Programming Windows: Five Words Apart (Premium)

On April 4, 2000, U.S. District Court Judge Thomas Penfield Jackson issued his Conclusions of Law in U.S. v. Microsoft, asserting that the software giant had violated the country’s antitrust laws through systemic acts of predatory and anticompetitive behavior that harmed competitors, partners, and consumers. The ruling came just two days after four months of tense settlement talks had finally collapsed.

It was so close.

The attempted settlement was mediated by Richard Posner, the Chief Judge of the Seventh District Court of Appeals, and a widely-regarded expert in U.S. antitrust law. Jackson had issued an especially brutal Findings of Fact document ahead of his ruling specifically so that Microsoft would be incented to settle the case. The Findings of Fact made it very clear that Jackson was about to come down hard on the firm.

Posner was a voluntary mediator and, as such, he had no power to OK a settlement. Instead, he was instructed to see if he could get the two sides—Microsoft on one, the U.S. Department of Justice and 19 U.S. states on the other—to agree, and then present that agreement to Jackson. He was given two months to reach a settlement and, if he failed, Judge Jackson would issue his own ruling—the Conclusions of Law—and then his own remedies, which included a possible breakup of Microsoft.

Posner was a great choice for this task, and in an ironic twist, he was well-respected by Microsoft and its lawyers. This was by design: Jackson hoped that throwing Microsoft this bone after its terrible performance in court would guide it towards doing the right thing. As for the DOJ, it, too, wanted a settlement since it would provide immediate relief from Microsoft’s illegal business practices; if Microsoft were simply found guilty of violating U.S. antitrust law, it would appeal, delaying this relief by years. And there was always the possibility that an appeals court, or even the U.S. Supreme Court, would strike down some parts of Jackson’s ruling, lessening its impact on Microsoft and the industry.

After an initial group meeting, Posner proceeded to meet with both sides separately and confidentially. He would make no settlement suggestions of his own. Instead, he would provide feedback to the two sides’ own suggested remedies before presenting them to the opponents.

Posner told Microsoft that it had lost the court case and that there was no reason to believe that the Court of Appeals would be interested in investigating Microsoft’s so-called facts on its own. But Posner also reminded the other side that the Court of Appeals had already ruled against them on the product bundling issue that was so central to the case. And that the higher court had previously supported product bundling when it benefitted consumers, as Microsoft had argued when it bundled Internet Explorer with Windows.

Not surprisingly, Microsoft was open to a settlement, but Bill Gates told Posner that he would not accept the structural remedy—a breakup of Microsoft into two or more separate companies—that some of the states were insisting on. Indeed, the states emerged during the settlement talks as a key wrench in the plan, since they feared that the DOJ would again agree to an ineffective consent decree that didn’t rein in Microsoft’s behavior. To them, a breakup was the only reasonable solution.

Gates and his top lieutenants felt victimized by the U.S. government and groused that their market dominance was temporary, and that Windows would soon be supplanted by handheld computers, cell phones, smart TVs, or some other emerging technology. They were vulnerable to would-be competitors like Linux, they argued, and were still performing poorly in the server market. That IBM suddenly embraced Linux during the settlement talks only darkened Microsoft’s collective mood; its one-time biggest partner had likewise embraced competitors like Apple and NeXT in the past, and many of its partnerships seemed designed solely to punish Microsoft for its past misdeeds.

Not helping matters, America Online in January 2000 announced that it would purchase Time Warner in the largest corporate merger in history. AOL, a new media sensation, was buying its way into the interactive TV market that Gates and Microsoft had so desperately craved by gobbling up a major old media player. And it could establish itself in Microsoft’s traditional gatekeeper role as a result. If there was a vig to be collected as users flocked online, it would be paid to AOL, not Microsoft.

“We have repeatedly said that we see the potential for AOL to metamorphize to a competitor to a number of Microsoft assets, including Windows,” Microsoft group vice president Paul Maritz at the time told Ken Auletta, the author of World War 3.0: Microsoft and Its Enemies. “This [acquisition] only reinforces that.”

In any event, the DOJ drafted the first settlement attempt almost two months into a mediation process that was supposed to last only two months. Predictably, the DOJ went for shock and awe, suggesting that Microsoft be split into three companies, one for operating systems, one for business solutions, and one for all of Microsoft’s other businesses. Perhaps an independent technical committee could oversee the integration of new features into Windows, it suggested.

“The future requires integration,” a bewildered Gates said publicly after hearing of the DOJ proposal; he reiterated privately that his firm would never agree to a breakup. But Microsoft countered with some ideas of its own: It would license the source code to Windows to PC makers and let them decide whether to include new Windows features in their machines. And it would fix the price of that license, making it consistent for all PC makers.

Numerous draft settlements sailed through Posner’s office over the next two weeks as the original late January end-date came and went. Suspicions raged on both sides, as each became convinced that Posner was playing them off each other or revealing confidential information to the other side. They weren’t sure if the proposals they were reading were written by their opponents or by Posner.

