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Microsoft Antitrust Issue

Microsoft Antitrust Issue Once upon a time there were two boys named Ed and Ned. This story is a fairy tale, but one in which most people already know all of the facts. "Ed was an eight-year-old who lived in a small town with his parents not far from the state capital. Ed’s father was a smart lawyer. He knew most people in the town were poor, so he built a gym set that all the kids in the town could play on. It was such a good gym set and both it and Ed became so popular that he decided to start charging each person twenty-five cents a day to play on it. Ed became rich and even started making more money than his father. Soon, a new boy named Ned moved to town. He was six years old. Ned’s dad could only mow lawns and do odd jobs around town. Ned liked the gym set and one day had an idea. He figured that the kids playing on the gym set would get thirsty, so each day he went to the grocery store and bought a six pack of Fizz Cola and set up a stand in front of his house. Most kids bought a glass of Fizz Cola each day they played on the gym set. Now, Ned was making more money than Ed and both their dads. Ed couldn’t stand another kid coming into town and making more money than him. Ed and his dad came up with a plan to triple the cost to play on the gym set to seventy-five cents and add a glass of Bubble Cola for each kid each day. Now, every person has to pay more but they get a refreshment too. Ed and his dad wondered if the kids would go for the deal. They thought seventy-five cents might be too much to pay to play each day. So, they said they were raising prices, but the glass of Bubble Cola is free. Now, no one wants to buy Fizz Cola from Ned, because they have to buy the glass of Bubble Cola if they want to play on the gym set. Ned tries to convince some kids that Fizz Cola is better than Bubble Cola and some kids even prefer Fizz Cola over Bubble Cola. Since they have to buy a glass of Bubble Cola, Ned can no longer sell his Fizz Cola. He may be forced to move away with his family, since he was the only source of income and now his dad has become ill. All the kids in the neighborhood go to the town meeting, that week, including Ed and Ned. Some kids say they don’t want to have to drink Fizz Cola every day, some say they can’t drink carbonated drinks, and some say they don’t have the extra money to spend every day. So the town council must come up with some solutions. The town council comes up with three possible solutions: 1. They could make no changes in the way Ed is handling his business, thus forcing Ned to move out with his parents. 2. The second choice is to split Ed into two separate companies, thus causing him to lower the price back to twenty-five cents. 3. The third choice is to double the price and force Ed to offer both Fizz Cola and Bubble Cola. Both Ed and Ned would split the profits evenly" (Mettler, 1-3). Microsoft is engaging in unfair business practices and should split off their network company; should offer both Microsoft Internet Explorer and Netscape on Windows; or a consent decree should be issued to require Microsoft to stop making exclusionary contracts with computer makers and Internet Service Providers (“ISPs”). Microsoft is being sued by the Department of Justice for giving away a copy of Internet Explorer with every new Windows 95 sale, violating a consent decree the two parties signed in 1995. They are also accused of being in violation of the Sherman Act, which prohibits a firm from participating in exclusionary or predatory acts. Back in 1994 the Justice Department announced that Microsoft agreed to end practices that were illegal. These practices, the government said, choked off competition and inflated prices in the personal computer software industry. Elizabeth Corcoran writes that “many computer companies were forced to buy computer software even if they never used it, as in cases where a company went out of business, and the new software had made the old obsolete" (Corcoran, 2). Today, the government is investigating whether Microsoft is engaging in unfair business practices. The Department of Justice says Microsoft is engaging in unfair business practices by not letting companies delete Microsoft’s Internet Explorer from Windows 95. The manufacturers do not get a license for Windows 95 unless they accept the browser. The government says this is a monopolistic practice. "A monopoly is an exclusive possession of the trade in some commodity…aimed to drive competitors out of business or keep them from entering a market. Where monopolies exist unrestricted competition is lost. So, if one seller controls a market, consumers are left with little choice but to buy that product, and that company has little incentive to improve the product or keep prices reasonable" (qtd. Microsoft Antitrust Issues, 505). Specifically, as Charles Rule has stated, "the Justice Department must prove not only that Microsoft has monopoly power but also that Microsoft has acquired or maintained that power through exclusionary or predatory acts. The law protects the marketplace from private conduct that interferes with the competitive process. The antitrust laws protect competition not competitors. To have a violation of section two of the Sherman Act the court must prove that the defendant has a monopoly power. Rule concluded by saying that the Supreme Court has defined such power as the power to control market prices or exclude competition”(Rule, 1 - 2). As illustrated in the story above a solution to the problem is to make changes in the way Microsoft is handling its business. The computer market is limited in systems installed on computers, because Microsoft has “locked in” manufacturers. It is virtually impossible for anyone to challenge Microsoft’s dominance on the desktop. In 1945 Judge Learned