U.S. urges Microsoft breakup; Federal-state plan calls for 2 companies with separate IDs; 'Robust rivalry' sought; Proposal to judge intended to remedy antitrust violations


WASHINGTON -- Federal and state officials urged a federal judge yesterday to split up Microsoft Corp. -- the most drastic remedy available for law-breaking by a monopoly.

Though bandied about for days in leaks and rumors, the release of the details on how officials want to divide the company could send fresh shockwaves through the computer-driven "new economy."

The 12-page remedy, suggesting the launching of a pair of big software corporations with separate identities and missions, is only a proposal. The idea of a corporate breakup to cure antitrust violations has not been used since the telephone system was splintered 16 years ago.

One of those new companies would control Microsoft's Windows operating system -- the command center, or brains, of personal computers. The other would own Microsoft's browser and all other computer-user programs. Only one could use the Microsoft name.

The two would be kept at arm's length, and government officials said they would expect the two companies to create a "robust rivalry" by entering each other's lines of business.

Behind the remedy proposal was the sweeping, but antique, language of the 1890 Sherman Antitrust Act -- a law Microsoft has been found to have broken repeatedly. But the proponents of the plan have translated that law's mandates for competition into highly sophisticated technological restraints on the digital-era behavior of one of the most modern companies.

The proposal is the work of the Justice Department and attorneys general from Maryland and 16 of the other states that sued Microsoft. Two states, Illinois and Ohio, urged that Microsoft be put under all the business behavior restrictions in the overall plan but that it not be broken up into two companies at least until its conduct had been evaluated over three years.

The plan, which may receive a long court review, could challenge the bold confidence of Microsoft's top executives that they can keep the company intact.

Bill Gates, Microsoft's founder and chief software architect, called the proposal "very disturbing, not just for Microsoft but for consumers and the entire high-technology economy."

Jim Cullinan, a company spokesman, added, "This is like telling McDonald's that it can only sell burgers, not fries, and that it has to give away the recipe for its secret sauce."

The document was filed with U.S. District Judge Thomas Penfield Jackson and made public after the financial markets closed.

Before the plan was announced yesterday, Microsoft shares dipped 6.25 cents to $69.75 in Nasdaq trading. But in after-hours trading, the stock rose back to $70.3125. A clearer investor reaction to the plan might emerge when markets open Monday.

Under the plan, the two new companies that would be carved out of Microsoft would be kept for 10 years under tight court-imposed restrictions -- including limits on joint ventures, or sharing of technical information or products.

After that, once those two companies become strong competitors with each other and new PC software rivals emerge to compete, Microsoft's two successor companies would be set free to deal with each other closely and might be allowed to merge.

Until the new companies existed, Microsoft would have to share some of its secrets with software competitors, sell its Windows system separately from its other products and let other companies buy Windows without having to buy other Microsoft products. Those rules would apply for three years to the new Windows company once it came into being.

Only with the restraints imposed by the whole package, federal officials said in releasing it, could the antitrust violations of Microsoft be remedied. Jackson ruled April 3 that the company had misused its monopoly over the Windows command center to harm competition in Web browsers and other programs for computer users.

The proposal is the suggested remedy for those violations, and for violations of the antitrust laws of Maryland and 18 other states. Those states had filed a parallel lawsuit with the Justice Department case filed 23 months ago.

At a news conference yesterday, Assistant Attorney General Joel Klein, the department's antitrust chief in the suit, labeled the software giant "an entrenched monopolist" and said the government's proposed remedy seeks to shift control over the public's choice of consumer products away from Microsoft -- and away from government overseers -- to consumers.

Klein said the department and the states had rejected proposals to break Microsoft into three or more companies because they believed that two strong new companies would respond better to market influences, thus reducing the need for close government supervision. Anticipating a complaint by Microsoft that the plan would stifle its creative energies, Klein said, "This decree will not limit Microsoft's ability to add new features to its products or otherwise to innovate."

Attorney General Janet Reno called it "the right remedy at the right time," arguing that it would "stimulate competition, promote innovation, and give consumers new and better choices in the marketplace."

The new companies under the plan would not be fledgling start-ups. With one confined to Windows and the other with every other software product, they would probably emerge instantly as giants in their own right.

Just as the forced breakup of the Bell system 16 years ago led to the birth of the "Baby Bells" and to a revolution in the telephone industry, the digital world -- changing daily -- could undergo a more fundamental shakeup if yesterday's plan goes into effect.

Jackson's approval of the formula is not a certainty. After he receives Microsoft's reply -- which no doubt will vehemently challenge every facet of the remedy plan -- the judge will hold a hearing. Tentatively, that hearing has been set for May 24, but it appears likely to be delayed because Microsoft's attorneys said yesterday that they will ask for an extension beyond the May 10 deadline for their response to the proposed remedies. Even if the judge does endorse the plan in a ruling expected within the next few months, the remedy suggested yesterday might not be put into full effect for years -- and perhaps never.

Microsoft, long eager to move the dispute out of Jackson's hands and into what it hopes is a more sympathetic appeals court, says it is optimistic that its planned appeal will knock down the plan -- and perhaps erase the judge's conclusion this month that Microsoft broke the Sherman Act repeatedly.

Justice Department officials said that, if the judge approves the plan to break up Microsoft, they would urge that the case go directly to the Supreme Court, bypassing the normal appeals court route. Such a maneuver could reduce the time required to get a final ruling.

The prospect for considerable delay led the federal and state governments to propose yesterday interim controls over Microsoft to be put into effect until it was split up. Those restrictions appeared to follow closely the findings by Jackson of illegal conduct by the company.

The main proposals on Microsoft

Split Microsoft into two companies: one owning the Windows software, the other Microsoft's browser and all other computer user programs.

Bar the two new companies from joint actions. They could share copyrighted Microsoft items on everything except Web browsers.

End all restrictions in 10 years, when new competitors might exist.

Delay the setup of the companies during court appeals.

Require Microsoft in the meantime to share secret Windows code with competing software firms; drop requirements that companies buy other Microsoft products to get Windows; allow computer makers to use non-Microsoft items with Windows; ensure the other companies' software works with Windows; avoid favors to companies that agree not to compete with Microsoft's browser or other software.

Apply those limits to the new Windows company for three years after it is set up.

Allow companies that sue Microsoft, or the future Windows company, to gain access to company records.

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