Case study – Playing Monopoly: Microsoft

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Case study – Playing Monopoly: Microsoft

1. Introduction

1.1 Background of the topic

The success of Bill Gates together with his company Microsoft and the most favours Windows computer operating systems that are still dominating the PC operating system market has always been an excellent example stimulating the youths in the It industry to follow. But the business success and seemingly amazing technology innovation should not be very strong reasons why the ethical issues related to Microsoft and its co-founder Bill Gates could be rationalized and tolerated. Since the company’s first operating system, MS-DOS (the prototype of which was brought from Gate’s friend without notifying his friend about the later usage of the system), the company been involved in a number of issues from which some of the business practices and some decisions are criticized in term of breaking the moral rules and create unfairness in the industry. For example, after the release of the first Windows system, many Macintosh (an Apple personal computer) users complained Microsoft had “stolen” the look and feel of the and Apple by developing a similar operating system following Apple in term of similar pull-down menus and icons and usage of mouse. And similar victims also include the famous browser developer, Netscape and the Sun Microsystems, the Java language developer.
Microsoft logo
1.2 Objective of the report

Review of the ethical issues that Microsoft was involved

Rationalize the forming of the monopoly operating market by analyzing some characteristics of the market;

Analyze how Microsoft’s business behaviors could be unethical using the utilitarianism, rights, and justice ethical theories;

Provide recommendations on restricting the unethical behaviors in the industries similar to the operating system market and better benefit the society.

2. Findings

After dropping out of his sophomore year in Harvard University in half way which he enrolled in 1974, Bill Gates set up a business with his closed friend Paul Allen focusing on the revise an upgrade of a program called BASIC (Beginner’s all-purpose Symbolic Instruction Code) aiming at replacing the “machine code” with English instruction in early computer model Altair 8080 (Lowe 1998, p.26). The introduction of the first computer platform on the personal computer, Apple II, had given Gates and Allen lucrative opportunities in writing software programs. Their business was renamed as the well known “Microsoft”. After meeting with IBM representatives with IBM’s interest to buy an operation system, Bill Gates managed to close a deal to buy an operating system and license to IBM as MS-DOS (Microsoft Disk Operating System). With the rapid growth of the IBM PC, the hardware and its operating system provided by Microsoft become industrial standards with a network effect that attract more programmers to develop software based on the MS-DOS platform (Sterling & Rice 1997, p.477). Following the release of the Apple Macintosh in 1984, the first commercially viable computer in which everything displayed on the screen consisted of bitmapped graphics, Microsoft soon developed a similar Windows operating system which dominated the IBM PCs and soon became dominant in the PC market (Henderson 2009, p.105).

And since then Microsoft has dominated the market of operation system but with some competitors appeared in the industry from time to time. One major competitor was Netscape in the 1990s, once the most popular web browser. Between April and December 1994, Netscape released its Web browser Navigator 1.0 in three platforms among which the most eminent success was found on the Windows platform, the Navigator made impressive innovations in the key areas such as frames, cookies and so on (Vasudeva 2009, p.3). Microsoft managed to win the war in the web browser product by developing its own browser, the Internet Explorer, and also use the widely criticized bundle strategy to bundle its Internet Explorer into the Windows series operating systems. Another major threat influencing Microsoft’s dominant in the operation system was the Java language which was considered a threat to the company due to it can operate on any computer equipped with Java software resulting in the decreased reliance of any specific operating systems. And Microsoft dealt with the Java threat by by growing the polluted Java (revised by Microsoft) market (Linden 1999). In 1998, Microsoft was charged by the US Department of Justice (DOJ) as vialating Sherman Antitrust Act by adopting a pattern of anti competitive practices, and sentence was once against the company by ordering a split into two standalone companies to increase the competition. But through a series of claimed political lobbying targeting at the particular politicians to influence the antitrust policy, the final sentence of the legal charge was more convenient to the company. Similar charges could also be found in the European market pointing at the company’s anti competitive practices.

3. Analysis

3.1 Ethically questionable behaviours and the evaluations

(Question 1 Identify the behaviours that you think are ethically questionable in the history of Microsoft. Evaluate the ethics of these behaviors.)

