Microsoft had been under fire from its domestic and European competitors,(note 1) legislators, and the federal government since 1990 for its alleged unfair trade practices(note 2) and possible violations of the Sherman Act(note 3) and the Clayton Act.(note 4) Competitors alleged that Microsoft offered discounts to personal computer (PC) makers who agreed to pay a license fee for the use of Microsoft's Disk Operating System (MS-DOS) based on the total number of PCs they sold, rather than on the number of copies of the program they made. Competitors also accused Microsoft of introducing features into some programs that link those programs only to other Microsoft products, and that the company gave its own applications program developers information about MS-DOS changes before informing its competitors.(note 5) Rather than going to trial, the Antitrust Division settled the case on July 15, 1994.(note 6)
The policy issues surrounding the Microsoft case raise serious questions about the future of antitrust law. International competitiveness policy, high technology industry analysis, the decline of the computer industry, and the emergence of the information superhighway should have driven the settlement agreement with Microsoft, not the failure of antitrust law to cope with the new problems presented by Microsoft. While the Antitrust Division might have had the right idea in actively enforcing antitrust laws to keep markets open, this settlement indicates that perhaps vigorous enforcement is not always the answer. Microsoft, in fact, can and should play a leading role in getting the White House's vision of the information superhighway realized; it could not have been expected to do so if faced with large fines or the threat of divestiture growing out of an antitrust action.
This Note will discuss the allegations against Microsoft and the lawsuit that the Antitrust Division could have brought against Microsoft if the antitrust laws had kept up with technology. This Note will also evaluate the competing policy issues that could guide the Antitrust Division in formulating new policy to use in evaluating allegations against firms like Microsoft. The Division will have to choose between the differing viewpoints about antitrust laws regulating competition in order to protect the United States's international standing.
Regardless of international concerns, enforcing antitrust laws in the new high technology economy will become increasingly difficult, and the Antitrust Division needs to reevaluate traditional measures of market power to better serve U.S. industry as a whole. This difficulty in enforcement has surfaced in the Microsoft case and will continue as the computer industry merges into the communications industry on the Information Superhighway. Finally, this Note will suggest and evaluate some possible changes to the Antitrust Division's enforcement policy.
I. The Antitrust Division's Investigation of Microsoft
A. Microsoft's Current Standing
Most computer experts agree that Microsoft sets the desktop
standard for operating systems (OS).(note 7) When IBM introduced the revolutionary PC
and needed an operating system to translate the applications
software language into computer-recognizable electric impulses,
Bill Gates, Microsoft's chairman and chief executive, took the
initiative. He bought an existing operating system from another
company and licensed it to IBM and then to other PC clones.(note 8) Currently, 80 percent of the
PCs in the world use MS-DOS or Windows,(note 9) a DOS-based operating system that
presents users with a screen of pictorial instructions, rather
than DOS codes, as their operating system.(note 10) Because of Windows and MS-DOS's
dominance, every PC applications software developer in the
industry must create software that is Windows-compatible.
