Observers: Microsoft Needs More Than A Mild Slap

Microsoft Corp. and the U.S. Department of Justice may be close to settling the software giant's antitrust suit, but any settlement that doesn't address Microsoft's fundamental structure would be "a mild slap on the wrist," industry observers

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Microsoft Corp. and the U.S. Department of Justice may be close to settling the software giants antitrust suit, but any settlement that doesnt address Microsofts fundamental structure would be "a mild slap on the wrist," industry observers say.

The two parties are said to be near a settlement that would entail restricting certain business practices of the Redmond, Wash., company rather than more fundamental remedies like a breakup of Microsoft into separate applications and OS companies, according to two newspaper reports Thursday.

(Update: Government lawyers have concluded that a last-minute offer by the Microsoft to settle the case was inadequate, and they are preparing for the trial judge to deliver his verdict Tuesday, sources close to the lawsuit say.)

Those business practices could include Microsofts OEM pricing policies, which were shown at the landmark antitrust trial to favor certain OEMs that complied with Microsofts requests, as well as its policy of policing what third-party software OEMs can ship on their systems.

Jim Cullinan, a spokesman for Microsoft, said the company would not comment on the reports. Gina Talamona, a spokeswoman for the DOJ, similarly declined to comment.

Microsoft and the DOJ, at the urging of Judge Thomas Penfield Jackson, the presiding judge in the case, have been engaged in mediation since November. At that time, Jackson appointed Richard Posner, the head of the U.S. Court of Appeals for Seventh Circuit in Chicago, to conduct settlement discussions.

Shades of 1994

If Microsoft and the DOJ do reach agreement, the next order of business will be to deliver to Jackson a settlement agreement that the judge, if he approves it, will turn into an enforceable court order, according to Stewart Gerson, an attorney with Epstein, Becker and Green, in Washington.

That court order, said Gerson, would involve an ongoing role for the court to ensure that Microsoft abides by it.

If the settlement talks result in an order that affects Microsofts business practices, but not the companys structure, it will be "a mild slap on the wrist" for Microsoft, as one IT manager characterized it.

"Microsoft will probably just crank their prices on all the OEMs and everyone will be in the same boat," said the manager, who asked not to be identified.

"Ive been wondering what would be best for the industry, what would be healthiest," the executive continued. "I think breaking up Microsoft into separate systems and applications companies would help the marketplace and stimulate Microsoft to deliver better products. Thats what Id like to see."

Both Gerson and Hillard Sterling, an antitrust attorney at Gordon and Glickson LLC in Chicago, think Microsoft and the DOJ will settle the suit. Heres why: Jackson is pushing for it, and its in everyones best interests to avoid a ruling that would likely result in an expensive and time-consuming appeal.

Thats why the DOJ is straddling a fine line between asking for too much and settling for too little, according to Hillard, who was involved in the Staples antitrust suit.

"If the government walks away with another vague consent decree [as it did in 1994], this whole effort will be wasted," he said. "So the DOJ must push for restrictions that come as close to the edge without crossing the line into the realm of breakup as possible."

Has DOJ moved off breakup dime?

"Undoubtedly, the DOJ is pressing for a breakup, but Microsoft would be better off appealing than voluntarily disassembling," Hillard continued. "The DOJ must move off the breakup dime to consummate a settlement."

And why is that?

"The DOJ faces significant risks of a Jackson reversal," he said. "Judge Jackson is particularly vulnerable if he orders such radical relief as a breakup."

Whether or not the talks result in something concrete, one thing is clear: Word of a possible settlement didnt go unnoticed on Wall Street Thursday. Microsoft, a component of the Dow Jones industrial average and a heavily weighted stock in the Nasdaq index, jumped 8 5/8 to 111 7/8.

Microsoft was the biggest point gainer among the Dow 30 and the second most active issue on Nasdaq.