TO HEAR BILL GATES and Microsoft partisans tell it, antitrust chief Joel Klein is a wild-eyed radical, determined to destroy the capitalist system by making success and bigness crimes. If not a radical, Klein is a reactionary, they say, in the grip of antique economic doctrines forged in the age of steel, oil, and heavy industry, but not applicable to the new infotech age that Bill Gates has ushered in. Microsoft would have us choose between Gates — the innovator, self-made billionaire, and benefactor to the world’s consumers — and Klein, a bureaucrat who never met a payroll and has the bureaucrat’s innate hostility to successful captains of industry.
It’s an appealing story line, but utterly misleading — Klein doesn’t fit the part for which Microsoft has cast him. A shrewd advocate, he is not insensitive to the public relations aspect of the war in which he is engaged, as I came to appreciate over lunch with him recently. He has an earthy charm (his unrealized dream was to be a Knicks point guard) and an engaging (to this writer) remnant of an accent and speech style honed on the streets of new York. More important, Klein is no anti-capitalist ideologue. Consider a decision that very nearly cost Klein his job — his failure to move against the gigantic merger of Bell Atlantic and Nynex, two Baby Bells too much in a hurry to grow up to do it the old-fashioned way, by providing great service at competitive prices. Klein says it was a close call, but that he was not convinced by those who argued that these two telecoms companies would have ended up competing if they had not been permitted to merge. An anti-big-business type would have had no second thoughts about challenging this merger.
Revealing, too, is the fact that Klein’s hero, the man who had the greatest influence on his approach to legal issues, was Supreme Court Justice Lewis Powell, for whom Klein clerked. On the court, Powell was the epitome of a conservative member of the establishment, a Virginia lawyer who approached each case on its merits, examined the facts, and wrote well-reasoned decisions. Among these was the famous Sylvania decision in 1977, which allows manufacturers to restrict sales of their branded products to a single franchised dealer in an area. Powell in effect legitimized a form of marketing that eliminates competition between sellers of, say, Sunbeam appliances in a specified geographic region — if doing so would promote Sunbeam’s competition with other brands. It is difficult to imagine a decision that brought greater satisfaction to the business community than did Sylvania in its day. In short, Powell is hardly the man that an anti-business ideologue would select as a hero.
Nor, it should be noted, is Judge Robert Bork, who Klein delightedly notes has enlisted in the anti-Microsoft camp (after reviewing offers from both sides, I am told, with the spurned Microsoft offer the more lucrative). Bork’s choice of sides should give pause to those who have attacked Klein for threatening to deprive us of the efficiencies Microsoft claims to have produced in its own industry: He is the most elegant advocate of the position that (to quote the epilogue of his classic, The Antitrust Paradox) “the goal [of antitrust] is maximum economic efficiency.” Klein’s delight in having Bork on his side is, of course, in part strategic: Bork is a powerful advocate, and his approval of Klein’s action is of considerable value in the public-relations battle that is accompanying the courtroom battle. But my impression is that Klein is uncomfortable advocating positions the intellectual content of which he finds questionable, one reason many say he prefers his present job to his former position trying to chase down Whitewater documents as deputy counsel in the White House. Bork’s support has raised his comfort level in the Microsoft case quite considerably.
The Gates vs. Klein fable, besides being misleading on the level of personalities, also misconstrues the nature of the antitrust laws. Their purpose is not to humble and cut down to size businesses that get too big. True, at times over the past century a bigness-is-bad philosophy may have held sway in the Justice Department’s antitrust ranks. There have been intellectual lapses, too — notably a failure to understand that certain business practices that seemed on surface examination to be anticompetitive were, in fact, designed to encourage competition and innovation. But antitrust decisions based on bad economics, or on hostility to business, have been the exception rather than the rule, especially in recent years.
The theme of these decisions is that bigness is fine, so long as it is obtained by means consistent with the law, and that the market power of the firm must be considered in deciding which tactics are permissible. Just as the criminal law distinguishes between Mike Tyson’s fists (lethal weapons) and mine (no serious threat to anyone, even when deployed in anger), so does antitrust law draw distinctions about competitive tactics. A hardball contract used by a newcomer to ease its entry into a market might not lawfully be available to an incumbent with substantial market power. That makes good economic sense, as one goal of antitrust policy is to preserve ease of entry while at the same time preventing a dominant firm from using muscle rather than skill to maintain its market position.
Economists, of course, disagree about whether these principles have been correctly applied in specific cases. No surprise — there is no more reason to expect economists to agree on these cases than there is to expect them to agree on monetary or fiscal policy, the art being what it is. But few except those on the libertarian fringe would disagree that, where markets fail to operate competitively, the government is bound to do one of two things: It can regulate prices and entry, substituting the long arm of government for the invisible hand of Adam Smith, or it can restore the vigor of competition through antitrust enforcement that prevents conspiracies and the use of anticompetitive practices by firms with market power.
