U.S. v. Microsoft: Anticompetitive Practices and Market Power

1. Case 20: U.S. v. Microsoft Ian Bracy Brian Hendel David Jones

2. Government • 1- Consumer’s are paying to much for system software • 2-Microsoft’s actions reduced innovation in the software industry • 3-tying of its IE browser and it’s OS, this restrained trade in violation of section 1 of the Sherman Act

3. Microsoft • 1-Not a monopoly, faced significant competitive threats in a highly dynamic industry • 2-Consumers benefit as a result of high-quality, innovative software

4. List of Anticompetitive Practices Microsoft was accused of • Tying of IE to the Operating System • Excluding browser competitors from OEMs and ISPs • Imposing agreements requiring OEMs not to remove IE or to substitute an alternative browser • Imposing exclusionary agreements on ISPs • Giving its browser away for free and paying others to take its browser

5. Netscape and the “cross-platform” language • A “cross-platform” language allows programmers opportunity to write a program and it will run on all OS’s this in turn will take away the applications supremacy that Microsoft has

6. Did Microsoft have Monopoly Power?

7. Government says “Yes” • OEMs felt they must buy from Microsoft • If a 5-10% increase in price, customers say they will still buy from Microsoft

8. Network Effects Present • Users would like an OS that allows all applications and developers write applications for the most popular OS • Incentive for firms to use the same OS • Switching Costs • All result in ??????

9. Applications Barrier to Entry

10. Market Power • Claimed that relevant market is larger than PC Operating Systems • Ex: Handheld devices, servers • Other OSs: IBM’s OS/2, Apple • Non-OS platforms: Netscape, Java • Unknown future innovations • Alleged actions indicate a larger market

11. Simple Monopoly Model • Static, short-run pricing model • Calculated Elasticity of Demand from demand for PCs and Microsoft’s market share • Marginal cost for Windows is negligible • Came up with a “monopoly” price of $1800 • Actual price was $60, so Microsoft claimed it had little market power

12. Problems with the Model • Did not consider: • Long run behavior • Dynamics • Network effects in the OS market

13. Court Perspective • Supports the Governments point of view on Market Definition and monopoly power issues • “appropriate to emphasize constraints on alleged Monopolist’s power with respect to BUYERS of operating systems, NOT constraints relating to producers of complimentary products” • Agreed with Applications Barrier to Entry present

14. Did Microsoft maintain its OS Monopoly by thwarting the threat posed by Netscape’s Browser?

15. Threat of Netscape • Netscape relies on Java a “Cross-Platform” language that allows programmers the opportunity to write a program and it will run on all OS’s. This “middleware” threatens Windows because now developers can write to other OS’s and they will be able to offer many applications as well.

16. Government’s Case • Evidence that Bill Gates told top level executives that there is a need to thwart the success of Netscape by bundling its browser with its OS and giving it away for free

17. Two-Level entry- Microsoft prevented companies from entering browser market unless they entered the OS market • This effectively increased the barriers to entry • If Microsoft decided to support only windows based-tech then developers have little incentive to create applications that not windows based

18. Other issues • Market Allocation:meeting with Apple • Predatory Pricing: distributing browser and giving it away for free • Bundling and OEM Restrictions: said to foreclose on competition and not for achieving efficiencies • Exclusionary agreements with ISP

19. Predatory Pricing: Internet Explorer vs. Netscape Navigator • Internet was an opportunity and a threat • Increased demand for Windows • Microsoft wanted to control the communication standards • Believed that Netscape could develop into a platform that competed with Windows • Browser conflict was part of a broader competition among future OSs

20. Predatory Pricing: Internet Explorer vs. Netscape Navigator • Netscape was a direct threat • Justified intense competition • Claimed it was not predatory because it was improving its own browser • Invested $100 million a year to develop IE • Integrating IE into Windows increased OS quality • IE was of equal or greater quality than Navigator • No evidence that giving away IE was not profit maximizing

21. Market Allocation • Winner-take-all competition • Network effects justified low or zero price for IE • Precursor to Windows 98 • Meetings with other companies • Claimed it was to discuss interfaces and complementary products • No agreements

22. Bundling Windows and IE • Microsoft had strict rules against OEMs altering Windows • Claimed it protected the user experience • Kept OEMs from removing IE • Produced efficiencies by merging with Windows • Very difficult or impossible to separate • Since it had no market power: • Bundling IE and the OS would not be a rational anticompetitive strategy

23. ISP agreements • Success with ISPs came from superior product quality and terms • Ex: IE was easier to integrate with AOL’s software • “No harm, no foul” • Other distribution methods available for Netscape

24. Court’s View • Government Win’s 1-Market Allocation 2-Predatory Pricing 3-Bundling 4-Exclusionary Agreements Microsoft Win Government could not provide enough evidence that OEM and ISP restrictions decreased competition

25. Permanent Internet Explorer Microsoft claimed removing IE would be detrimental to the user experience Difference between Windows 95 and 98 Government expert

26. Was Microsoft’s alleged anti-competitive behavior harmful to competition?

27. Government’s View • Microsoft succeeded in excluding Netscape from PC OEM distribution. -Microsoft had a 94% Weighted Average share of browser shipments by ISP’s -Netscape had a 14% Weighted Average share of browser shipments by ISP’s

28. Microsoft Defending its Actions • Microsoft claimed that its behavior was profitable regardless of changes in the competition • Distribution of IE increased OS demand; compliments • No harm to consumers • Did not eliminate the competition • AOL acquires Netscape

29. Microsoft Defending its Actions Disputed Government’s evaluation of market shares Real source of Netscape’s decline was Microsoft winning the technology battle Government was unable to distinguish pro- and anti-competitive behavior

30. Court’s Perspective • Supported the Government’s view that Microsoft’s anti-competitive acts caused immediate harm • Protect Applications Barrier to Entry • Forced OEMs to ignore consumer demand for browserless version of windows(slower pc and less memory) • Hurt middleware technologies

31. Resolution of Case • Focused on conduct remedies 1-Prohibited Microsoft from foreclosing the OEM channel of distribution 2-Placed limits on Microsofts ability to discourage others from developing, promoting, or distributing non-Microsoft middleware products 3- Series of Compliance measures whose goal is to enforce terms of the settlement agreement