Would two Microsofts be better off than one?

Nearly 10 years ago, on April 3, 2000, U.S. District Court Judge Thomas Penfield Jackson ordered that Microsoft be broken up into two companies — one to develop and sell operating systems, and the other to develop and sell other types of software. The order came as a result of a federal anti-trust suit against the company and a finding of fact that said Microsoft had abused its monopoly power.

Jackson’s order was overturned by an appeals court , and in November 2001, Microsoft and the U.S. Justice Department settled; Microsoft was allowed to stay intact. At the time, Microsoft officials breathed a sigh of relief that they would not have to break up the company.

Ten years on, Microsoft is struggling to maintain its dominance in a world in which Google thrives, Apple is resurgent, and the Internet has arguably become more important than operating systems. Where would Microsoft be today if it had been split in two a decade ago? There’s no way to know, of course, but I think there’s a reasonable chance that the two resulting companies would have thrived and been better able to fend off Google, Apple and other competitors.

Why would two Microsofts be better off today than one? The primary reason is that a split might have altered the corporate culture and led to different business and investment decisions. In 2000, Microsoft had no serious competition, either in operating systems or productivity suites. Both Windows and Microsoft Office were virtual monopolies. The company was a money machine with no serious challengers in sight.

In the years since then, Microsoft behaved as corporations normally do when they have a monopoly or near-monopoly and have hit on a successful business plan that brought enormous success for several decades: It kept doing what made it a success. That meant milking Windows and Office for all they were worth.

Sure, Microsoft knew that the Internet was important and would be increasingly so, but it felt no compelling need to change its way of doing business. It acted as if it had all the time in the world to become dominant on the Internet. After all, Internet Explorer had become the world’s most dominant browser, and the company already had the most dominant operating system and the most dominant productivity suite. What could go wrong?

Plenty, as it turns out. Because Microsoft moved so slowly on Internet search and other Web-based services, it allowed Google to become the dominant Internet company. And it also allowed competitors to beat it in creating operating systems for mobile devices — just look at Apple’s iPhone and Google’s Android operating systems.

If Microsoft had been split into two companies, all this may not have happened.

The operating system company might have recognized that as a one-trick pony, it needed to expand its market in order to thrive, and thus may well have put more focus on developing a killer operating system for mobile devices. Mobile may have become a focus rather than an afterthought.

Similarly, the application software company may have had to expand beyond its core and may have recognized that Web-based applications and services were the future. That would have meant moving on Internet search earlier and not ceding the market to Google. And it would have meant moving Office to the Web much more quickly as well. Google Apps might have been no threat at all.

There’s no proof that all this would have happened. It’s possible that Microsoft, cut in two, would have been more vulnerable to competitors than it is as a single behemoth. But I think there’s a good chance that it would be in a better position today if it had been split up 10 years ago.

Preston Gralla is the author of more than 35 books, including How the Internet Works(Que, 2006).

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