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Hanging, Drawing and Quartering – American Style:The Brutal Dissection of Microsoft
By: Kevin McFarlane

June 2000

Part 2

Also, Microsoft's very dominance - both fair, many of its products are considered by consumers to be better than those of its competitors, and "unfair", its exclusionary practices - lowers the barriers to entry of rival operating system platforms. The reason for this is that Microsoft is both an operating systems vendor and an applications vendor. To make and keep its operating systems popular it has to encourage lots of Independent Software Vendors (ISVs) to produce applications for them. But, as an applications vendor, it also competes with ISVs. To the extent that Microsoft's own applications outcompete those of its rivals, either by "fair" practices or "unfair" exclusionary practices this lowers the costs of those ISVs' developing for rival operating systems. Not being able to compete with Microsoft in the Windows market they must turn elsewhere to generate sales. This is why both Java and Linux have become as popular as they have. This also illustrates the fact that the market is self-regulating and is the more self-regulating to the extent that it is not interfered with by government.

Much is made of Microsoft's market power stemming from its operating systems dominance, which, incidentally, overlooks the fact that Microsoft earned its position. But its operating systems dominance is in turn sustained by the fact that plenty of applications are available for it and it is the applications that people use Windows for. The operating system is just a vehicle. Software developers are the key to Microsoft's power and Microsoft knows this. If OEMs observe that software developers are starting to produce sufficient numbers of applications, that sufficient numbers of consumers want to use, for a rival operating system they will then judge that the sale of PCs preinstalled with this rival operating system is a commercial proposition. As I write, this is already happening with the Linux operating system. The main reason that more and more ISVs are porting or writing applications for Linux is that they are hoping to be able to move into space that is not now dominated by Microsoft. Linux itself is a so-called "open source" and free operating system. That is, the user does not have to pay a licence to use it and is also free to modify its source code. But they are forbidden to make commercial gain out of any modification, i.e., to licence commercially the modified operating system. However, the applications developed to run on Linux need not themselves be free.

An Analysis of "Predatory Pricing"

What price a company chooses to supply its own products at is, and should be, entirely up to it. So long as it does not force the consumers at gunpoint to purchase those products there is nothing wrong with this. That is what freedom means. Most companies sometimes sell products at below cost. Sometimes this is when they introduce a new product or are trying to enter a new market and so need to entice the consumer. Other times it is when they need to get rid of unsold inventory and need to cut their losses. Consider the case of "remaindered" books, for example. These are often sold off at prices that are clearly below cost. No one complains.In the software industry, Netscape effectively supplied Navigator for nothing well before Microsoft got in on the act. OK, technically, it was the beta version that was free. (A “beta” version of a program is a pre-release version that is made available to selected end-users, usually for free or for a nominal price, in order to shake out any remaining bugs in the program. Beta programs are necessary because it is impossible for a software vendor to capture all usage scenarios with its own testing.)  Nevertheless, it was by supplying this for nothing that the Netscape brand name was established and made the company attractive to potential customers of its commercial offerings.Although companies should be free to do it, the practice of selling below cost, or giving products away in order to drive out the competition and then increasing prices above what would have existed otherwise is a double-edged sword and is generally not worth it.First, at the lower prices on offer for its products there will generally be an increase in demand for them. The predatory company must be in a position to meet this demand. If it is not in a position it will have to invest in additional capacity. If it does not do this then customers will be forced to turn to the smaller companies who may even be able to raise their prices to meet the increased demand. Obviously the opposite of what the predator wants.If the predator does invest in the additional capacity then, once the competitors are destroyed and it raises its prices, demand will be reduced. But the predator must continue to maintain its additional capacity even though it is no longer used in production. A very expensive proposition.Second, suppose a company does reduce prices below cost, thereby sustaining losses for a while, at least in the given line of business. After the competition had been destroyed it would have to raise its prices to a level consistent with a higher profit margin than that which it had when it had competitors, so as to recover its losses. But this action would then lower the barriers to entry of newcomers to the market. Any potential entrants waiting in the wings when there were many competing companies may have been deterred by having to meet the low costs of production required to sell at the former market prices.But now, with the monopolist's having to charge at above market prices in order to recoup its losses, those new entrants can afford higher production costs. Because they can sell their products just below the now higher prices of the monopolist and cover their production costs, thereby making a profit - something they were unable to do under the previously prevailing market conditions.Third, it is overlooked that any companies made bankrupt by the predator still have their productive resources, physical plant and people available, perhaps at knockdown prices. This makes them even more attractive to potential market entrants.Predatory pricing, in the sense of pricing below cost, is generally more costly the greater is the market share of the predator. Its losses must necessarily be much bigger than those of its nearest competitor. If a dominant company wants to drive out its competitors by aggressive pricing, the best strategy is for it to drive down its own production costs below those of its competitors and to price its products above its own costs but below those of its competitors. If its competitors are destroyed in this way the predator is not under the same necessity to raise its prices above the previous market level because it has not been operating unprofitably. But, because it is now a monopolist, it could choose to. However, it would not be able to escape the effects described above.This is why you will find that companies, such as Standard Oil in the nineteenth century, continually increased production and lowered prices. And, in fact, it followed a policy of always striving to lower its production costs. If one examines the case of the A&P grocery chain in the 1940s it will be found that it too did not practice predatory pricing despite antitrust allegations to the contrary.

