Effect of Microsofts Monopolistic Approach

Effect of Microsofts Monopolistic ApproachThe Effect of Microsofts Monopolistic Approach to Softwargon bundle on Innovation and Competition.Contents (Jump to)Chapter 1 IntroductionChapter 2 Literature Re figure2.1 Monopolist or Fierce competition2.2 Bundling, Innovative or curtailment Competition2.2.1 Bundling Examples in Other Industries2.3 The courting Against MicrosoftChapter 3 Analysis3.1 Bundling, Competitive or Market Restrictive?3.2 Strategies to Gain Market Share3.3 Microsoft and The European UnionChapter 4 ConclusionBibliographyChapter 1 IntroductionWhen mentioning Microsoft, ones thoughts naturally turn to figurers, as the devil are inexorably tied together. And while they both pauperization each otherwise, software package was the latter(prenominal) development in this marri fester of needs. Based upon physiques, com ordinateers utilize this foundation as the basis for their computations (Berdayes, 2000, p. 76). A digit is a numeral that instances an intege r and includes some(prenominal) one of the decimal characters 0 by dint of 9 as well as either of the binary characters 0 or 1 (Atis, 2005). Computers utilize digits under the base-2 routine form, which is also termed as the binary number system (Berdayes, 2000, p. 3). The base-2 system is utilized in computers as it implements easier with present day technology. A base-10 system could be engaged, however its cost in wrong of technology innovation would make computers prohibitively expensive (Berdayes, 2000, pp. 53-56). Via the utilization of binary digits as opposed to decimal digits, bits then arouse only two quantifys, 0 and 1 (Barfield and Caudell, 2001, p. 344, 368). The preceding is important in understanding the blood of numbers to computers as well as Microsofts later entrance into this world. The following(a) provides a optic understanding of how this worksT open 1 quantitative Numbers in the Binary System(Swarth more than University, 2005)Decimal Number Binary Number0=01=12=103=114=1005=1016=1107=1118= deoxyguanosine monophosphate9=100110=101011=101112=110013=110114=1110In computers, bits are utilized in conjunction with bytes, which are stand for as 8-bit bytes that work as followsTable 2 8 collation Bytes(Barfield and Caudell, 2001. pp. 50-54)Decimal NumberBytes0=00000000000000001=00000000000000012=000000000000001065534=111111111111111065535=1111111111111111The earliest computer has been traced back to the abax, which is the Greek intelligence agency that describes calculating board as well as calculating table which as invented in chinaware and called the abacus, it was also used in ancient Greece, the Roman Empire, Russia, Japan, and is still in use by the blind (qi-journal.com, 2005). Operating much as the bits and bytes in the mod computer, the abacus has a vertical row of beads that represent multiples of 10, 1, 10, 100, 1,00 and so forth (qi-journal.com, 2005). The basic principle of the abacus operates in much the s ame manner as the modern computer, with numerical representation. The start-off generations of modern computers were huge in comparison with todays small, mighty and fast machines, and needed air-conditioned rooms to dissipate the heat. Programming on the offshoot commercial computer in 1951, the UNIVAC, was a group of related mechanisms driven my mathematical equations that had to be written in instal for the UNIVAC to work on problems (hagar.up.ac.za, 2006). It would take some other 6 years for the filetime mortalal computer to be developed, the IBM 610 Auto-Point, which was termed as a personal computer because it only took one individual to operate it, however, the cost in 1957 termed at $55,000 translates in to well over $100,000 in todays value (maximon.com, 2006).In 1975 truism the introduction of the Altair 8800, which sold for $439, with 256 bytes of RAM, which also represented the year that Bill Gates, along with Paul Allen founded Microsoft (maximon.com, 2006). Altair was seeking a computer language, which Gates and Allen delivered via a schedule called BASIC on 23 July 1975, which they gave the ships company exclusive ecumenical rights to for 10 years (Rich, 2003, p. 34). Sold as an add-on with the Altair 8800 for $75, the preceding provided the r purgeue underpinnings for Microsoft (Rich, 2003, p. 35). Generating just $381,715 in 1977, Microsoft was upstaged by Apple Computers that made machines as well as their own operate system (Rich, 2003, p. 36). Apples success caught the attention of IBM, which was not in the personal computer grocery, the foregoing was the means via which Gates entered the celluloid with IBM based upon DOS, curriculum it secured from Seattle Computer for just $50,000 that heralded the commencements of the industry giant (Rich, 2003, p. 51). Microsoft MS-DOS represented the foundation for the beginning financial strength of the company, which would enable it to develop Windows 95 and successive versions l eading to Vista in 2007. along the way, Microsoft has been accused, rightly or wrongly, of a monopolizeric approach to software bundle up that has stifled competition and innovation. This reputation give seek to examine this facet, its effects, how it happened and the ramifications of the statement.Chapter 2 Literature Review2.1 Monopolist or Fierce CompetitorIn Trust on Trial How the Microsoft Case is Reframing the Rules of Competition, by Richard McKenzie (2000, p. 1), reflects that Microsoft in the last 25 years has become the worlds premier software company, dominating many of the foodstuff places it has entered and developed and also finds itself under sound assault for monopolizer behaviour. McKenzie (2000, p. 2) indicates that in the United States its the umpire Department against Microsoft, but behind the courtroom scenes there has been a good deal of political maneuvering by other major Ameri stinker corporate sophisticated combatants -Sun Microsystems, Oracle, N etscape, IBM, and America Online, to name just a few who would like nothing better than to see their market rival, Microsoft, get its comeuppance in the court of justness. In this instance it is the efficacy of antitrust law enforcement has been on trial as the Microsoft nerve represents the first large-scale antitrust proceedings of the digital age (McKenzie, 2000. p. 2). McKenzie (2000, p. x) reflects upon the government case against Microsoft as a monopolist, indicating that while its operating(a)(a)(a) system comes preloaded on at least(prenominal) nine of every ten computers containing Intel microprocessors sold in the country, if not the world was it this that made the company a monopolist?The market dominance that Microsoft has in the concomitant that its operating system comes preloaded in over 90% of the computers sold was ex pressure sensationed by the former United States Republican candidate Robert Dole, who verbalize Microsofts oddment appears to be to adjoin the monopoly it has enjoyed in the PC operating system marketplace to the Internet as a whole, and to soften the direction of innovation. (McKenzie, 2000, p. 28). This view was also repeated by the media as well as unsanded York Attorney General Dennis Vacco who see Microsofts convergence development strategies are evidence of monopoly power in that the Windows operating system has become almost the sole entry direct to cyberspace (McKenzie, 2000, p. 29). It is without question that Microsofts dominance resulting from preloaded operating software provides it with an return in introducing other forms of software. But, is that simply good business practices or predatory behaviour? For consideration, McKenzie (2000, p. 47) points to the book written by Judge Bork The Antitrust Paradox where he stated repeatedly antitrust should not interfere with any trustworthy size created by internal branch . And like it or not, that is how Microsoft got into the patch it now enjoys. But , in all the rhetoric, there is another facet to Microsofts dominance, the PC manufacturers themselves. As stated by the manufacturers themselves, there simply is no other choice (McKenzie, 2000, p. 29).Eric Browning, the principal(prenominal) executive of PC manufacturer Micron has said I am not aware of any other non-Microsoft operating system product to which Micron could or would turn as a backup for Windows 95 at this time (McKenzie, 2000, p. 30). This sentiment was also echoed by John Romano, an executive at Hewlett-Packard who aware we dont hand a choice (McKenzie, 2000, p. 30). The tie-in between monopoly power and market dominance has been explained by Franklin Fisher, the mind economist for the Justice Department as Monopoly power is a substantial degree of market power, or the ability of a firm (a) to charge a expense significantly in excess of agonistical levels and (b) to do so over a significant period of time (McKenzie, 2000, p. 30). Fisher further asserts th at Microsofts dominance in the market is protected by barriers to entry in the form of economies of scale in production, cyberspace effects, and switching be (McKenzie, 2000, p. 30). Fisher adds that There are no reasonable substitutes for Microsofts Windows operating system for Intel-compatible desktop PCs. Operating systems for non-Intel-compatible computers are not a reasonable substitute for Microsofts Windows operating system because there would be high costs to switching to non-Intel-compatible computers like Mac