May 13, 2002 9:25 AM PDT

States missed a break in Microsoft trial

Another procedural error on the part of the plaintiff states in the Microsoft antitrust trial has prevented evidence from getting into court. And that evidence, involving a specialized operating system called Windows XP Embedded, could have made the states' case.

On Thursday, lawyers representing the nine litigating states and the District of Columbia canceled a May 15 XP Embedded demonstration after being reprimanded by the judge. U.S. District Judge Colleen Kollar-Kotelly--under pressure to resolve the case on schedule--said the states' legal team had failed to give the court proper notice about the scope of the demonstration and the amount of information Microsoft would have to sift through to respond to it.

The demonstration could have resolved two issues for Kollar-Kotelly: whether Microsoft could develop a "modular" version of the operating system without so-called middleware, such as the software giant's Internet Explorer browser and Windows Media Player, and whether Windows XP Embedded could be used as the basis for a custom version of XP that would run without any serious loss of performance.

But even without the demonstration, "the judge has plenty of testimony on all sides of the debate," said Rich Gray, a Menlo Park, Calif.-based lawyer closely following the trial. "She has the cake already. The demo would have been the icing on it.

"She really wanted to see Windows XP Embedded, and she really wanted it in the record," Gray continued. "But she's trying to keep a clean record, and she's clearly ticked off at the states for putting her in a position where it's difficult to do that."

The litigating states want Microsoft to offer a second version of Windows without middleware. The proposal is designed in part to address the Court of Appeals ruling that Microsoft's integration of the code for Internet Explorer with that of its omnipresent Windows operating system was an anti-competitive act, intended to hamstring Netscape Communications' rival Navigator product.

The remedy provision also aims at similar actions on the part of Microsoft in response to products such as RealNetworks' RealPlayer media player and AOL's Instant Messenger software.

In testimony last month, Microsoft Chairman Bill Gates said middleware could not be removed without crippling Windows.

The plaintiff states' proposed remedy is a response to a pending settlement with the U.S. Justice Department and nine other states, a settlement the plaintiff states say doesn't go far enough. In a Thursday legal filing, the Justice Department urged Kollar-Kotelly to no longer delay approving the November agreement.

Microsoft concluded its portion of the remedy proceeding Friday. Lawyers for both sides will be in court this week arguing motions before the judge. The judge must decide whether to limit the scope to Windows and the browser, as Microsoft has requested, or to accept the states' argument to include other Microsoft technologies.

Kollar-Kotelly is expected to take about a month to review the testimony and evidence before both sides present their closing arguments in June.

States' gaffe: Self-demo-lition?
According to legal sources, before Kollar-Kotelly can decide whether she should accept the states' proposed remedy, she must determine if Microsoft can, in fact, remove middleware from Windows. Witnesses for the states have argued that an existing Microsoft product, a specialized version of the Windows OS called Windows XP Embedded, proves that the software giant can safely remove middleware from Windows without incapacitating the OS.

XP Embedded, designed to run cash registers, slot machines and other devices that use embedded processors, is customizable. It contains the core elements of Windows but doesn't necessarily include a browser or messaging software, depending on how it's configured.

A company using the specialized OS to run gas pumps, say, might configure it differently than would a company using it to run ATMs. And neither would be likely to include a browser--at least not at this point in the Web's evolution.

The states argue that XP Embedded could be configured, sans middleware, to run on everyday computers. Debate over the issue has intensified since Gates conceded in court that it is, in fact, technologically possible to configure such a version of XP Embedded for PCs.

Gray, the Menlo Park lawyer following the trial, said that during his testimony, Gates raised "legitimate criticisms" about the states' demand for a middleware-free version of Windows, including whether the plaintiff's definition of "middleware" was clear enough. But Gray said states' attorney Steven Kuney used his cross-examination of Gates to "effectively carve out an alternative remedy for the judge using XP Embedded that would accomplish the same goals."

Kollar-Kotelly had expressed interest in seeing the Windows XP Embedded demonstration that the states had proposed, which could have helped resolve the question.

"It's pretty clear (from the fact that) she wanted to see the demo that she's bought the states' argument that would have undercut one of Microsoft's major theories," Gray said. "She would like to see the demo because she would like to know how to frame Windows XP Embedded in the remedy."

Conceivably, Kollar-Kotelly could order Microsoft to offer Windows XP Embedded to PC makers, who could install the software with or without Microsoft middleware.

But the states' legal team was late in notifying the court about a witness involved in the demo: Virginia-based computer-testing consultant James Bach, who had been working for three months with Windows XP Embedded to create a middleware-free version of the OS that could run on a PC. The states' attorneys were also late to explain how much research had gone into Bach's project.

Microsoft attorney Steven Holley said Thursday that as part of the discovery process connected with the demo, the states had handed over to Microsoft's legal team 67 CD-ROMs. "That's roughly 36,000 400-page books," Holley said. He described the CD-ROMs as a "mountain of information" that Microsoft would need an indefinite period of time to review and test.

