Plan to Break Up Microsoft’s Power Is Best for Long Run

This is a tough one. Let me say it: Some of my best friends work for Microsoft. The company is revered worldwide for its success. Overall, its products are worth far more to their users in aggregate than they are worth to stockholders.

Nonetheless, I support the Justice Department’s decision to seek the breakup of the company. It’s not that I’m pro-government or anti-business; I’m for a proper balance of power between them.

Suspend the question of who’s right or wrong for a moment, and let’s consider the situation more closely. Are consumers being harmed? Are users being overcharged?

Certainly not in the short run. In terms of the value they provide, most of Microsoft’s products are reasonably priced. (They are certainly profitable to Microsoft, but Microsoft’s wealth is not the issue. The consumer’s welfare is.)

Although things may be all right in the short run, the problem is the long run. Over time, Microsoft’s (or any other monopoly’s) dominance makes it difficult for new companies and new technologies to emerge.

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Oddly, Microsoft’s pitch sounds like that of a government--and not the U.S. government, but the former Soviet government. It’s convenient for Microsoft to control the software business. Things will be more efficient if we take care of everything. Consumers benefit from the standardization. Microsoft products work better with other Microsoft products.

If we run everything, the promise goes (whoever is making it), we can make sure that everything is coordinated, that resources are appropriately allocated, that waste and errors are minimized. People won’t waste time and resources on diversionary efforts. (But we’re seeing another side of the lack of diversity when computer viruses hit: They sweep through almost the entire population.)

In the short run, that’s true. In the short term, it is indeed more efficient just to leave everything to Microsoft. But in the long term, some of those wasted resources end up being exciting start-ups that offer new and better solutions.

Both the Internet economy and the market overall depend on competition to flourish. Even waste and errors can lead to better results in the long run. Economist Joseph Schumpeter called it creative destruction.

Every once in a while, we burn a forest if it’s been too long since the last forest fire. It’s a controversial practice, but it’s generally agreed that the results are better over the long run--even when, as happened recently near Los Alamos in New Mexico, something goes wrong.

The challenge, of course, is that leaving it up to nature is easy--in the short run. Who wants the responsibility for starting a forest fire?

And who wants to take on the responsibility for taking on Microsoft, often considered one of America’s role models? It’s easy to say it has too much power but much harder to take on something that works.

But it’s necessary to do so. The problem is not Microsoft’s size or its success. And it’s not that Microsoft behaves so much worse than many other companies, unfortunately. Lots of companies try to tie up their partners with exclusive contracts, pre-announce products to forestall competition and so forth.

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The problem is the combination of those practices with market power. When most companies behave badly, partners and others are free to walk away. And they aren’t scared to talk about it--as many companies are scared to talk about their relationships with Microsoft. The market regulates most companies. But when the market can’t--when abuse is combined with market power--then government has to take the risk of stepping in.

Many people would feel more comfortable with a “conduct remedy,” in which the government would monitor and control Microsoft’s behavior, than with a breakup. Somehow that seems less dramatic, but ironically it’s what we shouldn’t want: government meddling.

The idea is not for the government, instead of Microsoft, to run the software industry. It’s for no one to run it--for it to evolve freely through the interactions of many players, including competitors, partners, customers and, yes, governments to set the rules but not to interfere in the affairs of individual companies.

In this case, someone needs to push the reset button--to break up the market rigidities of Microsoft’s control.

What’s interesting here is the change in identities: Microsoft is taking on many aspects of a government, while the government is becoming almost as arbitrary as a private company. Nonetheless, I think the Justice Department is taking the right tack--even though it may seem dangerous in the short run.

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So one has to ask for the justification. Perhaps the market may be taking care of it. Microsoft is indeed besieged on all sides--by open-source products and by its own declining stock price, which makes it harder to hire and retain good people. The Internet and its new business models are making it tough for Microsoft.

But even so, the government is sending the appropriate message. Free markets are not markets without rules; they are markets where everyone follows the same rules.

It might not make a difference in the short run, but in the long run we are likely to see new products we might not have seen otherwise--perhaps even from Microsoft, which will now have to innovate just a little faster to keep up with the competition, including perhaps other parts of its former self.

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Esther Dyson edits the popular technology newsletter Release 1.0 and is the author of the bestseller “Release 2.0.” She is also chairwoman of the Internet Corporation for Assigned Names and Numbers. Questions and comments should be directed to Esther Dyson as edyson@edventure.com.