Calling In Experts to Fix Microsoft if It's Broken

February 16, 1999

NEWS ANALYSIS

Calling In Experts to Fix Microsoft if It's Broken

By STEVE LOHR
or four months, in a Federal courtroom in Washington, the Government has relentlessly portrayed the Microsoft Corporation as a bullying monopolist. Now, as the antitrust trial enters the home stretch, the Government is moving beyond accusations to try to figure out how to curb the software giant without crippling it.
The Justice Department and 19 states suing Microsoft -- advised by a small group of economists, business school and law professors -- are scrambling to devise a set of remedial steps to recommend to the court if the Government wins the case. Most legal experts who have followed the trial expect that Microsoft will be found to have violated antitrust laws.

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No decision has been reached on a preferred remedy, according to people involved in the effort. But the suggested steps, they say, fall broadly into two groups. One set of advisers is pushing for more radical, "structural" remedies -- breaking up Microsoft or forcing it to license the software code for its industry-standard Windows operating system.
Another group favors "behavioral" remedies -- prohibiting Microsoft from writing exclusive contracts, requiring it to publicly disclose the software specifications for Windows, forcing it to publish a Windows pricing list for major manufacturers, and requiring antitrust training for all Microsoft managers.
Both approaches are problematic. A sweeping structural remedy is risky because it could reshuffle one of the nation's crucial high-technology industries with uncertain results. Detailed behavioral remedies could mire the Government and the courts in a kind of permanent regulatory oversight of Microsoft.
The remedy phase of legal proceedings, which will occur after trial if the Government wins, is when the key public policy issues in the Microsoft case will be addressed. And it represents a great challenge for the Government.
"Historically, the Government has spent its time on showing bad conduct on the part of the dominant firm in antitrust cases, and far too little attention has been paid to what should be done about it," said William Kovacic, a George Washington University Law School professor.
To aid in the effort, the Justice Department is tapping outside advisers including Timothy Bresnahan, a Stanford University economist and co-chairman of Stanford's Computer Industry Project. The state attorneys general also have consultants including Herbert Hovenkamp, an antitrust expert and law professor at the University of Iowa. In the last few weeks, several advisers have been asked to submit memos with recommendations to Washington.
But these suggestions are only a set of options for the consideration of Joel I. Klein, Assistant Attorney General in charge of the Justice Department's antitrust division, and his boss, Attorney General Janet Reno. Because any steps that would seriously affect Microsoft amount to a major economic policy move, it would be expected that the White House and Congressional leaders would be consulted as well.
But ultimately, it would be up to the courts to decide what remedy, if any, should be imposed. And since any ruling by the Federal District Court will be appealed, whatever remedy is eventually approved may not go into effect for two years or more. That means that the Government is engaged in setting ground rules for the future instead of restoring competition in the Internet browser market, the main focus of the suit filed last May.
Microsoft dismisses the debate over remedies. "It's all academic because Microsoft will win the case when all is said and done," said Charles F. Rule, a former senior Justice Department official who is a consultant to the software giant. "And this talk of structural remedies is the antitrust equivalent of nuclear winter -- just bizarre."
The most drastic structural remedy, of course, would be to break up Microsoft. One approach would be to slice it up into one company that has the Windows operating system and another that has other software applications, like the Microsoft Office suite of word processing, spreadsheet and data base programs.
Another breakup proposal is to carve Microsoft into two to five identical companies, each with the programming code for all Microsoft products. The resulting companies -- the "Baby Bills," after Microsoft's chairman, William H. Gates, and a pun on the Baby Bells formed in the split-up of AT&T -- would then compete with each other.

"You can break up the monopoly without having to break up the company."

Herbert Hovenkamp, law professor at the University of Iowa

This approach has been promoted by some of Microsoft's harshest critics -- for months by Gary L. Reback, a former legal adviser to the rival Netscape Communications Corporation, and more recently by Robert H. Bork, the former Federal judge, who is a consultant to Netscape.
The courts have occasionally endorsed breakup remedies -- notably, in the cases of Standard Oil in 1911 and AT&T in 1984. But these have been the exception. Generally, the courts have sided with Judge Charles Wyzanski, who in 1954 wrote in a landmark case, United States v. United Shoe Machinery: "Judges in prescribing remedies have known their own limitations. They do not ex officio have economic or political training. Their prophecies as to the economic future are not guided by unusually subtle judgment."
A more modest structural remedy would be to force Microsoft to auction off its Windows programming code, along with the Windows brand name, to two to four companies.
"You can break up the monopoly without having to break up the company," Professor Hovenkamp said.
The purchasing companies -- perhaps I.B.M., Sun Microsystems and others -- would then compete with Microsoft in the operating systems business, restraining prices and fostering innovation, Mr. Hovenkamp suggested.
But the danger of that approach, critics say, is that it runs the risk of having incompatible operating systems. There is an enormous benefit to consumers, they say, of having one industry-standard operating system.
Windows is a natural monopoly, so let it be, this argument goes. Instead, the focus should be on changing Microsoft's behavior so that it cannot use its operating-systems monopoly to thwart competition in new areas -- and browsing software has been just one example of this broader consideration.
"There are ways to make it more difficult for Microsoft to leverage its Windows monopoly without crippling Microsoft," said Michael A. Cusumano, a professor at the Massachusetts Institute of Technology's Sloan School of Management.
A suggested behavioral remedy is to force Microsoft to publish at one time the software hooks, or application program interfaces, to which rival software makers must write programs if they are to run on Windows. This would address the accussation, which Microsoft denies, that the company releases this software information in stages, with favored companies getting special treatment, and that it keeps some critical knowledge of the operating system to itself.
Another suggested remedy is to force Microsoft to publish a most-favored-customer pricing list for Windows -- the standard price available to all the major PC makers. This would prevent Microsoft from using Windows pricing to punish manufacturers who do not favor Microsoft products, a charge that Microsoft also disputes.

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"You can break up the monopoly without having to break up the company."
Herbert Hovenkamp, law professor at the University of Iowa