Microsoft Settlement Is a Failed Remedy, Says AAI, Urging States to Hold Tough

The following press release was slightly modified to appear as an aai column by Norman Hawker in the Nov. 7, 2001, edition of FTC:WATCH

CONTACTS:Albert A. Foer, President, 202-244-9800Robert Lande, Senior Research Fellow, 410-837-4538Norman Hawker, Research Fellow, 616-387-6118

"The settlement of the Microsoft case announced by Microsoft and the Department of Justice is a failed remedy," states Albert A. Foer, President of the American Antitrust Institute. "It fails to protect competition in the software industry and does not come close to dealing with the problems that were found to exist by the District Court and the Court of Appeals. It is shocking that the Department of Justice, after having its victory upheld by a unanimous en banc Court of Appeals, would agree to terms that are not only weaker than the interim relief ordered by Judge Jackson pending an anticipated break-up of the company, but weaker still than the terms agreed to by Microsoft in the mediation conducted by Judge Posner a year and a half ago when the issue of whether Microsoft had even violated the law was an open question. It is ironic that each time the Government's case on the merits grows stronger, the Justice Department takes a weaker position vis a vis Microsoft.

"The Court of Appeals unanimously held that any remedy be designed to restore competition to the operating system market, deprive Microsoft of the fruits of its illegal conduct, and prevent Microsoft repeating its illegal monopolization. The DOJ's proposal will accomplish none of this. We strongly urge the States to keep up their fight for consumers."

The problems with the so-called settlement are numerous, but six objections immediately appear upon even the most cursory reading:

1. There is no meaningful "Crown Jewels" Provision. Typically, consent decrees punish noncompliance by requiring a company to forfeit its "Crown Jewels"--usually by automatic divestiture of specified valuable assets. The current proposal contains no almost no penalty at all. If Microsoft fails to comply with the terms of the order, the only penalty is an extension of the "restrictions" for two additional years. But if Microsoft suffers no further penalty for disobedience, why should Microsoft care whether it ignores the "restrictions" for five years or seven?

2. The Return of the Ham Sandwich. When this case began, the DOJ argued that it was ridiculous to let Microsoft define what constituted the Windows Operating System by pointing to Microsoft's statement that it could include "a ham sandwich" in the operating system if it wanted to. The Court of Appeals specifically held that Microsoft used its unfettered ability to commingle software code from middleware products with the operating system's software code violated Section 2 of the Sherman Act. Yet the DOJ has expressly agreed to let Microsoft include whatever it wants in the Windows Operating System Product. In other words, where once Microsoft could put in a ham sandwich, now the DOJ has given Microsoft carte blanche to put in a steak dinner too.

Microsoft can evade all of the restrictions imposed on middleware such as Internet Explorer and Windows Media Player by using its DOJ-given ability to define what constitutes the "Windows Operating System Product." All Microsoft needs to do is redefine the product as part of the operating system. The DOJ goes further and allows Microsoft to avoid the problem of middleware versus operating system altogether by either always bundling the product with Windows or by not using a Trademarked name for the product. Finally, many of the most important Microsoft products folded into Windows XP, such as PassPort , are not even included the definition of Microsoft Middleware Products.

3. Microsoft remains free to use Windows to obtain a 100% installed base for its other products. The current proposal contains no limitation of Microsoft's ability to bundle products with Windows. OEMs would be given the right to hide these bundled products and install additional competitive products, but OEMs would not have the right to remove the Microsoft products and replace them with competitive products. Given the network effects of the software industry, this all but ensures that Microsoft will defeat its middleware rivals. For example, assume that OEMs with 75% of the market decide to install RealPlayer and hide Windows Media Player. Windows Media Player will still remain installed on 100% of the personal computers and it still can be used to play music streamed over the Internet, especially since RealPlayer lacks the "reasonable technical requirement" of playing streams encoded in Microsoft's proprietary format. If you're an online vendor of music, which will you choose: Microsoft's format that can be played on 100% of personal computers or RealPlayer's format that can be played on 75% of personal computers?

Although the Court of Appeals reversed the finding that bundling was illegal per se under Section 1 of the Sherman Act, the Court of Appeals unanimously found that such commingling of middleware software code constituted illegal monopolization under Section 2 of the Sherman Act.

