Date: Mon, 11 May 1998 22:22:35 -0700 (PDT)
From: Phil Agre <pagre@weber.ucsd.edu>
To: rre@weber.ucsd.edu
Subject: Microsoft's Ambitions and Antitrust Policy

[I have reformatted this to 70 columns.]

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Date: Mon, 20 Apr 1998 09:00:13 -0400 (EDT)
From: James Love <love@cptech.org>
Subject: Microsoft's Ambitions and Antitrust Policy

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Info-Policy-Notes | News from Consumer Project on Technology
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April 20, 1998


              Microsoft's Ambitions and Antitrust Policy

                   Ralph Nader and James Love

             Remarks at the Cato Institution Policy Forum 
                   on Antitrust and Microsoft
                         April 20, 1998 
         (http://www.essential.org/antitrust/ms/catoapril20.html)
 
1.      What is at stake?

In his day, John D. Rockefeller tried to monopolize oil production,
refining and distribution.  Alcoa sought to protect its monopoly in
manufacturing aluminum.  AT&T tried to monopolize local and long
distance transmission of telephone calls and the manufacturing and
sale of telephone handsets or devices that would connect to telephone
lines.  For decades IBM dominated the computer mainframe software and
hardware market.  Intel is trying to monopolize the manufacturing of
hardware used to run personal computers.

Microsoft is more ambitious, and the implications of its global
strategy are far more far important.  Microsoft wants to use a core
monopoly in software operating systems to dominate an enormous range
of new and important areas of electronic commerce, and Microsoft wants
to monopolize the software used to navigate the Internet and to
navigate the next generation of television and multimedia programs.

If Microsoft were to succeed in every area it is active, it would have
the most important control over commerce and worldwide information
flows of any firm, ever.

Increasingly, we are talking about technology that is used as a
gateway for many businesses, publishing ventures and civic
communications, and Microsoft wants to dominate, influence or control
the content itself, not just the transmission.

This elevates the disputes over Microsoft use of its Operating System
as a matter of public policy.

2.      How is this done?

In the software area, Microsoft engages in a very wide range of
anticompetitive acts --- many of them are very similar to techniques
used by Standard Oil, AT&T or IBM, before each of these companies
faced antitrust action.

One strategy of a monopolist is to deter entry or investment by rivals
by engaging in predatory pricing.  Standard Oil used cross subsidies
to selectively cut prices, so it could bankrupt its rivals.  AT&T used
cross subsidies to selectively cut prices, and drive rivals out of
business. IBM used cross subsidies to selectively cut prices, and
drive rivals out of business.  Microsoft does this too.

Microsoft can take a rival's core product, and spend countless
millions in R&D or acquisitions, and then offer a competing product
for free, or bundle it with Windows or with Microsoft Office --- the
suite of office productivity applications which are nearly as
ubiquitous as the operating system.

For example, faced with Microsoft's decision to spend hundreds of
millions of dollars on a free alternative, Netscape is unlikely to
justify continued R&D spending on its browser.  And when Microsoft
announced that it would include copies of its Outlook product in
Microsoft Office, Netmanage announced it would discontinue further
development of Ecco Pro (http://www.netmanage.com/products/eccopro/).

Microsoft benefits from predatory pricing in two ways:

-       once the threat of competition is less, it can later
        raise prices,

-       Microsoft's tough reputation scares off other new
        entrants.

But there are also technological strategies for predation, such as
those concerned with Interoperability.  These too have many parallels
with other monopolies.

In high tech markets, it is often the case that products must
interoperate with each other.  AT&T tried to limit the ability of
competitors products to interoperate with the AT&T telephone network,
by withholding technical information, using proprietary technologies,
or by changing standards to create incompatibilities of rivals
products. IBM did this.  Intel is doing this now.  Microsoft has done
this for a long time, going back to the days when programmers coined
the phrase, "DOS isn't done until Lotus won't run," referring to
Microsoft's introduction of minor changes in DOS that created problems
with Lotus 123, the spreadsheet program that is a competitor to
Microsoft's Excel.  If Microsoft can't make its own products look
better by taking advantage of technical back doors, it can make a
rivals products perform badly, or it can make its own products
technically essential, as it is trying to do with the browser.

When you combine both predatory pricing and technological predation,
firms and investors decide on their own to keep out of Microsoft's
way.  Consider the following quote from an April 18 story by Lisa
Bowen in Ziff Davis's ZDNET web site:
(http://www.zdnet.com/zdnn/content/zdnn/0418/308142.html)

        A further challenge for the DOJ is showing that 
        Microsoft is actually  stifling innovation because 
        it's hard to measure Microsoft's products against 
        those that never make it to market. 

        There's no question that many developers are shying 
        away from independent projects in areas that Microsoft 
        might consider. At Microsoft's Windows CE development 
        conference, developers lined up during a 
        question-and-answer session to ask the software behemoth 
        which products it doesn't plan to develop, as if they 
        were looking for crumbs.

        Other software makers said they attended the conference 
        to check out Microsoft's plans to make sure they stay out 
        of the company's road.

        A new area of predation for Microsoft concerns Internet
navigation.  One of the major reasons that Microsoft wants to have a
monopoly on Internet Browsers, is so that Microsoft can design the
Windows operating system to have as much control as possible on
navigation itself.  There are several aspects of this.

