Microsoft owes everything to Justice
Would Bill Gates have come to power if the Justice
Department's antitrust division hadn't attacked IBM?
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By Andrew Leonard
June 8, 2000 | In the beginning, there was IBM. Long before
hackers began reviling Microsoft, before freshly hatched
software start-ups quailed in terror at the mere hint of an
approaching Gatesian shadow, before even the most ardent
antitrust crusader eyed Redmond, Wash., with vengeful lust,
IBM reigned supreme.
It seems kind of quaint to recall it now, but when Bill Gates
was still in high school, IBM was the company that competitors
viewed with fear and loathing and programmers scorned with
mean jokes and constant sniping. IBM was everything
Microsoft is today, and more, dominating the entire world of
computing by any means necessary.
Like Microsoft, IBM didn't always have the
best technology, a fact that it admitted to
itself in internal documents evaluating its own
products. But it had market power and
knew how to use it. When competitors
began to challenge IBM in a particular niche
-- disk drives, for example, or computer
memory -- IBM delighted in tinkering with
its own mainframe operating system or
processor hardware so as to make other
offerings incompatible. IBM pioneered the
practice of "vaporware": announcing
hardware and software upgrades years before they would
become available, thus frightening off competitors and locking
customers in. Most effectively, IBM was a master of "price
discrimination," or setting prices low, or below cost, in niches
where it faced competition, while raking in profits in arenas
where it stood alone or had eliminated all opposition.
And like Microsoft, IBM got into trouble with the antitrust
division of the Justice Department. In 1969, the Justice
Department filed suit against IBM. The case wound on for 13
agonizing years before an incoming Reagan administration
blithely dismissed it in 1981. The IBM trial looms large over
the Microsoft proceedings; critics of antitrust enforcement point
to its "failure" as proof that antitrust enforcement can't work in
the high-tech economy. After all, they note, didn't IBM end up
losing its supremacy without the help of government
intervention? To none other than Microsoft, that hungry young
company running rings around the lumbering behemoth?
Not quite, says Richard DeLamarter, an economist who
teaches at Yale University. DeLamarter worked for the Justice
Department as an antitrust economist for eight years on the
IBM case; he ended up writing a book about IBM in 1986
called "Big Blue: IBM's Use and Abuse of Power." In an
interview, DeLamarter explained how the IBM trial influenced
and shaped the Microsoft proceedings, and how the two
companies are inextricably interlinked, thanks, in no small part,
to the efforts of antitrust litigators.
In "Big Blue," your description of IBM's business
practices reads a lot like [U.S. District Court] Judge
[Thomas Penfield] Jackson's "findings of fact" about
Microsoft. Except, of course, the names have been
changed. Do you see any significant parallels between
the two cases?
The antitrust proceedings are different, because everybody
went to school on the IBM case, and they've done things very
different this time in order not to have it drawn out. One of the
biggest things the DOJ did was hire David Boies [who led
IBM's defense]. He was the master of drawing things out, and
if he's working on the Department of Justice's side it's sort of
harder for Microsoft to do what he did.
In what other ways did the Justice Department change its
tactics?
In a trial, you have to prove things -- they've got to be put in
evidence in such a way that it is unimpeachable. That's a
problem when what you're dealing with are characterizations of
complex technology, like where you are trying to read intent
into the way a software designer solved a particular problem.
That's a very, very hard thing to do. The way we tried to do it
was through IBM's own documents, we had examples where
they would make a representation about their own products,
saying that it was not as good as something somebody else
would offer, and then when one of their executives was on the
stand saying it was really wonderful we'd have their own
documents to impeach them. They did some of that in the
Microsoft trial, but they also had summary witnesses that came
in, established their credibility to draw a conclusion, and then
presented the conclusion.
