Is Microsoft Really A Monopoly?

Is Microsoft really a Monopoly?

The modern industrial age has given rise to companies that span international borders and which can employ hundreds of thousands of individuals. There are considerable profits to be made in this global environment, and companies often seek to become as large as possible. Monopolies and trusts have long come under fire from government regulators, and Microsoft is only the latest company to struggle against possible government intervention. But it is not always clear what the long-term ramifications of breaking up large monopolies will be. For example, the breakup of Standard Oil resulted in several large oil companies, including Exxon and Mobil, which are now considering mergers with other oil companies. This research considers the market in which Microsoft competes, the type of competition within that market, and the microeconomic effects of breaking up Microsoft.

A monopoly is a market with a single seller. In this market, the monopolist company faces a downward sloping demand curve and is characterized as a price maker, meaning that the monopolist can charge any price along the demand curve because the company is the only vendor for the product. "In perfect competition, competitors are price takers, meaning that buyers have considerable power because there are multiple sellers in the market."(Browning & Browning 273)

An oligopoly is a market characterized by only a few sellers who share interdependence. "The goods produced in an oligopoly can be either differentiated or undifferentiated, but the number of sellers and their relationships is the salient defining characteristic of the oligopoly."(Browning & Browning 335) Within the oligopoly of the applications software market, Microsoft is the undisputed leader, much as AT&T is the leader in the long distance telephone market. "Other companies, such as Lotus market office suites, for example, but Microsoft's Office has an edge in this market that combines productivity software such as word processing and spreadsheets into a single bundle."(DeVoney 83) "The dominant firm model of oligopoly suggests that the leader in the market, Microsoft in this case, assumes competitive behavior on the part of its competitors, which seems to accurately describe the productivity software market at this point."(Browning & Browning 345) Thus Microsoft will make marketing decisions based on competitive behavior on the part of Lotus and others, and Lotus will make its decisions based on competitive assumptions about Microsoft and the others in the market.

The office productivity market provides a good example of the oligopoly structure of the market. Several so-called office suites are now available, including SmartSuite by Lotus and Office by Microsoft. "These suites combine word processing and spreadsheets with a variety of other components that may vary depending on the combination selected by the user. Thus a user of Microsoft Office might choose the package that includes Word and Excel along with Power Point and Access. Or, a user might choose Microsoft Publisher instead of Access if there is greater need for a desktop publishing program instead of a database manager. Regardless of which vendor or component combination is selected, users can share information across the various applications within the suite, and can quickly switch from one suite application to another using shortcuts and toolbars."(DeVoney 83)

The Justice Department argued that Microsoft is a monopoly in part because of the company's pricing strategy, particularly as this strategy applied to the company's Internet browser. In that market, Microsoft competed with Netscape, which was the dominant browser at the time that Microsoft came into the market. Microsoft started "bundling" its browser with its operating system that essentially reduced the price of the browser to zero. Customers received the browser when they purchased Windows regardless of whether they wanted the browser or not. According to Netscape, there was now no reason for anyone to purchase Netscape's browser, which certainly fit the concept of predatory pricing.

However, Netscape responded by giving away its browser, although the company maintained that it could not stay in business for long if it continued this strategy since, unlike Microsoft, it did not have other products that could bring in the revenue lost from the browser giveaway. "Under traditional predatory pricing strategies, once Netscape was eliminated from the market, Microsoft would have started charging for its browser, or in this case, increased its prices for Windows in recognition of the additional functionality offered by the browser."(The Myth 49)

The company did modify some of its behavior with regard to pricing as a result of the antitrust suit. "In addition to continuing to bundle the browser as part of Windows, the company embraced "subscription" pricing for Office 2000, a strategy which allows users to rent or lease software, and which makes the future prospect of downloading software directly from the Internet, or running software directly on the Internet, more appealing, particularly to the all-important corporate customer."(Caron & Gerwig 15)

The difficulty in declaring Microsoft a monopoly is that the company does not compete in only one market. "In 1999, it was estimated that Linux, a free operating system, had a three percent market share for all personal computers. Apple, which runs a proprietary operating system, had an additional 15 percent share and Microsoft is estimated to have had an 80 percent share of the operating market for personal computers."(The Myth 49)

Microsoft has built its business around the personal computer, but today's computing environment is moving away from the personal computer and toward client-server technology. "The Web has changed the way in which we use computers, and in a move which Microsoft itself helped to foster, the Internet may well eliminate or drastically reduce the need for locally resident software on personal computers. Instead, users will run software applications as they need them from the Web."(Satran)

Microsoft has also expanded its operations on a horizontal level, so that the company is now a participant in telecom companies, Internet companies and cable companies. "There is no doubt that the vast holdings and incredibly robust financial position of Microsoft makes it uniquely able to meet new market challenges. Although the company became a participant in the Internet market later than the market leader Netscape, it was able to bring considerable resources to bear to enter that market and capture more than a 60 percent share of the market