ATTENTION! ATTENTION!
Here's the news hot from Businessweek
The Barbarians are at the Gates of MSFT and heading for INTC as well. MSFT and INTEL stories are included in this post
BUSINESS WEEK ONLINE
May 7, 1998
THE COPS CONVERGE ON MICROSOFT
Justice is ready to pounce on Win98, as state AGs map their own attack
By the time Bill Gates assembled 60 business associates on May 5 to help him stage a last-minute public
plea for mercy from trustbusters, the clock was running out. Barring a last-minute settlement, BUSINESS
WEEK has learned, the Justice Dept. is prepared to launch an expansive antitrust action against Microsoft
Corp. within days. Ideally, the agency wants to pounce by May 15, the date on which the software giant is
scheduled to start shipping the Windows 98 operating system to PC makers. In any event, Justice wants to
move no later than June.
Meanwhile, officials from states including Texas, New York, and California are in the final stages of
assembling their own lawsuit--probably to be filed in federal court and most likely with some coordination
with the Justice Dept. So far, the states are tight-lipped about what they're after--except to say that they
hope to force Microsoft to ship a version of Win98 without an integrated Web browser. According to
sources in these states, the suit could come early in the week of May 11. ''We're waiting for final approvals
from the top guys,'' the source says.
Gates's May 5 rally was staged to head off a rumored move by the states to prevent shipments of Win98
entirely--a threat that now seems unlikely. Then he flew to Washington to deal with his bigger problem: the
federal probe.
During a two-hour meeting with Justice's antitrust division chief Joel I. Klein at the offices of Microsoft's law
firm, Sullivan & Cromwell, Gates made his case and listened to Klein's concerns. A Microsoft spokesman
says that Gates was not asked whether he's willing to make an accommodation, such as hiding the icon that
leads to the Internet Explorer browser on Win98. ''We're going forward with integration,'' says the
spokesman.
BROWSER-LESS. Justice, too, is going forward. Sources familiar with the case have told BUSINESS
WEEK how the agency would proceed. The heart of the matter is the charge that Microsoft uses illegal
means to protect its monopoly in PC operating systems and to extend monopoly power into other markets.
The feds are prepared to launch a quick court action to force Microsoft to alter Win98. By bundling the
Internet Explorer browser, Justice lawyers have concluded, Microsoft gives PC makers little choice but to
distribute its browser rather than competing products, while still allowing the sale of an integrated version.
Justice would ask the court to force Microsoft to offer a browser-less version of Win98 that would be sold
at ''a commercially reasonable'' price--meaning significantly less than the version with the browser. The
idea is to give rival browser suppliers such as Netscape Communications Corp. an opportunity to compete.
Initially, Justice may ask Microsoft to simply hide the browser. Later it may press for a fully browser-less
Win98.
Another immediate action would be aimed at the contracts Microsoft uses to dictate what PC makers show
on the opening screen of computers that run Windows. Microsoft has insisted that certain of its programs,
including Internet Explorer, show up as icons. If Justice gets its way, PC makers would be allowed to install
whatever they want.
Also on Justice's list of immediate remedies is a ban on all Microsoft deals designed to promote its browser
at the exclusion of rivals'. To head off litigation, Microsoft has given up contract language that forbade Net
services that feature Explorer from telling new users about other browsers. But online providers like
America Online and CompuServe are still bound by such contracts.
The Justice suit will also address the bigger issue of bundling in general--to determine what features can and
can't be included in the operating system. Justice lawyers are weighing whether including services such as
voice recognition, video streaming, and messaging will kill off growing markets. In cases where that may be
a possibility, the agency would ask Microsoft to price those features separately--like the browser.
Microsoft could still bundle features, however, if the company proves there are not separate markets for
these functions.
Meanwhile, Justice lawyers are also considering remedies aimed at ''undoing the effects'' of Microsoft's
bundling of the browser--including a sort of affirmative action program to make up for the ground Netscape
lost to allegedly illegal maneuvers by Microsoft. Netscape's market share, which once was 85%, has
dropped to 60%, while Microsoft's share has risen from zero to 40%. Justice is exploring ways to give
Netscape a better crack at PC makers, online service providers, and other channels of distribution. It might
even require Microsoft to include a copy of Netscape Navigator with Windows, some experts speculated.
Microsoft isn't about to accept anything so drastic without a massive fight. It's willing to make minor
compromises, but, according to Paul Maritz, group vice-president in charge of platforms and applications,
''nobody should think we won't be really serious about things that are core to our business.'' Microsoft
denies it has broken antitrust laws and claims the right to decide for itself what features it will add to its
operating system. It's adamantly opposed to any government move that would force it to sell features
separately. Says Maritz: ''An a la carte menu would be a nightmare for users and add years to our
development of operating systems.''
ALL UPHILL. What about something as simple as disabling Internet Explorer? Microsoft remains
opposed to the idea of a browser-less version of Windows 98. But company officials have conceded that
it's easy to hide the Internet Explorer browser icon so it doesn't appear on the Windows desktop screen.
What they most fear--and what prompted Gates to seek public support and that meeting with Klein--is a
court injunction that orders the company to remove the browser code from Win98, which could delay
shipment by months, according to analysts.
