Case Study ANTI TRUST MICROSOFT

Case Study ANTI TRUST MICROSOFT - Transcript

MICROSOFT S MONOPOLIZATION AND
ANTI COMPETITIVE
STRATEGIES
By Group 6 WMP4048 4053
Microsoft is a large diversified computer software manufacturer with one of the highest valuations in the world Microsoft produces the Windows family of operating systems for personal computers and servers It also produces applications software that run on the Windows family of operating systems e g the Internet Explorer IE Web Browser very successful MS Office Suite consisting of Word word processor Excel spreadsheet PowerPoint presentations Outlook e mail and news and Access database Almost all Microsoft products are complementary to a member of the Windows family of operating systems for personal computers and servers
Microsoft has monopoly in PC operating systems Windows operating systems which are used in more than 80 of Intel based PC s This market has high technological barriers Threat to Microsoft is not from new operating systems but from alternate products such as browsers which are new software that can be used with multiple operating systems and can also act as an alternative platform to which applications can be written This posed a threat to Windows monopoly and perhaps its long term existence
Microsoft s Anti competitive Strategies
Microsoft invested money to develop test and promote IE for free to all users In competition to Netscape browsers which was being sold for a price They even paid some customers to use IE instead of Netscape browser
Microsoft put a condition to PC manufacturers to license preinstall and distributes IE on every Window PC By this they were able to distribute IE on every PC by tying up IE to Windows 95 which was a monopoly version
This was extended to the Windows 98 successor of Window 95 misusing their operating system monopoly to exclude competition and deprive customer of free choices They made removal of IE from Windows 98 technically more difficult
Microsoft restricted all OEM s to remove any part of IE software or to add any other browser in the pc in a more prominent or visible way So OEM s are deprived of the choices they can make about which browser should be offered to customer
Microsoft entered with anti competitive agreement with all largest and most popular ISP s and OSP s It gave the list of ISP s in folders with OS that enabled users to subscribe to their services and substantial value to ISP s
Microsoft entered anti competitive agreement with ICP s to not pat or compensate his competitors for the distribution marketing or promotion of the ICPs content to not promote any other to inhibit competition
This way Microsoft precluded competition on the merits between Microsoft s browser and other browser used Windows operating system monopoly to extend to Internet browser market and maintained Windows operating system monopoly
Microsoft stated that the merging of Microsoft Windows and Internet Explorer was the result of innovation and competition that the two were now the same product and were inextricably linked together Also the consumers were now getting all the benefits of Internet Explorer for free Those who opposed Microsoft s position countered that the browser was still a distinct and separate product which did not need to be tied to the operating system since a separate version of Internet Explorer was available for Mac OS They also asserted that IE was not really free because its development and marketing costs may have kept the price of Windows higher than it might otherwise have been The case was tried before U S District Court Judge Thomas Penfield Jackson
While the initial verdict went against Microsoft the verdict was overturned on appeal Nonetheless EU recently found Microsoft guilty of anti trust conduct and slapped a fine of US 1 3 billion in 2008 the largest fine ever imposed on a company

THE CASE
During the last few years the Federal Trade Commission and the
Department of Justice of the United States have investigated Microsoft on various antitrust allegations The 1991 1993 and 1993 1994 investigations by the Federal Trade Commission FTC ended with no lawsuits The 1994 investigation2 by the United States Department of Justice DOJ was terminated with a consent decree in 1995 The key provisions of the 1995 consent decree were
1 Microsoft agreed to end per processor zero marginal price contracts with computer manufacturers Original Equipment Manufacturers OEMs but it was allowed to use unrestricted quantity discounts
2 Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon the licensing of any other Covered Product Operating System Software product or other product provided
However that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products or the OEM not licensing purchasing using or distributing any non Microsoft product
Thus the 1995 consent decree imposes two restrictions one horizontal and one vertical The horizontal restriction stops Microsoft from using zero marginal cost pricing However it allows for quantity discounts disregarding the fact that zero marginal cost pricing is a special case of a quantity discount contract The vertical restriction of the 1995 consent decree prohibits product bundling created by contract but allows Microsoft to keep expanding the number and type of functions of its products including Windows In short in the 1995 consent decree contractual bundling was disallowed but technological bundling was explicitly allowed
During 1997 Senator Orin Hatch R Utah held congressional hearings on Microsoft that featured Microsoft s CEO Bill Gates Netscape s CEO Jim Barksdale and PC manufacturer Michael Dell among others Senator Hatch took the position that if present antitrust law cannot deal with various anti competitive acts attributed to Microsoft Congress should change or enhance the antitrust laws 7 Sun Microsystems Oracle IBM Netscape and Novell formed a loose coalition lobbying intensely for antitrust action against Microsoft 8
On October 20 1997 DOJ alleged that Microsoft violated the 1995 consent decree by bundling Internet Explorer IE with the Windows operating systems and requiring computer manufacturers to distribute IE with Windows 95 DOJ petitioned the District Court to find Microsoft in civil contempt On December 11 1997 Judge Thomas Penfield Jackson issued a preliminary injunction barring the bundling of IE withWindows 9 On May 12 1998 the Court of Appeals DC Circuit ruled that the 1995 consent decree did not apply to Windows 98 which was shipped with an integrated IE as part of the operating system and an IE icon on the PC desktop On June 23 1998 the Court of Appeals voided the 1997 preliminary injunction arguing that courts are ill equipped to evaluate the benefits of high tech product design
