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IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
vs.
MICROSOFT CORPORATION,
Defendant.
STATE OF NEW YORK ex. rel.
Attorney General ELIOT SPITZER, et al.,
Plaintiffs and
Counterclaim-Defendants,
vs.
MICROSOFT CORPORATION,
Defendant and
Counterclaim-Plaintiff.
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Civil Action No. 98-1232 (TPJ)
Civil Action No. 98-1233 (TPJ)
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COURT'S FINDINGS OF FACT
FINDINGS OF FACT PDF
- BACKGROUND PDF
- THE RELEVANT MARKET PDF
- Demand Substitutability PDF
- The Possibility of Supply Responses PDF
- MICROSOFT'S POWER IN THE RELEVANT MARKET PDF
- Market Share PDF
- The Applications Barrier to Entry PDF
- Viable Alternatives to Windows PDF
- Price Restraint Posed by Microsoft's Installed Base PDF
- Price Restraint Posed by Piracy PDF
- Price Restraint Posed by Long-Term Threats PDF
- Significance of Microsoft's Innovation PDF
- Microsoft's Pricing Behavior PDF
- Microsoft's Actions Toward Other Firms PDF
- THE MIDDLEWARE THREATS PDF
- The Netscape Web browser PDF
- Sun's Implementation of the Java Technologies PDF
- Other Middleware Threats PDF
- MICROSOFT'S RESPONSE TO THE BROWSER THREAT PDF
- Microsoft's Attempt to Dissuade Netscape from Developing
Navigator as a Platform PDF
- Withholding Crucial Technical Information PDF
- The Similar Experiences of Other Firms in Dealing with Microsoft PDF
- Developing Competitive Web Browsing Software PDF
- Giving Internet Explorer Away and Rewarding Firms that Helped
Build Its Usage Share PDF
- Excluding Navigator from Important Distribution Channels PDF
- Microsoft's Success in Excluding Navigator from the Channels
that Lead Most Efficiently to Browser Usage PDF
- The Success of Microsoft's Effort to Maximize Internet Explorer's
Usage Share at Navigator's Expense PDF
- The Success of Microsoft's Effort to Protect the Applications
Barrier to Entry from the Threat Posed by Navigator PDF
- MICROSOFT'S RESPONSE TO THE THREAT POSED BY SUN'S IMPLEMENTATION
OF JAVA PDF
- Creating a Java Implementation for Windows that Undermined
Portability and Was Incompatible with Other Implementations PDF
- Inducing Developers to Use the Microsoft Implementation
of Java Rather than Sun-Compliant Implementations PDF
- Thwarting the Expansion of the Java Class Libraries PDF
- The Effect of Microsoft's Efforts to Prevent Java from
Diminishing the Applications Barrier to Entry PDF
- THE EFFECT ON CONSUMERS OF MICROSOFT'S EFFORTS TO PROTECT THE
APPLICATIONS BARRIER TO ENTRY PDF
FINDINGS OF FACT
These consolidated civil antitrust actions alleging violations of the Sherman
Act, §§ 1 and 2, and various state statutes by the defendant Microsoft
Corporation, were tried to the Court, sitting without a jury, between
October 19, 1998, and June 24, 1999. The Court has considered the record
evidence submitted by the parties, made determinations as to its relevancy
and materiality, assessed the credibility of the testimony of the witnesses,
both written and oral, and ascertained for its purposes the probative
significance of the documentary and visual evidence presented. Upon the
record before the Court as of July 28, 1999, at the close of the admission
of evidence, pursuant to Fed. R. Civ. P. 52(a), the Court finds the following
facts to have been proved by a preponderance of the evidence. The Court
shall state the conclusions of law to be drawn therefrom in a separate
Memorandum and Order to be filed in due course.
I.
BACKGROUND
1. A "personal computer" ("PC") is a digital information processing device
designed for use by one person at a time. A typical PC consists of central processing
components (e.g., a microprocessor and main memory) and mass data storage (such
as a hard disk). A typical PC system consists of a PC, certain peripheral input/output
devices (including a monitor, a keyboard, a mouse, and a printer), and an operating
system. PC systems, which include desktop and laptop models, can be distinguished
from more powerful, more expensive computer systems known as "servers," which
are designed to provide data, services, and functionality through a digital
network to multiple users.
2. An "operating system" is a software program that controls the allocation
and use of computer resources (such as central processing unit time, main memory
space, disk space, and input/output channels). The operating system also supports
the functions of software programs, called "applications," that perform specific
user-oriented tasks. The operating system supports the functions of applications
by exposing interfaces, called "application programming interfaces," or "APIs."
These are synapses at which the developer of an application can connect to invoke
pre-fabricated blocks of code in the operating system. These blocks of code
in turn perform crucial tasks, such as displaying text on the computer screen.
Because it supports applications while interacting more closely with the PC
system's hardware, the operating system is said to serve as a "platform."
3. An Intel-compatible PC is one designed to function with Intel's 80x86/Pentium
families of microprocessors or with compatible microprocessors manufactured
by Intel or by other firms.
4. An operating system designed to run on an Intel-compatible PC will not function
on a non-Intel-compatible PC, nor will an operating system designed for a non-Intel-compatible
PC function on an Intel-compatible one. Similarly, an application that relies
on APIs specific to one operating system will not, generally speaking, function
on another operating system unless it is first adapted, or "ported," to the
APIs of the other operating system.
5. Defendant Microsoft Corporation is organized under the laws of the State
of Washington, and its headquarters are situated in Redmond, Washington. Since
its inception, Microsoft has focused primarily on developing software and licensing
it to various purchasers.
6. In 1981, Microsoft released the first version of its Microsoft Disk Operating
System, commonly known as "MS-DOS." The system had a character-based user interface
that required the user to type specific instructions at a command prompt in
order to perform tasks such as launching applications and copying files. When
the International Business Machines Corporation ("IBM") selected MS-DOS for
pre-installation on its first generation of PCs, Microsoft's product became
the predominant operating system sold for Intel-compatible PCs.
7. In 1985, Microsoft began shipping a software package called Windows. The
product included a graphical user interface, which enabled users to perform
tasks by selecting icons and words on the screen using a mouse. Although originally
just a user-interface, or "shell," sitting on top of MS-DOS, Windows took on
more operating-system functionality over time.
8. In 1995, Microsoft introduced a software package called Windows 95, which
announced itself as the first operating system for Intel-compatible PCs that
exhibited the same sort of integrated features as the Mac OS running PCs manufactured
by Apple Computer, Inc. ("Apple"). Windows 95 enjoyed unprecedented popularity
with consumers, and in June 1998, Microsoft released its successor, Windows
98.
9. Microsoft is the leading supplier of operating systems for PCs. The company
transacts business in all fifty of the United States and in most countries around
the world.
10. Microsoft licenses copies of its software programs directly to consumers.
The largest part of its MS-DOS and Windows sales, however, consists of licensing
the products to manufacturers of PCs (known as "original equipment manufacturers"
or "OEMs"), such as the IBM PC Company and the Compaq Computer Corporation ("Compaq").
An OEM typically installs a copy of Windows onto one of its PCs before selling
the package to a consumer under a single price.
11. The Internet is a global electronic network, consisting of smaller, interconnected
networks, which allows millions of computers to exchange information over telephone
wires, dedicated data cables, and wireless links. The Internet links PCs by
means of servers, which run specialized operating systems and applications designed
for servicing a network environment.
12. The World Wide Web ("the Web") is a massive collection of digital information
resources stored on servers throughout the Internet. These resources are typically
provided in the form of hypertext documents, commonly referred to as "Web pages,"
that may incorporate any combination of text, graphics, audio and video content,
software programs, and other data. A user of a computer connected to the Internet
can publish a page on the Web simply by copying it into a specially designated,
publicly accessible directory on a Web server. Some Web resources are in the
form of applications that provide functionality through a user's PC system but
actually execute on a server.
13. Internet content providers ("ICPs") are the individuals and organizations
that have established a presence, or "site," on the Web by publishing a collection
of Web pages. Most Web pages are in the form of "hypertext"; that is, they contain
annotated references, or "hyperlinks," to other Web pages. Hyperlinks can be
used as cross-references within a single document, between documents on the
same site, or between documents on different sites.
14. Typically, one page on each Web site is the "home page," or the first access
point to the site. The home page is usually a hypertext document that presents
an overview of the site and hyperlinks to the other pages comprising the site.
15. PCs typically connect to the Internet through the services of Internet
access providers ("IAPs"), which generally charge subscription fees to their
customers in the United States. There are two types of IAPs. Online services
("OLSs") such as America Online ("AOL"), Prodigy, and the Microsoft Network
("MSN") offer, in addition to Internet access, various services and an array
of proprietary content. Internet service providers ("ISPs") such as MindSpring
and Netcom, on the other hand, offer few services apart from Internet access
and relatively little of their own content.
16. A "Web client" is software that, when running on a computer connected to
the Internet, sends information to and receives information from Web servers
throughout the Internet. Web clients and servers transfer data using a standard
known as the Hypertext Transfer Protocol ("HTTP"). A "Web browser" is a type
of Web client that enables a user to select, retrieve, and perceive resources
on the Web. In particular, Web browsers provide a way for a user to view hypertext
documents and follow the hyperlinks that connect them, typically by moving the
cursor over a link and depressing the mouse button.
17. Although certain Web browsers provided graphical user interfaces as far
back as 1993, the first widely-popular graphical browser distributed for profit,
called Navigator, was brought to market by the Netscape Communications Corporation
in December 1994. Microsoft introduced its browser, called Internet Explorer,
in July 1995.
II.
THE RELEVANT MARKET
18. Currently there are no products, nor are there likely to be any in the
near future, that a significant percentage of consumers world-wide could substitute
for Intel-compatible PC operating systems without incurring substantial costs.
Furthermore, no firm that does not currently market Intel-compatible PC operating
systems could start doing so in a way that would, within a reasonably short
period of time, present a significant percentage of consumers with a viable
alternative to existing Intel-compatible PC operating systems. It follows that,
if one firm controlled the licensing of all Intel-compatible PC operating systems
world-wide, it could set the price of a license substantially above that which
would be charged in a competitive market and leave the price there for a significant
period of time without losing so many customers as to make the action unprofitable.
Therefore, in determining the level of Microsoft's market power, the relevant
market is the licensing of all Intel-compatible PC operating systems world-wide.
- Demand Substitutability
- Server Operating Systems
19. Consumers could not turn from Intel-compatible PC operating systems
to Intel- compatible server operating systems without incurring substantial
costs, since the latter type of system is sold at a significantly higher
price than the former. A consumer intent on acquiring a server operating
system would also have to buy a computer of substantially greater power
and price than an Intel-compatible PC, because server operating systems
generally cannot function properly on PC hardware. The price of an Intel-compatible
PC operating system accounts for only a very small percentage of the
price of an Intel-compatible PC system. Thus, even a substantial increase
in the price of an Intel-compatible PC operating system above the competitive
level would result in only a trivial increase in the price of an Intel-compatible
PC system. Very few consumers would purchase expensive servers in response
to a trivial increase in the price of an Intel-compatible PC system.
Furthermore, a consumer would not obtain a satisfactory substitute for
an Intel-compatible PC operating system even if he purchased a server,
since server operating systems lack the features — and support for the
breadth of applications — that induce users to purchase Intel-compatible
PC operating systems.
- Non-Intel-Compatible PC Operating Systems
20. Since only Intel-compatible PC operating systems will work with
Intel- compatible PCs, a consumer cannot opt for a non-Intel-compatible
PC operating system without obtaining a non-Intel-compatible PC. Thus,
for consumers who already own an Intel-compatible PC system, the cost
of switching to a non-Intel compatible PC operating system includes
the price of not only a new operating system, but also a new PC and
new peripheral devices. It also includes the effort of learning to use
the new system, the cost of acquiring a new set of compatible applications,
and the work of replacing files and documents that were associated with
the old applications. Very few consumers would incur these costs in
response to the trivial increase in the price of an Intel-compatible
PC system that would result from even a substantial increase in the
price of an Intel-compatible PC operating system. For example, users
of Intel- compatible PC operating systems would not switch in large
numbers to the Mac OS in response to even a substantial, sustained increase
in the price of an Intel-compatible PC operating system.
21. The response to a price increase would be somewhat greater among
consumers buying their first PC system, because they would not have
already invested time and money in an Intel-compatible PC system and
a set of compatible applications. Apple does not license the Mac OS
separately from its PC hardware, however, and the package of hardware
and software comprising an Apple PC system is priced substantially higher
than the average price of an Intel- compatible PC system. Furthermore,
consumer demand for Apple PC systems suffers on account of the relative
dearth of applications written to run on the Mac OS. It is unlikely,
then, that a firm controlling the licensing of all Intel-compatible
PC operating systems would lose so many new PC users to Apple as the
result of a substantial, enduring price increase as to make the action
unprofitable. It is therefore proper to define a relevant market that
excludes the Mac OS. In any event, as Section III of these findings
demonstrates, including the Mac OS in the relevant market would not
alter the Court's conclusion as to the level of Microsoft's market power.
- Information Appliances
22. No operating system designed for a hand-held computer, a "smart"
wireless telephone, a television set-top box, or a game console is capable
of performing as an adequate operating system for an Intel-compatible
PC. Therefore, in order to adopt a substitute for the Intel-compatible
PC operating system from the realm of "information appliances," a consumer
must acquire one or more of these devices in lieu of an Intel-compatible
PC system.
23. It is possible that, within the next few years, those consumers
who otherwise would use an Intel-compatible PC system solely for storing
addresses and schedules, for sending and receiving E-mail, for browsing
the Web, and for playing video games might be able to choose a complementary
set of information appliances over an Intel-compatible PC system without
incurring substantial costs. To the extent this substitution occurs,
though, it will be the result of innovation by the producers of information
appliances, and it will occur even if Intel- compatible PC operating
systems are priced at the same level that they would be in a competitive
market. More importantly, while some consumers may decide to make do
with one or more information appliances in place of an Intel-compatible
PC system, the number of these consumers will, for the foreseeable future,
remain small in comparison to the number of consumers deciding that
they still need an Intel-compatible PC system. One reason for this is
the fact that no single type of information appliance, nor even all
types in the aggregate, provides all of the features that most consumers
have come to rely on in their PC systems and in the applications that
run on them. Thus, most of those who buy information appliances will
do so in addition to, rather than instead of, buying an Intel-compatible
PC system. Not surprisingly, then, sales of PC systems are not expected
to suffer on account of the growing consumer interest in information
appliances. It follows that, for the foreseeable future, a firm controlling
the licensing of all Intel-compatible PC operating systems could set
prices substantially above competitive levels without losing an unacceptable
amount of business to information appliances.
- Network Computers
24. A network computer system (sometimes called a "thin client") typically
contains central processing components with basic capabilities, certain
key peripheral devices (such as a monitor, a keyboard, and a mouse),
an operating system, and a browser. The system contains no mass storage,
however, and it processes little if any data locally. Instead, the system
receives processed data and software as needed from a server across
a network. A network computer system lacks the hardware resources to
support an Intel-compatible PC operating system. It follows that software
applications written to run on a specific Intel-compatible PC operating
system will not run on a network computer. Network computers can run
applications residing on a designated server, however. Moreover, a network
computer system typically can run applications residing on other servers,
so long as those applications are accessible through Web sites. The
ability to run server-based applications is not exclusive to network
computer systems, however. Generally speaking, any PC system equipped
with a browser and an Internet connection is capable of accessing applications
hosted through Web sites.
25. Since the network computing model relies heavily on the processing
power and memory of servers, the requirements for the user's hardware
(and thus the price of that hardware) are low relative to those of an
Intel-compatible PC system. Still, a user who already owns a relatively
expensive Intel-compatible PC system is not likely to abandon the investment
and acquire less powerful hardware just because one of the least expensive
components of his PC system — the operating system — is substantially
more expensive than it would be under competitive conditions. Just as
does the Mac OS, the network computing model presents a somewhat more
attractive alternative to the first-time computer buyer. But as in the
case where a prospective purchaser is considering acquiring the Apple
alternative, a new buyer considering the network computing model must
choose between types of computer systems. If the consumer opts for the
less expensive hardware of the network computer, that hardware will
not support an Intel-compatible PC operating system; and if the new
buyer opts for the more expensive hardware of an Intel-compatible PC,
an Intel-compatible PC operating system will almost certainly come pre-installed
(and in any event represent very little additional cost relative to
the price of the hardware).
26. Only a few firms currently market network computer systems, and
the systems have yet to attract substantial consumer demand. In part,
this is because PC systems, which can store and process data locally
as well as communicate with a server, have decreased so much in price
as to call into question the value proposition of buying a network computer
system. This fact would not change if the price of an Intel-compatible
PC operating system rose significantly, because the resulting change
in the price of an Intel-compatible PC system would be very minor. Another
reason for the limited demand for network computer systems is the fact
that few consumers are in a position to turn from PC systems to network
computer systems without making substantial sacrifices; for the network
computing option exhibits significant shortcomings for current PC owners
and first-time buyers alike. The problems of latency, congestion, asynchrony,
and insecurity across a communications network, and contention for limited
processing and memory resources at the remote server, can all result
in a substantial derogation of computing performance. Moreover, the
owner of a network computer is required to enter into long-term dependency
upon the owner of a remote server in order to obtain functionality that
would reside within his control if he owned a PC system. If network
computing becomes a viable alternative to PC-based computing, it will
be because innovation by the proponents of the network computing model
overcomes these problems, and it will happen even if Intel-compatible
PC operating systems are priced at competitive levels. In any case,
that day has not arrived, nor does it appear imminent.
- Server-Based Computing Generally
27. As the bandwidth available to the average user increases, "portal"
Web sites, which aggregate Web content and provide services such as
search engines, E-mail, and travel reservation systems, could begin
to host full lines of the server-based, personal-productivity applications
that have begun to appear in small numbers on the Web. If so, increasing
numbers of computer users equipped with Web browsers and IAP connections
could begin to conduct a significant portion of their computing through
these portals. To the extent they might do so, users probably would
not regard the Mac OS's limited stock of compatible applications as
the major drawback to using an Apple PC system that it is today, and
they might be increasingly drawn to network computer systems and information
appliances. The variety and ease of use of server-based applications
accessible through browsers would have to increase a great deal from
today's levels, however, before the total costs of dispensing with an
Intel-compatible PC operating system would decline sufficiently to impose
a significant constraint on the pricing of those systems. Again, that
day is not imminent; for at least the next few years, the overwhelming
majority of consumers accessing server-based applications will do so
using an Intel-compatible PC system and a browser.
- Middleware
28. Operating systems are not the only software programs that expose
APIs to application developers. The Netscape Web browser and Sun Microsystems,
Inc.'s Java class libraries are examples of non-operating system software
that do likewise. Such software is often called "middleware" because
it relies on the interfaces provided by the underlying operating system
while simultaneously exposing its own APIs to developers. Currently
no middleware product exposes enough APIs to allow independent software
vendors ("ISVs") profitably to write full-featured personal productivity
applications that rely solely on those APIs.
29. Even if middleware deployed enough APIs to support full-featured
applications, it would not function on a computer without an operating
system to perform tasks such as managing hardware resources and controlling
peripheral devices. But to the extent the array of applications relying
solely on middleware comes to satisfy all of a user's needs, the user
will not care whether there exists a large number of other applications
that are directly compatible with the underlying operating system. Thus,
the growth of middleware-based applications could lower the costs to
users of choosing a non-Intel-compatible PC operating system like the
Mac OS. It remains to be seen, though, whether there will ever be a
sustained stream of full-featured applications written solely to middleware
APIs. In any event, it would take several years for middlware and the
applications it supports to evolve from the status quo to a point at
which the cost to the average consumer of choosing a non-Intel compatible
PC operating system over an Intel-compatible one falls so low as to
constrain the pricing of the latter systems.
- The Possibility of Supply Responses
30. Firms that do not currently produce Intel-compatible PC operating systems
could do so. What is more, once a firm had written the necessary software
code, it could produce millions of copies of its operating system at relatively
low cost. The ability to meet a large demand is useless, however, if the
demand for the product is small, and signs do not indicate large demand
for a new Intel-compatible PC operating system. To the contrary, they indicate
that the demand for a new Intel-compatible PC operating system would be
severely constrained by an intractable "chicken-and-egg" problem: The overwhelming
majority of consumers will only use a PC operating system for which there
already exists a large and varied set of high- quality, full-featured applications,
and for which it seems relatively certain that new types of applications
and new versions of existing applications will continue to be marketed at
pace with those written for other operating systems. Unfortunately for firms
whose products do not fit that bill, the porting of applications from one
operating system to another is a costly process. Consequently, software
developers generally write applications first, and often exclusively, for
the operating system that is already used by a dominant share of all PC
users. Users do not want to invest in an operating system until it is clear
that the system will support generations of applications that will meet
their needs, and developers do not want to invest in writing or quickly
porting applications for an operating system until it is clear that there
will be a sizeable and stable market for it. What is more, consumers who
already use one Intel-compatible PC operating system are even less likely
than first-time buyers to choose a newcomer to the field, for switching
to a new system would require these users to scrap the investment they have
made in applications, training, and certain hardware.
31. The chicken-and-egg problem notwithstanding, a firm might reasonably
expect to make a profit by introducing an Intel-compatible PC operating
system designed to support a type of application that satisfies the special
interests of a particular subset of users. For example, Be, Inc. (‘Be")
markets an Intel-compatible PC operating system called BeOS that offers
superior support for multimedia applications, and the operating system enjoys
a certain amount of success with the segment of the consumer population
that has a special interest in creating and playing multimedia content with
a PC system. Still, while a niche operating system might turn a profit,
the chicken-and-egg problem (hereinafter referred to as the "applications
barrier to entry") would make it prohibitively expensive for a new Intel-compatible
operating system to attract enough developers and consumers to become a
viable alternative to a dominant incumbent in less than a few years.
32. To the extent that developers begin writing attractive applications
that rely solely on servers or middleware instead of PC operating systems,
the applications barrier to entry could erode. As the Court finds above,
however, it remains to be seen whether server- or middleware- based development
will flourish at all. Even if such development were already flourishing,
it would be several years before the applications barrier eroded enough
to clear the way for the relatively rapid emergence of a viable alternative
to incumbent Intel-compatible PC operating systems. It is highly unlikely,
then, that a firm not already marketing an Intel-compatible PC operating
system could begin marketing one that would, in less than a few years, present
a significant percentage of consumers with a viable alternative to incumbents.
III.
MICROSOFT'S POWER IN THE RELEVANT MARKET
33. Microsoft enjoys so much power in the market for Intel-compatible PC operating
systems that if it wished to exercise this power solely in terms of price, it
could charge a price for Windows substantially above that which could be charged
in a competitive market. Moreover, it could do so for a significant period of
time without losing an unacceptable amount of business to competitors. In other
words, Microsoft enjoys monopoly power in the relevant market.
34. Viewed together, three main facts indicate that Microsoft enjoys monopoly
power. First, Microsoft's share of the market for Intel-compatible PC operating
systems is extremely large and stable. Second, Microsoft's dominant market share
is protected by a high barrier to entry. Third, and largely as a result of that
barrier, Microsoft's customers lack a commercially viable alternative to Windows.
- Market Share
35. Microsoft possesses a dominant, persistent, and increasing share of
the world- wide market for Intel-compatible PC operating systems. Every
year for the last decade, Microsoft's share of the market for Intel-compatible
PC operating systems has stood above ninety percent. For the last couple
of years the figure has been at least ninety-five percent, and analysts
project that the share will climb even higher over the next few years. Even
if Apple's Mac OS were included in the relevant market, Microsoft's share
would still stand well above eighty percent.
- The Applications Barrier to Entry
- Description of the Applications Barrier to Entry
36. Microsoft's dominant market share is protected by the same barrier
that helps define the market for Intel-compatible PC operating systems.
As explained above, the applications barrier would prevent an aspiring
entrant into the relevant market from drawing a significant number of
customers away from a dominant incumbent even if the incumbent priced
its products substantially above competitive levels for a significant
period of time. Because Microsoft's market share is so dominant, the
barrier has a similar effect within the market: It prevents Intel-compatible
PC operating systems other than Windows from attracting significant
consumer demand, and it would continue to do so even if Microsoft held
its prices substantially above the competitive level.
37. Consumer interest in a PC operating system derives primarily from
the ability of that system to run applications. The consumer wants an
operating system that runs not only types of applications that he knows
he will want to use, but also those types in which he might develop
an interest later. Also, the consumer knows that if he chooses an operating
system with enough demand to support multiple applications in each product
category, he will be less likely to find himself straitened later by
having to use an application whose features disappoint him. Finally,
the average user knows that, generally speaking, applications improve
through successive versions. He thus wants an operating system for which
successive generations of his favorite applications will be released
— promptly at that. The fact that a vastly larger number of applications
are written for Windows than for other PC operating systems attracts
consumers to Windows, because it reassures them that their interests
will be met as long as they use Microsoft's product.
38. Software development is characterized by substantial economies
of scale. The fixed costs of producing software, including applications,
is very high. By contrast, marginal costs are very low. Moreover, the
costs of developing software are "sunk" — once expended to develop software,
resources so devoted cannot be used for another purpose. The result
of economies of scale and sunk costs is that application developers
seek to sell as many copies of their applications as possible. An application
that is written for one PC operating system will operate on another
PC operating system only if it is ported to that system, and porting
applications is both time-consuming and expensive. Therefore, application
developers tend to write first to the operating system with the most
users — Windows. Developers might then port their applications to other
operating systems, but only to the extent that the marginal added sales
justify the cost of porting. In order to recover that cost, ISVs that
do go to the effort of porting frequently set the price of ported applications
considerably higher than that of the original versions written for Windows.
39. Consumer demand for Windows enjoys positive network effects. A
positive network effect is a phenomenon by which the attractiveness
of a product increases with the number of people using it. The fact
that there is a multitude of people using Windows makes the product
more attractive to consumers. The large installed base attracts corporate
customers who want to use an operating system that new employees are
already likely to know how to use, and it attracts academic consumers
who want to use software that will allow them to share files easily
with colleagues at other institutions. The main reason that demand for
Windows experiences positive network effects, however, is that the size
of Windows' installed base impels ISVs to write applications first and
foremost to Windows, thereby ensuring a large body of applications from
which consumers can choose. The large body of applications thus reinforces
demand for Windows, augmenting Microsoft's dominant position and thereby
perpetuating ISV incentives to write applications principally for Windows.
This self-reinforcing cycle is often referred to as a "positive feedback
loop."
40. What for Microsoft is a positive feedback loop is for would-be
competitors a vicious cycle. For just as Microsoft's large market share
creates incentives for ISVs to develop applications first and foremost
for Windows, the small or non-existent market share of an aspiring competitor
makes it prohibitively expensive for the aspirant to develop its PC
operating system into an acceptable substitute for Windows. To provide
a viable substitute for Windows, another PC operating system would need
a large and varied enough base of compatible applications to reassure
consumers that their interests in variety, choice, and currency would
be met to more-or-less the same extent as if they chose Windows. Even
if the contender attracted several thousand compatible applications,
it would still look like a gamble from the consumer's perspective next
to Windows, which supports over 70,000 applications. The amount it would
cost an operating system vendor to create that many applications is
prohibitively large. Therefore, in order to ensure the availability
of a set of applications comparable to that available for Windows, a
potential rival would need to induce a very large number of ISVs to
write to its operating system.
41. In deciding whether to develop an application for a new operating
system, an ISV's first consideration is the number of users it expects
the operating system to attract. Out of this focus arises a collective-action
problem: Each ISV realizes that the new operating system could attract
a significant number of users if enough ISVs developed applications
for it; but few ISVs want to sink resources into developing for the
system until it becomes established. Since everyone is waiting for everyone
else to bear the risk of early adoption, the new operating system has
difficulty attracting enough applications to generate a positive feedback
loop. The vendor of a new operating system cannot effectively solve
this problem by paying the necessary number of ISVs to write for its
operating system, because the cost of doing so would dwarf the expected
return.
42. Counteracting the collective-action phenomenon is another known
as the "first- mover incentive." For an ISV interested in attracting
users, there may be an advantage to offering the first and, for a while,
only application in its category that runs on a new PC operating system.
The user base of the new system may be small, but every user of that
system who wants such an application will be compelled to use the ISV's
offering. Moreover, if demand for the new operating system suddenly
explodes, the first mover will reap large sales before any competitors
arrive. An ISV thus might be drawn to a new PC operating system as a
"protected harbor." Once first-movers stake claims to the major categories
of applications, however, there is a strong chance that the new operating
system could stall; it would not support the most familiar applications,
nor the variety and number of applications, that attract large numbers
of consumers, and there would no longer exist a first-mover incentive
to attract additional ISVs to the important application categories.
