Microsoft Corp.’s Pricing Policies Essay

Executive Summary This case study focused on the Microsoft Corporation and charges made by their competitors, the Federal Trade Commission, and the Department of Justice of antitrust violations and a monopoly of the computer operating systems and applications software, software development tools (e.g., programming language software), and hardware peripherals (e.g., Microsoft Mouse) that Microsoft specializes in. It focused on numerous issues that would lead one to believe that Microsoft was in fact monopolizing the entire industry they were in. . In order to adequately discuss and analyze the issues of this case, I have broken this paper up into four separate sections. Section 1 – Key Terms & Concepts: Description of the key terms & concepts that pertain to this case Section 2 – The Case Against Microsoft: Identify the facts and information that support my case against Microsoft Section 3 – The Defense of Microsoft: Identify certain facts and information that support a defense of Microsoft Section 4 – Discussion: What I have learned from the case After reading this case study, I went back to the email that I received from you and went over the questions that you suggested we consider. The first question was: If you were the DOJ how would you build a case against Microsoft or a dominant leader? I will attempt to do this in Section 2 – The Case Against Microsoft. The second question was: If you were Microsoft how might you defend yourself against DOJ claims? I will cover this in Section 3 – The Defense of Microsoft. I will attempt to show why it was very necessary for the DOJ to bring a case of monopoly and antitrust violations against Microsoft. In doing this, I will attempt to put myself into Microsoft’s shoes and defend their claims that they have not created a monopoly. Section 1 1. Key Terms & Concepts The reason I decided to include these terms and concepts was to make it easier for me to write this paper and use certain terms without describing them each time I used them in my paper. Department of Justice, Antitrust Division: The Assistant Attorney General for Antitrust, a presidential appointee, ran the Antitrust Division of the DoJ. When the Division thought the evidence was sufficiently persuasive, it brought criminal charges. The Division also entered into negotiations with businesses to end litigation in exchange for consent decrees in civil cases, or nolo contendere (no contest) please in criminal cases DOJ: Department of Justice: The United States Department of Justice (DOJ) is a Cabinet department in the United States government designed to enforce the law and defend the interests of the United States according to the law and to ensure fair and impartial administration of justice for all Americans (http://en.wikipedia. Org /wiki / United_States_Department_of_Justice) DOS: Disc Operating System FTC – Federal Trade Commission: The FTC enforces federal antitrust and consumer protection laws by investigating complaints against individual companies initiated by consumers, businesses, congressional inquiries, or reports in the media (http://en.wikipedia.org/wiki/Federal_Trade_Commission) ISVs: Independent Software Vendors MS-DOS: Microsoft Operating Systems NDAs: Non-disclosure agreements OEMs: Original Equipment Manufacturers OS: Operating Systems PC: Personal Computer Sherman Anti-Trust Act: it made illegal any form of contract or combination between entities in regards to trade and commerce that would have the effect of restraining trade. And it also put responsibility on government attorneys and district courts to pursue and investigate trusts http://en.wikipedia.org/ wiki/ Sherman _ Antitrust_Act) The Clayton Act of 1914: The Clayton Act was designed to prevent monopoly in the beginning rather than to remedy its effects. To accomplish this goal, Congress authorized antitrust prosecutions whenever business practices â€Å"may†¦substantially lessen competition or tend to create a monopoly in any line of commerce, in any section of the country.† Section Two of the act forbade sellers from discriminating in price – selling goods of like grade and quality to different buyers at different prices – when such differences were neither cost justified nor necessary to â€Å"meet competition.† Section Three limited the use of tying and â€Å"exclusive dealing† contracts. Tying contracts required purchasers or leases to acquire a second, separate product in order to obtain the desired product. Exclusive dealing contracts obliged a purchaser or lessee not to deal in products of competitors Vaporware: is software or hardware which is announced by a developer well in advance of release, but which then fails to emerge, either with or without a protracted development cycle. The term implies deception, or at least a negligent degree of optimism; that is, it implies that the announcer knows that product development is in too early a stage to support responsible statements about its completion date, feature set, or even feasibility (http://en.wikipedia.org/wiki/Vaporware) Section 2 2. The Case Against Microsoft In order to make my case against Microsoft and prove that they are most assuredly in violation of monopoly and anti-trust regulations, I will answer the following questions: 1. Is this a case of monopoly? 