Justice Department Is Challenging Microsoft’s Very Right to Exist

While the headlines were filled with U.S. District Judge Thomas Penfield Jackson’s evident determination to break Microsoft into two, possibly three, companies, the real threat to the software giant went almost entirely unnoticed. With appeals and a multiyear implementation period, the actual breakup of the software giant may be as much as a decade off. But on the day that Judge Jackson hands down his ruling, appeal or no appeal, the company will come under the other parts of Justice’s proposal: its so-called “conduct” remedies.

Under these restrictions, Microsoft may not survive as a major company long enough to be broken up.

The day they released the initial draft of their remedy proposal, Assistant U.S. Atty. Gen. Joel Klein and the 19 state attorneys general who joined the antitrust suit rushed forward to claim that theirs was the “least intrusive” course. The truth is that even a casual review of the actual proposal reveals why government lawyers would make lousy software entrepreneurs. Far from letting the market decide how software technology evolves, the Justice Department plan would turn the feds into commissars. It would impose a bevy of restrictions governing software development activities, pricing and marketing policies and overall business activities--in effect mandating that Microsoft’s successor companies leave the playing field and software innovation to rivals.

Under the government’s plan, the new mini-Microsoft that controls the Windows operating system would be granted a perpetual license to distribute Internet Explorer, but would be denied “any right to develop, license or distribute modified or derivative versions of the Internet browser.” In other words, Microsoft Windows would be permanently barred from improving what has become a key feature of every PC operating system, the ability to surf the Web.

The Justice Department would also slap a 10-year moratorium on the company’s ability to fully integrate new features into Windows, such as speech recognition technology. A decade, of course, is several lifetimes in the New Economy, where what economist Joseph Schumpeter called “creative destruction” grinds laggards into the dust in a matter of months. Indeed, if these restrictions had been in place 10 years ago, computer users might now be fuming about why the Netscape monopoly delivered so little for so much money.

But Justice doesn’t propose to stop at controlling product design. It wants to control prices too. Under its plan, if PC makers choose to delete the browser or any other software integrated with Windows, the new companies would be required to discount the “lite” version of Windows in proportion to the number of bytes of binary code removed.

This is like the government telling Ford to price its cars based on how much they weigh. Auto dealers could remove standard options like air-conditioning, power windows and CD players, place them on a scale, and then reduce the price of the car on a per-pound basis.

The fun doesn’t stop there. The Justice Department’s plan would effectively strip away the copyright on Microsoft’s most valuable product by allowing virtually any competitor to “study, interrogate and interact with” the Windows source code. Justice would even require creation of a “secure facility” where competitors could examine operating system changes before they were released in the marketplace.

To keep the gears of this Rube Goldberg remedy well-oiled, each of the new Microsofts would be required to establish compliance committees “consisting of not fewer than three members of the board of directors who are not present or former employees of Microsoft.” These committees would in turn appoint chief compliance officers who would be required to obtain a “written certification” from each person that he or she would abide by the agreement under penalty of conviction for criminal contempt of court.

What’s more, any “duly authorized representatives” of the U.S. attorney general or of the 19 states would have carte blanche to inspect the mini-Microsofts’ business premises, conduct “on the record” interviews with any employee or “demand [that] Microsoft provide copies of all books, ledgers, accounts, correspondence, memoranda, source code and other records or documents in the possession or control of Microsoft.”

Who on Earth would continue working at any company under these conditions?

No American business could successfully operate under these restrictions. The government is challenging not just Microsoft’s right to compete, but its right to exist. Consumers as well as stockholders will pay the price.