WORKSHOP
WHICH REMEDIES?
APPRAISING MICROSOFT II
INTRODUCTION BY RALPH NADER
PANEL #1: DIVESTITURES, STRUCTURAL REMEDIES
PANEL #2: UNBUNDLING, PRICING, CONTRACTING PRACTICES
PANEL #3: INTEROPERABILITY REMEDIES
PANEL #4: OTHER REMEDIES
ESSENTIAL INFORMATION
1530 P STREET, NORTHWEST
WASHINGTON, D.C.
FRIDAY, APRIL 30, 1999
8:30 AM.
Transcript by:
Federal News Service
Washington, D.C.
MR. LOVE: My name is James Love. I work in this building
for the Consumer Project on Technology. The opening speaker for
the conference is going to be Mr. Ralph Nader. He's going to
provide opening comments. We're going to move on to the first
panel directly after that, which will run from 9:00 to 10:30.
Then, we'll have a break for coffee for 15 minutes, and start the
second panel.
If anybody needs a copy of the program, it's downstairs by
the people by the people that are doing the registration.
There's a room where there are two computers hooked up to the
Internet in the back, called the Mayor's Room, if people need to
check on anything during the course of the day.
Mr. Nader is here, and I think we can begin. Thank you.
MR. NADER: Thank you very much, Jamie.
Thank you all for coming. Good morning. The subject of
this conference is: Which Remedies? Appraising Microsoft II.
I'm Ralph Nader, and I'm going to make a few introductory
remarks, and also note that the conference is sponsored by
Essential Information.
We are gathered here to exchange ideas about remedies for
the Microsoft antitrust case. On November 13 and 14, 1997, we
held our first conference to evaluate Microsoft's global strategy
with an emphasis on problems presented by Microsoft's anti-
competitive conduct. When we announced the first
Appraising Microsoft Conference on October 6, 1997, Sun
Microsystems had not yet filed its Java lawsuit against
Microsoft. The state attorney generals had not announced their
investigation into Microsoft's anti-competitive practices. The
U.S. Department of Justice had not filed their lawsuit against
Microsoft for the bundling of Microsoft's Internet Explorer, and
there had been no announcements of investigations by antitrust
officials in Japan, the European Union, or elsewhere.
Today, about one-and-a-half years later, the public knows
much more about Microsoft's global strategy and the nature and
scope of Microsoft's various anti-competitive practices. The
current Department of Justice and state attorneys general
antitrust lawsuit against Microsoft has not yet concluded, and no
one knows how Judge Jackson will rule.
There is, however, now, such an overwhelming amount of
evidence of anti-competitive practices by Microsoft that assuming
the antitrust statutes still have teeth, it's time for a broader
public debate on the types of remedies that would be useful in
promoting greater competition, innovation and consumer choice.
The issue of remedies for anti-competitive conduct is a
difficult one, and this appears to be the first public forum to
focus entirely upon this topic. We hope that this workshop will
encourage others to broaden the public deliberation. The program
today will focus on a number of different remedies, many of the
proposals go far beyond those imposed on Microsoft in 1995 in the
first Department of Justice-Microsoft Consent Decree. Some will
have a familiar ring, such as breaking the software giant into
different lines of businesses, like the earlier AT&T or Standard
Oil antitrust cases did.
Other remedies are more novel. Among other things, the
government might require Microsoft to, one, auction off several
licenses for Microsoft's intellectual property, creating instant
competitors for its main software products; two, provide
competitors with the technical information they need to make
products work properly with Microsoft Windows or Microsoft
Office; three, stop using discriminatory pricing to discipline
computer manufacturers who offer software from competitors; four,
support or not interfere with open or third party protocols that
run on top of Windows or Microsoft Office; or, finally, unbundle
various components of Windows or Microsoft Office. Some of these
sanctions could be implemented on a standalone basis while others
would work together.
We'll also consider other types of remedies today to anti-
competitive conduct by Microsoft from private antitrust action to
purchasing strategies by individual consumers, businesses,
especially governments, and others. The government procurement
approach is a particularly instructive one to analyze. On a
number of occasions, we have asked Microsoft to join this debate.
Indeed, we asked Microsoft to co-sponsor this workshop and to
choose half of the speakers. Microsoft's representative declined
this offer, but did support speakers that reflected Microsoft's
views. We have included some of these people as speakers today.
Our objective is to begin a broader discussion of remedies,
not only for the Microsoft case, which is of immediate interest,
but for the next generation of competitive problems in the new
information technologies. The remedies for anti-competitive
conduct that may be ordered by courts in the United States,
Europe, or elsewhere, will have enormous impact on consumers, the
future of the Internet, and the computer and software industries.
Corrective measures should facilitate innovation and competition,
and be forward-looking, aimed to prevent any future harm as well
as addressing past transgressions. New rules, whatever the
outcome, will be instrumental in defining the nature of
competition in the coming century.
I would like to thank all the panel members for their
participation, and also the audience, who will participate in
discussions throughout the day.
Our first panel is entitled Divestitures, Structural
Remedies, and it will be moderated by Marc Cooper, an economist
and research director for the Consumer Federation of America.
Thank you very much.
(Applause.)
MR. COOPER: Good morning, all. As Mr. Nader mentioned, I
am Dr. Marc Cooper, director of research at the Consumer
Federation of America. In 20 years in the consumer movement, I
have testified about 250 times at legislatures and at public
utility commissions, been on more of these panels than I can even
count, but I've never been a moderator before. Giving up the
adversarial role is not in my makeup, but I will try.
At least this conference starts from a place with which I'm
comfortable and asks a question that I can sympathize with. CFA
has done three research reports on this issue. We've looked at
the evidence in trial, and we think that the case against
Microsoft has been proven.
And so we move on to the question of what do we do about a
pattern of anti-competitive behavior that has resulted in an
abusive monopoly? Antitrust law, economic practice and, in fact,
the consumer movement's preferred alternative is competition. To
break the company up into enough entities to ensure a vigorously
competitive marketplace. Competition is the consumer's best
friend, and best form of consumer protection. Chicago School
economists would say three is enough. More traditional
economists would say six. And that would be the long-standing
remedy.
But many in the public policy arena believe that the
operating system software market will not work well if it's
organized in that fashion. The consumer might be hurt by trying
to break the industry up into a number of little pieces. Well,
then we still have the problem, how do we prevent the abuse of
market power where there cannot be vigorous, head to head
competition on a day-to-day basis to win each and every customer
one by one. If this is an industry, because of externalities,
economies of scale, tipping effects, that tends to have one
dominant firm, how do we protect consumers in that marketplace?
And in particular how do we prevent market power from one segment
of the industry, the operating system, from polluting other
segments of the industry that could, in fact, be vigorously
competitive? Those are difficult questions for an economy that's
obviously based upon a new, emerging industrial and technological
paradigm, and those are the questions that our panelists will
answer today. That is a debate that I am pleased to moderate and
listen to.
And we have on this first panel a set of prominent speakers
who are actively involved in getting the answers to those
questions. I'll simply give you their affiliations and let them
speak for themselves. We'll begin with Steve Salop, who is at
the Georgetown University Law Center. And he will present one of
the more innovative and new approaches to dealing with this new
kind of industry.
Glenn Manishin, a partner at Blumenfeld and Cohen at the
Technology Law Group. And he is the principal author of the
Software Information Industry Association's Remedies Document.
He has also been a pro bono attorney for the Consumer Federation
of America in a very important telecommunications case.
Stan Liebowitz is a professor at the University of Texas at
Dallas, and has written a number of papers on the specifics of
the Microsoft case and the general question of the structure of
this kind of industry and how it functions.
We will then have a brief response from Mike Pettit, who is
the president of PROCOMP.
We begin with Steve Salop.
MR. SALOP: Thank you. I have a couple of introductory
remarks while Craig is getting this into focus.
First of all, what I'm going to talk about is based on joint
work that I'm doing with Craig Romaine (sp), who is over there.
Craig works at Charles River Associates, an economic consulting
firm, and I'm a special consultant there as well as teaching at
Georgetown. And Frank Fisher (sp), who is also part of Charles
River Associates, is DOJ's witness. And so, I just want to say,
we have not worked on Fisher's testimony at all, there's a
firewall. So, this is not DOJ's opinion, this is not Frank
Fisher's opinion.
In addition, I do have some clients in the software
industry, competitors of Microsoft, or concerned about Microsoft,
and I've been advising them. But, again, today, these are my
opinions, and not necessarily the opinions of my clients.
Secondly, this is part of a larger study that we have done.
And there's an article reporting on our work in the George Mason
Law Review that's coming out in the George Mason Law Review
Symposium. If anyone would like an advance copy of our paper, we
can email you an almost final edit. As far as I can tell, it's
never going to be in the final edit, but almost final edit that
we have. And if you'll just give me a business card with your
email address, I will email it to you.
My main task today is to talk about these what are now being
called vertical divestitures. And I want to talk about that, but
I just want to make a couple introductory remarks about the
general goals of remedy, the theory of remedy, and the horizontal
divestiture.
There are three general goals of remedy in antitrust. One
is to directly stop the anti-competitive conduct, and prevent its
recurrence. In this case, that means prevent the preservation of
operating system monopoly power, and also the extension of future
leverage into other markets, and the two key markets that are on
the horizon now, you know the browser wars some would say is
over, but the next locus of competition is server software, and
then after that embedded devices.
The remedy has to not just stop the anti-competitive conduct
now, but it also needs to undo the anti-competitive effects, and
what I call kick-start the market back onto a competitive
trajectory. In that regard, there's a lesson from the Alcoa
case. Alcoa is a very famous antitrust case, for those of you
who don't do antitrust, and Judge Learned Hand had a long
discourse in his opinion about how to deal with monopolization,
and it's the classic antitrust opinion on monopolization,
everyone teaches it. And Hand had the problem that Alcoa, in the
case that he had, apparently did nothing really egregious. They
didn't blow up competitors' factories. They didn't price fix.
But they had had this monopoly for 28 years, and Hand had to
figure out how to deal with it. Was that a legitimate monopoly
that they got by superior skill and foresight in industry, or was
it a monopoly that just fell into their lap, was it a monopoly
they got through anti-competitive conduct? How would you explain
it? And he really thrashed around and grappled with that
question in an heroic effort to figure out the right answer, and
he's been applauded by many and criticized by others over the
years.
The important point is, that was not the first Alcoa case.
The first Alcoa case was in 1912. Alcoa, at that time, did
engage in a series of egregious anti-competitive conduct. They
engaged in market division, covenants not to compete with
European aluminum producers. They bought up patents. And they
apparently bought what people are calling naked exclusionary
rights to deprive their competitors of access to electric power,
which is a major input into production of aluminum.
In that case, that case settled by consent decree, very
rapidly, the Department of Justice sued them. They consented
out, and the consent decree required Alcoa to cease and desist
from all those activities. Get rid of the covenants not to
compete, stop pressuring the electric utilities, give up the
patent. And that was what DOJ got. And it didn't work.
For the next 28 years, until the second case, Alcoa
maintained the monopoly doing really nothing all that egregious,
just anticipating opportunities, doing basically what it looked
like consumers wanted. And that's why Hand got put in the
position of trying to figure out how to deal with the second
monopoly.
But, in fact, had the Justice Department gotten a good
remedy the first time, there might not have been a need for the
second case. I think that's the lesson here, is that what the
government needs to do is get a powerful enough remedy to kick-
start the market, put it back on a competitive trajectory, in the
event that Judge Jackson finds for liability.
Thank you.
So, that's what I want to talk about as the alternative
remedies. Now, one more caveat, I've given talks like this
before, and most of the criticism I get has to do with, well,
suppose Microsoft didn't engage in anti-competitive conduct,
isn't this a Draconian remedy? And the answer is, yes, it's a
horrible, terrible remedy if Microsoft is not liable. But you
don't actually ever get to the discussion of remedy until
Microsoft is found liable. So, everything being done today is
all done under the assumption that the court finds that Microsoft
engaged in anti-competitive conduct, has violated the antitrust
laws, and therefore a remedy is necessary.
There will be an issue of, how bad was their conduct? Did
they inadvertently step over the Section 2 line, or did they
skate always on the left-hand side of the road? And so, that's
the question. But the assumption, this discussion is only
interesting if we assume that Microsoft engaged in anti-
competitive conduct.
Okay, having said that, the first remedy that's been
discussed a lot is splitting up Microsoft along functional lines,
the AT&T style divestiture. That's what the press likes to call
a horizontal divestiture, anti-trusters will call it vertical
divestiture, but I take it that that lay-press says it's
horizontal because that's the way the knife cuts. A knife slices
this way, apps on top, OS on the bottom.
