Does a breakup make sense ?

Everyone knew that the government had mounted a strong case in U.S. vs. Microsoft. But nobody expect a complete rout.

Yet, when U.S. District Judge Thomas P. Jackson released his finding of facts on Nov. 5, he handed state and federal prosecutors an unambiguous triumph. Declaring that Microsoft routinely used its monopoly power to crush competitors, he portrayed the software giant as nothing less than a social menace.

Jackson s fact-findings were so critical of the company that they ve raised the stakes in this battle: Suddenly, the breakup of Microsoft is a real possibility. If you had asked me how likely a breakup of Microsoft was six months ago, I would have said 10%, says Robert E. Litan, an antitrust expert at the Brookings Institution in Washington, D.C. Now I say it s 50%.

The last time the government broke up a major company was in1982, when it worked with a cooperative AT&T to disband the old Bell system. That breakup is generally considered a success. But many Silicon Valley competitors are reluctant to back divestiture. Breaking them up is not the right answer, says Benchmark Capital partner David Beirne, a key backer of Red Hat Software Inc., which makes a Linux, based operating system that competes with Windows.

Microsoft president Steven A. Ballmer, in an interview with BUSINESS WEEK, also insisted that the company would be happy to resolve this as quickly as possible. But, he added, We aren t going to compromise on the principle of the freedom to innovate. In other words, the Feds can t tell Microsoft what to put in its products.

The main argument for divestiture is that Microsoft has so much power, and is so innately aggressive, that nothing else will keep the company from unfairly preying on rivals.

If the government tries to break Microsoft up, there are four structural remedies.

Horizontal breakup : Breaking Microsoft into three companies---one with operating systems, another with applications software, and a third with the Microsoft Internet businesses---would stop Microsoft from using its Window monopoly as leverage in the other two markets. But it falls short of the key goal of any remedy: To create competition in the market for operating systems.

Vertical breakup : This is the Baby Bills scenario. Microsoft would be divided in three with each company getting a third of the assets in every line of business. This approach would be a logistical nightmare. Worse, it could fracture the Windows standard. Critics fear that this would ultimately increase prices for consumers.

A Windows auction : By getting a major computer company such as Sun Microsystems or IBM to buy a license to Windows, this would create a new competitor in the operating systems market. But it is unlikely that any company would want to take on the challenge, which would require huge investments in product upgrades to keep up with Microsoft. Also, it could splinter Windows.

Open source licensing : Microsoft would be forced to publish the source code to Windows, though other companies could not use it to create clones. Software companies that create applications that run on Windows could put them on an equal footing with Microsoft s own applications writers. A problem: Pirates might make illegal copies of Windows.

In my opinion, horizontal breakup is the best solution. The government should choose this solution. Breaking Microsoft into three companies. Operating systems, applications software, and Microsoft Internet businesses. That could stop Microsoft from using its Windows monopoly as leverage in the other two markets. Create competition in the market for operating systems. What should the government do? The bottom line is that don t let Microsoft off too easily.