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The government’s announcement last week that it would not seek to break apart Microsoft Corp. as a penalty for the software giant’s antitrust violations would seem to be, at first glance, cause for robust celebration for the company. All along, the Justice Department appeared to stake the case on severing the company in order to restore competitive balance in the marketplace. And its surrender on that point could be seen as a signal that a relatively painless settlement is imminent. But the reaction from Redmond, Wash., where Microsoft is headquartered, was muted — even ambivalent. Wall Street shared the same vibe. Microsoft’s stock price barely fluttered. That could be attributed to simple corporate inscrutability. But it might also be a realization that this heavyweight match still has a few bloody rounds to go. In announcing that it would forgo a so-called structural remedy, the Justice Department said last week that it would instead attempt to bind Microsoft to a set of restrictions intended to prevent future anti-competitive conduct. And for Microsoft, the severity of those restrictions will dictate whether the company emerges from the three-year-old case standing tall. “The outcome could be anything from a slap on the wrist to something more onerous,” says Thomas Lenard, vice president of the Progress and Freedom Foundation, a D.C. think tank. Lenard’s organization is conservative, yet it supported the splintering of Microsoft. Why? Because a breakup would have been, to use the parlance of the antitrust world, “clean.” Once the company was split into two or three separate units, the government’s work would have been done. “A structural remedy is much less intrusive and regulatory,” Lenard says. Alternatively, if Microsoft is ordered to agree to a series of behavioral restrictions, those conditions will have to be monitored — by both the Justice Department and the D.C. federal judge who approves them. The Justice Department is seeking to have the restrictions modeled on an interim set of conditions the company was ordered to follow during the first phase of the antitrust proceeding. These include forcing the company to make its software codes more accessible to competing software developers; giving companies that build computers more flexibility in configuring Microsoft’s operating system, Windows, using non-Microsoft products; and prohibiting the company from entering into exclusive retailing deals and engaging in anti-competitive conduct, such as “bundling” its Internet browser with Windows. Moreover, it remains possible that the government could demand that Microsoft be forced to license its Windows technology to competing companies, diluting its core product in a way that would be similar to the effects of a breakup in the marketplace. “This would be a regulatory regime tailor-made for one particular firm,” Lenard says. “It gets into all sorts of business and technical decisions that Microsoft can make.” Microsoft almost certainly would be required to establish some sort of reporting mechanism with the government, agreeing to in-house monitors that would certify its compliance with the restrictions. “A lot of them would require supervision. You could design a bunch of conduct remedies that are really harsh, that Microsoft might prefer a breakup to,” says professor Robert Lande of the University of Baltimore School of Law. “It will hamper them. They will be saddled with reports. They’ll be transparent. No more secret deals. That would be pain on everyone’s part and [the case] would probably wind up back in court given Microsoft’s tendencies.” Still, David Balto, an antitrust lawyer in the D.C. office of White & Case, says that Microsoft could learn to live with some of the restrictions. The government, he says, will not be able to aggressively monitor every facet of the company. “It is remarkably difficult to go to the court every time there is a change in the marketplace,” Balto says. A senior official in the Justice Department’s Antitrust Division said last week that the department is also concerned about going too far. “We are aiming to have a conduct remedy that is effective,” the official said. “We are not interested in a remedy that puts the Antitrust Division or the court in the business of regulating the software industry.” The department plans to ask U.S. District Judge Colleen Kollar-Kotelly, who is now overseeing the case, to allow it to gather information about Microsoft’s business practices since last year’s antitrust trial. Much of that information is expected to be centered around the development of the latest version of Microsoft’s operating system, Windows XP. The software is scheduled to be released in October. Nothing in the interim conduct guidelines under which Microsoft is operating addresses the XP. Now that the Justice Department has abandoned its desire to break up the company, much of the upcoming court proceedings will be focused on the severity of the proposed conduct regulations. “The department will be putting on evidence as to future potential threats of Microsoft’s dominance and arguing for remedies that will fence Microsoft in,” says Willard Tom, an antitrust lawyer in the D.C. office of Morgan, Lewis & Bockius. In contrast, Tom says, Microsoft will push for the court to approve restrictions that only pertain to its previous illegal conduct. In the accelerated world of high-tech, such a distinction is crucial. “It’s tough to find a remedy that can anticipate future actions in a market that is only beginning to develop,” Tom says. “The difficulty of it is what caused the Justice Department to look at structural remedies in the first place.” The government’s antitrust campaign against AT&T 20 years ago makes for a useful comparison. A court-ordered breakup actually aided the telecommunications giant. “It got broken into a bunch of companies that were vigorous, that competed,” Lande says. Conversely, IBM Corp., which was the 800-pound computer gorilla before Microsoft emerged, survived the government’s antitrust case against it. As a result, it fell from its dominant position in the computer industry. “IBM got lazy and didn’t innovate,” Lande says. Regardless, a breakup was never palatable to Microsoft — and it isn’t expected to acquiesce to stringent conduct regulations either. “Any settlement talks will be very hard fought,” Tom says. “There is a serious possibility that there will be a full-fledged hearing on what a remedy should be.” Along with its decision not to pursue splitting the company as a cure for Microsoft’s established antitrust violations, the government also declared last week that it would abandon its “bundling” claim against the company. The moves come in the wake of a unanimous June 28 decision by the U.S. Court of Appeals for the D.C. Circuit that upheld the district court’s ruling last year that found that Microsoft had engaged in monopolistic conduct, but the court tossed aside the breakup order. The appeals court sent the case back to the U.S. District Court for the District of Columbia for an appropriate remedy. In doing so, it also held that the bundling claim, in which the government accused Microsoft of illegally tying consumers’ use of its Windows operating system to use of its Internet browser, would have to be retried under a stricter legal standard. The Justice Department said that the decisions were designed to speed the case toward an earlier conclusion. Now, only the proper remedy for Microsoft’s established antitrust violations will have to be tried before Kollar-Kotelly. The decisions were made to whittle the case down to “a manageable pack of issues,” the senior Justice official said, “that would lead us to a prompt and effective remedy as soon as possible.” The government’s announcement came as both sides were preparing a joint report for Kollar-Kotelly. She took over the case after the appeals court removed the previous trial judge, Thomas Penfield Jackson, citing Jackson’s expressed hostility toward the company during the trial.

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