Critics warn of MS chain reaction

Summary:It seems like a simple idea to break Microsoft into two parts but some say there's many hidden problems that will surface.

It sounds so simple and symmetrical: Split Microsoft Corp. into two equal companies, one selling the Windows operating system and the other, Microsoft's popular Office suite of word-processing, spreadsheet and other "applications" programs.

That's the plan put forward by the Justice Department in the lengthy antitrust trial now winding up in Washington.

U.S. District Judge Thomas Penfield Jackson, whose earlier rulings against the software company set the stage for the government's proposal, has suggested in comments from the bench that he is sympathetic to a breakup plan and could rule on the matter as early as next week.

But as songwriter Neil Sedaka observed in a different context, breaking up is hard to do. Indeed, a growing group of critics says that the government's breakup plan, far from providing for a tidy divorce, is in fact full of ambiguities and hidden complexities and could set off a chain reaction of unintended consequences.

Among them: a severely weakened Windows operating-system company, far less competition in the high-end market for corporate computer products and far more court supervision of software than the high-tech world has ever before experienced.

Another potential effect: With a breakup forcing top Microsoft executives to pick sides and go to one company or the other, most people are beginning to assume that Bill Gates, Steve Ballmer and other top executives would flock to the applications company, which would have few encumbrances placed on it.

"No one will go to the operating-system company," says Goldman Sachs & Co. analyst Rick Sherlund, because it would be "stripped of everything interesting," with its "opportunities to grow significantly restricted." Sherlund adds that a lack of management talent at the operating-system company would very likely weaken that company over time.

Of course, not everyone thinks the government's plan is flawed, and a long list of prominent business people, economists and policy makers have lined up solidly behind it. Most of them agree with Thomas Lenard, vice president for research at the Progress and Freedom Foundation, a Washington policy group, who says that the proposal seeks to fix what he describes as the core antitrust issue in the case: "the extent to which Microsoft is able to leverage its Windows monopoly to give its own products an artificial advantage."

Still, this emerging view of the government's proposal -- that it will create a strong applications company but a seriously enfeebled operating-system provider -- is in sharp contrast to the analysis heard last month, when the government first unveiled its plan. At the time, many people believed the dismembering would simply create two new monopolies. The new analysis comes from more careful study of some of the plan's less-noticed features.

Critics say the plan divides up Microsoft in a way that will unduly benefit its competitors -- and make for less competition in a key market. Specifically, they object to the way company products aimed at the high-end software market -- including database products increasingly used by many corporations and its suite of tools for developers -- will be transferred to the applications company rather than the operating-system company.

That would leave the operating-system company without many of the myriad support products -- such as "compiler" programs used in the software-creation process -- that most people in the computer industry take for granted. The operating-system company could license the products back from the application company, but on the same terms as anyone else. It could also build its own products from scratch.

Bjarne Stroustrup, the AT&T Labs researcher who created the C++ programming language, says that putting the Windows-development products in with an applications company might result in those products being translated to run on many different operating systems besides Windows.

But he says that might come at a stiff price: the slighting of high-end software development. "If you put languages and fundamental tools in a company with an emphasis on consumer software, solid support for more demanding systems-building products would be slim," Stroustrup says. "Most internal pressure would be for better support of consumer applications."

The operating-system company would be separated from products like database offerings that are making the Windows "platform" increasingly competitive with Sun Microsystems Inc. and Oracle Corp. in the high-end corporate-software market. While Microsoft was found to be a predatory monopolist in the market for Internet browsers, in some other markets it tends to be pro-competitive. In those areas, it brings about lower prices because of its basic business plan, which emphasizes mass-produced software sold to millions of users, says Betsy Burton, an analyst with the Gartner Group.

What's more, the ruling would force Microsoft to go against an industry trend: Most of Microsoft's competitors in the high-end market are melding their products together to gain reliability and higher performance, while Microsoft would be forced to do the opposite. Sun, for example, says on its Web site that it is in the midst of a "big bet" on developing "an integrated hardware and software stack" in which the "microprocessors, storage, system software, and middleware [are] seamlessly integrated."

Another issue is the "middleware" that the operating-system company would not be able to add to its products, without restrictions, for at least three years. "Middleware" commonly describes specialized software that provides a sort of "plumbing" that lets, say, a database program connect with an accounting program. The government's definition of middleware is more sweeping and includes everything from "multimedia viewing software" to Microsoft's Office product.

The operating-system company could add middleware to Windows if it also agreed to provide versions of the product without the middleware code. And it would have to offer computer makers these stripped-down versions at a discount equal to the size of the middleware, in bytes of code, divided by the overall size of the rest of the operating system. Microsoft officials privately scoff at this part of the proposal as "software pricing by the pound." They also say that Microsoft competitors would be able to go to court to challenge every advance in Windows as illegal middleware.

Some outsiders say there is reason for the concern. "Operating systems aren't static entities. They evolve over time," says Anthony Joseph, who teaches the subject at the University of California, Berkeley. Software features considered peripheral a few years ago might now be considered core parts of an operating system. "By picking a static definition, you can hinder development," he says.

Of course, many people say reports of the impending death of the Windows operating-system company are premature.

Dan Kusnetzky, vice president for systems-software research at International Data Corp., says Windows has built up such a huge installed base of users that it will continue to generate big profits for years to come, regardless of any new business rules.

