Justice Department Drops Effort to Split Up Microsoft


The Justice Department on Thursday abandoned its 16-month effort to split Microsoft Corp., saying instead it will seek a quicker but less dramatic resolution to the epic antitrust battle.

In a more conciliatory approach by the Bush administration, prosecutors said they will ask a federal court to impose restrictions on Microsoft’s business practices to prevent it from unlawfully using its monopoly power to hamper competition in the computer software business.

The government “is seeking to streamline the case with the goal of securing an effective remedy as quickly as possible,” the Justice Department said in a statement. The result should be “prompt, effective and certain relief for consumers.”


When the government filed suit against Microsoft in 1997, it launched one of the most serious antitrust cases in recent decades and threatened to alter the power structure of the then-burgeoning technology industry.

By sharply reducing the potential stakes, the government now is essentially accepting the industry’s status quo.

The turnabout comes as the industry is reeling from the steepest downturn in its history. But Justice Department officials gave no indication they took the industry’s condition into account.

The reversal also may suggest that the Bush administration will take a far less aggressive approach than the Clinton administration to regulating technology and other industries.

Attorneys for some of the 18 states that joined in filing the suit gave a lukewarm endorsement of the shift in strategy.

“It’s sort of a sprint to remedy,” said Iowa Atty. Gen. Tom Miller, who has been leading the coalition of states and the District of Columbia. A breakup plan could be resurrected “if there’s a [conduct] remedy now and it doesn’t work, or Microsoft violates it.”


As expected, the government also said it will not pursue hearings to show Microsoft violated additional antitrust laws by tying competitive products to its operating system software, which dominates the world computer market. The company’s market share is more than 90%. Microsoft has been found to have illegally coerced computer makers in a number of ways to preserve that monopoly.

Previously, officials had argued that Microsoft needed to be broken up because company executives would find ways around less onerous rules.

Stock Up 29% This Year

Several antitrust experts who have been following or are involved in the case said they were dismayed by the step.

“Microsoft continues to be in a very powerful position, as we see with their continued efforts to incorporate more and more technology into their operating system,” said Stanford University economist Garth Saloner, whose work has been cited by government lawyers in the case. “I suspect that at Microsoft headquarters, this will be seen as a sign that they can continue to embrace and extend in precisely the way they’ve done in the past.”

Others accused U.S. Atty. Gen. John Ashcroft of weakening the government’s bargaining position to produce a watered-down settlement that favors Microsoft.

“It’s naive in the extreme, as a matter of legal strategy, to make unilateral concessions at this juncture. One has to presume that this is part of a political calculation,” said Kevin Arquit, director of the Federal Trade Commission’s bureau of competition under former President Bush and an early architect of the government’s antitrust case.


Microsoft offered a muted reaction to the Justice Department’s decision. “We remain committed to resolving the remaining issues in the case,” said company spokesman Vivek Varma.

Shares of Microsoft dropped $1.72, or 3%, to $56.02 in Nasdaq trading Thursday, as investors worried the penalties might come in months and not years. But in one sign of the company’s return to dominance over the rest of the computer industry, its shares this year have risen 29%, the second-best among the 30 Dow industrials. By comparison, Hewlett-Packard Co., which sells computers using Microsoft’s software, is the Dow’s worst performer, having given up 44% of its value.

Some state officials and outside experts said the Justice Department was bowing to the reality of a recent opinion by a federal appeals court, which overturned a lower court’s breakup order.

The appellate panel found further hearings would be needed before such an extreme remedy could be implemented. Even that order wasn’t enough for Microsoft, which last month asked the Supreme Court to throw out the ruling that it illegally tried to maintain its monopoly.

“What the Justice Department is saying is, ‘Let’s not waste our time talking about a breakup and these other futile acts. Let’s move to the center and find an area of agreement,’ ” said Ernest Gellhorn, an antitrust expert at George Mason University. “It’s a very sensible move.”

Some in the Clinton Justice Department, who had made the Microsoft case their most visible fight, said the decision to abandon the breakup appeared reasonable.


“It was always our hope that there could have been a negotiated settlement, and perhaps the action today will facilitate a settlement,” said Eric Holder, second in command to former Atty. Gen. Janet Reno.

But as the slumping stock price suggested, the news wasn’t all good for Microsoft.

The Justice Department said it will examine issues that have arisen since the appeals court took the case, implying that it might target the new Windows XP operating system.

And openly throwing out the breakup option could suggest prosecutors felt negotiations were such a long shot that it wasn’t worth holding on to the threat.

“Even though they weren’t strong cards, they could have played them” in talks, said Giga Information Group analyst Rob Enderle. “I think they’ve given up on negotiations.”

Another complication was the first sign in a year of a rift between the federal government and the states, which took a harder stance in an earlier failed settlement attempt.

Justice said it will seek an order “modeled after” the now-vacated interim remedies that U.S. District Judge Thomas Penfield Jackson had imposed pending Microsoft’s appeal.


Those remedies included allowing the computer makers to modify the desktop appearance of Windows software and forbidding Microsoft to reward the manufacturers that acted to exclude Microsoft competitors.

But that might not be enough to satisfy the 18 states.

Iowa’s Miller on Thursday morning offered straightforward agreement with Justice’s decision, then felt compelled to issue a second statement.

“The states have agreed with the U.S. Department of Justice not to seek the breakup of Microsoft,” Miller said in the second release. “All other remedy options remain open to consideration by the states.”

California Atty. Gen. Bill Lockyer’s office echoed that more open-ended language.

New Rules of the Road

Jackson’s interim remedies weren’t as severe as they might have been because he was simultaneously ordering a breakup, said Lockyer spokeswoman Sandra Michioku. “There wasn’t as much of a focus on conduct,” she said.

Asked whether the states would continue on their own if they couldn’t get more than those restrictions, Michioku said, “It’s hard to predict that. We’ll face it as it arrives.”

Microsoft’s Varma declined to say whether the Redmond, Wash.-based company would accept the interim conduct remedies if that’s all it would take to end the case.


The two sides will return to court before a new U.S. district judge this month.

Officials said that will be too late to change at least the initial shipments of Windows XP, a product that is expected to solidify Microsoft’s software dominance.

That system has been faulted because it comes bundled with Microsoft’s audio and video player, the Passport authentication service for Internet transactions and Microsoft’s instant-messaging software.

Once new rules of the road are established, however, Windows XP machines that are sold later might be tinkered with by companies such as Dell Computer Corp. and Hewlett-Packard.

And some experts said carefully constructed remedies short of a breakup could have a profound effect.

Randal Picker, a University of Chicago professor who has written on the case, said the government should seek restrictions on Microsoft practices that parallel how the firm strong-armed computer makers.

For example, Microsoft could be forced to provide a stripped-down version of its operating systems and allowed to distribute extra features only on its Web site. That’s similar to what Netscape Communications had to do after computer companies, pressured by Microsoft, declined to make Netscape the Internet browser on their products.




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