The following Antitrust Law applies to this case:
1. Section 2 of the Antitrust Acts
“Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony.”
The U.S. antitrust law implies that monopolization under ¶ 2 of the Sherman at is illegal if the offender took anti-competitive action to acquire, preserve, or enhance its monopoly. To prove monopolization you need to prove the following:
- Possession of market power; and
- Willfully acquired or maintained this monopoly power as distinguished from acquisition through a superior product, business acumen, or historical accident.
Contrary to popular belief, for monopolization to be illegal under U.S. antitrust law, it is not sufficient for a company to monopolize a market in the sense of possessing a very large market share, even a market share of 100%.
U.S. antitrust law implies that attempting to monopolize is illegal under ¶ 2 of the Sherman Antitrust Act if the specific action taken have anti-competitive consequences. Bundling and price discrimination could be illegal if they have anti-competitive consequences. Exclusionary contract (which restrict distribution or production) could be illegal if they have anti-competitive effects.
To prove attempting to monopolize (under Sherman Act ¶ 2), the following criteria needs to be met:
- Engagement in predatory or anti-competitive conduct.
- With the specific intent to monopolize
- And, that there was a dangerous probability that the defendant would succeed in achieving monopoly power.
Section 1 of the Sherman Antitrust Act states:
“Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”
Unreasonable restraint of competition is illegal under ¶ 1 of the Sherman Act; this may include tying of product or other exclusive arrangements.
It is generally accepted in the application of antitrust law in the United States that anticompetitive acts harm consumers. Consumer hare or attempted harm is necessary for an antitrust violation. The affected consumer group may be present or future. Consumers may lose directly from high prices or indirectly through a limitation of choices of variety and quality or by a retardation of the innovation process. But without consumer victims or prospective likely victims, present or future, it is extremely hard to prove that an antitrust violation exists.
The U. S. District Court’s Findings of Fact (November 1999) and Conclusions of Law (April 2000) found for the plaintiffs in all the allegations against Microsoft. Judge Penefield Jackson found the following:
- The relevant antitrust market is the PC operating systems market for Intel-compatible computers.
- Microsoft has a monopoly in this market “where it enjoys a large and stable market share.
- Microsoft’s monopoly s protected by the applications barrier to entry, which the judge defined as the ability of an abundance of applications running Windows.
- Microsoft used its monopoly power in the personal computer operating systems market to exclude rivals and harm competitors.
- Microsoft hobbled the innovation process.
- Microsoft’s actions harmed consumers.
- Various Microsoft contracts had anti-competitive implications, but Microsoft is not guilty of anti-competitive exclusive dealing contracts hindering the distribution of Netscape Navigator.
The issue of remedies was from the beginning the most difficult part of the litigation. Observers believed that Microsoft was liable and expressed privately great consternation in finding an appropriate remedy. Given the remarks of Judge Jackson during the trail, there was no doubt Microsoft would be found liable by the District Court. Judge Jackson did not examine the proposals of the plaintiff and the defendant but decided on remedies in summary fashion. He was quoted as having said since the plaintiffs’ won the liability phase, the plaintiffs should determine the remedies. In the last week of March 2000 the New York times published the terms of the Microsoft and Department of Justice negotiations. From the published information it was implied that the Department of Justice and Microsoft were not far from an agreement. The holdup was that some States that were part of the litigation did not agree with the settlement terms.
The following were the terms of the final draft of the proposal by the Department of Justice:
- Microsoft would create a pricing schedule that would apply to all buyers, so that pries would not be conditioned on other Microsoft products that a buyer purchases. The schedule would allow for different prices for different quantities.
- Microsoft would not be allowed to have exclusive contracts that did not allow the other party to use, display, or feature its opponent’s products.
- Microsoft would be required to share technical information without discrimination among the potential recipients of this information.
- Microsoft would be required to disclose the application interfaces that link applications to Windows.
- Microsoft cannot increase the price of old versions of Windows when new versions are released. Microsoft would be forced to sell the old version at a constant price for three years after a new release.
