On Friday, the U.S. government and 19 states allied in an antitrust lawsuit against Microsoft Corporation released their joint remedy proposal and, as expected, have asked the judge to breakup the company. Under terms of the plan, Microsoft would be split into two separate companies, one which would sell the Windows operating systems, and one which would sell Microsoft's remaining products, primarily Office and other applications. The personnel, systems, intellectual property, and other assets of each business unit would be separated so that each resulting company could operate as separate and economically viable entities. The separated operating system and applications companies would be restricted from working together or recombining for ten years, and assets of these companies--be them employees, intellectual property, or whatever--would be non-transferable between the companies.

"Under our proposal, neither ongoing government regulation nor the self-interest of an entrenched monopolist will decide what is best for consumers," said Joel Klein, who heads the antitrust division at the Department of Justice. "Instead, consumers will be able to choose for themselves the products they want in a free and competitive marketplace."

While the broad themes of the remedy proposal were leaked earlier in the week, probably in an effort to prepare shareholders for the news, some of the details are interesting. For example, Microsoft will be prevented from "taking adverse action against any person or entity \[that\] provided evidence in this case." Likewise, the company would be unable to threaten any PC maker that bundled products that compete with Microsoft's operating systems and applications. And PC makers would be able to purchase Windows at a standard price, and not worry about discriminatory pricing. PC makers would be entitled to change the boot sequence, startup folder, Internet Connection Wizard, desktop, preferences, Favorites, Internet start page, first screen, or other aspects of Windows as they see fit. They could change the icons on the desktop, remove Microsoft promotional links, and supply new user interfaces, as long as the default Windows user interface is also offered.

And while the government isn't asking for the wide-spread open publication of APIs that I've called for in the past, the companies formerly known as Microsoft would be required to disclose APIs, interfaces, and other technical information to third parties in a timely manner, so that other developers receive the information at the same time as Microsoft's own employees. To "facilitate compliance," Microsoft would be required to create a secure facility where representatives of PC makers and other software development partners could "study, interrogate, and interact" with technology and documentation.

One of the most compelling portions of the remedy proposal regards product bundling. According to the proposal, Microsoft would be restricted from bundling "middleware" (defined as "Internet browsers, e-mail client software, multimedia viewing software, Office, and the Java Virtual Machine," but not "disk compression or memory management") to its operating systems unless the company also offered an identical version of the OS in which all of these bundled products could be easily removed by PC makers and end users. And if PC makers choose to ship versions of Windows that exclude these bundled products, the price paid for that license should be lowered accordingly. Thus, any products bundled into Windows would not be free, but would be optional for users. And users could purchase a version of Windows that didn't include bundled products that were unwanted.

As expected, Microsoft reacted angrily to the proposal. "This \[proposal\] was not developed by anyone who knows anything about the software business," said Microsoft chairman Bill Gates, who promised to appeal the case all the way to the U.S. Supreme Court if necessary. Microsoft can officially appeal only when the judge releases his remedy conclusions. But this phase of the trial may be some months away, as Microsoft is now asking for many months of preparation time in order to properly counter the government's proposal. The judge is expected to grant Microsoft's wish, which could extend the trial into the next year. "Microsoft has exciting plans to develop a broad array of next-generation software products that will take computing to the next level, but those plans are imperiled by the extreme regulation proposed by the government,'' Microsoft president Steve Ballmer said in a prepared statement issued Friday night. "We do not believe we have violated the law and the Court of Appeals has yet to consider this case."

"This decree will not limit Microsoft's ability to add new features to its products or otherwise to innovate,'' said the DOJ's Klein. "But by turning loose the power of competition in the operating systems business, this decree will stimulate innovation throughout the software industry. The American consumer will benefit enormously from this proposed remedy.