The Nation; The Land of Monopolies

Published: July 01, 2001

AFTER Thursday's decision by the United States Court of Appeals for the District of Columbia Circuit, which threw out out District Court Judge Thomas Penfield Jackson's order to break up Microsoft, the big question seemed to be: Who won? It's an interesting question, given that the court agreed with Judge Jackson that Microsoft was, after all, a predatory monopoly.

But whatever the answer in this case, there is a growing realization among economists and technology experts that Microsoft may be only the most visible symptom of a problem afflicting the Internet economy.

What troubles some observers of the world of Internet-enabled software and services -- which marches to slogans like ''get big fast'' and ''winner take all'' -- is that a number of factors may make it a breeding ground for monopolies.

Not all of those factors are new. There are decidedly old fashioned economies of scale that make it cheaper to manufacture things in bulk. In the world of selling intellectual property like software, the trend is even more pronounced, because it costs a great deal of money to develop the product and almost nothing to put it on disks and sell it again and again. This makes it harder for newcomers to enter the market, because they must spend so much time and money up front just developing a product, before they can try to sell it.

Inertia also helps, since consumers and businesses alike hate the frustration and delay that learning how to use new systems entails. This ''lock-in effect'' helps preserve market dominance, said Hal R. Varian, economics professor and dean of the School of Information Management and Systems at the University of California at Berkeley, because it creates a different kind of barrier to entry for newcomers -- not the cost to the company of entering the market, but the cost to consumers of making a switch.

But what is really driving the Internet economy, Mr. Varian says, is a relatively new phenomenon known as ''network effect'' -- the notion that a technology based on connectedness grows increasingly compelling and valuable as more and more people use it.

The power of the network effect can be seen in technologies like America Online's Instant Messenger. Once teens realized that they could gab after school online, it became a must-have, Mr. Varian said -- and its use exploded, rapidly bringing AOL a near-lock on a market of more than 100 million people that Microsoft is struggling to break into.