IMMEDIATE FOR RELEASE November 18, 1999
Contact:
Mark Cooper [phone]
Restore Competition to Correct Consumer Harm Caused by the Microsoft Monopoly
CFA Releases Analysis of Judge Jacksons Ruling:
Washington, DC The overwhelming evidence in the Findings of Fact in the U.S. vs. Microsoft trial leaves no doubt that immediate steps to restore competition to the industry are necessary, an analysis of Judge Thomas Penfield Jacksons ruling released today by the Consumer Federation of America concluded. The stunning finding that anticompetitive behavior by Americas largest corporation has imposed substantial harm on the public has stimulated an intense debate over how to remedy the situation, Mark Cooper, Director of Research for CFA, said. It crucial for the public to understand that the problems are so deeply embedded in Microsofts business model that stern measures are necessary. The failure of past behavioral remedies to discipline Microsoft indicates a different solution is needed. Cooper added. Only a classic, structural antitrust remedy, like divestiture, will suffice to correct Microsofts actions. The report, entitled, Monopoly Power, Anticompetitive Business Practices and Consumer Harm in the Microsoft Case, provides an analytic road map to Judge Jacksons findings, based on four papers published by CFA before and during the trial. In a detailed analysis of industry structure and corporate conduct, the CFA analysis identifies two dozen elements of the anticompetitive business model that Microsoft has used to undermine competition in the software market. 1. Microsoft sought to divide the market by collusive agreements or it imposed contract conditions on suppliers that foreclose and deter competition. 2. There are repeated examples of back room campaigns of intimidation, abrogation of contracts, and predatory pricing, in which the profits from the monopoly over the operating system were used to drive competitors out of other software lines. 3. Using the operating system as the core of its market power, Microsoft freezes out competitors with incompatibilities, builds in features to impede or disable competing programs, withdraws support for non-Microsoft applications, and locks in customers with constant imitation of competing products. 4. Bundling of software allows prices to be hidden from the public. The pricing terms and conditions are highly secret, locked in the contracts between computer manufacturers and Microsoft, which allows it to discriminate against companies that do not comply with its wishes.
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The report also identifies a dozen ways in which Microsoft harmed the public. 1. Microsoft retarded innovation by preventing specific products from being developed and deterring other software companies from devoting developer time and money to new products. 2. Microsoft denied consumer choice by delaying or driving specific products out of the market, preventing consumers from buying computers with software configured as they want, and forcing non-Microsoft products to be distributed in inconvenient ways. 3. Microsoft degraded the quality of its of own products and exposed consumers to greater risk by forcing its Internet browser onto the desktop to prevent competitors from being compatible with them. It degraded the performance of competing products to hurt their sales. 4. Microsoft increased costs for consumers in the short term by directly overcharging for operating systems, discriminating against specific computer manufacturers, and causing consumers increased time and effort to obtain non-Microsoft products. It raised prices in the long term by preventing competitors from entering the operating system market. It caused consumers to pay more for hardware through its software design, licensing and upgrade pricing policies. One of the most important lessons to be learned from the Judges findings is that consumers should not fear competition in the software industry, said Cooper. The claim that a competitive market would produce incompatible products is the type of false and misleading premise that Microsoft has hid behind for years. In a competitive software market, compatibility is likely a most highly valued commodity. It is something that independent software vendors, if given the chance, would compete vigorously to provide. Microsoft, on the other hand, has created incompatibilities to prevent non-Microsoft products from becoming popular. Microsoft has actually attacked and driven products out of the market because they would increase compatibility. A stern remedy must be fashioned to counteract the behavior that Microsoft has practiced for so long, Cooper said. Creating several Microsofts would set off a vigorous round of competition and demand less regulatory or governmental oversight. Computer manufacturers and programmers, who have been the captives of Microsoft, would immediately have alternatives enabling them to resist anticompetitive deals and threats.
