Editor 15-Jul-01
Court of Appeals: "Guilty!"

Microsoft won (as seen on TV) didn't they? No, they lost on all counts - so why did you hear it differently?




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The moment the Court of Appeals verdict was out Microsoft's powerful PR machine cranked into full spin cycle. Millions of dollars were spent in a matter of hours to manipulate public opinion. Flacks and lobyists fired up the phone banks and called reporters, journalists, politicians, TV personalities and even members of Chambers of Commerce to spread the official spin. Within hours everyone knew Microsoft had won a great victory for "The Freedom to Innovate(tm)".

Why was this spin campaign so successful? It was intense, but more important everyone already knew Microsoft was going to win. They knew that because Microsoft had been telling them so for months.

Even so, some where not fooled.

  • The Los Angeles Times was not fooled and has published a number of articles on the verdict, all pointing out that Microsoft is now in serious trouble.
    Note: these are all archived now (means pay for view), so no links.
    • Microsoft's Gamble Leaves It Vulnerable
    • Decision May Aid Microsoft's Rivals
    • Despite the Spin, Ruling No Victory for Microsoft

  • Robert H Bork and Kenneth W. Starr were not fooled (and you can't call that pair "socialist leaning, anti-business bleeding heart tree hugging one world liberals", can you)?

  • The Economist was not fooled.

  • The Wall Street Journal was not fooled, and published a number of articles similar to those in the LA Times ("for pay", so not listed here).

  • Most important of all, Wall Street was not fooled. Microsoft stock, instead of surging strongly after the verdict, went into a decline lasting days (since then there was a 6-point jump caused by cleverly presented quarterly financial results).

What Actually Happened?

With a libertarian, strongly pro-business Court of Appeals (known to dislike the convicting judge), and a Republican Department of Justice, Microsoft was totally confident their anti-trust conviction would be overturned.

What they didn't count on was judicial integrity. The Court of Appeals judged the case on merit rather than on prejudice. Microsoft lost on every single point. The court held that:

  • Microsoft does indeed poses a monopoly.
  • Microsoft has leveraged their monopoly in clear violation of the law.
  • The guilty verdict is completely sound and there is no reason to reconsider it.
  • Breaking up Microsoft is not an overly harsh penalty and could be re-imposed.

The court also included firm guidelines on how to judge which Microsoft actions are illegal and which are not.

Where the Court of Appeals disagreed with the District Court was on matters involving the penalty phase of the trial. Even so, they did not "overturn" the decisions of the District Court, they set them aside to be retried before a different judge. The Court of Appeals did say judge Thomas Penfield Jackson had given the "appearance of bias", but stated that careful examination of the case showed no actual evidence of bias.

A number of other flaws in the penalty phase were mentioned, including the way the DOJ argued the points of browser tying. The DOJ must re-argue these points, and the Court specified exactly what they must to do prove them, which they almost certainly will do.

What Happens Now?

First and foremost, Microsoft stands convicted as a predatory monopoly in clear violation of the law. They have no realistic hope of appeal, even to the Supreme Court.

  • Over 100 private anti-trust cases are pending. These may now proceed, and need only prove damages because guilt has already been established. Cases of this sort involve triple damages and could cost Microsoft billions.

  • New private anti-trust cases may be brought. Sun Microsystems and AOL / Times Warner are considered to be a strong possibility here. Again, triple damages and no need to prove guilt.

  • Microsoft may appeal the judgment to the Supreme Court. If they do so, this will be a delaying tactic only. The Supreme Court sent the case to Appeals in the first place, and they are unlikely to hear the case now with a unanimous verdict by all seven judges.

  • President George Bush is unlikely to intervene. He has enough political problems as it is, and political analysts say if he was going to do anything he would have started long ago, even before the election.

  • A District Court judge will be selected at random (excluding Jackson) and this judge will re-hear the penalty phase of the trial. The DOJ will re-argue the matter of browser tying in accordance with the Court of Appeals specification for proof. Breakup of Microsoft has not been ruled out.

