Microsoft Antitrust Violation Case - U.S. vs Microsoft Corporation

Introduction

The “Browser War” between Microsoft (MSFT) and Netscape (NS) raises issues of fair competition and ethical business conduct. What does it mean to compete with integrity? Should responsible managers compete in any way the law does not clearly forbid?

Ethical issues are more complicated when the law is unclear, providing managers with little guidance and the choice of whether to take advantage of the unclear law. Before the MSFT case, there was no sure way to know how a court would apply law intended for heavy industry. This post concludes MSFT did not behave in the best interests of its customers or shareholders, and therefore acted unethically by forcing Internet Explorer (IE) on its customers and limiting their choices. MSFT also risked its very existence by violating antitrust law.

Environmental Analysis

A. General Environment

MSFT saw the emergence of the internet as both a threat and an opportunity. In response to his top executives’ suggestion that MSFT consider an all-web strategy, Bill Gates said, “You’re putting us on a level playing field. You’re going to kill the company.” (Spinello, 357). MSFT’s anti-competitive responses to the internet lie at the heart of the allegations against it.

During the mid to late 90’s, MSFT faced a challenging legal and political environment. A generic resentment toward MSFT existed, allowing opportunistic politicians the chance to seek good press by attacking MSFT (Anderson). Some evidence exists that MSFT’s competitors, namely America Online (AOL), had a hand in triggering antitrust scrutiny (Id.).

B. Operating Environment

By the mid 90’s, MSFT’s Windows operating system (O/S) held a dominant position, about 90%, in O/Ss for Intel based personal computers (PC’s) (253 F.3d 34). IBM’s O/S 2 Warp had failed, and Linux had not yet appeared on the scene (Operating). MSFT did, however, face competition from other systems. Apple had its own O/S, but even counting Macs, MSFT had an 80% market share (253 F.3d 34). Sun Microsystems built networks to run on Bell Labs’ Unix O/S (Spinello), but even when those kinds of systems were included, MSFT’s position was still dominant.

A web browser, such as Navigator, threatened to displace Windows, because the user only needed the browser to access and run programs from offsite servers (Spinello). In this “winner takes all” game, MSFT saw a threat to its existence (Anderson). MSFT has a long history of antitrust litigation. In 1994, the DOJ accused MSFT of maintaining a monopoly in the O/S market, and illegally using licensing and software developer agreements to maintain and exploit that monopoly (56 F.3d 1448). MSFT and DOJ settled the case, and reached a consent decree regulating MSFT’s conduct (147 F.3d 935). In 1997, DOJ accused MSFT of violating the consent decree by bundling Internet Explorer (IE) 3.0 and 4.0 with Windows 95 (147 F.3d 935). MSFT won that case, but the court left open the question of whether bundling violated the Sherman Act (253 F.3d 34).

C. Internal Environment

Bill Gates, MSFT’s talismanic founder, dominated the company. His competitive values permeated the firm’s culture; his fears of MSFT being displaced, as it had done to others, drove attitudes and decisions company-wide.

D. Assumptions

Both MSFT and DOJ made assumptions. MSFT assumed that Netscape posed a mortal threat, and therefore MSFT needed to defeat it at all costs. The DOJ assumed MSFT harmed competition through its actions. Whether either assumption is true is debatable.

Problem Definition

The chief allegations against MSFT can be divided between its standing as a monopoly, and various practices constituting unfair restraints of trade (253 F.3d 34). A separate issue is which legal remedy is appropriate (Id.). The case raises the question of whether a company in a dominant market position should face a different set of competitive rules than a smaller company

• MSFT’s Size: Monopoly in PC Operating Systems

The government argued that MSFT had a monopoly because 90% of PC’s in America ran on a Windows operating system (O/S). The government claimed this dominant position harmed innovation and may have led to monopoly pricing. MSFT argued that the government too narrowly defined the market. MSFT contested that its customers could switch to Sun, Unix or IBM, and therefore MSFT could not act like a monopoly. MSFT changed the world’s way of doing business and transformed homes worldwide; saying that it hindered innovation was ludicrous. MSFT denied that its position harmed anyone, and that it competed fairly, and charged fair, low prices.

• Restraints on Trade The government claimed a series of MSFT’s acts were uncompetitive and therefore violated the Sherman Act

1. Bundling

The government argued that giving away Internet Explorer, by bundling it with the Windows software and making it part of the O/S, unfairly disadvantaged Netscape because it could not compete with a competitor who gave away its product for free. Because users got IE for free, there was no need to purchase Navigator (253 F.3d 34).

