The
Case Against the Case Against Microsoft
EXECUTIVE SUMMARY
The current antitrust case against Microsoft has no policy merit. It substitutes the judgements of court experts, economists, and antitrust attorneys for the consensual transactions of consumers themselves, and ignores basic points of sound law, economics and computer science.
The
rapidly evolving nature of computer science presents both consumers and
producers with a standardization/innovation
tradeoff. Human time and labor can
at any time be spent on newer, faster machines and more powerful software, but
at the possible cost of walking away from valuable investments of time and
labor on older machines and programs.
The question is not whether this tradeoff exists, but how it is to be
made.
On
the one hand, entrepreneurs who generate new ideas and knowledge (for example,
Sun Microsystems with its Java programming language) will seek to persuade
consumers to give up their existing capital for their product, claiming that
the benefits now outweigh the cost. On
the other hand, companies who have a stake in existing standards (for example,
Microsoft), will attempt to persuade consumers that the benefits are not worth
the costs. Either may attempt to
minimize the costs of switching by supporting existing standards within the
context of newer knowledge. This process provides essential information to
consumers and is socially valuable.
But
regardless of how the negotiations between producers and consumers are carried
out, the competitive process of the market is the only way to get the correct
answer. It is the only process that is
sufficiently complex enough and decentralized enough to manage the millions of
different decisions that consumers must make daily, and the only process for
making this decision that is compatible with the values of a free society. To infer a
priori that a particular point in
this tradeoff is best (for example, requiring an operating system to be
separate from a browser) over the verdict of the marketplace is at best the
arbitrary substitution of some people’s judgment for others, and at worst a
perversion of the rule of law.
In fact, a review of pricing data shows conclusively that Microsoft has not behaved monopolistically. Below is a table of inflation-adjusted prices based on advertisements in computing magazines over the last 9 years:
|
Product |
1990
price |
1999
price |
change |
|
|
|
|
|
|
Excel |
$320 |
$228 |
-40% |
|
Excel
upgrade |
$320 |
$72 |
-344% |
|
Word |
$213 |
$228 |
+7% |
|
Word
upgrade |
$213 |
$57 |
-270%
|
|
Windows |
$125 |
$137 |
+10% |
|
Windows
upgrade |
$125 |
$68 |
-84% |
When
viewed in light of the dramatic increase in functionality and power of
Microsoft products over the past decade, Microsoft’s pricing behavior becomes
even more benevolent.
This
case is an example of how government intervention in high-technology industries
does more harm than good. Computer
scientists, entrepreneurs and consumer advocates everywhere should call for its
dismissal.
Overview: Better Engineers Than Lawyers
Microsoft’s
fumbling of its videotape presentation in court in February confirms what many
in the technical community have always suspected: Microsoft’s engineers are better than its
lawyers. But, to be fair, they’re under a lot of
pressure. After all, for the past three
years, the Department of Justice has pursued antitrust complaints against the
world’s largest software company.
Because the company's founder is the world's richest man, and because
the company has achieved an
unprecedented role in shaping the computer industry, the case has captured the
attention of the popular media. This
case’s outcome will have a significant impact on the future of
Popular
support for Microsoft is tellingly strongest in cyberspace[1], the
environment most commonly frequented by computing professionals. Popular support for the DOJ is strongest in
the older, more established media. But regardless of popular feelings about
Microsoft, the case has no policy merit.
It is a slap in the face of an American success story. Successful business leaders, entrepreneurs,
and computing professionals everywhere should call for the dismissal of
Background: Simplicity and Standardization Are Key
In
order for computer non-specialists to easily use a computer, it must perform
many tasks in a simple and intuitive manner.
The more these tasks are performed behind the scenes, quietly and
efficiently, the easier the machine is to use.
These tasks include processing mouse movements, managing the files on
the hard disk, handling memory, starting programs when instructed and so
forth. Modern computers now handle these
tasks so effectively that we never think about them. But this ease of use enjoyed today did not
happen accidentally. It is the
remarkable result of human ingenuity, applied toward the creation of a single
computer program.
This
program is the operating system. The operating system is the program that
the computer starts running when switched on. During startup, the
operating system performs some checks of the computer and disk drive. It determines whether devices like a printer
and scanner are connected to your computer, and presents a startup screen. It then waits for mouse or keyboard commands
from the user.
