Frame Game

Antitrust Games

Many observers of the Microsoft antitrust case think the company is no longer playing to win. Instead, they believe that by stretching out the case through endless hearings and appeals, Microsoft is trying to render it moot. By the time the courts finally resolve what to do, the company and the technological landscape will no longer resemble the company and the landscape described in the evidence. Whether or not Microsoft’s legal strategists believe in this theory— Slate has no inside knowledge as to whether they do or don’t—the theory doesn’t work as advertised. Ultimately, Microsoft is at the mercy of the market. And the market doesn’t wait for legal resolutions before factoring them in. Perception and anticipation, not reality and resolution, will determine Microsoft’s fate.

Microsoft’s senior executives seem to be counting on the case’s eventual obsolescence. Hours after Judge Thomas Penfield Jackson ruled against the company Monday, Nightline’s Dave Marash asked Microsoft Vice President Bob Herbold, “You heard … a journalist who covers information technology say that Microsoft strategy has been delay, delay, delay. … Are you winning as this case gets strung out?” Herbold replied, “Well, the marketplace changes so rapidly. The issues that we’re discussing in this lawsuit, frankly, are two years old. And today the world is completely wired, global connectivity is here with the Internet, and it’s an exciting environment with new changes.” In other words, yes.

Maybe Herbold is right. Maybe the marketplace changes so rapidly that the courts can’t keep up. The salient point, however, is that the marketplace can keep up with itself. It reacts as rapidly as it changes. Rather than wait for the courts to act, it anticipates their actions and factors them in. That’s why Microsoft’s stock plunged 15 percent Monday before Jackson released his decision. What decimated the stock was anticipation, not reality. The same principle applies to Jackson’s upcoming selection of a penalty and to the appellate court’s subsequent review of Jackson’s decision. Microsoft can delay the reality. But it can’t delay the anticipation.

This consideration turns the delay strategy upside down. Dragging out the case may postpone a grim resolution, but it prolongs the grim anticipation. Minutes after the ruling, TV anchors and market gurus began chirping about the “cloud” over Microsoft. The company’s “black cloud is just bigger,” said one financial analyst as she downgraded its stock. NBC’s Tom Brokaw asked Bill Gates, “Don’t you expect to be in court for most of your adult life now as a result of this ruling?” USA Today’s lead sentence warned, “The harshly worded ruling Monday against Microsoft will further cloud the software giant’s future—emboldening competitors, fueling private lawsuits and laying the groundwork for a possible breakup of the company, experts say.” On Nightline, antitrust scholar Bill Kovacic concluded, “There is a routine pummeling that will take place in much of the coverage of their activities that portrays them in a bad light, speaks about their transgressions, focuses on what ought to be done to sanction them. Microsoft will never have the pre-eminence that it had before.”

To counter this speculation, Microsoft executives are telling every available news outlet two things. The first is that Microsoft has a “strong case on appeal.” The second is that far from getting bogged down in litigation, the company will “stay very focused” on “innovation” and “revolutionizing the Internet user experience.” The second claim can be tested over the next several months. The first, however, may take years to resolve. By the time Microsoft wins or loses on appeal—according to the delay theory—it won’t matter. What matters is what investors and potential business partners think will happen. If Microsoft fails to convince the market today that it has a good chance of winning on appeal, the market will sell off its stock, depleting Microsoft’s ability to bid for companies and employees. A victory on appeal two years from now may come too late.

Conversely, if Microsoft convinces the market today that it has a good chance of winning the case or drastically narrowing its losses on appeal, it may not matter two years from now that this claim turns out to be false. By then, the company will have preserved its leverage and alliances long enough to build an empire on the Internet. Punitive damages would hurt, but even if the courts break up the new empire into several well-positioned “Baby Bills,” each of them would be fortified by two additional years of what Judge Jackson calls illegal monopoly profits. By spinning investors and partners long enough to reach that objective, the theory that Microsoft will win on appeal fulfills itself.

So does the delay theory. It only works if you buy it. Perversely, Microsoft’s enemies are the theory’s most avid preachers. From every TV studio and chat room, they warn that Microsoft is stalling the case to death. Like most conspiracy theorists, they commit their credulous folly in the name of skepticism. If they succeed in convincing the market that Microsoft is outwitting the government and rendering the case obsolete, they’ll have only themselves to blame.