08/17/98 MICROSOFT TAKES THE STAND

View items related to this story

MICROSOFT TAKES THE STAND
It readies an E-mail trail aimed at proving the Justice Dept. dead wrong
When the U.S. Justice Dept. sued Microsoft Corp. (MSFT)in May, it packed its legal papers with details of the dirt the agency had uncovered in its nearly two-year investigation of the company. Justice cited explosive witness testimony, for example, charging that Microsoft traveled to archrival Netscape Communications Corp.'s (NSCP) headquarters in 1995 and proposed illegally dividing the browser market. The agency also quoted dozens of internal Microsoft E-mail messages and public statements in which executives threatened to, among other things, cut off Netscape's ''air supply.''
Now, the software giant is getting a chance to fire back. On Aug. 10, the company is expected to file not only its first detailed defense but also a motion for summary judgment asking U.S. District Court Judge Thomas Penfield Jackson to dismiss the case without holding a trial.
Using their own collection of E-mail messages and memos, Microsoft's attorneys hope to demonstrate that Justice's portrayal of the company is dead wrong. Rather than illegally trying to drive Netscape out of the browser business, as trustbusters allege, Microsoft will offer evidence that it was simply trying to give consumers more for their money. ''For Microsoft to say they want to win--that's what competitors are supposed to do,'' says Charles F. Rule, a former Justice Dept. antitrust chief who is now a legal consultant to Microsoft.
Based on information from court documents and interviews with people who are familiar with the company's legal strategy, Microsoft will use its mid-August court filing as an opportunity to tell its own version of the history of the company's Internet-development effort. Refuting Justice Dept. claims that Microsoft wrapped a Web browser into its Windows operating system with the aim of crippling Netscape, Microsoft hopes to demonstrate that it planned on adding Internet browsing into Windows before Netscape even existed. Microsoft will also attempt to show that Justice has quoted many internal E-mail messages out of context.
The Justice Dept. declined to comment, but in a court filing last year the agency said that ''Microsoft's description of its intention to include browsing functionality in Windows 95 'in late 1993 and early 1994'...is simply false.'' Justice argued in that document that Microsoft's early plans to add Internet capability to Windows were not concrete and did not include several important technologies. Additionally, the agency contended that other internal corporate documents, some written as late as 1996, indicate the company viewed its Internet Explorer and Windows 95 as separate products.
In the world according to Bill Gates, Microsoft's Internet odyssey began in 1993. That December, four months before Netscape's predecessor company, Mosaic, was even incorporated, sales and marketing chief Steven A. Ballmer sent Gates an E-mail wondering if the company should focus on the Internet when assembling Windows 95--then code-named Chicago. ''I think we could really popularize Chicago...if we could say [it's] the greatest front end to the Internet,'' wrote Ballmer, who is now the company's president.
In an E-mail that addressed issues raised by Ballmer, engineering manager Cliff Bamford on Dec. 16, 1993, argued that an Internet browser should be part of the operating system. ''An Internet product will really need to be a series of integrated products,'' Bamford wrote.
At the same time, a handful of Microsoft's engineers were up to their elbows in Internet technologies. Networking engineer James Allard had for months dreamed of adding standard Internet networking, search, and document-presentation technologies to Windows, turning it into ''[the] next killer application on the Internet,'' according to a memo he sent to Microsoft's product development managers in January, 1994. His memo specifically detailed how browsing technology should be added to the operating system.
Microsoft's Internet push got under way in earnest on April 6, 1994, when Gates and 20 product-development managers and engineers spent an entire day hashing it over at the historic Shumway Mansion in Kirkland, Wash.--an event that's certain to be analyzed at length in the trial. Since the meeting took place just two days after Netscape was quietly organized by a group of engineers in Mountain View, Calif., Microsoft execs will claim they had not even heard of the company at the time.
At this point, Gates was only gradually warming up to the potential of the Internet. Still, at the Shumway meeting he admonished his engineers to embrace Web mania and look for ways to add products such as Internet-based networking, E-mail, Web access, and navigation to Windows. A few days after the meeting, one of his lieutenants, Steven Sinofsky, circulated a technology blueprint containing specific plans for carrying out this strategy. In keeping with Gates's wishes, the systems group also included ''integrate Net browsing'' into Windows 95 as one of their key objectives in a three-year plan they circulated a few weeks afterwards.
It was a year later that a scouting party from Microsoft traveled to Netscape's Mountain View board room for a fateful meeting that ultimately launched the Justice Dept.'s investigation. On the Microsoft side were alliance specialist Dan Rosen, Allard, and a handful of others. Representing Netscape were Chief Executive James L. Barksdale, marketer Michael J. Homer, and chief technologist Marc L. Andreessen--who took notes on his portable computer.
The Justice Dept. says Microsoft had a proposition to make. It alleges that Microsoft wanted to illegally split the market with Netscape, and offered to forego creating browsers for operating systems other than its upcoming Windows 95 if Netscape opted out of the Windows 95 browser market. Sources close to Netscape add that Microsoft also wanted to make an equity investment in Netscape and take a board seat (a charge Microsoft doesn't deny).
''BIG STICK.'' The unstated implication, according to Justice and sources at Netscape, was that Netscape would have a fight on its hands if it failed to cooperate. ''There was a series of carrots, then a big stick hanging there,'' says one Netscape executive. When Netscape refused, Justice charges, Microsoft launched an all-out assault designed to put the young company out of business. Netscape complained to the Justice Dept. about Microsoft's tactics shortly after the meeting.
The meeting has since emerged as a key pillar of Justice's case--and one that Microsoft needs to knock down if it hopes to win in court. The plan, according to sources close to Microsoft, is to rely on depositions of Microsoft and Netscape participants to establish there was no offer of collusion and no threat of retribution.
Instead, Microsoft will argue that it was a perfectly normal meeting between an operating-system company and an independent software maker. Sources familiar with the company's defense strategy say that Microsoft showed off the Internet technology it was building into Windows 95 and invited Netscape to take advantage of those new features. And, as it often did when talking to software makers building products on Windows, Microsoft also tried to map out clearly what would be included in the operating system and what belonged in the other company's product--to avoid unnecessary conflicts. Microsoft adds it has an agenda printed on Netscape stationary and handwritten notes from one of its people that make it clear that they didn't try to carve up the browser market.
Will this be enough to persuade Judge Jackson? That's unclear. But, at the minimum, it will provide the public and opinion makers with a vastly different view of the company's behavior than the one they've been treated to so far.
By Steve Hamm in San Mateo, with Mike France in New York

RELATED ITEMS

TABLE: E-Mail: It's Microsoft's Turn