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Antitrust Legislation

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Preface In light of recent developments, I took a different approach to thispaper. The Microsoft Antitrust case has been somewhat of a phenomenon that hasbecome one of the most prominent cases in recent years. Because of this, Idecided to look at government intervention into individual markets, along withantitrust law, via that particular case. I am of the opinion that we can learn agreat deal by using that particular ongoing litigation. Antitrust law protectsthe public from companies that attain an undue domination of the marketplace viamergers, tying 1 product to another, vertical integration, and other practicestending to eliminate competition or bar entry into the market to newcomers.

Inthe 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.

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They were known to terminate licenses mercilessly once they figured out a way toclone 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), aswell as Wordstar and WordPerfect (word processors). All of these companies havenow either merged out of existence or are completely defunct, with theexceptions of Borland and Lotus (which are barely afloat). Microsoft now has theleading product in each sector of the market once occupied by these firms. Thecompany was responsible for ridding itself of these early competitors by eitherbuying them out or simply driving them into the ground. This early disregard setthe tone for how Microsoft does business even today. Microsofts advantagecomes from their domination of operating systems (OS). “By definition, if theOS maker creates applications, they will run better with the OS than a thirdpartys, and the OS owner can, over time, create modifications that will makethis even more so,” (Rapacious 1). Microsoft has the power to leverage theirdominance in operating systems (Microsoft currently has its Windows software inover 90% of all PCs) to gain a large market share in the various applicationsectors. They have always been able to do this and as a result have been able toget, or achieve, whatever it is that they have wanted. This is the verticalintegration that the antitrust laws talk about. In a July 1994, settlement, theJustice Department came to an agreement with the software giant over theantitrust charges it had filed against the company. The charges were broughtafter the department found out that Microsoft was giving personal computermanufacturers a discount on their OS when the PC manufacturer would pay thecompany a royalty for each computer sold, including those without MS-DOS orWindows software installed. “The practice gave PC makers little incentive toinstall competing programs since they would have had to pay a royalty to boththe competitor and Microsoft,” (Ramstad 1). The settlement only dealt withthis single count and left Microsoft alone to continue performing its numerousother anti-competitive practices. In the spring of 1995, Judge Stanley Sporkinrejected the deal that the Justice Department settled on. He did so on thegrounds that: 1. The government refused to give the court enough informationabout the agreement; 2. The deal was too narrow; it failed to deal with issueslike OS/application leverage, and allegations that Microsoft intentionally madechanges to Windows that made third party applications hard to run; 3. Theparties did not adequately consider anti-competitive issues; 4. The deal wasunsatisfactory when it came to enforcement and compliance mechanisms. Around thetime of the settlement, some suggestions started to come about how to deal withMicrosoft. Stewart Alsop suggested “that Microsoft be forced to document theAPIs in Windows, so that other companies could legally clone it. That wouldstill 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 differentcompanies and the playing field would become more level. In late August 1995,U.S. District Judge Thomas Penfield Jackson ended what had become athirteen-month judicial review by signing the agreement Microsoft and theJustice Department had come to. The review had been elongated by JudgeSporkins rejection of the deal. The signing, however, did not take the heatoff Microsofts proverbial back. The Justice Department had already beguninvestigating some of their concerns about the companys practices regardingnew software and whether they were complying with the agreement. Thisinvestigation became the court case we have all been hearing about in these lastfew months. By the time the Judge Jackson signed the agreement, the governmentwas already looking into Microsofts decision to include access to its on-lineservice, the Microsoft Network, into its Windows 95 operating system.

Competitors were afraid that this would allow the company to once again takeadvantage of its monopoly power in operating systems to gain a large share ofthe on-line market. A mere three months after its release, the company announcedthat the Microsoft Network had already enrolled more than 525,000 members. Theyalso had projections putting them over the 2 million member mark by the end ofthe next year (1996). This went on to fuel its competitors worst fears. AmericaOnline, Prodigy and CompuServe were among those that had long been arguing thatMicrosoft had an unfair advantage with its on-line access included in the OS.

