Microsoft: A remedial failure

Antitrust Law Journal

Volumn 75, Issue 3, 2009, Pages 739-772

  Shapiro, Carl ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

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EID: 67649220974     PISSN: 00036056     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Conference Paper

References (93)

1. Standard Oil Co. of NJ. v. United States, 221 U.S. 1 (1911).
2. United States v. Aluminum Co. of Am., 148 F.2d 416, 422 (2d Cir. 1945).
3. United States v. ATT, 552 F. Supp. 131, 160-66 (D.C. Cir. 1982),
4. aff'd sub nom. Mary- land v. United States, 460 U.S. 1001 (1983).
5. New York v. Microsoft Corp., 224 F. Supp. 2d 76 (D.D.C. 2002) (D.D.C. States Remedy 2002),
6. aff'd sub nom. Massachusetts v. Microsoft Corp., 373 F.3d 1199 (D.C. Cir. 2004) (entering Final Judgment in the district court case brought by the various Litigating States).
7. See Memorandum from Bill Gates to Executive Staff and direct reports (May 26, 1995) (memo tided "Internet Tidal Wave" and labeled "Microsoft Confidental"; filed as Government Exhibit 20)
8. [hereinafter Internet Tidal Wave Memo], available at http://www. usdqj.gov/atr/cases/exhibits/20.pdf.
9. D.D.C. States Remedy 2002, 224 F. Supp. 2d 76.
10. United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (D.C. Circuit 2001).
11. In the text, this case is referred to as Microsoft III.
12. Id. at 103 (quoting from United States v. Ford Motor Co., 405 U.S. 562, 577 (1972)
13. and United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968);
14. also citing to United States v. Grinnell Corp., 384 U.S. 563, 577 (1966)).
15. While the events of the past six years have confirmed this conclusion, the inadequacy of the remedy could be seen back in 2001 when the Justice Department and Microsoft announced their settlement. See, e.g., Timothy F. Bresnahan, A Remedy that Falls Short of Restoring Competition, ANTITRUST, Fall 2001, at 67.
16. D.C. Circuit 2001, 253 F.3d at 103.
17. Id. at 99.
18. Id. at 98.
19. Id. at 103-104
20. Id. at 105.
21. Id. at 106.
22. Id.
23. (quoting 3 PHILLIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW. AN ANALY- SIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION ¶ 650(a), at 67 (1996)).
24. United States v. Microsoft Corp., 84 F. Supp. 2d 9,1 411 (D.D.C. 1999) (Findings of Fact).
25. United States v. Microsoft Corp., 253 F.3d 34, 79 (D.C. Cir. 2001) (D.C. Circuit 2001).
26. Id. at 79.
27. The Justice Department had previously argued that its proposed breakup of Microsoft was not out of proportion to the causation evidence because it did not involve creating two operating system companies. Instead, it was designed to create a powerful new potential entrant into the operating system market, namely the applications com- pany. However, the Court of Appeals clearly considered that remedy unjustified given its scaled back liability findings, especially since the District Court had not conducted an evidentiary hearing on remedy.
28. D.C. Circuit 2001, 253 F.3d at 107.
29. New York v. Microsoft Corp., 224 F. Supp. 2d 76, 101 (D.D.C. 2002) (D.D.C. States Remedy 2002).
30. D.C. Circuit 2001, 253 F.3d at 49.
31. Press Release, U.S. Dep't of Justice, Department of Justice and Microsoft Corporation Reach Effective Setdement on Antitrust Lawsuit (Nov. 2, 2001), available at http://www. usdoj.gov/atr/public/press-releases/2001/9463.htm.
32. Charles A. James, The Real Microsoft Case and Settlement, ANTITRUST, Fall 2001, at 58.
33. Declaration of David S. Sibley at ¶3, Appendix C to Memorandum of the United States in Support of Entry of the Proposed Final Judgment, United States v. Microsoft Corp., No. 98-1232 (D.D.C. filed Feb. 27, 2002), available at http://www.usdoj.gov/atr/ cases/f223700/223738c.pdf.
34. Direct Testimony of Kevin M. Murphy at ¶ 159, New York v. Microsoft Corp., No. 98- 1233 (D.D.C. Apr. 12, 2002), available at http://www.microsoft. com/presspass/down load/legal/RemediesTrial/Murphy.pdf
35. See, e.g., D.C. Circuit 2001, 253 F.3d at 55. The D.C. Circuit Court describes the appli- cations to barrier as follows: Considering the possibility of new rivals, the court focused not only on Microsoft's present market share, but also on the structural barrier that protects the company's future position. Conclusions of Law, at 36. That barrier-the "ap- plications barrier to entry"-stems from two characteristics of the software mar- ket: (1) most consumers prefer operating systems for which a large number of applications have already been written; and (2) most developers prefer to write for operating systems that already have a substantial consumer base.
