Microsoft Remains Unbroken, but It Has Been Branded

So the Windows will remain unbroken. But there's still some ugly graffiti scrawled across Microsoft's(MSFT Quote) front door: dirty, illegal monopolist.

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Bill Gates and friends breathed a sigh of relief Thursday as the U.S. Court of Appeals for the District of Columbia blew away the cloud of a potential breakup at the company as a result of the government's antitrust case against it. But they must be feeling just a tad bit less satisfied the appeals court ruled, unanimously, that Microsoft had illegally maintained a monopoly through its Windows operating system.

Victory claims aside, Microsoft will have some tough legal decisions to make in the weeks ahead. Because even if it ends up at the bargaining table with a decidedly more friendly administration, the company still will have to stomach its monopolist moniker and the legal attention it could bring.

"The core of the case is intact," says Donald Falk, an attorney with Silicon Valley law firm Mayer Brown & Platt. "Eight judges have now looked at this record and they all say that Microsoft is an illegal monopoly. I'd have a hard time selling my client that that's a victory."

If your client's Bill Gates, though, it might not be that much of a stretch, at least publicly.

"The ruling lifts the cloud of breakup over the company, reverses the tying claim, and says clearly that we did not attempt to monopolize the browser market," Gates said at a press conference Tuesday. (Actually, the court remanded the government's tying claim to the lower court, but set a higher hurdle for the government to prove Microsoft actually caused harm by tying its Internet browser to its Windows operating system.)

Privately, though, Bill and friends might feel a little differently. One of Microsoft's oft-repeated assertions during its months-long trial was that it was, in fact, not a monopoly. Now, as Falk puts it, "the scarlet letter is there, it's been tattooed on their forehead and it's not going anywhere."

Not unless Microsoft chooses to appeal to the Supreme Court, that is. Because the appeals court's decision was unanimous, at 7-0, though, that option seems incredibly fraught with risk and would at best have the odds stacked against it. And it opens up the nasty little possibility that the highest court in the land use its own can of spray paint to underline the appeals court's finding.

While Microsoft didn't rule anything out -- it said it would use the next few days to go over the ruling and consider its options -- it seems much more likely to settling things and agree to some concessions on its behavior that the government could request. At least, that was the signal its executives were giving Thursday, as news organizations went all Microsoft, all the time. Gates and CEO Steve Ballmer, among others, made it only too clear that they were open to talking to with the government and putting this thing to rest.

A business-friendly Bush administration seemed only too willing to reach out for that olive branch.

Failing a settlement, the case could go back to the lower court again, which opens of the possibility of more of Gates' dirty laundry getting aired out in public. After all this time, still sounds appealing, doesn't it?

Aside from all that, the company might have a harder time with the attorneys general of 19 states who still seem to want Microsoft's head, or at least its operating system, on a platter. With the illegal monopolist label firmly stitched to its shorts, those states might only be encouraged to put the screws to Microsoft anew. Of course, they and any other plaintiffs would have to prove that Microsoft actually caused harm to consumers, something that would be difficult, given the fact that Microsoft's products have consistently gotten cheaper, not more expensive.

In the end, then, Thursday's ruling might have little more effect than blowing those dark clouds away, assuring that the world doesn't lay witness to AT&T(T Quote), part deux. But it surely doesn't mean this is the end of Microsoft's legal woes. It just means, that like any other company, Microsoft will be judged more on its results, and less on extraneous circumstances.

"This ruling is not a positive for Microsoft, it's just the taking away of a negative," says James Lucier, Washington, D.C., analyst for Prudential Securities, which has a buy rating on the stock. "The real story is going to be can they make their numbers, can they show the earnings growth?" (Pru hasn't done recent underwriting for the company.)

And what a story that is. With PC growth being anemic, Microsoft is branching out into markets such as video game consoles and Internet computing. There are already complaints that Microsoft is using its operating system dominance to gain a leg up in those areas.

In the post-PC era, whether it can sustain its growth, and more importantly, how it does it, may be the most important question of all for Microsoft. No matter what anyone calls it.