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Government Intervention And Antitrust Law Essay, Research Paper

Government Intervention in Individual Markets:

A Look at Government Intervention and Antitrust Law via the Microsoft Case

Growth and Development in the US Economy

36-363

Professor Burnett

Josh Preiser

0032432

May 9, 2000

Preface

In light of recent developments, I took a different approach to this paper. The Microsoft Antitrust case has been somewhat of a phenomenon that has become one of the most prominent cases in recent years. Because of this, I decided to look at government intervention into individual markets, along with antitrust law, via that particular case. I am of the opinion that we can learn a great deal by using that particular ongoing litigation.

Antitrust law protects the public from companies that attain an undue domination of the marketplace via mergers, tying 1 product to another, vertical integration, and other practices tending to eliminate competition or bar entry into the market to newcomers.

In the early 1980s, Microsoft was a much smaller company than it is today. However, it had already established a reputation of being a predator, a greedy predator. They were known to terminate licenses mercilessly once they figured out a way to clone a given technology, regardless of whether it was legal or not. Back then, Microsoft had some enthusiastic competition. The biggest of which were Borland (programming), Ashton-Tate (databases), Visicalc and Lotus (spreadsheets), as well as Wordstar and WordPerfect (word processors). All of these companies have now either merged out of existence or are completely defunct, with the exceptions of Borland and Lotus (which are barely afloat). Microsoft now has the leading product in each sector of the market once occupied by these firms. The company was responsible for ridding itself of these early competitors by either buying them out or simply driving them into the ground. This early disregard set the tone for how Microsoft does business even today.

Microsoft?s advantage comes from their domination of operating systems (OS). ?By definition, if the OS maker creates applications, they will run better with the OS than a third party?s, and the OS owner can, over time, create modifications that will make this even more so,? (Rapacious 1). Microsoft has the power to leverage their dominance in operating systems (Microsoft currently has its Windows software in over 90% of all PCs) to gain a large market share in the various application sectors. They have always been able to do this and as a result have been able to get, or achieve, whatever it is that they have wanted. This is the vertical integration that the antitrust laws talk about.

In a July 1994, settlement, the Justice Department came to an agreement with the software giant over the antitrust charges it had filed against the company. The charges were brought after the department found out that Microsoft was giving personal computer manufacturers a discount on their OS when the PC manufacturer would pay the company a royalty for each computer sold, including those without MS-DOS or Windows software installed. ?The practice gave PC makers little incentive to install competing programs since they would have had to pay a royalty to both the competitor and Microsoft,? (Ramstad 1). The settlement only dealt with this single count and left Microsoft alone to continue performing its numerous other anti-competitive practices.

In the spring of 1995, Judge Stanley Sporkin rejected the deal that the Justice Department settled on. He did so on the grounds that:

1.The government refused to give the court enough information about the agreement;

2.The deal was too narrow; it failed to deal with issues like OS/application leverage, and allegations that Microsoft intentionally made changes to Windows that made third party applications hard to run;

3.The parties did not adequately consider anti-competitive issues;

4.The deal was unsatisfactory when it came to enforcement and compliance mechanisms.

Around the time of the settlement, some suggestions started to come about how to deal with Microsoft. Stewart Alsop suggested ?that Microsoft be forced to document the API?s in Windows, so that other companies could legally clone it. That would still leave Microsoft an eighteen month head start on each release,? (Rapacious 3). It was also suggested that the company be broken up. This way, the operating system and the applications would be separated into different companies and the playing field would become more level.

In late August 1995, U.S. District Judge Thomas Penfield Jackson ended what had become a thirteen-month judicial review by signing the agreement Microsoft and the Justice Department had come to. The review had been elongated by Judge Sporkin?s rejection of the deal. The signing, however, did not take the heat off Microsoft?s proverbial back. The Justice Department had already begun investigating some of their concerns about the company?s practices regarding new software and whether they were complying with the agreement. This investigation became the court case we have all been hearing about in these last few months.

By the time the Judge Jackson signed the agreement, the government was already looking into Microsoft?s decision to include access to its on-line service, the Microsoft Network, into its Windows 95 operating system. Competitors were afraid that this would allow the company to once again take advantage of its monopoly power in operating systems to gain a large share of the on-line market.

A mere three months after its release, the company announced that the Microsoft Network had already enrolled more than 525,000 members. They also had projections putting them over the 2 million member mark by the end of the next year

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