Notes on the book - Trust on Trial by Richard B McKenzie PH.D (Walter B. Gerken Professor of Enterprise and Society in the Graduate School of Management at the University of California, Irvine. Pg. 15 – Antitrust laws should never be used to harass firms for building fortunes or for being "fiercely competitive." Pg. 15 – "MS's critics should not be allowed to mask their envy and greed behind flawed arguments." Pg. 15 – MS's rivals call themselves NOISE (Netscape, Oracle, IBM, Sun, and Everyone else). "Unfortunately, antitrust suits are often used to hobble aggressive competitors as they are to constrain monopolies. The NOISE group has not only actively supported the suit, it has done worse: it has campaigned …to press the DOJ to take up the case. This alone can undermine citizens' trust in the aims and fairness of antitrust enforcement." Pg. 15 - "Proposals to hobble MS by breaking it up will likely raise, not lower, software prices, all for the benefit of MS's competitors." Pg. 25 – "…it would be a shame if MS were penalized for its market strategies, mainly because such a conviction would have a broadly chilling effect on American competitiveness in the emerging information age." The DOJ is in essence is attempting to stifle innovation by punishing MS. Even if MS is guilty of all charges (the facts show otherwise), the DOJ is cutting off an arm rather than clipping a few fingernails ie. the remedy is worse that the disease. The DOJ is obviously convinced MS is guilty of anti-trust laws, but doesn't common sense/moral law dictate that the punishment of the guilty should not also punish the innocent. Pg. 30 – Technical addition – switching costs are generally equal among all operating systems. Switching costs from OS/2 to Linux would be the same as switching costs from Windows to BE-OS. The DOJ's argument that switching costs are too high for Windows is nonsense. The DOJ attempts to make this false point in order to show there isn't a viable alternative to Windows, and thus make a point in proving MS is a monopoly. The DOJ would have to imply that once you buy an OS you are locked in for life, and since businesses change and mix OS's on a regular basis, the DOJ is once again proven wrong. Because there are no over burdening switching costs, MS does not have a monopoly. Pg. 31 – The states economist Warren-Boulton testified that the price MS's charges for windows is "inelastic". Thus, the states's economist admits that MS does not charge monopoly prices for windows. This admission should quaff all future lawsuits that wish repentance for consumer over charge. If consumers have not been charged monopoly prices, they have been charged a fair price. Only, an overcharge can be reattributed back to the plaintiff The DOJ's economist on the other hand says that MS is charging "supernormal prices". These are obviously at odds with one another, even though both sides represent the plaintiffs. Boulton's testimony seems the most relevant because monopolies charge prices that create "elastic" prices because it is an easy way make more profit. MS charges "inelastic" prices. MS's business model is low price and high volume. This business model explains the "inelastic" price, and shows MS is probably not a monopoly. Judge Richard Posner has argued, "…an inelastic demand at the current price is good evidence of the absence of monopoly power." (proof is in the profits….) Another strike against the DOJ, using their own economist again, Fisher testified that that MS didn't have a monopoly until 1997. MS's market share in 1991 was 93% (Figure 2.1 on page 42). If market share proved monopoly power, Fisher should have declared MS a monopoly in 1991, not 1997. The plaintiffs inconsistencies only prove the weakness of their case. Pg. 34 – High market share is not "indicative" of a "firm's monopoly power…". Economics 101 says a firm with 100 percent market share is not a monopoly if it acts like a competitor. "In other words, it must price and develop its product as though it actually had market rivals because the firm has to fear the entry of potential competitors." (examples ensue ie. Signiture Software…) If this case were a murder trial, I would say there ample reasonable doubt not to convict. Pg. 39 – If MS charges to much for windows, why do the other OS's charge similar prices? Red Had Linux sells for $80, and "paid nothing for the OS. What it is charging for is the documentation and the support the company provides. This suggests that maybe much of the price of Windows is unrelated to the direct cost of producing each electronic file copy." Since other competitors don't sell their OS at just above marginal cost (as Judge Bork and others would like), why should MS. As McKenzie points out, maybe there are other costs involved like support, documentation, research, marketing etc… that needs to be taken into account rather than looking at the cost of replicating a CD (which is about $1). This only proves that the legal system should not be setting prices in a free market. Consumers will only