36. See Findings of Fact at 30, 36. This "chicken-and-egg" situation ensures that applications will continue to be written for the already dominant Windows, which in turn ensures that consumers will continue to prefer it over other operating systems.
37. Id.
38. Internet Tidal Wave Memo, supra note 5.
39. D. C. Circuit 2001, 253 F.3d at 77-79.
40. The model also includes a parameter for the annual interest rate, which is taken to be around 10 percent.
41. D.C. Circuit 2001, 253 F.3d at 79.
42. Of course, to the extent that liability findings are made in error, any remedy, includ- ing those involving the disclosure or licensing of intellectual property, can create adverse long-term incentives.
43. D.C. Circuit 2001, 253 F.3d at 79.
44. Id.
45. This key distinction is explained by the U.S. Supreme Court in United States v. Ford Motor Co., 405 U.S. 562, 573 n.8 (A court may "'do more than return the market to the status quo ante' " and must direct its remedy "to that which is 'necessary and appropriate in the public interest' " or that "will 'cure the HI effects of the illegal conduct' ") (citations omitted).
46. For example, if the baseline threat level is twice as high, p = 0.10, and if one retains the assumption that the stifled threat was twice as strong as the average threat, so h/p remains 2.0, one needs q/p = 1.31.
47. "Although [Microsoft's economic expert on causation] has protested any assertion that his analysis ignores, contradicts, or second-guesses the findings of the appellate court, the Court disagrees." New York v. Microsoft Corp., 224 F. Supp. 2d 76, 151 (D.D.C. 2002) (D.D.C. States Remedy 2002).
48. Brief of Professor Timothy Bresnahan, Professor Richard Gilbert, Professor George Hay, Dr. Bruce Owen, Professor Daniel Rubinfeld, and Professor Lawrence White as Amici Curiae at ¶ 21, New York v. Microsoft Corp., No. 98-1233 (D.D.C. filed June 13, 2002), available at http://www.stanford.edu/ ∼tbres/Microsoft/economists-amicus-brief. pdf.
49. D.D.C. States Remedy 2002, 224 F. Supp. 2d 76.
50. Id. at 268-269
51. The Remedy Decision was upheld on appeal, under an "abuse of discretion" standard. Massachusetts v. Microsoft Corp., 373 F.3d 1199, 1230 (D.C. Cir. 2004) ("There is more than one way to redress Microsoft's having unlawfully raised the applications barrier. And it was certainly within the district court's discretion to address the applications barrier to entry as it did, namely, by restoring the condition in which rival markers of middleware may freely compete with Windows.").
52. D.D.C. States Remedy 2002, 224 F. Supp. 2d at 101 (emphasis added). The court later states: "Accordingly, the Court finds unpersuasive Microsoft's argument that Plaintiffs are entided to no more than a simple proscription against the conduct found to violate the antitrust laws."
53. Id. at 148.
54. United States v. Microsoft Corp., 253 F.3d 34, 103 (D.C. Cir. 2001)
55. (quoting from United States v. Ford Motor Co., 405 U.S. 562, 577 (1972),
56. and United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968)).
57. As noted above, in this case no additional injunctive remedy is needed to restore competition on a forward-looking basis, but damage awards are required to make con- sumers whole for the harm to competition that has already taken place and to deny Microsoft the fruits of its statutory violation.
58. The Final Judgment defines a class of software, "non-Microsoft middleware," for which certain provisions apply. Besides browsers, this includes e-mail clients, instant mes- saging, and media players. The prospect that these categories of software would evolve into a serious platform threat to Windows was remote in 2001, and no such evolution has taken place in die intervening six years.
59. United States v. Microsoft Corp., 84 F. Supp. 2d 9, ¶¶ 60, 411 (D.D.C. 1999) (Find- ings of Fact).
60. Direct Testimony of Carl Shapiro ¶ 21, New York v. Microsoft Corp., No. 98-1233 (D.D.C. Apr. 5, 2002).
61. Direct Testimony of Paul Maritz ¶ 14, United States v. Microsoft Corp., No. 98-1232, (D.D.C. Jan. 20, 1999).
62. Id. ¶ 15.
63. Id.
64. Id. ¶ Mr. Maritz also lists one possible inflection point prospectively: the move to "information appliances" and "set top boxes."