The states' attorneys canceled the demo and withdrew Bach as a witness after a lengthy scolding on procedure by Kollar-Kotelly. The judge will have to make her evaluation without the benefit of the Windows XP Embedded demonstration.


The blunders are only the latest from the states' legal team, which has handed Microsoft a string of minor victories in the courtroom based on procedural errors. An earlier mistake involving Microsoft depositions allowed the software giant to remove witnesses that could have further called into question its licensing practices with PC makers.

"The judge can only work with what the states give her, and she certainly is being cautious about procedure," Gray said. "The last thing she wants is to be overturned on appeal because of a mistake in procedure."

Why XP matters
The renewed debate over XP Embedded and its role in any eventual remedy strikes at the very core of Microsoft's antitrust violations, say legal sources. Two courts found that Microsoft used a variety of anti-competitive technical and business practices to illegally maintain a monopoly in Intel-based operating systems.

A version of Windows to which PC makers could add the middleware they choose could greatly foster competition and consumer choice--and potentially lower the cost of the OS.

The litigating states' proposed remedy could lock in stronger safeguards that "would better protect original equipment makers (OEMs) from retaliation," while opening up "their ability to innovate," said Andy Gavil, an antitrust professor with Howard University School of Law. "More than anything else, this case was about channels of distribution. That means Microsoft's customers."

Said Paul DeGroot, an analyst at consulting firm Directions on Microsoft: "Freeing the OEMs from putting Microsoft's applications on (their PCs) could make a huge difference financially to the OEMs. There isn't much money left in building commodity hardware. If you have competing vendors coming to you, that's great for the OEMs, and it's an economic proposition for the ISVs (independent software developers)."

In theory, the stripped-down version of Windows would cost PC makers less to license, and they would be paid a bounty for middleware placement by AOL, RealNetworks and other software developers.

"Microsoft hates it," DeGroot said. "Now, instead of selling OEMs just the OS, they have to sell the OS and buy a spot on the desktop--something they used to get for free and could do at any time. A lot of the provisions of the settlement with the Justice Department were in fact designed to protect that capability."

PC makers selling the stripped-down version of Windows also would not have to carry the customer support burden for Microsoft's mistakes. While Gateway and some other PC makers have said their support calls have dropped with Windows XP, privately, some computer manufacturers have complained that later changes to the operating system increased customer support calls.

Microsoft uses Window's XP's automatic update feature to frequently dispatch security fixes, patches or third-party compatibility tweaks. These updates, which sometimes reinstall software removed by the customer, such as Windows Messenger, are "increasingly a support headache," said one PC maker source.

"OEMs want to put out a machine they know works, without too many choices," DeGroot said. "The last thing OEMs want is to put two browsers on the machine, or two media players, or two of anything. If the consumer wants to download Windows Media Player, the OEM is absolved of all the support issues here."

When asked if they would sell the middleware-free version of Windows, several PC makers declined to comment, citing the ongoing remedy proceeding as the reason. But none said that they would out-and-out reject the opportunity.

The pricing issue
Competition from PC makers selling Windows versions they could build on over time would likely lower the price of the operating system, which has stayed fairly steady for the past seven years, say analysts. PC makers pay anywhere from $65 to $90 for every copy of Windows, depending on the volume of copies and marketing discounts, said computer-manufacturer sources.

"This is characteristic of a monopoly," Bob Lande, an antitrust professor at the University of Baltimore School of Law, said of Windows pricing. "You would never see this in a truly competitive market."

During the same seven-year period, PC hardware prices plummeted, over time increasing the cost of Windows as the total percentage cost of a computer. The average selling price of a PC was $2,000 in 1996 but is less than $1,000 today, said IDC analyst Roger Kay. For Emachines' current $474 computer, for example, the cost of the operating system could be as much as 25 percent the total cost.

"Today you get a lot more for your hardware dollar," Kay said. "That's clear. (But) it appears you get the same basic functionality in the operating system."

In court, Microsoft has argued that enhancements and features added to Windows more than justify the steady cost. But analysts note that other PC component makers could make the same argument, except that competition has forced them to cut prices.

"One of Microsoft's main claims of increased value is the increased stability of the operating system," Kay said. "Of course, stability is something the customer could have expected originally. What Microsoft is calling a feature should be built into the base specification. In other words, 'the operating system works.'"

One example of the difference competition could make on Windows is seen in the microprocessor market, where Advanced Micro Devices' increasing success has forced Intel to cut prices. Though Intel prices had slowly declined from 1995 to 2000, the introduction of AMD's Athlon processor helped drive down prices and increase innovation.

"If Intel didn't have the competition from AMD, we would have seen the prices stabilize," said Kevin Krewell, an analyst with The Microprocessor Report, an industry newsletter. "The competition from AMD has definitely pushed Intel on pricing, no question about it. Microsoft doesn't have the same kind of pressure on it, which is why their prices have stayed more stable over time."

 

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