Economics of Networks

Is the Microsoft ruling "a great victory for American consumers?"

On Friday, November 5, 1999, Judge Thomas Penfield Jackson released his "findings of fact" in the case of US v. MS. The judge found for the plaintiffs in almost all allegations against Microsoft. The decision has been hailed by the plaintiffs' lawyers (including the US Attorney General) as "a great victory for American consumers."

Reality Check: Is it "a great victory for American consumers?"

First, consumers have directly benefited from the free distribution of Internet Explorer and the bundling of Internet Explorer with Windows, which the judge identified as key anti-competitive actions. When Microsoft started seriously competing with Netscape in the Internet browser market, Netscape was a monopolist in the browser market charging $40-50 to non-academic users. Microsoft gave its Internet browser away. Currently there are at least 40 million browsers installed in the United States. This means that the actions of Microsoft directly created a benefit of $1.6 to $2 billion to American consumers. In fact, the benefit is probably much larger since Microsoft actions intensified competition which resulted in higher quality Internet browsers.

Second, consumers have directly benefited from the relatively low price of Windows ($40-50 to computer manufacturers) compared to historical prices of operating systems and current prices of other operating systems. For example, IBM was selling OS/2 (which ran much fewer applications than Windows) for hundreds of dollars. Some Linux packages (that are essentially add-ons to the free Linux source code) that run very few (compared to Windows) applications sell for $150. If Microsoft has all the monopoly power that the judge finds, why is Microsoft so benevolent and does not charge more? The low price is a huge contradiction in the DOJ case and in the judge’s findings of fact. And, the consumers’ benefits may be many billions of dollars.

Third, DOJ has floated remedies proposals that include forcing Microsoft to auction the code of Windows or breaking up Microsoft. Both of these proposals are likely to be detrimental to consumers.

Consider first auctioning the Windows source code. Given the present stock market value of Microsoft, Windows source code may be worth as much as $200 billion. No company can bid that much cash in an auction. Practically speaking, only a handful of foreign governments can bid that much. This implies that the source code of Windows will be sold forcibly at a small fraction of its worth. Thus, auctioning the Windows code is a severe remedy that takes away the intellectual property of Microsoft. It will severely reduce the incentive for innovation, since dominant firms will no longer be guaranteed with certainty the value of their intellectual property. Moreover, source code evolves. Over time, different firms will add and alter the Windows code. Soon, incompatibilities will arise. Applications vendors will have to write different applications for each version of the evolving version of Windows. It was exactly this problem that made Unix a failure in the individual consumer market. It is unlikely that all applications will be written for each of the incompatible versions of Windows. If, when there are three incompatible versions of Windows (from three auction winners), each version has 1/3 of the applications, the benefits to a consumer from using a PC are reduced by 66% compared to the present world! This is not a victory for the American consumer! In summary, auctioning the Windows code will result in incompatibilities that harm consumers and increase the cost of applications.

Breaking up Microsoft is also likely to severely damage the company, and it would accomplish little or no more than alternative remedies. Microsoft is an entrepreneurial company that is run by very few top executives (about twenty). This makes it flexible and efficient, qualities that the DOJ should try to preserve, although Microsoft’s competitors would probably like to extinguish. Alternative breakup schemes have been proposed. Breaking Microsoft into an applications division and an operating systems division is a very severe remedy which accomplishes little more than to disclose Windows APIs.

Breaking up Microsoft into three equal parts, with each part containing an equal amount of each business, is also a severe remedy that is likely to hurt consumers. Like other breakup proposals, this proposal may kill the managerial flexibility and efficiency of the company. Moreover, as with the auctioning the code proposal, one expects that significant incompatibilities will result within a short period of time. Incompatibilities harm consumers by significantly reducing the benefits that consumers get from applications, as explained above and by increasing the cost of applications. Finally, it is unlikely that this new industry structure would result in significantly lower prices, since Windows prices are presently low, and each of the resulting three companies would have a much smaller scale of production. From a legal standpoint, this proposal has the weakness of also breaking up the applications division of Microsoft, although monopolization has not been established in applications.

In summary, consumers have reaped significant benefits from Microsoft’s pricing behavior in the browser and operating systems markets. Some remedies advocated by sources close to DOJ will result in losses for consumers. In conclusion, the judge’s findings of fact and the final judgment they are likely to lead to are likely to be a great victory for Microsoft’s competitors, including IBM, Sun, Oracle, and AOL, but unlikely to be of benefit to American consumers.

Send me comments at: NECONOMI@STERN.NYU.EDU

Back to the front US v. Microsoft page

Back to the top page (Internet Site for Network Economics)