Economics Term Paper on Case Analysis
When Baye and Schoten (1994) wrote the case, ‘Strategies Used by Microsoft to Leverage its Monopoly Position in Operating Systems to Internet Browser Markets’ their main purpose was to provide useful information on monopoly building purely for classroom contexts. The case was never intended for any real legal or economic fact. Furthermore, the authors decided to modify the actual public copy of the complaint initially filed in the Civil Action No. 94- 1546 on 15th July 1994. The actual case was United States of America v. Microsoft Corporation. The case is of high stake especially that it involves the world’s biggest supplier of software used in personal computers; Microsoft Corporation. It is interesting to catch a glimpse into the strategies used my Microsoft Corporation to become the biggest supplier of computer software through the use of dubious and unscrupulous ways. The case creates such great interest when it becomes apparent that Microsoft Corporation may have used anti-competitive strategies to unlawfully control the lucrative computer software industry.
Discussion of the Case
Primary barrier to entry in O.S Market and Netscape’s strategy
The market for PC operating systems has high barriers to entry. The main barrier for many players to enter into this market is the fact that many software applications require an operating system to run and this is makes the operating system attractive to the users. Currently, most of the software applications have primarily been written to run on windows operating system. Therefore, it becomes extremely difficult especially in terms of cost, and time for alternative operating systems to be used by end users.
In spite of the monopoly created by Microsoft Corporation in the PC operating system supply, there is an emerging serious threat brought about by the internet (Baye & Scholten, 1994). There has been a development of internet browsers with specialized software programs capable of allowing PC users to locate and access as well as manipulate applications and content available in the web. Netscape is such a serious new competitor to Microsoft Corporation as it is threatening to remove the monopoly status enjoyed by Microsoft Corporation. The trick being used by Netscape is that of applying a multi-platform strategy moving applications programming strategy to the user to allow customization of the operating system.
Microsoft’s pricing and distribution strategy for internet explorer compared to Netscape’s
In an attempt to finish the possible competition brought about by Netscape, Microsoft Corporation undertook diverse measures aimed at maintaining the status quo. The first strategy was an attempt to strike an agreement with Netscape on how they could control the market. However, the offer was turned down by Netscape noticing the illegality and malpractice nature of Microsoft Corporation (Baye & Scholten, 1994). However, Microsoft Corporation did not stop there; it went on to utilize very uncompetitive measures aimed at continuing its dominance in the industry. The secret towards the maintenance of Microsoft’s dominance was based on distribution and pricing strategy.
The massive resources within Microsoft’s disposal came in handy into facilitating Microsoft Corporation to kill the emerging competition and threat by Netscape. Microsoft spent millions of dollars in developing, testing and promoting internet explorer. Internet Explorer browser is actually distributed my manufacturers of personal computers alongside windows. Being the sole main supplier of operating system supplier to many original equipment manufacturers, Microsoft made it mandatory for the manufacturers to install internet explorer and distribute it freely.
The form of strategy adopted by Microsoft Corporation in the distribution and sale of internet explorer was totally meant to completely choke Netscape from taking over the industry. Indeed, while Netscape’s Navigator was being sold to end users, Microsoft’s internet explorer was being distributed free of charge. Microsoft even went on to pay certain customers to use internet explorer as preferred browser. On its part, Microsoft Corporation was not ready to compete with Netscape on the basis of merit; rather, it wanted to eliminate any form of competition from threatening newcomers such as Netscape who had a more quality web browser in comparison to internet explorer.
Internet browser market and market for operating system
The internet browser market is a separate product market with the market for operating systems (Baye & Scholten, 1994). Microsoft Corporation has had dominance in the supply of operating systems. However, the corporation also wanted to dominate the internet browser market by engaging into uncompetitive practices aimed at eliminating competitors such as Netscape. Indeed, companies involved in the provision of internet browsers operate in a totally different products market with those providing operating systems to PC users. Consequently, it is efficient when a company supplies internet browsers and operating systems separately.
In the case of Microsoft internet browser, it is often available and distributed separately to end users using diverse operating systems although it is still a requirement for original equipment manufacturers using Microsoft’s Windows to install internet explorer alongside the operating system. Therefore, the practice by Microsoft to force original equipment manufacturers to preinstall internet browser alongside Windows operating system is an attempt to use its success in the provision of operating systems in creating a monopoly position in the internet browser market. Indeed, there are significant advantages for Microsoft when it ties its success in operating system into the growth of internet browser. This means that the company does not compete with other providers of internet browsers on merit basis; rather the massive size and availability of resources is used to eliminate competition (Geer et al., 2003).
Control of start-up sequence and desktop screen in leveraging the use of internet explorer
The control of start-up sequence and desktop control screen by Microsoft has helped it leverage internet providers to use internet explorer. To start with, windows is the start-up screen seen on the desktop of many PCs. The requirement by Microsoft to OEMs requiring a license from Microsoft to install internet explorer with windows operating system means that internet providers have to use internet explorer. It is now a tradition for all PCs to be built with Windows irrespective of the OEM Company involved (Baye & Scholten, 1994). The users of theses PCs are presented with similar screens and software directly specified by Microsoft. This has meant that the restrictive boot-up and agreements on desktop screen have deprived of OEMs the freedom of using other internet browsers or other types of software not recommended by Microsoft.