The
most popular operating system is Microsoft Windows, currently released as
Windows 98. Other operating systems
include the MacOS (found in all Macintosh computers), Unix (a public domain
system with its roots in academic and industrial research) and IBM’s OS/2. Differences between operating systems are the
primary sources of differences between computers in the marketplace. It is the operating system, more than
anything else, that is responsible for the characteristic “look and feel” of a
particular computer.
But
if look and feel were all that mattered, Microsoft would still be begging for
venture capital and Bill Gates would be just another college dropout. Operating systems also provide standardization, the ability to run the
same programs, like word processors or spreadsheets, on different
computers. Both producers and consumers
of software highly value standardization.
Accordingly, it commands a high value in the marketplace.
How Operating Systems Provide Standardization
The
operating system provides important functions beyond tasks that users can see
directly. Application programs like
Quicken, Word, and Doom rely on hundreds of functions that operating systems
provide: drawing pictures, printing characters on the screen, providing dialog
boxes for interacting with users, and so forth.
These
operating system features provide two important market functions. First, they reduce the time it takes to write
programs. Software engineers only have
to write code unique to their application, not endlessly reinvent the wheels of
features common to most programs. It’s
the same advantage architects enjoy when they design a home: They can specify what the kitchen looks like
without having to design a range, microwave, and refrigerator.
Second,
operating system services provide standardization. When a computer company releases the
technical details of its operating system, programmers know that if their
software uses those services correctly it will run on any computer with that
operating system. This means that they
need make only one version of their program for each OS, instead of one version
for every computer. This saves an
enormous amount of time. It also
provides significant convenience for consumers, who get to buy software
products secure in the expectation that they will run on any computer with the
same operating system, instead of one and only one machine.
Standardization
of software is now so much a part of our lives that we don’t think about it
anymore. Can you imagine what it would
be like to have your word processing program run on one PC but not another? Things weren’t always this way, however. There is nothing about computing, no
scientific law, that compels standardization.
Today’s computing professionals could write hundreds of operating
systems tomorrow, all different from each other, all competing with each other,
and all completely incompatible with each other. Fortunately, we don’t waste our time on such
an obviously unproductive task.
Standardization
creates wealth by preserving and properly allocating the scarce resources
needed to develop software: human time and effort. Microsoft’s recognition of the importance of
standardization, and its attempts to capitalize on the high value of
standardization in the marketplace, are the single most important factors in
the company’s success. The value of
standardization to consumers has important implications for the Justice
Department's case.
Standardization vs. Innovation
But
if standardization has some obvious advantages, it also has some temporary
drawbacks. Over time, human knowledge
increases. New discoveries and ideas
reveal better ways to accomplish tasks than what we currently know. As new knowledge percolates throughout
society, old standards disappear and new methods emerge.
Economic
progress follows scientific discovery.
As humanity gains new knowledge through experimentation and study of the
world, we develop newer theories and techniques that displace existing
ones. A round earth replaces a flat
one. A sun-centered solar system
replaces an Earth-centered one. This
doesn't mean that the older theories were “bad,” only that they were the best
available given what humanity knew.
Similarly,
as consumers adopt entrepreneurs’ discoveries and new ideas, old standards and
products become obsolete. This does not
make older standards and products “bad,” only less advantageous in light of
newer knowledge. Were it otherwise, we
would still be driving Model Ts and using rotary phones.
But
if we abandon a standard, or replace an older product with a newer, we must
reallocate resources. We have a thorny
problem: Under what circumstances should we give up a standard? At what point does it make sense to discard
the resources invested in methods of older knowledge, and acquire the new
ones? We face a standardization/innovation tradeoff, an ever-present state of
adjustment to new economic realities that saturates market economies.
We're
all familiar with this tradeoff from personal experience. Consider, for example, the last time you
bought a car. Suppose that the latest
copy of Car and Driver arrives in
your mail with a profile on next year's version of the car you just
bought. It gets rave reviews: tests
indicate it gets 10% more miles per gallon, accelerates faster and costs the
same. Should you buy it?
