Policy Debate: Is Microsoft A Monopoly?

Issues and Background

The current popularity of Windows does not mean that its market position is unassailable. The
potential financial reward for building the "next Windows" is so great that there will never be a
shortage of new technologies seeking to challenge it. Powerful competitors such as IBM, Sun
Microsystems and Oracle are spending hundreds of millions of dollars annually to develop new
software aimed squarely at replacing Windows. That is one reason why we price Windows so
low. If we increased prices, failed to innovate, or stopped incorporating the features consumers
want (such as support for the Internet), we would rapidly lose market share.
~Bill Gates, The Economist, 6/13/98
Everyone who uses a computer or depends on computers has an interest in seeing Microsoft's
anticompetitive and anticonsumer practices curtailed by the antitrust authorities. Microsoft's
claim that it is defending its right to innovate is a cruel joke in an industry that sees its best
innovators attacked by the company's anticompetitive actions. Microsoft's agenda isn't
innovation, it's imitation, as well as the imposition of suffocating control over user choices and
an ever-widening monopoly.
~Ralph Nader and James Love, ComputerWorld, 11/9/98
Microsoft operating systems account for approximately 90-95% of microcomputer computer
operating systems. Microsoft's Windows operating system has become the de facto standard for
home and business computer applications. It is fairly clear that Microsoft is the dominant firm in
the market for computer operating systems. The question in the current Microsoft antitrust case is
whether or not the computer firm has used its market dominance to restrain trade in violation of
federal antitrust statutes.
The specific actions with which Microsoft has been charged include:
1. monopolizing the computer operating system market,
2. integrating the Internet Explorer web browser into the operating system in an attempt to
eliminate competition from Netscape, and
3. using its market power to form anticompetitive agreements with producers of related
goods.
Under current interpretations of U.S. antitrust law, Microsoft can be found guilty of
monopolization in the computer operating systems market only if it used its market dominance to
charge a price that exceeds the competitive price. Determining the "competitive price," however,
is not an easy task in this market since such a price is not directly observed. Imputing this price
from production costs is problematic since many of the costs of research, development, and
support in a company such as Microsoft are difficult to accurately assign to individual software
products. Those who believe that Microsoft is guilty of monopolization argue that Microsoft has

received up to $10 billion in monopoly profits. Microsoft supporters argue that Microsoft has
kept prices low because of the threat of potential competition.
The government alleges that Microsoft's decision to integrate Internet Explorer into the operating
system was designed to eliminate the competitive threat posed by Netscape and Sun
Microsystem's Java programming language. Microsoft argues that this action is a natural
extension of the Windows environment and that it should not be faulted for providing a free
program to all users. The recent purchase of Netscape by AOL is used as evidence by both sides
of the dispute. Microsoft argues that this reflects the the dynamic and competitive nature of the
software market. Critics of Microsoft argue that this was required only because of the reduction
in Netscape's market share as a result of Microsoft's unfair trade practices.
The third part of the government's case is that Microsoft has used its dominance in the operating
system market to force other firms to agree to policies that limit competition from products
produced by firms that compete with Microsoft.
Ultimately, the question that must be answered is whether Microsoft has maintained its market
dominance partly by the use of illegal anticompetitive practices. In a somewhat unusual move
that may have been designed to spur negotiations, on November 5, 1999, Judge Thomas Penfield
Jackson issued findings of fact that were based on the evidence that had been presented on the
antitrust allegations. The Court's Findings of Fact held that:

Microsoft has a monopoly of PC operating systems,

Microsoft harmed consumers through its use of its monopoly powers, and

several of Microsoft's contracts had anti-competitive effects.

