Question

124 BOX 5.2 WINDOWS CLEANING Network effects It is these negative network effects that have led to Microsoft being under seemingly constant investigation by competition authorities for over two decades. By controlling the Windows operating software, Microsoft attempted to force its own Internet browser, Internet Explorer, on to consumers and computer manufacturers and this led to Microsoft being acoused of abusing its market power and seeking to crush its rivals. Microsoft is a vertically integrated firm (see page 87), with a dominant position in the operating system market (.e. Windows) and in certain application software (Office and Windows Media Player markets. It has built this position by creating networks of users, which bring both benefits and costs to society. Network economies arise when consumers of a product benefit from it being used by other consumers. In the case of Microsoft's products, firms benefit from lower training costs because individuals who have learnt to use Microsoft products elsewhere can be readily absorbed into the firm, Individuals benefit too because they do not have to learn to use new software when they move to another organisation and the learning costs are fairly low as a new version of the software is introduced. The negative aspect of developing strong networks is that users can get 'locked in' to using the software and become reluctant to switch to alternative systems. Protecting the network is vital to Microsoft's competitive edge. An operating system attracts software developed around that operating system, thereby discouraging new competition since any alternative faces not only the challenge of creating a better operating system but competing against a whole array of already existing software applications. These so-called 'network effects' give an incredible anti-competitive edge to companies like Microsoft that control so many different parts of the network. US and EU investigations Interest in Microsoft's practices began in 1991, with a Federal Trade Commission inquiry into its monopoly abuse of the PC operating system market. However, perhaps the most famous investigation began on 18 May 1998, when the US Justice Department alleged that Microsoft had committed the following anti-competitive actions: Microsoft attempted to collude with Netscape Communications to divide the Internet browser market. Netscape Communications refused, I Microsoft had forced personal computer manufacturers to install Internet Explorer in order to obtain a Windows operating licence. Microsoft insisted that PC manufacturers conformed to a Microsoft front screen for Windows. This included specified icons, one of which was Microsoft's Internet Explorer. Definition Network economies The benefits to consumers of having a network of other people using the same product or service. N Newman, from MS Word to MS world: how Microt be building a global monopoly Net Action (1997)

1. In what ways was Microsoft’s behaviour (a) against the public interest; (b) in the public interest?

2. Being locked in to a product or technology is only a problem if such a product can be clearly shown to be inferior to an alternative. What difficulties might there be in establishing such a case?

etwork effects Microsoft is a vertically integrated firm (see page 87), with a dominant position in the operating system market (i.e. Windows) and in certain application software (Office and Windows Media Player) markets. It has built this position by creating networks of users, which bring both benefits and costs to society. Network economies arise when consumers of a product benefit from it being used by other consumers. In the case of Microsoft’s products, firms benefit from lower training costs because individuals who have learnt to use Microsoft products elsewhere can be readily absorbed into the firm. Individuals benefit too because they do not have to learn to use new software when they move to another organisation and the learning costs are fairly low as a new version of the software is introduced. The negative aspect of developing strong networks is that users can get ‘locked in’ to using the software and become reluctant to switch to alternative systems. Protecting the network is vital to Microsoft’s competitive edge. It is these negative network effects that have led to Microsoft being under seemingly constant investigation by competition authorities for over two decades. By controlling the Windows operating software, Microsoft attempted to force its own Internet browser, Internet Explorer, on to consumers and computer manufacturers and this led to Microsoft being accused of abusing its market power and seeking to crush its rivals. Us and EU investigations Interest in Microsoft’s practices began in 1991, with a Federal Trade Commission inquiry into its monopoly abuse of the PC operating system market. However, perhaps the most famous investigation began on 18 May 1998, when the US Justice Department alleged that Microsoft had committed the following anti-competitive actions: ■Microsoft attempted to collude with Netscape Communications to divide the Internet browser market. Netscape Communications refused. An operating system attracts software developed around that operating system, thereby discouraging new competition since any alternative faces not only the challenge of creating a better operating system but competing against a whole array of already existing software applications . . . These so-called ‘network effects’ give an incredible anti-competitive edge to companies like Microsoft that control so many different parts of the network.1
It is these negative network effects that have led to Microsoft being under seemingly constant investigation by competition authorities for over two decades. By controlling the Windows operating software, Microsoft attempted to force its own Internet browser, Internet Explorer, on to consumers and computer manufacturers and this led to Microsoft being accused of abusing its market power and seeking to crush its rivals. Us and EU investigations Interest in Microsoft’s practices began in 1991, with a Federal Trade Commission inquiry into its monopoly abuse of the PC operating system market. However, perhaps the most famous investigation began on 18 May 1998, when the US Justice Department alleged that Microsoft had committed the following anti-competitive actions:
-Microsoft attempted to collude with Netscape Communications to divide the Internet browser market. Netscape Communications refused.
-Microsoft had forced personal computer manufacturers to install Internet Explorer in order to obtain a Windows operating licence. -Microsoft insisted that PC manufacturers conformed to a Microsoft front screen for Windows. This included specified icons, one of which was Microsoft’s Internet Explorer
-It had set up reciprocal advertising arrangements with America’s largest Internet service providers, such as America Online (AOL). Here Microsoft would promote AOL via Windows. In return, AOL would not promote Netscape’s browsers.

