Microsoft loosens OEM licensing

Microsoft Corp. will begin to immediately offer computer manufacturers more flexibility to configure desktop versions of the company’s Windows operating system, Microsoft said Wednesday, admitting the change is in light of a recent Appeals Court ruling in the U.S. government’s antitrust case against the software maker.

The company is taking the dramatic step, which will loosen Microsoft’s control over how its operating system is configured for different hardware, because “we recognize that some provisions in our existing Windows license have been ruled improper by the court,” said Microsoft CEO Steve Ballmer in a statement.

The announcement does not take the place of any settlement discussions with the government in the company’s ongoing legal wrangling, Ballmer said. The U.S. appeals court ruled June 28 that Microsoft should not be broken into two companies, but upheld a judge’s ruling that the company engaged in illegal behavior befitting of a monopoly.

The Appeals Court ruled that certain provisions in Microsoft’s licenses with the OEMs (original equipment manufacturers) thwarted the distribution of third-party Web browsers. In a move underscoring the pressure Microsoft has been under to be more flexible with OEMs, the software maker is now allowing OEMs to offer its operating system completely free of the company’s Internet Explorer (IE) browser, if they so choose.

Microsoft said that it is changing its licensing rules immediately so that PC makers can take advantage of the changes for the upcoming launch of the company’s eagerly awaited Windows XP software, due out Oct. 25. The rules also extend to Windows 98, Windows 2000 and Windows ME.

As of Wednesday, PC manufacturers will have the following licensing options:

– Removing the Start menu entries and icons that provide end users with access to components of IE. Microsoft will add IE to the Add/Remove programs feature of Windows XP. In addition, OEMs will have the option of removing IE entries and icons from previous versions of Windows, including Windows 98, Windows 2000 and Windows Me.

– OEMs retain the option of putting icons directly on the Windows desktop, even though the company designed Windows XP to have a “clean” desktop.

Microsoft’s move didn’t come as a surprise to Mark Schechter, partner at Howrey Simon Arnold & White LLP and a former official in the U.S. Department of Justice’s antitrust division. The software maker clearly realizes that the Appeals Court didn’t criticize the District Court’s conclusion that Microsoft’s way of dealing with OEMs is out of line and contributes to its monopoly power, he said.

“What the government alleged and the District Court found is that Microsoft had monopolized the OS (operating system) market by making it difficult for competitors to have access to the distribution channel – PC OEMs,” he said. “And it did it by sharply limiting the rights of OEMs to make various types of changes to the (Windows) desktop screen,” which in turn made it difficult for OEMs to put competing software there, in particular browsers.

“Microsoft probably decided to get ahead of the game” based on the agreement on this point between the courts, he said.

“The Appeals Court essentially affirmed that part of the judgment,” and Microsoft is aware of that, Schechter added.

While Microsoft’s move indicates that the software Goliath is ready to concede on some points in order to untangle itself from its legal quandary, the step garnered varying responses from analysts Wednesday, who indicated it might be too little, too late.

Tim Bajarin, president of consulting company Creative Strategies Inc. in Campbell, California, said the move is a clear signal from Microsoft that it is prepared to move toward the middle ground in order to achieve a settlement in the antitrust case. Microsoft has always indicated a willingness to settle, but this is the first concrete sign that the vendor is willing to curb its business practices, Bajarin said.

“This is one of their first volleys to show the industry that they are willing to be somewhat flexible. It’s clear Microsoft is listening closer and … they really are looking for some kind of settlement rather than pushing forward indiscriminately,” he said.

Although it appears that Microsoft is finally softening its stance in the face of its ongoing legal battles, some analysts believe that as a first placating step, Wednesday’s move was not enough to give other browsers a fair chance.

“It’s a little too late for Netscape,” said Chris Le Tocq, an analyst for Guernsey Research in Los Altos, California. “Why would an OEM remove Internet Explorer as the browser when most of their customers expect to use it anyway.”

Bajarin suggested that, ironically, many of Microsoft’s most loyal PC makers, such as Dell Computer Corp., likely won’t take the opportunity to remove the Internet Explorer browser from the desktop. Many users have become “conditioned” over the past two years to use Microsoft’s browser software, Bajarin said, and PC makers may be reluctant to yank their browser of choice.

Furthermore, according to Le Tocq, there are three areas of Windows XP that OEMs will not have options to remove. Computer vendors cannot remove Windows Tour, which introduces users to new features of the operating system; Windows Media Player; or the link to Microsoft’s ISP (Internet Service Provider), the Microsoft Network (MSN), Le Tocq said. “They can remove Internet Explorer, but the MSN access link has to be left in.”

“Essentially, what Microsoft is doing here is moving from a war waged over browsers to a war which will be waged over media formats and Web services,” Le Tocq said.

Another analyst believes the concessions are the only way Microsoft will be able to ship Windows XP on Oct. 25. “They’re just trying to make sure XP gets out the door,” said Rob Enderle, a research fellow with Giga Information Group Inc. “They have no window to let this product slip at all.”

The court’s ruling made it clear that if Microsoft did not make concessions on the product, it would have been blocked, Enderle said.

“If (Microsoft) wants any revenue this year, it has to ship on this date,” he said. “If they don’t do anything, there will probably be an injunction blocking the product.”

But the decision is not necessarily an admission of guilt on the company’s part, either, he added. “If you have a judgment that says you did something, you have to bite the bullet and do what’s best for the company,” Enderle said. “They can’t put this product at risk over their beliefs.”

Until Oct. 25, the ball appears to be in the government’s court, Enderle said.

“The government has the advantage, and Microsoft is up against a time wall,” he said. “Right now, the XP launch is a big lever that can be used to get (Microsoft) to make changes.”

While it is impossible to decipher the exact motives behind Microsoft’s concession, the move does indicate further flexibility on the part of the dominant software maker.

For now, however, what is one small step by Microsoft could lead to one giant leap for the PC industry.

(Doug Gray and James Niccolai in San Francisco and Juan Carlos Perez in Fort Lauderdale, Fla., contributed to this report.)

Microsoft Canada, in Mississauga, Ont., can be reached at

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