Hand agreed with the government that the Aluminum Co. of America had an unlawful monopoly and should be broken up. Aluminum Co. of America, the Judge wrote, was wrong to “always anticipate increases in the supply demand for (aluminum) ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization” (Jacoby, A6). As illustrated by the Aluminum Co. of America decision the Justice Department should punish Microsoft by splitting it into a Microsoft Explorer Company and a Software Company. The Microsoft Explorer Company would mainly make the web browser. Microsoft would be forced to take the browser out of Windows 95 because it would no longer be able to put it on the Windows system if they weren’t one company anymore. The Software Company would be in charge of making the Windows systems and games; anything but the web browser. Again, Mr. Rule says, "the theory behind this split is that the “market share” of a software product is much less significant than the typical market share possessed by a manufacturer of a producer of physical goods. Once written, a piece of software can be copied an infinite number of times at marginal cost. In other words, the productive “capacity” of every piece of software, once written, is virtually infinite, even if its current sales are minimal" (qtd. Rule, 3). Windows is very popular partly because it provides for thousands of Independent Software Vendors (“ISVs”). This is a valuable platform that simplifies the task of creating compatible applications. Also, millions of consumers have become familiar with the “look and feel” of Windows and have assembled libraries of Windows applications. These “externalities” insulate Microsoft from competition. An example of this is the way Microsoft unfairly grabbed for Internet-browsing software with America Online ("AOL"). John Wilke reported that "Microsoft won a crucial contract with AOL by promising the company a prominent display on the Windows computer screen-in every computer shipped-if it rejected Netscape" (qtd. Wilke, B3). In all actuality, Microsoft has the power to keep companies from displacing them. According to the Supreme Court, if a firm has been attempting to exclude rivals on some basis other than efficiency, it is in violation of Section Two of the Sherman Act, which prohibits a firm from engaging in exclusionary or predatory acts. For example in United States vs. Lorain Journal Co. in Lorain, Ohio, the Supreme Court found that Lorain Journal Co. had a monopoly over local advertising. The journal wouldn’t let companies advertise on a news radio station, which was their only competition, if they wanted to advertise in their journal. Advertising in the journal was essential for local advertisers, and the journal was found guilty of trying to drive its only competition out of business. The main reason Microsoft has put Internet Explorer into its operating systems is that ISVs are being written to display information, whether stored on a computers hard drive or downloaded from the Internet in the hypertext mark-up language (“HTML”). Putting that same functionality into its operating system allows the thousands of ISVs to call on the same HTML “shared library” in the operating system and to avoid the need for each ISV to write its own version of HTML in its applications. Microsoft requires computer manufacturers to install Windows as shipped, therefore keeping them from deleting features, including Internet Explorer. Therefore, for this conduct Microsoft should be forced to split itself into two companies. Microsoft allows existing owners of Windows to download the latest version of Internet Explorer off the Internet at no charge and gives away copies of the web browsing software that Microsoft has written for other operating systems. The Supreme Court has indicated that a monopolist pricing is not predatory unless its prices are below an appropriate measure of that firms costs. Thus, giving away copies of Internet Explorer would be predatory, as “free” has to be below appropriate costs. So, Microsoft gives away its web browsing software in the expectation of earning revenues elsewhere. While the efficiencies of putting Internet Explorer into Windows seems clear, the eventual effect is so great that it diverts demand from web browsing software such as Netscape’s Navigator and Communicator. It was not until Microsoft came out with Internet Explorer versions 3.0 and 4.0 that people started choosing it over Netscape. Therefore, requiring Microsoft to offer Netscape could serve as another solution. Ensuring that Microsoft’s systems are consistent throughout the market and include Netscape assures software developers that if they write their software that uses a certain language in Windows, it will be present in every copy of Windows installed on a computer. That consistency also ensures consumers that they won’t have to relearn how to use their computer each time they purchase a new one. Based on tests by Microsoft and journalists they found that Netscape worked to its maximum capabilities on Windows. Microsoft should be required to treat Netscape no differently than any of its other thousands and thousands of ISVs that write programs for Microsoft. In short, given the predatory pricing of Microsoft, requiring them to offer Netscape would emphasize to Microsoft that it is in their best interest to avoid even the appearance that they are depriving a software developer of the information needed to develop applications that are compatible with Windows. Microsoft, through a provision in its licenses with computer manufacturers, requires when a new computer is turned on for the very first time, that the Windows user interface with all the features intact appear. That part of Windows is a guarantee to its consumers and ISVs that the look, feel, and functionality of Windows is consistent. Each computer manufacturer should be