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No.

385 November 9, 2000

Microsoft’s Appealing Case


by Robert A. Levy and Alan Reynolds

Executive Summary

Judge Thomas Penfield Jackson’s final judg- collapses. True to form, Jackson’s legal conclu-
ment in the Microsoft case indicates that he has sions about Microsoft’s tying arrangements,
fallen hook, line, and sinker for the government’s first-screen restrictions, and so-called exclusion-
flawed arguments. But the U.S. Court of Appeals ary contracts are quite simply incorrect.
for the District of Columbia Circuit is unlikely to The government’s remedies, rubber-stamped
be so accommodating. The Justice Department’s by Jackson, may well be the most destructive
case will crumble as a result of procedural errors, aspect of this baseless case. If one didn’t know bet-
flawed fact-finding, wrongheaded legal conclu- ter, those remedies would seem crafted to inflict as
sions, and Jackson’s preposterous plan to break much damage as possible, not just on Microsoft,
up the software company most directly responsi- but on the broader high-tech marketplace.
ble for America’s high-tech revolution. Meanwhile, real people will be injured by this
On the procedural front, Jackson expanded the foolishness. Microsoft’s shareholders—including
scope of the trial to include charges that were not millions of retirees and mutual fund investors—
part of the government’s initial complaint, con- have suffered an erosion of market value mea-
ducted the trial on an accelerated timetable that sured in hundreds of billions of dollars.
did not allow Microsoft sufficient opportunity to Company employees, like expendable chess
prepare its defense, embraced the government’s pawns, will be deployed to advance the Justice
proposed remedies without any hearing whatso- Department’s dismemberment scheme. And
ever, and granted media interviews, during and consumers will pick up the tab as disgruntled
after the trial, in violation of judicial ethics. competitors devote their resources to politicking
Still worse, Jackson’s findings of fact do not instead of creating innovative products.
hold up under serious scrutiny. Those findings Ultimately, that political agenda will destroy
were the shaky foundation on which he con- what it sets out to protect. Microsoft’s rivals may
structed his conclusions of law. And when the get the kind of government they ask for—includ-
foundation is unsound, the resultant structure ing oppressive regulation.

_____________________________________________________________________________________________________

Robert A. Levy is senior fellow in constitutional studies at the Cato Institute. Alan Reynolds is director of eco-
nomic research at the Hudson Institute.
The trial was judge’s legal verdict. Predictably, when Jackson
incurably Introduction issued his conclusions of law in April 2000, he
held that Microsoft had indeed violated the
plagued by proce- We’ll soon know whether the Department Sherman Act. Then came the bombshell. Less
dural irregulari- of Justice will be successful at dismembering than a month later, on April 28, Jackson pro-
ties; the judge’s what used to be the most valuable corporation posed an array of conduct and structural fixes,
in the world. If the government fails, it won’t be including the breakup of Microsoft into two
fact-finding was for lack of trying. Instead, DOJ’s case will come separate companies, without a minute of hear-
clearly erro- tumbling down because its foundation is paper ings on remedies.
thin. Despite an initial victory before U.S. Naturally, Microsoft has appealed—to the
neous; his legal District Judge Thomas Penfield Jackson, the D.C. Circuit Court, which had ruled in favor
conclusions are government cannot sustain its charges on of Microsoft two years earlier. To show how
unsupportable; appeal. The trial was incurably plagued by pro- important the case is, and to signal its will-
cedural irregularities; the judge’s fact-finding ingness—indeed, eagerness—to decide the
and his brutal was clearly erroneous; his legal conclusions are case, the D.C. Circuit set an accelerated brief-
remedies are not unsupportable; and his brutal remedies are nei- ing schedule and an early hearing. And
ther proportionate nor even related to the although appeals are typically heard by a
related to the asserted infractions. three-judge panel, the circuit agreed to have
asserted But first, some background. Here’s how the entire court hear the case.
infractions. Microsoft—prodigy of the new economy yet This time, however, DOJ and Judge Jackson
former neophyte in the ways of Washington— tried an end run around the appeals court,
suddenly awakened to find that its very exis- asking the U.S. Supreme Court to take the
tence was under siege.1 case directly. The government hoped to avoid
The Federal Trade Commission started the a repeat of its prior reversal by the D.C. Circuit.
ball rolling against Microsoft in 1991 with a But the Supreme Court wasn’t required to
fruitless two-year investigation of claims that take the case and elected not to, voting eight to
the software maker monopolized the market one with only Justice Breyer dissenting.
for PC operating systems. Then came another Evidently, the justices did not want to
two years of scrutiny by DOJ, culminating in a immerse themselves in a trial record that is
1995 consent decree. Two years later, the gov- both voluminous and complex. They decided
ernment claimed that Microsoft had flouted it would be better for the appellate judges first
that decree by tying its Internet Explorer brows- to sharpen the issues. No doubt the justices
er to the Windows operating system—that is, by were also aware that they could be wasting
requiring every buyer of Windows to take their valuable time should a Bush administra-
Internet Explorer as well. In the ensuing law- tion decide to settle the litigation in 2001.
suit, Judge Jackson agreed with DOJ, but he was Possibly, the Supreme Court also wanted to
reversed in mid-1998 by a higher authority, the ensure that the circuit court would have an
U.S. Court of Appeals for the District of opportunity to rebuke its own trial judge,
Columbia Circuit.2 given his glaring procedural and substantive
That didn’t stop DOJ. In May 1998 the blunders.
Antitrust Division, joined by 20 state attor- Meanwhile, pending appeal, the remedies
neys general (reduced to 19 after South ordered by Judge Jackson—both conduct and
Carolina pulled out), sued Microsoft for vio- structural remedies—have been put on hold.
lating the Sherman Antitrust Act.3 After an Originally, DOJ had asked the judge for a
eight-month trial, Jackson released his find- narrowly tailored court order that would
ings of fact in November 1999, once again enjoin Microsoft from engaging in four
deciding for the government on virtually every allegedly anti-competitive activities. Specific-
issue. Those fact-findings essentially dictated ally, Microsoft was not to (1) enter into new
the outcome, laying the groundwork for the contracts or enforce existing contracts with

2
Internet service providers or content for four years; and (10) establish what Loyola
providers that would foreclose distribution economics professor Thomas DiLorenzo has
or promotion of Netscape’s competing called a “creepy and totalitarian . . . Gestapo-
Internet browser; (2) technologically tie its style monitoring system” whereby the gov-
own browser to its operating system, unless it ernment has ongoing access to inspect and
gave users a practical means to untie the two copy virtually all of Microsoft’s records, and
products and offered the stripped operating Microsoft’s employees are able to report vio-
system at a reduced price; (3) treat Netscape’s lations of government regulations “on a con-
browser any differently than Internet fidential basis.”4
Explorer with respect to inclusion or exclu- Neither DOJ nor Judge Jackson was con-
sion from the Windows package; or (4) retal- tent with those directives, so then came the
iate against any original equipment manu- coup de grâce: structural remedies. Microsoft
facturer (OEM) that chose to remove would be split into two companies—an oper-
Internet Explorer from Windows 98. ating systems company, which would get a
That was the relief sought by DOJ in court one-time license for Internet Explorer, and an
filings as late as September 1998. But once applications company, which would other-
the trial ended a month later, those requests wise retain all rights to Internet Explorer. The
somehow morphed into a barrelful of reme- operating system company could not devel- When a party to
dies that extended far beyond anything DOJ op a modified version of the browser, even litigation is
had initially considered necessary to address though browser functionality is now integral systematically
Microsoft’s supposed misbehavior. In the both to Windows and to rival operating sys-
end, here are the remedies that the govern- tems, which would face no such restrictions. deprived of due
ment proposed—by and large rubber- For 10 years, the operating system and appli- process, the
stamped by Judge Jackson in his final order. cations companies could not recombine,
First, the conduct remedies. Microsoft invest in one another, cross-license products
court’s substan-
would have to (1) refrain from exclusionary on an exclusive basis, or engage in joint ven- tive findings and
contracts with Internet service providers and tures. For the first three of those years, all of legal conclusions
content providers; (2) refrain from tying con- the conduct remedies would remain in force
tracts with OEMs; (3) if products are bun- for both companies. Any contract between cannot be
dled, sell an unbundled version at a lower the two companies would have to be on sustained.
price (thus, Microsoft might not be able to terms no more favorable than those available
give away its browser); (4) agree not to “penal- to third parties. That “most favored compa-
ize” companies for supporting rival software; ny” provision would also apply to technical
(5) charge uniform operating system prices disclosures between the two firms.
to its largest customers, even if those cus- Will Microsoft win its appeal? It should,
tomers offered a better product, or better ser- given the procedural irregularities, factual
vice, or helped control software piracy; (6) errors, and mistaken legal conclusions plagu-
disclose to software developers its applica- ing Judge Jackson’s handling of the case.
tions programming interfaces—not just
instructions regarding use of the interfaces
but actual source code; (7) disclose sufficient Procedural Irregularities
source code to enable OEMs to redesign the
Windows opening screen, in effect devaluing When a party to litigation is systematical-
the Windows brand name and infringing ly deprived of due process, and the depriva-
Microsoft’s copyright protection; (8) contin- tion is egregious, as it was in the Microsoft
ue to license prior versions of its operating case, the court’s substantive findings and
system on the same terms for three years after legal conclusions cannot be sustained. A new
a new version is released; (9) retain all execu- trial is frequently necessary. Here, because the
tive e-mail pertaining to platform software procedural errors were so stark, it’s conceiv-

