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The Microsoft trial fallout ... by Ted Mittelstaedt

Friday, November 5th, 1999, was a momentous date for the computer industry. In the case of US Justice Dept. vs Microsoft Corp., the presiding judge found that Microsoft fits the definition of a monopoly. This month I'll be discussing the results of this, because it affects all aspects of the computer industry, especially networking.

It is certain that extremely few people in the computer industry are not going to care about the results. Microsoft, with its "you're either with us or against us" attitude, has been a terrifically polarizing force in the industry for years. Just about everything you read concerning this is going to be written by someone from the "For" or "Against" camp, and you must keep this in mind. To save time, I'll state up front that I'm delighted at the decision: "As ye sow shall ye reap," and I've seen Microsoft destroy many companies in the computer industry. The destruction of Netscape was inexcusable, and had no legitimate business reason. Everyone knew that the Network Computer was a hallucinogenic-induced dream, and they were all polite enough to allow Marc Andresson to spout on about it. Everyone, that is, except Microsoft: They just couldn't allow anyone else to have a corner of the spotlight. Politically, the Netscape destruction was unbelievably stupid; from a business perspective, Microsoft will lose more money from the loss of future (unethical) OEM contract deals than they gained by destroying Netscape.

Now that Microsoft is a declared monopoly, if they dare to press for any future OEM deals requiring people to load "their" Web browser (like the AOL desktop deal), they will be dead. Even "permitted" monopolies cannot get away with this.

Forget the idea that this particular trial will end up with no judgment against the company. If the judge was just going to slap the company on the hand there, would be no point in issuing such a strongly-worded finding. The most likely result is a judgment that the company has violated the Sherman Anti-trust act. Even more telling is the appointment of an arbitrator. If Microsoft had a ghost of a chance of escaping without a judgment against them, then they would gain absolutely nothing by negotiating an end to the trial. The fact that they welcomed an arbitrator indicates that they understand that they have lost -- and that they are now fighting a rearguard action in an attempt to limit the damage.

Even if the arbitration fails (and, if the prosecution is smart, they will allow it to fail) Microsoft is going to appeal this so there will be no resolution of the case for a number of years. Regardless of how many appeals the company makes, though, nothing can erase this finding of fact. This also sets another historic precedent: It is now possible to have a monopoly in desktop PC software. This means that, in the future, software company mergers and acquisitions are going to face tighter regulatory scrutiny than in the past. In fact, it's almost a guarantee that Microsoft will not be purchasing any more software companies until the trial is concluded. The days of willy-nilly acquisitions are going to be over real soon.

With a judgment against the company virtually certain, the most interesting thing to come out of the trial will be the sentence. In this respect, the court has been put in a very limited position. By definition, a monopoly is created when a company locks up a market; to unlock the market, the monopoly must be split up. Therefore, the court is most likely to recommend divestiture of some pieces of the company.

For those who think the court won't consider splitting the company because it's not in the United States' best interest, the problem is that it's not really possible to prove that splitting the company will damage the US. A court would have a difficult time considering vaporware, and it's known that the Justice Department lawyers favor splitting the company. It would be much easier merely to rule that a 20 to 40% divestiture must occur and leave it up to the federal regulators to decide what that is.

There is one other thing operating here that you won't read much about: the "Old Boy's Club." There is a kind of unwritten rule in American business that says that it may be OK to compete with your competitors, and take most of their market share, but squashing them flat for emotional reasons is not acceptable. It's one thing to give the market a little push to make a badly-managed competitor fall into bankruptcy, but you don't call up your competitors, frothing with spittle, and tell them they are dead. Nor do you make business deals that deny your own company hundreds of millions of dollars of income simply to push your competitors out of business. The "Old Boy's Club" may let you get away with this a couple of times, but, if this is your Standard Operating Procedure, they will eventually get sick of you, band together, and take you out. More than anything, the Justice trial is an expression of this. When the chips were down, even Intel, Microsoft's best bud, turned on them and rent and tore. Microsoft was unable to obtain a single credible witness outside of the company in their hour of need, while the government (which High Tech is pretty leery of anyway) had no shortage of witnesses.

Based on all of this, I feel what is most likely to happen is that, at some point in the future, Microsoft will be split up. It may also be that the splitting will not be court-ordered. As now appears obvious, a solution to this is years away, and if Bill Gates is smart he will already be thinking about shedding pieces of the company. In this way, when Microsoft finally exhausts all of its appeals, it may have reduced itself to the point that a divestiture isn't necessary. We may see The Great Microsoft Selloff appearing over the next few years, quietly, silently, behind the scenes.

