By Matt Rosoff [Bio]
Posted: Dec. 10, 2001

• Sidebar: Settlement Terminology Defined

Facing a Dec. 16 deadline, Microsoft is making changes to comply with the consent decree it signed with the Department of Justice (DoJ) and nine states in Nov. 2001. The consent decree—the document that Microsoft and these plaintiffs signed to settle their antitrust case—places restrictions on Microsoft's behavior that will create some benefits for OEMs, ISVs, other partners, and consumers.

With this date in mind, Microsoft CEO Steve Ballmer and Associate General Counsel Dave Heiner sent a memo to all Microsoft employees outlining specific changes they must make effective Dec. 16. (Although the decree will not be officially approved until Feb. 2002 at the earliest, its provisions will be retroactive to Dec. 16, 2001.) This is the first time Microsoft has given its entire staff specific guidelines on how to avoid antitrust problems and indicates that the company is taking the consent decree seriously, rather than risking further litigation by brushing it off.

Determining the true effects of the consent decree is difficult, partly because the parties chose to define some familiar computing terms in new and unfamiliar ways. (See the sidebar "Settlement Terminology Defined".)

Gains for OEMs

Overall, OEMs are the clearest beneficiaries of the settlement, winning a more consistent pricing scheme for Windows, the chance to enter new kinds of business agreements, and the ability to use different software configurations to appeal to consumers.

Uniform Pricing

Microsoft must sell Windows to the 20 largest OEMs at a uniform and openly published price. Volume discounts are allowed, as long as they're published and offered in an equal fashion to all covered OEMs. Market development allowances and other types of discounts are still permitted, as long as they are

• Published in a public schedule
• Offered at a uniform rate for the 10 largest OEMs, and another uniform rate for the next 10 largest OEMs
• Consistent with other parts of the consent decree (e.g., OEMs could not get a price break for agreeing to distribute Internet Explorer (IE) exclusively or in any fixed percentage, both of which are forbidden by the decree)
• Based on "objective, verifiable criteria" (e.g., OEMs could get a standard price break based on the number of users who sign up for MSN Internet Access from their PCs).

The recent memo to employees said that the OEM sales group was working to establish new standardized price lists. Previously, Microsoft determined the price of Windows for each OEM in closed-door, case-by-case negotiations, offering lower prices to OEMs who cooperated with Microsoft in key areas.

Uniform pricing for Windows will help OEMs estimate their cost per unit more effectively and will help OEMs who previously did not have a friendly relationship with Microsoft to compete better with OEMs that did.

More Choice in Software

According to Microsoft, OEMs are already free to install and promote any "non-Microsoft middleware product," such as a competing Web browser or media player. The consent decree makes this freedom legally binding and also gives OEMs the explicit freedom to bundle competing operating systems (OSs) and promote non-Microsoft ISPs during the initial startup sequence.

In addition, Microsoft must for the first time provide a mechanism for OEMs and end users to completely remove access to any "Microsoft middleware product," such as IE or Windows Media Player, including all icons, shortcuts, and Start menu entries. Similarly, Microsoft must for the first time provide a mechanism for OEMs and end users to change the default application for a specific function—for example, to launch RealPlayer rather than Windows Media Player whenever a video file is selected. (After a 14-day grace period, Microsoft is allowed to pepper the user with messages to change defaults back to a Microsoft product.) According to the recent memo, teams in the Windows group are working to create these mechanisms for the first Windows XP service pack.

These provisions open some new revenue opportunities for OEMs. For example, they could charge an ISV a premium to remove competing Microsoft middleware products and make the ISV's software the default. In addition, these provisions will help OEMs differentiate themselves by offering specialized software configurations for picky customers—especially those who want to avoid Microsoft products when possible. However, each OEM is unlikely to offer more than one or two alternate configurations, given the higher cost of manufacturing PCs with custom OS images.

No Retaliation

Of course, these provisions are moot if Microsoft punishes OEMs that try to take advantage of them. According to the consent decree, Microsoft cannot retaliate against any OEM by changing its commercial agreement (e.g., terminating a license agreement) or by withholding other forms of "consideration" (e.g., technical support; information about products and future plans; certifications; and logos).

Nonetheless, Microsoft interacts with hardware vendors on so many levels that there are many subtle ways it could favor certain OEMs, such as referring large accounts to their consulting arms or stocking its own data centers with their products.

Gains for ISVs and Other Parties

ISVs and other parties will benefit from the consent decree in other important ways, apart from the ability to promote their offerings via new agreements with OEMs.

Desktop placement. Microsoft may not enter into any agreement in which it offers favorable desktop placement to an ISV, ISP, or content provider in exchange for a promise to refrain from using or promoting a non-Microsoft middleware product. This will make it easier for these parties to enter into and maintain mutually beneficial relationships against Microsoft's wishes.

