What Light through Yonder Windows Breaks?

Every business would love to have a monopoly, and even under the antitrust laws, they can—provided they earn it, and keep it, fair and square.

In his verdict last week, U.S. District Court Judge Thomas Jackson did not question how Microsoft acquired its monopoly in operating systems for personal computers. Instead, the judge came down hard on the company—as expected—in finding that it violated the antitrust laws by unlawfully maintaining that monopoly through a campaign of threats and actions against computer manufacturers and Internet service providers that even thought about carrying Netscape’s browser. The big question now is what remedy the courts should impose: either a tough “conduct” decree hemming in Microsoft’s future behaviour or some sort of breakup.

Some analysts have contended that the outcome may not matter, because by the time a decision on a final remedy is made, the market will look radically different than it looks now. On this view, Windows will continue to lose market share to Linux-, Apple- and Java-based platforms that support different kinds of application software. Then there is the coming wave of “Net appliances”—Net PCs, telephones, kitchen appliances, automobiles—that consumers will use to access the Internet without using Windows-based computers. Why punish Microsoft if the market will do the job itself?

Not so fast. Windows still dominates personal computers shipped to the mass market, despite the growing love affair techies seem to have with Linux. Microsoft’s 1999 annual report shows that the company earned roughly 43-per-cent profit on $20-billion (U.S.) in revenue (a steadily rising share over the last three years) from Windows sales. Furthermore, all those Net appliances will not replace PCs for doing word processing and data manipulation. Microsoft knows that. Otherwise, why would it spend so much money updating Windows so that it will work seamlessly with servers and PCs?

Other critics of tough sanctions implicitly acknowledge these facts, but go to the other extreme by contending that Microsoft has become so important to the U.S. economy that the prospect of shackling it with a consent decree or, even worse, breaking it up, will take the air out of the high-tech sector that has been powering U.S. economic growth. A variation of this argument holds that if Microsoft can be brought down by the government, what is to protect other high-tech monopolies—like Intel Corp. and Cisco Systems Inc.—from the same fate? These fears, it has been said, explain the sudden and sharp selloff in tech stocks following the release of Judge Jackson’s opinion.

The Microsoft verdict was the excuse for, not the cause of, the high-tech stock selloff that many analysts have been long predicting (in any event, many high-tech stocks have rebounded substantially since last week’s rout).

The claim that Microsoft’s monopoly is so important to the U.S. economy is a little hard to square with the company’s claims that technology is moving so fast as to render any severe sanction overkill.

As to the assertion that no successful company is safe from the clutches of the government, Intel proves the opposite. When it was accused by the Federal Trade Commission of browbeating purchasers of its chips, the company quickly settled, agreeing not to discriminate against its customers. Meanwhile, no credible evidence has surfaced that Cisco is abusing its apparent market domination.

So, back to the Microsoft case. About the only thing both parties—and the judge—agree on is that the whole dispute centres on innovation. Microsoft says it was a pioneer in this respect and, indeed, is now running national TV ads proclaiming as much. The government and Judge Jackson disagree, saying that the company’s campaign of various dirty tricks against rivals thwarted innovation.

So, if the argument is about innovation, the remedy should be the one that does the best job of promoting it.

A stiff conduct decree, to the extent it requires a judge to review the company’s plans for each new version of operating systems, would almost surely stifle innovation (as Microsoft has correctly argued). Breaking up the company along functional lines—splitting, say, the applications and Internet functions from the Windows and operating systems divisions—might look easy but it would do nothing for consumers or innovation because it would keep intact the Windows monopoly.

The best means of promoting innovation is to promote competition. That means breaking up the Windows monopoly itself, perhaps in three equal-sized pieces, each with the same intellectual property to the Windows source code. With the monopoly gone, there would be no need for continued judicial supervision, either of the new Windows competitors or the rest of the company.

Sure, competition makes some people nervous, and it might even lead to different versions of Windows (although each of the new Windows competitors would have strong market incentives to be compatible with each other). But competition is how we get better products—perhaps even a version of Windows that lets you consistently and seamlessly start it up and shut it down!

It is well to recall the doomsayers at the time of the AT&T breakup in 1984, who feared the uncertainty and, yes, the potential loss of innovation due to the divestiture of Bell Labs—a national treasure—from the local operating companies. But history has since proven that the AT&T breakup unleashed innovation in telephone devices and, even more important, encouraged AT&T and its competitors (then Sprint and MCI) to rapidly install fibre-optic cables, which today form the backbone of the Internet. What better model for innovation could be there than that?