Twenty-five years ago, the US Department of Justice, twenty-two states, and the District of Columbia sued budding software giant Microsoft for illegally monopolizing the PC market. The plaintiffs argued that Microsoft exploited contracts with computer makers, barring them from removing its Internet Explorer or using rival programs.

A trial was held in the District Court for the District of Columbia, the outcome of which ultimately forced Microsoft to allow PC makers to install non-Microsoft software. Proving that history, if it does not repeat, then at least rhymes, Microsoft CEO Satya Nadella testified in the same courthouse that hosted the landmark Microsoft trial, helping to make the prosecution's caase against another tech giant and its main rival, Google.

Echoing the Microsoft case, the Department of Justice (DOJ) and a collection of states now accuse Google of illegally exerting monopoly power using contracts that give it default search engine status with software companies and equipment makers, capturing 90% of the market.

Nadella argued that it's almost impossible to compete with Google, given the search leader's massive competitive edge in collecting and analyzing user data. He also warned that Google, with its vast profits and lock on the search market, stands poised to extend its monopoly power in a new era where artificial intelligence technologies will turbocharge the search business.

Dynamic data is a 'vicious cycle'

Before rising to his CEO position in 2014, Nadella ran the engineering group for Microsoft's search and search advertising products from 2007 to 2011, a pivotal time for the adolescent search business. Speaking of Microsoft's early efforts in search, Nadella said that Microsoft "ran it without profits for a decade-plus."

Now, the "vast majority of search advertising" is profitable for Bing, Microsoft's rival to Google. "In some sense, when you look at a company like us...there is nothing more attractive internet search," Nadella said. "The organizing layer of the web is internet search."

But Microsoft struggles to break out of what is a tiny share of the search market due to Google's dominance, he argued. The problem is that Google's massive access to user data creates a vicious cycle in which Google can hone and develop its search product better than anyone else, making it all but impossible for small or large rivals to gain a toehold.

"The dynamic data access is a big asset," Nadella testified. "Search is a product in which what you see today informs tomorrow. Unless and until you're in that river of seeing what people are searching for all the time," it's hard to compete. "You need to get the high share to get high quality over the long run... you have to break that vicious cycle. That's the hardest part of it."

Users can love a product but won't switch

Despite this obstacle, Microsoft's Bing has made some headway with search, particularly in the desktop segment of the market, striking deals with PC makers to include Bing in every Windows machine.

"The predominant thing we've delivered with some degree of success is desktop search," Nadella said. But desktop search is not a growing market, and Microsoft's share of it is in the low teens, while Microsoft's share of the fast-growing mobile market is in the single digits, according to Nadella.

Despite the built-in Bing, Windows PC users still manually install Google Search and Google's Chrome browser. "Ironically, as it turns out, Windows is the most open platform today. Changing search is easiest on Windows," Nadella said.

Nadella rebutted Google's arguments that it's easy to switch away from Google on devices like iPhones by simply installing competing search apps such as privacy-oriented DuckDuckGo. "The entire notion that users have a choice is completely bogus," Nadella testified. "The only way to change is by changing defaults."

"There's no question users can switch. But the answer is that users don't switch. Users can love, love a product, but they won't switch because of defaults."

Microsoft's fruitless wooing of Apple

Microsoft had a series of dialogs with Apple about becoming the default search engine on Safari. Google has a long-standing default search engine pact with Apple. "The one that we tried and continue to try is the Apple default," Nadella said.

"In the US, [Apple's] iOS is more important," Nadella said. Unfortunately for Microsoft, the rest of the world is dominated by Android, which Google owns.

"The basic concept I had was to essentially run search as a public utility," Nadella said, adding that was the original vision of Google's co-founders. "That was the construct I used to see if Apple would be willing to make the switch."

When asked by Judge Amit Mehta, who is overseeing the trial and will solely determine its outcome, why Apple would ever want to switch to Bing, Nadella said, "They would want to do that if they felt economically, in the long run, it would be advantageous for them."

Microsoft was slow to respond and innovate

Despite Nadella's statements on the stand that Microsoft is focused on bringing innovation and competition to search, Google's attorney, John E. Schmidtlein, argued that Microsoft's lackadaisical focus on search and sluggish efforts to enter the mobile search business is the cause of the company's search woes.

By the time Microsoft had a credible search product in 2007, it was a distant third in search behind Google and Yahoo. In a presentation sent via email in November and December 2007, Microsoft executives were warned, "We are at least three to five years behind the competition" on search.

In 2007, Google had double the headcount for search compared to Microsoft. "I focused our headcount on the things that really mattered," Nadella said, "with the option that once we get more distribution, we'll go after the rest."  By 2018, Google's engineering team was five times that of Microsoft's.

Microsoft's capital expenditures on search likewise substantially trailed that of Google. "I felt well-supported and well-funded, but I was advocating for more," Nadella said.

Schmidtlein pointed to deals that Microsoft struck with Verizon and RIM's Blackberry, giving the software giant a large footprint to capture the mobile market with a default browser. Even there, however, users overwhelmingly preferred to use Google.

Microsoft went so far as to buy leading mobile phone maker Nokia for$7.2 billion in 2013 to gain even more of a default browser advantage, only to shut down the Nokia operation in 2015. These missteps in the mobile market were "a disaster financially, but it shows our willingness to persist," Nadella said. "The onus is on us to keep improving until we retain more users."

Microsoft was warned in emails as early as 2012 by its executives that it had "to act fast" on search. In 2013, a presentation was circulated among Microsoft executives (but not Nadella) that "Our mobile story sucks." 

The company misjudged the market, Schmidtlein said. As early as 2007, company CEO Steve Ballmer predicted, "There's no chance the iPhone will have any significant market share."

Google's monopoly could co-opt the AI revolution

Now at the cusp of the AI revolution, Microsoft seeks to rectify its slow-out-of-the-gate mistakes by investing at least$13 billion in AI leader OpenAI, developer of the immensely popular ChatGPT. "GPT has led Bing to an all-time high," according to Nadella, referring to the launch of a new version of GPT-powered Bing.

Bing is also the default search engine for ChatGPT. "Right now, it's very early days, and I'm glad we're out there using a new technology," Nadella said.

AI will fundamentally change everything in search, but Nadella worries about the exclusive contracts Google might use to lock in content providers. AI will be revolutionary for search if it is "allowed to play out in a way that the content used to inform LLMs [large language models underlying AI systems] is not exclusive," he said. "If we don't have access to data, that will be problematic."

"The dynamic is such that in the intermediate term, [Google] can use its economic rent to buy exclusive access to content." Google is already dangling checks to get advertisers on board, Nadella said. "When I'm meeting with publishers now...we are beginning to see the same dynamics that are troubling. What is publicly available today, will it be publicly available tomorrow? That is the issue."