Prospects for breaking up Microsoft remain murky

Some think split could hurt buyers

April 25, 2000|By Julie Bell | Julie Bell,SUN STAFF

Despite reports that government prosecutors favor a breakup of Microsoft Corp., antitrust experts said yesterday that it's far from clear that U.S. District Court Judge Thomas Penfield Jackson will order the dismantling of one of the world's most successful companies, even after ruling that Microsoft is an illegal monopoly.

"The Justice Department obviously has done well with Judge Jackson, but I wouldn't presume for a minute that he would order the breakup of Microsoft," said Daniel M. Wall, a San Francisco-based lawyer who was on the Justice Department team that won the breakup of AT&T Corp. "This case is a lot closer than people realize."

Also murky is the question of whether such a breakup would be good for consumers. Many favor tough penalties against the company, including the Ralph Nader-led Consumer Project on Technology, but others think a breakup might be bad for buyers.

Among the latter is University of Texas Economics Professor Stan J. Liebowitz, whose study of a previous Microsoft breakup proposal found that it would generate nearly $30 billion in additional costs for personal computer software producers over the first three years. As a result, the study done last April concluded that consumers might end up paying more for software and have fewer choices.

As Seattle-based Microsoft lashed out at any proposed breakup it also maintained that consumers would lose out.

"There is nothing in the trial record or in this case that would justify such an extreme and radical remedy," Microsoft spokesman Jim Cullinan said yesterday. "This would be bad for Microsoft, consumers and the entire industry."

Microsoft shares plunged more than 15 percent yesterday, but the downturn might have been as much from the company's disappointing earnings, reported Thursday after the close of trading for the long holiday weekend, as from the published reports that the government is leaning toward recommending a breakup.

Wall Street analyst Richard G. Sherlund of Goldman Sachs, who downgraded yesterday his recommendation that investors buy the stock, was among those whose reports helped push shares lower.

Microsoft's stock lost $12.3125 to close at $66.625 on the Nasdaq stock market.

The company reported Thursday fiscal third-quarter revenue of $5.66 billion, up from $4.6 billion a year ago but less than analysts' forecasts of up to $5.95 billion.

The company said it earned $2.39 billion, or 43 cents a share, up from $1.92 billion, or 35 cents a share.

The published reports said federal prosecutors and a majority of the 19 states suing Microsoft favor splitting the company in two for what Jackson has ruled are monopolistic practices.

The Wall Street Journal said antitrust enforcers want to split the company's Microsoft Office business -- which includes Microsoft Word, Excel spreadsheet and PowerPoint presentation software -- from the rest of the company. Other reports said Microsoft would be forced to split its Windows operating system from the rest of the company.

State antitrust enforcement officials declined to comment yesterday on what remedy plaintiffs will propose. The Justice Department also declined to comment.

At issue in the case, in part, is whether Microsoft's bundling of the Internet Explorer browser with its Windows operating system is an illegal "tying arrangement" that harms competition by forcing buyers to get two separate products at once, antitrust lawyers said.

The Court of Appeals previously disagreed with Jackson on that issue, saying Microsoft's bundling of the two did not violate a consent agreement the company had signed with the government.

If Jackson orders a remedy that splits the operating system from its Internet business, it will give the Court of Appeals a chance to revisit the issue. One key question is whether the bundling is part of a pattern of conduct by Microsoft that limits competition and creates a monopoly.

The case hinges in part on whether Internet Explorer and Windows are two different pieces of the same product, said Peter C. Ward, a Nashville, Tenn., lawyer who handles antitrust cases and previously worked for the Federal Trade Commission's Bureau of Competition.

"If the Court of Appeals says you should not sever the arm from a body, they may not agree with the judge's relief," Ward said of any breakup remedy Jackson might order. "The possibility that the judge might order something startling and that the Court of Appeals might remand it back for something a little less startling is a good possibility."

Liebowitz and Wall said Jackson might not be receptive to the breakup proposal. Wall said the case differs a great deal from other antitrust cases in which the government recommended the breakup of a company.

In the AT&T case, the court decided that monopolistic conduct was inevitable given the structure of the company, which then controlled long-distance and local phone service and phone equipment sales .

"The Microsoft case is about acts Microsoft took to, the judge said, maintain a monopoly in their operating system," Wall said. "It's hard for me to figure out how a structural remedy makes much sense in this case."

Liebowitz said if the company is broken in two, only one Windows operating system will remain, which means monopoly will not have been addressed.

Ken Wasch, president of the Software & Information Industry Association, a trade association for the software and digital content industry, is among those who disagree. He said a breakup would create a situation in which one part of the company that no longer controls Windows would have an incentive to create products for Linux, a free operating system available on the Internet.

The idea, he said, would "legitimize another operating system."

Wire services contributed to this article.

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