And it's why you find that the same applies to Microsoft. OK, you do find that people complain that some Microsoft products are too expensive compared to the competition. For example, Microsoft Office is now more expensive than most competing office suites. But, consider the historical context. Before Office became popular the norm was to buy standalone products such as Lotus 123 and WordPerfect and each of these, in their DOS versions, was more expensive than the entire Office suite, especially when you factored in the concept of competitive upgrades. Word processing prices had been rising before Microsoft Word for Windows was released in 1989 after which they fell from about $300 in 1990 to around $50 in 1990. Personal finance software fell from about $100 in some cases to about $20 after Microsoft came on the scene.  It was Microsoft that was responsible for making all of these types of product much cheaper than hitherto. In the period 1988-1995 software which did not compete with Microsoft fell in price by about 12%. Software that did compete with Microsoft's fell in price by 60%. (Thomas J. DiLorenzo, The Gates-Rockefeller Myth, Ludwig von Mises Institute. http://www.mises.org.)  Other commentators echo this. Prices rose 35% when WordPerfect was the dominant product and fell 75% after Microsoft Word took over. More generally prices have fallen 65% in markets in which Microsoft has a presence. They've fallen 15% in markets in which it doesn't. (Stan Liebowiz, “Bill Gates' Secret? Better Products”, Wall Street Journal, October 20, 1988, p2.)

Do Dominant Companies in a Market Require "Special Handling"?

A common belief is that certain "unfair" business practices should be excusable for companies with low market share but not for industry leaders. I believe that a Sun executive recently made a comment to this effect after the publication of Judge Jackson's Conclusions of Law.The idea of making certain laws applicable only when companies are deemed to have sufficient market power is ridiculous. A look at the history of the antitrust laws clearly shows that there is no way for a company to determine in advance when it is doing something that will be deemed prosecutable and when not. The only way it can proceed under this scenario is to seek government permission before it undertakes any economic activity. That is, the creative, productive individuals, who make up business organisations and who engage in providing for the well being of the populace, must seek permission from bureaucrats who create and produce nothing. No company can thrive for long under such conditions.Microsoft's industry dominance is, in any case, way overstated. In 1996 it had about a 4% share of world-wide software revenues. (Adam D. Thierer, “The Department of Justice's Unjustifiable Inquisition of Microsoft”, The Heritage Foundation, November 1997. See http://www.heritage.org/heritage/library/categories/regulation/fyi162.html.) Presumably this won't have increased massively in the past four years. Microsoft dominates the market for PC operating systems and desktop productivity suites. It has a large share of the market for development tools for Windows applications but not as big a share as it does for the first two categories. Also the last category is much smaller, as professional programmers are fewer in number than PC end users. But the Windows market as a whole is huge and there are plenty of important sectors where there is no Microsoft presence. The Enterprise Resource Planning (ERP) market is big and growing. No sign of Microsoft. (Since I wrote this statement Microsoft has announced Microsoft BizTalk Server, a business-to-business e-commerce package that looks as if it may duplicate some of the functionality of enterprise resource planning software.)  The scientific, technical, industrial and engineering software market is large. No sign of Microsoft.Much is said about the unfair advantage Microsoft has in owning the operating system. But:

