Microsoft Agrees to Loosen Grip on Software Industry : Technology: Justice Department says the antitrust accord should spur competition and innovation, plus lower prices. Pact also applies to overseas market.
Ending the most important antitrust investigation of the past decade, the Justice Department announced Saturday that Microsoft Corp., the world’s largest maker of computer software, had agreed to end marketing practices that “choked off competition and preserved its monopoly position.”
Industry experts and government lawyers predicted that the settlement will increase competition and spur innovation in the software industry and lower prices for consumers. Its main beneficiaries will be other makers of software, such as IBM and Novell, who will gain openings to sell their products to computer makers.
More broadly, the settlement marks the first time that U.S. officials have coordinated an antitrust accord with the nations of the European Union. As a result, Microsoft must abide by the new restrictions on both sides of the Atlantic.
“Microsoft is an American success story, but there is no excuse for any company to try to cement its success through unlawful means,” said Assistant Atty. Gen. Anne K. Bingaman, who heads the antitrust division of the Justice Department.
Without admitting any wrongdoing, Microsoft officials said they agreed to a settlement late Friday evening to head off a threatened antitrust lawsuit that could have kept the company tied up in court for years.
Since 1990, federal antitrust lawyers have been investigating complaints that Microsoft had used its near-monopoly power in the software industry to force its products onto computer makers. Last year, it was estimated that Microsoft’s programs ran 80% of the world’s 150 million computers.
Many in the computer industry feared that Microsoft’s dominance--based on its near-monopoly, with MS-DOS and Windows, on the software that controls the basic functions of a personal computer--was irreparably damaging even large competitors while driving smaller software firms out of business.
Microsoft’s largest direct competitor, Novell Inc., applauded the settlement.
“Clearly, we see this as a victory,” said David Bradford, general counsel for Novell. “This has been a long effort by many companies for many years, and this decision today will provide consumers with increased choices and more innovative products.”
The agreement will be in force for six years. It must be approved by a federal judge, but both parties agreed to abide by its terms immediately.
It’s main provisions bar Microsoft from:
* Using volume licensing agreements on the sale of MS-DOS and Windows that effectively block out competitors.
* Imposing highly restrictive confidentiality agreements on software developers who create programs that work with MS-DOS and Windows.
* Entering into certain multiyear software licensing agreements.
The volume licensing practices were the centerpiece of the Justice Department’s complaint. MS-DOS and Windows are usually installed by the computer manufacturer, and Microsoft gained a competitive advantage by giving computer makers--such as IBM, Compaq and Dell--volume discounts on software.
In exchange, the manufacturers signed licensing agreements to pay Microsoft a fee for MS-DOS and Windows on each computer sold, regardless of whether that software actually was installed.
Government lawyers had contended that these agreements locked out competitors. If, for example, a buyer wanted different basic software for a new computer, the manufacturer would have had to pay for that software in addition to the MS-DOS/Windows fee it paid to Microsoft--a double royalty.
“Microsoft has used its monopoly power, in effect, to levy a ‘tax’ on PC manufacturers who would otherwise like to offer an alternative system,” Bingaman said. This is the kind of illegal restraint of trade that violates the antitrust laws, according to the Justice Department complaint.
The agreement “will prohibit the company from continuing to engage in monopolistic practices in the future,” Atty. Gen. Janet Reno said. “While the company fairly and lawfully climbed to the top of the industry ladder, it used unfair and illegal practices to maintain its dominant position.”
Lawyers for Microsoft called these agreements incentives to use their programs.
In a news conference Saturday, Microsoft officials said they have operated “in a perfectly legal fashion” but nonetheless agreed to make a “few reasonable accommodations” to end the federal investigation.
Microsoft has flourished by providing “good technology at low prices,” not because it has locked out its competitors, said Bill Neukom, the company’s vice president for law and corporate affairs.
Neukom also said he doubted that consumers would see much change from the settlement because the operating system accounts for only 1% to 2% of the cost of personal computers.
It also is not clear that manufacturers will necessarily want to change the terms of their contracts, he said. Since Microsoft’s products are enormously popular, the manufacturers may prefer to pay for a license that allows them to put the software on all their machines.
