Still At Risk: Companies That Are Too Successful. by Robert W. Hahn. November 2001.

It's Microsoft and the government in the last mile of the antitrust marathon, and the winner is...

Well, call it a tie - assuming Judge Colleen Kollar-Kotelly approves a settlement still being finalized Thursday night that leaves the states that had joined the Justice Department's suit on the sidelines. The prosecutors extracted the right to regulate some of Microsoft's marketing practices and to assure that competitors' software runs properly with Windows. For its part, Microsoft retained the ability to add features to Windows without asking Uncle Sam for permission.

Naturally, both sides are inclined to look on the bright side. But before their relief becomes infectious, allow me some words of caution. Microsoft did, indeed, escape the fate its enemies had hoped for. But nothing about the conclusion of this case suggests that the trustbusters understand the risks in second-guessing market outcomes where competition is largely driven by innovation. Nor will the settlement serve as a deterrent to commercial interests seeking to enlist the government as an ally against rivals.

Start with the good news. The central issue in U.S. v. Microsoft was the company's right to integrate an Internet browser into its Windows operating system at the expense of rival Netscape. The trial judge said this design decision amounted to "tying," and was thus, on its face, illegal. But the appeals court set a far higher standard for equating software integration with illegal tying, effectively forcing the government to drop the issue. And the higher court jettisoned the trial judge's virtually unprecedented decision to break up a company that had grown large without the aid of significant mergers, setting the stage for this week's compromise.

So why can't I stop worrying and learn to love a legal system that once again found the middle ground? For one thing, the settlement does not reject the false premises on which the case was based. Microsoft was singled out because it was very profitable and dominated important segments of the market for software. But high, sustained profits and large market shares are characteristic of many "new economy" industries. And neither implies a lack of competition in industries - like software - in which incumbents must innovate or die.

Most important here, the government never really asked the key question that applies to both old and new economy industries: Did Microsoft's behavior slow technological change or raise prices? Even the judge who would have condemned Microsoft to a speedy demise admitted that the company's determination to become king of the Internet generated a windfall for consumers in the form of better products at lower cost.

The other pebble in my shoe is related to the origins of the case. The Clinton Administration targeted Microsoft after it had been lobbied heavily by archrivals Netscape (browsers), Sun Microsystems (servers) and Oracle (data base software). Those rivals didn't, in the end, get all they wanted. But their relatively modest investment in what has been called the political marketplace did tie Microsoft in knots for years. And the payoff they did get was obviously large enough to encourage two other rivals, AOL Time Warner (Internet services) and Kodak (image processing software), to lobby Congress to slow the introduction of the latest version of Windows - a lobbying effort that may have succeeded if September 11 hadn't distracted Washington.

Yes, even I can count our blessings. Once the recession is over, there is good reason to expect high technology industries to flourish again. And Microsoft itself seems to have shrugged off the distractions of endless litigation. However, I'm still having difficulty ignoring the reality that, as long as antitrust policy remains rudderless in a rapidly changing economic environment, companies like Microsoft will remain at risk of being punished for their success.

Robert W. Hahn is director of the AEI-Brookings Joint Center for Regulatory Studies and a consultant to Microsoft.

A version of this article appeared in the L.A. Times on November 2, 2001.