Microsoft: Opportunity Lost

When talks between the U.S. government and Microsoft Corp. (Nasdaq: MSFT) broke down for the last time Saturday, it heralded the beginning of the next painful phase in the ongoing antitrust case.

"After more than four months, it is apparent that the disagreement among parties concerning the likely course, outcome and consequences of continued litigation, as well as the implications and ramifications of alternative terms of settlement, are too deep seated to be bridged," announced U.S. Circuit Judge Richard Posner in a written statement.

Although Judge Posner, who was appointed as a mediator in the case last fall, declined to express his opinion about the failure of the negotiations, Microsoft Chairman Bill Gates said he was "disappointed" that talks had stopped.

I wonder, though, if either anticipated that their failure to settle would be responsible for triggering a historic 350 point plunge of the Nasdaq. Investors sold off their high-tech holdings Monday and consequently drove the Dow Jones Industrial Index up over 300 points.

Real Battle Begins

Of course, Monday's stock market roller-coaster ride preceded the ruling by U.S. District Judge Thomas Penfield Jackson that Microsoft Corp. violated the Sherman Antitrust Act by exerting "monopoly power by anticompetitive means" in an effort to take over the Web browser market.

Judge Jackson also ruled that Microsoft violated the law by "unlawfully tying its Web browser to its operating system" and that it could be sued under state anti-competition laws.

This news is ominous for Microsoft. Judge Jackson will next preside over hearings to determine what penalties to impose on the software titan, and after that decision is in, Microsoft will undoubtedly appeal the case. It could grind on for years -- possibly all the way to the chambers of the U.S. Supreme Court.

Pressure Not Enough

In addition to this long-term distraction, Microsoft faces serious threats to its dominance in many of the most important technology growth markets, which could adversely affect its position as a technology leader.

The lawsuit has also taken its toll on Microsoft's morale. I recently had the opportunity to speak with several people who are close to Microsoft, and they all told me that the antitrust case has been hard on Microsoft's workers. Many employees wanted the company to cut its losses and refocus its attention on strengthening the corporation for the long haul.

Employee pressure did not go unnoticed by top management. Last week, in an e-mail message to Microsoft employees, Chief Executive Steve Ballmer claimed the company's settlement offer was "substantial" and that more offers would be made if necessary.

The government has also been under pressure by the weight of public opinion indicating strong disapproval of how it is handling the case. However, the pressure on both parties was evidently not enough for them to put aside their differences and forge a realistic settlement.

Instead, the government seemed to be as inflexible as Microsoft was vague. Moreover, it appeared that some of the 19 states joining the government in the lawsuit were too busy fighting among themselves to forge a common approach to settlement.

Slapped With More Litigation

Because of Judge Jackson's ruling, Microsoft also stands to be slapped with a myriad of new lawsuits from both its rivals and clients.

Consumers, stockholders and taxpayers will ultimately foot the bill as the war between the government and Microsoft drags on toward a distant conclusion that will most probably please no one.

Perhaps what is so tragic about the whole ordeal is that the protracted and expensive legal wrangling that surely lies ahead could have been avoided -- but both sides lacked the vision and statesmanship to seize the opportunity to settle.