Ian Bracy Brian Hendel David Jones Case 20: U.S. v. Microsoft Ian Bracy Brian Hendel David Jones

Government 1- Consumer’s are paying to much for system software 2-Microsoft’s actions reduced innovation in the software industry 3-tying of its IE browser and it’s OS, this restrained trade in violation of section 1 of the Sherman Act

Microsoft 1-Not a monopoly, faced significant competitive threats in a highly dynamic industry 2-Consumers benefit as a result of high-quality, innovative software

List of Anticompetitive Practices Microsoft was accused of Tying of IE to the Operating System Excluding browser competitors from OEMs and ISPs Imposing agreements requiring OEMs not to remove IE or to substitute an alternative browser Imposing exclusionary agreements on ISPs Giving its browser away for free and paying others to take its browser

Netscape and the “cross-platform” language A “cross-platform” language allows programmers opportunity to write a program and it will run on all OS’s this in turn will take away the applications supremacy that Microsoft has

Did Microsoft have Monopoly Power?

Government says “Yes” OEMs felt they must buy from Microsoft If a 5-10% increase in price, customers say they will still buy from Microsoft

Network Effects Present Users would like an OS that allows all applications and developers write applications for the most popular OS Incentive for firms to use the same OS Switching Costs All result in ??????

Applications Barrier to Entry

Market Power Claimed that relevant market is larger than PC Operating Systems Ex: Handheld devices, servers Other OSs: IBM’s OS/2, Apple Non-OS platforms: Netscape, Java Unknown future innovations Alleged actions indicate a larger market Did Microsoft have monopoly power? 10

Simple Monopoly Model Static, short-run pricing model Calculated Elasticity of Demand from demand for PCs and Microsoft’s market share Marginal cost for Windows is negligible Came up with a “monopoly” price of $1800 Actual price was $60, so Microsoft claimed it had little market power Did Microsoft have monopoly power? 11

Problems with the Model Did not consider: Long run behavior Dynamics Network effects in the OS market Did Microsoft have monopoly power? 12

Court Perspective Supports the Governments point of view on Market Definition and monopoly power issues “appropriate to emphasize constraints on alleged Monopolist’s power with respect to BUYERS of operating systems, NOT constraints relating to producers of complimentary products” Agreed with Applications Barrier to Entry present

Did Microsoft maintain its OS Monopoly by thwarting the threat posed by Netscape’s Browser?

Threat of Netscape Netscape relies on Java a “Cross-Platform” language that allows programmers the opportunity to write a program and it will run on all OS’s. This “middleware” threatens Windows because now developers can write to other OS’s and they will be able to offer many applications as well.

Government’s Case Evidence that Bill Gates told top level executives that there is a need to thwart the success of Netscape by bundling its browser with its OS and giving it away for free

Two-Level entry- Microsoft prevented companies from entering browser market unless they entered the OS market This effectively increased the barriers to entry If Microsoft decided to support only windows based-tech then developers have little incentive to create applications that not windows based

Other issues Market Allocation:meeting with Apple Predatory Pricing: distributing browser and giving it away for free Bundling and OEM Restrictions: said to foreclose on competition and not for achieving efficiencies Exclusionary agreements with ISP

Predatory Pricing: Internet Explorer vs. Netscape Navigator Internet was an opportunity and a threat Increased demand for Windows Microsoft wanted to control the communication standards Believed that Netscape could develop into a platform that competed with Windows Browser conflict was part of a broader competition among future OSs Response to allegations of anticompetitive behavior 19

Predatory Pricing: Internet Explorer vs. Netscape Navigator Netscape was a direct threat Justified intense competition Claimed it was not predatory because it was improving its own browser Invested $100 million a year to develop IE Integrating IE into Windows increased OS quality IE was of equal or greater quality than Navigator No evidence that giving away IE was not profit maximizing Response to allegations of anticompetitive behavior 20

Market Allocation Winner-take-all competition Network effects justified low or zero price for IE Precursor to Windows 98 Meetings with other companies Claimed it was to discuss interfaces and complementary products No agreements Response to allegations of anticompetitive behavior 21

Bundling Windows and IE Microsoft had strict rules against OEMs altering Windows Claimed it protected the user experience Kept OEMs from removing IE Produced efficiencies by merging with Windows Very difficult or impossible to separate Since it had no market power: Bundling IE and the OS would not be a rational anticompetitive strategy Response to allegations of anticompetitive behavior 22

ISP agreements Success with ISPs came from superior product quality and terms Ex: IE was easier to integrate with AOL’s software “No harm, no foul” Other distribution methods available for Netscape Response to allegations of anticompetitive behavior 23

Court’s View Government Win’s 1-Market Allocation 2-Predatory Pricing 3-Bundling 4-Exclusionary Agreements Microsoft Win Government could not provide enough evidence that OEM and ISP restrictions decreased competition

Permanent Internet Explorer Microsoft claimed removing IE would be detrimental to the user experience Difference between Windows 95 and 98 Government expert Response to allegations of anticompetitive behavior 25

Was Microsoft’s alleged anti-competitive behavior harmful to competition?

Government’s View Microsoft succeeded in excluding Netscape from PC OEM distribution. -Microsoft had a 94% Weighted Average share of browser shipments by ISP’s -Netscape had a 14% Weighted Average share of browser shipments by ISP’s

Microsoft Defending its Actions Microsoft claimed that its behavior was profitable regardless of changes in the competition Distribution of IE increased OS demand; compliments No harm to consumers Did not eliminate the competition AOL acquires Netscape Microsoft’s claim that it did not restrict competition. 28

Microsoft Defending its Actions Disputed Government’s evaluation of market shares Real source of Netscape’s decline was Microsoft winning the technology battle Government was unable to distinguish pro- and anti-competitive behavior Microsoft’s claim that it did not restrict competition. 29

Court’s Perspective Supported the Government’s view that Microsoft’s anti-competitive acts caused immediate harm Protect Applications Barrier to Entry Forced OEMs to ignore consumer demand for browserless version of windows(slower pc and less memory) Hurt middleware technologies

Resolution of Case 3- Series of Compliance measures Focused on conduct remedies 1-Prohibited Microsoft from foreclosing the OEM channel of distribution 2-Placed limits on Microsofts ability to discourage others from developing, promoting, or distributing non-Microsoft middleware products 3- Series of Compliance measures whose goal is to enforce terms of the settlement agreement