Software Landing

Consumers won’t see any price changes immediately from the breakup of Microsoft, but whether the split eventually will bring higher or lower prices is debatable.

U.S. District Judge Thomas Penfield Jackson’s order yesterday to break the software giant into two companies – one for its applications, like the popular Microsoft Word and Office programs and Internet Explorer, and the other for its operating systems like Windows and Microsoft NT – divided industry observers on what it means for consumers.

Consumer advocates cheered the order, claiming it would bring lower prices, greater innovation and more choices.

“Without excess profits, they wouldn’t have the money to browbeat and bribe people not to ship competing products,” said Mark Cooper, research director for the Consumer Federation of America.

But Wall Street analysts were glum, saying the split would raise prices and hamper the company in the fastest-growing areas of the computer and Internet industries.

Other observers painted more of a mixed picture, with new competition creating new products and raising quality but prices staying the same.

“It’s dumb,” said Drew Brosseau, an analyst with Boston-based SG Cowen Securities Corp.

He said the order is likely to hamstring Microsoft as it pursues its new Internet business and to raise prices for business customers.

Concluding a two-year court fight, Judge Jackson gave Redmond, Wash.-based Microsoft four months to submit a plan to divide and operate as a pair of court-regulated companies.

He also set fresh restraints on Microsoft’s business practices that would take effect this year. One requirement gives computer makers the option of installing a version of Windows without the Internet Explorer Web browser.

The Justice Department and 17 of the 19 states charging Microsoft with anticompetitive practices said such a two-way breakup of the company would spur competition. They said the split would open the operating system market to new rivals and encourage the Microsoft applications company to export its software to other operating systems.

Microsoft, which has called a breakup “extreme and unjustified,” countered that the government’s plan would stifle its ability to create and market new products, harming consumers, the software industry and the economy.

The company said it would immediately ask a federal appeals court in the District to block the new restraints on business practices.

Court-ordered regulation clearly would harm the company and consumers, said Erick Gustafson, director of technology and communications policy for Citizens

for a Sound Economy, a D.C.-based group funded by private and corporate donations. The new rules, to take effect this year, would let the government review Microsoft’s product development, marketing and sales practices.

“There’s a lot of points along the way where the Justice Department can stifle innovation,” he said. “It’s very invasive.”

An association of 1,000 software developers and marketers – including Microsoft’s competitors – praised the order. It would help small software companies and benefit consumers as a result, said the Software & Information Industry Association, which filed papers in support of the government during the trial.

While the order is dramatic, most observers think there won’t be any immediate impact. Any effect could be delayed depending on what Microsoft does, especially if the case drags on through appeals. This could take up to two years.

“This is a long ways away from being finished,” said Brian Goodstadt, an analyst with S&P Equity Group in New York.

But even without appeals, it will take time for the consequences to show, others said.

“In the short run, very little. But in the long run you have more competition,” said Bob Lande, a law professor at University of Baltimore and a research scholar at the American Antitrust Institute, a consumer-oriented nonprofit organization.

Analysts say that while prices may hold steady, more competition gradually will spur new innovation that creates products and makes it easier for consumers to use computer software and services.

“The applications company would be forced to make it work well or somebody else will come in,” said Charles Rutstein, an analyst with Cambridge, Mass.-based Forrester Research.

The judge may have decided that Microsoft wasn’t believable, but the company was correct in saying that its industry was dynamic, he said.

“The landscape has shifted pretty dramatically,” he said. The rival Linux operating system has gained a foothold, and the hottest part of the computing industry lies in Internet businesses such as electronic commerce and data hosting, where Microsoft does not hold a dominant market position, he said.

Because of how fast the technology industry is changing, the order disturbs executives in the Northern Virginia technology community.

“There is concern that you are seeing a 100-year-old law applied to a fast-changing environment,” said Doug Koelemay, vice president with the Northern Virginia Technology Council. “You’re seeing the Justice Department work in an old economy way in a new economy.