One solution posed by Federal Judge Thomas Penfield Jackson in 2000 was that Microsoft be split into two companies. One would produce and market the Windows operating system; the other would produce and market the applications software, such as Microsoft Office and the Web browser, Internet Explorer. This was overturned on appeal in June 2001 and Microsoft agreed to provide technical information about Windows to other companies to foster competition. Also, Microsoft would not be allowed to retaliate against computer manufacturers that installed rival products or removed icons for Microsoft applications. Legal action against Microsoft was not confined to the USA. In March 2004, the European Commission fined Microsoft a record €497 million for abusing its monopoly position. It found that Microsoft had harmed competition in the media player market by bundling Windows Media Player with its operating system. Further, Microsoft had refused to supply information about its secret software code to suppliers of alternative network software at reasonable rates. Without it, firms that had purchased Windows Network servers would be solely tied in to Microsoft server software, discouraging the development of application software products by Microsoft’s rivals. In April 2006, Microsoft appealed the judgment, claiming that the EU’s ruling violated international law by forcing the company to share information with rivals. However, the Court of First Instance found in the Commission’s favour. Microsoft complied with the first ruling and un-bundled Windows Media Player from its operating systems. However, until October 2007, Microsoft continued to charge high royalty rates and fees for inter-operability information that would allow competitors to access the secret source code on the Windows Network System. As a result, in February 2008 the Commission penalised Microsoft a further €899 million for non-compliance with its 2004 decision and Microsoft became the first company in 50 years of EU competition policy to be fined for non-compliance with a Commission decision.2 An appeal was made, but Microsoft lost the case in 2012, though it did receive a reduced fine of €860 due to a ‘miscalculation’. Further cases against Microsoft arose in June 2009, when the Commission ordered Microsoft to un-bundle Internet Explorer from its new operating system, Windows 7. The Commission argued that un-bundling would increase competition and consumers would face more choice between Internet browsers.3 Microsoft did comply with the Commission, offering users an option of downloading one browser from a list of 12, including Mozilla Firefox, Google’s Chrome, Apple’s Safari and Opera. However, between May 2011 and July 2012, thousands of customers in Europe did not have this choice and so the European Commission imposed a €561 million fine on Microsoft.4 Microsoft was warned by the Commission about anticompetitive behaviour with its Windows 8 product and was told that severe penalties would be imposed if it broke the 2009 bundling agreement. Microsoft and the public interest These lawsuits raise an important issue: is Microsoft acting for or against the public interest? Clearly it has monopoly power and, as we have seen, this suggests an ability to raise prices, limit output and make supernormal profits. However, the competition authorities have never penalised Microsoft simply for possessing monopoly power. It has been fined when it has abused its market power, such as by raising barriers to entry and   restricting the opportunities for potential rival firms   to offer alternative products to customers, thereby restricting choice. Thus, it is not the monopoly   market structure that matters to competition   authorities, but the behaviour of the firm once it has monopoly power. In its defence, Microsoft has argued that it has continually sought to reinvest its profits in new product development and offered a number of innovative solutions over the past 30 years for individuals and businesses alike. Just think of all the versions of Windows and the ‘free updates’ there have been! Further, in an environment where technology is changing rapidly, Microsoft’s control over standards gives the user a measure of stability, knowing that any new products and applications will be compatible with existing ones. In other words, new software can be incorporated into existing systems. In this respect Microsoft can be viewed as operating in society’s interest. Also, Microsoft argues that it has a right to protect its in-house software code from competitors and receive a fair price for it. Indeed, it is a natural response for a firm to protect its intellectual property rights. Failure to do so could lead to the firm’s demise and stifle innovation. Challenges to Microsoft monopoly Microsoft is facing increasing competitive pressure, helped by the challenges from competition authorities. For example, Microsoft’s Internet Explorer had a market share of over 80 per cent in the early 2000s, but its desktop worldwide market share gradually fell and stabilised at around 50 per cent until falling to 44.8 per cent in February 2016. This happened as first Mozilla’s Firefox emerged, gaining a market share of 23.7 per cent in 2011, but this has slowly fallen to 11.7 per cent in February 2016, largely replaced by Google’s Chrome, whose share has increased from 11.2 per cent to 36.6 per cent over the same time period.5 There is also a growing challenge from other Internet firms, such as Google and Facebook, which have created enormous networks of users, who are then targeted with tailored adverts paid for by firms which want to reach these vast audiences. This is a very different business model from that of Microsoft and, as part of the desire to create large networks of users, free products are available that compete with those of Microsoft. For example, Google’s Google Docs and Apache’s Open Office both compete with Microsoft’s Office. Their market shares are growing, but still remain relatively small. market share of around 10 per cent leaves it significantly behind Microsoft. However, with the rise of tablet computers and smart phones, the market share of Google’s Linux open-source operating system, Android, is expected to grow significantly over the next few years, especially with the rise of tablets with detachable keyboards that double as a laptop.6 You might want to follow subsequent events as the news unfolds (see section A of the Hotlinks section of this book’s website for links to newspaper sites). ? Microsoft’s dominance has certainly been tested in many parts of the industry, but its market leading position for its various operating systems is still intact. The only real competitor for a standalone computer is Apple’s Mac but a market share of around 10 per cent leaves it significantly behind Microsoft. However, with the rise of tablet computers and smart phones, the market share of Google’s Linux open-source operating system, Android, is expected to grow significantly over the next few years, especially with the rise of tablets with detachable keyboards that double as a laptop.6 You might want to follow subsequent events as the news unfolds (see section A of the Hotlinks section of this book’s website for links to newspaper sites).