3.1.1 Copying Apple’s operating system

3.1.1.1 Case review

In year 1984, Apple introduced a Graphic User Interface or GUI as it is also known by people that allowed users to click on icons with a mouse rather than remember commands to input. And it was found out that people became more productive by using an Apple Macintosh computer than a PC integrated with MS-DOS operation system (Douthwaite 2002, p.120). Many Macintosh users complained Microsoft had “stolen” the look and feel of the and Apple by developing a similar operating system following Apple in term of similar pull-down menus and icons and usage of mouse, this became an ethical charge to Microsoft’s follower strategy.

3.1.1.2 Evaluations

Microsoft’s early decision to copy Apple’s product design and idea is unethical in the deontological theories. Deontological ethical theories or obligation based theories place the locus of right and wrong in autonomous adherence to moral laws or duties and thus hold that the rightness or wrongness of an action depends on the action itself and not on the consequences it produces (Smith 2009, p.19). According to W. D. Ross whose contribution in the ethics is considered to be the representative of pluralistic deontology, there are seven right making features of moral action, and the second moral obligation is the duty to do no harm or the duty of non-maleficence. For Microsoft’s case in which it copied Apple’s design and developed its own system that is very similar to that of Apple, we can say that Microsoft had done broken the duty of non-maleficence and caused substantial harm to the interest of Apple. This is why we say that Microsoft’s early behavior to copy Apple’s product design and idea is unethical.

3.1.2 Bundle IE into operating system at the cost of system performance

3.1.2.1 Case review

It is said that Microsoft started to incorporate the copy of Internet Explorer into its Windows series operating systems since the early version of Windows 95, and in Windows 98 the Internet Explorer was further integrated into the system so that it was difficult for the Windows users to remove the Internet Explorer. Microsoft has used its monopoly status on the commercial PC operating system to bundle nearly every PC desktop or laptop with its Internet Explorer even at the cost of lowering the overall performance of the Windows system which was criticized as an abuse of its monopoly power (Killelea 2002).

3.1.2.2 Evaluations

In my understanding, it is not ethical for Microsoft to bundle its products to avoid competition. Here we use the stakeholder theory to provide this judgement. A Stakeholder in the business environment refers to a person, group, organization, or system that affects or can be affected by an organization’s actions (Camarinha-Matos, Paraskakis & Afsarmanesh 2009). The basic notion of stakeholder ethics is that even if a company will make less profit for shareholders, it must care for a range of stakeholders if it is to behave ethically (Bredeson & Goree 2011). In the case of Microsoft regarding its behavior to bundle IE into operating system even at the cost of system performance, it is not ethical for the sake of the following stakeholders whose interests or profits were affected by the organization’s decision: the first stakeholder affected is the customers whose need for a higher performance was compromised because of the company’s business strategy to beat the browser competitor, Netscape. And for a long period of time, Netscape’s browser was much better than the Internet Explorer and received more customer preference; the second stakeholder was Netscape as the company was forced out the market; the third stakeholder was the retailers and distributors who were required to promise that they would not remove the Internet Explorer also would not promote Netscape if they wanted to sell Windows system, this impacted the benefits of retailers and distributors.

3.2 Market monopoly analysis

Question 2 What characteristics of the market for operating systems do you think created the monopoly market that Microsoft’s operating system enjoyed? Evaluate this market in terms of utilitarianism, rights, and justice, giving explicit examples from the operating systems industry to illustrate your points.

3.2.1 Characteristics of operating system market contributing to monopoly

3.2.1.1 Possibility of creating bundle services

The first characteristic of the operating system is the ability of the operating system providers to bundle the other services that they want into the system. In the case of Microsoft’s questionable decision to required licensees of Windows 95 and 98 to license IE as a bundle at a single price and also the company’s ban to allow the OEMs to uninstall or remove the IE from the Windows desktop (Hovenkamp,Janis & Lemley 2007). When widely used operating system providers and developers choose to bundle some of their applications into the operating system in the form of bundles with a single price, other pay applications though with higher quality and popularity among the customers will be very much possible to be given up provided the substitute applications provided by the operating system providers are not bad enough.

3.2.1.2 Application programs are developed based on specific operating system

An operating system (OS) is a set of computer programs that controls the computer hardware to support users’ computing needs. And OS converts an instruction from an application into a set of instructions needed by the hardware. In order for an specific program to be useful, software applications have to get access to the OS by requesting services through a defined application program interface (API) (Stair, Reynolds & Reynolds 2010, p.171). And also in the early time, developers probably due to the limit to the relative skills and technology will not develop software with different versions that could be used in different operating systems. So because of the reliance of the operating systems, software developers had no choice but to develop applications based on the most widely used operating system, the Windows series operating system if they want to sell their software applications in a wider market.

