The Main Event

By MICHAEL KRANTZ

Ted Zang spent the morning of Thursday, May 14, standing outside the U.S. District Courthouse in Washington, gripping a bulging briefcase and waiting for his damn cell phone to ring. The reporters rushing past him on their way to the daily Monica stakeout, he knew, were missing out on a more important story. Zang is an antitrust lawyer for New York attorney general Dennis Vacco, and that briefcase bore a thick stack of documents ready to be filed by 20 states in uneasy tandem with the Justice Department's antitrust suit against the world's most powerful software company: Microsoft.

Well, as we know by now, a last-minute overture by CEO Bill Gates sent Zang back to his office and the two sides into testy weekend negotiations. But as we also know, those talks fell apart almost before they began, and by last Monday, Zang and his heavy briefcase were mounting those courthouse steps once again.

The chief irony of the past week's convoluted maneuverings is that each side in the biggest antitrust case in two decades knew where its counterpart stood well before the conflict's looming D-day--Microsoft's May 15 deadline for giving its new operating system, Windows 98, to PC manufacturers. DOJ antitrust chief Joel Klein believed that the ways Microsoft uses its Windows monopoly to dominate other markets violate antitrust law, and that the company had to be reined in lest it gain a choke hold on the Internet. Gates felt otherwise, and had long since made it clear that he would rather fight than switch business models.

So when the DOJ suit was postponed, the state attorneys general who convened at the Justice building were naturally curious to learn why. Klein explained that Gates had called the night before, offering what appeared to be real concessions, including easing restrictions on what PC makers could put on their opening screens. That hardly squared with Gates' longtime obstinance on such matters, but Klein, whose sensitivity to politics and diplomacy would have made him a standout at the State Department, was willing to go the extra mile just in case. The states, however, were determined to maintain strategic independence. So the participating lawyers--from New York, Iowa, Texas and Connecticut--left the room to have a conference call with their counterparts before accepting Klein's requested delay.

Thus was set the pattern of two tortured days of talks among the three parties in this complex dance: Justice trying to cover every last base before launching one of the biggest antitrust actions ever; Microsoft hoping to learn as much as possible about the DOJ's case without actually surrendering any serious ground; and those state attorneys general, who at the Monday press conference distributed bios along with their press releases, clearly relishing their role as Joel Klein's conscience. "Quite frankly," Vacco confides, "until last week we weren't 100% sure the Department of Justice was going to sue."

Perhaps that's because until that weekend, Klein wasn't 100% sure that he would have to. As soon as the Microsoft team arrived on Friday, though, chief counsel William Neukom, whom Justice sources consider an honorable man with what lawyers call a "client problem," pretty much conceded that his boss's offer had been what the digerati call vaporware. Gates, says one DOJ insider, "was simply not going to allow computer makers to configure the first screen." As the talks, such as they were, broke off, the Justice lawyers told Neukom that "we wanted to hear something of substance the next day--or else."

They got the latter. By early Saturday afternoon the negotiations had collapsed; for all the huffing and puffing, the parties were back where they had started--headed for a showdown in federal court. On Monday, Justice and the states filed their separate suits and requests for preliminary injunctions; by Friday, Judge Thomas Penfield Jackson had rolled them all into one big bundle and set a court date of Sept. 8--some four months sooner than Microsoft had wanted in order to prepare for the injunction alone. That very speedy start date should doom Microsoft's attorneys to a sleepless summer--most large antitrust trials take years to begin, not months.

But the delay is still long enough for the company to ship Win 98, browser and all. And that matters, for the focus of this fall's fireworks will indeed be the dueling Web browsers: Microsoft's surging Explorer vs. Netscape's increasingly vulnerable Navigator, whose market share has slipped from a near monopoly to around 55%--and falling. The Justice filing comprises a long, closely reasoned and fairly persuasive argument that Microsoft engaged in numerous monopolist no-nos--intimidation, exclusionary dealmaking, old-fashioned dumping and so on--in its zeal to supplant Navigator. The story as Klein tells it goes something like this:

In mid-1995, with Navigator on fire and Microsoft's fledgling browser effort looking like toast, Microsoft executives visited Netscape's lovely office park in Mountain View, Calif., and, like conquistadores carving up the New World, offered to split this emerging market down what they tried to define as the middle. (Microsoft disputes the DOJ's account of the meeting.) We'll build the browsers for the upcoming Windows 95, Microsoft suggested; you supply them for Windows 3.1 and everything else. Well, clearly once Win 95 got rolling, there wasn't going to be much of an "everything else" left to supply; Netscape declined to settle for Gates' table scraps.

At which point Microsoft proceeded to do everything it could think of to sweep its rival into the dustbin of Internet history. In each case the strategy involved offering companies something they couldn't get anywhere other than Windows and extracting absolute fealty to Explorer in return. Computer makers had to feature Explorer on their PC desktops on pain of losing their Windows licenses. Internet service providers and websites clamoring for tasty placement on Windows' opening screens got it--as long as they marketed their services with the Explorer browser alone. The result, according to Klein? Netscape was unfairly excluded from competing on the PC platform, and computer makers were unable to offer their customers software titles and desktop designs other than those Redmond had expressly approved.

Do these alleged misdemeanors constitute violations of antitrust law or vivid illustrations of the company's take-no-prisoners business ethic? Or both? To support its case, Justice has amassed reams of testimony from Gates' business partners about strong-arm tactics and restrictive licensing deals. But perhaps the most damaging evidence comes from Microsoft's own words: smoking-gun memos, e-mails and offhand remarks in which executives admit that since their browser is unlikely to win market share on its own merits, they had better tie it to Windows. "We are going to cut off [Netscape's] air supply," a Microsoft vice president allegedly brags at one point. "Everything they're selling, we're going to give away for free."

