Settlement is 'a reward, not a remedy'

The Microsoft settlement does little to reverse the company's dominance or slow its growth in Internet services.

John Borland
John Borland Staff Writer, CNET News.com
John Borland
covers the intersection of digital entertainment and broadband.
6 min read
After years of litigation, a crushing court defeat and a settlement with federal antitrust regulators, Microsoft has retained the one thing that matters: Its ability to be the most powerful software company in the world.

Legal and industry experts are calling the settlement Friday between Microsoft and the U.S. Department of Justice a mixed victory--an agreement that theoretically opens the door to competing software companies but isn't likely to change Microsoft's profile as the most familiar and influential software company in the world.

Most experts agree that the settlement, if approved, would do little to undermine the company's vast market power--even as it restricts Microsoft's ability to abuse that power. With its enormous financial and technical resources untouched, and its ability to add new features into the Windows operating system unchanged, Microsoft will continue to dominate the market, legal and economic experts say.

"I don't see the market changing much at all," said Stanley J. Liebowitz, a University of Texas at Dallas economics professor who co-authored a recent book on Microsoft. "It's not clear that those actions (addressed in the settlement) were all that critical to their success."

Microsoft's settlement with the DOJ, which still must be approved by the federal judge on the case and 18 states, marks a big step back from the original trial court's relatively harsh decision to split the software company into two pieces.

Instead of cleaving the company in two, the settlement would end a longstanding Microsoft tradition of forcing computer manufacturers to distribute its software. The company would also have to share elements of its operating system to allow software programs from competitors to work on the Windows OS.

As one enforcement tool, a three-person oversight team would be installed at Microsoft, and members would have access to the Windows source code. Competitors would also have access to all Windows "APIs," the small bits of code that allow software programs to tap into the resources of an operating system.

Despite those restrictions, the agreement would not force Microsoft to change its own software--a critical omission that critics say makes the deal relatively toothless. The provision would allow the new XP operating system to remain as is, and it would allow Microsoft to continue to add new features that compete with independent companies' products, such as audio and video players, instant messaging, or voice telephony features. That means Microsoft would retain its platform for putting virtually any software function only a mouse-click away from consumers.

"This is a reward, not a remedy," RealNetworks General Counsel KellyJo MacArthur said in a statement. "This agreement allows a declared illegal monopolist to determine, at its sole discretion, what goes into the monopoly operating system in the future."

Based in Seattle only a short drive from Microsoft's campus in Redmond, Wash., RealNetworks is fighting a crucial battle against its formidable nemesis. In testimony to Congress in 1998, CEO Rob Glaser accused Microsoft of creating Windows features that disabled RealNetworks' audio and video players. Although that issue was never proven, Microsoft's new Media Player software, a direct competitor to RealNetworks' software, is a high-profile part of the XP operating system.

Some new opportunities
Although rival software companies generally decried the agreement as pro-Microsoft, it may provide them some opportunities--particularly in regard to distribution of competing software on new PCs.

Under the terms of the settlement, Microsoft cannot force computer manufacturers to include Microsoft software exclusively. Nor can Microsoft bar manufacturers from swapping out components of Windows for features provided by outside companies.

"The right of hardware providers to reconfigure could be of some value and significance, if hardware providers decide to be innovative," said Lawrence Sullivan, a professor at the Southwestern University School of Law and a leading antitrust author.

For example, under the new agreement, Dell could make a deal with RealNetworks to make its audio and video software the default player on a Windows computer. Or Hewlett-Packard could pick Yahoo to provide instant messaging software as the default chat software.

Supporters of the deal note that this would allow companies to compete with Microsoft on the basis of their technology. If they provide compelling and compatible products at fair prices, software companies argue, the computer manufacturers would theoretically not have to pick Microsoft programs.

"This settlement provides a stimulus to our economy by paving the way for innovation rather than continuing to be mired in litigation," Rep. Bob Goodlatte, R-Va, said in a statement. "Full, fair and open competition is the best way for the marketplace to flourish."

Microsoft Chief Executive Bill Gates said the deal "goes further than we might have wanted," but that it was "fair" to all parties and consumers.

"We recognize that the success of our products has created concerns," Gates said. "This settlement addresses those concerns in a fair...manner, enabling Microsoft to continue innovating and pushing technology forward."

Loopholes abound?
But critics are worried Microsoft still has the market power to make its software dominant by distributing it through the Windows operating system.

They also worry that the agreement stops short of addressing future products and services from Microsoft, chiefly the controversial Passport identity database and Microsoft's broader .Net strategy to dominate the market for e-commerce software and services. Under the agreement, the company would remain free to build links from its Internet Explorer browser to its own Internet services.

"It doesn't address any of the forward-looking issues like Passport or HailStorm," said Mitchell Kertzman, chief executive of Liberate Technologies, a Microsoft rival that creates software for set-top boxes. "It allows them to use their desktop monopoly to do the same thing to the Internet."

Some analysts also worry that the deal contains "loopholes" that would make it difficult for competitors to view critical parts of the Windows source code. One provision notes that Microsoft does not have to disclose portions of the APIs that might "compromise the security of anti-piracy, antivirus, software licensing, digital rights management, encryption or authentication systems."

"What you have is enough loopholes here to drive the sixth fleet through," said Ed Black, president of the Computer & Communications Industry Association, a Washington lobbying group that has sought stiff restrictions on Microsoft's behavior.

Ultimately, legal experts say the settlement would allow Microsoft to retain most of its power to propagate its software, and it includes enough loopholes and vagueness for Microsoft to extend its reach into the Internet and emerging services.

"Microsoft still has all the strategic tools it had the day it was sued," Southwestern University's Sullivan said.

Competitors are eager to see the deal fall through. They're hoping that U.S. District Judge Colleen Kollar-Kotelly or the states will reject the settlement.

Some are hopeful that the lower court's original findings of fact, which said Microsoft had acted as a monopoly, could provide the basis for new lawsuits. Others are hopeful that the European Union--which is aggressively investigating the software giant for abuse of dominance in the server market--could thwart the company's plans for Passport and .Net.

"Microsoft just got away with what is effectively corporate murder," Liberate's Kertzman said. "How are they going to be after that?"

Some are confident that, over the long term, a lack of competition will erode the quality of Microsoft products and encourage rivals.

Matthew Szulik, chief executive of Linux seller Red Hat, was optimistic that open standards would prevail. Without a strong settlement, Microsoft's own behavior--for example, its increasing software prices--will help hasten its decline, he said.

"By their own actions, they've put themselves in a bit of a trap. I can't see them escaping this trap without damaging their long-term prospects," Szulik said.