More antitrust tilting

Clearly, the silt churned up by the European Court of First Instance's ruling last week has not cleared. So much for my promise that last Friday's post would be my last blog on the topic.
Written by John Carroll, Contributor

Clearly, the silt churned up by the European Court of First Instance's ruling last week has not cleared. So much for my promise that last Friday's post would be my last blog on the topic.

As reported yesterday, a Brussels-based think tank which goes by the name of the "Globalisation Institute" released a whitepaper wherein they suggested that the best way for Ms. Kroes to achieve a "significant drop in Windows market share" was for the EC to force PC manufacturers not to ship computers with operating systems pre-installed.

I think Dell, HP, Lenovo, and most other PC manufacturers might have some rather strong words regarding such a proposal. Support costs are a headache for most PC manufacturers, and I fail to see how this is going to serve to reduce them. Raising costs on consumers across the board seems a funny way to achieve perfect competition (unless reducing the volume of computer purchases is a policy goal as well), though I did note one response on betanews that gushed enthusiasm for the move because it would "create a job for I.T. people: installing Windows on PCs for idiots." Thank you, EC.

If I had to make a case against antitrust in a court of law, I would base it almost entirely on "moral hazard." Item one in the evidence log would be whitepapers like the one offered up by the Globalisation Institute, which demonstrates in two pages the dangers of giving smart people too many economic levers to pull.

I'm not against antitrust in principle. As I've noted before, I don't think its necessarily wrong to prevent a company with the market share of Microsoft from signing exclusive contracts with OEMs. I also would consider it proper to require Microsoft to license its protocols to third parties, something that is only possible if those protocols are sufficiently documented as to make that possible. So, score one for the EC, as I don't think documentation requirements are beyond the antitrust Pale.

Those are policies designed to prevent lock-in, and that is a useful function for government antitrust authorities. The problems start, however, when government bureaucrats start to try to engineer "proper" outcomes. That's when no antitrust can often be better than an antitrust policy that doesn't understand limits (and why I have advocated an end to antitrust regulations in the past).

Why does the Globalisation Institute believe that forcing OEMs to ship only systems without operating systems pre-installed would result in any different an outcome? Has that had any effect in servers, a market where user ignorance is NOT a problem as recipients often have the technical skills to install any operating system they want (and buying "naked" systems without an operating system preinstalled is quite common)? Remember, Microsoft's server market share is growing robustly, as noted with some consternation by Ms. Kroes and the EC.

The Globlisation Institute makes the following claim on page one of its whitepaper:

While manufacturers compete on styling and brand reputation, in addition to specification, no manufacturer or component manufacturer is the sole choice for consumers. Intel processors compete with those from AMD; memory comes from numerous suppliers; hard drives come from a range of suppliers like Seagate, Hitachi and Western Digital; and so on.

There is no reason why there should not be diversity in operating systems, too.

Later, they continue with the following:

Yet operating systems are not a natural monopoly. Just as evolving standards in hardware allow the combination of competition and compatibility, in a competitive operating system market, there would be broad compatibility between different competitors’ operating systems.

Have Internet standards managed to make all web browsers completely compatible? Could I create a web page in Mozilla and be confident it would run, unchanged, in Safari and Opera (leave out IE, as I am fully aware of its limitations on the standards front)?

Java is a standard, of sorts. Can I create my application for the BEA WebLogic J2EE server and expect it will just run in other J2EE servers?

Mac and Windows run on the same basic hardware, and both use x86 family chips. Does that mean Mac applications can run on Windows, and vice versa?

The point is that choice of operating systems is not the magic bullet that the Globalisation Institute seems to think it is. There has never been a point in the history of software markets when there has NOT been a dominant player. That speaks to the fact that consistency across platforms is rather hard to get right even when companies are actively trying to ensure it happens, never mind when companies have a vested interest in differentiating themselves by doing things that are an improvement over competitors, but create incompatibilities as a byproduct.

This is why consumers consistently choose a dominant player. The primary reason is application compatibility, but at a technical level, they are choosing a consistent base upon which more third parties can build their products. This means that the edge would always go to the company that creates the largest ecosystem for third party software (and through software, imposes order on hardware manufacturers...Microsoft can make or break a technology like USB or Bluetooth).

Given that fact, after regulations that try to change Microsoft's market share by "unbundling" the operating system from computers fail (as I'm sure they would), should the next step in the EC's endless battle against Microsoft dominance be to force developers to create applications that run on Mac, Windows and Linux...or more, because lets face it, we don't want to entrench the status of those leading operating system contenders.  Moral hazard, indeed. 

The Globalisation Institute states as if it is self-evidently true that there is no such thing as a "natural monopoly" in software platforms. Based on what evidence? Hardware doesn't seem a great example of the lack of natural dominance, as standards have hewed pretty close to the designs articulated by Intel engineers since the early days of the PC industry, and Intel's influence has only grown stronger since Apple's shift to Intel chips. That speaks to a need for standards in markets where they don't naturally exist, not to a vision of perfect competition as exemplified in the market for computer hardware.

There is a strong natural component to dominance by any one company in computers. Human desire defines its broad outlines, as consistency yields economic benefits desired by computer users. As I said in my last blog, if Microsoft wasn't the dominant company, someone else would be. Though such an outcome might cheer fans of other operating systems, creating that outcome should NOT be a goal of antitrust.

Remember, computers markets are not like markets for asparagus. With asparagus, one asparagus farmer inherently creates the same product as another asparagus farmer. That isn't the case with computers, which is why, naturally, the market tends towards dominance by one company.

That doesn't mean the benficiary of that natural consolidation should be allowed to create unnatural walls designed to ensure their long-term dominance. It does mean, however, that there may be consumer-oriented reasons for high market share. All the market engineering in the world isn't going to change those realities.

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