Break It Up, Microsoft!

In its second attempt to rein in Microsoft, the U.S. Department of Justice is taking no chances: It wants to break the convicted monopolist in two.

As expected, one company would take charge of the Windows operating system, while the other would have ownership of Microsoft's applications and tools.

The proposal comes from a majority of the participating plaintiffs, the Justice Department and 19 states and the District of Columbia, which first brought charges almost two years ago. They also suggest the divested Microsoft companies be barred from reuniting for ten years. Also, founders, officers, and directors of Microsoft would be barred from owning stock in more than one of the new companies. Two of the plaintiffs are making separate recommendations.

Microsoft executives, who have repeatedly vowed to appeal any unfavorable decision, had no immediate comment, although they have scheduled a press briefing for Friday afternoon.

Federal Judge Thomas Penfield Jackson ruled on April 3 that Microsoft is an illegal monopoly that has harmed consumers by its actions.

A Microsoft applications company would slightly overshadow a Windows company, judging from Microsoft's latest quarterly financial reports. Revenue from its productivity applications and developer tools division was $7.8 billion for the first nine months of fiscal 2000; the Windows platform group revenues just topped $7 billion for that period.

Just the Latest Round

Those who have watched this battle unfold are philosophical and skeptical, noting that the outcome remains elusive.

"If you believe that choice is better than no choice, then it's an outcome that would benefit people," says Gary Reback, an attorney with Wilson, Sonsini, Goodrich, & Rosati and longtime Microsoft foe. He represented several Microsoft competitors who, over the past ten years, have urged U.S. regulatory agencies to scrutinize Microsoft's business practices.

"The government wouldn't undertake this whole thing for benefit of one or more companies," Reback adds. "It's for the larger economy and consumers." Splitting Microsoft could result in the creation of more companies that work with the separate operating systems company or the applications company, he notes.

Actual implementation of any remedy is distant. Microsoft is to file its response by May 10, and the government is to answer by May 17. A final hearing is scheduled for May 24. Microsoft has vowed to appeal any unfavorable ruling.

A breakup is a "pretty farfetched outcome for whole case," says Jeffrey Tarter, editor and publisher of Softletter. "No matter how angry you get, it's hard to justify on legal grounds. We're really talking fantasies here."

A breakup would certainly be a logistical challenge.

"I think it would be a distraction for Microsoft management for six months to a year," says Dick Shaffer, principal with Technologic Partners. "There's a lot of depth in their management, and there would be great wailing and gnashing of teeth in Redmond. But they'd cope just fine, in my view."

The outcome, however, could be "two very powerful, excellent companies," Shaffer adds. "One would have Gates in charge; the other wouldn't." If he were Gates, he would not go to the operating system company, Shaffer says. "The greater intellectual challenge is the OS, but you know what has to be done. More exciting would be the company with newer businesses."

Applications With Room to Move

Some would welcome Microsoft applications running on other computer platforms--among them, Palm Computing.

Palm would welcome Microsoft applications ported to the Palm operating system, says Carl Yankowski, Palm chief executive officer. That's more likely to occur if dual Microsofts are in business.

And without a leash to Windows, you might see Word and Excel running on other platforms like Linux, suggests Stacey Quandt, an associate analyst at Giga Information Group.

Pressure from a more popular Linux could challenge Windows pricing, she adds. "As companies like IBM, Hewlett Packard, Compaq, and Dell give credibility to Linux, it puts more pressure on Microsoft to lower prices."

Waiting on the Judge

The case is far from closed. After the May 24 hearing and the judge's ruling on remedies, the appeals will begin.

There has been talk that the Department of Justice could exploit an obscure law that bypasses the appeals court and elevates the case directly to the Supreme Court. However, observers say it is not likely that the high court would hear the case until after the next presidential election. If a Republican wins the White House, a conservative attorney general may choose not to follow through on the case.

Even if Microsoft finally is broken up, sorting out the effects on customers will be a slow process. More than one pundit makes a comparison to the 1984 divestiture of AT&T. "It took years for long distance phone service to become competitive, and local [calling] still isn't," Keenan says. "It's unwise to predict the ultimate outcome."