WILL RENO BRAKE WINDOWS?

By MICHAEL KRANTZ

Janet Reno stood steely-eyed before the microphone, the Attorney General Like She Oughta Be, bringing bad guys to heel on behalf of the American populace. The bad guy in question last week was the software titan Microsoft Corp. The Justice Department's antitrust division, led by new chief Joel Klein, claims the software colossus violated the terms of a 1995 agreement that bars the company from using its operating-system dominance to strong-arm PC makers such as Compaq Computer Corp. and Micron Technology into installing additional Microsoft software on their machines, thus squeezing out competitors.

The strong-arming in question this time around is Microsoft's charming practice of requiring its hardware partners to plant its Web browser, Internet Explorer, onto the desktop of every PC they make, or lose the right to sell Windows 95 computers--which, since Windows operating systems now run some 85% of PCs in the U.S., is roughly equivalent to going out of business. Microsoft, Reno said, "is unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly and undermine consumer choice." In other words, it's O.K. to be a monopolist only if you don't act like one. Reno is asking the federal district court to order Gates to drop the Explorer demand or pay the startling fine of $1 million a day.

The action makes for a potent political Rorschach test. Lefty Naderites see a portent of renewed federal antitrust activism. Right-wing anti-Clinton crazies divine a canny scheme to distract CNN from Reno's sluggish investigation of her boss's social calendar. Uber-capitalist high-tech buccaneers see a gaggle of clueless D.C. bureaucrats who they nonetheless hope will stick Bill Gates' severed head on a pike. And those lucky souls blessed with Microsoft stock options see the Beltway's latest ill-advised attempt to slay a goose that just wants to keep on laying golden eggs.

The problem, of course--or at least the uncomfortable truth--is that Bill Gates clearly wants to own all the eggs, not to mention the henhouses, the cartons, the supermarkets and the other geese. What's more, there's no immediately apparent reason why he can't. His Windows hegemony gives Gates an often insuperable lever that he has never been shy about using to elbow his way into the market for the countless applications, from spreadsheets to encyclopedias, that live on today's PCs. In testimony heard by Justice this fall and made public last week, one PC executive after another described how Microsoft's absolutist licensing agreements forced them to feature Explorer on their machines.

Compaq's tale of woe was particularly striking, if only because it demonstrates how even the world's largest PC maker can find itself laid out like an errant child across Bill Gates' knee. Stephen Decker, Compaq's director of software procurement, told Justice lawyers what happened in the spring of 1996, when Compaq told Microsoft it intended to replace Explorer on its Compaq Presario desktops with Explorer's primary rival, Netscape Navigator. Soon afterward Compaq received a Microsoft letter terminating its Windows 95 licensing agreement, followed days later by a second letter offering to reinstate Compaq into Gates' good graces if the Explorer icon were restored within 60 days.

Which, of course, it was. The Justice Department, said Reno, "won't tolerate any coercion by dominant companies in any way that distorts competition."

When it comes to Microsoft, however, Justice generally does. Gates bailed on his proposed acquisition of financial software giant Intuit after Justice objected, but for the most part the agency has spent recent years attempting to slap Microsoft down, only to cut wimpy deals that left the company more deeply ensconced than ever.

This time might be different, though the outcome of the present imbroglio matters primarily as a harbinger of the momentous battle looming on the horizon. The current, narrowly focused suit hinges on whether Explorer is already an "integrated" portion of Windows--in which case Microsoft has the right to force PC makers to include it--or remains an independent product piggybacking on Windows, which would leave Microsoft in violation of the '95 deal. "They've treated it as a separate product," says Netscape general counsel Roberta Katz. "They've advertised it separately; they've produced it separately; they've sold it separately."

But next year Gates plans to integrate Explorer into Windows 98, in keeping with his belief that navigating your PC should be no different from cruising the Web itself. "We don't think we can make an operating system in the late 1990s," says chief technology officer Nathan Myhrvold, "that doesn't integrate with the Net."

And there's the rub. Web browsers began as simple products that let users access Web pages, but they are swiftly evolving into full-service communications programs. Netscape, for instance, whose Communicator browser retains a large market lead over Explorer, has steadily upgraded Communicator with new applications--E-mail, groupware, newsreaders--just as Microsoft does with Explorer. Browsers, Klein says, "could erode Microsoft's operating-system monopoly, because browsers take computing beyond the desktop, where Microsoft rules, and into the world of the Internet, where no one is dominant."

At least not yet. But if the Net really is tomorrow's indispensable info appliance, and if Microsoft manages to merge the software that takes us there into Windows, the results will be dramatic. Suppose that, say, five years from now 98% of the world's computers run Windows 2001 (the only holdouts being aging potheads still designing really cool fractal algorithms on Macs). And suppose Gates, hoping to become the world's leading media titan, stops letting entertainment that Microsoft doesn't control be accessed by Windows machines.

Unthinkably evil, you say? Well, he's already taken a tentative step in that direction. Try to access Microsoft's popular online gaming site, the Zone, using Netscape's browser or a Mac machine for a taste of the power Gates could eventually wield. "We're sorry," reads the otherwise blank page. "The new Zone doesn't currently support Microsoft Windows 3.x; or Apple Macintosh or Unix (R) operating systems, or Microsoft Internet Explorer version 2.0 or Netscape Navigator browsers." Resistance is futile.

Stunts like this are why even many Silicon Valley libertarians secretly hope Justice reins in Gates before it's too late. Klein confirmed last week that his investigation of Microsoft remains "ongoing and wide-ranging." Microsoft's planned integration of Explorer into Windows 98 could trigger the most critical antitrust battle since the feds broke up Ma Bell in '84. Gates understands that the browser is the soul of the new machine that will carry us all into the 21st century, and he won't back down. "The point of antitrust law," Myhrvold argues, "is to say, 'Is there a situation that will harm consumers' interests?' And we feel very strongly that, no, this doesn't harm consumers." The size and complexity of operating systems grow over time, he says, as powerful new features are added. "That was true long before Microsoft was a corporation." The company has made billions by steadily improving a product that has won millions of customers, contributing immeasurably to America's economic boom in the process. Merging Explorer into Windows is just the next step in a natural evolution.

At any rate, it's unclear how effective industrial-era antitrust law can be in an age when any enterprising teen can, in theory, invent a new word processor on his laptop and kick Word's butt. The Web is the ultimate free market, whose invisible hand works with irresistible force, even on what seem to be immovable objects.

Popular opinion, for instance, once held that only Justice could topple IBM's hardware hegemony, but the market proved a far better Big Blue buster than the feds. And two years ago, the irresistible force in online services was supposed to be the Microsoft Network, which, like this year's Explorer, came bundled into every last Windows machine. Instead, MSN floundered and AOL cleaned its clock. Microsoft may yet get its comeuppance (Java, anyone?), but digital history suggests it will come not from Washington but from some hitherto obscure geek who--just like young Bill, once upon a time--shatters the old mold with a better idea.

--With reporting by Bruce van Voorst/Washington

With reporting by Bruce van Voorst/Washington