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Janet WACO Reno Judge Thomas Penfield Jackson J. Klein; TRUSTBUSTER

Judge Jackson Orders Microsoft Breakup

After two years of contentious legal wrangling, Microsoft Corporation was ordered by a federal judge Wednesday to split its operation into two competing companies. The landmark ruling, which could have far-reaching repercussions in the growing electronic commerce industry, also requires the company to comply with a lengthy list of restrictions on its business practices that would last three years if the breakup order withstands appeal, and 10 years if it does not.

Microsoft vowed to appeal Judge Thomas Penfield Jackson's ruling immediately, all the way to the U.S. Supreme Court if necessary. However, if the judgment is upheld, it represents the toughest antitrust ruling against a U.S. corporation since AT&T agreed to spin off the "Baby Bell" regional phone companies in 1982. The court's ruling allows the company to remain intact until the appeals process is exhausted, a process that some analysts project could take up to two years.

DOJ Remedy Validated
In his final ruling, Judge Jackson accepted the U.S. government's remedy proposal entirely, without alteration, and without acknowledging strident assertions by Microsoft's legal team that a breakup is potentially disastrous for the software industry and for the new economy. Since April 28th, when the breakup plan was first proposed on behalf of the Department of Justice (DOJ) and 17 state attorneys general, Microsoft has called it extreme and unwarranted. As late as just hours before the ruling was handed down, Microsoft chief executive Steve Ballmer said, "A breakup of Microsoft, I think, would be an awful thing for consumers and for the industry. The real issue in a possible breakup would be the harm it does to innovation."

Gates Vows to Appeal
In a videotaped response, Microsoft chairman Bill Gates said, "This is the beginning of a new chapter in this case. We will be appealing this decision and we have a very strong case on appeal." Gates added, "We believe this ruling is inconsistent with the past decisions by the appeals court, with fundamental fairness, and with the reality of the marketplace. This is clearly the most massive attempt at government regulation of the technology industry ever. This plan would undermine our high-tech economy, hurt consumers, make computers harder to use, and impact thousands of other companies and employees throughout the high-tech industry.''

The initial appeal, according to some experts, will focus upon the restrictions on the company's business practices. The restrictions include

  • requiring Microsoft to offer equal licensing terms to all PC makers,

  • barring the company from threatening or taking action against companies that make competing products by withholding license terms, technical support or sales support,

  • prohibiting Microsoft from forcing Windows licensees to buy other Microsoft software, and

  • preventing the company from locking PC manufacturers into agreements requiring them to promote, distribute or use Microsoft products.

  • Finally, a lack of Due Process in the handling of the case by Judge Jackson's acceleration of the proceedings and denial of research time to Microsoft.

While appealing Wednesday's ruling, Microsoft will ask a higher court to postpone or stay all of the restrictions.

Possible Appeals Process
Under U.S. law relating to major antitrust cases, Microsoft's appeal could bypass the normal appeals process and go straight to the U.S. Supreme Court. However, Microsoft may want to see that the case is not fully resolved before the swearing in of a new U.S. president in January 2001. There is speculation that Republican challenger George W. Bush, if elected, would not be sympathetic to the government's case against Microsoft. Also, some legal experts believe that the high court will not agree to receive the case on an expedited basis.

Reaction to Breakup Ruling, Mixed

Reaction was quick and varied today as high-tech executives, politicians and frontline software coders digested Judge Thomas Penfield Jackson's order splitting Microsoft into two companies. Some of the strongest statements came from Microsoft's biggest competitors, including rival Sun Microsystems, which has battled the software giant in and out of court for years over Sun's Java programming language. Sun had suggested remedies more elaborate than Jackson's order today but said it was satisfied with the judge's ruling. "We're not at this stage going to quibble," Sun chief counsel Michael Morris said in an interview today. "It's appropriate at this point to have a sense of perspective. On the whole, this is an appropriate remedy."

But Morris predicted Microsoft will try to squirm through loopholes in the order. "If past history is any gauge, Microsoft will try to force itself through every possible ambiguity and fuzziness that there may be. There are bound to be some ambiguities," he said. Sun has been bitter about Microsoft's dominance on desktop computers. In its product plans, Sun bypassed Microsoft's stronghold and instead competes in bigger servers and smaller gadgets. Jim Barksdale, former CEO of browser pioneer Netscape, one of the companies at the heart of the antitrust case, also hailed the decision. "We feel vindicated," Barksdale said. "I'm excited about the opportunity now for innovation in the industry."

Barksdale said he had favored splitting Microsoft into three companies, but he said splitting the company in two along with restrictions on those companies' business practices is a satisfactory outcome. "I think this judge has figured out what was going on in the industry and what was going on at Microsoft and decided it was bad," he said. Barksdale said the judge's restriction preventing Microsoft from tying one product to another benefits competition. "That, for instance, would have allowed Netscape to continue to prosper," he said.

