Settling with Microsoft

It has been more than four years since the Justice Department sued Microsoft for antitrust violations, alleging that the company used its operating system monopoly – the ubiquitous Windows – to stifle competition and innovation in the software industry. Supporting that central allegation were claims that Microsoft forced computer manufacturers to bundle its applications with its operating system and that code in its operating system hindered the development of competing applications.

The settlement, which a federal judge is expected to approve this week, directly addresses those issues. Microsoft will be prohibited from forcing computer makers to use its applications as a condition for using Windows – rival application can be included without fear of reprisal. Microsoft will be forced to divulge enough of its programming code to other software developers to ensure that their products work as well with Windows as do Microsoft’s.

This case dragged on for so long and picked up so much baggage along the way (including lawsuits by 18 states that jumped aboard the Justice bandwagon, 12 of which have endorsed a settlement) that it is no surprise a settlement addressing the key issues is being widely denounced as a sellout. Critics of the proposed agreement – a mixed chorus of consumer advocates, litigation lovers and politicians seeking favor with home-state software developers – want nothing less than Bill Gates’ head. Microsoft broke the law and must be punished.

Microsoft did break the law. It has a perfectly legal operating system monopoly and illegally used it to gain competitive advantage elsewhere. The punishment sought by critics of the settlement – breaking up Microsoft into two pieces – not only far exceeds the offense, it also offers no remedy.

The problem with Microsoft was not its company structure, which advocates of a breakup seek to dismantle, but with its business practices, which the settlement seeks to reform. Add to that a unanimous appeals court ruling last summer that threw out the original judge’s breakup order, and reform is the only real option.

The problem with the case, however, it that in addition to a series of court decisions that narrowed Microsoft’s liability, it never gained any significant public support. The allegations of stifled competition and innovation simply never made sense to a public which only saw anything to do with computers getting cheaper and better.

Microsoft’s long history of battling federal regulators (the first Federal Trade Commission investigation was launched in 1990) and its persistent denials throughout this case that it had done anything wrong make it a poor candidate for self-reform. Terms of the settlement include a team of independent monitors working within Microsoft during the five years of the consent decree to check compliance with the bundling and code provisions. If this team does its job – and it will be the Justice Department’s job now to see that it does – competing software developers will have to look somewhere other than Microsoft when trying to explain to investors why their product doesn’t sell or to customers why it doesn’t work.