Mr. Gates, meet Mr. Antitrust

Mr. Gates, meet Mr. Antitrust: By Janelle Brown. Three former Justice Department antitrust experts handicap the new Microsoft suit.


Janelle Brown
May 19, 1998 11:00PM (UTC)

There were more than 100 pages of legal documents filed today in the two antitrust suits against Microsoft. And that's not including the thousands of pages of commentary, PR spin and news analyses that have filtered through the media in recent months -- a mountain of conflicting information. Will the antitrust cases have dire consequences on technology innovation and consumer choice, as Microsoft alleges? Or are they a reasonable action necessary to preserve competition? Salon spoke with three experts in antitrust law who hold contrasting views on the ramifications of this case and how the lawsuits might play out. (We also offer The browser war goes thermonuclear, commentary by Scott Rosenberg, and Who owns the desktop? an analysis of interface issues by Andrew Leonard.)

Carl Shapiro teaches economics at the University of California at Berkeley. He served as deputy assistant attorney general for economics in the Justice Department's antitrust division from 1995 to 1996. Robert Litan preceded him in the same position and participated in the antitrust case against Microsoft that ended in a 1995 consent decree before moving to the Brookings Institute to become its director of economic studies. Luke Froeb teaches economics at the Owen Graduate School of Management at Vanderbilt University and was an economist at the Department of Justice's antitrust division from 1986-88 and 1990-93.

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One of the key demands for "relief" in the Department of Justice suit is that Microsoft separate its Internet Explorer browser from the Windows operating system. Is that reasonable?

Froeb: The relief here is problematic because it puts the Department of Justice in the software-design business. They're asking for a much bigger relief than the 1995 consent decree -- they're asking Microsoft to give up control of their front page and asking Microsoft to redesign their software to include other add-ons. That poses a huge problem, because the government is presuming to know what's best for the evolution of software design.

Because innovation is the primary dimension of competition here, it presumes an awful lot that the government knows how best to compete in this industry. It's easy to say Microsoft has market power; it's difficult to know what to do about it. In this case, the solution raises more problems.

Litan: It's an uphill climb. I think that the easier case for Justice to make is that Microsoft offer a choice to PC manufacturers to bundle or unbundle the products. But asking Microsoft to put Netscape on their system may be something that stretches the envelope.

In Justice's defense, they're only asking that Microsoft offer a choice ... I think Microsoft will probably choose to give manufacturers the choice if they're forced to. [The manufacturers] would almost certainly not take the option of loading other browsers on their system.

Is the antitrust case breaking any new legal ground?

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Shapiro: I would say that the Justice Department has very carefully crafted a case against Microsoft to avoid having to break new legal ground, and to give them the strongest position to limit Microsoft's conduct without taking unnecessary risks.

If you look at the conduct the Justice Department is complaining about, it falls in traditional categories of antitrust law that have been litigated for 50 to 100 years. We're looking at exclusionary contracts used by a monopolist, tying and bundling.

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I suspect many people will take note of one of the remedies -- the "must carry" provision, forcing Microsoft to carry Netscape. What they're saying is that because Microsoft has engaged in anti-competitive conduct, this "must-carry" is needed as a remedial measure to make up for the damage to competition already created by Microsoft. That's an important legal distinction.If anti-competitive conduct is found, the court has much broader scope to force the company that's engaged in monopolization to modify their business behavior to undo some of the ill effects of prior conduct ...

Here, the view would be Microsoft has crossed the line, and this is a way to fix the problem.

What is likely to happen in the short term?

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Litan: The case could very well be decided at the preliminary injunction stage -- basically, if the government wins the preliminary injunction, Microsoft will have strong incentive to settle. Alternatively, if Microsoft were to win out the preliminary injunction, and the flag is on their side, they can drag out the litigation and wait out the Justice Department. In the meantime, technology marches on and presumably they win.

Shapiro: I think we'll have a quick phase of the court reviewing whether to grant the preliminary injunction. One of the smart things about the complaint by the Justice Department is that they are not seeking to block the shipment of Windows 98; they are seeking to attach conditions to which that product is sold and distributed and limitations on how they can conduct business with OEMs and content providers. That makes it easier for the judge to grant an injunction without having great fear of disrupting the market.

Whether or not Internet Explorer and the operating system are separate products is central to this case. Do you think the Department of Justice is justified in defining what these products are?

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Froeb: Consumers want easy-to-use, they want everything to work together. That's precisely why Microsoft is bringing all this stuff onto one desktop -- to make it easy to use, to make sure components work well with each other. That's what an operating system does.

