Antitrust after Microsoft: The Obsolescence of Antitrust in the Digital Era

In February 2001, The Heartland Institute released its ninth book: Antitrust After Microsoft: The Obsolescence of Antitrust in the Digital Era, by David B. Kopel. The 170-page book may be purchased for $8.95 (plus $3.00 shipping and handling) from The Heartland Institute, 19 South LaSalle Street #903, Chicago, IL 60603; phone 312/377-4000. Or order through Heartland's online store at www.heartland.org.

U.S. v. Microsoft Corporation, the antitrust lawsuit brought by the U.S. Department of Justice and 19 state attorneys general in May 1998 against Microsoft Corporation, marked the end of an era of antitrust law theory, legislation, and action. Antitrust policy in the twenty-first century will be far different from what it was in the nineteenth, when the laws were first written, or in the twentieth, when it was put to use in a series of landmark cases that define the terms of the debate today.

The Microsoft case raises, and this book seeks to answer, a number of important questions about the viability of antitrust in an era of rapid technological change. Government regulators must often proceed slowly to allow political oversight of their actions, allowing technology to sweep away products and competitors long before judgments are reached. The vagueness of antitrust law makes it particularly hazardous for the information technology industry, where partnerships and price-cutting are standard business practices. The Microsoft case and the history of antitrust enforcement reveal the ability of markets to discipline companies that attempt to extract monopoly profits. Ultimately, the best path to take may be to repeal the Sherman Act, the country's principal antitrust law.

1. Technology is changing faster than regulators can move.

The information technology (IT) industry is changing so rapidly observers have coined the phrase "Internet Time" to track its progress. A rule of thumb is that three months of Internet Time equal one year of Standard Time.

Since 1998, when U.S. vs. Microsoft was filed, phenomenal increases have occurred in the power of computers, their ability to store information, and the speed of data transmission. Products at the core of the Microsoft case have disappeared, changed dramatically, been superceded by others, or been sold or merged with others. The result is a product landscape that would be almost unrecognizable to a juror or jurist studying Microsoft in 1998.

Technological change per se does not mean the Microsoft case ought to be dropped. It certainly does not mean Microsoft is innocent of the illegal business practices it is charged with. What is clear, though, is that Microsoft's actions have not stopped or even slowed the rate of technological innovation. Indeed, Microsoft products continue to play a major role in making much of that innovation possible.

The proliferation of new products and falling prices makes it difficult to defend the assertion that consumers were harmed during the 1990s by Microsoft's alleged monopolistic conduct. A much more likely explanation of what happened during the 1990s is that capital gravitated to the IT industry because it was lightly regulated by government and therefore able to innovate and grow rapidly. More regulation would kill the golden goose.

2. New competitors have emerged to challenge Microsoft's dominance.

Changing technology has transformed the market in which Microsoft competes. Competitors who once complained of Microsoft's market power have now merged with other competitors and become behemoths themselves. Microsoft faces serious competition from companies offering software and hardware products that weren't even invented ten Internet Years ago.

Microsoft's core business-­writing the operating systems of personal computers­-is under serious challenge from Linux and (to a lesser extent) Apple. The center of gravity for computing is shifting away from the PC and onto such devices as Internet appliances, personal digital assistants, Web-enabled telephones, and other tools.

Competitors include names familiar to those who followed the antitrust trial--AOL, Netscape, Sun, and Oracle--but many new names have been added to the list: Sega, Sony, Red Hat, Symbian, Phone.com, Netphone, AT&T/TCI, 3Com, Yahoo!, Excite, and even Microsoft's former ally, Intel. Some, like Red Hat, are using Linux to compete with Microsoft head-to-head for control of the PC operating system market. Others work to shrink that market by using non-PC devices to do what PCs used to do, and by writing programs in languages that can be read by computers using any operating system.

It was debatable a decade ago (Internet Time) whether Microsoft was a monopoly, but it is indisputable today that Microsoft faces intense competition from more directions than ever before. The rationale for treating Microsoft as a monopolist is evaporating with each passing month as the old battleground of the desktop PC becomes less and less relevant to consumers and to the IT industry.

3. Microsoft has not acted in the manner expected of a monopolist.

The story of the rise of Microsoft Windows, Microsoft Office, and Internet Explorer to their current positions of market dominance does not reveal the effects of an "applications barrier to entry," "path dependence," or any other non-market forces. Instead, it shows the steady application of Microsoft's high-volume/low-price strategy combined with continuous improvements to product quality and, in some cases, superior customer service.

Large market shares may be an inherent characteristic of the new Digital Economy, perhaps due to high fixed costs and low marginal costs or the fact that e-commerce allows consumers to identify and choose superior products much more quickly and accurately than they could in the Old Economy. Either way, there is little evidence that Microsoft has inordinate market power today or that consumers would be better off if Microsoft's competitors were somehow favored in the future.

The Sherman Act's language is so vague that any business operating in America today could be targeted for prosecution no matter what business practices it engages in. By casting so wide a net, it gives politicians and government officials discretionary power over which companies to target, a power that thoughtful observers from Adam Smith and the Founding Fathers to many economists today would say is just the opposite of what is needed for an economy to operate efficiently.

