Government Intervention And Antitrust Law Essay, Research Paper

Government Intervention in Individual Markets:

A Look at Government Intervention and Antitrust Law via the Microsoft Case

Growth and Development in the US Economy

36-363

Professor Burnett

Josh Preiser

0032432

May 9, 2000

Preface

In light of recent developments, I took a different approach to this paper. The Microsoft Antitrust case has been somewhat of a phenomenon that has become one of the most prominent cases in recent years. Because of this, I decided to look at government intervention into individual markets, along with antitrust law, via that particular case. I am of the opinion that we can learn a great deal by using that particular ongoing litigation.

Antitrust law protects the public from companies that attain an undue domination of the marketplace via mergers, tying 1 product to another, vertical integration, and other practices tending to eliminate competition or bar entry into the market to newcomers.

In the early 1980s, Microsoft was a much smaller company than it is today. However, it had already established a reputation of being a predator, a greedy predator. They were known to terminate licenses mercilessly once they figured out a way to clone a given technology, regardless of whether it was legal or not. Back then, Microsoft had some enthusiastic competition. The biggest of which were Borland (programming), Ashton-Tate (databases), Visicalc and Lotus (spreadsheets), as well as Wordstar and WordPerfect (word processors). All of these companies have now either merged out of existence or are completely defunct, with the exceptions of Borland and Lotus (which are barely afloat). Microsoft now has the leading product in each sector of the market once occupied by these firms. The company was responsible for ridding itself of these early competitors by either buying them out or simply driving them into the ground. This early disregard set the tone for how Microsoft does business even today.

Microsoft?s advantage comes from their domination of operating systems (OS). ?By definition, if the OS maker creates applications, they will run better with the OS than a third party?s, and the OS owner can, over time, create modifications that will make this even more so,? (Rapacious 1). Microsoft has the power to leverage their dominance in operating systems (Microsoft currently has its Windows software in over 90% of all PCs) to gain a large market share in the various application sectors. They have always been able to do this and as a result have been able to get, or achieve, whatever it is that they have wanted. This is the vertical integration that the antitrust laws talk about.

In a July 1994, settlement, the Justice Department came to an agreement with the software giant over the antitrust charges it had filed against the company. The charges were brought after the department found out that Microsoft was giving personal computer manufacturers a discount on their OS when the PC manufacturer would pay the company a royalty for each computer sold, including those without MS-DOS or Windows software installed. ?The practice gave PC makers little incentive to install competing programs since they would have had to pay a royalty to both the competitor and Microsoft,? (Ramstad 1). The settlement only dealt with this single count and left Microsoft alone to continue performing its numerous other anti-competitive practices.

In the spring of 1995, Judge Stanley Sporkin rejected the deal that the Justice Department settled on. He did so on the grounds that:

1.The government refused to give the court enough information about the agreement;

2.The deal was too narrow; it failed to deal with issues like OS/application leverage, and allegations that Microsoft intentionally made changes to Windows that made third party applications hard to run;

3.The parties did not adequately consider anti-competitive issues;

4.The deal was unsatisfactory when it came to enforcement and compliance mechanisms.

Around the time of the settlement, some suggestions started to come about how to deal with Microsoft. Stewart Alsop suggested ?that Microsoft be forced to document the API?s in Windows, so that other companies could legally clone it. That would still leave Microsoft an eighteen month head start on each release,? (Rapacious 3). It was also suggested that the company be broken up. This way, the operating system and the applications would be separated into different companies and the playing field would become more level.

In late August 1995, U.S. District Judge Thomas Penfield Jackson ended what had become a thirteen-month judicial review by signing the agreement Microsoft and the Justice Department had come to. The review had been elongated by Judge Sporkin?s rejection of the deal. The signing, however, did not take the heat off Microsoft?s proverbial back. The Justice Department had already begun investigating some of their concerns about the company?s practices regarding new software and whether they were complying with the agreement. This investigation became the court case we have all been hearing about in these last few months.

By the time the Judge Jackson signed the agreement, the government was already looking into Microsoft?s decision to include access to its on-line service, the Microsoft Network, into its Windows 95 operating system. Competitors were afraid that this would allow the company to once again take advantage of its monopoly power in operating systems to gain a large share of the on-line market.