and Unix (McKenzie, 2000, p. 30).However, the monopolistic tendencies of Microsoft have not resulted in the company charging higher prices as a result of its dominant position. This view was put forth by the chief economic consultant for the state attorneys general in that the absence of workable competitors in Intel-compatible operating systems means that Microsoft doesnt have to worry about raising its price or development its economic weight in other ways (M cKenzie, 2000, p. 30). He asserts that a monopolist would continue to appeal its price so long as its profits rose. (McKenzie, 2000, p. 31). Something that Microsoft has not done. Such is inconsistent with the manner in which monopolists behave. The line of reasoning for the preceding is that the cost of the operating system represents on average 2.5 percent of the price of personal computers (and at most 10 percent for very inexpensive personal computers), so even a 10 percent increase in the price of the OS operating system would result at most in a 1 percent increase in the price of even inexpensive PCs (McKenzie, 2000, p. 31). Warren-Boulton and so concludes that Microsofts price for Windows is very likely far below the monopoly price which is a result of the so-called coefficient of the price elasticity of demand facing any firm (the ratio of the percentage change in the quantity to the percentage change in the price (McKenzie, 2000, p. 31).Therefore, argues McKenzie ( 2000, p. 32) a monopolist would not price its product in the very low range, because a very low elasticity implies that a price increase will increase profits , thus the governments case has opposing views of Microsofts monopolist position, a telling facet in considering the overall implications of the company. The foregoing direct contradicts Franklin Fishers, the chief economist for the Justice Department, claims that Microsoft earns superhigh profits , which its low prices does not realize (McKenzie, 2000, p. 32). Thus, in being a so-called monopolist, Microsofts price policies do not reflect the behaviour of one. The complicated market, belligerent, product and business realities of Microsoft in a rivalrous market must also be viewed as the company taking actions to protect its position with new product introductions as well as making it difficult for competitors to gain an edge, the manner in which all firms operate if they intend to remain in business and continue as mar ket leaders. The fact that Microsoft provides its Internet web browser free along with its operating system, serves the interest of customers in that they have this feature already available in the purchase of their computers. It also represents a competitive action that limits other browsers from gaining an edge in the market.McKenzie (2000, p. 32) aptly points our that Any firm that is dominant in a software market isnt likely to requirement to give up its dominance, e in particular if there are substantial economies of scale in production and network effects in demand , something with both Fisher as well as Warren-Boulton indicate is received in the software industry. McKenzie (2000, p. 32) adds that if Microsoft where to start losing market contribution for its operating system it could anticipate problems in retention its applications network intact, which could mean its market percentage could spiral downward as a new market entrant makes sales and those sales lead to m ore and more applications being written for the new operating system . The flaw in the monopolist argue, as pointed out by McKenzie (2000. p. 34) is that even if a company had a 100% share of the market it must price and develop its product as though it actually had market rivals because the firm has to fear the entry of potential competitors . To make his point, McKenzie (2000, p. 34) points to classic microeconomics textbooks that teach that a monopolist represents a single producer that is capable of restricting output, raising its prices above competitive levels, and noble-minded its will on buyers so in the position of the U.S. Justice Department, Microsofts high, 90%, market share is a near or almost monopoly, that McKenzie (2000, p. 34) aptly states is like almost being pregnant, you either are or you arent.To illustrate his point, McKenzie (2000, p. 34) points to the company called Signature Software, which at the time had 100 percent of the market for a program that allo ws computer substance abusers to type their letters and e-mails in a font that is derived from their own handwriting. He adds that despite it being the singular producer in the market, the company prices its software very modestly, simply because the program can be duplicated with relative