Microsoft Corp.'S Intent to Acquire Intuit Inc. for $1.5 Billion Sent
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icrosoft Microsoft Corp.'s intent to Must Be acquire Intuit Inc. for $1.5 billion sent competitors run- ning for cover—and to lawyers, who composed a 49-page White Paper arguing for gov- ernment intervention against the merger. UPSIDE makes available an exclusive version of the White Paper, which has been circulat- S-H V ed only to U.S. Department of Justice officials and, presumably, to the undisclosed companies that financed it. In the paper, four • e - attorneys from the Palo Alto, Calif., law firm of Wilson, Sonsini, "3 Goodrich & Rosati, buttressed by arguments from two Stanford U University economists, set forth new theories about Microsoft's Oil domination of the digital revolution. Though the paper (edited . for length but not otherwise changed by UPSIDE) reads as though .V- lawyers and economists wrote it, it's important because it repre- 03: o sents one of the most complete accounts of Microsoft's strategy to CO " dominate the software industry. It also presents compelling rea- sons why the government should take action against Microsoft. 52 UP SIDE FEBRUARY 1995 ILLUSTRATION BY BRUCE MCGILLIVRAY pproximately three years ago, Microsoft entered the personal financial software market Awith its own product, Microsoft Money. With the proposed acquisition of Intuit, however, Microsoft is abandoning Money and reentering the market by way of acquiring Quicken. It also is entering the tax prepara- tion software market for the first time, with the acquisi- tion of TurboTax. The deal at bottom raises the follow- ing question: Is the substitution of Microsoft for Intuit as the market leader, and Novell (or any other company) for Microsoft as a competitor, likely to be anticompeti- tive and to tend to create a monopoly? Both the personal finance software and consumer tax preparation software markets are extremely concen- trated. Regarding personal finance software, the most commonly cited figure for Quicken is that it controls approximately 70 percent of the market, and that Microsoft's Money accounts for another 10 percent. The HHI [an economic measure of dominance in a market] for this market accordingly would exceed 5,000 [out of a possible 10,000]. In retail sales, moreover, it appears that Quicken's share is even higher—in the range of 86 per- cent. The HHI for retail sales in personal finance soft- ware thus might well exceed 7,000. The numbers are likewise extremely high for the tax preparation market. At the time the Department of Justice addressed the proposed Intuit-ChipSoft transac- tion in December 1993, it estimated that ChipSoft's TurboTax and Meca's TaxCut together accounted for approximately 75 percent of the tax preparation soft- ware market. Of that, ChipSoft, which is now owned by Intuit, is estimated to hold a 55-60 percent market share, again yielding a very high HHI of more than 3,400 (assuming 55 percent for ChipSoft and 20 percent for Meca). As in personal finance, the retail numbers look even higher: One source gives Intuit a 78-85 percent market share (and 15-18 percent for Meca). These num- bers would yield a market concentration figure approaching that in personal finance software, on the order of an HHI of 6,000 or more. Not only are these markets extremely concentrated, but recent experience indicates that they have very high barriers to entry. Computer Associates, in trying to increase market share in the personal finance software market, is reported to have given away for "free" (excluding postage and shipping charges) 1,000,000 copies of its personal finance programs. CA is reported, however, to have achieved little market share. Microsoft's experience in trying to increase market share for Money also supports the conclusion that barri- ers to entry are high. After three years in the market, in which it frequently charged approximately one-third the price that Intuit did for Quicken and made a very sub- stantial commitment in marketing staff and resources to Money, it gained only approximately a 10 percent market share. These high barriers to entry appear to reflect the substantial lock-in effects that exist in both the personal Step ill Over Your Competition It Conventional Steppers. PAS 5500/100 Steppers. 30% Smaller. 30% Faster. With The Small Footprint Stepper. In the world of microlithography, Incidentally, the Small Footprint smaller is definitely better. Stepper can also produce smaller, The smaller the chip the faster it faster chips. goes, the more efficiently it works. 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The Intuit acquisition is intended to control the gate- exert tremendous power over all information transmission. way on the home-to-business client side and leverage toward Just as was the case with IBM, it is not reasonable to expect the home-to-business server. Application of "increasing that other countries will permit the concentration of such returns" economic analysis would reasonably predict that, vast economic and political power under the control of a sin- given the present situation, Microsoft will succeed in gle company—and certainly not an American company. In monopolizing the entire network (just as it has monopolized the 1970s IBM crushed the American mainframe computer the desktop) and that the monopoly will remain in place for a industry, but Japan and Europe protected their mainframe very long period of time.