Microsoft owes everything to Justice

Would Bill Gates have come to power if the Justice Department's antitrust division hadn't attacked IBM?

By Andrew Leonard

Published June 8, 2000 9:29PM (EDT)

In the beginning, there was IBM. Long before hackers began reviling Microsoft, before freshly hatched software start-ups quailed in terror at the mere hint of an approaching Gatesian shadow, before even the most ardent antitrust crusader eyed Redmond, Wash., with vengeful lust, IBM reigned supreme.

It seems kind of quaint to recall it now, but when Bill Gates was still in high school, IBM was the company that competitors viewed with fear and loathing and programmers scorned with mean jokes and constant sniping. IBM was everything Microsoft is today, and more, dominating the entire world of computing by any means necessary.

Like Microsoft, IBM didn't always have the best technology, a fact that it admitted to itself in internal documents evaluating its own products. But it had market power and knew how to use it. When competitors began to challenge IBM in a particular niche -- disk drives, for example, or computer memory -- IBM delighted in tinkering with its own mainframe operating system or processor hardware so as to make other offerings incompatible. IBM pioneered the practice of "vaporware": announcing hardware and software upgrades years before they would become available, thus frightening off competitors and locking customers in. Most effectively, IBM was a master of "price discrimination," or setting prices low, or below cost, in niches where it faced competition, while raking in profits in arenas where it stood alone or had eliminated all opposition.

And like Microsoft, IBM got into trouble with the antitrust division of the Justice Department. In 1969, the Justice Department filed suit against IBM. The case wound on for 13 agonizing years before an incoming Reagan administration blithely dismissed it in 1981. The IBM trial looms large over the Microsoft proceedings; critics of antitrust enforcement point to its "failure" as proof that antitrust enforcement can't work in the high-tech economy. After all, they note, didn't IBM end up losing its supremacy without the help of government intervention? To none other than Microsoft, that hungry young company running rings around the lumbering behemoth?

Not quite, says Richard DeLamarter, an economist who teaches at Yale University. DeLamarter worked for the Justice Department as an antitrust economist for eight years on the IBM case; he ended up writing a book about IBM in 1986 called "Big Blue: IBM's Use and Abuse of Power." In an interview, DeLamarter explained how the IBM trial influenced and shaped the Microsoft proceedings, and how the two companies are inextricably interlinked, thanks, in no small part, to the efforts of antitrust litigators.

In "Big Blue," your description of IBM's business practices reads a lot like [U.S. District Court] Judge [Thomas Penfield] Jackson's "findings of fact" about Microsoft. Except, of course, the names have been changed. Do you see any significant parallels between the two cases?

The antitrust proceedings are different, because everybody went to school on the IBM case, and they've done things very different this time in order not to have it drawn out. One of the biggest things the DOJ did was hire David Boies [who led IBM's defense]. He was the master of drawing things out, and if he's working on the Department of Justice's side it's sort of harder for Microsoft to do what he did.

In what other ways did the Justice Department change its tactics?

In a trial, you have to prove things -- they've got to be put in evidence in such a way that it is unimpeachable. That's a problem when what you're dealing with are characterizations of complex technology, like where you are trying to read intent into the way a software designer solved a particular problem. That's a very, very hard thing to do. The way we tried to do it was through IBM's own documents, we had examples where they would make a representation about their own products, saying that it was not as good as something somebody else would offer, and then when one of their executives was on the stand saying it was really wonderful we'd have their own documents to impeach them. They did some of that in the Microsoft trial, but they also had summary witnesses that came in, established their credibility to draw a conclusion, and then presented the conclusion.

Last time it was much more detailed, there was more of an attempt to build an evidentiary base to it. And what happened was it just got drawn out. I think in this case the judge saw the potential for that, and so he did things like limiting the number of witnesses and the amount of time they would have to speak. And guess what? If you've only got a limited amount of time, you are not going to waste your time on proving things that look just like stalling tactics.

The IBM trial ended when William Baxter, Reagan's assistant attorney general for antitrust, dropped the case, declaring that it was "without merit." Is there a chance that this could happen again, if the appellate process for Microsoft stretches into a potential Republican administration?

It's politically controversial. There's something called the Tunney amendment, which limits the ability of the Department of Justice to withdraw from an antitrust case; you have the burden to show that it is in the public interest, not in your political interest. But basically no one can force the department to continue a case that it doesn't want to continue.

Some of the things that you detail in your book, such as IBM's penchant for price discrimination, sound a lot like classic Microsoft behavior -- like giving away the Web browser "free" while charging for the operating system. Is it possible to compare Microsoft and IBM directly?

Absolutely. Absolutely. It's the same story. Zero being a particularly low price.

How else can the companies be compared?

Where did Microsoft come from? Microsoft came out of the computer business at IBM's expense. If you have read my book you know that the theory is that IBM kept a close eye on competition and whenever anybody got very big it killed them. So then the question is why didn't they kill Microsoft, and I think the answer is, they had just settled an antitrust suit, and IBM didn't want to have another one. So it basically stood aside and let Microsoft grow, it stayed its hand, you might say. And in that respect, it's a little ironic that Bill Gates might now say critical things against the antitrust division. Because if it hadn't been for them, there wouldn't have been any Microsoft.

Do you have any evidence for that? Most computer industry observers attribute IBM's failure to its own incompetence.

