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Who Do You Antitrust? Part 1

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As trial continues on the U.S. Department of Justice's antitrust case against Microsoft, the public remains divided about whether or not Microsoft has tried to interfere with competition, and if so, if it matters. If you think this isn't an Apple problem, think again, because this issue has repercussions throughout the computing industry. Apple could benefit or lose no matter which way the issue is resolved, but after staking out the available paths, I think you'll discover a preferable one.

What Exactly Is Wrong? The problem presented by Microsoft's domination of the computer industry is complex and will likely have a complex solution, something you've probably guessed because no proposal has yet made sense to everyone. The issue defies attempts to encapsulate it in sound bites, so please indulge a more thorough discussion.

U.S. laws from the early 20th century classify businesses that hold a nearly exclusive position in a given market as "monopolies." That era saw several such businesses achieve virtual strangleholds on the markets they allegedly served. When competition arose, the monopoly firms would use their powerful positions either to squash it or to assimilate it in moves that predated the Borg by 500 years. Standard Oil, for example, owned railroads, insuring that Standard-brand oil was transported less expensively than any other oil. That gave Standard Oil lower costs and an unbeatable price advantage.

Standard Oil theoretically consisted of several companies, but they acted in collusion as a giant entity to fix prices and eliminate competition. Such a collaboration is called a "trust," defined by the American Heritage Dictionary as "a combination of firms or corporations for the purpose of reducing competition and controlling prices throughout a business or an industry." That's why the pro-competition laws in the U.S. are called "antitrust" laws, even though they're often applied to a single corporation, such as AT&T or Microsoft.

The laws themselves are often debated. Some quote economist Adam Smith, who theorized than an "Invisible Hand" works to guide free markets to optimal positions. If one company becomes too powerful, the Invisible Hand points to opportunities for smaller companies to come in and pick off sales, restoring competition. If no company succeeds in a market, the Invisible Hand is signing that no such market exists. The theory has withstood a few centuries of interpretation and practice, and remains the chief explanation of why a mostly unregulated economy manages to stay afloat so well. Regulations on U.S. businesses are typically social; few firms are told what products they can and cannot sell, and prohibited items are usually banned for social reasons like toxicity or "national security." Since the Invisible Hand usually keeps the economy flourishing, people are reluctant to see a bureaucracy like the U.S. government start regulating commerce.

Proponents of regulation and antitrust laws say this is a simplistic notion. Adam Smith, living hundreds of years ago, couldn't have imagined modern business. Corporations today are commonplace - it takes only a form and a small payment to start one. But they were extremely rare in Smith's day and for a long time thereafter - when Texas became a state, chartering a corporation took a two-thirds majority of both houses of the legislature. Corporations divorce personal responsibility from economic action, and it can be argued this has greatly changed how our economy works. Today, corporations are seen as responsible only to their shareholders. As little as 20 years ago, such businesses were widely - and without much question - seen as also having duties to their employees, the communities in which they reside, and their customers. Today there is little controversy, though much grumbling, if a corporation decides to lay off a few thousand people in the name of higher profits.

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Abandoning older customers in favor of newer ones may not be the best business move, but many companies do just that if the new path leads to higher profitability - how many profitable Macintosh software companies have decided to become more profitable Windows companies? The news is full of lawsuits, boycotts, and other actions against companies that have allegedly sold products they knew were harmful, or engaged in practices which they knew could damage the environment or employee health, simply for higher profits. Exploitation of workers was a staple of Adam Smith's era also, but in Smith's economy, such business owners could be held personally responsible for their actions. Today that responsibility lies with the corporations themselves, and corporations can be punished only economically unless specific charges can be proven against specific people. The buck stops nowhere, and lack of responsibility leads to a lack of social conscience.

That said, there are two key questions in the Microsoft matter:

1. Did Microsoft break the letter or spirit of the U.S. antitrust laws?

2. If they did, should Microsoft be punished, or should the laws be changed?

Is Microsoft Guilty? Judge Thomas Penfield Jackson is currently presiding over a trial to decide that question, but even "guilty" is a loaded word. Microsoft is charged with civil, not criminal, violations of the antitrust laws.

In June, when we first considered this issue in MWJ, we concluded that Microsoft was probably in violation of these laws based on evidence available at the time. The revelations at trial have been interesting, but haven't done much to damage the basic case against the company.

Under U.S. law, a company that holds a monopoly position cannot use that advantage to achieve dominance in another market. A monopoly position by itself is tolerable; public utilities are often said to constitute "natural monopolies" because the infrastructure of power lines and phone cables is impractical, if not impossible, to duplicate. Those utilities can often stay intact at the price of regulation, but sometimes even that isn't enough for regulators, as the 1984 breakup of AT&T demonstrated. It's easy to forget that in 1984, AT&T was pressing to require that all modems be used on business-rate phone lines. Today's competitive market would laugh at such a notion.

Conservative estimates give Microsoft 80 percent of computer operating systems sold today, a monopoly by most standards. For better or worse, companies in monopoly positions are held to stricter standards. If Microsoft tries to use its position as the dominant OS vendor to become a dominant force in another market, the company has broken the rules. It's pretty clear this is what happened with Internet Explorer.

