Economics of Networks

"AT&T" breakup for Microsoft doesn't compute

Editorial in the Star-Ledger, November 19, 1999
By Nicholas Economides

After the recent ruling against declaring Microsoft a monopoly, the computer giant must face the grim possibility that it will be broken apart.

Some say this may not be that bad and point out the success of the breakup of AT&T. However, a number of key differences make it very likely that a Microsoft breakup, besides harming Microsoft, would harm consumers and the computer industry.

AT&T was broken into the long-distance company that retained the AT&T name and into seven regional operating companies that each remained a regulated monopoly in local telecommunications. Competition in long distance has been the great success of deregulation, resulting in plummeting prices and huge consumer benefits.

But would a breakup of Microsoft be comparable in terms of consumer benefits? The answer is no.

First, the companies are quite different. In 1981, AT&T was a 100-year-old company with many layers of management. For historical reasons, the local phone companies within the old AT&T, such as New York Telephone, were managed separately from the "long lines" division. It was not difficult to separate the divisions since they functioned in many levels as separate companies. And AT&T's rigid management structure and abundance of managers helped it avoid managerial problems in the breakup.

In contrast, Microsoft is a young, entrepreneurial company that is run by very few top executives (about 20), and its divisions are very fluid. This makes it flexible and efficient, in fact, one of the most successful companies of this century. If Microsoft is broken up, it will have significant managerial problems, and its flexibility and efficiency will be severely reduced.

Second, the industries are different. Telecommunications companies are regulated as public utilities. In the 1930s, all phone companies were forced by the government to interconnect so that anyone could place a call to anyone else. It was an accepted fact that the phone companies coming out of the AT&T breakup would stay interconnected and calls would flow back and forth between them.

In contrast, baby Microsofts are not guaranteed to produce compatible software products. In fact, it is almost a certainty that, within a few months after a Microsoft breakup (say into three identical parts), each baby Microsoft would be producing its own "improved" Windows, which would be incompatible with the Windows of the other two baby Microsofts.

Some software vendors would write programs that would be compatible with each version of Windows, while others undoubtedly would not. For consumers, this would inevitably reduce the range of software that would be compatible with their computers.

I urge the Justice Department and the state attorneys general to consider the huge losses to consumers before demanding a breakup. After all, antitrust law exists to guard the interests of consumers.

NOTES: Nicholas Economides is a professor at New York University's Stern School of Business.

Etc. BOX: A Microsoft breakup, besides harming Microsoft, would harm consumers and the computer industry.

Send me comments at: NECONOMI@STERN.NYU.EDU

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