Legal Storm Brewing Over Microsoft’s Hailstorm

By Aaron Pressman and Keith Perine

Issue Date: Mar 19 2001

AOL TW and Sun are among the competitors quietly talking to antitrust regulators.

 

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EXCLUSIVE WASHINGTON — Even before Microsoft (MSFT ) announced its new online services plan — dubbed Hailstorm — on Monday, some of the company's leading competitors were quietly registering complaints about the effort with government antitrust regulators.

 

The competitors, including AOL Time Warner (AOL) and Sun Microsystems (SUNW ), allege that Hailstorm and other pieces of Microsoft's .Net initiative are designed to limit their access to customers and further leverage Microsoft's dominant Windows market share.

 

On Friday, AOL TW officials had a breakfast briefing with several state attorneys general involved in the government's pending antitrust lawsuit against Microsoft, which is under review by the U.S. Court of Appeals for the District of Columbia. AOL TW raised concerns that Microsoft's new products could create a choke point on the Internet for e-commerce, instant messaging and downloadable music.

 

An AOL TW official told TheStandard.com on Monday that Microsoft's latest offerings were an effort "to make sure that eventually there is no reason to use anything but the versions of programs that Microsoft gives you."

 

In many ways, the complaints surround the same kinds of behavior that prompted the 1998 government lawsuit against the Redmond, Wash.-based company. At that time, Microsoft battled Netscape by integrating a Web browser into Windows and striking deals with computer makers and Web sites to give its own product a leg up.

 

"We need to review the details, but some of the same kinds of antitrust issues seem to be raised," says Connecticut Attorney General Richard Blumenthal, who listened to the AOL breakfast briefing by phone. Blumenthal declined to comment on whether or how Friday's briefing would factor into the states' tactics in the ongoing case. "We really need to think and learn more about it before we can even reach a tentative conclusion."

 

But he pointedly described such briefings by Microsoft's competitors as just one of many sources of information for state officials, which also include academics, pro-Microsoft advocates and the states' own technical experts.

 

Microsoft denies that anything in its .Net plan is improper. The company's new HailStorm product is not limited to Windows and can be accessed by consumers running Linux, Apple's Macintosh operating system or even on a Palm (PALM) handheld device, Microsoft notes.

 

The company also said HailStorm is built on open standards and is available for use by any Web sites, including AOL. However, Microsoft plans to charge consumers, developers and participating Web sites.

 

Microsoft spokesman Vivek Varma said the company has not been formally notified of the latest allegations. When asked about some of the complaints, however, he dismissed them as inaccurate.

 

"Special-interest competitors would be mischaracterizing the vision — which is an open-access, open-design process vision — unlike AOL's walled-garden, proprietary approach to instant messaging," Varma said.

 

The next version of Windows, called XP, will integrate HailStorm services into the operating system, encouraging consumers to sign up when they start their computers for the first time. The operating system also features an integrated media player and a copyright-protection scheme to prevent users from distributing copies of music purchased online.

 

Competitors complain that XP won't allow consumers to choose a competing media player as the default program for playing music on their PCs. That could disadvantage not only AOL, which has grand designs on the music market, but also media software firms such as RealNetworks (RNWK) and Musicmatch. At least so far, those companies are trying to negotiate with Microsoft instead of going to the government.

 

Microsoft's Varma said the software would allow consumers to alter the default media player.

 

Sun and a few others have been in intermittent contact with state officials since Jackson ruled in the 1998 case, but after Monday's HailStorm announcement, they plan to step up their efforts.

 

"It's kind of amazing that with this verdict sitting against them, they're getting more aggressive on this path," said Sun general counsel Mike Morris, who compares the current situation to Microsoft's browser wars with Netscape. "These people are reprobates. They never learn."

 

Morris said Sun, which has always kept its lines of communication with regulators and lawmakers open, plans to redouble its anti-Microsoft lobbying efforts with the state attorneys general and key members of Congress, such as the Senate Judiciary Committee, which eventually will hold confirmation hearings for Charles James, Bush's prospective Justice Department antitrust chief.

 

Sun plans to wait until new antitrust personnel are in place at the DOJ before actively lobbying the department against Microsoft. Morris said Sun wasn't involved in Friday's briefing for the states because "we knew AOL was going to carry the ball on this one."

 

The latest allegations could be used by the states to defend the position that a strong remedy be imposed on Microsoft if, as is widely expected, the appeals court upholds some of the charges against Microsoft but throws out U.S. District Judge Thomas Penfield Jackson's plan to split the company in half. The states also could use the information as the basis of an entirely new case if the appeals court rejects all of the charges against Microsoft.

 

Many trial observers expect that the Bush administration would not pursue a Supreme Court appeal if the appellate court rules for Microsoft. If the court sends the case back down for further proceedings, James and U.S. Attorney General John Ashcroft are seen as more ready than their predecessors to reopen settlement talks. The states, however, have vowed not to drop the case.

 

Regardless of which side is right about .Net, Windows XP and Microsoft's motives, the software giant undisputedly is steaming ahead without regard to Jackson's order breaking up Microsoft.

 

The breakup, and various conduct restrictions on the operating systems company that Jackson also ordered, would make the marriage of Windows XP and .Net impossible. For example, Jackson's order forbids Microsoft from "binding" any middleware — such as Web browsers or media playing software — to Windows unless the company offers a Windows version that allows the middleware to be removed by computer makers or end users.

 

The appeals court verdict on Jackson's rulings is expected within a few months. But Microsoft's announcement Monday is a clear signal that the company is optimistic about its chances with the appeals court.

 

"I think there is a basic confidence here that their legal argument on integration is going to prevail," said William Kovacic, a George Washington University (dossier) law professor.

 

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