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Antitrust and Monopoly Case Study

Antitrust and Monopoly Case Study

The advent of the free market economy marked the beginning of developments, which although not appealing, have refused to go away from the global business culture. One of such developments was the emergence of monopoly. Monopoly arises when a single business entity dominates a particular market to the extent that it becomes difficult or simply impossible for competitors to keep up. In the end, the monopolistic entity can engage in unethical business practices without much opposition because there is no alternative product or service for consumers. The U.S. has witnessed hundreds of these cases, and since monopoly naturally drives businesses towards unethical conduct, the U.S. government had fought it since 1890 when the Sherman Act became law. However, despite this lengthy fight, monopoly persists. This paper conducts an analysis of Microsoft’s monopolistic practices at the turn of the century together with the antitrust suits that were filed in response to these practices. The intention is to evaluate the outcome of the suits as well as their consequences on Microsoft and the U.S. business environment.

Background of the Sector in Question

The Microsoft Corporation is U.S. computer software and services giant. It is the developer of the ubiquitous Windows family of operating systems and the widely successful Microsoft Office suite. In addition to these two, Microsoft has numerous other computer applications to its name. Succinctly put, the company is a global hegemony in the PC software and services market. In recent years, it has also made inroads in the consumer electronics market with the purchase of the Nokia Corporation. The company is doing well like most American companies of its kind.

Although its business activities seem to cut across several industries, Microsoft’s primary industry, which serves as the basis for this analysis is the software and services industry. This industry characterized by cutthroat competition among its players. New entrants to the industry are common, but they have to have the edge over the large players or be choked out or be acquired. Nevertheless, the industry’s importance has maintained a steady growth as computers continue to find new uses across different spheres of human life.

The industry’s composition is such that huge enterprises such as Microsoft form a very small fraction of the total number of players. However, in terms of market share, they are the dominant players. For example, in 2013, going by revenues, Microsoft received 16% of the total amount of revenues generated by this industry (Shields, 2014). Its closest rival, Oracle, attracted only 7% of the revenues. Similarly, IBM also attracted 7% of the industry revenues. The two rivals’ revenues, even if combined, are still less than Microsoft’s share. A combination of the top 10 players’ revenues almost matches the revenues of the rest of the industry. Interestingly, these top 10 players constitute less than 3% of the industry (Oxyleads, n.d.). Thus, it is an industry characterized by dominance and monopoly.

Why Microsoft was Subject to Anti-Trust Charges

With its 16% revenues share in the software and services industry, Microsoft is a clear industry leader and could be considered a monopoly in some aspects of this industry. However, this is nothing compared to the 90s when the company’s market share close to 90%. This, however, was not the reason Microsoft was taken to task with antitrust charges.

The reason Microsoft was taken to court was the “browser war” as commonly known today. Apparently, prior to 1998, the Netscape browser was the most popular and dominant browser. In a bid to popularize its own browser, Internet Explorer, Microsoft began to pre-install new computers with this browser, making it difficult for users to replace it with the Netscape browser (Caldre, 1998). In other words, the company was closing its Windows operating system to interoperability, particularly to the Netscape browser. This behavior choked Netscape, which depended on this browser as a source of revenues because Microsoft was giving an alternative for free (Caldre, 1998). The company eventually died because it was not able to recover even after the case was concluded.

Netscape did not bring the antitrust case against Microsoft, however. The federal government, through the Department of Justice, filed the suit, which was joined by 20 states (CNN Money, 1998). It was a historical case then, and it remains so today. No similar case has been recorded in the U.S. since then.

The Ruling

Despite Microsoft’s spirited efforts to win the case against it through video editing and other antics, the court ruled against it (Chan, 2011). It was proved beyond doubt the company had engaged in anti-competition activities whose intention was to kill competitors by rendering them irrelevant. For instance, the new computers that came pre-installed with Internet Explorer were products of exclusive deals that would not allow any other browser to run on them (Economides, 2001). In effect, the Netscape browser had no platform to host it. On the computers on which it could run, Microsoft provided a free alternative.

In the ruling, Judge Thomas Penfield Jackson ruled that Microsoft was guilty of antitrust practices and directed that the company be split into two to reduce its dominance (Gavil & First, 2014). The operating system division was to be a separate entity from the software division of Microsoft. Microsoft appealed the ruling. Before the determination of the appeal, it emerged that Judge Jackson had engaged in an inappropriate discussion relating to the case with journalists just before the final ruling (Chan, 2011). He was vacated from the case and a new judge, Colleen Kollar-Kotelly took over (Chan, 2011).

The final determination was never made because Microsoft agreed to a consent decree that prevented it from entering any exclusive deals that would keep competitors’ software from running on its Windows Operating system (Gavil & First, 2014). The decree also compelled Microsoft to makes it windows platform interoperable with software from elsewhere.

The Ruling’s Effects

Microsoft’s antitrust case is frequently termed as a landmark case of its kind because it set a precedent for the software industry. Its effects were profound for both Microsoft and the U.S. business environment. The most outstanding effect was that it opened up the Windows operating system for non-Microsoft software (Gavil & First, 2014). This is the reason there are thousands of software development companies today. In fact, today, Microsoft is on the receiving end of the browser war, as Google’s Chrome browser and its search engine, Google Search, dominate the market.

The direct effects on the company included the stepping of Bill Gates from the company’s helm, plummeting stock prices, and the eventual transformation of the company into what it is today (Chan, 2011). Without the lawsuit, it is possible that today, only Microsoft sponsored software would be running on its Windows platform.

Since the ruling, Microsoft has been cautious in how it approaches business (Chan, 2011). It appears to fear another antitrust lawsuit against it. Another interesting development from the case is that knowing how much companies dread antitrust lawsuits, rivals often use the possibility of such suits to tame one another. Overall, the software and service space has been marked by an element of sanity since the Microsoft case.