Judge in case can browse through variety of options; 'Baby Bills,' auction of licenses among possible solutions; Microsoft antitrust lawsuit


The richest man in the world, Bill Gates, might have been in Washington late last week, getting cozy with the political elite and championing the wonders that the digital age will shower on us.

But the real buzz in the nation's capital was whether "Baby Bills" are on the way, now that a federal judge has ruled that Microsoft Corp., the company that the Harvard University dropout founded in 1976, is a monopoly and in violation of antitrust laws.

Breaking Microsoft up in the same fashion that predecessors on the bench carved up other great 20th-century monopolies, such as Standard Oil Co. and AT&T; Corp., is just one of the potential remedies that U.S. District Judge Thomas Penfield Jackson could pen, said legal, technology and Wall Street sages. And while many legal experts and consumer advocates believe that a breakup is the best choice for ending Microsoft's dominance of computer operating systems, Internet browsers and other software, it has its own set of pitfalls.

Chief among them: Does Jackson want to spend the rest of his career overseeing three or more newly created companies to ensure that they don't operate in collusion?

Said Glenn B. Manishin, a former Justice Department lawyer who helped oversee the break up of AT&T; in the late 1980s: "A breakup is the hydrogen bomb of relief. -- It's a once and done remedy."

Other legal experts believe that a breakup would be the most favorable action to consumers in the end, spurring new competition and innovation in the industry.

One scenario

Should a breakup occur, legal and technology experts envision a scenario such as this:

Three new companies would be spun out, each given equal portions of the company's employees and the source codes for the company's Internet Explorer browser and Windows operating system software products, Windows 98, Windows 2000 and so on.

These companies would be free to use Windows to pursue any business initiatives they wanted, perhaps acquiring or merging with other software or Internet companies. Gates likely would head up one of these Baby Bills.

The old parent company would be given Microsoft's other businesses, such as its programming tools division, its consumer software products, such as Microsoft Money and Flight Simulator, its ventures in European cable, and e-commerce and Web initiatives.

"The only way to solve the core problem in the case -- Microsoft's overwhelming monopoly in the OS market -- is take that away," said Jeffrey Eisenach, president of the Progress & Freedom Foundation, a Washington-based technology think tank that advocates a breakup. "Splitting the company into three or four companies which would compete with one another is the only sensible way to prevent Microsoft from coming back again to crush competition and innovation."

Some legal scholars, like University of Baltimore Law School Professor Robert H. Lande, who has followed the Microsoft case closely, believe that a breakup is more unlikely than ever in light of Jackson's order Tuesday for Justice Department and Microsoft lawyers to submit their suggested remedies within 60 days, a blisteringly fast schedule given the complexities of the case.

Wall Street is betting that a settlement will be struck before the case goes further, said Patrick Dorsey, director of analysis for Morningstar.com. But if a deal isn't inked soon, other options for curbing the Redmond, Wash., company's dominance abound. They include:

The open source code option: Require Microsoft to make public the source code for its Windows operating system programs for PCs and computer networks.

That solution might seem the most democratic way to level the playing field, experts said. But, noted Eisenach, a former Federal Trade Commission administrator, it is no guarantee that any competitors would step up to the plate, because the millions upon millions of lines of operating system code would be of little use without the insight and guidance of the engineers behind them.

The auction option: Auction licenses to the Windows code to several competitors so they can use it to develop competing operating systems and software.

Licensing avoids the huge costs associated with breaking up Microsoft. But experts said it's questionable whether significant competition would emerge -- again, because some of the strength of the operating system code lies with having employees who understand it.

The conduct remedy: Leave intact the existing corporation, but establish a list of conduct restrictions and requirements on how it can operate, such as banning its exclusive business arrangements with PC manufacturers and regulating the pricing of its products.

Too much work for court?

While such a remedy avoids major upfront costs and internal disruption to Microsoft, it could be a lot of work for Jackson and his court, as well as the Justice Department, experts said. Both would have to enforce the decree's provisions.

Manishin, the former Justice Department lawyer, said a conduct remedy would be burdensome for the court and the Justice Department. An army of lawyers and administrators would be needed to monitor Microsoft and audit any business transaction or decision that might infringe on Jackson's decree.

Said Manishin, an antitrust lawyer with Patton Boggs LLP in McLean, Va.: "For Microsoft, a conduct remedy would be enormously intrusive. You'd have the government regulating virtually every business transaction they wanted to pursue. The entire company would become distracted."

Lande, of the University of Baltimore, agreed, saying, "Innovation would really suffer if government lawyers are going to have their noses in everything Microsoft does." Things at the Redmond campus might slow to a crawl, he warned. And, as Gates has predicted, the digital economy will be about "velocity" -- move nimbly, or face being overtaken by competitors or events.

Reagan appointee Jackson, who found Microsoft's behavior alarming, seems intent on ushering the case through his court expeditiously so that it can get to the destination experts have been expecting all along -- the Supreme Court.

After all, noted Lande, the presidential election is around the corner. And if the case were to languish in a lower court, there's no telling how much zeal a Bush administration would have for pursuing it. "Jackson is well aware this case will put him in the history books," said Lande. "It's the case of a generation. He doesn't want to mess it up."

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