MicrosoftLawsuit

                                                                                                                              November 12, 1999

              MICROSOFT AND THE STUPIDEST CASE I REMEMBER FROM LAW SCHOOL

     When I was in law school, I took antitrust law. It was taught by a gentleman named Louis Schwartz, who was at least 80 years old, as most professors at Hastings are, and a legend in the field. He caught on quickly that I would be the conservative anti-antitrust foil, and whenever there was a pause in the class, he would turn to me and ask what I thought of the topic. While I was always the model of decorum, I am sure that he, along with my classmates, would understand from the tenor and substance of my comments, that I was thinking that THIS IS THE STUPIDEST CASE I HAVE EVER SEEN.

     There are certain cases you read in law school, usually Supreme Court decisions, that are so stupid, so ridiculous, that you are convinced that a majority of the Court is senile. All of us law school graduates have our favorites. However, in my humble opinion, the area of law that is the absolutely most absurd is antitrust. The law is so confused that it is absolutely impossible for a business to know whether or not it is violating the law. And that is why Microsoft is in trouble. You see, my friends, THE case that is the fountainhead of the law that will control the Microsoft case is THE STUPIDEST CASE I HAVE EVER SEEN.

     Antitrust law is an amorphous topic. It is not really a LAW as much as a sentiment. In sum, businesses are not supposed to "unfairly compete" or "restrain trade." Nobody knows what the hell that means. Antitrust law wants businesses to compete with other businesses to provide better products at lower prices, but not so good to drive their competitors out of business.

     Another big problem with antitrust law is nobody knows whether the purpose of the law is to protect consumers, or competitors, or both. During the Warren Court, the plaintiff, usually the US government, almost never lost, because the Warren Court thought the purpose of the law was to protect "competition" as opposed to consumers, so even if consumers were not harmed, injury to a competitor would be enough. During the past 20 years, the focus has shifted mainly to the injury to consumers, so defendants have been more successful.

     Anyway, one of things you are not supposed to do is enter into a "tying" arrangement, especially if you are a monopoly. An example would be if your local cable company told you that you couldn't receive cable (at a fair price) unless you bought a television set from the cable company. That is a no-no, because the cable company is improperly leveraging its monopoly in one area to gain monopoly profits in another area.

     However, the concept is extremely problematic. Let's say you call the cable company and say how much for service and they say $30 for basic service, which includes 60 channels. You say, thanks, but all I need is ESPN and ESPN2, and at $.50 per channel, where do I send my dollar? They say sorry, if you want ESPN, you have to take Lifetime and the Soap Channel and all the rest. You say, but that is an illegal "tying" arrangement!! They say, sue us.

     Here are some examples of real "tying" lawsuits:

          1. Season ticket holder for a football team sued because he didn't want to pay for preseason tickets.

          2. Advertiser sued because the newspaper required advertisers to pay for spots in both morning and evening editions.

          3. Franchisee sued Baskin Robbins because Baskin Robbins would only license his name if the licensee bought ice cream from Baskin Robbins. (McDonalds has been sued on basically the same grounds).

           4. Mortuary sued because it required that a grave marker be purchased from the mortuary in order to obtain a plot.

The key concept here, to overly simplify, is whether you are dealing with two products or one. Are you buying a singular cable service (one -- no tying), or 60 channels (more than one -- tying). If you get a hole in your right shoe, and want to replace the shoe, you have to buy a left shoe, which you don't want. Could be tying if you are buying two shoes, but not tying if you are buying a singular pair of shoes. Antitrust lawyers spend careers analyzing whether a car is a "car," or is made up of separate parts. ("My dad sells tires. I want the car, but not the tires. If you don't knock $200 off the purchase price, I will sue you for tying the sale of the car to the tires!).

     The bottom line is that, like most areas of antitrust law, there are plenty of contradictory cases that say whatever a litigant wants to say. Some cases are stupider than others. Therefore, as a practical reality, there is no way to tell if your business practice is legal or not until you get sued .

     However, we should all agree that there should be something "unfair" about the tying arrangement, that somebody is hurt by the arrangement, that the consumer is being forced to pay extra for something he doesn't want to get something he does want. You would think.

