Why the Microsoft case matters

It is hard to see how consumers would benefit if Microsoft were now forced to remove Internet Explorer from Windows or to charge a hefty price for it.

September 22, 1999|By Robert W. Hahn

THE antitrust trial against Microsoft will conclude this week, with each side offering closing arguments in the landmark case. But the maneuvering that will end in a judgment or a settlement has barely begun.

Much now turns on what the Justice Department thinks could be done to Microsoft that meshes with the Clinton administration's antitrust doctrine. The trustbusters are in a curious position.

Although the Justice Department's case has been light on evidence of Microsoft's monopoly power, it has left much of the media howling for Microsoft's blood. But Joel Klein, the head of the antitrust division, is eager to be remembered as a believer in the New Economy.

Last year, he declared that "the role for antitrust in high-tech industries is likely to be modest in scope and surgical in application." And, it will be hard to come up with sanctions that neither harm consumers nor slow innovation.

The remedy that first comes to mind -- requiring Microsoft to undo the alleged anti-competitive acts that apparently led to this court battle -- is a nonstarter.

Perhaps Microsoft did have mischief in mind when it created an Internet browser as good as Netscape Navigator, and then bundled it free with Windows. It is hard to see, though, how consumers would benefit if Microsoft were now forced to remove Internet Explorer from Windows or to charge a hefty price for it.

Considering consumers

Navigator is easy to obtain now. But how about guaranteeing Netscape access to consumers by requiring computer makers to give buyers a choice between Navigator and Internet Explorer? But why leave it as a choice between Navigator and IE? What about other browsers, or those yet to be invented?

Would computer makers be required to ask a judge for permission each time they added or deleted a browser from the desktop? Such micro-management may appeal to some but presumably not to the antitrust chief who likened his job to surgery.

Perhaps Microsoft could be ordered to abandon contracts with Internet service providers that pressed Internet Explorer into the hands of consumers at the expense of Navigator. Sure, but the consequences would be symbolic since Microsoft never managed to enforce restrictions with Internet service providers and voluntarily abandoned the restrictions before the trial began.

Scott McNealy, the head of Sun Microsystems and no friend of Bill Gates, has an idea: Force Microsoft to divest its interests in other software companies and prohibit it from buying more. Just how this would affect Microsoft's alleged monopoly in Windows is unclear.

No easy solutions

What it would do is open the way for Sun and other Silicon Valley giants to buy embryonic software makers for less money. What about divestiture? Breaking Microsoft into one company that makes Windows and another that makes applications software like MS Office might be a solution to some problem. But it hardly addresses the government's allegations that Windows is itself a monopoly.

A "horizontal" breakup in which, say, three companies owned the rights to produce Windows, makes more sense on its face. But would the three companies create different versions of Windows, perhaps allying themselves with individual hardware makers? That would put Windows in the position of the Unix operating system, whose utility is now limited by Balkanization.

More likely, one version would dominate the market, bringing the government back to complain about operating system monopolists.

This last scenario captures a central dilemma of antitrust enforcement in the new economy. Competition in software and other high-tech services is apt to create firms that gain dominant market shares, at least for a while.

In part, that's because of "economies of scale": Delivering one more computer disk with complex, expensive-to-design software on it costs just pennies. In part, it's because of "network effects": The value of a product to one consumer is increased when many others use it, too.

That helps explain why many information technology companies other than Microsoft -- AOL, Oracle and Cisco, to name three -- are so much larger than their competitors. So market share is a particularly problematic call to antitrust action.

Remedies that divvy markets more evenly are likely to raise costs or encourage cartels. Worse, they are deterrents to innovation: Who will invest in a better browser when success means a visit from the Justice Department? The government has refused to talk about remedies.

Maybe Mr. Klein is reluctant to contemplate the fruits of victory before the judge declares him a winner. Or maybe the trustbusters just can't think of any remedies that are likely to make software cheaper and better.

Robert W. Hahn is director of the AEI-Brookings Joint Center for Regulatory Studies in Washington. He wrote this for the Los Angeles Times.

Pub Date: 9/22/99

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