Protecting Competition or Competitors? The Government’s Double Edged Sword
Introduction Protecting the competition, not the competitor, has become a commonly used statement in recent interpretations of the Sherman antitrust acts of the late 19th century. Such words, however, were not used in the preliminary decision of the U.S. v. Microsoft monopoly case. Just recently, U.S. District Judge Thomas Penfield Jackson cast Microsoft as a "voracious monopolist that has hindered innovation, harmed consumers, and run roughshod over its rivals." (Chandrasekaran, 1999: 1) A 207-page "findings of fact" report did not conclude whether Microsoft violates the Sherman Antitrust Act. The report suggests, however, that Microsoft is indeed a software hog with a decade of at least 90%-95% control of the Windows market share.
Chief Executive Officer Bill Gates said he respectfully disagrees with a number of the court’s findings. "In the end we’re quite confident that our integrity…and the benefits we provide consumers will be upheld." (Chandrasekaran, 1999: 1).
It seems that in an effort to protect the consumer, the government may have forgotten the power of the consumer’s dollar. Perhaps Microsoft has control of the market share because the product is superior to all others, and consumers know it. Is it possible that the government would be punishing the consumer, if in fact consumers truly are happy with the Microsoft product, and have chosen to buy it, not because Microsoft has a significant influence on the market, but because the product is more advanced?
What makes a product superior to another? Vision, innovation, risk, marketing: the same elements that Adam Smith praises in a new venture, then rewards, if successful, by granting the company a temporary monopoly in the market. According to Smith, this is not bad. Perhaps Microsoft is still a temporary monopoly in a market of short-term products, created by the power of the consumer.
According to Judge Jackson, as well as countless others who try to apply antitrust laws drafted almost a century ago, Microsoft is a monopoly. Yet, do the antitrust laws from 1911 still apply in the United States as technology grows and changes at lightening speed?
In a country which promotes capitalism and a fine work ethic, is it not hypocritical that the same government would try to hinder or break up the success of an individual and the work of such freedoms? This is the government’s double-edged sword. In essence, Microsoft grew out of its own tiresome efforts. Its products and profits are examples of dedication and innovation that the government hails in a capitalist economy. Yet, as soon as one’s success looms too large over the society, the Feds begin to cripple the innovator. Does the government feel threatened? Are they really working to benefit the consumer, or just trying not to be consumed?
Perhaps Adam Smith did not realize the amount of power he would designate to the government by stating,
Just as the people of the United States are progressing ahead with advances in technology, so must the government advance in its ability to govern the people. Laws of past centuries are not sufficient to comprehend the language of America’s people today. What laws need to be created that can interpret the power of the Internet and the computer in today’s society? Is the power of the people still represented by the government, or has it been sacrificed as well to the misinterpreted laws of the past?
The trick to the current case is proving if Microsoft has essentially been malicious in business practice, in order to gain its current market share, as well as, if that alleged market share poses a threat to consumer choice, and other competitors trying to enter the market.
Perhaps Microsoft can open some windows. The conclusion of the U.S. v. Microsoft antitrust case will likely foreshadow the future of technological innovation and growth within American business. A closer look at what constitutes a temporary monopoly versus a real monopoly will be examined. Is Microsoft purposefully and maliciously manipulating the consumer, or are they simply exercising their freedoms in a capitalistic market? How are the Sherman Antitrust Laws, the Clayton Laws, and the innovation of the Internet mis-interpreted within this monumental case? What kind of laws should be created to guide the success of capitalism into the 21st century?
A Whole New World At the dawn of a new millenium, technology is overcoming the United States, and the world, with its awesome advances in efficiency, communication, and research. More and more people are finding themselves receiving the benefits of technological advancements and innovations, especially in the area of computers. The advent of the Internet has re-shaped the way people communicate with one another, allowing individuals to share information in minutes what once took days to relay. This phenomenon has changed the way businesses operate, and the way people conduct their daily lives. Students no longer cling to the card catalog anymore when referencing books in a library. They now turn to their computers where they can access the library’s resources through the library’s site on the Internet. Better yet, they can access other university’s libraries, or they can skip the library all together and fulfill thorough research requirements by simply "surfing the web." Continuous development of on-line business services, banking programs, shopping networks, and entertainment opportunities are transforming individuals from television oriented couch potatoes to cybercafe information gatherers.