2. Exclusionary Agreements

The government claimed MSFT illegally froze out Netscape by entering into exclusionary agreements with internet service providers (ISP’s), online services (OLS’s), and internet content providers (ICP’s), requiring the use of IE and forbidding promotion of Navigator (253 F.3d 34). If they wanted to offer Windows, they had to take IE and omit Navigator.

3. Restrictions on OEM’s

MSFT controlled how a PC would start the first time it was turned on by cutting exclusive deals with original equipment manufacturers (OEM’s). The agreements forbid Navigator to be installed, or its icons to be displayed prominently (253 F.3d 34).

4. Java

MSFT entered into an agreement wherein Sun licensed Java to MSFT, and MSFT distributed it. Sun accused MSFT of altering Java, “polluting it,” in an effort to discredit it. Gates said in an email “this [Java] scares the hell out of me. It’s still very unclear to me what our OS will offer to Java client applications code that will make them unique enough to preserve our market position” (Government Exhibit 983, Appendix D). An MSFT document suggested that MSFT “kill cross-platform Java by grow[ing] the polluted Java market” (Spinello). The federal court in San Jose ordered MSFT not to alter Java.

• Lawsuit Result

The trial court’s factual findings were devastating for MSFT. The judge found MSFT to have a monopoly in a relevant market, abused its power, and competed unfairly with Netscape (253 F.3d 34). The trial judge had to choose between forbidding MSFT’s bundling and tying agreements, and a more draconian step like breaking up the company (253 F.3d 34). The trial judge ordered the company broken into two parts: One part would make O/S, the other applications (Id.).

The appellate court reversed (Id.). It affirmed the factual findings, but believed breaking up the company went too far (Id). The court remanded the case for a trial on the remedy.

DOJ and MSFT subsequently settled (231 F.Supp.2d 144). MSFT was not broken up (Id.). Rather, MSFT agreed to a series of measures designed to open up competition. MSFT agreed to refrain from entering anti-competitive agreements, to open up its source code to allow other companies to use it (Id.), and to a series of enforcement measures (Id.).

Alternative Courses of Action

A. Achieve and Maintain Dominant Position in Operating Systems

MSFT could have chosen to be content with being the dominant leader in the O/S market, rather than use additional tactics to eliminate competition.

• Strengths

Some argue it was inevitable that someone would become the dominant maker of O/S’s (Spinello). People want to buy an O/S with the applications they need; application developers want to develop software for the platforms people have (Id.). An O/S, therefore, must reach a “critical mass” to be successful, making it a “winner takes all” game (Id.). MSFT was already the leader in the market, so simply needed to maintain its status, and serve the interests of its shareholders by maintaining the profitable Windows business.

• Weaknesses

Domination in O/S’s, in conjunction with its actions in other areas of competition such as browsers and applications, exposed MSFT to antitrust attack. Without those tactics, the O/S would have to hold market share on its own. It if failed, market share would decline.

B. Provide a Better Product to Win the Competition

MSFT believed that Navigator posed an existential threat to Internet Explorer, and therefore MSFT. MSFT’s tying arrangements, bundling, free IE, and general efforts to keep Navigator off the market kept MSFT in a dominant position, but were illegal. MSFT competed, not by providing a better product, service, or price, but by excluding competition and limiting free choice. MSFT could have operated ethically and legally, by providing a better internet browser product.

• Strengths

If MSFT had competed by providing a superior product, not only would this have encouraged innovation, but it also would have kept prices competitive for consumers, avoiding the claim that it had harmed anyone. Rather than spending its resources to avoid competition, it could have better spent them in research, development and marketing activities.

• Weaknesses

MSFT would have had to compete based on its reputation, product quality and price, and innovation. If unsuccessful, it could lose its position. Limiting competition unethically was an easier route to take, but placed the company in legal jeopardy.

C. Partner with, rather than pollute Java

• Strengths

MSFT saw Java as a threat, and the evidence shows MSFT’s deal with Sun was largely a deception intended to ruin Java. The upside is that MSFT gained access to Sun’s technology and made it dependent on MSFT’s technology. Rather than try to pollute Java to weaken it, MSFT could have considered the partnership with Sun as an opportunity to expand its offerings. To increase the demand for Java, MSFT could have offered the software on a free trial basis, or at a discounted rate to encourage sales of Java through MSFT.

