| Lost in the debate over the Justice Department's lawsuit against Microsoft and its impact on Microsoft and its competitors is a larger question: What happens if the government starts regulating the research and development of computer operating systems?
It is not an idle question. The United States is the place to be if you are a software developer or entrepreneur. No other country on earth comes close to providing the challenges and rewards that exist here. Across the range of software products - operating systems, databases, application suites, and a vast array of programs that make computing fun for the masses - U.S. pre-eminence is unchallenged. There is one stunning exception to this dominance: encryption software. American policy has already cost the United States its leadership in that area, and the possible results of the justice Department suit threatens to spread the cost further. Contrary to a widely perceived view, encryption products - which software experts call "crypto" is not just the stuff of James Bond. To the contrary: encryption is the essential building block in electronic commerce - how the world will do business in the next century. Without very strong encryption, there is no security for business, no privacy for individuals, no confidence for anyone that their transaction assets will be secure. The United States restricts exports of encryption software above a relatively low level of "strength," although far stronger products are readily available abroad. In an export-driven market, it is no wonder that these products are growing faster outside the United States where companies can export freely. Cutting-edge crypto is now being developed in 35 nations outside the United States, including Britain, Israel, Germany and Switzerland. A June 1999 study by the Cyberspace Policy Institute at George Washington University finds that since December 1997 new foreign crypto products have increased 22%. The domestic encryption industry - and investment in it - is moving out of the United States, and foreign firms recruit our best talent. In their advertising, some foreign crypto firms also allude to the "red tape" involved in the purchase of U.S. products and imply the crypto might not be strong enough due to U.S. regulations. The Clinton administration's regulations banning exports of such products unquestionably are costing U.S. leadership in this critical tech-nology. The lesson we must learn from the administration's policy on crypto - that government cannot beneficially regulate these ubiquitous technologies of the Internet, and in fact can do them great harm has relevance to another Clintonian attempt to regulate software far more broadly: its suit against Microsoft's Windows operating system. Software drives the information economy: it has made possible the huge productivity gains that have rung out inflation during an unprecedented period of employment. Unlike any other industry, PCs double in power roughly every 18 months while prices plummet in real terms. Government's current light touch on this industry has a lot to do with its phenomenal performance. If the United States had one company that developed and sold the world's dominant operating system - the central nervous system of the PC - shouldn't that company be considered a national competitive asset? The answer is a resounding "Yes!" But the Department of Justice treats that company - Microsoft - like a pariah instead. Joel Klein, armed with statutes written more than a century ago when technological advance was not nearly as nimble and quick, seems intent on destroying U.S. leadership in software development. Should Klein & Co. "win" in regulating Windows, they will have harmed more than Microsoft and its Windows flagship. Thousands of other U.S. companies and hundreds of thousands of U.S. workers have benefited from this pivotal American innovation in the form of third-party software, spillovers, spinoffs and strategic partnerships with Microsoft. They, too, will be injured by an abrupt, government-forced change in the market. If the Justice Department emerges successful in forcing Microsoft to open its Windows source code to the entire world and/or breaks the company into pieces - Microsoft will stop or greatly reduce future investments in the government-regulated operating system, shifting resources into other areas. Microsoft Windows developers will disperse, perhaps out of the United States. If the government ultimately prevails, it will have sent a very chilling signal to all other U.S. software innovators - and investors -present and future. Just as the best crypto is now being developed abroad, so too might the next big innovation in critical software architecture. That would be a national loss we simply cannot afford. Michael Ebert is visiting fellow at Alexis de Tocqueville Institution |