Dateline: 05/25/98
Updated: 11/06/99
Friday the U.S. federal court declared that Microsoft is a monopoly in a preliminary decision. About.com Business Software Guide Steven Gindin has an excellent account of the case. You can also download the complete transcript from the U.S. Government Printing Office.
In my opinion this is a travesty of justice for the reasons outlined in an article I wrote here last May when the government's suit was launched. On this occasion the article is worth revisiting and follows below without amendment. There is an addendum following it updating some aspects of the story.
I should point out that this piece is a strongly worded editorial opinion and not meant to be an objective analysis of the pros and cons of the government's case. It is purely philosophical in nature.
Who can forget the scene in the classic movie, King Kong, where the government with its planes and machine guns tries to blow the giant ape from the top of the Empire State Building. We're all rooting for the gorilla, even though we know he's doomed. What was his crime anyway? He was big! So what!
Today a modern day version of King Kong is playing itself out. This time the gorilla is Microsoft. The government is still the government. And the government is still trying to kill the gorilla (or at least cage it, hobble it or in some other way destroy its ability to function freely.)
On Monday May 18th, the federal government and 20 states filed anti-trust lawsuits against Microsoft alleging the company was denying consumers the benefits of a free and competitive market and that it was trying to extend its "monopoly" on operating systems into dominance of the Internet browsing market.
I put "monopoly" in quotation marks because, in fact, Microsoft does not have a monopoly on operating systems. They dominate the market. They are the chosen operating system of 90% of consumers. But they are not a monopoly. There is OS-2, Unix, Apple's OS and other systems as well.
And even if they had 100% of the OS market, they would be a market monopoly, that is, a monopoly based on consumer choice, not a coercive monopoly. The difference is significant.
A coercive monopoly is one established by legislative fiat. It's a monopoly that occurs because the government decides the market is better served by one supplier and grants monopoly status to the chosen firm. Others are not merely unable to compete because they lack the expertise or the good will of the public, they are unable to compete because they are forbidden to compete. Try and deliver first class mail in Canada and you'll get the feds knocking at your door with a cease and desist order hop quick.
A coercive monopoly is monopoly based on the point of a gun. Refuse to stop delivering first class mail and you will be charged. Refuse to go to court and you will be arrested. Resist arrest and you will taken into custody by force. Defend yourself and you will be shot. Make no bones about it. A coercive monopoly is nothing less than a thug with a gun cornering the market.
A market monopoloy, on the other hand, is based on the voluntary interactions of individuals. Consumers voluntarily choose to buy that particular product. Competition is not prohibited by legislative fiat (by the point of a gun). It is made difficult by the sheer market power (popularity) of its competition. This is not a bad thing. In fact, it is what the market wants.
In their new book, The Gorilla Game: An Investor's Guide to Picking Winners in High Technology (which I will review in this space next week), author Geoffrey Moore explains how a company like Microsoft or Intel or Cisco Systems comes to dominate its particular market. The high tech markets these three companies dominate each started out as an area of new technology completely different from what went before, what Moore calls discontinuous innovation.
Discontinuous innovation involves a paradigm shift, or completely new way of doing things. It involves a massive retooling or infrastructure change. As an example, Moore mentions how "PCs have displaced terminals as the dominant desktop device, which in turn had shoved out typewriters."
He explains how a high tech market develops with first the techies dipping their toes in, followed by the visionaries. The technology enthusiasts have to have every new innovation that comes on the market and they have to have it first. The visionaries are forward looking business executives who see how the use of the new technology can give their own business a competitive advantage. At this stage, the technology is not yet a mass market phenomenon.
In the initial stages of a new technology there are usually several different competitors offering variations on the new technology. As the new technology starts to catch on with the pragmatist herd, one company starts to become dominant, or in Moore's terminology, it becomes the gorilla. Why?
Interestingly enough, it is not necessarily because a company has a better product or better marketing, according to Moore. It is, rather, "a function of the market itself desperately needing to set technology standards to interface all this proliferation of products into the existing infrastructure of systems."
The market grows extremely fast in this stage of development. It enters hypergowth. With such rapid growth, the market can't pussyfoot around waiting for some standards council to make a decision. It automatically adopts a de facto standard and the company with that standard becomes the market leader. That company gets to be the gorilla.