2. Is this case a violation of the Sherman Anti-Trust Act? Is this a case of monopoly? When I began considering my approach to this paper, I first thought about situations where I was absolutely sure I had been the â€Å"victim† of a monopoly. In order to do this, I first had to make sure that I fully understood exactly what a monopoly was. The American Heritage ® Dictionary defines a monopoly as â€Å"Exclusive control by one group of the means of producing or selling a commodity or service†. In simpler terms, I have always thought of a monopoly as a big corporation doing its best to â€Å"screw-over† the little guy (A.K.A the customer) by doing its best to make as much money as possible. The first situation that came to mind when I thought of a monopoly was how the Comcast cable company had a virtual strangle-hold on the cable service in my home’s area. Since they had â€Å"exclusive control †¦of the means of producing or selling a commodity or service†, in this case they were the only cable provider in our area, you were forced to settle for Comcast’s service unless you had satellite television or you were willing to settle for the wonderfully fuzzy reception from the antiquated â€Å"rabbit ear† antennas of years past. As a result, we unfortunately had to deal with Comcast’s horrible service and always rising rates. Luckily for us, another competitor came in to the picture when WOW! (Wide Open West Internet-Cable-Phone) set up service in our area. We switched cable providers almost immediately and we couldn’t have been happier. They have provided excellent customer service and their rates are consistently lower  than Comcast’s. As a consumer, we definitely benefited from the increased competition and eventual abolishment of the cable company monopoly in our area. With that out of the way, I was forced to look at whether or not Microsoft had a monopoly in their particular industry. Based on the information in this case, I cannot say that Microsoft has a monopoly on any single entire industry. Do they dominate the majority of endeavors that they choose to participate in? Of course they do. Just look at some of these numbers: As you can see from Table 1, Microsoft dominates the market shares of suite software in the United States. The only problem with these numbers is the fact that they are limited in their time range. In my experience, three years is a long enough time to make an approximate forecast for future happenings, from a financial standpoint. However, that is from a transportation and supply-chain perspective where the main variable happens to be the customer’s shipping fluctuations. In a volatile and constantly evolving market such as software development, these numbers could sway tremendously with the introduction of a new and sought after product or changes in consumer wants and desires. Table 2 shows the financial numbers of Microsoft and three of their competitors: This also tells a lot about Microsoft’s market dominance, but this time from a financial standpoint. Two things that stand out to me in this table are the fact that Microsoft has almost twice as much net revenue than their nearest competitor (Microsoft has 4,649 and Novell has 1,998). The second thing that jumped out to me is the fact that all of the competitors show an increase in net revenue from 1984 to 1994. Based on the growth of Microsoft’s competitors (which there are more than one), I feel confident in saying that Microsoft does not have a monopoly in their industry. They do not meet the standard set forth by the simple definition in the dictionary of â€Å"Exclusive control by one group of the means of producing or selling a commodity or service†. As you can clearly see from the tables, Microsoft  does not have exclusive control of the means of producing or selling a commodity or service. However, Microsoft does in fact hold a monopoly on many other counts, one of which is that Microsoft Windows, the Microsoft OS, is installed on most personal computers that can be purchased from Dell, Hewlett Packard, Compaq, and the like. Because this OS comes pre-installed, we as the consumers do not have much of a choice and there is not much of an alternative for us to go with unless we want to switch to an Apple Macintosh OS. Although Microsoft isn’t a natural monopoly in the classically defined or economic sense that I’ve identified above, it is a natural monopoly in the land of cyberspace. Microsoft is the path of least resistance for government, consumers, and programmers alike. Microsoft may have many faults, but they make a lot of things easier too. Most of us are willing to accept a monopoly such as Microsoft has for increased convenience and usability. Microsoft is a one-product company, no matter how it may sometimes appear. Their success is fundamentally due to the success of Windows. It rose to power with one product, and it resides there because of the success of that product. Unfortunately for us, this is not only the best product on the market, it is the only true alternative for us to use. In my book, regardless of the textbook definition, this constitutes a monopoly by Microsoft. Is this a case a violation of the Sherman Anti-Trust Act? As I stated in Section 1, the Sherman Anti-Trust Act makes â€Å"illegal any form of contract or combination between entities in regards to trade and commerce that would have the effect of restraining trade†. Based on this case and the readings from week #7, there is proof that Microsoft did violate the Sherman Anti-Trust Act, particularly Sections 1 and 2 of the Act. Section One prohibited contracts, combinations and conspiracies â€Å"in restraint of trade† while Section Two outlawed monopolies and attempts to monopolize. Microsoft violated the Sherman Anti-Trust Act by illegally using its market power to restrain trade in the high tech industry. A filing from the DOJ on December 19, 1999 stated that â€Å"Microsoft engaged in illegal conduct in five separate ways: * by tying browser sales to sales of the operating system; * by using its market power to illegally maintain a monopoly; * by attempting to monopolize the browser market; * by imposing exclusive dealing arrangements between itself and Internet service providers and/or developers; and * by imposing first boot-up and screen restrictions on computer makers.