Microsoft competes with regulators, itself

Journal Record, The (Oklahoma City), Jul 9, 1998 by Steve Lohr N.Y. Times News Service

A monopolist is big and bad. He has the muscle to dictate prices and bully competitors and consumers, both of whom are powerless to resist the monopolist's will.

Enter Microsoft, accused by the government of being a monopolist, and its new computer operating system, Windows 98, which will play a starring role in the monopoly case that the Justice Department will present to a federal judge in September.

Windows 98 went on sale 10 days ago and, according to PC Data, a market research firm, the early results are quite respectable -- about the same as the first days of sales for its predecessor, Windows 95. Still, since there are now about 300 million machines running earlier versions of Windows -- more than twice the number when Windows 95 was introduced -- the early sales are not a runaway success.

Monopolist perhaps, but Microsoft cannot utterly control the pace at which its new products are accepted in the marketplace. There are many stragglers in the Microsoft-led march of technology. The company's biggest competitor is often itself, as consumers keep using old Microsoft products instead of adopting the new ones -- a phenomenon that curbs the company's freedom to raise prices, oddly becoming one line of defense in the monopoly case.

Industry predictions of how well Windows 98 will sell vary. But most analysts expect that the number of people who will spend $89 to put Windows 98 on their old machines -- called the upgrade market, as opposed to new machines that will have Windows 98 already installed - - to be roughly 40 percent below the level for Windows 95, comparing both products in their first year.

Eying such numbers, some analysts say they see little evidence that Microsoft looks, walks or quacks like a monopoly. "Look at those low upgrade percentages," said Robert Levy, a senior fellow at the libertarian Cato Institute, "and it hardly demonstrates coercive monopoly power, which is what the antitrust laws are concerned with."

If the government is to win its antitrust suit, it must convince the courts that Microsoft is indeed a monopoly and that the company has abused its monopoly power to stifle competition. "The government could lose this case on the monopoly power issue alone," said Charles Rule, a former head of the Justice Department's antitrust division, who is an adviser to Microsoft.

Market share, pricing power and the ability to restrict competition are three key factors the courts typically take into account in determining whether a company has the market muscle of a monopolist.

Microsoft argues that even though it holds about 90 percent of the market for personal computer operating systems -- the software equivalent of a machine's central nervous system -- it faces competition on every front. Its rivals range from other operating systems, like Apple's Macintosh and Linux, which is distributed free on the Internet, to other software products that seek to undermine the central role of Windows in computing -- like Netscape's program for browsing the World Wide Web and Sun's Java, an Internet programming language.

So Microsoft regards itself as constantly under assault and any position of market strength to be fleeting, as Microsoft Chairman Bill Gates testified before the Senate Judiciary Committee in March. "The fact that we have kept our prices very low, about 3 percent of the price of a PC, is because of the competition," Gates said.

The price-restraining competition comes not only from outside rivals but also from within. Windows 95 is the most popular desktop operating system in use today, but only by a slight margin over older versions of Windows. By the end of 1997, according to Dataquest, a market research firm, Windows 95 was in use on 145 million machines worldwide while 140 million machines were running versions of the earlier Windows 3 -- mainly 3.0 introduced in 1990, and 3.1 in 1992.

Unable to convince a large share of computer users to buy its more recent operating systems, Microsoft thus loses sales of both newer versions of Windows and its newer software applications from word processors to games, which are tailored to run on Windows 95 and now Windows 98. "The slow move from the Windows 3.x family is perhaps the biggest thorn in Microsoft's side," said Chris LeTocq, an analyst at Dataquest.

If the company raised the price of Windows to consumers, even fewer computer users would upgrade their machines. "Microsoft is in essence competing with itself, and that inhibits its ability to raise prices," noted Rule, the Microsoft adviser.

To be sure, many students of modern software markets say the company protests too much. Microsoft, they say, may not resemble an old-style monopolist, but it is a high-tech model of the same species.

"Microsoft has a huge market share, it can push people around, it enjoys monopolistic profits and venture capitalists will not invest in an area that Microsoft is in -- all those things speak to its dominant market position and its market power," said Steven Salop, a professor at the Georgetown University Law Center. "I don't think the Justice Department is going to have any trouble proving Microsoft is a monopoly."