3.2.1.3 The network effect

Network refers to the fact that different instances of the product are logically connected or possibly physically connected through a network.When the value of a product or service to an individual consumer depends on the number of other consumers adopting it, it is called a network effect or network externality. Externality refers to influence one consumer has on another without a compensating payment (Messerschmitt 2000, p.232). In the case of Microsoft, with the fast and rapid growth of the IBM PCs which were equipped with the MS-DOS and the later Windows systems (IBM’s share of the market went from zero to 10 percent in 1983 and 40 percent in 1987), the Microsoft operating systems became the industrial standards. And as mentioned previously, because of the reliance of the operating systems, software developers had no choice but to develop applications a particular operating system, there were more and more software developers and companies preferred to create and developed the software based on the Windows series system. The characteristic of network effect had largely contribute to the Microsoft’s monopoly status because all the software developers and PC manufacturers will very likely to join together on the Microsoft systems that are widely used. This also explains why the Microsoft has long keeping the leadership in the industry for a number of years since it climbed to the top position in term of around 90% of the market share in the operation system products (commercial PC sector) as mentioned in the case.

3.2.2 Evaluation of the market using utilitarianism, rights, and justice

3.2.2.1 Effects of monopoly markets on the utility of participants in the market

Review of the utilitarianism ethics
Utilitarianism is a concept supporting the view that actions and policies should be evaluated on the basis of the benefits (utility) and the costs they will impose on the society and the public. Utility is any benefits produced by an particular action (Velasquez 2006, p.78). Jeremy Bentham and John Stuart Mill are the most famous exponents of the theory. The utilitarians conceived of their philosophical work as an attempt to lay down an objective principle for determining when a given action was right or wrong. And the maxim is the principle of utility which claims that “an action is right in sofar as it tends to produce the greatest happiness for the greatest number (Popkin & Stroll 1993, p.38). In other way of understanding, the utilitarianism ethics focuses on the effect and eventual result of an action rather than the setting of the rules and duties that should be followed.

Violation of utilitarianism by a monopoly market
As suggested by Manuel G. Velasquez (2006, p.214), there are three key effects that a monopoly market would have on the utility of participants within the market. First, the monopoly market allows resources to be used in such a ways that it will produce shortages of those things buyers want and cause them to be sold at higher prices than necessary. The high profits that exist in a monopoly suggests that there is deficiency of products in the market, while in a free market high profit in an industry will attract outsiders to flow into the market by producing substitute products the case in a monopoly market will be different. Because of the high entry barriers (e.g. network effects in the PC market results in high R&D and advertising costs), the entry of the potential competitors are refused and these investments will be transferred other non-monopoly markets where shortages are less serious indicating that the utility
created by these investments will also be lowered as result of the monopoly status of the market.

Figure 1 Profit maximization by monopolist

Source: Shy 1995

Second, in addition to the inappropriate resource allocation caused by the monopoly market, as the monopoly firm could set the prices of the products, usually in a high level than usual, will reduce the motivation of cost control and reduction and eventually lead to continual high output cost and low utility. As the charge above shows, the monopoly firm could reach the profit-maximising output can be sold at price P1 above the average cost AC at output Q1. In this case the firm is making abnormal “monopoly” profits (or economic profits) shown by the shaded area. And because the monopoly firms could easily set the price by its own with the advantages obtained by the monopoly position, the company could very easily keep the monopoly profit, so in this case the monopoly firm will keep on the existing business practices rather than further innovation to reduce the cost of the product. This stagnation of business practice could also be understood as caused by the shareholders and management teams who are content with the current balance.

Third, monopoly market places limitation on the negative rights that perfectly free markets respect. The strong power of monopoly firm due to there is only such firm in the market enable the company to do its business against the free market principles. Besides the inability of the monopoly market to allow the inflow and outflow of the resource effectively, monopoly market also restrict the fluctuation of the product prices to reflect the change of the cost of the production. In the case of Microsoft, it has maintained stable high prices for its major products and services. And the consumers have no choices but to accept such high prices because there is only one supplier that could meet their functional needs.

