4/27/00 9:45 a.m.
Another Foolhardy Antitrust Theory
Getting Microsoft straight.

By Alan Reynolds, director of economic research, Hudson Institute

ach phase of the government's antitrust crusade against Microsoft has gone off in different directions, with little connection between them. The trial became a forum for all sorts of whining by Microsoft’s rivals, mostly about petty matters unmentioned in the government's original complaint. Judge Jackson's Findings of Fact prudently ignored most of that biased trivia, and his Findings of Law discarded the rest. All that remains are two items — the Netscape browser and Sun's Java programming language. Yet the latest flurry of leaks about proposed remedies has nothing to do with Netscape or Java, and everything to do with pleasing Silicon Valley rivals and the Congressmen they support.

Recent leaks about proposed remedies came as another nasty surprise to world investors, because those remedies are so far removed from the Findings of Law. Like earlier setbacks for Microsoft, the news contributed to a massive selloff of stocks that now look vulnerable to future trustbusters (Cisco, Oracle, AOL); stocks dependent on Microsoft's commercial health (Intel-based chipmakers and Windows-based software firms); and stocks whose value had relied on security of intellectual property against whimsical federal assault (risky technological research, including biotech). Judge Jackson was adamant that the notorious caprice of antitrust rulings should trump copyright and every other rule of law: "Even constitutional privileges confer no immunity when they are abused for competitive purposes." Another scary show of power, like using federal troops to resolve family-custody battles in Miami.

Although the odds are strongly against any Draconian remedies in the Microsoft case actually surviving appeal, Microsoft and every other big tech company will now feel obliged to spend much more money on lawyers and politicians and a lot less on research and development. Together with the assault on intellectual property, that fact alone helps explain why world investors suddenly marked down U.S. tech stocks by a half trillion dollars or so.

Reporting about the Microsoft case is nearly always derived from lawyers, usually former DOJ or FTC antitrust lawyers, neglecting both technology and economics. Economists don't think much of measuring monopoly by market share (Office has bigger share than Windows, but so what?), or pretending that "Apple products" and "workstations" are in a different market. Economists have even less respect for theories about "tying" and "predatory pricing." These are issues long resolved by economic logic and evidence. They are not matters of opinion, except among lawyers. Liberal economists Paul Krugman and Brad deLong have been nearly as critical of the Microsoft case as I have. And so have conservative and libertarian economists (aside from those bankrolled by ProComp), such as Red Herring's brilliant columnist David Henderson.

It is really on the technological issues, however, that this case will ultimately collapse. Perhaps sensing this, the government appears to be revising the technological spin it has used since 1995. The government's original technological forecast, spelled out in the May 1998 Complaint, was that other operating systems could never be a serious threat to any version of Windows. The real threat was said to be "middleware." Software developers might one day create Java-based Office Suites that could run equally well on any platform. Yet such "platform independent" applications were said to be wholly dependent on one particular brand of browser, namely Netscape. Or perhaps Netscape itself could somehow become a "platform" for applications, in ways that were always left prudently unexplained (because it is entirely impossible). Although this theory is firmly grounded in technological illiteracy, it nonetheless remains absolutely critical to the notion that Microsoft did anything illegal. Since the government appears determined to recommend remedies that have nothing to do with the Findings of Law, however, the government apparently feels free to spin a new theory.

The government suddenly noticed that an operating system like Windows can be threatened only by other operating systems, like Mac, Linux, Solaris, and Palm (all of which are flourishing). Netscape and Java have been summarily dropped from the remedies phase. Yet without Netscape and Java, Microsoft stands accused of nothing illegal.

Putting that annoying technicality aside, the new theory claims the only thing that keeps more people from using non-Windows operating systems is the "applications barrier." This is the new rationale for forcing Microsoft to spin off Microsoft Office and perhaps all applications. Then, the story goes, the new company would rush to supply MS Office for all other operating systems, and those systems would then cut Windows down to size.