“The industrys fears are partially correct. Having a button on thedesktop works. People click on it, said Adam Schoenfeld, of JupiterCommunications,” (Cooper 1). Microsofts response to the situation at thattime was merely to suggest that there was no evidence showing MSNs closeconnection to Windows 95 had tilted the tables into its favor. In September of1996, Microsoft received a written request for information, (this is known as acivil investigative demand) from the Justice Department. Netscape had accusedthe company “of going beyond vigorous competition into the realm of illegaltactics in the browser war,” (Just. Dept. Examining 1). Netscape also charged,through letters to the Justice Department, that Microsoft had violated its 1994consent decree (settlement) with the government by offering PC manufacturers a$3 discount on Windows 95 for giving their browser, Internet Explorer, a moreprominent place on computer screens than Netscapes browser, Navigator.

Further complicating Microsofts problems, they received another civilinvestigative demand in May of 1997. This time, the Department of Justice wasseeking internal documents having to do with Microsofts planned purchase ofWebTV for $425 million. “WebTV is a start-up producer of set-top boxes thatbring the Internet to television sets,” (US Requests…1). A major industry isexpected to develop from the delivering of the Internet via television and otherhome appliances. So, the opportunity to be among the first in a very promisingmarket is what attracted the company to WebTV. About the same time thegovernment was looking into Microsofts purchase, Oracle (another softwareproducer) announced it was buying control of Navio Communications Inc. Navio wasdeveloped by Netscape Communications, which, “facing ever-stiffercompetition from Microsoft…decided to conserve its financial resources andshed Navio,” (US Requests…2). Microsoft officials pointed to this move byOracle in response to the governments most recent allegations. They claimedthat the deal was a sign that their purchase of WebTV was prompting capablecompanies to get into the market, thereby promoting competition. Drawing furtherattention to itself, Microsoft invested in Apple Computers. They purchased $125million in non-voting stock. This act was seen by many, upon first glance, as aneffort to further dominate the computer market by swallowing another competitor.

However, if one were to consider the pressure that Microsoft was, and is,enduring from the government, one can see an entirely different motivation forthe investment. Apple was struggling and this purchase of non-voting stock wasdesigned to help keep the company afloat. As long as Apple remains intact, thecomputer giant we know as Microsoft has another “competitor” that it canpoint to in its fight against antitrust violations. In October of 1997, thegovernment finally asked a judge to order Microsoft to stop requiring PC makersto include Internet Explorer when they install Windows 95 in their computers.

Attorney General Janet Reno, who referred to the company as a monopoly severaltimes in her press conference, claimed that the company had violated the 1994settlement, and that the Justice Department would seek a $1 million per day fineif they didnt stop the practice. She said, This administration has takengreat efforts to spur technological innovation, promote competition and makesure that the consumers have the ability to choose among competing products.

This} action shows that we wont tolerate any coercion by dominant companiesin any way that distorts competition. (Labaton 2) The governments petitionwas designed to receive an order that would bar Microsoft from compelling PCmanufacturers to accept their browser as a condition of receiving operatingsystem. It also asked the court to order the company to notify Windows 95 usersthat they can use any compatible Internet Browser, as well as provideinstructions on how to remove Internet Explorer from their computer. In responseto the petition, Bill Gates, Microsofts chairman and chief executive, saidthat his company was not violating the antitrust agreement. He proclaimed hisbelief that his company had every right to improve and add to the basic featuresof Windows. He went on to say that he hoped to further improve Windows by addingnew capabilities, such as speech recognition and machine vision. The JusticeDepartment has several key issues that it has to deal with in its case againstMicrosoft. By deal with, I mean they have to get around Microsofts answers totheir charges. First, the department is accusing the company of threateningcomputer makers who delete the Internet Explorer icon. The company answers thisby claiming that “…computer manufacturers are free to ship any competitorproduct they wish, but they are not allowed to disable features of ourproducts,” (Just Dept v MS 2). Second, the government is contending that theterms of Microsofts non-disclosure agreements are an obstacle in the way oftheir attempts to gather evidence for their investigation. Microsoft says thattheir non-disclosure agreements are no different than those of most companieswithin the software industry, as well as outside it. Finally, there is thematter of the competitive browser possibly representing a threat toMicrosofts key product, its operating system. Company officials claim that bynot allowing them to include their browser with Windows, the government ispreventing innovation. They say that the pace of the competition will quicklypummel a company that stops innovating, and that the consumers win becausecompetition drives firms to deliver better products at lower prices. In essence,Microsoft is claiming that by not allowing them to include the browser, thegovernment is stifling the competition that it is trying to protect. Orin Hatch,chairman of the Senate Judiciary Committee, held the first of what he claimedwould be several hearings on the Microsoft antitrust petition in the first weekof November 1997. At this hearing, the Senator produced an exclusivity agreementbetween Microsoft and Earthlink Network, Inc. It called for Earthlink to offeronly Microsofts Internet Explorer and prohibits them from implying thatanother browser is available. “What you have set forth appears to be aclassic example of an artificial entry barrier. It is not designed to enhancethe product. It is designed simply to hobble the competitor said Kevin Arquit(former general counsel of the Federal Trade Commission),” (Clausing…Senator).

