A VIABLE ALTERNATIVE TO BREAKING UP MICROSOFT:
Compulsory Licensing That Would Make Microsoft Compete With Its Past Self

By IAN AYRES AND AARON EDLIN

Wednesday, Apr. 10, 2002

The difficulty with the Microsoft antitrust case is that the most viable competitor for Microsoft is Microsoft itself. That was why the Clinton Justice Department proposed breaking the monopolist in two - effectively forcing half of Microsoft to compete with the company's other half.

But breakups are often costly affairs. A breakup could slow innovation in the software industry. It could also reduce the compatibility of different programs - in particular, the compatibility between applications like Microsoft Office and Windows. For these reasons, the Bush Justice Department scrapped the breakup remedy, and proposed monitoring and restricting Microsoft's conduct instead, through an agreement with the company.

Nine states, however, have challenged the agreed remedy for Microsoft's monopolization. As a result, everyone following the case is wondering whether Judge Kollar-Kotelly will think the Justice Department's "conduct" remedies, as embodied in the proposed agreement, are sufficient to restore competition in the operating system market. The stakes are huge, as the outcome will touch most computer users.

But there is a simple way to force Microsoft to compete against itself without breaking it up - and to supplement the settlement agreement in a way that should satisfy any objections that the nine states, or Judge Kollar-Kotelly, might have. The solution is this: the judge could force Microsoft to sell older versions of its software at a low price - of say $10 or $20 - whenever it launches a new version.

Compulsory Licensing: The Benefits of A Breakup Without Its Costs

This remedy - which imposes what lawyers call a "compulsory license" - has been used in other intellectual property contexts to promote competition. It has only been proposed by a few other people, such as Hal Varian, the Dean of U.C. Berkeley's School of Information Systems, in the context of Microsoft remedies.

A compulsory license of this kind would force the new Windows XP to compete with the old Windows 2000, sold at a very modest price. In effect, Microsoft would be forced to compete with its past self, and the low prices for its old software would ensure stiff competition.

Unlike a breakup of Microsoft, a compulsory license remedy would keep Microsoft intact and free to innovate, which is what Bill Gate and Microsoft say they want. In fact, Microsoft would be forced to provide innovations that consumers crave, because its new operating systems would need to compete with its old operating systems. Rather than making incremental improvements on old concepts, Microsoft would have to offer consumers something truly new to beat out its own older but far less expensive product.

Foreclosing Planned Obsolescence; Allowing Competitors' Versions of Software

Such competition - between new Microsoft software and old Microsoft software - is currently non-existent because, now, when Microsoft upgrades its software, it pulls the old version off the shelf. Our remedy would foreclose this strategic planned obsolescence.

Indeed, under our remedy, Microsoft would not be able to block competitors from marketing improved versions of Windows 2000. AOL/Time Warner's vice president just testified that AOL wanted to market a "Harry Potter" version of Windows, but that Microsoft vetoed the alterations. Our remedy would give rivals free rein to experiment with creating an improved Windows 2000 without seeking Microsoft's permission.

Microsoft would still earn its modest, judge-imposed licensing fee on any modified versions that were sold. But in contrast with the present situation, Microsoft would not have the power to block original or improved versions of Windows 2000 from being brought to market.

Copyright Protection, But Without the Ability to Refuse To License Uses

Nowadays, new Windows releases contain improvements, but they often also create a variety of incompatibilities with old programs, Internet browsers, and personal digital assistants like the Palm Pilot. Other firms complain that "hooks" are hidden or undocumented until late in the game. Consumers may prefer to avoid the incompatibilities and computer crashes that result, but whenever they buy a new machine, they get a new operating system, like it or not.

PC manufacturers - such as Dell, Compaq, and Hewlett Packard - have good incentives to choose the kind of operating system that will ultimately benefit consumers. But current copyright law gives Microsoft the ability to block manufacturers from loading preferred older systems.

Indeed, Microsoft can maintain its monopoly position even without innovating. That is because it can depend instead on its copyright protection, combined with the continual demand for hardware upgrades driven by Intel's innovations.

A Solution That Avoids Constant Court Monitoring in the Future

As an alternative to a breakup, Microsoft and the Bush Department of Justice have agreed to a variety of "conduct" remedies in their Proposed Final Judgment. For instance, under the agreement, Microsoft would disclose better and more timely information about the hooks for its new programs - and disclose it in a nondiscriminatory fashion. Unfortunately, this is a technical swamp that will require continuous monitoring and legal wrangling - problems that the courts should be at great pains to avoid.

The nine states that are challenging the proposed settlement want Judge Kollar-Kotelly to force Microsoft to create a stripped-down version of its flagship Windows software that could incorporate competitors' features. The states' proposal has many of the benefits of our remedy. However, it still forces courts, on an ongoing basis, to intrude into the messy business of defining the contours of the stripped-down program.

Fortunately, there is an alternative that can avoid requiring courts to weigh in (in a timely fashion!) on whether a new version of Windows is sufficiently innovative to justify some degree of incompatibility. Instead, the court should instead let consumers decide - a solution our proposal makes possible.

Poetic Justice For Microsoft's Past Monopolization

Forcing Microsoft to license previous versions would be administratively straightforward, and accordingly would not encourage excessive court entanglement with Microsoft. The licensing solution would also encourage Microsoft to make future software more compatible. If Microsoft continued to play hardball to shut others out of the market, it would tend - in a case, perhaps, of poetic justice - to lose market share to its own older operating system.

In sum, a compulsory licensing remedy would create immediate competition in the monopolized PC operating system market - and it would do so without the costs of a breakup, or the entanglement and delay imposed by court monitoring. Microsoft's monopolistic actions regarding prior versions of Windows provide a natural basis for requiring Microsoft to license what it considers to be inferior software at a discounted price.


Ian Ayres is the Townsend professor at Yale. Aaron Edlin is professor of economics and law at UC Berkeley, and was a Senior Economist covering antitrust for Clinton's Council of Economic Advisers. Professor Ayres has also written an article for The New Republic on the Microsoft case.

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