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Three-way split offers best remedy to Microsoft monopoly

Published Sep. 27, 2005

If you've doubted whether Microsoft is a monopoly that needs to be broken up, consider this previously unreported fact: Microsoft's after-tax return on invested capital, the best measure of a firm's profitability, was a stunning 88 percent last year. This means Microsoft was 13 times more profitable than other major U.S. corporations.

That's the headline from a "friend of the court" brief just filed by four top economists led by Robert Litan of the Brookings Institution, which adds that "this is the most impressive ... demonstration of the economic returns to monopoly that we have ever seen."

Since experts agree (and savvy users know) that Microsoft's products are not superior to those offered by others, these outsized rates of profit are proof of Microsoft's market stranglehold, and the best measure of how profoundly consumers have been overcharged, even as technological advances have driven prices down generally.

Unfortunately, these rates of profit are also proof of the government's economic ignorance, since this simple yet seminal analysis wasn't offered by the Department of Justice during a lengthy trial. Such a striking omission hardly inspires confidence that the feds are now going to get the fix right.

Indeed, the Justice Department's proposed remedy for Microsoft _ splitting it into a Windows operating system company and a second applications software firm _ also ignores an obvious fact: The Windows monopoly would be left intact.

But Microsoft's abuse of the Windows monopoly was the reason for the antitrust action in the first place. How can any "fix" leave it in place?

Litan and his colleagues (Roger Noll of Stanford, William Nordhaus of Yale and Frederic Scherer of Harvard) call instead for Microsoft to be split into three Windows operating systems companies, plus the software applications firm.

"This would introduce immediate price competition in operating systems," Litan told me. The government, by contrast, would basically pray that Microsoft's software side will want to adapt programs like Word and Excel to work with other operating systems, so that Linux (now used by a handful of techies) could become a serious rival to Windows. This is a weirdly indirect and uncertain way to end a monopoly that hurts consumers now.

That's not to say the economists' approach comes without risks. First, there's the fear that three separate operating system firms could undermine the standardization that Microsoft fairly cites as an industry plus.

Litan believes there would be "very strong incentives for the (three mini-Windows) companies to remain compatible" in the near-term. New features, like voice recognition, could easily be added to Windows in modular fashion.

"Over time," Litan adds, "if you ended up with divergence, it would be market-driven divergence," in which innovation is dictated by competitive forces, not by Microsoft's decision to leverage the Windows monopoly to vacuum up another industry sector.

To be sure, splitting Windows into three firms is more complex than dividing Microsoft into its existing business units. The personnel issues alone _ which baby-Windows gets which star engineers? _ are daunting. But AT&T's tricky breakup in the 1980s also brought cries that the sky would fall. The result has been lower prices and faster innovation.

That Bill Gates has an attitude problem with such concepts has been clear since the decision on Microsoft's monopoly first came down, when The NewsHour With Jim Lehrer discussed the ruling with antitrust chief Joel Klein. Instead of sending Gates or CEO Steve Ballmer on its behalf, Microsoft dispatched its deputy general counsel.

You could see Gate's imperial reasoning at work: this was The United States vs. Microsoft, after all. Bill Clinton sits atop one litigant, Bill Gates atop the other. Janet Reno is Bill Clinton's general counsel, Gates' plainly reckoned, meaning that an appearance by her deputy Joel Klein merited a response by a Microsoft deputy general counsel.

That decision tells you all you need to know about Microsoft's epic arrogance.

The Justice Department is privately thrilled with the economists' "three Windows" proposal, since it makes their own remedy look less Draconian. But Judge Thomas Jackson has the discretion to craft a fix that goes beyond what the government has urged. If ending the Windows monopoly isn't at the center of his thinking, what will have been the point of this whole messy saga?

Matthew Miller is a syndicated columnist based in Los Angeles.

Matthew Miller; distributed by Los Angeles Times Syndicate