Ready To Drop The Big One On Bill Gates?

The feds may soon hurl a major antitrust suit at Microsoft

For months, the legal battle between Microsoft Corp. and the Justice Dept. has been marked by nearly weekly court hearings. But an eerie quiet has settled in lately as combatants await the next skirmish: an Apr. 21 appeals court hearing on a federal ruling that Microsoft had to stop forcing computer makers to install its Internet browser as a condition for getting Windows 95.

Don't let the lull fool you. At the Justice Dept.'s antitrust unit, attorneys are poring over hundreds of documents--many of them contracts between Microsoft and its partners--as the division mulls what could be a landmark monopolization suit. Justice hasn't decided whether to pull the trigger. But it has retained high-profile litigator David Boies to help prepare an attack that would once and for all take on the big question: Does Microsoft unfairly use the dominance it derives from Windows to maintain control over the marketplace and to conquer new markets, such as Internet browsers and Internet content?

If the suit goes forward, it will make the current courtroom battle over enforcing a 1995 consent decree look like schoolyard fisticuffs. Indeed, an action under the Sherman Antitrust Act would be the most important antitrust battle in years, ranking alongside Justice's prosecutions of IBM and AT&T, which both ended in 1982.

MEMO PATROL. Unlike the IBM and AT&T cases, Justice has no plan to restructure or break up Microsoft. Instead, Justice officials want to halt a number of anticompetitive actions that they claim Microsoft uses to crush any threat to Windows' desktop hegemony. Trustbusters fear that once Microsoft can leverage Windows by adding extensions and making certain kinds of deals with content companies, it could control much of Internet commerce. Officials hope to make a decision on whether to proceed before the release of Windows 98--which blends the Internet Explorer browser and Windows--expected sometime in June.

To build such a case, trustbusters would have to prove that Microsoft intentionally committed anticompetitive acts to protect its monopoly. Sources close to Justice say antitrust chief Joel I. Klein is looking at several internal corporate memos, at least one by CEO William H. Gates III, that indicate the company planned a full-scale attack on perceived threats to Windows by Netscape Communications Corp. and Sun Microsystems Inc.

While it's not known precisely what charges its lawyers might settle on, sources close to the probe say Justice is concerned with several potentially illegal practices. First, they are examining whether Microsoft may be striking exclusionary deals with Internet content and service providers that could give the company a dangerous degree of dominance over the Web. Second, they are scrutinizing whether Microsoft attempted to undermine Sun's Java, which could make Windows less important to software writers.

Justice would likely argue that Microsoft is violating laws barring monopolies from using their market power to exclude competitors. Under antitrust law, behavior that would be considered acceptable by a company with a small market share could be abusive if committed by a monopolist. So Justice could claim, for instance, that Microsoft's decision to combine Internet Explorer with Windows, a product virtually all PC makers must buy, would illegally foreclose browser competition.

HOT BUTTONS. Klein's investigators are also scrutinizing possibly exclusionary deals that Microsoft has cut with content developers creating "channels" on Microsoft's Internet browser. These channels--buttons that link to the Web--will be incorporated into Windows 98 as part of Microsoft's Active Desktop. They feature Microsoft-developed Web content, such as the Microsoft Network, as well as that of partners, including Walt Disney Co. A few content developers--including Wired Digital and AudioNet Inc.--acknowledge receiving civil investigative demands for documents.

How could such deals stifle competition? Justice worries that if Microsoft succeeds in getting content providers to favor its browser, it could shut out browser rivals, such as the Netscape Navigator. "If you have enough deals, then it would put a competitor (like Netscape) at a disadvantage," says Steven C. Salop, a professor at Georgetown University Law Center. "It would raise rivals' cost and entrench Microsoft's operating system monopoly."

Another possible threat to Netscape is deals that Microsoft is striking with companies that connect consumers to the Internet. Regulators are trying to determine whether these deals require Microsoft's Internet Explorer to get preferential treatment.

If Microsoft succeeds in making Windows the dominant portal to the Web, Justice worries that it may control much of what goes on there. Consumers who want airline tickets, for example, might be whisked to Microsoft's travel service by pressing the travel icon on the desktop screen--lessening the chance they will discover other travel sites. Content companies worry that anybody that doesn't get onto that Windows screen could suffer. "If Microsoft can pick winners, then we don't have that even playing field," says Garth Saloner, a professor at Stanford University Graduate School of Business.

Justice's probe has also focused on Microsoft's role in the Java wars. Java could provide an alternative software "platform" to Windows. Microsoft licensed the technology from Sun. But Sun has sued Microsoft for breach of contract, claiming that Microsoft had made unauthorized changes to make a version of Java for Windows only. This might be a difficult case to make. "Justice would have to prove that Microsoft has created an incompatible version of Java simply to exclude competitors," says antitrust attorney Marc Schildkraut. "If Microsoft can show some increased benefit, it could be tough for Justice."

Privately, Justice officials hope that all the talk about a Sherman case will encourage Microsoft to come to the negotiating table. Considering Microsoft's attitude in fighting Justice's other cases, that's highly unlikely.

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