The Economist and the Beast

Despite his humble beginnings, a University of Virginia economics professor plays a key role in the Microsoft antitrust case.

by Oneya B. Fennell

Imagine a man dressed in a sports jacket, a button-down shirt, and one of his signature ties: a wildly striped eye-catcher including colors like orange, green and purple. He has a friendly smile; a soft, but commanding tone of voice; and a pleasantly cluttered office covered in 20 feet of books, from the floor up to the ceiling-- several of which he wrote himself. He is a devout Christian and a teacher whose class has something rarely seen at the University of Virginia: a two-year waiting list. His architect wife even makes incredible brownies. Life is good. An economist, Mr. Kenneth Elzinga has been a professor at the University of Virginia in Charlottesville, Va since 1971. A graduate of Kalamazoo college, with an M.A. and a Ph.D. from Michigan State University, he brings knowledge as a well as wisdom into the classroom. His "Dutch uncle talks," little speeches about life and living, are really appropriately dubbed, because this man easily reminds students of a favorite uncle.

Now, meet his newest nephew: Microsoft CEO Bill Gates. Professor Elzinga has joined forces with Microsoft as an economic advisor to help the company win acquital in what could well be the largest antitrust case in history. Despite an undistinguished high school career, which included vocational classes and many obstacles to ultimate success, Professor Kenneth Elinga has excelled in the field of economics and a become sought-after advisor, devoted teacher of corporations and college students alike.

Microsoft, which leads the world in operating systems with its ubiquitous Windows, is being sued by the Department of Justice (DOJ) for violating the Sherman Act-- a law that prevents unfair competition and monopoly power. This case first began when Netscape, a producer of browsers for use on the World Wide Web, sued Microsoft because of the inclusion of a Microsoft-owned browser on the Windows operating system. Netscape claimed that Microsoft was taking over the browser market, because the popularity of the Windows operating system and the fact that it included a browser would preclude people from purchasing one. Microsoft, in turn, argued that including a browser on an operating system is just like including a clock. Certainly, someone could sell independent clock software, but really it’s just a functionality of the operating system. Microsoft entered a consent decree in this case, which was not an admission of guilt, but allowed the DOJ to impose certain trade practices on the company. Competition continued between Nextscape and Microsoft, and now both companies offer their browsers for free.

Unfortunately for Microsoft, the hardships didn’t end there. The DOJ unearthed much evidence during the Netscape case which demonstrated alleged anticompetitive practices. Much of this information was in the form of e-mails that, even though deleted, still lurked within the company computers. As it turns out, when e-mails are deleted, they don’t go anywhere, they’re just hidden. These damning bits of evidence are allowing the DOJ to piece together a picture of Microsoft as a bully who threatened some of its competitors into annihilation, tried to intimidate others into sharing the market, and overall was a very bad company.

When Microsoft became a defendant in this case, the company asked Professor Elzinga, who is renowned for his work in antitrust policy to act as an economic consultant. "This basically involves filing reports, analyzing factors about Microsoft and the software market, as well as eventually testifying in court," Elzinga stated. Some of the things that are reported on are barriers to entry, or any hardships that a new vendor might have in bringing their goods into the software market, and market concentration, which shows what percentage of the market each firm holds.

Such complex analysis is a far cry from the expectations for Elzinga’s future when he was in high school. At his school in Coopersville, Michigan, he was never put into a pre-college curriculum and took shop/vocational classes. "I guess it was because of the rest of my family. They followed this sort of course, so I was expected to do the same thing," Elzinga explains.

Though he faltered slightly, Elzinga managed to greatly exceed all expectations of his future with the help of his high school Algebra teacher, Ms. Sawyer. "She pushed me hard in the classroom and actually made me think about college." A scholarship for tennis made Elzinga’s new-found dreams of college possible but once at Kalamazoo College, Elzinga feels that he still wasn’t taken seriously as a student. "I was so busy with tennis, and it stressed me out so much that I had to wait two hours after practice just to calm down enough to concentrate on classwork." The other obstacle to his success was his lack of knowledge about the college experience. "I can remember being in a receiving line and wondering why so many of the people I was being introduced to were named Dean; it took a while before I realized that it was a title."

