March 15, 2002
From the desk of Jane Galt:The other half of the
The other half of the two part series on the Netscape suit is up on Salon. The author, JJ Gifford, agrees with me that the appeals court gutted the core arguments Netscape had against Microsoft, and that the company is relying on the jury's emotions, rather than the law, to sustain the case. However, he (?) believes that Microsoft's behavior is so egregious that the company should be punished anyway, a conclusion I can't agree with -- taking aside the moral aspect, the effects on the business community, especially the technology business, would be disastrous. The more we turn the law into a lottery system, the more difficult it becomes for businesses to predict the outcomes of their actions. The more risk there is in the legal environment, the less investment. If Netscape wins, we're essentially saying to other companies: "even if the law is with you, your competitors can put you out of business if you're cuter." Which is not to minimize Microsoft's nasty tactics; only to point out that there really is a slippery slope to outsized legal verdicts. Many of the things competitors want Microsoft punished for, like bundling and exclusive distribution agreements, are perfectly legal -- how do I figure out where the tipping point is if I have a successful software business? This does not per se argue against anti-trust suits, but it does indicate the high cost of successful litigation in this area.
He also makes an extremely interesting point that I didn't address: monetary damages are meaningless to Microsoft, with its $36 billion cash hoard, so the companies will be aggressively seeking behavior remedies to cripple Microsoft. Yes, I mean cripple. AOL, Sun, Oracle and others are not interested in making Microsoft play fair; they want the company out of business. That's why they sought draconian remedies from the court, which Penfield Jackson obligingly provided. Gifford thinks that the breakup would have been the best remedy:
A so-called "structural remedy" -- a breakup -- would likely have been more effective. It would have replaced Microsoft with a pair of smaller but still strong companies, in a market suddenly open to competition. The collusion between operating systems and applications development that has long fortified Microsoft's monopoly would be erased. Unfortunately, the government declined to pursue such a breakup and instead opted merely to slap Microsoft's wrist. With these private actions, perhaps the company will at least get a spanking.
This ignores economic history. First of all, the anti-trust remedies that broke up great behemoths either moved along regional lines (AT&T), or along the fault lines left by previous mergers (Standard Oil). Breaking up an integrated company doesn't produce smaller, stronger companies in the short term; it's catastrophic, as centralized departments for everything except the product lines have to be dismantled and reassembled piecemeal.
It also makes it extremely time consuming to break the company up, as the court has to negotiate every last minor department, asset, and share. How will you compensate the shareholders? How do you split the stock up -- hard assets, soft assets, revenue, profit? Who gets Bill Gates and Steve Ballmer? Heads of department will try to poach the best employees for whatever company they're going to, leave the worst ones for the other company -- how do you prevent this? There's a thousand questions like this to be resolved, and the court will ultimately have to settle most of them. After years of economist and business leader testimony, negotations, and politicking, you finally produce a result -- and it takes further years to implement. You can require that every decision more complicated than what paperclips to buy get court approval, which eats up time but forces the company to stand still for the five or ten years the process takes, so that you can get a true handle on what's going on. Or you can let the company pretty much go about business as usual while you decide, which in the constantly changing technology industry means that the remedy will probably be inappropriate. Either way, by the end of this time, both Microsoft and Netscape will probably be close to death. Then the shareholders get to sue the government. Whee!
It's a very good article, but I'm extremely uncomfortable with Gifford's confidence that the legal system can easily intervene in a complex system like the technology market or a software company to produce results that will be desireable for the rest of us, not just the plaintiffs. Luckily I think that any outsized remedies handed down by a jury will be rapidly overturned on appeal.
Posted by Jane Galt at March 15, 2002 03:24 PM | TrackBack | Technorati inbound links