Antitrust Protectionism

Best evidence that the merger between Microsoft and Yahoo will increase competition?

Publicly, Google came out against the deal, contending in a statement
that the pairing, proposed by Microsoft on Friday in the form of a
hostile offer, would pose threats to competition that need to be
examined by policy makers around the world.

Here’s an Open Letter on Antitrust Protectionism (pdf) that I drafted nearly ten years ago during the Microsoft trial.  It’s still relevant today.

Comments

How much longer before most people realize that anit-trust laws are the most counter productive laws on the books? Anti-trust laws effectively criminalize doing business, trying to increase your market share, and thus bring the whole range of business activity under the government's yoke, so they can extract contributions and cater to rival businesses. For anyone to still believe the idea that these rules have anything to do with consumer protection takes a massive amount of trust in the benevolence of government.

Is this obvious? It seems to me that many IT markets have been winner-takes-all. If that's true, we may face a choice between a market with niches dominated by Google and Microsoft and a market where Microsoft dominated most of the major niches. In that case, the merger could be bad for Google and worse for competition.

Tom

It's odd that you link to that Antitrust Protectionism PDF that mentions the MSFT/Netscape case given that, in retrospect, it's crystal clear that Microsoft's bundling of Internet Explorer was an anti-competitive move that basically killed innovation in the browser market for a good 6 to 7 years.

Just look at how badly IE stagnated as soon as it became clear that MSFT had "won" the browser war - active development on the product basically ceased. It's still far behind its competitors today (coasting on bundling and a massive installed user base), but at least it's being actively developed. If Firefox and Safari hadn't come into existence, it's likely that IE would still be stuck at version 6 (at least in terms of features, if not in name).

As for MSFT/YHOO - it's clearly a move of desperation on MSFT's part (their online services strategy is entering its 10th year of failure now, so merging is basically a "Hail Mary" play to try to make something happen). But GOOG's response tells us nothing one way or the other about anything, because it's always GOOG's dominant strategy to object. If GOOG thinks the merger will increase competition, then clearly it's optimal to object. But even if GOOG doesn't think the merger will increase competition, they should still object just to tie up YHOO and MSFT in additional red tape while the courts sort it out.

Upon further consideration, Alex, are you being sarcastic, or are you just being incredibly dense? Perhaps an example will explain the extreme fallacy in your logic:

Best evidence that granting the entire search engine market to me will increase competition:

Publicly, Google, Yahoo, and Microsoft came out against a deal that would legally grant 100% of the search engine market to a single unnamed private individual living in the San Francisco Bay Area, contending in a statement this legislation, proposed by that individual on Friday, would pose threats to competition that need to be examined by policy makers around the world.

Now, the YHOO/MSFT merger may or may not increase competition (I tend to guess not, since MSFT's online division is extremely incompetent, and any attempt to merge it with YHOO's totally different technology will be a multiyear headache, so they'll probably just both die even faster). But the argument you give tells us absolutely nothing - you might as well just have said "I think the merger will increase competition because the sky is blue!"

The sad thing is that you really have to have some pretty good computer science chops to understand the tragedy of the MS monopoly.

It takes some architecture skills to understand how their infrastructure limits the shape of innovations.

MS can say they innovate (and they do, within their framework), but most people don't see their framework.

(For the comp sci folks in the audience, this might be a blast from the past ... Rob Pike on why systems software research does is irrelevant. (PDF))

Ed C,

All the data I've seen shows that during the existence of Standard Oil, output rose steadily and price continued to fall, firms and refiners that couldn't remain profitable in that environment were bought out and those assets were then back to being productively employed. At the same time, Standard Oil was spending money on research and development to make new products and find new uses for oil. If their competitive advantage came from being able to negotiate with rail roads, that still doesn't change the fact that this was the organization that was able to get the most value out of a barrel of oil. Same with Alcoa in the 50's, they continued to increase output year after year, and the price of Aluminum continued to drop. And its true that there were no other aluminum producers that could match alcoa, and Alcoa wasn't worried about other aluminum producers, but they were worried about plastics, so Alcoa continued to get more efficient and more productive. They got broken up too.

There is no doubt that MSFT knows how to work the patent and copyright system, and there is no doubt that real reforms are needed in the digital age, but just because one government law package is screwy doesn't mean that another screwy government law package can unscrewy it.

I agree with Scott.

"It is important not to get hung up on the number of firms in the industry when determining monopoly status. It should be more about productive outputs, innovations, pricing, and firm behavior, it should be about outcomes."

