The high hopes that Microsoft would settle the pending lawsuits from the Department of Justice and a coalition of 20 US states collapsed on Saturday (see news section).
The recent negotiations really began on 5 May after Microsoft chief Bill Gates addressed a rally of some 60 computer executives in New York to seek support against the Department of Justice's legal action over Microsoft's tying Windows 9x and the Internet Explorer browser.
He then went on to Washington for a less publicised two-hour evening meeting with Joel Klein, the head of the US DoJ's antitrust division. Gates agreed to make significant concessions if the DoJ would drop a further, tougher case, and returned to Redmond to develop a negotiating strategy.
Contact continued spasmodically by telephone, but there was no significant result for more than a week. Meanwhile, the DoJ and the states coalition readied two new cases that would be more difficult for Microsoft to brush aside, as effectively happened with the October 1997 petition that the DoJ presented to the federal court to stop the tying of Windows 95 and Internet Explorer.
Microsoft had insisted that PC makers had to have IE on the desktop if they wanted to license Windows 95 - until Judge Jackson issued a preliminary injunction that forbade this. The effect had been to lock Netscape out of the browser market, but the injunction did not persuade PC makers to load Navigator instead of IE - a sign of Microsoft's market power, many thought. The near-exclusive preloading of IE rather than Navigator has resulted in some tough times for Netscape.
The negotiations were getting nowhere, so the DoJ and the coalition decided to file new cases on 14 May. With its back against the wall, and the prospect of two tough antitrust actions that could go on for many years, detracting from Microsoft's product marketing and executive energy, Gates called Klein during the early hours of Thursday. He proposed that, if the legal cases were put on hold until Monday, Microsoft would delay sending Windows 98 to PC makers as planned on Friday, and send a team to Washington the next day, with a promise that they would negotiate, not lecture. This was agreed by the DoJ and the coalition.
Microsoft's negotiating tactics - last minute brinkmanship - have been seen many times previously. Jesse Berst, a well known commentator who has been an ardent Microsoft supporter, was "outraged" at the company's irresponsibility, and said that Microsoft should have compromised several months earlier.
"It's shocking and shameful that it's come to this. And that Microsoft stooped to using its partners and customers as hostages in its legal manoeuvres. The 'don't sue, you'll hurt innocent bystanders' ruse is something you'd expect to hear coming out of Baghdad - not Redmond."
Microsoft's decision to negotiate may have been decided the previous day, since it had invited a group of senior national newspaper reporters to Redmond, and it was generally expected that they would be there to hear about a settlement. It became known that Microsoft was apparently prepared to give way on three issues: relaxing restrictions about forcing IE to be used; allowing OEMs to modify the first Windows screen, a potential billboard for manufacturers and advertisers; and confirming the ending of some restrictive aspects of contracts with ISPs, so that the channel bar could equally have competitive icons - for example from Netscape.
Expectations were high by Friday morning for what were being called the settlement talks. Microsoft's shares, which had fallen 13 per cent in the previous three weeks as a result of the pending new legal actions, rose three per cent.
There was a bad start however - the Microsoft team ended up in the offices of its principal external lawyers, Sullivan & Cromwell, instead of at the DoJ main conference room. Although Microsoft had tried to set an agenda of negotiable points, the DoJ wanted more - certainly a way for Netscape to receive fair treatment, and a way to ensure that the market was kept open for competitors as Microsoft added more and more features to Windows.
The DoJ had acted in October against Windows 95, but the issue was now Windows 98, with Microsoft claiming that IE was so integrated that it was not possible to produce a version without it. It is now known that the DoJ had been demanding many documents about Windows NT from Microsoft, so it seems highly likely that the DoJ will insist that the older OS will be included in any settlement, since Microsoft's plan is to evolve Windows 98 into a consumer version of NT.
This time, representatives of the coalition were there to ensure that the DoJ would not weaken - as observers are clear that it did when the original consent decree was negotiated - and let through an ineffective and essentially unenforceable decree that did not restore competition.
The ghost of the 12-year IBM antitrust case still stalks the DoJ corridors - there were some 700 days in court, at very great expense, before the case was abandoned, largely because the issues were no longer relevant.
Consequently, the DoJ does not relish the prospect of another hideously long and expensive antitrust case against a company that is probably the most obdurate legal foe in America.
It emerged that the DoJ wanted Microsoft to include Netscape Navigator with Windows. This was too much for Microsoft - a spokesman described it as "like telling Coke they have to ship three cans of Pepsi in every six pack".
Senator Hatch, who had held the senate hearings to which Gates had been "invited" (leading Microsoft to announce the previous day that it was relaxing its contractual arrangements with ISPs), said that Microsoft's decision to negotiate "undermines any argument that Justice has no case. Microsoft would not be at the table unless it felt that Justice had a very strong case."
The DoJ's case includes some emails from Gates that are very specific, and legally damaging, on the subject of Microsoft's competitive actions. This suggests that the recent appeal court decision to allow Windows 98 to go ahead was not wholly a win for Microsoft.
The talks continued the next day, a Saturday. Just when it was assumed that a solution was imminent, it was suddenly announced in the afternoon that the talks had collapsed.
A terse statement the DoJ said: "The discussions between the Justice Department, a coalition of state attorneys general and Microsoft ended today without resolution. At this point they are not expected to resume."
It was reported that Microsoft had walked away from the discussion. Microsoft later said that the talks "are at an impasse over government demands that Microsoft abandon its principle of product innovation".
Microsoft then proceeded to back down from each of the points that it had offered for negotiation, and widely leaked in the previous days, including on the MSNBC Web site. Gates said in a videotaped response that he was "very disappointed", and claimed that "the government made some non-negotiable demands that were very surprising to us".
Gates continued: "The government is going to file a lawsuit. Microsoft is innocent of any of these charges and we're certainly going to defend ourselves vigorously." The planned public release of Windows 98 would go ahead, and Microsoft intended to begin shipments on Monday.
The videotaped interview did suggest a certain degree of advanced preparation by Microsoft, as though a breakdown had been engineered as a negotiating tactic.
It now seems highly likely that the lawsuits will be filed on Monday by the DoJ and the coalition, and probable that an early injunction would be sought, perhaps to halt Windows 98 sales.
However, Microsoft is a very tough negotiator and it could well be that it will in fact give way on the points being discussed, hoping that more damaging restrictions would not be sought, and that the DoJ would be seen to have "won" on minor points that Microsoft was prepared to concede. It is unlikely that such an outcome would be acceptable to the coalition. This one could run and run.
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