Government to Stick With Plan to Break Microsoft Into 2 Pieces
Government trustbusters will stick with their recommendation of a two-way breakup of Microsoft Corp., despite a federal judge’s criticism of the plan as ineffective.
Government lawyers were still debating their final recommendation late Thursday for submission today to U.S. District Judge Thomas Penfield Jackson, who indicated Wednesday that he favors a three-way division of Microsoft.
But knowledgeable sources said the Justice Department, 17 states and the District of Columbia will make only minor modifications to their original 13-page plan to break up Microsoft. In that plan, one business would make the Windows operating system and a separate company would market all other Microsoft products. The minor changes will include slightly raising investment limits for shareholders in the two companies, clarifying certain technical terms in the proposal and strengthening oversight and enforcement of remedies.
“We will just dot the i’s and cross the t’s. There will be no major overhaul of the plan,” the source said.
Another advisor to the states confirmed that the government would stay with its proposal to break Microsoft into two pieces, partly to keep the case legally sound for the next round of appeals. “We’re all playing appellate games here,” the advisor said. “You don’t want to be seen as chasing the judge” and coming up with a weaker proposal. “Everything’s going our way, so why screw it up?”
Submission of the government plan comes as shellshocked industry officials reacted Thursday to the abrupt ending of proceedings in the landmark antitrust case on Wednesday and debated what impact a breakup might have on their fast-moving industry.
Influential Microsoft investment analyst Rick Sherlund, of New York-based Goldman Sachs, said that Microsoft suffered a “stunning defeat” Wednesday and that the broken-up companies would be worth as much as 10% less than if the company is kept intact.
Other Microsoft watchers were similarly pessimistic about the firm’s prospects, whether divided into two companies or broken into three, with Windows, software applications and Web browser businesses, as Judge Jackson indicated Wednesday he preferred.
“If you split Microsoft into two companies, the operating system company becomes pretty tenuous,” said Stephen Hill, vice president of Linux Networx in Salt Lake City. “If I were going to buy stock, I’d buy stock in the applications company.”
Still, many experts believe splitting Microsoft into two will accomplish the government’s goal of stimulating greater software competition.
Among the beneficiaries of a breakup, experts count the BE Inc. computer operating system developed by former Apple Computer executive Jean-Louis Gassee. Also likely to benefit would be multimedia applications being developed by companies such as RealNetworks and small operating systems for hand-held devices being developed by such companies as Psion Computers of London.
“I could foresee the applications company working with or buying an operating system like BE, which has a lot of technical advantages” over Windows, said Jamie Love, director of the Consumer Project on Technology, a watchdog group affiliated with consumer activist Ralph Nader.
Some economists, however, think a Microsoft breakup could trigger a huge temporary increase in software prices.
“Everybody has conceded the fact that Windows is linked to [Microsoft Office], which owns 85% of the word processing market and makes the price of either software package a lot lower,” said Thomas W. Hazlett, an economist at the American Enterprise Institute, a Washington think tank.
A three-part division of Microsoft “seems absolutely brain dead to me,” said Gordon Eubanks, a longtime critic of the antitrust action and chief executive of Oblix, a Cupertino, Calif., software company. “The Internet is a platform,” he said, and the three divisions proposed by Jackson would inhibit Microsoft from providing comprehensive solutions that customers demand and that competitors are striving to provide.
After the government submits its plan today, Microsoft will have 48 hours to respond.
Jackson could spend months mulling the new submissions. But the jurist--who has repeatedly indicated his desire to wrap up the case--will have everything he needs to rule by next week.
Any final ruling will have to address some important details that have not yet been spelled out by the remedy plans submitted by both sides. Jackson has repeatedly voiced his frustration about having to decide the most important antitrust case in nearly two decades without much legal precedent or guidance from higher courts.
“Breakups have happened so rarely that, unfortunately, there aren’t a lot of good road maps,” said James Loftis, a Washington antitrust lawyer. “The costs and consequences of imposing a breakup” are varied, and there are “a lot of unknowns here.”
For instance, it is not clear which of the independent Microsoft companies would be vulnerable to the more than 130 antitrust lawsuits that have been filed against the software giant by consumers and rival software makers. Antitrust experts say the judge could allocate liability among all the companies or have just one shoulder the burden.
The government’s plan also does not indicate whether Microsoft Chairman Bill Gates and company President Steve Ballmer could both join the same company or would have to part ways.
“All we have here is a broad-brush proposal by the government. None of it is filled in, and a lot of basic questions are left open,” said Ernest Gellhorn, an antitrust expert and professor at George Mason University Law School.
If the government sticks with a two-way split of Microsoft, Jackson is still free to order the company broken up in any way he deems sufficient to address the antitrust violations he found Microsoft guilty of last month.
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Times staff writers Joseph Menn and Charles Piller contributed to this story.
