The US Court of Appeals quashed government trustbusters' efforts to split Microsoft into two companies last month (CRN, 4 July). However, the software giant isn't out of the woods yet.

After the long-awaited decision, which also absolved Microsoft of trying to monopolise the Web-browser market by integrating its Internet Explorer browser with its Windows operating system, many resellers are breathing a sigh of relief. They now know they won't have to incur the administrative headaches, added expense and inevitable business interruption that a Microsoft break-up would have caused.

Yet the fact the Court of Appeals agreed with the US District Court that Microsoft violated the 1890 Sherman Antitrust Act by "employing anti-competitive means" to maintain a monopoly in the operating system market implies the company won't be able to use that strategy in the Internet era.

Some of Microsoft's partners are pleased the software vendor won't be split in two, but a number of them say significant restrictions are appropriate to establish a more level playing field in Web services.

Andy Kass, a partner at Array Technologies, a US-based reseller, has never supported a break-up but feels Microsoft should be monitored closely.

"The bottom line is Microsoft can now do essentially anything it wants, short of napalming Pittsburgh, regardless of how it affects any vendor or end-user. Dispelling this myth of invincibility is a worthwhile result for all concerned," he said. "If this textbook case of anti-competitive behaviour by a dominant market player does not result in a real penalty, the antitrust laws are meaningless and the phrase 'free market' will become meaningless."

Enforcing business ethics, not policing product integration, is essential for protecting competition, said Joe Ivison, chief executive of US-based e-commerce reseller Superior IS. "Microsoft needs to have some restraints placed on its conduct," he said.

Even Microsoft chairman Bill Gates, anxious to end his three-year battle with the US Department of Justice (DoJ), humbly acknowledged last week that the case isn't over and it won't be business as usual for Microsoft at any time in the near future.

As the Court of Appeals remands the case to a lower court to determine the penalty for Microsoft's antitrust violations, the company's attorneys are considering an appeal against the ruling to the US Supreme Court.

In addition, several state Attorneys-General have vowed to appeal, with or without help from the federal government, to protect consumers as the Internet-services era dawns.

"Today's decision overturned many of the findings, but not all. We need to determine what actions to take," Gates said at a press conference following the decision, roughly a year after US District Court Judge Thomas Penfield Jackson ordered that Microsoft be broken up. "Most of the licensing provisions cited today by the court were discontinued years ago. But we'll be reviewing them in the light of today's decision and will work hard to resolve the issues without the need for continued litigation," he said.

The Court of Appeal's decision, which questions Jackson's impartiality and bars him from presiding over the remedial phase, paves the way for a negotiated settlement between Microsoft and the government, industry observers say.

In a press conference on the decision, US Attorney-General John Ashcroft and DoJ officials said a settlement is not out of the question. Other DoJ officials said the agency will consider a settlement only under certain conditions. "We'd be willing to entertain a settlement proposal if it addressed the anti-competitive issues (that the Court of Appeals cited)," said one official who wished to remain anonymous.

Since the Microsoft case began, competing operating system technologies such as Linux have emerged and flourished. But industry analysts, and the Court of Appeals, have not overlooked the fact that Microsoft's Windows hegemony only grew stronger as the case ran. Windows's market share has surpassed 90 per cent in the desktop segment and 40 per cent in the server segment, according to research firm IDC.

The antitrust decision also does not clearly define whether Microsoft has the legal right to integrate Internet technologies and services into its Windows and Office desktop products.

In its 125-page ruling, for example, the Court of Appeals reversed an earlier ruling that such integration amounted to "illegal tying", but at the same time declared some actions taken in the integration of Internet Explorer with Windows to be illegal and remanded that issue to the lower court for deliberation.

For all practical purposes, however, Microsoft's legal shackles have been removed, experts say. "Microsoft will be free to do what it wants with Windows XP and dot Net," said Nicholas Economides , an economics professor at New York University's Stern School of Business. "The case for tying (Internet Explorer and Windows) was dismissed by the Court of Appeals. It is a problem for the government's case."

Until a new case is brought, Microsoft will not feel restrained in driving its new technologies, Economides claimed. "The decision is likely to put some restrictions on those things, but it won't hit Microsoft that much."

During a press conference with Microsoft attorneys, the firm's chief executive, Steve Ballmer, said he saw the court's highly "technical, precise" distinction between co-mingling and "illegally tying" Internet Explorer with Windows as a green light for product integration. "It's the most significant guidance we get on our plans to continue with the Windows XP product as currently defined," he said.

"There's nothing in the ruling about HailStorm, and our view is that we'll continue with innovations we have planned in the Web services area," said Ballmer, when asked if the ruling could affect Microsoft's plans to integrate Internet services with Windows XP.

Still, resellers concerned about Microsoft's Web-services strategy said the industry will benefit more if the government pursues remedies that monitor how the company writes contracts with OEMs and independent software vendors (ISVs), rather than how it writes software.

"Times have changed, even since the initial ruling. Microsoft is feeling more competitive heat," said Chris Ferry, senior vice-president at systems integrator Bell Techlogix. "There are better remedies than breaking it up, such as more controls on its marketing and bundling practices."

When the Court of Appeal's decision emerged late last month, both sides claimed victory. Though the ruling favours Microsoft on two of three key legal issues, the court's affirmation of "limited liability" on the monopoly charges will make it tough for the new DoJ, under the Bush administration, to give Microsoft just a slap on the wrist, observers say.

