What is to be done about Microsoft?

Break it up? Open it up? Nationalize it? As the trial grinds on, the government smells victory and eyes remedies.

Published June 2, 1999 4:00PM (EDT)

Once upon a time, two decades ago, I owned a handful of shares in AT&T, purchased for me by a generous grandparent. Then came Judge Harold Greene's landmark decision in the early 1980s to break up AT&T into many little pieces -- and suddenly I owned a whole telecommunications portfolio.

As a young investor schooled in the '70s bear market, I decided that the last place I wanted to park my money was among the shards of a freshly trustbusted phone monopoly; I sold the shares, earning a few hundred dollars. Big mistake, in retrospect: If I'd held these fractional chunks of Baby Bells through the '80s and '90s, I'd have made out like a bandit.

I offer this little flashback not as stay-the-course advice to jittery investors at this moment of stock market uncertainty, but rather as a little piece of antitrust history to ponder as the Microsoft trial resumes this week: The unimaginable can come to pass -- and when it does, it often has unexpected consequences.

No one is surprised that the settlement talks encouraged by Judge Thomas Penfield Jackson during the trial's three-month break led nowhere. By all appearances, the particular brand of dig-in-your-heels, spit-at-the-world arrogance that has turned the Microsoft trial into such a wipeout for the Bill Gates team remains thoroughly entrenched in Redmond. The next few weeks are likely to bring more of the same.

In the latest round, the government will offer witnesses from IBM talking about the tactics Microsoft used to crush the OS/2 operating system, and Microsoft will grill an America Online exec to try to show that the newly merged AOL/Netscape is a powerful competitor. But by now the trial's outcome feels as inevitable as the months of delay that will surround its delivery. By the time Judge Jackson issues his ruling, we may all know just how well Microsoft's products handle the Y2K problem. Then, of course, there's the unavoidable Microsoft appeal, to a U.S. Circuit Court of Appeals that's shown itself friendlier to the company's stance than Jackson is. And who knows? The Supreme Court could give us its decision on Microsoft as early as 2003.

By then, Intel will be introducing its Pentium V, America Online will "reach" 137 percent of U.S. households and Windows 2000 may even be rolling out. During this long wait, the most popular pastime among Microsoft-watchers is talking about "remedies": In other words, if Microsoft has blown its case and is headed for defeat, what is to be done? How should the government go about fixing things?

One common assumption is that any such remedy must be shaped as a punishment, harsh enough to keep the company from repeating its behavior. Yet the history of antitrust enforcement suggests that their targets almost always prosper in the wake of a lost case. The progeny of Rockefeller's Standard Oil became the foundation of the U.S. automobile economy. AT&T's babies spent the '80s and '90s in a vast corporate mating frenzy that continues to this day -- while not perhaps exactly what the court envisioned, the mergers have nonetheless begun to reshape the telecommunications industry in more competitive ways. It's only the companies that win their antitrust cases, like IBM, that seem to suffer years of lost opportunities and depressed stock value as the price of victory.

No one knows what remedies the Justice Department will ask for if it wins its case. But a whole spectrum of proposals is keeping Microsoft-watchers busy speculating:

Pay up. Money, after all, is what started this thing, so why not levy some big fines on Microsoft? The company is sitting on such an enormous mountain of cash that it's hard to imagine a pocketbook punishment could be truly painful -- unless the court took the unprecedented step of stripping the company of its entire tens-of-billions reserve. Well, that's one way to fund some new government programs.

Bill, behave yourself! Under so-called "conduct remedies," the government would order Microsoft to stop doing things it's not supposed to be doing -- like using its Windows monopoly to try to build new monopolies in other areas. Trouble is, such behavior is already against the antitrust laws. And the current suit arose because of the failure of a previous "behave yourself" agreement between the government and Microsoft. Each new round of "conduct remedies" seems to give Microsoft another few years to tighten its hold on the marketplace.

