Taking on the titans

June 26, 1998

Underlying the trust-busting suit against Microsoft is the notion that the high-tech sector is a market different from all others and requires new regulations. Kam Patel reports on the academics warning that governments must act against commercial giants such as Bill Gates and Rupert Murdoch if consumers are not to suffer

In the United States they just have to have the biggest cars, the biggest waves and the tallest buildings. Now, true to form, America has got itself the absolute mother of all commercial law cases. In September, Bill Gates will face formal charges that his computer software firm, Microsoft, is an illegal monopoly. America has not seen anything on this scale since the Supreme Court decided to break up John D. Rockefeller's Standard Oil empire in 1911.

The US Department of Justice has accused Microsoft, valued at Pounds 135 billion, of using its monopoly on the sale of personal computers (the firm supplies its operating system to 90 per cent of the world's PCs) to lever its way into the market for Internet browsers, the computer software that helps users search for information on the Net.

Netscape, which pioneered the development of browsers, has been particularly outspoken in its demands for action against Gates. Netscape claims that Microsoft is using its monopoly to bully computer makers into inserting its Internet Explorer into computers, to the detriment of Netscape's business.

Although the prospect of US courts taking on Gates, one of the most powerful industrial figures ever, is exciting enough, the case is actually much more juicy. Its outcome could profoundly affect how people the world over think about and buy into an increasingly digital world in the early 21st century.

The anti-competition rationale being deployed against Gates is rooted in theories developed by academics studying the economics of high-technology industries such as information technology, pharmaceuticals, biotechnology and aerospace. Joel Klein, assistant attorney general and head of the Justice Department's antitrust division, has singled out Belfast-born Brian Arthur, economics professor at the Santa Fe Institute, as a key influence on his thinking.

Arthur's research suggests that classic theories of how free markets work do not apply in the high-technology sector. Compared with markets for standard bulk commodities such as coal, steel and even calculators, the high-tech sector operates to a different set of rules. Traditional markets for bulk commodities conform to textbook economics. They are shared out among many players competing with each other, and they are relatively stable.

High-technology markets, on the other hand, are skewed by the phenomenon of "increasing returns" - the tendency of anything that is ahead in market share to get farther ahead. The result is the squeezing-out of other players and the tendency for large corporations to dominate. As Arthur says, if lots of people buy a high-tech product, say Microsoft Word 6.0, others feel they also have to do so. More and more people get "hitched" into a network of users. "Larger market presence familiarises workers with the product and makes it more attractive to join others using it. Market success breeds further success."

It is a sure-fire route to creating monopolies. But Arthur, a free-marketeer at heart, is not quibbling about that. What he sees as dangerous, and the Justice Department agrees with him, is companies levering themselves from winning in one market into winning in another. "I favour policies where, to whatever degree practical, each company starts behind the same starting line in each new race. And I favour policies that severely punish companies that hobble their competitors' horses in the dark," he says.

After all, it was Netscape that took the risks and forged ahead with browsers at a time when Microsoft had practically written off the Internet. It is feared that the sort of entrepreneurialism Netscape showed in developing its browser might be stifled if the kind of action Microsoft is pursuing is permitted.

Arthur is in no doubt about the importance of what he calls the "O. J. Simpson case of the commercial world". He says: "On one level, the Microsoft case is about Internet browsers. At a deeper level it is about whether you really want one company to take over not only the Internet, but media and many other things. At an even deeper level, the Microsoft case is going to set the rules for all high-technology industries, certainly in the US, for the next 20 to 50 years. And its importance is amplified by the fact that, as an economy, we are becoming more and more high-tech. What is being argued out here is how you regulate increasing returns industries and what principles you use to do so. This has big implications for consumers."

The case is being followed closely in the United Kingdom by Tony Prosser, professor of law at Glasgow University. He recently gave evidence to the House of Commons culture committee during its probe into the multimedia revolution. The Microsoft case, Prosser says, will have a "crucial impact" on fast-developing media industries, which are rapidly moving towards more interactivity between media such as digital television and users. The result will give people much greater control over what they receive - be it home shopping and banking or more television channels. It will also mean that those who control the technology that permits interactivity - the box that sits on top of a television set - will have immense power.

