Two sides of capitalism

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Judge Kollar-Kotelly has the unenviable task of deciding whether Microsoft’s antitrust settlement is in the public interest. If only she could focus more on the pluralism of markets.

This story is as American as apple pie. It begins in California, in 1994. Jim Clark, already absurdly rich from his success at Silicon Graphics, is in search of the new new thing. He sees the potential of making the internet available to dummies. The best browser had been written by a student at the University of Illinois, Marc Andressen. Clark hired Andressen and his friends, rebuilt the browser from scratch, and settled the inevitable law suit with the University of Illinois.

The new product, Netscape Navigator, spreads like wildfire. Partly because it is given away. This doesn’t seem like a great business model, but these are the heady 1990s, and people are beginning to think that old-fashioned concepts like revenue and profits don’t matter any more. What matters is share of mind. And Netscape certainly has that. At the time of its IPO in 1995, Netscape has earned less than $20 million of revenues since inception. The market values the business at $2.2 bn.

Microsoft was notoriously slow to grasp the significance of the internet. But Netscape certainly grabbed a share of mind of Redwood executives, who feared that browsers might threaten Microsoft’s dominance. They were probably wrong.

The issue hinges on whether a browser could become something called middleware, which would free applications development from the operating system. Navigator never achieved that.

But in any event Microsoft launched a browser, Internet Explorer, which did much the same as Navigator, was pre-installed, and was free. From then, Netscape was dead in the water. It was selling plumbing systems to someone who has bought a new-built house. You have to persuade them to rip out their existing new plumbing, or have a second set of pipes for special occasions.

Although Navigator’s market share went into steady decline, Netscape stockholders didn’t do too badly. AOL bought the business for a sum that was still twice the ludicrous price at which Netscape had been floated. No doubt it seemed a good idea at the time. Many things did in 1999.

And there the story might have ended had Microsoft’s competitors not majored on it in their complaints to the US Department of Justice. The DOJ accused Microsoft of monopolising the market for operating systems for personal computers, and of acting to exclude competitors to protect that monopoly. The case was heard before Judge Thomas Penfield Jackson. Since the basic facts of Microsoft’s dominance and Microsoft’s actions were known and hardly disputed, Judge Jackson found Microsoft guilty. An attempt to negotiate an agreed settlement failed and the judge ordered that Microsoft be broken up.

It is not often that a district judge sees the most expensive attorneys in the country gathered in his Court, and Judge Jackson clearly enjoyed his moment in the limelight. Jackson talked expansively to journalists, sharing a joke in which he likened Microsoft to a mule and himself to its trainer. The joke clearly loses something in the retelling. It went down particularly badly in the Court of Appeal. Although that Court actually upheld the main charges against Microsoft, the appeal judges disqualified Jackson retrospectively. This effectively annulled the remedies proceedings.

By now, the apparent victory over Microsoft was turning into defeat. The Supreme Court refused an early hearing of the issues (this was a setback for the government because Microsoft was content to let the case meander for ever through the US legal system). And George W. Bush, who had shown marked lack of sympathy for the case, had become President.

And so the Court is sitting again, with a different judge, to accept the government’s surrender. Judge Colleen Kollar-Kotelly has the duty of deciding whether the settlement agreed between most of the parties is in the public interest. It would be a brave judge who would decide that a proposal backed by the US government and Microsoft damaged America. Judge Jackson was both brave and foolish. It is unlikely that his successor will be either.

The Microsoft case divides the American public – the Department of Justice has received 32,000 third party submissions. For one camp, the company is the standard bearer of American business, which has made its shareholders and employees rich by delivering exciting new products to a mass market. For others, Microsoft is a ruthless monopolist, determined to destroy its competitors and any innovation but its own. Since both these accounts are substantially true, the debate continues.

But the real debate is not, ultimately, about the details of operating systems and the practicality of middleware, about how the computer industry should evolve. These issues are important but they are issues to which nobody knows the answers. Not Bill Gates, nor Jim Clark: not George Bush, or the Supreme Court: not the many economists and computer geeks who have provided paid and unpaid testimony on each side. And it is simply ridiculous to ask Judge Jackson to pronounce on how desktop icons should be arranged.

The real debate is about the nature of a market economy. It is between those who believe that the success of capitalism is due to the pluralism of markets and those who believe that it is due to the wisdom of business people. Did markets beat planning because Bill Gates was smarter than the deadbeat who chaired the Politburo’s committee on the future of the Soviet computer industry? Or did markets beat planning because no one – not even Bill himself – has the capacity, or should ever have the authority, to determine the future of an industry?

The history of personal computing, and of other markets, suggests that there is something in both hypotheses. And that there is more truth in the second hypothesis than in the first. And if you believe that, you will want to stiffen Judge Kollar-Kotelly’s resolve.

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