Don’t Let Gates Railroad the Antitrust Laws

Responding to the Justice Department’s objections to fusing its Internet browser program with its Windows 95 personal computer operating system, Microsoft and its supporters have two distinct avenues of response. Some reject any government role in policing free markets to ensure that they operate in a transparent and competitive fashion. A less extreme (and more serious) argument is that high technology in general--and computers in particular--is just too complicated a field for inept government bureaucrats to deal with, and that their bumbling actions will slow the pace of innovation in a critically important industry.

Strip away the computer technospeak, however, and the basic issues in this dispute are as old as the antitrust laws passed by Congress a century ago. And they go beyond Microsoft’s marketing practices.

In important ways, the operating system of a computer resembles the railroads that the Bill Gateses of the last century pushed into remote corners of rural America. There is a large fixed cost in developing railroad infrastructure, creating huge economies of scale; the cost of railroad services declines with traffic as more customers use the system. And there are what economists call “network externalities”--the more that other locations and customers connect to the same rail network to which you are connected, the more valuable it is to both you and them. These economies of scale and network externalities buttressed a de facto transportation monopoly for many rural communities across the United States.

To curb abuses in the exercise of such monopoly power, the antitrust laws were passed and the Interstate Commerce Commission set up. Decades later, changes in motor vehicles, highways and air freight reduced the concerns about railroads as new transportation technologies eroded their monopoly power.

Now imagine that the railroad finally pushes into isolated Mudville at the turn of the century, and Mudville business begins to blossom. A thriving local package delivery industry develops around the railroad station. The railroad takes note and it too decides to enter the delivery business. If the story stopped here, the Mudville consumer would be the clear winner: more choices, better service, lower prices--all because of greater competition.

But what if the railroad suddenly insisted that quoted railroad rates should now include local delivery by its own package service? (You’d be free to use an alternative service, but you’d still pay the railroad’s delivery service fee whether you used it.) Or, the railroad might even include delivery for free with no rate increase. More subtly, the railroad could begin randomly varying its train schedules, so that only its delivery service knew for sure the precise time when the freight would arrive. Or it could rebuild the gates to the station so that only its special trucks could fit through and pull right up to the train for unloading. Any of these practices could in the long run work to reduce competition and (though it is not a sure thing) raise prices, leaving Mudville worse off.

Microsoft’s tying of its Internet software to Windows 95 resembles a railroad bundling local package delivery services with intercity transport. Though Microsoft may argue that it is just General Motors bundling tires with autos, General Motors has nothing like Microsoft’s market power and there is no practical danger of GM taking over the tire industry.

It would certainly be a mistake for the government to limit Microsoft’s ability to introduce innovations into its products. But the claim that Microsoft is using its monopoly position in personal computer operating systems to eliminate existing competitors is a troubling one. Today it is Internet browsers, but tomorrow it could be word processors and spreadsheets.

It is not just a question of giving buyers the option to purchase the operating system separately from Microsoft’s applications. Just as railroads were once forced to establish nondiscriminatory rates and publish timetables, Microsoft should also be required to give both company insiders and outside competitors equal access to the basic information needed to integrate new software applications with Windows, and compete on a level playing field.

Doing this would not be simple. The issues are complex. But Microsoft should address these questions and avoid turning an important debate into a cartoon attack on Washington.