What happens to the personal computer industry after Microsoft's Anti-Trust Trial? Perhaps we should look into history.

Anti-Trust: In the Most Literal Sense

by Del Miller

November 23, 1999

Thumbing through the couple of hundred pages or so of Judge Jackson's "Findings of Fact," I couldn't help but notice the scarcity of such terms as, "perhaps, maybe" or "just a wee bit." In fact, the Judge's findings were so brutally blunt as to leave little doubt as to the form his subsequent ruling will take. If I were in responsible charge at Microsoft, I would take this opportunity to smile real friendly-like, buy lots of people beer and scramble after the best settlement the Department of Justice will allow.

For short of a settlement, it seems clear that the judge will rule that Microsoft is firmly in violation of the Sherman Anti-Trust Act and that he will do so with such unambiguous force that the government will have no choice but to effect mojo-serious housecleaning in Redmond--the sort of housecleaning that has in the past parceled other giants of industry into mere shadows of their former selves.

One way or the other, the Microsoft of today will bear scant resemblance to the Microsoft that will have been fed through the rotating knives of jurisprudence. To envision what that future company will look like and what the effect will be upon the personal computer industry, perhaps we should look at the precedent set with AT&T. Both the differences and the similarities between Microsoft and the old Bell Telephone System are telling.

Monopoly: AT&T Style

Conventional wisdom states that before its 1984 divestiture, the Bell Telephone System was a dinosaur, so painfully inefficient and so monstrously monopolistic that the dynamic, high-tech communications infrastructure of today could never arisen without the government's belated trustbusting. This view, however, implies somehow that AT&T's track record of building the world's finest telecommunications system and its development of some of the greatest technologies yet seen on the planet, were merely the work of an infinite number of pole-climbing monkeys.

The truth is that the Bell System had been a brilliant and tireless innovator since it's inception in the latter part of the nineteenth century. Through acquisitions, mergers and it's own gigantic laboratories, the technology of long distance communication advanced as fast or faster than any other modern technology. While proponents of a Microsoft breakup point to the incredible world of choice available to the public following the AT&T divestiture, these same advocates usually have some trouble naming more than a couple of new services that can be directly attributed to a deregulated environment and, in all fairness, most of the necessary, enabling technologies were not around in ye olden days of the Bell System.

The Bell System, despite its faults, was one of the most remarkably effective organizations in the history of mankind, even under the overly helpful cloud of nearly continuous government oversight. It worked hard for its market leadership and not only pursued it's monopoly with considerable vigor, it did so with an eye to public service seldom found in today's commerce.

By any realistic measure, it provided reliable, universal telephone service at a reasonable price, largely due to: a) The Bell System Standards, a proprietary library of specifications on how to construct a continental scale telephone system, that have been more widely used than any open standard before or since--and by that I include the Windows standard of the PC world, and b) the use of long distance revenues to subsidize the cost of local service--akin to financing one's free internet browser with revenues from one's OS business.

The fragmentation of the Bell System has led to arguably more services available to the public, but this has been at the cost of a bewildering proliferation of standards for everything from connectivity to billing systems--virtual standards that are increasingly tied to the marketing strategies of a thousand different companies.

And while the price of long-distance service may have decreased somewhat, that is largely due to the fact that it is no longer subsidizes local service, the price of which has been buried in monthly statements so utterly complex that nobody knows what telephone service really costs them anyway. The real cost to society of all this discombobulation has never been fully totted up.

People often assume that AT&T's court ordered breakup was a sudden attack on a century old company that had grown fat and lazy over a century of protected, monopolistic leisure. This isn't really the case, however, as The Bell System weathered major governmental interventions into its business practices during every decade of the twentieth century. The government began investigating AT&T for violations of the Sherman Act in 1910 and it became clear to Theodore Vail, then president of AT&T, that the outcome would almost certainly breakup the company.

To avoid this, in 1913 he divested AT&T's considerable interest in Western Union, agreed to buy no more independent telephone companies unless approved by the government, and offered to allow independent phone companies to connect to the long distance lines of the Bell System. Instead of fighting the government in a losing battle, Vail restructured AT&T according to his own formula, achieving his overall aims but in the process eliminating any chance that AT&T would ever be a total monopoly. At the time of AT&T's court ordered divestiture in 1984, it controlled a little over eighty percent of the nation's phones, but that still left room for nearly fifteen-hundred competing phone companies, among them such giants as GTE and ITT.

