Analysis: 'Baby Bills' solution has potential

It's war. That is the reality of the breakdown of talks between Microsoft and the government at the weekend. It's now certain that the world's largest software company will face the biggest anti-trust suit that America has seen since the Bell Telephone company was broken up into the 'Baby Bells'.

The implications will be far reaching for the American economy and the global IT scene. Brokers are already seeing a fall in tech stocks with negative reaction from the financial community largely down to uncertainty. The anti-trust procedure in the US courts is ponderous at best, and will consume large amounts of senior management's energy at a time when the competitive landscape in which Microsoft operates is already tougher than the Seattle crowd is used to. But what will be the result of this anti-trust action? Do the courts really have the stomach for an all out break-up of Microsoft - the so-called ‘baby Bills' solution. If they do - the question becomes how many parts will Microsoft be broken into?

Anywhere between two and ten is possible. The first move would be to separate the operating system from the applications division, but it is unlikely the government would leave it there. These two divisions would still wield enormous power and would, arguably, be strengthened, not hindered by this new arrangement. So expect a bigger shake up than this - probably CE, Windows, and NT in separate divisions and also some kind of break up of the applications side. Obviously the browser business will be separated from the OS, since this is how the whole row got going but what is not at all clear is how the browser is going to be separated from the applications, and whether or not the government feels it needs to separate Excel from Word and other applications from each other.

Gary Barnett, analyst at Ovum reckons all the plumbing is in place but says a break-up would be fraught with risks including a cut in R&D. "If Microsoft was split into different groups it would have to share out its R&D spend which could be bad for consumers," he says.

Commentators that view this as a desktop-only dispute that will not impact on the wider world of IT in the enterprise and beyond are underestimating the impact. It could be an enormous blow to Wintel - with all the indications being that if it does come down to an all out attack on Microsoft, that Intel will also be drawn in and may face a DoJ suit simultaneously.

With the whole basis of the Wintel hegemony being brought into question, we start to see the sea change in the world of hardware and software. Whether this leads to a healthier more competitive environment for industry and consumer remains to be seen. There are those that say it never did IBM any harm in the long run, and it has had a competitive and positive effect on the baby Bells and telecommunications framework generally in the US.

Barnett sees the obvious benefit of splitting Microsoft into an applications division and an operating system division lying in the highly unlikely scenario where all companies have equal access to Windows' source code. "It would have massive benefits for the consumer, says Barnett, "but I have little confidence that it will ever happen."

But if, and it's a big if, the baby Bills solution is to work in the software industry, the legislators had better be sure that they don't hamper America's leading corporation at a time when the world market for IT products is only now starting to open up in a number of key territories.

ZDNet will be following developments closely - so stay tuned.