The Justice Department late Wednesday came out swinging at Microsoft Corp. with a brief rebutting the software giant’s proposed solution to the antitrust suit brought against it by the federal government and more than a dozen states.
In a court filing submitted to U.S. District Judge Thomas Penfield Jackson, the Justice Department and 17 attorneys general defended their proposal to split Microsoft into two distinct companies — one with rights to the Windows operating system and another with rights to everything else, including Microsoft’s lucrative Office applications and Internet Explorer browser.
“The proposed remedy will undo the harm to competition caused by Microsoft’s illegal conduct without creating the costly inefficiencies of more burdensome regulation or as [the government’s] experts explained, risking material harm to Microsoft’s shareholders,” the memo said.
Arguing in favor of the spin-off, the government said:
- Separating of Microsoft’s operating systems and applications businesses will undo the artificial preservation and enhancement of the applications barrier to entry caused by Microsoft’s illegal conduct;
- Separation will reduce Microsoft’s incentive and opportunity to manipulate the boundaries between applications and the operating system in order to prevent the development of cross-platform middleware;
- Separation will permit each business to compete with each other, both through internal development and through alliances; and
- There is no alternative that would restore competitive conditions without significantly greater burdens and potential inefficiencies.
The Justice Department also criticized Microsoft’s proposed solution, saying it did not seriously address the software giant’s anticompetitive practices.
“In proposing a remedy to this Court, (Microsoft) was required to make a proposal that addressed the violations the court found,” the government wrote. “It did nothing of the sort. Instead, it offered a cosmetic remedy that would have virtually no significance: It would neither undo the harm that Microsoft inflicted on competition nor prevent Microsoft from illegally using its monopoly power to inflict harm in the future.”
The brief filed by the Justice Department and the attorneys general was the last written filing before Judge Jackson opens penalty hearings on Wednesday. It was a response to a brief filed by Microsoft last week, proposing several changes to existing business practices, including allowing computer makers to delete the Internet Explorer icon from the Windows desktop and start menu and giving independent software vendors timely access to Windows application programming interfaces (APIs) necessary for writing software for Windows .
But the government argued that Microsoft’s solution missed the point of the sweeping antitrust probe, and did “not address some of the most important violations found by the court.”
“Microsoft focuses on the wrong target; it proceeds as if the issue in the case were whether Microsoft had illegally obtained its monopoly in the operating system market,” the brief said. “In fact, however, the central violation proven at trial and found by this court was that Microsoft illegally maintained its monopoly by obliterating middleware threats posed by Netscape Navigator, Java and Intel’s platform software initiatives and thereby increased entry barriers into the operating system market.”
The brief pointed out that a Sherman Act remedy to anticompetitive practices must serve three goals: ending the illegal conduct, preventing its recurrence, and healing the competitive harm to the marketplace. The government said Microsoft’s solution ignored the last goal and only groped toward the first two.
In addition, the government attempted to refute Mi
crosoft’s claims that breaking the company apart will stifle innovation. To back up its claim that “the story Microsoft now tells of dependency between the operating systems and applications is, at the very least, greatly exaggerated,” the government cited company leaders — including co-founder Bill Gates.
“I gain confidence about a potential reorganization when I see that it makes clear what every group is supposed to do, minimizes the dependencies and overlap between groups, and offers developing employees larger responsibilities,” Gates wrote in a 1996 online article cited by the government’s brief. The government also cited a 1996 book, Microsoft Secrets, by Michael A. Cusumano and Richard W. Selby, which stated that “Bill Gates insisted to us that Microsoft’s ‘dominant organization theme is by products,'” and “Bill Gates explained that the “small business units” system that Microsoft had implemented “makes it hard to share code. But it’s far better to do it that way. If we had tried over the last eight years not to use business units to do our stuff, this thing would break down.””
The government also attempted to counter Microsoft’s contention that “not one of the government’s experts opines that the extreme relief requested by the government will actually result in an immediate increase in competition in the market for ‘Intel-compatible PC operating systems.'”
The government responded that the restructuring is focused on redressing the harm to competition caused by Microsoft’s actions, not to guarantee immediate competition in the operating system arena. “If the latter were the objective, the proper remedy would be a reorganization of Microsoft into multiple PC operating system companies, which would directly and immediately compete with one another,” the brief said.
Instead, the government claimed, the proposed split would increase the likelihood of competition by lowering the barrier to entry that Microsoft raised through use of its applications.
Overall, the government said that “not surprisingly, Microsoft prefers its skeletal and short-term remedy to the transitional conduct remedies proposed by [the government]. But its objections to [the government’s] proposal are unfounded and based almost entirely on tortured readings or mischaracterizations of the language of the proposed remedy.”
In the brief Microsoft filed last week, it insisted that it would require six months to prepare for penalty hearings if Judge Jackson decides to consider breaking the company apart.
The brief scoffs at this, saying that Microsoft’s schedule was merely an attempt to delay a ruling and continue its illegal practices for as long as possible.
“Microsoft says that it needs extensive discovery in order to address [the government’s] proposed remedy,” the brief said. “But there is little in [the government’s] proposal that Microsoft can really say is unexpected. Microsoft has known for several months about [the government’s] interest in structural relief, information disclosure and the other forms of transitional conduct relief included in the proposed remedy; yet it is unable to specify any facts about which it needs discovery, from whom it could discover those facts or why it needs such discovery.”
