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  U.S., 20 States Sue Microsoft, Allege Abuses

By Rajiv Chandrasekaran
Washington Post Staff Writer
Tuesday, May 19, 1998; Page A01

Government lawyers took the world's leading technology company, Microsoft Corp., to court yesterday, filing two broad antitrust suits that seek to set new rules for competition in the digital age.

The suits, filed in federal court by the Justice Department and 20 state attorneys general, alleged that the software giant has engaged in a pattern of illegal business practices designed to protect its monopoly in personal computer operating systems and crush its competitors.

The two chief combatants in this antitrust war stumped yesterday for public support. Justice Department antitrust chief Joel I. Klein denounced "the barrage of illegal, anti-competitive practices that Microsoft uses to destroy its rivals and to avoid competition on the merits." Microsoft Chairman Bill Gates shot back from his headquarters in Redmond, Wash., saying the government cases "attack innovation" and "have the facts wrong."

Although government lawyers are taking on one of the country's most powerful corporations, they're asking for what some experts view as relatively modest changes in Microsoft's business practices. Specifically, the department and the attorneys general asked a federal judge in Washington, D.C., to order Microsoft to either strip its Internet "browsing" software from its upcoming Windows 98 software or include a browser made by rival Netscape Communications Corp. Browsers allow computer users to access information on the Internet.

The lawsuits also seek to give makers of personal computers more control over the first screens that users sees when they turn on a computer running Windows 98. In addition, the suits aim to bar Microsoft from enforcing contracts that limit the promotion of Netscape's browser.

The government lawyers contend that Microsoft, the world's most profitable and best-known software company, is violating the Sherman Antitrust Act by using its monopoly with Windows – the software that runs more than 90 percent of personal computers – to dominate the Internet browser market.

To make their case, the federal and state lawyers presented the court with a raft of internal Microsoft documents, many of them electronic-mail messages among top executives.

The lawsuits won't stop the release of Windows 98, which Microsoft started shipping to PC manufacturers yesterday. Instead, Justice and the states asked a judge to issue a quick preliminary injunction that would order Microsoft to make the changes in Windows while the case proceeds. They hope to get that injunction before June 25, when PC makers are scheduled to ship Windows 98-equipped computers to consumers.

The lawsuits could be among the most costly and contentious courtroom battles in business history, rivaling the landmark breakups of Standard Oil Co. and AT&T, according to legal experts. They will pit Gates, the world's richest man, against Klein, a tough, Brooklyn-born lawyer who leads the Clinton administration's newly activist corps of antitrust enforcers.

The Justice Department suit focuses on the company's battle with Netscape, the company that popularized browsers only to face a withering assault from Microsoft. The suit lays out, step by step, Microsoft's efforts to use the dominant position of Windows to best Netscape.

For example, the suit quotes one senior Microsoft executive messaging a colleague: "I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective. . . . We do not use our strength – which is that we have an installed base of Windows."

Klein noted yesterday that the department's investigation into Microsoft is continuing beyond browser issues. Sources close to the case have said the government will set its sights next on Windows NT, Microsoft's operating system for corporate computer networks. Allegations of anti-competitive practices with Windows NT could eventually be added to the Justice Department suit filed yesterday, the sources said.

The suit filed by the 20 states and the District extends slightly further than the Justice Department's case by asking for the judge also to force Microsoft to change the way it sells its popular "Office" suite of programs to computer makers. The states charge that Microsoft licenses Office, which includes word-processing and spreadsheet software, to PC makers in a way that discourages them from licensing competing software.

"Today is really D-Day for American consumers and customers, but it is also Independence Day for America's inventors, dreamers, entrepreneurs," said Connecticut Attorney General Richard Blumenthal.

News of the lawsuits led to a sell-off in Microsoft stock on Wall Street yesterday, causing the company to lose almost $8.3 billion in market value and Gates's personal wealth to fall by $1.8 billion. The company's shares dropped $3.37 1/2 to close at $86.06 1/4 in heavy trading.

But financial analysts said they doubted the litigation would have a noticeable impact on the company's sales and profits in the next several months. Over the long term, however, they expressed concern that a courtroom loss could force significant changes in the company's business practices that would impact its financial performance.

"This isn't going to be a show-stopper for Microsoft," said Richard G. Sherlund, an analyst with Goldman Sachs & Co. in New York. "But over the long run, this could weaken their franchise."