Additionally, Microsoft is creating Windows-based applications of
its own. Microsoft has more word processing software sales than
WordPerfect Corp., equals Lotus Development Corp. for spreadsheet
sales, and is rapidly gaining on Borland International, Inc. in
database sales.(note 11)
For the past several years, Microsoft has been attacked by competitors, politicians, and recently, the federal government, but so far has come out relatively unscathed. Microsoft competitors, such as Novell Corp., WordPerfect Corp., and Borland International, Inc., have been unsuccessful in competing against Microsoft and fear for their future.(note 12) Senators Orrin Hatch (R-Utah) and Howard Metzenbaum (D-Ohio) joined Microsoft's competitors to push the government to investigate and take action against Microsoft for unfair trade practices.(note 13) Since 1990, the Federal Trade Commission (FTC) has investigated allegations against Microsoft, but has deadlocked in two separate votes on whether to take action.(note 14) Senator Metzenbaum urged FTC Chairwoman Janet Steiger to hand the investigation over to the Department of Justice, saying, "Anticompetitive practices that eliminate competition unfairly sap the vitality from that industry and, ultimately, our economy."(note 15) The Antitrust Division, headed by Anne K. Bingaman, took over the investigation in August 1993 and settled the case in July 1994.(note 16)
B. Allegations Against Microsoft The Antitrust Division did not investigate Microsoft because of its large market share, as some analysts suggest. Instead, the Division sought to determine whether Microsoft had used its monopoly power in the operating system market to stifle competition and innovation.(note 17) Ultimately, the Division charged that Microsoft had indeed used its monopoly power to exclude competitors and to monopolize related markets through leveraging.(note 18)
1. The Monopolization Charge
The root of the government's potential case against
Microsoft was the claim by competitors that Microsoft used
predatory licensing practices by basing their license fee
discounts on the number of PCs sold.(note 19) This prevented PC makers from offering
customers alternatives in operating systems. While Microsoft's
licensing practices resulted in decreased costs to computer
makers and decreased prices to consumers, such a practice
effectively shut out other operating system competitors. For
example, Novell Corp. makes one of the only operating system
alternatives, DR-DOS. However, no original equipment manufacturer
in the United States offers DR-DOS, even though the Novell
operating system has received good reviews and has 5 percent of
the market outside the United States.(note 20) The long-term result of this licensing
practice is decreased innovation in the operating system market
and possible increased prices.
2.The Leveraging Claims
Additionally, the Antitrust Division investigated
allegations that Microsoft used its market dominance in operating
systems to attempt to monopolize other markets, such as
applications software and utilities.(note 21) The majority of new PCs today do not
use DOS as a stand-alone operating system. Instead, most run
Windows on top of an underlying DOS. Thus, it is very important
to the market success of any DOS product that it be able to run
Windows (and its newer versions) smoothly. Users have found that
error messages appear in Microsoft's Windows when another OS that
is not MS-DOS is used.(note 22)
That incompatibility discourages companies from buying products
from OS competitors when they already use Windows. Indeed,
customers faced with such error messages cannot get technical
support from Microsoft. Moreover, many believe that product
warranties may become invalid if competing software is used with
Microsoft products.(note 23)
In the applications market, Lotus, WordPerfect, and Borland alleged that Microsoft used its control over operating system information to better integrate complementary products, placing applications rivals at a significant competitive disadvantage.(note 24) Though Microsoft does give out product information to other applications developers, it gives its own developers a more complete version of that information first.
Many of Microsoft's competitors feel that this decree was a "hollow victory" for the government, because it had no effect on pricing to consumers or revenues for Microsoft.(note 28) The only short-term winner may be Novell (Microsoft's direct competitor in operating systems), which will benefit by getting their DR-DOS on the market. However, any benefit for Novell and any consent decree provisions which address the operating system market will be a moot point in the next year when Microsoft introduces its major DOS and Windows upgrade, code-named "Chicago."(note 29) One commentator stated that because "there really isn't an alternative to Windows," most consumers presumably will buy Chicago.(note 30) Since those who buy Chicago will automatically get MS-DOS in the package and will not need DR-DOS, it seems that Novell will once again be shut out of the operating systems market. The question remains: Should the Antitrust Division punish Microsoft in this situation because it is producing a better product than everyone else?
The answer may be "No" in this instance, but the answer might have been different had the Antitrust Division definitely been able to show that Microsoft gained market share with anticompetitive intent. Antitrust Division head Anne Bingaman must have feared that she could not so easily prove such a case as she stated, "We brought the case that was there to bring."(note 31) That statement is not an enthusiastic endorsement of the settlement, but a realistic one. The federal government uses antitrust law to protect consumers and prevent market monopolization. On the other hand, the government also aims to enable companies to grow strong enough to compete effectively in international markets. The Microsoft case, involving both of these conflicting goals, presented a dilemma. Some say that to address both problems, the Antitrust Division should strictly enforce the antitrust laws. While that initially might sound promising, the Microsoft settlement suggests that strict enforcement was not possible because the antitrust laws were not suited to evaluating the emerging new markets.