There are other factors that contribute to a company becoming the gorilla as well. One of these is (are you listening, Janet Reno?) a willingness to share - not being the bully! The concept is called open architecture. The reason PCs came to dominate the market instead of Apple Computers is because IBM adopted open architecture. It insisted that Intel license its chip to any and all comers. They let other manufacturers clone their machines. Apple kept everything close to the vest, wouldn't share, and tried to charge higher prices. Even though they were (and many people think still are) the superior machine, the mass market wants cheap and reliable.
Similarly, Microsoft encouraged other software manufacturers to create software that was Windows compliant. They didn't keep the Windows technology closed, but made it open to all comers who wanted to create for the platform. And in the process, they spawned many, many independent software companies.
Isn't it ironic that the U.S. government accuses Microsoft of bullyboy tactics when it is, in fact, its open architecture that made it dominant?
The U.S. and state government's suit against Microsoft is not merely wrongheaded. Not only has this suit the potential to hobble America's greatest and most dynamic company. It is, in fact, pure evil.
It is the product of envious competitors, unable to compete on the open market for the public's favour, asking the government to point a gun at Bill Gates's head (and yours and mine as well) and demand by force what it cannot get from the public voluntarily. If this is not pure evil, I don't know what is.
The anti-trust laws (and the anti-combines law in Canada) are a web of incomprehensible contradictions. There's an old joke about three businessmen in prison. They start talking. One mentions he's in for anti-trust violation. He charged more than his competitors and was charged with gouging the public and profiteering. You're kidding says the next guy. I'm also in for anti-trust violations. I charged less than my competitors and was charged with unfair competition and restraint of trade. The third guy starts to laugh hysterically. Asked why, he tells the other two that he's also in for anti-trust violations. He charged the same price as his competitors and was charged with collusion and conspiracy.
It's no joke. Such a stupid contradictory law is a disgrace in a supposedly free country. The only entity with the power to stop competition is the government (via grants of coercive monopoly). As long as there are no legal barriers to entry in an industry, competition exists even if there is only one company in the industry.
Moore in The Gorilla Game says that, while the power of a gorilla company is immense, it is not immutable. What will destroy such a company's power eventually is simply another discontinuous innovation.
This is, in fact, what is happening to Netscape. It had a virtual market monopoly in browsers, 90% of the market. Microsoft competed, first on price. They gave it away! If Internet Explorer had not been a good product, giving it away free wouldn't have made a dent in Netscape's market. But it was good and it made a dent. Netscape matched Microsoft's price and started giving it away too. The consumer benefited.
What is now threatening Netscape is discontinuous innovation. Microsoft is introducing an integrated Windows/Internet Explorer platform. This will be of tremendous benefit to consumers. Netscape must introduce innovations of its own that make it a compelling buy for consumers. It still has 60% of the market. If it doesn't change, it will be doomed to be a chimp to Microsoft's gorilla in the browser market. And that's just too bad for them.
New companies start up and others go bankrupt every day. That's the nature of a free market. Netscape is no different and ought not to employ the guns of government to save itself.
What are the implications of this suit for Microsoft and for investors? Immediately after the suit was filed, Microsoft's stock dropped 3.8% from 89 7/16 to 86 1/16. Since then it dropped even further to close at 85 9/16 Friday.
When an anti-trust suit was launched against IBM in 1969, its stock immediately dropped 4.4%. It subsequently lost half its value in the following two years, but that was during a severe recession. But from 1982, when the government dropped its suit against IBM, until 1987, IBM gained 250%.
Right now Microsoft is a stock to keep an eye on. If it keeps dropping, look to pick it up at bargain prices. If it settles, it may be a sign that the market has confidence in Microsoft's ability to beat this thing and bounce back. In either case, it's a stock worth looking at and accumulating. I'm planning to unload a couple of losers this week and may buy some myself.
In the meantime, King Kong is set for a battle royal with Govzilla. As with the original movie, I'm rooting for the gorilla!
As noted above, Microsoft's stock dropped slightly after the government launched its suit. And I did buy some, at 83 5/8. Unilke IBM, the stock subsequently doubled and split two for one early in 1999. What the stock will do now is hard to say. The company has come off another record earnings quarter and seems to be in fine shape. But it has been trading in a range between 75 and 100 3/4 since early March, climbing, then dropping, climbing then dropping. Since late August it has traded in a narrower range, between 85 and 97.
Much will depend on how the subsequent phases of the trial turn out. Will Microsoft appeal? Will it cut a deal? Personally, I'd like them to appeal and appeal on principle - namely on the principles outlined in my article above. But that is not likely to happen. Bill Gates is a great businessman, but he is not Hank Reardon, the heroic character from Ayn Rand's Atlas Shrugged who fought an anti-trust action on principle in the novel.
