It's the holiday season and the question most of us struggle with is what to get loved ones for Christmas. Well, there are some high-tech products that are coming onto the market that are sure to intrigue those who like gizmos and gadgets. Bill Gates, though, must have mixed feelings about them.

These new gadgets, from an e-mail device that plugs into an ordinary telephone jack to a web-browser machine with touch sensitive screens, have several things in common. They are stand-alone, special-purpose devices. They are mostly reasonably priced (the e-mail device is priced under $100, hardly more than a portable phone). Most importantly, they use an operating system called Linux.

Meanwhile, Sony is planning to release a new all-in-one Playstation that will enable their customers to surf the Web, to exchange e-mail, and to watch DVD movies, in addition to playing video games. Manufacturers of PCs are also coming out with new Internet computers. Purportedly more stable and reliable than Windows, Linux stands to get the lion's share of this new market as well.

Bill Gates and Microsoft are beginning to feel the heat of competition. It was only a matter of time. Hefty profits from its leading position in operating systems and in its popular applications software were bound to attract competitors. With little more than its leading position keeping other firms out of the operating systems market, Microsoft cannot sustain its lead indefinitely.

Time is working against Microsoft in another way. These new-generation non-computer computers are all highly specialized devices. Windows' advantage is that so many different applications are written for use on PCs that run on Windows. As the markets grow

for various computer applications, such as e-mail and Internet browsing, highly specialized, stand-alone devices are becoming financially viable. This happened long ago with the video-game device market. On the other hand, Wang's dedicated word-processor machine failed in the market in the early 1980s because it was too specialized for its time--it was ahead of its time. Adam Smith, credited as the founder of modern economics, put it this way in 1776: "Specialization

is limited by the extent of the market."

While Gates and Microsoft are surely sweating from the competitive heat, at the same time, they must feel relieved that the market is vindicating them from the charge of monopoly. Unlike the government’s monopoly position with the Post Office and public schools, Microsoft does not have the power of the state to enforce its monopoly position. Of course, its hard to say whether Microsoft would rather have its position go unchallenged and face whatever penalty the government gives them, or compete in the market with upstarts who have been able to develop a better or at least comparable operating system. But when you get right down to it, it doesn’t matter what Microsoft wants--courts will make decisions and competitors will be attracted to profitable markets.

What seems to be happening though, is that competitors are moving in on Microsoft faster than the courts. In this country, judicial matters require that we abide by due process. Microsoft’s competitors are not bound by any such rule. In an area where the pace of technological advance is swifter than the courts and regulators, market competitive environments can change faster than courts can rule or agencies can develop new regulation. In such areas, legislation, regulation and other forms of public policy are likely to just get in the way of competitors coming into play, the way a referee can get in the way on a ball field. Profits do a lot more to generate competition in markets than all of the antitrust lawyers in Washington can do, especially if the government doesn’t stand in the way of competitors.

It remains to be seen whether the courts will recognize that the software market in general and the operating systems market in particular are dynamically competitive, spawning new products and amazing improvements on older products. The competitive makeup of the industry can change while the courts blink because the speed of technological change approaches the speed of PCs themselves.

Well, in writing all of this down, I think I’ve come up with the perfect Christmas present for my wife. As a guy who went to Virginia Tech, what could be higher-tech than a couple of Virginia Tech Sugar Bowl tickets? (They don’t run on Windows, either.) Of course, getting two tickets for a national championship game will be the easy part. Convincing her to take me as her date will be tough.