If there wasn't an antitrust division, why wouldn't IBM have just bought them? They had all the money in the world, they could have just gone up to Bill Gates and said, What's your price? Why didn't they do it? Because they knew what would happen. There would have been this unholy uproar, "There's IBM, up to its old tricks again, driving the competition out of business." So what did they say? "We did that, we've been there, we didn't like it, it's not fun." The antitrust division going through your pants, your executives being forced to lie under oath, all the things that Microsoft has had to experience, IBM had already been through, and didn't want again. I don't really buy the IBM incompetence theory -- I just don't see them as stupid people.

One theory argues that even though the IBM antitrust suit was dropped, during the course of the 13-year trial, IBM was weakened by the enormous costs of fighting the Justice Department. Lawyers attended every company meeting directing people on what they could or could not say. Do you think its fair to say that the antitrust suit weakened IBM to the point that it became vulnerable to competition?

(Laughs) I would say that it was housebroken and, therefore, competition had a chance, because competition was finally based on price and performance, it wasn't based on bundling and vaporware and all the other crap that these firms use in order to maintain markets. IBM was forced to tie an arm behind its back, and not use its power as fully as it could have.

So ultimately it was worthwhile to engage in the suit, even if it was dismissed at the end?

Oh I think so. If you really stand way back and look at antitrust -- what is it about? It's about trust. It's about firms that have a great deal of power and whether or not you trust them. If you trust them, then you can leave them alone because they'll behave. With firms that misbehave, where you have a lot of dead bodies around and a lot of complaining then it's harder to trust them and the antitrust division gets involved and says, "Wait a minute you've been abusing your power."

Bill Gates has never said to anyone that he was concerned about Microsoft using power that he uniquely possessed, against which it was impossible for competition to remain in business. He never even said, "Oh yes, we did have sort of an advantage, and it must have been really hard for those guys to compete against us." The most he would say is, "It's a really dynamic world out there, we gave as good as we got." So it's very hard to trust Microsoft. The current antitrust proceeding is another sort of a housebreaking exercise -- a sort of growing-them-up thing. You've got all this power and you want us to trust you -- you've got to demonstrate to us that you are not just going to be Attila the Hun ...

And so I would say there was a benefit that came out of the IBM case -- it made IBM reluctant to abuse their power. And the benefit that is coming out of this one is that Bill Gates is going to have to learn to do the same, otherwise people are not going to trust them, and if they don't trust them they'll sic the dogs on him again. And it's not nice. He won't like it.

In your book, you note at one point: "It was just another demonstration of the fact that because the computer industry changes so fast and because IBM has a multitude of tactics available to stop competitors, litigation is often ineffective. By the time a court decision is reached or a case is settled, often a drawn-out process, it is very often irrelevant to the current state of the market." This exact point has been seized upon by many critics of antitrust enforcement as one of the primary reasons why the government should not intervene in high-tech markets.

They don't go the next step. Which is why don't we redesign antitrust? I actually have some ideas on that. Economists have finally discovered that these markets are "tippy." You've probably heard that term -- the markets quickly go to a dominant firm, because everyone wants to be compatible. I think you can run with that analogy a little way -- what's it like, it's like a high performance sailboat, that's tippy also, and the way you sail it, you intervene frequently and very quickly and in small ways. You don't wait until the race is over to turn the jib.

So what does that mean? To me that says that antitrust intervention has to happen very early, before you get these giants like Microsoft and you only have bad choices as to what to do then. If you intervene early the punishment can be quick and small -- a slap on the wrist or public humiliation.

How would you do that? You might say that any competitor who feels he's been unfairly hurt can lodge a complaint and then highly technical people at the National Bureau of Standards, or the National Academy of Science, would within 30 days render a judgment. And then based on their judgment, which would be publicized and which could be used in private suits if competitors wanted to, you would get a correction right away.

So the next time the boss says to an engineer, "Let's design this interface so nobody else can get on it," he can say, "I can do that, but you know the competition is going to scream, the experts are going to look at it and tell us this is junk, and we're going to end up with a fine, and are you sure you want to do that?" Rather than say, "We might get caught five years from now, and 10 years from now there might be an appeals decision that supports it and we might have to pay a price then."

So are you saying that a breakup of Microsoft isn't the ideal resolution?

That's right. The ideal solution would have been to intervene much earlier. The longer it goes on, the tougher the choices become -- and all of them are bad.

Do you think the rise of the Internet has made it more difficult to have dominating monopolies like Microsoft or IBM?

In order to effectively communicate, there's a need for standards, and those standards are beyond the control of any one firm. Although, I'm not sure that if there wasn't an antitrust element, that Microsoft would not have been much more successful in moving the source of its monopoly more onto the Net. They may succeed anyway, but at least the competition has been given a break.

Another thing the current case has done is that it has educated the competition. The computing industry seems to be full of people with the most incredible egos. You start a little company, and all of sudden it's world-class and you're a billionaire. And then somebody says to you, "Hey, you are in Microsoft's gun sights and you are dead." And they just can't believe it. They don't get it -- it's just so contrary to their experience.

And what I think the case has done is it's wised 'em up. So that anybody who begins to feel like Microsoft is going for them is now looking for partners, looking for some way to get some protection. That may make the quality of the competition more effective, and that in the end may cause more trouble for Microsoft than the case itself does.

I think that now chief executives who are in those chairs say it's just ridiculous to think that I could do this on my own, especially if I'm going to come under a full-fledged attack from Microsoft. I think this education process is good. It's a great model -- much better than a bunch of bureaucrats redesigning a market. It's much better to think that we'll wise up the participants of the market and the market will work better itself. If that's one of the benefits that comes out of the case it, then it is well worth doing.

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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