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NEWS ANALYSIS : Gates Dealt a Humbling, but Instructive, Blow

TIMES STAFF WRITER

Even Bill Gates, chairman of Microsoft Corp. and the second-richest man in America, can’t win every time.

For years, Gates defiantly rejected allegations that Microsoft unfairly or illegally exploited its position as the dominant supplier of personal computer software. He barely concealed his contempt for the government lawyers who dared challenge his view of what was fair and good in the computer world. He all but vowed never to settle.

But when the Justice Department finally called his bluff Friday and prepared to file an antitrust suit, Gates blinked.

For the boyish billionaire, who started Microsoft in his college dormitory room and built it into one of the most powerful corporations in the world, Saturday’s agreement was a humbling personal setback. But industry analysts said it may show that Gates and his company are finally starting to grow up.

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“For Bill, Microsoft is a personal crusade,” says Esther Dyson, publisher of an influential software industry newsletter. “So of course he was very personal about this. When he speaks about Microsoft--and I think he’s gotten better about this, because he’s been trained--he basically says ‘I.’ ”

The antitrust investigation, begun by the Federal Trade Commission four years ago, was a hot button for the blunt-spoken Gates. He walked out of an interview with CBS’ Connie Chung when she raised the issue and reportedly yelled at an FTC official at a meeting last year: “You don’t know what you’re talking about.”

But on Saturday, “billg,” as he is known on electronic mail networks, reigned in the vision of unbridled capitalism that has earned him frequent comparisons to John D. Rockefeller and the industrial barons of another era. Analysts said he apparently decided that Microsoft would be better off agreeing to relatively modest restrictions rather than battle the government in a lawsuit that could last years. The specter of enduring an experience similar to the decade-long antitrust suit against IBM was one motivating factor.

“Gates isn’t the kind who would settle,” said Charles Morris, an industry consultant who co-authored a book on IBM. “But this probably seemed like a reasonable price to pay. Something like this can really tie you up. It was one of the factors that dulled IBM’s competitive instincts. It made them very wary of playing hardball with smaller firms.”

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Despite the new agreement, Microsoft’s business is likely to remain strong and the balance of power in the software world, at least in the short term, is not likely to change.

But it comes at a time when the Microsoft chairman’s ambitions have begun to move beyond the office computer, into homes and onto the much-heralded information superhighway. In an era when alliances and working with others appear more and more to be the key to survival, the Microsoft monolith is seeking a kinder, gentler image, observers said.

“Gates realizes he’s kind of won the desktop” battle, Morris said. “That issue is really over. Now he needs to stay focused on these other areas.”

With net worth approaching $8 billion Gates, 38, places second behind investor Warren Buffett in the ranking of the nation’s richest individuals. And with his company’s $3 billion in cash reserves, he is considered an extremely potent player in the “mega-industry” being created by the convergence of computers, telecommunications and entertainment.

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Gates is planning to enter the satellite phone business, funding new companies in fields ranging from digital imaging to biotechnology, and pushing hard to make Microsoft a force in electronic publishing. He is also making overtures to the entertainment industry and has been holding discussions with Hollywood powerbroker Michael Ovitz.

Along with John Malone, Barry Diller, and corporate titans including AT&T; and Time Warner, Gates is in fact one of the key forces to be reckoned with in the new information age--and Saturday’s settlement won’t alter that. But it may dull the fear that has at times run rampant even among Microsoft’s prospective partners, who question the firm’s legendary hardball tactics.

Microsoft, whose systems are installed on more than 120 million computers worldwide, has dominated the personal computer since IBM agreed to license the company’s operating system--known as MS-DOS--for its first personal computers in the early 1980s. But as the market has matured, products such as word processors and accounting programs--a big part of Microsoft’s business--are rapidly becoming interchangeable, with a wide range of companies offering similar software.

The result is that prices have been falling and profit margins squeezed.

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Now, Microsoft hopes to provide more software products for higher-end computers. It is in these markets, where the firm has yet to gain a foothold, that the consent decree may have more impact than it will in Microsoft’s current business.

At the same time, the company is making a big push into the home entertainment area. Microsoft has a new multimedia publishing division, and hopes to dominate the market for the sophisticated set-top boxes that consumers will need to interact with their televisions and unscramble their 500 channels when the superhighway reaches their homes.

Hated and feared by nearly all its software industry competitors, Microsoft is looking to shed its Darth Vader image as its products move into the lives of families, where being a respected corporate citizen and good marketing can matter as much as writing superior computer codes.

In a move that may have foreshadowed this weekend’s conciliation, Microsoft last month decided not to appeal a court decision that awarded $120 million in copyright infringement damages to tiny Stac Electronics Inc., agreeing instead to take an equity stake in the Carlsbad, Calif.-based software maker and license the firm’s technology.

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Gates has also mellowed personally. He recently married a Microsoft executive and has begun to contribute to charities and academic institutions. And the bespectacled, eccentric computer jockey has become something of a celebrity, his face plastered on magazine covers all over the world.

Still, analysts said Gates’ new stance makes sense for the company economically as well as for its image. “Fundamentally, Microsoft’s power didn’t depend on these practices,” Dyson said. “And whatever happens to Microsoft, it’s the market rather than the legal system that’s going to be the more important factor. Legal systems are about what you have done. Markets are about what you’re going to do.”


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