- Microsoft would produce a Windows version without Internet Explorer. Computer manufacturers would be allowed to license some part of the Windows code so that they could change the opening screen, and choose the default browser.
- Tying by contract would be prohibited, but Microsoft would be allowed to integrate functions, applications, and features in its products.
The above list of conditions seemed like a reasonable basis on which a deal with Microsoft could be struck. Some State officials considered these remedies less harsh then they had wished for. The officials from these states communicated to Judge Posner that they would not sign such a deal. The judge was forced to declare the negotiations a failure. Given the proposals that the Government offered in the negotiations, there were expectations that the Department of Justice would demand more or less the same terms in the remedies phase. Instead, the Department of Justice asked for a much more radical step, the breakup of Microsoft. The judge adopted a remedy proposal that imposed the breakup of Microsoft into two “Baby Bills.” There would be an operating systems company, which would inherit all the operating systems software, and an applications company with all the remaining software assets. The cash and security holds of other companies held by Microsoft would be split between the two entities. Bill Gates and other officers, shareholders of the company would not be allowed to hold executive and ownership positions in both of the companies.
The District Court ruling also imposed interim conduct restrictions on Microsoft. The restrictions were to last three years, from the time of the breakup. The restrictions are as follows:
- Microsoft would create a pricing schedule that would apply to all buyers so that price would not be conditioned on the sale of other Microsoft products.
- Microsoft would not be allowed to have exclusive contracts that do not allow the other party to use, display, or feature it opponents’ products.
- APIs and other technical information of Windows should be shared with outsiders as it is shared within Microsoft.
- Microsoft is not allowed to take actions against manufacturers who feature competitors’ software.
- Microsoft will allow OEMs to alter Windows in significant ways.
- Microsoft is not allowed to design Windows to disable or compromise rivals’ products.
The above conditions were similar but more restrictive than the ones proposed by the government in the settlement talks at the end of March 2000. In March the government was satisfied that the restrictions, together with a ban on tying and a requirement that Microsoft would produce a version of Windows without Internet Explorer, were sufficient to settle the case. The Department of Justice did not produce any convincing argument that the proposed breakup would be more efficient or effective that the conduct restrictions that it had imposed earlier.
In arguing for the breakup the Government put forward a number of reasons. The government and the Judge stated the following reasons for the breakup:
- That it considered the repeated violations of antitrust law by Microsoft as an indication that Microsoft would not follow any conduct or contractual restrictions;
- That the lack of remorse by Microsoft’s executives was a clear indication that Microsoft could not be trusted to implement any other remedy;
- That the breakup was a surgical cut that would create the least interference with business;
- AT&T and the rest of the telecommunications industry benefited from AT&T’s breakup, and so should Microsoft and the software industry;
- The breakup eliminates the incentive for vertical foreclosure; and
- The breakup reduces the applications barrier to entry since now the applications company might writ popular Microsoft applications for other platforms.
In my opinion the government failed to so that the proposed breakup was the appropriate remedy. The Department of Justice needed to show that conduct remedies would not work and it failed to do so. The Department of Justice did not perform a cost-benefit analysis to show that conduct remedies were not sufficient and that a breakup was necessary. The government also failed to justify why it was ready to compromise a few weeks’ earlier on behavioral remedies and now claimed that structural remedies were necessary.
The first argument the government gave for the breakup does not stand to reason. The 1995 case was settled with a decree, which clearly indicated that Microsoft could include in its operating system any additional functionality. It is reasonable that Microsoft would believe, given the 1995 consent decree that adding browser functionality to Windows would not violate the consent decree. Of course, this does not mean that adding such functionality did not violate antitrust law in general, but it does away with the idea that the government was tricked by Microsoft.
The second argument of the plaintiffs makes no sense at all. Antitrust enforcement is not a tug of war in which the egos of either the plaintiffs or defendants need to be satisfied. The show of remorse or lack thereof by Microsoft executives could not possibly define the remedy. It is hard to believe that the judge would really find a different remedy appropriate if Microsoft executives simply showed public remorse. Microsoft, like any other defendant, has a right to appeal. Belief that they will prevail on appeal in a civil case is hardly worthy of punishment.