3
able that the appellate court will direct Judge ware that would bridge the gap between
Jackson to recuse himself from any subse- users and their operating systems, thereby
quent proceedings. enabling applications to run on multiple
Among the more flagrant errors were platforms, not just Windows.
these: Jackson expanded the scope of the trial DOJ characterized middleware as a poten-
to include charges that were not part of the tial threat to Microsoft. Ultimately, Jackson
government’s initial complaint. He conduct- would assert that Microsoft had exploited its
ed the trial on an accelerated timetable that dominant Office Suite software to stifle the
did not allow Microsoft sufficient opportu- middleware market. Inconveniently for
nity to prepare its defense. He embraced the Jackson, that charge had first been brought
government’s proposed remedies without against Microsoft by the attorneys general,
any hearing whatsoever. In rationalizing his who later dropped it when their lawsuit was
wholesale adoption of the government’s consolidated with DOJ’s. No matter. Jackson
remedies, he relied on post-trial evidence that shrugged off that minor predicament by
was not part of the record, then applied crim- enlarging the litigation as if all of the charges
inal sentencing guidelines to a civil antitrust against Microsoft appeared in the consoli-
case. Last, during and after the trial, Jackson dated complaint. Despite the amplified
granted media interviews, contravening an charges, he did not require the government
explicit canon of judicial ethics. to file an amended complaint. Instead, he
simply assured Microsoft that he “would not
Expanded Scope of the Trial be making any findings” and “would not
In May 1998, when DOJ first filed its predicate any relief” on the new allegations.6
antitrust complaint against Microsoft, the In the end, those assurances meant nothing.
centerpiece of the government’s case was its
allegation that the company had illegally tied Speed of the Trial
its operating system and its browser. A Faced with defending allegations that
month later, the D.C. Circuit Court of appeared out of nowhere, Microsoft sought
Appeals effectively wiped out that claim extra time to prepare its case. After all, an
(about which more below). The government antitrust suit against the largest company in
responded by raising new allegations, dra- the world was no small matter. Yet Jackson
matically expanding the scope of its case. had scheduled the trial to begin on
Jackson expanded Suspecting—incorrectly, as it happens—that September 8, 1998, only three and a half
Judge Jackson would feel bound by the high- months from the date of the complaint. And
the scope of the er court’s ruling, DOJ turned its attention to he limited each side to 12 witnesses, each of
trial to include a variety of peripheral issues, none of which whom would be required to submit testimo-
had appeared in its May complaint. ny in writing, not on the witness stand. Oral
charges that were Over the company’s repeated objections, presentations would be limited to cross-
not part of the the government decided to explore examination and rebuttal.
government’s Microsoft’s attempt to dominate the server That timetable and format were unprece-
market as well as its relationships with Intel, dented for a major antitrust case. So when
initial complaint. Apple, RealNetworks, and IBM. DOJ also the judge allowed DOJ to augment its com-
He embraced the took the side of Sun Microsystems in a pend- plaint, digging into all sorts of new charges,
government’s ing lawsuit in which that company had Microsoft was sure it would be granted some
charged Microsoft with “corrupting” Sun’s scheduling leeway. It was not. Despite the
proposed Java programming language by creating a complexity of the case, the expanded allega-
remedies without Windows-specific version that was incom- tions, and the need for extensive discovery,
patible with Sun’s own version.5 Java and Microsoft was given less than five months to
any hearing Netscape’s browser were two essential com- prepare for trial on the original accusations,
whatsoever. ponents of the “middleware” market—soft- and a much shorter time to defend against

4
the trumped-up charges that DOJ managed reason alone have some entitlement “I am not aware
to tack on with Jackson’s indulgence. to a remedy of their choice. of any case
Moreover, plaintiffs’ proposed final
Remedies Hearing judgment is a collective work prod- authority that
If the quickness of the main trial was uct of senior antitrust law enforce- says I have to give
extraordinary, the rush to judgment at the ment officials of the United States
remedies hearing set a new speed record. Department of Justice and the
them [Microsoft]
Perhaps more than any other event, the reme- Attorneys General of 19 states, in any due process
dies hearing—or, more precisely, the want of a conjunction with multiple consul- at all. The case is
remedies hearing—revealed Jackson’s mind- tants. These officials are by reason of
set. When he was first asked whether he con- office obliged and expected to con- over. They lost.”
templated further proceedings to address sider—and act in—the public interest; Due process was
remedies, Jackson responded, “I would Microsoft is not.11
assume that there would be further proceed-
turned on its
ings.”7 He added that he might “replicate the Never mind that public officials, no less head by Thomas
procedure at trial with testimony in written than private companies, act in their own self- Penfield Jackson.
form subject to cross-examination.”8 He interest. That’s why the Framers devised a
apparently had second thoughts. system of checks and balances—to rein in the
On June 7, 2000, Jackson endorsed the penchant for political society to overrun civil
government’s proposed final judgment and society. The principal difference between
its suggested remedies without a single mate- public and private actors—to which Judge
rial change. Not only was Microsoft to be Jackson is oblivious—is that private compa-
drawn and quartered, but its conduct was to nies are guided “as if by an Invisible Hand” to
be circumscribed step by step and inch by behave in the public interest. By contrast,
inch—all without issuing findings, develop- although self-interest leads to benign out-
ing an evidentiary record, or even granting comes in the marketplace, it frequently yields
the company further discovery on the reme- perverse outcomes when it comes to political
dies issue. After pledging to Microsoft that it decisions. The constituency of a private com-
would have an opportunity to be heard, pany is the public, which buys its product.
Jackson reversed himself with the incredible The constituency of a public official is too
excuse that “testimonial predictions of often the special interests that dispropor-
future events” are “less reliable even than tes- tionately control the political process.1 2
timony as to historical fact.”9 Evidently, the That basic lesson of public choice theory
judge forgot that his entire case rested on is lost on Judge Jackson. So, too, is a sober
“testimonial predictions” about the competi- conception of due process. Consider these
tive implications of Microsoft’s alleged mis- fantastic statements on his refusal to hold
conduct. hearings on remedies: First, it’s “procedurally
Even more astonishing, Jackson conjured unusual to do what Microsoft is proposing—
up this rationalization for adopting the gov- are you aware of very many cases in which the
ernment’s final judgment: “I am not an econ- defendant can argue with the jury about
omist. I do not have the resources of eco- what an appropriate sanction should be?
nomic research or any significant ability to be Were the Japanese allowed to propose the
able to craft a remedy of my own devising.”10 terms of their surrender? The government
That might explain why Jackson couldn’t for- won the case.”13 Second, “I am not aware of
mulate remedies without expert advice, but it any case authority that says I have to give
certainly does not explain why he chose DOJ them [Microsoft] any due process at all. The
as his sole adviser. Here’s his answer: case is over. They lost.”1 4
Due process was turned on its head by
Plaintiffs won the case, and for that Thomas Penfield Jackson. First, says the

