Nathan Newman

How Microsoft Lost Big
at the Appeals Court

Antitrust and Software Standards in Internet Era

Well, you have to give Bill Gates and the Microsoft crew credit for chutzpah. The DC Court of Appeals declares Microsoft an illegal monopoly, affirms that they have coerced, threatened, and lied to maintain their operating system monopoly -- and the Redmond boys declare it a victory.

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 unjudicial 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 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 and all Microsoft won was the chance to convince another judge not to impose the exact same remedy or even potentially more.

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 (

If the Court was clear that Microsoft had illegally maintained its operating system monopoly, the area where it was more skeptical was on the charge of Microsoft taking over the browser market itself, largely because of the lack of clarity of what would constitute the distinction between that "market" and any other piece of software. This was not an unreasonable argument and largely unimportant for the broader condemnation of Microsoft. Given the fact that browsers were given away by both Microsoft and Netscape, it was always obvious that such software was never that important itself as a separate market but were being distributed for other purposes -- in the case of Microsoft to control Internet standards to strengthen its operating system monopoly.

This gets to the root of what is at stake in the Microsoft lawsuit. No one except the industry players really care if it's Microsoft or its rivals selling us 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 -- which in the age of the Internet are the software standards on which all software has to run across networks.

The most interesting section of the decision is on 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 as on a handheld palm pilot. The most obvious application of this is in the Java "applets" run on web sites that work regardless of the computer accessing the web. 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, the threat of a language that would easily "port" any program to another computer is obvious. 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 was 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 a case like Microsoft, where it pursues its alternative standard through deception and exclusionary deals with developers with the explicit goal to undercut such standards based on economic power rather than superior design, that is a violation of the antitrust law.

In this light, Microsoft's seeking control of the distribution of browsers became itself an illegal monopolistic act, since by controlling the browser, you 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 middleware threat, they are anticompetitive."

Such exclusionary deals were bad enough, but the Appeals Court found that Microsoft had flat-out lied to software developers in encouraging them unknowingly to develop Java software for Windows that were incompatible with the original standards developed for the language. 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 anticompetitive 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 as the company trying to "lamely characterizes its threat to Intel as 'advice'" but the Court noted that 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 for 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 establishes the principle that consumers lose out when any 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 at the Appeals Court completely.

Nathan Newman is a former Project Director for NetAction where he worked extensively on advocacy around the Microsoft case. He is also author of the forthcoming book Net Loss on Internet policy and economic inequality. Email or see

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