Prosecutors’ Focus Turns to Software-Bundling Strategy
As federal and state prosecutors mull over what punishment to seek for Microsoft Corp. in negotiations or before a judge, they will be paying close attention to the company’s most important new product this year: Windows XP.
The strategy behind that new operating system relies on the most important Microsoft tactic left unresolved by the appeals court ruling. That issue is whether Microsoft can bundle features with Windows to attack markets the company has yet to dominate.
On Thursday, the U.S. Court of Appeals in Washington kicked the issue of “tying” one product to another back to a lower court for new hearings as part of the landmark antitrust case.
A new judge will examine whether Microsoft illegally restrained competition by bundling its Internet Explorer browser into earlier versions of Windows. The appeals court also adopted a tougher standard for antitrust officials to show that Microsoft was illegally trying to extend its monopoly into new areas.
Windows XP was not part of the initial antitrust lawsuit. Due out in October, the program will include features offering instant messaging, a music and video player and software easing Internet commerce.
State attorneys general, who are joined with the Justice Department in suing Microsoft, might use Windows XP as evidence of the company’s ongoing predatory conduct. “The tying issue is an extremely important one,” said Iowa Atty. Gen. Tom Miller.
As the case nears the four-year mark, analysts say that if no settlement is reached, Windows XP might already have given Microsoft huge gains in new markets before the suit concludes.
Windows XP will ship with Microsoft’s improved instant messenger, helping it make inroads against AOL Time Warner Inc., which has the leading instant-messaging service.
The system will also prompt Web users to register for Passport, Microsoft’s service for authenticating who individuals are and what credit cards they use for online transactions. Microsoft says this will save consumers from filling out information forms each time they order online.
Attorneys general for some of the 18 states say they plan to bring the Windows XP strategy to the attention of the new judge handling the case. And they might seek changes in the way the system is packaged.
“The Passport services are those most at risk because they potentially create a barrier for others,” said analyst Rob Enderle of Giga Information Group. Using Passport is a requirement for participation in Microsoft’s e-mail, instant messaging and some other online Microsoft functions.
Once an online shopper fills out the information, he or she might be reluctant to do so again for a smaller authentication service that works only with non-Microsoft services. And Microsoft could press online merchants to accept Passport in exchange for customer referrals or access to the programming code needed to write applications based on Microsoft software.
Microsoft spokesman Jim Cullinan said the company has no plans to change any Windows XP offerings, including Passport. “We use it internally because we want to make sure you are who you are,” Cullinan said. AOL and other Web sites use their own authentication software.
“Windows XP, we believe, will meet the court of appeals framework for pro-competitive innovation,” Cullinan said.
The new judge handling the case might force Microsoft to accept other authentication programs. “That could be done by providing a much more open link between Microsoft and other products,” Enderle said.
If that doesn’t happen by the fall, some Microsoft competitors might take matters into their own hands, making new filings against Windows XP as part of the ongoing case or in a new suit.
“I don’t think they can ship Windows XP in its current form under the law,” said Mike Pettit, president of an anti-Microsoft alliance known as ProComp. “Somebody will try to enjoin” XP from being distributed, because it attaches unrelated services to a product, he said.
The seven judges on the Washington appeals court upheld the trial judge’s finding that Microsoft has a monopoly on desktop operating systems and that it illegally tried to preserve that monopoly. Among other things, they said Microsoft wrongly made it impossible for computer makers, who preferred Netscape’s Internet browser, to disable Microsoft’s Internet Explorer.
But the court made it harder for prosecutors to show that Microsoft broke the law by including its own browser in Windows. In order to prevail on that claim, the government will have to delve more into the browser market and demonstrate that consumers were harmed, not just competitors.
Enderle and some legal experts said that would be a tough hurdle.
But the state attorneys general said it was far from impossible. “The reports of the death of tying turned out to be greatly exaggerated,” said Connecticut Atty. Gen. Richard Blumenthal.
Some of XP’s other features are more likely to survive a legal challenge, analysts said.
Microsoft’s chief rival in media players is RealNetworks Inc., which has a distribution deal with AOL. RealNetworks professed Friday not to be concerned about Windows XP, noting that Microsoft has been bundling a media player with Windows for years.
RealNetworks spokesman David Brotherton said the company isn’t planning to head to court, even if tying is found.
And Microsoft might have an even better shot of succeeding with its bundling plans when it comes to instant messaging.
That’s because the biggest victim would be AOL, which has been accused of trying to monopolize the instant-messaging market. AOL has blocked efforts by Microsoft, Yahoo Inc. and other instant-messaging providers to allow their subscribers to communicate with users of AOL’s closed system.
“In light of the distribution and bundling strategies that Microsoft is employing, people will continue to seek out services they know and trust,” said Lisa Pollock, Yahoo director of messaging products.
Yahoo is working with Microsoft and other non-AOL companies to make all their instant-messaging services compatible.
Microsoft’s shares closed Friday at $73, up 26 cents, on Nasdaq.
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Times wire services were used in compiling this report.
