Microsoft Expects to Beat Breakup

Antitrust judge orders Microsoft split, but software executives promise business as usual.

Cameron Crouch and Peggy Watt, PC World

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The software company is seeking a stay of the judge's order to submit a divestiture plan within four months and make certain immediate behavioral changes.

"We will submit a stay of the order so that the appeal can move forward without any harm to Microsoft or consumers," says Bill Gates, Microsoft's founder and chair.

After two years of legal wrangling, Federal District Judge Thomas Penfield Jackson on Wednesday ordered Microsoft broken into two companies to protect consumers and the computer industry from future misuse of its monopoly power. One company will market the Windows operating system technology, and the other will oversee Microsoft's applications business, including its Internet services. The Windows company could not develop or market the Internet Explorer browser.

Also, the two companies could not enter into any joint ventures, or license technology at better terms than they give other vendors.

Jackson also imposed behavioral restrictions while the breakup plan is being worked out, notably protecting vendors who market competing products. Microsoft must give all PC manufacturers the same Windows licensing terms, and let them promote non-Microsoft products on their desktops. It must also give competing software vendors the same technical information it gives its own applications developers. Also, Microsoft would have to offer a version of Windows that does not integrate IE.

Jackson also provided protection for those in the high-tech industry who testified against Microsoft during the two-year trial.

Executives Confident

Microsoft reacted to the ruling with confidence that the decision will be overturned. By immediately appealing, Microsoft can avoid having to release source code to competitors and follow other policies the executives find distasteful.

"Today's ruling represents an unwarranted and unjust intrusion into the software marketplace," Gates says. "It really flies in the face of the development of the kind of products that have benefited customers."

Microsoft contends that it is procompetitive and that it bundled IE with Windows to benefit consumers. "It was not to exclude Netscape or any other competitor from distributing or enhancing their product," Gates notes.

Microsoft says it used the success of its operating system to allow it to offer new technologies to consumers at low costs and thereby drive the PC industry as a whole.

This case is an attempt to change those rules, which allow people to innovate, Gates contends.

Development Plans Unchanged

Having to share source code, as Jackson orders, will deter software development, Microsoft executives say.

"We are to disclose our most valuable intellectual property even to our competitors," says Bill Neukom, Microsoft executive vice president for law and corporate affairs. "And we're to design the operating system to the vague specifications of the government."

Sure that it will succeed on appeal, Microsoft plans to forge ahead with Next Generation Windows Services. But "we need to keep our team together," Gates says.

"We have exciting plans for that team, including a breakthrough interface that involves handwriting and speech recognition," Gates says.

In a brief reflection on the courtroom conduct, Gates suggested that "perhaps I should have taken the time to go in personally and talk about this industry." His videotaped courtroom testimony came off alternately as insincere and stilted.

Gates and other Microsoft executives complain that they weren't permitted to offer evidence during the remedy phase of the trial, to dispute claims by the plaintiffs in their recommendations.

But Gates hastened to recognize the court's authority.

"While we disagree with the government on this, I want to make it clear we respect the role of government and our legal and justice system, and we will abide with any final ruling in this case," Gates adds.

Justice Department Jubilant, Some Vendors Pleased

The Justice Department praised Jackson's final judgment, saying the breakup and accompanying restrictions will foster competition and innovation in the high-tech world.

The elimination of Microsoft business practices that the Justice Department and Jackson deemed unfair will be a boon to the industry, says Joel Klein, assistant attorney general and head of the Justice Department's antitrust division.

"You play ball with us, you get a low price. You carry our competitors' products, you get a high price. That would be prohibited," Klein said at a news conference.

The Software & Information Industry Association also gave a nod to the ruling. The industry organization had submitted a brief suggesting Microsoft be divested into three parts, with a separate company handling Internet services.

"In terms of innovation, Judge Jackson's ruling will allow consumers to benefit from technological advances developed by any independent software publisher in the world, not just those developed by Microsoft or at the acceptance of Microsoft," says Ken Wasch, SIIA president.

No Breakup, Says Microsoft

Microsoft executives have repeatedly emphasized that a breakup would create two companies unable to compete in the technology market. Its most recent filing repeats the claim that a breakup would cause "severe harm" to computer manufacturers, software developers, and others in the industry. Microsoft contends that the Justice Department's proposals contain "numerous flaws" that the government attorneys have not addressed.

In particular, Microsoft objects to the government's request for what Microsoft calls "a wholesale transfer of proprietary information" about Windows to competitors, and says the restrictions limit what features the software company can build into products.

Nancy Weil of the IDG News Service contributed to this report.

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