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.”
Even if Rule and Microsoft are unsuccessful in persuading the court on this point, Caldera must still demonstrate the second element of monopolies: exclusionary or predatory conduct, conduct that has no business justification other than to preserve Microsoft’s market share and exclude competitors.
The most potentially damaging allegation in Caldera’s complaint is that Microsoft sabotaged Caldera’s DR-DOS in 1991 by writing a secret line of Windows code that displayed a misleading and alarming error message to users trying to install Windows on computers that were running any operating system other than MS-DOS. According to internal Microsoft e-mail recently leaked to The Wall Street Journal, the encrypted code was intended to “put competitors on a treadmill,” as it is put in a 1991 message written by Windows development chief David Cole. “We need to make sure [Windows] only runs on top of MS-DOS . . . the less people know about exactly what gets done the better.”
Investigative reporter/hacker Andrew Schulman first cracked the encrypted Windows code and published his controversial findings in 1993, writing, “It appears to be a wholly arbitrary test, a gratuitous gatekeeper seemingly with no purpose other than to smoke out non-Microsoft versions of DOS, tagging them with an appropriately vague ‘error’ message.”
Although Microsoft quickly eliminated the secret code (company spokesperson Cullinan says he has no knowledge of the alleged sabotage), Caldera claims the timing was particularly disastrous for DR-DOS sales. “Microsoft created these error messages for the purpose of creating the impression that DR-DOS would be incompatible with Windows in order to dissuade customers from purchasing DR-DOS,” Caldera states in its complaint. “The combined effect of Microsoft’s anticompetitive practices on DR-DOS was devastating. DR-DOS sales plummeted during fiscal year 1992, totaling $15.5 million in the first quarter, $13.7 million in the second quarter, $6.9 million in the third quarter, and $1.4 million in the fourth quarter [which ended October 31, 1992].”
Furthermore, Caldera claims that Microsoft’s flagship product, Windows 95, is nothing more than an “artificial tie” between its MS-DOS operating system and Windows graphic interface with no business justification other than to keep competing underlying operating systems—like Caldera’s DR-DOS—off the market. To prove its point, Caldera will soon release a piece of demonstration software called “Winbolt,” which, it says, will allow users to install the Windows 95 interface atop DR-DOS. The demo will show, Caldera says, that there is no significant technological advancement, or justified business efficiency, to the combination of MS-DOS with Windows in Windows 95.
On this point, Caldera v. Microsoft mirrors claims made by Netscape and the DOJ: that Windows 95 and Microsoft’s Internet browser are two separate products sold as one (or “tied”) for the sole purpose of driving competitors out of business. Responding by analogy, Rule argues that “the simple fact that a car is made up of components and that those components, like a carburetor, are sold separately, does not mean that the car is ‘tied’ with a carburetor. It would be silly if you had to buy a car part-by-part. It’s the same thing for each piece of an operating system: You shouldn’t have to assemble it at home.”
Still, if the Department of Justice prevails in its more celebrated lawsuit, Microsoft will suffer only the minor annoyance of having to continue offering Internet Explorer as a separate, stand-alone product, and having to grant Netscape access—equal to that of IE—to the Windows desktop. But if Caldera prevails, the impact on Microsoft will be tremendous. Caldera is asking for “broad injunctive relief,” which could mean that Microsoft would be forced to disintegrate Windows 95 and go back to the good old days of selling its DOS and its desktop interface separately. It’s hard to imagine which would be the more entertaining in the wake of that ruling: the explosion in Bill Gates’ office or the chaos throughout the industry.