Most
of us wouldn't, because the resources we invest in our cars are significant,
greater than the benefits we'd get from buying cars made with newer
features. Most people do not have the
resources available to buy the newest car every year, even if it's
technologically superior. On the other
hand, we may upgrade our computers more often, both because they represent a
less significant investment of resources and because the computer industry
generates new knowledge rapidly and makes it available cheaply.[2]
Standards
shift and new products take hold when the benefits of moving to the new outweigh
the costs of discarding the old.
Profit-making firms can attempt to influence when and where these shifts
occur by maximizing the benefits of their proposed innovations (increased ease
of use, greater functionality, lower cost) or by minimizing the costs of their
adoption (by offering compatibility with existing standards). Some firms even try both approaches. Microsoft, for example, consistently adds
features to Windows while providing support for applications that use DOS, its
much older command-line-based operating system developed in the early days of
personal computing, famous for its “c:\” prompt. Intel’s latest chips include extremely
sophisticated features for improved performance, but have always offered full
compatibility with their original design of twenty years ago[3].
An
understanding of the standardization/innovation tradeoff is essential to
analyzing the economics of the computer industry. Unfortunately, an appreciation of the
tradeoff appears to be lacking in both the public statements and the legal
documents on file in the Microsoft case.
The Internet, the World Wide Web and Browsers
Since
the early 1960s, computer scientists have investigated various methods for
connecting computers in a network. The
advantages of networking include sharing information, sharing resources and
improved efficiency. Over the past two
decades, standards have evolved that permit computers to connect to one another
easily and reliably. These standards are
the Internet Protocols, and include
telnet, TCP/IP, ftp, and a series of protocols for delivery of electronic mail. Computers
that use these standards connect to the Internet.
In
1988, a scientist named Tim Berners-Lee first proposed a general way of
organizing information that made the Internet much easier to use. By hiding the arcane commands and protocols
of the Internet from users, exchanging information on the Internet became
possible for millions of people.
The
portion of the Internet that now uses these standards is the World Wide Web, or WWW. An application program
that uses these standards to search the WWW for information and present it to
the user is a browser. The first browsers were text-based, like
Lynx. The first popular browser capable
of displaying graphics was written by Marc Andreesen, a graduate student in
computer science at the
Shortly
after the explosion of the World Wide Web, a group of programmers at Sun
Microsystems began to work on a way to write programs independent of any
particular operating system, such that the same program could execute on any
computer. They developed the Java programming language. The
developers of Java negotiated arrangements with Netscape to support Java within
Netscape’s browser. This meant that any
computer that could access the web and run a browser could run programs written
in Java, regardless of what kind of computer it was or what operating system it
had.
Microsoft,
reacting to the popularity of the WWW and Netscape’s browser, recognized that
the benefits of making available new Internet technologies might now outweigh
the costs of discarding investment in existing standards centered on the
company’s traditional desktop computing model.
Bill Gates responded by redefining Microsoft as an "Internet
company," and not just a software company.
Microsoft embraced the WWW, Java and the Internet protocols as new
standards, incorporating them into existing products. They developed a browser to compete with
Netscape’s called Internet Explorer, and integrated it with their Windows
operating system. Like every company
faced with a new standard, Microsoft sought to maximize the benefits of
adopting new technologies while minimizing the costs of doing so. In so doing, the company sought to (a)
embrace the tremendous benefits of the WWW, and (b) minimize the costs of
switching from its user environment by offering full compatibility, including
“look and feel,” with DOS and Windows.
When
Internet Explorer (IE) was first developed, Microsoft required all PC vendors
to put the Internet Explorer icon on the desktop and take other steps that
favored IE as a condition for pre-installing the Microsoft Windows operating system. The Department of Justice believed this
violated a previously obtained consent decree, and filed an antitrust
complaint. The legal minutiae of this
decree hinged on whether the browser is a “separate product” from its operating
system. A lower court ruled in the DOJ’s
favor, only to have that decision overturned on appeal six months later. The DOJ consequently changed strategies, and
now accuses Microsoft of using its market power to “bully” its competitors.
In any case, our interest is not in the particular “angels and pinheads” question of whether a piece of software is one product or two, or in refuting the latest legal theory that DOJ is using to bolster its case. We are concerned with the overall merits of the DOJ complaint, and the rationality of applying century-old antitrust law to the computer industry.