5
judge, decide who wins; then decide what remedies. That unbelievable assertion, com-
process was due. The Queen in Alice in ing as it did before Microsoft had exercised
Wonderland couldn’t have said it better. its indisputable right to appeal, meant that
Jackson required the company to admit fault
Post-Trial Justifications or face the consequences.
Maybe Judge Jackson recognized that he True enough, federal sentencing guide-
had not adequately explained his uncritical lines in criminal cases provide for reduced
acceptance of DOJ’s remedies. Surely, the punishment if a convicted defendant accepts
judge knew, however, that his explanation responsibility for his criminal acts. But
would be subject to even greater scorn if it Microsoft was sued under the civil, not the
were based on evidence that was not part of criminal, provisions of the Sherman Act.
the official record. Nonetheless, to buttress Courts are not authorized in civil cases to
his case, Jackson curiously relied on post-trial punish antitrust violators. Relief must be
e-mails, which had never been proffered as remedial, not punitive.1 7 Still, in a post-trial
testimony or exposed to the rigors of cross- luncheon speech to an antitrust seminar,
examination. That belated evidence suppos- Jackson told his audience that a “structural
edly proved that Microsoft, notwithstanding remedy was never my remedy of choice.” It
The decision to the ongoing litigation, was still trying to was “a last resort, and in my judgment
gut a half-trillion- leverage its monopoly position. Only harsh Microsoft’s intransigence was the reason.”18
dollar corpora- remedies, so the argument went, could cure There you have it; the decision to gut a half-
such grave wrongdoing. trillion-dollar corporation hinged on the
tion hinged on But the e-mails, unaccountably, con- petulance of a federal judge.
the petulance of a cerned matters not before the court.
According to one set of messages, Bill Gates Media Interviews
federal judge. had tried to persuade manufacturers of In a tribute to his candor, if not his legal
hand-held computers (personal digital assis- acuity, Jackson conceded in that same lun-
tants, or PDAs) to use a Microsoft operating cheon speech, “Virtually everything I did may
system called Windows CE. Unless the man- be vulnerable on appeal.”1 9 Perhaps his real-
ufacturers complied, Microsoft would code ization that his legal insights would not con-
new features in its applications software so vince an appellate court explains Jackson’s
that they would run only on PDAs made by media crusade to take his case public. Both
Microsoft itself.1 5 But Jackson had already during and at the conclusion of the trial, he
defined the relevant market to include only granted “friendly, informal and unstruc-
single-user desktop PCs that used Intel chips. tured” interviews to the New York Times. He
That crabbed view of the market excluded also spoke with the Wall Street Journal, the
PDAs, Windows CE, and applications soft- Washington Post, Newsweek, and CNN, com-
ware. Even if the definition could somehow menting on Microsoft’s legal strategy and the
be stretched to cover applications software, credibility of its witnesses.2 0 It’s interesting
Microsoft’s new features did not confer to compare Jackson’s public pronounce-
monopoly power that could be leveraged—at ments with the nearly total silence maintained
least not as long as versions of the same soft- by Richard A. Posner, respected chief judge of
ware without the new features were available. the U.S. Court of Appeals for the Seventh
Taking a different tack to justify his reme- Circuit, who was asked by Jackson to help
dies, Jackson observed that they had crystal- negotiate an out-of-court settlement. Despite
lized only after Microsoft had shown itself constant pleas from the media to assess the
“unwilling to accept the notion that it broke likelihood of a resolution, Posner said
the law or accede to an order amending its nothing.
conduct.”1 6In other words, it was Microsoft’s That is what we should expect from a fed-
lack of remorse that prompted such severe eral judge, who is charged under Canon

6
3A(6) of the Code of Conduct for United States tute a judge’s assessment of what was discov-
Judges2 1 to “avoid public comment on the ered during the trial. Regardless of Judge
merits of a pending or impending action.” Jackson’s colorful language about
The code goes on to advise against public Microsoft’s “immense profits”2 3 and
comment “until completion of the appellate “oppressive thumb,”24 nothing in his wordy
process.” In this instance, Jackson’s remarks document is intended to prove any law was
came before Microsoft had appealed; indeed, broken. The findings are just the foundation
the New York Times interview was conducted for the conclusions of law, which in turn
during the trial over which Jackson himself become the basis of any remedies.
was presiding. Not only was the case pend- Microsoft’s critics tend to treat Judge
ing, it was pending before him and might even, Jackson’s findings as sacred text, which a
postappeal, land back in his court for further higher court could never question. Yet some
proceedings. central “facts,” and even some legal conclu-
The only statements to the media condoned sions, are nothing more than heroic forecasts
by the Code of Conduct are those connected with about technology. “While some consumers
the judge’s official duties, his explanation of may decide to make do with one or more
court procedures (e.g., “the next step is for information appliances,” opines the judge,
defendants to file a notice of appeal”), or schol- “the number of these consumers will, for the
arly presentations for educational purposes. foreseeable future, remain small in compari-
None of Jackson’s comments fit the exceptions. son to the number of consumers deciding
Moreover, Jackson was well aware of the rules. that they will still need an Intel-compatible
In 1991 an appeals panel found that Jackson PC system.”2 5 On the contrary, technological
had improperly spoken at the Harvard Law forecasters from International Data Corporation
School about a pending case involving (IDC), among others, expect that sales of non-
Washington, D.C., mayor Marion Barry.2 2 The PC Internet devices will outnumber sales of
same judge, plainly unrepentant, now accuses PCs within a few years.2 6
Microsoft of insufficient remorse and not Those devices include wireless PDAs and
accepting responsibility for its prior acts. cellphones from such industry leaders as
Palm and Nokia; Linux-based Internet devices
from AOL-Gateway; powerful Internet-ready
Erroneous Fact-Finding game consoles from Sony, Nintendo, and
Sega; AOL’s hard-drive-equipped interactive
To be sure, procedural errors, even if they TV; and more. Because the judge totally
were to result in a new trial, might simply ignored the non-Microsoft browsers in all The few findings
prolong Microsoft’s agony. If Judge Jackson those millions of Internet devices, no appel-
continued to preside, there’s little reason to late court could possibly affirm his legal con-
that appear to be
presume—absent an appellate reversal on clusion that Microsoft had a “dangerous based on quanti-
substantive issues—that his findings and probability” of monopolizing the browser tative data are
conclusions would be significantly different market. 2 7 And for the same reason, the
a second time around. For that reason alone, judge’s speculation that “Internet Explorer is often seriously
it’s important to scrutinize not only proce- not demonstrably the current ‘best of breed’ inaccurate.
dural irregularities but substantive issues as Web browser, nor is it likely to be so at any
well. So we turn now to Judge Jackson’s find- time in the immediate future”2 8 must be duly
ings of fact and then to the conclusions of dismissed on appeal.
law that flowed from those findings. It will Within the judge’s litany of facts, the few
shortly be evident that the judge’s substan- findings that appear to be based on quanti-
tive errors are every bit as troubling as his tative data are often seriously inaccurate. For
procedural errors. example, here is his mistaken recitation on
Findings of fact are supposed to consti- Microsoft’s market share, which has been

