In 2022, fans of Taylor Swift were upset to discover that the Ticketmaster platform — their only option to buy tickets for the singer’s Eras tour — was ridden with technical difficulties, service delays, and confusing pricing practices, leaving many Swifties disappointed and empty-handed.
Regulators quickly zeroed in on Ticketmaster’s competitive position — the company controls more than 70% of the market for ticketing and live events — as the culprit for the meltdown. “The high fees, site disruptions, and cancellations that customers experienced shows how Ticketmaster’s dominant market position means the company does not face any pressure to continually innovate and improve,” said Amy Klobuchar, chair of the Senate Judiciary subcommittee on competition policy, antitrust, and consumer rights, implying that antitrust action was needed to trigger innovation and thereby reintroduce competition in the ticketing industry.
But does antitrust action actually promote those outcomes?
In a recent Strategic Management Journal article, we discuss our research findings, which conclude that the answer is both yes and no. Our research examines the aftermath of the famed U.S. antitrust case against Microsoft of the late 1990s and early 2000s in the enterprise infrastructure software industry. We show that technical innovation — that is, patenting — does increase following regulatory intervention against a dominant company. However, product innovation — the commercialization of those patents — does not. What’s more, profits decline across the market, with the most technically innovative companies faring the worst.
All in all, our findings suggest that, although antitrust intervention may increase one form of innovation, it does not automatically create meaningful competition and the consumer paradise that regulators imagine. This has implications for complementors (the apps that run on a platform), platforms, and regulators.
An Antitrust Experiment
Our research focuses on platform ecosystems and complementors. Often, complementors rely on the platform for technical infrastructure and access to customers but aren’t in competition with it. Sometimes, however, a complementor and a platform will offer rival services: Think of Apple’s built-in calculator and the many rival calculators available for download from the app store. Ticketmaster, too, is a platform, and together with its parent company Live Nation Entertainment, it also operates many performance venues, making it a dual platform-complementor.
Antitrust regulators take a keen interest in markets where platforms’ in-house complementors and rival complementors go head to head, and for good reason: Platforms have the power to give their own offerings unfair advantages and, by doing so, mute rivals’ chances to innovate. Concerns about platforms favoring their own complementors have been front and center in two recent high-profile antitrust matters: the European Commission investigations of Google’s search and browser apps and of Microsoft Teams.
In late 2022, a years-long fight between Google and the European Union ended with the EU General Court upholding the decision that Google’s Android platform had given an unfair advantage to its own search engine and browser apps. Antitrust authorities in India reached a similar conclusion. A complaint against Microsoft by the workplace communications app Slack accused Microsoft of promoting and entrenching its own app, Teams, on the Microsoft Office platform in order to keep businesses from trying Slack.
The issue goes back decades. In the landmark Microsoft antitrust case more than two decades ago, the “browser wars” were an early and prominent example of the same phenomenon. And in our research, we discovered a less-well-known case of the same dynamic in the enterprise infrastructure software market, which supports back-end functions such as database management, email servers, and IT security.
In the late 1990s and early 2000s, Microsoft’s Windows Server operating system was the dominant platform for this type of software. At the time, there were five major sub-markets: application integration, developer tools, database management, network and system management, and IT security.
In a great stroke of luck for future researchers like us, it turned out that Microsoft had rather popular in-house complementor offerings in two of these markets (developer tools and database management) but little presence in the other three, and the company’s 2001 settlement with the government meaningfully weakened its position in the two markets it previously dominated. This created an unusually clean quasi-natural experiment: After the settlement, what happened in the two markets where Microsoft was a key player (the “treated group”) as compared to the three where it wasn’t (the “control group”)?
We looked at several key variables — technical innovation (as measured by patent activity), profitability (return on sales), commercialization (new product introductions), and firm entry (the number of new competitors that moved into the market) — in these five markets between 1998 and 2004, the three years before and after the antitrust settlement. We conducted additional analyses of these markets in the decade following the settlement.
In the control group, as we anticipated, innovation and profitability didn’t change after the antitrust settlement. But among companies in the treated group, technical innovation increased markedly, indicating that a newly opened space for competition enabled fresh ideas. In particular, we observed a flurry of patent activity among complementors with low market shares in the treated group.
