Microsoft Miswiring

The government’s portrayal of the sharp corporate elbows in the Microsoft litigation has made for entertaining sound bites, but the coverage of the case has avoided two fundamental problems with the plaintiff’s case. There is also the growing sense that the case against Microsoft is just another example of economic regulation run amok.

The Sherman Act was designed to protect consumer welfare – that is, it was designed to protect competition, not competitors. In fact, as Judge Robert H. Bork, one of Netscape’s lawyers, has written, Senator Sherman’s original draft outlawed arrangements “designed, or which tend, to advance the cost to the consumer.” In the early years of the Act’s enforcement, the Supreme Court misapplied it against allegations of unfair competition, not unlike those made in the Microsoft case. But for most of this century, the courts have enforced the Act as it was intended: to protect consumers and competition. Unfair competitive behavior has been punished under subsequent unfair trade practice legislation, such as Section 5 of the Federal Trade Commission Act or similar state codes.

The first flaw of the government’s case against Microsoft is the failure to establish any consumer harm. American consumers are enjoying the greatest economic boom in history, fueled, in no small part, by the revolution in computer technology. Microsoft’s innovations have played a significant role in this development by providing consumer access to high technology through a common platform. The government cannot disprove that consumers are better off today because of Microsoft’s activities, and this fatally injures its case under the Sherman Act.

The second problem with the government’s case is the fact that the unwise strategies of Microsoft’s competitors played a significant role in the position the software developer enjoys today. Preoccupation with the more recent skirmishes between Microsoft and Netscape/AOL provides for good theater, but ignores these earlier mistakes that opened the door for Microsoft.

Apple Computer made a huge mistake when it thought its operating software was so superior that it refused to license it on the theory that people would be forced to buy its hardware in order to get the software. Though it failed, this was a more naked attempt at leveraging than anything Microsoft has ever tried. What tripped up Apple was not the government, but the consumer, who opted for more standardization in software and more choice in hardware than Apple predicted.

Oddly, a similar mistake was made by IBM. IBM hired Microsoft to provide the software for IBM hardware because IBM wanted to focus on hardware where it foresaw greater profits. When IBM realized what a mistake it had made, it tried to develop its own software system that was incompatible with common standards so that its own hardware would be indispensable. Again, and quite predictably, the consumer opted for software standardization and hardware choice.

Should Microsoft now be punished for having provided an innovation its competitors would not? Perhaps the company has been too aggressive recently in trying to hold on to what it has achieved. But consumers are far more effective policemen in the marketplace than the government, for the consumer is always looking to the future, while the government looks to the past. Already the “future” has shifted from personal computers to handheld devices and the struggle over the last broadband mile to the home. The government, however, is still fighting the war that, for all intensive purposes, has already been decided.

The last time the government went to battle in the computer industry it charged that IBM tried to tie its hole punch computer cards to its hardware – never mind that the market action had shifted from those cards to software operating systems practically before the suit was brought. Similarly, the government sought to charge the three original broadcast networks as monopolists even as the action was shifting to cable. Cable, in fact, is now in the process of being branded a monopolist of broadband communication before a significant market is even established.

The government is almost never right about predicting what consumers will do in markets that are otherwise free of government regulation. This is not to say that “combinations and conspiracies in restraint of trade” of the Sherman Act are untouchable. To the contrary, price fixing and anti-competitive aggregations of market participants have no redeeming market virtue and ought to be proscribed – as they were in the case of oil, tobacco, movies and telephones.

The remedy in these cases was to break down the cartels into the original constituent parts as they existed before the market manipulators closed the market down. Microsoft is nothing like those cases: Microsoft was not created by aggregating already existing market powers. From its beginnings, when a handful of computer enthusiasts convinced IBM to allow it to develop a disk operating system, Microsoft has been an American success story of innovation, drive, hard work, and a lot of luck. Government intervention in these circumstances will only discourage investments in future innovations – like establishing a speed trap on the information superhighway – and reduce consumer choice. The certain result of that kind of economic regulation is harm to consumers, which is exactly what the Sherman Act was designed to prevent.


This article appeared in the Commentary section of The Washington Times on Wednesday, August 18, 1999.