Sure, the Appeals Court didn't break the company up as ordered by the District Court, but almost no one was expecting that. This was an Appeals Court that had twice before ruled in favor of Microsoft, so the savage indictment of Microsoft's illegal practices surprised most legal observers and pleased those who had been campaigning against Microsoft's monopoly for years.

It's worth being clear: the Appeals Court affirmed almost every finding of fact by the lower court that Microsoft used coercion, intimidation, lying and other anti-competitive actions to prevent any challenge to its Windows operating system monopoly. The remedy of breaking up Microsoft was overturned largely because of the district judge's procedural failure to hold a separate hearing on the best remedy and for his un-judicial comments about Microsoft made to the press.

So the Appeals Court is sending the case to a new District Court judge who is free to impose the same breakup remedy or a range of other "conduct restrictions" to prevent Microsoft from repeating its old tactics as it rolls out its new XP operating system and .Net initiatives. (Software which is clearly aimed at destroying a whole new set of Internet rivals.) Microsoft lost on the facts affirmed by the Court; all Microsoft won was the chance to convince another judge not to impose the same - or a potentially more severe - remedy.

The decision is long but well written and presents many of the issues involved in an admirably clear way. Check it out on the web at http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=dc&navby=case&no=0052 12A.

While the Court was clear that Microsoft had illegally maintained its operating system monopoly, it was more skeptical about the charge that Microsoft was taking over the browser market, largely because of the lack of clarity about what would constitute the distinction between that "market" and any other piece of software. This was not an unreasonable argument and largely unimportant in terms of the broader condemnation of Microsoft. Given the fact that both Microsoft and Netscape were giving away browsers, it was always obvious that the browser software was never that important as a separate market. The concern was that browsers were being distributed for other purposes; in Microsoft's case the purpose was to strengthen its operating system monopoly by controlling Internet standards.

This gets to the root of what is at stake in the Microsoft lawsuit. No one except the industry players really care whether Microsoft or one of its rivals sells us a particular software. What people do care about is that new innovation not be stifled by letting one player like Microsoft control the rules of the game. Those rules, in the age of the Internet, are the technical standards which enable all software to run across all networks.

The most interesting section of the decision is the discussion regarding Microsoft's undermining of consistent standards for the software language Java. The promise of Java was that if standards were uniform across different computers, a program once written would run as well on a mainframe computer as on a Windows desktop or a hand-held Palm Pilot. The most obvious application of this is in the Java "applets" that run on web sites. They work regardless of the type of computer accessing the web site. Since, as the Appeals Court noted, the inability of the vast library of Windows software to run on rival operating systems is one of the factors locking in Microsoft's monopoly, a language that would easily "port" any program to another computer is an obvious threat. So Microsoft set out to create a rival, incompatible Java standard.

The Court started its discussion on Java by noting that creating incompatible standards in software is not automatically an antitrust violation. If there is a technological justification, "a monopolist does not violate the antitrust laws simply by developing a product that is incompatible with those of its rivals." However, having made the obvious point that an inferior standard is not protected against any improvement, the Court declared that in Microsoft's case the company pursued its alternative standard through deception and exclusionary deals with developers for the explicit goal of economic power rather than superior design. That behavior is a violation of the antitrust law.

In this light, Microsoft's effort to control the distribution of browsers became in itself an illegal monopolistic act, since by controlling the browser, Microsoft could control the software standards embedded within the browser. In the case of Netscape, it had agreed to distribute the original Java standard, what was called the Java Virtual Machine (JVM) with every browser. By cutting deals with computer manufacturers and Internet Service Providers to exclude the Netscape browser from distribution, the Appeals Court ruled, "Microsoft's agreements foreclosed a substantial portion of the field for JVM distribution and because, in so doing, they protected Microsoft's monopoly from a middle-ware threat, they are anti-competitive."

Such exclusionary deals were bad enough, but the Appeals Court also found that Microsoft had flat-out lied to software developers by encouraging them unknowingly to develop Java software programs for Windows that were incompatible with the original standards developed for the language: "Microsoft documents confirm that Microsoft intended to deceive Java developers. These documents also indicate that Microsoft's ultimate objective was to thwart Java's threat to Microsoft's monopoly in the market for operating systems."

One Microsoft document cited by the Court stated as a strategic goal: "Kill cross-platform Java by grow[ing] the polluted Java market." Give the Microsoft folks credit for honesty-- they referred to their own product as "polluted." But such anti-competitive "pollution," declared the Court, is not about technological superiority but about deceit and illegal and anti-competitive destruction of standards that would otherwise benefit consumers through increasing the compatibility of different software products and hardware.

Beyond anti-competitive deals and deceit, the Appeals Court accused Microsoft of undermining Java and innovation through straight-up intimidation and threats. Back in 1995, Intel was in the process of developing a high- performance Windows-compatible computer chip that would make the original Java standards run extremely fast and efficiently. Microsoft warned Intel that unless it abandoned those efforts, Microsoft might work with rival chip makers to hurt Intel. The Appeals Court dismissed Microsoft's legal defenses on this point, which was that the company was trying to "lamely characterizes its threat to Intel as 'advice.'" But the Court noted that giving advice "to Intel to stop aiding cross-platform Java was backed by the threat of retaliation" which thereby stifled innovation by Intel.

This last point highlights why the Microsoft trial mattered. Microsoft has defended its actions as the "freedom to innovate" but what the Appeals Court made clear is that their "freedom" comes at the expense of real innovation that benefits all consumers. The Internet was built on broad standards controlled by no single company, so that users would have the widest possible choice of content and software developers could innovate together all on one platform. The Appeals Court established the principle that consumers lose out when any one company like Microsoft uses illegal tactics to undermine those standards for their own financial interests.

That is the key new principle of antitrust in the Internet age. And on that crucial point, Microsoft lost its case completely at the Appeals Court.

NetAction (www.netaction.org) was one of the first public interest organizations to raise awareness about the impact on consumers of Microsoft's anticompetitive activities. In May of 1997, we launched the Consumer Choice Campaign, an online organizing effort that urged Internet users to put pressure on the Justice Department to enforce antitrust laws against Microsoft.

Nathan Newman was Project Director for the campaign. His white papers and our other published materials on Microsoft are archived at http://www.netaction.org/msoft. Nathan subsequently earned a Ph.D. from the University of California at Berkeley, and a J.D. from Yale School of Law. He is now working in labor law and with the National Lawyers Guild. His book NET LOSS on the Internet economy will be published next year by Penn State Press. At our request, he wrote the above analysis of the recent Appeals Court ruling. He can be contacted at nathan@netaction.org.

Copyright 1996-2001 by NetAction/The Tides Center

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