Idea of a Microsoft Split Gains Support, but Would It Aid Competition?

When consultant Bob Jacobson wrote a futuristic fable last year on how Microsoft Corp.’s impending breakup would energize the software industry, the very notion that the crown jewel of America’s high-tech economy might be cut into pieces seemed too farfetched to attract serious attention.

But in light of the testimony about Microsoft abuses of power made public in the government’s continuing antitrust trial against the software company, Jacobson’s tale, published by Menlo Park, Calif.-based think tank SRI in a newsletter, no longer seems so outlandish.

“A year ago, nobody thought Microsoft would do so poorly in court,” says Richard Doherty, director of research at the Envisioneering Group, a Seaford, N.Y.-based consulting company. “In the last 45 days, you’ve seen a lot more talk about how Microsoft should be reorganized.”

Zona Research, a Redwood City, Calif.-based market research firm, went so far as to suggest in a report issued Wednesday that Microsoft would be smart to seek a settlement with the Justice Department that would allow the software company to set its own terms for a breakup.

Indeed, possible scenarios for a Microsoft breakup vary widely, and there is little consensus among experts about which approach might actually foster competition in the software business and benefit customers as a whole.

An industry trade group is expected to release publicly next week a report it sent to the Department of Justice proposing Microsoft be broken up in the event the court finds Microsoft guilty of antitrust violations.

The 40-page report by the Software and Information Industry Assn. suggests three possible approaches for restructuring Microsoft. The first calls for creating several similar “Baby Bills” that would compete with one another in all areas of business. The second scenario suggests breaking Microsoft’s dominance of operating systems by requiring Microsoft to make the code for its Windows software publicly available. The third suggests breaking Microsoft into three: a Windows operating system company, a company that sells applications such as Word, and an Internet-oriented company.

Although the trade group also offers other remedies, SIIA is most supportive of a Microsoft breakup, sources say, because it believes that would minimize the possibility of government regulation of the software industry, something that is the worst fear of many of Microsoft’s allies and rivals alike.

It may be premature to be discussing ways to address Microsoft’s power over the industry. Even if U.S. District Judge Thomas Penfield Jackson decides that Microsoft has broken the law, it is unclear whether he would decide that the company’s infractions were serious enough to justify breaking up the company.

“There is no [precedent] for the catastrophic, apocalyptic remedy being proposed,” says Charles F. Rule, former head of the Justice Department’s antitrust division and now a consultant for Microsoft.

Even the famous Standard Oil antitrust case early this century was not comparable, says Rule, because in that case the court merely required Standard Oil to spin off various companies it had acquired over 40 years. “They didn’t take a single enterprise and break it up,” he says.

Beyond that, there is a great deal of opposition within the software industry to the idea of tampering with what has been, after all, a healthy growth industry.

“The SIIA acts as if it speaks for the industry, but our members are very divided,” says Ted Johnson, executive vice president of Visio, a Seattle-based software company and a member of the SIIA board. Johnson says a dissenting group forced the removal of a paragraph in the report that strongly recommended the breakup of Microsoft.

In any event, cutting up Microsoft would be a very complicated proposition. The Justice Department, the 19 states that are also plaintiffs in the case and the technology industry don’t agree on what would be the best way to do it.

Many software companies are against creating three or more Baby Bills because they fear that would fracture the Windows standard that has fostered the flourishing of Windows software developers. These companies worry that they would have to write different versions of their programs to work with all the possible variations of Windows.

Separating Microsoft’s software applications business from that of its Windows operating system and Internet businesses is seen as a better way to prevent Microsoft’s leveraging its dominance from one area to another. But Microsoft’s Office suite of productivity applications would still have a near monopoly in its market, as would its Windows operating system, which raises the question of whether such a breakup would truly increase competition.

Although some Microsoft critics argue that a breakup is one of the few remedies that would not require ongoing government regulation, experts disagree, saying such a solution would actually require a great deal of government intervention.

The AT&T; breakup in the 1980s, for example, came about as the result of a consent decree in which AT&T; itself chose which businesses it would keep and which it would spin off. Even so, says Rule, there were 250 separate issues about which businesses should go with which spin-off companies, each of which took years to resolve.

Splitting Microsoft’s applications arm from the Windows operating system body, for example, could require the government to make numerous determinations about what features the new Windows company would be allowed to incorporate into the operating system in order to enforce its separation from the applications unit.

And experts such as Doherty believe the government would have to monitor the Microsoft spinoffs to make sure they didn’t continue to cooperate with one another.

As the Microsoft antitrust trial progresses, however, the arguments against breaking up the software giant appear to be weakening.

Microsoft has been counting on having an appeals court reverse any negative decision by Judge Jackson. But experts say such a reversal would be unlikely if the Justice Department builds a strong enough case.

“It will be hard for Microsoft to attack the remedy [that is, a breakup] if the appeals court agrees Microsoft violated antitrust laws,” says Dana Hayter, an antitrust expert with Fenwick & West in Palo Alto.

In addition, many analysts no longer believe a Microsoft breakup would necessarily hurt shareholders.

“In the short run, it would be destabilizing,” says Robert Toomey, an analyst at Piper Jaffray, a Minneapolis-based brokerage house. However, he adds, “historically, when you’ve broken up companies, in a high proportion of cases the value goes up.”

That may be one reason Microsoft’s stock price (it closed Wednesday at $161.38 on Nasdaq, off 44 cents) remains close to an all-time high, giving the company a market valuation of $406 billion, in spite of the beating the company has been taking in court.

Jacobson believes that even if the court does not order a breakup of Microsoft, the software giant will come around on its own to the view that it would be better off in smaller pieces. Hewlett-Packard recently came to that decision when it chose to break itself into two companies.

Microsoft’s Internet portal “MSN is weighed down by being seen as a means to advance the Microsoft empire,” Jacobson says. “After a breakup, you wouldn’t have every part of the company conspiring to protect the status quo. You would get a lot more innovation.”