Microsoft Trial -- U.S.-Vs.-Microsoft Trial To Start -- Outcome Could Change Computer Industry

WASHINGTON - There's no bloody glove or bloody socks, no fibers from the Bronco or Bruno Magli shoe prints. The trial won't be broadcast on national television and it isn't expected to rivet the nation.

The government's antitrust case against Microsoft is no O.J. Simpson murder trial and certainly will contain none of the same kinds of compelling, soap-operatic detail.

But the courtroom drama scheduled to start tomorrow in Washington, D.C., will not be limited to dry economic arguments. It will have its own moments of intrigue featuring its own cast of characters, its own disputed evidence and its radically differing versions of the facts.

As Microsoft and prosecutors for the U.S. Department of Justice and 20 states face off in federal court, the government is expected to paint a dramatic picture of corporate villains in cutthroat competition, describing acts such as "cutting off" a competitor's "air supply," and "knifing the baby," in reference to an alleged proposal to kill off a competing software product.

Microsoft, in turn, will present its own lively defense accusing the government of trumping up evidence through an accumulation of out-of-context "snippets" of e-mail, correspondence and documents meant to bolster a weak and meritless case filed at the behest of jealous competitors.

Hyperbole aside, the historic lawsuit filed in May is the most important antitrust case in a generation - with parallels to cases against Standard Oil, AT&T and IBM - with the potential to change not only the computer industry but also the millions of personal computers purchased by consumers every year.

The outcome could influence how Microsoft, one of the world's most powerful companies, deals with competitors and customers and could alter how business is done in the industry. If antitrust prosecutors get their way, computer makers could get broad new latitude to offer competing brands of software on personal computers running on Microsoft's Windows operating system, the "brains" that run 90 percent of the world's PCs.

And before it is over, there might be a couple of U.S. Supreme Court precedents or two laying out the ground rules for competition in the topsy-turvy computer industry.

The trial's outcome also could have a far-reaching effect on antitrust enforcement. A defeat could make it more difficult to bring future monopolization cases and chill the heated, decade-long scrutiny of Microsoft.

Illegal tactics alleged

The lawsuit alleges that Microsoft used illegal tactics to monopolize the market for personal-computer operating systems. Once it became a monopoly, the suit alleges, it exerted that power to cut exclusive deals, attempted to divide markets with other companies and gave away new products - all in an attempt to demolish competitors and extend its monopoly to other areas, including Internet-browser technology.

Microsoft will counter that nothing it did was illegal or out of the ordinary in a competitive industry. And, most of all, Microsoft will argue, using a battery of economic data and expert testimony, that the Redmond company is not a monopoly.

The cast of companies touched by this case is virtually a who's who of the computer industry. First is Netscape Communications, the Internet-browser maker and Microsoft archrival. Netscape played a starring role when the government began investigating Microsoft's business practices regarding the Internet, and when the Justice Department filed a narrower lawsuit last year.

The companies also include Apple Computer, which allegedly took part in talks with Microsoft to divide the market for audio-video technology for the Internet; chip-maker Intel, which investigators say was pressured by Microsoft to drop plans to develop a new kind of operating system; and Sun Microsystems, maker of Java software, which the government charges Microsoft licensed and then reworked so that it would run only on Windows.

Despite the complexities, U.S. District Court Judge Thomas Penfield Jackson has remained determined to keep the trial on a tight schedule and avoid the specter of the U.S. vs. IBM case, which lasted 13 years. Each side is permitted only a dozen witnesses and their direct testimony will be submitted in writing. The trial is expected to last six to eight weeks.

Both sides have assembled a battery of attorneys. The government has hired to press the case a top New York lawyer, David Boies, who has had a bout of laryngitis but is expected to make opening statements.

Microsoft's team includes a top Wall Street law firm, lead by renowned litigator John Warden, and two former Justice Department antitrust chiefs. One of them is William Baxter, President Reagan's antitrust chief, who changed the course of antitrust enforcement toward a free-market standard.

Microsoft has complained it has been placed at a strategic disadvantage with the speedy trial and not permitted enough time to present even a portion of the relevant evidence to refute the broad allegations.

Already buffeted by a series of embarrassing allegations, Microsoft's image is expected to take an additional beating as government attorneys present internal documents, e-mail and deposition statements.

