Trial and Error
The Department of Justice has Microsoft on the ropes. But will the US government deliver its knockout punch and insist the software giant is broken up?
The Microsoft anti-trust trial is now in its seventh week. When it began, on 19 October, nobody with a modicum of knowledge of the background to the case seriously thought that the action brought by the US Department of Justice (DoJ) and 20 US states could lead to the dissolution of the most successful company in the history of the IT industry.
UK resellers, distributors and even rival vendors found themselves in broad agreement that the job of deciding what should and should not be included within the functionality of a software product was best left to the software companies. Even those with a vested interest in Microsoft's downfall are finding it difficult to predict outright victory for the DoJ or to articulate a convincing argument in support of Assistant Attorney General Joel Klein's allegations.
Microsoft resellers came closest to voicing any degree of concern, pointing out that the negative publicity accompanying the build-up to the trial might undermine consumer confidence in the products they sold.
When the investigation began in 1995, the DoJ's grievances against Microsoft focused almost exclusively on the integration of its Windows operating system and internet browser. The DoJ, which has a brief to 'protect consumers by ensuring lower prices and new and better products', was apparently targeting Microsoft for trying to give away its software for free.
Little wonder that the IT industry rejected the idea that a non-technical government department could make a successful case for the company to be divided up, as it had with Standard Oil in 1911 and AT&T in 1984.
Then in June this year, the DoJ's suit suffered what appeared to be a deathblow. The US Court of Appeal ruled in a separate case that the company was entitled to integrate Internet Explorer with Windows 95. The suit had lost what little substance it may have had.
In response, the government was forced to weave together a whole new anti-trust action based on allegations that Microsoft consistently engaged in illegal business practices to the detriment of software consumers.
On the eve of the trial, the vendor's principal lawyer, John Warden, asserted: 'After nearly two years of investigation, the case will look almost nothing like the lawsuit that was filed just five months ago.' Or as Microsoft legal spokesman Mark Murray put it: 'The government's case has had more makeovers than Madonna.'
But unfortunately for the software giant, the refashioned case has proven far more persuasive than it did in its original form. The DoJ's leading counsel David Boies, who successfully defended IBM during its 13-year struggle with US anti-trust regulators, has happily eschewed tedious and convoluted debate about technical product definitions for a high-profile battle of words between industry personalities with long-standing personal and professional antagonisms.
During the past weeks, Boies, with the help of the anti-Microsoft media, has succeeded in casting the vendor as the villain of the piece. Bill Gates' transformation in the media from benevolent boffin to scheming and untrustworthy mogul has not helped the situation. His refusal so far to testify in person has added weight to the suggestion that he has something to hide. The videotaped testimony he did supply showed an evasive and impatient character who appeared, like his company, aggressive, arrogant and aloof.
As the trial has progressed, the public has received a constant stream of court reports reinforcing this image. Details have emerged of the vendor's bullying tactics against long-term rivals such as Sun and Apple, but more worryingly for Microsoft, also against perceived allies such as Intel and Compaq. Within the privileged environment of the court, not one industry witness appears to have come out in favour of Microsoft.
The list of alleged abuses is exhaustive. Microsoft attempted to carve up the browser market with its arch-rival Netscape. Microsoft stole code from and then tried to sabotage Apple's QuickTime software. Microsoft threatened sanctions against Intel when the chip maker tried to enter the software market with NSP (multimedia enhancement software). Microsoft blackmailed Compaq, Hewlett Packard, AOL, Apple and others into making Internet Explorer the default browser on their respective products.
To make matters worse, as each allegation has arisen, Microsoft's attempts at denial have been consistently undermined by corroborative evidence from witnesses - increasing the perception that the company cannot be trusted. Over a million pages of emails have added flesh to the allegations and helped place the charges in context.
Meanwhile, the company's latest line of defence - that its actions are common practice and no worse than its industry rivals - might be true but holds little water in a court of law. Imagine a drunk-driver trying to use the same excuse.
Even the Microsoft legal team, led by John Warden (who, like Boies, is no stranger to the anti-trust area having successfully defended Kodak against the DoJ in 1992), has failed to help his client's image. Time and time again, Judge Jackson has reprimanded the Sullivan and Cromwell lawyers for badgering witnesses, posing misleading questions and time wasting. Warden, Edelman and Holley are looking more like liabilities. Rumours that they may be dropped by their embattled client are gaining momentum.
And so, for the first time, the suggestion that Microsoft could lose the case is gaining popular currency both in the US and further afield.
A recent survey by the San Jose Mercury News illustrates this. A poll of more than 3,000 respondents based in Silicon Valley found 52 per cent believe that the lawsuit will encourage fair competition. While pollsters did not think the company would be broken up as a result of the action, the majority of those questioned did believe that the trial was damaging Microsoft's position on an international level.
In fact, since the trial began, a string of reports have surfaced about related actions being considered or initiated across Europe. In Italy, the International Alliance for Compatible Software (IACT) has lodged an anti-trust complaint against Microsoft with the Italian competition authorities.
In Sweden, the governmental body responsible for scrutinising anti-competitive behaviour has also received a number of complaints about the vendor from software companies.
And the Icelandic government is still fighting its 12-month legal battle with Microsoft, which is refusing to translate its software into the country's native language. The vendor says the exercise would not be cost-effective, while the government claims that the company is contributing towards the death of its cultural heritage.
