Microsoft offer considered inadequate - Part II

Winning the battle, losing the war

Litan said the Justice Department, if it were to agree to lenient terms for Microsoft, "would be susceptible to the charge of winning the battle and losing the war."

The government's negotiating position also is tainted by its past experiences. Microsoft Chairman Bill Gates, who played chess on some of the earliest computers in middle-school, was thinking moves ahead of government lawyers in a previous court fight years ago.

Microsoft proposed agreeing to never require Windows customers to also buy any of its other products. But the company's lawyers also considered adding a provision that Microsoft would never be blocked from "developing integrated products which offer technological advantages."

Gates bristled after reviewing a draft the night before negotiations resumed. He ordered his lawyers to remove the last four words, a subtle change that would return to haunt the government.

Justice accepted the provision as part of its 1995 consent decree, and Microsoft later claimed the language allowed it to bundle its Internet software into its Windows operating system -- a core complaint in the government's current antitrust case. Litan said such loaded clauses are "all they're going to be looking for" in the government's current review of Microsoft's offer. "They don't want to get snookered."

Senior Microsoft officials have been expected to detail proposed operational changes at the company that would establish equal pricing and deal terms for the main product it sells to PC makers, the Windows operating system. Lawyers for the Justice Department and the 19 states that joined the suit have argued in court that the pricing deals with PC makers were discriminatory and used by Microsoft to unfairly stifle competition.

In addition, Microsoft is also offering greater disclosure of the inner workings of Windows, known as the application-programming interfaces, people close to the matter said. That would make it easier for rival software makers to create programs that can run with Windows. As the talks have progressed, Microsoft has agreed to more stringent examinations on these points, such as pricing audits, people familiar with the matter said.

Meanwhile, people close to the case have said that government negotiators are focusing on developing tough restrictions on Microsoft's conduct, not on restructuring or dividing the software giant. "The prospects all along for structural relief were somewhat remote," said Mark Schechter, a former senior Justice official who participated in 1994 settlement talks with Microsoft in a related case. "The issue on the table is whether Microsoft will make a proposal with sufficiently extensive behavioural provisions to satisfy the government's concerns."

Some Wall Street analysts held out hope Friday that the quickened pace of the talks signalled a settlement was near. Andrew Roskill, an analyst at Warburg Dillon Read, said that a month ago he would have attached a 20 percent likelihood to a settlement. He has now raised that to 60 percent.

Yet, some people following the talks closely rated the chance of a settlement as a long shot, despite the current flurry of activity. Some see the two sides merely positioning themselves so they can report to Judge Jackson that they made every possible effort to reach an agreement.

The sides have met separately with Judge Posner in Chicago for months, but have only met together for one introductory session, in late November. Judge Posner has demanded strict secrecy in the talks. Klein told a Senate panel Wednesday that Microsoft's punishment should be "commensurate with" the company's "serious pattern of anticompetitive conduct." Klein wouldn't discuss the ongoing mediation talks but said that while a settlement is preferable to litigation, any deal must address the department's concerns.

Gates, who gave up his chief-executive position last year to Steve Ballmer, has repeatedly insisted that the company he founded in 1975 remain intact. Gates and Ballmer have vehemently disagreed with the judge's findings so far.

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