  • New evidence can now be entered into the case to support a harsher penalty. This is very bad news for Microsoft because they have intensified their predatory behavior in anticipation of an Appeals Court victory.

  • The Department of Justice is unlikely to go soft on a case they have already decisively won, especially since militant States' Atorneys General are holding their feet to the fire. Ashcroft's appointment to head the DOJ was considered by many to be bad news for Microsoft.

  • [Update: The Department of Justice has already asked the Court of Appeals to accelerate sending the case back to District Court. This indicates they intend to pursue the case aggressively. It also indicates they are targeting the release of Windows XP and will probably ask for an injunction halting that release. ]

  • Competitors will attempt to get a court injunction halting the release of the next generation of Windows, Windows XP. A number of XP features are considered highly anti-competitive (one, Smart Tags, was so bad it was dropped by Microsoft within hours of the Court of Appeals verdict). Halting release of Windows XP would be a devastating blow to Microsoft's upgrade revenue.

  • Probes into new Microsoft anti-trust violations are already ongoing and will likely result in new anti-trust cases, particularly in regard to Microsoft's Passport and .Net services. The court has provided a veritable roadmap for how these can be won.

  • Several European anti-trust cases have been on hold pending the U.S. decision. These are now free to proceed.

  • Microsoft will continue its illegal behavior, and will make full use of the legal system to delay punishment as long as possible. They simply don't know any other way to do business and have done very poorly in any market where they could not leverage their monopoly.

  • Blocked from new markets, Microsoft will squeeze more money out of its current customers. Expect license enforcement to intensify even more, and schemes to force expensive version upgrades.

Will There be a Settlement?

Microsoft executives say they want a settlement, but this is just a public relations ploy. They told the government they won't negotiate if "structural remedies" are considered, knowing full well this is unacceptable to the States.

There's much less on the settlement table now than in the original settlement negotiations. Then, Microsoft could have avoided conviction as a monopolist by settling. Confident they would win on appeal, they would not accept a meaningful settlement, so they must now negotiate from a severely weakened position as a convicted monopolist.

Microsoft will, however, engage in settlement talks as a delaying tactic. Their strategy is to do as much damage to the industry as they can before they are finally punished. The more delays, the more damage they can do.

Of course, a settlement later in the game is still possible if Microsoft sees its case as totally hopeless.

How Does this Affect Your Business

Business technology decisions will be increasingly complex and increasingly critical to business success. Microsoft has used it's monopoly power to stifle new and innovative technologies. Companies with new ideas were simply bought and liquidated. With that monopoly power weakened, we will again enter an era of rapid change.

Microsoft will continue to offer the "path of least resistance", but that path is no longer the main highway. Microsoft's PC centric technologies are dated and they are engaged in a desperate scramble to retrofit them to a network centric world. This will not be entirely successful.

Linux, IBM and Sun are particularly well positioned as business transitions from PCs to the network centric model. Larger companies are already moving specialized systems to Web and Linux based applications. A prime example is Home Depot's store system. This trend is also starting to appear in smaller businesses.

Aware of this threat, Microsoft has launched the .Net and Hailstorm initiatives to make it look as though the new technologies are coming from Microsoft. Their goal is to tie businesses and consumers so tightly into their system they can establish a new monopoly.

A major part of the .Net strategy is to centralize the software you use and your own business and personal data on Microsoft owned serves so they can charge you a monthly fee for access to your own stuff. Access will be, of course, by Windows PCs and Windows mobile devices, only through Microsoft's .Net servers and only by using Microsoft .Net software, which you rent by the month. Fall behind on your .Net payments and you are out of business.

This is not speculation, folks, this is precisely what Microsoft is telling us they intend to do, and we see no reason not to believe them. Of course this will bring them right back into anti-trust court, and once again they will seek to delay conviction and remedy until it is too late to do any good.

Businesses that embrace and deploy new technologies intelligently, retaining ownership of their software and data in the new network centric environment, will have greater flexibility, lower costs and a sweeping competitive advantage. Those who follow "One Microsoft Way" will remain mired in the PC desktop era, but with their business data, personal information, software and network access under the control of a convicted monopolist.

- Andrew Grygus

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