Not a Monopolist, Just the Leader of the Pack
With U.S. District Judge Thomas Penfield Jackson’s finding Monday that Microsoft violated antitrust laws, the Justice Department will likely ask the court to regulate Microsoft’s software design and marketing practices, or even to dismember America’s flagship software maker. If Jackson agrees, the case will be tied up in protracted appeals.
At best, Microsoft eventually will gain a reversal after years of uncertainty--an outcome that will allow the company to fight to hold on to its position as the standard-setter for PC software. At worst, the Windows operating system will be balkanized, with many companies offering incompatible versions to small businesses and home users who don’t know what an operating system is and don’t want to learn the hard way.
Whatever the eventual outcome, the biggest losers in the meantime will be computer users. For, in its efforts to micro-manage the market for software, the Justice Department is setting ominous precedents that will distort innovation, cut employment and slow productivity growth in the new information economy.
Stepping back, it’s clear that the government’s assault on the Microsoft “monopoly” was built on a misinterpretation of antitrust principles. Microsoft Windows does, indeed, dominate the narrowly defined market for PC operating systems. What’s more, the company’s operating systems have been on top since the mid-1980s.
Yet there’s nothing exceptional in one brand dominating software categories. Indeed, it is the nature of markets driven by what economists call “network effects”: The more consumers use one brand of software, the more valuable it is for others to use the same one.
Since antitrust laws were created to benefit consumers, not competitors, network effects actually work to support established antitrust goals. Nor does being top dog in operating systems make Microsoft a monopolist in the pejorative sense of the term.
Unlike a classic monopolist, the company has never reduced output, raised prices or stopped innovating. Indeed, to maintain its position it has fought and won sequential battles with some corporate heavyweights, notably Apple and IBM.
And, unlike a classic monopolist, Microsoft sells its immensely complex, remarkably versatile operating system for less than a 10th the profit that a real monopolist would demand. That’s because Microsoft has always seen itself as vulnerable to The Next Big Thing in information technology. Which indeed it is. The technological change that displaces or devalues Windows could be a shift to Web-based software that runs on any computer. Or it could come from the rise of “netpliances”--everything from cell phones to superfast game machines that do e-mail and Web-surfing on the side.
Certainly the investors who just capitalized the initial public offering of the manufacturer of the Palm hand-held computer at $50 billion have little doubt that the Windows “monopoly” is vulnerable. The same can be said for the techies who have placed multibillion-dollar bets on Linux, a stable variant of the UNIX operating system that has become the center of a new software industry.
No one knows what might topple Windows from its top-dog position in this ultra-dynamic market. What Microsoft does know, however, is that competitive threats lurk everywhere. The company’s winning strategy has long been to price low, innovate constantly and invest a fortune in making Windows a versatile, easy-to-use “platform” for a broad range of its own and many other companies’ software. In other words, to serve consumers so well that it is able to fend off the numerous competitive challenges it faces.
The American economy is so complex and so resilient that it might relatively easily absorb the impact of a government-engineered demise of Windows as the standard for PC operating systems. What the economy might not be able to withstand, though, is the chilling effect of government-subsidized competition that Microsoft’s Silicon Valley competitors unleashed when they began to lose market share to Microsoft.
If Microsoft is fair game, what about other new economy giants that dominate their niches, say, AOL, Oracle or Cisco? Should the companies that have prospered in “winner-take-most” markets through a combination of good technology and hard-driving business tactics ward off the trustbusters with strategic, agenda-driven political connections?
Should high-risk start-ups--the sort that can only attract investors if they have a hope of the rich rewards that come with defining a category--try their luck in the friendlier climes of Israel or Singapore?
The good news, of course, is that the American economy is being transformed by a wave of “creative destruction” that rewards flexibility, technological savvy and risk-taking. The bad news is that Washington has little idea of how it can play a constructive role in this new economy, yet feels compelled to keep a hand--make that a fist--in the game.
