CXO

Final score: Microsoft/consumers 2--competitors 1

While there will likely be more litigation from competitors seeking to sanction Microsoft in some way, columnist Tim Landgrave explains why the recent federal ruling bodes well for both Microsoft, and more importantly, the public consumer sector.


On Friday, November 1, the U.S. District Judge approved the November 2001 settlement between Microsoft, the Justice Department, and the nine states that agreed to the settlement. The judge, Colleen Kollar-Kotelly, also issued a revised settlement intended to satisfy the litigation pending from the nine nonsettling states and the District of Columbia.

In her decision, the judge basically approved the settlement entirely. In doing so, she dismissed almost entirely the request by the nine nonsettling states and the District of Columbia for more onerous sanctions. In her opinion, she wrote, “The court is satisfied that the parties have reached a settlement which comports with the public interest.”

This is the issue that has most of Microsoft’s competitors upset—it’s in the public’s interest and not theirs.

What was this suit really about?
As I’ve written before, the suit was never really about harm to consumers. Microsoft has provided consumers with a standard computing platform. Moreover, its focus on supporting software and device driver development for the Windows platform has provided revenue for thousands of hardware and software companies, and consumer choice of Windows-compatible hardware and software that’s unparalleled in any other industry.

For proof, just go to a local computer store. You’ll see, at most, one or two aisles of Apple hardware and software; the rest of the store will be dedicated to products that enhance the consumer experience on the Windows platform. When consumers demand, and Microsoft supplies, additional functionality as part of the core operating system, the software industry continues to thrive. And the computer store example doesn’t even include the thousands of consulting and software development companies that support the economy by delivering solutions based on the Microsoft platform.

Compare the size of the consulting and support channel for Microsoft to any other major player, like IBM, Oracle, or Sun. These companies have their own service organizations that make up a large percentage of their overall profitability. Microsoft’s strategy of making money on the software and letting the consulting market deliver the solutions at a fraction of the cost of the captive IBM-style Global Services Delivery channel makes it increasingly difficult for its competitors to survive. As Kollar-Kotelly noted, it actually acts in the public interest and against the interests of Microsoft competitors.

In her decision, Kollar-Kotelly called the states on their inability to focus on the harm to consumers, instead focusing on the potential harm to Microsoft competitors (who fill their reelection coffers with donations).

For example, she wrote, "It appears that these types of remedial provisions (proposed by the plaintiffs) seek to convert certain legitimate aspects of Microsoft's business model and/or product design into a model which resembles that of other industry participants simply for the sake of changing the status quo." She continues by stating that Microsoft competitors not only are the only ones who desire stiffer penalties, but “are the likely beneficiaries of those provisions."

What’s the technology impact?
The real win for consumers will come from the judge’s recognition that a vibrant, competitive market exists for all the products that ride on top of Microsoft’s operating systems.

Competitors wanted the judge to more broadly define these applications or “middleware" so that they could preclude Microsoft from participating in these markets. Kollar-Kotelly disallowed the states' definition because she felt that it went beyond the definition used at the original trial and at the appellate level.

If it got its way, Microsoft wouldn’t be able to produce and distribute software like media playback, Web services, and interactive TV software and this could potentially extend even to handheld devices like the Pocket PC. In effect, Microsoft would be prohibited from using its marketing muscle to drive down the price of the software and increase the functionality available to consumers. Kollar-Kotelly understood that this would serve the interest of the competitors but was not in the public interest.

With this ruling, the courts have given Microsoft the green light to enhance its existing platform so that consumers will benefit from an integrated experience with new technologies. Consumers will continue to get more functionality for the same, or less, money, and Microsoft’s competitors will be forced to continue innovating to survive. Now that they can’t hide behind the judge’s robe to protect their overpriced, nonstandard software, competitors will have to focus on creating the products that consumers want or face obviation by a competitive Microsoft product.

What’s the business impact?
The judge upheld the settlement’s existing sanctions and agreed that they should last for five years. These sanctions largely speak to Microsoft’s requirement to allow customizations by original equipment manufacturers (OEMs) like Dell, Gateway, and Compaq, and publication of all application programming interfaces (APIs) for competitors who want to integrate with Microsoft systems.

The major victory for the nonsettling states was a modification to the original structure of the Microsoft settlement compliance committee. The original proposal included a technical committee and an internal compliance officer. Competitors were concerned that Microsoft could exert undue influence on these participants. The judge combined these into a single compliance committee composed of Microsoft board members and an independent individual to serve as a compliance officer. This individual will be responsible for reporting to both the committee and Microsoft's CEO.

From Microsoft’s perspective, the compliance committee—however onerous—is a much less invasive approach than the ultimate penalty of splitting the company or forcing Microsoft to give away its intellectual property to its competitors (for example, giving away the source code to Microsoft Office, as many of the states demanded). Microsoft will also benefit from this settlement because it lessens or eliminates much of the potential impact of suits brought by third parties.

What about other pending lawsuits?
Kollar-Kotelly’s comment in the memorandum that there was no direct evidence of consumer harm—only competitor harm—in the states’ case may effectively eliminate the basis on which many of the private antitrust cases pending against Microsoft rest.

Other plaintiffs like Netscape; Be, Inc.; and Sun Microsystems will also have a more difficult time proving harm. For example, a large part of Sun’s claim presupposes that Microsoft doesn’t have the right to develop an incompatible version of Java. But the Court of Appeals has already found that Microsoft incurred no liability in its development of a Windows version of Java. The judge rejected all new claims of “bad acts” as they related to middleware technologies like Java. In fact, Microsoft may be able to use this ruling to avoid shipping a copy of Java with its Windows clients. Sun and Microsoft have a hearing in early December to address this exact issue.

Is this the end?
Although there will probably be more frivolous litigation involving Microsoft, it’s likely that this ruling will make it difficult for competitors to continue using the courts to compete rather than doing so on the merits of their products.

In a show of reason, Kollar-Kotelly has returned to the core of the case—consumer harm—and recognized that Microsoft has been the consumer champion from the beginning.

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