How the government plans to tie down the MS monster

High fences, and hoops of steel...

Trial analysis Bill Gates and Steve Ballmer won't have enjoyed reading the DoJ and the plaintiff States' Proposed Final Judgment. As had been widely forecast in the last few days, Judge Jackson is being asked to agree to the splitting of Microsoft into two businesses, in what is referred to as a "reorganisation". As anticipated, certain conduct measures would come into force once the Final Judgment comes into force, but pending an appeal, the breakup part would be stayed until the outcome of any appeal were known. Microsoft is required to separate its operating systems business from its applications business, with Internet Explorer going to the application business, as expected. Microsoft is even being allowed to make its own proposal about a procedure to bring about a split. There is no specific discussion about splitting Internet Explorer from present versions of Windows, so the thinking is evidently that by the time the break up occurs, the present version of IE would be hopelessly out of date: it would not be permitted for Windows to be updated with a new version of IE. This would have the effect of forcing Microsoft to remove IE from Windows, which we all know is perfectly possible. Microsoft's operating systems business would not be allowed to develop IE, and there would be no cross-licensing of intellectual property for IE, as there will be for other products developed up to 27 April 2000. Nor would Microsoft be allowed to develop modified or derivative versions of IE in the Windows company, and no cross-licensing would be permitted going forward. Conduct requirements The conduct remedies turn out to be tough and fairly comprehensive. There are interim measures while the businesses are being separated that effectively prevent Microsoft getting up to any hanky panky. For the first time, the businesses will be required to play fair and make technical information such as APIs and interface details available to everybody at the same time. Recriminations and revenge against those who have dared to give evidence against Microsoft during the trial, or to use competing products, will not be allowed. Microsoft will be unable to use its power to enforce a pattern of behaviour on vendors because it will not be allowed to discriminate between vendors, or use any of the tricks that emerged during the trial. This is one of the most important provisions of the filing, because it effectively removes Microsoft's ability to blackmail vendors, and breaks much of Microsoft's monopoly power. "Covered shareholders" with more than 3 per cent of Microsoft's stock - essentially Gates and Ballmer, if Paul Allen has in effect divested most of his holding - may not hold shares in both companies. Nor may any directors have shareholdings in both businesses or play any role in the other business. This would certainly remove the normal incentive to help the other business, and human nature being what it is, it would not be surprising to find considerable antipathy between the two businesses in the future. The businesses will not be allowed to have any relationships or joint ventures with each other. But what is not included is any proposal to stop the split companies continuing to gobble-up developers, or to make acquisitions - and nor is there any requirement for a divestment of acquisitions. Operating systems business Most of the detailed conduct requirements are directed at how Microsoft would have to run its Windows business. There has been some ill-informed comment that because the present applications business was in the event excluded from the trial, the court has no right to order changes affecting that business. This is just wishful thinking, because the court has great power to order whatever is necessary to restore competition. OEMs will at last get their freedom from the PC homogeneity that Microsoft imposed as a means of keeping control, and at last, PCs will be more differentiated. The proposed judgment distinguishes between "covered OEMs" - the top 20 US OEMs, in terms of volume sales in the previous 12 months - and other OEMs. Covered OEMs will all have the same access to technical information, marketing support, future plans, and tools, and will also get the same technical, marketing and sales support. Microsoft will be allowed to charge higher prices for different language versions. There can be little doubt that should Microsoft misbehave, these OEMs will at last have the guts to shout loudly and get Microsoft back in court for contempt. Microsoft would not be able to terminate a Windows licence for a covered OEM without giving written notice of the reason and a 30-day opportunity for the OEM to deal with the issue. For all OEMs, Microsoft is not being allowed to restrict "the boot sequence, startup folder, internet connection wizard, desktop, preferences, favourites, start page, first screen" of Windows, or to "include a registration sequence to obtain subscription or other information from the user; display icons of or otherwise feature other products or services, regardless of the size or shape of such icons or features, or to remove the icons, folders, start menu entries, or favourites of Microsoft products or services; display any user interfaces, provided that an icon is also displayed that allows the user to access the Windows user interface; or launch automatically any non-Microsoft Middleware, Operating System or application, offer its own Internet access provider or other start-up sequence, or offer an option to make non-Microsoft Middleware the Default Middleware and to remove the means of End-User Access for Microsoft's Middleware Product." That's a pretty broad liberalisation. There are additional conduct remedies that ban exclusive dealing, essentially meaning that Microsoft would not be allowed to require a licensee to avoid using non-Microsoft software, or to promote Microsoft software exclusively, or to sabotage the running of the performance of any Microsoft-competitive software. There is also an absolute ban on OEM, IP or retail contractual tying, whether the product is separate, free or priced. A further measure to stop hanky panky is the requirement that there be no tying or bundling of products between the two companies. Bundling is totally verboten, although this provision would not come into effect until six months after the effective date of the Final Judgment - presumably to allow the channel to clear stock. If Microsoft "binds" any middleware product (including IE) to Windows, it must provide a means for both OEMs and end users to remove the software. If an OEM decides to remove end-user access to such middleware, the royalty would have to be decreased in proportion to the amount of binary code. This is a very interesting idea, but whether it will have any great impact remains to be seen. It should stop additional functionality being offered separately and being incorporated into Windows. This could create a separate market for such functionality. One requirement that Microsoft will not like at all is that predecessor versions of Windows must remain available for licensing for three years. The full text of this paragraph reads: "Microsoft shall, when it makes a major Windows Operating System