Against Microsoft : A primer for conservatives

National Review, Feb 7, 2000 by Robert H. Bork

OF the hundreds of thousands of words that have come tumbling out of word processors since the trial court's decision in the Microsoft case, most are hostile, often bitterly so, and almost all of those are written by people who would generally be classified as conservatives. Since modern conservatism professes devotion to free markets and to the rule of law, this virulence suggests an inadequate understanding of the case. That, sad to say, seems to be true of NATIONAL REVIEW and the writers it chose to bolster the pro-Microsoft view.

The facts need to be restated. Microsoft's monopoly is protected by the "applications barrier": Consumers want an operating system that has the most applications (word processing, etc.), and applications writers go to the system with the most consumers. This is the "chicken-and-egg" problem that makes it impossible for competitive operating systems to thrive. But Netscape's browser, which first made access to the Internet easy, also has the capacity to receive applications, so that, if it were used widely enough, neither consumers nor applications writers would care what operating system underlay the browser, and Microsoft's monopoly would gradually erode. The core of the case was Microsoft's attack on Netscape's browser by, among other tactics, incorporating its own browser into its operating system, thus making it inconvenient and expensive to use Netscape's browser as well. Computer manufacturers had no choice but to take Microsoft's browser; Netscape, having no operating system, could not effectively respond.

Microsoft's internal communications made clear that the object of incorporating its own browser in the operating system was entirely predatory, to "cut off Netscape's air supply," and not, as claimed at trial, to increase efficiency or respond to consumer desires. Indeed, Microsoft executives were clear that on the merits, their browser was unlikely to win against Netscape's.

NR's editorial comment opens with the least promising line of attack-that Microsoft does not really have a monopoly of personal-computer operating systems. That will come as news to computer manufacturers, who have repeatedly lamented, often in anger, that there is no viable substitute for Windows. Manufacturers must have it or shut down. No more realistic is the contention that because most consumers already own some version of Windows, Microsoft is its own competition, which accounts for prices "declining in every market in which Microsoft has a product." Judge Learned Hand rejected this argument in his 1945 Alcoa opinion, but it is irrelevant anyway, because consumers automatically get the latest version of Windows whenever they buy a computer. Microsoft does not lower its price for its operating system; any price decline is owing to machine and chip manufacturers.

That Netscape, as a company, survived Microsoft's assault is also irrelevant. The issue is the destruction of Netscape's threat to the applications barrier that protects Microsoft's monopoly. NR's prediction that America Online and Netscape, after the acquisition by AOL, would control 58 percent of the browser market has proved considerably wide of the mark. AOL has prudently decided not to challenge Microsoft's browser with Netscape's, with the result that Microsoft's current market share is about 70 percent and rising. The browser war is over.

The failure of the editorial's arguments means that NR's position must be vindicated, if at all, by the two articles published in the same issue. That is unfortunate. One article, by Prof. Richard Epstein, addresses the merits of the controversy, and the other, by Holman W. Jenkins Jr., attributes discreditable motives to just about everyone who supports the court's decision. Neither is remotely adequate.

Mr. Epstein displays a thorough incomprehension of antitrust theory and hence of the case against Microsoft. He starts with the mistaken notion that "it is virtually impossible, historically, to identify any successful case of predation" because the predator must lower its prices below cost and suffer greater losses than the prey. As I explained over 20 years ago, that argument holds only when the predator must expand output and sell below marginal cost. There are numerous successful instances of predation when those constraints were not present. Microsoft, having a monopoly of operating systems, did not have to increase its rate of output, and its marginal costs were negligible.

Microsoft continued to make profits on the joint product of operating system and browser, while Netscape, lacking an operating system, had to offer its only product, the browser, free, which is certainly below any cost you care to name. It is nonsense to say that Netscape was not hurt because it was free to offer its browser for nothing. That is freedom to lose money forever. But Epstein loses all credibility with the following fantastic statement: "The blunt truth is that this tie-in is worthless." Then why did Microsoft insist upon it? If you want a blunt truth, it is that the tie-in drove Netscape's browser from the market, and to Microsoft that was worth a great deal.