International Think-Tank on Innovation and Competition
Entry and Competition in the Browsers' Market
For twelve years, Microsoft has distributed its operating system with IE and for eight of those twelve years, this has been done under a Consent Decree issued by the U.S. antitrust authorities. Alternative browsers can be easily installed on every PC and competition in the field is on the basis of quality and functionality, at least since the introduction of IE in the mid 90s led to a drop of the price to zero. In the recent years Mozilla's Firefox has seen considerable success, with the gap between IE and Firefox's respective market shares narrowing with every passing month (see the figure below for world market shares). Opera and Safari have consolidated their market positions, while Google's new Chrome quickly picked up a few percent of the global market following its launch in autumn of 2008.
This tendency is even stronger in Europe, where the most recent data (from AT Internet Institute) show a large drop of IE's market share, from about 80 % a few years ago to 66 % in January 2008 and 58 % in January 2009, while Firefox has been growing up to 28 % in January 2008 and 33% in January 2009, Opera reached respectively 3.2 % and 4.1 % and Safari 2.1 % and 3 % (with Chrome at 1.5 % in January 2009). Notice that the access to the Internet is now a fundamental component of any PC and it has promoted the rapid development of all the Internet markets, starting with online sales and online advertising. These kinds of markets represent the main engine of innovation, and in times of crisis they contract as well, though they remain crucial drivers of the economic recovery.
It is odd, to say the least, that the European Commission has decided at this moment to pursue a preliminary investigation on Microsoft for abuse of dominance in connection with the integration of IE into Windows [The original complaint was by the competitor Opera, later backed by Firefox and Google].
It is an issue already raised and solved in the U.S. Clearly, the Commission is applying the judgment rendered by the Court of First Instance in the earlier European case. In that case, Microsoft was accused of excluding competition in the market for media players and was forced to commercialize a new operating system without its media player - which, by the way, was not bought by anybody, except for a few hundred collectors. Today, the issue emerges with IE. As with media functionality, a domain that has seen a flourishing of competitors' products such as Apple's iTunes, despite the alleged anticompetitive conduct, the market for web browsers is marked by lively competition and a wide and easy diffusion (rather than foreclosure) of rival products. The market can be read as extremely competitive, with a leader in a primary market (Microsoft for operative systems)pressured by entry and innovation in a secondary market (browsers) to adopt aggressive strategies. These include tying of the two products to be sold at a very low price and heavy investments in R&D to preserve the leadership. The consequence has been a strong competitive and innovative pressure from other browser producers, with Firefox as the main alternative to IE, and important benefits accruing to consumers in terms of price, quality and product variety.
Moreover, there do not seem to be solid economic motivations in support of the Commission's thesis. It seems unlikely that Microsoft's strategy can have a predatory purpose because any increase in the price of IE is now unrealistic (meaning recoupment is impossible). Moreover, Microsoft mostly gains from the introduction and the diffusion of other browsers because this increases the quality of PCs and therefore the demand for Windows, its main product. Many users try different browsers before choosing their favorite one, and it is hard to imagine a more competitive scenario than this. [Notice that the new version of Windows allows users to turn off applications such as Media Player and IE, avoiding any limit to the exclusive use of competing applications].
Finally, there are clear (technological) efficiencies from the design of an operating system including a browser, which, as a matter of fact, can be substituted with another one in a few seconds and freely. In conclusion, there are no reasons for which the tying of Windows and IE could harm consumers, whose interest (not the interest of the competitors) should drive antitrust policy.
If the Commission is going to pursue this direction, most likely it will fine Microsoft and force it to commercialize a new operating system without IE (which, as it happened for the one without media player, will not be bought by anybody) or with the option to install other browsers (saving few seconds of free download). Apparently, such an outcome would not have any impact on consumers, but the uncertainty on the freedom of innovation and efficient product integration could reduce the incentives to invest in R&D for Microsoft, for all the software companies producing applications for Windows and IE, and for many other firms in similar situations, with harmful consequences for the future consumers. This is not what we expect from policymaking aimed at promoting consumer welfare and growth, especially during a crisis that should suggest other priorities for policymaking.