The report is available on the CFA website at www.consumerfed.org/antitrustMicro.html # # #
The Consumer Federation of America (CFA) is a non-profit association of some 260 pro-consumer groups, with a combined membership of 50 million, which was founded in 1968 to advance the consumer interest through advocacy and education.
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MONOPOLY POWER, ANTICOMPETITIVE PRACTICES AND CONSUMER HARM IN THE MICROSOFT CASE:
THE FACTS SPEAK FOR THEMSELVES ANDTHEY CALL FOR A STERN REMEDY
In his recent Findings of Fact1 Judge Thomas Penfield Jackson concludes that Microsoft has a monopoly and has abused its market power at the expense of competition and the public. Industry structure, corporate conduct, and market performance point to a massive violation of the antitrust laws (see Exhibit 1). Structure: Microsoft enjoys so much power in the market for Intel-compatible PC operating systems that if it wished to exercise this power solely in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market First, Microsofts share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsofts dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsofts customers lack a commercially viable alternative to Windows. (3334) Conduct: Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsofts core products. (412) Performance: Many of these actions have harmed consumers in ways that are immediate and easily discernible. They have also caused less direct, but nevertheless serious and far-reaching, consumer harm by distorting competition Microsofts past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsofts self-interest. (409412) Judge Jacksons findings are written in chronological order, with conclusions about structure, conduct and performance offered throughout the analysis. This paper provides a road map to the Findings of Fact based on an analytic framework applied by the Consumer Federation of America to prior to and during the trial that provides a basis for devising an appropriate remedy.2
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Findings of Fact, United States v. Microsoft, State of New York v. Microsoft, Civil Action Nos. 98-1232, 1233 (TPJ), November 5, 1999. 2 Consumer Federation of America and Media Access Project, The Consumer Case Against Microsoft (October, 1998); The Consumer Federation of America, Media Access Project and US PIRG, The Consumer Cost of the Microsoft Monopoly (January, 1999); Consumer Federation of America, The Evidence Mounts, March 18, 1999; Consumer Federation of America, Letter to the Joint Economic Committee on Monopoly Pricing in the PC Operating System Market, Juen.
EXHIBIT 1 THE MICROSOFT BUSINESS MODEL AND ITS IMPACT ON CONSUMERS MARKET STRUCTURE AND CORPORATE CONDUCT: CHARACTERISTICS OF THE ANTICOMPETITIVE BUSINESS MODEL MARKET PERFORMANCE: CONSUMER HARM
UNDER THE TABLE Abrogation of Contracts Intimidation Market Division Patent Infringement Reverse Bounty Predation
CONTRACT PROVISIONS Preferential Location Exclusive Deals Quality Impairment Resource Denial Secret Prices Indirect Sales
LEVERAGING MONOPOLY TO PREVENT COMPETITION OS Tying Incompatibility Disabling Desupporting Imitation
RETARDING INNOVATION Chilling Effect on Investment Delaying and Preventing Products DENIAL OF CONSUMER CHOICE Denying and Delaying Products Denying User-Friendly Configurations Inconvenient Distribution of Non-Microsoft Thwarting Responses to Demand DEGRADATION OF QUALITY Impairing Functionality of Microsoft Reducing Availability of Product Impairing Functionality of Non-Microsoft Products INCREASING CONSUMER COST Transaction Cost Monopolistic Pricing, Short and Long-Term Raising Hardware Cost
ABUSIVE PRICING Hidden Price Upgrade Policy Excess Functionality Overcharges Cross-subsidy from OS
EXCESS PROFITS
BARRIERS TO ENTRY Installed Base Positive Network Effects
COST SAVINGS Volume Capacity Utilization Low Sales/Services 2