ease. McKenzie (2000, p. 34) also points out that Netscape at one time almost wholly dominated the browser market, so far did not price its advantage in monopolist fashion. In protect its position, Microsoft developed and introduced new products, all of which any other firm had the opportunity to do and thus innovate, yet such(prenominal) did not happen. McKenzie (2000, p. 137) asserts that the aggressive development of new products by Microsoft was in defense of its market position as well as being good selling and customer satisfaction practices. He points to the following innovations by Microsoft that helped to cement is market dominance and stave off competitive inroads, all of which could have been created by other firms (McKenzie, 2000, p. 137)1975Microsoft develops BASIC as the first programming language written for the PC. A feat that could have been accomplished by anther firm had they innovated and gotten the initial contract with Altair for the 8800.1983Microsoft developed the first mouse based PC word processing program, Word.1985The company develops the first PC based word processing system to support the use of a laser printer.1987Microsofts Windows/386 became the first operating system to utilize the new Intel 32-bit 80386 processor.1987Microsofts introduces Excel, the first spreadsheet that was designed for Windows.1989Word became the first word processing system to offer tables.1989Microsoft Office becomes the first business productivity application oblation a full suite of office tools.1991Word becomes the first productivity program to incorporate multimedia into its operation.1991Word version 2.0 becomes the first word processing program to provide dra g and drop capability.1995Internet Explorer becomes the first browser to support multimedia and 3D graphics1996Microsofts Intellimouse is the first pointing device to utilize a wheel to aid in navigation.1996Microsoft introduces fancy It, the first program to permit consumers to create, enhance and share photo quality images over their PCs.1997DirectX becomes the first multimedia architecture to integrate Internet ready services.1998Microsofts WebTV in conjunction with the hit video recording show Baywatch becomes the first internationally syndicated Internet-enhanced season finale.1999Windows 2000, which later becomes Windows NT adds the following innovations as firsts to a PC operating system,Text to speech engine,Multicast protocol algorithms that are reliable,Improvements in the performance registry,Inclusion of DirectX,Vision based user interfaces,Handwriting recognition,and a number of other innovations to enhance its operating system, and maintain as well as increase its ma rket position.The preceding represents examples of innovation spurred by Microsoft that could have been introduced by its competitors in various field first, but where not. Thus, Microsoft in these instances, as well as others introduce consumer enhancing innovations to further its market dominance through aggressive new product development, a path that was open to others as well.2.2 Bundling, Innovative or Stifling CompetitionRosenbaums (1998) book Market Dominance How Firms Gain, Hold, or Lose it and the impact on economical Performance provides a perspective on the means via which companies gain as well as overleap market share, and the tactics they employ to best their competition. Few people remember that when Microsoft introduced Microsoft Word and Excel, the dominant software programs for word processing and spreadsheets were Lotus 1-2-3- and WordPerfect (Rosenbaum, 1998, p. 168). In fact, WordPerfect was the application found in all businesses, period (Rosenbaum, 1998, p. 168). from each one of the preceding applications cost approximately $300, which Microsoft bested by selling his Office Suite program for $250. Through providing contain use Word programs in Windows, consumer had the chance to test Word before buying it (Rosenbaum, 1998, p. 168). More importantly, Microsofts spreadsheet, word processing, presentation programs were simply better and easier to use that the competition. By innovatively offering a free contain version of Word with the operating system, Microsoft induced trial, to which it had to follow up on with a better product.In looking at competitive practices and competition analysis, there is a relationship that exists between the structure of the market and innovation, to which Hope (2000, p. 35) poses the question as to whether monopoly is more conducive to innovation than competition . Hope (29000, p. 35) indicates that in rejoinder to the foregoing, there is no clear-cut answer, probably because there is none . Hope (2000 , p. 35 puts forth the guess that