There are two ways to deal with this problem, neither of which is present in the DOJ proposal. First, Microsoft could be prohibited from bundling its products with Windows. Given Microsoft's reluctance to comply with such orders, e.g., shipping a version Windows 95 that would not work when Judge Jackson initially ordered Microsoft to remove Internet Explorer, such an approach would almost certainly prove to be an exercise in futility. That is why the AAI advocated a second approach, a "must carry" provision for Microsoft to install competitive middleware products. This would level the playing field for all middleware products. Microsoft products would win the competitive battle only if they proved to be better than the competition, not simply because Microsoft products were the only ones shipped with every PC. Of course, the current "hide and seek" provision already in the DOJ proposal should allow OEMs and consumers to hide non-Microsoft Middleware Products installed pursuant to the "must carry" provision to the same extent the "hide and seek" provision applies to Microsoft Middleware Products.

4. The prohibitions on Microsoft's ability to retaliate against OEMs, ISVs, etc., are unworkable. The trial court found that Microsoft used a variety of retaliatory tactics against those who stood in the way of Microsoft's efforts to illegally maintain its monopoly. The concepts of uniform pricing and the explicit prohibitions on retaliation are welcome concepts, but as presented in the current proposal, they will have little practical value. For example, Microsoft remains free to retaliate against OEMs and others for using, promoting, developing, etc., products that compete with anything that Microsoft markets other than "Microsoft Platform Software." Consequently, Microsoft can retaliate against an OEM under the guise of inadequate support for .NET, Microsoft Office, PassPort, or otherwise.

5. The disclosure provisions are too narrow and unenforceable. During the mediation with Judge Posner, Microsoft had agreed to disclose not only the APIs, but the entire source code. Inexplicably, the Department of Justice has now agreed to narrow the disclosures to a limited set of APIs and Communications Protocols. Without disclosure of the entire source code, however, how will OEMs, ISVs, etc., know whether Microsoft has continued to hide any secret APIs and Protocols? Unless a Microsoft employee becomes a whistleblower, no one outside Microsoft will ever know whether Microsoft has complied with these provisions.

6. The enforcement mechanism is designed for failure. The present litigation against Microsoft began because an earlier consent decree proved unworkable, permitting disputes to be settled by interpretations based on contract law doctrines, rather than as a court order, subject to enforcement under the antitrust laws with the power of contempt of court. This is a situation where the few restrictions imposed on Microsoft come with a panoply of exceptions, a kind of Swiss cheese where the holes may be more important than the cheese. It will be very easy for Microsoft to ignore the restrictions or interpret them at its pleasure, subject only to the bureaucratic review of a committee, housed at Microsoft and half-dominated by Microsoft. This is a recipe for stalling and forestalling, not for decisive overview by the Court, which would be essential to a meaningful conduct remedy.

The AAI has prepared its own proposed provisions for a conduct-based remedy that would meet the law's requirements in this case. See Attached is a chart that compares the "stipulation" of the Justice Department and Microsoft to the AAI benchmark.

Remedy Provisions
AAI Proposal
DOJ SettlementUnrestricted right of OEMs to control the initial bootup sequence, including dual booting, icon placement, choice of applications and internet services.
XLicensing of DOS based operating systems to compete with Windows XP and other NT based versions of Windows
Microsoft is not required to license or even to continue its own sales of any OS in competition with Windows XPNo more "Embrace and Extend" for open standards and technology
"Must Carry" JAVA with Windows
"Must Carry" competitive middleware with Windows
"Open Source" Microsoft middleware
Port Microsoft applications to competing operating systems
End price discrimination among OEMs
Prohibition on price discrimination limited to Windows Operating System Products, and even then, Microsoft may give favored OEMs price reductions in exchange for "development, distribution, promotion or licensing."Disclose Source Code, APIs and other technical information to ISVs
Required disclosures are limited to the APIs and Communications Protocols "used by Microsoft Middleware to interoperate with a Windows Operating System Product" or to "interoperate natively" with a Windows 2000 Server.Disclose Source Code, APIs and other technical information to IHVs, IAPs, ICP, and OEMs

Same limited disclosures as to ISVsAppoint Special Masters/Technical Experts to oversee implementation of the remedy and advise the Court
Technical Committee oversees implementation of the remedy and advises the DOJ, but the TC is specifically prohibited from disclosing its findings or testifying to the Court.Give consumers and other interested parties the right to bring compliance issues before the Court
Prohibit retaliation against OEMs and ISVs for exercising Rights under the remedy or cooperating with the goverment
No prohibition on retaliation for cooperating with the enforcement of the settlement. Prohibition on retaliation for exercising rights under the settlement extended to IHVs.Require broad interpretation of provisions to accomplish the remedial goals outlined by the Court of Appeals
Remedy applies to future versions of Windows
XTerm of the remedy
10 years
5 yearsPenalty for failure to compy with the remedy
Imposition of structual remedy
2 year extension of the remedyReward for good faith compliance and accomplishment of remedial goals
Early termination of the remedy
Ongoing review review of the remedy to determine its success and make necessary modifications