On June 7, 2000 a decision was reached that would split Microsoft into two firms, one that
would provide operating systems and a second that would provide software applications. The
decision has been stayed pending the completion of appeals. On June 28, 2001, the Washington
DC Court of Appeals ruled on Microsoft's appeal. It upheld the decision that Microsoft was a
monopoly, but vacated the decision to split Microsoft into two firms. The case has been sent back
to the District Court for a new decision on remedies. Judge Thomas Penfield Jackson, the
original trial judge, has been removed from the case. Microsoft submitted an appeal to the U.S.
Supreme Court. (This appeal was rejected on October 10, 2001.)
On September 6, 2001, the U.S. Justice Department announced that it would no longer argue that
Microsoft should be broken up into separate companies. A settlement with the Federal
government was reached on November 2, 2001 that required Microsoft to release portions of its
source code to competitors to allow other programs to effectively function under Windows. A
substantial amount of this source code was released in AUgust 2002. This settlement also allows
computer makers to select which Microsoft products would be loaded onto computers that they
sell. While most U.S. states have accepted this settlement, 16 U.S. states and the District of
Columbia (as of 4/10/03) are still pursuing antitrust action against Microsoft.

Microsoft had attempted to settle several private antitrust cases with a settlement in which they
would have provided free software to schools. This settlement was rejected by Federal District
Judge J. Frederick Motz on January 11, 2002 on the grounds that this settlement would have
enhanced Microsoft's monopoly power by encouraging schools to replace computer systems that
used alternative operating systems. A variation of this agreement, however, that provides for
direct compensation of owners of Microsoft products was used to attain a settlement of a class
action suit against Microsoft in California on January 10, 2003. Some of the unclaimed funds
from this settlement would be used to fund computer purchases by the poorest school districts in
the state.
Even with the settlement of the federal antitrust case, there are still several aprivate ntitrust
actions pending against Microsoft. AOL and the Be Corporation have each brought antitrust
charges against Microsoft, claiming that Microsoft has undertaken actions that harmed the
producers of Netscape and BeOs. The European Commission is also currently discussing
possible antitrust action against Microsoft.

Primary Resources and Data

Antitrust Division of the U.S. Department of Justice

http://www.usdoj.gov/atr/
The Antitrust Division of the U.S. Department of Justice (in cooperation with the Federal
Trade Commission) is charged with investigating possible cases of antitrust violation,
analyzing merger applications, conducting studies on competition and antitrust policy,
and prosecuting violations of antitrust law.

Federal Trade Commission

http://www.ftc.gov/
The Federal Trade Commission (FTC), in cooperation with the Antitrust Division of the
Department of Justice, is charged with enforcing U.S. antitrust laws. This web site
contains information on recent antitrust cases, press releases, speeches, and other
information relating to U.S. antitrust policy. While at this site, be sure to examine the
mission statement of the Bureau of Competition, the FTC's antitrust division.

The Antitrust Case Browser

http://www.stolaf.edu/people/becker/antitrust/index.htm
Anthony Becker of Saint Olaf College provides this site that contains summaries of U.S.
antitrust cases, U.S. Supreme Court antitrust decisions, and links to a variety of U.S. and
international antitrust related web sites. In addition, this site contains the complete text of
the Sherman Antitrust Act, and slightly edited and abridged versions of the Clayton
Antitrust Act and the Federal Trade Commission Act.

U.S. Antitrust Law

http://www.law.cornell.edu/uscode/15/ch1.html

This page, provided by the Cornell University Law School, contains the complete text of
current U.S. antitrust law.

Antitrust Policy
http://www.antitrust.org/
This site, originally created by Luke Froeb at Vanderbilt University, provides a wealth of
information on U.S. antitrust policy. Economic analysis, case studies, and news items are
provided that deal with mergers, price fixing, vertical restraints, and other antitrust issues.

November 5, 1999 Court's Findings of Fact

http://www.usdoj.gov/atr/cases/f3800/msjudgex.htm
The November 5, 1999 Court's Findings of Fact indicate that Microsoft is a monopoly
that has used its monopoly power to harm consumers. This document contains the
complete text of these findings.

