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Microsoft Recants Exclusive Music Deals

Posted by iMark - 2005-10-22

Microsoft Corp., already under government scrutiny over its behavior toward competitors, told manufacturers of iPod-like portable audio devices that they were not allowed to distribute rivals' music player software, but then pulled back after one company protested.

The Justice Department said the incident was "unfortunate," but that government lawyers decided to drop the issue because Microsoft agreed 10 days later to change the contracts. The government disclosed details of the dispute in a federal court document made available Thursday.

The disputed contracts would have affected portable music players that compete with Apple Computer Inc.'s wildly popular iPod.

Legal and industry experts said Microsoft's demands probably would have violated the landmark 2002 antitrust settlement between the company and the Bush administration. They expressed astonishment that Microsoft was not more careful, given its mandatory legal training for employees about antitrust rules and continued monitoring by the Justice Department and a federal judge over its business deals through late 2007.

"One has to be skeptical that either the internal training is not working, in which case heads ought to be rolling, or that the lessons of the case are being ignored," said Albert A. Foer, head of the Washington-based American Antitrust Institute, which supports more aggressive U.S. antitrust policies.

Howard University law professor Andrew Gavil said he wonders whether Microsoft's early demands - which would have compelled manufacturers to distribute to consumers only Microsoft's Windows Media Player software - were a genuine mistake or a signal the company intends to revert to its hardball tactics.

"It's somewhat amazing it even happened," said Gavil, who has closely followed the Microsoft case. "It's troubling that anyone inside Microsoft was still thinking this was a legitimate business strategy."

Microsoft said it recanted its demands after lawyers reviewed the contracts and after an unspecified industry rival complained. "We have a legal process in place that prevents these incidents from occurring," spokeswoman Stacy Drake McCredy said.

The disputed contracts were drafts sent to manufacturers before Microsoft's lawyers reviewed them, said one lawyer familiar with details of the incident. This lawyer spoke on condition of anonymity because this person was not authorized to make public statements about the antitrust case.

The contracts, part of a campaign Microsoft called "easy start," affected one of the rare technology sectors where Microsoft is not already dominant: handheld music players and online music services. The software giant and others have struggled to match the runaway success of Apple iPod player and iTunes music service.

Microsoft wants consumers to use its media software to download songs and transfer them onto their portable music players from Internet subscription services, such as those from Napster Inc., RealNetworks Inc. and Yahoo! Inc. Each company currently offers its own media software.

Before the disclosure of the document involving portable music players, U.S. District Judge Colleen Kollar-Kotelly had set a hearing for this coming Wednesday to review the adequacy of the antitrust settlement. It was unclear whether she will challenge lawyers from Microsoft or the government over the contacts.

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