Microsoft faces legal scrutiny at every turn

WASHINGTON--It was an arrangement that sounded uncomfortably familiar to many high-tech industry veterans.

At the opening of this week's Comdex trade show in Las Vegas, Bill Gates showcased a computing product that runs a Microsoft operating system, connects directly to Microsoft's Internet service, uses a chip made by long-time Microsoft ally Intel and is made by Compaq, one of the largest manufacturers of PCs sold with Microsoft software.

The concept is hardly unique, as America Online and other competitors are striking similar deals to bolster their online services. But the product, called the MSN Web Companion, bears one crucial distinction: It will be offered by the largest software company in the world, which has already been branded a monopoly by the judge presiding over its historic antitrust case.

"Microsoft operationally has just decided to forge ahead and ignore the Justice Department, except in obvious ways," International Data Corp. analyst Roger Kay said. "Their view is they have a business to run, and they just keep going forward."

The unique legal cloud that hovers over its headquarters in Redmond, Washington, today raises a difficult question for the Microsoft of the future: Can the company continue to expand in a mercilessly competitive business environment without creating the perception that it is intentionally or irresponsibly disregarding the issues raised in its federal lawsuit?

Because of its unparalleled scrutiny, Microsoft's every move is now viewed

through the lens of U.S. District Judge Thomas Penfield Jackson's finding that the company holds a monopoly in the operating system market. Although their opinions inevitably vary, legal experts agree that the Web Companion and other non-PC products could provide a key test.

"Regardless what Microsoft has done in the past, the market has moved forward," Aberdeen Group analyst James Gruener said, adding that says the coming proliferation of non-PC devices and other gadgets were the hot topic at this year's Comdex and pose a tremendous threat to Microsoft. "In some ways, their hand is forced in this situation."

The Web Companion is a "single-purpose appliance," as opposed to a full-blown personal computer, that runs the stripped-down Microsoft

operating system called Windows CE--and, in this case, the single purpose is to use the Internet, connecting through the company's MSN Internet service. Microsoft is forging into new markets, such as fast Net access and products that blend attributes of traditional PCs with wireless phones, TV set-top boxes or other consumer electronic devices.

The company hopes to use Web Companion as the front end to its high-speed Internet strategy for home computers, which will in part be driven by RadioShack sales, analysts say. The company last week cut an e-commerce deal with Tandy, which owns RadioShack, that will place Microsoft stores in as many as 7,000 of the chain's retail outlets nationwide.

The legal question facing Microsoft is whether its approach to this expansion in any way parallels the business practices that raised objections over Windows 95 and led to its current antitrust troubles. Conversely, from a marketplace perspective, Microsoft must find a way to continue moving forward without being frozen by a chilling effect from its current case.

In his Nov. 5 finding, Jackson said Microsoft used its market dominance with its Windows operating system on PCs to force consumer acceptance of other products, most notably its Internet Explorer browser. Microsoft argued that its Web browser is an integrated piece of Windows that was beneficial to its customers.

Yet in light of Jackson's ruling, any new product that technically "locks in" consumers to Microsoft's Net service appears to raise an antitrust flag. But at least some industry analysts and legal experts question Windows CE is covered by any of the judge's findings.

Almost any strategy Microsoft embarks on with Windows CE, which Web Companion runs, could steer clear of the issues raised in the current antitrust case, legal experts say--provided that Microsoft is careful to avoid the appearance of unfair market leverage in introducing any related products to the operating system.

However, Microsoft could encounter very different concerns if it pursues plans to push Windows 2000--the long-awaited successor to the corporate Windows NT operating system--onto computing devices other than PCs, as some executives have indicated the company might do.

"With Windows CE, Microsoft is on solid ground because it has no legal relationship to the monopoly product," said Rich Gray, an intellectual property attorney with the General Counsel of Silicon Valley. "But with Windows 2000, it's clear they have a successor product taking advantage of some of the same key barriers to entry."

Microsoft executives recently have touted the importance of Windows 2000 in products other than personal computers. Last week, at the launch of Compaq Computer's iPaq Internet device, Microsoft vice president Rick Belluzzo spoke at length and often about "Windows 2000 on any device."

And Gray says Microsoft's activities in this area may lie beyond the scope of Jackson's findings if such Windows 2000 devices run processors made by companies other than Intel--an important factor in judging legal issues involving the software giant's business practices because of the long-standing relationship with the chipmaker that has led to the industry shorthand of "Wintel." In his findings of fact, Jackson said, "In determining the level of Microsoft's market power, the relevant market is the licensing of all Intel-compatible PC operating systems worldwide."

Bob Lande, a professor at the University of Baltimore School of Law, agreed that this is a gray area because of the way Jackson defined Microsoft's monopoly market. Moving Windows 2000 beyond Intel-based PCs could present some problems for the government, particularly if there is a long appeal, Lande said.

Microsoft would not comment specifically on any plans to expand Windows 2000 outside the PC. But many in the industry believe that a Windows 2000-everywhere campaign would not be a surprising strategy.

"It's really Microsoft's game to lose now, so they have to leverage what they can do well," Gruener said. "They have built a next-generation OS, and they want to take their success with Windows 2000 and extend that into the information appliance market."

Even if Microsoft envisions lighter versions of Windows 2000 to run cellular phones, digital organizers and other devices, antitrust experts caution that it must compete fairly. The line may be blurred regarding where Microsoft's monopoly market begins and ends in relation to non-Intel PC devices, but it could still be liable if it leveraged it monopoly power into wireless or Internet devices, Gray said.

"The bottom line is it just depends on what techniques Microsoft will use--and we don't know that yet--their exclusive dealing arrangements, comparable to their division of market, or their deliberate incompatibilities," Lande said. But if Microsoft learned its lesson, he added, it could still "make the paradigm shift without running afoul of the antitrust laws."