PFF VP Recommends Four Way Break Up of Microsoft

(February 27, 2000) The Progress and Freedom Foundation hosted a panel discussion at the National Press Club on Friday, February 25, on remedies in the Microsoft antitrust case. PFF VP Tom Lenard proposed splitting Microsoft up into four companies -- three identical clones which would own the operating systems, and one which would own the Office suite, development tools, Internet properties, and other applications.

The featured speaker, Thomas Lenard, is the Vice President for Research at the Progress and Freedom Foundation (PFF), a research group formed in 1993 which focuses on the digital revolution and its implications for public policy. He is a former economics professor, government official (FTC and OMB), and economics consultant.

The PFF is loaded with former Reagan administration economists and appointees, and takes a free market approach on most other issues. Microsoft competitor Sun Microsystems is a contributor to the PFF. Former Netscape government affairs chief Peter Harter is a member of the PFF Board of Directors.

Lenard argued that Judge Jackson should split Microsoft up into four separate companies, a remedy which he termed a "hybrid structural remedy." Three identical companies would each own intellectual property rights to the Microsoft operating systems, including Windows9x, Windows NT, Windows CE, and Internet Explorer. A fourth company would own intellectual property rights to the applications products, including the Office suite (Word, Excel, Access and Outlook), programming tools, back office, Internet access and content, and consumer software (Money, Encarta, Flight Simulator).

Lenard stated that the two types of remedies available are "conduct" and "structural". He stated that conduct remedies "attempt to constrain anticompetitive behavior by imposing a set of behavioral requirements." Structural remedies attempt to change the incentive structure facing a firm, such as by requiring a company to break up.

He rejected a conduct remedy because this would involve ongoing oversight of virtually all of Microsoft's operations, and turn the courts a regulatory agency. This, said Lenard, "could impede innovation."

He next analyzed a range of possible structural remedies. First, he considered dividing Microsoft along product lines into an operating systems company and an applications company. However, he rejected this because it would leave the Microsoft operating systems in one company.

He next analyzed a splitting Microsoft up into three identical clones. He stated that this would achieve the desirable goal of dividing control of the operating systems. However, it would be disruptive in the applications arena.

Hence, Lenard settled on recommending a hybrid structural remedy which splits ownership of the operating systems, but leaves the rest of the assets in one company.

Two other panelists, Robert Litan of the Brookings Institute, and Steven Salop of Georgetown Law School, spoke in support of Lenard's proposal.

Two other panelists criticized Lenard's proposal: Kenneth Elzinga, Professor of Economics at the University of Virginia, and Stanley Liebowitz, Professor of Economics at the University of Texas at Dallas.

Elzinga started out by saying that the songwriter and antitrust theorist, Neil Sedaka, correctly observed in a song that "Breaking Up is Hard to Do." He opposed Lenard's proposal to split up Microsoft. He said that antitrust breakups "have not happened very much in the nation's hundred year history of antitrust enforcement."

He added, "I don't know of anyone who thinks that structural remedies, where they have taken place, have been the government's finest hour."

Elzinga is a leading authority on antitrust law. He was also employed by Microsoft in both the Bristol and Caldera antitrust cases.

He said that Lenard's "proposal displays a disregard for the economic theory of the firm." He derided it as "a playground theory of the firm" in which Lenard expects that Gates, Allen, and Ballmer to pick teams from the roster of Microsoft employees like children playing softball on a playground.

"One can hardly imagine the tremendous divergence of energy from being a competitor in the software industry, to having to having to focus on rebuilding a new company for each of them. It is no wonder that Microsoft's competitors, and those they fund, want a structural relief. It would be enormously draining and diverting for Microsoft's managment."

He pointed out that companies broken up in the past, such as Standard Oil and American Tobacco, were the products of a series of mergers, and that these conglomerates held geographically dispersed physical assets. Microsoft, in contrast, is largely concentrated at one location, owns very few physical assets, and is not the product of mergers of previously independent firms.

Microsoft's assets are intellectual property, and this cannot be divided like a collection of oil refineries. He added that there is not only the matter of ownership of the intellectual property, there is also the personnel.

In the end, Elzinga stated that "I think a conduct remedy is appropriate." He stated that the government's case is essentially tying, which is behavioral, and best addressed by a conduct remedy. He also suggested that fining Microsoft would be appropriate.

Stanley Liebowitz took the most adamantly anti Department of Justice position. He stated that Microsoft's conduct has not harmed consumers. He also presented the results of a study which he conducted in which he found that the economic cost to programmers of a three way Microsoft breakup would be $30 Billion over three years. He also concluded that consumers would be harmed.

He stated during the question and answer session: "I don't think there needs to be a remedy."

During the question and answer session journalists asked questions and representatives of interest groups made statements that were either pro-Microsoft or anti anti-Microsoft.

For example, Bob Levy of the CATO Institute stated that "the real cost is the cost to other companies who ex ante now know that if they have the competence and the resources and the energy and the ambition to stick their neck up above the crowd, the government is going to come down on them." Ed Black took an opposing viewpoint.

A programmer associated with ACT asked Lenard how he came up with the number of three. While Lenard did not elaborate, Elzinger suggested that "he is a trinitarian, theologically."

Liebowitz said that three Microsofts would still leave a concentrated market for Microsoft operating systems. He said that a much larger number would eliminate concentration, but that by picking only three, Lenard was acknowledging that breakup would result in costs to consumers and programmers.

James Miller of the PFF moderated the panel.