Being a leader in an industry,
besides success, brings a lot of issues, which is visible in the Microsoft’s
case. The best known antitrust cases in the last three decades are the ones
against Microsoft, whereby the USA and EU accused Microsoft of anti competitive behaviour.
This article will try to answer
whether Microsoft is a monopoly in the PC operating system market and whether
it maintained this status by acting anti-competitively.
Microsoft’s Business
Microsoft is a multinational software
company which was founded in 1975 by Bill Gates and Paul Allen in Albuquerque,
New Mexico (Cusumano and Selby, 1995). Today, Microsoft is headquartered in Redmond,
Washington and operates its business in five segments: Windows Division, Server
and Tools, Online Services Division, Microsoft Business Division, and
Entertainment and Devices Division.
These operating segments, along with Microsoft’s products and services are set
out in the Table 1. Its core products
are the Windows PC operating system and the Office business productivity application.
Microsoft also makes video game consoles, enterprise applications, server and
storage software. Furthermore, Microsoft is engaged in online advertising,
mobile software, consulting, and support services. Its main and biggest
competitors in almost each operating segment are Apple, Google and Yahoo.
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Table 1: Microsoft’s operating segments and main competitors
Source: www.microsoft.com
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The greatness of Microsoft’s business can be presented through its revenues which show the very rapid growth of the company (Table 2). In the company’s first year in business, Microsoft generated 16 thousands US dollars in revenues, but this rose to an extraordinary 16 million US dollars within the next six years. Microsoft’s revenues have grown consistently over the years, reaching almost 70 billion US dollars in 2011.
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Table 2: Microsoft’s net revenues 1975-2011
Source: Cusumano and Selby (1995) and Microsoft Annual Reports
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What is the background of Microsoft’s huge success? Cusumano and Selby (1995) see Microsoft as a company with remarkably effective ideas on how to compete and market products in a rapidly expanding and evolving industry. Even if so, Microsoft was faced with very serious accusations of using anticompetitive practices in order to maintain its monopolistic position in personal computer operating systems. The best known antitrust cases include the legal actions brought by the USA and the European Commission against Microsoft.
The beginning of Microsoft’s Troubles in the USA and Europe
The first antitrust accusations against Microsoft began in the USA in 1990 when the Federal Trade Commission investigated the company; however the results were inconclusive due to inconsistent evidence which did not make it possible to reach a single conclusion (Gilbert and Katz, 2001).
Not long thereafter, the U.S. Department of Justice complained that Microsoft was using exclusionary and anticompetitive practices with personal computer manufacturers so as to maintain a monopoly in personal computer operating systems. This resulted in signing the consent decree between both sides, where Microsoft agreed to abide by certain restrictions on its licensing arrangements . However, shortly thereafter, Microsoft requested PC manufacturers to install and licence Microsoft’s browser Internet Explorer in order to obtain a licence for the Microsoft’s operating system Windows 95. Microsoft’s argument was that those two are not separate products; instead Microsoft claimed that it is an integrated product. At that time the leading browser was Netscape Navigator. The U.S. Department of Justice disagreed with Microsoft’s statement of integrated product and the District Court ordered Microsoft to offer these products as two separated ones. However, the Court of Appeals reversed the decision (Gilbert and Katz, 2001) not resulting in any penalties for Microsoft.
In 1998 the US government (the U.S. Department of Justice and twenty individual states ) brought an antitrust case against Microsoft accusing it for the monopolisation of the markets for PC operating systems and internet browsers (Gilbert and Katz, 2001) and the trial against Microsoft started. The government assumptions were that Microsoft was engaged in various forms of predatory conduct, by forcing PC manufacturers to licence and install Microsoft’s internet browser and was forcing them to enter into exclusionary contracts. Moreover, Netscape Navigator and Java, middleware products written for multiple operating systems, were in the centre of this case, and Microsoft was threatened by them because it felt they would endanger its monopoly (Motta, 2004).
Microsoft’s troubles in Europe started in 1998 when Sun Microsystems filled a complaint alleging that Microsoft was refusing to supply it with interoperability information necessary to interoperate with Microsoft’s dominant personal computer operating system. In 2000 the European Commission broadened the scope of the investigation to examine Microsoft’s conduct regarding its Windows Media Player product .