I'm really very skeptical of that remedy because it leaves
the monopoly intact. You still end up with an OS monopoly, you
still end up with a monopoly in applications. So, it does not
satisfy -- it prevents them from leveraging to some extent, but
it doesn't kick-start the market back to a competitive
trajectory.
For that, you need to create competitors. And there are two
ways to create competitors. One is to divide up Microsoft, do a
vertical divestiture, right, the knife goes vertically to divide
up Microsoft and reconstitute it as two or three or six
companies, whatever. And the other is licensing.
So, let me first talk about the normal divestiture, which is
the standard type of remedy that gets discussed. So, say, create
three vertically integrated companies. I think six is probably
too many, though I've never been accused of being a Chicago
economist, or, I suppose, praised for being a Chicago economist,
depending on your group. In the division remedy, you divide up
Microsoft into three companies, each company would get access to
all the intellectual property.
You'd have to give them not just the intellectual property
in the code, you'd have to give them each not just a CD with
Windows on it, but also access to work that's in the pipeline,
access to work that's in the brains of the programmers, and
probably more importantly the leaders at Microsoft. And so,
during a transition period, you'd have to require some type of
exchange of information, so that the people that knew one thing
in Company A would tell the people to do something else in
Company B.
Each company would get a third of the employees. That
raises a question of how you would divide up the employees. And
one possibility would be to let Microsoft choose how to divide
them up, but in order to prevent strategic gaming of that, you
know, maybe you could do something like this divide and choose
method that we all teach our children. You know, you cut the
cake, Child 1, you cut the cake, Child 2, you get to choose which
half of the cake you want. Okay. So maybe Bill Gates would get
to divide the company up into three pieces, and then he'd get
last choice as to which piece he would get to run. So, you'd
have to open up their contracts, or divide them up, and that's
the way it would work. And then, of course, the licensing
auction I'm going to talk about next, is an alternative way to
get to that same outcome. So, with this remedy, you would create
three competitors. Instead of one, you'd reconstitute the market
to three.
The other alternative that has been proposed is, instead of
actually dividing up the employees, let's just split up the IP.
And one way to split up the IP would be to give it to two other
existing companies, but how do you choose the existing company.
Do you want the judge to do it? You could, but an alternative
way to do it, and the way the FCC has been allocating spectrum
licenses, is to auction them off. That the person that's willing
to pay the most, it's probably worth the most to them. So, you
could auction off the IP, fully paid up licenses, to, say, two
licensees. Then you'd have three companies, Microsoft and then
the two licensees.
Since you're trying to replicate this vertical divestiture,
the license would include the applications as well as the OS. It
would be the current code. But, again, like the vertical
divestiture, there would also be an entitlement to unpublished
information in the pipeline, which probably would amount to the
fact that they'd get upgrades, they'd get all the upgrades in
advance for the next couple of years, during the transition
period, not as a compulsory licensing remedy, but as a transition
just to give the licensees their entitlement to the unpublished
information. It would be a fully paid up complete license,
unlimited right to disclose, modify, resell, do anything they
want. It's not just a read only license, it's more like do
whatever you want.
Again, the contracts would have to be reopened. There's a
real issue about the employees, so maybe certain employees would
be transferred to the licensees, and you would probably want to
include conduct remedies during a transition period. And this
issue of the employees, I think, is the $64 question, and I'll
talk about that in a minute or two.
Before I get to that, though, I want to talk about this
class of remedies of creating new competitors. The benefit, and
you could think of it in the benefits relative to the conduct
remedies, the benefits relative to doing nothing, or the benefits
relative to the functional divestiture, the horizontal remedy.
This type of remedy gives potentially, at least, immediate real
competitive benefits, because you get competition. There will be
three people selling Windows, three people selling Office.
Licensing remedies that you're going to hear about later today
are criticized by economists for reducing innovation incentives.
The licensing auction or the vertical divestiture will not do
that because it's not licensing on an ongoing basis, it's one
time licensing. And, therefore, if anything, it will increase
incentives to innovate as the firms get into a second type of a
race.
Third, with these remedies you don't need to engage in line
drawing between the OS and the apps. Now, probably drawing the
line between the OS and apps would not be difficult once. I
mean, you could do it the first time, but in the functional
divestiture, there's a lot of business restrictions. So, you're
going to need to redefine that line between the OS and apps every
time there's been a change. These remedies don't require that.
What are the criticisms? Well, the first is the potential
that this unified OS standard will become fragmented, something
that Stan is going to talk about, and I'll have a couple remarks
on it.
Second is that dividing up the employees could be disruptive
and inefficient.
And, third, this is alleged to be unfair because Microsoft's
OS monopoly is legitimate.
So, let me quickly talk about those three things. First,
the fragmentation. The argument is that a fragmented OS is
harmful because it necessitates costly porting. Now, to an anti-
truster, that's kind of a peculiar argument. I mean, antitrust
people believe in competition. The whole point of this case is
to increase competition. And to then turn around in the remedy
stage and say, well, now we've decided Windows is a natural
monopoly, let's not disturb it, instead let's regulate it. That
causes a lot of intellectual tension if not practical tension.
More specifically, some answers are, it's not clear how high
those porting costs are going to be. Porting costs are much
reduced to the extent that there's cooperation between the firms,
and that developers of tools are able to build cross-platform
tools, like this tool, Bristol's tool, that's now at issue in
their case against Microsoft, Java, which you know is a cross-
platform tool that Microsoft allegedly polluted, and it's being
discussed in the regular case. The cooperation is more likely,
the tools are more likely, the cross-platform tools are more
likely to develop if no operating system has a dominant position.
One reason why we have all these interoperability problems now is
because Microsoft tries to discourage cross-platform tools rather
than encourage it. So, I think one needs to be very careful in
estimating these high costs of porting. And, of course, it's
also true that UNIX is fragmented, it's viable, it's existing,
and Windows is fragmented, and that's sort of another peculiar
thing about this argument.
Windows 95/98 is based on one code base, Windows NT is based
on another code base. And surely they're viable. And these
are -- you know, Windows is trying to create convergence between
NT and 95/98, they're trying to create a single interoperable
operating system. That's a good thing. They're spending the
money. And, you know, it's as hard as it has to be hard, but
those are starting from different code bases. If we have -- if
you break up Windows into three companies, they're all going to
be starting from the exact same code base. So, if there's going
to be fragmentation that's hard to overcome, it ought to take a
long time.
Finally, it seems to me, in the end, there's choice here.
If you want to have a unified code base, you can either leave the
world alone, unregulated Windows, Microsoft monopoly, or poorly
regulated, or you can throw it open to industry committees, which
are slow and often criticized. And, as an antitrust person, I
think competition is a better way to go. But, I agree, this is
an important issue for debate, and people can disagree about it.
The next point is the issue about, should we do the
licensing remedy or should we do the division and reconstitution
remedy. And the difference there really focuses on the issue of
allocating the employees. The benefits of licensing over
division, the first one is that it leaves Microsoft intact, it's
less disruptive. And it eliminates the need to allocate the
employees, and it avoids the disruption, I think could be real
disruption, from dividing up the Microsoft teams.
On the other hand, the benefits of division over licensing,
it's the same one, the benefit is, it does not leave Microsoft
intact. Leaving Microsoft intact is a mixed blessing, because if
you leave Microsoft intact, and then you have licensees that are
just licensees that don't have the employees, that don't have the
startup, they are less likely to be real intense competitors.
So, if you divide it creates more competition on the level
playing field, and reduces the likelihood that the market tips
back to a Microsoft monopoly, which would be a real problem for
the government to engage in all this effort and then six months
later the licensees are dead and we're back to where we are. The
division also facilitates the information transfer since there
will be ex-Microsoft employees at each of the licensee firms.
I think the real issue here is that it's not clear, and
we're going to have to hear from the software companies, from the
potential licensees, on this issue more than having an economist
stand up here and speculate about it. The question is, will the
licensees be viable, and be able to be real competitors without
getting Microsoft employees. And I've heard from some, and some
people are concerned they really are going to need ex-Microsoft
employees to make their companies viable for both the information
transfer and the expertise.
Now, the licensing remedy does not say you can't have
Microsoft employees, it says you have to hire them one-by-one,
and that sort of process would entail high transactions costs.
It can be reduced by letting the Microsoft employees cash out
their stock options, by eliminating their own non-disclosure
agreements, and non-competes, and long-term employment contracts,
but the licensees are going to need to hire Microsoft people.
Indeed, they might want to hire them to be part of their bidding
team in the auction because of their expertise.
So, there's going to be an employee allocation issue either
way. The question is whether it's going to be done just by the
market, or whether we're going to allocate some employees at the
time of the decree. And I view that as an empirical question.
It would sure be nice just to be able to give out the IP, but if
the potential bidders say, we're not viable, all we can do is
sell Windows for six months, create some short-run intense
competition, but that's all, then that's not going to be as
successful as a remedy that creates real competition.
And so, the division remedy is really a live option. It may
be worth it to pay at the initial disruption costs, and get a
remedy that's more sure to create competition than the licensing.
And I'd say, this is the issue, in terms of people that pay for
the structural remedy, this is the issue that we need to get more
information on over the next four to six months until the
sentencing hearing, if it occurs.
The last issue, I'm kind of running out of time, is whether
the remedy should be limited just to the OS -- and actually,
Craig, don't bother with that slide. I think, you know, that's a
cleaner remedy, but it doesn't go as far. But, on the other
hand, it's not clear that the playing field will be level enough
to allow real competition. And so, I'm concerned that that will
not go far enough.
And then, the other possibility that I've been thinking
about, and I think some other people have been thinking about,
too, would be to do both types of divestitures, and this may be
the easiest, although it looks complicated, and allow the
licensing remedy to be viable. I just don't know yet. But the
idea would be, you do a combination. In the first instance, you
slice them horizontally into apps and OS, and then you dice the
OS into three companies, either by licensing or by division. So,
you create four companies in the end.
And you don't need line of business restrictions, because
there's enough competition. The OS companies, there's
competition, they can go into apps. If the apps company wants to
do an OS, that would be fine. And under this situation, since
the licensees would only have Windows, then, it may be more
manageable, maybe you don't need as many employee transfers. I'm
not advocating this. In fact, I'm not at the point where I'm
advocating any particular remedy. But this one is worth thinking
about as well.
So, thank you very much.
(Applause.)
MR. COOPER: Our next speaker is Glenn Manishin from
Blumenfeld and Cohen.
MR. MANISHIN: Thank you very much, Marc.
It's a pleasure to be here. I appreciate being invited.
It's always difficult for an antitrust lawyer to follow an
economist, because much of antitrust is based in economics. And
we in the legal field have to learn how to speak in what I
sometimes refer to as econobabble, something that Steve Salop
does not engage in, to practice our profession.
A slight disclaimer. I am the principal author of the
SIIA's Remedies Document, which I actually think is now available
on the CP Tech and the Central Org website, but I'm speaking
today for myself. If you've read the document, you will find
that some of my views are quite different from the collective
views of the entire software industry represented in the SIIA
document, and there's copies of this presentation that I'm going
to give on the media panel in the back.
As an antitrust lawyer for approximately 15 years, I spent
my formative days at the Department of Justice during the initial
phase of decree enforcement in the AT&T divestiture case. In
fact, my first T-shirt given to me by my friend Mike McNealy (sp)
of the FTC was the picture of a cracked bell with the phase,
reach out and cuff someone.
The hard reality is that antitrust is arcane, but it's also
boring. And, you know, now I think that we're finding that it's
both stimulating, it's important, it affects people's lives.
Unfortunately, in some of the press, not the august press that
are here today, of course, but some of the press are treating it
like an O.J. or a Kevorkian soap opera. The reality is that
antitrust law and antitrust remedies are tremendously complex.
Cases are costly and difficult, as we now know. And there are no
easy answers. Hence, the title of my remarks, The Case for
Structural Remedies or Breaking Up is Hard To Do?
The question mark is there because many people think
breaking up is hard to do. I don't think breaking up is hard to
do. It's not hard in the short-run, and it's not hard in the
long-run in the overall scheme of the relationship between
government, Microsoft, competition and consumers. In fact, the
principal benefit, I believe, of a structural relief, whether
it's the vertical or horizontal divestitures that Steve talked
about, or perhaps even the licensing remedy he put on the table,
is that it allows the courts to get out of the long-term role of
intrusive, difficult, oversight of a rapidly changing industry,
and fix, once and for all, the underlying problems.
