Commentary: How Microsoft Stays Two Steps Ahead of the Courts

Presidents come and go, antitrust policy waxes and wanes, and the Microsoft (MSFT ) case gets passed from judge to judge. But one thing never changes: the company's personality. Chairman William H. Gates III is still in charge, he still uses the same controversial techniques to expand his business, and he's as aggressive as ever.

For evidence, look no further than Windows XP, the latest version of the company's PC operating system, which is scheduled for release on Oct. 25. It's a monopoly product. More than 95% of all PC buyers will get it. And it's being packaged with a raft of Microsoft's other products, including MSN Internet service, Windows Media Player 8.0, and the MSN Messenger instant-messaging service. The transparent goal: to push the vast installed base of Windows customers to use other Microsoft software as more and more aspects of their lives migrate to the Net.

This land grab raises an important question: Does Microsoft's strategy violate antitrust law? Critics say yes. By weaving into the Windows interface software that other companies sell separately, such as its media player, they believe Microsoft is guilty of illegal "tying." That's the legal term used to describe a company that leverages a monopoly in one market into an adjacent area. Opponents also contend that Windows XP, when viewed in combination with Microsoft's other aggressive actions, such as writing contracts that discourage PC makers from distributing rival products, could be construed as illegal monopolization. That's when a company tries to kill rivals who threaten an existing monopoly.

NO VICTIM. Sound familiar? It should. These are the charges leveled against Microsoft in the current antitrust case. And they are the legal issues that will likely hang over the company for many years to come. Microsoft is committed to pushing its operating system ever outward, adding capabilities as new technologies emerge. And that means trustbusters are likely to keep monitoring whether the Windows behemoth is getting too big.

Whether a successful legal assault could be mounted against Windows XP depends, in large part, on how the District of Columbia Circuit Court of Appeals rules on the pending Microsoft case. This will mark the first time that a major appeals court has considered the application of tying and monopolization principles to the software industry. If the court finds that the government's case was valid, then it probably wouldn't be that hard to attack Windows XP.

But if, as expected, the appeals court takes a laissez-faire approach, then bringing a successful suit against Microsoft becomes much harder. Another factor could complicate any antitrust attack on Windows XP: the lack of an obvious poster child--a struggling young company like Netscape that is an innovative pioneer of the Web and faces destruction because of Microsoft's conduct.

Bottom line: Reining in Microsoft could be an iffy proposition. Given the complexity and rapid changes in high-tech industries, most federal judges are "skeptical of [their] ability to make technological judgments," says George Washington University antitrust scholar William E. Kovacic. "They're unlikely to intervene in markets unless they are highly confident that they have a good reason for doing so."

Over the long term, if Microsoft's opponents want to defang Windows XP, their best bet could be to work on an argument that the Justice Dept. raised in the antitrust trial: that the company is retarding innovation. In several briefs filed with Judge Thomas P. Jackson last year, the government argued that Microsoft was scaring rivals out of its path, thereby chasing away new ideas that could improve computing.

This reasoning impressed Judge Jackson, but it's still not widely accepted in the antitrust community. Why? Because Microsoft's XP operating system is clearly good for many consumers, who are grateful that the company bundles so many of the services they want into one easy package. Look for this debate--between consumer convenience, on the one hand, and innovation, on the other--to grow more urgent in coming years.

While the U.S. twiddles its thumbs over antitrust policy, Europe could take the issue into its own hands. Until recently, the European Commission let Washington take the lead in policing the software maker. That's changing. European Competition Commissioner Mario Monti has become alarmed by signs that U.S. courts could turn lenient against the software maker. He announced an investigation in August. Instead of duplicating the Justice Dept. attack on Microsoft's dominance of the browser market, however, Monti has zeroed in on its attempt to corner the server market. He could expand his inquiry at any time.

DIRE CONSEQUENCES. This is no fainthearted effort. Only one official is deployed in most EC antitrust inquiries. Against Microsoft, though, lawyers in Brussels say Monti has formed a "SWAT team" with more than half a dozen full-time investigators. Unlike the U.S., the EC isn't examining the possibility of breaking up Bill Gates's empire. But the European punishment could end up being quite severe--forcing Microsoft to reveal at least part of its Windows source code.

So don't be surprised if the Microsoft drama drags on for a while longer--in fact, quite a while longer. If regulators are to do much more than nip at Bill Gates's heels, it will take strong action in Europe or clear support in the U.S. for some of the novel theories raised in the Netscape case.

By Mike France

With William Echickson in Brussels

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