The Justice Department has abandoned its plan to dismember the world's leading software maker. Still, pundits who thought that Thursday's announcement was a concession to Microsoft should have been watching the stock market. The price of Microsoft stock dropped three percent - even more than the dip in the overall averages. Investors never expected the government to renew its absurd demand to breakup the company. After all, the U.S. Court of Appeals had affirmed only one of Judge Thomas Penfield Jackson's three main holdings. And the appellate judges had even warned the government, in no uncertain terms, that the "drastically altered scope" of Microsoft's liability would not support a divestiture remedy.
Neither will Justice revisit the charge that Microsoft illegally tied its Internet Explorer browser to its Windows operating system. But that, too, is no capitulation - just a recognition that the tying claim would be tough to prove and promised few benefits in any event. The appellate court said that requiring customers to take both products was not unlawful, in and of itself. Instead, under a "rule of reason" standard, the Justice Department would have to show that anti-competitive effects of the tie-in outweighed any pro-competitive benefits. More important, one aspect of the government' s monopoly maintenance charge - the single charge affirmed on appeal - was that Microsoft impermissibly prevented PC makers from removing the browser from the operating system. So the government had little to gain from separately pursuing a redundant tying allegation.
About the only good news for Microsoft was conjecture - not part of the government's formal announcement - that the Justice Department probably won' t try to halt the imminent release of Windows XP. Yet that's no surprise, either. More than 1,000 companies are busily creating XP-based products. With the economy threatening to tank, not even the more rabid state attorneys general, who are co-plaintiffs in the lawsuit, want to be accused of delaying the product that might restore value and confidence to the high-tech sector.
That doesn't mean XP is off the hook. The Justice Department proclaimed that it will seek remedies "modeled after the ... conduct-related provisions" of Judge Jackson's final judgment. To some observers, those conduct remedies are worse than splitting the company in two. Three of the proposals could easily affect XP. First, Microsoft would have to refrain from some types of tying contracts with PC makers. Second, if products were bundled, the company would have to sell an unbundled version at a lower price. Third, Microsoft would have to license prior versions of its operating system on the same terms for three years after a new version is released. That third proposal means that XP would compete against Windows 98 and 2000, thus minimizing Microsoft's leverage in dealing with consumers who are content with their existing operating system.
Unrelated to XP, there are several other pernicious conduct remedies. Microsoft would have to establish what Loyola economics professor Thomas DiLorenzo has called a "creepy and totalitarian ... Gestapo-style monitoring system," whereby the government has ongoing access to inspect and copy virtually all of Microsoft's records, and Microsoft's employees are able to report violations of government regulations "on a confidential basis." Microsoft would also have to disclose to software developers its applications programming interfaces - not just instructions regarding use of the interfaces, but actual source code. And PC makers would be able to access enough of the operating system code to re-design the opening screen of the Windows desktop.
Forced disclosure of Microsoft's software would have destructive implications. Users will have to deal with multiple versions of Windows. The common platform on which software developers can build will vanish. Government-driven balkanization of the operating system would wipe out Microsoft's most important contribution to software markets: standardization. The result would be fewer applications programs, increased costs of development, higher user prices, and greater complexity.
The essential message of the Justice Department's announcement is that it will not waste time on lost causes, like dismemberment, or on hard-to-prove, inconsequential charges, like tying. Instead, the government wants to move ahead aggressively and promptly to rein in Microsoft's supposed misbehavior so that Windows XP won't "monopolize" the market. That ratchets up the pressure for a settlement. But it also spells bad news for consumers, from whom few if any complaints have been heard. Inexplicably, the Bush administration pursues this baseless lawsuit on behalf of Microsoft's opportunistic rivals, who successfully commandeered the Justice Department to do their bidding.