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October 4, 1999

Time For A Deal

By Stuart J. Johnston

t's "Let's Make a Deal" time for Microsoft and the Justice Department. In late summer, both parties presented their final filings and closing arguments prior to federal Judge Thomas Penfield Jackson's ruling of fact in the landmark antitrust case. After Jackson rules on the facts, he will rule on whether Microsoft broke the law, and then impose remedies if, as many expect he rules against Microsoft.

Judge Jackson's ruling on the facts is expected in the next month or two, and that will leave the door open for an out-of-court settlement before he rules on the law. In the meantime, and, in fact, all along, he has been urging the parties to settle out of court. Though there have been earlier attempts at a settlement, this time a deal might be worked out because after Jackson rules on the law, a settlement will be nearly impossible.

A few optimists have thought at several points during the case that Microsoft might settle. First, there were the eleventh-hour negotiations just prior to the lawsuit being filed in May 1998. Those talks merely forestalled the suit by a couple of days, however, and the government later characterized the discussions as not in good faith, while Microsoft's attorneys described the government's demands as unreasonable.

After much of the case had been presented, there was another an attempt by Microsoft to settle. But, once again, there was no resolution. Microsoft had no incentive to settle when the case could still turn in its favor, or competition could heat up to a level where Microsoft could prove its dominance is only transitory.

In the interim, Microsoft possibly has gained some ground both in its arguments that the government has not conclusively proved consumer harm but only potential harm in the future, as well as in the shifting sands of market dominance caused by America Online's multibillion-dollar purchase of Netscape, AOL's subsequent alliance with Sun Microsystems, and the flurry of PC vendors offering Linux on their machines. But none of those things is likely enough to turn the case in Microsoft's favor.

So no matter how Microsoft chairman Bill Gates plays this game, he is not apt to walk away a clear winner.

The government is not likely to come out the clear winner either--at least not after all the appeals are done. Conventional wisdom is that Judge Jackson is likely to rule against Microsoft. The same thinking holds that the federal appeals court, which last year, in the first antitrust suit the government filed against Microsoft in Judge Jackson's court, telegraphed its warning that "courts should not be in the business of designing operating systems," is widely expected to side with Microsoft.

If that's how the case unfolds, then it will be a coin toss as to how the U.S. Supreme Court might rule. Given that one of the liberal justices could leave the court for health reasons at a time when a Republican appears to have a good chance at winning the White House, thus opening the way for the first GOP appointee in nearly 10 years, it is far from certain that the Justice Department will prevail in the long run.

That uncertainty may make a deal more palatable to both sides. However, the problem is that both sides have spent so much time and energy characterizing their causes as sacred.

"My guess is that the government has backed itself into a corner because they've taken such a hard line [that] they have to make it look like they're being tough on Microsoft," says Dr. Stan Liebowitz, an economics professor at the University of Texas at Dallas and co-author of the new book "Winners, Losers, and Microsoft: Competition and Antitrust in High Technology."

[I've cited Dr. Liebowitz's work before in referencing his work with co-author Dr. Stephen Margolis, another well-known economist, in my October 1997 column concerning path dependency theory.]

The problem confronting both parties in the suit is that neither side is likely to be happy with any possible settlement. "The government needs some cover, so somehow they have to make it look like [any settlement] is really hurting them [Microsoft]," Liebowitz says. And "somehow, Microsoft has to come up with something that looks like they're dying."

Can they come up with that? I've got my doubts. Microsoft executives have a hard enough time just being humble. Remember when the company was claiming in court that Netscape was a serious competitor, while at the same time it couldn't resist the impulse to announce publicly that Microsoft's browser was crushing all comers?

So let the deal-making begin. The question for both sides is this: Do you want to keep what you've already won, or do you want to trade it all for what's behind door No. 3?

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