Question

Case Summary

Microsoft is the world’s largest supplier of computer software. It has dominant market share of PC operating systems with its Windows system. High barriers to entry prevent significant competition in the operating systems market. The primary barrier is that a large number of software programs must be able to interface with any operating system to make it attractive to end users. It would be extremely difficult for any competitor to create a new operating system and create or encourage the creation of completely new software to compete with Windows. However, the development of Internet Browser programs, specifically Netscape, threatened this barrier, by allowing software developers to create software that could run using the browser software as a platform for the program. Therefore, software could be created that could still be used with Microsoft Windows, but would not have to be.

Microsoft recognized this development as a threat to its operating system monopoly. Initially Microsoft attempted to divide the market with Netscape, but Netscape refused. To defend its operating system, it set about to overtake Netscape with its own internet browser, Internet Explorer. To defeat Netscape, Microsoft leveraged its operating system monopoly to gain market share in the internet browser market.   Microsoft forced computer manufacturers to include Internet Explorer and strongly discouraged them from including competing browsers with the bundled software. It also leveraged its operating system power to encourage Online Service Providers (AOL, etc.), Internet Content Providers, and Internet Service Providers to use Internet Explorer and discourage them from making competing browsers available. The actions by Microsoft were effective in taking market share away from Netscape and protecting the Windows Operating System.

Discussion Questions

1. What is the primary barrier to entry in the operating systems market? How does Netscape’s product threaten to remove this barrier?
2. What is Microsoft’s pricing and distribution strategy for Internet Explorer? How does this compare to Netscape? Why would Microsoft pursue this pricing strategy?
3. Is the internet browser software market a separate relevant product market from the operating system market?
4. How does control of the start-up sequence and desktop screen allow Microsoft to leverage internet providers to use Internet Explorer? How effective was this strategy?

5. What are some of the ways in which Microsoft’s actions adversely effect competition and innovation? Does this show evidence of harm to consumers?

Answer 1

What is the primary barrier to entry in the operating systems market? How does Netscape’s product threaten to remove this barrier?

There are high barriers to entry in the market for PC operating systems. One of the most important barriers to entry is the barrier created by the number of software applications that must run on an operating system to make the operating system attractive to end users. A potential new operating system entrant faces a high barrier to successful entry:

• Because end users want many applications available,
• Because most applications today are written to run on Windows,
• And because it would be prohibitively difficult, time-consuming, and expensive to create an alternative operating system that would run the programs that run on Windows.

A new competitor “born” on the Internet is Netscape. Their browser is dominant, with a 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi-platform strategy where they move the key API [applications programming interface] into the client to commoditize the underlying operating system.

Internet browsers pose a competitive threat to Microsoft’s potential operating system monopoly in two basic ways. First, as discussed above, one of the most important barriers to the entry and expansion of potential competitors to Microsoft in supplying PC operating systems is the large number of software applications that will run on the Windows operating system (and not on other operating systems).

Second, Microsoft recognized that Netscape's browser was itself a "platform" to which many applications were being written -- and to which (if it thrived) more and more applications would be written. Since Netscape's browser could be run on any PC operating system, the success of this alternative platform also threatened to reduce or eliminate a key barrier protecting Microsoft's potential operating system monopoly.

What is Microsoft’s pricing and distribution strategy for Internet Explorer? How does this compare to Netscape? Why would Microsoft pursue this pricing strategy?

Microsoft’s pricing and distribution strategy for Internet Explorer was to provide Internet Explorer for free and use OEM distribution. Microsoft required PC manufacturers to license, preinstall, and distribute Internet Explorer on every Windows PC they shipped.

Netscape’s primary distribution vehicle is for Java virtual machines (JVMs) and is not free.

Microsoft would do this to leverage its Windows operating system. People are already buying their operating system and if Internet Explorer is included for free it may encourage users to use Internet Explorer for convenience.

Is the internet browser software market a separate relevant product market from the operating system market?

Internet browser software is completely separate from the operating system. Because of legal issues, Microsoft made efforts to integrate the browser into its operating system, however, browser software can easily be designed to run on any operating system and multiple browsers can be loaded and used with a single operating system

How does control of the start-up sequence and desktop screen allow Microsoft to leverage internet providers to use Internet Explorer? How effective was this strategy?

Through its operating system (OS) monopoly, Microsoft contractually obligated original equipment manufacturers to not alter the Microsoft boot-up sequence or desktop screen. This allowed Microsoft complete control over which icons and shortcuts were initially placed on the end user’s computer screen. In exchange for Microsoft promoting certain online services providers, internet service providers (ISPs) and internet content providers theses companies had to agree to also promote IE exclusively. This promotion included agreeing not to inform consumers that other browsers were compatible, not allowing other browsers to be downloaded and developing content that was designed to work more effectively with IE. Since the ISP market was extremely competitive, providers placed a high value on gaining Windows desktop access of consumers. In fact, they were willing to sign exclusive contracts with Microsoft for this access. In turn, since about a third of users obtained their browser software from their ISP, Microsoft was very effective in promoting IE over Netscape.

What are some of the ways in which Microsoft’s actions adversely effect competition and innovation? Does this show evidence of harm to consumers?

Microsoft’s actions adversely affects competition and innovation by it's restrictive contracts. Microsoft reduces the ability and incentive of OEM's to innovate and differentiate their products in ways that appeals to a multitude of consumers. This impairs the ability of Microsoft competitors who develop new products from marketing them to customers. These results show that Microsoft's actions did likely have negative effects on consumers of personal computers and software.

Microsoft won the lawsuit. Their team of lawyers found a loophole in the injunction made against them. They argued that the court “drastically altered the scope of liability.” Essentially, Microsoft argued that the penalty or judgment filed against them was too harsh and offered no room for a viable solution. The outcome of the appeal eventually ended in the Department of Justice and Microsoft coming to a settlement.

The government and maybe the consumer lost. They lost because, even though there is the option to buy different brand software, most programs are tailored to be most functional with Microsoft.

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