Here's what Reardon said and what I'd love to hear Gates say:
"I refuse to accept as guilt the fact of my existence and the fact that I must work in order to support it. I refuse to accept as guilt the fact that I am able to do it and to do it well. I refuse to accept as guilt the fact that I am able to do it better than most people - the fact that my work is of greater value than the work of my neighbours and that more men are willing to pay me. I refuse to apologize for my ability - I refuse to apologize for my success - I refuse to apologize for my money. If this is evil, make the most of it."
Your opinion: Why not post your thoughts on this case in our Forum. I've started a new thread, Microsoft Ruling a Travesty of Justice
About.com
Coverage of the Microsoft Trial
Info on the Microsoft trial compiled by Economics Guide
John Irons.
U.S.
vs. Microsoft: The Case at a Glance
An overview of the Microsoft case from ZD Net.
Center
Condemns Judge's Finding of Fact in Microsoft Anti-trust Case
Press release from the Center for the Moral Defense of
Capitalism.
Petition to Stop the Persecution of
Microsoft
Please sign the petition in defense of Bill Gates and Microsoft.
The petition linked is for non-U.S. citizens. U.S. citizens sign
here.
CPT's
Microsoft Anti-trust Page
An extensive listing of articles supporting the
government's case from the Consumer Project on Technology, an
organization with close ties to Ralph Nader.
Opening Pandora's Box
An Open Letter About the Politicization of the PC Industry by Dan
Fylstra, co-founder of BYTE magazine..
The Case for Microsoft
Economist David Hendrson defends Microsoft in this article from The
Red Herring magazine.
Why
Microsoft Must be Stopped
Article from Computerworld by Ralph Nader & James Love.
The DOJ's Unjustifiable Inquisition of
Microsoft
A superb examination of Microsoft's position in the marketplace
from the Heritage Foundation's Adam Thierer. He argues that there
is absolutely no evidence that Microsoft is a monopoly and that
it, in fact, only has about 4% of the total software market,
running behind IBM. Lots of charts and graphs in this well
documented article.
Call
to Split Up Microsoft
Article in Computer Reseller News by James Love.
Creative Insecurity
Reason magazine's Virginia Postrel shows how Microsoft
became successful by vigorous competition whereas Apple Computer
blew it by acting like a monopolist.
Antitrust Policy
A site from the Owen School at Vanderbilt University has
lots of resources on antitrust law and cases.
$1 Million a Day
An excellent critique from About.com colleague Mike Griffis on
the DOJ's persecution of Microsoft. Published on the Internet
last October and still vital today. Where my diatribe is largely
philosophical, Mike's is more oriented to a factual analysis of
IE vs. Netscape and the browser marketplace.
Friend of the Devil
Mike Griffis's column above sparked some angry letters to which
he responds here. (Gee, I'm shaking in my boots already!)
Microsoft: Friend of the Devil
Revisited
A follow up to his previous article from About.com colleague Mike
Griffis. Includes links to other articles on the subject both pro
and con Microsoft.
The
Support Group for people Used by Microsoft
A satirical site about the Microsoft imbroglio (for
people with a sense of himour only!)
Break Up
Microsoft
A group opposed to Microsoft.
Attacks Against Microsoft Immoral
Short article from the Ayn Rand Institute.
Anti-Trust Returns With a Vengeance
A superb longer treatment of the whole anti-trust issue from The
Intellectual Activist. Attacks the notion of "perfect
competition" which is the basis for anti-trust legislation.
The
U.S. Government's Assault on Microsoft
An excellent attack on the government's position from Glenn
Woiceshyn, a Calgary-based free-lance writer.
U.S.
Vs. Microsoft: We're Defending Our Right to Innovate
Bill gates' op-ed piece in the May 20th Wall Street Journal.
What
Others are Saying...
A collection of media clippings supporting Microsoft, many with
links to the full article on the Web.
Microsoft
Press Pass
Microsoft's media page at their website. Contains the latest
press releases and archives of previous ones as well as links to
articles of interest.
Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions.
Investing (Canada) Notes
Be sure to check out our new Library category Microsoft, which contains all of the above links and more.
Bulletin Board
Agree or disagree with my assessment of the Microsoft case? Whatever your opinion, be sure to tell the world on our Bulletin Board!