Get the Economy Moving: Accept the Microsoft Settlement

CSE sent this letter on January 25, 2002, in support of the settlement ending the federal lawsuit against Microsoft.

January 25, 2002

Renata B. Hesse

Antitrust Division

U.S. Department of Justice

601 D Street NW

Suite 1200

Washington, DC 20530-0001

To Whom It May Concern:

I write on behalf of nearly 300,000 members of Citizens for a Sound Economy Foundation (CSE Foundation) to inform you of our enthusiastic support for the consent decree reached between Microsoft Corporation, the United States Department of Justice, and nine States. While far from perfect, the consent decree in U.S. v. Microsoft Corp. would allow Microsoft to continue to integrate new features and functions into its operating system, while addressing the licensing practices the United States Court of Appeals for the District of Columbia Circuit found to be in violation of Section 2 of the Sherman Antitrust Act.

CSE Foundation believes that this balanced approach is in the best interests of consumers because it avoids the punitive remedies – including dismemberment – that would limit software functionality, raise costs, discourage innovation – all for only imagined benefits in return. Additionally, the settlement will restore some stability to a high-tech marketplace that has been in depression for over 18 months. Continuing on with the case at this point threatens to exacerbate the already considerable damage the litigation has caused to the software industry, as well as the semiconductor and telecommunications equipment sectors.

By allowing Microsoft to continue to add features to its Windows operating system – or “bundle” as its critics pejoratively describe it – the consent decree will ensure that consumers have access to whatever products they deem worthy of purchase. While industry rivals are quick to assert that operating systems, browsers, instant messaging, and other software are distinct products, in an intangible world, they can just as easily be described as features or functions. In fact, it is difficult to see how Microsoft could have improved upon its operating system without including new features, including Internet browser integration.

Consider a review from The Chicago Tribune:

“The only customers with reason to rush out and buy the upgrade are the minority with heavy Internet habits. If you’re any kind of Web wonk at all you’ve got to have Windows 98 right now.”

“Fire up a machine on Windows 98 and the display is all but identical to what you get on Windows 95, but old Internet hands will see instantly that huge things are going on under the hood.” (Coates, James. The Chicago Tribune, June 28, 1998.)

Other reviews predicted that Microsoft’s easy-to-grasp technical improvements would increase Internet familiarity:

“On a technical level, most of the improvements in Windows 98 seem substantial, but they’re hidden beneath the same Win 95 interface to which users are accustomed. We couldn’t ask for more.” (Costa, Dan. “From Chicago to Memphis; Windows 98; Software Review; Evaluation,” Computer Shopper, October 1997.

A wealth of evidence suggests that its facile integration increased familiarity with the Internet and contributed significantly to the meteoric rise in Internet users and investment. With the release of Windows 95, Microsoft embarked on a high-risk business strategy to vertically integrate new software functions to its operating system to capitalize on the Internet. Thanks to the inclusion of Internet Explorer and the Internet Connection Wizard (ICW) in Windows 95, and the Internet-centric improvements made to Windows 98, the use and popularity of the Internet exploded and Windows’ dominance was cemented.

The success of these successive editions of Windows was nothing more than a successful business improving its products to address competitive threats. The proposed settlement succeeds in ensuring that high-risk business strategies based on huge research and development budgets and low prices offset by high volume are not against the law.

Industries characterized by innovation and high sunk costs – costs which require large amounts of discretionary risk capital invested in non-salvageable assets – will produce few winners and many losers. Prices in such markets are typically disciplined by technological alternatives, as competition takes place more for the market itself. Investment flows to consumer-friendly innovations to displace the current technological standard instead of direct competition with nearly identical products that would bear little fruit.

Given these dynamics, if the government makes it clear that it will punish eventual winners by barring them from entering new markets, determining what prices they may charge, or limiting what functions their products should perform, investors will become sheepish and discretionary risk capital will become difficult to acquire. If capital spending and the economy as a whole are ever to rebound, this lesson must be learned. Thankfully, the proposed settlement recognizes this.

Of course the settlement does go quite far in punishing Microsoft and policing its activity. The company, in fact, agreed to a settlement that is substantially more punitive than anything the plaintiffs could have hoped to achieve through litigation. The agreement is arguably the most regulatory decree ever negotiated by the Justice Department, either through litigation or settlement

Included in the unprecedented provisions is the creation of an independent three-person technical committee to monitor Microsoft’s compliance with the agreement, a committee that will reside at Microsoft headquarters and that will have complete access to all Microsoft facilities, records, employees and proprietary technical data. This includes the source code or Application Programmers Interface (APIs) for Windows, which will ensure that third party developers have access to information to allow their products to perform better on the Windows system.

In addition to the technical committee, the Department of Justice and the nine states that have signed on to the settlement will also be empowered to monitor Microsoft’s compliance and to seek remedy – including injunctive relief – if the company fails to implement the consent decree satisfactorily. Microsoft will also implement an internal compliance program to educate their managers and employees about the different restrictions and obligations the decree imposes on them. It is important to note that all of this goes far beyond what the Court of Appeals required in its decision to drastically limit Microsoft’s liability.

As mentioned earlier, Microsoft will also be prohibited from entering into exclusive dealings. While hailed as pro-competitive, this regulation could actually harm industry players and consumers. By regulating the license agreements Microsoft signs with hardware manufacturers, the government would transfer wealth from Microsoft to those manufacturers by artificially changing relative bargaining strength. But if such action has the unintended consequence of reducing the incentive for Microsoft to produce enticing new products, the manufacturers would be worse off than if they had to negotiate free of government interference because it is Microsoft’s software that helps to drive sales of their products.

But all in all, the consent decree is a victory for consumers and should be approved expeditiously. The Department of Justice made some important compromises, but still managed to extract significant concessions. Although it is not clear that these new regulations will provide much benefit to consumers, when weighed against the possibility of continued litigation, the settlement is a worthwhile vehicle to conclude these proceedings. It is the opinion of CSE Foundation that the agreement is fair, meaningful, and properly tailored to address actual violations of law instead of the requests of industry rivals.

Sincerely,

Paul Beckner,

President and CEO