Could Microsoft Have Settled?

The Justice Department and its state co-plaintiffs are reportedly going to propose this week that Microsoft should be broken up into two companies. Microsoft’s stock price has plunged on this news. Many observers say the company should have agreed to a settlement in talks that broke down four weeks ago. Based on published reports, what deal did Microsoft pass up?

The deal the Justice Department was offering during four months of negotiations focused on rules restricting Microsoft’s behavior rather than breaking up the company. The details will not be officially released, but there have been leaks of the general propositions and Microsoft’s objections to them.

The Justice Department’s proposed deal would have barred Microsoft from:

  • charging more for the Windows operating system to computer manufacturers who installed a competing Internet browser or who didn’t make Microsoft’s Internet Explorer the default browser (Microsoft reportedly was prepared to accept this);
  • raising the price of old versions of Windows as new versions were released, in order to increase sales of the new version (also OK);
  • “tying” software, that is, requiring manufacturers who wanted Windows to install other Microsoft software-essentially Internet Explorer (the major sticking point: Microsoft believes Internet Explorer is an integral part of Windows and that this rule would doom Windows by outlawing future improvements);
  • contracting Internet service providers to feature Internet Explorer to the exclusion of other browsers (this issue is moot: Microsoft no longer demands such exclusivity).
  • Microsoft would also have had to publish its “APIs” (the underlying code that allows programmers to write Windows-compatible software) as soon as Microsoft programmers receive them (OK in principle, though the specifics were not worked out).

So only the tying issue apparently stood in the way of agreement. But Microsoft and the Justice Department were not even close on that one.

Complicating the negotiations were the state antitrust suits filed by 19 state attorneys general. No Justice Department settlement would have been binding on the states, and it appears that Microsoft wasn’t going to settle unless all or nearly all of the states were ready to agree to the Justice Department’s terms, too. Some of the AGs thought the Justice Department proposal was too soft, and some were peeved at the Justice Department for mostly ignoring them during the negotiations.

Next question?