The Microsoft Decision: Judge Finds for Government
By Michael Brick and Carolyn Koo
TheStreet.com/nytimes.com Staff Reporters
11/5/99 7:00 PM ET
In a sharp blow to Microsoft (MSFT:Nasdaq), a federal judge issued a decision late Friday favoring the government in its wide-ranging, yearlong antitrust lawsuit against the company, holding that the giant software maker holds monopoly power in personal computer operating systems.
U.S. District Court Judge Thomas Penfield Jackson's findings on the facts in the case set the stage for a final ruling in the coming months on whether Microsoft violated federal antitrust laws.
The judge said Microsoft's actions stifled innovations in the industry and deterred investments in rival technologies. He also found that the actions of Microsoft had the potential to harm consumers.
In his ruling, the judge said Apple Computer (AAPL:Nasdaq) was too small to compete effectively against personal computers that used Microsoft Windows, and that Linux software does not pose a threat to Windows. He said computer makers believed they had no choice but to use Windows.
Microsoft said it disagreed with many of the court's findings, and said it is confident that its position will ultimately be upheld. It said it will "vigorously" contest the case in court.
Assistant attorney general Joel Klein, who heads the U.S. Justice Department's Antitrust Division, said the Justice Department was "enormously pleased by the Microsoft findings." But he said it was premature to discuss what remedies would be taken against Microsoft.
The opinion did not specifically identify which antitrust laws Microsoft might have violated, if any, or say anything about penalties. But Judge Jackson sided with virtually every part of the government's case.
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Wall Street analysts said they believed the timing of the ruling was aimed in part at limiting the case's effect on the stock market. One speculated that the decision could have been delayed to today after it was announced last week that Microsoft was one of four new companies to be added to the Dow Jones Industrial Average on Monday. It has been widely known that the decision would come on a Friday evening.
Many analysts expect the ruling to have a minimal impact on the stock market, even if the document points to a catastrophic ruling against Microsoft. No matter what the eventual verdict is, market players expect an appeal from at least one of the parties and possibly both.
"It's going to be a bunch of facts which are going to be meaningless," said John Puricelli, analyst for A.G. Edwards. "This thing's going to go on for three years and it's going to go all the way to the Supreme Court because both sides are hardheaded." Puricelli has an accumulate rating on Microsoft. His firm has done no underwriting for the company.
Even a document that casts a pall on Microsoft's case could give the stock a lift, some analysts said. The stock is up more than 70% over the last year. Microsoft's stock closed regular trading at 4 p.m. Friday down 1/8 at 91 9/16 on heavy volume of 35 million shares. In after-hours on Island ECN, the company's shares were down sharply after the judge's ruling, off 3 3/8 to 88 3/16.
"At a minimum, the level of uncertainty will decrease, which is a positive," said Paul Dravis, analyst for Banc of America Securities, who rates the stock a buy. His firm hasn't done underwriting for Microsoft.
Some observers following the case believe the disclosure could lead to settlement talks. "Judge Jackson has encouraged settlement talk all along," said analyst James Lucier of Prudential Securities. "Microsoft and the Department of Justice have indicated they might entertain a settlement." However, he also said that the state attorneys general, the other plaintiff in the case, are not as amenable to a deal. Prudential has an accumulate rating on the stock and has not done any underwriting for the company.
Later this year or early next year, Judge Jackson will make a second ruling in the case, the conclusions of law, determining how antitrust statutes should be applied to the facts. The judgment, or final ruling, will follow after that, perhaps one or two months later. Though it is possible that appeals could be filed after each ruling, analysts expect that neither side will appeal until after the final judgment.
In May 1998, the Justice Department, 20 states and the District of Columbia sued Microsoft under sections 1 and 2 of the Sherman Antitrust Act. The judge heard opening arguments five months later, on Oct. 19, 1998. Testimony in the case lasted almost a year, ending with final arguments on Sept. 21, 1999.
The government contends that Microsoft violated U.S. antitrust laws by engaging "in a broad pattern of unlawful conduct with the purpose and effect of thwarting emerging threats to its powerful and well-entrenched operating system monopoly," according to Justice Department documents. Justice concludes that such behavior harms consumers by depriving them of choice and advances in the software industry.
The government said Microsoft tried to eliminate competition by offering to divide the browser market with Netscape in a meeting on June 21, 1995. Then, when Netscape refused, the government asserted, Microsoft took a number of steps to eliminate the competition. These included unlawfully requiring computer manufacturers to include its Internet Explorer Web browser as a condition of using its Windows 95 and Windows 98 operating systems. It also included alleged anticompetitive and exclusionary arrangements with Internet service providers and online services to install the Microsoft browser only and preclude the use of the Netscape browser, as well as setting a "predator price" for Internet Explorer, offering the browser for free.
Additionally, the government alleges that Microsoft tried to sabotage Sun Microsystems' (SUNW:Nasdaq) Java cross-platform capabilities, which it saw as a threat to the popularity of its Windows operating system.
Microsoft has denied all the charges, characterizing the government's case as "specious," "fiction," "fantasy," "silly" and "pure baloney." Among other rebuttals, it contends that Netscape has been more than able to distribute millions of copies of its software. It argues that it does not have a monopoly because it does indeed face significant competition, namely from Netscape, which was acquired earlier this year by America Online (AOL:NYSE) for $10 billion. Microsoft says its competition also includes Red Hat (RHAT:Nasdaq), a company with a market value exceeding $8 billion that develops open-source software, including the Red Hat Linux operating system. Microsoft also pointed out that even the government's chief economic witness said Microsoft's conduct had not harmed consumers "up to this point
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