Microsoft Anti-Trust Paper Essay, Research Paper

The Microsoft Corporation (Microsoft) has been under investigation since 1990 for alleged antitrust violations. The Department of Justice (DOJ) feels that Microsoft has a monopoly in the field of operating systems (OSs), and that Microsoft has traditionally cemented this monopoly through unlawful exercises of monopoly power. As a result, the DOJ got Microsoft to sign a consent decree addressing Microsoft’s illegal pricing policies and overly restrictive non-disclosure agreements. However, Microsoft is still under investigation in for alleged leveraging in the fields of software development and online services, and the alleged use of vaporware (the term used for products announced far prior to their release date, so as to prevent consumers from buying competing products). The Federal Trade Commission (FTC) began investigating Microsoft in 1990, for possible violations of the Sherman and Clayton Antitrust Acts, which are designed to stop restraint of trade by businesses, especially monopolists. By August of 1993 the FTC was deadlocked; instead of dropping the case, they handed it over to the DOJ. Anne K. Bingaman, the head of the Antitrust Division of the DOJ, proposed a settlement that was signed on July 15, 1994. For Microsoft, the advantage of settling was that it would not have to admit any wrongdoing. If the DOJ proved a case against them in court, it would open Microsoft up to cases from private companies, who would then be awarded incredible damage fees; Microsoft could avoid this situation by signing the consent decree, without actually admitting to anything contained therein. The Consent Decree and Antitrust Law The settlement covered the two most harmful of Microsoft’s practices, their pricing policies and their non-disclosure agreements (NDAs) in relation to Windows 95. The settlement included certain measures; one of these measures gives the DOJ complete access to Microsoft’s documents for use in other investigations. Although this final provision would prove highly beneficial, Judge Stanley Sporkin rejected the settlement, wondering why the DOJ had failed to pursue everything in the original complaint. Sporkin was later overruled and the consent decree was signed. The most important part of the settlement was a stipulation that would end Microsoft’s practice of selling MS DOS to original equipment manufacturers (OEMs) at a 60% discount if they agreed to pay Microsoft for every computer they sold, as opposed to paying them for every computer they sold with MS DOS preinstalled. As a result, if the OEM wished to install a different OS on some of its computers, it would, in effect, be paying for both operating systems. This is unfair for several reasons, the first being that consumers, in effect, pay Microsoft when they buy another product, and the second being that it would be uneconomical for an OEM to give up the 60% discount in favor of installing a less popular OS on some of its computers. The question before the FTC, and then the DOJ, was whether or not Microsoft had a monopoly in the PC OS market, and whether or not their pricing practices were anti-competitive. In United States v. E.I. du Pont de Nemours and Company, the Supreme Court defined monopoly power as the power to control prices or exclude competition, significantly raising the barriers to entry within the relevant market. The most important doctrine in prosecuting Microsoft was set forth in United States v. Griffith, which states that a monopolist may not use a monopoly in one field as leverage to gain a monopoly in another. The Griffith case had to do with movie theaters. Griffith used its monopoly status in small towns (where they owned the only theater) to get better contracts from motion picture companies. If the company wanted their movie to play in small towns, they were forced to agree to the contract terms offered by Griffith. As a result, Griffith obtained movies for substantially less than their competitors, which gave Griffith lower costs in monopoly towns and competitive markets alike. What Griffith did was anti-competitive because Griffith used monopoly power in small towns as a lever to gain market share in competitive cities. In United States v. Grinnell Corporation, the Supreme Court introduced a test for finding whether or not a monopolist was indeed unlawfully using monopoly power: “(1) The possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power as distinguished from growth or development as the consequence of a superior product, business acumen, or historic accident.” What this means is that monopolization is not illegal, but use of monopoly power is. This position was further developed in Telex Corporation v. International Business Machines Corporation. In this case, the court recognized that a monopolist might use practices that any company, regardless of size, could legally employ. A monopolist cannot, however, use his market power in such a way so as to prevent competition. Basically, a company is allowed to be a monopoly as defined in du Pont, but when a monopolist acts in a way that only a monopolist can (as defined in the second test in Grinnell), the monopolist has broken the law. In the case of Microsoft’s pricing policy, the DOJ, were it to go to court, would have to prove Microsoft’s monopoly power in the field of OSs, and then subsequently prove that their pricing policy was anti-competitive. Proving that Microsoft has a monopoly in the field of OSs would not be hard, and should the DOJ ever go to court with Microsoft, it will have to prove Microsoft’s monopoly power. If the