Damning MS with the facts II – monopoly power

Part two of our analysis of the DoJ's case

MS on Trial From the beginning, the Plaintiffs' Joint Proposed Findings of Fact (PJPFF) uses Microsoft's statements and documents to great effect. Where better to find that a browser is an application [and not a part of the operating system] than in the Microsoft Press Computer Dictionary? The DoJ starts with the meat of the case - that Microsoft has monopoly power over operating systems - and relentlessly shows this in the PJPFF. The concern that consumers were not much discussed in the evidence is neatly dealt with at one point with the argument that OEMs are "surrogates for determining the commercial alternatives reasonable available to consumers". So forcing OEMs to accept IE (as a licensing condition for Windows 95); obliging them to agree to costly restrictions on their ability to customise PCs; and stopping the inclusion of competitive products were tantamount to a direct restriction on users. There is an important argument that the DoJ does not address, and that is that many people are perfectly happy in an all-Microsoft world, and don't particularly care about the software. Of course, Microsoft cannot validly claim that these consumers made a choice for Microsoft since in most cases the possibility of choice has been anti-competitively restrained. In addition, Microsoft has historically included increased functionality in its operating systems, and incorporating browsing is merely a continuation of this. This is certainly not illegal in itself, but what has become an issue is the way in which Microsoft has done this, and its parallel predatory acts. The arguments that the DoJ offers, and the fundamental questions it poses, emphasise that this is not a case primarily about Netscape, but one about a predatory pattern of conduct that affects an industry. A strong argument used by the DoJ is that Microsoft "would not have rationally have reduced the value of Windows to end users [by its predatory conduct] unless it anticipate that doing so would create or increase monopoly power and thereby enable it to earn even greater monopoly profits". The DoJ demolishes Microsoft's claim that there is no applications barrier to entry, which is an important criterion in proving a monopoly (the other criterion is of course the high market share, which cannot be disputed). Microsoft's arguments about other platforms such as browsers and Java are reduced at a fundamental level by the DoJ's simple observation that the platforms cannot function without an operating system. Server operating systems like NetWare and Solaris are excluded by the DoJ's market definition. It was interesting that Joachim Kempin disclosed that Microsoft internally tracks its share of operating systems for Intel PCs, and that internal Microsoft documents analyse competition as "other x86" operating systems, which gives strong support for the DoJ's market definition and makes nonsense of the claim by MS witness Schmalensee that a market definition was not possible. Control via price hikes Some information from a sealed session shows the extent to which Microsoft raised the price of obsolete versions of Windows, which provides dramatic proof of its market power. We knew that IBM "agreed" to pay more than double for its Windows 3.11 licence or face losing $75 million in market development agreement discounts for Windows 95. Microsoft knew that there was no alternative for IBM, which in itself shows market dominance and pricing discretion. Microsoft was able to control IBM's royalty rate according to whether IBM kept its shipments of Windows 3.11 below 8 per cent of all Microsoft OS shipments - Microsoft's objective was to move users to Windows 95. But it is now also revealed that Microsoft also raised the price to OEMs of Windows 95 when Windows 98 was released, which the DoJ says is not consistent with there being a competitive market, since prices for older products would normally be expected to drop. The DoJ reveals enough of sealed sessions to make it clear that Schmalensee did not investigate this, and contradicted his own evidence. The DoJ also revealed that there were three other places in the sealed evidence where there was proof that Microsoft had raised OS prices to OEMs in absolute terms, apart from DoJ witness Franklin Fisher's statement that OS prices were not falling on a quality-corrected basis, and were rising. Microsoft's study as to whether it should charge $49, $89 or $120 for the Windows 98 upgrade (because of the fall off with higher prices, it decided on $89) shows Microsoft's power over pricing. It's also worth recalling that Microsoft's shipments of Windows increased from 11.4 million units in 1990 to 51.9 million units in 1996 [and must now be approaching 100 million units/year - the absence of a competitor speaks volumes about the power of the monopoly]. Windows cloning was a non-starter, the DoJ concludes, citing not just John Soyring of IBM (IBM "lacked the technical capability or the legal rights" to Windows 95 source code to ensure that Windows applications would run on OS/2) and Bryan Sparks of Caldera (who related how cloning proved impossible when he was at Novell), but also Joachim Kempin. In December 1997, Kempin had noted that cloning Windows APIs would be "a lot of work and potentially" pose "patent problems for someone attacking us". Best of all was Gates' comment about Microsoft's rendering engine, code-named Trident: "I think we want to make Trident extremely hard to clone. I think we want to patent the elements of Trident. I think we want to make extensions to Trident on an ongoing basis". It was prima facie evidence of intent. Evidence is assembled to show that Microsoft takes a proportion of its monopoly profits not in cash but in the form of costly restrictions on its customers and their commitments to behave in ways that will augment and maintain Microsoft's monopoly power. Penalties for shipping 'naked' PCs On the subject of naked PCs, there is evidence, some sealed alas, that Microsoft discourages OEMs from shipping such machines by penalising OEMs that do so. Microsoft claims of course that it does this to discourage piracy, but since it is perfectly possible to set up a hardware or software copy protection scheme, the excuse is inadequate, although the subject was unfortunately not raised in evidence. At first sight, the section headed "Alternative platform-level technologies, especially Internet browsers and Java, threaten Microsoft's operating system monopoly" looks as though it might have been penned by Microsoft. However, the purpose is to establish that Microsoft had reason to be concerned that there was a threat, and that it acted illegally by way of response. The DoJ is confused when it suggests that middleware could increase OS competition, since by definition middleware is between the OS and the application - and where is the browser in its middleware scenario? Is the middleware to control the browser as an application, or is it passively accepted that the browser does belong with the OS? It looks very likely that the DoJ will win the argument that Microsoft possesses monopoly power over operating systems, and that it will be found that alternative platforms did threaten Microsoft's monopoly and cause it to engage in various predatory campaigns to remove the browser threat to its monopoly in operating systems. ® Other Sections Part I Damning MS with the facts Part III - Browser Battles Complete Register Trial coverage

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