Suppose you're a consumer, and something breaks down. You call up Microsoft and say, "I can't get this form to work with your operating system. I'm working with Netscape." They've carefully designed their system to solve that problem with Explorer, and all the sudden you're working with Netscape. Who's the consumer going to blame? To protect its good name, Microsoft might want to make sure that if people use their product, they use it properly -- just the way that certain vendors of equipment will force you to go to their repair people or else you void the warranty. To protect the brand name, you do things like that. You see these sorts of agreements all the time, and they're not anti-competitive in other applications.

So there are certainly pro-competitive aspects of whatever Microsoft is doing. The DOJ is going in and saying that's not as important as making sure that Sun and Netscape have a place on your desktop. That really gives me pause.

Shapiro: This is the beauty of what Justice has done -- they don't need to show that the operating system and browser are separate products. Today's press release says, "[Assistant Attorney General Joel] Klein stated that the preliminary injunction being sought will not require Microsoft to redesign Windows 98. Our focus in the motion for preliminary injunction is not the code, it's on their agreements to limit the distribution and promotion of competing browsers."

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That's a good catch phrase: It's not the code, it's the contract. That's what antitrust law knows how to deal with -- contracts. It's where Klein has put his stake in the ground. Microsoft will say, "Oh they're trying to make us redesign our product." If you look at this case, they're very carefully avoiding that. Microsoft can say it, but it's not true.

Twenty attorneys general have also filed cases on behalf of their states. What effect will that have on the Justice Department case?

Froeb: That's a mess. Their group is named the National Association of Attorneys General -- they're called the NAGS, and it's not a misnomer. I think it's a disaster to get the states involved in an antitrust matter. This is clearly an interstate commerce issue, which the states have no business being involved in. The only reason they do it is because it gets the attorney general in the popular press and positions him to run for political office. If I'm the state attorney general of Connecticut, how do I raise my visibility? I file suit against a prominent defendant, get my face on TV and get a lot of free advertising. It's shameless, and there's no reason for it.

It really messes up commerce if anybody releasing a product in a business practice has to conform to 50 different attorneys general.

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Litan: The presence of the states makes it harder for the government to settle, because if it settles and the states continue litigation, the DOJ will be scrutinized by the public asking why it settled so early. It complicates the issue.

This does mark a new age in state antitrust enforcement. In the past you didn't hear a lot of this kind of state action. Since the tobacco litigation, the states now see they can act as a backstop to the federal government in the direction the states want to go.

This case has been compared to the IBM antitrust case, which lasted 13 years, was eventually dropped but still hurt IBM. Can you envision this case dragging out as long, and if so, what kind of impact would it have on Microsoft?

Froeb: This case couldn't run 13 years. It's going to be at the most a year or two: There will soon be a next generation of software that might not even resemble anything like browsers -- there might be a totally different standard in two years.

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The pace of judicial decision-making is glacial, is geologic, compared to the pace of software design. Six months is a whole product cycle in software; it's one motion in a judicial case. If it goes to full trial I'm sure the case will be moot before trial comes up. It'll either get dropped, or Microsoft will say, "Yes, in 2002, we'll only offer Windows 98 with your stipulation," and it won't matter because no one will be buying it at that point anyway.

The law that this case is based on is the 100-year-old Sherman Act. Do you think these old laws can be applied to the fast-moving technology industry?

Froeb: The problem with the Sherman Act is that it's only a paragraph long, and it leaves to law enforcers an enormous amount of discretion. If they exercise that discretion poorly, if they're not really careful, there can be many unintended consequences.

In an industry where the primary measure is innovation, not competition, it's very easy to misapply these laws. The laws are designed to take a snapshot of the industry and analyze the competition based on this static view of the world.

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But when the primary dimension of competition is between where we are now and what state we'll evolve to tomorrow, the laws don't do a good job at giving us much guidance on how to enforce them.

Antitrust enforcement is so speculative as it is. In this case they have to say, "Here's an anti-competitive practice, and the world would be better
without that practice." That adds a whole level of uncertainty to the antitrust analysis that doesn't exist when you're just looking at a static snapshot of the world.

Shapiro: Silicon Valley is prone to having all sorts of breathless young people saying, "It's a brave new world, we need entirely new economics and law." I'm coming out with a book this fall called "Information Rules." It's a strategic guide that explains how the information economy is somewhat different, but that the fundamental economic principles are not as new as some people would seem to believe. And the legal principles of the 20th century seem to be applied just fine. Interfaces, compatibility -- these are not new.

There is a very solid base of antitrust law that Joel [Klein] is relying on.


Janelle Brown

Janelle Brown is a contributing writer for Salon.

MORE FROM Janelle Brown


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