Monday, March 5, 2007

Microsoft’s Anti-Competitive Motivations

With some time on my hands, I hope to catch up with blogging this week.

Microsoft’s antitrust problems are back with two items in the news. For one, it’s failure to comply with terms of a prior case; for the other, it’s new evidence of Microsoft’s naked assertion of its market power.

Europe and the Windows APIs

Last week, European competition authorities said Microsoft is not complying with the terms of the 2004 ruling ordering it release its WIndows server APIs to competitors. You won’t find me a one-handed economist on this one, because I have seriously mixed feelings.

Microsoft is saying that it’s a simple patent case — it has intellectual property and its competitors aren’t willing to pay a fair price. Its general counsel says: “we believe that we have been fair and reasonable in setting the proposed protocol prices.”

On the one hand, Microsoft’s competitors complain that its terms of providing the technology are unrealistic, because Microsoft wants to charge royalties for use of the APIs, including royalties on open source software. As a result, no firm has licensed the APIs — clearly the EU edict is not having its desired effect, and the lack of takers suggests Microsoft is charging an unreasonable price.

On the other hand, should the government decide? Yes, if I were French or Swedish, I’d feel differently about aggressive government intervention in the free market. But for a capitalist system, government coercion should only be used to correct a “market failure”. Much as I dislike Microsoft’s predatory practices, it’s not clear this is one. Perhaps the competitors aren’t negotiating in good faith, but instead are waiting the EU to beat Microsoft over the head again.

The editorial page of the Wall Street Journal feels no ambivalence. Today it weighed in (registration required):

Brussels no longer acts as merely prosecutor, judge, jury and executioner in antitrust cases; it now claims the power to assess the worth of patents, too. …

EU antitrust officials make no secret of their preference for the open-source business model practiced by the companies behind all the complaints against Microsoft, among them such heavyweights as IBM, Sun Microsystems and Oracle.
Microsoft vs. Apple

The second piece of news is a byproduct of the disclosure from Microsoft’s recently-settled antitrust case in Iowa. While the settlement was portrayed as a happy compromise, Microsoft got the plaintiffs to close the website with 3,000 documents discovered in the case, while the plaintiffs got to add to their millions in fees gained from suing Microsoft.

Apparently some of the interesting documents have been mirrored before they were pulled. One document (“Plaintiff’s Exhibit 6060”) related to Microsoft’s plans for Office 97 for Macintosh. The Mac press finds it interesting that the internal MS memo promises to ship lousy Mac software, but I think there was a more important revelation, consisting of an e-mail from the general manager of the Macintosh business unit to Bill Gates:
From: Ben Waldman
Sent: June 27, 1997 1:56 AM
To: Bill Gates
Cc: Jon DeVaan; Greg Maffei
Subject: RE: Moving forward with Mac Office 97

I am writing to argue for making a final decision to FINISH Mac Office 97, and detach this issue form the current Apple discussions.

… The threat to cancel Mac Office 97 is certainly the strongest bargaining point we have, as doing so will do a great deal of harm to Apple immediately. I also believe that Apple is taking this threat pretty seriously. …

Regardless of the outcome of these discussions, though, I believe we should ship Mac Office 97. Furthermore, I believe we need to decide this immediately … as we are not only close to shipping coding externally, but need to finally start press and customer communications, especially with MacWorld a month away.
and the CEO’s reply:
From: Bill Gates
Sent: June 27, 1997 9:37 AM
To: Ben Waldman
Cc: Jon DeVaan; Greg Maffei
Subject: RE: Moving forward with Mac Office 97

I have 2 things I need to understand

Realistically, when do we think we would ship this product?
Can we avoid Apple knowing how are along we are for the next 30 days?
[Time cover]Although Microsoft made $300 million a year (sales) off Mac Office, it threatened to destroy Apple’s ability to sell to the corporate (and university) market. The threat worked. Six weeks later, Gates had a deal which included Apple dropping Netscape (effectively killing it) in exchange for Internet Explorer, and Steve Jobs could announce that with Gates’ help, he had saved Apple. The announcement was so unreal (with echoes of the famous 1984 “Big Brother” ad), that it provided the conclusion for the 1999 dramatization (i.e. TV docudrama) about the two men.

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