EC Theme: The Paradox of Being a Monopoly

February 12th, 2009

A number of comments in the EC – Microsoft discussion have asked why Microsoft would be treated differently than everyone else, or shouldn’t be able to do whatever it wants with Windows.

Microsoft is treated differently because of the monopoly status of its Windows operating system. Having a monopoly position has enormous consequences, both business and legal. A monopoly exists when a single entity controls nearly all of the market for a given type of product. Or, to quote from Wikipedia “a monopoly . . . exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it.” By the mid-1990’s Microsoft Windows had over 90% market share for Intel-based personal computer operating systems, and was moving closer to 95%.

Being a monopoly has some great rewards for a company. It can mean very little pressure on price or quality, even for a critical product. But a monopolist is not free to do whatever it wants to protect its dominant market position. A variety of governments, including the EU, have concepts of unfair competition. These concepts include limits on what a monopolist like Microsoft can do. Both the EC and the US courts have found Microsoft guilty of engaging in impermissible activities with regard to its Windows monopoly.

So to answer the question, yes there is a reason for singling Microsoft out: it alone has a monopoly on (Intel based) personal computer operating systems.

Categories: Mozilla | Tags: EC, Microsoft

17 comments for “EC Theme: The Paradox of Being a Monopoly”

1
Eddy Nigg said on February 12th, 2009 at 7:31 pm:

…and you forgot perhaps to mention the fact the Intel itself has the majority market of PCs (personal computers after all). But your statement isn’t correct entirely because I think the same applies to other chip makers as well, like AMD. Or does the monopoly (or market share) only apply to Intel based PCs? Mmmhh…
2
mitchell said on February 12th, 2009 at 8:02 pm:

Eddy

I looked at the US findings today and found the reference to Intel based. So i know it applies to that. It will take some work to figure out the AMD question, I don’t know off the top of my head. The decisions are complex — even the Findings of Fact are more than 200 pages!
3
voracity said on February 12th, 2009 at 8:40 pm:

Most economists don’t believe that monopoly is a straightforward concept. You have to define what the product is first and that is always arbitrary.

Is “Windows” the product? Is “Operating Systems” the product? Is “Operating Systems with Graphical Front Ends” the product? Is “Commercial OSs on Intel PCs” the product?

And why focus on that product? As one of many examples, Mac OS just recently had a monopoly on PowerPC home/office computers.

Let’s face it, the EC’s (and previously the US govt’s) interest in Microsoft has nothing to do with *monopoly* power, it’s about Microsoft’s power full stop.
4
Asa Dotzler said on February 12th, 2009 at 9:00 pm:

It’s just speculation, but I’ll bet that “Intel based” was a more politically useful way to say “x86 based”.

At the time of the US findings of fact, Mac didn’t run on x86 and the competitors to Windows in the x86 market were operating systems like OS/2, several *DOSes and a collection of *nixes.
5
Asa Dotzler said on February 12th, 2009 at 9:09 pm:

voracity, I think you’re intentionally avoiding the distinction. Sure Apple had an overwhelming share of the PPC market. I might have an overwhelming share of the carved soap toothpicks market but that’s just not important to the broader business landscape. Microsoft’s monopolies have a huge impact on the desktop computing landscape. That makes what they do consequential and different from what I happen to do with my soap-flavored toothpicks position.

Also, for the purpose of this discussion, economists don’t define monopolies. Neither do you. Governments do — with things called laws, in this case competition law or antitrust law.

Both the U.S. and the E.U. have determined that Microsoft meets the criteria and that they are in violation of the requirements for an organization meeting those criteria.
6
voracity said on February 12th, 2009 at 10:00 pm:

“That makes what they do consequential and different from what I happen to do with my soap-flavored toothpicks position.”

I thought that’s what I said. Except I used Apple Macs in place of soap-flavoured toothpicks. (Which are a beguiling proposition, I must admit.)

“Also, for the purpose of this discussion, economists don’t define monopolies. Neither do you.”

I don’t? Well, I’m shocked.

Whether they consult me or not, governments (or more probably courts) have to decide what counts as the product, whether a company has a monopoly on that product and whether they have abused their monopoly position.

The upside? What compels the government to take action is NOT whether the company has done something illegal — because laws based on monopoly can’t be defined until they are actually used. It is the other way around — the government decides when it needs to interfere with a company, and then *defines* what monopoly means in that case so that it has a legal justification for interfering.

