Microsoft backs away from deals

(continued from previous page)

"It's smart on Microsoft's part to slowly become a little more flexible in their position," Koo said. "Hopefully there will be some sort of a [compromise] deal before a court decision."

Gray agreed about the motive behind Microsoft's recent moves but was less certain that the plan would work. "The government is going to continue its investigation," he said.

Microsoft executives, Gates included, say they are not reacting to any government pressure. They insist that decisions on any IE promotional deals are made on a case-by-case basis, based on customer feedback. They add that such contracts are routine--and routinely changed.

"There's no basis for anyone to believe that these agreements are in any way anticompetitive," Microsoft spokesman Mark Murray said. "These kinds of decisions are primarily business decisions."

He did, however, offer this observation: "If we also have the impact of addressing regulators' concerns at the same time, then so much the better."

According to the language of one contract with Microsoft, some content partners must agree not to "directly or indirectly license or otherwise authorize distribution...of company content or logos by companies which produce other browsers."

The contract, a copy of which was obtained by NEWS.COM, is standard and only applies to a limited amount of any company's Web content, said Brad Smith, Microsoft's assistant general counsel. But some critics worry that it is too restrictive, particularly as Microsoft moves to integrate its browser with Windows, the world's dominant operating system for PCs.

Industry rivals and other critics reacted predictably to Microsoft's changes. "The fact that they backed out [of the ISP agreements] proves the point we've been making all along," Barksdale said at this week's Senate hearing.

At a hearing last November, Hatch decried a co-marketing deal between Microsoft and EarthLink that he said blocked the ISP from telling some new subscribers that they could choose browsers other than IE. European regulators also had closely scrutinized the contracts.

EarthLink, one of the ISPs affected by the change, declined comment.

Microsoft's Smith said the decision to change the ISP agreements has nothing to do with the current government inquiries. Gates too reiterated Monday that the changes were "based on a business review" rather than an effort to curb the investigations.

Hatch, who had criticized the ISP deals, praised Microsoft's decision to amend the contracts. "Senator Hatch is pleased that Microsoft--after ongoing discussions with the Judiciary Committee--has agreed to remove provisions of licenses with ISPs that have the effect of excluding alternative browsers," committee spokeswoman Jeanne Lopatto said. "We view this as a positive development."

Even so, analysts say, such concessions do not necessarily indicate that Microsoft will abandon core parts of its business strategy. "My guess is that Microsoft is not going to make the kinds of concessions that the Justice Department wants it to make," said David Vellante, an analyst with International Data Corporation.

One key issue Microsoft will fight to defend is integration of the browser and the operating system--a melding of technologies that opponents say gives the company an unfair market advantage.

"My sense from the body language and hyperbole of the hearings is that Microsoft believes that, if it loses on the integration issue, it is losing the OS," Vellante said. "Microsoft is rightly concerned about that. Imagine having the launch of new products subject to government inspection."