Is Bill Gates Crying Wolf?

He says the states' antitrust remedies would stifle innovation at Microsoft. Not likely

When William H. Gates III finally took the witness stand in the Microsoft antitrust case on Apr. 20, he made an effective case for the many benefits that Microsoft has brought to personal computing. By driving down costs and providing a standardized platform in the early days of the industry, Microsoft Corp. (MSFT ) enabled two decades of explosive growth.

Unfortunately for Gates and his company, the current court proceedings before Judge Colleen Kollar-Kotelly aren't concerned with Microsoft's historical contributions. The issue before the court is what should be done to remedy antitrust violations found in a trial and unanimously upheld by the Court of Appeals. And here Gates's over-the-top arguments against the sanctions proposed by nine state attorneys general put him on far shakier ground.

I'm not a big fan of the state AGs' proposed remedies because I think they would do only a bit better than the agreement between Microsoft and the U.S. Justice Dept. at preventing future abuses. In particular, I think the demand that Microsoft offer a version of Windows for PCs stripped of such popular components as the Internet Explorer Web browser and Windows Media Player is silly. The browser wars are long over. And while there is serious competition in media players, many computer makers already ship PCs with both Microsoft's Media Player and RealNetworks' player installed.

Gates's claim that marking some features of Windows optional would "turn back the clock on Windows development by 10 years" and lead to mass layoffs and other catastrophes is absurd. Although it wasn't pointed out until the third day of cross-examination, Microsoft already sells such a product, called Windows XP Embedded. This version, intended for special-purpose devices such as smart cash registers, allows designers to pick only those components of Windows that they need, greatly reducing the demands on memory and other hardware.

In his defense, Gates said that a mix-and-match Windows for PCs would create chaos because applications developers would not know which components were installed on any computer. But he sells Microsoft's abilities short. Microsoft Office is built in just this "componentized" way. If a program needs an Office feature that is not available, the user is asked to install it. Some come with Office but are not installed by default; some, like the Visio drawing package, are sold separately; some, such as the MathType equation editor, are sold by third parties. The same approach can work for Windows.

Gates had a stronger point in opposing one of the better proposals made by the states, that companies such as Palm Computer (PALM ), which produce hardware or software that must work with Windows, be given more access to the actual programs, the "source code," that make Windows work. The fear is that competitors would then be able to help themselves to Microsoft's intellectual property.

This fear is not unwarranted. Although the code is protected by both copyright and patents, Microsoft would end up exposing trade secrets. But the company, which has never conceded any wrongdoing, ignores an important point: It broke the law and is not entitled to guarantees that the remedies not be painful.

Judge Kollar-Kotelly should keep one thing in mind as she works her way through this thicket. Microsoft claims government restraints will ruin its ability to innovate. But the evidence suggests that competition, not freedom, drives innovation. Today, Microsoft is investing heavily in Web services, where its .Net initiative is challenged by IBM (IBM ), Sun Microsystems (SUNW ), and others. It is also showing creativity in handheld devices, where PocketPC must contend with Palm and handset makers.

Both the government and Microsoft argue that this case is about innovation. Microsoft has the proven technical ability to give computer manufacturers, which operate in a fiercely competitive industry, the freedom to pick and choose what Windows components are installed. So while some specifics of the componentized Windows proposal may be off the mark, the concept could well give consumers more, and better, choices.


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