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Why restraining Microsoft no longer matters

European regulators won a big court victory this week but CNET News.com's Charles Cooper says Microsoft must fend off a bigger challenge.

Historians famously scorn generals who prepare to fight the previous wars. But what would they say about regulators still struggling to set proper rules of engagement for the technology business?

Up until the mid-1990s, computer and software companies escaped close regulatory scrutiny. (IBM's 13-year battle with the United States Justice Department the notable exception.) But once IT grew into a multibillion dollar industry, the number of billion-dollar companies mushroomed and governments could no longer resist the temptation to have a bigger say--even if they were condemned to lag a step or two behind the times.

The latest example of this was last Monday's decision by Europe's Court of First Instance to uphold a previous antitrust ruling against Microsoft. Europe (old and new), which tends not to cut big monopolies much slack, hailed the decision as an important pro-consumer move. But the United States' antitrust chief, Thomas O. Barnett, countered that the ruling would do just the opposite, "chilling innovation and discouraging competition."

The depth of difference between otherwise sober bureaucrats underscores how very differently Europe and the U.S. approach the role of government and the limits of free enterprise. We haven't had this big a trans-Atlantic snit over the same data points since inspectors went hunting for Saddam's weapons of mass destruction.

The blunt truth is that John Ashcroft's crew had no clue about the technology shifts that were going to undercut Microsoft's momentum.

Oddly enough, the two sides are joined in their misunderstanding of just how little control they can ever exert over tech's future. I'll get to that in a moment but let's briefly review what happened after the Bush administration took office in 2001.

The Department of Justice didn't take long to drop its aggressive antitrust pursuit of Microsoft. Ultimately, the government agreed to a settlement with the company that Clinton-era trustbusters had fingered as a predatory monopolist. Since the attorney general gets appointed by the president, the antitrust department's accommodating approach was hardly a revelation, especially given President George Bush's political bent.

What I found more interesting was how the DOJ made the right choice for all the wrong reasons. The blunt truth is that John Ashcroft's crew had no clue about the technology shifts that were going to undercut Microsoft's momentum. To be fair, they were hardly alone. Remember that when the Microsoft lawsuit got underway, the Google guys were just working stiffs with bad haircuts and Linux/open source was widely dismissed by experts supposedly in the know.

In fact, I remember the snickers that went up in the courtroom after Microsoft's attorneys argued there was no Windows monopoly because of Linux. At the time, it was a bogus argument by a desperate lawyer. At the time few realized--including the brass at Microsoft--just how prescient a prediction they had just heard.

Government regulators come and go but Microsoft's bigger headache these days comes from new technology offerings. To wit, IBM just introduced a beta collection of free software applications to compete against Microsoft's Office. And Google, which long ago surpassed Microsoft in the sizzle category, keeps adding to its store of free applications. Meanwhile, Yahoo is spending $350 million to buy a Web-based e-mail and collaboration package comparable with Microsoft Exchange and Outlook.

And that's just from the well-known companies. What about under-the-radar Internet startups Microsoft's never heard of? Those are the bogeymen who inhabit Microsoft's nightmares, the ones unsheathing the killer app nobody anticipated.

This may be putting too fine a point on things for Neelie Kroes, the European Union's top regulator. She's playing to her constituency and it wants to see Microsoft weighted down with more regulatory restraints. It may come to that. Europe's bureaucrats seek to protect what they believe to be the public's best interests. By then, however, the terms of the technology race likely will have moved on.