Is the consumer suffering? That's the question to ask before any government intervention takes place. I like the point that several niches exist where Microsoft fails to perform. With the exception of its XBox Live and Windows Live (which both pale in comparison), what online success can Microsoft offer in comparison to Google. Google no doubt knows this and could have brought about this accusation just to slow down the process. Microsoft in the past did have monopolistic control over several niches of the industry and in a lot instances still does, but not all are controlled by the beast.

My biggest worries however are mentioned in the article:

“The potential concern would be that Microsoft, if it acquires Yahoo, could do on the Internet what it did in the personal computer world — make technical standards more Microsoft-centric and steer consumers to its products,† said Stephen D. Houck, a lawyer representing the states involved in the consent decree against Microsoft.

Perhaps this isn't the case...

Let's not forget to give credit to the consumer. Firefox was created as a response to Internet Explorer's inadequicies and consumers used the product. Mac seems to be gaining more and more of a foothold. And how can we forget all the attacks against Microsoft that scared so many people into considering Linux as an operating system?

As a computer science guy, I like a lot of what Microsoft does. They've done well with both XBoxes (although the 360's red light problem was an issue, it was no worse than the PS2's disk read problem). The Windows 2000 and XP operating systems were very stable and great for the average user when compared to the alternatives (which were pretty terrible). Vista didn't launch well at all, which cost Microsoft market share. I still don't use Vista; I have no reason to.

Lets face it, OS/2 was terrible for your average user. Linux is still terrible for your average user (I don't want my mom using a case-sensitive file system). Competing operating systems for the desktop market would, in my opinion, also be terrible. Sure they can try to conform to the same specs and have compatible software, but we all know how well many supposedly compatible products work together. Maybe today, with more people doing test-driven development and the overall higher quality of software, we could see some things work. But 10 years ago, I'm not so sure. Your average user doesn't want to mess with the issues associated with running different sorts of software on different distributions of an OS.

The fact that there may not be much innovation in OSes and file systems is great and all, but the market doesn't serve the innovator necessarily. The market serves the customer, and your average customer wants a stable operating system with a wide range of available software. He doesn't give a damn about microkernels or journaled file systems; he just wants things to work. Maybe certain innovations help, but I doubt they are as preferred as a mature, stable platform. Gamers, to some extent, like innovation because of their high-performance requirements, but much of that innovation is channeled into consoles which are not bound by the less flexible specifications of PCs.

I'm not trying to defend Microsoft's use of patents or copyrights; I don't know enough about their actions to do that. I don't think Microsoft does a very good job on a lot of things, and their reputation will probably come back to bite them when other OS alternatives become viable. I am trying to defend their near-monopoly in desktop operating systems because I believe that is what serves the consumer best. Don't listen to us computer science guys when we think we know what the market should look like; only the consumer knows that.

At some point I think you just have to trust that the market process has produced a desirable outcome. You shouldn't have to built a swimming pool to prove that a bowling ball sinks, and every business with a lot of market share shouldn't have to prove that things could theoretically be better if it were smaller.

Isn't Grant's argument that the market would favor the first commercial operating system to gain critical mass?

That's exactly what happened.

Network Effects are very strong in computer science, and especially operating systems. And if you really understand the guts of OSes, you can imagine all of the OSes you never saw "built out" or polished for the customer because ... the niche was filled.

To name just one, Distributed Operating Systems promised a system where backup was automatic, and power grew as each new computer was added to your office (or home). Everyone got the cumulative power of the installation, without the rigid distinction of "pc" and "file server" etc.

A few examples were built, and they worked well, but they faded when they couldn't leap from the university.

History is full of "lock in" of course. You may have heard that the screw-in compact fluorescents we buy share the same thread design as an ancient kerosene can. The shape limits their innovation. How did they get that shape? They inherited it from the incandescent bulb. And when a guy in Edison's lab was making the first incandescent he found it easier to cut up a kerosene can he had there, and re-use the cap and spout, than make a set of threads from scratch.

As an engineer I'd like a little more of a "period of flux" for good ideas to percolate before lock-in and infrastructure is decided.

I think in OSes we decided WAY too soon.

"Trying to sell such an internet-capable operating system or device without a browser would be as absurd as trying to sell an automobile without a steering wheel in order to protect the manufacturers of 3rd-party wheels."

We computer scientists sometimes make the pedantic point that an "operating system" does not in fact include any applications. It is the system that allows applications to operate.

