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A Bundle of Trouble? Implications Persist for XP, .NET

Last Thursday, the U.S. Court of Appeals for the District of Columbia appeared to hand Microsoft Corp. an important victory. After the dust had settled, however, some experts suggested that Microsoft’s position was more precarious than ever.

In addition to vacating the break up order that Judge Thomas Penfield Jackson imposed upon the software giant in June 2000, the appellate court issued a significant new interpretation of a product-tying law that has for years been used to prosecute vendor abuses in monopoly cases.

Antitrust law traditionally held to a narrow interpretation of product tying in which it was deemed illegal for monopolists to "tie" a product to another product that already enjoyed a dominant or exclusive share of a market. On Thursday, however, the appellate court struck a blow to this interpretation, ruling that product-tying is illegal only in cases in which the benefit to consumers is outstripped by the potential for harm to competition in the marketplace.

The court passed the buck on deciding the core question associated with this issue – i.e., whether or not Microsoft illegally ties products to one another to stifle competition – and remanded the task to a lower court.

At the same time, however, the appellate court upheld Jackson’s finding that the software giant had violated the Sherman Antitrust Act by illegally "commingling" software code in its Windows 98 operating system and its Internet Explorer Web browser. The court determined that Microsoft had done so for the purpose of maintaining its monopoly market share.

Why does Microsoft have reason to smile, then? To be sure, a measure of the software giant’s cocky stance is more spin than anything else.

Many analysts agree that Thursday’s decision was nothing less than a disaster for Redmond, which probably held out hope that the appellate court would see the merits of its case and would move to vacate Judge Jackson’s pesky findings of fact, which – among other uncomfortable rulings – found that the software giant had illegally abused its monopoly power.

"As you read through the 125-page document, it’s really clear that while the court took much of their effort with taking a shot at Judge Jackson, they’re not at all happy with Microsoft," notes Rob Enderle, a senior analyst with consultancy Giga Information Group. "So concluding that they’re letting Microsoft go on this one is way too premature."

In the near term, however, the court’s more liberal interpretation of the do’s and don’ts of product-tying could help to pave the way for Microsoft’s Windows XP launch. If Microsoft had lost on this point, legal observers claim, XP could have been stalled in the starting gate.

"At bottom, this had to do with the issue of standing, which is really about the right to bring a case," says a litigator with a New York-based law firm. "In order to have standing, you need to demonstrate injury, which because of the appeals court’s ruling [on product tying] is harder to do unless [XP’s] actually out there."

If the appeals court had not rejected the traditional argument that product-tying of any kind was illegal, the Justice Department, the state attorneys general or other interested parties could probably have obtained preliminary injunctions and prevented Microsoft from shipping Windows XP. That’s not to say that Microsoft’s foes couldn’t still prevent the software giant from delivering XP as planned, however.

"They maybe could [get a preliminary injunction] if they could demonstrate antitrust injury, but you usually have to wait until the government has a legitimate claim that’s active," the same litigator confirms.

More to the point, observers note, the appeals court’s determination that Microsoft’s commingling of code between Windows 98 and Internet Explorer violated provisions of the Sherman Antitrust Act could potentially put the software giant on the defensive with respect to all of its future product releases. As a result of Thursday’s ruling, Microsoft must now prepare to defend any and all inclusions of applications or services in Windows XP or in other products against allegations that the potential harm that their tying poses to competition outweighs the benefits, if any, that they provide to consumers.

As the first component of its nascent .NET services strategy, Windows XP integrates scads of new features and functionality – and has already come under fire from several state attorneys general and from other industry observers.

On Saturday, the Los Angeles Times reported that the state attorneys general are expected to make Microsoft’s Windows XP bundling practices an issue in the new tying case.

For his part, Giga’s Enderle predicts that the state attorneys general will attempt to enjoin XP’s shipping altogether. "The initial attack on XP will come from the attorneys general," he speculates. "They’ll try to block the product, or will certainly attempt to restrict the product in their own geographies, although they probably won’t do so in time to affect XP, at least not before it ships."

But Windows XP comprises only a small piece of Microsoft’s overall strategy, notes Dan Kusnetzky, a long-time industry watcher and a director of server operating environments with market research firm Int’l Data Corp. He says that the software giant’s next-generation services platform – .NET – will take integration and bundling to a whole new level.

"All of [.NET] is linked together so that competitors aren’t necessarily stifled, but are held at arms length, and it’s very possible that when you do connect non-Microsoft software, that there will be difficulties, incompatibilities and performance problems," he concludes.

This week, Microsoft shipped Release Candidate 1 of Windows XP to approximately 100,000 testers. Although the software giant removed XP’s most controversial feature – a so-called "smart tags" technology that automatically re-directed users to Microsoft-controlled Web sites – the next-generation operating system’s bundled instant messaging and audio/video media applications remain in place.

As a result, argues Kevin Fumai, an antitrust scholar at the Seton Hall University Law School, it’s imperative that Microsoft triumphs in the upcoming tying case in which it’s accused of illegally bundling applications and services to stifle competition.

"Because of the investment that they have in [XP] already, and considering what they have in mind with .NET and Hailstorm, it’s absolutely crucial that they triumph before a new judge in the tying case," he opines.

Not surprisingly, Microsoft’s foes are expected to approach the tying case with a similarly intense philosophy. "The tying issue is an extremely important one," Iowa Attorney General Tom Miller confirmed in the Times article.

What’s at stake, says Steven Newborn, co-head of the antitrust group for Clifford, Chance, Rogers & Wells LLP (Washington, D.C.) and a former antitrust litigator for the Federal Trade Commission, is the all-important issue of liability. "The most important issue in whether or not a private action is brought is usually the finding of liability," he says, noting that the appellate court upheld Judge Jackson’s finding of liability with respect to Microsoft’s illegal commingling of operating system and Internet browser code.

Consequently, experts say, if Microsoft loses the tying case, and if a new judge rules that it has illegally bundled products as part of an effort to stifle competition, private litigants could proceed with lawsuits of their own. Stephen Swoyer

Related Articles:
Tea Leaf Time: What's Next in the Antitrust Case?
Users Greet Antitrust Decision with a Yawn
Appeals Court Revokes Jackson's Break-up Order
Windows XP RC1 Out
RC1 for Windows XP Coming within 10 Days

About the Author

Scott Bekker is editor in chief of Redmond Channel Partner magazine.

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