In other words, we are experiencing what the jargon calls "convergence." This indicates the replacement of what we now see as different "media" (telephone, fax, radio, television, print publishing, the music business, and movies) by a single technology: the distribution of digital information via "switches," which are just differently configured computers. Control over the operation of those switches means power to shape the behavior of all our communications media, which is also control over the distribution of wealth and political authority in contemporary society (Moglen, 1998: 6).
As Adam Smith would agree, Microsoft claims this right as a reward for technical innovation. Others, however, contest that Microsoft never has been a technical leader in the industry. Many admit that Microsoft has made a living by buying up technology developed elsewhere and bundling it into the operating system, thus inhibiting further improvement. This act is often referred to as collusion, and is illegal based upon the antitrust laws as they currently exist within the United States of America.
Definitions and Variables There are numerous variables that contribute to the determination of whether a firm yields monopoly power over its consumers. Some of the fundamental definitions and laws include the definition of a monopoly as stipulated by the U.S. government, the enforcement of the Sherman Antitrust Act, the Clayton Antitrust Act of 1914, the Federal Trade Commission, and the Department of Justice. All of the above mentioned variables play a crucial role in determining, not simply whether Microsoft is maintaining illegal monopoly power, but also whether other companies and practices are ill suited for American consumers.
Monopoly A monopoly is an economic situation in which only a single seller or producer supplies a commodity or a service. For a monopoly to be effective, there must be no practical substitutes for the product or service sold, and no serious threat of the entry of a competitor into the market. This enables the seller to control the price. Of the following elements, one or more are of great importance in establishing a monopoly in a particular industry. 1) Control of a major resource necessary to produce a product, as was the case with bauxite in the pre-World War II aluminum industry; 2) technological capabilities that allow a single firm to produce at reasonable prices all the output of a particular commodity or service, a situation sometimes described as a "natural monopoly; 3) exclusive control over a patent on a product or on the processes used to produce the product; and 4) a government franchise that awards a company the sole right to produce a commodity or service in a given area. (Microsoft Encarta) There has been significant research completed to explain how the behavior of a monopoly firm differs significantly from that of a competitive firm. All companies in business must confront two forces: 1) a set of demand conditions for the commodity or service it produces; and 2) a set of cost conditions that governs how much it has to pay to those who supply the resources and labor required to produce the product. Every business firm must adjust its production to the point at which it is able to maximize its profits. The major difference between a monopoly firm and one in a competitive industry is that the monopoly will have greater control over the price it charges for its product, although this control is never absolute. The monopoly firm, thus has more freedom than the competitive firm to adjust price, as well as production, as it strives to achieve a maximum profit. (Microsoft Encarta) Economically, monopolies often result in a smaller output of goods or services as compared with competition, and also in prices that are often higher than those in competitive industries.
Sherman Antitrust Act The Sherman Antitrust Act was passed in July 1890, through the efforts of Senator John Sherman of Ohio. The act declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations."(Microsoft Encarta) The act was key legislation in the U.S. effort to maintain by legal means a competitive economic environment.
Clayton Antitrust Act In 1914, the U.S. Congress passed the Clayton Antitrust Act and also established the Federal Trade Commission. The Clayton Antitrust Act made illegal such practices as price discrimination and tying contacts, which forced a buyer or seller to deal exclusively with a particular firm.
