Silicon Valley, AOL TW React With Caution

Baldwin Louie — Thu, 28 Jun 2001 15:00:00 -0700

Silicon Valley regards Thursday's decision with more caution than it expressed when Judge Thomas Penfield Jackson handed down his decision last June. The fact that the courts have upheld the findings of fact is seen as an unmitigated victory, but without a strong remedy on the horizon, companies are resigned to the fact that the courts have not cowed Microsoft.

On the East Coast, the fact that Microsoft will remain intact for the foreseeable future gives it a boost in key areas of competition with AOL Time Warner. Talks between the two companies broke down two weeks ago when they could not agree to terms that would include AOL software in the upcoming release of Windows XP.

AOL Time Warner issued no official statement on the ruling, but one executive who had reviewed the decision says, "I think it's very tough on Microsoft."

Some companies complain that Microsoft's recent initiatives violate the same principles that inspired the original lawsuit. "These things just scream that this company has not modified its behavior in any way," says Mitchell Kertzman, CEO of Liberate Technologies, a Microsoft competitor. "If anything, they are more aggressive than ever, with Windows XP, .Net and HailStorm. Way more aggressive."

There's still hope that Thursday's decision will open the door for some effective action against the company. "The thing a lot of people somehow missed is that the courts affirmed the findings of fact – that Microsoft is indeed a coercive monopoly," says Eric Raymond, an open-source evangelist. "Now, it'll take some time for this to play out, but it has to open the doors for private antitrust lawsuits. If anyone brings a suit against Microsoft, they've got an open and shut case as to whether Microsoft is a monopoly."

Meanwhile, as long as Microsoft remains one company, its massive war chest allows it to buy into almost any market it wants.

Like media behemoth AOL Time Warner, Microsoft has made an unsuccessful foray into interactive TV, but both companies continue to spend heavily. In gaming, Microsoft is investing in its upcoming Xbox, while AOL Time Warner recently struck a gaming alliance with Sony's PlayStation 2.

In online music, AOL Time Warner has a huge advantage in that it owns a major label and is a partner in the MusicNet online music-distribution project. Microsoft has not articulated a clear strategy on online music, but it is providing technology for Sony and Universal's music service, Pressplay. Because Microsoft's Windows Media Player has significant market share, the major record labels are eager to ensure that any digital-music-distribution technology they adopt is compatible.

Even though the court upheld that the exclusionary browser deals that benefited Microsoft's Internet Explorer are illegal, it's unlikely that the ruling will realign the browser business in any way. Microsoft's Internet Explorer has 85 percent of the market; Netscape shares the rest with AOL's browser.

"The browser battle has been fought and won by Microsoft," says CIBC World Markets analyst John Corcoran. "Today's decision will have very little impact on this business."

The appeals court's decision frees Microsoft to pursue its strategy of spending massively to gain access to markets, while AOL Time Warner will try to leverage its 133 million subscribers to win the upper hand.

The courts failed to stop Microsoft from crushing Netscape, and as the company moves ever deeper into Internet software, its competitors fear the result. "Look at it – Microsoft adds $1 billion in revenue a month while the rest of the PC business is absolutely strapped for cash or going bankrupt," says Liberate's Kertzman. "Microsoft has usurped everyone else in the PC business, and that business is dying. Now they're trying to do the same thing to the Net. That's not good news – they're the black hole of business. They suck everyone else dry."

No court has been able to undermine the aggressive culture of Microsoft, which is built around the Windows operating system. "It was just something so ingrained in you, something that we didn't need to talk about," says Alex Edelstein, a Silicon Valley angel investor who used to work for Microsoft. "Windows was our bread and butter, and we were going to leverage it to the best of our ability. They did it with Windows and Office, and they'll do it with XP and smart tags."

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Silicon Valley, AOL TW React With Caution