THE ANTICOMPETITIVE BUSINESS MODEL At the center of Microsofts business model is a monopoly bundle of software that is tied to its operating system product. With this monopoly in operating systems, customers are locked into Microsofts product and pay higher prices see Exhibit 2). They simply cannot afford to switch. ____________________________________________________________________________ EXHIBIT 2 ABUSIVE BUSINESS PRACTICES IDENTIFIED IN THE FINDINGS OF FACT PARAGRAPH NUMBER MARKET STRUCUTURE MONOPOLY POSITION BARRIERS TO ENTRY HARDWARE SOFTWARE BUSINESS MODEL UNDER THE TABLE ABROGATION OF CONTRACTS INTIMIDATION MARKET DIVISION PATENT INFRINGEMENT REVERSE BOUNTY PREDATION CONTRACT PROVISIONS PREFERRED DESKTOP LOCATION EXCLUSIVE DEALS QUALITY IMPAIRMENT RESOURCE DENIAL SECRET PRICE INDIRECT SALES BUNDLING OS TYING INCOMPATIBILITY/INTEGRATION DISABLING DESUPPORTING IMITATION ABUSIVE PRICING HIDDEN PRICE UPGRADE POLICY EXCESS FUNCTIONALITY OVERCHAGES CROSS-SUBSIDY FROM OS EXCESS PROFITS 18-21,33-35 19,22-27, 54-55 30,36-43,166
390,394 106,129,236 88,105 390,394 139,260 107,137-139 139,272,301 143,247 90-92,128-129,160, 330,339-340 240,357,379 64,118,236-238,324 10,19,103 159, 170,198 129,390-396 160,170-172 90,122,128-129,192, 405-406 133-134,166 18-19,58 57,66 173-174,210-216 62-63,66 379 66,379
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While Judge Jackson identifies a combination of structural factors, like economies of scale and network effects, that give Microsoft market power, it is Microsofts broad and forceful campaign of anticompetitive actions to undermine competition that constitutes the abuse of monopoly power. Rather than just build better products and compete on the merits, Microsoft has employed a variety of anticompetitive practices to protect its core monopoly over the operating system market. Microsoft sought to divide the market by collusive agreements. It imposed contract conditions on suppliers that foreclose and deter competition. There are repeated examples of back room campaigns of intimidation, of abrogation contracts, and predatory pricing, in which the profits from the monopoly over the operating system are used to drive competitors out of other software lines. Using the operating system as the core of its market power, Microsoft freezes out competitors with incompatibilities, builds in features to impede or disable competing programs, withdraws support for alternative programs, and locks in customers with constant imitation of competing products or promises to imitate them. These practices make it difficult for competitors to design products to operate well as the operating system is manipulated and changed. Bundling allows prices to be hidden from the public, since the software is packaged with the computer and the browser was packaged with the operating system. The pricing terms and conditions are highly secret, locked in the contracts between Microsoft and the computer manufacturers that actually sell products to the public, allowing Microsoft to discriminate against companies that do not comply with its wishes. Once a dominant position was achieved, defending the operating system monopoly became the central theme of management. The strategy of leveraging the operating system to conquer the browser market was based on the business plan, not driven by any technical need to integrate the programs. Initially, Microsoft leveraged its power over computer makers who were dependent on it for operating systems to force its product onto the desktop and its competitor off. With the move to capture the browser market, the circle of Microsoft customers who are exposed to the anticompetitive practices has been extended to Internet service providers and Internet Content Producers. Microsofts campaign to eliminate the browser as a threat to its monopoly is only the most recent example. In addition to the browser case, Judge Jackson finds elements of this anticompetitive conduct in numerous other cases. These include competing operating systems (OS/2), programs oriented to software development (middleware like Suns Java, Intels Native Signal Processing and Lotus Notes) and applications intended for use by the public (IBMs Smartsuite, Apples Quicktime, RealNetworks streaming video). Taken together, there are at least two examples of every one of the abuses identified. HARMING THE PUBLIC IN DEFENSE OF MONOPOLY POWER The Findings of Fact leave no doubt that consumers have been hurt by Microsofts abuse of monopoly power (see Exhibit 3). Judge Jackson identifies almost two dozen specific ways that Microsoft has harmed the public in four general areas retarding innovation, denying consumer choice, degrading product quality and increasing consumer cost.
