Confirmed: U.S. wants to break up Microsoft

A report Thursday in the Washington Post confirms yesterday's story that the U.S. Department of Justice (DOJ) and 19 states suing Microsoft in a historic antitrust trial will seek to break the company up into as many as three separate entities. The demand, which will be presented to Microsoft's lawyers as early as this week during mediation talks in Chicago, seeks to separate operating system software such as Windows from applications software such as Office. And while Microsoft is sure to object to the demand, it now appears that the government isn't willing to accept any resolution that doesn't include breaking up the company.

According to sources familiar with the mediation talks, the DOJ and 19 states would like to see Microsoft split into three companies, but this could take several forms. In one scenario, Microsoft would be split along product lines into separate operating system, applications, and Internet companies. Indeed, a recent Microsoft reorganization ironically seems to make this possibility the most painless for the company. In a more popular scenario with the DOJ, however, Microsoft would be split into two operating systems companies and one applications company. This would prevent one company from dominating the operating system market, as both would have the ability to sell Windows. These companies would also be legally prevented from entering the applications business, opening that market to more competition and choice for consumers.

"What Justice wants is competing operating-systems companies, and that's the logic of a three-way split," William Kovacic, a law professor at George Washington University, told the Washington Post.

To breakup Microsoft, however, the DOJ would need to show some benefit to consumers, who have ostensibly been harmed by Microsoft's activities. But such benefit is easy to find, say sources, as the price for Windows would be much lower once there was competition. In today's protected market, Windows has no direct competition and the price hasn't dropped in years. Also, consumers would have more choice if more companies were selling Windows, because the competing companies would try and offer unique features to outdo the other.

Indeed, a coincidentally timed study by International Data Corp. (IDC) has concluded that a Microsoft breakup would be beneficial to consumers and the computer industry. The report concludes that today's market for Windows is "unrealistic, ... the same thing as saying, 'We're not going to trade with you unless you speak English.'" A breaking up of Microsoft would "expand the market tremendously," the report concludes.

There are problems, of course. Though investors might benefit from a split, the inequity of the remaining companies might cause investor skittishness. And as we saw with the breakup of AT&T in the early 1980's, there are huge employee and executive placement issues with any large-scale corporate split. Microsoft's chief resource is its approximately 33,000 employees. Which employees would go where? And if Bill Gates were placed at the head of one company, how would the government prevent all of the employees from running to that company? These questions will need to be answered before any split can be implemented.

And of course no story about the breakup of Microsoft would be complete without a stock quote from a Microsoft spokesperson denying that such a split has any merit. On that note, I present Mark Murray:

"It's a little ironic that anyone would be talking about breaking up Microsoft a day after AOL and Time Warner announced the largest merger in history, one aimed at competing directly with Microsoft," Murray says.

What Murray isn't saying, however, is that the AOL/Time Warner deal doesn't actually vindicate Microsoft's position: AOL Time Warner is a content company, which Microsoft strenuously denies being. In fact, just this week, the company made clear that it was a "software company, not a content company." So as AOL moves upward and onward to new markets, it seems that the computer software industry is actually being conceded to Microsoft. The AOL/Time Warner deal doesn't prove Microsoft's assertions at all; it simply validates the claim that this company has a stranglehold on the market. As the line between Internet and traditional media blurs, its only natural that AOL would form allegiances with companies on the other side of the fence.

In any event, none of the grandiose plans for breaking up Microsoft can come to fruition until a nasty series of appeals is exhausted. In the meantime, Microsoft could still settle its way out of this hole by making some major concessions. Possibilities include licensing the source code for Windows to competing companies or agreeing to court-ordered and monitored limits to its behavior. And of course, Justice and the 19 states would need to agree to any concessions. In the meantime, the possibilities are suddenly endless