The European Commission argued that Microsoft had dynamic and static incentives to foreclose competitors from the operating system market. Their argument was the same as the US’s government; Microsoft felt threatened by the competitors because they could decrease the monopolist’s profits that Microsoft was enjoying at that time (Genakos et al 2007).
Final Judgments
Both antitrust cases against Microsoft brought decisions that were not in Microsoft’s favour. Even though Microsoft had appealed, the judgements did not significantly change.
The trial against Microsoft ended when the District Court firstly issued Conclusions of Law and then the Final Judgement in 2000. In the Conclusions of Law Microsoft was found liable for: (1) the way in which it integrated Internet Explorer into Windows; (2) its various dealings with Original Equipment Manufacturers ("OEMs"), Internet Access Providers ("IAPs"), Internet Content Providers ("ICPs"), Independent Software Vendors ("ISVs"), and Apple Computer; (3) its efforts to contain and to subvert Java technologies; and (4) its course of conduct as a whole . In other words, Microsoft was liable for three antitrust violations: maintaining a monopolist position in the market of Intel-compatible operating systems for personal computers, attempted monopolisation of the internet browser market and tying its Windows operating system with Internet Explorer (Motta, 2004).
Furthermore, the Final Judgement imposed upon Microsoft certain behavioural and structural remedies, which meant a separation of Microsoft into two companies, whereby one company would focus on the operating systems business and the other on the applications business (Motta, 2004).
Since these decisions were not in Microsoft’s favour, the company appealed to the Court of Appeals. Unfortunately for Microsoft, the Court of Appeals confirmed the maintenance of monopoly claim and condemned the usage of exclusionary and predatory practices, but reversed the decision about attempted monopolisation of the browser market and remanded the case back to the District Court to find an appropriate remedy since the structural remedy was not an option (Rubinfeld, 2009).
At the end, Microsoft, the US government and nine states reached a settlement in which Microsoft agreed to a range of behavioural remedies, but the remaining states disagreed and did not join the settlement (Rubinfeld, 2009). The District Court accepted most of the proposed settlement. Some of the remedies enabled the OEMs to (independently) configure Windows OS, protect original equipment manufacturers from possible retaliation, and required Microsoft to modify Windows technology to ensure that manufacturers and end-users may disable various Windows’ functions (Motta, 2004). Moreover, the Court adopted “explicitly forward-looking remedies” which included Application Programming Interfaces disclosures (interoperation between Windows and Microsoft Middleware) and communications protocols (interoperation between PC operating systems and server operating systems).
The case against Microsoft in Europe had a bit different flow than one in the USA. After five years of investigation, the European Commission concluded that Microsoft had abused its monopoly of PC operating systems, hence violated the European Treaty’s competition rules (Genakos et al, 2007). The European Commission found that Microsoft abused its market power by deliberately restricting interoperability between Windows PCs and non-Microsoft work group servers, and by tying its Windows Media Player (WMP), a product where it faced competition, with its ubiquitous Windows operating system . Moreover, the European Commission claimed that Microsoft's conduct significantly weakened competition on the media player market and harmed the competitive process and consumers, who were consequently faced with the higher prices.
In 2004 the European Commission imposed remedies in order to restore the conditions of fair competition and fined Microsoft with 497.2 million euros , or approximately 650 million US dollars, which was approximately 17% of Microsoft’s revenues in 2004. Microsoft was required to disclose within 120 days complete and accurate interface documentation which would allow non-Microsoft work group servers to achieve full interoperability with Windows PCs . Also, within 90 days Microsoft was required to offer to PC manufacturers a version of its Windows client PC operating system without WMP . The Commission also requested Microsoft to retain the right to offer a version of its Windows client PC operating system product with WMP and it must not give PC manufacturers a discount conditional on their buying Windows together with WMP.
Since Microsoft failed to comply with the antitrust decision from 2004, three years later the European Commission fined Microsoft an additional 899 million euros .
Ambiguous Definitions and Issues
Even though that decision was made and Microsoft pleaded guilty for maintaining its monopolistic status and for using exclusionary and predatory practices, there are still some issues regarding this decision brought in the USA. The problems lay in defining monopoly power and determining a monopolistic position, including their market definition, and predatory conduct in software markets (Schmalensee, 2000).
