A bad break for Bill Gates

As Microsoft resists legal threats to split it up, the company will find no comfort in the fate of another US giant

The thousands of internet start-ups toiling away at turning dotty loss-making ideas into a profit could be joined by a new company. It hasn't got a ridiculous name and it isn't run by a spotty college drop-out. It is, astonishingly, Microsoft.

Judge Thomas Penfield Jackson's ruling that Microsoft engaged in "predatory" behaviour poses the possibility that one of the world's largest companies could be broken up. And if, as has been suggested by analysts, it is split into three - operating systems, applications and internet content - then it would expose one piece of the Microsoft monolith as a loss-maker.

MSN, the division which provides internet content and free e-mail addresses through Hotmail, makes no money. In fact, it is not expected to turn in a profit until next year.

Now this is all hypothetical, and if Microsoft was split up it wouldn't be for at least two years when, presumably, MSN would be in profit. But it demonstrates how serious the ruling could be for Bill Gates' software giant.

As well as breaking up the company, Micro-soft's rivals want two other penalties imposed: to force Microsoft to make its applications run on all operating systems and to place a restriction on Microsoft's corporate acquisitions.

Sun Microsystems has been one of Microsoft's strongest critics. Its UK managing director, Shanker Trivedi, said: "Microsoft is a great company, and we don't want to see it go out of business. But it acted as a monopoly and this needs to be remedied."

Mr Trivedi claims he is not motivated by any desire to see Microsoft weakened, but just wants to "break the monopoly to create an environment which fosters innovation - not stifles it".

So, just how damaging would these penalties be?

Having a tight restriction placed on the type of corporate acquisitions would be a shackle for any company - doubly so for Microsoft. In the past three years it has bought stakes in 12 companies in Europe alone. If it is to continue to compete in the internet and mobile internet markets - where some believe it has been slow off the mark - then an aggressive acquisition strategy could be key.

Then there is the issue that the court case has focused on: the fact that some of its products are "proprietary" - only working with other Microsoft programs.

Around 80 per cent of the world's computers are powered by Microsoft software. But if the proprietary software was removed then the exclusive gloss would fade on products like Windows 2000, its flagship operating system.

But, perversely, Microsoft could also benefit. Mr Trivedi said: "If the penalty was imposed then it would not actually be to the direct advantage of Sun.

"Take, for example, Microsoft Office. If it was made to run on all operating systems then it would create more competition for Star Office [produced by Sun]."

Then there is the most draconian of all the measures - the break-up. While many Microsoft executives will have woken up in a cold sweat over this, some analysts predict that splitting the company into three will deliver greater shareholder value.

David Morris, a US-based technology analyst at Security Capital Trading, said: "If the company was broken up, I think its value would be much higher. The sum of the parts is definitely worth much more than the whole of the company."

Some 7.3 per cent has been wiped off Microsoft's value since the judge's announcement.

However, Mr Morris said the market had over-reacted: "Right now I'm a buyer. Microsoft is one of the greatest companies of all time, and the stock is definitely looking cheap."

Another US analyst, who asked not to be named, said that if the company was broken up it would make it "leaner and meaner", putting it in a better position to react in the fast-moving technology world.

In the short term, however, the effect of the ruling will be much more muted.

According to Michael Gartenberg, vice-president of research company Gartner Group, it will be "business as usual for Microsoft as the barriers it has erected will remain up until its appeal is determined".

However, he thought Microsoft would be "less aggressive" when negotiating terms to sell its software to PC manufacturers. "Microsoft won't want to be seen to be beating companies with a stick," he added.

Microsoft is keen to play down the effects of the ruling.

Shaun Orpen, Microsoft's UK director of consumer marketing, said: "The fundamental principle here is the right to innovate. And if we have to go to the Supreme Court to do that, then so be it.

"Our competitors would love this to be a great distraction for us. But don't forget that since the case started 18 months ago we have launched Windows 2000 and are about to launch a raft of new products."

In any case, he points out, there is no legal basis on which to break up the company.