Although the upstart operating system might find itself with enough
applications support to hold a fraction of the market, the collective-action
phenomenon would still prevent the system from gaining the kind of positive
feedback momentum that can turn a fringe entrant into a rival that would
put competitive pressure on Windows.
43. The cost to a would-be entrant of inducing ISVs to write applications
for its operating system exceeds the cost that Microsoft itself has
faced in inducing ISVs to write applications for its operating system
products, for Microsoft never confronted a highly penetrated market
dominated by a single competitor. Of course, the fact that it is extremely
difficult for an efficient would-be rival to accumulate enough applications
support to compete with Windows does not mean that sustaining its own
applications support is effortless for Microsoft. In fact, if Microsoft
stopped investing the hundreds of millions of dollars it spends each
year inducing ISVs to write applications for Windows, it might become
easier than it currently is for a competitor to develop its own positive
feedback loop. But given that Windows today enjoys overwhelmingly more
applications support than any other PC operating system, it would still
take that competitor years to develop the necessary momentum. Plus,
while Microsoft may spend more on platform "evangelization," even in
relative terms, than any other PC operating- system vendor, it is not
difficult to understand why it is worthwhile for the principal beneficiary
of the applications barrier to devote more resources to augmenting it
than aspiring rivals are willing to expend in speculative efforts to
erode it.
44. Microsoft continually releases "new and improved" versions of its
PC operating system. Each time it does, Microsoft must convince ISVs
to write applications that take advantage of new APIs, so that existing
Windows users will have incentive to buy an upgrade. Since ISVs are
usually still earning substantial revenue from applications written
for the last version of Windows, Microsoft must convince them to write
for the new version. Even if ISVs are slow to take advantage of the
new APIs, though, no applications barrier stands in the way of consumers
adopting the new system, for Microsoft ensures that successive versions
of Windows retain the ability to run applications developed for earlier
versions. In fact, since ISVs know that consumers do not feel locked
into their old versions of Windows and that new versions have historically
attracted substantial consumer demand, ISVs will generally write to
new APIs as long as the interfaces enable attractive, innovative features.
Microsoft supplements developers' incentives by extending various ‘seals
of approval' — visible to consumers, investors, and industry analysts
— to those ISVs that promptly develop new versions of their applications
adapted to the newest version of Windows. In addition, Microsoft works
closely with ISVs to help them adapt their applications to the newest
version of the operating system — a process that is in any event far
easier than porting an application from one vendor's PC operating system
to another's. In sum, despite the substantial resources Microsoft expends
inducing ISVs to develop applications for new versions of Windows, the
company does not face any obstacles nearly as imposing as the barrier
to entry that vendors and would-be vendors of other PC operating systems
must overcome.
- Empirical Evidence of the Applications Barrier to Entry
45. The experiences of IBM and Apple, Microsoft's most significant
operating system rivals in the mid- and late 1990s, confirm the strength
of the applications barrier to entry.
- OS/2 Warp
46. IBM's inability to gain widespread developer support for its
OS/2 Warp operating system illustrates how the massive Windows installed
base makes it prohibitively costly for a rival operating system
to attract enough developer support to challenge Windows. In late
1994, IBM introduced its Intel-compatible OS/2 Warp operating system
and spent tens of millions of dollars in an effort to attract ISVs
to develop applications for OS/2 and in an attempt to reverse- engineer,
or "clone," part of the Windows API set. Despite these efforts,
IBM could obtain neither significant market share nor ISV support
for OS/2 Warp. Thus, although at its peak OS/2 ran approximately
2,500 applications and had 10% of the market for Intel-compatible
PC operating systems, IBM ultimately determined that the applications
barrier prevented effective competition against Windows 95. For
that reason, in 1996 IBM stopped trying to convince ISVs to write
for OS/2 Warp. IBM now targets the product at a market niche, namely
enterprise customers (mainly banks) that are interested in particular
types of application that run on OS/2 Warp. The fact that IBM no
longer tries to compete with Windows is evidenced by the fact that
it prices OS/2 Warp at about two-and-one-half times the price of
Windows 98.
- The Mac OS
47. The inability of Apple to compete effectively with Windows
provides another example of the applications barrier to entry in
operation. Although Apple's Mac OS supports more than 12,000 applications,
even an inventory of that magnitude is not sufficient to enable
Apple to present a significant percentage of users with a viable
substitute for Windows. The absence of a large installed base, in
turn, reinforces the disparity between the applications made available
for the Mac OS and those made available for Windows, further inhibiting
Apple's sales. The applications barrier thus prevents the Mac OS
from hindering Microsoft's ability to control price, regardless
of whether the Mac OS is regarded as being in the relevant market
or not.
- Fringe Operating Systems
48. The applications barrier to entry does not prevent non-Microsoft,
Intel-compatible PC operating systems from attracting enough consumer
demand and ISV support to survive. It does not even prevent vendors
of those products from making a profit. The barrier does, however,
prevent the products from drawing a significant percentage of consumers
away from Windows.
49. As discussed above, Be markets an Intel-compatible PC operating
system, called BeOS, that is specially suited to support multimedia
functions. The operating system survives on a relatively minuscule
number of applications (approximately 1,000) and a user base which,
at around 750,000, is trivial compared to the number of Windows
users. One of the reasons the BeOS can even attract that many users
despite its small base of applications is that it advertises itself
as a complement to, rather than as a substitute for, Windows. Although
the BeOS could run an Intel-compatible PC system without Windows,
it is almost always loaded on a system along with Windows. What
is more, when these dual-loaded PC systems are turned on, Windows
automatically boots; the user must then take affirmative steps to
invoke the BeOS. While this scheme allows the BeOS to occupy a niche
in the market, it does not place the product on a trajectory to
replace Windows on a significant number of PCs. The special multimedia
support provided by the BeOS may, for a small number of users, outweigh
the disadvantages of maintaining two large, complex operating systems
on one PC. Of that group, however, it is likely that only a tiny
number of users will find that support so attractive that they would
be willing to forego Windows, and its huge base of compatible applications,
altogether.
50. The experience of the Linux operating system, a version of
which runs on Intel- compatible PCs, similarly fails to refute the
existence of an applications barrier to entry. Linux is an "open
source" operating system that was created, and is continuously updated,
by a global network of software developers who contribute their
labor for free. Although Linux has between ten and fifteen million
users, the majority of them use the operating system to run servers,
not PCs. Several ISVs have announced their development of (or plans
to develop) Linux versions of their applications. To date, though,
legions of ISVs have not followed the lead of these first movers.
Similarly, consumers have by and large shown little inclination
to abandon Windows, with its reliable developer support, in favor
of an operating system whose future in the PC realm is unclear.
By itself, Linux's open-source development model shows no signs
of liberating that operating system from the cycle of consumer preferences
and developer incentives that, when fueled by Windows' enormous
reservoir of applications, prevents non-Microsoft operating systems
from competing.
- Open-Source Applications Development
51. Since application developers working under an open-source model
are not looking to recoup their investment and make a profit by selling
copies of their finished products, they are free from the imperative
that compels proprietary developers to concentrate their efforts on
Windows. In theory, then, open-source developers are at least as likely
to develop applications for a non-Microsoft operating system as they
are to write Windows-compatible applications. In fact, they may be disposed
ideologically to focus their efforts on open-source platforms like Linux.
Fortunately for Microsoft, however, there are only so many developers
in the world willing to devote their talents to writing, testing, and
debugging software pro bono publico. A small corps may be willing to
concentrate its efforts on popular applications, such as browsers and
office productivity applications, that are of value to most users. It
is unlikely, though, that a sufficient number of open-source developers
will commit to developing and continually updating the large variety
of applications that an operating system would need to attract in order
to present a significant number of users with a viable alternative to
Windows. In practice, then, the open- source model of applications development
may increase the base of applications that run on non- Microsoft PC
operating systems, but it cannot dissolve the barrier that prevents
such operating systems from challenging Windows.
- Cloning the 32-Bit Windows APIs
52. Theoretically, the developer of a non-Microsoft, Intel-compatible
PC operating system could circumvent the applications barrier to entry
by cloning the APIs exposed by the 32- bit versions of Windows (Windows
9x and Windows NT). Applications written for Windows would then also
run on the rival system, and consumers could use the rival system confident
in that knowledge. Translating this theory into practice is virtually
impossible, however. First of all, cloning the thousands of APIs already
exposed by Windows would be an enormously expensive undertaking. More
daunting is the fact that Microsoft continually adds APIs to Windows
through updates and new versions. By the time a rival finished cloning
the APIs currently in existence, Windows would have exposed a multitude
of new ones. Since the rival would never catch up, it would never be
able to assure consumers that its operating system would run all of
the applications written for Windows. IBM discovered this to its dismay
in the mid- 1990s when it failed, despite a massive investment, to clone
a sufficiently large part of the 32-bit Windows APIs. In short, attempting
to clone the 32-bit Windows APIs is such an expensive, uncertain undertaking
that it fails to present a practical option for a would-be competitor
to Windows.
- Viable Alternatives to Windows
53. That Microsoft's market share and the applications barrier to entry
together endow the company with monopoly power in the market for Intel-compatible
PC operating systems is directly evidenced by the sustained absence of realistic
commercial alternatives to Microsoft's PC operating-system products.
54. OEMs are the most important direct customers for operating systems
for Intel- compatible PCs. Because competition among OEMs is intense, they
pay particularly close attention to consumer demand. OEMs are thus not only
important customers in their own right, they are also surrogates for consumers
in identifying reasonably-available commercial alternatives to Windows.
Without significant exception, all OEMs pre-install Windows on the vast
majority of PCs that they sell, and they uniformly are of a mind that there
exists no commercially viable alternative to which they could switch in
response to a substantial and sustained price increase or its equivalent
by Microsoft. For example, in 1995, at a time when IBM still placed hope
in OS/2's ability to rival Windows, the firm nevertheless calculated that
its PC company would lose between seventy and ninety percent of its sales
volume if failed to load Windows 95 on its PCs. Although a few OEMs have
announced their intention to pre-install Linux on some of the computers
they ship, none of them plan to install Linux in lieu of Windows on any
appreciable number of PC (as opposed to server) systems. For its part, Be
is not even attempting to persuade OEMs to install the BeOS on PCs to the
exclusion of Windows.
55. OEMs believe that the likelihood of a viable alternative to Windows
emerging any time in the next few years is too low to constrain Microsoft
from raising prices or imposing other burdens on customers and users. The
accuracy of this belief is highlighted by the fact that the other vendors
of Intel-compatible PC operating systems do not view their own offerings
as viable alternatives to Windows. Microsoft knows that OEMs have no choice
but to load Windows, both because it has a good understanding of the market
in which it operates and because OEMs have told Microsoft as much. Indicative
of Microsoft's assessment of the situation is the fact that, in a 1996 presentation
to the firm's executive committee, the Microsoft executive in charge of
OEM licensing reported that piracy continued to be the main competition
to the company's operating system products. Secure in this knowledge, Microsoft
did not consider the prices of other Intel-compatible PC operating systems
when it set the price of Windows 98.
56. As the Court found above, the growth of server- and middleware-based
applications development might eventually weaken the applications barrier
to entry. This would not only make it easier for outside firms to enter
the market, it could also make it easier for non- Microsoft firms already
in the market to present a viable alternative to Windows. But as the Court
also found above, it is not clear whether ISVs will ever develop a large,
diverse body of full-featured applications that rely solely on APIs exposed
by servers and middleware. Furthermore, even assuming that such a movement
has already begun in earnest, it will take several years for the applications
barrier to erode enough to enable a non-Microsoft, Intel- compatible PC
operating system to develop into a viable alternative to Windows.
- Price Restraint Posed by Microsoft's Installed Base
57. Software never expires, so consumers who already have a version of
Windows with which they are content and who are not shopping for a new PC
system are somewhat reluctant to incur the cost of upgrading to a new version
of Windows. Fortunately for Microsoft, the pace of innovation in PC hardware
is rapid, and the price of that hardware has declined steadily in recent
years. As a result, existing PC users buy new PC systems relatively frequently,
and OEMs still attract at a healthy rate buyers who have never owned a computer.
The license for one of Microsoft's operating system products prohibits the
user from transferring the operating system to another machine, so there
is no legal secondary market in Microsoft operating systems. This means
that any consumer who buys a new Intel-compatible PC and wants Windows must
buy a new copy of the operating system. Microsoft takes pains to ensure
that the versions of its operating system that OEMs pre-install on new PC
systems are the most current. It does this, in part, by increasing the price
to OEMs of older versions of Windows when the newer versions are released.
Since Microsoft can sell so many copies of each new operating system through
the sales of new PC systems, the average price it sets for those systems
is little affected by the fact that older versions of Windows never wear
out.
- Price Restraint Posed by Piracy
58. Although there is no legal secondary market for Microsoft's PC operating
systems, there is a thriving illegal one. Software pirates illegally copy
software products such as Windows, selling each copy for a fraction of the
vendor's usual price. One of the ways Microsoft combats piracy is by advising
OEMs that they will be charged a higher price for Windows unless they drastically
limit the number of PCs that they sell without an operating system pre-installed.
In 1998, all major OEMs agreed to this restriction. Naturally, it is hard
to sell a pirated copy of Windows to a consumer who has already received
a legal copy included in the price of his new PC system. Thus, Microsoft
is able to effectively contain, if not extinguish, the illegal secondary
market for its operating-system products. So even though Microsoft is more
concerned about piracy than it is about other firms' operating system products,
the company's pricing is not substantially constrained by the need to reduce
the incentives for consumers to acquire their copies of Windows illegally.
- Price Restraint Posed by Long-Term Threats
59. The software industry in general is characterized by dynamic, vigorous
competition. In many cases, one of the early entrants into a new software
category quickly captures a lion's share of the sales, while other products
in the category are either driven out altogether or relegated to niche positions.
What eventually displaces the leader is often not competition from another
product within the same software category, but rather a technological advance
that renders the boundaries defining the category obsolete. These events,
in which categories are redefined and leaders are superseded in the process,
are spoken of as "inflection points."
60. The exponential growth of the Internet represents an inflection point
born of complementary technological advances in the computer and telecommunications
industries. The rise of the Internet in turn has fueled the growth of server-based
computing, middleware, and open-source software development. Working together,
these nascent paradigms could oust the PC operating system from its position
as the primary platform for applications development and the main interface
between users and their computers. Microsoft recognizes that new paradigms
could arise to depreciate the value of selling PC operating systems; however,
the fact that these new paradigms already exist in embryonic or primitive
form does not prevent Microsoft from enjoying monopoly power today. For
while consumers might one day turn to network computers, or Linux, or a
combination of middleware and some other operating system, as an alternative
to Windows, the fact remains that they are not doing so today. Nor are consumers
likely to do so in appreciable numbers any time in the next few years. Unless
and until that day arrives, no significant percentage of consumers will
be able to abandon Windows without incurring substantial costs. Microsoft
can therefore set the price of Windows substantially higher than that which
would be charged in a competitive market — or impose other burdens on consumers
— without losing so much business as to make the action unprofitable. If
Microsoft exerted its power solely to raise price, the day when users could
turn away from Windows without incurring substantial costs would still be
several years distant. Moreover, Microsoft could keep its prices high for
a significant period of time and still lower them in time to meet the threat
of a new paradigm. Alternatively, Microsoft could delay the arrival of a
new paradigm on the scene by expending surplus monopoly power in ways other
than the maintenance of high prices.
- Significance of Microsoft's Innovation
61. The fact that Microsoft invests heavily in research and development
does not evidence a lack of monopoly power. Indeed, Microsoft has incentives
to innovate aggressively despite its monopoly power. First, if there are
innovations that will make Intel-compatible PC systems attractive to more
consumers, and those consumers less sensitive to the price of Windows, the
innovations will translate into increased profits for Microsoft. Second,
although Microsoft could significantly restrict its investment in innovation
and still not face a viable alternative to Windows for several years, it
can push the emergence of competition even farther into the future by continuing
to innovate aggressively. While Microsoft may not be able to stave off all
potential paradigm shifts through innovation, it can thwart some and delay
others by improving its own products to the greater satisfaction of consumers.
- Microsoft's Pricing Behavior
62. Microsoft's actual pricing behavior is consistent with the proposition
that the firm enjoys monopoly power in the market for Intel-compatible PC
operating systems. The company's decision not to consider the prices of
other vendors' Intel-compatible PC operating systems when setting the price
of Windows 98, for example, is probative of monopoly power. One would expect
a firm in a competitive market to pay much closer attention to the prices
charged by other firms in the market. Another indication of monopoly power
is the fact that Microsoft raised the price that it charged OEMs for Windows
95, with trivial exceptions, to the same level as the price it charged for
Windows 98 just prior to releasing the newer product. In a competitive market,
one would expect the price of an older operating system to stay the same
or decrease upon the release of a newer, more attractive version. Microsoft,
however, was only concerned with inducing OEMs to ship Windows 98 in favor
of the older version. It is unlikely that Microsoft would have imposed this
price increase if it were genuinely concerned that OEMs might shift their
business to another vendor of operating systems or hasten the development
of viable alternatives to Windows.
63. Finally, it is indicative of monopoly power that Microsoft felt that
it had substantial discretion in setting the price of its Windows 98 upgrade
product (the operating system product it sells to existing users of Windows
95). A Microsoft study from November 1997 reveals that the company could
have charged $49 for an upgrade to Windows 98 — there is no reason to believe
that the $49 price would have been unprofitable — but the study identifies
$89 as the revenue-maximizing price. Microsoft thus opted for the higher
price.
64. An aspect of Microsoft's pricing behavior that, while not tending to
prove monopoly power, is consistent with it is the fact that the firm charges
different OEMs different prices for Windows, depending on the degree to
which the individual OEMs comply with Microsoft's wishes. Among the five
largest OEMs, Gateway and IBM, which in various ways have resisted Microsoft's
efforts to enlist them in its efforts to preserve the applications barrier
to entry, pay higher prices than Compaq, Dell, and Hewlett-Packard, which
have pursued less contentious relationships with Microsoft.
65. It is not possible with the available data to determine with any level
of confidence whether the price that a profit-maximizing firm with monopoly
power would charge for Windows 98 comports with the price that Microsoft
actually charges. Even if it could be determined that Microsoft charges
less than the profit-maximizing monopoly price, though, that would not be
probative of a lack of monopoly power, for Microsoft could be charging what
seems like a low short-term price in order to maximize its profits in the
future for reasons unrelated to underselling any incipient competitors.
For instance, Microsoft could be stimulating the growth of the market for
Intel-compatible PC operating systems by keeping the price of Windows low
today. Given the size and stability of its market share, Microsoft stands
to reap almost all of the future rewards if there are yet more consumers
of Intel-compatible PC operating systems. By pricing low relative to the
short-run profit-maximizing price, thereby focusing on attracting new users
to the Windows platform, Microsoft would also intensify the positive network
effects that add to the impenetrability of the applications barrier to entry.
66. Furthermore, Microsoft expends a significant portion of its monopoly
power, which could otherwise be spent maximizing price, on imposing burdensome
restrictions on its customers — and in inducing them to behave in ways —
that augment and prolong that monopoly power. For example, Microsoft attaches
to a Windows license conditions that restrict the ability of OEMs to promote
software that Microsoft believes could weaken the applications barrier to
entry. Microsoft also charges a lower price to OEMs who agree to ensure
that all of their Windows machines are powerful enough to run Windows NT
for Workstations. To the extent this provision induces OEMs to concentrate
their efforts on the development of relatively powerful, expensive PCs,
it makes OEMs less likely to pursue simultaneously the opposite path of
developing "thin client" systems, which could threaten demand for Microsoft's
Intel- compatible PC operating system products. In addition, Microsoft charges
a lower price to OEMs who agree to ship all but a minute fraction of their
machines with an operating system pre- installed. While this helps combat
piracy, it also makes it less likely that consumers will detect increases
in the price of Windows and renders operating systems not pre-installed
by OEMs in large numbers even less attractive to consumers. After all, a
consumer's interest in a non- Windows operating system might not outweigh
the burdens on system memory and performance associated with supporting
two operating systems on a single PC. Other such restrictions and incentives
are described below.
- Microsoft's Actions Toward Other Firms
67. Microsoft's monopoly power is also evidenced by the fact that, over
the course of several years, Microsoft took actions that could only have
been advantageous if they operated to reinforce monopoly power. These actions
are described below.
IV.
THE MIDDLEWARE THREATS
68. Middleware technologies, as previously noted, have the potential to weaken
the applications barrier to entry. Microsoft was apprehensive that the APIs
exposed by middleware technologies would attract so much developer interest,
and would become so numerous and varied, that there would arise a substantial
and growing number of full-featured applications that relied largely, or even
wholly, on middleware APIs. The applications relying largely on middleware APIs
would potentially be relatively easy to port from one operating system to another.
The applications relying exclusively on middleware APIs would run, as written,
on any operating system hosting the requisite middleware. So the more popular
middleware became and the more APIs it exposed, the more the positive feedback
loop that sustains the applications barrier to entry would dissipate. Microsoft
was concerned with middleware as a category of software; each type of middleware
contributed to the threat posed by the entire category. At the same time, Microsoft
focused its antipathy on two incarnations of middleware that, working together,
had the potential to weaken the applications barrier severely without the assistance
of any other middleware. These were Netscape's Web browser and Sun's implementation
of the Java technologies.
- The Netscape Web browser
69. Netscape Navigator possesses three key middleware attributes that endow
it with the potential to diminish the applications barrier to entry. First,
in contrast to non-Microsoft, Intel-compatible PC operating systems, which
few users would want to use on the same PC systems that carry their copies
of Windows, a browser can gain widespread use based on its value as a complement
to Windows. Second, because Navigator exposes a set (albeit a limited one)
of APIs, it can serve as a platform for other software used by consumers.
A browser product is particularly well positioned to serve as a platform
for network-centric applications that run in association with Web pages.
Finally, Navigator has been ported to more than fifteen different operating
systems. Thus, if a developer writes an application that relies solely on
the APIs exposed by Navigator, that application will, without any porting,
run on many different operating systems.
70. Adding to Navigator's potential to weaken the applications barrier
to entry is the fact that the Internet has become both a major inducement
for consumers to buy PCs for the first time and a major occupier of the
time and attention of current PCs users. For any firm looking to turn its
browser product into an applications platform such to rival Windows, the
intense consumer interest in all things Internet-related is a great boon.
71. Microsoft knew in the fall of 1994 that Netscape was developing versions
of a Web browser to run on different operating systems. It did not yet know,
however, that Netscape would employ Navigator to generate revenue directly,
much less that the product would evolve in such a way as to threaten Microsoft.
In fact, in late December 1994, Netscape's chairman and chief executive
officer ("CEO"), Jim Clark, told a Microsoft executive that the focus of
Netscape's business would be applications running on servers and that Netscape
did not intend to succeed at Microsoft's expense.
72. As soon as Netscape released Navigator on December 15, 1994, the product
began to enjoy dramatic acceptance by the public; shortly after its release,
consumers were already using Navigator far more than any other browser product.
This alarmed Microsoft, which feared that Navigator's enthusiastic reception
could embolden Netscape to develop Navigator into an alternative platform
for applications development. In late May 1995, Bill Gates, the chairman
and CEO of Microsoft, sent a memorandum entitled "The Internet Tidal Wave"
to Microsoft's executives describing Netscape as a "new competitor ‘born'
on the Internet." He warned his colleagues within Microsoft that Netscape
was "pursuing a multi-platform strategy where they move the key API into
the client to commoditize the underlying operating system." By the late
spring of 1995, the executives responsible for setting Microsoft's corporate
strategy were deeply concerned that Netscape was moving its business in
a direction that could diminish the applications barrier to entry.
- Sun's Implementation of the Java Technologies
73. The term "Java" refers to four interlocking elements. First, there
is a Java programming language with which developers can write applications.
Second, there is a set of programs written in Java that expose APIs on which
developers writing in Java can rely. These programs are called the "Java
class libraries." The third element is the Java compiler, which translates
the code written by the developer into Java "bytecode." Finally, there are
programs called "Java virtual machines," or "JVMs," which translate Java
bytecode into instructions comprehensible to the underlying operating system.
If the Java class libraries and a JVM are present on a PC system, the system
is said to carry a "Java runtime environment."
74. The inventors of Java at Sun Microsystems intended the technology to
enable applications written in the Java language to run on a variety of
platforms with minimal porting. A program written in Java and relying only
on APIs exposed by the Java class libraries will run on any PC system containing
a JVM that has itself been ported to the resident operating system. Therefore,
Java developers need to port their applications only to the extent that
those applications rely directly on the APIs exposed by a particular operating
system. The more an application written in Java relies on APIs exposed by
the Java class libraries, the less work its developer will need to do to
port the application to different operating systems. The easier it is for
developers to port their applications to different operating systems, the
more applications will be written for operating systems other than Windows.
To date, the Java class libraries do not expose enough APIs to support the
development of full-featured applications that will run well on multiple
operating systems without the need for porting; however, they do allow relatively
simple, network-centric applications to be written cross-platform. It is
Sun's ultimate ambition to expand the class libraries to such an extent
that many full-featured, end-user-oriented applications will be written
cross-platform. The closer Sun gets to this goal of "write once, run anywhere,"
the more the applications barrier to entry will erode.
75. Sun announced in May 1995 that it had developed the Java programming
language. Mid-level executives at Microsoft began to express concern about
Sun's Java vision in the fall of that year, and by late spring of 1996,
senior Microsoft executives were deeply worried about the potential of Sun's
Java technologies to diminish the applications barrier to entry.
76. Sun's strategy could only succeed if a Java runtime environment that
complied with Sun's standards found its way onto PC systems running Windows.
Sun could not count on Microsoft to ship with Windows an implementation
of the Java runtime environment that threatened the applications barrier
to entry. Fortunately for Sun, Netscape agreed in May 1995 to include a
copy of Sun's Java runtime environment with every copy of Navigator, and
Navigator quickly became the principal vehicle by which Sun placed copies
of its Java runtime environment on the PC systems of Windows users.
77. The combined efforts of Netscape and Sun threatened to hasten the demise
of the applications barrier to entry, opening the way for non-Microsoft
operating systems to emerge as acceptable substitutes for Windows. By stimulating
the development of network-centric Java applications accessible to users
through browser products, the collaboration of Netscape and Sun also heralded
the day when vendors of information appliances and network computers could
present users with viable alternatives to PCs themselves. Nevertheless,
these middleware technologies have a long way to go before they might imperil
the applications barrier to entry. Windows 98 exposes nearly ten thousand
APIs, whereas the combined APIs of Navigator and the Java class libraries,
together representing the greatest hope for proponents of middleware, total
less than a thousand. Decision-makers at Microsoft are apprehensive of potential
as well as present threats, though, and in 1995 the implications of the
symbiosis between Navigator and Sun's Java implementation were not lost
on executives at Microsoft, who viewed Netscape's cooperation with Sun as
a further reason to dread the increasing use of Navigator.
- Other Middleware Threats
78. Although they have been the most prominent, Netscape's Navigator and
Sun's Java implementation are not the only manifestations of middleware
that Microsoft has perceived as having the potential to weaken the applications
barrier to entry. Starting in 1994, Microsoft exhibited considerable concern
over the software product Notes, distributed first by Lotus and then by
IBM. Microsoft worried about Notes for several reasons: It presented a graphical
interface that was common across multiple operating systems; it also exposed
a set of APIs to developers; and, like Navigator, it served as a distribution
vehicle for Sun's Java runtime environment. Then in 1995, Microsoft reacted
with alarm to Intel's Native Signal Processing software, which interacted
with the microprocessor independently of the operating system and exposed
APIs directly to developers of multimedia content. Finally, in 1997 Microsoft
noted the dangers of Apple's and RealNetworks' multimedia playback technologies,
which ran on several platforms (including the Mac OS and Windows) and similarly
exposed APIs to content developers. Microsoft feared all of these technologies
because they facilitated the development of user-oriented software that
would be indifferent to the identity of the underlying operating system.
V.
MICROSOFT'S RESPONSE TO THE BROWSER THREAT
- Microsoft's Attempt to Dissuade Netscape from Developing Navigator as
a Platform
79. Microsoft's first response to the threat posed by Navigator was an
effort to persuade Netscape to structure its business such that the company
would not distribute platform- level browsing software for Windows. Netscape's
assent would have ensured that, for the foreseeable future, Microsoft would
produce the only platform-level browsing software distributed to run on
Windows. This would have eliminated the prospect that non-Microsoft browsing
software could weaken the applications barrier to entry.
