Microsoftcase is one of the most well-known cases of abuse of dominance.
In his book ‘Information Rules’, Hal Variandescribes network industries and contrasts them with the traditionaloligopolies:”the industrial economy was populated witholigopolies: industries in which a few large firms dominated their markets.This was a comfortable world, in which markets shares rose and fell onlygradually. This stability in the marketplace was mirrored by lifetimeemployment of managers. In the United States, the automobile industry, thesteel industry, the aluminium industry, the petroleum industry, variouschemical markets, and many others followed this pattern through much of thetwentieth century.In contrast, the information economy is populated bytemporary monopolies.
Hardware and software firms vie for dominance, knowingthat today’s leading technology or architecture will, more likely than not, betoppled in short order by an upstart with superior technology. What haschanged? The central difference between the old and the new economies: the oldindustrial economy was driven by economies of scale; the new informationeconomy is driven by the economics of networks.” Inthe economies of networks though, large networks are more attractive to usersthan small ones, as when another person joins the network, the existing membersbenefits as well. So these markets ‘naturally’ tip towards monopoly.
Anotherfeature of those network industries is that they could easily be replaced whena new product revolutionises the industry (hence the ‘temporary monopolies’ inVarian) and while there is an incentive to innovate in the form of temporarymonopoly rents, there is also an incentive to maintain the monopoly byanti-competitive behaviour known as abuse of dominance. Relevant Facts Prior to the CaseDuringthe 1990s, Microsoft provided its Internet Explorer with its operating system,which left Netscape Navigator, a rival search engine, heavily decimated. By’piggy-backing’ on the success of the Microsoft operating system they hadcreated, Microsoft helped ‘tip’ the market also towards its browser. Furthermore, during the same period, Microsoft alsomade it easier for consumers to migrate to its own dominant word-processing andspreadsheets packages. Ever since 1993, there had been complaints on howMicrosoft was locking competitors out of the operating system software marketby the use of anti-competitive practices, especially anti-licensing practices.1In1998, Sun Microsystems complained to the European Commission that the firmwould suffer a similar fate to other Microsoft rivals because Microsoft wasattempting to unfairly leverage its super-dominant position (over 90%) in theoperating system market into the market for group servers. Itclaimed that Microsoft was doing this by not releasing information that wouldallow other companies (including Sun Microsystems), to make their applicationscompatible with the Microsoft NT operating system.
By filing the antitrustcomplaint, Sun Microsystems wanted rightful access to technical information onthe Windows NT operating system. WhenMicrosoft failed to supply them with the essential information, the EC issuedits first Statement of Objections to Microsoft. By February 2000, on its own initiative,the Commission had already launched an investigation into Microsoft’s conduct(Russo) and when in 2001 the European Commission received another complaintagainst Microsoft, this time over bundling its Media Player with its operatingsystem at no extra cost, the two cases were joined. Thisnew complaint said that, by tying Windows Media Player with Windows, Microsoftwas making it impossible for other media players to survive because consumerswere unlikely to buy another media player when they got one for free with theiroperating system. Furthermore, because of Microsoft’s ever-lastingunwillingness to supply information to third-parties, these other Media Playersmight not be compatible, or work as well as WMP. The European Commission Decision on MicrosoftOnMarch 24th 2004, the Commission adopted a decision against MicrosoftCorporation, under the infringement of Article 82 EC (currently 102 TFEU) andthen Article 54 of EEA Agreement for’refusingto supply interoperability information and allow its use for (…) developing anddistributing work group server operating system products’ from 1998onwards, and by ‘making the availabilityof the Windows Client Pc operating system conditional on the simultaneousacquisition of Windows Media Player’. TheEuropean Commission noted how Microsoft had been overwhelmingly dominant overPC operating systems ever since 1996 (over ninety-per-cent of the market) andthat the Corporation had abused of said position (and infringed Art.102) in twoways.
Firstly, it had used his dominance in the market for operating systems toextend its dominant position into the complementary market for server operatingsystems as well. By withholding information from the competitors in the servermarket that enabled interoperability, Microsoft made it difficult for suppliersof applications software to make their product fully compatible with the mostpopular operating system. Furthermore, thislessened their incentive to innovate. Secondly,Microsoft was also leveraging its dominant position into the market for MediaPlayers by tying (bundling) its own software into the operating system.Dominant Position over Operating Systems for PCs: Barriersto EntryArticle102 of the Treaty on the Functioning of the European Union reads: “Any abuse by one or more undertakings of a dominantposition within the internal market or in a substantial part of it shall beprohibited as incompatible with the internal market in so far as it may affecttrade between Member States.
Such abuse may, in particular, consist in: (a)directly or indirectly imposing unfair purchase or selling prices or otherunfair trading conditions; (b) limiting production, markets or technicaldevelopment to the prejudice of consumers; (c) applying dissimilar conditionsto equivalent transactions with other trading parties, thereby placing them ata competitive disadvantage; (d) making the conclusion of contracts subject toacceptance by the other parties of supplementary obligations which, by theirnature or according to commercial usage, have no connection with the subject ofsuch contracts.”Towardsimplementation, two steps are requires: first, dominance has to be establishedand second, as dominance per-se in not against the law, the abuse of dominancemust also be established. To establish dominance one must first define themarket: regarding the PC operating systems, the European Commission highlightedthe high costs (both measured in time, expenses and commercial risks) ofadapting a software product that it’s not already present in the market for PCoperating systems, hence there is an incentive of using the operating systemwith the most users to get the most pay-off (‘network effect’). Anindirect network effect, is that third parties’ suppliers will -first andforemost- target Windows for new software and applications, especially giventhe costs and risks of making them compatible with a different operatingsystem.
