U.S. v. Microsoft (2001)

Maintenance of Monopoly

IntroductionIn May of 1998, the US Department of

Justice, twenty individual states, and DC filed suit against MicrosoftClaimed Microsoft had monopolized the

market for PC OSsAlso that it had used its monopoly to engage

in a wide range of antitrust violations

IntroductionCased was tried in federal court starting in

October of 1998The court determined its legal conclusions

on April 3, 2000After appeals, settlement discussions, and

a remedy trial period, Microsoft eventually settled at the end of 2002

IntroductionConsidered the antitrust case of the 1990s.

Arguably one of the most significant of the 20th century

Problems for Microsoft beyond this case:Class actions on behalf of consumersThe EU begins increased enforcement

Focused more on the media player packaged into Microsoft’s operating systems

Claims by Both SidesThe Government claimed that Microsoft

had engaged in multiple anticompetitive acts to protect its OS monopolyConsumers were being harmed by higher

pricesMicrosoft’s actions had reduced innovation

Microsoft argued it was not a monopolyHighly dynamic industry

Microsoft also claimed to be procompetitive since consumers benefitedAccess to high quality, innovative software

BackgroundMicrosoft a relatively young corporation

Began its existence in the mid 70sSince then, has exploded growth-wise and

made many of its employees millionairesWith success comes (antitrust) scrutiny

Questions about whether or not Microsoft has restrained competition, excluded competitors, or expanded its market power through noncompetitive means

Background (Earlier Cases Against MS)In 1990 the FTC investigated Microsoft

Involved software licensing practicesWas voted to bring no suit against the company

Immediately after that investigation ended the DOJ started its ownIn 1994, the DOJ filed a complaint saying that

Microsoft’s contracts with OEMs were anticompetitive/exclusionary

Case did not go to trial. Microsoft settled with the GovernmentSigned a consent decree which limited Microsoft but still

explicitly allowed the development of “integrated” products

Background (How it Got Started)The battle of the browsers

Netscape Navigator was first successful internet browser

To catch up Microsoft forced OEMs to license and install their browser (Internet Explorer)The Government sued Microsoft for this and was

initially successfulOn appeal, however, it was ruled that the

combination of Internet Explorer and the OS offered functionality not available without product “integration.

Background (How it Got Started)DOJ, 20 states, and The District of Columbia

brought suit against MS claiming:That Microsoft had engaged in a range of

practices in violation of Section 1 of the Sherman ActOS Licenses with OEMsContracts with ISPsTies between its OS and Internet Explorer

That Microsoft had attempted to monopolize the market for internet browsers (Violated Section 2 of the Sherman Act)

Why Java/Netscape Was a ThreatHigh “applications barrier to entry”

Operating Systems depend on a wide range of applications to be successfulThese are typically sunk costs once you’ve spent

time developing them

Java could potentially lower the barrierCross-platform languageNetscape could potentially distribute Java to

independent developersThey could choose to write programs for another OS

(OS/2 or Linux), putting Microsoft’s monopoly at risk

An Overview of the Economic IssuesDid the Microsoft Corporation possess

monopoly power in the market for personal computer operating systems?

Did Microsoft maintain its monopoly power by a series of anticompetitive actions that unreasonably restrained trade?

Claim #1Government's View:

Microsoft did possess monopoly power in the market for operating systems for Intel-compatible desktop personal computers

Microsoft's View:The relevant market for antitrust purposes is substantially

broader than Intel-based PC OSs; it includes hand-held computer operated systems and servers

Also, it faces threats from other non-OS platforms that can support applications and threats from yet unknown innovations

The very fact that Microsoft found it necessary to take action against Netscape and Java shows that those companies and their products are in the market. Thus, Microsoft does not have monopoly power.

Claim #2Government's View:

They claimed Microsoft foresaw the possibility that the dominant position of its Windows OS would be eroded by Internet browsers and by cross-platform Java.

Microsoft engaged in a series of anticompetitive practices in order to protect the monopoly power of its Windows OS

Microsoft's View:It did perceive a competitive threat from Java and

responded in a number of ways to combat that competitive threat

However, those responses were the reasonable and appropriate responses of a competitor and cannot be appropriately characterized as an attempt by Microsoft to maintain its OS monopoly.

Debating the Economic IssuesDid Microsoft have monopoly power?

The Government’s PerspectiveYes, according to market share data Microsoft’s

share of PC operating systems was very high and had remained stable over time.

During the 1990s, Microsoft’s worldwide share of shipments of Intel-based operating systems had been approx. 90 percent or more

Debating the Economic IssuesMicrosoft’s Response

Microsoft denied it had market power, claiming that the government’s market definition was invalid

It argued that it competed vigorously to remain a provider of the leading software platform. Any market power it enjoyed was temporary, thus could not be characterized as monopoly power

Debating the Economic IssuesThe Court’s Perspective

The court supported the Government’s position on the market definition and monopoly power issues

They also affirmed that there were significant barriers to entry in the market

Did Microsoft Maintain Its Operating System Monopoly by Thwarting the Threat Posed by Netscape’s Browser?

The Government’s CaseThe government stressed that by bundling its

free browser with its OS, Microsoft prevented browser companies from entering the browser market unless they entered the OS market as well

Did Microsoft Maintain Its Operating System Monopoly by Thwarting the Threat Posed by Netscape’s Browser?