  1. It is only with Windows that this advantage has seemed to bear fruit. In the MS-DOS days, Lotus, WordPerfect and Ashton-Tate ruled the roost, despite Microsoft's owning the operating system. Most people had scarcely heard of Microsoft.Microsoft dominates the Apple Macintosh software market despite not owning the MacOS operating system. Also, Internet Explorer 4 for the Macintosh was rated higher than Netscape 4. It was considered to make better use of MacOS features and look-and-feel.
  2. Not all Microsoft's Windows applications are spectacular successes. The Microsoft Network (MSN) was bundled with Windows 95, a supposed unfair advantage and anti-competitive by the DOJ's criteria. No one used MSN because it wasn't good enough. (It still isn't, judging by its market share.) Internet Explorer was also bundled. No one used it because it wasn't good enough. It was only when it got to version 3 that people noticed it.

Although it might be difficult to purchase a PC without Windows installed, once purchased, there is nothing to stop anyone from ripping it out and loading OS/2, Unix, Linux or BeOS. Besides Linux there are a number of lesser-known free operating systems – FreeBSD, NetBSD and OpenBSD. (Ironically, Microsoft's own Hotmail web email service runs on FreeBSD and not on Windows NT.) No doubt there are other operating systems that I've not heard of.Suppose the consumer sticks with Windows. Must they then purchase Microsoft Office? No. There's nothing to stop them buying Lotus SmartSuite or Corel Office or one of many integrated packages. They can now even have Sun Microsystems' Star Office, a Microsoft Office-like suite, for free. The German company, Star Division, which invented Star Office, was actually growing its revenues before its acquisition by Sun, despite Microsoft's supposed impregnability in this field. Note that Microsoft Office sales currently comprise 40% of Microsoft's revenues. So if we all stopped buying Office, which we can easily choose to do, this would be a major blow to Microsoft. If we all ripped out Windows, installed Linux and Star Office, which can import existing Office files then, given that most of the big ISVs are already writing Linux applications, Microsoft would lose its leverage over OEMs and possibly go bankrupt. This would be to assume no market response from Microsoft of course. But if the DOJ has its way Microsoft would not be able to make a market response, owing to its privileged monopoly position.

Sun, one of the most profitable computer companies in the world, claims to have thrown out all its Microsoft software. I see no sign of Sun's impending bankruptcy. (Actually, I suspect this is a piece of Scott McNealy (Scott McNealy is the chairman and CEO of Sun Microsystems) hyperbole but I wouldn't be surprised if there's a whiff of truth in it.)

A Commentary on Judge Jackson's "Findings of Fact"

The first major judgement in the antitrust trial of Microsoft was released on November 5th 1999. The second judgement, the Conclusions of Law was published on April 3rd 2000 and is really just a summary of the first judgement. Both judgements came down heavily against Microsoft, accusing it both of being a monopoly and of illegally abusing its monopoly position, that is, of trying to protect and extend that monopoly by illegal means.I consider only the first of the documents referred to. The first part of this document consists of an attempt to establish that Microsoft is, in fact, a monopoly. By this, the judge means not only that Microsoft has a 90+% share of the PC operating systems market but that it holds so-called "monopoly power" in that market. By this he means that Microsoft could, if it chooses, substantially increase the price or decrease (or freeze) the quality of its Windows operating system without incurring any competitive threat. This is alleged to be because of factors such as the following:

  1. Alternatives to Intel-compatible PC operating systems are more expensive, taking into account compatibility with existing applications and the cost of learning a new system.
  2. There is an "applications barrier" to entry associated with the viability of any new Intel-compatible PC operating system. That is, consumers will not be interested in a new operating system unless there are already plenty of applications available for it and software developers won't be interested unless there is already a huge market of potential consumers willing to buy their applications.

