Another WSJ commentary:
Mr. Priest is a professor of law and economics at Yale Law School.
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interactive5.wsj.com
May 19, 1998
A Case Built on Wild Speculation, Dubious Theories
By GEORGE L. PRIEST
Yesterday's suit by the Justice Department against Microsoft (joined, in a
needless piling on, by 20 state attorneys general) threatens to damage or even
cripple a company that has brought billions of dollars of value to consumers
around the world. Microsoft is a classic example of what even the Supreme
Court regards as a good monopoly: a firm that has gained monopoly power not
through merger or collusion, but business skill and acumen in creating a clearly
superior product.
To be sure, Microsoft's leasing practices are not entirely beyond reproach.
Provisions prohibiting licensees from advertising competing software--heavily
criticized by my friend Robert H. Bork--cannot easily be defended. But these
provisions are probably harmless in practice and can equally harmlessly be
stopped. Mr. Bork relies entirely on the 1951 Lorain Journal case, in which the
Ohio town's single newspaper was found guilty of monopolization for refusing
to deal with firms that advertised on a competing radio station. That case
supports the prohibition of Microsoft's advertising restrictions. But the case has
little to say about the broader Justice Department claims against Microsoft.
Most troubling is the Justice Department's effort
to define for Microsoft which services Windows
98 ought to include--for example, compelling it to
offer Netscape's Navigator as an alternative
browser to Microsoft's own Internet Explorer or
to constrain Microsoft from incorporating a
WebTV site or an e-mail program. Here the
Justice Department's lawsuit is based on theories
of monopolization that have been discredited for
decades and on wild speculation about the course
of future software innovation.
The most popularly accepted theory is that Microsoft insists on incorporating its
own browser program, as opposed to Netscape's, as a mechanism for extending
or leveraging its 80% market power over general operating systems to additional
services. If Microsoft incorporates such services, the theory runs, it forecloses
opportunities for sales by smaller software manufacturers that would otherwise
be its competitors.
But consider the example of General Motors, which in the 1960s was the
dominant player in the domestic auto market, with a market share of 50%.
Could GM increase its monopoly profits by including a car radio as standard
equipment? Including the radio surely foreclosed sales by independent radio
installers, but the gain to General Motors above the price it was earlier charging
for the car could be no more than the additional value of the radio.
Does it make a difference that Microsoft, unlike GM, is itself the producer of
Internet Explorer, so that the profits it gains are its own? Again, only insofar as
Internet Explorer is of value to consumers. Put differently, if Netscape
Navigator is a better browser than Microsoft Internet Explorer, requiring its
inclusion in Windows 98 will reduce Microsoft's competitive advantage over
rival operating systems. The Justice Department, thus, has the case exactly
backwards. If Internet Explorer is superior to Navigator, the effect of a
successful prosecution will be to harm consumers. If Navigator is superior, the
prosecution will overrule Microsoft's mistaken decision and shore up its market
power, which would otherwise decline.
The Justice Department is concerned about other programming services that
Microsoft includes or might include in future versions of Windows. But does
anyone believe that bureaucrats or judges can know how to define the optimally
integrated product in the fast-changing computer software market?
Concern about the foreclosure of potential competitors cannot provide an
answer. Should the only hotel in a small town be accused of foreclosure if it
offers free soap or toiletries--foreclosing competing grocery and drug store
sales? A free ironing board--foreclosing laundry services? Its own
minibar--foreclosing liquor and snack sales? Microsoft's definition of what
Windows will include is no different.
The second ground of the Justice Department's attack is no more convincing. It
rests upon pure speculation about the future of software innovation. The
thought is that Microsoft's foreclosure of smaller programming competitors
removes from the market entrepreneurs who, though small today given their
niche markets, may at some future time generate ideas that are sufficiently
innovative to challenge Windows in its entirety. This romantic hope is totally
speculative. Is the next Bill Gates more likely to invent an alternative to
Windows if Microsoft is forced to carry his current niche program or if
Microsoft's success forces him to develop something different? The latter
alternative is at least equally plausible.
The Microsoft lawsuit is reminiscent of the Justice Department's persecution of
an earlier monopolist, the United Shoe Machinery Corp. As late as the 1950s,
United Shoe possessed 75% to 85% of the domestic shoe-machinery market, at
a time when shoemaking was dominated by American firms. In that case, too,
the Justice Department attacked a set of leasing practices that it did not well
understand. And with no greater understanding, the courts struck those
practices down, leading United Shoe to decline and ultimately to drop out of the
market. The results: The price of shoe machinery went up, and foreign firms
began to enter the market. Foreign companies now dominate the market both
for shoe machinery and shoemaking itself. There was no clear benefit to
consumers whatsoever. Those are the stakes in the attack against Microsoft.
==============================
And then there's this in the LA Times today:
latimes.com
Tuesday, May 19, 1998
Justice Department Trustbusters Now Expected to Go After
Intel
By CHARLES PILLER, Times Staff Writer
SAN FRANCISCO-In the wake of the Justice Department
move against Microsoft Corp., another huge antitrust
action-against microprocessor titan Intel Corp.-looms. The
company faces a broad-ranging probe by the Federal Trade
Commission.
The investigation began last fall, and industry watchers say that the
agency may be ready to present its case against Intel soon. The FTC is
looking into widely shared concerns that the chip maker has used its
near-monopoly in PC central processors, and its influence over the
creation of industry technology standards, to maintain a stranglehold on
the chip business and to seize control over other lucrative markets.
Such actions could be found to violate the Sherman Antitrust Act.
The logic of the FTC action is simple, said Nathan Brockwood, a
chip industry analyst for Dataquest in San Jose: "Fundamentally, it's
hard to believe that Intel achieved its advantage through fair market
practices and that you can't achieve more competition through creating
a more level playing field."
