June 7, 2000 5:05 PM PDT

Judge: Microsoft must be broken in two

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Microsoft investors face split decision

June 7, 2000
A federal judge ruled today that Microsoft should be broken into two companies, a decision that could radically tilt the balance of power in the technology industry.

U.S. District Judge Thomas Penfield Jackson decided that Microsoft could retain its operating systems for PCs, TV set-top boxes, handheld computers and other devices. But the company would be forced to create a separate firm for its other software and Web products--such as Outlook, Internet Explorer, BackOffice and the Microsoft Network (MSN)--resulting in sweeping changes from corporate offices and homes to the entire Internet.

Jackson's order requires Microsoft to submit a plan for breaking into two companies within four months. If an expected appeal fails, Microsoft would have 12 months to complete the breakup under the guidance of a chief compliance officer.

The breakup and accompanying restrictions would remain in effect for 10 years, when the two companies could merge again into one firm.

In addition to the breakup, Jackson imposed restrictions on Microsoft's business practices that go into effect in 90 days unless an appeals court blocks the action. Microsoft said it will immediately appeal the ruling.

Microsoft "broke the law"
As part of a strongly worded decision, Jackson said the court "has reluctantly come to the conclusion...that a structural remedy has become imperative: Microsoft as it is presently organized and led is unwilling to accept the notion that it broke the law or accede to an order amending its conduct."

He added that Microsoft "continues to do business as it has in the past and may yet do to other markets what it has already done to the PC operating system and browser markets."

Jackson also said Microsoft has "proved untrustworthy in the past." According to Jackson, Microsoft had sought "months of additional time" in further hearings regarding a breakup.

   How Microsoft would be  split under Judge Jackson's  ruling
The "Operating Systems Business" includes OS products for computing devices such as:
• personal computers based on the Intel x-86 architecture and other microprocessors
• servers
• handheld devices such as personal digital assistants and cellular telephones
• TV set-top boxes

The "Applications Business" includes products such as:
• Office
• Internet Explorer
• BackOffice
• Internet Information Server
• SQL Server
• Mobile Explorer and other Web browsers
• streaming audio and video software
• Mobile Explorer
• SNA server software
• XML servers and parsers
• Java Virtual Machines
• Frontpage Express
• Outlook Express
• Windows Media Player
• Net Meeting
• MSN
• MSNBC
• Slate
• Expedia
• "all investments owned by Microsoft in partnerships or joint ventures"
The decision effectively marks the end of a bitter two-year trial that exposed Microsoft's hardball business tactics. But the case is far from over: Microsoft immediately said it will seek a stay, which would prevent the restrictions from taking effect while an appeal is decided. An appeal could tie up the case for two or more years.

Microsoft general counsel William Neukom said an appeal would be filed within "a very few days," although the process will take "a number of months, maybe a year or longer," to conclude.

"This is the beginning of a new chapter in this case," Microsoft chairman Bill Gates said in a videotaped response. "We will be appealing this decision, and we have a very strong case on appeal.

Next stop: Supreme Court?
The government, meanwhile, said it seeks to move the appeal directly to the Supreme Court, taking advantage of a little-used provision of antitrust law.

"I suspect we'll be filing our papers very soon to move the case to the Supreme Court," said Joel Klein, head of the Justice Department's antitrust division. "It's not so much which forum (which is important), but the need to get the case resolved so everyone can go forward."

That request would have to be granted by the Supreme Court justices, however. Microsoft said it would oppose that notion, preferring to go the traditional route through the Court of Appeals.

"Today's ruling represents an unwarranted and unjustified intrusion into the software marketplace," Gates said later in a televised press conference. "The ruling says to creators of intellectual property that the government can take away what you've created if it proves too popular."

Speaking on behalf of the 19 states, Iowa Attorney General Tom Miller defended the ruling as sending "a strong message that no company is above the law." He added that "this remedy will prevent recurrence of Microsoft's anticompetitive conduct and restore to the marketplace the vital competition that Microsoft itself destroyed."

Industry condemns, defends decision
Industry reaction was swift. RealNames, which recently signed an alliance with Microsoft, criticized the ruling.

"Has anybody considered what this means for Microsoft's partners and the future of technology?" said Keith Teare, founder and CEO of RealNames.

On the other hand, Carl Yankowski, CEO of Palm, supported a split. "It seems to us that the separation of the OS business from the applications business would create the incentive for each independent business to compete fiercely and fairly on a level playing field."

