Wednesday, June 20, 2007

Apparently, Being Competitive Is Illegal

From Reuters:

"U.S. antitrust authorities confirmed on Tuesday they reached an accord with Microsoft Corp. requiring the company to modify its Vista operating system in response to complaints its desktop search function puts Google Inc. and other potential competitors at a disadvantage.

"The Justice Department said Microsoft would create a 'mechanism' for computer users and manufacturers to select a default program to handle desktop search."
More from the New York Times:
"Google maintained that its desktop search program, available as a free download, was slowed by an equivalent feature that is built into Vista. When the Google and Microsoft search programs run simultaneously, their indexing programs slow the operating system considerably, Google contends. As a result, Google has said that Vista violated Microsoft’s 2002 antitrust settlement, which prohibits Microsoft from designing operating systems that limit the choices of consumers."
So, let me get this straight, Microsoft is being punished for allegedly putting its competitors at a disadvantage. Well, heck, we better start suing every company in the US (as well as any company in any other capitalist country on which we can get our hands) since they, by definition, are either a) doing that or b) trying to do that. After all, trying to create and sustain a competitive advantage over one's rivals is what companies have to do to remain competitive, stay in business, and, ultimately, drive innovation and create value for all stakeholders (shareholders, employees, and customers).

On top of that, it is not just that Google is somehow put at a disadvantage - it's that, apparently, Microsoft is obligated to provide society with a software platform on which any other company can build software (that competes with its own, don't forget) that runs just as well as anything that is built-in. This is like saying that Ford is obligated to create a vehicle in which any after market peripheral device (radio, CD player, ejection seat, etc.) works perfectly even if it replicates something that a built-in component already does. Imagine if a third party parts manufacturer sued GM or Ford because their (the third party manufacturer) part (which, remember is, at least partially, redundant) doesn't work flawlessly in every car GM or Ford produces. That would be absurd - everyone would consider the part manufacturer responsible for the operation of their own product.

At this rate, Microsoft might as well be classified as a public utility that is beholden to society the way phone companies are. Just as phone companies are required to ask permission of the government before changing prices (up or down in many cases) and to allow others to lease their lines at wholesale prices so that third parties can compete with them using their own assets, Microsoft could be forced to submit everything it does to DOJ inspectors and to allow any company that wants to build software to do so at its expense. At least in the case of the phone companies, one could begin to make a case that the only reason the phone company is in such a great position is because there was basically a government sanctioned monopoly for decades. What's the excuse with Microsoft? They were too good at creating value for consumers?


Triumvir Vis said...

I totally and completely disagree with your assessment.

Okay, that's probably hyperbole, but still.

I don't really even know where to begin.

Your analogies are too dissimilar to work. There is nothing on a car currently being built (that I know of) that require replacing the frame/unibody in order to remove. Essentially, Microsoft has made their radio (search feature) integral to the car body & electrical system (OS) such that it cannot be removed or even turned off without replacing the body . . . I mean, the entire vehicle. Not only that, but the integrated MS radio puts out interference that prevents any other radio from operating effectively. THAT is what is anti-competitive.

But even my above analogy isn't that close. An OS is nearly never the end-use of a computer system. The OS is present to allow applications to operate. A car may well be the end-use (pleasure driving), and the radio hardly at all (it is simply an accessory). The most normative end-use of a car is transportation. Thus, when an OS (car) prevents certain applications from running effectively, when the applications are otherwise within the parameters of the OS (so we're not talking about off-roading in my Corolla), we have a situation that doesn't work analogously, as a car can't have a built-in road.

I won't get into it, but this is also nothing like making telecommunication companies carry their competitors calls.

One last point (even though there are more to be made): when dealing with goods and services that benefit from the network effect, competition is much more difficult. When I buy the same make of car that you do, the value of yours increases almost not at all. Computers running on the same OS, however, do increase the value of others on the same OS, as file and program compatibility is largely tied to these. If applications and file formats were platform-independent (and we're definitely making a lot of progress in this), then the OS would have little no benefit from the network effect. I hold that where the network effect is operable, the usual benefits of free market trade do not apply, and special regulation is in order.

Ken said...

First, let me say that I realize the car analogy is not perfect, but that I believe that the places where it is "most vulnerable" are also the places where it is least relevant:

To address the first main paragraph - is it really the MS component "putting out interference" to the after market component or vice versa? The OS is designed to work in such and such a way and this after market component is not optimized for it - in fact, it could be said to be hindering the intended operation of the OS (it could get very messy to start debating exactly where the "core" OS ends and the "accessories" begin, so I'll gloss over it until it becomes critical). To go back to the car example - what if there were a component that absorbed so much electricity that it and the windshield wipers worked slowly? Would it be Ford's fault for not building a car that could handle whatever electrical requirements an after market component demanded? Even if the MS component were the offending party, so what? Where is it written that MS must provide a platform on which everyone else's stuff works optimally?

As to the second paragraph - so what? It doesn't matter whether the OS is the end-use or not. If it doesn't work well with things that normal consumers are going to expect to work on it, that is a matter to be corrected by market forces - by people voting with their feet and buying some other OS that serves their needs or meets their expectations better.

I'll ignore the utility thing since you did as well.

As to the networking effect being a special case where market forces don't apply and regulation is in order, can you please explain why you hold this? It doesn't seem to make sense to me. First off, if the reason is that "competition is much more difficult", so what? Why is competition that much more difficult? Because one company got there first (and so they should be regulated?), one company produced a better product and, so, more people bought it (and so they should be regulated), other companies did so badly that they went out of business (and so the successful company who delivered what the consumer wanted should be regulated?)?

