Computers

The DOJ vs. Microsoft - July 1, 2001

The appeals court has ruled... and both sides have claimed victory. The remedy set forth by the Judge in the DOJ v. Microsoft case (breaking up Microsoft into two companies, one operating systems, the other applications) was thrown out by the appeals court, along with the finding that Microsoft had tried to monopolize the web browser market. It did uphold the lower courts ruling that Microsoft is a monopoly in the OS market and that it illegally engaged in anti-competitive practices with its monopoly. The case will be sent back to the lower court and a new judge was appointed to oversee a new remedy phase of the trial.

What did Microsoft do?

The court found that Microsoft had leveraged its operating systems to keep competitors software off new computers. One of the things Microsoft does is control how Windows looks to the consumer when preinstalled on a new computer. Understandable, It want's to make sure it's software is set up correctly by the manufacturer of the computer (the OEM, or Original Equipment Manufacturer) otherwise consumers might find fault with something the OEM did and blame it on them. Unfortunately, this can be abused. An example of this that may or may not be true was that Compaq wanted to have Netscape's Navigator web browser preinstalled on new systems, with an icon on the desktop. Microsoft wouldn't allow that. At the time, Microsoft was trying to promote it's own web browser, Internet Explorer, which was bounded with Windows and now is "integrated" into the OS. Microsoft told Compaq it wouldn't sell them OEM copies of Windows if they did this. This would have put Compaq at a significant cost disadvantage vs. other computer manufacturers, as OEM versions of Windows are less then half the cost of full retail versions of Windows.

Why is it Illegal?

I'm sure you're saying to yourself, why shouldn't Microsoft be able to set conditions on the sale of it's own products? If they want to say we'll only sell to companies who color their computers red, white and blue they should be able to? And you'd be right, except for one thing, Microsoft has a monopoly on PC operating systems. Let's look at a couple of hypothetical examples of how being a monopoly affects how you can do business.

What if four different companies made PC operating systems that were commonly sold with new computers. Just for fun lets say Windows, OS/2, Linux and BeOS all have around a quarter of the market. If one of them makes heavy handed demands of OEMs, they can refuse and use the competing OSs instead. In this scenario there is no monopoly, so Microsoft could demand whatever they wanted and the OEMs could take it or leave it.

Contrast this with a world in which only one company that makes a PC OS, say MS Windows. Here the OEMs have no choice. If Microsoft says jump, they have to say how high, or they're out of the PC business.

I know, I know... You can get a PC with a non-Microsoft OS on it. Or can you? Go to Best Buy, Circuit City, CompUSA, etc... You won't find many, if any PC's that aren't running Windows. Sure you can find a few systems pre-loaded with Linux around. But except for a few niche markets, Windows is it. Be even offered to give their BeOS to OEMs to duel boot with Windows, giving the consumer the choice of which to use. Do you know how many companies tock Be up on that offer? Now there are a lot of reasons why an OEM might not want to do this, but the one that came up the most was rumblings about how Microsoft's licensing wouldn't allow it. We wouldn't want to confuse the consumer now would we.

You can get a computer without a Microsoft OS though. Buy an Apple. Yes, Apple makes computers and they run their own OS. I won't go into the 'is an Apple a PC' argument here. For the sake of argument let's say they are. Apple is one of the biggest OEM's around. Year in and year out it ships between 5-10% of the computers sold in the US. So that leaves, what, 90-95% to Microsoft? Still looks like a monopoly to me. Even if you include all the *NIX boxes running on different architectures, Microsoft OSs still ship on the vast majority of computers. In the consumer desktop computer market they are a monopoly.

Is that Bad?

No, Microsoft having a monopoly in OSs isn't bad. Having a common OS has some significant advantages. Writing apps, supporting users, developing hardware, ease of use moving between different computers are all advantages of having one dominate OS. What's bad is when the dominate OS is used to hurt competition in other areas. In fact the court has ruled it's illegal.

What Can Be Done?

The original ruling that Microsoft should be split up was pretty drastic. I think the Judge reached that conclusion because he felt anything less then that would result in a slap on the wrist and then business as usual for Microsoft. Unfortunately, I think he may be right. Back in 1995 Microsoft and the Justice Department were involved in another Anti-Trust lawsuit. The contention there was that Microsoft was forcing OEMs to pay for a copy of Windows for every computer sold no matter what OS shipped on the computer. That's right, if a customer called up IBM and said they wanted IBM's own OS/2 OS instead of Windows, Microsoft still wanted to get paid. Doesn't sound like a bad deal to me. It's also a good way to discourage OEMs from even considering offering a different OS to consumers. Microsoft and the DOJ settled and Microsoft, while not admitting guilt, agreed not to license Windows that way any more. Interestingly enough, OEMs were recently warned by Microsoft to watch out for computers being ordered without an OS preinstalled. It's likely, says Microsoft, that any PC shipped without Windows is just being ordered that way to save a few bucks, and a pirated copied of Windows will be installed by the customer (even Microsoft thinks it's a monopoly by that logic). Just let them know and they'll look into it. That ought to be good for OEM customer relations! (Quick note, piracy is a real issue, and one that deserves attention. It doesn't always justify the measures companies try to enforce because of it though).

What should be done? To be honest I don't see a good remedy. The best solution would be for Microsoft to 'play fair'. As you might have guessed, I just don't see that happening. The only thing that makes sense in that case is to force Microsoft to play fair. Or at least play fair with their monopoly. If a disinterested party were assigned to continually audit Microsoft's OS division they could review the way licensing deals were made. They could make sure MS applications didn't have an advantage over their competitors due to the operating system. They would provide a check to the rest of Microsoft. In a sense, Microsoft would be forced to build the wall between their OSs and the rest of the company they've always said was there.

It's by no means a perfect solution. One can argue that no 'protection' from a natural monopoly needs to be in place at all. If a company goes too far people will move to something else. If nothing else exists, someone will create it. The growing popularity of Linux, while not created as an alternative to Windows, can be viewed as such. The problem I see with allowing market forces to always sort things out is that a company can be in so powerful a position that it can raise the normal or 'natural' threshold that it should be able to get away with.

What Will Be Done?

A settlement I think. Microsoft will concede something, I don't know what. The DOJ will claim victory and it will be business as usual at Redmond. The sad thing is it doesn't have to be this way. I remember Bill Gates saying if Microsoft didn't stay vigilant, in six months a company could come out of nowhere and topple them. Unfortunately this fear has been channeled the wrong way. If Microsoft simply put it's efforts into making it's software do what it's customers want it to do instead of trying to make sure its keeping it's competitors down, it wouldn't be in this situation.

The funniest thing about this whole thing is I really think Microsoft could have avoided the whole ordeal. All it had to do was charge money for Internet Explorer. What if it had sold a version of Internet Explorer to compete directly with Netscape Navigator. It could have bundled the regular IE we all know and love with the OS, just like it did. All it would have had to do is offer an enhanced version for sale separately. It wouldn't matter if it sold a single copy. It could claim it was competing fairly by selling a comparable product and most people would have just stuck with the IE that came with the OS, getting rid of the Netscape threat. Wouldn't it be ironic if the concession Microsoft makes to settle the case is to extract IE from Windows? After all, Microsoft said IE would be free forever right, it would be a shame if the government forces them to start charging people for it to be competitive, after they have eliminated the competition.