DOJ Fishergreenspun.com : LUSENET : MS-DOJ : One Thread
Franklin M. Fisher is a professor of economics at the Massachusetts Institute of Technology. As the Department of Justices final witness, Professor Fisher draws on much of the prior testimony of industry executives to create an economic analysis of Microsofts anti-competitive conduct. Professor Fisher lays down the principal arguments against MS in this antitrust suit, the key argument being MSs unlawful extension and preservation of its operating systems monopoly. (12PM37) Professor Fishers testimony establishes that this case is primarily about defensive monopolization. MSs acts of offensive monopolization, attempted market allocation, predatory pricing, unlawful tying, and anti-competitive agreements should be evaluated in connection with MSs broader campaign to defend its operating system monopoly. (DT6133)
1. Overarching Theme: MS Extended And Protected Its OS Monopoly.
Sherman Act '2 claim (defensive and offensive monopolization).
According to the Supreme Court in Grinnell, the offense of monopolization under Sherman Act '2 requires: 1) monopoly power in the relevant market, and 2) an act of monopolization. Early in his direct testimony, Professor Fisher defines his understanding of monopoly power (the hallmark of monopoly power is the absence or ineffectiveness of competitive constraints on price, output, product decisions, and quality, DT632) and anti-competitive act (measures that are more restrictive of competition than necessary, or actions that would not be profitable without their effect on competition, DT646) for the purposes of his later analysis.
Professor Fisher concludes that MS possesses monopoly power in the market for operating systems for Intel-compatible desktop personal computers. (DT662) He finds that there are no reasonable substitutes for MS Windows, and he cites testimony from numerous OEM representatives to buttress his finding. (DT662-3). He notes that MSs share of personal computer operating systems is very high and has remained stable over time, (DT664) and he discusses how network effects, economies of scale, and the application programming barrier to entry reinforce MSs large market share and monopoly power. (DT665-71) He also cites the testimony of Joachim Kempin, Senior VP of OEM Sales at MS, (in setting the royalty rates for Windows 98, Kempin never thought about looking at other vendors) as evidence that other OS vendors impose no material constraint on the price of Windows. (DT672)
Professor Fisher finds that, in the absence of intervention, MS will obtain monopoly power in the market for Internet browsers. (DT679) In specifying that Internet browsers are the relevant market, he states that there is substantial demand for browsers that is separate from the demand for operating systems. He points out that browsers are distributed separately from the OS by ISPs and by retailers. He also concludes that there is demand for operating systems without browsers and for operating systems with a choice of browsers. (DT680) (These findings are significant for the tying claim delineated below. See Jefferson Parish (test for separate products is whether there is enough demand for the tied product separately).) Lastly, he identifies network effects and MSs bundling and free distribution of IE as barriers to entry that would facilitate MSs monopoly power in the Internet browser market. (DT681)
Professor Fisher concludes that MS engaged in anti-competitive conduct (or an act of monopolization, Grinnell) when it embarked on its plan to extinguish the browser threat to Windows by extending its monopoly control to the browser market. (DT691-6) He uses prior testimony to argue that MS recognized that its Windows monopoly was threatened by Internet browsers that could support operating system independent applications. (DT682-90) Professor Fisher finds that, taken together, MSs actions against the browser threat are anti-competitive and that MS would not have undertaken them except to exclude and foreclose competition. (DT696)
2. MS Attempted To Allocate Markets.
Sherman Act '1 (per se illegal market division) and '2 (acts of monopolization by a monopolist) claims.