Secondly, even granting the fact that the "value" of an MS OS increases when someone else buys one, so what? You're point would seem to be that, when the "value" of my purchased asset (the OS) is affected by subsequent purchases by third parties, that the industry should be regulated. Why? Shouldn't I have taken the responsibility for my purchase at the time of purchase? If I buy a Daewoo car and then Daewoo does so badly in this country that they leave the market and I can't get spare parts, should we regulate the car industry in some way? Perhaps to make sure that all parts are cross-compatible or that every type of car is sold a certain number of times so as to reach critical mass?

Also, I believe it would be harder than you may think to come up with an exaaple of a business where subsequent purchases didn't affect the well being in one way or another of a previous customer -- granted the way in which this would occur would not be due to interaction between the goods or services purchased. For example, take Daewoo again. Every subsequent car they sell gets them that much closer to being permanently (more or less) established in a certain market. Their continued presence in that market means that I will have support available to me when I need as well as the option to upgrade to another one of their products in the future. If, on the other hand, they don't sell more, I "lose" due to the fact that they may leave the market and leave me high and dry. Thus, if the principle on which you wish to base the regulating of the OS is that each purchase has the ability to affect previous purchases of the product by others, I think you have a problem. If, on the other hand, that is not the principle, please elaborate.

Triumvir Vis said...

Yes, it is MS putting out interference, not the after-market product. The problem is that MS is not only making their search function integral to OS, but are doing so in such a way that it can't be turned off. If we're sticking with your radio analogy, that's just ridiculous. There's no reason, at the very least, that MS can't leave the radio's power leads unwelded, or at least allow the radio to be turned off.

Now, I do have to grant that this is probably a borderline issue, as almost nobody searches their own drives for fun or profit. If this was a matter of MS making PowerPoint integral to the OS and impossible to turn off so that it was always using resources, would that be a clearer case for you? Or would you still claim that it is any alternative presentation software's problem?

You've mentioned a couple times that it is the after-market product's fault or problem that it can't run well with the existing equipment. That's only half-true. It is not the case that Google's product runs poorly because of Google's poor engineering. It runs poorly because of specific engineering by MS to prevent any non-MS search service from running well.

One huge problem with the car analogy is that no one car manufacturer has a market-share comparable with MS. Also, the network effect, as I understand the term, does not apply to cars. All network-like benefits that cars have are secondary to the use of the car. Strangely enough, most small-run cars (which suffer under the network effect) are more valuable than large-run cars.

You are certainly right that there is at least some benefit to multiple purchases of the same kind of thing. This is simply a matter of supply growing meet greater demand and thus lowering costs through large-scale production. Sure. But that isn't the network effect. To use the classic example, a single fax machine is absolutely useless. A single car is most certainly useful. In fact, if you had the only car in existence (you might have to modify it to run on some other fuel, admittedly), your car would be _more_ valuable, as you would have the fastest mode of passenger ground transportation. You could make a mint as a (relatively) high-speed taxi-driver. The ubiquity of cars actually lowers their individual value (especially because of vehicular congestion, check out the Freakonomics blog), even though it also lowers the cost of service and repair. Fax machines are the opposite. The ubiquity of fax machines greatly increases their value.

How is this relevant? Competition is not a good in itself. If you hold that, we have much more serious problems. Economic competition is good because it effectively brings about a number of other economic goods. In the case of a true monopoly, there is no competition. Now, where there is only a de-facto monopoly on a non-network-effect good or service, one may legitimately argue that there is potential competition, as anyone with capital might begin competing. Thus, if Cars-R-Us were the only manufacturer of cars, but they were clearly making crappy or overly expensive cars, somebody else assemble some metal-workers and such and start putting out high-quality or low-cost cars, and thus compete.

With fax machines, we're dealing with an open standard, and thus anybody can compete in making fax machines. We have the benefits of competition with fax machines. Microsoft's OS is different. Microsoft, through government-granted monopolies (copyrights and patents), is preventing others from competing directly (by natively running Windows- and DOS-based software). This government-granted monopoly might not be so bad if we were dealing with a non-network-effect item, as competition can exist by producing something with similar uses. As it is, MS is using its government-granted monopolies with a network-effect item to prevent direct competition and the benefits that attend that.

This is getting hugely long, but hopefully I can end with this last bit: Mac OS X and the array of Unix-like OSes are not direct competition to MS Windows. They are the closest you get, but they all run different realms of software. The Unix-like OSes are direct competition, largely, with one another. Many of them can run the same software, formats, and file-systems. If you desire to run a specific piece of software, perhaps because it is essential to your occupation, you may be required to run one specific OS. That would be like I-66 being restricted to one make of car. This analogy still breaks down, but there are more-or-less a whole slew of roads (applications) that only allow (run on) one make of car (MS).

Ken said...

I was going to post a follow-up comment addressing the various points from your second comment, but I think that would not be fruitful. Instead, let me reframe what I have already said or alluded to. I think you're missing the forest for the trees by focusing on the analogies. Just forget about the issue of the cars. Also, just forget about whether or not a certain aspect of an OS is integral for it (or, for that matter, whether it ever or often constitutes the end use of the product).

Now, what I don't understand in your position is this: even if MS is "putting out interference" - so what? I don't understand why market share or the network-effect constitute a reason to introduce government regulation. Please explain.

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