Behavioral Remedies Likely to Hit MS Hard

Judge Jackson today ordered Microsoft to be broken into two separate companies as part of his verdict in the U.S. government's antitrust case against the firm. In his verdict, he also imposed a variety of other remedies on Microsoft designed to curb its anticompetitive behavior.

"Portions of the judgement included conduct remedies, which Microsoft will appeal, but some are likely to survive the appeals process and could be implemented as early as 2001," said Chris Le Tocq, research director with Gartner Group Inc., based in San Jose, California. "Until the breakup, the remedies apply to the whole company, to some extent that might put pressure on Microsoft to bring the breakup forward."

The judge's verdict in the case today came as little surprise to industry observers given that he has leaned more and more strongly towards the U.S. government's case ever since determining in his findings of fact in November that Microsoft was a monopoly. Today, the judge wholeheartedly supported the government's key claims that Microsoft has abused its monopoly position in the operating systems market to dominate other markets, most notably Internet browser software, as well as squash competition.

The biggest problem for Microsoft in the period prior to the proposed breakup is the intense scrutiny the company will be placed under, according to Rob Enderle, senior industry analyst at Giga Information Group Inc., based in Santa Clara, California.

"Every time they do something they'll attract attention," Enderle said. "It's... like driving to work every day with the most strident back-seat driver, who's also a police officer."

Tim Bajarin, president of Creative Strategies Inc., in Campbell, California, said such scrutiny could have a positive result as Microsoft develops a second generation of Web-based appliances. "Had they gone unchecked, they could have used their market dominance in the same way," he said.

However, Bajarin didn't welcome the judge's ruling.

"I don't believe it's a smart decision for two reasons," Bajarin said. "In the PC arena, Microsoft and Windows already won the war. Two years from now, consumers are still going to want to use Microsoft software. I don't think any of us want the government telling us how to write software."

Splitting Microsoft into two companies -- an applications firm and an operating system business -- could result in what Bajarin dubs a "potential tower of Babel" situation. "What you're going to end up with is two monopolies," he said.

The other side of the coin is the reaction of Ken Wasch, president of the Software & Information Industry Association (SIIA), an IT trade association and a supporter of the plan to break up Microsoft. In fact, his organization proposed a three-way split of the software giant into applications, operating systems and Internet companies.

"Consumers won. Justice won. Microsoft lost," Wasch said. "There will be more choice in the software applications consumers can buy, and they will be cheaper."

At the other end of the reaction spectrum, Jonathan Zuck, president of the Association for Competitive Technology (ACT), an advocacy group for the IT industry that has been very supportive of Microsoft throughout the trial, made no bones about his opposition to the judge's ruling.

"This is a travesty of justice, where the ultimate losers will be the IT industry and consumers," he said. "This decision will ultimately lead to fewer choices; it will stifle innovation and will result in higher prices for consumers." Zuck described the breakup order as an "atomic bomb," and more of a punishment than a remedy.

Another Microsoft supporter, Keith Teare, chief executive officer of Internet keyword system provider RealNames Corp., worried about the implications of punishing Microsoft. "It sends a message to me that basically says 'Don't succeed too much, because if you do, if you become too powerful in the market, we'll come in and pull the rug from under your feet,'" he said. "I'm pretty sure that outside the U.S., that's how most people will see it. They'll be astounded that the U.S. is acting like the Soviet government, limiting the success of business."

Teare said Microsoft has been a good partner for RealNames to work with, and suggested that this aspect of the company didn't emerge during the trial. "The fact that Microsoft helps others innovate, that they don't try to own everything, is the hidden side of the story," he said.

Not surprisingly, an IT company that's no friend to Microsoft, Sun Microsystems Inc., warmly welcomed the judge's ruling. Sun has an ongoing lawsuit with Microsoft relating to the licensing of Sun's Java technology.

"These measures ... will protect Internet technologies from becoming the proprietary preserve of any one company -- which was, and Sun believes still is, Microsoft goal," Sun's Chairman and CEO Scott McNealy said in a statement. "Microsoft has expressed no regret for its actions throughout these proceedings, and the company has not recognized any wrongdoing."

So, who stands to benefit from the judge's ruling? Alternative operating systems to Windows may well find their fortunes much improved, Gartner's Le Tocq explained. "PC manufacturers are likely to look more readily on alternative OSes and alternative devices because part of the terms of the judge's ruling mean they will have a cafeteria-style system where companies can pick and choose their Microsoft technologies," he said.

Jon "Maddog" Hall, the executive director of Linux International, a nonprofit group that distributes information about the open-source OS, earlier this week looked forward to a Microsoft breakup as being beneficial for Linux. "(A breakup) would be the ideal time for people to say 'Hey, it's time to port Microsoft Office to Linux,'" he said.

Turning to the appeals process, Microsoft will likely have a difficult time of it, according to Robert Schneider, an attorney with Chicago law firm Chapman and Cutler, who has expertise in both antitrust and intellectual property law. He said either the U.S. Supreme Court or the U.S. Court of Appeals for the District of Columbia would have to overturn Judge Jackson's November findings of fact that determined Microsoft to be a monopoly.

Mark Schechter, an attorney at Howrey & Simon in Washington, D.C. and a former U.S. Department of Justice official, agreed with Schneider.

"Appellate courts don't like to second-guess findings of fact," he said. "Microsoft will have to focus on the conclusions of law." Schechter predicted that the focus of Microsoft's legal attack during the appeals process is likely to be the technological tying issue -- of its Windows OS with its Internet Explorer Web browser -- and some of the intellectual property issues. "I think they're going to attack the divestiture... arguing it's not proportionate to the violation," he added.

"If this case is litigated through the Supreme Court, it will be the case used to define (antitrust) rules... in the coming decades," said Bill Kovacic, a law professor at George Washington University in Washington, D.C., who has followed the case closely. The case will help determine "what a dominant enterprise may do," not only in the IT market, but for any large firms, potentially altering existing business practices, he added.

Mark Ostrau, an antitrust and intellectual property partner with law firm Fenwick & West, based in Palo Alto, California, doesn't think that Microsoft has good grounds for an appeal.

"The remedy is generally the least vulnerable to attack, because of the broad discretion the antitrust laws give a judge who finds a monopoly," he said. "(The decision is) designed to anticipate technology." The case is not likely to go to the Supreme Court, according to Ostrau. "It's an increasingly rare event that the Supreme Court would take a direct appeal like this, especially when the divestiture portion of the decision is stayed pending appeals," he said.

Looking back over the antitrust trial, Ostrau wasn't complementary about the performance of Microsoft lawyers during the case. "I don't think they took the resolve and the skill of the government seriously enough," he said. "In many respects, Microsoft is no more than a garage company that through strength of personality believed it was on the shining path."

Nor did he rate the government lawyers highly. "They pursued this case somewhat opportunistically," Ostrau said. "When they started the maze, they had no idea how to get to the end, or what it would look like. In a way, it's a very tactical approach, not a strategic one."

(George Chidi, James Evans, Doug Gray, Jack McCarthy, Rick Perera and Nancy Weil of IDG News Service contributed to this report.)

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