be hurt by its ignorance. Pg. 41 – McKenzie once again shows that MS, because of its volume of sales, can cut prices on consumers behalf. If the DOJ were to break MS up into "baby bills", OS costs would increase do to the lack of volume, and consumers would actually pay more for Windows after the break up than before. I don't see how the DOJ has helped consumers by forcing consumers to pay more for a product than they could have otherwise. Pg. 58 – "The history of antitrust enforcement is replete with miscarriages of justice." Standard Oil is discussed as one of the miscarriages, and rightfully so. It seems a lot of people don't now the facts in Standard Oil case. There are similarities in the Standard Oil case and the MS case which are just spooky. NOTE: Larry Ellison "indicates that MS might not be the serious problem both he and Klein had made it out to be." Perhaps this explains why the NOISE group jumped shipped, and has left Klein in a row boat with one oar paddling in circles. Klein keeps yelling for help, but the silence is deafening. The NOISE group finally realizes the Internet is the next opportunity, and focusing on MS will only distract them – as it has in the past to their regret – maybe the NOISE group has finally learned that its about continued innovation that makes you successful not jealousy. If your idea fails, you just try another one. Failure should make you stronger and wiser not weaker and depressed. Pg. 59 – I am reminded of the 3 stooges. Larry=19 states, Moe = DOJ, Curly = Judge Jackson. Or perhaps we should call them, Greedy, Incompetent, and Stupid. Pg. 63 – The Coase analysis (Ronald Coase is professor of law and economics at the University of Chicago). "The Coase analysis helps explain why the price of windows is as low as it is…MS has to charge such alow prices because it has to compete aggressively with itself." 2 out of 5 windows customers DON'T use windows 98. 1 out of 5 still use windows 3.1 or MS-DOS. MS must keep their price low in order to maintain incentives to old customers as well as new. Pg. 68 – "economics professors Liebowitz and Margolis undertook a survey of how well MS products fared in reviews by major computer publications when compared with its major competitors." This study revealed MS products with high market share were highly rated by the press, and MS products with lower market share were not rated highly by the press. This shows MS is probably not a monopoly because monopolies tend to wield monopoly power over markets with less favorable products. MS has not done this. The book lists examples… Pg. 70 – "Lowering prices to meet or beat competition is not legally predatory." It can be easily show that the windows/IE integration was not predatory, and therefore anti-trust laws could not have been broken. Pg. 71- Here we see the DOJ once again walking on both sides of the fence. In court, their witnesses continue to claim that Windows/IE integration is a "bad" thing. Thus telling the court that IE is integrated into windows and it was a predatory action violating antitrust laws. Yet, the DOJ then has Dr. Felten tell the court that Windows/IE can be easily removed for possible remedy solutions. Is IE integrated or not? Of course, the appellate has already ruled that IE is integrated and that there is nothing wrong with the integration, but the DOJ and Judge Jackson don't seem to be paying any attention. They seem to be living in their own little Alice in Wonderland world where logic is defined at their whim. McKenzie's labtop/modem analogy is classic. Pg. 73 – "The claim of the DOJ lead attorney, David Boies, and prosecution witnesses that there are NO BENEFITS whatsoever to be derived from integrating the browser into the OS reflects unbelievable sciolism and arrogance." McKenzie not only shows there are benefits and that other OS's do it for a benefit, but that Netscape was going to include Java into a Web based OS which is also beneficial. Why would all these companies, including MS do this if it weren't beneficial? The fact that Judge Jackson agrees that integration holds no benefit shows his complete incompetence on these issues. And it is this Judge that will be forming remedies that will shake the very foundation of all tech companies in the present and future. Thank goodness for appeals courts. Pg. 81 – "…network effects are central to the governments case…" If you don't know what network affects are, it is explained in the book. McKenzie does a great job of teaching some economics 101 principles in this chapter. Once you understand the reality behind network affects, you see once again that MS is not behaving like a monopoly. Jackson says the "applications barrier to entry" is a problem. Maybe for competitors, but as McKenzie points out. For MS customers who belong to the network, it is a benefit. Once again, we see that MS, who maintains the network, is providing consumer benefits – no consumer harm here – thus no violation of anti- trust laws. Pg. 86 – "The case thus represents a largely unrecognized assault