The ruling, issued Monday by U.S. District Judge Thomas Penfield Jackson, said Microsoft violated antitrust laws by "tying" its Web browser to its dominant Windows operating system, shutting out competitor Netscape.
Though the browser war is largely a thing of the past, Microsoft faces current and future battlegrounds for other technology that competitors sell but that Microsoft might want to integrate into its operating system. Although Microsoft may be more circumspect, executives made it clear they don't intend to hold still.
"They will try their best not to wave a red flag in front of the government bull, but at the same time I don't think they're going to fundamentally alter their strategy or product road map," said Summit Strategy analyst Dwight Davis. "They may be a little bit smarter in their industry relationships and partnerships."
In response to the ruling, Microsoft chairman Bill Gates said his company won't stop exploring new technological realms. "While our legal team works to resolve the case, we will put our energy and our focus on these new ideas, new innovations and new software that will improve people's lives," Gates said.
Gartner Group analyst Michael Gartenberg interpreted the statement to mean "the sky is the limit. Any computing function that adds value to an operating system is something that Microsoft views as fair game for inclusion."
Microsoft competitors are working on several technologies that could augment the company's desktop operating system. The list includes software to protect against intruders over the Internet, to let a person control a computer by voice commands, to edit digital movies, to send instant messages, or to create digital music files.
Computer users are interested in these areas, and a strong case can be made that they would work better if integrated into the operating system. Indeed, some, such as voice recognition, may not work without that deeper integration.
In some cases, it won't matter whether Microsoft chooses to integrate new features into its operating system. One outcome of Monday's ruling was that aggressive marketing tactics--such as the exclusive contract Microsoft used to get computer makers to ship their machines with Internet Explorer instead of Netscape Navigator--are legal.
In addition, Microsoft has said it will make use of an earlier ruling by an appeals court. That decision "clearly stated that it is inappropriate for the courts to get involved with technology product designs," a precedent that "should serve Microsoft well during the appeal," J.P. Morgan analyst William Epifanio said in a report today.
"If I was competing against Microsoft, I would be tempted to think about the lawsuit route," said Dataquest analyst Chris LoTocq. In other words, if Microsoft started encroaching on someone's territory, a competitor might be inclined to file a lawsuit whose effect would be to limit Microsoft's monopoly power in new markets.
One example is Internet video broadcasting. Analysts expect the Internet to serve as a major medium for sending video programs and ads, with what amounts to thousands of channels of information piped to home computers.
With that trend in mind, Gates said last December that the upcoming edition of Windows Me--the operating system for consumers--will have software that will make video editing easier. The software automatically takes video and separates it into segments for editing based on pauses on the tape and scene changes.
But with the arrival of that software, what becomes of competing products that target consumers, such as Avid Technology's Cinema software? One tack may be for Microsoft to increase its use of another strategy: to partner or invest in companies with key technologies and then attempt to closely integrate those technologies with Windows.
As an indication that Microsoft is not backing down from its practice of integrating or bundling technology with the operating system, the company has no plans to offer the video editing software separately, said Greg Sullivan, a product manager with the Windows division.
"If you look at things happening in the home, movies are being stored at home in digital form, along with music and home movies. The PC is a great general-purpose platform for storing, manipulating and playing the digital content showing up in our home," Sullivan said. "It makes sense a good home OS would be able to take advantage of those trends."
Voice recognition software is another possible battleground, said Barry Jaruzelski, of Booz-Allen & Hamilton. Such software, embedded in the operating system, "would give great advantage against the standalone players," such as IBM's ViaVoice software.
Indeed, even before Monday's ruling, Microsoft had been augmenting its voice recognition research with an aggressive investment and partnership strategy.
In 1997, the company invested $45 million in one of the leading speech recognition firms, Lernout & Hauspie. Lernout itself just bought Dragon Systems, leaving Philips and IBM as the major competitors in this field. Microsoft also acquired Entropic, which develops software and tools for speech recognition, in November 1999.
The same strategy is being applied in the music arena, an area of exploding interest among young consumers. Microsoft signed a partnership with MusicMatch of San Diego to provide digital media management software for PCs and portable devices to better compete against RealNetworks' Jukebox software.
MusicMatch's software lets people store and manage collections of digital music downloads, such as MP3 files. The agreement includes technical collaboration as well as joint marketing and distribution efforts, the companies said last November.
Likewise, personal "firewall" software to keep intruders out of systems connected to the Internet would be one of several security features Microsoft might want to add to Windows, Jaruzelski said. That would compete with software from companies such as Symantec. The company has built a business on utility software such as disk defragmenters, but it has watched as Microsoft adds many of those features to the operating system.
Even if Microsoft tones down its competitiveness, the ruling Monday and the antitrust suit overall have changed how business partners view Microsoft, Jaruzelski said.
"If they're embroiled in a legal environment, government or civil, they're probably going to be a little more circumspect in what they do," he said. "All the folks that interact with them--PC manufacturers, independent software vendors--will feel more willing to be more aggressive with them."