Rear Windows: The software market is changing faster than the Clinton Administration can regulate it

National Review, Dec 21, 1998 by Alan Reynolds

Mr. Reynolds is a senior fellow at the Hudson Institute and senior editor of the Institute's journal, American Outlook (www.hudson.org). This article is adapted from a study prepared for the National Center for Policy Analysis.

WHEN the Federal Trade Commission first began investigating Microsoft for antitrust violations in May 1990, Windows 3.0 did not yet exist and the Internet was an obscure academic curiosity. The Justice Department took over in 1993 and has changed complaints so frequently that we are apt to forget which shell hides the pea.

The court battle relies heavily on implausible gripes from Microsoft rivals. America Online, the Internet-service provider, feigned fear of Microsoft Network even though nearly ten times as many subscribers use AOL and its Compuserve arm to dial up the Internet as use MSN. A claim by the CEO of Oracle that Digital Equipment had to be "pressured" to abandon the bad idea of marketing $500 network computers was even more ludicrous. In any case, all the insinuations about secret deals that somehow never reached completion are beside the point. The government has not charged Microsoft with attempted collusion. And terms like "pressuring" and "bullying" have no meaning in antitrust law or economics.

Allegations of a "predatory pattern of conduct" are no clearer. Microsoft is said to have "preyed" on Netscape, maker of a popular website browser. (A browser is what you use to call up a site.) Microsoft has given away its own browser, Internet Explorer, as part of its operating systems, Windows 95 and Windows 98. The courts have tried to define "predatory" as shoving a competitor out of business without any efficiency gain. Yet having two choices of popular browser at a price of zero is clearly more efficient than having one practical choice (Netscape) at a higher price. And Netscape is stronger than ever, now that it has America Online's wealth and wide exposure. "Predatory pricing" means lowering prices temporarily, then putting them back up after competitors are dead. But nobody, least of all the prosecutors, is claiming that Microsoft ever intends to charge any price for its basic browser, much less a steep price.

The real complaint is that including Internet Explorer in Windows involves a tie-in sale, or "bundling." The worry seems to be that Microsoft might gain a monopoly of browser use and then use that monopoly to direct docile consumers toward the company's favored Internet-service provider (MSN), search engines (which direct you to websites that include the keywords you're looking for-Microsoft didn't have one before October), and destination sites (Microsoft Expedia).

This scenario is speculative, even fanciful. Indeed, the government's case against Microsoft is incoherent at every turn, a textbook example of antitrust law desperately chasing after a rationale. That case simply misunderstands both the economics and the technology of the market it is dealing with. If it reveals any anti-competitive behavior at all, it is on the part of Microsoft's rivals.

With Windows, Microsoft is said to have a monopoly of the operating-system "market." But this is an odd sort of market. Rival operating systems are either bundled with the computer (Apple, Sun, and IBM mainframes) or downloaded for free (Linux and Free BSD). News reports echo the Justice Department's claim that Windows is on 90 per cent of all computers. What the written complaint really said, however, is that Windows has recently been installed on 90 per cent of new "Intel-based" personal computers. The expression "personal computers" excludes business computers. And "Intel-based" excludes Apple, even though Apple's iMac has been one of the two best-selling computers.

In any event, the relevant "market" is not operating systems per se, nor browsers, but the market for all software services. An operating system like Windows or that of Apple is just a means to an end. It gets you into an application on your hard drive or network. Or it gets you to a browser, which then lets you use search engines to find websites.

Those accusing Microsoft of leveraging Windows have also been saying that programs written in JAVA, the programming language created by rival Sun Microsystems, will soon make operating systems like Windows irrelevant because these programs will run well on any operating system. Computer users would be able to use browsers to download JAVA programs and run those programs from a network on the Internet. Networks would replace the personal computer. Hence, the Justice Department's central theme-that Netscape's dominance of the browser trade, if left unchallenged, might have provided a viable alternative to any operating system. The Appeals Court, however, properly dismissed this idea as a "prognostication." In fact, neither JAVA nor Netscape is a substitute for an operating system, and neither are Netscape and JAVA combined. Netscape could have rendered an operating system unnecessary only if network computers had been a viable idea. When personal-computer prices came way down, the dream of $500 network computers soon became an illusion. People are not about to give up the independence of having their own word processor and other applications.