Anti-trust Policy in the Modern Economy
Microsoft's Anti-trust Case

Mark Hinman
UCCS

Baud 5590

Anti-trust Policy in the Modern Economy
Microsoft's Anti-trust Case

This paper's intention is to discuss the role of anti-trust legislation in the modern economy. To accomplish this, we will be reviewing the United States Government's anti-trust case against Microsoft that began nearly twenty-two years ago. To begin we will look at the history leading up to the filing, the government's argument, Microsoft's argument, and the outcome of the case. We will also look at the intent of the Sherman Anti-Trust Act. Specifically, how does the Sherman Anti-Trust Act protect consumers? Finally, we will discuss whether the anti-trust legislation actually accomplishes what it is intended to do, with respect to the technology industry. Microsoft has been under constant scrutiny since June 1990 when the Federal Trade Commission (FTC) launched a probe into the possible collusion between Microsoft and IBM. Three years later, the FTC handed over their investigation to the U.S. Department of Justice. After years of accusations for monopolizing and engaging in anti-competitive acts, Microsoft finally, on May 18, 1998, received a suit for violation of federal anti-trust laws.[i] The suit alleges that Microsoft is in violation of Sections 1 and 2 of the Sherman Anti-Trust Act, and seeks to prohibit Microsoft from selling certain products and engaging in certain sales practices.

