More of a Ripple Effect Than Shock Wave
Judge Thomas Penfield Jackson’s ruling that Microsoft Corp. must be split up is not only good for the future of technology and the U.S. economy. It could be the best medicine for Microsoft too.
Why? Because splitting Microsoft could energize parts of today’s company and let talented people range widely to develop applications for office and home software rather than constantly trying to control the marketplace through Microsoft’s Windows operating system.
And a freewheeling Microsoft would encourage innovation in the personal computer industry--innovation that is lagging today because Microsoft’s heavy hand restricts what computer makers and software developers may do.
The judge’s ruling is that Microsoft be split into an operating system company and an applications company. Each of those would be large and powerful. Within Microsoft today, the Windows operating system division has $8.6 billion in annual revenue and the office applications division has $8.7 billion.
But Microsoft’s power also has given it big-company maladies. Microsoft didn’t make alliances with innovators, but devised ways to undermine and quash them. It placed licensing restrictions on computer companies to keep them from doing business with providers of different information systems. It threatened software providers in order to maintain its power and extremely high operating profits--65% and 70% of each revenue dollar.
Even so, technology has begun to shift under Microsoft’s dominance. The Internet is spawning new companies. And big computer users across the world are adapting to the Linux free software--that is, non-Microsoft--system.
If Microsoft founder Bill Gates is smart, he will push his company to join the rush of innovation that Silicon Valley venture capitalists and lawyers anticipate in the wake of Wednesday’s federal court ruling.
But if Gates is stubborn, he will fight the judge’s ruling through endless appeals. He and his company will fail to adapt and time and technology will pass them by.
Just as we all should learn from history how antitrust actions in the past have benefited U.S. industry and the companies affected, so Gates should take lessons for himself and his company.
First he should understand that Microsoft is being punished not for its size or success, but for engaging in practices that “coercively excluded outsiders” from the software industry or placed a “contractual limitation on a participant’s economic activity.” The words are those of Supreme Court Justice Oliver Wendell Holmes in 1904 in a case in which the the Sherman Antitrust Act first came into prominence.
“The Sherman Act created no new doctrine. It merely stated that restraint of trade is inimical to the free-enterprise system,” explains Jon P. Goodman, director of the EC2 Annenberg Center Incubator Project at USC, whose doctoral thesis was on antitrust.
The U.S. has acted many times to punish restraint of trade. Each time, the result has been a more vigorous industry.
Gates could learn from Standard Oil Trust, broken up in 1911 into more than half a dozen companies--including firms that we know today as Chevron, Arco, Exxon Mobil and some of the component companies of BP Amoco.
In that day, John D. Rockefeller argued that Standard Oil had brought petroleum to consumers at reasonable prices--much as Gates argues today that Microsoft brings economy and convenience to consumers.
Like Gates’ misreading of Washington today, Rockefeller dismissed the government’s antitrust action as a political ploy of President Theodore Roosevelt.
But Roosevelt saw that Standard’s efforts to restrain others from the oil business imposed a cost on society, and ultimately the company was broken up.
Even as the case was proceeding, oil discoveries in east Texas and in Mexico were undermining Standard’s monopoly control. And when the Trust was broken, the U.S. oil industry emerged more vigorous than ever.
Gates could learn too from American Telephone & Telegraph, which was broken up in 1984 into the seven regional Bell operating companies plus the parent AT&T; Corp.
AT&T;, founded in 1885, worked as a regulated monopoly for decades and built a superior telephone system for the United States. But in 1959 it crossed the line and became an abuser of monopoly. In that year, a Dallas entrepreneur named Thomas Carter patented the Carterfone, a device that connected telephones with two-way radio systems in cars and trucks.
But AT&T; threatened to discontinue service to any customers who used the Carterfone. Carter sued, and in 1968 the Federal Communications Commission ruled in his favor, saying that consumers would benefit from outsiders innovating products to use with telephones.
The following year MCI started its long-distance services, bringing competition to AT&T.;
Yet AT&T; didn’t learn quickly. It took the government more than a decade to end the AT&T; monopoly, years that the giant might have used to join MCI and others in opening an era of constant innovation in telecommunications.
Ultimately the breakup of AT&T; brought innovation to U.S. and world industry--think of Lucent Technologies, the rise of wireless phone companies and even of AT&T; itself, now striving to become a leader in Internet telephony.
So it can be with Microsoft if it thinks expansively. To be sure, it may be hard for the monopolist to change its spots. One antitrust expert, economist Robert Litan of the Brookings Institution, thinks the company should be split into four firms to prevent the emergence of Microsoft monopolies in operating systems and applications.
But history shows that monopolies split into separate companies learn quickly to act independently, reaching out for new ideas and new business alliances. The long term result of Judge Jackson’s ruling could be renewal for Microsoft--not to mention broad areas of computer and information technology.
Breaking Up Microsoft
* A federal judge ordered Microsoft to be split in two for at least a decade. A1
* The case moves to an appeals court dominated by conservative judges. A1
* The firm’s stock is unlikely to drop much further, analysts say. C4
* Many in Seattle believe Microsoft has not violated antitrust laws. C4
