Netscape vs Microsoft Antitrust Lawsuit, 2002

Contents

An Introduction to the Case. 3

A Review of the Literature on the Subject. 3

Liffick’s Analysis of the Case. 4

Main Participants and Actions. 4

Primary Participants. 4

Secondary Participants. 4

Implied Participants. 5

Reduced List of Participants. 5

Primary Participants. 6

Secondary Participants. 6

Implied Participants. 6

Legal Considerations. 6

Possible Options for Participants. 7

Primary Participants. 7

Secondary Participants. 7

Possible Justifications for Actions. 7

Primary Participants. 7

Secondary Participants. 8

Key Statements. 8

Questions Raised. 8

Analogies employed. 9

Codes of Ethics Utilised. 9

Alternative proposals. 9

Pessimistic. 9

Optimistic. 10

Compromise. 10

The Ethical Theory That Had Most Influence Over Your Conclusions. 10

Conclusion. 10

Bibliography. 11

An Introduction to the Case

Netscape Communications (Netscape), a subsidiary of AOL Time Warner and the primary plaintiff, was previously a software company offering a web browser called Netscape Navigator (Navigator). Incorporating various features of another browser called Mosaic and improving upon it by introducing several revolutionary innovations at the time, the browser, priced at US$49 per user, dominated the market and boasted of 80% of the market share in 1996 [1, 2].

In 1995, Microsoft Corporation (Microsoft) had created its own browser, Internet Explorer, and had unofficially declared an emblematic war for superiority. However, the fact that Netscape offered complete support for Java and JavaScript led to developers optimizing web content for Navigator. In the same year, Marc Andreessen (Andreessen), a co-founder of Netscape, made various statements wherein he appeared to push Navigator not just as a browser, but as a cross-platform operating system.

This development seems to have created major concerns for Microsoft, who reportedly held 90% of the operating system market at the time. Microsoft sent their representatives to meet and negotiate with their counterparts at Netscape. As per Andreessen’s minutes-of-meeting, Microsoft offered the company a paltry sum in return for the source code of Navigator [3]. Microsoft then employed a new strategy where they bundled Internet Explorer for free with its hugely successful operating system, Windows [4].

The “first browser war” as the situation was called came to an end when AOL Time-Warner acquired Netscape for US$10 billion in 1998 [5].

A Review of the Literature on the Subject

Netscape filed an antitrust lawsuit on the same grounds that were stated by the US Department of Justice during their investigations during the 1990s. Netscape alleged that Microsoft had abused its monopoly by forcing Windows users to use the inbuilt browser as opposed to other offerings including Navigator. The company also alleged that Microsoft, by means of contracts with various vendors and customers, had barred the latter entities from using Navigator in addition to Internet Explorer [5]. In a statement to CNN Money, Netscape stated that it sought “equitable relief to eliminate the continuing effects of Microsoft’s illegal conduct and to restore competition lost in the operating system market and in the Web browser market.” [6].

Liffick’s Analysis of the Case

Main Participants and Actions

Primary Participants

• Netscape Communications [3]
  • Consulted an antitrust lawyer in preparation for any possible developments regarding any adversities related to the product, Navigator [3].
  • Appear to have baited Microsoft by framing a meeting with them, the intention of which was hoping of it giving them more credence to their future antitrust allegation [3].
  • Slowed down the pace of innovation for almost a year before their acquisition by the US technology giant, AOL Time-Warner [3].
    
    
• Microsoft
  • Experienced the proverbial “missed the bus” moment and were late to the scene of web browser innovation and implementation [3].
  • Reportedly tried to outmuscle Netscape with threats of elimination from the market by any means necessary [3].
  • Engaged in arm-twisting tactics with vendors, suppliers, and other entities in the information technology ecosystem, where they were forced to promote Internet Explorer above Navigator [5].
  • Bundled Internet Explorer for free with Windows [7].

