The Microsoft Antitrust Suit

Trust • A trust is “any large industrial or commercial

corporation or combination having a monopolistic or semi-monopolistic control over production of some commodity or service” (Webster’s)

• So antitrust means against or opposing a trust • Antitrust law protects competition, not

necessarily competitors – for the benefit of the consumers (long run)

The Sherman Antitrust Act

• Original federal statute opposing trusts (1890) • Named for Senator John Sherman• Based on Congress’ constitutional power to

regulate interstate commerce• Regulated by the Antitrust Division of the

Department of Justice (DOJ) and/or the Federal Trade Commission

• Many states have similar statutes

Sherman

• “if we will not endure a king as a political power, we should not endure a king over production, transportation and sale of any of the necessaries of life”

Two Criteria

• Monopoly power– having substantial market share (over the long

run), i.e. enough power to control the market

• Exclusionary or predatory practices– acts which have no legitimate business purpose

other than to stamp out competition

An example: United States v. Lorain Journal Co.

• The Journal (in Lorain, Ohio) would not take ads from businesses that advertised on the local radio station which represented the only competition for advertising revenue – Monopoly power: they were the only paper in

town – Exclusionary or predatory practices: refusing to

take ads had no legitimate business justification other than to eliminate competition

The Department of Justice (DOJ)

• Attorney General, Janet Reno

• Assistant Attorney General, Joel Klein

• The trial counsel, David Boies (a.k.a. Jaws, also lawyer for Gore in Florida Supreme Court)

Microsoft

• Chairman, Bill Gates• President and CEO,

Steven Ballmer • Lawyer, William

Newkom

Judge Thomas Penfield Jackson

Questions

1. Does Microsoft have monopoly power?

2. Has it engaged in predatory or exclusionary practices?

“Findings of Fact”

• The judge has ruled the pertinent market to be that of Intel-Compatible PCs– so non-Intel compatible PC operating systems

(e.g. Mac) are not seen officially as competitors

– likewise for non-PC operating systems (e.g. Unix)

• in the market so defined, Microsoft has monopoly power and is likely to maintain it for some time to come (why?)

Platform

• Recall that the software between the user and the hardware is multi-layered

• The operating system provides a platform, the so-called “application programming interfaces” (APIs) upon which applications interact with the hardware

• This platform allows Independent Software Vendors (ISVs) to focus on application software and not hardware idiosyncrasies

The Standard Bearer

• Microsoft’s dominance provided ISVs with a standard platform to build their applications upon

• Self-perpetuating situation: – The more “standard” it became, the more ISVs

used it to write their applications – The more ISVs used it to write their

applications, the more “standard” it became

“Applications barrier to entry”• “The overwhelming majority of

consumers will use only a PC operating system for which there already exists a large and varied set of high-quality, full-featured applications”

What price software?

• One criterion for establishing whether a company has monopoly power is its pricing practice.

• It is difficult to apply the standard rules to software

• Most of the cost is in development, almost none in production

Remember

• Establishing monopoly power is not enough

• Did Microsoft engage in predatory practices to maintain or extend its monopoly?

• The current allegations focus on Microsoft’s inclusion of its browser Internet Explorer (IE) along with its operating system Windows

Is a browser an application?

• Recall a browser is software used to gain access to and view files on the World Wide Web

• Part of the operating system’s job is to manage files; these days those files may be on the web, so maybe the browser is part of a “modern” operating system

• But the browser is used directly by the user, so maybe it’s an application

Microsoft’s side

• The inclusion of IE is a matter of integration and innovation; it is: – what the user wants

– what the ISV wants

– consistent with past business practices (Office is the integration of word processing, spread sheets, and so on)

The DOJ’s side

• The inclusion of IE is a matter of bundling and leveraging

• Bundling is offering or supplying related products or services in a single transaction at one all-inclusive price

• Leveraging is the act of placing a less popular product in the same “package” as a very popular product

Give it away, give it away, give it away now• The DOJ views the inclusion of

IE with Windows 98 as giving it away, which would constitute predatory pricing

• Microsoft also gave IE to users of non-Microsoft operating systems, such as Apple’s Macintosh

Other alleged predatory practices

• Withholding crucial technical information

• Excluding Netscape Navigator from important distribution channels

• Developing and insisting upon the usage of their own implementation of Java

Three stages

• 1. Finding of fact– November 1999

• 2. Conclusions (ruling) of law – April 2000

• 3. Remedy (judgment)– June 2000

Findings of Fact (Nov. 1999)

• After a 76-day trial (no jury), Judge Jackson came out with his Findings of Fact, the first step toward judgement

• His view is very consistent with the DOJ’s and has been called “a Reader’s Digest version of the government’s Finding of Fact”

Judge quotes:

• “Microsoft possesses a dominant, persistent and increasing share of the worldwide market for Intel-compatible operating systems”

• “Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition.”

Judge quotes (cont.):

• “Microsoft needed to give its browser away in furtherance of the larger strategic goal of accelerating Internet Explorer’s acquisition of browser usage share.”

Conclusions of Law (Apr. 2000)

• Not very surprising, given the Findings of Fact

• According to them, Microsoft did violate the Sherman Antitrust Act

Klein quote:

• "We are very pleased with the Court's ruling. The Court concluded that Microsoft violated the antitrust laws by abusing its monopoly power and attempting to monopolize the internet browser market. The decision will benefit consumers and stimulate competition and innovation in the high-tech industry."

Balmer quote:

• “We spent the past 25 years thinking of ourselves as a small, aggressive company playing catch-up to industry giants, even though at some point along the way we became a large company.

• “… values we hold dear — opportunity for everyone, integrity, innovation, customer focus and partnership — have been called into question today.”

Remedy (June 2000)

• Breaking up Microsoft – Baby Bills

• One for Operating Systems• One for Applications (incl. browsers)

• The big wigs cannot own a substantial stock in both

• (who will be the “standard bearer”?)

More to follow

• Directly to the Supreme Court?– NO

• United States Court of Appeals for the District of Columbia Circuit– No. 00-5212 (U.S. vs. Microsoft)

– No. 00-5213 (New York, et al. v. Microsoft)

Technology Tutorial

• To speed things up, the Appeals judges were going to have a technology review

• But even basic questions like “what is a browser?” and “what is an operating system?” are controversial in this case

• And neither side wanted their point of view compromised by the review

What’s to come?

• Oral arguments in the Court of Appeals are scheduled for Feb. 26 and 27

• After that:– Supreme Court?– European Union?– Individual and/or class action suits?

References• http://www.microsoft.com/presspass/doj/rickrulewp.htm• http://www.usdoj.gov/atr/cases/f3800/msjudgex.htm• http://www.microsoft.com/presspass/trial/apr00/04-

03conference.asp• http://www.usdoj.gov/atr/public/press_releases/2000/4464.htm• http://www.cadc.uscourts.gov/ECF/Microsoft/microsoft.asp• Newsweek, Nov. 15, 1999.• The Wall Street Journal, Nov. 8, 1999.• The Wall Street Journal, Apr. 5, 2000.• The Washington Post, Oct. 27, 2000.