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Observers puzzle at Microsoft's behavior: Whether sly or stubborn, it hasn't worked

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A federal judge's decision this week to break up Microsoft Corp. has seemed inevitable for weeks, but it was hardly the only logical outcome to a government victory in the landmark antitrust trial.

On Thursday, analysts and other Microsoft watchers reflected on how the legal strategies of the software giant and the Department of Justice brought the case to a point that few observers had thought possible when the trial began two years ago.

They also pored over published interviews with U.S. District Judge Thomas Penfield Jackson, who said after issuing his ruling that he simply grew to mistrust Microsoft during the course of the trial. He also urged the parties to try again to negotiate a remedy.

"A lot of this is a poker game going on," said Dr. Stanley Liebowitz, an economics professor at the University of Texas at Dallas and co-author of Winners, Losers & Microsoft, a book about antitrust law in the digital age.

Dr. Liebowitz believes the Justice Department sought a breakup because officials didn't want to be accused of coming up with a remedy that would only have slapped Microsoft on the wrist. And he noted that Judge Jackson said in one of the interviews that he chose to back the government's proposal to split up Microsoft because a less severe solution would have required an inefficient regulatory apparatus to police the company's actions.

"It's a breakup for the sake of a breakup," Dr. Liebowitz said.

At the same time, analysts puzzled over how Microsoft has rejected every chance to soften its stance, maintaining throughout that it has acted legally and to the benefit of consumers, the technology industry and the economy as a whole. Settlement talks guided by a mediator fell apart three months ago.

"I have been continually surprised that Microsoft has not negotiated a resolution of these issues," said Robert Walters, an antitrust lawyer at Vinson & Elkins in Dallas. "What I understand of the government's demands, short of the breakup of the company, have not been unreasonable solutions to the problem."

One view of Microsoft Corp. in its landmark antitrust case is of a shrewd, patient, risk-taking company that would bet everything in order not to concede an inch of legal territory. The other view is of a stubborn, arrogant business that remains out of touch to this day with the reality of its situation.

"When Microsoft executives say they don't understand the government's position, do they really not understand or are they just taking a stance?" asked Roger Kay, an analyst at International Data Corp., a market research firm in Framingham, Mass.

"I'd like to believe they're just cynics playing the best hand they could," he said.

But Microsoft executives simply couldn't come across as credible in the trial, he said. When Microsoft chairman Bill Gates said in his videotaped testimony that he couldn't recall critical meetings and e-mail messages, it seemed as if he was conveniently and selectively forgetting important details, Mr. Kay said.

Microsoft filed its motion Thursday to stay the court order, saying a breakup and additional conduct remedies imposed by the judge would inflict "grievous and irreparable harm" to the company, its 35,000 employees, thousands of business partners, millions of shareholders and tens of millions of consumers worldwide.

The company plans an appeal, and analysts expect the case will ultimately be resolved by the Supreme Court.

Shares in Microsoft fell $1.69 Thursday to $68.81.

Joel Klein, head of the Justice Department's antitrust unit, echoed the judge's comments that a negotiated settlement was still possible. "Settlement is always the preferred course in this kind of litigation," Mr. Klein said.

In response, Microsoft reiterated its position that it would be interested only in talks that would preserve both the company's ability to innovate and the integrity of its products.

Dr. Andrew Whinston, director of the Center for Research in Electronic Commerce at the University of Texas at Austin, said Microsoft would be well-served to change course at this point and end the legal fight.

"My suggestion: Repentance, contrition and confession," he said. "The remedy is draconian, but they must feel the Microsoft executives don't get it."

Dr. Whinston said Microsoft should acknowledge that its strategy of bundling products together is a monopolistic practice.

The core of the government's case against Microsoft is that the software giant illegally tied its Internet Explorer browser to Microsoft Windows, which performs the basic functions of nearly all personal computers, in an effort to wipe out rival Netscape Communications Corp.

Michael Gartenberg, a venture capitalist who until recently followed Microsoft for the Gartner Group research firm, said the company would never give up that strategy.

"They may as well go for the breakup then," Mr. Gartenberg said. "The stakes are extremely high at this point. The judge has upped the ante. I don't think Microsoft expected it would come down to this. But the truth is, we're not really seeing anybody's cards yet. And from Microsoft's point of view, the harsher the remedy, the less likely it is to stand up on appeal."

Mr. Walters, the Dallas lawyer, said risk-taking may be so ingrained in Microsoft's culture as a highly successful technology company that it can't compromise.

On the other hand, he said, "the stakes are so high, I would be very surprised if Microsoft didn't work really hard to come up with a gut check. At least from their perspective, all the marbles are at stake. It's the ultimate game of chicken."

Staff writers Vikas Bajaj in Dallas and Jim Landers in Washington contributed to this report.
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