by Ananda Gupta
June 8, 1999

America Online’s purchase of Netscape proved a huge development in the Microsoft antitrust trial, which creaked back into action on May 31. AOL, the world’s leading Internet service company, saw fit to pay nearly $5 billion for a small company that (if the government’s arguments were sound) wouldn’t be worth a fraction of that owing to Microsoft’s depredations. Yet somehow they did. Because of that, Microsoft could argue that its tactics didn’t really hurt Netscape so badly, and that AOL’s actions constituted maneuvers into a competitive position with it.

On Friday, the government’s economist, Franklin Fisher, worked into his testimony some interesting facts: that AOL was really more interested in Netscape’s portal business than its browser technology. Steve Case, AOL’s chief executive officer, even said that his company decided to buy Netscape "in spite of" the browser.

The conventional wisdom holds that Case’s remarks, along with corroborating e-mail between AOL executives, hurts Microsoft’s argument. But it actually highlights the changing nature of the Net, and the futility of regulatory attempts to keep up. A "portal" site is a site on which users begin their surfing. They see that site’s ads first, they look at its suggestions for good hunting on various topics, and they partake of its secondary services (free e-mail, Java-based gaming, classified ads, etc.). Popular portal sites record their "hit" statistics in millions, not the thousands or hundreds that other commercial sites use. Another significant point is that Microsoft doesn’t have a portal site - or rather, the one it does have, www.msn.com, is failing. It faces robust competition in the form of the new AOL/Netscape efforts, not to mention Yahoo! (the original portal site), About.com, or even I-Village, the new online community aimed at women.

Using portal sites is almost always free, just like downloading a browser (browsers have been free for so long that if Microsoft were ever to charge a price, disbelief, not outrage, would probably be the first reaction for most Net users). But for almost anyone new to the Net, a portal site is necessary, which begs the question: what good does monopolizing the browser market do a company if the user must also partake of a portal site, particularly if one has not yet reaped the benefits of such a monopoly?

The issue is problematic because it echoes the question of market definition, an important issue in all antitrust proceedings. It’s just not clear why consumers, or the government, should care whether one firm has a monopoly on a product (browsers) so complementary to another (portal sites), especially when the barriers to entry in either market are minimal. Thus, the question of market definition comes down to raw interest - the lines dividing one product from another will not necessarily be drawn according to economic criteria (such as the extent to which two goods substitute for or complement one another), but to suit the firms with political savvy. Enough of that, over time, is certainly a portal to poverty.

C:\SPIN is produced by the Competitive Enterprise Institute

Competitive Enterprise Institute

1001 Connecticut Ave. NW, S. 1250

Washington, D.C. 20036

(202) 331-1010