Justice Department Said to Be Seeking Breakup of Microsoft Empire
The Justice Department will demand that Microsoft Corp. break itself into three separate companies as a condition of an out-of-court settlement of the government’s antitrust lawsuit, according to sources close to the case.
The department’s demand will be presented at talks now underway in Chicago, where the Justice Deparment, 19 states and the company are attempting to negotiate an end to their long-running legal fight before the trial resumes next month. The proposal, which amounts to a high-stakes opening offer, makes clear that Justice has concluded that anything less than a divided Microsoft will not restore competition in the multibillion-dollar software market.
Microsoft is certain to object, which could either produce a middle-ground agreement or scuttle the talks. In that event, the Justice Department could ask the federal judge handling the case to order the breakup, all but guaranteeing a years-long slog through appeals courts.
A breakup would have a direct and wide-ranging impact on the hundreds of millions of people worldwide who use personal computers. Microsoft--which sprinted to the highest valuation in stock market history--would cease to exist as a single concentration of vast wealth. The company’s unprecedented domination of the computer-related technology industry could also come to an end. And no longer would only one firm sell Windows, the operating system that runs 90% of the world’s personal computers.
The Justice Department’s intention to seek a breakup was first reported in Wednesday’s editions of USA Today. That report, which said the department wanted the company split into two parts--one company selling only Windows and one company selling other software applications, sent Microsoft’s shares tumbling 3.3% on Wednesday.
Details of Justice’s proposal are sketchy, in part because it is still a work in progress, according to a source familiar with the talks. Justice and the 19 states that joined the lawsuit are now negotiating among themselves about which remedy to demand at the next negotiating session. The states have already made clear that they would favor a Microsoft breakup.
Justice officials declined to comment, noting that the department has refused to discuss the settlement talks. Justice spokeswoman Gina Talamona would say only that the USA Today story “does not adequately reflect our views.”
Microsoft spokesman Mark Murray on Wednesday said any recommendation to split up the company is “an extreme, radical proposal that’s not justified by anything in this case and doesn’t reflect the reality of competition in our industry.”
Antitrust experts speculated that Justice is probably leaning toward a remedy that would split off the applications side of Microsoft, which produces Microsoft Office among other programs, from the operating system side. It would then divide the operating system unit into two competing companies. That approach would reduce the chance that one company with an operating-system monopoly would use that power to dominate other markets, an ability that Justice now alleges Microsoft has illegally exploited.
If there is only one operating system company, “you have to say they can’t enter into the applications business again, and you have to police those restrictions, which would be a mess,” said William Kovacic, a law professor at George Washington University. “What Justice wants is competing operating-systems companies, and that’s the logic of a three-way split.”
For consumers, a Microsoft breakup could mean lower prices for operating-system software and an increase in the number, variety and quality of applications for sale, according to some analysts.
But skeptics of such an approach worry that one of the firms might add features that would make its version of Windows incompatible with others, causing headaches for consumers who have come to depend on the nearly ubiquitous Windows “standard.”
Another challenge for the government in a breakup would be the division of employees. Microsoft’s most valuable assets aren’t made up of factories, oil refineries or railroad lines that can be split in two or three ways. Most of Microsoft’s property is intellectual, and its chief resource is people. Which company would get Bill Gates, Microsoft’s billionaire founder?
U.S. District Judge Thomas Penfield Jackson ruled in November that Microsoft has used its monopoly power in the market for personal computer operating systems to bully rivals, squelch competition and harm consumers. Jackson’s ruling, however, addressed only factual issues in the case. If both sides do not reach a settlement, Jackson likely will issue a final ruling that will address whether Microsoft’s conduct violates antitrust laws.
In early December, two weeks after issuing his “findings of fact,” Jackson tapped Richard A. Posner, the chief judge of the U.S. 7th Circuit Court of Appeals to serve as a mediator in the case.
The option to break up Microsoft has been one of several “remedies” under consideration by Justice and the states. Other sanctions under discussion have included court-ordered limits on the company’s behavior and a requirement that Microsoft share the secret software code that makes up its dominant Windows operating system.