Market AllocationMicrosoft took part in a number of market

allocation efforts with Netscape, Apple, and Intel in an effort to minimize the competitive threat to its OS monopolyNetscape-Microsoft attempted to limit Netscape to

the server market, so Microsoft could dominate the PC browser market

Intel- Microsoft threatened to deny support for Intel’s new generation of processors

Apple-Microsoft required Apple to make Internet Explorer the default browser on all Macintosh operating systems

Did Microsoft Maintain Its Operating System Monopoly by Thwarting the Threat Posed by Netscape’s Browser?

Predatory PricingMicrosoft devoted $100 million per year to

develop Internet Explorer which it distributed at a negative price

Predatory Pricing StrategyDefinition: A strategy in which the predator forgoes

current profits in order to eliminate or cripple the competition, with the expectation of recouping those forgone profits at some point in the future.

Bundling and OEM RestrictionsMicrosoft bundled IE with Windows 95 and

with Windows 98 The Government stated that there was

separate demand for browsers and for operating systems

1996: Microsoft imposed screen and start-up restrictions on OEMs The Government argued that Microsoft

viewed Netscape as a platform to support substitute OSs

Exclusionary Agreements with ISPsMicrosoft drew up contracts with ISPs to

limit the number of customers to whom ISPs could distribute other browsers

Microsoft created a desktop folder for “favored ISPs”Government stated that Microsoft extracted

promises from those ISPs

Exclusionary Agreements with ISPs (cont’d)ISP restrictive provisions:

75% or more ISP shipments must only have IE and only include a competing browser when requested

Restricted total shipments of non-Microsoft browsers

Government saw provisions as anticompetitive

Microsoft’s Response“Browser battle” was really part of larger

effort to be leading PC provider of Microsoft Windows

Actions were not predatory improving its own browser and OSnot eliminating Netscape

Efficiencies in integrating browser into OS

Microsoft’s Response (cont’d)Discussions with Netscape, Apple, and Intel

did not alter their behaviorOffering free browser was “natural step”

toward integrating the browser into Windows 95 and 98

Government did not provide evidence that integrating the browser into its OS was “not profit-maximizing apart from any predatory motives”

Microsoft’s ResponseOEM restrictions justified in order to

“preserve the quality and speed of the start-up process”

Bundling is not anticompetitive if firm does not have market powerIn fact, efficiencies would be lost if Microsoft

had to separate its browser from the OS

Microsoft’s Response (cont’d)Justified in competing aggressively for the

distribution of its browserHence, ISP agreements were necessary

OEM and ISP agreements = “no harm, no foul”Netscape could distribute its browser through

the mail or encourage downloads from the web

The Court’s ViewJudge Jackson supported the Government’s

claims of anticompetitive actsSided with the Government on:

Market allocationPredatory pricingBundlingExclusionary agreement

Was Microsoft’s Alleged Anticompetitive Behavior Harmful

to Competition?

The Government’s ViewMicrosoft succeeded in excluding Netscape

from OEM distributionRelevant measure = Microsoft’s share of

browser usageContract restriction responsible for decline

in Netscape’s shareMicrosoft’s browser share reached over

85% by mid-2000

Microsoft’s ResponseWide distribution of browser = more people

buy PCs to browse the InternetPlanned to improve the quality of its

browserNone of its actions had or would harm

consumersAOL could distribute Netscape if it so

choseMicrosoft’s share of the browser market

would diminish

Microsoft’s Response (cont’d)Disputed Government’s measure of

browser market shareNumbers offered that the market for

browsers had not tipped in Microsoft’s favorNetscape failed to market its browser more

effectivelyMicrosoft had a better product

The Court’s PerspectiveFindings of Fact supported the

Government’s view“To the detriment of consumers,…Microsoft

also engaged in a concerted series of actions designed to protect the applications barrier to entry, and hence its monopoly power from a variety of middleware threats…” –Judge Jackson

The Court’s Perspective (cont’d)Microsoft kept Navigator from becoming an

innovation that could enable other firms to compete effectively in the OS market

Microsoft’s actions deterred investment in technologies and businesses that could threaten Microsoft

Resolution?The U.S. v. Microsoft case has now been

resolved, and a remedy chosenPath to remedy circuitous

The appellate court made clear it’s dislike of a structural remedyEasier to enforce than behavioral remedies, but also

riskier as far as creating inefficiency

Proposed settlement contained 3 components

Proposed SettlementFirst, attempted to prohibit Microsoft from

foreclosing the OEM channel by eliminating restrictive licensing agreements and outlawing retaliatory measures.

Second, it attempted to keep the ISP distribution channel open by placing limits on Microsoft’s ability to discourage companies from promotion of other middleware.

Third, the settlement offered a series of compliance measures whose goal is to enforce the terms of the settlement agreement.

Opposition to the Proposal9 States Opposed the Initial Proposal

The proposal didn’t prohibit Microsoft from illegally bundling it’s middleware with its OS

Claimed that the proposal wouldn’t effectively prohibit retaliatory conduct or open the ISP channel of distribution

Were worried Microsoft could still withhold vital technical information from developers of rival middleware

Enforcement mechanism won’t be effective

The Result?Judge Kollar Kelly was generally supportive

of the initial settlement between the DOJ and Microsoft

The court did offer more aggressive compliance procedures sympathetic to the issues raised by the litigating states

Where are We Now?Almost a decade later, the government’s

predictions about browser competition have turned out to be correct.IE’s share of the market grew to over 90%Microsoft’s OS monopoly continues today

New challenges for MicrosoftA rise in browser competition from Firefox,

etc.Power has shifted to web based companiesLinux based operating systems gaining

traction