Last time it was much more detailed, there
was more of an attempt to build an
evidentiary base to it. And what happened
was it just got drawn out. I think in this case
the judge saw the potential for that, and so
he did things like limiting the number of
witnesses and the amount of time they would
have to speak. And guess what? If you've
only got a limited amount of time, you are
not going to waste your time on proving
things that look just like stalling tactics.
The IBM trial ended when William Baxter, Reagan's
assistant attorney general for antitrust, dropped the
case, declaring that it was "without merit." Is there a
chance that this could happen again, if the appellate
process for Microsoft stretches into a potential
Republican administration?
It's politically controversial. There's something called the
Tunney amendment, which limits the ability of the Department
of Justice to withdraw from an antitrust case; you have the
burden to show that it is in the public interest, not in your
political interest. But basically no one can force the department
to continue a case that it doesn't want to continue.
Some of the things that you detail in your book, such as
IBM's penchant for price discrimination, sound a lot like
classic Microsoft behavior -- like giving away the Web
browser "free" while charging for the operating system.
Is it possible to compare Microsoft and IBM directly?
Absolutely. Absolutely. It's the same story. Zero being a
particularly low price.
How else can the companies be compared?
Where did Microsoft come from? Microsoft came out of the
computer business at IBM's expense. If you have read my
book you know that the theory is that IBM kept a close eye on
competition and whenever anybody got very big it killed them.
So then the question is why didn't they kill Microsoft, and I
think the answer is, they had just settled an antitrust suit, and
IBM didn't want to have another one. So it basically stood
aside and let Microsoft grow, it stayed its hand, you might say.
And in that respect, it's a little ironic that Bill Gates might now
say critical things against the antitrust division. Because if it
hadn't been for them, there wouldn't have been any Microsoft.
Do you have any evidence for that? Most computer
industry observers attribute IBM's failure to its own
incompetence.
If there wasn't an antitrust division, why wouldn't IBM have
just bought them? They had all the money in the world, they
could have just gone up to Bill Gates and said, What's your
price? Why didn't they do it? Because they knew what would
happen. There would have been this unholy uproar, "There's
IBM, up to its old tricks again, driving the competition out of
business." So what did they say? "We did that, we've been
there, we didn't like it, it's not fun." The antitrust division going
through your pants, your executives being forced to lie under
oath, all the things that Microsoft has had to experience, IBM
had already been through, and didn't want again. I don't really
buy the IBM incompetence theory -- I just don't see them as
stupid people.
One theory argues that even though the IBM antitrust
suit was dropped, during the course of the 13-year trial,
IBM was weakened by the enormous costs of fighting
the Justice Department. Lawyers attended every
company meeting directing people on what they could or
could not say. Do you think its fair to say that the
antitrust suit weakened IBM to the point that it became
vulnerable to competition?
(Laughs) I would say that it was housebroken and, therefore,
competition had a chance, because competition was finally
based on price and performance, it wasn't based on bundling
and vaporware and all the other crap that these firms use in
order to maintain markets. IBM was forced to tie an arm
behind its back, and not use its power as fully as it could have.
So ultimately it was worthwhile to engage in the suit,
even if it was dismissed at the end?
Oh I think so. If you really stand way back and look at antitrust
-- what is it about? It's about trust. It's about firms that have a
great deal of power and whether or not you trust them. If you
trust them, then you can leave them alone because they'll
behave. With firms that misbehave, where you have a lot of
dead bodies around and a lot of complaining then it's harder to
trust them and the antitrust division gets involved and says,
"Wait a minute you've been abusing your power."
Bill Gates has never said to anyone that he
was concerned about Microsoft using power
that he uniquely possessed, against which it
was impossible for competition to remain in
business. He never even said, "Oh yes, we
did have sort of an advantage, and it must
have been really hard for those guys to
compete against us." The most he would say
is, "It's a really dynamic world out there, we
gave as good as we got." So it's very hard to
trust Microsoft. The current antitrust
proceeding is another sort of a
housebreaking exercise -- a sort of growing-them-up thing.
