July 1, 2005

Microsoft to Pay I.B.M. $775 Million to Settle Antitrust Claims

Microsoft said today that it would pay I.B.M., which it displaced as the world's premier technology purveyor, $775 million to settle a number of outstanding antitrust claims.

The settlement stems from the Justice Department's antitrust case against Microsoft in the mid-1990's, in which Judge Thomas Penfield Jackson found the giant software company's practices harmed the International Business Machines Corporation, based in Armonk, N.Y. That case was settled in 2001.

Under the agreement announced today, I.B.M. will also receive a $75 million credit toward using Microsoft software. It is the latest, and one of the largest, in a string of antitrust settlements totaling more than $3 billion between Microsoft, based in Redmond, Wash., and its rivals. In April, Microsoft said it would pay Gateway $150 million. Last year, it agreed to pay Sun Microsystems $1.6 billion, Microsoft's largest such payout.

I.B.M. and Microsoft, which issued a joint statement today, came to an agreement just weeks before a deal to extend the statute of limitations on the claims was to expire in July. The companies said they had been negotiating for the last two months.

"It's good that our two companies worked out something of this magnitude without having to go to court," Microsoft's general counsel and senior vice president, Bradford Smith, said in a telephone interview. "This is significant for an industry that has been marked by more than its share of its litigation over past decade."

He said I.B.M. was one of four rivals that approached Microsoft to start settlement talks at the end of 2003, just before the statute of limitations on Judge Jackson's ruling were expiring. The other three were Gateway, Novell and an undisclosed fourth company. With this latest agreement, Microsoft has reached deals with all four companies.

I.B.M.'s general counsel and senior vice president, Ed Lineen, said, "I.B.M. is pleased that we have amicably resolved these long standing issues."

The settlement includes claims related to I.B.M.'s OS/2 operating system and SmartSuite software package, neither of which ever established more than a toehold in the personal computer market dominated by Microsoft's Windows and Office software. In the agreement announced today, Microsoft also dropped antitrust claims against I.B.M.

But the agreement did not cover claims of damage to I.B.M.'s server hardware and software business. I.B.M. has agreed, with some unspecified limitations, not to seek damages on harm to its server business before June 30, 2002. An I.B.M. spokesman, Scott Brooks, declined to say which, if any, of those claims the company planned to pursue.

The latest settlement will have little direct bearing on I.B.M.'s business, aside from providing a few hundred million dollars in extra profits. The company has moved away from building and selling personal computers and related software, largely ceding those businesses to Microsoft and hardware makers like Dell. I.B.M. now makes most of its money by providing computer services to large businesses and governments.

An antitrust expert who has closely followed the Microsoft cases said the I.B.M. and other settlements did not, and will not, have much impact on the personal computer industry.

"They are not in any way agreeing to fundamentally change how they do business," the expert, Andrew I. Gavil, a law professor at Howard University, said of Microsoft. "The only case where anyone is really holding out is the RealNetworks case. To them, if they can't get a change in that business model" - a reference to Microsoft's practices - "the cash doesn't do them much good."

In a lawsuit filed in 2003, RealNetworks contends that Microsoft has illegally stifled the growth of software that competes with Windows Media Player utility, which comes bundled together with Microsoft's operating system. RealNetworks is seeking $1 billion in damages.

The accord announced today is also unlikely to have any impact on Microsoft's appeal of a European antitrust judgment against it from last year.

In March 2004, the European Commission fined Microsoft 497 million euros (about $613 million at the time) and ordered the company to share details of its desktop operating system with rivals. That judgment also demanded that the company make available to personal computer makers a stripped-down version of its software without its media-playing software.

Just last month, the company and the European Commission agreed to limit access to the software details that Microsoft is disclosing to a select group of rivals. The deal was fashioned specifically to prohibit open-source developers, who provide their software free, from seeing the details at least until Microsoft's appeal of the original ruling works its way through European courts.

Shortly before the close, I.B.M.'s shares were trading up 42 cents, to $74.62, on the New York Stock Exchange. Microsoft's shares were down 6 cents, to $24.78, in Nasdaq trading.

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