Microsoft: We will bend, but not break

In a proposal filed today, which consists of six separate documents, Microsoft asked U.S. District Judge Thomas Penfield Jackson to dismiss a government plan to split the software giant. In return, the company would agree to take several actions, such as hiding its Web browser within Windows and allowing PC manufacturers to alter the first screen a person sees when turning on a computer.

"We are working to try to resolve this case as quickly as possible, in a fair and reasonable manner," said Microsoft chairman Bill Gates. "We believe there is no basis in this case for the government's unprecedented breakup proposal, and we are hopeful that the court will dismiss this excessive demand immediately so that the case can move forward much more rapidly.

"Even without the extreme breakup proposal, many elements of the government's proposed regulations are unwarranted, outside the scope of this case, and very damaging to consumers," Gates said. "The government's proposals would take away Microsoft's property by forcing us to disclose the source code for our products, even though Microsoft spent hundreds of millions of dollars to develop these products."

But attorney general Tom Miller of Iowa, one of the states participating in the trial, dismissed the company's proposal as "inadequate."

"These measures would not have prevented the serious violations of law found by Judge Jackson, and they are not adequate remedies to assure that the law is not broken in the future," Miller said.

"Microsoft's proposal is ineffective and filled with loopholes," the Justice Department said in a faxed statement. "It would not have prevented Microsoft from engaging in many of the illegal acts found by the District Court, nor would it prevent the company from using its monopoly power in the future to engage in the same kind of illegal behavior to crush new innovations."

Judge Jackson previously ruled that Microsoft abused its monopoly in the operating system market to thwart competition in other markets. To prevent further abuses, the U.S. Justice Department and attorneys general from 17 states on April 28 proposed splitting Microsoft into two companies: one that develops operating systems and another that creates applications.

In response, Microsoft said today that Jackson should toss out the breakup proposal and instead impose restrictions on Microsoft's business practices while the case is accelerated through the appeal process.

However, if Jackson is seriously considering a breakup, Microsoft is proposing that the start of hearings should be delayed until December.

Jackson previously told both sides he wanted to fast-track the process, wrapping up within 60 days of his initial ruling, or "conclusions of law," in April. The software maker argued today that the severity of the government's proposal warrants more time.

Microsoft is asking that three dates be considered, depending on what remedies Jackson is contemplating. If the judge is seriously considering the government's breakup proposal, Microsoft wants to delay the remedy hearing until Dec. 4.

If the breakup is removed as an option, Microsoft seeks a delay until Oct. 2. A third option would move the remedy hearing to Aug. 7 and require the courts to dismiss what Microsoft calls "disclosure remedies," such as compelling the company to reveal the inner workings of Windows and other proprietary information.

Glenn Manishin, an antitrust attorney with Patton Boggs in McLean, Va., said Microsoft is all but demanding that the court dismiss the breakup proposal or face a long battle. "Their position is basically, 'Accept what I say or I'll hold my nose until I turn blue,'" he said. "It's the antitrust equivalent of telling this huge behemoth they can't watch TV for a week."

The ideal situation for Microsoft would be for Jackson to throw out the government's proposal and make a ruling, which would allow the company to immediately appeal the case.

Microsoft's plan mirrors some proposals placed on the table during failed settlement talks with the government. Among the elements included in today's proposal:

• Microsoft would offer a version of Windows with Internet Explorer hidden from consumers. During the trial, the government argued that Microsoft should offer Windows without any browser, something the software maker contends is technically impossible.

• Microsoft offered to change the way it does business with its partners and customers, such as PC makers and Internet service providers. The government had accused the software maker of using exclusive contracts to force PC manufacturers and ISPs to give Internet Explorer preference over Netscape's Communicator browser.

• Microsoft would agree to fully disclose application programming interfaces (APIs) to software developers.

During the trial, the government focused on barriers to entry faced by rival software companies. The anitrust attorneys argued that Microsoft played favorites by withholding information from software developers that it perceived as competitors to Windows or other key applications, such as Office.

• Microsoft also agreed to give PC makers more freedom to modify the first screen that is displayed when a PC starts up. The government had faulted the company for placing the first-screen restrictions on manufacturers, which the software maker argued protected its Windows copyright.

• The company would agree not to withhold products designed for a non-Microsoft operating system, such as MacOS, for the purpose of strong-arming competitors into limiting the development and distribution of their own products. During the trial, the government argued that Microsoft threatened to cease development of Office for the Macintosh unless Apple agreed to make Internet Explorer its default browser.

• Microsoft would not charge more for an older version of Windows after the release of a newer one.

Under the proposal, Microsoft would be ready to start the injunction in 45 days and would agree to be monitored by the Justice Department for compliance for four years. The company also said it would pay attorneys' fees and other costs incurred by the 19 states that have participated in the suit.

Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif., said Microsoft's offer to accept an injunction restricting its behavior is a good tactic.

"It's not an unreasonable suggestion," he said. "I don't think the judge will take them up on it, but I don't blame them for trying."

Today's proposal indicates the size of the gap between the government and Microsoft over which solution best restores competition without obtrusive regulation. Each side has recently explained its stance in public forums.

Assistant Attorney General Joel Klein, in a speech delivered yesterday to the New Economy forum at the Haas School of Business at the University of California at Berkeley, described the government's breakup proposal as the cleanest solution with the least intervention.

For its part, Microsoft told congressional lawmakers in a letter that the government's proposal is "an elaborate set of software engineering and business restrictions," which it consistently referred to as "regulations."

Jackson ultimately will decide which proposal, if either, is the best approach to restoring competition in the operating system market. Jackson is not obligated to accept any part of either proposal, although he would likely grant Microsoft's request for a longer process if he is leaning toward breaking up the company.

Unless Jackson grants such a request in the next few days, the government is expected to file its response to Microsoft's proposal by May 17. A May 24 hearing could precede an immediate ruling from Jackson, expected no later than June 1, or set a schedule for further proceedings, should he grant Microsoft's request for more time.

George Washington University Law School professor Bill Kovacic said that in making its proposal, Microsoft wants to appear proactive.

"Second is to offer a conduct alternative as a way of deflecting attention away from the structural remedy the government has offered and focus the judge's attention on conduct," Kovacic said.

Jackson will have to carefully evaluate whether to extend the remedy process, Kovacic said. "Do you want to err on the side of too much process or too little? I think caution points in the direction of too much. It's not an undertaking most federal judges in the past approached casually."