     There is a Supreme Court case called Fortner Enterprises, Inc. v. United States Steel Corp., 394 U.S. 495 (1969), which the major "tying" case and is THE STUPIDEST CASE I HAVE EVER SEEN. In the briefest summary, US Steel, which produced a lot of steel at the time, had the bright idea to manufacture prefabricated houses. Seemed like a good idea at the time. So US Steel entered into an agreement with Mr. Fortner, a housing developer. A subsidiary of US Steel loaned Mr. Fortner $2 million at a below market interest rate to purchase and develop certain land in Kentucky. As part of the loan, Mr. Fortner agreed to purchase and erect prefabricated houses manufactured by US Steel on the land. The houses cost Fortner about $700,000 to purchase. The rest of the money went for the land, installation, etc.

     The development did not go well for Mr. Fortner and he blamed US Steel, alleging that the houses were supplied at an unreasonably high price and were defective. Therefore, Mr. Fortner had the bright idea to sue US Steel. Did Mr. Fortner sue because the houses were defective? Of course not! That would be mundane. Instead, Mr. Fortner accused US Steel of entering into an illegal "tying" arrangement.

     Before you read on, read the previous paragraphs and try and figure out the tying arrangement.

     No cheating. Go try and figure it out.

     The answer, if you haven't guessed it, is that Mr. Fortner alleged that US Steel improperly tied the $2 million loan to the requirement that Mr. Fortner buy the prefabricated houses. In other words, Mr. Fortner was complaining that US Steel would only lend him $2 million at below market interest rates IF he agreed to purchase US Steel's houses. The Supreme Court held that this was an obvious tying arrangement, especially because US Steel's houses were about $400 over market, and the only question was whether US Steel had "sufficient economic power" over credit to be liable.

     Let us try and understand the senility of the Supreme Court. My credit card charges me 21%. Ferrari Motor Credit charges 10% for a car loan. I have a great idea. I go to the Ferrari dealer, who is happy to see me, and asks if I would like to do a test drive. I say no thanks, but can I borrow $200,000 at 10%? They say huh?   I say, the Supreme Court has made it clear that you cannot tie your credit to the purchase of a separate product. They say, we are not in the credit business, we simply subsidize credit in order to stimulate car sales. I say that's great, but go read a Supreme Court case called Fortner Enterprises.

      (As a postscript, eight years later, the case wound its way back to the Supreme Court, where a less senile and obviously embarrassed Court ruled that US Steel, which is obviously not in the business of extending credit, did not have sufficient economic power in the credit industry to be liable).

     Now it is time for Microsoft, but please keep Fortner Enterprises in mind.

     I took the trouble, for your benefit, to read the Government's complaint against Microsoft, and to skim the Judge's Findings of Fact. Let me preface this by saying I am not a computer expert. In fact, I don't even own a computer. However, notwithstanding my ignorance, here is all you need to know about the case:

          1. Fact: Microsoft has a monopoly providing operating systems for Intel based PCs. Comment: This is not exactly true. There are plenty of operating systems that a consumer can buy. What Microsoft has is a monopoly on operating systems that people want to buy, as explained in the next paragraph. In any event, let's assume this to be true. Being a monopoly, by itself, is not illegal. Monopolies can compete. They just can't use their monopoly power to "unfairly" compete.

          2. Fact: It is inherent in the PC industry that there will be a dominant operating system. This is because consumers want a system that will run all present and future applications, such as word processing, accounting software, games, etc.. It is expensive for producers of applications to modify the applications to fit multiple operating systems. Therefore, it is in the interests of the application providers to prepare code for just one system, which encourages customers to buy that system, which causes new providers to only prepare code for that system, etc. You get the idea. This is the same basic reason your VCR is VHS and not Betamax. Comment: I want to stress that the Judge recognizes that a dominant operating system is inherent in the industry. In other words, nobody is arguing that the monopoly Microsoft has is inherently harmful to consumers.

          3. Fact: In the mid 1990's, Microsoft saw Netscape as a big threat, because Netscape's Navigator internet browser, if fully developed, could act as a operating system for various programs on the internet, specifically programs written in the JAVA language. If enough applications were written, consumers might decide they didn't need Windows to operate the computer, but could rely on Navigator to run the programs downloaded from the internet.   Therefore, Microsoft dedicated itself to destroying Netscape. Comment: This is the one big area of disputed facts. However, let's assume it to be true, as it undoubtedly is.

