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MSFT changes the rules
July 11, 2001: 6:14 p.m. ET

In wake of court ruling, software leader allows PC makers more flexibility
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - Further signaling its willingness to settle its antitrust case with the government, software maker Microsoft Corp. on Wednesday said it will give PC manufacturers more flexibility in configuring desktop versions of its Windows operating system.

In response to the ruling, which upheld a lower court's finding that Microsoft had illegally maintained its monopoly power in desktop operating systems, the company said it will now allow PC makers licensing its operating system software the option to remove the "Start-menu" entries and icons that provide end users with access to its Internet Explorer Web browser.

Further, Microsoft said it will include Internet Explorer, which is included with its operating system software, in the "Add/Remove programs" feature in Windows XP, scheduled for release this fall. Current versions of Windows do not allow users to remove the program.

The company's announcement represents a major shift in the way it licenses its Windows operating system to computer makers. Previously, it prohibited manufacturers from changing the desktop or Start-menu in any way. Later licenses allowed manufacturers to add icons such as the one to rival Internet browser Netscape Navigator, which is now owned by AOL Time Warner, CNNfn's corporate parent.

Microsoft also said it will give PC makers the option to add icons for software and services to the Windows XP desktop, where it previously had planned to ship the new product with a "clean desktop."

Microsoft CEO Steve Ballmer said the company made the move in response to a ruling last month by a U.S. appeals court that upheld a finding that Microsoft held a monopoly in PC operating systems and that some of its licensing practices were illegal.

"We recognize that some provisions in our existing Windows licenses have been ruled improper by the court, so we are providing computer manufacturers with greater flexibility and we are doing this immediately so that computer manufacturers can take advantage of them in planning for the upcoming release of Windows XP," Ballmer said in a statement.

The announcement also comes as both sides in the antitrust case are evaluating what their next move will be.

Although the appeals court upheld some of the lower court's ruling, it overturned its order that Microsoft split its business into two parts as a remedy for anti-competitive practices.

It also remanded other parts of the ruling back to the U.S. District court for further review by a new judge. Among them were the specific legal precedents and tests the lower court used to support its conclusion that Microsoft acted illegally when it tied its Internet Explorer Web browser  to the Windows operating system.

Microsoft already has expressed an interest in settling the case out of court, and Ballmer suggested the decision to allow PC makers and users to remove Internet Explorer is a show of good faith.

"This announcement does not take the place of settlement discussions with the government parties or any future steps in the legal process; however, we wanted to take immediate steps in light of the court's ruling," he said. "We are hopeful the we can work with the government parties on the issues that remain after the court's ruling."

Microsoft said the changes would require additional testing prior to the release of Windows XP, currently scheduled for Oct. 25. Even so, the company said it still expects to release the product on time.

Opponents remain skeptical

Officials at the Justice Department, which in conjunction with the attorneys general of 19 states, brought the antitrust suit against Microsoft in 1997 during the Clinton administration, have not yet stated their position on the idea of a settlement.

Some trial watchers have suggested that the Justice Department was willing to settle even before the District Court issued its final ruling on the matter but some of the state attorneys general stood in the way.

Two of them, Richard Blumenthal of Connecticut and Tom Miller of Iowa, already have expressed concerns about Windows XP, which embeds online features such as instant messaging and streaming media capabilities as well as Internet authentication services.

Blumenthal, who said he is open to the idea of a settlement of the antitrust case but so far the two sides have not held any discussions, characterized the move as "closing the barn door after everything is out."

"It relates almost exclusively to the browser, and the browser war is over," Blumenthal told Wednesday.

"The real question is what Microsoft will do as far as permitting access to other products like instant messaging and Internet access and whether they will really permit an open desktop," Blumenthal added.

Microsoft's rivals in the software industry also downplayed the significance of the move, saying it does not go far enough toward stemming the company's abilities to use its dominance in the desktop operating system market to crush competition on other areas.

"In the wake of the court ruling, Microsoft is clearly scrambling, but they still have a long way to go to address the anti-consumer, anti-competitive elements of Windows XP," said AOL spokeswoman Kathy McKiernan.

  There's no question that freeing the computer manufacturers from restrictions by Microsoft is a step in the right direction, but what Microsoft has offered at this point is only a baby step.  
  Ken Wasch
Software & Information Industry Association
Ken Wasch, president of the Software & Information Industry Association, which has been one of the most vocal Microsoft opponents, said the browser issue, which was the linchpin of the government's case four years ago, is irrelevant to the larger issues in the marketplace today.

"There's no question that freeing the computer manufacturers from restrictions by Microsoft is a step in the right direction, but what Microsoft has offered at this point is only a baby step," Wasch said.

Wasch said he would like to see Microsoft go a step further and publicly disclose the amount it charges each computer manufacturer that licenses Windows.

Currently, the company individually negotiates prices with each manufacturer based on a complex set of factors which Wasch says relates to the manufacturer's willingness to adopt a range of Microsoft technologies.

"What Microsoft has offered does not truly free the computer manufacturers to offer competing technologies, because Microsoft still retains the ability to punish those manufacturers that bundle competing products," he said.

Shares of Microsoft (MSFT: Research, Estimates) rose $2.02 to $66.50 on Nasdaq Wednesday. They soared another $3.90 to $70.40 in extended-hours trade. graphic

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