Microsoft Empire a Monopoly, Judge Says in Antitrust Case

WASHINGTON —  Microsoft Corp. suffered a serious defeat Friday in its antitrust battle when a federal judge declared that Bill Gates’ software empire holds a monopoly and had aggressively used that power by “stifling innovation” by rivals.

U.S. District Judge Thomas Penfield Jackson concluded: “Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft’s core products.”

The 207-page findings of facts in the case are not a final ruling, but they side heavily with the government’s position in the case and are the strongest sign yet that Microsoft could lose the case, if it does not settle first.

But the antitrust case is far from over. The final decision in the case and any penalties are not likely until early next year. Appeals could also drag out the case for years and eventually put it before the Supreme Court.

A central issue in the trial was Microsoft’s monopoly on personal computer operating systems and its ability to bundle other programs with it.

Jackson has said he hopes his findings of fact will spur Microsoft and the government to settle their differences out of court.

“Certainly there’s got to be a way to resolve this that is fair to Microsoft and is fair to consumers,” Gates said Friday after the ruling.

At a news conference in Redmond, Wash., Gates, the richest man in the world, said that Microsoft has done nothing wrong.

“Microsoft competes fairly and vigorously,” he said.

In Washington, a confident Joel I. Klein, assistant attorney general for antitrust, said the government remained open to a settlement with Microsoft. But Connecticut Atty. Gen. Richard Blumenthal indicated the 19 states that joined the case, including his own, are likely to be more hard-nosed in the wake of Judge Jackson’s decision.

These are “very compelling and powerful findings, picturing a predator [Microsoft] that has misued monopoly power,” Blumenthal said. “It should lead to serious and far-reaching remedies.”

The landmark trial strikes at the heart of technology that is fast transforming the Information Age. Nearly 40 million American households are now online, according to Forrester Research in Cambridge, Mass. And software such as Internet Web browsers and online chat applications are becoming as commonplace as microwave ovens and fax machines.

Justice lawyers sued Microsoft under the Sherman Act of 1890, which makes the possession of monopoly power and the maintenance of a monopoly through anti-competitive actions an antitrust violation. The law has been used to topple some of the most formidable corporate giants in America, including Standard Oil early in the century.

Touted as the biggest business case since the breakup of AT&T; Corp. in 1984, the antitrust trial of Microsoft began Oct. 19, 1998, and the trial concluded in September after months of rancor.

The Justice Department, 19 states and the District of Columbia alleged that Microsoft, whose Windows software runs more than 90% of personal computers, used its software to extend the company’s dominance to other products and crush rivals, such as Netscape Communications.

Gates Backs Efforts to Settle the Case

Microsoft was damaged in the trial by its own words in e-mails, memos and other business documents that Jackson cited throughout his factual findings.

Gates said Friday he would not compromise his company’s ability to innovate, though he supported any efforts to resolve the case.

“The only thing important is that we be allowed to innovate,” he said. “We will continue to make our best effort to resolve the case. But we still have to stick up for that one principle.”

Sounding at times like he was in a Microsoft advertisement, Gates said his company has had to struggle to stay competitive in a quickly changing business environment. The proof of the success of their effort is the consumers have not been hurt.

“We know we must continually move forward,” Gates said. “No one in this industry has a guaranteed position.”

The judge’s opinion was issued after securities markets had closed, but in afterhours trading, Microsoft shares fell $4.81 to $86.75, or a little more than 5%.

“Talking about a [Microsoft] settlement is really premature,” said Jim Lucier, an analyst at Prudential Securities in Rosslyn, Va. “We have at least one year, and maybe two more years, of legal proceedings to go.”

Any final settlement will likely not center on money, Lucier said. “I would imagine they’re [Microsoft] not really concerned with the financial penalty,” he said. “Microsoft has indicated in the past it would be amenable to a settlement in the case as long as its freedom to innovate remains intact.”

But the Justice Department is more interested in winning the right to regulate Microsoft’s behavior than in ringing up a huge financial settlement, Lucier said.

The government brought its controversial lawsuit against the technology giant in May 1998, alleging that its popular Windows software was used to illegally extend the company’s dominance to other products.

The government, which spent $7 million on its antitrust lawsuit, said Microsoft engaged in predatory conduct by giving away its Internet Explorer browser in competition with Netscape Communications. Microsoft also allegedly made exclusive agreements with Internet service providers and content developers, such as the Walt Disney Co., in exchange for exclusive promotion of Microsoft’s Web browser.

The government also alleged that Microsoft “tied” its Web browser to its operating system so that consumers would have to take what previously had been separate products.

Jackson said that the software giant “sought to increase the product’s share of browser usage by giving it away for free.” He said that in many cases, “Microsoft also gave other firms things of value--at substantial cost to Microsoft--in exchange for their commitment to distribute and promote Internet Explorer, sometimes explicitly at Navigator’s expense.”

Through its marketing techniques, Microsoft also has strong-armed consumers to purchase computer features they do not need, the judge said.

“Microsoft has forced Windows 98 users uninterested in browsing to carry software that, while providing them with no benefits, brings with it all the costs associated with carrying additional software on a system,” Jackson found.

Microsoft had maintained that it was being challenged by rivals--such as America Online Inc. and computer hardware and software developer Sun Microsystems Inc.--that potentially had as much if not more market clout than it did.

Company Says Dominance Shifts

Microsoft pointed to AOL’s surprise $10-billion purchase of Netscape in November 1998 to bolster its contention that dominance can quickly shift in the high-tech arena. And it suggested that alternative computer operating systems such as Linux were gaining market share and proving to be viable alternatives to Windows.

But Judge Jackson rejected that notion in his findings of fact, saying Microsoft’s market share “is directly evidenced by the sustained absence of realistic commercial alternatives to Microsoft’s PC operating system products.”

Microsoft, who relied mostly on witnesses from its own corporate ranks, remained confident throughout the trial--bolstered by a favorable appeals court decision May that held that the company did not violate a previous agreement with the government when it bundled its Internet web browser with Windows 95.

But in the decision released Friday, the government appears to have surmounted one legal hurdle: they have convinced Judge Jackson that Microsoft is a monopoly, setting the stage for the company’s conduct to be judged in violation of federal antitrust laws.

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Times staff writers Ashley Dunn, Robert L. Jackson and Karen Kaplan contributed to this story.