Microsoft Settlement Plan Has a Little Disappointment for Everyone

The settlement still would leave the software kingpin as the 800-pound gorilla, though.
Publish date:

The world's biggest software company didn't get everything it wanted. But its software will still be the most dominant on the planet.

The proposed settlement in the government's antitrust case against


(MSFT) - Get Report

inspired a declaration of victory from the Justice Department, gritted-teeth consideration from state attorneys general and a little bellyaching from Redmond.

Throw in a few acidic accusations from Microsoft's critics about the government caving, and praise from Wall Street about Microsoft getting everything it could have hoped for, and you've pretty much rounded out Friday's reaction to the proposed deal.

"It's a very reasonable settlement that goes right down the middle, and therefore will be criticized from all sides," says Ernest Gellhorn, an antitrust law professor at George Mason University.

Who the winners and losers actually are in the case, though, is another matter entirely.

It'd be hard to say Microsoft got off scot-free -- the company would be prohibited from much of the behavior that made it so wealthy and powerful in the first place, including exclusive deals with business partners, intimidating computer manufacturers from doing business with other software companies and hiding how its operating system works so competitors can't write software to run on top of it.

But it's also hard to say Microsoft's enemies got much either: The firm won't be prohibited from "bundling" software applications into its operating system. That said, computer manufacturers will be free to put other firms' software into their machines without the threat of retaliation from Redmond.

The 800-Pound Gorilla Still Lives

That could certainly help familiar Microsoft foes such as


(RNWK) - Get Report


AOL Time Warner


, but they'll still have to compete against the Goliath to make any gains in the market.

In that sense, this settlement isn't as much about how Microsoft will do business in the future as much as it is about how other companies will still have to compete with Microsoft. The proposed settlement will prohibit Microsoft from squishing its foes like bugs, but it doesn't fetter the software giant from flexing its competitive muscle in general.

"It does respond to their principal allegations, which is that if Microsoft products that perform competing functions are on the desktop when the computer is delivered to the consumer that companies like RealNetworks and other are put at a disadvantage," says Stephen E. Margolis, professor of economics at North Carolina State University and co-author of

Winners, Losers and Microsoft

. "Now, I would guess that a lot of consumers will still just want the whole Microsoft package anyway, but if they don't, this settlement gives computer manufacturers a way to respond to those preferences."

For that matter, the terms of the settlement would make the heated negotiations that Microsoft and AOL Time Warner engaged in regarding the placement of AOL's icon on the Windows start menu a moot point. Under the new rules, AOL should be free to negotiate directly with the computer makers who install Microsoft's software on their machines, and not have to fear Redmond's retribution.

Observers point out that since Microsoft loosened its restrictions on what computer manufacturers can put on the start-up screen earlier this year, few, if any, have made many changes. Many, such as Margolis, attribute that to the fact that what we all really want, as consumers, is to make things as simple as possible.

In that sense, the antitrust busters will have fulfilled their most basic charge: to promote competition and safeguard the consumer. After all, what stronger evidence of consumer choice is there than a consumer who's given a choice and decides not to exercise it?

A Scarcity of Happy Campers

Of course, the state attorneys general who are involved in the case might not see it that way. U.S. District Court Judge Colleen Kollar-Kotelly has given them until Tuesday to mull over the proposed settlement, and we'll see then whether they decide to hold their tongues and go along, or try to pursue the matter further on their own. The smart money's betting they'll agree to it, because they've got a slim chance of getting anything better. But if they do end up accepting it, they won't like it, either.

Iowa Attorney General Tom Miller issued a statement on behalf of the states that markedly avoided any support of the settlement while agreeing to reply by Tuesday.

Bill Gates wasn't exactly exuberant on Friday, either, though it was clear he'd like to get the whole thing over and done with.

"While this settlement imposes new rules and regulation, we believe settling the case now is the right thing to do for our customers, the technology industry and the economy," Gates said joylessly to reporters during a conference call.

But Gates having to swallow a little pride is not likely to satisfy Microsoft's enemies.

"I think




would have liked to have seen Microsoft more severely hamstrung, if not destroyed," says author Margolis. "But even they got a little something. An interesting feature of the settlement is the issue of server compatibility. That was never addressed in the trial, but servers are addressed in this settlement, and Microsoft has made some concessions to facilitate the compatibility of servers with Windows. So that actually does provide something for competing server makers."

The fact that the settlement calls for a three-member panel to monitor Microsoft's every move for the next five years probably doesn't put a spring in Gates step, either.

"They had to accept this panel of internal supervision, and that's something that there's uncertainty with, too," says economics professor Nicholas Economides of New York University's Stern School of Business. "We don't know how it's going to work."

In the end, the settlement will likely be an evolving work in progress, then, just like the long trial that produced it. The true winners and losers will emerge over time, but there's a pretty good chance Microsoft will be in the former's camp, and not that of the latter.