Updated from 6:23 p.m. EDT
After a decade of investigating, negotiating with and prosecuting
, the government
asked a federal judge Friday to split apart the company that dominates the personal computer software industry.
The widely expected proposal asks for a remedy comparable only to the 1984 breakup of the
telephone monopoly, the breakup of the
United Shoe Company
in the 1950s and the historic dismantling of industrial giant
. Splitting Microsoft, America's most powerful technological and economic engine, into separate entities responsible for the Windows operating system and Office software applications, would represent a step beyond the severance of those shell companies, antitrust experts said.
Department of Justice
failed to achieve a consensus with all 19 of the state attorneys general involved in the lawsuit, leaving Microsoft a strong argument that the pieces of the government's case do not come together to justify the harsh remedy.
"Under our proposal, neither ongoing government regulation nor the self-interest of an entrenched monopolist will decide what is best for consumers. Instead, consumers will be able to choose for themselves the products they want in a free and competitive marketplace," Joel Klein, the Assistant Attorney General who has led the antitrust prosecution of Microsoft, said in a statement.
Microsoft immediately responded, calling the proposal unjustifiably punitive and describing it as a major setback for the American economy and consumers. The company also said it will file a response with the court May 10. It will contend that the government's proposal threatens a core principle in the American economy namely, that businesses are encouraged to compete by creating innovative products that respond to the marketplace and consumers.
"Breaking up Microsoft into separate companies is not in the interest of consumers and is not supported by anything in the lawsuit," said Bill Gates, Microsoft chairman and founder, in a statement. "Microsoft never could have created Windows and Office if they were in separate companies.
Prosecutors from Illinois and Ohio dissented from the proposal, agreeing to recommend remedies to U.S. District Judge Thomas Penfield Jackson that would regulate the software giant's actions in the marketplace but not break up the company.
The government proposal asks the court to order Microsoft to prepare a plan to reorganize itself into two parts. One part of the company would own the operating system business, including the Windows operating system that runs more than 80% of the world's personal computers.
The other part would own the remainder of Microsoft's assets including the Office software package, the Web browser Internet Explorer and the cable television station
The proposal also would restrict the company from giving favorable treatment to computer companies and software developers who help Microsoft to exclude competitors. It would prevent Microsoft from punishing computer companies that want to sell products that compete with Microsoft's products.
The proposal would also prohibit bundling operating system products and would require the company to disclose source code information to competing software developers.
The proposed decree would remain in force for 10 years.
"The government has a long history of asking for extreme remedies and those remedies not being delivered by the courts," said Jim Cullinan, a spokesman for the company, who characterized any proposal to break up Microsoft as the latest and most extreme example. He said breaking up the company would harm the economy, the high technology industry and consumers.
What began as a quickly abandoned
Federal Trade Commission
investigation a decade ago has become a landmark antitrust case with implications for nearly every sector of the new economy, carrying the potential to elucidate, for the first time, the way longstanding fairness standards will apply in the digital age.
In the consolidated case, the Justice Department, 19 states and the District of Columbia sued Microsoft under sections 1 and 2 of the
Sherman Antitrust Act
. The government contended that Microsoft violated U.S. antitrust laws by engaging "in a broad pattern of unlawful conduct with the purpose and effect of thwarting merging threats to its powerful and well-entrenched operating system monopoly," according to Justice Department documents.
Justice Department officials concluded that such behavior harmed consumers by depriving them of choice and advances in the software industry. The government said Microsoft tried to eliminate competition by offering in a meeting on June 21, 1995, to divide the Web browser market with
. Then, when Netscape refused, the government asserted, Microsoft took a number of steps to eliminate the competition.
Those efforts included unlawfully intertwining Microsoft's Internet Explorer Web browser with the Windows 95 and Windows 98 operating systems. They also included arranging anti-competitive and exclusionary arrangements with Internet service providers and online services to install only the Microsoft browser and preclude the use of the Netscape browser.
In addition, the government alleged that Microsoft tried to sabotage
Java cross-platform capabilities, which it saw as a threat to the popularity of its Windows operating system. Microsoft denied all the charges, characterizing the government's case as "specious," "fiction," "fantasy," "silly" and "pure baloney."
Among other rebuttals, it contended that Netscape has been able to distribute millions of copies of its software. It argued that it does not have a monopoly because it faces significant competition from Netscape, which was acquired last year by
for $10 billion. Microsoft contended that Internet Explorer was an integral part of Windows, negating the allegation of illegal tying. The company said its competition also includes
, a company with a market value exceeding $8 billion that develops open-source software, including the Red Hat Linux operating system. Microsoft also pointed out that even the government's chief economic witness said the company's conduct had not harmed consumers "up to this point."
Jackson's preliminary findings held that the giant software maker enjoys monopoly power in the personal computer market. In his findings, the judge said Microsoft's actions stifled innovations in the industry and deterred investments in rival technologies. He also found that the actions of Microsoft had the potential to harm consumers.
"Microsoft enjoys so much power in the market for
-compatible PC operating systems that if it wished to exercise this power solely in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market," the judge wrote. "In other words, Microsoft enjoys monopoly power in the relevant market."
In his findings, the judge said that
was too small to compete effectively against personal computers that used Microsoft Windows, and that Linux software does not pose a threat to Windows. He said computer makers believed they had no choice but to use Windows.
In an unusual move widely interpreted to push the two sides toward a settlement, Jackson quickly named an authoritative mediator in the case, Judge Richard Posner of the Seventh U.S. Circuit Court of Appeals. Posner, widely respected in the antitrust field, reportedly held separate talks with each side, attempting to learn the intracacies of the software industry while nudging the sides closer to an agreement. Posner ordered a veil of silence during the negotiations, and both sides pledged to carry out negotiations in total secrecy.
But intense interest and mounting speculation were mainstays during the four months of secret negotiations. Investors were confused, and Microsoft's stock was buffeted by reports and rumors of a possible settlement. These included a vaguely sourced report in
on Jan. 12, rumors that emerged Dec. 14 from the options pit of the
Pacific Stock Exchange
and, more recently comments that
attributed to Gates after the introduction of the Windows 2000 operating system.
After hours, Microsoft shares gained 11/16 to 70 7/16. The stock closed regular trading, before the proposal was made public, at 69 3/4, down 1/16, or 0.09%. Much of the proposal's substance was public through published reports before the close.
Microsoft had traded within a tight 20-point range from the low-90s to the mid-110s from November 1999 to the beginning of April as prosecutors and the company attempted to settle the case. The shares began its gradual decline on April 3, two days after negotiations in the case broke down. On that day, Microsoft fell 15 7/16, or 15%, to 90 13/16 in extremely heavy trading volume of 128 million shares. On April 12, the shares fell 4 5/8, or 5%, to 79 1/4, the lowest level since early summer, after an influential
analyst lowered his estimate for the company's quarterly revenues.
Then on April 24, the shares fell 12 15/16, or 16%, to 66, more than 10% below its 52-week low, after news reports detailed the government's plans to ask for a breakup of the company. By Friday, analysts said, all the ominous news from the company's April 20 earnings report and the anticipated breakup proposal, seemed priced into the stock.