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Another Microsoft trial?
June 21, 2001: 2:50 p.m. ET

Two states now considering antitrust implications of Windows XP
By Staff Writer Richard Richtmyer
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NEW YORK (CNNfn) - With an appeals court decision in the landmark Microsoft Corp. antitrust case expected to come any day, two of the state attorneys general who were involved in that suit have suggested they might consider bringing the software maker back to court for a new trial.

The attorneys general, Richard Blumenthal of Connecticut and Tom Miller of Iowa, say they're concerned about Microsoft's plans for its Windows XP operating system as well as its new Internet-centric business strategy, which they described as "troubling."

In a joint statement issued late Wednesday following reports that they were preparing a new lawsuit, Blumenthal and Miller said while they do have "serious concerns about Microsoft's conduct and practices in recent months," they have no current plans for a second lawsuit. However, they added that a new suit remains an option.

The latest reports come as the U.S. Court of Appeals for the District of Columbia completes its review of a lower court ruling against Microsoft in what was a landmark antitrust suit brought by the U.S. Justice Department and 19 states.

After ruling that Microsoft has violated U.S. antitrust laws by abusing its monopoly power in computer operating systems, U.S. District Court Judge Thomas Penfield Jackson last June ordered the company split into two smaller companies to prevent it from violating state and federal antitrust laws in the future.

  We would never completely rule out a new suit, but our focus now is on the antitrust case that already is before the courts.  
  Attorneys General Richard Blumenthal of Connecticut and Tom Miller of Iowa  
The linchpin of the Justice Department's case was the claim that Microsoft, by integrating its Internet Explorer program into the Windows operating system, was using its dominant position in the market for computer operating systems to illegally monopolize the Web browsing software market as well.

Microsoft's rebuttal to that argument has been that the government's entire case was undermined by the widespread availability of Netscape's Navigator browser. Netscape later was bought by American Online, which is owned by AOL Time Warner, which also owns CNNfn.

The Appeals Court is expected to hand down its decision on the antitrust matter before the end of this summer. It could either uphold the lower courts' ruling, reverse it or return it to Judge Jackson for further clarification.

In their statement, Blumenthal and Miller said Microsoft's current product plans suggest that the company is engaging in the same types of practices Judge Jackson deemed illegal.

"We have found Microsoft's behavior to be very troubling," they said. "If the case is remanded to the district court, these are matters that we may well be able to bring to the judge's attention. We would never completely rule out a new suit, but our focus now is on the antitrust case that already is before the courts."

Blumenthal and Miller's comments came as attorneys general from across the country are meeting in Vermont, and a group funded by Microsoft's competitors is trying to convince them that its latest product plans are anti-competitive.

The group is called ProComp, which is short for Project to Promote Competition & Innovation in the Digital Age. It is sponsored by Microsoft rivals including Oracle (ORCL: Research, Estimates), Sun Microsystems (SUNW: Research, Estimates) and AOL Time Warner's (AOL: Research, Estimates) Netscape unit.

ProComp director Mike Pettit presented a paper criticizing Microsoft to the attorneys Wednesday. In it, he points to Microsoft's plans to embed features such as instant messaging and streaming media capabilities into Windows XP, due out in October, as evidence that the company is trying to use its dominance in operating systems to illegally quash competing products that perform similar functions.

He also pointed to the company's Hailstorm product, a set of "identity management" services introduced in March that works closely with its operating system software, as an indication that the company's current strategy is aimed at using its operating system strength to displace competitors in other areas.

Both Windows XP and Hailstorm are elements of a broader strategy Microsoft calls .NET, through which it is trying to extend its Windows franchise onto the Internet.

"Microsoft's forthcoming release of Windows XP appears to constitute a significant event in the evolution of the Internet," Pettit writes in the paper. "Microsoft has made no secret of the fact that it would like to control the means by which users access the Internet, and the distributed applications they employ," Pettit adds. "Given the important public policy consequences that arise if Microsoft succeeds, and the likelihood that it will do so, the issues raised by the release of Windows XP warrant careful review."

First battle in a new war?

For its part, Microsoft dismissed the ProComp report as competitors' attempts to spread "misinformation" about Microsoft products.

"We have designed Windows XP specifically to meet the needs of today's consumer and to unleash the power and potential of the PC," Microsoft spokesman Jim Cullinan said Thursday.

"The industry is very excited about Windows XP and we look forward to delivering it this October," he added.

The renewed antitrust concerns also are arising just days after Microsoft and America Online broke off negotiations to include AOL's software with Windows XP, a development some said could rekindle a long-running feud between the two companies. AOL was one of the most vocal industry players to speak out against Microsoft during its antitrust trial.

Merrill Lynch analyst Henry Blodget told his clients Thursday that the timing of these events could squelch the positive momentum that has been building recently behind Microsoft's stock, which could create a buying opportunity.

While he said he has no opinion about the legality of Microsoft's plans for Windows XP, he said the issue is sensitive enough to have the potential to cause considerable controversy.

"We also believe such controversy, if any, would come at a poor time for Microsoft, given that the company is awaiting the Appeals Court ruling on the existing antitrust trial. As a result, we believe it is possible that this could put a damper on the positive sentiment surrounding the stock," Blodget said in a research note.

Blodget pointed out that Microsoft's new-product plans frequently trigger controversy, which often has created buying opportunities for investors because the controversial products went on to be successful. He said the company has performed well recently on positive sentiment about new products, anticipation of a stronger PC market, expectations of a favorable appeals court ruling as well as revenue and earnings acceleration.

"We still believe that, over the intermediate term, these factors will likely outweigh controversy surrounding Windows XP, so we maintain our 'accumulate' rating," Blodget said.

Shares of Microsoft moved lower in the morning but regained their losses in afternoon trade. graphic


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