Antitrust issues loom over Tandy pact

Only Friday, U.S. District Judge Thomas Penfield Jackson issued a stinging "findings of fact" in which he determined that Microsoft is a monopoly that uses its dominance in computer operating systems to thwart competitors in other markets. Less than a week later, the company makes a major move to expand its business.

But Microsoft's aggressive behavior may be part of a bolder, albeit less obvious, plan: preparing for the potential breakup of the company.

Some antitrust experts have concluded that a "structural remedy," such a breakup of the company, is the inevitable outcome of the trial. So given that Microsoft has a lot of money to spend--several billions of dollars--the company may be building what could eventually become independent businesses, industry veterans and legal experts said today.

High-tech analysts point to a string of recent Microsoft acquisitions that, on the surface, seem to indicate aggressive expansion into new markets. But when viewed a different way, the deals appear to create the structure for two or possibly three different companies.

Berge Ayvazin, president of market researcher the Yankee Group, sees a possible split into two.

"Microsoft has prepared itself not only to offer up but [to] implement a structural change at an appropriate time in settlement, and that is to separate Microsoft's Internet businesses from its software business," Ayvazin said. He pointed to many of Microsoft's recent cable deals and its investment in AT&T as evidence that it may be laying the groundwork for such change.

The Supreme Court has long mandated that legal intervention, such as a court order barring a company from specific activity, "is insufficient when dealing with a durable and pervasive monopoly," said Glenn Manishin, a high-tech antitrust attorney with Blumenfeld & Cohen in Washington. Based on Jackson's ruling, known formally as findings of fact, a breakup "is almost a foregone conclusion," Manishin said.

International Data Corporation analyst Roger Kay points to the landmark AT&T divestiture case, which bears some striking similarities. After derisive findings of fact in that case, Ma Bell negotiated its dismantling with the government.

Taking steps before the final court ruling, AT&T "aligned the company internally, making lines of cleavage" so that when the judge "hammered, things broke apart just the way that AT&T wanted," Kay said.

"If they're imagining they might get broken up, they may be envisioning stand-alone businesses for the future, maybe something called Microsoft Communications," Kay said.

On Friday, for example, Microsoft invested $200 million in broadband service provider Teligent. Other recent broadband investments: its $5 billion stake in AT&T, $200 million in telecom Qwest, and $600 million in wireless player Nextel, among others.

The deal with Tandy, which owns RadioShack, could bolster Microsoft's expansion into high-speed Internet connections, known as "broadband." The agreement includes a $100 million investment in RadioShack.com and Microsoft stores with broadband access inside RadioShack retail outlets.

RadioShack helps put Microsoft squarely before the mass market with high-speed Internet service and other products, Kay said. But Microsoft must first cut itself free from its current antitrust burden, legal experts say--adding that the best way to do that is to settle.

Rich Gray, an intellectual property attorney with the General Council of Silicon Valley, sees the emergence of a separate applications company that operates independently or is tied to an Internet operation.

"Microsoft could spin off applications as a separate company, and that's something the government would have a hard time walking away from," Gray said.

Unofficially, attorneys have indicated that they might accept a division in which the operating system is separated from applications, but not necessarily requiring that applications be separated from the Internet, said sources close to the attorney's general offices from several states that are assisting in the case.

That scenario could assist Microsoft's drive to deliver software applications over the Internet, an increasingly important technological trend. In a speech yesterday at Compaq Computer's iPaq launch, Microsoft vice president Rick Belluzzo outlined an ambitious strategy.

Focusing on "any device"
"Microsoft will increasingly focus on rich content and software delivered to any device," said Belluzzo, who heads up the company's Consumer and Commerce Group. In describing what he called the "PC-plus" era, he said software will become a service that customers rent rather than buy.

"If you're Microsoft and you think the world is headed toward server-based mini-applications delivered through broadband pipelines, you could be even more ready to walk away from a company that has more typical, PC-based applications," attorney Gray said.

The separate company "would be free to develop pure Internet versions of all these applications unfettered by the potential impact on a company that is no longer part of the Microsoft family," he added.

A breakup strategy is not that far-fetched, said Bill Kovacic, a law professor at Georgetown University. "If Microsoft saw some way a restructuring would be a better way to reposition itself for the future, then I see a basis for a solution."

Other antitrust experts disagree, opting for a simpler interpretation.

"If [the Tandy deal] says anything, Microsoft is going to continue their strategy until someone tells them they can't," said Dana Hayter, an intellectual property and antitrust attorney with Fenwick & West in San Francisco.

"There is nothing wrong with that from an antitrust perspective, unless they set it up so that people have to use [Windows] CE or Windows 98. Then there is more of a link of what they're doing on broadband and their monopoly on the PC systems' end."