A Win Win Win Breakup?

Justice's plan looks right for consumers, the tech industry, and Microsoft itself

As the Justice Dept. pondered remedies in the Microsoft antitrust case, I worried that the lawyers would either come up with a plan that would put the government in the business of regulating software design or a plan that would break the company up in a way that would destroy it. Against all odds, Justice has proposed a solution that is good for consumers, good for corporate customers, good for the high-tech industry, and, ultimately, maybe even good for Microsoft.

The key is that the proposal accepts Windows' domination of desktop operating systems and Microsoft Office's control of desktop productivity applications as accomplished facts not easily reversed. But the proposal also recognizes that although the desktop will remain vitally important for a long time to come, it is not the future of computing. The battleground that matters is the software on servers that run networks, especially the corporate networks that are Microsoft's bread and butter. This is a market that Microsoft is determined to dominate. The government is equally set on keeping the market competitive.

The brilliance of the proposal, assuming it survives Microsoft's seeming determination to fight to the bitter end, is the way it would turn the new applications and operating systems companies into competitors. In a way, that could make both surviving entities stronger. To understand how this might happen, you have to understand the Microsoft way.

Currently, Windows is the sun around which all Microsoft activities revolve. Exchange, the most popular corporate e-mail system and arguably the best, runs only on servers running Windows NT or its successor, Windows 2000. Thus, companies have to buy the Windows server software if they want to run Exchange. A number of features in the desktop version of Windows 2000, such as automated backups, work only with 2000 servers. The new Pocket PC handhelds synchronize only with Windows desktops and work with Exchange as the mail service. The forthcoming Web Companion, a simple, inexpensive stand-alone Web-browsing appliance for the home, will run only using the Windows-based Microsoft Networks.

Now consider an alternative world in which Microsoft is split along the lines proposed by Justice. The Office group writes versions of Word, Outlook, and Internet Explorer for simple network computers based on the Linux operating system. Low cost and simplicity currently make such devices attractive to corporations, but the lack of good applications has discouraged their use. With Office 98 and other Macintosh products, Microsoft has proved that it can write non-Windows software that blows away the competition just by being better. A breakup would presumably prompt the surviving companies to move even faster.

The biggest benefit of a breakup, though, would likely involve the fast-growing market for server-based applications. The applications company would probably move swiftly to make Exchange available on the big servers that run on Sun Microsystem's Solaris and IBM's AIX operating systems as well as low-cost Linux servers. Microsoft's SQL Server, which lags far behind Oracle and IBM products in the database market, might become a more formidable competitor if freed from the Windows collar. And the new applications company would have a better chance to succeed in the growing market for Web-based software if it were free to write programs for a variety of systems.

The operating system company could face more of a struggle. Without the leverage of exclusive rights to popular Microsoft applications, the server operating system would have to compete on its own merits. This would generate pressure for better software. Even though Windows 2000 is an excellent product, its predecessor, Windows NT, could not run on the big computers needed for very large corporate data bases, a failing that is supposed to be corrected with a Data Center product due next month. The new company would have plenty of resources to respond more rapidly in the future, since it would have the cash cow Windows to fall back on.

In short, the proposed split is a win-win-win situation. It could give customers more choice, increase competition in key markets, and give the new companies the sort of free-wheeling entrepreneurial challenge that made Microsoft great in the first place. The biggest risk is that a besieged and distracted Microsoft will turn ever more inward during a prolonged series of appeals. That's why the interest of all concerned might be served best if, even at this late date, the government and Microsoft could negotiate the terms of a breakup.

Before it's here, it's on the Bloomberg Terminal.