Antitrust Not On Internet Time: Microsoft Remedies Discount Serious Competitive Threats

Many have come to believe that the technology industry requires strict governmental policing of allegedly anti-competitive behavior. But today’s software and Internet companies may find that the special rules about to be applied to Microsoft will establish a precedent that can be selectively employed as they achieve similar spectacular success. The beast some of them have helped unleash—one that even regards corporate breakup as reasonable—may look less friendly then.

Given the blow being dealt to Microsoft by antitrust regulation, it is worthwhile to reflect on some recent developments in the industry that illustrate just how dynamic this sector really is. The new capabilities are so sweeping that they render any requirement that Microsoft be broken up or even prevented from “bundling” software with its operating system both ridiculous and unfair. Even a cursory overview illustrates these points. Like Microsoft, nearly everybody “bundles,” gives software away free, favors some partners over others, places limits on the use of their software, and wants to “crush” their competitors. Consumers benefit from such rivalry.

Below is a list, far from exhaustive, of a handful of recent software and hardware innovations that, jointly and even separately, represent credible threats to Microsoft.

Online applications software reduces the importance of desktop computer applications.

If it can be done on a desktop computer with a hard drive, chances are it can now be done on the Internet. Increases in bandwidth and computing power are creating entirely new classes of “killer” apps critical for those on the move and those not wedded to Windows. There’s even an acronym: ASPs, or applications service providers.

  • Free word processing and spreadsheet software are readily available online. Sun Microsystems, for example, purchased Star Division, a niche producer of an office application suite called StarOffice. Sun sees StarOffice as a Web-based alternative to Microsoft’s PC-captive Office software.
  • Similarly, is a Web-based office package that c|net calls “the most comprehensive free office suite we’ve seen so far online.” Free costs a lot less than Microsoft Office.
  • AnyDay, Yahoo!, and uncountable other websites offer free calendars, address books, and other productivity tools that typically used to require installation with a program disk. Personal information is stored on secure servers, generally not the user’s computer, and thus can be accessed with any computer. Likewise, email has long been offered free (or very cheaply) all over the Web. As such programs become increasingly acceptable for business purposes, they pose greater threats to heavy email programs such as Microsoft Outlook.
  • Fax capability like that bundled with Windows is now offered free over the Web by such firms as Fax4Free and eFax. Users can set up free fax numbers and send and receive free faxes in their free email.
  • Flashbase is one firm that offers online database services to business users, potentially bypassing database programs like Microsoft Access.
  • Microsoft sells FrontPage, one of the most popular programs for creating web pages. Yet many websites offer to users absolutely free or inexpensive web pages (and hosting), that require no user-end software—one simply fills out templates on the sites. Vendors include Yahoo and Juno.
  • Any aspirations Microsoft may have had to dominate small business services, either through its traditional applications or its bCentral website, face threats from such sites as and FreeMerchant, which allow users to set up entire online stores. FreeMerchant and others offer free banking, including checking and bill-paying, free business Website hosting, traffic logging, store builder routines, and auction tools.
  • allows phone calls over the Internet without a requirement that one download or install a program on the hard drive.

Online data storage reduces importance of the desktop.

Remember when a 20-megabyte hard drive was a big deal?

  • I-drive now offers “infinite” data storage on the Web for users. Other companies like Yahoo! and FreeSpace offer users tens of megabytes of free data storage. These allow users to store and share files such as MP3s (near CD-quality music files), enjoy the security of virtual backup of all key files, and, perhaps most importantly, access their files from any connected computer or enabled device in the world.

Competition in operating systems is alive and well.

There’s no turning back from Web applications and the increasing irrelevance of the operating system. Even so, competition in the operating-system market remains heavy.

  • Back in July 1998, just after the Department of Justice’s antitrust case was filed against Microsoft, 30 US companies offered computer systems, most of them Intel Pentium based, preinstalled with Linux. Today there are at least 78.
  • When Red Hat Linux went public the stock value skyrocketed. The stock now has a market value of over $8 billion.
  • Several investments in Linux have come from firms with the wherewithal to tell Microsoft to take a hike—which incidentally is how markets properly police themselves. Intel and Dell have both invested heavily. Dell, long a Microsoft supporter, offers Linux pre-installed and even offers Linux on laptop machines.
  • The Macintosh iMac remains a hugely popular computer.
  • Less influential but noteworthy nonetheless is Intel’s announcement of a $25 million investment in the Be operating system at the 1998 Comdex, citing its rich multimedia capabilities. Hitachi also announced a Be partnership.

The open-source software revolution can threaten proprietary operating systems.

If the free Web software campaign continues, there soon may be nothing left for Microsoft to “bundle” with Windows at all. Meanwhile, an even more non-proprietary model of software creation threatens both these visions of the computer business.

