DOJ Investigates Microsoft's $135M Investment in Corel

An end user with a very big stake in the future of Corel Corp. -- the U.S. Department of Justice (DOJ) -- is using its legal powers to probe the antitrust implications of Microsoft Corp.'s recent $135 million investment in the struggling software vendor.

Officials at both Microsoft and the DOJ last week confirmed that the agency is seeking documents related to the investment deal and strategic alliance that Microsoft and Ottawa-based Corel signed last October. The two office software rivals said the agreement signaled the start of increased collaboration, including joint development, testing and marketing initiatives.

The DOJ is looking into "the competitive effects of the transaction," said agency spokeswoman Gina Talamona. However, she declined to comment on the scope of the investigation or when the DOJ began its probe of the deal.

Microsoft spokesman Jim Cullinan said DOJ officials made "a narrowly focused request for information" about the deal. "Nothing in our investment in Corel should raise any legal concerns, but we are cooperating with the Justice Department to provide them with the information they've requested," he added.

Corel's WordPerfect suite of office applications competes against Microsoft Office, but market research firm IDC in Framingham, Mass., said Microsoft controls approximately 94% of the word-processing portion of the market.

However, the DOJ is a major WordPerfect user: In 1999, it bought an enterprise site license that covered the installation of Corel's software on a total of 35,886 PCs. That contract runs for three years, according to a DOJ official.

Some critics of Microsoft welcomed the DOJ's investigation of the Corel deal.

"Microsoft has market power in Office, and to invest in its only significant remaining competitor has got to raise questions," said Ken Wasch, president of the Software & Information Industry Association in Washington, which has filed briefs in support of the antitrust case against Microsoft.

An End User With Clout

What happened?

In October, Microsoft made a $135 million investment in operating system and applications competitor Corel, which makes WordPerfect, a Linux operating system and other business and graphics applications.

What's the problem?

In January, Corel said it may spin off its Linux operating system business. It also said it would focus on taking care of existing WordPerfect customers and not on building its customer base. Microsoft said its deal calls for .Net cooperation and nothing else.

What's the DOJ doing?

It wants to see if antitrust rules have been violated. The DOJ may be one of Corel's biggest customers, with a WordPerfect enterprise license for more than 35,000 workstations.

Wasch called the request for information about Corel "a perfectly reasonable inquiry" into antitrust concerns. In particular, he cited a restructuring announcement made last month by Corel, in which the company said it will target WordPerfect at the current installed base and try to spin off its Linux operating system distribution division.

As part of the restructuring announcement, Corel CEO Derek Burney said executives at the company were "choosing not to go into a head-to-head battle" with Microsoft, because most users have selected the latter's office suite as a de facto standard.

But Cullinan said there was nothing in Microsoft's agreement with Corel that asked the latter firm "to do or not do anything" with its products. Corel officials "can make their own decisions about what software they want to develop for what platforms," he said. The only exception, he added, was an agreement for Corel to develop software supporting Microsoft's .Net initiative.

In any event, Corel's Linux operating system efforts aren't making money, said Bill Claybrook, an analyst at Aberdeen Group Inc. in Boston. If Corel's Linux ddistribution plans are "the basis of [the government's] investigation, it's pretty shallow, as far as I'm concerned," he said.

WordPerfect is widely used by law firms that want to take advantage of formats that were developed specifically for attorneys. The Corel software remains the standard at Alston Hunt Floyd & Ing. But documents frequently have to be reformatted on Microsoft Word for use by the firm's corporate clients, said Herbert Chun, information systems director at the Honolulu-based law firm.

Because of that, Chun said he hopes Microsoft's investment in Corel will help improve integration between the two products. The deal should make Microsoft "more willing to share the code [needed] to make the translation more seamless," he added.

George A. Chidi Jr. of the IDG News Service contributed to this article.

This story, "DOJ Investigates Microsoft's $135M Investment in Corel" was originally published by Computerworld.

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