- The Washington Times - Wednesday, June 14, 2000

In Judge Thomas Penfield Jackson's latest legal assault on Microsoft, he still refuses to acknowledge that the world's leading software company has for many years been cutting product prices to consumers while at the same time increasing the production of its application and operating systems used by businesses and individuals.

As such, Microsoft fails to meet the traditional standards of a coercive monopoly, i.e., one that price-gouges consumers by deliberately curtailing production. If there was a reason to justify trust-busting a hundred years ago under the Sherman Anti-trust Act, this was it. But today's Microsoft case is a completely different story.

Want to identify a true monopoly? Try the Organization of Petroleum Exporting Countries. Until recently, the oil cartel deliberately, with great public fanfare, substantially raised prices by slashing production. Consumers worldwide suffered a global shock at the gas pump. Disposable income growth slowed. Stock markets declined, as interest rates rose. Central banks acted to deflate liquidity in order to prevent a permanent inflation rise.

Microsoft decisions to reduce prices, however, have benefited consumers and economic growth everywhere. This is the exact opposite of OPEC. The U.S. is busting the wrong company.

Judge Jackson and Justice Department arguments about so-called predatory pricing decisions by Microsoft featured plenty of could-haves, might-haves and maybe-wills for the future. But clear evidence on anti-consumer price increases is non-existent.

Here are some facts. Street prices for the complete Windows OS package have dropped nearly 50 percent since 1990, or 8.4 percent yearly deflation. And remember, the number of functions and features included in Windows has increased enormously. Though nearly impossible to calculate (because of the huge amount of code necessary to enhance the products), the unit cost declines each year would be far greater than the average price drops.

Breaking out major applications systems in the software package shows the same pattern of price deflation. Between 1991 and 1998, Microsoft Word fell to $146 on the street from $274. This is a 47 percent decline, or nearly 8.5 percent per year. Similarly, Microsoft Excel dropped 41 percent (to $156 from $266), or 7 percent annually. Office also dropped 50 percent in price, more than 8 percent yearly.

Also benefiting consumers, Microsoft price drops forced price declines throughout the industry. This is especially the case for Microsoft Word, which drove down the price of Corel's Word Perfect, and Microsoft Excel, which forced Lotus 1-2-3 to cut prices. That's what tough competition does.

Some call this predatory pricing. But this version of predatory pricing completely unlike the Standard Oil case nearly a hundred years ago means lower costs to consumers, not higher. In this way, consumers have come to love predatory pricing. It simply means greater consumer buying power. This is why 65 percent to 70 percent of consumers surveyed by various polling firms show that people support Microsoft and oppose the Justice Department.

What's more, Microsoft products are easy to use, reliable, flexible, adaptable and available to everybody. Functionality continues to expand with new features. Bill Gates and Co. have enabled computer dinosaurs like myself to harness the information technology revolution. No small feat.

As a result, the entire U.S. economy has benefited. Just as my favorite dead economist Joseph Schumpeter argued in his opus "Business Cycles," periods of rapid technological advance are characterized by faster than normal growth, higher than typical productivity, and lower than usual inflation.

In fact, Microsoft's business strategy of producing high volume at low prices typifies the performance of the entire economy. This is not a coincidence. Take away Microsoft's value-added entrepreneurial energy by breaking up the company and heavily regulating its conduct, and the whole economy is likely to suffer.

By the middle of next week Microsoft will publish a compelling documentation of the price story and everything else involved in the government anti-trust lawsuit. This "motion to stay" will tear the government's case to pieces. I can't wait.

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

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