Let the legal battle begin

I like Germany so much I preferred it when there were two of them," went one of the jokes which did the rounds as East and West became one country after the Berlin Wall came down. The US Justice Department apparently likes Microsoft so much it would like to see several different companies emerge from the monolith of Redmond, Washington.

The prospect of divestiture - breaking up the company into several units - was hinted at in documents filed before the huge anti-trust case against Microsoft opens in Washington today. "Depending on the nature and scope of the violations determined by the court at trial, plaintiffs will seek such additional permanent relief as is necessary to restore competitive conditions and to prevent Microsoft from commit- ting similar violations in the future," the US government said in its pretrial statement.

It could mean many things. But one of the ways that you stop a monopoly in its tracks is to break it up. When the government took on John D Rockefeller's giant Standard Oil in 1911, it was split into many local companies. Regional break-up is clearly not a model for Microsoft.

But the example of the US telephone industry may provide a more convincing parallel. Out of the old US telephone monopoly came AT&T, the long-distance telephone operator, as well as the "Baby Bells", regional companies which operate local services. The break-up also allowed other, smaller companies to flourish in a deregulated environment.

In the case of Microsoft, the telecoms example might imply two companies - one producing Windows 98 and the other operating systems, the other developing applications, a parallel to the Bell case. Perhaps, however, it could be split into companies broken down vertically, with each producing a single application. There might be MicroExplorer, for instance, selling Internet browsers, MicroMedia, selling multimedia, and MicroOffice, with the company's cluster of business software. All of this is a very long way off. The anti-trust case has yet to get off the ground. Microsoft has plenty of evidence to deploy, and will argue that it has not breached anti-trust laws. And the government's case is not as strong as it might like to hope.

The Department of Justice's case turns on a crucial meeting which it alleges took place in June 1995, in Mountain View, California, the headquarters of Netscape Communications, the Internet browser producer. Microsoft was concerned that Netscape was taking the browser market, the Justice Department claims. At a meeting on 21 June, Daniel Rosen, Microsoft's general manager of new technology, proposed an interesting deal to James Barksdale, Netscape's president. Microsoft would invest in Netscape, give it technical information and help mesh its products with Microsoft's operating systems. In return, Netscape would give Microsoft a seat on the board, keep it informed of new products, license its technology to Microsoft and - crucially - not produce a browser for Windows 95. The two would divide the existing browser market between them.

It was, says Barksdale, "the damnedest meeting I've ever attended in 35 years in business". According to Microsoft, it was a standard business gathering where software ideas were discussed. But it is clear, from documents obtained from Microsoft, that the company saw Netscape as a key competitor. In a May 1995 internal memo entitled "The Internet Tidal Wave", Bill Gates had seen it as "a new competitor born on the Internet".

One key to the case is whether the government can prove that Microsoft deliberately used its existing dominance against Netscape, making access to key technical information about Windows a weapon. The government will point to similar deals and duels with AOL, Intel, Spyglass, an early browser company, and Compaq. There are piles of testimony, easily as much as confronted the public in the Monica Lewinsky affair, to wade through.

But, like the Starr Report, it is worth asking: how much does this matter? The importance of the case lies in its more general applications, and what it might mean for the industry, consumers and the economy as a whole.

A coalition of US consumer companies released a report last week, for instance, which suggested that Microsoft's dominance allowed it to keep prices artificially high, something which the company strenuously denies. "We estimate that the price of the Windows operating system pre-installed in PCs is about $30 more than it should be," the groups said in a report, "The Consumer Case Against Microsoft". Reducing its hold on the industry might allow new entrants to the market, bringing prices down.

But one of Microsoft's central arguments is that it has been a crucial force in creating new products, and that the Justice Department is clamping down on normal methods of business competition.

In any case, anyone who thinks that competition policy is capable of creating a lasting solution to the problems of market dominance would do well to look around the US corporate scene.

The government may have broken up Standard Oil, but that hasn't harmed Exxon, one of the world's largest companies and the direct successor to Standard Oil of New Jersey. And if the AT&T or IBM antitrust cases are anything to go by, it will be years before any decision is made. Bill Gates is unlikely to find himself, or his company, cut down to size any time in the near future.