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'Guilty' Microsoft verdict would have a huge impact in NZ |
(Computerworld, 25 January 1999)
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With New Zealand’s geographical isolation from the rest of the world
the outcome of the U.S. Department of Justice v Microsoft case
could be thought to have little or no impact on New Zealand’s PC market.
In this article, Techlaw briefly reviews the competition law arguments in the case and then discusses the likely impact of the case on the New Zealand PC market. The Microsoft case reached an interesting stage when Microsoft’s counsel began calling its witnesses to testify in its defence. Microsoft is defending itself against the allegations raised by the U.S. Justice Department under the Sherman Antitrust Act 1890 that Microsoft is abusing its market position. One of the first witnesses Microsoft called was an economic expert, Mr Richard Schmalensee, dean of the prestigious Sloan Management School of Management at Massachusetts Institute of Technology. For a summary of Mr Schmalensee's testimony see http://www.microsoft.com/presspass/trial/jan99/01-11schmal.htm and for the testimony in full see http://www.microsoft.com/presspass/trial/schmal/schmal.htm Whether Microsoft has a monopoly in the PC operating systems market is one of the essential elements that the Justice Department must prove. To find a monopoly involves examining whether Microsoft really faces any competitors in the PC operating system market. Mr Schmalensee denied that Microsoft had a monopoly, but in cross-examination by the U.S. Government, Mr Schmalensee was unable to identify any competitors. Mr Schmalensee’s answer to this problem was to argue that companies developing technology now would become competitors of Microsoft in the future. The counter argument is that those companies have no relevance to the market today. The US Government lawyers also made life difficult for Mr Schmalensee by producing a 1982 Harvard Law Review article written by him. In that article he stated that "persistent excess profits" is a good indicator of long-term monopoly power. The Justice Department’s own economic experts supported the article and pointed towards Microsoft’s large profits. The conclusion drawn was that Microsoft was a monopolist. In an attempt to brush the article aside, Mr Schmalensee joked "what could I have been thinking?" and admitted that the 1982 article did not "provide a good indication of my present views". One has to wonder whether or not Microsoft’s other witnesses will be more persuasive. Certainly the press reports favour the view that Mr Schmalensee’s evidence did not go well for Microsoft. There is now a very real possibility that the decision may go against Microsoft. In the New Zealand context, the U.S. Courts will determine if Microsoft holds a monopoly in the PC operating system market in the U.S. only. However, in Techlaw’s view that decision will also determine the nature of competition in that market in New Zealand. Our applicable competition law is in Section 36 of the Commerce Act 1986. Section 36 deals with the abuse of a dominant position in a market. The elements required to establish whether Microsoft is in breach of Section 36 in New Zealand are:
If Section 36 has been breached, our Commerce Commission has the responsibility and discretion to decide whether to prosecute Microsoft NZ under the Commerce Act 1986. Is the Commerce Commission likely to prosecute? Let us assume the effect of the actions of Microsoft U.S., as the parent company of Microsoft NZ, is a misuse of its dominant position Microsoft NZ. Our Commerce Commission has not indicated that it has any intention to investigate or act on this matter. The Commission is no doubt waiting on the outcome of the U.S. case. If our Commerce Commission chose, after a guilty verdict in the U.S., not to prosecute Microsoft NZ, Microsoft could adopt a strategy of continuing its existing conduct in the New Zealand market. It does not take much to imagine a world where Microsoft, if allowed to act that way, would simply dissemble itself, with its many overseas operations continuing to act in the way that would then be prohibited in the U.S. However, no doubt the U.S. Government in the Microsoft case will anticipate this potential strategy. Microsoft’s world leadership would be maintained if its strategy involved continuing to act as it does now in overseas markets while obeying the Court order in the U.S. In reality the strategy would reduce the effectiveness of any U.S. Court order. At an extreme, Microsoft could even defeat a U.S. Court order by simply closing down much of its U.S. operation and moving to a more "friendly" jurisdiction. There are many examples of large corporations doing this. The latest being the major corporations that moved out of Hong Kong before the handover to China. We can therefore anticipate that the U.S. Courts would make an order that Microsoft’s U.S. corporation must in turn apply that order to its subsidiaries. If this happens, it will be a startling illustration of how the competition law environment in countries like New Zealand can be determined by the Courts of other countries. If Microsoft is found guilty in the U.S. and the Court order applies to Microsoft NZ, this could lead to the perverse conclusion that in order for us to maintain self-respect and sovereignty, New Zealand should legislate to ensure Microsoft’s monopoly is maintained in this country. The alternative is to acknowledge that our Government and its Commerce Commission has no role in regulating competition where overseas companies are involved. As New Zealand commerce is dominated by overseas owned multi-nationals, this poses some interesting questions about our competition laws. Microsoft’s products are fundamental to our industry cost structure and hence part of the costs that affect our international competitiveness. What if the effect of a Court order in the Microsoft case is to raise international costs for its software but lower the costs of its software in the U.S.? After all one of the "solutions" proposed by a commentator is for Microsoft’s products to be given to three companies that can compete for sales. Would those three companies also be established in New Zealand? One can anticipate the argument that duplicating Microsoft NZ’s infrastructure would inevitably, given the size of our market, just result in increased sales and distribution costs. We have strong transfer-pricing rules that apply to Microsoft in its dealings with its subsidiary, Microsoft NZ. Will a Court order that raises international costs offend the transfer-pricing regime? But most importantly, if an unfavourable U.S. Court decision in the Microsoft case affects its overseas subsidiaries, can countries like New Zealand accept the loss of sovereignty? A guilty verdict will force us to debate whether we are just a "company branch" country with little control over the way overseas companies compete here or whether we are still the masters of our own destiny. For copies of the actual documents filed by the parties and other information on the trial we recommend the following sites: Good reference sites providing up to date coverage and archive material on the dispute include: For useful background material on antitrust policy generally see the antitrust.org site. |
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