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Recession and antitrust

The tech downturn started shortly after Microsoft lost round one.

By the time you read this, it will have been nearly a year since Judge Thomas Penfield Jackson issued the historic ruling to break Microsoft into two companies and restrict its activities in other ways. And it will have been a year since economic prosperity ruled the tech world. To be sure, the downturn didn’t set in for real until late August. But the two events are eerily close in time, so much so that several conservative legislators claim cause and effect between them, calling on President Bush to dampen the Department of Justice’s (DoJ’s) enthusiasm for the case.

As I write this, we are all waiting for the appeals process to come to a quick resolution. It’s anyone’s guess how the appellate court will rule, and whether the Supreme Court will get involved. But it is clear that Bush will play a role in the outcome–at least in signing off on the ultimate remedies. Some say Microsoft has suffered enough and no longer has the monopoly status that it did when the DoJ originally brought the case. Others say it still exerts the desktop dominance that enables it to set the terms of any deal related to PC software, and this should be restricted. Whatever the outcome, we are all hoping it will lead us back to a time of prosperity, to a time before the word recession crept into daily life once again.

The question is, what outcome would be best for the economy? I’ve thought long and hard about this question. I was thinking about this the other day as I rummaged through an old drawer of documents, trying to determine what to keep and what to purge as I moved into my new office. I wondered what it was like to be editor back in 1991, when new software for DOS, Windows, OS/2, Macintosh, and Unix came out every day. Most of the products and many of the platforms are now dead, and the software industry contains only a few heavyweights.

Outside of the open-source community, most of the software we review in these pages is 10 years old and approaching version 10. With each new upgrade, users and IT managers have a harder time justifying the upgrade expense. At some point, it will no longer be economically viable to release a new version of the most popular software. Despite the stability, there still is plenty of stuff PCs could do for us. But innovation has ground to a halt. It seems that no one is willing to release new software to enhance our productivity. So why is innovation at a 10-year low? The answer can be found in the years prior to the antitrust case. At some point in the mid-1990s, smart software developers figured out that if their products were worth anything, they either had to partner with Microsoft or get eaten by them. Few large software companies (such as Adobe) were so well established that Microsoft didn’t bother with them or their markets. But anything having to do with office productivity was on Microsoft’s turf. Either you partnered with it and make your solution a PowerPoint, Word, or Excel add-on or Microsoft would reverse-engineer your code and make your application part of its office suite, or of the Windows OS itself.

Some say this isn’t bad. Small-time developers come up with the ideas and their products become part of the Microsoft family one way or another, with Microsoft support. The problem with this argument is that it doesn’t figure in the motivations of the small-time developers. Why would anyone develop a software package just to get bought out for cheap and watch Microsoft cash in on their ideas? Smart developers either went the open-source way and wrote code for Linux, or they went into other forms of development–company database and Web software or hacking. I suppose some of them also went to work for application service providers as well, which may be the last bastion of mass-market office productivity software (most of which mimics existing shrink-wrapped software).

Today, few smart programmers want to get into actually developing mass-market software. Microsoft’s great white hulk lurking just offshore is a disincentive to launching any new productivity software, to say the least. And the trial only reinforces this fact. Whatever the outcome, who can forget testimony by scads of small developers with whom Microsoft made offers they couldn’t refuse? In this respect, those conservative legislators are right: The trial has stifled innovation by revealing Microsoft’s tactics. Who would knowingly enter these waters?

My view is that we have got to find a way to get innovation going again. Innovation is the key to the tech economy. It provides office workers with new ways of increasing efficiency and productivity. And we all know productivity keeps the economy going. But how do we get back to the time when several vendors vied for the various office markets and PCs did new things all the time? We ensure that anyone with a great idea and a little bit of capital can take her product to market without worrying about getting cut in two by Microsoft.

One way to do this is to cut Microsoft in two, as Jackson’s ruling does. And, supposing the appeals court rules in favor of the DoJ, this would remove the competitive advantage Microsoft has regarding the OS: If anyone releases innovative software, Microsoft can release a new version of the operating system in which its own version of the same software runs much better. The other remedies in Jackson’s ruling further restrict Microsoft’s ability to gobble up software markets at will.

But, supposing the appellate court sides with Microsoft, the new DoJ will have to find a way to restore innovation. It could bring the case to the Supreme Court–which, according to the experts I’m reading, is not much more favorable to Jackson than the appellate court is. Or it could seek different remedies along the lines of Judge Jackson’s without the “death penalty” break-up.

Whatever happens in the appeals process, we all hope it will give us the emotional lift we need to climb up the other side of the v-shaped downturn and get back to the innovative tech climate we had before the trial.

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