E2 Editorial: The release of this proposal took place on April 28, 2000

Break It Up

States, Justice Propose Splitting Microsoft in Two

The Justice Department and 17 states proposed breaking Microsoft into two companies.

By Jonathan Dube


April 28 - The Justice Department and 17 states today proposed breaking Microsoft into two companies to prevent it from continuing to violate antitrust law.

One company would sell Windows, the operating system that runs most of the world's personal computers. The other would handle applications software, such spreadsheets and databases and the Internet Explorer browser.

It is the stiffest antitrust penalty sought against an American corporation since a 1982 agreement split telephone giant AT&T into regional "baby bells."

"This is the right remedy for the right time," Attorney General Janet Reno said."Our proposal will stimulate competition, promote innovation, and give consumers new and better choices in the marketplace."

The government's 17-page proposal for sanctions against Microsoft was submitted to U.S. District Court Judge Thomas Penfield Jackson just after U.S. financial markets closed, so as to minimize impact on the company's stock.

Two of the 19 states involved in the lawsuit, Illinois and Ohio, submitted statements about the filing but did not join it. The Ohio and Illinois attorney generals said they wanted to wait and see if "there is an opportunity to determine whether significant restrictions upon Microsoft's behavior would alone be sufficient to significantly eliminate Microsoft's anti-competitive conduct."

But the other states agreed with the Justice Department's plan. Connecticut Attorney General Richard Blumenthal, whose state was among the 17 who joined the proposal, said, "This is a very measured but responsible remedy."

Jackson ruled on April 3 that Microsoft repeatedly violated federal antitrust laws and used its monopoly power in the operating systems market to crush rivals. Jackson will rule on what punishment should be imposed based on the government's filing, Microsoft's response and a hearing scheduled for May 24.

A Long Battle

But the government still faces a potentially years-long battle.

Microsoft has said it plans to appeal Jackson's ruling and company executives have insisted that no laws were broken. Microsoft Chairman Bill Gates said the proposal would hurt consumers.

"These proposals would have a chilling effect on innovation in the high technology industry," Gates said. "Microsoft could never have developed Windows under these rules. Looking forward, this kind of regulation would make it impossible for Microsoft to develop the next generation of great software."

Microsoft has powerful allies. House Majority Leader Dick Armey, R-Texas, quickly denounced the government plan. "Punishing success only stifles innovation, guaranteeing fewer products and smaller productivity gains for American consumers and workers," he said.

Split Could Spur Competition

The government believes splitting Microsoft would offer consumers greater choice by preventing the company from using its Windows operating system, which runs on more than 80 percent of personal computers, to force companies and consumers to use other Microsoft software.

The Justice Department's antitrust chief, Joel I. Klein, said the proposed remedy would "make sure in the future that new products and new technologies are able to get to market and give consumers a choice."

"What we want to see is competition," Klein said. "That's why we have a structural remedy which creates the right market incentives so that these two new companies go at each other and create robust rivalry. That's what will benefit consumers."

Under the plan, the two companies wouldn't be able to recombine for 10 years. The plan would impose three-year restrictions on the Windows company to give computer makers more flexibility to feature rival products.

Neither new company would be allowed to threaten personal computer manufacturers for using rival products or to withhold licenses and technical support needed to use the former Microsoft products.

The new operating system company would be required to disclose key software codes of Windows to companies that write application programs that must be linked to that computer operating system.

No More Bundling

In a move aimed at evidence introduced that Microsoft used the operating system to promote its Internet browser and to smash rival Netscape's browser, the company would be banned from tying future use of Windows to any other Microsoft product.

The company also would be barred from designing software for the purpose of interfering with or degrading the operations of rival products. It would be required to treat all hardware and software makers equally with respect to pricing, licensing of Microsoft products and access to required technical codes.

Gates and his board of directors would have to create a proposal for implementing the split. Gates and other officials would receive stock in only one of the new companies, while ordinary shareholders would get stock in both.

Some stock analysts said two Microsoft companies might be valued more highly than one, although most see the stock suffering from uncertainty until a final outcome of the case. Microsoft shares rose in after-hours trading to 71.94 from the close of 69.75, reversing the steady slide that began earlier this week when news of the proposal leaked.

Microsoft has until May 10 to respond to the government's filing, but has said it would request an extension to respond to any proposal that includes a breakup.

The government will get a chance to reply to Microsoft's response on May 17. Jackson is expected to issue his ruling this summer or fall.

The Associated Press and Reuters contributed to this report.

Details of Government's Proposal

The U.S. Justice Department set out the following proposal for breaking up Microsoft, the world's biggest software company, into two companies to restore competition in the industry:

  • Microsoft would have to separate its Windows operating system from applications.
  • Microsoft would have to submit a breakup plan four months after U.S. District Court Judge Thomas Penfield Jackson rules.
  • Temporary uniform standards would have to be adopted for licensing the Windows operating system to personal computer makers.
  • Personal computer makers would be allowed to make modifications to the appearance of the Windows operating system.
  • Boards of directors for the two companies would be kept separate.
  • The two companies established would be barred from merging or forming any joint ventures with each other.
  • No retaliatory action could be taken by the two companies against those who gave evidence to the federal government against Microsoft.
  • Temporary restrictions would be imposed on Microsoft until the appeals process was completed.
  • A temporary ban would be placed on Microsoft to prevent any threats or acts against personal computer makers.
  • An internal antitrust committee would be formed within Microsoft to ensure compliance with the breakup.
  • Tthe terms of the breakup plan would last 10 years.

Gates: Microsoft Breakup Would Hurt Consumers Ballmer Reassures MS Employees Full Text of Justice Department's Breakup Proposal

Rating of this node is currently at -1 vote. I guess I'll look for an even better write-up on the net of this historic event that sort of matters in my world (in a macroscopic way it does matter).

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