The District Court and Court of Appeals defined the market as Intel-compatible personal computer operating systems in which Microsoft had more than 95% of shares, but this definition of the market did not include shares of Apple’s Mac operating system or other non-PC based competitors which were of concern to Microsoft . Apple’s Mac operating system was excluded from the relevant market based on the evidence that there was almost no substitutability between Mac operating system and Windows (Rubinfeld, 2009), since consumers would not switch from Windows to Mac OS in response to a substantial price increase because of the costs of acquiring the new hardware needed to run Mac OS and compatible software applications, as well as because of the effort involved in learning the new system and transferring files to its format . Microsoft argued that the relevant market was incorrectly defined and that is substantially broader than Intel-based personal computer operating system (Rubinfeld, 2009). This measure of market share provided a misleading assessment of the degree of competition (Schmalensee, 2000). Since Microsoft took actions against Netscape and Java it means that Microsoft really had competitors at the market, hence it could not have a monopoly power (Rubinfeld, 2009). Moreover, Microsoft did not behave as monopolist, since it charged a much lower price for Windows than it the monopolistic level (Gilbert and Katz, 2001).
The decision of maintaining the monopoly power in personal computer operating systems also brings issues. Microsoft was accused for engaging in a series of anticompetitive practice in order to keep the monopoly power, and this decision took into consideration high entry barriers and exclusionary and predatory pricing. The government’s and courts’ argument was that integration of Internet Explorer into Windows was predatory (Schmalensee, 2001); since the Internet Explorer was given for free (Rubinfeld, 2009). They claimed that Microsoft could earn more money by selling its internet browser separately for a positive price, but there was no evidence for that (Schmalensee, 2001). Software firms compete statically and dynamically, by selling products and developing new product, and the value of any software platform (e.g. Windows) depends largely on the quality and the number of applications (e.g. Internet Explorer and its applications) written to run on certain platform (Schmalensee, 2001). Microsoft’s competitive actions were motivated by Netscape’s real threat and consequently the possibility of losing market power, because if a substantial number of applications were developed to run on Netscape’s Navigator browser then Microsoft would experience a serious competition from any operating system that worked with Navigator (Klein, 2001). Hence, the way Microsoft fought against competitors can be seen as reasonable and appropriate response of a competitor (Rubinfeld, 2009).
There are also contradictory opinions for the antitrust case brought in Europe, concerning the imposed remedies. The Commission forced Microsoft to produce and distribute in the EU a version of Windows (known as Windows-N) without Windows Media Player. In the EU the two versions of Windows were sold at the same price and almost no OEM bought and adopted Windows-N. Hence, the remedy imposed by the Commission had no noticeable effect in the marketplace (Economides and Lianos, 2010). The European Commission argued that consumers were harmed by Microsoft’s anticompetitive behaviour and accused Microsoft for illegal tying (Genakos et al, 2007), but the remedy chosen did not solve any problems, since almost no one bought the new version of Windows. Even though the Commission reacted negatively when Microsoft decided to unbundle Internet Explorer from Windows 7-E, unbundling would seem to be more appropriate remedy in the “tying case” because it would be more effective in terms of reinvigorating competition. Moreover, the problem cannot be solved by the characterization of the Microsoft case as a strictly “tying” case (Economides and Lianos, 2010).
Conclusion
This article has given an insight into antitrust cases against Microsoft, showing the complex path in deciding whether a company has abused its status in an industry, in this case, the software industry.
Both the USA and the European Commission brought decisions that were not in Microsoft’s favour and with serious consequences for Microsoft. Had Microsoft not appealed, the Microsoft that is known today would not exist, since there was a decision which had almost split Microsoft into two companies. All software and high-tech companies can learn something from Microsoft’s cases; they should be more careful that their innovations and products satisfy competition and regulation policies. Furthermore, the USA and EU and their relatively slow and traditional policymaking should consider changing some policies or should be more flexible and adaptive in light of the rapidly changing and innovative high-tech industry, whereas policies do not follow the rapid change of this industry.
In both cases was concluded that Microsoft had a monopoly and that it abused its monopoly status using anticompetitive practices, consequently harming the original equipment manufacturers and consumers.
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