Microsoft vs. DOJ
June 24, 1998

Bill Gates & His Evil Empire
by Louis Corrigan (TMF Seymor)

Imagine you are playing a board game, something like Monopoly. All the players start out on the same footing, but after two hours, one guy clearly dominates. You could keep playing for hours and hours, but this guy will only get stronger while other players fall behind and maybe go bankrupt. Assuming this game could go on indefinitely, would you keep playing?

Of course not. The smart thing to do is start over, find a new game, or, as in three-on-three basketball, mix up the teams. Our game-playing teaches us two things. First, we all prefer fierce competition. It makes us happier, better players because it affords opportunities for innovation and creativity. Second, some games have a tendency to move toward diminished competition, ultimately ending with one victorious player holding monopolistic power. That's one of the great ironies of free market capitalism: It often doesn't work the way ECON 101 textbooks say it should, in part because barriers to entry in some businesses can become insurmountable. For our benefit, then, there are times when a referee needs to step in and change the rules, or maybe even change the game.

That's why Microsoft should be broken up. Bill Gates should be declared "King of the World," and then we should just reshuffle the cards. For starters, consider this: Gates's Microsoft stock alone is worth $51 billion. Even the most devout champion of entrepreneurial capitalism should be willing to admit that Gates is simply too rich. That's even if we give him the benefit of the doubt and assume that he's won the software wars fair and square and has thus earned his wealth.

Now, I know many of you will find this hard to swallow. But let's consider an even more extreme case. Let's imagine that, like Biff in Back to the Future II, Bill has a racing guide telling him which technology horses will win the races for the next 30 years. So he makes huge bets on the horses running the major races (think voice recognition, the convergence of the Internet and TV, the delivery of high-bandwidth Internet access, the ubiquity of handheld Internet devices, and so on). Let's say he accumulates 10% of all the wealth in America... or 25%... or 50%. At what point are you willing to say that he (and Microsoft) controls too much? Even if he doesn't turn small town America into a living hell, there's surely a point where you would agree that Gates's power is a threat to our way of life. If so, then you're actually not philosophically opposed to reshuffling the cards.

The Justice Department charges that Microsoft has engaged in predatory conduct by forcing exclusionary contracts on PC makers that depend on the Windows operating system (OS) -- highlight the Explorer browser rather than Netscape's Navigator, or else! -- and by bundling various products with Windows. That is, the government is charging Microsoft with what we know to be true, that the company has methodically worked to leverage its monopolistic control of the OS to dominate other markets. Then there's the allegation that back in 1995 Microsoft looked at Netscape's dominance of the browser market and offered to divvy up that market with this upstart. That would be illegal collusion of the first order.

While there's no doubt that Gates is a fierce and agile competitor, one shouldn't forget his ambition nor why he is achieving it. In the last two years, Microsoft has acquired some 40 companies and used its billions in cash to make huge bets on virtually every horse racing in every race. It wants to dominate not just the OS market, but the market for applications software and entirely new media and e-commerce businesses. Microsoft has the money for this because it has pricing power in an industry where essentially no one else does. Windows will cost about the same today as it did three years ago. Sure, it has some added features. But when you recognize that the PC that sold for $2,000 three years ago would sell for maybe $300 today (if it were still available), it's easy to see how astonishing Microsoft's market position is.

The government's goal in dealing with Microsoft should be to foster competition, and thus innovation, in areas where the firm's current or future dominance threatens to curtail it. Regulating Microsoft's activity by forcing it to distribute Navigator along with Explorer won't go far enough. After all, the telecommunications revolution only followed the break-up of AT&T. Various plans have been proposed, such as splitting Microsoft into a firm that sells Windows and another that sells applications software, with the Windows unit being required to license its software to cloners who could change it.

However, that plan ignores the software giant's many new ventures. Silicon Valley research outfit SRI International has proposed creating five Baby Bills: an OS company (Windows), an applications software company (Office), a media company (Microsoft Network), a networking company (WebTV), and a fifth outfit including what's left. Breakup plans are obviously messy and somewhat unsatisfying. Yet make no mistake, without serious action today, Microsoft will have greater control over the digital economy than Standard Oil had 80 years ago over the industrial economy when it controlled 90% of America's oil production. We can't let that happen.

Free market extremists will protest that such a move would violate property rights. What these folks willfully ignore is that property rights only exist under the rule of law, and that we determine the specifics of the social contract governing them. For our common good, we determine how much wealth people keep and how much goes to the government to be used on public projects or redistributed. We have laws against price gouging in times of emergency, and we have laws prohibiting wealth-creating activities, such as cocaine trafficking, that we've determined are not in the public's interest.

The idea that Microsoft has some right to act unchecked by the will of the American people is preposterous. Like all corporations, Microsoft exists by virtue of our willingness to allow it to exist. If we want to enforce tougher rules, create new ones, or totally change the game, that's our prerogative. And though only about 30% of Americans currently think we should act to restrain Microsoft in any way, I believe that's because the majority are thus far ignorant of the allegedly unlawful means the company has used to maintain market power and the scope of Gates's ambition to expand that power. If they knew, they would understand the allusions to Darth Vader and the Evil Empire.

Next: If You Can't Beat It, Leave It