Professor Fisher asserts that MSs activities to prevent the emergence of the browser as a platform threat are part of a consistent course of conduct to prevent other firms from developing any platform software that threatens the Windows operating system monopoly. (DT697) He refers to the infamous Netscape meeting where MS proposed that the competitors divide the browser market and, if Netscape refused, MS would crush them. (DT698-108) Professor Fisher notes that MSs attempt to enter a horizontal market allocation agreement is significant for two reasons: 1) If Netscape had agreed, MS would have succeeded in eliminating its only serious browser competitor and in monopolizing the market for browsers; and 2) The attempt helps reveal the anti-competitive purpose and effect of the actions MS took after Netscape refused to divide the market. (DT699-100)
Professor Fisher finds that MS engaged in similar anti-competitive conduct in its relations with Intel regarding NSP, Netscape, and Java and with Apple regarding QuickTime. (DT6109-16) Professor Fisher underscores the pattern of behavior where MS is confronted with a competitor who is writing platform-level software to which application programs could be written. MS, recognizing the threat to the applications programming barrier to entry and the consequent threat to its operating system monopoly, would first attempt to persuade the competitor to withdraw from MSs product space (similar to a market allocation attempt) and second threaten action to punish the competitor even if such action did not make sense from a business standpoint. (with Intel, no microprocessor support; with Apple, no Mac Office development) (DT6117-18) According to Professor Fisher, taking action that does not make sense from a business standpoint in order to restrict competition (and thereby profit from the reduced competition) is the essence of predatory anti-competitive conduct. (DT6119)
3. MS Engaged In Predatory Pricing To Exclude Competition.
Sherman Act '2 claims (predatory pricing and acts of monopolization by a monopolist).
According to the Supreme Court in Brooke Group, the offense of predatory pricing under Sherman Act '2 requires: 1) price is below cost; and 2) a reasonable prospect of recouping the investment in below-cost prices.
Professor Fisher calls MSs browser development undertaking a textbook example of predatory conduct. (DT6120) Despite huge browser-related costs (tens of millions of dollars a year, DT6122), MS distributed its browser at a negative price. The IE browser was not only given away free; companies were also paid money and given valuable concessions to accept, use, distribute, and promote IE. (DT6123) MS has incurred what Professor Fisher terms an opportunity cost, the cost of foregoing the opportunity to earn money from the sale of desktop space, in order to secure commitments to distribute its browser. (DT6130) Professor Fisher stresses that, without the gain to MS that results from preserving its highly profitable OS monopoly and from monopolizing the browser market, MSs conduct does not make sense from a business standpoint. (DT6127-8) MS has priced below cost, and MS will recoup foregone profits through the preservation of its OS monopoly and through the acquisition of an Internet browser monopoly. (DT6129)
4. MS Engaged in Contractual and Technological Tying To Exclude Competition.
Clayton Act '3 (tying) and Sherman Act '2 (acts of monopolization by a monopolist) claims.
According to the majority opinion in Jefferson Parish, a successful tying claim requires: 1) separate tied and tying products; 2) market power in the tying market such that the tie forces buyers to take the tied product and forecloses competition in the tied product market. The concurring opinion written by Justice OConnor puts forth a different test: 1) market power in the tying market; 2) a substantial threat that the tying seller will acquire market power in the tied product market; and 3) a coherent economic basis for treating the tying and tied products as distinct, such that consumers would wish to purchase the tied product separately without also purchasing the tying product. Justice OConnor would then balance the anti-competitive harm against efficiencies.
