Company, government eyeing deal?

[Mitch Stone <mstone@vc.net>]

http://www.seattletimes.com/news/technology/html98/micr_19990308.html 

Posted at 11:15 a.m. PST; Monday, March 8, 1999  

Microsoft trial: Company, government eyeing deal?  

by James V. Grimaldi  Seattle Times Washington bureau  

WASHINGTON - In the wake of today's unexpected antitrust settlement 
between Intel and the Federal Trade Commission, Microsoft and the 
government are exploring ways to settle the landmark antitrust lawsuit 
before it resumes next month after a six-week recess, according to people 
close to the case.  

The possibility of a settlement comes as Microsoft reels from the case 
presented by the U.S. Department of Justice and 19 states, which have 
begun considering far-reaching sanctions that include dismantling the 
software corporation.  

"It makes sense to explore settlement discussions," a source close to the 
case said today.  

Although Microsoft has been saying privately it isn't talking about a 
settlement, company Chief Operating Officer Bob Herbold said today, "You 
never block out the notion of settlement, but we're not going to talk 
about it publicly."  

Herbold didn't draw any parallels between Intel's case and Microsoft's. 
"We view our situation as our situation," he said.  

Nothing is expected sooner than next week, when some of the attorneys 
return from vacations. Others have indicated that preliminary discussions 
could occur.  

Both sides acknowledge there is no urgency to do anything before the 
trial resumes about April 12. Even then, the trial will have two more 
breaks that could become natural times for settlement talks - after 
rebuttal cases are presented and after closing arguments.  

One person close to the government's case estimated a 60 percent chance 
of a settlement. Over time, the chances increase as the trial moves to a 
final ruling expected this summer from U.S. District Judge Thomas 
Penfield Jackson.  

One source close to Microsoft, however, said those odds were somewhat 
unlikely given that the two sides have come out of the case with 
strikingly different assessments of who was winning.  

Company urged to resolve case 

Microsoft has been urged by legal and political supporters and 
consultants to see if there is a way to resolve the case out of court 
rather than risk a government victory.  

If the company loses, they say, it faces the possibility that federal or 
state prosecutors will try to break up the company or force Microsoft to 
open up and license the computer code underlying its core product, the 
Windows operating system.  

The Intel settlement will provide more incentive for those political 
allies to push their point: If the FTC and Intel can come to an 
agreement, what would it hurt for Microsoft to attempt to cut an 
out-of-court deal?  

As the case headed into a recess late last month, Microsoft General 
Counsel William Neukom would not say whether Microsoft would contemplate 
settling during the break.  

"We have said since negotiations broke down some months ago that 
Microsoft is always willing to listen to the government," Microsoft 
spokesman Greg Shaw said. "However, our freedom to continue to innovate 
is nonnegotiable."  

Microsoft rested its case Feb. 26, and the break provides a natural time 
for both sides to assess their performance so far and see if there is any 
room for settling out of court.  

Monopolistic tactics 

Federal antitrust prosecutors and 19 state attorneys general have alleged 
that Microsoft is guilty of wielding its monopoly in personal-computer 
operating systems to protect that monopoly from competitors such as 
Netscape Communications.  

Despite widespread accounts that the government has the edge in the case, 
Microsoft contends it has prevailed on important points of law while the 
government has succeeded only in courtroom theatrics.  

That difference could pose significant obstacles to any settlement 
discussions. The government, emboldened by what it believes to be its 
courtroom success, is unlikely to agree to an offer that would simply 
prohibit Microsoft from engaging in the kind of business tactics that got 
it into trouble in the first place.  

On the other hand, Microsoft, resolute that the government's case was 
more theatrics than substance, is unlikely to concede proposals that 
would dramatically restructure the corporation or surrender its 
intellectual-property rights.  

Charles "Rick" Rule, a Microsoft legal consultant, said last week that 
the software company has not rejected out-of-hand any settlements in past 
disputes the way IBM steadfastly declined to consider settling in its 
decadelong antitrust battle. Microsoft settled a previous case by 
reaching a consent decree with the government out of court in 1995.  

In the meantime, the government has embarked on the politically tricky 
and economically precarious task of figuring out what to recommend to 
Jackson should it win.  

While the government officially calls such work premature because the 
judge has made no ruling, the task is not merely academic.  

The kind of remedies the judge decrees if Microsoft loses could be the 
same as what is ultimately negotiated in settlement talks.  

The government's work so far has been conducted in two largely 
independent task forces - one assembled by the Department of Justice and 
the other by 19 states.  

Both seem to be considering a range of options that fall into three 
categories: structural remedies, which would result in a breakup of the 
company; behavioral remedies, aimed at preventing the repeat of illegal 
acts; and compulsory licensing, which would force Microsoft to open the 
Windows code for licensing by other companies.  

The last alternative is quickly becoming a favorite among some economic 
consultants working for both the states and the Justice Department and 
also has found some sympathy among antitrust enforcers.  

Behavioral remedies seem likely at the least, according to antitrust 
legal experts meeting last week in New York to discuss antitrust law. 
Those range from consent decrees not to engage in exclusive contracts to 
forcing Microsoft to make public the prices it charges computer makers 
for Windows.  

The pricing plan, which would include provisions allowing for volume 
discounts, is meant to remedy allegations that Microsoft used differing 
pricing levels to punish enemies and favor allies.  

Plans to break up Microsoft have not found strong allies among the 
government, though it is being examined and some industry groups are 
advocating it.  

The Software and Information Industry Association has called for dividing 
the company into two pieces - one that would sell operating systems and 
another that would sell applications, such as the Internet browser and 
the popular Word and Excel programs.  

`Baby Bills' a possibility 

Another plan would clone the company into "Baby Bills," a reference to 
Chairman Bill Gates and the forced breakup of AT&T into "Baby Bells" in 
the 1980s.  

At last week's meeting in New York on antitrust issues, a panel of top 
national antitrust scholars, attorneys and government regulators 
concluded that Jackson is likely to find for the government in some 
fashion.  

"The remedy is where the big challenge is going to be," said Robert 
Pitofsky, chairman of the Federal Trade Commission, one of the two top 
antitrust regulators in the country. The commission is not directly 
involved in the Microsoft case.  

"The first principle is if a monopoly has been achieved or maintained 
illegally, the government's obligation - not right - is to restore 
competition to the place where it would have been but for the illegal 
behavior," Pitofsky said. "You do what it takes."  

Another panelist, University of Iowa Professor Herb Hovenkamp, author of 
a well-regarded antitrust treatise, said he had a "nagging fear (Jackson) 
is going to wuss out and there won't be structural relief."  

He said he thinks a breakup of a monopoly is the only solution not 
harmful to consumers that does not require regulatory supervision.  

A wrinkle introduced into the remedies question is the entrance of an 
important new player in the New York Attorney General's Office: Harry 
First, a well known antitrust law professor named last week to head the 
state's antitrust division. First replaces Stephen Houck, who will 
continue as the states' lead counsel on the antitrust lawsuit.  

First, a pro-antitrust-enforcement scholar who once questioned the FTC's 
approval of the Boeing-McDonnell Douglas merger, said New York will take 
a more aggressive role in advocating remedies.  

But First said he has no preconceptions: "I certainly don't have any 
instant solutions."  

Seattle Times staff reporter Jay Greene contributed to this report.  

Mitch Stone
mstone@vc.net