Earlier this month US District Court Judge Thomas Penfield Jackson issued his “conclusions of law” in the Microsoft antitrust case. BAM! Nearly $90 billion in value was destroyed–at Microsoft alone. The firm’s stock plunged 14%. The broader NASDAQ index fell 7.6%–wiping out $380 billion. Although the NASDAQ has made back some of the loss in the past few days, it is now down nearly 18% from its high of March 10th for a total of $1 trillion in wealth destroyed. Markets are sending an obvious message–government interference in the economy is a big money loser.
Yet if you were to visit Capitol Hill this week, rather than hear talk of an economy in danger of being waylaid by government interference, you would think we were on the cusp of a bright new era. Giddy with his victory over Microsoft, Joel Klein, head of the Antitrust Division, crowed that Jackson’s verdict will “set the ground rules for [antitrust] enforcement for the information age.” Senator Patrick Leahy, ranking member of the Senate Judiciary Committee saw the verdict as “confirm[ing] the new vigor in antitrust oversight, and that trend is good for consumers and for the economy.”
So by Washington’s standards, Jackson’s ruling against Microsoft should be a big winner for the markets. So why the roller-coater ride in stocks? Many analysts seem outright perplexed that a direct assault on Microsoft could possibly spill over and harm other tech stocks. A portfolio manager at Entrust Capital insists that the simultaneous plunge in the NASDAQ is “unbelievable.” Assessing the antitrust action against Microsoft, he says, “you’d think it would be positive for other tech stocks and Microsoft’s competitors.” Tom Galvin, DLJ’s chief strategist, believes investors should be “buying into this news” because “there will be beneficiaries if Microsoft is put into the penalty box.” Most analysts are touting the stocks of competitors such as Oracle, Sun Microsystems, Corel and Red Hat.
But those who presume that Microsoft’s pain will necessarily translate into its competitors’ gain should heed the lessons of history. One study of fifty-four court decisions affecting Microsoft (1991 to 1997) found that after favorable decisions, Microsoft’s stock price rose along with that of competitors (market-adjusted), but twice as quickly. Unfavorable decisions caused price declines for both, with Microsoft’s stock declining twice as much. This week, NASDAQ sub-indices for Chip, Internet and Computer stocks fell 8%. Corel and Red Hat are now more than 60% below recent highs. The lesson? An assault on a great company can’t confer greatness on laggards–even when those laggards run to Janet Reno to secure, by coercion, a success they couldn’t achieve in a free market.
What’s important for the market to note is that the essence of the trustbusters’ case against Microsoft is that the firm is too successful, that its success in PC operating systems and applications will be extended to the Internet and telecommunications. Microsoft has been stellar in adding new features to its Windows platforms and integrating different mediums. The trustbusters call these separate products, label the firm’s efforts an abusive “tying” arrangement and seek to impede the integration of mediums in effect, to enforce disintegration. It’s no wonder that tech stock prices disintegrate in response–the trustbusters are striking at the very heart of technological advance. And the assault isn’t likely to stop with Microsoft.
For all the musing about the “New Economy,” where some believe the high-tech industry has rewritten the laws of economics, it remains that the growing economy has been the result of the simple fact that until now, the government has stayed out of the way of high tech. When Bill Gates was free to add new features to his Windows platforms and integrate different mediums, the value consumers found in Windows increased and Gates turned his source code into literal mountains of money. But under antitrust, the businessman who makes an excellent product is a threat to those who haven’t. Why should Gates, or any successful businessman, be willing to work when his hands are tied by the government?
Americans should understand that trustbusters really mean it when they call Jackson’s ruling a “landmark.” And what it really means is that there’s now an established, legal precedent for assaulting other leaders of the information age. It’s not a matter of time when other businessmen start to come under the boot of the new antitrust activism–it’s already happening.
Richard M Salsman
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