This article is from the August 15, 2001, issue of Red Herring magazine.
To the untrained eye, Microsoft's (Nasdaq: MSFT) July announcement that it would make its licensing agreement with PC manufacturers more flexible was a sign of contrition. But while the company can breathe a sigh of relief that it no longer faces dismantling, it still must fight battles on several fronts in a war where every little public relations victory counts.
As Microsoft awaits the courts' remedies for its antitrust violations (a settlement involving a fine seems most likely), the company is simultaneously trying to reinvent itself as a broad-services and media company.
Most legal experts laud the appeals court ruling overturning the breakup decision of U.S. District Judge Thomas Penfield Jackson. "It's a perfect ruling," says David Steinman, an attorney with the antitrust division of Gray Cary Ware & Freidenrich in San Diego. "Both sides now have ammunition and bargaining power to reach a settlement that each can spin to save face." In July, Microsoft settled its antitrust suit with the state of New Mexico. Still, the company could face tougher challenges in Europe, where antitrust litigators are riding high after blocking the General Electric/Honeywell merger.
OLDER AND WISER? As Microsoft prepares to release its XP operating system in October, there still are many questions about whether its tightly integrated platform repeats the practices that first got the company into trouble. Geoffrey Bock, senior analyst with the Patricia Seybold Group, a consultancy, says he expects more than one state attorney general to file an injunction seeking to block XP's release until all questions are answered.
Meanwhile, Microsoft competitors past and present may emerge, all seeking a piece of the settlement pie. Tom Campbell, a former U.S. representative from California who teaches antitrust law at Stanford Law School, says the ruling means that those who think Microsoft's actions cost them money may file claims. "Even states can come in to form a class on behalf of its citizens and sue to collect damages on their behalf," he says.
To those who argue that penalizing Microsoft is irrelevant now that the browser and desktop-application wars are over, Ken Wasch says no. Mr. Wasch, president of the Software & Information Industry Association in Washington, D.C., argues that there still are myriad ways to improve word processing and spreadsheet programs, which Microsoft has long dominated. "Some startups might take the risk of legally challenging Microsoft on monopolistic grounds," he says, "and we'll know the beast has really been tamed when we see startup companies getting funding for platform-independent desktop productivity applications."
As it wards off these foes, Microsoft will attend to the little matter of reinventing itself to a primarily services-based media company, an arena in which it battles both startups and titans like AOL Time Warner (NYSE: AOL). "Microsoft is trying to convert itself into a telecommunications services vendor for the digital age," Mr. Bock says. "Absent the court case, they'd have about an 80/20 chance of success; now it's about 50/50." Given the odds Microsoft was facing not long ago, a 50 percent chance might not be half bad.
Write to luc.hatlestad@redherring.com. Additional reporting by Chris Alden.