Microsoft's Antitrust Case

Introduction

Microsoft has repeatedly been accused of making market allocation proposals to its competitors. It has also been criticized for using broad range of other anticompetitive and unlawful tactics to eliminate potential rivals, including tying, predatory product design, and intentional deception. Microsoft owns several monopoly products, including its Windows operating system and Office suite of productivity applications.

These monopolies are extremely lucrative , Microsoft makes more than 60 Billion USD annually, largely from Windows and Office alone. It boasts of profit margins of 77% and 65% respectively for these two monopoly products. Over the years, Microsoft has carefully cultivated and expanded the barriers to entry protecting these monopolies .Although Microsoft has paid many multimillion-dollar settlements for its antitrust violations over the years, these settlements have proven to be a very small price for such an extremely large ongoing revenue stream.

Microsoft’s History of Anticompetitive Conduct

Most consumers prefer operating systems for which a large number of applications have already been written & most developers prefer to write for operating systems that already have a substantial consumer base. This “chicken-and-egg” situation ensures that applications will continue to be written for the already dominant Windows, which in turn ensures that consumers will continue to prefer it over other operating systems. Microsoft is said to have originally developed its Office monopoly for the express purpose of strengthening the applications barrier that protect the Windows.

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Microsoft very quickly realized that in order to stay viable in terms of competition merely possessing Office and other applications won’t be sufficient. Microsoft’s nightmare was “Middleware Threat”. Middleware products are software products that, like Windows, expose application programming interfaces (APIs) that software developers can use in writing other applications. Microsoft since the outset therefore systematically crushed eliminated all entities that posed middleware threat to it’s staggering business including Netscape’s web browser and WordPerfect to name a few.

This initial interoperability came to be known as part of Microsoft’s now-classic

“embrace, extend, and extinguish” strategy, which Microsoft has subsequently and successfully employed in many other product areas.

This strategy has three phases: First, Microsoft “embraces” a competing product by developing software or implementing standards that are compatible with the competing product. After that Microsoft extends interoperability features with windows and once the competing product becomes dependant on the windows platform and it becomes an unannounced standard , Microsoft pull the plug in the extinguish phase by discontinuing support and compatibility features.

Microsoft’s Elimination of Word Perfect

Back in 1994, Microsoft launched an anticompetitive campaign to to take down an office productivity application owned by Novell .The application namely “Word Perfect” posed a threat to MS Word which happens to be an integral part of MS Office productivity applications ( word processing, spreadsheet & presentation applications) .

Microsoft Office is One of the most important groups of applications and it happens to be extremely lucrative in terms of profits. It significantly helps Microsoft cause barriers to entry for competitors. WordPerfect enjoyed widespread adaptation and happened to be pretty popular with significantly large customer base.

Microsoft withheld crucial technical information about Windows, going so far as to extend the Windows API, the set of commands a program uses to communicate with the operating system to ensure that WordPerfect did not work smoothly with Microsoft’s monopoly operating system.

Microsoft, with time developed a reputation of market leader and an established monopoly. It has been accused of using its monopoly power in the past to control the industry standards and apparently, it did the same in this case. it excluded WordPerfect from the major channels of distribution for office productivity applications. For instance, Microsoft prohibited OEMs (original equipment manufacturers) from pre-installing Novell products and gave discounts for refusing to sell other developers’ office productivity applications.

Microsoft extinguished WordPerfect and strengthened it’s monopoly in office productivity application suites, accomplishing its goal of protecting its lucrative Windows ,effectively as shown in the figure below:

Microsoft’s Elimination of Netscape

In 1996, Microsoft began a series of steps to eliminate a threat to its operating system

monopoly from Netscape’s web browser. Web browsers are “middleware” products, meaning that they expose APIs that developers can use in writing other applications. Microsoft recognized that if developers began using the APIs in Netscape’s browser rather than the APIs in Windows, consumers might eventually have access to the applications they needed from any computer with Netscape’s browser installed and would not be locked into computers running Windows Microsoft first sought to deal with this threat through a direct market allocation proposal: Microsoft told Netscape that if Netscape would agree to stop exposing APIs, Microsoft would provide Netscape with special help in developing “value-added” software applications that relied on Microsoft’s proprietary technologies. Netscape rejected Microsoft’s proposal.

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Microsoft then retaliated by taking steps to bring Netscape down not just by developing its own version of a web browser called internet explorer but then also technologically and contractually tied Internet Explorer to its monopoly Windows operating system. To ensure that only Internet Explorer ran well on Windows, Microsoft designed Windows, as its then-Vice President Brad Chase wrote, to make “running any other browser a jolting experience.” To ensure that Internet Explorer had exclusive access to the primary browser distribution channels, Microsoft also used an extensive set of exclusive-dealing contracts with OEMs, independent software vendors (“ISVs”), Apple, and others.

Microsoft was very aggressive in its campaign to shut Netscape out of all major distribution channels. For example, when Apple resisted distributing Microsoft’s Internet Explorer web browser with its Mac OS operating system, Microsoft threatened to stop supplying Microsoft Office for Mac OS. As the district court found, “ninety percent of Mac OS users running a suite of office productivity applications [used] Microsoft’s Mac Office. In 1997, Apple’s business was in steep declin. Had Microsoft announced in the midst of this atmosphere that it was ceasing to develop new versions of Mac Office, a great number of ISVs, customers, developers, and investors would have interpreted the announcement as Apple’s death.

Microsoft also introduced its ActiveX technology extensions, which allowed software written much like traditional computer programs to run in the Internet Explorer browser, but that only worked on Microsoft’s monopoly operating system. As shown in the graphic below, Microsoft’s campaign was highly successful.

