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Microsoft still in charge

Microsoft has in recent months forged ahead with new products and bundling strategies. But an appeals court decision could slow the company's plans.

A chastened Microsoft? Think again.

During its antitrust battle with the Justice Department and 19 states, Microsoft showed more restraint--at least publicly--in its business strategies and tactics. But given George W. Bush's election and signs that the Court of Appeals would partly deflate the government's victory in the trial court, the software behemoth has returned to the hard-charging Microsoft of old.

Microsoft's victory special coverage For example, for several months Microsoft has been aggressively rolling out its .Net software-as-a-service strategy, seen as a threat to companies ranging from Sun Microsystems to AOL Time Warner. In addition, the company has been advancing long-standing initiatives on all fronts, including an Internet service code-named HailStorm, the upcoming Windows XP operating system, and other products which employ so-called bundling tactics that partially sparked the current antitrust case.

Iowa attorney general Tom Miller said that because of Microsoft's more aggressive tactics, the Justice Department and 19 states will be keeping a close eye on the software maker's conduct. "The company's recent announcements regarding (Windows) XP and HailStorm indicate to us that Microsoft may be repeating its efforts to maintain and extend its monopoly even more broadly into the Internet," Miller said.

Thursday's decision by the Court of Appeals to send back to a lower court a charge that Microsoft illegally tied its Internet Explorer Web brower to Windows--which experts view as a victory for the government--could mean trouble ahead for the software giant. Still, in order for the government to prove that Microsoft illegally tied products, its case must meet new standards set by the appeals court.

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When Microsoft dominated high-tech media coverage in 2000, much of the news focused on its antitrust battle while the company's business appeared to languish. In fact, the company launched only one major new product last year, Windows 2000, and that was a disappointment, analysts say.

Less than 10 percent of Windows 95, 98 and NT desktops were upgraded to Windows 2000 Professional, and less than 5 percent of Windows NT Servers made the switch to Windows 2000 Server, according to research firm Gartner.

But this year, Microsoft will blitz the market with new products, such as the HailStorm Internet service, the Windows XP operating system and the Xbox video game console. Meanwhile, it will update and expand older programs such as MSN Explorer and Windows Media Player. Microsoft kicked off the product barrage at the end of May with Office XP.

Not since Microsoft integrated its Internet Explorer Web browser with Windows 95 has the company intertwined so many products and made them so interdependent on each other, said Emmett Stanton, an antitrust attorney with Fenwick & West in Palo Alto, Calif.

Click to read the court's ruling The issue of product integration, or "tying," turned out to be one of the most controversial aspects of the antitrust case. Microsoft claimed it had the right to improve Windows by incorporating new products such as a Web browser, while the government argued that the company illegally used its monopoly in operating systems to crack other markets.

With the company's recent initiatives, "they've almost thrown a glove down in front of the Justice Department, because they're really pursuing in practice the same thing they did with the browser," Stanton said. "It's rather bold to do that while that very issue is being litigated in the context where you essentially lost it in the trial court and you're litigating it on appeal."

In Thursday's ruling, the appeals court threw the tying question back to a lower court and set new standards in order for the government to prove illegal product tying. The court said the government, in the next phase of the case, "must show that Microsoft's conduct unreasonably restrained competition" in order to prove a tying claim.

The appeals court wrote that the government must also determine if Microsoft "price bundled--that is, was Microsoft's charge for Windows and IE higher than its charge would have been for Windows alone?"

In the case of Windows Media Player 8, Microsoft plans to offer the product only with Windows XP, the OS upgrade that will be released in October. Microsoft's reasoning: Like the browser, new Media Player features require it to be stitched together with Windows.

Microsoft also recently advanced instant messaging with the introduction of Windows Messenger. The technology, which also is integrated into Windows XP, adds videoconferencing, collaboration and telephony to instant messaging.

Caught in the HailStorm

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Microsoft's most ambitious project this year may be HailStorm, one of the cornerstones of the Microsoft .Net initiative, a plan to turn software from a product installed by customers into an Internet-delivered service.

HailStorm will let people more easily conduct online transactions, whether through a PC, a cell phone or a handheld computer. The service, which has yet to launch, will maintain personal information, such as credit card numbers and account passwords, allowing people to more easily check flight schedules, book and pay for tickets, and maintain calendars, among other activities, Microsoft says.

The company will use its Passport authentication service as the cornerstone of HailStorm. It already uses Passport for its MSN Web and Messenger services and will include HailStorm in Office XP and Windows XP. But the tactic, extending an existing monopoly to the Web, bears striking similarity to actions with Internet Explorer and Windows 95 and 98, said Ken Wasch, president of high-tech trade group the Software & Information Industry Association.

"The appropriately named HailStorm initiative is raising eyebrows among people who previously never were concerned about the Microsoft monopoly," Wasch emphasized.

Analysts are most concerned with Microsoft's approach to Extensible Markup Language (XML)--a way of coding information for transmission over the Web so that it can be recognized by software written by different programmers. XML is one of the building blocks Microsoft will use in HailStorm.

To its credit, the company was a pioneer encouraging the World Wide Web Consortium (W3C)--the body that oversees Web standards--to adopt XML. Microsoft, like IBM and other companies, also touts how it is moving away from proprietary technology to open standards through the adoption of XML.

XML's greatest advantages may be its portability and universality. In theory, XML-generated content could be viewed on computers and other devices, such as handheld computers or cell phones, regardless of the programs that generated them.

But even with XML, Microsoft caused concern because it is quietly using slightly different XML vocabularies--or schemas--that are not necessarily compatible with the standard language and that favor the company's products, said Chris LeTocq of Guernsey Research.

"Microsoft has tried to create the notion that because it uses XML, it is functioning as an open company," LeTocq said. "But those associations are invalid. Even if Microsoft's Word format is written in XML, you still need a license to use it."

LeTocq said that "absolutely Microsoft is leveraging the desktop applications" to drive its HailStorm strategy. For example, he said, "It's highly likely the calendar schema will work well with Outlook. I think it's likely the document schema will work well with Office and be the schema generated by Office."

Because Microsoft's XML dialect would favor Windows and Office--two products, according to Dataquest, that have more than 90 percent market share--the company can transfer its dominance from a mature market into younger markets, say analysts and legal experts.

"It might mean that (if) I buy a Stinger phone--this phone that Microsoft is developing--that it will not only view Web pages but Word documents," said Technology Business Research analyst Bob Sutherland. "But a competitive phone might not be able to view Word documents."

The SIIA's Wasch believes Microsoft's behavior with HailStorm and other product initiatives this year sends a strong message: "Microsoft is clearly communicating to many industries outside the computer industry that it wants a piece of their business too, in terms of how they will be able to favor Microsoft content properties."