Conduct Remedy Deemed Likely in Microsoft Case

FRAMINGHAM (03/29/2000) - A settlement in the Microsoft Corp. antitrust case that doesn't break the company up has always been possible, but the toughest problem in crafting any settlement is preventing Microsoft from doing to other companies what it did to the former Netscape Communications Corp., according to Stephen D. Houck, former lead trial counsel for the 19 states involved in the lawsuit.

"The plaintiffs have always been willing to talk about a conduct remedy with Microsoft. It's a difficult thing to accomplish, because it can be quite complex," said Houck, former antitrust chief for the state of New York, who in opening arguments in the trial accused Microsoft of engaging in activities that were designed to "choke" Netscape, including providing its Internet Explorer browser for free.

"Clearly, the browser is a prime example of a tactic that Microsoft has used, and I'm confident the government would not settle a case unless there were some way to resolve issues like this in the future," said Houck, who is now in private practice at Reboul, MacMurray, Hewitt, Maynard & Kristol in New York.

Judge Thomas Penfield Jackson has delayed release of a final verdict in the case, pending ongoing talks between the two parties involved. The two sides are now engaged in talks with a court-appointed mediator in Chicago, according to sources.

The settlement talks are secret, but any settlement will have to address a number of the government's claims, experts say. The most difficult problem, according to Houck, is the tying claim.

Many of the government's legal claims against Microsoft stem from the company's treatment of Netscape. In its case, the government argued that Microsoft delayed giving Netscape access to the APIs (application programming interfaces) for Windows 95, hurting Netscape's ability to quickly release a browser for that new system while also using its operating system pricing power to discourage PC makers from including Netscape on their systems.

In sum, the government accused Microsoft of using its operating system monopoly to illegally thwart a rival. Microsoft has denied the charges and said its decision to integrate Explorer into the operating system and give it away benefited consumers.

It's conceivable that a settlement could be reached that requires Microsoft to release a version of Windows that does not include a browser. But analysts see that as an almost empty gesture. The real problem is developing a settlement agreement that can prevent situations similar to what Netscape faced.

That means a settlement would have to set restrictions on Microsoft's ability to integrate applications with the operating system. "Presumably, Microsoft wouldn't be able to integrate these applications without making them easily removable, akin to Velcro," said Hillard Sterling, an attorney at Gordon & Glickson PC in Chicago.

A settlement may also involve guarantees that Windows APIs are available to third-party developers. It may include provisions for access to Windows source code. But analysts wonder just how effective these terms would be is ending Microsoft's grip on the PC operating system market.

Ensuring that the APIs aren't used by Microsoft to disadvantage third-party developers won't change the fact that applications drive the choice of operating system, said Dan Kusnetzky, an analyst at International Data Corp.

(IDC) in Framingham, Mass.

Microsoft applications, especially its word processor and spreadsheet, which have more than 90% of the revenues in those markets, are designed to work with one another and are linked to specific features on the Windows NT and 2000 servers, said Kusnetzky.

"People have felt that Microsoft wanted to own the operating system, and they're much more clever and subtle than that," said Kusnetzky.

But such a settlement could aid attempts to emulate Windows on other operating systems, such as the Wine project, an open-source effort that allows Windows applications to run on Linux machines, said Kusnetzky.

However, making Windows source code and interfaces available won't break Microsoft's dominant position on the desktop, because the company's application and operating system groups work together "and have hidden knowledge of what each other are doing," said Kusnetzky.

IDC argued in a report last fall that if Microsoft decided to break up along operating system, application, tool and database lines, it would be free to offer products for other operating systems and free users from the stranglehold of Windows-only solutions.

If a settlement leads to a requirement that Microsoft produce a version of Windows that doesn't include a browser, most end users will have to quickly install one, said Rob Enderle, an analyst at Boston-based Giga Information Group Inc.

"If all the applications are starting to interface with the browser as opposed to the operating system, then getting the browser along with the operating system is not only a benefit, it's a requirement," said Enderle.

Any settlement is also expected to include terms that would make Windows pricing transparent, ending any alleged ability of Microsoft to use its monopoly power to dictate contracts with PC makers.

Microsoft has adamantly opposed any settlement that involves a breakup of the company. A settlement with a conduct remedy will most likely involve some ongoing enforcement by the government, and that is seen as a major handicap to any settlement. That, along with past history and the widely perceived failure of an earlier consent decree with the company, leaves some critics suspicious of any settlement prospects.

"I can't imagine a scenario where you can work out details of a very complex set of conduct remedies on Microsoft terms using a Microsoft draft," said Ken Wasch, president of the Software and Information Industry Association in Washington, which filed a brief in support of the government in the Microsoft case and has argued for a breakup.

"You (have) got to be suspect when the defendant in a law enforcement action proposes his own punishment," said Wasch.

But Stanley Liebowitz, an economics professor at the University of Texas and an opponent of the government's antitrust case, said Judge Jackson runs clear risks with a structural remedy and that may be why he is pushing for a settlement.

"I don't think (Judge Jackson) wants to do anything that's too strong, because it runs the risk of backfiring and getting him a reputation in history as a judge who really messed up the economy," said Liebowitz. "He doesn't understand this market that well, and he knows it."

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