Is it just me, or might this have been a compelling model for Microsoft as well? Consider that Microsoft owns at least 90% of the OS market, yet the number of viable competitors could easily be counted by a reasonably trained circus pony.

Now any company aggressive enough to damn near corner the nation's telephone market might just have the moxie to defend its turf, and sure enough, AT&T fought furiously against the movement to break it up. It raised its objections with religious conviction and billions of dollars of legal expenditures, but the combined weight and wisdom of the government was brought to bear on the company in a show of technological know-how and business savvy not seen since the late Triassic. The end result was a Solomonesque legal solution that was so far removed from the technological issues involved that the entire matter might as well have been decided by a convention of Avon ladies.

Even so, when Judge Harold Greene finally delivered his decision for divestiture in 1982, AT&T accepted it with admirable grace and committed its enormous resources to making the transition a smooth one. The century old traditions of the Bell System saw the telephone network as a national treasure and worked to protect it even as it was taken from them.

AT&T and Microsoft: A comparison

Contrary to popular belief, the Sherman Anti-Trust Act does not make monopolies illegal, it only forbids monopolies from pursuing "predatory" or "exclusionary" acts to maintain or further the existing monopoly.

In 1907, Theodore Vail determined that, because of the nature of the telephone business, a monopoly was the most efficient way to provide universal service. He felt that government regulation was a viable and not unwelcome substitute for the marketplace, as long as it was "independent, intelligent, considerate, thorough and just." Upon this dubious expectation was founded a sometimes rocky, though generally productive partnership between AT&T and government that lasted until final divestiture in 1984.

While the OS market has features that suggest a monopolistic model might be appropriate, this has never been Microsoft's defense. Microsoft has instead staged rather extravagant fits of kicking, screaming indignation over the mere notion that it might somehow be a monopoly and has condemned any efforts of the government to look into the matter. As a backhanded proof it points to a handful of companies not yet controlled, directly or otherwise, by Microsoft, and argues vociferously that any one of them could rise up on some Armageddon-ish day and usurp the throne. After all, anything's possible.

Using similar arguments, the company maintains that it is not anti-competitive since the personal computing industry is growing fast and innovating wildly throughout the "Windows Everywhere" world. But then, so was the telephone network under the Bell System and look how far that got AT&T. But here we're talking about a different kind of competitiveness, folks; a kind that ties most of the considerable innovation found in the computer business to products that in one way or another benefit Microsoft. In the Microsoft Manifesto of free markets, anyone in the industry is perfectly free to innovate and compete in any way that is compatible with Microsoft's business plan.

Forgive me for my unlawyerly-like view of all this, but the overwhelming shadow that Microsoft casts over the computer industry is so clearly anti-competitive, in effect if not in actual mechanism, that claiming to be otherwise is nothing but a lawyer's word game. Microsoft is not anti-competitive in pretty much the same way that Jeffrey Dahmer was not a vegetarian.

The Rules have changed

Microsoft's defenses during the trial, if I may paraphrase liberally, was, "All the other kids are doing it." Admittedly, the company does have a point; corporations the world over pursue their bottom line with such carnivorous ruthlessness that Microsoft's hardball practices are hardly singular. But what Microsoft fails to realize is that, according to the law, once you become a monopoly the rules change.

At some point, gunpoint perhaps, Microsoft will have to realize it can no longer play according to the Marquess of Queensberry rules but instead it must follow a path similar to that taken by Standard Oil, Carnegie Steel and AT&T. Clearly, limits of one sort or another will be placed on the company, whether through regulation or through divestiture or some combination of the two.

AT&T, at the time of Judge Greene's ruling possessed a tradition of cooperation with the government,. The operation of the phone company had long been tied to hundreds of regulatory agencies at all levels, establishing a protocol that, ironically, was most helpful in conducting the court ordered breakup. AT&T accepted the final decision with commendable grace and devoted enormous resources to comply with the ruling, both in letter and intent.