Now I get your point totally that a computer system sold today is expected to do certain things.

And it is convenient for someone to bundle all that stuff on one CD. It might have been the computer maker (Dell or HP or Apple) or it might have been a software vendor.

Today Apple does it all, and HP/Dell negotiate a bit with MS about what they can put on their PCs. (A point of the anti-trust case was that some PC manufacturers wanted to bundle Netscape and MS used OS-monopoly to fight it.)

So sure ... expect your computer to do a bunch when you open the box ... but be aware that the consumer idea of an "operating system" is actually a large bundle of operating system, drivers, applications, etc., etc.

We computer scientists sometimes make the pedantic point that an "operating system" does not in fact include any applications. It is the system that allows applications to operate.

Pfft -- even in computer science there's no absolute, objective line between what's part of the operating system and what's an application. In your view is the windowing system part of the operating system? Is the file browser? How about the command-line shell? If not, should all of those be unbundled as well?

In any case, that's all irrelevant to the question of what an operating system is as a *product*, and that's what matters for this discussion.

BTW, I hope plain folk are aware that when MS said Explorer was not separable from Windows they lied, totally.

They didn't. The reliance on the Internet Explorer HTML rendering engine for the help system or as a component with public APIs that could be embedded in third party applications, for example, was perfectly reasonable. Now, it's possible to include that HTML rendering engine in the package but leave out browser shell that contains the HTML renderer. It's possible, but dumb. And even if you do that, you've included most of the browser -- you've just left out the relatively trivial container for it.

A funny thing about search engines is: you could write a better one today, show it to the world tomorrow, and have the whole freaking world using it the day after that.

There's not a more unstable thing to monopolize on the planet.

Cheers,

So Michael Giesbrecht -- why haven't you done it?

A later story:

"But after a brief retort from Bristol's chief attorney Patrick Lynch, who refuted Tulchin's claims, the judge - looking thoughtful - said it was her decision not to dismiss the case and that she would reserve judgment until the court had heard Microsoft's side of the story. With that, she ushered in Redmond's first witness, Jim Allchin. Compared to his grueling couple of days on the stand during the Washington trial, where the government's attorney, David Boies, had shown that an Allchin-approved video testimony had actually been a fake, day one in Connecticut was a breeze. Bristol is promising a lively cross examination tomorrow."

On "they lied", I'd think the video tape they faked before federal court is pretty solid proof.

If Microsoft was trying to claim removing the browser was going to impair performance, that's absurd. But removing the HTML rendering would have screwed up other functions, not because Microsoft was doing shady things, but because an HTML renderer is an extremely useful component (for help, for rendering HTML-formatted emails, etc). And not removing the HTML rendering engine would have meant the browser was effectively there, but hidden.

I'm not defending Microsoft's *conduct* but rather pointing out that, technically speaking, the idea of removing the browser and the ability to display HTML from Windows would have been ridiculous (indeed, every other general purpose operating system and every internet-capable computer or other device bundles these things into the basic package).

History is full of "lock in" of course.

Except that no one has ever identified even one example of a superior good being unable to displace an inferior one due to 'lock-in'.

Which reminds me, there's a new paper by the bundled economists Liebowitz and Margolis. I downloaded it from the Stanford Law site.

I thought of my answer. "Lock-in" as I am using it here is really a dominant design, or a de-facto standard. It's just one that arises by happenstance (or market power) as opposed to by conscious agreement.

Surely there is a body of work on the trade-offs between standards and innovation? The good old NTSC standard allowed an American television industry to grow, but it restricted the ways it could grow.

Windows is similar to NTSC in this regard. Once in place, it allowed the PC industry to grow, but it restricted the ways it could grow.

For more on this see James Utterbeck and Clayton M Christensen on innovation, or David Bank's book "Breaking Windows":

on Page 71: " ... Inside Microsoft, such sacrifices were known as paying the "strategy tax." "I agree that making sure applications are primarily on Windows is something we have lost site [sic] of," Gates wrote ... "

odograph,
That is a very interesting assertion. I'll have to think about it a bit, but my
first reaction is that we can't see the dog that didn't bark ... if you get what I mean.

I agree, but it doesn't necessarily follow from that that we should break up businesses that DO get "locked-in". The theory that maybe some new products would come out if you destroy the market share of the current one seems like a pretty shaky reason to break up a company with reasonable customer satisfaction. When those new shiny OSes you mentioned never saw the light of day, your average user was still trying to figure out how to send an email.

