WASHINGTON -- Microsoft Corp. illegally protected its Windows software monopoly by bullying computer makers and Internet services to thwart competition, a federal judge ruled, handing the government a victory in its landmark antitrust case.
The decision by U.S. District Judge Thomas Penfield Jackson that Microsoft violated the Sherman Antitrust Act sets the stage for hearings on penalties that could include breaking up the world's No. 1 software company. It also can be cited as powerful evidence by private companies suing Microsoft.Shares of Microsoft plummeted 15 3/8 to 90 7/8 on the Nasdaq Stock Market today where trading was halted until 5:30. The drop reduced Microsoft's market value by about $79 billion and wiped away $11.3 billion from Chairman Bill Gates' personal fortune.
Settlement talks between Microsoft and the government in the two-year-old case collapsed over the weekend, clearing the way for Jackson to rule.
Jackson found that Microsoft illegally integrated its Internet Explorer Web browser into the Windows operating system. The Justice Department and 19 states argued that the combination of two distinct products was an illegal attempt by Microsoft to extend its monopoly to the market for Internet browsing software.
Jackson also held that Microsoft used a variety of contract restrictions, threats and pressure to protect the dominance of Windows--the software that powers 95 percent of the world's personal computers. Microsoft broke the law by threatening to charge computer makers higher prices for Windows if manufacturers loaded rival products, such as Lotus Notes, the judge held.
After settlement talks collapsed on Saturday, Gates and other company officials made it clear Microsoft is prepared to pursue a long-term legal strategy of appeals. Analysts say Microsoft is betting that time is on its side: The case could be scuttled by an appeals court decision, changes in the marketplace or this November's elections.
Microsoft can't appeal until Jackson imposes sanctions, a process that could take another six months. The government, however, could ask Jackson to quickly impose temporary sanctions, such as requiring Microsoft to offer a version of Windows that doesn't include its Internet Explorer browser.
Jackson focused much of his ruling on Microsoft's contract and licensing restrictions that barred computer makers from promoting Netscape Navigator on the desktop computer screen or Internet service providers from using Navigator.
These restrictions, imposed as a condition of licensing the Windows operating system, effectively prevented the rival browser's distribution in a key channel of commerce --installation on PCs, Jackson said. Similar restrictions on Internet access providers and services such as America Online Inc. were also intended to keep Navigator out of another important distribution channel--Internet downloads--Jackson ruled.
Today's ruling marks a climax--though hardly the conclusion--of a case that began on May 18, 1998, when the government filed its lawsuit.
Jackson had encouraged both sides to seek a settlement and recruited a federal appellate judge in Chicago, antitrust expert Richard A Posner, to act as a mediator. Those efforts fell apart after Jackson delayed the release of his ruling for about a week to give the company and the government additional time to negotiate.
Jackson's decision was foreshadowed by his factual findings on Nov. 5 that Microsoft had a monopoly on PC operating system software and repeatedly took steps to stymie challenges to its dominance. A monopolist is barred by law from engaging in tactics that would be considered legal for other marketplace rivals.
An International Business Machines Corp. executive testified during the four-month trial--spread out over almost a year --that Microsoft pressured the company to drop competing software such as Lotus SmartSuite by threatening to hold advance access to a new version of the Windows operating system.
Garry Norris, the executive, also testified that IBM, the world's No. 2 PC maker, was repeatedly told it would pay higher prices for Microsoft products if it continued to install its competing OS/2 operating system onto IBM PCs.
Government lawyers presented a wealth of company e-mails, including many written by Gates, to buttress their claims that Microsoft deliberately set out to thwart efforts by Netscape, now part of AOL, to distribute its browser to consumers.
By forbidding computer makers from promoting Netscape on the first screen that appears when a PC is turned on, Microsoft ensured that PC makers would have a reduced incentive to offer Navigator to consumers, the government said.
Navigator was viewed as a threat to the Windows monopoly because it contained the Java programming language that enables software programs to run on any operating system, not just Windows. The government also charged that Microsoft deliberately tried to subvert Java, devised by Sun Microsystems Inc., to keep software developers from being able to write programs that were compatible with all operating systems, not just Windows.