THE BROWSER WARS: WHAT'S AT STAKE.

In a sense, the restraining order that Judge Thomas Penfield issued last week against Microsoft was little more than a procedural skirmish in what promises to be a much longer and complex legal battle. Penfield has already appointed an outside expert, Internet law expert Lawrence Lessig, to sift through mountains of evidence; Lessig's report--and presumably a "final" decision--aren't due until next summer.

Nevertheless, the restraining order (see page 2) offers some useful clues about how Jackson is likely to decide the case. Because the court warned Microsoft to stop requiring PC vendors to bundle Internet Explorer with Windows, Microsoft's critics insist they've won an important victory. But the judge also threw out some of the Justice Department's key arguments, saying that Microsoft has "advanced a plausible interpretation" of the ambiguously-worded consent decree it negotiated two years ago. Worse, the bundling issue no longer really matters: Major PC vendors have already announced they'll continue to ship machines pre-loaded with IE, because of consumer demand.

Our sense is that the restraining order will have almost no short-term impact on the browser market, or the software industry as a whole. But we also believe Microsoft is within striking distance of near-total control of Internet access standards, not just of the browser market. And that kind of control clearly has major implications for almost every company that develops or markets software.

Here's our take on the long-term impact of the restraining order:

Did Judge Jackson strike a "stunning blow" against Microsoft?

Despite some negative public relations fallout, we suspect Microsoft got exactly what it wanted: An excuse to integrate Internet Explorer even more seamlessly into Windows 98. Until now, there's been no fundamental integration between the two products--just bundling deals with PC manufacturers. So consumers could fairly easily uninstall--or ignore--IE. Once Windows and IE are welded together in Windows 98, however, it's going to take real work to install a non-Microsoft browser. (It's also going to take serious effort to figure out one more overly-complex, badly-designed Windows interface, but that's a separate issue.) If Netscape complains that it can't compete against a fully-integrated operating system browser--well, now it's the Justice Department's fault.

The court opinion specifically covers "any successor version" of Windows. Doesn't that mean Microsoft has been given a direct order to keep its browser out of the operating system?

Not a chance. The antitrust laws prohibit "tying" of separate products, which in practice means that Microsoft can't force a PC company to install IE by threatening to withhold Windows. But--as Microsoft has argued--the government has no authority to define what features a company builds into its products. In fact, there's a long list of OS components that were once independent utilities from third-party companies. It's going to take some pretty torturous legal logic to prove that browsers are somehow different from disk utilities, anti-virus programs, solitaire games, and the like.

If IE is fully integrated into Windows, what happens to Microsoft's presence in the retail browser market?

That's an interesting question. One possibility is that Microsoft will continue to sell separate "IE for Windows 95" and "IE for the Mac" versions, at least until Windows 98 and NT 5.0 are well established. But Judge Jackson has already said he doesn't like Microsoft's argument that its browser can be an integrated component and yet simultaneously available as a self-contained product. So the folks in Redmond have to walk a fine line here.

The more difficult challenge for Microsoft, however, is whether it can keep an integrated browser competitive. These days the revision cycle for operating systems seems to be about three years; the browser market operates on a more rapid 6-12 month cycle. In theory, therefore, a fast-moving competitor like Netscape could quickly make Microsoft's integrated browser look like a fossil frozen in time. But by then, Microsoft should have enough market inertia on its side to convince most users that Windows compatibility is more important than sexy technology.

In the end, who really cares what happens to Netscape's market share?

The issue isn't who gets to dominate what Bill Gates once called "a zero billion dollar market." What's really at stake--and Microsoft certainly knows this--is control over Internet access standards. Once IE is fully integrated into Windows 98 and NT 5.0, Microsoft becomes the de facto gatekeepers of the Web. Audio and video plug-ins, HTML extensions, virtual Java machines, Internet banking, Web TV, remote diagnostics, Web publishing, hybrid CD-ROM support--just about every current Internet technology initiative is likely to be transformed into yet another "Windows API." It's not obvious how fast this transformation will happen, or how Microsoft will actually make money out of its gatekeeper role. But right now the only serious obstacle seems to be Judge Jackson's courtroom--and that doesn't look like much of a threat any more.

EXCERPTS FROM JUDGE JACKSON'S RESTRAINING ORDER

[...] Microsoft has demonstrated, at the very least, the ambiguity of the term "integrated product." Microsoft has advanced a plausible interpretation of the term, and has provided a reasonable explanation for its understanding that the consent decree did not preclude Microsoft's insistence that OEMs accept [Internet Explorer] as part of Windows 95. The government has not clearly convinced the Court that Microsoft violated a clear and unambiguous provision of the consent decree.

[...] Contrary to Microsoft's claim to absolute discretion to dictate the composition of its operating system software, it appears not unlikely, as a matter of contract, that Microsoft's "unfettered liberty" to impose its idea of what has been "integrated" into its operating system stops at least at the point at which it would violate established antitrust law. At oral argument on Dec. 5, 1997, Microsoft's counsel conceded that the company could not declare that certain of its other products, such as its "Word" and "Excel" software, are "integrated elements" of its operating system. Under Microsoft's [interpretation] it is unclear what distinguishes those particular products from Internet Explorer. Adopting Microsoft's interpretation would appear to render [the relevant provision of the consent decree] essentially meaningless.

[...] Whether or not the government has correctly divined Microsoft's intentions, the probability that Microsoft will not only continue to reinforce its operating system monopoly by its licensing practices, but might also acquire yet another monopoly in the Internet browsers market, is simply too great to tolerate indefinitely until the issue is finally resolved. Those practices should be abated until it is conclusively established that they are benign.