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Is a breakup an effective solution?

Antitrust experts are dubious that consumers will reap direct rewards from a breakup of the software giant given the murky results of other attempts.

    Breaking up Microsoft will unleash innovation, drive down prices, and ultimately bring about more and better products for consumers--just like the breakup of other American monopolies, right?

    Not necessarily.

    As the government once again seeks to break up a monopoly, antitrust historians are dubious that consumers would reap direct rewards. Past breakups, they point out, have produced mixed results that took years to trickle down to consumers and often required additional government intervention.

    While the Microsoft case has Breaking the giant: Special Coverage some parallels to other antitrust actions, most notably the breakup of AT&T, the software industry has some peculiarities that also cast doubt on the effectiveness of a breakup. For example, the industry has a tendency to favor an entrenched product, making it possible that Microsoft products will remain dominant for many years even if the company is split.

    "In cases like this one, there?s no magic bullet," Lawrence Sullivan, an antitrust authority and law professor at Southwestern University in Los Angeles, said of the government's attempt to split Microsoft. "No one knows how it will end."

    "Even in the best-case scenario, there will be a long period of time in which pricing won?t be significantly better for consumers--in fact, it could be worse," Sullivan said. "You could have two monopolists each charging a toll that is bigger than what Microsoft is now charging as a single monopolist."

    Indeed, as the government moves to break up Microsoft, echoes of controversial breakups of the 20th century reverberate into the digital age.

    AT&T's similarities, differences
    Experts say the case that most closely parallels Microsoft is that of AT&T, a government-sanctioned monopoly that was America?s primary provider of phone service for 70 years. A 1974 antitrust suit led to AT&T?s eventual breakup in the early '80s.

    In 1982, a federal judge for the District of Columbia determined that AT&T used profits from its monopoly on local telephone service to suppress competition in the emerging long-distance and telephone equipment industries.

    AT&T was required to allow competitors to interconnect their phone networks--essentially opening up its infrastructure to others so competitors wouldn?t have to build parallel infrastructures from scratch. Similarly, Microsoft may be forced to open its source code to competitors, allowing them to examine and improve upon Microsoft code.

    The result of the AT&T antitrust hearing, in which each side employed more than 30 full-time attorneys, was an agreement to break up Ma Bell into seven Baby Bells that provided local service. AT&T was left with long distance and its Western Electric subsidiary.

    Long-distance phone rates plummeted almost immediately. Many hailed the breakup as a mammoth victory for AT&T?s competitors, especially MCI, and for long-distance users.

    But the benefits of the breakup weren?t universal. Local rates didn?t drop for some time. The government created the 1996 Federal Communications Act in part to completely break AT&T?s residual stranglehold on local phone service and introduce competition into the local market.

    Some say a government recommendation to cleave Microsoft into two pieces would have a similar result: It would start the process of breaking up the monopoly, but it would not be a solution in itself.

    Future regulations governing the software industry, especially modifications to copyright law, may be more detrimental to Microsoft?s dominance than if government achieves its goal of splitting the company, said Jeffrey Lanning, special counsel for the Federal Communications Commission in Washington.

    "Separating Windows from the rest of Microsoft is like the '84 divesture (of AT&T)," said Lanning. "It was a modest success, but it wasn't the best solution. The real answer would have been to get rid of, not quarantine, the local monopoly--that's why we had to have the '96 act."

    Government may be powerless
    Others say rapid changes in the market make the government powerless to stop Microsoft and other monopolists. For example, AT&T has recently jumped into the global cable and wireless industries with a zeal that rivals its former dominance of the phone lines.

    In 1997, CEO Michael Armstrong supervised the acquisition of Teleport Communications and agreed to form an international venture with British Telecommunications. In 1999, AT&T and BT bought a 30 percent stake in Japan Telecom and formed Advance, an alliance to provide mobile communications services worldwide. AT&T also bought the Japanese and U.S. portions of the IBM Global Network, renamed AT&T Global Network Services.

