No. 33
November 8, 1999
Jessica Melugin*

Market developments illustrate how DOJ’s case is becoming obsolete

With Judge Thomas Penfield Jackson’s finding of facts filing last Friday, the Microsoft anti-trust trial has been back in the spotlight and more senseless than ever. Leaving aside serious flaws in the government’s case against the software giant, the best hope for Microsoft may be how much the software industry has changed in the 15 months since the trial began.

Slow to act, crusading federal officials are also slow to learn. An uncooperative market has again refused to conform to the pace and agenda of Washington lawyers and technocrats. Competitive forces, alive and well in the software industry, have acted in a more impartial and timely manner than the federal courts or regulators could ever hope to mimic.

The perceived permanence of Microsoft’s monopoly in operating systems is central to the government’s case. The prosecution claimed Microsoft’s operating system monopoly allowed for exclusive contracts with original equipment manufacturers (OEMs), the bundling of Explorer with Windows, and the end of incentives to innovate. But with the recent popularity of Linux software, a Microsoft competitor, Microsoft’s operating system monopoly itself should be questioned.

In 1994, the Linux operating system was running on only half-a-million computers and industry experts were skeptical about its chances for commercial success. Today, Linux’s "open" system is installed on more than eight million computers worldwide and touts over 60 venders in the United States alone. Included are heavy hitters Compaq, Dell, and Hewlett-Packard.

Red Hat Inc., a successful seller of Linux software, recently went public and quickly rose to over $50 per share. With Red Hat’s Wall Street success, experts predict an increase in the number of Linux-related IPOs. This would mean more cash for businesses to spend promoting the Linux operating system. Increased marketing could win Linux the mass-market appeal it will need to compete against Windows for desktop PCs. There have been changes for older Microsoft competitors too.

Netscape, held up at the start of the trial as the quintessential victim of Microsoft’s "market reign of terror," complained of plummeting browser profits. In testimony, they accused Microsoft of giving Internet Explorer away for free to drive Netscape out of business.

Netscape has since been purchased by AOL and, in alliance with Sun Microsystems, controls more than 40 percent of the market in the United States, hardly an indicator of coerced dominance by Microsoft. And despite the complaints of Microsoft’s competitors, consumer preferences are being catered to everyday.

The unexpected success of Apple’s iMac indicates that there are viable alternatives to the Windows operating system, and that consumers are enthusiastic about them. Many vendors sold out within just a few hours of iMac’s debut and Apple kept all of its plants running full-time to meet consumer demand. Hardly anyone, especially regulators outside the industry, would have predicted the product’s popularity. Therein lies the problem of actions such as the Microsoft case.

Federal courts move at glacier speed and the inability of regulators to keep pace with the technology industry is nothing new. After 13 years of litigation against IBM, the government dropped antitrust charges in 1982. The desktop revolution toppled IBM from what was once thought to be its assured 70-percent market share for computing equipment. Market forces prevailed, and the government was forced to admit that the case was "without merit."

Judge Penfield’s verdict in the Microsoft case, expected in the next couple of months, is an opportunity to leave courtroom drama, media spin, and public opinion polls behind in favor of the facts. Concern for the consumer should be the aim of anti-trust law and the government has been unable to prove that Microsoft’s behavior has done anything other than benefit consumers. A finding in favor of Microsoft would set a precedent in anti-trust law for intervention aimed at protecting consumers, not competitors. A finding against Microsoft may be good news for its competitors in the short-run, but sanctioning the government to play favorites will eventually hurt every firm in the industry and harm consumers who value progress and innovation.

In the time since the trial began, market forces have harnessed fierce competition among firms for the benefit of consumers. If restrictive federal actions or a regulatory oversight approach is adopted in the high-tech industry, the incentives for innovation and progress will be lost. While Washington lawyers and technocrats argue over Microsoft, Netscape, and other competitors, the consumer remains the market’s only favorite.