Antitrust: An open letter to the European Commission

I'm no fan of antitrust. That should be clear from past articles (my second article on ZDNet was named, rather melodramatically, "Death to Antitrust") where I've outlined several reasons why I believe antitrust policy is outdated and detrimental to economic health.

Contrary to popular belief, I'm not emperor of the world, and lots of people think antitrust is very important to the proper functioning of modern economies. The US government obviously falls into that category, as does European Commission, who last week conducted hearings where Microsoft and its opponents argued over remedies proposed by the European antitrust authorities.

I take less issue with the actions of antitrust regulators, however, if they make it a point to consider the original purpose of antitrust, which was to benefit consumers using competitive markets as a means to that end.

In my post-Tunney comments (which was originally a letter sent to State Attorneys General involved in the case, as well as the Microsoft legal team and Judge Kollar-Kotelly), I argued that requiring Microsoft to open protocols related to interoperability was in keeping with the original spirit of antitrust, more in keeping with the lessons of the last 100 years of economic history and vastly superior to the structural remedies previously advocated by Judge Jackson. Along those lines, I recommend that the European Commission concentrate on mitigating market power through the enforcement of more open desktop and server interoperability protocols and reject attempts to take software design decisions out of Microsoft's hands.

What not to do - The Commission's Media Player Proposals
The European Commission understands the difficulties faced by competitors when Microsoft decided to integrate a new feature into Windows. Given that every copy of Windows ships with the new feature, third parties must convince end users that their product is sufficiently better than the existing, integrated product that they are willing to download a replacement. Though this is certainly easier today compared to 10 years ago before the Internet revolution reshaped global commerce, it still requires interest on the part of the individual.

This is a valid issue. However, making life easy for competitors is not the goal of antitrust. Consumers derive a number of benefits from the presence of features integrated into Windows that outweigh the heightened competitive pressures faced by third-party vendors of those features.

Gains from API consistency
As I noted in my Tunney comments, software needs standards because software lacks natural levels of compatibility. Application Programming Interfaces, or APIs, are the means by which programmers reuse code built by other programmers. However, there is infinite variability in the definition of an API. To send mail, one vendor might choose to create an operation named "SendMail," while another might call it "_SendSmtpMail". Furthermore, the types of data either operation requires to perform its task (a.k.a. "parameters" in programmer-speak) will vary between the two operations.

This search for standards explains why consolidation around one dominant API has happened repeatedly throughout the history of the computer industry. Standard APIs imply a larger market for products which adhere to that API, enabling boosted developer competency and an increase in compatible product. In the past, IBM defined the APIs for the industry, a role filled today, at least on the desktop, by Microsoft. Linux is rapidly becoming the centre of the Unix programming domain, and Apache has all but become the de facto standard for Web servers.

Integrating the latest technology behind new APIs is one of the tasks required of standard-setting companies or organisations. This enables developers to use that technology easily without having to become masters of its idiosyncrasies, enabling them to concentrate on logic specific to their application. In the case of Windows, Microsoft included networking and a primitive Web browser with Windows 95, Mail handling functionality through Outlook Express, Instant Messaging through MSN Messenger, and media playing as far back as Windows 3.0.

This integration leads to software that can assume the presence of high-level technology features that conforms to a particular API. Intuit's tax software is built atop the Internet Explorer HTML rendering engine, a product that I've noted in the past is more API than client browser tool. Similarly, a number of companies reuse Microsoft media playing components, among them any product that uses DirectShow to render video to a screen (DirectShow is now THE media API for Windows), or more specifically, the repackaged Napster music service. This leads to more feature-rich applications, which benefits consumers.

It's worth noting that MediaPlayer IS capable of playing media in formats besides Microsoft's own, something far more important than which client application an end-user uses. MediaPlayer is built atop Microsoft's DirectShow pluggable media handling technology. Plug-ins exist for MP3, as well as QuickTime and the Real Audio format. In other words, third parties have a relatively easy time making themselves a part of the Windows media playing API. They just have to provide a DirectShow "filter" (in DirectShow parlance) for their media format, and end users can view/hear the new media stream using Media Player.

Gains from market building
Most people who use a television know next to nothing about how it works. This doesn't mean, however, that regular consumers shouldn't use TV sets.

The same applies to regular computer users. Most consumers view computers as a tool. They want to be able to run the software they find at the local computer store or download off the Internet. They want to use the hardware that is available. They don't tend to explore all the capabilities of their computer, simply because they have other things to do with their lives.