Elzinga finally got his bearing with the help of another great teacher. "Professor Cleland really took an interest in me as a student and encouraged me to study economics. If he were a government professor, it is likely that I’d be in that field now." Elzinga quit tennis, and went on to graduate school in economics, where Professor Adams, a specialist in antitrust policy became a new mentor. Elzinga wrote a thesis paper in antitrust, and quickly became a name in the field. He has served as an advisor for many firms over the year, with Microsoft being the latest challenge.

And a formidable challenge it is, for although the public is divided on the Microsoft case, there is great evidence of the fact that the technological juggernaut has alarming market power. There is even a popular bumper sticker stating, "We are Microsoft. Resistance is futile, you will be assimilated." Mr. Elzinga, however, has seen a very different side of Microsoft during the case. "Microsoft is paranoid. They think that everyone is plotting against them, and that drastic measures are necessary just to stay in existence."

Paranoia, however, doesn’t seem to be the best defense. Day after day, prosecutors are ripping into Microsoft executives. The self-proclaimed "technogeeks" at Microsoft speak fluent computerese but are by no means prepared to keep their cool in court. One key development involved a claim that their browser, Microsoft Explorer, could not be removed from the operating system without sacrificing the system’s speed. A video was entered into evidence by Microsoft, allegedly showing this fact. The government’s lead prosecutor David Boies, however, noticed some things that Microsoft hid-- there were several computers used in the video said to contain only one and the computer on which the operational problems were demonstrated had never even had the browser removed. The Microsoft executive on the stand had no explanation for the discrepancy, became flustered, and slumped in the witness stand like a man already defeated.

Ironically, its weaknesses in court are giving Microsoft actual reason to be paranoid. The stakes of this case are incredibly high. When a company is found guilty of an antitrust violation, it must pay treble damages. Treble damages amount to three times what the harmful practices have cost consumers and competitors. "If Microsoft’s actions have made the price of its operating system go up by $2 ," Elzinga explains, "then $6 would have to be paid to every purchaser of a Windows system. That’s already billions of dollars. Additionally, treble damages would have to be paid to every software maker that Microsoft has hurt." The stock prices already reflect a nervousness, as Microsoft stock has fluctuated since the start of the trial.

The tense, technical nature of this trial holds a special appeal for even those, such as Elzinga, who are not usually involved with the world of computers and software. The uniqueness of this industry allows for some remarkable extensions of economic theory. "An interesting thing about Microsoft is they can claim that software has a market externality. This means that the more people who use a piece of software, the more valuable that software becomes. For example, if you and I both use Microsoft Word, we can exchange documents very easily. This ease of exchange has an inherent value." This could effect barriers to entry, because simply the fact that a piece of software is not already widely used could make sales more difficult.

"Another interesting characteristic about the software market is that there is really no limit as to how much they can produce." With most industries, as production continues, after a certain point, the cost of making another unit of a good eventually exceeds the revenue that can be gained from that good. With software, however, almost all the costs are incurred with writing the program, so to continue producing additional copies costs next-to-nothing.

The peculiarities of the software market are important to Elzinga primarily because of the research and teaching opportunities they have given him. He has just co-authored an article with colleague David Miles entitled "P.C. Software". Next, he and Miles intend to tackle a huge database containing information about the software market to analyze the turn-over and entry rates of firms. With his new extension into the world of technology, Elzinga frequently apprises his students in Econ 420-- Antitrust Policy-- of developments in the Microsoft case and others in the field.

An interesting remark he made in one class showed that in antitrust, what’s old is new again. It seems Microsoft is using many of the same arguments as were used by the defense for Standard Oil of New Jersey back in 1911. "Microsoft, like Standard Oil claims that it is a new industry and that the same rules cannot apply to them. Additionally, they believe that a harsh judgment will hinder further technological development." Standard Oil of New Jersey et al. versus United States was a landmark antitrust case which is credited for first empowering the Sherman Act. Standard Oil of New Jersey was broken up and forced to end many of its practices. Today, this company is known as Exxon.

More used to wearing many different hats and switching gears today than he was during his time as a tennis star, Professor Elzinga moves seamlessly from the world of technology and courtrooms to the classroom where he truly loves his work and his students. Elzinga is currently reserving opinion on the Microsoft case, "There’s a lot of evidence that hasn’t come out yet, and I haven’t really decided," but whatever the outcome, one of the favorite professors at U.Va will have a great deal to tell his students about the future of antitrust enforcement. Despite all odds, Professor Elzinga has gained the knowledge to help shape the world of economics as well as that of technology. He can remind us all to listen to that kid in shop class, he just might have something important to say.