June 7, 2000 Final Judgment

http://usvms.gpo.gov/
This final judgment contains the order to split Microsoft into two separate companies:
one providing the operating system and the other providing application software.

United States Court of Appeals for the District of Columbia Circuit, "U.S. v.
Microsoft"
http://ecfp.cadc.uscourts.gov/MS-Docs/1720/0.pdf
This is the text of the Washington DC Court of Appeals ruling that upheld the finding of
fact but vacated the remedy in the Microsoft case. (To view this document, the Adobe
acrobat viewer plugin is required. You may download this viewer by clicking here.)

Revised Proposed Final Judgment

http://www.usdoj.gov/atr/cases/f9400/9495.htm
This document contains the 11/6/01 revised proposed final judgment in the federal
antitrust case against Microsoft.

Comments on the United States v. Microsoft Settlement Provided to the Court on

February 14, 2002
http://www.usdoj.gov/atr/cases/ms-major.htm
This website contains the text of the 47 "major" responses to the proposed settlement in
the Microsoft antitrust case. Only 5 of these argued for the proposed settlement.

Microsoft, "Transcript of Microsoft News Teleconference on California Class Action

Antitrust Settlement"
http://www.microsoft.com/presspass/legal/ca/01-10-03newstranscript.asp
This document contains a transcript of the January 10, 2003 teleconference announcing
the settlement of the California class action antitrust suit against Microsoft.

The Seattle Times' Microsoft Trial page

http://www.seattletimes.com/microsoft/
The Seattle Times maintains an archive of newspaper articles relating to the Microsoft
antitrust case at this site. This site provides extensive coverage of recent developments in
the trial.

Time, "Target: Microsoft"

http://www.time.com/time/reports/microsoft/
This site contains links to articles and statistics concerning the Microsoft case that have
been compiled by Time magazine.

Yahoo! Microsoft Case links

http://headlines.yahoo.com/Full_Coverage/Tech/Microsoft/
Yahoo! provides links to online coverage of the Microsoft antitrust case. This page is
updated several times a day and is perhaps the most comprehensive source of current
news about the case. Links to online articles and audio and video resources are available
at this site.

NewsLinx Microsoft Case page

http://www.newslinx.com/newstopics/reno_vs_gates.html
NewsLinx provides another set of links to online news articles dealing with the Microsoft
antitrust case. Links to news articles are sorted by publication date. (Only articles through
February 2001 are listed on this page.)

FindLaw Special Coverage: Microsoft Case

http://news.findlaw.com/legalnews/lit/microsoft/index.html
This page, provided by FindLaw, contains an extensive collection of links to online
information dealing with the Microsoft antitrust case.

Michelle Clark Neely, "Does Big Business Need Taming?"

http://www.stls.frb.org/publications/re/1998/c/re1998c4.html
Michelle Clark Neely examines the evolution of the economic theory that underlies
antitrust policy in this July 1998 article which appeared in Regional Economist, a
publication of the Federal Reserve Bank of St. Louis.

Linux Online
http://www.linux.org/
Linux is the most widely used unix alternative to Windows in the personal computer
market. While the Linux operating system is still free, several commercial vendors
provide Linux installation CDs and support services. The availability of this support has
lead to an increase in the popularity of the Linux operating system. It still remains,
however, a small share of the operating system market.

FreeBSD
http://www.freebsd.org/

FreeBSD is another free unix PC operating system that was an outgrowth of the BSD
unix package that was one of the first major operating systems for unix mainframe
computers, minicomputers, and workstations. FreeBSD currently appears to be somewhat
less popular than the Linux version of unix.

BeOS
http://www.beincorporated.com/
BeOS is another, relatively recent, operating system that operates on Intel and PowerPC
hardware platforms. The Be corporation, however, has recently been dissolved. The rights
to the operating system have been sold to a subsidiary of Palm. A separate antitrust case
has been brought against Microsoft by the Be corporation.

Freebyte, "Free and other operating systems"

http://www.freebyte.com/operatingsystems/
This page contains an extensive list to information about alternative operating systems.

