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| MICROSOFT BREAKUP? | |
 April 28, 2000  |
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The Justice Department asks a court to split Microsoft into two separate companies.
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Ken Wasche, we just heard it explained in rather technical terms what this breakup is. Fill in the picture for us, for someone who knows what Microsoft offers or uses it, how would the two companies be split and what would each do?
MARGARET WARNER: But they will both each start out remaining a monopoly in its own market, won't they? KEN WASCHE: That won't last very long. I mean, keep in mind Microsoft argued in court that Linux was a formidable competitor. But in the marketplace they argue that Linux doesn't exist on the desktop and therefore they haven't developed Microsoft Office for Linux. The only reason Microsoft hasn't developed Office for Linux is because they're protecting the monopoly and the operating system. The moment they no longer have to protect that monopoly, they'll develop Office for Linux, making Linux a credible competitor on the desktop.
KEN WASCHE: Exactly. So what you're going to see is the operating |
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| Will a breakup help or hurt consumers? | ||||||||||||||||||||
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RICHARD McKENZIE, University of California, Irvine: Absolutely not. I think the Justice Department is proposing to inflict more damage on American consumers than Microsoft ever dreamed of inflicting even if it were the abusive monopoly that it's been declared to be. In my view, Microsoft is not a monopoly. It has demonstrated a fierce competitiveness. And what this proposal proposes to do -- let's be very clear -- is hobble a competitor, somebody who is willing to go out and upgrade its Windows operating system to include a browsing capability and then basically give away that browsing capability. MARGARET WARNER: I'm sorry. But do you agree with Ken Wasche that each of these two Microsoft derived companies will now become competitors?
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| What will happen to Internet Explorer? | ||||||||||||||||||||
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MARGARET WARNER: We've been describing or fleshing out what has been said about these two companies. We haven't yet talked about the Web browser which was behind this whole lawsuit. Explain what will happen to the Web browser Internet Explorer.
MARGARET WARNER: What's your view, Ken Wasche, of whether this will bring greater competition to the browser market?
KEN WASCHE: That's right. They'd have to develop their own. Exactly. MARGARET WARNER: All right. Mr. McKenzie, do you think that this proposed remedy would address the browser situation adequately?
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| Conduct remedies | ||||||||||||||||||||
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MARGARET WARNER: Will Kovacic, lay out for us also, there are some conduct remedies proposed here. How would they work?
MARGARET WARNER: From what I understood from Joel Klein's explanation, he would like all these conduct remedies to extend three years into the breakup period but also to extend if they were to be ordered to actually start and run through the appellate process?
MARGARET WARNER: And explain one other part of this for us. Mr. Wasche jokingly said let's call one company Gates Co., and one company Balmer Co., but in fact the proposal is that the top stockholders like Mr. Gates and I assume Mr. Balmer would only be allowed to own one company, have stock in one company. WILLIAM KOVACIC: This is basically a way of learning, I think, from past divestiture experience -- a major complaint levied against the Standard Oil breakup in 1911, the American tobacco breakup in 1911, is that even though the firms, in fact, were dissolved, the same owners were still in place. There was the perception that the fact of common ownership retarded the evolution toward a competitive framework. The measure you just described is designed basically to preclude that.
MARGARET WARNER: All right. Ken Wasche?
MARGARET WARNER: Let me ask you about one other thing. Joel Klein spoke approvingly of the breakup of AT&T and how it had triggered this huge, you know, explosion in telecommunications. But also to a lot of people it meant a lot of confusion and there are just too many choices and so on. Is there a danger here, Ken Wasche, of that, that maybe consumers don't want all of this if this were to go through?
MARGARET WARNER: What's your view of this, Mr. McKenzie?
MARGARET WARNER: And Bill Kovacic, what happens next now? Microsoft has said it's obviously going to oppose this.
MARGARET WARNER: All right, gentlemen three, thank you all very much. |
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MARGARET
WARNER: Joining me now to explain the breakup proposal, and debate its
potential impact, are Ken Wasche, president of the Software and Information
Industry Association, a trade group for the computer software industry;
and Richard McKenzie, a professor of economics and management at the
University of California, Irvine, and author of Trust on Trial: How
the Microsoft case is Reframing the Rules of Competition. Welcome,
gentlemen. 