The third argument that the breakup is a surgical cut and therefore will disrupt the industry the least is countered by the facts. A breakup of Microsoft, if it is finally ordered at the end of the appeals process, would eliminate Microsoft as a flexible and formidable competitor. The endorsement of the breakup by Microsoft’s competitors in the servers and back office competitors (who were not alleged to have been damaged by the Windows monopoly but will greatly benefit from the confusion and disruption created by a Microsoft breakup) is evidence that the breakup is one of the most disruptive possible outcomes.
The fourth argument that since AT&T’s 1982 breakup was successful so would Microsoft’s is incorrect. AT&T was divided into the long-distance company and seven regional operating companies, each of which remained a regulated local telecommunications monopoly until 1996. The destruction of AT&T’s long-distance monopoly encouraged competition, which brought sharply lower prices and immense consumer benefits. There are a number of key differences between the two companies and their competitive situations. These differences make it very like that a Microsoft breakup, besides harming Microsoft would harm consumers and the computer industry.
Microsoft has integrated in the Windows class of operating systems many functions and features that were originally performed by stand-alone products. The Court of Appeals in the June 23, 1998 decision affirmed that Microsoft’s bundling Internet Explorer with Windows was legal under the terms of the 1995 consent decree. The Department of Justice argued that Microsoft’s bundling of Internet Explore with Windows and its attempt to eliminate Netscape as a competitor in the browser markets was adding more functionality to Windows and marginalizing a series of add-on software manufacturers. The Department of Justice alleged that Microsoft added browser functionality to windows and marginalized Netscape because Netscape posed a threat to the Windows operating system. The threat posed by Netscape was a crucial part of the Department of Justice allegations. The Department of Justice alleged that applications could be written to be executed on top of Netscape; this was due to the fact that Netscape could be run on a number of operating systems. Since Netscape could be run on a number of operating systems the Department of Justice alleged that Netscape could erode the market power of Windows. The Department of Justice used the logic that Microsoft gave away Internet Explorer and integrated it in Windows so that Netscape would not become a platform that could compete with Windows. Thus, the Department of Justice alleged that Microsoft ‘s free distribution of Internet Explore, its bundling with Windows, and all its attempts to win the browser wars were defensive moves by Microsoft to protect their Windows monopoly.
The Microsoft trial took place in the U.S. District Court District of Columbia from October 19, 1998 to June 24, 1999. Twelve witnesses testified for the plaintiffs and the defendants. Microsoft’s CEO Bill Gates was not called as a witness, but a videotape deposition was used extensively during the trial. Judge Jackson announced before the trial that he would deliver his finds of the fact before his conclusions of the law. This was interpreted by some as an indication that the judge was trying to give an opportunity to the sides to reach a compromise and resolve the case through a consent decree. On November 5, 1999 Judge Jackson issued his findings of fact, siding with the plaintiffs. In December 1999, Judge Richard Posner who was a prominent antitrust scholar and the Chief Judge of the Seventh Circuit court, agree to serve as a mediator for settlement discussions.
On April 1, 2000 the settlement discussion hit a roadblock as some states reportedly disagreed with the proposed agreement. On April 3, 2000, Judge Jackson issued his conclusions of law finding for the plaintiffs on the majority of the points. In particular, Judge Jackson found Microsoft liable for monopolization and anti-competitive tying of Internet Explorer with Windows but found that Microsoft’s exclusive contracts did not make it liable for preventing Netscape from being distributed. On June 7, 2000 Judge Jackson issued his remedies decision. This decision split Microsoft into two companies, and imposed severe business conduct restrictions. Microsoft appealed and was granted a stay on all parts of the District Court decision until the appeal was heard. The Washington DC Court of Appeals agreed to hear the case during their plenary session, the District Court agrees with the government’s proposal to petition the Supreme Court to hear the case immediately. This invoked a rarely used provision of antitrust law. On September 26, 2000 the Supreme Court indicated that they would not hear the case before the Court of Appeals.
