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The Independent Institute
Commentary

Should Microsoft Be Broken Up?
No. Breaking up Microsoft is Disruptive.


If the judge in the Microsoft case decides to break up the company, the winners will be a small group of competitors who have been politicking for years to restrict Microsoft’s ability to compete, and the losers will be practically everyone else.

These competitors, companies such as Sun, Oracle, IBM and AOL, are all large and powerful firms in their own right, particularly after the AOL/Time Warner merger. AOL, in 1995, convinced the government to investigate Microsoft’s online service in what proved to be a precursor of the current case. AOL claimed that its online service couldn’t compete against Microsoft’s MSN service. The supposed reason? Microsoft’s inclusion of an icon for MSN on the Windows desktop.

History has shown this claim to be unfounded since AOL has 10 times the market that MSN has. That claim, though proven false, resurfaced and turned into the current case. In this version, Microsoft’s inclusion of an icon for its browser on the Windows desktop purportedly made it impossible for the Netscape browser to compete.

Amazingly, the judge agreed, basing his decision on a faulty economic theory that Stephen Margolis and I disproved in our book, Winners, Losers & Microsoft. The judge’s preliminary decision—or findings of fact—was worded strongly enough to indicate that he might be willing to actually break up the company.

The verdict could come as early as March. Settlement talks seem to be going nowhere, and everyone, myself included, expects the judge to find Microsoft guilty. The only questions left are the punishment and the possibility that the appeals court will overturn the verdict. That is why so much attention has been paid to reports that a breakup of Microsoft has been requested by the prosecution, representing the Justice Department and the 19 states involved in the case.

Breaking up a company is costly and disruptive, in the same way that a divorce is disruptive to family members. This explains why it is the remedy preferred by Microsoft’s competitors (and some politically motivated “consumer” activists) who have no interest in seeing additional competition that might lower prices.

Consumer interests, however, have been virtually ignored in both the government’s case and the judge’s ruling. So there is little reason to expect consumer interests to be any more prominently considered in the punishment.

A Microsoft breakup would damage consumer welfare in several important ways. Consumers would be injured because Microsoft has been a relentless price cutter, bringing about reductions in software prices in almost every market in which it has competed. The $495 list price that was common on many software products in the 1980s has all but disappeared thanks to Microsoft’s aggressive pricing.

Price declines have been five times greater in markets where Microsoft competes than where it does not compete. This price-cutting is anathema to Microsoft’s enemies. Microsoft’s critics sometimes defensively point out that a few firms that have lost their markets to Microsoft have since lowered their prices almost to zero. They claim from this that Microsoft actually charges high prices. It is important to remember, however, that when those firms - WordPerfect and Lotus - dominated the market, they were not interested in low prices, nor would they be charging such low prices now if they were dominant still.

Another source of consumer damage would come from the multiple versions of Microsoft products that would be the result of a breakup. Having several versions of Windows and Word would impose large costs as consumers try to figure out which version to buy and to determine how to best retain compatibility with their old programs.

Consumers would also be harmed because a crippled Microsoft would have a diminished ability to produce quality software. Third-party product reviews clearly indicate that Microsoft has produced the highest-quality products in the markets it came to dominate.

Finally, consumers would be harmed because there would be fewer serious players competing in the emerging Internet market for broadband content, which seems to offer untold possibilities, including high quality audio/video interactivity.

Microsoft is one of the few firms large enough and good enough to compete for this market against the likes of AOL/Time Warner and AT&T. If Microsoft is cut to pieces, that will be one important choice that will no longer be available to consumers, and a likely low-price choice at that.

Microsoft’s low prices and generally superior products have not been good for its competitors. It is bad enough that these firms found a pliant Department of Justice willing to do their bidding. It will be a sad day indeed if the most competitive firm in the industry is handicapped in this most injurious manner.


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.