Microsoft Is The Victim Of A Legal Mugging

Now that the Senate Judiciary Committee has set Bill Gates of Microsoft Corp. up as a robber baron, he and his company's shareholders can expect to be robbed.

There is no antitrust case against Microsoft. What is happening is that Sun Microsystems, Netscape Communications, and Novell are trying to achieve through antitrust politics what they could not achieve in the marketplace. Economists have known for decades that antitrust is what losers do to winners.

A genuine antitrust case requires a company to be a monopolist and to be convicted of acting in restraint of trade. For a company to restrain trade, it must face no substitutes for its product and be able to use its monopoly position to restrict output, raise prices, and block entry of new competitors. But in today's software industry, output is rising, prices are falling, and new companies are forming continually.

But facts have nothing to do with the government's antitrust cases. The Justice Dept. has an antitrust division that must find cases to justify its budget. According to BUSINESS WEEK (Jan. 19), the Justice Dept. "is relying on a novel theory" in its antitrust thinking about Microsoft. What that means is that Assistant Attorney General Joel Klein is, in effect, legislating the offense to fit Microsoft. He is creating the law as he moves along. Mr. Klein's approach is the opposite of a rule of law. A company cannot violate a law that is not on the books. If the Justice Dept. believes that new developments require new legislation, it should go to Congress and request new law, not write it itself and apply it retroactively to a preselected target.

Microsoft's success has made it a target for antitrust lawyers schooled in the belief that business is theft. Before Microsoft, there was IBM. The Justice Dept., in its unmitigated arrogance, tied IBM up for 19 years in an antitrust suit that the government never got around to defining. After forcing IBM to waste huge sums of money on legal fees and to run its business for two decades with an eye to legal considerations instead of the marketplace, the Justice Dept. ended up asking the court to dismiss its suit against IBM as "without merit."

The malfeasance in the Justice antitrust suit against IBM is so extraordinary that the department should have been abolished on the demonstrated grounds that it is a clear and present danger to U.S. business.

This destructive scenario is set to repeat itself with Microsoft. Mr. Gates's time will now be reallocated from software development to lawyers and lobbyists, as Microsoft tries to fight off the political attack on its success. And every tort lawyer in the U.S. will figure out a way to piggyback a claim on the government's antitrust investigation.

The CEOs of Novell, Sun, and Netscape have shown poor judgment in encouraging the government to mug Microsoft. By bringing antitrust into software, these shortsighted executives have opened the gates of Silicon Valley to the redistributionist impulses of politics and regulation. The ingenuity and wealth of the U.S. software industry are the likely ultimate victims.

FAILURE TO CLONE. Microsoft is so far from being a monopoly that senators have coined a proxy term: "currently dominant firm." Microsoft is a currently dominant firm, but the reason lies in the mistakes of Apple/Macintosh, not in nefarious plotting by Microsoft. Apple Computer Inc. had the best operating system and a far more user-friendly computer. But the company's management made a business mistake. Apple refused to license companies to clone its product. This restricted output and made Macs relatively expensive. The result was a big market for the inferior PC, which Microsoft and other software companies exploited.

Capitalism in the U.S. has no future when CEOs of innovative companies appeal to the government to redress unequal market outcomes. To watch Sun's Scott G. McNealy behaving like a populist redistributionist whining for the government to give him an advantage or to take one away from a competitor is discouraging to those who fought to put supply-side incentives back into the economy.

The Justice Dept.'s investigation of Microsoft is an opportunity for ideologues who demand equal outcomes. The same quotas that are required for race and gender balance can be applied to product market shares. Once merit is breached in one area, the case for it is weakened everywhere. Just as the market for air travel was once divvied up by "fair" government regulators, so can be the market for computer software. Whatever the outcome, Microsoft is sure to be in court long after it has lost its market dominance.

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