Fighting Breakup, Microsoft Presses for Curbs Instead

Microsoft Corp. on Wednesday urged a federal judge to discard a government plan to break up the software giant as punishment for violating antitrust laws, proposing instead that far less stringent curbs be imposed on its business practices.

The submission of its remedy plan to U.S. District Judge Thomas Penfield Jackson sets in motion a crucial race to conclude the landmark antitrust case before a new administration takes office, or before a fast-moving technology industry renders obsolete the key issues in the case.

In its proposal, Microsoft offered to hide its Internet Explorer Web browser by removing the desktop icon in its Windows operating system. The company also said it would give PC makers the flexibility to display any software, including non-Microsoft icons, on the Windows desktop screen.

The company also promised to end the use of restrictive contracts favoring its own software products and to offer equal access to critical pieces of its software code to independent software makers.

“We believe there is no basis in this case for the government’s unprecedented breakup proposal, and we are hopeful that the court will dismiss this excessive demand immediately so that the case can move forward much more rapidly,” said Microsoft Chairman Bill Gates in prepared remarks. “Even without the extreme breakup proposal, many elements of the government’s proposed regulations are unwarranted, outside the scope of this case and very damaging to consumers.”

The Justice Department, in a statement issued late Wednesday, said that “Microsoft’s proposal is ineffective and filled with loopholes. It would not have prevented Microsoft from engaging in many of the illegal acts found by the District Court.”

Faced with the unpleasant task of deciding how it should be sanctioned for breaking the law, Microsoft offered to quickly accept its own punishment plan in exchange for Jackson rejecting the more draconian government remedies.

The software giant said its plan could be implemented almost immediately, but said that “if the court elects to consider the full range of relief requested by the government,” any hearing on sanctions should not begin until Dec. 4--after a new president is elected.

And it reminded the court--and the technology industry that has been following the case--that “given the lightning pace at which the software industry moves,” restrictions on its business conduct should last no more than four years--a far cry from the 10 years sought by the government.

“Microsoft has two paths: They either accept a breakup and go forward, or they try to delay the proposal and hope for a better environment with a new [political] administration,” said Rob Enderle, a technology analyst with consulting firm Giga Information Group in Santa Clara, Calif.

Antitrust experts believe that the judge will grant Microsoft a few months more to defend its case--but not until December.

“If we are going to dismember the world’s premiere commercial enterprise, it’s not asking too much to take a few months to decide whether that’s the right thing to do,” said Bill Kovacic, professor of law at George Washington University.

Microsoft Chief Executive Steve Ballmer said his company would “love to resolve the case as quickly as possible.”

But industry critics and government lawyers attacked Microsoft’s plan as too weak and ineffective to resolve a far-reaching dispute that has been called the biggest business case since the breakup of Standard Oil Co. in 1911.

Connecticut Atty. Gen. Richard Blumenthal said that “Microsoft is in denial. It denies doing anything wrong and it’s offering nothing new.”

Indeed, several industry observers said Microsoft’s proposals included contract and licensing reforms that the company said during the trial it had already implemented with computer makers such as Dell Computer Corp. and Compaq Computer Corp.

“Microsoft’s proposal is the antitrust equivalent of no television for a week,” said Ken Wasch, president of the Software and Industry Information Assn., an industry trade group.

“What they have proposed to do is tinker with their [business contracts] and remove restrictions that they said they already eliminated two years ago,” Wasch added.

The stark choices in proposed sanctions are certain to draw close scrutiny by Jackson and the Justice Department, whose chief, Joel I. Klein, views the Microsoft case as a vehicle to set the competitive ground rules for the New Economy.

The bitter antitrust dispute has already roiled U.S. stock markets, driving the technology-heavy Nasdaq market down nearly 20% since Jackson ruled on April 3 that Microsoft violated state and federal antitrust laws by abusing its monopoly.

Microsoft’s remedy proposals come as the company is preparing to release an updated version of its Windows software next month. Called Windows ME, or Millennium Edition, the new program integrates the Internet Explorer Web browser even more tightly to the Windows operating system. Critics cite the move as evidence that the software giant has not changed its business practices, even amid tough antitrust scrutiny.

“This is a company that simply cannot be trusted,” said Mike Pettit, president of ProComp, an industry group funded by Microsoft opponents.

Jackson had ordered Microsoft to submit its own plan after ruling last month that the company violated U.S. antitrust law by abusing its monopoly in operating systems for personal computers.

Microsoft has insisted it followed the law and promised to appeal Jackson’s findings vigorously.

“The government’s adventurous request to split Microsoft into two companies should be rejected as a matter of law,” Microsoft said in court papers submitted to the judge.

The Justice Department, the District of Columbia and 19 states sued Microsoft two years ago, charging that the company used its flagship Windows software--which runs some 90% of the world’s personal computers--to crush Netscape, then the dominant Web browser.

On April 28, the Justice Department and 17 of the 19 states called for Microsoft to be split in two: a personal computer operating systems business and a separate applications software firm that would have such assets as Microsoft Office and the Internet Explorer browser.

Microsoft is now looking for a narrow approach to particular conduct remedies that it believes are at issue in the case, said Richard Gilbert, professor of economics at UC Berkeley and formerly chief economist for the Justice Department’s antitrust division.

But Microsoft’s proposed remedies are “not adequate at this stage, especially given the revelations in the case about its conduct and its very permissive interpretation of antitrust laws,” Gilbert said. “There’s really not a lot new in it.”

In supporting documents filed by Microsoft, the software Goliath attacks the government’s breakup proposal, saying it is an “attempt to rip apart Microsoft’s integrated operations.” The company said the government’s proposal to open the Windows source code would “constitute a wholesale confiscation of Microsoft’s intellectual property--the company’s crown jewels,” the documents say.

Jackson’s current timetable calls for a government response on May 17, followed by a hearing May 24.

“Microsoft has clearly staked out one side of the settlement, that is the light side,” Gilbert said.

“The government has put forward a strong and appropriate proposal. Now it’s a question of how far Judge Jackson wants to go.”

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Bloomberg News was used in compiling this report.