Break up Microsoft, government says

Recommendation asks for two companies.

By John Fontana
Network World Fusion, 05/01/00

breakup Looking to smash the Microsoft monopoly in the same way it did AT&T 16 years ago, the Department of Justice and 17 states Friday asked U.S. District Court Judge Thomas Penfield Jackson to split Microsoft into two competing companies.

The proposal recommended that Microsoft be split into one company focused on the Windows operating system and the other on software applications such as Office and Internet Explorer, which has been at the heart of the antitrust case filed nearly two years ago.

Read the DOJ's proposal.

The government will also seek behavioral remedies that will restrict the company's business practices during the appeal Microsoft has already said it will launch once the penalty phase of the case is concluded.

In addition, the DOJ asked that the two new companies be barred from reuniting for 10 years, and that Chairman Bill Gates and other executives be barred from owning stock in more than one of the new companies.

The last major corporation breakup was in 1984 when AT&T was deemed a telephone monopoly and divided into eight companies.

Microsoft's response was swift, even though the proposal is only a set of recommendations made to Judge Jackson.

"We think that today's proposals are very disturbing not just for Microsoft but for consumers and the entire high-technology economy," Gates said at an afternoon news conference. "This [breakup] proposal was not developed by anyone who knows anything about the software business. What's in here makes no sense."

CEO Steve Ballmer was optimistic and emphasized that the company will not be broken up. "We are working on a whole new generation of software that will really bring the power of the Internet to businesses and homes everywhere. All of these new ideas would be threatened by the extreme regulation proposed by government lawyers," he said.

Attorney General Janet Reno told the Associated Press: "This is the right remedy for the right time. Our proposal will stimulate competition, promote innovation, and give consumers new and better choices in the marketplace."

Judge Jackson can now accept all, part or none of the proposal. Microsoft will give its response and present its own proposal on May 10.

But Bill Neukom, Microsoft's senior vice president of law and corporate affairs said the company will propose a new schedule for the remedies process. "The government's unprecedented and extreme remedy proposal will require a significant expansion of the remedy process. Even the government will have to agree that an American company deserves more than 12 days to respond to a government proposal to tear apart a $400 billion company," he said.

Under the current schedule, the DOJ will respond to Microsoft's proposal on May 17. On May 24, Judge Jackson will hold a formal hearing in Washington before retiring to draft his ruling, which could take weeks.

The government's proposal calls for Microsoft to submit a proposed plan to divide the company no more than four months after Judge Jackson makes the penalties final. The proposed plan would establish both an operating system company and an applications company.

The proposal also says those companies would be prohibited from entering into any business agreements or sharing of technology, such as application programming interfaces.

In addition, the government asked for conduct remedies to take effect 30 days after Judge Jackson's final ruling. Those remedies restrict Microsoft's relationships with original equipment manufacturers (OEMs). Those restrictions would require Microsoft to allow OEMs to support competing products without fear of reprisals, force Microsoft to establish uniform licensing terms, and permit OEMs to add desktop icons, collect subscription information from users, or automatically launch any browser when the operating system starts up.

Microsoft also would have to disclose APIs, interfaces and technical information to OEMs and independent software developers "in a timely manner."

Microsoft also would be banned from exclusive deals that provide benefits to business partners that shun competing products. The company also would be banned from tying products to its operating system and would have to offer a mechanism to easily remove any product built into the operating system, much like Microsoft claimed Internet Explorer was built into Windows 98.

The proposal also calls for Microsoft to establish a compliance committee of its corporate board of directors, including three members who are not employees of the company.

Microsoft supporters and detractors had strong reactions to the 17-page proposal.

"Nothing presented in the case calls for such extreme measures, and this ridiculous proposal has nothing to do with the case. It's clear that overzealous prosecutors are only interested in punishment, not in making anything better," Jonathan Zuck, president of the Association for Competitive Technology, said in a statement. ACT is a national education and advocacy group for the technology industry. "By allowing government in at this critical time in the development of America's tech economy, we are transferring the controls from the inventors and innovators to the legislators and regulators."

"Microsoft's illegal behavior and abuses, their power and arrogance, and their apparent disregard for the law left law enforcement officials with no other viable alternative," Ed Black, president of the Computer and Communications Industry Association said in a statement. CCIA is an international, nonprofit association of computer and communications companies. "The proposed remedy provides a genuine opportunity to realign our industry and to jump-start competition in important, critical areas of computing."

While the government lays out a scenario for dealing with Microsoft, some IT executives are concerned that they will eventually be the ones to suffer.

Microsoft's corporate customers say that despite their well-known complaints with often buggy or insecure software, they do rely on Microsoft's integration of its wide-range of products for desktops, servers and the Internet. While they would welcome lower prices forged by greater competition, they are only left to speculate that a move as dramatic as dissecting Microsoft will eventually lead to more innovation and integration.

Users wonder if the piece parts of a dismantled Microsoft can equal the sum of what exists now.

"I can't see a breakup making the products any better," says Jeff Allred, manager of network services for the Duke University Cancer Center in Durham, N.C. "Who is there to fill in the gaps in competition? Apple isn't focused on my corporate network. Linux will take a few more years to develop. What happens to me in the interim? Competition is always good for the consumer, but in this case, how long will it take for me to see advantages."

According to a recent Giga Information Group/Sunbelt Software survey of more than 1,000 companies worldwide, 92% of respondents said they would continue to buy and install Microsoft Windows-based products.

"Put yourself in my shoes," says Greg Scott, IS manager for Oregon State University's College of Business. "I have to provide IT services for a medium to large enterprise. What I want is consistency and reliability. I don't like a lot of surprises. The operating system is more dependent on back-end systems, so how can you break those apart and still have an effective system?"

But some say integration is a double-edged sword that enterprise customers should look at with a critical eye.

"Indeed there is benefit in products working together," says David Smith, an analyst with the Gartner Group in Stamford, Conn. "But the costs may come down the road when you don't have the best products or you have ones that are not easy to support."

But there is concern that enterprise consumers may be getting the short end of the legal stick.

"I think the DOJ is more focused on the consumer market and less so on the corporate computing world," says Dwight Davis, an analyst at Summit Strategies in Kirkland, Wash. "A breakup throws a big curve into IT roadmaps. The corporate world is not clamoring for a breakup; they are a conservative bunch and don't like uncertainty."

That uncertainty also is focused on what effect a protracted legal battle will have on Microsoft's ability to turn out quality products.