That, in my opinion, is the hard lesson of the AT&T case. A
very good judge, a very good Justice Department broke up the
world's largest corporation at that time, but did not go with a
pure structural solution, and coupled it with behavioral or
conduct remedies, line of business restrictions, proscriptions on
equal access. And I practiced them for eight long years. And a
mini-industry decree enforcement grew up in this town that was so
arcane that even antitrust lawyers in general didn't understand
it. The last thing, I think anyone in this room, whether you're
a Microsoft proponent, Microsoft opponent, or just a policy
thinker, is to have the courts engage in that sort of intrusive
long-term regulatory oversight of Microsoft and the software
industry.
I'm going to digress just for one second, it might take
another minute, but I want to tell you a parable, and I owe this
to a good friend of mine, Reed Hundt, who told it first, in the
immediate aftermath of the 1996 Telecommunications Act. It's the
end of the century, Congress has just passed a broad new law
mandating competition in an increasingly important area of
commerce, and yet the large entrenched firms react to that not by
competing, but by buying up competitors, by trying to control the
pipes through which the product is passed to consumers, by
refusing to make their products interoperable or interconnectable
with their competitors, and becoming so large that they claim,
essentially, that any effort to regulate them or break them up
would challenge and undermine the basic economic viability of the
United States. It's not 1999, it's 1899. And the two companies
were AT&T, Theodore Vail's (sp) creation, and Standard Oil
Company of New Jersey with the Standard Oil Trust, John
Rockefeller's creation. We broke up both of those. We entered
into an era, in each instance, of unbridled, vigorous
competition, and I think we can do it again.
Steve has stolen some of my thunder. These are some basic
sort of fundamental principles. I think they closely correspond
to an evolving national consensus here in America about the role
and the relationship between government, courts, technological
innovation and competition. And they're not legitimately
debatable. Government should intervene when there's a market
failure. The goals of antitrust relief are two-fold, perhaps
three-fold, depending on how you split it, to pry open the market
to competition, and to prevent the occurrence of the unlawful
acts. And, most importantly, regulation, whether it's
administrative regulation or judicial regulation, is really an
imperfect substitute for market competition.
I might add another, bigness is not bad. What's bad is
being bad. What's bad is acting bad. Therefore, structural
relief in this case should not be intended to change Microsoft
because Microsoft is big, but change Microsoft only if Microsoft
has gone big by being bad. And bad, by the way, is not evil.
Bad is a rational business use of economic power that you gain in
a way that maximizes your profits. The problem is, as Steve
could tell you about dead weight loss to monopoly power, that
when you exercise that power and you have a monopoly, it tends to
hurt your competitors and consumers as well.
So, if you look at both conduct relief, and I've put some of
the pros on the left-hand side, and structural relief, pros on
the right-hand side, I think that you'll find that they're
fundamentally different. A conduct remedy, one that prescribes
or proscribes certain behavior, tells the defendant do this or
don't do that; a structural remedy tries to remove the basic
cause of the anti-competitive and, therefore, eliminate the
incentive to act badly by changing the incentives, by changing
the structure, you change how the company acts.
Now, if you look, therefore, at the relationship between
conduct remedies and structural remedies, I think you'll find in
a conduct case, much like the AT&T case became, unfortunately,
the rules have to get longer and more complex, because you can't
just prohibit what happened in the past, you have to foresee what
might happen in the future. You find an example of that in 1998
with the definition of Windows under the first decree, it's not
something that's unusual because creative lawyers will find a way
around any decree. So the prohibitions get stronger, and
stronger and stronger. And as they get more complex, they don't
change the basic incentives of the defendant.
Now, structural relief is very different. What it does is,
it does two things, it eliminates the wisdom cost of regulation
by decree. It avoids the judicial definitions that Steve talked
about, what is an operating system, what is an application. It
can do it in some instances both at the beginning and in the
long-run. But it maintains incentives for innovation, and if you
look at the last line, there's a very big contrast in terms of
how you have to enforce, detect, and cure violations. In a
conduct decree, you need lots of lawyers watching all the time,
not just from the government, but also from private industry.
My next slide is an historical anecdote. I'll let you read
it at your leisure, but it comes from the Supreme Court's
decision in Standard Oil. Standard Oil was the biggest
industrial reorganization ever, 37 independently divested
companies, worth $90 billion at the time. But it also
illuminates the ease with which the Supreme Court affirmed that
case and, more importantly, that there was no adverse effect on
shareholders. Prices rose. There was no adverse effect on
competition. There was no adverse effect on international trade.
To the contrary, it ushered in an era of 65 years of increasing
efficiency in oil production, increasing competition, and allowed
the industrial revolution in America to proceed really well. And
perhaps most importantly, what the court said there is, not only
do you restrain the doing of the acts in the future, they talked
sort of strangely in 1910, but to enforce the statute requires
broader and more controlling remedies.
So, let's look at three options that I have. They're sort
of like Steve's. The first one is what I call horizontal, what
the economists call vertical, but again, it's the OS versus
applications, perhaps splitting up content into a separate
industry. The second could be considering the imposition of an
open source software obligation on Microsoft. That's an
incremental change to the licensing model that, as Steve has
advocated, have some benefits. And the third would be the
divestiture, multiple, vertically integrated entities, or so-
called Baby Bills.
Let's look at number one very quickly. I've gotten my five
minute sign. A horizontal divestiture does one thing. It
eliminates the ability of the OS to leverage or extend it's
monopoly power. It still has the incentive to do so, as any
business would, but because it's not in any other markets, it
can't do it. It also reduces the risk of long-term governmental
oversight. That is, you need to have the line drawn at the
beginning, but not overall. It does maintain the OS monopoly
power. Importantly from my perspective, it prevents the
realization --
(End of tape 1, side 1.)
MR. MANISHIN: (In progress) -- I don't know if there are
any, but I do know that that kind of division makes it impossible
for them to be realized. And, as Steve pointed out, absent
reintegration, you have some very real risks of it happening all
over again.
Windows as open source software, a very novel approach to an
antitrust remedy, but it does alter fundamentally the role of the
OS in the market, because it makes the operating system much more
like a commodity, and forces innovation into other areas,
applications, middleware, content, et cetera. It does, in
addition, solve the bundling dilemma that the judge is confronted
with now. That is, if the OS monopoly chooses to integrate
something into the operating system, then it's obligated then to
release it to the public, and anyone can use it. On the other
hand, if it thinks that it shouldn't be integrated, and it wants
to compete as a separate product, it has the choice to do it.
So, everyone gets the benefit of whatever integrations there are,
and no one has to figure out what should be in the OS and what
shouldn't be. On the other hand, there's a huge conflict, I
think, between the intellectual property rights of Microsoft and
the requirements of the court, perhaps, to set a reasonable
licensing fee, and it requires continued governmental oversight.
Finally, my preferred approach, the vertical divestiture,
three or more identically situated mini-Microsofts. This is good
because, first, no one has to divide up the company on
definitional lines. I live in fear of Judge Jackson having to
decide what's an OS, because if you look at the history of
operating systems, things that used to be shareware are now in
the OS, whether it's DOS, Windows, Windows 95, or Macintosh, who
can decide what's right? I don't think any human being can do
that.
It also avoids line drawing among markets, which is a
corollary to that. Second, it maintains all the efficiencies,
all economies of scale remain because these economies of scale in
software are realized at very low levels of production, all
economies of scope remain. It may be more complex, as Steve has
pointed out, in terms of employees, stock options, et cetera.
But if anyone in here has ever done a corporate deal, those
things can be fixed. They are not insurmountable. They may take
some time, but they can be done. And, I agree with Steve, the
risk of OS fragmentation is largely illusory, and it's probably
offset by the long-term entry of compatible, enhancing products.
So, in conclusion, I have three points. Conduct remedies
present serious risks of decreased scope and definition
enforcement, and the need to do repetitive antitrust actions.
Adding to the Alcoa parable that Steve gave, in the AT&T example
there have been three antitrust actions against the Bell System.
And under the 1996 act, there probably will be a fourth, perhaps
not against AT&T, more likely against some of its divested
entities in the future.
Structural relief offers a very clean mechanism for
eliminating regulation by decree by the court, which is
particularly problematic in a technologically changing area.
And a vertical divestiture is preferable in view of its
efficiency and government regulation impacts.
I want to end just with a quick quote, as a baby-boomer, I
remember JFK's inaugural address, and about 18 months later he
spoke in Rice University in Houston to announce the mission to
the moon by the end of the decade. And what he said there is,
let me see if I get this right: We choose to go to the moon. We
choose to go to the moon and do these other things, not because
they are easy, but because they are hard.
I think that this is hard. It is hard politically. It's
hard as a matter of short-run administration. But in the long-
run, by getting the courts out of the business of having to deal
with new antitrust lawsuits, new enforcement remedies, getting
all the lawyers for the software industry focusing on product
develop, not putting evidence together to try and constrain
Microsoft, everyone wins. The costs go down, and consumers are
the ultimate victors.
Thank you.
(Applause.)
MR. COOPER: Our third speaker is Stan Liebowitz from the
University of Texas at Dallas.
MR. LIEBOWITZ: I'd like to thank Jamie for inviting me to
be here. I actually didn't know I was going to be on the panel
until about 2:00 yesterday afternoon. So, I don't have quite as
formal a presentation as the other gentlemen on the session with
me. And I also forgot to make a copy of my notes for myself.
So, I'll be crooking my neck quite a bit here to see what's on
the slide.
What I want to talk about are the costs of breaking up
Microsoft in this vertical direction, essentially three
Baby Bills. Unlike some of the other people on the panel, I do
think that breaking up is hard to do, both at the level that the
song was talking about, and in this case on the economic level.
I think it's going to be very difficult, it's going to be very
costly. It's going to be very good for Microsoft's competitors.
It's not going to be good for Microsoft. And, well, I'll get to
the consumer in a minute. The fact of the matter is that it's
going to be great for a lot of the people in the room here.
I don't live in Washington, I live in Texas. And I haven't
smelled such action in terms of -- it's been a while since
there's been a big make-work project like this for economists and
lawyers. So, there's a lot of enthusiasm, I'm sure.
At any rate, I have a book coming out, and I wanted to plug
the book. If you ant to know what the impact of Microsoft has
been on consumers overall, empirically, not theoretically but in
fact looking at what's happened in various markets, various
prices, the book goes through it in great detail. And that's
something that I'm not supposed to talk about today, and I won't
really talk about at any length.
But let me say that what you will get out of the book is
that Microsoft has charged very low prices, that it has been very
good for consumers, that it has won markets when it has superior
markets, and it's failed to win markets when it hasn't had
superior products.
One other little point that I wanted to make before I get
into the material today, the term "network effects" gets used
fairly often. I noticed as I was looking at Steve's paper on the
plane yesterday, and network effects are important in a lot of
markets that have compatibility issues. And software is
presumably one of them. But, the impacts of network effects are
somewhat unclear. Steve was very careful when he was talking
about the Microsoft case to always use the term "alleged" in
terms of Microsoft's practices as to whether they were
monopolistic or not.
The fact of the matter is, when we talked about tipping,
when we talk about winner-take-all, when we talk about other
aspects of network effects, in particular I'm talking about lock-
in or protecting and enhancing monopoly power, those are really
alleged impacts because they're theoretical and there's almost no
empirical evidence whatsoever to investigate whether or not these
effects occurred the way the theory says it might. One of the
things that we do in the book is, in fact, to test some of those
things. And what we do discover is that there is a tendency to
winner-take-all, but there isn't a tendency towards lock-in or
protection of monopoly or inertia in the market, not in any clear
sense.
So, that said, I obviously don't believe that Microsoft
should be broken up because I think there are no benefits. The
benefits would be negative.
What I'm going to talk about today are what the costs would
be. ACT asked me some time ago to help them with an estimate of
what the costs would be. One very clear and simple cost, which
Steve alluded to as well, which is the cost of porting software
from one operating system to another. And the methodology that I
used was really quite simple. First, we determined what the
percentage, and we did this just by taking a look at a study that
was done by an association of software producers, what percentage
of their costs, or in this case actually revenues, could be
categorized into R&D, tech support, marketing and selling, and
general administrative.
After taking these numbers, we took a look at the size of
the Windows 32 market, 32-bit market, which would be Windows
95/Windows NT. And, IDC gives estimates, it's one of the
companies that gives numbers that are used in the industry, and
we took the numbers for 2000, 2001, 2002, to put them in the
future, to give some estimate of what they might be if we started
next year. And that would then, if you just multiply those two
together, give you some idea of what the R&D would be expected to
be in the industry, and what the tech support expenses.
