wants to help America's impoverished schoolchildren -- and maybe help itself at the same time.
On Tuesday, Microsoft
announced that it had reached a proposed agreement to settle more than 100 private class action lawsuits alleging that it gouged consumers for its software.
Under the terms of that settlement, which needs to be approved by the U.S. District Court in Maryland, Microsoft would donate more than $1 billion in cash, software and support to the nation's poorest school districts -- 14,000 schools in all -- over the next five years. Lawyers' fees, which are not included in that amount, would be determined by the judge.
But while the settlement has been praised by some as a unique, creative way to put the suits to rest while benefiting needy schoolchildren, critics say the settlement is little more than a thinly veiled grab by Microsoft to gain more of a presence in one of the last consumer-oriented software sectors where others still have a significant share of the market.
For years, education software has been the purview of Microsoft's original nemesis,
. Microsoft's Windows is the clear winner in their rivalry, but Apple was able to claim one small victory over the giant from Redmond, Wash.: the education software space. By 1996, it dominated that area with a 45% market share.
Since then, though, Apple's share has fallen to 23%, according to published reports, with Windows-based computer maker
now in the lead at 37.5% of the market. That said, Apple still derives 40% of its revenue from schools, analysts say.
Given that backdrop, Microsoft's billion-dollar gift could turn out to be more of a bomb for the little computer maker from Cupertino, Calif.
"Apple's grip on that sector is not as strong as it once was, but that is their stronghold, an area that they're really good at," says Lehman Brothers analyst Dan Niles, who rates Apple buy. "If Microsoft can in fact do that as their quote-unquote punishment, then I don't see how you can view that as a positive for Apple." His firm hasn't done underwriting for Apple.
A spokeswoman for Apple would not comment.
But Microsoft's other nemeses, as well as a lawyer who has been handling part of the price-gouging cases in California, say the settlement is little more than a bald-faced attempt for Microsoft to extend its monopoly into schools while generating fees for attorneys who negotiated the current settlement.
"Under this settlement, they're giving away their software, which has zero marginal cost for them, and putting it in poor schools that never would have bought it anyway," says Ed Black, head of the Computer & Communications Industry Association, an anti-Microsoft trade group. "They're like the guy on the street that's got people watching the pea in the pod: Microsoft's got everyone watching, but they just put the pea in their pocket and walked to the bank."
"It's not a punishment, it's a reward," says Eugene Crew, an antitrust attorney at Townsend & Townsend & Crew in San Francisco who has been working on the California portion of suits. He says that his firm was taken aback by the proposed settlement, which it first read about in media reports Tuesday morning. He says he'll ask U.S. District Court Judge J. Frederick Motz not to accept the proposed settlement during a hearing set for next Tuesday, or at least release his clients from being covered by it.
In a news release, Microsoft said that if the deal is approved, it will take a $550 million pretax charge against earnings in its current, second fiscal quarter. Wall Street analysts currently estimate that Microsoft will earn 49 cents per share for the period, according to Thomson Financial/First Call.
The private suits arose after the U.S. government filed its own antitrust case, now also up for settlement, against Microsoft in 1998. Some suits were dismissed, because consumers were found not to have standing, having only gotten the software when they bought a PC. The remaining suits were consolidated under the federal judge in Baltimore, who has the power to include all of them in the settlement.
The current settlement was hammered out by lawyers Michael Hausfeld of Cohen, Milstein, Hausfeld & Toll in Washington and Stanley Chesley of Waite, Schneider, Bayless & Chesley in Cincinnati as well as other antitrust attorneys. In statements and interviews, Hausfeld and Chesley said they came up with the settlement because they determined a cash settlement or trial would result in less than $10 being returned to each plaintiff, and would take years to pay out. The settlement they crafted, they say, benefits schools, children and the country at large now, while forcing Microsoft to pay up.
But Crew, the California attorney, says the other lawyers crafted the settlement after setbacks in court.
"These people had a case that was totally dismissed. They had no class certified and no trial date. So what does Microsoft do? Microsoft secretly contacts their lawyers and without our knowledge or consent negotiates a settlement in the dark that would include California, and then they spring it on us now for the first time in the press," Crew says. He also alleges Microsoft is trying to get kids "hooked" on its software when they're young to make future customers out of them.
Chesley disputes the strength of Crew's case, though, and says he has plenty of California plaintiffs on his side.
"We have the Los Angeles Board of Education and most of California's cities thinking this is a phenomenal deal," says Chesley, who emphasized that his fees would be determined by the judge and not Microsoft. "It's nice to cast Microsoft as Public Enemy No. 1, but they're still a national asset. It's not like they're giving kids cigarettes or breast implants."
For its part, Microsoft says it's pleased to have the opportunity to settle the suits in such a unique and beneficial way. And it also says it's not making a grab for Apple's school market, because schools will be allowed to choose what kind of computers and software they want to buy and learn on.
"If you choose to interpret it that way, that's your decision," says Matt Pilla, a Microsoft spokesman. "But no matter how you slice it, it's a good thing for kids and its platform-agnostic. If a school needs to have a specific technology, whether it's Mac or PC, that's their choice."