Time Line of Events [pic][ii] The government's complaint contains four counts: 1. Microsoft illegally monopolized the market for operating systems (“OSs”) for personal computers (“PCs”) under paragraph 2 of the Sherman Anti-Trust Act.[iii] 2. Microsoft had anti-competitive contractual arrangements with various vendors of related goods, such as with computer manufacturers (“OEMs”) and Internet Service Providers (“ISPs”), and had taken other actions to preserve and enhance its monopoly; that these contractual arrangements and other actions were illegal under paragraph 2 of the Sherman Anti-Trust Act.[iv] 3. Microsoft illegally attempted to monopolize the market for Internet browsers (but failed to succeed), an act that is illegal under paragraph 2 of the Sherman Anti-Trust Act.[v] 4. Microsoft bundled anti-competitively its Internet browser, IE, the Microsoft Internet browser, with its Windows operating systems; that this is illegal under paragraph 1 of the Sherman Anti-Trust Act.[vi] Microsoft defended its position with the following arguments: First, Microsoft argued that the law was on its side since the Court of Appeals had ruled on June 23, 1998 that Microsoft could legally add new features and functions to Windows. Therefore, Microsoft argued that it was legal to add IE’s functionality to Windows, and it had done nothing wrong by integrating IE in Windows.[vii] Second, Microsoft argued that it was just competing hard against Netscape, that such competition was welfare enhancing, and that it did not commit any anti-competitive acts.[viii] Third, Microsoft argued that it did not have monopoly power in the operating systems market.[ix] Fourth, Microsoft argued that competition in the software sector was intense and that a new competitor or entrant could replace its leadership position at any time.[x] Although this seems to have been a deeply held belief of Microsoft’s management (as revealed by the internal e-mails), its economics expert witness failed to convincingly articulate this Schumpeterian view in the context of an anti-trust defense.[xi] Fifth, Microsoft argued that it is a leader in software innovation and that it has enhanced rather than hobbled the innovation process.[xii] Sixth, Microsoft argued that consumers have benefited from its actions rather than been harmed by them. Microsoft claimed direct consumer benefits from its low pricing of the operating system, the zero pricing of its Internet browser, and from its enhancement and acceleration of the innovation process.[xiii] Microsoft also argued (rather ineffectively) that consumers benefit from the de facto standardization that its large market share brought to the operating systems market.[xiv] The fate of Microsoft was decided on June 7, 2000, as district court of Judge Jackson orders the breakup of Microsoft into two companies, one limited to operating systems and one limited to applications.[xv] A variety of conduct orders were also a part of the judgment. However, the district court’s order was reversed on June 28, 2001 by a federal appeals court.[xvi] The court reverses the breakup order largely due to procedural failures, lack of explanation of how the order would restore competition, and the need to reconsider remedies in light of the reversal of some of the liability holdings.[xvii] By November of 2001, the Justice Department and Microsoft reached a settlement.[xviii] The agreement included conduct-based remedies directed to the practices held unlawful by the appeals court and limited Microsoft’s ability to counter rivals’ competing products.[xix] For example, the agreement prevented Microsoft from entering into exclusive distribution contracts, offering selective price cuts to individual computer manufacturers, restricting computer manufacturers from modifying the appearance of the Windows desktop in prescribed ways, and requiring Microsoft to disclose information about its operating system products to help competitors design their own products.[xx] What gave the government the authority to bring this action against Microsoft; why does the government care? In 1890, the United States pioneered competition law and significantly strengthened the future of free markets in the American system by adopting a new federal statute: the Sherman Anti-Trust Act.[xxi] For the first time in history, a national government had taken responsibility to investigate and, if necessary, prosecute monopolies and price-fixing cartels.[xxii] So why do we have Anti-Trust laws? Anti-trust laws are laws that seek to prohibit anti-competitive or unfair business practices. Competition is one of the things considered in costing the products of the companies.[xxiii] When there are many competitors in a market, prices are naturally lower. Companies must find ways to set themselves apart from the competition by offering better service or developing new technology. On the part of the customers, the introduction of anti-trust legislation enables the consumers to enjoy lower prices, better product diversity, giving them more choices.[xxiv] Businesses also benefit from Anti-trust legislation. New businesses just entering the market are given a chance to a.) Grow - because companies are not allowed to form monopolies and create barriers to entry and b.) Be assured that larger companies will not engage in unfair contractual practices that would set prices way below the price point driving the smaller company out of business. So the question is: Did Microsoft's success harm consumers? The relevant questions are these: (1) Are the markets for operating systems and browsers healthier and more competitive than they would have been had the case not been brought?[xxv] (2) Are consumers better off than they would have been had the case not been brought?[xxvi] (3) Did Microsoft create a barrier to entry for any other company?[xxvii] The answer to questions one and two is no in the authors opinion. The suit caused Microsoft to hold back on some of its development and avoid bundling products in with Windows for fear it would find itself back in court. Fear of further action resulted in delays of technology release or no release at all. Operating systems markets and consumers do not benefit from products that fail to hit the market. The answer to question three is probably yes. There were other operating systems at the time but Microsoft was overwhelmingly the dominant player. Microsoft kept the price of the Window's OS so low that the sunk costs to other players to enter the market would have been excessively high. This does seem counter intuitive, if Microsoft truly had a monopoly; they could have charged whatever they wanted for the product and maximized profits. Monopoly power is a substantial degree of market power.[xxviii] While a firm with a slight degree of market power may find it profitable to charge supra-normal prices for a short time or to charge prices that are only slightly supranormal, a firm with monopoly power will find it profitable (a) to charge a price significantly in excess of competitive levels and (b) to do so over a significant period of time.[xxix] Microsoft did not do this because they were afraid of losing market share to competitors. I would also argue that in the technology world development something innovative puts you in the market regardless of barriers to entry. For example: When journalist Steven Levy showed Bill Gates the first iPod, Gates' first reaction was, "It's only for Macintosh?" Gates saw the iPod through the lens of desktop computers; if the iPod connected only to Macs, it didn't pose a threat to Microsoft. What he didn't figure out was that the iPod would herald the iTunes Store, allowing Apple to become not only the most influential entertainment company in the world, but also the dominant software maker for mobile devices. Yes, the first iPod didn't work on Windows. In time, it would help render Windows irrelevant.[xxx]. This leads us to the question do Anti-Trust laws work as designed in the new economy? Before we can answer that, we must define what is meant by new economy. Because of the marked difference between the economic characteristics that define the traditional industries and those that define the new industries, the new industries in the aggregate are often referred to as the “new economy."[xxxi] Although Anti-Trust laws were created some time ago, their intent is still the same – to protect consumers. The laws themselves are adequate; the problem lies in the legal system that carries out enforcement of the laws. The mismatch between “law time” (how long it takes to try a case) and “new-economy real time” is troubling because litigation of anti-trust cases in the new economy might drag on for so long that the conditions of the industry might ultimately become irrelevant, and the litigation itself might have devastating effects on the companies involved by making investment riskier and complicating business planning.[xxxii] The case against Microsoft illustrates this thought. David Mitchell Smith, an analyst with Gartner, commented "In some cases, Microsoft was less ambitious or aggressive about going into emerging market opportunities because it struggled to figure out ways to go after them without running afoul of anti-trust issues", he said. “There were a lot of technical decisions that percolated up into the legal department to make sure they could do what they were planning to without causing problems.”[xxxiii] The Anti-Trust case against Microsoft was probably the anti-trust case of the decade in the 90's. Some twenty years later, it is finally over. Technology continues to grow at an astounding pace and Microsoft is getting back in the game. Windows 8 is planned to have many integrated applications with bells and whistles already offered by other technology companies. If the government's intent was to stall Microsoft for a while, mission accomplished. However, if we are to have Anti-trust laws that truly do protect consumer, we need to fix the legal system that enforces them.