Secondary Participants

• Sun Microsystems [5]
• Alleged that Microsoft had falsely promised Independent Software Vendors (ISVs) that programs developed on their platform would be compatible with that of the original creator of the Java platform, Sun Microsystems [5].
  • Formed a non-committal coalition with Oracle, IBM, Netscape, and Novell to lobby for an antitrust motion against Microsoft in 1997 [5].

• AOL Time-Warner
• Alleged that Microsoft had forced contracts on them regarding the distribution of Navigator and Internet Explorer [7].
  • Acquired Netscape for US$10 billion in 1998, which was seen by many experts and technology commentators as a metaphorical surrender from the browser war [6].
  • Provided funding and legal contacts to their newly acquired subsidiary, Netscape [6].

• Marc Andreessen
• Co-Founder of Netscape and co-author of both Mosaic and Navigator [3].

•  Bill Gates
• Failed to recognize the potential of the web and the internet as a whole [3].
  • In 1995, sent a memo to Microsoft employees titled “The Internet Tidal Wave,” which outlined a new future for the company, one which was connected to the internet [3].

Implied Participants

• United States Department of Justice
• Conducted a series of investigations related to antitrust issues related to Microsoft since 1993, which were ongoing at the time of events concerning this essay [5].
  • Previously exacted several concessions from Microsoft with respect to the company’s deal-making and product offering strategies [5].

• Judge Penfield Jackson

• Made public comments regarding a previous ruling related to one of the antitrust motions made against Microsoft [5].
  • Accused of having ex-parte contacts [5].
  • Failure to appear impartial during the previously mentioned judgement [5].

Reduced List of Participants

The reduced list contains participants whose actions directly impacted the final settlement, where Microsoft agreed to pay a settlement sum of US$750 million to AOL Time-Warner, the parent company of Netscape. The settlement deal included a royalty-free license to Internet Explorer as well as improved access to Windows. Actions will not be mentioned below to avoid duplicity as they are already mentioned above.

Primary Participants

• Netscape Communications
• Microsoft Corp

Secondary Participants

• AOL Time-Warner

Implied Participants

• Judge Penfield Jackson

Legal Considerations

The allegations levelled at Microsoft all revolve around a very significant piece of the United States (US) legislation called the Sherman Act. While the act includes broad prohibitions on trade constraints, monopolization, and unfair contracts amongst others, it does not concern itself with unique and/or specific violations [5]. The Sherman Act aims to provide avenues of relief against:

1. Monopolization:
   Monopoly is the situation in which a given party can control the prices of products or services. It can also create huge barriers to entry and thus exclude competition [5].
   
2. Attempted Monopolization:
   Intent to achieve a monopoly in the technology industry is usually proven by providing evidence of engagement of a given party in predatory and/or anticompetitive measures [5].
   
3. Tying:
   This violation is one of the most important ones, especially with respect to the technology industry. It involves two or more products, where the “tied” product(s) cannot be purchased, subscribed to, or used without the purchase, subscription, or use of the “tying” product. The “tying” product must have a significant market share and economic volume [5].

While the above legal provisions of the act were applied to the case at hand, Microsoft did not technically flout any of the existing laws per se. This was primarily because Intellectual Property Rights (IPRs) did not exist in its present form at the time. The lack of specific violations in the law led to courts having to interpret the law as and how they saw fit. However, it was the ethical ramifications of certain decisions and courses of action that were taken by the company that influenced judgements at various points of time, most of which did not go in their favour in the past [4, 5].

Possible Options for Participants

Primary Participants

• Netscape Communications
• Not slowed down the rate of innovation. Being a much smaller company, it would have been much more agile in improving its product, which would be difficult to match for its much bigger competitor.
  • Avoided the sale of the company to AOL Time-Warner.
• Microsoft Corp
• Attempted to re-negotiate an acquisition deal favourable to both parties and offered a much bigger sum of money, equity, or other forms of financial instruments in return for Netscape and the Navigator source code.
  • Adopted technologies by means of licensing deals instead of trying to build products which directly infringed upon, and not just competed with other offerings.