7
To demonstrate widely echoed by the media as being all the retail sales of Linux and computers sold with
that Microsoft’s proof needed that Windows has a monopoly: no operating system).
At the outset, it helps to keep in mind that
market share was Every year for the last decade, there are three distinct versions of Windows,
large, Jackson Microsoft’s share of the market for not just one. Windows CE, now called Pocket
Intel-compatible PC operating sys- PC, is mainly used on hand-held computers
resorted to the tems has stood above ninety percent. in competition with the products of compa-
simple expedient For the last couple of years the figure nies such as Psion and Palm. IDC estimates
of narrowing the has been at least ninety-five percent, that Windows CE has less than 10 percent of
and analysts project that the share that market. Windows NT, now called
defined market. will climb even higher over the next Windows 2000, is used on servers and on
few years.29 high-powered desktops called workstations.
In the server market, Windows NT/2000
Those seemingly precise figures were lift- competes with versions of Unix, including
ed uncritically from the government’s Linux, and with Novell Netware. IDC esti-
Exhibit One.3 0 They are not facts at all but mates that Windows NT has 36 percent of
outdated estimates and projections pub- that market. Clearly, Microsoft has a modest
lished in early 1997—before “the last couple of share of the lucrative computer markets in
years”—by IDC. At that time, IDC analysts which Windows CE and NT struggle to com-
thought Apple’s Mac operating system pete. Moreover, the lines between those sub-
would slip into oblivion, and they could not markets are blurry, particularly when it
imagine that Linux would be popular comes to workstations and to laptops, which
enough to warrant a separate mention. are marketed in all three versions of
In June 2000 IDC estimated that various Windows (and with competing systems such
versions of Windows, including NT for work- as Mac, Linux, and Psion).
stations, had accounted for 87.7 percent of In order to demonstrate that Microsoft’s
“new license” (wholesale) shipments of market share was much larger than those fig-
“client” operating systems in the previous ures suggest, Judge Jackson resorted to the
year. Mac acccounted for 5 percent, accord- simple expedient of narrowing the defined
ing to IDC, and Linux 4.1 percent. IDC ana- market. He included only single-user desktop
lysts now project that Windows’ share will computers, in which Microsoft has an edge,
fall to 85 percent by 2004, and possibly much limiting the trial testimony as well as his own
lower if the exciting new Unix-based Mac OS findings to Windows 95 and 98.
X catches on (“Apple could always opt to (Nonetheless, he proceeded to apply his pro-
bring OS X to Intel platforms,” notes IDC).31 posed remedies to Windows CE and NT as
Rather than Windows’ share being 95 per- well.) Unlike the trial testimony, however,
cent and rising, as the judge stated, his own IDC’s definition of Windows’ share of the
source now says Windows’ share is below 88 “client” market is not confined to Windows
percent and falling. That is still a large num- 95 and 98. On the contrary, the apparent
ber, of course, but we are about to explain Windows share of nearly 88 percent is sub-
why it is much too large. To be sure, the stantially inflated by including Windows NT
newest IDC estimates, based on shipments for workstations, now called Windows 2000
rather than the installed base of old and new professional edition. Including NT might
computers, are an improvement over the have been perfectly reasonable if the judge
1997 figures. Yet the new estimates still had defined the “relevant market” to include
involve serious exaggerations arising from the operating systems of all workstations,
what is included in Windows’ share (such as but that is not what he did.
Windows NT for workstations) and what is Judge Jackson chose to define the relevant
excluded from competitors’ sales (such as market to include only “Intel-based” com-

8
puters. That means the market was confined stations that compete directly with Sun.
to “IBM clones” (i.e., computers originally Because the government chooses to exclude
designed to run on Microsoft operating sys- Sun workstations, which are not “Intel based,”
tems, just as Apple computers were designed Windows workstations should surely be
to run on Mac OS and Sun computers to run excluded too. If we exclude NT workstations, then
on Solaris). The wonder is, not that most the IDC estimate for Windows 95 and 98 drops from
Intel computers use Windows, but that other 88 to 66 percent of the “licensed shipments” of “client”
operating systems, such as Linux, BeOS, and operating systems. Yet the problems do not end
the Intel version of Solaris (and possibly of there. Licensed shipments do not include retail
Mac OS X), have been cleverly adapted to sales, downloads, and computers shipped with
operate on the “Wintel” architecture. no operating system. And IDC’s “single-user”
When the government proposed, as part client computers do not include computers
of its Microsoft breakup scheme, to create a linked to a server in a local network.
separate operating systems company, astute Counting licensed systems alone, as IDC
journalists made the undeniable observation does, seriously understates the use of Linux.
that the new company’s major competitors Licensed sales ignore sales in retail stores,
in the operating system business would where Linux is very strong, not to mention
include Sun Microsystems, Novell, Apple, millions of free (not licensed) Linux down-
Sun, Apple, and
and Palm.32 Yet Sun, Apple, and Palm were loads. When retail sales were included, Palm were totally
totally excluded from Judge Jackson’s defini- according to a report in a leading newspaper, excluded from
tion of the “relevant market” because they are Linux accounted for 23.6 percent of all oper-
not “Intel based.” Apple and Palm use ating systems sold, while Windows suppos- Judge Jackson’s
Motorola microprocessors, while Sun builds edly had a 71.4 percent share.3 6Walk through definition of the
its own. Defining the market to include only any store selling software, and you will see
Intel-based computers provided the magic by many boxes of Linux, most of which
“relevant mar-
which the government managed to com- (notably, Corel Linux) are aimed at desktop ket” because they
pletely ignore Apple, the sixth largest pro- users rather than servers. Yes, looking at are not “Intel
ducer of computers in the United States, as retail sales alone would clearly underestimate
though “Apple products” are not really com- Windows and Mac, because those systems are based.”
puters.3 3 Novell’s networking software was more often sold wholesale, by bulk licensing
arbitrarily excluded too, because the judge of the operating system to computer makers.
counted only “single-user” computers. That Yet it is just as misleading to base market
single-user limitation also eliminates, by def- share on licensed shipments alone. Doing so
inition, all network or “thin client” comput- ignores the remarkable success of Linux in
ers—from IBM, Sun, Compaq, and others— retail stores.
that use non-Microsoft operating systems.34 Even if someone counted both licensed
In fact, most of Microsoft’s leading competi- and retail sales, that would still ignore
tors were simply defined out of existence by “naked” computers shipped without a new,
Judge Jackson. commercially available operating system.
In the workstation market, limiting com- Naked computers account for 15 percent of
petitors to those that produce Intel-based sys- the market, according to government expert
tems completely excludes Sun Microsystems— Frederick Warren-Boulton.3 7Whatever sort of
lately the world’s largest seller of worksta- operating system is most often installed on
tions.35 Sun workstations, which start at less naked computers (including free operating
than $2,000, can even run Windows software if systems and older software), it will not be a
a card for that purpose is plugged in. The exclu- new version of Windows. Anyone who wants
sion of Sun, by itself, invalidates the govern- Windows 98 or 2000 knows it is much cheap-
ment’s use of IDC’s measure of market share. er and easier to have it preinstalled by the
Recall that IDC includes Windows NT work- manufacturer than to pay retail for a boxed

