IT'S HARD to believe that Bill Gates could have a bad day. If you're the richest guy in the world, a leading technological mogul who is sitting on a corporation with a nearly half-trillion-dollar market value, it's tough to fathom much of anything that could ruin your financial afternoon. Try having all of your life's hard work crumble before you. And not just fall apart because you are competitively inept - no, your empire will crumble because a third party sees your industrious pursuit of technological excellence as predatory.
That's exactly what happened when District Court Judge Thomas Penfield Jackson handed down his findings of fact Nov. 5 in a 207-page document detailing how Microsoft is a monopoly that used its power to limit competition, to dominate the market, and to eliminate competitors altogether. All of these, ruled Jackson, are tantamount to a decrease in consumer welfare.
Jackson erred in his findings on many accounts. The crux of his findings - that Microsoft used its monopoly power in an anti-competitive, anti-consumer manner - is inherently flawed.
Jackson, along with the Department of Justice, is confusing extreme competitiveness with anti-competitiveness. Microsoft is not a corporation that rests on its laurels. It innovates to stay competitive, and that's in the consumer's best interest. Its success is not the result of unfair or predatory tactics. Rather, it is the product of skill, foresight and industry. They created a superior operating system and hence have a dominant share of the market. That's not wrong. That's fair.
In a personal interview, Kenneth Elzinga, professor of economics - and consultant for Microsoft on two antitrust matters unrelated to the Department of Justice's case - pointed out an interesting contradiction. Classical economist Lord Hicks observed that: "The best a monopoly profits is a quiet life," meaning that monopolies don't need to worry about improving their products or appealing to consumers. Au contraire: They can content themselves knowing that their products will be bought by consumers at very high prices because there is nowhere else to buy them. Yet, Elzinga observed: "Microsoft does not have a quiet, relaxed life-type culture." The Microsoft Corporation is always improving, rarely slowing down, and generally committed to progress.
The Department of Justice cited Microsoft's refusal to integrate Netscape Navigator - and instead developing its own Web browser - as a key element of its antitrust case. This doesn't amount to exercise of monopoly power. Elzinga further commented: "I'm always suspicious that a new entrant is the monopolist. Netscape was the incumbent. How do you enter a market where the marginal cost [the price of using Netscape Navigator] is zero? Well, Microsoft did it in a pro-consumer way." That is, they gave away their browser for absolutely no cost - which is as pro-consumer as it gets.
Additionally, Judge Jackson failed to acknowledge nuances of the software and electronics industry. It is such a dynamic industry that long-term growth is impossible unless Microsoft continually innovates. For instance, take Windows 3.1. It was followed by subsequent versions of Windows - Windows 95, then Windows 98 - and all within the span of just a few years. What this implies is that Microsoft maintained its lead on the other companies by tirelessly upgrading its products. Because any competitor who comes along with an improved product is a challenge to Microsoft, it is clear that Microsoft's advantage isn't sustainable in the long run without maintaining product superiority.
And this perpetual updating of products is in the best interest of the consumer. Take Windows 95, for example. Unlike an automobile whose value is ever depreciating, Windows 95 affords the same benefits whether used in 1995 or 2010. So when new and better products are offered, all it does is add to consumer choice, and perhaps even drive down the market price of an older product, all of which benefit the consumer.
But somehow, Judge Jackson saw Microsoft's dominance in the PC market as stifling its competitors. That, too, simply is untrue. Apple and Linux are viable competitors, but if Microsoft creates a better product, it should not be punished. Doing so would set a dangerous precedent. It sends the message that you should innovate, but up to a point. That is, if you become too successful, watch out, because then your competitors - accompanied by the government - are going to get you. That is a surefire way of discouraging entrepreneurial ability.
Judge Jackson has been perpetually unfriendly to Microsoft, whereas the appellate courts consistently have favored the unfettered market. This was Jackson's attempt to finally stick it to Microsoft, but his economic analysis was superficial.
(Jeffrey Eisenberg's column appears Tuesdays in The Cavalier Daily.)
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