NEW YORK (CNNfn) - U.S. regulators Monday launched one of the biggest antitrust assaults of the century, accusing Microsoft Corp. of using its dominance in computer software to drive competitors out of business.
Reviving images of trust-busting fervor against industrial titans like Standard Oil, AT&T and International Business Machines, U.S. officials charged the software giant with engaging in anticompetitive behavior.
And just like the breakup of Standard Oil helped define competition in the early 1900's, legal experts said the pair of antitrust lawsuits against Microsoft could have a profound effect on competition in the 21st century.
Gates: A step backward
Microsoft Chairman Bill Gates called the legal attack a "step backwards for America, for consumers and for the PC industry" and vowed the Redmond, Wash.-based company would prevail in court. (370K WAV) or (370K AIFF)
In an interview with CNNfn's Lou Dobbs, Gates said the company is prepared to defend its position vigorously in court.
Microsoft's critics hailed the government's decision, saying the lawsuits mark the initial step in loosening the chokehold the Microsoft monopoly has on the computer industry.
The lawsuits, filed by the Justice Department, 20 states, and the District of Columbia in U.S. federal district court in Washington, escalate a verbal sparring match to a potentially long and costly legal battle.
Central to the government's case, unveiled after weeks of behind-the-scenes talks, is that Microsoft has illegally tried to "leverage" its market leading Windows operating system to "develop a chokehold" on the Internet browser software market.
"The Internet is already revolutionizing communication, commerce and the flow of information around the world," said U.S. Attorney General Janet Reno. "No firm should be permitted to use its monopoly power to keep out competitors or to spurn innovations."
Microsoft angled for the high ground in the eyes of consumers, insisting the government is simply holding up a company's response to the needs and desires of consumers.
Last-minute talks between the Microsoft and government officials broke down after the two sides couldn't agree to concessions that would change the company's contracts with PC makers.
"We were willing to explore ways in which [computer makers] might create more choices in browsing technology," said William Neukom, Microsoft general counsel. "There were a number of issues we thought were worthy of discussion, but the government would not engage us. We were there to solve a problem, and they were constantly asking for more."
Lawsuits but no delay of Windows 98
The lawsuits did not ask the court to delay or block shipment of Windows 98, Microsoft's new operating system.
"We stopped short of asking for enjoining the product precisely because we believe in creating options, not restricting them," said Joel Klein, the Justice Department's chief antitrust lawyer. "We are not seeking to impose a recall."
Microsoft spokesman Jim Cullinan said the company already began shipping Windows 98 to computer makers early Monday, aiming for a June 25 release date for consumers.
Meanwhile, in their separate suit, the states charged Microsoft used its dominance to push other software products as well, including its office productivity suite of applications, such as word processing and spreadsheet management and its e-mail software Outlook Express.
The states that sued Microsoft were California, Connecticut, Florida, Illinois, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, New Mexico, New York, North Carolina, Ohio, South Carolina, Utah, West Virginia and Wisconsin, plus the District of Columbia.
Though the lawsuits did not specifically mention Windows NT, the high-powered operating system geared to business users, Gates said he believed the charges apply to all Windows operating systems.
"The principles they have in mind would stop all advances in all forms of Windows," he said.
Neukom, however, added that "the suit as we understand it focuses on Windows 98."
Microsoft is scheduled to release an updated version of NT next year, and some experts had feared the government would include NT in its lawsuit, a move which could hurt Microsoft's bottom line.
Many experts believe Windows NT will eventually become the standard operating system for consumers as well as businesses.
The suits seek a hearing and a preliminary injunction that orders Microsoft to provide the Windows 98 operating system either with no browser, or with alternative browsers, so that computer makers and consumers could freely select the browser of their choice.
U.S. District Court Judge Thomas Penfield Jackson will hold a conference in the next few days to schedule a hearing for the preliminary injunction request. It was Jackson who last December issued the preliminary injunction that prohibited Microsoft from forcing PC makers to install its Web browser on Windows 95.
The states' bid for an injunction asks the court to order Microsoft to include Netscape's Navigator and one additional browser in shipments of Windows 98. However, the injunction being sought by the federal government seeks only the inclusion of Navigator.
Gates has slammed the government's proposal that it include rival browsers in Windows 98, saying it does not foster competition but only helps its main browser rival, Netscape Communications Corp. (175K WAV) or (175K AIFF)
But the Justice Department case extends beyond competition between Web browsers.
The government wrote in its complaint that because Netscape's Navigator could be used as an alternative platform that can run software applications on a variety of operating systems, Microsoft considered the browser a threat to Windows.
The Justice Department cited internal Microsoft documents as evidence the company sought to leverage its dominant Windows operating system to turn users away from Navigator and toward Internet Explorer, instead of allowing the products to compete on their own merits.
