Deal may put Microsoft at head of the class

A proposed settlement agreement to donate some $500 million in technology to schools could give the software maker a chance to erode Apple's position in education.

Michael Kanellos Staff Writer, CNET News.com
Michael Kanellos is editor at large at CNET News.com, where he covers hardware, research and development, start-ups and the tech industry overseas.
Michael Kanellos
5 min read
A proposed settlement agreement in a series of antitrust suits may not only give Microsoft a fairly inexpensive legal resolution--it may also help the company and its PC allies further erode Apple Computer's position in education.

Under a settlement proposal in a series of private antitrust lawsuits announced Tuesday, Microsoft agreed to donate approximately $500 million to help bring technology to some of the nation's most disadvantaged schools. The deal will also allow these schools to obtain a virtually unlimited supply of Microsoft software for the next five years.

Those terms could hurt Apple and other software providers, according to analysts and educators. Historically, education has been one of Apple's primary markets. And although the company has slipped to No. 2 in kindergarten through grade 12--behind Dell--it still has a larger installed base than anyone else.

Free software, though, is hard to pass up. Apple, as well as Linux companies and other educational software developers, could find themselves out in the cold in school districts flush with new Microsoft products.

Michael Theochares, an educational multimedia specialist at a Massachusetts public school, decried the settlement as "anticompetitive" and "targeted at a competitor with dominant market share" in elementary and secondary schools.

"What's even more infuriating is that Microsoft is turning this into an altruistic proposition," he said. "You can't get better advertising than this. This is a settlement?"

Microsoft could wind up "undercutting everyone in the education market," Gerard Klauer Mattison analyst David Bailey said. The best-case scenario for Apple would be that Microsoft increases the overall level of PCs in schools without directly harming a company like Apple, he said.

Linux specialist Red Hat Software tried to counter Microsoft's move soon after the settlement was announced. The company said it would provide its software to every U.S. school district and encouraged Microsoft to convert the software component of the deal to increased hardware donations, which costs the company little.

"While we applaud Microsoft for raising the idea of helping poorer schools as part of the penalty phase of their conviction for monopolistic practices, we do not think that the remedy should be a mechanism by which Microsoft can further extend its monopoly," Red Hat CEO Matthew Szulik said in a statement.

An Apple spokeswoman declined to comment on the issue.

The potential pain for Apple comes in the unique settlement terms. Under the deal, Microsoft will grant approximately $500 million to help underprivileged schools create self-sustaining technology programs. Of that, $90 million will go to teacher training, while $160 million will go to technical support. Microsoft will also match contributions from other donors.

Additionally, Microsoft would give the schools software and would give nonprofit organizations approximately 1 million licenses for the Windows operating system, which the nonprofits in turn would use to provide refurbished PCs to the schools.

The donations would go to public elementary and secondary schools, at which 70 percent of students are eligible for federal meal assistance, or approximately 14 percent of the nation's schools, according to Microsoft. Approximately 12,500 schools, representing 7 million students and 400,000 teachers, would be eligible to participate in the program.

"A slap in the face"
Nancy Hudnall, an accountant from Rolla, Mo., faulted the terms of the proposed deal.

"Settlement of this case as proposed is a slap in the face of all consumers, as well as free trade," she said. "By allowing Microsoft to remedy their anti-competitive actions by infiltrating our schools, the consumer and Microsoft are in a 'lose-win' situation."

Hudnall emphasized that she is a user of Microsoft products and has no grudges against the company. "However, I do feel that our legal system is not acting in the public's best interest," she said. "The need of schools should be addressed in another manner, not as a means to alleviate our judicial system's inability to deal with Microsoft's unethical business dealings."

With these donations, Apple equipment becomes far less attractive to cash-strapped districts. Even if the grant funds are used to buy Apple equipment, a district would have to pass up opportunities for free software.

In recent years, Apple has seen its share of the market decline because of price competition. Dell is now No. 1 in the education market, with 37 percent of new elementary and high school sales in the second quarter, according to IDC. Apple came in second, with 23 percent.

Familiarizing students with Microsoft technology could also make loyal customers out of today's students. Developing familiarity, in fact, was the basis for Apple's push into education back in the 1980s. The theory was that students would stick with the technology they understood best. While there may be some truth to this, it hasn't completely panned out in the numbers. Apple's share of the PC market is below 5 percent, far below its share in education.

Microsoft CEO Steve Ballmer denied the proposed settlement was an attempt to boost the company's share of the education market.

"The benefits we provide can be used for PCs or Macintoshes," he said. "It can be used for PC software or Macintosh software. Certainly, the money can be used for non-Microsoft software, so I don't view it as some big thing about market share."

IDC analyst Roger Kay pointed out that Microsoft also produces applications for Apple computers.

Although the settlement terms will likely help Microsoft's position in education, more tangible benefits come from the relatively light terms. The company is effectively making a $500 million charitable donation and giving away its own software to settle a case where the liability could have stretched into far higher figures.

The case in some ways is being settled for pennies on the dollar, according to Bob Lande, an antitrust professor with University of Baltimore School of Law.

The company will also likely get positive public relations messages out with the deal, said Gartner Dataquest analyst Michael Silver.

"This gets Microsoft out of all these lawsuits in one fell swoop," Silver said. "It's a penalty, but it makes Microsoft look good and gives schools PCs, and in so doing would give Microsoft an even larger installed base than they already have."