A mere three months after its release, the company announced that the Microsoft Network had already enrolled more than 525,000 members. They also had projections putting them over the 2 million member mark by the end of the next year (1996). This went on to fuel its competitors worst fears. America Online, Prodigy and CompuServe were among those that had long been arguing that Microsoft had an unfair advantage with its on-line access included in the OS. ??The industry?s fears are partially correct. Having a button on the desktop works. People click on it,? said Adam Schoenfeld, of Jupiter Communications,? (Cooper 1). Microsoft?s response to the situation at that time was merely to suggest that there was no evidence showing MSN?s close connection to Windows 95 had tilted the tables into its favor.

In September of 1996, Microsoft received a written request for information, (this is known as a civil investigative demand) from the Justice Department. Netscape had accused the company ?of going beyond vigorous competition into the realm of illegal tactics in the browser war,? (Just. Dept. Examining 1). Netscape also charged, through letters to the Justice Department, that Microsoft had violated its 1994 consent decree (settlement) with the government by offering PC manufacturers a $3 discount on Windows 95 for giving their browser, Internet Explorer, a more prominent place on computer screens than Netscape?s browser, Navigator.

Further complicating Microsoft?s problems, they received another civil investigative demand in May of 1997. This time, the Department of Justice was seeking internal documents having to do with Microsoft?s planned purchase of WebTV for $425 million. ?WebTV is a start-up producer of set-top boxes that bring the Internet to television sets,? (US Requests?1). A major industry is expected to develop from the delivering of the Internet via television and other home appliances. So, the opportunity to be among the first in a very promising market is what attracted the company to WebTV.

About the same time the government was looking into Microsoft?s purchase, Oracle (another software producer) announced it was buying control of Navio Communications Inc. Navio was developed by Netscape Communications, which, ?[facing] ever-stiffer competition from Microsoft?decided to conserve it?s financial resources and shed Navio,? (US Requests?2). Microsoft officials pointed to this move by Oracle in response to the government?s most recent allegations. They claimed that the deal was a sign that their purchase of WebTV was prompting capable companies to get into the market, thereby promoting competition.

Drawing further attention to itself, Microsoft invested in Apple Computers. They purchased $125 million in non-voting stock. This act was seen by many, upon first glance, as an effort to further dominate the computer market by swallowing another competitor. However, if one were to consider the pressure that Microsoft was, and is, enduring from the government, one can see an entirely different motivation for the investment. Apple was struggling and this purchase of non-voting stock was designed to help keep the company afloat. As long as Apple remains intact, the computer giant we know as Microsoft has another ?competitor? that it can point to in its fight against antitrust violations.

In October of 1997, the government finally asked a judge to order Microsoft to stop requiring PC makers to include Internet Explorer when they install Windows 95 in their computers. Attorney General Janet Reno, who referred to the company as a monopoly several times in her press conference, claimed that the company had violated the 1994 settlement, and that the Justice Department would seek a $1 million per day fine if they didn?t stop the practice. She said,

This administration has taken great efforts to spur technological innovation, promote competition and make sure that the consumers have the ability to choose among competing products. [This} action shows that we won?t tolerate any coercion by dominant companies in any way that distorts competition. (Labaton 2)

The government?s petition was designed to receive an order that would bar Microsoft from compelling PC manufacturers to accept their browser as a condition of receiving operating system. It also asked the court to order the company to notify Windows 95 users that they can use any compatible Internet Browser, as well as provide instructions on how to remove Internet Explorer from their computer.

In response to the petition, Bill Gates, Microsoft?s chairman and chief executive, said that his company was not violating the antitrust agreement. He proclaimed his belief that his company had every right to improve and add to the basic features of Windows. He went on to say that he hoped to further improve Windows by adding new capabilities, such as speech recognition and machine vision.

The Justice Department has several key issues that it has to deal with in its case against Microsoft. By deal with, I mean they have to get around Microsoft?s answers to their charges. First, the department is accusing the company of threatening computer makers who delete the Internet Explorer icon. The company answers this by claiming that ??computer manufacturers are free to ship any competitor product they wish, but they are not allowed to disable features of our products,? (Just Dept v MS 2). Second, the government is contending that the terms of Microsoft?s non-disclosure agreements are an obstacle in the way of their attempts to gather evidence for their investigation. Microsoft says that their non-disclosure agreements are no different than those of most companies within the software industry, as well as outside it. Finally, there is the matter of the competitive browser possibly representing a threat to Microsoft?s key product, its operating system. Company officials claim that by not allowing them to include their browser with Windows, the government is preventing innovation. They say that the pace of the competition will quickly pummel a company that stops innovating, and that the consumers win because competition drives firms to deliver better products at lower prices. In essence, Microsoft is claiming that by not allowing them to include the browser, the government is stifling the competition that it is trying to protect.

