Case against Microsoft might become moot when Windows 98 comes out

The Outlook

October 26, 1997|By Samantha Kappalman

THE Justice Department last week charged Microsoft Corp. with violating a 1995 consent decree and asked a federal judge to impose a $1 million-a-day fine.

The government contends that by requiring personal computer makers to include its Internet Explorer Web browser software when they install its Windows 95 operating system, the company is unfairly exploiting its near-monopoly on PC operating systems and seeking to dominate the browser market. While Netscape Communications Corp.'s Navigator software is still the leading browser, Microsoft's Internet Explorer is gaining fast.

Microsoft has defended its marketing practices and says the policies do not violate the 1995 consent decree.

What is this fight really about? What are the stakes for the long run?

Richard G. Sherlund

Analyst, Goldman Sachs, New York

I think the issue is, is the Department of Justice leveling the playing field for Netscape? They sincerely think the product is separate. Microsoft's point of view is that it's very hard for the government to draw a line between browser and operating system. It will become an integral part of the operating system with the release of Windows 98 and this will make it inseparable.

I think they're both right. The functionality that is browsing has been delivered independent of the operating system, but going forward, Netscape has said it intends to turn its browser into an operating system.

I don't believe the Department of Justice has the right to fine Microsoft. Both parties point to language in the consent decree. This is a contract dispute. It will be a hard decision for a judge to make.

The other issue here is the public image of Microsoft. Does this make them come across as a bully in the market?

Rob Enderle

Senior analyst, Giga Information Group, Santa Clara, Calif.

The fundamental fight is whether or not Microsoft can bundle Internet Explorer with Windows 95. The language that the Justice Department is relying on is tying -- Microsoft is not allowed to tie one product to another. Microsoft is counter-arguing that it is one product and it is provided for free, so it is not a case of tying. Internet Explorer is actually a part of Windows, not a separate product -- that's what it is coming down to.

If the Justice Department is able to separate the two products and Microsoft can't force a particular vendor to use Explorer, then Netscape will have more breathing room, but only until Windows 98 comes out. It is unlikely that the court is going to force Microsoft to separate two parts of the same product.

Given how these things work, they'll [PC manufacturers] be preloading Windows 98 at the time this thing is settled. It will be more of a moral victory than a material one.

If the judge comes down on Microsoft's side, it would have little impact. If the judge tries to change Windows 98, it will be a long drawn-out battle. If Microsoft hadn't brought some programs out of Windows and put them in a plus pack, the argument that it is one product would be much stronger.

Mark Cunningham

Director of equity research, SQC Research, New York

The Department of Justice is stepping in at a point where Microsoft has become so incredibly successful that it is a case where one company can dominate the industry. It is very successful, and so the idea behind the anti-trust legislation in the first place was to make a fair playing field. New players are either acquired or can only exist by doing what Microsoft asks them to do. This is not just about that Microsoft is successful, it is about whether the dominance is being used in an unfair way with suppliers and competitors.

I think that at some point it can have an impact, but it won't be substantial. It'll be a victory in the sense that it will have a chilling effect on the way executives of Microsoft behave in the future -- in terms of being too assertive in the way they attempt to tell suppliers to do it their way or the highway.

It's impossible to predict the way the judge will decide, but I think there is merit to the case.

Barry Randall

Senior analyst, Dain Bosworth Inc., Minneapolis

I think the announcement should be taken at face value. The Justice Department had a serious issue with current business practices and seeks to stop them. It is incorrect to over-interpret this and say that it extends to integration of other products.

I think that if they did have that problem, they would have had a better [way] of announcing it than [through] Janet Reno. The Justice Department realizes that making Microsoft not integrate a browser functionality into Windows 98 has ramifications that are broad and negative for Microsoft stock and the pace of the stock market in general.

Pub Date: 10/26/97

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