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Commentary

Hey, Remember Microsoft?


     
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Just as America Online announced its plans to acquire Time Warner, the Justice Department has reportedly concluded that Microsoft needs to be broken up into several “Baby Bills”—or perhaps I should say “Baby Steves,” in light of Bill Gates’ announcement yesterday that he has promoted Steve Ballmer to CEO of Microsoft. Even Judge Thomas Penfield Jackson, who released his findings of fact two months ago, must get the feeling that they deal with events that occurred a long time ago.

Whether or not antitrust law is out of date in the fast-paced world of the Internet, the Microsoft antitrust action clearly is. Even though Judge Jackson has moved the proceedings along at breakneck speed, the market has been completely transformed since the trial began. The trial focused on the computer desktop, which the market is treating with quaint disregard these days. Instead, there is a mad rush to stake out positions in the melding of entertainment, news, commerce and information on the Internet.

Major Combatants

It is now clear that the major combatants in these markets will be large and well-financed. In addition to AOL-Time Warner, whose revenues surpass Microsoft’s, the players include such giants as AT&T, Disney, News Corp. and Sony.

Success in the Internet market battles to come will require the provision of broadband Internet access and proprietary content. Ownership of cable systems, which provide broadband access, is considerably more important than ownership of the PC desktop. After all, you can put any program you want on your desktop, but you have no control over what your cable company offers. Nevertheless, Judge Jackson concluded that control of the initial desktop configuration was the key to immense market power.

Microsoft, too, is focused on the forthcoming battle, having made the Internet its No. 1 priority in the mid-1990s. One of the first things it did was to create its browser, Internet Explorer. At that time Netscape’s Navigator was the dominant browser. Microsoft’s breaking of Netscape’s stranglehold on the browser market formed the basis of the antitrust case.

Microsoft’s other Internet ventures—the Microsoft Network, buying content providers, trying to put a midget version of Windows into set-top boxes and Internet appliances, investing in cable systems—have proved less successful. But they demonstrate the company’s intent. Mr. Gates, who will remain chairman and also assume the title of “chief software architect,” reinforced the point yesterday. He said he wanted to concentrate on developing Internet-based software services.

Yet Judge Jackson rejected the idea that Microsoft was focused on the Internet market. Instead he concluded that the Netscape browser was a potential operating system, and that Microsoft developed Explorer in order to thwart this threat to Windows. He concluded that there were no viable alternatives to Windows. Linux was irrelevant—never mind Red Hat’s stunning August initial public offering—and so were Internet appliances.

In his findings of fact, Judge Jackson agreed with claims first put forward by Microsoft’s competitors, including Netscape, which in 1998 was acquired by AOL. With the acquisition of Time Warner’s extensive cable holdings, AOL could once again give Netscape an overwhelming market share if it wants. But never mind. Now we are told that the remedy the government seeks is to shrink Microsoft at a time when the other players in the market are supersizing.

A breakup is often a crippling blow, sowing chaos and confusion within the new component companies. Although it is technically true that the number of firms would be increased by a Microsoft breakup, the number of viable competitors in this market would be reduced. What would three Baby Bills do then? Quite possibly the same thing the Baby Bells have been doing: merge with other corporations in an attempt to remain competitive. The AOL-Time Warner behemoth could end up owning Windows, too. Would consumers benefit from such an outcome?

Kept Prices Low

Concern for consumers has not been the focus of this case. The judge virtually ignored consumer welfare in his ruling, and it played virtually no role in the government’s arguments. Even if you believe the government’s charge that Microsoft bullied other firms, it has kept prices low, which is good for consumers.

Consumers would be well-served in the upcoming battle for the Internet if they have more choice, not less. If the government does decide on some sort of breakup at this crucial moment, consumers are likely to be deprived of an important option. Antitrust is being used, as it has been before, to promote the interests of the few at the expense of the many.


Stan J. Liebowitz is Research Fellow at The Independent Institute, Ashbel Smith Professor of Economics and Director of the Center for the Analysis of Property Rights and Innovation at the University of Texas at Dallas, and a contributing author to the forthcoming Independent Institute book Housing America: Building Out of a Crisis, as well as the policy report Anatomy of a Train Wreck.






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