Commentary: Microsoft Could Still Lose a Lot of Yardage

For a company that's supposedly about to end its four-year legal nightmare, Microsoft Corp. (MSFT ) is facing some tough going. Witness the bipartisan barrage of criticism it received in the Senate Judiciary Committee on Dec. 12. Republican Orrin Hatch of Utah said he had "serious questions" about the enforceability of the company's settlement with the Justice Dept. Democrat Herb Kohl of Wisconsin was even more incredulous: "Are we really confident that in five years this settlement will have had an appreciable impact? I'm not."

If nothing else, the hearing proved that Microsoft's enemies have staying power. That became clear when Senator Patrick Leahy (D-Vt.) urged the judge handling the case to "seriously consider" an alternative proposal by nine state attorneys general. The states are pushing a far tougher set of remedies than those agreed to by Justice. The AGs want to force Microsoft to sell a stripped-down version of Windows, include the popular Java programming language in Windows, and make versions of its Office software for additional operating systems.

WISH LIST. On Dec. 12, Microsoft dismissed the states' proposals in a court filing, arguing instead for the Justice Dept. settlement. Small wonder. The states' proposals read like a wish list from the software giant's rivals. If adopted, they would surely hamper Microsoft. Could the remedies stick? Maybe--if the states can win over U.S. District Court Judge Colleen Kollar-Kotelly.

Thanks to California, which has agreed to underwrite most of the cost of litigation, the group has the resources to fight all the way to the Supreme Court. Furthermore, legal experts agree that the states' proposals are well grounded in antitrust law. "These proposals are a credible outline of additional penalties that address the findings accepted by the court," says Ernest Gellhorn, a conservative antitrust expert at George Mason University who generally is sympathetic to Microsoft.

Indeed, several of the proposals do a better job of reflecting the June 28 Court of Appeals ruling than does the Justice settlement. Requiring a stripped-down version of Windows, for instance, comes almost directly from the court's finding that Microsoft had unlawfully "commingled" software code from its Internet Explorer browser with Windows to thwart competitors. The government's solution to the problem--merely allowing consumers to delete icons of certain Microsoft programs--was rejected by the court when it turned down Microsoft's petition for a rehearing of part of the case.

Another example is Java. The appellate court slapped Microsoft for illegally quashing the competitive threat posed by Java, which makes it possible for programmers to create applications that can run on any operating system. The Justice settlement doesn't mention Java.

If the state remedies prevail, they could help level the playing field in the tech industry. Creating a stripped-down Windows would make it easier for PC makers to put together an alternative package of software applications from a variety of companies. The remedies addressing Java and Office aren't likely to cause a major shift in the balance of power, but they could help Java creator Sun Microsystems Inc. (SUNW ) and Linux operating-system marketer Red Hat Inc. (RHAT )

The states still face hurdles. For one, they may never get their day in court. Before Judge Kollar-Kotelly begins hearings on their proposals next March, she must evaluate Justice's settlement. She could simply accept the Bush Administration handiwork, making it hard for the states to press their case. For that reason, says Iowa Attorney General Tom Miller, "we hope she doesn't rule on the [Justice settlement] until she has heard from us." The betting is that Miller will get his wish, but it's no sure thing.

If the AGs do get a chance to make their case, the hearings could get ugly. Microsoft will fight them tooth and nail. Indeed, Microsoft lawyer Charles "Rick" Rule told the Judiciary Committee that his client already had given up more than it wanted in the deal with Justice. "Quite frankly," he said, "[this] is the strongest, most regulatory conduct decree ever." But the AGs are not about to give up. They have already come further than many expected. And it now looks like Microsoft may face more opponents than it bargained for.

By Dan Carney

With Jay Greene in Seattle

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