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Rarely is a 125-page Federal Appeals Court decision characterized as a breath of fresh air, but that is a fair depiction of the recent ruling in the Microsoft case. The decision teaches us that personal ambition and corporate envy are not powerful enough to eviscerate a private business.
The ruling solidly rejected the claim that Microsoft attempted to monopolize the Internet browser market. This conclusion is hardly striking, considering the coming irrelevance of this market segment. As consumers make the transition to broadband, it will be difficult to discern an operating system from a browser for most hardware devices. Microsoft was the first to realize this and integrated accordingly.
It is this integration that stands as the most important element of this case and bears the most relevance for the road ahead. In many ways the word “integration” is itself a product of the 1995 Consent Decree signed by Microsoft and the U.S. government. The consent decree severely limited Microsoft’s business practices, but explicitly noted that the agreement “shall not be construed to prohibit Microsoft from developing integrated products.”
The appeals court heeded this distinction. In an era when software, content, and online services are one package, competition for distinct elements of that package may not make sense. In fact, it is increasingly difficult to think in terms of separate “elements” as it is. Internet functionality is now viewed as a feature of operating systems than it is a separate component.
As the court recognized, “assuming choice is available at zero cost, consumers will always prefer it to no choice.” But in many industries, if the government were to mandate choice at each juncture, consumers would be deprived the efficiencies of integration. Consumers should be left to decide which benefit – efficiency or choice – better suits them. The history of software development, as well as new strategies by Sun, Oracle, and AOL Time Warner, seem to suggest that most consumers prefer integration.
Of course, Microsoft’s antagonists, including the disqualified Judge Jackson, argue that consumers were deprived of the chance to definitively answer this question because integration robbed browser-only software companies of research dollars that would have been used to develop a much better browser.
But even if this hypothetical had proved true, it is impossible to discern “how much better” the browser would have to be before court action would be warranted. Let us not forget, to prevent Microsoft from integrating products is to deprive consumers of features and functions that they would have normally received free of additional charge. As MIT economists Richard Schmalensee made clear during the trial, nearly all competitive operating system makers charge no additional price for browsing functionality.
The appeals court made certain that any sanction for integration must be based on overwhelming evidence of anticompetitive intent and monopolistic pricing. This standard should bode well for consumers in the months ahead. As software companies rush to add additional features to their products, antitrust regulators should be kept on a short leash. It is impossible for high-tech firms to succeed if they are forced to offer the same stale product year after year; adding new features and functions that once required a separate application is a response to competitive pressure.
But because the court did not summarily dismiss the tying claim, the high-tech industry is certain to see it again. This is unfortunate because it may encourage high-tech corporations to intensify their competition for political favors in Washington at the expense of consumer-enhancing competition in the marketplace.
The same companies that sponsored the current case look poised to test the appeals court’s new tying standard when Microsoft releases its Windows XP in October. Other suits will soon follow. Should AOL Time Warner be disciplined for “tying” its Internet Service Provider (ISP) AOL with the Internet access provided by Time Warner cable lines? Should Sun and IBM be prevented from tying Java and XML web services?
Courts will be called on to answer these questions, but the D.C. Circuit Court of Appeals unanimous decision provided a clear admonition: Function and feature integration is a natural process unique to certain industries such as software. Any suit that wishes to trample on this natural process must prove extraordinary misconduct.
As long as antitrust laws exist, interest groups will pressure public officials to file suit against their rivals. The resources firms will devote to such pursuits is and will always be a function of the probability that a lawsuit will be filed and won. With state attorneys general, the Department of Justice, and the European Commission all possible targets, the billable hours for antitrust lobbyists look to be on the rise.
The D.C. Circuit Court of Appeals recognized the growth such influence peddling and issued an opinion that will constrain it, at least in the marginal cases. More could have been done to stem this tide, but considering how far this case got in the first place, the opinion was a breath of fresh air nonetheless.