Microsoft And Monopoly Essay, Research Paper

America’s century-old antitrust law is increasingly irrelevant to our modern

global information technology market. This law is obsolete, in accordance to the

current Microsoft situation, because in the past there wasn’t technology as

there is now. Recently the government has been accusing Microsoft as being a

monopoly. "Techno-Optimists" claim that "efforts by government to

promote competition by restraining high-tech firms that acquire market power

will only stifle competition." Some analysts disagree. They concede that

dynamic technology makes it tough to sustain market power. Still, consumers will

want compatible equipment, which will lead them to buy whatever product other

consumers are using, even if the product is inferior. Hence, is Microsoft a

monopoly or not? The range of views extends from the optimists who think that

changing technology removes the need for antitrust, to "middle-of-the-roaders"

who think that antitrust has always been and still is an important weapon in the

government’s arsenal. Microsoft is not a monopoly. Our world of

telecommunications and information technology has brought about many changes in

many fields but new technology has neither extinguished nor revitalized the

reason for antitrust. There are monopolies that the government ought to control.

Those are the very monopolies that the government created itself. It is

government that creates monopoly power by erecting and maintaining barriers to

market entry. In the most recent dispute between Microsoft and the Department of

Justice (DOJ), Microsoft is accused of "tying-in" an Internet browser

into Windows. Microsoft’s "tie-in" of its browser (Internet Explorer)

with its operating system (Windows 95) is a tie-in that shows no greater threat

to competition than the packaging of tires with cars, cream with coffee, laces

with shoes, even left gloves with right gloves. In actuality, tying arrangements

is pro-competitive. Consumers will buy the product that is more appealing to

their needs. Seven years ago the Federal Trade Commission began its

investigation of Microsoft’s market power in the sale of operating systems for

personal computers. That investigation was later joined by the DOJ and pursued

vigorously by Anne Bingaman, then head of the Antitrust Division. The DOJ

uncovered one practice it deemed worthy of challenge. Microsoft licensed its

Windows software for multi-year periods on a "per processor" basis.

Which means that, Microsoft, to help prevent software piracy, insisted that

computer makers pay a royalty to Microsoft for each computer they shipped,

whether or not Windows was installed as the operating system. DOJ was not

persuaded by Microsoft’s argument that physical machines can more easily be

counted than intangible copies of computer software. Nor was DOJ convinced that

customers might actually favor long-term contracts to guard against

unpredictable price increases and other uncertainties. This arose the question;

did Microsoft exploit its dominant market position by "insisting" on

"unfair" licensing arrangements? Of course not. Consider that Windows

became the industry standard because PC-makers thought it was a

"superior" product. An assessment that surely took into account the

entire set of product features. Not only technical features but also ease of

use, quality, price, service, and contract terms. Just like any other product in

the competitive market. Consider that there were no barriers that would prevent

another competitor from driving Windows out as being the market leader. These

are simple conditions that exist in an economic market. Those considerations,

apparently, did not impress the DOJ’s Antitrust Division. After a five-year

investigation costing millions of dollars, the Antitrust Division found little

that could be characterized as anti-competitive. But that did not stop the

government. Not only did DOJ file an antitrust suit that caused Microsoft to

cancel its planned release of Intuit (a manufacturer of a popular personal

finance program) it also threatened to halt the release of Windows 95

(Microsoft’s upgraded operating system). The head of the Antitrust Division,

Bingaman, was reportedly concerned about the link between Windows 95 and the

Microsoft Network (MSN), an Internet service provider intended to compete

against America Online (AOL). Whenever a user started a Windows 95 system, an

MSN icon appeared. Then one click of the mouse connected the user with the MSN

service. That packaging, according to DOJ, gave MSN an unsporting edge over its

online rivals. But a few more mouse clicks enabled any Windows 95 user to bring

up an AOL icon, which would appear automatically thereafter, at the same time as

the MSN icon. Satisfied with its discovery that MSN’s edge could be neutralized,

the Antitrust Division abandoned its threat to block Windows 95. In result, MSN

now loses an estimated $200 million annually providing service to fewer than 3

million customers. On the other hand, AOL, has 9 million subscribers and will

add nearly 3 million more when it acquires Compuserve’s consumer business.