"It's hard to conclude if Microsoft has won a tremendous victory or suffered a tremendous loss," said Alex Edelstein, a fund manager at Gemstone-Edelstein Capital, who worked at Microsoft from 1991 to 1995.

"I would like to see an environment where Microsoft can compete effectively and small companies can compete against it without worrying that Microsoft will illegally use its monopoly contract for the Windows operating system against them," said Edelstein, who also worked at Netscape Communications from 1995 to 1997 and served as assistant to former Netscape chief executive and Microsoft nemesis Jim Barksdale. "It definitely is the case that if some sort of regulatory action isn't taken, there really won't be any reason for Microsoft to change its behaviour," he added.

The conduct remedies may be as challenging as a break-up, argued John Hitchcock, vice-president of marketing at eForce, a US-based professional services firm. "They'll still be under heavy scrutiny," he said. "I think that the 'Big Brother' effect will continue to be there."

Frustrated partners say Microsoft has already resolved some issues with internal changes, as well as with its support of industry standards such as XML for its dot Net platform over its proprietary Windows APIs.

"If you think about when the trial commenced and where Microsoft is today, it's a vastly different organisation with a different strategy: software as a service," said Dave Castellani, chief executive of Mi8, an ASP. "The dot Net platform is an honest, genuine, open architecture move for them.

If you really understand how Microsoft is organised, you'll know that it is already broken up. It is not a big company. It's a lot of little companies that act in an entrepreneurial way and compete with each other. This creates the ability for them to change on a dime."

On the server side, the Linux oper-ating system remains Microsoft's greatest threat. Linus Torvalds, the leader of the Linux movement, said the court's decision is on target but won't have much impact on the commercial progress of Linux. "It matters much more for companies like AOL and Sun than it does for Linux," said Torvalds, who owns the trademarked Linux name. "A Microsoft split-up would have been interesting from an 'industry needs a good jolt' angle, but I'm not in the business. I thought the ruling was quite fair."

Yet one ISV said the ruling may have erased any chance of competition.

"Whether or not you believe Microsoft abused its position and acted in a monopolistic fashion, by overturning the ruling the courts are giving Microsoft a green light to do it again," said Rick Onyon, president of FusionOne, which hopes to compete with one of Microsoft's HailStorm services.

"The court has given out the message that companies can get away with monopolistic and predatory behaviour."

Bill Coleman, chief executive of e-commerce software vendor BEA Systems, lauded the decision, because it accounts for the possibility of future anti-competitive conduct by Microsoft. "Now that they've been judged guilty of antitrust behaviour, the remedy will be cultural, which allows the government to enact restraints on future behaviour," Coleman said. "Now Microsoft's intended behaviour with HailStorm, which we think is anti-competitive, can be brought up in the remedy phase."

THE MICROSOFT CASE: A RECAP

1993

- August: US Department of Justice (DoJ) takes over Federal Trade Commission investigation examining possible collusion between Microsoft and IBM.

1994

- July: Microsoft and DoJ sign consent decree that says Microsoft cannot require computer makers licensing its Windows operating system to also license other software. Decree doesn't prohibit Microsoft from developing 'integrated products'.

1995

- February: US District Court Judge Stanley Sporkin rejects consent decree as too easy on Microsoft.

- June: Federal appeals court reverses Sporkin's ruling and upholds consent decree. Sporkin is removed from the case, which is then transferred to US District Judge Thomas Penfield Jackson.

- August: Jackson approves decree.

1996

- September: DoJ begins probe of Microsoft's integration of its Internet Explorer browser with its Windows 95 operating system (OS).

1997

- October: DoJ files petition alleging that Microsoft violated the consent decree by bundling Internet Explorer with Windows 95.

- December: Jackson issues preliminary injunction that bars Microsoft from requiring computer makers to install Internet Explorer as part of Windows 95. Microsoft offers computer makers a version of Windows 95 without Internet Explorer. DoJ says this does not obey the injunction and asks Jackson to hold Microsoft in contempt.

1998

- January: Microsoft reaches an agreement with DoJ to give computer makers the option to install Windows 95 without the Internet Explorer icon.

- May: DoJ and 20 states file a major antitrust suit against Microsoft, alleging that the software company abuses its market power to stifle competitors.

Federal and state cases are later combined. Earlier in the month, the appeals court had ruled that Jackson's December 1997 injunction should not apply to Windows 98, which came bundled with Internet Explorer.

- October: Antitrust trial begins, with Jackson presiding.

1999

- August: Antitrust trial concludes.

- November: Jackson issues 'findings of fact' stating that Microsoft holds monopoly power and has harmed competitors and consumers. In an attempt to reach a settlement, Jackson refers the case to Richard Posner, chief judge of the US 7th Circuit Court of Appeals, for voluntary mediation.

2000

- April: Days after Posner ends the fruitless mediation talks, Jackson rules that Microsoft abused its monopoly status.

- June: After remedy proposals stall, Jackson orders Microsoft to be split into two separate companies: one for its Windows OS and one for other software, including Internet Explorer. Microsoft appeals the decision to the US Court of Appeals. Jackson grants DoJ's request to send case to the US Supreme Court.

- September: Supreme Court refuses to hear case and returns it to the Court of Appeals.

2001

- June: Court of Appeals overturns Jackson's order to break up Microsoft but rules that the company did violate antitrust laws. The case is remanded to a lower court under a different trial judge to determine the penalty for Microsoft's anti-competitive behaviour.