unbelievable
Microsoft's Icon Demand Could Land XP in Court
By Joe Bousquin
Senior Writer
8/2/01 8:40 PM ET
Microsoft (MSFT:Nasdaq) has done something either very smart or very stupid. You decide.
This week, the software giant said that if computer manufacturers want to put icons from Redmond's rivals on the desktops of PCs using Microsoft's Windows operating system, they will have to include an icon for Microsoft's own MSN Internet service as well. While competitors such as AOL Time Warner (AOL:NYSE) routinely pay for the placement of icons on the PC desktop, Microsoft says it wants its icon placed free of charge.
That's the kind of tactic that previously got Microsoft in antitrust trouble, and could result in its upcoming software now being blocked. Or, it could be a shrewd, tough-minded maneuver that Redmond's playing skillfully.
Injunction Junction, What's Your Function?
Inside-the-Beltway folks are talking with increased seriousness about a possible government request for an injunction against Microsoft, one that would delay the release of its next-generation operating system, Windows XP, set for Oct. 25. The talk comes, in part, because of the MSN icon issue. Investors are starting to hear the chatter.
Erik R. Olbeter, an analyst with Schwab Capital Markets' Washington Research Group, issued a note Wednesday saying XP's release could be delayed by the company's stance on contracts with computer manufacturers.
"You could have the state and/or the Department of Justice petition the District Court to enjoin Microsoft from releasing Windows XP, and there is now a significant amount of talk in Washington of doing just that," says Olbeter, whose firm hasn't done recent underwriting for Microsoft.
In June, an appeals court unanimously upheld a lower court's ruling that Microsoft illegally maintained its monopoly in computer operating systems. But it also sent the case back to a lower court to figure out what actions, or "remedies," should be taken against the company.
Not All Icons Are Created Equal
Microsoft says it just wants to have equal play, and actually increase consumer choice, by having the MSN icon on the first screen users see when they fire up the computer.
"The issue can be boiled down to the fact that if there are going to be icons on the desktop, we just believe that there should be an MSN icon there as well," says Microsoft spokesman Jim Desler. He reiterated, by the way, that Windows XP will be ready for its Oct. 25 launch date.
A Case of the Stupids
But the icon move is surprising, in part because of a July 11 announcement, when Microsoft said it would give computer manufacturers, known as OEMs, more flexibility over what's on the desktop. The announcement was viewed as a concession that Microsoft was loosening its death grip on the desktop . But the subsequent MSN icon requirement turns that theory on its ear.
"Microsoft has certainly made it easier for their own supporters to abandon them by making this MSN announcement," says Mike Pettit, president of the anti-Microsoft trade group ProComp. "But anybody that has really studied the company for a long time knew the July 11 announcement on OEM flexibility was bogus in the first place."
The icon issue comes at a very delicate time. Not only have Microsoft and government officials been taking first steps toward settlement talks in the case, but Thursday, the appeals court denied Microsoft's request for a rehearing on certain aspects of the ruling against it.
In addition, privacy advocates have taken the company to task on its Passport identification service, also part of Windows XP, and Sen. Chuck Schumer (D., N.Y.) is seeking congressional hearings on supposedly anticompetitive parts of the software. In short, Microsoft is being watched liked a hawk.
Which is why the company's behavior is so perplexing.
"Why would Microsoft risk going to court for a preliminary injunction, which they certainly do, with this icon policy?" Olbeter asks. "Is it really that important?"
A Sudden Case of the Smarts
Unless, that is, the move is an extremely shrewd and calculated step on Microsoft's part.
Ernest Gellhorn, a law professor at George Mason University, says Microsoft could be using the icon as a way to get leverage in its settlement talks with the government.
Now that it's on the table, the company can back away from its icon at any time, gaining a conciliatory stance in the case. On the other hand, if the icon issue never incited controversy, Microsoft would have MSN on the desktop. Either outcome helps the company.
"That's what the two parties are doing: jockeying like crazy to get a settlement more favorable to its side," Gellhorn says. "They're sophisticated, smart people, and they make sophisticated, smart decisions."
That said, Gellhorn believes the government could win an injunction on the icon issue.
"Microsoft is arguably doing the very same thing it was held liable for in the Court of Appeals," Gellhorn says. "I think the government has a pretty good shot at getting interim relief."
It's Your Money
So, what does all this mean for investors? Well, for one, it shows that the company is characteristically playing hardball, trying to get XP out in a form that is as much to its advantage as possible. On the other hand, if an injunction is granted, the anticipated XP revenue, which is perhaps the most important part of the Microsoft investment story right now, is in potential jeopardy.
Says Schwab's Olbeter: "If Microsoft is no longer giving signals that they are going to avoid taking steps that could be viewed as violations, that makes it a more dangerous game."
Smart or stupid, that's the game Microsoft seems to be playing.
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