The mouse that roared

While Microsoft is squaring off against the Department of Justice in one courtroom (in what may prove the most important antitrust action since the breakup of Ma Bell), and is simultaneously fighting Sun Microsystems in another, the real excitement may be taking place in an obscure district courtroom in Salt Lake City. There, a small software company, Caldera Inc., of Orem, Utah, is suing Microsoft over the way Caldera claims Bill Gates and company drove a competing operating system, DR-DOS, to near-extinction. Microsoft, Caldera claims, abused its monopoly power to make it impossible to compete with the company in operating-system sales.

Oddly enough, the M-word will be conspicuously absent from the DOJ and Sun cases. Despite a market share hovering near 95 percent in the operating-system sector (the only sector that really matters), Microsoft steadfastly denies that it is now, or ever has been, a monopoly—a contention that, however laughable on its face, the US Department of Justice is not contesting in its legal dispute with the company. In fact, the case currently being argued before US District Judge Thomas Penfield Jackson over Microsoft's rapacious moves against Internet up-and-comer Netscape hinges on a single disputed parenthetical clause in an official "consent decree" negotiated by Microsoft and the federal government in 1994.

In Salt Lake City, meanwhile, the big questions and big claims of Microsoftian price fixing, industrial sabotage, and illegal monopolistic practices are being raised. Caldera is trying to prove once and for all that Microsoft is in fact a monopoly (a designation that would subject it to numerous restrictions that currently do not constrain it) and that it used illegal, anti-competitive monopoly powers to freeze Caldera's DR-DOS—"a better, cheaper, faster, operating system," according to the Utah firm—out of the personal-computer market. Caldera claims that in the late 1980s, DR-DOS held nearly 20 percent of the operating-system market now controlled by Windows 95 and is due damages from Microsoft for illegal actions it took to monopolize the market.

In recent months, drowned out by the din of the DOJ case, the Caldera case has quietly moved forward. In July, a federal magistrate granted the company unprecedented access to the heavily guarded source code in Windows 95. On August 14, Caldera lawyers grilled Microsoft vice president Paul Maritz about controversial Windows licensing policies in a sworn deposition. And this week, Caldera will tell Microsoft exactly what it wants: damages equal to the revenue lost to Microsoft's alleged actions over the past 10 years—times three. "Suffice to say it's a very large number," says Caldera president and CEO Bryan Sparks.

Microsoft spokesman Jim Cullinan says the Caldera suit "is without merit." He says Microsoft is not a monopoly "because there is clear choice in operating systems." For example, Cullinan says, "we have Sun [Microsystems] that says they have the product to make Windows obsolete, other companies, like Netscape, that say they will replace Windows. This is competition and this is good."

By definition, a "monopoly," prohibited by Section 2 of the Sherman Antitrust Act, has two elements: the market power to set prices in a given market and the taking of actions that serve no practical purpose other than to preserve that market share by keeping competitors out. In 1973, the Supreme Court acknowledged that even dominant companies may "protect [themselves] against loss by operating with superior service, lower costs, and improved efficiency," thus narrowing the definition of objectionable monopoly powers to cover only practices that are solely predatory. "The Act is not violated simply when one firm's vigorous competition and lower prices take sales from its less efficient competitors," explains a DOJ report. "Rather, that is competition working properly."

The easier-to-prove of these claims is that Microsoft has the monopolist's power to fix prices in the operating-systems market. Virtually every PC sold today, after all, comes pre-installed with Windows software that has been licensed directly to computer manufacturers. "Not surprisingly, in view of Microsoft's monopoly power and the absence of competition," Caldera's complaint states, "the price of [operating systems] escalated from $2-$5 per copy in the 1981-1982 period to $25-$28 per copy by 1988."

Although Microsoft will not comment on the pricing structure of its operating systems, saying only that prices vary according to private contracts with computer manufacturers, Charles F. Rule, who headed the DOJ's antitrust division under presidents Ronald Reagan and George Bush, and who now serves as a legal consultant to Microsoft, disputes Caldera's contention that Microsoft has true monopoly power. "Even though most people look at Microsoft and say, 'Oh gee, Microsoft accounts for a very large amount of operating systems shipped on PCs today,' monopoly power is not defined by market share," he says. He also insists that the software giant does not have the ability to set operating-system prices. "First of all, it is inappropriate to limit the market of operating systems to PCs," he says. "Presumably, there are people out there buying iMacs, making their choice between PCs or Macintosh." Since Microsoft is not setting the price of Apple's operating systems (its $150 million investment in the struggling company notwithstanding), it follows that the behemoth does not set the price of all operating systems. "Furthermore," Rule argues, "if Microsoft jacked up [the price of Windows], there would be real opportunities for other operating systems to come in. So the presence of other operating systems prevents Microsoft from raising its price, i.e., Microsoft doesn't have monopoly power to set prices."