• Weaknesses

Java provides a product to customers that MSFT does not offer, which Gates saw as a potential weakness. Java could offer its product through other suppliers, or sell it directly through Sun, competing with MSFT. It would be in MSFT’s best interest to maintain a positive partnership with Sun so that both benefit.

Chosen Alternative

MSFT needs to take few, if any, steps to maintain its dominant position in the O/S market. To retain that status, it simply needs to focus on continually improving its O/S, to offer a product that consumers want to purchase. MSFT also needs to focus on developing a superior browser, to fairly compete with Navigator. It has the financial resources to devote to research and development, so should be able to remain on top.

MSFT must work closely with its attorneys to ensure it follows the law. Although the decisions in this case were made at the highest level, an overall ethical program might help to tone down the “win at all costs” mentality, especially when the costs might include the breakup of MSFT and even criminal penalties. The first task should be developing a code of conduct, which should define the behavior that is expected of all employees, as well as the ramifications for violations of the code. Microsoft should express that all employees will be expected to behave ethically and will be held accountable, and that leadership of all levels must set the example. The code of conduct should be visibly posted throughout the offices, and shared with all employees. It should also be publicized by posting it to the web site, which would help improve MSFT's reputation in the public and courts' eyes.

MSFT should also strengthen its partnership with Java by distributing the product on a 90-day trial basis for free. This would encourage customers to try it, and would likely result in their purchasing it through MSFT. These alternatives encourage innovation and competition, and will result in better products and lower prices for consumers. Healthy competition would have avoided the legal issues that MSFT faced.

Implementation

MSFT should capitalize on its relationship with Java by offering it on a 90-day trial basis for free. Customers would need to register the product to activate it, by providing their email address. After 60 days, MSFT should email customers, reminding them that their trial is about to expire, and offering the product at a discounted sales price. This would encourage sales and support through MSFT.

To provide a better O/S and internet browser, MSFT should develop focus groups, conduct surveys, monitor support center call topics, and offer incentives for customers who submit their “wish lists” for product enhancements. Not only would this provide insight to product developers, but also would build trust in the company and improve its reputation. Customers would feel MSFT was interested in and responsive to their suggestions, which will encourage customer loyalty. All customers, of both MSFT and its competitors, would benefit by having superior products available at lower prices, all provided ethically and legally.

Summary of Analysis

The Browser War shows the difficulty of working within an ethical framework, especially in a highly competitive environment in a winner takes all battle. A purely utilitarian framework does not solve the problem, due to the difficulty of quantifying the costs and benefits, and who will bear them (Shazly). Likewise, deontology does not solve the problem either, as no universal principle would constrain MSFT because the problems arise solely from MSFT’s dominant position (Id.). Instead, applying the Golden Rule to MSFT’s various stakeholders appears to give the most socially responsible and pragmatic results (Spinello).

MSFT chose to compete in ways that harmed its customers by limiting their choices. MSFT also took risks that could have devastated its shareholders, as the company was almost judicially dismantled. MSFT should have concentrated on making Windows better, and making IE better than Navigator. Ethical competition requires that companies take actions to benefit their customers, not limit customers’ choices. Ethical competition may not be the easiest way to succeed, but it is the right way—a way that builds integrity, trust, and reaps long-term rewards.

References Used

1. Spinello, R. A. "Competing Fairly in the New Economy: Lessons from the Browser Wars." Journal of Business Ethics 57.4 (2005): 343.

2. Anderson, William L., et al. "The Microsoft Corporation in Collision with Antitrust Law." The Journal of Social, Political, and Economic Studies 26.1 (2001): 287.

3. Goodin, Dan. “Microsoft, Intel Wage War of Words.” CNet News (12 Nov. 1998).

4. "Microsoft's Anti-Trust Tryst: Ethical Implications." Strategic Direction 19.6 (2003): 21.

5. “O/S Interface Design Between 1981-2009.” WebdesignerDepot.com (2009).

6. Shazly, Mona R. El, and Ryan J. Butts. "In Quest of Profits: Legal and Ethical Implications Facing Microsoft." International Journal of Social Economics 29.5/6 (2002): 346.

7. Microsoft Web site – Corporate Governance section

8. U.S. v. Microsoft Corp., 231 F.Supp.2d 144 (D.D.C. 2002).

9. U. S. v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001).

10. U.S. v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998).

11. U.S. v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995).