Competitive Intelligence / Competitive Strategy, by Arik Johnson
by Arik Johnson

Microsoft Corporation or Federal Estate Taxes:
Which is Worse for Consumer Choice and Encouraging Competition?

As we've all discovered by now, Microsoft Corporation suffered a setback April 3rd when the Anti-Trust Division of the U.S. Department of Justice convinced U.S. District Judge Thomas Penfield Jackson to rule that Microsoft broke antitrust law by illegally abusing its monopoly power over its operating system for personal computers. While the Sherman Antitrust Act might say Microsoft can't bundle Internet Explorer with the Windows O/S, Microsoft pledged to appeal the ruling and followed up that vow with a series of television ads to influence public opinion.

The stock market reacted with disappointment to the ruling, to say the least. Heck, we suffered a full scale market "correction" the likes of which everybody's been talking about lately. Even presidential candidates, when asked, weighed in on the subject -- George W. Bush saying he'd go easy on the company; while Al Gore remained conspicuously silent (you'll notice it has always been the "Department of Justice prosecuting Microsoft" and never the "Clinton/Gore Department of Justice prosecuting Microsoft", even though they're one in the same. Jackson has put the remedy phase of the case on the fast track and may even send it directly to the Supreme Court rather than letting the parties hash out the details in the Court of Appeals.

Coming up the end of April, we'll hear from the 19 states that are also part of the suit and the DOJ proposals for remedies in the matter. Then, on May 10th, Microsoft gets to reply to those proposals; a week later, the DOJ and states reply to the reply. In other words, it's their last chance to settle before remedies get tossed around and appeals begin. While the final remedy won't be officially discussed until the May 24th hearing on the case, and probably won't be decided until after years of appeals have taken place, the question of what will happen to the company may come down to presidential politics. Bush continued, "I'm not going to comment on the particulars of the Microsoft suit, but as president, the question should be innovation as opposed to litigation". He added, "I am unsympathetic to lawsuits. You can write that down. I am worried about the effect of lawsuits on job creation. If you're looking at the kind of president I'll be, I'll be slow to litigate."

But, unlike one might expect, presidential politics has little to do with executive influence over the DOJ and a lot more to do with its impact on the Federal Judiciary. Remember, the executive branch nominates new Supreme Court justices, and, since the appeal probably won't be decided for years to come, it's likely that some of the new administration's nominees might end up with influence over the case.

Who'd Microsoft really hurt with its monopolistic behavior? Where are the victims? In reality, the only real victim has been Netscape for the most part, eventually being forced to merge with AOL or face eventual extinction in the Browser Wars. Ironically, the AOL merger didn't help Netscape's browser share much -- today, two-thirds of Internet users prefer IE, while Netscape's user base has shrunk to one-third. The only real danger that ever existed for consumers -- which is who this is all about, right? -- was the possibility that Microsoft could dump IE on the market, force the competition out and then charge higher prices for software that had previously been free.

In truth, consumers haven't been hurt much my opinion; although some users of alternative operating systems might feel differently. This is especially true of the Linux crowd who've been out to get Microsoft all along. My opinion is that, Microsoft should simply introduce its own Linux O/S (it's open-source remember, anyone can introduce their own version) and maybe even bundle it with Windows and that war would be over too. Bill Gates would get the chance to prove that innovation really is the engine of growth in the New Economy by building a better Linux. And, Netscape is going to form the foundation of other AOL plays in upcoming product releases - such as its anticipated partnership with Gateway to provide AOL "countertop" and "wireless Web tablet" appliances at the $500 price point.

Frankly, I don't think the DOJ is quite on target by identifying Microsoft as the most significant anti-competitive threat to American business. Here's another one to consider: the Federal Estate Tax a.k.a. the "Inheritance Tax". I've spoken to more small and medium sized business owners than I can number who've said they don't know how they're going to come up with the cash to pay the taxes on their family business to keep it in the family after they pass-on to the next life. And, the continued consolidation that occurs in industries such as Banking and Finance, Media and Publishing, Energy and Utilities and even Telecommunications sectors is exacerbated by a federal government that insists on taxing estates with greater than $600,000-or-so worth of value. The majority of Estate Tax collections are on estates with less than $2 million in survivors' assets. The practice regularly forces small family newspapers, banks and telcos or fuel cooperatives to be sold for taxes to larger competitors, thereby reducing consumer choice, particularly in already choice-challenged rural areas and causing an inflationary effect on prices. All these, while serving to reduce the number of small businesses, which, as we all know, are the true engine of job growth in any economic boom.

Even a $4.2 billion consumer products giant like privately-held S.C. Johnson & Son has estate tax problems; the company's 70-year-old Chairman, Samuel C. Johnson, great-grandson of the company's founder, is rumored to have started an entirely separate company (Johnson Worldwide Associates, a sporting goods firm) to be sold- or spun-off just to pay the taxes on the family fortune! Don't get me wrong… billionaires deserve to pay taxes on estate succession. But, I doubt that many pay their "fair share" based on their degree of wealth relative to the rest of us. I don't propose to let them off the hook - just let a few of the small businesses out there, the ones who really add value and consumer choice to a community, be allowed to survive.

And, we won't bankrupt the government in making these kinds of changes. How critical are Estate Taxes to the continued operation of our federal government? Well, take a look at page 30 of your 1040 Tax Form Instructions for the answer. On it, you'll see listed 1998 Income and Outlays of revenues and expenditures for the U.S. Government. You'll notice that some 8 percent of total tax receipts came from the "everything else" category (92 percent came from Personal and Corporate Income Taxes and Social Security, Medicare, unemployment and retirement taxes) described as originating in "Excise, Customs, Estate, Gift and Miscellaneous Taxes". I'd like to see a presidential candidate with the courage to increase the threshold subject to the "Estate" taxes portion of that catchall piece of the government pie and focus instead on helping prevent business consolidation of small companies that are sold off to larger competitors at just the time when we need competition in all industries the most.

Arik R. Johnson is Managing Director of the Competitive Intelligence (CI) outsourcing & support bureau Aurora WDC. Learn more about Arik at his firm's Web site