Internet : The Land of Monopolies

FTER Thursday's decision by the United States Court of Appeals for the
District of Columbia Circuit, which threw out out District Court Judge
Thomas Penfield Jackson's order to break up Microsoft, the big question
seemed to be: Who won? It's an interesting question, given that the court
agreed with Judge Jackson that Microsoft was, after all, a predatory
monopoly.

But whatever the answer in this case, there is a growing realization among
economists and technology experts that Microsoft may be only the most
visible symptom of a problem afflicting the Internet economy.

What troubles some observers of the world of Internet-enabled software and
services - which marches to slogans like "get big fast" and "winner take
all" - is that a number of factors may make it a breeding ground for
monopolies.

Not all of those factors are new. There are decidedly old fashioned
economies of scale that make it cheaper to manufacture things in bulk. In
the world of selling intellectual property like software, the trend is even
more pronounced, because it costs a great deal of money to develop the
product and almost nothing to put it on disks and sell it again and again.
This makes it harder for newcomers to enter the market, because they must
spend so much time and money up front just developing a product, before
they can try to sell it.

Inertia also helps, since consumers and businesses alike hate the
frustration and delay that learning how to use new systems entails. This
"lock-in effect" helps preserve market dominance, said Hal R. Varian,
economics professor and dean of the School of Information Management and
Systems at the University of California at Berkeley, because it creates a
different kind of barrier to entry for newcomers - not the cost to the
company of entering the market, but the cost to consumers of making a
switch.

But what is really driving the Internet economy, Mr. Varian says, is a
relatively new phenomenon known as "network effect" - the notion that a
technology based on connectedness grows increasingly compelling and
valuable as more and more people use it.

The power of the network effect can be seen in technologies like America
Online's Instant Messenger. Once teens realized that they could gab after
school online, it became a must-have, Mr. Varian said - and its use
exploded, rapidly bringing AOL a near-lock on a market of more than 100
million people that Microsoft is struggling to break into.

Put all of these together and you get an environment in which the benefits
of getting big pay off again and again, and consumers themselves reward the
urge to grow. The result is a number of markets thoroughly dominated by the
biggest player.

"As software becomes a bigger part of our lives and it becomes a bigger
part of the economy, this is going to become a bigger problem," said
Michael Froomkin, a professor at the University of Miami School of Law.

Nor is this effect limited to software. The dynamics of the new market have
helped Intel grab 80 percent of the PC microprocessor market - a share that
will grow even larger after last week's announcement that Compaq Corp.
would stop offering customers its own Alpha processors by 2004. Oracle
Corp., which dominates the database market, is the second largest software
company - only Microsoft is larger. And ask just about any teenager about
America Online's hunk of the market for Instant Messenger software.

In a world that tends toward bigness, what's a policy maker to do? Judge
Jackson concluded that consumers were being hurt by Microsoft not because
the company raised prices too much, but because it suppressed the
creativity and competitiveness that a truly open market allows.

Lawrence I. Lessig, a professor of law at Stanford university and author of
"Code and Other Laws of Cyberspace," said that whether the company chooses
to fight on or settle, its true intentions will be revealed in the
architecture of its future products.

"Are they building code that will level the playing field, or are they
building code that will tilt the playing field in their direction?" he
asks.

"Microsoft, more than anybody else, recognizes that architecture matters,"
said Mr. Lessig.

It has been suggested that the so-called open source technologies -
software like the computer operating system Linux - might offer real
competition to the commercial software giants. These software platforms are
designed by volunteers, given away for free. But Linux, like many of these
software labors of love, isn't a really consumer product that can be easily
installed and run by mere mortals. Although people who run Web sites have
flocked to the free, open software, consumers have not.

Some commentators suggest that technology moves too quickly for government
to effectively regulate, and that fast moving technology markets should
simply be left to regulate themselves. They point to the fact that the
technology market is so volatile that today's monopolist is tomorrow's
loser - lessons learned by the makers of such products as Lotus 1-2-3 and
Wordstar, which once dominated their worlds.

A recent paper by the economists David S. Evans and Richard Schmalensee
suggested that classic antitrust law might not be the best tool to deal
with these emerging issues. The two economists, who have written papers and
legal filings supporting Microsoft's position in its antitrust case, said
that government should act to keep companies from abusing their monopoly
power to undercut competitors, but that "the application of antitrust
principles should take account of the important ways new-economy industries
differ from traditional ones."

In particular, they wrote, if a dominant company can prove that there is
healthy competition despite its commanding share of a market that has
winner-take-all characteristics, that fact "should be a defense to claims
of predation."

Mr. Schmalensee, the dean of the Sloan School of Management at the
Massachusetts Institute of Technology, declined to comment because he
anticipates being called as a witness if the Microsoft case goes to a new
phase.

Robert Litan, an economist at the Brookings Institution, while admitting
that "judicial time doesn't move anywhere near as fast as Internet time,"
says that the fact that antitrust regulation in the new economy is hard
doesn't mean that it should be abandoned.

Governments fight terrorism even though that task becomes more difficult
with each passing day, he said, and although he hesitated at a potential
comparison between antitrust and terrorism, he said,"we may not be able to
stop it, but we'd be stupid if we didn't try."

"We do need to watch the winners more closely," he said. That naturally
means paying attention to the most powerful players, because "monopolies
are in the position to wield their power unfairly."

arch/ive/ief (2000 - 2005)