What's Next for Microsoft and the Tech Revolution?

There can be little dispute about Microsoft's guilt. The Justice department proved beyond a reasonable doubt what virtually everyone in the computer hardware/software business has known for years: Microsoft leveraged its operating system monopoly to dictate terms of business engagement and thwart (some would say crush) innovative product development by rival companies. And they did so again and again. Or as Judge Jackson said: "Only when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself."

That said, it is also true that the Internet has completely altered the business environment within which Microsoft competes. Microsoft's dominance was PC-based. So long as the personal or desktop computer was mission-critical, Microsoft's operating system and applications software were mission critical. Today, the Internet is mission critical and Microsoft's software is increasingly less so. In the near future, PCs and the Windows operating software that makes them functional may well be irrelevant. Who needs it when you can get everything you might imagine simply by pulling it off the Web?

Indeed, Microsoft's business strategy today is based on this premise. The company expects that the revenues derived from its Windows operating system (and Office suite applications) software will diminish substantially in the years ahead, while revenues from leasing application software over the Web will correspondingly increase. The company is obviously not eager to kill the Windows cash cow too quickly (it's wildly profitable), but it is entirely realistic about the role of Windows in a post-PC world.

Which is why Microsoft has become such a huge player in things like low-orbiting satellites, cable television systems, media, voice recognition software development and video games. Microsoft's senior management understands that what worked yesterday will not work tomorrow. The company must embrace technological convergence or it will be out of business in five years.

The danger is that Judge Jackson's ruling will bog Microsoft down in a swamp of litigation. Every dollar the company spends defending itself in court is a dollar it doesn't spend on voice recognition technology or low-orbiting satellites or broadband Internet access. It is in the national interest for Microsoft to spend money on the latter and not the former. What the judge has done is make certain that Microsoft must devote substantial resources to litigation.

This is why Judge Jackson's ruling alarms so many commentators and experts. Perhaps unintentionally, it gives aid and comfort to one of the most virulent movements in American political life, the legal blackmail movement. In the words of National Journal columnist Stuart Taylor Jr., the legal blackmail movement uses "the threat of ruinous litigation to impose de facto regulation and taxation on targeted industries, including guns and tobacco." Judge Jackson's finding against Microsoft puts the software industry directly in the crosshairs of this movement.

The mantra of this movement is, basically, "the legal fees alone are enough to bankrupt the industry." Therefore the industry, whether it's guns or tobacco or HMOs or latex paint, has to settle. Microsoft may soon find itself having to settle for fear that litigation could lead to financial catastrophe. If you find this proposition hyperbolic, think about the fact that 19 state attorneys general, at least 10 major computer software companies and God knows how many other allegedly injured "software developers" are already lining up to file suit after suit against Microsoft.

Now that Judge Jackson has handed down the findings of fact and law, the next step is what is known as the penalty phase. Simply put, how should Microsoft be punished? There are basically four options.

The first option is a fine. Option two is government regulation of the digital technology industry. Option three is the breakup of Microsoft. Option four is voidance of Microsoft's intellectual property rights with regards to Windows. The only good option is option four.

The fine option only feeds the legal blackmail beast. If the judge decides that Microsoft should have to pay $5 billion for its illegal conduct, then that number becomes the benchmark for all future litigation from supposedly injured parties and the "settlement" fees are adjusted accordingly. Five billion dollars here and $5 billion there add up to real money in a very short period of time. It is in the national interest to have billions of dollars pouring into the digital technology industry. It is decidedly not in the national interest to have that money flowing out of the industry to pay off the plaintiff's bar.

Government regulation, in the form of, say, the Office of Digital Technology Regulation (a division of the Dept. of Commerce or Justice), is such an obviously awful idea that it is almost too hideous to contemplate. Washington bureaucrats (and the lobbyists who influence them) are perhaps the last people on Earth capable of making intelligent decisions about the future of digital technology. The marketplace has done that reasonably well and with extraordinary efficiency. It should remain as unfettered as possible.

Breaking up Microsoft is apparently the Dept. of Justice's big idea, but it doesn't make much sense in the real world. For one thing, it would hardly qualify as punishment?since investors would flock to the Baby Microsofts and shower them with cash. For another, the future of technology is digital convergence (the merging of, say, wireless Web and voice-recognition technology). Breaking up Microsoft doesn't hasten that process. It slows it down.

The only workable "penalty" that might be imposed is the voidance of Microsoft's intellectual property rights on the Windows operating system software. Fortune columnist Stewart Alsop first proposed this idea back in December of 1998 and it remains the best solution. Throwing Windows code into the public domain would allow anybody and everybody to improve it, alter it, adapt it in whatever way they saw fit. And it would cost Microsoft a ton of money (since the cash cow would be dead). Most important, it would level the playing field and allow the market to continue to function in a more or less unfettered fashion.

Judge Jackson has set a date certain (May 24) for completion of the penalty phase. What he decides will have an enormous impact on the digital technology revolution. Here's hoping he does the right thing. If he doesn't, the aftershocks will be much worse than the earthquake.

jellis@nypress.com