Different Perspectives in the Debate

Department of Justice Antitrust Division's Microsoft Antitrust Case Filings

http://www.usdoj.gov/atr/cases/ms_index.htm
This page contains online copies of the Antitrust Division's filings in the Microsoft case.
This is the most comprehensive source of detailed information on the Justice
Department's antitrust case against Microsoft.

Microsoft - PressPass
http://www.microsoft.com/presspass/legal/default.asp
PressPass is Microsoft's web page devoted to presenting its side of the antitrust case. This
site contains a variety of online articles stating Microsoft's positions and links to
speeches, testimony, and online articles that support Microsoft's position.

Chris E. Hall and Robert E. Hall, "National Policy on Microsoft: A Neutral

Perspective"
http://www.netecon.com/neutral.pdf
In this January 3, 1999 online paper, Chris E. Hall and Robert E. Hall provide a careful
examination of the government's case against Microsoft. They note several weaknesses in
the arguments of both the government and Microsoft. It is suggested that while Microsoft
dominates the market for operating systems, it has not been a major force in the internet
or in content markets. It is also noted that it is difficult to claim that Microsoft has
harmed consumers by exerting monopoly power in the internet browser market since it
gives its browser away at no cost to consumers. (The Adobe acrobat viewer plugin is
required to view this document. You may download this viewer by clicking here.)

Consumer Project on Technology's Microsoft Antitrust Page

http://www.cptech.org/ms/

The Consumer Project on Technology, an organization begun by Ralph Nader, provides a

series of links to online materials related to the antitrust case. Most of these materials
provide arguments suggesting that Microsoft has violated U.S. antitrust laws.

Ralph Nader and James Love, "June 15, 1998 letter to Assistant Attorney General Joel
Klein"
http://plug.skylab.org/199807/msg00731.html
In this June 15, 1998 letter, Ralph Nader and James Love provide a series of arguments
suggesting that Microsoft has taken a variety of actions that have reduced competition in
computer software markets. They note that it is impossible to buy a nationally branded
PC-compatible personal computer without also buying the Windows operating system.
Nader and Love argue that this substantially raises the cost to consumers who prefer the
use of an alternative computer operating system. They suggest that the Justice
Department should take into account the importance of encouraging the free software
movement in pursuing its case against Microsoft.

Ralph Nader and James Love, "Why Microsoft Must be Stopped"

http://www.computerworld.com/news/1998/story/0,11280,34273,00.html
In this 11/9/98 ComputerWorld article, Ralph Nader and James Love argue that Microsoft
has used a variety of illegal tactics to restrict competition in the market for browsers,
server products, programming languages, word processing software, spreadsheet
software, and many other types of software products.

Nathan Newman, "From Microsoft Word to Microsoft World: How Microsoft is

Building a Global Monopoly"
http://www.netaction.org/msoft/world/
Nathan Newman, the Project Director of NetAction, argues that Microsoft is trying to
attain dominance in a wide variety of software markets. This article details Microsoft's
recent acquisitions in a variety of software product markets and describes a series of
actions that Microsoft has taken to deter competition from other software products and
operating systems. NetAction argues that the government should:
...step back in to vigorously defend open standards and open competition, while
carefully guarding against even the smallest abuses by Microsoft since even
minor abuse by such a dominant player magnifies its advantages due to the
network effects of the new economy.

Richard B. McKenzie and William F. Shugart II, "Is Microsoft a Monopolist?"

http://www.independent.org/tii/content/pubs/review/tir32_mck_shug_article.html
Richard B. McKenzie and William F. Shugart II build a case in support of Microsoft in
this Fall 1998 Independent Review article. They argue that Microsoft has reduced its
profits by giving away Internet Explorer. A monopolist would be expected to charge a
monopoly price for such a product. McKenzie and Shugart argue that Microsoft realized
network externalities only as a result of its long track record of successful innovation.
They suggest that there are no "commercially reasonable alternatives" to Windows
because Microsoft has acted in a competitive manner, rather than as a monopolist.

