Bill Gates Blinks

By MICHAEL KRANTZ

Say what you will about Bill Gates--the man knows when to swallow hard and cut a deal. At first blush, the abrupt announcement last week that Microsoft had settled one round of its continuing dispute with the Federal Government--by agreeing to let PC makers remove the icon for the company's Web browser, Internet Explorer, from their machines' desktops--looked like abject capitulation. But as usual, the closer you look, the craftier the CEO's reasoning seems.

At issue was whether forcing PC vendors that license Microsoft's Windows95 to take Explorer as well constitutes product "tying"--a violation of the consent decree signed by Microsoft in 1995. After Joel Klein, the Justice Department's antitrust chief, reopened Justice's dormant suit against Microsoft, U.S. District Judge Thomas Penfield Jackson issued a preliminary injunction forbidding Microsoft to engage in Explorer strong-arming. This in turn produced Microsoft's infamously petulant response: offering to sell versions of Windows that didn't have Explorer but didn't work either. After showing in court that it took less than 90 seconds to disable Explorer using Windows' "Add/Remove" program, Jackson testily asked the company to explain why it was not in contempt.

Judge Jackson is a soft-spoken man, but when he talks he has the force of the federal bench behind him, so even Bill Gates listened--perhaps this time a bit too closely. In hearings two weeks ago, the combatants conducted an intricate dissection of the injunction's language. Jackson's prose demanded that Microsoft stop forcing vendors to include "any Microsoft Internet browser software (including Internet Explorer 3.0, 4.0, or any successor versions thereof)" on their Windows machines. O.K., Microsoft lawyers asked Justice, pointing to a long, obscure list of .DLL and .EXE program files, then which ones belong to Explorer and which to Windows95?

At that point, what had seemed like foolhardy grandstanding suddenly looked like a clever legal maneuver. The program called Explorer, Microsoft lawyers explained, no longer exists as an independent entity. Microsoft engineers have woven ever larger chunks of Explorer code into the fabric of the Windows operating system in the form of those .DLL files--miniprograms that link PC applications to the Net. The more intertwined Explorer and Windows become, the more fluidly Windows will adapt to the Web--which is why rivals are so eager to stop Microsoft from tying the two together.

But they may not get what they want. Jackson's vaguely phrased order merely told Microsoft to let PC makers remove Explorer's visible manifestation--that big blue e--from their desktops, not to erase all traces of Internet-related code from Windows, which by now may be impossible. Microsoft knew this and could have just asked Jackson to clarify his order.

But that is not Bill Gates' style. Better, he figured, to take Jackson at his sloppy word, appeal his order and let the results illustrate the court's ignorance. "It seemed absolutely clear to you," Jackson asked Microsoft V.P. David Cole in court, "that I entered an order that required that you distribute a product that would not work. That's what you're telling me?" Cole's stone-faced reply: "In plain English, yes."

It is a measure of Microsoft's almost refreshing naivete that these guys actually thought plain English might cut it inside the Beltway. For while Gates' semantic hairsplitting may have been technically accurate, in p.r. terms it was painfully misguided. The media gasped at Microsoft's brinkmanship, and that $1 million-a-day fine Klein asked for last fall now loomed like a juicy apple ripe for Jackson's picking.

In other words, Gates had been guilty of foolhardy grandstanding after all. Last Thursday, with closing arguments set to begin, the chairman chose retreat. "I am pleased to advise the court that we have reached [an agreement that] settles the dispute on the compliance," announced Microsoft lawyer Richard Urowsky. "We believe this order will achieve all the relief the United States sought," echoed Justice attorney Phillip Malone. The judge donned his glasses. "And that," he said, "concludes our business for the day."

Well, not quite; the jousting just reconvened on the courthouse steps. "This is a very important victory for consumers and innovators," Klein exulted, adding that the latter would no longer "be snuffed out by Microsoft's... monopoly power. That's the way capitalism works in America."

Well, again, not quite. The settlement was how politics works in America. The way capitalism works is this: strategists at such vendors as Dell and Compaq let it be known that they had no plans to offend the company that rules their industry by accepting an offer made with a gun to its head. Meanwhile, Gates' browser rival, Netscape CEO Jim Barksdale, held his own Thursday press conference, seizing this window of Microsoft vulnerability to announce that not only will he start distributing Netscape's Navigator browser for free, just like Microsoft, but that he will also give away his crown jewels--the browser's source code--inviting every programmer on the Web to join forces to battle Microsoft.

Whether this Hail Mary play will work remains to be seen--as does the question of how long Gates' capitulation will last. The settlement merely delays the underlying case until April 21, when Microsoft's appeal is scheduled to be heard by a three-judge panel, viewed by antitrust sources as libertarian-leaning and thus possibly pro-Microsoft. By then programmers will be working with early versions of Windows98, which integrates Explorer even more fully--thus in theory solidifying Microsoft's hammerlock on the Net.

If, that is, Klein hasn't stopped them first. The antitrust chief's larger investigation remains active and aggressive; a Justice source confirms that wider anti-Microsoft action under the Sherman Act, if it comes, will probably arrive before the new operating system does. First Jackson will hear from "special master" Lawrence Lessig, the Harvard law professor whose court-ordered study of Microsoft's business practices is due in May. Around the same time, of course, Microsoft's appeal (which includes a request to have Lessig removed from the case) reaches court, and Win98 hits software shelves near you.

No wonder Bill Gates folded this hand. The game is young, and a much bigger pot is at stake in the next round.

--With reporting by Declan McCullagh/Washington

With reporting by DECLAN MCCULLAGH/WASHINGTON