The DOJ Complaint and Public Statements
The
civil action of United States of America
v. Microsoft Corporation was filed on
The
DOJ’s argument, while elaborate, runs essentially as follows:
1) Microsoft
has a monopoly in the PC operating system market. This monopoly is protected by technological
“lock-in”.
2) The
emergence of the Internet, WWW standards and Java are seen by Microsoft as a
threat to that monopoly.
3) Microsoft’s
actions in response to this threat (such as its promotion of Internet Explorer
through restrictive tie-ins with the Windows operating system) are illegal
violations of sections 1 and 2 of the Sherman Act of 1890. They are also anticompetitive and detrimental
to consumer welfare.
4) Preventing
Microsoft from engaging in these practices will promote innovation and
competition in the browser market. This
will enhance consumer welfare.
This
argument is fundamentally flawed.
Monopoly and Network Effects
Microsoft
has the largest share of the PC operating system market, generally estimated
between 80-90%. As noted, however,
operating systems provide a tremendous consumer benefit: standardization. A smaller market share for Microsoft and more
operating systems in the marketplace, while perhaps mimicking textbook notions
of “competition” more closely, would impose tremendous costs on consumers. Where standardization is crucial, it doesn't
make sense to talk about the importance of consumer welfare, while at the same
time citing the dangers of a large market share. It is precisely that large market share that
enhances consumer welfare, when consumers’ welfare includes the value of their
time and effort.
Additionally,
the current complaint alleges that Microsoft’s “monopoly” is protected by
“network effects.” Network effects occur
when a person’s benefit from using a product increases with the number of
people who use it. Network effects are
in fact socially beneficial, as they play the leading role in making technology
affordable for ordinary consumers.
Problems arise, so the DOJ claims, when network effects cause “lock-in”
of an inferior technology, in which an otherwise weaker product can outsell a
stronger one if its installed base of users is large enough. Despite widespread popular belief, this
theory has little empirical support.[4]
A
declaration filed in support of the DOJ notes correctly that “application
software written for a specific operating system cannot run on a different
operating system without extensive and costly modifications or add-ons,” and
that “Network effects have increased the desirability of Microsoft Windows [95
and 98] for consumers. Once enough users
had been attracted to Windows, that very fact made Windows even more desirable
to further users.”[5] The complaint then claims that the number of
software applications that must run on an operating system constitutes a
significant barrier to entry that leads to potential for the abuse of monopoly
power by Microsoft, and that therefore legal action is therefore justified.
This
claim is contradictory to the Justice Department's stated objectives of
consumer welfare, because these very “barriers to entry” are what make Windows
so attractive to consumers. It is
precisely the large number of applications programs available under Windows and
the standardization Windows provides that
motivate consumers to purchase the Windows operating system. It is nonsense to recognize the benefits of
standardization for consumers and then cite them as harmful “barriers to
entry.”
The Competitive Threat to Microsoft and the Historical
Record
The
documents on file in United States v.
Microsoft contain numerous admissions that market processes are
working. Sections I.6 through I.10 of
the complaint state very clearly that the combination of Web-based standards
and Java, developed by Microsoft’s competitors, poses a significant threat to
Microsoft’s domination of the PC operating system market. Entrepreneurs at Netscape and Sun have
generated new knowledge, with benefits that might outweigh the costs of
discarding an existing standard, even a standard as popular as Windows.
If
Microsoft were truly an unassailable monopoly, then it wouldn't care about its
competitors. It wouldn't need to respond
to the market, it wouldn't need to innovate, it would restrict output and it
would raise the prices of its products.
As the complaint itself admits, Microsoft has done just the
opposite. Instead of ignoring the threat
from Netscape, Microsoft developed a competing browser, and by the government’s
own admission “spent hundreds of millions of dollars to develop, test, and
promote [it]."[6] Instead of acting like a monopolist that
ignored consumers’ wishes and throttled innovation, Microsoft “released three
subsequent versions [of IE] (2.0, 3.0, 4.0), in each case adding features and
functionality to the product."[7] Instead of pricing like a monopolist, it
gives its browser away free.
Nor
does the record show evidence of monopolistic behavior in operating system
licensing. Last month, Microsoft sought
to protect its Windows pricing data for PC vendors from public disclosure,
citing existing confidentiality agreements[8]. Fortunately, a wealth of data on Microsoft
consumer prices is already publicly available, and can be found in any good
college library.