Orin Hatch, chairman of the Senate Judiciary Committee, held the first of what he claimed would be several hearings on the Microsoft antitrust petition in the first week of November 1997. At this hearing, the Senator produced an exclusivity agreement between Microsoft and Earthlink Network, Inc. It called for Earthlink to offer only Microsoft?s Internet Explorer and prohibits them from implying that another browser is available. ??What you have set forth appears to be a classic example of an artificial entry barrier. It is not designed to enhance the product. It is designed simply to hobble the competitor? said Kevin Arquit (former general counsel of the Federal Trade Commission),? (Clausing?Senator).

After the hearing, Microsoft asked a federal judge to throw the government?s petition out. They filed their response to the Justice Departments allegations with Judge Thomas Penfield Jackson (the same judge that signed the antitrust settlement two years earlier). The company is claiming that the government?s case is without base, is implausible and is a perversion of the truth. According to what their claims, the original decree allows them to develop integrated products. The response also claims that the company ??realized long before Netscape was even a company that [Microsoft] needed to build this type of functionality into Windows for consumers,? (Clausing?Microsoft 2). Netscape was founded in 1994. The first version of Internet Explorer wasn?t released until July of 95, and that was a limited beta version.

In May of ?98, the DOJ and the attorneys general of 20 states filed a pair of antitrust lawsuits against Gates? company. The suits claimed that Microsoft used Windows to attempt to force customers to use their other software products, the most important of which was their Internet Explorer (IE) web browser, as well as targeting contracts used by Microsoft that required companies to put up a ?first screen? that was created by the OS creators. The states and DOJ also sought an injunction that would have required Microsoft to strip IE from Windows 98, which was due on shelves at the end of June that year. Microsoft?s response to the injunction request was to claim that the IE browser cannot be taken out of Windows 98 system without severely damaging the functionality of the entire product. The injunction failed, had it been granted, though, Microsoft would have been required to remove the browser or include a copy of Netscape?s Navigator and another competing browser with the OS. The lawsuits were to be heard by Judge Penfield Jackson, the same judge who heard the first lawsuit over the browser.

According to Michael Martinez of ABC News in his May 1998 article, comments were made by representatives of the DOJ, the states, and Microsoft. Attorney General Janet Reno said, ?Consumers and computer manufacturers should have the right to choose the software they want installed on their personal computers. We are acting to preserve competition in the software industry.? New York Attorney General Dennis Vacco, who was heading up the states? case along with the attorneys general from Iowa and Connecticut added, ??it is Microsoft who is acting like an Orwellian big brother by controlling the range of products available to consumers.? The Microsoft response to the new allegations was to claim that attacking them for integrating their software was an attack on innovation. ?By going after the basic principle of integration, the government can conceivable go after a very broad set of things,? Gates said (Martinez, Government).

Opponents of the renewed allegations were swift in coming to the defense of Microsoft. They point out that it was Netscape who dominated the browser arena early on and forced Microsoft to play catch up and aggressively market IE. Many people are of the belief that rivals of the software giant might have been better off focusing their attentions on improving their products rather than seeking refuge in the courts.

Mark Schmidt, the Director of Programs for the National Taxpayer?s Union Foundation (NTUF) argued against the claims that ?Microsoft?s ?anti-competitive conduct has resulted in higher consumer prices, less consumer choice, and decreased levels of innovation?? made by Iowa AG Tom Miller, in a September 1999 article (Schmidt, Lawyers). Mr. Schmidt claims that after figuring in inflation, the costs to computer manufacturers of installing the Windows and MS-Office programs have actually decreased. In response to claims of anticompetitive behavior, he quotes Mitchell Kertzman of Microsoft rival Sybase as saying ?Basically, all the big companies, all the companies that have won, are run by bloodthirsty killers,? (Schmidt, Lawyers). As for decreased innovation as a result of Microsoft?s practices, well I must say that he has a very persuasive argument,

?The integration of Windows with Internet Explorer was an important advance for software users, who would almost surely find it easier to use an Internet Explorer that looks similar to and operates like Windows? Even Ohio AG Betty Montgomery, who is suing Microsoft admits, ?Many Ohio consumers have benefited from the innovative products marketed by Microsoft of the past 19 years.? (Schmidt, Lawyers)

One of the proposed sanctions that would be placed on Microsoft should the DOJ and the states win their case would be to force them to sell or license its Windows source code (a blueprint of sorts, one that lays out the foundations of a piece of software). George Washington University Law School Professor William Kovacic warned, ?It also reduces incentives to innovate if a dominant firm is forced to share its hard-won assets?like intellectual property in the software business?with other companies,? (Schmidt, Lawyers).