But Intel spokesman Chuck Mulloy countered: "Our view is that
we've achieved the success we've achieved by complying fully with all
the applicable laws."
Last year Intel took in nearly 80% of industrywide revenues for
microprocessors-$18.9 billion, according to Dataquest. The closest
competitor, Motorola, took in $1.1 billion.
According to Mercury Research in Scottsdale, Ariz., Intel sells
about 82% of all central processors, the brains in PCs, and about 71%
of all "chipsets"-processors that control subsidiary PC functions such
as memory and communications pathways.
"You look at those numbers and say, 'What's wrong here?' "
Brockwood said. "Especially if you're someone in the government."
Intel's towering market share means that PC vendors have
developed a dependence on Intel chips akin to their dependence on
Microsoft's Windows operating systems.
Like Microsoft, Intel has exploited its position to push hard into new
areas, such as the markets for memory chips, graphics-acceleration and
networking products and motherboards-the basic platform on which
chips are housed within computers.
Now the FTC must decide whether this dominance constitutes an
illegal monopoly that unfairly stymies competition.
Neither the FTC nor Intel would comment about the specifics of the
agency's investigation. But Intel acknowledges that the probe touches
many aspects of its business.
One key issue involves the possibility that Intel pressures computer
makers to shun the chips of competitors. Inducements may take the
form of exclusive contracts, for example, or rebates for vendors that
use only Intel products.
Some critics also suggest that the chip maker uses co-op
advertising-in which Intel pays a portion of the cost of computer
makers' ads in exchange for displaying the "Intel Inside" logo
prominently-to induce loyalty to Intel as the vendor's sole chip
supplier.
Intel denies any improper actions. And a number of computer
makers-including IBM Corp. and Compaq ComputerCorp.-use
both Intel processors and those produced by competitors Advanced
Micro Devices Inc. and the Cyrix subsidiary of National
Semiconductor Corp. IBM even manufactures and sells Cyrix-designed
chips. Yet IBM and Compaq receive normal treatment from Intel.
Some smaller PC companies, however, privately say that they
would not consider an alternative supplier of central processors for fear
of endangering their relationship with Intel.
Intel also regularly develops new technologies that later become
industry standards. Some critics have suggested that Intel withholds
information that would enable competitors to quickly build products
based on such new standards. The most prominent example involves a
new way of attaching the central processor to the PC.
"In the past, alternative suppliers could make processors that fit into
Socket 7, an open industry standard and the same socket the Pentium
fit into," said Mike Feibus, principal analyst at Mercury Research.
This changed with the Pentium II, the latest in Intel's flagship series
of central processors. Pentium II requires a new connection method
known as Slot 1, as well as new supporting chipsets. Unlike Socket 7,
Intel kept Slot 1 as proprietary, leading critics to suggest the company
was attempting to move the PC industry into a direction that only it
could control.
It later became clear-albeit after Intel seized a decisive jump on
Pentium II product development-that many competing companies can
gain access to the Slot 1 technology through a variety of
cross-licensing agreements, some of which date back decades. Among
key competitors, only AMD appears to be frozen out of Slot 1.
But Intel may have greater vulnerability on another front. In
November, Intergraph Corp., a maker of advanced computer
workstations, filed a lawsuit charging that Intel improperly withheld
technical information required to create competitive products based on
Pentium II processors. Intergraph also charged that Intel improperly
blocked the supply of Pentium II chips themselves.
Intergraph alleged that Intel acted in reprisal after Intergraph refused
to give Intel a free license for a technology that Intergraph had
developed. This claim gained credence on April 10, when the U.S.
District Court for the Northern District of Alabama granted an
injunction sought by Intergraph.
Intel's Mulloy denied that allegation and said that Intel is open to a
settlement while it appeals the ruling.
For PC buyers, however, Intel's aggressive tactics may seem beside
the point, some analysts say.
"It's hard to see how a consumer has been harmed by Intel's
success," Dataquest's Brockwood said. "They realized a long time ago
that the only way they could grow is to grow their market." That has
meant cheaper, faster microprocessors year after year.
And AMD and National Semiconductor can blame themselves for
some of their troubles. In the last year, sales of low-cost PCs-which
those companies specialize in creating chips for-surged dramatically.
But manufacturing problems at both companies prevented them from
capitalizing fully on their opportunities.
While he supports the FTC probe, National Semiconductor's vice
president for corporate marketing, Steve Tobak, does not view it as "a
critical juncture." Instead, he plans to compete more effectively to
supply chips for low-cost PCs.
"If I have to rely on the federal government to enable my business
to succeed, then I've got a real problem," Tobak said. And he notes that
Intel has maintained a vigilant posture about its antitrust vulnerabilities.
"We try to conduct our business to be fully accordant with the law
and provide training to our people to make sure that this is the case,"
said Intel spokesman Howard High.
That training seems apparent in the company's FTC track record.
The agency conducted a similarly broad investigation of Intel from
1991 to 1993 but took no action. And earlier this year it allowed Intel to
take over two competing chip companies-Chips & Technologies and
the chip division of Digital Equipment Corp.-with few restrictions.
Digital completed the sale of its chip division on Monday.
Still, the FTC may view Intel's growing power as sufficient cause
for alarm.
"The lack of viable competition is what paves the way for
strong-arm tactics," said Mercury Research analyst Feibus. "If you
have a healthy, competitive industry, the possibility of muscling out
your competition goes away."
Intel shares lost 94 cents to $79.38 on Nasdaq on Monday.
================
Current Score:
USDOJ - +2
Microsoft - -0-
Intel - -0-
Public - minus 100
Barry |
