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Breakup may create two monopolies, analysts say
Thursday, May 4, 2000
By PETER J. HOWE
If the Justice Department prevails in its drive to break Microsoft Corp. in half -- and that's still a big if -- many analysts wonder whether the breakup would simply create two new monopolies and more headaches for consumers.
Government antitrust regulators last week urged that Microsoft be split into two companies, one focused on the Windows operating systems for personal computers, the other on "applications" such as e-mail and document production that run on Windows. Months or years of appeals seem likely.
The proposed remedy is roughly analogous to breaking an automotive monopoly into two companies that make engines and vehicles. Then rival engine companies would have a better shot at selling
their products, and automakers would no longer be beholden to using one type of engine.
Splitting Microsoft in a similar way would create "two strong, robust, viable competitors," said the country's top antitrust prosecutor, Joel Klein. In his ideal scenario, both would be open to partnerships with technology developers overwhelmed by Microsoft in the past five years. And they might even invade each other's turf in a GM-vs.-Ford consumer war.
But Klein faces some severe doubters.
"It really only replaces one monopoly with two," said economist Frederic Scherer, a public policy professor at Harvard University's John F. Kennedy School of Government, who with three colleagues filed court papers urging that Microsoft's operating systems division be broken into three companies.
Given Microsoft's domination of the applications market through products such as the Office suite of e-mail, word processing and graphic presentation software, "you're essentially taking one integrated monopoly and breaking it into two vertically separated near-monopolies," Scherer said.
And David Morrison, head of Lexington-based Mercer Management Consulting's MercerDigital Internet practice, said the typical computer user probably would be unhappy.
Though Microsoft was found to have used illegal tactics to maintain its monopoly in the operating system market, Morrison said: "For most people, the de facto standardization has been wonderful. Application developers love the fact that Windows is a dominant, pervasive operating system.
"For the average person, this monopoly has been a good thing, and I don't think society has suffered," Morrison said. "The cost of having different operating systems out there, if it happened, that are all incompatible, the headaches and friction cost of that would be so overwhelming it wipes out the fact that Microsoft makes an extra $5 or $10" in monopolist profits on every copy of Windows it sells.
However, David Smith, an analyst with The Gartner Group, said that while "you may be theoretically turning it into two different monopolies, you're turning it into two monopolies that can't leverage each other."
"Is it going to miraculously revive competition in the industry? No. Is it going to increase competition somewhat in some areas the two companies might share? Somewhat," Smith said.
The government's proposed split, which could well be heavily reworked by Judge Thomas Penfield Jackson or the Supreme Court, would create two new companies that would be carefully monitored to prevent collusion and forbidden from recombining for 10 years.
The operating systems company would control Windows and its successors and products developed for handheld wireless devices, Internet servers and television set-top boxes. It would have a license to keep selling the Internet Explorer code but be forced to develop a new Web browser in the future.
The applications company would control a vast range of programs that are now made to run on the Windows operating system, including Microsoft Office, Internet Explorer, the Net Meeting video-conferencing product and the Outlook e-mail product as well as "streaming video" and voice recognition software.
The second company would also take control of the MSN Web portal, the Hotmail free e-mail service, Slate magazine, the MSNBC television network, and the Expedia travel network, and Microsoft's huge stable of joint ventures with cable TV companies, hardware makers and software makers.
The company's $21 billion cash pile would be split between them, and Microsoft Chairman Bill Gates and President Steve Ballmer would be forced to take stock in only one of the companies.
The government's plan assumes the new applications company would welcome developing versions of Microsoft Office for rival
systems such as Linux or Unix-type platforms such as Solaris from
Sun Microsystems, which are used to run computer servers and large-organization computer networks.
Likewise, once Windows had no investment in Microsoft software, the new operating systems company might be far more eager to support products such as IBM's Lotus Notes or the WordPerfect word processing systems now sold by Corel.
But just as more than half of Baby Bell customers kept AT&T for their long-distance phone service for years after the 1984 breakup of AT&T, Microsoft's dominance of the market might lead millions of people to prefer using versions of Office that run on Windows, assuming they would work better.
Given that people at different companies and organizations want to be able to exchange documents and Powerpoint presentations,
the popularity of Microsoft Office -- of which more than 100 million
copies are in circulation -- might serve as a force toward re-monopolization.
"The people who develop software would still have a lot of incentive to develop strictly for Windows, because for the foreseeable future, it will still be the dominant system out there," said Charles Hill, an economist at the University of Washington.
The two-part breakup proposal pleased some business executives who had worried that if Microsoft were to be broken into even more pieces, as Harvard's Scherer and others urged, they would have to develop software to run on a Babel of different platforms.
"We'd have to port to every different version of Windows NT, and that's not what we want to do," said Michael Ruettgers, chief executive of EMC Corp., which makes data storage equipment.
Also, given the rapidly evolving nature of the software industry, computer operating systems could be a far less important market
three years from now because more and more people might use so-called dumb boxes that run on software housed within the Internet.
Mercer Consulting's Morrison said that if and when some clearly superior alternative to Microsoft's products emerges, computer users and product developers will migrate to the new alternative because of the desirability of common standards. "We will, over some 36-month period, go from 10-90 to 90-10," if
one strong rival emerges, Morrison said.
Beyond whether a Microsoft bifurcation is good for consumers, another key question is whether it's good for investors, especially given the explosion in stock ownership among Americans. The Microsoft stock meltdown -- its shares have plunged from $119 on New Year's Eve to less than $70 Friday -- has been a major driver of the Nasdaq's woes this spring.
"With more people investing in stocks than ever before, I have yet to see how sparking a devastating stock market loss protects consumers," said Rep. Jennifer Dunn, R-Wash., a leading supporter of Microsoft.
Material from Ross Kerber of the Globe and news services was included in this report.
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