Microsoft split appears unlikely, many experts say

As the government and Microsoft Corp. argue before an appellate court this week in one of the largest antitrust cases in U.S. history, experts believe it is unlikely that the software giant will be split in two.

They point to several reasons: the sinking technology sector, the weakening economy, the changing marketplace and the more conservative administration of George W. Bush.


A breakup now is "not even worth talking about, to tell you the truth," said Bob Lande, a law professor at the University of Baltimore.

The U.S. Court of Appeals for the District of Columbia Circuit is scheduled to hear oral arguments today and tomorrow on a federal judge's ruling to break the company in two. At issue is whether Microsoft exercises illegal monopoly power and, if so, what remedy should be imposed.


The software company and the Justice Department declined to comment on specifics of the case, but industry analysts pointed to several factors that they said will make a breakup unlikely.

"I think the government's going to begin to lay off Microsoft," said John Robb, president of Gomez Inc., an Internet research firm in Massachusetts. "With a weak economy and an extra-weak tech sector, it's not in the government's or the country's best interest to continue to put pressure on the country's leading technology company."

The government has been turning up the heat on Microsoft for years. On May 18, 1998, the Justice Department filed a complaint contending that Microsoft had violated Sections 1 and 2 of the Sherman Antitrust Act, which curbs monopolies. The District of Columbia and 19 states, including Maryland, have a similar suit pending.

The ensuing trial lasted 78 days - from October 19, 1998, through June 24, 1999. During that time, 26 witnesses testified and depositions of 79 other witnesses and 2,733 exhibits were admitted into evidence, according to court documents

In April, U.S. District Judge Thomas Penfield Jackson ruled that Microsoft violated federal and state antitrust laws. He said the company had a monopoly with its Windows product and could gain a monopoly over Internet browsers.

On June 7, the court entered a final judgment requiring Microsoft to submit a plan - after the appeal is finished - for breaking into two firms: an operating system business and an applications business.

Government lawyers tried to move the case to the U.S. Supreme Court, but the high court said it would not decide the case and sent it to the U.S. Court of Appeals in Washington. The case could then be appealed to the Supreme Court. A settlement is also among the possibilities.

"No matter what the Court of Appeals does, there's going to be a next round - whether the next round is settlement or the next round is all the way to the Supreme Court," Lande said. "This is not the final step, but it is a very important step."


In its brief filed with the Court of Appeals, the states said that Microsoft has an unlawful monopoly of operating systems and that it tried to monopolize the browser market. The government also argued that the company violated the Sherman Act by tying two of its products: the Windows operating system and the Internet Explorer browser.

"The District Court acted properly in imposing the structural and conduct remedy for Microsoft's wide-ranging course of illegal actions," the government says in its brief.

Microsoft said in its appeal that the government no longer argues that Internet Explorer can or should be removed from Windows, and that it has not shown that the company exercises a monopoly power. The company also said that Jackson's public comments show hostility toward Microsoft that affected his ruling.

"Plaintiffs cannot seriously contend, for example, that it was permissible for the district judge to compare Microsoft to 'gangland killers' in comments made to a reporter while the case was still pending," the appeal says.

Lande said Jackson's out-of-court statements undermined his decision.

"You know there are at least a couple of judges who are going to slap Jackson down real hard for his out-of-court statements," Lande said.


Dismantling Microsoft without destroying it would be a long and arduous process. But if the court orders a breakup, it might not be such a bad thing for Microsoft, said Neal Goldman, director of Internet computing strategies for the Yankee Group in Boston. It would force each piece of the company to be more competitive, he said. However, it would weaken one of the company's greatest strengths: pursuing its corporate visions with diligence.

"Over the years, as much as you love to hate them, Microsoft has done some things really, really well," Goldman said. "And the long-term patience, I would argue, is their key success factor. "

In January, Microsoft Chairman Bill Gates stepped aside as the company's chief executive and promoted company President Steve Ballmer to the position. Removing the more prickly Gates, whose trial testimony was damaging, and having the more likable Ballmer run the show should help the company, Robb said.

Those who have been following the case closely said it was in the defendant's best interest to drag the battle out, with hopes of the arrival of a more conservative Bush administration that would favor a settlement. Now, Lande said, there is a good chance that Charles A. James, who has been nominated to head the Justice Department's antitrust division, will settle as soon as he can take over the case - probably about the same time the appellate court makes a decision, which is likely to take months.

Others agree that a settlement could be in the future. "Expect settlement talks after the ruling," Bill Wyman, president of the Precursor Group in Washington, wrote in an investment report that the independent investment research firm put out this month.

Robb said that the computer business needs a common platform to make writing software easier. For that, the industry needs a giant such as Microsoft.


"If we attack this company and damage it in any meaningful way, it's going to be bad for the economy and the nation and the industry," he said.

Besides, some say, much has changed for the software giant and the industry in the past few years.

"I think the world has changed so sufficiently since the beginning of the case that I don't believe that Microsoft has the same level of power that they used to have even two years ago," Goldman said.

Robb agrees: "Five years ago, Microsoft was mentioned in almost any meaningful discussion about technology," he said. "And now, given the Internet, Microsoft has moved to the side, is less prominent. People talk about other companies now."

Experts said the impact of damaging the company would be felt in the technology sector and the general economy.

On April 3, when Jackson ruled that Microsoft violated antitrust laws, the technology-heavy Nasdaq fell 349.15 points - its largest point loss ever - to 4,223.68, down 7.64 percent.


Shares of Microsoft closed that day at $90.88, down $15.37. In contrast, shares closed Friday at $56.75, up $1.56.

"Even if Microsoft was doing some wrong, ... the day he [Jackson] announced that he wanted to break up Microsoft, we saw what happened to the stock market," said Ken Smiley, a senior information-technology industry analyst for the Massachusetts-based Giga Information Group.

"And the stock market hasn't come back since," Smiley said.