DOJ and States Shoot for the Moon

For the Department of Justice and the 19 states' attorneys general, Friday afternoon's proposed remedies in the antitrust case against Microsoft Corp. resembled a salary negotiation: There's no harm in asking for the moon.

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For the Department of Justice and the 19 states attorneys general, Friday afternoons proposed remedies in the antitrust case against Microsoft Corp. resembled a salary negotiation: Theres no harm in asking for the moon.

Since the plaintiffs proposals are just that -- non-binding suggestions to U.S. District Court Judge Thomas Penfield Jackson -- it doesnt hurt their case to ask for the most radical relief. Microsoft is likely to restate its innocence in two weeks in its remedies submission, which will likely be considered just as radical in the opposite direction, observers said.

Specifically, the DOJs proposal, filed late Friday afternoon, calls for Microsoft to split itself into two separate companies, with Windows on an island as its own operating system company and the applications business, which includes Office and Internet Explorer, forming the other.

The proposal calls for Microsoft itself to craft the actual breakup plan. It requires the Redmond, Wash., company to submit such a plan to the court within four months after Judge Jackson files his remedies.

Also as part of the proposal, the two newly formed companies would not be allowed to merge for a decade. In addition, three years of business restrictions meant to spark competition would be imposed on the companies. This would include forcing the new Windows company to license Windows products under uniform terms and conditions for "Covered OEMs," as the proposal puts it, or the top 20 OEMs.

In addition, the boards of the two companies would be kept separate and Microsoft Chairman and Chief Software Architect Bill Gates would be prohibited from investing in both.

Also, the new Windows company would be prohibited from changing licensing terms from older versions of Windows for three years after an upgrade was released.

Emotions running high

As with previous milestones in this landmark case, the breakup proposal sparked strong reactions from every corner of the industry.

Microsofts reaction was blunt.

"Breaking up Microsoft into separate companies is not in the interest of consumers and is not supported by anything in the lawsuit," said Gates, following the DOJs filing. "Microsoft never could have created Windows and Office if they were in separate companies."

"We think todays proposal is very disturbing for Microsoft consumers and the entire high-tech community," Gates said in a press conference. "Its very important we keep the company together. Microsoft would be greatly damaged" by the plan, he added.

Gates expressed frustration, asking aloud at one point why the government was using the euphemism "reorgnization" to refer to "the breakup of an operating company."

"The governments proposal goes far over the line of what is justifiable under antitrust law, and thats a solid [legal] strategy," said Hillard Sterling, an antitrust lawyer with Gordon and Glickson LLC in Chicago. "A breakup order faces almost certain appellate reversal. Even Judge Jacksons strong language doesnt suffice to justify a structural remedy."

Users have pondered a possible breakup for months and their opinions generally fell along ideological lines -- do you like or dislike Microsoft as a vendor? -- rather than strictly legal ones.

One IT executive saw in the proposal the same over-extension that Hillard Sterling saw.

"The government first looked at unbundling the browser from the OS, and now theyve changed their tune to breaking up the company," said Larry Leffler, president of Innovative Computer Concepts Inc., a San Diego software distributor and networking services company. "How do you jump from sea level to Mount Everest?"

Ted Stowe, software architect at Perkins Coie, a Seattle law firm, looked at a breakup in practical terms.

"Id rather have one company" to deal with, Stowe said. "I dont want to have to purchase multiple support contracts for developing products because Ill get different levels of competency at these other vendors, and theyll all have their own directions."

IT specialists were talking about breakup all week at the Windows Hardware Engineering Conference (WinHEC) in New Orleans, following reports that the government would seek such a remedy.

Most at the show agreed the case would likely continue for years with little immediate impact on the industry.

And aside from jittery stock market valuations, opinions were divided as to whether the proposal would benefit or harm the industry as a whole.

"I personally think breaking up Microsoft would be a good thing, both for the software industry and even Microsoft," said Ingrid Haysom, strategic relations manager for Rainbow Technologies, an Internet security group in Irvine, Calif. "I came from Australia to America, home of the free market. I really believe that increased competition is good for everybody. Its good for innovation and results in better products."

Others at the conference fiercely defended their vendor.

"My money is on Microsoft," said Ed Gonsalves, director of sales and marketing for Smart Link Technologies in Watertown, Mass., which creates software and chips for embedded modems. "If youre asking me whose side Im on, either an American companys or the federal governments, Id take the business side every time."

One exec went so far as to suggest that while breaking up Microsoft "might be fairer," he didnt necessarily support the fairer course.

"If they split Microsoft up, I think they run the risk of killing the goose that laid the golden egg," said Neil Trevett, vice president of marketing for 3D Labs of Sunnyvale, Calif. "Like it or not, Microsoft laid the foundation for phenomenal PC growth…is a breakup going to be more effective in pushing the technology forward? It might be in the long term, but in the short term it will be a very bumpy ride."

"Will we have to redesign our whole network?"

Other IT managers voiced additional concerns with the governments proposal.

Nick Gass, an IT specialist at Color Kinetics, a manufacturer of digital lighting in Boston, said wondered what a split-up would mean for his network.

"Everythings so tightly integrated right now, so maybe when they un-integrate there will be ramifications setting things up. ... I dont know how Id have to deal with that -- buying new software to support the two companies would be the big hassle. Are we going to have to redesign our whole network?"

Still, Gass thinks the headaches are worth the price of justice.

"It was stimying innovation in the industry," he said. "I think it provides a breath of fresh air in what was otherwise a fetid swamp of iron-clad integration and monopolistic business practices."

Microsoft now has until May 17 to reply and propose its own remedies. Hearings with Judge Jackson follow on May 24 in his courtroom in Washington.