Microsoft on the other hand, has had the same general response to higher authority as a colicky two year old on a long plane flight. Its previous consent decree against product tying was internally dismissed as an annoyance and flaunted with such hubris that informed onlookers could only observe in amazement. You don't mess with the Feds even if you are Microsoft.

The performance of Microsoft's legal department during the trial bodes further ill toward any palsy-walsy, let's-do-lunch settlement. If rigged demos, eyeball rolling exercises in semantics and a general failure to understand the government's interests don't foul an already questionable relationship I don't know what could. An essential element of a workable settlement is trust between the parties, an element here nearly as abundant as red Kryptonite.

Regulation?

Even if an agreement can be reached and even if it results in a Microsoft that continues under a single umbrella, it will likely be under the terms of a consent decree in which the company will be regulated under some totally unimaginable bureaucracy of the likes found only in Bill Gates very worst, writhing nightsweats.

"But wait," I hear you say, "regulating the operating system industry would be completely unworkable, inefficient and could hardly satisfy the government's stated objective of benefiting the consumer!"

Please remember, however, that this is not only the government we're talking about here, but a hard-driving crew of career-minded, politically motivated, government lawyers guiding this particular process and, historically speaking, their kind's collective sense of the public welfare has always followed an arcane theology of cross-purpose and legal complexity that defies both reason and explanation. Sheer, goofy unworkability in no way eliminates this potential remedy.

Perhaps Microsoft's astonishingly feeble performance in Judge Jackson's court was intentional; a clever ploy to ruin any chance of trust between the parties, making ongoing regulation unpalatable to the government. Just a thought.

Breakup?

Therefore, it seems more likely that the government will follow the same path it did with Standard Oil and ultimately with AT&T--a structural change that breaks Microsoft into independent companies pursuing different markets or even competing among themselves. While the long term impact of such a move can best be predicted via a call to the psychic hotline, some basic trends can be fuzzily predicted.

Any remedy that weakens Window's hold upon the desktop will undoubtedly spark a wave of new and competitive products. The competitive nature of the computer market may even return to the chaotic flux that existed prior to Microsoft's reign, when Lotus, Ashton-Tate, Digital Research, Borland and even Apple seemed to have a fighting chance in the software/OS market.

But the benefit to the consumer would likely be mixed, as it was in the case of the telephone industry. Without the reassuring presence of the Windows standard, the industry will be cast into a sea of unfamiliar choices that are bound to cause the same, general confusion in the market place as headlights do for a deer. Nevertheless, a breakup of Microsoft seems to be the best of some very questionable options.

It has been repeatedly opined that the rate of technological and commercial changes in the PC industry makes any court ordered remedy out-dated at the moment of inception and there is certainly a point to this. By the time that structural modifications in the PC world are implemented the internet may have made Microsoft's position on the desktop a non-issue.

On the other hand, if Microsoft uses its considerable heft in the operating system world to leverage a fortress-like advantage in the networked future we might see the entire Microsoft hegemony repeated. The same scenario could hold true for any number of industries in which Microsoft has already gained a toehold. It is not as if that sort of thing has never happened. A structural change to Microsoft would be the only way to protect the dozens of new industries now rising in the high-tech world.

Tomorrow is another day

Like AT&T, Microsoft's contribution to its own industry is enormous and the exalted market positions achieved by both companies resulted from hard work, raw talent and business acumen. In both cases, this success seems to be ultimately rewarded by an ironic reversal of fortunes at the hands of anti-trust regulators. It seems a shame, but perhaps this is the only practical outcome in a society that values free access to the marketplace.

Without such regulation, the potential for a "Microsoft Everywhere" future is quite real and it would destroy much of the vibrancy of these nascent markets. If regulation or divestiture of Microsoft prevents such a domino effect, then the government's anti-trust actions will be worth every bit of the effort expended.

Besides the benefits there are definite drawbacks as well, and it is doubtful that a breakup of Microsoft, or even a heavy regulatory hand, will, on balance, affect the personal computer industry any more than a hundred different market forces are already doing. But while the Department of Justice might do little to make the PC industry any better, it will likely keep the future of competition from becoming very much worse.

Copyright 1999, Del Miller. All rights reserved.

Del also writes the "Difference Engine" column at www.macopinion.com

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Friday, 10-Feb-2012 02:16:19 EST