Acton Commentary

Too Successful For Our Own Good? The Case of the Microsoft Corporation


Rumors in Washington have it that government lawyers reached a consensus on a breakup scenario for Microsoft. The corporation would be broken up into at least two distinct “Baby Bills”–one responsible for the Windows operating system and the other for software development. Although the U.S. Department of Justice officially denies these rumors, momentum in the case is clearly toward a government-imposed restructuring of the computer giant. But is there a need to breakup Microsoft? Has the company really become too successful for our own good?

“Big” in business is often taken to mean bad: bad for the consumer, bad for innovation, and just plain morally wrong. This sentiment had early roots in the Social Gospel movement in the late nineteenth century and also in the Populist movement, which both shared a negative evaluation of the American economic system: private property, the profit motive, corporations, and competition. The Sherman Antitrust Act of 1890, a culmination of the crusade against economic concentration, made it a crime to “monopolize, or attempt to monopolize” an industry. It is under this act that Microsoft stands today under judgment.

Empirical analysis conducted over the last several decades by Robert Bork, Yale Brozen, William Bowman, Harold Demsetz, George Stigler, and others has overturned the conventional wisdom about “bigness” upon which the Sherman Antitrust Act was first based. Leaving aside businesses buying special influence with politicians and then using the power of the state to gain an unfair competitive advantage, the success and even the dominance of a company often reflects nothing more than a superior ability to meet consumer needs. Charges of “monopoly,” therefore, can easily degenerate into envious attacks on success.

Consumers regularly discipline businesses, big or small, failing to satisfy their needs. Prices are a compromise reached between a producer and a customer. As long as everyone remains free to decline the terms of an exchange, all parties are given an equal chance to arrive at mutually beneficial arrangements. When such an arrangement cannot be reached between parties, for whatever reason, an exchange will not occur. Consumers instead take their dollars elsewhere in search of a better deal, thereby creating an incentive for the business to improve its performance. This is the very basis of a free economy founded upon voluntary exchange.

Economic concentration need not be bad for consumers. In fact, it can increase productive efficiency, the single most important factor contributing to consumer welfare, by taking advantage of economies of scale that permit a company to better serve its customer. Big businesses that fail to take advantage of economies of scale slowly die. The Supreme Court has repeatedly cited Bork’s book The Antitrust Paradox to support this conclusion. The real test of the legitimacy of “bigness,” according to the law, therefore, revolves around whether consumers are actually harmed by a firm’s success. As David Evans, senior vice president at National Economic Research Associates, recently asked about Microsoft: Where are the bodies?

It is beyond dispute that Microsoft has been a dominant force in the information technologies industry. Its innovation with Windows has revolutionized how the world computes. Most users of Apple and IBM-compatible computers choose the Windows platform, leaving many of Microsoft’s competitors, and often now the loudest proponents of the antitrust case, lying in its wake. Even U.S. District Court Judge Thomas Penfield Jackson acknowledges in his Findings of Fact that the “inclusion of Internet Explorer with Windows at no separate charge contributed to improving the quality of Web browser software, lowering its cost, and increasing its availability, thereby benefiting consumers.”

Consumers continue to choose the Microsoft platform over its rivals because they believe that it best meets their needs. A recent poll conducted by PC World magazine shows three-quarters of Americans believe breaking up Microsoft would be a mistake for the country. On what basis, then, do the Justice Department and state Attorney Generals challenge such overwhelming support for Microsoft products among American consumers?

Microsoft unfairly stifles competition and innovation, they argue, thereby harming the consumer. But this claim depends entirely upon crystal ball predictions and flies in the face of the innovation found in each new version of Microsoft Windows and Office. No one was able to predict the decline of IBM as a computer maker at the time the latest antitrust suit was first filed by the Justice Department against IBM. No one could have predicted that Steve Jobs and Steve Wozniak, working in their parent’s garage, would create a computer that would soon shoot Apple Computers to the top, overtaking IBM. Nor could they predict the meteoric rise soon after of IBM-compatible computers and eventually of the Windows platform. Lawyers at the Justice Department cannot accurately predict the future of the market. If they could, they would be working on Wall Street, not at the Justice Department.

What remains clear today is that innovation and entrepreneurship remain vibrant in the high technologies industry. The development of server-based technology in response to the Windows platform is just the latest innovation. Netscape, Microsoft’s main “victim” according to the Justice Department, was acquired by America Online (AOL) last year. Then, earlier this month, AOL and Timer Warner announced a merger. AOL Time Warner will now operate a platform, similar to the Windows operating system, accessible over the Internet and capable of offering a plethora of applications to the user. This technology soon promises to rival Microsoft and, along with Sun Microsystem’s Java and the growth of the Linux operating system, underscores the highly dynamic and competitive nature of the high technologies industry.

Consumer welfare, again, has not been harmed by the success of Microsoft. A new generation of server-based platforms, spurred on by the success of Windows, actually promises a future of continued advances in consumer satisfaction. But what happens to the consumer upon the breakup of Microsoft? A study authored by Stan Liebowitz, an economist at the University of Texas at Dallas, on behalf of the Association for Competitive Technology suggests that it would cost consumers an additional $50 to $310 billion over a three-year period just on additional software. It is wrong to impose such weighty loses upon the American and world consumer and, in the process, allow a monopoly judgment by government lawyers to trump the subjective choices of millions of consumers.

A key component of the Social Gospel and Populist movements of a century ago was a concern that the economic needs and interests of common people be served. History has shown that economic freedom under the rule of law addresses those concerns better than a system that punishes those who are especially successful in serving others.