BabySofts, anyone?

Software Magazine, August, 1998 by Joshua M. Greenbaum

Divestiture could be the best thing for Microsoft, its customers, and maybe even Bill Gates' image.

The current face-off between Microsoft and the Justice Department has engendered all sorts of comparisons to previous court cases pitting alleged monopoly against alleged truth and justice, most notably that of John D. Rockefeller and Standard Oil. The non-antitrust breakup of AT&T is another oft-cited case, as is the failed antitrust breakup of IBM.

What's interesting about the historical record is that when you look at overall shareholder value and market dominance, the best thing that ever happened to Standard Oil and AT&T was to be broken up. Standard began Exxon and Mobil, and AT&T stockholders before divestiture now own, in addition to a reviving AT&T, some very hot numbers like Lucent and SBC. All the surviving companies of these two break-ups market leaders or dominators, and all shareholders who hung on to the made a bundle in the long run.

Meanwhile, there's IBM. Lou Gerstner has managed to revive the ailing company he inherited from John Akers, but is IBM really as well off as it could be? One could argue that, at least on the software side, IBM should be a much more dominant player than it is today. Maybe had the Justice case prevailed, IBM Software Company would be vying with Microsoft, CA, and SAP for the top software spot instead of occupying the stealth market position it has today.

What these three cases tell us is that Bill Gates should consider setting aside his corporate ego and make this a short, and very sweet, antitrust case. Because, if the Standard/AT&T/IBM model is any indication, the best solution for Microsoft, its stockholders, and customers is simple: Bust up Microsoft.

Here's my plan. Create six separate companies -- the BabySofts -- to handle the company's major lines of business: Platforms & Operating Systems, Back-Office, Front Office, Internet, Tools, and Professional Services. Link them in a tight strategic embrace so that customers can still obtain strong synergies between product lines, but keep them legally separate companies with all the requisite R&D, sales, and marketing functions. Then set up the non-profit Microsoft Software Foundation, modeled on the Open Software Foundation, to develop specifications, interfaces, and standards for the BabySofts and the rest of the market.

How competitive would the BabySofts be? Front Office, Platforms & Operating Systems, and Tools would own their markets -- the MS Office, Windows, and Visual Basic franchises are unassailable. BackOffice would probably quickly achieve market leadership, particularly with the forthcoming SQL Server release and growing interest in Transaction Server. Internet would be a struggle, as the break-up would remove the artificial advantage that Explorer has in the Internet market. But let's be honest, you don't need alleged monopolistic practices to beat Netscape. Barksdale and company don't exactly constitute the most formidable marketing and development machine.

Rounding out the break-up would be the Microsoft Services Company. A separate services company based on Microsoft-specific technology and business integration would quickly be a major player in the enterprise IT market: Microsoft has always held back on services, and left a lot on the table as a result.

Stockholders should reap a windfall from the sell-off, but it's the customers who will really benefit. First, the BabySofts can -- and will have to -- be more responsive to customer needs and less inclined (or able) to antagonize customers who choose competing products. Second, important issues like getting DCOM onto Unix and legacy systems will be a lot easier because the BabySofts will want to be as competitive as possible and the Microsoft Software Foundation will make sure standards are developed with at least a patina of external industry input. Third, the Services company will become the hub of an enormous design, implementation, and support business centered around Microsoft technology -- and CIOs will be able to go to a single, highly qualified source for all their services needs.

Fourth, a divested Microsoft will cease to be one of the companies people love to hate. Instead, Bill and his (former) company can cast themselves as the good guys who chose not to waste the time and energy of the software industry, the industry's customers, Microsoft's stockholders, and U.S. taxpayers by fighting for a set of inalienable rights that might not be that worthwhile anyway. If Microsoft does divest, I predict that 10 years from now Bill Gates will be a true American hero and no one will remember Joel Klein.

And 20 years from now an entire generation will retire fat and happy on their BabySoft stocks. Who needs Social Security?