Celler-Kefauver Act More recently, the Celler-Kefauver Act (1950) attempts to prevent mergers through the acquisition of the assets of competing firms if the effect is to substantially lessen competition. Overall, the Supreme Court has said, that the "antitrust laws in general, and the Sherman Act in particular, are the Magna Carta of free enterprise," guaranteeing "the freedom to compete – to assert with vigor, imagination, devotion, and ingenuity whatever economic muscle (a business) can muster" (Kempf Jr, 1999: B5). Furthermore, many courts have emphasized…that the "antitrust laws protect competition, not competitors." (Kempf Jr., 1999: B5) In the preliminary decision that was just released by Judge Jackson, he did conclude the Sherman Antitrust Laws had been broken. Sound antitrust policy, however, as well as ensuring that consumer interests come ahead of competitor interests are the core of the case. (Kempf Jr., 1999: B5).
Microsoft Corporation
The Case Although the name Microsoft has come across the table of the Federal Trade Commission and the Department of Justice several times within the last decade, it is the most recent allegation that has stirred up the legal community and led reporters through media bliss. On May 18, 1998, the U.S. Department of Justice filed the antitrust case against Microsoft alleging that Microsoft used a variety of illegal business tactics to monopolize the market for PC operating system software and to extend its dominance into the growing market for Internet browsing software. The government contends that Microsoft was creating an unfair dominance in the PC software industry by "bundling" Microsoft’s own web browser, Internet Explorer, within its Windows software package largely to undercut Netscape’s browser, a seen threat to Windows. The government also contends that Microsoft forced personal computer makers and Internet service providers to sign contracts that limited their ability to promote the Netscape browser. None of this information should surprise legal analysts, businessmen, or consumers. Microsoft had been faced with antitrust charges before. In 1990, the Federal Trade Commission (FTC) investigated Microsoft for alleged anti-competitive practices. They were unable to reach a decision, however, and the charges were dropped. The Department of Justice continued the probe which resulted in an agreement in 1994 that called for Microsoft to change the way its operating system software was sold and licensed to computer manufacturers. Until that time, Microsoft had been selling its Windows software packages to OEM’s (___) so that major PC makers around the world were selling their hardware with only Microsoft’s software. Essentially, a computer is but a series of wires and metal without any software to read the entangled infrastructure. Bill Gates, and Microsoft, were proved to have been selling software to such companies at incredibly cheap prices. So cheap, in fact, that PC producers could not help but turn away from Microsoft’s competitors. Is it simply shrewd business strategy, or was Microsoft especially malicious in a long-term attempt to control the market? Monopolization in itself is not illegal. As it pertains to the current aspect of this case, in the recent allegations, Microsoft was charged with breaking Section One and Two of the Sherman Act. Section One prohibits contracts, combinations, and conspiracies in restraint of trade. Section Two prohibits attempts to monopolize "any part of the trade or commerce among several states, or with foreign nations." (Goldman Rohm, 1999: 19). What is illegal is if a company has maintained monopoly power through predatory practices. Unfortunately, it is difficult to prove. The other extremely important element that will determine if Microsoft is an illegal monopoly is if the consumers are harmed. By h armed, a consumer must face especially high prices of a product that exists alone in the market, thus forcing consumers to buy without options. Alternatively, a company could lower its prices so low, both to consumer, and to other companies, that other competitors would not be able to compete, forcing them out of the market, again to leave the consumer with a lack of buying options. The trick to the current case is proving if Microsoft has essentially been malicious in business practice, in order to gain its current market share, as well as, if that alleged market share poses a threat to consumer choice, and other competitors trying to enter the market.
