U.S. Asks Court to Split Microsoft in Two

By David Lawsky

WASHINGTON (Reuters) - The U.S. government on Friday urged a federal judge to break software powerhouse Microsoft Corp. (NasdaqNM:MSFT - news) into two separate companies to curb its monopoly power in key software.

The Justice Department and 17 of the 19 states that brought one of the biggest antitrust cases in U.S. history formally unveiled the proposed breakup of the company in a 17-page proposed order to a federal judge.

The dramatic request opened the penalty phase of the two-year-old case that pits one of the world's most successful high technology companies against the full weight of the U.S. government.

`Under our proposal, neither ongoing government regulation nor the self-interest of an entrenched monopolist will decide what is best for consumers,'' Assistant Attorney General Joel Klein said in a statement. ``Instead, consumers will be able to choose for themselves the products they want in a free and competitive marketplace.''

It was the stiffest antitrust penalty sought against a major American corporation since a 1982 agreement to split telephone giant AT&T into regional ``baby bells.'' The Microsoft case has also been compared with the breakup of oil baron John D. Rockefeller's Standard Oil empire in 1911.

The government proposal would separate Microsoft's dominant Windows operating system business from software applications like word processing, spreadsheets and control of the Web browser.

``These proposals would have a chilling effect on innovation in the high technology industry. Microsoft could never have developed Windows under these rules,'' Microsoft Chairman Bill Gates said in a videotaped statement.

The announcement of the proposal does not mean that Microsoft will be broken into pieces immediately. The company has promised to appeal vigorously all the way to the Supreme Court. That could push the controversial case into 2001 when a new president will take office and could change U.S. antitrust policy.

Cleaving Microsoft in two would mean profound changes for the company whose rapid growth since its 1975 founding has made Chairman Bill Gates one of the world's richest men and helped put the United States at the forefront of the digital age.

Some stock analysts say two Microsoft companies might be valued more highly than one although most see the stock suffering from uncertainty until a final outcome of the case.

Microsoft shares firmed slightly to 70 ^11/16 in after-hours trading following the announcement of the proposal, from its close of 69 ^3/4 in the regular trading session.

Greater Choice

The government hopes splitting Microsoft would offer consumers greater choice by preventing the dominant Windows operating system, that runs on over 80 percent of personal computers, from being used to force companies and consumers to use other Microsoft software.

The split could also encourage development of alternative operating software and new applications for such systems.

Computer analysts say Microsoft has provided two decades of leadership and standard setting for the industry. But they are divided on whether that leadership has already begun to slip as the personal computer age gives way to a world where microchips are embedded in everything from telephones to cars.

The proposal to break up the company stems from an antitrust complaint filed by the U.S. government in May, 1998 that charged Microsoft illegally used its monopoly power to crush Netscape, a rival Web browser maker that has since been sold to American Online Inc. (NYSE:AOL - news).

A long trial began in October, 1998, and included sometimes confrontational videotaped testimony from Gates, who quibbled with prosecutors over the meaning of seemingly simple words.

Federal District Court Judge Thomas Penfield Jackson ruled in November last year that Microsoft held monopoly power in key systems and used it to harm consumers and competitors.

A Chicago judge was appointed to explore a settlement but announced on April 1 that the effort had failed.

Then on April 3, Jackson ruled that the Microsoft actions had violated the law. Friday's proposal set out the penalty the government would like the judge to levy on Microsoft for breaking the law.

There is no sign that the legal wrangling over the case will end soon. Jackson has set a May 24 date for oral arguments on the proposed penalty and he hopes to expedite any appeal, possibly straight to the Supreme Court.

But the company has said it will need much more time and would prefer the normal progression of the case through an appeals court.

A slower timetable could keep the matter from reaching the highest court until after the January swearing in of a new president -- either Republican George W. Bush (news - web sites) or Democrat Al Gore (news - web sites). There is speculation in Washington that Bush would be more skeptical of the government case.

Most opinion polls suggest that a majority of the public support Microsoft's position rather than that of the government.