Economy/Microsoft Antitrusst Case term paper 4231

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America's century-old antitrust law is increasingly irrelevant to our modern global information technology market. This law is obsolete, in accordance to the current Microsoft situation, because in the past there wasn't technology as there is now. Recently the government has been accusing Microsoft as being a monopoly. "Techno-Optimists" claim: "efforts by government to promote competition by restraining high-tech firms that acquire market power will only stifle competition." Some analysts disagree. They concede that dynamic technology makes it tough to sustain market power. Still, consumers will want compatible equipment, which will lead them to buy whatever product other consumers are using, even if the product is inferior. Hence, is Microsoft a monopoly or not? The range of views extends from the optimists who think that changing technology removes the need for antitrust, to "middle-of-the-roaders" who think that antitrust has always been and still is an important weapon in the government's arsenal. Microsoft is not a monopoly. Our world of telecommunications and information technology has brought about many changes in many fields but new technology has neither extinguished nor revitalized the reason for antitrust. There are monopolies that the government ought to control. Those are the very monopolies that the government created itself.

It is the government that creates monopoly power by erecting and maintaining barriers to market entry. In the most recent dispute between Microsoft and the Department of Justice (DOJ), Microsoft is accused of "tying-in" an Internet browser into Windows. Microsoft's "tie-in" of its browser (Internet Explorer) with its operating system (Windows 95) is a tie-in that shows no greater threat to competition than the packaging of tires with cars, cream with coffee, laces with shoes, even left gloves with right gloves. In actuality, tying arrangements is pro-competitive. Consumers will buy the product that is more appealing to their needs. Seven years ago the Federal Trade Commission began its investigation of Microsoft's market power in the sale of operating systems for personal computers. That investigation was later joined by the DOJ and pursued vigorously by Anne Bingaman, then head of the Antitrust Division. The DOJ uncovered one practice it deemed worthy of challenge. Microsoft licensed its Windows software for multi-year periods on a "per processor" basis. Which means that, Microsoft, to help prevent software piracy, insisted that computer makers pay a royalty to Microsoft for each computer they shipped, whether or not Windows was installed as the operating system. DOJ was not persuaded by Microsoft's argument that physical machines can more easily be counted than intangible copies of computer software. Nor was DOJ convinced that customers might actually favor long-term contracts to guard against unpredictable price increases and other uncertainties. This arose the question; did Microsoft exploit its dominant market position by "insisting" on "unfair" licensing arrangements? Consider that Windows became the industry standard because PC-makers thought it was a "superior" product. An assessment that surely took into account the entire set of product features. Not only are there technical features but also the ease of use, quality, price, service, and contract terms. Just like any other product in the competitive market. Consider that there were no barriers that would prevent another competitor from driving Windows out as being the market leader. These are simple conditions that exist in an economic market. Those considerations, apparently, did not impress the DOJ's Antitrust Division. After a five-year investigation costing millions of dollars, the Antitrust Division found little that could be characterized as anti-competitive. But that did not stop the government. Not only did DOJ file an antitrust suit that caused Microsoft to cancel its planned release of Intuit (a manufacturer of a popular personal finance program) it also threatened to halt the release of Windows 95 (Microsoft's upgraded operating system).

The head of the Antitrust Division, Bingaman, was reportedly concerned about the link between Windows 95 and the Microsoft Network (MSN) an Internet service provider intended to compete against America Online (AOL). Whenever a user started a Windows 95 system, an MSN icon appeared. Then one click of the mouse connected the user with the MSN service. That packaging, according to DOJ, gave MSN an unsporting edge over its online rivals. But a few more mouse clicks enabled any Windows 95 user to bring up an AOL icon, which would appear automatically thereafter, at the same time as the MSN icon. Satisfied with its discovery that MSN's edge could be neutralized, the Antitrust Division abandoned its threat to block Windows 95. In result, MSN now loses an estimated $200 million annually providing service to fewer than 3 million customers. On the other hand, AOL has 9 million subscribers and will add nearly 3 million more when it acquires CompuServe's consumer business. Although rivals complained that bundling MSN software with Windows 95 would swamp competition, Microsoft's proved them wrong because Microsoft made lesser money then AOL. Whatever competitive advantage Microsoft may have in the sale of operating systems, the company has been ineffective in maintaining that advantage. Consumers, simply, refuse to buy a product they do not like. However, the DOJ didn't stop pursuing Microsoft. For the Antitrust Division, now headed by Joel Klein, has raised the issue yet again, this time objecting that Windows 95 and Internet Explorer are two separate products, not one integrated product. Is the Internet Explorer a "separate" product, as Klein claims? Or are the two products "integrated," as Microsoft claims? Because DOJ denies that Windows 95 and Internet Explorer are "integrated", Klein proposed to fine the company $1 million a day until the two products are unbundled.

