Microsoft Antitrust Anticlimax

SAN MATEO (04/03/2000) - Microsoft Corp. and the U.S. Department of Justice are going to the brink to try to settle the landmark antitrust case filed against the software giant, but the shifting technology and business landscape is raising questions of how much impact any resolution might have.

In fact, the rapid pace of industry change coupled with the marathon duration of the trial could conspire to make any ruling to restrict Microsoft's power irrelevant, according to industry, legal, and IT observers last week.

"The reality is, the facts of this case were outdated before the case even began," said Jonathan Zuck, president of the Washington-based Association for Competitive Technology, which has been a vocal Microsoft supporter.

Last week, U.S. District Judge Thomas Penfield Jackson delayed a ruling on the case to give the two sides more time to negotiate, a process that is being mediated by Chief Justice Richard Posner of the 7th Circuit U.S. Court of Appeals in Chicago. The move was spurred by Microsoft's settlement proposal, which aims to stave off a presumably harsh decision from Jackson.

"Ultimately, Microsoft is willing to go no farther than they absolutely have to," said Emmett Stanton, an antitrust attorney at Fenwick & West, a law firm in Palo Alto, Calif. "By all indications, they are willing to accept restrictive contracting, and licensing and behavioral remedies.

"Where I think it gets hard for Microsoft is in the limits on what they may want to do in the future, as opposed to accepting limits on what they have done in the past," Stanton said. "Hypothetical future restrictions are difficult because they have no idea how the market will develop."

Indeed, the high-tech landscape has changed greatly since the Department of Justice and 19 state attorneys general filed the suit in May 1998. America Online bought Netscape Communications, whose browser war with Microsoft sparked the antitrust charges. Linux and handheld systems pose a threat to the desktop PC's dominance as a computing platform.

Perhaps more importantly, Microsoft has shown signs of moving away from its dependence on the Windows platform, which enjoys a 90 percent-plus desktop market share -- a fact that earned the company the "monopoly" tag from Jackson last November in his findings of fact.

Microsoft has shifted to a "software as a service" focus, and president and CEO Steve Ballmer recently said that Microsoft will evolve as a company to deliver client software that is tightly integrated with Web services.

"All of these changes render many of these conversations [about Microsoft's monopoly] moot. If there are findings of liability by the court, it will be difficult to find sanctions that would be at all relevant," Zuck said.

Others don't buy that argument.

"Judges don't typically go along with the 'Repent and sin no more' decree," said Stanton. "In the case of the way Microsoft treated OEMs on the licensing issue, if Microsoft says 'We haven't done that in two years,' the judge is likely to give a big 'So what?' "In an internal e-mail last week written by Ballmer to Microsoft employees, he stated that the company has "put more on the table than the judicial process would ultimately provide, even if we lost the case." Still he maintained -- as the company has all along -- that its ability to move forward must not be impeded.

In settlement negotiations, it was leaked that Microsoft is considering opening access to its software underpinnings as a way of creating more competition in the Windows market. Reports last week indicated that Microsoft would also accept some regulatory oversight regarding its licensing practices, and eliminate selective discounts on Windows to computer makers.

Some in the industry, however, favor a breakup -- one of the proposed government remedies vehemently opposed by Microsoft -- as the only way to blunt Microsoft's competitive advantages.

"Personally, I'd like to see an operating systems and applications company," said Dr. James Goodnight, president and CEO of the SAS Institute, in Cary, N.C.

"Recently, Microsoft added a multidimensional database capability in SQL Server. We charge $25,000 to $30,000 for that. They give it away for free, [but] they didn't develop it for nothing. They say it's all good for consumers, but the price of operating systems is still pretty high compared to the drop in PC hardware prices."

One IT manager hoped for a resolution forcing Microsoft to uphold the spirit of antitrust laws, but with as little direct government intervention as possible.

"Opening code is appealing to me, especially because there are so many people out there whose life's goal is to attack Microsoft. They will pour over the code, pointing out flaws and making the code better," said Eric Kuzmack, lead analyst for Gannett Co., based in Silver Spring, Md. "I do not want the government trying to create some type of oversight."

By making Windows code more accessible, software vendors would be able to write programs that interact better with the operating system. Some, however, are skeptical of such a development.

"As a developer, I'm more interested in them fixing their APIs rather than publishing them," said James Martin, vice president at Catapult Systems, an Austin, Texas-based company that builds custom Internet, client/server, and database solutions.

James Logan, senior director of software development at telecommunications provider Convergent Communications, in Englewood, Colo., said that opening its APIs to the developer community would be a big step for Microsoft, which Logan feels until now has leveraged the company's operating system dominance to enforce its advantage in other business areas.

"If they were to guarantee the same release time -- even beta or early releases of the APIs -- to external developers that they have for the various business units inside Microsoft, that would go a long way toward reducing their competitive advantage," Logan said.

