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Manhattan Institute

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Breaking Up Isn't Hard to Do


Breaking Up Isn't Hard to Do

November 10, 1999

Microsoft is now headed for a breakup, or in any event it should be. Bill Gates should orchestrate the breakup himself, while he can still shape its terms and timing. He owes it to his shareholders. At this point, a breakup is in their best interests not because the government’s theory about illegitimate “bundling” is true, but because it mainly isn’t.

Judge Thomas Penfield Jackson’s findings of fact, issued last Friday evening, leave two rounds to go in the trial. The second will set out conclusions of law, and the third will order a remedy. What are Judge Jackson’s main legal options? Any of the following, separately or together:

* Unbundling. Force Microsoft to expunge browser capabilities from Windows 2000. Or worse, make the company sell or give the entire Windows source code to one or more competitors.

* Technology quarantine. Forbid Microsoft to add any new capabilities to Windows without the judge’s permission. Microsoft would be required to disclose any future change in Windows well in advance, and then discuss them with lawyers on all sides, for however long it might take to persuade them it’s a good idea. Which might often take quite a while.

* Contract quarantine. Proscribe various contract terms or prices. Windows would be priced and sold like a utility’s services, which is to say, on “nondiscriminatory” terms, to all comers. Legitimate, cost-based differences would still be permitted; the lawyers would say which are which. When they couldn’t agree, they’d ask the judge.

* Divestiture. Divestiture Lite would direct Microsoft to erect a Chinese wall between its Windows programmers and those that work on what Justice deems to be “applications”, like Internet Explorer or Microsoft Office. Everybody would get to argue, for a long while, about how high the wall should be. The highest possible wall would be true divestiture, a complete corporate split.

Judge Jackson’s strong language notwithstanding, he will likely stop well short of the most draconian remedies two rounds from now. A nonconsensual divestiture decree isn’t in the cards, not even on the facts he’s found. But it’s certain that no matter how long Microsoft is prepared to litigate, it can’t hope this case will fizzle out entirely, as the big IBM antitrust suit did in 1982. Even if Judge Jackson reaches too far and is then overturned on appeal, he’ll get a second chance on remand. In an antitrust case of this kind, a trial judge’s encyclopedic findings of fact are going to culminate in some kind of remedy, sooner or later.

Once the remedying begins, it won’t soon end. Complex remedial decrees invariably kick off endless rounds of follow up bickering. Costs mount quickly. Private lawsuits follow. And antitrust law awards triple damages.

If Microsoft’s commanding position were really attributable to nefarious bundling, then splitting the company would weaken both halves. But if this isn’t true, then the two halves will emerge even stronger, once the immediate pain of halving passes.

Stronger, in part, because this is the only real way to put a halt to creeping paralysis by lawyer. But stronger, more importantly, because splitting up an information-age company so rich in business judgment, technical competence and marketing skill won’t dissipate the talent, it will replicate it.

Freed from the baleful scrutiny of all those lawyers, the operating-system spinoff will forge ahead with the expansion of Windows. With or without a full-fledged browser attached, Windows will stay Web-wired, or get rewired if it must, and keep on growing. Freed from the same legal bale, the applications-software spinoff will build as fast on the platform of its already dominant Office suite. Web capabilities won’t be expunged here either; they’ll be integrated just as completely. The government might hope to see the separate Micro and Soft go for each other’s throats, but they won’t. There are too many other places to settle out there on the endless prairie of software.

The annals of antitrust law record more than a few happy endings like that—endings that rather undercut the bundling theories put forward at the beginning. Mobil, Amoco, Exxon, Arco, Pennzoil and Chevron are all corporate children and grandchildren of a single corporate mother, Standard Oil. So are Alcoa and its Canadian spinoff, Alcan. So too are AT&T, Lucent, SBC, Bell Atlantic, BellSouth, US West and AirTouch. When those companies were first told to go their separate ways, the smart investor went long with all them. Collectively, the children of broken up corporate marriages tend to fare remarkably well—better than many others have under kinder, gentler remedies that stopped well short of a breakup.

So give them what they want, Bill. Your next $80 billion beckons.