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Home / Adam Smith Institute / Did Microsoft’s antitrust prosecutions give us the iPhone? Um, no.

Did Microsoft’s antitrust prosecutions give us the iPhone? Um, no.

Summary:
Tom Forth writes about the Microsoft antitrust case (which is my earliest memory of a competition lawsuit, and which I followed with interest as a child). Many of the responses to the EU’s Google ruling have compared it to the Microsoft case, including my own on this blog and in City AM.He argues that the threat of more antitrust lawsuits were what drove Microsoft to effectively bail out Apple in 1997, when it was close to bankruptcy. Without the 0m injection of cash and commitment to maintain Office software for Macs that Microsoft gave Apple, we’d have had no Apple and hence no iPhone. Keeping Apple afloat allowed Microsoft to point to the existence of a viable rival – so no monopoly and no need for investigation.It’s a good story, even if it’s a little strange to assume that without

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Tom Forth writes about the Microsoft antitrust case (which is my earliest memory of a competition lawsuit, and which I followed with interest as a child). Many of the responses to the EU’s Google ruling have compared it to the Microsoft case, including my own on this blog and in City AM.

He argues that the threat of more antitrust lawsuits were what drove Microsoft to effectively bail out Apple in 1997, when it was close to bankruptcy. Without the $150m injection of cash and commitment to maintain Office software for Macs that Microsoft gave Apple, we’d have had no Apple and hence no iPhone. Keeping Apple afloat allowed Microsoft to point to the existence of a viable rival – so no monopoly and no need for investigation.

It’s a good story, even if it’s a little strange to assume that without Apple, nothing like Apple or the iPhone could have existed – a sort of domino theory of innovation, where ours is the best of all possible worlds. (Tom acknowledges this point, but says he’s just not convinced by it. On Twitter he argues that the lack of competition in English bus services justifies his scepticism.)

But the story Tom tells is basically wrong – it’s the conventional folk history of what happened, sure, but it actually misinterprets the situation with Microsoft at that time. First, note that the $150m cash injection was a relatively trivial sum of money – the real ‘bailout’ came from promising to maintain software support for things like Internet Explorer and Office for Mac.

Microsoft was throwing its weight around in the 1990s. It was blocking the sale of alternatives to its software and demanding that Windows PCs be shipped with other Microsoft products too. But there was such an abundance of complaints that prosecutors decided to focus on what they saw as Microsoft’s most egregious crime: bundling Internet Explorer with Windows.

But this took Apple out of the picture. As Daniel Eran Dilger says:

By narrowing the monopoly case, prosecutors effectively took the majority of business between Apple and Microsoft out of the picture; the existence or disappearance of Apple would simply have made no difference in a trial that revolved primarily around Netscape's Navigator and Microsoft's Internet Explorer on Windows.

Microsoft didn't need to bail out Apple to pretend that the Mac platform was providing effective competition to Windows. Further, doing so would not really help its case, since the existence of the Mac did nothing to put Netscape on OEM PCs or to make it appear that Microsoft had not violated its 1994 consent decree.

Included in the findings of fact is a summarizing statement that demonstrates how little bearing Apple's Mac had on the outcome of the decision:

“Viewed together, three main facts indicate that Microsoft enjoys monopoly power.  First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.”

In other words, bailing out Apple was irrelevant to the main lawsuit against Microsoft, including to the judge ruling on the case. (Dilger’s post is fascinating and detailed on this whole affair – I recommend a full reading if this case is interesting to you.)

In fact, antitrust was not the reason Microsoft decided to bother with Apple. 

Further underlining the fact that the agreement had nothing to do with antitrust violations, Microsoft demanded that Apple make Internet Explorer the default web browser on the Mac. If the company was at all worried about its monopoly case, such a deal would be an absurd way to create the appearance of an open market. 

Far from bailing out Apple to avoid the appearance of a monopoly, they were trying to use Apple to squeeze Netscape – a quarter of whom were Mac users – in the browser space even more! Microsoft’s bailout was for the exact opposite of what Tom claims.

The real reasons were to do with expanding Microsoft software usage to make money and to defuse impending lawsuits from Apple. Apple had amassed a large patent warchest and was reported to be planning to sue Microsoft for patent infringement and for using stolen code for its video processing on Windows

To head these off, Microsoft wanted to tie Apple users into its software more (Internet Explorer and Office) and give Apple a series of sweeteners to persuade it to drop the lawsuits. Bailing out Apple wasn’t relevant to Microsoft’s monopoly lawsuits. It was driven by a desire to be more monopolistic and to avoid being sued for intellectual property theft by Apple. 

Whether the actual Microsoft antitrust case was justified is a discussion for another post. A few points, though: I agree with Lawrence Lessig, one of the regulators behind and Special Master during the lawsuit, that history has proved it to have been misguided – the emergence of Linux shows that the operating system space can be competitive even if a dominant firm is being extremely aggressive in trying to destroy its competitors. 

In my previous post I explained why competition within a software platform doesn’t matter if there is or can be competition between platforms. And Thomas Hazlett has shown that antitrust lawsuits against Microsoft lowered the overall value of the computer industry – a sign that the enforcement has not been good for the sector as a whole.

But the folk story that Tom cites is widely misunderstood, and misses the real dynamics of why Microsoft helped to bail out Apple. I hope people aren’t misled by it.

Sam Bowman
Sam Bowman is Deputy Director of the Adam Smith Institute, Britain’s leading libertarian think tank, where he has worked since 2010. He is responsible for managing the Institute’s team on a daily basis, working on the ASI’s overall strategy, acting as a media spokesman for the Institute and writing and researching in his spare time.

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