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CASE: Microsoft Industry Predator Or Fierce Competitor?

• Microsoft was one of the most influential software companies of the twentieth century.

• The company was founded by Bill Gates, Paul Allen, and several other friends to fill a niche in the personal computer operating system and software business.

• The phenomenal growth of this company did not happen by luck.

• Events that led the Department of Justice (DOJ) and 19 state attorneys general to file a class action lawsuits against Microsoft for illegally bundling its Internet Explorer with windows 95 are still controversial.


• When judge Thomas Penfield Jackson released his finding on November 5,1999, declaring Microsoft’s monopoly in the PC industry, the company’s business practices once again were under scrutiny.

• Even with changes in politics (President Clinton to President Bush) and Attorneys General (Reno to Ashcroft) as well as judges (Jackson to Kollar-Kotelly) Microsoft still is not completely “off the hook”

• If a settlement can be reached without going back to court, market watchers and competitors will still keep an eye on the company’s business practises.

• If Microsoft goes back to court, some observers believe the company will not be “punished” severely as Judge Jackson had desired, but its business practices could be constrained.


THE ROAD TO MONOPOLY• Microsoft enjoys a monopoly in the market for Intel-

compatible PC operating systems.• No products currently in the market or anticipated in

the near future can be substituted for the Intel-compatible operating system without incurring substantial costs.

• Three facts bolster the previous arguments offered by DOJ and judge Jackson that Microsoft exerted monopoly power in the market for pc operating systems: market share, high barriers to entry, and lack of variable alternatives.

• Microsoft maintains a dominant and increasing market share for Intel-compatible PC operating systems.


• In each of last 10 years, Microsoft has had a 90 percent market share in operating systems for Intel-compatible PCs

• In the last 2 years, Microsoft’s market share has stood at 95 percent and is expected to increase even further.

• Microsoft has effectively argued that it has just been successful and competitive.– HIGH BARRIERS TO ENTRY.– LACK OF VALUE ALTERNATIVES.– EXAMPLE OF HIGH BARRIERS TO ENTRY


STRATEGIC ALLIANCE PATNERS OR HOSTAGES TO MICROSOFT

• Several companies that transacted business with Microsoft testified that they acquiesced to Microsoft's dominance in the market because Microsoft’s corporate practices intimated and threatened them.

• Companies claimed that Microsoft forced them to freeze the development of software applications that directly competed with Microsoft’s software products by threatening to change technologies so non-Microsoft applications, chips, and systems would be incompatible with Microsoft’s.

• On the other hand, Microsoft argued that it’s cross-marketing agreements with the firms are based on industry standard contracts that were legal and competitive


INTEL• By early 1995, Intel Architecture Labs was in

advanced stage of development of its native Signal Processing (NSP) software, which would provide Intel microprocessors with substantially superior video and graphics quality.

• Microsoft was alarmed, as Intel’s development of software for non-Microsoft operating systems had the potential of weakening the barrier to entry that protected Microsoft’s monopoly power.

• During the first week of July, at a meeting between Gates and Andrew Grove CEO of Intel, Gates tried to talk to Grove into not shipping NSP’s and decreasing the number of people working on software at Intel.


• In a meeting between Gates and Grove in August 1995, gates informed Grove that Microsoft would withdraw its support of the next generation microprocessors if Intel continued to develop platform-level software that competed with windows.

• Intel was in an awkward situation; if Microsoft made the chips incompatible with Windows-Intel would have had a tough time selling its PC microprocessors.

• Faced with its threat, Intel stopped the development of platform-level interfaces.


APPLE

• QuickTime was Apple’s software for creating, editing, publishing, and playing back multimedia content.

• Apple’s versions of QT run on MAC OS and Windows, which competed with Microsoft’s multimedia DirectX.

• QT a potential threat to its applications barrier to entry.• Microsoft, from mid-1997 to 1998, tried to stop Apple from

producing a Windows 95 version of its multimedia software.


• Microsoft informed Apple that if it did not stop marketing the multimedia software with a platform for content development, Microsoft itself would enter the authoring business in order to ensure that those writing multimedia content for windows 95 would concentrate on Microsoft’s APIs instead of Apple’s.

