The games bureaucrats play

When a bureaucrat makes a comment that defies logic, like the following, it may mean something’s up:

It is misleading to imply that the commission could be the cause of delays. It is not up to us to tell Microsoft what it has to do to Vista. The onus is on Microsoft to design its product in conformity with European competition laws.

The words are those of a spokesman for the EU, who is referring to a comment from someone at Microsoft to the effect that uncertainty over how the EU will act is making it hard for the company to make some critical decisions on how to design its new operating system, Windows Vista. Microsoft asked for guidance from the EU and the EU has declined to respond. Government agencies are frequently asked to give advisory opinions, which clarify how the agency thinks a law or its own regulation would apply in a particular situation. When there’s an absence of legal precedent, advisory opinions reduce uncertainty and benefit everyone by cutting down on enforcement and litigation expenses.

Recall that in February a group of companies called the European Committee for Interoperable Systems filed a complaint with the EU to prevent Microsoft from extending its dominance into “a range of existing and pre-announced future product areas.” Basically, if anyone produces any kind of software, this group doesn’t want Microsoft to be allowed to build similar functionality into its Windows operating system. The group’s members are a familiar bunch, including: Adobe Systems, IBM, Nokia, Oracle, RealNetworks, and Sun Microsystems. These are companies who have, in the past, sought to buttress their leverage in negotiations with bigger or faster competitors by threatening to run to authorities.

For the EU, this sort of invitation opens opportunities for global influence that aren’t otherwise available to Europe, as in the past. It’s also a chance to boost European industry and, probably most importantly, to advance the institutional objectives of the bureaucracy itself. As Northwestern Law Professor Fred S. McChesney pointed out,

The Europeans are antitrust newcomers, and so will justify their existence only by imposing more restrictive rules than the American federal enforcers impose. Looser rules would have the Europeans merely blessing actions already resolved in America, and such a “me too” attitude hardly justifies a separate European presence in global antitrust.

Upon receiving the complaint, the EU Commissioner for Competition, Neelie Kroes, sent a letter to Microsoft. The letter, like most of the work of her department, is not open to public scrutiny. But when asked about the letter, the same EU spokesman commented at the time, “We are concerned about the possibility that Vista will include software elements which are available separately[.]” For example, Vista might include a feature that does what Adobe’s popular Acrobat does only consumers won’t have to pay separately for it. If that happens, Adobe may have to lower its prices. If the EU cares more about protecting competitors than consumers, it could prohibit Microsoft from adding the new functionality to Vista or set up an onerous interoperability regime designed to eliminate any competitive advantage Microsoft may have, even if it’s legitimate.

The notion of confining a rival to one single product segment, thus allowing its deserving competitors a chance to spread their wings in the adjoining niches, is not new. Government divided up the telecom market this way, for example. And 10 years later, nearly everyone realized that the line-of-business restriction separating local from long-distance was bad for consumers and for innovation. The ’96 Telecom Act created a path to a free market, but the FCC used it to deliberately create an uneven playing field in the local exchange intended to give competitors a head start and a chance to become viable under minimal competitive pressure. The FCC gave competitors access to every element of the local exchange at wholesale discounts of approximately 50 percent and it sought to delay the entry of the Bell Operating Companies into long-distance as long as possible (approx. 5 years). Then-FCC Chairman Reed E. Hundt thought he was very clever. He was a great believer in “competition” law/regulation — or the idea that bureaucrats can do a better job of promoting competition than the free market. Fortunately, the Supreme Court tossed much of it out. And Supreme Court Justice Stephen Breyer commented that the plan to provide access to every element at steep discounts,

by itself does not automatically mean increased competition. It is in the unshared, not in the shared, portions of the enterprise that meaningful competition would likely emerge. Rules that force firms to share every resource or element of a business would create, not competition, but pervasive regulation, for the regulators, not the marketplace, would set the relevant terms.

Few sympathized with the Bell Operating Companies because they seemed wealthy and unassailable. And few seem to sympathize with Microsoft, who’s also had it pretty good for a long time. Some think luck had a lot to do with it and that Microsoft was only tangentially deserving. The software giant got its reward; now its time to share. The problem with this logic is (1) regulatory bureaucracies become permanent fixtures, constantly searching for ways to justify their requests for budget increases and (2) the regulated companies focus less on innovation and put more emphasis on participating in the regulatory process, attempting to dupe unsuspecting regulators — or induce the complicitous few — into tilting the market to create winners and losers. Regulation is easy to summon forth, and difficult to contain. Ask anyone who is subject to regulation by the FCC — the agency is unpredictable. Today it’s your friend. Tomorrow it’s your enemy. Like a sail boat, it tacks with the political breeze.

It helps when the regulatory process itself is efficient, transparent and predictable. Often, it is not. When any regulator takes formal action, it can be very time-consuming — with investigations, hearings, findings of fact, conclusions of law — and worst of all, the whole thing can be appealed. The EU’s 2004 judgment against Microsoft was the product of a 5-year investigation and the appeal is still pending.

That’s why regulators have also developed many informal tools to make their job easier. These actions are intended to fly under the radar. Many times the actions don’t have to be published and can’t be appealed. One example is a vague warning to follow the law. Another is a set of detailed questions. Neither is an identifiable decision or action with consequences that can be reviewed by a court of law. But anyone contemplating the investment of millions or billions of dollars and relying on the assistance of counsel will immediately interpret the warning or the detailed questions as a serious wake-up call and will take whatever action they can think of to minimize their risk, including going well beyond what is required by any law or regulation on the books. This technique is particularly useful when no one is really sure how the courts would rule on a matter, because they’ve never confronted the precise issue before. Regulators like this trick, and use it all the time.

If the EU wants Microsoft to strip Vista of any new functionality, but is particularly unsure it would be upheld on appeal, the safest and most direct course of action would be to insinuate and to hope Microsoft “voluntarily” retreats, thus depriving itself of the right to appeal. This is probably what the EU is up to. But it needs to reinforce the fiction that it isn’t really doing anything.

Hance Haney is a Senior Fellow in technology studies at the Discovery Institute.

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