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Press Release

The End of the Beginning to High Tech Antitrust


Last week, the Justice Department and Microsoft announced that an agreement had been reached to end the antitrust case against the company. According to most legal analysts, the final deal closely resembles the settlement Microsoft first offered shortly after the case was launched in 1998. Evidently, the Bush administration had heard enough from those critics who questioned the wisdom of spending $40 million prosecuting Bill Gates when that money could have gone toward tracking down Usama bin Laden.

Such an anticlimactic conclusion to the federal government’s role in U.S. v. Microsoft may tempt observers to describe the case as Shakespeare’s MacBeth described life: "A tale full of sound and fury Signifying nothing." But to dismiss it as such is to miss the point of the entire exercise in wasteful government meddling: He who dares to ignore Washington, D.C. does so at his own peril.

Today, many in Washington fondly reflect on how naïve it was for Microsoft to devote its revenue to software development instead of a cadre of D.C. lawyers and lobbyists. To them, Microsoft was foolish for developing software that increased Internet familiarity when it really should have been hosting lunches and paying consultants to visit with policymakers.

With the release of Windows 95, Microsoft embarked on a high-risk business strategy to vertically integrate new software functions to its operating system to capitalize on the Internet. Thanks to the inclusion of Internet Explorer and the Internet Connection Wizard (ICW) in Windows 95, the use and popularity of the Internet exploded and Windows’ dominance was cemented.

Rival corporations displaced by Windows’ new features launched an offensive on a different front, which took Microsoft by great surprise. They did not merge, or sign exclusive contracts, or coordinate business strategies to discriminate against Microsoft products. Instead, these businesses came to Washington to demand that Microsoft’s advantage be eliminated through government fiat.

These industry rivals came equipped with novel economic theories to support the government intervention. Forceful government action was required, so their arguments went, because the market failed to deliver the best consumer products at competitive prices. In this case, "network effects" caused market failure because the Windows standard was adopted because of its ubiquity instead of its value. This created an "applications barrier to entry," where alternative operating systems could not match the number of Windows applications, or the convenience of nearly universal compatibility.

While both of these theories have been seriously discredited, there can be little doubt that by including functions in Windows that previously required additional software products, Microsoft solidified its position in the operating system market. And by leveraging Windows’ popularity to discourage computer manufacturers from offering alternatives, Microsoft further solidified that position.

But, as the D.C. Circuit Court of Appeals correctly ruled, actions taken to maintain dominance in one market cannot be double-counted as "attempted monopolization" in a distinct market. When Microsoft integrates Internet browsing functionality into its operating system, the market distinctions disappear: There are not two "monopolies," but one.

For this reason, the Appeals Court rejected the government’s "attempted monopolization" claim, and raised the evidentiary standard of the "tying" charge to an unattainable level. Faced with a drastically narrowed case that only convicted Microsoft of "monopoly maintenance," the Justice Department formally rescinded the break-up plan and sought a conduct remedy. After the events of September 11th, the differences were resolved quickly.

While the Justice Department’s role in the case has come to a close, Microsoft’s legal future remains in the hands of the 18 states that partnered with the federal government to prosecute Microsoft. There can be little question that the state attorneys general who prosecuted Microsoft did so at the behest of internal state interests, but to press on after the federal government has settled is beyond the pale. The attorneys general that appear unwilling to agree to the settlement represent a compliant group of regulators intent on serving their masters to the bitter end.

While far from perfect, the settlement does allow the high-tech industry and economy as a whole to put this whole unfortunate episode behind it. Back in 1998, many commentators suggested that part of the reason for the high-tech sector’s breathtaking growth was that it was "one-step ahead of regulators." No one would risk the embarrassment of saying such a thing today.

The legacy of the case will have profoundly negative consequences for consumers because it reaffirmed the basic socialistic pretension that consumers are less fit to pick winners and losers in the marketplace than regulators in Washington, D.C. This means that private businesses still must concern themselves with the preferences of consumers, but they must also devote a significant portion of their time and resources to Washington, because any disgruntled competitor can trump consumer sovereignty with a call to a well-placed lobbyist or politician.