Analysts frown on Microsoft remedy proposal

If Microsoft shows little contrition for abusing its monopoly, how can its own recommendations for modifying its behavior be taken seriously?

That's the question legal and antitrust experts are asking today after sifting through the details of the proposal filed yesterday by the software giant.

The answer, at least so far, is that Microsoft's response to the government's breakup proposal is tardy, grossly inadequate and unlikely to resonate with the judge overseeing the case.

The Redmond, Wash.-based software maker yesterday proposed its own modifications to its business practices and asked a federal judge to dismiss a breakup plan put forth by the government two weeks earlier.

Following U.S. District Judge Thomas Penfield Jackson's ruling that Microsoft abused its monopoly in the operating system market to thwart competition in other markets, the Justice Department (DOJ) proposed breaking the software giant into two companies: one that sells operating systems and another that develops applications.

In response, the company filed a proposal that would keep it intact but impose restrictions on its behavior.

Microsoft CEO Steve Ballmer yesterday defended the company's actions and the proposal. "While we may disagree with the court's decision, our proposal shows that there are ways to address all of the violations the court found without resorting to the government's excessive demands."

But that statement sums up exactly what antitrust experts and analysts say is wrong with the proposal: Microsoft doesn't believe it did anything wrong, so it has no incentive to dramatically change its behavior.

"Microsoft says they didn't do anything wrong, and they may well believe that," said attorney general Tom Miller of Iowa, one of the states that has joined the Justice Department in seeking a breakup. "So anything they offer is more than they should, so they don't offer very much."

Miller, who, with attorneys general from Connecticut and Wisconsin, has taken a leading role for the states, said Microsoft's proposal would not prevent future antitrust abuses.

"The other thing is (that) leveraging from monopolies in other products is such a fundamental part of their business plan, they're not willing to give that up," he said. "As long as they're not willing to give that up, you're headed to continued violations of antitrust laws."

Connecticut attorney general Richard Blumenthal agreed. "Microsoft is in denial. It denies doing anything wrong and is offering nothing new." He warned that the company's proposal is "laden with loopholes--a pale imitation of our conduct proposals--and an invitation to constant and continuing government interference and intrusion."

On the surface, Microsoft is offering to make major concessions it long has resisted: giving PC makers more freedom to customize the first screen displayed when a computer starts, refraining from using exclusive contracts that encourage PC makers and Internet service providers to favor Microsoft products, and giving software developers access to information essential to making their products work well with Windows, among other proposals.

"I think a year or two ago this might have been enough, but things have progressed a lot further," said Gartner Group analyst David Smith.

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"Policing Microsoft is going to be nearly impossible--and even if it was possible, because you have no bit of remorse on Microsoft's part, you have no belief they would follow the intent of any ruling that tried (to) control their behavior," added International Data Corp. analyst Roger Kay. "So the conclusion you come to is: make a one-time draconian remedy, and let the games start again and everybody be as competitive as they can be."

Microsoft's proposed concessions, which it offered to impose within 45 days of the judge's final ruling, call for four years of government oversight. Many relate directly to specific tactics laid out in Jackson's "findings of fact."

While the company's plan addresses the technical issues of the case, it does not catch its spirit, which is restoring competition and preventing future antitrust abuses, said Iowa's Miller.

Microsoft's proposal deals with specific events of the past, while the government also hopes to level the playing field in the future.

"Microsoft's plan looks backwards only," said Glenn Manishin, an antitrust attorney with Patton Boggs in McLean, Va. "The requirement of antitrust law is to eliminate the monopoly and prevent reoccurrence in the future. You can't look backward; you must look forward."

The government believes the only way to adequately restore competition and prevent further abuse is to sever Windows from Microsoft's software applications, such as Office and Internet Explorer. This would help remove what in legal parlance are called "barriers to entry" for competing applications.

Through this separation, the government hopes to spur competition in a way that would be nearly impossible under Microsoft's proposal or other restrictions on its business practices. Many of the company's core applications such as Word and Excel are the leaders in their respective markets, but Microsoft develops them only for Windows and Macintosh, forcing competitive applications companies to consider other operating systems, such as Linux. If split, Microsoft would be unable to use codevelopment or comarketing between Windows and the software applications to gain unfair advantage over competitors' products.

"The proposed remedy of spinning off the Microsoft applications group speaks directly to this issue," said Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif. "If there was a new standalone Microsoft applications company, that company would have different incentives than the standalone Microsoft Windows company."

Microsoft's general counsel, William Neukom, faulted the government for including Office in its remedy proposal. "The government's proposals bear little relationship to the case it presented at trial, and they are not supported by the evidence or the Court's legal conclusions," he said two weeks ago. "The case has always been about browser software, not the relationship between Windows and Office."

The final decision is Jackson's, who could accept all, some or none of either proposal. He has broad discretion to include other products in the case if he thinks that is the best way to restore competition, said George Washington University Law School professor Bill Kovacic.

But as he does so, he increases his risk when the Microsoft appeals the decision. "As the judge steps beyond the record in the trial, a reviewing court no longer owes him the deference they would otherwise," Kovacic added. They can second-guess him more critically."