Don't Disintegrate Microsoft (Yet)

Abstract

During the Clinton Administration, the United States sought to disintegrate Microsoft to remedy the firm's purported monopolistic conduct. The remedy proposed by the United States would have divided Microsoft into two firms. One, the Oppco, would have retained the firm's operating system business. The other firm, the Appco, would have retained the firm's applications business, including Internet Explorer and Microsoft's Office Suite. The United States did not rebut the presumption that the integration of Microsoft's operating system and applications business was procompetitive. Instead, the government claimed that disintegration of Microsoft would lower the so-called "applications barrier to entry," a barrier that Microsoft's unlawful conduct purportedly "raised." Most importantly, the government claimed that an independent Appco would probably transform Microsoft's Office Suite into a form of middleware, the existence of which would lower the "applications barrier to entry" and thus facilitate the emergence of operating systems competitive with Windows. This paper argues that the district court erred when it granted the government's petition for disintegration. Simply put, the court's factual findings did not support any element of the story supporting the government's request for relief. There was, for instance, no finding that Microsoft "raised" the applications barrier; that barrier existed before, during, and after the conduct at issue in this case. Similarly, there was no finding that Microsoft unlawfully maintained that barrier, i.e., that, but for Microsoft's anticompetitive conduct, middleware would have emerged and lowered the applications barrier to entry. Moreover, there was no finding that an independent Appco would, in fact, have the ability or incentive to transform Microsoft's Office Suite into a form of middleware. Finally, there was no finding that Appco would be the only source of middleware capable of lowering the applications barrier to entry. The absence of the sort of findings necessary to justify disintegration was a necessary consequence of the government's litigation strategy. The government did not undertake to prove that Microsoft's conduct actually reduced social welfare. Instead, the United States chose to rely upon outmoded antitrust rules that reduced its burden at trial. For instance, the government relied upon the per se rule against tying contracts, which bans certain ties regardless of their competitive effect. Moreover, the government relied upon precedents suggesting that non-standard contracts entered by a monopolist are presumptively unlawful, regardless of their actual effect. By lightening its load at the trial stage, the United States deprived itself of the sort of factual findings necessary to justify the destruction of presumptively beneficial integration. Absent further findings that validate the government's story, Microsoft should remain intact.