          4. Fact: Microsoft's strategy to destroy Netscape was to compete directly with Microsoft's own browser (Internet Explorer) and to obtain market share. If Microsoft could obtain a large enough market share, then it would not be economical over the long term for enough applications to be prepared directly for Netscape. Therefore, Microsoft created Explorer and gave it away for free, thereby forcing Netscape to stop charging for Navigator, which hurt Netscape's profitability. Then Microsoft did deals with companies like AOL, in which AOL favored Explorer at the expense of Netscape. Comment: Again, all undoubtedly true.

          5. Fact: Unlike Windows 95, in which Microsoft agreed (after being sued by the government) that a computer maker could delete Explorer before shipping the product, in Windows 98, Microsoft intertwined the Explorer computer code so that it cannot be deleted before shipping. In effect, if you want Windows 98, you have to take Explorer. This is all part of the plot to increase market share for Explorer at the expense of Netscape. Comment: Again, absolutely true.

          After writing probably hundreds of pages saying things that nobody disputes, here is the conclusion of the Findings of Fact, the bottom line, the entire point. If the sentences are too big, just read my comments.

VII. THE EFFECT ON CONSUMERS OF MICROSOFT'S EFFORTS TO PROTECT THE APPLICATIONS BARRIER TO ENTRY

408. The debut of Internet Explorer and its rapid improvement gave Netscape an incentive to improve Navigator's quality at a competitive rate. 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.

[COMMENT: The Judge is saying that the introduction of Explorer was a good thing for consumers because it competed with Navigator and lowered prices for consumers.)

409. To the detriment of consumers, however, Microsoft has done much more than develop innovative browsing software of commendable quality and offer it bundled with Windows at no additional charge. As has been shown, Microsoft also engaged in a concerted series of actions designed to protect the applications barrier to entry, and hence its monopoly power, from a variety of middleware threats, including Netscape's Web browser and Sun's implementation of Java. Many of these actions have harmed consumers in ways that are immediate and easily discernible. They have also caused less direct, but nevertheless serious and far-reaching, consumer harm by distorting competition.

(COMMENT: While Explorer is a good thing for consumers for browsing the internet, Microsoft's purpose in introducing Explorer was to prevent Netscape from competing with Microsoft as an operating system.)

410. By refusing to offer those OEMs who requested it a version of Windows without Web browsing software, and by preventing OEMs from removing Internet Explorer -- or even the most obvious means of invoking it -- prior to shipment, Microsoft forced OEMs to ignore consumer demand for a browserless version of Windows. The same actions forced OEMs either to ignore consumer preferences for Navigator or to give them a Hobson's choice of both browser products at the cost of increased confusion, degraded system performance, and restricted memory. By ensuring that Internet Explorer would launch in certain circumstances in Windows 98 even if Navigator were set as the default, and even if the consumer had removed all conspicuous means of invoking Internet Explorer, Microsoft created confusion and frustration for consumers, and increased technical support costs for business customers. Those Windows purchasers who did not want browsing software -- businesses, or parents and teachers, for example, concerned with the potential for irresponsible Web browsing on PC systems -- not only had to undertake the effort necessary to remove the visible means of invoking Internet Explorer and then contend with the fact that Internet Explorer would nevertheless launch in certain cases; they also had to (assuming they needed new, non-browsing features not available in earlier versions of Windows) content themselves with a PC system that ran slower and provided less available memory than if the newest version of Windows came without browsing software. By constraining the freedom of OEMs to implement certain software programs in the Windows boot sequence, Microsoft foreclosed an opportunity for OEMs to make Windows PC systems less confusing and more user-friendly, as consumers desired. By taking the actions listed above, and by enticing firms into exclusivity arrangements with valuable inducements that only Microsoft could offer and that the firms reasonably believed they could not do without, Microsoft forced those consumers who otherwise would have elected Navigator as their browser to either pay a substantial price (in the forms of downloading, installation, confusion, degraded system performance, and diminished memory capacity) or content themselves with Internet Explorer. Finally, by pressuring Intel to drop the development of platform-level NSP software, and otherwise to cut back on its software development efforts, Microsoft deprived consumers of software innovation that they very well may have found valuable, had the innovation been allowed to reach the marketplace. None of these actions had pro-competitive justifications.

(COMMENT: This is the key paragraph that will be laughed at by present and future law students. The Judge is saying that Microsoft was able to screw Netscape by "tying" the sale of Windows to the sale of Explorer. In other words, Microsoft used its monopoly power in operating systems to force computer manufacturers, and therefore consumers, to buy Explorer. If you want to buy Windows, you have to buy Explorer. As a result, Netscape was harmed, and think of all the great things that would have been invented if Netscape was more successful (although the Judge has no ideas what those great things are).)

