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  U.S. Says Microsoft Violates Antitrust Pact

By Rajiv Chandrasekaran and Elizabeth Corcoran
Washington Post Staff Writers
Tuesday, October 21, 1997; Page A01

The Justice Department yesterday accused Microsoft Corp. of using its market power as the world's largest software company to force personal computer makers to distribute Microsoft's Internet browsing program.

The department asked a federal judge to find Microsoft in contempt of court for violating a 1995 consent decree that sought to restrain some of the company's business practices. Microsoft should pay a fine of $1 million each day that it continues to violate the agreement, said Attorney General Janet Reno.

The government's decision to pursue Microsoft opens a broad legal battle over what kinds of new services the company can fold into its core Windows software product.

It was the government's third legal move against Microsoft, which many in the industry feel unfairly dominates the $102 billion a year software industry, and as a result holds back innovation. Microsoft yesterday denied the department's allegation, saying officials are misinterpreting the decree's content.

At issue is Microsoft's practice of requiring that PC makers include the company's Internet Explorer browsing software on each machine that is sold with Microsoft's Windows operating system.

More than 90 percent of new PCs use Windows, a market dominance that the Justice Department said puts Microsoft in an unfair position to muscle other browser companies.

"Forcing PC manufacturers to take one Microsoft product as a condition of buying a monopoly product like Windows 95 is not only a violation of the court order, it is plain wrong," Reno said at a news conference yesterday. "Microsoft is unlawfully taking advantage of its Windows monopoly . . . to undermine consumer choice."

Microsoft executives maintained yesterday that they had not violated the order, in which the company settled earlier antitrust concerns by agreeing to change the way it licensed its software to PC makers. The Redmond, Wash.-based company argues that including a browser with Windows is a necessary innovation in the Internet age – a step that is covered by a portion of the agreement that lets Microsoft integrate new features into the operating system.

William H. Neukom, Microsoft's senior lawyer, said yesterday that he believed the government is misinterpreting the terms of the agreement. The document "explicitly recognized Microsoft's right to enhance its operating systems technology," Neukom said in a telephone conference with reporters. "This was carefully negotiated with the then-lawyers at [the Justice Department] in 1994."

The Justice Department must convince Judge Thomas Penfield Jackson of the U.S. District Court for the District of Columbia to order the remedies, which would include an end to such licenses and letters to Windows owners informing them that they do not have to use Internet Explorer and giving instructions on how to remove the Internet Explorer "icon" from their screens.

"We think consumers need to be clearly notified of their choices," Joel I. Klein, the assistant attorney general in charge of the antitrust division, said in an interview.

Industry analysts said the proposed remedies would be unlikely to alter the software on most new computers. That's because Internet Explorer is a free product, and most computer makers are likely to include such software since it doesn't add to their costs, industry observers said.

"I don't think it's going to have a material impact," said Richard G. Sherlund, an analyst with investment bank Goldman, Sachs & Co. in New York. "Most hardware makers are going to continue to ship machines with it because it's free and it's a pretty good product."

The department's petition alleges that at least three unnamed computer manufacturers were turned down when they asked Microsoft for permission either to remove the Internet Explorer browser entirely or just the desktop icon. In one 1996 case, the department alleged that Microsoft threatened to withhold Windows 95 from "one of the country's largest computer makers" if it failed to include Internet Explorer according to Microsoft's specifications.

With an increasing amount of information residing on the global Internet, Microsoft contends that a computer's basic operating system must be able to tap into that material, in the same way that Windows serves as the portal to material that resides on a PC's own data storage systems. A browser is software that allows a computer to seek and receive information – be it text, sound or video files – on the Internet.

However, Justice Department officials said yesterday that they don't believe the Internet Explorer browser is an enhancement to Windows, but is rather a completely separate software product. "This is a clearly distinct product," said Klein. "They market and advertise it separately. Everyone in the industry recognizes it's distinct."