• Microsoft further informed Apple that if Apple developed and marketed its authoring tool, Microsoft would render the technologies in those tools incompatible with Apple’s tools.

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• Furthermore whatever means and resources were needed to make sure that the developers used Microsoft’s tools would be invested.

• In June 1998, Microsoft met with Apple to persuade Apple to stop the development of multimedia software for Windows. Apple rejected Microsoft’s proposal.

• Microsoft’s main aim was to deter the development of multimedia software that would run across platforms.


• During the summer of 1994, IBM informed Microsoft that IBM wanted the same favorable terms that it gave Compaq for licensing Microsoft’s OS products.

• Compaq it seemed paid the lowest rate in the market and had the strong marketing and technical support from Microsoft.

• Microsoft asked IBM to enter into a “Frontline Partnership”, which was prevalent between Microsoft and Compaq.

• If IBM accepted the terms, it meant that it would have to abandon its own operating system.

• at an industry conference in November 1994, Microsoft and IBM met and IBM rejected the terms.


• IBM then went on to acquire Lotus Development Corporation.

• Lotus, according to Microsoft, was a middleware threat. Lotus offered users a common interface across platforms.

• At this time IBM was in negotiation with Microsoft for Windows 95 license.

• After IBM’s acquisition of Lotus, there was trouble in paradise. Three days after IBM announced its intention of installing SmartSuite- which directly competed with MS Office-Microsoft informed IBM that it was ceasing negotiations with IBM for the licensing of its Windows 95 and refused to release the “golden master” code of Windows 95.

• Microsoft stated that it first wanted to settle the ongoing audit of IBM’s previous royalty payments to Microsoft for different OS systems.


• IBM needed the code for its product planning and development.

• Finally 15 minutes before the start of Microsoft’s official launch event on August 24, 1995, Microsoft granted IBM a license to pre-install Windows 95.

• On the same day IBM paid Microsoft $31 million to close the issue of the audit.


JUDGE JACKSON’S RULING• On November 5, 1999, U.S. District Judge Jackson

released his findings of fact which declared that Microsoft routinely used its monopoly power to crush competitors; he portrayed the software giant as nothing less than a social menace.

• On November 19, judge Jackson appointed Richard Posner as the mediator and urged both Microsoft and the DOJ to settle the case outside of court.

• Although Judge Jackson released only the finding of fact on November of fact-


WHAT WOULD A “BREAKUP” HAVE MEANT FOR MICROSOFT?

• HORIZONTAL BREAKUP:– Microsoft could have been broken up into three companies-

one with operating systems, another with application software, and a third with the Microsoft Internet business.

• VERTICAL BREAKUP:– “Microsoft would be divided in three with each company

getting a third of the assets in every line of business.– Microsoft reacted to both to scenarios even before the

fruition.


Contd..

• WINDOWS AUCTION:– The third scenario would have been to have a Windows

auction. “Getting a major company such as Sun Microsystems or IBM to buy a license to Windows would have created a new competitor in the operating systems market.

• OPEN SOURCE LICENSING:– Microsoft could have been forced to publish its source code

to Windows with a provision allowing other companies to create clones.

• CLOSE SUPERVISION:– The last scenario is to keep closer watch over the

company’s practices.


OCTOBER 31, 2001 SETTLEMENT• On October 31, 2001, a settlement was reached

between Microsoft, the DOJ, and eight of the eighteen states.

• Essentially, the settlement gave PC makers more freedom to install non-Microsoft software on new machines.

• Also, PC makers could remove users across to competing Microsoft features like Internet browsers.

• Retaliation against companies that take advantage of these freedom is banned.

• The settlement prohibits exclusive contracts; moreover Microsoft must disclose design information to hardware and software makers to enable the manufacture of products that run compatibly with Windows.


• California, Connecticut, Iowa led the dissenting nine states in requesting tougher provisions.

• Judge Kollar-Kotelly asked the disenting states for their proposals and scheduled more hearings for March 2002.

• Before March, there is a mandatory public-comment period along with a court hearing that permits a last chance to have a voice on U.S. v. Microsoft.

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