80. Executives at Microsoft received confirmation in early May 1995 that
Netscape was developing a version of Navigator to run on Windows 95, which
was due to be released in a couple of months. Microsoft's senior executives
understood that if they could prevent this version of Navigator from presenting
alternatives to the Internet-related APIs in Windows 95, the technologies
branded as Navigator would cease to present an alternative platform to developers.
Even if non-Windows versions of Navigator exposed Internet-related APIs,
applications written to those APIs would not run on the platform Microsoft
executives expected to enjoy the largest installed base, i.e., Windows 95.
So, as long as the version of Navigator written for Windows 95 relied on
Microsoft's Internet-related APIs instead of exposing its own, developing
for Navigator would not mean developing cross-platform. Developers of network-centric
applications thus would not be drawn to Navigator's APIs in substantial
numbers. Therefore, with the encouragement and support of Gates, a group
of Microsoft executives commenced a campaign in the summer of 1995 to convince
Netscape to halt its development of platform-level browsing technologies
for Windows 95.
81. In a meeting held at Microsoft's headquarters on June 2, 1995, Microsoft
executives suggested to Jim Clark's replacement as CEO at Netscape, James
Barksdale, that the version of Navigator written for Windows 95 be designed
to rely upon the Internet-related APIs in Windows 95 and distinguish itself
with "value-added" software components. The Microsoft executives left unsaid
the fact that value-added software, by definition, does not present a significant
platform for applications development. For his part, Barksdale informed
the Microsoft representatives that the browser represented an important
part of Netscape's business strategy and that Windows 3.1 and Windows 95
were expected to be the primary platforms for which Navigator would be distributed.
82. At the conclusion of the June 2 meeting, Microsoft still did not know
whether or not Netscape intended to preserve Navigator's own platform capabilities
and expand the set of APIs that it exposed to developers. In the hope that
Netscape could still be persuaded to forswear any platform ambitions and
instead rely on the Internet technologies in Windows 95, Microsoft accepted
Barksdale's invitation to send a group of representatives to Netscape's
headquarters for a technology "brainstorming session" on June 21. Netscape's
senior executives saw the meeting as an opportunity to ask Microsoft for
access to crucial technical information, including certain APIs, that Netscape
needed in order to ensure that Navigator would work well on systems running
Windows 95.
83. Early in the June 21 meeting, Microsoft representatives told Barksdale
and the other Netscape executives present that they wanted to explore the
possibility of building a broader and closer relationship between the two
companies. To this end, the Microsoft representatives wanted to know whether
Netscape intended to adopt and build on top of the Internet-related platform
that Microsoft planned to include in Windows 95, or rather to expose its
own Internet-related APIs, which would compete with Microsoft's. If Netscape
was not committed to providing an alternative platform for network-centric
applications, Microsoft would assist Netscape in developing server- and
(to a limited extent) PC-based software applications that relied on Microsoft's
Internet technologies. For one thing, the representatives explained, Microsoft
would be content to leave the development of browser products for the Mac
OS, UNIX, and Microsoft's 16-bit operating system products to Netscape.
Alternatively, Netscape could license to Microsoft the underlying code for
a Microsoft-branded browser to run on those platforms. The Microsoft representatives
made it clear, however, that Microsoft would be marketing its own browser
for Windows 95, and that this product would rely on Microsoft's platform-level
Internet technologies. If Netscape marketed browsing software for Windows
95 based on different technologies, then Microsoft would view Netscape as
a competitor, not a partner.
84. When Barksdale brought the discussion back to the particular Windows
95 APIs that Netscape actually wanted to rely on and needed from Microsoft,
the representatives from Microsoft explained that if Netscape entered a
"special relationship" with Microsoft, the company would treat Netscape
as a "preferred ISV." This meant that Netscape would enjoy preferential
access to technical information, including APIs. They intimated that Microsoft's
internal developers had already created the APIs that Netscape was seeking,
and that Microsoft had not yet decided either which ISVs would be privileged
to receive them or when access would be granted. The Microsoft representatives
made clear that the alacrity with which Netscape would receive the desired
Windows 95 APIs and other technical information would depend on whether
Netscape entered this "special relationship" with Microsoft.
85. After listening to Microsoft's proposal, Barksdale had two main questions:
First, where would the line between platform (Microsoft's exclusive domain)
and applications (where Netscape could continue to function) be situated?
Second, who would get to decide where the line would lie? After all, the
attractiveness of a special relationship with Microsoft depended a great
deal on how much room would remain for Netscape to innovate and seek profit.
The Microsoft representatives replied that Microsoft would incorporate most
of the functionality of the current Netscape browser into the Windows 95
platform, perhaps leaving room for Netscape to distribute a user-interface
shell. Where Netscape would have the most scope to innovate would be in
the development of software "solutions," which are applications (mainly
server- based) focused on meeting the needs of specific types of commercial
users. Since such applications are already minutely calibrated to the needs
of their users, they do not present platforms for the development of more
specific applications. Although the representatives from Microsoft assured
Barksdale that the line between platform and solutions was fixed by a collaborative
decision-making process between Microsoft and its ISV partners, those representatives
had already indicated that the space Netscape would be allowed to occupy
between the user and Microsoft's platform domain was a very narrow one.
Simply put, if Navigator exposed APIs that competed for developer attention
with the Internet-related APIs Microsoft was planning to build into its
platform, Microsoft would regard Netscape as a trespasser on its territory.
86. The Microsoft representatives did not insist at the June 21 meeting
that Netscape executives accept their proposal on the spot. For his part,
Barksdale said only that he would like more information regarding where
Microsoft proposed to place the line between its platform and Netscape's
applications. In the ensuing, more technical discussions, the Netscape executives
agreed to adopt one component of Microsoft's platform-level Internet technology
called Internet Shortcuts. The meeting ended cordially, with both sides
promising to keep the lines of communication open.
87. The executive who led Microsoft's contingent on June 21, Daniel Rosen,
emerged from the meeting optimistic that Netscape would abandon its platform
ambitions in exchange for special help from Microsoft in developing solutions.
His sentiments were not shared by another Microsoft participant, Thomas
Reardon, who had not failed to notice the Netscape executives grow tense
when the Microsoft representatives referred to incorporating Navigator's
functionality into Windows. Reardon predicted that Netscape would compete
with almost all of Microsoft's platform-level Internet technologies. Once
he heard both viewpoints, Gates concluded that Rosen was being a bit naive
and that Reardon had assessed the situation more accurately. In the middle
of July 1995, Rosen's superiors instructed him to drop the effort to reach
a strategic concord with Netscape.
88. Had Netscape accepted Microsoft's proposal, it would have forfeited
any prospect of presenting a comprehensive platform for the development
of network-centric applications. Even if the versions of Navigator written
for the Mac OS, UNIX, and 16-bit Windows had continued to expose APIs controlled
by Netscape, the fact that Netscape would not have marketed any platform
software for Windows 95, the operating system that was destined to become
dominant, would have ensured that, for the foreseeable future, too few developers
would rely on Navigator's APIs to create a threat to the applications barrier
to entry. In fact, although the discussions ended before Microsoft was compelled
to demarcate precisely where the boundary between its platform and Netscape's
applications would lie, it is unclear whether Netscape's acceptance of Microsoft's
proposal would have left the firm with even the ability to survive as an
independent business.
89. At the time Microsoft presented its proposal, Navigator was the only
browser product with a significant share of the market and thus the only
one with the potential to weaken the applications barrier to entry. Thus,
had it convinced Netscape to accept its offer of a "special relationship,"
Microsoft quickly would have gained such control over the extensions and
standards that network-centric applications (including Web sites) employ
as to make it all but impossible for any future browser rival to lure appreciable
developer interest away from Microsoft's platform.
- Withholding Crucial Technical Information
90. Microsoft knew that Netscape needed certain critical technical information
and assistance in order to complete its Windows 95 version of Navigator
in time for the retail release of Windows 95. Indeed, Netscape executives
had made a point of requesting this information, especially the so-called
Remote Network Access ("RNA") API, at the June 21 meeting. As was discussed
above, the Microsoft representatives at the meeting had responded that the
haste with which Netscape received the desired technical information would
depend on whether Netscape entered the so-called "special relationship"
with Microsoft. Specifically, Microsoft representative J. Allard had told
Barksdale that the way in which the two companies concluded the meeting
would determine whether Netscape received the RNA API immediately or in
three months.
91. Although Netscape declined the special relationship with Microsoft,
its executives continued, over the weeks following the June 21 meeting,
to plead for the RNA API. Despite Netscape's persistence, Microsoft did
not release the API to Netscape until late October, i.e., as Allard had
warned, more than three months later. The delay in turn forced Netscape
to postpone the release of its Windows 95 browser until substantially after
the release of Windows 95 (and Internet Explorer) in August 1995. As a result,
Netscape was excluded from most of the holiday selling season.
92. Microsoft similarly withheld a scripting tool that Netscape needed
to make its browser compatible with certain dial-up ISPs. Microsoft had
licensed the tool freely to ISPs that wanted it, and in fact had cooperated
with Netscape in drafting a license agreement that, by mid- July 1996, needed
only to be signed by an authorized Microsoft executive to go into effect.
There the process halted, however. In mid-August, a Microsoft representative
informed Netscape that senior executives at Microsoft had decided to link
the grant of the license to the resolution of all open issues between the
companies. Netscape never received a license to the scripting tool, and
as a result, was unable to do business with certain ISPs for a time.
- The Similar Experiences of Other Firms in Dealing with Microsoft
93. Other firms in the computer industry have had encounters with Microsoft
similar to the experiences of Netscape described above. These interactions
demonstrate that it is Microsoft's corporate practice to pressure other
firms to halt software development that either shows the potential to weaken
the applications barrier to entry or competes directly with Microsoft's
most cherished software products.
- Intel
94. At the same time that Microsoft was trying to convince Netscape
to stop developing cross-platform APIs, it was trying to convince Intel
to halt the development of software that presented developers with a
set of operating-system-independent interfaces.
95. Although Intel is engaged principally in the design and manufacture
of microprocessors, it also develops some software. Intel's software
development efforts, which take place at the Intel Architecture Labs
("IAL"), are directed primarily at finding useful ways to consume more
microprocessor cycles, thereby stimulating demand for advanced Intel
microprocessors. By early 1995, IAL was in the advanced stages of developing
software that would enable Intel 80x86 microprocessors to carry out
tasks usually performed by separate chips known as "digital signal processors."
By enabling this migration, the software, called Native Signal Processing
("NSP") software, would endow Intel microprocessors with substantially
enhanced video and graphics performance.
96. Intel was eager for software developers and hardware manufacturers
to write software and build peripheral devices that would implement
the enhanced capabilities that its microprocessors and its NSP software
together offered. Intel did not believe, however, that the set of APIs
and device driver interfaces ("DDIs") in Windows had kept pace with
the growing ability of Intel's microprocessors to deliver audio/visual
content. Consequently, IAL designed its NSP software to expose Intel's
own APIs and DDIs that, when invoked by developers and hardware manufacturers,
would demonstrate the multimedia capabilities of an Intel microprocessor
utilizing NSP.
97. Microsoft reacted to Intel's NSP software with alarm. First of
all, the software threatened to offer ISVs and device manufacturers
an alternative to waiting for Windows to provide system-level support
for products that would take advantage of advances in hardware technology.
More troubling was the fact that Intel was developing versions of its
NSP software for non-Microsoft operating systems. The different versions
of the NSP software exposed the same set of software interfaces to developers,
so the more an application took advantage of interfaces exposed by NSP
software, the easier it would be to port that application to non- Microsoft
operating systems. In short, Intel's NSP software bore the potential
to weaken the barrier protecting Microsoft's monopoly power.
98. Over time, Microsoft developed additional qualms about Intel's
NSP software. For instance, Intel initially designed the NSP software
to be compatible with only Windows 3.1. At the time, Microsoft was preparing
to release Windows 95, and the company did not want anything rekindling
the interest of ISVs, equipment manufacturers, and consumers in the
soon- to-be obsolescent version of Windows. More acute was Microsoft's
concern that users who received NSP software on their Windows 3.1 systems
would have difficulty upgrading those systems to Windows 95. By June
1995, Intel had completed a pre-release, or "beta," version of its NSP
software for Windows 95, but Microsoft worried that a commercial version
would not be ready by the time OEMs began loading Windows 95.
99. Along with its concerns about contemporaneous compatibility, Microsoft
also complained that Intel had not subjected its software to sufficient
quality-assurance testing. Microsoft was quick to point out that if
Windows users detected problems with the software that came pre-installed
on their PC systems, they would blame Microsoft or the OEMs, even if
fault lay with Intel. Microsoft's concerns with compatibility and quality
were genuine. Both pre- dating and over-shadowing these transient and
remediable concerns, however, was a more abiding fear at Microsoft that
the NSP software would render ISVs, device manufacturers, and (ultimately)
consumers less dependent on Windows. Without this fear, Microsoft would
not have subjected Intel to the level of pressure that it brought to
bear in the summer of 1995.
100. Microsoft began complaining to Intel about its NSP software in
inter-company communications sent in the spring of 1995. In May, Microsoft
raised the profile of its complaints by sending some of its senior executives
to Intel to discuss the latter's incursion into Microsoft's platform
territory. Returning from the May meeting, one Microsoft employee urged
his superiors to refuse to allow Intel to offer platform-level software,
even if it meant that Intel could not innovate as quickly as it would
like. If Intel wished to enable a new function, the employee wrote,
its only "winning path" would be to convince Microsoft to support the
effort in its platform software. At any rate, "[s]ometimes Intel would
have to accept the outcome that the time isn't right for [Microsoft]."
In the first week of July, Gates himself met with Intel's CEO, Andrew
Grove, to discuss, among other things, NSP. In a subsequent memorandum
to senior Microsoft executives, Gates reported that he had tried to
convince Grove "to basically not ship NSP" and more generally to reduce
the number of people working on software at Intel.
101. The development of an alternative platform to challenge Windows
was not the primary objective of Intel's NSP efforts. In fact, Intel
was interested in providing APIs and DDIs only to the extent the effort
was necessary to ensure the development of applications and devices
that would spark demand for Intel's most advanced microprocessors. Understanding
Intel's limited ambitions, Microsoft hastened to assure Intel that if
it would stop promoting NSP's interfaces, Microsoft would accelerate
its own work to incorporate the functions of the NSP software into Windows,
thereby stimulating the development of applications and devices that
relied on the new capabilities of Intel's microprocessors. At the same
time, Microsoft pressured the major OEMs to not install NSP software
on their PCs until the software ceased to expose APIs. NSP software
could not find its way onto PCs without the cooperation of the OEMs,
so Intel realized that it had no choice but to surrender the pace of
software innovation to Microsoft. By the end of July 1995, Intel had
agreed to stop promoting its NSP software. Microsoft subsequently incorporated
some of NSP's components into its operating-system products. Even as
late as the end of 1998, though, Microsoft still had not implemented
key capabilities that Intel had been poised to offer consumers in 1995.
102. Microsoft was not content to merely quash Intel's NSP software.
At a second meeting at Intel's headquarters on August 2, 1995, Gates
told Grove that he had a fundamental problem with Intel using revenues
from its microprocessor business to fund the development and distribution
of free platform-level software. In fact, Gates said, Intel could not
count on Microsoft to support Intel's next generation of microprocessors
as long as Intel was developing platform-level software that competed
with Windows. Intel's senior executives knew full well that Intel would
have difficultly selling PC microprocessors if Microsoft stopped cooperating
in making them compatible with Windows and if Microsoft stated to OEMs
that it did not support Intel's chips. Faced with Gates' threat, Intel
agreed to stop developing platform-level interfaces that might draw
support away from interfaces exposed by Windows.
103. OEMs represent the primary customers for Intel's microprocessors.
Since OEMs are dependent on Microsoft for Windows, Microsoft enjoys
continuing leverage over Intel. To illustrate, Gates was able to report
to other senior Microsoft executives in October 1995 that "Intel feels
we have all the OEMs on hold with our NSP chill." He added:
This is good news because it means OEMs are listening to us. Andy
[Grove] believes Intel is living up to its part of the NSP bargain
and that we should let OEMs know that some of the new software work
Intel is doing is OK. If Intel is not sticking totally to its part
of the deal let me know.
- Apple
104. QuickTime is Apple's software architecture for creating, editing,
publishing, and playing back multimedia content (e.g., audio, video,
graphics, and 3-D graphics). Apple has created versions of QuickTime
to run on both the Mac OS and Windows, enabling developers using the
authoring software to create multimedia content that will run on QuickTime
implementations for both operating systems. QuickTime competes with
Microsoft's own multimedia technologies, including Microsoft's multimedia
APIs (called "DirectX") and its media player. Because QuickTime is cross-platform
middleware, Microsoft perceives it as a potential threat to the applications
barrier to entry.
105. Beginning in the spring of 1997 and continuing into the summer
of 1998, Microsoft tried to persuade Apple to stop producing a Windows
95 version of its multimedia playback software, which presented developers
of multimedia content with alternatives to Microsoft's multimedia APIs.
If Apple acceded to the proposal, Microsoft executives said, Microsoft
would not enter the authoring business and would instead assist Apple
in developing and selling tools for developers writing multimedia content.
Just as Netscape would have been free, had it accepted Microsoft's proposal,
to market a browser shell that would run on top of Microsoft's Internet
technologies, Apple would have been permitted, without hindrance, to
market a media player that would run on top of DirectX. But, like the
browser shell that Microsoft contemplated as acceptable for Netscape
to develop, Apple's QuickTime shell would not have exposed platform-level
APIs to developers. Microsoft executives acknowledged to Apple their
doubts that a firm could make a successful business out of marketing
such a shell. Apple might find it profitable, though, to continue developing
multimedia software for the Mac OS, and that, the executives from Microsoft
assured Apple, would not be objectionable. As was the case with the
Internet technologies it was prepared to tolerate from Netscape, Microsoft
felt secure in the conviction that developers would not be drawn in
large numbers to write for non- Microsoft APIs exposed by platforms
whose installed bases were inconsequential in comparison with that of
Windows.
106. In their discussions with Apple, Microsoft's representatives made
it clear that, if Apple continued to market multimedia playback software
for Windows 95 that presented a platform for content development, then
Microsoft would enter the authoring business to ensure that those writing
multimedia content for Windows 95 concentrated on Microsoft's APIs instead
of Apple's. The Microsoft representatives further stated that, if Microsoft
was compelled to develop and market authoring tools in competition with
Apple, the technologies provided in those tools might very well be inconsistent
with those provided by Apple's tools. Finally, the Microsoft executives
warned, Microsoft would invest whatever resources were necessary to
ensure that developers used its tools; its investment would not be constrained
by the fact that authoring software generated only modest revenue.
107. If Microsoft implemented technologies in its tools that were different
from those implemented in Apple's tools, then multimedia content developed
with Microsoft's tools would not run properly on Apple's media player,
and content developed with Apple's tools would not run properly on Microsoft's
media player. If, as it implied it was willing to do, Microsoft then
bundled its media player with Windows and used a variety of tactics
to limit the distribution of Apple's media player for Windows, it could
succeed in extinguishing developer support for Apple's multimedia technologies.
Indeed, as the Court discusses in Section VI of these findings, Microsoft
had begun, in 1996, to use just such a strategy against Sun's implementation
of the Java technologies.
108. The discussions over multimedia playback software culminated in
a meeting between executives from Microsoft and Apple executives, including
Apple CEO, Steve Jobs, at Apple's headquarters on June 15, 1998. Microsoft's
objective at the meeting was to secure Apple's commitment to abandon
the development of multimedia playback software for Windows. At the
meeting, one of the Microsoft executives, Eric Engstrom, said that he
hoped the two companies could agree on a single configuration of software
to play multimedia content on Windows. He added, significantly, that
any unified multimedia playback software for Windows would have to be
based on DirectX. If Apple would agree to make DirectX the standard,
Microsoft would be willing to do several things that Apple might find
beneficial. First, Microsoft would adopt Apple's ".MOV" as the universal
file format for multimedia playback on Windows. Second, Microsoft would
configure the Windows Media Player to display the QuickTime logo during
the playback of ".MOV" files. Third, Microsoft would include support
in DirectX for QuickTime APIs used to author multimedia content, and
Microsoft would give Apple appropriate credit for the APIs in Microsoft's
Software Developer Kit.
109. Jobs reserved comment during the meeting with the Microsoft representatives,
but he explicitly rejected Microsoft's proposal a few weeks later. Had
Apple accepted Microsoft's proposal, Microsoft would have succeeded
in limiting substantially the cross-platform development of multimedia
content. In addition, Apple's future success in marketing authoring
tools for Windows 95 would have become dependent on Microsoft's ongoing
cooperation, for those tools would have relied on the DirectX technologies
under Microsoft's control.
110. Apple's surrender of the multimedia playback business might have
helped users in the short term by resolving existing incompatibilities
in the arena of multimedia software. In the long run, however, the departure
of an experienced, innovative competitor would not have tended to benefit
users of multimedia content. At any rate, the primary motivation behind
Microsoft's proposal to Apple was not the resolution of incompatibilities
that frustrated consumers and stymied content development. Rather, Microsoft's
motivation was its desire to limit as much as possible the development
of multimedia content that would run cross-platform.
- RealNetworks
111. RealNetworks is the leader, in terms of usage share, in software
that supports the "streaming" of audio and video content from the Web.
RealNetworks' streaming software presents a set of APIs that competes
for developer attention with APIs exposed by the streaming technologies
in Microsoft's DirectX. Like Apple, RealNetworks has developed versions
of its software for multiple operating systems. In 1997, senior Microsoft
executives viewed RealNetworks' streaming software with the same apprehension
with which they viewed Apple's playback software — as competitive technology
that could develop into part of a middleware layer that could, in turn,
become broad and widespread enough to weaken the applications barrier
to entry.
112. At the end of May 1997, Gates told a group of Microsoft executives
that multimedia streaming represented strategic ground that Microsoft
needed to capture. He identified RealNetworks as the adversary and authorized
the payment of up to $65 million for a streaming software company in
order to accelerate Microsoft's effort to seize control of streaming
standards. Two weeks later, Microsoft signed a letter of intent for
the acquisition of a streaming media company called VXtreme.
113. Perhaps sensing an impending crisis, executives at RealNetworks
contacted Microsoft within days of the VXtreme deal's announcement and
proposed that the two companies enter a strategic relationship. The
CEO of RealNetworks told a senior vice president at Microsoft that if
RealNetworks were presented with a profitable opportunity to move to
value- added software, the company would be amenable to abandoning the
base streaming business. On July 10, a Microsoft executive, Robert Muglia,
told a RealNetworks executive that it would indeed be in the interests
of both companies if RealNetworks limited itself to developing value-
added software designed to run on top of Microsoft's fundamental multimedia
platform. Consequently, on July 18, Microsoft and RealNetworks entered
into an agreement whereby Microsoft agreed to distribute a copy of RealNetworks'
media player with each copy of Internet Explorer; to make a substantial
investment in RealNetworks; to license the source code for certain RealNetworks
streaming technologies; and to develop, along with RealNetworks, a common
file format for streaming audio and video content. Muglia, who signed
the agreement on Microsoft's behalf, believed that RealNetworks had
in turn agreed to incorporate Microsoft's streaming media technologies
into its products.
114. RealNetworks apparently understood import of the agreement differently,
for just a few days after it signed the deal with Microsoft, RealNetworks
announced that it planned to continue developing fundamental streaming
software. Indeed, RealNetworks continues to do so today. Thus, the mid-summer
negotiations did not lead to the result Microsoft had intended. Still,
Microsoft's intentions toward RealNetworks in 1997, and its dealings
with the company that summer, show that decision-makers at Microsoft
were willing to invest a large amount of cash and other resources into
securing the agreement of other companies to halt software development
that exhibited discernible potential to weaken the applications barrier.
- IBM
115. IBM is both a hardware and a software company. On the hardware
side, IBM manufactures and licenses, among other things, Intel-compatible
PCs. On the software side, IBM develops and sells, among other things,
Intel-compatible PC operating systems and office productivity applications.
The IBM PC Company relies heavily on Microsoft's cooperation to make
a profit, for few consumers would buy IBM PC systems if those systems
did not work well with Windows and, further, if they did not come with
Windows included. IBM's software division, on the other hand, competes
directly with Microsoft in other respects. For instance, IBM has in
the past marketed OS/2 as an alternative to Windows, and it currently
markets the SmartSuite bundle of office productivity applications as
an alternative to Microsoft's Office suite. The fact that IBM's software
division markets products that compete directly with Microsoft's most
profitable products has frustrated the efforts of the IBM PC Company
to maintain a cooperative relationship with the firm that controls the
product (Windows) without which the PC Company cannot survive.
116. Whereas Microsoft tried to convince Netscape to move its business
in a direction that would not facilitate the emergence of products that
would compete with Windows, Microsoft tried to convince IBM to move
its business away from products that themselves competed directly with
Windows and Office. Microsoft leveraged the fact that the PC Company
needed to license Windows at a competitive price and on a timely basis,
and the fact that the company needed Microsoft's support in many more
subtle ways. When IBM refused to abate the promotion of those of its
own products that competed with Windows and Office, Microsoft punished
the IBM PC Company with higher prices, a late license for Windows 95,
and the withholding of technical and marketing support.
117. In the summer of 1994, the IBM PC Company told Microsoft that,
with respect to licensing Microsoft's operating-system products, it
wanted to be quoted terms just as favorable as those extended to IBM's
competitor, Compaq. It was IBM's belief that Compaq paid the lowest
rate in the industry for Windows and enjoyed unparalleled marketing
and technical support from Microsoft. In response to the IBM PC Company's
request, Microsoft proposed that the companies enter into a "Frontline
Partnership" similar to the one that existed between Microsoft and Compaq.
Pursuant to that proposal, Microsoft and the IBM PC Company would perform
joint sales, marketing, and development work, and the PC Company would
receive future Microsoft products at the lowest rates in the industry.
118. At the same time that it offered the IBM PC Company the rather
general terms in the Frontline Partnership Agreement, Microsoft also
offered the PC Company specific reductions in the royalty rate for Windows
95 if the company would focus its marketing and distribution efforts
on Microsoft's new operating system. Specifically, the PC Company would
receive an $8 reduction in the per-copy royalty for Windows 95 if it
mentioned no other operating systems in advertisements for IBM PCs,
adopted Windows 95 as the standard operating system for its employees,
and ensured that it was shipping Windows 95 pre-installed on at least
fifty percent of its PCs two months after the release of Windows 95.
Given the volume of IBM's PC shipments, the discount would have amounted
to savings of between $40 million and $48 million in one year. Of course,
accepting the terms would have required IBM, as a practical matter,
to abandon its own operating system, OS/2. After all, IBM would have
had difficulty convincing customers to adopt its own OS/2 if the company
itself had used Microsoft's Windows 95 and had featured that product
to the exclusion of OS/2 in IBM PC advertisements.
119. Representatives from IBM and Microsoft, including Bill Gates,
met to discuss the relationship between their companies at an industry
conference in November 1994. At that meeting, IBM informed Microsoft
that, rather than enter into the Frontline Partnership with Microsoft,
IBM was going to pursue an initiative it called "IBM First." Consistent
with the title of the initiative, IBM would aggressively promote IBM's
software products, would not promote any Microsoft products, and would
pre-install OS/2 Warp on all of its PCs, including those on which it
would also pre-install Windows. IBM thus rejected the terms that would
have resulted in an $8 reduction in the per-copy royalty price of Windows
95.
120. True to its word, IBM began vigorous promotion of its software
products. This effort included an advertising campaign, starting in
late 1994, that extolled OS/2 Warp and disparaged Windows. IBM's drive
to best Microsoft in the PC software venue intensified in June 1995,
when IBM reached an agreement with the Lotus Development Corporation
for the acquisition of that company. As a consequence of the acquisition,
IBM took ownership of the Lotus groupware product, Lotus Notes, and
the Lotus SmartSuite bundle of office productivity applications. Microsoft
had already identified Notes as a middleware threat, because it presented
users with a common interface, and ISVs with a common set of APIs, across
multiple platforms. For its part, SmartSuite competed directly with
Microsoft Office. In mid-July 1995, IBM announced that it was going
to make SmartSuite its primary desktop software offering in the United
States.
121. Microsoft did not intend to capitulate. In July, Gates called
an executive at the IBM PC Company to berate him about IBM's public
statements denigrating Windows. Just a few days later, Microsoft began
to retaliate in earnest against the IBM PC Company.
