Microsoft has a big day ahead. On Oct. 25, the company is planning a massive party to celebrate the launch of Windows XP, the latest version of its desktop operating system. Chairman William H. Gates III has called it his most important new product since Windows 95. He isn't the only one who's excited: The whole PC industry is counting on XP to ignite consumer spending and end its worst doldrums in a decade.
But the party may not go off as planned. The Justice Dept., which was expected to approach Microsoft Corp. (MSFT ) with kid gloves, appears to be taking aim at the new operating system. And some state attorneys general are charging that XP, which will come bundled with an impressive array of new technology, is a dangerous landgrab. Emboldened by last month's appeals-court ruling that the company violated the Sherman Antitrust Act, they are investigating whether Microsoft is illegally using XP to extend its dominance into new markets.
So far, Justice is mum about its views on the new product. But actions speak louder than words. In a surprise move on July 13, incoming Justice antitrust chief Charles James joined a couple of the attorneys general in a request to quickly get a new judge assigned to the Microsoft case. The motion signaled that the Bush Administration could be tougher on the company than expected--and wants to impose new restrictions on its business practices as soon as possible. Microsoft responded on July 18 with its own motion asking the court to reaffirm the company's control over the design of Windows.
The government's moves raise the possibility that it may intervene to slow XP's rollout. Specifically, it might seek an injunction halting the release of the blockbuster product in the next few weeks--a gutsy move that would roil the PC industry. Even if trustbusters don't go that far, they will be able to air their concerns soon, either in court or at the bargaining table. "Microsoft may be repeating some of its predatory practices," says Connecticut Attorney General Richard Blumenthal. "If it uses XP to extend its monopolistic power in the operating system, that's a real problem."
Gates is well aware that XP is under scrutiny. So he has taken a few small steps to appease critics, such as giving PC makers and consumers more power to choose non-Microsoft products. But he's still playing hardball on other issues. For instance, he is withdrawing Sun Microsystems' Java technology from XP. That means Web applications using Java won't run on XP without installing extra software. More important, Gates is adamant that his company can put any new technology it wishes into the operating system. In Microsoft's July 18 motion, it asked the appeals court to reconsider a portion of its ruling suggesting that it might not have that right.
SHOWDOWN. Bill's commitment to bundling could set the stage for a showdown over XP's design. Given the industry dependence on Microsoft, the fight has implications far beyond Redmond. The AGs believe that last month's ruling bars the company from wrapping any feature into XP that could hobble a non-Microsoft competing software "platform," or program that serves as a base for other applications.
According to Blumenthal and other government lawyers, three XP features may fit this description. The first is instant messaging, a technology expected to one day offer a wide variety of new services, such as programs that help engineers in different locations work off the same blueprints at the same time. The second is Microsoft's Passport authentication technology, which verifies a consumer's identity and will allow the development of a new breed of services--which Microsoft is calling HailStorm--that can, for example, send an alert when a consumer's plane is late. Finally, there is Windows Media Player, which allows computers to play music and video. It could one day serve as a platform for new forms of entertainment.
With the imminent launch of XP, antitrust lawyers have been analyzing whether any of its new features might run afoul of the appellate court's ruling. That's tough to figure, because the final version of XP hasn't been released, and the legal definition of what constitutes illegal bundling remains unclear.
"NO MANDATE." If the appeals court accepts Microsoft's request to clarify its earlier ruling, that may provide some guidance. But no matter how the judges rule on the company's new motion, many experts believe that, in the long run, trustbusters could have a hard time stopping Microsoft from bundling these features into XP. "There is no general mandate in the D.C. Circuit's opinion for radical unbundling," says Iowa University antitrust scholar Herbert J. Hovenkamp, who has advised the AGs.
Consider instant messaging. Of XP's new features, this is the one that government lawyers probably have the best chance of attacking, because instant messaging could support a wide variety of innovative products. For example, new game software using the technology would let multiple users play against each other. Microsoft is also clearly trying to leverage its Windows monopoly to build a customer base for its messenger system rather than those produced by rivals.
But it's not an open-and-shut case. Instant messaging could never be the type of broad platform that, say, Netscape's Navigator browser could have been. The number of programs suitable to run on messaging software is much smaller than the number able to run on a browser, so the Netscape precedent set in the appeals court decision may not fully apply.
The bottom line: Any potential legal challenge to Microsoft's bundling decisions in XP is no sure thing. But that may not stop the trustbusters from trying. The reason? The company is betting heavily on XP's success. Threatening to ruin Bill's party may be the best way to get him to the bargaining table.
By Mike France
With Jay Greene in Seattle and Dan Carney in Washington