This means they aren't likely to use new technology unless someone shows them the ropes. In that regard, integrated products act like training wheels for the non-technical user. They learn what kinds of things are available on the Web by using Internet Explorer. They try out instant messaging using MSN Messenger. They experiment with digital media using the integrated Media Player product. Furthermore, they can be assured that any computer they encounter running a particular version of Windows will have the same high-level features.

This creates market opportunities for companies that build ancillary products that require the popularity of certain technology. Content providers have new opportunities due to the presence of a unified market capable of consuming their product.

Many analysts have opined that the lack of broadband applications has held back widespread adoption of broadband in the United States. Microsoft's inclusion of new high-level features into their OS builds markets by creating a consumption point for technology, generating revenue for third parties and building a large and profitable software ecosystem that provides lots of jobs, in Europe and elsewhere.

Remember, antitrust is about consumer benefit
Non-technical users eventually become more experienced with new technology, and might find the default product lacks features they want. Such people might decide to go out and download alternative products. This was certainly the case when media player was the "lobotomised" product which existed in previous versions of Windows. Such products served as poor competition to more professional products, and experienced users quickly went in hunt of them. In this case, integration drove demand for third party products by introducing non-technical users to new areas of technology in greater numbers than these third parties might have managed on their own.

The inclusion of product only becomes a problem for Microsoft's critics when the product becomes sufficiently good that regular users have less of a need to try alternatives. Being "too good" has been identified as problematic by American courts in the past. The Honorable Learned Hand famously stated in his Alcoa Aluminum antitrust ruling:

"We can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organisation, having the advantage of experience, trade connections, and the elite of personnel."

Consequently, this ruling has been widely criticised, and for good reason. It actually suggests that companies should NOT make high quality, low cost products for their customers as it is "anti-competitive" if they are so good that life becomes very hard for competitors. In other words, the Alcoa ruling lost sight of the original purpose of antitrust. The preservation of competition for its own sake became the underlying principle, not benefit to consumers.

In short, if Microsoft makes such good integrated product that consumers have less incentive to try alternatives, then that is GOOD for consumers.

Never forget, however, that alternatives DO exist to every product in Microsoft's software library. Linux, the Mac OS, FreeBSD, Netscape, Mozilla, Opera, RealPlayer, Apple's QuickTime player, WordPerfect, StarOffice, etc. ALL exist. The "problem" with Microsoft isn't that competitors do not exist. Rather, the issue is whether consumers choose to use competitors' products.

Part of the reason competitors always exist in software markets is that software isn't like airplane manufacturing, an industry that requires billions in up-front costs. Software has low barriers to entry due to low cost tools (PCs, plenty of free development tools) and the human skill orientation of software development. Microsoft has often been considered paranoid due to its constant fear that the company that will replace it lies just over the horizon. To some extents that fear is justified, as software evolves VERY swiftly due to low barriers to entry.

Most of the industry considers Linux a serious competitive threat to Windows. I don't imagine Microsoft fails to take Linux seriously, and neither should antitrust regulators.

Remember the power of free markets
Free markets work for one simple reason: because individuals have more knowledge than planners can ever hope to gather. This isn't because the people charged with making economy-wide decisions are stupid. Rather, just as an individual responsible for manufacturing TV sets knows less about what is required to run a steel mill, far-removed planners cannot know as well as individuals their particular needs, or the circumstances of individual lives. Individuals spend their entire lives living inside their own skin (at least, I do). This is "division of labour" at its most distilled, and represents why relying on free individuals to make decisions in markets works better.

Individuals make better buying decisions as well as better producing decisions. In other words, people who work at Oracle are better able to make proper decisions related to the Oracle database product. People at Novell are better able to make proper decisions with respect to their directory services product. Lastly, people at Microsoft are better able to make proper decisions with respect to Microsoft products.

When the Commission suggests that Microsoft redesign their products, they are bypassing division of labour and OF NECESSITY making a less informed decision than anything Microsoft could make. Like I said, this isn't because commissioners are less intelligent than the general population. Rather, it is because commissioners don't spend every working day of every year getting to know the insides and outsides of Microsoft products.

There are a number of reasons why Media Playing functionality exists in Windows that have relevance today, and that I've mentioned. You would see where they are going with the technology, however, if you attended Microsoft's recent Professional Developer's Conference in Los Angeles. The ability to use media will be extended to every aspect of the Longhorn user interface (Longhorn is the next generation of the Windows operating system), leading to richer and more interactive user interfaces. Such is the advantage of integrating advanced media playing architectures into Windows, as it enables media to be used in ways that stand-alone applications of the sort envisioned by the European Commission cannot enable.