For example, in summer 2001, Microsoft and AOL were renegotiating a contract that had put an AOL icon in the "Online Services" folder of every Windows desktop PC. AOL also had an existing agreement to bundle RealNetworks' RealPlayer with AOL's access software. According to AOL, Microsoft offered it a deal: AOL could keep its place in the Online Services folder if it dropped its agreement with RealNetworks and bundled the Windows Media Player instead. (Microsoft denies this account; see "AOL and Microsoft: Nothing to Talk About" on page 28 of the Aug. 2001 Update.) Under the consent decree, this kind of agreement would be illegal.

No exclusive distribution deals. Microsoft may not offer any form of consideration to any OEM, hardware vendor, ISV, ISP, online service, or Internet content provider on the condition that these parties distribute, use, promote, or support the Windows OS or any Microsoft middleware product exclusively or in any fixed percentage.

Microsoft can still pay a bounty to these partners—for example, it could pay an OEM US$35 a head for each system purchaser who chooses MSN Internet Access. But other companies can offer OEMs similar bounties, allowing them to compete more effectively.

Alternate desktop platforms. Microsoft may not enter into any agreement with any ISV that denies them consideration if they develop, use, distribute, or promote an alternate desktop OS, or any product that runs on an alternate desktop OS. This provision pointedly excludes the server OS market, where Microsoft faces its greatest competition. Nonetheless, if an ISV finds it commercially viable to develop for the Mac or for a desktop version of Linux, it can do so without fearing retaliation.

Disclosure of APIs. Microsoft must disclose all APIs in the desktop OS that are used by Microsoft middleware products to communicate with the OS. This applies even if the middleware products are updates or patches released between versions of an OS. So, for example, Microsoft might put out an updated version of Windows Media Player, with new functionality enabled by previously undocumented APIs in Windows. However, it must provide these same APIs to competitors no later than the last major beta release of this update. This will make it possible for competitors (such as RealNetworks) to offer updates with similar functionality in a reasonably timely manner.

This provision won't lead to a whole new generation of non-Microsoft software, though, because it does not apply to applications such as Office that Microsoft distributes separately from Windows. In addition, this provision says nothing about middleware-to-middleware APIs. For example, IE might use a Windows Media Player API to incorporate Media Player's video playback functionality within the Web browser. Microsoft might not have to disclose this API to give Netscape Navigator the same ability.

Disclosure of communication protocols. Microsoft must make available all protocols that the desktop version of Windows uses to interoperate natively with a Microsoft server OS. This could make it easier for ISVs to create Windows-based clients that interoperate natively with Windows servers, and to create server products that mimic certain functions of a Windows server. Examples of covered communication protocols could include Microsoft’s implementation of TCP/IP and the Server Messenger Block (SMB) protocol used for file operations (such as file access and transfer) between clients and servers.

Authentication protocols are specifically excluded from this provision. Without this exception, Microsoft could have been forced to disclose, with no restrictions, all the details of Windows 2000's extensions to the Kerberos authentication protocol. In turn, this could have allowed a competitor such as Sun to build software mimicking the functions of a Windows 2000 domain controller (as Sun and others did for Windows NT 4.0 domain controllers).

Changes at Microsoft

To comply with all these provisions, Microsoft itself must undergo some fairly significant changes. In addition to the noted effects on the Windows and OEM sales groups, the recent memo also warned Microsoft's business development groups to consult the Law and Corporate Affairs team before making any business deal that takes advantage of an exception in the consent decree. Also, according to the memo, Microsoft is creating an internal compliance committee to ensure that employees will comply with the terms of the settlement. Presumably, this compliance committee will be headed by an internal Compliance Officer, as outlined in the consent decree. This Compliance Officer need only be an "employee"—not an executive or director—and has fairly simple administrative duties, such as briefing officers and directors on an annual basis regarding compliance.

But the most significant change in Microsoft's day-to-day business won't happen until the court approves the consent decree. This cannot happen until a public comment session ends in Feb. 2002, and there's a slim chance it might be amended or rejected altogether. (For a complete rundown of possible scenarios, see "Microsoft Wins Antitrust Battle, War Will Continue" on page 30 of the Dec. 2001 Update.)

But if and when the consent decree is signed, a three-person technical committee (TC) will be established at the Microsoft campus in Redmond, WA. One member of this TC will be appointed by the DoJ and other plaintiffs in the case, and will probably be tough on Microsoft. Microsoft will appoint one of the other members; these two members will appoint the third. With reasonable notice, any member of the TC—and any consultant or expert the TC wants to use for advice—may interrogate any employee (employees may have counsel present), look at source code to any product, gain unfettered access to any facility, and read and copy any document in the possession, custody, or control of any employee (although this does not explicitly include e-mail messages).

Even though the TC may share uncovered information only with the plaintiffs, this nonetheless represents an unprecedented intrusion into a corporation's private business affairs, and leaks to the media or competitors are conceivable.

The full text of the consent decree is at www.microsoft.com/presspass/trial/nov01/11-06revised-annotated.asp.