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Microsoft Is Wrongly Targeted

The government is mistaking bargaining power for market power; consumers would be the losers.

October 19, 1998|WILLIAM F. BAXTER | William F. Baxter, an economic consultant to Microsoft, was the assistant U.S. attorney general in charge of the antitrust division from 1981 to 1983

Trial is scheduled to begin today in United States vs. Microsoft Corp., potentially the most important antitrust case of the last quarter-century. The court's decision is likely to have a profound impact not only on Microsoft and the software industry but also on the development of antitrust law.

If the government prevails, the decision will be a watershed, returning antitrust to the bygone era of parimutuel pursuit of "level playing fields"--placing more weight in the saddle bags of faster competitors at the expense of consumers and innovation. As one who has spent a professional lifetime in academia and government helping to put antitrust law on a sounder and more rational economic footing, I find that prospect quite alarming and extremely depressing.

In May, when the Department of Justice and a number of state attorneys general filed the complaints against Microsoft, the case was billed as a "surgical intervention" to excise a few allegedly anti-competitive provisions that Microsoft had successfully bargained for in its distribution agreements with Internet access providers and PC manufacturers. The government's primary target was Microsoft's integration of Internet functionality (personified as Internet Explorer) into Windows 98. The complaint alleged that the integration amounted to a per se illegal "tie" of two separate products. The tie, the complaint asserted, excluded Netscape and its web browser from the market.

Fortunately, the tide has been running strongly against the government's case. In June, the Court of Appeals for the D.C. circuit ruled that the Justice Department could not use the 1995 Microsoft consent decree to block the integration of Internet Explorer into Windows 95. Relying on sound antitrust principles, the appellate court decided that so long as the integration of Internet functionality into Windows creates advantages for the consumer, the integration is real and lawful. Since the advantages of having Internet functionality integrated into the operating system are numerous and tangible, that standard, which will govern the upcoming trial, dooms the government's tie-in claim. The government had to modify its case or drop it.

After several modifications, the government's claims are far from modest, and its requested remedies more closely resemble butchery than surgery. The case is nothing less than an assault on Microsoft's ability to design its software. No matter how the Justice Department "spins" it, the government's demand that Internet Explorer be sold separately from Windows 98 is an effort to assert control over what features can and cannot be included in the operating system. The government's proposed remedies--requiring, among other things, that Microsoft ship at no charge Netscape's web browser with every copy of Windows 98--are borderline insane. Had the parties agreed to this joint distribution arrangement, the government surely would have attacked it as anti-competitive. By hampering Microsoft, a government "win" no doubt will help Netscape. But that seems an odd goal for the government, particularly since it comes at the expense of consumers and innovation.

Moreover, it has become clear in the course of discovery that Microsoft's licensing practices, neither separately nor collectively, have not foreclosed Netscape from the market. In July and August alone, Netscape distributed more than 12 million copies of its browser. Netscape's problem is not an inability to reach consumers; rather it is getting consumers to use its browser when they also have access to Microsoft's Internet Explorer. According to substantially all--19 out of 20, at last count--independent technical reviewers who have compared the two, Internet Explorer today is superior to Netscape's web browsing software.

Nothing of substance remains in the government's complaint. After sifting through millions of pages of Microsoft's internal e-mail, the government has scrounged up several sensational snippets that appear to portray a very aggressive company that wanted to trounce Netscape. So what? To prevail, the government must present objective evidence that Microsoft has market power and that exercise of that power has harmed consumer welfare; by itself, subjective evidence that Microsoft wanted to increase its market share at Netscape's expense is irrelevant. As Supreme Court Justice Stephen G. Breyer once observed, an " 'intent to harm' competition without more offers too vague a standard in a world where executives may think no further than 'Let's get more business.' "

Equally unavailing to the government's prospects is its latest desperate attempt to dredge up past examples of Microsoft's unconsummated joint venture discussions with other computer companies and of Microsoft's hard bargaining with industry giants such as Intel. Those examples have nothing to do with the allegations in the complaints. Moreover, joint venture discussions are commonplace in the computer industry and almost every other industry for that matter. And, if the government really can't tell the difference between bargaining power (which is of no moment under the antitrust laws) and market power (which is), it has forgotten all the lessons in antitrust economics learned in the 1980s.

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