July 9, 2004 4:00 AM PDT

Microsoft's 1994 consent decree: Boon or bust?

In the summer of 1994, with the threat of an antitrust charge looming, Microsoft agreed to settle charges that it was engaged in predatory business practices in its dealings with computer makers.

Though much less well-known than the broader Sherman Act case later brought by the Department of Justice, this initial action established a legacy of treating Microsoft as a company whose monopoly power needed to be kept in check.

The 1994 accord, signed 10 years ago this month, focused on the way Microsoft worded contracts with computer makers. Specifically, Microsoft agreed to do away with a number of practices, including a system in which manufacturers got a discount on copies of Microsoft's operating systems by paying for a license for every computer they shipped--whether or not it included a Microsoft OS. The agreement also limited Microsoft from engaging PC makers in contracts that lasted more than a year, and it demanded that the company not make contracts or pricing contingent upon acquiring any other product.

In a broad sense, these provisions did eliminate some barriers that would have made it tough for rivals to compete. But some say the fact that an antitrust suit was filed against the company a few years later shows that the deal didn't represent the promise that then Attorney General Janet Reno held out when she announced it.

"Today's settlement levels the playing field and opens the door for competition," Reno said in a press release announcing the July 15 accord.

That issue, though, hasn't been entirely laid to rest. Although a U.S. Appeals Court last month upheld a deal between the software maker and the Justice Department, the European Union has levied a fine of about $600 million against the company and required certain changes to its software. The EU ruling is under appeal in a process that could stretch out for years.

To mark the anniversary of the agreement and reflect on its legacy, CNET News.com spoke to three people who were involved in the case. Microsoft lawyers Bill Neukom and Brad Smith helped negotiate the deal, while author Wendy Goldman Rohm covered the case for Wired magazine and in her book, "The Microsoft File: The Secret Case Against Bill Gates."

Wendy Goldman Rohm

News.com: What is the legacy of the 1994 consent decree?

Rohm: At that time, Microsoft agreed to a number of things, including not using illegal contracts to tie up the marketplace; disseminating technical information about the operating system in an open and nondiscriminatory manner (it had been preventing competitors from getting to market with their own applications and other products by withholding critical information that would allow them to maintain compatibility with new versions of the operating system); and, in essence, not leveraging its market dominance in one area of the marketplace (the operating system) for an unfair advantage in other areas of the market--including new and emerging markets. It was behaving like a classic monopolist, and continues to behave that way--unfettered by ongoing antitrust suits and settlements.

Has Microsoft, to this point, complied with the order?

Microsoft keeps moving faster than government regulators. It in fact is quite shrewd in this regard. Even after paying fines for noncompliance, it has made more profit over time by not complying with antitrust laws than by complying.

How many of the current complaints against Microsoft can be traced back to either the wording of that consent decree, its limits or the issues raised by it?

Many of the issues raised in the original DOJ lawsuit are the exact same issues that have been antitrust problems in recent years for Microsoft, both in this country and abroad--the same issues, but involving different products and different markets. Product tying, technological tying, predatory pricing, are all practices it continues to use around the world to gain unfair advantages in new markets. These are advantages that come directly from misuse of its market power versus superior products---something addressed directly by U.S. as well as EU antitrust law.

Bill Neukom News.com: What was the thinking at the time the 1994 accord was reached?

Neukom: I think the government thought its job was to try to ensure there was a market for the licensing of desktop operating systems going forward. The government's role was to make sure that the marketplace environment provided adequate opportunity for competition.

But Microsoft still dominates the OS market.

I think the result that Microsoft's operating systems continue to be very popular with OEMs (computer makers) and their customers has to do with the technology that was offered in those operating systems. I think what happened in terms of the shakeout with DOS, OS/2 and Windows had to do with competition on the merits of technology and price.

Before the consent decree was reached, Microsoft had disputed the notion that it held monopoly power.

