Microsoft to Pay $775 Million to Settle IBM Antitrust Suit

Continuing its practice of settling lawsuits in order to focus on the competitive threats it faces, Microsoft has agreed to pay IBM US$775 million to settle a long-simmering antitrust lawsuit.

The action was a private suit that was brought in conjunction with the government action that resulted in an epic trial and an eventual antitrust ruling against Microsoft, which was eventually settled.

In addition to paying $775 million to IBM, Microsoft will also extend IBM an addition $75 million credit toward licensing of its products. IBM agreed not to bring any new legal actions for at least two years.

Other Sizeable Settlements

The latest settlement brings to nearly $3.8 billion the amount that Microsoft has agreed to pay out of its considerable cash reserves in order to settle suits, many of which sprang up after the U.S. Department of Justice accused Microsoft of using its virtual monopoly of the PC operating system software market to elbow competitors out of emerging sectors, such as the Web browser.

In recent years, Microsoft has reached other sizeable settlements with companies such as Novell, which it paid $537 million, America Online, which received $750 million, Gateway, which was paid $150 million, and Sun Microsystems, which will receive a $1.6 billion payout.

“Over the last few years we have been focused on resolving our disputes with other companies, and today’s announcement takes another significant step toward achieving that goal,” Microsoft General Counsel Brad Smith said in a statement.

The deal also leaves RealNetworks as the last major technology company with a potentially costly suit outstanding. RealNetworks is seeking $1 billion in damages from the world’s largest software maker. Microsoft is also still busy wrangling with the European Union over the specific terms of penalties it faces for antitrust violations in that market.

Echoes From the Past

Big Blue had claimed that because it would not agree to promote the Internet Explorer browser in new PCs, Microsoft penalized it with its licensing terms and through other means, an assertion that was backed in the 1999 ruling against Microsoft in the government antitrust action.

The cash will be a boon to IBM, which recently missed analyst expectations for quarterly earnings and is in the midst of a major shift in its business model after selling off its PC business to China-based Lenovo. IBM is focusing more on enterprise technology opportunities, including software. Big Blue ranks second to Microsoft in terms of software sales.

Many observers said it seems clear that despite the detente, IBM and Microsoft are not likely to completely bury the competitive hatchet. While the Sun deal called for close cooperation between the two parties and the AOL agreement put the IE browser into AOL for some time to come, not such forward-looking provisions were included in this deal.

“IBM is pleased that we have amicably resolved these longstanding issues,” Big Blue General Counsel Ed Lineen said in a statement. The deal erases complaints related to the OS/2 operating system software and SmartSuite products from IBM but does not cover separate claims against Microsoft for harming IBM’s server business.

Other Irons in the Fire

Microsoft, for its part, has made no secret of its desire to clear the enormous backlog of antitrust and intellectual property lawsuits against it. However, it has also been cautious to ensure that all settlements come on its terms whenever possible.

Analysts say the legal strategy is a shrewd one and a necessary one, as Microsoft can’t afford to be distracted from dealing with new competitive threats. Its Internet Explorer browser is seeing market share rates dip to their lowest levels since it overtook Netscape in the 1990s.

Also, open-source software such as Linux is posing perhaps the biggest threat yet to Microsoft’s dominance of the enterprise software market, a threat that might grow as Linux desktop software is refined.

“Microsoft recognizes that it is at its best from a competitive standpoint when it’s focusing its time, energy and resources on innovation and making better products,” Enderle Group principal analyst Rob Enderle told the E-Commerce Times. “They recognized some time ago that they have to get back to that sharp focus.”

Even as Microsoft’s antitrust issues are paid down, the tech industry might be girding for a new round of similar claims. AMD, the number two maker of computer chips, has filed an antitrust claim against market leader Intel, saying the larger company coerced companies into staying away from AMD products.