What Did We Accomplish in Microsoft?

I need to do a second DRM post to follow up my last post—and if you haven’t read Ed Felten’s posts (here and here), you should—but before doing that, let me raise a different question. I just completed 3+ class sessions on Microsoft in my antitrust class. Here is the question: to what extent do we think that the current competitive structure in computers and the Internet is because of—or in spite of—the U.S. and EU cases against Microsoft?

The simple version of the Microsoft story runs something like this. Microsoft acquired a dominant position in operating systems through a mix of hard work and good fortune (and strategic missteps by competitors like IBM). Markets such as those for operating systems may be characterized by Schumpeterian competition, meaning that we have periods of monopoly separated by relatively brief periods of competition for the market. Think of this as a model of punctuated equilibria if you prefer biological metaphors

The emergence of the Internet and the Netscape browser started the first post-Windows period of competition. The DC Circuit’s unanimous decision in the Microsoft case makes clear that Microsoft behaved anti-competitively in maintaining its Windows monopoly and in using that monopoly to distort the between-period of competition.

Judge Jackson for the District Court originally proposed to cleave Microsoft in two, into an operating systems company and applications company, but that remedy did not survive review in the DC Circuit. Instead, the remedy put in place was much more limited. That remedy attempted to limit the ability of Microsoft to exert pressure on computer manufacturers as well as other key channels for software distribution. And by imposing greater uniform pricing on licenses for Windows the decree reduced the ability of Microsoft to control distribution channels.

This remedy appears to be having results. The point of the remedy was to enable software makers to seek distribution through key channels such as computer manufacturers and Internet service providers. On February 7th, in a front-page story, the Wall Street Journal reported that we are now starting to see competition over the desktop, in particular in the form of planned billion-dollar deal between Dell and Google for the distribution of Google software.

But now the question: is the emergence of search in general and Google in particular somehow related to the antitrust action against Microsoft? Are there steps that Microsoft would have taken against Google akin to those that it took against Netscape, steps that Microsoft has not taken because of either the remedy or the threat of further antitrust sanctions? Or is it possible that we're just seeing the next wave of Schumpeterian competition and Google would have emerged as a competitive threat to Microsoft even had there been no antitrust case against Microsoft?

And take one step forward, what of Vista, the forthcoming version of the Windows operating system? We are starting to see reports of competitor complaints about how that operating system will be structured. In my antitrust exam two years ago, I asked my students to address what would happen if Microsoft used its control over Internet Explorer to alter competition in search. For example, what would happen if Internet Explorer had built in a search toolbar directing searches to MSN? Would competition still be preserved if users could install a second toolbar to search Google?

Or would the presence of two toolbars sufficiently confuse consumers that permanent installation of the MSN toolbar would partially foreclose installation of the Google toolbar? After all, this was one of the stories in the DC Circuit case, where the embedding of the icon for Internet Explorer on the desktop made it more expensive for computer manufacturers to add an icon for Navigator.

[Disclosure: The Law School has received grants from Microsoft in the past, and, I believe, continues to do so.]

Comments

[Michael Martin]

I don't think the emergence of Google has much to do with Microsoft's antitrust woes, although I agree that the DC Circuit's remedy was better than Judge Jackson's. Google, MySQL, and other services-oriented firms are exploiting a technological feature of Internet-related markets that only emerged as hardware and bandwidth have gotten soooo much cheaper than software, i.e., that on-demand services are in some ways more cheaper to implement and more convenient for both the firms offering services and their customers. Microsoft is at a cost-disadvantage to Google in competing in markets with these characteristics because they have the incentive also to maintain market share in the old, client-centered services model that made sense when hardware was percentage-wise a larger cost than software and content in general. Google is to Microsoft what Microsoft was to IBM. Hopefully Sergey and Larry will keep with Bill and Melinda's philanthropy!

[Kimball Corson]

Before I think about the substance of the post and address it later, let me say how encouraging it is to see open discussion (at least proposed) in connection with a grant provider who may well be further subject to criticism. It worries me that fine educational institutions get so much money from corporate America which does not always like to play by the rules and has been known to use its financial muscle to get the institutional results it wants. This is the current Achilles heel of better universities, I fear. Money can be pitted directly against research results and integrity seriously compromised.

[Cory Hojka]

My first thought here is that Google today isn't just a search engine company. In addition to Google's search service and its derivatives in that area (i.e., book search, blog search, etc.), we also have gmail, picasa, blogger, and Google maps. Thus, we are dealing with a company that evolved to include far more than just seach. It now offers a variety of integrated services, and not just an application tool like Netscape. As a result, the transactional costs of switching from Google's services to Microsoft's equivalents (if they even exist) are probably going to be far higher than just switching web browsers. People, I'd believe, would therefore want and seek out the the Google experience they are accustomed to and not be inclined to easily switch over to MSN services.

True, Microsoft can set the default web page of IE to search.msn.com or something when one installs Window. However, I think that's actually what they do now and it hasn't altered the economics that much. Technically, they could go further and remove the ability to set IE's home page to anything else than MSN search (or develop other anticompetitive tactics), but my assumption here is that the market, and not the DC injunction, would be the main obstacle to that approach. I seriously doubt that Corporate America would at all tolerate any such anti-competitive methods when it comes to their desire to control the corporate intranet web-based experience for their employees.

When it comes to the toolbar, Microsoft here probably can do more harm, but what is the extent of this harm? Do most people use toolbars?

(Note: When I used to do computing support, my experience was that most people found them confusing and avoided using them, but perhaps that has shifted somewhat over the years.)

Even if toolbars do cause people to use MSN search, is it only an occasional use or does it act as a complete substitute? Would it also encourage them to move away from the various other services that they've become accustomed too? Etc.

Honestly, I'm pretty skeptical that an integrated toolbar would have the anti-competitive consequences for Google that Microsoft's IE tactics did for Nextscape. It would likely lead to a small shift in usage between Google and MSN, but it wouldn't control the user experience anywhere near completely as tying IE into the operating system did when it came to choosing web browsers. Thus, I think most users would still prefer their default choices in web services, even if some might develop a slight change in their basic search engine uses due to the toolbar.

[Michael Martin]

Latest evidence of Google's strategy to dominate services: Google acquires Writely

http://weblog.infoworld.com/techwatch/archives/005510.html

[Michael Martin]

Bill Gates responds:

Interviewer: Google bought a little company that does an online word processor, and there's talk of it doing an online calendar. Do you think it could assemble a Web office and compete with what you have?

Gates: I think they can do anything they want. Remember Orkut? That was a great social-networking thing that I don't think has been heard of for the last few years. They came out with an instant-messaging voice-type product.

Certainly, there will be lots of ways that people offer software over the Internet. There will be so many companies doing these things. It's not really appropriate to look at just one.

Not many people are brave enough to compete with (Google), with that kind of scale and momentum. Well, we are. The idea that there will be complementary capability, where using rich-client capability and Web capability--that's a big theme from us. You can look through our history. We've been pretty rational as the fads roll through. Yes, there's a lot to be said for that, but that doesn't take away from the fact that you want--when not connected to the Internet--access to your information. You want richness and responsiveness that local applications can provide.

http://news.com.com/Gates+sizes+up+the+Webs+next+generation/2008-7345_3-6051890.html