Microsoft foes ready to carve up company

WASHINGTON -- "No! No!" says the Red Queen of Hearts. "Sentence first -- verdict afterwards."

In Alice in Wonderland fashion, Microsoft officials feel as if their foes in industry and government have sentenced the company before a verdict has been reached in its antitrust case.

Speaking last month, before the trial was recessed at the federal courthouse in Washington until mid-April, Microsoft Chairman Bill Gates said: "All the e-mails I've gotten from my lawyers tell me not to use the lens of the press to judge what may or may not be happening." But others are, and these are the solutions -- if Microsoft is found guilty -- that are being bandied about. First, there are the so-called "death penalty" remedies. One would break Microsoft into several firms, each of which would market a different type of software. Another would divide Microsoft into rival "Baby Bills" of a sort, each of which would offer its own version of Windows, Microsoft applications and server technology. In some respects, the latter approach would be comparable to the 1984 breakup of AT&T. Still another potential path would be to require Microsoft to license Windows source code. That would enabled rival companies to clone the operating system while third-party developers extend its overall functionality. Microsoft could also be barred from signing exclusive or preferential contracts with hardware vendors. That would require vendors to scrap their current practice of forcing consumers to purchase machines already loaded with Microsoft's operating system. In any event, if Microsoft loses the case, it clearly would be bound to change its way of doing business. "The exclusive contracts (with partners) are as good as dead," Hillard Sterling, a technology and antitrust lawyer at Chicago-based Gordon & Glickson, told PC Week, a trade magazine. Asked last week what he would do if he were the judge presiding over the Microsoft trial, Federal Trade Commission Chairman Robert Pitofsky said: "the remedy is where the challenge will be." Pitofsky, on a legal panel in New York, contended the rapid rate of change in the high-tech field makes it far harder to apply standard antitrust formulas than in oil or steel. "High-tech is different," he said. "You don't want to under- administer or over-administer the law in that industry. It's very hard to strike that balance in high technology." As for Microsoft, spokesman Jim Culligan said: "We believe it's premature to talk about remedies since we believe we've built a strong legal record in this case." Culligan was reacting to reports, initially published in the Wall Street Journal, that the nation's largest software industry trade group had recommended the Justice Department consider breaking up Microsoft. Such a step, the group's 40-page report said, could be an appropriate remedy for the damper that Microsoft allegedly puts on competition. At the same time, the Software and Information Industry Association's board urged the government to avoid imposing any sanctions that risked a "fracture" of the Windows operating system. Microsoft Windows, the report noted, has emerged as a de facto industry standard. It currently runs on more than 90 percent of the world's personal computers. The next version of the operating system, dubbed Windows 2000, is due to be released next year. In the meantime, Microsoft is about to release the next version of its browsing software, Internet Explorer 5.0. On March 18, Gates is to demonstrate the program at the software company's Redmond, Wash., campus. Preliminary versions have been widely praised in the trade press. The antitrust charges lodged last May against Microsoft stem from its earlier behavior in the Internet browser wars. Remedies -- if the case goes against Microsoft -- could be shaped by the company's response toward a consent decree signed in 1995. The decree was approved by U.S. District Judge Thomas Penfield Jackson, who is presiding without a jury over the current case. The government charged Microsoft with flouting the decree by bundling its browser directly into Windows 95, after having first sold Internet Explorer to retailers as a stand-alone item. After putting e-mail into evidence that shows Gates never intended to change the way Microsoft does business, the Justice Department does not appear to be interested in negotiating a new consent decree. But even if the government persuades Jackson that Microsoft is an abusive monopoly that behaves in an exclusionary and predatory manner, the company would be free to appeal, all the way to the U.S. Supreme Court. Outside the courtroom, the quest for effective remedies proceeds along two tracks: * Justice Department antitrust chief Joel Klein has a panel of internal and independent legal experts and cyber-savvy economists weighing possible courses of action. Some members of Klein's panel have participated in the trial, although David Boies, the government's lead litigator, is not involved. * Attorneys general for 19 states, led by Iowa's Thomas Miller, a Democrat, also are crafting recommendations. At the staff level, this effort is being coordinated by Steven Houck, New York's antitrust chief. It's unknown if the Klein and Miller task forces will make a joint proposal to the judge. Jackson remains free to chart his own course and to seek outside advice. If he does so, he's likely to turn to Harvard Law School Professor Lawrence Lessig, on whom he sought to rely in an earlier phase of the case. Microsoft successfully challenged Lessig's appointment then as a special master by citing a joking e-mail message he sent a friend. But it's not clear that Microsoft will lose -- as both new technologies and the appeals' process move forward in tandem. Says Microsoft General Counsel William Neukom, who has supervised the defense: "We're in a very innovative business where companies reinvent themselves and their product lines on a very rapid basis. The notion that the government can observe this torrent of innovation in technology and decide who ought to do what in terms of the design of their products I think is foolish."

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