These are all things that Microsoft developers, as "experts" from a division of labour standpoint in Microsoft products, well understand. One hundred years of economic history has shown that the best approach to economic management is to leave choices as much as possible up to individuals. Along those lines, I suggest that the Commission should leave choices related to the design of Microsoft's products up to Microsoft's own developers.

Regarding the inclusion of competitors' products in Windows
This isn't per se as serious an issue, though it sets a nasty precedent. Imagine a judge ordering J.K. Rowlings to include short stories from lesser-known fantasy writers because of her "unfair" power in the fantasy book market. What if Dell was forced to offer IPaq and Palm handhelds as add-on options to new PCs instead of the Dell-branded Axim Pocket PC product? What if independent consultants such as myself were forced to include documents praising other consultants in business presentations because it is "unfair" that I get all the attention.

No one would ever suggest doing any of these things. It's not categorically different, however, than forcing Microsoft to ship with competitors' products. Such a policy is justified by the theoretical need to attack "monopoly" status (I don't have a monopoly on consulting). It doesn't make the concept any less weird, though, or less a serious imposition on the economic freedom of large numbers of people.

Would companies whose products were ordered included in Windows be required to pitch in to the costs of developing Windows? If not, why not? Microsoft pays to have its own products included in Windows because it is completely responsible for all costs associated with Windows development. Why wouldn't makers of third-party products which Microsoft is forced to include, and test, in Windows, be required to pitch in?

Furthermore, why can't companies pay PC manufacturers to ensure inclusion? That is an option on Windows PCs that doesn't exist for platforms made by Apple and Sun. Apple and Sun both make the hardware that runs their proprietary operating systems, whereas Microsoft does not. Sun has already used this to great effect, paying companies such as Dell, Gateway and HP to ship with their Java Virtual Machine pre-installed. What are the odds of Microsoft convincing Apple or Sun to do the same thing with .NET?

How would companies get the right to be included in Windows? Would the decision be made behind closed doors or out in the open where everyone can see it? Either way, is not the commission inviting lawsuits from those parties who feel they were unfairly left out? Such conflicts are easily avoided by stating on principle that free companies in free markets have the right to include whatever they want in their own products.

The proper approach - deal with Microsoft's market power
Dominance in the software industry is a natural and NECESSARY part of that market (note the term "dominance" as opposed to "monopoly". There ARE multiple alternatives to Microsoft's products. People just aren't using them as much). The software market has not been without a dominant player for its entire history, and unless software stops evolving and technology becomes sufficiently well understood that consistent and universal standards can be made with a reasonable expectation of accuracy and long-term applicability, will remain so for the foreseeable future.

That does not mean, however, that the Commission cannot do something useful as the result of their investigation. At the end of the American court case, it was decided (by a Clinton-appointed judge) that the best approach would be to require Microsoft to open more protocols in order to facilitate interoperability. She explicitly rejected, however, the notion that courts would call the shots with respect to design decisions in Microsoft's products (in other words, no requirement to remove products from Windows). In so doing, she ensured that competitors would have an easier time interoperating with a product whose dominance was based in the need for standards (and from which consumers derive a number of benefits), but not impinge on what Microsoft is best qualified to do, which is make decisions for its own products.

Should the Commission take a similar approach, Microsoft is highly likely to go along with it. They negotiated in conjunction with America's Department of Justice the settlement approved by Judge Kollar-Kotelly. Likewise, Microsoft has shown a strong interest in putting their antitrust tribulations behind them. What appears non-negotiable, however, is their right to design their own products as they see fit.

Requiring that Microsoft open protocols in order to simplify interoperability does not restrict their design freedom, as well it shouldn't. Furthermore, the Commission could walk away with a solution to this case now, rather than waiting for several years, as would surely be the case if they decide to require changes to Windows. Microsoft fought tooth and nail to ensure the inclusion of Internet Explorer in Windows. I expect that they would fight just as hard to maintain Media Player in Windows.

Conclusion
The United States spent over four years fighting a similar antitrust case in its own courts, and a Clinton-appointed judge (the same administration that STARTED the original antitrust suit) came to the conclusion that judicial control of software design decisions was a bad idea.

I think it's just as bad an idea in Europe.

Deal with Microsoft's market power, and trust that markets chose to standardize on Windows for a reason. Consumers and producers (programmers, hardware makers, etc.) derive benefit from a large, ubiquitous market mostly unified around a single platform. Governments, who can't gather enough information to compare with what exists in the mind of every buying and producing citizen, should be loath to tamper with it.

John Carroll is a software engineer now living in Geneva, Switzerland. He specialises in the design and development of distributed systems using Java and .Net. He is also the founder of Turtleneck Software.