Then, and this is the more difficult part, we tried to get
an estimate of what the costs of porting would be. And the way
we got this estimate was, two-fold. We basically interviewed
various executives, various people in software companies who had
some experience in porting applications, either in the UNIX world
or the Macintosh, and we said, look, there are going to be these
different operating systems that are going to be fairly close, so
it's more likely to be UNIX-like than the movement, say, from Mac
to the PC. What are your estimates as far as your additional
costs?
And they gave us numbers. And I'll give you what the
average was. The average increase in R&D expense, according to
the executives, was 78 percent. The average increase in
technical support was about 46 percent. And then for sales and
marketing, they said 5 percent, 10 percent, those who gave an
estimate at all.
We then scaled it down. I wasn't interested in getting the
maximum, or in this case even the average. I was trying to get a
number that I thought would be very defensible. And so, we went
with one-third of the estimate that the executives gave us, which
was a 25 percent increase in cost for R&D, and a 25 percentage
increase in cost in tech support.
And then we applied these to the amounts that we'd already
calculated that would be spent on R&D. And this is what the
bottom line was. The bottom line is, you come up with a fairly
enormous number fairly easily. On the top, we have the three
years, 2000, 2001, 2002. The second line, the second row has the
revenues from the operating system. Then we have our incremental
cost factor, which actually works out to be 6.4 percent of
revenues. Okay, so that's the number that we're applying. Now,
it's not 75 percent, it's not 50 percent, this is the number that
we're applying.
When you apply that to the number on the top, you get the
incremental cost per year, and that was for each new platform,
each new version of Windows. And we doubled that to get two
versions of Windows. And the number we come out with for three
years is a tad bit less than $30 billion.
Now, we could have easily made it $100 billion. If I had
gone with the number that the executives gave, it would have been
$100 billion. But that would have been high. If I gave the high
end of what the highest executive gave, we could have gotten well
over $100 billion. So, I think this is actually a fairly
conservative estimate. And the fact that it's only 6.-something
percent of revenues, I think, would fit in reasonably well as not
being terribly aggressive. If you were going to think of any
producer who produces a product for the Windows platform, that
ignores the Macintosh platform. Macintosh platform is about 10
percent the size, and so if they thought they could do as well on
the Mac as on the Windows platform, they're giving up essentially
10 percent.
You can do the same thing with UNIX. We have quotes in the
paper that talk about firms that are no longer supporting various
UNIX platforms. They're giving up percentages of revenue. And
if it's more than this 6 percent, then the number we're getting
is reasonable. So, that's the number we get. And that's $30
billion.
And the question, of course, is, and I was actually sort of
surprised to read Steve's paper, if you do a cost/benefit
analysis, this is one part of the costs. But it's not the full
thing. This is the cost of just porting programs, but it's a
real cost, and there are other costs that are going to be out
there as well. One of those costs will be the cost to an
industry that's bigger than the software creation industry,
that's the consulting industry. It turns out that the consulting
industry in software is larger. We don't really know what the
impact factor would be that we would apply, but we know that
there's this very large component out there that's going to have
to have some increase in cost. As well, there's this other cost
element, which has got to do with network effects, and that is
the fact that consumers will have fragmented products to deal
with.
Now, people are up here saying, well, we'll have three
competing versions of Windows. Okay, we'll also have, under some
scenarios, three competing versions of Word, and three competing
versions of Excel. Well, that sounds great to antitrust lawyers
who are even getting rich during all of this. I suspect that's
not really something that consumers will be terribly happy with.
I don't think they want to have three versions of Word, and three
versions of WordPerfect.
There was a lot of unhappiness, if you remember, when Office
98 came out, and the people at Office 95 couldn't read the 98
files. Well, we're going to have that going on in a much greater
degree when we have fragmented versions of Windows, because
they're going to have to go in opposite directions. If they
really compete with each other, they're going to try to get as
big a market share as possible. If the network effects are as
strong as they're supposed to be, one of them will end up
becoming dominant, or maybe some other operating system, but we
will wind up where we started, and we'll have just created
enormous costs for the economy and consumers in the meantime.
Now, I actually think I'm probably about done, and I never
don't use up my time. But, at any rate, that's about it, and my
mouth is very dry.
(Applause.)
MR. COOPER: At least one of the speakers hit the time, and
I allocated him an extra five minutes since the other guys had
gone over to balance it out.
Our final comment will be a response from Mike Pettit,
President of PROCOMP.
MR. PETTIT: Well, thanks, Marc.
I'll take Stan's extra five minutes, if that's all right?
I, too, didn't know that I would be on the panel until late
yesterday, and so my job, I think, is to respond in part to what
they've said, some of which, of course, I'd like to study a
little bit more. But I think there are some lessons in all of
this.
And I remember a year ago when Microsoft started the Chicken
Little act, a tiny little acorn had fallen on their head in the
form of a consent decree case, and in the form of a threat that
the Department of Justice and the states would not let them bolt
together their browser and their operating system in whatever way
they chose. And so, Microsoft had a rally on Wall Street, and
they said, literally, the economic sky will fall if you don't let
us do whatever we want.
Now, if you know the story of Chicken Little, maybe you need
kids or a good memory to know this, it's not just Chicken Little,
remember the acorn fell on Chicken Little's head, and Chicken
Little said, well, I've got to go tell the king that the sky is
falling. So, on the way to tell the king, Chicken Little ran
into Henny Penny, and Ducky Lucky, and Goosey Lucy, and Turkey
Lurkey, and then to Foxy Loxy. And, all repeating the same
arguments that the sky would fall, and by the time, of course,
they got to Foxy Loxy, Foxy Loxy ate all the rest of them, and it
turns out they'd wasted their time and they'd over reacted.
So, that reminds me a little bit of kind of where we are
with Microsoft, and what we've seen over the last year. And I
think it is instructive. Now, I don't want to call Stan's
argument the Turkey Lurkey argument, because that would be unfair
and I haven't analyzed it carefully. It does seem that quite a
bit of what he's complaining about, and where the costs are
derived from are from the interoperability, and I don't think
those are insurmountable obstacles.
But I would say that in terms of the argument that antitrust
defendants make when they're in similar situations, this is
nothing new. What Microsoft is arguing today is really nothing
new. In fact, it's not as severe as what AT&T argued back in the
1970s and 1980s. At that time, let me read to you a quote from a
book, The Deal of the Century, which is a marvelous book about
the AT&T episode. These were the arguments that AT&T was making
at that time about the lawsuit. It was a rip-off and outrage
that AT&T's competitors and the government had twisted the facts
around to make AT&T the villain, when all the company was trying
to do was adapt to change while continuing to serve the public
and its shareholders.
Now, that sounds an awful lot like Microsoft today. There
are also very interesting descriptions about the trial in this
book, that those of you that have sat in the courtroom every day
would be amused by, that the stories were not related to a
central theme, each was a splintered tale, and anecdote about the
telephone industry. Each was confined by its own peculiar
details, and the character of the witness, typically an
uncharismatic businessman whose words were riddled by technical
jargon. Even the newspaper and magazine reporters who covered
the trial seemed, for the most part, unable to communicate any
essential story to its readers.
So, I would say, in this case, by contrast, the case is more
interesting, lively, it's being conducted in a shorter period of
time, certainly some of the imaginations of some of the witnesses
that I've seen over the last couple months would rival anything
I've seen at the movies. And I think it's really been great
entertainment.
But one argument that AT&T made which is really the essence
of the Turkey Lurkey defense, is, if you touch us and if you
impose any kind of structural remedy on us, literally, our
national security will be threatened. We will become a third
world country in our telecommunications system, and we'll have
inefficient and overly expensive, and an unreliable network for
telecommunications.
Now, Microsoft cannot make the argument about the
reliability since they're running advertisements in all the
national magazines saying that Windows NT is three times as
reliable as their monopoly product, the Windows operating system,
so I find that curious. But what to make of all this, and what
is the end of the AT&T story. Well, I think we all know, we have
seen prices decrease, service quality improve. We've seen more
innovation in the last 14 years in that industry than we saw in
the previous hundred. Literally, the deployment of fiber optics
and cellular telephones, and the Internet itself, all of these
things we have today, and not in 10 or 15 years from now, because
of the actions that the government took.
So, I would say to you, the price was worth it. There are
some tough issues in going through these kinds of things. I
think Glenn and Steve and Stan have addressed them. I think the
interoperability is a tough issue, but I think at the end of the
day, we know that the advances of tomorrow come only if we have
competition today. And that's not just a wild-eyed economic
theory. That we know from experience.
Now, another thing that I think Microsoft has argued which
I'm interested in talking about a little bit is the idea of
polls, that somehow the industry doesn't support any of these
remedies and that kind of thing. Remember, this is the same
Microsoft whose chairman, while under investigation, sent out an
email in February of 1998, to many people in his company and
said, it would really be helpful to me if somebody could produce
a poll that showed that people wanted the operating system and
the browser bolted together. So, I think their argument about
polls probably should be viewed through that prism a little bit.
But I would also say, we know something about polls, because
we were interested a year ago in finding out exactly what were
the views, privately, of people in the industry? Did they feel
the government was going too far about these things, and it was
not an easy proposition to actually find these things out,
because we didn't want to just send a survey out to these
companies and have the assistant to somebody fill them out and
send them back in. Our requirement was that the executives
themselves submit to a 20 or 30 minute telephone interview, and
that we really get down into the detail of these things. To do
that took more than 60 days, to get on everybody's schedule and
calendar, and it was a very difficult proposition.
A lot of the people said, I think this is a trick, I think
you work for Microsoft and I'm not going to give my views about
this kind of thing. But we did learn some very interesting
things. First of all, of the people that we talked to, 71
percent of these people identified themselves as Microsoft
partners. Now, of the Microsoft partners, 67 percent of those
people said, antitrust laws should be applied equally to all
companies regardless of industry; 74 percent of those people, the
Microsoft partners, said Microsoft uses monopolistic practices.
Now, and this against my interest here, only 30 percent of those
people wanted the government to do necessarily something about
it, these are Microsoft partners, remember.
Sixty-three percent of these people wouldn't enter a market,
even if they had a superior product if Microsoft had a dominant
position. This is what's most startling to me, only 26 percent
of Microsoft's own partners believe that Microsoft would actually
comply with the court's decision. That means 74 percent of their
partners, the people that know them best, know that Microsoft is
not exactly a cooperative person in terms of their attitude
towards consent decrees and the government. Fifty-two percent of
these people said, regardless of the outcome of the lawsuit,
Microsoft will continue to squeeze competitors out of the
marketplace.
Now, I talk about these things because what must have been
in the minds of the respondents was the idea of whether conduct
remedies can work, whether Microsoft could make a promise to the
government and adhere to that promise, and whether we can trust
them to do so. I think, attitudinally, the things that we've
seen from Microsoft, first of all, going back to the earlier
consent decree case, it's come out in the trial, Bill Gates'
attitude, almost immediately, was this antitrust thing will blow
over. We have not changed our business practices at all. And,
from that, I think then you look at the whole way in which
they've responded to this. Well, we didn't do these things,
we're not a monopoly, we were set up. Let's cut the DOJ budget
after all, and those kinds of things. And I think those things
will play into the judge's mind when he has to decide the
fundamental question, do we go down the road with some of these
structural remedies, either the IP remedies, a combination slice
and dice, or can we trust them to do a bunch of conduct related
things. And I think we ought to be very skeptical that any
package of conduct things would actually work in this case.
So, I think we back into the proposition, this is going to
be hard, it's probably going to take a combination of structural
and conduct remedies to get the job done. Any remedy at the end
of the day will have to be approved by David Boies and the NFL
players association and the owners, and I think we're in for a
very interesting period. But I think if the case -- ultimately
at the end of the day, that we decide, is it worth it for
industry standards setting bodies to ensure that we get over the
problems with interoperability and all these kinds of things, or
do we just have an unregulated monopoly and let them do whatever
they want? I think the answer is pretty clear.
Now, I'll take another minute and respond to some of the
things that have been proposed here. I think the issues that
have been raised, certainly by Stan and Steve and others, are
real. I think we need to have a remedy, if we can, that requires
a minimum of judicial oversight and ongoing government
regulation. Obviously, the definitional problems with the OS
would be tough if you slice it that way. But it can be done.
And it can be done by defining other products that are out there
in the marketplace, and just preventing Microsoft from copying,
stealing, and bundling something where a market already exists.
So, that would be one way to steer around that problem.
