New York Times

October 20, 1998

What's Good for Microsoft...

By T.J. RODGERS

SAN JOSE, Calif. -- The Justice Department is suing Microsoft for the antitrust offenses of "tying" and "predatory pricing." It claims that Microsoft illegally tied its Internet browser to its Windows software because the company sells them only as a package, and that it was selling the package below cost because it didn't raise the price of Windows when it added the browser.

If Microsoft loses this antitrust case, every high technology company will be in the Justice Department's gun sights, because we all do business just like Microsoft. The Silicon Valley C.E.O.s siding with the Government to one-up a rival should be supporting Microsoft on basic principles.

In 1994, my company sold for $12.31 all the silicon chips needed to run a small computer: the memory to store programs ($4.16), the memory to store data ($3.99) and the "microcontroller," a small stand-alone computer that is the brains of the system ($4.16).

But a few months ago, we "tied" all of those chips together, to use antitrust jargon. We created a chip that performed the functions that previously required three chips, and we cut the price by a "predatory" 92 percent to just 95 cents. We would not have survived without "tying" (which Silicon Valley refers to as creating a "system-on-a-chip") and "predatory pricing" (known to us as "learning-curve pricing," also known as "Moore's Law," named after Gordon Moore, a co-founder of Intel, who predicted that the price of chips is cut in half every 18 months).

Tying and price cutting -- adding more value for less money -- is what high-technology companies do. Apparently, the lawsuit against Microsoft is its penalty for being too successful at it. To consumers, however, "predatory pricing" means that a computer that costs $700 today has 50,000 times the power of a $5 million 1951 Univac mainframe computer.

Jim Barksdale, chief executive of the Netscape Communications Corporation, has complained that Microsoft competes unfairly in the Internet browser market. Yet Netscape itself is a master of predatory pricing. When we were evaluating which browser to use on our company computers, I favored Microsoft's Internet Explorer because it is more compatible with the Microsoft spreadsheets and word processors we already use. But I lost out on that option because our engineers had already downloaded and begun to use more than 200 free copies of the Netscape browser and that meant we were committed.

Once they had us (and 85 percent of the browser market), Netscape couldn't have been more predatory: it charged us $152,000 for 1300 copies of their browser. It turns out that their real software -- not the version they give away, but the software for which they provide technical support -- isn't free at all. If Microsoft violated the law by giving away browsers, why didn't Netscape?

Illogic abounds in the case against Microsoft. The company is in trouble for selling its product below cost at the same time that the Senate Judiciary Committee has castigated it for making a profit of more than 20 percent.

But can Microsoft really be cheating customers when, at a price of only $99, Windows 98 delivers a more complex program than many million-dollar mainframe software packages do? For years, Microsoft has enhanced Windows with new features -- spreadsheets, word processors, fax utilities, etc. -- but somehow it crossed an arbitrary line by adding a browser.

The Justice Department has a point when it complains that Microsoft has a big marketing advantage when it adds features to Windows. But Microsoft earned that advantage with years of work and billions of well-invested dollars. Its only mistake was to fight against the tide of the Government's trustbusting.

Consider the seminal case against Alcoa, the Aluminium Company of America, which set the antitrust agenda that remains largely intact to this day. In 1945, Judge Learned Hand ruled that Alcoa had a monopoly on aluminum production purely because of its size and its ability to anticipate and satisfy demand faster and at a lower cost than its rivals. The Government broke up the company because, according to Judge Hand, it excluded competitors by "[embracing] new opportunity as it opened." In other words, it was punished for being competent.

It's hard to believe that Silicon Valley executives would embrace the logic of the Hand decision, but they have. Scott NcNealy, the chief executive of Sun Microsystems, a Microsoft rival, said , "Government has to come in and discipline [Microsoft] until the rest of the world catches up." What if it's our Japanese competitors that do the catching up while the Justice Department is hobbling Silicon Valley?

Scott McNealy is not alone in supporting litigation. Lawrence Ellison, the chief executive of the Oracle Corporation, the second largest software company behind Microsoft, failed with a plan to replace PCs with network computers so that Oracle's software could replace Windows.

Ellison now wants the courts to take from Microsoft what he was incapable of earning in the free market: he recently told an audience at Harvard University that "every American of voting age should file a suit against Microsoft."

But using the courts to regulate the marketplace -- what Ayn Rand called "a free market, enforced by law" -- brings on debacles like the antitrust case against I.B.M., which wasted 13 years and billions of dollars for both the company and taxpayers. During that period, the free market succeeded where the lawsuit failed: companies like Sun Microsystems, Netscape and Oracle were founded and became important competitors, solving the I.B.M. "monopoly problem" at no public cost. Winning by politics is antithetical to the free-market competition that underpins Silicon Valley's success.

The Justice Department isn't just attacking Microsoft; it's attacking the way Microsoft does business -- and, by extension, the way most successful high-technology companies do business. I deplore this unwarranted action and hope that my fellow Silicon Valley C.E.O.'s will put aside their short-term competitive urges to stand together against the Government's intrusion into our enterprises, which, if successful, will make all Americans less well off.

T.J. Rodgers is president and chief executive of Cypress Semiconductor.