Emory Undergraduate Journal of Law & Society

In 1975, two childhood friends who spent most of their time creating programming languages for computers decided to found their own software company, and thus Microsoft was born. Throughout the years, Microsoft emerged as the leading software company with the launching of various services such as the MS-DOS operating system, Windows operating system, Office software package, and MS internet browsers with Microsoft operating systems. These products allowed Microsoft to enter the daily lives of millions of people, making Microsoft capture 90% of the market share for over a decade. While Microsoft contributed to huge advancements in technology, operations of companies, and daily lives of people; it also became one of the biggest monopolies with its market share for operating systems, bundling of different operations with its OS system, the ability to fix prices, and business practices of withholding information from rival companies. At this point, the company had to be subjected to some regulations to make sure its monopoly power within the market was diminished and the Department of Justice’s antitrust suit was an important milestone in achieving this. The case set a precedent that technology companies could be regulated by the government, and it allowed other companies to grow within the market while incentivizing Microsoft to innovate by prohibiting them from engaging in exclusive agreements to bundle their products.

In the case, U.S. v. Microsoft Corp, the plaintiff (the U.S. government) accused the defendant (Microsoft) on the grounds that it was using its monopoly power to engage in profit maximization activities while violating antitrust laws. Microsoft managed to hold a monopoly power because nearly 90% of the computers were using Microsoft operating systems. (U.S. v. Microsoft Corp. 2001) The Court ruled that “no firm could enter the PC operating systems within a reasonably short period of time and present a significant percentage of consumers with a viable alternative.” (U.S. v. Microsoft Corp. 2001) Having the dominant market share -with 90% of computer operating systems belonging to Microsoft-Microsoft had a reliable reputation which further created barriers to entry for other firms. Any firm that wanted to enter the market faced this credibility problem and had to compete with Microsoft to gain the trust of the customers. The Court also ruled that “Microsoft was enjoying a great market power for operating systems that if it wished it could charge prices above a competitive market price.” (U.S. v. Microsoft Corp. 2001) The power to set a price within the market, possessed another barrier to other firms and the examples of IBM and Apple’s failure to compete within the market strengthens this idea. In the end, the Microsoft Corporation was declared to be a monopoly.

One of the main arguments against Microsoft was the fact that it was using the monopoly power it had on operating systems to advance its sale of software products. Attorney General Joel Klein explained this situation as “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). Essentially, Microsoft was bundling its Internet Explorer services with its operating system, meaning every computer that had the Windows operating system also had the Internet Explorer installed. Through this practice, Microsoft restricted the ability of other internet services like Opera and Java. A customer who purchased a computer with Windows operating systems already had an internet service installed and it required them to spend time and money to uninstall the Internet Explorer and install another service. Microsoft also made uninstalling Internet Explorer difficult and if a customer tried to uninstall Internet Explorer they were either not able to completely uninstall it from the system or uninstalling caused operational issues such as system crashes. The convenience of getting a computer with an already installed internet service coupled with the difficulty of uninstalling Internet Explorer and switching to other internet services discouraged customers from seeking other alternatives. It is important to note that Microsoft had an agreement with the Department of Justice prior to this case establishing that Microsoft was allowed to sell Windows with integrated components. (Manes 1998) While Microsoft argued that Internet Explorer was an integrated component of Windows, the Court disagreed with this argument because of the above mentioned reasons. While the decision to declare this activity as bundling instead of an integrated component was an important way of showing the antitrust violations of Microsoft, additionally it allowed other internet services that didn’t have operating systems to compete in the market.

Microsoft violated the Sherman Act’s Section I clause on the grounds that it engaged in bundling of its products and the Section II clause on the grounds that it showed intent to monopolize, engaged in anti-competitive behavior with pricing and the barriers of entry to the market. The Court ordered the breakup of Microsoft into two different companies for the operating system and software components. Microsoft appealed the case and later they reached a settlement with the Department of Justice. They agreed that Microsoft would share its programming interfaces with other companies to allow them to produce applications that work compatible with Windows. Microsoft also agreed not to make exclusive deals with computer producers that would allow them to bundle Windows with other software services like Internet Explorer.

In conclusion, U.S. v. Microsoft Corps served as the first major case to deal with information technologies and set a precedent within the industry. (Geier 2001) While the technology industry was able to develop without restrictions, this case showed that antitrust laws also apply to the information technologies market. Even though Microsoft was not broken into different companies, the case allowed new innovations to take place. For example, Microsoft could no longer rely on Windows for its software services and had to make them compatible with other operating systems; necessitating them to develop their technology. Furthermore, as Microsoft was required to share its programming interfaces, other companies had the ability to learn from Microsoft and develop new products that were compatible with Windows. Last but not least the case also diminished Microsoft’s reputation as the leader within the market and allowed other companies like Google and Apple to grow within the market.

References

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