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Jewish World Review June 21, 2002 / 11 Tamuz, 5762

James K. Glassman

Jim Glassman
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Technology Back on Track

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At long last, the new judge in the Microsoft antitrust case heard closing arguments. The stage is set to end a miserable interlude in high-tech history, in which misguided government industrial policy helped destroy hundreds of billions of dollars worth in assets and distracted the nation's best technical and commercial minds at a critical time.

It all began in 1994, when Microsoft signed a consent decree, pledging not to use its dominance in operating systems illegally to crush competition. Three years later, under heavy pressure from Microsoft's competitors, President Clinton's Justice Department filed a lawsuit. Twenty states joined in, and the initial trial began in 1998. In the spring of 2000, with the trial ending, prosecutors decided to push for a breakup of the company ? a move I predicted at the time in the Wall Street Journal would cause a crash in Nasdaq stocks and touch off a "regulatory recession."

This was not simply a guess. Careful research by economists George Bittlingmayer of the University of Kansas and Thomas Hazlett of the Manhattan Institute had found that "government action against Microsoft appears to inflict capital losses on the computer sector as a whole." That stands to reason since Microsoft has provided programmers and consumers with a low-cost platform for thousands of software programs. Threatening the platform threatens innovation and increased computer use. In addition, when investors see Microsoft in the government's crosshairs, they worry that other companies will be next.

Of course, there were other reasons for the market decline (there always are), but the extreme measures sought ? and at least temporarily won, with Judge Thomas Penfield Jackson's ruling in April 2000 ? against Microsoft comprised the central catalyst.

A year ago, the U.S. Court of Appeals rejected the break-up, called for "drastically reduced liability" for Microsoft and asked a new district judge to offer a remedy. The judge told the parties to work out a settlement ? which is what the feds and Microsoft did in November. Immediately, tech stocks rallied. But nine states refused to join the deal, throwing the final result into turmoil and the huge worldwide marketplace for personal computer software and hardware into uncertainty.

Now, the new judge, Colleen Kollar-Kotelly, has the opportunity to add stability to the market for high-tech investment and to give consumers and hard-pressed investors (which is to say more than half of U.S. families) a victory. Just as the decision to try to break up Microsoft helped precipitate the high-tech collapse, this new decision ? to adopt a settlement that gives flexibility to computer manufacturers, software makers and end users and has a strong enforcement mechanism ? could produce a market turnaround.

But for Microsoft's competitors the settlement is not enough. From the start, companies like Sun Microsystems, Oracle, Real Networks and AOL TimeWarner had the opportunity to take Microsoft to court on their own, but they preferred to let the federal government (at first) and now the state attorneys general (AG) do their work. Governments, after all, have unlimited legal resources.

The remedy offered by the nine states left in the case is, in a word, outrageous. Under their proposal, for example, Microsoft would have to charge extra for Windows if it includes Microsoft Messenger in the software, while AOL can still give away its popular Instant Messenger to attract new customers. AOL, by the way, "continues to be the 800-pound gorilla in the consumer Internet market," Rebecca Buckman recently reported in the Wall Street Journal. The company has "about 34 million subscribers compared to just 7.7 million for MSN," which is in second place. Plus, AOL, which owns the browser Netscape, would get a free copy of the source code for Microsoft's browser, Explorer. (AOL, a company whose stock has dropped by four-fifths in recent years, is being absurdly short-sighted. If the AGs win this one, won't the "gorilla" make an obvious next target?)

The proposed remedy would also require Microsoft to include a copy of Sun's Java software in every copy of Windows. Microsoft would have to provide its source code for Office applications software to its competitors at an auction price. Plus, fierce competitors like Scott McNealy of Sun and Larry Ellison of Oracle would get a huge benefit: Any time Microsoft wants to make an acquisition, an investment or an exclusive license, it would have to notify the plaintiff's lawyers two months in advance.

It's sad, but these companies decided in the mid-1990s that the best way to battle Microsoft was not in the marketplace but in the courts, state legislatures and Congress. The losers have not merely been investors in Microsoft and other high-tech companies, but consumers.

Antitrust laws, after all, are supposed to protect consumers, not producers, and this case, strangely enough, began because Microsoft was bundling its browser ? for free ? with its operating software and was providing a smooth interface between the two. That decision, along with vast improvements to browser software, created a revolution, and today more than half of Americans are online ? buying, learning, communicating.

But the remedy proposed by the nine states would force Microsoft to remove its "middleware" code from Windows at the request of a computer-maker. Middleware (such as browsers, instant messaging, e-mail client software, etc.) is software that connects an operating system to other software. The result, according to a study by economist Stan J. Liebowitz of the University of Texas at Dallas, would be to load $30 billion to $80 billion in new costs on software producers. Who would pay? Consumers, says Mr. Liebowitz, through "higher prices, fewer choices of software, less certainty that software they buy will run properly."

Balkanization, additional costs, confusion, uncertainty ? those will be the consequences of the settlement proposed by nine state attorney generals, who shouldn't be making antitrust policy in the first place.

It's time to end this costly nonsense and get back to work and to sanity ? back to what Americans do best: innovation, entrepreneurship, investment and, yes, joy in using the fabulous technology that results. High technology left the tracks a little over two years ago; now, a court in Washington has a chance to get it running swiftly and surely again.

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JWR contributor James K. Glassman is the host of Tech Central Station. Comment by clicking here.

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