[KLUG Advocacy] [Fwd: Linux Report from InfoWorld.com, May 21, 2003]

[Adam Williams]

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MICROSOFT DISCOUNT FUNDS RAISE EYEBROWS

By Marc Ferranti, IDG News Service

Posted May 16, 2003 8:08 AM Pacific Time

News about special funds used by Microsoft to offer
discounts on software and services has caused some concern
among government officials and regulators but is unlikely to
affect current antitrust cases and inquiries, according to
legal analysts and people involved in the proceedings.

However, the discounts do raise the question of whether
antitrust cases thus far have changed Microsoft's
anticompetitive behavior and bear further scrutiny, they
said.

An article Thursday in the International Herald Tribune
(IHT) and its sister publication, The New York Times,
reported that last July Orlando Ayala, then Microsoft's
worldwide sales manager, sent e-mail authorizing company
officials to draw from special funds in order to win over
customers who looked likely to choose open source Linux
software over Windows.

"Under NO circumstance lose against Linux," the IHT quoted
Ayala's e-mail as saying.

In response to the article, the European Commission is
considering whether to order Microsoft to hand over the e-
mail, sources close to the Commission said Thursday. The
Commission, the European Union's executive body, is
currently pursuing an antitrust case against Microsoft.
Microsoft officials acknowledge the existence of "business
investment" programs that are used to give discounts,
particularly to institutions in developing countries, and
to make competitive offers on consulting services. But the
programs did not originate specifically to undercut deals
offered by Linux vendors, according to Microsoft spokesman
Jim Desler, in Redmond, Wash.

For example, the company's Education and Government
Incentive Program is focused on low-income countries,
Desler said.

"It provides access to technology and software for
governments and institutions that don't have IT funding,"
Desler said.

Microsoft also has "discretionary funds available to use
for certain purposes," Desler said. "These business
investment funds have been used in response to major
companies dropping prices for services and consulting."
"These programs were developed with customers in mind and
we have a legal team to make sure they comply with laws
and regulations," Desler said. Microsoft has an ongoing
dialogue with officials in the U.S. to ensure compliance
with the settlement reached last year in the U.S.
government's antitrust case against the company, he
pointed out. In addition, the company has regular
communication with officials engaged in the current EU
antitrust case against the company, he said.

If discounts were below the cost of products and were used
specifically to undercut competition, however, it could
give new ammunition to competition regulators and
competitors, according to some lawyers.

"This could get into the realm of predatory pricing,
internationally, if what they're saying is, 'We don't care
what it costs, get the order and we'll take care of the
bottom line'," said Bob Schneider, head of the
Intellectual Property Department at the Chicago law firm
of Chapman and Cutler. "Especially if they were targeting
Linux, it's an indication of the same type of behavior
that the [U.S.] antitrust settlement was precluding."

Officials at the U.S. Department of Justice, which with 17
states agreed to a settlement on antitrust charges against
Microsoft, declined to comment on the issue Thursday.
West Virginia and Massachusetts have appealed the U.S.
settlement and are pushing for tougher restrictions
against Microsoft. However, because pricing issues related
to Linux were not part of the remedy proceedings leading
up to last year's settlement, they would not be able to
bring up any allegations of attempts by Microsoft to use
price discounts to undercut Linux deals, according to Doug
Davis, assistant attorney general for West Virginia.
"In the appeal, we're bound to the record in the trial
court and the remedy proceedings," he said. "The issues
that were raised [by the article] will likely be looked
at, however."

Allegations involving predatory pricing against Linux
would have to be dealt with in a new case, Davis
indicated. Legal scholars who have followed the case
agreed.

"This sounds like a separate claim," said Einer Elhauge, a
professor at Harvard Law School and antitrust expert.
"That's a separate issue that might prompt a new
investigation, but it's not the same as the prior
behavior."

Predatory pricing might be difficult to prove, he added.
"You must prove pricing is below cost. In software, that
gives rise to complicated questions ... Often the marginal
cost of software is near zero."

"Some courts have also said that even a monopolist has a
right to meet competition -- that if a competitor is
offering their product for free, a monopolist is allowed
to offer it for free, also," he added.

In Europe, price discounts have not been singled out as an
issue in the current Microsoft case.

However, allegations that Microsoft was discounting
software to win contracts in the workgroup server software
market -- a segment under special scrutiny in the European
lawsuit -- could overlap with part of the Commission's
existing lawsuit, said Thomas Vinje, a lawyer for some of
Microsoft's rivals.

If the Commission decides that an inquiry is called for,
it would probably open a separate investigation rather
than delay a decision on current charges, he said.

-- Additional reporting by Paul Roberts in Boston, Scarlet
Pruitt in London and Paul Meller in Brussels.

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