By Philip Elmer-DeWitt
May 3, 2010

Shades of the United States vs. Microsoft, an antitrust case that the government lost

A report in Monday’s
New York Post
that two government agencies — the Federal Trade Commission and the Department of Justice — are each considering launching an antitrust investigation against Apple (AAPL) puts me in mind of the case the DOJ and 20 states brought against Microsoft (MSFT) nearly a dozen years ago.

To many observers — including the judge who heard the case — U.S. vs. Microsoft seemed open and shut. In Nov. 1999, Judge Thomas Penfield Jackson found that Microsoft’s dominance of the PC operating systems market constituted a monopoly and that the company had illegally used that power to try to crush Apple, Java, Netscape, Lotus Notes, Real Networks, Linux, and others. His remedy, offered the next spring, was to break Microsoft into two units, one that made operating systems and another that made applications.

Microsoft immediately appealed, and while it couldn’t overturn the findings of fact, it successfully fought the remedy. Based on embargoed interviews Judge Jackson had given the press during the trial, the D.C. Circuit Court of Appeals found he had displayed anti-Microsoft bias and conducted himself unethically. It handed the case to another judge with instructions to craft a more modest remedy.

The case was settled in Nov. 2001. Microsoft remains intact and its software still runs nearly 9 out of 10 of the world’s PCs, although to many in the industry, the company doesn’t seem to have the kind of swagger it exhibited before and during the trial.

Given that history, what chances does the government have against Apple?

The issue here, according to the Post‘s report, is a clause — Section 3.3.1 — added to the latest iteration of the iPhone software developers agreement that prohibits programmers from writing apps for the iPhone, iPad or iPod touch using “an intermediary translation or compatibility layer.”

As the Post sees it, the new policy “kills competition by forcing programmers to choose between developing apps that can run only on Apple gizmos or come up with apps that are platform neutral, and can be used on a variety of operating systems, such as those from rivals Google, Microsoft and Research In Motion.”

To win a Sherman Antitrust case against Apple, the government would have to prove both that Apple’s market share constitutes a monopoly — itself not illegal — and that it has abused that monopoly power in ways that damage its competition.

While it is true that Apple controls what apps can run on its mobile devices and even what tools developers can use to write those apps, it’s going to be harder to show that it has a monopoly of the smartphone market or that its competitors have been harmed the way Microsoft’s were.

The case against Microsoft was launched after Bill Gates bundled a free Web browser (Explorer) into Windows — which had a market share at the time in the mid 90’s — cutting off Netscape’s air supply (to use the language of Microsoft’s internal memos) and driving it out of business.

Apple’s doesn’t enjoy that kind of market share. Its slice of the U.S. smartphone market is smaller than Research in Motion’s (RIMM) and Google’s (GOOG) Android share is rapidly catching up. And while there are companies that can legitimately claim they have been harmed by the success of the iPhone — Palm (PALM) comes first to mind — Palm can hardly blame Section 3.3.1 of the SDK for its troubles.

Adobe (ADBE) might — and probably has — filed a complaint against Apple based on the damage Apple has done to its efforts to promote Flash as a cross-platform development tool. And if the DOJ takes the case, it could use the line of attack it used against Microsoft, arguing that the “network effects” of the iPhone OS and the App Store tend to lock customers into Apple’s ecosystem, and that to create a level playing field, the two businesses should be forcibly separated.

It didn’t work 12 year ago, and it’s hard to see how it’s going to work today.

See also:

[Follow Philip Elmer-DeWitt on Twitter @philiped]

You May Like