Microsoft’s Elimination Of Rival Media Players

In 1997 Microsoft looked at other rival media players as a middleware threat , which is why it took significant steps make sure they stayed in control of the market. They started bundling the media player with windows in order to force users into using “Windows media player”.

When Microsoft initially started the bundling process, it released a version of it’s media player for Apple’s Mac OS as well and it continued to do so until 2003 till the point it was in competition with RealPlayer and Apple QuickTime. After 2003 once it had gained upper hand in terms of market share thanks to “Bundling”, it pulled the plug and no version for Mac OS was revealed thereafter for obvious reasons. Even though, Microsoft continued to promise that it would release a new Mac version of Media Player for a long time till 2006, when it announced that it was terminating the project.

The Case against Microsoft

Microsoft Corporationwas accused of becoming a monopolyand engaging in abusive practices contrary to the Sherman Antitrust Act 1890sections 1 and 2

The offense of monopoly under section 2 of the Sherman Act has 2elements:

• The possession of monopoly power in the relevant market

• The willful acquisition and maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or superior product

Case Background

In March 2004 EU fined Microsoft €497m , for it’s alleged abuse of it’s dominant position in the operating software and server software market. EU found that Microsoft had abused its dominant position in PC operating systems by withholding critical interoperability information from its competitors. The investigators alleged that Microsoft bundled bundled Media player with windows .An act which was seen a threat by its rivals such as Real networks Real Player and Apple computers Quick time.

This basically implied that providers of rival work group server operating systems were unable to compete effectively even though they were rated more highly by users than Microsoft’s products on a range of parameters such as reliability, security and speed.

The Commission ordered Microsoft to disclose certain specified “interoperability information”on reasonable and non-discriminatory terms to vendors of work group servers, so that they could develop and distribute interoperable products.

US vs Microsoft

• 1994 Novell said that, late in the rollout process, Microsoft withheld software components known as namespace extensions so competing developers would have trouble making their programs run smoothly on Windows
• May 1998 DOJ & AGs of 20 states sue MICROSOFT thwarting competition to protect SW monopoly

April 2014 US Supreme Court’s decision toreject without comment an appeal from Novell signals the end of Novell’s decade-long antitrust claims against Microsoft Corp.This follows an earlier ruling by the 10th US Circuit Court of Appeals that also favored Microsoft

EU Vs Microsoft

• In 2000, Statement of Objectives per Sun Microsystem Complaint, Java coding.
• In 2001, Statement of Objectives. Windows Media Player Bundling Issue
• EU saw US appeal settlement as weak and ineffective.
• In 2004, EU fines MICROSOFT record $612 million.
• MICROSOFT must offer windows w/o media player option. And disclose coding information to rivals
• MICROSOFT pays fine and discloses information following requirements but EU claims coding specs insufficient.
• IN 2006, EU fines MICROSOFT $450 million, and $2.4 million a day with increase to $4.8 if still not compliant.
• In 2007, MICROSOFT loses appeal in European Court of First Instance (ECFI).
• Decided against bringing it to the highest court: European Court of Justice
• In 2008, MICROSOFT fined additional $1.45 billion for noncompliance to 2004 decision.
• In 2009, MICROSOFT complies & unbundles internet explorer for EU product.
• 27 June 2012, theGeneral Courtupheld the fine, but reduced it from €899 million to €860 million. The difference was due to a “miscalculation” by the European Commission

Conclusion

Microsoft’s anti-competitive conduct over the last two decades has caused real harm to consumers, who continue to pay high prices and use lower quality products than would have prevailed in a competitive market.

In Our opinion there clearly was contrast in the way US & EU the two trustbusters handled the situation .The process in US was way more transparent & Open , that included Court Hearings ,Independent Judges, Consumer welfare focus .The process US followed allows more time for preparing cases with a more empirical approach .It wont be unfair to term the process business friendly.

On other hand the way EU commission dealt with the case was fundamentally different with situation tailor-made for rivals to secretly disclose evidence. Commissioners missed hearings. EU’s approach was more analytical in nature and was more concerned with market dominance rather than consumer welfare

References

• Antitrust in the European Union Unchained Watchdog.” The Economist 18 Feb. 2010.
• “Antitrust Maturing Monopoly Europe Gets Tougher with Microsoft.” The Economist 7 Aug. 2003.
• “Antitrust The Unusual Suspects.” The Economist 6 July 2006.
• Economides, Nicholas, and Ioannis Lianos. “The Elusive Antitrust Standard on Bundling in Europe and in the UNited States in the Aftermath of the Microsoft Case.” Antitrust Law Journal 76.3 (2009).
• “The EU and Competition A Real Monti?” The Economist 19 Aug. 2004.
• “European Antitrust Policy Competing Visions.” The Economist 13 June 2002.
• “Global Antitrust and the Evolution of an International Standard.” Vanderbuilt Journal of Transnational Law 35 (2002): 989-1017.
• “Improving European Antitrust The EU’s Policy Needs Reform. But Not in the Way the European Commission Is Proposing.” The Economist 20 Jan. 2000.
• “Microsoft and Antitrust The End, Sort of.” The Economist 16 Dec. 2009
• “Microsoft on Trial.” The Economist 28 Apr. 2006.
• http://www.ecis.eu/documents/Finalversion_qConsumerchoicepaper.pdf
• http://www.bloomberg.com/news/2014-04-28/microsoft-wins-antitrust-case-as-top-court-rejects-novell.html
• http://redmondmag.com/articles/2014/04/28/court-nixes-novell-suit.aspx