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Press Release

    John Walker Lindh Glad he didn’t Miss Anything in MSFT Case

    03/20/2002

    WASHINGTON – You would never know it by listening to Monday’s opening argument by the co-counsels for the nine angry states, but there has already been a trial, judgment, appeal, and settlement in the landmark U.S. v. Microsoft antitrust case. Microsoft has long since terminated nearly all of the business practices for which the appellate court upheld antitrust liability, and a consent decree is in place that would restrict Microsoft’s conduct for five years and establish a technical board to ensure that Microsoft provides developers with key programming information in an apt and timely fashion.

    Yet the nine angry plaintiffs and their corporate patrons – their co-counsel, Brendan Sullivan, used the word “shills” – are undeterred by such facts. Their case in this separate remedy proceeding is essentially a rehash of the arguments brought by the Justice Department in May of 1998. Beyond the pathological denial that the case has already run its course, use of the word “consumers” was also conspicuously absent from plaintiffs’ opening argument. In its place were the now infamous anecdotes about how Microsoft used its market power to crush rivals and strangle the entire computer industry.

    While myriad economic and legal analysts have succeeded in demonstrating the ways operating system standardization and the free distribution of Internet browsers have provided almost incalculable benefits to consumers, questions about Microsoft’s “corporate citizenship” and bully-like behavior still dominate discussion of the issue. The states’ case relies on internal Microsoft e-mails, meeting summaries, and strategic documents to attribute dubious motives to rather rudimentary business practices.

    When Microsoft discovered that certain computer manufacturers were supporting the distribution of rival operating systems and middleware, it retaliated. It threatened to increase prices, limit availability, or altogether rescind the Windows license. This is not all that different from what a meat and seafood vendor might do if it discovered that a client restaurant was getting its pork chops from a rival supplier behind its back. In this case, the states argue that such action should not be tolerated because Microsoft commands 95 percent of the market for Intel-compatible personal computers.

    But what does it matter if computer manufacturers cave so swiftly to Microsoft’s demands? This industry does little more than match Intel chips with Microsoft software. Price competition is intense because there is negligible differences between products. Success is based on a manufacturer’s ability to improve its cost structure relative to that of competitors, and the best way to do that is to buddy-up to Microsoft to get bigger discounts, which are passed on to consumers to undercut rivals. By offering a carrot for complaisance, Microsoft’s alleged incivility lowered prices and increased output to the benefit of consumers.

    Of course, the states’ co-counsels ignore such analysis and instead tried to pass off stories about Microsoft’s multi-billion dollar rivals getting caught with their pants down as evidence of criminal misconduct. But Microsoft’s actions were more indicative of a hotly contested market than the sort of stodgy inertia typically associated with monopoly; if such brash action was required to defend against external risk, it is disingenuous to argue retrospectively that no risk really existed because Microsoft is an entrenched monopolist.

    The truth is that with different strategies, things could have turned out quite differently for Microsoft’s competitors. Just as these multi-billion dollar corporations teamed to egg on the Justice Department and 19 states to sue Microsoft, so too could they have aligned to confront Microsoft in the market. If AOL’s $4.4 billion acquisition of Netscape occurred in 1995, instead of the end of 1998, the Navigator browser may have never succumbed to Microsoft. If Oracle leveraged its dominance in database software with the partnership of Sun and IBM to contain Microsoft’s advance into the server market, this axis could have extracted the kind of concessions it now demands of the court.

    But all of this would have not only been more expensive than a taxpayer-financed antitrust crusade, but would have also required these companies to temper their dreams of becoming the next Microsoft. The price of arrogance can be quite high, as Netscape discovered when it refused to make slight changes to its browser when approached by AOL in 1995. Believing it was the preeminent Internet technology company, Netscape offered a “take it or leave it” offer it believed AOL had no choice but to accept.

    By contrast, Microsoft, the newcomer to the browser market, readily complied with AOL’s request to “componentize” its browser design and added a desktop icon to Windows. AOL subscribers – roughly a third of the online market – became Microsoft users and the rest, as they say, was history.

    Now these corporations want to use the legal system to undo their failed strategies. But when the costs of bad business decisions are not borne by those who made them, the consumer benefits of private enterprise are attenuated. And when this moral hazard becomes endemic, as it is in Japan’s financial sector, the macroeconomic effects can be profound and lead to collapse.

    Passing the cost of bad business decisions onto consumers through antitrust action socializes risk and reward, and undermines the market. Antitrust enforcement that seeks to punish competitiveness to defend “competition,” makes the case for its own abolition.