Judge Jackson does not say that it is impossible for a new competitor(s) to enter the market. (Indeed, they already exist.) What he claims is that such competitors(s) will be unable to challenge Microsoft's dominance in "less than a few years." (Judge Thomas Penfield Jackson, Findings of Fact, paragraph 31.)  He proceeds to dismiss the alleged competitive threat of various non-PC devices and also of PC operating systems such as Linux, BeOS and the non-Intel Apple Macintosh.A couple of preliminary observations on Judge Jackson's findings are due here.First, his findings amount to saying that it is very difficult to enter the PC operating systems market and hope to win a substantial market share. This would be so regardless of any actions on Microsoft's part. Very few people would disagree with this and I certainly don't.Second, Judge Jackson alleges, much more dubiously, that Microsoft could substantially increase its prices without incurring any cost. The obvious question to ask then is: why hasn't it? It hasn't because obviously it thinks that there is some price above which its revenues would decrease and/or above which it would attract competitors.Concerning improvements to Windows, in paragraphs 43 and 44 Judge Jackson admits that Microsoft does continually make such improvements and that it devotes considerable sums to persuading independent software developers to write to the new functionality. This makes it even harder for alternative operating systems to succeed. But Judge Jackson claims that it would still be prohibitively hard even if Microsoft did not continually "evangelise" Windows.Again, if Microsoft has it so cosy why doesn't it just stand still? Judge Jackson says that Microsoft's continual product innovations make life tougher for potential competitors and increase Microsoft's consumer market and profitability. The implication seems to be that he doesn't want it to act in this way. For example, he writes (paragraph 61):

"First, if there are innovations that will make Intel-compatible PC systems attractive to more consumers, and those consumers less sensitive to the price of Windows, the innovations will translate into increased profits for Microsoft. Second, although Microsoft could significantly restrict its investment in innovation and still not face a viable alternative to Windows for several years, it can push the emergence of competition even farther into the future by continuing to innovate aggressively. While Microsoft may not be able to stave off all potential paradigm shifts through innovation, it can thwart some and delay others by improving its own products to the greater satisfaction of consumers."

Why is it wrong for Microsoft to act in this way? Don't all great businesses aspire to this? The judge also seems to think that it is a sin for businesses to attempt to maximise their profits. He writes (paragraph 63):

"…it is indicative of monopoly power that Microsoft felt that it had substantial discretion in setting the price of its Windows 98 upgrade product (the operating system product it sells to existing users of Windows 95). A Microsoft study from November 1997 reveals that the company could have charged $49 for an upgrade to Windows 98 — there is no reason to believe that the $49 price would have been unprofitable — but the study identifies $89 as the revenue-maximizing price. Microsoft thus opted for the higher price."

