Justice No Longer Seeking to Break Up Microsoft

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In a reversal of a Clinton-era strategy, the U.S. Justice Department said Thursday it was no longer interested in seeking a court-ordered breakup of Microsoft for antitrust violations and would strive to find a remedy in the 3-year-old case "as quickly as possible."

The department also said it will not pursue the bundling issues — the unresolved claim that the company illegally tied its Internet Explorer browser to its Windows operating systems.

The agency is taking these steps to obtain "prompt, effective and certain relief for consumers," it said in a press release.

But the Justice Department did indicate that it will seek penalties first suggested by a judge earlier in the case that could affect or delay the company's soon-to-be-released Windows XP operating system.

That news sent Microsoft's stock dropping on Wall Street, where investors have been eagerly awaiting the release of the company's new operating system in hopes it would reinvigorate the stagnant technology sector. At midday, Microsoft's stock was down 75 cents to $56.99 a share.

Microsoft, which has long resisted a breakup, reacted cautiously to the announcement. "We remain committed to resolving the remaining issues in the case," said spokesman Vivek Varma.

But other Microsoft supporters were less reticent.

"It would be a good thing to get this whole thing behind us, as a company and the nation as a whole," said retiree David Himmel, 61, a Microsoft shareholder who was strolling through the sprawling grounds of the corporate campus in Redmond, Wash. "It's been a long process. But who knows? This may be a lead toward a settlement."

"This is an important decision not only for Microsoft, but for our community," said Seattle Mayor Paul Schell's press secretary Roger Nyhus. "Microsoft is a bellwether, and this decision will help preserve the innovation of one of our region's most important employers. We would all like to see a swift end to this case."

Justice said it would no longer seek to break Microsoft into two companies — one for its Windows operating system and the other for its other business and home software — as U.S. District Court Judge Thomas Penfield Jackson once ordered in the case. That order was eventually reversed by an appeals court, and a new judge was appointed to consider a new penalty.

But the Justice Department said it would seek to stop Microsoft from making certain exclusive deals with partners, forcing computer manufacturers to keep specific icons and programs on the Windows desktop, and other requirements. Those restrictions were also imposed by Jackson, but immediately rescinded when Microsoft appealed the case.

Howard University law professor Andy Gavil said the restrictions could have a large impact on Windows XP, which has been completed by programmers but won't reach stores until October. Microsoft has given computer manufacturers more latitude in icon placement than in previous versions of Windows, but Microsoft still requires that certain Microsoft icons appear on users' screens.

"It's hard to square the interim remedy with Windows XP," Gavil said. "All of these little things really have to do with how XP is being prepared and marketed."

Gavil said the Justice Department's action means the case could move more quickly and is more palatable to Bush appointees.

"Rather than fight the battle over breakup, get down to the brass tacks over how we can change their conduct now in a way that will preserve some competition in the marketplace," he said. "It is probably more philosophically agreeable to the administration."

A senior White House official, speaking on condition of anonymity, said Bush has been briefed regularly about the Microsoft case by his counsel, Al Gonzales, but had not directed the Justice Department to take any action in the case. The official said Bush went out of his way to leave the matter in Attorney General John Ashcroft's hands.

The about-face wasn't totally unexpected. At the time of his confirmation hearings, Ashcroft hedged when asked repeatedly by senators about the government's commitment to pursuing the lawsuit against Microsoft.

Ashcroft for the most part said that was among a host of issues he would need to review.

And analysts said they weren't surprised the business-friendly Bush administration decided to abandon the breakup.

"I don't think anybody really thought that the breakup was likely to happen, so why continue to pursue it?" said Steve Kleynhans, vice president of the Stamford, Conn.-based META Group.

Iowa Attorney General Tom Miller, who has been one of the leaders in 19 states' suit against Microsoft, said in a statement that he agrees with the current strategy.

"Since the Court of Appeals decision, the states and DOJ have directed their efforts to one objective — the quickest and most effective remedy possible," Miller said. "This decision is consistent with that objective."

Not everyone was pleased.

"It's hardly a surprise that the Bush/Ashcroft Justice Department has flip-flopped and is no longer seeking an effective remedy against Microsoft. Microsoft put their bets on this horse and now it is time to collect their winnings," public policy watchdog group Common Cause said.

Stephen Scott, a Los Angeles entrepreneur in Redmond on business, offered a blunt assessment of the government's decision: "Wimps. They folded."

Reuters and the Associated Press contributed to this report.