December 6, 2001 4:00 PM PST

Apple: Microsoft should pay $1 billion--cash

Apple Computer CEO Steve Jobs said Thursday that Microsoft should give $1 billion in cash to help schools, instead of software and some money, to settle more than 100 consumer lawsuits.

Jobs' statement came one day before Apple plans to file a supplemental legal brief further contesting the legitimacy of the proposed settlement of the suits.

Microsoft and attorneys working the cases, which are consolidated in a Baltimore federal court, cut the controversial deal in late November. Attorneys for Microsoft and the plaintiffs are set to return to court Monday to complete a hearing before U.S. District Judge J. Frederick Motz.

"We think a far better settlement is for Microsoft to give their proposed $1 billion--in cash--to an independent foundation, which will provide our most needy schools with the computer technology of their choice," Jobs said in the statement.

Apple has been a vocal opponent of the proposed settlement, which would have Microsoft seed a private educational foundation to aid needy schools and donate an estimated $1 billion in software, services, training and cash over five years. In all, Microsoft would donate $500 million to charitable foundations for these schools and $500 million in free software. Microsoft also would provide Windows licenses for 1 million refurbished computers donated to the schools.

Analysts and Microsoft critics warn that Apple's big stake in the educational market could be jeopardized by Microsoft pouring in millions of dollars of free software. Some critics have even called the giveaway anti-competitive.

Under the Microsoft proposal, the software giant could become a key beneficiary. The enticement of free software could encourage school districts to spend $500 million on Microsoft-compatible equipment and services. By contrast, if Microsoft were to give $1 billion to charitable institutions geared toward building technology capabilities inside of schools, Apple could greatly benefit because schools that could not previously afford new computers would become technology buyers.

"It's very difficult for Apple to compete with a free product," Technology Business Research analyst Tim Deal said. "The settlement just seemed ludicrous to me."

In a separate antitrust case--Microsoft's landmark battle with the Justice Department and an array of state attorneys general--nine states and the District of Columbia are due to deliver to a federal judge by about 12 p.m. PT on Friday a proposal that seeks stiff sanctions against the software giant. The proposed penalties could include a further opening of Windows source code and could also take in Windows XP, streaming media software and the .Net initiative.

According to sources who had seen a late draft of the states' proposal, it would include a provision to compel Microsoft to continue to offer its dominant Office software for Apple's Macintosh computer beyond the expiration of a deal between Apple and Microsoft which ends in August. The provision also would require Microsoft to offer a version of Office for the Linux operating system, sources said.

Educators: "No thanks"
In letters sent to the court, some educators raised concerns about the value of the proposed settlement to the consumer lawsuits, and some made recommendations similar to the one from Jobs.

The benefit to schools "would depend upon the degree to which Microsoft is allowed to use this settlement to impose its corporate self-interest on schools in the process," wrote William Fiske, instructional technology coordinator for the Rhode Island Department of Elementary and Secondary Education.

He described the settlement as a "transparent effort to direct the expenditures of funds beyond what Microsoft itself offers to schools. Furthermore, the settlement allows the company to influence a wide range of decisions concerning software and teacher training."

Marianne Handler, professor of technology at National-Lous University's College of Education, raised similar concerns.

"Where is the element of choice for the schools involved?" she asked in a letter sent to the court. "Shouldn't educators decide when and what technologies they might like to have?" Handler also warned the proposal would send "a terrible message to young people."

Fiske warned in his letter that the free software provision "will eliminate any competition and ensure upgrade fees to Microsoft for the foreseeable future." He recommended compelling Microsoft to set aside funds for purchasing software, leaving the choice to the schools.

Or, according to Handler: "I believe Microsoft should have to provide the dollars the schools need...I also think (the settlement) should result in a penalty for Microsoft."

Barbara Reeves, director of information technology for the Maryland Department of Education, wrote in her letter to the court that the deal raises several concerns.

Because the minimum requirements for refurbished systems likely "will be below the standard set in our state," she wrote, "schools that choose to participate may be disadvantaged, thus increasing rather than decreasing the digital divide."

Reeves also questioned the approach to training and support, which "may not fit well into the context" of different school districts' policies. For these reasons, she asked Motz to consider postponing preliminary approval of the proposed settlement.

What's the deal worth?
Apple's original brief largely focused on the competitive aspects and educational impact of the proposed settlement. Its supplemental brief is expected to attack the value of the deal.

"The centerpiece of Microsoft's proposed $1 billion civil antitrust settlement is their donation of Microsoft software--which they value at $830 million--to our schools," Jobs said Thursday. "We think people should know that the actual costs to Microsoft for this donated software will likely be under $1 million."

Deal agreed in part.

"I wouldn't say that it's that low, but software margins are high--very high. So the cost to Microsoft is much less than the $800 million," Deal said.

Analysts estimate Microsoft's gross margin on Office, for example, is in excess of 90 percent.

Microsoft spokesman Jim Desler rebutted Jobs' valuation.

"Their estimation is based upon the software donation and the value of the software," he said. He emphasized other aspects, such as "an educational foundation being established with $510 million behind it."

Software is "just one element" of the package, Desler noted. "This is a well thought-out and comprehensive program that we feel will provide tremendous benefits to underserved schools."

About 12,500 schools--many of which are among the nation's poorest--would be eligible to receive software from Microsoft under the proposal. But some attorneys for the plaintiffs question the software's value to all the schools.

"One-third of the software value in the deal is accounted for by a single title, Microsoft Magic School Bus," said Dan Furniss, an attorney with Townsend, Townsend & Crew in San Francisco, which leads a California group of plaintiff lawyers opposing the deal.

"Magic School Bus is a nice thing for elementary kids, but there's no way the whole country needs $280 million worth, and this would provide more copies than anyone could ever use," Furniss said. "This is the problem: A lot of this software is never going to be used. They valued it based on it being installed on every single machine that's given out. You've got Magic School Bus in high school and Office XP in third grade, which is ludicrous."

Desler said the estimate comes "from the plaintiffs' economist. We said all along that it's entirely up to the schools which software they will be provided."

Still, he estimated that "25 percent of schools use Magic School Bus. It's a very popular program."

 

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