A federal judge yesterday "reluctantly" ordered Microsoft Corp. split in two, declaring the software giant an "untrustworthy" monopoly that refuses to abandon illegal business practices that crush competitors and harm consumers.
In a strongly worded order, U.S. District Judge Thomas Penfield Jackson largely accepted the plan submitted by attorneys from the U.S. Justice Department and 17 states to divide the company and to impose restrictions on its aggressive behavior until the breakup can be put into place.
Microsoft immediately asked the judge to delay any restrictions on its business and will seek to have the judge's order overturned. Even if the company ultimately loses, a breakup could be years away.
The judge's historic ruling sets in motion what would be the largest forced reorganization of a corporation since the breakup of Standard Oil in 1911. It also affirms the government's continued role as a powerful referee in the marketplace of the information age and, if upheld, would change the dynamics of the multibillion-dollar software industry and rewrite the high-technology rules of the road for the 21st century.
"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," Jackson said. "There is credible evidence to suggest that Microsoft, convinced of its innocence, continues to do business as it has in the past, and may yet do to other markets what it has already done in the PC [personal computer] operating system and browser markets."
Under the judge's order, one of the two resulting Microsoft companies would continue to make and sell the Windows family of products, including the monopoly operating system for personal computers. The second company would produce software application programs along with the myriad other Microsoft business operations.
In an interview with The Washington Post, Jackson said he chose the plan because he wanted to avoid the court or government having to set up an onerous regulatory scheme to constantly monitor the company's behavior in the future. He said he also considered breaking the company into three parts. In the end, he said, he chose "the least drastic of the remedies I considered."
At Microsoft headquarters in Redmond, Wash., Chairman Bill Gates predicted that the company he co-founded would be redeemed with complete victory on appeal.
"Today's ruling really represents an unwarranted and unjustified intrusion into the software marketplace," Gates said. "The idea that somebody would say that breakup is a reasonable thing comes as quite a surprise to us, and we are quite confident that it won't be something that ever comes into effect."
Gates pledged to challenge both the court's legal conclusions as inconsistent with antitrust law and the factual findings.
Attorney General Janet Reno, speaking at a Justice Department news conference, said she was satisfied with the "strong, effective remedy to address the serious antitrust violations that Microsoft has committed."
Justice Department antitrust chief Joel I. Klein, beaming by Reno's side, called the decision good news for consumers. "It will stimulate competition in the PC operating-system market and throughout the entire computer industry," Klein said. "When the remedy is implemented--and this is the key point--customers, consumers, in a free and competitive marketplace, will decide for themselves what software they want to purchase. Neither a monopolist nor the government will dictate that choice."
The judge ordered that the separated companies be barred from reuniting for 10 years; the operating-system company would be required to provide both the separated company and the rest of the computer industry equal access to the applications programming interfaces--the part of the operating code that allows programmers to write software running on Windows.
In an apparent reference to the 1982 breakup of AT&T Corp., Jackson said the remedies proposed have been used successfully in the past and that they address the objective required under law, "namely, to terminate the unlawful conduct, to prevent its repetition in the future and to revive competition in the relevant markets," Jackson ruled.
The judge said Microsoft's counterproposal, which involved a series of less-drastic restrictions on its conduct, "is plainly inadequate in all three respects."
Government antitrust lawyers envision that the operating-system company will design its product not so that it favors Microsoft applications, but so that it offers all independent software developers equal access to distributing their products on the program that runs nine out of 10 of the world's personal computers.
The second applications company, the government postulates, could become an instant competitor that would sell its products, such as word processors and spreadsheet programs, to both the new Microsoft operating-system company but also to competing operating-system platforms. But Microsoft predicts chaos in the computer industry: Innovation would be stifled, consumers harmed and the two divided companies doomed to fail because of overly onerous restrictions imposed on both companies.
Within four months, Microsoft must outline the reorganization of the company into two pieces under the broad outlines described by the government, the judge ruled. Microsoft had sought a year to produce the plan. Now the company will appeal that decision, too.
While the appeals process is moving forward, Microsoft was ordered to follow a series of tough restrictions on its business practices. In three months, if the provisions are not put on hold by the courts, Microsoft would be required to share equally with the computer industry its applications programming interfaces.