I think, frankly, any combination of things, anything short
of the slice and dice thing that Steve talked about would require
ongoing conduct remedies, and maybe additional lines of business
restrictions, if our goal is really to restore competition, deny
them the fruits of their illegal behavior, and ensure that
something doesn't happen in the future.
So, with that, I'll bounce around and maybe address some of
the questions in the follow-up.
Thank you.
MR. COOPER: I wanted to make sure I understood that.
I suppose I should give Steve Salop a chance to respond to
the question of the cost calculation, and then if there are
other -- if Glenn wants to do a response, and then I'd just as
soon throw it open to the audience.
MR. SALOP: I've seen the study for 10 seconds. So, I mean,
it's a matter of one has to evaluate the study. There surely
will be some transition costs for a divestiture remedy. The
question is how large they are, the extent to which they can be
economized by cooperation and the development of cross-platform
tools. And the third, and this is the big question, to what
extent are any increased costs offset by the benefits of
increased competition, both lower prices -- competition lowers
prices and increases innovation. So the real issue is the
tradeoff.
Now, if I put on my antitrust professor hat, the
Supreme Court has been clear as crystal that arguments that
competition is unreasonable because it raises costs are arguments
that are out of bounds under the antitrust laws. If a firm or a
group of firms argues that they need to cooperate, they need to
fix prices because competition is unreasonable, the judge is
supposed to say, I'm sorry, that's a very nice argument, but sit
down. We don't listen to arguments like that in the courtroom.
So, I think that's an issue as well.
MR. COOPER: Why don't we throw it open to the audience for
questions, and hopefully they'll be questions to the panelists as
opposed to position statements from the floor.
QUESTION: I think that the clarity of thinking about the
Standard Oil case would help us resolve the structural entities.
And I'd like the panel to discuss similarities and differences
between Standard Oil in 1911, which as I understand it was a
holding company, where each of the 32 divisions were really
standalone companies. Isn't that quite different from what we're
faced with with Microsoft, and how does that affect our thinking
about this?
MR. COOPER: It sounds like a question for a lawyer.
MR. SCHERER: I've done a study of the Standard divestiture,
and there is very important parallel here. Yes, Standard was a
decentralized set of operations, but many of its key operations
were centralized at the Standard Oil Headquarters on Broadway and
in New York. In particular, part of the divestiture involved the
key pipeline companies. The key to getting competition was
divesting the pipeline companies. For quite a few years, the
pipeline companies maintained their headquarters offices in the
same building on Broadway in New York as the remaining Standard
Oil of New Jersey, and partially as a result of that physical
proximity, no real competition developed in pipeline, in the key
area of pipeline.
One needs to worry about that kind of thing having everyone
physically gathered around Redmond, Washington. That's going to
be a barrier to getting effective competition.
MR. MANISHIN: Let me just react to that, what the question
was. I think the difference between Standard Oil and today is
that because Standard Oil acquired its monopoly power in the most
visible way, that is forcing smaller competitors to take stock in
the central holding company and, therefore, gaining control of
them on fear of being squashed, that the remedy, that
divestiture, was much easier to implement because it was a simple
stock spin-off. Here, any kind of divestiture is going to entail
more than a stock spin-off. So that the remedy was easier to
implement, but it does demonstrate, I think, as the gentleman who
just spoke said, and as the quote I put on the screen said, that
what began as genius, what began as innovation, ended up becoming
the use of power in a way to centralize control over production
and control over distribution through conduct that was not, in
the words of today, rational, economic business behavior, but
rather the anti-competitive use of exclusionary market power.
And bottom line, it's going to be tougher today to break up
Microsoft than Standard Oil, but we've been through the AT&T
divestiture, if you look at the plan of reorganization, it was
795 single spaced pages. It took a year-and-a-half just to read
and approve, let alone implement. We did that. Even Aunt
Tillie, on her farm, if she kept her stock, benefited from it.
So, I think if we can break up AT&T, we can break up
Microsoft. The parallels are different, but they're still there.
MR. LIEBOWITZ: I don't have any doubt that you can break up
any firm that you want to break up, and just apply enough force
and it will crack. The fact of the matter, though, is I think
there are some important differences between the industry
Microsoft is in and the Standard Oil case. And that is, in
Standard Oil, the oil production was not a natural monopoly in
the sense that it didn't have almost complete fixed costs, and
very low variable costs of production. There were no network
effects, and so it didn't have this normal tendency towards
winner-take-all. The way things tend to work in software is that
someone gets a very large market share, and then they're
overthrown by someone else who comes up with a new version of the
product that's better, just as WordPerfect was replaced by Word,
and WordPerfect itself replaced WordStar, and Visicalc was
replaced by Lotus 1-2-3, which was replaced by Excel.
UNIDENTIFIED PANELIST: Which will never be replaced.
MR. LIEBOWITZ: Well, that's yet to be seen. The fact of
the matter is, Excel is still winning the reviews, and we've got
to see, we haven't had something completely counter-factual to
these things. Because one of the things I did do is go through
product reviews in great detail in the book. So, these markets
are different.
There's one other thing. People have been bringing up the
telephone case. I can understand why they would, that was the
last great feeding frenzy for lawyers and economists, at least
that I remember even though I was on the outside of that one.
The fact of the matter is that that was a regulated firm. And so
an efficiency enhancements that might have been brought about
might have had to do with the fact that it was no longer being
regulated, more from that than it was from the fact that you were
introducing new competitors. We don't know what it would have
done if it hadn't been regulated in the first place.
We do know that regulated firms do not have the same
incentive to come up with new ideas, and cost cutting innovations
than non-regulated firms, because regulators will tend to take
their profits away. We don't know that monopolies have less
incentive to come up with new innovations and ideas than
competitors. And, so, that's also a major distinction that
people are glossing over that they shouldn't. I don't think we
should use the AT&T case as any sort of standard for what's
likely to happen here.
MR. PETTIT: Well, there's another thing on innovation that
people argued then, if you spun-off Lucent, or what became
Lucent, it would be a bad thing somehow. Lucent is doing just
fine, and their pace of innovation is doing great.
The other thing is that, at the time, of course, you had a
regulated entity that was cross-subsidizing into other businesses
and using that as a tool to stifle innovation, but at least there
was protection on price for consumers. In this case, you have no
protection because there's no regulation, and you've got a
monopolist with $22 billion of cash able to do anything they
want. So, if you're arguing they're a natural monopoly, or
something akin to that in your previous answer, I would like to
know if you support the idea of regulating these guys?
MR. LIEBOWITZ: They're a temporary natural monopoly, so to
speak. There are these winner-take-all results because of I
think it's mainly the cost economies, but there are also network
effects both going in the same direction. But it's not clear
that we need to have it as a regulated monopoly, because it's not
clear that it stays. We've seen these overthrows in various
cases, and what we don't know is whether or not, when a better
product comes along, suddenly they won't be able to overthrow,
that's this idea of lock-in. But there aren't any cases that I'm
aware of where anyone has demonstrated lock-in. And in the
software markets we've looked at, the products with the better
reviews are the ones that keep the large market share.
MR. SALOP: I want to respond to that briefly, and that is,
I think it's too easy to say that because someone wins, it's the
best product, and because it gets good reviews even. Note, the
argument is that the reason why Microsoft products work better is
because they control the APIs, they control the source code, and
so they make it harder for other firms to interoperate. And, as
a result, the other products don't work so well with Windows.
MR. LIEBOWITZ: That's a possibility, and I'll admit that
that could be the case. The fact is that Microsoft also had the
dominant products in the Macintosh, and they were dominant on the
Macintosh before they were dominant on the PC market. So, the
evidence, again, is sort of counter to that.
MR. SALOP: And that's the product that they said they
wouldn't upgrade for Apple unless Apple caved in and took IE over
Netscape, is that the product you mean?
MR. MANISHIN: Let me just add, as a Macintosh user, that
the only thing that makes Macintosh viable in today's economy is
the fact that Microsoft produces files that are the same file
format in the PC world. But, I think that Stan's argument can be
reduced to the absurd conclusion that every software market is a
natural monopoly. Every software market exhibits network
externalities, every software market exhibits increasing returns
to scale. Under that scenario, there should be one producer of
every software in every product category, and that simply can't
be the case.
MR. COOPER: We'll have to have a set of ground rules.
First, when you ask your question, I need you to tell us who you
are, and when you answer the question, I need you to come to the
podium so they can get it on the tape, or speak extremely loudly
from your seat.
QUESTION: (Off mike.)
MR. MANISHIN: The question was, the definition of
competition in relation to open source. I think that the folks
at Red Hat would agree with you. And, the best part, the best
thing to be said for the open source software model, which has
different variations depending upon whose open source licenses
you look at, is that it allows a new form of competition in
service, for customer support, and product emulation. That is,
you take the same kernel, you make improvements, sometimes
there's a mandatory grant back of the license rights, so that
then everyone in the community shares that.
But that's consistent with the accepted antitrust definition
of competition, which includes not only product emulation to the
core product, but extensions to the product, the whole core of
customer support functionalities, price, and so competition is
not just coming up with a new product, it's the whole continuum
of how you serve consumers, and open source is one way to go. It
could be a very viable way. I think right now the problem with
applying that directly to the Microsoft case is that it's
difficult to come up with a single accepted widespread definition
of what an open source software model is. And since there's so
many colors or flavors out there, picking among then when it's a
nascent concept, it's only been around for a little while, is
going to be tough. Again, that's not insurmountable, but it's
why I just called it a novel remedy.
MR. SALOP: I'd just like to say one thing about that. I
just want to add, you know, if you do the vertical divestiture or
the licensing, it's possible that one of the new companies would
take some kind of open source approach. I mean, they'd have a
license, it would be their code. They could do that if they
wanted to do it.
MR. LIEBOWITZ: I just don't want to give the wrong
impression. I'm not saying there's no competition. What I'm
saying is, the competition tends to take a different form. It's
you compete to become the number one product for this generation,
which may be two years. And one product will wind up with a
large market share. Then a few years later, they can wind up
going down very low. We have examples of changes in market share
of 60 percentage points in one or two years. It's not that
uncommon. Certainly within three to four, it's quite common to
have those types of changes. The way to perhaps think of it is
something like the record industry, which I think shares some
characteristics. You have the number one product, and it's there
for a while and it may generate a big market share, and then it's
very quickly replaced by another number one product, and another
number one product. It's not that any moment in time there's no
competition, but at any moment in time there may be a dominant
market share. And that's the nature of the competition to some
extent.
MR. COOPER: I thought for sure Glenn was going to use the
word "essential facility," because that is a concept that exists
in antitrust law, and it may, in fact, be the most friendly to
your idea. That is, if there is something that is an essential
facility, and by definition cannot support multiple providers,
then you have this question of how you regulate the essential
facility to allow whatever uses it in related markets that can be
competitive. So, it's a concept that exists in antitrust.
Because Stan has gone back to this question of, a little
bit, repeatedly about the sequential replacement of a dominant
firm, if you look at the data that was put in the trial, the
answer is that there were one or two generations of replacement
of leaders. But it turns out that Microsoft now is the first
company that dominates more than one product line. It has
dominated the operating system market for longer than anyone
else, except, of course, if you don't consider DOS and Windows
and Windows 98. You see the only way they could show that there
was sequential leadership was by defining leadership, not by
firms, but by products, and Stan has said that.
In point of fact, Microsoft dominates the terrain like no
other company ever has. Is it possible that they might get
replaced? It's possible, but when you look at the track record,
certainly in the operating system, no one has come even close to
that, nor has another firm dominated across markets. Fundamental
difference in the record industry is that there is no necessary
link between one generation and the next, certainly not
technological. That is, you've got a pop singer, and another one
comes along, and the relationship between those two singers is
zero. Whereas, the relationship between the source code and an
application or the next generation of the source code may be very
powerful. But now we're arguing the question of whether the case
is proven.
The answer to your question is essential facilities are, in
fact, a well-established antitrust concept. But, Glenn is right,
what's the essential facility here? It was easy when it was a
railroad bridge across the Mississippi River, and the only one
around. It gets a lot more difficult to figure out what the
essential facility is when it's an operating system.
MR. SALOP: I think, you know, with respect to Stan's point,
I think another thing you might want to look at now is what's
going on in server software. There is competition among server
software, but Microsoft is now making a big move into enterprise
space, you know, what is really the central nervous system of the
economy. And their technique they're using repeatedly is using
control over the standards, control over the protocols, in order
to bootstrap their desktop monopoly into server space because the
products in server space need to communicate with the desktop.
