In 1998, the United States Department of Justice and 20 states sued Microsoft for illegally maintaining its monopoly position in the PC market primarily through the legal and technical restrictions it put on the abilities of PC manufacturers and users to uninstall Internet Explorer and use other browsers such as Netscape Navigator.
What led to the lawsuit against Microsoft?
The lawsuit against Microsoft was the culmination of over a decade of mounting tensions between the company and the US government. Here are some of the key events that led up to the antitrust case:
- Early 1990s – Microsoft begins bundling Internet Explorer with its Windows operating system, sparking concerns about anticompetitive behavior.
- 1994 – The DOJ begins investigating Microsoft’s licensing practices as it relates to bundling IE with Windows.
- 1995 – The DOJ expresses concern over Microsoft’s limits on OEM licensing terms when licensing Windows.
- 1996 – The DOJ further investigates Microsoft requiring PC manufacturers to license and distribute IE with Windows.
- 1997 – The DOJ claims Microsoft violated a 1994 consent decree barring exclusionary contracts with restrictions on IE and Windows.
- 1997 – The DOJ learns Microsoft threatened to terminate Windows licensing to Apple if it did not make IE the default browser on Macs.
- 1998 – After failed negotiations, the DOJ and 20 states file antitrust suits against Microsoft.
This pattern of leveraging Windows dominance to gain advantage in other markets like web browsers was at the heart of the government’s case against Microsoft.
What anti-competitive practices was Microsoft accused of?
The DOJ and state prosecutors outlined a wide range of anticompetitive business practices in their suit against Microsoft:
- Unlawful exclusive dealing contracts with internet access providers, online services, and software vendors to shut out rival Netscape Navigator.
- Integration of IE into Windows in a way that deceived consumers and deterred browser competition.
- Predatory behavior toward manufacturers and distributors to compel exclusive distribution and promotion of IE over Navigator.
- Explicit threats and retaliation against companies that did business with Netscape.
- Acquisition of competitor technologies to Appropriate innovations and block rivals.
- Monopolistic licensing restrictions on Windows and IE tying that limit consumer choice.
Essentially, Microsoft was accused of using its Windows monopoly power to dominate the web browser market and quash competition from Netscape Navigator.
What remedies did the DOJ and states seek?
To remedy the alleged antitrust violations, the Department of Justice and state prosecutors requested the following primary reliefs from the court:
- Divestiture of Microsoft’s Internet Explorer assets, ensuring it becomes an independent business from Microsoft.
- Prohibition of exclusive dealing contracts that limit ISP, online service, and software vendor distribution of non-Microsoft browsers and technologies.
- Ban on retaliation practices against OEMs and vendors for licensing or distributing non-Microsoft software.
- Mandatory uniform OEM licensing terms for Windows OS without restrictions on modifying desktops.
- Disclosure of Windows APIs to allow interfacing with non-Microsoft middleware and enable product innovation.
- Establishment of an independent monitoring committee to ensure all conduct remedies are fully complied with.
In effect, the DOJ and states wanted to break up the IE-Windows bundle and open Windows to greater competition and browser choice.
What defenses did Microsoft raise?
In response to the government antitrust case, Microsoft argued the following key defenses:
- Integrating IE into Windows benefits consumers through improved performance, fewer crashes, and ease of use.
- Windows faced robust competition from Apple and open-source operating systems constraining any anticompetitive behavior.
- Restrictions on OEM licensing were designed to prevent fragmentation that could devalue the Windows platform.
- Exclusive deals with ISPs and others were driven by efficiencies, not exclusion of Netscape.
- Microsoft’s market share growth was driven organically by strong execution and innovation.
- Divesting IE would be unprecedented regulation hampering OS design and innovation.
Essentially, Microsoft claimed IE integration and other conduct improved consumer welfare versus hurting competition and any rise in market power was legal.
What precedents did the DOJ lawsuit rely on?
