Microsoft Reboots and Waits
Sunday, June 24, 2001
By Jonathan Krim and Alec Klein,
Washington Post Staff Writers
For software giant Microsoft Corp., a looming federal appeals court decision on whether it is an illegal monopoly that should be broken up could not come at a more crucial moment.
The company — which once seemed ready to be laid low by an army of hungry upstarts, its own strategic stumbles and its conviction last year on three counts of antitrust violations — is poised to be a larger force than ever.
A shakeout in the tech sector has weakened or eliminated many potential competitors. The company is ready to roll out a series of new, high-profile products this fall, including a video-game console and the biggest overhaul of its Windows operating system in years. And it is deploying an array of applications and services that aggressively move the company off the desktop, where it dominates, and onto the Internet.
Yet it is precisely the execution of this vision — leveraging the operating system to reach into more and more corners of the computing world — that led the government to bring its historic antitrust case.
Although legal analysts expect the appeals court to throw out the order to break the company in two, how it rules on the three antitrust counts on which Microsoft was convicted will chart a new course for the company, which could run the gamut from quick settlement to protracted legal battles to severe restrictions on how it does business.
"It's premature to say the behemoth is resurging," said Rob Enderle, an analyst in the Silicon Valley office of consulting firm Giga Information Group.
Microsoft continues to vigorously defend what it regards as its right and obligation to enhance its software virtually without limits. With pride, chief executive Steve Ballmer said in an interview last week that rather than being distracted by the unresolved antitrust case, the company has kept its focus on innovation and surged ahead.
Given that a federal appeals court is mulling the case — a ruling could come at any time — some analysts consider this a high-risk strategy. Many features of the new Windows XP operating system, such as applications for music and video, instant messaging, and Internet telephony, are incorporated in ways similar to how Microsoft integrated the Internet Explorer Web browser, which sparked the antitrust case in the first place.
"They're betting that even if they are forced to settle, they will have the 'freedom to innovate,' as they call it" and continue to extend the operating system, said Robert Litan, vice president and director of economic studies at the Brookings Institution, who worked in the Department of Justice on an earlier Microsoft antitrust action.
A big piece of the bet is Windows XP, which is scheduled to reach stores on Oct. 25 and which Ballmer calls the most significant advancement for the software since the release of Windows 95. In addition to being the crown jewel of Microsoft's recent efforts, it's a hoped-for catalyst for slumping sales of personal computers and related devices and software.
Windows XP has caused a storm of protest from Microsoft rivals, who claim that its deep integration of programs such as Windows Media Player show that Microsoft remains intent on crushing its competition. And prosecutors have taken notice.
"We continue to look at XP . . . and all those related issues, and I'm quite concerned," said Iowa Attorney General Tom Miller, who heads a loose confederation of 19 state attorneys general who joined the prosecution against the software company. "It looks like there's the possibility that history is repeating itself."
Last June, Judge Thomas Penfield Jackson ruled that Microsoft illegally bundled its browser — the software that allows users to surf the World Wide Web — with previous versions of Windows. He found that the company illegally attempted to carve up the browser market. And he found that through a variety of means, including bundling applications in Windows, the company has maintained an illegal monopoly in the market for operating systems.
Jackson ordered Microsoft to break itself in two: One company for the operating system and one for other applications. Jackson then put his order on hold so an appeals court could review the case, effectively freeing Microsoft from any restraints until the matter is resolved.
Legal experts point out that before Jackson ruled, Microsoft and the government came close to settling the case in a way that, had the talks not broken down, might well have prohibited Windows XP in its current form.
"XP pushes back all the previous boundaries" of bundling various applications into the central operating system, said Steven Salop, an antitrust specialist at Georgetown University who has done consulting for some of Microsoft's competitors in the past.
If the appeals court upholds the government on the bundling issue, "it becomes virtually impossible for Microsoft to justify XP," added Andrew I. Gavil, an antitrust expert at Howard University.
Would prosecutors seek to block shipment of XP, as it once considered doing with Windows 98?
Many analysts say it is unlikely that Charles James, the newly confirmed head of the antitrust division at the Justice Department, would seek such a penalty. In general, the Bush administration has expressed a preference for limited government interference in the marketplace.
"The landscape is different, with a different administration which has expressed a view that it will be less interventionist," said Nicholas Economides, a professor of economics at New York University.
Economides believes it more likely that the government would push for a settlement that involves "some type of contract restrictions that would prevent them [Microsoft] from writing exclusive contracts, where only Microsoft products are distributed. This is traditionally how antitrust cases are resolved."
Even if Jackson is upheld on ruling that Microsoft monopolized the operating system market, "the practical effect of reversal on other grounds . . . especially in the context of a new administration, would be a victory for Microsoft," said Jonathan B. Baker, an antitrust scholar at American University's law school.
Former members of the prosecution team disagree. They see the core of the case as the charge of maintaining a monopoly, and even if that is the only count that is upheld, the government has a strong hand to force significant changes in the way Microsoft does business.
In previous settlement talks, the government pushed hard to end the practice of bundling. They also sought several other concessions, among them calling for the company to:
Give computer manufacturers more control to alter the desktop, the opening screen that users see when they start Windows.
Not seek to impose its will by charging different computer makers different prices.
Provide equal access to the parts of Windows code that outside software developers need to make their products compatible with Windows.
Ballmer, however, sees those talks as ancient history and does not believe the company needs to change its relationships with computer manufacturers.
Yet many of the issues related to the relationship between Microsoft and computer manufacturers and others come into play with Windows XP.
That's because the new operating system eliminates icons for other applications from the desktop. Competitors fear the absence of the icons will make it more difficult to find non-Microsoft applications and could deprive computer makers of revenue from selling space on the desktop to third-party software makers.
"It is today unclear what it [Windows XP] will actually look like when it is ultimately shipped," said an AOL Time Warner Inc. executive who declined to be identified. "But obviously, for it to be a success, it needs to be compatible with how consumers use their PCs today. And at this stage it doesn't appear to be."
The AOL executive compared Windows XP to a television set that was designed to block rival programming.
"If you bought a new TV and took it home, and when you plugged it in you saw that it didn't work well with ABC, NBC and CBS, you may not be too pleased, right? That's the issue that Microsoft has to worry about in regard to Windows XP. That's the bottom line."
Microsoft strongly denies that characterization and claims that the power of XP is that it gives users choices in how the desktop is presented.
Another wild card that could affect settlement talks is the relationship between new federal prosecutors and the state attorneys general, who each filed suit against Microsoft.
"The state and federal governments might not be in as much agreement," said Stephen Houck, who was the lead trial attorney for the consortium of states in the case before moving to private practice.
Houck believes that the states might want to pursue the case, perhaps to the U.S. Supreme Court, even if federal prosecutors want to settle.
Finally, there is the issue of Judge Jackson himself. When the appeals court heard arguments in the case, it sharply criticized Jackson for comments he made inside and outside his courtroom that were viewed as biased against Microsoft.
If parts of the case are sent back to the district court, most legal experts said, a new judge will almost certainly be in the mix. |
