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Beware High-Tech Monopolies

By ORRIN G. HATCH

Today I will convene the Senate Judiciary Committee for a hearing on market power and structural change in the software industry. The future development of the Internet and the digital economy will be shaped by structural changes in today's marketplace. With respect to such technological paradigm shifts, healthy competition and effective antitrust policy are particularly important.

Many economists believe that a positive "feedback cycle" in high-tech markets often allows individual firms, such as Microsoft, Intel or Oracle, to garner unusually large market shares. Computer operating systems are a case in point: As Microsoft's Windows became more popular, more software developers wrote their programs to work with Windows. The more applications were written for Windows, the more popular Windows became. This cycle often translates early market leads into unusually large market shares, if not de facto monopolies. Some 90% of personal computer users now use Windows, and are, to some degree, "locked in"--switching operating systems is a lot harder than, say, switching shampoos. Such dominance reduces competition, typically leading to higher prices, less innovation and fewer consumer choices.

But it also produces an important positive effect. When one firm dominates the market for a product that serves as a "platform" for other products--as Windows is for application programs--software developers are saved the cost of writing software that will work on a variety of different platforms, boosting productivity and innovation. In this way, Microsoft's establishment of the Windows standard has been a boon for software consumers.

The danger, however, is that the dominant firm can exploit its market power to prevent new competitors with innovative, paradigm-shifting technologies from having a fair chance at becoming the new market leader or de facto standard. The World Wide Web and the Java programming language are two such potential paradigm shifts. And Microsoft, the operating system leader, is in a competitive battle with respect to both Web browsers and Java.

Netscape's Navigator, the first commercially popular browser, is in a heated battle with Microsoft's Internet Explorer for control of the browser market. Many believe Microsoft is leveraging its Windows monopoly to remove Netscape as a strategic threat.

Sun Microsystems pioneered Java, a language whose programs will, according to Sun, be able to run on any computer--a possibly serious threat to Microsoft, since it would mean application programs would no longer depend on the Windows platform. Although Microsoft has licensed Java, it has chosen to convert it into a proprietary version that only works with Windows, leaving Internet software developers to choose between "pure" Java and Microsoft's rendition.

Thus Microsoft is waging a fierce battle to control two potentially fundamental technological developments and to prevent new technologies, developed by other firms, from undercutting its current dominance of the PC software industry. Microsoft is determined not to allow fundamental, structural technology shifts to undermine its dominance of the software market. As it should be--Microsoft shareholders no doubt demand as much.

But this is precisely where the practices of a currently dominant firm, such as Microsoft, should be scrutinized, and where the rules of the road must be clarified and enforced. Tying arrangements, free product offerings, licensing or marketing practices that are effectively exclusionary--these and other practices may be entirely appropriate in most instances. The question is whether Microsoft is unduly exploiting its Windows monopoly to foreclose Netscape and Java from getting a fair market test. Who decides these battles--Microsoft or the marketplace? If existing monopoly power, as opposed to the market, determines the direction of important technological change, then innovation is chilled, the consumer loses, and antitrust enforcement is in order.

Such enforcement may be all the more important if its absence could lead to one firm dominating critical Web interfaces. And, should inaction lead to an effectively proprietary Internet, many in Washington will call for regulation of the Internet itself. Better to have properly calibrated antitrust enforcement today than heavy-handed regulation tomorrow.

At this point, most of us who are studying these matters have as many questions as answers. My hope is that today's hearing will allow industry leaders to help policy makers better understand the questions, and make progress drawing well-informed conclusions.