Microsoft Case Essay, Research Paper

There has been a great deal of focus on anti-trust legislation of late, as it involves most famously, Microsoft. Through the media’s attention to this particular company and the conditions of legislature, we have come to hear a great deal more about anti-trust legislature. The purpose of this paper is to analyze antitrust laws in relation to the well-known Microsoft antitrust case. The thesis of this paper is that Microsoft is a monopoly in the field of PC operating system and has abused its monopoly power.

In order to have a complete comprehension of the case, I think it is helpful to provide some background information about the nature of monopoly, the history of antitrust laws as well as its intent and its role today.

It was during the late 1870’s that the railroad industry was quickly becoming a monopoly. Through this monopoly the railroad industry was gaining a substantial amount of power, revenue, as well as land. “As they began to flex their industrial might, society become aware of the potential problems associated with monopolies. Fearing that their businesses would be affected an organization of farmers known as the Grangers began to push for legislative action” (Millunzi). So what is monopoly? There are two kinds of monopoly. One is natural monopoly, which is subject to regulation by the government. Such monopoly is desirable in our society. Because of extensive economies of scale, it would be inefficient to have several firms in an industry, such as the utility or the telephone industry. The other type is unregulated monopoly. The monopolists have considerable control over product price because they are the only producers in the market. You get their products at their price or you get nothing. Fortunately, The U.S. has laws to protect the consumers. On July 2, 1890 the Congress passed the Sherman Antitrust Act, which states 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 (Jackson), and again in 1914 with the Clayton Act.

The primary purpose of antitrust legislation is to prevent businesses from creating unjust monopolies or competing unfairly in the marketplace. Antitrust law seeks to maximize market efficiency and to protect consumers. It is often assumed that when a company succeeds in achieving a monopoly status, in whatever their industry, society loses out on the benefits that can be gained through competition. Monopolies give the public a single provider instead of a choice; monopolistic corporations are inefficient and stifle innovation; being anti-competitive, they result in higher prices and poorer service to the consumer. “Without opposition a company is able to charge unfair prices for inferior products, at the same time erecting a substantial barrier of entry to potential competitors. (Millunzi).

When we consider Anti-Trust legislation, we are looking at governmental efforts to prevent the forces of corporate wealth and power from assuming despotic control in our society over the lives of the members of society, whether individuals or other corporations. Whatever the stated or implied goals, the real and essential justifications for antitrust laws are to prevent the violation of equal rights to participate in a free market, which are the foundation of both a free society and its free enterprise system, and to insure that corporate power does not gather to itself sufficient control to become a despotic force in its own limited, but segment of this society s economy (Economides). As is generally true with all depots, they will continue expanding their wealth, power, and control until stopped. Regulation of capitalist enterprise, therefore, is absolutely essential in order to maintain a free society.

We have seen monopolies comes and go, such as the phone company AT&T years back, and we are seeing it again with Microsoft.

Microsoft

Twenty years ago, Microsoft was a tiny two-people partnership that wrote interpreter for a now demised language BASIC for an obscure computer company. Today, Microsoft Corporation is the largest software company in the U.S. The name Microsoft is on the tip of almost every computer user s tongue. Their software products cover almost everything that the computer has ever been conceived to perform, from movie making to personal finance, operating system to application development environment. Some of them we may be too familiar with, Microsoft Excel, Microsoft Word, Windows, etc., to name just a few. Obviously, Microsoft has had profound influence in the computer industry and computer users as well. As Microsoft engaged in a series of antitrust case, there are a few questions that need to be answered about Microsoft. Does Microsoft have a monopoly in the PC operating system? If it is a monopoly, has it abused its monopolistic powers? The answer is yes .

The case began in1990 when the Federal Trade Commission (FTC) began an investigation of possible collusion between Microsoft and International Business Machines Corp. By August of 1993, the investigation ended with no lawsuits. They handed the case over to the Department of Justice (DOJ). Investigation by the DOJ revealed that Microsoft monopolized in the field of operating systems (OS) of personal computers and illegally maintained its monopolistic power through anti-competitive actions.

On July 15, 1994 the DOJ and Microsoft settled the dispute by filing a consent decree. The provisions of the decree stated:

Microsoft agreed to end per-processor (zero marginal price) contracts with computer manufacturers (Original Equipment Manufactures, OEMs ) but it was allowed to use unrestricted quantity discounts.

Microsoft shall not enter into any License Agreement in which the terms of that agreement are expressly or impliedly conditioned upon the licensing of any other Covered Product, Operating System Software product or other product (provided, however, that this provision in and of itself shall not be construed to prohibit Microsoft from developing integrated products); or the OEM not licensing, purchasing, using or distributing any non-Microsoft product. (Economides)

On October 20,1997, DOJ sued Microsoft, charging the company with violating the 1995 settlement by requiring computer makers to install its Internet Explorer browser if they want to license or distribute Windows 95.

