UT-EMBA Mexico City 2005 Monopolization  Under §2 of the Sherman Act, it is illegal to monopolize or attempt to monopolize.  EC Art. 82 outlaws “abuse” of a “dominant position in the market”  To tell if a monopoly is illegal, ask: What is the market? Does the company control the market? –No matter what your market shares, you do not have a monopoly unless you can exclude competitors or control prices.

UT-EMBA Mexico City 2005 Monopolization (cont’d)  How did the monopolist acquire or maintain control? Possessing a monopoly used to be illegal; probably not any more using “bad acts” to acquire or maintain one is.  What kind of bad acts? Anticompetitive behavior Other antitrust violations Predatory pricing Tying arrangements Exclusive dealing/refusals to deal  KEY: did/will behavior “diminish competition”

UT-EMBA Mexico City 2005 Microsoft  Does defendant have monopoly power? Market share – 70% “rule of thumb” What market?  Did defendant misuse it? Microsoft I: Caldera v. Microsoft Microsoft II: The U.S. case - settled Microsoft III: The European case

UT-EMBA Mexico City 2005 Microsoft Example “Microsoft possesses a dominant, persistent, and increasing share of the world- wide market for Intel-compatible PC operating systems. Every year for the last decade, Microsoft's share of the market for Intel-compatible PC operating systems has stood above ninety percent. Even if Apple's Mac OS were included in the relevant market, Microsoft's share would still stand well above eighty percent. …”

UT-EMBA Mexico City 2005 MICROSOFT ARGUMENT: Our monopoly cannot hurt consumers for two reasons: 1. Innovation in the computer industry is so fast that any monopoly is inherently unstable. If we are inefficient, we will lose our monopoly. 2. Our industry is characterized by “network effects” – i.e., the value of the product increases as it is more widely used. These two characteristics mean that consumers benefit (and costs of production decrease) from a monopoly, AND that the monopoly nevertheless must be efficient (keep costs down) to survive.

UT-EMBA Mexico City 2005 HISTORY: Caldera case early 1990s): Microsoft used its dominance in the operating system (OS) market to leverage PC makers into using only Microsoft software applications. DOJ and Microsoft entered a consent agreement in which Microsoft agreed not to tie products together in this way. DOJ claimed Microsoft violated the consent agreement: you be the judge. Microsoft Example

UT-EMBA Mexico City 2005 Netscape: “As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy dramatic acceptance by the public... This alarmed Microsoft, which feared that Navigator's enthusiastic reception could embolden Netscape to develop Navigator into an alternative platform for applications development.” Microsoft Example

UT-EMBA Mexico City 2005 Netscape: Microsoft offered to leave the browser market for non-windows machines to Netscape (i.e., not to develop a version of Internet Explorer for those machines) and to give Netscape preferred access to information about new versions of Windows IF Netscape would refrain from developing its produce as a “platform” that could support applications. Microsoft Example

UT-EMBA Mexico City 2005 Netscape When Netscape refused to cooperate with Microsoft, Gates sought to limit other companies’ use of the Netscape Browser. “Apple was installing Netscape at the default browser on its machines. … Ninety percent of Mac OS users were running a suite of office productivity applications [called] Microsoft's Mac Office.” “Microsoft threatened to cancel the product unless... Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS.” Apple agreed. Microsoft Example

UT-EMBA Mexico City 2005 Sun Microsystems “The inventors of Java at Sun Microsystems intended the technology to enable applications written in the Java language to run on a variety of platforms... [so that] a program written in Java... will run on any PC system.” Wanted Java to be windows-compatible, but … Microsoft Example

UT-EMBA Mexico City 2005 Sun Microsysterms “Microsoft designed its Java developer tools to encourage developers to write their Java applications using certain "keywords" and "compiler directives" that could only be executed properly by Microsoft's version of the...” “Microsoft encouraged developers to use these extensions by shipping its developer tools with the extensions enabled by default and by failing to warn developers that their use would result in applications that might not run properly with any [version of Java] other than Microsoft's...” Microsoft Example

UT-EMBA Mexico City 2005 Intel: “Although Intel is engaged principally in the design and manufacture of microprocessors, it also develops some software....” At a meeting, “Gates told [Intel CEO] Grove that he had a fundamental problem with Intel using revenues from its microprocessor business to fund the development and distribution of free platform-level software. In fact, Gates said, Intel could not count on Microsoft to support Intel's next generation of microprocessors as long as Intel was developing platform-level software that competed with Windows.” Microsoft Example

UT-EMBA Mexico City 2005 Intel: “Intel's senior executives knew full well that Intel would have difficultly selling PC microprocessors if Microsoft stopped cooperating in making them compatible with Windows and if Microsoft stated to [PC manufacturers] that it did not support Intel's chips. Faced with Gates’ threat, Intel agreed to stop developing platform- level interfaces that might draw support away from interfaces exposed by Windows...” Microsoft Example

UT-EMBA Mexico City 2005 Apple: “QuickTime is Apple's software architecture for creating, editing, publishing, and playing back multimedia content.... QuickTime competes with Microsoft's own multimedia technologies...” “Microsoft tried to persuade Apple to stop producing a Windows 95 version of its multimedia playback software …” In return, Microsoft offered to cooperate with Apple in a joint multimedia product. “Microsoft's representatives made it clear that, if Apple continued to market multimedia playback software for Windows 95 that Microsoft would enter the authoring business to ensure that those writing multimedia content for Windows 95 would use Microsoft's product instead of Apple’s.” Microsoft Example

UT-EMBA Mexico City 2005 IBM: IBM makes PCs, operating systems (OS/2) and software. “Microsoft tried to convince IBM to move its business away from products that themselves competed directly with Windows (OS) and Office (software).... When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support.” Microsoft Example

UT-EMBA Mexico City 2005 Microsoft: The EU Case 1.Bundling Windows Media Player into Windows Why do this? 2. Failing to share Windows information with Server manufacturers Why do this?

UT-EMBA Mexico City 2005 Private lawsuits Remedies for Microsoft’s wrongdoing? Microsoft vs. the Time Warner-Turner Broadcasting merger – do you see any parallels between the two situations?