If either Justice or the state attorneys attempt to get an injunction to block the release of Windows 98, it's
likely to be an uphill struggle. ''Windows will be very hard to stop,'' admits one attorney representing a
Microsoft rival. ''They'll have to show irreparable harm. That will take a lot of convincing.'' A temporary
restraining order is more readily achievable--but it only lasts a few days until a hearing can be held.
As Justice puts the finishing touches on its suit, Netscape and other Microsoft critics continue to hope for
more draconian relief. Gary Reback, a Palo Alto (Calif.) attorney who represents 10 high-tech clients, is
calling for ''structural'' changes that will prevent Microsoft from abusing its monopoly power. ''What the
government does has to change the fundamental calculus of market power,'' says Reback, who favors
breaking up Microsoft.
Until now, Justice officials have said they didn't foresee seeking a breakup. But they now concede that
could be the result if the court concludes that splitting the software giant is the best solution.
Any sort of remediation would certainly be welcome at Netscape. The Web browser pioneer has posted
losses and laid off employees as its market share has dwindled. Says Roberta Katz, Netscape's
vice-president for legal affairs: ''We don't sit around and say, 'Woe is us.' But you have to ask how big
would we have been if we weren't subjected to illegal exclusionary behavior? That's worth a lot.''
With D-Day approaching, an eleventh-hour settlement seems the only way out for both sides. Otherwise,
Bill Gates can expect to make many other high-profile appearances to tout Microsoft's unfettered right to
design products as it sees fit. Only, next time the venue may not be a New York rally. It may be a federal
court.
By Susan B. Garland in Washington and Steve Hamm in San Mateo, with Mike France in New York
YOU'RE THE NEXT TARGET, INTEL
When Intel CEO Andrew S. Grove hands over the reins to Craig R. Barrett in May, he may pass on
something Intel had hoped to avoid: a federal antitrust action. BUSINESS WEEK has learned that as early
as June, Federal Trade Commission staffers are aiming to present to the commissioners a proposed action
charging Intel Corp. with illegally using monopoly power to harm rivals and punish customers who cross the
chip giant. The agency is also probing whether Intel unlawfully uses its chip dominance to muscle into new
markets--an inquiry that could result in a separate action further down the road.
The Intel inquiry has many parallels to the Justice Dept.'s case against Microsoft Corp., the other half of the
''Wintel'' duopoly that dominates computerdom. As in the Microsoft case, there will most likely be a quick
surgical strike to halt anticompetitive behavior. Meanwhile, investigators probably will pursue a
wide-ranging probe of alleged monopoly abuses. ''You need to streamline. Otherwise you're heading off
into a Vietnam,'' says Stephen Calkins, a former FTC general counsel who teaches at Wayne State
University law school. Intel won't comment on the potential case. But the investigation differs in one major
way from the Microsoft probe: The FTC isn't under the deadline that the launch of Windows 98 placed on
Justice. So FTC lawyers are taking their time to ensure they have enough evidence to build a strong case.
Sources familiar with the FTC's investigation say it is initially zeroing in on charges that Intel retaliated
against two customers that sued the company in patent disputes. After the companies--Digital Equipment
Corp. and Intergraph Corp.--filed separate suits, Intel cut off chip supplies and technical information. That
didn't sit well with U.S. District Judge Edwin L. Nelson, who on Apr. 10 slapped an injunction on Intel to
stop such behavior toward Intergraph. Industry executives say the FTC probe is looking at how Intel uses
such intellectual-property ''blackmail'' to keep customers in line.
PRIX FIXE? The FTC also is sifting through complaints that Intel discourages computer makers who buy
processors from rivals. The company's most obvious weapon here is the famous Intel Inside marketing
program. The chipmaker paid out an estimated $1 billion in rebates last year to PC companies that use Intel
chips exclusively. Rivals call this practice exclusive dealing and charge that it freezes out competitive
products and allows price-fixing.
Industry execs who have worked with the FTC say it is also taking a careful look at Intel's growing control
over the basic design of PCs. Parts of the PC that used to be based on ''open'' standards are increasingly
getting superceded by Intel technologies, which the chipmaker usually has licensed for free to all comers.
But details about the latest innovation, the patented connector used in the Pentium II, are being kept secret.
That could shut out rivals like Advanced Micro Devices Inc. and National Semiconductor Corp. if, as
expected, motherboards designed for Pentium IIs become ubiquitous in PCs.
Another FTC concern: efforts by Intel to leverage its processor monopoly into other chip markets. Intel's
share in chipsets--the companion chips that work with the microprocessor--shot from 8% in 1993 to more
than 75% last year, while rivals such as VLSI Technology Inc. were driven out. Now, Intel is moving into
graphics and networking chips. Industry execs says Intel can force PC makers to buy these other chips by
bundling them with processors on Intel motherboards. The FTC might label that monopoly leveraging.
If the FTC decides to go ahead and pursue Intel, how will it fare? The agency isn't pushing any far-out legal
principles, and it has had a good track record lately with actions such as its blocking of the Staples-Office
Depot merger. Indeed, competitors claim its case may be stronger than Justice's Microsoft action. That's
not exactly the sort of kickoff that Intel's Barrett was anticipating.
By Andy Reinhardt in New York and Susan B. Garland in Washington
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