The Supreme Court has held that the antitrust laws do not prohibit the mere operation of monopoly businesses.(note 35) However, such companies cannot unduly or improperly exercise their monopoly power, and that power must, as an additional limitation, result from the natural growth of the company.(note 36) For instance, the Court has held that a Section 2 violation involves "the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident."(note 37) In a 1979 case, the Court of Appeals for the Second Circuit noted that certain conduct is illegal when practiced by a monopolist "because it tends to destroy competition, although in the hands of a smaller market participant it might be considered harmless, or even `honestly industrial.'"(note 38) Therefore, monopolists are held to a stringent standard of conduct whereby monopoly power combined with willful conduct violates Section 2.(note 39)
The willful conduct standard requires proof of intent to monopolize: "[C]onsideration of intent may play an important role in divining the actual nature and effect of the alleged anticompetitive conduct."(note 40) The Supreme Court is less suspicious of internal growth than of growth through merger(note 41) because there is less of a chance that the intent behind internal growth is to reduce or suppress competition. The most recent antitrust cases focus less on intent and more on the effect of, and motivation behind, the monopolist's challenged acts. For a plaintiff to succeed on a Section 2 claim, the challenged conduct must impair the opportunities of rivals and "not further competition on the merits or [do] so in an unnecessarily restrictive way," or "exclude rivals on some basis other than efficiency."(note 42) To be illegal, such exclusive conduct must not be justifiable by any legitimate, pro-competitive business reason.(note 43) Assuming Microsoft has a monopoly in the operating system market, Microsoft could claim that its dominance was acquired lawfully through the foresight of Bill Gates in seeing the potential success of IBM's PC and in producing a superior operating system for that PC. If this claim was made, intent would once again become relevant, so that Microsoft's course of conduct would have to be analyzed as a whole.(note 44)
When a firm with monopoly power, such as Microsoft, enters into contractual arrangements with customers with the intent and effect of forcing those customers to purchase exclusively from the monopolist, courts might find that the firm violated antitrust laws. Exclusive dealing in this manner is not fair competition and is not justifiable from an efficiency standpoint. Therefore, the Antitrust Division might have had a strong claim against Microsoft under the Sherman Act for anticompetitive exclusive dealing in regard to their licensing practices.
B. The Leveraging Case Necessary to Support the
Monopolization
1. Tying Charges
Another option for the Antitrust Division would have been to
broaden the charges against Microsoft to include tying
allegations. Tying arrangementscontracts in which the sale of one
product is conditioned upon the sale of a secondare subject to
rigorous scrutiny under Sections 1 and 2 of the Sherman Act and
Section 3 of the Clayton Act.(note
45) This practice results in
forcing the buyer into taking an unwanted product, the foreclosure of competitors of the seller from the tied product market, the extension of market power from the tying product market to the tied product market[,] . . . the reduction of consumer alternatives for purchasing particular goods, the increase of barriers to entry into both the tied and tying product markets, and the use of hidden price discrimination in pricing the ties or the tying product.(note 46)
Thus, a firm violates the antitrust laws if: (a) the firm has conditioned the purchase of one product on the sale of another, (b) a substantial volume of commerce is foreclosed, (c) the firm has sufficient market power in the tying market to force purchases in the tied market, and (d) the products involved are really two separate products.(note 47)
The tying charges would have addressed the allegations that Windows can only be run on MS-DOS. Microsoft's competitors essentially allege that the company uses its dominance to obtain a monopoly in the applications software market. Because most PC consumers use Windows, they are forced to buy software that is compatible with it, which is usually also marketed by Microsoft.
2. Refusal to Deal and Essential Facility
The government might also have asserted a "refusal to deal"
and an "essential facility" claim against Microsoft. These
charges would have addressed the allegations that Microsoft gave
its own applications software developers information about
forthcoming Windows or MS-DOS changes before it gave the
information to other developers.
