July 11, 2001 3:25 PM PDT

Microsoft changes Windows license terms

Microsoft on Wednesday changed the licensing terms it imposes on PC manufacturers to install its Windows operating system, responding to a recent ruling in its antitrust case.

In a dramatic shift, Microsoft will allow PC makers to remove Internet Explorer icons and entries from the Start menu and provide the ability to remove user access to Internet Explorer in the new Windows XP. The company also will extend this to Windows 98, Windows Me and Windows 2000.

Microsoft's licensing changes come as some state attorneys general have raised concerns about Windows XP, the new version of the operating system, which could become the focal point of future proceedings in Microsoft's antitrust case. In late June, the U.S. Court of Appeals for the District of Columbia Circuit unanimously ruled that Microsoft had illegally maintained a monopoly in Intel-based operating systems.

The court found that Microsoft's commingling of Internet Explorer with Windows 95 and Windows 98 code was anti-competitive.

Legal experts were less than impressed. "It's the minimum first step they could take to start complying with the court's judgment," said Andy Gavil, an antitrust professor with the Howard University Law School. "I don't know if they could have done anything less than this, given the court's judgment."

Emmett Stanton, an antitrust lawyer with Fenwick & West in Palo Alto, Calif., said Microsoft was merely staying a step ahead of the court system.

"Microsoft is taking a pre-emptive step to avoid some remedies that the trial court might impose," Stanton said. "They're focusing these unilateral changes on those things the appeals court said were anti-competitive conduct."

Keeping the XP train running
More importantly, the licensing changes will likely prevent any possible injunction that could jeopardize Windows XP's shipping on time. Though the case must return to the trial court for reassignment to a new judge, rehearing the "tying" claim and redoing the remedy process, the Justice Department or 19 states could ask for an injunction against Microsoft in the meantime.

"It wouldn't surprise me if some eager beaver state attorney general had been working on some kind of injunction action against Windows XP," Stanton said. "I don't think the Justice Department would have any enthusiasm for that."

By being proactive, Microsoft "has removed any clouds hanging over XP," Stanton emphasized.

But Iowa Attorney General Tom Miller said that Microsoft's licensing change would not be enough to "prohibit" any possible injunction against Microsoft or Windows XP, "because it only deals with the browser."

Miller wouldn't say if the government planned to ask for any injunctions against the software maker or if it would try to block Windows XP's release.

"We are having some internal discussions, but we're keeping those confidential at this point," he said.

Microsoft said the changes were based Microsoft special coverage on the appellate ruling. "We did this to address some of the specific antitrust violations found by the Court of Appeals," said Microsoft spokesman Jim Cullinan. "We are going to provide OEMs (original equipment manufacturers) greater flexibility with Windows. We are making these changes now to make sure Windows XP ships on time and we minimize any disruption to the high-tech industry."

In another change, Microsoft will allow PC manufacturers to place icons on the Windows XP desktop.

"Based on extensive usability studies, we wanted Windows XP to ship with a clean desktop and improved Start menu, because we believe that provides end users with the best experience," Cullinan said. "But PC manufacturers now have the option to place icons directly on the desktop."

Too little, too late?
Miller, who is one of the leaders representing the 19 states, saw little value in Microsoft's licensing changes.

"A lot of it deals with the browser," he said. "The browser war is over. Microsoft has won the browser war. They have achieved their objective. To say they will no longer do the things that are necessary to achieve that has little significance."

Miller said Microsoft's action is typical of a "defendant who has done something illegal and has achieved their objective. Then lo and behold, they agree not to do it anymore."

Competitors were almost as dismissive. "It's wonderful to see two weeks after the court's decision that Microsoft has now read it," said AOL Time Warner spokesman John Buckley. "Just as their stepping back from Smart Tags was a step in the right direction, this, too, is a step in the right direction. But it doesn't address some of the most anti-competitive elements found in Windows XP. They still have a long way to go."

PC makers showed modest enthusiasm for the loosening of the licensing restrictions. For Dell Computer, the change in icon restrictions means business as usual.

"We've always delivered options and flexibility to customers," said company spokesman Tom Kehoe. "When you order from us, you get to call the shots, right? So with today's announcement from Microsoft, we get to continue doing that."

