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Antitrust questions dog Microsoft

Microsoft is facing renewed criticism from consumer groups charging that the software giant's marketing methods are anticompetitive.

On the day of its latest Internet Explorer launch, Microsoft is facing renewed criticism from consumer groups that charge that the software giant's methods of marketing its software are anticompetitive.

Washington-based Consumer Project on Technology began circulating a letter yesterday calling on the Justice Department's assistant attorney general, Joel Klein, to investigate claims of predatory pricing and illegal bundling of Internet Explorer.

"Microsoft should not be permitted to drive Netscape's Navigator IE 4.0 shakes industry and other products out of the market by offering [IE] for free; and Microsoft should not be permitted to bundle [the browser] with its operating system or integrate [it] with the operating system in ways that are unavailable to other firms," the letter states.

The letter comes as Microsoft is releasing its much-promoted 4.0 version of Explorer. Users can download the company's latest browser for free and integrate it into Windows 95, or they can wait until Microsoft ships it next year as part of Windows 98.

James Love, director of the Consumer Project on Technology, said the stakes in Microsoft's bid to dominate the browser market justify swift action from the Justice Department.

"We're afraid that if Microsoft is Policing Redmond's rise able to bankrupt Netscape, they may well be the 900-pound gorilla in the standard-setting arena for applications that run on the Internet," Love said. "It's not in the public interest to permit Microsoft to define and extend its monopoly in the operating system into these key applications."

Microsoft said criticism about IE is not new and insisted that the antitrust complaints are unfounded. "Navigator is available from literally tens of thousands of sites," Microsoft spokesman Mark Murray said. "There are absolutely no limitations on consumers' choice [for browsers]. It's clear that Internet Explorer is winning the battle on product quality and features."

The sentiments raised in Love's letter are echoed by other consumer groups and some antitrust attorneys. They point to instances in which the software giant has agreed to curtail certain practices that were criticized as being anticompetitive, and they say Microsoft's undisputed domination in operating systems leaves it vulnerable to challenge.

"Microsoft's aggressive tactics have been complained about to the Justice Department, and this is something that really will affect what people are able to do [online]," said Pam Samuelson, a professor specializing in antitrust law at University of California at Berkeley. "There's reason to be worried about monopolization of the network."

Steve Smith, a partner within the antitrust group at the law firm of Morrison & Foerster, agreed that Microsoft's tactics could be challenged if its critics can demonstrate the following: that the browser and the operating system are two separate products; that Microsoft dominates the market for operating systems; and that by bundling the two together, the result is lessened competition in the overall market for browser software.

"The principal thing you'd want to focus on is what is the effect of Microsoft's conduct on the market for browsers," he said.

Ian Feinberg, an attorney practicing antitrust law at Gray Cary Ware & Freidenrich, added that even if consumers or the government is able to prove anticompetitive practices, finding an adequate remedy will be difficult.

"What are you going to tell Microsoft to do or not to do?" he asked. "It's not clear that the consumers are better off if Microsoft is not permitted to enrich its operating system environment to include a browser."

Other choices, such as requiring that Microsoft get out of the applications market or that the software giant be treated as a kind of public utility are also unworkable, Feinberg contended.

In late July, another group that accuses Microsoft of unfair competition released a report that takes the software giant to task for its bundling of Explorer and setting up arrangements with Internet service providers to offer the browser exclusively to its subscribers. NetAction, the San Francisco-based group, has also mounted a campaign to raise awareness in Congress.

The Senate has responded by announcing that a key subcommittee will hold hearings on anticompetitive practices in the computer industry. A staff member of the Senate Commerce subcommittee on business rights and competition said an agenda has yet to be drafted for the hearing, which is expected to be held in November. But he noted that Microsoft and its marketing of Explorer are likely to be discussed.

If Love's letter is generating interest in Microsoft within the Justice Department, it wouldn't be the first time. The company settled an antitrust investigation in 1994 by agreeing to end certain practices, including requiring PC makers to pay a royalty to Microsoft for every computer shipped, regardless of whether the machine carried its products. Microsoft admitted no guilt in the deal.

Last year, the department indicated it was looking into more antitrust allegations regarding the company. That announcement followed a letter sent to the department in August 1996, in which Netscape complained that Microsoft allegedly pressured PC makers to bundle Explorer with its products. Executives from Netscape and Justice Department officials were unavailable for comment.

The agency is also in the process of reviewing Microsoft's activity in the streaming media market, with particular attention to the software giant's investments in Progressive Networks (now called RealNetworks), VDOnet and VXtreme, a recent acquisition.

Microsoft holds a board seat on VDOnet and a five percent stake in the company, while in July it acquired a ten percent nonvoting stake in RealNetworks. It acquired VXtreme outright in early August.

Where Apple Computer (AAPL) is concerned, antitrust regulators may look into Microsoft's access to QuickTime patents and the technology's progression toward streaming, as well as a number of other issues related to the $150 million investment that surprised industry watchers at Macworld Boston in August. (See related story)

However, the Justice Department cleared Microsoft's purchase of Internet terminal maker WebTV, first announced in April, after what the agency called a "thorough investigation" into possible violations of antitrust laws in emerging convergence technologies.

Microsoft critics continue to argue that the company's plans to integrate Explorer into its Windows products is unprecedented and dangerous for a medium that is taking on increasing importance in the world of business and personal communications.

"This is the first time that I know of that Microsoft has flatly admitted it's bundling an application straight into [its operating system]," said Gary Reback, an antitrust attorney at Wilson Sonsini Goodrich & Rosati who has taken on Microsoft in the past. "It's as if the person who owned 95 percent of the TV [market] decided what channels came on those TVs. We've always had rules in antitrust law that you can't do that."

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