DOJ, states expected to propose Microsoft breakup today

WASHINGTON--The Justice Department and 19 states today are expected to ask a federal judge to break software giant Microsoft into two companies, say sources close to the government.

The proposal would split Microsoft into two entities, one responsible for the company's Windows operating systems and the other for software applications, such as Office, and Microsoft's Internet properties, such as MSN.

The proposal is expected to be delivered to U.S. District Judge Thomas Penfield Jackson at approximately 4:00 p.m. ET, a government representative said.

Today's proposal moves the Microsoft trial into its final stage, where Jackson will evaluate government proposals on remedies, or what to do about Microsoft's antitrust violations. Jackson on April 3 ruled that Microsoft violated two sections of the 1890 Sherman Act.

Legal experts warn not to look at the government's proposal as the end of Microsoft. Jackson does not have to accept any or all of the remedy proposal, and Microsoft will have a chance to respond on May 10. The fact that Jackson wanted to fast-track the remedy proceeding to 60 days may have been his way of telling the government he didn't want a breakup proposal, said University of Baltimore School of Law professor Bob Lande.

"I still believe that there is only a tiny chance of a breakup," he said. "Jackson is a Reagan-appointed judge who gave Microsoft only 12 days to react; if he were contemplating breakup, he would have given them more time. Doesn't it show something about his mindset?"

But Jackson may have good reason to seriously consider the proposal, as it deals, from a legal perspective, with one of the case's core arguments: Microsoft illegally used its monopoly to create barriers to entry.

"In plain English, is there something about the market in question, here the market for operating system software, that makes it somewhat difficult for a new company to enter that market?" said Rich Gray, an intellectual property attorney with Outside General Counsel Silicon Valley in Menlo Park, Calif.

Jackson seemed to think so in his "findings of fact" issued on Nov. 5, Gray said. "He explains, correctly I believe, that any new entrant into the OS market must have a sufficient critical mass of applications such as word processing and spreadsheets available for its new OS product, or it has no real hope of entering the OS market."

Joe Wilcox News.com staff writer   Discussing the goal of the remedy proposal.

Separating Microsoft's operating system from software applications could conceivably spur competition. Many of Microsoft's core applications, such as Word and Excel, are the leaders in their respective markets, but the Redmond, Wash.-based software maker only develops them for Windows and the Macintosh. A competitive applications company would have to consider other operating systems, such as Linux.

"If the 'Office company' were separated from the Microsoft 'Windows company,' it would have no incentive to write applications only for Windows," said Glenn Manishin, an antitrust attorney with Patton Boggs in McLean, Va. "Like Corel, it would want to port to all platforms, immediately jump-starting potential OS rivals like Linux and BeOS."

The government's remedy proposal would be a hard blow for Microsoft, which derives more than 40 percent of its revenue from Office and has been building much of its future product portfolio around the Internet by investing in broadband companies and renting Office applications over the Web. Microsoft has also argued that since Office was not part of the government's case, it should not be affected by the court's remedy.

"The fact that Office was not the target of the trial is legally immaterial, as the remedy would be directed to eliminate the same type of leveraging conduct that Microsoft engaged in vis-a-vis Netscape and other middleware, and to 'pry open' the OS market to effective competition," Manishin said.

Jackson will likely weigh his final remedy in light of the appeals process. The more severe the remedy, coupled with weaknesses in his ruling, the more likely part or all of the case will be overturned on appeal, Lande said.

Paul Dravis Analyst with Banc of America Securities   Discussing stock ramifications for Microsoft.

Jackson's final judgment--including remedies--could come as early as June 1, which would be 60 days from his ruling. The judge earlier this month told both sides he wanted to fast-track the remedy process.

The government is expected to make a proposal for preliminary relief, possibly placing interim restrictions on Microsoft's behavior. The judge would likely not act on breakup until the appeals process ends, probably within 24 months.

But on the sidelines, Microsoft will have to face more than 130 private antitrust cases, 27 of which were consolidated in Baltimore this week. Once Jackson issues his final ruling, lawyers hope to use his findings of fact in their cases and gain access to some of the government's evidence.

Microsoft will respond to the government's remedy proposal on May 10, with a government response scheduled a week later. A remedy hearing is supposed to take place on May 24. But today's proposal could change that schedule.

"The more ambitious the controls on behavior, the more likely on May 10, or whenever Microsoft responds, it says it needs more time," said George Washington University Law School professor Bill Kovacic. "Then the likelihood of May 24 being the date when final hearings takes place diminishes."