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  Microsoft Settles Case With Justice

By Elizabeth Corcoran
Washington Post Staff Writer
Sunday, July 17, 1994; Page A01

The Justice Department announced yesterday that giant Microsoft Corp. has agreed to end practices that the government said choked off competition and inflated prices in the personal computer software industry. The deal came after a contentious 4 1/2-year investigation.

Microsoft said it would drop allegedly anti-competitive licensing practices for its MS-DOS and Windows operating system software, which is used in 80 percent of personal computers sold today. The Justice Department contends these practices pushed computer makers to favor Microsoft's products.

"There's no question they had locked up the market with these practices, completely unfairly," said Anne K. Bingaman, assistant attorney general for the Justice Department's antitrust division. "That will end."

Bingaman predicted that consumers will have more choice and lower prices in operating systems, which control the basic functions of a personal computer.

Microsoft general counsel William Neukom described the agreement as a "good result" for the company. "We have always said, and continue to say, that we have not done anything wrong," he said. "We're settling because we think its time to put this investigation behind us and proceed with a full focus on our business."

The deal was signed late Friday after intensive final negotiations by telephone between Bingaman and Bill Gates, the 38-year-old entrepreneur who founded the company in 1975 and built the Redmond, Wash.-based company into the world's largest software company. The Justice Department was prepared to begin a court battle Friday against Microsoft if the negotiations failed, Bingaman said. The government investigation into Microsoft's business practices was started by the Federal Trade Commission in late 1989.

If approved by a court, the settlement would bring to an end the broadest antitrust investigation ever in the personal computer industry.

The case has been complicated by fierce emotions on all sides. Microsoft and its billionaire founder are widely feared and envied by many companies in the software industry. Yet few can refuse to work with the industry leader, which had sales of $4.5 billion last fiscal year.

Industry experts yesterday were split on how much change the settlement would bring to prices, innovation and the industry's structure. They noted that the department chose not to act on a collection of other complaints that have been raised against the company.

"The government came up with a very narrow agreement that will have very little affect on Microsoft's business," said Rick Sherlund, an analyst with investment firm Goldman Sachs & Co. in New York. He argued that the settlement would not substantially change the marketplace.

But Novell Inc., a Provo, Utah, software company that makes an operating system called DR-DOS, countered that the accord will enable it to compete more fairly against Microsoft.

"This is excellent for Novell and good for the industry," said David Bradford, the company's general counsel. "It sends very strong message to the industry that Microsoft will be held to account for any anti-competitive conduct."

The European Commission, which also had been investigating the company's business practices in Europe, signed a similar accord with Microsoft on Friday. The Justice Department said the Microsoft case was the first in which it had coordinated an anti-trust action with Europe.

At the heart of the settlement was Microsoft's "per-processor" licensing agreements, which the company began using in 1988 and which now represent a majority of Microsoft's contracts with computer companies. Most people do not buy operating systems separately, but acquire them as part of a new personal computer.

In these contracts, a hardware vendor would agree to pay Microsoft a royalty for every machine it sold that contained a specific type of microprocessor. Microsoft would be paid even if its operating system was not included with the machine. In return, the hardware vendor would get a low per-unit price.

The Justice Department contended that the effect of this arrangement was to discourage computer makers from including other company's operating systems on their machines. That was because the manufacturer would in effect be paying twice for an operating system – once for Microsoft's and again for the other company's.

Effective Friday night, computer makers that have these types of contracts with Microsoft can renegotiate the terms. Those who continue with the same contracts need not pay Microsoft a royalty when they ship their hardware with another company's operating system.

The settlement also stipulates that the company can no longer require hardware vendors to pay royalties for a minimum number of copies, even if the vendor did not sell as many machines as it had predicted. The Justice Department contended that this practice cost computer makers because they could possibly be forced to pay for more copies of the software than they sold.

Microsoft also will discontinue its practice of signing two- to five-year contracts with computer makers. The company will stick to one-year contracts, which would give computer makers more flexibility in moving to other companies' operating systems.

Finally, Microsoft pledged to ensure that when it circulates test copies of its software, it will not try to strong-arm software developers into signing restrictive non-disclosure agreements.

The department contends that this practice restricted the ability of developers to work with other operating systems.

The settlement does not address a battery of other allegations that software companies have raised about Microsoft's business practices in the past. Notable among these were claims that Microsoft's domination of the operating system market gives it an unfair advantage in the other side of its business, the creation of "application" software such as word processors and data bases.

Microsoft contends that this issue is not legitimate – it spends more than $100 million a year publicizing technical details of its operating systems so other companies can write applications to work with them.

Bingaman said the Justice Department reviewed those allegations but chose not to include them in the settlement.

"We looked at every possible legal theory through the course of a long, tough winter," Bingaman said. "This settlement is everything we would have hoped for in court, and possibly more."

On Friday, the government filed a suit and simultaneously proposed a settlement in the form of court consent decree. A judge must now evaluate the proposed settlement and industry comments, then decide whether to let it take effect. Terms call for the government to enforce the agreement for 6 1/2 years, once the consent decree becomes final, a process that normally takes about 60 days.

The agreement with the European Commission will be in place for 4 1/2 years.


* August 1981: Microsoft Corp. introduces MS-DOS 1.0, the first operating system for the IBM personal computer.

* 1988: Microsoft institutes "per-processor" licenses in which hardware vendors agree to pay royalties on every machine of a certain type even if it doesn't carry MS-DOS.

* November 1989: Microsoft and International Business Machines Corp. say they will support the same operating system for personal computers. The Federal Trade Commission begins studying the possibility of collusion between IBM and Microsoft.

* June 1990: The government tells Microsoft it is the subject of an anti-trust probe.

* September 1990: IBM and Microsoft stop cooperating on operating system software.

* April 1991: The FTC investigation widens to include other aspects of Microsoft's licensing practices.

* March 1992: IBM releases its OS/2 operating system.

* August 1993: FTC deadlocks on a decision on Microsoft and gives up case. The Justice Department begins a new investigation.

* September 1993: Competitor Novell Inc. files a complaint about Microsoft with the European Commission.

* January 1994: Microsoft loses a patent infringement case to Stac Electronics Co.

* June 1994: Microsoft pays $83 million to settle a patent violation with Stac Electronics.

* July 1994: The Justice Department reaches a settlement with Microsoft.

© Copyright 1998 The Washington Post Company

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