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Press Release

    Tech Bytes- Tid Bits in Tech News: Bundling Redux

    05/17/2001

    Although still five months from its scheduled ship date, Microsoft’s latest version of Windows has re-ignited the “tying” controversy that precipitated the antitrust case currently on appeal. However, this time Microsoft is not accused of leveraging its operating system “monopoly” to force consumers to accept other products. Instead, rivals contend that Microsoft is using the popularity of its Media Player to encourage consumers to upgrade to Windows XP.

    Citizens for a Sound Economy has been among the fiercest opponents of the Reno Justice Department’s unwarranted $50 million crusade against Microsoft. In court, the government failed to demonstrate any evidence of consumer harm and relied on specious economic theories that have no relevance to real-life microeconomics.

    One such theory was that Microsoft “tied” Internet Explorer to Windows in an effort to “foreclose” on Netscape’s ability to distribute its product. This theory, dubbed “predatory innovation,” dismissed the possibility of any consumer benefit from integration and ignored the fact that the number of computers with Netscape Navigator increased at a geometric rate during the period in question. Both of these omissions have doomed the government’s case and made the breakup proposal a nonstarter.

    Now the same competitors are returning to Washington to demand that the government prohibit Microsoft from innovating once again. But this time they do not even have the circumstantial evidence that allowed the original case to get as far as it did.

    In 1995, Microsoft’s Internet Explorer was far behind Netscape Navigator in market share. Most independent observers believed IE to be inferior and Microsoft was unable to reach a licensing agreement with Netscape to distribute Navigator.

    In the years that followed, the fortunes of the competitors changed dramatically. Microsoft improved the quality of its browser, signed a licensing contracts with AOL to gain access to its subscribers – which account for one-third of all browsers, and integrated browser functionality into Windows and the entire suite of Microsoft Office products. As stated in Judge Thomas Penfield Jackson’s finding of facts, Microsoft’s innovation “improv[ed] the quality of Web browsing software, lower[ed] its cost, and increase[ed] its availability, thereby benefiting [sic] consumers.”

    Of course to Microsoft’s antagonists, the software improvements and consumer betterment mattered little. Their basic argument remained: Microsoft had a small presence in the browser market before Windows 95. If Microsoft were legally prohibited from including browser functionality in Windows, a market for browsers and other “middleware” products would have been robust.

    Whether or not this counterfactual is true, it still does not explain why the coercive maintenance of this artificial market is any concern of the government? If a firm can better service consumer demand with one integrated product, whose interests would the government serve if it were to prevent this efficiency? Certainly not consumers.

    These questions become even more difficult for Microsoft’s antagonists to answer regarding XP. The new Media Player 8 requires the more stable code of Windows XP to operate properly. Therefore, consumers interested in upgrading their online music and video experiences will have to upgrade operating systems as well.

    But the cause and effect “bundle” here is precisely opposite from the government’s antitrust suit: Microsoft is allegedly leveraging the popularity of Windows Media Player to “force” consumers to upgrade to the latest version of the Windows operating system.

    But how can this be? Those driving the antitrust case argued that Windows is an indomitable monopoly franchise that can drive “middleware” providers out of the market simply by including their functions in its next version. Now these same people argue that Microsoft is illegally using its Media Player to compel upgrades to Windows XP.

    Windows Media Player is currently engaged in fierce competition with Real Player, which just recently won a contract to become the software delivery device for MusicNet, the vaunted online music clearinghouse. In addition, Real Networks owns the online distribution rights to Major League Baseball and other highly valued content. Not only does Microsoft not enjoy a monopolistic position in this market, but Real Player’s success suggests that Microsoft may not even be the dominant market player in the near term.

    If companies in the fiercely competitive software and hi-tech industry are not allowed to innovate, they cannot service consumer demand and will fail. Just as it was impossible for Microsoft to improve upon its Windows operating system without including browser functionality, it is impossible for Windows Media Player to be improved without basing it on a more stable and versatile operating system.

    Software innovation was an indispensable component of the hi-tech economy’s growth between 1995 and 2000. Judge Jackson’s April 2000 verdict sent shockwaves through financial markets because it, in effect, outlawed the very innovation so essential to economic growth.

    As the nation struggles to overcome the current economic slowdown, it is essential that we reject the theory of “predatory innovation” in all its manifestations and stop imputing devilish motives to software innovations that lower prices and benefit consumers.