The additional provisions of the settlement will make it easier for Microsoft’s competitors by freeing them from restrictive agreements under which they were virtually unable to work with competing operating systems if they were developing software for Microsoft systems. The agreement also prevents long-term contracts that lock computer makers into some Microsoft products and require them to purchase a minimum number of products.
In 1981, Microsoft, which is based in Redmond, Wash., won the right to put its operating software on IBM’s first personal computer. Since then, MS-DOS and Windows have become the industry standard.
Saturday’s announcement symbolizes a new, more aggressive approach to antitrust law under the Clinton Administration. The Microsoft case was the most significant one to be pursued by the Justice Department since it ended antitrust suits against IBM and AT&T; in 1982. The case against IBM was dropped, but the case against AT&T; ended in a landmark settlement that broke up the Bell System and paved the way for a new era of competition in telecommunications.
In the previous Republican administrations of Ronald Reagan and George Bush, federal prosecutors eased off enforcement of the nation’s antitrust laws, arguing that government should not interfere in the market simply because more efficient companies were dominating an industry.
But Clinton Administration lawyers under Bingaman have countered that the government must police “unfair competition.”
“This historic agreement will level the playing field,” she said at a news conference Saturday at Justice Department headquarters.
The investigation of Microsoft began at the Federal Trade Commission four years ago but languished there. The Justice Department took over the case last year and was apparently ready to go to court.
But a trial could have been long and costly for both sides, and it is not clear that the government would have prevailed. Microsoft could argue strongly that its incentives and volume discounts were legal, even if they had the effect of hurting its weaker competitors.
“This settlement is everything we could have hoped for,” Bingaman said.
The High-Stakes Battle Over Software
Microsoft Corp.’s agreement with the Justice Department and the European Commission ends one of the highest-profile antitrust investigations ever. Here are some key elements in the drama:
THE AGREEMENT
* Microsoft required computer makers to pay a fee for each machine shipped even if it contained another software maker’s operating system. This allegedly gave Microsoft an advantage by forcing makers to pay two royalties if they wanted to use a competitor’s operating system. The agreement ends this practice.
* Microsoft required computer makers to sign lengthy contracts that often prevented customers from buying more advanced products. The government charged this discouraged new competitors. The agreement bans contracts longer than one year.
* Software designers who created applications using Microsoft’s operating system had to sign confidentially agreements precluding them from working with Microsoft’s competitors. That in effect tied the new products only to Microsoft. The agreement prohibit overly restrictive confidentially contracts.
* The deal with the Justice Department will have the force of law after it is approved by a judge. It lasts for 6 years.
THE IMPACT
* Will lead to greater competition and perhaps a broader range of products.
* May eventually lower prices for consumers.
* Could create confusion at the retail level and hard choices for consumers over what products to buy.
THE MARKETPLACE
* Microsoft has dominated the business for operating systems, which control basic computer functions, with its DOS and Windows products. Market share figures are for 1993. DOS: 39% DIS with Windows: 35% Macintosh: 9% Unix: 7% Others: 6% IBM OS-2: 3.5%
* Software dominance has kept Microsoft’s revenues and profits rising steadily. Revenues in billions of dollars ‘93: $3.75 billion
THE TIME FRAME
March 1991: Microsoft and IBM reveal that Federal Trade Commission has begun investigating both companies for potential anti-competitive practices.
April 1991: Microsoft says FTC investigation has been broadened to include nearly all of its operations.
April 1992: Microsoft Chairman Bill Gates says he is not worried about the FTC investigation and other legal problems as business booms.
February 1993: FTC Chairman Janet D. Steiger seeks a preliminary injunction barring Microsoft from using unfair tactics. But board deadlocks on taking action.
July 1993: Justice Department steps in to review the Microsoft complaint.
August 1993: FTC folds its inquiry, but the Justice Department officially launches its own people.
June 1993: Federal prosecutors say they are holding negotiations with Microsoft as they were close to filing a lawsuit.
July 1994: Microsoft avoids a lawsuit by agreeing with Justice Department and the European Community to end unlawful anti-competitive practices.
Source: Associated Press
