Microsoft breakup proposal, `a drastic surgery'

SHORTLY BEFORE the U.S. government filed its antitrust suit against Microsoft two years ago, Mr. Joel Klein, the assistant attorney general in charge of the Justice Department's antitrust division, explained in a private meeting his concept of ``surgical'' government intervention. In the case of Microsoft, he said, it could well include breaking up the company.

``It would be drastic surgery, but it is surgical,'' Mr. Klein said, according to a person who attended the meeting.

With its proposal on Saturday last, filed in a federal court in Washington, the government has formally opted for surgery, a split-up of Microsoft into two companies and a variety of restraints on its business practices for three years. But the government regards that surgery as the conservative treatment - less regulatory and less likely to harm consumers or the industry than the alternatives.

The government proposal, supporting memorandum and affidavits from three economists, two computer experts and a pair of investment bankers are emphatically documents not only of persuasion, but also of education.

The thick pile of papers is intended to convince Judge Mr. Thomas Penfield Jackson that the breakup plan is likely to be the most effective and least regulatory way to ensure competition in software markets under the sway of a company that Judge Jackson has ruled is a ``predatory'' monopolist. And they do so by going step by step through the same arduous intellectual trek that the government and states took in recent months to arrive at such a sweeping solution to ``the Microsoft problem.''

The government must give Judge Mr. Jackson - and higher courts, since appeals are assured - the confidence to take what would be a drastic step indeed: breaking up a company that is an American symbol of technological excellence and wealth creation. It operates in a fast-moving, dynamic industry, suggesting further reason to hesitate before reshaping the software industry by court edict.

``The government has put together a well-thought-out package, but this is uncharted territory,'' observed Mr. Hal Varian, an economist at the University of California at Berkeley. ``No one can say with real assurance that this is the right answer.''

Yet Judge Mr. Jackson invited a proposal of severe sanctions with his ruling earlier this month that the company repeatedly violated the nation's antitrust laws by using its market power to stifle competition and innovation, especially the challenge to its dominance represented by the rise of Internet software.

The Justice Department and States, in their papers, used their trial victory as the starting point of their argument. ``A strong remedy is thus essential on the record of this case,'' the plaintiffs' memorandum declared. Without such a solution, they said, Microsoft's ``actions threaten an enormous toll on competition and innovation in the computing and information technology industries.''

Throughout the papers by the government and supporting experts, one line of argument that emerges is that the remedy proposed is likely to be the best because alternatives that could be worse were not taken. The government chose to recommend breaking up along functional lines: Microsoft's industry-standard Windows operating system business in one company, while another company would get the rest including Word processing, Excel spreadsheet and MSN Internet service.

But the Government pointed out that it rejected a breakup alternative that would have given the Windows operating system to two or three companies.

That would have created immediate competition in the market for personal computer operating systems, in which the court determined Microsoft had a monopoly, with nearly 85 per cent of personal computers running Windows. Yet there were fears in the industry and on Wall Street that such a breakup would have led to consumer confusion with different flavours of incompatible Windows and huge losses to Microsoft shareholders.

The Government shunned that approach because of the risk of ``efficiency losses,'' in the understated prose of its memorandum.

``This is the most conservative of the structural split-ups,'' noted Mr. Garth Saloner, an economist at the Stanford University business school.

In their supporting paper, the two investment bankers try to provide assurance to the court that the kind of breakup being proposed should not prompt huge losses to shareholders. Mr. Robert F. Greenhill and Mr. Jeffrey P. Williams wrote that the government's proposal ``will not result in a material decrease in market value over the intermediate to long term,'' studiously side stepping any handicapping of how the stock market might react next week.

And in the long term, the breakup ``could be positive'' for Microsoft shareholders, who will get shares in each of the two companies, by unlocking value. The reasoning is that each of the two companies will probably be dominant in its respective market - Microsoft productivity programs like Word and Excel hold market shares of more than 90 per cent. Investors might thus prefer to hold shares in two monopolies instead of one.

Throughout the case, the government has pointed to the future. Sure, the government has said, the nation's high-technology markets look vibrant, but innovation could have been even faster were it not for Microsoft's chokehold on the software market.

Innovation in Internet software like the browser, they say, could have been even faster without Microsoft's influence. Microsoft's campaign against Netscape Communications, the Web browser pioneer, was at the centre of the Government's antitrust suit.

The Government called on Mr. Paul Romer, a Stanford University economist, to make its most forceful innovation arguments.

The goal of any remedy, he argues, should be to make sure that tomorrow's upstart entrepreneurs are not discouraged from competing against Microsoft. ``This remedy,'' he wrote, ``will significantly increase the returns that outside innovators, the potential new entrants, can hope to earn if they develop and commercialise a powerful new technology like the browser.''

The Government has mustered a formidable corps of experts to argue the case for what it wants to do. Microsoft, of course, will have its turn to file its counter arguments, which will be that the government's proposal is dangerously extreme and not justified by the evidence in the case.

``No doubt there's a sincere belief in Justice that this can be done cleanly,'' said Mr. Lloyd Cutler, the former White House counsel in the Clinton administration who has filed a friend-of- the-court brief on behalf of Microsoft. ``But I think this is the kind of heavy-handed regulation that Mr. Joel Klein has long said he wants to avoid, and it's very risky for the economy.''

In the end, it is up to Judge Mr. Jackson. And, as was not the case in the trial, he does not have to side with the plaintiff or the defendant. His job is merely to shape what he believes to be the appropriate remedy.

``The ball is really in Mr. Jackson's hands now,'' said Mr. Herbert Hovenkamp, a professor at the University of Iowa law school. ``He is not bound by the recommendations of either side on remedies. And the result could be that his ultimate remedy does not closely resemble the proposals of either side.''

Steve Lohr

New York Times

* * *

Reining in Microsoft

In addition to asking that Microsoft be split up, which may not happen for a while if it happens at all, the Government has asked that the company's activities immediately be restricted in a series of measures called conduct remedies. They are:

Microsoft cannot take retaliatory action against companies or individuals that testified against it in the trial.

Microsoft cannot take retaliatory action against computer makers that load competitors' software on their computers.

Microsoft must allow computer makers to alter the Windows operating system so that the first screen users see is the manufacturer's, not Microsoft's.

Microsoft must provide information about how software interacts with Windows to other software companies so that their programs can be more efficient.

If Microsoft adds new programs or features to Windows, it must sell a version at a lower price with the features or programs hidden or removed.

Microsoft cannot try to divide markets in a way that would reserve part of the market for some Microsoft products.

Microsoft must form an antitrust compliance committee with a chief compliance officer who reports to the company's chairman and its chief executive.

Microsoft must publish a standardised price list for Windows that is the same for all computer makers.

Microsoft cannot design Windows so that it disables or compromises programs from other companies.

Microsoft cannot have exclusive deals with, or retaliate against, other software or Internet companies.

Microsoft cannot tie other software products to Windows by sales contracts.

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