Commentary: Let The Markets Regulate Microsoft

Microsoft recently announced what many will see as an unprecedented change in its business model for selling software as commercial products for use by customers immediately after installation. The company's shift toward substantially greater openness is great for consumers and should put to rest calls for more government action in this area.

Microsoft (nasdaq: MSFT) says it will take a much broader approach to providing access to extensive documentation about the software hookups called APIs for Microsoft's high-volume products, such as Windows Vista, Office, Server, etc. It will also provide licenses to any applicable patents necessary to implement these protocols at low, non-discriminatory rates. This will help other companies and the open-source community make their own programs interoperable with Microsoft's.

Microsoft also committed to greatly enhanced data portability, including the ability to select non-Microsoft document formats as the default, bringing increased interoperability between products sold by Microsoft and those sold by its direct competitors.

Why would a private company be so open? Some surely will say Microsoft is simply caving to pressure from antitrust regulators, such as those in Europe who recently hit the company with hundreds of millions of dollars in fines at the end of one multi-year investigation and who already have announced a new one. The hope of such commentators will be to justify those government proceedings already completed or underway against a host of private firms--including Microsoft, Intel (nasdaq: INTC - news - people ), Apple (nasdaq: AAPL - news - people ), and Qualcomm (nasdaq: QCOM)--and then to call for more.

While government pressure likely is one factor leading to Microsoft's increased openness, it would be dangerously simplistic to think such an important and complex business decision turned on this single factor. A prudent analysis also must consider what other factors are at play, which are most effective, and at what cost. In this case, the market is the better bet.

But even if in this case the government's influence had been greater than the market's, the market is a better tool to use in future efforts toward constructive engagement between producers and consumers, for several reasons.

At least two major problems are too often overlooked concerning government action in this area. The first is that government action imposes huge costs on the economy. It is hard to imagine why it could be best to shift hundreds of millions of dollars in wealth from the broad base of a corporation's public shareholders toward government coffers. The second is that it is highly ineffective in triggering the desired behavior.

Government remedies are largely ineffective because of a lack of credibility, in both complaint and commitment. The public pronouncements that government actors typically must provide to explain their complaints in politically sustainable ways often don't provide guidance for what specific behavior is being sought. Any savvy bureaucrat knows to pitch each complaint toward politically powerful constituencies and lobbyists rather than the regulatory targets.

In addition, the government complaints are often not credibly founded on the facts, especially as those facts inevitably evolve during the many years that typically pass during government proceedings. The European government spent years calling for Microsoft to provide a version of its operating system that did not include an integrated copy of windows media player out of fear the company would use this integration as leverage to monopolize the market for media players.

But over this time, the one player that came to occupy the vast majority of the online viewing market was Adobe's (nasdaq: ADBE - news - people ) flash media player, which is used on popular Web sites like YouTube, a service run by Microsoft's competitor Google (nasdaq: GOOG).

The lack of a credible complaint also undermines credibility in the government's commitment to the remedies it achieves. The copies of Windows without the media player that Microsoft was ordered to produce were actually obtained by such an incredibly small number of customers that the only copies easily found today are the "souvenirs" used by law professors as demonstrative aids in class. Not surprisingly, almost immediately after the European government won the appeal of this remedy, it announced a new proceeding targeting a different result.

In contrast, the market provides compelling reasons for companies like Microsoft to listen to its customers. It's comparatively easy for a company to respond to input of this type; Such direct and dynamic exchange between producers and consumers is also comparatively more effective in generating benefit for them both. ...

•	Commentary: Let The Markets Regulate Microsoft Forbes.com, Tuesday, March 11, 2008 Byline: F. Scott Kieff, Washington University School of Law