Microsoft, the software giant whose products are found on nearly all personal computers, was ordered broken into two separate companies Wednesday by a federal judge.
Unless halted by appeals, Microsoft must present to U.S. District Judge Thomas Penfield Jackson a plan to split itself into two entities.
One business would develop and market operating systems, the software handling the basic functions of a computer. The other would handle Microsoft's line of programs, including the ubiquitous Office productivity suite.
It is the first court-ordered breakup of a major U.S. corporation since the 1984 divestiture of AT&T, and it concludes a contentious two-year battle between the Redmond, Wash.-based company and the Justice Department in alliance with the attorneys general from 19 states.
"The court's order today is the right remedy for Microsoft's serious and repeated violations of antitrust laws," said Assistant Attorney General Joel Klein, who prosecuted Justice's case.
Microsoft co-founder and Chairman Bill Gates said the company will appeal immediately, seeking a stay on both the divestiture and a series of restrictions that Jackson ordered. That appeal will be aimed at a Washington, D.C., appellate court that has been friendly to Microsoft in past cases.
But Justice officials said they will pursue a little-used statute that allows for an expedited appeal directly to the U.S. Supreme Court.
Gates called the decision "an unwarranted and unjustified intrusion" into the software marketplace.
"The ruling says to creators of intellectual property that the government can take away what you've created if it proves too popular," he said during a news conference at Microsoft's headquarters.
In a strongly worded decision, Jackson called Microsoft "untrustworthy," citing the company's failure to adhere to consent decrees in previous antitrust cases. The judge also said that Microsoft should have known this was coming after attempts to settle failed.
"The final judgment proposed by plaintiffs is perhaps more radical than might have resulted had mediation been successful and terminated in a consent decree," he wrote.
The divestiture order is stayed pending the appeals process, but Microsoft is far from off the hook.
In 90 days, a series of restrictions on Microsoft's behavior will kick in. Attorneys for the company said some of them could be as damaging as the breakup itself.
The restrictions include:
· Requiring Microsoft to disclose technical details about the inner workings of its operating systems to those wanting to write software for them. Competitors had complained that Microsoft had secret "hooks" in Windows that it used to make its applications perform better.
· Barring Microsoft from charging varying prices for Windows to different customers in the computer industry. The company had been accused of charging more for the operating system to those who didn't do as Microsoft wished.
· Allowing PC makers to customize Windows by adding to, changing or even removing components. Microsoft was accused of strong-arming manufacturers such as Houston-based Compaq Computer Corp. to ensure that Windows was installed in a certain way.
· Barring Microsoft from including code in its programs that would hurt the performance of competing products. Competitors charged that Microsoft deliberately designed products to hamper the way other programs work.
· Restricting Microsoft from including new programs, which the court called "middleware," in the Windows operating system unless consumers and manufacturers could easily remove them.
This last requirement cuts to the heart of the government's case against Microsoft. The Justice Department argued during the trial that Microsoft used its monopoly power in operating systems to gain a foothold in the market for World Wide Web browsers.
In his decision, Jackson said that Microsoft's refusal to admit that it had broken any laws and its behavior when under past consent decrees indicated that "structural changes" to the company is the best remedy.
During the news conference, Microsoft attorney William Neukom said a full appeal would be filed "in a matter of days" with the U.S. Circuit Court of Appeals in Washington.
He noted that court had overturned a previous ruling by Jackson in June 1998 and predicted that both the restrictions and the breakup order would be struck down.
Neukom said Microsoft's appeal would rely heavily on the fact that the company had not been allowed to call witnesses in the remedies phase of the case. Among those Microsoft wanted to testify was Compaq Chief Executive Michael Capellas.
Neukom said Microsoft would oppose the government's attempt to take the case directly to the Supreme Court.
"No more special exceptions are needed in this case," Neukom said. "The government should not be afraid of trying its case in front of the Court of Appeals."
If Microsoft loses its appeals, the company's split would be along the lines proposed by the Justice Department after Microsoft lost a conclusions of law ruling from Jackson. The ruling restricts how much the two entities could interact.
One company would have control over the various versions of Windows. Microsoft makes operating systems that run on PCs, television set-top boxes, handheld computers, telephones and even computers built into the dashboards of cars.
The other company would own the rights to Microsoft's extensive portfolio of programs, ranging from the Excel spreadsheet and Word word processing program to its children's software and the popular Flight Simulator game.
That company would also have the rights to the controversial Internet Explorer browser, which currently doubles as the user interface for Windows 98, Windows 2000 and the soon-to-be-released Windows Millennium Edition.
While the applications company would be able to license the rights to use Internet Explorer to the operating system company, the latter would not be able to change it or develop a browser on its own.
Industry observers had widely divergent views about what effect the ruling might have.
"We don't think it matters," Michael Fitzgerald, editor of Red Herring, a magazine that tracks the technology and electronic commerce industries. "Nothing will happen for the next couple of years while the case winds its way through the appeals courts. Even beyond that, we don't think it would alter how Microsoft operates all that much."
"Microsoft could be more powerful as two companies than it can as one," said Rob Enderle, an analyst with Giga Information Group. "Right now they are self-limiting."
In fact, Enderle said, Microsoft's power in the industry may diminish if the company doesn't make major changes.
"Microsoft had peaked. We expected a slow decline for them over the next year," he said.
The most dangerous outcome of all, Enderle said, is for Microsoft to fight the verdict for 18 months -- and lose.
"If you fight to the death, you end up dead, especially when you are fighting the government," he said.
A national firm specializing in outplacement of employees agrees that a protracted battle would create an atmosphere of uncertainty at Microsoft that could hurt the company.
"Who will want to sign with a company with a publicly discussed uncertain future?" said John A. Challenger, chief executive at Challenger, Gray & Christmas. "Microsoft's human resource management will have the enormous task of retaining the work force, no matter how loyal they have been in the past."
A weakened Microsoft could provide a significant opportunity for hardware makers to break out of Microsoft's control. Companies such as Compaq could benefit by being able to add new features and differentiate themselves more from competitors, said Chris LeTocq, a research director at The Gartner Group, a technology market research firm.
Even so, Compaq was not in a celebratory mood Wednesday.
"Compaq opposes any effort toward the breakup of Microsoft," said company spokesman Alan Hodel.