4. Microsoft's business practices are pro-consumer.

The same business practices defined as anti-competitive by the Department of Justice are routinely and legally used by other companies in the IT industry and in other industries. Microsoft priced Windows and its applications in the fashion of a company knowing it has powerful competitors ready to enter the market unless prices are kept low and quality high. Its practice of giving discounts to computer manufacturers who help develop new versions of Windows, include hardware to take full advantage of Windows, and promote the Windows name is a standard practice in other industries that works to the benefit of consumers.

That the antitrust trial court found discounts, aggressive language in internal emails, and a contract disagreement with Sun Microsystems to be evidence of antitrust violations shows how easily antitrust laws can be manipulated against almost any company--even a company whose success depends on continuously improving its products and lowering its prices. Whatever the ultimate result of the Sun/Microsoft contract dispute, a conflict over contract interpretation is not an antitrust violation and ought not to be at the center of an antitrust suit.

5. Microsoft won the "browser wars" by producing a better product.

For three years, Netscape's Navigator had a monopoly in the Web browser market. It lost that monopoly when Microsoft introduced Internet Explorer (IE), gradually improved its quality, and in 1997 started giving IE to retail customers for free and encouraging other companies to integrate it into their programs. Due to America Online's acquisition of Netscape, Navigator is likely to once again be the market leader sometime in 2001.

It is puzzling that the Department of Justice would choose to overlook Netscape's monopolist past and anti-consumer practices (past and present) and target instead the company that broke up a monopolized market and gives away a superior product. As was true of the case against Windows, the business practices used by Microsoft to promote IE were not exclusionary, and invariably worked to the benefit of consumers.

So why the legal jihad against Microsoft? The company was a victim of industrial policy gone awry. Government officials tried to "pick a winner": a Web browser they thought, wrongly, had the potential of becoming an applications platform that could eventually help another company compete successfully with Microsoft Windows in the operating system market. Microsoft's decision to launch and aggressively market its own Web browser--a browser that most computer magazine reviewers now say is superior to the regulators' Chosen One--ruined the plan and embarrassed its authors.

6. The punishment proposed by Judge Jackson bears no relation to the charges against Microsoft.

The remedies imposed against Microsoft (with one exception) have nothing to do with the company's supposed illegal conduct. In particular, the proposed breakup of the company into Operating and Applications Companies goes far beyond whatever would be necessary to stop anti-competitive behavior. The order is radical (without precedent) and seems to reflect the resentment of a humiliated judge and Department of Justice, rather than a sincere attempt to attain justice.

Unsurprisingly, the punishments that would bear no relation to the alleged crimes would also fail to produce the desired outcomes. Consumers would not be helped. Breaking up Microsoft, according to one study, would force American consumers to spend $50 billion to $125 billion more for software over a three-year period. Competition would not emerge. Innovation, far from being encouraged, would be squashed under the thumb of Department of Justice bureaucrats. All companies and all industries that rely on the new digital technologies--and it is increasingly difficult to find any that do not--would be hurt directly or indirectly by the proposed remedies.

7. The problems with antitrust pre-date the Digital Era and the Microsoft case.

A review of the history of antitrust laws and prosecutions reveals that the original intent of lawmakers was to protect producers from low prices, rather than consumers from monopoly power. Antitrust cases are most likely to be invoked when prices are falling and consumers are benefiting, rather than in instances where monopolists are abusing their market power.

A close look at "antitrust's greatest hits"--the Standard Oil case of 1906, the Alcoa case in 1937, and the breakup of AT&T in 1981--reveals the same patterns of arbitrary rulings, disregard for consumers, and political interference with the administration of justice as were on display in the Microsoft case of 1998. Misinterpretations of these cases constitutes many of the "facts" and nearly all of the vocabulary used to defend antitrust law from its critics.

High-tech companies can look at the history of the transportation industry for insight into the choices they face. The railroad industry took the path of heavy-handed regulation, which created a legacy of inefficiency and bankruptcy that continues to the current day. Passenger trains today, for example, account for less than 1 percent of all trips. In sharp contrast is the automobile industry, which was subject to relatively light regulation. Today that industry is characterized by innovation, growth, and responsiveness to consumers.

8. Antitrust laws ought to be revised or repealed entirely.

The Microsoft persecution is not an isolated case of prosecutorial excess. It is the flagship case of antitrust at the beginning of the twenty-first century. The Department of Justice's Antitrust Division loudly promises that the Microsoft case is the vanguard of many more Digital Economy cases to follow. The consequences for information technology companies and all the companies that rely on them would be dire indeed.

If the Microsoft case is the best the Antitrust Division has to offer America, then there is no reason to keep the Sherman Act. The Sherman Act today is what it always has been: a tool for failed competitors to win in the political arena what they cannot achieve by satisfying customers in the free market. The fast pace of the digital era makes relying on government bureaucracies even less defensible today than it was in the past. It is long past time to repeal the pernicious Sherman Act.