Pointing the blame at Gates

The government has attempted to trace each allegation directly to Microsoft Chairman Bill Gates, and much of the trial will revolve around the actions of the company co-founder, even though he is not on the witness list. So focused is much of the case on Gates that the company might later feel compelled to add him as one of its permitted two rebuttal witnesses.

The government argues that Microsoft set out on an illegal plan to win the market for Internet browsers, the tools used to view content on the World Wide Web. First, the suit alleges, Microsoft tried to divide the market with rival Netscape and then, failing that, cut a series of exclusive and predatory deals with business partners such as Internet-service providers. The deals allegedly were based on exchanging certain promotional placement on the Windows opening screen, the first thing computer users see when they turn on their machines.

One example deals with America Online, an online-content site and one of the nation's largest Internet-service providers. The government charges that Microsoft so wanted to have its browser be the only one on AOL that it cut a deal that undermined its own online-content site, the Microsoft Network (MSN), which competes with AOL.

To get the exclusive spot on AOL, Microsoft provided a spot on Windows where Internet users could link to AOL. The move, Gates predicted, would "put a bullet through MSN's head," but was worth it, nonetheless, if Microsoft could keep AOL from giving out Netscape's browser.

Microsoft said the government's account is false. According to Microsoft, AOL chose Microsoft's technology only because it had a more sophisticated design that suited AOL's needs.

Another example cited by the government is Microsoft's move to give away its browser while Netscape charged a fee. Prosecutors allege that was a predatory act, citing a statement by a Microsoft employee that it was meant to "cut off Netscape's air supply."

Microsoft says the evidence has been distorted by the government and not supported by all the facts.

The company contends that the scope of the case should be limited to the browser issue, the heart and soul of the case originally filed in May. The reason is a Court of Appeals ruling last year in Microsoft's favor. The ruling stemmed from another, narrower case brought by the government that focused on charges that Microsoft broke the terms of a 1994 consent decree by folding the browser into the operating system.

The court ruled that Microsoft could bundle the browser with the operating system if it was more efficient either for the computer user or the software writers to bundle the two together.

Prosecutors now want to show that the allegations against Microsoft are not limited to Netscape, but apply to other competitors as well, particularly as they relate to Microsoft's war to win the Internet-browser market.

Judge Jackson has denied Microsoft's motion to have the broader allegations thrown out.

The government further signaled its intention to expand the case when it substituted on its witness list two corporate executives, one from Apple and one from Sun.

Apple's Avi Tevanian is expected to talk about an alleged market-division attempt over media streaming, the software that seamlessly sends video and audio over the Internet.

To counter Tevanian, Microsoft's Chris Phillips is expected to testify that the meetings with Apple actually were held at the request of Apple, not Microsoft.

In turn, government lawyers can be expected to ask Phillips about his suggestion to Apple that it kill plans to expand its audio-video-playing QuickTime software into the streaming market, or, as Phillips allegedly put it, to "knife the baby."

In exchange, Microsoft reputedly offered to concede to Apple the market for tools to edit video and audio files for the Internet.

If the allegations are proved, sanctions sought by the government could range from demands that Microsoft include competitors' software in the Windows operating system, to the breakup of the company.

Those remedies could have the biggest impact for consumers. Under one scenario outlined in the government's lawsuit, Microsoft would be required to include competing Web-browsing software in its operating system. Under others, the government would give computer-makers carte blanche to reconfigure the start-up screens and the computer desktop to offer users a wider choice of products.

Microsoft could face legal and financial risk so significant that some still think the company might attempt an out-of-court settlement.

That's because antitrust laws allow any tag-along lawsuits following a judgment in favor of the government - without requiring those plaintiffs to reprove the illegal conduct. In those cases, any alleged Microsoft victim, from competitors to consumers, could sue to recoup hundreds of millions of dollars - any proven damages multiplied times three - caused by illegal business practices.

Despite the government's assertions, it's clear prosecutors have a tough case - and it is one that could become the fodder for any anticipated appeal to the U.S. Supreme Court.

"The Justice Department has decided they need these broader allegations to counter the appellate-court ruling on the browser issue," said Robert Litan, a Brookings Institution scholar and former Department of Justice antitrust official. "They don't want the browser issue decided on a technicality."