"Just because there are some restrictions on how they sell the product doesn't mean demand will change," he says. "It's an annuity business. Microsoft could live quite happily just with people upgrading machines and buying new machines for newcomers to the organization." It sounds so simple and symmetrical: Split Microsoft Corp. into two equal companies, one selling the Windows operating system and the other, Microsoft's popular Office suite of word-processing, spreadsheet and other "applications" programs.

That's the plan put forward by the Justice Department in the lengthy antitrust trial now winding up in Washington.

U.S. District Judge Thomas Penfield Jackson, whose earlier rulings against the software company set the stage for the government's proposal, has suggested in comments from the bench that he is sympathetic to a breakup plan and could rule on the matter as early as next week.

But as songwriter Neil Sedaka observed in a different context, breaking up is hard to do. Indeed, a growing group of critics says that the government's breakup plan, far from providing for a tidy divorce, is in fact full of ambiguities and hidden complexities and could set off a chain reaction of unintended consequences.

Among them: a severely weakened Windows operating-system company, far less competition in the high-end market for corporate computer products and far more court supervision of software than the high-tech world has ever before experienced.

Another potential effect: With a breakup forcing top Microsoft executives to pick sides and go to one company or the other, most people are beginning to assume that Bill Gates, Steve Ballmer and other top executives would flock to the applications company, which would have few encumbrances placed on it.

"No one will go to the operating-system company," says Goldman Sachs & Co. analyst Rick Sherlund, because it would be "stripped of everything interesting," with its "opportunities to grow significantly restricted." Sherlund adds that a lack of management talent at the operating-system company would very likely weaken that company over time.

Of course, not everyone thinks the government's plan is flawed, and a long list of prominent business people, economists and policy makers have lined up solidly behind it. Most of them agree with Thomas Lenard, vice president for research at the Progress and Freedom Foundation, a Washington policy group, who says that the proposal seeks to fix what he describes as the core antitrust issue in the case: "the extent to which Microsoft is able to leverage its Windows monopoly to give its own products an artificial advantage."

Still, this emerging view of the government's proposal -- that it will create a strong applications company but a seriously enfeebled operating-system provider -- is in sharp contrast to the analysis heard last month, when the government first unveiled its plan. At the time, many people believed the dismembering would simply create two new monopolies. The new analysis comes from more careful study of some of the plan's less-noticed features.

Critics say the plan divides up Microsoft in a way that will unduly benefit its competitors -- and make for less competition in a key market. Specifically, they object to the way company products aimed at the high-end software market -- including database products increasingly used by many corporations and its suite of tools for developers -- will be transferred to the applications company rather than the operating-system company.

That would leave the operating-system company without many of the myriad support products -- such as "compiler" programs used in the software-creation process -- that most people in the computer industry take for granted. The operating-system company could license the products back from the application company, but on the same terms as anyone else. It could also build its own products from scratch.

Bjarne Stroustrup, the AT&T Labs researcher who created the C++ programming language, says that putting the Windows-development products in with an applications company might result in those products being translated to run on many different operating systems besides Windows.

But he says that might come at a stiff price: the slighting of high-end software development. "If you put languages and fundamental tools in a company with an emphasis on consumer software, solid support for more demanding systems-building products would be slim," Stroustrup says. "Most internal pressure would be for better support of consumer applications."

The operating-system company would be separated from products like database offerings that are making the Windows "platform" increasingly competitive with Sun Microsystems Inc. and Oracle Corp. in the high-end corporate-software market. While Microsoft was found to be a predatory monopolist in the market for Internet browsers, in some other markets it tends to be pro-competitive. In those areas, it brings about lower prices because of its basic business plan, which emphasizes mass-produced software sold to millions of users, says Betsy Burton, an analyst with the Gartner Group.

What's more, the ruling would force Microsoft to go against an industry trend: Most of Microsoft's competitors in the high-end market are melding their products together to gain reliability and higher performance, while Microsoft would be forced to do the opposite. Sun, for example, says on its Web site that it is in the midst of a "big bet" on developing "an integrated hardware and software stack" in which the "microprocessors, storage, system software, and middleware [are] seamlessly integrated."

Another issue is the "middleware" that the operating-system company would not be able to add to its products, without restrictions, for at least three years. "Middleware" commonly describes specialized software that provides a sort of "plumbing" that lets, say, a database program connect with an accounting program. The government's definition of middleware is more sweeping and includes everything from "multimedia viewing software" to Microsoft's Office product.

The operating-system company could add middleware to Windows if it also agreed to provide versions of the product without the middleware code. And it would have to offer computer makers these stripped-down versions at a discount equal to the size of the middleware, in bytes of code, divided by the overall size of the rest of the operating system. Microsoft officials privately scoff at this part of the proposal as "software pricing by the pound." They also say that Microsoft competitors would be able to go to court to challenge every advance in Windows as illegal middleware.

Some outsiders say there is reason for the concern. "Operating systems aren't static entities. They evolve over time," says Anthony Joseph, who teaches the subject at the University of California, Berkeley. Software features considered peripheral a few years ago might now be considered core parts of an operating system. "By picking a static definition, you can hinder development," he says.

Of course, many people say reports of the impending death of the Windows operating-system company are premature.

Dan Kusnetzky, vice president for systems-software research at International Data Corp., says Windows has built up such a huge installed base of users that it will continue to generate big profits for years to come, regardless of any new business rules.

"Just because there are some restrictions on how they sell the product doesn't mean demand will change," he says. "It's an annuity business. Microsoft could live quite happily just with people upgrading machines and buying new machines for newcomers to the organization."

Topics: Microsoft, Enterprise Software, Government, Operating Systems, Software, Windows

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