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Another Perspective



LIVE GATES

On July 2, Bill Gates appeared on stage in London at the Live 8 concert, a massive publicity stunt aimed at drawing attention to the plight of poor Africans.  Gates and his wife Melissa are probably the greatest philanthropists in history.  Gates' company, Microsoft, made him the richest person in the world; Gates' character, however, is what makes him so generous.  Microsoft is big on giving, too.  Just a day earlier, in fact, it gave $850 million to IBM.  That payment wasn't charity, though.  It was hush money.

IBM got Microsoft to fork over $775 million in cash plus another $75 million in credit against software license fees.  IBM did this without litigation, but instead negotiated the deal.  The settles claims IBM could have pressed in court, claims stemming from an antitrust settlement Microsoft hammered out with the US Department of Justice.  After a long battle and plenty of wrangling and amending and whatnot, the final judgment in the most recent US case was completed in November 2002.  It took two and a half years for IBM and Microsoft to get from that point to an agreement that ended a dispute between the companies over the pricing of Windows on PCs.  IBM and Microsoft still disagree about other matters, things having to do with the server market, but there's no sign litigation is imminent.

Bill Gates at Live 8
Bill Gates on stage
The best example at Live 8

Microsoft has paid settlement money to a number of other companies, too, since it got an unfavorable judgment in 2000.  After it lost that case, it appealed, engaging in a two-year battle to claw its way back from a position in which it might have been forcefully broken up.  In the end Microsoft did okay.  It's had to pay out nearly $4 billion dollars as a result of the illegal activities it was willing to concede.  In the end, Microsoft could fork over a lot more dough, as there are still claims pending again it, and some observers believe the total could exceed $5 billion when legal costs are figured in.  Still, despite these costs, Microsoft remains fabulously successful.  It piles up cash so fast it sometimes seems as if it has no idea what to do with the money.

In fiscal year 2003, which ended June 30, Microsoft reported pretax income of just over $11 billion after paying $750 million to settle claims made by AOL.  Last year it booked costs of $1.9 billion for a settlement with Sun; about $300 million of that appears to be legal costs because Sun says it collected $1.6 billion.  Microsoft paid about $600 million in fines to the European Commission for anticompetitive behavior not directly related to its US legal situation.  And in the end Microsoft still reported higher pretax income, $12.2 billion.  During the first nine months of the current fiscal year, the company reported $12.8 billion in pretax income.  So even though it will record the IBM payment and a $150 settlement deal with Gateway in its current quarter, Microsoft is bound to have a record year.

Bill Gates at Live 8
Geldof and Gates
Control!  Halt!  Delight!

The company retains its huge market power in desktop operating systems and productivity software and it is doing everything it can to get a stronger grip on the DBMS business, accounting applications software, and the server operating systems market.  It is working hard to build up its game console business.  It operates the MSN Internet service.  And it is trying to get its search engine into a position from which it can mount a successful assault on Google and Yahoo.

Like nearly all of the pop entertainers who entertained at the Live 8 concerts, Gates and Microsoft are haves, and they all are happy to take from the have-lesses in the name of the have-nots.  Gates is bound to deliver on his promises; he has an astonishing track record when it comes to giving.  Microsoft is strictly business, nothing personal, and it is not inclined to charity in its commercial practices; the court decisions and hefty settlements it has paid attest to that.  As for the entertainers, well, for the most part they more closely resemble Microsoft than they do Bill Gates.

We didn't hear Bob Geldof, the impresario leading Live 8, propose a voluntary contribution of, say, $1 a CD and ten cents a single music download, as part of his plan.  To make this work, we respectfully suggest, it ought to be overseen by some trustworthy party, such as the Red Cross, which would be required to provide reports on intake and expenditures.  Instead, Geldof mainly said that the wealthy nations that were about to attend the G8 conference ought to pledge more aid to Africa, aid that comes out of their taxpayers' pockets and for which there will be no transparency.