But those patents didn’t lead to successful products. Commercialization did not increase in the treated markets, (and there was no difference between low- and high-market-share complementors.) What’s more, we found that most everyone’s profits declined — especially those of complementors with low market shares, who, in theory, should have been the beneficiaries of the antitrust action. Despite being the most innovative of the bunch, they failed to thrive. In contrast, the bigger players who had been nipping at Microsoft’s heels did not patent significantly more after the antitrust settlement than they had before, but they didn’t see the drastic profitability decreases either. If anything, because they did not increase their investment in innovation, the big players seem to have benefited most from the antitrust case against Microsoft by becoming more efficient, not more innovative.
And finally, although regulators might have hoped to see new companies enter the treated markets, it didn’t happen. The number of firms moving into the markets, we found, did not increase following the settlement, another consumer-benefiting outcome that failed to materialize.
All in all, the effects of the settlement were uneven. We certainly don’t want to discount the fact that regulating Microsoft did trigger a substantial increase in patent activity. This is an important finding, because it shows that antitrust action can indeed be a lever for technical innovation. However, when it came to profits, the real beneficiaries were not the most innovative companies but rather the companies just behind in Microsoft in market share, who arguably didn’t need the help.
Lessons from Platform Markets
So, why did antitrust regulation produce such mixed results? We suspect complementors themselves deserve some of the blame. According to several industry executives we interviewed, many complementors, especially the smaller ones, struggled to step out of Microsoft’s shadow. When Microsoft eliminated assets to comply with the settlement, complementors tried to replace them, a project that turned out to be harder than expected. These companies may have innovated but not in areas they could successfully commercialize.
In some regards, complementors had benefited from Microsoft’s strength more than they realized. For instance, Microsoft’s well-liked and widely used proprietary implementation of Java was phased out following the settlement, forcing companies to develop their own alternatives. We found message boards from this era in which developers complained about the loss of Microsoft Java. Without realizing it, they’d become unwisely dependent on their rival.
The lessons for complementors in platform markets are clear: You probably need a backup plan. Dominant platforms don’t remain dominant forever. If your entire business rests on the fate of another company, you’ll always be vulnerable.
The same general advice applies to platforms: Be wary of overdependence. If your platform strategy depends on the innovativeness of a diverse set of complementors, make sure not to overreach. Prepare your “offspring” for life outside your shadow. Being preemptive is especially important if your platform is getting ready to comply with the European Union’s Digital Markets Act. Similarly, in the United States, the proposed American Online Innovation and Choice Act seeks to prevent platforms from favoring their own apps at the expense of rivals.
We believe that antitrust regulators should also keep these findings in mind. When they want to boost competition, they have two options: a structural remedy, in which a dominant firm is broken up or forced to divest from specific markets, or a behavioral conduct remedy, in which a dominant firm is barred from engaging in specific anti-competitive behaviors. While behavioral remedies can work, regulators must be careful with the specific toolkit. By eliminating some of Microsoft’s complementary assets offerings, the settlement we studied may have inadvertently eliminated rival complementors’ paths to commercialization.
Another important implication of our research for regulators is that technical innovation, product innovation, profitability, and consumer choice don’t necessarily move in lock step — just because companies patent more neither means they’ll turn their patents into offerings that the market values nor guarantees a better range of options for customers. If increasing consumer choice and meaningful competition is the ultimate goal of regulation, promoting innovation alone may not achieve it.
For example, in a lawsuit against Facebook parent company Meta over its acquisition of the virtual reality company Within, the Federal Trade Commission has argued that keeping the companies separate would push them to develop more features and attract more users, benefiting competition in the future. Our results indicate a weakness in this logic: While antitrust may indeed result in more features, those features may not attract users.
Our research also highlights a potential drawback of regulatory intervention: It may inadvertently tip the scales in favor of second- and third-place players who focus more on efficiency than innovation. Depending on how the Teams versus Slack standoff resolves, one could imagine a scenario where sanctions against Microsoft result in a market dominated by two large companies with roughly equal market share instead of just one. It’s an improvement, perhaps, but a modest one.
So before regulators intervene, they should think carefully about what exactly the desired outcome of antitrust action is and behave accordingly. On its own, a hobbled giant doesn’t create a thriving marketplace.
