U.S. Faces Uphill Climb in Fight With Microsoft

After months of publicity, legal maneuvering and angry denunciations from Capitol Hill to Silicon Valley, the government’s antitrust case against Microsoft Corp. opens today in federal court.

Toiling for nearly a decade, federal antitrust authorities have spent millions of dollars to bring the case against Microsoft Corp., whose chairman, Bill Gates, is America’s richest man. Gates’ flagship Windows software runs more than 90% of the world’s personal computers, and critics say the software mogul is intent on extending Microsoft’s influence into nearly every aspect of American life.

Microsoft is already into Internet software, cable television, entertainment, retailing, travel and financial services. Next month, the Redmond, Wash.-based company is even set to introduce a $200 cordless telephone.

Experts say it will require draconian measures to head off Microsoft’s complete domination of the Information Age. Among other options, the Justice Department is said to be considering seeking a breakup of the software giant. And one expert working with the government has even pondered a proposal to force Microsoft to make public the source code for Windows, essentially “nationalizing” Microsoft’s core asset.

The government faces an uphill battle, however. Even if it wins at trial, the Justice Department and state antitrust lawyers face a lengthy and possibly hostile appeals process, beginning with the U.S. District Court in Washington. That court rebuked the government in May for seeking to block Microsoft from integrating its Internet Web browsing software into its newest operating system, Windows 98.

What’s more, a breakup of Microsoft could take a decade or more and might even draw opposition from Microsoft’s competitors, who have already expressed concern that the antitrust case may open the door for the entire software industry to come under government supervision.

“I have yet to talk to anybody who has an effective remedy for this case,” said Carey Heckman, co-director of the Law and Technology Policy Center at Stanford University. “It’s unlikely that the government could be more effective than the free market.”

But, Heckman added, Microsoft “could develop a massive amount of economic power if the government doesn’t police them.”

Microsoft Accused of Abusing Dominance

The government contends that Microsoft uses its dominance in computer operating systems to force PC makers and consumers to use other Microsoft products. The government’s case is strongly focused on the Internet, where it alleges Microsoft has attempted to use its Windows monopoly to drive archrival Netscape Communications Corp. out of the market for Internet browsing software.

Microsoft responds that Netscape lost ground in the browser market partly through strategic blunders and missteps. Microsoft says its business practices aren’t thwarting competition and innovation but rather are providing consumers with products that cost less and are easier to use.

To remedy Microsoft’s alleged unfair business practices, the government initially sought to bar the company from enforcing agreements that prevent PC makers, Internet service providers and others from choosing which Web browser they will distribute or promote: Microsoft’s Internet Explorer or the competing Netscape Navigator.

But some experts say that even if U.S. District Judge Thomas Penfield Jackson orders Microsoft to remove its browser from current and future versions of Windows, Microsoft’s sales or market share would hardly suffer. That’s because the factors that motivate PC makers to install Internet Explorer would remain unchanged: The browser would likely remain free; it would still be easily installed with Windows; and, since experts have praised its quality, customer demand for Microsoft’s browser likely would continue unabated.

But more recently, government lawyers have been considering tougher remedies. The Justice Department has indicated in recent filings and in discussions among its legal teams that it may seek stronger sanctions against Microsoft if it wins its case against the software giant. Such measures may include seeking a breakup of Microsoft into separate companies: one devoted to developing the Windows computer operating system and a second company that develops applications such as Microsoft Word and Encarta.

But even Microsoft’s opponents raise questions about that scenario. It took a decade, for example, to split up AT&T; Corp.’s telephone monopoly, and experts estimate it would take at least that long to split up Microsoft. In that length of time, however, the rapidly moving software business likely will have changed dramatically.

Government Weighs Imposing Sanctions

Government lawyers are also said to be studying whether to require Microsoft to more widely publish the critical technical details of its Windows operating system.

Independent software developers need details about the so-called application program interfaces (APIs) in Windows to create products designed to work with the operating system. These developers have long complained that Microsoft’s own programmers get more accurate and timely information about these specifications first, allowing Microsoft to bring new products to market faster than other software developers.

Such a sanction, however, would likely require ongoing supervision of Microsoft. The constant change that is endemic to the software business would likely fuel numerous disputes over sharing APIs. That would require more refereeing than any jurist could reasonably make time for. Judge Jackson could, of course, appoint an independent group of experts to supervise the sharing of technical information. But earlier this year, Microsoft successfully challenged Jackson’s attempt to have a special magistrate help sort out technical details of the Microsoft browser dispute.

