Commentary: Microsoft: All The King's Horses And All The King's Men...

Gates & Co. win on appeal? It's not a sure thing

Standard Oil. American Tobacco. Alcoa. DuPont. AT&T. The list of great American corporate icons that have been torn apart by the government is short, and musty with age.

When the Justice Dept. and 19 states cobbled together a series of untested legal theories and sued Microsoft Corp. in May, 1998, most people didn't think there was a chance that the world's premiere software company would ever join that exclusive club. How wrong they were.

On June 7, U.S. District Judge Thomas Penfield Jackson ordered the division of Microsoft into two separate pieces. He also shackled the software giant with a series of restrictions on its business practices, even forcing it to save e-mail for four years so trustbusters can thumb through them. Why so tough? Because Judge Jackson believes the company is unrepentant: "Microsoft, convinced of its innocence, continues to do business as it has in the past, and may yet do to other markets what it has already done in the PC operating-system and browser markets."

As he has after each losing round in this long fight, Microsoft Chairman William H. Gates III put a brave face on the news. "Today is the first day of the rest of this case," he said minutes after the ruling came down. "We have strong legal, factual, and procedural arguments.... We'll win on appeal."

Unfortunately for Gates, that may be wishful thinking. While there's no doubt that the higher courts are likely to be more sympathetic to the company's cause than Judge Jackson is, Microsoft can hardly count on a victory. In fact, the growing consensus among antitrust experts is that the company has a good chance of losing. And during the many months while the appeal is pending, the interim remedies imposed by Judge Jackson put handcuffs on a company that is watching some of its best employees depart for Net startups.

TECH-SAVVY. What's changing the opinion of legal experts, who once thought Microsoft the odds-on favorite in an appeal before the conservative majorities on the higher courts? For one thing, Judge Jackson has demonstrated that computer technology isn't too complex for lawyers to understand. "As courts get more sophisticated about computer technology, they are getting more comfortable" making major rulings, says New York City antitrust litigator Richard M. Steuer.

More important, it may be possible for the antitrust skeptics on the D.C. Circuit Court of Appeals and the Supreme Court to find that Microsoft violated the law without doing the one thing they most fear: creating a precedent for widespread judicial intervention in the high-tech industry. How? By setting a very high legal standard for when a court can find that a tech company has violated the Sherman Act. Microsoft would be the rare case that meets the standard. That's possible because, thanks to a treasure trove of internal e-mails, the evidentiary record against the company is exceptionally strong. "This is an extremely dangerous case for the company," says George Washington University Law School antitrust scholar William Kovacic. "There is no margin for error anymore."

In the meantime, with Judge Jackson's ruling, Justice and Microsoft's rivals get to have their cake and eat it too. While the case is under appeal, the interim restrictions on Microsoft's behavior put strict limits on the software giant's ability to bully PC makers and independent software designers. Microsoft can't punish PC companies because they buy products from its competitors. Every PC maker pays the same price for Windows-based software on standard volume discounts--and Microsoft can't offer its favorites special marketing help. The restrictions seem likely to tamp down the company's more aggressive impulses, much as government rules hampered IBM two decades ago. Of course, Microsoft will be appealing these, too.

All of this has critics gloating, even though some concede that Microsoft has already backed off from its most predatory tactics. "To some extent the behavioral changes have already taken place, and the government is just locking them in," says Alex Edelstein, CEO of Viralon Corp., a San Francisco Web-marketing company. He previously worked at both Microsoft and Netscape Communications Corp., the centerpiece victim of the government's case.

In fact, some PC makers are showing strong streaks of independence from Microsoft already. Gateway Inc., for instance, announced on May 30 that a generation of Web appliances it is developing with America Online Inc. will run on the rival Linux operating system.

While the interim restrictions focus on Microsoft's role in the traditional PC business, one piece of Jackson's ruling could have an immediate impact on the company's plans for the Net, too. He ordered the company to freeze its divisions in place as of Apr. 27--meaning it can't shift software projects from one group to another. Microsoft is on the verge of announcing a new generation of technologies that spans almost all its divisions, weaving tighter than ever its operating systems, applications, and the Web. Microsoft denies that its plans will be foiled by Jackson's decree, characterizing it as vague. "It's full speed ahead," says Gates, though he admits that if the company loses the appeal and is broken up, the strategy will have to be scrapped.

The timing is bad for Microsoft, which can't afford to lose any more ground on the Net to the likes of Sun Microsystems Inc. and Oracle Corp. Its competitive disadvantage has contributed to a serious brain drain that CEO Steven A. Ballmer is trying to staunch with salary increases and stock grants. "It's tough when the external impression is `You're evil and you're trying to oppress us,"' says Hadi Partovi, a former Microsoft browser manager who defected to Tellme Networks Inc. of Mountain View, Calif., along with 20-odd other Microsofters.

But there are no clearcut answers--even for Partovi, who is still intensely loyal to Microsoft. He's against a breakup, but believes his former employer overstepped the bounds of propriety. "Microsoft should have been more self-restrained," he says. "When there was a tradeoff between what the customer wants and what we thought worked for Microsoft strategically, Microsoft was more concerned with the Windows franchise." Microsoft's paying a steep price for that attitude.

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