Most economists, and virtually all designers of competition policy, take market structure as their starting point as something which is somehow, almost exogenously, given (although it may be affected by competition policy), and which produces results in terms of costs, prices, innovations, etc However, Hope (2000, p. 35) tells us that this is wrong, based upon elementary microeconomics, as Market structure is inherently endogenous (and is) stubborn by the behaviour of existing firms and by entry of new ones, simultaneously with costs, prices, product ranges, and investments in RD and marketing. Exogenous variables, if they in fact exist in a particular situation, represent facets such as product fundamentals such as production processes, entry conditions, the initial preferences of the consumers, variables determined in other markets, and government policy (Hope, 2000, p. 35). As a result, Hope (2000, p. 35) advises that the questions as to wh ether there will be more innovation with monopoly than with competition is no more meaningful than to ask whether price-cost margins will be higher if costs are high than if they are low .2.2.1 Bundling Examples in Other IndustriesAron and Wildman (1999, p. 2) make the analogy of Microsofts bundling methodology with that of cable tv whereby a broadcaster how owns a marquee channel can disallow competition in thematic channel (such as comedy or science manufacture carry) by bundling their own thematic channels with the marquee channel. The preceding illustrates the idea that consumers tend to value channels such as HBO, Cinemax and Showtime that their reputation helps to cause consumers to consider other program platforms they offer. These channels advertise their other channels on their marquee stations and vise versa, offering bundling of channels at reduced prices to encourage purchase. Aron and Wildman (1999, p. 2) offer the logic that a provider that attempts to compete b y offering a thematic channel on a stand-alone basis, without an anchor channel, would not be able to survive the competitive pressure of a rival with an anchor. The argument that having a marquee channel, or anchor, is break to the viability of broadcasters is supported by the development of pay television in the United Kingdom. Aron and Wildman (1999, p. 2). The dominant pay television supplier is BSkyB which controls most of the critical programming rights in Britain, enabling it to use bundled pricing to execute a price squeeze against rivals which as in the case of Microsoft the pay television industry is that a firm that monopolizes one product (here, an anchor channel) can effectively leverage that monopoly to preclude competition in another product market by using bundled pricing (Aron and Wildman, 1999, p. 2).Aron and Wildman (1999, p. 3) provide another example of how firms utilize bundling to inhibit their competition, through the example of Abbott and Ortho laboratorie s, which produce blood-screening tests utilized to test blood that is donated for viruses. Interestingly Abbott produced all quintette of the test utilized to check for viruses, whereas Ortho only produced three, thus Abbott bundled the five tests in a manner that Ortho was unable to compete, thus effectively making it a monopolist (Aron and Wildman (1999, p. 3). Were these good business practices that this enabled Abbott to increase its market share at the expense of another company that did not innovate in producing all five tests to pinpoint? Ortho claimed that Abbott was effectively a monopolist in two of the tests, Ortho claimed that Abbott could and did use a bundled pricing strategy to leverage its monopoly into the other non-monopolized tests and preclude competition there (Aron and Wildman, 1999, p. 3).The preceding examples show that a monopolist can preclude competition using a bundled pricing strategy (Aron and Wildman, 1999, p. 3) and that in so doing can accomplish such without charging prices in excess of what is reasonable for their customers, which makes sound business sense in that capturing the market thus eliminates the need for such, and also provides the business condition that prevents competitors from re-entering the market at lower prices. Thus it is rational for a monopolist to behave as if competitors exist, which in fact they will if it provides such an opportunity through increased pricing. The examples indicated show that it is indeed possible in equilibrium for a provider who monopolizes one product (or set of products) to fruitfully execute a fatal price squeeze against a rival in another product by using a bundled pricing strategy (Aron and Wildman, 1999, p. 3).2.3 The Case Against MicrosoftSpinello (2002, p. 83) in