Microsoft’s View Microsoft’s lead lawyer is John Warden. Of his chief goals is to prove that Microsoft still has competitors. If there are competitors, than consumers have choices, and Microsoft is not an illegal monopoly. Research has suggested that Microsoft does in fact have competitor. The competitors and products that are in direct competition to Microsoft are:
In regards to the sensitive Internet browser issue, it has been recognized that,
Since data changes so quickly, however, suppose that Microsoft eventually becomes the number one used Internet browser, as Microsoft Windows is forecasted to become the most purchased and used software package. Many conclude that this would be the result of illegal tying contracts to OEM’s. The government’s finding of facts report concentrates heavily on this question of whether or not Microsoft was wrong to distribute the Internet Explorer Browser free over the Internet and promotional giveaways, as well as bundled in with Windows software. Microsoft took a huge loss in order to distribute the browser free of charge to OEM’s who were accustomed to paying a licensing charge for the browser. Still, "Microsoft’s tying contracts with OEM’s are not exclusionary. To require Internet Explorer is not to exclude Netscape." (Levy, 1999: G-5.) Consider the Washington Post as an analogy to Microsoft. The Post has a virtual monopoly in the Washington DC newspaper market. The Post "ties" its business section to the rest of the paper. When you buy the Post, one also gets the business section. Yet, the Post does not insist that its subscribers not buy competitive independent business publications like the Washington Business Journal. Imagine if the Post were forced by the government to untie its business section from the rest of the paper. (Levy, 1999: G-5). Lastly, and possibly most importantly is that, "Netscape controlled 90 percent of the browser market long after Microsoft began bundling its browser with Windows." (Levy, 1999: G-5). It was not until after PC Magazine, and then consumers discovered that newer versions of Internet Explorer were superior to Netscape’s browser, that Microsoft’s market share exploded. Simply, a better product won the battle for consumer acceptance. Almost hypocritically, it is the American capitalist system that allows for product innovation and individual company success. At what point, however, does success become excessive enough to control consumer action? Just as products are removed from the market if they do not meet certain standards of American protocol, products are now removed from the market if they become too good. Clearly this is harmful to the consumer. Surely, Adam Smith would not want to hamper innovation that benefits the consumer. Ideally, Smith says, "Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only as far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it" (Smith, 1776: 660). He furthers his thought by commenting on how the mercantile system does remove consumers from being first priority, and how the importance of trade is switched to the priorities of the producers. Regardless, however, of the system that is used, in order for Microsoft to be truly considered an illegal monopoly, the government must prove harm to its consumers. "Microsoft's economic witness, Richard L. Schmalensee, dean of MIT's Sloan School of Management, countered that the government has provided no evidence of consumer injury from the company's conduct and any prediction that would occur in the future is ‘sheer speculation.’" (quote)
The Government’s View With all the evidence listed above, and still no mention that consumers are harmed, the government, represented by the Department of Justice (DOJ), continues to argue that Microsoft could not have maintained such market dominance without illegally conducting business. Since the DOJ has been unable to prove strong consumer harm as a result of Microsoft’s business practices, in reality they are chasing Microsoft with the antithesis of the antitrust laws; competitors first, competition second. The government should be promoting competition, not handicapping the players who happen to compete at an incredibly effective level. The goal of any competition is to beat the opponent, not to tie the game. Although rules of the game are outlined, there is no penalty for the team whose players lift extra weight or practice seven days a week. In essence, the "DOJ is pursuing industry egalitarianism "a level playing field for all" (Kempf Jr., 1999:B5). In other words, equal opportunity should create equal outcome? Impossible.
The government’s lead lawyer is David Boies. His main goal is to prove:
The Department of Justice enjoyed a temporary victory when Judge Thomas Penfield Jackson stated in his preliminary decision that,
These statements, combined with three other main allegtions, are the basis for the government’s claim that Microsoft is an illegal monopoly. The three main facts are: 1.) Microsoft’s share of the market for Intel-compatible PC operating systems is extremely large and stable, 2.) Microsoft’s dominant market share is protected by a high barrier to entry, and, 3.) largely as a result of that barrier, Microsoft’s customers lack a commercially viable alternative to Windows. (Findings of Fact, 1999, ) Yet, even with all these statements, the government fails to prove absolutes. Microsoft’s share of the market may be extremely large and stable, but that does not imply that there are no longer competitors in the market. A high barrier to entry does not indicate no barrier to entry. Lastly, the claim that Microsoft’s customers lack viable alternatives to entry is ludicrous as long as there are other competitors still competing. Whether or not such competitors are aggressive in marketing their products and being visable to their consumers is not what is being contended. Once again, the government has failed to prove that Microsoft’s success is the result of malicious practices. What they have proved is that Microsoft has displayed the best use of competitive markets and the capitalist system, as set up by American liberty herself. Ironically, if the government is trying to create a level playing field for all, it seems odd to note that Microsoft formed at a time when IBM clearly dominated the PC software market. In fact, IBM was under serious investigation for antitrust behavior because of their market size. Yet, Microsoft, a tiny, newly formed company, was able to conquer the "Big Blue." Their playing fields were hardly equal, but Gate’s innovation and drive pushed him up and over the mountain top.
