Economist Predicts Microsoft Breakup Would Harm Consumers and Software Developers

(February 27, 2000) Economist Stanley Liebowitz estimates that splitting Microsoft into three companies would result in $30 Billion in new costs to software developers, and further costs to consumers. He participated in a panel discussion in Washington DC hosted by the Progress and Freedom Foundation on February 25.

Stanley Liebowitz is an economics professor at the University of Texas at Dallas who is a member of the Chicago/Rochester school of economic thought. He spoke on behalf of the Association for Competitive Technology.

The program featured Progress and Freedom Foundation (PFF) Vice President Tom Lenard, who advocated breaking up Microsoft. Lenard recommended splitting Microsoft up into four companies -- three identical clones which would own the operating systems, and one which would own the Office suite, development tools, Internet properties, and other applications.

Liebowitz strongly criticized the Lenard proposal, largely on the basis that Liebowitz estimates that there would be enormous costs to consumers and developers in having to work with a fragmented market for Windows operating system market.

He described his study: "What I did was really very simple. I took a look, and said 'Look, you're a developer. There is going to be some extra costs for writing your programs to run on a different group of Windows.' It seemed a very straight forward proposition. We know that developers have problems writing programs that work on different versions of Unix, and that they are having problems writing programs that will work on slightly different versions of Linux. And it is likely to happen with Windows. What would those costs perhaps be?"

"So we conducted a simple study where we asked developers what the extra costs would be," said Liebowitz "and they gave us estimates. We basically scaled those estimates down by one third."

"About seven percent of their revenues is what they thought the extra cost would be to them, if they had a second operating system, a second version." Liebowitz concluded that "When you then apply that seven percent number to the size of the Windows applications market, you come up with a number over three years of $30 Billion."

However, he added that "this is only part of the cost of this type of breakup. The other cost is the cost to consumers" of having to deal with a market that is fragmented.

Stanley Liebowitz

Liebowitz got some laughs when he joked that the PFF, a usually libertarian free market group, had an design in sponsoring a report recommending the breakup of Microsoft. "What they really want to do is do in antitrust. And what they are proposing to do is to, like a Trojan horse, put forward this remedy, that will cause such consternation and havoc to consumers. This is not Standard Oil -- back in 1911 when nobody was driving automobiles. Everybody has a computer. When you impose enough costs and enough harm on consumers, they are not going to forget. And that may just do in antitrust."

Liebowitz's long list of publications includes co-authoring with Stephen Margolis a book titled "Winners, Losers and Microsoft: Competition and Antitrust in High Technology."

During the question and answer session a journalist asked Liebowitz what type of remedy he would recommend. He responded, "I don't think there needs to be a remedy."

However, Liebowitz continued. "If we were to believe that Microsoft has engaged in activities that are harmful, they tend to relate to their bullying of OEMS. But when they bully OEMs, we are told, from the transcript, is that they threaten to withhold Windows from them, or they structure exorbitant pricing -- would be illegal under the price discrimination sections. But, so I would recommend to stop that, I would tell Microsoft that they have to have a price list ... and that people have to abide by that ..." Mark Popofsky, of the Department of Justice, took notes.