Information Technology and the Law

It’s easy to hate Microsoft. They’re the giant. They’ve got all of the market share and the corporate arrogance to go along with it. But did you ever wonder what would have happened had Microsoft represented themselves better? What if Bill Gates had been called as a witness and had given a deposition that seemed like something closer to the truth? What if Microsoft had employed no obviously doctored demos? What if none of these damning corporate emails existed and instead they were damning conference calls or private conversations which could never be recovered? Clearly, this is not what happened, but I wonder if the outcome would have been the same in such a case.

That said, I would like to take a quick at the outcome, the settlement between Microsoft and the United States government. The settlement prohibits Microsoft from several actions. Microsoft can no longer retaliate against an Original Equipment Computer Manufacturer (OEM) who has taken steps to promote or foster competition with respect to the operating system that their machines run, charge varying prices to different OEM companies, or restrict the ability of OEM companies to include and/or promote other “middleware” products than Internet Explorer. Microsoft now has to make it easier for competitors to interoperate with Windows by releasing their API to the public. Microsoft cannot retaliate against manufacturers and distributors who try to compete. Microsoft cannot force manufacturers and distributors into exclusivity deals or ask that competing products be excluded from their installations. Microsoft must allow end users and OEM companies to easily remove Microsoft “Middleware” products and to replace them with competing products using fairly standard mechanisms.

The settlement then goes on to describe how the plaintiff, the U.S. government will be responsible for holding Microsoft accountable, as well as the process for appointing a Technical committee (which will be composed of individuals of varying interests to keep it fair), the process for establishing a Microsoft Internal Compliance Officer position, and the Voluntary Dispute Resolution process by which the Technical Committee and Microsoft Internal Compliance Officer interact to ensure that Microsoft sticks to the measures described in the settlement.

All in all, the settlement seems pretty fair to me. It does not at all cripple Microsoft’s business, but aims to take steps to allow competitors entry into the lucrative market. I guess my only question would be how well it is working. We are now four years removed from the 2001 settlement and [speaking very unscientifically] I cannot say that I see much of a difference in the market, even if Microsoft’s business practices have changed.

As others (see this) have pointed out, bundling a web browser and an operating system can create efficiencies and yield benefits to the consumer. However, the court ultimately decided that Microsoft was wrong in bundling the two because it was destroying competition and thereby harming consumers. By bundling Windows and IE, Microsoft helped prevent middleware products such as Netscape Navigator and Java from becoming widely used by developers as a platform for applications, and by doing so, it prevented competition within the operating system market, since Windows has many more applications written for it than any other operating system. Therefore, in its decision, the court was not singling out web browsers as the only component of an operating system that must be removable. That the court decided that IE should be unbundled from Windows resulted from the specific facts of the case, and these facts indicated that the act of tying the two together would ultimately harm competition in the OS market.

So no, it was not normatively wrong for Microsoft to bundle the two together. In fact, because of the potential benefits to the consumer, it would have been entirely possible if Microsoft had tied the two together for those very reasons. In other words, they might have decided to bundle the two for technological reasons only, and not in order to prevent competition. Unfortunately, I don’t think a good intention would have changed whether or not the Sherman Act was being violated. However, Microsoft was well aware of the threat to their monopoly on the OS market, and acted accordingly, whether responsibly or irresponsibly I will not comment on.

Often in antitrust cases there is a fine line between exclusion and competition, and this case demonstrates that point. Microsoft’s action could be viewed as competitive since the bundling might have yielded benefits to the consumer. Its action can also be viewed as anticompetitive. Neither of these views is necessarily wrong, and in fact both may be correct. Yet Microsoft stated in its appeal that it did not engage in any exclusionary conduct. However, it seems pretty obvious how the tying of IE and Windows could potentially harm the OS market, and since Microsoft clearly tied the two together to protect its monopoly, Microsoft most certainly did engage in exclusionary conduct.