required to install non-Microsoft user interfaces that the consumer can change with a click of the mouse. After the computer is turned on for the very first time, the consumer can configure the machine to turn on to a different screen thereafter. Similarly computer manufacturers should be required to offer other third party applications even if those applications compete with Windows. So, if the Windows first screen is the most valuable real estate in the world, more than three-quarters of that screen is available to computer manufacturers to accommodate the icons of applications and utilities provided by the manufacturer and third parties. Microsoft also includes a “wizard” in Windows that makes it easier to get an Internet Service Provider. This wizard also offers a select group of ISPs that Microsoft has a contract with, so in return the ISPs offer Internet Explorer and not any competing web browser as the contract states. These agreements are with twelve ISPs in the United States. Practices such as these that might ordinarily seem good or that have only a slight exclusionary effect can “tip” markets in favor of a given operating system platform. Thus, tipping can have dramatic long-term effects that are anticompetitive, enabling Microsoft to eliminate any program that threatens to make Windows obsolete. As a result, the threat of “tipping” warrants government intervention and the requirement that Microsoft stop these exclusionary contracts. Microsoft is participating in monopolistic practices because they won’t let companies delete Internet Explorer from Windows 95, and they have locked in manufacturers. This is a violation of Section Two of the Sherman Act which prohibits a firm from engaging in exclusionary or predatory acts. They have also violated the Act because they offer Internet Explorer for free, which is “below appropriate costs.” Finally, Microsoft uses its exclusive contracts with ISPs and computer manufacturers to stifle competition. These are all violations of Section Two of the Sherman Act. If the court comes to the conclusion that Microsoft has violated Section Two of the Sherman Act they will have three possible solutions. The three possible solutions are: split Microsoft off from their network company; offer both Microsoft Internet Explorer and Netscape on Windows; have a consent decree be issued to require Microsoft to stop making exclusionary contracts with computer makers and Internet Service Providers. Bibliography: Bibliography Andrews, Paul, and Stephen Manes. Gates. New York: Doubleday, 1993. Barrow, Robert J. "Why the Antitrust Cops should lay off High Tech." Business Week 17 Aug. 1998: 20. Bridis, Ted. "Judge delays Microsoft trial; denies request to throw out case." Indianapolis Star. n.d. n.pag. Corcoran, Elizabeth. "Software Antitrust Accord: Microsoft to end unfair practices." Sacramento Bee 17 July 1994 SIRS Researcher on the Web. SIRS Online. Sept. 29, 1998 Gay, Martin K. The New Information Revolution: A Reference Handbook. Santa Barbara, CA: ABC-CLIO, 1992. Grimaldi, James V. "Document questions Gates' 'forgetfulness'." The Seattle Times. The Indianapolis Star 2 Sept. 1998, early ed.: C2. Helm, Leslie, and Jube Schiver Jr. "Microsoft Accord Reflects Limits of Antitrust Law." Los Angeles (California) Times 18 July 1994: n.pag. Newsbank: Business and Economic Development 25 (1994): fische 51, grids B12-13. Jacoby, Jeff. "Firing antitrust guns at the successful." Indianapolis Star 29 Oct. 1998: A6. Liebowitz, Stan. "Bill Gates' Secret? Better Products." Wall Street Journal 20 Oct. 1998: n.pag. Lubar, Steven D. Infoculture. Boston: Houghton Mifflin Company, 1993. Mettler, Lewis A. "The Coca-Cola Analogy." 9 July 1998. Internet. 9 October 1998. Available Mettler, Lewis A. "Is 1.4 billion enough harm?" 15 June 1998. Internet. 9 October 1998. Available Mettler, Lewis A. "You will really need to be creative." 9 July 1998. Internet. 9 October 1998. Available "Microsoft Antitrust Issues." Issues and Controversies on File. Vol. 2 NO. 24 (1997) 505. Moody, Fred. I Sing the Body Electric. England: Viking, 1995. Quittner, Joshua, and Michelle Slatalla. Speeding the Net. New York: Atlantic Monthly Press, 1998. Rohm, Wendy Goldman. The Microsoft File. New York: Times Books, 1998. Rohm, Wendy Goldman. "U.S. reportedly is ready to sue Microsoft Corp." Boston (Massachusetts) Globe. 15 July 1994: n.pag. Newsbank: Business and Economic Development 25 (1994): fische 44, grids D12-13. Rule, Rick. "Overview of Section 2 of the Sherman Act and Its Application to Microsoft." 1 Nov. 1998. Internet. 29 Apr. 1998. Available Stoll, Clifford. Silicon Snake Oil. New York: Doubleday, 1995. Stross, Randall E. The Microsoft Way. Reading, Massachusetts: Addison-Wesley, 1996. Wilke, John R. "Microsoft Case: Tapes, E-mail, and Meetings." Wall Street Journal 5 Oct. 1998: B3. Wilke, John R. "Microsoft Sets New Position In Its Trial." Wall Street Journal 27 Oct. 1998: n.pag. Wilke, John R. "Other Firms Take Focus in Microsoft Case." Wall Street Journal n.d. n.pag. Zajac, Andrew. "Rival solicited Microsoft stake." Chicago Tribune. The Indianapolis Star. n.d.: B2. Works Cited Corcoran, Elizabeth. "Software Antitrust Accord: Microsoft to end unfair practices." Sacramento Bee 17 July 1994 SIRS Researcher on the Web. SIRS Online. Sept. 29, 1998 Jacoby, Jeff. "Firing antitrust guns at the successful." Indianapolis Star 29 Oct. 1998: A6. Mettler, Lewis A. "The Coca-Cola Analogy." 9 July 1998. Internet. 9 October 1998. Available "Microsoft Antitrust Issues." Issues and Controversies on File. Vol. 2 NO. 24 (1997) 505. Rule, Rick. "Overview of Section 2 of the Sherman Act and Its Application to Microsoft." 1 Nov. 1998. Internet. 29 Apr. 1998. Available Wilke, John R. "Microsoft Case: Tapes, E-mail, and Meetings." Wall Street Journal 5 Oct. 1998: B3.

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