To
examine the question of Microsoft pricing behavior, the author went back
through ten years of PC Magazine and
sampled the price of Microsoft operating systems (DOS, Windows 3.1, Windows 95,
Windows 98, and Windows NT). The results
are shown in Figure 1, with prices reported in constant 1990 dollars[9]:
Figure 1: Microsoft OS Prices as Advertised in PC Magazine
Up until 1995, Windows and DOS licenses declined in price even as functionality improved. With the release of Windows 95, Microsoft offered users two choices: an original license for new users, or an upgrade path for existing Windows users. The initial price of a Windows 95 license at $125 was about 70% more than that of a Windows 3.1 license at $74 in constant dollars. This reflected at least in part the dramatic differences in functionality between the two products. The cost of an upgrade to Windows 95, however, was only $73 in constant dollars, essentially the cost of a Windows 3.1 license despite the fact that Windows 95 was a vastly more powerful product.
If we are to give the DOJ the
most charitable interpretation possible, we would observe that between 1996 and
1999, the cost of a Windows 95 single license rose 9.6% in constant dollars. Statistically significant, perhaps, but
hardly evidence of monopoly power. On
the other hand, the cost of a Windows upgrade remained essentially constant
during that time. Upgrade paths for all
Windows OS products, in fact, have consistently declined in price. This is exactly the opposite of monopolistic
pricing that we should see if “lock in” has occurred. Once Microsoft has presumably captured users
with its Windows OS, as a monopoly it should be able to restrict output and
raise prices for Windows users. In fact,
the historical record shows it does nothing of the kind.
Nor is this picture confined to operating systems. In addition to examining operating systems, the author looked at prices for Excel, Word, and the current state of the art C/C++ program development environment. These results are shown in Figure 2:
Figure 2: Microsoft Application Prices
Similar patterns emerge to those of Figure 1. Prior to the release of Windows 95, costs of
applications to consumers remained constant or declined. With the release of Windows 95, an upgrade
path was introduced in which consumer costs declined dramatically. For applications, Word and Excel prices for
both licenses and upgrades actually declined since 1992. Of the three applications examined, only the
price of a state of the art C/C++ development license has increased beyond
inflation. This is largely because these
are lower-volume products than Word and Excel (there are far fewer C++
developers than users of word processors and spreadsheets), combined with the
increasing complexity and power of modern code development environments.
Again, this pricing behavior exactly the opposite of
what is required to support the DOJ’s claim of monopoly. Once consumers are “locked in” to Windows, a
monopolistic Microsoft should raise its application prices through the
roof. In fact, it has done no such
thing.
These are the facts shown by the historical record:
1) Over the past ten years, the cost of a new
Windows license increased at a rate slightly ahead of inflation: from $125 in 1990 to $137 in 1999 in constant
dollars. This despite that over these
ten years, Windows was significantly enhanced to support hundreds more
peripheral devices, repair numerous bugs reported by users, connect to the
internet, use a significantly larger help database, support more “wizards” to
assist users in system configuration, and in general become a significantly
more advanced and more powerful product that consumed millions of dollars of
Microsoft’s research and development capital.
2) Over the past ten years, the cost to consumers of
obtaining the latest Windows release has declined with respect to
inflation. For the prices obtained by
the author, the cost to consumers of upgrading to the newest version of Windows
has declined by 84%. In 1990, a Windows
upgrade cost $125; in 1999 it is $68 in constant dollars. Again, this has occurred while Microsoft has
added significant functionality with each upgrade. Microsoft’s incorporation of Internet
functionality into its latest Windows releases is entirely consistent with this
trend.
3) Over the past ten years, the cost of some
Microsoft applications has declined in constant dollars, and for others it has
increased slightly. For the applications
and prices obtained by the author, Word has increased by 7%, from $213 to
$228. Excel has declined by 40%, from
$300 to $228. A state of the art C/C++
development environment has increased by 39%, from $285 to $396. Similar to the
functionality of operating systems, Microsoft application functionality has
increased during this time. In fact, one
could argue that the newest versions are so different, particularly for
development environments, that each release is a dramatically different product. In each case, however, the functionality
added is significantly greater than the observed price increase.