During the week following the Court of Appeals defeat of its 1995 consent degree enforcement suit DOJ filed a major antitrust suit against Microsoft In this action DOJ Complaint 98 12320 filed on May 18 1998 DOJ was joined by the Attorneys General of 20 States and the District of Columbia This paper focuses on this last and continuing lawsuit against Microsoft
Over the years Microsoft has integrated in the Windows class of operating systems many functions and features that were originally performed by stand alone products 11 Moreover the Court of Appeals in its June 23 1998 decision affirmed that Microsoft s practice of bundling IE with Windows was legal under the terms of the 1995 consent decree To overcome this interpretation of the law DOJ argued that Microsoft s bundling of IE with Windows and its attempt to eliminate Netscape as a competitor in the browser market was much more than adding functionality to Windows and marginalizing a series of add on software manufacturers DOJ alleged and the District Court concurred that Microsoft added browser functionality to Windows and marginalized Netscape because Netscape posed a potential competitive threat to the Windows operating system This distinctive threat posed by Netscape was a crucial part of the DOJ allegations DOJ alleged that applications could be written to be executed on top of Netscape Since Netscape could be run on a number of operating systems DOJ alleged that Netscape could erode the market power of Windows In DOJ s logic Microsoft gave away IE and integrated it in Windows so that Netscape would not become a platform that would compete with Windows Thus DOJ alleged that Microsoft s free distribution of IE its bundling with Windows and all its attempts to win the browser wars were defensive moves by Microsoft to protect its Windows monopoly
The Microsoft trial took place at an accelerated schedule at the U S District Court of the District of Columbia from October 19 1998 to June 24 1999 Only twelve witnesses testified from each side Microsoft s CEO Bill Gates was not called as a witness but his video taped deposition was extensively used during the trial Judge Thomas Penfield Jackson announced that he would announce his findings of fact before his conclusions of law This was widely interpreted as implying that the judge was trying to give an opportunity to the sides to reach a compromise and resolve the case through a consent decree
On November 5 1999 Judge Jackson issued his findings of fact siding very strongly with the plaintiffs In December 1999 Judge Richard Posner a prominent antitrust scholar and the Chief Judge of the Seventh Circuit Court of Appeals agreed to serve as mediator for settlement discussions 12 On April 1 2000 settlement talks broke down after some States reportedly disagreed with the proposed agreement On April 3 2000 Judge Jackson issued his conclusions of law finding for the plaintiffs on almost all points In particular Judge Penfield Jackson found
1 The relevant antitrust market is the PC operating systems market for Intel based computers
2 Microsoft has a monopoly in this market where it enjoys a large and stable market share
3 Microsoft s monopoly is protected by the applications barrier to entry which the judge defines as the availability of an abundance of applications running Windows
4 Microsoft used its monopoly power in the PC operating systems market to exclude rivals and harm competitors
5 Microsoft hobbled the innovation process
6 Microsoft s actions harmed consumers
7 Various Microsoft contracts had anti competitive implications but Microsoft is not liable of anti competitive exclusive dealing contracts hindering the distribution of Netscape Navigator
On June 7 2000 after an extremely short hearing Judge Jackson issued his remedies decision splitting Microsoft into two companies and imposing severe business conduct restrictions The plaintiffs remedies proposal as adopted by the Judge imposed a breakup of Microsoft into two pieces an operating systems company which would inherit all the operating systems software and an applications company with all the with all the remaining software assets Cash and securities holdings of other companies held by Microsoft would be split between the resulting entities Bill Gates and other officers shareholders of the company would not be allowed to hold executive and ownership positions in both of the resulting companies
The District Court ruling also imposed interim conduct restrictions on Microsoft These restrictions to last three years were
1 Microsoft would create a pricing schedule that would apply to all buyers so that price would not be conditioned on the sale of other Microsoft products
2 Microsoft would not be allowed to have exclusive contracts that do not allow the other party to use display or feature its opponents products
3 APIs and other technical information of Windows should be shared with outsiders as it is shared within Microsoft
4 Microsoft is not allowed to take actions against manufacturers who feature competitors software
5 Microsoft will allow OEMs to alter Windows in significant ways
6 Microsoft is not allowed to design Windows to disable or compromise rivals products
Microsoft appealed and was granted a stay of all parts of the District Court decisions until the appeal is heard Although the Washington DC Appeals Court expressed its willingness to hear the case in plenary session the District Court agreed with the government s proposal to petition the Supreme Court to hear the case immediately invoking a rarely used provision of antitrust law The Supreme Court refused to hear the case before the Appeals Court We discuss the decision of the Court of Appeals and subsequent events in section 7
Some Views in favor of Microsoft
