TCS Daily

The Microsoft Settlement: Good for the Economy, Good Even for Competitors

By James K. Glassman - November 2, 2001 12:00 AM

The stock market often speaks more eloquently and accurately than any analyst, politician or corporate leader. On Thursday, it was saying clearly that a settlement between Microsoft Corp. and the federal government was good for consumers, business and the economy. And, most of all, it was good for tech companies - including Microsoft's competitors.

As the New York Times put it on Friday: "The stock market rose sharply yesterday, led by a surge in technology issues, as Wall Street anticipated that Microsoft and the Justice Department would settle the long-running antitrust case against the software company."

Microsoft's own stock rose $3.69 a share, or 6.3 percent, on Thursday. But that wasn't the big story. More remarkable - at least at first glance - were the sharp increases in the stock prices of Microsoft's fiercest competitors, the companies that encouraged the Justice Department and state attorneys general to file the suit in the first place and to keep pushing for a breakup.

Shares of AOL Time Warner -- which, through aggressive lobbying on Capitol Hill, in Congress and in Europe, has tried in recent months to prevent the release of Microsoft's new operating system, Windows XP -- shot up 5 percent. (Road Runner, a broadband Internet service provider owned by AOL, is refusing to provide users of XP with technical support.) Shares of Sun Microsystems, a key player in inspiring the original Justice Department action, rose 6.8 percent. Stock in Oracle Corp., whose CEO, Larry Ellison, hired trash-snooping private investigators to thwart Microsoft's opposition to the federal suit, jumped 4.5 percent.

Other software winners were PeopleSoft, up 7 percent; Adobe Systems, up 2.8 percent; Siebel Systems, up 8.3 percent; and Veritas Software, up 10.9 percent. Semiconductor maker Intel rose 6.2 percent, and hardware vendor Cisco Systems, 4.4 percent. Overall, the tech-heavy Nasdaq Composite Index rose 3.3 percent.

But these increases should have been no surprise. My colleague at the American Enterprise Institute, Thomas Hazlett, along with George Bittlingmayer, an economist at the University of California at Davis, have identified a clear link in share-price reactions to antitrust actions involving Microsoft. They wrote on April 4, 2000, in the Wall Street Journal:

"When antitrust actions against Microsoft move forward, Microsoft shares and a computer industry index (excluding Microsoft) both tend to drop by statistically significant margins. When antitrust actions against Microsoft are set back, both Microsoft and other computer stocks go up." Hazlett and Bittlingmayer published their findings in the March 2000 issue of the Journal of Financial Economics.

Around the same time, I predicted, also in a Wall Street Journal op-ed, that attempts to break up Microsoft would have a devastating effect on Nasdaq stocks, including the stocks of Microsoft's competitors. I warned of a "regulatory recession" as a result of the antitrust action. While there are other reasons for the Nasdaq crash and the economic slowdown of the past year and a half, the action against the company most responsible for spreading inexpensive computing power around the world played an enormous role.

In other words, what's good for Microsoft is good for the computer industry?

In a way, yes, for three reasons: first, Microsoft provides a standard platform that makes programming easier for the vast majority of software and hardware companies; second, Microsoft's success helps spread computer use (and Internet use) throughout the world, blasting open a marketing path that other companies, almost as free-riders, can exploit; and, third, when politicians prey on Microsoft, investors worry (correctly) that intervention will eventually spread to other successful companies.

On Friday morning, Microsoft and the Justice Department submitted a settlement proposal to a U.S. district court judge, Colleen Kollar-Kotelly. The 18 state attorneys general have not committed to the same agreement, but they are leaning that way. While Microsoft considers the deal a tough one, Bill Gates, chairman of Microsoft has called it "fair and reasonable."

Its provisions are complex, but, in essence, it forces the company to refrain from penalizing computer makers that distribute non-Microsoft operating systems or "middleware" (software such as browsers, e-mail programs and media players); to charge computer makers published rates and offer uniform discounts; to share the applications program code for its own middleware with competitors; and to make available communications protocols that will help Microsoft's competitors in the server market. The deal would also allow PC makers to drop the desktop icons that link to Microsoft products - though it is not clear why they would want to do that.

As George Priest, a professor at the Yale Law School who is an expert in antitrust matters, said, "The settlement appears to closely track the appeals court ruling. The approach is, 'Let's not impair innovation, but let's stop the harsh practices that have nothing to do with innovation.'"

But, while their stock prices were rising, "Microsoft's largest competitors voiced bitter disappointment about the terms of the proposed deal," wrote Stephen Labaton in the New York Times on Friday. The next step, after Judge Kollar-Kotelly accepts the settlement, is a Tunney Act review - to certify that it is in the public interest.

Microsoft's competitors - led, ironically, by AOL Time Warner, the content-and-delivery behemoth that has become the world's largest media company - will try to overturn the deal. They are asserting, writes Labaton, that Microsoft "used its political influence with a Republican administration to try to quickly put an end to the case."

In fact, it was the independent judiciary branch -- specifically, the U.S. Circuit Court, which overturned an outrageous decision by Judge Thomas Penfield Jackson to break up the company - that paved the way for a reasonable settlement. Many observers expected the Bush Administration to drop the case when it came into office. Instead, the President took a hands-off approach and appointed Charles James, no friend of Microsoft, as his antitrust chief.

It is hard to understand why AOL is depleting so much political capital in trying to win the antitrust fight against Microsoft. The Bush Administration can't be pleased by accusations that the settlement is a kind of political payoff.

The best advice for companies like Oracle and AOL is to stop devoting resources to paying lobbyists and lawyers to fight this deal and instead to concentrate on research and innovation - better and cheaper products to help consumers and the economy. Especially now, when the U.S. so desperately needs an economic boost. So far, Windows XP has been the most important technology catalyst of the year. Where are AOL and the others when we need them most?

My guess is that this ill-considered lawsuit has cost technological progress a full year of growth. It is now time to put legal action behind us and, as Gates said, to "focus on the future."

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