And that was what Java was really all about in the trial. That's
what Dynamic HTML was about in the trial. And there's a whole
lot of other communication protocols between the desktop and the
server, you know, COM and DCOM versus Corba, ODBC, and actually
probably in a way, the most interesting example involves Samba
and SMB, which the computer people know this a lot better than I
do. I mean, Linux communicates with Microsoft using something
called Samba, and Microsoft changed --
[END OF TAPE #1]
MR. SALOP: -- IT managers, and that gives Microsoft a big
boost in the market, because they can always say, we are
compatible with Windows desktop OS.
QUESTION: I have a question for our distinguished
economist. I think some of the arguments made are surprising,
being rather unscientific. And I would like to bring --
(inaudible) -- something you can test and verify. Now, we come
to the world of applications. Try to get a company to become a
competitor for Microsoft Excel or Microsoft Word. So, the
argument that the better product wins is bogus. It is an
unscientific argument. There is such a gravity world around
Microsoft Office that there is no way that there could --
(inaudible) -- a better Word or a better Excel, that is not
supported by the facts.
MR. LIEBOWITZ: Well, first of all, what we did examine was
the historical record, okay, because that's something that
exists, and you can perform tests, and you can see what happened.
Now, you're talking about something that hasn't happened, and
it's very hard to know what hasn't happened, why it hasn't
happened. There was talk a while back, I forget who the two
fighters were, it was Lennox Lewis against somebody else, and
Lennox Lewis was complaining he couldn't get anyone to take a
fight with him. Now, the reason he couldn't get anyone to take a
fight with him was because they were pretty sure they were going
to lose. And they were pretty sure they were going to lose
because he was better. Now, what you can't do is to say whether
or not a firm that's thinking about taking on Excel is having
trouble getting funding, which I don't even know if it's
factually correct, but let's assume that it's true, because
they're very unlikely to be able to come up with a better
product, or because Microsoft enjoys some sort of monopoly.
I would say, given Microsoft's track record of producing
very good products, because that's one thing is that Excel is the
single most highly rated product that we found when we looked at
various applications, that it's like going up against Muhammad
Ali. You are going to have big problems, because they're very,
very good at that. And so, I think it's perfectly understandable
that they'll have trouble getting funding, but it has nothing to
do with monopoly.
Remember, we're not trying to punish. We keep saying, we're
not trying to punish someone for being successful. But, in fact,
that's what a lot of this amounts to, we're punishing the firm
because they're being too successful.
QUESTION: (Off mike.)
MR. MANISHIN: Products change over time. WE live in an
information economy. Information is a product. That's what
portals sell. Software is information, and so the fact that some
products exist in the ground, some products are electrons over
wires, some products are stored on magnetic media and become
electrons on a phosphorescent screen with pixels really makes no
difference.
You know, Marc said the essential facility, the only reason
I didn't use that term was that the remedy for an essential
facility case has traditionally been reasonable and non-
discriminatory access to that essential facility. The problem,
in my opinion, with all these conduct remedies, and some of them
are better than others, is that someone, again, has to decide
what's reasonable, what's non-discriminatory, and that makes
oversight really hard, really difficult.
But fundamentally, if we cannot adapt our laws and our
policies that prefer marketplace competition over anything else,
and assume that competition would produce the best products for
consumers, whether they're technically best or not, is irrelevant
is consumers buy them, then we have a problem. And we're not
saying punish Microsoft because it's successful. We are saying,
restrain Microsoft because, as a result of its success, it's used
its power to foreclose rivals from trying to compete with it. If
it has been successful and that's all it's done, it gets enjoy
the fruits of its labor. It should win the liability case. If
it wins the liability case, everything here is moot. But if it
hasn't, it's because it has used that success to maintain
dominance in an artificial way.
MR. COOPER: You make a point about the use of the word
"commodity," actually that word has a tremendous importance in
this case, because the biggest fear of Microsoft is that it's
product will become a commodity, and if you read through the
emails, that was the concern. In point of fact, from the
consumer point of view, commodities are very consumer friendly.
They're easy to use, they stimulate lots of competition. So, to
say that Microsoft's products are not commodities, in essence,
Microsoft would like to prevent them from becoming a commodity.
And, in fact, we think that would be fairly consumer friendly if
it did become a commodity, and you should go through the trial
and look at that.
So the notion that you would have multiple people who are
able to deliver that good to the marketplace fairly quickly and
are forced to deliver at a competitive price, that's what
commodities are, and those are actually pretty consumer friendly.
Now, if the assertion is that this is a fundamentally
different product than any other commodity, then I think we go
back to my original question of how are we going to prevent
abuse.
And I think I'll wrap up a little bit. I think the key
question here is, people are not complaining about the behavior
of Microsoft in the 1980s, although there may be some people who
were not particularly happy about that. It's the behavior in the
1990s, after you gain a dominant position, and begin to leverage.
So, if Microsoft had not done any of these things, if there
weren't all this evidence about not only the fact that they
produced a good product, which may or may not be the case, but
they also did a lot of other stuff. And the case is all about
the other stuff.
The other point that you do need to recognize with Stan's
argument, he never talks about the operating system. He only
talks about the applications. And the case is about the
operating system, where lots of stuff went on. So, it may well
be that at some point Microsoft produced these terrific
applications, it may be that they were using their advantage in
the operating system, but the case is about the operating system
and not simply that they produce a better product, but they did a
lot of other stuff.
I think we've come to the end. It's 10:30, and I'm going to
try and keep Jamie on his schedule. There's obviously lots of
questions. I suspect similar questions will come up around any
of the panels as well.
We have a 15 minute break, and then we'll start up with the
next panel.
[APPLAUSE AND END OF PANEL #1.]
MR. NADER: The second panel is titled Unbundling, Pricing,
Contracting Practices. This panel, as well as all other panels
will be available in a video for anybody who is interested in a
copy of the entire conference. As you are beginning to realize,
if you didn't earlier, we have some of the best minds in the
country gathered here today on the issue of remedies, and the
antitrust Microsoft case.
Our first presenter is attorney Gary Reback, who is a
partner in the law firm of Wilson, Sonsini, Goodrich, and Rosati,
where he's the head of that firm's high technology group. A very
well known litigator in this area, to the computer industry. He
received his undergraduate degree from Yale University, his law
degree from Stanford Law School, and during the past couple of
years Mr. Reback was named to the Elite 100 by Upside Magazine,
the Top 100 by Microtimes, and the 100 Most Influential Lawyers
in America by the National Law Journal.
He has been lead counsel on a number of highly publicized
software cases, winning Lotus versus Borland in the Supreme
Court, and both Ashton Tate versus Bravo Technologies, as well as
Telemarketing Resources versus Simitech in the 9th Circuit Court
of Appeals. He's authored the widely read white paper which
successfully opposed Microsoft's acquisition of Intuit, and was
counsel to the anonymous amici opposing the Justice Department's
consent decree with Microsoft in United States versus Microsoft.
He's represented a number of companies in connection with the
Department of Justice's lawsuit against Microsoft and finally,
he's negotiated the federal government's clearance of Borland's
acquisition of Ashton Tate, Novell's acquisition of WordPerfect,
and Sybase's acquisition of PowerSoft, as well as the merger of
Cadence Design Systems with Valid Logic.
So if anybody has done it all it's Gary Reback. He brings
to you the lessons of his experience, and his perspective on this
issue of remedies and the antitrust Microsoft case.
Mr. Reback.
MR. REBACK: Thank you, Ralph. I think that introduction is
going to be a lot longer than what I have to say here today. I'd
like to pause for a second and talk about, just for 10 seconds,
reflect on how we got to the point that we've gotten to, because
those of you from the press have periodically over the past five
years called me and asked me questions, and you started off
asking me the question of whether there would even be a
government investigation of Microsoft. Would there be a
government investigation of Microsoft, and I still have on the
credenza in my office a newspaper article from one of the local
newspapers captioned, it's a very prestigious national newspaper
as well, captioned, Microsoft Complaints to Gather Dust. And
then it starts off by saying how people in Washington were sure
that the complaints by people inside the software industry and
outside the software industry would go absolutely nowhere. But,
there was an investigation.
And then people said, you know, nothing will come of this
investigation, there will never be a trial. But, there was a
trial. And many of you have come to me since that trial started
and you've asked me questions, and you've asked questions like,
can you imagine the trial having gone as well as its gone? Yes.
Yes. The short answer is yes. We all knew what was there. And
it particularly troubles me when I read particularly those of you
who write in the East Coast press how Microsoft acolytes are so
concerned that Microsoft has done such a poor job of presenting
its case. And I want to respond by saying, did it ever occur to
you that that's the truth? That what you're seeing in court is
the true Microsoft? The Microsoft that we all have come to know
in the software community? That's what you're seeing. There is
no surprise about that.
And so we're now confronted with the question, what should
we do about it? Now, I have to tell you, there were times I
thought we'd never get to this point. I thought we'd never get
to the point of asking the question, you know, if this all gets
proved up, and it gets submitted to the judge, and liability is
found, now what? And for many years I thought I'd never have to
answer that question, so I didn't spend a lot of time thinking
about it. But, more recently I have begun to think about it and
there are people on this panel and the preceding panel who've
spent more time than I have thinking about it.
But, I am reminded of the people who said there would be no
investigation and no trial, and Microsoft would win on summary
judgment. I'm reminded of those people because, you know, about
eight months ago I was on a panel on the West Coast, and I was
talking about divestiture remedies and breaking up Microsoft
spokesperson on that panel in a fit of exuberance said to people
that he would pay them each $10,000 if the government broke up
Microsoft. So I encourage people to save their ticket stubs
against that contingency as a hedging maneuver, and we'll see
what will happen in this space.
I just want to review the bidding from the previous panel,
and try to set up some of the discussion in this panel. I think
we all agree, or we would like to agree at least that the best
remedy in this space, at least from the perspective of the
software industry would be a remedy that does not require
continuous judicial monitoring. My own view, just from reading
the press is that Judge Jackson is tired of that. Quite frankly,
the government does not do a good job of monitoring consent
decrees. I think they would be the first to agree with that, not
just in Microsoft's space, but in other space as well. The
Justice Department does not view itself as a regulatory agency,
it views itself as a law enforcement group, and therefore the
continuing process of monitoring consent decrees is not something
that would be high on its agenda, if something else would work
better or just as well. And so the debate is framed around the
question of should we incur the significant costs of a
divestiture remedy or some other similar remedy at this stage,
given our desire to avoid continuous line drawing down the road.
And you heard a lot about that in the last session.
To bridge the gap here, the first type of remedy that people
have talked about, and will talk about further in this session,
particularly Joe, is the business conduct remedy. That's the
thou shalt not proscription. And if you ask me that's going to
be where the rubber meets the road. On the assumption that this
panel is based on that Microsoft is found guilty is found to be a
monopolist, I'm shocked, is found to be a monopolist, found to
violate Section 2 of the Sherman Act. I think the tension is
going to be between some more significant remedy, and a
proscription type remedy, remedies involving prohibitive
contracts, those kinds of things. Joe is going to talk about
that. And I'm going to try not to -- I'm going to try not to
spend a lot of time right here doing that, because you may have
questions about it.
I want to note one thing though. The issue of bundling, and
I'm going to come back to this on the next transparency, a
business proscription thou shalt not bundle. Thou shalt not
bundle what? Thou shalt not bundle it how? Very intriguing and
difficult questions. And I noted that in the same week that
Microsoft announced it was going to have settlement negotiations
with the government, and all the press flocked to that, and
followed the settlement negotiations, in that same week Microsoft
announced that it was bundling in its media player into the
operating system. And since then it has expanded that to include
sound playback, issues involving content, and artists, and the
recording industry, and now sort of all that is to be bundled in
the operating system, and you can't help wondering if we don't
end up with a remedy that addresses that kind of issue, what has
been the point of all of the trial and all of the investigation,
if after all of the evidence that we've all seen, Microsoft is
just proceeding with business as usual, then really how much have
we accomplished in that space?
You've heard discussion of source code licensing from Steve
Salop and from others. That's an intriguing possibility. Again,
others have thought about it better than, and more substantively
than I have. I'd like to note two things that I don't know were
clear from the prior discussion. There are two ways to think
about source code licensing. One is that somebody is going to
take the code and make a compatible product, and we'll all be
better from that. And maybe that's a possibility. In my own
experience in the computer industry, products that are merely
compatible, and have to continuously play catch up don't do very
well, because nobody is willing to build a business around them,
and no MIS director is willing to stake his or her company on
them. And I think that's going to be true here as well.
I mean, just think about it, suppose you and I get together.
