06/08/2000

By Doug Bedell / The Dallas Morning News

Microsoft's breakup may mean little to consumers in the near future as the company fights Wednesday's ruling with appeals, but prices for future Windows versions could triple, according to the company's own experts.

Related stories Microsoft vows to fight ruling Analysts discuss split's effects

The government argued, on the other hand, that the split would prompt competition in the market for operating systems, which could bring lower prices for consumers.

Home and office computer users may gradually find alternative, low-cost operating systems such as Linux much more appealing, some experts speculated. And, at the same time, increased competition to add features to the Windows operating system could force higher prices for those developing such features.

The anticipated fall release of Windows Me (Millennium) - the consumer upgrade for Windows 98 - will not be affected, a company spokesman said.

Richard Schmalensee, professor of economics and management and dean of the Sloan School of Management at the Massachusetts Institute of Technology, testified last week for Microsoft that "the government's proposed remedies are likely to harm consumers through higher prices, lower output, reduced efficiency, and less innovation."

Splitting Microsoft, Mr. Schmalensee said, "is likely to produce immediate, substantial increases in the prices of both Windows and Office."

Mr. Schmalensee, using Microsoft's economic estimates, predicted that the price of Windows products would triple. Government witnesses have hotly disputed that contention.

U.S. District Judge Thomas Penfield Jackson's ruling may also affect the way Microsoft offers operating systems to consumers in the future. The judge's ruling, if allowed to stand, would change the way the company could add new Windows features, such as voice recognition.

If the operating-system company wishes to include innovations in new releases, Judge Jackson decided, it must also offer versions that exclude the new features. Microsoft chairman Bill Gates warned Wednesday that this would create consumer confusion. Microsoft, Mr. Gates contends, would have to issue both a standard Windows and a "Windows Lite" version, which would be stripped of "innovative features."

Microsoft attorneys maintain that this requirement would force consumer prices higher.

But Carl Howe, a research director at Forrester Research, said he believes software buyers will - for the first time - be able to choose between competing brands.

"We will get renewed innovation, renewed competition," Mr. Howe said. "Microsoft's definition of innovation is bundling more stuff into Windows. For most consumers, that is not innovation, that is bundling."

Kevin M. Murphy, the George Pratt Schultz Professor of Business Economics and Industrial Relations at the University of Chicago Graduate School of Business, also predicted that the breakup "is likely to place upward pressure on software prices, retard innovation and quality improvements in both operating system and applications software."

Mr. Murphy said the government wrongly assumed that a new Microsoft applications company would respond to incentives to create versions of Microsoft Office and other applications for Linux, BeOS and other alternative operating systems.

"In particular, by promoting the growth of alternative operating systems, the 'Applications Company' could undermine its own highly profitable revenue base," Mr. Murphy testified. "Basic economics and empirical evidence suggest that the 'Applications Company' would be unlikely to behave this way."

Red Hat Linux chief operating officer Tim Buckley said the court ruling was unlikely to redirectthe primary focus of his company from the server market to consumer desktops.

"Of course, I would love to have Microsoft Office on Linux," said Mr. Buckley with a laugh. "Sure. That's OK."

In addition to being harder to use for most consumers, Linux desktop operating systems use Sun's Star Office and other word-processing applications.

Linux has made inroads into Microsoft's server market primarily as the importance of the Internet has increased over recent years. A 1999 International Data Group research study showed Linux - a free operating system developed under the "open source" concept - was installed in 25 percent of all new servers, up from 15 percent the year before. Open-source software allows users and developers direct access to features in the operating system. Closed or proprietary operating systems such as Windows require developers to pay fees for access.

"For us, the issue is not whether Microsoft is broken up or not," said Mr. Buckley. "It's proprietary vs. open source. Conceptually, we believe the market has been saying for a long time, 'I want control of the software.' And that's something that's accelerating, regardless of the ruling."