The APIs have it. One popular idea is to require Microsoft to "open" or fully publish its APIs -- the "hooks" programmers use to connect pieces of software with one another. Open Microsoft APIs would, theoretically, level the playing field and prevent Microsoft from leveraging its secret knowledge of Windows interfaces to outflank its competitors' products. Trouble is, Microsoft staunchly denies that it has ever done so, and insists that its APIs are already fully open to its licensees. If you believe in the "secret APIs" interpretation of history, then you have no reason to believe Microsoft will be any more forthright under court order.

Use the source, Bill. Another increasingly popular remedy is to make Microsoft publish the full source code to Windows -- allowing programmers of all stripes access to its innards. There's a lot of potential in such an approach, and Microsoft seems to sense that it may get pushed in this direction. So, as recent comments by president Steve Ballmer suggest, it's already devising its own watered-down version of open source to give the company some cover. Just as Microsoft "embraced" Java in order to make a version of it just different enough to confuse the marketplace, the company (like some of its competitors, to be fair) seems to be "embracing" open source by changing the meaning of the term to something it can bend to its will.

Power to the OEMs. OEMs -- "original equipment manufacturers," the computer manufacturers who throw together a processor, a hard drive and a copy of Windows and call it a computer -- have long been at the mercy of Microsoft's complex licensing policies. Considerable evidence in court has shown how Microsoft wields its power over OEMs to reward the compliant and punish the independent-minded. One idea is to put Microsoft's dealings with OEMs on a level field by publishing all its pricing information and contracts. That could rein in some Microsoft abuses -- but it would require vigilance on the government's part.

How much do I hear for this software? Another idea floated at Ralph Nader's second "Appraising Microsoft" conference is to require Microsoft to auction off licenses to Windows to some small number of other companies. Presto! Operating-system competition! Except that software isn't just a license -- it's a whole structure of knowledge and knowledgeable programmers. The ability to sell Windows by itself isn't worth much if you're not in a position to keep developing the software, fixing its bugs and improving its functions.

Nationalize Microsoft. This has actually been proposed by at least one influential columnist. But even the most ardent Microsoft-basher must quail at the prospect of putting the federal bureaucracy in charge of an "essential utility" that's also a piece of software.

Birthing Baby Bills. Breaking up Microsoft is the thermonuclear antitrust remedy, once considered nigh impossible but increasingly the subject of industry chatter. The big question is, which is better -- a vertical or a horizontal breakup? Does it make more sense to divide Microsoft's operating system business, its applications units and its media properties into discrete enterprises -- or to break it up into several different companies, each of which would "inherit" the full portfolio of Microsoft's current intellectual property? Either way, who "gets" Bill Gates? Or if such a breakup should come to pass, would he just take his billions of marbles and go home?

Naturally, the egos in Redmond feel that they have built a wealthy empire on the sweat of their brows -- and the gu'mmint has no right to mess with their success. But the prospect of a decision by Judge Jackson to break up Microsoft might not be such a nightmare for the company, its executives and its investors. Today's Microsoft is a hobbled giant that's facing lawsuits at every turn, losing the interest of its top executives and having a hell of a time getting its most important new product, the Windows NT upgrade known as Windows 2000, out the door.

A federally mandated breakup could be the best thing that ever happened to the company: Look what happened to AT&T. If Microsoft's success truly is a byproduct of a sterling corporate culture, as partisans contend, then propagating that culture in new offshoots that are able to compete with one another can only guarantee a healthy industry. While today's Microsoft has grown so big and rich that its most efficient means of adding new technologies to its product line is to buy whole companies, a crop of lean Baby Bills could become tomorrow's innovators.

There's one argument that just might persuade Redmond's stock option-stoked legions to buy into a breakup of the company. All they have to do is stop thinking about such an outcome as a humiliating legal defeat -- and begin envisioning it as the ultimate stock split.

By Scott Rosenberg

Salon co-founder Scott Rosenberg is director of MediaBugs.org. He is the author of "Say Everything" and Dreaming in Code and blogs at Wordyard.com.

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