Judge Orders Microsoft Broken Into 2 Companies
In one of the most stringent punishments of a U.S. corporation in history, a federal judge on Wednesday ordered Microsoft Corp. to be split in two for at least 10 years and imposed a harsh regime of limitations on its competitive practices.
U.S. District Judge Thomas Penfield Jackson stayed, or suspended, his breakup order until all appeals are exhausted. But he ordered the restrictions on Microsoft’s behavior--some of which may have a more detrimental effect on the company over time than the breakup itself--to go into effect in 90 days.
The order is almost certain to end up before the U.S. Supreme Court, although how soon that might happen is open to question.
The impact on consumers is hazy, in part because it may be months or years before large portions of the order are implemented, if they ever are. Yet many industry observers believe that by unshackling innovation and competition in personal computer software development, the order may eventually lead to lower prices and more consumer choice.
If confirmed by higher courts, Jackson’s order will place Microsoft in a select group: Along with AT&T; and the Standard Oil trust, it will be one of the largest companies ever to be dismantled by government order.
Bill Gates, Microsoft’s chairman and co-founder, moreover, would take his place next to Standard Oil’s John D. Rockefeller as an industrial magnate who fought a breakup to the bitter end and lost.
Conforming to a well-worn script, Microsoft officials on Wednesday promptly vowed to appeal all elements of Jackson’s order and to ask that all provisions be stayed pending appeal.
Gates called the order “an unwarranted and unjustified intrusion” into the software marketplace.
“This ruling says to creators of intellectual property that the government can take away what you’ve created if it turns out to be too popular,” he said, referring to his company’s flagship Windows software, which runs about 90% of the world’s personal computers.
“We believe we have a very strong case on appeal,” Gates said, echoing a position he has taken since Jackson first ruled in November that the company had abused its monopoly power in personal computer operating systems to foster a new monopoly in the Internet browser market.
Jackson followed that finding with a ruling in April that the Redmond, Wash.-based company’s activities broke the antitrust law. That in turn set the stage for Wednesday’s order, which set forth the remedies necessary to redress the violations.
Judge’s Mistrust of Company Is Evident
The stinging language of the judge’s order Wednesday afternoon made clear that the two years of proceedings in the case, brought by the U.S. Justice Department and 19 state attorneys general, have left Jackson with a profound mistrust of Microsoft’s executives and its remorseless corporate culture.
He noted that the software giant has “proved untrustworthy in the past . . . does not yet concede that any of its business practices violated the Sherman [Antitrust] Act,” and remains poised to “do to other markets what it has already done in the PC operating system and browser markets”--that is, use strong-arm tactics to extend its monopoly.
In formalizing his final order, Jackson summarily rejected scores of last-minute amendments requested by Microsoft. Among other things, the company asked that its breakup be mandated for only four years instead of 10 and that it be given a year to prepare a breakup plan instead of four months. That plan will have to cover how to apportion Microsoft’s assets, including its intellectual property, employees and an estimated $21 billion in cash between the two offspring.
Jackson also forbade Gates himself from owning stock in both of the split-off companies and prohibited anyone from being an officer or director of both.
“Clearly [Jackson] doesn’t have much confidence in the company’s ability or willingness to comply with the law,” remarked Steven D. Houck, formerly the lead attorney representing state attorneys general that had joined the Justice Department’s lawsuit.
The department, the lead plaintiff in the case, said it would ask the Supreme Court to take up Microsoft’s appeal directly--a request Microsoft said it would oppose. The company believes that prior rulings by the Court of Appeals in Washington suggest it might look favorably upon the company’s position that a breakup is an overly harsh punishment.
State officials, however, said they would support a direct appeal to the Supreme Court.
“There are some very unique reasons why the Supreme Court would want to hear this case quickly,” said Connecticut Atty. Gen. Richard Blumenthal. The issues were well set out in the trial court, he said, and “delay and time are the enemy of everyone,” including Microsoft.
Microsoft’s shares, traded on Nasdaq, rose 88 cents on Wednesday to $70.50 ahead of Jackson’s ruling. In after-hours trading, they went as high as $72.
Among the most significant elements of the judge’s order are these:
* Microsoft is to be split into two companies: one to develop and market computer operating systems, the basic software programs that allow most computers to run; and a second to develop and market applications, which are subsidiary programs that perform specific functions ranging from word processing to game playing, as well as Web TV and the Internet Explorer Web browser.
