TCS Daily

Take a Look at Microsoft`s `Crimes`

By Alan Reynolds - May 8, 2000 12:00 AM

Even before the government launched its complaint against Microsoft in May 1998, the company`s business rivals were busily promoting "remedies" to hobble Microsoft or expropriate its intellectual property. But how could anyone presume to remedy problems without a clear understanding of what those problems are?

How is it, exactly, that Microsoft is said to have broken the law? News reports said Judge Jackson found Microsoft a monopoly that "bullied competitors" and "stifled innovation." But none of that has the slightest bearing on legal liability. Being a monopoly is not illegal. Neither is being a bully. And vague talk about a shortage of innovation in computer software is just talk -- hard to believe and impossible to prove.

Antitrust czar Joel Klein seems in a hurry to bypass discussion of mere legal details, and rush into the fun part -- divvying up the spoils among the companies who helped him build and prosecute this case, such as Oracle, Sun, AOL-Netscape, HP and IBM. But the phrase "appropriate relief" means punishments must be linked to specific allegations of criminal behavior (i.e., the Judge`s Conclusions of Law). Without demonstrable connections between alleged problems and proposed solutions, the remedies themselves will surely fail on appeal, even if the precarious findings of fact and law hold up. Indeed, the financial press has lately been quoting Wall Street analysts cheered by the excess ambition of government remedies, since the mismatch between crime and punishment greatly increases the odds that Microsoft will win on appeal.

The Judge`s findings had to be far more precise than his frequently quoted oratory about Microsoft`s "immense profits" or "oppressive thumb." In essence, the Judge found Microsoft innocent of "exclusive dealing" in its contracts with other companies (although the government now wants to ban such contracts), but guilty on the following four points:

1. Monopoly Maintenance: Microsoft supposedly attempted to "maintain" its lead in desktop operating systems by "illegally" offering consumers a free alternative to the previously pricey Netscape browser, and by offering software developers what the Judge describes as an "attractive alternative" to Sun`s notoriously sluggish Java programming language. You may wonder what one particular browser or programming language could possibly have to do with the reasons why most people prefer Windows to other popular systems from Apple, Linux, Sun and Palm. That is a good question with no good answer.

The government speculated that Netscape and/or Java "middleware" could somehow (1) substitute for any operating system at all, or (2) make us indifferent about the relative ease or expense of operating systems.

Netscape and/or Java, said the 1998 complaint, might become "alternative platforms to which applications can be written." This is just a bad mix of company hype and technological gobbledygook. The Findings of Fact at least noted that no "full-featured personal productivity applications" have ever been written in Java. What the Judge failed to note, however, is that if anyone could develop such platform-independent Java applications, they would certainly not be platform-dependent on a specific browser like Netscape!

The Internet itself may make having the latest Windows or Mac less important, but this has nothing to do with Netscape`s particular brand of browser. The Internet uses several generic languages, such as html (hypertext markup language, which is far more important than Sun`s Java or Netscape`s unrelated JavaScript). These Internet languages can be read by any competent browser on any operating system. If lawyers on either side of this case ever listen to any unpaid expert who knows anything about technology, this whole Netscape-Java house of cards must collapse.

2. Browser Monopoly: Microsoft supposedly tried to drive Netscape out of business with the intent of "monopolizing the browser market." Yet the Judge estimates that Netscape will still hold 40% of this "market" by next January.

Even if there were no other browsers (there are dozens), that would leave Microsoft with a substantially smaller share than Netscape had when it ran to the Justice Department whining about competition. The Judge admits he could not find a single word suggesting that Microsoft executives then expected Internet Explorer to account for even as much as half of all browser use, much less a monopoly. As he notes, "a defendant may not be held liable for attempted monopolization absent proof that its anticompetitive content created a dangerous probability of achieving the objective of monopoly power." Such proof is absent. An invisible and unsuccessful "intent" to monopolize browsers could not possibly survive appeal.

Technological change could soon make the whole issue moot. When America Online`s deal with Microsoft runs out next January, AOL could easily make the improved Netscape 6.0 browser number one again by bundling it with the next AOL 6.0. Meanwhile, a "second browser war" is rushing ahead, leaving Microsoft and Netscape in the dust. In the emerging post-PC world, the government cannot sustain the pretense that "Intel-compatible PCs" (a market definition which excludes even Apple and Sun desktops) are the only means of accessing the Internet.

