U.S. v. Microsoft: The Appeal

Ken Auletta is author, most recently, of World War 3.0: Microsoft and Its Enemies. Thomas Hazlett is a resident scholar at the American Enterprise Institute and a former chief economist of the Federal Communications Commission. This week they discuss Ken’s new book, the appellate arguments, and how the case will end. 

Hi Ken,

You think I’ve been sipping the Kool-Aid. Perhaps you’ll recommend a good ER. But so far I’m feeling fine. It is a virtual certainty that the divestiture order will be struck down in the D.C. circuit’s ruling, and it’s a good bet lots of Microsoft’s antitrust liability will be reversed. You suggest I’d be foolish to put much money on this, but I—like millions of technology bulls invested in the Nasdaq—already have. The tech sector is pulling hard for Microsoft to pull this case out, a distinct clue about the merits of the case we might discuss later.

You seem to set the “consumer harm” issue to one side and focus on Microsoft’s “thuggish behavior to block innovation.” I do not see that as a good approach. One of the colossal mistakes in Judge Jackson’s opinion is where he divests Microsoft into two monopolies (using his market share assumptions), one in operating systems and one in applications. Using Judge Jackson’s own beliefs about market power, both companies would raise their prices. Pay more for Windows and Word. Consumer protection?

You are right, Ken, that Judge Jackson lowered the boom on Microsoft and that the burden is now very high in requesting that the appeals court sweep it all away. But Judge Jackson’s opinion cannot stand up to scrutiny. Take the foreclosure issue, where the district court found that Microsoft bundled Internet Explorer (its browser) with Windows (its operating system), denying Netscape access to customers.

Jackson got it wrong. Bundling IE with Windows does not foreclose Netscape’s browser, Navigator, which works very nicely with Windows/IE (I have personally demonstrated this proposition at least one thousand times since 1995). What tends to make things tough for Netscape is that Microsoft bundled IE efficiently and inexpensively. Customers didn’t pay extra for browsing functionality, and the browser could be fired right up even on a brand new computer. That forced Netscape to drop the $49 price tag, resume its initial free download campaign, and search for revenues through Web site development and e-commerce services. Good for customers, not predatory.

You know better about Microsoft’s brutalities than I, Ken. Keep reporting them, as they make good reading and healthy sunshine. But corporate rudeness, nor even “strong-arm” tactics, is not the purview of antitrust. We have business torts, property law, and contract law. They protect firms from bullying each other. As, quite often, does the market.

Consider the case of Apple. According to Jim Carlton’s painful-to-read 1997 book, the Republic has never seen a better product made less of than the Mac. Rejecting the urgings of even the young Mr. Gates to license the innovative Mac operating system to major computer makers in 1985, the company arrogantly restricted their user-friendly computer technology to in-house exploitation. Partners were shunned, retailers abused, software developers alienated, customers taken hostage. Their philosophy was high prices and high profit margins; a computer technology boutique. A terrible shame. Apple coulda been a contenda for industry standard.

It was Microsoft that seized the moment, exuding its own arrogance. But that is embedded in the DNA of entrepreneurship, on the one side, and standard setting, on the other. What is remarkable about Microsoft is not that it irritates its rivals, or even that it does so in far clumsier fashion (from every account I’ve read) than other big-time corporations. What is distinct is its low-price, quick-to-market, extend-the-network vision, coupled with relentless execution.

You ask a provocative question: How to prove something that didn’t happen? This comes up in reference to the government’s speculation that, in discouraging innovation by squishing Netscape, Microsoft hurts future customers.

There are a couple of answers. The first is: Wait until the harm is evident, and then file the antitrust case. American Airlines chased upstart rivals out of the Dallas-Fort Worth market, according to the government, and so the government filed suit. This timing has the great advantage of allowing low prices to obtain without a prosecution, while high prices are attacked with a lawsuit. In the Microsoft case, the consumer gain is visible and apparent, while the consumer harm is speculative and fuzzy. On modern standards for antitrust jurisprudence, this set of facts is—and ought be—a loser for the government.

But there are enlightening facts in evidence even today. Among the kettle of ironies in this case is the sizzling fact that Microsoft’s scorched-earth policy vis-à-vis Netscape directly led to browserware everywhere. By 1996, one could not buy an Intel-based PC (the monopoly brand, per Judge Jackson) without Web surfing capability built-in. AOL, assisted by its free browser deal with Microsoft, was “carpet-bombing” the nation with free-trial log-on disks for dial-up online service. Netscape added e-mail functionality to Navigator and frantically sought to fend off the 800-pound gorilla.

This spurred the mother of all industrial revolutions in Internet Time. Capital threw itself at the dot-com entrepreneurs, in heat to hop onto the networks enabled and made vast by millions of Web surfing PC users. Indeed, the “on” twist for this spigot of risk capital was Aug. 8, 1995—the Netscape IPO. The ferocious counterassault by Microsoft was not in the least unexpected, but it did not deter billions from pouring into the startups, VC’s, technology plays, and application gambits.

Every great invention suppresses countless others. The transcontinental railroad doomed the entire long-haul covered wagon sector. But in opening new vistas it invites headier entrepreneurs to build on an elevated platform. Microsoft’s attack on Netscape was as lowdown and dirty as Apple’s bullheaded refusal to license the Mac OS. But it contributed in a way that helps customers far beyond the dreams of Apple’s less visionary leaders. For this, shareholders in the beast from Redmond deserve nothing more—or less—than the spoils of capitalist victory.

And I, too, have eaten up the allotted space. Please do tell me more about Judge Jackson. He’s a curious fellow, and you have been spending quality time together.