A study on

Microsoft – Monopolistic Practices & US Anti Trust Law

 Table of contents

1. Introduction:..........................................................................................................................................3
2. Monopoly and antitrust Laws in US:....................................................................................................3
3. Market structure of software products:...............................................................................................3
4. Windows operating system:.................................................................................................................4
5. Browser - Internet Explorer:.................................................................................................................4
6. Effect on Consumers:...........................................................................................................................4
7. Recommended changes to Microsoft practices from Anti-trust case judgment:............................5
 1. Introduction:
Microsoft Corporation is an American public multinational corporation headquartered in Redmond,
Washington, USA. Microsoft is a large diversified computer software manufacturer with one of the
highest valuations in the world. Microsoft produces the Windows family of operating systems for personal
computers and servers. It also produces applications software that run on the Windows family of
operating systems, most notably the very successful MS- Office Suite consisting of Word (word
processor), Excel (spreadsheet), PowerPoint (presentations), Outlook (e-mail and news), and Access
(database). Almost all Microsoft products are complementary to a member of the Windows family of
operating systems for personal computers and servers.

Microsoft is believed to use monopolistic business practices and anti-competitive strategies to gain
market dominance for which the U.S. Department of Justice found the company in violation of antitrust
laws.

2. Monopoly and antitrust Laws in US:

The U.S. antitrust law, under Sherman Act is illegal, if a firm takes anti-competitive actions to acquire,
preserve, or enhance its monopoly.

Microsoft has been charged under antitrust laws for the following actions that include:

1. Monopolizing the Operating system market for personal computers and servers.
2. Protection of Monopoly by availability of abundance of applications running on windows operating
system.
3. Microsoft hobbled the innovation and its actions harmed users.
4. To eliminate competition from Netscape, producer of Netscape web browser, Microsoft integrated
its web browser Internet Explorer into the operating system.
5. Using its market power, in operating system market, Microsoft forced other firms to agree to
policies limiting competition from competitors.

US antitrust law also believes that anti-competitive acts harm consumers who may belong to present or
future. Consumers are effected either by high prices or limitation of choices of variety and quality or by a
impeded process of innovation.

3. Market structure of software products:

For understanding competition and potential anti-competitive actions, market structure needs to be
understood. Software product markets are characterized by strong virtual network effects. A virtual
network is collection of compatible goods that share same technical platform. All computers running same
operating system can be treated as virtual network. In these virtual network markets, larger sales of
component A induces larger availability of complimentary components which further improves positive
feedback on A and further increases market share and profits. Market exhibits network effects when value
to the buyer of an extra unit is more when more units are sold, while all other conditions remain equal.
These markets are characterized by extreme inequities in market share and profits between different
firms. Market share of largest firm will be multiples of second largest firm.

Non-standard based proprietary technologies, with strong market share have potential to create anti-
competitive markets without actually creating them. By keeping its operating system prices very low
(Windows 98 operating system was sold at an average price of $40 - $60 to OEM), Microsoft attempted to
create large market share for Windows operating system, virtually eliminating it competitors there by
limiting consumer choices. And also indirectly create market for it other products like office suite MS-
Office.

The value of Windows increased more with availability of abundant applications supported on windows.
This indirectly prompted consumers to buy Windows operating system. This in turn increased incentive for
independent application vendors to create more applications to Windows, in the process increasing the
value of Windows more. With high level of market share consumers will be ready to pay more. Therefore
profits associated with Windows brand can be large multiple of profit with other operating systems such
as Mac. This implied very large market share for windows compared to other competitors.

4. Windows operating system:

Microsoft resorted to anti-competitive activities to monopolize operating system market for personal
computers and servers. Following are some of these activities:

• Licenses provided to OEMs on Windows operating system, made difficult or prohibited OEMs to
include another Browser other than Internet Explorer (IE) provided by Microsoft.

• Deliberate attempt to intermingle IE code such that it cannot be separated from operating system
which made difficult for OEMs to separate IE from Windows.

• Microsoft entered in exclusive agreements with OEMs and Internet Access Providers (IAP)
prohibiting distribution of Netscape Navigator, competing Browser of the time.

• Microsoft threatened Intel on cross-platform support of Java impeding growing popularity of Java
which may reduce Microsoft operating system market share.

5. Browser - Internet Explorer:

Microsoft decision to Bundle IE with windows can be seen as an attempt to eliminate Netscape as
competitor in Browser market than mere adding functionality to Windows Operating system. This also
effected other add-on software manufacturers. Application could be written to be executed on top of
Netscape and since Netscape could be run on number of other operating systems, this posed threat to
windows market share. Microsoft bundled IE with Windows and eliminated threat from Netscape. With
these actions and restricted OEM licenses in relation to Netscape, having large market share in Operating
system, Netscape would not become platform that would compete with Windows.

Microsoft also sabotaged Sun’s Java language effort to bring in universal language so that applications
written in Java could be executed on any operating system. Growth of Java is seen as threat to Windows
market as applications written on Java platform could be executed well on other operating system,
creating markets for other operating systems, when Java becomes popular programming language.
Microsoft has written Java virtual machine for windows and also provided additional features which will be
available only on Windows. This can also be seen as anti-competitive activities against Java platform.

6. Effect on Consumers:
Potentially, anti-competitive activities effected consumers in three ways. First, it increases prices hurting
consumers. Second, anti-competitive activities limit consumer choice in terms variety and quality. Also,
these activities impede innovation effecting future consumers. In Microsoft case, consumers are hurt as
they could not get windows without browser as Microsoft forced OEMs to ignore consumer demand for
browserless version of Windows. Inclusion of internet explorer lead to degraded system performance, and
restricted memory.

Also, it is found from internal mails in Microsoft (that discussed a range of prices considered by the
company for pricing windows) that Windows 95 and 98 prices were too high.

7. Recommended changes to Microsoft practices from Anti-trust case judgment:

Disclose middleware interfaces partially: Microsoft will be required to partially disclose interfaces used
by Microsoft middleware to interoperate with operating system.

Definition of Middleware: Definition of middleware is broadened to include browser, e-mail clients,

media players, instant messaging software, and future new middleware developments.

Disclose Server protocols partially: Interoperability between windows and Microsoft has to be on par
with Windows and non-Microsoft servers.

Freedom to substitute middleware: OEM and consumers will have freedom to substitute middleware
software of their choice.

Ban on retaliation: Microsoft will be prohibited against retaliation against OEMs and Software
developers for supporting and developing competing software.

Uniform pricing: Operating system licenses to OEMs will be on uniform terms, however Microsoft is free
to offer discounts on volume sales.

Compliance and enforcement: A panel of three independent, on-site, full-time computer experts will
help enforce the settlement. One panel member will be selected by Microsoft, one by the Justice
Department, and one by both.

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