Microsoft Disputes Divestiture Plan

SAN FRANCISCO (04/28/2000) - Calling the government's proposal to sever Microsoft Corp. in two "very disturbing," founder and chair Bill Gates reiterated his vow to keep fighting the legal foes that have branded Microsoft an illicit monopoly.

Gates was subdued and precise during a one-hour press briefing that followed the release Friday of proposed remedies for Microsoft's antitrust violations.

The U.S. Department of Justice and 19 states and the District of Columbia suggest divesting the company to resolve what has been called "predatory" practices by the software giant.

Microsoft President and Chief Executive Officer Steve Ballmer says he's "disappointed beyond belief" in both the breakup proposal and what he called "draconian" proposed restrictions on Microsoft's behavior. Ballmer has repeatedly and publicly declared the company will not be divested.

In a 17-page proposed final judgment, the plaintiffs urge presiding Judge Thomas Penfield Jackson to break Microsoft into two companies: operating systems and applications. The OS company would own all flavors of Windows. The applications company would include tools and apps such as the Office suite and Internet Explorer.

The two would initially cross-license the intellectual properties behind the technologies but would not be permitted to work together.

The behavioral remedies would take effect 30 days after Jackson rules, sometime after final arguments on May 24. They would remain in effect for three years, and the breakup order would expire ten years after it takes effect.

Attorneys general for Ohio and Illinois--states among the group of plaintiffs -- filed a separate statement suggesting the three-year period be extended to ensure that Microsoft restrains its anti-competitive conduct.

Microsoft Finds Proposal "Fatal"

As expected, Microsoft executives expressed emphatic disapproval of the breakup proposal, saying it would hurt Microsoft's ability to develop and deliver new products.

"This (breakup recommendation) is an arbitrary split," Gates says. "Microsoft would be greatly damaged by this kind of split."

Gates claims Microsoft could not have developed Windows without work by both the Office and the Windows teams. "The requirement that Office people not work with Windows people would have been fatal" had Microsoft been subject to such restriction in the past.

Both Gates and Ballmer say the plaintiffs' proposal is not good for customers, which is the crux of the antitrust argument.

"The regulation (of Microsoft by the government) would be equally threatening and hard on our ability to do good work for consumers," Ballmer says.

Joel Klein, assistant attorney general, says the proposed structural remedies create market incentives and will prompt robust rivalry.

"Each company will have the incentive to compete vigorously through developing and licensing products that compete with the other company's core businesses," Klein says. He also contends that a separate applications company would be motivated to port the Microsoft Office suite to other operating systems, which could benefit consumers.

Office is available for Apple's Macintosh systems (Microsoft is an investor in Apple). But the programs do not ship for Unix or Linux.

Different Opinions, Interpretations

Microsoft and the government differ on their interpretation of the suggested remedies.

For example, Gates says Microsoft could not add features to a product without also offering the functions "on an a la carte basis."

Klein denies the decree would limit Microsoft's ability to add features to products or to innovate.

Microsoft will offer alternatives in its response, due May 10, says Bill Neukom, Microsoft executive vice president and general counsel. He says the government's "excessive demands" will delay the case's resolution.

Microsoft's Compliance Checklist

Under the proposed remedies, Microsoft must:

- Not force bundling. Windows licensees would not have to promote products distributed separately from Windows.

- Let system vendors change the splash screen. The vendors can also bundle whatever applications they choose to include.

- Have uniform terms for licensing Windows to system vendors, instead of cutting special deals.

- Provide application programming interfaces and other technical information to partner vendors in a timely fashion.

- Establish a secure facility for hardware and software vendors to study and test Microsoft code for compatibility.

- Not knowingly implement any OS technology that interferes with competing applications.

- Not cut deals with vendors for that limit use of or hamper performance of competing software.

What's more, Microsoft officers who go to one of the Baby Bills would be prohibited from owning stock in the other, as would board members. A compliance committee within Microsoft's corporate board would oversee the process.

Microsoft would have to save all internal e-mail for four years, and Justice Department and state attorneys could inspect its records and interview employees to ensure compliance.

Second Guesses, Second Chances

Other parties are speculating on the proposal's effect on consumers.

A statement from the Software & Information Industry Association, from which Microsoft recently resigned, lauds the proposal.

"The Justice Department's proposal is a slam-dunk winner for consumers," says Ken Wasch, SIIA president. A Microsoft breakup will restore competition to the desktop, he adds.

But Microsoft supporters in the Association for Competitive Technology predict a slowdown in innovation that would hurt the economy.

"I'm aghast this is being suggested...it's gross overkill," says Jonathan Zuck, president of the Association for Competitive Technology. "It's like identifying a traffic problem and dropping a nuclear bomb on it."

And many others wonder whether the proposed breakup would ever occur, given the expected string of appeals and the constant market changes of the technology industry.

Friday's proposal is only recommendations to a judge, points out Dan Kusnetzky, vice president of system software research at IDC. "If Microsoft doesn't like it -- and they won't -- they'll appeal all the way to the Supreme Court," he adds.

"The concert won't be over until the Supremes sing," Kusnetzky says.

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