Judge Jackson has dealt Microsoft several blows, and the appeals court has delivered the government setbacks. New York's lead antitrust lawyer in the case, Steve Houck, predicted the highest court would end up with the case.

Broader government allegations showing a pattern of behavior are likely being presented with higher courts in mind.

"They want to make it very difficult for an appellate court or Supreme Court to throw it out," Litan said.

James V. Grimaldi's phone message number is 206-464-8550. His e-mail address is: jgrimaldi@seattletimes.com

----------------------------- The government's allegations: -----------------------------

The U.S. Department of Justice and 20 states allege that Microsoft has used its power as maker of the Windows operating systems to try to extend its dominance to other markets, mainly the market for Internet-browser technology.

Specifically, they allege that Microsoft:

-- Attempted to monopolize the browser market by proposing to Netscape on June 21, 1995, that the two companies divide the market for Internet browsers, and restrict or eliminate competition.

-- Tied Microsoft's Internet browser to its Windows operating system and prohibited computer makers from removing the browser from their computers.

-- Reached anticompetitive agreements with nearly all of the nation's largest and most popular online-service providers and Internet-service providers, which link computer owners with the Internet. These contracts require the providers to offer Microsoft's Internet Explorer as the exclusive or primary browser through which they distribute their services.

-- Attempted to thwart the development of competing Internet browsers and Sun Microsystems' Java programming language which, together, posed a threat to Microsoft's dominance of the operating-systems market.

-- Set about to defeat Netscape by giving away its browser, thereby eliminating Netscape's ability to charge for its browser, and entering into agreements with Internet-content providers that require them to agree not to pay Netscape.

-- Induced or discouraged customers, suppliers and others from doing business with Netscape through agreements, understandings and announcements that Microsoft's browser would always be free.

-- Used its monopoly power to induce major computer companies, including Apple and Intel, to limit or reduce their use and support of Netscape's browser.

-------------------- Microsoft's Defense: --------------------

Microsoft intends to show that all of its actions have been completely legal and have resulted in significant benefits to consumers. It has responded to the government's allegations this way:

-- The June 21, 1995, meeting between Microsoft and Netscape was not an attempt to divide the market for Internet browsers. It was, according to Microsoft, an attempt to forge "a strategic partnership in some areas of the two companies' businesses" while continuing to compete in other areas.

-- Microsoft's Windows operating system and Internet Explorer browser are one integrated product. In addition, Microsoft argues, case law permits linking one product to another as long as it achieves some technologically beneficial result. The combination of Windows and the browser has many beneficial results, Microsoft argues.

-- The agreements with Internet companies are moot because they either have or will soon expire.

-- Contracts with computer makers and the start-up screens are protected under federal copyright laws.

-- Microsoft altered Sun's Java to improve it for software developers - not to thwart any alternative operating system.

-- Conversations with competitors have been an entirely legal and normal course of doing business in the software industry.

-- Microsoft has not kept Netscape from distributing its browser, either through business deals or by giving away Internet Explorer. Netscape, Microsoft points out, also gave its browser away free initially. Consumers, the company says, are making choices based on technology.

---------------- The consequences ----------------

Often, the most far-reaching remedy in an antitrust case is the breakup of a company, such as the division of AT&T into the "Baby Bell" phone companies. In Microsoft's case, the government has not suggested breakup or divestiture. Rather, it has focused on remedies that give computer makers and Internet service providers more latitude in providing customers with non-Microsoft products and services.

The remedies initially outlined by government prosecutors include:

-- Requiring Microsoft, for three years or more, to put versions of Netscape Communications' browser on any version of the Windows operating system it sells or distributes.

-- Stopping Microsoft from requiring any computer company to include Microsoft's browser as a condition of licensing Windows.

-- Permitting computer makers to delete Microsoft's Internet browser from the Windows operating system on personal computers sold by the manufacturers.

-- Halting Microsoft's practice of restricting computer makers from changing the initial boot-up screens or computer desktop.

-- Stopping Microsoft from requiring business partners to carry, license or use its Internet browser as a condition for also licensing the Windows operating system.

Prosecutors recently have indicated they have been rethinking these proposals, and could expand them to include a requirement that

Microsoft publicly disclose proprietary technical data about how Windows runs.