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Microsoft gets green light to punish OS-less PC vendors

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The Microsoft antitrust settlement - dubbed a "Seattlement" by one reader because of the generous terms - is to be reviewed by Judge Colleen Kollar-Kotelly, this week. But lawyers at the Department of Justice and the settled States have already been indicated that they're not altogether happy with Microsoft's compliance to the arrangement they signed 14 months ago.

Does this signal a new bout of activism at Ashcroft's DoJ? Have the lawyers drunk a dose of Spitzers?

That's hardly likely, as we'll see. But in one little-noticed finding in the most recent compliance status report issued last week, Microsoft has been allowed to withhold rewards to OEMs who ship a PC without an operating system installed. Microsoft argues that this is a necessary sanction to discourage piracy. But equally, it's a disincentive for corporate purchasers who want to ghost an image of Linux onto a pre-specced PC.

Microsoft specifies this condition in what's called an MDP, or Market Development Program, although for most of its history it's been known as an MDA, for Market Development Agreement.

MDPs and MDAs

In testimony during the DoJ's antitrust case, IBM alleged that Microsoft used the MDA as a kind of pre-nuptial agreement that dictated the terms of the pricing structure, before formal negotiations over Windows licensing could begun. For example, in October 1994 Microsoft offered IBM an MDA that listed up to $27 per license in potential discounts, if IBM met certain conditions. The more points in the MDA that IBM agreed to, the lower the price became. IBM was then promoting its OS/2 operating system as an alternative to Chicago, which was released as Windows 95 ten months later.

IBM decided it could only qualify for $8 worth of these. The MDA set the price for Windows 95 at $75 - a hefty increase over the $9 IBM was paying for Windows 3.11, claimed IBM. For making Windows 95 the default OS, IBM alleged, Big Blue would earn a royalty reduction of $3. (Microsoft argued that none of the MDA terms prevented OS/2 being preloaded, and that IBM was itself trying to negotiate better terms for NT 4.0 royalties.)

In a deposition during the remedy phase, former Apple executive Peter Ashkin provided more detail of MDPs from his time as Gateway's CTO from 1998 to 2001. Gateway's MDP offered discounts of up to $16 per license.

"OEMs cannot ignore such a large sum of money, especially if their competitors are earning these discounts. Achieving the MDP milestone discounts could mean the difference between making a profit and losing money on a particular unit," Ashkin testified. " MDPs have little to do with marketing and much more to do with controlling the configuration of OEM-manufactured PCs." [Testimony here [PDF, 230kb].

While an early draft of the proposed settlement being circulated in 2000 specifically named MDAs, the final settlement didn't, preferring to forbid retaliation against rivals.

"Microsoft shall not retaliate against any ISV or IHV because of that ISV's or IHV's: a) developing, using, distributing, promoting or supporting any software that competes with Microsoft Platform Software or any software that runs on any software that competes with Microsoft Platform Software."

But does "no software" qualify as competing software?

Is that your Final Judgement?

The compliance committee doesn't seem to think so. "These MDP funds are reduced by $1 per unit if any desktop computer is sold by the OEM without a license to an operating system (Windows or otherwise)," the latest report notes.

"As structured, the MDP does not appear on its face to violate the explicit terms of the Final Judgment with respect to the pre-installation of operating systems."

Clearly scrutiny has had some effect. Hewlett Packard's decision to bundle Apple's iTunes player dismayed Microsoft, but the prospect of retaliation didn't deter HP from cutting the deal. However, Microsoft has had notable success in dissuading OEMs from preloading Linux. Dell and IBM used to sell certified Linux notebooks

The latest six month compliance bulletin also complains that Microsoft needs to do more to license its protocols: by reducing the complexity of the legal agreements and lowering the cost of taking out a license. The attorneys says that the MCPP licensing program has done little but uphold the status quo, and certainly doesn't increase the likelihood of a "platform challenge" to the Windows monopoly.

Fourteen licensees have taken advantage of the MCPP: six for streaming media, three for server protocols, two for terminal server protocols and one for certificate management. Microsoft says it is talking to twenty more potential licensees.

The compliance bulletin is signed by the DoJ and sixteen state AGs including New York and California. Massachusetts continues to press for a stronger settlement. Meanwhile, a verdict on an EU investigation arising from a complaint lodged by Sun Microsystems is expected in the next few weeks. ®

Related Link

January 2004 Status Report (DoJ and States' Attorneys)

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