Professor Fishers testimony addresses the tying concerns of both the majority and the concurring opinions in Jefferson Parish. He establishes the browser as a separate product from the operating system under the majoritys separate demand test. He stresses that there is demand for browsers separate from the demand for operating systems (DT6142), and he notes that IE was not originally bundled with the OS in either the retail or the OEM channels. (DT6141) He also cites OEM testimony that MS _forces_ them to include IE on the desktop or in the Start menu despite OEM interest in removing IE. (DT6147) He highlights that MS decided to tie the browser to the OS not to achieve efficiencies, but to foreclose competition in the tied product market. (DT6143)
Professor Fisher addresses the first two prongs of OConnor's test in his discussion of MSs monopoly power in the OS market and its likely monopoly power in the Internet browser market absent intervention. (DT662,79) He also identifies a compelling economic justification for treating the browser and the OS as separate products: giving OEMs and users a choice of browsers. Professor Fisher finds that MSs tying arrangement results in significant exclusionary effect that ensures that IE is the only browser on most PCs shipped by OEMs. (DT6152) The exclusionary effect stems from the fact that most OEMs prefer to load only one browser to avoid user confusion and the resulting consumer support costs, and to avoid increased testing costs. (DT6150)
Professor Fisher also speaks to Judge Walds concern that monopolists could merely commingle lines of code in order to integrate two separate products and evade tying scrutiny. Professor Fisher emphasizes that, even if two products as designed cannot readily be separated, the technological tying of the two can raise the same anti-competitive concerns that contractual tying would raise. (DT6156) He argues that, if combining two products in a way that produces plausible efficiencies, or that makes it difficult to separate the products, were an absolute defense to a claim that the combination was anti-competitive, software commerce would be essentially immune from tying scrutiny. (DT6158) Virtually every product design, particularly in the area of computer software, can make a plausible claim for some efficiency or benefit. (DT6157)
Professor Fisher dismisses as pretext MSs efficiency claim that it must force OEMs to take IE because the absence of IE may undermine the quality of the OS, to the detriment of users. (DT6159) He cites Professor Feltons testimony that it is possible to construct a mechanism for removing web browsing from Windows 98 without loss of stability or functionality. (DT6160-1) Professor Fisher also notes that MS has inconsistently enforced its requirement that IE be on the desktop; presumably MS would not allow exceptions if they undermined the quality of the OS. (DT6162-3) He rejects the MS argument that bundling IE is necessary to provide a uniform platform for software developers. Given the different versions of Windows and IE in the marketplace, developers must redistribute the necessary IE code anyway to ensure the proper version of the necessary DLL or file is present to support their applications. (DT6165) Lastly, Professor Fisher concludes that, given that the purpose and effect of MSs tying is to weaken browser competition to protect MSs OS monopoly, the significant anti-competitive effects outweigh the technological benefits which appear to be small or nonexistent. (DT6158)
5. MS Engaged in Anti-Competitive Agreements with ISPs, OLSs, and ICPs.
Sherman Act '2 claim (acts of monopolization by a monopolist).
Professor Fisher describes MSs agreements with ISPs, OLSs, and ICPs that boycott or disfavor Netscape and other browsers (including agreements not to promote, distribute, use or pay for Netscapes browser - or to do so only on less favored terms), thereby further excluding competition. (DT6169-199) MS used the strong demand for access to its Windows OS in order to extract promises from the services not to deal or to deal unfavorably with Netscape. (DT6176) These anti-competitive agreements relegated browser competitors to distribution through decidedly inferior channels, thereby foreclosing competitors by requiring them to use more costly and less efficient channels. (DT6191) Professor Fisher says that the decision to grant AOL access to Windows was basically suicide for MSN, but Bill Gates decided that the lost opportunity was less important than its over-riding goal of winning the browser battle and protecting its core monopoly. (DT6181) Absent their anti-competitive effect, these agreements do not make sense from a business standpoint. Rather than trading desktop space for financial remuneration or internal gain, MS placed requirements on content providers that reduced the ability of browser competitors to distribute and promote their products through the leading ISPs, OLSs, and ICPs. Professor Fisher concludes that, regardless of whether such provisions would be anti-competitive in themselves if put in place by a company with a small share of the OS market, they are certainly anti-competitive when MS uses them to protect its dominant position in the OS market. (DT6192)