The Judge predicted that Internet appliances "will, for the foreseeable future, remain small in comparison to the number of consumers deciding that they still need an Intel-compatible PC system." But many such forecasts in the "Findings of Fact" are already obsolete, and cannot possibly survive even a speedy appeal. The International Data Corp estimates that post-PC Internet devices -- ranging from Palm Pilot VII to AOL-TV and Sony Playstation II will outsell PCs within only two years! Nearly all of these gadgets have non-Microsoft operating systems and browsers. The new AOL-Gateway Internet appliance, for example, will use Linux, not Windows.

The only potential U.S. rival to the menacing computer incognito challenge from Sony, Sega and Nintendo is a planned Microsoft appliance. But Microsoft`s own Internet "game" machine (with hard drive and keyboard) would not survive the government`s plan to amputate the machine`s heart (a shrunken Windows 2000) and give it to a separate company. Japan must be laughing all the way to the bank.

3. Tying the browser to the operating system: The government and Judge Jackson had previously accused Microsoft of violating a 1994 consent decree by making it possible for Windows users to get on the Internet without buying any additional "browser" software. An Appeals Court ruled against the government and Judge Jackson just after they launched this 1998 complaint, making liars of those who still assert that Microsoft ever "evaded" this or any other antitrust deal. Many pages of the Judge`s findings of law are devoted to rehashing this lost battle, using such curiously opinionated comments as this: "Internet Explorer is not demonstrably the current `best of breed` Web browser, nor is it likely to be so at any time in the immediate future." A Judge who found himself competent to write such software reviews was also quite happy to offer forecasts about the future irrelevance of Mac, Linux, Solaris, Palm, AOL-TV, Sony Playstation, etc.

Microsoft did not force anyone to "purchase an unwanted product" (Internet Explorer) as the Judge put it. Internet Explorer is free. The Judge`s strained claims of "consumer harm" from Internet Explorer involve such trivia as wasted space on the hard drive (the Microsoft browser is the size of one 100 meg zip disc), or the possibility of crashing while surfing (as though having a browser forces you to sign up for an Internet service).

Browsers have usually been free ever since Mosaic, and bundled with most operating systems (OS2, Linux, Solaris, BeOS), most Internet services (AOL), and some office suites (Star Office, WordPerfect 7/8). The Judge`s unique vision of a browserless version of Windows would be as popular as Microsoft Office without Word. Judge Jackson concedes that his finding of tying is "arguably at variance" with the 1998 Appeals Court decision, but says that "is not for this Court to say." Regardless of whether the 1998 Appeals Court ruling is binding, its relentless logic cannot fail to sway any future appeal on this issue.

4. Predatory pricing: The Judge says charging a zero price for Internet Explorer was "predatory" (too cheap). Never mind that Sun gives away the entire Star Office Suite and/or the Solaris operating system for Intel machines, that K-Mart and others give away free Internet services, or that many vital programs such as Adobe Acrobat and Zip have long been free. What this whole issue is really all about is that other software firms want Microsoft to be compelled to charge more, or offer fewer free features, so they too can charge more.

The Judge imagines that everything that costs something to produce, like Internet Explorer, should be priced to cover those average costs. But elementary economics explains that prices depend on the marginal cost of adding another unit, not on average cost. The marginal cost of adding such an extra software feature like Internet Explorer is roughly zero, yet such added features are precisely what makes it possible to sell Windows upgrades.

Near-zero marginal cost also explains why office suites and utility bundles are much cheaper than buying each part of the package separately, and why such bundled marketing is not "tying."

The theory of predatory pricing has always been that a big company may cut prices temporarily to bankrupt the competition, then make up the loss by hiking prices after the competition is gone. But Judge Jackson says, "Microsoft has no intention of ever charging for licenses to use or distribute its browser." His definition of "predation" is just a variation on the Netscape theme. Microsoft was not eager to get into Internet software because the company has such a low profile on the web, he asserts, but only wanted to grab business from Netscape "to ensure that developers would not view Netscape as truly cross-platform middleware." Since there was never the slightest possibility than any sane developer would regard any particular browser as any more "cross-platform" than another, nor that any "cross-platform" software could be designed for Netscape`s platform alone, this whole notion of predation relies on technical misunderstanding.

Viewed from the rarely-mentioned perspectives of technology and/or economics, each and every element of this case looks far too weak to sustain the drastic demolition remedy the government is hoping for.

One thing is certain. From now on Microsoft will be devoting much more money to lawyers, lobbyists and politicians, and therefore less on such things as research and development. More money will now flow from Washington state to Washington, D.C. Getting more fists into deep pockets is always considered a marvelous accomplishment in the nation`s capital, regardless of the outcome and regardless of how many years and taxpayer dollars may be wasted.

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