Microsoft Monopoly

University Degree Business and Administrative studies

Microsoft Monopoly

Paul Locke

Tony Rump

ECON 201

October 20, 2007

Microsoft Monopoly

Since 1990, a battle has raged in courts between the United States government and the Microsoft Corporation. The federal government maintains Microsoft's monopolistic practices are harmful to United States citizens, by creating higher prices and potentially downgrading software quality. Microsoft claims they are not breaking any laws and are just doing good business. The only thing Microsoft is guilty of is taking advantage of free enterprise.

Microsoft's antitrust problems began in 1990, when the Federal Trade Commission began investigating them for possible violations of the Sherman and Clayton Antitrust Acts. The investigation continued for the next three years without resolve, until Novell, a competitor of Microsoft's MS-DOS, filed a complaint with the Competition Directorate of the European Commission in June of 1993 (Eisenach). The Federal Trade Commission decided to hand the case over to the Department of Justice and the case was finally ended on July 15, 1994, with Microsoft signing a consent settlement (Reynolds). The settlement focused on Microsoft's selling practices with computer manufacturers. Microsoft would sell MS-DOS and other operating systems to original equipment manufacturers at a 60% discount. OEM agreed to pay a royalty to Microsoft for every single computer they sold regardless if it had a Microsoft operating system installed on it. After the settlement, Microsoft would be forced to sell their operating systems according to the number of computers shipped with a Microsoft operating system installed, and not for computers on other operating systems (Reynolds). The Justice Department accused Microsoft of specifying a minimum number of operating systems the retailer had to buy. This action eliminated any chance for another operating systems vendor to get their system installed. With Microsoft

signing long-term contracts, they eliminated the chance for new operating systems to gain the popularity (Eisenach).

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Probably the most controversial issue was the practice of tying, Microsoft would use their leverage in one market area. For example, Microsoft would use their graphical user interface to sell their operating system. In the end, Microsoft decided sign the settlement agreement. Microsoft did not actually have to admit to any of the alleged charges, but were able to escape any type of formal punishment. The settlement Microsoft agreed to prohibits it from charging for its operating system on the basis of computer shipped rather than on copies of MS-DOS shipped; imposing minimum quantity commitments on manufacturers; signing contracts for greater than one year; tying the sale of MS_DOS to the sale of other Microsoft products (Eisenach). Jesse Berst, editorial director of Windows Watcher, states "To use a railroad analogy, Microsoft builds the tracks on which the rest of the industry ships its products. Microsoft is creating the standards for the rest of the computer industry. They are able to build them much faster than an outside organization. Other companies are able to create their applications much better and faster. The customer receives a much better product” (Antitrust).

The case against Microsoft was brought to the U.S. Department of Justice, as well as several state Attorneys General. Microsoft is accused of using and maintaining monopoly power to gain an unfair advantage in the market. The case has been under observation for a long time, but the Justice department is having trouble coming up with substantial evidence against Microsoft. Specifically, the Department must prove Microsoft has monopoly power and is using it to gain unfair leverage in the market. Microsoft has maintained this monopoly power through "exclusionary" or "predatory" acts. In 2001 an appeals court overruled a

lower-court decision to divide Microsoft into two firms. Instead, Microsoft was prohibited from engaging in a number of specific anticompetitive business activities (McConnell).

Microsoft began expanding into the browser area because of increasing threat from Netscape and Java. Java is the programming language used to make Netscape. Programs written in Java can work on any PC, whether it has Windows on it or not. The more Netscape is used, the more other vendors will begin writing Netscape compliant programs and the more Java will be used, which puts a damper on Windows. So Windows introduced their Internet explorer to combat the increasing Netscape usage. It did not do this to create a monopoly, but to protect itself. If people realize Java programs can be run on any PC, then they will realize they do not need to buy Windows.

