Are 'Baby Bills' in your future?

Consider the Microsoft Windows Co. How about the Microsoft Office Co. Would breaking up Microsoft end its monopoly powers?

Would standalone Microsoft Windows and Microsoft Office companies be less monopolistic threats in their respective markets?

That seems to be the contention of the government. According to several published reports, the U.S. Department of Justice and some of the 19 state attorneys general suing the company for antitrust violations are leaning toward advocating for a breakup of Microsoft Corp. (MSFT). Reports claim that the government -- which is due to submit to Judge Thomas Penfield Jackson this week its proposed remedies in the Microsoft case -- is now favoring structural remedies, which, if enacted, would break Microsoft into two or three different companies.

While structural remedies like a breakup had been almost considered out of the picture until this week, they are now possibly at the forefront of the DOJ/states' expected short list of remedy proposals.

The Wall Street Journal reported Monday that government remedy proposals would require Microsoft to divest itself of its Office division, leaving the company holding its operating system and consumer/Internet divisions.

The Washington Post and USA Today reported the government is seeking to require Microsoft to split itself into two or three "Baby Bills," a proposal allegedly suggested by some of the states and other non-Microsoft sympathizers throughout the current antitrust case. A Windows company, an applications company and an Internet company would be created in such a breakup, according to these latter accounts.

But just how easy it would prove to divide up Microsoft along these lines is up for debate. As a result of several recent reorganizations, the company is not as readily diceable as it once was.

Microsoft's Platforms Group, for example, is the central repository for all things Windows-related. But as a result of a late March reshuffling, Microsoft added its Developer division employees and products into the Platforms unit. It is unclear if the government would seek for Microsoft to divest itself of its entire Platforms Group or only the operating-system component of it.

The so-called Office Group, whose official name is the Business Productivity Group, likewise, is responsible for a lot more than just Office. The unit handles the Office desktop suite; BackOffice server suite; Visio drawing/design products acquired by Microsoft late last year; Pocket PC, bCentral small business portal and Small Business Server (a Windows NT-based BackOffice bundle); and ebook and tablet PC software.

Again, it's unclear whether the DOJ and states are seeking Microsoft to split off just Office or the entire Business Productivity Group. And neither the DOJ nor Microsoft is commenting on remedy proposals.

In reporting revenues, Microsoft breaks out its Windows numbers separately. It lumps together its desktop applications and developer tools numbers. For its fiscal third quarter, ending March 31, Microsoft's Windows division reported $2.3 billion in revenues, with the Productivity Applications and Developer business unit pulling in $2.6 billion. The remaining Consumer and Other unit is far smaller and less significant to Microsoft's bottom line. In Q3 2000, that unit contributed $756 million in revenues.

It's not just the "hows" regarding a potential Microsoft breakup that are uncertain. The potential benefits that competitors and customers would derive from dealing with a Microsoft Windows company or a Microsoft Office company are murky, too.

Microsoft is a "virtual monopoly" in the desktop applications market, acknowledges International Data Corp. research director Mary Wardley, dominating the Windows office suite market with "upwards of 90 percent marketshare." In the Macintosh desktop suite market, Microsoft holds an even greater share, she said.

While, in the past, Microsoft enjoyed a huge benefit by capitalizing on the "support, synergy and safety factor" benefits that consumers derived from buying their operating systems and applications from a single vendor, Wardley said.

These days, with desktop office suites more commodity-like purchases, the pendulum has swung back a bit.

Corel's WordPerfect Office, Lotus' SmartSuite and Sun Microsystems' StarOffice are eeking out an existence, but primarily because of Microsoft missteps, such as eliminating concurrent licensing with Office. It's not a given that a separate Microsoft Office company would give consumers or competitors any more wiggle-room than does the existing Microsoft Business Productivity Group, Wardley said.

The same holds true in the Windows market. Some, such as Sun Microsystems (sunw) CEO Scott McNealy, have suggested breaking Microsoft into five companies -- three Windows operating system vendors that would compete with one another, plus a desktop applications and an Internet content company. But the bulk of recent reports on the latest likely remedy proposals claim the government is leaning more towards suggesting Microsoft spin off a single Windows company.

Windows dominates the PC operating system market; Windows NT and 2000 are strong contenders in the server OS market, giving Unix a serious run for the money. It's only in the handheld OS market where Microsoft trails substantially its Palm rival.

The Microsoft investigation is entering the remedies phase starting this week. After the DOJ and states submit remedy proposals by April 28, Microsoft will submit its reply by May 10, with the DOJ and states submitting their rebuttal by May 17. Judge Jackson will hold a remedies hearing on May 24.

Microsoft has said it plans to appeal the case before the U.S. Court of Appeals or the U.S. Supreme Court or both.


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