Microsoft's offer to settle federal antitrust charges frees computer makers to embed competitors' software into Microsoft's Windows, one of several major concessions that could form a basis for resolving the case, people close to the settlement discussions said.
Under the proposal, personal-computer and software makers would be allowed to modify the secret "source code" underlying Windows to add rival products such as Internet browsers or media players. Microsoft also would offer a version of Windows without its own Internet software, these people said.
Along with other provisions limiting Microsoft's power, the settlement would rein in the software giant's conduct at a time when the Internet is fast reshaping the industry and has already begun to diminish Microsoft's dominance. It would also bring to a close one of the most important and bitterly fought antitrust cases ever tried.
While some government officials said over the weekend the offer doesn't go far enough, others called it a decisive step signalling that the software giant is finally serious about reaching a settlement. These people said that because the offer falls short in crucial respects it was uncertain if an agreement could be completed before Judge Thomas Penfield Jackson rules against the company as expected later this week. But they said Microsoft is addressing in a serious way many of the major concerns raised by the government in four months of mediation, and that the talks were likely to continue.
The offer addresses key issues in the case, but in language that state and federal officials want clarified and broadened; other parts, such as the source-code measure, contain limits that these officials feel are too restrictive. Microsoft said over the weekend it is ready to clarify the offer and add new language, but failure to come to terms on any one of the provisions could derail a deal, participants said.
Microsoft's offer, which runs less than a dozen pages, was sent to the government Thursday night through a court-appointed mediator, Richard Posner, a federal appeals-court judge in Chicago.
The offer, if it leads to an agreement, would represent a triumph for Judge Posner, who met separately with the two sides more than a dozen times since the mediation began late last year and pressured each to come to a compromise. He continued his efforts over the weekend, including a telephone conversation with Microsoft Chairman Bill Gates on Saturday, people close to the case said. It wasn't clear Sunday when the two sides would meet face-to-face, though such a meeting was still seen as possible this week, the people said.
Significantly, Microsoft agreed that terms of any settlement would apply to all current and future versions of Windows. While much of the trial focused on products that are already largely obsolete, a settlement also would place limits on Microsoft's most important new product line, Windows 2000 and its successors. This powerful new software is aimed at corporate networks, a market where Microsoft faces competition from challengers such as Linux.
The settlement proposal also contains language that would limit Microsoft from rewarding or punishing PC makers by banning price discrimination for Windows licenses, those close to the case said. During the trial, the government alleged that PC makers that went along with Microsoft got lower prices while those that offered competing software on new PCs were forced to pay higher fees for Windows.
Some of the terms of Microsoft's offer were being checked with industry experts over the weekend to determine if they would work as claimed, and government lawyers were scouring the offer to identify loopholes. They remain deeply distrustful of Microsoft and have said in the past that a single poorly drafted clause in an earlier antitrust settlement between Microsoft and the government, in 1995, gave rise to the current case. They don't want to face that again.
Microsoft officials reject that claim, saying the company has complied fully with the 1995 agreement and that the disputed provision, which shielded Microsoft's ability to add new features to Windows, was upheld by an appeals-court panel two years ago.
The current case was triggered when Microsoft moved to add Internet software to Windows at no additional charge. While the company's witnesses testified that they combined the products to build a better operating system, the government introduced evidence to show that it was intended to hurt a small rival, Netscape, whose Navigator browser threatened to erode Windows' power.
The Microsoft settlement would commit the company to provide a version of Windows in which access to the browser has been removed. But its provisions giving access to Windows source code to PC makers and software companies falls short of freely publishing the Windows source code for all, a remedy that had been broached earlier in the case, but was never put on the table.
The proposal does offer to disclose Windows software instructions known as application programming interfaces, or APIs. This is another measure to protect "middleware," programs that interact with Windows and link to other programs. In a preliminary ruling Nov. 5, Judge Jackson found that Microsoft had monopoly power and that restricting these intermediate-level programs was one of the ways it tried to slow innovation and head off competition.
Settlement efforts could still be complicated by differences among the Justice Department and 19 states in the case. These tensions flared up in recent days as settlement talks intensified, but don't appear serious enough to derail them, participants said. They also said that if the current talks fail to produce an agreement before Judge Jackson rules, the terms offered by Microsoft are likely to form a baseline for future efforts to forge a remedy by the court.
-Rebecca Buckman in Redmond, Wash., contributed to this article.
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