The rewards of ending a monopoly:
A Microsoft break-up would benefit not only the company's
shareholders but its product quality
The Financial Times, November 24, 1999
By Robert Litan, Vice President and Director, Economic Studies
Fifteen years ago, Judge Harold Greene presided over the
break-up of AT&T, and in the process made antitrust law a
topic of mainstream conversation in the US. Now, Judge
Thomas Jackson has helped
educate a new generation of
Americans, and another
company, about antitrust law.
Judge Jackson's findings of fact all but say that
Microsoft has repeatedly abused its monopoly in
operating systems for personal computers. With
his appointment last week of Judge Richard
Posner as a mediator, he has changed the focus
of debate from "What remedy will be ordered?" to "Will the parties settle, and on
what terms?"
Neither side wants Judge Jackson to rule over Microsoft - and potentially the
computer industry - in the way Judge Greene oversaw the US
telecommunications industry in the US for 12 years. Both probably agree on the
principle that the outcome should encourage innovation, although they differ on
how it should be done.
This probably rules out any settlement that requires the court to continue to
oversee Microsoft's conduct. Such oversight would be needed in a settlement
involving Microsoft publishing its "applications programming interfaces" (APIs) -
enabling its applications to work on operating systems other than Windows.
Constant judicial oversight might be required to settle disputes over disclosure.
Another possible remedy would require Microsoft to auction the source code for
Windows to at least two other companies. In principle, this could create a
chance for the purchasers to crack Microsoft's operating systems monopoly.
But interest in this option has waned because potential buyers have realised the
code is worthless without access to Microsoft employees who know its
intricacies. This leaves the break-up of the company, which would probably
come in one of two ways. The court could create three vertically-integrated
companies - known as the Baby Bills. Alternatively, it could allow Microsoft to
split itself into two separate companies, controlling operating systems and
applications. The court could then divide the operating systems company into
three.
The reason for choosing the latter approach is that Judge Jackson's findings did
not find abuses on the applications side of Microsoft, so there is no need to split
up that part of the company. In either case, Microsoft's chairman Bill Gates, and
its other senior managers, would have to be divided among the various
companies, and divest their shareholdings in the others. Either break-up option
has the strength that it strikes at what Judge Jackson sees as the heart of the
problem - Microsoft's repeated abuse of its monopoly position in operating
systems. Divide up that part of the enterprise and competition in that market will
instantly re-emerge, without extensive and continuing judicial oversight.
The only reasonable objection to the break-up options is that they could fracture
the Windows standard. In the short run, this is highly doubtful. The three new
operating systems companies would have strong incentives to use the common
APIs of the current Windows - and the new Windows 2000 - so that each would
have a full range of applications programs.
Over the longer run, standards might diverge, but it is through that competitive
process that innovation occurs - the major theme of Jackson's opinion. As
Walter Mossberg of the Wall Street Journal has pointed out, Microsoft's best
products have emerged when the company faced real competition. The
examples include Internet Explorer, Money and Word - at least until
WordPerfect fell by the wayside.
The same was true after AT&T was broken up. The variety of telephones
proliferated, and their price dropped. More importantly, the break-up gave strong
incentives for AT&T to follow its competitors MCI and Sprint in laying fibre optic
cable. Fibre optics in turn provided the backbone capacity for the vast explosion
in data traffic unleashed by the internet. Ironically, Microsoft now claims this
threatens to erode its market position.
It is possible, if not likely, that one of the three new operating systems
companies will eventually win a future standards race, and become a new
monopoly. But, during the transition, improvements will come more rapidly, and
the winner will have Judge Jackson's opinion as a guide as to how behave.
Meanwhile, Microsoft's top management should realise that break-up is best for
the shareholders. As it is, the company can only justify its share price by
constantly growing the earnings of an increasingly cumbersome enterprise. A
break-up would refresh each of the component parts. Shareholders will be
rewarded, just as they were when AT&T was broken up. This case will settle
only when those running Microsoft come to the same realisation.
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