on a firm's property rights in its technology and network, which were earned as a consequence of a substantial up-front investment. Do we really want antitrust laws to be used for a virtual land grab?" MS has spent billions of dollars on windows, and yet, the DOJ's remedies do not discuss compensation to MS. Pg. 87 – "The DOJ probably views MS's zero and below zero prices as predatory because the lawyers haven't been able to shake the economic mind-set of an earlier industrial era…This means that the DOJ and court don't really understand the pricing implications of its own network-effects theory." Even an anti-MS think tank disagrees with the DOJ's network-effect/barrier to entry theory… McKenzie proves that "network-affects are real", and when fully understood it shows MS sold IE just as Netscape sold Navigator before it to increase network affects - pricing at zero cost is not predatory, and network-effects do not "Lock-In" consumers. When network-affects are implemented correctly, it actually helps consumers not harm consumers. Once again showing MS doesn't have a monopoly and that MS has not broken anti-trust laws. Pg. 89 – "Which price is best depends upon the exact nature of the network effects and production costs or the extent of economies of scale. The greater the anticipated network effects and scale economies, the lower the initial price should be." This is exactly what we way Netscape and MS do in the browser wars. Nobody was acting like a monopoly here, firms were just competing based on the network-effects theory. Pg. – 91 "It is interesting that such use of the nation's antitrust laws can force anticompetitive pricing by all firms in the market, an outcome contrary to the ostensible intent of antitrust laws." The idea here is that "legally assaulting" MS will raise their cost and hence hurt/slow their network-affects. This allows everyone Sun, Netscape etc…to raise their prices and gain market share from MS at the same time. Higher prices are harmful to consumers, thus antitrust is potentially harming consumers. "if the DOJ gets its way (software) will be more expensive than they are now." Pg. 92 – It is clear that switching costs are not high. AOLTV is banking on it. McKenzie adds many other examples which prove the DOJ is wrong again. Pg. 102 – "Once again, the DOJ wants to have it both ways. It can't claim that the OS is controlled by substantial network effects and then pretend that consumer responsiveness (or elasticity of demand) will be low for all time. The fact of the matter is that substantial network effects translate into a significant curb on any monopoly power…" The DOJ does not recognize the fact that network effects work for competitors as well as the dominant player. The DOJ would like us to believe network effects ONLY work for the monopoly. Thus the DOJ tries to prove, falsely, that network effects will allow MS to sustain its supposed monopoply. McKenzie uses Apple as an example. Apple used restrictive practices to obtain short run profits. This gave MS an opportunity to start its own network. This was a good business decision by MS which the DOJ is condemning. Pg 104 – discussion on Digital Opportunism – a few examples are discussed…"The court goes on to note, "MS actually paid AOL a bounty for every subscriber that it converted to access software that included IE instead of Navigator." So What? Netscape could have done likewise. There is nothing in this deal the prevented Netscape from competing." Pg 107 – Judge Jackson thinks OS/2 warp failed because of MS's monopoly of windows, but as McKenzie points out, "IBM made critical mistakes in its promotion of the OS/2 applications network". SDK issues, CD-ROM and internet integration issues are also brought up. "The judge simply doesn't understand the full history of the OS wars." The judges finding of fact, is more like a finding of fiction. Pg 108 – Netscape claimed MS attempted to enter a "special relationship" on api's to suppress windows competition. McKenzie shows that evidence presented in court that was not disputed by the DOJ or discussed in the judges FOF proved that Netscape had access to all the information it needed in order to finish its browser. Netscape's claim was a complete fabrication. Pg. 119 – "Given the government's firm charge that MS harmed Netscape…There are statistical procedures (the DOJ) could have used to support its position. But (the DOJ) chose not to use them…" "the evidence doesn't match up with the governments strong charge." "The government's charge amounts to pure speculation which seems a poor foundation for a serious charge of consumer harm in order to make its broader antitrust case stick." Pg. 120 – "Monopolists are companies that restrict output to raise prices. The DOJ has never presented any evidence that MS has done that." MS giving its browser away was …"classic competitive-non monopolistic-responses." Pg. 123 – What is remarkable about the MS case is that the DOJ and court dare to claim solemnly that MS has been able to stifle the development