    In 1999, AT&T Puppet masters: Who controls the Net bought cable giant TCI and Liberty Media, which owns TV Guide and numerous cable channels, as well as cable-based Internet company Excite@Home. It also agreed to pay $58 billion for cable company MediaOne.

    AT&T?s increasing market share in the cable and wireless industries makes many academics and attorneys wonder whether the breakup was anything more than temporary. They say a Microsoft breakup may lead the company down a slightly different path, but one that it may eventually dominate as well.

    A Microsoft breakup, for instance, will do nothing to bring competing products to market because the software industry tends to favor one dominant player, said Stanley Liebowitz, professor of economics at the University of Texas at Dallas. Liebowitz?s book, "Winners, Losers, and Microsoft: Competition and Antitrust in High Technology," examines the software industry and the economic issues underlying the Microsoft antitrust case.

    Big is better
    "Market leaders in the software industry always have very large market shares. Before Excel, we had Lotus 1-2-3. Before Word, we had WordPerfect. We still have Quicken," Liebowitz said. "The question is, do the old antitrust rules fit this new market, where we have leaders that look like monopolies?"

    Trying to compare the AT&T case or any big antitrust case with the Microsoft case is folly, said William Shughart, professor of economics at the University of Mississippi in Oxford. The largest monopolies of the twentieth century, including AT&T and Standard Oil in 1911, were broken up into geographical regions--an impossibility for a software company that operates in the borderless world of the Internet.

    "The world is very different in 2000 than 1911," Shughart said. "There?s no geography in the Microsoft case. You can?t break up the company along horizontal lines. Microsoft wouldn?t be able to continue business as usual on a regional basis after a breakup."

    Daniel M. Wall, a partner and Full text of government proposal chair of the antitrust department of San Francisco-based Latham & Watkins, said a breakup fails to address what he believes is a central issue in the Microsoft case: the company?s behavior toward competitors. Unlike AT&T, which merely profited from its government-granted monopoly, Wall said, Microsoft hamstrung vendors into exclusive agreements and unfairly undercut competitors? prices.

    Modifying bad bahavior
    "AT&T was about the problems that arise from regulated local phone companies in the same umbrella as competitive long-distance providers. A structural remedy made enormous sense--it was the cure for the disease," said Wall, who previously worked in the Antitrust Division of the Justice Department as a prosecutor in the government's case against AT&T.

    "Microsoft is not a structural case. It?s a case about bad conduct--efforts that Microsoft made to defend its position in Windows," said Wall, who favors slapping Microsoft with a prohibition from preferential or exclusive agreements with Internet service providers. "A structural remedy may not even make sense. You still have a Windows monopolist with all the same incentives that Microsoft currently has to hold onto that monopoly for dear life."

    Luke Froeb, associate professor of management at Vanderbilt University and a former economist with the Antitrust Division of the Reagan & Bush Justice Departments, said the only parallel he sees in the Microsoft case lies in the government?s antitrust investigation into IBM in the 1970s and early '80s.

    IBM, which unveiled its first computer in 1952, enjoyed an 80 percent market share in the 1960s and 1970s. It unveiled the first computer without vacuum tubes in 1960, developed a floppy disk storage system in 1971 and unveiled the first laser printer for computers in 1975. In 1970, the government began a sweeping antitrust investigation into IBM?s dominance.

    The 12-year investigation fizzled in the early '80s as the computing landscape shifted from mainframes to personal computers. The government abandoned the tainted effort entirely in 1982, as clones of the IBM PC eroded Big Blue?s dominance. Within three years, revenues were declining, and the company began a nearly decade-long slide. In retrospect, IBM?s antitrust legacy seemed laughable.

    "You had a government bring a monopoly case in a rapidly changing industry," Froeb said of the IBM debacle. "The case dragged on for 10 years. By that time, any remedy was moot because the mainframe computer had been replaced by the PC. By the time Microsoft is settled, no one will care, and it won?t make any difference anyway."