On October 20, the Justice Department's antitrust division filed a complaint which alleges that Microsoft exerts pressure on personal computer manufacturers to accept Microsoft's web browser as part of Windows 95, in violation of a 1995 federal court order.  A federal district court judge will need to decide whether to hold Microsoft in contempt, and whether to grant the various remedies that Justice is requesting, including a one million dollar per day fine.

The central issue in the antitrust action is whether Microsoft's market-dominating Windows 95 operating system can incorporate web browser functionality, or whether Microsoft's web browser, called Internet Explorer, is a separate product.

Justice's Complaint: Microsoft Pressuring Computer Makers

The Justice Department complaint states that Microsoft violated the 1995 court order, because Section IV(E)(i) of the court order forbids Microsoft from requiring personal computer makers to license "other Microsoft products" in order to have a license to Microsoft's monopoly operating system products.  Justice believes that when Microsoft required personal computer makers to license and distribute its Internet Explorer browser as a condition of licensing the Windows 95 operating system, Microsoft violated the court order.  The Department of Justice feels that Microsoft is limiting the choices of personal computer manufacturers and consumers, that Microsoft is forcing personal computer manufacturers into an anti-competitive game, and even suggests that Microsoft may have threatened nasty reprisals for anyone who complained.

In addition to asking the court to fine Microsoft a million dollars per day, the complaint asks the court to order Microsoft to stop requiring that personal computer makers accept Windows 95 and Internet Explorer as a bundle.  The requested court order would also require Microsoft notify Windows 95 consumers that they do not have to use Internet Explorer, and compel Microsoft to instruct Windows 95 users on how to remove the Internet Explorer icon from their Windows screen.

At a news conference, Attorney General Janet Reno accused Microsoft of "unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly."  By requiring computer makers to include Internet Explorer with Windows 95, Justice reasons that Microsoft will make Internet Explorer the standard setting on the vast majority of new personal computers sold, and therefore Microsoft will have leveraged its monopoly in the operating system market into a monopoly of the Internet browser market .  Although Windows operating systems are used on 85-95% of the world's personal computers, Microsoft's web browser trails the market leader Netscape Navigator, which holds 60-80% of the browser market.

Besides extending its monopoly in operating systems to a monopoly in web browsers, Justice believes that Microsoft will be acting to protect its Windows operating system monopoly.  Joe Klein, antitrust chief of the Justice Department, has said, "[Browsers] take computing beyond the desktop, where Microsoft rules, and into the Internet, where no one rules."  Microsoft is currently also in a court struggle with Sun Microsystems, over implementation of the computer language Java, which along with browsers may provide a method of breaking the Windows operating system monopoly.  A few years ago, Bill Gates wrote, "A new competitor `born' on the Internet is Netscape.  Their browser is dominant, with 70 percent usage share, allowing them to determine which network extension will catch on. They are pursuing a [strategy] . . . to commoditize the underlying operating system."  In another document, Paul Maritz, a Microsoft vice president, warned that browsers could create a "virtual operating system" in which "Windows will become devalued, eventually replacable."  It is this threat which Justice feels Microsoft is now illegally moving to stifle.

Justice has provided testimony from a number of prominent computer manufacturers, as part of their case.  Compaq's director of software procurement, Stephen Decker, told the Justice Department that Microsoft had warned the computer-maker that if it went ahead with a plan to place a Netscape icon rather than an Internet Explorer icon on desktops of its Presario model, Microsoft would terminate Compaq's Windows 95 agreement.  "We had a relationship with Netscape and we had been shipping their product for a while," Decker said. "Netscape was actually the browser partner and we wanted to give that position on the Compaq Presario desktop." But Decker said Compaq backed down in the face of the threat: "We put the [Microsoft] icon back on."  Justice released documents showing that Microsoft threatened to withold the Windows 95 operating system from personal computer makers Gateway and Micron, as well, when those companies asked to remove the software giant's Internet browser from their PCs.

The antitrust chief of the Justice Department, Joe Klein, summarized the governments case by stating , "Anyone can give away a browser, but no one can force it onto a computer desktop unless you have monopoly power. .... When you use that power to snuff out a new entrant, that's what's prohibited."

Justice: Silencing Criticism?