I'll get us some venture capital, and we'll bid for one of these
source code licenses and we'll go into business. And we're going
to get, I think on day one, 18 million lines of code, 18 million
lines of code. I hope you can read that, you know, because it's
going to be tough for me. And you know what the first thing
that's going to happen is going to be? The first thing that's
going to happen is there's going to be a bug in Windows. I'm not
going to be able to fix it. I don't know where in the 18 million
lines of code to go to fix it. I wouldn't know if I found the
right line of code and fixed it, whether I might not crack the
firewall, kill the kernel, and bring down the entire system. So
that's something to think about when we think about licensing
remedies.
Steve has talked about how we might begin to deal with that,
by having support, or employees or whatever. I think a remedy
like this makes more sense when you think about it in terms of
somebody who is already in the game, perhaps on the server side,
getting one of these licenses, and making that company's product
more compatible with Windows or Windows NT. That's where that
kind of thing might come into play.
The last set of remedies from the last section, divestiture
remedies. You've heard about the functional divestitures. You
know, we use these terms horizontal and vertical and it's tough
to figure out which is which, quite frankly. I've heard the
terminology that I think most of us can understand better, the
functional divestiture is where we take the apps and send them
one place, and the OS and send them another place, and that kind
of thing. And you heard discussion about that. And then what
are called the Baby Bells, the multiple integrated companies, so
that we try to maintain the efficiencies, whatever efficiencies
there are of integration, at least for backward compatibility.
Stan has talked about the costs that we might incur from
competition, and I think we all ought to reflect on that for a
moment. How much is competition worth? Is it worth 6 percent to
have a choice? Just take his numbers. Is it worth 6 percent to
have competition. What are the benefits that competition brings
to us. Is it worth 6 percent, or 2 percent, or 1 percent? And
coupled with that, something the last panel didn't point out,
which are the costs attendant to the other side of the equation.
What are the costs of monopoly in this space? We have the
traditional costs of monopoly, the inefficiencies in allocation
of information, the inefficiencies in allocation of resources,
economists know that better than I do.
But, you in the software industry would know that there are
enormous costs in trying to keep up with Microsoft's competitive
products, at the same time you're trying to build on their
platform. They release a new beta and they enable 40 new APIs,
and you don't know whether the final product is going to work on
those APIs or not. Do you commit the resources to build on those
APIs, or do you want until you see the final product, and then
you play catch up, knowing that you can't ever achieve market
share? What are the costs balanced against that 6 percent? So
those are the kinds of things we need to talk about or think
about in that space. And I leave that to people who know more
about that than I do.
I would like to now turn our attention slightly, and try to
reframe a little bit what we're talking about here to the issue
of what are we trying to achieve? In other words, we're talking
about remedies, and we're going to talk about structure on these,
we're going to talk about proscriptive remedies. But, what is it
we're trying to achieve. And let's go back and think about the
government case, and what is it we think that the government has
proven or would like to prove. So I think that one major issue
in the case that they'd like to remedy, I can't speak for them.
As I always say, I can't speak for the Department of Justice, but
I wish I could.
But, one thing they'd like to do, I think, is to liberate
the OEM channel. To make sure that OEMs have complete freedom of
choice, to put on their desktops whatever they want to, to bundle
whatever functionality they would like to, because after all,
they're closer to the customer, they're are a whole large number
of such OEMs. Right now, all of them have to sit across the
table from one supplier of operating systems, and essentially one
supplier of productivity applications. So we'd like a remedy
that would give them more choice.
Obviously, if on the other side of the table there were
three or four suppliers of operating systems, OEMs would have a
choice, but they don't have that now. So that's one issue. A
second issue is the issue of bundling. And we've heard a lot
about that in the trial. We'll probably hear more about it at
the rebuttal phase. And the question is sort of, what to do
about that, something I raised a few moments ago.
There's been a lot of discussion at the trial on Netscape.
Netscape and the browser wars, are I think behind us in some
sense. But, I believe that everybody understands that the story
of Netscape is metaphorical in this sense. And the issue will
be, what can we do to make sure that what has happened doesn't
happen again. How can we be certain that streaming media, or
sound and recording playback, things that could be platform, dual
boot technology, a number of new technologies, how can we make
sure that they're not bundled out of existence. So that's, I
think, another goal.
A third goal, access to information. You heard about this
in the testimony of Avi Travanian from Apple, heard about it from
several other witnesses, heard about it at the Hatch committee
hearings, Senate Judiciary. How can we be certain that people
get access to information to build on the OS? Now, in a free
market, where there's competition, if there are multiple
operating systems, then every vendor would have the incentive to
make all of his or her information as freely available as
possible, to get more apps built on the platform. That model
simply doesn't work for a monopolist. So we have to think about
that. Do we want that monopoly model, and if we do, how are we
going to make information freely accessible, because I don't
think we can count on anyone's good faith to provide it.
And finally, perhaps a lesser goal in this space, and that
lesser goal -- I don't know if it's a lesser goal, but a lesser
consideration than the top three, there are several in this Two
Year Vendor's Convention one, and that's the issue of
acquisitions. As part of this remedy, if it's not a divestiture
remedy, should there be some proscription on acquisitions, if so,
for what period of time? There has been a lot of discussion in
the Valley for a very long time about how Microsoft might buy,
say, the number four player in a competitive market, the number
four company, bundle that technology in for free, and put out of
business the other six players in that market. Is that something
we should address at the remedies phase, and if so, how should we
address it?
I don't think that -- let me just make one point on the
access to information, that issue has been around a very long
time. And as many of you know who are following the industry,
that issue is present in the Caldera case in Salt Lake City, and
will come to trial in January. So that's very much with us. The
question of whether in that case, whether Microsoft misled the
market with statements that it made at the beta phase of its
product, whether it withheld information, whether in fact to
capture the phrase that one of the previous speakers used,
whether in fact Microsoft's conduct in the '80s was just as bad
or malicious as its conduct in the '90s. And if so, if the
monopoly was not secured in the first instance through rightful
competition, then what? How do we proceed.
So if you'll just give me the last transparency, and I view
myself here as sort of setting up the remaining speakers in this
space, in responding to your questions. When we look at sort of
the goals, the goals of the trial, what we should expect out of
the trial on one side, and the various remedies that have been
proposed on the other side, I think we have to ask ourselves the
question, how do those proposed remedies address the goals of the
trial? Would licensing the source code result in unbundling and
a level playing field? Would it result in information being
freely given to people at the next level? Divestiture, I
suppose, surely would, but there are costs attendant to that.
How are those costs to be measured.
And finally, what about business conduct? Would
proscriptions, thou shalt not, work? They've never worked
before, as one of the previous speakers pointed out. They didn't
work in the Alcoa case, they haven't worked with respect to the
consent decree in this case. I don't think any of us would
reasonably expect that even in the best of situations, with the
best of intentions, business proscriptions will work is we're
trying to do what it is we see on the left side of that page.
And let me close with just an example here. And I know that
Joe in particular will talk about this kind of thing, but think
about, for example, how a monopolist is able to discipline an
original equipment manufacturer, a manufacturer of computer
products. We've heard a lot and we've seen in the record issues
of whether Microsoft can charge more to OEMs if the OEMs disobey.
But, suppose you're an OEM, and you see a hot new disk drive, and
you want to get that into your product so that more people will
buy your product, and you can make it a better product, and you
can differentiate your product at market. Well, contrary to the
last court of appeals opinion, you can't just take a peripheral
like a mouse and plug it into the computer. You can't take a
disk drive and plug it into the computer. You need a device
driver, which is a piece of software. Now, you might be able to
write that, if you had a documented API. But, if you don't have
a documented API you can't write the device driver, if you can't
write the device driver, you can't improve your product.
And so, suppose I'm the monopolist, and you're the OEM, and
you come to me and you say, I want to put this new disk drive in,
and I need a documented API from you to do it. If I'm a
monopolist, I've got to say, what's in it for me? What's in it
for me? And when the next competitive product comes around, I
want to make sure you go with me, and not that competitive
product, otherwise no device driver, no product differentiation,
and for the rest of you who are consumers, no better desktop
computer.
Thank you.
(Applause.)
MR. NADER: Thank you very much, Mr. Reback, for those
remarks.
Our next presenter is Jean-Louis Gassee, who recently
started a new company called Be Incorporated, which is developing
new technology in the personal computer field. But, before this
new venture, Mr. Gassee spent over nine years at Apple Computer,
and started Apple's French subsidiary, and was also named
president of the Apple Education Foundation. Apple France became
and remains Apple's largest business unit outside the United
States. Before joining Apple, Mr. Gassee was the president and
general manager of the French subsidiary of Exxon Office Systems.
He's also held in the past several general management positions
with Data General, and has been area manager in the South
American and Middle East areas, as well as marketing director for
Europe.
He's also spent six years at Hewlett Packard, where he was
responsible for overseeing the launching of the company's first
desktop scientific computer, and the development of its sales
organization in France. He's served on a number, and serves on a
number of publicly traded companies, such as 3Com, Electronics
For Imaging, and Laser Master Technologies. He received his
degree in mathematics and physics in Orsay, France, and holds a
masters of science degree.
Mr. Gassee.
MR. GASSEE: Thank you.
I'll spare you transparencies. I know, having been 31 years
in corporate life, I know what they do to your eyes. I'm here
before you, I'm the French farmer abducted by aliens, and raised
in California, that's my new life as an entrepreneur. So coming
before an audience of representatives of the media and the legal
community, and various associations, I'm a little troubled by all
the issues that we have to deal with.
One is that we tend to assume that software is a thing. And
therefore, we have intuitions about things that do not apply to
software, and that makes all these discussions extremely
complicated. For instance, some of the remedies proposed have a
sort of physical metaphor to it, like cutting it vertically, or
cutting horizontally. That is extremely difficult. How do you
draw the line in the English language, or in legalese, when they
are not the same, between an application and an operating system.
And that's what creates a lot of difficulties in discussions in
this. Another issue which I want to address is the issue of
interoperability. Gary gave me a lead in this issue by talking
about dual boot, and I'll get back to that in a moment.
But, let's start with the claim that Microsoft makes that
they want freedom to innovate. The last thing on my agenda today
here is to bash Microsoft. I admire Microsoft. As you can, by
counting the years I've spent in companies, I've been in this
business 31 years. I started right after the student riots in
1968 in Paris. So I love this business. I've been following it,
and as I love and follow this business, I admire Microsoft. They
have been incredibly good at doing everything, or most of the
things they do. They are incredibly well managed. They have a
very good strategy. They fix their mistakes very well, and
unfortunately, that's a part of the problem that we cannot
ignore.
Power corrupts, monopoly power corrupts absolutely. And,
you know, the nature, you're nature, human nature, which, you
know, it's what it is, leads Microsoft to claim they want to
innovate, while actually what they want is to prevent innovation
from occurring that would threaten their monopoly position. Let
me take an example. You buy randomly 1000 computers, anywhere
you like. How many of these computers will have anything but
Windows on the hard disk? You know what the answer is, zero.
I've went to Linux World, and I heard stories about which I
liked, because to me Linux is a big hope for this industry. I
heard stories companies such as IBM, or Compaq bundling Windows.
So I went to them, I said, so how did you do this, because I have
my questions about OEMs. And they said, on no, no. We don't
install it, but we sell it, the reseller does it. That's what
IBM says, that's what Compaq says. That's interesting.
Well, here's what happens. Let's say you are the CEO of a
PC OEM coming to Wall Street to discuss your affairs. And you
say, well, ladies and gentlemen, we decided to improve the
product experience for our consumers, we now bundle Linux and --
forgive me, the OS on the hard disk. It's factory installed, no
installation problem, and there is even a utility so that the
consumer can delete what they don't like after having tried it.
So it is really a benefit for the customer. No installation
woes, the magazine reviews are ecstatic, our customers give us,
you know, very, very good comments. Oh, by the way, we lost $50
million of Microsoft Windows rebates as a result of this action.
Well, you are now an ex-CEO of a PC OEM.
What happens is that, to borrow a phrase from a gentleman
whose name I forgot, I apologize, but the PC OEMs are a vessel
state. I've seen grown men quake when considering doing things
that might displease Microsoft, or might impose a financial
penalty, because here's how this scheme works. You get the price
for Windows, and you qualify for additional rebates, if you
behave. If you don't behave, like if you store the competitor's
product, or a competitor's product on the hard disk, you lose
these rebates. That conduct might be acceptable for an aspiring
competitor with 12-1/2 percent market share. But, when you have
100 percent market share, and let's kid ourselves in the macro
sense that we have only 80 percent market share, that is
offensive. They have 100 percent market share in the PC
business. That's what it is.
