Despite intense competition and absent any evidence of consumer harm, the Justice Department persists in its antitrust litigation against Microsoft. I will address three questions about that litigation. First, what theory does the government rely on to defend its interventionist role? Second, what logic, if any, justifies the remedies reportedly under consideration by the Justice Department? Third, what's really driving the browser wars?
The theory of network effects says that high-tech consumers, concernedabout compatible software applications, might be seduced into purchasinginferior goods. Undoubtedly, there's some truth to the theory. But inunregulated software markets, users were not fooled by network effectsdespite compatibility concerns. Consumers refused to anoint WordPerfect asruler-in-perpetuity of word processing, or Lotus as spreadsheet leaderforever, merely because use of those products was ubiquitous.
Network effects theorists argue that consumer purchases are not a reliableindication of a "superior" product. Instead, objective measures can telluswhich products are technically superior, no matter what consumers actuallybuy. The problem with that argument is that it leads directly togovernmentpaternalism -- to the idea than an elite corps of government experts knowsour interests better than we do and can regulate our affairs to satisfythose interests better than the market does. When we permit government tomake such assessments, and we allow those assessments to trump thesubjective choices of consumers, we abandon any pretense of a free market.
Various remedies have been floated by the Department of Justice.Essentially, each remedy punishes vigorous competition by dismembering thewinning competitor. First, vertical divestiture: One company keeps theWindows operating system; a second company gets applications programs; athird company takes on Internet and e-commerce products. Normally onedoesn't attack monopoly power by spinning off the monopoly itself into aseparate company. But what is worse, vertical divestiture will requireongoing government decisions about whether a product is part of theoperating system, or an application or Internet related. Just look at thebrowser to see how difficult it can be to compartmentalize a product withina nearly seamless operating environment. And look at the AT&T fiasco toseehow easy it is for a court to get bogged down in post-divestitureregulation.
Second, horizontal divestiture: Each of several vertically integratedclones -- Baby Bills -- would receive full rights to Microsoft's sourcecodeand other intellectual property. They could then proceed to compete freelyand fiercely against one another. May the better Bill win, at least untilanew leader emerges, at which time the government will undoubtedly call foranother divestiture. No one seems to know which corporate Bill gets thereal-life Bill or whether new operating system features have to be sharedand, if so, why any company would continue to innovate, knowing thatcompetitors will reap the benefits.
Third, compulsory licensing: Microsoft would be forced to license theWindows source code to one or more companies, each of which could developand sell it independently, thereby creating instant competition in theoperating system business. The problems should be obvious: If newtechnology is to be declared public property, it will not materialize. Iftechnology is to be proprietary, then it must not be expropriated. Onceexpropriation becomes the remedy of choice, the goose is unlikely tocontinue laying golden eggs.
Meanwhile, government-driven balkanization of operating system protocolswill wipe out Microsoft's most important contribution to software markets:standardization. Like the Unix system, Windows will end up with a dozen ormore variations -- no common platform on which software developers canbuild. The result will be fewer applications programs, increased costs ofdevelopment and higher user prices.
Finally, what's really driving the browser wars? To find out, just readthe Justice Department's complaint. There you will find Netscape mentioned130 times in 130 pages -- government resources co-opted for the welfare ofacompetitor, not for consumers. The conclusion is all but inescapable thatantitrust laws are being used as an anti-competitive subsidy to prop upunsuccessful firms. Instead of focusing on new and better products,software executives will find themselves consorting with former members ofCongress, their staffers, antitrust officials and the best lobbying andpublic relations firms that money can buy.
On the other hand, perhaps this case is merely a tactic for empirebuilding, which has become standard procedure in Washington, D.C.PresidentClinton has asked for a 17 percent increase in funding for the AntitrustDivision. To justify that increase, the Department of Justice must providethe American public with dramatic evidence of its effectiveness. Hence, ahigh-profile case with sensational remedies as the exit strategy, played tothe media and focused not on substantive legal issues but on publicridiculeof a company and its chief executive. We deserve better.