The Supreme Court has established that the monopolist has no duty to cooperate with others and that in the vast majority of cases, a monopolist may "deal with whom he pleases."(note 48) Nevertheless, "[t]he absence of an unqualified duty to cooperate does not mean that every time a firm declines to participate in a particular cooperative venture, that decision may not have evidentiary significance or that it may not give rise to liability in certain circumstances."(note 49) Thus, in some circumstances, a monopolist's refusal to deal with a party seeking business ties may constitute, or be evidence of, illegal monopolization.
The "essential facilities" approach under Section 2 of the Sherman Act finds a violation when a monopolist refuses to provide a competitor with reasonable, non-discriminatory access to some "facility" that is essential to effective competition.(note 50) The facility essential to competitors in the Microsoft case is the MS-DOS or Windows technology information. While this might seem like a worthwhile charge to bring, Microsoft can assert a legitimate business justificationthe desire to reap the benefits from its technological innovation and research and development investment.(note 51) This defensive response by Microsoft would likely defeat the "essential facilities" charge.
C. Problems with the Case Against Microsoft
Antitrust Division head Anne Bingaman stated after the
settlement that, in order to win, "you have to have the law and
facts" on your side.(note 52) The
fact that the parties reached a settlement indicated that one or
the other was missing in the Microsoft case. Because the factual
allegations were so widespread, the deficiency in the federal
government's case against Microsoft must have been applicable
law.
First, the antitrust laws allow a monopolist to defend its actions through economic justifications.(note 53) For example, Microsoft could have claimed that it should be able to take advantage of its technological innovations without providing the specifications of MS-DOS or Windows to competitors. This defense is easy for Microsoft to assert, but difficult for the government to disprove.
Furthermore, proof of monopolization hinges on market share which, in turn, hinges on market definition. The government likely had trouble identifying Microsoft's market share in software applications markets. In order to identify a firm with monopoly power, the government investigates excess profits made by the firm, monopoly conduct, and the overall market structure.(note 54) In the Microsoft case, the government could find excess profits and some evidence of leveraging through the competitors' allegations. Establishing Microsoft's market share in the numerous software segments, however, created a weakness in the government's case.
Microsoft does have a substantial market share in operating systems, but to substantiate the monopolization case, the government would have to show that Microsoft had anticompetitive intent proven through instances of leveraging or refusing to deal. Furthermore, to substantiate the leveraging claims, the government would need evidence of high market shares in the software markets. However, market definition of Microsoft's markets is problematic. Therefore, in order to show high market share in software, the Antitrust Division would have had to define the markets narrowly, potentially leading to an inaccurate picture as to the market power that Microsoft wields.
III. Globalization and the Technological RevolutionThe Inadequacy
of Antitrust Law
As world markets open to American products and the domestic
economy merges with a global one, the role of domestic antitrust
policy becomes clouded.(note 55)
The United States leads the world in technology, especially in
the fields of microprocessors, supercomputers, software, and
telecommunications, because of vigorous competition and
innovation in U.S. markets.(note
56) President Clinton recognized that "America's economic
performance and international influence rest in large part on its
technology base."(note 57) He
favored an activist approach in his campaign platform wherein the
government would promote the development of industrial
technology.(note 58)
Many think Microsoft is the model for such international competitiveness because it sets the industry standard in the operating system market worldwide.(note 59) Additionally, Microsoft sparked domestic innovation by inspiring the creation of 500 companies in the United States to write software for Microsoft's Windows and currently involving 16,000 companies in creating more compatible software.(note 60) However, others maintain that Microsoft both dominates certain markets and shuts out some domestic competitors.(note 61)
A. The Transformation of the Computer Industry High technology industries are driven today by small, innovative companies. Although Microsoft appears to be as large as IBM once was, it is not. Companies that are succeeding in the new economye.g., Microsoft, Novell, and Intelhave done so by moving horizontally, rather than vertically.(note 62) Vertically-integrated giants (like IBM) that produced every component of their product in the early days of computing are not successful today in the high technology marketplaces. Microsoft has succeeded because it is structured like a small company, employing many different product developers instead of a huge managerial hierarchy. Thus, it is able to sell low-cost, high-profit PC hardware and software through the fast-growing distribution network, rather than through the monolithic internal infrastructures of the old days.(note 63) This change is due to the nature of the computer industry where innovation, rather than efficiency, drives production.(note 64)