There are no barriers to entry in the technology industry. It's not like owning a quarry or a forest. Besides, having a monopoly in and of itself is by no means illegal. It doesn't mean you are a bad company. It means you are a successful company.

What do you make of criticism of the 1994 consent decree--that it did not go far enough?

I don't think of the 1994 consent decree as broadly criticized. I think competitors often have complaints about what their competitors are doing. You don't have to watch the NBA finals to know that the referee often gets an earful of complaints. The criticism is more from competitors. I don't think it's from OEM customers. Regulators listen to customers, not competitors, and the customers were not complaining.

Why is it that Microsoft is able to reach settlements now that weren't possible in the past?

I think there is something to be said for Scott McNealy's comments where he said, "We finally listened to our customers." Key managers in leading companies in information technology are more likely to work together now to try and find common ground than to pick a fight with a rival. I think that is a sign of maturity. Microsoft is more mature. I think the industry as a whole is more mature.

Brad Smith News.com: Some critics say the 1994 consent decree must not have worked if the later actions by regulators were needed.

Smith: I think it is more accurate to say the 1994 decree achieved its objectives, but its objectives were limited. The purpose of the 1994 decree was to make it easier for developers of competing operating systems to enter into contracts with (computer makers). There was a concern at the time that a (computer maker) would never be interested in another operating system because of contractual terms. It wasn't meant to address everything that affects operating systems...Look at Dell and HP, they offer Linux in a landscape today that was shaped, to some degree, by the 1994 decree.

What stands out to you about that accord?

When we concluded that agreement in 1994, it was the first time that the DOJ and European Union had ever negotiated together to resolve an antitrust issue. In a global economy, I think that is a constructive step. Personally, I felt in 1994 that it would be the first of probably several such coordinated attempts in the decade that followed. I think it is unfortunate that we are looking back 10 years later and that has never been repeated.

Some say Microsoft scored its biggest success by ensuring that while it was limited in conventionally tying sales of one product to another, it remained able to combine the features of products together, so-called technological tying.

In 1994 we were entering the final development phases for what became Windows 95, which was code-named Chicago. There was more euphoria about that than any software release in the history of the industry. It was the integration of two products (DOS and Windows) that had been separate. The irony, and there is one, is that the issue that became so controversial in 1998 was viewed in 1994 as a demonstrably good thing that everyone was excited about.

Did the 1994 consent decree establish a companywide sense of the company's unique obligations as far as antitrust matters?

It certainly contributed to that. The company (had already) started to focus in a serious manner on antitrust issues. There was an FTC investigation that started in 1990. People at Microsoft today have a really enormous sensitivity to operate under the law and more broadly in accordance with their responsibilities as an industry leader. The 1994 consent decree contributed in one way to that evolution. I'd say later events contributed even more.

2 comments

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barely an objection to Chicago
Sure, you could argue that the MSN tying was not cool, but Microsoft offered an online services folder.

(And MSN lost on quality grounds back then.)

But Windows 95 was secure, because the desktop was not powered by Internet Explorer, or the start menu or the Start Menu.

Some later versions of Windows 95 had an IE 3.0 installer, but it wasn't the same as integration.

--Sam
Posted by smkatz (38 comments )
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Pretty clear - business as usual
Lets see - we Still don't have open API's, file formats, and protocols, and MS's desktop marketshare is still around 95%. Just those basic facts tell us that everything the government has done to restore true competition in the marketplace has been a complete and total failure at all levels.

This has left us in a state where MS's insecure-by-design software have given spammers and script-kiddies massive distributed computing power to cause total havoc on the internet costing government, businesses, and consumers tens of billions of dollars a year in damage. Way to go, DOJ!

On the other hand, the security industry LOVES this stuff! Instrusion detection software, Anti-virus software, anti-spyware software, consulting fees, all trying to plug the holes of the Swiss Cheese Windows security model add up to billions!!!
Posted by waltsjc (19 comments )
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