Bill Gates at Live 8
John Sherman
Introduced Uncle Sam to antitrust

Shortly before the Live 8 concert in London, some people who had obtained tickets, which were scarce, tried selling their free but rationed passes on Ebay.  Bob Geldof was quick to bully Ebay into culling the ticket listings.  Shortly after the event, Geldof again went after Ebay, this time for letting people offer to sell souvenir photos, videos, or sound recordings.  The official exploitation of Live 8 will be in the hands of the giant record company EMI, one of the haves, and some of the money the record company takes in will end up as going to Africa, we hope.  Whether the process is handled with grace, as the Bill and Melinda Gates Foundation manages things, or pillaged like a rerun of the UN's Iraqui food-for-oil program remains to be seen.  The road to numbered bank accounts is paved with good pretensions.

Like Live 8, American antitrust law is based on smart ideas and good intention.  Also like Live 8, the way things actually play out might not fulfill the dreams of idealists, or even the expectations ordinary folk.  Ordinary people don't like a world that allows business to thrive in the total absence of mercy (and in some cases in the total absence of common decency).  Ordinary people know that without some protection, they are suckers who will never get an even break.

Economies thrive when enterprises can fully concentrate on growing and making a profit.  It's up to a society's other constituents, such as government antitrust agencies, to control the corporate kudzu that almost inevitably results.  In America, antitrust law is complex but a basic understanding of its strongest ideas can be understood by anyone capable of learning two words: Sherman and Clayton.

The 1890 law named after Senator John Sherman basically makes it illegal for companies to restrain trade.  At the time the law was passed, companies would buy out competitors or firms in related business and built up market power.  The resulting entity was called a trust.  When the trusts exercised their market power in ways that restrained trade, the Sherman Act empowered the Federal Courts to break up the offending trust.

Bill Gates at Live 8
Henry De Lamar Clayton
Followed a hard act to follow

In 1914, the Sherman Act was clarified and extended by Congressman Henry De Lamar Clayton.  The Clayton Act prohibits companies with monopoly power from engaging in a number of anticompetitive practices, such as cutting prices (or giving away goods or services) to destroy competition, or using other types of discriminatory pricing to maintain or extend their monopolies.  It set limits on interlocking corporate directorates.  It also limited the government's power to engage in strikebreaking.

These two old laws are practically the Ten Commandments of antitrust.  There are other, more recent, acts that have changed the shape of the law, but these two acts address classes of business misbehavior that are as old as money, and maybe older, forms of misconduct that have been observed to stifle economic progress and innovation.

The Clayton and Sherman Acts and their descendants have been hard to beat, but the computer business boasts companies whose lawyers that have done a superb job of whittling them down, helped by the cynical use of political considerations that affect the way courts interpret the laws.  IBM has been one of the most skilled at this, and its strongest courtroom card was the relevant market joker.

Basically, antitrust law applies to a monopoly.  Practices that are perfectly legal for the little guy are not legal when carried out by a monopoly.  A simple example would be that a company without much market power operating in a competitive market might make sales deals that favor customers that push its products.  The same kind of arrangement might not be legal for a firm that controlled a market.  For example, suppose Microsoft charged IBM more for Windows than it charged Dell, because IBM allowed its customers to buy Lotus instead of Office, while Dell didn't.  That kind of behavior could lead to an antitrust claim.  And, in fact, that's more or less what IBM said Microsoft did, an argument that persuaded Microsoft to give IBM $850 million to shut up and go away.

IBM remains the master antitrust defendant (and potentially a pretty good plaintiff, too).  Years ago, when IBM spent a lot of time in court, mainly in connection with the mainframe business, IBM's lawyers consistently claimed that the relevant market wasn't IBM mainframes but rather all kinds of computers.  IBM argued that its customers could switch platforms if they wanted to, and it didn't have monopoly power in the broader market for computers, so IBM didn't have a monopoly.  Of course that argument was nothing but hogwash.  But when IBM was in its heyday, judges didn't understand anything about the computer business and IBM's lawyers could bluff them blind.

Microsoft's legal team is in the same league.  It has presented brilliant arguments in defense of its client.  It has spotted and exploited the flaws and blind spots of the legal system.  This might not look pretty to Microsoft's adversaries, or anyone else for that matter, but it's the way litigation, particularly big league litigation, is played.

If this seems unreasonable or unfair, you may have to be satisfied with karmic justice.  Here's some:

Bill Gates apparently thinks it's cool to appear in public with Bob Geldof.

— Hesh Wiener July 2005


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