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The Open-Standards Ploy

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Tags Legal SystemMonopoly and CompetitionProduction Theory

09/04/2001Dale Steinreich

Perhaps it's inevitable that a good magazine sooner or later really blows it on a particular issue. A relatively recent and shocking column entitled "Will History Repeat Itself?" in the August 6 issue of Forbes is a good example.  

Written by Stephen Manes, a close watcher of the software industry, the purpose of the article is to briefly examine the history of the federal government's antitrust case against IBM and to glean insights and policy prescriptions for the feds' current antitrust campaign against Microsoft.

Manes points out that IBM lost its first antitrust case in 1936 when the Supreme Court ordered it to allow punch cards made by rival manufacturers to be used in its machines.  Manes notes that the Court's order didn't make competing cards more popular among consumers, but he doesn't seem to be bothered by this.  The implication is that the federal government didn't intervene quickly enough, hence consumers got hooked on a medium they actually loathed.  

Since coercing the use of competing cards wasn't a sufficient enough humiliation for Big Blue, the feds struck again twenty years later and forced IBM to divest a portion of its punch-card division and allow purchase (not just lease) of its machines.  

Of course this solution wasn't sufficient either, and in 1969, the still-unsatisfied feds decided they wanted nothing less than a full-fledged breakup of the company.  The battle lasted until 1981, when the feds finally gave up.  

Despite the antitrust campaign, IBM remained dominant until the spread of the desktop CPU.  Then the landscape of the industry changed but IBM, large and bureaucratic, didn't:  the creative destruction of competitive markets ultimately wrote the epitaph for its earlier dominance.

Manes notes that the changing market and not the federal government ended IBM's dominance.  So does the IBM case provide evidence of the futility and waste of antitrust campaigns to him?  Not at all.  He concludes that the federal government didn't act quickly and decisively enough.  

The lesson for today as it applies to Microsoft?  Break up the company.  To Manes, the June 28, 2001, U.S. Court of Appeals decision avoiding a Microsoft breakup was a huge mistake ensuring that Microsoft will "remain intact and predatory" and continue "sticking it to competitors and customers alike." 

Manes sees all sorts of sinister designs to crush RealPlayer and AOL Instant Messenger in the new Windows XP the way Netscape was "slayed" in the browser-integrated Windows 98.  But wait a minute.  Exactly when was Netscape "slayed?"  Manes is careful not to mention that the "slayed" Netscape is the browser exclusively packaged on promotional disks for AOL's very popular Internet service and soon will be (if not already) the immutable default browser underneath the AOL desktop.1  Neither Windows XP nor Microsoft can do anything to change these situations.  Disabling the popular AOL desktop would be a possibility, but why risk angering tens of millions of AOL subscribers? 

Thus, alleged Microsoft omnipotence is absurd, but Manes, typical of many Microsoft critics, propagates the Naderite charade that outside Microsoft, there's no choice of hardware and software.  (Ralph Nader himself made his infamous assertion on The Wall Street Journal op-ed page that consumers couldn't purchase a computer these days without Windows on it.)  

It seems to be a standard argumentative technique of Microsoft critics to pretend that Apple and Sun Microsystems don't exist.  Avoided are uncongenial realities such as Microsoft investing $150 million in Apple to keep its platform commercially viable because sales of its software to Apple users is profitable.2  

This was certainly more constructive than many actions Apple took to advance the cause of its platform, having done it almost irreparable damage in the 1980s by keeping its prices and profit margins relatively high compared to firms manufacturing IBM-compatible clones.

Apple fans argue that the Macintosh platform compares favorably to the shaky Windows, which has a graphical-user interface not fully integrated with the operating system.  For those of us weary of long bootup and shutdown times as well as the not-uncommon Windows lockups and crashes, they have a point.  

The problem is that marginally "superior" technology (where it can be objectively defined) doesn't necessarily end up dominating markets when it competes against sufficiently close alternatives that are viewed by consumers as a better value in terms of perceived real benefits over costs.     

With much freer licensing arrangements, Imation's SuperDisk technology in late 1997 could have expanded every new 3.5-inch disk drive from 1.44 megabytes to 120 megabytes in storage capacity and put Iomega's 100 megabyte zip drive (with its larger, smaller-capacity disks) at a significant market disadvantage.  The technology would have represented an undeniable advance in convenience had it caught on, allowing 3.5-inch drives to read both 1.44-MB disks and their 120-MB counterparts of the same size but with 83 times the capacity.  

