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June 8, 2000

When Judge Thomas Penfield Jackson "ordered, adjudged, and decreed" the breakup of Microsoft into two separate companies he effectively replaced Bill Gates with government lawyer Joel Klein as the chief decision maker of the Microsoft Corporation. The Judge accepted almost verbatim the Clinton administration's breakup proposal, authored by Klein and his colleagues in the corrupt Reno "Justice" Department (with the help and advice of Microsoft's competitors), effectively nationalizing the company.

There is no more competitive industry than the computer industry, where the dynamic market process has produced a company like Microsoft, which produces both a computer operating system and applications. The Soviet central-planning style breakup scheme ordered by Judge Jackson abolishes what the competitive market process has produced and in its place puts a byzantine regulatory regime that is to be administered by federal and state government lawyers. There could not possibly be anything more damaging to competition, economic rationality, and consumer welfare.

The judge's order effectively destroys Microsoft's ability to compete in the Web browser market, thereby making that market less competitive, and also prohibits the company from employing routine competitive devices that are used by thousands of other businesses, such as exclusive-dealing contracts and tie-in sales.

Judge Jackson even goes so far as to order a kind of forced labor by commanding Microsoft to "use all reasonable efforts to maintain and increase the sales and revenues of both the products produced or sold" prior to his order and to "support research and development" for such products.

Never mind that some of these products might become obsolete in the meantime, as they frequently do in the high-tech world; the government commands the company to keep on producing them, thereby wasting resources and causing higher costs and prices.

Most businesses that develop close relationships with vendors or suppliers frequently give preferential treatment to those business partners from time to time in order to maintain a good working relationship. Microsoft is prohibited from doing so with the applications side of its business, for Judge Jackson has forbade offering it "terms more favorable than those available" to any other business.

In a fit of egalitarian extremism the judge further decreed that all computer manufacturers doing business with Microsoft must be offered "equal access to licensing terms; discounts; technical, market, and sales support," etc., etc. Such discrimination, based on merit and performance, is a necessity for any successful business, but Microsoft is banned from it.

The judge's order imposes a huge paperwork burden which will cost the company (and ultimately, consumers) untold millions of dollars and wasted man-hours each year. Every single agreement made between the operating system and applications businesses will have to be reported in detail to the government every three months.

The company is ordered to divert valuable management talent away from producing better computer products and appoint a "Chief Compliance Officer" who will report/genuflect to the government on a regular basis.

A Gestapo-style monitoring system is established whereby the government is given "access during office hours to inspect and copy...all books, ledgers, accounts, correspondence, memoranda, source code, and other records and documents." Fat chance that this proprietary information will not make it into the hands of Microsoft's competitors, who urged on the lawsuit, were government witnesses at the trial, and who helped write the breakup order that the judge ultimately accepted, which included this very directive.

A particularly creepy and totalitarian aspect of Judge Jackson's order is his encouragement of an internal spying network within the Microsoft Corporation with his admonition to "establish and maintain a means by which employees can report potential violations" of the government's regulations "on a confidential basis."

The source code--perhaps the most valuable asset possessed by Microsoft--will be stolen with the help of the government. Microsoft is required to establish a "secure facility" where virtually all of its business associates will be permitted to "study, interrogate and interact with relevant and necessary portions of the source code..." This would be like forcing Coca-Cola to allow other businesses to "study" the secret formula for Coke, effectively ruining its business.

Microsoft is ordered to produce "written reports" about its practices whenever the Justice Department lawyers or any of the state attorneys general want one, opening up the door to endless political extortion ("Give us campaign contributions and we won’t ask for a report.")

No central planning scheme would be complete without price controls, and the Jackson/Klein scheme is no exception.

The "order" demands "equal access" to discounts offered to computer manufacturers and, after each new product release, it must "continue for three years after said release to license on the same terms and conditions the previous Windows Operating System Product to any [computer manufacturer] that desires such a license."

The high-technology revolution, led by Bill Gates and Microsoft, has occurred precisely because, up to now, the computer industry has been the least-heavily regulated industry in the world. All that will change dramatically if Judge Jackson's order stands and the higher courts allow Bill Clinton, Janet Reno, and Joel Klein to effectively nationalize the Microsoft Corporation.

The rest of the world, envious of America’s economic success (thanks in no little part to companies like Microsoft), must be marveling at such a stupendous act of stupidity and arrogance.


Thomas DiLorenzo, Professor of Economics at Loyola College in Maryland, is on the senior faculty of the Ludwig von Mises Institute. Send him MAIL.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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