Justice Department Files Slightly Revised Microsoft Breakup Plan

Updated from 1:20 p.m. EDT

The Department of Justice filed a slightly revised plan Friday to split Microsoft (MSFT) into two companies, and the software giant said it saw "strong indications" that a ruling was imminent and postponed a major promotional event.

The new government plan closely mirrors the original, filed April 28. The only unexpected substantive changes were an extension of the time period after the final judgment before remedies would take effect. The other major change is the clarification that the proposed two new companies could license one another's products under certain circumstances.

Judge Thomas Penfield Jackson is widely expected to adopt and sign the revised proposal as early as next week. Microsoft has two business days to comment on the plan.

As the Justice Department filed its documents, the company sent an electronic message to reporters and editors postponing Forum 2000, an event scheduled for June 1 at the company's Redmond, Wash. headquarters.

"There are strong indications that the U.S. District Court in Washington, D.C., may enter its final decree next week in our continuing antitrust matter, an event that we feel would distract attention and focus from our event next Thursday," Microsoft said in its email. "It certainly is not an easy decision, as we are quite excited to share our enthusiasm for the future of the Internet."

William H. Gates, Microsoft's chairman, had been scheduled to present his strategy for Next Generation Windows Services, the planned online offering of the suites of software and operating systems ubiquitous on PCs today. For now, however, antitrust issues loom large behind the company's plans.

Microsoft had no immediate comment on the substance of the government's revised plan to break it up.

Wall Street showed little reaction to the Justice Department's revised plan, which was filed in federal court in Washington, D.C., on Friday afternoon. Microsoft's shares closed down 1/16, at 61 7/16, after hitting a 52-week low of 60 3/8 earlier in the day.

The revised plan exempts Paul Allen, a Microsoft co-founder, from a measure intended to prevent Gates and Steve Ballmer, the chief executive, from maintaining control over more than one of the companies that would be created by a breakup. As revised, the measure affects only people who own 5% or more of the company's stock. Allen, who resigned from Microsoft management in 1983, currently owns a 4.1 % stake in Microsoft, making him the company's third-largest shareholder. He has sold $3.4 billion of the software giant's stock since mid-February.

In a memorandum attached to the revisions, prosecutors attacked the behavior of Microsoft lawyers in a hearing Wednesday, seeking to undermine the company's pleas for additional preparation time. They said the company's lawyers knew all along that the government would seek a breakup, but delayed instead of specifying why more time was needed.

"Even at the hearing on May 24, Microsoft was not forthright," prosecutors wrote. "The fact that Microsoft had prepared but kept secreted in its briefcases a 35-page Offer of Proof concerning testimony from 16 different witnesses that it allegedly wanted to offer itself demonstrates both that Microsoft was not genuinely surprised about what was expected of it and that it was perfectly capable of being forthright with the court but chose not to do so."

The bitter words came after Microsoft's chance to win an extension had already expired. Jackson has concluded hearings in the case, leaving the company a chance only to comment on the form of the proposed ruling.

In what surprisingly became the final hearing Wednesday, Jackson praised a document filed by a software industry association that advocated a three-way breakup, calling it an "excellent brief."

During the remedies phase of the case, various economists and antitrust lawyers have publicly considered three-way and even five-way breakup proposals. But the Department of Justice now appears to have taken the view of those who consider the Windows operating system a so-called natural monopoly, a standard to which consumers and hardware makers will gravitate no matter how many operating system companies are created. Under that view, the Justice Department would seek to encourage competition by prying all other software and Internet applications away from the standard-setting Windows.

On Wall Street, analysts seemed alternately invigorated and cautioned by the seemingly expedited pace of events in the two-year-old antitrust battle. Jackson's comments in court -- including an expression of dismay at Microsoft lawyers' request for several months to prepare for the remedies argument despite their intention to appeal -- make it clear that the judge is ready to end the case. But the time required for appeals is still anybody's guess, and settlement talks could restart in the interim.

Jackson has ruled that Microsoft employed illegal business practices to extend a monopoly on computer operating systems to other markets.

Microsoft has repeatedly said it will appeal every aspect of the case, from findings of fact to remedies. In a conference call with analysts Thursday, company officials said they were "disappointed" with Jackson's expected ruling and reiterated their intention to appeal the case, according to analysts' reports.

The Justice Department proposal calls for a two-way breakup, placing the Windows operating system in one company and creating a second business for everything else, including software applications, the Internet Explorer Web browser and the Microsoft Network Internet service provider and network of Web sites. Microsoft would have four months to submit a logistical plan for compliance.

Within 30 days of a ruling, the behavioral remedies outlined by 19 states and the Justice Department are supposed to take effect. These remedies include publishing the so-called source code used by programmers to design software applications for Windows. Other proposed behavioral remedies would regulate Microsoft's relations with computer makers and software companies.

The company could ask an appeals court to stay a portion of the remedies; Jackson himself could stay portions of his remedies.

Microsoft's remedies proposal, which it was required to file May 10, asked for a dismissal of the Justice Department's breakup proposal. The company filed additional documents Monday to bolster the dismissal motion, using arguments the government itself made in its prior case against Microsoft.

Forced to propose remedies for a ruling it plans to appeal on behavior it still maintains was legal, Microsoft asked for behavioral regulations, including restrictions governing the company's license agreements with computer makers. In court Wednesday, Microsoft lawyers declined to discuss their proposed remedies, focusing instead on arguing against a breakup.

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