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Press Release

    Playing Parlor Games: What Justice Ought Not Do

    02/26/1999

    The latest parlor game around the nation’s capital involves predicting the punishment for activity that is allegedly inappropriate and illegal. Of course, I am writing about the antitrust case brought by the Department of Justice against Microsoft. The government claims that Microsoft is using its operating system as leverage to corner the market on Internet browsers. If Microsoft were found guilty, the case would move to a penalty phase. At that point, regulators will be hard pressed to implement a remedy that would not harm consumers.

    The government has accused Microsoft of anti-competitive and exclusionary practices. Microsoft’s decision to sell their browser and operating system as an integrated product is alleged to violate antitrust laws. Unfortunately for the government regulators, there is little evidence of a dramatic and negative impact on consumers because of Microsoft. In fact, a recent poll of 1,010 consumers conducted by CSE Foundation and Wirthlin Worldwide revealed that more than four out of five (81%) Americans believe that Microsoft is good for consumers. Nonetheless, the buzz has already begun about potential penalties for Microsoft, with options that range from divestiture to restrictions on what Microsoft can display on the Windows desktop.

    A divestiture could mean that government regulators – or a federal judge – would break the company apart. When asked about any possible advantages to this proposal, Nobel laureate economist Milton Friedman was not optimistic. He replied, "If there are such advantages, [to a break-up of Microsoft] I would prefer to let the market bring it about through competition rather than to have government officials who I doubt are very much more knowledgeable than I am to decide in what components to break it up into."

    Federal regulators do not know the best way to organize a software company. For example, if Microsoft were ordered to divest its operating system from its applications, the convenience of buying one piece of software to handle most computer needs would be denied to consumers. It is silly to think that the average consumer should be forced to purchase and install two, or three, or even four pieces of software when she previously only had to deal with one.

    Some may argue that the Microsoft operating system is integral to all personal computing and therefore it is an "essential facility." Under this legal theory, regulators could force Microsoft to publish millions of lines of source code for all of its competitors to see. Design specifications of new products are protected in other industries – Ford does not have to give GM the blueprint for the new Mustang – and should be protected in the software industry.

    The essential facilities doctrine comes from a 1912 Supreme Court case, United States v. Terminal Railroad Association. The court held that the owners of a rail switching station must allow competing railroad companies access to their switches because they were "essential." Among the four tests that must be met to make a facility essential to the marketplace – in the case of Microsoft, its source code – is the requirement that it is practically or reasonably impossible for a competitor to duplicate the facility. However, unlike the railroads of yesterday, several competitive operating systems and dozens of browsers have already been designed and vigorously promoted in the marketplace.

    A solution listed in the Department of Justice complaint would insist that Microsoft place a competitive browser on the Windows desktop. The complaint specifically names Netscape as the alternative. This idea persists despite the announcement of a merger between America Online and Netscape that would create a $4.2 billion company with 15 million subscribers. America Online already is on the Windows desktop and Netscape is a leading competitive browser to Microsoft’s Explorer. Therefore, this remedy would reward the most widely used browser with placement on the desktop of the most widely used operating system. Why should Netscape be given this plum position and not any other browsers? And, don’t forget that the market – through the AOL-Netscape merger – has effectively placed Netscape on the Microsoft desktop.

    Time and again antitrust regulators take up the mantle of consumer protection. The Microsoft case represents a situation where intervention would be only for economic protection. There is no water or air to be protected from pollutants. There are no products on the market that could explode in an accident or that could be swallowed by a child. The economics suggest that the danger at hand is not a monopoly, but that the Department of Justice is too anxious to intervene in a dynamic market.

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    This piece appeared in The Washington Times, February 5, 1999. Permission to reprint outside Washington, D.C., or to quote from is expressly given provided Citizens for a Sound Economy Foundation and the author are credited.