Perhaps if Microsoft had provided a better defense for why the two were integrated, it would have stood a better chance in court. But even then, the general incompetence of Microsoft’s witnesses wouldn’t have lent much credibility to those appeals. Especially when you get one of the executives admitting on the stand that prices for Windows are chosen without consideration of the prices of competitor’s products.

Microsoft was right to recognize the importance of the browser, and made a prudent business choice in pursuing the market. The browser provides several key opportunities for greater business profit and influence on the Internet. Without dwelling on the specific browser shares (which are difficult to measure), I will comment on the influence that market share provides a browser developer.

Home page

A user’s home page on the web has many parallels to the desktop initially displayed upon booting a computer. Both provide a starting point from which users begin their work, and both provide an opportunity to guide a user’s mouse to choose certain services. In both cases, a novice might not be able to (or not think to) control the display. When using others’ computers, it sometimes boggles my mind how many people still have IE set to msn.com upon startup, and I doubt many of these people considered the possible portals before deciding to settle on msn. Setting the default home page is a very powerful means of making people default to other services (e.g., webmail or movie guides).

Applications/Extensions

Microsoft has shied away from using the browser as middleware, but Firefox provides a framework for extensions to browser functionality. While Microsoft prefers to maintain Windows as the standard for development, the Mozilla team aims to provide an architecture for adding Internet functionality (or a calendar) on top of their browser. While browser middleware has now arrived, it is perhaps been superseded by powerful web pages that handle features previously delegated to special applications. Wikis, project management tools, bug tracking, and many other tools provide web-based means for collaborating or even working by oneself. While this market segment escapes direct influence from browsers, it is yet impacted by standards.

Standards

While the World Wide Web Consortium has no authority as an Internet regulator, it plays a vital role in setting standards for Internet technology. Its recommendations ease web design, and provide browsers with a defined set of protocols to implement. Theoretically. Web designers love to complain of Microsoft’s poor job in adhering to the standards, making it a challenge to design pages that can accommodate both Internet Explorer and browsers that adhere to the standards. Unlike ICANN, the W3C attempts to be very open, such that anyone with enough money can join as a member and give input into the standardization process. This grants the body significant credibility in determining good standards for all web users. However, the companies with the largest users base (i.e., Microsoft) set the de-facto standard of how web pages must be designed in practice. They may choose to ignore standards so as to promote interaction with their online services, to the detriment of others. Normally I would rely on market pressure to force companies to adopt a certain set of standards. However, if a company is found to be flouting standards and using its market share to dominate a new sector (as may be made possible with a browser monopoly), I think it would be reasonable for the courts to coerce the adherence to standards as a resolution to a successful anti-trust case.

Ignoring for a moment the dubious deals that Microsoft made with Apple, Intel, OEMs, ICPs, and ISVs, I would like to question the wisdom of holding Microsoft liable for the business and technical decision to tie Internet Explorer with Windows. The appellate court found per se tests inappropriate on this question and remanded the question back to the district court for a resolution based on “rule of reason.” On remand, the Department of Justice would need to show that the tying arrangement unreasonably restrained trade.

Bundling two products together can create efficiencies, and operating systems in particular benefit from this bundling. The core of an operating system is just its basic kernel — but nobody would want an operating system that included nothing else with the kernel. Most of the competitive advantages of an operating system are the tools and APIs that are layered on top of the kernel. We expect any UNIX operating system to bundle the standard UNIX tools — sh, init, ls, login, cp, mv — and I would be hard-pressed to say an operating system without these tools is a UNIX at all. Similarly, if Microsoft sold the Windows kernel — KERNEL32.DLL — without the Windows installer, graphical shell, the start menu, the desktop, and the file explorer, nobody would buy it. An operating system by its nature simply is a bundle of disparate bits of software designed to work well together; thus, the integration and bundling constitute a large part of the operating system’s value to consumers.

