Microsoft vs. DOJ
June 24, 1998

Anti-Antitrust
by Brian Graney (TMF Panic)

Antitrust is one of the grayest of the gray policies of American government. There's simply no other way to put it. Since the concept was first introduced in this country over one hundred years ago, it has been at loggerheads with the ideals of innovation, entrepreneurialism, and Darwinian survivalism that form the underpinnings of American capitalism.

The agencies whose mission it is to guard over the antitrust realm, the Federal Trade Commission and the Justice Department's Antitrust Division, are in a unique and difficult position in American government. They are saddled with the heavy burden of acting as the sheriffs for the wild, wild free market economy. But just as the Iron Horses changed the fabric of the Wild West in late 19th century America, today's information technology train is opening up the free market to all kinds of new products and forms of competition, rendering the old, traditional theories of antitrust policy as dated as a Winchester repeating rifle.

The new tyrant of the West is not Black Bart, but Black Bill. Gates, that is -- the CEO of software giant Microsoft Corp. Facing him in the duel at high noon is the new sheriff in town -- the Justice Department's top trustbuster, Joel Kline. The two gunslingers stepped out of the saloon and into the street on May 18 when Kline filed suit against Gates's company for alleged antitrust violations. One of the main issues in the case is whether or not Microsoft's decision to integrate its Internet Explorer browser in its Windows 98 software constitutes an illegal use of monopoly power in operating systems by Microsoft. At least, that is how the legal briefs will categorize the issue once Kline and his deputies submit them in federal court.

The real issue here, however, involves the practice of tying, which the financial and technology press have tossed aside for the presumably flashier term "bundling." So, a major aspect of the case actually revolves around the following question: By tying the browser with the operating system and selling them as one product, is Microsoft acting anti-competitively? The Justice Department wants to convince the court to say, "Why yes, it is!" But unfortunately for the Feds, that will likely prove to be a difficult task, given that economic theory (not to mention the bent of today's free market) appears to point to the contrary.

The act of tying products and selling them together is not always an anti-competitive or even an economically inefficient practice. From the consumer's point of view, tying is often more desirable to buying two interrelated goods separately. But the concept is, not surprisingly, a vague one that is open to all kinds of economic -- and legal -- interpretations. Consider the following remarks on tying from Robert Bork, one of the country's foremost antitrust jurists, in his book The Antitrust Paradox:

"The automobile dealer who refuses to sell only the chassis or the grocer who declines to subdivide a can of pears are engaged in tying. [Antitrust] law... attempts to avoid this ridiculous conclusion by distinguishing between packages that are inherently one product and those that are inherently more than one. But the distinction makes no sense. There is no way to state the "inherent" scope of a product."

Therein lies the problem with the Justice Department's case and, not coincidentally, a weakness in traditional antitrust policy that is becoming more apparent in an age of rapid technological innovation. Which goods should be sold separately and which should be sold together? Should software be sold with the PC, or should it be purchased separately? Further, what separates operating software from Internet-related software, such as browser software? Are these products economically distinct, or should they be grouped under a single software umbrella? Where does one draw the line?

One way to navigate this modern-day version of Jacob's Ladder is to allow the free market to work its magic without interference. In other words, let the consumers decide. In fact, consumers already have decided that they prefer to buy PCs that include a processor, a keyboard, disk drives, and software all in one box. It also appears that their well-being as consumers has not been greatly harmed by having an Internet browser integrated into their operating software. In this case, tying may very well be the most economically efficient way to sell operating systems and browser software. One thing the Justice Department needs to prove to win this case, then, is that the current way Microsoft sells its software is either inefficient or harmful to consumers.That will be a difficult objective to achieve, since the issues are sublime and the potential damage in either case will be nearly impossible to measure. It will also involve the deft navigation of a great deal of uncharted territory by the antitrust authorities.

Traditionally, the government's role has been to ensure that a company in a monopoly position in this industry (such as Microsoft) does not inhibit fair competition by constructing barriers to entry and refrains from bilking consumers by arbitrarily raising the prices of its products. Arguably, neither of these two scenarios has occurred. Microsoft's main browser competitor, Netscape Communications, currently has a 60% share in that market. Moreover, it is not Microsoft's fault that more innovative systems have not been developed to challenge its dominance in the PC operating software market segment. Regardless, Microsoft is not acting in line with the traditional economic model of a monopolist where many believe it matters most: price. The price of computer software is only getting cheaper, rather than more expensive, as it would under an old-fashioned monopoly.

To sum up, traditional antitrust policy just ain't gonna cut it in this case. As the country's trustbusters will discover while arguing their case against Microsoft, antitrust policy needs to evolve to fit modern realties. The innovation of the railroad and its potential for economic misuse was part of the reason why the nation's two major antitrust regulations, the Sherman and Clayton Antitrust Acts, were passed in the first place at the turn of the 20th century. Now, as the information and technology locomotive steams into the 21st century, new antitrust rules addressing our modern economic realities will be needed if the government ever hopes to exert some kind of regulatory presence in this ever-changing marketplace. Otherwise, traditional antitrust policy risks being laid to rest at Washington's version of Boot Hill with other policies that have seen their heydays in American government come and gone.