After the hearing, Microsoft asked a federal judge to throw the governmentspetition out. They filed their response to the Justice Departments allegationswith Judge Thomas Penfield Jackson (the same judge that signed the antitrustsettlement two years earlier). The company is claiming that the governmentscase is without base, is implausible and is a perversion of the truth. Accordingto what their claims, the original decree allows them to develop integratedproducts. The response also claims that the company “…realized long beforeNetscape was even a company that Microsoft needed to build this type offunctionality into Windows for consumers,” (Clausing…Microsoft 2). Netscapewas founded in 1994. The first version of Internet Explorer wasnt releaseduntil July of 95, and that was a limited beta version. In May of 98, the DOJand the attorneys general of 20 states filed a pair of antitrust lawsuitsagainst Gates company. The suits claimed that Microsoft used Windows toattempt to force customers to use their other software products, the mostimportant of which was their Internet Explorer (IE) web browser, as well astargeting contracts used by Microsoft that required companies to put up a”first screen” that was created by the OS creators. The states and DOJ alsosought an injunction that would have required Microsoft to strip IE from Windows98, which was due on shelves at the end of June that year. Microsoftsresponse to the injunction request was to claim that the IE browser cannot betaken out of Windows 98 system without severely damaging the functionality ofthe entire product. The injunction failed, had it been granted, though,Microsoft would have been required to remove the browser or include a copy ofNetscapes Navigator and another competing browser with the OS. The lawsuitswere to be heard by Judge Penfield Jackson, the same judge who heard the firstlawsuit over the browser. According to Michael Martinez of ABC News in his May1998 article, comments were made by representatives of the DOJ, the states, andMicrosoft. Attorney General Janet Reno said, “Consumers and computermanufacturers should have the right to choose the software they want installedon their personal computers. We are acting to preserve competition in thesoftware industry.” New York Attorney General Dennis Vacco, who was heading upthe states case along with the attorneys general from Iowa and Connecticutadded, “…it is Microsoft who is acting like an Orwellian big brother bycontrolling the range of products available to consumers.” The Microsoftresponse to the new allegations was to claim that attacking them for integratingtheir software was an attack on innovation. “By going after the basicprinciple of integration, the government can conceivable go after a very broadset of things,” Gates said (Martinez, Government). Opponents of the renewedallegations were swift in coming to the defense of Microsoft. They point outthat it was Netscape who dominated the browser arena early on and forcedMicrosoft to play catch up and aggressively market IE. Many people are of thebelief that rivals of the software giant might have been better off focusingtheir attentions on improving their products rather than seeking refuge in thecourts. Mark Schmidt, the Director of Programs for the National TaxpayersUnion Foundation (NTUF) argued against the claims that “Microsoftsanti-competitive conduct has resulted in higher consumer prices, lessconsumer choice, and decreased levels of innovation” made by Iowa AG TomMiller, in a September 1999 article (Schmidt, Lawyers). Mr. Schmidt claims thatafter figuring in inflation, the costs to computer manufacturers of installingthe Windows and MS-Office programs have actually decreased. In response toclaims of anticompetitive behavior, he quotes Mitchell Kertzman of Microsoftrival Sybase as saying “Basically, all the big companies, all the companiesthat have won, are run by bloodthirsty killers,” (Schmidt, Lawyers). As fordecreased innovation as a result of Microsofts practices, well I must saythat he has a very persuasive argument, …The integration of Windows withInternet Explorer was an important advance for software users, who would almostsurely find it easier to use an Internet Explorer that looks similar to andoperates like Windows… Even Ohio AG Betty Montgomery, who is suing Microsoftadmits, Many Ohio consumers have benefited from the innovative productsmarketed by Microsoft of the past 19 years. (Schmidt, Lawyers) One of theproposed sanctions that would be placed on Microsoft should the DOJ and thestates win their case would be to force them to sell or license its Windowssource code (a blueprint of sorts, one that lays out the foundations of a pieceof software). George Washington University Law School Professor William Kovacicwarned, “It also reduces incentives to innovate if a dominant firm is forcedto share its hard-won assetslike intellectual property in the softwarebusinesswith other companies,” (Schmidt, Lawyers). Schmidt also pointed outthat in May of 98, 26 CEOs of major computer companies sent a letter to theJustice Department asking that they refrain from filing any additional chargesagainst Microsoft (Schmidt, Lawyers). On March 24th of this year, the Wallstreet journal reported that Microsoft sent a detailed proposal to thegovernments attorneys in an effort to settle the case. It was expected thatthe proposal contained price changes, separation of the Internet Explorerbrowser from the Windows OS, as well as some access to parts of the source code.