DOJ decided to litigate, proving that Microsoft’s pricing practices were anti-competitive would not have been hard, either. The fact that Microsoft could institute the pricing policies that it did is evidentiary of their ability to exclude the competition from the market. This fact, buttressed with the fact that MS DOS has had over 70% of the PC OS market for the past decade, and currently has a market share of almost 90% proves that Microsoft is indeed a monopoly under the definition set forth in Du Pont. The same evidence that is used to prove that Microsoft has a monopoly could also be subsequently used to prove that they are in violation of section 2 of the Sherman Antitrust Act under the tests set forth in Grinnell and the doctrine set forth in Telex. Under the Grinnell test, Microsoft fits into the first category, in that it has monopoly power, and fits into the second, as well, in that it maintains that power not through superior product or business acumen, but through anti-competitive pricing policies that limit the choices of consumers. The real effects of these plans can be seen in the case of Novell’s DR DOS, the number one alternative to MS DOS, which does not come preinstalled on any domestically manufactured computer, even though it is arguably a better product. Novell has been hurt by the fact that no OEMs will sell computers with DR DOS preinstalled, because for an OS to survive, independent software vendors (ISVs) must be willing to write software for it. If the OS does not come preinstalled on any computers, then no ISV will write software for it. If there is no software for it, consumers will not buy it. Microsoft also violates the Grinnell doctrine by using monopoly power as a lever to get favorable terms in contracts. Clearly, Microsoft has used its monopoly power in this field to keep control of an already cornered market. By raising the barriers to entry in the field of OSs, Microsoft may have done permanent damage to the competition. The settlement has done little to loosen Microsoft’s monopoly power, but it has made Microsoft change its pricing structure to one in which Microsoft’s contracts let OEMs sell systems with competing OSs without paying Microsoft, by prohibiting the aforementioned processor agreements. Under the decree, only copy and system licenses would be legal. The other corrective measure of the settlement had to do with non-disclosure agreements (NDAs). Microsoft made ISVs sign overly protective NDAs that prevented the ISVs from writing software for competing OSs. The NDAs in question were for a product codenamed Chicago, which was released as Windows 95. The DOJ contended that the ISVs were, ineffect, forced to sign these contracts. Given Microsoft’s past track record, it was not unreasonable to assume that Windows 95 would become a major OS in the future, and having products for it would be vital to an ISVs survival. It can be inferred through Microsoft’s actions that Microsoft realized this, and used it to its own advantage. While NDAs are a common practice in many industries, designed to keep secrets secret, Microsoft instead used them to force ISVs to stop developing products for competing OSs for an unreasonable amount of time. Microsoft was clearly using a practice that was unavailable to a company without monopoly power in order to maintain its own monopoly power, which is a blatant violation of Grinnell. On a related note, Apple, the company that makes Macintosh computers, the PCs main competitor, alleges that Microsoft CEO Bill Gates called up and threatened to stop making Macintosh products if Apple did not stop development on a program that was to compete with a similar Microsoft program. Microsoft is the largest producer of Macintosh programs. As was previously stated, without strong software support, an OS cannot survive. System 7, Macintosh’s OS, then, would presumably suffer as a result of Microsoft’s decision. Apple also alleges that Microsoft would not send them a beta copy of Windows 95 until they dropped Microsoft’s name from a lawsuit. While these allegations cannot be proven, they certainly fit in with Microsoft’s way of doing business, and, if they could be proven, they would certainly be grounds for legal action. Most importantly, these practices violate the doctrine set forth in Aspen Skiing Company v. Aspen Highlands Skiing Corporation, in which Justice John Paul Stevens delivered the opinion of the court: “The absence of an unqualified duty to cooperate does not mean that every time a firm declines to participate in a particular corporate venture, that decision may not have evidentiary significance, or that it may not give rise to liability in certain circumstances.” This decision has its roots in Lorain Journal Company v. United States, in which the Supreme Court declared that refusing to deal with someone was fine, unless it was for the purposes of monopolization. According to Aspen, while Microsoft has the right to refuse to deal with Apple, doing so is evidence of abuse of monopoly power. More specifically, by threatening to not deal with Apple, Microsoft is using its dominance in the field of Macintosh applications to give it leverage in another field, which is contrary to Griffith. If Microsoft can create an industry standard, their innovation rightfully earns them a short-term monopoly under Berkey and Telex (until the other software companies create applications that conform to the standard). However, if Microsoft used its power in the field of Macintosh applications as a lever, as Apple claims that it did Microsoft has broken the law under the Grinnell doctrine.

