• Microsoft sells

• Software
• Operating systems for PC (Windows 95, 98, NT, 2000)
• Operating systems for local network and Internet servers (Windows NT, 2000)
• "Back-office" products for network and Internet servers
• Internet Clients
• Internet and Network Servers
• Desktop applications (Office, Word, Excel, Access, PowerPoint, MS-Money, etc.)
• Games
• Programming languages (Visual Basic, Java)

• Services

• Internet service (MSN, WebTV)
• Internet content (MSN)
• Product support

• Hardware
• Mice, keyboards

• The judge’s "findings of fact" (November 1999) and "findings of law" (April 2000) find for the plaintiffs (US Department of Justice and 19 States) in almost all the allegations against MS

• The judge finds:
• Microsoft has a monopoly in the PC operating systems market (for Intel-based computers) "where it enjoys a large and stable market share"
• Microsoft used its monopoly power in the PC operating systems market and harmed competitors
• Microsoft hobbled the innovation process
• Microsoft actions harmed consumers
• Various Microsoft contracts had anti-competitive implications, but MS is not guilty of anti-competitive exclusive dealing contracts hindering the distribution of Navigator

• by attempting to kill Netscape Navigator through predatory actions because

1. Netscape Navigator run on top of many OSs

[Problem: Internet Explorer also runs over many OSs]

2. Netscape Navigator could become the platform over which some applications could be run over the Internet

[Problem: Limited to Internet-based applications; Navigator is not an OS and was unlikely to ever become one]

[Problem: Grabbing market from Navigator may have had competitive justification

• by killing Java as an non-OS-specific language over which applications could be written (instead of being written for Windows)
• MS promoted its own version of Java which was Windows-specific

[Problem: MS claims that Sun’s non-OS-specific language was inefficient and slow, and it improved it -- a competitive justification]

 

ESSENCE OF THE JUDGE’S ARGUMENT ON ATTEMPTING TO MONOPOLIZE THE BROWSER MARKET

• MS lost money while trying to gain market share from Netscape, in its attempt to monopolize the browser market by leveraging its monopoly of the OS market

• MS failed in this attempt

[Problem: You cannot extract monopoly surplus twice -- "Chicago critique"]

[Problem: Contradicts plaintiff’s theory if the browser and OS markets are the same]

• MS has monopoly power in OS market

• Browser market separate

• Technological and contractual tying of IE with Windows raised price and hurt consumers

[Problem: Hard to prove that a quality-adjusted new version of Windows without IE should not have a higher hedonic price than old Windows; i.e. hard to prove increase in price is because of tying and consumers were hurt]

• Consumers do not want IE even for free because it burdens the OS with memory and overhead requirements

[Problem: Very unlikely]

[Problem: Contradiction: in ¶ 2 part of the case browsers are in the same market as OS, but in section 1 part of the case, browsers and OS are in different markets]

[Problem: For ¶ 2 part of the case, IE price is too low; for ¶ 1 tying, IE price is too high]

1. Break up Microsoft according to lines of business into two companies, one for operating systems (Windows 98, NT, and 2000), one for applications (MS-Office, MS-Money, etc.) and whatever else MS makes (including server software). Internet Explorer is licensed to both companies.
2. Impose a variety of interim conduct restrictions

• Reduces the incentive for vertical foreclosure

• Reduces the applications barrier to entry by separating "MS APPs" from "MS OS"

[Problem: Over 10,000 applications available for Windows, most not made by MS; MS Office is already available for Mac OS; MS Office not available only for Linux (3-4% of the market); no significant reduction in the applications barrier to entry]

1. Microsoft is an entrepreneurial company that is run by very few top executives (about twenty) with very fluid divisions

• This makes it flexible and efficient, qualities that the DOJ should try to preserve (although Microsoft’s competitors would probably like to extinguish)

• Big difference from AT&T’s breakup, since AT&T was a mature company with plenty of managers, and the long lines division was run separately from the local telephone companies

• Moreover, AT&T’s long lines was not divided as originally proposed by DOJ

• To support breakup remedies, DOJ has to show that conduct remedies will not work, and DOJ has not shown that

• Since new "MS OS" have no incentive to keep the price low so that it can exercise monopoly power in the adjacent browser market, MS OS can now exercise the monopoly power it has (according to DOJ) and raise the price of the operating system

• If DOJ is correct and MS has significant monopoly power because of the "applications barrier to entry," higher prices will be the direct result of the breakup

• DOJ has not performed the appropriate cost-benefit analysis to show that conduct remedies are not sufficient and that a breakup is necessary

• If first Microsoft is broken into two companies according to type of program produced, and then the operating systems company is broken into three parts, creating five "baby Bills" (Litan et al.) there will be even worse consequences

• "Baby Bills" will have incentives to create incompatible versions of Windows

1. Baby Bills will try to differentiate their operating systems to avoid strong competition leading to small price-cost margins; this is true even in industries without network externalities

• D’Aspremont et al. Econometrica (1979)
• Economides, EER (1984)
• Shaked and Sutton, RES (1982)

1. Baby Bills will try to make their operating systems incompatible with each other in a race to become the dominant OS, since the dominant firm receives the lion’s share of profits in a winner-takes-most world

• Economides and Flyer (1997)
• Economides (2000)

• This would inevitably reduce the range of software that would be compatible with each user’s computer; consumers’ surplus will decrease

• The hybrid breakup would be a huge headache for corporate IT departments

• Emerging incompatibilities would also hurt shareholders, since the combined value of the resulting Baby Bills will be smaller than that of the original Microsoft

1. Impose various restrictions on the contracts that Microsoft can write with sellers of complementary goods and with competitors

• This remedy is easy to tailor according to the violation

• Microsoft routinely discloses APIs that hook applications to the operating system and allow for interoperability

• Currently, Microsoft does not disclose the APIs that tie together parts of the Windows operating system, which includes Internet Explorer

• If the APIs that hook Internet Explorer to other parts of the operating system are disclosed, Netscape (and any other browser) can get the same interoperability with Windows as Internet Explorer

• Such disclosure would solve all technological bundling problems

• Regulation requires a stable product

• Regulation of AT&T did not occur until 35 years had passed after the invention of the telephone, despite the fact that

1. Telecommunications had stronger externalities than software
2. During its first 40 years AT&T took much more aggressive actions than Microsoft, including refusal to deal and refusal to interconnect
3. Imposition of compatibility on subsequent MS products such as compatibility of Windows 2000 with others’ network servers, WSJ, 4/19/2000

[Problem: future products not part of litigation]

• Appeals court reverses tying decision

• Case is settled before the final decision but after a new president takes office

• MS is expected to have legal fees of up to $6 billion; but biggest loss to MS is continuous antitrust scrutiny that does not allow it to make significant acquisitions in telecommunications and the Internet during the next two years

• A breakup is likely to impose the dark shadow of radical antitrust intervention on the whole computer industry

• In the computer sector there are many firms that have a dominant position in their respective markets

• If DOJ wins big on Microsoft, antitrust suits against AOL, Yahoo, and others will not be far behind