Additionally, the OEMs do not have the freedom to choose among the various internet browsers available to the advantage of their customers. Internet Service Providers (ISPs) have also been curtailed by the restrictive agreements by Microsoft pertaining to placement of desktop boot-up sequence and display. The restrictions by Microsoft have also required Internet Content Providers (ICPs) to exclusively promote the use of internet explorer due to the restrictions from distributing or promoting other internet browsers. The outcome has been a continuous creation of monopoly by Microsoft in the provision of operating systems and internet browsers through measures aimed at eliminating competition from worthy providers of internet browsers. The substantial reduction in the incentives for OEMs into using other internet browsers makes it difficult for competitors to have a fair ground against Microsoft.
The strategy used by Microsoft, though blatantly uncompetitive, has been effective in maintaining its monopoly status. Through the agreements entered into between Microsoft and ISPs, there were restrictive measures on the installation of internet explorer alongside Windows operating system. This has had the effect of making internet explorer as the primary internet browser supplied and promoted by ISPs. In fact, the agreements are so restrictive that the ISPs are prohibited from mentioning to their subscribers the existence, compatibility or availability of other forms of internet browsers. Furthermore, it is a requirement for ISPs to use internet explorer on their sites. Indeed, certain Microsoft-specific extensions of programming have been included in these sites to make them better when viewed using internet explorer.
Adverse effects of Microsoft’s actions on innovation and competition
In a collective manner, the contracts signed by Microsoft with various industry players such as ISPs, ICPs and OEMs may have had unreasonable restrictions aimed at eliminating any form of competition (Baye & Scholten, 1994). Indeed, the agreements continue to inflict major challenges to other players in the internet browser industry from having a fair ground to compete based on merit. There is an artificial increase in the market share of internet explorer without necessarily increase in user demand of the browser. Microsoft’s actions are totally against the spirit of healthy competition in the provision of internet browsers. Additionally, the practices are likely to make internet explorer the permanent browser on the grounds of manipulation and restrictive measures imposed by Microsoft to OEMs, ICPs and ISPs. The illegal restrictions by Microsoft are meant to kill the spirit of competition through promotion of internet explorer to internet users as an imposition rather than free choice.
Competition and innovation are important for the continued provision of high quality products to customers. In the absence of competitive forces in the market, there is a possibility of consumer misuse by the sole supplier of certain important products. This is true with Microsoft Corporation. Microsoft has put considerable concerted effort towards elimination of competition in the market for internet browser. By using its vast resources and powerful market control in the OS market, it has created artificial market dominance for its internet browser software- internet explorer. Microsoft has undertaken measures to continue its monopoly status on the provision of operating systems as well as the market for internet browsers (McKenzie & Shughart, 1998). However, Microsoft sought to dominate the internet browser market through illegal practices of monopoly building without integrating innovation. This has had the effect of crating high barriers to entry for other innovative players. Consequently, consumers have been disadvantaged by the practices of Microsoft. Indeed, this practice robs off consumers the right to use the browser of their choice based on effectiveness and merit.
The practices of Microsoft discourage innovation through numerous ways such as impairment of the need to undertake research and development by competitors in producing better browsers, impairing the competitor’s ability to obtain adequate financing to undertake research and development, inhibiting competitors from marketing better innovative products, tying OEMs into using its software through prohibitive agreements. Furthermore, Microsoft has reduced competition and the urge to be innovative often brought about in a competitive market.
Monopoly building by Microsoft Corporation demonstrates a tendency towards creation of illegal practices. The dominance by Microsoft Corporation in the PC software supply has been maintained by malpractices that have had an effect of creating huge barriers to entry by other players. Microsoft Corporation has undertaken measures that have greatly hampered innovation to the disadvantage of consumers of software products.
Current status of the firms
Presently, Microsoft Corporation does not control the software industry of the world like it used to few years ago. Indeed, other competitors with high level of innovation such as Apple have emerged and turned around the competitive nature of the software industry (National Traders Association, 2013). Nevertheless, Microsoft Corporation continues to be relevant in the global software market with numerous releases of its diverse versions of Windows operating system. In the recent past, the corporation ventured into the computer hardware market with its first release of Surface tablet. The objective was to unsettle the dominance of Apple’s iPad. Nevertheless, the Surface tablet was unable to attract immense sales due to the let down on consumers as the tablet could not run traditional Windows applications. Competition continues to be rife in the software market with various strong players emerging in the recent past such as Apple’s MacOS and the continued growth of Netscape’s Mozilla internet browser. Therefore, Microsoft Corporation is no longer a monopoly it used to be.
Baye, M. & Scholten, P. (1994). Strategies Used by Microsoft to Leverage its Monopoly Position in Operating Systems to Internet Browser Markets. Managerial Economics and Business Strategy, 6e, 1-24.
Geer, D., Bace, R., Gutmann, P., Metzger, P., Pfleeger, C., Quarterman, J. & Schneier, B. (2003). CyberInsecurity: The Cost of Monopoly. How the Dominance of Microsoft’s Products poses a Risk to Security. Computers and Communications Industry Association.
McKenzie, B.R. & Shughart, F.W. (1998). Is Microsoft a Monopolist? The Independent Review, Journal of Political Economy, 3(2), 1-50.
National Traders Association. (2013). Research Report on Microsoft Corporation. National Traders Association.
Economics Term Paper on Case Analysis