Resellers and distributors in the UK have not been shy in their criticism of Microsoft's control over the channel, even if that criticism has traditionally been shrouded in anonymity. Rising prices and shrinking margins (when almost every other PC-related product is getting cheaper), tighter licensing structures, including the termination of negotiable concurrent agreements, and the constant threat of the introduction of a direct sales strategy are often cited as examples of the vendor's stranglehold on the channel.
Does this represent evidence of anti-competitive behaviour on the part of the vendor? No. But the channel has also complained about the way in which Microsoft wields absolute control over the price at which its products are sold. Similar to the UK automobile industry - which is currently under investigation by the DTI - Microsoft dictates exactly how much resellers and distributors charge for its products. Individual dealers are not permitted to offer discounts to consumers. In theory, this is illegal and alone could warrant an investigation into anti-competitive practices.
But investigations of abuses of market power are extremely rare in this country and pretty much unheard of with reference to the IT industry. The Monopolies and Mergers Commission (MMC) - the UK's equivalent of the anti-trust division of the DoJ in the US - can only act in response to recommendations from the Office of Fair Trading (OFT). In turn, the OFT can only act in response to complaints from members of the public or other businesses.
'The commission does not have the power to initiate an investigation.
We are purely a reactive body,' explains an MMC representative. 'Other than the OFT, we can only act on the advice of one of the regulatory bodies (such as Oftel), but these have only been set up for public utilities.
There is no such organisation that scrutinises the software industry.'
But this situation is about to change. On 9 November, the new Competition Bill received Royal Assent and will come into force on 1 March, 1999.
The Bill gives UK authorities sweeping new powers specifically targeting anti-competitive agreements between companies and abuse of market power.
As well as enhanced powers of investigation for the renamed Competition Commission, the new legislation will also ensure that, for the first time, firms that act in an anti-competitive way will face serious interim penalties.
This will allow abuses to be halted pending further investigation rather than after the event. The OFT will have the power to charge a company up to 10 per cent of its annual revenues if it is seen to be abusing its market position. The commission will act as a court of appeal.
One of the objectives of the Bill is to bring the UK's legislation in line with the rest of Europe, where anti-competitive behaviour is more closely monitored and companies are more easily penalised. The new measures are modelled upon articles 85 and 86 of the EC Treaty.
The Secretary of State for Trade and Industry, Peter Mandelson, described the changes as 'long overdue', adding: 'This is good for consumers and gives more opportunities for enterprising and innovative businesses to thrive. It will also ensure that both consumers and competitors who suffer will finally have effective rights to damages.'
A DTI representative refuses to discuss subjects under investigation in the UK, but points out that large multinational companies are dealt with directly by the EC. The EC confirmed that Microsoft is being scrutinised, but supplied no details of its investigation or whether it advocated the company being broken up.
In general, industry observers in the UK still think this an unlikely scenario. The channel opinion is dictated, predictably, by self-interest. One reseller summed up his camp's point of view, saying: 'Microsoft has developed a reputation for playing hardball with competitors and with its channel.
It has also made some bad PR mistakes during the trial, but the truth is there are too many people and too many businesses dependent on this company's success for it to be broken up and sold off.'
Pete Deane, managing director of Horizon Open Systems, one of Sun's largest resellers in the UK, presents the opposing view: 'The details which have emerged during the trial are conclusive evidence of the bad feeling the industry has always had about the way Microsoft does business and the whole idea of proprietary computing systems. I wouldn't like to predict if it will be broken up, but this will have a serious impact on the company in the long term.'
Clive Longbottom, strategy analyst with CSL Consulting, floats a third scenario. He does not believe that the courts should decide the issue.
He says the lawyers lack the necessary technical expertise to make a fair and workable ruling.
While he agrees that the nature of the case has changed and that Microsoft has handled things badly, he thinks the company can save itself by taking the initiative and acting first. His solution is that Microsoft divides itself up - and into not two, but five separate businesses: operating systems, applications, multimedia, hardware and home software.
He says: 'Gates is an astute businessman. He knows that if Microsoft is forced to break, its stock price will collapse, and that's where his money is. But if he breaks up the company himself, as I have been advising for some time, Microsoft will remain as the holding company, the anti-trust situation will be remedied and the share value will go through the roof.'
As for a separate action being initiated by the EC, Longbottom thinks it unlikely. 'The EC has been looking at the situation for some time now. It did have something on the boil and then I think it realised it was wasting its time and taxpayers' money and put things on hold to see what happens in the US. If the EC had decided to press charges and the US didn't, it would have looked extremely foolish,' Longbottom says.
Longbottom and everyone else close to the Microsoft case predicts that it is unlikely to produce a concrete result for months or even years.
All parties agree that whatever the outcome of the trial, the next stop will be the US Supreme Court, the country's highest court of appeal.
But the trial should not be dismissed on the basis that it will fail to produce an immediate winner. The process is still crucial because it is the only available opportunity for the facts to be presented both to the judge and to the forum of public opinion.
No new evidence can be introduced at the appeal stage - the appellate or Supreme Court will base its decision on the information already presented - and, crucially, on the way in which the general public interprets the evidence as expressed through public opinion.
So even in its best-case scenario, Microsoft will face two main problems: if Judge Jackson rejects the main allegations of the DoJ's case he will still, almost certainly, determine that Microsoft's control of the personal computer market constitutes a monopoly.
In this instance, the company will be rendered extremely vulnerable to private lawsuits - three of which are currently pending.
Second, the US Supreme Court is renownd for its sensitivity to public opinion in difficult cases. If Microsoft continues to steer its present course, in terms of public relations, and fails to convince the industry, the media and the general public that it has not grown too big for its boots, the tide of opinion, which is already turning against the company, could soon become a flood.