Microsoft Breakup Will Have Far-reaching Impact on IT

Court-ordered split of Microsoft will have far-reaching impact on the IT industry

For the high-tech industry, it is one of the most profound, precedent-setting documents ever written. In 17 tersely written pages, U.S. District Judge Thomas Penfield Jackson last week ordered Microsoft Corp. to divest into two separate companies, one for operating systems and the other for applications.

The harsh remedy will undoubtedly have lasting effects—both positive and negative—on the industry for years to come.

"The future of the platform upon which we do our computing is much less certain, and much less rosy, if this judgment stands through the appeals process," intoned Larry Shaw, PC coordinator at Nordstrom Inc. and an eWeek Corporate Partner, in Seattle.

Regardless of the outcome of the appeals process, with the decision now entered into the public record as well as the public consciousness, the high-tech world will be forever changed.

Start with the newfound confidence of the main plaintiff, the Department of Justice. The successful prosecution of the Redmond, Wash., software developer is the clearest signal yet that the DOJ, led by Attorney Gen eral Janet Reno and Assistant Attorney General Joel Klein, will not heed the conventional wisdom in Silicon Valley that government has no business regulating high tech.

"Judge Jackson is driving the knife deeply in this significant final chapter; he adopted the governments proposal, and it didnt mince words or show ambiguity," said Hillard Sterling, an antitrust lawyer at Gordon & Glickson LLC, in Chicago.

"You have to have a level of regulation and oversight, we have to get used to that," said Dwight Davis, an analyst at Summit Strategies Inc., in Kirkland, Wash.

Microsoft unrepentant

Microsoft, not surprisingly, does not agree with the governments increased role. Chairman Bill Gates called the ruling an "unwarranted and unwanted intrusion into software marketplace," adding, "It really flies in the face of the kind of improvements that have benefited consumers."

Many IT managers who support the need for regulation dont agree with the governments execution in this case.

"I agree that the DOJ should be looking out for unfair practices that are being used and stop those practices," said Gary Bronson, enterprise operations manager at Morrison Knudsen Corp., in Boise, Idaho, and an eWeek Corporate Partner. Still, Bronson said, "it is my opinion that the Department of Justice is not in the best position to architect a divestiture of Microsoft."

The guilty party at the center of the controversy clearly suffers the most from this decision. At minimum, the Microsoft image is forever tainted by the divestiture mandate.

"My view is that the Microsoft brand isnt damaged, its dead," said Alan Brew, an analyst with Addison, a branding and communications consultancy in San Francisco. "Two new companies will emerge, and neither one will be Microsoft. Microsoft is the past."

Permanent damage

Jacksons final order also provided emphatic punctuation to the growing notion that Microsofts credibility, both in the courts and in the marketplace, had suffered permanent damage from the legal process.

"Were effectively a fashionable industry, and Microsoft is the unfashionable kid on the block right now," said Richard Barnwell, chief technology officer for Zefer Inc., in Boston. "Its all about market perception. ... Theyre a great company, but nobody wants to dance with them anymore."

On the other hand, some observers maintained that a breakup would actually benefit Microsoft by creating two cash-rich monopolies that can better compete in an increasingly changing market based not on Windows alone but on the open standards and protocols of the Internet.

"They may have used predatory practices and monopolistic practices, all the things that were said about them," suggested Sam Albert, a management consultant based in Scarsdale, N.Y. "But I see breaking them up as advantageous to them. [Microsoft] doesnt see it, but I dont see that anything will get in the way of two independently operating companies acquiring people and doing what they did before."

If Microsoft doesnt see the advantages to the court-ordered divestiture, its because it doesnt want to. The company itself has called any attempt at divestiture corporate suicide.

"Microsoft thinks its[ridiculous] that the government is pursuing this," said Tyler Smith, operations manager at Spencer Reed Technology Group, in El Segundo, Calif. "Gates wants his deal and ... if he still has the latitude to fight it, hell continue to fight it. If you keep blocking his recourse, hes going to find a way around it."

Final nail in the coffin

Many observers believe changes in the tech industry had already begun to chip away at Microsofts dominance.

"You began to get this trend toward more portable wireless devices, and then you get the whammy of the Department of Justice legally declaring them a monopoly, and that was the final nail in the coffin," Zefers Barnwell said. "I think the government precipitated this, but it was something that was going to happen anyway, and the effects are just more rapid."

If anything, divestiture only reinforces the current trends. A move toward Linux and other alternative platforms for development, such as Java, had already been tugging attention away from Microsoft.

"I think everything does change," said Nick Gass, IT specialist at Color Kinetics Inc., in Boston. "An early indicator of what the future holds was Gateway [Inc.s] decision to use Linux as an OS and a non-Intel [Corp.] chip for home computer use. This would have been very unlikely prior to the governments decision, because Microsoft would have likely punished Gateway for such a move. If such trends continue, its much more likely customers will use other platforms. Ideally, progress will come toward cross-platform development."

"I think well see Linux benefit the most, because thats the most viable contender as a new operating system," said David Skok, chairman and found er of SilverStream Software Inc., in Billerica, Mass.

Going forward

While Jacksons decision reverberates through the industry, both sides last week indicated they were still open to a settlement. A more plausible scenario is the appeals process, which will likely end with the Supreme Court addressing the most pertinent issues in the case: product tying, licensing issues and the merits of the divestiture.

The tying issue --whether or not applications can be integrated into the operating system --will likely dominate the discourse, legal observers said.

This leaves some users at a loss, wondering how something so simple as integrating the Internet Explorer browser into Windows could end up taking Microsoft, its customers and the industry as a whole all the way to the Supreme Court.

"Theyre already the dominant force," said Bob Baraldi, director of IT at Springfield Technical Community College, in Springfield, Mass. "Would it have been so awful if they didnt dominate the browser market? Why did they have to go and obliterate everyone?"