Talks go on as Microsoft proposal is scrutinized

Microsoft delivered a settlement proposal to the Department of Justice and 19 states late last week in an effort to stave off a ruling in the landmark antitrust trial. Although sources close to the government have said the offer doesn't go far enough, the mere existence of a proposal has enhanced the possibility of a settlement, which in turn has warranted a delay in a final ruling by Judge Thomas Penfield Jackson.

Jackson was slated to issue a ruling on March 28, according to sources. Now, however, his ruling won't come for approximately 10 more days, according to the Associated Press. The news agency also reported that Assistant Attorney General Joel Klein was in New York, on matters unrelated to Microsoft. Legal experts had predicted a delay earlier today.

"There is an outside chance Jackson could call the parties in today and say, 'I know I told you Tuesday, but I want to make sure a couple more days wouldn't make a difference,'" said Bob Lande, a professor at the University of Baltimore School of Law. "You give them a deadline to focus the mind, but maybe in the end you offer more time."

Over the weekend, government lawyers reviewed Microsoft's latest settlement proposal, which sources said did not go far enough to satisfy prosecutors.

Microsoft sent its proposal late last week to Judge Richard Posner, head of the 7th U.S. Circuit Court of Appeals and key mediator in the case.

According to sources close to the situation, the proposal offered "few surprises." Microsoft offered, among other items, to eliminate selective discount pricing for its Windows operating system. It also offered to open the Windows source code, which would make it easier for competitors to develop programs to work with the operating system, and said it would sell a version of Windows without a bundled Web browser, sources said.

Microsoft had already offered many of the concessions during earlier negotiations. But there were "some interesting things there," a source said.

An interesting twist in the new proposal is the possibility that Microsoft will sell a version of Windows without its Internet Explorer browser. During the lengthy antitrust trial between the software giant and the Justice Department, Microsoft had argued that its operating system and its browser technology are integrated products that can?t be separated. The government countered by saying Microsoft had "bolted" the two products together in violation of antitrust law.

Agreeing to eliminate selective discounts has also been a big issue in the case and would mark a significant change in how Microsoft and the entire computing industry operates. The actual fees that Microsoft charges computer makers remain shrouded in mystery. Large computer makers are said to pay roughly $30 to Microsoft for every copy of Windows, while smaller ones pay anywhere from $50 to $80, according to analysts' estimates. Still, outsiders don't know the exact numbers.

"You'd think we'd see it by now. I've been in this business for years," said Roger Kay, an analyst at International Data Corp. Secrecy can help Microsoft keep prices artificially high at times because it forces computer makers to independently bargain, Kay said.

By contrast, Intel, which settled an antitrust case with the Federal Trade Commission on relatively benign terms, posts its wholesale prices on the Internet and offers larger discounts on a sliding scale, according to company sources.

If the proposal is rejected, there could be little time for the two sides to reach an agreement. But Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif., said settlement talks could collapse or break through at any point.

Information about the talks leaked to the press last week, saying that a settlement could be reached, drove Microsoft?s stock up nearly 10 points. But the leaks were actually a sign negotiations weren?t progressing, Gray said.

"When two parties are negotiating in good faith, they tend not to discuss the negotiations. The judge had also told both sides not to talk about the negotiations," he added.

Few legal experts have given the talks more than a 50-50 chance of success. Further dissention among states involved in the suit may have fragmented the government camp, George Washington University Law School professor Bill Kovacic said.

Some state representatives wanted to inflict a "harsh remedy" to Microsoft's alleged misconduct, favoring a breakup of the software giant. Others wanted to impose a "conduct remedy" that would restrict Microsoft's business practices.

The differing voices may have been encouraged by the Justice Department's step back from earlier calls to break up Microsoft. Many states still feel that a breakup would be in the industry?s best interests.

"It would not be unreasonable to assume there were some hard liners among the states who were willing to take their chances with Judge Jackson," said Kovacic.

Connecticut, Iowa and New York have until now taken a hard line on breaking up Microsoft. Connecticut attorney general Richard Blumenthal and Iowa attorney general Tom Miller are said to favor a breakup. But Miller also is "a firm believer in negotiating settlements whenever possible," said a source close to the Iowa attorney general.

The position of Wisconsin assistant attorney general Kevin O?Connor, who took a more prominent role in the case following the departure of government lawyer Stephen Houck, is harder to gauge, University of Baltimore's Lande said.

But Lande and others said O?Connor, who has been working on remedies since the trial started, is more moderate but probably leans toward breaking up Microsoft.

This triumvirate--Blumenthal, Miller and O'Connor--has had, on the side of the states, the most influence on negotiations, Kovacic said.

States favoring a softer position on Microsoft may not have viewed "this group as representing their best interests," he added.

If Jackson rules tomorrow, many legal experts expect him to come down hard on Microsoft. But the growing dissension among the states and with the Justice Department could make it more difficult to deliver a strong remedy proposal, Lande said.

Following the ruling, Jackson is expected to schedule remedies to determine what to do about Microsoft?s alleged misconduct.