Punish Monopolization

by Matthew S. Schwartz

Bill "I-use-$100-bills-as-toilet-paper" Gates, head of Microsoft, (and currently holding the much sought after title of Richest Man in the World,) doesn't look like a business man at all. On the contrary, his big glasses and mousy scruffled hair peg him as a computer-nerd. He no doubt used his diminutiveness as an asset when he was first making big business deals, tricking the competition into believing that there was nothing to fear - this guy wouldn't know anything about business.

That's where they were wrong.

The Justice Department and 20 states have recently filed the biggest antitrust lawsuit since that of Standard Oil. Like Standard Oil, the government contends that Microsoft is in violation of the Sherman Antitrust Act. The act, passed over a century ago in 1890, was developed in order to protect consumers from money-hungry businesses eager do anything in their power - legal or otherwise - to maintain market dominance.

The government claims that Microsoft has violated the Sherman Act in three ways: tying, predatory conduct, and exclusionary agreements. The tying charge is the least damning of the three. The government (largely persuaded by Netscape) is claiming that by including its web browser, Internet Explorer, with the Windows OS, Microsoft is "tying" two separate products and is in violation of the law. However, Microsoft claims that the web browser and the OS are not separate products; they are integrated products. The courts have sided with Microsoft on this issue, if for no other reason than they are hesitant to impede technological innovation.

However, tying is still a very big issue. Even though they are not charging customers for the web browser, Microsoft is gaining valuable market dominance by selling an OS with the web browser built in. With a functional browser already installed, why would customers have any reason to go out and purchase Netscape Navigator, a competing web browser? Which leads to the next point: predatory conduct. As a monopoly (Microsoft controls 90% of the PCs on the market), it is illegal to use dominance in one area to gain dominance in another area. However, this is just what Microsoft is doing, and has been doing for years.

One example: years ago, Microsoft developed a partnership with IBM. They backed IBM's OS, OS/2, saying that Windows would be phased out, and urged software companies to begin writing applications for OS/2. However, Microsoft never meant what it said. While other programmers were writing for OS/2, Microsoft's programmers were in fact writing their own applications (word processors, spreadsheets, etc.) for Windows. Then, Microsoft pulled out of its partnership with IBM, instead pushing its own OS. And while most other programmers had been spending time working on applications for OS/2, which they were led to believe would become the new standard, Microsoft had gotten a huge head start writing applications for its own OS. Thus, Microsoft was able to use its OS dominance to gain dominance in the applications market.

More recently, when Microsoft was trying to break into the web browser market, it supposedly tried to illegally divide the market with Netscape. In a meeting, it suggested that Netscape let Microsoft have the PC market, while Netscape could have the rest. After Netscape refused, Microsoft planned to use their OS dominance to crush Netscape. Microsoft's group vice president was quoted in the New York Times as telling industry executives, "We are going to cut off their air supply. Everything they're selling, we're going to give away for free."

Microsoft also used its dominance to force other companies to carry their products instead of competitors. In one such exclusionary agreement, Microsoft supposedly forced Apple to use Microsoft's web browser instead of Netscape's browser, by threatening to stop producing software for Apple if they didn't. In another agreement, Microsoft talked various Internet Service Providers, including America Online, into using Microsoft's browser instead of Netscape's in exchange for a promise that Microsoft would include a link to America Online in its OS.

Software makers have always regarded Microsoft as a bully. They dread the day that Microsoft decides to enter their market, for fear that Microsoft will use its massive power to destroy them. Becoming a powerful international company on the merits is one thing; illegally maintaining one's dominance is something else altogether. The court should rule in favor of the government, and Microsoft should be punished for its illegal acts. MR

This article was published in the 18 November 1998 edition of The Michigan Review (Volume 17, Number 4).
For questions or comments, see the Contact Information page.