It is believed that the proposal was brought about after weeks of talks becauseJudge Penfield Jackson said that if a deal wasnt reached soon, he would issuehis findings of law. After ripping Microsoft in November (99), it seems thatthe Judge will find for the DOJ (WSJ, Microsoft). There are questions as to howeffective any of this antitrust litigation will be. If one looks back to someprevious cases, it looks to be rather unnecessary. In 1969 the government wentafter IBM for allegedly violating antitrust laws. That case was dropped thirteenyears later when their market share started to drop with emerging companies(including a young Microsoft) gaining. Schwinn Bicycle actually lost anantitrust suit in 1967, but foreign competition relegated the firm to bankruptcyin 1992. RCA, a once dominant radio and television producer was made to licenseproducts. They followed the Justice Department mandate and directly licensed toJapan, who now is the leader in the electronics industry. (Schmidt, Lawyers)There are going to be very definite repercussions to the Microsoft case, nomatter what the verdict. We have to weigh the cost of these trials against whatusually ends up being short term dominance by a powerful firm. If Microsoft isbroken up, Bill Gates isnt going to be the only one that is affected. Iftheyre not broken up, it seems Netscape will have to suffer only moving 160million units of their browser. It seems to me that the majority of consumershave benefited from Microsofts dominance and progress in software. Governmentintervention just doesnt seem to do anything but hinder that benefit.

BibliographyClausing, Jeri “Senator Takes on Microsoft in Antitrust Hearings” NewYork Times, 11/05/97, http://www.newyorktimes.org “Microsoft Counters JusticeDepartments Lawsuit” New York Times, 11/11/97, http://www.newyorktimes.orgCooper, Charles “MSN surpasses half-million point as rivals stew” PCWeek,11/20/95 http://www.zdnet.com/pcweek/news/1120/omsn20.html Labaton, Stephen”Government Accuses Microsoft of Violating Antitrust Agreement” New YorkTimes, 10/21/97, http://www.newyorktimes.org Lohr, Steve “Justice DepartmentExamining Microsofts Internet Strategy” New York Times, 9/20/96, http://www.newyorktimes.org”US Requests Documents Concerning Microsoft Purchase of WebTV” New YorkTimes, 5/20/97, http://www.newyorktimes.org Markoff, John “Gates says HisCompany is not Violating Antitrust Agreement” New York Times, 10/22/97,http://www.newyorktimes.org Martinez, Michael “Government Sues Microsoft”ABC News, 05/18/98 http://abcnews.go.com/sections/business/DailyNews/Mirosoft980513.htmlRamsted, Evan “Judge approves Microsoft antitrust settlement” The DetroitNews, 8/22/95, http://detnews.com/menu/stories/14207.htm Schmidt, Mark”Lawyers Playing Lawmakers” National Taxpayers Union, 9/9/99, http://www.ntu.org/issues/taxes/tech/pp119.htmUnknown Author “Microsoft: An Unprincipled, Rapacious Company” The EthicalSpectacle, April 1995, http://www.spectacle.org Unknown Author “The JusticeDepartment v Microsoft: The Evidence and the Answers” New York Times,10/27/97, http://www.newyorktimes.org Unknown Author “Microsoft offers aproposal to settle antitrust charges” Wall Street Journal, 3/24/00 http://www.msnbc.com/news/386566.asp

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Antitrust Legislation. (2019, Apr 30). Retrieved from https://graduateway.com/antitrust-legislation/

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