"Microsoft concluded that it would 'be very hard to increase browser share on the merits of [Internet Explorer] alone. It will be more important to leverage the OS [Windows] asset to make people use IE instead of Navigator,' " the Justice Department said in its complaint.
The government referred to another company memo stating that if Windows and Internet Explorer "are decoupled, then Navigator will have a good chance at winning."
"What Microsoft has been doing, through a wide variety of illegal business practices, is leveraging its Windows monopoly operating system to force its other software products on consumers," Klein said.
The Justice Department's case also examines Microsoft's response to other products that pose a potential threat to Windows.
The government said the "most significant potential threat to Microsoft's operating system monopoly" come from alternative platforms that can be used on a variety of operating systems, such as Sun Microsystems, Inc.'s Java.
"Java is designed in part to permit applications written in it to be run on different operating systems," the Justice Department wrote in its complaint. "As such, it threatens to reduce or eliminate one of the key barriers to entry protecting Microsoft's operating system monopoly."
The government added that "non-Microsoft browsers are perhaps the most significant vehicle for distribution of Java technology to end users."
Gates: ironies abound
Gates contended Microsoft was being punished for the very values America promotes.
"How ironic that in the United States, where freedom and innovation are core values, these regulators are trying to punish an American company that has worked hard and successfully to deliver on these values," Gates said.
He also said it was ironic that the government would file a sweeping antitrust suit on the day Microsoft shipped Windows 98 to computer manufacturers. (203K WAV) or (203K AIFF)
Nonetheless, two of the major U.S. personal computer manufacturers, Dell Computer Corp. and Gateway, told CNN their plans are full speed ahead to begin testing and installing Windows 98 operating system as soon as they receive it.
Spokesmen from both companies said the lawsuits would not alter their target of making Win 98 available to the public June 25.
Both Dell and Gateway also have given customers who have bought computers since April certificates for free upgrades for Win 98.
Three Pepsi cans in every six pack of Coke?
Gates said forcing Microsoft to include Netscape's competing software in Windows 98 is like requiring Coca-Cola to include three cans of Pepsi in every six-pack it sells. (330K WAV) or (330K AIFF)
Microsoft lawyer Bill Neukom said the government reaching into uncharted territory in its lawsuit: forcing a company to carrier its competitor's products. (298K WAV) or (298K AIFF)
For its part, the government said Microsoft was well aware of the potential threat from the upstart browser maker. Microsoft, "from Bill Gates on down," realized that its browser was threatened by Netscape's Navigator browser, Klein said.
And Klein said Microsoft also tried at one point to secretly divvy up the browser market with Netscape - which Gates said that was an "outrageous lie."
When Netscape refused Microsoft's proposal, Microsoft then worked to "in Microsoft's own words, and I quote, 'cut off Netscape's air supply,'" Klein said.
Microsoft gaining ground on Netscape
Microsoft has been steadily gaining ground on Netscape in the browser market. According to industry research firm Dataquest, Microsoft's share of the browser market nearly doubled to 39 percent in the fourth quarter of 1997 from 20 percent in the fourth quarter of 1996.
Microsoft's critics said the government has been hampered by Microsoft's close relationship with PC makers.
"The biggest hurdle is those that have relevant information may be afraid to come forward," Kevin Arquit, an outside attorney for Sun Microsystems. "PC makers may have a lot of useful information, but if they rely on Microsoft, there may be some reluctance to come forward. Hopefully, this will show the government is serious and those companies will go forward."
The Justice Department's complaint, however, quotes depositions taken from executives from several PC manufacturers supporting its claims that Microsoft unfairly dominates the industry.
"[Gateway executive James] Von Holle has testified that if there were competition to Windows he believed such competition 'would drive prices lower' and promote innovation," the government said.
States say issue is consumer choice
State officials, led by Attorneys General Dennis Vacco of New York, Tom Miller of Iowa, and Richard Blumenthal of Connecticut, said the real issue in the lawsuits are consumer choice.
"We are taking this action to give a fair shake to competitors and free choice to consumers in one of the most crucial industries in this nation," said Miller.
"With over 90 percent of all computers using Microsoft operating systems, the company retains a virtual monopoly over the computing industry," Vacco said.
Gates, however, suggested the government was basing its case on behalf on a single competitor's complaints: Netscape's.
"Demands that Microsoft completely hide its Windows user interface and its Internet technology from PC users, and that we ship Netscape's competing software in every copy of Windows, all appear to benefit a single competitor at the expense of consumers," Gates said.
He later added that government officials "kept saying Netscape this, Netscape that" when the two sides were trying to negotiate a settlement last week.
Microsoft shares (MSFT) closed at 86-1/16, down 3-3/8.
-- by staff writer Jamey Keaten and John Frederick Moore