Finally, one antitrust expert working with the government has pondered forcing Microsoft to auction off its Windows operating system to five or six companies. Windows would, in effect, be nationalized, and the winning bidders would acquire the right to continue development of Windows and license its use.

Although the expert said he has not formally proposed this and considers it a legal longshot, another antitrust expert, Ernest Gellhorn of George Washington University, said such compulsory licensing schemes have been used by the government in the past.

In a Justice Department antitrust suit challenging a restrictive pharmaceutical licensing agreement by drug maker Glaxo Group and several other companies, the U.S. Supreme Court ruled in 1973 that Glaxo could be forced to sell its products to others for resale or sublicensing to pry open competition in the pharmaceutical market.

“Mandatory selling on specified terms and compulsory patent licensing at reasonable charges are recognized antitrust remedies,” the court said.

But many experts say a public liquidation of Microsoft’s main asset poses serious legal problems.

“It is not an uncommon remedy for the government to require the divestiture of part of a business, but to take all of the property from an ongoing concern would seem to violate the Constitution,” said Tim O’Rourke, a Washington antitrust lawyer. “I just don’t see that happening here.”

Any of the stronger sanctions being considered by the Justice Department likely would require the government to amend its complaint, a step that would lead to a more protracted legal battle, which would allow Microsoft to release another generation of Windows products before the antitrust case could reach a conclusion.

Company Prepares for Court Battle

The specter of a broader case, together with possible tougher sanctions, has enraged Microsoft’s legal team, which asked Jackson to delay the trial for up to six months to allow Microsoft time to defend itself. In a recent court filing, the company referred to government efforts to “transform this case into an IBM-like ‘kitchen sink’ monstrosity,” referring to the government’s 13-year antitrust case against IBM that was eventually dropped.

Jackson refused to grant the request and the trial goes forward today, to the dismay of Microsoft supporters who characterize the government’s case as overreaching.

“The government’s pursuit of Microsoft . . . reflects bureaucratic hubris and represents a threat to innovation and consumer welfare,” said Microsoft legal consultant Charles Rule, who served as head of the Justice Department’s antitrust division during the Reagan administration.

Unlike almost all other antitrust disputes--where price and market dominance were the central issues--the Microsoft case has sparked a more fundamental concern about the company’s effect on innovation.

Although the dominant software maker, Microsoft has a reputation as a technology imitator, not an innovator. Products ranging from spreadsheet programs to Web browsers were created by other companies years before Microsoft entered those markets. And many fear few software innovations will reach the market if Microsoft’s dominance is not curbed by the government.

Also at stake is the credibility of federal antitrust enforcement, the limits of power in the Information Age and the future of innovation in one of the nation’s most financially and strategically important industries: information technology.

“If the government loses its case it will fuel the notion that Microsoft is invincible,” said Michael H. Morris, general counsel of Sun Microsystems Inc., an archrival of Microsoft. “It will change the psychology of the industry forever and make it tough to ever bring another case against them.”

In recent months, a host of frustrated Microsoft opponents, ranging from Sun Chief Executive Scott McNealy to the Software Publishers Assn. trade group in Washington, have offered remedies the Justice Department might use to rein in Microsoft.

But some have already resigned themselves to the notion that Microsoft will remain the software world’s top dog.

“I think you can rest assured that dominance is set for Microsoft for the foreseeable future,” said Andrew Schwartzman, executive director of Media Access Project, a Washington watchdog group on communications issues. “As far as this case is concerned, it may take legislation” from Congress to level the playing field.

Summary of Both Sides’ Arguments

U.S. GOVERNMENT

Antitrust authorities in Washington, D.C., and 20 states filed suit against Microsoft in May, accusing the software giant of unfair business practices to protect its monopoly in PC operating systems and to extend that monopoly to new markets. Among their allegations:

* In violation of antitrust law, it integrated its Web browser with Windows 98 in an effort to crush Netscape, its main competitor in the browser market.

* It prohibited PC makers from altering the start-up sequence of Windows 95 or Windows 98. It provided discounts or incentives to Internet service providers for favoring Internet Explorer over Netscape’s Navigator.

