What Are We Learning from the Microsoft Case?

Remarks before the Federalist Society

Date:
By: 
Orson Swindle, Former Commissioner

Good morning. I am glad to be here today to offer opening remarks to today's discussion about what we are learning from the Microsoftcase and other government antitrust cases against those in high-tech industries. Given the role that high technology, innovation, and the Internet are playing in our economic expansion, this is an opportune time to debate the future of government antitrust enforcement in high-tech industries. The trial of the Department of Justice's ("DOJ") case against Microsoft Corporation -- the world's leading manufacturer of operating systems -- has just been completed before Judge Thomas Penfield Jackson, and it seems as if all the world awaits his findings of fact and conclusions of law. In addition, the Federal Trade Commission (over my dissent) recently issued an order making final a consent agreement with Intel Corporation - the world's leading manufacturer of general purpose microprocessors - to resolve allegations that the company had monopolized and attempted to monopolize the market for general purpose microprocessors.(1) These cases have brought many long-simmering disputes to a boil, and we should take this opportunity to assess where we are with regard to government antitrust enforcement in high-tech industries.

What I would like to do this morning is to provide a thumbnail sketch of the allegations in the Microsoft case, and suggest a discussion of three issues -- monopoly power, consumer injury, and remedies -- that are raised both by the Microsoft case and by other recent antitrust cases involving high-tech. The panelists that follow will be able to engage in provocative debate as to how these issues will play out in the Microsoft case. The rest of us can sit back and enjoy the intellectual fireworks!

Before proceeding any further, I must point out that the views that I will express are my own and do not necessarily reflect the views of the Commission, my fellow Commissioners, or the Department of Justice.

Briefly, the Department of Justice alleges that Microsoft has monopoly power in the market for personal computer operating systems and that it has engaged in anticompetitive practices to eliminate competitors' browsers as competing platforms for running software applications, thereby unlawfully maintaining its monopoly power. DOJ also alleges that Microsoft has sought to restrict the access of its browser competitors, especially Netscape, to significant channels of distribution, thereby unlawfully restraining competition in the browser market. DOJ further alleges that Microsoft has attempted to obtain a monopoly in the browser market. Finally, DOJ alleges thatMicrosoft engaged in an illegal tying arrangement by using its position with regard to operating systems to induce consumers to use aMicrosoft browser. Microsoft vigorously denies that it has monopoly power in the market for personal computer operating systems, that its acts or practices were unlawful, and that its actions caused harm to consumers.

Monopoly Power

As I mentioned earlier, there are at least three issues raised by the Microsoft case which are worthy of serious discussion. The first is: When does a firm have "monopoly power" in the market for a high-tech product? Courts have defined monopoly power to be "the power to control prices or exclude competition."(2) Because monopoly power is difficult to measure directly, courts have used market share as indirect evidence of the existence of monopoly power. Microsoft allegedly has an 80% or more share of the market for personal computer operating systems, and courts typically have concluded that a 70% or more market share creates an inference of monopoly power absent evidence that overcomes that inference.(3)

I think that it is particularly important in antitrust cases involving high-tech to look beyond mere market share to determine whether monopoly power exists. On the one hand, in antitrust cases involving high-tech much has been made of the theory that a firm's market power may be durable because of what are known as "network effects." Network effects essentially mean that certain products become more useful as more and more people come to use them. Simple examples are telephones and fax machines, both of which became more useful with increased use. The theory underlying network effects is that once consumers become "locked-in" to a product incorporating the current technology, they may be reluctant to switch to another product with a superior technology because of the premium associated with the widespread use of a common technology. Since network effects may make consumers less likely to switch, a firm with a high market share that makes a product including the current technology may be more likely to have monopoly power.

On the other hand, experience teaches that the normal operation of economic incentives in dynamic high-tech markets generally will spur advances in technology that cause consumers to switch to a superior new technology in spite of network effects. For example, in the early 1980s consumers were locked into the technology of vinyl records and turntables, but consumers rapidly switched technologies with introduction of compact disks. Perhaps the threat of similar technological switches explains why some of the titans of high-tech industry today do not appear to behave like the monopolists of old, for whom "unchallenged economic power deaden[ed] initiative . . . [and] immunity from competition [was] a narcotic."(4)

The ultimate determination of whether a firm that makes a high-tech product has monopoly power is a difficult assessment that must be undertaken in light of the particular product market at issue, including an analysis of how technological change may affect the ability of the firm to control price and exclude competition. For example, in the Intel case, I expressed uncertainty as to whether Intel, despite its extremely large market share in general purpose microprocessors, actually had monopoly power because it appeared to face aggressive competition from innovative firms, especially those that were supplying general purpose microprocessors for personal computers costing less than $1,000.