Some say Microsoft began its "illegal" agenda when it began requiring PC manufacturers to sign a license agreement. They were going to have Windows and Internet Explorer preinstalled on their new systems. Although it is possible for consumers to install other browsers onto Windows, critics say Microsoft still has an unfair advantage. It also keeps other browser companies from being able to consult with PC manufacturers to put their browser on the PC from the beginning. PC manufacturers did not hesitate to comply with Microsoft's new standard because they did not want to lose the ability to manufacture computers with Windows installed on them. Windows holds a great market share and most consumers only buy PC's with Windows already installed on them. It would be detrimental for a company to refuse compliance of Microsoft's new standard. This is another complaint of critics. Manufacturers had no other choice but to do what Microsoft said. The fear was their own company losing profits. Microsoft also "pulls the strings" it has with other ISP's

and software companies. There is a lot of software not made by Microsoft and it comes with the Windows package. Microsoft allows these companies, their icons and programs to be displayed on the Windows desktop. In return, these companies must give preferential treatment in promotion. One example is AOL's 4.0 browser is specially designed to work best with the Microsoft Internet Explorer. Much of the increase in AOL's clientele base can be attributed to the combined efforts of Microsoft and AOL (CNN).

Microsoft is not only working with ISP's, but also with companies who build and maintain web pages. Microsoft also gives them preferential treatment through Windows and in return, they make their web pages to be compliant with the Microsoft browser. Most web pages even have a disclaimer, "Best viewed with Microsoft." Microsoft can hold its position in the browser market. When Netscape refused to bow out, Microsoft decided to do everything in their power to limit the amount of resources they could access. Their methods were often compared to those of Andrew Carnegie's, of Carnegie Steel, in the early 1900's. When a competitor would come into town, he would lower his prices way below cost to drive the competitor out of business. He could afford to do this because he already had the established capital to sustain him. He would just dip into reserves of cash for the time being, and the lowering of prices would not put him out of business. This was deemed illegal and his practice is one of the main reasons the Sherman Antitrust Act was enacted. According to the Act, no company can engage in monopolistic activities intentionally. Microsoft was offering software for free, which is not illegal. Another such action was charging higher prices for its Windows operating system to computer manufacturers that featured Netscape’s Navigator rather than Microsoft’s Internet Explorer (McConnell).

Though fierce competition does promote technological innovation, Microsoft does use its monopoly power to establish its dominance in the browser world. Microsoft uses its strong position with the Windows operating system to force PC manufacturers and software companies to comply with Microsoft's standards. Almost every software company has some connection to Microsoft. Microsoft uses these connections to make insure no other competitors will succeed. Microsoft has countless connections with numerous ISP's, software companies, server companies, and just about any other computer company. Microsoft knows it has the dominant operating system in the market right now and every software company wants to be part of it. If they are not, then they are likely to go under. The more companies joining Microsoft, the more the monopoly power will grow. I don’t believe Microsoft's monopoly agenda solely contains the browser war, but it extends to a much higher market. The Federal government made it clear that the behavior used by Microsoft to maintain and extend its monopoly, not the presence of its large market share, violated the Sherman Act. That is, the government in effect declared Microsoft “a bad monopoly” (McConnell).

Microsoft feels by integrating their Internet Explorer web browser technology into Windows, they are only improving its overall functionality available to the rising customer demands for greater agility and responsiveness have many manufacturers moving their supply chains from a traditional "push" model to a "pull" model—one who is driven by customer demand rather than by supply. These demand-driven supply networks (DDSNs) link all supply chain activities to customer demand. Manufacturing companies follow DDSN models consistently lead their industries in financial performance. Supply Chain Demand and Supply Planning solutions from Microsoft and its partners help manufacturers succeed with a

DDSN model by empowering their people to more accurately manage demand, balance demand with available supply, and establish and synchronize plans with supply chain partners (Microsoft).

Microsoft has not gained its enormous popularity through monopolistic and illegal measures, but instead through superior products. Microsoft simply created products the consumers like and willing to buy. Competing technologies can coexist in today's society, without the need for standards set by an external body. Microsoft is only taking advantage of its position in the market and using innovative marketing strategies to attract new customers. They have chosen to implement a market development strategy to attract new customers who are looking for a system with Internet capability. It's not everybody is against Microsoft. I believe the case was misguided and the government shouldn't be involved. Even a monopoly is free to compete aggressively.