Wall St. unfazed by MS charges

Even though the Justice Department charged Microsoft with violating a consent decree for its software licensing practices, investors are not fazed.

5 min read
Even though the
Justice Department charged Microsoft (MSFT) with violating a 1995 consent decree governing its software licensing practices, whatever impact the action may have is not fazing investors, who drove the stock up in afternoon trading yesterday and down a bit today.

The department has asked a federal court to hold the company in Microscope on Microsoft contempt of the consent decree. If Microsoft is found guilty but continues to violate the order, the department wants the court to impose a fine of $1 million a day.

Nevertheless, the company's stock is down just 2-3/4 to 135-3/4 today, a drop of less than two percent from its previous close. Yesterday afternoon, shares in the software giant were up 4-41/64 to 137-13/64, with more than 10 million shares trading hands.

Imposition of a fine--or even a guilty verdict--is at the discretion of U.S. District Judge Thomas Jackson in Washington, D.C. Microsoft has 11 days to respond to the charges, at which point Jackson will take both sides' arguments under consideration.

Attorney General Janet Reno and Joel Klein, head of the Justice Department's antitrust division, alleged that Microsoft requires PC manufacturers to distribute its Internet Explorer browser in order to get a license for its Windows 95 operating system.

"Microsoft is unlawfully taking advantage of its Windows monopoly

DOJ antitrust chief Joel Klein on cost to PC makers and consumers
to protect and extend that monopoly and undermine consumer choice," Reno said in a prepared statement Monday morning.

Consumer activists who have been pressuring the government to take action against Microsoft were pleased with the Justice Department's announcement, while industry analysts were more skeptical.

Microsoft disputed the charges, saying that it requires Windows licensees to ship the entire operating system but that the browser is part of the system and not a separate product.

"We are operating in a completely lawful manner," said William Neukom, Microsoft senior vice president for law and corporate affairs. "The consent decree explicitly states that Microsoft may integrate new features into the operating system that it licenses to PC manufacturers without violating the decree. All software vendors are entitled to improve their products and to do so rapidly."

Federal regulators apparently think otherwise.

Klein on Microsoft fine
"Microsoft has a different view of the consent decree," Klein said. "Everybody knows [the browser and the operating system] are two separate products."

Another official within the antitrust division said that, based on Microsoft's marketing techniques and emphasis on browser market share, the company has conducted business as if the two products were separate.

"Their whole set of commercial conduct says so," said the official, who asked not to be named. "This is not just like putting Paintbrush in the operating system."

Specifically, the Justice Department charged Microsoft with violating a court-ordered consent decree it signed in 1995 that prevents the company from tying the shipment of its software applications to the licensing of Windows. The department claims that Microsoft is shutting out other browsers by forcing PC makers to ship Internet Explorer with their Windows-based machines.

The department wants the court to make Microsoft stop that practice and notify consumers who use Windows 95 on their computers that they can use any compatible browser. They are also asking that Microsoft come up with an easy way to remove the IE icon from users' desktops if they so choose.

To make the charges stick, Justice must prove that the operating system and the browser are two separate products.

Microsoft is trying to integrate the browser into its operating system, a move that effectively would make it just another component of the operating system. Microsoft's Neukom said such integration--the built-in ability to find data on the Web--is simply the next "incremental and logical step" in enhancing Windows, which also allows users to locate data on a hard drive, floppy drive, CD-ROM, and network server.

"Microsoft has always included ways in its operating system to locate information from different sources," he said during a conference call this afternoon.

Windows 98 and NT 5.0, both due next year, are supposed to have complete browser integration. When asked about the integration factor, Klein said only that Windows 98 was a "work in progress" and that his team was "aware of the issues."

Microsoft senior VP William Neukom answers charges
"At this point we don't see this petition as having an effect on the makeup of Windows 98," Neukom said. "We hope we won't have to face the day where we have to break up the logical components of functionality of the operating system."

Justice Department officials declined to comment further on Windows 98 and NT 5.0 because they are not yet commercially available, but a former Justice attorney felt that the department has its sights set on the browser-OS integration in Windows 98.

"It seems like this action is intended to prohibit that," said Sam Miller of the law firm Folger, Levin, & Kahn in San Francisco, who was the department's lead counsel in its original Microsoft antitrust investigation in 1994.

Browser rival Netscape Communications (NSCP)--which has complained to Justice about Microsoft's allegedly anticompetitive practices before through its attorney, Gary Reback--said today it was "very supportive" of the federal department's actions.

"Netscape believes in aggressively pursuing fair competition in the marketplace," said Peter Harter, the company's public policy counsel.

Harter said the action went beyond the browser software war and could affect anyone involved in e-commerce. He also downplayed the browser-OS integration issue that promises to be at the center of the case.

"It's not about one product that is integrated into another, but rather if Microsoft is conducting business in an illegal fashion that prevents innovation and competition." Netscape's stock held steady yesterday at 39-1/2, up 1/4. Today, it is down 3-1/4 to 36-5/8.

Klein made it clear that the charges will not impede other investigations of Microsoft's businesses, including the company's recent purchase of and investment in several streaming media companies.

The Justice Department petition asks the court to take the following actions:

 To stop Microsoft from forcing original equipment manufacturers, or OEMs, to ship IE as a condition of licensing Windows 95.

 To impose a daily $1 million fine if Microsoft does not comply with the consent decree, an amount that Klein called "unprecedented" for the Justice Department.

 To require Microsoft to tell PC users that IE is not the only browser option with Windows 95 and to give them "simple instructions" how to remove IE from their desktops.

 To disallow parts of nondisclosure agreements, or NDAs, that Microsoft's business partners are required to sign. Justice is concerned that the agreements prevent OEMs and other Windows licensees from disclosing information to government investigators or that the agreements force signees to notify Microsoft before approaching the government.

Microsoft has told the department that it won't deter its partners from complying with investigations, but Monday's petition seeks to "clear the air," according to Klein. "We won't allow anyone to interfere with people's right to give information to their government," he said.

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Business editor Dawn Yoshitake contributed to this report.