November 7, 2001

If U.S. government doesn't restrain Microsoft, other forces might

Author: JT Smith

- by Jack Bryar -

It's a split decision all around for Microsoft
this week. Several states broken off from a U.S. Justice Department-inspired
settlement of its antitrust lawsuit. In several critical markets around the world, consumers seem deeply divided about whether to boycott Windows XP or just steal it.

On the legal front, several states had met over the weekend and into Monday trying to negotiate changes to roughly a dozen items in the proposed Justice Department settlement. Vague and unenforceable language was a principal concern of
Iowa Attorney General Tom Miller, who acted as the coordinator between the various states. Other state AGs had signaled their willingness to settle, including New
York's Democratic Attorney General Eliot Spitzer.

By the time the hearing began Tuesday, the litigating states had been
into three camps
, those who accepted the proposed settlement, those
that were holding out for further adjustments, and those that saw the deal
as fundamentally flawed.

Half the states settled. New York's Spitzer announced
that his state would join North Carolina, Illinois, Wisconsin, Kentucky,
Michigan, Louisiana, Ohio and Maryland in approving a revised deal. Spitzer declared that thanks to the last minute negotiations, "We have
gotten a remedy proportionate to the findings affirmed by the D.C. Circuit."

Sources at Microsoft said that nearly all of his suggested changes were
flatly refused, and that Spitzer simply decided it was time to declare
victory. While there appeared to be few substantive revisions to the original
settlement, the negotiators did add language to cover Microsoft's activities
in the Internet services market. Sources suggested that this would restrict
Microsoft's ability to leverage its operating system to promote its .NET

Others doubted much had been accomplished at all. A Justice Department
lawyer called the alterations "clarifications, not substantial changes,"
and while the DoJ was prepared to sign onto the deal, many state AGs were not. In a public statement released on the state's
Web site,
Massachusetts Attorney General Tom Reilly declared that the
agreement had "enormous loopholes" and suggested that the agreement was
effectively worse than no remedy at all. According to California Attorney
General Bill Lockyer, negotiations among the states to present a common
front quickly degenerated from policy disagreements "into finger pointing."
Several AGs admitted they had been subject to intense lobbying by both
Microsoft and its competitors. Sun's Scott MacNeally had been especially
critical of the deal, calling it a "reward" for Microsoft's behavior. After
publicly soliciting
from on the state's Web site, Lockyer refused to sign the deal.

Massachusetts' Reilly, said that Kansas, West Virginia
and the District of Columbia were also refusing to settle. Connecticut
Attorney General Richard Blumenthal added that he was "reluctant" to sign
the settlement, saying his "present intention is to proceed in litigation."
Reportedly, Minnesota was also leaning toward rejecting the deal. Iowa's Miller had not signed onto the settlement either, but was reportedly
trying to engage in further negotiation. For its part, Microsoft made clear
it was finished. Microsoft attorney John Warden declared, "the settlement
process has come to an end," and mediator Eric Green predicted that several
of these states would ultimately sign on to the settlement as negotiated.

A number of the dissenting AGs were particularly bitter. West Virginia's
Attorney General Darrell V. McGraw Jr. said the settlement was "inadequate
on its face." McGraw said Microsoft was a unlawful actor that had "damaged
the economy, restrained innovation and ... has victimized thousands."
McGraw said it the Justice Department had engaged in an "intensive effort
to railroad this settlement through without any in-depth analysis" of its
affects on the software industry or consumers.

Massachusetts's Reilly said
the split was going to make it much more difficult for the remaining states
to proceed. "We're a small state, and we're up against a powerful and
very rich corporation," Reilly said. "It's not a position that you would
want to be in terms of resources, in terms of money," but that Massachusetts
would stand alone if necessary to protect consumers and smaller competitors. He added: "They might not have the money that Microsoft has, they may
not have the power that Microsoft has, but they deserve a fair shake."

Microsoft tried to put the best face on the split, saying "the fact
that so many states have joined the federal government in supporting this
agreement is a very significant positive step toward resolving these issues
once and for all."

However, even if one state proceeds to litigation, Microsoft could face severe additional penalties, and theoretically U.S. District Judge Colleen Kollar-Kotelly could overturn the re-negotiated deal. Kollar-Kelly scheduled hearings to consider whether the proposed settlement is in the public interest. The public will be able to comment during a
60-day period that should last until mid-January. The Department
of Justice will then publish and respond to those comments during the following
30 days, after which the court may ratify the agreement, or overturn it.

In either case, the proposed settlement will not affect any separate
litigation by the remaining states. However, that process would be unlikely
to begin before March.

No matter what the states ultimately decide, the company's troubles
are far from over. HP, IBM, and Sun Microsystems will almost certainly pursue
civil antitrust claims. Microsoft's troubles with European regulators may turn
out to be even more significant than its difficulties with U.S. officials.
Earlier this summer, European Commission launched
an investigation
into Microsoft's tying its Media Player into XP, accusing
the company of using nearly the same tactics it had used to destroy competition
in the browser market. Sources suggest that the EC could fine the company
as much as $2.5 billion.

The European press is clamoring for government intervention. France's
Le Monde newspaper has been typical of the European reaction, suggesting
that the settlement amounted to a new form of illegal protectionism. Noting that "the American Right Wing does not condemn monopolies," France's
Le Monde newspaper accused
the Bush administration of engaging in a form of "stock exchange patriotism."
It denounced the settlement as contrary to American principles of free
enterprise, and called it an approach that would weaken American economic strength.

Even more damaging may be the public's reaction, the combination of
bad economic times, market saturation, threats
of a public boycott
, and public
weariness with Microsoft's marketing tactics
is hurting the company
in the pocketbook. Normally well-tempered analysts have all but called
on consumers to pirate XP.

In many countries outside the United States, the official
version of Windows XP is doing something no Microsoft product has done
in a long time -- it is gathering dust on store shelves. For example, in
Australia, analysts suggest that Microsoft's multimillion dollar ad blitz
has resulted in sales of only about 250 copies to businesses and less than
2,000 copes sold nation-wide. Jim Lang, sales manager for Sydney's Computerland,
The Melbourne Age
, "I don't think we've sold a single copy. No one is making the move to XP."

And those that have, may be using pirated copies. According to European
newspapers, China counterfeiters had not only hacked around XP's "activation"
they were also selling copies for roughly $4 a CD
and dumping
them on the Asian market. In Malaysia and Singapore, pirate copies have been
for over a month
and selling like crazy. It's a sign that, if government
regulators fail to restrain Microsoft, consumers may do the job for them.

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