The Ruling and Current Investigations The 1974, the Tunney Act provides a 60 day judicial review of all consent decrees, in which parties opposed to the decrees can file complaints with the judge, and the judge can then rule on whether or not the decree shall stand. When the law was enacted, its purpose was to make sure that there were no decrees that were not in the public interest. Judge Stanley Sporkin found the Microsoft consent decree to be lacking. As a result, he refused to sign it. His decision was later overturned. The fact that he would not sign the decree is evidence of its weakness. Microsoft allegedly engages in several other practices that would warrant investigation, including vaporware, and then making claims in relation to Windows 95 and the Microsoft Network, Microsoft’s online service. Another major criticism is that Windows 95, which is covered in the decree, is viewed by some as being an intermediary step between MS DOS and Windows NT. The interfaces of Windows 95 and Windows NT are fairly similar. The major difference between the two products is that, while 95 is covered by the decree, NT is specifically excluded, because of its small market share. If NT becomes successful, Microsoft will have successfully, in a way, cancelled the consent decree. However, the fact that the DOJ can now make inquiries that must be answered has been extremely beneficial to the DOJ, and extremely costly to Microsoft. In the 50 months that led up to the settlement, the DOJ received 1 million pages of documents from Microsoft. After the consent decree had been signed, the DOJ launched what Microsoft called the campaign of harassment, and eventually sued Anne K. Bingaman. This harassment was a request for documents concerning a merger with Intuit, the dominant company in the field of financial software. Compliance with the request cost Microsoft $5 million in copying and legal fees. This investigation is seen by most as the reason why the deal did not happen. The vaporware claims seem to be impossible to prove. Microsoft has been consistently late in releasing products. The most notable was Windows 95. Windows 95 was due out in spring of 1995, and then Microsoft postponed the release date until summer, then to fall, and then until early 1996. Windows 95 was, in fact, released by the end of 1995, but the series of delays make it a prime example of vaporware. Microsoft’s competitors feel that Microsoft announces products long before they are ready so that the market will become more enthusiastic about their release, so that consumers will not buy their competitors products. Since everybody is allowed to announce products, Microsoft is protected by the Telex case. The only way the government could make any sort of case would be if it could prove that Microsoft willfully lied about products or release dates. For this reason, perhaps, litigation on this issue has not been seriously considered. What is being seriously considered are the results of Microsoft’s vertical integration. An example is a Windows feature called Object Linking and Embedding, which was used in Microsoft’s spreadsheet program, Excel, before the Microsoft gave the specifications for its usage to the other software companies. Precedent protects Microsoft, though, because in Berkey, the court ruled that even a monopolist does not have to pre-disclose specifications to a new product. The circumstances of the two cases are very similar. In the case of Berkey, Kodak had monopoly power in the field of film, and introduced a new film format. Kodak pre-disclosed the format two months before its release, but, when it was released, Kodak was the only company that made cameras that accepted the new film format. The court ruled that since a monopolist can compete like anyone else, he can legally invent and market products. Since predisclosure makes inventions and innovations less profitable, it make them less likely. Therefore, as in Telex, it is the right of the monopolist to engage in this standard business practice; the consumer also benefits, because temporary monopolies promote innovation. Since Microsoft did not attempt to maintain a monopoly on OLE technology, they are hardly at fault. However, relying on the Berkey case as a precedent presents problems for several reasons. The first is that Berkey was a district court decision, and does not therefore hold the status of a Supreme Court case. Secondly, legal scholars see the decision as at fault. According to some, the best line of thinking that can be taken from the Berkey case is a simple one: the DOJ and the courts should weigh the long term market power that will be given to the monopolist for his innovation against the beneficial effects for consumers in having new products. Under the Griffith doctrine, leveraging is per se illegal. Here, Microsoft used its monopoly in OSs to gain market share in the field of software. The test set forth in Berkey is whether or not a non-monopolist could do what Microsoft did. Since the two situations are almost identical, and the Berkey court ruled that Kodak could, in fact, have done what it did, even if it wasn’t a monopolist, it is logical to assume that they would find the same way in a case against Microsoft. However, given the faultiness of the precedent, the benefits and costs should be weighed. In this instance, consumers were benefited by the new technology of OLE, but it was used as a lever, to transfer part of Microsoft’s OS monopoly into in the spreadsheet market. Judging by Excel sales, consumers began to think that Excel was a better product than its competitors. The