Why a Breakup of Microsoft Is a Bad Idea

FRAMINGHAM (07/03/2000) - The very name Microsoft Corp. evokes an emotional response from people. The conventional wisdom is "Love them, hate them, admire them or stand in awe of them -- in today's world of technology you can do anything but ignore them."

The truth is, Microsoft is neither good nor evil. It's a company neither to be feared nor held in awe. Microsoft is a business, no more and no less. The government's recent effort to portray it as something else has done a disservice to the industry and the public and has led to a verdict that serves no one, except Microsoft's competition. After you get past the emotional side of the case against Microsoft, you discover why a breakup is a bad idea.

First, a court-ordered breakup wouldn't be simple. As much as the government likes to believe that there are natural fracture lines between applications and operating systems, the reality is that Microsoft is far more complex than that.

It is - for all intents and purposes - an applied research company. It creates "technology streams" such as the Windows NT microkernel, the Windows 95 user interface and the Active Directory server. It then packages these technologies, licenses them and sells them. Some of these technologies are deployed into applications architectures, some into more traditional operating systems. What learned government panel will decide whether Active Directory is an operating systems technology or an applications architecture?

Second, the notion that a breakup will somehow level the playing field for Microsoft Office's competitors is false. The most oft-cited example is that the new applications company would create an Office suite for Linux. Microsoft creates applications where a market for them exists. It has long supported Apple's Macintosh operating system with Office applications and other software.

If there were a potential profit in creating an Office suite for Linux, it would do so, as it has for the Mac OS. But the business proposition isn't there, nor will it be if the company is broken up. Linux remains unpopular for desktop users for many reasons, though lack of Microsoft Office isn't chief among them.

Third, the government believes that breaking up Microsoft will lower costs for IT users. Not only is this unlikely, but the more likely scenario is higher costs. Breaking up Microsoft along the court's current guidelines will result in core technologies being split arbitrarily, potentially raising total cost of ownership and creating barriers to complex technologies working well together.

IT departments complain that different products don't work well enough together, and a breakup would make that worse. All users will pay the added price of supporting the profit structures of two companies instead of one.

The only beneficiary of the court verdict would be a Microsoft competitor that will be able to react much faster without the constraints imposed on a split company. For Microsoft, future success won't necessarily mean market dominance.

The dominance that it has achieved in the operating system and office suite markets probably won't be repeated. Success without total dominance means there will always be strong players whose market positions will be large enough and stable enough to afford its adopters reasonably low risk and provide the competition the government seeks. But a divided Microsoft will be unable to compete effectively in the sea change that is the technology industry. Today, many of its strengths are also its weaknesses, and many of the markets it would like to serve are new to it and other companies. Today's rapid pace of technology, not the breakup of Microsoft, will serve to level the competitive playing field.

If Microsoft has engaged in inappropriate behavior, it should be forced to change its conduct. A breakup is a punishment that doesn't fit the crime and doesn't serve the public interest, Microsoft's customers or the industry at large.

Michael Gartenberg, former lead Microsoft analyst at Gartner Group Inc., is a partner at Dellet LLC, a venture capital firm in Englewood, New Jersey, focusing on the Israeli market. Contact him at michaelg@dellet.com.

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