Microsoft Fallout

Dec. 21, 2004
Will government's action lead to more choice for business?

When a federal judge dropped a bombshell on Microsoft Corp. on Nov. 5 -- declaring the company a monopoly that had abused its market dominance to the detriment of competitors -- manufacturers were left wondering what the fallout will be for them as users of Microsoft products. Unfortunately, even a month after the ruling, the long-term effect on business remains abundantly unclear. To some observers, the effect appears negligible. "I don't think this will materially impact users," says Richard J. Sherlund, a leading technology industry analyst and a managing director at Goldman Sachs Group Inc., New York, of the decision. "I don't see much change as a result." But some executives in the computer industry, particularly those who compete with Microsoft, suggest that the "findings of fact" by U.S. District Court Judge Thomas Penfield Jackson could lead ultimately to increased competition and innovation in the software industry. And that would translate to greater choice for both consumers and businesses that buy software. "Many in the technology industry are heartened by Judge Jackson's findings," says Edward J. Black, president of the Computer & Communications Industry Assn. Membership of the Washington-based trade group, which has been critical of Microsoft, includes CEOs and executives from numerous computer hardware, software, and service firms with total sales of more than $300 billion. "The overall technology industry will be healthier and more innovative by restoring competition," adds Black, who notes that Microsoft, rather than being an innovator, "was a consolidator and utilizer of the innovations of others. These findings are a blow against Microsoft's monopoly and a victory for consumers. No matter how large or wealthy a company like Microsoft may be, [it is] not above the law." Yet, other observers believe Jackson's findings bode ill for business in general and for the high-tech industry in particular. "If you're sufficiently ambitious, competent, and hard-working, if you're willing to risk your time and fortune, if you succeed at rising above your competition by serving customers with better products, then watch out, because our government will come down on your neck with the force and effect of a guillotine," comments Robert A. Levy, a senior fellow at the Cato Institute, a libertarian Washington think tank. Weighing in with similarly strong sentiments is the U.S. Chamber of Commerce, Washington. "No high-tech company should cheer these findings, because they could easily become the next target of government's mad rush to regulate our most promising industry," says Bruce Josten, executive vice president of the organization. "Every high-tech executive in America should be asking, 'Am I next?'" That view has widespread support on Capitol Hill. Among the most vocal legislators has been Rep. Thomas J. Bliley Jr. (R, Va.), the influential chairman of the House Commerce Committee. The government, he insists, should not in any way restrict high tech, which he points out has been the engine of economic growth for the U.S. for some time. "The high-tech industry is responsible for producing 30% of our economic growth [and] should not be burdened by excessive government regulations," he declares. Although the impact on overall business has yet to be seen, Microsoft clearly has been hurt. In fact, even before Jackson's ruling, market changes already may have eroded the company's hegemony, speculate some. "Microsoft did have a monopoly that [it] used to hurt companies or products like Netscape and WordPerfect," observes the CEO of a leading high-tech firm who asks not to be identified since his company is a Microsoft partner. "But I think that with the Internet, they [Microsoft] no longer have that dominant a position." Despite the fact that Microsoft could face a "structural" remedy -- i.e., the possible breakup of the company similar to that imposed on AT&T in the 1980s -- the firm struck a recalcitrant note in its reaction, suggesting the likelihood of an appeal. Speaking at a meeting of shareholders, Microsoft Chairman Bill Gates said the company was disappointed at the government's findings and vowed to fight on in the courts. "I still believe that the American legal system, at the end of the day, will recognize that Microsoft's innovations and behavior were completely fair and brought tremendous benefits to millions of consumers," Gates said. At least one observer, however, questions whether an appeal is a smart idea. "Microsoft may have some incentives to play this out because they're not going to get a good settlement from the Dept. of Justice and therefore hope that they can get a better settlement on appeal," says David B. Yoffie, professor of international business administration at Harvard Business School. "I do not believe that's the right solution for Microsoft. I believe Microsoft should try and settle, because the potential for a Draconian remedy is very high. To roll the dice on the appellate court or the Supreme Court is a very risky move." One thing's for certain. The once-aggressive software giant is likely to be hobbled even more than it already was when it comes to acquiring other companies. Says Sherlund of Goldman Sachs: "The ability of Microsoft to do acquisitions, which was already limited, will be impacted."

John S. McClenahen and William H. Miller in Washington contributed to this article.

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