Answer 1

QUESTION NO 1)

PART A: The ways in which Microsoft against the public interest

Microsoft which has an eminent image in the minds of us has some advantages over it's competers in many ways, thought it's Monopoly is practiced over the other firms in many ways. It's monopoly includes it's ability to raise the price and to limit their work beyond the current scope of that of that project over many firms. It can also produce a super normal profit {abnormal profit} which means that the profit which is created over the normal profit being produce tho the capital.

And also we must consider the fact that the Microsoft has fined not only for it's monopoly but also it has charged for the inappropriate market practice or misuse of market buy creating some tackle over some new firms to produce or to market their products.

B: IN THE PUBLIC INTEREST

Microsoft argues that the profit created by them is not simple stocked in their hand instead of that they re-invest this profit for their product development. By supporting to this view they have argued for their innovative solutions that has created over the 30 years, for example the Windows new version that they have developed and make available for free update.

And also being a private firm it has the right to protect it's interest at any cost and to develop new projects to flourish their business.

QUESTION NO 2)

When we are adopted with a thing for years and we continuously for years we became expert with that particular thing and anybody can resolve the problems that met with that thing. Similarly Microsoft  which prevailed over the world for many years and we use it without any trouble like that if any new developer introduced a new system, it will take some time to flourish among our minds.

And in addition that the operating system may attract the Software formed around it and it results to discourage the competers. So it result in a situation in which the new firms who develop a new software has not only to develop a new operating system but also to create an alternative array for the whole existing systems and which cause the trouble.It is termed as "Networking effects".

Competition to a well developed and well structured existing framework is not that much easy and in such competition the new firm has to tackle a number of challenges come across.