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November 2, 2001 [WSJ.com]

Showdown: The Microsoft Case

riva.richmond@dowjones.com

Settlement May Not Put End
To Woes Afflicting Microsoft

By RIVA RICHMOND
Dow Jones Newswires

Microsoft Corp.'s settlement with the U.S. Justice Department, if approved by a federal judge, may end a historic three-year antitrust case. But the final chapter in a storied history of government probes into the software giant's competitive practices still hasn't been written.

"There's definitely going to be some peace for a while, but that doesn't say the battle is over," said Nicholas Economides, a professor at New York University's Stern School of Business who has closely followed the saga.

The Justice Department's case has roots that stretch back a decade. Those tendrils are wrapped tightly around practices that helped Microsoft, of Redmond, Wash., maintain and expand its overwhelming dominance of the software industry, and defeat rivals such as Netscape.

Whether the settlement will put an end to the heated disputes that resulted seems unlikely. Microsoft faces a widening investigation by European antitrust enforcers even as it resolves its conflict with U.S. authorities. It also faces the prospect of lawsuits from a number of companies, including Sun Microsystems Inc. and AOL Time Warner Inc., whose Netscape unit was at the heart of the U.S. antitrust case.

Under the deal presented to a federal judge in Washington, Microsoft would provide rival software developers with information allowing them to develop competing products and ensure those products work with Microsoft's Windows operating system. Microsoft also would allow three independent experts to work full-time on its premises to ensure compliance with the settlement's terms.

The first government probes into Microsoft's competitive practices began at the Federal Trade Commission in 1991, some 10 years after the company introduced its MS-DOS operating system and six years after it shipped its first version of Windows. The FTC's investigations of antitrust allegations ended in 1994 with no lawsuit filed against Microsoft.

But Justice picked up the ball, launching an investigation in 1994 that ended a year later with a consent decree. Under its terms, Microsoft agreed not to bundle products through contracts with computer manufacturers, but kept its right to expand the functions of its products, including Windows, in a kind of "technological bundling," said Mr. Economides.

Peace didn't reign long. In 1997, Congress began to consider Microsoft's alleged anticompetitive practices in hearings led by Sen. Orrin Hatch of Utah. Members of Congress heard testimony from the likes of Microsoft's Bill Gates, Netscape's Jim Barksdale and Dell Computer Corp.'s Michael Dell. Around this time, an alliance between Sun, Oracle Corp., International Business Machines Corp., Netscape and Novell Inc. formed to lobby for antitrust action against Microsoft.

In October 1997, the Justice Department charged Microsoft with violating the 1995 consent decree by bundling Internet Explorer, its Web-browsing software, into Windows 95. With this tactic, Microsoft sought to leverage its near-ubiquitous operating system to grab a dominant place for Internet Explorer at the expense of Netscape's browser.

The judge who presided over the case, Thomas Penfield Jackson, issued a preliminary injunction in December 1997 barring Microsoft from bundling Internet Explorer with Windows. That injunction was later voided by a court of appeals, which also decided in May 1998 that the 1995 consent decree didn't apply to Windows 98.

That line of recourse exhausted, the Justice Department, together with 20 states and the District of Columbia, immediately filed the broader antitrust case that the department now hopes to settle.

The case went to trial for 78 days, beginning in October 1998 and ending in June 1999. It resulted first in Judge Jackson's November 1999 "findings of fact," which leaned strongly in favor of the plaintiffs' legal arguments.

Settlement talks mediated by Judge Richard Posner began in December, but broke down on April 1, 2000. Two days later, Judge Jackson issued "conclusions of law," which found that Microsoft had illegally "tied" its Web browser to Windows to shield its operating-system monopoly and extend it into new markets. On June 7, the judge issued a remedy decision that called for a breakup of Microsoft into two companies and severe restrictions on its conduct.

Microsoft took the decision to the U.S. Court of Appeals in Washington, D.C. In June, that court unanimously reversed Judge Jackson's ruling that Microsoft be split in two, but slammed the judge for negative comments made about Microsoft to reporters outside of court. It ordered Judge Jackson removed from the case and said it would appoint a new judge to decide what penalties, if any, Microsoft should face.

In their ruling, the judges handed Microsoft a victory by rejecting the government's claim that bundling of the Internet Explorer browser with Windows was an illegal "tie" of two products meant to block competition. But the court upheld Judge Jackson's finding that Microsoft has a monopoly in the market for operating systems for Intel-compatible personal computers, a finding which Microsoft had contested. And the judges said they agreed that Microsoft had behaved anti-competitively and that those actions had contributed to the maintenance of its monopoly power.

In August, the appeals court named Judge Colleen Kollar-Kotelly to decide penalties in the case. In early September, the Justice Department and state antitrust enforcers said they wouldn't seek a breakup of the company, would drop the tying claim and wouldn't seek to halt the fall shipment of Windows XP, Microsoft's latest version of its operating-system software.

That move was designed to narrow the two sides' differences and make reaching a settlement easier -- an effort that received a major boost after the terrorist attacks of Sept. 11 as Judge Kollar-Kotelly ordered both sides to pursue talks in light of the attacks' effects on the U.S. economy. On Friday, a proposed settlement was announced.

Write to Riva Richmond at riva.richmond@dowjones.com


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