4/27/2000 MSFT: Washington Post
washingtonpost.com
Special Reports Proposal Would Break Up, Rein In Microsoft
_____ Conclusions of Law _____
Judge Thomas Penfield Jackson recently issued his Conclusions of Law in the U.S. v. Microsoft case, upholding his November findings.
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By James V. Grimaldi
Washington Post Staff Writer
Friday, April 28, 2000; Page A01
The U.S. Justice Department today will ask a federal judge to split Microsoft Corp. into two competing companies whose business practices would be tightly restrained for up to 10 years, people who have seen the plan said last night.
Lawyers for Justice and the states that joined the antitrust case are to present the breakup proposal to U.S. District Judge Thomas Penfield Jackson, igniting a historic debate about the future of one of the world's most successful companies.
Jackson, who ruled April 3 that Microsoft broke federal antitrust law, could rule on the company's fate by summer. Microsoft has said it will appeal his decision, and a final disposition could be years away.
Virtually all of the 19 states in the case are expected to sign on to the federal government's proposal that Microsoft be divided into two companies ? one that sells the various Windows operating systems and another that does everything else, including producing software applications such as office-efficiency programs and the Internet Explorer browser, according to people who have seen the plan.
Under the plan, the companies wouldn't be able to recombine their efforts for 10 years. Other provisions would impose three-year restrictions on the operating-system company aimed at giving computer makers more flexibility to feature rivals' products. The rules are meant to place limits on Microsoft until competition can be jump-started in the marketplace.
Justice and the states settled on the breakup plan because they believe it offers the best chance of stimulating competition "without long-term government intervention and regulation," according to an official close to the case.
Microsoft has been prepared for months to battle what some call a corporate death penalty. The company's response is due next month and a remedy hearing is set for May 24, but officials of the Redmond, Wash.-based company plan to ask the judge for more time to respond.
Microsoft spokesman Mark Murray said last night that a breakup "will hurt Microsoft's ability to innovate, and it will hurt consumers."
"Microsoft has delivered tremendous benefit to consumers as an integrated company," Murray said. "And there is virtually no information in this case to support these radical steps."
The move could be one of the most far-reaching made by the Justice Department during the Clinton administration. White House officials summoned Justice lawyers for a briefing Tuesday. White House spokesman Joe Lockhart declined to comment on the substance of the plan, saying it was a Justice decision.
Under the plan, the sources said, Microsoft Chairman Bill Gates and his board of directors would be required to put together a proposal for implementing the breakup, including how to divide up intellectual-property rights such as patents and copyrights. The company would decide which of the new entities would retain the Microsoft name, and Gates and other officials would receive stock in only one of the companies, sources said. Ordinary shareholders would get stock in both entities.
Government attorneys believe the plan aims squarely at the problems outlined in Jackson's two-part verdict, sources said. In particular, they will argue that the plan will reignite competition in the multibillion-dollar software industry for personal-computer platforms; also, they will contend the plan repairs the damage described by Jackson, who ruled that Microsoft used its monopoly power to crush innovations that threatened Windows.
Also, they are expected to argue that the breakup creates incentives for Microsoft to refrain from the behavior at issue in the case and that it rectifies the damage by creating competition similar to the rivalry created when Netscape Communications Corp. first offered its Internet browser in 1995.
The browser, which ran on top of the operating system, was considered "middleware" that threatened to eventually supplant Windows. Under the divestiture plan to be made public today, the separation of products such as Microsoft Office ? which includes a word processor, spreadsheet and other programs ? from Windows could stimulate a new middleware threat, the attorneys plan to argue.
Under the government proposal, the operating-system company would be subject to a series of restrictions that would last for three years. They would include:
A requirement that it disclose applications programming interfaces (APIs), the coding that links Windows to software applications. Jackson ruled that Microsoft had offered its friends in the industry early access to APIs as incentives and punished opponents by withholding early access.
Limits on how Microsoft can put or "tie" new products and innovations into Windows. For example, any new program would be required to have a software "button" that would permit it to be added or removed from the operating system. This provision is meant to address the judge's finding that Microsoft illegally tied its Internet browser to Windows.
Uniform licensing terms for Windows to computer makers, to ensure that Microsoft does not use pricing to punish companies for promoting products from Microsoft competitors.
A requirement that computer makers be allowed to configure Windows to make it easier to feature Microsoft competitors' products on the computer's "desktop" display.
A ban on retaliation against business partners ? both computer makers and software developers ? that resist Microsoft's will ? for example, demands that they not ship the products of a Microsoft competitor.
Microsoft's top executives this week have called the plan extreme and unwarranted, and they have promised employees that such a breakup will never occur.
Yesterday, New York Attorney General Eliot Spitzer called Microsoft's comments "astonishing."
"Those of us who have been encouraging this litigation, those of us who believe in antitrust enforcement, are the real believers in the free market," Spitzer said. "Those, such as Bill Gates, who talk the language of the free market do not believe it. They have a corporatist view that big is good. We think competition is good."
Even before the proposal's delivery to the court, the second-guessing began as a group of noted economists filed an unsolicited friend-of-the-court brief supporting a breakup because "a centralized monopolist such as Microsoft endangers our economy."
But the economists propose dividing Microsoft into four separate companies in an approach dubbed "slice and dice": three operating-system companies separated from everything else.
Perhaps more significant from Microsoft's standpoint, the economists from Harvard, Yale, Stanford and the Brookings Institution argue that a two-way split ? like the one called for under the government's plan ? could actually raise prices for consumers.
The two companies would continue to hold monopoly power, the economists argue, and "each may maximize its own profits and set prices higher than would be the case in a competitive market . . . [and] than would be the case with an integrated monopoly such as the present Microsoft."
The economists also informed Jackson of a stunning calculation that undoubtedly will become hotly debated: that Microsoft's post-tax rate of return on its 1999 investment in capital projects and research and development was 88 percent, about 13 times the average profitability of other major corporations and an indication of the company's monopoly power.
"That figure is grossly inaccurate," Microsoft's Murray said.
Jackson is free to accept or reject the unsolicited brief. If he accepts it, it could open the floodgates for other outside opinions.
The group of economists is led by Robert Litan of the Brookings Institution, who negotiated a 1995 consent decree with Microsoft when he worked with the Justice Department. Litan has argued for months that the company should be broken up. The others are Roger Noll of Stanford, an authority on the economics of the telecommunications industry; Yale's William Nordhaus, who is an expert on government regulation and a Clinton adviser; and Harvard's Frederic Scherer, a specialist in the economics of industrial organization and antitrust.
The only dissent to the Justice Department plan is expected to be filed by Ohio Attorney General Betty Montgomery. She is considering filing a comment with the brief that would explain her objections to the breakup plan while endorsing the plan's restraints on Microsoft's conduct, people familiar with the matter said.
Bill Lockyer, the attorney general of California, home to the largest concentration of software and other high-tech companies in the world, appears to have decided to sign onto the plan although he earlier advocated breaking Microsoft into three companies.
Under the now-defunct California proposal, the third company would have focused on Microsoft's Internet properties, such as the online company MSN and the news organization MSNBC, and could have been an instant competitor to Dulles-based America Online, the world's largest online company.
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