First, a quick plug: Noe Valley Bookstore is having an anniversary fundraiser — and if you buy a copy of my novel Lessons in Magic and Disaster from them today or tomorrow, all their profits go to the TGI Justice Project, which works to put a stop to human rights abuses committed against Black and Brown Trans people “inside of California prisons, jails, detention centers and beyond.”

Also! If you pre-order my upcoming novel Good Things Are Coming Your Way from Noe Valley Bookstore any time between now and June 8, 10 percent of proceeds go to the TGI Justice Project.

And finally, this lovely bookstore is hosting a book trivia party tomorrow night at Barebottle Brewing Company, and I’ll be there. Come hang out!

Why the 1998 Microsoft case still matters

Nearly 30 years ago, the government sued Microsoft — and won. This seminal antitrust victory paved the way for our current regime of tech monopolies. But it also provided the roadmap for how to deal with other tech companies that gain excessive power in the marketplace — and in politics and society generally.

I've been obsessed with the 1998 Microsoft lawsuit for as long as I can remember. My obsession has only grown in the past decade, as the biggest tech firms have gained levels of power and influence that Bill Gates could only have dreamed of in the 1990s. And also, as the government seemed more and more helpless to constrain the power of monopolies or to enforce antitrust laws in general.

And in fact, the Microsoft lawsuit has been having a bit of a moment lately. According to experts, it provided the blueprint for two lawsuits against Google (for search engine monopoly in 2020 and for advertising monopoly in 2023). And it was influential on the ongoing lawsuit against Apple (filed in 2024 over the company's smartphone monopoly and use of market power to squelch competitors.)

So I decided to talk to some experts about the Microsoft case and find out how the government won — and what lessons that victory holds for our current moment. And next week, we'll get into how the outcome of the Microsoft case cleared a path for Google, Apple and other big operators to become monopolies in their own right.

"Network effects"

Starting in the mid-1980s, economists began writing about "network effects" — meaning the market power that requires people to use a service because everyone else is already using it. By the 1990s, there were plenty of economic models showing how network effects could harm competitors and limit choice.

But antitrust enforcers hadn't caught on to this idea, said attorney Gary Reback, who helped launch the Microsoft case, during a 2024 Stigler Center panel. None of this economic research "was reflected in antitrust jurisprudence: not cited, not mentioned. Antitrust was stuck in 'price theory.'"

"Price theory" claimed that monopolies were only a problem if they raised prices for consumers, rather than focusing on other issues, like whether consumers had a choice of products.

There had been examples of network effects since the beginning of antitrust law, said Doha Mekki, who was acting Assistant Attorney General for the DOJ's Antitrust Division under Joe Biden. For example, railroads were highly networked, and there had also been utility law from the beginning. But the Microsoft case was important in transforming how we talk about network effects in tech monopolies, Mekki told me.

After the Microsoft case, federal agencies started to recognize that even if a market might appear competitive, it could quickly become monopolistic — as "everyone, both software developers and users, migrate over to one platform," noted Sandeep Vaheesan with the Open Markets Institute.

Unfortunately, this awareness of network effects didn't last, Vaheesan told me. During the Bush and Obama eras, there was a return to something like price theory, because tech companies were giving away their products for free or "very cheap," so regulators asked, "What's the issue here?"

Bush and Obama-era regulators, according to Vaheesan, basically said:

"Yeah, maybe [tech companies] have very high market shares, in some cases in excess of 90 percent, but the consumer benefits are so evident, let's not mess with this good thing."

But toward the end of the first Trump presidency, "network effects" jurisprudence made a comeback, Vaheesan said. You saw the Department of Justice and Federal Trade Commission bringing big cases over Google's search monopoly and Facebook's acquisition of WhatsApp and Instagram, and this only intensified under Joe Biden's FTC chair, Lina Khan.

When people were ready to return to thinking more broadly about the market power of tech firms beyond simply consumer pricing, the Microsoft case was there to provide a template.

"Much more ambitious"

The 1998 lawsuit against Microsoft came on the heels of a 1994 consent decree, which revolved around licensing agreements between Microsoft and the manufacturers of PCs. "Microsoft nudged, or arguably coerced, [manufacturers] into installing Windows on every PC that they shipped," Vaheesan told me. The 1994 consent decree was criticized for its timidity: it addressed those specific licenses, but not the broader issue of Microsoft's market power.

