Microsoft: The Right Remedy

The portrait of Microsoft as a bullying monopolist in Judge Thomas P. Jackson's finding is simply startling. In clear language and vivid detail, he outlines for one and all to see a consistent pattern of abusive behavior against some of the best and brightest in the high-tech industry--Compaq, Sun Microsystems, Intel, IBM, and, of course, Netscape. He concludes that Microsoft Corp. violated antitrust law by using its monopoly in computer operating systems to dominate PC makers, crush potential rivals, control Internet service providers, and harm consumers. Unless he's overturned on appeal, Judge Jackson's harsh findings could forever change the legal and economic landscape for Microsoft. His findings demand that something be done to rein in Microsoft's monopolistic activities. The question before the courts--and before the country--is what to do and how to do it with minimal government interference in the marketplace.

Efforts to change Microsoft's behavior in the past have had limited results, at best. It took a consent decree in 1995, a Justice Dept. antitrust suit in 1997, plus Senate antimonopoly hearings in 1998 just to get Microsoft to loosen its grip on PC makers and Internet service providers. Judge Jackson's dramatic fact-finding notches up the pressure for more radical remedies.

The obvious solution--breaking Microsoft up into pieces a la AT&T or Standard Oil--is itself problematic. Separating operating and applications companies would end the competitive edge Microsoft's applications group now enjoys over rivals. But it would still leave Microsoft with a monopoly in operating systems, which is at the heart of the actions that Judge Jackson is likely to rule violate the Sherman Antitrust Act. There's nothing to stop a new operating-systems company from repeating in the future what Judge Jackson accuses Microsoft of doing today--leveraging its operating-system monopoly to crush innovation and competition. In addition, the government would have to constantly monitor both companies to keep the operating-system unit from integrating functions, such as internet browsers, that should be considered applications. It was a nightmare of excessive regulation when Judge Harold Greene oversaw AT&T's deregulation. It could be worse if Microsoft were broken up this way.


Busting Microsoft vertically into three "Baby Bills," the alternative breakup scenario, is rife with problems as well. It could increase competition, but it also threatens to put incompatible versions of Windows on the market, splitting the standard for the global PC industry. The hardest part would be in deciding how to divvy up Microsoft and its employees into three equal companies.

We favor an alternative: make the source code underlying Microsoft's Windows operating system available to others. It is probably the most efficient way of mitigating the effect of Microsoft's monopoly on operating systems. It keeps government interference to an absolute minimum and requires no continuous oversight. Licensing the code would allow other companies to develop competing applications that would work as well as Microsoft's own applications. If they use the code in a product, they would pay a fee. The unfair linkage between Microsoft's two monopolies would be broken.

While the legal battle will continue for years to come, the technological landscape is changing at breathtaking speed. Any remedy to Microsoft's monopoly should be seen in the context of the Web, not just the PC. Opening the source code is a solution that fits the future, not just the past. Whatever the government does, it should act to prevent Microsoft from leveraging its monopoly in PCs to the Internet.

Just look at how fast technology is evolving. In 1993, the high-tech economy consisted of a narrow Wintel world dominated by Microsoft and Intel. PC makers were captives of Microsoft operating systems and applications software. Innovation was subdued and PCs were getting boring. Today there is much more innovation and ferment. New markets and opportunities are opening up. Wireless phones and Palm Pilots pull down data from the Net over non-Windows software. Linux runs 16% of all computer servers and the Mac is back. On the Web, companies are not as firmly under Microsoft's thumb. Nor are the cable companies, who are using both Microsoft Windows CE software and Sun's Java software in their cable boxes.


By 2002, when the current antitrust case might ultimately reach the Supreme Court, the marketplace will be even more varied. Consumers will increasingly use the Web, not their PCs, to run their applications software. Net-based applications will be accessed via a browser or through a PC run on simpler, cheaper operating-system software. Microsoft is putting its popular Office suite online as a service provided on the Net, to counter rival Sun's purchase of Star Div., which is about to offer an online office suite. Can Microsoft retain its 40% profit margins when applications shift from the PC to the Net and when its operating systems become less central to computing? How long can it retain the massive cash flow that it is using to leverage into the Internet world? Microsoft may still be huge in the PC market three years from now, but that market may have morphed into something far less profitable. And it will have a difficult time dominating any of the hot, new super-competitive markets in telecom, the Web, handhelds, or wireless phones.

The markets are beginning to erode Microsoft's monopoly. But Justice must still act, and the best way to do so is to open the source code. Otherwise, there is always the chance that Microsoft will turn its huge cash flow and enormous leverage on these new markets. Judge Jackson, a Republican appointed by Ronald Reagan, has presented us with clear evidence of monopoly abuse on a massive scale. To a society built on competition, it is simply not acceptable.

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