For Free-and-Clear Microsoft, What's Next?

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Now that an appeal to increase Microsoft’s penalties for abusing its monopoly and violating antitrust law has been effectively denied, will the past be a prologue to Microsoft’s future business tactics?

Analysts, experts and lawyers involved with the appeal agree that Microsoft is now free to repeat the same exclusionary tactics that got the company in trouble with the government in the first place. But they also say market conditions are much different today compared to the browser wars of the mid-1990s that led Microsoft to bundle Internet Explorer with its Windows operating system and kill off Netscape’s market standing.

In addition, Sun Microsystems has settled litigation it launched against Microsoft over its tactics, which effectively served to dilute Java’s effectiveness on the Windows platform.

Massachusetts and two computer industry associations, the Computer and Communications Industry Association and The Software and Information industry Association, had argued the 2002 settlement, which followed its court ruling that it violated antitrust law, didn’t go far enough.

But The U.S. Court of Appeals appeal ruling, released Wednesday afternoon, upheld the existing settlement terms of the consent decree that Microsoft struck with the government.

“I think that the core legal issue raised in this case is one of the most important issues in the 125-year history of antitrust law,” said Glenn Manishin, an attorney with Kelley, Drye & Warren, who appeared on behalf of the CCIA in the appeal process.

“What the court did was ignore a settlement. Because the question is whether the government can steal a case from the courts by settling it after they won, whether they can snatch defeat from the jaws of victory.” The Court of Appeals ruling upheld the 2002 settlement terms by saying to the government, “‘We respect your judgment, we’ll be very deferential,'” Manishin said. “That’s what is happening here.”

The settlement does not force Microsoft to stop tying its Web browser, e-mail client and media player into its operating system, which had been a cornerstone of the government’s initial case against Microsoft. It did, however, expand the definition of middleware, including browsers, e-mail clients, media players, instant messaging software and future middleware developments. It also forced Microsoft to give developers access to its own API in order to let developers interoperate with its operating systems.

Critics, including the parties in the appeal, had argued that the settlement allowed Microsoft to define what is and is not part of the Windows operating system. In addition, although it was obligated to allow computer manufacturers to install icons or shortcuts for non-Microsoft software on the Windows desktop or in the start menu, Microsoft was allowed to restrict or limit those additions if they “impair the functionality of
the user interface.”

Massachusetts wanted the final settlement with the government to be expanded, adding a provision that the browser be unbundled from the Windows operating system. The court said no.

Manishin said he thought it unlikely that any parties would try to appeal the case to the U.S. Supreme Court. If an appeal were filed, however, it might entail a question of how deferential the judicial branch of government should be to the executive branch over such legal cases. “As a practical matter, the only realistic opportunity to have a change in the [settlement] was in this court,” he added.

In addition, he said, the concept of middleware, and how it is bundled in operating systems, is changing, as applications continue to move “up the stack.”

As the lawyers in the case argued, the settlement decree would not stop Microsoft from doing today what it did in 1995 to Netscape and Java. But Netscape has since moved on, and so has Sun, by reaching a settlement with Microsoft over their long-running litigation over Java.

Plus, Microsoft has similar antitrust issues to address in the European Union, where it is appealing the EU’s ruling that it violated antitrust law and had to separate Windows Media Player from its operating system.

The timing of the [Wednesday’s ruling] is on Microsoft’s side, said Joe Wilcox, senior analyst with Jupiter Research, which is owned by Jupitermedia, as is internetnews.com. “Microsoft just got a stay in the EU case. It has put several states’ consumer lawsuits behind it. This is really the last major hurdle of putting the case behind it.”

Brad Smith, senior vice president and general counsel at Microsoft, hailed the decision as the “most important step in resolving our legal issues and moving forward.” In a press conference call, Smith also said he hoped the decision would have an impact on the software giant’s legal problems with the EU, which has temporarily stayed its decision forcing Microsoft to remove its media player from European versions of its Windows operating system.

“I do hope the people in Europe and around the world will take the time to pause and read the decision,” he said. “At the heart of this case was the question of whether Microsoft should be required to remove software code from our products, or provide multiple versions of our products with certain features removed. This unanimous decision clearly states that removing code would be a huge step backwards for consumers and for the industry as a whole.”

Laura DiDio, senior analyst for Yankee Group, argued that the Department of Justice has been monitoring Microsoft pretty closely regarding the terms of the settlement.

“So far, they’ve gotten good grades for compliance,” she told internetnews.com. “Did the settlement go far enough or was it a slap on the wrist? That argument will go on. But at the end of the day, you need to close the book on the case. I think what the court was saying here is that Microsoft is complying.”

DiDio noted that Microsoft has a lot of goodwill to make up with customers and business partners over security concerns with its products. Plus, its licensing 6.0 program proved unpopular with customers who said it raised their prices. And there’s the continued ascendancy of the free Linux operating system that is growing in popularity, as well as its plans to offer unique search services.

Microsoft realizes these days that it has to be more customer centric, said DiDio. For all the competition it faces, and even with all the settlements it has put in place since the litigation began over its business tactics, DiDio noted that Microsoft’s biggest competitor on the desktop and in the office suite remains itself.