The federal agency on Monday accused Microsoft of using its powerful position in the software operations market to steal customers from a niche it doesn't dominate: Internet browsers, the programs that help computer users find whatever it is they're looking for.
The government objects to Microsoft's requirement that personal computer manufacturers installing its Windows 95 operating system on their products also install Microsoft's browser, Internet Explorer.
"Microsoft is unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly," Attorney General Janet Reno said. "It's plain wrong."
The Windows system is used on more than 80 percent of the nation's personal computers. But Navigator from rival Netscape Communications Inc. is the leading Internet browser, with 62 percent of the market share.
The government asked U.S. District Judge Thomas Penfield Jackson in Washington to hold Microsoft in contempt of a 1995 court order _ a consent decree actually reached a year earlier _ that bars the Redmond, Wash.-based company from anti-competitive licensing.
It proposed an unprecedented $1 million daily fine should Microsoft defy the judge's order. It was the largest contempt fine ever sought by the Justice Department's antitrust division, which usually seeks $10,000 daily fines in contempt cases.
"This is a very serious abuse," said Assistant Attorney General Joel I. Klein, head of the division. He argued that Windows and Internet Explorer "are two different products" and should be sold separately.
The government also asked the court to require Microsoft to notify consumers who own PCs with Windows 95 that they are not required to use Internet Explorer and to give them instructions on how to remove the visual Internet Explorer icon from their computer screen if they choose.
"This action is unfortunate and misguided," said Microsoft spokesman Mark Murray. "The facts will show that Microsoft is in full compliance with the consent decree."
William Neukom, senior vice president of law and corporate affairs at Microsoft, said the decree explicitly does not prohibit the company from developing integrated products.
Including the browser with Windows 95 was "the most logical next step" after including tools to allow users to obtain information from the computer's hard drive or a compact disk, Neukom said.
The squabble underscores how the Internet is, in many ways, the biggest threat to Microsoft.
Besides the dominance in the nation's PC software market, Microsoft also makes word processing programs, spreadsheets, databases and programming tools, all closely linked with Windows 95. The company collects huge licensing revenue in all of those markets.
But the Internet is eroding the importance of operating systems. As use of the Internet grows and browser software becomes more sophisticated, it doesn't matter whether the computer runs Windows 95.
"This is not about the Internet," said Netscape's general counsel, Roberta Katz. "It's about doing away with competition in the browser market because the browser threatens the operating system."
The government told the court that "as Microsoft fears, browsers have the potential to become both alternative 'platforms' on which various software applications and programs can run."
For example, Netscape's software, Communicator, gives users an all-in-one program for e-mail, the Web and allows groups to collaborate over a network. And it runs on more than just Windows machines.
And Java, a software language from Sun Microsystems, allows programs to be run straight off the Web, no matter the operating system. Already, crude word processors and spreadsheets are available _ and they don't need Windows 95. Sun already has sued Microsoft, accusing it of improperly adapting Java language for Internet Explorer.
If Windows becomes irrelevant, Microsoft's dominance of the other software sectors could come crashing down.
To avoid such a fate, the government contends, Microsoft has sought to siphon away Netscape's customers and control the browser market. By bundling its browser and operating systems, Microsoft can ensure that Windows 95 and its successor due out next summer, Windows 98, remain dominant.
Microsoft has 11 days to file a written response to the government court filing. A hearing is likely later.
On Wall Street, Microsoft stock dipped after the government's announcement, but closed up 25 cents a share at $132.50 on the Nasdaq stock market. Shares of Netscape closed up $4.25 at $39.25.