DOJ and States File Proposed Remedy

The steady drumbeat of the Microsoft antitrust trial continued on April 28. After the markets closed, the Department of Justice (DOJ) and 17 of the 19 states' attorneys general involved filed a proposal to split Microsoft into two separate companies--one to produce the Windows OS, the other to sell applications and content and manage Internet properties such as MSN. The proposal calls for Microsoft to create a plan within 4 months that implements the breakup scheme. Microsoft revenues for 1999 were split as follows:

  • Windows OS: 43.1 percent or $8.5 billion
  • Applications: 44.6 percent or $8.8 billion
  • Internet properties and services:12.3 percent or $2.4 billion
The proposal offers structural and behavioral remedies. It would prohibit anyone who owns 3 percent or more of the outstanding shares in one of the resulting companies from owning shares in the other company. In addition, while implementing the breakup, Microsoft would have to divulge portions of its Windows OS, provide mechanisms to remove functionality from it, refrain from adding additional functionality to it, and submit to a government review of the company's dealings with OEMs and other partners. Two states, Illinois and Ohio, filed an alternative proposal that recommends a 3-year watch period with structural remedies should Microsoft fail to satisfy the court during that period. The alternative proposal recommends new regulations to resolve the issues involved. The DOJ's proposal follows the lines of the 1982 settlement of the AT&T antitrust suit, which that led to AT&T's divestiture of its holdings in the Baby Bells and Lucent Technologies. Assistant Attorney General Joel Klein stated in an interview Friday night that the proposal's goal is to reintroduce competition to the marketplace in the least disruptive way while offering an expedited result, suggesting that the plaintiffs will seek a fast track for the case. Klein noted that the AT&T suit began in one presidential administration, went to court in a second, and concluded in a third. Microsoft has until May 10 to file a response, with a hearing slated for May 24, although many consider a delay likely. Judge Jackson will issue a final ruling after that hearing. Because Judge Jackson’s earlier rulings have sided with the government, many expect him to impose the DOJ's proposals. The key to the case's timing lies in the behavioral remedies that Jackson requires while the case is on appeal. If Microsoft deems the behavioral proposals too restrictive, it's likely to face an expedited hearing in the appellate courts; otherwise, the company will seek to delay the process as long as possible. Most legal experts expect that the US Supreme Court will review the case, given its economic impact. Microsoft management contends that the proposal, if implemented, will ruin each resulting company and hurt consumers. Microsoft Chairman Bill Gates said that the plan was an “unprecedented and radical regulation of our activities” and that it was “not developed by anyone who knows anything about the software business.” In Microsoft’s published response, Gates said: "Breaking up Microsoft into separate companies is not in the interest of consumers and is not supported by anything in the lawsuit. Microsoft never could have created Windows and Office if they were in separate companies. Innovations that began within Office have quickly been incorporated into Windows so they are available to every applications developer. Dismantling Microsoft would hurt the company's ability to continue to innovate, and that would hurt consumers. It's anti-consumer to tear apart the development teams that created two of the most innovative technology products and that have helped to revolutionize productivity. Microsoft has a proven track record of delivering consumer value as a single company." You can read the complete response at Microsoft's Web site.
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