Bill Gates, Robber Baron

The Internet Age offers the long-deferred promise of the sovereign consumer. By surfing the Net, you can become the ultimate comparison shopper. You can find out the best deals on everything from cars to books to groceries to hotel rooms. Net shopping has even begun to crack that most resistant of price-gougers, the airline cartel.

Free-market futurists, such as George Gilder and Peter Huber, insist that cyberspace, with its instantaneous communication and nearly perfect information, at last allows free markets to be truly self-correcting. A seller, anywhere in the world, can find a willing buyer. Webs of middlemen and barriers to competition gradually disappear. The market will purge itself, and the need for clumsy, meddlesome state regulation, as Karl Marx predicted in a rather different context, will just wither away.

Thus it is more than a little ironic that the very emblem of the computer age, Microsoft Corp., is placing its clumsy thumb on the scale of this elegant equilibrium. Like monopolists of a century ago, Microsoft has observed that if you can capture enough market share, three large benefits accrue. First, you can scare off, drive out, or gobble up competitors. This conveniently gives you even more market share. Second, your monopoly in one key area of the business (in this case the ubiquitous Windows operating system) facilitates market power in other key product lines, such as word processing and Internet access. And third, of course, comes the reward: With market power, you can jack up prices that captive consumers must pay. Somehow, this cyber-platform, on which the entire Internet free market rests, is not quite self-correcting after all.

PLAYING CUTE. Enter the U.S. Justice Dept. In 1995, Justice charged Microsoft with using its near-monopoly of operating systems to stifle competitors and gouge consumers. Microsoft signed a consent agreement, promising to avoid several nasty anticompetitive practices. But in December, the government hauled Microsoft back into court, warning that it was playing cute.

Microsoft requires computer manufacturers that include the Windows operating system to package it with Microsoft's Internet browser. One way or another, the consumer pays for this additional product--it is built into the retail price of the computer--whether the buyer wants it or not. This gives Microsoft an unfair advantage in the fiercely competitive Internet-access market, where there are plenty of lean and efficient rivals. Such "tying arrangements," in which a consumer is compelled to buy one product as a condition of buying another, are the hoariest of antitrust abuses, considered illegal per se.

To comply nominally with the consent agreement, Microsoft had offered manufacturers a bogus choice: Take the unwanted Internet software, or take an outdated version of Windows. The third alternative, offering Windows 95 without the browser, Microsoft insisted, would cripple the operating system. But the presiding judge in the case, Thomas P. Jackson, a computer hobbyist, managed the feat with a few clicks of his mouse in about 15 minutes. Judge Jackson has ordered a contempt hearing for Jan. 13.

FOOL'S QUEST? To hear Microsoft tell it, you'd think the Computer Age had changed the rules of commerce. Microsoft Chairman and CEO Bill Gates has argued that the government is trying to structure an industry it knows little about. This is nonsense. What Gates is attempting is as old as the efforts to monopolize the steel, rail, oil, and telephone industries in the robber baron era.

Every time a new industry has arisen, offering a right-of-way on which closely related industries (and their consuming publics) depend, there is enormous temptation to use this market power improperly. Earlier in this century, competition policy intervened to keep railroads from gouging shippers; broadcast networks from monopolizing programming; department stores and other distributors from jacking up the prices of retail products; telephone companies from keeping a stranglehold on consumer instruments that used phone lines; and airline cartels from dominating reservation systems. The particulars varied, but in every case the basic affront to free competition was the same.

Policymakers will now have to figure how to prevent Gates and Microsoft from crushing makers of computer applications that depend on the Windows operating system. Cyberspace may indeed offer the potential of untold consumer choice--if nobody gains a stranglehold. Markets are sublime institutions, but they require a referee. Once again, the search for a perfect self-regulating market has proven to be a fool's quest.

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