US, States Favor Plan To Split Up Microsoft

The Justice Department and 19 states are leaning toward asking a court to split Microsoft Corp. into two or three separate companies in a plan designed to end the software giant's monopoly in the US computer industry, people familiar with the discussions said over the weekend.

The drafting of a breakup plan marks a dramatic moment in the two-year lawsuit and only the first time since the 1974 antitrust lawsuit against AT&T Corp. that the federal government has considered such a drastic proposal for a corporate lawbreaker.

Microsoft has vowed to appeal the April 3 verdict that it broke federal antitrust law. A spokesman for the company said yesterday that a breakup remedy would go too far.

"There is nothing in the case that was brought that would merit such an unfounded remedy and one that is not in the interest of the industry or of consumers," Microsoft spokesman Greg Shaw said. "It is difficult to know what's being floated as a trial balloon and what is something that all the parties will agree upon."

Under the Justice Department plan being shared with states and industry executives, Microsoft would be forced to split off the Windows operating system from the rest of the company, sources said. The Windows company would be permitted to include the software functions that would allow users to browse the Internet.

Microsoft then would be forced to spin off a second company that sells its software applications, such as a word processor and the Excel spreadsheet programs. That company also might get parts of the company that make the Internet browser, sources said.

If Microsoft is divided into three companies, sources said, the third would be an Internet company that would get the browser and the Microsoft Network, which is the Internet service provider and Web portal that competes with America Online Inc. and other companies.

Justice Department spokeswoman Gina Talamona said she would have no comment on press reports regarding remedies.

The goal of a breakup proposal would be to tear down the barrier to competitors entering into competition with Windows, sources said. In his ruling US District Judge Thomas Penfield Jackson described the barrier as the absence of a cluster of companies willing to write the software programs, necessary to give a potential rival enough of a following to challenge Microsoft's Windows monopoly.

This plan is meant to create one or two companies that could sell the bundle of software programs necessary to spur competition for the Windows operating system. The new company or companies could either become a competing personal computer operating system or license software to potential Windows rivals that now lack the programs necessary to compete with Microsoft's Windows.

Another suggestion from industry supporters of the government case is that such a company might decide to write programs for Linux, the free personal computer operating system available over the Internet. That could turn versions of Linux into a viable Windows competitor, some industry executives argue.

All this is to remedy what Jackson found in a two-part ruling - a company that has abused its Windows monopoly to crush competitors, stifle innovation and harm consumers in the computer industry.

Most of the 19 states are expected to join the Justice Department in the draft plan, although some state attorneys general are arguing that the plan is not tough enough and doesn't include strong provisions to rein in Microsoft's behavior until the breakup is accomplished.

There also is continuing debate about how to limit the business tactics of the remaining Windows company, with some states arguing for tough limits on business practices for the company even after the breakup. Such conduct limitations would be implemented in a decree that could last from two to four years or more, sources said.

The remedy proposal, which has not been completed, is sufficiently far along that government attorneys are writing a proposed order to be submitted to Jackson for his review and sharing the plan with industry officials to search for loopholes. Playing a key role in the discussions is Greenhill & Co., a Wall Street mergers-and-acquisitions firm hired by the Justice Department in December to evaluate and perhaps develop breakup proposals.

Attorney General Janet Reno was briefed on the proposal last week. White House officials have not been briefed, but such a briefing still could occur.

The proposal is to be submitted to the court from Tuesday to Friday. Jackson gave attorneys the flexible deadline to allow the Justice Department and the states to come together on a proposal, or to allow a majority of states to file their own remedy plan separately by the end of the week. A remedy hearing is set for May 24.

Jackson is expected to set a remedy by this summer. Even if Jackson accepts the government's proposal to break up Microsoft, a final outcome in the case could be many months away while Microsoft pursued appeals.

The judge has said he might encourage a speedy appeal to the US Supreme Court, which is allowed under federal antitrust law.

Microsoft is expected to vigorously fight any breakup proposal and has adamantly denied that splitting up the company would boost shareholder value. Last week Microsoft chief executive Steve Ballmer disputed such suggestions from some Wall Street analysts.

At a meeting with editors and reporters of The Washington Post, Ballmer said that software's up-front fixed costs are extraordinarily high, while the marginal costs - the costs per unit to reproduce software programs - are low. To split up the company and allow two or more competitors to go head-to-head selling similar products would drive the price of the software so low that neither company could make a profit, he said.

"I was an economics major," Ballmer said. "I learned enough of economics to know that If you have two guys selling the same thing and the marginal cost is zero, the price point on that is a well-known economic fact. And yet you have people say that it will increase shareholder value. I would vehemently dispute any notion there would be enhanced shareholder value on breakup."

Reported By The Washington Post, http://www.washingtonpost.com.