Just over a decade ago, a U.S. District Court judge decided that Microsoft was as much of a threat to the technology sector as Standard Oil was almost a century ago to the oil industry, and with that he ordered Microsoft split into two.
Judge Thomas Penfield Jackson said Microsoft had “placed an oppressive thumb on the scale of competitive fortune.” Bill Gates called the break-up decision “the most massive attempt at government regulation of the technology industry ever.”
This was in 2000. Jackson’s break-up order didn’t survive appeal, which limited the remedies to a set of rules to keep Microsoft from punishing equipment makers who sold rival products, and from withholding application programming interfaces (API) to third-party developers.
The U.S. Department of Justice remedies supervision ends Thursday, closing the landmark case, which began in 1998. But the questions posed by Jackson’s decision remain.
Among them: Did tech innovation suffer over the last 10 years because Microsoft wasn’t broken up?
“Not really,” said Vinton Cerf, Google ‘s chief Internet evangelist, in response to the question at the Interop conference this week. “It has to do with the fact that open source has become such a strong force in the software world — look at Linux, and its predecessor, Unix, look at Android, or Chrome and the Chrome OS to follow,” as well as the other open source initiatives, he said.
Google was incorporated in Sept. 1998, one month before the start of the Microsoft antitrust case.
“Open source saved us,” said Simon Crosby, the CTO of Citrix, adding that innovation has happened in completely unpredictable ways over the last decade. For instance, “Amazon web services would not exist if were not for the Xen hypervisor,” he said.
But at the time of the antitrust case, the competitive threats from Google-like companies, cloud computing, and smart phones were only vaguely imagined.
What loomed foremost in the courtroom was Microsoft’s massive market share in desktop operating systems and productivity apps, as well as the dramatic decline of the Netscape Web browser with the arrival of Internet Explorer.
Economists from Stanford, MIT and Berkeley filed briefs advising the court on remedies, giving Jackson the arguments for strong action.
“The most important benefit for society that will be created by this remedy will come from faster innovation,” wrote Paul Romer, a professor of economics at Stanford, in a court brief about a break-up.
Jackson‘s order created two new and powerful companies, one to run the operating system business, and the other, its applications. Each company would have revenue at more than $8 billion a year and profits of more than $3 billion in 2000 dollars.
These new and well-financed firms would, presumably, be hungry to grow, operating under a completely different set of incentives.
The breakup gave the separate applications company, for instance, the freedom to port to any operating system, consequently giving rise to new Windows operating system threats.
How might the operating system company have responded?
The mobile revolution wasn’t on the radar at the time of the antitrust case, but its disruptive potential was realized by Rebecca Henderson, an MIT economist, who told the court that cell phones “might one day attract developers in large numbers.”
An independent operating system company, worried about desktop market share, may have realized the importance of Henderson’s observation and moved aggressively.
Instead, Apple revolutionized the mobile market with the release of the first iPhone in 2007. And what did Microsoft release that same year? Vista — a PC operating system that Microsoft CEO Steve Ballmer later acknowledged as something that “was not executed well.”
Cloud computing didn’t exist at the time of the trial, but the idea that server-based applications offered a desktop alternative was well known. And without a desktop operating system to protect, an independent Microsoft application business may have jumped into this area on pace with aggressive startups such as Salesforce.com.
In another major market, virtualization, VMware had a two-year jump on Microsoft in building out its technology.
Would a separate Windows operating system company have acted sooner?
For its part, Google used its search engine to quickly dominate the online advertising market and is now using its wealth to fight Microsoft on multiple fronts.
Microsoft’s search engine, Bing, arrived in 2009.
During the antitrust case, Microsoft’s attorneys argued repeatedly, but to no avail, that the tech industry was certain to produce potent threats. But the government’s focus was on the immediate, and in the forefront was Netscape’s browser.
The government charged that Microsoft was using predatory business practices to attack Netscape. In 2002, Microsoft had more than 90% of the browser market, but today it now has about 55% of the market.
It is impossible to know whether Microsoft’s two successor companies, had a breakup been imposed, would have had success beyond what their parent has achieved.
Microsoft remains a very formidable company and strongly positioned in areas such as cloud computing. It is fully capable of taking a leadership position in hotly contested areas.
But as the last decade has shown, the same is true for other companies as well.