of an alternative computer platform…(Navigator/Java). Pg. 126 – "One of the most fundamental problems with the MS case is that the DOJ often make a very strong claim, …which however they fail to support…(via empirical data ). "It is truly remarkable that in the tens of thousands of pages of documents and court testimony, the DOJ never produces a shred of data- not even a datum-that independently validates the innovation claim." Pg. 147 – "Just because policies are endorsed by gov't bodies does not mean that they are efficient, just, right, or fair." "We need to be on guard against the gov't being used by people who have little or no concern for the public's welfare…" Pg. 148 – examples of anti-trust misuse are listed and examined… MS seems to have been taken to court because of its market efficiencies not its market share. These efficiencies have created MS's market dominance. The only way to slow MS down is to make MS less efficient. This is good for competitors, but bad for consumers. Anti-trust is but a means to redistribute wealth. Pg. 152 - "antitrust laws do far more harm than good…" Milton Friedman. "The accused firm is left in a whale of a legal bind, given that it must prove whoat it won't do in the future. It must prove the absence of a prospective negative, which is a difficult legal assignment at best." This describes the MS case. Pg. 154 – the intent of antitrust was to fight monopolies, but the unexpected consequence was "accusing firms can impose legal costs on their more aggressive competitors, causing them to refrain from such aggressive competitive price cutting." Thus, antitrust is causing higher costs for consumers. Pg. 154 – The Intent of Antitrust Laws – an enlightened history of Antitrust Antitrust came about via states who used it as a weapon in order to protect local monopolies from being out competed from large outside trusts. Trusts, like Standard Oil, that brought prices down from the efficiency created from the trust itself. Standard Oil did not raise prices and limit production which is the typical definition of a monopoly. Like MS, Standard Oil didn't behave like a monopoly, but competitors needed to protect themselves from a better company. Thus, Antitrust laws were introduced in states on behalf of local competitors not on behalf of consumers. Protection of local business was the key reason for Antitrust Laws, not protection of consumers. If you look at the history of all Antitrust cases, 99 percent deal with complaining competitors not consumers. It is my opinion, that antitrust laws should be abolished. They do not protect consumers as we think they should; only competitors are protected which allows them to raise/maintain higher prices. "the real intent of the antitrust law for many supporters was not so much to fight monopoly as to ensure that smaller, less efficient firms could survive in markets dominated by larger, more efficient firms." Examples abound starting at page 154. Pg. 157 - "…competitive-not monopoly-behavior can be construed to be against the law…" This vagueness in the law allows a competitor an easy form of protection from a more efficient firm. This protection is anti-consumer. Anti-trust could also be seen as anti-consumer. Pg. 158 – The DOJ's (Klien's) reasoning: Why is the DOJ (Klien) taking MS to court for Antitrust violations? Klien's interpretation of the antitrust laws is one of preserving local competition – even though this competition costs consumers by denying them a cheaper product by a more efficient firm, and even though in the MS case network affects/economies of scale drive consumers to a dominant player. This is why Klien believes an "active" DOJ is needed in the technology area. In Klien's world, the market will continue to consolidate into a dominate player which will require constant gov't intervention in order to preserve competition. Why do consumers pay more in Klien's world? The answer is Network Affects and Economies of Scale as Mckenzie has pointed out. MS has a very large network which allows them to be very cheap – high volume at a low price (Mckenzie discusses networks in previouse chapters). If MS's network is divided into 4, distributed equally amongst 3 other companies, consumers have 4 different products to choose from, but the network is Ľ of the original – lower volume forces higher prices. One might think that the competition between the 4 firms will lower prices, but this is not so. Without the efficiencies of the large network, prices are forced to drop only as far as cost benefits will allow. The networking affect is the key to lower prices for one firm vs. higher prices for multiple firms. The question is – are consumers better off with less choice at a better price, or more choice at a more expensive price. I believe the consumer should answer this question not the government. Governments have not shown the capacity to be fair, knowledgeable or quick enough to provide the required assistance to maintain choice. Thus, it is better to have less choice at a better price. If a