Other market forces started to impact the talks. By late February, it was clear that Netscape had lost the web browser war, making the bundling issue less contentious. And besides, virtually all operating systems, even those used on portable devices like the Palm Pilot, now included a web browser. And Microsoft was amenable to fairer software licensing terms. So a new issue emerged as the most concerning for the DOJ: Would Microsoft share more technical information with its rivals?

“The Justice Department, which was canvassing Microsoft’s enemies, had grown ever more concerned that Microsoft would keep non-Microsoft operating systems and non-Office software from interoperating smoothly with Windows,” Auletta writes in World War 3.0.

This fear may sound ludicrous today, since all of Microsoft’s APIs are now publicly documented online and freely available to anyone with a web browser. But at the time, Microsoft was as infamous for withholding technical information and other documentation from its competitors as it was for any of its other nefarious business practices. From “it’s not done until Lotus 123 don’t run” in the MS-DOS days to Microsoft’s withholding of its Win32 APIs for Windows 95 from Netscape in the mid-1990s, Microsoft had a rich history of wielding information like a weapon.

Microsoft agreed to open the kimono to its competitors. And on February 28, Posner finally told Gates that they were only “five words apart” from a settlement.

There were little ripples that threatened to undo the agreement. The states, again, stuck a wrench in the plans and blasted the draft consent decree for being “weak.” A list of requested clarifications, inexplicably sent by the DOJ directly to Microsoft, was perceived in Redmond as a long list of new demands.

But Microsoft had begun to see the light, had finally walked back from the belligerence that it had exhibited during its entire antitrust ordeal. It agreed to everything. It would not retaliate against PC makers that chose competing software solutions. It would not require them to use Microsoft’s web browser or other middleware solutions. And it would standardize the Windows licensing price. Most crucially, Microsoft said that it would not deny any developer access to the technical information that they needed to write software that interoperated with Windows.

Pushing the technical documentation angle, the DOJ expanded that last proposal to include Windows server software, since Microsoft was making a big pushing into the corporate market with Windows 2000. If Microsoft accepted these terms, the DOJ promised to sign off on the consent decree.

Gates agreed.

And on Friday, March 3, the Microsoft co-founder signed a draft proposal that was more stringent than the terms he could have agreed to years earlier when the DOJ complained that the company was violating the terms of its earlier consent decree. He could have easily averted the trial and the damaging Findings of Fact that resulted.

Posner told the DOJ and states that they had ten days to sign off on the proposal as well.

The DOJ was onboard. But the states, once again, scuttled the deal by demanding harsher penalties. Essentially an unwelcome third party to the negotiations, the states squabbled with each other and with the DOJ, asking for it to clarify certain terms in the agreement so that Microsoft wouldn’t find loopholes as it had in the past.

Again, the settlement hinged on technical documentation. The DOJ expanded the documentation needs from Windows on PCs and servers to include APIs that Microsoft’s other server applications used. It wanted to prevent Microsoft from creating servers that only worked properly with Windows PCs or vice versa.

For its part, Microsoft worried that the DOJ had confided with its competitors, companies like AOL, Apple, IBM, Oracle, and Sun, that wished to disrupt Microsoft’s PC and server integration, a fear the DOJ later confirmed; it had discussed this issue with those firms. And then the states insisted that Microsoft’s documentation requirements cover handheld computing devices as well. When would it end?

Posner had had enough: The states’ demands were unreasonable, he said, and he instructed them to present a cohesive front with the DOJ. He also asked Judge Jackson for more time: They were very close, he argued.

Microsoft kept agreeing. In addition to the terms it previously accepted, Microsoft said that it would not raise its Windows licensing price for at least three years after the next major release. And that it would no longer offer exclusive marketing agreements to certain PC makers; instead, the top 25 firms would all get the same terms. Microsoft even agreed to an independent technical committee that would administer the consent decree and determine whether future middleware additions to Windows were allowed under the terms of that decree; if they were not, Microsoft would offer a separate version of Windows that did not include those new features.

The DOJ added some agreements of its own: Once a settlement was reached, Judge Jackson’s Findings of Fact would be vacated, ensuring that they were not used as the basis for future lawsuits against Microsoft. And the consent decree would stand for just five years.

Yet again, the states kept meddling. Ignoring Posner’s request that they align with Justice, six of the states sent what they called a tentative consent decree proposal to the mediator that included the handheld devices requirement. These six states also wanted to ensure that Microsoft wouldn’t move to illegally hinder Linux.

This fractious new communication was troubling, as Posner only wanted to deal with two sides, not three or four, since the six states represented less than one-third of all the states allied against Microsoft. He simply instructed them to stop making proposals separately and, again, to line up with the DOJ instead.

On March 21, 2000, Judge Jackson summoned both sides to his chambers to discuss what was taking so long; he was unaware of the many proposals that had come from Microsoft and the DOJ and the states. Frustrated, he gave Microsoft a preview of the pain to come, noting that he would find the firm guilty of violating the Sherman Act if there was no settlement. Both sides told him that they had made progress, and they asked for more time.

The states aside, they were indeed close. But when a Microsoft lawyer contacted a DOJ lawyer to hammer out the definition of the term interoperability, he was rebuffed: That kind of communication would need to go through Posner.