Gateway was equally unimpressed. see special report: Microsoft messaging tactics recall browser wars "Basically it doesn't change a lot for our Windows XP launch plans," said Gateway spokesman Brad Williams. "We've seen in the past our customers prefer a clean desktop, and we're going to stick with those plans." But Gateway is still evaluating the other changes offered by Microsoft and hasn't decided "which we will take them up on," Williams added.

"IBM champions open standards, so we therefore would welcome greater flexibility on the desktop," said company spokesman Ray Gorman. "We are confident the XP launch timetable remains on track."

Gartner analyst Michael Silver slammed Microsoft's licensing changes, calling them too little, too late.

"Microsoft basically is doing something they should have done a long time ago," he said. "It's kind of ridiculous for them to stick to these requirements over time, and only now they're fixing past issues."

Microsoft's control of the Windows desktop dominated part of the failed discussions between AOL Time Warner and Microsoft. Had the two companies reached an agreement, the latest version of America Online's Internet access software would have shipped with Windows XP.

Microsoft acknowledged the changes would require late tweaking to Windows XP, but Cullinan said that would not jeopardize the operating system's Oct. 25 launch date. Last week, the company issued the first of two expected Windows XP release candidates--or final testing versions--before the software is released to manufacturing and to PC makers.

The company had been expected to issue Release Candidate 2 by early August, but Wednesday's announcement could force a delay.

More obstacles ahead
IDC analyst Roger Kay saw the decision as indicative of a new willingness to compromise. "This is the first unilateral concession the company has made in a while, and I would say it is a pretty big thing," he said. "It also appears to me as an overture to settlement.

"This action helps ensure that Windows XP ships on time, because it essentially forestalls future action in the government's case," Kay added. "It allows the OEMs, which are the real deliverers of the technology, to essentially configure the system the way that they see fit."

But lawyer Stanton said he doubted Microsoft's action was an overture to settlement of the antitrust case. "The big obstacle to settlement is going to be the state attorneys general."

Throughout the antitrust case, the government slammed Microsoft for restrictive contracts that prevented PC makers from modifying the Windows desktop. Although Microsoft argued it had the right to dictate the look and feel of Windows based on copyright law, the appeals court shot down that argument.

Guernsey Research analyst Chris LeTocq said Microsoft's licensing change clearly was a "reaction to the appeals ruling's anti-competitive comments. Note that this represents action on the current XP configuration, not a going-forward policy statement."

He also noted that Microsoft, while giving some ground on Internet Explorer, kept firm on other features more tightly integrated with Windows XP. Windows Media Player and the MSN Internet service "are still required on the Start menu," he said.

Silver agreed, pointing out that Microsoft's apparent Internet Explorer concession is much smaller than it seems. Windows XP actually ships with two browsers: Internet Explorer 6 and MSN Explorer, the front end to Microsoft's online service.

"If the vendor removes both icons, then an MSN access icon goes on the menu," he said. "The user can remove it, but the vendor can't. So when the user gets the machine, Microsoft still has what it wants: Access to their own Internet service."

Gavil raised concerns over Microsoft's bundling tactics.

Microsoft's "press release doesn't say anything about the ability of consumers to add or remove any of the new programs being added to Windows XP," he said. "That's leading them down the path for new confrontations. They are not owning up to the true consequences of the court's order. They are reading it as narrowly as possible."

Competitors and state attorneys general have sharply criticized Microsoft for its integration tactics, such as making Windows Media Player, instant messaging and HailStorm Web services a part of Windows XP.

"Microsoft hasn't addressed these things," Gavil said.

While PC makers will have more freedom to configure systems, AOL Time Warner could be the biggest beneficiary of Microsoft's licensing changes, Silver said.

"Even if AOL can't come to an agreement with Microsoft to put AOL on the Windows XP CD, they can work with the vendors to get on the machine and on the desktop," he said. "That's something Microsoft would never have given them anyway"--particularly considering the desktop icon restrictions.

Buckley responded: "This move today strengthens the OEMs with whom we have very good relations, therefore, it's good for consumers and it's good for AOL."

 

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