Presumably, Microsoft had calculated that $49 would still have yielded the company an adequate profit and not merely enabled it to break even. In which case, the judge would no doubt have argued that, as Microsoft could still make money at this level, it could afford to charge less still.Later, Judge Jackson admits that, as a matter of fact, it is not possible to say whether Microsoft charges the profit-maximising monopoly price. He thinks that it may be charging lower than it needs to, so as to make the Windows platform attractive to more and more users. This, of course strengthens further the so-called "applications barrier to entry" of competing operating systems. Thus it appears that no matter what price Microsoft charges for a Windows upgrade it is guilty of monopoly power.In fact, the price of Windows has fallen in real terms relative to its functionality. According to Richard A. Levy the price of Windows 3.0, which required the added purchase of DOS, sold for $205 in 1990. Eight years later, Windows 98, which does not require DOS, was sold for £169 for the full system and $85 for an upgrade. (Robert A. Levy, Microsoft Redux: Anatomy of a Baseless Lawsuit, p2.)The remainder of the judge's findings is devoted to documenting various ways in which Microsoft imposes, and has imposed, burdensome restrictions, exclusionary contracts, requirements and differential pricing on OEMs, and on other software partners, in such ways that they receive the most favourable terms only if they fully comply with Microsoft's wishes. Essentially, this boils down to the fact that Microsoft wants to do all that it can to keep consumers using its operating systems and applications rather than those of its competitors. So it will naturally drive as hard a bargain as it can to maintain its position.This behaviour of Microsoft is perhaps the most widely condemned of its practices but these critics overlook one simple fact. Windows is Microsoft's product. It created it. It owns it. It should have the right to set the terms under which it is sold. OEMs who do not like those terms are free to seek better terms elsewhere. Consumers who do not like those terms are free to use another operating system, such as the free Linux, or another type of personal computer, such as an Apple Macintosh.

It should also be deemed significant that if Microsoft feels the need to resort to such behaviour, it might be because the applications barrier to entry is not so high after all and that a kinder, gentler Microsoft would soon face significant competition.

Tying

The dominant theme of Judge Jackson's Findings of Fact is the relationship between Microsoft and Netscape, and the alleged harm done by the former to the latter. The two principal "anti-competitive" actions by Microsoft are its bundling (and subsequent integration) of Internet Explorer with Windows and its promotional agreements with Internet Service Providers and related companies. The latter refers to practices such as Microsoft's referring business to ISPs in return for their not promoting Netscape, or for their offering Internet Explorer as the default browser.Microsoft's bundling of Internet Explorer with Windows is a practice known as "tying," one that is commonplace in business. However, tying only seems to incur the wrath of the US government when you're a ruthless monopolist such as Microsoft.Now Microsoft in fact merely insisted that PC manufacturers (OEMs) take Internet Explorer with Windows 95. This in itself was not exclusionary. OEMs could still offer Netscape. What they could not do is remove Internet Explorer. According to the DOJ this gives Microsoft an unfair advantage owing to its dominance of the operating systems market.However, Microsoft also bundled software for the Microsoft Network (MSN) with Windows 95 from the outset. Prior to the launch of Windows 95, online service providers, such as CompuServe and America Online (now both part of America Online, known as AOL), feared that Microsoft's operating systems monopoly would enable it to crush them. What has been the result to date? Up until about 1999 MSN was losing about $200 million a year serving 2 million customers. AOL was very profitable with about 15 million customers. I do not think this picture has changed very much in the last few months.Internet Explorer too was bundled with Windows 95 from the outset and, about a year later, was also bundled with Windows NT, Microsoft's business-oriented operating system. Yet Microsoft was unable to dent Netscape's 90% market share until about Internet Explorer version 3 onwards. Why? Because earlier versions of Internet Explorer were not good enough. The same applied to MSN. The fact is that, for all its market power, Microsoft has to offer products that are good enough in order for it to defeat its rivals. Tying and exclusive contracts in themselves are insufficient. Ironically, in the past, technical commentators criticised Microsoft for its lack of tying. They used to complain that customers had to resort to third-party software, such as disk compression and defragmentation tools, rather than being able to use software already supplied with the operating system. But when Microsoft eventually includes such utilities it is accused of shutting out the competition. So it is damned if it does and damned if it doesn't.An interesting fact to explain for those who think Microsoft has been successful with its applications purely on account of its operating systems dominance is why Microsoft Office also dominates in the Apple Macintosh market. This is even more astonishing given that many Apple Macintosh enthusiasts hate Microsoft.

In his Conclusions of Law Judge Jackson does admit that Microsoft did not foreclose Netscape. Tying is not the same as exclusion. Microsoft has certainly resorted to exclusionary tactics with other products. But, in regard to the bundling of web browsers, it is Netscape that has resorted to exclusionary behaviour, not Microsoft. It offered payments to OEMs if they agreed to ship PCs without Internet Explorer. Netscape also resorted to tying when it was the dominant browser. It tied its email program to its browser, almost destroying a competing email program from Eudora. I have no objection to such behaviour. But it's a bit rich for Netscape to now run to the government.