The main focus of concern in Britain has been media tycoon Rupert Murdoch - chairman and chief executive of News Corporation, whose interests include The THES. Prosser says: "Murdoch's BSkyB (satellite television operation) will be the first to launch digital satellite television in the near future. But it also has a stake in the company that developed the devices that are essential for unscrambling digital TV signals. The concern is that if the owner of the technology also provides programme services and charges for them in a competitive market, there is obviously an incentive to make the devices incompatible with services offered by competitors."

Similar concerns were voiced last month by the former director of the UK telecoms regulatory body Oftel, Don Cruickshank. In a lecture on future regulation of electronic communications industries, Cruickshank called for a new regulatory structure in the UK to reflect new realities. The communications market can no longer, he points out, be broken into "telecommunications" and "broadcasting", the basis for the current regulatory framework. That terminology belongs to a world that has ceased to exist. In the "old world", the telephone, for instance, is a one-to-one communication device. But already other services are available via telephone lines, not least Internet access. Soon it will be possible to connect the telephone line to the television to engage with digital services such as shopping. Telephones, computers and television, for some time to come, may manifest themselves as discrete entities, but the services they provide are blurring into one another, or "converging".

In contrasting these developments with the "old world", Cruickshank points out that when engineers built the telephone networks and governments authorised their use, they were extremely careful to design the systems so that the intelligence of the network was located at a centre: "All monopolistic organisations have always had a network centre, a nerve centre if you like. The BBC has one, and they call it the BBC Television Centre. Likewise ITV, which has its Network Centre. They betray themselves by the language they use and their existence says a lot about the relationship between those organisations and government. Having relatively small centres made monitoring and interrogation (of those organisations) easier."

But developments in technology have slashed the cost of transmitting, storing and processing data. This undermines the network centres. "You and I can buy all the intelligence that used to be at the centre for a few hundred pounds and be in control - or we would be if the rules governing the networks and access to media were properly framed," Cruickshank says. He wants to see a new regulatory structure to oversee the entire electronic communications industry. This would involve forming two new bodies: an Electronic Communications Commission, to control competition and economic issues, and an Electronic Communications Standards Authority to police content and uphold standards.

Unless the government grasps the regulatory nettle, Cruickshank fears that consumer interests will suffer: "There is a real danger that regulatory authorities, competition authorities and governments will sleep-walk into a market structure that is extremely detrimental to consumers. These authorities take comfort from the belief that existing levers work. But they will find that when the levers come to be pulled they are connected to nothing. It is the duty of government to formulate rules so that ordinary people who want to access information are able to get it."

Cruickshank believes there are lots of reasons why the UK government is slow in heeding his warnings. No government likes not being at the centre of the network or, at the very least, not being able to access it easily. But also, politicians are wary of having to deal with the "masters of the universe": the Gates and Murdochs of this world. "They should beware that technology in this area is moving very fast and they run the risk of attempting to close the stable door after all the horses have bolted."

Bill Gates's road to court

12 November 1997

The US Justice Department threatens Microsoft Corp with an unprecedented $1 million- a-day fine for being an illegal monopoly. The department objects to Microsoft's requirement that computer makers who want to license the Windows 95 operating system must also license the firm's internet browser, Internet Explorer. "This kind of product forcing is an abuse of monopoly power and we seek to put an end to it," says assistant attorney general Joel Klein, head of the antitrust division.

December 1997

A federal court orders Microsoft to stop requiring PC-makers to insert the browser with Windows 95. But the judge rejects calls for a $1 million-a-day fine.

January 1998

An out-of-court settlement between Microsoft and the Justice Department solves part of the browser bundling quarrel, but it does not does not address the government's central concerns.

March 1998

Bill Gates tells a Senate hearing that Microsoft is not a monopoly and warns that government meddling in his industry will harm innovation. Wisconsin senator Herb Kohl says: "Mr Gates, no one, no matter how powerful, is above the law."

May 1998

Talks to settle the dispute between the Justice Department and Microsoft collapse. On May 18, the Justice Department and attorneys general from 20 states file a lawsuit against Microsoft accusing the company of being an illegal monopoly.

June 1998

Microsoft wins an appeal against an injunction barring it from weaving its Internet browser into Windows 98. This will not affect the main suit, which comes to court on September 8.

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