9
CD with instructions. If few naked computers While Judge Jackson’s reliance on, and
use new versions of Windows, that fact alone treatment of, market share data raises serious
could shave as much as fifteen percentage concerns, some of his other findings of fact
points from Windows 98’s market share, are equally dubious. In particular, there is his
which has already been shown to be much emphasis on the pure number of games and
smaller than the judge believed. At the very other software applications, old and new,
least, uncertainty about naked computers that supposedly create an insurmountable
further detracts from the spurious precision “applications barrier” to entry. Rival operat-
of Judge Jackson’s allegation about some ing systems are prevented from competing,
undefined version of Windows having a 95 insists the judge, because they cannot offer
percent share of some undefined market. the huge array of software programs that is
No higher court is likely to accept as fact available on a Windows platform. “Although
the government’s archaic and selective esti- Apple’s Mac OS supports more than 12,000
mates of Microsoft’s share of an artificially applications,” he says, “even an inventory of
defined market of “Intel-compatible” com- that magnitude is not sufficient to enable
puters that are neither small enough to use Apple to present a significant percentage of
Palm’s system nor powerful enough to use users with a viable substitute for Windows.”38
Sun’s. In fact, judges in the nation’s higher This “relative dearth” of software for Apple
courts have become increasingly sophisticat- was the judge’s implausible excuse for
ed about economics in recent years, which excluding Mac from the relevant market
means they (like economists) are unlikely to (although Linux, with far fewer applications
accept any measure of market share as a than Mac, was not excluded).
viable measure of monopoly. The judge asserts that the large stockpile
To illustrate just how misleading market of Windows and DOS applications must
share can be, consider the Microsoft Office make it impossible for non-Microsoft operat-
Suite. It has a very high market share but cer- ing systems to gain a “significant” number of
tainly no monopoly. Many popular comput- customers. Yet Mac, Linux, Palm, and Sun’s
ers come preloaded with rival office suites. Solaris are all doing quite well. In reality, few
Word Perfect is installed on CyberMax, computer users want more software than is
Quantex, NuTrend, and ABS. Lotus Smart contained in the major office suites that are
Suite comes with IBM and Polywell. And readily available for all operating systems.
Sun’s Star Office is preloaded on eMachines. Economist Richard McKenzie has estimated
If consumers don’t like the office software that a credible challenge to Windows could
A credible chal- that comes with their computer, they can eas- be mounted with no more than a few hun-
ily switch to another as an inexpensive dred key applications.39
lenge to upgrade, or download Star Office for free. Word Perfect, Star Office, and Applix
Windows could Monopoly means no consumer choice; it offer free or inexpensive office suites for
be mounted with does not mean that consumers freely choose Linux (which is why Lotus and Microsoft do
one product over others, even when the others not), but that does not make Linux any easi-
no more are free. Similarly, the fact that the Windows er to install or use. IBM’s OS/2 system ran all
than a few operating system is currently more popular Windows software in the early 1990s, but
than systems from Apple, Sun, or VA Linux OS/2 was nevertheless an overpriced system
hundred key does not mean Windows has a monopoly. It that required expensive hardware. Microsoft
applications. means that Windows is the consumers’ choice. Office has always been available for Mac, but
Although the Internet may make consumers that did not make Apple’s pricey computers
relatively less concerned about which operat- any more affordable. Plainly, factors other
ing system they use, they will never be wholly than the availability of applications software
indifferent to the features and ease of use that dissuaded consumers from buying those
an operating system affords. rival systems.

10
Furthermore, the Justice Department operating system in violation of the 1995 con- Microsoft’s
grounded many aspects of its case on a debat- sent decree between the company and DOJ. applications bar-
able interpretation of a technological fore- Microsoft then pressed its case in the U.S.
cast. According to DOJ, applications will be Court of Appeals for the District of Columbia rier, if it existed
gravitating away from local PC hard drives Circuit. Six months later, the appellate court, at all, would
toward the Internet. Perhaps so, but that not wanting to be in the “unwelcome position
does not prevent a wide range of Internet of designing computers,”4 0reversed the trial
afford no com-
browsers from accessing the Internet and court and vacated the injunction. petitive protec-
interacting with the service providers that DOJ had advised the D.C. Circuit to look tion in an
will be providing the new applications. Still, to antitrust law for guidance in interpreting
the government assumed that only Netscape the consent decree. The circuit court took Internet-domi-
would be able to reach and communicate that advice but, to DOJ’s dismay, expressly nated world.
with applications service providers. rejected the antitrust standard that the gov-
That was the logic underlying the govern- ernment preferred. Specifically, the appellate
ment’s muddled argument for protecting court declined to apply a 1984 Supreme
Netscape’s “usage share” from competition. Court case, Jefferson Parish Hospital District No.
Judge Jackson, agreeing with that argument, 2 v. Hyde,4 1 which held that tying two prod-
evidently ignored two countervailing facts. ucts is impermissible, even though the prod-
First, several dozen browsers all read the ucts may be functionally integrated, if there
same languages (mainly html) and can all is sufficient consumer demand to constitute
link to Internet-based applications. Second, a a separate viable market for the second prod-
“network-centric” delivery system for soft- uct. On the basis of that case, DOJ main-
ware, if it ever catches on, would make it irrel- tained that Windows and Internet Explorer
evant how many programs were once avail- were illegally tied as long as Internet Explorer
able on floppy discs and CD-ROMs. In other could profitably have been sold by Microsoft
words, Microsoft’s applications barrier, if it as a separate product.
existed at all, would afford no competitive Instead of following Jefferson Parish, the
protection in an Internet-dominated world. D.C. Circuit treated the Microsoft package
not as a contractual tie but as a physical or
“technological” tie—principally because
Legal Issues Internet Explorer and Windows were com-
bined in a manner that precluded removal of
Judge Jackson’s findings of fact were the the browser. The appropriate benchmark,
foundation on which he constructed his con- said the court, must be one based on “plausi-
clusions of law. When that foundation is ble benefit” to the consumer. Under that
unsound, the resultant structure inevitably standard, a tying arrangement would survive
collapses. Still worse, in this case much of antitrust scrutiny if it resulted in a “product
Jackson’s legal structure collapses even if we that combines functionalities . . . in a way
accept his factual foundation. To illustrate, that offers advantages unavailable if . . .
we next examine Jackson’s critique of bought separately and combined by the pur-
Microsoft’s tying arrangements, first-screen chaser.”4 2 In essence, the court concluded
restrictions, so-called exclusionary contracts, that Microsoft’s packaged product, includ-
and the infamous June 1995 meeting ing both Windows and Internet Explorer,
between Microsoft and Netscape. was better for customers than buying the two
components separately and trying to put
Tying Arrangements them together. Accordingly, the D.C. Circuit
In December 1997 Judge Jackson prelimi- remanded the case to Judge Jackson for
narily enjoined Microsoft from tying the reconsideration of his injunction but warned
Internet Explorer browser to the Windows DOJ in no uncertain terms to abandon the

11
Jackson got it suit. “The Department may well regard fur- First-Screen Restrictions
right when he ther pursuit of the case as unpromising,” In its complaint, the government rebuked
instructed the court.4 3 Microsoft for insisting that OEMs not delete
said that “the We now know, of course, that neither DOJ certain icons from the Windows opening
inclusion of nor Judge Jackson took the appellate court’s screen. In that manner, argued DOJ,
admonition very seriously. DOJ went forward Microsoft used its control over the desktop
Internet Explorer with its antitrust suit, alleging that Microsoft’s to dictate Internet access and, to some extent,
with Windows at tying arrangement violates the Sherman Act. content. On initial boot-up, Microsoft uses
no separate And Jackson in his final judgment effectively about 15 percent of its first screen to display
lectured the D.C. Circuit on the law—ignoring selected icons. But OEMs can easily remove
charge . . . con- the higher court’s plausible benefit rule in favor most icons (although not Internet Explorer);
tributed to of his own formulation based on the Jefferson they can add icons to 85 percent of the
Parish standard that the crcuit had considered screen that Microsoft doesn’t use, install rival
improving the and rejected. Even Harvard professor Lawrence software, even make Netscape the default
quality of Web Lessig, hand-picked by Jackson to file a friend- browser.
browsing soft- of-the-court brief, acknowledged that the Microsoft never restricted any OEM from
government had not made out a claim of tech- installing a rival browser and displaying its
ware, lowering its nological tying. Although Lessig thought the icon on the startup screen. Consumers could
cost, and crcuit should have applied a different rule, he go a step further; they could delete the
increasing its said bluntly: “Under the Court of Appeals test, Internet Explorer icon or even substitute a
Microsoft must prevail.”44 shell for the first screen—all with a few clicks
availability.” Indeed, Microsoft should prevail no mat- of the mouse—in which case the icon would
ter which standard is applied. In a nutshell, disappear forever. Thus, Microsoft’s restric-
the company could not have been acting tions are no more burdensome than, say,
anti-competitively if its actions were in those imposed by an automobile dealer who
response to similar actions by its rivals. presets the stations on your car radio or
Jackson found, for example, that “consumers refuses to remove the hood ornament.
in 1995 were already demanding software Judge Jackson seemed to agree. He found
that enabled them to use the Web with ease.” that “Microsoft’s license agreements have
Moreover, “IBM had announced in never prohibited OEMs from pre-installing
September 1994 its plan to include browsing programs, including [Netscape’s] Navigator,
capability in OS/2 Warp [IBM’s operating on their PCs and placing icons and entries for
system, which was then the principal chal- those programs on the Windows desktop.”47
lenger to Windows] at no extra charge.” Despite that apparent endorsement of
Jackson also found that “Microsoft had rea- Microsoft’s first-screen policy, the judge held
son to believe that other operating-system that the company’s license agreements with
vendors would do the same.”45 Combining OEMs violated the Sherman Act insofar as
Internet functionality with an operating sys- they required Microsoft’s permission before
tem was just one more instance of product an OEM could delete specified icons from
improvement through integration. That pro- the desktop. Not only did Jackson’s holding
competitive practice—the norm in high-tech elevate a trifling contractual restriction,
industries—could not, therefore, violate the which bound OEMs but not consumers, to
antitrust laws. the level of an antitrust violation, but it also
For once, Jackson got it right when he said precluded Microsoft from exercising its
that “the inclusion of Internet Explorer with rights under federal copyright law.
Windows at no separate charge . . . contributed Companies that hold valid copyrights are
to improving the quality of Web browsing entitled to demand of distributors that copy-
software, lowering its cost, and increasing its righted products be delivered to customers in
availability, thereby benefiting consumers.”46 the form prescribed by the creator.48