Microsoft is in a heated battle with Palm, which maintains a commanding lead in the handheld market. The competition played a role in the antitrust case and may have influenced Jackson.

Special coverage: Breakup While urging Jackson last month to break up Microsoft, the Justice Department revealed two emails by Gates that they contended demonstrated Microsoft's continuing efforts to dominate the software market.

In one email, Gates urged his managers to make changes in Microsoft's Outlook program to better support the company's line of handhelds. "We really need to demonstrate...why our PDA will connect to Office in a better way than other PDAs, even if that means changing how we do flexible schema in Outlook and how we tie some of our audio and video advanced work to only run on our PDAs," Gates wrote.

Jackson's ruling shocked some legal experts, including University of Baltimore Law School professor Bob Lande, who noted the absence of the standard in-depth legal analysis.

"This makes it more likely the Supreme Court will say, 'Let the Court of Appeals have a real ruling on it.' There's just no legal analysis on the legal standards for remedies."

Judge sides with Justice Department
Jackson's ruling was based largely on a proposal from the Justice Department that said restrictions alone would be ineffective in keeping Microsoft from abusing its monopoly in operating systems for the personal computer. The only real deterrent, the judge agreed, is to separate the Windows operating system from the company's businesses in other markets.

Jackson ruled in April that Microsoft abused its monopoly in operating systems to beat down competition in other markets, notably Netscape Communications and its Internet browser.

Today's ruling, while harsh, could have been more radical. In the government's and Microsoft's final court appearance, the judge introduced the idea of a three-way split that caught both sides by surprise.

"It's historic for a major American technology company to have been found guilty of violating the Sherman Act," said Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif. "All of those old-world antitrust cases are going to be applied in full force today to Microsoft."

The immediate effect of the ruling on Microsoft is uncertain. As expected, Jackson stayed the breakup pending appeal--a request that Microsoft must file within 60 days.

Microsoft's appeal of the restrictions, see full text of Judge's final ruling which would be separate from an appeal of the breakup order, could be a litmus test for the case's eventual outcome.

If this preliminary appeal fails, the provisions would have immediate and far-reaching consequences on the company. Among the restrictions, Microsoft:

 could not lock PC manufacturers into agreements requiring them to promote, distribute or use Microsoft products;

 could not threaten or take action against companies that make competing products by withholding license terms, technical support or sales support;

 would have to offer equal licensing terms to all PC makers;

 and could not force Windows licensees to buy other Microsoft software.

After a breakup, the two separate companies also would face a series of restrictions and requirements:

 They could not threaten or withhold licenses or technical support for companies using competing products;

  the OS company would have to equally disclose the programming code necessary for linking software applications to the OS;

  the OS company would have to license the Internet Explorer Web browser from the applications company;

  and the OS company would have to give all hardware and software makers equal pricing, licensing of products and access to technical information. The case took a bad turn for Microsoft in November when Jackson issued his scathing "findings of fact," in which he concluded that Microsoft harmed consumers by leveraging its OS monopoly to reduce competition.

In his April 3 decision, Jackson said Microsoft violated two sections of the 1890 Sherman Act by illegally maintaining its OS monopoly and unlawfully extending that into the Web browser market.


Learn more about the landmark antitrust case and what's next this weekend on
CNET News.com TV

Saturday and Sunday, June 10 and 11, 4 to 5 p.m. ET on CNBC

The case pitted Microsoft against the Justice Department and attorneys general from 19 states. From gaffes with videotape evidence to failed settlement talks, the trial has been an unusually tense drama that captured the attention of the tech industry.

Tech executives, lawmakers and ordinary consumers have taken sides cheering or condemning the government's attack on Microsoft, one of the world's largest and most powerful corporations.

The company's backers argue that Microsoft has fueled the rapid growth of the industry by creating a widely accepted standard OS. Detractors acknowledge that benefit but fault Microsoft for ruthlessly crushing competition and ultimately reducing consumer choice.

See MS-DOJ timeline "It's not shocking to anyone that the court enters a fairly powerful injunction," said Robert Taylor of Howrey, Simon, Arnold & White in Menlo Park, Calif.

"The more difficult question is whether or not the public--the public being the computer-using public and the American public--in general is going to be served by the breakup of this company. And that is an issue over which I suspect reasonable people will be disagreeing from now until the very end of this case."

News.com's Jeff Pelline and John Borland contributed to this report.

 

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