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U.S. vs. Microsoft: Another Day of Reckoning

Written By: R. Krause
Published On: April 26 2000

U.S. vs. Microsoft: Another Day of Reckoning
R. Krause - April 26th, 2000

Event Summary

On Monday, 3 April 2000, U.S. District Court Judge Thomas Penfield Jackson ruled that Microsoft [NASDAQ:MSFT] had violated Federal antitrust laws. The decision followed several weeks of intense negotiations between Microsoft and the U.S. Department of Justice. In the ruling, Jackson stated that "Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its own continued dominance in the relevant market."

Furthermore, the judge noted "Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits."

The decision, which was not a surprise, followed Jackson's November 1999 Findings of Fact. In the findings, Judge Jackson declared, "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." He also found that Microsoft had caused immediate and far-reaching harm to consumers.

Microsoft's stock price, which had risen in late March on speculation of a negotiated settlement, plunged almost 20% - from 106 5/8 on 31 March to 85 1/8 by the end of the following week. Judge Jackson has set May 24 for a hearing on penalties, setting the stage for a court-ordered breakup of the software titan and a direct appeal to the U.S. Supreme Court.

In the wake of the ruling, Microsoft has taken its case directly to the American public. Bill Gates is the centerpiece of new television ads, which debuted on 6 April 2000. In the ads, Gates states that he started Microsoft to "harness the power of the PC to improve people's lives." And in another move reminiscent of political campaigns, Microsoft had begun conducting opinion tracking polls.

Market Impact

Enough about the stock prices here - the key thing to look at is what remedies the judge will propose.

Most indications on the settlement talks suggest that Microsoft offered too little - an offer to open up the Windows source code, allowing PC makers to customize the Windows desktop, licensing Windows - to placate the Department of Justice. Microsoft has reorganized internally, dividing the company into three divisions - Windows, business applications, and consumer/Internet.

Judge Jackson has now spoken twice, in extremely harsh tones, about Microsoft, using words such as "violent" and "predatory" to describe the company. Although the ruling doesn't specifically indicate any possible remedies, it is reasonable to presume that the harshest possible remedy - breaking up the company - remains a viable scenario.

In the face of all this, Microsoft continues to display the same arrogance shown by Gates in his video deposition. No judge likes that. In any event, the remedies will be on Judge Jackson's terms and not Microsoft's. Barring a settlement, we forecast a breakup as the most likely scenario (60% likelihood).

User Recommendations

Watch and wait. At a minimum, Microsoft will be distracted for the remainder of the legal process. Software ship dates and quality can be expected to slip accordingly.

If you use any products competitive to Microsoft - AOL's Netscape Navigator, Red Hat Linux - remember that these companies should be eager for your business. Press them hard for the best possible deal.

 
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