My point is that the US government was right — Microsoft was a concern — but they’re response was wrong. They should not have tried to hobble Microsoft, they should have tried to boost it’s competitors (in the most transparent way possible, of course).

Today, Microsoft is quickly losing its grip on the computing industry. The desktop market is starting to resemble your market for soap-flavoured toothpicks — not very interesting at all. Laptop sales have overtaken desktop sales, netbooks are booming and the mobile phone world — which has many, many more users than there are for PCs — is quickly becoming the mobile computer world. At the same time, more and more applications are migrating to the web and cutting the ties we once *had* to have with our operating systems. Google today has much more influence on the global economy than Microsoft.

In that climate, the EC wants to make life more difficult for Microsoft. Fine. I don’t care much for Microsoft. But let’s be careful that this case doesn’t set some idiotic precedent about what counts as “bundling” that other companies like Apple or Nokia or Nintendo or whoever will be bound to follow in the wake of a Microsoft demise. Because bundling is not the problem. Power is.
7
voracity said on February 12th, 2009 at 10:13 pm:

Here’s a hypothetical: suppose the EC mandates a remedy and, for unrelated reasons, Microsoft’s share of the OS market fell and Mac’s share increased to something like 65/30. What happens then? Who decides what market share is low enough to take the yoke off Microsoft?
8
Eddy Nigg said on February 12th, 2009 at 11:03 pm:

No, it’s obvious that the reference to “Intel the chip-maker” isn’t meant to be taken literally and perhaps somewhat unlucky formulated. I think Asa’s x86 reference is closest, but I think it’s not going far enough.

Lets speak about the office and home (computer) consumer market – there is where Microsoft enjoys even these days a market share of ~ 90%. Quite an achievement I must say, but with it comes also the responsibility of being a monopolist. From the point of view of Mozilla it’s absolutely correct to look after the interests of itself, the same way Microsoft would have done if the legislation allowed it. Make no mistake about that one!

One of the major problems with MS is, that it’s not limited to the operating system, but with the introduction of undisclosed standards and bundling of its additional software, a situation exists which strangles competition or shuts it out completely. This is what the governments of Europe (and the US) are after.
9
NM said on February 13th, 2009 at 12:32 am:

First, a nitpick, but the non-x86 market is non-existent.

Second, I want to point out that in /all/ other markets, the EU has been *much* more aggressive in enforcing competition in the market even when one company controlled much less than 90%. In fact, as far as I can tell, it has acted systematically for market shares over 50%, and some times below that.

The fact is that Microsoft has been treated with kid’s gloves, and the current investigation is rather benign compared to what they have done for other companies.
10
Mitchell Baker said on February 13th, 2009 at 6:46 am:

Voracity:

Yes, the competition laws have rounded edges and need a lot of facts. It’s possible you’re right, that they allow discretion that gets used when a company gets immensely powerful and industry counterpoints seem to be lacking. Many people seem to believe the EC has made MS an unfair target.

It may also be that NM is exactly right, and that MS is getting special preferential treatment because it hasn’t been broken up; I believe this may be a more common remedy in the EU.

On the question of general concern with government power I
think the experience of living with Microsoft’s actions of the 1980s, watching their activities in the 1990s and seeing the ongoing results throughout the last decade eliminates my sense that Microsoft is being unfairly targeted. (I know it sounds melodramatic to talk about Microsoft’s virtual controlled vast portions of the entire computer industry. And I know it seems like ancient history to suggest that those actions still affect us today.

Maybe it’s this difference that is at the heart of disagreement.

In any case, yes, the question of a remedy is tricky and risky.
11
Iang said on February 13th, 2009 at 12:50 pm:

As voracity lays out, economists generally rubbish the attempts of governments to “define” monopoly. The record is terrible.

AT&T v. government: AT&T won. And then cellulars defeated landlines.
IBM v. government: IBM won, until the market defeated IBM. Why? It’s because of a little thing called the “entry level mainframe” and another little thing called “open source OS,” better known as PCs and Unix, respectively. Remember 1989?
Intel v. government: Intel again was untouched until they made a mistake. That mistake was _exceedingly well known_ to anyone who followed the CPU business, and had been repeated about 10 times before by everyone else. Result: AMD stole into serious 2nd place.
Microsoft v. the world: As mentioned above, it is in its sunset era. Why? The rise of Apple, the rise of Linux, and the failure of the general security rewrite, a.k.a. Vista.
Microsoft v. EU in the media player battle: result? I never heard of any consumer saying “thank you!” so how can there be a result? Meanwhile, everyone has an iPod.