"The 1998 case was much more ambitious," said Vaheesan. "If you read the complaint, it's actually quite impressive... The basic allegation is that Microsoft is using its monopoly power on Windows to basically squeeze out rivals in adjacent markets for things like internet browsers [by] bundling Internet Explorer with Windows to muscle out Netscape."

Microsoft didn't just want to dominate the web browser market: the company was concerned that Netscape had the potential to become a rival operating system, Vaheesan noted. At this time, Netscape already had millions of users.

Netscape was what's called "middleware," which Microsoft defines as "software that acts as a bridge between applications, databases, and operating systems." Netscape had its own APIs (Application Programming Interfaces), meaning that developers could in theory write software that could run on Netscape instead of directly on Windows. (Think about how Chrome has gone from being a browser to being an operating system.)

"Microsoft viewed Netscape as an existential threat to what had, up until then, been a fairly secure operating system monopoly," said Vaheesan.

And it certainly did not hurt the government's case that there were emails from Bill Gates spelling out the company's determination to smother its rivals in the crib.

"The importance of middleware is a theme that comes up in a lot of later enforcement, including the United States v. Google case [and] the Apple case," said Mekki, now a senior fellow with the Center for Law and the Economy at Columbia University Law School. "The concept of the innovation that might have spawned the next great platform, really has been a profound insight for enforcers litigating in digital ecosystems and technology platform markets." 

"You might think of competition as just being limited to the competition between platforms," added Mekki, who took a leading role in the Google lawsuit. In 1998, a lot of enforcers might have thought that only a "fully fledged head-to-head competitor" could constitute a threat to Microsoft's monopoly.

"But the importance of middleware is that there's room for innovation on the margins, right? It's the little upstart, nipping at the heels of a large platform, that not only delivers innovation, better products and services to the market, but also incentivizes even bigger, more established platforms to continue innovating."

With middleware, "there's the potential for new platforms to flourish."

"The U.S. v Google case really rhymes with The United States v. Microsoft," said Mekki, and some elements of Microsoft also turn up in the ongoing Apple case. In the Apple case, there are cross-platform messaging apps and other applications that Apple tried to suppress because they could make consumers spend less time in iOS.

"There's this pattern recognition that was really crystallized in U.S. v. Microsoft that helps us understand this concept [and] that enriches our understanding of the competition that matters," said Mekki. "Because ultimately, that's what antitrust is about: you are trying to better appreciate the competition that matters." She added a lot of people working in antitrust "really admire" the work that Janet Reno and her team did on that case.

Predatory pricing

And finally, the Microsoft case was important because it raised the issue of a company giving away its product for free — in this case, Microsoft bundling Internet Explorer with Windows. (Though Microsoft was still free to set whatever price it wanted for Windows itself.) Unfortunately, this case wasn't able to change the prevailing standards for going after "predatory pricing" in tech.

During the 1980s and the 1990s, there was a "near consensus that, predatory pricing isn't a real thing," said Vaheesan. "It's just irrational for businesses to lose money today to build up monopoly tomorrow... and the kind of corrolary was, 'Even if it does happen, so what? People are getting cheap stuff today, and isn't a bird in the hand worth two in the bush?'"

Future Supreme Court justice Stephen Breyer wrote a famous 1983 judgement along those lines, in which he argued that low prices today were worth any potential risk of monopoly down the road. The Supreme Court took this further in its 1993 Brooke Group decision, which established a "safe harbour" for below-market pricing and put the burden on the government to prove that the companies will raise prices in the future.

In the 21st century, there's been more awareness that low prices today can be bad for consumers in the long run. We've seen the rise of companies like Uber, which burned through VC money to keep its prices artificially low and drive taxi companies out of business in many cities. People started realizing that this was indeed a viable strategy if you had deep enough pockets, and other big tech firms have followed suit in various ways.

"So now there's a recognition that this is a real problem," Vaheesan said. Unfortunately, "the law on predatory pricing is quite bad, in my view. It's very, very hard to successfully bring a predatory pricing case, so very few people try."

Next week, we'll talk about the ways in which the Microsoft case did fall short — and how it facilitated the rise of a new crop of tech monopolies.