The US Microsoft Case

1. Introduction
This paper is intended to discuss the Microsoft (MS thereafter) case by means of international competition terms, and the current situation of the market after a period of 10 years. Not only the discussions in the panels at Berkman Center of Harvard University but also the class discussions have been taken into account as the focus of the paper. As to make later statements more clear, it would be a good idea to give some brief information about the progress of the case since the beginning. In order to do so, it has been decided to highlight the important aspects of the progress of the procedures one by one chronologically from the opening speech of Phil Malone who is a Clinical Professor of Law at Harvard Law School, and the Director of the Law School’s Cyberlaw Clinic at the Berkman Center, and more importantly who had worked for 20 years as a federal prosecutor with the Antitrust Division of the U.S. Department of Justice (DOJ thereafter) where he was leading the counsel in the DOJ's investigations of MS starting from 1996.

1990 —> Investigation on possible monopolization of MS’s DOS which is the ancient predecessor of Windows operating systems
1993 —> Federal Trade Commission (FTC thereafter) were in a deadlock whether or not to take action
1994 —> FTC handed off the case to Antitrust Division of DOJ
July 1994 —> JOD and European Commission (EC thereafter) filed a settlement about licensing practices of MS
July 1996 —> Netscape brought its complaints to the DOJ about its internet browser related to Microsoft’s monopolization
October 1997 —> MS was sued because of monopolization. MS said “it was only improving Windows with integrated products”
December 1997 —> Court accused MS by requiring PC makers to take Internet Explorer (IE thereafter) in order to get Windows
October 1998-June 1999 —> 67 trials against MS because of monopolizing the markets and attempts to it
June 1999 —> tied IE illegally because of the presence of anticompetitive effects
June 2001 —> 7 judges unanimously issued their decisions as that MS had a monopolistic power in the market
November 2002 —> business restrictions on MS
November 2002-January 2008 —> regular monitoring of MS’s compliances
January 2008 —> Judge extended the final judgment of regular monitoring of MS compliances which have been due to expire in November 2007 in order to prolong it for 2 years from November 2007 to November 2009
On the other hand, over much of this time, also EC did not lose their focus on this issue and they have pursued their own investigations about MS’s bundling Windows Media Player (WMP thereafter) with Windows for communication between computers and its servers as well as between servers. In short;
2003 —> EC found MS violating the European Union (EU thereafter) laws
November 2007 —> The decision of EC in year 2003 (above) was upheld

2. Discussions and Decisions
In this part of the paper, the topics that are significant in terms of “competition in markets” will be separately dealt with under 5 subtopics. Those are given in the following, respectively.

a) Innovation and Intellectual Property Rights
As all we are familiar with, the word innovation corresponds to a high level of ability of a person, firm, company, country etc. to create new ideas which are probably expected to be useful. From that point, innovation is desired to be as high as possible. In the company level, level of innovation is almost always a good predictor in order to evaluate the success and profitability of a company. It is quite obvious that the technological innovation level of the companies increases the level of competition in the relevant markets, and fosters the economy of a country. A few possible reasons urging the companies to innovate are to get a bigger share in the market (dominance), to increase the future profits, and the pressure of falling behind in the competitive race. For MS case, MS was defending itself of investing billions of dollars on IE (for developing communication protocols, i.e. server-to-server and server-to-client communication), and claiming that they would not be able to innovate anymore if they are not allowed to get returns from these investments. Although, IE is a no-revenue product, however, Bill Gates said:
If we lose competition in browser, we will lose everything.
Thus, this is probably the key argument and connection between the innovation and intellectual property.

b) Monopolization and Abuse of Dominant Position
As having around 90% of share in Operating System (OS thereafter) market, MS has, obviously, been a monopolizer. However, MS had possibly desired to use that huge share in order to increase its share and power in other relevant markets such as internet browser and media player. The case was just the fact that MS was tying IE and WMP to Windows in order to increase its market power also in internet browser and media player markets, even though those were no-revenue products. Probably, what MS aimed was to dominate the internet browser and media player markets in order to be able to take decisions and to determine the market rules regardless from the other competitors, those completely translate into dominance in a market. However, MS tried to utilize from its big share and power in OS market in other markets as well, and that was a sort of abuse of dominant position. Because, MS knew and believed that the customers would be still using the tied products, if they tie-up some other apparently-no-revenue software to Windows. From that aspect, MS’s dominance in OS and internet browser market also resulted with something else deeper. For instance, since IE was bundled together with Windows, this, at first moment, kept customers away from deciding and choosing their own options freely and probably most of the customers continued using bundled software, even though they were not supposed to. As a result, bundling somehow affected the choice of customers unconsciously. So, abuse of dominant position may sometimes result with the diverse choice of customers in favour of dominant company, even though the customers themselves are not really aware of that. Moreover, as stated in the EU review of MS pricing, MS was pricing the bundled and the unbundled Windows with same prices. Therefore, this was a sort of price-fixing practice to some extent. Because, the content and/or the quality of the product do not determine the price, however so does the company itself. This could even be solely taken as an anticompetitive effect, since it does effect the competition in the market.
Similarly, on the other part, companies could also apply anticompetitive practices even if they know that this will only bring more shares and more power at the time being. Because, more shares and more market power will not always result with direct profits, however, those practices would probably bring more profits in the future. Yet, current accounting profits of a company would not tell much about the monopolization of this company in the market.
In contrast, could monopolization be useful in some aspects?
Does monopolization do something good and efficient for consumers (even if it does not seem so)?” asked Keith Hylton, and replied immediately:
Monopolization raises prices, extracts surplus from consumers, imposes a loss on the economy. Even in this case, if the firm innovates, they benefit from that in a way how Schumpeterian argument puts monopolization. Yes, the company extracts welfare from consumers, but, yet there is a big residual surplus that consumers have.