According to their argument, Microsoft would have been faced with many active
competitors if it had attempted to restrict output in order to receive monopoly profits.
McKenzie and Shugart note that Microsoft charges computer vendors approximately $45
for a Windows license and CD. They argue that "[f]orty-five dollars for an operating
system that incorporates millions of lines of code and is fairly powerful and easy to use
does not seem like the price a monopolist would choose."

Virginia Postrel, "Creative Insecurity"

http://www.reason.com/9801/ed.vp.html
Virginia Postrel discusses the reasons for Microsoft's success in this online Reason
article. She notes that Microsoft's success was partly the result of Apple's attempts to
behave like a monopolist. She argues that Microsoft, on the other hand, has always
behaved in a more competitive manner by charging low prices.

Bill Gates, "U.S. v. Microsoft: We're Defending Our Right to Innovate"

http://www.microsoft.com/presspass/doj/5-20wsjoped.asp
In this May 20, 1998, Wall Street Journal Op-Ed, Bill Gates argues that the Windows
operating system evolved in response to consumer demands. He notes that car companies
have often added new products as standard equipment that were initially separate
products. Gates suggests that the integration of the Internet Explorer browser is an
analogous response to evolving technology and consumer demand. He argues that the
government should not be able to limit a firm's ability to improve its product to better
satisfy consumer demand.

Franklin M. Fisher, "May 12, 1998 Declaration in the Case of U.S. v Microsoft"
http://www.usdoj.gov/atr/cases/f1700/1766.htm
In this statement, Franklin M. Fisher argues that Microsoft has engaged in policies
designed to limit competition in the market for internet browser software.

Robert A. Levy, "Microsoft and the Browser Wars: Fit To Be Tied"

http://www.cato.org/pubs/pas/pa-296.html
In this February 19, 1998 Cato Policy Analysis article, Robert A. Levy examines the
Justice Department's arguments against Microsoft's bundling of Internet Explorer with the
Windows 95/98 operating systems. He argues that government interference with market
incentives is inappropriate in the dynamic and competitive software market. Levy
suggests that the bundling of Internet Explorer with the Windows operating system is no
more harmful to competition than "the packaging of tires with automobiles, cream with
coffee, laces with shoes, even left gloves with right gloves." He suggests that the problem
lies with antiquated antitrust laws, not with Microsoft's actions.

Stan Liebowitz and Stephen E. Margolis, "Dismal Science Fictions: Network Effects,
Microsoft, and Antitrust Speculation"
http://www.cato.org/pubs/pas/pa324b.pdf
In this October 27, 1998 Cato Policy Analysis article, Stan Liebowitz and Stephen E.
Margolis note that it is often argued that Microsoft's large market share is the result of an
historical accident. This argument suggests that an inferior product (Microsoft DOS and

later Microsoft Windows) became the "standard" as a result of Microsoft's role as the
provider of the initial operating system for IBM compatible computers. Liebowitz and
Margolis provide several theoretical and empirical reasons to dispute this "lock-in"
argument. They also argue that Microsoft's success is the result of successful innovation,
rather than anticompetitive practices. (To view this document, the Adobe acrobat viewer
plugin is required. You may download this viewer by clicking here.)

Stan Liebowitz, "A Defective Product: Consumer Groups' Study of Microsoft In Need
of Recall"
http://www.cei.org/gencon/004,01559.cfm
In this February 9, 1999 Competitive Enterprise Institute article, Stan Liebowitz argues
that several consumer groups have provided flawed evidence against Microsoft.
Liebowitz argues that consumers have benefited from Microsoft's software products and
pricing decisions.

