For more detailed information about the economic theories surrounding the Microsoft case click here: http://wwwpub.utdallas.edu/~liebowit/magazine.html

Why is the Department of Justice suing Microsoft? Ostensibly, the government’s case, which it brought to court yesterday, is built on allegations that Microsoft has abused its near-monopoly status to muscle out its competitors in the software market. But underlying that charge is the belief that Microsoft’s success does not rest on having built superior products. Rather, the government believes that Microsoft has merely leveraged its control over operating systems to dominate the software market even where it products are clearly inferior to the alternatives.

I am currently writing a book (with Stephen Margolis) for the Independent Institute that is a culmination of our decade-long research examining whether markets choose inferior technologies and standards. Antitrust thinking at the DoJ apparently has been influenced by claims that in markets where compatibility is important flagrantly wrong products such as the QWERTY keyboard and VHS video-recording system might get chosen. When we have examined these claims in our earlier research, however, we found that these so-called inferior products were not inferior. In case after case the ‘evidence’ that was supposed to support these claims did not stand up to examination.

Because compatibility is an important element of software products it has been claimed that this industry is a potential incubator for such market mistakes. For this reason our book examines the software industry in detail.. Although our work is not yet finished, the empirical research that we have completed using computer magazine reviews to measure software quality indicates that Microsoft achieved its success by making better products. Once again, the empirical evidence does not support the economic theories being promulgated as a new basis for antitrust.

First, we analyzed the two largest software markets, spreadsheets and word processing. These products form the basis of ‘office suites’ which in turn represent almost half of Microsoft’s revenues. Although its innovative prowess has been the subject of much disparagement by its critics, Microsoft’s ability to create superior products in these markets is quite apparent upon examination of the data.

It is important to note that Microsoft had dominant market shares in the Macintosh markets well before its success in the PC market. For example, in 1989, when Excel had a market share of 10% in the PC market, it had 90% of the Macintosh market. That same year, Microsoft Word had only 15% of the PC word-processing market (with Word for DOS) but 51% of the Macintosh word processor market. This is significant because the Macintosh operating system is not a Microsoft product so Microsoft’s success could not have relied then, as the government alleges it does now, on leveraging its own operating system.

Instead, Microsoft achieved that success the old-fashioned way – with better products. Comparison reviews of Macintosh spreadsheets covering a period 1986-1996 found Excel to be the best (or tied for the best) spreadsheet in 83% of the cases. Its average score in the MacUser reviews that we found was 4.78 compared to 4.2 for Lotus 1-2-3 and 4.5 for Resolve. In the PC market Excel won (or co-won) 74% of the comparisons (28 of 38), while the then leading spreadsheet, Lotus 1-2-3, squeaked out but a single win (3%) following Excel’s introduction. Similar results were found for Microsoft Word, although the judging is more complex since Microsoft had both DOS and Windows versions of Word. The Macintosh version of Microsoft Word received a top rating in 60% of the cases where a statement was made about the best wordprocessor. Its average score since 1987 in MacUser was 4.21 compared to 3.7 for WordPerfect and 4.0 for MacWrite. In the DOS world, WordPerfect appeared to deserve its dominant market share, garnering 52 % of the wins through 1992, whereas the second place product, Microsoft Word for DOS, garnered only 35% of the wins. When the market switched over to Windows, however, WordPerfect lost its footing. Out of 30 comparisons, WordPerfect was able to win only 2 (7%). Microsoft Word, on the other hand, won 16 (53%).

Where Microsoft products have been found inferior they have failed in the marketplaces as well. Microsoft Money, which has only won 6% of comparison reviews of personal finance software, has made little headway against Intuit’s Quicken, despite Microsoft’s much ballyhooed operating system dominance and despite Microsoft’s lower price.

So what accounts for Microsoft’s success? As we examined the historical data, it became clear that Microsoft’s experience in creating successful graphical products (using menus, mice and windows) for the Macintosh helped it create successful products for Windows (unlike both WordPerfect and Lotus 1-2-3, whose products in the Macintosh markets were failures), as did Intuit’s experience (Quicken had been the leading personal finance software in the Macintosh market).

Microsoft has benefited consumers not just with better products but also with lower prices. Prices fell by about 80% in the spreadsheet market, with almost all of that decrease coming after Microsoft unseated Lotus. In the word processing market, prices rose by about 35% from 1986 until 1990 (under WordPerfect’s dominance), at which point, concurrent with Microsoft’s ascendance, they started a decline that by 1997 left prices at only 25% of their original value. These dramatic price drops are far larger than in most other software markets and are inconsistent with a view that Microsoft behaves like a monopoly when it attains a large market share.

In short, Microsoft’s success is due to factors--low prices and superior products—that have nothing to do with antitrust violations. The threat to consumers here comes from the antitrust authorities, not Microsoft.

Stan Liebowitz is an economist in the Management school of the University of Texas at Dallas and a Fellow at the Independent Institute.