IBM and Microsoft: Antitrust then and now

The giant's insistence on "conduct remedies" harks back to the 1980s, when IBM ended its antitrust skirmish by vowing to change its monopolistic ways.

6 min read
Is history repeating itself?

The landmark case against Microsoft harks back to the 1980s, when IBM was mired in a 13-year antitrust battle of its own with the Justice Department.

The technology and political climates surrounding each case are distinct, making it impossible to say with certainty that Microsoft will be afflicted by the same malaise that plagued IBM during and after its case.

But the IBM and Microsoft cases are both unwieldy and have many similarities, including protracted length and incalculable legal expenses. Some experts also warn that the antitrust cases may have similar long-term effects on the companies and their employees.

Although IBM eventually survived the ordeal and thrived again, the experience paints an ominous picture for the Redmond, Wash.-based software giant. The government's lengthy probe cast a burdensome shadow over Big Blue's seemingly invulnerable image, even though the suit against the company was dismissed "without merit" in 1982.

Experts argue that IBM was mired in antitrust troubles for more than a decade after the dismissal and did not recover from the legal morass until the early to mid-'90s.

Special coverage: Breakup "First, it cost the company a lot of money," said Stephen Margolis, professor of economics and business at North Carolina State University in Raleigh. "Far more important, it cost the company a lot of its attention, and entrepreneurial energy went toward fighting the case. It changed IBM for years, if not forever."

Historians and legal experts say it's impossible to overstate the burden that the antitrust case laid on IBM, which unveiled its first computer in 1952 and enjoyed a 70 percent market share in the '60s and '70s.

In January 1969, the government began a sweeping antitrust investigation into IBM's dominance and attempted to break it into smaller companies that would compete against one another.

During the six most critical years of the trial, from 1975 to 1980, the parties called 974 witnesses and read 104,400 pages of transcripts, according to Emerson Pugh's 1995 book "Building IBM: Shaping an Industry and Its Technology."

see full text of Judge's final ruling The 13-year investigation, which required IBM to retain 200 attorneys at one point, fizzled in the early '80s as the computing landscape shifted from mainframes to personal computers. The government abandoned the tainted effort entirely in 1982, as clones of the IBM PC eroded Big Blue's dominance.

But the company, still fearful of the watchful eye of the Justice Department, took pains to avoid the appearance of a monopoly long after it relinquished its hold on the market.

People who worked for IBM in the '80s and early '90s said the company routinely fell victim to "pricing death strategy"--a reluctance to lower prices below cost, even on products that weren't selling--to avoid what the government would call predatory pricing.

By the mid-'80s, the company was in bad shape. The antitrust troubles, combined with ill-timed product failures such as the Future System, pinched revenues. The company began a nearly decade-long financial slide. In retrospect, the antitrust case against IBM seemed laughable.

See MS-DOJ timeline Although the outcome of the Microsoft case is difficult to predict, many experts say the case could ensnare the software giant in appeals for a half-decade or more--at which point the shifting computing landscape may again render the government's worries obsolete. The judge overseeing the case has sought to fast-track it, but there's no guarantee the appeals court or Supreme Court will act swiftly.

"They're both cases in rapidly moving industries," said Luke Froeb, associate professor of management at Vanderbilt University and a former economist with the Antitrust Division of the Justice Department during the Reagan and Bush administrations. "The IBM case dramatically illustrated the difference between judicial making, which is positively glacial, and the speed of progress in the private sector."

In particular, experts say, Microsoft's dominance of the PC market may not seem so nefarious in a post-PC world where dishwashers and alarm clocks are connected to the Internet. Analysts also worry that Microsoft's wireless strategy isn't as sophisticated as those of wireless giants such as Nokia, and the software company's dominance will dwindle as people access the Internet via cell phones instead of desktop computers.

"With IBM, the Justice Department was trying to hit a moving target, but the target had moved so much there was no point in shooting anymore--so they dropped the case," Froeb said. "I see a lot of the same problems here."

One of the largest differences between the two cases--the political climate surrounding each--doesn't bode well for Microsoft. Experts say the chance that the government will dismiss the Microsoft case, as it did unceremoniously with IBM, is slim.

That's because the nation was undergoing broad political and economic changes in the late '70s and early '80s that favored big business, contrary to the prevailing attitude today.

As baby boomers entered the work force and started families in the '80s, the nation became more conservative, and the idea of government intervention became increasingly intrusive--not protective and helpful, as many perceived it in the post-war years. Heightened economic competition from Japan in the '80s made many people root for U.S. companies, even those that once may have exploited their monopolies.

When Ronald Reagan became president in 1980, he surrounded himself with economists who espoused the so-called Chicago School theory, an economic philosophy honed at the University of Chicago that placed great faith in markets and relatively little faith in governments or any force that tried to manipulate markets.

"There was a strong bias for leaving markets alone and a notion that the market has capacity to respond to almost anything--that the market would correct any monopoly," said Lawrence Sullivan, law professor at Southwestern University School of Law in Los Angeles and author of the 1977 "Handbook of the Law of Antitrust." "The broad ethos of the (Reagan) administration was that federal judges were inept--that they could try to operate on markets like a doctor performing surgery with his elbows."

After the eight-year Reagan administration, however, the economic philosophy moved toward the conventional view: that markets have self-correcting mechanisms but that they sometimes need a shove from the government. Bill Clinton, who touts a "third way" between capitalism and socialism, also clings to this view.

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"The government walked away from IBM on the eve of trial," Sullivan said. "I don't think that's going to happen in this case at all. The government is very enthused about prosecuting this case."

Experts also say the IBM case may hold a valuable lesson for Microsoft: Even a voluntary remedy or a relatively less severe conduct remedy can be an extreme burden.

Although the government dropped the IBM case and therefore never dictated how the company should operate, IBM took initiatives throughout the investigation to minimize the appearance of monopolization.

Fearing a breakup decree, IBM voluntarily "unbundled" its pricing of hardware, software and services. Still conscious of the antitrust specter, the company spun off a services division in the '80s called Integrated Solutions and Services Corp.

Managers found extreme difficulties in trying to separate the company, whose employees were deeply ingrained in IBM culture. The company was reintegrated in the mid-'90s as IBM Global Services, which provides Web hosting, network hosting and Web design programs.

Likewise, Microsoft would rather the government punish it with a "conduct" remedy, at which point the company would modify its behavior without radically altering its structure. By contrast, the judge said today that breaking up the company is the only effective solution.

IBM spokesman John Bukovinsky wouldn't comment on the possible fallout for Microsoft from a voluntary division of the company. But he knows what happened when IBM tried it with Integrated Services and Solutions.

"We had to take all sorts of pains to separate that company," Bukovinsky said. "Is there some extra legal burden? Yes, but what ensues is a lot of administrate burden as you operate a separate corporation that is still an integral part of your core business."