Even if a settlement is reached, many observers said the government has its hands full ensuring that Microsoft complies.

"How do you trust Microsoft?" asked Bob Young, chairman of Linux maker Red Hat, in Cary, N.C.

Additional reporting by Michael Lattig, Ed Scannell, Martin LaMonica, and Rebecca Sykes of the IDG News Service, an InfoWorld affiliate.

If the two sides can't negotiate a settlement, what's next for the antitrust case?

If, as U.S. District Judge Thomas Penfield Jackson has hoped, Microsoft and the U.S. Department of Justice do not settle the antitrust lawsuit hanging over the software giant's head, both sides will be heading back to court.

Jackson indicated last fall that he believed the government had presented evidence to warrant labeling Microsoft a monopoly that used its dominance in the operating system market to quash competition in the browser market.

In Jackson's findings of fact, he did not rule on whether or not the software vendor had violated antitrust law, but if he does, the stage will be set to consider remedies in the case. That means another round of court hearings and witnesses.

Jackson was slated to deliver his ruling last week, but he delayed it because of renewed settlement talks between the government and Microsoft. Chief Justice Richard Posner of the 7th Circuit U.S. Court of Appeals in Chicago, reportedly urged Jackson to give the two sides more time.

If a settlement is reached prior to the judge issuing his conclusions of law, the case would end. Posner's written timetable for resolving the case reportedly states that if Microsoft and the Department of Justice can't reach a settlement by Wednesday, his mediation efforts will stop, according to reports.

Should the two sides reach an agreement on a settlement proposal, the other proponents in the case -- the 19 U.S. state attorneys general -- will have only two days to give the deal their seal of approval.

Microsoft has vowed to appeal a ruling that goes against it, a move that could mean a resolution would be years away.

"[Microsoft officials] are by no means desperate for a settlement. Microsoft has said they are willing to take the litigation to the Court of Appeals and beyond. They figure by the time all is said and done, the market will have changed so dramatically that whatever remedies were realistic in 1998 or 1999 are no longer meaningful in 2002," said Emmett Stanton, an antitrust attorney with the law firm Fenwick & West, in Palo Alto, Calif.

Microsoft Corp., in Redmond, Wash., is at www.microsoft.com.

OEM bystanders

Microsoft has maintained a firm grip on OEMs deploying its products, but that grip could soften if the software giant agrees to concessions in settling its antitrust case.

Whatever the outcome, however, Microsoft will still need a healthy relationship with its PC makers. So the real danger to Microsoft on the OEM issue is the possible onslaught of private litigation that could be opened by any ruling, according to Emmett Stanton, an antitrust attorney at the law firm Fenwick & West, in Palo Alto, Calif.

"The government is not entitled to recover any damages, but can only be provided relief in some sort of injunction. But that injunction could expose Microsoft to private litigation," Stanton said. "It could give plaintiffs trying to prove damages a leg up in proving liability."

Officials from IBM, Dell, and Compaq all refused to comment. But each of them, as well as smaller OEMs who harbor fewer loyalties to Microsoft, are watching and waiting to see how any ruling or settlement will affect their business.

"It's really a double-edged sword," said Ron Myers, vice president of Wallingford Electronics, in Austin, Texas. "Microsoft's power has created the world we know today, but part of that leadership has resulted in complete domination."

"If we'd like to see anything come from the case, we'd like to see Microsoft level the playing field so smaller integrators can play ball like the big guys do," Myers said.

"When [large OEMs] can sell Microsoft Office installed for around $75, and we have to add complete and legal copies of the same software for anywhere from $179 to $249, then it goes beyond the question of volume. Right now, margins are so tight that gaining even $10 is a good thing," Myers said.

Brad Cole, president of Cole Computer, said the "stupid" antitrust case should be thrown out. Cole said Microsoft's extensive investments in research and development benefit the industry, and any restrictions -- particularly a court-ordered breakup, which the government apparently has shied away from -- would hurt everyone.

"They find problems way before we'd find them," Cole said. "If we split them up, smaller companies like mine lose that R&D."

"Sure, we holler and scream because Gateway and Compaq get a better percentage of the software than we do, but Compaq also pays to keep some of their own manpower on campus with Microsoft, and we couldn't afford to keep that kind of manpower in place," Cole said.

One OEM representative, who requested anonymity, said the government should make Microsoft announce its price structure in detail, "across the board for large and small companies. That way we know what our goals are and can accurately set our own business projections. Right now, they don't disclose anything," he said.

The OEM rep also wanted to see more desktop freedom "from the splash screen to the icons" for makers -- a sore point with Microsoft.

"Currently all the installations for Windows 95, 98, and 2000 have an Explorer window look which they won't let us customize. I want to install my own icons, and I don't want to be obligated to install Explorer," he said.

Wallingford Electronics Inc., in Austin, Texas, is at www.wallingford.com. Cole Computer Corp., in Oklahoma City, is at www.okcmasters.com.

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