The "Crime" of Microsoft

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by Tibor R. Machan

The Department of Justice's Antitrust Division wants Microsoft to be be split up. The result is that it will no longer be legal for MS to bundle its Internet Explorer with Windows (or, in other words, integrate IE into Windows). Consumers who want Windows without IE gain at the expense of those consumers who want Windows as it is, with IE fully integrated. If this recommendation is accepted by the judge on the case, not only would the ruling mean that MS will not have the legal right to do what its competitors can do. It will also amount to an indictment of bundling, or product integration, at least on the part of dominant firms, ones, we may assume, that have been very successful in their overall satisfaction of costumers.

So we need to consider whether a firm like Microsoft ought to have the legal right to work to extend its considerable prominence in its market by integrating another competitive product (especially one that is inferior or doesn't have a monopoly position in its own right)? With how the Department of Justice would like to have it, the courts should make sure Microsoft has no legal right to bundle its Internet Explorer with Windows and, by implication, that large, successful firms may not do what others have the right to. In this particular case this means is that Microsoft's competitors will not be prohibited from doing the very thing Microsoft will be prohibited from doing. It is pretty much beyond argument that there is something awfully weird about this: a successful firm can't do what less successful firms can do, all in the name of fairness. Might it not also be something the Department of Justice of a free society morally should not urge the courts to do because it is, ironically, quite unjust? Let us first consider whether what Microsoft is accused of having done, namely, bundling or product integration, is something that ought to be legal or not. Clearly, breaking up the company and prohibiting product integration only for it but not for the competitors is unfair – it is a kind of handicap that makes sense in spectator sports but is disgusting when applied in real life by government's imposing on some burdens others are not made to carry.

Second, In the case of Microsoft what is supposed to have been unlawful on its part is bundling or, more technically, product integration and we need to ask whether there is really anything wrong with this.

To bundle is, roughly, to tie to one's primary trade various adjacent favorable provisions, conditions, terms and such. So that if I go to work for you as a painter and you really want me to do the job, I might be able to set certain terms such as getting your commitment that the next job will go to me, as well. Authors of books, for example, are sometimes committed to show their next manuscript to the publisher who published their last book – the publisher gets first right of refusal. Or, again, if one goes to work at a university or college, one is required to accept their form of retirement and cannot choose one independently. (On this score one might wish to check just how many universities and colleges offer only one option, usually TIAA-CREF.) When labor unions negotiate contracts with big firms, they add all sorts of provisions besides wages as terms of employment. All these are cases of bundling.

What Microsoft did is to extract various commitments from those retail firms who wanted to include its operating system with the various computers they wanted to sell to customers. Microsoft said, in effect, "If you want to sell our operating system, you also have to sell some other software components. Otherwise we will not deal with you." Because of this tactic, which was possible because the retailers and customers wanted Microsoft's operating system very badly, Microsoft was deemed to be restricting competition. Of course, every market agent who bundles stands in the way of some competition for at least a while. A labor union, for example, often bargains to restrict outside competition by non-union workers. (Some states actually have laws forbidding this, which many consider intrusive and a violation of freedom of trade and rightly so.)

Now what precisely is wrong with bundling? Well, supposedly the fact that it keeps some people committed to dealing with a vendor even though there may well be products or services that might have been chosen by customers that could turn out to be better, cheaper and so forth. But, as the saying goes, a deal is a deal, so long as no extortion or coercion was involved in striking it. Microsoft never forced any of the retailers to include the software it wanted to be sold alongside its operating system. Microsoft bargained, played some peaceful hard ball, as it achieved this objective, just as any market agent would who knew that the customers wanted its wares badly enough.

So what the controversy about Microsoft is largely about is whether striking hard bargains ought to be legal in a free society. There is little doubt that it should be legal and that prohibiting it constitutes restraint of trade. Which is exactly what the Department of Justice is doing, via its anti-trust division – restraining trade, preventing market agents from striking good deals for themselves which they can do because the buying public wants its wares badly enough.

Tibor Machan is Distinguished Fellow and Professor, Leatherby Center for Entrepreneurship & Business Ethics, Argyros School of Business & Economics, Chapman University, and Research Fellow at the Hoover Institution, Stanford University.

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