Analysis of U.S. versus Microsoft

2

Some Background

1990Federal Trade Commission begins investigating Microsoft’s marketing practices, including bundling application and operating-systems software.

1993Justice Department (DOJ) takes over the investigation.

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Some Background

1994• Settlement regulating Microsoft’s

marketing practices to 2000.

• DOJ files suit to the acquisition of Intuit, a large financial-software firm.

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Some Background

1995• MS and Intuit cancel merger plans.

• District Judge A. Sporkin calls the ‘94 settlement inadequate. Appeals Court overturns his decision.

• DOJ looks at plan to bundle Win95 with MS Network.

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Some background

1995 Court order prohibiting MS from forcing computer makers to license any other MS product as a condition of licensing Win95.

1996Netscape files complaint against Microsoft with DOJ

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Some background1997• State of Texas launches an antitrust

investigation of Microsoft’s business on the internet.

• DOJ requests information on Microsoft’s plan to acquire WebTA, an internet-television hybrid.

• State of Mass. Begins an antitrust investigation.

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Some background

1997 • European Commission investigates MS’s

licensing after complaints

• DOJ asks a federal court to hold Microsoft in civil contempt for violating terms of the 1995 court order and seeks to impose a $1m-per-day fine for as long as the violation continues.

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Microsoft Accused

DOJ and attorneys general from 20 states, launched the suit on May 18, 1998

“What cannot be tolerated -- and what the antitrust laws forbid -- is the barrage of anti-competitive practices that Microsoft uses to destroy its rivals and to avoid competition.”

-- J. Klein, DOJ

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Microsoft Wins a Round

June 23, 1998

A federal appeals court reversed an earlier court ruling that had granted a preliminary injunction forcing the software company to offer a version of its Windows 95 operating system without its IE.

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The Question Matters

• Whether or not MS indulged in “tying” is not the key point at issue in the broader case.

• More important is whether, as a monopolist, Microsoft has behaved in a way that is inconsistent with its legal responsibilities.

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The Microsoft Trial

• Filed on May 18, 1998.

• Commenced on Oct. 20, 1998.

• Ended on Sept. 21, 1999, after 76 days of testimony.

• Judge Jackson issued the findings of fact on Nov. 5, 1999.

• Ruling on April 3, 2000.

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The Verdict

Judge rules Microsoft violated antitrust laws

• MS used its OS monopoly power to dominate the browser market

• MS used its clout in the software market to maintain its monopoly in OS

• MS bundled its browser into its OS to try to force Netscape out of the browser market

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The Indisputable Fact

Many of the emails collected by the DOJ reveal that Microsoft was extremely rattled by the success of Netscape’s Navigator, seeing it as a threat to the dominance of Windows, especially when combined with the Java programming language, which can work with any operating system.

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Microsoft’s Memos (I)

Unless MS was to “leverage Windows…I don’t understand how IE is going to win.”

“My conclusion is that we must leverage Windows more. Treating IE as just an add-on…loses our biggest advantage --Windows market share.”

-- J. Allchin, senior VP, late 1996

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Microsoft’s Memos (II)

“ If you agree that Windows is a huge asset, then it follows quickly that we are not investing sufficiently in finding ways to tie IE and Windows together.”

-- J. Allchin, senior VP, early 1997

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Microsoft’s Memos (III)

“ Memphis [the in-house name for Windows 98] must be a simple upgrade, but most importantly it must be a killer on OEM shipments so that Netscape never gets a chance on these systems.”

-- J. Allchin, senior VP, early 1997

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What’s New in Windows 98?

According to computer analysts• a few bugs have been eliminated• a so-called Universal Serial Bus improve

Windows 95’s “plug and pray”– make it easier to configure things like printers

and modems– files are stored more economically– one or two other useful features such as

better management of notebook-battery consumption

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Things to Ponder

• Is the Microsoft ruling “a great victory for American consumers?”

• When defining remedies, what criteria should be applied?– “structure” vs. “conduct” remedy

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Remedies Proposals

• Impose restrictions on the contracts that MS can write with the sellers of complementary goods and with competitors.

• Force MS to disclose the APIs that allow it to include IE in the OS.

• Force MS to give away the Windows source code, or license it to successful bidders in an auction imposed by the government on MS.

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Remedies Proposals (Cont.)

• Break up MS according to lines of business.

• Break up MS in three equal parts, with each part containing an equal amount of each business.

• Break up MS along lines of business (OS and applications) and then break the OS division in three equal parts.

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Remedying Microsoft

June 2000

Judge Jackson accepted the proposal by the DOJ that Microsoft should be broken up into an operating-system company and a separate applications company.

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Microsoft Gets a Break

Sept 2000

• Resignation of Joel Klein, head of the Justice Department’s antitrust division

• Refusal of the Supreme Court to review the case before Washington’s appeal court has had its say

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Going Microsoft’s Way?

Feb 2001

• Election of George Bush

• Charles James, who also criticized the break-up plan, is the new head of the government’s antitrust division,

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Going Microsoft’s Way

Feb 2001• The case returned to the courtroom • The court addressed three issues

– correct finding?– correct remedy?– fair trial?

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Antitrust on Trial

• What role should antitrust law play in an advanced market economy?

• Can the software, telecoms, and other fast-changing high-tech enterprises of the 1990s be dealt with, when it comes to antitrust, in the same way as traditional industries?