Acton Commentary

Microsoft: A 'Monopoly' for the Consumer

Consumers in New Mexico benefited recently when their attorney general announced she planned on settling her state’s suit against Microsoft. Spurred in part by a federal appeals court’s recent ruling in favor of Microsoft, New Mexico Attorney General Patricia Madrid commented, "This matter is now ripe for a speedy resolution...It is time to settle this case and move forward." Other states that joined the suit against Microsoft would be wise to follow New Mexico’s lead.

If encouraging entrepreneurial innovation and affirming consumer choice are the goals of the state attorneys general, freedom—not a litigious government—is needed. The Quaker philosopher and statesman John Bright said, "[W]e ought to realize that trade should be as free as the winds of heaven." The New Mexico decision affords Microsoft the freedom—at least in that state—to continue making products at the demand of the consumer.

We must remember that the biblical theme of justice extols us from favoring one side over another unfairly, regardless of size or stature. Yet it appears that the government’s case against Microsoft is the result of "knock down the successful" thinking.

The antitrust suit against Microsoft was brought in May 1998 and consumed almost 80 days of courtroom testimony over nine months. The direct costs to all litigating parties were tremendous, but the Institute for Policy Innovation projected that the suit would cost America $147 billion of the Gross Domestic Product over a 10-year period. In retrospect, was the suit worth it? Was the government’s case directed toward a greedy monopoly or toward a successful company that consumers preferred?

The word monopoly is a pejorative term that has come to describe an entity that has virtually total control over a product, market, or industry. Such power allows the monopolist to restrain competition and/or extract prices higher than the price that would be present under free competition. Unnatural monopoly power frequently comes about as the result of corporate mergers, or, somewhat ironically, government-imposed barriers to competition (such is the case with the U.S. Postal Service).

In the case of Microsoft’s operating system, however, its dominant position was attained by unique innovation and subsequent improvements and by shrewd marketing strategy. Unlike other monopolies that have been pursued successfully by antitrust suits, Microsoft did not attain its position by merger and acquisition; it simply provided a product that was preferred by consumers over other products. In the process, everyone benefited by a uniformly accepted operating system that facilitated the development of compatible software by the whole computer industry. How would the personal computer industry have developed—and how quickly—without the original DOS and subsequent Windows operating systems? What would the cost of software have been for consumers?

These are points that should be addressed when weighing the unfavorable symptoms associated with a monopoly. Normally, monopolies are considered undesirable because they extract high prices and stifle competition and innovation. Microsoft, however, continued to lower prices of its product and carried out rapid innovation. Consumers recognized these desirable outcomes. According to a Portrait of America poll in December 1999, only 12 percent of Americans wanted to see Microsoft broken up.

Prior to the Clinton administration’s antitrust suit against Microsoft, there had been little activity by the government in this area since the AT&T case in 1988. The government had been less interested in company size and the structure of an industry and more interested in the impact on competition, productivity, and pricing. While there was still concern about horizontal mergers, more lenience was allowed for technological innovations by leading firms—even if such innovation caused a dominant position in relation to weaker competitors. Emphasis was given to strengthening the competitive vigor of U.S. industry at home and abroad. More concern was given for economic and technological impacts and less concern for social and political purposes of antitrust law.

So even if we assume that, under these conditions, Microsoft did have a monopoly in its operating system, what was the effect on consumers? They paid ever-decreasing prices for a product that had more and more technically desirable features. Even the bundling of the browser with the operating system proved to be a convenience with no price increase, and competitive browsers continued to flourish. In contrast, the Postal Service, which has a government-sanctioned monopoly for first-class mail granted by Congress, is noted for its inefficiency and slow innovation. It has also raised prices twice in 2001 with no free-market forces allowed to check the increasing price trend.

For what else was Microsoft charged? The government laid out charges of exclusionary practices including exclusive marketing arrangements for original equipment manufacturers, content providers, independent software vendors, and even Apple Computer. Surely, business has a duty to behave properly toward consumers and competitors. Why not use the Golden Rule—do to others what you would have them do to you?

The government and Microsoft should actively seek to reach an agreement outside of court, similar to the New Mexico deal. Nothing is to be gained by continuing litigation. Other states’ attorneys general, who reputedly scuttled the tentative agreement worked out by Judge Posner, unfortunately are less sophisticated in antitrust matters and must be encouraged to agree to the settlement.

The government’s message to successful entrepreneurs such as Microsoft is "be careful that you are not too successful or we will seek to destroy you." This type of action costs both sides billions of dollars—with taxpayers and consumers paying for the lawsuit. It is time to change that attitude. Should not the government be more concerned with its own inefficient and ineffective monopolies such as the post office and public schools, to name just two of many? It is time to rein in the bloated bureaucracy and let the efficient free market do many things now relegated to the government. The New Mexico settlement with Microsoft is a good first step in that direction.