Shareholders Should Be Celebrating Microsoft’s Failure to Settle

Once again, Microsoft Corp. has failed to settle the lawsuit brought against it by the U.S. government. And, once again, the stock market interprets this news as bad for Microsoft. Am I the only one, other than perhaps Microsoft Chairman Bill Gates and Chief Executive Steve Ballmer, who fails to understand the stock market’s reading of the news?

The 14% decline Monday in Microsoft shares implies that the market believes that Microsoft intended to settle the lawsuit and that any settlement would benefit Microsoft.

But just a few months ago, Judge Thomas Penfield Jackson issued extraordinary findings of fact in which he explained that Microsoft was not merely a monopoly but a monopoly that abused its power. We are well past the time when Microsoft can hoodwink government negotiators into another meaningless settlement. Any new settlement must address Jackson’s findings of fact, which is to say that it must undermine Microsoft’s monopoly.

If the government does not insist on breaking up the company, it must at the very least demand changes sufficiently radical to shift the balance of power in the software industry away from Microsoft and toward its rivals. And that change would mean, very simply, lower profit for Microsoft. Much lower profit.

Of course, there are antitrust cases in which the costs of litigation exceed the benefits. This isn’t one of them. The price Microsoft pays to litigate--in legal fees and bad publicity--are a rounding error next to the profit it reaps from its monopoly in computer operating systems.

Thus, the most cost-efficient strategy for Microsoft to adopt is to stall for as long as possible. If it must cede its monopoly profit, better to cede it later rather than sooner. Apparently, the people who run Microsoft understand this fact. That they do should cause their shareholders to shout with glee, and to buy more shares.

The more you think of it, the odder it is that Microsoft shareholders appear to want a quick settlement. Time in this case is Microsoft’s best friend; and anything that Gates and Ballmer can do to buy more time should only increase the value of the company.

In time, for instance, there will be a new president in the White House. None of the presidential candidates has taken a firm stand on the case, though Texas Gov. George W. Bush, the Republican hopeful, said he opposes breaking up the company.

Sooner or later, a new president will have to decide whether to continue with the lawsuit or to abandon it. And there is at least a chance--a good chance, if the new president is a Republican--that he’ll tell his attorney general to take a dive.

The other benefit conferred by time upon Microsoft is market power. In the few years since the government brought its lawsuit, Microsoft has put Netscape Communications Corp. out of business (it was bought by America Online Inc. in March 1999) and acquired a new monopoly in Internet browsers. Granted a few more years of monopoly profit, the company will no doubt use its market position with browsers and its unlimited budget to gain a better purchase on the Internet. (If Microsoft can hold out for a few more years, I wouldn’t want to be Yahoo Inc.)

It is always possible that Microsoft will find some noneconomic reason to settle. Perhaps Gates and Ballmer will suffer some crisis of conscience. Perhaps they will decide that what is good for Microsoft is no longer good for America. If they do, it will be a disaster for their shareholders.

Michael Lewis, author of “Liar’s Poker” and “The New New Thing,” is a columnist for Bloomberg News.