Exclusionary Contracts

Microsoft put in place a series of arrangements with Internet Service Providers, Internet Content Providers and Online Service Providers which all entailed some sort of restriction on the extent to which Netscape could be offered or promoted as an alternative browser. For example,

"Originally, in return for referring business to fewer than a dozen ISPs (of more than 4000 firms offering ISP services), Microsoft required that they use Internet Explorer as their default browser…" (Robert A. Levy, Microsoft Redux: Anatomy of a Baseless Lawsuit, p9.)

This means in effect that "If Microsoft refers a customer to you, don't give that customer our competitor's browser." Microsoft subsequently relaxed this requirement. Even so, even under the most restrictive of these deals, ISPs were allowed to distribute Netscape to 25% of their customers and were even able to exceed this limit without retribution from Microsoft.In another type of contract, with Internet Content Providers, Microsoft had "Active Channels" which guided users to the specific web sites of the Internet Content Providers. They were not allowed to promote Netscape on the page to which Microsoft directly linked but they could do what they liked on all the other pages.AOL also struck an agreement with Microsoft to have its icon displayed on the Windows opening screen in return for AOL's using Internet Explorer as its default (but not exclusive) browser. It was obviously advantageous for AOL to leverage Microsoft's operating systems dominance in order to promote its services. But there were also technical reasons for its preferring Internet Explorer. AOL provides a customised version of Internet Explorer. At the time Netscape was not customisable enough, and still isn't, to meet AOL's requirements.Other companies supposedly harmed by Microsoft's aggressive practices are IBM, Apple, Compaq, Gateway, Intel and Sun. IBM was threatened with retribution if it continued to offer competitive products such as its OS/2 operating system and its Lotus SmartSuite office application. IBM ignored the threat and continued regardless. A pattern which seems to have been repeated by others. A couple of interesting cases are Apple and Compaq. At one point there was an allegation that Microsoft had sabotaged Apple's QuickTime multimedia program. However, the cause turned out to be buggy software from Apple. A similar incident happened with Real Networks' RealPlayer multimedia program. It's almost as though, if an ISV's application goes wrong when run on a Microsoft operating system, it must automatically be due to Microsoft subterfuge.Microsoft supposedly pressured Compaq into dropping support for QuickTime. However, Compaq denied this, saying that this was due to Apple's decision to charge for a product that they had previously supplied for free.The relationship between Sun and Microsoft is rather different. For a start there is an ongoing court battle between the two companies, which has nothing to do with the antitrust case. Nonetheless, Microsoft's actions in regard to Sun feature in the main antitrust case. And, after Judge Jackson's Conclusions of Law, Sun may formally raise its status to an antitrust issue.Sun invented the Java Programming Language and licensed it to other software companies, including Microsoft. Sun continues to develop the language and, as it adds new versions, licensees are expected to implement these versions according to Sun's specifications or, if they do not, they should not be able to advertise their implementations as compliant.Microsoft, however, has done two principal things. First, it chose not to implement some aspects of the Java Language. Second, it added its own platform-dependent extensions. (Java is a platform-independent programming language, i.e., it can run without alteration on a variety of operating systems.)According to Microsoft its license with Sun allowed it to do this. Sun denies this. Clearly, this is a contractual dispute and should be settled on contractual grounds. It seems obvious that Sun did not intend Microsoft to be able to use Java in this way. But there may have been loopholes in the contract it drew up with Microsoft. If Microsoft is guilty of breach of contract it should, of course, be made to pay the appropriate penalties (compensation to Sun). Of all the charges I have seen against Microsoft, related to this antitrust case, this is the only one that is valid (assuming Microsoft to be in breach).But, regardless of the merits of the case, the DOJ views Microsoft's actions as part of a larger pattern of anti-competitive behaviour - protecting the "applications barrier to entry." Interestingly, one charge relates to Microsoft's Visual J++ software development system, which provides a Windows-only implementation of Java. Judge Jackson claims that Microsoft hid this from developers. Presumably, the justification for this was motivated by quotes such as the following from Thomas Reardon, a Microsoft executive, in 1996:

