Microsoft's Six Fatal Errors

'Still in Denial' Just days earlier Microsoft had taken its second stab at a settlement. In three meetings at the Justice Department beginning on Feb. 24, the two sides sat down to talk. Microsoft submitted several drafts to Klein. "We put three proposals on the table," said one Microsoft insider. "We felt like we were offering more." But more wasn't enough. The government, which was considering a breakup even then, wanted Microsoft to submit to curbs on its behavior. Microsoft refused many of them, such as putting government-appointed people on the board. To Microsoft, the government was simply taking control of the company and nationalizing it. To the government, "they were still in denial that they would lose," said Boies. The government believed Microsoft was submitting the same settlement proposal it had offered before the trial began. By the last meeting on June 2, the talks had stalled.

A month earlier Jackson set up a procedural framework that would give Microsoft another opportunity to settle. In an unusual move, he decided not to release his findings of fact (his decisive version of the facts) and his conclusions of law (how those facts overstepped antitrust law) simultaneously. Instead, he staggered their release. That way, he could focus both sides on arguing the same set of facts--his own. And by releasing his facts first, he would tip his hand and give the losing side incentive to wrap up the case.

That incentive arrived in Redmond on Nov. 5 last year. If Microsoft had missed any prior signals that things were going badly, only a megaphone might have been clearer than Jackson's findings of fact. Of the document's 412 paragraphs, no more than four looked favorably on Microsoft.

The Last Dance Weeks later Jackson appointed Judge Richard Posner, one of the most respected jurists in the country, to try to make a deal. A prolific author and revered professor, Posner is most importantly a member of the Seventh Circuit Court of Appeals and is well schooled in the economic and legal gymnastics of antitrust law. In a case certain to be appealed by either side, there was perhaps no one better to peer over the legal horizon and give both sides enough to worry about to make a settlement look irresistible. Posner met with both sides separately, probing the facts and the elasticity of each side's stance. He met privately in Chicago with Gates, who convinced the judge, himself a conservative wary of government intervention, that a breakup was out of the question.

There was a moment of hope in February. Posner asked the government if it was willing to set aside breakup proposals and base a settlement on rules that Microsoft must live by. Though some of the 19 states that were also parties to the suit opposed the idea, the Feds decided that they could live with "conduct remedies" if it meant they'd be implemented quickly, rather than at the end of protracted litigation. It was a major concession, one that could have given Microsoft one last opportunity to dodge the breakup bullet. But to Microsoft, the conduct remedies were "effective breakups anyway," said one Microsoftie. And the company didn't want to strike a deal with the Feds if the 19 states wouldn't also agree to it.

The government, for its part, believed Gates & Co. weren't going far enough and hadn't faced the fact they were about to lose in court yet again when the judge issued his conclusions of law. "Microsoft's argument kept coming down to: we're not really a monopoly, so we should be able to do what we want," Boies explained last week. "They were not willing to constrain their conduct in any way." By Saturday morning, April Fools' Day, Posner, sensing that the gap between the two sides couldn't be bridged, called off the talks. They headed back to the courtroom, and last week the judge issued his devastating ruling.