To all: BW take on tomorrow, a big day friends, the stakes appear to be high. Whoever wins has the inside track. Unfortunately for DOJ while they seem to have Judge Jackson in their back corner they cannot say the same at the DC appelate court whose rulings are considered secondary only to the US Supreme Court and whose previous rulings have been favorable to MSFT.
BUSINESS WEEK ONLINE
May 20, 1998
A QUICK INJUNCTION: "DECISIVE BATTLE" IN THE MICROSOFT WAR?
Edited by Douglas Harbrecht
Arguing that the release of Windows 98 will cause "irreparable harm" to consumers, the Justice Dept. wants to slap a quick injunction on Microsoft that would force the company to adhere to new ground rules. The injunction, says the government, would stop Microsoft from bullying rivals and business partners without halting the shipment of Win98.
On May 22, U.S. District Judge Thomas Penfield Jackson has scheduled a meeting to set a date for the
injunction hearing -- a confrontation that could very well determine who ultimately wins this showdown. "It will be a decisive battle," says George Mason University School of Law Professor William E. Kovacic. "If the Department of Justice wins, it will give tremendous leverage to their case. If the DOJ loses, they will be forced to march through the litigation swamp that tends to eat government lawyers alive."
The Justice Dept. and the coalition of state attorneys general that are suing Microsoft want Jackson to impose an injunction before June 25 -- the day that Windows 98 is scheduled to be sold in stores. But it's unclear if the judge will be able to act that swiftly. He has to give Microsoft time to answer the government's charges and to review what evidence will be used against the company. Then Jackson has to hold a hearing, after which he has to weigh the evidence and issue a ruling. According to New York City antitrust attorney Stephen M. Axxin, this process would ordinarily take 60 days at a minimum, much too long to beat the Windows 98 rollout.
According to court papers, the government plans to ask Jackson to prohibit Microsoft from striking deals with computer makers, Internet service providers, and Internet content providers that prohibit them from promoting the browser sold by Microsoft's chief competitor, Netscape Communications Corp. Second, it wants to give PC manufacturers more power to control the first screen users see when they turn on their computer, rather than Microsoft's own screen, which features the company's Internet content sites. Finally, it hopes to force Microsoft either to sell its Internet browser separately from Windows 98, or to include Netscape's rival product in the operating system.
To prevail, the Justice Dept. and state AGs will have to prove that they have a "substantial likelihood of
winning" the case, and that allowing Microsoft to sell Windows 98 will cause irreversible injury to consumers. Normally, that's a tough standard for the government to meet -- much harder than the legal standards that would be applied ultimately in trial. But in this case, the trustbusters have cause for hope. Judge Jackson has already shown a willingness to hit Microsoft with an injunction. In December, he ordered the company to stop requiring PC makers to take its browser as a condition of licensing Windows 95. "Justice does have a thumb on the scale, and it's Judge Jackson," says Ernest Gellhorn, an antitrust professor at George Mason.
Imposing an injunction in this case could be tougher than in the Windows 95 suit, however. Last year, Jackson was only asked to interpret the meaning of a contract: the 1994 consent decree struck between the Justice Dept. and Microsoft. This time he'll have to evaluate the merits of the government's underlying charges -- a much more complex task.
According to several antitrust experts, it's likely that Jackson will compromise by approving some, but not all, of the government's proposed remedies. If the Judge takes this path, says New York University antitrust
expert Eleanor Fox, it's most likely he would crack down on Microsoft's contractual practices. Of all
Microsoft's allegedly anticompetitive acts, they are considered the most vulnerable to government attack, Fox says. And unlike forcing Microsoft to bundle Netscape's browser into Windows 98, this remedy wouldn't be unreasonably disruptive to the market. "There's little cost to enjoining [the contracts]," Fox says. In contrast, "asking a judge to force Microsoft to carry the Netscape browser is a harder thing to do."
By Mike France in New York
--------------------------------------------------------------------------------------------------------------------------------And now back to making money
May 20, 1998
THE AFTERMATH: BUY MICROSOFT
Normally, if the Department of Justice and 20 state attorneys general file antitrust lawsuits against a company you would expect its stock to react. Indeed, the term "predatory and exclusionary" business practices calls up images of Standard Oil just before the monopoly built by John D. Rockefeller Sr. was broken up.
