Article 12 of 54
Financial Post: Editorial
Why three Baby Bills is worse than two
(c) National Post 2000. All Rights Reserved.
On Wednesday, Judge Thomas Penfield Jackson invited government
attorneys to draft an even more sweeping proposal for breaking up
Microsoft. But a split -- whether into two Baby Bills, three or more --
isn't the way to increase competition. Judge Jackson's zeal seems
destined to hurt consumers, the very constituency antitrust law seeks to
Last month, Judge Jackson found Microsoft liable for monopolizing the
operating-system market by tying its Internet Explorer browser to
Windows and by attempting to monopolize the browser market. The Justice
Department recommended splitting Microsoft into two pieces: an
operating-system company focused on Windows and an applications company
selling other software.
In Wednesday's hearing, Judge Jackson demanded a new proposal that
considers a three-way breakup. A vertical three-way breakup would place
Explorer in a stand-alone company, separate from a Windows company and
an applications company. A horizontal three-way breakup would split
Microsoft into three identical pieces, giving all intellectual property
to each of the three. A third, hybrid proposal would combine elements of
both of these, resulting in five new companies -- an applications
company, an Internet company and three competing operating systems
companies. The Justice Department is supposed to submit its revised plan
Yet there are signs that even the government is worried about going
too far. When asked by Judge Jackson why it hadn't considered a
three-way breakup, the government's lead attorney, David Boies, replied
that such a remedy would have "time-consuming and disruptive effects" on
Microsoft and on the industry as a whole.
That's exactly right. And despite Judge Jackson's best efforts, any
breakup is unlikely to increase competition. Justice's original two-way
breakup plan was premised on the hope that an autonomous applications
company would create a new operating system to compete with Windows. But
more than 70,000 applications run Windows, creating what the government
calls an "applications barrier to entry" in the operating-system market.
However capable the new applications company, it still wouldn't be able
to single-handedly create a successful rival operating system.
Separately, even with a new applications company's support, Microsoft's
biggest operating-system competitor, Linux, is unlikely to become a
serious desktop threat to Windows.
What a breakup is likely to do, however, is raise prices. Microsoft's
main "anti-competitive" actions -- giving away Explorer or selling
Windows at low prices, in order to sell other Microsoft products -- have
only helped consumers. After a breakup, none of the new divisions of
Microsoft will have any reason to subsidize each other, but will be
forced to sustain independent development costs. The breakup is
therefore laying the groundwork for the Baby Bills to exercise their
market power and increase prices.
This problem becomes even worse with a three-way vertical breakup. A
browser company would have to charge for its product -- something
Microsoft currently doesn't do -- making Internet access more expensive.
If a vertical breakup is a bad idea, a horizontal division would be
even worse. Under this scenario, each Baby Bill would begin producing
its own "improved" version of Windows. It is unlikely these systems
would be compatible with each other. Some software vendors might write
programs that worked with all versions; others might not, greatly
reducing the range of consumer software. Such incompatibilities would
also hurt shareholders, since the combined value of the Baby Bills
probably would be smaller than that of the original company. The
situation would also be a nightmare for corporate technology
departments, which would struggle for years with the new operating
systems until one becomes dominant.
Some breakup supporters point to the successful 1981 dismantling of
AT&T as reason for splitting Microsoft. It's true that, since the AT&T
breakup, long-distance prices have fallen, but the AT&T and Microsoft
cases are very different.
The various parts of the old Ma Bell empire were managed separately,
so it wasn't hard to separate them. There are no such natural divisions
within Microsoft. AT&T also had an abundance of managers to help cope
with the breakup. Microsoft employs only about 20 senior executives;
wrenching them apart could cause huge managerial problems. Finally, AT&T
was a regulated utility and the companies emerging from the breakup were
guaranteed to stay interconnected. In contrast, the Microsoft breakup is
likely to lead to incompatibilities and further loss of efficiency.
The government hasn't yet demonstrated that other "remedies" or
punishments wouldn't work. Why is it not enough to impose "conduct"
restrictions on Microsoft, for example limiting its ability to sell
different products as a bundle? Such restraints may involve harder
implementation work for the government, but they will not be as damaging
A Microsoft breakup is likely to cripple the company and create huge
losses for both consumers and the economy. In his desire to enforce
antitrust law, Judge Jackson needs to remember just who it is he's
trying to help.