Secondary Participants

• AOL Time-Warner
• Could have been more patient rather than rushing into a settlement with Microsoft. Certain experts were reported to have stated that Microsoft could potentially have been made to pay punitive damages amounting to billions of US dollars [8].

Possible Justifications for Actions

Primary Participants

• Netscape
• Claimed three times the estimated revenue loss as per US laws.
  • Preparation of the antitrust lawsuit was essential for the company’s survival.

• Microsoft
• Elimination of Netscape would ensure that the company had yet another revenue stream in terms of internet browsers.

Secondary Participants

• AOL Time-Warner
• Receiving a favourable result would mean a large infusion of liquidity through its subsidiary.

Key Statements

Brad Silverberg, Former Senior Vice President, Microsoft – “Microsoft ran the risk of being made irrelevant as the technology advanced. Netscape was a real competitive threat. Platform leadership for the PC was at stake.” [3]

Rob Horowitz, Chief Executive, Directions on Microsoft – “People laugh at how this big company might be scared of these little things, but that’s how they operate. They look at threats and take them very seriously. It’s a strategy that’s served them well.”

Jon Mittelhauser, Browser Developer, Netscape – “There was certainly discussion that, as the Web becomes mature and as the browser becomes mature, the need for the underlying operating system as it is goes away.”

Brad Chase, Senior Executive, Microsoft – “We want people to think ‘Internet=Microsoft’”

Bill Gates, then Co-Founder and Chairman, Microsoft – “There is a message here about putting past differences behind us.” “Microsoft is focused on the future of digital rights management.” [8]

Richard D. Parsons, Chairman, AOL Time-Warner – “It may signal there’s a different attitude toward doing business.” “We’re putting the past behind us.” [8]

The change of leadership at AOL Time-Warner seems to have triggered a change in the stance of the company with respect to this case [8].

Questions Raised

Was Netscape’s version of the meeting trustworthy or was it distorted to suit the company’s narrative? Was Andreessen’s jibe at Microsoft truly the spark that ignited a full-scale browser war? If Internet Explorer was not tied to Windows, would the antitrust motion have moved in Microsoft’s favour?

Did the sale of Netscape to AOL Time-Warner aid rather than hinder Netscape’s antitrust motion? If Microsoft would have kept its fear of competition in check, would the company have avoided the need for a settlement with its counterpart? What would have been the outcome of the case if a settlement was not proposed?

Analogies employed

The previous verdicts against Microsoft appear to have been the main reasons for a change of stance for the company. In 1995, the consent decree prohibited contract-based bundling of products but allowed bundling related to technology, which was a loophole that Microsoft exploited. In 1997, the court passed a preliminary injunction which forbade the inclusion of Internet Explorer with Windows [7]. However, a court hearing in 1998 resulted in the quashing of the injunction.

Referring to Microsoft as a juggernaut and a behemoth is not without reason. With an operating system market share of 90% at the time, Windows had virtually no competitors, save for an ageing Unix which was too complicated for widespread personal use and the newer Unix clone, Linux, which had not hit the ground running yet [3]. With more than US$40 billion in reserve cash flows, the company was the proverbial Goliath, which required several entities including the government to control its influence with respect to trade practices. Similarly, Netscape is a proverbial David, who had managed to find the blind spot of its humungous competitor, internet browsers.