Microsoft argues that the publication of this code is an undue and irreversibly damaging confiscation of the company's intellectual property and should be put on hold until the appeals are complete. The government responds that the judge found that Microsoft used access to the code to hurt its competitors and help its allies.
Microsoft also will seek an emergency hold on an order requiring that computer makers be given more flexibility in the way they configure the Windows operating system. The company contends that this would let computer makers damage the Windows product and hence create more cost in service calls and harm the product's reputation when it breaks down.
In his order, Jackson said the restrictions were necessary because Microsoft's credibility is in doubt. The judge pointed to an incident involving an earlier consent decree case when the company, which he ordered to separate its Internet Explorer Web browser from the Windows operating system, gave a "disingenuous" explanation about why it hadn't done so.
"Microsoft has proved untrustworthy in the past," Jackson wrote. "Microsoft's purported compliance with that injunction while it was on appeal was illusory and its explanation disingenuous."
Jackson, in his ruling, said he gave great deference to the government's proposal for a breakup. "Plaintiffs won the case, and for that reason alone have some entitlement to a remedy of their choice," Jackson said. The federal and state antitrust attorneys "are by reason of office obliged and expected to consider--and act in--the public interest; Microsoft is not."
Jackson in his memorandum and order, and in the Post interview, referred to out-of-court settlement as a preferable alternative to his proposed remedy. "The final judgment proposed by plaintiffs," Jackson wrote, "is perhaps more radical than might have resulted had mediation been successful and terminated by a consent decree."
Iowa Attorney General Tom Miller suggested that the breakup was the least intrusive approach available, and would prove a boon to shareholders in the end. "It maintains the highest possible shareholder value, probably increases shareholder value," he said, citing the breakup of AT&T, which yielded a complex of companies whose aggregate value eventually soared beyond the company that spawned them.
He cast the decision as a boost for the entire technology industry. "When Microsoft has to compete by innovating rather than reaching for its crutch of the monopoly, it will innovate more," Miller said. "It will have to innovate more, and the others will be free to innovate."
Jackson's order comes at an awkward time for Microsoft in that it is set to announce a strategy called Next Generation Windows Services in two weeks. The idea is to shift to Internet-based services and software for a variety of computing needs rather than selling software in shrink-wrapped packages.
Microsoft's move to the Web-based products is now in jeopardy as a result of the ruling, said Bill Whyman, an analyst at Legg Mason. "This is a sledgehammer," Whyman said. "It's going to create tremendous uncertainty and risk overhang for the company, which can't be good for the stock."
After Microsoft files its appeal, the Justice Department plans to ask Jackson to send the case to the U.S. Supreme Court under a special provision in the Sherman Antitrust Act. Microsoft has vowed to oppose such a move and would prefer the case go first to the U.S. Court of Appeals for the D.C. Circuit, which has given Microsoft victories in the past. Microsoft also would prefer that the Court of Appeals narrow the case before it gets to the Supreme Court.
Connecticut Attorney General Richard Blumenthal said the case should move to the Supreme Court as quickly as possible. "Delay and time are the enemy of everyone, including Microsoft," he said.
Some scholars think Microsoft's fate up to this point might have been inevitable because of the company's in-your-face attitude at the trial and in subsequent filings. Michael Cusumano, a Massachusetts Institute of Technology business professor who has written two books about Microsoft and is a shareholder, said Gates is gambling dangerously with the future of his company when he could have been the architect of his own fate with an out-of-court settlement.
"These guys have been incredibly aggressive since the beginning of the company and relatively immature about how a company with a monopoly share should behave," Cusumano said. "The combination of this incredible aggressiveness and this immaturity led them to this situation."
Klein of the Justice Department shared that view. "Microsoft itself is responsible for where things stand today," Klein said. "Its repeated illegal actions were the results of decisions made at the highest levels of the company over a lengthy and sustained period of time. They reflected defiance of, not respect for, the rule of law."
Staff writers John Schwartz, Ariana Eunjung Cha, Peter S. Goodman, John Burgess and David Streitfeld contributed to this report.
CAPTION: THE MAKING OF A MONOPOLY (This graphic was not available)