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Microsoft Responds in Antitrust Showdown

Microsoft turned to Google for a little help this week as it fought to finally get antitrust eyes off its back.

On Tuesday, the company fired back at two groups of states requesting that most aspects of Microsoft's consent decree be extended for another five years. And to help make its case, Microsoft pointed to Google's stock valuation as proof that innovation in the computer industry is thriving.

This is just the latest development in a long and torturous case that gained momentum in 2002 when Microsoft agreed to settle its long-running antitrust case with the federal government and several states. A federal judge had previously ruled that Microsoft was in violation of antitrust laws, a decision that had been upheld on appeal.

Microsoft had until Nov. 6 to respond to the states' filing that opposed expiration of oversight, which had originally been set to run out next week. However, Federal Judge Colleen Kollar-Kotelly agreed in mid-October to a temporary extension of oversight to Jan. 31, 2008, as she considers motions by the states, Microsoft, and the U.S. Department of Justice (DoJ).

In its filing Tuesday, Microsoft's attorneys argue that the complaining states are trying to get through the backdoor what had already been refused -- i.e. a ten-year term -- by the court during the settlement phase of Microsoft's antitrust case five years ago.

The judge, Microsoft argues, had granted a five-year oversight period with the possibility of a two-year extension that could be invoked only if the company was found to have violated the terms of the settlement agreement. Microsoft says no such argument has been put forward, so no extension is warranted.

Perhaps more telling, however, are arguments by the complaining states that Microsoft's dominance on the desktop and browser continue to hold the industry back.

"Experience since entry of the court's decree in 2002 refutes the central assumption that supported departure from the 10-year term typical of antitrust remedial decrees -- that the industry section was characterized by rapid change. Just the opposite: Microsoft's Windows monopoly is indisputably resilient," one of the groups' filings said.

Microsoft, in its latest filing, claims that's hardly the case.

"The suggestion that innovation has slowed is truly astounding in view of the rapid development of the open-source software movement, the move to Web-based software applications (which are accessible from any operating system and browser), and the trend toward advertising-funded software development, rather than Microsoft's traditional model of developing proprietary client software in exchange for a one-time license fee," Microsoft's brief states.

Exhibit A for Microsoft's argument: why Google, of course.

Google was a privately held company five years ago, yet today "the capital markets value the company at approximately $231.5 billion, making it the fifth most valuable company in America -- more valuable than Time Warner, Disney, and News Corp., combined," Microsoft's filing argues.

And Google is not the only company that is thriving in the face of Microsoft's dominance, the argument continues.

"There are many others, such as Yahoo, MySpace.com, Apple's iTunes, Salesforce.com, and a wide variety of shopping, blogging, photo sharing, and social networking Web sites," the filing states.

Ironically, Microsoft's 2002 antitrust settlement appeared to be on a smooth course to a quiet end until last June when Google complained that the company was unfairly keeping its desktop search engine from being used as the default on Windows Vista.

Microsoft eventually relented and agreed to make changes to enable users to pick Google as their default for desktop search. The agreed-upon changes will appear in Vista Service Pack 1 next year.

However, if Microsoft had thought it would all blow over, it was mistaken. In late August, one group of states began arguing that the oversight should continue past mid-November. By mid-October, a second group of states jumped on the bandwagon. (Microsoft had previously voluntarily agreed to extend oversight until 2009 in regard to its communications protocol-licensing practices.)

All of the legal maneuvering eventually caused the judge to accept more filings and to extend the time she needs to evaluate all the claims and counterclaims in the case, so she could make her decision.

The next significant date comes Friday, when the DoJ's filing is due. The DoJ has stood by Microsoft to this point in arguing that the oversight should expire as originally planned, and is expected to continue on that tack in Friday's filing. Meanwhile, the complaining states have until Nov. 16 to file final briefs in the case.