I don't think its clear that mitigating strong network effects is necessarily good for consumers or producers, although I admit to not having read any papers on the subject.

If you want innovation, I think you just have to look beyond the desktop sector (although I'm not familiar enough with OS technology to know if Linux and SunOS are really that innovative).

Trying to sell such an internet-capable operating system or device without a browser would be as absurd as trying to sell an automobile without a steering wheel in order to protect the manufacturers of 3rd-party wheels.

So you agree that bundling is important and that MSFT leveraged its Windows monopoly to gain an unfair advantage in the browser market. Good.

There was never a time when bundling Internet Explorer killed off the competition.

If MSFT considered the rotting corpse of Netscape (which, incidentally, was not called Firefox back then - it was called Phoenix and Firebird) to be serious competition, why did they effectively cease active development of IE?

More generally, you can't claim that bundling isn't an important competitive advantage unless you want to claim that Bill Gates is a complete moron. Because if bundling isn't an important competitive advantage, then why would he drag his company through years of lawsuits and billions of dollars of settlements when he could have defused the primary government argument by simply unbundling the damn browser?

It's one thing to argue that there are costs and benefits to anti-trust regulation and that you think the costs outweigh the benefits - that I can respect. But it's absurd to take the view that it's ALL costs, there are NO benefits, and it could NEVER be the case that a company is leveraging its monopoly to eliminate competition in other sectors (even when it obviously is). That's just crazy fanaticism.

The Windows 2000 and XP operating systems were very stable and great for the average user when compared to the alternatives (which were pretty terrible). Vista didn't launch well at all, which cost Microsoft market share. I still don't use Vista; I have no reason to.

Lets face it, OS/2 was terrible for your average user. Linux is still terrible for your average user (I don't want my mom using a case-sensitive file system). Competing operating systems for the desktop market would, in my opinion, also be terrible.

OS/2 was vastly superior to Microsoft's primary operating systems at the time (DOS/win31, win95 and win98). It was Microsoft's monopoly power, Microsoft's profits and market network affects that prevented a much superior product from prevailiong. Even today eComStation, OS/2's successor, it much more stable than Microsoft's OS. www.ecomstation.com

Microsoft continues to skew the market to lockin Microsoft products. Open Source software and Linux would be much more widely used if not for numerous obstacles Microsoft has thrown out. Microsoft's purchase of Yahoo is a twofer. If helps it compete with Google and since Yahoo owns the Open Source, Zimbra email client server that competes with Microsoft Outlook/Exchange, Microsoft can kill another Open Source competitor.

For clarity:

"Yes, I am ambivalent about what I'd [] do if I held immediate power to [break up] MS right now. I think the proper number of pieces is 4 (os, application, developer tools, extras inc xbox), but I'm [not sure] it matters [at this late date]."

Better, standards based, computing is possible. And interestingly this is the battleground for MS (and IBM).

QNX was an excellent MS/DOS alternative. It did real-time multitasking years before MS, and with a smaller footprint. I'd be very surprised if the "scrutinizers" considered it though.

Basically Patrick, I think it is reasonable to expect that some standards (de-facto and intensional) were as good as they could be, but that it begs incredulity to take an extreme - that either "all" or "none" of them were substandard.

The world does not contain that kind of absolute.

Because if bundling isn't an important competitive advantage, then why would he drag his company through years of lawsuits and billions of dollars of settlements when he could have defused the primary government argument by simply unbundling the damn browser?

Why did MS fight so hard? Seems pretty obvious. First because a web browser is a fundamental element of a desktop operating system. It wouldn't be too much of an exaggeration to say that the rest of the crap exists to enable the user to connect to the internet and browse the web. If you had a computing device that could do *only* that it would still be pretty useful. But a desktop computing device without that ability would be severely crippled.

Second he fought so hard because it was clear that the browser was becoming, if not *the* application platform, then at least A critically important application platform. Microsoft, you may have noticed, is in the platform business.

Lastly, MS fought so hard because of the precedent it would set. If MS was not able to add new categories of functionality to its operating system as the computing world evolved, it's operating system would increasingly become a boring mass of software plumbing (which, BTW, is just what MS's competitors hoped for -- and continue to hope for -- in pushing for all the anti-trust activity).

"Why did MS fight so hard?"

Ah Slocum, you aren't evil enough ;-)

If MS had a real browser monopoly they could have forced a roll over to MS web servers (extending the monopoly again) and wiped out the UNIX market once and for all.

