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How would breaking up Microsoft Corp. affect the economy? Consumers Would Be Hit Hardest

BY Sen. Slade Gorton
by Sen. Slade Gorton on 7/10/00.

More than a year ago, the Department of Justice filed a lawsuit against Microsoft Corp., which is based in my home state of Washington. While I believe the lawsuit was ill-advised in the first place, the remedy decision handed down by Judge Thomas Penfield Jackson to split Microsoft into two separate companies is simply disastrous.

His decision, if carried into practice, would have a terrible impact on the U.S. economy for decades to come, cost consumers billions of dollars and set a troubling precedent for government regulation of the high-tech industry.

Founded in 1975, Microsoft epitomizes a technological revolution that expanded well-beyond the Pacific Northwest and forever changed how we work, communicate and teach our children.

Microsoft helped usher in the most important change occurring on earth: Today the power of information has been taken from a few large, centralized institutions and put directly in the hands of people in every city and town across our globe via the Internet.

Most Americans understand Microsoft's value. Microsoft products make nearly every business in America more competitive. The technology revolution fueled by Microsoft has made Americans more secure in their jobs and more families secure in their future.

In a poll conducted by Citizens for a Sound Economy, 82 percent of those polled responded that Microsoft is good for American consumers. This survey also found that seven out of 10 American consumers feel that technology companies, not the federal government, should determine what features and applications are included in the software that consumers use with their computers.

Unfortunately, Jackson disagreed. On April 3, the day after the court issued its conclusions, Wall Street responded to the heavy-handed decision by punishing Microsoft shareholders to the tune of $80 billion.

This decline helped fuel a 349-point slide in the Nasdaq, the biggest one- day drop in the history of the exchange. That drop was felt by people in all walks of life, as at least 2,000 mutual funds and countless pension funds include Microsoft shares.

Aberdeen, an independent Boston-based technology consulting company, recently released its findings of what the breakup of Microsoft would cost consumers. The results are staggering. Aberdeen found that splitting Microsoft would cost more than $43 billion over 10 years.

Who would ultimately pay for a breakup of Microsoft? The consumer. Either the consumer will pay in the form of higher prices, less standardization and interoperability or Microsoft will shoulder the brunt of these costs, resulting in lower profits that will deflate stock value by an estimated $10 billion in shareholder equity.

The high cost to consumers and dips in the stock market, however, are only part of the story. The Association for Competitive Technology and the ASCII Group released a report last year citing their concerns about a possible decision by Jackson to break up the company. Those concerns not only stemmed from lost revenue or consumer pricing, but also were based on fear of the precedent this case sets for future interference and regulation by the government.

A breakup of Microsoft will be the proverbial camel's nose under the tent, setting a precedent for further regulation of the information-technology industry - an industry that is rapidly changing and conquering new challenges that the government should aim to encourage, not threaten to limit.

Economist Milton Friedman recently warned about the possible impacts of the suit on the information-technology industry as a whole. He pointed out the obvious flaw, involving government regulators.

Friedman states, "Silicon Valley is suicidal in calling government in to mediate in disputes among some of the big companies in the area and Microsoft. ... Once you get the government involved, it's difficult to get it out." I couldn't agree more.

George Gilder, a techno-guru and a senior fellow at Discovery Institute, expressed his strong reservations about the government's action and Jackson's decision.

"The government and Judge Thomas Penfield Jackson have no idea how to create technology or how to run a technology company. They certainly have no clue how to create several new ones," stated Gilder in a recent article.

Despite the government's attack on Microsoft, the information-technology industry has continued to move forward. The explosive growth of the Internet eventually will have a fundamental impact on every aspect of American life.

Already, the Internet is introducing a vastly different technological landscape than exists today, causing the lawsuit to be less and less relevant. In the future, users will not necessarily rely on stationary personal computers to access information, but increasingly will use Web phones, hand- held computers and similar technology that is advancing at an exponential rate.

Microsoft, and any other technology company, cannot be expected to remain competitive in this highly volatile industry if tethered to the glacial pace of the federal government.

The government's attack on Microsoft also must be measured on a global scale. Foreign companies are scrambling to compete with U.S. information- technology firms in the global marketplace. By trying to slow down what is arguably the most successful and innovative company in the history of the world, the government is setting a dangerous precedent that will serve only to allow foreign competitors to play catch-up.

The outcome of the Justice Department's lawsuit is not yet known and will go before either the U.S. District Appeals Court or the Supreme Court.

In either venue, I am confident that Microsoft will win on appeal and that the United States, and the rest of the world, can continue to benefit from a company that is constantly striving to find new ways to improve our lives.

Sen. Slade Gorton (R-Wash.) is a member of the Commerce, Science and Transportation Committee.