Judge Rules Software Giant Microsoft Has a Monopoly
R. Morris Coats
Recently, Thomas Jackson, the federal judge hearing the Microsoft case, issued his "Findings of Fact" in the Microsoft case. What the judge decided was that Microsoft is a monopolist. While it sounds like such a thing should be easy to prove or disprove, it isn’t. Even if Microsoft has a monopoly in the market for Intel-based operating systems (which is what the judge found), it doesn’t mean that Microsoft is guilty of an antitrust violation. And even if the court finds Microsoft guilty of antitrust violations, it isn’t clear that there is a sensible remedy in the matter.
Finding Microsoft virtually alone in its market is a matter of definition. Here, though, it is not like defining the word "is" or the term "sexual relations," but like defining a neighborhood in a large city. Does a particular neighborhood include the house three blocks away or the empty lot up the street? Any parent knows that one must be more specific than "the neighborhood" when setting boundaries for their children’s play. Judges know that markets have to be defined, delineated, before finding that there is only one firm in that market.
The judge found that Microsoft has a monopoly in operating systems, yet Apple’s Mac operating system is a competitor. Oddly enough, he found that Mac’s operating system didn’t really compete because Mac bundles its software with its non-Intel-based hardware. His reasoning is that those who already have an Intel-based computer are not going to buy a Mac and its operating system. It seems from reading his so-called "facts" that if Microsoft and Intel had been vertically integrated, that Apple would have been more of a competitor.
Of course, if the market had been defined even more broadly, to include all computer software, Microsoft’s market share would have been even less significant. Other software companies are always potential competitors for Microsoft. In antitrust cases, after firms are operating, the Justice Department and the judiciary can come along and define a market so narrowly that target firms become monopolists, just as defining a neighborhood so narrowly can make any child playing outside its own yard a violator of a stay-in-the-neighborhood rule.
But having a monopoly is not against the law. In fact, U.S. policy actually promotes monopoly with its intellectual property laws. Intellectual property law has extended a monopoly to companies such as Microsoft and Intel through copyrights and patents to encourage innovation. Innovating firms are extended the protection from competitors for limited length of time so that such firms can make exorbitant profits for a while so that the high profits will increase the amount of innovation.
Antitrust laws are supposed to protect competitors from certain so-called "unfair" acts, not against innovators. In 1911, in the first antitrust case to get to the U.S. Supreme Court, Lafourche's Chief Justice E. D. White ruled that merely having a monopoly, being the only one in the market, did not constitute "monopolization," a violation of the Sherman Act. If a firm comes to have a superior position in a market because of lower costs or superior products, the antitrust laws are not to be used against it. So the distinction between having a monopoly, as Judge Jackson has ruled with Microsoft, and monopolizing, has to do with how a firm gets its dominant position in a market, by doing better or by doing meaner.
Microsoft's dominant position in the Intel-based operating systems market seems to be due to something called "network effects." All this means is that in some markets, the number of other users of the product has a strong influence over how much people will pay for the product. In computer software, the issue is compatibility, because people want to be able to share files and easily go from one computer to another. The more users, the greater the compatibility, and the greater the variety of software available for that operating system "platform."
It is unlikely that Microsoft will get away with a "Cease and Desist" order (where Bill Gates promises to stop being bad), because the judge does not seem to trust Microsoft. Breaking up Microsoft into different software companies does not seem to offer any hope of increasing competition in operating systems. Because of the network effects, the operating systems market just cannot be made any more competitive than it is.
Let's see what happens on appeal.