No Easy Path to a Breakup

A Microsoft breakup would spell big trouble for the company in wireless and end-to-end services.

Compared with this, breaking up the phone company was simple. If the remedies put forth by the Department of Justice and 17 state attorneys general in the antitrust action against Microsoft Corp. prevail—and thats a big if—a breakup along product lines would be a logistically arduous act that many dont consider feasible.

Even those who cite the precedent of the 1984 breakup of AT&T Corp.—now viewed as a successful maneuver—see marked differences in the Microsoft case that make breaking up the software giant a daunting proposition.

"You just knew the remedies phase would be the toughest part of this whole thing," said Bernie Thompson, CEO of VistaSource Inc., an ASP (application service provider) in Westboro, Mass., that is gearing up to compete with Microsoft on the services front.

While the plaintiffs proposal broadly sketches out the dividing lines between an operating systems company and an applications company, a large gray area exists among many Microsoft products and features.

Active Directory, for example, is inextricably linked to Windows 2000 but also considered an application. The same holds true for Exchange and the MSMQ message queuing product.

The split would have an even greater impact on future Microsoft projects such as NGWS (Next Generation Windows Services) and the Biz Talk e-commerce platform, architectures that represent the companys tightest integration yet between operating system and application.

BizTalk is unworkable without Windows 2000. And NGWS, which Microsoft is expected to publicly roll out next month, is expected to glue productivity applications such as Office to the operating system with Extensible Markup Language for Internet delivery.

"Were working on a whole new generation of software that will really bring the power of the Internet to businesses and homes everywhere," Microsoft President and CEO Steve Ballmer said at a press conference after the government filed its proposal. "All of these new ideas and new opportunities would be threatened by the extreme regulation proposed by government lawyers."

The entire next generation of server products from the Redmond, Wash., company—SQL Server, Systems Management Server, Exchange and other BackOffice components—are more tightly integrated than ever with the operating system.

Untying the products makes no sense to Steven Blyth, chief technol ogy officer of SuperMarkets Online Inc., in Anaheim, Calif. Blyth moved his company from a third-party database to SQL Server on Windows 2000 because of finger pointing between Microsoft and the database vendor. "We wouldnt have gotten up and running if [the applications and the operating system] were separate," he said. "We develop as if Windows, SQL Server and Active Server Pages are a single entity."

In the market for Internet appliances, handheld devices and wireless services, some software engineers believe its impossible to say where the operating system ends and applications begin—casting doubt on Microsofts grand plans in the embedded software space.

The governments proposal says nothing of service and support. Moreover, the Microsoft brand name, real estate and even intellectual property remain question marks.

All of these issues would take time to sort out and would paralyze the new companies for months, according to observers. "Say it ground things to a halt for six months," said Dan Kusnetzky, an analyst at International Data Corp., in Framingham, Mass. "Thats two years on Internet time that other companies are moving forward."

Microsoft Chairman and Chief Software Architect Bill Gates called the breakup demarcations "random." Others consider this to be precisely the prosecutions point, to keep Microsoft from gaining advantage by tying its operating system and applications together.

For some customers, however, that integration has been a key selling point.

"If the operating system becomes separate, the newer application releases will not ... be in sync," said William Bolt, vice president of IS for the Phoe nix Suns and Arizona Diamondbacks sports franchises, in Phoe nix. "One of the reasons we have gone in a single direction with most applications from Microsoft is because the integration is there."

A breakup across product lines is one key difference between the proposed Microsoft breakup and AT&Ts 1984 divestiture. "The goal there was to free AT&T from regulation and let it compete in the long-distance market," said Gerry Waldron, an attorney at Covington & Burling, in Washington, who worked at the heart of telecom reform in the office of Rep. Ed Markey, D-Mass., during the AT&T split.

"As I read the Microsoft proposal, there would be heavy regulation of the new companies after the split, so the end goal is radically different," said Waldron, whose firm currently does non-anti trust work for Microsoft.

Nevertheless, Waldron said he sees one clear parallel: Breaking up Microsoft would be as time-consuming as was splitting up AT&T.

"It took a god-awful amount of time and effort, and it sucked out morale from both sides," he said. "It took 18 months for us to get from consent decree to implementation and then six to 12 more months for things to settle down."

Even if a breakup does not ultimately fly with U.S. District Judge Thomas Penfield Jackson or an appeals court, the nonstructural provisions the government is requesting could prove equally daunting for Microsoft.

Under the proposal, Microsoft would be required to publish OEM licenses, support licenses on legacy software for three years after an upgrade is released, and loosen OEMs ability to modify the look and feel of Windows. The moves would deliver immediate benefits to Microsofts competitors.

"We could go in, for example, to an ASP or OEM and say our software is less expensive, runs on more platforms, and looks and feels like Microsofts software," said VistaSources Thompson, whose business will host productivity applications. "Its difficult to get that message to [customers] now" because of their Microsoft contracts.

At minimum, he said, the remedies would foster price competition.

Long term, a Microsoft breakup would have other potential benefits for customers, competitors and possibly even Microsoft itself. Breaking off applications, for example, would encourage the applications company to port server applications to platforms such as Linux.

"Plenty of companies have built their businesses on Windows-specific apps and have done very well with it, so why should the Microsoft applications [company] be any different?" said Jim Kobielus, an analyst at The Burton Group Corp., in Midvale, Utah. "Just because the judge said mommy and daddy cant live together anymore doesnt mean the children wont still play with each other."