Network: What is Bill Gates up to?

The trial isn't over, but Microsoft seems to have its own plans.

MICROSOFT IS on the defensive. As the US government's massive anti-trust case trial went into recess last week, the company was battered and bruised, with its case looking more than shaky and with few friends in the media to defend it.

What had looked like a classic legal wrestling bout between giants has increasingly seemed a mismatch, as the company has been frequently routed. Its spin doctors continue blithely to deny this, but they are increasingly out of kilter with what is said and written.

Credibility has been at the core of its problems: repeatedly, Microsoft witnesses have lacked it. A demonstration of how its browser could not be disentangled from the Windows operating system proved to be flawed; James Allchin, a Microsoft vice-president, admitted that many of the benefits that the company claimed from integrating the two could equally well be obtained from simply buying both Windows 95 and Internet Explorer separately. David Rosen, another key witness, was simply dismissed by the US government's lawyers after his evidence had clearly contradicted the facts, other witnesses, or his own statements too many times.

The government contends that Microsoft had monopoly power, which the company denies. But its senior vice-president, Joachim Kempin, said last week that when he sets prices, he goes by the prices of other Microsoft products, not competitors' - a tacit admission that there is no competition. The government has set out how, through bargains, side deals, pressure and argument, Microsoft parlayed that into advantage in the market-place. The company claims that it is not its fault if its competitors are not so hot, that nothing it has done has been illegal, and that consumers benefit. But it is losing the argument.

So what now? In the short term, the case will reconvene in a month or so. But in the longer term, the industry and legal experts are starting to cast forward to the next steps: how the case ends, whether the appeal succeeds, and what may happen to Microsoft if it loses.

The company may be relying on its appeal fight, which will probably go first to the District of Columbia Court of Appeals later this year, and then to the US Supreme Court. If so, it should probably think again; few of the lawyers who have examined its case think it has a strong chance of getting its way there. What seems more likely is that the company may have to adapt to a new world in which it is forced either to license Windows to other users or split up.

Microsoft is already working on things that go beyond Windows 98. The first tantalising glimpse of what they could be came from John Dvorak, of PC magazine, last week. He presented a vision of Windows 2001, or "Neptune" as he says it is code-named. It looks uncannily like the product Microsoft is defending in court - something that genuinely melds the operating system with the browser - but it doesn't yet exist outside a company presentation which Dvorak says he was given anonymously.

Microsoft's aim, says Dvorak, quoting in-house documents, is to "create a more valuable consumer PC by removing complexity, adding relevancy, connecting it to everything, and making it easy to operate". It is a Web- centred system, with a task-focused approach that builds every function around a start page. Manufacturers can mould this entry point to their own machines. It is aimed at the general household user, the growing market that has boosted computer sales in the US as people take to the Net in droves.

The central contention that Microsoft made in selling Windows 98, and that it is fighting to defend in court, is that there is - already - no distinction between the operating system and the browser; they are a seamless unity. Windows 98 goes some way towards proving that for users, but only so far: there are still too many times when it is blindingly obvious that the two live in neighbouring but parallel universes.

However, the company has made it clear that this is the path it wants to go down. Why, for instance, did it not allow manufacturers to change Windows to separate off the browser and use others? "As you know, the browser is part of Windows," says Kempin. "We did not like people to butcher the Windows operating system... We design our products with a certain amount of pride and we are keen that they get presented to the user as we presented them." The government says the issue is control over the browser market; the company says it is about software, consumers and design. "The bottom line for Microsoft is protecting our ability to innovate and add new features for consumers," says a company spokesman, Mark Murray.

Though it is still early days, the conjunction of speculation about Microsoft's next software move and its corporate future after the trial is suggestive. As Dvorak points out, if Neptune is the future, then Microsoft still appears intent on, to put it mildly, leveraging the strength of its operating system into the Internet. It is also moving closer to integrating this with its forays on to the Web as a content provider. If his company is to be broken up or forced to license its operating system to all comers, Bill Gates may have to make some pretty abrupt changes of strategy.