Break Up Microsoft?
By George Reisman

The meaning of the government’s proposal to break
Microsoft into two separate companies, the one
confined to producing Windows, the other confined
to producing application software, is that one or
the other of these two major branches of personal
computer software is to be closed to the productive
genius of America’s most successful software
innovator: Bill Gates. As the New York Times
reports, "Under the government plan, Mr. Gates,
the company’s chairman, would have to choose one
of the two companies and divest himself of any
financial interest in the other." (April 29, p. B4.)

In other words, Gates is to be prohibited from producing and
competing either in a major area which he has been responsible for
creating from the ground up, namely, Windows, or in an area which
he has been responsible for advancing beyond what other suppliers
had achieved, for example, word processing and spreadsheet
software.

Thus, in the name of freedom of competition and the combating of
monopoly, Gates’s freedom of competition is to be blatantly violated
and one or the other of the two branches of software is to be
monopolized against him—i.e., it is to become an industry, or part of
an industry, reserved by means of the government’s initiation of
physical force, to the exclusive possession of others.

All branches of software production are to be open to everyone,
except to Gates (and also, as The Times reports, his two most
important associates, Steven Ballmer, the current president of
Microsoft, and Paul Allen, its co-founder.) The result is that freedom
of competition in software is to apply to everyone except to those
with the ability to revolutionize software. It is though the automobile
industry were to be legally open to everyone except to Henry Ford. Or
the electric power industry were to be legally open to everyone
except to Thomas Edison.

What underlies such an incredible outcome is the utterly mistaken
belief that overwhelming competitive success, to the point that one
man or one company dominates an entire industry, constitutes
monopoly. This, of course, is the kind of success that Gates and
Microsoft have enjoyed.

The fact is that such an outcome of free competition is not monopoly.
But it is monopoly when those capable of bringing about such an
outcome are forcibly excluded from an industry, or any part of an
industry. The accompanying forcible reservation of an industry or part
of an industry even to a mass of less capable producers is the real
monopoly, as much as if the industry had been forcibly reserved to
the possession of one man or one company. The essential element in
monopoly is forcible exclusion and forcible reservation, not the
number of producers.

The destructive nature of the government’s proposed breakup of
Microsoft is further indicated by one of the major reasons for
advancing it. Namely, what The Times article describes as "A
requirement that Microsoft share with other companies any technical
information about Windows, including software interfaces that the
system engineers are sharing with other people at Microsoft."

What this refers to is the fact that an important reason that
Microsoft’s application software is so often better than that of others
is that Microsoft, as the creator and proprietor of Windows, has
greater access to and knowledge of Windows than its competitors.
This gives Microsoft an important competitive advantage when it
comes to producing applications that run under Windows, because it
knows better how to integrate them with Windows.

What the government does not see, and what Microsoft’s
unsuccessful competitors apparently to do not care to realize, is that
this competitive advantage that Microsoft enjoys in application
software was a major reason for its having developed and improved
the Windows operating system in the first place. The prospect of
profits from application software is a powerful motive for improving
operating system software. But it is such a motive only when the
producer of the operating system is free to produce application
software too. Only then can he directly and most substantially profit
from the resulting improvements in the application software.

It follows, of course, that to break up Microsoft must undermine the
incentives of the surviving Windows portion to continue to innovate.
For it will not be in a position directly to profit from any major new
applications that can be based on those improvements. That will be
the monopoly privilege of others.

At the same time, the surviving applications portion of Microsoft will
be deprived of the benefits it would have derived from a free and
motivated Windows division.

Of course, the supporters of the government’s proposal expect that
once others have the same access to Windows that Microsoft now
has, those others will be in a position to produce and innovate more
effectively. Indeed, they will—in the same way that buggy makers
and gas companies would have had greater ability to innovate if they
had not been put out of business by Ford and Edison or if they had
been in a position to forcibly appropriate the advances made by those
great innovators as of the mid-point of their careers.

The consumers of computer software need the freedom of Bill Gates
and Microsoft to produce and innovate in any branch of computer
software they choose. That is, they need for them to enjoy the full,
unbreached freedom of competition. They do not need the hobbling of
this man by the breakup of his company, which would serve only to
reduce the efficiency of both surviving parts and provide monopolistic
protection to less capable producers, whatever their number.

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