KEN
WASCHE, Software & Information Industry Association: Well, the two
companies will be an operating systems company. Let's call it Gates
Co., and the other will be an applications company that contains products
like Office and all the Internet properties. We'll call that Balmer
Co., after Microsoft CEO, Steve Balmer. These two companies will become
fierce competitors with one another and will unleash, we believe, a
range of new products as they go after new markets. 
MARGARET
WARNER: And just explaining, when you say operating system, that is
the desktop that we see, the windows, the basic windows screen and the
applications are all the Windows programs: Word, excel, office, whatever.
systems
company will start developing applications so that there will be competitors
to Word, Excel, Access and the presentation graphics like Power Point,
and these major software categories have been a dead zone for many years
because virtually no other product has been able to survive in competition
against the components of Microsoft Office. That's going to change under
this proposal. 
MARGARET
WARNER: Mr. McKenzie, do you think breakup is the way to go, to address
the problems that were uncovered during the trial or at least that Judge
Jackson found?
RICHARD
McKENZIE: No. What I see is a loss of synergy between Windows and Office
and for that matter Internet Explorer. You're going to have to go to
one firm to get your operating system and you're going to have to go
to another firm in order to get your Internet Explorer and maybe another
one to get your Office suite. Right now, Microsoft has an incentive
to lower its price in order to sell more Windows but it also has an
incentive to lower the price of Windows in order to sell more Office.
Take Office out and the Windows company will not have that incentive
to keep the price down and it won't have the incentive to try to co-mingle
the operating system with the applications, and I see a real loss here.
By the way, you can expect Microsoft to develop a Linux version of Office
once, in fact, Linux moves into the desktop. There is no reason why
they wouldn't.
MARGARET
WARNER: Let me break to introduce that we're now joined by William Kovacic,
an antitrust professor at the George Washington University Law School.
Glad you're with us. 
WILLIAM
KOVACIC: The Web browser, it appears, will become part of the applications
company that will be one of the assets that the applications company
absorbs, and the assumption behind the breakup is that no longer will
the successor companies have an incentive to distort design decisions
in order to simply reinforce the preeminence of one product or another.
Over time they'll have an incentive to compete against each other, perhaps
to replicate each other's practice, each other's products and maybe
even develop competing products that go head-to-head in a number of
areas. 
KEN
WASCHE: Well, absolutely. Under the proposal contrary to what we've
just heard, is both companies will have access to the Internet Explorer
browser. The operating system company will have a one-time license to
the Windows -- to the Internet Explorer source code, but it will be
up to the applications company to develop it further. So you will not
-- ordinary users are not going to have to go to two different companies
if they don't want to, to get the operating system and the browser.
They could get it from the same company or they could get it from different
companies. 
MARGARET
WARNER: So, what you're saying is if this goes through, you could look
on your Windows screen and you might see Internet Explorer but it would
be the current version, and that Windows company, that operating-system
company, would no longer have access to the subsequent versions developed
by the applications? They'd have to develop their own. 
RICHARD
McKENZIE: No, I don't. I see it basically increasing the price of browsing
and getting an operating system. Look, a monopoly is supposed to restrict
output in order to raise prices and profits. And nowhere in the conclusions
did the judge find that Microsoft is charging monopoly price. Indeed
what the judge found is that Microsoft is charging too little for its
browser. So you should anticipate the remedy to be consistent with that
would mean that prices would go up. Consumers would be harmed. And you're
going to have a substantial regulatory cost of being heaped on Microsoft
as well as the Justice Department and perhaps a variety of compliance
committees. That's in the works there. You're also going to increase
Microsoft's incentives to charge higher prices because what they're
learning from this decision is that their dominance got them into trouble.
Their low prices got their dominance. The way to keep the Feds off of
their back is simply to reduce their dominance by increasing the prices.
