Sporkin Ruling May Hamper Microsoft
Microsoft is officially “a potential threat to this nation’s economic well-being.”
That according to U.S. District Judge Stanley Sporkin, who made headlines last week by rejecting an antitrust deal worked out by Microsoft and the U.S. Department of Justice.
What’s all the fuss about? Should investors be concerned? How in the world could a huge success such as Microsoft be considered a threat to the economy? Hold on to your sanity, we’re headed through the looking glass into the Wonderland of software marketing and antitrust enforcement.
Once upon a time, more specifically June 1990, the Federal Trade Commission began investigating Microsoft for alleged anti-competitive practices.
The FTC probe focused on questions surrounding the huge success of Microsoft DOS and Windows, which work together as the operating system for 85 percent of the world’s personal computers. Makers of rival systems complained that Microsoft had attained a market stranglehold by, for example, licensing its operating system to computer makers with fees based on the total number of machines sold - regardless of whether they were equipped with the Microsoft operating system. Manufacturers were thus encouraged to load MS-DOS and Windows exclusively.
The FTC also looked at accusations that Microsoft used its dominance in operating systems to gain unfair advantage in the more competitive markets for word-processing, spreadsheet, and other applications software. Microsoft was said to preview new versions of DOS and Windows with its own applications developers, giving them a headstart on software tailored to work with the new systems. Competitors also charged that Microsoft withheld technical details about its operating systems and even planted “bugs” to hinder the workings of products that compete with the likes of Microsoft Word and Excel.
Some rivals even argued that the government should require Microsoft to be split into two companies, one for operating systems and one for applications.
So the FTC looked. Three years and millions of subpoenaed documents later, commission members deadlocked 2-2 on whether to file charges. The case was dropped.
But by then a new administration had come to Washington, D.C., and with it, a new activist head of the antitrust division at the Justice Department, Anne Bingaman. She took up the Microsoft case. Here’s what followed: more subpoenas; more depositions; long conference calls; secret conferences in Brussels and other expensive cities. Finally, last July, Bingaman made an offer that brought from Bill Gates the words she longed to hear: “I can live with this.”
Without admitting any wrongdoing, Microsoft agreed to change the way it licenses operating systems. No other concessions were required. Bingaman proclaimed the deal “levels the playing field and opens the door for competition.” But other software firms groused that it was less than a slap on the wrist. Microsoft, unfettered, went on a buying binge. Its most notable purchase: Intuit Corp., maker of Quicken financial software, for $1.5 billion.
But a major snag developed last month at a hearing before Judge Sporkin, whose approval was required to ratify the consent decree. Instead of an expected rubberstamping, the former head of enforcement at the Securities and Exchange Commission allowed two anonymous computer companies to intervene. They brought forth new evidence that Microsoft has announced new software before it was ready - - “vaporware,” in industry jargon - in order to discourage competitors and hurt their sales. Such hardball tactics have long been common throughout the software industry, but Judge Sporkin was shocked.
He declared the consent decree too narrow and against the public interest. Despite protests from the Justice Department that it lacks evidence to pursue tougher charges, Sporkin urged stronger action to unseat Microsoft from its dominant position in operating systems. “Simply telling a defendant to go forth and sin no more does little or nothing to address the unfair advantage it has already gained,” he wrote.
The Justice Department will appeal the ruling. Meanwhile, Microsoft is under no obligation to abide by the consent decree’s modest restraints, although the company says it will.
Some analysts fear that Bingaman and her cohorts will feel compelled to prove their mettle by filing tougher antitrust charges, perhaps in tandem with a separate, ongoing investigation of Microsoft’s proposed acquisition of Intuit. If so, Microsoft can look forward to a few more years of distracting subpoenas, depositions, and uncertainty.
But that’s nothing new for Microsoft, which has flourished anyway. And next year’s elections could bring a new, more laissez-faire regime to the Justice Department. The company and its investors may have more to fear from the vagaries ahead as it attempts to remake itself from a software company into a mass marketer of electronic information and entertainment. More about that next week.
xxxx Microsoft Address: One Microsoft Way Redmond, WA 98052-6399 Phone: 1-206-882-8080 Value: ** Strength: ***** Safety: *** Growth: **** (5-star rating system) Ticker symbol: MSFT Trading: NASDAQ Stock price: $60.37 Shares outstanding: 625,000,000 Employees: 16,380 Chairman: William H. Gates Revenue FY 1994(ends June 30): $4,649,000,000
Barry Mitzman is a syndicated columnist and television commentator based in Seattle.