Sorting Through the Microsoft Decision

The decision by the U.S. Court of Appeals in the government's antitrust case against Microsoft Corp. has spawned the expected flurry of coverage, comment and spin, but little light has been shed in the popular or trade press on the significance of the decision to other businesses in the personal computer industry.

The real story of the decision is not that the court failed to order the breakup of Microsoft or that the trial court judge was criticized for his out-of-court comments to the press about Microsoft's conduct. Microsoft was not exonerated by the Court of Appeals, and the court remanded parts of the case to a different trial judge, a fairly common practice.

The significant story is that the appeals court identified a set of Microsoft business practices that violated the Sherman Antitrust Act, which prohibits business trusts and other forms of monopolies. The court agreed with the trial court that Microsoft was a monopolist in the market for operating systems for Intel-compatible PCs. The company has more than 95 percent of the sales in that market.

The importance of the decision is the court-outlined rules and standards by which Microsoft's future behavior will be gauged when it interacts with firms that make or sell hardware, software or content for use in personal computers.

The court found Microsoft had taken a number of anti-competitive actions to weaken or exclude rivals. The most significant of these actions were directed toward producers of middleware, software that exposes application programming interfaces (APIs) and eliminates the need to write specifically for the Windows operating system.

The anti-competitive practices attributed to Microsoft included:

? Prohibiting original equipment manufacturers, known as OEMs, from making any alterations to the Windows desktop;

? Making it difficult for customers to delete the Internet Explorer browser;

? Commingling operating system and Internet Explore code so that deleting the IE code removes needed operating system code;

? Entering into exclusive agreements with Internet Service Providers to market only Microsoft browsers;

? Taking various steps to prevent Java from developing into a viable rival platform.

The court rejected, but remanded to the trial court for further consideration, the finding that Microsoft had illegally tied the Internet Explorer browser to the Windows operating system. The court accepted that the two products had been tied, but it wanted proof that there actually is a distinct market for browsers, and that the tying arrangement produced actual anti-competitive effects in a market for browsers.

If the case is not settled by the Bush administration, this will be one of the key issues to be examined in future trial court proceedings.

Similarly, the court did not find Microsoft had violated antitrust law with respect to the market for browsers. Although Microsoft employed the same anti-competitive conduct with respect to the Internet Explorer browser as it did with the operating system, the court rejected the trial court's finding that browsers constituted a separate and distinct product with their own relevant market.

Therefore, while Microsoft's comment on the decision claimed it had received a clean bill of health with respect to browsers, the court simply concluded that no one could monopolize the browser market, because no such market existed.

The decision also lays down an approach to the antitrust oversight of Microsoft in its dealings with PC hardware, software and content producers.

It is clear from the decision that a Microsoft practice that raises a barrier to competing with the Windows operating system or is directed at preventing competition with Windows may place Microsoft in peril.

The anti-competitive practices described above were all found to be independent violations of the Sherman Antitrust Act. These practices are common in the industry; the difference is that Microsoft is a monopolist with respect to its operating system and cannot act with the same aggressiveness as others in that market.

Where a plaintiff can show that its product would compete with the Microsoft operating system or another Microsoft product with comparable market dominance, then Microsoft may not unduly burden the rival's ability to compete, grow or be placed on a Windows-based system by OEMs.

These constraints are not necessarily limited to competition with the Windows operating system, but if the market at issue is something other than the operating system, it must have the same kind of monopoly in that field that the court found Microsoft already has achieved in the operating system market.

What is the standard by which Microsoft's future conduct will be judged? While the decision is not a model of clarity, one rule clearly emerges: The conduct does not have to completely exclude actual or potential rivals or drive them into bankruptcy.

It is enough if Microsoft is successful in denying the rival access to an efficient distribution mechanism, such as through ISPs, OEMs or other channels without a valid, pro-competitive reason.

Jonathan Cain is a member of the law firm Mintz Levin Cohn Ferris Glovsky & Popeo PC in Reston, Va. The opinions expressed in this article are his. He can be reached by e-mail at jcain@mintz.com.