In the era of globalization, the management mantra seems to be “bigger is better.” From automakers to securities traders, every business aspires to the size and weight that would allow it to influence — if not dictate — developments in its particular industry. In the fast-moving world of high-technology, there is another dimension to the race for pre-eminence: “first movers.” By quickly dominating a field, a technology company can establish the standard that all other companies, including its competitors, must use. The most famous such standard is the Wintel combination of Intel computer chips and the Microsoft operating system. Yet, as both of those companies have learned, success can sew the seeds of future catastrophe: The preliminary ruling issued earlier this month in the antitrust suit filed by the U.S. government against Microsoft is a cautionary tale for any company that dreams of dominating its industry.
In a blistering 207-page ruling, U.S. District Court Judge Thomas Penfield Jackson found that Microsoft “demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft’s core products.” He argued the company “stifled innovation,” deterred investment in other products and hurt consumers.
Damaging though the rulings are, they are not a final judgment; that might be issued by the end of the year, however. In the interim, the judge appointed Mr. Richard Posner, chief judge of the 7th U.S. Circuit Court of Appeals, to oversee “voluntary” talks between the parties. In the wake of Judge Jackson’s findings, Microsoft chairman and founder Mr. Bill Gates now sounds more conciliatory about reaching a settlement. It is not hard to understand why.
Although the ruling offers only “findings of fact,” such findings are almost impossible to overturn by appellate courts, which consider only rulings of law. Judge Jackson would have to be clearly mistaken before he would be overruled; appeals courts are extremely reluctant to take that step, preferring to defer to the opinion of judges who actually heard the evidence presented at trial.
If there is no settlement, the judge has several options. Al though he has not ruled that the company violated the Sherman Antitrust Act, his preliminary findings indicate that he will. If so, he could force Microsoft to break up, by divesting it of some of its divisions. Alternatively, he could make the company change the way it does business. For example, it could be forced to include rival products in its Windows operating system or allow other companies to produce the OS. The judge is more likely to take the second course, even though that will necessitate close monitoring of Microsoft and the company has had questionable compliance with a previous consent decree reached with the Justice Department.
Microsoft has another incentive to settle before a final ruling is issued. Such a decision would allow other firms to sue the company without having to prove in court that the company has acquired monopoly power; instead they could merely rely on Judge Jackson’s findings. That would also be a boon to the growing number of consumer suits that have been filed in state courts against Microsoft.
Microsoft is easy to dislike. Ninety percent of the personal computers sold in the world use its operating system and it has been quick to leap into new fields as they have developed. Unfortunately, all too often size breeds arrogance and Microsoft’s products have not always performed as promised.
But this trial has not been triggered by Microsoft’s success; rather the issue is the means by which it obtained that market share. The focal point of the court proceedings has been the company’s aggressive tactics — exemplified by the take-no-prisoners language of Mr. Gates’ e-mail. It has used all of its resources to extract every possible advantage in its business dealings and it views every competitor as a threat. Judge Jackson’s concern is not the company’s size, but its readiness to use its market power to exploit and intimidate the companies with which it does business. That is a perfectly reasonable focus of judicial inquiry and, despite the criticism, it provides more than ample grounds for state action and regulation. Now that Judge Jackson has indicated which way he is leaning, a settlement is in the interests of all concerned. Having laid down guidelines for good behavior, Judge Jackson — and the government — would do best to leave the market to its own devices.
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