United States District Court Judge Thomas P. Jackson is crystal clear in his recent “findings of fact”: Microsoft is marked for destruction. But why does Judge Jackson want to punish one of the most successful corporations in American history? Because Bill Gates proclaimed that he wanted “to prove that a successful company can renew itself and stay in the forefront”[i]–and he proceeded to do just that.
By the early 90s, Microsoft had gained a dominant position in the software industry by creating Windows, the first commercially viable graphical operating system that could be used on PCs. But in the mid-90s, Gates realized that the Internet represented the next step in the ongoing computer revolution; thus, he created a business plan to “stay in the forefront” of this revolution. In so doing, he set into motion the same technological and commercial innovation that had led to Microsoft’s leading market position in the first place.
Microsoft began by investing a staggering $100 million each year in Internet research and development, and in four years the company expanded its Internet division from only six people to more than one thousand. These investments, in the words of Judge Jackson, paid “technological dividends.”[ii](Paragraph 135) Microsoft developed a Web browser called Internet Explorer, and “after the arrival of Internet Explorer 4.0 in late 1997, the number of reviewers who regarded it as the superior product was roughly equal to those who preferred [Netscape’s] Navigator.” (Paragraph 135)
But Gates took Microsoft even farther. He integrated Internet Explorer into Microsoft’s Windows operating system so that it would be easier to incorporate the fast-growing Internet into all aspects of personal computing. In fact, Judge Jackson partly acknowledges the groundbreaking work performed by Microsoft in this regard:
- The inclusion of Internet Explorer with Windows at no separate charge increased general familiarity with the Internet and reduced the cost to the public of gaining access to it, at least in part because it compelled Netscape to stop charging for Navigator. These actions thus contributed to improving the quality of Web browsing software, lowering its cost, and increasing its availability, thereby benefiting consumers. (Paragraph 408)
Concurrent with its technological innovation, Microsoft put into practice novel business services and licensing arrangements. Just one of many examples addressed by Judge Jackson is the Internet Explorer Access Kit (IEAK), a service that permits an Internet access provider (IAP), such as America Online or Earthlink, to accept a license agreement on the Web and then download and customize Microsoft’s Internet software. When Microsoft began offering this service in September, 1996, it was the first time an Internet access provider could
- create a distinctive identity for its service in as little as a few hours by customizing the title bar, icon, start and search pages, and “favorites” in Internet Explorer. The IEAK also made the installation process easy for IAPs. With the IEAK, IAPs could avoid piecemeal installation of various programs and instead create an automated, comprehensive installation package in which all settings and options were pre-configured. (Paragraph 249)
- More than 2,500 access providers–representing more than95% of the Internet subscriber market in the US–used Microsoft’s IEAK service. (Paragraph 251) Notably, Netscape did not create a similar service until nine months after Microsoft introduced IEAK, and Netscape charged almost $2,000 for something Microsoft offered for free. (Paragraph 250)
Microsoft blended technological innovation with business acumen and thus offered its business partners an integrated package of new technology andnewbusiness opportunities. In exploiting these opportunities, Microsoft often offered “valuable consideration”–such as special discounts–to companies like Compaq, IBM, and Intel as an incentive to adopt its Internet Explorer and other Microsoft technology. In fact, Judge Jackson uses the term “valuable consideration” eight times to describe Microsoft’s business agreements with other companies–leaving the honest reader to conclude that Microsoft’s dealings were not some form of coercion but rather value-for-value trades.
For instance, Microsoft beat Netscape in developing a special type of browser that America Online (AOL) required for its Internet service. As a result, the two companies entered into several agreements in 1996. In exchange for AOL’s commitment to use Microsoft’s Internet software, Microsoft promised to provide AOL with unprecedented access to Internet Explorer source code, extensive technical assistance, “free world-wide distribution rights to Internet Explorer,” an assurance “that future versions of its Web browsing software would possess the latest available Internet-related technology features, capabilities, and standards,” and the placement of an AOL icon in a special folder on the Windows desktop. (Paragraph 288)
This relationship has been advantageous to both parties. Overall usage of Internet Explorer has risen dramatically, and as a result of this agreement AOL registered almost one million new users in a single year–11% of its total membership–through its icon on the Windows desktop. This fact alone prompted AOL to state in 1998 that its business arrangement with Microsoft was an “important, valued source of new customers for us.” (Paragraph 302)
Microsoft’s achievements should be held up as a model of how to create and maintain a highly productive, innovative company. Yet Judge Jackson is unable to view any of these facts in a positive light. While Judge Jackson recognizes many of the concrete facts that demonstrate Microsoft’s productive achievement, he is incapable of praising the innovation and business acumen that led to Microsoft’s success.
- [i] Bill Gates, The Road Ahead 64 (1995)
- [ii] US v. Microsoft, No. 98-1233 (TPJ) (D.D.C. Nov. 5, 1999) (findings of fact). All references to the findings of fact hereafter will refer only to the paragraph number.
- [iii] United States v. Trans-Missouri Freight Association, 166 US 290, 324 (1897), emphasis added.
- [iv] Albrecht v. Herald Co., 390 US 145, 153 (1968).
- [v] Olympia Equipment Leasing Co. v. Western Union Telegraph Co., 797 F.2d 370, 377 (7th Cir. 1986), citing Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 US 585 (1985) (holding that a monopolist has a duty to help a competitor).
- [vi] US v. Aluminum Co. of America, 148 F.2d 416, 431 (2d Cir. 1945).
- [vii] “Statement by Bill Gates on the Findings of Fact,” www.microsoft.com/presspass/ofnote/11-09wsj.asp, visited Nov. 11, 1999.