In its defense, Microsoft claims that Windows 95 cannot perform several crucial tasks, like word processing, imaging, and drawing unless all Explorer files are installed. DOJ rejoins that Microsoft did not have to make Windows dependent upon the browser and could easily have allowed computer manufacturers to "uninstall" Explorer without endangering the operating system. Internet Explorer is more than a bunch of enabling files and more than an applet (a mini-applications i.e. Notepad). It is an elaborately developed Web browser, capable of standing alone and, in fact, was originally sold by Microsoft as a full-featured, independent application. Nevertheless similar products, also tied to Windows, have survived government scrutiny. MSN, for example, is a full-featured, independent application, yet DOJ allowed it to be packaged with Windows as a joint product. DOJ's introduced a new rule that products initially distributed in separate boxes must be permanently distributed in separate boxes. It is as if air-conditioning, once sold as a later-installed option in cars, must be forever so sold like that. More importantly, insists Microsoft, two products can be "integrated" even if they are not technically interdependent. The products need not function only in combination, nor be marketed only as a package. To be characterized as "integrated," they just need to be combined in a manner that creates synergism, a whole that is better than the sum of its parts. According to Microsoft, that characterization applies no less to the current product package than it did in the 1980s when operating systems first included software that allowed interaction with hard disk drives, or later when operating systems began supporting local area networks. Again there is more proof of Microsoft not being a monopoly and abiding by the rules of the DOJ. Today, fax modems and e-mail, once available only as separate products, are essential ingredients of an operating system. Any system without those functions would be incomplete. And in an environment where "Internet access" is very important browser software is no less essential. That is why IBM and Sun Microsystems, like Microsoft, have packaged browsers with their operating systems. That is also why IBM, Hewlett-Packard, Compaq, and other computer manufacturers have bundled both Internet Explorer and its principal competitor, Netscape Navigator, with Windows 95. Like a competitor, it assures Internet users maximum flexibility. Netscape has itself tied a wide range of other software products, for example e-mail, security systems, and graphics to its browser.

Such decisions, argues Microsoft, are better left to computer companies than to government lawyers. Even if competitor protection were a legitimate objective of the law, there is no reason for the government to interrupt Microsoft's situation. Rather than badgering Microsoft, the DOJ ought to be thanking the company for challenging Netscape's "near-monopoly" in the sale of browsers and consumers should be grateful to Microsoft for causing Netscape to reduce its price. Microsoft chief Bill Gates stated the question "Would the DOJ require the New York Times to eliminate its business section in order to protect The Wall Street Journal? Why should the answer to that question be any different if the Times were to sell its business section separately, or if the Times sold 90 percent of the newspapers in New York? Our antitrust laws were not intended to prop up competitors but to ensure that consumers benefit from the widespread availability of goods and services at fair prices." Therefore I truly believe Microsoft is not a monopoly and probably never will be.

Bibliography

1. Bank, David. "Why Software and Antitrust Law Make an Uneasy Mix," The Wall Street Journal, October 22, 1997, p. B1.

2. Gates, Bill. "Why the Justice Department Is Wrong," The Wall Street Journal, November 10, 1997, p. A22.

3. Moore, James F., "U.S. v. Microsoft: The Bigger Question," New York Times, January 25, 1998, p. 12-BU.

4. Train, Kenneth E., Optimal Regulation: The Economic Theory of Natural Monopoly, October 1991, p231-45

5. Wollenberg, Keith K., "An Economic Analysis of Tie-In Sales: Re-Examining the Leverage Theory," Stanford Law Review 39 (1987): 737, 755-56

6. "Microsoft Under Attack, but Who Is It Hurting?" USA Today, October 23, 1997

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