John, According to the WSJ, MSFT cannot bundle or integrate.
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December 12, 1997
Federal Judge Orders Microsoft
Not to Bundle Windows, Browser
By JOHN R. WILKE and DON CLARK
Staff Reporters of THE WALL STREET JOURNAL
A federal judge ordered Microsoft Corp. to stop bundling its Internet software with its widely used Windows computer operating systems, dealing at least a temporary blow to the software giant's plans to dominate one of the computer industry's hotly contested markets.
Judge Thomas Penfield Jackson's order bars Microsoft from requiring personal-computer makers that license its operating system to also accept its Web software. The ruling, a victory for the Justice Department, applies not just to the Windows 95 operating system but to its successors, an unexpectedly broad stroke that could cloud Microsoft's plans.
Links
<Picture: [Go]>Join the Discussion: What do you think of the judge's ruling? Would breaking Microsoft up be an unfair penalty? Or has the company simply proven too successful for its competitors?
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<Picture: [Go]>Computer Companies Tell How Microsoft Used Tough Tactics (Oct. 23) <Picture: [Go]>U.S. Charges Microsoft With Violating 1995 Accord (Oct. 21)
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<Picture: [Go]>See the Justice Department's October press release on the case.
Microsoft is locked in a battle to overtake Netscape Communications Corp. in the browser business, and its practice of bundling its Internet Explorer with Windows has helped it gain market share at a rapid rate.
The judge didn't find Microsoft in contempt of a 1995 consent decree, however. The Justice Department in October had asked for a $1 million-a-day fine, alleging that the Redmond, Wash., software giant had violated a provision that forbade Microsoft from leveraging its near-monopoly in Windows to benefit its other products.
Judge Jackson appointed a special master, Lawrence Lessig, an authority on Internet law at Harvard University, to review the case and report back to U.S. District Court in Washington, D.C., in May. The order is in effect at least until the special master makes his report and the court revisits the issue.
Government officials last night hailed the decision as a victory for consumers. "The important thing is that starting [Friday], choice will be restored to the market," said Joel Klein, assistant attorney general for antitrust. "No consumer should be denied the browser of their choice because Microsoft made their computer vendor an offer they couldn't refuse."
A Microsoft spokesman said, "We see this as a balanced decision. We are gratified with a number of provisions in the ruling." The spokesman noted that the judge didn't find Microsoft in contempt of the consent decree, adding that the company is confident the court would ultimately conclude that Microsoft's integration of the browser with Windows is good for consumers. He said it is too early to say whether Microsoft will appeal the ruling.
While the preliminary ruling is in effect, Microsoft is expected to be forced to change the terms of its licensing agreements so PC makers won't have to take its Internet Explorer Web software as a condition of buying Windows 95. Significantly, however, the ruling also applies to the successor Windows 98 program expected in April, which more fully integrates the Internet software with the operating system. Though the consent decree is ambiguous, many industry executives believed that Windows 98 wouldn't be affected by a ruling because the decree allows Microsoft to ship "integrated products."
Rick Sherlund, a Goldman Sachs analyst, speculated that Microsoft might be able to strip out the browser from Windows 98 and offer PC makers a choice of a stripped-down or integrated version. He said the change might not hurt Microsoft financially, because most PC makers are likely to voluntarily take the integrated product.
But the process could make it much easier for Netscape to win new agreements to distribute its own browser through PC makers. Mike Homer, an executive vice president at the Mountain View, Calif., company, said many of Microsoft's contracts with PC makers expire in the next three to six months. If PC companies aren't required to ship the integrated Windows 98 product, Netscape will have a much better chance. "This opens up whole new opportunities for us that Microsoft had been attempting to close," Mr. Homer said. "We think this is a great first step in the case against Microsoft."
The judge's ruling has implications beyond Internet software. Through the browser technology, Microsoft and Netscape have attempted to set standards that tie information services to the use of their software. Netscape's Mr. Homer argued that the ruling weakens Microsoft's ability to dictate those standards and cause content providers to shy away from making services that can be seen using Netscape's software.
"I think the impact is going to be astonishing," said Jeff Kingston, a San Francisco attorney who isn't party to the case but recently opposed Microsoft in another case. By ending Microsoft's influence over PC makers, he argued, it changes the market's competitive dynamics. "It prevents a substantial distortion of competition."
The judge's findings offer some solace to Microsoft. In the government's complaint, the court is asked to decide whether Microsoft violated the consent decree. But the judge noted that under precedent, the decree must be "clear and unambiguous," and any ambiguity must be resolved in Microsoft's favor.
Microsoft cited the language in the consent decree giving it the right to develop "integrated products," and that its combining Explorer with Windows represents such a product. The government argued that the two are separate, since they are packaged separately in retail stores and function independently. The judge said that Microsoft "has demonstrated, at the very least, the ambiguity of the term 'integrated product.' "
But the ruling at other points challenges Microsoft's unilateral right to determine how a separate product is defined, and hints that the government might have cause to challenge Microsoft's conduct under traditional antitrust law as well as the consent decree.
"Contrary to Microsoft's claim of absolute discretion to dictate the composition of its operating system software, it appears not unlikely, as a matter of contract, that Microsoft's 'unfettered liberty' to impose its idea of what has been 'integrated' into its operating system stops at least at the point at which it would violate established antitrust law," Judge Jackson wrote.
He said it is unclear what would distinguish Microsoft's other products, such as its dominant "Word" and "Excel" PC application programs, from being declared integrated under Microsoft's expansive reading of the 1995 agreement.
Adopting Microsoft's interpretation "would appear to render" the important antitying provision of the agreement "essentially meaningless," the judge found. Still, he wrote that the ultimate question -- whether Microsoft is actually violating the consent agreement -- remains to be decided. "Without the benefit of further evidence ... an attempt to answer that question would be premature."
The judge gave several months for the two sides to marshal their case, collect evidence and interview witnesses. The court would then consider further motions and the government's request for a permanent injunction.
The Microsoft spokesman said the evidence in the market suggests PC makers will continue to take the Internet software voluntarily. Since the introduction of Internet Explorer 4 in October, he said, PC makers have been allowed to use that version or its predecessor, and 75% voluntarily have used the new product.
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