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Press Release

Welcome, Albeit Unsurprising, News in Microsoft Case


The Department of Justice has formally announced it will not seek a court-ordered break-up of Microsoft in the "remedy" phase of the antitrust case against the company. Nor will the DoJ pursue its claim that the inclusion of Internet Explorer in the Windows operating system is illegal. This announcement is evidence that sanity has been restored to the Justice Department, but does nothing to resolve the fundamental policy question raised by the suit: Should a consumer business that increases distribution, lowers prices, and offers laudable products be subject to prosecution?

It was by coincidence that The New York Times review of Microsoft’s new XP operating system came the same week as the DoJ’s statement. While the DoJ reversed course, David Pogue of the Times continued a trend that has been ongoing for some time: Enthusiastic independent reviews for Microsoft products. While the litigious Reno Justice Department launched a rhetorical assault on Microsoft’s business practices and innovations, those same innovations won praise among independent software reviewers.

How can a new product excite millions of consumers and earn superb reviews from respected critics if it is not a vast improvement over what is currently available? No one is forced to buy Microsoft’s latest edition, but computer manufactures and millions of consumers will because "Windows XP is very attractive and extremely stable," with new features that will "keep you busy for months."

Lawyers, policy analysts, and software industry executives can argue about the distinction between "integration" and "welding" all they want, but improving a product should not be illegal. But that is precisely what the antitrust case against Microsoft wished to outlaw: It is difficult to explain how Microsoft was to improve on its previous operating system without browser integration. Consider a review from The Chicago Tribune:

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

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. (emphasis added)

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.(emphasis added)

Windows 98, with its rich set of convenience and Internet features is the most powerful and friendly environment ever invented for computing.(emphasis added)

A wealth of evidence suggests that this increased familiarity with the Internet contributed significantly to the meteoric rise in Internet users and investment. But it also harmed some competitors because it eliminated the need for their products. In spite of the fact that rival software compatible with Windows is available on the Internet with the click of a mouse, the DoJ prosecuted Microsoft for adding the features praised by reviewers.

A legal challenge to Microsoft XP is a possibility, which is unfortunate given its recent acclaim, but it is unlikely that the Ashcroft DoJ or computer manufacturers’ lobby would support it. The personal computer industry is in the midst of the first drop in year-on-year sales in its history. Hewlett-Packard and Compaq have decided to merge to whether the storm and chip manufacturer, Intel, has failed to meet financial analysts’ estimates and seen its stock tumble.

By regulating the license agreements Microsoft signs with hardware manufacturers, the government would transfer wealth from Microsoft to those manufacturers. But if such action had 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.

Computer industry analysts predict that the release of Microsoft XP will provide a much-needed boost to personal computer sales. "If technical and design merit were the only criteria for judging an operating system," Pogue writes, "the release of Windows XP would be cause for jubilation." The irony, of course, is it that the manufacturers’ so dependent on XP for a spike in their sales are the ones most responsible for the new criteria on which to judge an operating system thanks to their direct testimony during the trial.

Antitrust enforcement is rarely, if ever, in the interests of consumers, but the Microsoft case teaches us that it can be harmful to competitors and other market participants as well. The dynamics of the high-tech marketplace have changed so considerably since the case was filed that many interest groups’ short-term political goals are contrary to what they were in 1998.

In a fast-paced industry, shortsighted political goals are just that. If capital spending and the economy as a whole are ever to rebound, this lesson must be learned: 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. Competition will largely be for the market itself, with consumer-friendly innovations displacing the previous technological standard.

Given these dynamics, the government has absolutely no businesses deciding what markets certain firms may enter, how much they may charge, what functions their products should perform, or whether they should actively promote the products and services of their competitors.

Attorney General Aschroft would be well-served if he were to follow last weeks’ statement with a formal renuciation of the suit itself. Such action would force industry rivals to quarrel in the marketplace, instead of the courtroom and place consumers, instead of high-powered attorneys, back in the drivers seat.