Since the computer industry is fusing with other technologies, companies like Microsoft are able to spread out from core businesses to follow the innovation trends. Presently, Microsoft has captured nearly 40 percent of the $8 billion PC software industry(note 65) and 80 percent of the operating system market share.(note 66) In 1992, Microsoft had less than 50 percent of its sales in applications software and, a year later, software comprised over an estimated 60 percent of its annual sales.(note 67) Applications software will take most of Microsoft's resources for research, development, and marketing, as price wars begin to heat up.(note 68) Nevertheless, the applications market appears to be saturated because three-fourths of applications sales are upgrades of existing products.(note 69)
The desktop standard market is only growing at a 5 percent annual rate(note 70) and, presumably, Microsoft's growth rate has declined as a result. Where the company used to double every two years, it now grows at only a 20 to 25 percent annual rate(note 71) and expects slower growth in PC sales during the last half of 1994 and the first half of 1995.(note 72) In order to find profits and escape the saturated software market, Microsoft is exploring new markets, while avoiding the vertical integration that has plagued IBM.(note 73)
According to many analysts, the computer market will change drastically as computer and communications technologies merge. The merger between cable and telephone companies points "the way to the convergence of the $20-billion (annual revenue) cable industry with the $80-billion telephone industry and the $150-billion computer industry."(note 74) Following this trend or perhaps forecasting it, Microsoft has begun to move resources to form joint ventures to produce communications equipment. As the growth rates in operating systems and the existing applications software markets slowly decline due to innovations in other areas, Microsoft is diversifying into areas such as networks and the emerging Information Superhighway"a seamless web of communications networks, computers, databases, and consumer electronics that will put vast amounts of information at users' fingertips."(note 75) Microsoft is not limited to any one market segment, and its market share cannot be easily evaluated for any one product because it is always moving ahead to new products as old markets decline. Currently, antitrust policy does not fit this type of growth and should change to better fit the characteristics of these changing industries.
B. Antitrust Policy and the International Economy
Members of the Clinton administration believe that vigorous
antitrust enforcement is essential to sparking innovation and
strengthening companies that can compete effectively at home and
abroad. Vice President Gore has said, "U.S. preeminence in
computers, telecommunications and biotech is a direct result of
active government intervention."(note
76) Enforcement of antitrust policy theoretically stimulates
competition, expands innovation, and thus, would keep the United
States as the world leader in computer technology.
Ernest H. Preeg, trade expert at the Center for International & Strategic Studies and a former U.S. ambassador, agrees with Anne Bingaman that "[a] more forceful domestic strategy to stimulate continued technological innovation is clearly in order if the United States is to remain at the technological forefront over the longer term."(note 77) At a hearing before the Senate Judiciary Committee, Robert Pitofsky, a Georgetown University law professor, also recognized that antitrust law should become globalized, but asserted that the best way to do that was to "enforce the antitrust law more vigorously and as Congress intended."(note 78) Professor Pitofsky mitigates this position by adding that the government should recognize certain efficiency defenses so as to encourage more joint ventures, which lead to innovative research and development.(note 79)
Anne Bingaman hails from the Democratic school of antitrust enforcement, which uses government as a tool to protect consumers from unfair business practices.(note 80) Bingaman advocates vigorous antitrust enforcement, including strict merger review and a presumption of illegality on the side of business in antitrust violations.(note 81) According to Bingaman, this philosophy is not detrimental to international competition but, in fact, is essential: "It is precisely because the United States is faced with strong foreign rivals that we need vigorous antitrust enforcement . . . ."(note 82) Many theorists support Bingaman, including George Washington University's antitrust expert, Thomas Morgan, who states that "[a] vigorous competitive marketplace at home is essential to the production of firms that are able to be effective in the global marketplace . . . . In that sense, strict enforcement is more important."(note 83) Strict enforcement may well be the best way to protect international competition, but as the Microsoft settlement shows, strict enforcement of current antitrust laws will not work in the new computer industry and the high technology information superhighway industries.