Product release (such as Windows 95, OSR 2.0, OSR 2.5, Windows 98, Windows 2000 Professional, Windows .Millennium,' .Whistler,' .Blackcomb,' and successors to these), continue for three years after said release to license on the same terms and conditions the previous Windows Operating System Product to any OEM that desires such a license. The net royalty rate for the previous Windows Operating System Product shall be no more than the average royalty paid by the OEM for such Product prior to the release. The OEM shall be free to market Personal Computers in which it preinstalls such an Operating System Product in the same manner in which it markets Personal Computers preinstalled with other Windows Operating System Products." There will be uniform terms in the Windows licence, without those tricky discounts for what Microsoft called market development, or any other discounts other than a straightforward volume discount. Microsoft will have to publish a price list. Another provision would stop Microsoft making agreements that would have the effect of limiting competition. Source code Microsoft will be obliged to allow OEMs access to Windows code in "a secure facility where qualified representatives of OEMs, ISVs, and IHVs shall be permitted to study, interrogate and interact with relevant and necessary portions of the source code and any related documentation of Microsoft Platform Software for the sole purpose of enabling their products to interoperate effectively with Microsoft Platform Software." Techno-sabotage will be outlawed: l Microsoftt won't be allowed to "take any action that it knows will interfere with or degrade the performance of any non-Microsoft Middleware when interoperating with any Windows Operating System Product without notifying the supplier of such non-Microsoft Middleware in writing that Microsoft intends to take such action, Microsoft's reasons for taking the action, and any ways known to Microsoft for the supplier to avoid or reduce interference with, or the degrading of, the performance of the supplier's Middleware." Enforcement and compliance The initial consent decree in 1994 completely omitted any measures to ensure enforcement, but this time around tough procedures have been included. The businesses will have to file copies of every agreement, as well as a memorandum on oral agreements. Microsoft will not be allowed to take any action that "undermines, frustrates, interferes with, or makes more difficult the reorganisation required by this Final Judgment". An elaborate procedure has been set up with the intent of bringing about a change of culture at Microsoft. Certainly when IBM was being investigated for antitrust, all meetings during the investigation had the minutes vetted by a lawyer, and IBM was much scared lest it offended the DoJ. Microsoft's culture is so different that it is unlikely that a change will be seen, at least in the same way. The plaintiffs are asking for a Compliance Committee to be set up, with at least three non-executive directors who would have to appoint a Chief Compliance Officer to act rather like a privatised magistrate judge. This compliance person would be given wide powers and be responsible for ensuring that all Microsoft staff had read, understood, and would abide by the terms of the final judgment. There's an echo here that deals with Gates' remark after the consent decree that just one person at Microsoft would read it. Although it is hard to imagine the businesses changing their culture, there are tough provisions should an employee be caught failing, including criminal contempt of court, which could mean jail time. A further bitter pill is a provision that a system must be set up to make it possible for whistle-blowers to report potential violations confidentially. Those delightful Microsoft internal emails that never failed to amuse us during the trial must in future be kept for four years - all of them. It seems that Microsoft has escaped being done for the deliberate destruction of past emails. There is a requirement that separate books be openly kept for the two businesses, with this being required retrospectively after the Final Judgement comes into effect, so eliminating any creative accounting in the interim. When it claimed at trial that there was no separate financial data for Windows and applications revenue, even Microsoft's principal economist witness was incredulous. Microsoft also put obstacles in the way of any investigation of its accounts by the DoJ just as the trial was starting. There are also inspection requirements. The DoJ or the plaintiff States can demand to inspect any document, whether financial, correspondence, or source code, and to interview any officers, staff or agents. Microsoft can also be required to produce written reports under oath about anything in the final judgment. The Final Judgment will be for ten years from the date it takes effect. The Court will continue to have responsibility for enforcing the Final Judgment, and to punish violations. It is strange that there is a provision for the plaintiff States to recover their legal costs, but the DoJ has not asked for its costs, although it could do so. Maybe Judge Jackson will decide that US taxpayers deserve a break. Is this a good proposal? The legal actions by the DoJ and the plaintiff States against Microsoft will be judged mostly on the effectiveness of the proposed final judgment, filed on 28 April, which has a densely-written 16 pages, with a little over 5,000 words. It has taken nearly two years since the Complaint was issued on 18 May 1998, which is quite quick considering the intransigence of Microsoft. Judge Jackson deserves the credit for keeping the case cracking along, but he may have been a little too hasty and given Microsoft some ground for appeal - that it could not present all its evidence. The DoJ's proposal is far from being a definitive blueprint for what will happen. Judge Jackson could decide to make substantial changes, although the balance of probabilities makes this unlikely. Microsoft too has its opportunity to insert some objections, although it would be trying to do this from a position of weakness. There's no specific mention of the dissenting views from Illinois and Ohio in the submission, and their separate comments are most unlikely to have any significant influence on the outcome. It is going to take a long time before the utopia envisaged in this proposed judgment could come about. Our preliminary estimate is that the Final Judgment will be entered in July this year, before Judge Jackson goes on holiday, so that the conduct remedies would come into effect quite soon. But so far as the plan for reorganisation is concerned, it seems unlikely that this would be approved any earlier than March 2001, and implemented after appeal, possibly in 2003, unless the Supreme Court regards the case as a priority. On the surface, it would seem that the measures proposed are sound and for the main part practical, but the unknown factor is the potential political interference in the legal process. If that happens - and the chances are far from being negligible - we suspect that the European Commission might itself take some effective action. ® Complete Register Trial coverage

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