Hard to gauge extent, effectiveness of Microsoft concessions

The Redmond, Wash.-based software giant has tentatively agreed to sweeping restrictions on how it does business with its partners. The concessions include separating the Internet Explorer Web browser from its Windows 98 operating system as well as not charging PC makers higher prices for Windows 98 or Windows NT if these companies decide to sell products that compete with Office 2000 and other Microsoft software.

Although these compromises would seemingly resolve a number of the issues that precipitated the case, the fear is that they may loom large but prove irrelevant. Because of Microsoft's pervasive influence in the high-tech industry, any settlement could have unforeseen consequences and effects.

"The problem with conduct remedies, especially in extremely dynamic markets, is that they have a tendency to address stuff that is in the past and not the markets to come," said Dana Hayter, an intellectual property attorney with Fenwick & West in Palo Alto, Calif.

Three concessions stand out from the others: selling PC makers Windows at a standard price, without deep discounts for some; opening part of the Windows "source code"--in this case, application programming interfaces (APIs)--which would make it easier for competitors and others to develop Windows programs; and selling a version of Windows without a Web browser.

Uniform pricing presents one of the more interesting sticking points. To Gartner Group analyst Michael Gartenberg, the concession would have little impact on Microsoft and its revenue stream. The company could still offer volume discounts, and PC makers would still buy Windows.

"Vendors can already offer alternative operating systems like Linux today for free," he said. "The market has overwhelmingly endorsed Windows at this point, and another operating system coming up at a lower price won't represent much of a challenge for Microsoft on the desktop."

Restraint on how Microsoft offers discounts could greatly affect the sale of Office 2000. PC manufacturers complain privately that they are sometimes penalized for not taking other Microsoft products with Windows. Restraint of this behavior, for example, could benefit IBM, which offers Lotus SmartSuite on many of its notebooks and PCs and Lotus Domino on Netfinity servers.

But the threat of lost revenue may not work as a deterrent, because Microsoft might believe that such a restriction would be tough to enforce. Monitoring this kind of behavior and other restrictions on Microsoft's business practices, particularly those involving third parties, is very difficult, Hayter said.

"If Microsoft changes the way it prices the OS, for instance, and the Justice Department thinks the way Microsoft has done volume discounts favors some OEMs (original equipment manufacturers) over others, then they have to go back to court and have a hearing about giving preferences to favored OEMs," he explained.

Hayter is not convinced proposed restrictions would be enough to prevent Microsoft from "leveraging its OS monopoly and, frankly, in Office productivity applications that run on the OS to foreclose competitors' opportunities in new markets."

The loosening up of APIs is a long-sought prize by some in the software development community and also the government, which has accused Microsoft of withholding API information from its partners.

Microsoft can wield a tremendous advantage over competitors if its programmers have full access to APIs and others do not. Access to these secret recipes could enable Office 2000 to work better with Windows than Corel WordPerfect Office 2000.

Enforcement is once again a stumbling point, said University of Baltimore School of Law professor Bob Lande. "How do you guarantee Microsoft truly reveals all the API information and (doesn't) hold some back?"

Offering a version of Windows without the browser appears like a major concession--something Microsoft argued in court was technically near impossible--but in some ways it is not, say analysts.

"Microsoft can offer to unbundle the browser because there is no longer an issue at this point," Gartenberg said. "The battle there is already won."

But with AOL preparing the long-delayed and much anticipated Netscape Communicator 6, the browser wars could start again. Removing Internet Explorer as the default and obvious choice of browser could level the playing field for competing on the products' merits.

There is no guarantee the government will accept all or even part of Microsoft's settlement proposal or any new offers placed on the table. The deadline for ending settlement negotiations is fast approaching. Unconfirmed reports have the mediating judge, Richard Posner, prepared to call an impasse if no basic agreement is reached before Wednesday.

In addition, there is also likely a fear of words. Ambiguity in a 1995 consent decree between the DOJ and Microsoft, after all, allowed the company to eventually tie Internet Explorer with Windows 95 and Windows 98, indirectly leading to the current case.

"Microsoft has had two years to finely craft a proposal with lots of subtle loopholes, and the enforcers know this," said Lande. "So Microsoft puts the proposal on the table, and the enforcers say, 'Oh, my God, we got to work 24 hours a day to figure out what they are.'"

George Washington University School of Law professor Bill Kovacic believes some states will be a hard sell on almost any agreement restricting Microsoft's business conduct but not demanding breakup of the company.

"If I were placing bets, I would give odds of four chances out of 10 they will settle," he said.