C. High Technology Industries and Market Analysis
Concern about antitrust policy and international
competitiveness is compounded by the transformation of the global
economy through the information and technological revolution.
Many experts think that this high technology international
economy demands a new kind of antitrust analysis.(note 84) High technology markets do not fit
into the traditional antitrust law's relevant market definition
and market-power measurements.
Antitrust law measures monopoly power by narrowly defining the relevant market and then determining the monopolist's share of that market. In high technology industries, one innovative product can make up an entire market. However, the small producer does not truly control a substantial share of the industry, because another innovator can easily displace the first with a new product. Consequently, innovation, rather than market share, determines market power. Thus, market power becomes harder to measure under traditional antitrust law analysis. Important technological improvements can catapult a small firm to the top of the market for a short time. That firm's market share potential may never be realized, however, because the next innovation may be more powerful, allowing a new company to take over the market.(note 85)
Microsoft has successful staying power even within this market structure because it constantly moves to new markets while profits are fresh, leaving the old markets behind. Usually, new information markets are dominated by a single firm with an innovative product. One innovation, such as Windows, creates opportunities for more new products that are designed to work with the first product. As more applications are developed for new software or hardware, the firm's market expands quickly. However, this means that the old leader's market power collapses just as rapidly. As a result, the traditional measure of market powermarket sharedoes not fully take into account the dynamics of the computer industry.(note 86)
Robert Shapiro, a former Clinton economic advisor, also notes the problems of antitrust enforcement in the high technology industries of the new economy: "In global competition, a firm's capacity to innovate is fast becoming more important than its ability to cut costs by being more efficient."(note 87) In an industry such as computers, small firms flourish in such an industry because "a firm with an innovative product or process can overtake the industry leader without matching its scale."(note 88) Shapiro adds that in such an industry, the number of competitors is not a good measure of a firm's standing because innovative products create their own markets with one firm dominating for a short time. However, the barriers to entry into the market are slight because innovation is based on "human resources that no firm can monopolize."(note 89)
Since the government is concerned with establishing technological superiority in a global market, Microsoft is essential to the functioning of the computer industry at present. Shapiro further stated: "Curbing the leader in one segment of this well-functioning industry at the behest of the leader's lagging rivals, would, in effect, subsidize firms that have not competed as successfully and so weaken all players' economic incentives for innovation."(note 90)
Because of the nature of the industry, the Antitrust Division should be careful not to overstate firms' power in the markets in question. This is not to say that strict enforcement has not been good for competition in the past; however, the new economy is very different and requires a new antitrust analysis. "[T]he increasing role of computer technology in previously distinct businessessuch as consumer electronics, telecommunication, publishing, entertainment, and educationis blurring the boundaries of the computer industry. That blurring makes market definition in the computer industry increasingly problematical."(note 91)
Strict enforcement of the antitrust laws can work to promote competition, but they should be tempered by policy considerations that look at the broader economy to see where strict enforcement is best suited. The policy behind the information superhighway suggests that Microsoft was not a likely candidate for strict enforcement. The information superhighway and Microsoft's place on it are becoming a reality. With the advent of integrated communications industries and the complicated structure that accompanies this trend, the Antitrust Division should reevaluate its competition policy. More importantly, the Division should consider long-term global communications development in its analysis. The United States's future in the global economy depends on technology innovation; that future lies in the information distribution market where communications is "becoming an entirely new medium."(note 92)
IV. Microsoft's Place on the Information Superhighway
A. U.S. Regulatory Policy and the National Information
Infrastructure
The information market requires the collapse of industry
boundaries as computer, telecommunications, and cable companies
join together to provide the information infrastructure that
includes "wireless voice and data phones; cellular and personal
communications systems (PCS); connected notebook computers and
personal digital assistants (PDAs); conferencing phones using
voice, data, and video; and server farms with video quality
information integrated into intelligent broadband networks."(note 93) As Vice President Gore
noted, the "new marketplace will no longer be divided along
current sectoral lines . . . . Everyone will be in the bit
business. The functions provided will define the marketplace."(note 94)Computer companies such as
Microsoft provide the software to link these technologies.
