European Microsoft server case unlikely to translate here

Microsoft on Monday filed a response to a European Commission charge that the software giant is using its dominance in PC operating systems to block out rivals in the booming market for software that runs on servers--high-end computers that power Web sites and link networks of PCs together within corporations.

In August, the European Commission, which investigates antitrust issues for the 15-nation European Union, found evidence that Microsoft may have abused its power to gain a foothold in the server software market and increase market share for its Windows 2000 server operating system.

The European Commission's investigation could propel the Justice Department or state attorneys general to scrutinize Microsoft's business practices in server software in the United States, analysts and antitrust lawyers say.

But that's a remote possbility, most add. For one, Microsoft holds only 38 percent of the server software market, a far cry from its virtual monopoly in desktops and a threshold too low for U.S. law.

"If the Europeans find Microsoft had violated competition in server software, it could embolden people here to file another case," said Bob Lande, a University of Baltimore law professor and director of the American Antitrust Institute.

But, he added, "unless it was truly outrageous conduct by Microsoft, 50 or even 60 percent market share" would make for a better case.

In the U.S. antitrust case against Microsoft, the Justice Department focused on Microsoft's bundling of its consumer operating system and Web browser software. A U.S. judge this summer ordered a breakup of Microsoft, but the case is under appeal.

Still, it's extremely unlikely the European Commission investigation into Microsoft's server software will crop up in the current Justice Department case, said Michael Gartenberg, a partner in New York-based venture capital firm Hudson Venture Partners. "The ruling has come down. Microsoft has already appealed it. Nothing is going to change there," he said.

But it's quite possible the European Commission's software investigation may resurface again in other legal action in the United States, he said. "Once you start digging around in one place, other things tend to pop up as a result," Gartenberg said.

Picking the best target
Analysts and antitrust lawyers say U.S. regulators focused on the desktop market because the Web browser case was much stronger in the late 1990s and because Microsoft's market share in the server software market was still small at the time. In 1998, at least one state official said the issue of the Windows server operating system could be raised.

"They've been fooling around with the browser case since 1995, and once you march off in one direction, it's hard to abandon it," Lande said. "Why didn't they add server software to the original case? You can imagine the trial staff saying it would have doubled the size of the case.

"You don't go after everything. You just pick the best target at the time and go after them," Lande added. "Any time you narrow a case--as any prudent enforcer does--the case is more trial-able. The disadvantage is that you miss something, especially with the market evolving."

Microsoft has risen quickly in the server market. The company sold a mere 16,000 copies of Windows NT in 1992 but increased that to 2 million copies in 1999, said IDC analyst Dan Kusnetsky.

But Microsoft still hasn't been as dominant as it has been in the desktop market. The company has been hobbled by delays, cultural barriers, software that didn't work as well as traditional server operating systems such as Unix, and the rise of Linux, a clone of Unix that's available for free or very low cost.

Microsoft's server operating system market share was 38 percent in 1999, Kusnetzky said. Linux had 24 percent of the market, Novell NetWare 19 percent and Unix 15 percent, but Linux was the fastest-growing.

Does the U.S. have a server case?
The European Commission's legal action began in December 1998, when Sun Microsystems, one of Microsoft's most outspoken rivals, filed a complaint with the commission. Sun alleged that Microsoft's dominance in the desktop computer market should require it to disclose how server software can interact with desktop software. Sun spokeswoman Penelope Bruce said other companies also were involved in the complaint, although the European Commission didn't name them and Bruce declined to do so.

Whether or not the United States pursues its own case against Microsoft in the server software market depends on the outcome of the existing case, and, more remotely, whether Democratic candidate Al Gore or Republican George W. Bush wins the presidential election, lawyers say. Bush is seen as more friendly to business interests.

The server software issue could be diminished if the company ends up being broken into two pieces--a Windows operating system company and an applications company. Microsoft's other server software, such as email and database software, would be separated from Windows.

Microsoft's Windows 2000 server operating system has comparatively little showing in the high end of the server market, where profit margins are plump, administrators are demanding and computers have dozens of processors.

The lukewarm reception, Kusnetzky believes, partly is a consequence of Microsoft's marketing methods. The company plugged its software to business decision makers such as managers instead of information technology (IT) personnel, he said.

"Microsoft targets Dilbert's boss, not Dilbert," Kusnetzky said.

But that strategy--infiltrating corporate computing networks by surrounding the high-end computers with hundreds of Windows computers--went only so far. Forcing IT personnel to support Windows made Microsoft an enemy, so now Microsoft faces cultural barriers as well as technical ones in selling high-end Windows 2000 versions such as Advanced Server or Datacenter.

Lande said the Justice Department and state attorneys are more likely to pursue a server software case if they win the first trial.

"If they lose the case, they'll curl up and retreat. You can only get knocked out and bloodied so much before you give up," he said. "But if they win, they'll say it's the same predatory practices and Microsoft is doing it in a slightly different market. It's a pattern. 'We nailed them once; let's nail them again.'"

There are many ways that Windows desktop software can take advantage of features in Microsoft server software, Kusnetzky said, though the ties aren't as strong as the integration of the browser and desktop versions of Windows that was at the core of the U.S. antitrust case.

For one, the Microsoft Office suite of business software advertises features such as group scheduling, messaging and collaboration. Those functions don't work without a server running Microsoft Exchange email software, however.

Similarly, Web publishing features of Microsoft Word and PowerPoint benefit from having servers running Microsoft's Internet Information Server. And when sharing a Microsoft Access database with more than a certain number of people, "you're certainly led to Microsoft SQL Server," Kusnetzky said.

In addition, new desktop features of Windows 2000 such as IntelliMirror, Active Directory and group security require Windows 2000 on the server, he said.