Microsoft oversight ends with little to show for effort

As the software giant's 2002 consent decree with the Justice Department ends, Windows continues to generate billions in cash fueling forays into new markets.

Jay Greene Former Staff Writer
Jay Greene, a CNET senior writer, works from Seattle and focuses on investigations and analysis. He's a former Seattle bureau chief for BusinessWeek and author of the book "Design Is How It Works: How the Smartest Companies Turn Products into Icons" (Penguin/Portfolio).
Jay Greene
4 min read

As Microsoft's 2002 settlement with the Justice Department expires today, it's easy to look back at notice how much has changed in techdom. Web search has become a wildly profitable business. The burgeoning smartphone and tablet markets have exploded the notion of how people will do their computing. And social networks emerged, shifting computer users' focus.

But one thing hasn't changed is Microsoft's grip on the personal computer market. In 2002, Microsoft's Windows operating system held 93.9 percent of the desktop and laptop computer operating system market, according to research firm, IDC. And today? Microsoft's share sits at 91.1 percent.


The end of the consent decree is certainly momentous. It may be hard to remember, but the software giant's rule over the industry seemed unshakeable when the settlement was signed. And there was much consternation among rivals over the milquetoast nature of the deal, calling for some regulatory oversight but no structural change to Microsoft's business.

That was largely because the Clinton administration brought the suit, hoping to apply antitrust law to emerging digital markets. But the case dragged on into the Bush administration. And it had little interest in increasing government intervention.

"Once Bush won the election, the steam came out of the case," said Herbert Hovenkamp, a professor of antitrust law at the University of Iowa College of Law.

Rivals complained at the time that the case would do little to stop Microsoft's march into new markets, using its Windows hegemony. Seen as little more than a slap on the wrist, the consent decree gave computer makers new freedom to include software from Microsoft rivals on PCs and prohibited Microsoft from retaliating when they did feature non-Microsoft technology. It also required Microsoft to disclose more information about Windows so that rivals could develop programs to work smoothly with the operating system.

And while Microsoft is no longer the dominant force it was a decade ago, it would be mistake to credit the consent decree. "I don't think the settlement we ended up with changed much," Hovenkamp said.

That change has come through market forces, not regulatory ones. The tides in technology have shifted, with companies such as Google, Apple, and Facebook gaining mindshare and market share in the intervening years.

Just take a look at browsers. Microsoft's obliterating Netscape's Navigator browser with anticompetitive behavior is what triggered the lawsuit. When Microsoft signed the consent decree, it so thoroughly dominated the browser market that it was hard to imagine surfing the Web with anything other than Internet Explorer. It accounted for 95 percent of the market.

No more. In April, according to NetApplications, Internet Explorer's share of the global browser market sat at 55.1 percent, Mozilla's Firefox accounted for 21.6 percent, Google's Chrome had 11.9 percent of the market, and Apple's Safari held 7.2 percent.

It'd be wrong to suggest that the consent decree played a meaningful role in that shift. The widespread adoption of broadband data connections meant users could download browser software quickly, rather than having to wait minutes or even hours to get something that competed with Internet Explorer. Even more important, Microsoft, for several years, stopped innovating in browsers, letting rivals steal share, though its latest version, Internet Explorer 9, is once again competitive.

And while rivals have gained ground in new markets, the consent decree did nothing to staunch the source of much of Microsoft's power--its desktop and laptop operating system monopoly. Though that market is less relevant today, it, along with Microsoft's other dominant product, the Office productivity suite of applications, fuel the software giant's business. And that gives Microsoft a financial advantage that most rivals can't match.

Notes: Dell's earliest data is from fiscal year 2003 and its latest data is from fiscal year 2011. Facebook's financial data is for 2009 and comes from reports of Goldman Sachs offering document. Twitter revenue is an estimate of ad sales from eMarketer for 2011. And information not available is because the companies weren't yet public and required to file financial data with regulators or didn't exist.

Just two days before the consent decree expired, Microsoft agreed to buy Skype, the video chat service, for $8.5 billion, its largest acquisition ever. Much has been said over the eye-popping price, given that an investor group purchased Skype for $2.75 billion just 18 months earlier. But Microsoft was able to shell out that much cash because it's sitting on a $50 billion pile of cash, according to its most recent quarterly results. (The cash data in the chart accompanying this article is from Microsoft fiscal year-end results, not the most recent quarter.) What's more, in the first nine months of the current fiscal year, the company has added more than $13 billion, a pace, if maintained, that would allow it to replenish its coffers from the Skype deal before the calendar year ends.

That financial advantage plays itself out over and over. Microsoft clawed its way into the video game industry, and lost billions of dollars along the way, before turning its Xbox business into a profit center. It continues to dump billions of dollars more into the mobile phone market and Internet search business, money losers both. But it's clear that Microsoft intends to lose billions more, if necessary, to secure a spot in those markets.

Microsoft is able to afford those wildly expensive forays because of the dominance of Windows and Office. It's an advantage that rivals don't have and one that the consent decree did nothing to slow.

For its part, Microsoft acknowledges that the consent decree altered the company and its culture. "Our experience has changed us and shaped how we view our responsibility to the industry," Kevin Kutz, Microsoft's director of public affairs, said in a statement. Though Microsoft remains as ambitious as ever, it's not the belligerent behemoth that disregarded the regulatory threat. It'd be hard to imagine CEO Steve Ballmer saying "the heck with Eric Holder" today, as he once said of former U.S Attorney General Janet Reno.

The truth is that Microsoft is a much less dominant force in the tech industry than it was nine years ago. But the dominance of Windows continues to give Microsoft a huge source of power. The consent decree did little to change that.