The week in review: Morpheus rising

The network's new software, called Morpheus Preview Edition, is based on open-source Gnutella technology, software that has been a mainstay of the file-swapping world since 2000. Until the surprise shutdown, the Morpheus service was based on technology licensed from Dutch company Kazaa BV. Morpheus' network went dark Feb. 26.

But are faithful users happy with the new software? The consensus emerging from early reports does not bode well for struggling StreamCast Networks, which is fighting mightily to keep Morpheus operational. Some users called the release a "downgrade," saying they felt "cheated" by the new system.

Morpheus' network blackout was attributed to StreamCast Networks' unpaid licensing bills, according to Kazaa BV, the maker of the file-swapping software that Morpheus formerly used.

StreamCast Networks Chief Executive Steve Griffin, however, characterized the shutdown as an "attack" on his company and on the millions of people who used the Morpheus software. Bulletin and chat boards around the Web have been buzzing with conspiracy theories, ranging from a competitor's sabotage to plots by the record industry.

The shutdown has thrown a spotlight on a little-known Australian company whose service now carries bragging rights as the world's largest file-swapping network. Australia's Sharman Networks seemingly came out of nowhere in January to buy the Kazaa Media Desktop from creator Kazaa BV.

Despite its role in the high-profile fracas, little is known about the company. Sharman has hired a public relations firm and a lobbyist in Washington, but it has not provided even rudimentary contact information for its operations in Australia. Australian copyright authorities say they've investigated the company but haven't been able to find any evidence of its existence.

HP's fight to the finish
With a March 19 shareholder vote looming, the proposed merger of Hewlett-Packard and Compaq Computer received a much-needed boost when an influential advisory firm recommended that shareholders vote in favor of the deal.

The recommendation by Institutional Shareholder Services, an adviser to major money managers and pension funds, has long been considered crucial to the passage of the hotly contested $22 billion merger. ISS's decision likely means that the battle over the merger will remain heated and the outcome unclear until shareholders vote later this month.

However, the recommendation drew a lukewarm response from investors and a cautious outlook from Wall Street. Several HP institutional shareholders who reviewed the ISS report said it doesn't push them any closer to making a decision.

"It seems to be a recapitulation of what both sides said...but not very convincing on the analysis side," said Jerome Dodson, president of Parnassus Investments, which owns 170,000 shares of HP, or less than a 1 percent stake. "ISS offered no rigorous reasoning or insight into the reasons for their decision."

HP also got a boost from the Federal Trade Commission, which voted unanimously to approve the acquisition without conditions. Officially, the FTC voted to close its investigation without taking action, which allows the deal to proceed as proposed.

The endorsements were good news to HP CEO Carly Fiorina, who gave an exclusive, wide-ranging interview on the merger fight to CNET News.com. She said HP will hit the ground running should the mega-merger win investor support.

Fiorina touched on such topics as executing on the $22 billion merger and the timing of the tech industry's economic recovery. She also reaffirmed that HP has already completed a three-year product plan that it plans to share with customers on April 1--assuming shareholders approve the merger.

"The biggest risk of the merger is not strategy, but execution," Fiorina said. "But in the last six months, we have executed (on our financials), and that should give our investors some comfort."

Microsoft deal in the crosshairs
As a hearing began into whether the Justice Department's settlement deal with Microsoft was in the public interest, the DOJ garnered a bit of a black eye when it conceded that it settled in part because trustbusters failed to prove part of the basic theory of the antitrust case. DOJ lead attorney Philip Beck said that Microsoft was able to hold on to a monopoly in Intel-based operating systems through anti-competitive acts, but the government was not in a position to make that argument stick.

SBC Communications and four trade groups argued that the settlement is not in the public interest. Former Judge Robert Bork said that the settlement is "indeed deeply harmful to the public interest" and characterized it as "a surrender" on the part of the Justice Department.

And Friday, Sun Microsystems announced that it planned to file a private antitrust suit against Microsoft over the company's handling of Java. The suit seeks $1 billion in damages, as well as some technology concessions over how the software is handled in the future.

In deposition tapes released this week, Microsoft CEO Steve Ballmer testified that if the court approves harsher sanctions being sought by nine states, the software giant will have to withdraw the Windows operating system from the market. During a Feb. 8 deposition, Ballmer said he would not "know how to comply" with the litigating states' proposal for a modified version of Windows.

"I actually think we would need to withdraw the Windows product from the marketplace. That...would be the only way I understand to comply with the proposal as put forward by the non-settling states," he said.

Console clashes
Microsoft scrambled to placate Japanese customers following complaints about the company's Xbox video game console scratching game and movie discs. Complaints began to appear shortly after the Xbox went on sale in Japan two weeks ago. Customers said game discs and DVD movies came out scratched after they removed them from the Xbox, although in most cases the discs were still playable.

The scratching complaints affected "significantly less than 1 percent of systems sold," according to a Microsoft statement, which said that the company plans to evaluate any Xbox console a customer is concerned about and repair or replace any defective units.

Sony's plans to bring online access to its PlayStation 2 console was met with skepticism as analysts said the company still needs to work on the business plan for online gaming. Sony executives announced that a PS2 network adapter, with an Ethernet port for broadband Internet and a modem for dial-up access, will go on sale in August, along with games from Sony and third-party publishers that support online play.

Sony also has begun taking orders for a $200 kit that lets Linux run on its PlayStation 2 video game console. The company said it's taking preorders for the kit and expects to begin shipping the kit May 22, meeting a deadline it announced at the LinuxWorld Conference and Expo in January.

Sony doesn't expect the product to be a mainstream hit but hopes that hobbyists who tinker with the PlayStation can become top-notch game designers. Judging by the 9,626 people who signed a petition for Linux on the PS2, there is significant interest.

Also of note
Macromedia is pitching Flash MX, the new version of the software to be announced Monday, as a one-stop resource for designing entire Web pages and associated applications...Apple Computer is struggling to produce its new all-in-one, flat-panel iMac, due in part by a shortage of 15-inch liquid-crystal-display flat panels...A flaw in Microsoft's Java Virtual Machine could allow hackers to hijack a browser and redirect traffic, capturing sensitive data such as a person's passwords...The light-emitting diodes on some communications equipment apparently broadcast the data being sent by the devices.

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