What Officials May Aim To Break Microsoft's Control Over PC Manufacturers
MAR 01,1999
By John R. Wilke, Staff Reporter of The Wall Street Journal
WASHINGTON -- State and federal antitrust enforcers would seek to break
Microsoft Corp.'s control over personal-computer makers if the government
prevails in the software giant's trial.
The effort could shift the balance of power in the PC industry, giving
manufacturers more freedom to offer software and online services they develop
or license from Microsoft's rivals. While the case could go either way, and any
ruling is sure to be appealed, evidence presented in the four-month-long trial
showed that even PC makers like Compaq Computer Corp. and Gateway Inc. faced
retribution if they offered software or other features that didn't fit with
Microsoft's plans.
If the government wins, one recommendation now being discussed centers on
pricing "transparency," which would force Microsoft to set fixed prices for
licensing Windows to PC makers and make other changes in its contracts, people
close to the case said. It is as simple as it is potent; Microsoft's current
terms are kept secret and allow the company to use Windows' prices and a
complex web of rebates to favor some PC makers and punish others, the
government alleges.
"Microsoft uses pricing as a club to force the PC makers to do what they
want, and that chain has to be broken," said one official involved in the case.
Any curbs sought by the government also would try to end Microsoft-imposed
restrictions on what computer users see when they switch on a Windows-loaded
PC. In the trial, the government has alleged that Microsoft used those screen
restrictions and pricing agreements with PC makers to block rival software,
such as Netscape Communications Corp.'s Web browser, Navigator.
A Justice Department official said any conclusions about punishment are
premature without knowing how, or how broadly, the judge will rule. All
"responsible" options are under review, this official said, ranging from a
forced restructuring of the company to compulsory licensing of Windows to rival
software firms to restrictions on its business practices.
But officials say that an overriding goal of any remedy package would be to
break Microsoft's hold over the PC makers. Microsoft wields considerable power
over these companies -- some of them many times its size -- through its
licensing contracts for basic Windows software, which runs about 90% of the
world's PCs.
Already, major PC makers are tugging at Microsoft's ties. Compaq and
Gateway, for example, are pushing into a widening range of Web-based services.
"Compaq is an independent company, and we'll make our own decisions on products
and services, and if they compete with Microsoft, so be it," said the company's
general counsel, Thomas Seikman. At the same time, he said, the company is
Microsoft's largest customer and remains a close partner.
Microsoft spokesman Jim Cullinan said Sunday that any discussion of remedy
is unfair and premature, because "the facts and the law show that the
government has not proven its case." He declined to comment on Microsoft's
pricing, but rejects the government's claim that Microsoft uses pricing to
punish some PC makers.
"As in any tough business negotiation, each side gives a little, and each
side wants to get the best deal," Mr. Cullinan said.
Some of the toughest negotiations occur over terms of Microsoft's secret
"market-development agreements," which spell out Microsoft's technical and
marketing demands and offer deep discounts for Windows if a PC maker agrees to
implement them. One major PC maker says, for example, that Microsoft takes
$7.50 off the unit price of Windows if PC makers agree to carry a "Windows"
logo on their machines and submit to certification by Microsoft's labs.
Changing Microsoft's relationship with PC makers already has been broached
by U.S. District Judge Thomas Penfield Jackson, who is hearing the nonjury case
and could accept or reject any government recommendation. Early in the trial,
Judge Jackson asked a witness whether in addition to individual PC buyers, PC
makers themselves could also be seen as "customers." Just last week, he asked
pointed questions about Microsoft's decision after the lawsuit was filed to
give PC makers more freedom to customize their products. He pointed out that
the new freedoms were granted at the company's "sufferance or grace" and not in
the formal contracts, which still forbid such changes.
The question of what restrictions might be imposed on Microsoft if Judge
Jackson rules against the company is getting greater scrutiny as the trial
winds down. Microsoft rested its defense Friday, beginning a court recess of
about six weeks, which will be followed by rebuttal witnesses and closing
arguments; a ruling is expected by summer. However, Friday's session appeared
to offer another setback for Microsoft, with the government scoring points in
an area in which it didn't expect to do well, because earlier in the trial the
judge had seemed skeptical about the issue.
The topic was Microsoft's alleged actions to undermine Java, Internet
software language that Microsoft saw as a threat to Windows. Robert Muglia, a
Microsoft executive, said instead that Microsoft was interested in cooperating
with Sun Microsystems Inc., Java's developer.
But his claims conflicted with internal documents presented by David Boies,
the government's lead trial counsel, including a 1997 memo by Bill Gates,
Microsoft's chairman.
Mr. Boies pointed out that Mr. Gates said in the memo that he was "hardcore
about NOT supporting" Sun's latest version of Java. Mr. Muglia tried to
explain, questioning what Mr. Gates meant by his use of the word "support."
But that triggered a frustrated outburst from the judge. "He does not like
the idea of supporting it," he said, shaking his head. "I don't think it could
be read another way."
The witness persisted, but before he could get very far into his
explanation, Judge Jackson had had enough.
"Stop!" he said. "There is no question pending!"
Later, after all the lawyers and spectators had gone, Judge Jackson was
alone outside the courthouse, waiting in the twilight for a ride home. "These
are good lawyers," he said with a smile, puffing on his pipe. "They've put on
quite a show."
Copyright (c) 1999 Dow Jones & Company, Inc.
All Rights Reserved.
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