Will such evidence be sufficient? Early handicapping from antitrust experts gives Klein high odds in the first part of his case--proving Windows is a monopoly, duh--but rates his chance of overall victory as fifty-fifty at best. "Justice will have to show Microsoft has achieved a dangerous amount of control of the browser market," notes George Mason law professor William Kovacic, a former Federal Trade Commission antitrust enforcer. "That's a fairly demanding test."

The DOJ's proposed remedies are raising eyebrows even higher. Klein, effectively, wants Microsoft either to ship Windows without Explorer or to bundle Navigator as well; allow PC makers to modify their desktops at will and remove Explorer if they so desire; and let online services that have Windows deals promote the Netscape browser anyway. Microsoft responds that stripping Explorer from Windows 98 would mean rewriting significant parts of an operating system that contains 18.2 million lines of code, thus greatly hampering its release--a dubious definition of consumer protection.

The legal debate this fall will center in part on similar questions: whether the DOJ's remedies would actually prevent consumer harm, as opposed to merely promoting one company's fortunes at another's expense. Asked whether the PC vendor Packard Bell would want to buy Windows at a discount if it didn't include Explorer, a spokeswoman was skeptical. "Would customers want to pay less for a computer without an integrated browser," she mused, "or do they prefer to have an integrated, simple way to surf the Internet?" Microsoft dependents always speak carefully in public, but her implication is clear: her customers would probably want the browser anyway.

Besides, the Justice proposals don't yet address what Klein considers the underlying problem: Microsoft's ongoing practice of rolling new technologies into its operating systems, a process that makes each new version of Windows better and more powerful but also, Klein and his adherents argue, tends to discourage innovation outside of Microsoft's Redmond campus. In fact, what is most striking about the DOJ suit is how much of the perceived Microsoft problem the filing doesn't tackle and how many possible remedies Klein didn't request: an outright breakup of the company, say, or a court-ordered "Chinese wall" between its operating-system and application development efforts. Sun CEO and No. 1 Gates antagonist Scott McNealy tossed out his own provocative suggestion last week: make Gates sell his interests in the many companies he's bought into in recent years and prevent him from scarfing up anyone new for 10 years. "They talk about all their innovation," says McNealy. "Well, let them innovate, and not take their monopoly currency--their cash--and go buy somebody, bundle them and then waste everybody else."

McNealy may not get that particular wish, but he and his allies are surely hoping for more than they've seen from Justice thus far. "We've been disappointed in the past," a subdued Gary Reback, the Valley's leading anti-Microsoft attorney, said last week. "The government made a start and didn't finish the job. I would hope that doesn't happen again." Although Klein confirmed to TIME last Friday that he has "ongoing investigations into other issues" relating to Microsoft, for the moment he has opted for a surgical strike: bring a tightly focused case today that he might actually win and (perhaps) tackle larger issues somewhere down the road.

He'll have an eager audience in Silicon Valley's cabal of anti-Gates activists, who have spent the past year aiding and abetting a DOJ investigation that was going nowhere before they stepped in and started guiding it last summer. A source close to the project told TIME how, under guarantees of anonymity lest Gates learn of their betrayal, Microsoft's rivals (and some of its partners) led Justice to specific documents and officials at one firm after another. "We knew whom to direct Justice to at IBM, Compaq and Gateway, because we'd all shared beers at computer conferences together," says an informant. "After a long day, we'd sit around and complain about Microsoft."

This guidance could be startlingly specific. Last summer the DOJ issued a series of subpoena-like civil investigative demands to nearly a dozen Microsoft customers, requesting information and documents, including e-mail, sales data and meeting notes. The narrowly written requests, carefully shaped by Justice's allies, demanded items of such specificity that when the Feds arrived, there was little the recipients could do but swallow hard and hand over the goods. "We really laser-beamed it in on them so there was nowhere to move," says an executive who aided the probe. "We tried to make sure it wasn't just a couple of companies; we wanted to hit the entire industry so that everyone had a little cover. That way Microsoft couldn't train the guns on any one of us and say, 'You s.o.b.s are engineering this.'"

Now those s.o.b.s get to watch and wait, just like the rest of us. In this era of megamergers, Joel Klein already has plenty of antitrust enforcement on his plate. Last week he announced his intention to fight a proposed partnership between American Airlines and British Airways; the DOJ's case against the proposed merger of Lockheed-Martin and Northrup-Grumman also begins this September; and the chipmaker Intel is said be next in the cross hairs of his colleagues over at the FTC. But the resolute Klein seems determined to make Gates a test case for reinterpreting the 19th century Sherman Act to apply to 21st century Silicon Valley. If Microsoft loses in court this fall, Windows NT 5.0, due in spring 1999, would be the logical target of a new and far more sweeping federal suit. Indeed, Bill Gates could find himself fending off Justice in perpetuity, a prospect which in turn raises the fear that the company could come to resemble the IBM that emerged from 13 years of tortuous antitrust wars a wounded giant--drained of the competitive fire that helped spark the computer revolution. Microsoft's enemies have long yearned for the Feds to take on Redmond. The question is whether they'll like what they wished for if they get it.

--Reported by Michael Duffy, Declan McCullagh and Bruce van Voorst/Washington and David S. Jackson and Janice Maloney/San Francisco

With reporting by Michael Duffy, Declan McCullagh and Bruce van Voorst/Washington and David S. Jackson and Janice Maloney/San Francisco