3.2.2.2 Evaluation of the market using the justice ethics

Review of the justice ethics
The ethics of justice deals with moral choices through a measure of rights of the people involved and chooses the solution that seems to damage the least number of people (Sherman 2007). Three major categories of justice theories include distributive justice, compensatory justice and retributive justice. Distributive justice concerns what some consider to be socially just allocation of goods in a society; Compensatory justice is an ethical principle that supports making up for previous wrongs by giving priority to those whose predecessors suffered and central to retributive justice are the notions of merit and desert (Kolm 2002). Another important kind of justice is retributive or corrective justice. Retributive justice refers to the extent to which punishments are fair and just. In general, punishments are held to be just to the extent that they take into account relevant criteria such as the seriousness of the crime and the intent of the criminal (Velasquez, Andre, Shanks & Meyer 1990).

Monopoly market and justice
According to the capitalist justice (classified as distributive justice theory) which holds that benefits and resources should be distributed according to the value of the contribution that one has made to the society, a group or a task (Velasquez 2006, p.110). And in the free and competitive market, when the supply and demand reach a equilibrium point at which the buyers and sellers both obtain the value of how much each contribute to each in the purchasing transactions. So we can under justice in the market behavior as that the actual price is or at least quite close to the equilibrium point with acceptance of some normal turbulence and fluctuations. In a monopoly market, as mentioned above, the monopoly firm could usually set the product price at a high level and to enjoy a so called monopoly profits by restricting the entry of other potential competitors. When the actual price is much higher than the equilibrium point which is usual in the monopoly market, it could be concluded that the customers pay much higher than what the monopoly firm contribute to them in return resulting in injustice.

3.2.2.3 Evaluation of the market using the ethics of rights and duties

The theories of rights and duties in ethics
A right is an individual entitlement to do, to have or to enjoy something (Mccloskey 1965). There are legal right, moral rights or human rights that derive from legal system or moral standards and these rights could both be negative or positive (positive rights are duties of other agents to provide the holder of the right with what ever he or she needs to pursue his or her benefits). One of the most famous ethical theories is Kant’s Categorical Imperative. A categorical imperative is a command or law that allows for no exception (Wilkens 2011, p.117). The golden rule of ethics also also could be applied in Kant’s Categorical Imperative as a major principle of the theories: Do unto others as you would have them do unto you.

Monopoly market and rights
Rather than protecting the negative rights of freedom, it is said that monopoly market will lead to inequality of power between the customers and the within such inequality of power distribution the monopoly firm will hold an absolute power over the customers by setting the rules and prices. In the case of Microsoft, it has acted in contradiction with the golden rule of the ethics by controlling the operating system market and set the price on a high level for a number of year due to its market leadership and monopoly position, we can anticipate that Bill Gates if being put in the shoes of the PC customers or its competitors will complaint the high price and monopoly practices and decision that Microsoft has adopted to protect its control over the market. This means that Microsoft’s monopoly business in the market is unethical according to the ethics of rights and duties.

4. Conclusion

Question 3
In your view, should the government have sued Microsoft for violation of the antitrust laws? In your view, was Judge Jackson’s order that Microsoft be broken into two companies fair to Microsoft? Was Judge Kollar-Kotelly’s November1, 2003 decision fair? Was the April 2004 decision of the European Commission fair to Microsoft? Explain your answers.

In conclusion, after the analysis of the market characteristics and market monopoly behaviors using utilitarianism, rights, and justice with the particular reference to the case of Microsoft’s business behaviors in the operating system market, several conclusions could be made to Microsoft’s business development and monopoly market status:

First of all, the raise of a particular monopoly firm in the operating system market seems to be reasonable due to there are several industrial characteristics which include possibility of creating bundle services, the fact that application programs are developed based on specific operating system and a network effect that enhances the leadership position and increase the value of the products with the number of the customers supporting the products increases. This means that, regardless of what had been done unethically by Microsoft and its founder Bill Gates, the raise of Microsoft or any other operating system would be just a business trend in the operating system market which request to have a widely used operating system based on which software could be developed. And in this regard, to have a monopoly operating system is not necessarily a bad trend.

Second, Judge Jackson’s sentence that Microsoft needed to be broken into two separate companies is fair to Microsoft based on what the company had done. When talking about whether the penalty of made by the Judge is enough or not we can use the theory of retributive justice which as mentioned above refers to the extent to which punishments are fair and just. Two basic support that the sentence that Microsoft needed to be broken into two separate companies is fair: in the first place, Microsoft had the clear intention to use the unethical way to win the competition over a number of companies such as Apple, Netscape and the Sun Microsystems, the harm was not done unintentionally; second, by forcing a number of competitors out of the market, now the decision by the judge was only to separate the company into two independent companies to increase the competition and avoid unfairness in the industry, so it is not too much to ask Microsoft to just divide the company into two standalone companies.