So what are institutional investors who own Microsoft doing in response to the news that it's on Justice's 10 Most Wanted list? They're buying. True, Microsoft's shares dropped $3.50 when the market opened on May 18. But that was almost exactly the same amount that the stock had gained four days earlier, when the market -- and the rest of the free world -- was led to believe that a Justice-Microsoft settlement was imminent. In fact the stock is now in the same $85 to $87 band in which it has been hovering for the past two months.
Investors who follow Microsoft closely see the chance to gobble up shares while the market continues to
digest the news. "The only ones selling the stock were the 12 guys who didn't know that the Department of Justice was going to file a suit," says Scott Schoelzel, manager of the Janus Twenty fund, which owns more than $300 million worth of Microsoft, according to public figures. The May 18 "selloff was an opportunity to accumulate shares."
Others agree. "I bought Microsoft," said hedge fund manager Jim Cramer on May 18. "And that's because of its good fundamentals." Indeed, few companies can match those. The Redmond, Wash., company pulled in $11.3 billion in sales last year, $3.5 billion of which ended up as net profit. The company's price to earnings ratio for projected fiscal 1998 earnings is currently around 55. That's more than double the figure for the S&P 500, but remember that this is a company with no debt and an ever-brightening revenue picture. On average, analysts are expecting Microsoft to earn $1.72 per share for the fiscal year ending next month, to be followed by $2.05 a share for 1999. Not a single estimate was changed as a result of yesterday's announcement, according to Zacks Investment Research.
The less-than-overwhelmed reaction probably reflects the fact that, of all the things the Department of Justice could have done, the suit filed yesterday was in fact a piece of good news. "I was happy when I saw that the worse case scenario didn't happen," says Rose Papp, the director of research at L. Roy Papp & Associates, which holds $5 million worth of Microsoft in its America Abroad fund. "No one is talking about breaking up the company anymore."
Neither is there fear that Windows 98, which is scheduled to be launched in June, will be held hostage by a
government injunction. Instead, the Department of Justice is calling for Microsoft to include Netscape's
Internet browser on Windows 98, to allow computer manufacturers to control what appears on the opening
screen of PCs they sell, and for Microsoft to annul any contracts which might include provisions that exclude a PC maker from doing business with a Microsoft competitor. Even if any of these actions were to occur, Microsoft wouldn't lose revenue from them: It still gives Internet Explorer away for free, after all.
Meanwhile, it will probably be years before there's a conclusion to the case. By then, Microsoft's business
focus will have already shifted away from Windows 98 to some new hot sector of the software industry. "I'll probably own Microsoft for another 10 years," says Schoelzel. "And by then this lawsuit will be of little interest."
The only significant effect the lawsuit will have on Microsoft's top line will be the legal costs of fighting both lawsuits at the same time the company is fending off legal assaults from competitors such as Sun
Microsystems. Schoelzel estimates that those costs won't be higher than $5 million a quarter. Montgomery Securities analyst David Readerman, who covers Microsoft for Nationsbanc Montgomery Securities, has estimated the costs to be closer to $100 million a year. But that's still less than 1% of Microsoft's annual revenue.
By Sam Jaffe
Markets Writer
BusinessWeek Online
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BUSINESS WEEK ONLINE
May 20, 1998
BEEP! BEEP! MICROSOFT HAS AN EYE ON THE ROADRUNNER
Roadrunner, Time Warner's budding cable Internet service, may soon have a new booster. Sources close to
the service say that software giant Microsoft is anxious to become a partner, and may invest as much as $500 million in the venture. Time Warner is currently negotiating with US West's Media One unit to merge
Roadrunner with US West's own Media Express Internet service. Microsoft would seek a 25% stake in the
combined venture, say these sources.
Roadrunner and Media Express have about 75,000 total subscribers, who use cable modems to attach to the
Internet service. The service currently reaches about 25% of U.S. homes through either Time Warner or
Media One cable subscribers, and has major presences in such cities as New York, Boston, Atlanta, Detroit
and Los Angeles. In all, the combined Internet service is available to about 27 million homes.
Microsoft's aims with such an investment aren't exactly clear. But Chairman Bill Gates gave some clues
when he spoke to the cable industry convention in Atlanta in early May. Gates stressed that cable TV's use of fiber optic wires gives it an advantage over telephone companies in delivering digital services.
Microsoft would almost certainly press to have its Windows CE software become part of any digital box that delivers the Roadrunner service, says one source, although it is unlikely that the software company would get an exclusive contract. Other companies, including Sun Microsystems and Oracle, have made similar pitches for Roadrunner's business.
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