U.S. Urges Court to Split Microsoft Into 2 Companies
The U.S. Justice Department and 17 states suing Microsoft Corp. for antitrust violations Friday asked a federal judge to issue the enforcement equivalent of a corporate “death penalty” and split the software giant into two competing companies.
Two other states in the lawsuit--Illinois and Ohio--filed papers supporting the government plan but objecting to an immediate breakup of the software giant.
Microsoft characterized the Justice proposal as “radical” and said a breakup goes beyond the scope of the landmark antitrust case, which centered on Microsoft’s refusal to separate its Internet browser from its Windows computer operating software. The company is expected to appeal any punishment all the way to the Supreme Court and said innovation in the booming technology industry would be stifled more than encouraged by the plan.
“We do not believe courts will uphold these radical regulatory remedies, which would hurt consumers and undermine the economy,” said Microsoft Chairman Bill Gates, who called the government’s proposal “extreme and unwarranted.”
The 100-year history of anti-trust enforcement provides only a handful of examples of courts breaking up companies, so Friday’s action unleashed a furious debate about the economic consequences.
Joel I. Klein, chief of the Justice Department’s antitrust division, said a breakup of Microsoft would enrich the American consumer and produce benefits akin to those that occurred after the department forced a breakup of AT&T;’s telephone monopoly in 1984.
Atty. Gen. Janet Reno called a split “the right remedy at the right time.”
Microsoft has until May 10 to respond to the government’s proposal, which ushers the case into its final stages. But Microsoft general counsel Bill Neukom said the company will ask for additional time for “months and months of discovery and evidentiary hearings,” increasing the likelihood that the case may not be decided until another administration takes office.
U.S. District Judge Thomas Penfield Jackson, who earlier this month found the company guilty of violating antitrust laws, has not hinted how he will rule on remedies.
Under the plan submitted by the government Friday, the world’s most powerful software company would be divided into two firms: one that would develop Microsoft’s three major Windows operating systems, and a separate company that would market all other Microsoft products, including the lucrative Microsoft Office software, Internet Explorer Web browser and such products as WebTV and the Microsoft Network.
Illinois and Ohio filed papers suggesting that the court impose only conduct remedies forcing Microsoft to change its cutthroat business tactics and then reassess the need for a breakup in three years.
“A reorganization could be difficult to undo and its effects would be difficult to predict,” Ohio Atty. Gen. Betty Montgomery told Associated Press.
All of the government lawyers advocated restrictions that would obligate Microsoft to license Windows to the 20 largest computer makers at a uniform price. The government’s plan also would free personal computer makers to modify the appearance of Windows, something Microsoft has staunchly opposed on the grounds that changes would violate the software’s licensing and copyright protections.
The tough government proposal, together with Microsoft’s slumping stock price, could increase pressure on the software giant to return to the negotiating table to settle a landmark antitrust case that many experts say is the most important such dispute since the breakup of Standard Oil Co. in 1911.
Microsoft stock eased 6 cents, to $69.75, in regular Nasdaq trading, then rose to $71 in after-hours activity after details of the government’s proposals were announced.
The case is likely to slow Microsoft’s once blistering pace of deal-making, which saw the company acquire a dozen companies outright and invest in 60 more in the last two years, said the Gartner Group, a technology consulting firm.
“Microsoft will be forced to be cautious in its investment activities during the extended limbo period” and avoid “large acquisitions on the order of the” pending merger of Time Warner and Microsoft rival America Online Inc., the firm said in an analysis issued this month.
The government’s plan, if approved by Jackson, also could trigger higher prices and more technical glitches in a software marketplace where quality control already is a major problem. But over the long run, government officials contend that consumers will benefit from increased competition, lower prices and more product innovation.
Nevertheless, the government believes that its plan will jump-start competition in the market for personal computer operating systems, where Microsoft’s Windows software runs more than 90% of all PCs.
“By turning loose the power of competition in the operating systems business, this decree will stimulate innovation throughout the software industry in operating systems, applications and computing devices,” Klein said Friday.
But experts said there is no guarantee that, if the breakup is approved, the applications division would compete against the company making Windows. Nor would a breakup guarantee any boost in development of products for rival PC operating systems such as the open source Linux or IBM Corp.’s OS/2. Currently, the only machines that can run non-Microsoft platform Office products are made by Apple Computer Co.
Court-imposed breakups have had complex consequences in the past. Oil prices fell after the government carved Standard Oil into 28 separate concerns.
The price of long-distance phone calls plummeted 40% after the breakup of the AT&T; telephone monopoly in the mid-1980s. But the advent of new phone competition initially required consumers to punch in as many as two dozen numbers to select a carrier and place a long-distance call.
“The trial was all about the browser war between Internet Explorer and Netscape Navigator. . . . I don’t see how a breakup has any bearing on that or will help promote competition,” said C. Boyden Gray, who filed a friend of the court brief supporting Microsoft on behalf of the Assn. for Competitive Technology, a Washington-based trade group.
If Jackson imposes the penalties requested by prosecutors, the company will have as long as four months to submit how it will be broken up.
Although Microsoft’s Windows platform division and the Office unit each generated about $9 billion in revenue last year, Microsoft’s Office products, which sell for as much as $500 a copy, are far more profitable than the Windows operating system.
Some say dividing Microsoft, a company that eschews corporate hierarchy and is largely housed on one sprawling corporate campus in Redmond, Wash., could prove problematic.
Mark Cooper, policy director of the Consumer Federation of America, said AT&T; also contended that its vast telephone network was too integrated and interconnected to be broken up.
“But in the end they managed to do it, even to the point of putting yellow tape down the middle of the phone company here in [Washington] D.C., dividing AT&T; from” what ultimately became Bell Atlantic.
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CONSUMER IMPACT
Industry experts are split on whether a Microsoft breakup would benefit consumers. C1
