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Monopolies Without End

Not Just Microsoft

May 14, 2000|Charles Ferguson | Charles Ferguson is the author of "High Stakes, No Prisoners: A Winner's Tale of the Internet Wars." He was the founder of Vermeer Technologies, which produced software for Web-site design. He sold the company to Microsoft in 1996

NEW YORK — The rise of Microsoft, and the antitrust dilemma it has produced, is at once an old story, a uniquely contemporary problem and a harbinger of things to come.

The government's proposal to dismember Microsoft into separate companies selling operating systems (e.g., Windows) and applications software (e.g., Office) is well-founded. The company is, in fact, a predatory monopolist. Yet, Microsoft is also beginning to show its age, which could become an even more dangerous problem over the next 20 years.

Declining, inefficient monopolists often use their accumulated power to coast. They can retain market dominance and high profits long after their technology falls behind, slowing technical progress and innovation throughout their industry. In the technology sector, where technical change averages more than 40% a year and is the lifeblood of progress, this can be exceedingly dangerous. In some cases, as with IBM between 1980-95, this "excess momentum" can result in huge economic losses before unaided markets correct the problem.

Thus, both because of Microsoft's ruthlessness and prospective inefficiency, its divestiture, if handled intelligently, would yield significant economic benefits for the U.S. and world economy. In fact, the government took far too long to challenge Microsoft's behavior effectively. Furthermore, for all its power, Microsoft is a small problem compared with several other regulatory and antitrust problems being generated, or in some cases revealed, by the Internet revolution. For example, both domestically and worldwide, the telecommunications industry alone probably causes at least 10 times more economic damage than is associated with Microsoft's monopoly. Yet, the antitrust authorities have taken, as yet, no action in this domain.

Slowly, the U.S. government is beginning to realize that Microsoft is only one symptom of a far larger issue. Last week, the assistant attorney general for antitrust, Joel I. Klein, and Treasury Secretary Lawrence H. Summers both delivered speeches in California. Klein defended the proposed Microsoft divestiture. He noted that Microsoft's recent arguments resembled those advanced by the AT&T monopoly in the 1970s, which were later proved false by AT&T's successful divestiture.

Summers spoke more generally. He noted three features of the information revolution: its dependence on brainpower more than conventional economic resources; the globalization of information technology and markets; and that the industry tends to produce successive monopolies, with a single firm often dominating each generation of technology and products.

Both Klein and Summers were correct in what they said, but there is far more to say. As information technology becomes the engine of world economic growth, it is colliding with powerful, entrenched systems, including monopolies protected by law, wealth and political power. In some of these collisions, technology is losing.

For now, with the exception of Microsoft, most of the technology sector itself is in quite healthy shape: competitive, fast-moving, with an astonishing ferment of new start-ups in areas ranging from Internet software to networking equipment to Web sites to wireless data services. Even Cisco Systems, the awesomely wealthy firm that produces the equipment used to operate the Internet and corporate intranets, is losing market share to younger firms in some important areas. Intel faces competition both from clones and from newer, cheaper microprocessors used in game systems and palmtops. Oracle, IBM, Microsoft and others continue to compete for the database-software market. The world now contains an estimated 10 million Web sites, and there is no danger that anyone will monopolize them. And this year, venture-capital investment in new technology start-ups will probably reach $100 billion in the United States.

This is not to say, however, that everything is fine. First, as Summers correctly stated, the technology sector does tend to generate monopolies, and, at some point, that will surely happen again. But far more important at the moment, the technology revolution has another vital characteristic. As digital information technology progresses, its natural behavior is to invade and replace traditional industries based upon older technology. Thus compact disks replace vinyl records, DVDs replace videotape, digital cameras are replacing film, e-mail is starting to bother the post office and FedEx, and the Web is beginning to encroach upon traditional publishing, even of digital CDs.

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