International Think-Tank on Innovation and Competition
Moving beyond the IE Case
August 24, 2009
A few days ago Microsoft proposed a consumer ballot screen to access the Internet from the new operating system Windows 7, which will go on sale in October 2009. This would allow computer manufacturers and single consumers to easily install their favourite web browser as the default one and, if they want, to disable the browser of Microsoft, Internet Explorer (IE). Without doubts, this new mechanism will grant free and effective choice to final consumers and provide a more than satisfying solution to the pending E.U. antitrust case concerning the tying of IE with Windows. The same European Commission has welcomed this proposal, though it is still investigating its practical effectiveness.
To understand the consequences of this important step, which is likely to end a decade of conflicts between the large software company and the E.U. antitrust authorities, 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 recent proposal of a ballot screen, 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 led to a drop of the price 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 has been growing 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. Notice that browsers are now an integral part of computer experience and they have promoted the rapid development of all the Internet markets, starting with online sales and online advertising.
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 commercialize a new operating system without its media player, which, by the way, was not bought by anybody, except for a few hundred collectors. In the current case the focus is on the market for browser, which, as we have seen, is characterized by lively competition and increasing market shares for rival products. To a large extent, this industry can be read as extremely competitive, with a leader in a primary market (operative systems) pressured by entry and innovation in a secondary market (browsers) to adopt aggressive strategies, including tying the two products to be sold at a very low price and investing heavily 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.
In such a scenario, it is hard to see 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. Tying Windows with IE could only represent a constraint for competing browsers in theory, not in practice: after all IE could be substituted with another browser in a few seconds and freely even before the introduction of the ballot screen.
With the new ballot screen mechanism launched by Microsoft (and originally proposed by the European Commission), minor browsers and even new entrants will receive a large advantage, so as to strengthen the competition against Microsoft. As a matter of fact, notice that the ballot screen for the final consumers will show up if IE has been installed, but if the computer manufacturers have installed an alternative browser, no ballot screen will appear: this may represent a substantial advantage for Firefox, Opera and all the competitors of IE. As a separate consequence, the proposed mechanism will certainly strengthen the leadership of Google as a search engine, since browsers like Mozilla and Opera are currently paid to pre-set the leading search engine as the default one, and computer manufacturers will be probably paid to do the same in the future: this may strengthen the dominance of Google in the market for online advertising (though the recent alliance between Microsoft and Yahoo! may counterbalance this effect). Not by chance, Google is heavily supporting the antitrust investigation on Microsoft, while advertisers and content providers fear such a bonanza for Google.
In conclusion, with the new features proposed by Microsoft for Windows 7 (the possibility to turn off applications such as Media Player and IE, and the ballot screen aimed at installing alternative browsers and disabling IE), one can safely argue that even the theoretical constraints to entry and competition in the browsers’ market will be all eliminated. It is therefore time to move on from this long lasting antitrust issue, leave market forces to work by themselves, and focus policymaking on other important issues in such a critical macroeconomic context.