6. The Anti-Competitive Effects of MSs Conduct.
Professor Fisher uses prior testimony and statistical data from user studies to contend that MSs conduct has 1) prevented browser competitors from effectively competing on the merits for new business, 2) artificially raised barriers to entry into both the browser and OS markets, 3) preserved MSs OS monopoly, and 4) threatens to monopolize the browser market. (DT6210-40)
Professor Fisher underscores the significance of new installations given that the vast majority of browser users tend to stay with the browser they receive on their PC or from their ISP. (DT6211) While users can download browsers for free from the Internet, they prefer not to because they pay in terms of time and trouble to do so. (DT6217) The same is true for browser distribution by CD-ROM in the mail; it requires time and trouble for installation. (DT6222) Given the costs of these two distribution channels and the prevalence of MSs restrictive agreements with OEMs and ISPs, MS has created barriers to entry which ensure that virtually all new users receive IE. MS effectively excludes Netscape and other browser competitors from the market, limiting them to a declining share of existing users. (DT6212)
Statistical data from studies of user browsing behavior confirm this anti-competitive effect. Professor Fisher cites a MS document which found that at year end 1997 MS enjoyed a 94 percent weighted average share of browser shipments by ISPs who agreed to make IE their default browser, compared with a 14 percent weighted average share of browser shipments by ISPs who did not make IE their default browser. MSs weighted average share of browser usage by subscribers to ISPs who made IE their default browser was over 60 percent; MSs weighted average share of browser usage by subscribers to ISPs who did not make IE their default was less than 20 percent. (DT6224)
Professor Fisher also examines the difference in IE usage across subscribers of different ISPs by looking at IEs share of hits as reported by AdKnowledge, Inc., a web marketing company. MSs share of IE Parity browser usage (ISPs whose browser choice was not contractually restricted) rose in twenty months from 20 percent to just under 30 percent. Professor Fisher calls the IE Parity group the control group which reflects the IE share increase due to competition on the merits. By contrast, MSs share of all other ISPs rose from 20 percent to 49 percent. In particular, for AOL and CompuServe, MSs share rose from just over 20 percent to over 87 percent. (DT6228)
Professor Fisher finds that MSs incremental share (change in IE hits divided by the change in all hits) is even higher than its market share (calculated above). MS estimated that its incremental share of users for the last six months of 1997 was 57 percent. The AdKnowledge data confirms that MSs incremental share was 57 percent for the twenty months ending in August 1998. By contrast, Netscapes incremental share was 40 percent for the same period. (DT6233) Professor Fisher claims that incremental share is even more important than market share because it reflects industry trends (5PM66) which, in turn, influence developer decisions regarding which browser technology to accommodate (DT6239, 11PM81) and OEM, ISP, and ICP decisions regarding exclusivity agreements with MS. (DT6234) To the extent that industry participants exclusively embrace the IE technology, they generate a cycle that reinforces IEs market power in the browser market. (DT6239)
Professor Fisher relies on this data and on the substantial barriers to entry in the browser market to conclude that, absent a legal intervention, MS will obtain monopoly power in the Internet browser market. He further states that MSs dominance in the Internet browser market would reinforce and has already reinforced MSs monopoly over PC operating systems. (DT6238-42)
1. MS Tries To Generally Undermine Professor Fishers Expert Testimony.
MS stresses that Professor Fishers testimony needed correction. (5PM14-5) MS suggests that the AdKnowledge data is flawed because it is not verified by other data compilation firms, (5PM10-1) it doesnt distinguish between IE and browsers that use IE technology but no IE shell, (5PM20) it doesnt count individual users, but rather hits, (5PM22-3) and it undercounts AOL users because of caching. (5PM37) MS highlights Professor Fishers lack of familiarity with computer technology prior to the case. (5PM81-91) MS also calls Professor Fisher Cravath, Swaine & Moores in-house economist. (5PM92)
MS does not advance far in its attempt to injure Professor Fishers credibility; rather many of MSs questions seem petty. The fact that Professor Fisher lacks intimate knowledge of the computer industry is irrelevant given that he speaks as an economist, not a technical expert. However, MS does serve a blow to Professor Fishers economic analysis by suggesting that he did not independently investigate market conditions. Instead, MS suggests that Professor Fisher merely used the biased data and quotations that the DOJ provided to both him and Dr. Warren-Boulton. (7AM77, 7AM79, 7PM11)
Professor Fisher responds well, however, to questions regarding the integrity of the data he relied on. He says that, as far as he knows, AdKnowledge is the only firm that has data that would allow an analysis of browser-usage share. (5PM16) MSs own analysis, which relies on data other than AdKnowledge Data, produces the same numbers. (5PM12, 11PM74) The share of browsers using IE technology is more important than the share of browsers called IE because Professor Fisher is only interested in the extent to which IE technology is distributed to thwart the Netscape platform threat. (7PM37, 12AM37) The use of hits data, rather than user or shipment data is not significant unless there is any reason to believe that there is a systematic, browsing behavioral difference between Netscape and IE users. (5PM23, 11PM63-4) Lastly, Professor Fisher acknowledges the AOL caching problem, but this data problem provides little aid to MSs case because it means the data underestimates the IE share. (11PM67)
2. MS Tries To Undermine Professor Fishers Conclusion That The Windows OS and IE Have Significant Market, Even Monopoly Power.
