No green light for tying apps into Windows XP

When four state attorneys general who led the legal fight against Microsoft Corp. gathered last week to talk to reporters, there was at least one message that they wanted heard loud and clear in Redmond, Washington: We're watching you.

The AGs put the software company on notice that bundling - known as "tying" - separate software programs into the upcoming Windows XP operating system and HailStorm Internet services offering would almost certainly be cited to support a renewed call for breaking up the company or imposing strict limits on its business practices. "The reports of the death of tying turned out to be greatly exaggerated," said Connecticut AG Richard Blumenthal.

Their view stood in stark contrast to the opinions expressed by Microsoft executives from Bill Gates on down who proclaimed that the legal cloud had lifted and the company was now free to bundle anything it wanted into Windows XP and HailStorm. "There is nothing in today's ruling that changes our plans for our future products, including Windows XP," Gates said last week.

Legal authorities who have reviewed last week's unanimous decision by the U.S. Court of Appeals for the District of Columbia said that far from giving Microsoft the green light to bundle, the court laid down clear lines intended to prevent any dominant software vendor from abusing a market-leading position.

"It's very, very harmful to Microsoft," said New York antitrust attorney Kevin Arquit, who worked on an earlier Microsoft case at the Federal Trade Commission. Although the company has publicly praised the ruling, "it's pretty hard to imagine them not appealing to the Supreme Court."

Microsoft has long bundled new products - everything from file compression tools to streaming media players - into its dominant PC operating systems. Sometimes, as with the 1995 addition of a Web browser, Microsoft also makes it tough for the bundled product to be removed, hampering makers of competing products. And it was the Web browser bundling that crushed competitor Netscape and sparked the current antitrust case.

While last week's appeals court ruling asked a lower court to reconsider whether the browser-Windows combination violated a provision of antitrust law against straightforward tying, the court ruled that the very same combination was illegal under a separate provision of law prohibiting a company with a monopoly from maintaining its dominant position through anti-competitive acts. In essence, the court said Netscape posed a risk to unseating the Windows monopoly and Microsoft's moves to block that threat reduced competition without benefiting consumers.

"Even though Microsoft has not yet been found liable on the tying theory, they were found liable for the same acts under the monopoly maintenance theory," Arquit said. "The consequences are identical under either so it's dangerous to look at just the tying part of the case."

So expect the government to return to court later this year when the remedy phase of the case is retried, arguing that Microsoft is continuing to protect the Windows monopoly by bundling more and more products into Windows XP. The continued pattern of behavior could be cited to demonstrate that the company should still be split or barred from adding new products unless it also offers a version of Windows without the bundled items.

"The history of XP and the potential that XP presents to continue Microsoft's domination of current markets and new markets will be highly probative [relevant] of the types of remedies that are appropriate," New York attorney general Elliot Spitzer said.

On the issue of whether any tying is permissible, even if it does not protect the Windows monopoly, the appeals court set a high - but hardly unreachable - standard for the government. The new standard will apply when a lower court retries the tying portion of the case and could be relevant if the government brings a new case against Microsoft for bundling in XP.

Judge Thomas Penfield Jackson had applied a long-standing antitrust test that prohibited a monopolist from tying if any harm to competition was shown. The appeals court, noting that software integration was a new and evolving field, rejected that "per se" test and asked a lower court to consider whether the harms to competition were outweighed by benefits to consumers.

Microsoft, citing a 1998 decision by a three-judge panel of the appeals court, had argued that it should be able to bundle anything that benefited consumers at all. Last week, the appeals court disavowed its earlier ruling and opted for the balancing test.

This story courtesy of The Industry Standard http:/

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