Settlement negotiations are underway in the Microsoft antitrust case, and the company has offered to concede several contentious issues. The Department of Justice, however, remains focused on handicapping the software giant. If the DOJ succeeds, it would harm consumers and set a dangerous precedent.

Microsoft’s proposed settlement would ease the controversial contract restrictions it places on its partners. This would allow Internet service providers to offer access to Netscape Navigator and other browsers that compete with Microsoft’s Internet Explorer. PC makers would be free to customize the opening screen of Windows and consequently to advertise Microsoft’s rivals.

According to Bill Gates, the proposal reflects his company’s intent to placate the government without sacrificing Microsoft’s “right to innovate.” “As long as we keep that intact,” Gates said, “We’d like to settle this thing.”

It also reflects how Microsoft’s legal miscues have placed a winnable case in jeopardy. The company’s combative defense strategy has handed the momentum to the DOJ, which is focused on permanently restructuring Microsoft. The DOJ wants to either break the company into competing firms or force it to license Windows’ programming code to competitors. These goals contradict the claim by anti-trust chief Joel Klein that “The Justice Department… remains open to a settlement that fully protects consumers.”

Evidence reveals that consumers don’t need the government’s “protection.” While textbook monopolies harm consumers by raising prices, stifling competition, and offering inferior products, Microsoft passes these litmus tests.

Far from gouging consumers, Microsoft’s prices have fallen or remained stable. Explorer is free. The price of a Windows upgrade hovers around $100, within easy reach of computer buyers.

These prices stay low because Microsoft’s dominance is tenuous. The software industry’s dynamic mix of low entry costs and potentially enormous profits spawns a constant stream of new products designed to win Microsoft’s markets. It’s only a matter of time before one succeeds.

The Linux operating system, for example, poses a growing threat to Windows. IBM, Hewlett-Packard, and Silicon Graphics have incorporated Linux into their infrastructure, and Dell offers Linux preinstalled on some workstations. Though imperfect, Linux’s growing popularity proves that a superior product could unseat Windows.

Such threats have forced Microsoft to improve its already popular applications. Even though Explorer routinely beats Navigator in reviews, Microsoft recently released Explorer 5.0. According to PC Week, this new version is a “compelling and well-made upgrade” that gives consumers “more options.” And two of Windows 98’s improvements made Smart Computing magazine’s 1998 “Smartest Products” list.

Microsoft has used these facts to attack the government’s case. The company scored a coup when Franklin Fisher, a government witness and Massachusetts Institute of Technology economist, was asked whether Microsoft hurts consumers. “On balance,” he replied, “I’d think the answer is no.”

The fact is, Microsoft is good for consumers. Its affordable, accessible products fueled the PC boom and the information revolution. Windows’ standardized platform benefits computer users; by minimizing compatibility problems, it leaves software developers free to design the applications that consumers demand. The integration of Explorer and Windows makes it easier to sift through and apply information gleaned from the Web.

Unless the DOJ reverses course, it will rob consumers of these benefits and jeopardize the progress of the Information Age. The market economy rests on the right of a business to own its products and, consequently, to collect profits. These rights give entrepreneurs the incentive to create new products and respond to customers.

These rights and incentives have been the foundation of the hi-tech industry’s dynamic growth, which has occurred largely in the absence of specific regulations. This foundation would be destroyed if the DOJ breaks up Microsoft or forces it to license Windows. Splintering Microsoft would rob the firm’s shareholders of the assets they created. Forced licensing of Windows’ would transform the application into a form of public property.

Such measures would not only erode ownership rights but also set a dangerous precedent. A DOJ victory would give eager regulators their long-awaited wedge into the hi-tech industry. Riding the DOJ’s precedent, government planners would replace consumers as the industry’s overseers. Successful companies would be rewarded with regulation. Dominant companies would be rewarded with destruction.

The DOJ should spare the industry this fate by dropping its case or settling now. A limited settlement would preserve Microsoft’s “right to innovate” and, by implying the company’s guilt, allow the DOJ to save face and win the public relations victory it covets. Microsoft and the hi-tech industry would be left free to respond to consumers. The Information Age’s promising future, now hanging in the balance, would be protected.

Justin Matlick is a Chicago-based senior fellow in information studies for the Pacific Research Institute in San Francisco. He can be reached via email at jmatlick@pacificresearch.org.