UPDATE: MS Takes Final Swing at Breakup Proposal

SAN FRANCISCO (05/31/2000) - Microsoft Corp. issued its final response today to the U.S. government's proposal to split the software titan into two separate companies, paving the way for District Court Judge Thomas Penfield Jackson to issue a final ruling in the case which could come as soon as tomorrow.

In its court filing submitted this afternoon, Microsoft repeated its criticism that the government's proposal to break up the company is extreme and out of proportion to the judge's findings in the case. The software vendor went on to offer a detailed critique of the government's breakup proposal, in which it addresses for the first time the logistical and economic realities that such a move would entail.

Highlighting the complexities of splitting in two a giant, global corporation that has subsidiaries in 75 countries, the software vendor asked Judge Jackson to grant it 12 months in which to submit a detailed proposal of the steps the firm would take to divide itself in two. The Department of Justice's (DOJ's) proposal submitted last week allowed four months for Microsoft to pull such a plan together.

The company also criticized what it referred to as a "glaring omission" in the DOJ's breakup proposal -- its failure to provide a clear definition of what constitutes an 'Internet browser.' The definition is crucial, Microsoft argues, because the government has asked the court to limit how the operating systems side of Microsoft's business can continue to develop the product.

"At the moment, there is no indication of what that limitation means because there is no indication of what the government is referring to as the 'Internet browser,'" Microsoft said in its filing.

The filing also addresses government criticisms of Microsoft's last-minute "offer of proof" submitted last week, in which the software vendor listed evidence and witnesses that Microsoft would have presented had it been given additional time to argue against the proposed breakup.

The DOJ last week called the offer of proof submission "a cynical ploy calculated to raise diversionary issues on appeal," and criticized Microsoft for not submitting the materials at an earlier date. Microsoft today said no appropriate occasion had arisen earlier to submit the filing.

Microsoft today submitted additional "offers of proof" in the form of statements from the heads of several large Microsoft customers including Compaq Computer Corp. President and Chief Executive Officer Michael Capellas and Jeffrey Katzenberg, the founder and CEO of DreamWorks SKG. Microsoft says these executives would have testified on its behalf that breaking up the software maker would adversely affect their businesses.

The filing from Microsoft leaves Judge Jackson free to issue a final ruling in the two-year historic case at any time. The ruling could conceivably come as early tomorrow, and Jackson is widely anticipated to side with the government's request that Microsoft be broken up.

Microsoft has vowed to appeal the decision, a process that could delay any structural changes for months or even years. The government has recommended that certain behavioral restrictions be applied in the meantime.

Judge Jackson on April 3 ruled that Microsoft had repeatedly violated antitrust laws in order to maintain its monopoly in the PC operating systems market and to expand that monopoly into new markets, most notably the Internet browser market.

On April 28, the DOJ asked Jackson to cleave Microsoft into two separate companies -- one focussed on the Windows operating system and the other on software applications and Microsoft's Internet properties -- as a way of curbing the company's behavior. The DOJ was joined in its request by 17 of the 19 U.S. states that are also plaintiffs in the case and the District of Columbia.

Microsoft insists the judge's findings don't warrant such a drastic remedy. On May 10 the software giant proposed a set of milder behavioral restrictions to curb its behavior. The restrictions include limiting the terms of its licensing agreements with PC makers, and offering a version of the Windows operating system that omits the icon for Microsoft's Internet Explorer Web browser software. The government rejected that proposal as ineffective.

In oral arguments on May 24, Judge Jackson appeared to lean in favor of a breakup of Microsoft. He also surprised observers by denying Microsoft's request for additional time to prepare its defense against the structural remedies.

At the end of the May 24 hearing, Microsoft submitted a 35-page "offer of proof" listing expert witnesses it would have called and additional evidence the software giant would have submitted to defend itself against the proposed breakup.

On Friday last week, the DOJ submitted its final remedies proposal, repeating its call that Microsoft be split in two and clarifying details contained in its original proposal. In a memorandum to the filing, the DOJ gave a harsh criticism of Microsoft's last minute offer of proof.

"The fact that Microsoft had prepared but kept secreted in its briefcases a 35-page Offer of Proof concerning testimony from 16 different witnesses... demonstrates that Microsoft was not genuinely surprised about what was expected of it," the government said.

Microsoft's filing today was its response to Friday's filing from the government.

Microsoft, in Redmond, Washington, can be reached at +1-425-882-8080 or at http://www.microsoft.com/. The DOJ, in Washington, D.C., can be reached via the Internet at http://www.usdoj.gov/.

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