It is also possible that, if Microsoft quietly encourages competitive development in other aspects of the market, they may no longer qualify as a monopoly when the final appeal is exhausted. One obvious area for this is the porting of Microsoft Office by a third party to Linux. (This would also have the side benefit of killing off Star Office, which is now owned by Sun, and is currently the only alternative-OS office suite that is usable in a business environment.) Who knows: We may see the ironic result that, within a year, Microsoft will be actively helping some small startup, like a Netscape II, gain a permanent, competitive market presence, instead of attempting to squash them.

At this point, though, the copy from Redmond is still quite uncooperative as Bill Gates fights a losing battle against reality. If this keeps up, a court-forced split is most likely. This leads to the question of how will it be split?

The first and most obvious way to split Microsoft is to force Microsoft to divest itself of the Operating Systems group. Indeed, for a number of reasons, if divestiture of the company is a requirement and Microsoft has anything to say about it, Bill Gates will most likely wish to hold on the applications.

The problem with splitting the company into an OS company and a separate Applications company, is that in the computer industry, the popular Operating Systems are determined by what applications are available for them. If Microsoft is purely an applications company, you would think that they would have a financial incentive to port their applications (like Microsoft Office) to other operating systems like UNIX. However, it was shown in the trial that Microsoft does not make logical business decisions, they make emotional decisions. (If they made logical decisions, they wouldn't have been caught in the trial to begin with.) Due to this, it's likely that, if Bill Gates were running a software applications company with a monopoly on desktop applications, he would not port his software to other operating systems. He'd rather thumb the corporate nose at the enemies responsible for tearing Microsoft down. This would also make it more likely that he could successfully argue that the split shouldn't have happened (since the Windows OS would still have a monopoly) should he ever attempt to reacquire the OS company.

The other problem with this kind of a split is: What happens to the OS company? Well, it would be sold, so there would likely be a massive defection of programmers; it's not possible to prevent people from leaving, and the programmers would likely want to stay with the parent company (the parent company would have lots of money). The most likely buyers are people like Sun, or AOL, who has absolutely no interest or experience with Windows. So, it's likely that development on new Windows versions would halt for a number of years.

An OS/App split would do little to change things, and could harm the consumer. So, if this kind of split doesn't happen, what kind of split might be possible? The only other realistic option is for regulators to start chopping pieces and products from Microsoft. An obvious first step would be Internet applications. Since Microsoft was tarred by wrecking Netscape, a logical step would be forcing divestiture of Internet applications. The problem is that both the Web browser and Web server are currently free, so nobody will want to buy them just to give them away. However, a more tempting target would be Microsoft Proxy Server, and since Proxy is an integral part of Microsoft Small Business Server, that product would get axed too. Another is Microsoft Exchange. E-mail started off separately anyway, and Netscape also sells a mail server that is a competitive mail server. Microsoft Front Page is another one that could be divested.

Another way to split would be to look at products that were originally purchased by the company. For example, Microsoft SQL Server was a company acquisition, and it's easy to see that if SQL survived before an acquisition, it can survive after an acquisition. There are also some products dependent on SQL server -- like BackOffice -- that could be shaved as well.

When you get into the details, splitting the company could be done. There are a number of connection points between products that are thin enough that those product groups could go away. The only alternative is government regulation of the company: All major decisions about those software titles determined to be a monopoly would be approved by the court. Court oversight would be removed once the product could be shown not to occupy a monopolistic position in the market. In practice, this would be a nightmare and certainly would be resisted by the Old Boy's Club.

While it is now a fact that Microsoft is a monopoly, what is not at all clear is: Why? Did Microsoft become a monopoly because of cruel strong-arm tactics by its CEO? Intel certainly doesn't have the same history that Microsoft does, but they are a monopoly too. Or, did Microsoft become a monopoly because the users in the industry all prefer a software monopoly? If this is the case, then nothing will prevent Microsoft from being a monopoly, even if the company is split up. Once the regulators leave, the customers will choose to buy Microsoft products and the company will become a monopoly again.

It seems evident to me that we are in for a divestiture ruling, and it also seems likely that it will be messy, with a number of products sliced out of the Microsoft pie. If this happens it's likely these will be network products, because Netscape was a network products company. Considering that the natural forces I discussed in November will already be at work, the court decision will only magnify what is already happening. One thing is certain out of all this: The computer industry will see significant changes over the next decade. Things will never again be the same in the software industry.

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