SAN MATEO (05/08/2000) - For such smart guys, Microsoft Corp.'s top executives sometimes act incredibly dumb. While federal and state officials were meeting to agree on a proposal to penalize Microsoft for its antitrust violations, Chairman Bill Gates and CEO Steve Ballmer loudly proclaimed in the press that the company had no reason to change any of its business practices. Ballmer told editors of The Washington Post, for example, "We behaved in every instance with super integrity."
After hearing all that, I expected the Feds to propose breaking Microsoft not into two companies but into a third and fourth as well. Chairman Bill would be responsible for selling "Gates CE," while chief executive Steve would be marketing "Ballmer Bob."
Despite recent comments from Microsoft officials, it's impossible to see how a breakup into Baby Bills could be bad for consumers. If your company wants to buy PCs in 2003 with Windows and Office preinstalled, you could -- just as you can today. If you preferred PCs with Windows and Corel Office, you could get this combination preinstalled more easily and probably less expensively than today.
The obsession with browser wars has obscured other accusations against Microsoft. Under U.S. law, it's not illegal to hold a monopoly. But a company with a monopoly in one product must ensure it doesn't use that monopoly to sell its other products.
According to Judge Jackson, as a condition for licensing Windows, Microsoft contracts required PC makers to refrain from promoting products made by Microsoft's competitors; Microsoft contracted with major ISPs, inducing the ISPs to use Microsoft products rather than competing brands; and Microsoft changed its version of Java so third-party Java apps would run only on Windows, and even pressured Intel into undermining the competitive threat Java posed.
Additionally, there's the action that the mainstream press treats as the entire case, because it's easy to explain: Microsoft priced Internet Explorer at zero, and then bolted it to Windows to eliminate competitors.
This alone didn't hurt Netscape. As recently as 1996, at least 10 different browsers were on the market, including such serious players as Symantec Cyberjack, Attachmate Emissary, and IBM Internet Connection. Since these products could no longer be sold, consumers lost browser innovations.
Judge Jackson ruled that only when Microsoft's acts are viewed as a "well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself." This includes two primary tactics.
1. Predatory pricing. Microsoft's ability to use cash reserves from Windows and Office to develop and give away other products destroys competition.
2. Embrace and extend. Microsoft first announces that it "embraces" a standard.
But the company then "extends" the standard so it only works with Microsoft products.
Microsoft executives have learned nothing from their court disaster. Microsoft is now reportedly requiring Web hosting services to use the free MS Media Player exclusively, shutting out RealNetworks' competing software.
If we want high-tech innovation and competition, Microsoft must not be allowed to dump products free or "embrace and extend."
Many people e-mailed to say that breaking Microsoft into "Windows Inc." and "Everything Else Inc." won't stop the new companies from using the same tricks.
As a single remedy, that may be true. But the breakup, which almost certainly will be stayed pending appeals, must be in conjunction with clever conduct remedies, which will take effect immediately.
The plaintiffs proposed what they call "conduct plus" remedies, or measures that are easy to enforce, even against executives who have demonstrated they will use any loophole.
The most important remedy is a prohibition on bundling any new "middleware" with base-price Windows. Middleware is defined to include browser, e-mail, multimedia, instant messaging, and other software.
For the next three years, even if Microsoft wins on the breakup issue, smaller software companies can innovate with less fear that Microsoft will "embrace" them to death. This opens a window of opportunity. Let a thousand Microsofts bloom.
Brian Livingston's latest book is Windows 2000 Secrets (IDG Books). Send tips to email@example.com. He regrets he cannot answer individual questions.