Microsoft has long maintained that Internet browsing technology is inexorably intertwined in Windows 98 and it cannot be separated without a massive revision of the product. As a result, if Microsoft loses in court, government lawyers expect the company to offer to add Netscape's browser instead of chopping up Windows 98.

For Netscape, having its software included on every Windows 98 machine sold could boost its fortunes, industry analysts said. The Justice Department suit estimated that Netscape still has about 50 percent of the browser market, with Microsoft steadily gaining.

Netscape, in a statement, said it believes the legal action "will help level the playing field in the software industry."

Gates said that he believed that Microsoft had tried to offer government regulators a number of concessions in negotiations last week with the hope of avoiding an antitrust lawsuit. "But the words out of their mouths were `Netscape this' and `Netscape that,' " he said.

Reciting what has become a common Microsoft refrain in the last few days, Gates said government demands to include Netscape software in Windows is like "requiring Coca-Cola to include three cans of Pepsi in every six-pack it sells." Efforts to remove Internet technology from Windows is comparable to asking Coke to remove an ingredient from its soft-drink formula, he added.

To that, a senior government official involved in the case responded: "If Coca-Cola had the only store in town, you'd want them to carry Pepsi, too."

Klein said his lawyers have amassed evidence that shows Microsoft tried to avoid competing in the browser market by offering to enter into an "illegal conspiracy" with Netscape.

Microsoft "quickly realized that Netscape's Internet browser . . . posed a real threat to Microsoft's Windows monopoly," Klein said. "To deal with that threat, Microsoft first went to Netscape and proposed that, rather than compete with each other, the two companies should enter an illegal conspiracy to divide up the market. When Netscape refused, Microsoft then used its Windows monopoly to, in Microsoft's own words, `cut off Netscape's air supply.' "

Among the evidence that the Justice Department presented to back up that contention yesterday was a February 1997 memo by a Microsoft executive, Christian Wildfueur. The memo said it would "be very hard to increase browser share on the merits" of the company's Internet Explorer browser alone, adding that Microsoft should "leverage [Windows] to make people use IE [Microsoft's browser] instead of Navigator."

Gates sharply denied that Microsoft had ever tried to persuade Netscape to "divide up the market" for browsers, as the government has alleged in its complaint. Such charges, he said, were "an outrageous lie."

Microsoft's top lawyer, William H. Neukom, said that the company welcomed the opportunity to defend itself. "We want to be in court with rules of evidence, where we can avoid trial by excerpt," he said, criticizing the government's practice of including short quotes from Microsoft executives in its complaint.

In addition to requiring the addition of Netscape's browser, the government lawsuits also seek to give PC makers the right to block Microsoft's Internet Explorer browser. But several legal and industry analysts doubted yesterday that many PC makers would use that option.

"Manufacturers could be worried about losing favor with Microsoft," said Robert Litan, a former deputy assistant attorney general at Justice.

In the long run, however, the department views PC makers' ability to reconfigure the first screens of Windows as more significant than the browser issue. Microsoft lets PC makers create "shell" programs that run on top of Windows, but they must be specially activated by a computer user – a requirement that critics say makes such programs impractical to implement.

Klein said that restriction places "competitive shackles" on PC makers. He cited a memo from Gates in which the chief executive said that such shell programs were interfering with the "very, very important goal" of winning Internet browser share.

Klein and many Microsoft rivals believe that shell programs could develop into "alternative platforms" that would compete with Windows.

The states filing suit included California, Connecticut, Florida, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Mexico, New York, North Carolina, Ohio, South Carolina, Utah, West Virginia and Wisconsin. They were joined by the District of Columbia.

The Justice suit and the states' suit likely will be combined by the court. Justice has asked that U.S. District Judge Thomas Penfield Jackson – who issued a preliminary injunction in December allowing PC makers to block the desktop "icon" for Internet Explorer – hear the cases.

Klein said he wouldn't seek "to impose a recall" of Windows 98 if the preliminary injunction he seeks is issued close to or after the software's June 25 consumer release.

For both sides, a crucial issue in the suit will be whether the government is seeking to limit one of the country's most dynamic technology companies from innovating its products. Gates charged yesterday that the legal action would have precisely that chilling effect.

Justice sought to counter that claim, arguing that Microsoft's behavior limits the ability of other firms to innovate. "Microsoft has an excellent record of innovation," said Attorney General Janet Reno. "But we want to make sure that the field is open to the next Microsoft, the next great innovator who can help improve our lives and our economy."

© Copyright 1998 The Washington Post Company

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