Microsoft Act III – What Remedy will the Doctor Prescribe?

By Peter Kelman, Esq.

This article appeared in substantially the same form in Mass HighTech, May 10, 2000.

Judge Penfield Jackson, the presiding judge in the Microsoft antitrust case, now confronts his most difficult issue.  His Court must fashion a “remedy” to cure the harm caused by Microsoft’s monopolistic practices.  The Justice Department has recommended that Microsoft be “split” into two separate companies.  But will that solve the problem that got us here?  Or would court ordered corporate mitosis merely create two smaller monopolies where there had once been one?  Before suggesting a remedy, let us first trace the historical roots of today’s dilemma.

Five years ago a home computer costing $2,500 might have included the following configuration: a 66MHz 486 or early Pentium processor, 28.8K modem, 600 megabyte hard drive, basic sound and graphics cards, and perhaps an internet browser – all operating under Windows 95.  Fast forward to the present.  Every component is either substantially faster, bigger, better or cheaper except the operating system.  While Microsoft has upgraded its operating system to its current version of Windows 2000, it lacks the order of magnitude of improvement present in the other components of a computer.  In fact, some computing experts take the position that the Windows operating system has degraded over time.  Carter Browne, president of CBCS Consulting of Boston, says that while he could recommend Windows 95 to corporate clients, he has trouble recommending Windows ’98 – he thinks it is just too buggy and crashes too much.  Traditional antitrust analysis examines price control as the sine qua non of a monopolistic power, but that does not seem to be the real dimension Microsoft abused.  Rather it is product quality, or lack of it.

Microsoft’s monopoly position as the supplier of desktop operating systems is not the result of either brilliant scheming or Machiavellian contracting.  Rather it was created by a marketplace that needed a standard platform on which to run applications.  If not Microsoft, then some other corporation would have emerged as the supplier of the computer platform of choice.  Ask the CIO of any company that tried to maintain dual platforms for both Windows and MacIntosh operating systems in the 80’s and early 90’s.  It was a nightmare.  Windows created the de facto standard for running desktop computing applications.

Microsoft’s leverage comes from the fact that it is the only company with the know-how to modify and enhance Windows.  Using perfectly legal mechanisms (copyright, contracts and trade secret law), Microsoft has protected the Windows operating system source code with a cloak of lawful secrecy. Legal commentators, like Jonathan Zittrain of Harvard Law School, have persuasively argued that our intellectual property laws should change to prevent a company from keeping code secret for so long.

Microsoft deserves recognition for emerging as the victor in a once crowded operating system field.  The key imperative before Judge Jackson’s Court is not how to break up the best of breed, but how to recreate a competitive environment conducive to improving Windows.  Breaking up Microsoft would not accomplish this, since Windows would presumably remain the well-guarded property of one of the resulting companies. But how to best do that?  Who should receive the code?

The Windows operating system pervades our electronic economy; it is a fixed resource of the workplace.  Just as the government has done with other fixed resources, like the spectrum for transmitting data, the government should conduct an auction of the Windows source code.  Auctions come in many different varieties; Jackson’s Court should determine the details.  Probably more than one bidder should receive the rights to the code, with the marketplace determining the value of Windows. Who should get the proceeds from an auction?  Perhaps some combination of Microsoft and the companies it has harmed.  Or perhaps Microsoft should be required to place some portion of the auction price in a fund to benefit third parties.  Again, that is for the Court to decide.

To develop a truly competitive environment, in which multiple companies compete as players in the operating system arena, one other issue must be addressed.  As any service company knows, a slogan for success is “It’s the people, dummy.”  No matter how important a product may seem, it is the people behind the product who create value.  To disclose Windows source code without providing access to the people who wrote the code would unfairly maintain the balance of power in Microsoft’s favor.  Assuming that Microsoft, like most technology companies, has asked its employees to sign non-competition agreements, the Court should void these agreements.  This would make available to Microsoft’s competitors those employees who are the genius behind the code.

A judicially supervised auction of Windows source code would have the effect of placing the power to improve the product in the hands of more than one company.  As we all know, competition breeds improvement.  This approach is consistent with what Bill Gates has asked for all along, namely that Microsoft be left intact to create a better product.  Now the motivation to improve would come from competition within the marketplace, not from a personal vision.  The judiciary would be spared the unenviable task of deconstructing a behemoth the marketplace created.  Competition would make Bill Gates once again a prophet: as he says in Microsoft’s ironic new television campaign, “The best is yet to come.”

Copyright 2000, Peter Kelman.  All rights reserved.