Simply because Microsoft has an 80 percent market share this does not mean the company is behaving like a monopolist Acting like a monopolist means raising prices to gain monopoly profits and this can only be done when barriers to entry eliminate the threat of competition In the computer industry there are numerous alternatives to the Windows operating system including Apple s Macintosh IBM s AIX Sun s Solaris and even the popular freeware Linux In an open market virtually any software company must be viewed as a potential competitor Without a true barrier to entry Microsoft is hard pressed to exercise any market power In fact because there are no barriers to entry Microsoft s market share may be better viewed by the fact that the firm is an aggressive competitor not a monopolist that has gained its market share by providing consumers what they want at affordable prices This is borne out by the fact that the price of Windows has actually fallen and will fall even further if the courts do not interfere with the company s efforts to add an Internet browser to the operating system without raising the price
Critics claimed that a network effect creates monopoly power for Microsoft even without barriers to entry That is the more people who use a product such as Windows the more valuable and dominant it becomes and the more difficult it becomes to change Namely the company knows that signing people up today at low prices will offer the opportunity to collect higher prices from more people down the road But this argument assumes that in the future all competitors to Microsoft will be gone so it can safely raise prices to exploit its monopoly position In a market that is as dynamic as the computer industry real and potential competitors do exist and to assume that they will be successfully driven from the market at some point in the future is a high risk strategy that today s investors may not be willing to bear
Building on the network effect critics also claim that the dominance of one product can make it difficult for new products to enter the market even if they are superior Path dependency as this line of thinking is called has been used to explain failed technologies that were allegedly superior to products that ultimately won out in the marketplace Two famous cases are the QWERTY keyboard the standard keyboard in use today and VHS videotape Both of these were said to be inferior to alternative products But research into the QWERTY keyboard found no evidence to suggest alternative keyboards were superior and VHS videotapes won out over Betamax because VHS tapes are long enough to record movies
In the marketplace products survive because they meet consumer demand Otherwise entrepreneurs with better products can fill the void New technologies and better products constantly replace outdated products even when vast infrastructures are involved The nation has moved from barge transport to rail transport from horses to automobiles and from vinyl records to compact discs In short path dependency arguments do not offer an accurate description of a dynamic economy
Politics over markets Microsoft has evolved into an aggressive leader in this industry It is telling that the Department of Justice is seeking a larger market share for a specific Internet browser Netscape as part of the remedy it is seeking against Microsoft Netscape with 50 percent of the browser market is a billion dollar giant in an industry that includes a number of other browsers as well Could this be just another case of a company going to Washington to get what it wants through government intervention rather than the marketplace
The late Nobel economist Milton Friedman believed that the antitrust case against Microsoft set a dangerous precedent that foreshadowed increasing government regulation of what was formerly an industry that was relatively free of government intrusion and that future technological progress in the industry will be impeded as a result
Jean Louis Gass e CEO of Be Inc which at the time made a competing operating system which eventually folded in the face of Microsoft s dominance criticized the emphasis on the packaging problem He claimed Microsoft was not really making any money from Internet Explorer and its incorporation with the operating system was due to consumer expectation to have a browser packaged with the operating system BeOS came packaged with its web browser NetPositive Instead he argued Microsoft s true anticompetitive clout was in the rebates it offered to OEMs preventing other operating systems from getting a foothold in the market
Conclusion
The issue central to the case was whether Microsoft was allowed to bundle its flagship Internet Explorer IE web browser software with its Microsoft Windows operating system Bundling them together is alleged to have been responsible for Microsoft s victory in the browser wars specifically Netscape as every Windows user was forced to have a copy of Internet Explorer It was further alleged that this unfairly restricted the market for competing web browsers such as Netscape Navigator or Opera that were slow to download over a modem or had to be purchased at a store
Underlying these disputes were questions over Microsoft s allegedly anti competitive strategies to impose high entry barriers including forming restrictive licensing agreements with OEM computer manufacturers entering into exclusionary agreements with ICPs and ISPs altering its application programming interfaces APIs to favor Internet Explorer over third party web browsers restricting alterations to its boot up sequence and active desktop and above all Microsoft s intent in its course of conduct i e to kill competition by any means and deprive consumers of product choice especially in browsers by discouraging innovation
Other cases Against Microsoft in News
Microsoft has been in numerous lawsuits by several governments and other companies for unlawful monopolistic practices
In 2004 the European Union found Microsoft guilty in the highly publicized European Union Microsoft competition case and slapped a fine of 1 3 billion Additionally Microsoft s EULA for some of its programs is often criticized as being too restrictive as well as being against open source software
European antitrust regulators in February 2 2008 fined Microsoft 1 3 billion for failing to comply with a 2004 judgment that the company had abused its market dominance The new fine by the European Commission was the largest it has ever imposed on an individual company and brings the total in fines imposed on Microsoft to about US 2 5 billion at current exchange rates Microsoft had previously been fined after the commission determined in 2004 that the company had abused the dominance of its Windows operating system to gain unfair market advantage The commission imposing the new fine said that it was because the company had not met the prescribed remedies after the earlier judgment