Microsoft, Decision Two

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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 mustfirst determine the "relevant market" in which the corporation iscompeting. That determination is extraordinarily important, because asufficiently narrow definition of the "relevant market" can make anybusiness a "monopolist." For Microsoft, asserted the government, theappropriate "relevant market" comprises only single-user desktop PCs thatrun on an Intel microchip, and Judge Jackson agreed.

Thus, as economist Alan Reynolds has pointed out, Apple's PC market sharedoesn't figure into the analysis because Apple runs on a Motorola chip --even though Apple boasts from 13 million to15 million users and sharplyrising iMac sales, nearly half of which are to new users or Microsoftconverts. Nor does Sun Microsystems' share count because Sun, too, isn'tIntel based -- except Sun's Solaris system, which isn't single user. AndLinux, which now runs more Web sites than any other server operatingsystem, came too late to be included in the government's complaint, so itdoesn't count either. Then there are hand-held computers, sub-notebooks,set-top TV boxes and other consumer electronics products, which also aren'tIntel. And finally, 15 percent of PCs are marketed "naked," without anoperating system. Reynolds estimates that Microsoft's real market share isunder 70 percent. If that constitutes a monopoly, the Justice Departmenthad better investigate Quicken, AOL, and Intel -- each of which has alarger share than Microsoft.

Judge Jackson also agrees with the government that Microsoft's practice of"tying" its browser to Windows is further evidence of monopolisticpredation, which harmed Netscape, maker of a competing browser. "Microsoft's campaign succeeded in preventing--for several years, andperhaps permanently -- Navigator and Java from fulfilling their potentialto open the market for Intel-compatible PC operating systems to competitionon the merits." Aside from Judge Jackson's quixotic notion that onecompany has an obligation to make the marketplace "fair" and "open" for itsrivals, Microsoft's tying arrangements weren't the cause of Netscape'sdecline, nor has Microsoft been able to secure market leadership by bundling other products with Windows. For example, Microsoft Network (MSN)hasn't dented AOL's control of the online market. MSN loses about $200million per year serving 2 million customers. AOL, with 15 million users,is making a ton of money. So, despite all the complaints, Microsoft'stie-ins proved impotent; consumers didn't like the Microsoft Network andthey couldn't be forced to buy it. By contrast, when consumers decidedthat Microsoft's Internet Explorer was better than Netscape's browser, theyswitched.

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

Meanwhile, as Microsoft improved Internet Explorer, Netscape made some keymistakes. First, it didn't offer software developers a viable platformonto which applications could easily be written. Then, it responded tooslowly when its browser was outclassed: it twice spurned help from AOL, itwas late offering a free browser and it took three years to exploit itsNetcenter portal. Perhaps Netscape's browser would still be the marketleader if CEOBarksdale had spent more time on product development and less time cobblingtogether his anti-Microsoft coalition and pleading for government aid.

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

The contours of the high-tech world are changing every day. As themarketplace reinvents itself, Microsoft may discover that it is competingwith yesterday's technology -- struggling to match both Internet upstartsand 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 environmentthat Microsoft faces. By the time the court is through deliberating, themarket will have changed in ways that the Justice Department and JudgeJackson cannot even imagine.