The Department of Justice leaned heavily on the following two landmark antitrust cases to support its allegations against Microsoft:
- United States v. IBM (1969) – IBM was accused of monopoly tying of hardware, software, and services on mainframe computers. The case ended in 1982 with the DOJ dropping charges following extensive evidentiary proceedings.
- United States v. AT&T (1982) – AT&T was accused of using its telephone service monopoly to gain an unfair advantage in computer markets. The suit ended in a divestiture of AT&T into separate local and long distance companies.
Like IBM and AT&T, Microsoft was accused of illegally leveraging monopoly power in one market (operating systems) to dominate another (web browsers). The remedies sought mirrored the AT&T breakup.
| Key Court Rulings | Implications |
|---|---|
| Finding Microsoft liable for illegally maintained monopoly (1999) | Affirmed claims of anticompetitive conduct in protecting the Windows monopoly. |
| Rejection of proposed breakup of Microsoft (2000) | Prevented split into Windows and IE companies but left room for other remedies. |
| Overturned tying liability on appeal (2001) | Reversed claim IE-Windows illegally tied but anticompetitive conduct liability remained. |
| Approval of final settlement imposing limited conduct remedies (2002) | Imposed software design restrictions and monitoring but avoided breakup. |
How was the case resolved in the end?
After dragging on for years, here is how the Microsoft antitrust lawsuit finally resolved:
- The district court ruled Microsoft illegally maintained its operating system monopoly but rejected the proposed structural remedies to break up the company.
- An appeals court overturned the illegal tying ruling related to bundling IE and Windows but upheld other monopolistic conduct violations.
- After the Bush DOJ took over, Microsoft agreed to settle the case with more limited conduct remedies barring exclusive deals and restricting some licensing terms.
- Microsoft also agreed to share Windows APIs with third-party developers and appoint a monitoring committee, avoiding a breakup.
- The settlement imposed few major long-term constraints on Microsoft’s business practices and product integration abilities.
Despite the original aim to split up Microsoft, the final settlement was viewed by many critics as a slap on the wrist for the software giant that failed to alter its monopoly position in operating systems.
What was the impact of the case on tech antitrust law?
The Microsoft case impacted technology antitrust jurisprudence in the following key ways:
- Showed antitrust law can still be applied to high-tech industries despite product complexity and rapid change.
- Set precedents around illegal monopoly maintenance conduct like intimidation and exclusive dealing.
- Demonstrated difficulty of structurally breaking up a complex software company.
- Shaped the concept of software integration as an antitrust defense.
- Influenced later investigations into alleged monopolistic conduct by Intel, Google, Apple, Facebook and Amazon.
While it did not lead to the dismemberment of Microsoft, the case established important standards in applying competition policies to the software industry.
Could the rise of cloud computing change the antitrust analysis?
The shift to cloud computing and software-as-a-service could impact the competitive analysis around any future Microsoft antitrust issues in several ways:
- The Windows desktop OS monopoly becomes less relevant in a cloud-based software world centered on mobile devices.
- Cloud services exhibit powerful network effects and economies of scale that can offset cloud provider lock-in concerns.
- Subscription model lowers barriers for customers to use multiple integrated software platforms.
- Data portability and interoperability standards can be mandated to prevent vendor lock-in.
- Dominant cloud infrastructure providers like AWS may constrain Microsoft’s ability to leverage Office 365, Azure and other cloud services.
As computing moves to the cloud, the dynamics around monopolistic conduct and remedies in software markets continue evolving. But the core tenets of antitrust law still apply in promoting competition.
Conclusion
The landmark Microsoft case established key precedents in applying antitrust policies to rapidly changing technology markets. While the company avoided being broken up, the case highlighted abusive behaviors by monopolists that can harm competition and consumers. With computing shifting to the cloud, software market dominance raises new regulatory challenges. But the basic principles of fostering competitive markets remain relevant in ensuring monopolists don’t maintain their grip on power through anticompetitive means. Robust enforcement of antitrust laws protects innovation and provides consumers the benefits of technology choice.
