Netscape-Microsoft legal feud heats up

Netscape Communications has stepped up its efforts to foment a legal challenge to Microsoft, sending a letter to the Justice Department that accuses Microsoft of anticompetitive behavior in its bid to establish itself as a leader in the Internet market.

In a letter sent to the department on August 12, Netscape's outside counsel Gary Reback alleges that Microsoft is hurting consumer choice in the Internet space by leveraging its vast resources in the desktop PC arena to squeeze other competitors out of the market. The letter points specifically to Microsoft's attempt to gain market share for Internet Explorer through exclusive deals with Internet service providers and hardware OEMs.

Reback's letter is the latest in a series of ever-escalating confrontations between Netscape and the Redmond, Washington, software giant and the most forceful protest so far.

"Microsoft's recent conduct far exceeds any reasonable definition of pro-competitive, welfare-enhancing behavior," the letter states. "In addition to these under-the-table arrangements, Netscape's recent investigation has uncovered numerous additional steps that Microsoft has taken for the purpose of eliminating competition in the Internet software market."

Antitrust attorneys said it was unclear what action the Justice Department would take in the case, if any. "I think it's premature to think that the DOJ is going to haul Microsoft into court to stop this," said Keith Shugarman, an antitrust lawyer at Goddwin, Procter, & Hoar.

The DOJ may be taking another look at Microsoft's activities, though. Tim O'Reilly, president of O'Reilly & Associates, said he was contacted by the Justice Department last week regarding Microsoft. O'Reilly, which makes a Web server for Windows NT, has been a vocal critic of a licensing restriction imposed by Microsoft on Windows NT Workstation 4.0.

Microsoft officials though, were typically nonplussed by the Netscape/Reback letter. "We view these as wild and untrue statements," company spokesman Greg Shaw said, adding that the company has not been contacted by the Justice Department on the matter. "This press release diverts attention away from the progress of Internet Explorer."

Reback addressed the letter to Joel Klein, the department's deputy assistant attorney general of international and policy matters. Reback made the letter public today in response to a recent deal between Microsoft and the Wall Street Journal that gives Explorer users free access to the Journal's Web site.

"When the Journal announced its deal with Microsoft, there was enormous outrage" in the paper's public discussion forums, said Reback, an antitrust attorney with the law firm of Wilson, Sonsini, Goodrich, and Rosati. "It occurred to me that if the world only knew that that's one of many deals that restricts consumer choice. So here's some chapter and verse."

Netscape has comparable deals with the New York Times, but Netscape's relationship with the Times isn't exclusive. In other words, the online newspaper could also do a deal with Microsoft. But Reback is suggesting that Microsoft edged out the competition by striking an exclusive arrangement that would limit consumer choices by preventing the Journal from pursuing deals with other vendors, namely Netscape.

In fact, in an eight-page letter claiming that Microsoft has engaged in a number of illegal actions, Netscape alleges:

--that the company has imposed what amounts to a "secret tax" on PC OEMs, offering hardware companies cash reductions in the license fee for Windows 95 if they bundle Internet Explorer with their systems. Microsoft has made exclusive deals with PC vendors, prohibiting companies such as Hitachi from bundling Netscape Navigator with its PCs, the letter states. Netscape estimates that it will cost OEMs more than $100 million a year to offer customers non-Microsoft Internet software.

--that Microsoft has lured a growing number of ISPs to offer Internet Explorer and not Navigator by giving the companies cash, an icon on the Windows 95 desktop, and a number of other goodies, including software, hardware, and advertising. The letter claims that Microsoft has offered to "buy out" contracts that some ISPs had with Netscape, and that some international ISPs have received "marketing funds" of $400,000 from Microsoft on the condition that they do not offer Netscape software. Netscape's letter does not name the ISPs.

--that the company is using its control of the Windows NT operating system to hurt companies, such as Netscape, O'Reilly and Associates, and Process Software, which offer Web servers for NT. Netscape specifically labels as anti-competitive an NT licensing limitation that allows only ten users to connect over TCP/IP networks to servers running NT Workstation 4.0. The letter also states that Microsoft has threatened hardware OEMs that offer NT Workstation bundled with Netscape's Web servers, saying that the OEMs may be in violation of Microsoft ten-user licensing restriction.

--that Microsoft has concealed "secret APIs" in Windows NT Server to gain a preferential performance advantage for its own Internet Information Server.

--that Microsoft has attempted to "zero out" the markets for Internet servers, tools, and browsers by bundling those products for free with its operating systems.

The Justice Department will now have to weigh the charges and decide whether an investigation is warranted. If so, it won't be the first time that Reback has succeeded in getting the Department to focus on Microsoft's activities.

In April 1995, the antitrust division filed suit to block Microsoft's acquisition of personal finance software powerhouse Intuit. The department sided with Netscape--again led by Reback--in maintaining that the merger would give Microsoft a monopoly in the personal finance software market, leading to higher prices and less innovation. Although the case never made it to court, a month later Microsoft and Intuit announced that they were scrapping the deal.

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