Justice Probes Microsoft’s Stake in Canadian Rival

The Justice Department is investigating Microsoft Corp.’s $135-million investment in Canadian rival Corel Corp., raising a new antitrust issue for the beleaguered software giant.

The Justice Department is examining whether Microsoft’s stake in Corel could thwart competition in key business software products--such as text editors and spreadsheets--that Microsoft dominates with a market share of more than 90%.

Antitrust investigators also might scrutinize whether Microsoft geared its investment to induce Corel to stop distributing Linux, a computer operating system that competes with Microsoft’s Windows.

The Justice Department’s broad 1998 antitrust suit against Microsoft already has yielded a federal court order that the company be split in two--an order that Microsoft has appealed.

Microsoft’s investment in Corel was sufficiently small--it purchased 24 million nonvoting shares, representing a 25% stake--that it did not automatically trigger federal antitrust scrutiny. But Justice Department spokeswoman Gina Talamona said the government often looks at smaller deals that raise antitrust concerns.

“This is not at all unusual,” Talamona said. “We do these kinds of reviews from time to time.”

Last month, the Justice Department ordered Microsoft to turn over internal documents related to its investment in Corel, a money-losing, Ottawa-based company that makes the once-dominant Word Perfect text editor. The department delivered a civil subpoena to Microsoft last month.

The review comes amid a management shake-up at Microsoft. Rick Belluzzo, head of Microsoft’s consumer business, was elevated to president, replacing retiring Chief Operating Officer Robert Herbold.

The investigation also comes as the Redmond, Wash.-based company readies its most significant product update since the introduction of Windows 95.

Later this year, Microsoft plans to introduce Windows XP. It will bundle an array of multimedia and Internet features--a move critics say appears to defy last June’s federal court order that Microsoft be split up.

The federal district judge, Thomas Penfield Jackson, found that Microsoft violated U.S. antitrust laws by using its flagship Windows operating system to muscle out its competitors in the market for Internet browsers and multimedia software.

“I think the [government is] going to depict this deal with Corel, and the other bundling initiatives announced with Windows XP earlier this month, as an indication of what can happen if the court doesn’t constrain the company,” said William E. Kovacic, a George Washington University law professor who has closely followed Microsoft’s antitrust travails.

The investigation, however, is unlikely to stop Microsoft’s quest to overturn Jackson’s decision.

The government’s subpoena is “a very narrow request for information, and we are prepared to cooperate . . . to get their questions resolved,” said Microsoft spokesman Jim Cullinan. “It doesn’t raise any legal issues” with respect to the giant antitrust case.

“This new Justice Department case is totally separate from the antitrust appeal,” agreed Robert Lande, a law professor at the University of Baltimore. But Lande said any finding that Microsoft invested in Corel to end its distribution of Linux would represent a “smoking gun” that could help the government’s antitrust appeal.

The landmark antitrust case is scheduled to be argued Feb. 26 and 27 before the U.S. Court of Appeals--a mostly conservative court where Microsoft thinks it might get a sympathetic hearing. And the Bush administration might not be as eager to pursue Microsoft as the Clinton administration was.

President Bush is expected to appoint Washington attorney Charles A. James, a Republican antitrust lawyer, to head the Justice Department’s antitrust division. Although James has expressed skepticism about the government’s case against Microsoft, he is expected to await the appeals court decision before initiating any shift in direction.