Punishing Winners Hurts the Marketplace

Punishing Winners Hurts the Marketplace
Andrew Sellgren

Journal of Commerce
November 15, 1999

ALBERT EINSTEIN WAS SELFISH. By 1905 he had already characterized the motion of molecules in a fluid, explained the photoelectric effect and showed the equivalence of matter and energy. He should have left general relativity for someone else to discover.

Alan Greenspan is selfish. His stewardship of the Federal Reserve has provided us with eight years of solid growth and stable prices. His prowess at directing monetary policy is now evident, so he should step aside and let someone else have a go.

Bill Gates is selfish. He has built his company into a dominant position in the markets for operating systems and application software. He should leave the browser market to another firm.

So goes the chorus of the sore loser. In athletics, things are different. When a basketball player scores more than 40 points, we don't force him or her to sit out the rest of the game to give others a chance. When a golfer hits more than 350 yards, we' don't impose a penalty stroke for poor sportsmanship. In athletics, we cherish competition and revere dominant players.

Somehow, we have gotten away from that ideal in the competition of the marketplace. In commerce, champions are targets.

Microsoft is one such champion. It has proved itself to be an outstanding company. Many argue that its programmers have turned out shoddy programs, but the firm's objective is to make profit, not superlative programs per se. By the profit criterion, Microsoft has been one of the greatest companies in the history of this country.

While Microsoft has reaped profit, consumers have benefited. Its relentless dominance has simplified our lives and has saved us from a convoluted market for computer software.

The industry has built standards around Microsoft's products, and that has had a positive impact on investment. Corporations have been able to make investments in software, knowing that those products will be supported, that those platforms will not become obsolete. Computer users have been able to learn to use software, knowing that those skills will be relevant in the future.

Standardization has also improved the products that are available to us. Software makers can turn out 10 products that run on the Windows platform, rather than one product that runs on 10 platform. Manufacturers of computer hardware need to provide only one; driver per model, so hardware is cheaper, more diverse, and more reliable.

Nonetheless, we have lent our ears to Microsoft's competitors.

Anti-Microsoft zealots correctly point out that the company has a large share of the market for personal-computing operating systems and for applications software, and in many instances Microsoft has bullied its competitors.

Some want to break up the company. Would software prices be lower if Microsoft were broken up? Would separate companies innovate more? Economists have debated these questions, and frankly there is no consensus.

We handed the issue over to the court system, which held that Microsoft is a monopoly, though it still must decide what to do about that.

The process has proved incredibly costly. The legal costs are obvious, but the diversion of talent and energy is more pernicious. Microsoft and its competitors have had to divert managerial talent to warding off legal rather than competitive challenges. As a result, the Mi
crosoft litigation has weakened the entire software industry. If we reward the litigants in the present case, then we will invariably get more such litigation. This will slow down the pace of innovation and weaken our industries on the global scene.

Economists might not agree about the direct effects of breaking up Microsoft, but there is near unanimity about the long-term effects of punishing successful companies. In a nascent market where there are incompatible standards, consumers benefit from having a clear winner. If we punish such winners, we will diminish competitors' incentives to win the race.

Aspiring athletes know of the rewards to dominance, and that is one factor that drives them to excel. For some reason, we have been paying heed to people who think that commerce is different, that commercial champions should be constrained. On the contrary, we should embrace our commercial champions. We would be glad to have Michael Jordan on our basketball team, so we should revel in the fact that Microsoft fights for the red, white and blue.

Firms have to play rough to succeed in the today's global marketplace. If we want our industries to dominate the world, we have to abide some brutish business tactics, and we have to let those firms play for the biggest stakes, including market domination. It boils down to this: We would be better off with more companies like Microsoft, not fewer.

Punishing Winners Hurts the Marketplace Andrew Sellgren Journal of Commerce November 15, 1999 ALBERT EINSTEIN WAS SELFISH. By 1905 he had already characterized the motion of molecules in a fluid, explained the photoelectric effect and showed the equivalence of matter and energy. He should have left general relativity for someone else to discover. Alan Greenspan is selfish. His stewardship of the Federal Reserve has provided us with eight years of solid growth and stable prices. His prowess at directing monetary policy is now evident, so he should step aside and let someone else have a go. Bill Gates is selfish. He has built his company into a dominant position in the markets for operating systems and application software. He should leave the browser market to another firm. So goes the chorus of the sore loser. In athletics, things are different. When a basketball player scores more than 40 points, we don't force him or her to sit out the rest of the game to give others a chance. When a golfer hits more than 350 yards, we' don't impose a penalty stroke for poor sportsmanship. In athletics, we cherish competition and revere dominant players. Somehow, we have gotten away from that ideal in the competition of the marketplace. In commerce, champions are targets. Microsoft is one such champion. It has proved itself to be an outstanding company. Many argue that its programmers have turned out shoddy programs, but the firm's objective is to make profit, not superlative programs per se. By the profit criterion, Microsoft has been one of the greatest companies in the history of this country. While Microsoft has reaped profit, consumers have benefited. Its relentless dominance has simplified our lives and has saved us from a convoluted market for computer software. The industry has built standards around Microsoft's products, and that has had a positive impact on investment. Corporations have been able to make investments in software, knowing that those products will be supported, that those platforms will not become obsolete. Computer users have been able to learn to use software, knowing that those skills will be relevant in the future. Standardization has also improved the products that are available to us. Software makers can turn out 10 products that run on the Windows platform, rather than one product that runs on 10 platform. Manufacturers of computer hardware need to provide only one; driver per model, so hardware is cheaper, more diverse, and more reliable. Nonetheless, we have lent our ears to Microsoft's competitors. Anti-Microsoft zealots correctly point out that the company has a large share of the market for personal-computing operating systems and for applications software, and in many instances Microsoft has bullied its competitors. Some want to break up the company. Would software prices be lower if Microsoft were broken up? Would separate companies innovate more? Economists have debated these questions, and frankly there is no consensus. We handed the issue over to the court system, which held that Microsoft is a monopoly, though it still must decide what to do about that. The process has proved incredibly costly. The legal costs are obvious, but the diversion of talent and energy is more pernicious. Microsoft and its competitors have had to divert managerial talent to warding off legal rather than competitive challenges. As a result, the Mi crosoft litigation has weakened the entire software industry. If we reward the litigants in the present case, then we will invariably get more such litigation. This will slow down the pace of innovation and weaken our industries on the global scene. Economists might not agree about the direct effects of breaking up Microsoft, but there is near unanimity about the long-term effects of punishing successful companies. In a nascent market where there are incompatible standards, consumers benefit from having a clear winner. If we punish such winners, we will diminish competitors' incentives to win the race. Aspiring athletes know of the rewards to dominance, and that is one factor that drives them to excel. For some reason, we have been paying heed to people who think that commerce is different, that commercial champions should be constrained. On the contrary, we should embrace our commercial champions. We would be glad to have Michael Jordan on our basketball team, so we should revel in the fact that Microsoft fights for the red, white and blue. Firms have to play rough to succeed in the today's global marketplace. If we want our industries to dominate the world, we have to abide some brutish business tactics, and we have to let those firms play for the biggest stakes, including market domination. It boils down to this: We would be better off with more companies like Microsoft, not fewer.