(FORTUNE Magazine) – Say the government wins. Then what? What the heck should we do with Microsoft?

I haven't been following the case in detail. I've been treating it more like one of those 3-D eye puzzles, which you can solve only by standing back ten feet and making an effort to let everything go fuzzy. It's my way of keeping some perspective. The one salient fact that keeps popping out when you follow the trial this way is that Bill Gates acts in his videotaped deposition as if he were a teenager with something to hide from an overzealous parent. To my eyes, the CEO appears to think that he runs a monopoly but just isn't willing to admit it. I know I'm not the only person with that perception, and that's a problem for Mr. Gates and his case. Right now, it's looking as though the government actually has a chance to win its case against Microsoft. The government may not serve the company up like a Thanksgiving turkey on a silver platter, but it's got a good chance at least of getting the judge to slap Microsoft's wrist.

Not surprisingly, predicting Microsoft's future has become Silicon Valley's favorite betting game: Everyone has an opinion about what we should do. The classic opinion is that the government should break the company up into its components: system software (Windows 95, NT, CE), applications (Microsoft Office, Money, Outlook), media (Microsoft Network, Expedia, Carpoint), and so forth. There was a time when this might have been an interesting way to respond to the Microsoft monopoly--but that time is long gone.

The rationale for breaking Microsoft up is that this would prevent the company from using market power in one arena to win market power in another. Frustrated critics look at the company's effective monopolies in operating systems and productivity applications and assume that other tech sectors will fall to Microsoft, like so many dominoes in a line. But they're ignoring history.

Microsoft didn't develop its extraordinary positions by exploiting monopoly power. Its market power in operating systems--its initial monopoly--resulted first from the luck of the draw, when it became the favored supplier of the operating system for the original IBM PC in 1981. It then extended that position by fighting with incredible tenacity and insight to migrate users from DOS to Windows 95 over the next 14 years. (IBM's OS/2 never had a chance, regardless of Microsoft's behavior--it was too big and klunky to ever succeed as a PC operating system.) Then there's Microsoft's effective monopoly in productivity applications software. (Sure, there are still a few diehards out there who use the WordPerfect word processor or the Lotus 1-2-3 spreadsheet, but Microsoft now sells more than 80% of the products in both categories. It is in the process of winning a similar share in personal information managers, as it bundles Microsoft Outlook with anything it can think of.)

Microsoft originally won its market power in applications software by building better products and by being a much smarter marketer than its competitors--not by exploiting its Windows monopoly. Look at how Microsoft made Excel the dominant spreadsheet, for example: The company designed it originally for the Macintosh, which had no good spreadsheet at the time. Only after that did it set out to make the best spreadsheet for Windows. Lotus or Wordperfect could have made the same decisions. They didn't.

Breaking up the company might hinder Microsoft's effort to become a media giant. But it might not--as we've seen in operating systems and desktop applications, Microsoft eventually gets around to making smart decisions. What the breakup definitely would not do is renew competition in either operating systems or applications. A separate Microsoft Applications company would still have a monopoly and the power to build on that position. A separate Microsoft Operating Systems company would also have a monopoly.

Another favorite remedy for the Microsoft problem is to create a Department of Microsoft, which would be charged with regulating the company's behavior to ensure that it competes fairly. Obviously, the government would call it something else, like the Department of Technical Standards Development, or some such. But this government body would decide what interfaces were standard (Windows) and therefore could not be governed by a single company (Microsoft). The idea is that such an agency could have detected that Netscape Navigator was indeed an innovative product, and could have acted to prevent Microsoft from building a browser into its operating system to squash Navigator.

Most people recognize the problem with this approach: Bureaucrats paid on a General Services schedule have no incentive to make quick decisions about a fast-moving technology. This would turn Windows into an even worse product in the future, which is hard to contemplate since it's bad enough as is.

There's even been talk about levying a hefty fine on Microsoft. The idea is that if Microsoft is really found to have acted unfairly as a monopoly, a fine could redress the costs of such actions. Get real. Microsoft has more than $17 billion in cash, and no matter how much money it loses on Microsoft Network or its fancy Websites like Expedia and Carpoint, it keeps adding more to that kitty. So what kind of fine would you levy and how the heck would you justify it? Say you could rationally justify a fine of $5 billion, an amount big enough to pay off some countries' national debt. Microsoft would still have $12 billion.

My favorite remedy is much simpler. And it deals with the real problem.

I say, Let's take away the intellectual-property protection Microsoft enjoys on its monopoly products. Companies (and individuals) are allowed to own certain intellectual property--copyrights and patents--exclusively for a period of time. The idea is that this will provide these companies or individuals with the freedom to develop new ideas and be creative.

What I propose is that government take away this exclusivity in cases when it no longer provides an incentive for innovation, when instead it becomes a way to prevent competition. It's clear that we'd all be better off with other companies' providing versions of Windows that work with all the software out there. The competition would keep Microsoft honest, and we'd get a better product as a result.

So let's take away Microsoft's legal protections for Windows. Going this route would probably earn us some kind of government agency (perhaps the Software Competition Commission or even a new department of the Patent and Trademark Office), whose charge would be to determine when a company has a monopoly product, and to then end that company's intellectual-property protection. That would be the full extent of the remedy. The market would take over from there, and we might, at last, get real competition in the software industry. We'd also likely get the better products that tend to accompany real competition. And wouldn't that be a shocker, after years and years of the Microsoft hegemony?

STEWART ALSOP is a partner with New Enterprise Associates, a venture capital firm. Except as noted, neither he nor his partnership has a financial interest in the companies mentioned. Alsop may be reached at stewart_alsop@fortunemail.com; the column may be bookmarked at www.fortune.com/technology/alsop/.