Third, Judge Kollar-Kotelly’s November1, 2003 decision to finally ratify the settlement between Department of Justice (DOJ ) and Microsoft which required Microsoft to share the application programming interface (API) with other rival software companies who wanted to developed applications based on the Microsoft’s Windows operating systems together with other treaties to allow the other software developers to use the system to developed their own software and compete with the applications developed by Microsoft but the most serious penalty to break the company into two separate companies was abandoned. While as said above, according to the theory of retributive justice Microsoft deserves the breaking up penalty due to its unethical behaviors, Judge Kollar-Kotelly’s November1, 2003 decision to finally ratify the settlement is not fair enough.

Fourth, regarding the April 2004 decision of the European Commission to fine Microsoft 497 Euros and order the company to disclose the interfaces required for the server software development and also to offer a version of Windows without the company’s own Digital Media Player, this decision is fair to the company and to other software companies for two major reasons: firstly, it has been proved above that Microsoft should disclose its application programming interface (API) to other service provider to ensure fair competition, so this will a reasonable demand; secondly, bundle service to integrate IE or media player is considered as unfair competition which people’s human right of free choice. In conclusion, the April 2004 decision made the European Commission is fair.

5. Recommendations

Question 4
Who, if anyone, is harmed by the kind of market that Microsoft’s operating system has enjoyed? Explain your answer. What kind of public policies, if any, should we have to deal with industries like the operating system industry?

5.1 Victims caused by Microsoft’s monopoly in the operating system market

There are stakeholders whose benefits and interests are impacted by Microsoft’s monopoly in the operating system market; we will discuss how they suffer from the monopoly as following.

5.1.1 Customers

Since the establishment of Microsoft’s dominance in the operating system, though the majority of the customers within the influence network effect did enjoy some conveniences by sharing series of operating systems so that customers do not have to learn to master different operating system and also files could be shared more easily because the operating platform are the same or made by a single firm, they were actually limited in the choices of operating systems and other software because the Microsoft’s strategy to combat the raise of any software and programs that are perceived by Microsoft as a threat to the existence of the company. For example, the once most popular web browser, Netscape was forced out of the market and the customer had no choice but to accept a less desired Microsoft Internet Explorer.

5.1.2 Competitors

With the network effect that has been enhanced by the monopoly market status of Microsoft, the competitors that try to produce their own operating systems would experience additional difficulties before they can establish in the market. What’s more the standards that have been set up in the software industry by Microsoft will increase the difficulties of the market entry and customers’ desire to try the new operating systems developed by the competitors.

5.1.3 Software developers

To the software developers, because of the monopoly market that Microsoft enjoyed and the fact that any new software need to be built based on the Windows systems, the software developers will on one hand have to rely on the the Microsoft in term of accessing to their application programming interface (API) and give up their bargaining power and on the other hand they will have to sacrifice their own interest to win the cooperation relationship with Microsoft.

5.1.4 The society

As mentioned above, due to the high entry barriers (e.g. network effects in the PC market results in high R&D and advertising costs), the entry of the potential competitors are refused and these investments will be transferred other non-monopoly markets where shortages are less serious, this will cause inefficient resource allocation and eventually leads to high social cost and reduced overall utility to the society.

5.2 Policies recommended to regulate industries like the operating system industry

5.2.1 Restrictions on the bundle services

The government and the relative industrial monitoring departments should enact policies to restrict the large operating system providers to bundle its own applications or other third party software into the operating systems without the agreement and acknowledgement from the customers. In addition to this, though some applications could be allowed to be pre-installed in the operating systems to provide better customer experience, the operating system provider should be requested to enable such pre-installed applications to be removed by the customers.

5.2.2 Disclosure of application program interface (API)

Disclosure of the application program interface should be a standard policy to be fulfilled and followed by companies such as the operating system developer to provide an open operating system environment for the third party software companies to build up the software usable in the operating systems they would like to choose.

5.2.3 Implementation of a high ethical standard in the industry

The relative departments and governments should encourage and promote a high ethical standard that regulate the anticompetitive, predatory tactics and also the political contribution behaviors. The implementation of these ethical standards will enforce and monitored closely by the relative departments.

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