Mock Trial


U.S. versus Microsoft

December 1998

United States: Microsoft is the "unkillable" giant of the computer industry. In order to understand how big Microsoft is, we must examine some numbers.

In each of these categories Microsoft has only one or two competitors. In the past companies with far smaller market shares were considered monopolists.

The prosecution intends to address the following issues through witness testimony:

1st, Microsoft's contracts with hardware manufacturers and with companies that provide access to the internet illegally stifle competition. The relevant precedent is Lorain Journal v. US, in which the court ruled that monopolists, like Microsoft, cannot impose conditions on partners in order to exclude rivals, like Netscape.

2nd, The bundling of Internet Explorer with Windows 95 and the integration of the browser in Windows 98 amounts to tying, an illegal practice that forces customers of one product to "purchase" another.

3rd, Microsoft's bundling is an act which monopolizes business according to the Sherman Act. The relevant precedent is Jefferson Hospital v. Hyde, in which the court ruled that two products are illegally tied if consumers want to buy them separately and cannot do so.

4th, Microsoft threatens computer manufacturers who attempt to take Internet Explorer off their desktops.

The intent of these practices is to preserve Microsoft's monopoly position in the operating system market, to acquire a monopoly position in the browser market, and to extend its dominance in other software applications markets.

The US calls Warren-Boulton.

US: In the marketplace is there a practical difference between a PC and an operating system?

W-B: Yes. It is important to observe that consumers do not demand an OS for its own sake. Rather consumers demand a PC, for which an OS is an essential component. In economic terms this means that the demand for an OS is a derived demand.

US: So there is no demand for an OS by itself?

W-B: No. Indeed, the vast majority of users need and buy only one operating system per PC even though the cost of an operating system is only about 2.5% of the purchase price of the machine. As a consequence consumers are unlikely to search for a substitute for an existing OS. Office Equipment Manufacturers are also unlikely to try to find a substitute OS since they design their equipment to a given software standard. All things considered, the price elasticity of demand for OS is very low and the cross price elasticity, while positive, is also quite low.

US: In spite of user and OEM reluctance to switch OS's, are there alternatives to Windows?

W-B: Yes, but not very successful. Microsfot has had more than 90% of the OS market in PCs shipped since 1990.

US: Would you conclude that MS has a monopoly in the operating system market?

W-B: Considering both market shares and elasticities I would have to say that Microsoft has a monopoly.

The US calls Netscape:

US: Originally what was the cost of the Netscape browser?

N: $39.00 retail, as well as a 90 day free trial. At the end of the trial period customers had to pay for the software.

US: Did this price rpovide your company with economic profit?

N: Yes. Netscape's revenue growth in 1995 was so great that the company was named the fastest growing company in history. License fees for Navigator were $44.3 million in 1995, which accounted for more than half our total annual revenue of $85.4 million. Our employee base grew from 100 to 500 between 1994 and 1995.

US: What is the price of your browser today?

N: It is available for free.

US: If it was such an important source of revenue why is your browser now offered for free?

N: On 12/7/95 Microsoft announced to the world that Internet Explorer, our only rival, would be free. As a result our stock price fell $30 per share.

US: In addition to giving away its browser for free, did MS pursue any other predatory stance?

N: Yes, on 12/7/95 they announced that they would bundle IE with Windows, thereby putting their product in the hands of 95% of all new computer buyers. At the same time they insisted that OEM's licensing Windows must remove the Netscape icon from their desktop. Compaq would be a specific example.

US: What is the consequence of these practices for a company like Netscape?

N: The effects have been two-fold. First, MS's practices served to isolate the using public access to any alternative browser to their own IE. Second, in effect the potential web audience for any content provider is limited to users of IE. The end result for content providers is that they must program to an MS--Windows standard, further pushing Netscape out of the market.

The prosecution calls Sun Microsystems:

US: What is Sun's agreement with MS?

Sun: They signed a Technology License and Distribution Agreement which stated that MS could include our JAVA technology in IE and other MS software development tools.

US: Did MS abide by the agreement?

Sun: No. First, they embedded the JAVA technology in the Windows operating system, which was not permitted under the original TLDA. Second, any product incorporating JAVA was to pass a compatibility test before commercial distribution. MS did not adhere to this.

US: Does MS Visual/JAVA 6.0 allow programs to call Windows specific functions?

Sun: Yes. In effect this demonstrates they possible use of JAVA as the code for an operating system. As important, these MS enhancements mean that internet content providers are now in the position of not being able to program for a unviersal set of internet clients. If the programmer creates content that utilizes the MS enhancements to JAVA, then Netscape users would not be able to access the content.

US: Is this specificity of content for a particular browser of any consequence?

Sun: Yes. If a content provider wants to reach the largest possible audience they will program using an instruction set that has the ability to use the most common operating system. The implication is clear. MS was trying to use its monopoly in OS's to foreclose the market for alternative browsers.

The prosecution calls Apple Computer:

US: Were you ever contacted by MS with regard to the internet and browsers?

Apple: Yes, by email.

US: What was the nature of the communication?

Apple: Microsoft threatened to stop supplying Apple with MS WORD if we did not agree to drop the Netscape browser icon and use IE with our Macintosh computer.

US: Were you repeatedly pressured by MS to drop out of the multimedia market?

Apple: Yes. We refused their entreaty and subsequently our Quicktime multimedia package would no longer work on Windows computers. Our market share in the multimedia market has now shrunk to 5%.

US: Once QT became incompatible with a Windows environment, were content providers forced to make a choice as to the audience for whom they would program?

Apple: Yes. While the browser market is about evenly split between Netscape and IE, the multimedia market is dominated by MS Windows compatible products. Programmers will work in that software which guarantees them the largest audience. Rather than program for the universal platform championed by Netscape, providers will program for the dominant OS bundled with its own proprietary browser.

United States: Microsoft is an anticompetitive firm. This corporation gives its browser away for free, making it unattractive for any rational web customer to buy another company's browser. The only reason MS has been able to do this is because of its deep pockets, financed by monopoly profits earned in its other lines of business. This act alone has helped Microsoft gain a huge share of the browser share.

By giving away its browser and building IE so that it can display advanced media produced with its own products or those of its business partners, but not others, it is foreclosing competition in other software applications. By refusing to adhere to industry standards of universality and open code, MS has created a circumstance in which the browser of its only other competitor cannot display all media created for the Windows environment.

The prosecution suggests that the following changes be made in order to restore a competitive environment to the browser and OS market.

  1. MS must unbundle their browser so that customers can buy Windows and IE separately if they choose.
  2. MS must offer Windows and IE at their respective, true marginal cost.
  3. MS must cease and desist from entering into exclusionary contracts with hardware makers.
  4. The code for Windows and IE must be made freely available to all software developers.
  5. Display enhancements to IE in the form of the JAVA and JAVAScript virtual machine must be shared with other browser development firms in order to preserve universality in the internet.

The prosecution rests.