case that the DOJ has concerned themselves with the most of late is Windows 95. The major question raised is whether or not bundling software for the Microsoft Network constitutes an antitrust violation. On August 8, 1995, the DOJ announced that it would not finish its investigation before the release date of August 24. Instead of getting an injunction, the DOJ decided to make the investigation ongoing. Microsoft’s opponents feel that bundling the software is abuse of Microsoft’s OS monopoly, because they are using this monopoly as a lever to gain dominance in the field of online communications. To understand the importance of this issue, one must first realize that there is huge potential for growth in the online industry. If one company were able to monopolize through anti-competitive means, the results could be disastrous. In order to understand just how helpless the DOJ is in the matter, one must consider the fact that they cannot sue unless they can prove that Microsoft will drive the other online companies out of business. The problem is if they wait too long, there is no feasible remedy to undo the harm. If they proceed too soon, they will be charged with being premature.” This is the problem that the DOJ ran into with the previous consent decree. It was too little, too late. Microsoft had already established their monopoly, and began cementing it through anti-competitive means in 1988. By the time anyone did anything, Microsoft had 90% of the OS market. In this instance, Microsoft is protected under Telex, in that America Online, a leading online service provider, gets its software preinstalled on computers by OEMs. Since no one argues that America Online has a monopoly, Microsoft is also protected under Berkey. Including access software in Windows 95 also makes sense economically, because Microsoft does not have to pay for extra disks and distribution costs. Also, the practice of giving away software is accepted in the online service industry, and what Microsoft is doing is no different. Users are not forced into using something, which they don’t want to use, they are merely confronted with a choice of whether or not to use the Microsoft Network, and since preserving freedom of choice is the ultimate goal of antitrust legislation, Microsoft’s actions are protected. Still, experts predict that if this case were to go to trial, it would be close. The computer industry is one unlike any other. Constant innovations make it the fastest changing industry around. The federal government has had a lot of trouble writing and enforcing laws in this field, because it doesn’t know how to deal with the uniqueness of the industry. When the FTC began its investigation of Microsoft in 1990, it should have realized immediately that Microsoft’s pricing policies were blatant antitrust violations. Instead, Microsoft was allowed to do irreversible damage to the OS market, and walked away 5 years later with a slap on the wrist. The DOJ’s failure to litigate in other complaints, even though the cases are not as strong, shows a lack of commitment to the antitrust laws and their enforcement in the computer industry. Precedents need to be set on two issues. The first is defining exactly what the limitations are on a monopolist enjoying the fruits of his innovation, such as OLE. The second is defining exactly what constitutes leveraging in the computer software market. Until these precedents are set, the DOJ has no good way to control the computer industry, except through threat of litigation. As of now the United States Government has not finished with this case yet. The antitrust trial is still going on day by day. Both sides have a strong case, but many legal issues still come into play. Netscape and AOL scandals have put an edge on Microsoft’s side of the case, which could lead the court to a different decision in the future. If I was a judge of this case, I believe I would rule in favor of The Plaintiff, the United States, because what Microsoft is doing is wrong. Even though it isn’t a bad thing that they are doing, (Offering a total group of products in one giant Operating System), I believe that other companies should have as big a chance to sell their product. Other operating systems are not getting enough exposure, because in fact they have no way of getting around a huge company such as Microsoft. I would rule against Microsoft. 1.Sherman Act (1890)+ Federal Act. + Outlawed all contracts, combinations, or conspiracies in restraint of trade, and all monopolies. Note: two or more participants are involved. + Aimed at competitors who agree to restrict competition. + Illegal for anyone to monopolize or attempt to monopolize. + Illegal to attempt to retain or obtain a monopoly. + Must show a willful intent to monopolize. + Possession of monopoly power is not illegal (superior product or historical accident).+ Increasing capacity to fill demand is illegal if it prevents competitors from entering the market. + Very strict. 2.Clayton Act (1914)+ Prohibits specific types of anti-competitive behavior. + FTC also can sue. + (In addition to DOJ) Prohibits tying arrangements.+ Seller refuses to sell buyer one product unless buyer agrees to purchase another product. (Must be two different products. Windows 95 and IE might be considered two different products. Windows 98 they are one.) + Prohibits exclusive dealing contracts. + Seller or manufacture requires that a buyer not purchase a competitor’s product. 3.Tunney Act ()+ The Tunney Act lets judges review the details of anti-trust settlements and reject those that seem like sweetheart deals.