December 12, 2001

Microsoft theater: Will Senate hearings, rebel states accomplish anything?

Author: JT Smith

- By Jack Bryar -

The nine states opposing the original Microsoft settlement have proposed their own settlement. It's an uneven mix of good ideas and unlikely solutions. However, their proposals may get drowned out as the investment community rallies to protect their stock holdings. There are going to be hearings on the original Justice Department settlement by
the U.S. Senate, but the witness list has already been watered down and Microsoft
supporters have been telling media circles not to expect any news.

The nine rebel states have weighed in with a series of proposals to
cut Microsoft's monopoly down to size, and, potentially, eliminate it.
Last Friday, the rebel states and the District of Columbia filed a 40-page
document with U.S. District Judge Colleen Kollar-Kotelly outlining the
groups set of preferred remedies in Microsoft's long-running antitrust
case.

On the face of it, the state's proposed remedy (now
online in PDF
) is a mixed bag of common sense and long-shot proposals.

Among the provisions is a suggestion that Microsoft produce versions of its office suite for other OSes such as Mac
and Linux. How a settlement of this sort could guarantee quality,
product and timely releases nearly boggles the mind, and one has trouble
believing that the Open Source community would embrace a Penguin-friendly version
of the Office suite of products. The proposal recommends forcing
Microsoft to provide a stripped down version of the OS, with no
add-ons such as its browser or media player program, although why anyone would
buy such a product, unless it was virtually given away, is another
open question. Forcing Microsoft to include Java support makes sense
technically and may address a key finding of the U.S. Court of Appeals, which cited
Microsoft's attempt to undercut Java as evidence the company illegally abused its
monopoly position, but it is an unusual remedy and will be hard to sell to the
court.

Other provisions, such as appointing a court-appointed special
master to supervise Microsoft's behavior, is an idea that has been used
repeatedly in cases requiring administrative oversight over long periods of time.
By contrast, the Justice Department's proposed settlement calls for an
oversight by a three-member panel whose findings could not be used in
any enforcement actions in the future. The state's proposal has real teeth,
proposing that any finding of non-compliance would require Microsoft
to publicly release its source code. In legal circles, this is known as
a "crown jewel" penalty, a punishment so severe that the company would
avoid the temptation to indulge in another round of legal gamesmanship of the
type that followed earlier antitrust lawsuits.

The litigants may be hoping that Kollar-Kotelly's relatively
liberal leanings
will give them an edge in court. She may also be
influenced by the decision of European antitrust enforcers to reject the Justice
Department's proposed settlement. Whatever her decision, it will be made in the midst
of a media frenzy that is likely to get louder and more strident over
the next several weeks.

Microsoft has already reached out to people in the investment community for
support and they have not disappointed. Prudential Securities, one of the
principal market makers of Microsoft stock has unleashed its financial analysts.
Rather than advise stockholders on the relative impact of litigation on
Microsoft's earnings, these analysts have attacked the ethics and
motives of that state's attorney general.

One of the most strident has been Prudential analyst James Lucier. Lucier
is a prominent conservative who had previously served as chief of research
on behalf of Americans for Tax Reform. In an
extraordinary article circulated by First
Call
, the normally dry-as-dirt financial analysis wire service, Lucier denounced the states' position as "doing the public a disservice," saying:

"It is hard to see how any of the [remedies proposed by the
states] have any bearing on the case as it now stands. We think it is
reasonable to ask what the state AG's think they can achieve by drawing out the
case ... in our opinion the litigants have at last lost their grip on
reality. In our view, the proposed final order seems designed more for purposes
of going out in a final blaze of glory than achieving any serious legal
or public policy objective ... One could dismiss the whole thing as a
baroque revenge fantasy by embittered ex-Netscape lawyers."

Lucier went on to compare the states proposed remedies as comparable
to the "The 21 Demands" presented to Germany at the end of World War I. Because those demands were partly responsible for rise of the Nazis a decade later, it was hard to know where Lucier was going with his analogy, but it sure was colorful.

Other analysts were more circumspect. In another piece
of First Call "analysis," Prudential analyst John McPeake claimed the states
were asking "for anything that they could possibly fit into a 40-page
document." McPeake, who holds substantial Microsoft stock, also suggested that the
Justice department's original was a fine remedy for Europe "although
the U.S. case and the EU investigation are factually and legally different."
CSFB analysts Wendell Laidley and Vikram Churamani suggested that the "demanding" nature of the states suggested remedies made it likely that the court would reject them altogether.

Today the U.S. Senate's Judiciary Committee is scheduled
to begin the hearings. Chairman Pat Leahy (D-Vermont) promised a hard focus when the Justice Department's proposed settlement was first announced. However, all the heat from the financial community and conservatives has had an effect. The content of the hearings has been sanded down, and Microsoft backers are suggesting it will be a non-event.

Leahy's own view has been curiously ambivalent. Critical of the
lack of antritrust enforcement
elsewhere in the economy, Leahy has
been far more circumspect about Microsoft. Last year, when Judge
Thomas Penfield Jackson earlier proposed breaking up the company, the senator issued a masterpiece of doublespeak, praising Richard Posner's mediation and Jackson's decision to break up the company, while simultaneously praising Microsoft for its efforts to "lead the American software industry in the global marketplace."

During the hearings Senators will have a chance to question Charles
James, the assistant U.S. attorney general and lead government attorney as to whether
there was anything improper in his negotiations with Microsoft attorney Rick
Rule. However, none of the other federal attorneys who
were shut out of the negotiations
are being asked to testify. In addition, Microsoft supporters were able to drop a number of Microsoft critics such as James Barksdale from the original witness list. He has been replaced by Jonathan Zuck, head of the Microsoft backed group called
The Association of Competitive Technology.

Many of the alleged beneficiaries of the original Justice Department
settlement aren't in attendance, although Red Hat's Matt Szulik has
agreed to testify. Testimony may be covered in part by CSPAN, although
Microsoft partisans have argued that the testimony will not be all that
compelling, and the network had not finalized its coverage decision as of press time.

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