Legislation It does appear, by the evidence that has been presented thus far, that Microsoft is quickly gaining an advantage in the market that has not been witnessed before. The government may be uncomfortable with the idea of such an influential industry gaining too much power, especially in such unchartered territory. The difficulty that the government is facing stems from old antitrust laws and completely new products. The laws that were created specifically to combat one major antitrust case are not applicable in this situation. Numerous comparisons have been completed that compare John D. Rockefeller to Bill Gates. Both men of awesome innovation transformed the society of their times. Rockefeller used oil and fuel to change the economy, Gates uses software. Both men understood intelligence, and knew how to manipulate their competitors. Their profits and their restlessness pushed them into new fronts. Rockefeller spread out to railroads, shipping, steel, gas, and copper. Gates has leveraged himself from computer operating systems to applications software, into the Internet, and now, the travel business, financial services, the media, and beyond (Goldman Rohm, 1999: xiii). In Rockefeller’s time, antitrust laws were created because the government has never seen that kind of business manipulation before. Rockefeller’s success in the oil industry shocked the government and made them nervous. Thus, laws were created and the company was broken apart. The same should apply today. In order for the government to prove that Microsoft acted maliciously in its business ventures, and not just strategically to beat it competitors, it will need to alter its legislation. The laws as they are stated currently indicate that free competition is the main premise for the acts. Just as Smith advocated for a temporary monopoly to be returned to the state after it enjoyed its time of fruitfulness, the Department of Justice is interpreting the laws to show that Microsoft is disrupting the state’s free competition practice. The main difference, however, between Adam Smith’s contentions and Microsoft, is that Microsoft is not one single invention, or one book. The power in Microsoft comes with its name, now with its products. In reality, Microsoft has created a series of short-term products which have each been successful enough to receive wide acclaim from consumers before being replaced by an even better model. Thus, when Windows 95 was released, it ultimately received temporary monopoly status for a couple reasons. Windows software was the first software product to use "click-on" icons, in place of the standard DOS protocol. The Windows format was new, and possibly even a risky adventure to introduce to accustomed DOS interface consumers. Yet, its innovation became widely accepted, and computer manufacturers were eager to incorporate the successful product into their product. Thus, Windows 95 became known and respected as the number one used software package in the United States. As time went on, Microsoft continued to update its software and eventually introduced an improved product called Windows 98. Although the product was similar to the first, it was a new product and the old one was eventually removed from stores. Due to Microsoft’s success and profit, it was able to invest in other avenues. Microsoft was fortunate to be chaired by Bill Gates who seemed to have a vision for the future. Gates looked at technology and saw the incorporation of the Internet and eventually all the other switches: tv, cable, etc. He used his innovation, and his money from the success of one product to build others. He acquired other companies who made other products. He created Microsoft Internet Explorer and the Microsoft Network. He dabbled in the entertainment sector and becomes a minority partner in DreamWorks SKG. Yet, in completing all these ventures, he has yet to deter consumers from viewing other options. In fact, he has created more access to the Internet and other communicative devices that actually increase consumer’s awareness. True, Bill Gates has engraved the word Microsoft into more objects of consumer choice than any other company to date. This name recognition, however, does not indicate an illegal control of the consumer’s market. Suppose that every product that Bill Gates and his company created were owned by Microsoft, but all had different names? Even if every product was just as successful as it is currently with the Microsoft name attached, is it as likely that the Department of Justice would be issuing subpoenas? Name recognition can be threatening, but is more often than not, the result of quality marketing. The consumer’s biggest decision aid when purchasing a product is the brand. Microsoft has made a name for itself. That certainly should not limit a consumer, nor indict the company as a malicious monopolizer.