Jackson's decision was also endorsed by the leader in the handheld computing market, where Microsoft has fiercely been trying to grab market share for its Windows CE operating system. "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 in a level playing field," Carl Yankowski, CEO of Palm, said in a statement. "Palm believes it is critically important to maintain a fair, competitive handheld market in which consumers determine standards based on their free choice of superior products in areas such as innovation, convenience, ease of use, design and price."

Leaders of smaller high-tech competitors also hailed the ruling. "It potentially opens up a chance for another operating system to grab hold," said David Skok, founder and chairman of SilverStream Software, maker of e-commerce applications. "What stops another OS from taking hold is the lack of applications. If you have Microsoft Office running on Linux, Linux will have a good chance." Other high-tech leaders supported the software giant.

"Compaq opposes efforts to break up Microsoft," said Compaq Computer spokesman Alan Hodel. "Compaq saw several problems with the government's plan, and we continue to see those." Intel, which has not taken a position on the case, said it is too soon to tell what effect the ruling will have on its relationship with Microsoft or on the industry as a whole. "Our view is that it could represent a significant change for this industry, but we're confident that if it does, the industry will find a way to adapt just as it has with all significant changes in the past," said Intel spokesman Chuck Mulloy. "Clearly, we'll be watching developments as the process evolves and Microsoft goes into the appeals process."

Dell Computer representatives were equally circumspect. Given the appeals process, "it's not clear to us what or when the final resolution will really be known," said Dell spokesman TR Reid. "Absent that clear understanding of the final outcome, we'll leave the speculation about what might occur and when and the effect of that to other folks." Executives from companies specializing in upstart operating system Linux were less jubilant about the order than one might expect, arguing Linux already has prevailed in the server market. "The implications of a breakup...aren't that material to what we're doing...in the server market where Red Hat has concentrated," said Red Hat chief operating officer Tim Buckley.

Said Paul Thomas, the newly appointed chief executive of TurboLinux: "Last year, Linux was the fastest-growing operating system, period. We're already doing great." Eazel is more directly affected by today's ruling. It's a company populated with former Apple Computer employees creating software and services to improve Linux for the desktop. Bud Tribble, vice president of software engineering at Eazel, argued that Microsoft has a monopoly in Internet browsers and that Jackson's order doesn't contain that monopoly power.

"Splitting Microsoft into an operating system company and an applications company does address the issue of them using their monopoly power to continue their dominance of the applications market but doesn't address the issue of them extending their monopoly to the Internet," he said. "Our main concern is that the protocols and standards for the Internet remain open."

Keith Teare, founder and CEO of RealNames, which is 20 percent-owned by Microsoft and whose technology is incorporated in Microsoft Internet Explorer, was predictably critical of Jackson's decision. "We're condemning the court's decision as well as the government's prosecution," he said. "We're 3 years old, and Microsoft was prepared to give us the trust of owning a core part of the browser. That doesn't seem the behavior of a monopolist." Teare said he worried that the breakup could prevent smaller companies such as his from being able to work with the software giant. "If anything in this decision were to deter Microsoft from partnering with companies like us, that would be massively detrimental to Silicon Valley," he said.

Reaction was mixed among the more rank-and-file techies gathered in San Francisco for the JavaOne conference. "Any country that will screw a company that's created more wealth in the last 10 years is crazy--completely nuts," said Michael Cohen, a consultant with MF Consulting in South Africa. Said James Fuller, a consultant based in Kansas City: "It's good news and bad news. It opens up the opportunity to introduce chaos, but it will open up more opportunity for guys like me who can introduce new products on the PC side that don't depend on Microsoft technology." Jeff Verdegan, a systems engineer of ABN/AMRO Bank, said the judge's decision won't have a huge effect, especially not immediately, as the case will be appealed.

"Given their installed base of operating system users, they still have a whole lot of momentum. It won't change overnight," he said. Verdegan said rival technologies such as the Linux operating system and the Java programming language will spur competition more than the judge's decision. "The other forces--Java and Linux--and the whole move to open standards is what we need more of," he said. Adam Breindel, technical architect for a firm called True Horizon, said he will look into investing in Microsoft in the next few days because companies that have been broken up have historically been worth more separate than as a single entity. "This gives more value to Microsoft shareholders," he said. "I'd buy the stock at this point."

A few political figures in Washington also lashed out at Jackson's ruling, joining Microsoft's call for a quick appeal. "Today is the day our foreign competitors have waited for: the day the United States begins to choke its own economic engine," said Rep. Jennifer Dunn, a Republican from Microsoft's home state of Washington. "The Court of Appeals overruled this judge twice before on Microsoft issues; unfortunately, it must again." House Majority Leader Dick Armey, R-Texas, echoed that call. "Judge Jackson is basing his ruling on a zoom-lens snapshot of one moment of time," he said. "But that picture is already outdated. I'm shocked that one judge would presume to know exactly how the high-tech economy should evolve."

 

 

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