Microsoft trial back in court as deal hopes fade

SHORT OF a miracle, the corporate legal saga of the year will once again start rolling in Washington this morning. The Microsoft trial is heading into what may be its final weeks, though nobody is putting any money on the final deadline.

The miracle would be a decision to do a deal by the US government and 19 states which brought the case. That was what Judge Thomas Penfield Jackson discreetly urged as he packed them off for a three-month break, and at points it looked as if that might happen. But the US Department of Justice and the state attorney-general seem to have concluded that the offerings from the software giant did not come up to scratch.

The crux of the trial is the government's claim that Microsoft used its dominance in the market for operating systems to gain an advantage in the competition over Internet browsers. It used its strength with Windows 95 against Netscape, another browser producer, to win sales and a place in computers for its Internet Explorer, the government argues.

In the first phase of the trial, which lasted from October until February, each side presented 12 witnesses; now, each will present three. This phase should be over by the time of the 4 July holiday, though it could be months after that, perhaps next year, before the trial finishes.

Microsoft was widely regarded as having lost the first round on points, though the government never came close to landing a knock-out blow; but then anti-trust is not boxing. It is more like a cross between long-distance running and poker.

In pre-trial depositions in the past few weeks, some of the ground that will be covered in the trial's rebuttal phase has been mapped out. For the first time the government will bring forward a witness from the manufacturers of personal computers to talk about their relationship with Microsoft. Garry Norris headed IBM's PC division from 1995 to 1997, and he testified in a pre-trial deposition that Microsoft put the screws on IBM because of its rival OS/2 operating system.

Both sides will bring back their economic experts to talk about monopolies and competition. Microsoft will once again contest the argument of computer expert Edward Felten that the browser can be removed from Windows 95, an increasingly esoteric debate that partly centres on the meaning of "browser" and "removed". And it will grill David Colborn of America Online, which has purchased Netscape since the trial began, as well as calling Gordon Eubanks, a friendly Silicon Valley executive, to testify about the competitive pressures in the industry.

One of the most striking features of the trial is the way that life has moved on outside the courtroom, in an industry where a year can see the rise and fall of a new technology.

Microsoft has been through a restructuring that focuses iton products and reorients it towards a post-PC world of handheld devices and the Internet.

It has also seen a small palace revolution. President Steve Ballmer, in an apparent attempt to stamp his control on the company, has outmanoeuvred chief technology officer Nathan Myhrvold, once a pivotal figure, who will take a sabbatical, according to Time magazine. And the company has spent billions on acquisitions and corporate links with the telecommunications, wireless and cable sectors. It is clearly preparing itself for a new existence.

So wouldn't it have an interest in a deal? The company has made three offers to the Department of Justice, centring on changes to its business practices, but these have not gone far enough for the government lawyers. The last face-to-face meeting was in March.

Microsoft has offered to end some exclusive agreements, change the way that Internet Explorer appears on desktops and to provide open access to some of its software codes. But the government - and especially the states - want more.

As its decision to call Mr Colborn shows, Microsoft will also use changes in the broader industry in its own favour. The tie-up between AOL, Netscape and Sun Microsystems, a rival software producer, creates a new dynamic in the market and shows that there is real competition, it will say. This trio has every intention of competing against Microsoft, it will argue, and Redmond executives hint that they have documents that will blow a hole in the government's case. AOL chairman and president Steve Case has claimed that the linkup was not aimed at the browser market, which executives said was dead.

It may be that Microsoft's aim is to even the legal scores a bit before it heads back into settlement talks. It was perceived to have done badly in the first round, arguing too mechanistically, fielding arrogant and sometimes weak witnesses, losing credibility and failing to dent the government's case in key areas. If it can land a few punches it could yet have a better chance of cutting a deal on terms closer to its own preferences.

A deal would head off the most radical of the options if Microsoft is found guilty of anti-competitive practices - break up. That still seems one of the less likely solutions. There are other options on the table, though, which would have an equivalent effect - making the company give up control of Windows, for instance.

The new post shake-up Microsoft looks as if it is being prepared for something close to break up, and the company at least considered spinning off some of its activities as separate vehicles, according to some reports. But a court-enforced partition would be quite different from a strategic decision. Microsoft is trying to put the ball back in the government's court by calling new witnesses, widening the argument and rebutting key government claims. But it must make a careful judgement over the next month about how far it can push its case before it needs to think about compromise.