Microsoft and the Antitrust Laws in the Digital Age the Browser Wars and Beyond


A recurring question raised in public debate over the legal battle between the government and Microsoft is whether the U.S. antitrust laws, the laws which regulate business competition in the U.S., are too antiquated to provide any value in the modern world of digital technology. The popular argument that the antitrust laws are outmoded has no merit. The antitrust laws encourage innovation and give consumers freedom of choice in the digital age.

True, the antitrust laws are ancient. The principal law, the Sherman Antitrust Act, enacted in July 1890, was designed to put limits on abuses of power by the oil and railroad barons of the day. The digital world doesn't worry much about oil conglomerates or the control of the railways, but we still have reason to fear abuses by corporate power barons. The antitrust laws deter abuse of economic power by protecting competition. Economists widely agree that competition between companies encourages innovation and allows consumers to choose between products based on price and other features.

The Antitrust Laws: Monopolization

At a basic level, the Sherman Antitrust Act is easy to comprehend. Simply stated, the law makes it illegal for a company to be big and bad. That's really not much of an oversimplification.

There are two key elements to a legal claim for monopolization. First, the accused company must have monopoly power. Generally, monopoly power is measured by market share. A company controlling approximately 70% of the sales for a type of product is considered to have monopoly power. Having monopoly power alone is no crime. Many companies have acquired monopoly power through fair means. There is nothing illegal about a company growing huge because it has a superior product - or just better marketing - than its competitors.

It is the second element of monopolization -- being "bad" -- that is key to the current debate. To violate the law, a company with monopoly power must have "willfully acquired or maintained" that power. That means the company must have engaged in predatory conduct - conduct designed to harm competition. A monopolist acts with no business justification other than to harm competition.

An antitrust violation occurs when a company with monopoly power abuses its market power to maintain or increase its control of the market. An antitrust violation called monopoly leveraging occurs when a company with monopoly power in a particular market uses its power in such a way as to gain an advantage in the market for another type of product.

Microsoft & The Justice Department

Let's apply this law to the current debate concerning Microsoft. Microsoft is, undeniably, a company with monopoly power. Through its computer operating system products, Windows 95 and Windows 98, Microsoft controls over 85% of the market for operating systems for personal computers. The antitrust laws prohibit Microsoft from exploiting this control for anticompetitive purposes. Specifically, the antitrust laws prohibit Microsoft from restricting access to Windows solely to harm competition or force users to purchase other Microsoft products.

Providing for fair competition and freedom of choice are worthy causes so why the criticism of the antitrust laws? It arises from the misperception that the antitrust laws prevent digital age companies from providing consumer benefit.

The Justice Department is at fault for creating some of the recent confusion by making a key part of its case the argument that the antitrust laws prohibit Microsoft from bundling Windows with Microsoft's Internet Explorer browser. Microsoft is at fault for a public relations campaign suggesting the antitrust laws hurt consumers. The antitrust laws have been unjustly maligned by both sides.

The federal appellate court clarified some of the confusion by ruling, in favor of Microsoft, that the law allows Microsoft to determine the features and functions to include in its operating system as long as the combination provides previously unavailable consumer benefit. But that ruling has been criticized by many as going too far.

The Browser Wars

Let's take a look at the specific case of internet browser software to better understand the practical and legal issues being addressed in the case. A browser is merely a medium through which other products and services can be provided. Microsoft and its principal competitor for browser products, Netscape, are willing to give their browser software away free because the real profit in internet publishing comes from deals with companies who pay for prominent links to their own commercial internet web sites on the browser interface. The browser provider with the largest market share can ask for more from advertisers, service providers and other companies with internet sites linked to the browser interface. By giving away its browser, Microsoft gains the additional advantage that software developers will design programs with Microsoft platform standards in mind.

In sum, Microsoft wants consumers to have easy access to its browser, Microsoft Explorer, so it has bundled it with Windows. Getting anything "free" is certainly good for consumers. That's why, historically, the courts have concluded that bundling product to provide consumer benefit is not illegal. On this issue, Microsoft has a good argument if it can show that the bundle is fairly priced and the combined operating system/browser product offers benefits over separate products.

Separate Products

A longstanding question in the debate is whether operating systems and browsers are separate products. Defenders of Microsoft argue that the browser is merely one of many features in the operating system. The argument is that with each new version the operating system product grows not only in size but in features. Operating systems today contain disk compression software, diagnostic tools, and a myriad of other features which were offered years ago only as separate products. The argument has a core of reason to it and appears to be favored by the appellate court that looked at the Microsoft case earlier this year.

The appellate court ruled that Microsoft had the right to add features and functions to its operating system if doing so offers previously unavailable advantages to the consumer. But that analysis misses the point. In reality, Windows is a bundle of many products and the real issue is whether the bundling forces consumers to use unwanted Microsoft products.

The U.S. Supreme Court requires a more practical approach to product definition than was suggested by the appellate court. Products are defined not by their functional relationship but, rather, by the nature of the demand for them. As long as consumer demand for browsers is distinct from demand for operating systems, browsers and operating systems will be deemed separate products. In other words, an operating system, such as Windows, and browsers, such as Navigator, are separate products because they are available separately and are otherwise distinguishable in the eyes of users. There will likely be more rulings in the case clarifying this issue.

Predatory Conduct

The issue Microsoft must face which is more troublesome, and has been neglected far too much in the debate, is conditioning. Specifically, whether Microsoft has been conditioning or threatening to restrict access to Windows to gain an advantage over competitors. The antitrust laws prohibit Microsoft from using its operating system monopoly to increase its market share. In particular, it would be illegal for Microsoft to deny Windows to other computer companies merely because the other companies intend to compete with Microsoft. Likewise, it would be illegal for Microsoft to bundle Windows with Microsoft Explorer in a way that forces consumers to use Microsoft Explorer instead of Netscape Navigator. If the Justice Department and the state governments suing Microsoft can muster evidence of such predatory conduct, Microsoft will have a difficult time defending itself.

In the end, whether Microsoft will win or lose the browser wars will be determined, simply, by whether Microsoft used its control over access to Windows to limit the availability of Navigator or otherwise force consumers to use Explorer.

Conclusions

There are two conclusions to be drawn now. First, the antitrust laws are old but they are hardly outdated. The antitrust laws limit abuses of economic power to preserve competition and protect consumers. From that perspective, the antitrust laws are exactly what we need to resolve the browser wars and protect innovation and choice.

The second conclusion to be drawn is that, as time goes on, the legal battle between the government and Microsoft will expand way beyond the browser wars. The central focus of the government's antitrust law attack is to question Microsoft's use of Windows. The question whether Microsoft has used its operating system monopoly in a predatory manner to either maintain its operating system monopoly share or leverage control over a host of new markets is far-reaching. It is a question so far-reaching it will never be fully answered.

The most likely result is that sometime Microsoft will concede; if not in this chapter, then perhaps the next. Whether that is the best outcome from the standpoint of protecting innovation and choice in the digital age is something we will never know for certain.

© 1998 Gary L. Benton