Gates may be hoping to outlast legal threat

News Analysis For more than two years, Microsoft Corp. has faced a barrage of attacks from government trustbusters. The software giant's internal e-mail was exposed. Its

Tuesday, April 4th 2000, 12:00 am

By: News On 6

News Analysis

For more than two years, Microsoft Corp. has faced a barrage of attacks from government trustbusters. The software giant's internal e-mail was exposed. Its chairman, Bill Gates, was ridiculed for his evasiveness in a video deposition. And the company was broadly caricatured as a schoolyard bully in one of the highest-profile antitrust cases in U.S. history.

On Monday, in the most serious legal blow to the company, a federal judge ruled that Microsoft has illegally protected its Windows software monopoly through a host of anti-competitive practices.

And yet, Microsoft still didn't seem to be a company on its knees, other than taking a 14 percent hit to its stock price during regular trading on news that settlement talks had broken down over the weekend.

Instead, analysts said, Microsoft has placed a bet that time is on its side.

Even after the stinging defeat presented by U.S. District Judge Thomas Penfield Jackson's ruling, the case could still fall apart with an appeals court decision, by changes brought in the marketplace or with the presidential election in November.

Mr. Gates vowed that Microsoft would ultimately prevail against the federal government and the 19 states that joined the lawsuit. "While we did everything we could to settle this case and will continue to look for new opportunities to resolve it without further litigation, we believe we have a strong case on appeal," Mr. Gates said.

Microsoft executives have maintained for months that they would have liked to get the antitrust case out of the way with a settlement, but analysts said running out the clock with an appeals process might not be a bad option.

It may take six months just to reach the beginning of a remedy phase for the trial, in which the judge would consider proposals that would probably include breaking up the company. Microsoft's appeals process, which easily could take years, would probably begin after the sanctions were decided.

"While it's a gamble, it's a gamble that's absolutely stacked in Microsoft's favor," said Tim Bajarin, president of Creative Strategies Research International, a technology research firm in Campbell, Calif.

Michael Gartenberg, an analyst with the Gartner Group research firm, said, "In three years, we may be asking what the fuss was about."

Breakup option

Many industry observers favor a breakup of Microsoft as the only viable solution to the problems that were uncovered in the court case. "The operating system needs to compete on its own," said Dr. Leon Kappelman, associate professor of business computer information systems at the University of North Texas. "They have to make it easier for all companies to interface with it."

But the speed of the technology industry and the grinding pace of the U.S. legal system have proved a curious match ever since the legal fight began in October 1997, when Judge Jackson sought to impose a fine of $1 million a day on Microsoft. The government had contended that the Redmond, Wash.-based company was violating a court order from a 1995 consent decree by trying to destroy competing makers of Internet browsers.

One of the main issues in the case was whether Microsoft used its monopoly hold on operating systems to promote Internet Explorer, its own browser for the World Wide Web, at the expense of Netscape Communications Corp. Many analysts concluded long ago that the browser war was over; Microsoft has 80 percent of the browser market now, with the remainder going to Netscape.

But Microsoft has argued that Netscape is now part of a formidable technology empire in its own right. In March 1999, America Online Inc. completed its purchase of Netscape, continuing an aggressive acquisition binge. In January, giant AOL announced its plan to merge with Time Warner Inc., the parent of high-profile media properties including Time magazine, Warner Bros. film studios and CNN.

Market challenges

With the Internet, Microsoft is facing competition from companies large and small. Analysts said the rival Linux operating system has emerged as at least a credible alternative to Windows for some uses inside corporations.

Some software companies involved in the Linux business have multibillion-dollar market values.

"When the case was brought, it wasn't clear the Internet would become the focal point that it now appears to be," said Stan J. Liebowitz, a professor of managerial economics at the University of Texas at Dallas and co-author of Winners, Losers & Microsoft , a book about antitrust law in the digital age.

Changes ahead

Within a few years, as people become less dependent on personal computers for Internet access, the competition is expected to involve more players. Many analysts expect hand-held organizers, cell phones and television set-top boxes to become dominant forms for Internet access, and Microsoft's dominance in the Windows PC market would be little help with those devices.

Microsoft is poised to focus its efforts over the next several years on diversifying its products into the new devices, Mr. Bajarin said.

Nevertheless, the home and office PC markets remain significant, and Microsoft's monopoly there is not likely to be diminished in the next decade, Dr. Kappelman said.

So far, there is little evidence that Microsoft's business has been hamstrung by the government's scrutiny, analysts said. Windows programs are used on 95 percent of the world's PCs. Since the beginning of the government's action more than 2 1/2 years ago, Microsoft's revenue has jumped 61 percent to $6.1 billion in its most recent quarter. The company's market value has more than tripled over the period.

"I don't think that Microsoft as a company has been distracted," Mr. Gartenberg said. "They've managed to keep their eye on the ball as best as anyone could."

The other reason for Microsoft dragging out the case is the possibility that the Democrats might lose the White House in the election this fall, analysts said. "The Bush campaign has stated straight out they would take a different approach to antitrust law," said Lars H. Liebeler, a Washington, D.C., lawyer who provides antitrust counsel to the Computing Technology Industry Association, a trade group.