Microsoft (msft) is already negotiating to settle the charges, pending before the Federal Trade Commission, lawyers close to the case said. The FTC focused on Microsoft's aggressive advertising campaign targeting Palm Inc. (palm), whose products compete against those hand-held devices using Microsoft's Windows software.
Microsoft's rivalry with Palm arose briefly at the end of the antitrust trial last year when the government introduced evidence suggesting that the software titan was already planning to use Windows as a weapon against Palm and other new rivals. Last April, a federal court found that Microsoft had used an arsenal of illegal and predatory tactics to protect its Windows monopoly and extend it to the Web.
The FTC found that Microsoft's cheeky "Can Your Palm Do That?" ads last year deceptively claimed features that were unavailable unless buyers spent more for wireless capability, lawyers close to the case said. Consumers were told of this in nearly unreadable print at the bottom of the ads; Palm's latest units had wireless capability built in. A Microsoft spokesman Sunday declined to comment. Microsoft (msft)
While the new false-advertising charges are unrelated to allegations in the antitrust trial, they are an unflattering reminder of the harsh business practices central to the government's case. In two days of arguments that begin here Monday before a seven-judge federal appeals panel, Microsoft is expected to tell the court that its aggressive tactics were legal and proper and that it doesn't have monopoly power in today's fast-changing technology industry. Microsoft is also expected to argue that the trial judge, Thomas Penfield Jackson, was biased against the company and committed a number of procedural errors during the historic 78-day trial.
Legal experts expect Microsoft to prevail on at least some of its arguments and overturn a breakup of the company ordered by Judge Jackson last June. But some of the government's broad claims seem likely to be upheld, these experts say, leaving it to the Bush administration and its nominee for Justice Department antitrust chief, Charles James, to decide whether to seek a settlement of the case.
Microsoft's market dominance
Microsoft's competitors charge that even as it seeks to overturn the antitrust ruling, the Redmond, Wash., software maker has continued to use its dominance to push into new markets. Despite new competition on the Internet, Microsoft holds a strong position there as well; its Internet Explorer browser is the on-ramp to the Web for most consumers.
Windows and Office software each have market share well above 90 percent. Microsoft is pushing into the market for network "server" computers, using its strength in Windows against Sun Microsystems (sunw), Oracle (orcl) and others. It is attacking RealNetworks (rnwk) and Apple (aapl) by bundling its own multimedia software into Windows at no extra charge. It is adding software for Microsoft's Internet service and instant-messaging into Windows, targeting AOL Time Warner Inc., the leading Internet-service provider. And it has attacked Palm, the market leader in hand-held computers, with a slimmed-down version of Windows.
In each of these markets, Microsoft says, it is coming from behind against entrenched competitors, and its tactics aren't illegal -- they are exactly the kind of tough competition that the law encourages. At the same time, Microsoft officials say, their efforts to push into new markets often bring lower prices for consumers, who benefit from the new competition. Palm, for example, faced few rivals and enjoyed overwhelming market share when Microsoft entered the fray.
Hewlett-Packard (hwp), which participated with Microsoft in the anti-Palm ads and made the device pictured in them, is also negotiating to settle false-advertising claims, industry executives said.
The ad campaign, which ran widely last year in newspapers and magazines, was recently ended by Microsoft with no mention of the FTC inquiry. In a new, $3 million ad campaign, Microsoft makes no references to Palm while showing a new generation of wireless devices at work.
Hand-held devices based on Microsoft software still trail Palm. Palm claimed a 66 percent hardware market share last year, and its software market share was even greater. For Microsoft, that is the real battleground: Its Windows version runs fewer than 10 percent of hand-held devices.
Only five months ago, Microsoft agreed to settle false-advertising charges in another hot new market: set-top boxes that bring Internet service to television. The FTC found that Microsoft's WebTV service falsely and deceptively understated its cost by failing to disclose certain additional telephone charges, and deceived customers by claiming that the service would give them access to the entire Internet.
Microsoft settled without admitting or denying the FTC claims, and it is expected to seek a similar end to the current case.
-- Rebecca Buckman also contributed to this article.
