Microsoft's PR Move Raises New Antitrust Concerns

In defiance of antitrust prosecutors, Microsoft(MSFT Quote) crushes competitors. In compliance with prosecutors, it seems the company sometimes does the same.

A quietly simmering dispute over two different ways to ensure online privacy has exposed a new dilemma for the software giant. As it wins control over the market for Web browsers, the company is betting its future on its .NET initiative, selling software online. But in this new marketplace, Microsoft is learning that it can potentially trample rivals as a mere side effect of good public relations and other small matters. Matters may come to a head Wednesday when advertisers and online advertising agencies bring their concerns to Microsoft.

A group of state attorneys general met Microsoft officials and engineers in Seattle recently to discuss Internet Explorer, the Web browser central to the long-running antitrust case that pits some of those attorneys against the company. With the ruling against the Redmond, Wash.-based company on appeal, these prosecutors wanted Microsoft's help on a seemingly unrelated issue.

By making a few changes to Internet Explorer, they thought, the software maker could help consumers shrug off the monitoring devices used by online marketers to track purchases and movement on the Web -- and sometimes to gather personal data about customers.

"The engineers and team came back overnight," said Bill Lockyer, attorney general of California. "That was technically a stunning response."

But those changes placed Microsoft in an extraordinarily delicate legal position.

Crashing the Party

The software the engineers designed that night seemingly rendered obsolete months of negotiations over online privacy standards between Internet advertising agencies, the Federal Trade Commission and the Commerce Department. And Microsoft's unexpected involvement has brought new accusations that the company is using its dominance in the browser market to quash potential rivals.

"They're able to now have this market impact with the browser because of the way in which they used the operating system to crush Netscape," Lockyer said. "They can cause a change in the businesses that succeed or fail."

As online privacy has gained attention, two competing solutions have emerged. On July 27, the FTC approved a set of standards drafted by the Network Advertising Initiative, a group of online advertising agencies including DoubleClick(DCLK Quote) and Engage(ENGA Quote). One week prior, Microsoft unveiled the changes to its browser.

Under the plan approved by the FTC, those who collect data on the Internet would have to inform Web users when data is being collected, let them choose how the information can be used, give them a chance to contest its accuracy and make a reasonable effort to keep it secure.

The change to Internet Explorer would warn users of the browser when a monitoring device, known as a cookie, is about to be placed on their computer. It would allow the user to block that cookie, all cookies, or just those placed by third-party advertising agencies like DoubleClick and Engage.

The end results of each approach are nearly indistinguishable.

Pace of Technology or Anticompetitive Intent?

But Microsoft critics contend that, depending on how the prompts to users are phrased and how the default choices are set, the changes to Internet Explorer could steer Web users to reject cookies placed by third-party advertisers and accept those placed by first parties. Those parties would include Microsoft itself, which serves its own Microsoft Network of Web sites with advertising, as well as America Online(AOL Quote) and Yahoo!(YHOO Quote).

"It gives them a huge competitive advantage," said a Senate staff member who is familiar with the dispute and who, like most Congressional aides, spoke on the condition of anonymity. (Members of the Senate Committee on Commerce have filed legislation that would require disclosure of online monitoring.) The advertisers are "pretty much out of business. If you wanted to place an ad and make sure it was effective, Microsoft or AOL or Yahoo! would be the only people you go to."

But that does not necessarily constitute anticompetitive behavior. Like the advertising agencies and the government, Microsoft must understand that the business and privacy objectives are congruent. And if its patch tramples the advertising agencies, Lockyer said, well, "there aren't a lot of buggy-whip manufacturers active."

Even when the company's intent is as benign as tending to its image with a consumer privacy effort, Microsoft does not operate in a vacuum, noted Richard Purcell, director of corporate privacy for Microsoft.

"Technologies and online business models will continue to adjust," Purcell said. "Microsoft is in a very curious position, but fundamentally my concern is to deliver technologies that empower consumers to control the information, and good things are going to come out of that."

The change Microsoft unveiled is only at an early testing stage, and the potentially affected advertising agencies have expressed confidence the company will hear their concerns. In fact, Microsoft's description of its Explorer alteration does not definitively state that it will prompt users to reject third-party cookies, such as those placed by companies like DoubleClick and Engage.