Is Internet Explorer fundamentally different from these other operating systems components? Arguably, there is a separate market for web browsers, while there is no separate market utilities like “ls.” However, there is a significant market for many other components shipped with a modern operating system. There is a market for Windows shell replacements (WindowBlinds, Aston) and Windows file managers. More substantially, there is an enormous market for word processors; yet, Microsoft bundles Notepad and WordPad with Windows for free, and every self-respecting Linux distribution bundles emacs and LaTeX. Do these bundles constitute an unreasonable restraint of trade?

Should we demand that Microsoft sell discounted versions of Windows without all these tools? Or that each of them be individually removable? What if another prominent OS vendor bundles some 7800 different software packages with its operating system, for free?

Tying so often yields benefits to the consumer in the OS market that it seems unfair to single out web browsing as the only component of an operating system that must be removable or unbundled. Moreover, building web browsing into an operating system really does have concrete, identifiable benefits to the consumer. Ignoring the ethics of Microsoft’s shady dealings with OEMs, bundling a web browser with Windows really is one of the most efficient ways to get a browser on every computer in the world. Should we really bar these sorts of market efficiencies?

(It may well be the case that anti-trust law under the “rule of reason” does not in fact prohibit the tying of Internet Explorer and Windows, but I think it is definitely a substantial deficiency in the law that it is impossible to know whether it does or not.)

In response to mdaly’s post entitled “No-click Clickwrap Agreements,” I agree that passive terms of use that do not require the user to at least click an icon are NOT valid contracts.

Passive clickwrap agreements are the lowest rung on the food chain. If actual written contracts are at the top, EULA’s with an “I agree” click-through are in the middle, and passive terms of use are at the bottom. We argued at length a few weeks ago about whether or not the “I agree” EULAs are valid contracts because the majority of people do not understand what they are agreeing to. If EULAs are shaky, then there is no way passive agreements could ever be considered valid. EULA’s at least give the user the opportunity to understand the terms of the agreement, and reject the offer if they so choose. One of the only arguments in favor of EULAs is that the meeting of the minds occurs when the “I accept” button is clicked. There is no need for negotiation, because the manufacturer of the EULA basically says their terms are not negotiable. With a passive agreement, even this halfhearted argument cannot be applied.

Let’s say you go for a 10-mile run down a suburban sidewalk. You would never expect to encounter on your run a small sign on someone’s lawn that says all people who run across their driveway owe $100 for asphalt upkeep. If someone put that sign up and sued you for the money, the situation would be akin to the passive website terms of use. Of the thousands of other regular driveways you ran across, you were never made aware that you had “implicitly” signed an agreement about the terms of use of the driveway. The driveway (website) was there for you to run across, so you did. Sure, the owner is responsible for the upkeep of the asphalt (server), but everyone knows that maintaining your driveway is just a cost of the privilege of owning a home. If these agreements were allowed to stand, anyone could easily dupe you into agreeing to anything. No judge would ever hold up this contract in court.

In response to Don’s post about Microsoft’s monopoly, I disagree completely that Microsoft could ever be absolved of monopolistic action. Whether or not third-party effects like bandwidth limitations and hard drive requirements barred Netscape from entering the market is inconsequential. The fact of the matter is that Microsoft had/has a huge OS market share, and was acting as basically the sole manufacturer of commercial operating systems. They used this fact to leverage the market for secondary products (like web browsers) in their favor, which is both normatively wrong and illegal. It again comes back to the Lexmark argument (that is, the argument made in discussing the Lexmark case pertaining to its marking scheme, not its copyright assertion). Lexmark was just in trying to allow only their cartridges to work with their printers, because if buyers did not like this marketing scheme, they could just go buy a different printer. Microsoft, as the sole actor in the OS market, provided users with no alternative to their product. Therefore, it was immoral for Microsoft to gain an unfair advantage in secondary markets based on their OS stranglehold because consumers had no choice in the matter. So I guess my response to Don’s question “does that fact that distribution costs for internet browsers have been decreasing, or that hard drive storage spaces have been increasing bar Microsoft from aggressively posturing against competing products and systems?” is a resounding NO.