The federal government cannot afford to subsidize this burgeoning industry.(note 95) It will be up to private investment to lay the foundation for the superhighway. However, the Clinton administration recognizes that the government needs to serve as catalyst and coordinator of the entire effort.(note 96) Government involvement will help the U.S. gain a stronger foothold in the global market: "[B]y taking the lead in quickly employing these new information technologies, America's businesses will gain enormous advantages in the worldwide marketplace."(note 97) In order to accelerate the development of the technology and to ensure access to the highway for the rich and the poor alike, the administration must remove some of the immense legal and regulatory barriers so private investment can increase.
In order to provide a conducive environment for development, the Clinton administration has been slowly unveiling its National Information Infrastructure (NII) initiative, where "the marketplace must offer opportunity and the ability to compete" and the government establishes protocols, standards, and regulatory policies while letting the private sector do the rest.(note 98) The NII includes various legislative proposals, such as the National Information Infrastructure Act of 1993 (popularly called the Boucher Bill), and the High Performance Computing and Communications (HPCC) Program, which are designed to "spur the development of the applications" and "advanced computing and communications technologies" that will be available over the superhighway.(note 99)
By encouraging competition, the government hopes to increase investment.(note 100) However, the existing regulatory structures may not adequately foster the kind of competition the communications industry needs to spur the growth of the information superhighway. Vice President Gore outlined the problem of market definition in these new high technology industries. "Even if the lines between industries and markets were clear in the past, technological and market changes are now blurring them beyond recognition, if not erasing them entirely. Regulatory policies predicated on such perceived distinctions can harm consumers by impeding competition and discouraging private investment in networks and services."(note 101) Thus, the administration is seeking "gradual deregulation . . . as it clears the path for a future `information superhighway' . . . ."(note 102)
With the advent of new regulatory schemes for the industries involved in the information superhighway, the Antitrust Division needs to reformulate antitrust enforcement guidelines so that the guidelines both protect high technology industries through strict enforcement and encourage private investment. Companies with large amounts of capital, such as Microsoft, must be persuaded to provide the funding for the superhighway. Therefore, the government cannot afford to support or enact regulations that attack such pivotal companies. The government will have a challenge in determining which markets have to be watched closely and which need to be left alone. However, the companies contributing to the information superhighway most likely will be the innovative companies like Microsoft; these companies can move quickly into emerging markets and will not linger in any one market long enough to monopolize it.
B. Microsoft's New Markets
>
The future world economy is based on networks and
communications technology. The fast-moving companies that can
capitalize on these developments will succeed in laying the
highway framework and escape government scrutiny. In keeping with
the trend, Microsoft has introduced an office software system
that relies on Windows and connects computers, phones, copiers,
fax machines, and printers into a digital web for convenient
exchange of information.(note
103) To accomplish this, Microsoft has formed alliances with
companies such as Hewlett-Packard, Compaq, and Northern
Telecom.(note 104) Microsoft has
recorded a 130 percent surge in sales of its office software
system.(note 105)
The big news, however, is Microsoft's current research and development efforts ($100 million a year) for the information superhighway.(note 106) Microsoft has recently boosted its expenditures 20 percent from the previous quarter and 36 percent from the fourth quarter in 1992 for research and development in interactive cable TV and personal communications systems.(note 107) Bill Gates wants to provide the links between cable and telephone technologies, which could potentially determine the face of interactive communications. Moreover, analysts predict that "[t]here will be a growing business for companies that can generate new information and programming for the system."(note 108)
Other joint ventures included a partnership with Compaq to design a product combining a notebook computer, fax, and phone with Windows software.(note 109) Additionally, Microsoft has a deal with Intel Corp. and General Instruments to produce cable TV converters to allow cable subscribers to use interactive multimedia services and software. Intel and Microsoft are joining up again to propose another product, which would integrate the user's PCS and telephone.(note 110) Bill Gates also has steered Microsoft into the CD-ROM market (a $325 million market in 1993), which is expected to reach $1 billion by the end of 1996.(note 111) Microsoft ranks fourth in this field with products including an interactive movie guide and a CD-ROM encyclopedia with video clips, still images, and sound; both are priced to appeal to consumers with average incomes.(note 112)
Microsoft also aims to capture the software market for information distribution. Although it has an advantage in its existing distribution network, Microsoft will not be able to dominate that market as easily as it did the operating system market.(note 113) In the information content business, as in books or records, "people want to buy a lot of different things from a lot of sources."(note 114) In this field, emerging industries will be very competitive. Because innovation will play a greater role than efficiencies, market leaders will come and go. Additionally, brand loyalty does not really exist in the information business as it does in the computer industry because information, not equipment, is the commodity.(note 115) Joint ventures are going to be the only way for companies to efficiently invest in research and development because of the reduced risk and cost for the parties involved. With so many strategic alliances, no one player will easily dominate a particular market.