competitor has the next great idea, we have to assume consumers are smart enough to "switch" , and if a dominant by efficient firm starts to act like a monopoly, we have to assume also that consumers will "switch". If we make these assumptions, we will never have to worry about monopolies because consumers naturally prevent them from occurring. Yet again, antitrust laws are not necessary. The markets will naturally balance themselves if given a chance. Pg. 160 – why antitrust laws are bad : "An increase of 1 percent in antitrust case activity leads to about a 0.15 percent increase in the overall unemployment rate." (Bittlingmayer study) If antitrust were good for consumers/workers, we should the opposite effect. Antitrust activity on domestic firms weakens these firms compared to import markets. Foreign producers get an advantage over domestic firms who must compete with larger firms abroad. This shows how antitrust is outdated (very outdated). We live in a global community today, unlike the solely domestic world of the 1890's. The U.S must have strong firms in place if they are to compete with the larger foreign firms. Antitrust makes our strong firms weaker which hurts our exports which hurts U.S consumers. (Shughart, Tollison, Silverman study). "When antitrust enforcement has been aggressive, financial markets have gone into a tailspin." (Bittlingmayer study). Markets boomed when antitrust enforcement was lax. Pg. 161 - The failure of antitrust is anchored in its misuse by competitors and politicians. McKenzie explains the relationship between antitrust and politics. "Politics can affect not only the total number of cases brought but also which cases are taken to court." McKenzie points out that low paying gov't lawyers who are looking for experience and a better job in the private sector also taint the antitrust process. Klein is a good example. McKenzie quotes an FTC lawyer who admitted "I want to go to trial so badly there are times when I overstate the possibilities…" Shughart says, "…the antitrust bureaucracy does not select cases to prosecute on the basis of their potential net benefit to society. Instead, the managers and staff of the Antitrust Division and the FTC use the discretion at their disposal partly to further their own private interests rather than those of the public at large." Shughart has research to back up this claim. "The offices of state attorneys general are widely recognized as "profit centers" for state governments…" (State AG's don't necessarily behave in the public's interest either.) "a special reason (AG's) jump on the antitrust bandwagon: they want to avoid "being tobacco'd", an expression that is now used widely within state AG's circles to indicate that they don't want to miss out on the next round of legal awards…" Pg. 168 – McKenzie describes how Bill Gates and Microsoft got "Borked". Borked describes a campaign run by enemies to discredit you through any and all means possible. Pg. 170 – The market backdrop – discussion of some relevant tech industry history – One interesting point was that Ray Norda of Novell and McNealy of Sun believe that "competitive industries should keep to their own markets and take a more live-and-let-live approach to product development." This seems very naďve. Shareholders will want expansion and growth. Firms reaching out into others markets are the norm for all business. Why should Norda and McNealy wish product development to be different? This attitude whether it be selfishness or taking higher moral ground explains why MS succeeded in taking away their future market share. They assumed no one would be able to compete with them – maybe ego and arrogance would be better descriptions of this philosophy. Pg. 185 – Stephen Auditore, president of Zono research said, "This initiative (network computers) has much more to do with power and greed than it does with customer need. Sun is attempting to substitue its products for MS's. Instead of paying a tax to MS for Windows, Sun wants people to pay them a tax for Java." Pg. 186 – McKenzie notes the "consortium" (ms detractors like IBM, SUN, Oracle, Netscape,Novell…) colluded to separate the server stack amongst them. This prevented these firms from competing against one another, and allowing them to focus their attention on MS. This "secret" collusion may have been a violation of antitrust law. The collusion works as follows: Oracle buys Lotus, keep Lotus notes and sell Lotus SmartSuite to Novell. Oracle would get Novell's Unix division. Sun and IBM would rewrite their version of Unix to match the Oracle backed standard. This Unix could now compete with Windows NT. None of these firms would now compete with each other, and they would focus their efforts on the server side giving up on the PC side. The cartel crumbled when Ellison of Oracle backed out of the deal to buy Lotus. Steve Jobs of Apple convinced Ellison that conceding the desktop (PC) market to Microsoft was stupid. Later, SUN introduced a browser called HOTJava and licensed Java to Microsoft. Netscape