  • The Netscape Navigator browser is now an open source program, and the Netscape Netcenter portal that features it is one of the most-trafficked websites. Incidentally, if America Online—which owns Netscape—were to make Netscape the default browser for subscribers to the AOL service, its share would instantly catapulted far beyond that of Microsoft’s Internet Explorer.
  • Sun has announced that it is working toward “community sourcing” as much of its software as possible. Not quite open-sourcing; licensing fees do apply. But the approach represents a business model quite different from Microsoft’s.

Web “portals” show that no company can dominate the online universe.

Many have worried that Microsoft’s dominant position in the operating-system market could lead to its dominating content on the Internet. But people seem to insist on clicking wherever they please.

  • Microsoft’s Web properties are big contenders for Web surfers’ eyeballs, but are bested by AOL and Yahoo! properties.
  • Among news, information, and entertainment sites, MSNBC ranks seventh. In the crucial search-site and shopping-site categories, Microsoft does not make the top ten.
  • Microsoft Network failed at online ventures in entertainment. It cancelled production of its online shows and closed music and movie review sites. And just three months after introducing it, Microsoft dropped TaxSaver, its tax preparation program. Tax software is one of the biggest consumer markets.
  • AOL’s purchases, first of Netscape, then of media conglomerate Time Warner, make the fear of Microsoft domination of Web content clearly unfounded. Likely instead is that an equally ridiculous future case against AOL-Time Warner is already being forged somewhere in Washington, DC.
  • Rumors persist that Yahoo!, with its vast array of Web-based consumer and business services, may merge with eBay. In February 2000, Yahoo! sites got 45.5 million unique visitors, while eBay got 11.8 million. While there’s surely overlap between the two, by comparison Microsoft’s entire set of Web properties (including, Microsoft Network, MSNBC, Expedia travel, and Money Central) received 44 million unique visitors.

The PC is increasingly just one among many ways of accessing the Internet.

Contrary to the judge’s findings of fact, network computers—stripped-down devices used to surf the Internet and take advantage of Web-based applications like word processors and calendars—are growing in importance, especially with the emergence of online storage. And handheld devices that can access the Web are becoming increasingly popular.

Handheld devices

  • The Palm VII handheld device allows wireless surfing of key sites on the Internet. Palms now are available with a collapsible keyboard.
  • MicroStrategy, through its unit, offers what it calls “a new form of media that delivers highly personalized and timely information to individuals via the Internet, telephone, and wireless devices.” These are the key services of the Internet age—but no one needs Microsoft to enjoy them. AvantGo offers similar content services over handheld devices.
  • WebTV is owned by Microsoft. Nonetheless, the phenomenon of surfing the Web by television represents a strategy aware that the world does not need to use PCs to access the Internet. Microsoft never “tied” WebTV to the Windows operating system, of course; any of thousands of other companies could have purchased and expanded WebTV.

Smart Cell Phones

  • AOL has announced plans to offer its services through arrangements with several wireless data carriers, device, and mobile phone makers.
  • Smart phones of seemingly endless variety are emerging, including some that embrace the Java programming language and some that provide instant messaging services.

Gaming Consoles

  • The Sega Dreamcast and the upcoming Playstation II will be Web enabled, allowing users to surf and email without Microsoft in the background, taking advantage of Internet applications, free storage, and increased bandwidth.

Information Appliances

  • Now available is the I-Opener, a $299 “Internet appliance” that features e-mail and Internet browsing capabilities without the rest of the PC functions (i.e., no Windows operating system is needed). The maker is Netpliance.
  • AOL has cut a deal with Gateway to offer stripped-down computers. An AOL/Gateway/Netscape device would entirely bypass Microsoft Windows, yet allow all the functionality of the Internet. AOL also intends to offer “PC-free Web gadgets.”
  • The term “information appliance” acquires new meaning as ordinary household appliances are hooked up to the Internet. A GE prototype networked refrigerator allows access to the Web and the ability to control appliances.

The Internet and computer technologies are advancing in ways no one can predict, assuring new sets of winners in the future. As evidence, Cisco Systems has now attained a market capitalization larger than that of Microsoft. Technology executives hoping for political victories against Microsoft or standing silently on the sidelines should realize that they may be next in the crosshairs (so watch out, Cisco). Whatever economists may not understand about dynamic business strategies—including the alleged evils of “tying” and giving away free products to build market share and sink competitors—they are a part of a mix that serves consumers handsomely.

Any attempt to regulate or break up Microsoft or subject high-technology generally to the auspices of antitrust (a) will target “threats” better addressed by the marketplace; and (b) will prospectively freeze this vibrant, innovative sector into a timid stance painfully aware of the selective nature of antitrust aggression. A company like Microsoft may grow large under capitalism, but never as large as the capital markets and the opposing business interests who desire to crush it. Investors always find other ventures to fund the market-policing of “monopoly” abuses.

* Wayne Crews is Director of Competition and Regulation Policy at the Competitive Enterprise Institute and the founder of

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