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U.S., 20 States File Antitrust Lawsuits Against Microsoft

TIMES STAFF WRITERS

In one of the sharpest legal attacks on big business in this century, the Justice Department and 20 states alleged in two antitrust lawsuits Monday that software giant Microsoft Corp. had engaged in an unlawful campaign to eliminate its competition.

Atty. Gen. Janet Reno charged that the company has developed a “chokehold” on the market for Internet software, illegally using its monopoly power to restrict consumer choice.

Microsoft forces computer manufacturers, the federal suit charges, to buy its Internet software as a condition of obtaining its flagship Windows operating system, which runs roughly 90% of the world’s personal computers. If the government wins its case, Microsoft would be forced to drop its Internet software from its Windows system or include a competing program.

Although the immediate issues in the legal battle surround Microsoft’s browser, the suits’ longer-range effect could rein in the company’s ambitious goals to dominate a broad range of software products. The approaching legal battle--which could drag on for years--also carries enormous economic stakes, given Microsoft’s pivotal role in U.S. leadership of the computer industry.

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Because nearly half of all Americans own a personal computer at home and almost as many surf the Internet, the broad punitive action sought by the government against Microsoft could throw the burgeoning computer industry into turmoil and send ripples throughout the U.S. economy, experts say.

The computer and communications industry has dramatically transformed the nation’s economy in the last decade, accounting for more than 8% of the national output of goods and services--or about $660 billion a year.

Microsoft Chairman Bill Gates, who aggressively built his company into one of the most admired and feared forces in high technology, vowed to fight the government and portrayed the suits as a threat to far more than his corporation.

“This is a step backward for America, for consumers and for the personal-computer industry that is leading our nation’s economy into the 21st century,” Gates said from Microsoft headquarters in Redmond, Wash.

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Investors registered their own qualms Monday, sending Microsoft shares down $3.38, to close at $86.06 on the Nasdaq stock market.

“There has been some apprehension among investors associated with this lawsuit,” said Rick Sherlund, analyst at New York investment bank Goldman Sachs. “These are big issues, strategically, over the long term. Whatever the court decides on the preliminary injunction is what we have to live with for several years.”

Experts were sharply divided over the strength of the government’s case, some saying its legal arguments have shortcomings and others warning that prolonged litigation will hurt Microsoft whatever the outcome.

“Today’s Justice Department action is but the opening salvo in what I believe will be one of the most important antitrust cases in modern times,” said Sen. Orrin G. Hatch (R-Utah), chairman of the Senate Judiciary Committee and a strong critic of Microsoft. Just as in the historic Standard Oil antitrust case early in this century, when oil magnate John D. Rockfeller’s riches ranked supreme, Gates’ phenomenal success has made him by far the wealthiest American--worth $46.2 billion. The price drop in Microsoft shares on Monday, however, cut the value of Gates’ 20% share of the company by $1.8 billion.

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As evidence that Microsoft engages in anti-competitive practices, the federal suit cites various internal memos and e-mails that suggest the firm had a strategy to use its market power to defeat rivals. The government also contends that Microsoft attempted to enter a secret illegal deal with its main rival, Netscape, to divvy up the market.

“The lawsuit we have filed today seeks to put an end to Microsoft’s unlawful campaign to eliminate competition, deter innovation and restrict consumer choice,” said Justice Department antitrust chief Joel Klein. “In essence, what Microsoft has been doing, through a wide variety of illegal business practices, is leveraging its Windows monopoly system to force its other software products on consumers.”

The 53-page complaint and 71-page supporting memorandum, filed in U.S. District Court in Washington, seek a preliminary injunction that would force Microsoft to include the Internet Web browser of archrival Netscape in any Windows 98 operating system upgrade that also contains Microsoft’s own Web browser. Alternatively, the Justice Department said Microsoft could offer consumers a version of Windows 98 without any browser at all.

Gates called the government’s request outrageous.

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“It’s like telling Coca-Cola it must take something out of its [soft-drink] formula,” he said.

Nevertheless, Microsoft began shipping Windows 98 to computer makers for sale to consumers starting June 25. Microsoft makes an estimated $45 for each copy of Windows shipped on a computer.

The government also asked the court to bar Microsoft from enforcing contracts that block online service providers who offer Microsoft’s browser to their customers from also offering alternative browsers.

The government’s request for a preliminary injunction also seeks to give PC makers more leeway in determining the first image computer users see when they turn on their machines. Currently, users are greeted with Microsoft’s Windows logo.

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The states’ lawsuit, filed in the same court as the federal suit, mirrors the federal action. But it also asks the court to order Microsoft to include at least a third browser alternative in Windows 98.

The states, along with the District of Columbia, also object to how Microsoft markets its Microsoft Office suite of business software. They ask that the court bar Microsoft from charging computer makers for Microsoft Office based on every computer they make, regardless of whether Office is actually installed.

Neither the states nor the federal government has asked the court to halt distribution of Windows 98. But any preliminary injunction could force some computer makers to offer coupons or rebates to consumers if the court orders Microsoft to alter the configuration of Windows 98.

But government officials said they want consumers to have more choice over the kind of software they use to navigate the Internet--the worldwide computer network that is fast becoming a conduit of entertainment and information for businesses and consumers around the world.

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The government noted that Microsoft is so feared and powerful that even some companies hurt by Microsoft’s business practices are reluctant to speak out for fear of retribution.

The federal government’s case against Microsoft rests largely on allegations of illegal product “tying” in which the company bundles its operating system software along with other products.

Using excerpts from e-mails, interviews and depositions of Microsoft executives, including Gates, the government alleges that Microsoft concocted an aggressive scheme to use Windows to win broader market share for its Internet browser and crush Netscape.

The government says the campaign started during a May 1995 meeting between Microsoft and Netscape officials, in which Microsoft allegedly offered to divide the browser market with its rival. Netscape officials say they refused.

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Microsoft has consistently denied that account of the meeting.

In another episode, the government cites an electronic mail message from Gates expressing concern that computer makers were installing non-Microsoft browsers “in a far more prominent way than . . . our own Internet browser.” Gates said that practice interfered with Microsoft’s “very, very important goal” of “winning Internet browser share.”

Robert H. Bork, a former federal judge who is advising Netscape, said such admissions by Microsoft officials convey the message that the Justice Department has a strong evidentiary case against Microsoft.

But other experts believe the department may be overreaching in the look and functionality of its software.

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“The Department of Justice has a difficult case to prove,” said Rob Enderle, a technology-industry analyst at Giga Information Group. “A lot of this lawsuit is touchy-feely. I don’t think the DOJ has really presented evidence that consumers have been hurt.”

* BROAD IMPACT: Few companies would escape effects of the antitrust suit. D1

* NEW TARGET: Intel Corp. may be the government’s next antitrust target. D1

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

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The Government vs. Gates

BIG ANTI-TRUST BATTLES: HOW MUCH OF THEIR MARKETS THEY HAD

How Microsoft’s market share compares to that of other major anti-trust targets.

MICROSOFT: 90% PC operating systems in 1998

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IBM: 65% Mainframe computers in 1982

AT&T;: 90% Long-distance service in 1983

STANDARD OIL: 90% Oil refining in 1910

Source: Times files and wire reports

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Researched by JENNIFER OLDMAN / Los Angeles Times


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