Once again, the government totally misunderstands technology, or hopes the rest of us do. The "applications barrier" to the use of non-Windows operating systems is mainly a problem in theory, not in fact.

The only trial evidence on the topic related to IBM's OS/2. But nobody outside the Justice Department ever imagined that customer rejection of IBM's bulky and overpriced OS2 was due to any shortage of applications. IBM owns Lotus, after all, and sold more software than Microsoft until 1998. Besides, when OS2 was trounced by Windows 3x all Windows apps ran fine on OS2. And, as the Judge noted in the findings of fact, IBM "prices OS/2 Warp at about two-and-one-half times the price of Windows 98." Regardless of how many applications are available, an overpriced, inferior operating system won't survive.

Like OS/2, Apple's PowerPC always ran Windows software, and any Mac can still do the same with the addition of a little software. Historically, Apple's problem was simple. Like OS/2, Apple's operating system was much too expensive. To get the Mac operating system required paying premium prices for Apple hardware. Only companies that sell cheap products are ever hauled into antitrust court, not companies like Netscape, IBM, and Apple that tried to squeeze too much out of their customers. Under Steve Jobs's leadership, however, Apple's products and pricing are much more competitive than ever before, and the company is doing very well.

The government says it does not matter that Mac sales are rising by 25% a year, or that Apple is the sixth-largest U.S. computer maker. It would not even matter if Apple's market share doubled in the next year or two (as I expect), because the government flatly excluded Apple from its obsolete 1997 estimate of Windows' share of the "relevant market" (oddly defined as the worldwide stock of computers, old and new, including NT but not Sun workstations). Earlier this year, Joel Klein explained to the Judge that "Apple products . . . [were] carefully examined and found not to be in the same market" with Windows. But Apple has hinted that its awesome new OS-X, which was created on Intel machines, may be made available for Intel machines. At some point, even Mr. Klein may have to carefully reexamine the idea that Apple makes computers, not just products.

Since Mac already gets Microsoft Office, the burden of the new theory appears to fall on Linux or BeOS. Actually, perfectly fine office suites are available for both systems, including WordPerfect and Sun's Star Office for Linux. Besides, free software is readily available to allow Linux computers to run Windows software. But packaged versions of Linux can also partition hard drives, so users often use two or more operating systems, such as Windows, Mac, or Sun's Solaris. Applications are not the problem with home use of Linux. Installation and drivers are the problem. But that is changing. Corel Linux is designed for novices, not servers. And many companies will be marketing Linux computers (sometimes labeled "Internet appliances"), including several from AOL-Gateway.

BeOS 5 is a free download that runs within Windows, so there is no "applications barrier" to prevent anyone from trying it. Initially aimed at Internet multimedia, BeOS comes with the excellent Net Positive browser (or Opera). However, the inexpensive Gobe office suite looks up to the job. Palm Pilots come in Windows or Mac versions, and are designed to swap files with those desktops. Sun Microsystems offers a card that lets you run Windows software on its desktop "workstations," which offers users many choices between Solaris or Windows applications.

In the past, the government seemed fascinated with the notion that the sheer number of applications, rather than their quality, is what made consumers pick one operating system over another. With the commercial development of the Internet, however, many services that used to be purchased as packaged software for each computer — such as encyclopedias, games, maps, and calendars — are already free and handy on the web. Free or rented online office suites may never catch on, but will not require Java or Netscape if they do. The Internet itself is the "alternative platform" to Windows or Mac, not just one brand of browser nor just one of several programming languages read by numerous browsers on computers, Internet appliances, TV-set top boxes, Internet game consoles, and wireless devices.

From the beginning, the case against Microsoft has been built on shaky technological theories and forecasts. The new "applications barrier" theory behind the remedies phase is a bit less absurd than the old "Netscape platform" hoax in the Findings of Law. But the remedies have to square with the findings to survive appeal. And both are grounded in technological quicksand.