The Rewards of Ending a Monopoly

Fifteen years ago, Judge Harold Greene presided over the break-up of AT&T, and in the process made antitrust law a topic of mainstream conversation in the US.
Now, Judge Thomas Jackson has helped educate a new generation of Americans, and another company, about antitrust law.

Judge Jackson’s findings of fact all but say that Microsoft has repeatedly abused its monopoly in operating systems for personal computers. With his appointment last week of Judge Richard Posner as a mediator, he has changed the focus of debate from “What remedy will be ordered?” to “Will the parties settle, and on what terms?”

Neither side wants Judge Jackson to rule over Microsoft—and potentially the computer industry—in the way Judge Greene oversaw the US telecommunications industry in the US for 12 years. Both probably agree on the principle that the outcome should encourage innovation, although they differ on how it should be done.

This probably rules out any settlement that requires the court to continue to oversee Microsoft’s conduct. Such oversight would be needed in a settlement involving Microsoft publishing its “applications programming interfaces” (APIs)—enabling its applications to work on operating systems other than Windows. Constant judicial oversight might be required to settle disputes over disclosure.

Another possible remedy would require Microsoft to auction the source code for Windows to at least two other companies. In principle, this could create a chance for the purchasers to crack Microsoft’s operating systems monopoly. But interest in this option has waned because potential buyers have realised the code is worthless without access to Microsoft employees who know its intricacies. This leaves the break-up of the company, which would probably come in one of two ways. The court could create three vertically-integrated companies—known as the Baby Bills. Alternatively, it could allow Microsoft to split itself into two separate companies, controlling operating systems and applications. The court could then divide the operating systems company into three.

The reason for choosing the latter approach is that Judge Jackson’s findings did not find abuses on the applications side of Microsoft, so there is no need to split up that part of the company. In either case, Microsoft’s chairman Bill Gates, and its other senior managers, would have to be divided among the various companies, and divest their shareholdings in the others. Either break-up option has the strength that it strikes at what Judge Jackson sees as the heart of the problem—Microsoft’s repeated abuse of its monopoly position in operating systems. Divide up that part of the enterprise and competition in that market will instantly re-emerge, without extensive and continuing judicial oversight.

The only reasonable objection to the break-up options is that they could fracture the Windows standard. In the short run, this is highly doubtful. The three new operating systems companies would have strong incentives to use the common APIs of the current Windows—and the new Windows 2000—so that each would have a full range of applications programs.

Over the longer run, standards might diverge, but it is through that competitive process that innovation occurs—the major theme of Jackson’s opinion. As Walter Mossberg of the Wall Street Journal has pointed out, Microsoft’s best products have emerged when the company faced real competition. The examples include Internet Explorer, Money and Word—at least until WordPerfect fell by the wayside.

The same was true after AT&T was broken up. The variety of telephones proliferated, and their price dropped. More importantly, the break-up gave strong incentives for AT&T to follow its competitors MCI and Sprint in laying fibre optic cable. Fibre optics in turn provided the backbone capacity for the vast explosion in data traffic unleashed by the internet. Ironically, Microsoft now claims this threatens to erode its market position.

It is possible, if not likely, that one of the three new operating systems companies will eventually win a future standards race, and become a new monopoly. But, during the transition, improvements will come more rapidly, and the winner will have Judge Jackson’s opinion as a guide as to how behave.

Meanwhile, Microsoft’s top management should realise that break-up is best for the shareholders. As it is, the company can only justify its share price by constantly growing the earnings of an increasingly cumbersome enterprise. A break-up would refresh each of the component parts. Shareholders will be rewarded, just as they were when AT&T was broken up. This case will settle only when those running Microsoft come to the same realisation.