Issues in anti-trust cases tend to be very complex and technical, but in the case of the government vs. Microsoft, they are quite understandable. The government alleged that Microsoft used predatory pricing tactics to destroy competitors and eliminate competition in the marketplace. They were also accused of erecting technical barriers within their operating systems to make it difficult or impossible for non-Microsoft software to run on Windows. In 1993, the Justice Department (DOJ) began an investigation into these practice, which resulted in a consent decree on July 15, 1994, in which Microsoft agreed that it would not tie other Microsoft products into its Windows operating system.
In the late 1990's Microsoft began bundling its Internet Explorer web browser product into Windows and soon acquired a dominant position in the browser market. As a result, an anti-trust case was brought against Microsoft in October 1997. The four counts filed against Microsoft were:
Count 1: "Unlawful Exclusive Dealing and Other Exclusionary Agreements in Violation of Section 1 of the Sherman Act.... Microsoft's agreements with ISPs, ICPs, and... OEMs... unreasonably restrict competition... thereby restraining competition in the Internet browser market..."
Count 2: "Unlawful Tying in Violation of Section I of the Sherman Act.... Microsoft has tied... its Internet browser to its separate Windows operating system..."
Count 3: "Monopolization of the PC Operating Systems Market in Violation of Section 2 of the Sherman Act.... Microsoft possesses monopoly power in the market for PC operating systems.... Microsoft has willfully maintained, and unless restrained by the Court will continue to willfully maintain, that power by anticompetitive and unreasonably exclusionary conduct. Microsoft has acted with an intent illegally to maintain its monopoly power in the PC operating system market, and its illegal conduct has enabled it to do so..."
Count 4: "Attempted Monopolization of the Internet Browser Market in Violation of Section 2 of the Sherman Act."
In order to understand the environment in which the Microsoft anti-trust actions occurred, it is necessary to examine the beginnings of Microsoft. After an early career as a hacker, Bill Gates and Paul Allen founded Traf-O-Data in Seattle, Washington, a company started to develop and market a machine to generate traffic flow statistics. This machine was not the success that Gates and Allen hoped for, however. It may have been the youthfulness of the owners (Gates was 16), or it may have been that the state of Washington began to offer the same services for free.
By 1975 Gates and Allen were back in the computer business. They founded a company in Albuquerque, New Mexico to develop and sell BASIC interpreters for the Altair 8800, a new computer built by MITS, for whom Gates and Allen had previously worked. Initially using the name Traf-O-Data, it was later changed to Micro-soft, which stood for microcomputer software, and finally changed to Microsoft when the company filed for a registered trademark on November 26, 1976. Their second product was released in 1977. It was a Fortran compiler for the CP/M operating system and in 1978 they released a COBOL compiler for CP/M.
It was in the late 1970's that Microsoft had its big break. IBM was planning to release a personal computer in 1981 and they needed an operating system. Initialially they approached Digital Research for rights to use their operating system CP/M, but were unable to reach an agreement. Gates then stepped in and offered IBM QDOS (Quick and Dirty Operating System), a clone of CP/M which they had purchased from Seattle Computer Products for $50,000. They renamed it MS-DOS (Microsoft Disk Operating System). After settling infringement problems with Digital Research, IBM offered MS-DOS with each personal computer for $40 (CP/M was priced at $250). MS-DOS outsold CP/M many times over and Microsoft was on its way. The company had retained the right to sell the operating system along with other computer manufacturers, so when IBM clones began to flood the market in the early 1980's, Microsift was perfectly positioned to dominate the market for operating systems. MS-DOS soon became the standard in the operating system market and in March 1986 Microsoft went public at $21 per share, raising $61 million.
In the late 1980's Microsoft partnered with IBM in the development of an advanced operating system called OS/2. In 1989 at Comdex, Bill Gates announced that the 1991 release of version 3.0 of Windows would be the last, and Microsoft continued to issue statements that signaled that OS/2 was the operating system of the future. On May 16, 1991 Gates announced to employees that the OS/2 partnership with IBM was over and that Windows would be the operating system Microsoft would support in the future. In spite of its technical advancements and superior functionality, OS/2 began a slide that would culminate with its extinction within a few years.
Microsoft began diversification into three main areas: additional operating systems, compilers and interpreters for programming languages, and a suite of application products in the office suite. Just as in the comparison between Windows and OS/2, many of Microsoft's early products were inferior to the competition, but they were able to dominate market share. The leading example of this was Word Perfect, a superior product to anything Microsoft could produce, but which soon saw a drop from leader in word processing software to a distant second place.
This dominance was due to several strategies. First, Microsoft developed a common user interface that allowed users to use similar commands in each of the individual application products. Secondly, they initiated the concept of backward compatibility so the older versions of applications could work with newer versions of the operating system. This was in contrast to hardware manufacturers, which until the late 1980's, produced new versions of their machines that were incapable of running earlier versions of software. Thirdly, the integration of their individual applications allowed users to create and use data between applications. For example, a spreadsheet created in Excel could be imported into a PowerPoint presentation.
In the early 1990's, Microsoft's position in the PC market was completely dominant. Not only did it completely control the market for operating systems, but it had extended this domination to applications. Who can forget that widely-publicized incident years later when the prosecutor began his case during the anti-trust trial by asking the spectators if anyone used an operating system other than Windows. This dominance led Microsoft to adopt a policy that required manufacturers to pay for a Windows license even if the machine was shipped with another operating system. Competitors began to complain about predatory pricing practices and development of technical barriers to make it appear that other software would not work with Windows. The government began to take notice of Microsoft's actions.
The federal anti-trust lawsuit against Microsoft began on October 19, 1998. Negotiations and testimony stretched on for over a year. On March 29, 1999, during the course of the trial, Microsoft reorganizes its operations into four separate divisions. Company officials indicated the restructuring was unrelated to its ongoing lawsuit with the government. On January 13, 2000, Bill Gates handed over day-to-day management duties to old friend Steve Ballmer, in a corporate restructuring that would allow Gates to focus more time on long-term strategies. More likely it was an attempt to lessen the effect of negative publicity. Gates had been embarrassed by revelations during the trial regarding emails he sent.
On April 3, 2000, judge Thomas Penfield Jackson, ruled the company was convicted for violating its earlier consent decree and abusing its monopoly in the desktop operating systems market. He issued a "findings of fact" that Microsoft had a monopoly in the PC desktop operating systems market. He established three main facts that taken together indicated that Microsoft enjoyed monopoly power. First, Microsoft's share of the market for Intel-compatible PC operating systems was extremely large and stable. Second, Microsoft's dominant market share was protected by a high barrier to entry. Third, as a result of that barrier, Microsoft's customers lacked a commercially viable alternative to Windows. He went on to explain the nature of the barrier of enrty as a vicious circle. Because there was a multitude of people using Windows, the product was very attractive to users. Because it was very attarctive to users, most software vendors wrote application software first and formost for Windows. Thus the large amount of application software reinforced the demand for Windows, increasing Microsoft's dominant position and increasing software vendors' incentives to write applications primarily for Windows. The small market share of a potential competitor made it prohibitively expensive for that competitor to develop its PC operating system into a substitute for Windows. On June 7, 2000, Judge Jackson issued his final ruling calling for Microsoft to be split into two companies, one for the Windows operating system and another for its Internet and other businesses.
Judge Jackson's remedy was later overturned on appeal and Microsoft eventually reached an agreement with the Department of Justice and some of the states which brought suit against it, which did…