        Microsoft wants to write the default bookmarks and menu
options for content based upon current and new Internet technologies.
The unsuccessful experiments with so called "push" channel
technologies was one attempt.  The new Microsoft "Start" page project
is a more elaborate version. Microsoft has also designed its Browser
so it can periodically check in with Microsoft to reset bookmarks,
menus and other items with ones Microsoft's suggests, gently but ever
so steadily taking consumers "where Microsoft wants them to go today."
Microsoft is developing its own search engine, which it hopes will
replace Yahoo and other popular search sites.

        This is a "path of least resistance" strategy, based upon the
idea that time and attention are the ultimate scarce resource in the
information age.

        Will it work?  Consider commercial airline reservation
systems.  One study indicated that professional air travel agents
using online reservation systems would pick the first fare they saw 53
percent of the time, and a fare from the 1st screen 93 percent of the
time.

        When Microsoft bought Web TV, it changed the travel menu so
that Expedia, the Microsoft travel service, appeared first in the
travel menu.  Sabre told us their Travelocity web site lost is
prominent menu location, and was moved to page 6, next to Tom's
Travel, in an alphabetical listing. How many people in the audience
ever look at page 6 when you use an Internet search engine?

What will happen if Microsoft succeeds in its wildest dreams and
determines which flower shop, which citizen group, and which car
dealer appears on page 1 and which one appears on page 6?  What if
Microsoft could determine what information appears on page 1 when a
person searches for information about Representative Rick White or
legislation concerning digital copyright?

3.      What Should Be Done.

        In 1997, we organized a conference to Appraise Microsoft's
Global Strategy.  I believe we now have a fairly good idea of where
some of the problems are.  It is time to shift the debate to the issue
of remedies.  What can and what should be done about the Microsoft
Monopoly?  This will be the focus of our next Microsoft conference.

        The current DOJ litigation deals with narrow issues concerning
restrictive contracts and product bundling.  The easiest remedies
would limit the use of restrictive contracts, such as contracts that
prevent Internet Service Providers or OEMs from giving consumers the
opportunity to choose non-Microsoft products.  Practical rules
regarding product bundling are more difficult, as is the issue of
predatory pricing, which DOJ and the EC have ignored.  But there are
several other types of remedies which may be more useful.

Issues regarding interoperability are very important. The European
Community's 1984 undertaking with IBM was mostly about
interoperability
issues. (http://www.essential.org/antitrust/ms/1984ibmeu.html). There
has been much antitrust work on interoperability that relates to
telephone monopolies.  In recent years, the Federal Trade Commission
has negotiated agreements with several other software companies to
open user interfaces, such as the FTC's 1995 agreement with Silicon
Graphics, Inc (Docket No. C-3626), which required SGI to "establish
and maintain an open architecture, and publish Application Program
Interfaces ("APIs"), for . . . computers and operating systems in such
manner that [third party] software developers and producers may
develop and sell . . .  software, for use on [SGIs] computers, in
competition with [SGI]."

        More relevant is last week's landmark ruling in the Intergraph
v. Intel case, where a federal judge ruled that Intel's CPU platform
is an essential facility - and ordered Intel to provide
non-discriminatory access to technical data needed to develop products
which interoperate with the Intel CPU.
(http://www.intergraph.com/intel/highlights.stm ).  Now that the "tel"
half of Wintel is considered an essential facility, what about the
"Win" half? Biases of Internet navigation and related areas are very
important, particularly if Microsoft succeeds in monopolizing the
browser market, dominating the search engine market, and becoming the
front end for new video set top boxes.  Policy makers and the public
need to debate conduct rules which would prevent a dominant OS vendor,
like Microsoft, from exercising undue influence over Internet
information searching and navigation technologies.

        There are also other remedies that challenge Microsoft on a
more basic level.  We are asking OEMs to offer consumers the
opportunity to purchase alternative operating systems, not owned by
Microsoft.  (http://www.essential.org/antitrust/ms/ipnmarch91998.html)
These include both commercial competitors, like Rhapsody, BeOS or OS2,
and a new generation of powerful free operating systems, such as Linux
or FreeBSD, which are rapidity maturing as alternatives.

        We believe there are factors which make it more feasible for a
new OS to succeed.  Larger and cheaper hard disks and computer memory
make it possible to run multiple operating systems on the same
computer.  We do this now at our offices.  Secondly, the Internet and
new Internet standards bodies make it easier to share data across OS
platforms.  Third, new software development tools make it easier to
port software applications across platforms.

        There remain barriers for new OS platforms, however. The most
important of which concern device drivers, which are still scarce for
Windows alternatives.  Making matters more difficult would be efforts
by Microsoft and Intel to control the architecture of a new generation
of high performance device drivers.

        Leading Original Equipment Manufactures (OEMs) for personal
computers, like Dell, Micron, Gateway 2000, Packard Bell, Compaq and
others need to be free from retaliation by Microsoft if the OEMs offer
non-Microsoft products, including choices of software operating
systems. This may be difficult in practice if Microsoft can
discriminate in its pricing of the software OEMs need for the current
corporate and consumer market.  If Microsoft were required to use
non-discriminatory licensing of Windows and Microsoft Office, OEMs
would be free to offer consumers additional choices.

        Essential Information has created an Internet email list to
discuss these issues.  You can participate by sending a note to
listproc@essential.org with the message "sub am-info yourfirstname
yourlastname."  Archives of this list are available on the Internet at
http://www.essential.org/listproc/am-info/ (no period). The Consumer
Project on Technology also maintains a web page on Microsoft antitrust
issues at http://www.essential.org/antitrust/microsoft/microsoft.html
(no period).

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