Microsoft has joined in private industry's efforts to work with the government to lay the foundation for the Superhighway. The "Cross-Industry Working Team" (XIWT), a cross section of the providers of NII technologies from several key information industries including AT&T, MCI, Bell Atlantic, TCI, and Apple,(note 116) is designed to develop common technological approaches to bridge research efforts from different industries, plan pilot projects, create a dialogue among participants from private and public sectors, and organize technology forums to discuss research results and disseminate information.(note 117)
Microsoft is a big player on the information superhighway because it has more capital to invest in research and development than most of the small companies making up the new computer market, and it is quick to move in on new investments. The government's best interests were served by leaving Microsoft alone at this time, but it is too early to say that another company following Microsoft's example will be so important that it should be shielded from strict enforcement. The Microsoft case illustrated that if the government had needed to stop Microsoft completely, it could not have done so under current antitrust law.
V. Policy Changes for Antitrust Law in
High-Tech Industries
One commentator has argued that "the current restrictive
approach to market definition leads to overenforcement because
agencies fail to account for the full range of restraints on
market power" when they are investigating high technology
industries.(note 118) Therefore,
a solution to high technology market anomalies could be to look
at a broader market, perhaps the whole industry, in order to
accurately consider the impact of competing and compatible
products, and calculate market concentration considering the
interaction of products in the industry.(note 119) Exploring a broader definition of
the market at issue would also alleviate problems in determining
market power based on market share. For example, an alleged
monopolist may have 100 percent of the market share in a product
market, but have very little power to cause an increase in that
product's price in the entire industry. Measuring market power
based on the market share of the broader relevant market might be
a better indicator of the power of a particular firm to affect
the communications industry as a whole.
Another possibility for regulating high technology industries such as the computer industry is to require companies to produce products that are compatible with all others. In high technology industries, compatibility is necessary for successful products. Because programs are licensed, firms cannot reverse engineer many products to make them compatible. MS-DOS and Windows are truly essential facilities for the software industry. Therefore, the Antitrust Division should require Microsoft to test its MS-DOS with all applications software and give applications software developers the information they need to make their applications compatible.(note 120) If all the systems and software were compatible, consumers could select which to use, and, presumably, the market would be competitive. While "[w]ithholding from others advance knowledge of one's new products . . . ordinarily constitutes valid competitive conduct,"(note 121) in this case, that standard does not apply. When one company has a monopoly in an industry standard, like MS-DOS, the company must be forced to communicate more extensively with its applications software developers.(note 122) Requiring compatibility might alleviate these problems. This solution also suggests that a broader market definition is in order because it would take into account an entire system (operating systems and software), rather than one or the other.
Conclusion
Given the unique nature of the emerging multimedia industry
and the unique role that Microsoft is playing within that
industry, it was justand fortunatethat the government had only
partial success in its case against Microsoft. Unless Congress
and the Antitrust Division reformulate the antitrust law to
address the realities of the marketplace, it will be difficult to
check unfair practices in the future. The government has a strong
interest in deregulating the new information industries and must
work to develop a competition policy that will allow for strict
enforcement when it is needed and leniency where it is
necessary.
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