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Coming Down Hard: Government Plan Would Split Microsoft

Logo - ABC NewsApril 24, 2001 | ABC News

By Sascha Segan

The Justice Department and 19 states are leaning toward asking a federal court to break up Microsoft into two separate companies, sources involved with the case said.

In the plan currently being floated by the Department of Justice, one company would keep Windows, and the other would produce applications like Microsoft Word and Excel. Both new companies would be allowed to make Internet browsers and tie them into their products.

Microsoft’s Office applications division accounts for 40 percent of the company’s revenues. Its programs are used by millions of people around the world.

Officials are likely to reject another proposal under which Microsoft would be broken into three companies, the third getting the Internet browser and Internet service provider Microsoft Network, sources said.

The proposals are due on U.S. District Court Judge Thomas Penfield Jackson’s desk by Friday.

A Crushing Blow

Jackson delivered a crushing blow to the software giant on April 4, ruling that it had violated antitrust laws by using anti-competitive means to monopolize the operating system market and to attempt to take over the Web browser market.

The judge said Microsoft put pressure on computer makers and Internet service providers to lock out Netscape, its major rival in the Web browser world. With Windows, the company established an “applications barrier to entry” by preventing computer makers from establishing alliances with other operating system companies, thus stunting the production of popular programs for non-Windows systems.

He will hold a hearing on solutions in the Microsoft case on May 24, and is expected to choose one this summer.

But the federal government and the 19 states aren’t necessarily all in agreement on which the judge should choose. Some states are working on separate proposals for the government to regulate Microsoft’s conduct without a breakup.

Cooperation between the plaintiffs would be key to making a remedy stick, said San Francisco attorney Terry Gross, who was involved in a class-action suit against Microsoft.

“If the Justice Department and the attorney generals for the 19 states that are involved really join forces on proposing strong remedies that include this kind of breakup, I think Judge Jackson will … give a lot of weight to it,” he said.

First Breakup Since 1984

If Microsoft is broken up, it would be the first time the Justice Department shattered a company in this way since the 1984 breakup of telephone monopoly AT&T. Launched in 1974, the landmark antitrust suit against “Ma Bell” resulted in the creation of regional phone companies, sometimes referred to as “Baby Bells,” such as Bell Atlantic, US West and Ameritech.

Microsoft’s stock dropped more than $12 to about $66 today. (See related story.) But some economists say that even if Microsoft is broken up, this may not necessarily be a bad thing for investors. For example, in other breakups such as Standard Oil and AT&T, stockholders eventually made out much better than they would have had the company stayed together.

There are two motivations behind the plan, sources said. Government officials believe that breaking up the company may be the only way to prevent Microsoft from engaging in further anticompetitive practices. And a breakup would save Microsoft and the government from an expensive, complex regulation and oversight process that would be necessary if the company was merely ordered to control its conduct.

The new companies could either create a competing personal computer operating system or boost the applications available for other operating systems, such as Apple’s Mac OS and Linux, a free operating system available over the Internet.

Company, Polls Oppose Breakup

A Microsoft spokesman said the company was steadfastly against any breakup plan.

“We believe there is nothing in the trial record nor in this case that would suggest an extreme and radical remedy such as breaking up Microsoft would be appropriate … this type of extreme remedy would be bad for Microsoft, our shareholders, our customers, and the entire industry,” Jim Cullinan said.

One Microsoft competitor characterized a breakup as “rather harsh” but said it would improve options for home computer users. A Microsoft applications division freed of ties to Windows might produce top business applications for a wide range of operating systems, said Matthew Szulik, president of Linux firm Red Hat.

“It would certainly accelerate innovation and certainly would provide a challenge for Microsoft to deliver more value to the customer,” Szulik said.

But a majority of Americans polled by ABCNEWS doesn’t want to see Microsoft broken up. In an April 5-9 poll, 62 percent of respondents said Microsoft should remain intact. A majority of the people polled said Judge Jackson should impose controls on Microsoft’s conduct instead.

Republican Sen. Slade Gorton, who represents Microsoft’s hometown of Bellevue, Wash., said today a breakup is “the wrong remedy at the wrong time for the wrong conditions.”

And Microsoft has vowed time and again to fight a breakup. The company has said it will appeal Jackson’s verdict, starting a process that could take years and go all the way to the Supreme Court.

“From a legal perspective, we’re confident. We’re in the fifth inning of a nine-inning game,” Microsoft Chief Operating Officer Bob Herbold said.

But Microsoft could be ordered to stop certain practices, like pressuring computer makers not to stock computers running non-Windows operating systems, even while the appeals process goes on.

“A remedy such as the breakup of the company certainly would not go into effect until all of the appeals are over,” Gross said. “But some of the other remedies,” which would control Microsoft’s business conduct, “may go into effect immediately.”

ABCNEWS’ Bob Woodruff and ABC affiliate KOMO contributed to this story.