Microsoft: A Tale of Two Markets

This article orginally appeared in National Law Journal, February 8, 1999, as “In ‘Microsoft,’ Feds Are Aiming Poorly”, p. A21.

It could be the best of times, it could be the worst of times. Ranked first by market value, its stock hitting new highs daily, earnings up strongly, Microsoft ought to be on top of the world. But midway through what is perhaps the most important antitrust trial ever, the company has been lambasted by the press and in the courtroom. Evidently, Microsoft hasn’t convinced many observers, least of all the judge, that Windows is not a monopoly. Without rehashing that debate, let’s assume that the Department of Justice has it right, that Microsoft has virtual control of the operating systems market. Against that background, here’s an assessment of DOJ’s three principal charges — two that are probably unworthy of serious analysis and a third, more weighty, that has taken center stage.

First, DOJ alleges that Microsoft has effectively barred Netscape from access to Windows 98 customers by insidious tactics like tying its browser, Internet Explorer, to its operating system. That claim, quite simply, is preposterous. More than 100 million copies of Netscape’s browser were delivered last year alone. More than 65 million Internet users start up at Netcenter, which after Yahoo is the second most visited site on the Web. More than 400,000 Web sites link to Netscape’s home page — more than twice the number of links to Microsoft’s home page. Netscape still controls 42% of the browser market and will soon control an additional 16% through its new partner, America On-Line, which paid more than $4 billion for a four-year-old company purportedly mangled by Microsoft. Meanwhile, consumers benefit enormously from an intensely competitive market and free browsers.

Second, DOJ has asserted that Microsoft uses its control over the Windows opening screen to dictate Internet access and content. Yes, Microsoft does have desktop icons and “active channels” that guide users to favored Web sites, like MSNBC. But Netscape has similar cross- promotional deals, with ABCNEWS for example. More important, PC manufacturers can add icons and channels, or remove the channel bar completely; they can install any software they wish; they can even make Netscape the default browser. PC users can go still further; they can replace the opening screen altogether and substitute a non-Microsoft shell.


In order to show that Microsoft used monopoly power to “coerce” customers into signing exclusionary contracts, the government first must examine the relevant market. It hasn’t done so.

No rational person would be upset if an auto dealer preset the radio stations on a new car. That’s because the customer can change the presets in a few seconds. Microsoft’s opening screen works the same way. To suggest that Windows users — the folks that the antitrust laws are intended to protect — are somehow restricted in their choice of Internet sites is patently absurd.

Finally, DOJ has accused Microsoft of entering into a series of “exclusionary” contracts with the intent of burying Netscape. To be sure, lots of companies negotiate exclusive deals all the time, but those deals can run afoul of the antitrust laws if one of the companies is a monopolist. The question, then, is whether Microsoft has tried to leverage its monopoly in operating systems to obstruct other companies from doing business with Netscape.

For example, DOJ gripes that Microsoft offered a place on its Windows desktop to both Intuit and AOL only if those companies would pare their dealings with Netscape. And DOJ protests further that Microsoft’s contracts with Internet service providers and content providers required that they diminish or sever their relationship with Netscape. True or not — and Microsoft vigorously disputes the allegations — those contracts are utterly irrelevant to this case. Whatever monopoly Microsoft may enjoy in the operating systems market, it plainly did not exploit that monopoly in negotiating the so-called exclusionary contracts. In a nutshell, DOJ has identified the wrong market. Here’s how the government missed the boat.

Remember, Microsoft did not tell Intuit, AOL, ISPs and ICPs that they could not buy the Windows system. Instead, Microsoft is charged with refusing to provide referrals and space on the Windows desktop, which is used by those companies to advertise and distribute their products. So the pertinent market in which to look for monopoly power is not the operating systems market but the advertising or software distribution market.

Microsoft does not have a monopoly in either of those markets. Vendors sell software through retail stores, over the Internet, by mail order, bundled with hardware and through a variety of other channels. Products are advertised in newspapers and magazines, on radio and television, by direct mail, over the Internet and on and on. Not even the Windows desktop is controlled by Microsoft, which uses only 7 of 49 possible icons. In other words, 85% of the desktop space is available to PC manufacturers and consumers, who can display icons for any programs they wish, including software produced by Netscape and other Microsoft rivals. In order to show that Microsoft used monopoly power to “coerce” customers into signing exclusionary contracts, the government first must examine the relevant market. It hasn’t done so.

The overriding lesson here is that consumers want an integrated operating system, which is easier to operate, document and debug; less expensive to market and distribute; improves quality control; and provides a uniform standard for software developers. That’s the verdict of the marketplace; it ought to be the verdict of the court. Judge Thomas Penfield Jackson should take his cue from South Carolina’s attorney general, Charles Condon, who withdrew from the Microsoft suit after AOL announced its acquisition of Netscape: “Recent events have proven that … innovation is thriving,” noted Condon. “Further government intervention … is unnecessary and … unwise. Consumers have not taken a leading role in this action. That’s because there are no monopolies on the Internet.”

If Judge Jackson can appreciate those dynamics, if he can overcome his apparent distaste for Microsoft’s aggressive behavior, then he may well bring this ridiculous case to a sane conclusion — promoting competition instead of subsidizing competitors. Yes, it could be the age of wisdom, or it could be the age of foolishness.

Robert Levy is a senior fellow in constitutional studies at the Cato Institute.