By taking action now, the Justice Department has quieted the criticisms being leveled on Justice by a variety of sources, including a number of U.S. Senators.  In June, showing their lack of confidence in Justice's scrutiny of Microsoft, three senators asked the Federal Trade Commission to investigate Microsoft's compliance with the 1995 court order.  The commission denied the request, saying that it would overlap with the Justice inquiry.  In that same month, one of the three Senators, Conrad Burns (R-Montana), the Chairman of the Commerce subcommittee on Communications, threatened to prevent Joe Klein's nomination as antitrust chief of the Justice Department on the grounds that Klein would not take appropriate action against Microsoft. Burns later voted for Klein after assurances that the antitrust division would get enough resources to investigate the software giant.  "Hundreds of software companies came to me with concerns that Microsoft violated the 1995 consent decree, and my interest was to ensure that these allegations were properly addressed," Senator Conrad Burns (R-Montana) said in a statement. "I would commend the Justice Department for vigorously pursuing these very serious allegations and taking action it felt was appropriate."
 
Microsoft's Answer: A Better Operating System

In making its powerful counter argument, Microsoft points to the same provision of the 1995 court order that the Justice Department relies on.  Microsoft notes that the court order gave Microsoft the right to innovate and extend its operating system, by increasing the operating system's "functionalities." Web browsers help people search for information and organize it, and Microsoft therefore believes that they should be part of the operating system.

"There's nothing more incremental and logical than having Windows including a new way of locating and collecting information," William Neukom, Microsoft's senior vice president for law and corporate affairs, said.  Internet browsing, the company believes, is a natural addition to the functionality of the Windows operating system because computer users need to access an increasing amount of information from the global network.  The web window, with its forward and back buttons, and rich content, becomes the fundamental part of the interface in Microsoft's next generation operating system, Windows 98.  That product, already in testing, allows text and visual information to lay side by side with contemporary files and folders.  By providing a web browsing functionality as an integral part of Windows, Microsoft believes the consumer has an easier method of locating information, whether it is on their hard drive or on the Internet.  The consumer can move seamlessly from their own computer to the Internet, and back.

"I'm afraid the government may misunderstand the meaning of that provision of the consent decree," Neukom said. "They may not appreciate the way software publishers enhance and improve their products. ... We believed the government understood we have the right to continue to develop our operating system as we had 10 years prior to that.  The point of the consent-decree language was to let Microsoft define the functionality [of an operating system], not to have the government legislating what functionality should be in an operating system and what shouldn't be. That's a matter that should be left to the company."

Following the Microsoft reasoning leads to the conclusion that what the Department of Justice perceives as an attempt to pressure computer manufacturers to accept an add-on product is really Microsoft exercising its contractual right not to provide computer makers with its operating system if the computer makers do not agree to include the entire operating system.  Spokesman Mark Murray admitted that Microsoft had discussions with Compaq over the Internet Explorer icon, saying that "we didn't threaten them. We were enforcing the terms of our contract. ... We've always said computer manufacturers need to ship our product in its entirety, not pick and choose between functionality."  Murray noted that Microsoft did not prohibit Compaq from including the Netscape browser on the desktop in addition, and indeed Compaq has chosen to include Netscape's Navigator on many of the PCs it sells. Microsoft merely insisted that Internet Explorer not be deleted, Murray said, as part of the functionality of a whole Windows operating system.

Microsoft's Reaction: So What?

Employees at Microsoft have for the most part ignored the Department of Justice's action.  "I was here [in Redmond] doing product reviews," said John Neilson, who manages Microsoft’s interactive services media division. "We spent a couple minutes at the beginning of each meeting talking about it and then went on."

Microsoft CEO Bill Gates remarked, "This is called capitalism."  While the idea of a million dollar a day fine may sound impressive, Gates, who is personally worth around $38 billion, said he would comply with a court ruling rather than pay a cent.

Gates has one significant thing in common with his employees: stock holdings. Government action will not have a real impact on the Redmond campus of Microsoft until it effects their stock options.  Wall Street showed little reaction to the Justice Department's action, raising Microsoft's stock price because of strong earnings reports.

Reuters reported a remark that Microsoft's second in command, Steve Ballmer, made at a San Jose industry conference:  "I say to heck with [Attorney General] Janet Reno."

Microsoft's Foes Circle

Netscape, as can be expected, was pleased with Justice's action.  "Antitrust laws are designed to protect and preserve competition. We think it's good to preserve that," said the browser company's Rosanne Siino, vice president of corporate communications. "We are absolutely supportive of the DOJ's actions, and think it is commendable they are looking into this."