Nicholas Economides, "Analysis and News of US v. MS"

http://raven.stern.nyu.edu/networks/ms/top.html
On this site, Nicholas Economides provides an analysis of the antitrust case against
Microsoft, a collection of online articles and analysis related to the case, and links to
other sources of information. Those who are not familiar with the concepts of network
economics may wish to examine his dictionary of terms in network economics. In a paper
on "Competition and Vertical Integration in the Computing Industry," Economides argues
that government regulation of the rapidly changing computer industry is a dangerous
practice.

Stan Liebowitz, "Bill Gate's Secret? Build Better Products"

http://wwwpub.utdallas.edu/~liebowit/oped.html
In this October 1998 Wall Street Journal op-ed, Stan Liebowitz argues that Microsoft's
market dominance is due to its successful innovation and high quality products. Evidence
from a survey of product reviews is used to support this claim.

Stan Liebowitz, "Should Microsoft be Broken up? No. Breaking up Microsoft is

disruptive"
http://independent.org/tii/news/000128Liebowitz.html
In this January 28, 2000 op-ed piece in the Dallas Morning News, Stan Liebowitz argues
against a break up of Microsoft. He argues that Microsoft's presence in software markets
has resulted in lower costs to consumers. Liebowitz suggests that breaking up Microsoft
will lessen competition since it is currently one of the few firms that is large enough to
compete with AOL/Time Warner and AT&T in the emerging market for broadband
content.

Boycott Microsoft, "Microsoft Hall of Innovation"

http://www.vcnet.com/bms/departments/innovation.shtml
This web site contains a list of "innovations" that are alleged to have been developed by
Microsoft and, where possible, provides evidence of the earlier use of these concepts by

other software companies. It is suggested that Microsoft has not provided many
significant innovations.

Robert Litan, Roger Noll, William Nordhaus, and F.M. Scherer, "U.S. v Microsoft amicus curiae brief of April 27, 2000"
http://www.econ.yale.edu/~nordhaus/homepage/final%20microsoft%20brief%20with
%20appendix.htm
In this amicus curiae brief, Litan, Noll, Nordhaus, and Scherer recommends that
Microsoft be divided up into three competing firms that would sell the Windows
operating systems and a fourth firm that would sell applications software. It is argued that
this remedy would eliminate the monopoly power that has been the source of the
problems in this market. They note that Microsoft has displayed conduct that suggests
that less severe remedies would not be effective.

April 27, 2000 Declaration of Paul Romer

http://www.usdoj.gov/atr/cases/f4600/4643.pdf
This document contains Paul Romer's evaluation of the government's proposed plan to
split Microsoft into separate operating system and software application companies. He
suggests that this plan will encourage innovation and economic growth.

Salon, "Microsoft wins -- or does it?"

http://www.salon.com/tech/feature/2001/06/28/appeals_reaction/
This June 28, 2001 Salon article examines the decision of the Washington DC Court of
Appeals. Reactions to this decision from several economists and other analysts are also
included in this article.

Robert Reich, "Electrosoft: A Fable for Today"

http://www.prospect.org/webfeatures/2001/07/reich-r-07-02.html
Robert Reich argues for an end to the Microsoft monopoly in this July 2, 2001 American
Prospect article. He suggests that the best solution would be to make the Microsoft
operating system freely available. Reich indicates that Microsoft's control of the
operating system market gives it the ability to set standards that can be used to eliminate
competition in other software markets. He argues that the setting of standards is best done
by either the government or by the industry as a whole, not by a single firm.

Timothy J. Brennan, "Do Easy Cases Make Bad Law? Antitrust Innovations or Missed
Opportunities in United States v. Microsoft"
http://www.aei.brookings.org/admin/pdffiles/related_02_08.pdf
Timothy J. Brennan critically analyzes the economic arguments used in the case against
Microsoft in this May 2002 online article. He suggests that the theory, evidence, and
remedies were independent and inconsistent with each other. Brennan suggests some
other approaches to the case that would have been internally consistent. (To view this
document, the Adobe acrobat viewer plugin is required. You may download this viewer
by clicking here.)