"[W]e should just quietly grow j++ [Microsoft's developer tools] share and assume that people will take more advantage of our classes without ever realizing they are building win32-only java apps." (Judge Thomas Penfield Jackson, Findings of Fact, paragraph 394)

However, months before this software was released (in late 1998) Microsoft in fact made it crystal clear in technical articles and interviews that Visual J++ was a Windows-only implementation. (Though, strictly speaking, this is not true. Visual J++'s "natural" mode of operation is Windows-only but developers can choose to write so-called "pure Java" code if they choose to. But they must make do with less help from the development environment and make do with a slightly out-of-date version of Java. It is also possible to extend the development environment in such a way that it is as Sun-compatible as other Java development environments. Though developers have to look elsewhere for the extensions.)

My own view of Microsoft's behaviour is this. If Microsoft is not in breach of contract no penalties should be forthcoming. On the other hand, I happen to disagree with Microsoft's strategy on Java, regardless of whether it is legally in the right or not. I think it should either implement Java according to Sun's specifications or abandon it altogether.

Conclusion

The DOJ claims that Microsoft has harmed consumers. But its definition of harm is defined almost exclusively as damage to competitors. It does not say that Microsoft sold consumers shoddy goods or that it defrauded them. On the contrary, Judge Jackson's Findings of Fact actually praises Microsoft for its innovations and the benefits it provides, and has provided, to consumers. On the whole, the DOJ does not say that consumers were overcharged, except in so far as it says that Microsoft could afford to charge less than it does for some of its products and still make a profit. The DOJ's definition of harm means principally that Microsoft's aggressive business practices have prevented or severely hampered competitors' efforts at providing alternative products to Microsoft's. In short, it alleges that Microsoft has restricted consumer choice.The DOJ recently ordered 55,000 copies of Corel WordPerfect Office, so its consumer choice has obviously not been harmed by Microsoft's aggressive practices. I have no quarrel with its choosing WordPerfect Office if it feels it is a better match for its requirements. But, no doubt, the decision was partly motivated by a desire to snub Microsoft. I don't know what's worse, the deliberate snub to Microsoft or the fact that the DOJ employs 55,000 unproductive bureaucrats.Microsoft is condemned for taking steps to protect its dominant position in the market, for acting aggressively to protect the so-called "applications barrier to entry", that is, of making it as hard as possible for competitors successfully to offer anything that could threaten Microsoft's Windows dominance. What then does Judge Jackson want Microsoft to do? Allow competitors to challenge its dominant position while taking no actions to maintain its lead?It should be noted that in virtually every case where Microsoft engaged in so-called anti-competitive exclusionary behaviour it offered some kind of value to its partners. That is, it almost always said: "If you do not trade with company A, we will offer you product X on very favourable terms." Microsoft may additionally have threatened to offer product X on less favourable terms (or not at all) but it was rare that it offered solely a threat. But even if all that Microsoft offered was a threat, that is, a refusal to trade on the terms offered by a partner, it was perfectly within its rights to do so. That is what free trade means.Sure, Microsoft has heaps of economic power. But a fundamental fact that the antitrust laws overlook is the distinction between economic power and political power. Richard Salsman describes this distinction very succinctly (Richard M. Salsman, The Injustice of Antitrust Laws as reflected in the High-Tech Lynching of Microsoft):

"Economic power means the power of a dollar – how many you earn and how many you can spend determines the extent of your ‘power.' Economic power involves trading benefits with whomever you choose to deal and with whoever chooses to deal with you. That is, it involves the power to harm no one…""Political power is the power of a gun – of police, the military, the taxman and the jailer…"

"For those of you still unclear about these distinctions, let me suggest an experiment. After you graduate from Harvard, during your first year in the workforce, don't buy or use any of Microsoft's products. That is, send the alleged "Robber Baron" no money. At the same time, send the government no money. That is, don't pay your taxes. Then wait. Watch who comes after you for your money and how and with what weapons."

