An Analysis of the Government's Economic Case in U.S. v. Microsoft

• Date: 01 June 2001
• Author: Albert L. Nichols,David S. Evans,Richard Schmalensee
• Published date: 01 June 2001
• DOI: 10.1177/0003603X0104600201
• Subject Matter: Article

The Antitrust Bulletin/Summer 2001

An analysis

of

the government's

economic

case in U.S. v.

Microsoft

BY DAVID S. EVANS,* ALBERT L. NICHOLS**

and RICHARD SCHMALENSEE***

I. Introduction

163

u.s.

v.

Microsoft

was

mainly

about

what

was

known

as

the

browser

war.' Netscape Navigator was introduced in the fall

of

*Economist with National Economic Research Associates.

** Economist with National Economic Research Associates.

*** Economist with the Massachusetts Institute

of

Technology.

AUTHORS' NOTE: We thank Howard Chang and Bernard Reddy for help-

ful

comments

and

discussions on the topics examined in this article.

James

Hunter,

Melissa

Long,

Lauri

Mancinelli, Emily Trinks,

and

Kirstyn Walton

provided

valuable research assistance. We received

support from Microsoft

for

the preparation

of

this article as well as the

research reported in it. The views expressed herein, however, are solely

those

of

the authors.

Microsoft III was the consolidation of cases brought by the U.S.

Department

of

Justice and a coalition

of

20 states (one later dropped

out). U.S. v. Microsoft Corp., 98 CIV. 1232 (TPJ), and State

of

New

York et al. v. Microsoft Corp., 98 CIV. 1233 (TPJ). The authors were

economic

consultants

to

Microsoft

during

the

case,

and

one

of

us

(Schmalensee) presented written and oral testimony. Schmalensee's writ-

ten

testimony

can

be found at <http://www.microsoft.com/presspass/

triallmswitness/default.asp>, along with transcripts

of

testimony by other

Microsoft witnesses and Microsoft's legal filings. Court and government

© 200! by Federal Legal Publications. Inc.

164 The antitrust bulletin

1994,2 and it quickly became one of the most widely used soft-

ware applications ever offered. Navigator's popularity peaked in

early 1996, when it accounted for more than 80% of browser use

outside of proprietary online services." But it continued to retain a

filings as well as testimony by the government's witnesses are available

at <http://www.usdoj.gov/atr/cases/msjndex.htm>. The court

of

appeals

Web site (<http://ecfp.cadc.uscourts.gov/>) provides links to the filings

in the appeals portion of the case. The electronic versions on these sites

sometimes have page or paragraph numbering that differs from the offi-

cial versions because of the vagaries of automatic numbering and conver-

sion problems from one format to another.

In this article, U.S. v. Microsoft and references to the "case" refer to

Microsoft III unless noted otherwise. Similarly, citations to transcripts,

written testimony, or legal filings also refer to this case unless noted oth-

erwise. The "government" refers to the Justice Department and the state

plaintiffs.

Microsoft I(1995)

resulted

in a

consent

decree

in

which

Microsoft agreed to end certain volume discounting practices and not to

tie the sales of other products to Windows (U.S. v. Microsoft Corp., 159

F.R.D. 318 (D.D.C.), rev'd, 56 F.3d 1448 (D.C. Cir. 1995) [hereinafter

Microsoft

l]).

The Justice Department claimed that Microsoft violated

that

consent

decree

by

tying

Internet

Explorer

to

Windows

(U.S. v.

Microsoft Corp., 980 F. Supp. 537 (D.D.C. 1997), rev'd, 147 F.3d 935

(D.C. Cir. 1998) [hereinafter Microsoft II]). The district court granted a

preliminary injunction, which the D.C. Circuit Court

of

Appeals then

reversed. The appeals court found that Windows was an integrated prod-

uct that included IE.

2Netscape has used various other names (e.g., Communicator) for

its

products

with

Web-browser

functionality. We use

"Navigator"

to

cover all

of

them.

AOL and other online services had their own proprietary browsers

until late 1996. There was considerable controversy during the trial as to

which data on browser use were most reliable. The source the govern-

ment relied upon did not have data prior to January 1997. Data from the

University

of

Illinois put Netscape's share at more than 80% for the first

half

of

1996

(University

of

Illinois

at

Urbana-Champaign

(UIUC,

Browser Statistics, <http://www.ews.uiuc.edulbstats!latest.html>),

but

such

"hit"

data

undercount activity by subscribers to

AOL

and

other

online services. Data from monthly surveys conducted for

Microsoft's

internal use starting in March 1996 show similarly high shares (75% to

79%) for most

of

1996 if subscribers to OLSs are excluded. Both sources

put Microsoft's share at less than 10% in early 1996.

If

OLS subscribers

are included, Netscape and Microsoft's shares decline because AOL used

Microsoft :165

majority

of

users well into 1998. Microsoft introduced Internet

Explorer (IE) as part

of

the first release of Windows 95 in August

1995. Little used at first,

IE's

share rose rapidly after the intro-

duction

of

IE 3 in August 1996 and after America Online (AOL)

began using IE components in its proprietary subscriber software

that

November.

By

June

2000,

when

the

trial

concluded,

Microsoft's

share

of

browser

use (including

AOL's

subscriber

software) was

just

under 70%, while Netscape's share was about

30%.4

Microsoft fought the browser battle as part of a broader strug-

gle to remain the leading provider of software platforms. A soft-

ware platform contains modules

of

code that are accessed through

application programming interfaces (APIs). APIs provide a wide

variety

of

features and services to software developers. Applica-

tions software developers use these APIs to economize on writing

code for

computer

users

that

have the

corresponding

software

platform installed on their computers. Today, most personal com-

puters

(pes)

use Microsoft Windows> as their software platform,

and many software developers have written applications that uti-

lize some

of

the more than

5000

APIs in Windows." Microsoft

browsing software from Booklink. CompuServe and Prodigy also pro-

vided "other" browsing software to their members. For details, see Direct

Testimony

of

Richard L. Schmalensee app. 0 (Jan. 3, 1999) [hereinafter

Schmalensee Direct].

4This estimate is consistent with both the

VIVC

data cited in foot-

note 3 and with updates

of

the Microsoft survey data prepared for the

expected remedies phase

of

the trial. To our knowledge,

DOl's

browser

data are not available past August 1998.

"Windows" is used here as a generic term to cover several Micro-

soft platform products. Most

of

the case focused on Windows 95 and its

successor, Windows 98 (the latest version

of

which is Windows ME).

However, they share a common set

of

APIs with the Windows NT (now

Windows

2(00)

family

of

products.

By one estimate, 70,000 applications are available for MS-DOS

and the Windows platforms compared to 12,000 for the Apple Macintosh

(see

Transcript,

February

17, 1999, p.m. Session, 24 (Cross

of

John

Rose); Transcript,

November

4, 1998, p.m. Session,

85-87

(Cross

of

Avadis Tevanianj).