* Microsoft is bound to offer the same licensing terms for its products to all computer manufacturers, whether they help to promote the company’s products exclusively or offer competing software to customers. It is forbidden to retaliate against PC makers who alter the look of the Windows screen display, and it is compelled to share technical blueprints of its software with computer makers and outside software developers, including competitors, to ensure better compatibility with non-Microsoft products.
* The company is forbidden in most cases to market software that interferes with the operation of rivals’ programs.
* The company will have to “unbundle,” or separate, its Internet Explorer from its Windows operating system so the programs can be purchased and installed separately.
“Competition . . . will limit Microsoft’s power to thwart innovation,” said Assistant Atty. Gen. Joel Klein, head of the Justice Department’s antitrust division. “After divestiture, I expect both companies to be vibrant, strong and successful firms.”
The impact of a breakup on Microsoft itself--or the software and hardware industries in which it competes--remains unclear, given the rarity of a corporate divestiture on this scale and years of legal appeals.
If Jackson’s ruling holds up, many believe the offspring companies will be less competitive than their giant forebear, while others believe they could both find it easier to maneuver in new markets.
A breakup of Microsoft is “not necessarily bad for America’s high-tech industry, nor is it necessarily bad for Microsoft,” said Robert Reich, former Labor secretary and a professor of economic and social policy at Brandeis University in Waltham, Mass. “AT&T; was broken up and the separate parts did even better than the whole.”
Iowa Atty. Gen. Tom Miller said that if Jackson’s conduct restrictions are upheld, consumers shopping for computers will see an almost immediate change in the software configurations of PCs.
“Computer makers, acting really on behalf of consumers, will have the ability to provide choice, I think, very, very quickly,” Miller said.
In fact, many industry professionals believe Jackson’s conduct remedies will hurt the company’s competitive prospects far more than the breakup itself. That is because they restrict Microsoft’s ability to reach marketing and development agreements not only in PC operating systems and Web browsers, but in such new and promising technologies as network servers and wireless phones.
“Microsoft’s future growth comes from the Internet,” said Bill E. Whyman, an analyst at Washington-based Legg Mason Precursor Group. “But the conduct remedies might shackle its ability to move off the desktop and onto the Web.”
Jackson’s order is the climax of a case that has been going against Microsoft almost since testimony began last year. In a series of rulings starting in November, Jackson found that the company strived illegally to extend Windows’ domination of the PC operating system market into markets for Web browsers and other products.
That activity, he found, all but destroyed the competitive prospects of Netscape Communications Corp., whose Navigator Web browser competes with Explorer. Netscape was acquired by America Online last year as Navigator’s loss of market share accelerated.
Bullying Even the Big Players
Jackson found that Microsoft had wielded its Windows monopoly to bully major computer makers out of designing changes to their PC displays that would have made the computers easier to operate.
The case unfolded as Microsoft began to face numerous other challenges to its more than 10-year domination of the PC software market. Among these is a new generation of powerful computing devices that do not require Windows, including cellular phones and television set-top boxes.
The likelihood of court-imposed sanctions also has emboldened Microsoft competitors and even its commercial partners, who have been more successful in resisting its demands and exposing its attempts to extend its power.
Computer companies that once bowed meekly to Microsoft licensing terms have been offering customers alternative operating systems, including the free Linux system, a genuine threat to the Windows monopoly, for example.
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Marching Orders
In addition to breaking the company into two parts, the judge’s order includes restrictions on the company’s business practices that will go into effect in 90 days unless Microsoft is granted a stay. Microsoft must:
Offer the same prices on Windows to the top 20 computer makers;
Give software makers access to the code that lets programs run on Windows;
Not take action against a computer maker for using a product or service of a Microsoft competitor;
Allow computer makers flexibility in configuring a system and not require certain Microsoft icons be displayed on the desktop;
Not require computer makers to enter into exclusive agreements as a condition of granting a Windows operating system license or agreements limiting competition.
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Sources: Associated Press, Court records
Researched by NORA Yatters Angeles Times
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MORE COVERAGE
THE IMPACT: Immediate effect of the ruling may be slight. C
COMMENTARY: The breakup is good news. C
CONSUMERS: The ruling touches a nerve. C
WALL STREET: Many analysts still like the stock. C *
Times staff writer Joseph Menn contributed to this report.