Remember when certain 3.5-inch drives could read 720-KB diskettes but not 1.44-MB diskettes?  Many hardware buffs do and think consumers benefited when the technologies merged, allowing the old low- and new high-capacity disks to be read and written on by the same device.  

SuperDisk could have represented the same type of advance in standardization, but "on steroids."  The 120-MB SuperDisk could have been today's standard instead of the current obsolete 1.44-MB drives (still a standard feature on new systems), which could have their capacity doubled and still not be able to hold the average MP3 song file.  

Instead, Imation retained tight control, kept availability low by not building strong OEM alliances like Iomega did, and invested a significant amount of money in an inscrutable last-ditch marketing campaign3, and voila! the SuperDisk eventually disappeared just like the visionary Motorola-based Commodore Amiga platform that began to popularly fade away in 1990.4            

The saga of Sun is a different matter.  It created Java as a language that would transcend the Wintel platform and thus challenge Microsoft's dominance.  Although Sun opened the specifications of the language to competitors, the company retained control of these specifications as well as control of compatibility standards and licensing terms.  

With great fanfare in December 1999, it announced the release of "its" Java 2 Enterprise Edition (J2EE), the result of two years of effort by hundreds of programmers at many different companies.  Though it didn't write the code behind the J2EE extension, the great "open-source" champion Sun insisted that firms using the J2EE standard in their software pass compatibility tests and pay a royalty of 3 percent of their sales to Sun.  

An outraged IBM, which produced 80 percent of J2EE, refused to pay the royalty.  To make matters worse, Sun (already a competitor with IBM in server hardware) released iPlanet, software that competes with IBM's WebSphere.5

In fact, complaints against Sun by IBM, BEA Systems, and SilverStream almost exactly mirror those made by Sun, Oracle, and RealNetworks against Microsoft; i.e., Sun is using its control of a standard to put competitors at a market disadvantage.  Sun's iPlanet competes not only with IBM's WebSphere but software designed by BEA and SilverStream as well.  

Scott Dietzen of BEA fears that Sun will toughen its compatibility tests to hinder competitors while steadily acquiring market share for its iPlanet.6  

Other small developers swear that Sun promised them it would hand control of the Java standard to an independent panel, but Sun now claims it was misunderstood.  One of Sun's most vocal critics was IBM's Java head Patricia Sueltz, who claimed that Sun's tight-fisted control of Java was hindering its widespread adoption.  Sun hired her away from IBM before the release of J2EE, and she instantly became one of Sun's biggest champions.7

The J2EE episode exposes the inconsistencies of the antitrust crusade and the willing dupes that "consumer advocates" such as Ralph Nader have become for Sun's Scott McNealy and Oracle's Larry Ellison.  Suffice it to say that Microsoft was more than amused by the J2EE controversy.  

Microsoft developer Charles Fitzgerald said, "After years of sanctimonious claims that Java was an 'open standard,' Sun has finally dropped the pretense. . . . [t]he major losers are the companies that took Sun's rhetoric at face value and thought Sun wouldn't give itself an advantage over other vendors."

Sun isn't the only company embracing "open standards."  It's been little more than a decade since progressive economists and industrial policy proponents lamented the "myopia" of American business (read:  greedy fixation on short-term profits at the expense of long-term "planning") and predicted a thorough dominance of the U.S. economy by Japanese corporations.  And yet, where are the vaunted Japanese planners today?  Like Oracle and Sun, sweating over the possibility of losing out to none other than Bill Gates.  

In May of this year (four months after the January 8, 2001, unveiling of Microsoft's Xbox video-game system at the Consumer Electronics Show), Ken Kutaragi, head of Sony Computer Entertainment, allied himself with some of the prime movers and shakers of the anti-Microsoft movement (Sun, RealNetworks, Netscape-AOL-Time Warner) to thwart Microsoft's impending dominance of broadband entertainment.  

And what is Sony's Kutaragi calling for?  The same thing his new-found partners demanded for Windows 98:  open standards. (What a surprise!)  "Right now it [the market] is like going to Disneyland, which is fun, but then not being allowed to leave.  We do not want to be a closed world like the PC world," said Kutaragi.  Of course why would Sony want a closed world when (like Sun) one of "open standards" could be so much more potentially advantageous to its interests?8

Sony's young consortium hasn't flagrantly "pulled a Sun" yet, but Kutaragi's behavior vis-à-vis Microsoft as well as his alliances can only make many perspicacious observers suspicious.  Whether "History Repeats Itself" a la Sun in this regard might be a future topic worthy of exploration for Manes and his Microsoft-hating ilk, but don't hold your breath.  

