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Japan's Attack on Microsoft

February 14, 2000

[Mr. Kusunoki, an associate of the Ludwig von Mises Institute in the U.S.,
is a student at the Graduate School of Law, University of Kyoto, Japan. This article appeared in the Asian Wall Street Journal, February 14, 2000.]

The U.S. Justice Department's antitrust suit against Microsoft is a hotly
disputed topic the world over, with many accusing the federal government of
regulatory overreach. Less well known is that the Japan Fair Trade
Commission has also challenged Microsoft Japan, a wholly owned subsidiary
of U.S. Microsoft, under the Japanese Antitrust Law. Though the Japanese
case has been resolved without litigation, on close examination the
criticisms of Microsoft are no more warranted in Japan than in the U.S.

In November, 1998, Japan's FTC called on Microsoft Japan to consider
whether its practices were illegal under the Antimonopoly Law. The agency
suspected that Microsoft Japan forced personal computer manufactures to
accept a contract by which Microsoft Japan licensed the shipping of its
spreadsheet software Excel only when the Japanese version of its
word-processing software, Word, was licensed with it.

At the time Excel was the top selling spreadsheet software program in
Japan, but Microsoft Word lagged behind other programs in the Japanese
word-processing software market. Likewise, Microsoft Japan was accused of
forcing PC manufactures to accept a similar contract for the email program
Outlook, which lagged behind other email programs with schedule-managing

Through these practices, the government alleges, Word and Outlook became
the top software programs in their respective markets, in terms of market
share. These practices were alleged to be the result of unreasonable tying
arrangements, and thus illegal under Article 19 of Japan's Antimonopoly

As a remedy, the Japanese FTC proposed that Microsoft Japan cease the above
practices, accept PC manufacturers' applications for licenses for Excel
only, and refrain from the above practices in the future. This case ended
the following month because Microsoft Japan accepted this recommendation by
Japan's FTC. In addition, Microsoft stated that it welcomed the agency's
approach: At the very same time, Microsoft was being attacked in the U.S.
through much harsher litigation.

When the Japanese FTC issues a "warning," it is an indication that the
agency suspects illegal practices but is not completely sure of its case; a
"recommendation," in contrast, is declaration that some practices are
certainly illegal. For Microsoft, then, it was a relief that Japan's FTC
issued a warning rather than recommendation. After all, Microsoft Japan was
being charged with practices very similar to those for which Microsoft was
taken to court in the U.S.

However, we cannot and should not think that the Japanese FTC administers
its Antimonopoly Law generously. The reason the agency issued a warning
rather than a recommendation was that the distributional share of the
overall market held by Microsoft Japan was, in contrast with the U.S.
market, very small. For example, the Internet service providers that were
presumably forced to exclude browsers other than Microsoft Japan's had less
than 10% of the total volume of Japanese browsers.

It is doubtful whether the U.S. Department of Justice would have challenged
Microsoft if the situation had been the same as in the Japanese case. Of
course, it is understandable that Microsoft said it welcomed the Japanese
FTC warning, since Microsoft hoped that a lenient Japanese settlement would
provide a model for the U.S.

But what about the economics of the claims themselves? Is a "tying
agreement" harmful to consumers and to market competition? Prior to this
case, the Japanese FTC had judged a tying arrangement to be wrong solely
because it led to "coercing victims to purchase tied items." In its
Microsoft case, however, the agency slightly amended its claims to say that
the practice led to "establishing entry barriers and excluding
competitors." Hence, the Japanese standard is now fairly close to the U.S.
standard established in the 1984 antitrust case, Jefferson Parish Hospital
District No.2 vs. Hyde.

It is impossible for any merchant to be perfectly satisfied with a
contract's conditions. It can always claim to have been "coerced," provided
we use a very loose definition of that term. So the new legal standard of
"anticompetitiveness" is actually less dangerous to market freedom than the
former one. At least now there is additional burden on the regulators to
show that the tying arrangement has harmed someone besides the contracting

And yet, even in this case, there are reasons to question the regulators'
logic. It is perfectly normal for firms to seek contract conditions that
are the most advantageous for themselves. This suggests nothing more than
that the firm is defending itself against pressure from competitors, which
is precisely what Microsoft was doing in Japan.

If this type of decision making itself were made illegal under antimonopoly
law, all strategic marketing would be illegal under antimonopoly law. To
declare strategic decision making suspicious or illegal is equivalent to
denying the merit of the market economy itself. It is very difficult, if
not impossible, for a federal agency--whether it be in Japan or the
U.S.--to distinguish the behavior of a supposed monopolist from that of
market rivalry itself.

The Japanese FTC has not yet recognized the importance of this argument,
and neither have Japanese courts. But as the economy becomes ever more
internationally integrated, technologically innovative and strategically
competitive, it becomes increasingly clear that antitrust law itself
violates the basic principles of a truly competitive market economy.


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