Microsoft Case - The Transformation Of Government From Regulator Of TheOld Economy To Definer Of The New

The Washington Post

At first glance, the Microsoft breakup order last week looks like a
throwback to an earlier era. At a time when big telecommunications,
finance, entertainment and other new-economy industries are
consolidating into a handful of post-industrial global giants--and when
government is deregulating and privatizing almost everything in
sight--here's Washington imposing the heaviest of heavy hands, slicing up
the very icon of American technological prowess. Or maybe it's just another
example of what I've been calling a new era of regulation by litigation;
Microsoft joins cigarettes and guns as subject to court-imposed sanctions
when the normal paths of legislation and regulatory-agency rule making
are politically blocked.

But I think the Microsoft case can be better understood as a harbinger of a
new kind of role for government in the emerging "new economy"--even if
the company wins on appeal and escapes a breakup. Rather than
regulating particular markets, government will be setting the contours of
property rights as they apply to new ideas, and thus defining the new

At the core of the case is Microsoft's ownership of its Windows operating
system, a piece of software that's become the de facto standard by which
much of the world's information technology is linked. Think of Windows as
the pavement on the information highway. U.S. District Judge Thomas
Penfield Jackson found nothing wrong with Microsoft owning the
pavement. He didn't order that Windows be licensed free to all comers;
Microsoft can continue charging a toll. But the court determined that
Microsoft cannot limit highway access only to Microsoft cars, trucks and
SUVs. To do so, said Jackson, would discourage innovation elsewhere in
the economy.

By splitting Microsoft into a Windows "pavement" company, and another
company making the software applications that will travel on the highway,
the judge has set a boundary to Microsoft's property right in Windows.
Ideally, the boundary will give the first company a strong incentive to
continue improving Windows and the second one a strong interest in
developing a lot of cool applications, while also creating more opportunities
for other software developers to make a lot of money doing their own
things. The hoped-for consequence: more innovation.

The government--wielding antitrust law--used to be concerned about a
different problem: companies that got so big, or merged into such huge
combinations, that they could raise their prices higher than they would if
faced with real competition. The object of antitrust enforcement, in short,
was to keep consumer prices as low as possible.

The Microsoft case isn't really about how much consumers pay for the
technology they buy. After all, the prices of most hardware and software
have been dropping for years. This case is about the pace of innovation.

Why the shift in the focus of antitrust? Because the economy is changing
so quickly that mere size or dominance of a given market poses less of a
problem than ownership of a system of inter-connectivity, such as
Windows, that may discourage invention. The shift in antitrust is part of a
larger shift in the role of government in response to the new economy. The
old economy centered on large-scale production. Businesses prospered if
they could make and sell more of a particular product, at a lower cost per
unit, than their rivals. Large-scale production yielded efficiencies that, in
turn, generally benefited consumers with low prices and spurred economic
growth. But large-scale production also had some less salutary
consequences--not just the possibility of monopoly power that artificially
raised prices but also, occasionally, onerous working hours, unsafe
working conditions and environmental pollution. Hence the major bone of
contention between business and government in the 20th century:
"command and control" regulations that prevent such
excesses--regulations sometimes designed and enforced clumsily, whose
costs to business rivaled or exceeded their benefits to the public.

Large-scale production is still with us, of course. Despite all the hoopla, the
old economy remains significantly larger than the new. Most people
continue to be engaged in making or delivering things that don't change
much from year to year. And--no surprise--the government is still doing a
lot of old-fashioned regulating, including traditional antitrust enforcement.

But the terms of competition are changing, and with them, the function of
government. The new economy is centered on innovation rather than
production scale. And the things that are being sold in the new economy
aren't just tangible products or services but also new ideas--ways to
accomplish certain objectives (communicate with friends, invest in the stock
market, buy books, find the cheapest and most reliable supplier, write this
very article) better, cheaper or faster. Don't think about a technology as a
particular gadget. Think about it as an idea, a new and better way to solve
the problem.

The key competitive question--on which the future of countless companies,
as well as the speed and trajectory of the emerging economy depend--is
who has the right to profit from a new idea and by how much? "Intellectual
property" is the phrase most often used to describe this right, and it's
usually encased in boring old terms like patents, copyrights and
trademarks. But as technology increasingly drives competition, these old
legalisms are taking on vibrant new lives. Billions of dollars are riding on
who gains a patent or copyright to what, the definition of a trademark or
trade name, and the exact boundaries of such rights.

The Microsoft case arose under antitrust law, but the intellectual property
at issue--the thing of value whose ownership limits were being
questioned--was Microsoft's copyright to its Windows operating system.
How far did that right extend? Microsoft claimed it went very far indeed, all
the way to requiring computer manufacturers that used Windows to
include with it all sorts of Microsoft applications--Internet browsers, e-mail
and so on. Judge Jackson disagreed. He decided that Microsoft had no
property right in its bulked-up version of Windows. If it had, that would
discourage the development of other intellectual property.

Here, precisely, is where government (in this case, a federal district court
judge) is shaping the contours of the new economy. Boundaries around
new intellectual property aren't like the boundaries in the old economy of
bricks and mortar, producing tangible goods and services. In the new
economy, edges and limits aren't well established. Often, they're not there
at all. Should a private company be entitled to copyright the map of the
human genome? How about a patent on a newly synthesized fragrance?
On a new means of conducting an auction over the Internet?

Government has to answer these new questions in order for the market to
function, and for businesses and individuals to be able to predict how their
actions today may influence their futures. It's less a matter of a
government "intrusion" into the marketplace, as Bill Gates scornfully
described Jackson's order, than of government defining the rules of
ownership and exchange where none exist. But the criteria for the new
property--what's mine, what's yours, and what can be sold or
licensed--can't be found in logic or analysis alone. Decisions will depend on
the values society places on such things as innovation, tradition and

Ideally, Congress or state legislatures would set out the broad principles,
leaving specific applications to agencies and courts. Yet so far, almost
everything has been left to the courts. The number of patent-related
lawsuits has exploded, from 800 in 1980 to more than 2,100 in 1997 (the
last date for which such data are available). It will probably fall to the
courts to map such uncharted intellectual property terrain as who owns
the human genome and new forms of life. Already judges are struggling to
decide delicate questions of property rights in embryos. And you can safely
expect a torrent of lawsuits to codify a domain of personal privacy.

The final outcome of the Microsoft case won't be known until it works its
way through the federal court system. But whatever the result, last week's
decision marks a major step in the Transformation Of Government From
Regulator Of The Old Economy To Definer Of The New regulator of the old
economy to definer of the new--an inevitable change, as the American
economy moves from large-scale production of things to the continuous
creation of new ideas.

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