Winds of change swirl around Microsoft

U.S. District Judge Thomas Penfield Jackson's findings of fact that declare Microsoft Corp. a monopoly virtually ensure that he will find the software maker guilty of violating antitrust laws.

Download the authoritative guide:

U.S. District Judge Thomas Penfield Jacksons findings of fact that declare Microsoft Corp. a monopoly virtually ensure that he will find the software maker guilty of violating antitrust laws.

More important than a guilty verdict, however, are the remedies Jackson ultimately imposes and the effect those remedies will have -- not just on Microsoft, but on the rest of the technology industry.

"Surely, any remedy the judge imposes will ripple through the industry," said Chris Stone, founder and president of Network Decisions Inc., in Concord, Mass. "It looks like there will be alterations of business practices, and that will affect everyone around them."

At this point in the suit, such change is inevitable. After Jackson announced his findings of fact on Nov. 5, government officials said the Redmond, Wash., companys abuse of its monopoly power called for harsh penalties.

Microsoft officials, meanwhile, continued to express a willingness to settle the case -- as long as theyre allowed, in their words, to continue to innovate.

After he publishes his conclusions of law -- and if, as expected, he finds Microsoft in violation of federal antitrust laws -- Jackson will consider suggested remedies from both parties before issuing his final ruling.

Based on interviews with lawyers involved in the case, analysts, users and antitrust experts, here are three categories of remedies Jackson will likely focus on and how they would, if implemented, affect Microsoft and the rest of the industry.

1. Breakup

Dividing Microsoft into several companies would provide the most explicit "cure" for monopoly power, observers said.

One widely speculated breakup option would divide the company similarly to its current internal organization: a platforms company that includes Microsofts operating systems; an Internet services company that offers MSN (The Microsoft Network) and other services; a developer company that provides software tools; and an applications company that develops applications, such as Office 2000.

Under this scenario, Microsoft would not be able to leverage its Windows operating system dominance to expand its presence in markets such as Internet service, as it has done with MSN, proponents argue.

To truly level the playing field, others have suggested that Jackson split Microsoft into three separate but equal operating system companies that would build competing versions of Windows.

Without getting into specifics, government officials argue that aggressive remedies are necessary to reinvigorate innovation in the industry.

"One of the tragedies of the last few years is that Netscape [Communications Corp. ], arguably the most innovative company on the planet, was basically crushed by the actions of Microsoft," said Bill Lockyer, the attorney general for the state of California, in Sacramento. "That cant be undone, but there ought to be efforts made to make sure that it cant repeat itself."

A breakup, however, would prove tricky because of the extreme cross-pollination of technology among Microsofts divisions. Deciding who gets certain intellectual property or what group owns which contracts could take years to hash out.

In addition, because a breakup would be so dramatic, Jackson may avoid it, according to some legal experts.

"More severe penalties will have a harder time surviving appeal," said Hillard Sterling, an antitrust lawyer at Gordon & Glickson LLC, in Chicago.

Some argue that a breakup of Microsoft would actually inhibit, not improve, competition.

"Im not sure its a remedy," said Bob Frankenberg, president and CEO of Encanto Networks Inc., in Santa Clara, Calif. "Lets say they were broken into seven companies . . . and they have $21 billion in cash. So now we have seven companies each with $3 billion in cash and the same sort of drive the parent had. Are we ahead? I dont think so. I think the behavior needs to be addressed."

Bob Young, CEO of Linux vendor Red Hat Inc., of Durham, N.C., said there are better options than a breakup.

"I dont think anyone in the industry benefits from that kind of punishment as much as they would from the policing of Microsoft," Young said.

2. Oversight

Jackson could choose to keep Microsoft intact but require some type of government-controlled oversight of the company.

Such supervision could include approving what features Microsoft could add to future operating systems, restricting Microsofts ability to enter new markets, or reviewing and publicizing the companys Windows OEM contracts.

These restrictions could give IT managers more choice by enabling PC makers to modify the Windows boot sequence or to bundle non-Windows applications without paying additional licensing fees.

However, the governmental "police force" this would require frightens many observers, who see it as a potential chokehold for rapid product development.

"All youve succeeded in doing is slowing down the march of technology," said a user at an aerospace company who requested anonymity.

Competitors such as Sun Microsystems Inc. have suggested that Microsoft be severely restricted from entering new markets, such as broadband or wireless industries.

If Microsoft is restricted from entering new markets, however, customers could suffer. One example: hosted applications.

This week, Microsoft announced Microsoft Office Online, a program to partner with more than a dozen ASPs (application service providers) to deliver rentable Office applications to small and midsize businesses over the Web for a per-user fee. If Microsoft were barred from entering this market or limited by what types of hosted services it could offer, customers would feel the impact.

"I dont want to see [the government] hamper Microsofts ability to be effective in servicing their products," said Steven Fragapane, CIO for Sterling Capital Ltd., in Baltimore, which is moving to a hosted model for its Office applications.

More disturbing to some is the prospect of the government becoming heavily involved in the software development business.

"If these types of remedies survived the appeals process, then maybe the era of government involvement [in software] is at hand," said Dwight Davis, an analyst at Summit Strategies, in Kirkland, Wash. "Many of the companies that were so vociferous about getting the government involved with Microsoft may rue the day."

3. API access

An in-vogue but untested remedy would be opening Microsofts crown jewels -- the Windows APIs -- for free access.

The rationale would be to artificially create competition based on a market in which several vendors can offer compatible variations of Windows.

Proponents of this remedy say open-source development of Windows would benefit consumers because the development model generally means the best-built product wins in the marketplace.

Some IT professionals disagree. For one, having companies compete to create the best version of Windows could lead to the same kind of fragmentation that crippled the Unix market in the 1980s.

"That would be very scary to me," said Larry Shaw, PC coordinator at Nordstrom Inc., a PC Week Corporate Partner based in Seattle. "That would put it in the same genre as Unix, where youve got a nonuniform environment for developers and customers to work with."

What likely wont be part of any remedy is a financial penalty.

"This case is not about money, its about change in the industry so consumers get the benefit," said Iowa Attorney General Tom Miller. "The issue is how they conduct themselves, not how much money they pay."

Making Jacksons decision on which remedies to impose more precarious is the fact that the industry today is dramatically different from the industry that existed at the time of Microsofts anti-competitive actions.

Linux has emerged not only as a competing server platform but also as a rival software development model through its ties to open source. In addition, the software development model is shifting from Windows onto the Web.

"[Jacksons] remedies are technically based on the facts, but it would be derelict for the judge to ignore the changes in the industry," said Sterling, the antitrust lawyer. "Thats the problem. Your remedies mess with the marketplace, and theres that chance they will boomerang and end up harming consumers."

Many in the high-tech community, even Microsoft rivals, oppose any government intervention in Microsofts business. Theyd prefer to let the free market decide the winners and losers.

"I can fight back, or I can sell out. Im not afraid of Microsoft," said Rodney Bienvenu, president and CEO of SageMaker Inc., a Fairfield, Conn., provider of enterprise information portals for vertical industries. "Its ridiculous. You have a case where the government doesnt understand the problems Microsoft faces."