From...

by Alex Lash and Elizabeth Wasserman

(IDG) -- In the wake of U.S. District Court Judge Thomas Penfield Jackson's damning report of the facts in the Microsoft (MSFT) antitrust case, attention turned to whether the case might be settled – or alternatively, what penalty awaits the company if it loses.

Bill Gates took a defiant stance, telling shareholders at the company's annual meeting that Microsoft won't back down from its right to control and improve Windows.

So far, there's little indication a compromise is at hand. "If we can't define the user experience, then the Windows brand becomes absolutely meaningless," Gates told shareholders. "No company should accept these limitations on its ability to innovate."

	MESSAGE BOARD
Microsoft

Pundits' favorite breakup scenario last week was the three-way split: Separate companies for the operating system, application and Internet businesses. Some analysts think a breakup would benefit shareholders – that the parts would be worth more than the whole, as in the AT&T breakup.

However, a leading Microsoft analyst crunched what-if numbers and found the parts might be worth far less than the whole. David Readerman, director of Internet strategy at Thomas Weisel Partners, calculates that based on the valuations of comparable businesses, the three mini-Microsofts would be worth a collective $377.9 billion – well short of its current $500 billion-plus valuation.

On the legal front, a one-into-three breakup is also out of vogue, as it wouldn't involve divesting control over Windows.

"Breaking the company up that way doesn't address the operating system monopoly, but it might address the company's ability to leverage that monopoly and misuse it in other areas," says Wayne Klein, the antitrust unit chief of the Utah attorney general's office.

State prosecutors like Klein are convinced that any ruling must not only address Microsoft's operating system monopoly but also ensure that there's no need for constant governmental oversight. That pushes the "source-code" remedy to the fore: forcing Microsoft either to publish its Windows source code or auction it off to two or three competitors, which could use the information to sell competing and compatible operating systems.

Even if Microsoft relinquished the Windows source code, the very nature of the software business would lead in due time back to a monopoly scenario, says Stan Liebowitz, a University of Texas economist who coauthored a recent book in defense of Microsoft's business practices. "One company will ultimately win," he says.

At least one shareholder at last week's meeting, who introduced himself as Harry from Yonkers, N.Y., advised compromise. After wishing Gates a belated happy birthday, he asked for a favor: "I would appreciate very much if you and the board will try your damnedest to see this suit is settled out of court."