Commentary

Microsoft: In Search of the Perfect Remedy

Microsoft’s blockbuster antitrust trial resumes on February 22 when the attorneys serve up their oral arguments. By late spring, Judge Thomas Penfield Jackson will issue his conclusions of law, which everyone expects will lambaste Microsoft. Next, barring an unlikely settlement, there will be a hearing on remedies, then final resolution, probably before winter. Not surprisingly, competing legal briefs are out in force. Harvard professor Lawrence Lessig wrote one at Jackson’s request; former judge Robert Bork got the nod from the state attorneys general; two opposing trade associations weighed in for the Justice Department and Microsoft. Garnering the award for most prestigious authors, the Microsoft group managed to recruit Lloyd Cutler, C. Boyden Gray, Nicholas Katzenbach and Griffin Bell.

Unofficially, the Progress and Freedom Foundation, a generally conservative think tank, is making the case for Microsoft’s archrivals, like IBM, Oracle and Sun Microsystems. PFF submitted its brief to the media, not the court. It wasted little time on legal nuances but devoted fully 11 of its 32 pages to a recitation — uncritical and almost verbatim — of Jackson’s fact findings. Then PFF went straight for the kill — Microsoft’s dismemberment. That remedy, according to author Thomas Lenard, “requires the least amount of regulation.”

Wrong! The least and best regulation — sustained by the facts and the law — is no regulation at all. Instead, PFF crows that it has come up with the optimal solution, one that answers the critics of draconian structural remedies like divestiture. For support, Lenard craftily cites appellate judge Richard Posner, recently appointed mediator by Jackson to see if a settlement could be reached. Posner has written that promoting competition is “the proper purpose of the antitrust laws.” PFF links that statement to its own assertion that dismemberment promotes competition. Ergo, Posner must endorse dismemberment. Inconveniently, PFF’s adopted advocate is the same Richard Posner who has characterized divestiture as a “luddite solution [that] would entail the sacrifice of known and substantial economic benefits — those flowing from efficient scale — for a conjectural improvement in performance from competition.”

Whether luddite or pro-competitive, the PFF remedy is a “hybrid” of vertical and horizontal divestiture. Here’s how it would work: Like a vertical breakup, Microsoft would be split into an applications company (A), selling products like Word and Excel, and a Windows company (W), selling the operating system bundled with the Internet Explorer browser. Then, like a horizontal breakup, W would be cloned into three identical companies, each of which would share “equally” in employees, existing contracts and intellectual property rights. Never mind that nobody at PFF or elsewhere has the foggiest idea how to share employees and contracts equally.

After the breakup, writes Lenard, if A wanted to do business with any of the Ws, it would have to do business on the same terms with all of the Ws. For a reasonable period — maybe three to five years — A and the Ws could not merge or contract exclusively with one another. Otherwise, any of the four companies could develop or acquire products of any type without restriction. That last feature, contends PFF, ensures that the government won’t have to intervene regularly to decide whether a new product is an application or part of the operating system. Because none of the three Ws will have monopoly power, PFF insists that it won’t matter if they bundle other products or engage in practices that would be off-limits to a monopolist.

Thus, to avoid ongoing regulation — the bane of vertical divestiture — PFF finds it necessary to carve Microsoft horizontally as well. But the problem with that approach, which compels multiple Ws, is that programmers all over the globe have developed thousands of compatible programs, thanks to the standardized platform that Windows affords. If PFF were to get its way, that enormous value would disappear overnight. Government-driven fragmentation of operating system protocols would wipe out Microsoft’s most important contribution to software markets: standardization. Like the Unix operating system, Windows would end up with many variations — no common platform on which software developers can build. The result would be fewer applications, increased costs of development and higher prices for consumers.

Anticipating that criticism, Lenard declares, without any support whatever, that “network effects” — the desire of users to maintain compatibility with other users — and high switching costs will prevent fragmentation. If the W companies want to retain their installed base of users, says Lenard, they won’t create incompatible new features. To be blunt, that argument is nonsense. PFF did not — indeed, could not — point to a single instance in which competing entities didn’t struggle to gain market share by adding unique features and functions, not available from rivals and not capable of replication. That’s exactly what happened with Unix. And that’s precisely the dispute now in court over Microsoft’s incompatible enhancements to Sun’s Java language. Before long, new features dominate old features and the standardized system disappears — at least until a new leader emerges, at which time PFF will undoubtedly call for another divestiture to buy more time.

Still, bemoans PFF, we have to do something. Without a large library of applications programs, there will never be a serious rival for Windows; and until there’s a serious rival for Windows, applications programs won’t be written. In Lenard’s words, it is “not profitable for developers to devote resources to developing programs for an alternative operating system that only has a small share of the market.” Astonishingly, barely three pages later, Lenard announces that “Microsoft was especially concerned about technologies, such as Netscape’s browser and [Sun’s] Java, that could support platform-independent computing and thereby erode Microsoft’s market position.” Those two statements cannot logically coexist. If no firm could dent Microsoft’s “applications barrier to entry,” why in the world would Microsoft be concerned about software developers flocking to the Sun-Netscape “middleware” market?

At a minimum, before we adopt PFF’s “perfect remedy,” let’s be sure there’s a problem to be remedied. When technology given life by our most creative and successful companies is essentially expropriated by bureaucrats who decide how, by whom and under what conditions it is to be marketed, we shouldn’t be surprised if innovation and entrepreneurship — twin engines that propel economic growth — sputter to a standstill.

Robert A. Levy is senior fellow in constitutional studies at the Cato Institute.