How Microsoft beat the regulators

On both sides of the Atlantic, monopoly laws are proving ineffective as a means of controlling hi-tech industries. Paul Rodgers reports
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THE investigation lasted four and a half years. In the last 18 months alone, it tied up lawyers for 14,000 hours and economists for another 3,650. Yet its conclusion - a consent decree between the US Department of Justice, the European Commission and Microsoft, the world's dominant computer software company - barely qualified as a slap on the wrist.

For Microsoft's founder and chairman, Bill Gates, the decree was a satisfying victory. The main area it covered - licences Microsoft used to cement the position of MS-DOS as the leading operating system for PCs - was already in effect. The programme is ubiquitous.

The surprise twist came last month when the US District Judge, Stanley Sporkin, threw the agreed settlement out and demanded a trial. Both Microsoft and the Justice Department appealed this month and could take the case to the US Supreme Court. The move will add a few hundred more lawyers' hours to the total but is unlikely to lead to a more substantial result.

The huge amount of time spent pursuing Microsoft and the limpness of the remedy illustrate one of the biggest problems facing modern regulators on both sides of the Atlantic: how do you keep up with fast-changing, high technology industries when investigations take years to complete and court cases just as long to prosecute?

The issues that attracted the attention first of the US Federal Trade Commission, then the Justice Department and, a year ago, the European Commission are already fading into history. Complaints raised now - such as Apple's allegation last week that Microsoft withheld development copies of its software to pressure the manufacturer over pending law suits - would have ceased to matter by the time a trial judge handed down a ruling.

"The law's always playing catch-up," said Paul Saffo, a director at the Institute for the Future, a think-tank in Menlo Park, California. Mr Saffo argues that a new theory of regulation is needed to deal with technology- driven industries. "We need monopoly laws that are less like sledgehammers," he said.

But solutions seem hard to find. Some commentators have called for Microsoft to have limits placed on its future activities. A system of forced licensing, for example, would make it sell all its upcoming operating systems to any competitor that was willing to pay a set price.

But even that approach would not account for changes in the types of business that Microsoft engages in, let alone the arrival of another dominant player. "The only thing that could be worse than the status quo would be a law that tried to anticipate a company becoming dominant," Mr Saffo said.

The slowness of the regulatory apparatus also worries officials in the UK. Sir Bryan Carsberg, of the Office of Fair Trading, argued before the Department of Trade and Industry select committee last week that the country's divided regulatory regime needs to speak with one voice. Files in competition cases are now passed between the OFT, the DTI and the Monopolies and Mergers Commission before a final decision is made. "A unitary competition authority would end up doing things a little quicker than the three-pronged system that we have now." he said.

Sir Bryan would also like to see a prohibitive approach, similar to the European Union's system. Certain practices would be banned unless companies received specific exemptions from regulators. "The US system is even stronger, with its draconian methods of rooting out cartels," he said. American regulators can take statements under oath, and companies that win private cases against monopolies automatically get triple damages. Company directors can be sent to jail.

Thomas Vinje, a Brussels-based lawyer with Morrison & Forester, admits there is a problem but does not agree that changing laws will make things any better. An avid observer of the European Commission's competition watchdog, Directorate General IV, he believes it just needs more staff to do a better job.

That, he admits, will do little to deal with Microsoft's dominant position. Present concerns revolve around "vapourware" - a product that is announced long before it is ready for market in an attempt to scare off competitors. "It's crafty marketing when engaged in by anyone who doesn't have a dominant market position, but it becomes abuse when it's done by a company that has market power," Mr Vinje said.

The big concern about Microsoft is that it will use its strength in personal computers to lever its way into control of the information superhighway.

If that happens, regulators could still be bogged down dealing with issues that arose a decade earlier. The Microsoft case began in 1990, when the FTC received complaints about Microsoft's licensing agreements. Computer makers who wanted to use its MS-DOS operating system had to pay royalties even on equipment shipped with software from a competing company.

The investigation broadened as other rivals made fresh allegations. One of the most damaging was the charge that Microsoft had buried secret coding in its operating software. This allowed its programmers to develop applications software such as word processors, spread sheets and games quicker and with fewer bugs. Microsoft vigorously denies the allegation.

Just what the FTC investigators discovered will never be known. After three years of slogging, the commission was deadlocked. Its lawyers felt they had a case, as did at least two of the five commissioners. But two others disagreed and the fifth bowed out through conflict of interest. It dropped the case.

Enter Anne Bingaman, President Clinton's new assistant Attorney-General. Declaring she would stand in for the FTC's fifth commissioner, Mrs Bingaman launched her own probe.

It, too, ran into difficulties. Justice officials were terrified of getting into "another Asian land war" - a reference to the Pentagon's skittishness in the wake of the Vietnam dbcle. Justice had already been burned in its 14-year pursuit of IBM. By the time that case closed in the mid-1980s, Big Blue was no longer the monolithic force of the computer industry. The same, it was feared, could easily happen with Microsoft.

Then there was the question of political pressure. Although there is no evidence that it influenced the outcome of the probe, a vigorous lobbying campaign was mounted by Microsoft supporters in Washington. Mr Gates has often met Robert Rubin, the head of Mr Clinton's National Economic Council. Mr Rubin came to government from Wall Street, where he was a co-chief executive of Goldman Sachs, one of the merchant banks that underwrote Microsoft's flotation.

The political argument for leaving Microsoft alone is strong. Why should the American government hobble a company that makes it a world leader in computer industry?

But Mrs Bingaman appeared to be ready to take the plunge. Throughout the late-night negotiations that preceded the settlement, she had an agent posted in Salt Lake City, Utah, ready to file suit if talks fell through. According to Wendy Goldman Rohm, the author of a forthcoming book on the case, Utah was chosen for the filing because dockets in the state's courts are relatively clear, and it is the home of Novell, one of Microsoft's biggest rivals.

If the appeals by Microsoft and the Justice Department fail, Mrs Bingaman could find herself again despatching agents to Salt Lake City. This would probably be a colossal waste of time and taxpayers' money. But until someone comes up with a regulatory framework that can investigate, evaluate and prosecute market-dominating companies effectively, the only alternative will be to give suspected monopolists a free hand.