Microsoft's Antitrust Settlements May Top $4.5B

As it strives to dispose of its remaining antitrust litigation in the United States and reach a final settlement with the European Commission, the Redmond, Wash.-based software giant on Monday announced a $536 million antitrust settlement with rival Novell plus a wide-ranging agreement to cooperate with the Computer and Communications Industry Association (CCIA), an industry trade association that has long opposed Microsoft.

As part of those deals, Novell will release its antitrust claims against Microsoft under U.S. law related to NetWare, as well as withdraw from participation in the European Commission's case against Microsoft. In addition, Novell and the CCIA will no longer participate as interveners on behalf of the European Commission in Microsoft's appeal of the commission's March 24 ruling, which imposed a hefty fine on Microsoft and an order to open more of its protocols to competitors and ship a version of its Windows operating system without the Windows Media Player digital media application.

Brad Smith, Microsoft's chief legal counsel, acknowledged on Monday that the software giant is intent on resolving all of its antitrust litigation as soon as possible and hopes that the Novell and CCIA agreements will pave the way for a settlement with the European Commission.

Those deals are just the latest in a string of agreements Microsoft has made during the past year and a half to exit its painful "antitrust era," which began roughly six years ago in the United States and resulted in guilty verdicts at home and in Europe.

Though Microsoft has evaded a potential breakup and Windows redesign, the company has amassed a hefty bill in settling antitrust offenses. Since mid-2003, Microsoft has paid out just less than $3 billion to settle claims with four entities, including AOL Time Warner ($750 million), Sun Microsystems ($700 million) and now Novell ($536 million). Microsoft also paid $1 billion to settle more than a dozen state class-action lawsuits related to the main antitrust case, and its top attorney said it's "reasonably possible" that the company might have to pay another $950 million for other class-action claims.

Altogether, that would bring Microsoft's settlements tab to nearly $4 billion. That's no chump change: The total represents half of Microsoft's total profit for its 2004 fiscal year, which reached $8 billion.

What's more, that figure doesn't take into account the legal fees that Microsoft has shelled out to law firms over the past decade, nor does it include the whopping $617 million fine Microsoft paid to the European Commission earlier this year.

As Microsoft works to get the court to overturn the commission's remedies, one former Novell solution provider said it was a good move for the software giant to settle with Novell. "Novell and its SuSE Linux product have a much stronger presence in Europe. It was probably better for Microsoft to pay Novell now vs. [paying] more to the European Commission later if Novell stayed in the litigation game," said the solution provider, who requested anonymity.

Microsoft is digging down deep into its pockets to put the litigation behind it and try to jump-start the software business, which has slowed considerably since the antitrust case, industry observers and channel partners say.

"Clearly, it's a financial windfall for Novell, but it makes a strong statement that Microsoft is looking to reduce the amount of--or completely eliminate--enemies in the industry," said Alex Zaltsman, managing director of Exigent, a solution provider in Morristown, N.J. "Despite the dominance that Microsoft holds in the desktop and server operating-system marketplace, they cannot count on domestic and foreign governments to be on their side. It certainly beats dealing with the fallout of a negative outcome with the European Commission."

Microsoft is hoping that the Court of First Instance will reverse the penalties ordered by the European Commission that would require the company to ship a stripped-down version of Windows and open up more intellectual property to competitors.

"Today's agreement demonstrates that we in the private sector can work out these issues. Increasingly, the strong majority of competitors are saying their issues have been resolved. If their issues have been resolved, then the needs of competitors have been addressed as well, and we hope it's just the kind of factor that the EC would take into consideration," Smith said. "We need help from the Court of First Instance of Luxembourg. ... The commission needs additional persuading. These are two additional steps down a clear path we have been following."

Technology companies are setting aside their differences to tackle a common problem, said Andrew Brust, chief of new technology at Citigate Hudson, a New York-based Microsoft Gold Certified Partner. "I am glad to see the DOJ case is, in effect, completely resolved, and I am hopeful that the settlement with both parties will help resolve remaining legal/antitrust issues with the EU," he said.

"We've come a long way in technology detente. Oracle joined ACT [Association for Competitive Technology], Microsoft is about to join the CCIA, and Microsoft settled with Sun and has a much warmer relationship with Time Warner than it did before," Brust said. "It seems the industry is putting an end to a very divisive, litigious and counterproductive era and can now move forward to concentrate on creating value and innovation. I find this especially encouraging, given the apparent uptick in IT spending of late."

Microsoft's $4 billion-plus settlements bill is sizable but not as big as it could have been if competitors had sought more damages--or if IBM jumped into the fray, said Thomas Carey, an intellectual property attorney and partner at Bromberg and Sunstein, Boston. IBM owns Lotus Software, another Microsoft competitor that lost a big chunk of market share to Microsoft.

Microsoft was in "danger of being liable for treble damages to any competitor who had been harmed. In theory, Microsoft's competitors could have claimed that their damages should be measured by reference to the growth of Microsoft's market capitalization and demanded three times that amount as a remedy," Carey said. "The most vigorous assertion against Microsoft was launched by Sun, which settled in April for close to $2 billion. Now, with Novell cleared up, Microsoft seems to have cleaned up the last of its major antitrust issues."

Yet one solution provider said Microsoft is paying for losses that its competitors incurred on their own. "I think Microsoft has been really busy trying to put all the legal issues behind it and to move forward with growing its core businesses again," said Ken Winell, president of Econium, a Microsoft partner in Totowa, N.J. "It is a big number [in settling legal claims]. It's amazing how the losers sue Microsoft and save themselves."