October 21, 1997 in Nation/World

Microsoft Accused Of Antitrust Violations Justice Department Asks Federal Court To Fine Software Giant $1 Million A Day

Greg Miller And Jube Shiver Jr. Los Angeles Times
 

The Justice Department accused Microsoft on Monday of stifling competition on the Internet and urged a federal court to fine the software giant $1 million a day.

The action strikes at the heart of Microsoft’s multibillion-dollar effort to extend its dominance of the PC industry to the rapidly growing Internet and could provide a boost to rivals such as Netscape Communications Corp. and Sun Microsystems Inc.

The Justice Department alleges that Microsoft has run afoul of a 1995 antitrust settlement by forcing computer makers to equip their PCs with its Web browsing software or risk being denied its Windows operating system.

“Microsoft is unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly and undermine consumer choice,” said Attorney General Janet Reno.

But the department’s antitrust ambitions appear to be far broader. The department also asked the court to strike down non-disclosure agreements that Microsoft requires of its business partners. Officials said the agreements deter cooperation with investigators by requiring companies to notify Microsoft before responding to Justice Department requests.

“We have an ongoing and wide-ranging investigation,” said Joel I. Klein, assistant attorney general in charge of the antitrust division. He added that the request was meant to remove “any fear of intimidation or reprisal.”

Microsoft officials reacted with defiance, insisting that the company is in compliance with a 1995 settlement that ended what many considered the Justice Department’s most important antitrust investigation of the last decade.

William H. Neukom, Microsoft’s senior vice president for law and corporate affairs, said the company is “operating in a completely lawful manner,” and doesn’t plan to make any changes.

“It would be very unlikely for Microsoft to change the way it brings Internet technology to its customers,” he said.

Microsoft has 11 days to respond to the charges. Afterward, the U.S.

District Court in Washington will decide whether a hearing is appropriate.

Analysts said Microsoft’s confidence is not surprising given the way the Redmond, Wash.-based software giant’s soaring profit and sales growth has been uninterrupted by antitrust probes that have swirled around the company since 1990.

Even if the fine and other aspects of the Justice Department’s petition are imposed - a matter to be decided by the court - the penalties could be little more than an annoyance to the software juggernaut.

Still, Monday’s move by the Justice Department adds to a growing antiMicrosoft tide. Netscape and others have gladly cooperated with antitrust regulators over the past year. Sun Microsystems recently filed a suit of its own against Microsoft. Consumer advocate Ralph Nader recently went to regulators to bemoan Microsoft’s practices.

Microsoft is best-known for its Windows operating system, which runs about 85 percent of the world’s computers. But browser software and other new technologies such as the Java programming language provide new ways to access information and run programs, threatening Microsoft’s monopoly.

After initially being caught offguard by the popularity of the Internet, Microsoft has spent billions of dollars to catch up.

The centerpiece of the company’s Internet strategy is Internet Explorer, a Web browser that competes with Navigator, the Netscape browser that is still by far the most popular software people use to surf the Web.

In its push to displace Navigator, Microsoft has given its browser away for free, offered incentives to Internet service providers and even struck a deal with arch-rival Apple Computer Inc.

But it was another technique used by Microsoft that caught regulators’ attention.

Microsoft officials acknowledge that the company requires PC makers to equip their machines with Internet Explorer if they want to license the Windows operating system. Because of Windows’ huge popularity with users, that leaves PC makers with little choice.

Microsoft and the Justice Department disagree, however, on whether this bundling violates a 1995 antitrust settlement. Microsoft officials argued Monday that Internet Explorer is not so much a separate product as an extension of the Windows operating system. Improving the operating systems, executives said, was clearly permitted in the settlement.

“A fundamental principle at Microsoft is that Windows gets better and makes the PC easier to use with each new version,” said Microsoft founder Bill Gates. “Today, people want to use PCs to access the Internet. We are providing that functionality in Windows.”

But Justice Department officials were unswayed by this argument.

“Internet Explorer is treated by the marketplace, consumers, manufacturers and Microsoft itself as a separate product,” said one Justice official, who asked not to be named. “They even talk about how they’re doing (against Netscape) in the browser wars. This looks like two products to us.”

Netscape officials were clearly pleased with Monday’s turn of events.

“All we want is a level playing field,” said Lori Mirek, senior vice president of marketing at Mountain View, Calif.-based Netscape. “Microsoft clearly has an operating system monopoly.”

Experts said Monday’s move by the Justice was uncharacteristically swift, with potentially far-reaching impacts on an industry that has as much influence over today’s consumers as oil and telephone service - industries that attracted regulators’ attention in previous decades.

“They’re setting the landscape for the next century in terms of electronic commerce and access to information,” said Garth Saloner, a professor of economics at the Stanford Business School. “When history looks back, the set of practices Microsoft has been engaged in will have dwarfed Standard Oil in scope and importance.”

xxxx PROFITS UP Microsoft Corp. said Monday its first-quarter profits rose about 8 percent over the same period last year, held down by a write-off for investment in Web-TV. Net income for the quarter ended Sept. 30 was $663 million or 50 cents a share, compared with $614 million or 47 cents a share a year ago. Stock in the company was up 25 cents to close at $132.50 a share Monday on the Nasdaq stock exchange.


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