In the wake of the breakup Executives, analysts consider impact that Microsoft split

Thursday, June 8th 2000, 12:00 am

By: News On 6

For two years, the antitrust case against Microsoft Corp. has been little more than an interesting sideshow for much of the technology industry, dealing with such abstract questions as what kinds of innovations might exist if the software giant weren't so powerful.

But on Wednesday, industry players began to grapple with how a federal judge's decision to break the company in two and impose certain conduct restrictions would affect their businesses.

"Anybody who thinks this is irrelevant to their business is being fairly myopic," said Lee Blaylock, chief executive of ServiceLane.com in Dallas, an Internet company that connects consumers and local service firms.

Like many high-tech executives, Mr. Blaylock believes that Microsoft has been overly aggressive as a competitor, although he doesn't think consumers have been harmed. In fact, he said there has been a lot of value to having Microsoft set the standards for software.

"My intuition says breaking up Microsoft is going to be bad for the industry in general, but good for some of Microsoft's competitors," he said.

U.S. District Court Judge Thomas Penfield Jackson's order would cleave the company, based in Redmond, Wash., into two pieces - one for the Windows operating system and another for all the company's applications software, including Microsoft Office, the Internet Explorer browser and other Web-related businesses. Microsoft is appealing the decision and vows it will remain intact. The appeals process could take years.

Monumental decision

Robert Crandall, a senior fellow at the Brookings Institution in Washington, said Judge Jackson's ruling is monumental and will have reverberations for decades to come.

"What you are doing is you are taking away the gains from innovation by breaking up a successful innovator," said Mr. Crandall, who was a witness for Microsoft during the trial. "You have to worry about that."

But other observers say the breakup will be a boon to the economy.

"I think this is good news," said Carl Howe, a research director at Forrester Research. "It's going to take a while to get there, but breaking up Microsoft will unleash value for shareholders."

Consumers and business will be the big beneficiaries of the breakup, he said.

Many others believe that by the time the legal process is over, changes in technology may have rendered the government's concerns and remedies moot. "The case is about something that could be obsolete technology," said Daniel Slottje, professor of economics at Southern Methodist University.

Still, Microsoft's business could be hurt in the short term, said Dr. Stanley Liebowitz, an economics professor at the University of Texas at Dallas. He said the uncertainty surrounding the company may hamper its efforts to sell Windows 2000 software to corporations, and thatthe judge's order is too ambiguous on which pieces of the program would go to which half of Microsoft.

"You don't know which company your products are going to come from, and you don't know how well everything will work with the operating system," said Dr. Liebowitz, co-author of Winners, Losers & Microsoft, a book about antitrust law in the digital age. The concerns may lead some customers to choose products from rival computer companies such as Sun Microsystems Inc. In a statement, Sun applauded the judge's ruling, saying it would spur competition in the industry.

Ripple effect

Analysts paid particular attention Wednesday to the judge's curbs on Microsoft's business practices, which are to take effect in September and would last until three years after the proposed split occurs. Microsoft would be banned from taking actions against computer makers that choose to feature other companies' software products. The company would be required to charge computer makers the same price for Windows - except for certain specified volume discounts. And it would be required to give software developers access to portions of Windows code that enable programs to run on the operating system.

"It's a sad day in the technology industry when the government starts meddling over how you design your product," said David Goldstein, president of Channel Marketing Corp., a Dallas-based market research firm.

Mr. Goldstein said some of the changes would probably cause Microsoft to change its pricing model, with a ripple effect that would be felt throughout the industry.

"My concern in all this is the government is affecting more than just Microsoft," he said. "It just can't be good for the consumer."

Keith Teare, chief executive of RealNames Corp., based in Redwood City, Calif., which has Internet search technology that it is used in products from Microsoft and other technology companies, said the conduct restrictions could curb Microsoft's appetite for setting up partnerships with small companies like his.

"We would not be able to operate our business as effectively were it not for our partnership with Microsoft," Mr. Teare said. "If Microsoft were to question whether it can make relationships with companies like ours, it would be incredibly negative to the entire technology sector."

Compaq Computer Corp. reiterated its objections to the Justice Department's breakup plans. "Compaq has seen several problem points in the government's plan to break up Microsoft and we continue to see the same problems," said Alan Hodel, a spokesman for the Houston-based company.

But Dell Computer Corp. said the trial has little impact on the company's fundamental business, which is based in Round Rock, Texas.

"For us it's not really a Dell issue," spokesman T.R. Reid said. "Our business is the same it was 15 years ago. We are not in business for Microsoft or any other supplier per se. We are in business for our customers and in turn for ourselves."

Employee concerns

Employee issues also loomed large in the Microsoft case, and analysts expressed concerns about a brain drain from Microsoft. Rob Enderle, a vice president at Giga Information Group, said Microsoft will hurt itself and the industry if it pursues a lengthy appeal.

"It's going to cripple the firm," he said, because morale would plummet as Microsoft continues to negotiate its way through the court system.

But other analysts say employees would be misguided if they leave the company en masse.

"At a company as large and successful as Microsoft, people are going to worry about their careers but they are not going to panic," said Joseph Gallagher, a consultant at Watson Wyatt Worldwide in Dallas.

Microsoft also should be concerned that more employees would want to join the applications company than the operating systems firm, because applications would be perceived to be a more creative business, he said.

Gary Arlen, an interactive services consultant in Bethesda, Md., agreed. "Architects win prizes for what you see out front, not the plumbing and beams inside," he said.

Microsoft's competitors have already been helping themselves to its talent during these uncertain times, said Michael Boyd, an analyst at International Data Corp. in Framingham, Mass.

"This is the time for the competition to come in and pick off their [Microsoft's] key people," he said. "That's why they did all the stock option grants recently."

But on the whole, Microsoft employees don't have much to worry about. Even if the company is split up, the new companies should continue to treat them well. In fact, Mr. Boyd said, more jobs will be created if a breakup goes through because many support and administrative jobs will have to be duplicated in the two organizations.

Microsoft's Internet Explorer will face severe competition for dominance of the Web browser world. Personal Technology, 1FMicrosoft Corp. must break into two companies, a federal judge rules.