* It forced PC makers to license its browser as a condition of buying the Windows operating system.

* It’s executives made false public statements concerning future product features and anticipated shipment dates.

* It threatened other technology executives with blacklisting if they didn’t step back from plans to develop Internet software, even offering to illegally split the browser market with Netscape.

*

Microsoft Corp.

In its replies to the suit, the company says that it is not a monopolist, but an innovative and hard-working competitor. Among the arguments it plans to make during the trial:

* It couldn’t have bundled its Web browser with Windows to crush Netscape because Microsoft planned to add Internet features to Windows long before Netscape became a company.

* Its contracts with PC makers don’t illegally restrict them from customizing Windows, and it is willing to negotiate ways to alter Windows screens.

* Its contracts with Internet service providers aren’t “exclusionary” because they don’t block Netscape’s competing browser from being available to the public.

* Windows is not a monopoly, but instead competes against other operating systems made by Apple, IBM and others.

* Any new feature, such as the tight integration of Internet Expolorer with Windows 98, that offers technological advancement is legitimate, even if the underlying product does have a monopoly.

* The company argues that Windows 95 and Windows 98 are copyrighted works and as such are protected by federal copyright law, granting Microsoft rights that outweigh antitrust state laws.

Sources: Times and wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times

Antitrust Timeline

Key events in the antitrust confrontation between Microsoft Corp. and the U.S. government:

* June 1990: Federal Trade Commission secretly investigates possible collusion between Microsoft and International Business Machines Corp.

* Feb. 5, 1993: FTC takes no action against Microsoft after 2-2 vote of its commissioners.

* Aug. 21, 1993: U.S. Justice Department takes over Microsoft investigation.

* July 15, 1994: Microsoft and Justice sign consent decree that says Microsoft cannot require computer makers that license its Windows operating system to also license any other software product, but Microsoft may develop “integrated products.”

* Feb. 14, 1995: U.S. District Judge Stanley Sporkin throws out consent decree as too easy on Microsoft.

* Aug. 21, 1995: U.S. District Judge Thomas Penfield Jackson approves consent decree.

* September 1996: Government investigates possible violation of consent decree by Microsoft.

* Oct. 20, 1997: Justice Department asks a federal judge to fine Microsoft $1 million a day for allegedly violating the consent decree by bundling Internet Explorer with Windows 95.

* Dec. 11, 1997: Judge Jackson issues preliminary injunction against Microsoft, requires unbundling of Web browser from operating system.

* Jan. 22: Facing a certain contempt citation, Microsoft signs agreement giving computer makers freedom to install Windows 95 without Internet Explorer icon.

* May 12: Appeals Court rules that injunction against Microsoft should not apply to Windows 98, allowing Microsoft to proceed with launch of new product.

* May 18: Justice Department, 20 U.S. states and the District of Columbia file major new antitrust cases alleging Microsoft abuses its market power to thwart competition.

* June 23: Appeals Court overturns Windows 95 injunction, ruling that Jackson made both procedural and substantive errors.

* Aug. 27-28: Government lawyers depose Microsoft Chairman Bill Gates.

* Sept. 1: The Justice Department files new allegations that Microsoft used anti-competitive practices to throttle big-name competitors like Netscape, Intel Corp., Sun Microsystems Inc. and Apple Computer Co.

* Sept. 17: Jackson denies a request by Microsoft to limit the scope of the upcoming trial to a narrow set of issues laid out in the government’s original complaint.

* Oct. 7: The government says if it wins an allegation that Microsoft abused monopoly power that it may seek additional remedies against the software maker.

* Oct. 9: Jackson orders Microsoft to give the government access to its financial databases.

* Oct. 19: Trial set to begin.

Source: Times and wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times

Microsoft Glossary

Monopoly: A company that has such dominance in its industry that it has the power to dictate prices and limit competition.

Operating system: The software that governs a computer’s basic functions such as printing and storing files and running programs.

Windows: Microsoft’s operating system for PCs, which controls about 90% of all personal computers.

Application: A software program that allows computer users to perform specific tasks, such as word processors for writing letters.

Browser: An application, such as Netscape Navigator or Microsoft Internet Explorer, that allows computer users to view pages on the World Wide Web.

Bundling: The practice of making a product more attractive to customers by throwing in additional products or features for free.