NEW YORK (CNNfn) - Shares of Microsoft Corp. could be in for a rocky ride on Monday, following Friday's preliminary finding that the world's largest software maker harmed consumers by using its stranglehold over the personal computer operating system market to squash competitors.
Industry analysts that follow the Redmond, Wash.-based company say the decision, handed down late Friday by U.S. District Judge Thomas Penfield Jackson, was so damaging, and so one-sided, that it could hang over the company's stock price for months.
"The tone of these findings was far more negative than I ever expected," said Bill Epifanio of J.P. Morgan.
And, because Microsoft is now a member of the Dow Jones industrials, it could have implications for the broader market as well.
On Friday, Microsoft shares fell 5 percent to 87-1/16 in after-hours trade, and analysts expect another 5 to 10 percent drop when trading resumes on Monday.
As for the broader market, the early indications Sunday pointed to a lower opening on Monday. As of 7 p.m. ET, the S&P500 futures on the Globex were down almost 10 points.
Click here for an updated Globex quote.
Rick Sherlund, an analyst for Goldman Sachs, said the ruling was an "ominous" turn of events that will darken the cloud of uncertainty over the company, leading to renewed speculation about its fate at least until Jackson's final decision and order, expected in February or March.
A rout against Microsoft
"It was very clearly a rout against Microsoft," he said. "His language was harsh, and his conclusions were one-sided."
In his findings of fact, Jackson said Microsoft (MSFT), which holds more than 90 percent of the market share for PC operating systems, caused "consumer harm by distorting competition."
"Three main facts indicate that Microsoft enjoys monopoly power," Jackson wrote. "First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.
"Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft's core products," Jackson added.
"The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft's self-interest."
Trustbusters in the driver's seat
Experts said the strongly-worded finding is likely to encourage state and antitrust regulators to push for dramatic changes in the way Microsoft does business, making a settlement less likely than if the judge had ruled in the company's favor in even a few of the main findings.
"The terms under which the government will feel like settling this case, given the perception that they have such a sweeping victory here, are likely to be so powerful and onerous that it's hard to imagine Microsoft accepting them," said William Kovasic, Law Professor, George Washington University.
On Sunday, the government's top antitrust enforcer, Assistant Attorney General Joel Klein, told ABC's "This Week" the government is "looking at a full range of remedies" to find the appropriate punishment. And, while he indicated the government is open to a settlement, he said any deal with Microsoft would have to be in the best interests of consumers, a sign that the Justice Department would be looking for significant concessions from Microsoft.
"We are looking at the range of sanctions; talking to people in the industry, people who work with Microsoft; people who manufacture computers and we're doing an analysis to make sure that we have a remedy that will promote competition, assure innovation and promote consumer choice," Klein said.
Asked if breaking up Microsoft is among them, Klein told Fox News: "That is in the range, but ... it is premature for us now to get ahead of the story."
Government not seeking fines
One penalty that he appeared to rule out is a fine.
"Let me make clear we are not looking for any financial penalties," Klein said on CNN. "We're concerned with competition."
Microsoft's chief operating officer, Bob Herbold, said on Sunday television news shows that "there's nothing we'd like more than to settle this case."
Meanwhile Microsoft Chairman Bill Gates, in a full-page advertisement published in the Washington Post and addressed to the company's customers, partners and shareholders, said the company is committed to resolving the issue but he also said Microsoft is fighting a bigger battle - specifically, the company's right to change or improve its products without government intervention.
"Microsoft is committed to resolving this matter in a fair and responsible manner," he wrote, "while ensuring that the fundamental principles of consumer benefit and innovation are protected."
CNNfn poll shows little support for Microsoft
But Gates' comments appeared to be falling on deaf ears with consumers, according to a CNNfn.com poll of online readers conducted over the weekend.
More than 80 percent of the more than 25,000 people who responded to the poll said they agreed with Judge Jackson's findings and more than a third said the company should be broken up.
Click here to see the poll results
Microsoft lawyers will continue to argue in court that the company has not violated antitrust laws, seizing on the few paragraphs of Jackson's opinion that supported its defense, including a finding that its investments speeded development of the Internet and made Web-browsing easier for consumers.
But investors now can safely assume the final decision in the case will back the government, adding at least a long-term element of risk in the stock.
Investors who can tolerate that risk might elect to buy Microsoft when the stock dips, reasoning that any court-imposed remedy, no matter how harmful to the company's competitive position, will be postponed until after all appeals are exhausted, which easily could be 2001.
"This is truly the early innings of a long ballgame," Epifanio said.
Bill Whitlow, a Safeco Corp. mutual fund manager, said Jackson's ruling does little to change the prospects of a company that has been under a regulatory microscope for years.
"The one thing that does change is that the odds of a settlement in the case go down," he said.
He argued that even if Microsoft is broken up, as some of its rivals have proposed, overall shareholder value would rise.
Breakup could be 'a disaster'
Epifanio disagreed, saying the most widely discussed breakup scenario, splitting Microsoft into three companies for operating systems, applications and Internet operations, would eliminate technical synergies and cross-platform bundling that have helped propel its bottom-line growth.
A more radical proposal to split the company into three or four identical "baby Bills" would be "disaster -- purely disaster," Epifanio said.
"Nobody even knows if four Microsofts could survive," he said.
That leaves the more likely possibility that a court will impose remedies changing the way Microsoft behaves toward computer makers and other software companies. But in the rapidly evolving computer industry it becomes nearly impossible to calculate how such changes will affect Microsoft after a lengthy appeals process.
"Once they've exhausted the appeals process the industry is going to look a lot different than it does now and certainly different than it did when Microsoft committed these acts," Whitlow said.
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