122. The IBM PC Company had begun negotiations with Microsoft for
a Windows 95 license in late March 1995. For the first two months, the
negotiations had progressed smoothly and at an expected pace. After
IBM announced its intention to acquire Lotus, though, the Microsoft
negotiators began canceling meetings with their IBM counterparts, failing
to return telephone calls, and delaying the return of marked-up license
drafts that they received from IBM. Then, on July 20, 1995, just three
days after IBM announced its intention to pre-install SmartSuite on
its PCs, a Microsoft executive informed his counterpart at the IBM PC
Company that Microsoft was terminating further negotiations with IBM
for a license to Windows 95. Microsoft also refused to release to the
PC Company the Windows 95 "golden master" code. The PC Company needed
the code for its product planning and development, and IBM executives
knew that Microsoft had released it to IBM's OEM competitors on July
17. Microsoft's purported reason for halting the negotiations was that
it wanted first to resolve an ongoing audit of IBM's past royalty payments
to Microsoft for several different operating systems.
123. Prior to the call on July 20, neither company's management had
ever linked the ongoing audit to IBM's negotiations for a license to
Windows 95. IBM was dismayed by the abrupt halt in the license negotiations
and the prospect that it might not get a license for Windows 95 until
the audit process concluded. IBM's executives executives surmised that
all of its major competitors had already signed licenses for Windows
95. The PC Company would lose a great deal of business to those competitors
during the crucial back-to-school season if it could not begin pre-installing
Windows 95 on its PCs immediately. The conclusion of the audit appeared
to be weeks, if not months, away. The PC Company thus faced the prospect
of missing the holiday selling season as well. IBM executives pleaded
with Microsoft to uncouple the license negotiations from the ongoing
audit and offered Microsoft a $10 million bond that Microsoft could
use to indemnify itself against any discrepancies that the audit might
ultimately reveal. IBM also offered to add a term to any Windows 95
license agreement whereby IBM would pay penalties and interest if any
future audit disclosed under-reporting of royalties by IBM.
124. On August 9, 1995, a senior executive at the IBM PC Company went
to Redmond to meet with Joachim Kempin, the Microsoft executive in charge
of the firm's sales to OEMs. At the meeting, Kempin offered to accept
a single, lump-sum payment from IBM that would close all outstanding
audits. The amount of this payment would be reduced if IBM offered a
concession that Kempin could take back to Gates. As one possibility,
Kempin suggested that IBM agree to not bundle SmartSuite with its PCs
for a period of six months to one year. He explained that the prospect
of IBM bundling SmartSuite with its PCs threatened the profit margins
that Microsoft derived from Office and constituted a core issue in the
relationship between the two companies. The IBM executive rejected Kempin's
suggestion. In a follow-up letter, Kempin stated that Microsoft would
require approximately $25 million from IBM in order to settle all outstanding
audits. Kempin reiterated that,
If you believe that the amount I am asking for is too much, I would
be willing to trade certain relationship improving measures for the
settlement charges and/or convert some of the amounts into marketing
funds if IBM too agrees to promote Microsoft's software products together
with their hardware offerings.
The message was clear: IBM could resolve the impasse ostensibly blocking
the issuance of a Windows 95 license — the royalties audit — by de-emphasizing
those products of its own that competed with Microsoft and instead promoting
Microsoft's products.
125. IBM never agreed to renounce SmartSuite or to increase its support
for Microsoft software, and in the end, Microsoft did not grant IBM
a license to pre-install Windows 95 until fifteen minutes before the
start of Microsoft's official launch event on August 24, 1995. That
same day, the firms brought the audit issue to a close with a settlement
agreement under which IBM ultimately paid Microsoft $31 million. The
release of Windows 95 had been postponed more than once, and many consumers
apparently had been postponing buying PC systems until the new operating
system arrived. The pent-up demand caused an initial surge in the sales
of PCs loaded with Windows 95. IBM's OEM competitors reaped the fruits
of this surge, but because of the delay in obtaining a license, the
IBM PC Company did not. The PC Company also missed the back-to-school
market. These lost opportunities cost IBM substantial revenue.
126. Even once the companies had resolved the audit dispute, Microsoft
continued to treat the IBM PC Company less favorably than it did the
other major OEMs, and Microsoft executives continued to tell PC Company
executives that the treatment would improve only if IBM refrained from
competing with Microsoft's software offerings. On January 5, 1996, Kempin
sent a letter to a counterpart at the IBM PC Company. In it, Kempin
expressed his belief that the PC Company would enjoy a closer, more
cooperative relationship with Microsoft if only IBM's software arm did
not compete as aggressively with the products that comprised the core
of Microsoft's business:
As long as IBM is working first on their competitive offerings and
prefers to fiercely compete with us in critical areas, we should just
be honest with each other and admit that such priorities will not
lead to a most exciting relationship and might not even make IBM feel
good when selling solutions based on Microsoft products. . . .You
are a valued OEM customer of Microsoft, with whom we will cooperate
as much as your self-imposed restraints allow us to do. Please understand
that this is neither my choice or preferred way of doing business
with an important company like IBM. In addition, we would like to
see the IBM PC company being more actively involved in assisting Microsoft
to bring key products to market . . . . To date the IBM PC company
has not always been an active participant in these areas - understandable
given your own internal product priorities. I hope you can help me
to change this.
In closing, Kempin wrote, "You get measured in selling more hardware
and I firmly believe if you had less conflict with IBM's software directions
you actually could sell more of it."
127. When Kempin spoke to the same executive at the end of the month,
he repeated a message he had delivered more than once before: The fact
that the IBM PC Company pre- installed SmartSuite on its PC systems
made Microsoft reluctant to help IBM sell more PC systems. After all,
the more PC systems IBM sold with SmartSuite, the fewer copies of Office
Microsoft could sell. For this reason, as Kempin explained to a group
of IBM PC Company representatives in August 1996, Microsoft refused
to provide IBM press releases with quotes endorsing any PC system that
IBM shipped with SmartSuite. Microsoft later expanded that rule to cover
any IBM PCs shipped with the World Book electronic encyclopedia instead
of Microsoft's Encarta. IBM might have been less concerned about Microsoft's
refusal to offer endorsements if such quotes did not appear frequently
and prominently in press releases announcing new PC systems from other
OEMs such as Compaq. Microsoft's conspicuous silence with respect to
IBM PCs sent the message to customers that IBM's PCs did not support
Windows as well as PCs manufactured by other OEMs did.
128. Microsoft also denied the IBM PC Company access to the so-called
"enabling programs" that Microsoft ran for the benefit of OEMs such
as Compaq, Hewlett-Packard, and DEC, even though IBM met the prescribed
objective criteria for admission. Like the absence of public endorsements,
IBM's exclusion from Microsoft's enabling programs led customers to
question whether the Microsoft software they needed would work optimally
with IBM's PCs. IBM learned through surveys it conducted that the firm
had lost between seven and ten large accounts, representing about $180
million in revenue for IBM, because the tension between Microsoft and
IBM led customers to doubt that Windows would not work as well with
IBM PCs as with PCs produced by firms with which Microsoft was on cordial
terms. Microsoft justified its exclusion of the PC Company from the
enabling programs with its suspicion that IBM might use the programs
to gain entrée with customers and then attempt to sell those customers
IBM software instead of Microsoft products. At the same time, a Microsoft
executive told a counterpart at IBM that the PC Company would be admitted
to the programs when IBM's CEO repaired his relationship with Bill Gates.
129. Microsoft's executives were persistent despite IBM's repeated
refusals to sacrifice its own software ambitions to improve its relations
with Microsoft. In February 1997, one executive from Microsoft told
a group of IBM PC Company executives that Gates might relent in his
reluctance to cooperate with their company if IBM moderated its support
for Notes and SmartSuite. In a meeting held the next month, Microsoft
representatives conditioned fulfillment of two objects of IBM's desires
on the company's willingness to pre-install Microsoft's products in
the place of competing applications, such as SmartSuite, and objectionable
middleware, such as Notes. The first inducement that the Microsoft representatives
blandished before the PC Company was early access to Windows source
code, which Compaq and a handful of other OEMs enjoyed. IBM wanted this
early access in order to ensure its hardware's contemporaneous compatibility
with Microsoft's operating system products. Next, Microsoft offered
IBM permission to certify itself as being compliant with certain hardware
requirements that Microsoft imposed (and that customers had come to
look for as a sign of an OEM's ability to support Windows). Self-certification
would have decreased the time it took IBM PCs to reach the market, and
IBM knew that the privilege was already being extended to some of its
main OEM competitors. With respect to both benefits, the representatives
from Microsoft explained that Microsoft would extend them to the PC
Company on the condition that it stop loading its PC systems with software
that threatened Microsoft's interests.
130. The discriminatory treatment that the IBM PC Company received
from Microsoft on account of the "software directions" of its parent
company also manifested itself in the royalty price that IBM paid for
Windows. In the latter half of the 1990s, IBM (along with Gateway) paid
significantly more for Windows than other major OEMs (like Compaq, Dell,
and Hewlett- Packard) that were more compliant with Microsoft's wishes.
131. Finally, Microsoft made its frustration known to IBM by reducing,
from three to one, the number of Microsoft OEM account managers handling
Microsoft's operational relationship with the IBM PC Company. This reduced
support impaired still further IBM's ability to test, manufacture, and
ship its PCs on schedule, further delaying IBM's efforts to bring its
PC products to market against the competition in a timely manner.
132. In sum, from 1994 to 1997 Microsoft consistently pressured IBM
to reduce its support for software products that competed with Microsoft's
offerings, and it used its monopoly power in the market for Intel-compatible
PC operating systems to punish IBM for its refusal to cooperate. Whereas,
in the case of Netscape, Microsoft tried to induce a company to move
its business away from offering software that could weaken the applications
barrier to entry, Microsoft's primary concern with IBM was to reduce
the firm's support for software products that competed directly with
Microsoft's most profitable products, namely Windows and Office. That
being said, it must be noted that one of the IBM products to which Microsoft
objected, Notes, was like Navigator in that it exposed middleware APIs.
In any event, Microsoft's interactions with Netscape, IBM, Intel, Apple,
and RealNetworks all reveal Microsoft's business strategy of directing
its monopoly power toward inducing other companies to abandon projects
that threaten Microsoft and toward punishing those companies that resist.
- Developing Competitive Web Browsing Software
133. Once it became clear to senior executives at Microsoft that Netscape
would not abandon its efforts to develop Navigator into a platform, Microsoft
focused its efforts on ensuring that few developers would write their applications
to rely on the APIs that Navigator exposed. Developers would only write
to the APIs exposed by Navigator in numbers large enough to threaten the
applications barrier if they believed that Navigator would emerge as the
standard software employed to browse the Web. If Microsoft could demonstrate
that Navigator would not become the standard, because Microsoft's own browser
would attract just as much if not more usage, then developers would continue
to focus their efforts on a platform that enjoyed enduring ubiquity: the
32-bit Windows API set. Microsoft thus set out to maximize Internet Explorer's
share of browser usage at Navigator's expense.
134. Microsoft's management believed that, no matter what the firm did,
Internet Explorer would not capture a large share of browser usage as long
as it remained markedly inferior to Navigator in the estimation of consumers.
The task of technical personnel at Microsoft, then, was to make Internet
Explorer's features at least as attractive to consumers as Navigator's.
Microsoft did not believe that improved quality alone would depose Navigator,
for millions of users appeared to be satisfied with Netscape's product,
and Netscape was known as ‘the Internet company.' As Gates wrote to Microsoft's
executive staff in his May 1995 "Internet Tidal Wave" memorandum, "First
we need to offer a decent client," but "this alone won't get people to switch
away from Netscape." Still, once Microsoft ensured that the average consumer
would be just as comfortable browsing with Internet Explorer as with Navigator,
Microsoft could employ other devices to induce consumers to use its browser
instead of Netscape's.
135. From 1995 onward, Microsoft spent more than $100 million each year
developing Internet Explorer. The firm's management gradually increased
the number of developers working on Internet Explorer from five or six in
early 1995 to more than one thousand in 1999. Although the first version
of Internet Explorer was demonstrably inferior to Netscape's then- current
browser product when the former was released in July 1995, Microsoft's investment
eventually started to pay technological dividends. When Microsoft released
Internet Explorer 3.0 in late 1996, reviewers praised its vastly improved
quality, and some even rated it as favorably as they did Navigator. After
the arrival of Internet Explorer 4.0 in late 1997, the number of reviewers
who regarded it as the superior product was roughly equal to those who preferred
Navigator.
- Giving Internet Explorer Away and Rewarding Firms that Helped Build Its
Usage Share
136. In addition to improving the quality of Internet Explorer, Microsoft
sought to increase the product's share of browser usage by giving it away
for free. In many cases, Microsoft also gave other firms things of value
(at substantial cost to Microsoft) in exchange for their commitment to distribute
and promote Internet Explorer, sometimes explicitly at Navigator's expense.
While Microsoft might have bundled Internet Explorer with Windows at no
additional charge even absent its determination to preserve the applications
barrier to entry, that determination was the main force driving its decision
to price the product at zero. Furthermore, Microsoft would not have given
Internet Explorer away to IAPs, ISVs, and Apple, nor would it have taken
on the high cost of enlisting firms in its campaign to maximize Internet
Explorer's usage share and limit Navigator's, had it not been focused on
protecting the applications barrier.
137. In early 1995, personnel developing Internet Explorer at Microsoft
contemplated charging OEMs and others for the product when it was released.
Internet Explorer would have been included in a bundle of software that
would have been sold as an add-on, or "frosting," to Windows 95. Indeed,
Microsoft knew by the middle of 1995, if not earlier, that Netscape charged
customers to license Navigator, and that Netscape derived a significant
portion of its revenue from selling browser licenses. Despite the opportunity
to make a substantial amount of revenue from the sale of Internet Explorer,
and with the knowledge that the dominant browser product on the market,
Navigator, was being licensed at a price, senior executives at Microsoft
decided that Microsoft needed to give its browser away in furtherance of
the larger strategic goal of accelerating Internet Explorer's acquisition
of browser usage share. Consequently, Microsoft decided not to charge an
increment in price when it included Internet Explorer in Windows for the
first time, and it has continued this policy ever since. In addition, Microsoft
has never charged for an Internet Explorer license when it is distributed
separately from Windows.
138. Over the months and years that followed the release of Internet Explorer
1.0 in July 1995, senior executives at Microsoft remained engrossed with
maximizing Internet Explorer's share of browser usage. Whenever competing
priorities threatened to intervene, decision-makers at Microsoft reminded
those reporting to them that browser usage share remained, as Microsoft
senior vice president Paul Maritz put it, "job #1." For example, in the
summer of 1997, some mid-level employees began to urge that Microsoft charge
a price for at least some of the components of Internet Explorer 4.0. This
would have shifted some anticipatory demand to Windows 98 (which was due
to be released somewhat later than Internet Explorer 4.0), since Windows
98 would include all of the browser at no extra charge. Senior executives
at Microsoft rejected the proposal, because while the move might have increased
demand for Windows 98 and generated substantial revenue, it would have done
so at the unacceptable cost of retarding the dissemination of Internet Explorer
4.0. Maritz reminded those who had advocated the proposal that "getting
browser share up to 50% (or more) is still the major goal."
139. The transcendent importance of browser usage share to Microsoft is
evident in what the firm expended, as well as in what it relinquished, in
order to maximize usage share for Internet Explorer and to diminish it for
Navigator. Not only was Microsoft willing to forego an opportunity to attract
substantial revenue while enhancing (albeit temporarily) consumer demand
for Windows 98, but the company also paid huge sums of money, and sacrificed
many millions more in lost revenue every year, in order to induce firms
to take actions that would help increase Internet Explorer's share of browser
usage at Navigator's expense. First, even though Microsoft could have charged
IAPs, ISVs, and Apple for licenses to distribute Internet Explorer separately
from Windows, Microsoft priced those licenses, along with related technology
and technical support, at zero in order to induce those companies to distribute
and promote Internet Explorer over Navigator. Second, although Microsoft
could have charged IAPs and ICPs substantial sums of money in exchange for
promoting their services and content within Windows, Microsoft instead bartered
Windows' valuable desktop "real estate" for a commitment from those firms
to promote and distribute Internet Explorer, to inhibit promotion and distribution
of Navigator, and to employ technologies that would inspire developers to
write Web sites that relied on Microsoft's Internet technologies rather
than those provided by Navigator. Microsoft was willing to offer such prominent
placement even to AOL, which was the principal competitor to Microsoft's
MSN service. If an IAP was already under contract to pay Netscape a certain
amount for browser licenses, Microsoft offered to compensate the IAP the
amount it owed Netscape. Third, Microsoft also reduced the referral fees
that IAPs paid when users signed up for their services using the Internet
Referral Server in Windows in exchange for the IAPs' efforts to convert
their installed bases of subscribers from Navigator to Internet Explorer.
For example, Microsoft entered a contract with AOL whereby Microsoft actually
paid AOL a bounty for every subscriber that it converted to access software
that included Internet Explorer instead of Navigator. Finally, with respect
to OEMs, Microsoft extended co-marketing funds and reductions in the Windows
royalty price to those agreeing to promote Internet Explorer and, in some
cases, to abstain from promoting Navigator.
140. Even absent the strategic imperative to maximize its browser usage
share at Netscape's expense, Microsoft might still have set the price of
an Internet Explorer consumer license at zero. It might also have spent
something approaching the $100 million it has devoted each year to developing
Internet Explorer and some part of the $30 million it has spent annually
marketing it. After all, consumers in 1995 were already demanding software
that enabled them to use the Web with ease, and IBM had announced in September
1994 its plan to include browsing capability in OS/2 Warp at no extra charge.
Microsoft had reason to believe that other operating-system vendors would
do the same.
141. Still, had Microsoft not viewed browser usage share as the key to
preserving the applications barrier to entry, the company would not have
taken its efforts beyond developing a competitive browser product, including
it with Windows at no additional cost to consumers, and promoting it with
advertising. Microsoft would not have absorbed the considerable additional
costs associated with enlisting other firms in its campaign to increase
Internet Explorer's usage share at Navigator's expense. This investment
was only profitable to the extent that it protected the applications barrier
to entry. Neither the desire to bolster demand for Windows, nor the prospect
of ancillary revenues, explains the lengths to which Microsoft has gone.
For one thing, loading Navigator makes Windows just as Internet-ready as
including Internet Explorer does. Therefore, Microsoft's costly efforts
to limit the use of Navigator on Windows could not have stemmed from a desire
to bolster consumer demand for Windows. Furthermore, there is no conceivable
way that Microsoft's costly efforts to induce Apple to pre-install Internet
Explorer on Apple's own PC systems could have increased consumer demand
for Windows.
142. In pursuing its goal of maximizing Internet Explorer's usage share,
Microsoft actually has limited rather severely the number of profit centers
from which it could otherwise derive income via Internet Explorer. For example,
Microsoft allows the developers of browser shells built on Internet Explorer
to collect ancillary revenues such as advertising fees; for another, Microsoft
permits its browser licensees to change the browser's start page, thus limiting
the fees that advertisers are willing to pay for placement on that page
by Microsoft. Even if Microsoft maximized its ancillary revenue, the amount
of revenue realized would not come close to recouping the cost of its campaign
to maximize Internet Explorer's usage share at Navigator's expense. The
countless communications that Microsoft's executives dispatched to each
other about the company's need to capture browser usage share indicate that
the purpose of the effort had little to do with attracting ancillary revenues
and everything to do with protecting the applications barrier from the threat
posed by Netscape's Navigator and Sun's implementation of Java. For example,
Microsoft vice president Brad Chase told the company's assembled sales and
marketing executives in April 1996 that they should "worry about your browser
share [ ] as much as BillG" even though Internet Explorer was "a no revenue
product," because "we will lose [sic] the Internet platform battle if we
do not have a significant user installed base." He told them that "if you
let your customers deploy Netscape Navigator, you will loose [sic] leadership
on the desktop."
- Excluding Navigator from Important Distribution Channels
143. Decision-makers at Microsoft worried that simply developing its own
attractive browser product, pricing it at zero, and promoting it vigorously
would not divert enough browser usage from Navigator to neutralize it as
a platform. They believed that a comparable browser product offered at no
charge would still not be compelling enough to consumers to detract substantially
from Navigator's existing share of browser usage. This belief was due, at
least in part, to the fact that Navigator already enjoyed a very large installed
base and had become nearly synonymous with the Web in the public's consciousness.
If Microsoft was going to raise Internet Explorer's share of browser usage
and lower Navigator's share, executives at Microsoft believed they needed
to constrict Netscape's access to the distribution channels that led most
efficiently to browser usage.
- The Importance of the OEM and IAP Channels
144. Very soon after it recognized the need to gain browser usage share
at Navigator's expense, Microsoft identified pre-installation by OEMs
and bundling with the proprietary client software of IAPs as the two
distribution channels that lead most efficiently to browser usage. Two
main reasons explain why these channels are so efficient. First, users
must acquire a computer and connect to the Internet before they can
browse the Web. Thus, the OEM and IAP channels lead directly to virtually
every user of browsing software. Second, both OEMs and IAPs are able
to place browsing software at the immediate disposal of a user without
any effort on the part of the user. If an OEM pre-installs a browser
onto its PCs and places an icon for that browser on the default screen,
or "desktop," of the operating system, purchasers of those PCs will
be confronted with the icon as soon as the operating system finishes
loading into random access memory ("RAM"). If an IAP bundles a browser
with its own proprietary software, its subscribers will, by default,
use the browser whenever they connect to the Web. In its internal decision-making,
Microsoft has placed considerable reliance on studies showing that consumers
tend strongly to use whatever browsing software is placed most readily
at their disposal, and that once they have acquired, found, and used
one browser product, most are reluctant — and indeed have little reason
— to expend the effort to switch to another. Microsoft has also relied
on studies showing that a very large majority of those who browse the
Web obtain their browsing software with either their PCs or their IAP
subscriptions.
145. Indeed, no other distribution channel for browsing software even
approaches the efficiency of OEM pre-installation and IAP bundling.
The primary reason is that the other channels require users to expend
effort before they can start browsing. The traditional retail channel,
for example, requires the consumer to make contact with a retailer,
and retailers generally do not distribute products without charging
a price for them. Naturally, once Microsoft and Netscape began offering
browsing software for free, consumers for the most part lost all incentive
to pay for it.
146. The relatively few users who already have a browser but would
prefer another can avoid the retail channel by using the Internet to
download new browsing software electronically, but they must wait for
the software to transmit to their PCs. This process takes a moderate
degree of sophistication and substantial amount of time, and as the
average bandwidth of PC connections has grown, so has the average size
of browser products. The longer it takes for the software to download,
the more likely it is that the user's connection to the Internet will
be interrupted. As a vanguard of the "Internet Age," Navigator generated
a tremendous amount of excitement in its early days among technical
sophisticates, who were willing to devote time and effort to downloading
the software. Today, however, the average Web user is more of a neophyte,
and is far more likely to be intimidated by the process of downloading.
It is not surprising, then, that downloaded browsers now make up only
a small and decreasing percentage of the new browsers (as opposed to
upgrades) that consumers obtain and use.
147. The consumer who receives a CD-ROM containing a free browser in
the mail or as a magazine insert is at least spared the time and effort
it would take to obtain browsing software from a retail vendor or to
download it from the Web. But, just as the consumer who obtains a browser
at retail or off the Web, the consumer who receives the software unsolicited
at home must first install it on a PC system in order to use it, and
merely installing a browser product takes time and can be confusing
for novice users. Plus, a large percentage of the unsolicited disks
distributed through "carpet bombing" reach individuals who do not have
PCs, who already have pre-installed browsing software, or who have no
interest in browsing the Web. In practice, less than two percent of
CD-ROM disks disseminated in mass-distribution campaigns are used in
the way the distributor intended. As a result, this form of distribution
is rarely profitable, and then only when undertaken by on-line subscription
services for whom a sale translates into a stream of revenues lasting
into the future. The fact that an OLS may find it worthwhile to "carpet
bomb" consumers with free disks obviously only helps the vendor of browsing
software whose product the OLS has chosen to bundle with its proprietary
software. So, while there are other means of distributing browsers,
the fact remains that to a firm interested in browser usage, there simply
are no channels that compare in efficiency to OEM pre- installation
and IAP bundling.
148. Knowing that OEMs and IAPs represented the most efficient distribution
channels of browsing software, Microsoft sought to ensure that, to as
great an extent as possible, OEMs and IAPs bundled and promoted Internet
Explorer to the exclusion of Navigator.
- Excluding Navigator from the OEM Channel
- Binding Internet Explorer to Windows
- The Status of Web Browsers as Separate Products
149. Consumers determine their software requirements by identifying
the functionalities they desire. While consumers routinely evaluate
software products on the basis of the functionalities the products
deliver, they generally lack sufficient information to make
judgements based on the designs and implementations of those
products. Accordingly, consumers generally choose which software
products to license, install, and use on the basis of the products'
functionalities, not their designs and implementations.
150. While the meaning of the term "Web browser" is not precise
in all respects, there is a consensus in the software industry
as to the functionalities that a Web browser offers a user.
Specifically, a Web browser provides the ability for the end
user to select, retrieve, and perceive resources on the Web.
There is also a consensus in the software industry that these
functionalities are distinct from the set of functionalities
provided by an operating system.
151. Many consumers desire to separate their choice of a Web
browser from their choice of an operating system. Some consumers,
particularly corporate consumers, demand browsers and operating
systems separately because they prefer to standardize on the
same browser across different operating systems. For such consumers,
standardizing on the browser of their choice results in increased
productivity and lower training and support costs, and permits
the establishment of consistent security and privacy policies
governing Web access.
152. Moreover, many consumers who need an operating system,
including a substantial percentage of corporate consumers, do
not want a browser at all. For example, if a consumer has no
desire to browse the Web, he may not want a browser taking up
memory on his hard disk and slowing his system's performance.
Also, for businesses desiring to inhibit employees' access to
the Internet while minimizing system support costs, the most
efficient solution is often using PC systems without browsers.
153. Because of the separate demand for browsers and operating
systems, firms have found it efficient to supply the products
separately. A number of operating system vendors offer consumers
the choice of licensing their operating systems without a browser.
Others bundle a browser with their operating system products
but allow OEMs, value-added resellers, and consumers either
to not install it or, if the browser has been pre-installed,
to uninstall it. While Microsoft no longer affords this flexibility
(it is the only operating system vendor that does not), it has
always marketed and distributed Internet Explorer separately
from Windows in several channels. These include retail sales,
service kits for ISVs, free downloads over the Internet, and
bundling with other products produced both by Microsoft and
by third-party ISVs. In order to compete with Navigator for
browser share, as well as to satisfy corporate consumers who
want their diverse PC platforms to present a common browser
interface to employees, Microsoft has also created stand-alone
versions of Internet Explorer that run on operating systems
other than 32-bit Windows, including the Mac OS and Windows
3.x.
154. In conclusion, the preferences of consumers and the responsive
behavior of software firms demonstrate that Web browsers and
operating systems are separate products.
- Microsoft's Actions
155. In contrast to other operating system vendors, Microsoft
both refused to license its operating system without a browser
and imposed restrictions — at first contractual and later technical
— on OEMs' and end users' ability to remove its browser from
its operating system. As its internal contemporaneous documents
and licensing practices reveal, Microsoft decided to bind Internet
Explorer to Windows in order to prevent Navigator from weakening
the applications barrier to entry, rather than for any pro-competitive
purpose.
156. Before it decided to blunt the threat that Navigator posed
to the applications barrier to entry, Microsoft did not plan
to make it difficult or impossible for OEMs or consumers to
obtain Windows without obtaining Internet Explorer. In fact,
the company's internal correspondence and external communications
indicate that, as late as the fall of 1994, Microsoft was planning
to include low-level Internet "plumbing," such as a TCP/IP stack,
but not a browser, with Windows 95.
157. Microsoft subsequently decided to develop a browser to
run on Windows 95. As late as June 1995, however, Microsoft
had not decided to bundle that browser with the operating system.
The plan at that point, rather, was to ship the browser in a
separate "frosting" package, for which Microsoft intended to
charge. By April or May of that year, however, Microsoft's top
executives had identified Netscape's browser as a potential
threat to the applications barrier to entry. Throughout the
spring, more and more key executives came to the conclusion
that Microsoft's best prospect of quashing that threat lay in
maximizing the usage share of Microsoft's browser at Navigator's
expense. The executives believed that the most effective way
of carrying out this strategy was to ensure that every copy
of Windows 95 carried with it a copy of Microsoft's browser,
then code-named "O'Hare." For example, two days after the June
21, 1995 meeting between Microsoft and Netscape executives,
Microsoft's John Ludwig sent an E- mail to Paul Maritz and the
other senior executives involved in Microsoft's browser effort.
"[O]bviously netscape does see us as a client competitor," Ludwig
wrote. "[W]e have to work extra hard to get ohare on the oem
disks."
