Reining In Microsoft Reins In Innovation
The Microsoft decision is now in. As widely anticipated, U.S. District Judge Thomas Penfield Jackson plans to break up the company and closely regulate the remnants. Microsoft’s shareholders have lost hundreds of billions of dollars as the stock market anticipated Jackson’s decision.
Such losses might be a small price to pay for a radical improvement in the performance of the software industry. But that’s not likely. Indeed, the damage to Microsoft’s owners may pale beside consumers’ losses from higher prices, greater complexity of use and slower innovation.
Public attention has been on the proposed breakup, which is a virtually unprecedented antitrust remedy when it is employed to do more than reverse past mergers. The court envisions two Microsofts--one to own the Windows operating system and one to produce applications software, including the ubiquitous Office business suite. Even though the government apparently persuaded Jackson that nobody has an incentive to write software for any operating system but Windows, it justifies the breakup on the grounds that an independent Office entity would write popular applications software for Linux. This analysis is detached from reality: If the availability of Office, along with thousands of other applications, did not make the Apple Macintosh operating system an effective competitor to Windows, why would Office make the far less established Linux operating system a real threat?
This decision also reflects ignorance of the difficulty of reworking Office for a new operating system. The Apple version of Office is not an adaptation but different software optimized to run on the Macintosh. Indeed, Word and Excel, the core programs in Office, were hits on the Mac before Windows became popular. The investment in creating them was justified by the fact that the Mac was the most popular graphical user interface in the 1980s, and there were few serious alternatives available.
Linux has a much smaller market share and three office suites written for it, one of which is free. Thus, regardless of who owns Office, “Office for Linux” is not in the cards until Linux grows up.
Not only do the facts establish that the proposed breakup will not produce the benefits the government claims, basic economics suggests that splitting Microsoft would mean higher prices for Windows. Today, Microsoft has a strong incentive to price Windows low because Windows sales often lead to lucrative orders for Office and other Microsoft products. But after divestiture, the owner of Windows would no longer earn these ancillary revenues and would thus have very good reasons to charge more for its sole product.
How much more? Under assumptions introduced in trial by the government’s chief economic expert, the price of Windows could triple. Perhaps dismantling the Evil Empire would, as the government claims, unleash innovation that compensates consumers for higher software prices. Believing that, however, requires a gigantic leap of faith. With Microsoft forced to divide 36,000 employees between two firms and key personnel wondering whether to jump ship, neither company is likely to lead. And investors certainly don’t share the trustbuster’s optimism that other companies would fill Microsoft’s shoes. Since settlement talks broke down at the end of March, the value of the stock of Microsoft’s competitors has fallen sharply.
Less widely noticed than the breakup, but arguably as important, the court would regulate the rump PC operating system company. Computer manufacturers would be free to remove features from Windows and then demand a price reduction. Proprietary features of Windows that have nothing to do with the abuses alleged by the court would be made public, and software designers would be able to examine key parts of the Windows source code. This would make it likely that even more of Microsoft’s intellectual property would become public. Meanwhile, the company would not be allowed to improve its Internet browser.
The court would thus transform Microsoft into one of the most closely regulated firms in the economy, with the court the ultimate arbiter of Windows design. The best consumers could hope for is that an unregulated alternative--one capable of innovating promptly without having to justify its every action in court--would quickly rise to take Windows’ place.
It is premature to mourn the destruction of the company that drove the computer revolution by pricing low and staying on top of the technology. The court’s bizarre rush to judgment on remedy makes it even more likely that Microsoft will prevail in the appellate courts. Yet even if Microsoft emerges unscathed, it will be hard to put the regulatory genie back in the bottle. From now on, companies inclined to risk all in order to scale the heights of the New Economy must know that if they compete hard, they may find themselves marching to a judge’s orders.
