The Microsoft Dilemma

Whether you love Microsoft Corp. (MSFT ) or hate it, you can't help being in awe of the world's most relentless company. Just last year, in U.S. v. Microsoft, Federal District Judge Thomas Penfield Jackson ordered the company split in two. The stock fell nearly 60% from peak to valley, and talent fled. Yet Chairman William H. Gates III and CEO Steven A. Ballmer never lost faith that Microsoft would prevail.

Today, their company is scoring big wins with new products, as detailed in a recent BusinessWeek Cover Story ("Microsoft," June 4). Its stock has recouped a third of its losses, and it has $30 billion in cash. Meanwhile, the threat of breakup is diminishing. A federal appeals court will rule soon on Microsoft's appeal of Jackson's decision. Many experts expect the appellate judges to reject parts of Jackson's rulings. That could set off new settlement talks. And Microsoft would likely get a better deal from Justice now that antitrust skeptic George W. Bush has replaced Bill Clinton in the White House.

Should the world fear an unshackled Microsoft? It's an intriguing question. Microsoft has ceased the most egregious tactics cited in the antitrust case--cutting exclusive deals with computer makers to shut out rivals. And it's hard to see how Microsoft is harming consumers with its latest bundling initiatives. Take Windows XP, the desktop operating system that's slated for release on Oct. 25. It will make life easier for customers by seamlessly integrating a range of Microsoft products and services. Microsoft's Passport service lets customers create a digital wallet so they can shop at Web sites without divulging their credit-card numbers to each one. Its .Net services, which will begin to appear next year, will let unrelated Web sites communicate with each other and with PC programs so customers can instruct the Internet to do complex jobs--such as sending e-mail alerts if a flight is late or a stock is falling. Each extension of Microsoft's sphere of influence makes computers a bit simpler to use.

The drawbacks of Microsoft's dominance are less visible. Still, they're real. For one, innovation may well be damped. Venture capitalists generally won't fund companies that seek to attack Microsoft head-on. Even many established companies hesitate to try something that Microsoft might slap down. Unfortunately, innovation gets short shrift in the antitrust debate, because it's intangible. When an idea dies in its crib, the loss is hard to measure.

Another danger posed by Microsoft is yet harder to quantify. It's the danger to American society if a single company gains a chokehold on information technology, the key source of growth in the New Economy. Microsoft's power today rivals that of the 19th century trusts, whose dominance helped spark the populist movement and drove Congress to pass the Sherman Antitrust Act of 1890.

We're left with a dilemma. Break up or restrain Microsoft, and you lose clear, immediate consumer benefits. Set it free, and you risk long-run harm to innovation and the emergence of a company that is simply too powerful. After all the time and expense that have gone into U.S. v. Microsoft, the most important issues underlying the case remain unresolved.

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