A direct consequence of such barrier to entry is how,once a firm has gained a large share of the market, it is almost impossible forany competitor to access, even if more technologically advanced or if able tocharge lower prices. Those network effects mean that ‘suppliers may compete for the market ratherthan in the market and devote resources to winning the race for the nexttechnological development’ (Korah).Anotherthing to consider are switching costs (changing from one operating system toanother, both costly because of the new hardware and the time it might take forconsumers to learn the new system) and portable middleware (applications thatare ‘portable’ – compatible- with different systems) but once a single firmbecomes widely used the market might still tip.
MicrosoftCorp eventually acknowledged its dominant position in the market and theCommission found that Microsoft was also dominant in the market for operatingsystems for servers, over at least 60 per cent.Sharing information and foreclosure of competitorsOn the refusal tosupply interface information to competitors selling servers (such as SunMicrosystems, which filed a complaint in 1998), the Commission noted thatwithholding such necessary information is indeed and abuse of dominance and itwas a serious threat to competition in the market. Furthermore, the Commission argued that Microsoft hadboth static and dynamic incentives to foreclose competitors from the serveroperating markets (Genakors): Microsoft was worried by the possibility of astrong presence of competitors in the complementary market that could threatentheir profits in the future. By running applications such as spreadsheet onservers, the customers’ reliance of PC and Windows would dwindle and in thefuture, server operating systems might become a potential non-Microsoft platformand direct competitor, hence the need to monopolise the server market, at leastin the short term.
In Lyons (Lyons) we read: ‘the key idea in dynamic foreclosure theory is that an action thatshifts short-run market share can have long-run benefits to the monopolist throughdepressing rivals’ incentives to innovate’ and it will mean a future wheredevelopers will prefer not writing software for non-Microsoft platforms. Microsoftjustified their refusal to share full information on the grounds of the largeresearch and development costs they had incurred and argues that this wasprotected by intellectual property rights. Microsoftclaimed that a ruling would stop others from innovating because the rewards toinnovation would be limited after this case in court.
However, the EuropeanCommission argued that it was Microsoft’s behaviour that stopped others frominnovating and invest in research because of its predatory behaviour. Also, to be competition-less, it would also refrainWindows from innovating. Tying Windows Media Player to the operating system asan abuse of dominant positionTheCommission noted how since 1999 the two products had been bundled together andin order to demonstrate the abusive nature of this fact, they stated byacknowledging four elements to tying: i.the tying and tied goods are separate products, ii. the undertaking concernedis dominant in the tying market, iii. the undertaking concerned does not givecustomers a choice to obtain the tying product without the tied product; iv.tying forecloses competition.
2Both i. and ii. werealready established but were the consumers deprived of choice? The Commission found it so, as the software forWindows Media Player was not only integrated to the operating system, butMicrosoft had, in the past, required for the manufacturers licensed to installWindows to also preinstall its media player and no other.
This way, consumerswere not only taken away the choice of which media player to use (it wasinstalled without charge, hence the pool of users that would use thepre-installed device was the growing majority), but also the choice of havingan operating system without WindowsMedia Player. 3Onthe fourth element – foreclosure- the Commission, given both Microsoft’s sharesof the OS market and the number of PCs that were sold with Windows Media Playeralready pre-installed (114m of 121), concluded that the Corporation had usedits dominant position in the OS market to distribute its player and leaving thecompetitors at a disadvantage; moreover the tying would enable Microsoft toexpand into the media-related complementary markets and hence ultimatelyreducing consumer choice. Fines, Remedies and ConditionsTheEuropean Commission imposed a fine of 497 million euros (the largest fine everfor such violation in Europe)4.
Theremedies imposed on for the server market are the following: within 120 days Microsoftwas required to share all the information necessary for interoperability withits competitors in work group servers. Though, Microsoftwas required to disclose interface information to design compatible work groupservers, but not the source code, essentially dismantling any fear of cloningthat Microsoft might have. Onthe tying of Windows Media Player to the Windows OS, Microsoft was required tooffer (within 90 days), a fully-functioning version of the Windows Client PCOperating System without the pre-installedWindows Media Player, while still retaining the right to offer a bundle. Further DevelopmentsMicrosoftalmost immediately announced its intention to appeal and did not comply withthe 2004 decision. Further periodic penalties for non-compliance were issuedagainst Microsoft until September 2007, when the General Court delivered ajudgement upholding the European Commission’s decision of 2004.
Still, therewere more fines for non-compliance, until one for 899 million euros in Februaryof 2008. In2009 the European Commission announced it would lead an investigation regardingthe new bundling of Windows operating system with its browser Internet Explorer,once again accusing the corporation of ongoing tying and abuse of dominance. InDecember of the same year, a decision which formally concluded the proceedings wasadopted which rendered Microsoft’s proposals legally binding. Among them,Microsoft committed to offer to his consumers different browsers choice and thepossibility to turn down Internet Explorer (or off) to another browser of theirchoice.
1 (Microsoft’s standard agreements required a payment ofroyalties based on the number of computers sold, regardless of whether thecomputers contained preinstalled Microsoft software). 2 Commission Decision3 In Korah, the author notes how the Commission shouldn’t have been soconcerned with the concept of tying, as the effects of this specific case weredifferent from the classical ones: because they were supplying the playerwithout charge, the Commission was mostly interested in the indirect networkeffect that made it difficult for other suppliers to compete.4- The fine was doubled firstly as a deterrent and secondly because ofMicrosoft’s financial resources.