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/apr00/0403conference.asp
• http://www.usdoj.gov/atr/public/press_releases/2000/44
64.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.