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Keep the Focus on Consumers

BY Paul Beckner
by Paul Beckner on 6/9/00.

Here's the last word on the Microsoft case from Judge Thomas Penfield
Jackson: get ready for a government-directed "rescue mission" of the otherwise wildly successful high-tech sector.

The Internet and the American software industry are prime examples of how the free market works for the benefit of consumers when left alone by government. But the Justice Department and Judge Jackson have rejected this notion in favor of federal controls. This decision ought to be overturned on appeal, but in the meantime, it is worth examining to see what particular havoc that its practical implementation will cause.

Just who will benefit if the Justice Department succeeds in breaking apart Microsoft? Surely, Microsoft's competitors will enjoy seeing the company hamstrung by strict government regulations over its business activities. But antitrust law was never intended to tilt the playing field toward competitors who have lost out in the marketplace; it is supposed to protect consumers from high prices and slow innovation. By this standard, the Justice Departments plan fails miserably. In fact, consumers seem to be the last people on the government 's mind.

The Justice Department wants to split Microsoft into an operating system company that would control Windows and an applications company that would control the popular Office business suite and other softwareand perhaps some third or even fourth company, if the judge's most recent pronouncements are any indication.

On first glance, it looks like a neat solution _ a "surgical" fix in the words of antitrust chief Joel Klein. Look a little closer, though, and it becomes apparent that the trustbusters don't have a clue about the economics of computer software.

The cost of producing computer software is almost entirely the initial intellectual input. Once the programmer's work is done, the cost of one additional unit is almost nil. The first copy might cost millions or even hundreds of millions to produce from conception to completion; the next copy costs pennies.

Consumers have demanded software that works together with other programs in a seamless fashion. This drove Microsoft's development of its Internet Explorer browser software as an integrated part of the Windows operating system. To Microsoft, this was a way to build volume, the key to both higher profits and lower prices for consumers. To the government, it was predatory behavior.

Of course it's hard to know who was predator and who was prey. Netscape, the company that persuaded the Clinton administration to go after Microsoft was bought by America Online for $10 billion _ hardly a bargain-basement price for a failed enterprise. Nevertheless, the government would now replace the old Microsoft with two companies, forcing each new firm to spend enormous sums to create what the other has. And neither firm will likely be able to build the sales volume that has allowed Microsoft to offer its software packages so cheaply. This is the government's plan for helping consumers?

Unfortunately, the most consistent theme in this trial is the government's indifference to consumers. One of the main complaints against Microsoft, after all, was that it gave away Internet Explorer for free. To compete, Netscape began giving its software away, too. It was also forced to improve its program to keep pace with Internet Explorer. So even consumers who didn't use Explorer benefited from Microsoft's strategy.

The Justice Department seems to be locked in a Depression-era understanding of markets _ one that assumes technologies go unchanged for decades, and that capital is unavailable to those who would challenge established businesses. But this is not the 1920s and Microsoft is not Standard Oil.

Today technologies, and particularly software technologies, change by the hour. Capital markets are so deep that the clich in Silicon Valley is now that capital is free, only talent is expensive. Students are rushing out of Stanford and Harvard business schools and the nation's engineering academies to start companies that are capitalized in tens of million of dollars on the day they first open their doors. John D. Rockefeller would not recognize today's economy.

But, then, neither do the trustbusters today. Micromanaging the software industry could wreck the virtuous circle of rising innovation and falling prices that has delighted consumers and driven American economic growth for a decade. And by punishing a company for no reason but that it has grown and prospered, it is sending send a signal that too much success will not be tolerated.


Paul Beckner is president of Citizens for a Sound Economy, a nationwide grass-roots organization that promotes market-oriented economic policies. Readers may write to him at: CSE, 1250 H Street NW, 7th Floor, Washington, D.C. 20005.