Microsoft case analysis

1
Microsoft case analysis

• Microsoft was a monopolyMicrosoft was not a
  monopoly
• What Microsoft practices were suspicious? How
  did Microsoft justify these practices?
• Which remedy do you recommend?Why is your
  choice better than the alternatives?
• 4. Structural (horizontal or vertical breakup)
• 5. Intellectual property rights
• 6. Conduct

3
2
1. Was Microsoft a monopoly?

• Yes (Govt)
• Controlled 95 of the OS market for Intel PCs
• MS could charge any price for Windows without
  reducing demand
• MS was able to impose restrictive contract terms
  on business partners, who could not switch
  suppliers
• No (MS)
• Dominant market share not a monopoly because
  barriers to entry are low.
• New technologies (Java, Web) posed constant
  threat to its dominance
• Its prices were stable or declined while
  functionality increased

3
2a. What Microsoft practices were suspicious?

• Restrained competition
• Attempt to divide the market with Netscape
• Exclusionary conduct
• Microsoft threatened to withhold critical
  technical information and right to license
  Windows from OEMs unless they promoted IE or
  dropped Netscape exclusionary agreements
• Tying
• Bundling of IE (unilateral conduct) with Windows
  OS alleged to leverage the OS monopoly to promote
  an otherwise weak product. Bundling with its
  Windows OS mean Microsoft effectively sold IE at
  a zero price

4
2b. How did Microsoft justify these practices?

• Tying and exclusionary conduct was standard in
  the industry
• Consumers benefited from the conduct (standards
  and interoperability were enhanced, and the
  combined Windows/IE was a quality improvement)
• Netscape remained available for download, so no
  effect on Netscape take up or Java usage

5
Microsoft case analysis

• Microsoft was a monopolyMicrosoft was not a
  monopoly
• What Microsoft practices were suspicious? How
  did Microsoft justify these practices?
• Which remedy do you recommend?Why is your
  choice better than the alternatives?
• 4. Structural (horizontal or vertical breakup)
• 5. Intellectual property rights
• 6. Conduct

3
6
1. Was Microsoft a monopoly?

• Yes (Govt)
• Controlled 95 of the OS market for Intel PCs
• MS could charge any price for Windows without
  reducing demand
• MS was able to impose restrictive contract terms
  on business partners, who could not switch
  suppliers
• No (MS)
• Dominant market share not a monopoly because
  barriers to entry are low.
• New technologies (Java, Web) posed constant
  threat to its dominance
• Its prices were stable or declined while
  functionality increased

7
2a. What Microsoft practices were suspicious?

• Restrained competition
• Attempt to divide the market with Netscape
• Exclusionary conduct
• Microsoft threatened to withhold critical
  technical information and right to license
  Windows from OEMs unless they promoted IE or
  dropped Netscape exclusionary agreements
• Tying
• Bundling of IE (unilateral conduct) with Windows
  OS alleged to leverage the OS monopoly to promote
  an otherwise weak product. Bundling with its
  Windows OS mean Microsoft effectively sold IE at
  a zero price

8
2b. How did Microsoft justify these practices?

• Tying and exclusionary conduct was standard in
  the industry
• Consumers benefited from the conduct (standards
  and interoperability were enhanced, and the
  combined Windows/IE was a quality improvement)
• Netscape remained available for download, so no
  effect on Netscape take up or Java usage

9
Microsoft case analysis

• Microsoft was a monopolyMicrosoft was not a
  monopoly
• What Microsoft practices were suspicious? How
  did Microsoft justify these practices?
• Which remedy do you recommend?Why is your
  choice better than the alternatives?
• 4. Structural (horizontal or vertical breakup)
• 5. Intellectual property rights
• 6. Conduct

3
10
1. Was Microsoft a monopoly?

• Yes (Govt)
• Controlled 95 of the OS market for Intel PCs
• MS could charge any price for Windows without
  reducing demand
• MS was able to impose restrictive contract terms
  on business partners, who could not switch
  suppliers
• No (MS)
• Dominant market share not a monopoly because
  barriers to entry are low.
• New technologies (Java, Web) posed constant
  threat to its dominance
• Its prices were stable or declined while
  functionality increased

11
2a. What Microsoft practices were suspicious?

• Restrained competition
• Attempt to divide the market with Netscape
• Exclusionary conduct
• Microsoft threatened to withhold critical
  technical information and right to license
  Windows from OEMs unless they promoted IE or
  dropped Netscape exclusionary agreements
• Tying
• Bundling of IE (unilateral conduct) with Windows
  OS alleged to leverage the OS monopoly to promote
  an otherwise weak product. Bundling with its
  Windows OS mean Microsoft effectively sold IE at
  a zero price

12
2b. How did Microsoft justify these practices?

• Tying and exclusionary conduct was standard in
  the industry
• Consumers benefited from the conduct (standards
  and interoperability were enhanced, and the
  combined Windows/IE was a quality improvement)
• Netscape remained available for download, so no
  effect on Netscape take up or Java usage

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3. Remedies

• Behavioral
• restrictions on Microsofts exclusionary
  agreements
• requirements to publish in advance application
  program interfaces of new versions of Windows so
  that no software developer is disadvantaged
• Structural
• vertical separation (as done with ATT in 1984)
  into an OS company, a software company and an
  Internet/e-commerce company
• horizontal separation (baby bills)
• requirement to license the Windows source code
• DOJ/Microsoft Settlement

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3 Remedies (contd)

• Problems with Remedies
• Behavioral remedies
• Require continual involvement by courts and
  regulators
• Too many agreements to monitor
• Easy to sidestep?
• Structural remedies
• Horizontal separation or licensing could lead to
  incompatibility of OSs and applications (multiple
  standards)
• Vertical separation could lead to multiple
  monopolies ? an even worse outcome for consumers
  (double monopoly markup)

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Update on US vs. Microsoft

• June 1999 8-month Federal District Court trial
  ends
• Nov. 1999 Judge Jackson issues his initial
  findings of fact, finding that Microsoft held
  monopoly power and used it to harm consumers,
  rivals, and other companies.
• Apr 2000 Mediation period ends
• June 2000 Judge Jackson orders the break up of
  Microsoft into two companies.
• June 2002 Federal appeals court reverses the
  breakup order
• Sept 2002 DOJ announces it wants a quick remedy
• Nov 2002 Judge Kollar-Kotelly approves
  settlement proposal between MS, DOJ 9 states
  (see next slide)7 states drop out Massachusetts
  will appeal
• Subsequently Remaining 9 states drop their claims
• Feb 2003 MS Rivals file anti-competition charges
  in EU re Windows XP

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US vs. Microsoft settlement key terms

• Under its settlement with DOJ, Microsoft
• May not participate in exclusive deals that could
  hurt competitors.
• Must offer uniform contract terms for computer
  manufacturers.
• Must let manufacturers and customers remove icons
  from desktops for some Microsoft features.
• Must release some technical information to rival
  software developers.