4) Upgrade costs of common applications declined
significantly: 270% for Word (from $213
to $57) and 344% ($320 to $72) for Excel.
5) There is no evidence of monopoly pricing
(restricted output and increased consumer cost). The historical record shows consistently
improved functionality at lower cost, exactly what classical economic theory
would predict for a productive, successful company.
These results are summarized below:
|
Product |
1990
price |
1995
price |
1999
price |
%
change |
|
|
|
|
|
|
|
Excel |
320 |
251 |
228 |
-40% |
|
Excel
upgrade |
320 |
67 |
72 |
-344% |
|
Word |
213 |
251 |
228 |
+7% |
|
Word
upgrade |
213 |
74 |
57 |
-270% |
|
Windows |
125 |
74 |
137 |
+10% |
|
Windows
upgrade |
125 |
43 |
68 |
-84% |
Figure 3: Microsoft Pricing History, 1990-1999 in constant dollars
Microsoft’s Response and the Sherman Act
Microsoft’s
initial response to the threat from Netscape and Java is the key issue in the
government’s case. The government’s
initial concern was Microsoft’s requiring favorable treatment of Internet
Explorer as a condition for manufacturers to pre-install Windows on their
machines. Microsoft also negotiated exclusive Explorer promotion arrangements
with Internet service providers and Internet content providers (ISPs and
ICPs). Although Microsoft has since
agreed under DOJ pressure not to pursue these types of arrangements, an
analysis of them sheds a great deal of light on the role of antitrust in high
tech industries.
Microsoft’s
arrangements required ISPs and ICPs to provide preferential treatment to
Internet Explorer if they want to appear in Windows’ Internet connection
screen. Preferential treatment might include stating that IE is the preferred
browser, removing links to competing browsers from their main sites, and so
forth. The DOJ alleged that these
practices were anticompetitive, and were illegal violations of sections 1 and 2
of the Sherman Act.
The
Sherman Antitrust Act of 1890 forbids contracts “in restraint of
trade." Enacted in response to
perceived concerns about the economic power of corporations, it is the primary
legal weapon in the antitrust arsenal.
Given the failure of 19th century policymakers to appreciate
the extent to which antitrust served the private interests of competitors of
successful businesses rather than the public interest[10] -- a failure that persists still today
-- and given the extraordinary difficulties in distinguishing “restraint of
trade” from ordinary competition and contractual arrangements, it is not
surprising that attempts to apply the Sherman Act 100 years later to high
technology lead to contradictions and problems.
In
the case of computer technology and other network industries, attempts by firms
to address the standardization/innovation tradeoff are necessary to promote
consumer welfare -- but may still be interpreted under traditional antitrust
theory as restraining trade. For
example, Microsoft’s negotiated tie-in arrangements are the predictable and socially
beneficial acts of a profit-making firm seeking to persuade consumers to adapt
to the new Internet standards by minimizing their transition costs. After all, consumers may not care which
browser they use, or they may not want browsers at all.
Consumers
do want to use their time wisely. It may
be that the most valuable use of consumer time is a simple, easy-to-use
pre-installed operating system with simple, fast Internet connection startup
screens. Or perhaps entrepreneurs will
decide that Microsoft’s pre-installed vision of computing is not meeting
consumer needs. If so, they will provide
value by installing less restrictive operating systems on computers and sell
them on the open market. Or it may be
that producers and consumers of software will embrace Java, and get rid of
Windows altogether. We simply don’t
know.
But
in the absence of dynamic marketplace negotiations, there is no rational reason
to prefer one specific outcome over another (for example, an operating system
without a browser) as the DOJ complaint does. The DOJ’s stated goal of
“improved competition in the browser market,”[11] for
example, treats a particular point in
the standardization/innovation tradeoff as most desirable, without any a priori evidence. In fact, the suggestion that more favorable
access to the desktop for Netscape is both desirable and requires legal
intervention now appears ridiculous in light of AOL’s multi-billion dollar
buyout of the company.
Due
to the rapid generation of new knowledge by computer scientists and
entrepreneurs, there may not be a browser market five years from now. Perhaps consumers will prefer the WWW and
their desktop integrated into a single, easy to use computing environment, and
won’t like having to use a separate program to search the web. Or perhaps future developments will make
today’s PC operating systems obsolete.
