Judge Wakes Up Investors Who Shrugged Off the Antitrust Case
By STEVE LOHR
for more than a year, the Microsoft Corporation has been untarnished on Wall Street and on Main Street from the government's relentless antitrust assault on the company. But suddenly, it may begin feeling some pain as investors and the computer industry consider the likely impact of the blow delivered on Friday evening by Judge Thomas Penfield Jackson.
The judge, who is deciding the antitrust case without a jury, took a defining first step toward a verdict, with findings of fact that concluded that Microsoft is a monopoly whose bullying tactics have hurt consumers and the economy by stifling innovation in the computer industry.
With that conclusion, Judge Jackson set the stage for an eventual ruling against the software giant and remedies that could be as extreme as a breakup of the company.
The Microsoft Corporation has not known this kind of threat to its business or public image in the 18 months since the government filed its antitrust suit.
At the trial in Washington, Microsoft was pummeled again and again with harsh allegations of corporate misconduct and incriminating evidence. Its every embarrassing slip up in the courtroom was chronicled daily in the news media.
Yet Wall Street shrugged it all off as an irrelevant sideshow. Microsoft's stock price kept climbing, minting more Microsoft millionaires and insuring that William H. Gates continued to extend his lead as the world's richest person. And polls of public opinion have shown that the favorable reputation of Mr. Gates and his company have been untarnished by its antitrust battle with the government.
But on Friday night, in late after-hours trading after Judge Jackson's findings were made public, Microsoft's stock price fell sharply, down $5 from $91.5625. David Readerman, an investment banker who studies the company, says he expects Microsoft's shares to drop early this week, though by no more than 10 percent. Still, a 10 percent decline in would erase $47 billion in the wealth of Microsoft shareholders.
"It won't be a wipeout," said Mr. Readerman, a managing director at Thomas Weisel Partners in San Francisco. "Microsoft is still a great growth story. But not only the Department of Justice, but also now a federal judge feel that some of that growth was acquired improperly."
Mr. Readerman added: "The findings of fact by a United States federal judge is a serious thing, and now it's out. It's new information, and it's not pretty reading."
A judge's findings of fact are not a ruling, but they set the framework for the outcome of the case -- a legal judgment or an out-of-court settlement. [Key sections of the findings begin on Page 29B.]
And suddenly, the industry and investors will begin thinking seriously about remedies the government might seek. With Judge Jackson's one-sided findings, even sanctions that had seemed extreme -- like breaking up the company -- now seem to be back on the table.
On Wall Street, Mr. Readerman noted, bankers will surely be doing spreadsheet calculations of the value of Microsoft if it is broken up into separate companies. The division most often mentioned is into three companies -- one with its industry-standard Windows operating systems, a second with its office productivity software and a third with its Internet and electronic commerce products. Many bankers have said they believe that if the court were to split up Microsoft -- like Standard Oil was split when the government forced its breakup earlier this century -- the company's value would actually increase.
In earlier rounds of settlement talks, Microsoft has shown a willingness to loosen its contracts with personal computer makers, including opening up its secret "marketing development agreements," Judge Jackson found that these contracts provided price incentives for companies that favored Microsoft's software products and punished companies that did not. Microsoft, according to people close to the talks, has also offered to publish the pricing lists -- adjusted for volume sales -- for its licensing agreements with personal computer makers like Compaq, Dell, Gateway and I.B.M.
But the company has fiercely resisted any suggestion that it must be forced to give companies wide-ranging access to its fundamental software technology or allow them to modify it. "We take the simple-minded view that it is our intellectual property, we made it -- it's our song, and you should play it our way," explained William Neukom, Microsoft's general counsel.
The government alleged that Microsoft uses access to its Windows technology as another tool to reward allies and punish rivals. Without that access, other software products will not run smoothly on Microsoft's Windows operating systems.
Regardless of the government allegations or the judge's findings, Microsoft believes that the case law protecting intellectual property strongly supports its stance. And while the company would find it difficult, if not impossible, to appeal Judge Jackson's findings of fact, an appeal can be built around legal precedents.
In any settlement talks, it is Microsoft's concept of intellectual property protection that is the biggest obstacle, according to antitrust scholars. "Anything that suggests compulsory access to its technology is poison to Microsoft," said William Kovacic, a professor at the George Washington University law school.
For Microsoft, the great incentive to settle would be to sidestep an actual verdict declaring the company a monopoly. That could open the floodgates to rounds of private antitrust suits because proving that a company is a monopoly is often the most costly, time-consuming hurdle. Being a monopoly is not illegal in itself. But if a federal court has ruled Microsoft to be a monopoly, that hurdle has been overcome for all subsequent antitrust litigation.
Since Judge Jackson's findings of fact are not a final ruling, a settlement would presumably erase the monopoly finding.
"Taking that off the table is the biggest carrot the government has to offer Microsoft," said Herbert Hovenkamp, a professor at the University of Iowa law school.
On the other hand, Judge Jackson's findings of fact come down so strongly on the government's side, it gives Microsoft little room to compromise and thus little incentive to settle.
Instead, they may well hope to win the case on appeal, which could end up before the Supreme Court and last until 2002.
For the government, there is perhaps one incentive to try to reach a settlement. "Despite the finding coming down strongly on the government's side, there is one additional reason for it to seek a settlement -- we have a Presidential election next year," said David Yoffie, a Harvard business school professor. "And a new administration in Washington could change a lot in its thinking and approach to the Microsoft case."
Copyright 1999 The New York Times Company
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