158. Microsoft did manage to bundle Internet Explorer 1.0 with
the first version of Windows 95 licensed to OEMs in July 1995.
It also included a term in its OEM licenses that prohibited
the OEMs from modifying or deleting any part of Windows 95,
including Internet Explorer, prior to shipment. The OEMs accepted
this restriction despite their interest in meeting consumer
demand for PC operating systems without Internet Explorer. After
all, Microsoft made the restriction a non-negotiable term in
its Windows 95 license, and the OEMs felt they had no commercially
viable alternative to pre-installing Windows 95 on their PCs.
Apart from a few months in the fall of 1997, when Microsoft
provided OEMs with Internet Explorer 4.0 on a separate disk
from Windows 95 and permitted them to ship the latter without
the former, Microsoft has never allowed OEMs to ship Windows
95 to consumers without Internet Explorer. This policy has guaranteed
the presence of Internet Explorer on every new Windows PC system.
159. Microsoft knew that the inability to remove Internet Explorer
made OEMs less disposed to pre-install Navigator onto Windows
95. OEMs bear essentially all of the consumer support costs
for the Windows PC systems they sell. These include the cost
of handling consumer complaints and questions generated by Microsoft's
software. Pre-installing more than one product in a given category,
such as word processors or browsers, onto its PC systems can
significantly increase an OEM's support costs, for the redundancy
can lead to confusion among novice users. In addition, pre-installing
a second product in a given software category can increase an
OEM's product testing costs. Finally, many OEMs see pre-installing
a second application in a given software category as a questionable
use of the scarce and valuable space on a PC's hard drive.
160. Microsoft's executives believed that the incentives that
its contractual restrictions placed on OEMs would not be sufficient
in themselves to reverse the direction of Navigator's usage
share. Consequently, in late 1995 or early 1996, Microsoft set
out to bind Internet Explorer more tightly to Windows 95 as
a technical matter. The intent was to make it more difficult
for anyone, including systems administrators and users, to remove
Internet Explorer from Windows 95 and to simultaneously complicate
the experience of using Navigator with Windows 95. As Brad Chase
wrote to his superiors near the end of 1995, "We will bind the
shell to the Internet Explorer, so that running any other browser
is a jolting experience."
161. Microsoft bound Internet Explorer to Windows 95 by placing
code specific to Web browsing in the same files as code that
provided operating system functions. Starting with the release
of Internet Explorer 3.0 and "OEM Service Release 2.0" ("OSR
2") of Windows 95 in August 1996, Microsoft offered only a version
of Windows 95 in which browsing-specific code shared files with
code upon which non-browsing features of the operating system
relied.
162. The software code necessary to supply the functionality
of a modern application or operating system can be extremely
long and complex. To make that complexity manageable, developers
usually write long programs as a series of individual "routines,"
each ranging from a few dozen to a few hundred lines of code,
that can be used to perform specific functions. Large programs
are created by "knitting" together many such routines in layers,
where the lower layers are used to provide fundamental functionality
relied upon by higher, more focused layers. Some preliminary
aspects of this "knitting" are performed by the software developer.
The user who launches a program, however, is ultimately responsible
for causing routines to be loaded into memory and executed together
to produce the program's overall functionality.
163. Routines can be packaged together into files in almost
any way the designer chooses. Routines need not reside in the
same file to function together in a seamless fashion. Also,
a developer can move routines into new or different files from
one version of a program to another without changing the functionalities
of those routines or the ability to combine them to provide
integrated functionality.
164. Starting with Windows 95 OSR 2, Microsoft placed many
of the routines that are used by Internet Explorer, including
browsing-specific routines, into the same files that support
the 32-bit Windows APIs. Microsoft's primary motivation for
this action was to ensure that the deletion of any file containing
browsing-specific routines would also delete vital operating
system routines and thus cripple Windows 95. Although some of
the code that provided Web browsing could still be removed,
without disabling the operating system, by entering individual
files and selectively deleting routines used only for Web browsing,
licensees of Microsoft software were, and are, contractually
prohibited from reverse engineering, decompiling, or disassembling
any software files. Even if this were not so, it is prohibitively
difficult for anyone who does not have access to the original,
human-readable source code to change the placement of routines
into files, or otherwise to alter the internal configuration
of software files, while still preserving the software's overall
functionality.
165. Although users were not able to remove all of the routines
that provided Web browsing from OSR 2 and successive versions
of Windows 95, Microsoft still provided them with the ability
to uninstall Internet Explorer by using the "Add/Remove" panel,
which was accessible from the Windows 95 desktop. The Add/Remove
function did not delete all of the files that contain browsing
specific code, nor did it remove browsing-specific code that
is used by other programs. The Add/Remove function did, however,
remove the functionalities that were provided to the user by
Internet Explorer, including the means of launching the Web
browser. Accordingly, from the user's perspective, uninstalling
Internet Explorer in this way was equivalent to removing the
Internet Explorer program from Windows 95.
166. In late 1996, senior executives within Microsoft, led
by James Allchin, began to argue that Microsoft was not binding
Internet Explorer tightly enough to Windows and as such was
missing an opportunity to maximize the usage of Internet Explorer
at Navigator's expense. Allchin first made his case to Paul
Maritz in late December 1996. He wrote:
I don't understand how IE is going to win. The current path
is simply to copy everything that Netscape does packaging
and product wise. Let's [suppose] IE is as good as Navigator/Communicator.
Who wins? The one with 80% market share. Maybe being free
helps us, but once people are used to a product it is hard
to change them. Consider Office. We are more expensive today
and we're still winning. My conclusion is that we must leverage
Windows more. Treating IE as just an add-on to Windows which
is cross-platform [means] losing our biggest advantage — Windows
marketshare. We should dedicate a cross group team to come
up with ways to leverage Windows technically more. . . . We
should think about an integrated solution — that is our strength.
Allchin followed up with another message to Maritz on January
2, 1997:
You see browser share as job 1. . . . I do not feel
we are going to win on our current path. We are not leveraging
Windows from a marketing perspective and we are trying to copy
Netscape and make IE into a platform. We do not use our strength
— which is that we have an installed base of Windows and we
have a strong OEM shipment channel for Windows. Pitting browser
against browser is hard since Netscape has 80% marketshare and
we have 20%. . . . I am convinced we have to use Windows — this
is the one thing they don't have. . . . We have to be competitive
with features, but we need something more — Windows integration.
If you agree that Windows is a huge asset, then it follows
quickly that we are not investing sufficiently in finding
ways to tie IE and Windows together. This must come from you.
. . . Memphis [Microsoft's code-name for Windows 98] must
be a simple upgrade, but most importantly it must be killer
on OEM shipments so that Netscape never gets a chance on these
systems.
167. Maritz responded to Allchin's second message by agreeing
"that we have to make Windows integration our basic strategy"
and that this justified delaying the release of Windows 98 until
Internet Explorer 4.0 was ready to be included with that product.
Maritz recognized that the delay would disappoint OEMs for two
reasons. First, while OEMs were eager to sell new hardware technologies
to Windows users, they could not do this until Microsoft released
Windows 98, which included software support for the new technologies.
Second, OEMs wanted Windows 98 to be released in time to drive
sales of PC systems during the back-to-school and holiday selling
seasons. Nevertheless, Maritz agreed with Allchin's point that
synchronizing the release of Windows 98 with Internet Explorer
was "the only thing that makes sense even if OEMs suffer."
168. Once Maritz had decided that Allchin was right, he needed
to instruct the relevant Microsoft employees to delay the release
of Windows 98 long enough so that it could be shipped with Internet
Explorer 4.0 tightly bound to it. When one executive asked on
January 7, 1997 for confirmation that "memphis is going to hold
for IE4, even if it puts memphis out of the xmas oem window,"
Maritz responded affirmatively and explained,
The major reason for this is . . . to combat Nscp, we have
to [ ] position the browser as "going away" and do deeper
integration on Windows. The stronger way to communicate this
is to have a ‘new release' of Windows and make a big deal
out of it. . . . IE integration will be [the] most compelling
feature of Memphis.
Thus, Microsoft delayed the debut of numerous features, including
support for new hardware devices, that Microsoft believed consumers
would find beneficial, simply in order to protect the applications
barrier to entry. 169. Allchin and Maritz gained support for
their initiative within Microsoft in the early spring of 1997,
when a series of market studies confirmed that binding Internet
Explorer tightly to Windows was the way to get consumers to
use Internet Explorer instead of Navigator. Reporting on one
study in late February, Microsoft's Christian Wildfeuer wrote:
The stunning insight is this: To make [users] switch away
from Netscape, we need to make them upgrade to Memphis. .
. . It seems clear to me that it will be very hard to increase
browser market share on the merits of IE 4 alone. It will
be more important to leverage the OS asset to make people
use IE instead of Navigator.
Microsoft's survey expert, Kumar Mehta, agreed. In March he
shared with a colleague his "feeling, based on all the IE research
we have done, [that] it is a mistake to release memphis without
bundling IE with it."
170. Microsoft's technical personnel implemented Allchin's
"Windows integration" strategy in two ways. First, they did
not provide users with the ability to uninstall Internet Explorer
from Windows 98. The omission of a browser removal function
was particularly conspicuous given that Windows 98 did give
users the ability to uninstall numerous features other than
Internet Explorer — features that Microsoft also held out as
being integrated into Windows 98. Microsoft took this action
despite specific requests from Gateway that Microsoft provide
a way to uninstall Internet Explorer 4.0 from Windows 98.
171. The second way in which Microsoft's engineers implemented
Allchin's strategy was to make Windows 98 override the user's
choice of default browser in certain circumstances. As shipped
to users, Windows 98 has Internet Explorer configured as the
default browser. While Windows 98 does provide the user with
the ability to choose a different default browser, it does not
treat this choice as the "default browser" within the ordinary
meaning of the term. Specifically, when a user chooses a browser
other than Internet Explorer as the default, Windows 98 nevertheless
requires the user to employ Internet Explorer in numerous situations
that, from the user's perspective, are entirely unexpected.
As a consequence, users who choose a browser other than Internet
Explorer as their default face considerable uncertainty and
confusion in the ordinary course of using Windows 98.
172. Microsoft's refusal to respect the user's choice of default
browser fulfilled Brad Chase's 1995 promise to make the use
of any browser other than Internet Explorer on Windows "a jolting
experience." By increasing the likelihood that using Navigator
on Windows 98 would have unpleasant consequences for users,
Microsoft further diminished the inclination of OEMs to pre-install
Navigator onto Windows. The decision to override the user's
selection of non- Microsoft software as the default browser
also directly disinclined Windows 98 consumers to use Navigator
as their default browser, and it harmed those Windows 98 consumers
who nevertheless used Navigator. In particular, Microsoft exposed
those using Navigator on Windows 98 to security and privacy
risks that are specific to Internet Explorer and to ActiveX
controls..
173. Microsoft's actions have inflicted collateral harm on
consumers who have no interest in using a Web browser at all.
If these consumers want the non-browsing features available
only in Windows 98, they must content themselves with an operating
system that runs more slowly than if Microsoft had not interspersed
browsing-specific routines throughout various files containing
routines relied upon by the operating system. More generally,
Microsoft has forced Windows 98 users uninterested in browsing
to carry software that, while providing them with no benefits,
brings with it all the costs associated with carrying additional
software on a system. These include performance degradation,
increased risk of incompatibilities, and the introduction of
bugs. Corporate consumers who need the hardware support and
other non- browsing features not available in earlier versions
of Windows, but who do not want Web browsing at all, are further
burdened in that they are denied a simple and effective means
of preventing employees from attempting to browse the Web.
174. Microsoft has harmed even those consumers who desire to
use Internet Explorer, and no other browser, with Windows 98.
To the extent that browsing-specific routines have been commingled
with operating system routines to a greater degree than is necessary
to provide any consumer benefit, Microsoft has unjustifiably
jeopardized the stability and security of the operating system.
Specifically, it has increased the likelihood that a browser
crash will cause the entire system to crash and made it easier
for malicious viruses that penetrate the system viaInternet
Explorer to infect non-browsing parts of the system.
- Lack of Justification
175. No technical reason can explain Microsoft's refusal to
license Windows 95 without Internet Explorer 1.0 and 2.0. The
version of Internet Explorer (1.0) that Microsoft included with
the original OEM version of Windows 95 was a separable, executable
program file supplied on a separate disk. Web browsing thus
could be installed or removed without affecting the rest of
Windows 95's functionality in any way. The same was true of
Internet Explorer 2.0. Microsoft, moreover, created an easy
way to remove Internet Explorer 1.0 and 2.0 from Windows 95
after they had been installed, via the "Add/Remove" panel. This
demonstrates the absence of any technical reason for Microsoft's
refusal to supply Windows 95 without Internet Explorer 1.0 and
2.0.
176. Similarly, there is no technical justification for Microsoft's
refusal to license Windows 95 to OEMs with Internet Explorer
3.0 or 4.0 uninstalled, or for its refusal to permit OEMs to
uninstall Internet Explorer 3.0 or 4.0. Microsoft's decision
to provide users with an "uninstall" procedure for Internet
Explorer 3.0 and 4.0 and its decision to promote Internet Explorer
on the basis of that feature demonstrate that there was no technical
or quality-related reason for refusing to permit OEMs to use
this same feature. Microsoft would not have permitted users
to uninstall Internet Explorer, nor would consumers have demanded
such an option, if the process would have fragmented or degraded
the other functionality of the operating system.
177. As with Windows 95, there is no technical justification
for Microsoft's refusal to meet consumer demand for a browserless
version of Windows 98. Microsoft could easily supply a version
of Windows 98 that does not provide the ability to browse the
Web, and to which users could add the browser of their choice.
Indicative of this is the fact that it remains possible to remove
Web browsing functionality from Windows 98 without adversely
affecting non-Web browsing features of Windows 98 or the functionality
of applications running on the operating system. In fact, the
revised version of Professor Felten's prototype removal program
produces precisely this result when run on a computer with Windows
98 installed.
178. In his direct testimony, Felten provides a full technical
description of what his prototype removal program does. This
description includes a list of the twenty-one methods of initiating
Web browsing in Windows 98 that were known to Felten when he
developed his program. When the revised version of Felten's
program is run on a computer with Windows 98 and no other software
installed, Web browsing is not initiated in response to any
of these methods.
179. James Allchin tried to show at trial, by way of a videotaped
demonstration, that the functionality of Internet Explorer could
still be enabled, even after the prototype removal program had
been run, by manually adding a new entry to the Windows Registry
database. During Felten's rebuttal testimony, one of Microsoft's
attorneys directed Felten to perform a second demonstration
intended to show that the functionality of Internet Explorer
could still be enabled, even after the prototype removal program
had been run, by hitting the "control" and "N" keys simultaneously
after running the Windows Update feature. Neither of these methods
of initiating Web browsing was among the twenty-one documented
methods known to Felten when he developed his program.
Furthermore, the latter demonstration was hardly a reliable
test of Felten's program, because the Encompass shell browser
and other applications had been installed on the Windows 98
PC system used in the demonstration. At most, the two demonstrations
indicate that Felten did not know all of the methods of initiating
Web browsing in Windows 98 when he developed his program, and
that he did not include steps in his program to prevent the
invocation of Internet Explorer's functionality in response
to methods of which he was unaware. Microsoft has special knowledge
of its own products, and it alone chooses which functionalities
in its products are to be documented and which are to be left
undocumented. Felten was aware of this fact, and he himself
noted that his own documentation of initiation methods was not
exhaustive.
180. Allchin also attempted to show that Felten's program causes
performance degradations in Windows 98, as well as malfunctions
in certain Windows 98 applications and the Windows Update feature
of Windows 98. Those demonstrations, however, were performed
on a PC on which several third-party software programs had been
installed in addition to Windows 98, and which had been connected
to the Internet via a dial-up connection. Felten's program was
not intended to be definitive and had not been verified under
preconditions other than those for which it was designed. Thus,
there was no reason to expect that his program would operate
flawlessly during Allchin's demonstrations, and nothing can
be inferred from any failure to do so.
181. In fact, the revised version of Felten's program does
not degrade the performance or stability of Windows 98 in any
way. To the contrary, according to several standard programs
used by Microsoft to measure system performance, the removal
of Internet Explorer by the prototype program slightly improves
the overall speed of Windows 98.
182. Given Microsoft's special knowledge of its own products,
the company is readily able to produce an improved implementation
of the concept illustrated by Felten's prototype removal program.
In particular, Microsoft can easily identify browsing-specific
code that could be removed from shared files, thereby reducing
the operating system's memory and hard disk requirements and
obtaining performance improvements even beyond those achieved
by Felten.
183. Microsoft contends that Felten's prototype removal program
does not remove Internet Explorer's Web browsing functionalities,
but rather "hides" those functionalities from the perspective
of the user. In support of that contention, Microsoft points
out that Felten's program removes only a small fraction of the
code in Windows 98, so that the hard drive still contains almost
all of the code that had been executed in the course of providing
Internet Explorer's Web browsing functionalities. Some of that
code is left on the hard drive because it also supports Windows
98's operating system functionalities. Microsoft did not offer
any analytical basis, however, for distinguishing this sharing
of code from the code sharing that exists between all Windows
applications and the operating system functionalities in Windows
98.
184. While Microsoft's observation suggests that Felten's program
does not greatly reduce Windows 98's "footprint" on the hard
disk, that point is irrelevant to the question of whether Felten's
program removes Internet Explorer's functionalities from Windows
98. This is because the functionalities of a software product
are not provided by the mere presence of code on a computer's
hard drive. For software code to provide any functionalities
at all the code must be loaded into the computer's dynamic memory
and executed. To uninstall a software program or to remove a
set of functionalities from a software program, it is not necessary
to delete all of the software code that is executed in the course
of providing those functionalities. It is sufficient to delete
and/or modify enough of the program so as to prevent the code
in question from being executed.
185. This deletion and modification is precisely what Felten's
program does to Windows 98. After Felten's program has been
run, the software code that formerly had been executed in the
course of providing Web browsing functionalities is no longer
executed. Web browsing functionalities are not merely "hidden"
from the user. To the contrary, Felten's program deletes and
modifies enough of Windows 98 so as to prevent the necessary
code from being executed altogether. Since code that is not
to be executed does not need to be loaded into memory, Felten's
program is able to reduce the memory allocated to Windows 98
by approximately twenty percent.
186. As an abstract and general proposition, many — if not
most — consumers can be said to benefit from Microsoft's provision
of Web browsing functionality with its Windows operating system
at no additional charge. No consumer benefit can be ascribed,
however, to Microsoft's refusal to offer a version of Windows
95 or Windows 98 without Internet Explorer, or to Microsoft's
refusal to provide a method for uninstalling Internet Explorer
from Windows 98. In particular, Microsoft's decision to force
users to take the browser in order to get the non- Web browsing
features of Windows 98, including support for new Internet protocols
and data formats is, as Allchin put it, simply a choice about
"distribution."
187. As Felten's program demonstrated, it is feasible for Microsoft
to supply a version of Windows 98 that does not provide the
ability to browse the Web, to which users could add a browser
of their choice. Microsoft could then readily offer "integrated"
Internet Explorer Web browsing functionality as well, either
as an option that could be selected by the end user or the OEM
during the Windows 98 setup procedure, or as a "service pack
upgrade."
188. Unlike a "pocket part" supplement to a book, a software
upgrade need not consist only of new material. A service pack
upgrade may install a combination of new software files and/or
replacements for existing software files. The use of such service
packs to distribute new functionality is a standard feature
of Windows applications generally. Microsoft could offer "integrated"
Internet Explorer Web browsing functionality as a service pack
upgrade that would locate the relevant software and replace
it with the current Windows 98 software. In this way, any consumer
who wished to do so could easily acquire all of the functionality,
features, and performance of the current version of Windows
98 by obtaining the browserless operating system package and
the service pack upgrade and then installing them together.
189. Microsoft contends that a service pack must necessarily
be deemed part of the operating system when it replaces and
adds a large number of core operating system files in the process
of upgrading the operating system to a higher level of functionality.
This contention is false. Both Microsoft Word, an application
program, and Norton Utilities, a suite of utility and application
programs, replace and add files to Windows without thereby becoming
part of the operating system.
190. Microsoft's actual use of a service pack upgrade to offer
integrated Internet Explorer Web browsing functionality (Internet
Explorer 4.0) separately from the Windows 95 operating system
illustrates the feasibility of this approach. In fact, it produces
results remarkably similar to those that could be achieved by
offering integrated Internet Explorer Web browsing functionality
as a separate service pack upgrade to a browserless Windows
98 operating system. When installed together by the end user,
the combined software provides nearly all of the features that
Microsoft attributes to the "integrated" design of Windows 98.
Of the missing features, all but WebTV for Windows can be obtained
by thereafter installing a separately obtained copy of Internet
Explorer 5.0. Microsoft has presented no evidence that the WebTV
functionality could not easily be included in the stand-alone
version of Internet Explorer 5.0.
191. Therefore, Microsoft could offer consumers all the benefits
of the current Windows 98 package by distributing the products
separately and allowing OEMs or consumers themselves to combine
the products if they wished. In fact, operating system vendors
other than Microsoft currently succeed in offering "integrated"
features similar to those that Microsoft advertises in Windows
98 while still permitting the removal of the browser from the
operating system. If consumers genuinely prefer a version of
Windows bundled with Internet Explorer, they do not have to
be forced to take it; they can choose it in the market.
192. Windows 98 offers some benefits unrelated to browsing
that a consumer cannot obtain by combining Internet Explorer
with Windows 95. For example, Windows 98 includes support for
new hardware technologies and data formats that consumers may
desire. While nevertheless preferring to do without Web browsing,
Microsoft has forced Windows users who do not want Internet
Explorer to nevertheless license, install, and use Internet
Explorer to obtain the unrelated benefits. Although some consumers
might be inclined to go without Windows 98's new non-browsing
features in order to avoid Internet Explorer, OEMs are unlikely
to facilitate that choice, because they want consumers to use
an operating system that supports the new hardware technologies
they seek to sell.
193. Microsoft's argument that binding the browser to the operating
system is reasonably necessary to preserve the "integrity" of
the Windows platform is likewise specious. First, concern with
the integrity of the platform cannot explain Microsoft's original
decision to bind Internet Explorer to Windows 95, because Internet
Explorer 1.0 and 2.0 did not contain APIs. Second, concern with
the integrity of the platform cannot explain Microsoft's refusal
to offer OEMs the option of uninstalling Internet Explorer from
Windows 95 and Windows 98 because APIs, like all other shared
files, are left on the system when Internet Explorer in uninstalled.
Third, Microsoft's contention that offering OEMs the choice
of whether or not to install certain browser-related APIs would
fragment the Windows platform is unpersuasive because OEMs operate
in a competitive market and thus have ample incentive to include
APIs (including non-Microsoft APIs) required by the applications
that their customers demand. Fourth, even if there were some
potential benefit associated with the forced licensing of a
single set of APIs to all OEMs, such justification could not
apply in this case, because Microsoft itself precipitates fragmentation
of its platform by continually updating various portions of
the Windows installed base with new APIs. ISVs have adapted
to this reality by redistributing needed APIs with their applications
in order to ensure that the necessary APIs are present when
the programs are launched. To the same end, Microsoft makes
the APIs it ships with Internet Explorer available to third-party
developers for distribution with their own products. Moreover,
Microsoft itself bundles APIs — including those distributed
with Internet Explorer — with a number of the applications that
it distributes separately from Windows.
194. Microsoft also contends that by providing "best of breed"
implementations of various functionalities, a vendor of a popular
operating system can benefit consumers and improve the efficiency
of the software market generally, because the resulting standardization
allows ISVs to concentrate their efforts on developing complementary
technologies for the industry leaders. Microsoft's refusal to
offer a version of Windows 98 in which its Web browser is either
absent or removable, however, had no such purpose. Rather, it
had the purpose and effect of quashing innovation that exhibited
the potential to facilitate the emergence of competition in
the market for Intel-compatible PC operating systems.
195. Furthermore, there is only equivocal support for the proposition
that Microsoft will ultimately prove to be the source of a "best
of breed" Web browser. In fact, there is considerable evidence
to the contrary. Both Microsoft and the plaintiffs have used
product evaluations to support their claims about the relationship
between innovations in Web browser technology and consumer choices
regarding the use of Web browsers. These product evaluations
generally compare Internet Explorer with Navigator by identifying
the beneficial and detrimental features of each. Because the
evaluations disagree as to which features are most important,
there is no consensus as to which is the best browser overall.
When read together, the evaluations also do not identify any
existing Web browser as being "best of breed" in the sense of
being at least as good as all others in all significant respects.
Moreover, there is nothing in the evaluations, nor anywhere
else in the evidence, to suggest that further innovation efforts
by vendors other than Microsoft in the field of Web browser
technology are no longer necessary or desirable. To the contrary,
many of the product reviews suggest further innovations in both
Microsoft and non- Microsoft Web browsers that would benefit
consumers.
196. Despite differences in emphasis, the product evaluations
do generally concur as to which browser features are beneficial,
which browser features are detrimental, and why. Thus, the evaluations
provide extensive detailed information about consumer preferences
that can be used to predict likely directions in the evolution
of Web browser technology.
197. First, the evaluations suggest that, although most Web
publishers charge nothing for access to their sites, consumers
recognize that there are search and communication costs associated
with Web transactions. Accordingly, consumers prefer, and benefit
from, innovations in Web browser technology that reduce these
costs. Second, consumers recognize that the Web contains a vast
and growing range of digital information resources, many of
which contain viruses that are capable of causing devastating
and irreversible harm to their security and privacy interests.
Accordingly, consumers prefer, and benefit from, innovations
in Web browser technology that help them identify and avoid
harmful Web resources. Third, consumers recognize that they
frequently lack adequate information to enable them to assess
accurately the costs, risks, and benefits of performing a particular
Web transaction. Accordingly, consumers prefer, and benefit
from, innovations in Web browser technology that help them assess
these costs, risks, and benefits prior to performing the transaction.
198. The reduction of search and communication costs, the identification
and avoidance of harmful Web resources, and the provision of
more accurate information as to the costs, risks, and benefits
of performing Web transactions are just three of the many possible
areas of innovation in the field of Web browser technology.
Far from demonstrating that Internet Explorer is currently a
"best of breed" Web browser, the evidence reveals Microsoft's
awareness of the need for continuous improvement of its products.
For example, Microsoft frequently releases "patches" to address
security and privacy vulnerabilities in Internet Explorer as
they are discovered. In sum, there is no indication that Microsoft
is destined to provide a "best of breed" Web browser that makes
continuing, competitively driven innovations unproductive.
- The Market for Web Browsing Functionality
199. Since the World Wide Web was introduced to the public
in 1991, the resources available on the Web have multiplied
at a near-exponential rate. The Internet is becoming a true
mass medium. Every day Web resources are published, combined,
modified, moved, and deleted. Millions of individuals and organizations
have published Web sites, and Web site addresses are pervasive
in advertising, promotion, and corporate identification.
200. The economics of the Internet, along with the flexible
structure of Web pages, have made the Web the leading trajectory
for the ongoing convergence of mass communications media. Many
television and radio stations make some or all of their transmissions
available on the Web in the form of static multimedia files
or streaming media. Many newspapers, magazines, books, journals,
public documents, and software programs are also published on
the Web. Multimedia files on the Web have emerged as viable
substitutes for many pre-recorded audio and video entertainment
products. Web-based E-mail, discussion lists, news groups, "chat
rooms," paging, instant messaging, and telephony are all in
common use. In addition to subsuming all other digital media,
the Web also offers popular interactive and collaborative modes
of communication that are not available through other media.
201. The use of Web browsers to conduct Web transactions has
grown at pace with the growth of the Web, reflecting the immense
value that subsists in the digital information resources that
have become available on the Web. Consumer demand for software
functionality that facilitates Web transactions, and the response
by browser vendors to that demand, creates a market for Web
browsing functionality. Although Web browsers are now generally
not licensed at a positive price, all Web transactions impose
significant costs on consumers, and all browser vendors, including
Microsoft, have significant economic interests in maximizing
usage of the browsing functionality they control.