References
Butts, Chris. “The Microsoft Case 10 Years Later: Antitrust and New Leading ‘New Economy’”, 2010. http://scholarlycommons.law.northwestern.edu/cgi/viewcontent.cgi?article=1105&context=njtip.
Cuizon, Gwendolyn. “What Are Antitrust Laws.” Article. Suite101.com, March 2, 2009. http://suite101.com/article/what-are-antitrust-laws-a96954.
Economides, N. “United States V. Microsoft: A Failure of Antitrust in the New Economy.” UWLA L. REV. 32 (2001): 3.
Felton, Ed. “The Microsoft Case, Ten Years Later.” Freedom to Tinker, May 20, 2008. https://freedom-to-tinker.com/blog/felten/microsoft-case-ten-years-later/.
Gohring, Nancy, and Grant Gross. “End of an Era: Microsoft Antitrust Oversight Ends | Macworld.” Macworld, May 11, 2011. http://www.macworld.com/article/1159841/microsoft_antitrust.html.
“Historians-on-america.pdf”, n.d. http://www.america.gov/media/pdf/books/historians-on-america.pdf#popup.
“JSTOR: Harvard Law Review, Vol. 114, No. 5 (Mar., 2001), Pp. 1623-1646”, n.d. http://www.jstor.org/discover/10.2307/1342690?uid=3739768&uid=2129&uid=2&uid=70&uid=4&uid=3739256&sid=21101100873703.
Masnick, Mike. “Looking Back At The Microsoft Antitrust Suit: Did It Matter? | Techdirt.” Techdirt., July 2009. http://www.techdirt.com/articles/20090729/0447005696.shtml.
“Microsoft Antitrust Main Page”, n.d. http://www.uri.edu/personal/mdee4037/MainPage.html.
Page, William H, and John E Lopatka. The Microsoft case antitrust, high technology, and consumer welfare. Chicago: University of Chicago Press, 2007. http://public.eblib.com/EBLPublic/PublicView.do?ptiID=471812.
“Timeline”, n.d. http://www.uri.edu/personal/mdee4037/TIMELINE.html.
“United States V. Microsoft: An Economic Analysis”, n.d.

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[i] “Microsoft Antitrust Main Page.”
[ii] “Timeline.”
[iii] Economides, “United States V. Microsoft,” 10.
[iv] Ibid., 10.
[v] Ibid., 10.
[vi] Ibid.
[vii] Ibid., 11.
[viii] Ibid.
[ix] Ibid.
[x] Economides, “United States V. Microsoft.”
[xi] Ibid., 11.
[xii] Ibid.
[xiii] Economides, “United States V. Microsoft.”
[xiv] Ibid., 11.
[xv] Page and Lopatka, The Microsoft case antitrust, high technology, and consumer welfare, 74.
[xvi] Ibid.
[xvii] Page and Lopatka, The Microsoft case antitrust, high technology, and consumer welfare.
[xviii] Ibid., 78.
[xix] Page and Lopatka, The Microsoft case antitrust, high technology, and consumer welfare.
[xx] Ibid., 71.
[xxi] “Historians-on-america.pdf.”
[xxii] Ibid.
[xxiii] Cuizon, “What Are Antitrust Laws.”
[xxiv] Ibid.
[xxv] Felton, “The Microsoft Case, Ten Years Later.”
[xxvi] Ibid.
[xxvii] Ibid.
[xxviii] “United States V. Microsoft: An Economic Analysis.”
[xxix] Ibid.
[xxx] Masnick, “Looking Back At The Microsoft Antitrust Suit.”
[xxxi] “JSTOR: Harvard Law Review, Vol. 114, No. 5 (Mar., 2001), Pp. 1623-1646,” 114.
[xxxii] Butts, “The Microsoft Case 10 Years Later: Antitrust and New Leading ‘New Economy’,” 277.
[xxxiii] Gohring and Gross, “End of an Era: Microsoft Antitrust Oversight Ends | Macworld.”