Electrosoft: a Fable for Today

Microsoft will not be broken up. There’s no chance the Bush administration will ask the Supreme Court to reverse Thursday’s federal appeals court rescue of the company. Instead, the case will go back to a new judge to decide how to respond to Microsoft’s monopoly without splitting it up. The best outcome: a new order requiring Microsoft to make its Windows operating system available to everyone free of charge.

Here’s the problem with Microsoft’s monopoly, which even the appeals court agrees still must be addressed: Windows is so widely used that other producers of computers, browsers and other software have to license it from Microsoft if they want to connect their gadgets and codes to most other gadgets and codes on the market. This gives Microsoft power to thwart competition and discourage innovation.

Imagine what would have happened a century ago at the dawn of the age of electricity if a company named, say, Electrosoft had patented a design for electrical plugs and sockets. Assume its design is four prongs arranged vertically--maybe not the most efficient, but Electrosoft is the first and biggest company in this new market for electrical appliances, so the four-prong vertical design becomes a standard that everyone begins to use.

Soon all homes have Electrosoft sockets in their walls, and all appliance makers use Electrosoft plugs. Building contractors and appliance makers pay Electrosoft a royalty every time they install or make a new socket or plug. As Electrosoft’s profits mount up, it becomes one of the richest companies in America, and the net worth of its president soars to a level about equal to the total net worth of the bottom half of all American families combined.

Now suppose Electrosoft uses its huge profits to start marketing its own electric appliances. It even gives away a free toaster or lamp with the purchase of any Electrosoft plug or socket. Good for consumers, right?

Yes, but wait. As a result, every other maker of toasters and lamps is wiped out. They can’t make a profit. And potential inventors of future electric appliances don’t even try. Why bother? There’s no money to be made competing with Electrosoft.

A few years later, Electrosoft raises the price of its toasters, lamps and other appliances. Buyers have no alternative but to pay the higher price. And forget about innovation. Electrosoft might invent some other appliances, but isn’t in any great hurry. After all, no other company is inventing electric appliances. Refrigerators and electric stoves won’t appear for a century.

Now fast forward to the present day, and Microsoft. The company says consumers gain when it adds free software gizmos to its Windows operating system, like e-mail servers and Internet browsers. But like the Electrosoft example, consumers will suffer in the long run if Microsoft wipes out competitors and discourages other software inventors from coming up with their own new gizmos, such as voice-recognition devices, video mail, three-dimensional Internet or whatever else lurks just beyond the imagination.

Microsoft says consumers benefit from having a common standard Windows operating system. The company is right--imagine how confusing life would be if there were tens or hundreds of different operating systems. But this doesn’t mean Microsoft should rake in huge profits from selling Windows.

Every period of rapid technological change creates a need for common standards. In the early 1880s when lightbulbs were first invented, bulbs and sockets came in 175 different sizes. The threads on hoses, screws and other industrial parts that were supposed to fit into one another were almost as varied. When a portion of Baltimore was in flames, city officials discovered that almost none of its fire hydrants and fire hoses matched up.

Yet rather than one company setting common standards, industries as a whole set them and made them freely available. A standard for lightbulbs and sockets emerged in 1884, and shortly thereafter the two-prong plug and socket that we still use today. In the early 1920s, Herbert Hoover, then secretary of Commerce, created a National Bureau of Standards to hasten the development of many other standards, free of charge. It was one of his finest achievements.

So if Microsoft isn’t going to be broken up, there’s the other way a court can undercut its monopoly: Require it to make Windows freely available, like any other common standard. That way, consumers get the convenience of a common standard without sacrificing the benefits that come from competition and innovation.

But don’t hold your breath. The Bush administration will settle on terms favorable to Microsoft. And Microsoft won’t be willing to give up Windows. That means Microsoft is likely to behave just like Electrosoft. Watch your wallets.