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Wall Street Journal

 

Is a Breakup Next? Not Likely

April 04, 2000

By Peter W. Huber

So the dog finally caught the fire truck. Now what?

In his “findings of fact” last November, Judge Thomas Penfield Jackson concluded that Microsoft had a monopoly in one market, operating systems for Intel-based personal computers, that it had aggressively extended into an adjacent but distinct market, browsers. In Monday’s “conclusions of law,” he ruled—to no one’s surprise—that by doing so, Microsoft had violated the antitrust laws.

Microsoft, Judge Jackson concludes, unlawfully established, or maintained, monopolies in markets for both operating systems and browsers. He rejects the government’s claim that Microsoft had entered into unlawful marketing arrangements with other companies—one small piece of good news for Microsoft in an otherwise bleak landscape, since antitrust law generally treats multicompany stratagems more strictly than “unilateral” conduct.

’Exclusionary’ and ’Predatory’

But Microsoft’s unilateral conduct was bad enough—“exclusionary” and “predatory” to the point where it “ostracized” Netscape Navigator. “Microsoft paid vast sums of money, and renounced many millions more in lost revenue every year, in order to induce firms to take actions that would help enhance Internet Explorer’s share of browser usage at Navigator’s expense.” Microsoft engaged in unlawful “tying,” too, though Judge Jackson tiptoes through that one. His conclusion, he acknowledges, can’t easily be squared with an earlier ruling by the appellate court in a closely related case. But Judge Jackson suggests he’s got the Supreme Court on his side here.

In the next and last round, he has to fashion a remedy. There’s little chance that Judge Jackson—a cautious jurist when he gets down to the nitty gritty of final judgment—will end up ordering any radical breakup. Forced breakups are rare. Judge Jackson might conceivably order Microsoft to spin off its browser operations, but anything much more than that would likely be struck down on appeal.

What’s almost inevitable now is a “future conduct” injunction. Judge Jackson will order Microsoft to open up the interfaces that define how Windows interacts with other programs, and limit Microsoft’s freedom to set prices and conditions of use. He might also direct Microsoft to stop building certain Web-related features into Windows. But it won’t get much worse than that. Not much better, either.

The economic underpinnings of these single-company cases are shaky at best. There was a day when General Motors could not legally “tie” its own brand of radio into the dashboard of its cars; radios were clearly a “separate product,” and “tying” was illegal on its face. But a series of court rulings in the 1980s substantially curtailed such cases. On reflection, putting radios in car dashboards didn’t seem so “exclusionary” after all. The appellate court that will review Judge’s Jackson’s final order has already made clear that it views such findings in the software industry very skeptically.

Even the seemingly clear-cut issue of Microsoft’s operating-system monopoly is getting muddier day by day. What has worried Microsoft about browser technology all along is that it is an altogether new kind of application. Indeed, it can be viewed as another operating system of sorts, just turned upside down. Windows supplies an interface to the computer on the desktop; a browser provides an interface to countless computers on the World Wide Web. And most of the Web’s mainframes and servers use no Microsoft software at all. Marc Andreessen, Netscape’s top technology officer in its heyday, boldly promised to reduce Windows to an unimportant collection of “slightly buggy” device drivers.

But for all that, appellate courts aren’t likely to strain to overturn Judge Jackson’s voluminous findings of fact, still less to sweep software out from under the ambit of the antitrust laws altogether.

The new information-centered markets seem to stratify into horizontal layers, with a single player coming to dominate each one: microprocessors (Intel), operating system (Windows), various software applications (e.g., Word), browser (Explorer), Internet service (America Online), search engine (Yahoo!), and various e-commerce and content applications (e.g., Amazon). The interfaces represent points of potential attack, where cooperators mutate into competitors. The best hope for competition seems to lie in making sure that different firms come to dominate the different layers. That requires reasonably clean, honest interfaces, and that’s where Judge Jackson is likely to end up focusing his remedy. If he does so carefully, his judgment stands a good chance of holding up on appeal.

Ironically, the future the Justice Department was so anxious to protect has already been assured. The Windows-Intel desktop is in decline, and everyone from Redmond, Wash., to Silicon Valley knows it. Henceforth, just as Mr. Andreessen foresaw, capabilities will migrate out to remote servers and the Web, and users at home and in offices alike will be running their “net appliances” and “personal digital assistants” on stripped-down, non-Windows operating systems. If the Supreme Court ever gets to see this case, Microsoft’s hegemony will by then be history.

Does this complete fizzle of a conclusion mean the case should never have been brought? The serious reply must be no. The case has already had a direct impact on Microsoft’s practices. The company has moderated its strong-arm tactics. Contracts have already been redrafted and toned down. Tight links between Windows and browser code have been severed. Those are all defensible results. Other companies with dominant positions in one layer of the market will certainly hesitate, in the future, to craft codes or contracts in the ways that got Microsoft in trouble.

What lies ahead in antitrust jurisprudence is more of the same. At Senate hearings in late February, the chief executives of AOL and Time Warner promised to open up a key interface—between Time Warner’s cable properties and AOL’s online services—that, until recently, Time Warner had been very determined to keep closed. The most important and controversial sections of the massive 1996 Telecom Act, and the FCC regulations implementing it, concern the “unbundling” of the local phone company’s “network elements” right down to the level of virtual space (bandwidth) within the individual telephone line leading to your home. The electric-power industry is now in the throes of being unbundled along similar lines, with generation being untangled from transmission and the different layers of transmission being uncoupled from each other.

For “operating system” and “browser,” substitute any number of other hardware/software or software/software pairs that define the layers and interfaces of the new digital economy: “cable programming” (like CNN) and “distribution channel” (Time Warner Cable); or “Visa/Mastercard network” and “competing bank”; or “airline reservation system” and “airline.” In due course, a good number of these software-defined interfaces are bound to end up in court.

Interface-Policing Ordeal

Is Microsoft right to take its chances in seeing its own interface-policing ordeal through to the bitter end? “Conduct” remedies often lead to years or decades of stifling judicial supervision. Private suits against Microsoft will multiply in the wake of the government’s win, and they’ll be seeking cash, not supervision. In a February hearing, Judge Jackson compared Microsoft to Rockefeller’s Standard Oil, which antitrust litigators broke up into 30 separate companies in 1911. But Microsoft ought to be worrying even more about the specter of silicone breast implants or tobacco. In its boundless capacity to pile on lawyers, and eventually damages, private litigation can relentlessly sap corporate energy, cash, and morale.

I have previously suggested on this page that Bill Gates should take the initiative and orchestrate his own breakup while he can still shape the terms. Nobody’s going to impose such a remedy on him any time soon, or indeed ever, in my view. But the day may well come when he will wish he had thought to impose it on himself.

Original Source: http://www.manhattan-institute.org/html/_wsj-is_a_breakup_next.htm

 

 
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