In-depth analysis of divestiture ruling

In his final ruling against Microsoft Corporation, which had previously been found guilty of violating U.S. antitrust laws, Judge Thomas Penfield Jackson outlined the plan for breaking Microsoft into two companies. The plan explains the events to come over the next several months, including the divestiture schedule, the transfer of assets between the resulting two companies, and a series of provisions that the company must adhere to immediately, regarding its relation with partners and competitors.

First up is the plan for divestiture, which would logically split Microsoft into two companies, one responsible for Windows, the other for Office and its other applications. The judge wants Microsoft to come up with a divestiture plan within four months, while a series of responses would occupy another two months. When the Court accepts the final plan of divestiture, Microsoft is expected to execute the plan. That is, the company will be split up via the method outlined in the plan. But Microsoft doesn't get to set the broad goals of the plan, which instead closely follows the DOJ's proposed remedy. According to the ruling, Microsoft will separate its operating system business from its application business and transfer all of the employees, systems, and other tangible assets to a separate entity so that the separated business is economically viable and can act independently. Until the divestiture plan is implemented, Microsoft is required to maintain its OS and applications businesses as ongoing, economically viable entities.

In cases where intellectual property is shared between the operating system and applications divisions at Microsoft, the resulting OS company will get a perpetual, royalty-free license to use, distribute, modify, and create derivative versions of that technology. However, there is one major exception to this policy: The ruling clearly states that "Internet browser" and related technology will not be transferable between the two companies. So, for example, the OS company would be able to use future versions of Windows Media Player developed by the applications company, but it would be unable to use future versions of Internet Explorer. This is, perhaps, one of the stickier issues in the ruling, as all other modern operating systems, including IBM OS/2 Warp, Apple Macintosh, and Linux, ship with a Web browser.

After implementing the divestiture plan, the separated companies cannot acquire assets of the other company for a period of ten years. The companies would be prohibited from merging or otherwise recombining, forming joint ventures, provide APIs or other technical information to the other company that isn't simultaneously divulged to other companies, or provide the other company with more favorable licensing terms. Every three months, both companies will be required to report any cross-company agreements with the U.S. Department of Justice for review.

With respect to business relations, Microsoft is restricted from threatening any action against any OEM that supports products that compete with Microsoft's products. The company will be required to license its Windows operating system products to OEMs under conditions set forth in a unified license agreement, which will set the price of Windows for all PC makers. This pricing will be made available to the top 20 OEMs and the DOJ on a Web site set up by Microsoft. Different language versions can have different royalties, and reasonable volume discounts can be applied to those OEMs that actually sell many copies of Windows. For PC makers, however, the best news regards their new-found permission to configure Windows as they see fit. Under terms of the ruling, PC makers will be able to modify the boot sequence, startup folder, Internet Connection Wizard, desktop, preferences, Favorites, start page, first screen, or any other aspect of the Windows operating system in order to gather registration or subscribe users, display icons or other features, remove icons, folders, start menu items, or Favorites relating to Microsoft products or services, display any user interface as long as there is a way to return to Microsoft's default, and automatically launch any non-Microsoft middleware, OS, or application. PC makers can offer their own Internet access providers, start-up sequence, and remove any of Microsoft's bundled middleware products.

Microsoft will be required to disclose APIs, communications interfaces, and other technical information to all software developers, hardware makers, and other OEMs in a timely manner, using the same media that it utilizes to deliver such information to its own employees. This covers all technology that Microsoft uses to provide application or middleware interoperability with its platform software. And Microsoft will be required to create a secure facility in which representatives from OEMs can "study, interrogate, and interact with relevant and necessary portions of the source code and any related documentation of Microsoft Platform Software for the sole purpose of enabling their products to interoperate effectively with Microsoft Platform Software." The company is prohibited from building features into its products specifically designed to interfere with the performance of non-Microsoft products.

Microsoft is also banned from entering into any exclusive deals with third parties that restrict the development or distribution of non-Microsoft products. And it cannot deny a Windows license to an OEM because that company promotes or distributes non-Microsoft software.

Addressing Microsoft's illegal product bundling strategy, the ruling prevents the company from bundling middleware products in Windows unless it also offers a version of Windows in which all middleware products can be easily removed by OEMs or end users. If any OEM chooses to remove a middleware product, the license for that copy of Windows is then reduced. The price reduction is literally based on the ratio of the number of bytes of binary code in the distributed version of Windows compared to the number of bytes of binary code in the "full" version of Windows. This answers a major question about the plan to provide feature-reduced versions of Windows, and it's seemingly one of the more welcome changes.

Finally, the company will be required to create an internal compliance committee that will distribute copies of the Court's final judgment to employees and require them to sign a document that certifies that they have read, understood, and agreed to the terms of the of the judgment and have been advised that any failure to comply with the judgment may result in conviction for criminal contempt of court. This addresses the culture at Microsoft that has allowed its anti-competitive behavior to continue unchecked. The DOJ will be allowed to inspect all books, ledgers, accounts, correspondence, memoranda, source code, or other documents relating to the final judgment. Microsoft employees will be prevented from interfering with these inspections, which can occur at any time over the course of the next ten years.

Ten years is, of course, a long time, especially in the software business. But as Microsoft turns its hopes to the appellate process, questions remain about the viability of the judge's plan, which seeks to breakup one of the most economically successful company in the history of the United States. Proponents of the company argue that this plan punishes the company for succeeding, while others question the means used to achieve that success. Whether the breakup happens will depending largely on the view of the appellate or Supreme Court judges who examine the case in the future, rather than the opinions of the general public, however

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