was very displeased. IBM decided to buy Lotus Notes, which Oracle was supposed to buy. Then Netscape began competing directly with IBM's Lotus Notes. Microsoft used the cartel's bumbling to introduce and integrated browser, which gave them even more market share. The appellate court saw the tie-in legal. A fact Judge Jackson, in his conclusions of law, still has not agreed with, thus defying/breaking the law laid by a higher court. Now we have a situation where MS competitors failed on their own merits, and they have failed to work together. The only other option for potential success was the government. "As has so often been true in the history of federal and state regulations, companies that are unable to successfully cooperate in achieving collective goals often turn to the government for assistance." NOTE: NOISE stands for (Netscape, Oracle, IBM, Sun and everybody else) MS rivals coined this phrase, it is their verbage. Pg – 189 - "There is nothing illegal or improper about cooperating for the purpose of setting industry standards…But the NOISE principals' arguments are disturbingly inconsistent. They seek to collectively supplant MS and ,at the same time, accuse MS of wrongly doing what they are trying to do…This is rank hypocrisy." "It is doubly hypocritical, for David Boies, the gov't lead trial attorney on the case, to dismiss the NOISE efforts on the grounds that small companies should legally be allowed to collude, but large companies should not be able to do the same. It is definitely a streatch to view IBM, whose sales reamain close to 5 times MS's, as a "small" firm under any circumstances." Pg – 191 – "What's remarkable about the history of antitrust enforcement is how often the political system has heeded the chants of offended market rivals for antitrust prosecutions. This is reason enough to scrutinize the political maneuvering of market rivals in the MS case." Pg – 202 – "John Doerr-a Silicon Valley venture capitalist (access to billions of dollars) who has investments in Sun, AOL, Netscape and Red Hat (a linux service provider who competes with MS windows)…worked closely with Vice President Al Gore…Doerr's work with the administration had become so close that Clark of Netscape freely described Doerr as a "fixture" in Washington and mused about how Doerr's colleagues often joked that a future Democratic presidential compaign slogan might very well be "Gore and Doerr in 2004". Pg – 207 – McKenzie discusses some of the anti-MS figurheads: Bob Dole – works for and is paid by a netscape lobby group Judge Robert Bork – works for and is paid by a netscape lobby group (Bork has flipped flopped based on previous writings – no credibility here) Sen. Orin Hatch – like Al Gore, Hatch got a bunch of money from Silicon Valley for his presidential campaign. Anti-MS firms as a whole spend nearly twice as much as MS on lobby groups. We can see once again that Antitrust is a political beast. Pg – 213 – Over 240 economists signed a petition declaring MS's innocence in this case; MS paid none of these people. Pg 217 – Antitrust is about redistribution of wealth – in this case, MS redistributes its wealth to its competitors and lawyers. Pg. 218 – "One of the signal antitrust ironies is that Bork has helped to repoliticize the antitrust enforcement process after making a career of decrying it. To that extent, he has contributed to undermining the trust we can have in antitrust." Pg. 222 – "…one of the government's chief economic experts, Franklin Fisher, argued forcefully years ago in his defense of IBM against antitrust charges that practically no weight should be given to evidence of intent (in contrast to his testimony in the MS case)." Once again we see an anti-ms advocate flip-flopping on issues – again, no credibility. Pg. 224 – Robert Scheer, a liberal columnist for the LA times wrote, "Nowhere in the DOJ's filing is there a compelling case that the power of MS undermines consumer freedom. Instead, what should be called into question is the outdated model of antitrust being pursued by the gov't. In the Information Age, the concern of the regulators should focus not on size but rather the power of a company or industry over the lives of ordinary citizen-consumers." Pg. 225 – "The MS case has put antitrust on trial because it shows how politics can corrupt the legal process. And this has put trust in the antitrust litigation on trial." Pg. 226 – The DOJ never had a remedy in mind when it went to trial. If they won, they had no idea what they were going to do. This shows their ignorance of the issues. Conclusion: McKenzie has shown that MS has NOT raised prices, acted predatory or restricted output. Therefore, MS is innocent of all antitrust charges brought against it. The MS vs DOJ case is about answering just one question: Do you want the government dictating our technological future, our do you want consumers and free enterprise to drive technology forward? If you don't think government would make a good CEO, then vote appropriately in the upcoming elections… rhogue