Schmidt also pointed out that in May of 98, 26 CEOs of major computer companies sent a letter to the Justice Department asking that they refrain from filing any additional charges against Microsoft (Schmidt, Lawyers).

On March 24th of this year, the Wall street journal reported that Microsoft sent a detailed proposal to the government?s attorneys in an effort to settle the case. It was expected that the proposal contained price changes, separation of the Internet Explorer browser from the Windows OS, as well as some access to parts of the source code. It is believed that the proposal was brought about after weeks of talks because Judge Penfield Jackson said that if a deal wasn?t reached soon, he would issue his findings of law. After ripping Microsoft in November (?99), it seems that the Judge will find for the DOJ (WSJ, Microsoft).

There are questions as to how effective any of this antitrust litigation will be. If one looks back to some previous cases, it looks to be rather unnecessary. In 1969 the government went after IBM for allegedly violating antitrust laws. That case was dropped thirteen years later when their market share started to drop with emerging companies (including a young Microsoft) gaining. Schwinn Bicycle actually lost an antitrust suit in 1967, but foreign competition relegated the firm to bankruptcy in 1992. RCA, a once dominant radio and television producer was made to license products. They followed the Justice Department mandate and directly licensed to Japan, who now is the leader in the electronics industry. (Schmidt, Lawyers)

There are going to be very definite repercussions to the Microsoft case, no matter what the verdict. We have to weigh the cost of these trials against what usually ends up being short term dominance by a powerful firm. If Microsoft is broken up, Bill Gates isn?t going to be the only one that is affected. If they?re not broken up, it seems Netscape will have to suffer only moving 160 million units of their browser. It seems to me that the majority of consumers have benefited from Microsoft?s dominance and progress in software. Government intervention just doesn?t seem to do anything but hinder that benefit.

Work Cited

Clausing, Jeri?Senator Takes on Microsoft in Antitrust Hearings? New York Times, 11/05/97, http://www.newyorktimes.org

?Microsoft Counters Justice Department?s Lawsuit?

New York Times, 11/11/97, http://www.newyorktimes.org

Cooper, Charles?MSN surpasses half-million point as rivals stew?

PCWeek, 11/20/95 http://www.zdnet.com/pcweek/news/1120/omsn20.html

Labaton, Stephen?Government Accuses Microsoft of Violating Antitrust Agreement? New York Times, 10/21/97, http://www.newyorktimes.org

Lohr, Steve?Justice Department Examining Microsoft?s Internet Strategy?

New York Times, 9/20/96, http://www.newyorktimes.org

?US Requests Documents Concerning Microsoft Purchase of WebTV? New York Times, 5/20/97, http://www.newyorktimes.org

Markoff, John?Gates says His Company is not Violating Antitrust Agreement?

New York Times, 10/22/97, http://www.newyorktimes.org

Martinez, Michael?Government Sues Microsoft? ABC News, 05/18/98

http://abcnews.go.com/sections/business/DailyNews/Mirosoft980513.html

Ramsted, Evan?Judge approves Microsoft antitrust settlement?

The Detroit News, 8/22/95, http://detnews.com/menu/stories/14207.htm

Schmidt, Mark?Lawyers Playing Lawmakers?

National Taxpayers Union, 9/9/99,http://www.ntu.org/issues/taxes/tech/pp119.htm

Unknown Author?Microsoft: An Unprincipled, Rapacious Company?

The Ethical Spectacle, April 1995, http://www.spectacle.org

Unknown Author?The Justice Department v Microsoft: The Evidence and the Answers? New York Times, 10/27/97, http://www.newyorktimes.org

Unknown Author?Microsoft offers a proposal to settle antitrust charges?

Wall Street Journal,3/24/00http://www.msnbc.com/news/386566.asp