Judge Jackson's and the US Justice Department's verdict on Microsoft is that it has damaged consumers by bludgeoning its competitors. But the view of competition they hold is this:

"A free economy cannot exist without competition. Therefore, men must be forced to compete. Therefore, we must control men in order to force them to be free." (Ayn Rand, Atlas Shrugged, New American Library, New York, 1957, p129)

Kevin McFarlane

June 2000

 

Glossary of Computing Terms:

Application Program: Software, such as word-processors and spreadsheets that perform certain types of task.

Application Programming Interface (API): Software that allows application programs to interact with the operating system.

Enterprise Resource Planning (ERP): Software that helps a manufacturer or other business manage the important parts of its business, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders.

Independent Software Vendor (ISV): A company that writes application programs for operating systems. This usually refers to companies other than creators of the operating system itself (who themselves may also write application programs for their own operating system).

Internet Service Provider (ISP): A company that provides software that enables PCs to connect to the internet.

MS-DOS: Short for "Microsoft Disk Operating System." This is the character-based operating system that preceded Microsoft Windows. With such a system the user must enter commands at the keyboard to perform any useful functions, rather than use "point-and-click" with a mouse.

Operating System: Software that controls the basic operations of the PC, such as managing files, printing and launching other programs.

Original Equipment Manufacturer (OEM): A personal computer manufacturer or manufacturer of other computer hardware, such as printers.

Unix: An operating system, available in multiple variants, that competes with Microsoft Windows.

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Further reading:


 

 

 


the Windows market as a whole is huge and there are plenty of important sectors where there is no Microsoft presence

 

 

 

 

 

 

 

 


Microsoft dominates the Apple Macintosh software market despite not owning the MacOS operating system.

 

 

 

 

 

 


Suppose the consumer sticks with Windows. Must they then purchase Microsoft Office? No. There's nothing to stop them buying Lotus SmartSuite or Corel Office or one of many integrated packages. They can now even have Sun Microsystems' Star Office, a Microsoft Office-like suite, for free.

 

 

 

 

 

 

 

 


Sun, one of the most profitable computer companies in the world, claims to have thrown out all its Microsoft software. I see no sign of Sun's impending bankruptcy.

 

 

 

 

 


Judge Jackson alleges, much more dubiously, that Microsoft could substantially increase its prices without incurring any cost. The obvious question to ask then is: why hasn't it?

 

 

 

 


Judge Jackson alleges, much more dubiously, that Microsoft could substantially increase its prices without incurring any cost. The obvious question to ask then is: why hasn't it?

 

 

 


Internet Explorer too was bundled with Windows 95 from the outset and, about a year later, was also bundled with Windows NT, Microsoft's business-oriented operating system. Yet Microsoft was unable to dent Netscape's 90% market share until about Internet Explorer version 3 onwards. Why? Because earlier versions of Internet Explorer were not good enough.


An interesting fact to explain for those who think Microsoft has been successful with its applications purely on account of its operating systems dominance is why Microsoft Office also dominates in the Apple Macintosh market. This is even more astonishing given that many Apple Macintosh enthusiasts hate Microsoft.


At one point there was an allegation that Microsoft had sabotaged Apple's QuickTime multimedia program. However, the cause turned out to be buggy software from Apple. A similar incident happened with Real Networks' RealPlayer multimedia program.


The DOJ claims that Microsoft has harmed consumers. But its definition of harm is defined almost exclusively as damage to competitors.


At one point there was an allegation that Microsoft had sabotaged Apple's QuickTime multimedia program. However, the cause turned out to be buggy software from Apple. A similar incident happened with Real Networks' RealPlayer multimedia program.


the DOJ employs 55,000 unproductive bureaucrats.