Microsoft Resuming Tactics to Crush All Competition.

CAN Microsoft stock its operating system with software designed to undercut its competitors' most popular programs?

That question was at the heart of the antitrust case filed against the company after it merged its Internet Explorer Web browser with Windows -- a maneuver that sent Netscape's Navigator straight to the recycle bin. But despite a recent appeals court ruling, that key issue remains as murky as a Windows help file.

On June 28, the U.S. Court of Appeals for the District of Columbia upheld a trial court ruling that Microsoft had engaged in anticompetitive conduct to preserve its dominance of the PC operating system market. The court spared the software giant from a proposed corporate breakup, however, ruling that U.S. District Judge Thomas Penfield Jackson had committed judicial error by publicly badmouthing Microsoft while the case was still in progress. (Fortunately, the same standard doesn't apply to journalists.)

The ruling sent the case back to another federal judge and gave Microsoft a new chance to negotiate a settlement. But before the courts get around to doing anything else, Microsoft will release a Windows upgrade that seems to repeat the conduct that got the company dragged into court. Windows XP will include Windows Messenger, a program that allows users to communicate via text, audio, video and Internet telephony. The program is designed to help Microsoft overtake AOL Time Warner's commanding lead in the instant messaging market. The idea is simple enough: Once everyone gets Microsoft's Messenger with Windows, they won't have much reason to use AOL. Instant Messenger - or, for that matter, AOL itself. Does any of this sound familiar?

When Microsoft used this same tactic to target Netscape, it was accused of inappropriately wielding its clout to protect its operating system monopoly. It also was accused of abusing its monopoly power to gain control of the Web browser market and of illegally tying two products together to stifle competition. Judge Jackson found Microsoft liable on all three counts, and the appeals court backed him up on the first count. But that court disagreed on the second two counts, kicking out two of the three legs that supported the government's case. The appeals court said government lawyers never established there was such a thing as a "browser market" for Microsoft to control. This might seem like nitpicking, but it's equivalent to prosecutors failing to provide evidence of a dead body in a murder case.

Judging on precedents

On the matter of bundling products, the court said Microsoft shouldn't be judged by past precedents that presumed such arrangements would harm consumers. The software market is unique, it said, and strictly prohibiting the integration of new programs in an operating system could end up "deterring welfare-enhancing innovation." The appeals court sent that matter back to a federal judge and set a high bar for government lawyers. To prove Microsoft's product tying was illegal, plaintiffs must show it "unreasonably restrained competition" in some market other than the so-called browser market -- which, if you'll remember, doesn't yet exist in the eyes of the court. They also must prove the harm done by such integration isn't outweighed by the benefits, including the cost savings to consumers who seem to get two products for the price of one.

Government lawyers aren't likely to meet this burden, and they may not even try. Microsoft can make a convincing argument that adding features to Windows only helps consumers. Meanwhile, the harm that could come from its browser monopoly lies faraway in the future -- like the day the company revives its now aborted plans to display its own, sponsored links on other people's Web pages. Microsoft still awaits punishment from a new judge for its anticompetitive behavior. But its liability has so far been limited to its efforts to protect itself from possible operating system replacements - a narrow finding that won't restrict its bids to take over the markets for instant messaging, online payments, media distribution or anything else. Until courts offer some clear guidance on how product-bundling rules apply to monopolists who make software, the company has no reason to stop doing what has worked so well thus far: embracing rival technologies, tying them into Windows and breaking their competitors' backs.