Government: Microsoft Must Be Broken Up

SAN MATEO (04/28/2000) - Almost two years after filing its landmark antitrust lawsuit against Microsoft, the Department of Justice has proposed a punishment once considered unthinkable by all but the most vociferous critics of the software giant: breaking up the company.

"Both businesses will be entirely free to compete with each other in all lines of business," said Assistant Attorney General Joel Klein, who heads the Justice Department's Antitrust Division. "The result will be revitalized competition in the browser market."

Microsoft has already indicated that it would strongly oppose such a plan.

However, an East Coast consultant familiar with Microsoft's plans said the company has already accepted the fact that it may be broken up and plans to make the best of it.

"You'll see them fight the breakup through the judge's decision this summer and when push comes to shove, you will see them capitulate and try to become heroes," said the consultant, who requested anonymity. "They aren't dumb, and all their best advisers on this are telling them this is the best thing for them to do."

Indeed, many in and around the high-tech industry are not so sure breaking up the company would be the outrageous scheme Microsoft is publicly making it out to be.

"If you break [Microsoft] up, it would probably just be good for the company," said Ken Claggett, president of Syzygy International, a software development company, in Fort Lauderdale, Florida. "[The Justice Department] broke up AT&T and that was good for the Baby Bells. If anything, I think it would open more doors for Microsoft. [Microsoft] could concentrate harder on specific tasks within each of the new organizations."

In its 17-page filing to U.S. District Judge Thomas Penfield Jackson Friday, the Justice Department's antitrust division proposed that Microsoft be split into two companies: one that builds and sells its Windows operating systems, and one that builds Office, Internet Explorer, BackOffice, and the company's other products. Chairman Bill Gates and Microsoft's board of directors would create a proposal to break up the company, and they would be allowed to own stock in only one, although other shareholders would get stock in both companies.

The Windows company would face restrictions for three years, designed to spur competition. They would include limits on what new products or technologies Microsoft can add to the operating system; disclosure of Windows APIs; uniform Windows licensing terms for all computer makers; and oversight on how Microsoft treats its hardware and software partners.

"By turning loose the power of competition in the operating system business, this decree will stimulate competition throughout the software industry ... the American consumer will benefit enormously," Klein said at a news conference.

Microsoft Chairman and Chief Software Architect Bill Gates, who co-founded the company, said a breakup "was not in the interest of consumers and is not supported by anything in the lawsuit."

"Microsoft never could have created Windows and Office if they were in separate companies," Gates said in a statement. "Innovations that began within Office have quickly been incorporated into Windows so they are available to every applications developer."

The Department of Justice's proposal can be viewed in PDF format at www.usdoj.gov/atr/cases/f4600/4639.pdf.

Although industry analyst Dwight Davis called it "the height of folly" to predict what impact any remedy would have on the industry as a whole, he said that it would have been more serious for Microsoft if the Justice Department had recommended that the company make its Windows source code freely available.

"More radical, I think, is the opening of Windows source code," said Davis, an analyst at Summit Strategies, in Kirkland, Washington. "If you split the company you've left the monopoly that the company arguably holds in place, but with two entities instead of one. If you tinker with Microsoft's intellectual property [and] say, 'We are going to force you to go the Linux route and open your source code to all comers,' that really strikes to the heart of Microsoft's business model."

Jackson's stances on Microsoft and its business practices indicate that he will likely approve the Justice Department's recommendations. In fact, his harsh April 3 verdict that Microsoft is an illegal monopoly paved the way for the department's ambitious request, one antitrust expert said.

"Jackson's ruling just beckons for severe relief, like a breakup," said Hillard Sterling, a lawyer at the firm of Gordon & Glickson, in Chicago. "The government surely wouldn't take a dove-like attitude at this late stage."

Jackson set a May 10 deadline for Microsoft to reply to the proposed remedies, although the company could seek an extension. The government is slated to respond to Microsoft's filing by May 17, and Jackson has set May 24 for oral arguments.

Klein said the four months Microsoft will have to present a breakup proposal if Jackson approves it will be plenty of time for company officials to devise a workable plan.

"I have every confidence that, if the court orders this, Microsoft can live within the court's orders," Klein said. "The best way to proceed is let the process go forward."

Seventeen states signed on with the Justice Department's recommendations. Two states, Ohio and Illinois, were less enthusiastic about a breakup, instead suggesting to the court that it wait at least three years before implementing a structural remedy. They will file separately, Klein said.

Jackson has set a mechanism for a Microsoft appeal to bypass an appellate court -- which gave Microsoft a key win two years ago when the appellate court ruled that the company could ship Windows 98 with Internet Explorer -- and go straight to the Supreme Court. But observers say that is unlikely to happen.

A source close to the case said Microsoft is already counting on Supreme Court justices for support whenever the case does reach that level, with an eye toward having a favorable 7th U.S. Circuit Court of Appeals ruling in hand by that time.

"This [case] faces careful scrutiny on appeal," Sterling said. "It's highly likely that appellate judges will view a breakup as unnecessary, unwise, and unsupported under antitrust law."

In October 1997, the Justice Department asked a federal court to hold Microsoft in contempt of a 1995 consent decree and to charge the company $1 million per day for requiring PC makers to include its Internet Explorer browser as a condition of licensing Windows 95. Months of legal skirmishes ensued, and in May 1998 the Justice Department, along with 19 state attorneys general and the District of Columbia, filed the antitrust suit that accused Microsoft of using its Windows dominance to control other markets, particularly the Internet browser market.

The trial began in October 1998 and lasted 11 months. Jackson issued findings of fact last November indicating that he believed the government had proved that Microsoft was an illegal monopoly. Jackson made that his official verdict April 3 after negotiations between the two sides broke down.

Microsoft Corp., in Redmond, Washington, is at www.microsoft.com. The Department of Justice is at www.usdoj.gov.

Bob Trott is an InfoWorld associate news editor based in Seattle. Additional reporting by Dan Neel and Ed Scannell.

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