On June 23,1998, the Court of Appeal ruled that the 1995 consent decree did not apply to Windows 98, which was shipped with an integrated IE as part of the operating system . The DOJ argued that Microsoft s bundling of IE with Windows and its attempt to eliminate Netscape as a competitor in the browser market was much more than adding functionality to Windows and marginalizing a series of add-on software manufacturers. (Jackson)

On November 5, 1999, Judge Thomas Penfield Jackson issued his findings of facts . On April 3, 2000, Judge Jackson issued his conclusions of law , finding Microsoft liable for maintaining its monopoly power by anticompetitive means and attempted to monopolize the web browser market, both in violation of section 2 of the Sherman Act (Jackson). It also concluded that Microsoft violated section 1 of the Sherman Act by illegally tying Web browser to its operating system.

As we can see, there are several reasons indicate that Microsoft is a monopoly in the field of PC operating system. According to the findings of facts , Microsoft possessed a dominant, persistent, and increasing share of the worldwide market for Intel-compatible PC operating systems (Jackson). For the last decade, Microsoft enjoyed over ninety percent of the market share for Intel-compatible PC operating systems. PC manufacturers have no commercially reasonable alternative to Microsoft operating system for the PCs that they distribute. In addition, Microsoft s market share is protected by high barriers to entry. One of the most important barriers is that a large number of applications are written to run on Windows. It would be difficult, time-consuming, and costly to create an alternative operating system that runs the programs that run on Windows. Therefore, a potential competitor would find it difficult to enter the market. As a result of such barrier, Customers do not have any option to choose an operating system for their PCs other than Windows. Microsoft, then, can charge a price for Windows far above the competitive market price without losing customers.

Bill Gates, the founder of Microsoft, claimed that Microsoft was not a monopoly and that the software industry changed radically every six to eighteen month (Economides). This was not true and I think if Microsoft became a monopoly in the free and open market because they had a great product at reasonable price, no one would complain. There was nothing wrong with being a natural monopoly if the status was gained because the product was excellent. Consumers would not worry that there was no substitute for Windows. In addition, Microsoft was also famous for its innovation.

However, the main violation in this case consists of Microsoft s effort to prevent their competitors from participating on an equal basis in a free market. According to the testimony, IBM was threatened into holding back the development of its operating system, known as OS/2, so that it would not compete with Windows. (Jackson)

Besides, Netscape s investigation also revealed another anticompetitive action conducted by Microsoft. Microsoft made written offers to OEMs, Internet Service Providers (ISPs), and to large corporations. These offers provide for either clandestine side payments, or discounts on Windows. These inducements are on the condition that the offeree makes competitors browsers far less accessible to users than Microsoft s browser, known as Internet Explorer. (Reback)

In order to squeeze others competitors (Netscape is the biggest rival) out of the browser market, Microsoft conducted another market manipulation tactic by bundling Internet Explore with the Windows operating system free for redistribution. This meant OEMs and consumers would get Microsoft browser on the Windows desktop whether desired or not. Such action was not fair. And by forcing Internet Explorer on customers at the expenses of Netscape and other rivals Microsoft has violated the antitrust law. (Reback)

Although bundling IE with Windows may benefit consumers in way that it is given away with no extra charge, increasing its availability, improving the quality of web browsing software, as argued by Microsoft. The action, however, bring much more detrimental effect to consumers than getting IE for free. Consumers will get IE even they don t need it and they have to satisfy with the slower speed, less memory than the browserless computer. Their preferences of Netscape Navigator may be ignored. And Microsoft will use it monopoly power to harm any rival with the potential to innovate in the computer industry.

In my opinion, Judge Jackson has done a very effective job in applying antitrust regulation to the case. He was completely fair in his decision. It allows for Microsoft to divide into two companies, which can spell a great deal of success for Microsoft if they really have no competition, then splitting into two companies only serves to provide them with more opportunities. And if there is no real competition on the horizon, then in 10 years they can reunite the company, having lost nothing in the process. He could have penalized much more substantially, which was a reasonable decision. We, as users, do not question why computer technology is the way it is, but rather blindly accept what Microsoft has told us, given us, and shown us. We have not stopped to examine how it could be better and more convenient to the user. Through Judge Jackson s decision the computer industry is given the opportunity to see if it can do these things. Without the complete influential power of Microsoft, it stands to reason that another company may well come onto the scene, giving us more than we have at present, with only Microsoft to provide us with the technology.

As a conclusion, Microsoft is indeed a monopoly. Today we will find it challenging in selecting desktop applications, programs that can run properly without crashing when users are running the latest version of Microsoft s Windows operating system. Microsoft, the only company that really know how its operating system works and the only company that can arbitrary change how that operating system works. Not content with its enormous market share in PC software, through it prodigious power, Microsoft wants to hold our hand as we navigate the information superhighway, and to push us toward its own partners or by strategically placing desktop or browser links to its products and services. This will give Microsoft enormous advantage in positioning its own products in electronic commerce and let it play kingmaker for other businesses. Fortunately, the U.S. has antitrust law to protect businesses and consumers, to insure that every participant plays fairly in the market. Any violation of the law must be prosecuted. Antitrust regulation is indispensable in a free society, if free market and open competition are to be maintained.