12
“Exclusionary” Contracts nological cooperation and cites an earlier e- DOJ has fallen
DOJ also contended that Microsoft’s con- mail sent by Netscape’s chairman, Jim Clark. far short of its
tracts with Internet service and content “We want to make this company a success,”
providers (ISPs and ICPs) were exclusionary— wrote Clark, “but not at Microsoft’s expense. burden under the
that is, they were designed to prevent ISPs We’d like to work with you. . . . Depending on antitrust laws,
and ICPs who dealt with Microsoft from also the interest level, you might take an equity
dealing with Netscape. Naturally, companies position in Netscape.”5 0
which is to show
negotiate exclusive contracts all the time, but That e-mail didn’t convince Jackson. He that there was a
those contracts can run afoul of the antitrust accepted DOJ’s version of the meeting and clear and unam-
laws if one of the companies is a monopolist. noted that “had Netscape accepted Microsoft’s
The question, then, is whether Microsoft offer, nearly all of its share [‘well above seven- biguous invita-
tried to leverage its alleged operating system ty percent’ of the browser market] would tion to engage in
monopoly to obstruct ISPs and ICPs from have devolved upon Microsoft.”5 1But why on
doing business with Netscape, thereby fore- earth would Netscape do something so
collusive, illegal
closing Netscape from using that channel to transparently suicidal? Why would Microsoft acts.
market its browser. bother to propose such a foolish deal? What
In assessing DOJ’s exclusive dealing claim, was Microsoft’s “offer” in return? How could
Judge Jackson reached two contradictory the new Windows 95 have succeeded without
conclusions. First, he held that the various the critical support of Netscape, the hottest
ISP and ICP agreements “did not foreclose browser around? The whole story makes no
enough of the relevant market to constitute a sense.
§ 1 [Sherman Act, section 1] violation.” But Was the meeting a DOJ setup? That’s hard
second, he declared that Microsoft’s absolu- to prove; but within 48 hours of the meeting,
tion under section 1 “in no way detracts from the government received detailed notes
the Court’s assignment of liability for the about it, recorded by Netscape officer Marc
same arrangements under § 2.”49 Those two Andreessen, who had been present, and sup-
holdings simply cannot coexist. If Microsoft plied by Netscape’s outside attorney, Gary
is exonerated of a section 1 charge, covering Reback.52 Yet, if DOJ possessed evidence of
conspiracies in restraint of trade, then a sec- an illegal market-splitting proposal by
tion 2 charge, covering attempts to monopo- Microsoft, why did it take three years for the
lize, must also fail. Foreclosing Netscape’s government to press charges? Whatever the
distribution channels was a central element answer to that question, DOJ has fallen far
of both violations. If Microsoft had indeed short of its burden under the antitrust laws,
attempted to exclude Netscape from the ISP which is to show that there was a clear and
and ICP channels, and if Microsoft enjoyed unambiguous invitation to engage in collu-
the overwhelming monopoly power that sive, illegal acts. There is nothing in antitrust
Jackson asserts, then surely Microsoft would law that would forbid a meeting to explore
have succeeded. Yet Jackson himself concedes technological cooperation that, in any
that it did not. event, never materialized. The charge of
attempted market splitting is just one more
Meeting with Netscape unsubstantiated accusation DOJ has raised
In June 1995, according to the govern- to embellish an otherwise vacuous lawsuit.
ment, Microsoft met with Netscape and pro-
posed that the two companies split the
browser market, in violation of the antitrust Draconian Remedies
laws. Specifically, Netscape was to stop devel-
oping platform-level browsing software for Judge Jackson’s final remedies are
Windows. Microsoft contends that the meet- undoubtedly his most pernicious blunder. In
ing was initiated by Netscape to explore tech- some respects wholly disassociated from any

13
Jackson’s reme- of Microsoft’s alleged transgressions, in other viding Microsoft Office for Linux, a system
dies—if one didn’t respects lopsided when weighed against his the judge dismissed as a trivial niche product.
findings and conclusions, Jackson’s reme- Citing new theories and post-trial evidence,
know better— dies—if one didn’t know better—would seem the government appeared to be groping for
would seem crafted to inflict as much damage as possible, any sort of rationale to justify its elaborate
crafted to inflict not just on Microsoft, but on the broader plans for restructuring and regulating the
high-tech marketplace. company.
as much damage Seemingly separate charges—maintaining Anyone who believes that Microsoft’s vig-
as possible, not a monopoly in operating systems, attempt- orous competition with Netscape and Sun
ing (unsuccessfully) to monopolize browsers, was illegal would surely expect the judge’s
just on Microsoft, illegally “tying” Internet Explorer to remedies to focus on those issues, such as
but on the broader Windows, and behaving in a “predatory” “untying” Internet Explorer (thereby impos-
high-tech manner—all come down to essentially the ing a hugely irritating inconvenience on con-
same thing. Stripped of irrelevant gobbledy- sumers) and prohibiting Microsoft from
marketplace. gook about “bullying,” which is neither offering its own version of Java. But the actu-
definable nor illegal, the essence of al remedies have little to do with those
Microsoft’s alleged infractions was, first, alleged offenses, or even with the judge’s
making it possible to use the Internet with poorly supported claim that Windows 98 has
browsing software included in Windows at a monopoly (which is not itself illegal).
no extra charge and, second, offering soft- Surely, if the problem were a Windows 98
ware developers a faster, Windows-specific monopoly, the spin-off of a separate
version of the Java programming language Windows company would do nothing to
licensed from Sun. change that. The newly created operating sys-
The thrust of the judge’s conclusions of tem (OS) company would still have the same
law, in his own words, is that Microsoft’s mis- large market share for Windows 98 and small
conduct purportedly foiled “Netscape’s shares for Windows NT and CE. And the
Navigator Web browser and Sun’s implemen- applications (APPS) company would still
tation of the Java technology.”5 3 Nearly all of have the most popular office suite, while
the many companies recruited to complain struggling valiantly against Quicken and
in court about their dealings with Microsoft Turbo Tax in financial software. In fact, any
were participants in a circus sideshow having company that sold nothing but Windows
nothing to do with those accusations. would be in a stronger position to raise its
The government’s role in protecting price: The company would no longer be con-
Netscape and Java—in effect, taking sides in cerned that a higher price for the operating
the now-obsolescent, prewireless “browser system would shrink the market for applica-
wars”—was central to the case from the begin- tions.
ning. That was always a curious obsession The only rationale for separating OS from
because browsers have mostly been free, ever APPS was a claim by the software lobby that
since Mosaic in 1993, and have long been intimate knowledge of Windows is what
bundled with most operating systems (OS2, gives Microsoft an edge in applications. Yet
Linux, BeOS, EPOC), most Internet services no shred of evidence was presented at the
(AOL), and some office suites (Star Office, trial to substantiate that claim. In fact, the
Word Perfect 7 and 8). When it came to reme- government’s most theatric “remedy”—sepa-
dies, however, the government quickly lost its rating OS from APPS—is entirely unrelated
previous passion for helping out Netscape to any complaint aired at the trial. There is
and Java, both of which are doing fine despite simply no link between the breakup scheme
being “pummeled” by Microsoft. Instead, and any specific illegal behavior ostensibly in
DOJ hired new experts to spin new theories need of a remedy.
about, say, the hypothetical wonders of pro- Naturally, one effective way to reduce the

