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More of a Ripple Effect Than Shock Wave

THE MICROSOFT BREAKUP RULING | THE OUTLOOK

Company Likely to Maintain Its Market Dominance

June 08, 2000|CHARLES PILLER and JOSEPH MENN and KAREN KAPLAN | TIMES STAFF WRITERS

Even as Microsoft Corp. faces a court-mandated breakup into two companies, the immediate impact of the ruling may be surprisingly slight.

Although the company's power has already declined in a technology world shifting rapidly to Internet-based products, experts believe Microsoft's monopoly power over PC software may ensure its preeminence while years of likely legal appeals are played out.

"The [immediate] effects on everybody will be so negligible that it will be hard to see any difference," said Jeffrey Tarter, editor of industry newsletter Soft-Letter. "The sun will rise in the east, people will continue to buy Microsoft products, and money will keep flowing into Redmond."

Wall Street had already taken into account the inevitability of the breakup ruling, and analysts don't expect dramatic changes in Microsoft's share price, which has lost more than a third of its value this year. Microsoft shares gained 88 cents to close at $70.50 in Nasdaq trading Wednesday, rising as high as $72 in after-hours trading after the judge's decision.

"We think at these levels Microsoft's valuation is very defensible, even if you look at the sum of the parts not being as big as the whole" after a breakup, said Chris Galvin, an analyst with investment bank Chase Hambrecht & Quist in San Francisco.

U.S. District Judge Thomas Penfield Jackson ordered that Microsoft be broken into two companies--a computer operating systems business, which would include its Windows operating systems, and another company with its applications businesses, including the Internet Explorer Web browser.

Jackson also ordered "behavioral remedies" on Microsoft that would begin in 90 days, unless contradicted by another court.

Those provisions would bar Microsoft from threatening or intimidating PC makers--the software giant's most important customers--to deter them from supporting competing products. This could have the effect of creating wider options for PC customers, including a range of choices for operating systems and business productivity applications.

PC makers would also be allowed to customize Windows and Microsoft would be prohibited from using preferential pricing to reward allies or punish more independent companies.

The judge's ruling would further require Microsoft to give competitors the same technical data about the Windows operating system used by Microsoft's own personnel. This move could help other software makers enhance their products for optimum effectiveness in a Windows-based PC.

Some Agreements in Question

The order would prevent Microsoft from binding new "middleware" products--such as e-mail programs, Web browsers and multimedia viewers--to a Windows operating system. The incorporation of its Web browser was a key element of the government's case.

The judgment could also be interpreted to prohibit Microsoft from investing in a company on the condition that it uses Microsoft products.

Last year, Microsoft invested $5 billion in AT&T Corp. in order to get its Windows CE operating system installed on millions of cable set-top boxes deployed by the telecom giant. If Wednesday's judgment stands, that agreement would be unenforceable, according to Chris LeTocq of GartnerGroup in San Jose.

Microsoft invested $150 million in Apple Computer Inc. on the condition that its longtime rival sell Macintosh computers with Microsoft's Internet Explorer browser. Apple would no longer be required to ship iMacs with Explorer, LeTocq said.

Microsoft said it will appeal those remedies and ask the higher court to forestall Jackson's order until its arguments are heard.

Legal experts said judges commonly allow serious punishments in civil cases to be delayed while they consider their merit.

But if the full range of behavioral sanctions are indeed implemented, "they have the potential to do such damage to the company that Microsoft will no longer be Microsoft," said Rob Enderle, an analyst with Giga Information Group in Santa Clara, Calif.

Even if the sanctions are stayed during appeal, years of antitrust problems have already altered the software giant's trajectory.

Love-Hate Relationship With PC Makers

While Microsoft has struggled to build effective Internet appliances based on Windows, top PC makers have shown increasing independence. Most now offer the insurgent Linux operating system--a direct competitor to Windows--as an alternative to Windows.

Computer maker Gateway recently formed an alliance with Microsoft rival America Online to produce Internet appliances based on Linux.

But such moves fall far short of open revolt.

PC makers have "always been of two minds," said Roger Kay, an analyst with International Data Corp. in Framingham, Mass. "They love the status quo and hate the fact that Microsoft has the franchise. It's a humiliating relationship."

But both PC makers and corporate buyers are by nature conservative, and will not flood to upstart competitors such as Linux.

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