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annals of communications
The New Yorker - July 9, 2001

the microsoft verdict

by ken auletta

At the Rockefeller Center headquarters of AOL Time Warner last Thursday, one of the company's senior executives took time to watch the breaking news. The U.S. Court of Appeals for the District of Columbia had delivered a ruling in the Microsoft antitrust case, and, as depicted on the cable television networks, the verdict appeared lopsidedly simple: Microsoft triumphs. Reporters and anchors had not yet read the hundred-and-twenty-five-page decision, but producers had orders to sum it all up right away. So CNBC, CNN, and Fox News latched onto the court's decision to overturn the district court's proposed remedy to split Microsoft in two, and declared a victory for Bill Gates.

At AOL Time Warner, however, there was a surprising serenity. The senior executive was exchanging instant messages about the case while watching the television news, and he was smiling. This seemed odd, since AOL had testified against Microsoft in the trial. Then AOL Time Warner's general counsel, Paul Cappuccio, came into the office, and he was smiling, too. He declared, with some zest, that the verdict was in fact a solid defeat for Microsoft.

Both sides, it turns out, had reason to be pleased. The higher court did spare Microsoft from a breakup, finding that the lower court rushed to order a remedy "without considering the evidence Microsoft sought to introduce." It rejected the lower court's conclusion that Microsoft had illegally attempted to monopolize the Web-browser market. What's more, in returning the case to the district court, the Appeals Court decreed that a new judge should preside. It rebuked the trial judge, Thomas Penfield Jackson, for talking, sometimes indiscreetly, to reporters and thus for calling "into question the integrity of the judicial process." Gates appeared on CNBC Thursday evening and said of the decision, "They reversed most of what was in the district-court ruling."

But the core of the government's case--and of Judge Jackson's earlier decision--was left intact: that Microsoft's Windows operating system held a monopoly over the desktop P.C. market, and that Microsoft used its "market power" to unlawfully "maintain its monopoly in the operating system market," violating the Sherman Antitrust Act. Microsoft, the Appeals Court found, unfairly used its monopoly power to strong-arm computer manufacturers, Internet access providers, Internet content providers, independent software venders, and companies like AOL, Apple, Intel, and Sun Microsystems. The court did not remove the threat of an imposed remedy but simply ordered a new court to devise one. It did not, as Microsoft expected, affirm the company's right to bundle (Microsoft prefers the word "integrate") new features with Windows. It did not throw out as "biased" Judge Jackson's ruling and facts, as Microsoft had urged it to do. And the decision did not end Microsoft's legal ordeal.

As it happens, Judge Jackson had given me a series of interviews, including one in which he said that Bill Gates "has a Napoleonic concept of himself and his company." The Court of Appeals took Judge Jackson to task for what it considered indiscretions in his dealings with the press, and suggested that the ten hours of taped interviews I did with him could not have been "monologues," and that, in the course of inducing "conversation," I might have tainted the Judge with my personal views. I never shared any of my opinions about the case with Judge Jackson. As for the charge of inducing conversation, I plead guilty.

No matter how high Microsoft's stock jumps, the government has the edge. Microsoft has been found guilty and will be penalized. It may have to endure another trial. An attempt will be made to get the government and Microsoft to negotiate an out-of-court settlement, but that won't be easy. The attorneys general of the nineteen states who were part of the original lawsuit must unanimously agree to drop the case before a settlement can be reached, and they will be less inclined to do so, having been fortified with a verdict vindicating their assertion that Microsoft was a predatory monopolist. With the Appeals Court ruling and with pressure from the more hawkish states, President Bush won't want to appear to be letting Microsoft off the hook.

This fall, Microsoft will introduce its new Windows XP operating system. Its marketing strategy will be, as always, to capitalize on its Windows operating system by adding free features. The company is expected to add new digital-photography software, instant messaging, and streaming video and audio, and may continue to make it more difficult for competitors' software to function on Windows. But a company that has been found guilty of monopoly-law violations may not be free to pursue such a strategy. AOL, RealNetworks, Sun, and others may bring lawsuits, compelling the new district-court judge to police Microsoft more closely. Gates hoped that this round would be the last, but it seems that the fight is destined to drag on.

Paul Cappuccio said that AOL Time Warner will press to assure that Microsoft has to "open its desktop" to competing products. This is what the government did when it compelled the Baby Bells to make their telephone wires available as "common carriers" for competitors. And it is what the F.C.C. did last January when it forced AOL Time Warner to open its cable wire to at least three other Internet service providers.

"When the nation's second-highest court rules seven-to-none that you are a monopolist that has violated the antitrust laws," the senior AOL Time Warner executive said with a grin, "it's not a good day, no matter how hard you spin it."

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