Consumer Analysis Just what does the consumer gain from Microsoft as a monopoly? Like any other company with large brand name recognition, Microsoft has a reputation to uphold. Products are expected to be high quality and user friendly. Their costs are supposed to be competitive with other competitors, even though consumers generally expect a higher quality product from the brand name.
Unfortunately, today’s antitrust enforcers appear less interested in the reality of competition. They are focused on the façade of many competitors whose success is assured by depriving consumers of their present unrestricted ability to purchase bundled offerings that quickly and easily promote them with a high quality, low cost package they want. Microsoft and CEO Bill Gates continually attest to the consumer’s importance within their business. A statement from Bill Gates, made shortly after the preliminary ruling was released calling Microsoft a monopoly, said the following.
Gates proceeds to the recognize the computer industry as intensely competitive and innovative, thus the very reason and importance for creating great value for consumers, not to mention millions of new jobs. It is no secret that Microsoft places heavy emphasis on their consumer’s opinion. "Microsoft's products are popular because we've focused on our customers and innovated to meet their needs," Gates says. "In this industry, no company has a guaranteed position. Microsoft has succeeded because we have been guided by the most basic American values: innovation, integrity, serving customers, partnership, quality and giving to the community. We compete vigorously, but fairly." The Court even recognizes in paragraph 408 of its findings that consumers have benefited from Microsoft's actions:
Although the government has not been able to prove anything yet, their biggest ace card would be to indicate how Microsoft has disrupted the market by harming its consumers. As mentioned before, the Department of Justice must prove this, not by demonstrating that industry competitors are hurt, but by showing how Microsoft consumers are choosing poorly because there were no other options. Speculation, of course, is not permissible evidence.
Stephen Houck, a government lawyer said, "The overwhelming weight of evidence is not just that Microsoft is a monopoly, but wielded its monopoly power to the detriment of consumers. If the market remains structured as it is currently, Microsoft will retain both the means and the incentive to do what it has done for years and restrict consumer choices, raise prices, and stifle innovation." (Martinson, 1999: 25) The government sites many cases in which Microsoft used strategic business deals to get a product implemented into a computer’s manufacturing main frame, as well as instances when Microsoft took loses on products just to introduce them into a competitive market. Their moves, however, can not be considered as anything more than innovative if any company could have used the same technique. Surely, hundreds of software companies got ousted from the industry, or even forced to re-route their work because of Microsoft. Yet again, since when did the competitor’s rights come first? In essence, Darwin’s survival of the fittest applies to industries, just as much as Smith’s ideas of personal greed dictate communal advancement. Microsoft has done nothing more than fight for its survival in an increasingly competitive industry.
Conclusion Overall, Microsoft has been attacked with a double edged sword. In a country that has worked to promote a competitive economy and innovative entrepreneurs, success is a formula that eventually equals death. Laws that are designed to prevent from Possible monopoly breakups
Works Cited Hahn, Robert W. 1999. "If Microsoft Lose, Then What?" The Los Angeles Times September 20, page B5. Ignatius, David. 1999. "Law Trails Technology." The Plain Dealer September 24, page 11B. Kempf Jr., Donald G. 1999. "Antitrust Upside Down: The Microsoft Case." The Seattle Times October 11, page B5. Levy, Robert A. 1999. "Going too Hard on Microsoft." The San Diego Union-Tribune September 26, page G-5. Martinson, Jane. 1999. "Dismantle Microsoft." The Guardian September 22, page 25. Moglen, Eben. "Microsoft Wants Us." The Nation Volume 266 Issue 22, pages 5-6. |