CASE STUDY

THE MICROSOFT CASE

The most important and controversial antitrust case in recent years has been the U.S. government’s suit against the Microsoft Corporation, filed in 1998. Certainly, the case did not lack drama. It pitted one of the world’s richest men (Bill Gates) against one of the world’s most powerful regulatory agencies (the U.S. Department of Justice). Testifying f”r the government was a prominent economist (MIT Professor Franklin Fisher). Testifying for Microsoft was an equally prominent economist (MIT Professor Richard Schmalensee). At stake was the future of one of the world’s most valuable companies (Microsoft) in one of the economy’s fastest growing industries (computer software).

A central issue in the Microsoft case involved tying-in particular, whether Microsoft should be allowed to integrate its Internet browser into its Windows operating system. The government claimed that Microsoft was bundling these two products together to expand the market power it had in the market for computer operating systems into an unrelated market (for Internet browsers). Allowing Microsoft to incorporate such products into its operating system, the government argued, would deter other software companies such as Netscape from entering the market and offering new products.

Microsoft responded by pointing out that putting new features into old products is a natural part of technological progress. Cars today include stereos and air conditioners, which were once sold separately, and cameras come with built-in flashes. The same is true with operating systems. Over time, Microsoft has added many features to Windows that were previously stand-alone products. This has made computers more reliable and easier to use because consumers can be confident that the pieces work together. The integration of Internet technology, Microsoft argued, was the natural next step.

One point of disagreement concerned the extent of Microsoft’s market power goring that more than 80 percent of new personal computers use a Microsoft operating system, the government argued that the company had substantial monopoly power, which it was trying to expand. Microsoft replied that the software market is always changing and that Microsoft’s Windows was constantly being challenged by competitors, such as the Apple Mac and operating systems. It also argued that the low price it charged for Windows-about $50, or only 3 percent of the price of a typical computer-was evidence that its market power was severely limited.

Like many large antitrust suits, the Microsoft case became a legal morass. In November 1999, after a long trial, Judge Pen field Jackson ruled that Microsoft had great monopoly power and that it had illegally abused that power. In June 2000, after hearings about possible remedies, he ordered that Microsoft be broken up into two companies-one that sold the operating system and one that sold applications software. A year later, an appeals court overturned Jackson’s breakup order and handed the case to a new judge. In September 2001 the Department of Justice announced that it no longer sought a breakup of the company and wanted to settle the case quickly.

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