- The Washington Times - Monday, June 19, 2000

Tons of newsprint poundage and heaps of cyberspace space have been used by commentators to discuss and opine about the assault on Microsoft by U.S. District Court Judge Thomas Penfield Jackson and the Justice Department, including my own modest contributions.

It is really too much for mere mortals to ingest. More information shock. However, for broad themes likely to stand the test of time, there were a couple of illuminating articles published about the recent decision that are worth at least a quick review.

Yale law professor George L. Priest (he is a Microsoft consultant) wrote in the New York Times that the breakups of Standard Oil and AT&T;, frequently cited as precedents for the proposed Microsoft breakup, really are not precedents at all. "Breaking up an enterprise that was not itself the product of a merger is unprecedented in antitrust law," he wrote in opposition to the Jackson-Justice Department remedy.

Mr. Priest argues that Standard Oil was itself a "loose trust" of 30 oil companies that were combined by John D. Rockefeller Sr. into the new Standard Trust. So the court-ordered breakup merely reassembled the original pieces back to the independent status they enjoyed before the Standard Trust was created. Microsoft therefore is a completely different case. What the legal authorities wish to break up is the original piece.

As for AT&T;, Mr. Priest asserts it was a "government-sanctioned monopoly with semi-autonomous local companies and other divisions, like a manufacturing arm, for which there was no justification for government regulation." Thus, the Ma Bell breakup that created a bunch of regulated local phone companies and a stand-alone unregulated firm was really more like early deregulation than a monopoly breakup. This, too, is completely different than the Microsoft situation.

Former Reagan-Bush legal adviser Boyden Grey argued in the Wall Street Journal that Microsoft's so-called monopoly really was a function of AOL, not Microsoft. That is, when AOL decided to purchase the Microsoft browser, then the Washington State software maker saw its market share jump from roughly 40 percent to 60 percent.

AOL is the 900-pound gorilla in the software applications world. Its decisions are crucial in determining market share. Now that the portal provider has acquired Netscape, however, and intends to use the Navigator 6 browser system, Microsofties expect their market share to drop back to around 40 percent.

Hudson Institute economist Alan Reynolds takes up a similar point in National Review Online and The Washington Times. He argued that the recurring use of the word monopoly shows the "impulsive promiscuity with which anti-trust lawyers abuse the word 'monopoly'."

There never was a 95 percent market share of the Windows office-suite market. Various Justice Department staffers and other disingenuous types conjured up this number by using only Intel-compatible computers. But Motorola-compatible computers from Apple and Palm Pilot are excluded from this market, as are SPARC-compatible desktop systems from Sun Microsystems.

What is more, the software market is very competitive. Mr. Reynolds points out that consumers and computer manufacturers can choose among numerous systems, including Corel Word Perfect, Lotus Smart Suite, Appleworks and Sun's Star Office (which is free). New computers from IBM and Polywell come with Smart Suite. Computers from Quantex and Cybermax come with Word Perfect, and eMachines come with Star Office.

With all these choices, how can there be a true monopoly? "The fact that most people prefer MS Office is no evidence of monopoly, nor is the fact that most people prefer Palm Pilot to Windows CE, Sun's Solaris to Windows 2000, or Windows 98 to Mac or Linux," Mr. Reynolds wrote. He added: "The fact that all office and utility suites involve bundling or 'tying' of several separate products is not evidence of monopoly either… ."

In Alan Murray's excellent front-page feature in a recent Wall Street Journal, he makes the key point that Microsoft's standardizing of software applications has created tremendous networking benefits. This, in turn, has created new economic efficiencies that enhance user productivity.

Also, the Journal's Washington bureau chief reported on Treasury Secretary Lawrence Summers' speech that appeared to question the whole economic framework upon which the proposed Microsoft breakup is based. Borrowing from the ideas of Joseph Schumpeter, Mr. Summers recognizes that technology companies seek at least temporarily dominant market shares in order to recoup high initial investment costs.

This is another way of arguing almost exactly what Microsofties have argued. Namely, theirs has always been a high volume and low price business strategy. With marginal costs for the next new customer or the next new software feature virtually zero, high volume market share is crucial to gain revenues and profits.

But as competitive technology markets invent the next new thing, these temporary monopolies quickly lose market share dominance. Put another way, free market competition is a more effective means of regulation than buggy-whip antitrust policies developed 100 years ago during the period of smokestack technology breakthroughs. Smokestack bricks and mortar are different than cyberspace knowledge and information applications.

Here is a final point, supplied by a recent Investor's Business Daily editorial. Since 1994, the Justice Department has filed nearly 500 antitrust suits, including IBM, Cisco, CBS, NBC, Time Warner, Georgia-Pacific, General Electric and Citigroup.

Five hundred antitrust actions is a big number that represents a major step up in the federal government's attempt to regulate the economy. The Microsoft lawsuit remedy proposal would by itself be a major expansion of antitrust policy, where competitors, not consumers, would be protected.

This is new stuff, but it is not good stuff. Periods of intense antitrust regulation, such as the early 1900s, the 1930s, and the 1970s, were times of economic underperformance, or worse. Ditto for the stock market. Antitrust is anti-growth and anti-wealth creation.

Also, what's bad for the goose may be worse for the gander. Other dominant technology companies may be prosecuted on the same flawed notion that competitors need to be protected even if consumers are perfectly happy.

Before Judge Jackson and Deputy Attorney General Joel Klein do any real economic damage, let us hope the U.S. Court Appeals for the District of Columbia steps in to present clearer economic and judicial logic in order to defend the public's true interest. And that interest is a continuation of our technology-driven prosperity that rewards, not punishes, the entrepreneurial men and women who made this miracle possible.



Lawrence Kudlow is chief U.S. investment strategist and chief U.S. economist at ING Barings LLC.

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