U.S. antitrust charges hit Microsoft

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The U.S. Justice Department is accusing Microsoft Corp. of illegally using its clout to force computer makers to put its browser on their computers and asking $1 million a day in damages.

Attorney General Janet Reno, taking the stance that Microsoft's Internet Explorer browser is a separate product and not an intrinsic part of Windows, charged Microsoft forced computer makers to include the additional software on their machines, violating a consent agreement signed in 1995 barring the software maker from imposing anti-competitive terms on licensees.

"Forcing PC manufacturers to take one Microsoft product as a condition of buying a monopoly product like Windows 95 is not only a violation of a court order, it's just plain wrong," Ms. Reno said.

Her department immediately went to U.S. District Court in the District of Columbia seeking a civil contempt citation against the software maker.

Microsoft last month said more than 50 PC makers -- including the world's top five, Compaq Computer Corp., IBM Corp., Packard Bell NEC, Dell Computer Corp. and Toshiba -- have "chosen" Internet Explorer 4.0 as their default browser, introduced Sept. 30.

But PC makers have little choice than to take IE: If they want a license for Windows 95, Microsoft Senior VP William Neukom acknowledged Oct. 20, they also must agree to install IE.

In a phone press briefing, Mr. Neukom said Microsoft is operating in "a completely lawful" and "pro-competitive" environment in accord with the '95 decree and stressed PC makers are free to install rival browsers as well.

Mr. Neukom said Justice Department officials "misunderstand" the consent decree and also don't understand how innovation takes place in the software industry.

Microsoft introduced IE two years ago with no marketing support the day it launched Windows 95.

But as Microsoft developed new versions of IE, it has spent millions of dollars on marketing and advertising for IE, which now encompasses a line of browsers that work with Windows 95 and other operating systems.

Microsoft also sells a version of the IE product in computer stores.

In the press briefing, however, Mr. Neukom took pains not to refer to IE as a standalone product. Instead, he argued IE is simply the "functionality" that gives Windows 95 the ability to search the Web.

The Justice Department also accused Microsoft of using its deals with computer makers to illegally seek to bar computer makers from complaining. Mr. Neukom defended confidentiality agreements with PC makers as a standard and necessary procedure in the computer industry.

In addition to deals with PC makers, Microsoft has agreements with the top 10 Internet service providers to distribute IE. Many have made it their default browser, though many also offer Netscape Communications Corp.'s browsers. The Justice Department's complaint this week doesn't challenge distribution through ISPs.

The Justice Department took no immediate position on other complaints against Microsoft including Netscape's that Microsoft's giveaway of its Web browser to consumers amounts to a predatory pricing tactic that is illegal.

With the exception of the boxed version sold in stores, Microsoft has offered its browser free to consumers, PC makers and ISPs since its 1995 launch. That has eaten into the potential revenues of Netscape, which industry executives say has been forced to slash the price of its browser to get PC makers to bundle it.

Assistant Attorney General Joel Klein said the Justice Department is continuing to examine such issues as pricing but felt Microsoft's requirement that computer makers include its browser in their machines was a particularly obvious violation of an earlier consent decree, and he indicated the department felt the timing was right for acting.

"Microsoft went over the line," he said. "Anybody can give away a browser, but nobody can force it onto a computer desktop unless you have monopoly power. When you use that power to snuff out a new entrant, that is what is prohibited."

Mr. Klein said that the Internet browser and the Web threatened Microsoft's hold on software and Microsoft's internal memos and comments in its internal meetings indicate the company's interest in gaining control of the browser.

The Justice Department stance raises some big questions about Microsoft's plan to incorporate a browser as part of Windows 98, which Microsoft intends to launch in next year's second quarter. Windows 98 is being designed to integrate the IE 4.0 browser more tightly into the operating system than is done with Windows 95.

With the launch of IE 4.0 last month, Microsoft executives for the first time predicted they will displace Netscape as the browser leader by taking more than 50% of the market. IE now commands more than 30%, with Netscape controlling most of the remaining market.

Mr. Klein said that based on Microsoft's internal memos, Microsoft regards a browser as a separate program right now, and the Justice Department, too, looks at a browser as separate. While raising questions about how the Justice Department would view a browser included with Windows 98, Mr. Klein deferred questions about the future version of Windows, noting it was still in development.

Microsoft said it will "vigorously defend" itself and expects to show the court that no changes are necessary. Mr. Neukom said it could take weeks or months for the matter to be resolved.

If Microsoft were forced to divorce the browser from its operating systems, Mr. Neukom said the result would be "artificial," impractical and could result in consumers paying more for their software.

Meanwhile, he said, Microsoft will push ahead on development of Windows 98. "At this point, we don't see the bringing of this petition ought to have an effect on the makeup of Windows 98," he said.

Copyright October 1997, Crain Communications Inc.

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