MS tries to create a broad market for Internet browsers by including hand-held internet access devices and set-top boxes. MS suggests that these devices would reduce demand for PC operating systems and browsers, thus reducing the market power of Windows and IE. (6AM13) MS also implies that the new Netscape-Sun-AOL arrangement disproves Professor Fishers theory regarding MSs likely monopoly in the Internet browser market. (6AM21) Lastly, MS hints that the network computing model poses a threat to the personal computer and thus diminishes MSs market power in PC operating systems. (6AM19)
Professor Fisher responds well to these challenges. He notes that hand-held and set-top boxes are not substitutes for PCs, and thus the operating system and browsing functionality they provide could never compete with Windows or IE or affect their monopoly power. (12AM7) Nor could the network computing model affect Windowss monopoly power because, again, the relevant market is the PC OS market, and a network computer OS should not be included in that market. (12AM8-9) Professor Fisher also provides compelling economic reasons for believing that AOL will not abandon IE and promote Netscape, (6AM21-3) and then he stresses that the possibility of a long run threat to MSs monopoly power does not change the fact that MS took successful anti-competitive actions to eliminate the Netscape browser threat to buttress its monopoly. (6AM28,34) The DOJs case was also fortuitously advanced by Judge Jacksons discovery of a Washington Post Op-Ed piece which indicated that AOL has no intention of competing with MS. (6AM45)
3. MS Tries To Undermine Professor Fishers Predatory Pricing Conclusions.
MS contends that in the software industry companies frequently spend tens of millions of dollars to distribute free software and to convince companies to take their free software. The reason they do it is to increase demand for other products, including their core offerings. Adobe Acrobat is an example of such a phenomenon. (7AM42) MS also claims that the expression to cut off a competitors air supply to be relatively common parlance in Silicon Valley. (7AM63)
While Professor Fisher concedes that companies sometimes provide free software to expand a market or to sell ancillary products, MS has not done that. (7AM44-5) He says that MSs actions as well as its internal correspondence (cut off a competitors air supply) are inconsistent with an ancillary revenue theory. (7AM50) He points out that increased Windows demand could be achieved through the distribution of browsers that are not IE browsers (i.e. through the distribution of Netscape browsers). And he notes that its not necessarily profitable to give away IE for free because the increased revenue from increased Windows demand may not outweigh the cost of IE. (7AM46) MS does not make much headway with the ancillary revenue theory, but MS does get Professor Fisher to acknowledge that a monopolist would be wise to restrict its language in characterizing its actions lest they be misunderstood. (7AM66)
4. MS Tries To Undermine Professor Fishers Tying Claim.
MS argues that tying IE and Windows provides beneficial efficiencies. For example, the potential customers of MSs OS system products that MS talked to consistently said that they regarded the integration of IE functionality into Windows as one of the most attractive features of MSs products. (7AM69) MS highlighted the functionality loss that occurred after Professor Felten removed IE access from Windows 98, namely the difficulties in getting Windows Update and Internet Help. (7AM47-8)
Again, MS does not succeed in advancing its claim. Professor Fisher distinguishes between consumer perception of seamless integration and welding, or interweaved code. (7AM71-2) The former benefits consumers, while the latter may not. He concedes that MS is competent to decide whether its in its business interests to interweave code, but MS cannot consider the preservation of its OS monopoly as part of those legitimate business interests. (7AM72-3) Professor Fisher also emphasizes the difference between considering the functionality loss due to Professor Feltons program and considering how MS could have designed Windows 98 to achieve essentially the same ends of seamless integration in a way less restrictive to competition. (7AM48)
-- Anonymous, January 19, 1999