Microsoft Actions Suppress Internet Rivals, U.S. Says

WASHINGTON — In a bold move meant to weaken Microsoft’s grip on the computer industry, the Justice Department on Monday accused the software giant of stifling competition on the Internet and urged a federal court to fine the company $1 million a day.

The action strikes at the heart of Microsoft’s multibillion-dollar effort to extend its dominance of the PC industry to the rapidly growing Internet, and could provide a boost to such rivals as Netscape Communications Corp. and Sun Microsystems Inc.

The Justice Department alleges that Microsoft has run afoul of a 1995 antitrust settlement by forcing computer makers to equip their PCs with its Web browsing software or risk being denied its Windows operating system.

“Microsoft is unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly and undermine consumer choice,” said Atty. Gen. Janet Reno.

But the department’s antitrust ambitions appear to be far broader. The department also asked the court to strike down non-disclosure agreements that Microsoft requires of its business partners. Officials said the agreements deter cooperation with investigators by requiring companies to notify Microsoft before responding to Justice Department requests.

“We have an ongoing and wide-ranging investigation,” said Joel I. Klein, assistant attorney general in charge of the antitrust division. He added that the request was meant to remove “any fear of intimidation or reprisal.”

Microsoft officials reacted with defiance, insisting that the company is complying with a 1995 settlement in a separate investigation that ended what many considered the Justice Department’s most important antitrust investigation of the last decade.

William H. Neukom, Microsoft’s senior vice president for law and corporate affairs, said the company is “operating in a completely lawful manner” and doesn’t plan to make any changes.

“It would be very unlikely for Microsoft to change the way it brings Internet technology to its customers,” he said.

Microsoft has 11 days to respond to the charges. Afterward, the U.S. District Court in Washington will decide whether a hearing is appropriate.

Analysts said Microsoft’s confidence is not surprising given the way the Redmond, Wash.-based software giant’s soaring profit and sales growth have been uninterrupted by antitrust probes that have swirled around the company since 1990.

Even if the fine and other aspects of the Justice Department’s petition are imposed--a matter to be decided by the court--the penalties could be little more than an annoyance to the company.

“It’s basically a fine of $1 million a day,” said John Girton, an analyst at Van Kasper & Co. in San Francisco. “In their 1997 fiscal year, they made [a profit] of $3.45 billion. It’s not a major blow.”

Wall Street seemed to agree. After falling as low as $127.50, Microsoft shares rebounded to close at $132.63 on Nasdaq, up 38 cents on the day, before the company reported its quarterly earnings.

Still, Monday’s move by the Justice Department adds to a growing anti-Microsoft tide. Netscape and others have gladly cooperated with antitrust regulators over the last year. Sun Microsystems recently filed a suit of its own against Microsoft. Even consumer advocate Ralph Nader recently went to regulators to bemoan Microsoft’s practices.

Microsoft is known best for its Windows operating system, which runs about 85% of the world’s computers. But browser software and other new technologies such as Sun’s Java programming language provide new ways to access information and run programs, threatening Microsoft’s monopoly. Sun’s suit accuses Microsoft of improperly adapting Java for Internet Explorer.

After initially being caught off-guard by the popularity of the Internet, Microsoft has spent billions of dollars to catch up.

The centerpiece of the company’s Internet strategy is Internet Explorer, a Web browser that competes with Navigator, the Netscape browser that is still by far the most popular software people use to surf the Web.

In its push to displace Navigator, Microsoft has given its browser away, offered incentives to Internet service providers and even struck a deal with archrival Apple Computer Inc.

But it was another Microsoft technique that caught regulators’ attention.

Microsoft officials acknowledge that the company requires PC makers to equip their machines with Internet Explorer if they want to license the Windows operating system. Because of Windows’ huge popularity with users, that leaves PC makers with little choice.

Microsoft and the Justice Department disagree, however, on whether this bundling violates a 1995 antitrust settlement. Microsoft officials argued Monday that Internet Explorer is not so much a separate product as an extension of the Windows operating system. Improving the operating systems, executives said, was clearly permitted in the settlement.

“A fundamental principle at Microsoft is that Windows gets better and makes the PC easier to use with each new version,” Microsoft Chairman Bill Gates said. “Today, people want to use PCs to access the Internet. We are providing that functionality in Windows.”

But Justice Department officials were unswayed by this argument.

“Internet Explorer is treated by the marketplace, consumers, manufacturers and Microsoft itself as a separate product,” said one Justice official, who asked not to be named. “They even talk about how they’re doing [against Netscape] in the browser wars. This looks like two products to us.”

Netscape officials were clearly pleased with Monday’s turn of events.

“All we want is a level playing field,” said Lori Mirek, senior vice president of marketing at Mountain View, Calif.-based Netscape. “Microsoft clearly has an operating system monopoly.”

Experts said Monday’s move by the Justice Department was uncharacteristically swift, with potentially far-reaching impacts on an industry that has as much influence over today’s consumers as oil and telephone service--industries that attracted regulators’ attention in previous decades.

“They’re setting the landscape for the next century in terms of electronic commerce and access to information,” said Garth Saloner, a professor of economics at the Stanford Business School. “When history looks back, the set of practices Microsoft has been engaged in will have dwarfed Standard Oil in scope and importance.”

Miller reported from San Francisco and Shiver from Washington. Staff writer Leslie Helm in Seattle contributed to this story.

* PROFIT GROWTH SLOWS

Microsoft profits rose 8%, held down by a write-off for its investment in WebTV. D11