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History shows Microsoft dilemma is nothing new

How are Bill Gates and Microsoft like John D. Rockefeller's Standard Oil? In more ways than you might think.

May 18, 1998 3:45 p.m. (EDT)

by Patrick Thibodeau

John D. Rockefeller would probably sympathize with Bill Gates.

Like Microsoft Corp., Rockefeller's Standard Oil Co. controlled about 90% of his market. And as with Microsoft, Rockefeller faced a hostile U.S. government concerned about his company's rapidly growing market dominance.

Rockefeller sold fossil fuels. Gates sells software. But both men faced the same problem: the Sherman Act, the most commonly known part of antitrust law, which was passed in 1890.

Indeed, the type of antitrust lawsuit that Microsoft now faces is "not new -- we've been there before," said Dr. William Comanor, a former chief economist at the Federal Trade Commission.

"Software is becoming the basis of the new economy, but surely that was also true of petroleum in 1912," the year Standard Oil was broken up, Comanor said.

The Department of Justice's expected antitrust complaint with Microsoft is based on the belief that the company has used its market power to override the checks and balances of free market competition.

To antitrust foes, it's an old and hotly debated argument.

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Microsoft, Standard Oil and similar firms "achieved their dominant positions by being efficient, by being aggressively competitive, by innovating, by reducing prices," said Dominick T. Armentano, an adjunct scholar at the Cato Institute in Washington, a libertarian think tank. "That's the only way to explain their market share," he said.

But that doesn't mean the government should let those companies be, Comanor argues. Microsoft "seized the opportunity and more power to them -- but does that mean that therefore the economy should accept their dominance forever and forever, despite the possible cost to society?"

In its possible Microsoft challenge, the DOJ would allege, in part, that the company is using its monopoly in operating systems to gain control of another market, Web browsers.

But Microsoft's decision to give its browsers away for free is "not a novel practice, either," said Dr. James Brock, a professor of economics at Miami University in Oxford, Ohio. The American Tobacco Co. gave away tobacco to crush competition, he said.

"I'm not against firms giving away things," Armentano said. "If other firms can't compete with that, I think it's unfortunate for them, but certainly not unfortunate for the market," he said. Armentano is also an economics professor emeritus at University of Hartford in Connecticut.

The courts broke up American Tobacco in 1911. But corporate breakups are few, and government regulators more often seek some other kind of change by the offending company.

The rapid pace of technology also means the legal process must move quicker if it's really to serve the interests of those it means to protect.

Marc Schildkraut led the FTC's antitrust investigation in the early 1990s into Microsoft's practice of having equipment manufacturers pay for the MS-DOS operating system on every computer they sold, regardless of whether it was installed or not. The FTC commission couldn't agree on a course of action and turned the case over the DOJ, which got Microsoft to sign a consent decree ending the practice.

The investigation began in 1990 and was concluded in 1994. But it was too late to be of any help to DR DOS, a rival operating system owned by Novell, Inc. Microsoft had already built its market share. Moreover, the growing use of Windows made it even more difficult for rival operating system to establish a foothold.

"I don't think antitrust can just give up because it's a fast-moving industry; it's got to try to do what it can to make sure that people aren't preventing other people from entering," said Schildkraut, an antitrust attorney at Howrey & Simon in Washington.

The government's antitrust battles must also deal with market forces. Since the 1984 AT&T break-up, the seven baby Bells have been reconsolidating. If the SBC Communications, Inc. merger with Ameritech Corp. goes through, there will be four Bells.

That hasn't discouraged one antitrust attorney who was at the DOJ when the AT&T case was under way in the early 1980s.

"On balance, the [AT&T break-up] remedy worked, by and large," said Tyler Baker, who is now an attorney at Carrington, Coleman, Sloman & Blumenthal LLP in Dallas. "The notion that we're back where we started is fundamentally wrong. ... There have been fundamental sea changes [here] that have unleashed a lot of competitive forces and influenced a lot of things."

The AT&T breakup is credited with reducing long-distance phone rates, in particular, and allowing for more competition on the local scene.

The effectiveness of specific "remedies," as these actions are called in government circles, may be debated. But in two prior major antitrust cases, the results were clear, according to Comanor and F.M. Scherer, a fellow former FTC chief economist, in a paper published in the International Journal of the Economics of Business in 1995.

The cases against Standard Oil and U.S. Steel had radically different outcomes, both for the companies and their industries.

The government won the Standard Oil case and broke that company into more than 30 successor firms. But it lost its U.S. Steel battle in 1920.

"U.S. Steel was a continual drag on the economy for the next 50 years and caused substantial harm," Comanor said. U.S. Steel's market share declined from about 60% in 1920 to just over 20% in 1990. A flood of imports from Europe and Japan after World War II played a played a major role in that decline.

"The striking thing about the petroleum industry is U.S. firms still dominate the world petroleum industry. And the U.S. firms that dominate are the remnants of the old Standard trust," said Comanor, who is also an economics professor at the University of California in Santa Barbara.

"A sluggish giant did not help our economy," Comanor said. "I think the way to consider this issue is to consider the story of U.S. Steel."

But David R. Henderson, a fellow at the Hoover Institution at Stanford University, disagreed.

Standard Oil didn't monopolize -- they were just good at what they did, Henderson said. In the decade Rockefeller assembled his trust, the company's output expanded considerably and prices fell about 60%, he said.

Bill Gates and John D. Rockefeller "are being punished for their success," Henderson said.

Senior writer Stewart Deck contributed to this story.

Related CNN Interactive stories:

• U.S. files Microsoft suit: Justice Dept., 20 states and D.C. slap software giant with wide antitrust suit
• Text of federal complaint against Microsoft
• Text of states' complaint against Microsoft
• Microsoft Says No 'Legal Basis' To Halt Windows 98

Related sites:

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• Microsoft Corporation
  • Microsoft motions, letters and press releases
• U.S. Department of Justice
  • Justice Department filings against Microsoft

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