c) Effects and Results on the Markets
It would be a better idea to start with how MS gained from that in order to better understand the effects and results of its monopolization and abuse of dominant position. Bundling IE with Windows was actually increasing the overall cost of Windows OS (although, MS disclaims) and lowering the cost of supply. Because, MS was probably adding up the development cost of IE on the cost of Windows OS and this, of course, increases the overall cost of Windows OS. Similarly, bundling a product with another one lowers the cost of supply by the company side, because in this case, the company does not need to pay the common costs for both products, such as packaging costs, transportation costs, installation costs etc. Increased overall costs and lowered supply costs would create a non-replaceable comparative advantage for this company over the others, since this company would be able to produce the identical products with much lower costs, but by using anticompetitive methods.
As we expect to happen, the most important effect of MS’s monopolization and then of its abuse of dominant position was the break or a possible lack of competition in the market. The lack of competition in a market, inevitably and as mentioned before, translates into lack of innovation, increase in prices and a dull economy, as a result.

d) Remedies Applied in the US
In the time of case, the share of MS in OS (with Windows) and internet browser (with IE) markets were as follows:
OS: 91% (99% without Apple’s MAC OS)
Browser: 72%

Remedies applied in the US were:
i) Recoveries of civil litigation
ii) Civil fines
iii) Change in pricing mentality

Remedies applied in the EU were:
i) Fines (due to abuse of dominant position, disclosure failures and unreasonable fees)
ii) Offering stand-alone Windows OS by unbundling IE and WMP
iii) Refrain from repeating the same actions

e) The US and the EU viewpoints
First, we will start with the US viewpoint, since it is the home country of the company itself.
DOJ and court lawyers, briefly, stated that it was not quite important that how much of the products MS bundled with and tied to Windows and how much they did not. The important thing was the effect of this tie-up on the relevant market(s) in terms of anticompetitive practices and abuse of dominant position.
On the EU side, EU and institutions said that MS brought the arguments to much more front and centre which were already previously mentioned in Part 2.a of this paper. Those were the claims of MS that “they would not be able to innovate anymore if they are not allowed to get returns from these investments.” EC did not accept these arguments, and once more emphasized on the importance of competition in markets.
On the contrary, Justice Division of Court of First Instance (CFI thereafter) stated that dominant companies should be allowed to refuse licensing intellectual property rights, and tuned its previous disclosures, anyhow. This decision of CFI would, for sure, harm innovation within and among the companies.
Accordingly, Keith Hylton correctly mentions the difference between the US and the EU as below:
The biggest difference between the US and the EU is really a common-law vs. civil-law distinction; because civil law takes more a top-down approach and takes rules as what the government says.

3. Conclusions
In the lights of everything being mentioned throughout the whole paper, there arises a core question in minds which was also highlighted by Phil Malone towards the end of his opening speech as follows:
What would have been different in today’s computer industry (and possibly in many others too) in terms of products available, in terms of innovation and in terms of unleashing the great value of economy unless the government had not succeeded to break up MS?
Indeed, this question would come with a bunch of many different answers, whereas most of them would probably have the similar reasoning and focus. It is obvious that the level of competition and innovation in today’s market would be less than now they are, and the prices would probably be higher. As a matter of fact, MS would have an outrageous level of dominance and power, maybe with only a few very weak competitors which would be subject to disappear after a while.
Yet, one of the best answers to this question comes from Frank Fisher, saying that:
We would be living in a Microsoft world, Microsoft-controlled world!
As a result of all above, as Doug Melamed mentioned as well, we now understand that “tying-up” can be looked at more broadly as bundling products for the purpose of many things, but firstly and more importantly to protect the market power in hand.

4. References
I. http://www.youtube.com/watch?v=POSFITzU--c&feature=related
(USvMicrosoft: 10 Years Later – Phil Malone)
II. http://www.youtube.com/watch?v=om3Bsg4lPzU&feature=related
(USvMicrosoft: 10 Years Later – Panel)

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