Look, this Microsoft (MSFT) - Get Report settlement stuff is starting to scare me.

Not the idea of a settlement. Microsoft did so badly at trial that it's clearly in the company's interest -- and its shareholders' interest -- to settle, now, definitively, and end this charade.

What scares me is the constant drumbeat of reporting on the new leverage and clout the state attorneys general apparently have in approving or rejecting the terms of a settlement. And even more, the nutsoid idea, repeated endlessly in press coverage for the past two weeks, that a number of those AGs believe a good remedy would be to divide the ownership of Windows among three companies -- two new ones, plus the existing Microsoft. Microsoft would be required to deliver the source code for all current versions of Windows to these two new entities -- does the eminent-domain phrase "taking without compensation" come to mind here? -- after which each of the three Windows developers/sellers would be free to advance the product according to its own vision of the market, technological advances and customers' wishes.

Hey, that's a disaster! Wake up, AGs! Put aside for moment the delicious prospect of a rebuke to Microsoft, and think about what this kind of move would mean to Windows users -- the population, after all, that the DOJ and state AGs are supposed to be trying to help.

Inevitably, those three "freed" versions of Windows would diverge. The original Microsoft version would generally be seen as the one, pure, true Windows. But to compete with Big Redmond, the other two sources of Windows would have to start adding new features, new spins, new emphasis here, there and there.

And the Windows software market would collapse into a maze of warring nonstandard standards. If you're old enough to recall the early days of PCs, you'll remember that in the beginning, Microsoft made custom, slightly different versions of DOS for each new "important" PC to come along. Worse, applications developers had to produce several special, works-with-just-one-flavor-of-Windows versions of their apps.

Lotus

, for example, had custom versions of 1-2-3 v. 1a for

IBM

(IBM) - Get Report

PCs,

Texas Instruments

(TXN) - Get Report

Professional PCs,

DEC

Rainbow PCs. Because although all were "IBM PC clones," theoretically (if not quite actually) compatible with the original IBM PC and PC-XT, each used a slightly different version of DOS.

So each required its own customer version of DOS. Madness, absolute madness.

That whole system finally collapsed of its own weight -- thanks, mainly, to Microsoft, which saw the chaos ahead if it continued producing these machine-specific versions of DOS.

Needless to say, applications vendors didn't like this situation, either. The cost of developing, packaging, inventorying and shipping to retailers all these slightly different versions of their products was a terrible burden. First, they had to decide which new PCs would attract enough buyers to make a custom port of their applications to those machines worthwhile. Then they had to produce the code. And then they had to persuade retailers to stock all those varieties.

Note that the net effect of this fracturing of the DOS-PC market was to reduce competition, because PC vendors that couldn't persuade application-software publishers to produce versions for their machines died quick, ugly deaths in the market.

Is that what you want, AGs? Less competition?

Split Windows among three companies, all starting with identical code bases, but also with market imperatives to quickly develop proprietary "improvements," and you have a recipe for disaster.

Yet according to everything I've heard and read, including talks with sources involved in the settlement negotiations, that's the kind of "remedy" many of the state AGs want. Anything less, it seems, doesn't inflict enough pain on Microsoft.

Whoa! What about the pain inflicted on us?

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At the time of publication, neither Seymour nor Seymour Group held positions in the companies discussed in this column, though positions can change at any time. While Seymour cannot provide investment advice or recommendations, he invites your feedback.