Why Did Microsoft Face Antitrust Charges in 1998?

Antitrust laws apply to virtually all industries and to every level of business. Governments design them in order to make sure there's fair competition in the market. They prohibit a variety of practices that restrain trade including price-fixing, anti-competitive corporate mergers, and predatory acts designed to achieve or maintain monopoly power. In simpler terms, antitrust laws prevent companies from making and boosting their profits by playing dirty.

Without these laws in place, consumers wouldn't have the choices they do and would be forced to pay higher prices in order to get the goods and services they require. Some companies may try to circumvent the laws to try to position themselves as a leader in the market. The government may step in to stop them from establishing a monopoly, thus knocking out the competition. This article focuses on the 1998 Microsoft antitrust case. Read on to learn more about the case and the ruling that followed.

The Microsoft Antitrust Case

Microsoft (MSFT) was one of the world's most successful software companies in the 1980s. The company's rising presence in the personal computing market raised alarm bells with federal authorities. The Federal Trade Commission (FTC) launched an investigation in the early 1990s to determine whether Microsoft was trying to create a monopoly. Although that investigation was closed, the Department of Justice (DoJ) picked it up.

On May 18, 1998, the DoJ and the attorneys general of 20 different states filed antitrust charges against Microsoft to determine whether the company's bundling of additional programs into its operating system constituted monopolistic actions. The suit was brought following the browser wars that led to the collapse of Microsoft's top competitor, Netscape, which occurred when Microsoft began giving away its browser software for free.

The government case accused Microsoft of making it difficult for consumers to install competing software on computers operated by Windows. If Microsoft was found to have made it unreasonably difficult for consumers to uninstall Internet Explorer and use a competing browser, the company's practices would be deemed anti-competitive. The case meandered along with accusations of misleading statements and a variety of courtroom distractions. A group of economists even published a full-page open letter to President Bill Clinton in major newspapers in support of Microsoft stating that antitrust laws hurt consumers as well as the success of domestic firms in global competition. They urged authorities to drop protectionism fueled by antitrust laws.

Problems With the Case

The trial didn't necessarily run very smoothly. In fact, the DOJ's case against Microsoft was plagued with problems. First, there were questions about whether charges should have been brought against Microsoft in the first place. Microsoft claimed that its competitors were jealous of its success. Meanwhile, those who supported Microsoft proposed that if the company was to be considered a monopoly, it was, at best, a noncoercive one. They argued that even with options like Unix, Linux, and Macintosh, consumers demonstrated a preference for the convenience of Microsoft's Windows product on their computers. Windows may not have been the superior product, but it could run on a Toshiba laptop or on a number of clones. The ease of its installation and its other bundled software allowed it to become the norm.

The Ruling

Despite the creative editing of video, facts, and emails, Microsoft lost the case. The presiding judge, Thomas Penfield Jackson, ruled that Microsoft violated parts of the Sherman Antitrust Act, which was established in 1890 to outlaw monopolies and cartels. He found that Microsoft's position in the marketplace constituted a monopoly that threatened not only the competition but also innovation in the industry. Jackson also called for Microsoft to divide the company in half and create two separate entities that would be called baby bills. The operating system would make up one half of the company and the software arm would make up the other.

Microsoft's Appeal

Microsoft didn't take the ruling lightly and appealed the decision. The company took issue with the judge's position, citing bias in favor of the prosecution. The appeals court overturned Jackson's decision against Microsoft. Instead of seeking to break up the company, the Department of Justice decided to settle with Microsoft. In its settlement, the DoJ abandoned the requirement to break up the company, In return, Microsoft agreed to share computing interfaces with other companies.

Post-Antitrust Case

The company saw its once invincible market share erode due to old-fashioned competition. But the lessons learned from the case continue to resound. Many now wonder if bringing antitrust cases against non-coercive monopolies is merely a costly redundancy of work the free market can do at no charge.