Friday evening, U.S. District Judge Thomas Penfield Jackson issued his findings of fact in the Microsoft antitrust case. He ruled that Microsoft is a monopoly, that it has abused its monopoly power, and that this abuse has harmed consumers. “For Microsoft’s image, the damage is incalculable,” said the Wall Street Journal. “It’s hard to imagine how the findings … could have been worse news for Microsoft,” added the Washington Post. The media, like the company itself, seem crippled by a failure of imagination. Things can get worse for Microsoft. Much worse.
From the outset, Microsoft (which owns Slate) and the press corps have treated the case as a bipolar debate: Either Microsoft has engaged in illegal business practices, or it hasn’t. Among other things, the Justice Department accused the company of stifling competition by requiring business partners to sign exclusionary contracts, colluding with Netscape to divide the browser market, and eventually bundling Internet Explorer with Windows to wrest control of that market. Microsoft could have conceded some of these issues–for example, that its contracts were unnecessarily exclusive–or it could have denied that any of its practices were illegal. The company chose the latter course.
In a bipolar world, that calculation made sense: At best, Microsoft would get to run its business as usual, and at worst, rather than surrender prematurely, the company would be ordered by the judge to change some of its practices. What the company failed to grasp is that the two-sided clash in the courtroom left open a third possibility in the financial press and the stock market. Microsoft says none of its practices are illegal. The Justice Department says some of Microsoft’s practices are illegal. But a third camp, led by Microsoft’s competitors, says all the company’s practices are illegal–and if that perception prevails, true or not, investors may conclude that Microsoft can’t thrive once it is stripped of those practices by the courts or by a settlement. The Justice Department can only hurt Microsoft. The stock market can kill it.
Until now, the notion that Microsoft owes all its success to ruthless marketing rather than technical ingenuity has been a fringe view. But that view gained momentum Friday with the judge’s declaration that “it is Microsoft’s corporate practice to pressure other firms to halt software development that either shows the potential to weaken the applications barrier to entry or competes directly with Microsoft’s most cherished software products.” Justice Department antitrust chief Joel Klein underscored that sentence in a press conference after the ruling. Nightline, the New York Times, and other media outlets followed suit. On Nightline, Klein called the case “a story of predation, of anti-competitive behavior, and monopolistic abuse. … It’s a mighty powerful story about consumer harm and predatory practices.”
Discussing the ruling on television over the weekend, Klein repeatedly distinguished Microsoft’s “predatory” practices from its “innovations,” which he praised. But Microsoft’s corporate enemies aren’t interested in this distinction. They want to convince the public, politicians, and the financial markets that the “corporate practice” cited in the judge’s opinion isn’t just Microsoft’s bad habit, but Microsoft’s soul. They want to equate the “story” of the trial–predation–with the story of the company.
Immediately after the opinion was released, Ed Black, a Microsoft antagonist who heads the Computer and Communications Industry Association, told reporters in front of the courthouse: “The behavior they [Microsoft] are accused of, which the judge seems to be finding in fact that they did, is not behavior off to the side of their business. It reflects a fundamental approach of the core business strategy of the company, which is to leverage and utilize their monopoly to expand into neighboring markets, and to use that monopoly as a critical tool of leverage with all of their business partners, customers, and competitors. Because it is so central to the way they do business … it will be very hard for this company to make slight adjustments to their behavior and in any way comply with the spirit of the antitrust law.” Minutes later, Black told viewers of CNN’s Crossfire that “Microsoft really was created” from “the old IBM monopoly” and that the company relied not on “innovation” but on illegal strong-arm tactics, like in The Godfather. Crossfire co-host David Corn joked that Microsoft even “stole the operating system from Apple.”
By itself, this account of Microsoft’s livelihood is a mere insult. Combined with the antitrust case, however, it threatens mortal injury. The combined message to investors is that Microsoft will now be forced to fight fairly–and that it can’t. Microsoft “will have to compete on the merits of their products,” Corel Vice President Kevin McNeil told the Wall Street Journal. Microsoft is “not an innovator but a fast follower,” anti-Microsoft futurist Paul Saffo told the Los Angeles Times. In a press release, Sun Microsystems argued, “Microsoft should be prohibited from buying the distribution channels of the future (e.g., cable and wireless) and from buying rather than inventing technologies”–a constraint designed to handcuff Microsoft in a high-tech economy driven by timely acquisitions.
The image of Microsoft as a crippled and helpless giant is increasingly penetrating the mainstream media. “In Courtroom and Beyond, Software King Is at Risk,” warned the front page of Sunday’s Washington Post. The Los Angeles Times published a virtual obituary of Microsoft: “Its strategy of buying up rivals to absorb their technology no longer works as well as it has in the past, in part because of the greater likelihood of firmer antitrust scrutiny of such deals. … Jackson’s finding that Microsoft commanded a monopoly–and the implication that he will rule shortly that the company broke the law–may well hobble its efforts to meet [new] challenges. … [A]s much as [Bill] Gates is widely viewed as a business genius, his company is seen as technologically mediocre.”
Microsoft has understood all along that its business image is as important as its political image. At every opportunity, its spokesmen have reiterated their commitment to quality and innovation. But they have failed to foresee a collision between this message and their defiance in the antitrust case. By insisting that everything Microsoft has done is fair competition, they risk the possibility that the public, if it accepts the judge’s finding to the contrary, will conclude that Microsoft doesn’t know the difference. The ultimate danger is that investors will conclude that Microsoft, stripped of its ability to exploit its monopoly power, doesn’t know how to “compete.”
Microsoft has stuck to this all-or-nothing strategy even in the wake of the judge’s findings. “The American legal system ultimately will affirm that Microsoft’s actions and innovations were fair and legal,” Gates declared. Microsoft Senior Vice President Bill Neukom added, “We’ve always competed fairly, and we will continue to do that. … We think that Microsoft’s actions have been entirely normal competitive behavior.” At the end of a conference call with reporters, a Time correspondent asked, “Does Microsoft plan to change any of its practices based on this court’s findings today?” Microsoft Chief Operating Officer Bob Herbold replied, “The answer to that question is no.”
Microsoft may be right in claiming that it has done nothing wrong. Even if it isn’t, it may succeed in selling that argument to the public. But if it fails, the stakes are enormous. In the courtroom, the worst that can happen is an array of sanctions–possibly even a corporate breakup–designed to force Microsoft to compete “on the merits.” In the stock market, however, the damage can get much worse. Investors can decide not only that Microsoft owes its success to the abuse of monopoly power, and not only that the courts will strip the company of this ability, but that Microsoft doesn’t know any other way to survive.