Microsoft Averts Legal Collision, Agrees to Talks
An expected showdown between Microsoft Corp. and federal and state antitrust officials was abruptly forestalled Thursday as the company signaled a last-minute willingness to negotiate a settlement to charges it illegally stifled competition in the software industry.
Sources on both sides said Redmond, Wash.-based Microsoft and government officials agreed to hold settlement talks starting today and continuing at least until Monday. At least one top Microsoft official was flying to Washington to participate.
In the meantime, Microsoft agreed to delay shipments of its Windows 98 operating system upgrade to computer manufacturers--scheduled to begin today-- until Monday at the earliest. Microsoft officials said the delay would not affect plans to start offering Windows 98 to retail customers June 25.
In return, the federal government and at least 20 state attorneys general will withhold the filing of a broad-ranging antitrust lawsuit that was expected Thursday.
Microsoft shares fell as low as $85.81 early Thursday before rebounding to close up $2 at $88.94 on Nasdaq. The stock traded as high as $91. Thursday’s events suspended what was widely expected to be a historic confrontation between a broad coalition of government regulators and the world’s most aggressive and successful marketer of personal computer software.
Sources indicated that Microsoft appeared poised to offer “significant” concessions in its marketing and software-design practices to address regulators’ and rivals’ charges that the company uses its domination in PC operating software to force manufacturers and customers to use its other products.
These concessions may include allowing computer makers to offer customers Internet Web browsers manufactured by rival companies instead of Microsoft’s proprietary Internet Explorer; allowing manufacturers to interpose their own graphical interfaces, or opening screens, before Microsoft’s appears after the computer is turned on; and giving manufacturers more latitude in determining the character and content of the Windows screen.
Thursday’s events appeared to be the climax of a lengthy game of brinkmanship. As late as Wednesday night, state and federal officials were prepared to file their lawsuit in federal court here Thursday morning. Instead, they abruptly canceled a press conference announcing the move and later issued a statement confirming the settlement talks.
A Microsoft spokesman said the company had been in talks with government officials for several days and made “significant proposals” last week. “This is not an eleventh-hour negotiation,” said the spokesman, Mark Murray. Only on Thursday morning, he said, did the two sides feel they had reached a “conceptual agreement.”
Although Microsoft General Counsel William Neukom was flying to Washington to conduct face-to-face talks with federal antitrust chief Joel Klein and the attorneys general of New York, Wisconsin and Texas, Murray cautioned: “This is not a done deal by any means. We aren’t celebrating yet.”
At issue in the federal government’s latest legal campaign against Microsoft are allegations that the company uses its dominant position in personal computer operating systems--such as Windows 98 and its predecessor, the enormously popular Windows 95--to quash rivals in other software sectors.
The government’s case specifically concerns Microsoft’s proposed integration of Internet Explorer, an Internet Web browser, into Windows 98.
Critics say that could destroy the market for competing browsers, especially Netscape Communications Co.’s Navigator, and give Microsoft a monopoly on access to the Internet. That is important because Internet use is expected to be a leading driver of growth in computer sales over the next several years.
Windows 98 is a slightly enhanced version of Windows 95, one of a family of Microsoft programs that run on more than 90% of personal computers worldwide.
Legal observers say the pressures to settle out of court are strong on both sides.
“For Microsoft, the concern is that an antitrust lawsuit would be a huge distraction,” said Samuel R. Miller, an attorney who led the Department of Justice’s previous antitrust suit against Microsoft, which resulted in a 1994 settlement. “It would put a cloud over potential innovation in Windows 98 if there is a risk that a court would say you can’t include” something.
For the Justice Department, he said, “there is a risk of getting bogged down in an IBM-type judicial Armageddon that diverts resources, including those needed for merger reviews.”
Many legal experts say the government’s chances of prevailing at trial are uncertain, as are the prospects that a court would allow the government to dictate what programs can be marketed by software manufacturers, and how. “They are pushing the envelope of antitrust jurisprudence when they talk of what technology should be integrated into the operating system,” Miller said.
Whether Microsoft’s apparent blink will eventually yield a settlement acceptable to all parties remains unclear. Those parties include not only the state and federal regulators but also software and computer manufacturers across the commercial spectrum--many of whom have mutually contradictory interests.
Others are skeptical that the software giant will voluntarily repress its legendarily ruthless marketing culture.
“They are not likely to concede anything that fundamentally erodes their monopoly position,” said Gary Reback, a former attorney for Netscape and one of Microsoft’s most prominent critics.
Some critics also contend that Microsoft has a long history of offering last-minute settlements that tend to work to its own advantage. These include the 1994 consent decree that settled earlier antitrust charges against the company but did little to weaken its stranglehold on the software industry.
State officials involved with the lawsuit warned that they would be on the lookout for loopholes in any proposed settlement. “Ultimately what we’re looking for is some assurance that the market will continue to be free and open to innovators so that the future Bill Gates can do what the current one did,” said Tom Landess, a spokesman for the attorney general’s office in Columbia, S.C., referring to the founder of Microsoft.
Expectations of an antitrust battle of unprecedented scale have been building since October, when the federal government charged Microsoft with violating the terms of its 1995 consent order by requiring computer makers to include its Explorer Web browser in their machines.
The battleground quickly shifted to Windows 98. The operating system upgrade is Microsoft’s most important new product in years, although it is not expected to provoke anywhere near the marketing frenzy that accompanied the introduction of Windows 95 in August 1995.
Nevertheless, Microsoft Chairman Gates and other company officials have in recent weeks stepped up their rhetoric about the baleful impact on Microsoft and the U.S. economy of any attempt to halt shipments of the new program if it does not conform to antitrust standards, such as by including the Explorer browser.
“The effect would be profound and would ripple throughout the economy,” Gates said at a May 4 company “rally” in New York. Competitors noted in response that Microsoft itself had delayed the introduction of Windows 98 for several months earlier this year without any evident effect on U.S. economic growth.
Microsoft exerted potent political pressure on state and local officials through its marketing partners. The Texas state attorney general, for example, held off joining other states moving against the company in concert with the federal government after Texas-based computer manufacturers closely aligned with Microsoft, including Compaq Computer, urged him to stand aside.
Although Microsoft officials have long insisted that their policies conform to existing antitrust law and the terms of the 1995 consent decree, the company may have decided to cut its potential losses once it became clear that a lawsuit would be filed.
Times staff writers Karen Kaplan and Greg Miller contributed to this story.
* SOONER THE BETTER: A quick settlement would be good news for computer manufacturers and consumers. D1