† http://news.com.com/2100-1001-233992.html The DOJ filing in December of 1999 shows exactly why Microsoft was in violation of the Sherman Anti-Trust Act. Some of the things that Microsoft has done that clearly violate the act include, but are certainly not limited to: Microsoft customers upgrading their copies of Microsoft Office at the Microsoft website, but using the competition’s web browser, are greeted with a message insisting on the use of MSIE for the â€Å"full edition† of the update. On November 18, 1998 the digital greeting card company Blue Mountain Arts discovered that beta versions of Microsoft’s Outlook Express (which comes free with Internet Explorer) were automatically filing Blue Mountain’s e-mail greeting cards into the â€Å"junk† folder rather than the â€Å"inbox.† Shortly afterwards, Blue Mountain Arts discovered that Microsoft’s WebTV service was blocking their e-mail greeting cards as well. When the courts ordered Microsoft to ship Windows without an integrated Internet Explorer, the company â€Å"complied† by offering a non-functional version of the OS, claiming that the browser was now so completely  integrated into Windows to remove it was tantamount to â€Å"breaking† the operating system. -All three of these examples were taken from the following website: http://www.vcnet. com /bms/departments/dirtytricks.shtml To summarize, I’ve identified the following facts: Microsoft does have a monopoly in their industry Microsoft did violate Acts 1 and 2 of the Sherman Anti-trust Act It is convenient for Microsoft to say that their success is solely based on them being able to produce good products. Although they do devote extraordinary resources to improving their technologies, they also work diligently to stifle growth and in-roads from their competition. Section 3 3. The Defense of Microsoft – I am not going to spend a great deal of time attempting to defend Microsoft. They have spent millions and millions of dollars working tirelessly to do it themselves. Furthermore, I firmly believe that they have established a monopoly and that this monopoly serves to futher one parties interests: Microsoft’s. However, I did some research online and came up with the following paragraph from an article titled â€Å"The Microsoft Antitrust Suit† written by Peter Tracey. In it, he wrote â€Å"The persecution of Microsoft is an assault on the free market, and on the intelligence of the American people. It is the result of long-held envy by Microsoft’s competitors, including Netscape and Oracle. It is in violation of the constitution, being both ex post facto and vague (Getman). The governments persecution of Microsoft should be stopped, moreover, the antitrust legislation that has exposed business to unfair and unreasonable practices should be repealed.† (http://www.levelthreesolutions.com/ peter/msantitrust.html) In Microsoft’s opinion, the government should not get involved in determining what means a company uses to produce their products. They feel that they have been able to succeed through hard work, tenancity, and superior products. Although it may be â€Å"unfortunate† for their competitiors, Microsoft feels that â€Å"if you can’t stand the heat, stay out of the kitchen.† In essence, Microsoft makes the most money doing what they do by taking solid ideas from other people, such as the Disc Operating System, and making them better. Microsoft doesn’t monopolize the industry. They simply work harder, take risks, and capitalize where other companies have floundered. Section 4 4. Discussion – Before I discuss this particular case study, I must tell you that I have always been a big fan of Microsoft and Bill Gates. I have enjoyed the relatively cheap cost of Microsoft’s software such as Microsoft Excel and Word. I have also felt that with each successive upgrade of these products I have only been able to improve my performance both at work and school. I also thought it was impressive that Bill Gates could take his ideas, push forward with his undefeatable will, and become one of the richest people in the entire world. However, this case study and the analysis that I’ve done with it has really opened my eyes to the â€Å"seamy† side of Microsoft and Bill Gates. I was so moved by this case that I even went and downloaded one of Microsoft’s few internet browser competitors, Netscape, to compare it’s product with Internet Explorer. When my wife asked me what my paper was I about I told her it was about Microsoft and whether or not they were a monopoly in the industry. Her very quick and wry response said it so perfectly: â€Å"Duh, of course they are. Even I know that.† I think this says it all so succinctly. Do I think Microsoft needs to be disbanded or separated in to two different operating companies? Not really. Like I said before, I enjoy Microsoft’s products and I use them constantly. In fact, I am writing  this paper using one of Microsoft’s products, Microsoft Word. I just honestly think that fair competition and a level playing field for Microsoft’s competitors would only benefit the consumer in the long run. More people with new insights will be given the chance to expand the technology already in place. Too many companies are skittish about taking on Microsoft because of the monopoly and the fear of being annihilated. Finally, I have learned that cases of anti-trust and monopoly are not always as clear cut as one may think. I always thought that Microsoft had a clear monopoly and that there was nothing any of us could ever do to remedy it. I also really didn’t care as long as they continued to improve Windows and the accompanying Office Suite. I can see now that competition in all economic arenas, whether it is cable television or fast-food or computer software, is important, no vital, for lower prices and increased technological growth.