Nonetheless, the problem for Microsoft is that two suits were filed against the company in May 1998. One was filed by the Justice Department, the other by the states. Since they are quite similar, the two suits were consolidated for trial, and the Court of Appeals is hearing them together, though appellate court communications list them separately. If the Justice Department dropped its case, the states' case would still be alive with full legal standing. If the federal government settles the case but the states do not, then the government is no longer in the case but the states still are. Even before those decisions must be made, the Bush administration will have to argue it before the Court of appeals.
Yet the Bush administration adopted a narrower reading of the appeals court decision more in line with the position of the Microsoft legal team and some legal experts. The appeals court decision did express a reluctance for having the judiciary meddle in software design decisions, though it also found that Microsoft had illegally ''commingled'' code when it bundled its browser with Windows. The Justice Department took to heart the court's cautionary words on product design. The tentative settlement would prohibit Microsoft from entering into pricing deals and contracts with personal computer makers that effectively force them to favor Microsoft products over rival offerings. The settlement would also allow personal computer makers to remove the desktop icons that link to Microsoft products like Internet Explorer browser, media player and instant messaging software.
With all the information that has been presented for both sides of the issue, you are probably left in a daze, not knowing what to think. Is Microsoft good? Or is Microsoft bad? Well, the answer is a little bit of both. Even though the Justice Department found that Microsoft might be practicing some techniques that are less than ethical, they did not find that Microsoft was breaking any anti-trust laws, nor did Microsoft actually admit to the accusations when they signed the agreement. If anything, them signing the agreement was more of a sorry than a full-fledged admission of guilt. Other people might disagree with me, and there might be a lot of allegations floating around from different companies, but the fact of the matter is plain and simple. Microsoft has not been formerly charged and found guilty of an illegal practices pertaining to them being a monopoly.
When considering whether a monopoly should persist or not the factors must be examined closely. Whether or not the consumers are being exploited is something that is essential when contemplating the breakup of a monopolistic firm. Often times, and in the case of Microsoft, the consumers benefit from the monopoly. After more than three years of litigation, repeated courtroom setbacks and failed settlement talks, Microsoft emerged largely successful from its long antitrust battle. Microsoft’s agreement with the Justice Department does not require it to alter the design or development of its products and will not change Microsoft’s strategy of aggressively moving into new markets.
While Microsoft may be limiting its competition, it is aiding the consumer. For it is able to charge a lower price and produce more efficiently because of smaller costs that if it existed in a purely competitive industry. Microsoft is not the stereotypical monopoly, in that it continues to innovate, which explains the upgrades to its present software. It would not be right to break-up this firm, for its existence is beneficial to the public. Regulatory action may be needed though in order to provide competitors with more of a fighting chance. Competition still exists though and in the unpredictable industry of technology a firm can plummet and rise swiftly.
Bibliography
Amicus Curiae Brief of Professor Lawrence Lessing, United States v. Microsoft, Civil Action No. 98-1232 (TPJ)
Brinkley, Joel and Steve Lohr (2000), U.S. v. Microsoft, McGraw Hill
Conclusions of Law, United States v. Microsoft, Civil Action No. 98-1232 (TPJ) & State of New York v. Microsoft Civil Action No. 98-1233 (TPJ)
Elzinga, Kenneth G., and David E. Mills (1999), “PC Software,” The Antitrust Bulletin, vol. 44, page 739.
Findings of Fact, United States v. Microsoft, Civil Action no. 98-1232 (TPJ) & State of New York v. Microsoft Civil Action No. 98-1233 (TPJ)
Litan, Robert E., Roger Noll, William D. Nordhaus, and Frederic Scherer, “Remedies Brief of Amici Curiae in Civil Action No. 98-1232 (TPJ).”
United States v. Microsoft, conference at New York University (May 5, 2000), in streaming video at http://www.stern.nyu.edu/networks/video.html.
Final Judgment, Civil Action No. 94-1564
New York times, April 2, 2000. See also Brinkley and Lohr (2000), page 286-7