Microsoft shares suffer as remedies loom

Proposed remedies to end Microsoft's OS monopoly may be announced as early as today, and reports say the US government is expected to push for a breakup of the company.

          Proposed remedies to end Microsoft's monopoly in the market for operating systems will be announced this week, possibly as early as today, and reports say the U.S. government is expected to push for a breakup of the company.

          Bracing for the remedy proposal and facing concerns about Microsoft's earnings potential, investors sold shares in the software giant in midday trading yesterday, leading to the largest intraday drop in the value of Microsoft's stock in 13 years.

          By the close of the market yesterday, Microsoft's shares traded at $US66.63, a drop of more than 15% from the previous day. Microsoft's was the most actively traded issue, with more than 156 million shares changing hands before the bell. By that time, investment firm SG Cowen had downgraded the software maker from "strong buy" to "buy," while Goldman Sachs Group had dropped Microsoft from its "recommended" list to "market outperform."

          Microsoft's woes sent the tech-heavy Nasdaq into a slide, with most of the major PC manufacturers, including Compaq Computer, Dell Computer Gateway 2000 and Hewlett-Packard, seeing their share value drop by between 3 and 5 points. The Nasdaq 100 dipped 4.3%.

          The US Department of Justice (DOJ) and 19 US states have until Friday to announce how they propose to punish Microsoft under a schedule set for the "remedy phase" of the antitrust case set by US District Judge Thomas Penfield Jackson, but details of the proposal surfaced yesterday as a result of leaks over the weekend to various media by unidentified sources.

          Under the proposal, the Office package of business productivity software, including Word and Excel, would be spun off into a separate business, and Microsoft would be subject to restrictions on its conduct until the divestiture, a story in the Wall Street Journal said.

          Microsoft also would be forced to split off the Windows operating system business from the rest of the company, unidentified people who are familiar with the proposal told the Journal and the Washington Post. The operating system company would be permitted to include browser software, but the Office business would also have rights to Microsoft's Internet Explorer Web browser, the reports said.

          The proposal also might recommend a third company that would get the browser and the Microsoft Network (MSN), Microsoft's ISP (Internet service provider) and Web portal, the Post said. However, the Wall Street Journal quoted sources as saying the government is unlikely to recommend a breakup into three entities because it would create "enormous inefficiencies and possibly fragment the Windows standard to the detriment of consumers."

          Justice Department spokeswoman Gina Talamona was not available for comment today, but the Post quoted her as saying she would have no comment on press reports regarding remedies.

          Goldman's decision to drop the company from its recommended list came after Microsoft's cautionary note after issuing its third-quarter financial report last Thursday, in which it said for business PCs had been light during the period. The company Thursday -- the last before the stock market's three-day Easter holiday weekend -- also sounded its customary note of caution for the months ahead.

          The goal of a breakup would be to tear down the barrier to competing with Microsoft's Windows operating systems, according to sources quoted by the Post. In his ruling, Jackson described the barrier as the absence of a cluster of companies willing to write software programs needed in order for a rival operating system to challenge Microsoft's Windows monopoly.

          According to the Journal, the restrictions on Microsoft's conduct would include a ban on exclusive dealing with certain companies and require Microsoft not to discriminate in price or terms among PC makers. Other provisions would give PC makers greater freedom to put rival software on new computers and require Microsoft to offer greater disclosure on the inner workings of Windows.

          It also could require that if new features are added to future versions of Windows, Microsoft must also provide an "unbundled" version.

          Jackson's schedule for the remedy phase allows the 19 US states and the District of Columbia, which also is a plaintiff in the case, to file a separate proposal if a majority don't agree with the DOJ's proposal. However, Jackson has told government attorneys that he strongly prefers a single proposal from that side.

          Jackson's schedule requires Microsoft to file its response by May 10 and the government to file a response to Microsoft's brief by May 17. A final hearing is scheduled to take place May 24.

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