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Microsoft: Reply in two days
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May 29, 2000: 1:18 p.m. ET
Software maker readies response to government's plan for a two-way split
By Staff Writer David Kleinbard
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NEW YORK (CNNfn) - Microsoft Corp. has until Wednesday to present a response to the government's final plan to split up the embattled software maker.
The Redmond, Wash.-based company will this week respond to the Justice Department's revised proposal, submitted Friday, which mirrored its original request that Microsoft be split into two companies, instead of a three-way split that some trade groups had recommended.
Under the revised proposal filed by the Justice Department and 19 states, Microsoft would be divided into two separate companies - one for its Windows operating system and the other for its remaining businesses, including applications software such as Microsoft Office.
Representatives from Microsoft's offices, which were closed on Monday in observance of the Memorial Day holiday, were not immediately available to discuss the status of its response.
Some industry trade groups had proposed that U.S. District Court Judge Thomas Penfield Jackson break the company into three pieces, one for Windows, one for the applications business and a third for Microsoft's Internet-related properties. 
However, government attorneys said splitting Microsoft into two pieces would be less time consuming and disruptive than a three-way split, while still providing an incentive for the newly formed applications company to develop versions of its Office for use with computers running operating systems other than Microsoft's Windows.
A breakup of Microsoft would be the harshest antitrust penalty leveled against a U.S. corporation since AT&T agreed to spin off its regional "baby bells" in the early 1980's.
The Justice Department's proposed split is designed to prevent Microsoft from using its monopoly power over PC operating systems to crush competition from "middleware," such as Netscape's Navigator browser and Sun's Java technology. Middleware is software that operates between an operating system and another type of software application.
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CNNfn's Steve Young explains the Microsoft case.
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Ken Wasch, president of the Software and Information Industry Association, one of the groups that had proposed a three-way split, praised the government's efforts during the landmark trial but added it still favored a three-way split.
"Justice has done outstanding work," Wasch said. "Nevertheless, we continue to believe that a three-way split rather than a two-way split would provide additional assurance that the competitive playing field would indeed be leveled."
More time for appeal
The government extended the amount of time before the final judgment would take effect to 90 days from 30 days to give Microsoft more time to file an appeal.
In response to a suggestion from Judge Jackson, the government defined the word "Microsoft" to include the company's officers, directors, employees, and assignees. The government also increased the amount of stock one person would be allowed to hold in both parts of a split Microsoft to 5 percent from 3 percent, partly to accommodate Microsoft co-founder Paul Allen, who is not affiliated with the company but holds substantial amounts of its stock.
The government added a sentence to clarify that its proposal would not prohibit the newly formed operating systems company and the applications company from licensing technologies to one another on a non-discriminatory basis if those technologies are not offered as separate products.
Harsh words for Microsoft
In its revised filing, the Justice Department attacked the procedures Microsoft used to claim that it did not have an adequate opportunity to be heard on the proposed remedies. On Wednesday, Microsoft offered to have top executives, including Chairman Bill Gates, testify on the company's behalf about the proposed remedies. However, the Justice Department described the offer as nothing more than a "cynical ploy." 
"Its eleventh-hour submission appears to be just a cynical ploy calculated to raise diversionary issues on appeal," the Justice Department said.
"Microsoft has known for months plaintiffs' interests in remedies along the lines they proposed on April 28th and has had ample opportunity since the filing of the proposed final judgment to set forth its substantive and procedural concerns."
Microsoft reiterated that a break up would have deep repercussions throughout the industry.
"The government's proposal does not change the fact that breaking Microsoft up will be bad for consumers, bad for the high-tech industry and bad for the economy," Microsoft spokesman Jim Cullinan said.
Separately, the Justice Department attacked Microsoft's claim that expert testimony from one of the government's witnesses was wrong. Microsoft's attorneys said during Wednesday's hearing that Rebecca Henderson, a computer expert from MIT used by the government, made an incorrect statement about Windows 2000's ability to log into a Unix server. The government responded in its revised filing that Microsoft had quoted only a fragment of Henderson's statement, and if the company had quoted the entire sentence, her statement was correct.
The Justice Department called the allegation that Henderson's testimony was inaccurate "remarkable, both because it is the only fact that Microsoft has sought to controvert and because the allegation is so plainly wrong and, indeed, disingenuous."
Supreme Court looms
Microsoft has until the close of business Wednesday to respond to the revised filing. The judge would be free to issue a final ruling at any point after receiving Microsoft's comments.
Should Judge Jackson order a breakup, government officials will ask for a stay to allow Microsoft to appeal. Following the filing of an appeal, the government would then have 15 days to choose whether to bypass the appeals court and seek immediate review by the U.S. Supreme Court, a Justice Department spokeswoman said. Antitrust experts expect the government to try to obtain an immediate review by the Supreme Court because it would speed the process and because the appeals court has favored Microsoft in previous antitrust actions against the company.
Microsoft postpones conference
In a separate development, Microsoft said Friday that it would postpone its much-awaited Forum 2000 conference for analysts and the press to June 22 from June 1. Microsoft was slated to use this forum to provide an update on its "vision, strategy, and technology roadmap," including its plans for so-called Next Generation Windows Services. 
The software giant said it delayed the conference because there are "strong indications" that the court may enter its final decree next week, an event Microsoft feels would "distract attention and focus from of our event next Thursday."
In Friday's filing, the government also retained a series of restrictions on Microsoft's business conduct that would remain in place for three years, including:
· Prohibiting Microsoft from harming or threatening computer makers for supporting products that compete with Microsoft's
· Requiring Microsoft to license the Windows operating system to PC makers on uniform terms set in a published schedule
· Barring Microsoft from restricting the way a computer maker sets up a machine's boot sequence, Internet connection wizard, or start page
· Forcing Microsoft to disclose programming tools called APIs to other software makers and PC vendors
· Requiring Microsoft to set up a "secure facility" where representatives from PC makers and software companies could study the source code for Microsoft platform software to enable their products to interoperate with Microsoft's
Microsoft finds the secure facility provision to be especially odious, claiming that it amounts to giving Microsoft's valuable intellectual property to competitors for free.
Shares of Microsoft (MSFT: Research, Estimates) closed down 1/16 to 61-7/16 on Friday. 
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