WASHINGTON -- Microsoft and the U.S. Justice Department on Friday announced a settlement in their three-year-old antitrust case, with the software giant accepting restrictions on its business practices but avoiding harsher penalties.
The pact, which must be endorsed by a federal judge, gives computer makers freedom to feature software made by companies other than Microsoft, and requires Microsoft to share the inner workings of its Windows operating system with other software makers.
Although the business restrictions are a far cry from splitting the company in two, a remedy sought under the administration of President Bill Clinton, attorneys general from some of the 18 states that joined the government suit saw merit in the settlement.
Microsoft Chairman Bill Gates called the pact "fair and reasonable," and U.S. Attorney General John Ashcroft said the agreement would end "unlawful conduct" by the company. A number of Wall Street analysts called the agreement a "win" for Microsoft.
Microsoft shares, which jumped more than 6 percent on Thursday on reports of a tentative settlement, see-sawed around the unchanged level in Friday trade on the Nasdaq stock market. Shares closed down 44 cents, or 0.71 percent, to $61.40.
If approved, the settlement would end a three-year-old legal battle in which Microsoft was found to have illegally maintained its monopoly in personal computer operating systems.
The agreement aims to rewrite the rules of the computer business so that consumers will be able to buy machines loaded with a variety of different software, not just those features that are pre-selected by Microsoft, the Justice Department said.
The settlement would allow computer manufacturers to work with other software developers and place their products on Microsoft Corp.'s Windows system, and would prevent the software giant from punishing anyone who makes or uses competing products, the Justice Department said.
It would require Microsoft to provide software developers with the interfaces necessary to inter-operate with Windows. The company would also have to offer uniform licensing terms to key computer makers.
Also, Microsoft will have to modify its new Windows XP operating system within a matter of months so that software can be added and deleted by consumers and computer makers, the department said.
The pact "will put an end to Microsoft's unlawful conduct and bring effective relief to the marketplace and ensure that consumers will have more choices in meeting their needs of computing and working with their computers," Ashcroft told a news conference.
SETTLEMENT SEEN FAVORABLE TO MICROSOFT
Gates said the settlement would impose some tough rules and restrictions on the company's business but resolving the case now was the right thing to do.
"The settlement is fair and reasonable and, most important, is in the best interests of consumers and the economy," Gates said in a statement.
Alan Loewenstein, a portfolio co-manager at John Hancock Technology Fund, which owns shares in Microsoft, said the proposed settlement looked very favorable to the company.
"It's the best thing for the company. They didn't split the company up. They didn't say you have to unbundle things," said Loewenstein.
Drew Brosseau, an analyst at SG Cowen, said, "I don't think it can be viewed as anything but a win for Microsoft."
The Justice Department said the restrictions on Microsoft would be in effect for five years and may be extended for an additional two years if the judge finds the company engaged in multiple violations of the agreement.
Computer makers and consumers would be allowed to substitute competing software on the Windows system, according to the settlement.
Microsoft would be banned from signing agreements with software makers and computer manufacturers that require exclusive support or development of Microsoft software. This will allow rival manufacturers to work with Microsoft and at the same time support and develop rival products.
The pact would require Microsoft to have a panel of three independent, on-site, full-time computer experts to help enforce the settlement.
At a hearing on Friday, District Court Judge Colleen Kollar-Kotelly granted the states until Tuesday to examine the settlement.
STATES SEEN JOINING
After the hearing, three of the state attorneys general who have been the most critical of Microsoft praised the idea of a settlement and said they would present it to the other states over the next few days.
Iowa Attorney General Tom Miller said outside the court that "there is optimism" about joining the settlement, but he said there were no guarantees.
The attorneys general of Connecticut and New York sounded a similar note.
"This settlement reaches results now, in real time, well before any litigation would have produced results," said Connecticut Attorney General Richard Blumenthal. "It holds the prospect for making the market in this industry more competitive, enabling and enhancing innovation, benefiting consumers in very real and significant ways."
Antitrust experts said the states are under pressure to go along with the Justice Department deal and would be unlikely to get a tougher remedy on their own, they said.
Kollar-Kotelly had pressed the government and the company to settle the case. She ordered the two sides into intensive settlement talks on Sept. 28, saying a quick resolution of the case had become more important "in light of the recent tragic events affecting our nation" -- a reference to the Sept. 11 attacks on New York and Washington.
The attorneys general said last month's attacks had indeed added a sense of urgency to the settlement talks.
"The world changed on Sept. 11," Blumenthal said. "The war abroad, the threats at home, the cloud on our economy have created a very powerful dynamic for resolving the issues in this case."
The case returned to the district court after an appeals court in June agreed that Microsoft had used its monopoly in personal computer operating systems illegally. But the appeals court reversed an order by trial court judge Thomas Penfield Jackson that would have split the company in two.
At his press conference, Ashcroft rejected any suggestion that the settlement was weak.
"We believe that this settlement is a very strong settlement and that it not only encompasses the relief that was signaled by the court of appeals but that this has additional safeguards," Ashcroft said.
Most of the original case against Microsoft focused on the tactics the company used to drive rival Netscape Communications Corp. out of the market for Internet browsers, but the trial became a broad examination of the company's busies practices.
Some analysts warn that the legal fallout from the trial is not over for Microsoft. The findings of the federal courts can be used by private parties in suits against the company.
"We remind investors that it's not over yet. Microsoft still has legal proceedings with other jurisdictions," said J.P. Morgan Securities analyst Chris Galvin.
Microsoft shares have risen about 50 percent this year but remain below their 52-week high of $76.15.
