What the Microsoft-DOJ deal means

A lot has been stirred up during the contentious antitrust case. Has everything been resolved? Connect the dots with these questions and answers.
Written by Rachel Konrad, Contributor
Microsoft and the Department of Justice on Friday agreed to settle a 3-year-old antitrust battle--a settlement that could change the computing landscape and, according to some proponents, bolster the sagging U.S. economy.

Here are questions and answers that highlight the key aspects of the case.

What happened Friday?
The Justice Department and Redmond, Wash.-based Microsoft reached an antitrust agreement in principle, then asked U.S. District Judge Colleen Kollar-Kotelly to approve it. The agreement would require Microsoft to give full access to its books and business plans for five years to independent monitors.

What's the purpose of the agreement?
It's meant to ensure that Microsoft complies with antitrust laws, and helps competitors make products compatible with the company's Windows operating system. The proposed settlement would be in effect for five years, with the possibility of a two-year extension.

Is the agreement a done deal?
No. Kollar-Kotelly and the 18 states that are co-plaintiffs in the original antitrust case must approve the settlement. The states have until Tuesday to decide whether to back the agreement. If the judge approves the deal, an appeals court judge could overrule it--an action that has some precedent: In 1995, U.S. District Judge Stanley Sporkin refused to sign an earlier consent decree hammered out between the Justice Department and Microsoft.

If approved, would this deal be a win for Microsoft?
Yes, for the most part. The agreement is far less restrictive than the proposal submitted during last year's failed settlement discussions. It does not state that Microsoft illegally maintained a monopoly in Intel-based operating systems, nor does it forbid Microsoft from bundling popular software options to further the company's ability to dominate people's computing experiences and expand its control of the Internet. It also lacks the bite warranted by an appeals court ruling in June that upheld antitrust claims against Microsoft.

Gates, who immediately and vigorously blasted previous verdicts seeking to break up the giant or impose significant restrictions on its business strategies, described the newest agreement as "fair."

How does the agreement affect Windows XP, the newest version of the Windows operating system?
Windows was at the heart of the initial court ruling that branded Microsoft a monopolist, but Friday's deal allows the operating system to remain largely unchanged. Windows XP, which was released last week with far more applications than any preceding operating system, was once a focal point of further proceedings but will be free of any significant restrictions, according to the agreement.

How does the agreement affect Passport, Microsoft's controversial strategy to collect detailed information about consumers?
The newest agreement doesn't mention Passport, even though critics say Microsoft is using its newest operating system to promote the technology. Likewise, it doesn't affect Microsoft's .Net strategy to bundle software and services for e-commerce clients and other corporate Windows users.

How does the deal affect PC manufacturers such as IBM, Dell and Hewlett-Packard?
The agreement could benefit computer manufacturers by giving them the freedom to substitute non-Microsoft applications, including Web browsers, e-mail clients, media players and instant-messaging applications.

Under the settlement, Microsoft must sell Windows to PC makers under a uniform pricing scale. That could end Microsoft's tradition of charging different prices to different PC makers--particularly those that offered non-Microsoft software in the PCs. Microsoft also is prohibited from engaging in exclusive contracts that would prohibit software developers or PC makers from using competing products.

Will this result in lower prices for consumers?
Probably not. Although Microsoft can no longer charge some PC makers more than others, those forced to pay higher prices had generally absorbed any additional costs to stay competitive.

How does this agreement address the bundling issue?
The company is still free to include applications with the operating system. But in an attempt to create a level playing field for competitors, the proposal requires that Microsoft disclose protocols to ensure that it cannot make the Windows operating system work better with its software than with that of competitors. The limitations on how Microsoft works with PC manufacturers are intended to ensure that competing software also has an equal chance at mass distribution.

How will the agreement be enforced?
The Justice Department proposes installing a government-appointed oversight team at Microsoft with access to Windows source code. But it's unclear who would be on the team, and it's equally unclear when and why such a group would be able to blow the whistle at Microsoft--or whether Microsoft would have to modify its behavior when the team raised concerns.

It's also tough to say whether the agreement can prevent Microsoft from simply sidestepping the restrictions imposed by it or by the government team. For example, if Microsoft could pester Windows users with pop-up boxes asking them to set a Microsoft application as the default, it might not matter much that PC manufacturers can load the computer with alternative applications from rival software companies.

Why does the penalty seem relatively light?
Microsoft critics insist that politics influenced the judge and the Justice Department, which advocated a breakup of Microsoft under the Clinton administration but accepted a relatively mild settlement under the Bush administration, at the behest of Assistant Attorney General Charles James. In September, with little consultation from the 18 states that were suing Microsoft, the Justice Department unexpectedly reversed its original desire to break up Microsoft, and it decided not to hear a trial regarding whether Microsoft illegally integrated Internet Explorer into Windows 95 and 98.

How did Wall Street react to the settlement?
Unenthusiastically. Microsoft shares fell slightly Friday after gaining about 6 percent on anticipation of the agreement.

In general, Wall Street has remained far more focused on Microsoft's revenue and profits--especially as the economy continues to sour. Windows XP sales have disappointed retailers, and market research firm IDC forecast a 31 percent decline in U.S. consumer PC sales compared with the fourth quarter of 2000.

If approved, would the agreement end the European Union's antitrust investigation of Microsoft?
No. In fact, the cases and philosophies underlying the investigations are dissimilar. The DOJ has focused mainly on Windows 95 and Windows 98, while European regulators are investigating Microsoft's attempts to dominate the server-software market.

Many legal experts believe that the EU's investigation could result in substantially more damages to Microsoft--in particular to Passport and .Net--than U.S. investigations. Europe takes a harsher stance in determining when a company abuses its dominance: Instead of focusing exclusively on whether a monopolist causes harm to consumers, as in the United States, Europe focuses on whether a monopolist hampers competitors.

Where does the proposed agreement go from here?
Before Kollar-Kotelly holds the Tunney Act hearing, there must be a 60-day period of public comment. The Justice Department must publish the proposed settlement in the Federal Register on or before Nov. 16.

The Justice Department also will "publish a notice informing the public of the proposed Final Judgment and public comment period in The Washington Post and The San Jose Mercury News, for seven days over a period of two weeks commencing no later than November 15, 2001," the proposed settlement states.

Within 30 days after the close of the period for public comment, the Justice Department must publish its response in the Federal Register.

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