Don’t Divide Microsoft: Try Code-Sharing, Licensing of Windows

Armed with U.S. District Judge Thomas Penfield Jackson’s scathing monopoly findings of fact, it is no surprise that the Justice Department has asked the court to hold that Microsoft acted in a predatory and anti-competitive way. Should the case proceed, the government surely will ask Jackson to impose a severe structural remedy against the company. And it is equally unsurprising that Microsoft feels that its future is unfairly threatened and that reports of the early stages of the court-sponsored mediation have not been promising.

Both sides should put aside their pride and positions and acknowledge what a dynamic marketplace has done.

U.S. District Judge Richard A. Posner, the volunteer mediator, might credibly show the government how some of its cherished factual determinations relating to innovation and pricing are vulnerable on appeal and how the most severe potential remedy, the breakup of Microsoft, might not solve the problem of monopoly leveraging and could--as was the case with the AT&T; divestiture--lead to higher consumer prices and years of undesirable judicial supervision.

Posner also might persuade Microsoft that the inevitable legal conclusion that it had violated antitrust norms would be so tied up in unreviewable facts that the company should avoid risky appeal, especially in the face of burgeoning private lawsuits where an adverse holding could become a costly precedent that would constrain even a future Republican administration’s negotiation latitude.

Why should the parties adhere to such suggestions? First, there is an available remedy that would address the problem that Jackson had defined. The division of Microsoft into separate companies would still leave one of them with an exploitable desktop operating system monopoly. An agreement that the Windows system was an “essential facility” whose source code must be made available, at a suitable royalty, to outside developers, however, could spur the evolution of systems and features that Microsoft could not limit--and spur competition on price.

The government should go along not only because of the aptness of the potential remedy, but also because it would institutionalize the important precedent that antitrust can be employed effectively in the information age.

Microsoft has argued vehemently that this sort of remedy unfairly deprives it of its earned success. But Microsoft has few real options at this point, and the limitations that it faces are only in part the product of the government’s lawsuit. In a larger sense, they have come about because, though Microsoft might dominate on the PC desktop, computing increasingly has left that environment and Microsoft behind.

The popular image that the court has adopted of a dominant Microsoft obscures a larger truth. Microsoft has been incredibly dynamic in adapting and promoting technology that others have invented, but its products are less like starships than they are like 1950s cars: unnecessarily complex, constantly obsolescent and too frequently in need of service.

In part because of the dominance of Windows, the future of computing has moved off the desktop. Whether it is e-mail capture, messaging or accessing the Internet, the greatest growth is mobile, wireless and hand-held. While desktop PC makers fight for market share in a largely static universe, the largest gains are being made in palmtop PCs and wireless telephones that offer a growing array of computing and Internet functions.

Even with its vast power, Microsoft has gained only a small share in the critical palm-based market. Industry analysts predict that in three years, mobile devices and Internet “appliances” will outnumber PCs by 6 to 1--600 million to 100 million. While this may be too optimistic, the large growth that will occur threatens still greater erosion of Microsoft’s former operating software hegemony.

As for those Internet browsers, which once were at the center of the dispute, they have been left in the dust by “portal” products like Yahoo, Excite and Alta Vista, even though, thanks to Microsoft, consumers now get the browsers for free.

Microsoft can continue issuing new releases of its Windows and Explorer products and likely will attempt to harden that base through some form of subscription program that could prove popular, but the ongoing growth that rapacious shareholders will demand can’t come from the desktop OS replacement market but from new products and concepts in which--notwithstanding Jackson’s withering findings--Microsoft is far short of dominant.

Microsoft’s current position is strangely reminiscent of IBM’s nearly 20 years ago. At the beginning of the government’s litigation against it, IBM had a functional monopoly in mainframe computers. It still had that position when the case ended, except that because of the rise of PCs and distributed computing, fewer companies wanted mainframes and IBM had to remake itself.

Microsoft Chairman Bill Gates knows that his company’s dominance is threatened not just by the government, but by upstarts like he was when he convinced IBM to adopt MS-DOS as its system standard. If institutional pride is deflected, Microsoft still could agree with the government to certain conditions as to contracting and licensing and even as to code sharing that would allow consumers more choice on the desktop and might even help Microsoft gain access to other companies’ products such as America Online’s messaging service.

If it did so, Microsoft could use its still-vast capital to evolve into the business it must become. If the government were to agree without overreaching into areas like a company breakup that likely would lead to higher consumer prices and the forced creation of products for which there is no demand, the parties will have secured an important victory for consumers in the cyberfuture.