his work Regulating cyberspace The Policies and Technologies of Control inform us that there are four distinct aspects of the United States government case which is based upon violations of the Sherman Act, which are as followsThe companys monopolization of the PC operating systems market was achieved via anticompetitive means, specially in the instance of the utilization of its browser, in violation of Section 2 of the Sherman Act, which declares that it is unlawful for a person or firm to monopolizeany part of the trade or commerce among the several States, or with foreign nations (Spinello, 2002, p. 83).That Microsoft engaged in Unlawful exclusive dealing arrangements in violation of Sections 1 and 2 of the Sherman Act (this category includes Microsofts exclusive deal with America Online) (Spinello, 2002, p. 83).That Microsoft in its attempt to maintain it competitive edge in browser software attempted to illegally amass monopoly power in the browser market) in violation of Section 2 of the Sherman Act (Spinello, 2002, p. 83).And that the bundling of its browser along with the operating system was in violation of Section 1 of the Sherman Act (Section 1 of this act prohibits contrac ts, combinations, and conspiracies in restraint of trade, and this includes ligature arrangements) (Spinello, 2002, p. 83).Spinello (2002, p. 89) provides an analysis of the Department of Justice case against the company utilizing a distinct example as represented by Netscape. He contends that the option for consumer choice was never inhibited by Microsoft, and that Netscapes own practices contributed to the decline in quality in popularity of its browser.Chapter 3 Analysis3.1 Bundling, Competitive or Market Restrictive?The Concise Dictionary of cable Management (Statt, 1999, p. 109) defines a monopoly as A situation in which a market is under the control or domination of a single organization . The Dictionary continues that This condition is generally considered to be met at one-quarter to one-third of the market in question (and that) A monopoly is contrary to the ideal of the free market and is therefore subject to legal sanctions in all industrialized countries with a capi talist or mixed economic system. In addressing this facet of the Microsoft case, McKenzie (2000, p. 27) elaborates that Microsofts market position as a single seller in the market as a result of its dominance represents latent, if not kinetic, monopoly power and in the opinion of the taste presiding over the case, the company is illegally exploiting its market power in various ways to its own advantage and to the detriment of existing and potential market rivals and, more important, consumers. This goes to the heart of the matter concerning the assertion that Microsofts monopolist approach is stifling competition and innovation as its bundling practices effectively eliminates software such as Netscape and others from becoming an option for other companies as the Internet browser Explorer comes preloaded with Windows and Vista operating software. This view was publicly asserted by the United States Attorney General at the time, Janet Reno in a 1997 press conference where she state d on behalf of the Justice Department that Microsoft is unlawfully taking advantage of its Windows monopoly to protect and extend that monopoly (McKenzie, 2000, p. 27).Gillett and Vogelsang (1999, p. xiv) in Competition, Regulation, and Convergence Current Trends in Telecommunications Policy Research advise that Bundling is a disputative element of software competition that has been at the heart of the Microsoft antitrust litigation, and represents an integral aspect in the question of how and if Microsofts monopolistic approach to software bundling has an effect on innovation and competition. They state that through bundling, can profitably extend this monopoly to another product, for which it faces competition from a firm offering a quality product (in the sense that it would generate more surplus than the product offered by the monopolist) (Gillett and Vogelsang, 1999, p. xiv). They continue that Bundling the two products turns out to be an equilibrium outcome that makes soc iety in general and consumers in particular worse off than they would be with competition without bundling . Gillett and Vogelsang (1999, p. xiv) offer the idea that bundling is likely to be wellbeing reducing and that unbundling would not be a suitable remedy Aron and Wildman (1999, p. 1) advise us that through the use of bundling a company can exclude its rivals through the combined pricing, thus successfully leverage its monopoly power. They continue that the preceding represents part of an equilibrium strategy by which the monop