So Jim Allicin stepped in.

Infamously embarrassed twice on the witness stand during the trial, Allchin—who oversaw Windows development—proposed to “re-engineer Windows” so that all of the communication protocols it supported would be “plug replaceable” through open interfaces. I’m not aware of any explicit confirmation of this, but Allchin’s proposal, as described by third parties like Ken Auletta, sounds an awful lot like COM. Regardless, the point seems to be that both Microsoft and third parties would have access to the exact same external interfaces.

Officially, Microsoft proposed that PC makers could access the source code for Windows and could modify the versions of Windows that they shipped to hide Internet Explorer and bundle their own choice of browser. Hypocritically, this offer demonstrated that the claims it made in court, that IE was integrated with Windows and not just tacked-on, were untrue. Microsoft also proposed Allchin’s idea, which it presented as a “socket” approach by which any competing software, service, or device could easily plug-in to Windows.

Posner passed along 10 more contested points from the DOJ, to which Gates “reluctantly” agreed after several hours of phone calls over days of intense negotiations. “I think we’re within a few words of having a settlement,” Gates told Newsweek the week of March 23. Jackson gave the two sides another ten days to finalize the deal.

And it was quite a deal. Both sides agreed that Judge Jackson’s Findings of Fact would be vacated, ensuring that they could not be used as the basis for future lawsuits against Microsoft. They agreed that Microsoft would not withhold Windows from any PC maker that wished to use it, and that it would not retaliate against PC makers that bundled competing operating systems. They agreed that Microsoft would not require PC makers to bundle its middleware as a requirement for receiving Windows. That Microsoft would offer Windows on consistent licensing terms for all PC makers. That PC makers would get “more editorial control” over the opening desktop display. That PC makers would be able to remove IE from Windows Millennium when it was released. That it would no longer limit the ability of third-party developers to create software or services that competed with Microsoft’s own offerings. And that Microsoft would make available to all third parties, on a timely basis, whatever documentation they needed about new Windows APIs. The consent decree would be in effect for five years. And an independent antitrust compliance officer, replacing the previous technical committee proposal, would ensure compliance.

It looks impressive, even today. But the two sides differed wildly on the details of each so-called agreement. As Auletta notes, the DOJ’s version of this draft agreement is almost twice as long as Microsoft’s because it defines many terms in far more detail. For example, in the DOJ’s view, all developers would get all the APIs and documentation that Microsoft created. But from Microsoft’s perspective, it would only provide this information to “competent” developers.

Posner attempted to find a last-minute solution, a common middle ground. But each side kept pushing harder for its version of the agreement. Worse, the states were again pressing for their own pet concerns, leaving Posner with the unwelcome prospect of negotiating with over 20 parties: Microsoft, the DOJ, and 19 attorneys general.

So, on April 1, 2000, Posner told Microsoft and the DOJ, both of which had submitted new proposals he hadn’t even read, that the mediation effort was over. The two sides were just too far apart and that no judge had ever invested this much time in a failed negotiation like this. Privately, he complained that the states had behaved like “assholes” and he had to be persuaded by Judge Jackson to not take this complaint public.

“After more than four months, it is apparent that the disagreements among the parties concerning the likely course, outcome, and consequences of continued litigation, as well as the implications and ramifications of alternative terms of settlement, are too deep-seated to be bridged,” Posner explained in his only public comments on the process. He thanked the DOJ, Microsoft, and Judge Jackson. But not, notably, the states. Assholes.

Apprised of the failed mediation, Judge Jackson informed the two sides that he would issue his Conclusions of Law on April 4. He found that Microsoft used illegal and anti-competitive means to maintain its Windows monopoly, attempted to illegally monopolize the web browser market, illegally bundled its Internet Explorer web browser with Windows, and illegally campaigned against the Netscape threat, “paying vast sums of money, renouncing many millions more in lost revenues every year, in order to induce firms to take actions that would help enhance Internet Explorer’s share of browser usage.” Microsoft, he said, had violated multiple sections of the Sherman Act and had done so in some cases repeatedly.

Microsoft won on only one count: Jackson found that Microsoft had not foreclosed on Netscape’s ability to ship its web browser to consumers, contrary to what he had declared in his Findings of Fact; after all, anyone could download the browser from its website.

“It was as if Microsoft, down 20 to 0 in the ninth inning, sent a batter to the plate who then smacked a solo home run,” Mr. Auletta writes in World War 3.0.

Microsoft, for its part, vowed to appeal, setting off the years-long sequence of events that the DOJ and 19 states had wanted to avoid all along. But on the day of the ruling, Microsoft got a preview of its future when the stock market experienced its fifth-worst day ever, triggering a 30 percent drop in Microsoft’s value.

The software giant was about to enter a dark age, a lost decade in which it would cede control of the personal computing market to a series of upstarts it would have otherwise had no problem defeating. Windows would soon start its long and slow decline.

Note: This article obviously relies heavily on World War 3.0: Microsoft and Its Enemies by Ken Auletta. If you’re interested in this topic, I highly recommend this book. And unlike a lot of the source material for this series, it’s available in both digital and print formats. –Paul