That is why so many conservatives are supporting the Justice Department in its action against Microsoft: They know that if Microsoft is permitted to extend its monopoly of personal-computer operating systems into areas in which it has no plausible efficiency claims, there will inevitably be a call to regulate it. And we know that regulation introduces huge inefficiencies, not least among them a tendency by regulators to protect those they are supposed to restrain. If you don’t like regulation, you must like competition, and if you like competition — of the sort that allows the product with the combination of price and quality that most appeals to consumers to win pride of place in the market — it is hard not to see merit in the complaint that the Justice Department has filed against Microsoft. If Bill Gates thinks the Justice Department might stand in the way of further innovation by Microsoft, wait until he meets a regulator who is intent, not on opening up the channels of competition and then departing the scene, but a red-in-tooth-and-claw regulator who will poke his nose into every cranny of Microsoft’s business — forever.
I leave it to the lawyers to argue over the details of the 53-page filing against Microsoft by the Justice Department. What strikes an economist who has labored in the antitrust vineyards for decades is the lack of novelty in this complaint. The Justice Department says that a firm with monopoly power in one market cannot be allowed to leverage that power so as to dominate another market in which its product faces competition. Nothing new there, even though the doctrine is being applied to a firm that is attempting to wrap itself in a New Age hi-tech aura so as to suggest that what’s sauce for the industrial goose is not sauce for the software gander.
Market capitalism is supposed to reward those who produce goods that consumers want, at prices they are prepared to pay. If Microsoft thinks its Internet browser is better than rival Netscape’s, it should put that to the test of the market, not tie its browser to its monopoly operating system. Indeed, internal Microsoft memoranda suggest that the company knew its browser had no chance in open competition with Netscape, and that it could only succeed if computer makers who wanted to license the Windows operating system — the de facto industry standard — also had to promote the Microsoft browser. Opposition to tie-ins like this is standard antitrust economics, which raises four pertinent questions:
P Are we dealing with separate products? Right shoes and left shoes are not separate products, copying machines and the paper they use are. So are browsers, which are sold separately from operating systems in your neighborhood computer store.
P Does the seller have market power? With some 90 percent of the operating-system market, and an ability to impose onerous contract terms on equipment manufacturers too fearful to complain, Microsoft clearly does.
P Is the dominant seller tying the sale of its competing product to its monopoly product? So it seems. If an equipment manufacturer wants to get Microsoft’s operating system, it must take the browser.
P Is the effect of all of this to lessen competition? That would seem self-evident, in two ways. Equipment manufacturers have a major incentive not to use other browsers, since they are forced to take Microsoft’s, and Microsoft is given control of the on-ramp to the Internet.
Even Microsoft’s defenders concede some of these points, but they argue that any cure would be worse than the disease. Not so. Actually, there are three available remedies. The courts could eliminate the anticompetitive clauses in Microsoft’s contracts with equipment manufacturers, leaving them free to select the mix of software that they think will appeal to consumers. If the manufacturers all end up favoring Microsoft products when no longer compelled to do so, my guess is that Klein would be surprised but content to live with the judgment of the marketplace. In any event, there would be nothing new in a remedy that focused on eliminating anticompetitive contract terms. Or particularly damaging to Microsoft’s long-term prospects: It is already easing the restrictions it has traditionally placed on manufacturers such as Compaq and Gateway, presumably in response to the pressures it now faces from the antitrust authorities.
Or the courts might decide to treat Microsoft’s operating system as an essential facility that should be made available to all software providers on terms equivalent to those available to Microsoft. Again, nothing new there. Owners of essential facilities such as electric transmission lines and airline-reservation systems have similar obligations.
Or the courts might separate Microsoft into its component parts, with the monopoly operating system spun off, and operated as a profit-maximizing company with no incentive to discriminate in favor of any company’s software products. That’s what happened to the Bell System, with all of the advantages consumers have since reaped. And that is what is happening in the electric industry as competition is introduced.
These remedies, of course, await a prior finding that the evidence amassed by Joel Klein’s lawyers is convincing. The public interest will best be served if that decision, one way or the other, is made promptly, which in antitrust terms means during the next two years. Which brings us to the final nightmare conjured up by Microsoft: an interminable trial (such as that inflicted on the parties to the IBM litigation of the 1970s), costing the taxpayers millions and diverting resources that Microsoft would otherwise devote to innovation.
Odd that the company’s publicists should bemoan that their client is about to become a prisoner of a slow-moving system of justice — while Microsoft’s legal team petitions Judge Thomas Penfield Jackson to delay the start of the trial. Fortunately, Jackson has heeded the cries of Microsoft’s lobbyists, ignored the pleadings of its lawyers, and insisted on an early (September) trial date, not as early as the Justice Department would have liked, but early enough to signal the court’s determination to avoid a repetition of the 13-year-long IBM trial.
So we may, after all, enter the new millennium with a healthy, competitive software industry. That would be an industry in which entrepreneurs wake up every day with the salutary fear of being crushed, yes — but by their rivals’ superior products, not by overweening market power.
Irwin M. Stelzer is director of regulatory policy studies at the American Enterprise Institute.
