Sorry, Bill, The Deal Is Off

Microsoft Corp. seems to have finally met its match. The knockout punch came not from some powerful competitor but from U.S. District Court Judge Stanley Sporkin. On St. Valentine's Day, Sporkin massacred the consent decree the Justice Dept. reached with Microsoft last summer. The result of years of government investigation into Microsoft's allegedly monopolistic practices, the decree had been decried by most of the software industry as ineffectual.

In the end, Sporkin surprised Microsoft's competitors by agreeing with them. "This certainly is good news," says Gordon E. Mayer, CEO of Geoworks, a small Alameda (Calif.) software company. "If the object is to increase competition, it is the right thing to do." Adds Stephen M. Case, CEO of America Online Inc.: "What I think is being said [in Sporkin's decision] is that this particular consent decree didn't go far enough."

ON A LIMB. Euphoria over the Sporkin decision may be short-lived, however. Scrambling to recover, the Justice Dept. planned a Feb. 16 announcement that it will appeal Sporkin's decision. If the decision is overturned, Justice antitrust chief Anne K. Bingaman will reinstate the consent decree she negotiated. "There's a good argument that the court exceeded its authority" by rejecting the decree, contends Washington antitrust lawyer Joseph Kattan. Even lawyers who normally would be against Microsoft agree. "I approve in concept with what [Sporkin] is saying," says prominent antitrust lawyer Maxwell M. Blecher. But he says Sporkin went out on a limb by trying to force Justice to bring more charges against Microsoft. "I think it will be reversed on appeal," he says. Justice seems confident: It has asked that the appeal be expedited--meaning a decision could come as early as late February.

Still, the Sporkin ruling is likely to slow the juggernaut approach of Microsoft Chairman William H. Gates III, who announced plans for a $1.5 billion acquisition of financial software company Intuit Inc. just weeks after the consent decree was announced. Some rival executives contend that the limited nature of the consent decree emboldened--rather than chastened--Gates. Now they hope for a deal that gives Gates less latitude.

Indeed, the Sporkin opinion may inspire more rivals to push for a scuttling of the Intuit merger and other measures to slow Gates's moves into new markets. Justice's review of the Intuit deal is likely to be delayed by antitrust issues anyway. And Justice has asked more companies, including Lotus Development Corp., to comment on the merger. "The issues Judge Sporkin has raised about Microsoft's market position and industry dominance are real," says Thomas M. Lemberg, general counsel at Lotus. "It's positive that these issues will be further vented."

In rejecting the consent decree, Sporkin relied heavily on arguments raised in an 11th-hour protest by Silicon Valley lawyer Gary L. Reback on behalf of anonymous clients. In a highly unusual move, Reback filed a friend-of-the-court brief on behalf of three companies that refused to identify themselves. They argued that Justice should have considered the fact that Microsoft's dominance will soon go way beyond operating systems because it can leverage its position there to corner such closely related markets as business applications and networking, home software, and online services. In short, it might largely take control of the Information Superhighway.

Microsoft's opponents now hope the government will take steps to make that more difficult, if not impossible. "People said there was nothing we could do about Microsoft," says attorney Reback. "There is, and we've done it here. Now the question the government has to deal with is: How do we want the Information Superhighway to work?"

Still, Microsoft is far from K.O.'d. In the wake of Sporkin's decision, Microsoft executives declined to say what they would do next. But the company has issued statements strongly disagreeing with the opinion. After Justice files its appeal, Microsoft is likely to come back swinging, and try to help Justice get the decree restored.

In his 45-page opinion, Sporkin concluded that the decree was not in the best interest of the public for various reasons (table). But the big surprise is his insistence that Justice should have brought more charges against Microsoft. He rejected the decree in part because Justice "was unable and unwilling adequately to address certain anticompetitive practices" that the decree did not mention. Further, he said, Microsoft was likely to continue those practices. Foremost among the supposed tactics that concerned Sporkin is the allegation that Microsoft preannounces products that aren't ready for market to keep customers from buying similar ones from competitors. Justice rejected Sporkin's arguments. And it contends that turning over more information about its Microsoft consent decree--as he says it should--would jeopardize future settlements with other companies.

If Justice loses its appeal, its options in cracking down on Microsoft are limited. It could renegotiate a new consent decree. But that would require backpedaling by Bingaman and Gates. Microsoft lawyers have insisted that they would not consider any other settlement, and Justice pointed out in a Jan. 20 hearing before Sporkin that after four years of investigation by the FTC and Justice, the decree was the best case it could make. Sporkin threw that out after a few weeks' review.

Justice also could try to prosecute the case in court. But even if Justice won at trial, legal experts say, it would probably lose on appeal. Preannouncing products is common industry practice, and courts in the past have failed to deter other companies--IBM, for example--from such tactics. And no court has ever successfully impeded a company dominant in one market from taking over another--making the argument that Microsoft is in danger of taking over the Information Highway a dubious one. "Those kinds of predictions, while plausible, are so uncertain that an appellate court would be very nervous about buying it," says William E. Kovacic, an antitrust law professor at George Mason University.

MICRO-BASHING? Much of the software industry would be happy just getting an airing of their grievances against Microsoft. Software companies charge, for example, that Microsoft requires them to disclose their own product plans in order to get early access to its operating system, then takes their ideas and announces competing products. They also claim that Microsoft will cut them off from information if they publicly complain. A public trial, says one executive, "may change the public image of Microsoft" as a great American company.

But those charges have always been murky. If Bingaman could not find enough evidence in a nonpublic investigation, would a public trial do any better? So far, few rivals are coming forward with public allegations against Microsoft, allegedly fearing retaliation. And some companies think the charges are overblown. "There's so much rhetoric and so little fact to support these arguments," says Symantec Corp. President Gordon E. Eubanks, "that close scrutiny would probably reveal poor business decisions by competitors, rather than a conspiracy by Microsoft, is the problem."

If its appeal of the Sporkin decision fails, Justice's final option would be to drop its case altogether. But if the consent decree was a disappointment to competitors, that would be considered a disaster. So, rivals are left to hope that, whatever happens, the rising intensity of criticism of Microsoft's dominance will cause it to moderate its push into new markets. "Microsoft will change its behavior in order to avoid possible confrontation," predicts Mayer. Wishful thinking? Perhaps. But Judge Sporkin has handed a potent argument to those who thought Microsoft was unstoppable.


ANTICOMPETITIVE PRACTICES The judge contended the government and Microsoft "have been unable and unwilling adequately to address certain anticompetitive practices" the company has vowed to keep using

FEW COMPLIANCE MECHANISMS The settlement didn't adequately define how Microsoft would be made to comply with the deal's terms

INSUFFICIENT DETAILS The government did not provide sufficient details about its agreement with Microsoft

NARROW SCOPE The settlement should have been more far-reaching


BINGAMAN: Her best deal wasn't good enough