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  Microsoft Agrees to Talks at 11th Hour

By Rajiv Chandrasekaran
Washington Post Staff Writer
Friday, May 15, 1998; Page A01

Microsoft Corp. made a surprise last-minute attempt yesterday to avert two massive antitrust lawsuits by agreeing to delay the release of its controversial Windows 98 software and begin settlement talks with government lawyers.

Less than three hours before the noon deadline the Justice Department and 20 state attorneys general had set for taking Microsoft to court, the company offered to compromise on key issues in the planned suits, several sources close to the matter said.

The Justice Department and the states, in exchange, decided to hold off filing their cases. Two government officials involved in the case characterized Microsoft's settlement overture as "major concessions."

Microsoft officials refused to comment publicly on the discussions yesterday, so it wasn't clear why the software giant had blinked in the final hours before the legal confrontation. But it may be a simple matter of pragmatic business judgment.

A settlement would prevent what lawyers had predicted would be one of the most contentious and costly antitrust battles in history, pitting the Clinton administration against the world's richest man, Microsoft Chairman Bill Gates. Even if Microsoft prevailed in court, it risked tarnishing its reputation among consumers.

Top attorneys for both sides will begin their negotiations at the Justice Department's headquarters today. The discussions likely will continue through at least part of the weekend, people familiar with the case said.

The negotiations are likely to turn on the issue of whether Microsoft will agree to let computer makers modify Windows 98 by removing or deactivating Internet browsing technology. The Justice Department believes this "unbundling" would bolster competition by rivals such as Netscape Communications Corp.

Microsoft is resisting any such limitation on its products, sources said, and instead wants to confine the talks to a much narrower agenda. Sources familiar with the case said Microsoft told the government lawyers yesterday that it would be willing to discuss three key issues: the sequence of screens that people see when they turn on their computers; the "icons" and links to Internet sites Microsoft places on the Windows computer desktop; and contracts between Microsoft and companies that both provide access to and content on the Internet.

The three issues were included in the department's and the states' suits. The regulators allege that Microsoft's controls of the start-up screens and the desktop icons – as well as the contracts – are anticompetitive.

Microsoft had planned to ship copies of Windows 98, the newest version of its personal computer operating system software, to PC manufacturers today. Microsoft promised yesterday that it would postpone those shipments until Monday.

News of the settlement talks sent Microsoft's stock up by as much as $4.06 1/4, to $91, yesterday before it closed at $88.93 3/4, up $2, in heavy trading.

Although Microsoft and Justice Department attorneys had been in discussions since last week, the company did not indicate that it would be willing to make any concessions until late Wednesday night, after federal and state lawyers had decided to file their suits, the sources said. Even as late as yesterday morning, government officials had signed their lawsuits and were still working out the order of speakers at the planned midday news conference that was to announce the filing.

Government officials said Microsoft lawyers have promised that the company will negotiate, not lecture meeting participants – a tack they say the company has taken in previous gatherings.

"We're not going to be locked in the room to be shown baby pictures of Bill Gates," one state official said. "These are going to be intensive, focused negotiations in which they attempt to address our concerns."

At the center of the case is the allegation that Microsoft is unfairly using its market power with Windows – the software that runs more than 90 percent of the world's personal computers – to maintain that monopoly and extend it into other markets. The suits would have alleged that Microsoft is violating the Sherman Antitrust Act, which prevents companies from using monopoly power in one market to squelch competition in another market.

The toughest bargaining in the negotiations is likely to come over the issue of whether PC makers can remove the browser from Windows 98.

Microsoft has indicated to government lawyers that it won't budge on this issue. But winning such a concession is central for the Justice Department. Sources close to the case said government lawyers will try to make Microsoft address the issue today.

One possible compromise would be for Microsoft to allow PC makers to delete the desktop icon for its Internet browser – but not the browser itself. The company agreed to precisely this concession earlier this year to settle Justice Department complaints about Windows 95. But government lawyers indicated yesterday that such a move wouldn't be enough to appease them this time.

Microsoft has also said it won't consider another remedy being considered by government lawyers – that Microsoft place rival browsers, specifically Netscape's, into Windows.

Given the chasm between both sides on the browser issue, some high-level sources expressed doubt yesterday that a settlement could be reached.

Several of Microsoft's rivals, however, voiced concern that the Justice Department would accept too weak a compromise. In a letter to Attorney General Janet Reno, an industry group formed to fight Microsoft was skeptical that "Microsoft would ever agree to terms that genuinely threaten its monopoly power."

"We believe that in 1994, Microsoft agreed to a consent decree [that sought to limit the company's business practices] precisely because they knew it was ineffectual," wrote Mitchell S. Pettit, executive director of the Project to Promote Competition & Innovation in the Digital Age, a private group that represents Netscape, Sun Microsystems Inc. and other Microsoft competitors.

One senior government official maintained that "the department has made it clear that it is ready and willing to fight."

The talks between Justice and Microsoft began May 6, the day after Gates met in Washington with the department's antitrust division chief, Joel I. Klein. But the discussions didn't turn into real negotiations until Wednesday, sources said.

Microsoft's offer to delay the release of Windows 98 was considered by Klein and three state attorneys general who had come to Washington for the news conference – Dennis Vacco of New York, Richard Blumenthal of Connecticut and Tom Miller of Iowa. It was then shared with other attorneys general, who unanimously agreed to delay their suit, the sources said.

For today's negotiations, Microsoft will send its chief lawyer, William H. Neukom, and several deputies. On the other side will be a handful of Justice attorneys and state antitrust lawyers from New York, Texas and Wisconsin.

Although Microsoft had said earlier that any delay of Windows 98 would have an "immediate and harmful effect" on the technology industry, several PC manufacturers said yesterday that the postponment would not change their plans to have Windows 98-equipped machines on store shelves by June 25 – the product's official commercial release date.

"The schedule isn't that tight," said T.R. Reid, a spokesman for Dell Computer Corp. "It won't cause problems for us."

Staff writers Elizabeth Corcoran in Redmond, Wash., and Robert O'Harrow Jr. in New York contributed to this report.

© Copyright 1998 The Washington Post Company

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