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"Microsoft Wins . . . Sort Of" -- A Commentary by Prof. George Priest

Microsoft Wins . . . Sort Of
By George L. Priest, John M. Olin Professor of Law and Economics

(This article originally appeared in the November 2, 2001, edition of the "Wall Street Journal.")

The Justice Department and Microsoft appear to have reached an agreement in principle to finally settle the litigation. Thus will end what many have called the greatest antitrust case of the past five decades. The country has survived. The future can only be brighter.

The terms of the settlement impose substantial restrictions on Microsoft. It would be banned from exclusive dealing arrangements with manufacturers, access providers, suppliers and vendors, as well as from preferential treatment of some of these same entities. It would also be prohibited from retaliating against manufacturers and vendors who support products made by competitors. And manufacturers would be given greater freedom to display non-Microsoft software. But these restrictions are not likely to substantially disrupt Microsoft's operations. Besides, they are not unexpected, since they follow from actions that the District of Columbia U.S. Court of Appeals found to be unlawful.

Some terms of the settlement appear to extend beyond that court's findings of illegality. Apparently, Microsoft would be prohibited from compelling current Windows owners to upgrade the Windows program and would have to continue to offer earlier Windows versions, creating some level of competition between new Windows formulations and their predecessors. In addition, the consent decree that will establish the legal foundation for the settlement appears to run for five years, with an additional two years if Microsoft is found to have violated its terms. In many antitrust settlements, consent decrees run for longer terms. But in an industry as dynamic as computer software, five or seven years approaches infinity.

There are reports that the settlement also includes provisions for the confidential disclosure of Microsoft's source code. This would be surprising because the appeals court found no illegality in the development of the Windows source code and none from possession of the Windows monopoly itself. Thus, there would be no legal basis whatsoever for such disclosure.

What to make of such a settlement? Fortunately, for consumers, it is backward-looking only--enjoining those past Microsoft actions that the court found illegal. Thus, it should not seriously impair Microsoft's ability to improve products for the future. Gone, certainly, is the idea of breaking up the company, but absent also are those parts of Judge Thomas Penfield Jackson's interim order that would have hobbled innovation. Gone are any efforts to impose obstacles to the distribution of Windows XP or the addition of any future applications that would improve Windows.

The case is not over. Some states appear to be holding out for more. Several of them have asked for more time to study the settlement and some can be expected to later argue before Judge Coleen Kollar-Kotelly--in the hearing to be held to evaluate the settlement--that its terms aren't sufficient. But these arguments, unlikely to succeed, will be largely for show.

First, as mentioned, the terms of the settlement appear to extend beyond the findings of illegality of the court of appeals. Secondly, to the extent that the court discussed separate state law claims, as opposed to those of federal antitrust law, it indicated that they were legally identical. Thus, there is no legal basis in state law or otherwise for stronger remedies against Microsoft. Finally, Judge Kollar-Kotelly herself has pressed strongly for settlement.

The states are not compelled to agree to the settlement terms. But, if they do not, their only recourse is to litigate the case before the judge who has approved the reasonableness of the current settlement. It would be folly to do so.

What is the larger significance of the case? The "great" antitrust cases of the last century--those brought against U.S. Steel, Standard Oil, Alcoa and Microsoft--were regarded as "great" chiefly because they were brought against the then-most successful firms in the country. Because there is a good deal of common sense in our antitrust jurisprudence (in Microsoft, the court of appeals insisted on application of the "rule of reason"), the outcomes of great cases are seldom disastrous for the country or consumers, though they have seldom conferred much benefit either. In U.S. Steel, the government lost. In Standard Oil, a national monopoly was broken up into regional monopolies--a more efficient form of monopolization. The Alcoa case was brought before World War II, and by the time it reached the remedy stage--after the end of the war--the industry had changed dramatically because of the building of new aluminum plants to aid the war effort.

The Microsoft case is much the same. In the opening paragraphs of its opinion, the court of appeals warned the Justice Department and other antitrust prosecutors that industries like computer software may have to be analyzed in ways that differ from manufacturing companies like the Standard Oils or Alcoas. According to the court, "In technologically dynamic markets . . . [monopoly] may be temporary, because innovation may alter the field altogether." On this ground, among others, the appeals court proceeded very carefully to find illegal only those Microsoft practices that had no apparent relation to Microsoft's success in enhancing computer services for consumers.

This is not to say that the Microsoft litigation has benefited the country in any important way. The case has obviously distracted the management of a vital, innovative company over an extended period of time. Microsoft's market capitalization has been cut in half (in part, to be sure, because of larger market movements), hardly justifiable in the context of the limited prohibitions embodied in the settlement. And the Justice Department has been shown to be an available instrument for competitors of a successful firm to advance their positions on grounds other than competitive merits.

But if there is a benefit, it is that the prohibitions on Microsoft are as limited as they are. In essence, the company will have survived intact without serious constraints on how it might improve its products. We can expect Microsoft and, perhaps, the dot-com industry--equally unburdened--to revive in the future. For that, consumers in America and around the world can be thankful that the outcome of the litigation has not been worse.

Mr. Priest teaches law and economics at Yale Law School. He has served as a consultant to Microsoft.