14
market share of a product as popular as and necessary portions of the source code, and Consumers buy-
Windows is to make that product less attrac- any related documentation of Microsoft ing a computer
tive to consumers. That is where the so-called Platform Software”).5 5
conduct remedies come in. They would indeed Finally, lurking among Judge Jackson’s with “Windows”
prevent Windows from becoming more useful more harmful remedies is this one, destruc- would have no
to consumers. Because those restrictions were tively if unintentionally designed to com-
designed to last for 10 years if the company is pletely paralyze innovation:
idea what that
not split in two, and because court-ordered meant until they
divestiture is highly unlikely, the heart of the Microsoft shall not, in any Operating turned on the
U.S. software industry would be transformed System Product . . . bind any Middle-
into a regulated utility for a fatally long time. ware Product to a Windows Operat- machine.
Consider, for example, the way the following ing System unless . . . all means of Standardization,
regulation, from the judge’s final judgment, End-User Access to the Middleware
redefines and redistributes the property rights Product can readily be removed by
arguably
to Windows: OEMs . . . [and] by end users. When an Microsoft’s most
OEM removes End-User Access to a important contri-
Microsoft shall not restrict . . . an Middleware Product . . . the royalty
OEM from modifying . . . [any] aspect paid by the OEM for that copy of bution to soft-
of a Windows Operating System Windows is reduced.56 ware markets,
Product to . . . display icons or other- would be no
wise feature other products or services Requiring that the price of Windows be
. . . display any user interfaces, provid- reduced if the browser or other “middleware” more.
ed that any icon is also displayed that is removed is just a devious way of prohibit-
allows the user access to the Windows ing Microsoft from including Internet
user interface, or . . . launch automat- Explorer for free, and from adding other free
ically any non-Microsoft Middleware, features such as voice recognition, Web secu-
Operating System or applications.54 rity, or virus protection. Since AOL-Netscape
and others could continue offering integrat-
That “remedy” effectively gives computer ed products—with some add-ons priced at
manufacturers carte blanche to expropriate the zero—Microsoft’s OS company would be put
Windows trademark. OEMs would be free to at a hopeless competitive disadvantage.
hide the Windows screen, have a different oper- Because “middleware” can include just
ating system launch automatically (whether about everything,5 7 Microsoft could not inte-
consumers want one or not), and transform the grate any features in Windows that could not,
desktop into an advertising billboard. That as a technical matter, be easily removed. And
remedy is also a recipe for Balkanization: because Internet Explorer would be owned by a
Consumers buying a computer with separate APPS company, which would be pro-
“Windows” would have no idea what that hibited for years from dealing with the OS com-
meant until they turned on the machine. pany, the browser currently built into Windows
Standardization, arguably Microsoft’s most could only be improved by leasing a newer
important contribution to software markets, browser from, say, AOL-Netscape. Like most of
would be no more. the proposed remedies, that one would be good
Further compromising Microsoft’s intel- news for competitors but bad for competition.
lectual property rights, Judge Jackson would
mandate that the company invite OEMs,
other hardware vendors, and competing soft- Lessons to Be Learned
ware vendors to scrutinize the inner workings
of Windows whenever they see fit (i.e., “to Judge Jackson’s final judgment indicates,
study, interrogate and interact with relevant if there was ever any doubt, that he has fallen

15
Rent-seeking hook, line, and sinker for the government’s Sun, IBM—spend between 6 and 10 percent.60
businessmen had flawed arguments. As a result, real people will Sad to say, Microsoft has learned to play the
be, and have been, injured by this foolishness. political game in a hurry. For many years con-
better rein in Microsoft’s shareholders suffered an erosion spicuous by its absence from Washington, D.C.,
their appetite for of market value measured in hundreds of bil- Microsoft has now expanded its D.C. office
lions of dollars, which adversely affected from 4 people in 1994 to 14 this past April.
government other tech stocks and the economy in gener- Between January 1999 and February 2000,
largesse before al.58 If Jackson’s remedies are effectuated, Microsoft’s political action committee ladled
they begin to reap company employees, like expendable chess out $278,000 to 149 congressional incumbents
pawns, will be deployed to advance DOJ’s dis- in both parties. The company expects to spend
the unwelcome memberment scheme. Bureaucrats will more than $1 million this election cycle.6 1
fruits of their supervise the allocation of those employees— It’s even worse among Microsoft’s rivals. A
sales, marketing, programming, product single Silicon Valley fundraiser in April
unwholesome development, research, procurement, legal, brought in $1.3 million to Democratic Party
labors. and accounting—as well as the allocation of coffers.6 2TechNet, the brainchild of political-
real estate and intellectual property. ly connected financier John Doerr, has made
Billionaire businessmen, like Larry Ellison Silicon Valley an official new participant in
of Oracle and Scott McNealy of Sun the Washington problem. Instead of making
MicroSystems, have skillfully yet wrongly used principled arguments regarding the proper
government in an attempt to bring down a role of government, TechNet, with great
competitor.59 Consumers pick up the tab when enthusiasm, has advocated industrial-age
those companies devote more of their resources government intervention against too suc-
to politicking and less to the kinds of integrat- cessful high-tech competitors. Ultimately,
ed products that, until now, have characterized that political agenda will destroy what it
the software industry. That misuse of the polit- sets out to protect. Because politicians are
ical process, which economists call rent seeking, basically order takers, we get the kind of
is both facilitated and made necessary by an government we ask for, including oppres-
amorphous set of antitrust statutes that dele- sive regulation. To their lasting regret, some
gate too much discretion to DOJ officials and people in Silicon Valley may soon get the
federal judges. Potential defendants, like kind of government they are requesting. The
Microsoft, simply cannot know the rules that lesson is straightforward: rent-seeking busi-
presumably govern their conduct. nessmen had better rein in their appetite for
Meanwhile, the Clinton administration government largesse before they begin to
doesn’t comprehend this basic tenet of eco- reap the unwelcome fruits of their unwhole-
nomics: In the real world, producers seek to some labors.
carve out market niches in order to have
some influence over the terms on which they
sell their products. The profits that arise Notes
when they succeed propel economic growth. For an abbreviated version of this paper, see
Rather than measure high-tech markets “Antitrust for Dummies,” American Spectator,
against the textbook model of perfect com- November 2000, pp. 52–56.
petition, a model better suited to an agrarian
1. For more background, see Robert A. Levy,
economy, we need to concern ourselves with “Microsoft and the Browser Wars: Fit to Be Tied,”
the sterile marketplace that will evolve if vig- Cato Institute Policy Analysis no. 296, February
orous antitrust enforcement extinguishes the 19, 1998; and Robert A. Levy, “Microsoft Redux:
incentives for new and improved products. Anatomy of a Baseless Lawsuit,” Cato Institute
Policy Analysis no. 352, September 30, 1999.
Without those incentives, Microsoft would
not spend 17 percent of its revenue on 2. United States v. Microsoft Corp., 147 F.3d 935
research and development. Its rivals—Oracle, (1998).

