The news that Microsoft settled one of its last remaining antitrust lawsuits in October presents an opportunity to review the whole episode and assess what it means for the next generation of business innovators. The matter is of special interest to me. Working at the Justice Department in the mid-1990s, I helped lead the first investigation of Microsoft.
Before we get to the lessons learned, a brief recap: It goes without saying that Microsoft's rise to power on the strength of its operating systems for desktop PCs is one of the great American business success stories of all time. But as I argued a decade ago, the company abused its extraordinary power to cement its dominance in the operating systems market. Then it attempted to extend its monopoly into new markets, including Web browsers and online media players.
Courts in the U.S. and Europe found that Microsoft broke the law. After Justice won its most celebrated case, which concerned Microsoft's efforts to destroy Netscape's browser business, I argued in amicus curiae briefs that Microsoft should be split into three Windows companies. This would have restarted competition in the operating systems market and, in my view, would have led to better bug-free desktop operating systems than are now available.
Unfortunately, antitrust enforcement can be slow and unreliable. The Bush Justice Department was less interested in reining in Microsoft than Clinton's was. But though the company avoided a breakup, it did have to pay several billion dollars to settle related claims, and it is now subject to various restrictions on the way it does business.
Looking back today, what I find interesting is that the market may be sorting out what the legal system could not. Back when my colleagues at the Justice Department first began investigating Microsoft, the company's monopoly seemed impossible to breach. Though I still believe we would have been better off with a breakup, it is clear that rivals have managed to check Microsoft on many fronts. And interestingly, most of this competition has come from companies that nobody would have perceived as serious contenders 10 or even five years ago.
The Feds failed to breach Microsoft's monopoly--but Linux and Google just might succeed.
For example, Microsoft's operating system for servers faces a serious threat from Linux, the open-source system that was created in a way that few people could have anticipated in 1995: through volunteers. And Mozilla, the open-source cousin of Linux, is steadily eating into Internet Explorer's dominance in the browser market. As important as these developments are, they still haven't made a dent in Microsoft's Windows desktop monopoly. Yet even this may change, and from another source that few--perhaps not even Bill Gates--could have anticipated: Google.
The search engine appears to be taking aim at Windows--Microsoft's crown jewel--by enticing software companies to write code interfacing with Google's toolbar rather than with Windows. Google has partnered with Sun Microsystems to make this vision a reality.
Microsoft could respond by embedding a search engine of its own in the next version of Windows, just as it bundled Internet Explorer and Windows Media Player with Windows. But by the time Microsoft finally releases a Windows upgrade, it is possible that Google will have become so entrenched that a bundling strategy would fail. On the other hand, Google already seems stretched to the breaking point with all of its new search projects (movies, books, and its map of the world). And it's not clear what (other than perhaps Google's stock?) can induce software writers to expend the money and time to interface with Google's toolbar.
Still, the overriding lesson for entrepreneurs is that the toughest competition comes from the rival you've never heard of--and if you don't think there are rivals out there, you're kidding yourself. If even Microsoft cannot afford to relax, then neither can you. By the same token, if the rivals you see yourself competing against have never even heard of you, and would probably scoff at you if they knew you considered them a viable target, then it is probably you--and not they--who is in the more enviable position.
Robert Litan is a vice president at the Ewing Marion Kauffman Foundation in Kansas City and a contributing editor at Inc.