By Bringing Microsoft To Heel...

The trial of Microsoft Corp. has been deeply revealing. It has played out like a Greek tragedy, with the protagonist self-destructing in full public view. Each offer Microsoft heard for a simple and limited solution requiring fairer conduct toward partners and competitors was rejected. What would have been acceptable to Intel Corp. and other high-tech companies with large market shares was again and again deemed unacceptable by Microsoft. Business Week has long favored behavioral remedies as the best sanctions against Microsoft's monopolistic behavior. But sadly, it is now clear from the evidence presented at the trial and Microsoft's own intransigence that something more drastic is necessary.

The trial demonstrated the truth of what many in Silicon Valley have said for years: that Microsoft bullies companies and closes off potential avenues of innovation that threaten its Windows monopoly. People should read the court's finding of fact, which describes this conduct in chilling detail. The names of many of the biggest and most innovative companies are in the transcript. This case is not about overzealous government prosecutors or whiny losers. It is about strong high-tech companies demanding fairness and a level playing field.

The trial also revealed that Microsoft has no intention of changing its tactics. It is trying to do to Palm what it did to Netscape Communications Corp. and Sun Microsystems Inc.: stop a rival network platform. Its Outlook is the only major e-mail software that doesn't synchronize with Palm, unless additional software is installed. Bill Gates sees nothing wrong in any of this. There is no sign of remorse. Indeed, a tone of total disrespect for the law, the judge, and the court runs through Microsoft's testimony. Judge Thomas Penfield Jackson, a conservative appointed by Ronald Reagan, is rightly aghast at this attitude.

It appears that there have been no internal or external restraints on Microsoft's self-destructive behavior in the courtroom. Microsoft--a public company, lest anyone forget--has probably lost billions in market capitalization by not settling early. Yet not a peep has been heard from the board of directors. Nor have institutional investors raised their voices.

No one really knows if breaking Microsoft into two companies--one for applications, the other for operating systems--will work. It will not be as clean as many say, and messy court-ordered behavioral constraints may accompany any split. Some argue that these conduct remedies alone remain the best hope of curtailing Microsoft's monopolistic behavior. Others worry that the applications company may turn out to be a monopolistic giant in its own right.

Microsoft may well get the appeals court or the Supreme Court to reverse the decision, and it deserves a full hearing. But at this point, cleaving Microsoft in two is probably the least bad solution, despite the inevitable disruption. Will innovation suffer as Microsoft claims? Not likely. For all its prowess, much PC innovation--DOS, e-mail, icons, and spreadsheets--was created independent of Microsoft. Even more important, the decision sends a clear signal to all that illegal monopolistic behavior that stymies innovation is not acceptable in the New Economy.

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