Monday, September 17, 2007

EU to Microsoft: "You're too good"

That was the main message to Microsoft today as a European Union court ruled against the US software company in an appeal of its previous anti-trust ruling. Fines and penalties against the company could reach over $2 billion.

Microsoft's crime? Bundling it's music software, Media Player, with its Windows operating systems, and failing to instruct competitors on how to make their systems communicate effectively with Windows. So says the ruling, but the real crime is Microsoft's dominance of the operating system software. From today's Wall Street Journal:

European regulators hailed the court decision as a victory for consumers, who, in the words of Competition Commissioner Neelie Kroes, are "suffering at the hands of Microsoft." Ms. Kroes said she would like to see a "significant drop" in Microsoft's nearly 95% market share in operating-system software.

These consumers who are being hurt, when offered a choice by Microsoft between Windows with Media Player and without, voluntarily chose the version with Media Player. The claims are laughable. Microsoft may have Windows on 95% of people's Intel machines, but this in an era when the operating system is becoming less important and web based application hosting such as Google's fantastic suite are sucking the value (i.e. price) out of bundled operating system packages. Microsoft may bundle it's Media Player with Windows, but that doesn't prevent the iPod and its necessary music player software, iTunes, from dominating the segment. Yes, everyone has Media Player on their Intel machines, but those people who are actually listening to music to any degree are listening to it on iTunes, and their iPods. Microsoft is squelching its competition, at least, the competition that tries to be just like it. But that doesn't mean it can stop any competition whatsoever, as Google and iTunes prove.

And how do our politicians respond to the EU's move? With seeming concern,

The U.S. Justice Department's chief, Thomas Barnett, contrasted Europe's approach with America's. He said that in the U.S., even dominant firms "are encouraged to compete vigorously," while Europe's stance may end up "harming consumers by chilling innovation."

This seeming contrast is nothing but a separate forms of the same principle, that the best corporations are a danger to the marketplace and must be stopped, either by being hamstrung by regulations or stripped of their competitive advantage and forced to compete on "level playing fields". Will the real defenders of capitalism please stand up? They are not in this bunch.

Even Microsoft can't properly defend itself, arguing that "traditional anti-trust tools aren't appropriate for fast-moving technology industries." Implying of course that they are appropriate for slow-moving traditional industries, when in fact, slow moving industries became that way due to over-regulation and anti-trust limitations.

There is only one proper answer here: laissez faire. Monopolies which hurt the consumer, cannot exist for long in a free economy where proper rights are enforced. Microsoft has continued to innovate with new generations of its operating system and yet has still seen its revenues stall, and it's share of components (email, music, etc) of its operating system decrease. And this has not been through the use of regulation, but rather through good old-fashioned competition.

I use a Vista machine and I use Media Player with 3rd party music player. However, my email, photos, blogs, maps, and soon calendar and even documents are hosted by Google. My browser is Firefox, my finance software is Intuit's Quicken, and my picture and video editing are all Adobe Elements. All have Microsoft alternatives, and many are already bundled with Windows. No matter. This component erosion means that Microsoft cannot get the same revenue per copy of Windows, and this shows in its stalling top line growth.

Markets don't fail, and it's time our politicians learned that.


JLH said...

After reading your article and researching antitrust laws over the past week, I too have concluded that the allegations and final ruling against Microsoft are unreasonable and have major implications for the business world. Although I fully support anti-trust legislation when it effectively curbs monopolies, I see it as an impediment to market growth when it is excessively applied. If Microsoft was successfully sued for providing (or “bundling” in the words of the opponents) their customers with a media player option in their operating system, then corporations worldwide need to take note. Apparently the promotion of one’s product over that of the competition’s is now grounds for suing. Apple iTunes will have to be compatible with all MP3 players, Gillette razors will have to hold every brand of blades, and the list goes on. Instead of promoting fair market conditions, these kinds of rulings will only prohibit capitalism. In your article you suggest that the only solution to this problem is “laissez faire” economics because “monopolies which hurt the consumer cannot exist for long in a free economy where proper rights are enforced.” Although I agree that laissez faire is a logical answer, I’m curious how you propose countries to successfully enforce these “proper rights” in the absence of anti-trust legislation. Is there a more effective solution on the horizon?

Kendall J said...

Hi jlh, thanks for your comment.

First off,the laws that prevent coercive monopolies already exist on the books outside of anti-trust. That is, a coercive monopoly must violate rights by force or fraud to maintain its dominant position. Non-coercive monopolies, or companies with a high degree of monopoly power maintain their position by voluntary contracts with their customers and suppliers, and requires them to defend their position therefore by actually being better than their competition. Anti-trust legislation takes aim at monopoly power, as such and in reality is aimed at curbing all monopoly power. This is flawed reasoning.

Two great books I'd recommend on the topic are "The Abolition of Anti-Trust" by Gary Hull, and "Markets Don't Fail" by Brian Simpson. Both cover the flawed concepts that underly anti-trust legislation.

Kendall -