Susan Creighton, a partner with the law firm Wilson Sonsini Goodrich and Rosati, is part of the legal team at the heart of a number of antitrust actions seeking to break Microsoft.  Currently representing Netscape, Creighton argues that Microsoft's actions fail a basic antitrust law test, in that Microsoft has not shown that it is the essential conduit for marrying operating system and browser. "People can get Internet Explorer today, .... and make it part of their computers.  It doesn't require a computer-maker forcing the consumer to take the two products together," she said.

"I think it's fabulous," said James Love, director of the Consumer Project on Technology, a Ralph Nader group that this month launched a campaign to force new government scrutiny of the software giant, to a reporter for Wired. "But we've been down this road before with Justice, and we'll just have to take a close look at it and see where it goes."

Japan's Fair Trade Commission and the European Union have ongoing, wide-ranging investigations of Microsoft's licensing practices.  They are expected to work with the United States Department of Justice.  Texas, Massachusetts, Connecticut, New York, California and South Dakota are also probing Microsoft's possible violations of antitrust and consumer protection provisions.

Where Things Stand Today

While many in the technology industry are delighted to see Big Bad Microsoft under attack, the prevalent attitude is that the courts are the last place in the world you want to see choices made about technologies. They move too slowly; they just don't get the unique, innovation-producing, price-reducing nature of the software business.
 
Although the contempt case will be heard by U.S. District Judge Thomas Penfield Jackson, the Justice Department faces an additional hurdle, in that appeals will be handled by a pool of judges who have generally reacted with skepticism to government antitrust controls.  In the government's favor, on the other hand, is the narrow scope of the case. Unlike making an antitrust case from scratch, in which prosecutors would have to prove the market dominance of Windows and pass other tests, the contempt matter is focused solely on the violation of the consent decree.

A more distressing short-term impact on Microsoft could be the symbolic value of the department's action. By acting on the consent decree, the regulators -- who have been accused by many in the technology industry of ignoring criticisms of Microsoft -- have sent a message that it will take those complaints seriously.  "It sends a very clear signal to people in Silicon Valley that the government is listening and is willing to bring action," said Kevin J. Arquit, a former director of the FTC's Bureau of Competition and a partner at the New York law firm of Rogers & Wells. "It's going to loosen the constraints people in [the] industry have felt in talking to the government."

The Future beyond the Current Action: Windows 98 and Java

The court order actually defines an operating system, but the definition is open to interpretation: "any set of instructions, codes, and ancillary information that controls the operation of a Personal Computer System and manages the interaction between the computer's memory and attached devices such as keyboards, display screens, disk drives, and printers."  Initially, Microsoft's first operating system, MS-DOS, lacked a graphical interface altogether.  With Windows, which is now an operating system in the minds of most people, but started off as a MS-DOS application, Microsoft added graphical capabilities.  By bundling Windows 95 and Internet Explorer, Microsoft may not have created enough of a seamless system for it to seem like an operating system, rather than an operating system and an application.

A central part of Microsoft's strategy, is to make that graphical component conform to a web browser design.  Windows 98, now being tested around the country by preferred customers, makes the line even more blurred.  The computer industry, after all, does not work at the pace of the courts.  The ability of regulators to convince a federal court that Microsoft has acted improperly with respect to a court order targeted at Windows 95 may have limited applicability to a Windows 98 operating system that integrates the browser into the interface even further.

Even a symbolic victory may be an important factor in determining the government's willingness to press forward in technology areas, however.  "This certainly shapes up as a crucial test of the government's efforts to control dominant firms in high-tech industries," said William E. Kovacic, a law professor at George Mason University and a former FTC attorney.

Joe Klein, Chief of the Antitrust Division, has refused to say specifically whether he is investigating Windows 98. He called it "a work in progress" and said "we are aware of it."

Others have pointed out that the true battle may be elsewhere: over the destructive tactics Microsoft is allegedly undertaking with respect to Java, Sun Microsystem's computer language.  Java has the potential to circumvent the Windows monopoly altogether.  However, a legal system that has difficulty deciding whether an operating system can be integrated with browser technology will probably have an even harder time trying to determine whether the implementation of a Java license is unlawful.