A Framework for Negotiation on a Microsoft Remedy

Hal R. Varian

December 1999

If Microsoft is found guilty of violating Federal and/or State antitrust laws, the remedy will certainly involve conduct requirements. For example, transparent pricing and contracts (``open Windows'') and full documentation of Windows APIs and file formats will likely be required.

But the Department of Justice will probably want to ask for more than this. The difficulty that they face is that other proposed remedies such as source code licensing or breakup are very big steps indeed, and they run the serious risk of standards fragmentation.

One remedy that is less dramatic than breakup or source code licensing that has not been widely discussed is something called the ``compulsory licensing of old binaries remedy,'' or CLOBR. An example would be the following: ``Microsoft is required to license binary versions of its operating system more than 36 months old at a flat price of $10 per license.'' The 36 months and the $10 figures are only meant to be illustrative; they could easily be adjusted.

CLOBR has several interesting features:

  1. It creates competition for current versions of Windows without creating significant standards fragmentation.
  2. It discourages Microsoft from unnecessarily bundling additional components into Windows, since they will have to sell the bundled package 36 months later for a low price.
  3. CLOBR leaves Microsoft ``free to innovate.'' In fact, it virtually forces Microsoft to innovate since they will need to ensure that each new version of the OS is substantially better than the widely available older but cheaper versions.
  4. It leaves Microsoft free to compete aggressively in other markets, while preventing it from using its dominance of the desktop market to gain unfair advantage over competitors, since an inexpensive alternative to the current version of the OS is always available.
  5. It is highly tunable, unlike other proposed remedies. A requirement to license 5-year old binaries at a price of $40 would have no impact on Microsoft at all, while a requirement to license 2-year old binaries at $5 would be quite significant. This makes CLOBR a useful framework in which to discuss a negotiated settlement. The Court could even reserve the right to modify the terms later on, based on Microsoft's subsequent conduct.
But CLOBR, like other proposed remedies, has faults.

  1. The presence of the older, inexpensive OS would create competition for Microsoft, but also create competition for other new entrants into the OS market.
  2. Under CLOBR, Microsoft would have an incentive to unbundle features from the core OS and sell them as add-ons. This incentive would have to be countered by a definition of what constitutes a minimal operating system. Note that unlike the browser debate, the issue would revolve around a definition of a minimal OS, rather than the maximal OS.
CLOBR's logic is similar to that of patent or copyright law. In intellectual property law, an inventor is granted a monopoly for a fixed period of time to its intellectual property so as to provide appropriate incentives to innovate. But the monopoly is limited, so as to avoid the social losses from monopolization. In the case of patents and copyright, the innovation eventually passes into the public domain. In this case, the software passes into the compulsory licensing phase, rather than the public domain, but the effect is similar: the temporary monopoly in the intellectual property provides a balancing of private incentives and the public good.