Is Microsoft a monopolist?

• Author: McKenzie, Richard B.

The Microsoft monopoly is self-evident, if the Justice Department's lawyers are to be believed. In the complaint filed against Microsoft in the U.S. District Court of the District of Columbia on May 18, 1998, the Justice Department declares unequivocally that "Microsoft possesses (and for several years has possessed) monopoly power in the market for personal computer operating systems."(1)

The Justice Department's lawsuit merely reaffirms the position U.S. Attorney General Janet Reno had previously staked out: "Microsoft is unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly." Hence, it seems beyond dispute that the Justice Department's antitrust assault on Microsoft will, if successful, produce benefits for the American public. "We took action today [in the courts]," Reno announced earlier this year, "to ensure that consumers will have the ability to choose among competing software products" (PC Magazine 1997).(2) Assistant Attorney General Joel Klein echoes Reno's claims. In a statement accompanying his department's antitrust complaint, he charges that "in essence, what Microsoft has been doing, through a wide variety of illegal business practices, is leveraging its Windows operating system monopoly to force its other software products on consumers" (Klein 1998b, 1).

Both Klein's and Reno's allegations appear to reflect a widespread public sentiment. Indeed, it has become common for reporters, columnists, scholars, and computer industry analysts to use terms such as "monopoly" or "near monopoly" to describe Microsoft, as if the firm's monopoly status were an established fact, not one open to debate. Wall Street Journal reporter Alan Murray (1998) declares flatly on the front page of his paper, "Microsoft is a monopoly" (emphasis in original). It is such, Murray tells us, because Bill Gates has managed to win near-total control of the most valuable real estate in business today: "His Windows operating system has become almost the sole entry point to cyberspace.(3) Michael Miller, editor in chief of PC Magazine, has seconded Murray's conclusion, asserting that "Microsoft has an effective monopoly on PC operating systems. He [Jim Barksdale, head of Netscape] knows it, Bill [Gates] knows it, and all the senators [who questioned Gates at a Senate hearing in early 1998] know it. So do all of us who buy PCs" (Miller 1998). Miller's only remaining concern is whether antitrust or regulatory action would be good for the computer industry.

Given the assumption that Microsoft has monopolized the market for computer operating systems, the critics have felt comfortable applying their rhetorical skills to condemn Microsoft's founder and CEO Bill Gates, who is viewed with animosity as a real-life counterpart of Gordon Gekko, the unsavory character in the 1980s movie Wall Street. Gekko is renowned for having proclaimed, in a fit of self-congratulation, the moral goodness of unchecked greed.

Indeed, the rampant criticism of Microsoft's purportedly unfettered market power has given rise to increasingly shrill attacks. A Los Angeles Times editorial chided Microsoft for having "macro-gall" when it sought to defuse the threat of an adverse court decision by offering computer manufacturers two versions of Windows 95: an older version without Internet Explorer and a newer version with Internet Explorer included (Los Angeles Times 1997). Even former Republican presidential candidate Bob Dole, who once defended Microsoft against Justice Department action but who now lobbies for competing computer software companies, accepts antitrust intervention as necessary because "Microsoft's goal appears to be to extend the monopoly it has enjoyed in the PC operating system marketplace to the Internet as a whole and to control the direction of innovation" (Dole 1997).

New York Times columnist Maureen Dowd (1998) has minced few words in her denunciation of Gates as a "rich spoiled brat" who has not yet realized the "grim truth": "People hate Microsoft even more than they hate the Government." Gary Reback, a Silicon Valley antitrust lawyer, mused to the New Yorker, "The only thing the robber barons did that Bill Gates hasn't done is use dynamite against their competitors."(4) In his article on Microsoft for the electronic magazine Slate, Jacob Weisberg observed, "A few months ago, everyone I met seemed to think that working for Microsoft was a pretty cool thing to do. Now, strangers treat us like we work for Philip Morris" (Dowd 1998).

