Government to court: Break up Microsoft

WASHINGTON- The government asked a federal court Friday to break software giant Microsoft into two companies in the largest trust-busting move since AT&T was carved into seven Baby Bells.

If accepted by a federal judge, the proposal would bar Microsoft officers and directors, including billionaire co-founder Bill Gates, from owning stock in more than one of the new companies.

Under the government proposal, Microsoft would be split into rival companies. One would produce its Windows operating software, the source of Microsoft's monopoly power, according to a court filing. The other company would handle other software applications, such as word processing, spreadsheet and database programs. Ownership of Microsoft's Web browser, Internet Explorer, would rest with the applications company.

The government asked that the companies be barred from reuniting for 10 years from its effective date.

''This decree will not limit Microsoft's ability to add new features to its products or otherwise to innovate,'' said Joel Klein, the Justice Department's antitrust chief. ''But by turning loose the power of competition in the operating systems business, this decree will stimulate innovation throughout the software industry. ... The American consumer will benefit enormously from this proposed remedy.''

Gates, in a conference call with reporters, called the proposal ''very disturbing, not just for Microsoft but for consumers and the entire high-technology economy.''

He predicted his company would prevail on appeal.

Microsoft has until May 10 to respond to the government's proposal. Bill Neukom, the company's general counsel, said Microsoft will ask for a major extension of its deadline.

''A proper response to this ruling will require months and months of discovery and evidentiary hearings,'' Neukom said, adding that the government's proposal goes ''far beyond the scope of the case they tried to prove.''

''This is like telling McDonald's that it can only sell burgers, not fries, and that it has to give away the recipe for its secret sauce,'' said company spokesman Jim Cullinan. ''We are confident that the appeals court will support Microsoft's position.''

The remedy proposal was submitted by the Justice Department and attorneys general from 17 states and the District of Columbia - the plaintiffs who successfully sued Microsoft over antitrust violations. Two other states, Illinois and Ohio, filed supporting statements but objected to an immediate breakup of the company.

Ohio Attorney General Betty Montgomery said ''a reorganization could be difficult to undo and its effects would be difficult to predict.''

The government's plan was filed with U.S. District Judge Thomas Penfield Jackson, who on April 3 ruled that Microsoft illegally used its monopoly power in operating systems to crush rivals.

Microsoft, the company that helped make Gates into the richest man in the world, was found to have illegally tied its Web browser to Windows, the operating system that which dominates the computer market worldwide.

Company executives, who insist that no laws were broken, have vowed to appeal Jackson's ruling. And they have powerful allies.

House Majority Leader Dick Armey, R-Texas, denounced the government plan: ''Punishing success only stifles innovation, guaranteeing fewer products and smaller productivity gains for American consumers and workers.''

Under the government's proposal, Microsoft's business practices would be placed under numerous restrictions to prohibit it from punishing clients who choose to use a rival's products.

''Microsoft shall not take or threaten any action adversely affecting'' any computer makers, the proposal said. Neither would the company be allowed to withhold licenses and technical support needed to use the former Microsoft products.

Microsoft's new operating system company would be required to disclose key software codes of Windows to companies that write application programs that must be linked to that computer operating system.

The company also would be barred from designing software for the purpose of interfering with or degrading the operations of rival products. It would be required to treat all hardware and software makers equally with respect to pricing, licensing of Microsoft products and access to required technical codes. A schedule of royalties for Windows licenses would be required as part of a provision ensuring that all computer makers receive uniform terms.

The Justice Department also asked for restrictions on combining future use of Windows to any other Microsoft products. The restraint stems from a key issue raised during the 78-day antitrust trial in which government prosecutors alleged Microsoft illegally tied its operating system to its Web browser.

''This has never been about punishing any individuals,'' Klein said. ''This has been about protecting American consumers and the competitive vitality of the software industry.''

Even if Jackson were to approve the measure, which is uncertain, implementation of the breakup could be postponed pending an appeal that could take up to years.

Jackson's April 3 verdict concluded that Microsoft was a monopoly, one that illegally used its power to crush competitors and stifle innovation, hurting consumers in the process.

The last time the Justice Department sought to break up a company was in its antitrust suit against AT&T. A settlement was reached in the case.

''At the time, the AT&T breakup was every bit as big ... as anything that conceivably could happen to Microsoft,'' said Warren Grimes, an antitrust professor at Southwestern University School of Law in Los Angeles.

In some ways, it was even bigger because the Bell system had been one of the world's largest employers, he said.

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On the Net:

Microsoft: http://www.microsoft.com

U.S. Department of Justice Antitrust Division: http://www.usdoj.gov/atr