Baby Bills?

The root case of the current antitrust legal battle between the US Department of Justice (DOJ) and 20 state Attorneys General against Microsoft has to do with competition in the desktop software market. Microsoft played dirty against DRDOS when introducing Windows 3.1 to beta testers in 1991 in order to win a monopoly in the operating system segment of this market, and has been foreclosing competition by tying products to Windows ever since. The DOJ tried once before to restore competition to the market place. In 1994, a Consent Decree agreement was signed with Microsoft which averted an antitrust trial at that time. Among other things, it ended tying of Microsoft products and per-processor licenses with original equipment manufacturers (OEMs). These were being used to disadvantage other software producers.

However, before agreeing to the Decree, Microsoft insisted that language be added that states that the prohibition on tying separate software products “shall not be construed to prohibit Microsoft from developing integrated software products.” The DOJ, not seeing the trap, agreed. Bill Gates, Microsoft’s CEO at the time, publicly and proudly stated that the agreement would have no material effect on his company. And in the short term, he was right.

Microsoft, rather than tying products together, instead “integrated” them. DOS and Windows were integrated to make Windows 95. Then disk-compression technology, Internet connectivity tools and even web-browsing technology were all integrated into Windows, killing or maiming competitors who could not ever hope have their software distributed alongside Microsoft’s in each operating system upgrade.

Fast forward today, and you have Microsoft at the wrong end of a bad decision by an annoyed Judge, and a distrustful DOJ which knows that Microsoft cannot be trusted with behavioral modifications. This leaves structural remedies, a topic few in the investment community even dared consider until recently.

Structural remedies can take many forms, and involves separating one or more parts of a company by divesting interests or, in the extreme case, breaking up a company onto two or more separate entities. In a telling development, the DOJ has retained a New York investment firm, Greenhill & Co., to look at how best to impose the needed restructuring while doing the least damage to the economy and the stock markets.

Most likely, Microsoft will be broken up along product lines. A split between the operating systems, productivity software, and content and entertainment divisions, for example. It is also possible that Microsoft could be forced to divest itself of all assets it has acquired in the past several years, for example, and not be allowed to buy any new companies or technologies for some period into the future.

One option which has been debated but isn’t likely is breaking up Microsoft into three or more identical mini-Microsofts, the so called “Baby-Bills” option named after the ATT breakup nickname “Baby-Bells”. Another unlikely scenario is the free release of the Windows source code, although unrestricted, non-exclusive licensing is likely to be forced.

What actually ends up happening is, of course, still to be seen. Hearings about the remedies won’t start until after Judge Jackson hands down his Findings of Law, expected in March of 2000. It is quite likely that Microsoft will not be structurally affected until well into 2001 or later.

This delay might actually be a bad thing for Microsoft, as it will give a single target for the many expected private antitrust lawsuits brought to trial by companies Microsoft has unfairly crushed over the years. There is already one such case underway, brought by Caldera who now own DRDOS. Many more are expected. Additionally, class-action lawsuits have been filed in the name of consumers of Microsoft products in several states, and again, more are expected.

While all this is bad news for Microsoft, it is great news for consumers. In the next article, we’ll look at how all these events are likely to effect the marketplace and end users.

Published in the Victoria Business Examiner.

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