- Preventing OEMs from Removing the Ready Means of Accessing
Internet Explorer and from Promoting Navigator in the Boot Sequence
202. Since the release of Internet Explorer 1.0 in July 1995,
Microsoft has distributed every version of Windows with Internet
Explorer included. Consequently, no OEM has ever (with the exception
of a few months in late 1997) been able to license a copy of Windows
95 or Windows 98 that has not come with Internet Explorer. Refusing
to offer OEMs a browserless (and appropriately discounted) version
of Windows forces OEMs to take (and pay for) Internet Explorer,
but it does not prevent a determined OEM from nevertheless offering
its consumers a different Web browser. Even Microsoft's additional
refusal to allow OEMs to uninstall (without completely removing)
Internet Explorer from Windows does not completely foreclose a resourceful
OEM from offering consumers another browser. For example, an OEM
with sufficient technical expertise (which all the larger OEMs certainly
possess) could offer its customers a choice of browsers while still
minimizing user confusion if the OEM were left free to configure
its systems to present this choice the first time a user turned
on a new PC system. If the user chose Navigator, the system would
automatically remove the most prominent means of accessing Internet
Explorer from Windows (without actually uninstalling, i.e., removing
all means of accessing, Internet Explorer) before the desktop screen
appeared for the first time.
203. If OEMs removed the most visible means of invoking Internet
Explorer, and pre- installed Navigator with facile methods of access,
Microsoft's purpose in forcing OEMs to take Internet Explorer —
capturing browser usage share from Netscape — would be subverted.
The same would be true if OEMs simply configured their machines
to promote Navigator before Windows had a chance to promote Internet
Explorer, Decision-makers at Microsoft believed that as Internet
Explorer caught up with Navigator in quality, OEMs would ultimately
conclude that the costs of pre-installing and promoting Navigator,
and removing easy access to Internet Explorer, outweighed the benefits.
Still, those decision-makers did not believe that Microsoft could
afford to wait for the several large OEMs that represented virtually
all Windows PCs shipped to come to this desired conclusion on their
own. Therefore, in order to bring the behavior of OEMs into line
with its strategic goals quickly, Microsoft threatened to terminate
the Windows license of any OEM that removed Microsoft's chosen icons
and program entries from the Windows desktop or the "Start" menu.
It threatened similar punishment for OEMs who added programs that
promoted third-party software to the Windows "boot" sequence. These
inhibitions soured Microsoft's relations with OEMs and stymied innovation
that might have made Windows PC systems more satisfying to users.
Microsoft would not have paid this price had it not been convinced
that its actions were necessary to ostracize Navigator from the
vital OEM distribution channel.
204. Although Microsoft's original Windows 95 licenses withheld
from OEMs permission to implement any modifications to the Windows
product not expressly authorized by Microsoft's "OEM Pre-Installation
Kit," or "OPK," it had always been Microsoft's practice to grant
certain OEMs requesting it some latitude to make modifications not
specified in the OPK. But when OEMs began, in the summer of 1995,
to request permission to remove the Internet Explorer icon from
the Windows desktop prior to shipping their PCs, Microsoft consistently
and steadfastly refused. As Compaq learned in the first half of
1996, Microsoft was prepared to enforce this prohibition against
even its closest OEM allies.
205. In August 1995, Compaq entered into a "Promotion and Distribution
Agreement" with AOL whereby Compaq agreed to "position AOL Services
above all other Online Services within the user interface of its
Products." An addendum to the agreement provided that Compaq would
place an AOL icon — and no OLS icons not controlled by AOL — on
the desktop of its PCs. Pursuant to its obligations, Compaq began
in late 1995 or early 1996 to ship its Presario PCs with the MSN
icon removed and the AOL icon added to the Windows desktop. At the
same time, Compaq removed the Internet Explorer icon from the desktop
of its Presarios and replaced it with a single icon representing
both the Spry ISP and the browser product that Spry bundled, i.e.,
Navigator. Compaq added this icon in part because it recognized
Navigator to be the most popular browser product with its consumers;
it removed the Internet Explorer icon because it did not want its
PCs desktops to confuse novice users with a clutter of Internet-related
icons.
206. When Microsoft learned of Compaq's plans for the Presario,
it informed Compaq that it considered the removal of the MSN and
Internet Explorer icons to be a violation of the OPK process by
which Compaq had previously agreed to abide. For its part, AOL informed
Compaq that it viewed the addition of an icon for Spry as a violation
of their 1995 agreement. AOL did not object to the presence of a
Navigator icon; what concerned AOL was the fact that clicking on
this icon brought the user to the Spry ISP. Despite the protests
from Microsoft and AOL, Compaq refused to reconfigure the Presario
desktop. Finally, after months of unsuccessful importunity, Microsoft
sent Compaq a letter on May 31, 1996, stating its intention to terminate
Compaq's license for Windows 95 if Compaq did not restore the MSN
and Internet Explorer icons to their original positions. Compaq's
executives opined that their firm could not continue in business
for long without a license for Windows, so in June Compaq restored
the MSN and IE icons to the Presario desktop.
207. Microsoft did not further condition its withdrawal of the
termination notice on the removal of the AOL and Navigator icons;
AOL, however, did protest both the continued presence of a Spry
icon and the reappearance of the MSN icon. After AOL sent Compaq
a formal notice of its intent to terminate the Promotion and Distribution
Agreement in September 1996, Compaq removed the Spry/Navigator icon.
For reasons discussed below, Compaq did not then replace the Spry/Navigator
icon with an icon solely for Navigator. 208. In its confrontation
with Compaq, Microsoft demonstrated that it was prepared to go to
the brink of losing all Windows sales through its highest-volume
OEM partner in order to enforce its prohibition against removing
Microsoft's Internet-related icons from the Windows desktop.
209. If the only prohibition had been against removing Microsoft
icons and program entries, OEMs partial to Navigator still would
have been able to recruit users to Navigator by configuring their
PCs to promote it before the Windows desktop first presented itself.
This is true because the average user, having chosen a browser product,
is indisposed to undergo the trouble of switching to a different
one. With the release of Windows 95, some of the high- volume OEMs
began to customize the Windows boot sequence so that, the first
time users turned on their new PCs, certain OEM-designed tutorials
and registration programs, as well as "splash" screens that simply
displayed the OEM's brand, would run before the users were presented
with the Windows desktop.
210. Promoting non-Microsoft software and services was not the
only, or even the primary, purpose of the OEM introductory programs.
The primary purpose, rather, was to make the experience of setting
up and learning to use a new PC system easier and less confusing
for users, especially novices. By doing so, the OEMs believed, they
would increase the value of their systems and minimize both product
returns and costly support calls. Since just three calls from a
consumer can erase the entire profit that an OEM earned selling
a PC system to that consumer, OEMs have an acute interest in making
their systems self-explanatory and simple to use. A secondary purpose
motivating OEMs to insert programs into the boot sequence was to
differentiate their products from those of their competitors. Finally,
OEMs perceived an opportunity to collect bounties from IAPs and
ISVs in exchange for the promotion of their services and software
in the boot sequence. Thus, among the programs that many OEMs inserted
into the boot sequence were Internet sign-up procedures that encouraged
users to choose from a list of IAPs assembled by the OEM. In many
cases, a consumer signing up for an IAP through an OEM program would
automatically become a user of whichever browser that IAP bundled
with its proprietary software. In other cases, the IAP would present
the user with a choice of browsers in the course of collecting from
the user the information necessary to start a subscription.
211. In addition to tutorials, sign-up programs, and splash screens,
a few large OEMs developed programs that ran automatically at the
conclusion of a new PC system's first boot sequence. These programs
replaced the Windows desktop either with a user interface designed
by the OEM or with Navigator's user interface. The OEMs that implemented
automatically loading alternative user interfaces did so out of
the belief that many users, particularly novice ones, would find
the alternate interfaces less complicated and confusing than the
Windows desktop.
212. When Gates became aware of what the OEMs were doing, he expressed
concern to Kempin, the Microsoft executive in charge of OEM sales.
On January 6, 1996, Gates wrote to Kempin: "Winning Internet browser
share is a very very important goal for us. Apparently a lot of
OEMs are bundling non-Microsoft browsers and coming up with offerings
together with Internet Service providers that get displayed on their
machines in a FAR more prominent way than MSN or our Internet browser."
Less than three weeks later, Kempin delivered his semi- annual report
on OEM sales to his superiors. In the report, he identified "Control
over start-up screens, MSN and IE placement" as one interest that
Microsoft had neglected over the previous six months. The ongoing
imbroglio with Compaq was prominent in Kempin's thinking, but he
also recognized that establishing control over the boot process
was necessary to ensure preferential positioning for MSN and Internet
Explorer.
213. In an effort to thwart the practice of OEM customization,
Microsoft began, in the spring of 1996, to force OEMs to accept
a series of restrictions on their ability to reconfigure the Windows
95 desktop and boot sequence. There were five such restrictions,
which were manifested either as amendments to existing Windows 95
licenses or as terms in new Windows 98 licenses. First, Microsoft
formalized the prohibition against removing any icons, folders,
or "Start" menu entries that Microsoft itself had placed on the
Windows desktop. Second, Microsoft prohibited OEMs from modifying
the initial Windows boot sequence. Third, Microsoft prohibited OEMs
from installing programs, including alternatives to the Windows
desktop user interface, which would launch automatically upon completion
of the initial Windows boot sequence. Fourth, Microsoft prohibited
OEMs from adding icons or folders to the Windows desktop that were
not similar in size and shape to icons supplied by Microsoft. Finally,
when Microsoft later released the Active Desktop as part of Internet
Explorer 4.0, it added the restriction that OEMs were not to use
that feature to display third-party brands.
214. The several OEMs that in the aggregate represented over ninety
percent of Intel- compatible PC sales believed that the new restrictions
would make their PC systems more difficult and more confusing to
use, and thus less acceptable to consumers. They also anticipated
that the restrictions would increase product returns and support
costs and generally lower the value of their machines. Those OEMs
that had already spent millions of dollars developing and implementing
tutorial and registration programs and/or automatically-loading
graphical interfaces in the Windows boot sequence lamented that
their investment would, as a result of Microsoft's policy, be largely
wasted. Gateway, Hewlett-Packard, and IBM communicated their opposition
forcefully and urged Microsoft to lift the restrictions. Emblematic
of the reaction among large OEMs was a letter that the manager of
research and development at Hewlett- Packard sent to Microsoft in
March 1997. He wrote:
Microsoft's mandated removal of all OEM boot-sequence and auto-start
programs for OEM licensed systems has resulted in significant
and costly problems for the HP-Pavilion line of retail PC's. Our
data (as of 3/10/97) shows a 10% increase in W[indows]95 calls
as a % of our total customer support calls . . . . Our registration
rate has also dropped from the mid-80% range to the low 60% range.
There is also subjective data from several channel partners
that our system return rate has increased from the lowest of any
OEM (even lower than Apple) to a level comparable to the other
Microsoft OEM PC vendors. This is a major concern in that we are
taking a step backward in meeting customer satisfaction needs.
These three pieces of data confirm that we have been damaged
by the edicts that [ ] Microsoft issued last fall. . . .
From the consumer perspective, we are hurting our industry and
our customers. PC's can be frightening and quirky pieces of technology
into which they invest a large sum of their money. It is vitally
important that the PC suppliers dramatically improve the consumer
buying experience, out of box experience as well as the longer
term product usability and reliability. The channel feedback as
well as our own data shows that we are going in the wrong direction.
This causes consumer dissatisfaction in complex telephone support
process, needless in-home repair visits and ultimately in product
returns. Many times the cause is user misunderstanding of a product
that presents too much complexity to the common user. . . .
Our Customers hold HP accountable for their dissatisfaction
with our products. We bear [ ] the cost of returns of our products.
We are responsible for the cost of technical support of our customers,
including the 33% of calls we get related to the lack of quality
or confusion generated by your product. And finally we are responsible
for our success or failure in the retail PC market.
We must have more ability to decide how our system is presented
to our end users.
If we had a choice of another supplier, based on your actions
in this area, I assure you [that you] would not be our supplier
of choice.
I strongly urge you to have your executives review these decisions
and to change this unacceptable policy.
215. Even in the face of such strident opposition from its OEM
customers, Microsoft refused to relent on the bulk of its restrictions.
It did, however, grant Hewlett-Packard and other OEMs discounts
off the royalty price of Windows as compensation for the work required
to bring their respective alternative user interfaces into compliance
with Microsoft's requirements. Despite the high costs that Microsoft's
demands imposed on them, the OEMs obeyed the restrictions because
they perceived no alternative to licensing Windows for pre-installation
on their PCs. Still, the restrictions lowered the value that OEMs
attached to Windows by the amount of the costs that the restrictions
imposed on them. Furthermore, Microsoft's intransigence damaged
the goodwill between it and several of the highest-volume OEMs.
216. Microsoft was willing to sacrifice some goodwill and some
of the value that OEMs attached to Windows in order to exclude Netscape
from the crucial OEM distribution channel. Microsoft's restrictions
succeeded in raising the costs to OEMs of pre-installing and promoting
Navigator. These increased costs, in turn, were in some cases significant
enough to deter OEMs from pre-installing Navigator altogether. In
other cases, as is discussed in the next section, OEMs decided not
to pre-install Navigator after Microsoft brought still more pressure
to bear.
217. Microsoft's license agreements have never prohibited OEMs
from pre-installing programs, including Navigator, on their PCs
and placing icons and entries for those programs on the Windows
desktop and in the "Start" menu. The icons and entries that Microsoft
itself places on the desktop and in the "Start" menu have always
left room for OEMs to insert more icons and program entries of their
own choosing. In fact, Microsoft leaves enough space for an OEM
to add more than forty icons to the Windows desktop. Still, the
availability of space for added icons did not make including a Navigator
icon inexpensive for OEMs. Given the unavoidable presence of the
Internet Explorer and MSN icons, adding a Navigator icon would increase
the amount of Internet-related clutter on the desktop. This would
lead to confusion among novice users, which would in turn increase
the incidence of support calls and product returns. Microsoft made
this very point clear to OEMs in its attempts to persuade them not
to pre-install Navigator on their PCs. Furthermore, OEMs recognized
that including multiple Navigator icons in an attempt to draw users'
attention away from Internet Explorer would only increase the amount
of clutter on the desktop, thus adding to user confusion. Although
the Windows 98 OEM license does not forbid the OEM to set Navigator
as the default browsing software, doing so would fail to forestall
user confusion since, as the Court found in the previous section,
Windows 98 launches Internet Explorer in certain situations even
if Navigator is set as the default.
218. The restrictions on modifying the Windows boot sequence,
including the prohibition against automatically loading alternate
user interfaces, deprived OEMs of the principal devices by which
to lure users to Navigator over the high-profile presence of Internet
Explorer in the Windows user interface. An OEM remained free to
place an icon on the desktop that a user could click to invoke an
alternate user interface. Plus, once invoked, the interface could
be configured to load automatically the next time the PC was turned
on. This mode of presentation proved to be much less effective than
the one Microsoft foreclosed, however, for studies showed that users
tended not to trouble with selecting an alternate user interface;
they were content to use the interface that loaded automatically
the first time they turned on their PCs.
Furthermore, while Microsoft's restrictions never extended to
the interval between the time when the PC was turned on and the
time when Windows began loading from the hard drive into RAM, developing
anything more complicated than a simple splash screen to run in
that period would have involved, at a minimum, the writing of a
DOS utility and, at the maximum, the pre- installation of a second
operating system. Such measures were simply not worth the cost.
Finally, although the Windows 98 license does not prohibit an OEM
from including on the keyboard of its PCs a button that takes users
directly to an OEM-maintained site containing promotion for Navigator,
such a configuration is extremely costly for an OEM to implement,
and it represents a less effective form of promotion than automatically
advertising Navigator in the initial boot process.
219. In the spring of 1998, Microsoft began gradually to moderate
certain of the restrictions described above. The first sign of relaxation
came when Microsoft permitted some fifty OEMs to include ISPs of
their choice in Microsoft's Internet Connection Wizard. Then, in
late May and early June 1998, Microsoft informed seven of the highest-volume
OEMs that it was granting them the privilege of inserting their
own registration and Internet sign-up programs into the initial
Windows 98 boot sequence. If the user selected an IAP using the
OEM program, Microsoft's Internet Connection Wizard would not run
in the boot sequence. Microsoft subsequently extended these same
privileges to several other OEMs, upon their request.
220. It is important to note that Microsoft's tractability emerged
only after the restrictions had been in place for over a year, and
only after Microsoft had managed to secure favorable promotion for
Internet Explorer through the most important IAPs. Furthermore,
while Microsoft permitted the OEMs to include in their registration
and sign-up programs promotions for their own products (including
OEM-branded shell browsers built upon Internet Explorer) and for
ISPs (but only if and when those ISPs were selected by consumers
in the sign-up process), Microsoft continued to prohibit promotions
for any other non-Microsoft products, including Navigator. In a
single exception, Microsoft granted Gateway's request that it be
permitted to give consumers who used Gateway's sign-up process and
selected Gateway.net as their ISP an opportunity to choose Navigator
as their browser. Microsoft granted this permission orally, and
it did not extend similar privileges to any other OEMs.
221. Microsoft asserts that the restrictions it places on the
ability of OEMs to modify the Windows desktop and boot sequence
are merely intended to prevent OEMs from compromising the quality
and consistency of Windows after the code leaves Microsoft's physical
control, but before PC consumers first begin to experience the product.
In truth, however, the OEM modifications that Microsoft prohibits
would not compromise the quality or consistency of Windows any more
than the modifications that Microsoft currently permits. Furthermore,
to the extent that certain OEM modifications did threaten to impair
the quality and consistency of Windows, Microsoft's response has
been more restrictive than necessary to abate the threat. Microsoft
would not have imposed prohibitions that burdened OEMs and consumers
with substantial costs, lowered the value of Windows, and harmed
the company's relations with major OEMs had it not felt that the
measures were necessary to maximize Internet Explorer's share of
browser usage at Navigator's expense.
222. Microsoft asserts that it restricts the freedom of OEMs to
remove icons, folders, or "Start" menu entries that Microsoft places
on the Windows desktop in order to ensure that consumers will enjoy
ready access to the features that Microsoft's advertising has led
them to expect. The Windows trademark would be blemished, Microsoft
argues, if consumers could not easily find the features that impelled
them to purchase a Windows-equipped PC. At the same time that it
has put forward this justification, however, Microsoft has permitted
OEMs to de- activate Microsoft's Active Desktop and its associated
"channels" prior to shipment. More significant is the fact that
Microsoft's license agreements require OEMs to bear product support
costs. So if a consumer has difficulty locating a feature that he
wants to use, he will call a customer service representative employed
by the OEM that manufactured his PC. Since only a few calls erase
the profit earned from selling a PC system, OEMs are loathe to do
anything that will lead to consumer questions and complaints.
Therefore, if market research indicates that consumers want and
expect to see a certain icon on the Windows desktop, OEMs will not
remove it. Since OEMs share Microsoft's interest in ensuring that
consumers can easily find the features they want on their Windows
PC systems, Microsoft would not have prohibited OEMs from removing
icons, folders, or "Start" menu entries if its only concern had
been consumer satisfaction. In fact, by forbidding OEMs to remove
the most obvious means of invoking Internet Explorer, Microsoft
diminished the value of Windows PC systems to those corporate customers,
for example, who did not intend for their employees to browse the
Web and did not want a browser taking up hardware resources. Incidentally,
there is no merit in the hypothesis that OEMs might cause problems
in the functioning of the rest of Windows by removing Internet Explorer's
desktop icon and program entry, because Microsoft still allows users
to do exactly that.
223. According to Microsoft, its restrictions on the ability of
OEMs to insert programs into the initial Windows boot sequence are
meant to ensure that all Windows users experience the product the
way Microsoft intended it the first time they turn on their PC systems;
after all, there would be little incentive to develop a high-quality
operating-system product if OEMs were free to alter it for the worse
before handing it over to consumers. This argument might be availing
were it not for the fact that Microsoft currently allows several
of the largest-volume OEMs to make major modifications to the initial
Windows 98 boot sequence. Microsoft permits each of these OEMs to
configure its own splash screens, tutorials, registration wizards,
Internet sign-up wizards, and utilities so that they run automatically
when the consumer first turns on a new PC system. Either Microsoft
stopped caring about the consistency of the Windows experience in
1998, when it tempered its restrictions on modifications to the
boot sequence, or preserving consistency was never Microsoft's true
motivation for imposing those restrictions in the first place. With
all the variety that Microsoft now tolerates in the boot sequence,
including the promotion of OEM-branded browser shells, it is difficult
to comprehend how allowing OEMs to promote Navigator in their tutorials
and Internet sign-up programs would further compromise Microsoft's
purported interest in consistency.
224. Although Microsoft has tolerated a variety of OEM modifications
to the Windows boot sequence, it has never acquiesced to an alternate
user interface that automatically obscures the Windows desktop after
the PC system has finished booting for the first time. In demanding
the removal of such automatically loading user interfaces, Microsoft
has postulated that consumers who purchase Windows PCs expect to
see the Windows desktop when their PC systems finish booting for
the first time. If consumers instead see a different user interface,
they will be confused and disappointed. What is more, Microsoft
asserts, OEM shells have tended to be of lower quality than Windows.
One OEM's version allegedly even disabled the ability of a Windows
user to invoke functionality by clicking the right button of his
mouse.
225. The alternate shells that OEMs have developed may or may
not be of lower quality than Windows. One thing is clear, however:
If an OEM develops a shell that users do not like as much as Windows,
and if the OEM causes that shell to load as the default user interface
the first time its PCs are turned on, consumer wrath will fall first
upon the OEM, and demand for that OEM's PC systems will decline
commensurately with the resulting user dissatisfaction. The market
for Intel-compatible PCs is, by all accounts, a competitive one.
Consequently, any OEM that tries to force an unwanted, low-quality
shell on consumers will do so at its own peril. Had Microsoft's
sole concern been consumer satisfaction, it would have relied more
on the power of the market — and less on its own market power —
to prevent OEMs from making modifications that lead to consumer
disappointment.
226. At times, Microsoft has argued that the limitations it imposes
on the ability of OEMs to modify Windows originate in a desire to
prevent its platform from becoming fragmented, like UNIX. Microsoft
believes that ISVs benefit from the fact that Windows presents the
same platform for applications development, irrespective of the
underlying hardware. Certainly, Microsoft has a legitimate interest
in ensuring that OEMs do not take Windows under license, alter its
API set, and then ship the altered version. This fact does not add
credibility to Microsoft's stated justification, though, for two
reasons. First, Microsoft itself creates some degree of instability
in its supposedly uniform platform by releasing updates to Internet
Explorer more frequently than it releases new versions of Windows.
As things stand, ISVs find it necessary to redistribute Microsoft's
Internet-related APIs with their applications because of nonuniformity
that Microsoft has created in its own installed base. More important,
however, is the fact that none of the modifications that OEMs are
known to have proposed making would have removed or altered any
Windows APIs.
227. To the extent Microsoft is apprehensive that OEMs might,
absent restrictions, change the set of APIs exposed by the software
on their PCs, the concern is not that OEMs would modify the Windows
API set. Rather, the worry is that OEMs would pre-install, on top
of Windows, other software exposing additional APIs not controlled
by Microsoft. In the case of alternate user interfaces, Microsoft
is fearful that, if these programs loaded automatically the first
time users turned on their PCs, the programs would attract so much
usage that developers would be encouraged to take advantage of any
APIs that the programs exposed. Indeed, one user interface in particular
that OEMs could configure to load automatically and obscure the
Windows desktop — Navigator — exposes a substantial number of APIs.
Therefore, Microsoft's real concern has not been that OEM modifications
would fragment the Windows platform to the detriment of developers
and consumers. What has motivated Microsoft's prohibition against
automatically loading shells is rather the fear — once again — that
OEMs would pre-install and give prominent placement to middleware
that could weaken the applications barrier to entry.
228. Like most other software products, Windows 95 and Windows
98 are covered by copyright registrations. Since they are copyrighted,
Microsoft distributes these products to OEMs pursuant to license
agreements. By early 1998, Microsoft had made these licenses conditional
on OEMs' compliance with the restrictions described above. Notwithstanding
the formal inclusion of these restrictions in the license agreements,
the removal of the Internet Explorer icon and the promotion of Navigator
in the boot sequence would not have compromised Microsoft's creative
expression or interfered with its ability to reap the legitimate
value of its ingenuity and investment in developing Windows. More
generally, the contemporaneous Microsoft documents reflect concern
with the promotion of Navigator rather than the infringement of
a copyright. Also notable is the fact that Microsoft did not adjust
its OEM pricing guidelines when it lifted certain of the restrictions
in the spring of 1998.
229. Finally, it is significant that, while all vendors of PC
operating systems undoubtedly share Microsoft's stated interest
in maximizing consumer satisfaction, the prohibitions that Microsoft
imposes on OEMs are considerably more restrictive than those imposed
by other operating system vendors. For example, Apple allows its
retailers to remove applications that Apple has pre-installed and
to reconfigure the Mac OS desktop. For its part, IBM allows its
OEM licensees to override the entire OS/2 desktop in favor of a
customized shell or to set an application to start automatically
the first time the PC is turned on. The reason is that these firms
do not share Microsoft's interest in protecting the applications
barrier to entry.
- Pressuring OEMs to Promote Internet Explorer and to not Pre-Install
or Promote Navigator
230. Microsoft's restrictions on modifications to the boot sequence
and the configuration of the Windows desktop ensured that every
Windows user would be presented with ready means of accessing Internet
Explorer. Although the restrictions also raised the costs attendant
to pre-installing and promoting Navigator, senior executives at
Microsoft were not confident that those higher costs alone would
induce all of the major OEMs to focus their promotional efforts
on Internet Explorer to the exclusion of Navigator. Therefore, Microsoft
used incentives and threats in an effort to secure the cooperation
of individual OEMs.
231. First, Microsoft rewarded with valuable consideration those
large-volume OEMs that took steps to promote Internet Explorer.
For example, Microsoft gave reductions in the royalty price of Windows
to certain OEMs, including Gateway, that set Internet Explorer as
the default browser on their PC systems. In 1997, Microsoft gave
still further reductions to those OEMs that displayed Internet Explorer's
logo and links to Microsoft's Internet Explorer update page on their
own home pages. That same year, Microsoft agreed to give OEMs millions
of dollars in co-marketing funds, as well as costly in-kind assistance,
in exchange for their carrying out other promotional activities
for Internet Explorer.
232. Microsoft went beyond giving OEMs incentives to promote Internet
Explorer. The company's dealings with Compaq in 1996 and 1997 demonstrate
that Microsoft was willing to exchange valuable consideration for
an OEM's commitment to curtail its distribution and promotion of
Navigator. In early 1996, at around the same time that Compaq was
removing the MSN and Internet Explorer icons and program entries
from the Presario desktop, Compaq announced its intention to work
with Netscape for its internal Internet needs and on Internet server
initiatives. In response, Microsoft insisted that Compaq support
Microsoft's Internet initiatives throughout its business. To make
its displeasure felt, Microsoft initiated a series of cooperative
ventures with some of Compaq's competitors, including DEC and Hewlett-Packard.
233. When Compaq eventually agreed to restore the MSN and Internet
Explorer icons and program entries to the Presario desktop, it did
so because its senior executives had decided that the firm needed
to do what was necessary to restore its special relationship with
Microsoft. On May 13, 1996, Compaq signed an addendum extending
the firms' Frontline Partnership to the realm of network-related
products. Pursuant to the addendum, Compaq agreed to ship Internet
Explorer as the default browser product on all of its desktop and
server systems, to adopt and promote Internet Explorer internally,
and to focus the majority of Compaq's key network- oriented announcements
and marketing activities on Microsoft's technologies and strategy.
In September of the same year, Compaq agreed to offer Internet Explorer
as the preferred browser product for its Internet products and to
use two or more of Microsoft's hypertext markup language ("HTML")
extensions in the home page for each of those products. Then in
February 1997, Compaq committed itself to promote Internet Explorer
exclusively for its PC products in exchange for Microsoft's agreement
to pay Compaq a bounty for each user that signed up for Internet
access using a Compaq PC. Despite the view of some within Compaq
that the firm's goal should be "to feature the brand leader Netscape,"
Compaq elected not to resume the pre- installation of Navigator
on its Presario PCs after it removed the joint Spry/Navigator icon.
In fact, Compaq stopped pre-installing Navigator on all but very
small percentage of its PCs.
234. In return for Compaq's capitulation and revival of its commitment
to support Microsoft's Internet strategy, Microsoft has guaranteed
Compaq that the prices it pays for Windows will continue to be significantly
lower than the prices paid by other OEMs. Specifically, the operating
system licenses signed by Compaq and Microsoft in March 1998 gave
Compaq "[g]uaranteed better" pricing than any other OEM for Windows
95, Windows 98, and Windows NT Workstation (versions 4 and 5) until
April 2000. Compaq's license fee for Windows is so low that other
OEMs would still pay substantially more than Compaq even if they
qualified for all of the royalty reductions listed in Microsoft's
Market Development Agreements ("MDAs"). What is more, while Microsoft
requires other OEMs to verify actual compliance with particular
milestones in order to receive Windows 98 royalty reductions, Microsoft
has secretly agreed to provide the full amount of those discounts
to Compaq regardless of whether it actually satisfies the specified
conditions. In addition to a guaranteed most-favorable price on
Windows, Compaq has enjoyed free internal use of all Windows products
for PCs since March 1998.
