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U.S.: Would A Break-up Of Microsoft Curb Innovation?

Now that a judge has found the Microsoft Corporation guilty of illegal monopolistic practices, the U.S. federal government and 19 American states want the giant software company broken into two parts. They say this will stimulate business competition and technological innovation. Microsoft's founder says a break-up will do the opposite. RFE/RL's Andrew F. Tully reports:

Washington 2 May 2000 (RFE/RL) -- Bill Gates, Microsoft's founder and chairman, says the U.S. government's attempt to break up the company would stifle innovation.

The government contends that Microsoft's own business practices stifle such innovation by limiting competition.

It will be up to Federal District Judge Thomas Penfield Jackson -- and probably the U.S. Supreme Court, eventually -- to decide which view is correct.

Jackson ruled on April 3 that Microsoft is guilty of violating American laws forbidding monopolies. During a long trial, the government -- the U.S. Justice Department and the attorneys general of 19 states -- argued that the company used its dominance of the software market to crush competitors.

A prominent example cited during the trial was that of Netscape Communications Corporation. Its World Wide Web browser, Navigator, was so innovative that it once dominated the Internet market.

Microsoft once had been slow to recognize the importance of the Web. But eventually it decided to create a browser of its own, Internet Explorer. First the company took advantage of its vast wealth to give away Internet Explorer. Then it made it an integral part of its dominant computer operating system, Windows. Therefore, any consumer using Windows would have no need to install another company's browser.

Despite Netscape's initial success selling its browser, the smaller company eventually was forced to give away Navigator to match Microsoft's tactic. But Internet Explorer quickly took over much of Navigator's market share, and the cash-poor Netscape allowed itself to be sold to the giant Internet service provider America Online -- rather than go out of business altogether.

Prosecutors argued during the trial that such tactics discourage not only competition, but also innovation.

On Friday, the U.S. Justice Department and the 19 states issued their recommendation to remedy Microsoft's behavior. They want Microsoft split into two distinct companies. One would be limited to all forms of Windows computer operating systems. The other would be limited to application programs like word processing, spreadsheets and Web browsing.

Under the proposal, ordinary shareholders of Microsoft stock would be issued shares in both companies after the break-up. But Gates and Microsoft's board of directors would be allowed to hold stock in only one of them.

Minutes after the proposal was filed with the court, Microsoft issued a response -- not in the form of a printed document, but a videotape of Gates pleading his case. The Microsoft founder said his company has energized the computer industry, and that to break it up would do the opposite.

"These regulations do not help the software industry in any way. They simply retard the speed at which it's going to move ahead."

It is noteworthy that the government proposal would include the browser software, Internet Explorer, with the company limited to program applications, not the company limited to operating systems. After all, Internet Explorer is now considered part of the Windows operating system.

Joel Klein -- the federal government's leading lawyer in the case against Microsoft -- said this arrangement would force the operating system company to develop a browser to compete with Internet Explorer.

"The operating-system business will receive a license to continue to distribute the existing Internet Explorer code, but it will have to develop its own browser in the future. That browser will compete with Internet Explorer, which will belong to the applications company. The result will be revitalized competition in the browser market."

Klein dismissed Gates' argument that the government's proposed remedy would stifle competition. He noted that two decades ago, the government forced the U.S. telephone monopoly, American Telephone and Telegraph Company, to divide itself into regional systems. Klein said this break-up led to unprecedented technological innovation in telecommunications. He said he expects the same if Microsoft is broken up.

"Let me be clear: This decree will not limit Microsoft's ability to add new features to its products or otherwise to innovate. But by turning loose the power of competition in the operating systems business, this decree will stimulate innovation throughout the software industry -- in operating systems, applications and computing devices."

Robert Crandall is the author of several books on business, technology and government regulation. He agrees with Gates that companies making two related products - known as "vertical integration" -- is beneficial to innovation.

"Vertical integration in rapidly changing industries is often thought to lead to better coordination of investment decisions and therefore more -- greater productivity gains."

But Crandall conceded that there are "potentially off-setting effects." He said if Microsoft could continue to have its operating system and applications divisions collaborate, its competitors might have to make their own operating systems to maximize the performance of their application programs. And that could mean confusing for businesses and personal computer users.

"We do know that vertical integration can lead to greater innovation. What we don't know is whether, in fact, the outcome is likely to lead to a combination of product attributes and prices which are better for the consumer or not."

Microsoft must respond to the government's recommendations by May 10, but the company says it will request an extension to give it time to draft a detailed reply. It also plans to appeal the judge's verdict.

So whatever happens to the world's leading software designer, it will not happen any time soon.