In each case, the government(s) achieved practically nothing. In each case, the market beat up the incumbent, eventually. About the only thing the government(s) can claim is they might have distracted the victim a bit.
12
Iang said on February 13th, 2009 at 12:51 pm:

Hey, but thanks for taking this up, Mitchell! I know if feels like being slashdotted sometimes 🙂
13
NM said on February 13th, 2009 at 4:51 pm:

“AT&T v. government: AT&T won. And then cellulars defeated landlines.”

The EU has vigorously intervened, much more recently, to force competition in the landline market, forcing unbundling for DSL. Result: broadband penetration has shot ahead of the US in most of western Europe.
14
TI3GIB said on February 14th, 2009 at 6:55 am:

I thought the EC was stupid enough to go on something like this, but it seems that Mozilla is also stupid enough for it. Internet Expolrer has been steadily losing browsershare to Firefox for the last two/three years, why makes the effort to destroy it completely knowing that that’s precisely where it’s going ?

Your argument is this limits consumer choice, but you fail to understand that this removes any choice the consumer has. If an operating system doesn’t come with a broswer, how is the regular consumer supposed to download one (say Firefox) to use it on his machine.

I’m completely disgusted by this.
15
Lennie said on February 15th, 2009 at 7:13 am:

I’m worried Mozilla (Mitchell’s) thoughts are on Microsoft/EU instead of making Mozilla’s products better. That’s my personal biggest worry (with this issue).

Also because the EU is late in the game of the browsers and there is no simple solution to this problem.

It feels more like a marketing problem. There are just to many people who don’t know what they are missing when using Internet Explorer (attention to security was one, which has improved some what).

The presure from other browsers has created a situation Microsoft is actually starting to put real work in their browser again.

I think the competition has been really helpful creating a better situation, but it also means new computer buyers may still stay with IE, because it might now be good enough by their standards after Microsoft had put some effort in IE.

If that happends we’re still stuck with the same IE marketshare. Which might mean Microsoft will slow down their development and stifle the web again.

The whole bundeling of PC, Windows and IE is the real problem and Microsoft’s power of the PC-vendors is the cause.

Maybe there should just be a public bulk discount percentage on Windows and products. So there is no way for Microsoft to favor one over the other.

But I doubt the EU has any power over that, as it’s an international market and the PC-vendors probably all have their asian and US offices.

Maybe the EU can force the PC-vendors to buy and install Windows only on request. The PC should enter the EU without Windows (or license equivalent).
16
Andy said on February 16th, 2009 at 5:07 am:

While all companies have to aim at a monopoly situation for their own markets to be most profitable only perfect competition is the most efficient allocation for the economy. In any other case consumers (e.g. SME, citizens, large companies, public procurement) pay the monopoly rent.

This implies that you cannot leave it to the dominant market players to talk about the rules where they will always favour the protectionist school (competiveness). Competition needs authoritarian enforcement to make a free competitive market happen.

Competition needs to be enforced by the authorities and this is what Kroes does. Von Hayek stressed that competition leads to the discovery of new facts, basically that only competition ensures innovation that would be inexistent otherwise.

Competition enforcement by competition law is just not enough. Competition law has a time lag that does not serve IT market needs. We need more political support for open web standards and have to overcome patented standards. We need the government to invest in Linux based national operating systems to overcome our joint dependencies on Microsoft products. We pay the monopoly price and make Microsoft profitable! This is like a license cost drain on the total European single market. Like an addict we have to license Office, have to support IE idiosyncracies, have to run the latest Windows even when Microsoft totally messes it up.

As a European citizen I don’t like the idea that the voice of citizens counts less than the lobby astroturfs from an American company that helds the EU markets hostage. We have to break free and have to kick their lobbyists out if they obstruct again EU interoperability policies or insult our competition authorities.
17
Jonas Sicking said on February 18th, 2009 at 11:59 am:

As I understand it, one important rule that applies to companies in a monopoly position is this: You are not allowed to use a monopoly in one area to create a monopoly in another.

This is one of the rules that heavily applies in the microsoft case.

In other words, microsoft is not allowed to use its monopoly on the OS market to gain a monopoly in the browser market, or the media player market, or the office-suite market, etc.