Although rivals complained that bundling MSN software with Windows 95 would

swamp competition, Microsoft’s proved them wrong because Microsoft made lesser

money then AOL. Whatever competitive advantage Microsoft may have in the sale of

operating systems, the company has been ineffective in maintaining that

advantage. Consumers, simply, refuse to buy a product they do not like. However,

the DOJ didn’t stop pursuing Microsoft. For the Antitrust Division, now headed

by Joel Klein, has raised the issue yet again, this time objecting that Windows

95 and Internet Explorer are two separate products, not one integrated product.

Is the Internet Explorer a "separate" product, as Klein claims? Or are

the two products "integrated," as Microsoft claims? Because DOJ denies

that Windows 95 and Internet Explorer are "integrated", Klein proposed

to fine the company $1 million a day until the two products are unbundled. In

its defense, Microsoft claims that Windows 95 cannot perform several crucial

tasks, like word processing, imaging, and drawing unless all Explorer files are

installed. DOJ rejoins that Microsoft did not have to make Windows dependent

upon the browser and could easily have allowed computer manufacturers to

"uninstall" Explorer without endangering the operating system.

Internet Explorer is more than a bunch of enabling files and more than an applet

(a mini-applications i.e. Notepad). It is an elaborately developed Web browser,

capable of standing alone and, in fact, was originally sold by Microsoft as a

full-featured, independent application. Nevertheless similar products, also tied

to Windows, have survived government scrutiny. MSN, for example, is a

full-featured, independent application, yet DOJ allowed it to be packaged with

Windows as a joint product. DOJ’s introduced a new rule that products initially

distributed in separate boxes must be permanently distributed in separate boxes.

It is as if air-conditioning, once sold as a later-installed option in cars,

must be forever so sold like that. More importantly, insists Microsoft, two

products can be "integrated" even if they are not technically

interdependent. The products need not function only in combination, nor be

marketed only as a package. To be characterized as "integrated," they

just need to be combined in a manner that creates synergism, a whole that is

better than the sum of its parts. According to Microsoft, that characterization

applies no less to the current product package than it did in the 1980s when

operating systems first included software that allowed interaction with hard

disk drives, or later when operating systems began supporting local area

networks. Again there is more proof of Microsoft not being a monopoly and

abiding by the rules of the DOJ. Today, fax modems and e-mail, once available

only as separate products, are essential ingredients of an operating system. Any

system without those functions would be incomplete. And in an environment where

"Internet access" is very important browser software is no less

essential. That is why IBM and Sun Microsystems, like Microsoft, have packaged

browsers with their operating systems. That is also why IBM, Hewlett-Packard,

Compaq, and other computer manufacturers have bundled both Internet Explorer and

its principal competitor, Netscape Navigator, with Windows 95. Like a competitor

to assure Internet users maximum flexibility. Netscape has itself tied a wide

range of other software products, for example e-mail, security systems, and

graphics to its browser. Such decisions, argues Microsoft, are better left to

computer companies than to government lawyers. Even if competitor protection

were a legitimate objective of the law, there is no reason for the government to

interrupt Microsoft’s situation. Rather than badgering Microsoft, the DOJ ought

to be thanking the company for challenging Netscape’s "near-monopoly"

in the sale of browsers and consumers should be grateful to Microsoft for

causing Netscape to reduce its price. Microsoft chief Bill Gates stated the

question "Would the DOJ require the New York Times to eliminate its

business section in order to protect The Wall Street Journal? Why should the

answer to that question be any different if the Times were to sell its business

section separately, or if the Times sold 90 percent of the newspapers in New

York? Our antitrust laws were not intended to prop up competitors but to ensure

that consumers benefit from the widespread availability of goods and services at

fair prices." Therefore I truly believe Microsoft is not a monopoly and

probably never will be.

1. Bank, David. "Why Software and Antitrust Law Make an Uneasy

Mix," The Wall Street Journal, October 22, 1997, p. B1. 2. Gates, Bill.,

"Why the Justice Department Is Wrong," The Wall Street Journal,

November 10, 1997, p. A22. 3. Moore, James F., "U.S. v. Microsoft: The

Bigger Question," New York Times, January 25, 1998, p. 12-BU. 4. Train,

Kenneth E., Optimal Regulation : The Economic Theory of Natural Monopoly,

October 1991, p231-45 5. Wollenberg, Keith K., "An Economic Analysis of

Tie-In Sales: Re-Examining the Leverage Theory," Stanford Law Review 39

(1987): 737, 755-56 6. "Microsoft Under Attack, but Who Is It

Hurting?" USA Today, October 23, 1997