Possible breakup could divest Microsoft of Office

The company could be forced to spin off software and applications to end its anti-competitive practices in a proposal being drafted by antitrust officials.

WASHINGTON--Microsoft could be forced to spin off its Office software and other applications to end its anti-competitive practices, said a person familiar with a proposal being drafted by U.S. and state antitrust officials for submission to a federal judge.

Microsoft shares edged up slightly this morning, opening up $2.13, or 3.19 percent, at $68.75 after plunging yesterday as details of the plan emerged.

The proposal also would impose immediate, temporary restrictions on the company's dealings with computer makers and Internet service providers, the person said. The constraints would remain in effect pending outcome of court appeals and would be lifted if a divestiture is approved.

The Justice Department and leading states in the case are leaning toward the plan and are circulating it among all 19 states that joined the 1998 suit against Microsoft.

"Defiant" comments last week by Microsoft chief executive Steven Ballmer may have emboldened officials to recommend a divestiture, said Ken Wasch, president of the Software & Information Industry Association, which supports the government's case. Ballmer "did more damage to the Microsoft cause than any other single event in the last year," Wasch said.

Ballmer told The Washington Post in an interview and in subsequent speeches that the company had done nothing wrong except perhaps be rude to competitors.

Microsoft shares plummeted $12.88, or 16 percent, to $66.06 in midday trading yesterday. The company said Friday that third-quarter revenues rose less than forecast.

Splitting up
The government plan would separate Microsoft's Windows operating system business from the software that the Redmond, Wash.-based company makes for office use, such as the Excel spreadsheet program and Microsoft Word.

Government officials have until Friday to submit proposed remedies for the anti-competitive practices that Judge Jackson U.S. District Judge Thomas Penfield Jackson identified in the landmark antitrust case. Jackson ruled April 3 that the software company engaged in illegal monopoly practices.

The draft proposal is designed to prevent Microsoft from using its Windows dominance to leverage control of new markets such as the sale of servers, or operating systems for large computer networks. Competitors have accused the company of bundling office applications software to network server software to push competitors out of that market.

Joel Klein, the Justice Department's antitrust chief, has said in recent weeks that any remedy would be designed to prevent future misconduct.

The Wall Street Journal and the Post reported yesterday that government officials were weighing breakup proposals.

Illegal conduct
Jackson found that the company illegally defended its Windows monopoly by forcing computer manufacturers to accept licensing restrictions for the operating system. Computer makers were discouraged from installing rival Web browsers and were required to install Microsoft's Internet Explorer, which was bundled with Windows.

Under the government proposal, antitrust enforcers wouldn't require Microsoft to separate its Web browser from Windows unless computer makers request an unbundled version of the operating system, the person said.

Internet Explorer would be treated as a free technology available to both the new software applications company and the Windows operating system business, the person said.

The government also is proposing stringent restrictions on Microsoft's business practices that would remain in effect until the breakup is implemented, the person said. That would enable Jackson to impose immediate curbs on software company, while it pursues possibly lengthy appeals of his decision.

The restrictions on Microsoft's conduct would include requirements that the company charge all computer makers the same price for Windows, the person said. The company is accused of charging different prices to coerce customers to submit to Microsoft's demand not to install competing software products.

Opening code
These remedies would also require Microsoft to publish the software codes that enable applications programmers see special coverage: The verdict is into write software programs that run on the Windows operating system, which runs more than 95 percent of the world's personal computers.

Also during this transition period, Microsoft would be forbidden from raising the price of older products after a newer version has been introduced into the market, the person said. Such price increases had been designed to force customers to adopt the latest technologies, antitrust enforcers said.

Earlier, antitrust enforcers had indicated they were leaning toward a milder version of remedies, one that wouldn't include any divestiture. The latest plan has been shared in recent days with representatives of other states in the case and with software industry officials, the person said.

The plan has been drafted in an incremental fashion as discussions progressed among state and federal antitrust enforcers.

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