U.S. v. Microsoft: The Appeal

Ken Auletta is author, most recently, of World War 3.0: Microsoft and Its Enemies. Thomas Hazlett is a resident scholar at the American Enterprise Institute and a former chief economist of the Federal Communications Commission. This week they discuss Ken’s new book, the appellate arguments, and how the case will end.

Shorn of its three most compelling advocates—David Boies, Judge Jackson, and Bill Gates on videotape—the case of U.S. v. Microsoft is now collapsing under its own weight. The seven member en banc panel for the Washington, D.C., Circuit Court of Appeals is too well informed about the New Economy, too knowledgeable about antitrust law, and too P.O.’d about a district judge’s childish antics—as nicely revealed in your new book—to let much of the District Court ruling stand. 

The government’s case (which is to say the District Court’s ruling) is “awfully speculative” Judge Tatel commented on Tuesday. He was discussing one of its least speculative aspects: the finding that Microsoft monopolized browsers even as PC users yet have a choice between Netscape’s Navigator and Microsoft’s Internet Explorer. The real stretch is the government’s central contention that Microsoft pre-empted rivalry to its Windows franchise by nipping Navigator—loaded with Java—in the bud. As this Java programming language snuck onto PCs it would clear the way for thousands of Java-compatible applications to be written. Consumers could then toss Windows aside, because Netscape/Java runs on any old operating system. 

Who knows if Java could have developed as a true operating system competitor? That is simply government speculation, a huge weakness in an antitrust case. Predatory practices are about competing too much, driving a competitor out of the market so prices can be raised to monopoly levels. Here no operating system competitor ever emerged and hence was never vanquished. More than that, the only telltale evidence of anti-competitive intent is pro-competitive conduct—prices were slashed, browser use skyrocketed, innovation and network development were intense. When the government proudly boasts that it has caught Microsoft red-handed, spending some $100 million annually to improve Internet Explorer so customers will like it better and use it more, you see the problem. 

It is true that Microsoft saw a potential threat to Windows and responded to Netscape in the browser “jihad.” In 1994, Netscape caught Microsoft napping when the Internet went mass market in a virtual instant (of course who, net worth less than $1 billion today, was not?). Netscape’s killer app was a smash, the most popular new application in PC history. Some 38 million copies were distributed in just 18 months—it worked perfectly with the Windows “monopoly.” 

It is not shocking that Redmond would respond. Indeed, the presumption of competitive response drove Netscape to Java to begin with. Netscape anticipated the “jihad” in their first strike, incorporating Java programming language that would bring a host of allies to support Netscape (Sun, Oracle, and the anti-MS gang) along with all those great applications to come. When software from the upstart Netscape popped up on millions of PCs, it was a threat to Microsoft.

We know about Microsoft’s fear and outrage, its arrogance. But what antitrust judges ought to ask is: What should Microsoft have done? Not asleep at the wheel (something that Judge Jackson, we learn from your book, was able to master), Judges Edwards and Williams queried the DOJ about just this. 

Microsoft responded to the competitive threat in furious fashion. It laughed at the $49 price tag Netscape attached to Navigator and distributed its IE for free. Indeed, it slipped IE into Windows, and Microsoft’s browser went everywhere a new PC did. It underpriced Netscape with bulk buyers including, most importantly, AOL. In a March 1996 deal that shocked the world, America Online signed an exclusive agreement with Microsoft. The beast from Redmond agreed to customize its software for AOL’s success and to charge $0.00. Netscape insisted on bringing online subscribers to its Web site first and charging AOL for each customer copy. Low prices, better service. Antitrust violation?

Even on appeal, Microsoft still sabotages itself with a lawyerly approach. “What lies at the heart of the case and cuts across all,” intoned MS counsel Richard Urowsky in Monday’s hearing, “is that Microsoft did nothing to foreclose Netscape from any part of the marketplace.” These lyrics address the technical definition of “foreclosure.” But they screech even to the trained ear. Microsoft has done tons to keep Netscape off computers and out of your life. 

Judge Jackson missed it, but this is the case for Microsoft. Every rugged competition has potential costs. But the feds could not show that there has been any consumer loss. As you described in World War 3.0, this is how MIT Professor Franklin Fisher, the Department of Justice economic expert at trial, handled this question:

Fisher was asked if current consumers were being victimized by Microsoft. After at first hesitating and mumbling, he declared, “On balance, I would think the answer was no, up to this point.” … The real harm to consumers, Fisher hurried to assert, would appear in the future, when Microsoft raised prices and it became clearer that Microsoft impeded innovation.

Remarkably, Judge Jackson rejected this view, going further than the prosecution’s own case. He found consumer harm when Microsoft offered software on terms too good for Netscape to match. It was a remarkable speculation. One likely to be corrected by the appeals court now sitting, very much awake.