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Perspective on Integration, Bundling and the Law

May 20th, 2000 - Chuck Flink (Feedback Appreciated!)

I saw an interesting article today on ZDnet:  Can't beat 'em? Throw in the kitchen sink  What caught my eye was the last paragraph in which the authors report that it is ironic that Sun is calling for tighter integration between software and hardware while at the same time encouraging the Department of Justice (DoJ) to go after Microsoft for doing the same thing!  Sun is bringing in Oracle and Veritas products to form a 'bundled offering' known as Sun Stacks, aimed at integrating solutions for vertical markets.  This is very typical marketing strategy in the computer industry and would not have been attracted any interest if it wasn't for the DoJ case against Microsoft.  Here are my observations in the form of response to the authors:

Ironic?  Your last paragraph says it is ironic that Sun is now going after the very type of cross-market bundling that Microsoft was supposedly found guilty of doing.  The real irony is that anyone seriously thought the Sun, Oracle, DoJ effort against Microsoft was based on some principle of opposing "bundling".  Sun, Oracle and the others just wanted to freeze the competition while they played "catch up".

The odd thing about our monopoly law is that some actions are illegal for monopolies that are not illegal for their competitors.  Further, you don't know you're a monopoly until after your competitors fail and leave you the sole winner in a market.  Then your competitors bring in the DoJ to "freeze" your activity in the market (e.g. this one of bundling middleware with other software and hardware) while they redouble their efforts to "catch up".

Integration (of markets, hardware, software, distribution, etc.) is the engine of progress.  It reduces cost and increases standardization, improving productivity.  If carried too far, however, it leads to monopoly and all the abuses associated with unbridled power. 

Apparently our government long ago stumbled into a strange way to keep the pot stirring, allowing integration but preventing it from going too far:  retroactively declare any big winner a "monopoly" and dismember it!  Iím reminded of the teachings of Machiavelli who told the Prince to keep shifting power back and forth between the provinces and the capitol, thus forever preventing any possible adversary from gaining sufficient power to threaten the kingdom.  It all sounds very un-American, but quite effective.

I approve of the DoJ activities to the degree they stir the pot of competition and creativity.  (Though I don't believe it was a necessary expenditure of scarce DoJ funds given the natural volatility of this market.)  To the degree the proponents of the DoJ position demonize Microsoft and claim any type of principled "high-ground", I'm compelled to call them liars or fools.  Neither side is being honest with the citizenry when they claim any moral superiority in light of the overall reality of this situation.  This article about Sun and Oracle bundling products is a classic example demonstrating my point.

I was always under the impression that laws could not be retro-active:  e.g. if I drove a School Bus in Virginia at age 18 because that was legal then, I can't be prosecuted now that there is a new law that says you have to be 21.  The antitrust laws, because of their retroactive nature, are most likely unconstitutional, or at least should be.  But they are valuable to society on the whole in the strange way I described above. 

I'm willing to live with them so long as the citizens recognize that a "crime" under these laws depend upon the actions of your competitors, not just yourself.  As such, a "crime" in this arena is certainly does not carry the burden of guilt that should follow a conscious effort to do something illegal.  I could give a long list of examples from the history of Microsoft alone where it appeared someone was about to do to Microsoft what Microsoft had previously done to IBM:  blowing by them with a new idea.  (Talking of irony, would it have been possible for Microsoft to escape from under the thumb of the monopolistic IBM if, at the time, IBM wasn't itself under dismemberment pressure from the DoJ?)  Unfortunately, Microsoft's competitors often failed to deliver on their promises, succeeding only in giving Microsoft an idea and a new market to enter.  If the competitors had been successful, the market would have been shared and there would have been no "crime".  Because the competitor failed, MS became a "monopoly" retroactively in the eyes of at least one judge.  

A more devious, more confident, less paranoid Microsoft would have divided the market with their competitors, ensuring protection from the claim of "monopoly".  Of course, then they would have had to avoid openly consorting with their competitors, but that is clearly not hard to do.  Simply look at the airline industry!

The result could have been higher profits for all involved and higher costs to consumers through less standardization and less amortization of fixed costs (development, etc.)  The result might also have been lower profits and prices if the competitors could discover hidden economies or invent new solutions.  We'll never know which of these two possible outcomes represents reality because we cannot ever know what "could have been invented only if".

The road forks in front of every businessman and investor every day.  No "law" can before-the-fact assure that the movement down one path or another does not lead to an after-the-fact monopoly or creative discovery.

 So to summarize:  the only ironic thing is that so many "citizens" don't understand what is going on around them every day.

Comments are always welcome.  Corrections, additions and comments from readers will lead to future updates of this article.  Write me!  Your opinions may well be published in a future update.  Thanks in advance!

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