If the U.S. Department of Justice has its way, Microsoft will become two companies, and the ever-unrepentant chairman Bill Gates will only hold stock in one of them.
On Friday afternoon, nearly two years after the government filed its antitrust suit against the software giant, the Justice Department and 17 states presented a joint proposal to District Court Judge Thomas Penfield Jackson, recommending that Microsoft should be split into two companies. The proposal calls for one company to own the Windows operating system, while the other would lay claim to Microsoft applications like Word and Excel. The two companies would be prohibited from morphing back into one for 10 years. (Two other states, Ohio and Illinois, submitted their own proposals to the judge, with slightly differing recommendations.)
The recommendation to Jackson, who ruled in early April that the company was guilty of anti-competitive and monopolistic practices, came as something of an anticlimax, as news of the breakup had been leaked and widely reported earlier this week.
Still, the details were intriguing. In a sort of corporate "Sophie's Choice" scenario, officers in Microsoft would hold stock in only one company, while shareholders would have their shares split between the two. As part of the remedy, the new operating system company would have to open some of its tightly guarded Windows code to other companies that write application programs.
An angry Gates called the proposal "very disturbing," in a press conference on Friday. "This is an arbitrary split. This was not developed by anyone who understands the software business. It takes away any incentive by saying that intellectual property has to be given away to other companies."
Gates predicted that a breakup will hurt not just Microsoft, but the entire tech industry: "This is really out of bounds, really out of touch with what's going on in our industry. It will retard the speed with which it moves ahead."
CEO Steve Ballmer said that he was "disappointed beyond belief" by the proposal, and vowed to appeal. But his indignation about the "Draconian regulations" did not prevent him from using the media spotlight to get in a few words promoting his product: "We were born a competitor in a competitive industry, we will continue to innovate. We're introducting Windows 2000, Windows 2000 server, SQL," Ballmer added, going on to list several other new products before getting to a "new version of Microsoft Money; we're very excited about that."
Of course, the proposal doesn't mean that Microsoft will necessarily be split up, certainly not anytime soon. Microsoft has until May 10 to respond to the government's finding, and then Jackson has to rule on the proposal; Microsoft would have four months after that to submit a plan for the breakup.
The company promises to appeal -- and to drag its feet through the legal process. As William Neukom, Microsoft's senior vice president of law and corporate affairs, put it on Friday: "Even the government will agree that more than 12 days are needed before breaking up a $100 billion company. [We'll need] months of discovery and evidentiary hearings." In the meantime, Microsoft will be free to go after new markets.
For its part, the government is anxious to rein in Microsoft, even before the proposed "reorganization" would take effect. In a series of provisions, it suggests that before the breakup is implemented Microsoft be banned from threatening PC manufacturers that offer its rivals' products; publish the price it charges PC manufacturers for the Windows operating system; and other curbs on its bullying tactics.
Of course, all that is nothing compared to a breakup. Not since AT&T in the 1980s has the government recommended such measures to fight monopolistic business practices. But one state attorney general joining in the case predicted that a Microsoft breakup would result in technology innovations like those seen in the telecommunications field. Dick Blumenthal, state attorney general of Connecticut, said: "AT&T's greatest innovation before the breakup was new colors for the Princess phone. The reorganization of AT&T led to a surge of innovation in technology, innovations like the Internet that have changed American lives. There will be the same kind of surge of innovation from them [a broken-up Microsoft], that will be given opportunity to fairly and fully compete."