I look forward to hearing from our panelists on the issue of whether Microsoft has monopoly power in the market for personal computer operating systems in light of ongoing technological and other developments in the marketplace.

Consumer Harm

The second issue that I think the Microsoft case and other high-tech antitrust cases raise is whether the alleged unlawful conduct has caused harm to consumers, and not just to competitors. Antitrust law traditionally evaluates whether the conduct at issue has caused or is likely to cause harm to consumer welfare(5) in the form of higher prices, reduced output, and decreased innovation. Markets for many high-tech products have been and continue to be characterized by decreasing prices, increasing output, and robust innovation, often stemming from massive spending on research and development. Such market characteristics do not confer immunity from antitrust challenge on those competing in these markets, but they do transform the relevant questions into whether prices would have fallen even more, output would have increased even more, and innovation would have been even more vibrant in the absence of the alleged antitrust violations.

While there certainly are circumstances under which such harm can be proven, we should be wary of reaching the conclusion that markets that are already creating tremendous benefits for consumers would have done even better. For example, in the FTC's Intelcase, the Commission alleged that, in the wake of intellectual property disputes between Intel and three computer manufacturers that purchased Intel microprocessors, Intel decided to curtail the supply of technical information and prototypes to those three firms. The Commission's complaint alleged that Intel's actions entrenched its monopoly position in general purpose microprocessors and diminished the incentives of firms commercially dependent on Intel to develop innovations relating to microprocessor technology. I was unwilling to support the Commission's case against Intel because "[w]hatever injury Intel might have visited on [the three computer manufacturers], I [could not] accept that it could appreciably affect -- much less stem -- the immense tide of invention and improvement that continuously drives this industry."(6) I eagerly anticipate a vigorous debate among our panelists as to whether Microsoft's alleged conduct has caused harm to American consumers.

Remedies

Finally, we need to address the issue of what kinds of remedies should be imposed when firms in high-tech industries are found to have violated the antitrust laws. As I mentioned above, many high-tech markets are characterized by decreasing prices, increasing output, and robust innovation -- certainly characteristics that yield tremendous benefits to consumers. To avoid "killing the goose that lays the golden eggs," remedies should be very carefully calibrated to address demonstrated consumer harm and to prevent violations that are the same as or similar to the violations that caused that harm. Adherence to the Hippocratic oath -- "First, do no harm" -- seems a standard quite applicable to the remedies that should be imposed in antitrust cases concerning high-tech.

The Microsoft case has generated a flurry of debate as to what sort of remedy the court should impose if Microsoft is found liable. Among others, the remedies that have been discussed have included breaking up the company (vertically or horizontally), mandating that the company allow access to its operating system technology, and prohibiting the company from using certain contractual provisions. One suggested remedy recently caught my eye. Under the heading "Wheel of Fortune," John McCaslin of the Washington Times offered a snippet reporting that David Boies, DOJ's lead trial attorney, had told British consumers that they might receive checks as part of the relief ordered.(7) I will leave it up to the panelists to offer their views as to what will be revealed if and when Judge Jackson, with or without the assistance of Vanna White, turns over his letters with regard to remedy.

Thank you, and I look forward to a stimulating discussion.

Endnotes:

1. Intel Corporation, FTC Dkt. No. 9288.

2. United States v. E.I. du Pont de Nemours & Co., 351 U.S. 377, 391 (1956).

3. ABA Section of Antitrust Law, Antitrust Law Developments 235 (4th ed. 1997).

4. United States v. Aluminum Co. of America, 148 F.2d 416, 427 (2d Cir. 1945).

5. R. Bork, The Antitrust Paradox 89 (1978) ("the case is overwhelming for judicial adherence to the single goal of consumer welfare in the interpretation of the antitrust laws").

6. Statement of Commissioner Swindle at 3. My statement in the Intel case is available at <www.ftc.gov/os/1999/9908/swindleintel.htm>.

7. Assistant Attorney General Klein this week clarified that Mr. Boies "never expressed an opinion as to whether a private party (American or otherwise) had a claim against Microsoft, nor did he solicit or encourage any party to assert such a claim, or consult counsel regarding such a claim." Joel I. Klein, That Microsoft Vendetta, Washington Post, Sept. 28, 1999, at A25.