Analysts: Ruling Unlikely to Change Microsoft

BOSTON (04/03/2000) - Microsoft Corp. has been ruled a monopolist law breaker by a U.S. district court judge, but analysts today said that label isn't likely to change how the company does business. At least not immediately.

The software vendor vowed to appeal Judge Thomas Penfield Jackson's "conclusions of law," or verdict, released today in the antitrust case brought against Microsoft by the U.S. Department of Justice (DOJ), 19 U.S. state attorneys general and the District of Columbia. As that process drags on -- certainly for months, and perhaps for years -- Microsoft is not bound to change its business practices. The remedy phase of the trial will establish the penalties Microsoft will face, but those won't take effect until the appeals process is exhausted.

"Nothing will change anytime soon," said Tim Bajarin, president of Creative Strategies Inc., in Campbell, California. "I have a hard time seeing any real, immediate effects on Microsoft" aside from the company having to dig deeper into its pockets to spend money on lawyers.

In fact, Microsoft just might fare better following the ruling than some observers expect, said Chris Le Tocq, research director of Gartner Group Inc., in San Jose, California. "Whatever happens to Microsoft, whether it's structural or behavioral changes, it's still a powerful software house that's going to keep producing," he said.

Although Microsoft shares took a beating on the stock market throughout the day in anticipation of the verdict, and the tech-heavy Nasdaq composite index plunged, Le Tocq predicted that the company's financial turmoil will abate.

"The stockholders may not be happy today," he said, "but they have a company that still has a lot of strength."

Even if the remedy imposed is a company breakup -- something Microsoft officials have sworn to fight to the bitter end -- the software maker might retain that strength and perhaps emerge even hardier, analysts said.

A remedy that calls for a change in Microsoft's business behavior might ultimately be more destructive to the company, said Rob Enderle, vice president and analyst at Giga Information Group Inc. in Santa Clara, California, who termed Judge Jackson's ruling "particularly harsh" and "a terribly damaging judgment for Microsoft."

However, as a remedy, breaking up Microsoft would be a one-time action that could leave the resulting companies -- often dubbed "Baby Bills" after Microsoft Chairman Bill Gates -- free to compete, Enderle said.

Analyst Martin Reynolds, a vice president and research fellow at Dataquest Inc. in San Jose, California, echoed that sentiment.

"You could argue that Microsoft as separate companies could be worth more than as one company," he said. "It might become a true innovator."

That's exactly what Microsoft needs to do to pump up its revenue stream, he suggested.

"Microsoft's big challenge right now is how to deal with the flattening of its revenue," Reynolds said. He added that the company might find growth beyond U.S. borders, but that probably won't be enough to maintain the revenue stream to which Microsoft is accustomed.

If the case proves anything thus far, it is the need for updated U.S. antitrust laws, Creative Strategies' Bajarin said, so that regulations are applicable to today's fast-paced world of technology and business. It's "painful," he said, to watch the case drag on with its emphasis on the Internet browser market, which no one cares much about any more, and that pain will extend as the appeals process goes on.

"We need to rethink antitrust laws," Bajarin said. "What you challenge today may be a non-issue six months from now," which is what has happened thus far with issues at stake in the case.

The fast pace of change in the IT industry could well be a significant factor as the remedy phase of the trial kicks into gear. The problem with remedies focused on changing Microsoft's conduct is that the software market moves too fast, so that there will be constant bickering about whether new variants are covered by remedies or not, said Dana Hayter, an antitrust attorney with Fenwick & West LLP in San Francisco. Structural remedies, such as breaking up Microsoft, would produce a cleaner, more final result in that regard.

A breakup that created separate companies for software applications and operating systems would force Microsoft to change its incentives, because the company making the operating systems would have a motive for being open so that as many applications as possible could be written for it.

Judge Jackson ruled today that Microsoft violated two sections of the Sherman Antitrust Act, and his ruling dealing with the company maintaining its monopoly through predatory behavior is the strongest part of his verdict, Hayter said.

That aspect of the ruling deals with Section 2 of the Sherman Act, and could suggest that a structural remedy lies ahead in Microsoft's future.

"A structural remedy is more likely to be appropriate where a defendant has violated Section 2," Hayter said. "Section 2 violations basically say you're so big and predatory that you're distorting the market."

Judge Jackson also touched diplomatically on a ruling in a separate but related Microsoft case by the Court of Appeals for the District of Columbia with which he disagreed. That court overturned a previous ruling by Jackson that barred Microsoft from requiring PC makers licensing Microsoft's Windows 95 operating system to also take the software vendor's Internet Explorer Web browser as part of the license.

The court's 2-1 decision found that integrating the browser with Windows 95 led to technological benefits. The court further suggested that courts should be cautious when it comes to second guessing decisions made by high-technology companies because courts lack technical expertise.

That same appellate court will hear appeals in the ongoing case and Jackson's nod toward that higher court is recognition that he acknowledges the disagreement he had with them in the previous matter, said Robert Hauberg, a lawyer with the Washington, D.C. firm of Baker, Donelson, Bearman & Caldwell.

He is also a former antitrust attorney with the U.S. Department of Justice.

The fact that Jackson didn't rule down the line in favor of the U.S. government on every point in the antitrust case suggests he might be trying to nudge federal and state prosecutors "to sit down and be realistic" when it comes to arriving at remedies, Hauberg said.

Although a court-appointed mediator declared an impasse in settlement talks between Microsoft and the U.S. government over the weekend, the sides still could sit down to work out acceptable remedies. Asked if he thinks that is likely to happen, Hauberg said, "If I were predicting, I'd say they would have another run at it."

(Juan Carlos Perez in Miami, Margret Johnston in Washington, D.C., and James Niccolai and Jack McCarthy in San Francisco contributed to this report.)

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