Microsoft

SEATTLE -- Microsoft Corp. has vowed to fight the federal government's plan to break up the company into two separate parts, a battle that will begin not in court, but in the stock market on Monday.

That's when traders return to Wall Street, where the company's stock will be under the microscope -- offering a key test of consumers' confidence in the company. For Microsoft, it signals the start of a long battle.

''Monday is only the first step,'' said Rob Enderle, an analyst with the Giga Information Group in San Jose, Calif. ''From there, they'll have to fight every step of the way to prevent any lack of confidence from turning into a downward spiral while they fight this thing.''

On Friday, the U.S. Justice Department and 17 of the 19 states that filed antitrust complaints against Microsoft submitted a plan to a federal judge to break the company into two new businesses.

One company would retain the popular Windows operating system, which runs the majority of the world's computers, while the other would consist of Microsoft's applications and Internet products, such as Microsoft Office and the Microsoft Network group of Web sites.

The plan must be approved by U.S. District Judge Thomas Penfield Jackson, who will also receive a written response from Microsoft and is expected to hold hearings on what, if any, remedies are necessary to counter Microsoft's violations of antitrust law.

Microsoft, which reorganized itself along similar lines last year, has vowed to fight on. Anticipating that, the Justice Department asked the judge for temporary restrictions on Microsoft's business practices as the case goes through the appeals process.

The court battle comes at a critical time for the company, which is facing increased competition on a number of fronts.

The Linux operating system, developed by computer enthusiasts via the Internet, has become a cheap and effective alternative to Windows for large corporate computer users. America Online Inc., set to merge with Time Warner Inc. next year, is also planning several new consumer computing devices in partnership with Gateway Inc.

''I think there's a general sense of vulnerability over at Microsoft,'' said Jonathan Zittrain, executive director of the Berkman Center for Internet and Society at Harvard Law School. ''Windows is starting to show its age ... They'll be forced to reinvent themselves again while, at the same time, handling this case.''

Indeed, Microsoft chairman Bill Gates is already trying to steer the company in a new direction, hoping to put Windows operating systems not only on new computers, but on handhelds, cellular phones and home electronics. With a common operating system, Gates believes that all of those devices can be linked to personal computers and the Internet, giving people an immense amount of flexibility and control over their data.

At an engineering conference on Tuesday, Gates urged developers to use Microsoft's new Windows offerings in all their new devices.

''I don't know any company that's creating the software platform for the second phase of the Internet. Honestly, I don't,'' Gates told The Associated Press in a telephone interview this week. ''Microsoft is really unique, particularly in the long-range research we've done.''

A breakup could threaten that research. Currently, Microsoft spends about $3 billion annually on research and development for this vision, dubbed Next Generation Windows Services. Some industry watchers fear that two separate companies, struggling to survive, would have to delay Gates' vision of the wired world and postpone research that could advance the industry.

''If this action delays (new research), it hurts the consumer,'' said Charles Gerlach, an analyst with Mainsprint, a Cambridge, Mass.-based consulting firm.

The government plan could also end up hurting investors. Shares of Microsoft closed at $69.75, down just 6 1/4 cents, on Friday on the Nasdaq Stock Market. In after-hours trading over the weekend, it hovered around $70. The stock has already proven to be a market mover: Judge Jackson's April 3 ruling, in which he said Microsoft broke antitrust laws, sent the market into a month-long correction.

Word of the Justice Department's breakup plan, leaked to the media last weekend, combined with mediocre earnings from Microsoft to send the company's stock into a tailspin on Monday that dragged down the rest of the market with it.

Enderle said a drawn-out appeal of the case, expected to take two years or more, could erode confidence in Microsoft, not only on the part of investors, but also with the software developers who work with the company.

''Until this appeal is over and done with, how can you trust anything that Microsoft says about future products?'' Enderle said. ''There is always the chance, however slim, that they lose the appeal.''

Steve Ballmer, Microsoft's president and chief executive officer, said Friday that the company wasn't worried about losing its customers or business partners.

''Our customers and partners will recognize that ... government lawyers with judicial review will not be able to commit anything so egregious that they cannot continue to invest in and benefit from our innovation,'' Ballmer said.

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AP Business Writer Bruce Meyerson in New York contributed to this report.

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