So once you have your monopoly in the business, you are in a
position to fine, the rebate now is turned around into a fine,
you're in the position to impose a lethal fine on the PC OEM.
Well, I'm not a lawyer, so you know, maybe I will be told through
very complicated syllogism that this is up, but to me, you know,
the 12 year old in me, still very much alive, says it's not good.
I don't see who benefits but Microsoft and its allies,
shareholders, which are very happy, and that's a big problem when
we consider remedies, and their various allies.
That is a conduct which is harmful to the industry, it
prevents innovation from happening, because people who want to
put new competitive, innovative products on the marketplace are
forced off. This is what I talked to a consultant who did work
for another large company said, yes, we do work for Microsoft on
strategy. They have a very simple strategy, no crack in the
wall, not a single crack in the wall, because otherwise the water
gets in and soon the masonry starts to crumble. So that's one
thing I wanted to shed light on. And I'll get to remedies in a
moment.
I'd like to spend two minutes on the interoperability
argument. The argument we heard this morning perhaps it needs a
little bit more thinking, because on the one hand the study, such
as it is that was done, was asking incumbents not innovators.
Your established companies consider legitimately that doing more
work is bothersome, and they have a vested interest in working
with Microsoft and maintaining the Microsoft monopoly. SO I
think that puts in question some of the conclusions suggested by
that study. And when it comes to interoperability, Gary talked
about dual boot. Well, if you have multiple boot or dual boot,
and you can boot Linux or the BeOS and Windows on the system,
then you can bring applications. Our system takes less to boot
than it takes to launch Outlook Express. So the argument it
takes 18 seconds to book, which is again, Outlook express on my
computer takes about a half a minute to boot. So you can switch
between operating system in less time today in less time than it
takes to switch between applications. So the interoperability
argument I think should be reexamined, I'd like to suggest, in
view of this fact.
Now, when it comes to remedies, the problem is, in my
opinion, as Gary, again -- sorry to quote you so many times,
Gary. But, I think that a number of things have happened that
make the quarrels about the browser integration a little bit
passe, as you say in English. What Microsoft has done recently
is add a new wing to the roach motel. But, seriously, file
formats are the great roach motel. Once you start using them
it's very hard to get out. And look, Windows begat Explorer,
Explorer begat a dialect of HTML which is proprietary to
Microsoft. So if your server does not speak that dialect of
HTML, or if your site server, you're not going to be viewed. So
that's a problem.
Well, let's look again at what's happening with MS audio,
this is another way for Microsoft to create a format that they
own. And I have to admire what they've done. You know, the
secure digital music initiative, you know, this is consensus
building. And having been Californicated now for about 14 years,
I know the problems with consensus. It takes time, and it gets a
little soft, and sometimes very boring. In the meantime,
Microsoft having no consensus problem, the way they so admirably
decided, all right, here is MS audio. And bingo, another file
format which developmentally -- you know, a new wing to the roach
motel. And soon we'll have the pleasure of using Office 2000, a
great product. You know, a great product, I'm not arguing that.
Well, what is Office 2000 file format? It is an extension of
HTML, and there you have it, another way for Microsoft to control
the situation, because as we know if you link -- if you own the
mint that prints the tokens of commerce, you have a very
interesting advantage.
In my country of birth, you know, the French academics
complain that the Americans have a, you know, world domination
through three kinds of tokens, the language, English, or such as
it is American English, Walt Disney, you know, in the
entertainment, and the almighty dollar. Well, what we have here,
and perhaps this is the reason why the government sues Microsoft,
is that Microsoft has become in a way a state and its mint.
So, now to the remedies. First, I think we should look at
the commercial contracts and the OEM contracts, and I have to
agree that what's being said here, first we should shed light on
them, so that nobody can hide and do a little bit of backdoor
deals, and if someone pays more or less for Windows, the consumer
would know what's going on. In terms of remedies, the structural
remedies, I'm going to say something unpopular here, I apologize
in advance, but my view is if we cut Microsoft in Baby Bells, I'm
going to run for the phone and buy Microsoft stock, because I
want my part of the action, my share of the action, because the
basket of securities are going to be as a result of slicing and
dicing Microsoft, will probably rise in value. So, you know, as
a shareholder, I might like that. As a consumer, I don't know.
The Balkanization of Windows, you know, probably an unsavory
metaphor these days, but the destabilization of Windows, if I
were a cynic I'd say, let's do it, because this would weaken and
cause the same problems for Windows that we've seen for UNIX,
where you have variants of UNIX which do not interoperate so
well. And I agree with Gary that even if we're given a free
license to the Windows source code, I know what I would do, I
would run, because maintaining -- and Gary is very generous. I
think 18 million is a little too small. I want Windows to be
more robust, so the next version of 2000, with 35 million lines
is more like it, and I don't think this is a sustainable
proposition in reality. So in my unpopular opinion, we are left
with, you know, acknowledging that Microsoft is a monopoly and
regulating it. Sorry about that.
(Applause.)
MR. NADER: -- professional software developer with more
than 15 years experience, and brings an insider's perspective to
his role as President of the Association for Competitive
Technologies. Since assuming leadership of ACT, Mr. Zuck has
provided analysis and commentary, and background information on a
wide range of technology issues, and has been part of the debate,
the public debate on various television channels. He has also
written a variety of articles in PC Magazine, PC Week, and
several books containing collections. By the way, the
Association for Competitive Technologies is an industry trade
association of computer software, hardware, and consulting
businesses and professionals, dedicated to protecting the freedom
to achieve, compete and innovate.
Now, Mr. Zuck in a way can be viewed as a stand in for Bill
Gates, while his wealth is not equal to the equivalent wealth,
the bottom 115 million Americans, he does have a number of
viewpoints on the subject, that vary from some those of some of
the other panelists. And we're very glad to have him here to
present his views and analysis.
Mr. Zuck.
MR. ZUCK: Thank you for having me here. It's interesting I
didn't know I'd be represented as an avatar, that's a technical
term for, Bill Gates, I would love his wealth if I'm actually
going to be representing his views, which I don't really know all
of.
I actually asked Jamie Love if I could give the keynote at
this conference, but he said somebody named Ralph Nader had
already taken that. But, the reason I wanted to do that is I
wanted to take a couple of minutes, not too much time, to give a
little bit of a framework for evaluating a remedy, because it
seems in large measure what we need to do is try to figure out
the basis on which we would decide what would be a good remedy
and what would be a bad remedy, et cetera.
Now, unfortunately, I'm handicapped in this to some extent,
because I'm not a lawyer with experience in suing companies, and
I'm not an economist with experience in building studies, et
cetera. I've just been a software developer, so unfortunately I
need to go further back into my experience, back to high school
when I did debates. And those of you that did debate in high
school or in college will find some of this familiar. And what I
think it provides -- I want to provide a bit of a logical
framework for the analysis of remedy, or a plan that you might
propose.
In debate, in so-called "research debate" there's an
affirmative side that has the plan, and there's a negative side
that essentially defends the status quo, if you will. And that
affirmative side has four important burdens. The first burden is
that there is a harm. In other words, they must effectively
identify a specific harm, in this case it should be a harm to
consumers, and because that's a harm that therefore needs to be
solved by this plan that they're proposing. The second piece of
this burden is called inherence, which means that there aren't
forces already in place that would make this harm go away. And
this is a very important part of proposing a drastic measure.
The third burden of the affirmative team of the debate is
solvency, which means that the plan being proposed will directly
address the harms that were sort of proven in that particular
burden. And then finally, there is something about the cost-
benefit analysis of the plan. In other words, do the
disadvantages, and they're called DAs in debate, outweigh the
benefits of the plan. And so those are four burdens that must be
met by the affirmative team in a research debate.
Why do I raise this? There's another important issue
associated with debate, as well, and that's the issue of
presumption. And you've heard this in the context of criminal
cases, the presumption of innocence, the burden of proof, et
cetera, and very often what we find is a situation lately in
which it is the burden rests with the defenders of the status quo
to prove what the costs of a remedy would be, or to prove what
the disadvantages would be, et cetera. And the burden of proving
or somehow really justifying the benefits of a particular remedy
seems to fall away. And I want to remind everyone that in the
case of a tie in a research debate, you always have to vote with
the status quo, or with the negative, because there's always
unforeseen risks, there's always costs, et cetera.
So we cannot take lightly the idea of making this drastic
intervention into one of the most successful and dynamic
industries in our country. In fact, the majority of the industry
feels that way. Mike Pettit during his discussion of polls
talked about the fact that even companies that feel that there's
something wrong fear dramatic intervention into this marketplace.
Poll after poll conducted by news organizations and independent
polling firms, demonstrate the consumers are very wary and
suspicious of direct intervention into the technology industry.
Poll after poll o IT executives and software developers, again,
very wary, very suspicious of direct intervention into the high
tech industry.
So remember this issue of presumption when dealing with the
issue of remedies. The burden of proof rests with the proponent
of a particular remedy, and it is that proponent that needs to
show those four burdens.
If we look briefly at harm, I know we're supposed to just be
talking about remedies, and unfortunately the debate up here has
gotten a little bit clouded and so I'm going to just talk a
little bit about some of these things, but I really do want to
focus on some of these remedies. But, if you look at the issue
of harm and you talk about the harm to consumers, there really
hasn't been any demonstrated harm to consumers. People talk
about the harm to innovation, and yet this is still one of the
most innovative industries in the entire world economy. It
is -- last year was an all time high in venture capital
investment into the high tech industry, with over 12.5 billion in
investment in venture capital. So people aren't shying away from
this as an unhealthy industry. It has the greatest contribution
to our trade deficit. It's an enormous trade surplus associated
with the high tech industry. It's a very healthy industry.
I will ask you all to remember that our poster child for
pity in this case is Netscape Communications that recently did a
merger with AOL.
[TAPE CHANGE.]
MR. ZUCK: -- system. And integration is when this
componentized functionality becomes a part of the system services
of that operating system. In other words, if the only use of it
is end users, it's bundling, if the constituents of that
functionality are developers for that operating system, it's
integration. And these are just my definitions as sort of a
basis for this discussion. So when talking about Internet
Explorer technology, I think I would probably have to concede
that IE 1 and 2 were bundled, and that the process of integration
began with IE 3.0 technology.
But, let's talk about bundling. I want to make a very
important point that there's nothing wrong with bundling.
Companies bundle products in order to make their product more
interesting. I mean, we've already heard that Microsoft only
competes with itself, but let's not dismiss the fact that they do
compete with themselves. My father bought a computer with DOS on
it, he bought Notiveni (sp), and it was only 15 years later that
I was able to convince him to upgrade his computer, because he
got tired of the C key that wasn't working, and was having to
insert that manually. So, you know, there's nothing that says
that people necessarily are going to upgrade operating systems,
and we're already seeing that in the 32 bit operating system
market. So they need to improve the operating system, because
this is not like a leased line to a house like a phone line, this
is something that if you don't buy more, that revenue stream is
dead.
So everyone does bundling. Every major OS at least bundles
a browser, several types of applications, and usually much, much
more. Because I knew that Mr. Gassee was going to be on my
panel, I went to their website and looked at the Be operating
system. They bundle something called Be Mail, which is the
equivalent to Outlook Express in Windows, although it may be much
faster. I don't want to make any kind of technical assertions.
Something called Net Positive, which is an integrated, bundled
Internet browser functionality. Something called Poorman, which
is actually a built in web server. Something called Style Edit,
which is a built in word processor, and something called Sheep
Shaver, which is actually providing Mac emulation, which, very
similar to a browser, is an attempt to expand the target audience
of your operating system.
Bundling in a Mac emulator is a way to gain access to
another breed of applications, and to bootstrap applications onto
your operating system. Netscape did much the same thing by
integrating email functionality into their browser, at a time
when they had a very dominant market share of close to 90
percent.
My second point, bundling doesn't mean dominance. IE was
bundled before Navigator even shipped, and Navigator built its
dominant market share at a time when Internet Explorer was
bundled with the operating system. There is nothing mystical
about bundling something with the operating system to create
market share. In fact, ironically the number one use of Internet
Explorer was to go download copies of Netscape Navigator. So, in
fact, the bundling of IE 1 and 2, the primary beneficiary of that
was, in fact, Netscape.
This led to much more aggressive innovation in the browser
technology. The fact that Microsoft entered this market and so
that there was more than one company that was in the browser
market, led to a very rapid pace of innovation in the browser
technology market. IE technology only gained mind share and
market share when it began w