Bill Gates Isn't Home Free Just Yet

Will recent allegations alter Microsoft's deal with Justice?

Is Microsoft Corp. (MSFT ) up to its old bare-knuckled tactics? That's the allegation being made by once-reticent companies now trying to scuttle a proposed settlement between the software giant and the U.S. Justice Dept. With hearings on the proposed deal slated for Mar. 6, companies such as Sony (SNE ), Palm (PALM ), and SBC Communications (SBC ) charge that Microsoft is still bullying its rivals and trying to leverage its desktop monopoly into new areas as diverse as handheld software and Internet telephony.

The companies are already having an impact. Microsoft and Justice have agreed to "clarifications" to their pact that will require Microsoft to better interconnect its software with other companies' programs. Now the new complaints aim to convince Judge Colleen Kollar-Kotelly to do more than strengthen the settlement to remedy Microsoft's past monopolistic behavior. They also seek to prevent Microsoft from continuing to use its power to gain unfair advantages in new markets.

The companies certainly have compelling stories to tell. Handheld-device maker Palm Inc., for instance, has been fighting for 18 months to have Microsoft include tools to create Palm programs in Visual Studio.NET, Microsoft's just-released package for software applications developers. If Palm is shut out of Visual Studio, independent developers specializing in handheld device applications could churn out loads of nifty new networked products for Microsoft's PocketPC while Palm would be left high and dry. That would give PocketPCs a big competitive advantage over handhelds using the Palm operating system.

Palm says the giant has fought it at every turn. First, say execs at Santa Clara (Calif.)-based Palm, in the summer of 2000 Microsoft didn't return their calls concerning Visual Studio. Then, they say, Microsoft claimed that it didn't have the resources to accommodate Palm. As the months wore on, Palm executives grew more concerned. They worried that Palm could suffer the same fate as Netscape Communications or Microsoft's desktop-software competitors. "Ultimately, Microsoft's behavior would have eliminated Palm as a competitive platform," Palm's lawyers complained in a Jan. 28, 2002, memo to the Justice Dept. opposing the settlement.

Other companies have similar complaints. Sony Corp., which makes several high-end PC models, says Microsoft is using the proposed settlement as an excuse to force PC makers to accept unfavorable Windows licensing deals. SBC Communications Inc. accuses Microsoft of trying to dominate the Internet telephony business by embedding key software into Windows XP.

But Palm's complaints may have the biggest impact. Besides opposing the settlement, the company has also agreed to be a witness for nine states proposing much tougher penalties in hearings beginning on Mar. 11. Chief Competitive Officer Michael Mace will argue that even prior to the problems with Visual Studio, Palm was denied information needed to connect its equipment with Microsoft's desktop programs. Mace says he's troubled by the forces Microsoft is "aligning against us," adding, "we just want a level playing field."

Microsoft, for its part, denies it has done anything wrong. Officials say they made an offer allowing Palm to write programs for Visual Studio in January and have yet to hear back. More broadly, Microsoft argues that none of the issues raised by Palm relate to the findings against it in the current case and therefore shouldn't play into the remedy. "These issues don't have anything to do with the case," says company spokesman Vivek Varma.

Judge Kollar-Kotelly's reaction to Palm's arguments may indicate what she thinks of the entire case. If she agrees that Microsoft's behavior in handhelds is a recurrence of the monopolistic behavior it displayed in desktops, she might side with the states or tell Justice to renegotiate its deal. Were that to happen, Microsoft would soon be the one complaining.

By Dan Carney in Washington, with Cliff Edwards in San Mateo, Calif., and Jay Greene in Seattle

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