Commentary

Microsoft, Decision Two

Do you surf the Internet with a Microsoft browser? If so, federal judge Thomas Penfield Jackson and the Justice Department want you to know that your choices have been unfairly curtailed by the predatory and monopolistic practices of the Microsoft Corporation. Even without evidence that consumers were harmed, Judge Jackson ruled that Microsoft violated the Sherman Antitrust Act. His opinion is remarkable for its naive view of the business world and its skepticism about healthy competition.

To determine whether a business has violated antitrust laws, the court must first determine the “relevant market” in which the corporation is competing. That determination is extraordinarily important, because a sufficiently narrow definition of the “relevant market” can make any business a “monopolist.” For Microsoft, asserted the government, the appropriate “relevant market” comprises only single-user desktop PCs that run on an Intel microchip, and Judge Jackson agreed.

Thus, as economist Alan Reynolds has pointed out, Apple’s PC market share doesn’t figure into the analysis because Apple runs on a Motorola chip — even though Apple boasts from 13 million to15 million users and sharply rising iMac sales, nearly half of which are to new users or Microsoft converts. Nor does Sun Microsystems’ share count because Sun, too, isn’t Intel based — except Sun’s Solaris system, which isn’t single user. And Linux, which now runs more Web sites than any other server operating system, came too late to be included in the government’s complaint, so it doesn’t count either. Then there are hand-held computers, sub-notebooks, set-top TV boxes and other consumer electronics products, which also aren’t Intel. And finally, 15 percent of PCs are marketed “naked,” without an operating system. Reynolds estimates that Microsoft’s real market share is under 70 percent. If that constitutes a monopoly, the Justice Department had better investigate Quicken, AOL, and Intel — each of which has a larger share than Microsoft.

Judge Jackson also agrees with the government that Microsoft’s practice of “tying” its browser to Windows is further evidence of monopolistic predation, which harmed Netscape, maker of a competing browser. “Microsoft’s campaign succeeded in preventing—for several years, and perhaps permanently — Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits.” Aside from Judge Jackson’s quixotic notion that one company has an obligation to make the marketplace “fair” and “open” for its rivals, Microsoft’s tying arrangements weren’t the cause of Netscape’s decline, nor has Microsoft been able to secure market leadership by bund ling other products with Windows. For example, Microsoft Network (MSN) hasn’t dented AOL’s control of the online market. MSN loses about $200 million per year serving 2 million customers. AOL, with 15 million users, is making a ton of money. So, despite all the complaints, Microsoft’s tie-ins proved impotent; consumers didn’t like the Microsoft Network and they couldn’t be forced to buy it. By contrast, when consumers decided that Microsoft’s Internet Explorer was better than Netscape’s browser, they switched.

That’s why Netscape’s browser share, once 90 percent, declined to 42 percent. Recall that Netscape still controlled 90 percent of the market long after Microsoft began bundling its browser with Windows. Not until PC magazines, then consumers, discovered that newer versions of Microsoft’s browser were superior did Microsoft’s market share explode. A better product, not tying arrangements, won the battle for consumer popularity.

Meanwhile, as Microsoft improved Internet Explorer, Netscape made some key mistakes. First, it didn’t offer software developers a viable platform onto which applications could easily be written. Then, it responded too slowly when its browser was outclassed: it twice spurned help from AOL, it was late offering a free browser and it took three years to exploit its Netcenter portal. Perhaps Netscape’s browser would still be the market leader if CEO Barksdale had spent more time on product development and less time cobbling together his anti-Microsoft coalition and pleading for government aid.

Absent from Judge Jackson’s argument is any explanation of why most consumers are so satisfied with Microsoft’s products; how millions of other consumers managed to break free of Microsoft’s monopolistic stranglehold and buy Apple, OS2, Linux, Unix and other competing systems; and why consumers who are alleged to have been harmed have never complained.

The contours of the high-tech world are changing every day. As the marketplace reinvents itself, Microsoft may discover that it is competing with yesterday’s technology — struggling to match both Internet upstarts and new software-media giants like AOL-Netscape-Time Warner. Meanwhile, antitrust bureaucrats argue for dismembering the struggling leader, apparently oblivious to the dynamic and intensely competitive environment that Microsoft faces. By the time the court is through deliberating, the market will have changed in ways that the Justice Department and Judge Jackson cannot even imagine.

Robert Levy is senior fellow in constitutional studies and Noah Pollak is manager of editorial services at the Cato Institute.