IP: Microsoft

[Dave Farber <farber () cis upenn edu>]

> Date: Thu, 12 Oct 2000 11:35:33 -0700
> To: Dave Farber <farber () cis upenn edu>
> From: "Robert M. McClure" <rmm () unidot com>
> Subject: Microsoft
>
> Dave,
>
>    I have written the following to put forth as clearly as I can why 
> Microsoft
> deserved to lose their antitrust case.


> Bob
>
>         Frequently I encounter people who think the government is being
> unfair to Microsoft.  I have written the following to support my view
> that Microsoft has violated the law and deserves to be seriously sanctioned,
> probably by being broken up.
>
>         Bear in mind that I am an ardent free trader and have little use
> for government intervention in private business arrangements, I would like
> to try to make the case that Microsoft has, in fact, violated the law
> as written and that the government was correct to prosecute them.
>
>         My credentials for making this case are 1) that I have been in the
> computer industgry since 1958 and 2) have done quite a bit of legal expert
> witness work, including the field of antitrust enforcement.
>
>         Quite often people lump "bashing" of Microsoft with the bashing of
> the gun, tobacco, pharmaceutical and other industries.  In the case of
> these other industries, your description of them as being "bashed" is
> well founded.  Not in the case of Microsoft.
>
>         I am not attempting to defend the antitrust laws, since I personally
> think many of strictures imposed by them are indeed counterproductive.
> However, since they are on the books, I feels that all the players should
> abide by them.  The essential problem here is that Microsoft has played
> fast and loose with the rules while Microsoft's competitors have not, being
> somewhat fearful of the power of the Federal Government.
>
>         The intent of the antitrust laws is to protect consumers, not
> competitors, although competition is needed in order to provide consumers
> with protection for a monopolistic supplier.  So how does Microsoft harm
> consumers?  There are essential three ways:
>
>         1.  Price
>         2.  Innovation
>         3.  Irresponsible behavior
>
>         Let me address these.  In point of fact, only the first is really
> covered by the antitrust laws, but the second and third points are also
> relevant.
>
>         First price. The marginal cost of production of software is
> near zero.  Only a monopoly position could extort $50 (or more) from
> every computer buyer.  When the PC was first intruduced in 1981, the
> cost to the computer manufacturer to license the operating system of the
> day from Microsoft was $50.  The computer was sold at a price of 3,500 to
> 4,000 1981 dollars.  That computer typically had a monochrome monitor,
> 64 kilobytes (NOT megabytes), a single floppy drive holding 360 KB, and
> no hard drive of any size.  In 2000, a typical consumer machine sells for
> 800-1000 year 2000 dollars has a color monitor, 64 megabytes of memory,
> and a hard drive of 10+ gigabytes.  The manufacturer still pays Microsoft
> $50 or more.  Since the computer has declined so dramatically in price
> (a factor of 5-7 depending on how you calculate inflation), one could
> reasonably expect the cost of software to decline as well.  Why not?
>
>         The clear reason is lack of competition in operating systems.
> For computers using Intel, AMD, Cypress, etc chips (about 87% of all
> computers), Microsoft operating sytems (Windows in its various incarnations)
> have at least a 95% market share.  For desktop machines, the MS market
> share is in excess of 98%.  This market share was created with a very
> clever licensing policy (in my opinion, Microsoft's only significant
> innovation).  This policy was essentially this.  A manufacturer that
> agreed to pay Microsoft a flat fee for each machine produced (whether
> that machine was shipped with a Microsoft operating system of not) paid
> a (for the day) relative modest fee of about $50.  A manufacturer that
> did not agree to pay the fee for all computers shipped paid a few for
> each operating system shipped approximately 3-5 times as much.  The
> deal was not negotiable.  A manufacturer would not have much choice, and
> having paid a fee for each machine would have no incentive to supply any
> alternative system (and in 1981, there were several).
>
>         The need to be compatible with IBM, which shipped MS-DOS with
> their computers led substantially all manufacturers into shipping MS-DOS
> as well.  Writers of application software then had no choice but to write
> software for MS-DOS (and subsequently Windows).  The "lock-in" effect
> was quite literally unbreakable.  So far in this chronology, I don't see
> that the antitrust laws have been violated.
>
>         Microsoft's next step was problematical.  They decided to move
> from systems and system tools into applications in a big way.  To this
> end they used their inside knowledge of their plans in the operating
> system arena and their ability to selectively bundle, to shut out
> competition, and thereby lessen the pressure on prices.  Several times
> over the last decade they have chosen to crush an innovative entrant
> by providing a similar product as a bundled item.  This amounts to
> cross-subsidization of a non-monopoly product by a monopoly product and
> this is clearly not permitted.
>
>         In short, given the volumes of software shipped with personal
> computers, if there were true competition, the price would more likely
> be one-quarter to one-third of the current price.
>
>         Second issue: innovation.  Microsoft is sometimes credited with 
> being
> an innovator.  Nothing could be further from the truth.  Microsoft was an 
> army
> of programmers who are quite capable of producing very complex software, but
> they do not seem to have the ability to come up with significant innovations.
> They may do engineering, but not invention.
>
>         Starting with MS-DOS, you may remember that it was originally
> written by Seattle Computing and was purchased by Microsoft who knew,
> as Seattle Computing did not, that IBM was interested in outsourcing
> the operating system for the personal computer (PC) that they were
> shortly to intruduce.
>
>         Windows was basically copied from the Apple operating system (which
> itself was copied from Xerox).  The first two versions of Windows were
> disasters.  Only when MS reached version 3 did they succeed in producing
> a system that was workable.
>
>         Word was derivative of numerous word processing systems (Word 
> Perfect,
> Word Star, Borland, etc) then on the market.  Excel was similarly derivative
> of already available spreadsheets (A---, Lotus 123, etc).  It was widely
> believed in the industry that Microsoft used secret hooks into their
> operating system that were not published for use by other application
> software houses.
>
>         When Microsoft couldn't engineer their own product, they usually
> took the tack of buying out a competitor.  Only the roadblocks put forth
> by the FTC and Justice Department prevented several of these mergers or
> acquisitions.
>
>         The browser case is so well known it is not worth repeating, but
> is another case of egregious behavior on the part of Microsoft.
>
>         The net of all this is that potential competition was seriously
> discouraged from competing (or attempting to compete) with Microsoft.
> The industry was thereby deprived on many innovations that would otherwise
> have appeared.
>
>         Finally, Microsoft's products, had they been automobiles would
> not only have been recalled, but probably banned.  Substantially all
> industry insiders agree, even those who support Microsoft, that Microsoft's
> software is inferior in reliability to most industry software.  It seems
> that MS has concentrated on sizzle and not the steak.  They are undoubtedly
> correct that fancy new features sell better than bug fixes, but it is
> nevertheless irresponsible to put out software that crashes several times
> every day.  Microsoft likes to point to the increased productivity produced
> by computers and increased useability, but never offsets this with the
> time required to reboot, restore files, and otherwise recover from software
> glitches which they, themselves, inflict.  It may not be a violation of
> the law to sell crappy software, but it is definitely immoral.
>
>         I conclude, therefore, that the government suggested remedy of
> splitting Microsoft into a systems and an application company is to correct
> one.  As a side note, this will probably benefit the shareholder's of
> Microsoft since the history of break-ups has been that the value of the
> parts exceeds the value of the original company.