411. Many of the tactics that Microsoft has employed have also harmed consumers indirectly by unjustifiably distorting competition. The actions that Microsoft took against Navigator hobbled a form of innovation that had shown the potential to depress the applications barrier to entry sufficiently to enable other firms to compete effectively against Microsoft in the market for Intel-compatible PC operating systems. That competition would have conduced to consumer choice and nurtured innovation. The campaign against Navigator also retarded widespread acceptance of Sun's Java implementation. This campaign, together with actions that Microsoft took with the sole purpose of making it difficult for developers to write Java applications with technologies that would allow them to be ported between Windows and other platforms, impeded another form of innovation that bore the potential to diminish the applications barrier to entry. There is insufficient evidence to find that, absent Microsoft's actions, Navigator and Java already would have ignited genuine competition in the market for Intel-compatible PC operating systems. It is clear, however, that Microsoft has retarded, and perhaps altogether extinguished, the process by which these two middleware technologies could have facilitated the introduction of competition into an important market.

(COMMENT: Microsoft's strategy successfully prevented Netscape from competing as an operating system.)

412. Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry. Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products. Microsoft's past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest.

(COMMENT: Microsoft consists of a bunch of ruthless bastards who have demoralized their competition.)

     Let's review. What exactly did Microsoft do that was uncompetitive? Did it abuse its monopoly power in dealing directly with Netscape? The answer is NO. In short, while the Judge will not say it explicitly, Microsoft saw Netscape as a competitor, played hardball and out competed Netscape, and, with one exception, did nothing illegal, even for a monopoly.
.
     The ONE exception, when you eliminate all the verbiage, is that Microsoft "forced" purchasers of Windows to take Explorer. Microsoft used its monopoly power in operating systems (Windows) to expand its powers in the competitive browser market (Explorer). In other words, Microsoft illegally "tied" Windows to Explorer.

     Microsoft argues that Windows and Explorer are now one product, so there can be no tying arrangement by definition. In fact, an appellate court has already rule that the products are "integrated," and Microsoft will be relying heavily on that case. But let's leave that argument to the side and for another day.

     The entire problem with "tying" is that it allegedly prejudices consumers by making them pay more for a product that they do not want and would be cheaper if it wasn't tied to the monopoly product. So how much is Microsoft unfairly making by "tying" Explorer to Windows? NOTHING!!!!! NOTHING!!!! Microsoft gives away Explore for FREE. Microsoft did not increase the price of Windows when it added Explorer. There is absolutely no evidence in the record that Microsoft has made a dime in the browser market as a result of its monopoly power.

     The Judge, in utter desperation that the tying arrangement is of no harmful economic consequence to consumers (as opposed to a competitor like Netscape), and in fact is beneficial to consumers, is forced to argue that consumers are harmed because they have to take Explorer even if they don't want it. In Paragraph 410, he theorizes that there are two categories of consumers who are harmed by being "forced" to take Explorer for FREE:

          (1) Explorer makes Windows run less efficiently. It is cumbersome. Therefore, if you already have Navigator, you would want Windows without Explorer, so your operating system would run more smoothly.

               (COMMENT: This is analogous to a luxury car maker who decides to add air conditioning to every one of its models, but doesn't increase the costs of the car. A customer in Alaska complains that he will never use the air conditioning, the air conditioning is a burden on the engine, and therefore he wants a car without air conditioning.)

          (2) Business customers don't want their employees wasting hours at a time drafting drivel to send to their friends and others. Therefore, they don't want their employees to have access to Explorer.

               (COMMENT: Do such employees actually exist?)

     That's it, folks. That is the illegal act. Microsoft gave away a product that almost everybody wants, except for some computer geek in Sunnyvale and my present employer.

     In a country with a functioning legal system, the notion that a company could have committed an illegal act by giving away something for free that 99% of the consumers are happy to have would be absurd. But we don't. We live in a country where US Steel had to spend ten years before it convinced the Supreme Court that it did nothing wrong by lending a contractor money at below market interest rates to buy its products. If this case goes to the Supreme Court, Microsoft will win, because the present Court, by a 5-4 margin, will hold that the purpose of antitrust law is to protect consumers, not competitors like Netscape. But because there are cases like Fortner Enterprises on the books, which stands for the proposition that antitrust law is incoherent, Microsoft is scared shitless right now.

     Thank you for listening.

     DBS