The U.S. Justice Department alleges that Microsoft entered the Web browser market in 1995 because Netscape was talking about Netscape Navigator replacing the operating system. Windows (or Mac OS) would host Navigator, but Navigator would be your gateway to Internet capabilities, from the Web to file transfer to videoconferencing. Historically, Microsoft has made its Big Money on applications like Office and Encarta, with help from server software like BackOffice and Windows NT Server Edition (the one bundled with lots of Microsoft's servers). Windows is now posting lots of revenue for Microsoft, but it's unclear how the company accounts for the servers that are technically applications but sold with Windows NT Server Edition as "platforms." Microsoft software often does well because it takes full advantage of the latest advances in Microsoft operating systems. Microsoft Office 95 was available when Windows 95 was released, providing benefits like long file names to frustrated Office users. If Microsoft became "just another developer" writing Internet software to specifications set by Netscape, they'd lose a major competitive advantage, and that was not acceptable to super-competitive Microsoft.

So they created an Internet strategy that involved not only moving applications towards Internet standards and providing servers for those standards (a smart move few people would question), but also creating a Microsoft Internet browser to provide Microsoft's own layer of "middleware." If the Internet did become the next operating system, Microsoft wanted it to be their Internet. They wanted the standards for multimedia to be Microsoft standards, not QuickTime. They wanted people to write ActiveX controls to add on to a browser's functionality - not Netscape plug-ins or OpenDoc parts or Java applets. They wanted standards invented in Redmond and incorporated in Microsoft applications, not some third-party technology that another company knew better.

This is all healthy competition, an area the government normally wouldn't touch - but it didn't stop there. Microsoft also allegedly decided to use its position as the supplier of Windows to force its Internet software into customer hands. The Department of Justice (DOJ) claims that Microsoft required Windows licensees like Compaq and Dell to include the Internet Explorer icon on all systems or risk losing the right to distribute Windows. The DOJ further alleges that Microsoft initially refused to allow PC makers the right to include Netscape Navigator or any other Web browser with PCs equipped with Windows 95, and that Microsoft coerced Internet service providers into preferring Microsoft Internet software by providing priceless marketing exposure within Windows for those who cooperated and denying it to those who stuck with Netscape.

Early evidence released in the trial supports some of these claims. David Colburn, AOL's senior vice-president of business affairs, has testified that Microsoft approached the company to make Internet Explorer the browser of the AOL software - specifically asking "How much do we need to pay you to screw Netscape?" Microsoft points to other documents in the AOL negotiations emphasizing the technical merits of Microsoft's software - how it competes with Netscape. But the government's claim is not that Microsoft's browser works poorly, it's that they tried to use a monopoly position with Windows to dominate the Internet software market. In that sense, the AOL testimony was particularly damaging, because Colburn was not swayed from his claim that AOL chose Microsoft's technology because it was the only way to have AOL's client software included on the desktop of every copy of Windows 95.

<http://www.usdoj.gov/atr/cases/f2000/2045.pdf>
<http://www.mercurycenter.com/business/microsoft /trial/breaking/docs/colbur102798.htm>

Other allegations say Microsoft used similar tactics with ISPs - unless they agreed to promote Internet Explorer, restrict distribution of Netscape Navigator, and try to convert users to Microsoft software, they wouldn't be included in Windows 95's built-in software for signing up new Internet accounts. In each case, Microsoft is accused of using the power of owning Windows to push Microsoft Internet software into the hands of people who may or may not have wanted it. Few people will purchase a program when a free version does almost everything they need. If you doubt this, think of how many email users you know who have never purchased a commercial client like Claris Emailer, Eudora Pro, or Bare Bones Mailsmith. Microsoft counts on this strategy to increase market share; recent figures show Microsoft Internet Explorer now has anywhere from 40 percent to 55 percent of the browser market, up from nothing in 1995.

The Joy of Bundling -- Microsoft, in part, defends against these allegations by saying Internet Explorer is part of the operating system. The Justice Department says Internet Explorer is an application, just like Microsoft Word or Netscape Communicator or Riven. As such, Microsoft's inclusion of the browser in Windows 98 is bundling, and anything that's bundled can be unbundled. Microsoft rebuts by saying Internet Explorer functionality is built into Windows 98 and used by many parts of the operating system; the Internet Explorer "application" is just a shell that puts an application wrapper around core Windows 98 capabilities. Trying to rip out those capabilities would be as disastrous as trying to remove the Apple Event Manager from the Mac OS.

The Internet Explorer functionality is increasingly contained in what Mac OS users know as shared libraries (called dynamically linked libraries, or DLLs, to Windows folk). The Windows version of Internet Explorer calls those libraries to do the majority of its work. Other parts of Windows 98 use those libraries as well, as do a growing number of applications (for example, Eudora Pro 4.0 for Windows can use those libraries to render HTML-formatted email), so unbundling them is not an option for Microsoft. That's why the company maintains that the government's demand to remove the "shell" application is misguided, since the bulk of the Internet Explorer functionality must remain in Windows 98 for it and other applications to work properly.

So is it bundled? Not in a traditional sense. Microsoft is to be commended for adding more Internet functionality to the OS, since the media continues to emphasize how the Internet is increasingly important to Every Single Person in the World. Removing the Internet Explorer shell doesn't solve the problem, and neither would the government's belated request that Microsoft should bundle Netscape Communicator with Windows 98. Communicator is now free in response to Microsoft's free browser, so Microsoft would incur no cost for the bundling, but the company's resistance to the suggestion shows how deeply Microsoft is out to control the middleware layer Netscape threatened to dominate just two years ago.

Before we surrender Microsoft to the DOJ's legal wolves, however, it's important to realize that this isn't a simple case of one company bullying others. The outcome of Microsoft's antitrust trial promises to impact the rest of the industry as well, and we'll look at that in part two of this article.

[Matt Deatherage is the publisher of MWJ, an acclaimed subscription-only newsletter for serious Macintosh users. Those who sign up this week for a free three-issue trial subscription can still receive MWJ's Mac OS 8.5 special edition, the most comprehensive coverage of Mac OS 8.5 available anywhere.]

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