In a surprise breakthrough in antitrust settlement talks, negotiators for Microsoft and the government have agreed on a plan by which the software giant will acquire the U.S. Department of Justice for $7 billion, sources close to the discussions said yesterday. Though no official announcement has been made, the parties are said to be working out the final details of the settlement, including the role of Attorney General Janet Reno in the new subsidiary, which will be known as "MicroJust."

"Really it's just a question now of who gets a parking place and a company ThinkPad," said one source. The breakthrough is credited to the mediation of Federal Circuit Judge Richard Posner, a law and economics scholar who has advocated privatization of many governmental functions. Federal District Judge Thomas Penfield Jackson, who issued a stinging opinion calling Microsoft a predatory monopolist, appointed Posner last month. Posner is reported to have pointed out that a company like Microsoft, which can afford to pay the market price for a portion of the government, is likely to put the assets it acquires in the deal to their "highest and best use," generating increased revenue and expanding benefits for society.

"Public justice is wasteful," one scholar familiar with the issue said. "You spend a lot of time prosecuting small-time crooks who will never permit you to recoup your costs. In addition, most governments lack the sophistication to construct a full marketplace strategy for maximizing revenues." As an example, this expert said, the newly reformed justice subsidiary of Microsoft is likely to begin aggressively pursuing claims against "defendants who can pay enough to make it worthwhile." Hypothetical examples cited were Netscape, Sun Microsystems, Apple Computer, and America Online. Problems of proof would be reduced by adoption of a "bright line" rule that use of non-Microsoft products was anticompetitive. This would eliminate expensive and difficult proceedings like the lengthy trial of the Microsoft case.

The recent breakthrough is rendered more dramatic by widespread reports that, before Posner's intervention, the parties were far apart. Microsoft originally offered to end the suit by issuing Attorney General Reno a coupon good for $25 off the government purchase of any Microsoft product. This approach foundered when the company insisted that the coupon be redeemed by December 31, 1999.

"That was a deal-breaker for us," one executive explained. "We figured our computers would crash the next day, and we wouldn't be able to fill Janet's order."

In response, government lawyers suggested a plan that would actually have broken up Microsoft CEO Bill Gates himself. Each of the smaller parts of Gates--known during negotiations as "Micro-Mes"--would have been placed in charge of a division of the company.

When Microsoft attorneys rejected the initial offer, the government then countered with a plan by which Gates would remain intact but be given control only of the company's rapidly failing Windows CE division, which makes an unpopular operating system for personal digital assistants (PDAs). The underlying idea was that not even Gates could bully PDA users into buying Windows CE, a punishment that fit the violations. It was at this point that Posner suggested that the parties discuss acquisition.

To the surprise of both sides, they found "substantial agreement" on most issues. Reno and top Justice aides had long been wanting to get out of Washington and escape from the "corporate culture" of the Clinton administration. White House officials had repeatedly wished the Justice Department would just "go away." And Microsoft was full of fresh ideas for making use of the Justice Department's "unparalleled brand recognition."

The company reportedly plans to spin off the department's troubled Federal Bureau of Investigation division. Potential buyers reportedly include the Wackenhut security empire and maverick billionaire H. Ross Perot.

Microsoft planners say they have just begun to find long-term ways to make the department's "moribund bureaucracy" into a profit center. Possible plans include online auctions of probation and parole services, and the possibility of having federal prisoners take over the programming work for the company's Windows 2000 operating system. "How much worse could they make it?" one industry insider wondered.

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