You've got all this power and you want us to trust you --
you've got to demonstrate to us that you are not just going to
be Attila the Hun ...
And so I would say there was a benefit that came out of the
IBM case -- it made IBM reluctant to abuse their power. And
the benefit that is coming out of this one is that Bill Gates is
going to have to learn to do the same, otherwise people are not
going to trust them, and if they don't trust them they'll sic the
dogs on him again. And it's not nice. He won't like it.
In your book, you note at one point: "It was just another
demonstration of the fact that because the computer
industry changes so fast and because IBM has a
multitude of tactics available to stop competitors,
litigation is often ineffective. By the time a court decision
is reached or a case is settled, often a drawn-out process,
it is very often irrelevant to the current state of the
market." This exact point has been seized upon by many
critics of antitrust enforcement as one of the primary
reasons why the government should not intervene in
high-tech markets.
They don't go the next step. Which is why don't we redesign
antitrust? I actually have some ideas on that. Economists have
finally discovered that these markets are "tippy." You've
probably heard that term -- the markets quickly go to a
dominant firm, because everyone wants to be compatible. I
think you can run with that analogy a little way -- what's it like,
it's like a high performance sailboat, that's tippy also, and the
way you sail it, you intervene frequently and very quickly and in
small ways. You don't wait until the race is over to turn the jib.
So what does that mean? To me that says that antitrust
intervention has to happen very early, before you get these
giants like Microsoft and you only have bad choices as to what
to do then. If you intervene early the punishment can be quick
and small -- a slap on the wrist or public humiliation.
How would you do that? You might say that any competitor
who feels he's been unfairly hurt can lodge a complaint and
then highly technical people at the National Bureau of
Standards, or the National Academy of Science, would within
30 days render a judgment. And then based on their judgment,
which would be publicized and which could be used in private
suits if competitors wanted to, you would get a correction right
away.
So the next time the boss says to an engineer, "Let's design this
interface so nobody else can get on it," he can say, "I can do
that, but you know the competition is going to scream, the
experts are going to look at it and tell us this is junk, and we're
going to end up with a fine, and are you sure you want to do
that?" Rather than say, "We might get caught five years from
now, and 10 years from now there might be an appeals
decision that supports it and we might have to pay a price
then."
So are you saying that a breakup of Microsoft isn't the
ideal resolution?
That's right. The ideal solution would have been to intervene
much earlier. The longer it goes on, the tougher the choices
become -- and all of them are bad.
Do you think the rise of the Internet has made it more
difficult to have dominating monopolies like Microsoft or
IBM?
In order to effectively communicate, there's a need for
standards, and those standards are beyond the control of any
one firm. Although, I'm not sure that if there wasn't an antitrust
element, that Microsoft would not have been much more
successful in moving the source of its monopoly more onto the
Net. They may succeed anyway, but at least the competition
has been given a break.
Another thing the current case has done is that it has educated
the competition. The computing industry seems to be full of
people with the most incredible egos. You start a little
company, and all of sudden it's world-class and you're a
billionaire. And then somebody says to you, "Hey, you are in
Microsoft's gun sights and you are dead." And they just can't
believe it. They don't get it -- it's just so contrary to their
experience.
And what I think the case has done is it's wised 'em up. So that
anybody who begins to feel like Microsoft is going for them is
now looking for partners, looking for some way to get some
protection. That may make the quality of the competition more
effective, and that in the end may cause more trouble for
Microsoft than the case itself does.
I think that now chief executives who are in those chairs say it's
just ridiculous to think that I could do this on my own,
especially if I'm going to come under a full-fledged attack from
Microsoft. I think this education process is good. It's a great
model -- much better than a bunch of bureaucrats redesigning a
market. It's much better to think that we'll wise up the
participants of the market and the market will work better
itself. If that's one of the benefits that comes out of the case it,
then it is well worth doing.
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