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TR: What would be the most important issues the government should focus on to enable the new economy to work smoothly?

Varian: My top three are intellectual property, privacy and Internet governance. The main worry I have about intellectual property is that it’s driven by the content providers, who are putting a lot of lobbying money into strengthening copyright laws to cope with the Internet. With privacy, the danger is getting railroaded into a bad policy as a way to placate a public outcry. The Communications Decency Act, for example, was a knee-jerk reaction to the threat of online pornography. Finally, the governance problems facing the Internet are huge; they’re difficult enough at the national level, yet they ultimately require international coordination. I think that we’re going to see a lot of wasteful legal suits by disgruntled participants in the next few years.

Shapiro: Another thing the government has to keep an eye on is antitrust. I take the view that the legislation passed a hundred years ago has now been elaborated. The basic legislation said, “You can’t monopolize a market. Don’t stifle competition.” Now we have a hundred years of court decisions explaining what that means. This legal structure is, I think, quite flexible: It has handled many new industries and new technologies. If there’s a worrisome area there, it’s sorting out the boundary between antitrust and intellectual property. One troubling decision, for instance, essentially forces Eastman Kodak to license its patented technology for servicing high-volume photocopiers. I’m doing work for Intel now and I’m concerned about the Federal Trade Commission’s action against Intel as a precedent for forcing companies to divulge intellectual property under conditions they would not agree to voluntarily. [The FTC accused Intel of violating antitrust law by denying its customers technical information they needed to develop computer systems based on Intel microprocessors.]

TR: Say “antitrust” and most people are going to think of Microsoft.
Varian: The press has focused on Microsoft vs. Netscape or Microsoft vs. Sun. But the real role of antitrust is not to choose winners but to define the rules of the game. The most important outcome of the Microsoft case is going to be the precedent it sets for future competition.

Shapiro: The challenge for antitrust is: Do network effects lead to durable monopoly power? And in the presence of network effects, what conduct stifles competition and innovation? Linux is out there as an alternative operating system that’s quite good, but it doesn’t yet have critical mass. Can it really take off and succeed? This is not a new issue. In the 1950s FTD, the floral service, tried to impose a rule that a florist could not join another network if it wanted to be a part of FTD. The Justice Department said, basically, not so fast-you guys have a monopoly over floral networks, and that’s exclusionary. And so FTD agreed to drop that provision, the same way the Justice Department is now asking Microsoft to drop provisions that make it difficult for America Online to distribute Netscape.
varian: The point is that if you’re in a race, it’s fine to run as hard as you can, but it’s not fine to trip the other guy. The important thing is to make sure that you have appropriate rules of conduct for those firms that end up having dominant market positions.

Shapiro: Microsoft says in its defense: We have to run as fast as we can because technology is changing. If we slow up or don’t give good value to our customers, we’re going to be out on our ear.

TR: Is that true?
Shapiro: I don’t think so. In any event, Microsoft is running down the racetrack, and certainly improving its product, but the question is whether some of its tactics are designed to stiff-arm competitors. And that’s the role of antitrust law: to make sure that competition is not blockaded, and then let the consumers decide.

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