WILLIAM
KOVACIC: The divestiture would be supplemented by conducted-related
controls that are designed to facilitate the transition from the existing
corporate structure to the new structure which would consist of two
successor companies. One approach would be to preclude the companies
from retaliating against customers who decide to deal with the products
of other firms. Another would be to limit the ability of Microsoft to
engage or the successor companies to engage in certain types of bundling.
Another would basically preclude the consolidation of the two firms
over time. There would be a limitation on their ability except to the
relatively distant future, to recombine their operations so that the
solution that the government has proposed today is really a hybrid.
It doesn't involve simply a clean cut between the applications and operating
system unit but would entail continuing supervision. So, it doesn't
completely avoid the types of monitoring and compliance issues that
tended to weigh against a pure conduct control solution. 
WILLIAM
KOVACIC: The idea is to have some mechanism in place, interim measures,
that run throughout the appeal. It's a certainty that if Judge Jackson
were to order a divestiture, that he would set aside that requirement
until the appeals are exhausted because it is such an irreversible measure
that there would be interim measures many of which resemble those that
have been discussed before, put in place immediately, whether they in
fact would take hold I think depends on how drastic, in fact, they would
be seen to be. The more irreversible, the more dramatic their effect
in the market, the greater the basis there is for Microsoft to say even
those should be suspended during the appeal.
MARGARET
WARNER: All right. Mr. McKenzie, I want you and Mr. Wasche to address
something that I'm sure you disagree on which is, will this enable Microsoft
to continue to innovate? Joel Klein said absolutely it does not preclude
it. You heard Bill Gates said it will preclude it. What's your view
of that? 
RICHARD
McKENZIE: Well, in my case, I think it's going to impair innovation
just simply because you're going to disentangled two companies that
for several years are going to be impaired by the breakup itself. And
it seems to me that there are a lot of innovations down the road that
could come by integrating an operating system with a suite of Office
application packages. Those innovations could come. This breakup disallows
any kind integration of Office with Windows. Suppose that is more efficient?
Suppose the consumers, indeed, want that, especially since 90 percent
of consumers use Windows and 90 percent of consumers use Office? Why
soak up hard drive space with all that extra code? Why not allow for
the synergy? 
KEN
WASCHE: I have two points about this. The first thing is the beauty
of the proposal that Joel Klein presented today is that there are no
line of business restrictions. This is not as regulatory as many people
had feared. It's as minimally regulatory as possible. Gates Co., the
operating system company, can purchase or develop a whole range of applications
and sell them, they just can't leverage the operating system anymore
in a fashion that precludes other products. But what's most interesting
about this is in the little clip that we heard from Bill Gates, he argued
to the public today the absolute opposite of what he argued in court.
In court, he argued that having the operating system company and an
applications business in the same company bestowed no particular advantage
on the applications business because he argued that he treated the applications
development at an arm's length basis. In other words it was no more
advantage than third party or other company's products. But today he
argued that there was some synergy between the two businesses. Well,
which is it, Bill? Clearly, actually I believe him today, rather than
what he said in court, is that the applications business has benefited
to the detriment of third-party applications, and it has been detrimented
or been in a detrimental position for many years. 
RICHARD
McKENZIE: It seems to me that what this breakup does is propose that
Microsoft incur all of the development costs that it once incurred to
produce Office, do it once again, and basically it hobbles it. Suppose
it's more efficient for the Microsoft Windows firm to buy Office Suite
back and offer that to consumers. They can't do that. It has to go the
more expensive route and develop a whole new suite of applications.
To me I see that as wrong. Many of those costs are going to be passed
through to consumers in the form of higher prices and less quality products.
BILL
KOVACIC: I think we'll see a request when Microsoft responds to the
government's proposal. Microsoft will request a fairly elaborate process
to evaluate the government's proposal. After all, it will say we're
not a trivial part of the economy. And this is a very serious measure,
which indeed it is. Notwithstanding the interesting experience in some
of the previous divestitures even though cases such as AT&T show
us how robust and resilient the economy can be, there were well defined
organizational units within AT&T that were spun off. The assets
were not basically ideas and human beings. It was relatively easier
to draw the lines. I think that Microsoft is going to say, a rush job
won't do in evaluating this. I think it means that the remedies process
extends well into the summer.