Has Microsoft committed the perfect caper?

FTC:WATCH® No. 564 ISSN. 0196-0016 THE aai COLUMN

Robert H. Lande & James Langenfeld

As readers of detective novels know, a "perfect caper" is committed when the perpetrator gets to keep all of its ill-gotten gains and goes unpunished. Even if they are brought to trial, due to a variety of unusual circumstances, they still escape sanctions. This is essentially what some people are arguing about Microsoft (MS). They argue that even if the courts ultimately hold that MS violated the law, it will not be made to account for it, at least not by private plaintiffs. They argue that MS will never have to pay out even a single dollar in an antitrust case.

In brief, they argue: 1. This case was mostly about MS detrimentally affecting innovation and consumer choice, especially in the long run. 2. The only harms that can even potentially be quantified are those from higher prices. Damages from the innovation that never happened and the choices that were never presented to consumers are too difficult to quantify. 3. Even if some price effects from MS's actions can be found, these will be too hard to disentangle from MS's legitimate business practices. 4. Therefore, even ignoring Illinois Brick issues, MS will escape financial liability completely.

While there is a lot of merit to this argument, we believe that it is overstated. These arguments are basically the same ones all defendants make in monopolization cases (correctly or not). The proof of damages in any antitrust case is not easy. Damages relating to a new competitor being excluded always require a projection of what would have happened to the excluded entrants' sales "but-for" the anticompetitive acts. But this does not mean that the required proof of damages is impossible. Economists estimate damages in these types of cases all the time, with varying degrees of success.

We believe that there are several areas where it may be possible for private plaintiffs to collect damages from MS, assuming that Judge Jackson's decision is upheld on appeal. The probability of plaintiff success in providing damages, however, may be inversely related to the seriousness of MS's alleged illegal acts.

For simplicity, we divide possible plaintiff allegations into three groups: harms directly concerning the operating systems (OS) market; harms directly concerning the browser market; and harms resulting from conduct used to prove the maintaining monopoly charge.

MS's most serious alleged offense is illegally maintaining its OS monopoly by suppressing nascent competition that could result in a competing OS. Factually this is one of the weakest parts of the government's case. Where are the dead bodies, the innovations that would have occurred except for MS's conduct? It will be difficult for Netscape, Sun, Oracle, etc. to prove that MS's conduct foreclosed their ability to make a successful OS, absent evidence that any of these companies were close to succeeding. If such evidence exists, it might be possible to estimate the market share of a likely new entrant in the "but-for" world by using entry into other software as benchmarks, such as Word's displacement of WordPerfect. Such evidence, however, was not presented during the government's trial.

Purchasers of WindowsTM are the plaintiffs in the vast bulk of the suits against MS. They might have an easier time than MS's nascent competitors because they would only have to show that as potential entrants got close, MS probably would have lowered its OS price to deter purchasers from switching to a new OS. Even with proof that there may have been a rival OS, it could still be a formidable task to show that entry would have caused MS to lower its price. Judge Jackson's statement that MS considered pricing at $49, but instead chose $89, would only be the starting point for plaintiffs.

The second category of anticompetitive effect concerns MS destroying competition in the browser market. The "browser war" is all over but the burial, given new usage rates. MS's well publicized decision to "choke off" Netscape's air supply appears to have succeeded.

Browsers are now a free product. Prior to MS's allegedly predatory campaign, however, Netscape had been able to charge for its browser. This price surely would have had to come down if Microsoft had entered using legitimate tactics, but perhaps not to zero and perhaps not as quickly. For damages, Netscape would have to estimate prices for its software and the timing of MS's entry in the actual vs. the "but-for" worlds.

Finally, there were a variety of other anticompetitive actions that Judge Jackson found helped MS maintain its monopoly position in the OS market. The government just proved that they exist. Some quantification would be required in estimating damages from each act.

1. MS prevented shell "tutorial" programs. IBM and Hewlett-Packard testified that the forced removal of their tutorials from their boot-up sequence made their PCS harder to use, caused customer confusion, and increased service calls. Since the OEMs invested millions of dollars in developing these and similar products, they might be able to prove at least these damages, and possibly damages from lost sales. The harm to consumers from never being able to purchase these products would be extremely difficult to quantify.

2. MS prevented OEMs and others from providing browserless Windows. Some users wanted a browserless Windows so employees would not waste time surfing the net and perhaps import viruses. Could a plaintiff examine employee time logs to quantify how much they wasted their time surfing the net and the costs of imported viruses?

3. MS excluded Netscape from the most cost-effective of the OEM distribution channels. Higher distribution costs for Netscape may be among the easier items to demonstrate, but disaggregating damages for the "but-for" world would still require substantial analysis.

4. MS price-discriminated based on exclusivity. Some OEMs paid different amounts for a Windows license depending upon whether they agreed to install Internet Explorer (IE) exclusively. These damages may be relatively solid, but the provable amounts could be few and small.

5. MS tied IE to WindowsTM. The government's theory is that the goal of MS's anticompetitive tie is a percentage of Internet commerce through the preferential placement of links on screens. How much would the payments from travel agents, insurance companies, banks, etc, be worth? As a starting point, the court could examine the amounts of money that MS is already getting for these placements. Using this as a benchmark, however, would be difficult due to disaggregation issues, but perhaps not impossible. The amounts of money involved could be quite large.

Detective novels usually have a clever private investigator who eventually causes the bad guys to loose their ill gotten gains. In this case, the main anticompetitive effects of MS's behavior appear to have been reduced innovation and diminished consumer choice, which are difficult to quantify. We cannot predict the extent to which the private cases can overcome the formidable proof problems. Surveys and creative economic/statistical analysis may come up with estimates for many of the alleged anticompetitive practices, but it is unclear whether they will be considered "reliable" or "speculative". Most of the justice in what may be an "almost perfect" caper might have to come from the antitrust police, and not from a PI.