Microsoft's Six Fatal Errors

It was a bleak winter day in early 1998, and Microsoft's lawyers had come from Redmond to appear before Judge Thomas Penfield Jackson in the other Washington. In a legal clash predating the landmark antitrust suit, Jackson had asked the company to remove its Web browser from Windows 95 on the grounds that forcing the browser on PC makers violated a prior pact with the Feds. Microsoft said a separation was technically impossible. But to comply with the judge's order, the company produced one browser-free version of Windows 95 so old that its shelf life was even shorter than Bill Gates's temper. Another browserless version was so broken its only feature was an error message. The judge was clearly angry that Microsoft insisted the only way to comply with his order was to ship defective products. It was a hardball maneuver that cost Bill Gates & Co. dearly.

The judge's frustration had been mounting. Already in this early skirmish, Microsoft had submitted a legal brief questioning the technical know-how of Justice Department attorneys--and by extension the judge--who "have no vocation for software design." It also went over his head to the appeals court. Ultimately siding with Microsoft, the appellate judges overruled Jackson and told him the courts shouldn't be software designers. For Gates's empire, it was a short-lived victory. Looking back recently, one Microsoft insider said that first round clearly came at a high price: "We shouldn't have pissed off the judge."

Last week Jackson ordered the biggest software redesign Microsoft has ever known, concluding that splitting the software giant into two independent companies was "imperative." In one of the few court-ordered breakups over the past 100 years, the judge endorsed the government's plan to create one company that would sell Windows and another that would sell everything else. Jackson's strongly worded opinion left little doubt why he went for the ax, as opposed to milder restrictions: Microsoft's bad attitude. First, he said, the company consistently maintained that it has done nothing wrong. Second, Microsoft could continue to flout the law and unfairly bully competitors. Last, referring to that first encounter more than two years ago, he called Microsoft "untrustworthy." Elaborating on the Windows incident, Jackson told NEWSWEEK, "I found their compliance to be less than genuine." Microsoft's attitude calls for the kind of remedy that it can't weasel out of, the judge seemed to say, because it has been a weasel before.

If upheld, Jackson's order, aside from causing the biggest Windows crash in the company's 25-year history, would bring an end to a software empire that became the planet's most valuable company and an engine of the New Economy. Some--Microsofties among them--will blame the judge. Some will blame an overzealous government that has unsuccessfully tried to rein in Microsoft for more than a decade. A NEWSWEEK reconstruction of the key moments on the road to Microsoft's Judgment Day, however, suggests that the most likely culprit is the same defiant corporate culture that made Microsoft so successful in the first place. In the marketplace, rough-and-tumble tactics can be a virtue, but in the legal arena, Microsoft's blood sport backfired--at least with this judge. One critical turning point: Gates's own videotaped deposition in which he ducked questions and denied the obvious. After the tape was played in court, Jackson noted that Gates wasn't "particularly responsive." Watching the video, the judge wagged his head and rolled his eyes. And he practically double-dared the chairman to testify. "Microsoft took a scorched-earth approach," says Howard University law-school professor Andrew Gavil, "and they got scorched."

Just after the judge's decision, Gates blasted the order as "an unwarranted and unjustified intrusion" but also appeared almost relieved to be heading to any courtroom other than Jackson's. "People say a lot of things about us," Microsoft CEO Steve Ballmer told NEWSWEEK. "But never has anyone said we're untrustworthy." The company likes its odds on appeal. Microsoft's lawyers and executives will be upgraded to geniuses if their reading of the law squares as well with higher courts as it has in the past. Jackson has had his fair share of reversals. The company has plenty of supporting law to lean on, as well as public support from two thirds of Americans. And many antitrust experts think the company won't be broken up even if higher courts find some violations. With the exception of last week's disaster, Microsoft has had a string of successes in the courtroom. "The company is fundamentally arrogant when it comes to litigation," says one company insider, "because it has historically won." Along with the early Windows misstep, there are five other moments that led Gates & Co. to its gloomy Judgment Day:

Let's Not Make a Deal In May 1998, in the weeks before the government filed its latest antitrust action against Microsoft, antitrust chief Joel Klein and Gates met at the offices of Microsoft's lawyers in the capital. Their conversations went well enough that "it looked like we were going to have a settlement," recalled David Boies, Klein's chief prosecutor. But when William Neukom, Microsoft's natty general counsel, met with Klein and officials at the Justice Department on May 15 in an eleventh-hour effort to head off litigation, each side quickly felt the other wasn't serious about settling. By their Saturday-morning meeting, Microsoft thought the government wasn't willing to negotiate; the Feds thought Microsoft was backtracking on its concession to give consumers a choice of browsers. Talks collapsed by midday. "For reasons I will never understand," said one official in the negotiations, "Microsoft was not prepared to implement the settlement." The following Monday, May 18, when Microsoft started shipping Windows 98 with its browser built in, Klein filed the lawsuit, accusing the company of trying to extend its Windows monopoly to the Internet. The news shaved $10 billion off the value of Microsoft shares in a single day.