June 10, 2000

It has not been a good year for Bill Gates. After months of legal sparring with the U.S. Dept. of Justice, his beloved Microsoft has been found guilty of violating antitrust law. The punishment? Harsh: Judge Thomas Penfield Jackson has ordered Microsoft to do what was considered unthinkable not long ago -- viz., to be split in two. Furthermore, Microsoft must eschew certain business practices deemed to be anti-competitive.

It's a bitter pill for the founder of the company to swallow. As the company's fortunes have fallen, so has Gates' personal wealth. Once reckoned to be worth over $100 billion, his assets now are valued at around $55 billion or so. Not quite on the cusp of penury, but a sharp decline nevertheless. (To make matters more galling, surely, Gates' ardent foe, Mr. Larry Ellison, CEO of Oracle, has seen his wealth multiply, and now stands poised to replace Gates as the richest man in the world.)

Microsoft may have suffered a devastating setback in Judge Jackson's courtoom, but it is hardly likely to fold up its tent and depart sweetly into the sunset. As it prepares its appeal of Judge Jackson's unfavorable ruling, it steadfastly maintains that its practices are perfectly legal, and that the woes of its competitors are entirely of their own making.

Consider the Web browser war which pitted Netscape's Navigator against Microsoft's Internet Explorer, and where the latter has emerged the winner. The Dept. of Justice (DOJ) argued that this was a result of Microsoft's illegal bundling of its Windows operating system and the browser: Why would a computer user bother to install Navigator separately if a browser already came bundled with the operating system?

Not so fast, says Microsoft, pointing out that initial versions of its software fared badly against a superior Navigator. It was only when Internet Explorer improved significantly that the marketplace rewarded it with a commanding market share. Far from forcing Internet Explorer down the throats of unwilling consumers, claimed Microsoft, it was the superior quality of their product that endeared it to the vast majority of computer users.

But Judge Jackson would have none of it. He concurred with the DOJ's charge that the software behemoth illegally exploited its monopoly power in the operating systems market to vanquish its hapless rivals in other markets. This "predatory" behavior had the chilling effect of stifling innovation, leaving consumers with fewer choices and higher prices. If Microsoft were permitted to continue unmolested, argued the DOJ, the full benefits of the technological revolution in the software industry would fail to materialize.

Microsoft argued, to little avail, that it was not a monopoly. Could not a customer, unwilling to buy Windows, choose instead a Mac operating system (from Apple), or a Linux operating system? Furthermore, far from being exorbitant, the Windows operating system cost only about a hundred dollars -- 5 percent of the $2000 for a standard personal computer.

How about the reduced innovation argument? Had Microsoft's anti-competitive practices squelched advances in the software industry?

Here, Microsoft could point to the burgeoning Internet, the meteoric rise of companies like America Online (soon to be merged with the entertainment colossus Time Warner), and the rapid emergence of handheld computing devices (such as the wildly popular Palm Pilot). If innovation had been stifled, argued Microsoft, these developments, many of which threatened its own preeminent position in desktop computing, would not have occurred.

But Judge Jackson was firm. Microsoft had violated antitrust laws, and it had to be punished. In an interview he gave shortly after his ruling (an event that itself raised a few eyebrows), he called the company untrustworthy. To protect the consumer, Jackson decided, the leviathan needed to be broken up. One part (Baby Bill I, say) would concern itself solely with the operating system; the other, Baby Bill II, would deal with applications software (notably, the Office suite and Internet Explorer).

With the company thus rent asunder, goes the argument, competition will flourish. No longer will programs like Word, Excel and PowerPoint enjoy the protection of the Windows umbrella. Now they would have to compete, solely on their own merits, with rival applications (Corel's WordPerfect, for instance). The result? More choices, lower prices, and better products for consumers.

That, at least, is what Judge Jackson and the DOJ envision. Will it come to pass? Some are not so sure.

Is it possible that we might now be saddled with two monopolies instead of one? Might Baby Bills I and II end up completely dominating their respective markets -- and charging monopoly prices in each?

Another possibility: Would the ubiquitous and familiar Windows platform be replaced by a confusing array of operating systems? If so, the task for software developers would become exceedingly onerous (several versions of WordPerfect would need to be developed), and the consumer, far from enjoying this plethora of choices, might wistfully recall the "monopolistic" Windowed world of yore.

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