Microsoft is the world’s largest supplier of computer software. It has dominant market share of PC operating systems with its Windows system. High barriers to entry prevent significant competition in the operating systems market. The primary barrier is that a large number of software programs must be able to interface with any operating system to make it attractive to end users. It would be extremely difficult for any competitor to create a new operating system and create or encourage the creation of completely new software to compete with Windows. However, the development of Internet Browser programs, specifically Netscape, threatened this barrier, by allowing software developers to create software that could run using the browser software as a platform for the program. Therefore, software could be created that could still be used with Microsoft Windows, but would not have to be.
Microsoft recognized this development as a threat to its operating system monopoly. Initially Microsoft attempted to divide the market with Netscape, but Netscape refused. To defend its operating system, it set about to overtake Netscape with its own internet browser, Internet Explorer. To defeat Netscape, Microsoft leveraged its operating system monopoly to gain market share in the internet browser market. Microsoft forced computer manufacturers to include Internet Explorer and strongly discouraged them from including competing browsers with the bundled software. It also leveraged its operating system power to encourage Online Service Providers (AOL, etc.), Internet Content Providers, and Internet Service Providers to use Internet Explorer and discourage them from making competing browsers available. The actions by Microsoft were effective in taking market share away from Netscape and protecting the Windows Operating System.
Discussion Questions and Answers
1. What is the primary barrier to entry in the operating systems market? How does Netscape’s product threaten to remove this barrier? The primary barrier to entry is the development of software that is compatible with the operating system. Since 90% of new PC’s are shipped with the Windows operating system, software developers would have very little incentive to create software for use on a different operating system. Without a variety of software applications, consumers would have little interest in switching to a different operating system. Programs such as Netscape can be used as software platforms. Software developers could create programs that run off Netscape. Since Netscape can be run on any PC operating system, consumers could still use these programs even without a Microsoft operating system. Since all operating systems would be able to run all programs, the operating systems would become a commodity.
2. What is Microsoft’s pricing and distribution strategy for Internet Explorer? How does this compare to Netscape? Why would Microsoft pursue this pricing strategy? Microsoft distributes Internet Explorer to OEM’s for free. Initially, even at no cost, Internet Explorer was not as popular as Netscape, which charged manufacturers for its software. Microsoft’s distribution strategy is to bundle Internet Explorer with all versions of the Windows operating system. Through contractual agreements, Microsoft required OEMs to license, pre-install, and distribute Internet Explorer on every Windows PC it sells. Microsoft clearly pursued its aggressive strategy in the browser market to protect its operating system monopoly. Increasing market share would not help its profitability, since it did not charge for the product. While it may have hoped that it would drive Netscape and other competitors out of the market and then be able to recoup its losses, the internal records do not indicate this. They instead express the more urgent concern of protecting their operating system monopoly.
3. Is the internet browser software market a separate relevant product market from the operating system market? Internet browser software is completely separate from the operating system. In light of the legal issues, Microsoft has made efforts to integrate the browser into its operating system. However, browser software can easily be designed to run on any operating system (Netscape), and multiple browsers can be loaded and used with a single operating system.
4. How does control of the start-up sequence and desktop screen allow Microsoft to leverage internet providers to use Internet Explorer? How effective was this strategy? Through its operating system monopoly power, Microsoft has contractually forced OEMs to not alter the Microsoft boot-up sequence or desktop screen. Therefore, Microsoft has complete control over which icons and shortcuts are initially placed on the end users computer screen. In exchange for promoting certain online service providers, internet service providers, and internet content providers, these providers had to agree to promote Internet Explorer exclusively. This promotion included agreeing not to inform consumers that other browsers were compatible, not allowing other browsers to be downloaded from their sites, and developing content that was designed work more effectively with Internet Explorer. Since the internet provider market was very competitive, providers placed an extremely high value on gaining desktop access to consumers. They were willing to sign exclusive contracts with Microsoft to gain access to the Windows desktop. In turn, since one-third of users obtain their browser software from their internet service provider, Microsoft was very effective in promoting Internet Explorer over Netscape.
5. What are some of the ways in which Microsoft’s actions adversely effect competition and innovation? Does this show evidence of harm to consumers? By its contracts, Microsoft reduces the ability and incentive of OEMs to innovate and differentiate their products in ways that would appeal to consumers. Impairing the incentive of Microsoft’s competitors to develop new products. Impairing the ability of Microsoft’s competitors to obtain financing for developing new products. Inhibiting competitors who develop new products from marketing them to customers. These results show that Microsoft’s actions did likely have a harmful effect on consumers of personal computers and software.