Although the department's petition only covers the requirement to include Internet Explorer with Microsoft Windows 95 software, some industry specialists said the legal argument could be extended to its next-generation operating system, called Windows 98 and scheduled for release next year. That software will integrate browsing functions into the operating system.

Several legal and industry specialists said Klein's forceful comments suggest that he would seek to block such a product, perhaps seeking that the browser and operating system continue to be sold separately, as they are today.

"This is the first step," Steve Newborn, a former Federal Trade Commission lawyer who is now an antitrust attorney at Rogers & Wells, said of yesterday's action. "Knowing the people at Justice, they're very serious about letting Microsoft continue to innovate, but not exercise market power."

Sherlund suggested that the department's move "clouds the future for Windows 98." Neukom played down those suggestions, saying the legal move would not have an "effect on the making of Windows 98."

One of the biggest winners in the department's action is Microsoft's chief competitor in the browser market, Netscape Communications Corp., which first complained to Justice about Microsoft's browser-operating system tie-ins more than a year ago.

"We're very supportive of the action [Justice is] taking," said Roberta Katz, Netscape's general counsel. "We've always said we want a level playing field."

Netscape's shares surged $4.31 1/4 to close at $39.25 on the Nasdaq Stock Market yesterday. Microsoft stock, after falling more than $7 immediately after the announcement, ended the day with a gain of 25 cents at $132.50 on the Nasdaq. Microsoft yesterday also reported better-than-expected first-quarter financial results.

Netscape's Navigator browser has about 60 percent of the market for Internet browsing software, according to industry analysts. Microsoft's Internet Explorer has about 30 percent.

Microsoft, however, recently released a new version of its browser that some industry observers expect to capture a greater share of the market.

Consumer groups lauded the department's action against Microsoft. "We hope this is the first step," said Jamie Love, director of the Consumer Project on Technology, an advocacy group headed by activist Ralph Nader. The group is convening a two-day conference in mid-November in Washington to discuss Microsoft's business practices.

Some legal experts suggested that the Justice Deparment may try to argue that Microsoft trespassed on forbidden ground, not in merging its browsing software with the operating system, but in distributing the Web software separately from the operating system in the first place. By making the software available separately, Microsoft suggested that the browser was a separate product.

Even so, it is not a simple argument. Precisely what "integrated" products are has been a source of contention in antitrust law, said Steve Sunshine, a former deputy assistant attorney general in the Justice Department's antitrust division. "You go to a car dealership and buy a car with a radio. Because you can buy a radio separately, is it one product or two? Today the view is that its an integrated product."

Some analysts suggested that the easiest solution for Microsoft could be one that would dismay its competitors: namely, only make the browser available as part of the operating system.

At the same time, Sunshine said the department's action is not really an antitrust case. "This is simply a case about whether Microsoft has lived up to the contract it made with [the Justice Department] in the court," he said. "The court doesn't care if the markets are hurt, or consumers are worse off. It's simply a case of whether the consent decree is adhered to."

The Justice Department also asked the court to make Microsoft revise provisions of contracts it has with other companies that require them to notify Microsoft when disclosing information to the government. Although Microsoft has maintained that those agreements do not prevent the companies from talking to federal regulators, Reno and Klein said the wording may have had a chilling effect on people wishing to complain about the software giant.

"Anyone should feel free to come talk to the department without Microsoft's knowledge and without any fear of reprisals whatsoever," Reno said. "We will not let Microsoft infringe on that fundamental right."

Microsoft also is under investigation by six state attorneys general and the European Commission, the executive body of the European Union, over similar anti-competitive charges.

In addition to its ongoing investigation of the browser market, the Justice Department is examining the company's decision in August to invest $150 million in struggling Apple Computer Inc. as well as recent investments in multimedia software companies.

"We're continuing our ongoing investigation into several Microsoft matters," Klein said. "This has been, and will remain, a very active, thorough and wide-ranging inquiry."

Microsoft has 11 days to respond to the department's petition.

© Copyright 1998 The Washington Post Company

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