- The Washington Times - Tuesday, May 2, 2000

It is a strange fact of life that what people are very willing to accept in theory they often find troubling in hard, cold reality. That was a lesson Attorney General Janet Reno first was handed two weeks ago. Despite substantial public support of federal actions to return Elian Gonzalez to his father, the actuality of armed federal agents seizing the boy led to a public outcry.Miss Reno may learn the lesson again, after her department's proposal last Friday to breakup Microsoft. Many who have been unconcerned in theory with the government's power under the antitrust laws may blanch at the reality of dismembering the most successful company in American history, along lines determined by government regulators.

In substance, the Justice Department plan (and that of 17 states) was not much different from what had been discussed in the media for months. They want Microsoft to be broken into two parts one to operate Windows and other operating systems owned by Microsoft, and the other to make applications. In addition, the operating system company would be required to abide by pages of specific "conduct" restrictions.

More surprising was what was not included in the order. Unlike the 1983 consent decree breaking up the Bell System, this proposal does not include any restriction on the newly created "Windows" company getting back into the application business. If one believes the government line that Windows is a monopoly product, this leaves the Justice Department "solution" incomplete. Even leaders in the pro-breakup movement, such as the Progress and Freedom Foundation's Tom Lenard, have said such a divestiture would not help competition.

So why did the government propose it? There are many possibilities. One is that it helps Microsoft's competitors, who have been pushing the case from the beginning. If there are efficiencies in letting the guys who know the operating system also offer applications (an idea that appeals to common sense), it is likely they will team up with somebody. Why not let the government's allies into the game?

A second possibility is that the breakup is simply a bid for publicity a dramatic gesture. Reports that the rarely shy state attorneys general pushed hardest for a breakup, give some credence to this theory.

If this was the thinking, it may have worked. The lead story in most news accounts was the breakup, complete with all sorts of diagrams of how the two new government-created companies would look. Buried far below that were the less sexy "conduct remedies."

Moreover, by proposing divestiture, the antitrust regulators may also be trying to lure Microsoft into accepting those very restrictions. Microsoft has long resisted restrictions on conduct. By putting the firm's very integrity at stake, the regulators may hope to wear down that resistance.

Nevertheless, the proposed conduct restrictions are as draconian and harmful as divestiture. Virtually every type of restriction imagined since the litigation began was included. Among them: limits on integrating new features into operating systems (thus slowing innovation), allowing computer manufacturers to alter the way Windows boots up (reducing uniformity and ease of use), and mandated disclosure of technical specifications (undercutting research and development incentives). Astonishingly, the list even included a ban on exclusive marketing deals, although even Judge Jackson tossed out that part of the government's case.

The cumulative effect would be an end to the creativity and energy that made Microsoft so successful. Under these rules, the new Windows company would be about as innovative as your local water company.

But Janet Reno and her state counterparts may have reached too far. Despite ceaseless attacks, polls show Bill Gates remains among the most popular figures in America. People know he built Microsoft out of nothing, and may resent the government rearranging it like a Lego set.

Moreover, populist appeals that Microsoft is "just too big" and Mr. Gates is "just too wealthy" may not go as far as they once did. Microsoft has now been overtaken by Cisco as the world's largest company. And, Bill Gates himself has nearly been overtaken by Oracle's Larry Ellison (one of the leading supporters of the Justice Department case) in total wealth.

At the same time, the economic case against Microsoft is looking increasingly weak. AOL including Netscape and now Time-Warner can hardly be pushed around. And Microsoft's inability to dominate the growing wireless market shows its growing weakness.

It is too early to say whether all this will prevent the regulators from getting their way. But it is too early to press the "delete" button on Microsoft just yet.



James L. Gattuso is vice president for policy and management at the Competitive Enterprise Institute. He formerly served as deputy director of the Federal Communication Commission's Office of Plans and Policy.

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