It sounds like every executive's nightmare.
On April 24, Robert Levitan, chief executive of the online gift service
, announced he had signed a deal with a software company. This expensive deal, which he had negotiated for more than a month, offered Flooz promotion through the software company's wildly popular email service and network of Web sites.
That same day, three newspapers said a federal judge would soon be asked to split Levitan's new partner apart. The software company's stock plunged
"It was not even on our radar," Levitan says.
But this was little surprise, and even now he is not worried. The software company is, of course, Microsoft
, and there is nothing unique or even nightmarish about Levitan's situation. Though dire news from the courts has spooked the software giant's investors and sliced its historic market capitalization by 41%, or $256 billion, hardware, software and Internet companies of all sizes are locking arms with Microsoft at a brisk pace.
Just this week, Microsoft signed deals with a financial software company, an online storage company, a broadband service outfit and a computer security firm. Partners like
and the Web-hosting company
, which have signed agreements with Microsoft in the months intervening the harsh initial
antitrust ruling and prosecutors' request to sever the operating system business from the applications business, express an almost Zen-like appraisal of the developments.
"We look at that the same way as any news spectator," says Chris Arisian, vice president for alliances at Exodus, which last month announced a deal to market Microsoft's Windows DNA 2000 platform alongside its Web hosting services. "Even if they broke the company up, we would still be aligned with the entity making the operating system."
Many of the companies that have signed agreements with Microsoft say the predominance of Windows makes Microsoft an attractive, even necessary partner. That includes hardware maker Dell, whose sales force is in the middle of a 16-city tour demonstrating how well its rack-based servers work with Windows 2000.
"One of the things we're known for is responding to what customers actually want as opposed to telling them what they want, and most people want Windows," says John Thompson, a spokesman for Dell.
This consistent view of Microsoft's market position, antitrust experts say, should interest investors for several reasons. Not only does it speak to the company's strength in all areas of the computing industry, it forebodes possible outcomes of the legal battle in appellate courts. The choices these companies make shed light on Microsoft's current behavior after its alleged bullying in the browser market half a decade ago.
"I think they're seeing Microsoft is going to continue to be a strong player, whether it's one number or two or three in your Rolodex," says William F. Causey, an antitrust litigator at the Washington firm
Nixon Peabody LP.
There is a catch. The extent of Microsoft's market strength, of course, is the linchpin of the government's case. If Microsoft controls the market for operating systems (Judge Thomas Penfield Jackson ruled it does) and uses that monopoly to create what Jackson called the "dangerous probability" of a monopoly in a second market, the software giant is breaking the law and should arguably be severed.
, which uses software and proprietary devices to deliver broadband Internet access to hotels and other buildings with tricky architecture, the attraction to Microsoft spanned the two new companies proposed by prosecutors. In a deal announced Wednesday, CAIS accepted a $40 million equity investment from Microsoft. The deal grants CAIS extended discounts on Microsoft operating platforms. In exchange, CAIS agreed to exclusively deliver MSN to hotel guests.
"It's not important whether Microsoft is broken up or not," says Gary Rabin, the company's chief strategy officer. "We went into business with a company that had two major things we needed."
This would seem to indicate that the end of the browser wars was not the last of Microsoft's attempts to extend Windows dominance to other markets. But that alone is not illegal.
"Antitrust principles say the person that's got the favored product should win," says Joseph Angland, a partner in the antitrust group of the law firm Dewey Ballantine. "Even monopolists are encouraged to compete vigorously, and that includes finding the right joint ventures."
The government "would become concerned if partnerships locked up resources from competitors," he added.
For that, the closest case may be Tandy, owner of the
chain of home electronics stores. Through a joint promotion agreement announced Nov. 11 and expanded on Monday, the company has agreed to create Microsoft "store within a store" arrangements. The deal's extensive terms range from the retailer's offer of $400 rebates on its own products when customers sign up for MSN service to Microsoft's development of the
According to Kay Jackson, a Radio Shack spokeswoman, the only other company in the running was
"It's a wonderful ISP and it's got great market share," Jackson said. "While content is important, our strategy is home connectivity. Microsoft has navigation software. Through Microsoft, we give the entire World Wide Web to our customers."
During the trial, Microsoft cited AOL's purchase of
as evidence that it faces viable competition in browser and software markets.
In a friend of the court brief filed in support of the government, the
Software and Information Industry Association
countered that "AOL's merger with Time Warner reinforces AOL's focus on the entertainment industry rather than on software, which remains Microsoft's domain. AOL is not an actual or potential rival in the markets for operating systems or for Microsoft's other key software technologies."
But even RadioShack.com sells some software products based in Linux, an operating system that is routinely cited as a Windows rival despite its dismal market share and the fact it is available for free.
The circumstances that make Microsoft irresistible to Tandy reflect market realities that antitrust laws seek to encourage, says Angland. He views Windows as a so-called natural monopoly, an opinion that seems validated by Thompson, the Dell spokesman, who said the operating system is "baked into" the hardware maker's strategy.
"After all the fuss and bother of this trial, when you look at Microsoft's market share, it's going to be a two-digit number and the first digit is going to be a nine," Angland says.
For executives like Levitan, the Flooz chief, that fact is no more worrisome than the possibility of a Microsoft breakup. Rather, it is simply the way the game is played.
The Microsoft partnership "is a test of our functionality to email platforms, but it is also a test of working with Microsoft," Levitan said. "If the litigation has the effect of having Microsoft appreciate their partnership more and be more collaborative, we would certainly appreciate that."
Jim Cullinan, a Microsoft spokesman, said the company will prevail in the antitrust case on appeal. To the companies with which it does business, he said, "we're trying to be the best partner we can."