Codes of Ethics Utilised

The primary code of ethics utilized is elucidated in detail under the Legal Considerations section, which comprises of the Sherman Act. Ethics is of great importance while enforcing the act due to the non-mention of specific violations. The Federal Trade Commission of the US states the below as guidelines of the act:

1. Monopolization
2. Exclusive Supply or Purchase Agreements (Attempted Monopolization)
3. Tying the Sale of Two Products
4. Predatory or Below-Cost Pricing
5. Refusal to Deal

[9]

Alternative proposals

Pessimistic

Microsoft could have tried to erode Netscape’s market share in a much slower manner that they did (Netscape’s market share went from 80% in 1995 to 54% at the time of their acquisition [4]). Early release of Internet Explorer source code would have dealt a crippling blow to Netscape’s product model. The inclusion of Java support for their browser would have also bridged a considerable gap in technology know-how instead of endeavouring to create their own version of the language.

Optimistic

Microsoft should have engaged Netscape in a more diplomatic fashion, especially given that the company held the latter in high esteem, so much so that they poured a significant amount of resources to develop a browser themselves. Instead, they could have sought to acquire Netscape and its intellectual property while retaining the existing staff, which would have been a win for everyone involved, especially since the Netscape-induced “paranoia” seems to have fuelled Microsoft’s domineering and anti-competitive business practices.

Compromise

Avoiding controversy should have been Microsoft’s primary goal, especially with government-based ethical, trade, and law agencies looking for errors to exploit. Indulging in aggressive business practices with other technology entities should have been kept to a minimum, with rational decision-making taking precedence over emotional or perceptive ones.

The Ethical Theory That Had Most Influence Over Your Conclusions

Consequence-based ethical theories held most sway over my conclusions. Utilitarianism, in its right spirit, would attempt to ensure that the maximum number of participants are benefited. For an entity of Microsoft’s stature, morality and duty would be extremely subjective and prone to unfavourable interpretations of what they really are.

Conclusion

Framing an ethical code of conduct is of utmost importance to any company. Trade watchdogs usually show leniency in cases where violations have occurred despite the best efforts to set up a code by a given entity. While trying to circumvent laws and exploiting loopholes is a part and parcel of any capitalistic market, attempts to impose non-ethical authority by means of establishing a pseudo-plutocracy usually does not bode well for everyone involved.

Facing numerous antitrust claims by various parties appears to have coerced Microsoft into settling claims one at a time. Fighting on too many fronts, even for a behemoth like Microsoft would prove too much, especially when one significant litigant is the Department of Justice of the very nation your business is based out of.

The settlement was significant as it resulted in the birth of formal IPR laws. This litigation also highlighted certain aspects of the legislature. An entity may be faultless whilst exploiting loopholes in existing laws. However, care must be exercised with respect to the respective code of ethics of the state, with utilitarianism, in my humble opinion, is the most important.

Bibliography

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[2]	J. R. Quain, “Nothing but Netscape,” Fast Company, 31 10 1996. [Online]. Available: https://www.fastcompany.com/27743/nothing-netscape.
[3]	J. Hoffmann, “Browser Wars Part 1: When Netscape Met Microsoft,” [Online]. Available: https://thehistoryoftheweb.com/browser-wars/.
[4]	J. Borland, “Victor: Software empire pays high price,” CNET News.com, [Online]. Available: https://web.archive.org/web/20050205055830/http://news.com.com/2009-1032-995681.html?tag=toc.
[5]	S. N. Weinstein, “United States v. Microsoft Corp,” Berkeley Technology Law Journal, vol. 17, no. 1, 2002.
[6]	CNN Money, “Netscape sues Microsoft,” [Online]. Available: https://money.cnn.com/2002/01/22/technology/netscape/.
[7]	N. Economides, “The Microsoft Antitrust Case*,” 2001. [Online]. Available: https://www.stern.nyu.edu/networks/Microsoft_Antitrust.final.pdf.
[8]	S. a. K. D. D. Lohr, “Microsoft and AOL Time Warner Settle Antitrust Suit,” 2003. [Online]. Available: https://www.nytimes.com/2003/05/29/technology/microsoft-and-aol-time-warner-settle-antitrust-suit.html.
[9]	Federal Trade Commission, “Single Firm Conduct,” [Online]. Available: https://www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/single-firm-conduct.