US v Gates: Microsoft given bloody nose by browser monopoly ruling

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Bill Gates and his computer software giant, Microsoft, put on a brave face yesterday after a US judge ruled that the company had unfairly exploited the virtual monopoly enjoyed by its Windows 95 system and instructed an immediate change in marketing practices. But while the short-term cost to Microsoft is limited, the long-term damage to the reputation of Mr Gates may be more severe. Mary Dejevsky reports.

The US government had brought the case against Microsoft, claiming that the company had broken the terms of a two-year old legal agreement designed to preserve open competition in the US software market. Late on Thursday, several weeks earlier than expected, the judge, Thomas Penfield Jackson, announced his verdict: a 90 per cent victory for the government - and a corresponding defeat for Microsoft.

The judge ruled that Microsoft "shall cease and desist ... from the practice of licensing the use of any Microsoft personal computer operating system software (including Windows 95 or any successor version thereof), on the condition that the computer manufacturer also install its browser software". In other words, Microsoft may not require computer-makers to accept Microsoft's browser, Internet Explorer as a condition for taking its Windows 95 operating programme.

The ruling is a preliminary one. The judge also appointed a specialist in the field, a law professor, Lawrence Lessig, to consider all the facts and report by 31 May.

The ruling that Microsoft may not link its two products in the interim, however, represents a further defeat for the company. Both Microsoft and its chief rival in the browser market, Netscape Communications Corp, with its Netscape Navigator, are set to compete for expiring licensing agreements in this period, and Netscape feared (and government lawyers argued) that Microsoft would try to crowd it out of the market. The vice-president of Netscape, Lori Mirek, said the decision restored a "level playing field" in the browser market and would allow Netscape to compete to have its browser pre-installed by computer makers. A Microsoft spokesman said it believed the legal review would vindicate the company. "We're confident," he said, "that once the court has reviewed all the facts it will agree that Microsoft complied fully with the consent decree and that Microsoft's integration of Internet Explorer with Windows 95 is good for consumers."

The one consolation for Microsoft is that the judge denied the government's request that it be considered in contempt of the 1995 agreement. This could have made it liable for fines of up to $1m a day.

The chairman of Microsoft, Bill Gates, was spreading his company's gospel in Peking when the ruling was announced and declined to comment beyond saying that the competition with Netscape would continue. "They'll have a new version, we'll have a new version. It's a healthy competition that you expect in the computer software market," he told his student audience. "It's not a business where anybody has a guaranteed postition - even Microsoft, with all its success," he said, forecasting that speech-recognition was the next computer frontier. But the benevolent image of Mr Gates is probably gone for good.

This is the second ruling against the company recently - the first found in favour of Sun Microsystems, which had complained that Microsoft was unfairly using and altering its Java system for its own purposes. It prevents the company from fully exploiting the dominance of Windows during a crucial period. And it deprives Microsoft of its reputation as a new-style consumer- friendly company, an undoubted marketing asset in the past.

Yesterday some analysts predicted that Microsoft would have to delay the launch of its new version of Windows, expected in mid-1998, because it had planned to integrate the browser.

For the US government, the head of the Justice Department's anti-trust division, Joel Klein, said consumer choice had been re-established. "No consumer should be denied the browser of its choice because Microsoft made their computer vendor an offer that their vendor couldn't refuse."

Shares in Microsoft Corp fell by 1.31 dollars to 137.75 in early trading in New York yesterday - less than some had predicted - while Netscape gained 2.50 to 28.75.