For the first time in its lengthy and highly public battle with the US Department of Justice (DoJ), Microsoft has started to consider its own break-up.
A legal document filed late last week by Microsoft, which has dominated the software industry during the last decade, asked the court for a year to submit a plan to break itself up. The DoJ ruled that Microsoft should be split in April this year.
This latest development is a reversal of the software giant's public position. On 5 May Microsoft previously filed its own alternatives to the DoJ's proposed split, involving changes to its business practices and making its technology more open.
Steve Ballmer, president of Microsoft, recently wrote in a NewsWeek article, "The Government's plan to dismantle Microsoft and subject the remains to harsh regulatory constraints would cripple Microsoft's ability to innovate on behalf of consumers and could undermine the future success of America's high-tech industry."
But now the software giant has begun legal discussion with the DoJ over the terms of potential break-up. In a document submitted to the District of Columbia, Microsoft said that splitting its operating system and application divisions would take much longer than the four months suggested by the DoJ. The document said, "Four months is not remotely enough time to formulate a plan for attempting such an undertaking."
It also observed that, since Microsoft has subsidiaries in countries around the world, each of which is responsible for sales and marketing and product support for the software giant's entire product line, Microsoft would need considerable time to consider country-specific issues generated in any attempt to break the company apart.
Microsoft also asked the court to give the Government more time to respond to the DoJ ruling, and hence give itself longer to prepare for an appeal.
Dan Kusnetzky, research director at analyst group IDC, said that by suggesting it was difficult to perform a break-up, Microsoft was contradicting some of its earlier evidence to the DoJ.
Since the 1994 Consent Decree Microsoft has insisted there was a so-called Chinese wall between its applications and operating system divisions.
"If the operating system and applications are not linked in some way then splitting Microsoft will not do any harm. But if they are linked then Microsoft has lied," said Kusnetzky.
Any split in the company would have a profound effect for users who have Microsoft Enterprise or Select site licence agreements. Through these agreements, users are able to obtain volume discounts on Microsoft front- and back office and operating system product families.
Kusnetzky said, "In the event of a split Microsoft may be legally bound by existing software licensing contacts." But users could face problems at a later date, when software contracts are renewed, he said.
The on-going legal battle is now having an effect on Microsoft technology strategy. Stating it did not want to clash with the expected ruling by Judge Penfield Jackson on 1 June, Microsoft delayed its anticipated announcement of Next Generation Windows Services. Now put off until 22 June, the strategy is designed to forge closer links between the operating system and the Internet.
In the end, the ruling by Judge Jackson was postponed and is expected this week. Yet the Next Generation Windows Services is likely to lead Microsoft into more hot water with US competition law, Kusnetzky predicted.
"The concept of Next Generation Windows involves tying a whole bunch of Microsoft software together," he said. "But the strategy is complicated by Judge Jackson talking about breaking the company apart."
Ovum analyst Gary Barnett agreed that the legal dispute with the US Government was having an effect on Microsoft's IT strategy. Barnett believes a split of Microsoft into operating system and application companies is not beneficial to the user.
"The judgment is entirely sensible, but a split has no benefit. It is a punishment for Microsoft and businesses may have to pay more for their software," he said.
A spokeswoman for Microsoft said it was still early days in the legal process. Although the company is considering the effects of a break-up, Microsoft would appeal against the ruling, she added.
The effect of a prolonged appeals process remains uncertain. But whatever the eventual outcome, Microsoft's back- and front office and operating system strategies are likely to be influenced by legal considerations as well as the needs of business users.
The DoJ ruling and after