Invention. Today, a single firm, Microsoft, is by far the most important worldwide supplier of web browsers. Yet Microsoft did not invent the web browser, nor even commercialize it. Only after the web browser had demonstrated its mass market appeal did Microsoft pay serious attention to it.

The implications for the interaction of competition policy and innovation are clear. Sometimes innovation comes from outsiders. Sometimes, for whatever reason, even very capable incumbent firms cannot see innovative opportunities. In those circumstances, which we might call Schumpeterian, outsiders bring competition or competitive pressure to bear on incumbents.

The example is important. Microsoft is a very capable commercializer of computer technologies. The firm is not inward-looking, thinking only about its own technical direction, but instead very aware of outside technological developments. That such a firm missed something as important as the browser and the widespread use of the Internet suggests a valuable lesson. For society to have a rapid rate of technical progress, we need innovative competition from outsiders as well as innovation incentives for incumbents.

Innovation in the United States has had elements of success by large companies, of course. But it has also had elements of success that were driven by outsiders. It is not just that the browser was invented by students and staffers in a physics-computing laboratory. One of the most important founders of the PC industry, and of its leading firm today, Microsoft, was a college dropout. IBM and Digital Equipment Corporation were not about to invent the PC in 1974, just as Microsoft was not about to invent the browser in 1994.

Competition policy and innovation are not opposed in these circumstances. Low barriers to entry and a level playing field for entrants and incumbents both are the essential goals of competition policy. They support at once competition from innovative outsiders and the return to innovation by outsiders.

### 3. c) Emphasis on the browser war

A second aspect of the Microsoft case which played only a minor role in the trial, but which is very important for policy formation, is the way the “browser war” between Microsoft and Netscape played out.

I have reviewed the history of the browser war elsewhere, so I will not repeat it here. The really important point is this. Innovator Netscape, a startup, was commercializing the browser when imitator Microsoft attempted its own browser as a “strong second.” Despite Microsoft’s formidable advantages as an organization, it was unable to defeat Netscape by improving its own browser or giving it away.

Microsoft’s formidable resources made the browser war highly asymmetric. Microsoft’s Internet Platform and Tools Division was an order of magnitude and a half larger than all of Netscape. Microsoft put many of its best people on the browser, and they did some very good work at the height of the browser war, while Netscape both made some extraordinary strides and some startup mistakes. Microsoft is the best incremental improvement and commercialization firm for software in the world. Despite all those advantages, Microsoft was unable to win the browser war.

Microsoft officials grew more and more frustrated with the inability of their excellent implementation and commercialization capabilities to give them success in the