Antitrust potholes on the information highway

May 17, 1994|By Robert Kuttner

THE Justice Department will soon decide whether to bring an antitrust suit with profound implications for information technology, and for the government's policy on competition.

The subject of the investigation is Microsoft, which has displaced IBM as the most dynamic information-age company. Where it once dominated the computer field with a near-monopoly in hardware, IBM is now reeling because of intense competition from lower-cost rivals. Once America's most secure employer, IBM has had to lay off tens of thousands, and to rethink its entire corporate strategy.

Microsoft, in contrast, has thrived in part because it has maintained something close to monopoly power in software, notably in the "operating system" programs that allow non-specialists to use sophisticated computers. Microsoft controls about 80 percent of the global market for operating system software like DOS and Windows.

There is more than a little irony here, since IBM was once a prime target of antitrust litigation that dragged on from 1969 to 1982. In the end it was not the Justice Department that ended IBM's stranglehold, but Microsoft.

IBM, in its arrogance, concluded that software was a minor detail and that the future of the industry was hardware. IBM fatally miscalculated by letting little Microsoft keep control of the operating systems necessary to run IBM computers and their imitations.

While IBM has foundered, Microsoft has grown to a $25 billion company, thanks to its near-monopoly in operating systems. Its founder and chairman, Bill Gates, the archetypal genius computer nerd, is now worth $8 billion. Some 2,200 Microsoft employees are also millionaires thanks to their holdings in Microsoft stock.

Microsoft has used its market power in operating systems to muscle into other areas. It is an increasingly aggressive competitor in applications software -- the myriad practical uses of computers, from word processing to data crunching. Microsoft runs full-page ads giving consumers big financial incentives to quit the most popular word-processing program, WordPerfect, in favor of Microsoft's alternative package.

Mr. Gates also hopes to position Microsoft as gatekeeper to the emerging information superhighway, by developing the software that will turn the home computer into a home information center.

And with the deep pockets that come from being the industry leader, Mr. Gates hopes to consolidate his dominance and avoid IBM's fatal mistake.

Enter Anne K. Bingaman, President Clinton's chief of the Justice Department's antitrust division. Ms. Bingaman has little sympathy for the argument that Microsoft is the jewel in America's high-tech crown. Rather, she is an old-fashioned trust-buster who sees recurrent patterns of abuse in excessive market power, whether the industry is software in 1994 or steel in 1894.

During the 12 years of Presidents Reagan and Bush, the prevailing doctrine held that antitrust was a mostly obsolete idea; monopolies could seldom survive very long because excessive prices would quickly attract competitors. The antitrust division became a backwater.

Ms. Bingaman, in contrast, is of the old school. She believes that dominance of a market gives a monopolist the ability to reap excess profits and then use its market power to undercut competitors in myriad ways.

For example, Microsoft can aggressively price-cut to squeeze rivals like WordPerfect. It can make computer manufacturers offers they can't refuse, by selling them operating systems cheap, which then come with the machine that the customer purchases. Why should you buy a rival operating system when Windows comes with your computer "free"?

Microsoft's rivals charge it with a variety of other "predatory" practices including demanding tying arrangements, discriminatory pricing, and anti-competitive uses of technology licensing.

These are shrewd business tactics, but will they run afoul of the Justice Department?

Ms. Bingaman isn't saying yet, but her department has nearly completed its investigation. Ms. Bingaman has made it clear that she has little sympathy for the view that we must tolerate near-monopolies for the sake of technical progress. She also indignantly denies any conflict in goals between the antitrust division and Vice President Al Gore's ambitious plans for an information superhighway.

Broadly speaking, Ms. Bingaman has it about right. America's industrial history is replete with new industries that began with a brief period of frenetic innovation, competition and price-cutting. Soon a market-leader emerged and used monopoly profits to limit competition.

This describes steel, coal, oil, railroads, investment banking, telephones -- and operating software. Sometimes these monopolists blundered, failed to anticipate shifts in technology, and let in upstarts. But the shrewd ones remained monopolies for long periods. That's why government has often stepped in and broken up trusts, or blended antitrust litigation with regulation.

Given Ms. Bingaman's general views of what constitutes anti-competitive practices, the department could well proceed against Microsoft. Both sides, however, would benefit from a consent agreement rather than prolonged litigation. Far from being the enemy of free markets, this kind of government activism serves competition, innovation and consumer welfare.

Robert Kuttner writes a column on economic matters.

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