Also, don't expect antitrust action against the Sony-Sun-RealNetworks-AOL consortium any time soon for colluding to "stick it to consumers" (to use Manes' words).  That might bring a consistency to antitrust witch trials that the likes of McNealy and Ellison would find more than a bit uncomfortable.

  • 1. Harley Hahn (harley.com) is fond of pointing out Internet Explorer's derivation from Mosaic (the implication of which is that Mosaic can't be designated a competitor of the Explorer browser).  Aside from using questionable economic logic Brooks conveniently fails to mention that Netscape is a derivation of Mosaic as well.  Competitors to Explorer today include not only Netscape but Opera 5.12, NeoPlanet 5.2, iCab, K-Meleon 0.5, and Mozilla 0.9.4.  Windows competitors today include not only Mac OS X 10.1 but also Unix and its GUI manifestations Linux and Solaris.
  • 2. It is amusing to see Apple undoubtedly unsettle large contingents of its following with its current trumpeting of Microsoft Explorer and the new Microsoft Office v.X for Mac at its Web site (apple.com).
  • 3. One colleague at the time (Dr. John M. Wells), who was as impressed with the technology as I was, saw the TV advertisements and said, "No wonder it's not catching on.  You can't tell what they're selling!"
  • 4. It was nice to see no replay of the Imation blunder in the relatively recent merging of the CD-R and RW standards in compact disk drives.  A similar consumer-benefiting resolution occurred in the conflict between the Rockwell X2 and U.S. Robotics K56flex standards for 56K modems in 1997.  Despite the intervention of the ITU in February 1998, the X2 standard had won out and the new V.90 standard imposed by ITU seems to have been based much more on the previous X2 standard.
  • 5. Of course there's nothing wrong with Sun producing and copyrighting its own software. But to claim an open standard (according to most programmers' understanding of the term) and then charge fees to use the standard seems to many open-standards fans to be a self-serving use of the term.
  • 6. If Microsoft is not alone in supposedly using its control of a standard to put competitors at a disadvantage, it's certainly not alone in terms of allegedly bullying customers and using questionable tactics against rivals.  In late June 2000, popular news sources revealed that Oracle had hired Clinton dirt-diggers Terry Lenzner and Jack Palladino's firm, Investigative Group International, to rummage through the wastebaskets of Microsoft allies to find damaging information on Microsoft and the trade groups that supported it.  The recent dirt on Larry Ellison and Oracle gets juicier by the day.  In a June 2001 security analysts meeting, he went into a thirty-minute obscenity-laced tirade against his business partners, Microsoft, and even the entire audience of securities analysts.  "Oracle is a bully, and I get the impression that they're proud of it . . . why have a go at your own customers?" asks Jeremy Young of the Oracle Applications User Group.  And Craig Conway of PeopleSoft, an Oracle partner, says, "IBM is a perfect partner. Oracle goes out and proclaims you are an idiot. . . . When you alienate everybody, you become someone no one wants to play with." IBM accuses Oracle of misleading advertising in claiming that IBM's WebSphere 4.0 AE is "seven times more expensive than Oracle 9iAS." Of course very little of these industry controversies are reported in establishment newspapers. Regnant is the fantasy of Microsoft looming as a destructive, all-consuming Kraken on one side, with Oracle/Ellison and Sun/McNealy as poor innocent victims on the other side. Maybe that naive perspective will begin to shatter, now that Ellison has championed the cause of national ID cards and offered to donate software to administer a national ID system for the U.S.
  • 7. Despite having a small following (which seems to be knit together much more by hatred of Microsoft than any great allegiance to Sun) that is trumpeting the alleged merits of Solaris and StarOffice, in terms of both popular home and commercial applications Sun hasn't even made a dent in Microsoft, despite making its competitor to Microsoft Office (StarOffice 5.2) downloadable for free at its Web site.  There have been relatively few takers.
  • 8. This is certainly not to suggest that all open-standards champions are semantic opportunists. Far from it. Many are earnest leftists and socialists who find true open standards and shareware attractive because they represent the promise of a "freebie" at someone else's expense. Of course, you get what you pay for, hence the general unpopularity of the genre.

Dale Steinreich

Dale Steinreich is an economist and an Associated Scholar of the Mises Institute.

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