"Microsoft in the end does have a dominant share of the browser market, so in the end what they implement will have an impact," said Daniel Jaye, chief technology officer of Engage. "They have a responsibility that their technology doesn't trump the public policy concerns."

The entire dispute has materialized since a federal judge three months ago ordered Microsoft split in two after ruling that it had violated federal antitrust laws.

On May 9, Richard Blumenthal, the Connecticut attorney general, wrote a letter to Steve Ballmer, the chief executive of Microsoft, on behalf of nine other state attorneys general.

"We believe you are critically positioned to help educate consumers and to protect consumer privacy rights by using your browser to aggressively alert and educate consumers about their cookie options," Blumenthal wrote. He applauded Netscape, Internet Explorer's only real rival, which is owned by AOL, for allowing consumers to reject third-party cookies while accepting first party cookies. He sent Netscape a similar letter, to which it has not publicly responded.

Although AOL is also a huge first-party advertiser and would seemingly enjoy similar advantages, that fact has garnered no public criticism from online advertising agencies.

Suggestions and Fixes

Microsoft had begun work on software applications to counteract online profiling in November, but the company was "somewhat behind the curve because we have to issue it as a patch," Purcell said. Blumenthal's missive "did quicken our attention, as those kinds of letters do."

On June 21, some of the attorneys general, who were in town for their annual convention, gathered in Seattle with Microsoft officials and engineers. The company's team had programmed a PC to show how the browser handles cookies. They demonstrated their technological fix, which they were considering including in the next version of Internet Explorer, and attorneys general offered suggestions.

The next day, the company's engineers met again with some of the same state officials and others who missed the first meeting. This time the Microsoft team had incorporated changes suggested the night before. For example, attorneys general had asked whether users could be allowed to completely erase cookies at the end of a session online, and the engineers had developed a new dialogue box prompting users to do just that. The state officials were impressed.

But "the attorneys general carefully and specifically have not endorsed this particular product or approach," Blumenthal said. "The whole antitrust lawsuit raises issues of competition that may be implicated by exactly this sort of product."

During the next week, Microsoft warned the advertising agencies it would soon announce the changes. Starting July 13, the online advertising companies called attorneys general, state by state, to raise those concerns.

"They were very distressed about, 'We've been working with the FTC and this came out of the blue,'" said Linda Moran, a senior assistant attorney general of Washington.

An Odd Position

On July 20, Microsoft unveiled the change to Internet Explorer. Engage and DoubleClick issued news releases praising the software companies' commitment to privacy. However, Engage emphasized that a better solution was TrustLabels, a software specification it developed to reject third party cookies not certified by "trusted authorities."

Through its consumer and commerce group, Microsoft operates MSN, a portal and network of Web sites that qualifies as a first-party advertiser. The group produced $3.11 billion of the company's $22.96 billion in 2000 revenues. On July 17, Microsoft said MSN had 201 million users in June, making it more popular than Yahoo! and America Online.

Further complicating relations with the third-party advertising agencies, Microsoft is a customer. MSN buys ad-serving software from Engage's software and consulting division, which grossed $6.9 million in the quarter, around 12% of total revenue.

Jeff Connaughton, a lawyer for Quinn Gillespie & Associates, a Washington, D.C., firm that negotiated the FTC agreement, said he is confident Microsoft will hear the advertising agencies' concerns.

"We should avoid over-broad solutions that undermine appropriate policy solutions we worked hard to develop," he said. "It will be Microsoft's decision to make. But I'm confident a number of small and medium advertisers will make their strong views known."

They will have their chance on Wednesday, when Michael Wallent, Microsoft product manager for Internet Explorer, comes to the Washington, D.C., law firm of Hogan & Hartson to meet with more than 20 representatives of Internet advertising companies and of major advertisers including AT&T and Xerox.

"If we can convince Microsoft that the FTC principles are those that should be abided by, we can get them to change the patch," said Jeffrey J. Miller, vice president for corporate development and legal affairs of the advertising agency Avenue A. "It does put them in an odd position. It's a very strange situation."