16
3. United States v. Microsoft Corp., Civil Action 98- 2000, p. A17.
1232 (D.D.C. 1998).
21. As adopted by the U.S. Judicial Conference,
4. Thomas J. DiLorenzo, “MS-Nationalization,” reprinted in 175 F.R.D. 363 (1998).
Ludwig von Mises Institute, June 8, 2000,
<http://www.mises.org/fullstory.asp?control 22. James V. Grimaldi, “Hearsay,” Washington Post,
=442>. June 12, 2000, p. F31. Despite finding that Judge
Jackson had been lax in his observance of judicial
5. See Sun Microsystems, Inc. v. Microsoft Corp., Civil ethics, the appellate panel concluded that his
Action C-97-20884-RMW (N.D. Cal. 1997). infraction was not sufficient to justify his removal
from the case.
6. United States v. Microsoft Corp., Civil Action 98-
1232, Transcript (September 17, 1998), p. 7. 23. United States v. Microsoft Corp., Civil Action No.
98-1232, Findings of Fact (November 1999), ¶
7. United States v. Microsoft Corp., Civil Action 98- 412.
1232, Transcript (April 4, 2000), pp. 8–9.
24. United States v. Microsoft Corp., Civil Action No.
8. Ibid. at 11. 98-1232, Conclusions of Law (April 2000), p. 20.

9. United States v. Microsoft Corp., Civil Action 98-1232, 25. United States v. Microsoft Corp., Civil Action No.
Memorandum and Order (June 7, 2000), p. 4. 98-1232, Findings of Fact (November 1999), ¶ 23.

10. Quoted in James V. Grimaldi, “Reluctant Ruling 26. IDC, for example, predicts that by 2002 there
for Judge,” Washington Post, June 8, 2000, p. A1. will be more than 55 million hand-held and note-
book-style information appliance devices and
11. United States v. Microsoft Corp., Civil Action 98- that by 2005 shipments of those appliances will
1232, Memorandum and Order (June 7, 2000), exceed shipments of PCs. Cited in Red Hat, Inc.,
p. 5 (footnote omitted). “Red Hat and North Carolina State University
Partner to Establish First Open Source-Based
12. See Fred S. McChesney and William F. University,” Press release, Business Wire, October
Shughart II, eds., The Causes and Consequences of 18, 2000.
Antitrust: The Public Choice Perspective (Chicago:
University of Chicago Press, 1995). 27. United States v. Microsoft Corp., Civil Action No. 98-
1232, Conclusions of Law (April 2000), pp. 21–23.
13. Quoted in John R. Wilke, “For Antitrust
Judge, Trust, or Lack of It, Really Was the Issue,” 28. United States v. Microsoft Corp., Civil Action No.
Wall Street Journal, June 8, 2000, p. A1. 98-1232, Findings of Fact (November 1999), ¶ 12.

14. Quoted in Joel Brinkley and Steve Lohr, 29. Ibid. ¶ 35.
“Retracing the Missteps in the Microsoft
Defense,” New York Times, June 9, 2000, p. C8. 30. Richard B. McKenzie, Trust on Trial: How the
Microsoft Case Is Reframing the Rules of Competition
15. See John R. Wilke and Rebecca Buckman, (Cambridge, Mass.: Perseus, 2000), pp. 64–66 and
“U.S. Judge Calls Abrupt End to Microsoft Trial,” Table 2.1, p. 33.
Wall Street Journal, May 25, 2000, p. A3.
31. International Data Corporation, “Computer
16. United States v. Microsoft Corp., Civil Action Operating Environments Coevolve,” IT Forecaster,
98-1232, Memorandum and Order (June 7, August 8, 2000, <http://www.idc.com/itforecaster/
2000), p. 3. itf20000808.stm>.

17. See United States v. E.I. du Pont de Nemours & Co., 32. Lee Gomes and Rebecca Buckman, “Unintended
366 U.S. 316, 326 (1961). Consequences?” Wall Street Journal, June 2, 2000,
p. B1.
18. Quoted in James V. Grimaldi, “Microsoft
Judge Says Ruling at Risk; Every Trial Decision 33. See United States v. Microsoft Corp., Civil Action
Called ‘Vulnerable,’” Washington Post, September 98-1232, Plaintiffs’ Joint Reply to Microsoft’s
29, 2000, p. E1. Proposed Conclusions of Law (January 2000), p. 3
(“Apple products . . . [were] carefully examined
19. Ibid. and found not to be in the same market”).
20. See Leonard Orland, “Jackson’s Unethical 34. See Bill Howard, “Thin Is Back,” PC Magazine,
Press Talks,” National Law Journal, August 14, April 4, 2000, p. 168. IBM’s network computers use

17
BSD Unix, Sun’s use Solaris, and Compaq offers 45. United States v. Microsoft Corp., Civil Action 98-
Linux or Windows CE. Sun Ray and Neoware have 1232, Findings of Fact (November 1999), ¶ 140.
their own proprietary operating systems.
46. Ibid. ¶ 408.
35. Gartner Group, “Gartner’s Dataquest Says
Worldwide Server and Workstation Markets 47. Ibid. ¶ 217.
Experience Double-Digit Growth in Second
Quarter 2000,” Press release, <http://gartner11. 48. See WGN Continental Broadcasting Co. v. United
gartnerweb.com/public/static/aboutgg/press Video, Inc., 693 F.2d 622, 625 (7th Cir. 1982).
rel/pr20000802a.html>. In the second quarter of
1999, Sun was number one with 22.9 percent of 49. United States v. Microsoft Corp., Civil Action
global workstation shipments, but that slipped to 98-1232, Conclusions of Law (April 2000), p. 39.
19.3 percent a year later as Dell captured the low
end of the market. 50. John R. Wilke, “Netscape Secretly Offered
Microsoft a Stake,” Wall Street Journal, October 22,
36. See chart accompanying Ariana Eunjung Cha, 1998, p. B7.
“Ruling Threatens New Product,” Washington Post,
June 8, 2000, p. A21. The data in the chart seem to 51. United States v. Microsoft Corp., Civil Action
be drawn from PC Data (one of several sources 98-1232, Conclusions of Law (April 2000), p. 23.
listed), which collects sales figures from 17 major
software retailers. 52. John R. Wilke, “In New Twist, Microsoft Says
It Was ‘Set Up,’” Wall Street Journal, October 27,
37. United States v. Microsoft Corp., Civil Action 1998, p. A3.
No. 98-1232, Testimony of Frederick R. Warren-
Boulton (November 18, 1998), p. 20. Warren- 53. United States v. Microsoft Corp., Civil Action No.
Boulton added naked computers to Microsoft’s 98-1232, Conclusions of Law (April 2000), p. 9.
share, but that is inappropriate. Naked computers
must use some sort of operating system, but it is 54. United States v. Microsoft Corp., Civil Action No. 98-
unlikely to be a new version of Windows. If some 1232, Final Judgment (June 7, 2000), sec. 3.a.iii.
naked computers use old versions of Windows,
that would show that Microsoft has to compete 55. Ibid., sec. 3.b.
against itself when trying to sell new or upgraded
software. 56. Ibid., sec. 3.g.

38. United States v. Microsoft Corp., Civil Action No. 57. See ibid., sec. 7.g, where Judge Jackson’s bizarre
98-1232, Findings of Fact (November 1999), ¶ 47. definition of middleware somehow encompasses
even Microsoft Office.
39. Richard McKenzie, “Microsoft’s ‘Applications
Barrier to Entry’: The Missing 70,000 Programs,” 58. See Gary Robbins and Aldonna Robbins, “The
Cato Institute Policy Analysis no. 380, August 31, Real Economic Costs of the Microsoft Decision,”
2000. Institute for Policy Innovation, October 3, 2000,
<http://www.ipi.org>.
40. United States v. Microsoft Corp., 147 F.3d 935,
950 (1998) (citation omitted). 59. See Gary Rivlin, The Plot to Get Bill Gates (New
York: Times Books, 1999).
41. Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2
(1984). 60. United States v. Microsoft Corp., Civil Action 98-
1232, Testimony of Paul Maritz (January 22,
42. United States v. Microsoft Corp., 147 F.3d 935, 948 1999), ¶ 155.
(1998).
61. Karen Foerstel, “GOP Deplores Microsoft
43. Ibid. at 953. Ruling, Urges Gates to Support Party,” CQ Weekly,
April 8, 2000, pp. 833–34.
44. United States v. Microsoft Corp., Civil Action 98-1232,
Brief of Lawrence Lessig (1999), p. 17. 62. Ibid.

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