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US government U-turn spells defeat for Microsoft break-up

Rupert Cornwell
Friday 07 September 2001 00:00 BST
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The US Government said yesterday it would no longer seek the break-up of Microsoft, the world's largest and most powerful software manufacturer, as President George Bush's Justice Department reversed the policy of the Clinton administration. The about-turn removed a giant uncertainty over the future of the company.

Instead, the government said it would seek to secure a quick decision on the penalty to be imposed after Microsoft was found guilty last year of breaking US anti-trust laws to defend a quasi-monopoly position in personal computer software. The move, the Justice Department insisted, was to "obtain prompt, effective and certain relief for consumers".

For the same reason, the government is dropping its complaint about Microsoft's Explorer web browser being tied in with the Windows operating system. To pursue the tying claim "would only prolong proceedings and delay the imposition of relief that would benefit consumers".

In the longer term the ruling is being seen as a huge victory for Microsoft – one which banishes the huge costs and logistic nightmare of a court imposed split. But it will have no impact on the most important factor weighing on the company's immediate prospects: the dismal state of the personal computer market.

That was why, after a brief surge after the announcement, Microsoft shares fell back by mid-morning to stand 60 cents below Wednesday's close of $57.74 (£39.55). One analyst said: "Without an upturn in the PC market, it's hard to see how Microsoft can do well, even with the introduction of Windows XP," the updated operating system for which shipments to stores are due to start in October.

Yesterday's developments leave Microsoft's punishment squarely in the hands of Colleen Kollar-Kotelly, the federal judge named on 24 August to handle the case.

Her appointment came after a complex legal battle which had seen the original court order of April 2000 for a break up of Microsoft overturned by a federal appeals court on the grounds that the first judge, Thomas Penfold Jackson, had shown personal bias against the company.

But it did not dispute Judge Jackson's central finding, that Microsoft had indulged in illegal monopolistic practices. Microsoft then announced it was appealing the entire case to the Supreme Court, a move widely taken as a delaying tactic to prevent any judicial interference with the launch of Windows XP.

The Justice Department, however, promptly declared it saw no grounds for any appeal, and urged both sides to get together by 14 September to begin talks on a final settlement. Judge Kollar-Kotelly, a Clinton appointee who is famous for her no-nonsense approach to cases, has made known she intends to respect that timetable.

With the split-up option off the table, the question now is what penalty will be imposed, amid allegations that with Windows XP, Microsoft is using some of the same tactics held to be illegal in the original trial.

Stephen Houck, a former lead attorney for several US states against the company, said the government's announcement "was no big surprise, nobody really thought that after all this time Microsoft would simply be broken up. I think they'll try to be forward looking and make sure the same thing doesn't happen again with Windows XP".

Defending its decision, the Justice Department said it had "established a basis to end Microsoft's unlawful conduct, prevent its recurrence and open the operating system market to competition". For its part, Microsoft merely said it remained committed to "resolving the remaining issues in the case".

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