The Happy End of the Browser War

December 15th, 2009

After a decade of contrasts, the EU vs. Microsoft antitrust case finally arrived to a conclusion with an agreement for which Microsoft will now distribute its operating systems with a "Choice Screen" for the selection of the web browser.

Consumers will be able to install immediately their favourite browser as the default between the 12 most widely used browsers (including Internet Explorer, of course, but also Firefox Mozilla, Google Chrome, Safari, Opera and others), rather than downloading it from the Internet through the pre-installed browser Internet Explorer as until now. The 12 browsers will be presented in a random order in a neutral initial page. This outcome follows a market test opened by the Commission between October and November and is a positive conclusion of a longlasting case, which opens a new era of collaboration between the market leader of the software industry and the European antitrust authorities.

Since we want to evaluate the economic consequences of this important step, we need to have a look at its background. In the last twelve years, Microsoft has distributed its operating system bundled with IE – and for eight of those twelve years, this has been done under a Consent Decree issued by the U.S. antitrust authorities. Even without the “choice screen” offering an opportunity to download rivals' browsers, alternative browsers can be easily installed on every PC. Competition in the field is on the basis of quality and functionality, at least since the introduction of IE in the mid-90s resulted in browsers’ prices dropping to zero. Recently Mozilla's Firefox has seen considerable success, with the gap between IE and Firefox's respective market shares narrowing with every passing month; 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 the fall of 2008. This tendency is even stronger in Europe, where the most recent data (from W3 Counter) show a large drop of the market share of IE (in all its different versions), from more than 80% a few years ago to 60.6% in July 2008 and 52.9% in July 2009, while Firefox grew from 29.7% to 31.4% in the last year, Safari moved from 1.9% to 3.1% and Opera from 1.1% to 1.2%, with the new Chrome reaching a market share of 3.1% in July 2009. In spite of this dynamic competitive scenario, following a formal complaint by Opera, in January 2009 the European Commission sent a Statement of Objections to Microsoft concerning the possible anti-competitive consequences of tying Windows with IE. The Commission was 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 commercialise a new operating system without its Windows MediaPlayer, which, by the way, no one purchased. In the Internet Explorer case, the focus was on the market for browsers, which is characterised by lively competition and increasing market shares for rival products.

To a large extent, the browser industry seems extremely competitive, with a firm that is the leader in a primary market (operative systems) pressured by entry and innovation in a secondary market (browsers). The latter is characterised by an increasing degree of product differentiation (in terms of performance and visual experience) and by demand that overlaps with the primary good (almost any PC has access to the Internet) and typically covers multiple browsers at the same time (Internet users often try and sometimes use different browsers on their devices). Under these conditions, tying becomes a normal aggressive strategy of the leader without exclusionary purposes, but aimed at strengthening competition and reducing prices in the secondary market to gain scale economies in the secondary market (against a modest sacrifice of profits in the primary market). As shown in "Endogenous Market Structures and Antitrust Policy" (International Review of Economics) , this is the classic situation in which the entry pressure in the browser market reinforces innovation by leaders and followers, producing important consumer benefits in terms of price, quality, and product variety. In such a scenario, it is hard to see other pervasive anti-competitive consequences of the Microsoft strategy. It seems unlikely that it could have a predatory purpose because any future increase in the price of IE is now unrealistic. 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 and Office applications, its main products. Finally, there are technological efficiencies from the design of an operating system including a browser. In conclusion, tying Windows with IE could have represented a constraint for competing browsers in theory but not practice; after all, IE could be substituted with another browser in a few seconds and freely even before the introduction of the choice screen.

With the new mechanism launched by Microsoft, minor browsers and even new entrants will get a boost, strengthening the competition against Microsoft. As a matter of fact, the choice screen will show up if IE has been installed, but if the computer manufacturers install an alternative browser, no choice screen will appear for the final consumers – this may represent a substantial advantage for Firefox, Opera, and other competing browsers. What is sure is that, given the choice screen prepared in the agreement between the European Commission and Microsoft, all the possible constraints to entry and competition in the browsers’ market will be eliminated. It will be interesting to verify the impact of this policy shift on the browser market.

See also Beyond browsers: Moving on from the EU vs. IE case (VOX, October 8, 2009)

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