Because of Microsoft's dominance in the market for computer operating systems and hence its presumed monopoly status, a growing collection of state attorneys general (twenty at the time the Justice Department filed its suit) began to coordinate with federal trustbusters their investigations of Microsoft's past practice of incorporating its own services and programs within Windows without also giving other vendors the same right. Apparently, the attorneys general were especially worried that the forthcoming version of Windows, Windows 98, would seamlessly integrate Microsoft's Web browser, Internet Explorer, thus precluding, in their collective view, the installation of competing browsers. New York Attorney General Dennis Vacco summed up his colleagues' conclusion that Microsoft's product development strategies are evidence of monopoly power by saying, "It would be unfortunate if one company were allowed to control access to the Internet in violation of the antitrust laws, restricting consumer choice and stifling competition before it has a chance to develop" (Bank 1998).

Firms in the computer industry want to go even further to rein in what they believe is Microsoft's undue market power. They have begun a drive to have the U.S. Justice Department force Microsoft to be more open in allowing programmers outside of Microsoft to have access to the code that Microsoft's programmers have. They also want Microsoft to be prohibited from integrating into Windows new products that compete directly with non-Microsoft programs and to have Microsoft divest itself of its software compatibility laboratories, which offer a Windows-approved logo to outside vendors (Markoff 1998).

As the deadline for filing its antitrust suit neared, the Justice Department began to insist in its negotiations that Microsoft must also include a copy of rival Netscape's Web browser with each copy of Windows sold, if Microsoft's own Internet browser, Internet Explorer, was integrated into Windows 98 (Brinkley 1998). Indeed, in its antitrust suit, the Justice Department seeks such a remedy, mentioning Netscape (and only Netscape) by name. Specifically, the Justice Department asks the courts to prevent Microsoft from including its browser software in Windows unless "Microsoft also includes with such operating system the most current version of the Netscape Internet browser." Moreover, if the Justice Department gets its way, Microsoft would be forced to allow computer manufacturers to delete Internet Explorer and to alter in other ways the sequence of screens computer users see as Windows boots up.(5)

The complaint filed by the Justice Department on May 18 levels three specific charges of unlawful behavior against Microsoft. The list of alleged antitrust violations includes "agreements tying other Microsoft software products to Microsoft's Windows operating system; exclusionary agreements precluding companies from distributing, promoting, buying, or using products of Microsoft's software competitors or potential competitors; and exclusionary agreements restricting the right of companies to provide services or resources to Microsoft's software competitors or potential competitors."(6)

We do not wish to join the chorus of criticism of a major American firm and its leadership now under way in the courts and the press. On the contrary, our purpose is to ask for a pause in the debate in order to consider the easily skirted issue of whether as a general matter firms with large market shares--not just Microsoft--can legitimately be classified as "monopolists" and, if so, whether they should be subjected to the antitrust sanctions now at issue in what is likely to be a protracted court battle. We also ask whether Microsoft's business practices are necessarily those of a monopolist; and more specifically, whether the types of tying and exclusionary agreements Microsoft has been accused of employing represent the unfair methods of competition they have been purported to be.

Even if a firm can, in some sense, be found guilty of violating the antitrust laws (because such laws make tying arrangements and exclusionary contracts illegal), it does not necessarily follow that Microsoft's actions have been those of a classic monopolist (even when the industry is beset with "network effects," which the Justice Department's lawyers believe to be endemic to the computer software business). Many market behaviors that might be construed as violations of the antitrust laws might also be interpreted as the behaviors expected of highly competitive firms. Even if a firm can be classified as having, in some sense, "monopoly power," one must also be concerned with whether or not antitrust action can be taken in a timely manner, before market forces are likely to correct any extant abuse of market power; and whether antitrust action, if taken, can generate the heralded consumer benefits to an extent that more than compensates for the legal expenditures and for the costs resulting from the disruption of markets while the suit winds its way through the courts. This issue is hardly a minor one: recall that the Justice Department wasted substantial legal resources in its infamous thirteen-year prosecution of IBM, and note that if the Justice Department and state attorneys general prevail, future product developments in high-technology industries may be tightly constrained.(7) That upshot could mean that competition would be thwarted, not...