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THE NATION | THE MICROSOFT DECISION / NEWS ANALYSIS

Still King of Software, Hardball

Remedies come too late to weaken Microsoft's dominance in personal computers, experts say.

November 02, 2002|Jon Healey, Joseph Menn and Glenda McCarthy | Times Staff Writers

After four years of antitrust litigation that could have torn the company apart, Microsoft Corp. today enjoys the same comfortable position it occupied before the landmark case against it began -- on top of the software world, looking down.

Technology executives and analysts said the prosecution of the most important antitrust case in a generation has done almost no discernible harm to Microsoft.

That's because the remedies ordered by U.S. District Judge Colleen Kollar-Kotelly come too late to weaken Microsoft's dominance in personal computers, and they won't slow the company's drive into a range of new markets. Kollar-Kotelly's order excludes software for hand-held devices, television set-top boxes and Internet-based services -- three important arenas for Microsoft and competing software companies.

"What's most interesting is how much the tech landscape has changed," said University of Chicago antitrust expert Randal Picker. "At the beginning, we were at the dawn of the Internet era, and now we're looking in the rearview mirror. Microsoft is still a behemoth, and it looks like a battle between the big guys" -- Microsoft, IBM Corp. and AOL Time Warner Inc.

When the Justice Department and 19 states launched their suit against Microsoft in 1998, the Internet explosion was just beginning. The antitrust enforcers warned that unless the firm was stopped, it would extend its monopoly of computer desktop software to the Net, stifling what otherwise could be an era of unprecedented innovation and competition.

Even though the attorneys general won the most important arguments in the original case -- establishing Microsoft's violations and winning the right to restrict the firm's conduct -- they couldn't move fast enough to prevent their dire warnings from coming true.

The last two years have been extremely tough for technology companies, whose sales have plummeted as corporate customers tightened their belts and consumers lost their fervor for new PCs. By contrast, Microsoft reported record quarterly sales last month. And it has surpassed General Electric Co. as the company with the highest stock market value in the world.

The Redmond, Wash.-based company has prospered in large part because it can charge computer makers what it likes for its products. Its Windows operating system powers more than 90% of the world's PCs.

As Microsoft attempts to extend its hegemony from the office to the living room -- with products such as the Xbox video game console and MediaPlayer multimedia software -- it is bound to face competition. In fact, Microsoft dominates few of the fields it recently has entered.

Gerard Tellis, professor of marketing at USC's Marshall School of Business, said innovation is alive and well in the technology industry, so Microsoft shouldn't be demonized for its success. The company won its powerful position, he said, by offering quality products.

Tellis, an outspoken opponent of the government's antitrust action, pointed to IBM and Xerox Corp. as examples of companies that appeared to have a monopoly at one point but lost clout because they weren't innovative enough. If Microsoft becomes lethargic, it could find itself in the same position, he said.

"The whole industry is so competitive and so innovative it doesn't take a huge laboratory," he said. "People can do it on their laptops."

Microsoft executives said the ruling "imposes significant requirements" but allows the company to keep innovating. "We recognize that we will be closely scrutinized by the government and our competitors, and we will devote all the time, energy and resources needed to ensure that we meet our responsibilities," the firm said in a statement.

Even with that scrutiny, Microsoft is expected to pursue new markets aggressively.

The company is going after the technology that will determine how services will be delivered over the Web. It is gaining in software for computer servers, which power Web sites and corporate networks, and hand-held computers at the expense of struggling competitors such as Sun Microsystems Inc., which makes large machines, and Palm Inc., which makes tiny ones.

It is also trying to establish proprietary formats for audio and video as de facto standards for digital music and movie products and services. It is rolling out software that places a Microsoft-powered computer at the heart of home entertainment. And it is pushing Windows into a new generation of Internet-enabled mobile phones.

A key issue for Kollar-Kotelly was deciding whether to extend restrictions on Microsoft's actions into these areas, as many of its competitors sought. The judge focused on enabling software developers to compete with core pieces of Microsoft's monopoly in personal computers, but she declined to give similar protection to competitors in other, emerging arenas.

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