235. Microsoft's relations with Compaq beginning in late 1996
illustrate the blandishments that Microsoft is willing to extend
to OEMs that ally with it to help it capture browser share. Microsoft's
relations with Gateway and the IBM PC Company, by contrast, reveal
the pressure that Microsoft is willing to apply to OEMs that show
reluctance to cooperate on this front.
236. In February 1997 a Microsoft account representative told
his counterpart at Gateway that Gateway's use of Navigator on its
own corporate network was a serious issue at Microsoft. He added
that Microsoft would not do any co-marketing and sales campaigns
with Gateway if the firm appeared to be anything but pro-Microsoft.
If Gateway would replace Navigator with Internet Explorer, Microsoft
would compensate Gateway for its investment in Netscape's product.
If Gateway refused, Microsoft might be compelled to audit Gateway's
internal use of Microsoft products. Gateway was separately told
by Microsoft representatives that its decision to ship Navigator
with its PCs could affect its business relationship with Microsoft.
Despite the pressure from Microsoft, Gateway refused to switch its
internal use to Internet Explorer or to stop shipping Navigator
with its PCs. Although Microsoft did not implement its more specific
threats, Gateway has consistently paid higher prices for Windows
than its competitors. Microsoft's actions not only corroborate the
evidence of its interest in suppressing the usage of Navigator,
they also demonstrate its ability to threaten recalcitrant customers
without losing their business.
237. Similarly, in early 1997, Microsoft tried to convince the
IBM PC Company to promote and distribute the upcoming release of
its new browser, Internet Explorer 4.0. At a meeting with IBM executives
in March 1997, Microsoft representatives threatened that, if IBM
did not pre-load and promote Internet Explorer 4.0 to the exclusion
of Navigator on its PCs, it would suffer "MDA repercussions." One
of the Microsoft representatives in attendance, Bengt Ackerlind,
stated that in return for IBM shipping its systems without any software
that competed with Microsoft, IBM would receive "soft dollars,"
marketing assistance, improved access to the source code of Windows
95 and Microsoft's BackOffice product, and the ability to self-certify
for Microsoft's Windows Hardware Quality Lab provisions. In a follow-up
meeting three weeks later, Microsoft representatives again insisted
that IBM distribute and promote Internet Explorer exclusively and
again offered soft dollars, marketing assistance, and MDA reductions
in return. Later that day, in a smaller meeting that Microsoft referred
to as "secret discussions," Ackerlind stated Microsoft's desire
that IBM promote Internet Explorer 4.0 exclusively and warned that
if IBM pre-installed Navigator on its PCs, "We have a problem."
238. The IBM PC Company refused to promote Internet Explorer 4.0
exclusively, and it has continued to pre-install Navigator on its
PCs. The difference in the ways that Compaq and IBM responded to
Microsoft's Internet-related overtures in 1996 and 1997 contributed
to the stark contrast in the treatment the two firms have since
received from Microsoft.
- Effect of Microsoft's Actions in the OEM Channel
239. Microsoft has largely succeeded in exiling Navigator from
the crucial OEM distribution channel. Even though a few OEMs continue
to offer Navigator on some of their PCs, Microsoft has caused the
number of OEMs offering Navigator, and the number of PCs on which
they offer it, to decline dramatically. Before 1996, Navigator enjoyed
a substantial and growing presence on the desktop of new PCs. Over
the next two years, however, Microsoft's actions forced the number
of copies of Navigator distributed through the OEM channel down
to an exiguous fraction of what it had been. By January 1998, Kempin
could report to his superiors at Microsoft that, of the sixty OEM
sub-channels (15 major OEMs each offering corporate desktop, consumer/small
business, notebook, and workstation PCs), Navigator was being shipped
through only four. Furthermore, most of the PCs shipped with Navigator
featured the product in a manner much less likely to lead to usage
than if its icon appeared on the desktop. For example, Sony only
featured Navigator in a folder rather than on the desktop, and Gateway
only shipped Navigator on a separate CD-ROM rather than pre-installed
on the hard drive. By the beginning of January 1999, Navigator was
present on the desktop of only a tiny percentage of the PCs that
OEMs were shipping.
240. To the extent Netscape is still able to distribute Navigator
through the OEM channel, Microsoft has substantially increased the
cost of that distribution. Although in January 1999 (in the midst
of this trial), Compaq suddenly decided to resume the pre-installation
of Navigator on its Presario PCs, Compaq's reversal came only after
Netscape agreed to provide Compaq with approximately $700,000 worth
of free advertising.
241. In sum, Microsoft successfully secured for Internet Explorer
— and foreclosed to Navigator — one of the two distribution channels
that leads most efficiently to the usage of browsing software. Even
to the extent that Navigator retains some access to the OEM channel,
Microsoft has relegated it to markedly less efficient forms of distribution
than the form vouchsafed for Internet Explorer, namely, prominent
placement on the Windows desktop. Microsoft achieved this feat by
using a complementary set of tactics. First, it forced OEMs to take
Internet Explorer with Windows and forbade them to remove or obscure
it — restrictions which both ensured the prominent presence of Internet
Explorer on users' PC systems and increased the costs attendant
to pre-installing and promoting Navigator. Second, Microsoft imposed
additional technical restrictions to increase the cost of promoting
Navigator even more. Third, Microsoft offered OEMs valuable consideration
in exchange for commitments to promote Internet Explorer exclusively.
Finally, Microsoft threatened to penalize individual OEMs that insisted
on pre-installing and promoting Navigator. Although Microsoft's
campaign to capture the OEM channel succeeded, it required a massive
and multifarious investment by Microsoft; it also stifled innovation
by OEMs that might have made Windows PC systems easier to use and
more attractive to consumers. That Microsoft was willing to pay
this price demonstrates that its decision-makers believed that maximizing
Internet Explorer's usage share at Navigator's expense was worth
almost any cost.
- Excluding Navigator from the IAP Channel
242. By late 1995, Microsoft had identified bundling with the client
software of IAPs as the other of the two most efficient channels for
distributing browsing software. By that time, however, several of the
most popular IAPs were shipping Navigator. Recognizing that it was starting
from behind, Microsoft devised an aggressive strategy to capture the
IAP channel from Netscape. In February 1996, Cameron Myhrvold, the Microsoft
executive in charge of the firm's relations with ISPs, outlined the
strategy in a memorandum to his colleagues and superiors within the
company:
It's essential we increase the share of our browser. Network operators
[(IAPs, plus the telephone and cable companies providing Internet
access services)] are important distributors and we will license at
no cost the Internet Explorer for distribution with their Internet
access business to maximize the distribution/adoption of IE as browser
of choice. We will attempt exclusive arrangements, fight for preferred
status, but settle for parity with NetScape. Even offering IE for
free will not win us every sale. In the U.S. we will offer IE broadly
to net[work ]op[erator]s and IAPs including the many hundreds of smaller
IAPs.
In the first step of this strategy, Microsoft enticed ISPs with small
subscriber bases to distribute Internet Explorer and to make it their
default browsing software by offering for free both a license to distribute
Internet Explorer and a software kit that made it easy for ISPs with
limited resources to adapt Internet Explorer for bundling with their
services.
243. Those who planned and implemented Microsoft's IAP campaign believed
that, if IAPs gave new subscribers a choice between Internet Explorer
and Navigator, most of them would pick Navigator — both because Netscape's
brand had become nearly synonymous with the Web in the public consciousness
and because Navigator had developed a much better reputation for quality
than Internet Explorer. To compensate for Navigator's advantage, Microsoft
reinforced its free distribution of Internet Explorer licenses and the
access kits with three tactics designed to induce IAPs with large subscriber
bases not only to distribute and promote Internet Explorer, but also
to constrain severely their distribution and promotion of Navigator
and to convert those of their subscribers already using Navigator to
Internet Explorer.
244. Microsoft's first tactic was to develop and include with Windows
an Internet sign- up program that made it simple for users to download
access software from, and subscribe to, any IAP appearing on a list
assembled by Microsoft. In exchange for their inclusion on this list,
the leading IAPs agreed, at Microsoft's insistence, to distribute and
promote Internet Explorer, to refrain from promoting non-Microsoft Web
browsing software, and to ensure that they distributed non-Microsoft
browsing software to only a limited percentage of their subscribers.
Although the percentages varied by IAP, the most common figure was seventy-five
percent.
245. In a similar tactic aimed at a more important IAP sub-channel,
Microsoft created an "Online Services Folder" and placed an icon for
that folder on the Windows desktop. In exchange for the pre-installation
of their access software with Windows and for the inclusion of their
icons in the Online Services Folder, the leading OLSs agreed, again
at Microsoft's insistence, to distribute and promote Internet Explorer,
to refrain from promoting non-Microsoft Web browsing software, and to
distribute non-Microsoft browsing software to no more than fifteen percent
of their subscribers.
246. Finally, Microsoft gave IAPs incentives to upgrade the millions
of subscribers already using Navigator to proprietary access software
that included Internet Explorer. To IAPs included in the Windows Internet
sign-up list, Microsoft offered the incentive of reductions in the referral
fees it charged for inclusion in the list. To OLSs in the Online Services
Folder, Microsoft offered cash bounties.
247. In sum, Microsoft made substantial sacrifices, including the
forfeiture of significant revenue opportunities, in order to induce
IAPs to do four things: to distribute access software that came with
Internet Explorer; to promote Internet Explorer; to upgrade existing
subscribers to Internet Explorer; and to restrict their distribution
and promotion of non-Microsoft browsing software. The restrictions on
the freedom of IAPs to distribute and promote Navigator were far broader
than they needed to be in order to achieve any economic efficiency.
This is especially true given the fact that Microsoft never expected
Internet Explorer to generate any revenue. Ultimately, the inducements
that Microsoft offered IAPs at substantial cost to itself, together
with the restrictive conditions it imposed on IAPs, did the four things
they were designed to accomplish: They caused Internet Explorer's usage
share to surge; they caused Navigator's usage share to plummet; they
raised Netscape's own costs; and they sealed off a major portion of
the IAP channel from the prospect of recapture by Navigator. As an ancillary
effect, Microsoft's campaign to seize the IAP channel significantly
hampered the ability of consumers to make their choice of Web browser
products based on the features of those products.
- The Internet Explorer Access Kit Agreements
248. In September 1996, Microsoft announced the availability of
the "Internet Explorer Access Kit," or "IEAK." By simply accessing
the correct page on Microsoft's Web site and clicking on a box to
indicate agreement with the license terms, any IAP could download
the IEAK, which included a copy of Internet Explorer. With their
technical knowledge, sophisticated equipment, and high-bandwidth
connections, IAPs found it very convenient to download Internet
Explorer and the IEAK from Microsoft's Web site.
249. Using the IEAK, an IAP could create a distinctive identity
for its service in as little as a few hours by customizing the title
bar, icon, start and search pages, and "favorites" in Internet Explorer.
The IEAK also made the installation process easy for IAPs. With
the IEAK, IAPs could avoid piecemeal installation of various programs
and instead create an automated, comprehensive installation package
in which all settings and options were pre-configured. In addition
to ease of customization and installation, the IEAK enabled each
IAP to preset the default home page so that customers would be taken
to the IAP's Web site whenever they logged onto the Internet. This
was important to IAPs because setting the user's home page to the
IAP's Web site gave the IAPs advertising and promotional opportunities.
Netscape, by contrast, refused to allow its IAP licensees to move
Navigator's home page from Netscape's NetCenter portal site.
250. Many IAPs would have paid for the right to distribute Internet
Explorer. Indeed, Netscape was charging IAPs between fifteen and
twenty dollars per copy of Navigator they distributed. Because of
the features and convenience it offered, the IEAK significantly
increased the price that IAPs would have been willing to pay. Nevertheless,
Microsoft licensed the IEAK, including Internet Explorer, to IAPs
at no charge. At the time Microsoft released the IEAK, Netscape
did not offer IAPs an analogous tool. Although Netscape eventually
followed Microsoft's lead by introducing a tool kit similar to the
IEAK known as Mission Control, that kit was not made available to
IAPs until June 1997 — a full nine months after the release of the
IEAK. Whereas IAPs could obtain the IEAK for free, Netscape initially
charged $1,995 for each copy of Mission Control.
251. Approximately 2,500 IAPs executed an electronic copy of a
license agreement for the IEAK. Included in that number were the
eighty IAPs that together accounted for ninety-five percent of all
Internet access subscribers in the United States. The IAPs that
executed an IEAK license agreement agreed to make Internet Explorer
their "preferred" browsing software. The term "preferred" was not
defined in the license, and Microsoft did not investigate the extent
to which Internet Explorer was in fact enjoying "preferred" status
in the client software of its IEAK licensees. In fact, other than
to provide information and respond to technical questions, Microsoft
made no effort to maintain regular direct contact with the vast
majority of the IAPs that had executed licenses.
252. Whether or not IEAK licensees actually gave Internet Explorer
preferred status, Microsoft's decision to license Internet Explorer
and the IEAK to IAPs at no charge beguiled many small ISPs that
otherwise would not have done so into distributing Internet Explorer
to their subscribers. By giving up the opportunity to charge for
Internet Explorer, and also by developing the IEAK at substantial
cost and offering it at no charge, Microsoft thus increased the
flow of Internet Explorer through the crucial IAP channel.
- The Referral Server Agreements
253. In the late summer of 1996, at around the time that it announced
the availability of the IEAK, Microsoft also introduced the Internet
Connection Wizard ("ICW") as a feature in Windows 95 OSR 2. If a
user clicked on the ICW icon appearing on the Windows 95 desktop,
the program would automatically dial into a computer maintained
by Microsoft called the Windows Referral Server. The Referral Server
would then transmit to the user's computer a list of IAPs that provided
connections to the Internet in the user's geographic locale. Included
in this list would be information about each IAP's service, including
its prices. If the user then indicated a desire to sign up for one
of the listed IAPs by clicking on the appropriate entry, the user
would be connected to an IAP-maintained server that would automatically
configure the user's PC to work properly with the IAP service.
254. For several reasons, IAPs viewed inclusion in the Windows
95 Referral Server as a valuable form of promotion. First, the ICW
icon appeared prominently on the desktop of every PC running Windows
95 (from OSR 2 onwards), which, by the middle of 1996, accounted
for the vast majority of all new PCs being shipped. Because Microsoft
prohibited OEMs from removing any of the icons that it placed on
the Windows desktop, IAPs knew that the ICW would confront all users
of Windows 95 PCs the first time they turned on their systems. Second,
inclusion in the Referral Server was a highly focused form of promotion,
because the IAP list provided by the Referral Server presented itself
to users who had already indicated some interest in signing up for
Internet access. Third, the easy-to-use features of the ICW heightened
the probability that a user who started using the program would
complete the process of subscribing to an IAP. Finally, inclusion
in the Referral Server was a relatively inexpensive means of distribution
because, unlike "carpet bombing" with CD-ROMs, it did not require
the production and dissemination of anything tangible.
255. Despite the value that IAPs attached to placement in the
Windows 95 Referral Server, Microsoft elected to charge those that
it granted placement a low bounty price that merely went to pay
down the cost of maintaining the necessary server computers and
leasing the network they ran on. Although it could have been exchanged
for large bounties from IAPs, Microsoft decided to exchange placement
in the Referral Server, along with other valuable consideration,
for the agreement of the selected IAPs to promote and distribute
Internet Explorer preferentially over Navigator and to convert existing
subscribers from Navigator to Internet Explorer.
256. Between July 1996 and September 1997, Microsoft entered into
Referral Server agreements with fourteen IAPs. These were AOL, AT&T
WorldNet, Brigadoon, Concentric, Digex, EarthLink, GTE, IDT, MCI,
MindSpring, Netcom, Prodigy, Sprint, and Spry. Three of these companies
did not take the technical steps necessary to appear in the Referral
Server even though they had signed agreements with Microsoft. Brigadoon
failed to take those steps because it filed for bankruptcy. For
its part, Digex left the ISP business to focus exclusively on Web
hosting. GTE, on the other hand, decided to enter promotion agreements
directly with OEMs rather than abide by the conditions Microsoft
attached to inclusion in the Referral Server. Although AOL eventually
entered a listing into the Referral Server, it waited until November
1998, after the release of Windows 98. The remaining IAPs in the
Windows 95 Referral Server represented ten of the top fifteen Internet
access providers in the North America.
257. Pursuant to the terms of the agreements it signed with these
ten IAPs, Microsoft provided each with a listing in the Windows
95 Referral Server and mentioned them in press releases and marketing
activities relating to the ICW. Microsoft also licensed Internet
Explorer to them at no charge, and assisted them in customizing
Internet Explorer for use with their services. In exchange, the
listed IAPs agreed to offer Internet Explorer as the "standard,"
"default," or "preferred" browsing software with their services.
For example, Microsoft's agreement with EarthLink required it to
"[o]ffer the Microsoft Internet Explorer as the standard web browser
for [EarthLink's] ISP Service."
258. The agreements also imposed several restrictions on the ability
of the IAPs in the Referral Server to promote and distribute non-Microsoft
browsing software. First, the agreements required the IAPs to limit
their promotion of browser products other than Internet Explorer.
For example, the agreements prohibited the IAPs from providing any
links or other promotions for Netscape on their services' home pages.
In fact, an IAP listed in the Referral Server was not permitted,
either in its Referral Server entry or elsewhere, to express or
imply to its subscribers that they could use a browser other than
Internet Explorer with the IAP's service. Second, the agreements
prohibited the ten IAPs from providing non-Microsoft browsing software
to their customers unless a subscriber specifically requested it.
Third, the agreements gave Microsoft the right to remove from the
Referral Server any IAP, that in two consecutive calendar quarters,
allowed non-Microsoft browsing software to climb above a specific
percentage of all browsing software distributed by that IAP. Thus,
even if the IAP ensured that all users subscribing to its service
through the Internet Connection Wizard received only Internet Explorer
with their subscriptions, Microsoft could nevertheless remove the
ISP from the Referral Server if copies of Navigator made up more
than the specified percentage of the browsing software that the
IAP distributed through all sub-channels. Twenty-five percent was
the figure specified in most of the agreements. For Netcom and Sprint,
the figure was fifty percent, while for IDT it was fifteen.
259. In addition to conditioning placement in the Referral Server
on an IAP's undertaking to limit its promotion and distribution
of non-Microsoft browsing software, Microsoft through its Referral
Server agreements exchanged valuable consideration for the commitment
of the ten IAPs to convert existing subscribers from Navigator to
Internet Explorer. Microsoft also compensated them for employing
Internet Explorer-specific technologies whose dissemination would
encourage the developers of network-centric applications to focus
on APIs controlled by Microsoft, as opposed to Netscape or Sun.
For example, in exchange for Netcom's commitment to offer deals
to its customers encouraging them to upgrade their software to the
newest version that bundled Internet Explorer, Microsoft subtracted
nine dollars from the referral fee. Microsoft also deposited one
dollar into a co-marketing fund for each Netcom subscriber who actually
upgraded to client software that bundled Internet Explorer.
260. Where the agreement with Microsoft required the IAP to abandon
a distribution agreement already entered with Netscape, Microsoft
compensated the IAP with additional consideration. For instance,
in response to a representation from MCI that it had already committed
to pay Netscape between five and ten million dollars for Web browsing
software, Microsoft agreed to grant MCI a credit of five dollars
toward a co-marketing fund (not to exceed five million dollars)
for each copy of Internet Explorer that MCI distributed to an MCI
Internet access customer who had not already received a copy. Finally,
Microsoft offered yet further reductions in referral fees to the
IAPs using Microsoft-controlled technologies likely to stimulate
developers to focus their attention on Windows-specific software
interfaces rather than the cross- platform ones provided by Netscape
and Sun. For example, Microsoft offered to reduce EarthLink's per-copy
referral fee by ten dollars in exchange for EarthLink's use of at
least two ActiveX controls in the design of its home page and the
use of Microsoft FrontPage server extensions on its Web hosting
servers.
261. Microsoft could have covered the cost of developing and maintaining
the ICW and the Windows Referral Server, and even made a profit,
by charging higher referral fees than it did to the favored IAPs.
Instead, Microsoft bartered away so much of the referral fees it
otherwise could have charged that the costs of running the Windows
Referral Server have thus far exceeded the payments Microsoft has
received from the favored IAPs. Microsoft readily made this sacrifice
in order to induce the important IAPs to take actions that aided
Microsoft's effort to exclude Navigator from the IAP channel.
262. Microsoft's motivation for the limits it placed on the distribution
of non- Microsoft browsing software by IAPs in the Windows 95 Referral
Server could not have been simply a desire to ensure that IAPs did
not promote competing browsing software to subscribers acquired
with Microsoft's help. The agreements gave Microsoft the right to
dismiss an IAP that either told its subscribers they could choose
Navigator or distributed too many copies of non- Microsoft browser
products. This was true even if the IAP never mentioned Navigator
in its Referral Server entry and distributed nothing but Internet
Explorer to the new subscribers it garnered from the ICW. In light
of that fact, the Windows 95 Referral Server agreements emerge as
something very different from typical cross-marketing arrangements.
Furthermore, while facilitating for consumers the process of connecting
to the Internet may have been one motivation for developing the
Internet Connection Wizard, that motivation cannot explain the exclusionary
terms in the Referral Server agreements. After all, contractually
limiting the distribution of non-Microsoft browsing software by
IAPs did nothing to help consumers gain easy access to the Internet.
The real motivation behind the exclusionary terms in the Referral
Server agreements was Microsoft's conviction that even if IAPs were
compelled to promote and distribute Internet Explorer, the majority
of their subscribers would nevertheless elect to use Navigator if
the IAPs made it readily available to them. Microsoft therefore
paid a high price to induce the most popular IAPs to encourage their
customers to use Internet Explorer and discourage them from using
Navigator.
263. Absent the conditions Microsoft placed on inclusion in the
Referral Server, the IAPs would have had no reason to limit the
percentage of subscribers that used one particular browser or another.
As Cameron Myhrvold explained to colleagues within Microsoft in
April 1997, "ISPs are agnostic on the browser. It is against their
nature to favor a browser or even a platform. This has been damn
hard for us to influence." In fact, Myhrvold told the same colleagues
that he "had a hard time guiding the ISPs to IE loyalty even when
I make them sign explicit terms and conditions in a legal contract."
264. Microsoft monitored the extent of compliance of IAPs in the
Referral Server with the shipment restrictions contained in their
agreements. It did this by periodically asking each of the ten IAPs
to send Microsoft estimates of the number of copies of Internet
Explorer — and non-Microsoft browsing software — they were shipping.
When, from time to time, various IAPs in the Windows 95 Referral
Server (specifically Netcom, Concentric, and EarthLink) fell below
the shipment quotas specified in their agreements with Microsoft,
executives at Microsoft reacted by contacting the derelict companies
and urging them to meet their obligations. Concentric and Earthlink
eventually (by May 1998, if not sooner) reduced their Navigator
shipments enough to bring them below the required percentage. Microsoft
never formally removed an IAP from the Referral Server. For a time
after the release of Internet Explorer 4.0, however, no entry for
Netcom appeared in the new version of Referral Server. This was
at least in part due to Netcom's failure to ensure that Internet
Explorer accounted for fifty percent of the browsing software it
shipped.
265. In addition to failing, for a time, to meet the required
shipment quotas, Concentric and EarthLink occasionally promoted
Navigator in ways that were arguably prohibited by the Referral
Server agreements. Despite their delinquency, Microsoft never removed
Concentric and EarthLink from the Referral Server. Of much less
concern to Microsoft than the shipment and promotion of Navigator
by IAPs having signed Referral Server agreements was the fact that
Concentric and EarthLink, along with Netcom and three of the other
IAPs in the Windows 95 Referral Server, also appeared in Netscape's
referral server. This did not violate either the letter or the spirit
of their agreements with Microsoft, for while the agreements prohibited
the IAPs in the Windows 95 Referral Server from promoting Navigator,
they did not purport to hinder Netscape in promoting those IAPs.
At any rate, Microsoft did not have reason to be concerned with
the appearance of its IAP partners in Netscape's referral server,
whose main exposure was to existing Navigator users interested in
switching their IAPs. A listing in Netscape's referral server did
not help Netscape get its software on users' systems, and pursuant
to their agreements with Microsoft, the six ISPs in both Microsoft's
and Netscape's referral servers were actually placing Navigator
on far fewer users' systems than they would have in the absence
of their agreements with Microsoft.
266. In reaction to Microsoft's Referral Server agreements, Netscape
entered into agreements of its own with five of the Regional Bell
Operating Companies (RBOCs). Under the Netscape agreements, the
RBOCs agreed to make Navigator their default Web browsing software
in all cases, except those in which subscribers affirmatively requested
other browsing software. In exchange, Netscape agreed to list the
RBOCs first among the IAPs included in Netscape's referral server.
In contrast to Microsoft's agreements, Netscape's agreements with
the RBOCs imposed no restrictions on their ability to distribute
other browsing software, such as Internet Explorer, whether in response
to customer requests or otherwise. Furthermore, Netscape's contracts
with the RBOCs required them to set Navigator as the default only
so long as AT&T and MCI were both restricted by their agreements
with Microsoft from providing Navigator to their customers on par
with Internet Explorer. In any event, the RBOCs currently deliver
Internet access to less than five percent of the Internet access
subscribers in North America.
267. Microsoft's Windows 95 Referral Server agreements were of
relatively short duration. For example, Microsoft's agreement with
EarthLink provided that it would expire two years from its signing
in August 1996 unless either party elected to terminate it sooner,
and both Microsoft and EarthLink were free to terminate the agreement
for any reason on thirty days' written notice. The other Referral
Server agreements were similarly short in term.
268. In April 1998, coincident with rising public criticism, the
impending appearance of Bill Gates before a Congressional panel
on competition in the computer industry, and the imminent filing
of these lawsuits, Microsoft unilaterally waived the most restrictive
provisions in the Windows 95 Referral Server agreements. Specifically,
Microsoft waived the provisions that restricted the IAPs' ability
to distribute non-Microsoft Web browsing software. With respect
to promotion, the revised agreements merely required the IAPs to
promote Internet Explorer at least as prominently as they promoted
non-Microsoft browsers. Notably, however, the agreements still required
the IAPs to make Internet Explorer their default browser.
269. By the end of September 1998, all of the Windows 95 Referral
Server agreements had expired by their own terms. Microsoft's Windows
98 Referral Server agreements do not contain any provisions requiring
that Internet Explorer make up any particular percentage of the
IAPs' shipments. Furthermore, the Windows 98 Referral Server agreements
offer no discounts on the referral fees predicated on the IAPs'
adoption of any particular Microsoft technology or licensing any
Microsoft product. With regard to promotion, the agreements require
only that the IAPs promote Internet Explorer no less favorably than
non-Microsoft Web browsing software. Still, for those IAPs concerned
with the costs associated with supporting two browser products,
this parity requirement is enough to compel them not to not make
Navigator readily available to their subscribers. The new agreements
have a one-year term and are terminable at will by the IAP on ninety
days' notice.
270. IAPs no longer value placement in the Windows Referral Server
as much as they did in 1996. For one reason, the ICW has apparently
not been responsible for as many new IAP subscriptions as either
Microsoft or the IAPs anticipated. In fact, from the third quarter
of 1996 through the third quarter of 1998, only 2.1% of new users
of the Internet became IAP subscribers through the Windows Referral
Server. Partially on account of this realization, Microsoft began
in the spring of 1998 to surrender significant control over the
Internet sign-up process to OEMs. As described above, Microsoft
gave the top fifty OEMs in the world the right to select both the
IAPs (up to five) that appear in the Windows 98 Referral Server
on the PC systems they sell and to determine the order in which
those IAPs appear. Microsoft also permits the fifty OEMs to keep
any bounties that the IAPs pay them for inclusion in the Referral
Server. The OEMs simply pay Microsoft a nominal fee (a flat fee
of approximately $10,000 plus thirty cents per subscriber) to defray
the costs of operating the Referral Server program. Furthermore
(as is also discussed above), Microsoft has allowed seven of the
highest-volume OEMs to supplant the ICW altogether.