65. Id. ¶ 17. Another Microsoft witness, Mr. Gordon Eubanks, the President and CEO of Oblix Inc., cites the same list of "major changes" over the past twenty years. Trial Transcript at 26, United States v. Microsoft Corp., No. 98-1232 (June 16, 1999 a.m. session) (testimony of Gordon Eubanks), available at http://cyber.law.harvard.edu/msdoj/transcripts/ 0616a.doc.
66. "Rather, the fruit of its violation was Microsoft's freedom from the possibility rival middleware vendors would pose a threat to its monopoly of the market for Intel-compati- ble PC operating systems. The district court therefore reasonably identified opening the channels of distribution for rival middleware as an appropriate goal for its remedy." Mas- sachusetts v. Microsoft Corp., 373 F.3d 1199, 1233 (D.C. Cir. 2004).
67. HERBERT HOVENKAMP, THE ANTITRUST ENTERPRISE: PRINCIPLE AND EXECUTION 298 (2005) (citations omitted).
68. New York v. Microsoft Corp., 224 F. Supp. 2d 76, 185 (D.D.C. 2002) (D.D.C. States Remedy 2002).
69. Shapiro Testimony, supra note 48.
70. D.D.C. States Remedy 2002, 224 F. Supp. 2d at 185.
71. Id.
72. Id. at 105.
73. James, supra note 25, at 61.
74. The issue did arise of whether Google Desktop qualified as "non-Microsoft mid- dleware" under the Final Judgment, but Google Desktop does not appear to be a serious platform threat to Windows.
75. California Group's Report on Remedial Effectiveness at Exhibit 1, New York v. Microsoft Corp., No. 98-1233 (D.D.C. filed Aug. 30, 2007)
76. [hereinafter California Group Report], available at http://www.naag.org/ assets/files/pdf/antitrust.2007-08-30-Filed-CA- Group-Effectiveness-Report.pdf.
77. D.D.C. States Remedy 2002, 224 F. Supp. 2d at 106.
78. Id. at 129.
79. See, e.g., Bresnahan, supra note 9, at 67-71.
80. California Group Report, supra note 62.
81. Transcript at 39, New York v. Microsoft Corp., No. 98-1233 (D.D.C. May 17, 2006). Microsoft indicated that the shortcomings of its documentation resulted from Microsoft not having the right resources or processes in place.
82. California Group Report, supra note 62, at 8.
83. Microsoft's Reports Concerning the Final Judgments at 12, United States v. Microsoft Corp., No. 98-1232 (D.D.C. filed Aug. 30, 2007), available at http://www.microsoft.com/ presspass/download/legal/SettlementProceedings/08- 30MSFTReportConcerningFinal Judgments.pdf;
84. Report Stating the Position of the United States on die Recently-Filed Motions to Extend the States' Final Judgments, United States v. Microsoft Corp., No. 98- 1232 (D.D.C. filed Oct. 19, 2007), available at http://www.usdoj.gov/ atr/cases/f227000/ 227010.pdf.
85. D.D.C. States Remedy 2002, 224 F. Supp. 2d at 274.
86. D.D.C. States Remedy 2002, 224 F. Supp. 2d at 184.
87. According to the California Group Report, supra note 62, at Exhibit 4, the share of Windows in worldwide server operating system shipments grew from 44 percent in 2000 to 73 percent in 2006. While I am not in favor of assessing the effectiveness of the remedy based on market shares and I do not necessarily endorse the particular measure used in Exhibit 4, the district court's prediction that technology would change so much within five years that Windows would be displaced by other more advanced technologies clearly has not been borne out.
88. T.S. ELIOT, THE HOLLOW MEN (1925),
89. reprinted in T.S. ELIOT, COLLECTED POEMS 1909-1962, 82 (1963).
90. This is the level of consumer surplus in the presence of various entry threats. To the extent that such potential competition affects the current flow of consumer surplus (rather than just the probability that the monopoly ends), these will be higher than the surplus consumers would receive if the monopolist faced no such threats whatsoever. If the flow of consumer surplus depends positively on the magnitude of the threats cur- rently faced (a feature I do not model explicitly), a stronger remedy is required to restore competition.
91. If the behavior persists, consumer surplus falls even further and a stronger remedy than the one derived below is needed to restore competition.
92. We are assuming here that the potential entrants earn zero economic profits and that entry is efficient.
93. As noted in the text, a stronger remedy would be needed to also compensate con- sumers for the loss of consumer surplus they suffered during the interim period. Damage awards can play that role.