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Breaking up Microsoft: What's at stake for the megagiant?

Berkeley expert assists United Nations with Gulf War fallout

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Breaking up Microsoft: What's at stake for the megagiant?

By Diane Ainsworth, Public Affairs
Posted June 7, 2000

Would Microsoft's breakup be a boon to competition or a blow to innovation?

Some of the many legal experts, economists and computer scientists at Berkeley immersed in the case are defending the government's plan to divide the company into two -- one to provide the Windows operating system and the other to supply the software applications -- while others think the split is not critical for continued innovation.

"I think the Department of Justice's proposal is reasonable, but it wouldn't disrupt the entire industry, bring about any miraculous changes in the industry," said Michael Katz, a professor of business administration, whose research specialty addresses competition in high-tech markets. "The breakup will increase competition and, ultimately, innovation. It's likely to lead to fragmentation problems as well. The company Microsoft will simply become two giant companies instead of one."

"Splitting up the operating system and applications into two businesses will lessen Microsoft's incentive to gobble up small, startup companies. because you won't have that kind of octopus business approach to work with," said economist Richard Gilbert, who worked with the Justice Department in 1994 to help negotiate the settlement of the first federal antitrust case against Microsoft's bundling of the Microsoft Windows platform and Word '95 software.

"The Microsoft applications company will want to optimize their products for use with other operating systems to stay competitive," he said. "But really all that will happen is that the two new companies will have different stockholders. We'll have Microsoft I and Microsoft II."

At issue is Microsoft's alleged violation of antitrust laws to keep its hold on the market by entering into restrictive contracts favoring some companies' software products over others. Many believe the alleged misconduct has effectively quelled competition among PC-makers and software applications companies attempting to bring new, innovative operating systems, software packages and Internet browsers into the marketplace.

"The case against Microsoft centered on actions that prevented firms from using their products as platforms to launch new alternatives to the Windows operations system," Gilbert said. "In this respect, innovation is clearly at the heart of the Microsoft case.

"At the same time, much of the challenged conduct is bread and butter antitrust enforcement," he said. "Microsoft entered into contracts that tended to squeeze out the competitors such as Netscape and Sun Microsystems. This is a plain-vanilla 'no-no' for dominant firms."

In its suit, the Justice Department and 17 of the 19 states that have filed similar claims against Microsoft are recommending that the megagiant be divided into an operating systems company to sell the ever-popular Windows, which is used by about 85 percent of the world's desktop computers, and a universally used applications company to develop and sell word-processing programs such as Microsoft OfficeWord (now the industry standard), spreadsheet programs such as Excel, Internet browsers such as the company's own Internet Explorer, and other standardized software applications software.

Breaking up monopoly companies has not been a common course of action, but AT&T was forced to split up into the "Baby Bells" in 1984, and Xerox was forced to license its copier patents in 1975. In stark contrast to the IBM antitrust case of the 1970s, which dragged on for 13 years before the government finally dropped it in 1982, however, federal U.S. District Judge Thomas Penfield Jackson wants to wrap this one up in the next two years. Microsoft has already put the brakes on, requesting a six-month delay before the penalty phase begins.

"That's an obvious ploy," said Michael Harrison, professor emeritus in the Electrical Engineering and Computer Sciences Department. "I think George W. Bush would be inclined to settle the case once there's been a changing of the guard."

Another approach proposed by some of the experts is splitting Microsoft into as many as five identical "babies," each with complete copies of Microsoft intellectual property. These companies would then be in competition with each other and, perhaps, encourage smaller companies to come out of the woodwork.

"Actually, I don't think there's a lack of innovation and creativity out there anyway," Harrison said. "I work with all a lot of these computer guys designing new programs and applications all the time. They're just like Gates and the kids in the garage who started Apple."

Among the most controversial of the charges against Microsoft is an allegation that the company forced consumers to purchase its Internet browser by selling the Windows '98 operating system, which integrated Windows '95 and Microsoft's Internet Explorer into a single product, Gilbert noted.

"Competition policy generally gives firms a lot of discretion to design features into their products, but comes down hard on conduct that forces consumers to purchase a bundle of separate products," he said. "Yet the fact that software can be bundled together with a few lines of code tends to blur the distinction between 'technological tying' and forced bundling."

"The question of how you bundle or package software is more of a marketing issue in my mind," added George Necula, a computer scientist in the Electrical Engineering and Computer Sciences Department. "Separating the operating system from Office won't have much impact. The consumer can still install operating systems and software applications from other companies. Linux, for example, is an operating system that can be installed on a PC with Windows.

"But in terms of costs," he added, "it might be extremely expensive to separate the two because it would involve rewriting huge chunks of software."

Meanwhile, Microsoft is not likely to lose its monopoly in PC operating systems any time soon. Although Linux captured nearly 17 percent of the retail market for operating systems last year, according to PC Data, industry analysts say its strength lies primarily in computers that run Web sites or small devices rather than standard desktop computers. But with tens of thousands of programs for Windows on the market, most consumers don't want to the hassle with new, untested systems.



June 7 - July 11, 2000 (Volume 28, Number 34)
Copyright 2000, The Regents of the University of California.
Produced and maintained by the
Office of Public Affairs at UC Berkeley.
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