The (Legal) Road Ahead: A Kinder and Gentler Microsoft?

While the recent court ruling that branded Microsoft as a monopoly has more immediate repercussions for the client PC software market, there are long-term implications for the midrange-class systems as well. IBM business partners and analysts following the IBM space agree that continued action against the Redmond software giant may help maintain competition in the corporate computing world.In his long-awaited "Findings of Fact" in the U.S. Department of Justice antitrust case against Microsoft, District Judge Thomas Penfield Jackson flatly called Microsoft a monopoly and asserted that the company has stifled innovation in the computer industry.

"The findings, in and of themselves, were not a surprise at all to anyone, with the exception of how strongly worded they were," says Tom Bittman, operating systems analyst with GartnerGroup (Stamford, Conn.). "We didn't have a momentous decision here. But it underlined where this case is headed over the next perhaps several years."

Microsoft, in a press conference after the ruling, showed no signs of softening its public stance on the case. "One area that we respectfully disagree is the issue of a monopoly," says Microsoft senior vice president and general counsel, Bill Neukom. "No segment of the U.S. economy is more intensely competitive than computer software."

However, Microsoft may not fare so well if it persists, says Bittman. "It's in Microsoft's interest--although it may not be in their personality--to settle for their shareholders' sake." Such a settlement would "clearly include behavioral remedies," says Bittman. It's uncertain what kind of structural remedies would be included, he adds.

AS/400 business partners agree the developments to date may dampen Microsoft's aggressive marketing approaches. "[The ruling] would have to change Microsoft's behavior," says Bill Benjamin, VP with LANSA Inc. (Lombard, Ill.). "It's a shot across the bow. It's great for everybody, because as we move into new paradigms for computing, such as wireless devices and the Web, Microsoft isn't going to dominate."

In his ruling, Jackson pointed to distinct evidence that Microsoft has a monopoly. "Viewed together, three main facts indicate that Microsoft enjoys monopoly power," Jackson wrote. "First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows."

The browser battle between Netscape Navigator and Microsoft's Internet Explorer was a centerpiece of the trial, and Jackson reserved some of his strongest conclusions for that debate at the end of his novella-length document. He acknowledges that Internet Explorer benefited consumers by compelling Netscape to stop charging for Navigator. "These actions thus contributed to improving the quality of Web browsing software, lowering its cost, and increasing its availability, thereby benefiting consumers," he wrote.

But Jackson's findings followed that brief praise with a conclusion that Microsoft's tactics to prevent OEMs from decoupling Internet Explorer from the base operating system had strong reverberations throughout the industry. "Most harmful of all is the message that Microsoft's actions have conveyed to every enterprise with the potential to innovate in the computer industry," Jackson wrote. "The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest."

"The minute anybody comes up with a remotely competitive product--even their non-core products--it's go after it and squash it until it dies," says LANSA's Benjamin.

"If you're in an industry Microsoft has been going after, you're a dead man, sooner or later," agrees Ken Holec, CEO of Showcase Corp. (Rochester, Minn.), a Microsoft business partner in the mid-1990s. "Therefore, software companies may choose not to invest in those areas as aggressively."

In fact, a development in the enterprise marketplace that has some similarities to the browser battle is in OLAP tools. In its recent release of SQL Server 7.0, Microsoft bundled OLAP Server, which caused a number of OLAP tool providers to restructure their business to get out of Microsoft's way. "A lot of the OLAP community overreacted and skewed their offerings towards applications, even though they had a three-to-five year head start over Microsoft," Holec says. "At this point in time, the functionality [of Microsoft's OLAP Server] is fairly limited. Anybody that's looking at doing very serious analytics is still willing to invest in a separate OLAP server that can handle volume, security and performance issues." The Department of Justice investigation of Microsoft's browser bundling may make the software giant think twice about other bundling practices, Holec believes.

IBM, which is both a rival and partner with Microsoft, played a critical role in disclosures about Microsoft's strong-arm tactics. While IBM remains characteristically mum about the latest ruling, IBM executive Garry Norris was the first OEM to testify against Microsoft in the hearings last May.

Several weeks prior to the much-ballyhooed launch of Windows 95, Microsoft, allegedly incensed by continued shipments of IBM's OS/2, cut off negotiations for licensing Windows 95 to run on IBM PCs. Microsoft claims it wanted to settle issues around royalty payments from IBM. Judge Jackson wrote that, "IBM executives pleaded with Microsoft to uncouple the license negotiations from the ongoing audit," even offering a $10 million bond that Microsoft could use to indemnify itself against any discrepancies that the audit might ultimately reveal. Microsoft didn't grant IBM a license until 15 minutes before the official product launch of Windows 95. Microsoft continued to exert pressure on IBM to abandon its competing Lotus offerings on its PCs, Jackson adds.

IBM itself battled the Justice Department for years, resulting in consent decrees which unbundled the company's service business, and later its hardware and software businesses. This planted the seeds for the rise of independent software makers, the key component of the current AS/400 market.

If Microsoft does not settle the case out of court, a final ruling--which may include a remedy--may be issued sometime next year. Speculation as to such remedies has included restrictive agreements, Microsoft opening pieces of the source code to Windows, and Microsoft being broken up into smaller companies, or "Baby Bills." Years of appeals could follow the ruling. If such actions come to pass, "That's going to change how users negotiate with Microsoft," says Bittman. This is a good time to engage Microsoft in negotiations, he adds. "Microsoft is beating the bushes to get deals signed. However, if a company has an enterprise agreement in place today, they might want to be cautious about the wording. They may buy into a bundle that's owned by two different companies in two to three years."

A lawyer with a major hardware company who requested anonymity speculates that even though the findings seem to be against Microsoft, he thinks it is unlikely Jackson will try to break up Microsoft. "Breaking a company up is very, very extreme," he says. "This is probably the biggest antitrust case of the century, so Judge Jackson is more likely to be conservative."

Any action against Microsoft may slow down the Windows NT/2000 juggernaut that has been moving into the enterprise computing space. "[The ruling] is going to weaken Microsoft's hand," says Holec. "They don't know how to support enterprise or 'Net market companies very well. If Microsoft were split up, the company would lose distribution economies of scale, joint R&D opportunities. The IBM model of taking care of the customer with support and new releases is more conducive to the mid- to high-end accounts. That's not the Microsoft approach, which is high-volume, drive all the business through the channels and the partners."

Of course, in the meantime, market forces may cause Microsoft to lose its dominance in some areas. "The industry is rapidly shifting toward the Internet, and toward leveraging bandwidth and cheaper processing power," says Bittman. "Microsoft is much more at risk not to the Department of Justice, but to technology changes. The general-purpose PC is becoming passe. Computing access is the vision that's winning over. The issue is becoming who owns the software infrastructure--IBM with DB2 and Domino or Microsoft with BackOffice?" Bittman adds that Steve Ballmer, president of Microsoft, acknowledges that the future model for software acquisition will be more of a rental model. This will push Microsoft more toward a role of service provider.

"Microsoft's an amazing, brilliant company," Benjamin says. "They just crossed the line too many times in trying to keep innovation out of the market."