Let Microsoft Compete

Thursday, April 30, 1998

Bowing to immense pressure from the Justice Department, Microsoft agreed in January to stop bundling its Internet browser with shipments of its popular Windows 95 operating system. The Justice Department argued that such bundling amounted to anticompetitive practice, and it sought record fines of $1 million a day to coerce Microsoft into stopping the practice. I believe that such government attacks on the leading software company will harm the performance of an industry with the most sustained and rapid technological advance in modern times.

Only lawyers schooled in arcane language can figure out if Microsoft actually violated a 1995 antitrust consent decree when it threatened to revoke licenses for Windows 95 unless manufacturers installed Microsoft's Internet browser. However, this interpretation of the decree clearly is no boost to industry progress.

Products and operating systems change rapidly, driven by fierce competition and easy entry of new companies. Courts and bureaucrats move slowly.

This tying together of Windows and Microsoft's browser may have given the company a temporary edge in the browser market against Netscape Communications Corporation. But history shows that such advantages are usually of little consequence for the development of the industry. Apple Computer, an early leader in personal computers with its easy-to-use icons, stumbled badly in the 1980s. It soon became a minor player.

Poor Guide

The same fate could await Microsoft, especially if, as many leaders of the industry believe, most computers become mainly machines for communicating with other computers through the Internet and other networks. Microsoft might then be at a competitive disadvantage as it adds bells and whistles to an operating system that may have become too expensive.

It is difficult to tell what is a product tie-in within the software industry because products merge almost seamlessly. Windows already incorporates many applications in its operating system, such as a graphical user interface and font types. With a slightly different time sequence of innovations, Microsoft's browser could have been part of what was called Windows 95 from the beginning.

The Justice Department apparently is basing its current case against Microsoft on the concept of "network externalities." This refers to an early standard, such as a computer operating system, that greatly influences future standards because of the need to communicate among compatible machines. Network effects are obviously at times important, but alleged network inefficiencies are a poor guide to antitrust policy because they are difficult to document.

I am not advocating the abandonment of antitrust actions against fast-moving industries but rather the confinement of government cases to price-fixing agreements, the traditional bread and butter of antitrust. Those agreements can usually be clearly documented. More important, they invariably are anticompetitive and harm consumers, whether in computers or in a slowly changing industry such as combat boots.

Swift Justice

In the computer industry, products and operating systems continue to change rapidly, driven by fierce competition and easy entry of new companies. Courts and bureaucrats move too slowly and lack the up-to-date knowledge required to determine whether particular systems or standards are pro- or anticompetitive. Competition, by comparison, quickly and effectively punishes companies that try to impose on their customers costly and inefficient products or standards.

IBM's experience with tie-ins and its fall from the leading position in computers illustrate the pitfalls. In the early days of this industry, data were entered into large computers through magnetic cards. IBM, which had a huge share of the computer market, forced companies that bought its computers also to buy its punch cards. The Justice Department alleged that this tie-in of cards and computers extended IBM's monopoly power over computers into the competitive card industry.

Before long, cards were made obsolete by the development of electronic data storage, and IBM's efforts to force the purchase of its cards were of no consequence. This tie-in case was the first in two decades of government antitrust attacks against IBM that probably contributed to its sharp decline in importance. Since IBM was arrogant and self-confident, antitrust suits against Big Blue were popular. Bill Gates and Microsoft are also said to be arrogant and unrepentant, but personal attitudes and popularity are no basis for public policy.

The reaction that began in the Justice Department in 1980 against problematic antitrust interventions should continue. The government should "cease and desist'' from bringing dubiously grounded antitrust cases against innovative competitors, even when they are imperious and unpopular.