The Case Against the Case Against Microsoft

Why the Justice Department is barking up the wrong operating system.

(Note: Ralph Nader made the case against Microsoft in Slate two weeks ago. In the following article, hotlinks lead to more detailed discussion.)

It is no crime for a company to be successful. The are designed to complement, not displace, market forces. The laws do not prevent market winners from enjoying the fruits of their success or protect losers from the consequences of their failure.

What the antitrust laws do condemn is anti-competitive conduct–truly exclusionary or predatory acts–by firms that have “”–the power to raise prices or exclude competitors from the market. Microsoft’s critics have never established that Microsoft and its conduct satisfy either element of the law.

I n most discussions of Microsoft, it is just assumed that the company has monopoly power. However, no court has ever reached that conclusion. Even though more than 80 percent of the personal computers in the world use Microsoft’s operating system, it is far from clear that an antitrust court could be persuaded that personal computer operating systems constitute a separate market. After all, Microsoft’s critics claim that browsers in the near future will (or perhaps already do).

Even assuming for the sake of argument that Microsoft does have monopoly power, the question still is whether truly anti-competitive behavior accounts for its success. We don’t need to speculate about the answer, because government antitrust enforcers have spent the better part of seven years putting Microsoft’s competitive behavior under a microscope.

A lmost seven years ago the Federal Trade Commission set out to determine whether Microsoft had monopolized personal computer operating systems. After one of the most extensive antitrust investigations in history (completed by the Justice Department when the FTC failed to issue a complaint), the government found only a single, rather picayune practice–the so-called “per processor” license–worthy of challenge. According to the government itself, that practice did not account for Microsoft’s competitive success. Rather than suffer the cost and hassle of litigation, Microsoft agreed to a ending the practice.

For Microsoft, acceding to the consent decree was just the beginning. Bill Gates couldn’t blow his nose without starting a new investigation. The Justice Department stopped Microsoft from acquiring Intuit, the maker of Quicken personal-finance software. It threatened to block Microsoft’s introduction of Windows 95 because Microsoft included the.

N ow comes the charge that Microsoft has by including its Internet browsing software, Internet Explorer, with Windows 95. Microsoft points to a that was negotiated by Microsoft for the specific purpose of allowing the company to include IE with Windows.

It is telling that the government chose not to attack the “bundling” of IE with Windows as an actual antitrust violation–merely as a violation of the consent decree. Whatever the technical merits of the government’s interpretation of the decree, you have to wonder what important public interest will be served if the government’s case succeeds. Microsoft makes the IE browser to consumers who buy new personal computers with Windows 95 installed. And more convenient, seamless access to the Internet from the desktop will. It is hard to see any anti-competitive danger that justifies denying people these benefits.

Microsoft’s inclusion of IE with Windows does not prevent computer manufacturers from installing competing browsers or putting those browsers on the desktop. Indeed, the computer companies that wanted to take IE off their desktops (the behavior Justice wants to prevent Microsoft from forbidding) probably intended to give Netscape Navigator an exclusive position on the desktop. Microsoft did not demand that Netscape be removed, only that IE be there as well. This may be the first time that the government has gone against a company with a smaller share of sales in order to protect the ability of its dominant competitor to secure an exclusive.

So after seven years and millions of dollars spent investigating Microsoft, the government seems to have found virtually no anti-competitive acts to account for the company’s success. Is this because all Microsoft’s competitors, licensees, and suppliers are too scared to tell the government what they know? Unlikely. Has the government not tried hard enough? Hardly. All the incentives for antitrust enforcers–media adulation, professional recognition, and congressional budgetary rewards–push the government toward “bagging the biggest game.” We taxpayers are employing an army of lawyers and economists who spend their every waking moment–and probably a few in dreamland–thinking of ways to get Microsoft. They are the best in the business, and their efforts have turned up precious little.

The ongoing government scrutiny itself may help to explain the absence of verifiable episodes of anti-competitive behavior by Microsoft. A swarm of government enforcers peering over a company’s shoulder is a strong incentive for it to behave. More fundamentally, though, Microsoft’s success is not a mystery requiring any criminal explanation. The real and obvious source is the good fortune of being the pre-eminent operating system on IBM PCs. This is not an antitrust violation.

Microsoft’s position is a reflection of an economic phenomenon often referred to as “network externalities” (a k a “positive economic feedback” or “increasing returns to scale”). In the market for personal computers, the value of a machine is directly proportional to the number of applications that run on it. Both suppliers and consumers will gravitate toward, regardless of whether it is technically the best. Once such a standard becomes predominant, it will be very difficult to displace–at least until the next “paradigm shift” comes along.

Being the operating system on IBM PCs, which set the standard for personal computing, meant that Microsoft became the standard personal computer operating system. The fact that Microsoft won that round is no guarantee it will emerge the winner of the next paradigm shift. In the browser wars, Microsoft faces a formidable array of opponents–Sun and Oracle, to name just two–and, after two years, it still lags behind Netscape even though IE generally gets better reviews than Navigator.

Microsoft’s competitors, however, want the government to put some sand in Microsoft’s saddlebags. However frightening Bill Gates may seem or however unfair and imperfect the market phenomenon of network externalities may appear, do we really want antitrust lawyers and economists determining Internet standards? It’s difficult to believe the answer is “yes.”