(Beyond that though, you should focus on what the Windows-using computer companies could have delivered. They had options, and certainly would not have had to deliver "browserless" computers to their customers.)

OS/2 was vastly superior to Microsoft's primary operating systems at the time (DOS/win31, win95 and win98). It was Microsoft's monopoly power, Microsoft's profits and market network affects that prevented a much superior product from prevailiong.

No. OS/2 was originally a Microsoft product and then a Microsoft/IBM joint product. At the time Windows 3.0 was released, there were relatively few Windows applications, and Microsoft had nothing like monopoly power in the graphical interface computing market.

Windows 3.0 knocked out OS2 for the simple reason that it required far less memory to run at a time when computer memory was quite expensive. (For a short while, before the messy divorce, IBM and Microsoft jointly declared that OS2 was for computers with lots of memory and Windows 3.0 was for computers with limited memory).

Also, although there were not very many Windows applications, there were a few important ones (PageMaker, Excel). OS2 was different enough from Windows that it wasn't trivial to create OS2 versions -- so at the time Windows 3.0 was released, OS2 cost more to run and had fewer applications. OS2 also had worse device support and was initially tied to the 286 rather than 386 processor which, oddly enough, made it much worse for running DOS applications than Windows (which could run multiple virtual DOS sessions). Windows was certainly messier than OS/2, but it did more and ran on cheaper computers, and that was enough.

The "breakup" section of this wiki page is pretty good:

http://en.wikipedia.org/wiki/OS/2#Breakup

odograph,

Certain cards (ATI's, if I remember correctly) tend to run better on OpenGL, while others tend to work more efficiently on DirectX. Many of the games I've seen use OpenGL (such as any using id's Doom 3 engine) run just as well as would be expected of a DirectX game. A few years ago, I know Linux OpenGL performance was behind Windows, but that may have changed. I don't think there is any evidence of Windows hampering the OpenGL standard, although you'd probably have to talk to graphics programmers to really know. The guys from EA I talked to were XBox 360 devs, so they may have been biased (incidentally, they also remarked on how much they hated developing for the Playstation 3).

It would be a massive mistake for MSFT to sabotage OpenGL. If they did, some gamers (who tend to be computer-savvy) might abandon Windows altogether. Although I really don't know if they could. Graphic languages seem to be collections of matrix operations. I don't think there are many ways to optimize that sort of thing for different OSes (beyond thread handling).

...once can easily make the case that the alternative is better on purely objective grounds. But that doesn't mean anything to an economist because we don't know how objective measures map into preferences, short of simply observing whether a consumer chooses one good or the other.

You are correct. However, the U.S. v. Microsoft fiasco was based exactly on that conceit; i.e. the government--relying on dubious scholarship--WAS ABLE to make that judgment.

What Liebowitz and Margolis showed was that the claims of the Paul David-Brian Arthur-Gary Reback axis were wrong. There were no examples of superior products 'locked out' due to network effects. And, that possibility, is the entirety of the theoretical case against Microsoft.

There is also an extensive professional literature documenting the superiority of the Dvorak keyboard, Betamax, etc. Whoop dee do.

If you'll bother to read the papers I linked to, you'll see that those papers have been exposed as exceptionally sloppy scholarship.

"How do you explain how we went from black and white television to color, or from vinyl 33-1/3 rpm records to CDs, from the VCR to DVD? There were network effects at work there too."

There seem to be some feature-barriers (probably a better way to say it) that force a change. Sure. Nothing is absolute.

As it happens I said to my peers a few years ago that Windows had the future until such time as we hit something that they couldn't do, some feature they could not import. So far they have been doing ok. The most recent hurtle has been video integration, but everyone has done that "good enough."

Said the guy who did a http post over tcp/ip ... heck, powered by 110v.

There are no absolutes, and dominant designs can lose favor, but they enjoy a strong position. As long as they can do their job adequately they may not be displaced by something that is merely better.

I'm no comp-sci geek (I type with two fingers), but I think of Windows the way I think of electrical outlets and cable jacks. The benefit to the consumer comes from the uniformity that a monopoly provides. A million great software programs on the market does nothing for me if they are incompatible with my computer. I would argue that a uniform OS benefits most software developers by providing a stationary target and easy mass distribution.

It is a hard process

Every success is based on continuous efforts. It is not possible be done over nigh.

It's a total creative writing class trick, but for once it doesn't come off as such

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