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EXHIBIT 3 CONSUMER HARM RESULTING FROM MICROSOFTS ABUSE OF MONOPOLY POWER ANTI-CONSUMER BEHAVIOR RETARDING INNOVATION Chilling Effect on Investment Developer Time, Money Delaying and Preventing the Development of Products Netscapes Navigator IBMs OS2/Smartsuite Suns JAVA Real Networks Apples Quicktime Intels Native Signaling Processing Undermining Compatibility DENIAL OF CONSUMER CHOICE Denying Products that Better Suit Consumer Needs Delaying Release of Products Denying Consumers User-Friendly Configurations Forcing Purchase of New Versions with New PCs 57, 66 Denying and Delaying Non-Microsoft Products Thwarting Responses to Consumer Demand Forcing Consumers to Buy Non-Microsoft Products In Inconvenient Ways DEGRADATION OF QUALITY Impairing Functionality of Microsoft Products Reducing the Availability of Product Impairing the Functionality of Non-Microsoft Products INCREASING CONSUMER COST Raising Consumer Transaction Cost Monopolistic Software Pricing Short Term Revenue Price Discrimination Undermining Long Term Competition Raising Hardware Costs PARAGAPH IN FINDINGS
379, 397,412 411, 132,395-396 81-88,408-410 116-118,125-130 397-403 111-114 104-110 94-103 390-396, 407 247, 410 167-168 210-216 90-91,93 225-229 203-206, 239-240 247,309-311,357 173, 174 407 92,128-129,160, 171-172,330,339-340 203-206, 239-240239-240,247 57, 62-63 64,236-238 66 57, 66,77
Microsoft retarded innovation by preventing specific products from being developed and deterring other software companies from devoting developer time and money to new products. Microsoft denied consumer choice by delaying or driving specific products out of the market, preventing consumers from buying computers with software configured as they want, and forcing non-Microsoft products to be distributed in inconvenient ways.
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Microsoft degraded the quality of its of own products and exposed consumers to greater risk by forcing its Internet browser onto the desktop and preventing competitors from being compatible with the operating system. It degraded the performance of competing products to hurt their sales. Microsoft increased costs for consumers in the short term by directly overcharging for its operating system, discriminating against specific computer manufacturers, and causing consumers increased time and effort to obtain non-Microsoft products. It raised prices in the long term by preventing competitors from entering the operating system market. It caused consumers to pay more for hardware through its software design, licensing and upgrade pricing policies A STERN REMEDY IS CALLED FOR TO RESTORE COMPETITION The central issue in a Sherman Act case is competition. The law presumes that but for the monopolization and anticompetitive behavior, consumers would have been better off because competition, which was harmed by these acts, is good for consumers. Indeed, if the Department of Justice had demonstrated consumer harm, but not bad behavior, the case would have been thrown out of court. In fact, as Judge Jacksons findings make clear, the evidence before the court documents both harm to competition and harm to consumers. Given the decisive demonstration by the Department of Justice of anticompetitive behavior as evidenced in the Findings of Fact and the shadow that Microsoft has cast over the industry for such a long time, it is crucial to fashion a stern remedy that restores competition as quickly as possible. It must be recalled that the behaviors that led to the Findings of Fact took place after Microsoft signed a consent decree intended to address the very same underlying issues. Microsoft had fair warning that its behavior was suspect. To have persisted in that behavior to the extent that such a convincing case could be compiled against it suggests that behavioral remedies that require either the good faith of Microsoft or regulation of its behavior will not work. Microsofts complaints about government restrictions on its ability to innovate and its ongoing campaign to reduce the budget of the Department of Justice also argue against behavioral remedies, which would require the courts to regulate its conduct. Structural remedies, like divestiture, ar...