We simply don’t know. Given what
we do know about computing and innovation, however, a focus on the browser
market seems short-sighted. It is
doubtful, for example, if consumer welfare would have been enhanced by
government intervention in the market for washboards and ditto machines.
What Microsoft “Might” Do
One of the most disturbing aspects of the
Microsoft case is DOJ’s preference for emphasizing hypothetical markets over
actual ones. The DOJ does not base its
case on consumer harm caused by Microsoft, because there is none: Microsoft has
consistently offered better products at lower prices. Instead, the case documents recommend
preemptive action based on Microsoft's potential
to monopolize and cause harm:[12],[13]
"There is a substantial probability that these anti-competitive actions will
permit …”
"Microsoft could raise the price of its operating system . . ."
"Microsoft is likely to recover its lost profits . . ."
"... the Microsoft browser may well become the bottleneck input
..."
"... are likely to enable Microsoft to monopolize ..."
"Microsoft could obtain an additional benefit if these restrictions . .
."
"At that point, Microsoft can raise the price of its OS ..."
"Microsoft will likely recoup whatever profits it has foregone ..."
"This could
potentially have significant adverse consequences ..."
"Microsoft's actions are likely ..."
[italics added]
Even the government’s own key economic
expert, Franklin Fisher, admitted that
Microsoft has yet to cause actual harm.[14]
It’s difficult to make a case for consumer harm. On the one hand, even if Microsoft did everything it stands accused of, its actions still haven’t shielded it from competition. Microsoft has been unable to gain significant market share as an Internet portal. The Be operating system is available for PC’s at around $70,[15] and has hundreds of common applications written for it. Dell, SGI, and HP have all committed to support Linux, another alternative OS with a supported version available for only $50.[16] The list goes on and on.
On the other hand, there are deeper, more
troubling issues raised by this kind of argument. It might be just as "possible,"
"likely" and "substantially probable" that Microsoft's
actions will continue to successfully anticipate consumer preferences in the
marketplace, and continue to offer better products for less money just as they
have done in the past. None of us are omniscient: we just don’t know. We do know that punishing people solely on
the basis of what they might do ought
to offend anyone who values reason and the rule of law.
Conclusions
The
policy question this paper considers is a simple one: Does antitrust as
presently constituted do more harm than good to high technology sectors? The Microsoft trial is evidence that it does.
It
is wrong to assume that the millions of consumers who have bought Windows 3.1,
Windows 95 and now Windows 98, bundled with Internet Explorer, were not made
better off by those purchases. The
failure of elected and appointed officials to recognize and respect those
judgments does more harm than good.
It
is wrong to substitute the judgments of a few economists, antitrust attorneys
and judges on what constitutes consumer welfare for the consensual transactions
of consumers themselves. This does more
harm than good.
It
is wrong to deny that a standardization/innovation tradeoff exists, or to
presume to know a priori how that
tradeoff should be made. Pretending such
knowledge and enforcing it through law does more harm than good.
It
is wrong to ban attempts to “restrain trade” in the computing industry, since
the very real and socially important objective of minimizing the costs of
adopting new standards can best be achieved by one company trying to convince
consumers not to trade with
another. Such cost minimization
practices can include aggressive price cutting, licensing restrictions, and
massive innovation, practices that Microsoft is now on trial for. Punishing companies who minimize the social
costs of adopting standards does more harm than good.
Before
he was chairman of the Federal Reserve Board, Alan Greenspan was asked for his
opinion on antitrust law. His reply:
American antitrust statutes were "a jumble of economic irrationality and
ignorance."[17] Thirty years later, events have proven him
right.
The
case of United States of America v.
Microsoft may be front page news. It
may make interesting reading, it may be politically inevitable and it may even
enjoy modest support in some circles.
But
that doesn't make it right. The
government's proper role is to ensure that Microsoft (or any other company)
honors its contractual agreements with customers and shareholders. Going beyond that responsibility and interfering in the voluntary actions of
consumers is bad logic, bad law and bad policy.
Supporters of freedom, reason, and entrepreneurship should urge the
Department of Justice to drop this ill-considered action as an affront to
rational thinking. Markets may not be
perfect, but they're better than this.