While I am, as I’m sure many others are also, quick to judge Microsoft for its perceived monopolistic dealings, I feel a need to address several descriptive and normative aspects of the momentous, and on the whole well-written Appellate decision in USA v. Microsoft Corp. With this being said, and given the scope of the decision, with its very layered and nuanced argumentation, I do not attempt a full-analysis or criticism. Rather, I wish to address but a few issues I believe the Court unfortunately overlooked during its analysis.

First, the Court examines claims of Microsoft’s monopoly in an effort to determine whether or not Microsoft actually behaved as a monopolist. Among the many points within Section II (B)(1)(b), the Court determined that Microsoft’s defense claims against restrictive OEM license agreements “is insufficient to shield Microsoft from liability for those restrictions because, although Microsoft did not bar its rivals from all means of distribution, it did bar them from the cost-efficient ones.” USA v. Microsoft Corp, at 25. On one hand, this behavior seems harshly competitive against competing browser developers (i.e. Netscape). Yet, on the other, it represents a natural competitive advantage which, it seems, Microsoft should be able to exploit - for indeed, many businesses exploit such advantages against their rivals. In order for the Court’s logic to hold, “cost-efficien[cy]” must be stretched to mean “barrier to entry.” I’m not sure this relationship holds - especially in light of the fact that Netscape held a commanding lead in internet browser market share (despite the lack of “cost efficiency”) at the very time this action was begun. See, USA v. Microsof Corp, at 25 (Microsoft desired to “reverse the direction of Navigator’s usage share”). Though bundling and integrating IE into Windows gave IE some advantages over Navigator, Netscape seemed to be very successful in distributing its product - even given the bandwith limitations and hard drive space requirements of the time. As technology advances, bandwith increases, and hard drives become larger, the issues the Court points to as “barriers to entry” seem inceasingly inconsequential. Yet, still, one must be circumspect in absolving Microsoft. More importantly, perhaps, does that fact that distribution costs for internet browsers have been decreasing, or that hard drive storage spaces have been increasing bar Microsoft from aggressively posturing against competing products and systems?

Another problem the Court makes is assuming, it seems without any evidence, that various ISVs, Apple, and IAPs would promote Navigator, if they could, simply because it is a better product technically. This assumption obscures, obviously, that these various entities each have differing commitment levels to supporting Microsoft and its products. In fact, many of these companies (i.e. Apple, Intel, IBM, AOL) compete with Microsoft in various arenas, and may thereby have their own competitive reasons for choosing Netscape as a threat against Microsoft to gain bargaining leverage and/or competitive advantage. Clearly, the PC software and hardware markets share so many points of interconnection and competition that practically no vendor exists in isolation of the others, and each seeks to maximize their own position - often at the expense of their competitors. See, for example, USA v. Microsoft, at 40 (Details quid-pro-quo relationship between Intel and Microsoft, whereby each developer sought leverage against the other through support, or lack therof, of their various products). Thus, we see that “retaliation,” as termed by the Court, is not always a full indicator of monopolistic muscle. Moreover, many compliantly competitive firms engage in similar behavior. Though many seem to idealistically cling to a vision of a completely competitive PC and PC software market, I doubt this actually exists (or ever will).

Ultimately, however, we must also recognize the Court’s initial assertion that technology presents especial difficulty in antitrust law because it may occur that “innovation to a large degree has already rendered the anticompetitive conduct obsolete (although by no means harmless).” USA v. Microsoft Corp, at 8. If these facts truly hold, does and should our fundamental conception of the technological market structure change? I feel this was not adequately considered by the Court, but rather dismissed in favor of a standard structural approach (which admittedly has some merit).

I believe the issues raised in this post represent merely the proverbial “tip of the iceberg” with regard to the wisdom of the Microsoft decision. Not only to other descriptive issues abound, but larger normative questions such as the intrinsic value (or lack therof) of allowing Microsoft to remain such a dominant force, or the propriety of replacing a monopolostic operating system developer with a potentially monopolistic middleware developer. I hope that my thoughts, though largely contrary to what I sense might be the majority view might encourage lively debate regarding these important issues.