EVERYONE knew that the trial of Microsoft initiated by America's Justice Department had gone badly for the software giant. But the language of Judge Thomas Penfield Jackson's “findings of fact” was still amazing in its severity. The judge concluded that Microsoft had used its prodigious market power and immense profits to stifle innovation and to harm both consumers and any companies that dared to compete with it. But, devastating though this picture of Microsoft is, there is still a long way to go. The judge has yet to assess whether the firm breached antitrust laws. If he thinks it did, a separate hearing will decide remedies, with the Justice Department proposing and Judge Jackson disposing. After that, Microsoft can appeal, all the way to the Supreme Court if need be.

It has taken two years to get this far (see article). Allowing for normal legal delays, it could take another two before anything horrid is done to Bill Gates's company. Yet what Joel Klein, the department's antitrust boss, now knows is that the judge's findings will form an unshakeable framework for the conclusion of the case. Appeals courts cannot question Judge Jackson's assessment of the credibility of testimony. So powerful is his portrayal of Microsoft as a relentless and predatory monopolist that his verdict, when it comes, will be very hard to overturn. As one antitrust expert put it this week: “Judge Jackson has poured a lot of concrete here.”

But now comes the even harder part. Showing that Microsoft is a monopoly with a baleful influence over the computer industry is one thing; deciding what to do about it is something else altogether. The terms of the findings mean that nothing in the way of remedies is off the table, including a break-up of the company. That gives Mr Klein great scope, but it does not solve three big problems he faces.

The first is that the pace of change in the industry is so rapid. Even after the judge's findings, some commentators still argue that no remedial action is necessary; the future, they say, is with the Internet and the Internet is fundamentally hostile to vendor monopolies of critical infrastructure (see article). Despite its egregious business practices, they note, Microsoft has been unable to extend its dominance to the web.

The Internet has indeed fostered the growth of server-based computing, which reduces the importance of the client (PC) operating system; as well as open-source software, such as Linux, that is nibbling at Windows's hegemony. Yet, as Judge Jackson points out, “the fact that these new paradigms exist in embryonic form does not prevent Microsoft from enjoying monopoly power today,” or, he maintains, for the foreseeable future. Microsoft's huge profits (more than those of the world's next 500 software firms combined) and its lofty share price hardly point to a firm about to be knocked off its pedestal by technological change. Rather, they suggest that Microsoft has exploited its monopoly to slow down innovation by rivals, thereby causing real economic damage.

So remedial action is called for. But Mr Klein's second problem is that Microsoft has shown itself to be adept at circumventing past attempts to curb its excesses. To devise “conduct remedies” to restrain a firm as clever and as aggressive as Microsoft, without the need for constant and intrusive policing, may be impossible. There is much to be said, for example, for preventing Microsoft from entering into the kind of exclusive contracts that curtailed Netscape's access to its market, and for making its pricing policies public and non-discriminatory. Yet it is now insufficient for the Justice Department simply to have yet another go at modifying Microsoft's behaviour.

That points to structural remedies, which are anyway preferable as a matter of antitrust law. Ever since the Standard Oil case in 1911, the Supreme Court has held that conduct measures are inadequate when dealing with a durable and pervasive monopoly. But—and this is Mr Klein's third big problem—some break-up ideas could do more harm than good. For example, splitting Microsoft into competing, vertically integrated firms (the so-called Baby Bills solution) could result in a balkanisation of the software industry and an erosion of the standards and easy compatibility that consumers want.

The road ahead

So what should Mr Klein suggest? His starting-point must be that any action should provide consumers with choices they do not have today, and also stimulate innovation that would have otherwise been chilled. One potentially elegant structural solution that stops short of breaking the firm up would be to force it to publish the full specifications of the Windows “application program interfaces” (APIs), the codes that software firms who want their products to run on Windows must follow. IBM spent a fortune in the early 1990s in an attempt to reverse engineer or “clone” these for a rival operating system. But it could not persuade its customers that it had done enough to run a critical mass of Windows's applications; and Microsoft, as the incumbent, was always able to stay one jump ahead. Were such expense and uncertainty to be removed, IBM might be tempted back into the fray.

Going further, Microsoft could be required to license the source code for Windows itself to the highest bidders. If that encouraged the entry of powerful companies such as Sun Microsystems and Oracle, a main objective of the Justice Department would have been achieved.

Yet a drawback of both approaches is that they rely on other firms' appetite for risk-taking. So if after a year, say, no new entrant had appeared to challenge Microsoft's monopoly, the break-up option would need to be revived. There is one version of the Baby Bills that would carry less risk of perverse unintended consequences: to divide Microsoft into two or three competing operating-system companies and an applications company. (The firm's expanding investments in web services could simply be sold—the Internet can do very well without Microsoft's attentions.)

If there were two or three Windows companies, they would have no incentive to create different APIs, as they would all have a strong interest in supporting the greatest possible number of Windows applications. They would instead compete on price, ease of use, features and the trade-off between stability and backwards compatibility. The remaining applications firm would, for its part, have an equal interest in ensuring smooth integration with differing versions of Windows; and it would want to make both Office and BackOffice (which includes Microsoft's database product) available on Linux, the fledgling open-source Windows rival, and on every flavour of commercial Unix operating systems. The discipline of real competition would thus trigger innovation and give consumers more choice—but without jeopardising the Holy Grail of interoperability. And without having the government trying to run a technology industry.