Microsoft Talks Collapse
By JOEL BRINKLEY
May 17, 1998
WASHINGTON -- Negotiations between the Microsoft Corp. and state and federal justice officials collapsed on Saturday afternoon, apparently after the company's chairman, Bill Gates, ordered lawyers to withdraw earlier concessions. Justice Department officials said that they intended to file a sweeping antitrust suit on Monday.
A senior representative of the state attorneys general who were also involved in the negotiations said that several states would file their own suit on Monday unless Microsoft offered significant new concessions before then.
In a statement issued late on Saturday, the Justice Department said that discussions between Microsoft and the Justice Department and state attorneys general ended on Saturday without a resolution. "At this point, they are not expected to resume."
Microsoft, in its own statement, said that the company had made "a number of significant offers to address the government's concerns, but we cannot agree to their demands without undermining our ability to innovate for consumers."
"This impasse is disappointing," Gates said in the statement. "We worked hard to resolve this, but the government demands went too far with no basis in law, and most importantly were not in the interests of consumers."
Microsoft also announced that it would begin shipping Windows 98, its updated operating system, to computer manufacturers, on Monday.
A senior government official involved with talks said they fell apart "because Microsoft didn't put anything of substance on the table."
Microsoft, on the other hand, said that it had made "extremely far reaching concessions in the area of contracts with Internet service providers."
The federal and state governments had planned to file their antitrust suits last Thursday. The suits, which are described as being very similar, assert that Microsoft has used predatory pricing policies and contracts to extend its monopoly in computer operating systems to other areas of the computer industry, particularly the Internet.
They also challenge Microsoft's practice of bundling applications programs, especially its Internet Explorer browser for viewing the World Wide Web, with its Windows operating system, because they say it leaves companies that make similar programs with no viable way to compete.
Through last week, Microsoft had been in negotiations with the Justice Department and state attorneys general while also carrying out an ambitious lobbying and public relations campaign to stave off the litigation.
At the last minute on Thursday, as state and federal officials gathered in Washington to announce the filing of their suits, Microsoft offered new concessions that won the company a short reprieve. Principal among those concessions was an offer to negotiate whether computer makers would be allowed to determine some of the features that appeared on the Windows desktop, the main screen first seen by users.
In return for delaying the filing of the lawsuits, Microsoft delayed shipments to computer makers of Windows 98, its updated operating system, until Monday. The company had planned to begin shipping the software on Friday. It is scheduled to be sold by retailers beginning June 25.
Talks opened at the Justice Department on Friday and continued on Saturday in the offices of Microsoft's Washington law firm, Sullivan & Cromwell. Two senior government officials who were involved with the talks said that Microsoft, on order of Gates, had retracted some of the concessions it had put forward the day before.
"They said that, on reflection, Bill Gates had expressed an unwillingness to do what they had said they were willing to do before," one of the officials said.
Greg Shaw, a Microsoft spokesman, said: "Negotiations are fluid; proposals are put on the table and taken off the table. And when we saw their demands, it became clear to us that they were intended to benefit a competitor, not the public."
Entering the talks, Microsoft had said it was willing to negotiate some alterations in the terms of its contracts with computer manufacturers, primarily those that force manufacturers to take other Microsoft products along with Windows, the operating system that runs about 90 percent of all personal computers. And, government officials said, the company had initially offered to modify its policy of requiring manufacturers to display the default Windows desktop as the first screen that a computer user sees when the machine is turned on.
The two government officials said that Microsoft later backed away from its agreement to discuss relinquishing any control of the desktop.
"This is very important to us," Shaw said. "We have felt that PC users prefer to have the Windows experience out of the box. The government wanted to change that, and in essence, allow computer makers to take bids from software companies to win the right to that first screen."
A government official denied that assertion but said that the government did want to break Microsoft's hold on the default desktop. "We want to give computer manufacturers and consumers a choice of what appears on their screens," the official said.
Microsoft said that the government had "demanded that Microsoft give up its right to display a Web browsing functionality that is a core part of Windows, thereby making it hard for consumers to use these technologies."
Alluding to Netscape Communications Corp.'s Navigator browser, the Microsoft statement said that the Justice Department had "also demanded that Microsoft include Netscape's competing browsing software in every copy of Windows." Shaw called that idea "simply outrageous, over the top."
Shaw added that forcing the inclusion of Navigator "would be like telling Coke that they have to have three cans of Pepsi in every six pack."
Government officials said that including a copy of Netscape's browser with Windows was just one of several options offered to open up competition in the Web browser market.
The Justice Department's original complaint against Microsoft, filed last October, charged that the company had violated a 1995 consent decree by requiring computer makers to take its Internet Explorer browser as a condition of licensing Windows 95, thereby putting Netscape, Microsoft's principal competitor in the browser marker, at a severe disadvantage. Internet Explorer is even more closely integrated into Windows 95's successor, Windows 98.
In the negotiations, state and federal prosecutors also were intent on preventing Microsoft from continuing to bundle all manner of additional programs with Windows, including the company's new electronic program guide called WebTV for Windows, which allows computer users to see what's on television and certain Web sites.
The lawsuit prepared by the state attorneys general urges the court to separate this program, among others, from Windows 98. At the negotiating table, Microsoft's lawyers refused to budge on the bundling issue.
After the talks broke down on Saturday afternoon, Gates said: "Microsoft will continue to vigorously defend the right of every American company to innovate and continually improve its products for consumers. We cannot compromise on this principle." The company insists that integrating products in Windows is the key to innovation.
A senior government official who was briefed on the discussions said: "Some of the attorneys general got the feeling that Microsoft was just fooling around, trying to learn as much as possible about what we planned to do. They really failed to make any substantive offers. And we're not in the mood to be jerked around anymore."
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