271. By both lifting restrictions in its agreements and ceding
control over the IAP sign- up process to OEMs, in the spring of
1998, Microsoft relaxed the strictures that it had imposed in the
fall of 1996 on the distribution and promotion of Web browsing software
by the most popular IAPs. In the year-and-a-half that they were
in full force, however, the restrictive terms in the Referral Server
agreements induced the major IAPs to customize their client software
for Internet Explorer, gear their promotional and marketing activities
to Microsoft's technologies, and convert substantial portions of
their installed bases from Navigator to Internet Explorer. They
may have welcomed more flexibility to distribute Navigator to those
subscribers that expressed demand for it, but they had no incentive
to launch an expensive campaign to reverse the tide that Microsoft's
restrictions had already generated. Consequently, few ISPs have
responded to Microsoft's contractual dispensations by increasing
significantly their distribution and promotion of Navigator. Furthermore,
one of the reasons Microsoft felt comfortable relaxing the controls
on IAPs in the spring of 1998 was that it had achieved — and planned
to maintain — control over the distribution and promotion of Web
browsing software by AOL and the other major OLSs, whose combined
subscriber base comprised most of North America's Internet users.
- The Online Services Folder Agreements
272. In late 1995 and early 1996, senior executives at Microsoft
recognized that AOL accounted for a substantial portion of all existing
Internet access subscriptions and that it attracted a very large
percentage of new IAP subscribers. Indeed, AOL was and is the largest
and most important IAP. The Microsoft executives thus realized that
if they could convince AOL to distribute Internet Explorer with
its client software instead of Navigator, Microsoft would — in a
single coup — capture a large part of the IAP channel for Internet
Explorer. In the early spring of 1996, therefore, Microsoft exchanged
favorable placement on the Windows desktop, as well as other valuable
consideration, for AOL's commitment to distribute and promote Internet
Explorer to the near exclusion of Navigator. AOL's acceptance of
this arrangement has caused an enormous surge in Internet Explorer's
usage share and a concomitant decline in Navigator's share. To supplement
the effects of the AOL deal, Microsoft entered similar agreements
with other OLSs. The importance of these arrangements to Microsoft
is evident in the fact that, in contrast to the restrictive terms
in the Windows Referral Server agreements, Microsoft has never waived
the terms that require the OLSs to distribute and promote Internet
Explorer to the near exclusion of Navigator.
- AOL
273. Prior to 1995, OLS subscribers used proprietary access
software to view only their OLS's specialized content. Beginning
in 1994, however, the public became increasingly interested
in accessing information on the Web. So to keep from losing
subscribers and to attract new ones, OLSs upgraded their services
to provide access to the Web. In November 1994, for example,
AOL purchased BookLink and incorporated its Web browsing software
into AOL's proprietary access software to enable AOL's subscribers
to access and view Web content.
274. While public awareness of the Web was taking hold, companies
like Netscape and Microsoft were hard at work developing Web
browsing software. By the fall of 1995, a number of OLSs, including
AOL, had decided not to devote the considerable resources that
would have been required to keep up with this rapid pace of
innovation. They chose instead to license state- of-the-art
Web browsing technology from a separate supplier. Microsoft
saw AOL, with its subscriber base then approaching five million,
as a potential breakthrough opportunity — a way for Microsoft
quickly to obtain credibility in Web browsing technology as
well as usage share for the current version of its browsing
software, Internet Explorer 3.0.
275. In November 1995, David Cole of AOL advised Pete Higgins
of Microsoft that AOL was looking for Web browsing software
to license and incorporate into future versions of its proprietary
access software. Bill Gates and AOL's Chairman, Steve Case,
subsequently spoke several times on the telephone. In those
conversations, Gates urged that AOL representatives meet with
Microsoft technical personnel in order to get a better sense
of the quality and features of Internet Explorer 3.0. For his
part, Case told Gates that he wanted Microsoft to include AOL's
client software with Windows such that AOL received the same
desktop promotion that MSN enjoyed. Gates insisted that such
favorable treatment of AOL within Windows was out of the question.
276. Lower down in Microsoft's chain of command, executives
took issue with Gates' reluctance to grant AOL favorable placement
in Windows. In October 1995, before Gates and Case began talking,
a group of Microsoft executives prepared for Gates a memorandum
on the company's Internet Explorer efforts entitled, "How to
Get to 30% Share in 12 Months." The executives wrote that
we need to remove barriers to browser adoption by Online
Services and Internet Access Providers. Today MSN is an access
service . . . , an online service . . . , and an Internet
site . . . ; in other words, it competes with everyone. By
bundling MSN in the Windows box, we are threatening ISV's
in each of these areas, who in turn have no incentive to promote
our Internet Browser.
277. One of the proposals the executives put forward was that
Microsoft "Open Up the Windows Box." In other words, the executives
believed that, in exchange for favorable treatment of Internet
Explorer, Microsoft should include the client software of IAPs
in Windows and give those services prominent placement on the
desktop, even if such placement drew attention away from MSN.
Over the months that followed, senior Microsoft executives came
to the conclusion that opening up the Windows box to MSN's competitors
was a necessary price to pay for increasing Internet Explorer's
share of browser usage.
278. Case ultimately agreed to visit Microsoft's Redmond campus
in January 1996. In preparation for that meeting, Microsoft
purchased PC systems from five different OEMs (Compaq, Hewlett-Packard,
IBM, Packard Bell, and NEC) at retail outlet stores. When they
turned these systems on, employees at Microsoft discovered that
the OEMs were already shipping AOL's software pre-installed
on their PCs and giving the AOL service more prominent placement
than MSN on the Windows desktop. From the fact that AOL was
already enjoying broad distribution and promotion on the Windows
desktop through agreements with OEMs, several senior Microsoft
executives, in particular Paul Maritz and Brad Chase, concluded
that Microsoft would not be giving up all that much if it traded
placement on the Windows desktop for AOL's commitment to promote
and distribute Internet Explorer. At least initially, Gates
took a different lesson from the experiment with the five PC
systems. He seems to have felt that Microsoft should react not
by ‘opening up the Windows box,' but rather by clamping down
on the ability of OEMs to configure the Windows desktop. Indeed,
the discovery that OEMs were promoting AOL on the Windows desktop
was one of the things that led him to complain to Joachim Kempin
on January 6, 1996 about OEMs that were bundling non-Microsoft
Internet services and software and displaying it on their PCs
"in a FAR more prominent way than MSN or our Internet browser."
279. Case's insistence that Microsoft promote AOL on the Windows
desktop stemmed partly from factors other than the additional
subscriptions expected to come from the OLS folder. After all,
AOL already enjoyed distribution agreements with major OEMs
that placed an AOL icon on the desktop of millions of new PC
systems. But given that its OEM agreements tended to be short-term
and somewhat tenuous, and considering how sensitive the OEMs
were to Microsoft's will, AOL executives realized that AOL's
position on the Windows desktop would be more secure if it met
with some degree of contractual acquiescence from Microsoft.
After all, whereas Microsoft retaliated in subtle and not-so-subtle
ways against OEMs, such as IBM, that pre-installed software
on their PCs that Microsoft found minatory, it pronounced more
extreme sanctions against OEMs, such as Compaq, that had the
temerity to remove icons and program entries from the Windows
desktop that Microsoft had placed there. Case had reason to
see value, then, in shifting AOL from being a source of software
at whose promotion Microsoft took umbrage to the dispenser of
software whose placement on the Windows desktop Microsoft guaranteed.
Moreover, obtaining Microsoft's commitment to include the AOL
client software and prominent promotion for AOL in every copy
of Windows would place AOL on all Windows 95 PC systems, including
those sold by the multitude of OEMs whose shipment volumes were
too low to warrant the negotiation of separate distribution
deals. Furthermore, placement on the desktop in some fashion
would improve AOL's negotiating position when it asked individual
large OEMs to place an AOL icon directly on the desktop of their
PC systems. Whatever the reason, and irrespective of the considerable
value that Microsoft offered AOL apart from desktop placement,
Case made clear to Gates his sincere conviction that AOL would
not recruit its subscribers to Internet Explorer unless Microsoft
included AOL's client software in Windows and promoted AOL in
some form on the Windows desktop.
280. Four days before Case was due to arrive at Microsoft's
campus, Gates sent an E- mail outlining Microsoft's goals in
negotiating a deal with AOL to the responsible Microsoft executives.
He wrote:
What we want from AOL is that for a period of time — say
2 years — the browser that they give out to their customers
and the one they mention and put on their pages and the one
they exploit is ours and not Netscape[']s. We need for them
to make our browser available as the browser to existing and
new customers. We have to be sure that we don't allow them
to promote Netscape as well. We want all the hits that come
off of AOL to register on servers as our browser so people
can start seeing us as having measurable browser share.
Gates understood that if AOL gave assurance that its subscribers
used Internet Explorer when browsing the Web, the measure of
browser usage share data to which application developers paid
most attention — i.e., server "hit" data — would show a significant
rise in Internet Explorer's usage share. Gates also realized
that such a commitment by AOL was worth seeking even if it lasted
for only a couple of years.
281. On January 18, 1996, Case arrived at Microsoft's campus
with three other AOL executives. During the first meeting, Microsoft
described the componentized architecture of Internet Explorer
3.0 that would allow AOL to embed the browsing software into
AOL's access software. The AOL executives viewed componentization
as a highly attractive feature, because AOL wanted its subscribers
to feel they were using an AOL service whether they were viewing
proprietary AOL content or browsing content on the Web. In fact,
Case and the other AOL representatives told their Microsoft
hosts that AOL wanted total control over the "browser frame"
(the windows in which Web content is displayed) to make it distinctive
to AOL. In other words, AOL wanted no menus, dialog boxes, or
other visible signs that would alert AOL users to the fact that
they were using Web browsing software supplied by a company
other than AOL.
282. At the end of the meeting, Case expressly acknowledged
the attractiveness of Microsoft's componentized approach. Notably,
Netscape had not yet developed a componentized version of Navigator.
Netscape had assured AOL that it would do so, and AOL believed
that Netscape was capable of eventually making good on its pledge,
but the fact remained that Microsoft had already completed a
componentized version of Internet Explorer. Case was impressed
enough with Internet Explorer 3.0 that when he returned to AOL
he told a number of fellow executives that, when it came to
AOL's technical considerations, Microsoft perhaps enjoyed an
edge over Netscape. Still, the AOL executives saw Navigator
as enjoying better brand recognition and demonstrated success
in the marketplace.
283. Later in the day on January 18, Case and his team also
met with Gates, Chase, and Chase's direct superior, Brad Silverberg,
to discuss the business aspects of a potential AOL- Microsoft
alliance. At one point during the meeting, Case again told Gates
that AOL needed inclusion of its client software in Windows
and prominent placement on the Windows desktop if there was
to be a closer relationship between the two companies. Gates
expressed frustration that Case continued to insist on getting
an AOL icon on the Windows desktop in addition to the technology,
engineering assistance, and technical support Microsoft was
offering AOL. Despite the obvious importance that Case attached
to desktop placement, Gates said he would not agree to that
condition.
284. A week after the January 18 meeting, Chase and Silverberg
met with Gates. They reiterated that, whether Gates liked it
or not, an AOL icon already appeared on the desktop of the major
OEMs' PCs. Given that fait accompli, they argued, Microsoft
would gain much more than it would lose by agreeing to place
AOL on the Windows desktop in exchange for AOL's commitment
to promote and distribute Internet Explorer. This time, Gates
agreed to give AOL some sort of promotion in Windows. He continued
to insist, however, that Microsoft not place an AOL icon directly
on the Windows desktop. Rather, Gates agreed to include AOL,
along with other OLSs, in a generic "Online Services Folder,"
an icon for which would reside on the desktop. Since MSN enjoyed
a branded icon directly on the desktop, including AOL in the
OLS folder would maintain its inferior status to Microsoft's
service.
285. Still, Gates viewed the concession as a significant one;
he understood that it meant undermining MSN's success in the
pursuit of browser share. As he told an interviewer in the spring
of 1996:
We have had three options for how to use the "Windows Box":
First, we can use it for the browser battle, recognizing that
our core assets are at risk. Second, we could monetize the
box, and sell the real estate to the highest bidder. Or third,
we could use the box to sell and promote internally content
assets. I recognize that, by choosing to do the first, we
have leveled the playing field and reduced our opportunities
for competitive advantage with MSN.
286. In light of AOL's success in having gained access to
the Windows desktop through the expedient of OEM pre-installation
without Microsoft's acquiescence, Gates' abiding reluctance
to grant AOL access through Microsoft's front door may have
stemmed from a preoccupation with the message such a move would
send — both to other firms in the computer industry and to consumers
deciding which Internet service to use. Although Gates viewed
it as a significant concession, he acquiesced in granting AOL
a place in Windows because he believed that Microsoft could
not pass up the opportunity AOL presented to drive Internet
Explorer's usage share dramatically upward and to exclude Navigator
from a substantial part of the IAP distribution channel.
287. The negotiations between Microsoft and AOL proceeded
throughout February and early March 1996. On March 11, 1996,
AOL announced that it had selected Navigator as the primary
Web browsing software for GNN, which was AOL's basic ISP service
at the time and had a subscriber base only two to three percent
the size of the subscriber base of AOL's flagship online service.
The GNN arrangement was thus eclipsed the following day when
AOL announced that it had chosen Internet Explorer as the primary
Web browsing software for its flagship service.
288. Under the March 12 agreement, Microsoft gave AOL access
to, and the right to modify, Internet Explorer source code in
order to customize it for use with AOL's proprietary access
software. This concession went far beyond the freedom that the
IEAK granted IAPs to place their own branding on Internet Explorer.
Microsoft also agreed to provide AOL with significant engineering
assistance and technical support to enable AOL to integrate
Internet Explorer into AOL's proprietary access software. Further,
Microsoft agreed to provide AOL with certain specific features
of Internet Explorer 3.0 by precise target dates and to ensure
that future versions of its Web browsing software would possess
the latest available Internet-related technology features, capabilities,
and standards. Finally, Microsoft granted AOL free world- wide
distribution rights to Internet Explorer and agreed to distribute
AOL's proprietary access software in Windows and to place an
AOL icon in the OLS folder on the Windows desktop.
289. In return for Microsoft's commitments, AOL agreed to
base the proprietary access software of its flagship online
service for Windows and the Mac OS on Internet Explorer 3.0
and to update that software as newer versions of Internet Explorer
were released. Another provision in the agreement provided that
"AOL and AOL Affiliates will, with respect to Third Party Browsers,
exclusively promote, market and distribute, and have promoted,
marketed and distributed, Internet Explorer on or for use by
subscribers to the AOL Flagship Service." Specifically, AOL
agreed to ensure that in successive six-month periods, neither
the number of copies of non-Microsoft Web browsing software
it shipped (through any sub-channel, including GNN), nor the
number of new subscribers accessing AOL (including GNN) with
non-Microsoft Web browsing software, would exceed fifteen percent
of the total number of copies of proprietary access software
that AOL distributed through any channel (i.e., through the
Windows desktop or otherwise). AOL retained the right to distribute
non-Microsoft Web browsing software to subscribers who affirmatively
requested it, as long as doing so did not did not raise the
relevant shipment quotients above fifteen percent.
AOL also retained the right to provide a link within its service
through which its subscribers could reach a Web site from which
they could download a version of Navigator customized for the
AOL service. At the same time, however, the agreement prohibited
AOL from expressing or implying to subscribers or prospective
subscribers that they could use Navigator with AOL. Nor did
it allow AOL to include, on its default page or anywhere else,
instructions telling subscribers how to reach the Navigator
download site. In any event, as the Court has found above, downloading
large programs over the Internet involves considerable time,
and frequently some frustration, for the average user with average
hardware and an analog connection. The prospects were slim that
many AOL users (who tend to be novice users with average equipment)
would expend the effort to download Navigator when they already
had browsing software that worked well with the AOL service.
Finally, while the agreement permitted AOL (subject again
to the fifteen-percent shipment quotas) to distribute non-Microsoft
Web browsing software when requested by third- party providers,
distributors, and corporate accounts, it obligated AOL to use
all reasonable efforts to cause the third party to distribute
that software on its own and to minimize the use of AOL's brand
name with the distribution.
290. The Microsoft executives responsible for closing the
deal with AOL recognized that AOL had agreed to distribute and
promote Internet Explorer to the virtual exclusion of Navigator.
Two days after Microsoft signed the agreement with AOL, Chase
sent to Microsoft's executive staff a memorandum answering questions
he thought the executives might have about the agreement. One
such question was, "I find it hard to believe that AOL is using
Internet Explorer as its browser. Are there exceptions?" Chase
responded: "Yes the[re] are some but they are pretty remote.
An AOL customer could choose to use Navigator and it will be
available to be downloaded from the AOL site, though not in
a prominent way. There are some circumstances with 3rd party
distribution deals where AOL has some limited flexibility. On
its GNN service, AOL can do what it wants. But for all intents
and purposes it is true, AOL will be moving its 5M customers
to a new client integrated with Internet Explorer 3 starting
this summer/fall."
291. As with the restrictive provisions in the Referral Server
agreements, the provisions in the March 1996 agreement constraining
AOL's distribution and promotion of Navigator had no purpose
other than maximizing Internet Explorer's usage share at Navigator's
expense. Considering that the restrictions applied to AOL's
proprietary access software regardless of the sub-channel through
which it was distributed, and that Microsoft collected no revenue
from Internet Explorer, the restrictions accomplished no efficiency.
They affected consumers only by encumbering their ability to
choose between competing browsing technologies. In order to
gain AOL's acceptance of these restrictions, Microsoft accorded
AOL free desktop placement that undermined its own MSN, in which
Microsoft had invested hundreds of millions of dollars. Significantly,
Microsoft did not waive any of the terms of its agreement with
AOL (nor of its agreements with other OLSs) when it waived some
of the restrictive provisions in its Referral Server agreements
in April 1998. The reason was Microsoft's recognition that holding
OLSs, particularly AOL, to exclusive distribution and promotion
terms was more important to maximizing Internet Explorer's usage
share than holding ISPs to similar terms.
292. Microsoft closely monitored AOL's compliance with the
restrictive provisions in the March 1996 agreement. Microsoft
employees periodically inspected AOL's service for any sign
of promotions for Netscape. The scrutiny was close enough to
prompt an AOL executive to write Microsoft's Chase: "We are
not selling NS advertising around its browser or otherwise —
let's move on. . . . [I]t is not time to be paranoid . . . ."
293. Ever since the negotiations with Microsoft intensified
in early 1996, it had been AOL's intention to select one firm's
Web browsing software and then to work closely with that firm
to incorporate its browsing technology seamlessly into the AOL
flagship client software. Regardless of which software it chose
as its primary offering, though, AOL still wanted the ability
to satisfy consumer demand for competing Web browsing software.
AOL did not want users who preferred a certain brand of Web
browsing software to have to go to a competing OLS in order
to obtain it. Therefore, even once it selected Internet Explorer
as the software that it would integrate seamlessly into its
client, AOL would have preferred to make an AOL- configured
version of Navigator readily available to subscribers and potential
subscribers.
294. Despite its preference, however, AOL did not make Navigator
readily available to subscribers after the agreement with Microsoft
took effect. To the contrary, AOL made it relatively difficult
for new subscribers to obtain a version of Navigator that would
work with its client software, and it pressured existing subscribers
who used Navigator to abandon it in favor of client software
that included Internet Explorer. In essence, AOL contravened
its natural inclination to respond to consumer demand in order
to obtain the free technology, close technical support, and
desktop placement offered by Microsoft.
295. On October 28, 1996, Microsoft and AOL entered into an
additional agreement called the Promotional Services Agreement,
whereby AOL agreed to promote its new proprietary access software
that included Internet Explorer to existing AOL subscribers,
and Microsoft agreed to pay AOL for such promotion based on
results. Specifically, Microsoft agreed to pay AOL $500,000,
plus twenty-five cents (up to one million dollars) for each
subscriber who upgraded from older versions of AOL's proprietary
access software to the version that included Internet Explorer,
plus $600,000 if AOL succeeded in upgrading 5.25 million subscribers
by April 1997. In addition, AOL's Referral Server agreement
with Microsoft provided that AOL would receive a two-dollar
credit on referral fees for each new subscriber who used Internet
Explorer. So while the March 12, 1996 agreement ensured that
nearly all new AOL subscribers would use Internet Explorer,
the Promotional Services and Referral Server agreements enlisted
AOL in the effort to convert the OLS's millions of existing
subscribers to Internet Explorer. In fulfillment of these agreements,
AOL began to prompt its subscribers to download the latest version
of its client access software, complete with Internet Explorer,
every time they logged off the service.
296. It is not surprising, given the terms of the 1996 agreements
between Microsoft and AOL, that the percentage of AOL subscribers
using a version of the client software that included Internet
Explorer climbed steeply throughout 1997. By January 1998, Cameron
Myhrvold was able to report to Gates and the rest of Microsoft's
executive committee that ninety-two percent of AOL's subscribers
(who by then numbered over ten million) were using client access
software that included Internet Explorer. A year earlier, the
same type of data had shown that only thirty-four percent of
AOL subscribers were using AOL client software that included
Internet Explorer. The marked increase resulted in no small
part from AOL's efforts to convert its existing subscribers
to the newest version of its client software.
297. Even if an AOL subscriber obtains the new client software
that includes Internet Explorer, he can still browse the Web
using any browsing software, including Navigator, that happened
to be installed on his hard drive. It is unlikely that many
users will go to this effort, however, given the ease of browsing
with the software that comes with AOL's client software. The
average AOL user, being perhaps less technically sophisticated
than the average IAP subscriber, is particularly unlikely to
expend any effort to use browsing software other than that which
comes included with the AOL software. AOL, acting pursuant to
the provisions of the March 1996 agreement, has not made it
easy for its subscribers to locate, download, and install a
version of Navigator configured for its service. Consequently,
those AOL subscribers who did not already have Navigator on
their systems by the time that agreement took effect were even
less likely to use Navigator.
298. So when Microsoft executives learned that ninety-two
percent of AOL subscribers were using client software that included
Internet Explorer, they could rest assured that virtually the
same percentage of AOL's subscribers were using Internet Explorer
whenever they connected to the Internet with AOL. In fact, an
examination of the "hit" data collected by AdKnowledge indicates
that as of early 1999, only twelve percent of AOL subscribers
were using Navigator when they browsed the Web (see Section
V.H.1., infra, for a description of the method by which AdKnowledge
collects data). AOL (and its CompuServe subsidiary), in turn,
accounted for a very large percentage of all IAP subscribers.
In fact, according to data Microsoft collected and used internally,
AOL and CompuServe accounted for sixty-five percent of the combined
subscriber base of the top eighty IAPs in late 1997. It is thus
a reasonable deduction that the restrictive terms Microsoft
induced AOL to accept in 1996 pre-empted a substantial part
of the IAP channel for Internet Explorer.
299. On November 24, 1998, AOL and Netscape agreed that AOL
would acquire Netscape for 4.3 billion dollars' worth of AOL
stock. In a related transaction, AOL entered into a three-year
strategic alliance with Sun, pursuant to which Sun would develop
and market both its and Netscape's server software and would
manage the companies' joint efforts in the area of electronic
commerce. AOL purchased Netscape not just for its browsing technology,
but also for its electronic commerce business, its portal site,
its brand recognition, and its talented work force. To the extent
AOL was paying for Netscape's browser business, its primary
goal was not to compete for user share against Internet Explorer.
Rather, AOL was interested in Navigator to the extent that it
drove Web traffic to Netscape's popular portal site, NetCenter.
AOL was also interested in ensuring that an alternative to Internet
Explorer remained viable; it wanted the option of dropping Internet
Explorer to retain enough vitality so that it would not be at
the mercy of Microsoft for software upon which the success of
its online service largely depended. Finally, AOL was interested
in keeping Navigator alive in order to ensure that Microsoft
did not gain total control over Internet standards.
300. AOL had the right under its agreement with Microsoft
to terminate the distribution and promotion provisions relating
to Internet Explorer on December 31, 1998. If AOL had decided
to terminate those provisions, the March 1996 agreement would
otherwise have remained in effect, and AOL could have continued
to base its proprietary access software on Internet Explorer,
taking advantage of Microsoft's engineering and technical support.
Microsoft, however, would have had the option of removing AOL
from the OLS folder. What is more, Chase informed AOL that Microsoft
might react to AOL's termination of the restrictive provisions
by discontinuing the OLS folder altogether, which would have
disadvantaged the AOL's subsidiary OLS, CompuServe, which also
enjoyed a place in the OLS folder.
301. Despite its acquisition of Netscape, AOL did not exercise
its right to terminate the exclusivity provisions of its agreement
with Microsoft at the end of 1998. AOL executives made the reasons
clear to AOL's board of directors on November 17, 1998, when
they presented the Netscape/Sun transactions for the board's
approval. They wrote:
In exchange for using IE as our primary browser component,
Microsoft bundles [AOL] in the "Online Services Folder" on
the Windows desktop. This is an important, valued source of
new customers for us, and therefore something we are inclined
to continue. Microsoft has made it clear that they will not
continue to include us in Windows if we don't agree to continue
our "virtual exclusivity" provisions for use of IE within
[AOL]. . . . There are benefits to [Netscape] of replacing
IE with the [Netscape] browser — it would dramatically shift
browser market share (from about 50/50 today to 65/35 in favor
of [Netscape]). However, our present intent is to continue
with IE, partly to get the continued marketing benefits of
Windows bundling, and partly to maximize the likelihood of
continued "détente" with Microsoft.
By not exercising its right to terminate the "virtual exclusivity"
provisions in the agreement with Microsoft, AOL commited itself
to abide by those restrictions until January 1, 2001.
302. AOL does not believe that it must make every possible
use of Netscape's browsing software, and maximize Navigator's
usage share, in order to justify its purchase of Netscape. Now
that AOL has the capability to produce its own state-of-the-art
componentized browsing software, however, the fact remains that,
of the various advantages Microsoft currently offers AOL in
exchange for its agreement to distribute and promote Internet
Explorer with near exclusivity, the only one likely to still
be of great value to AOL at the beginning of the new millennium
is the inclusion of AOL's client software, and the promotion
of its service, within Windows. Assuming Microsoft continues
to offer that placement to AOL after January 1, 2001, the extent
to which AOL continues to distribute and promote Internet Explorer
to the exclusion of other browsing software will depend largely
on the value that AOL assigns to that placement and to any new
forms of consideration Microsoft offers. With respect to the
value of placement in the OLS folder, AOL registered approximately
970,000 new subscribers through the OLS folder in the fiscal
year ending in June 1998. This represented eleven percent of
the new subscriptions AOL gained that year, and it was enough
to prompt AOL executives in November 1998 to describe the OLS
folder to the AOL board as an "important, valued source of new
customers for us."
303. If AOL were to halt its distribution and promotion of
Internet Explorer, the effect on Internet Explorer's usage share
would be significant, for AOL's subscribers currently account
for over one third of Internet Explorer's installed base. But
even if AOL stops distributing Internet Explorer after January
1, 2001 and updates its entire subscriber base to client software
that includes its own or some other proprietary browsing software,
Microsoft will still have ensured that, over the preceding four
years (AOL subscribers began using proprietary access software
based on Internet Explorer in November 1996), a very large majority
of AOL subscribers used Internet Explorer whenever they browsed
the Web through the AOL service. This period is significantly
longer than the two years Gates thought AOL's obligations would
have to last in order for the deal to be worthwhile to Microsoft.
304. AOL's subscribers now number sixteen million, and a substantial
part of all Web browsing is done through AOL's service. By granting
AOL valuable desktop real estate (to MSN's detriment) and other
valuable consideration, Microsoft succeeded in capturing for
Internet Explorer, and holding for a minimum of four years,
one of the single most important channels for the distribution
of browsing software. Starting the day Microsoft announced the
March 1996 agreement with AOL, and lasting at least until AOL
announced its acquisition of Netscape in November 1998, developers
had reason to look into the foreseeable future and see that
non-Microsoft software would not attain stature as the standard
platform for network-centric applications. Microsoft exploited
that interval to enhance dependence among developers on Microsoft's
proprietary interfaces for network-centric applications — dependence
that will continue to inure to Microsoft's benefit even if AOL
stops distributing Internet Explorer in the future. The AOL
coup, which Microsoft accomplished only at tremendous expense
to itself and considerable deprivation of consumers' freedom
of choice, thus contributed to extinguishing the threat that
Navigator posed to the applications barrier to entry.
- Other Online Services
305. In the summer and fall of 1996, Microsoft entered into
agreements with three other OLSs, namely, AT&T WorldNet, Prodigy,
and AOL's subsidiary, CompuServe. The provisions of these agreements
were substantially the same as those contained in the March
1996 agreement between Microsoft and AOL. As with the AOL agreement,
Microsoft did not deign to waive the restrictive terms in these
OLS agreements when it waived similar terms in the Referral
Server agreements in the spring of 1998. The OLSs were discontented
with the provisions that limited their ability to distribute
and promote non-Microsoft browsing software. Prodigy, for one,
found those provisions objectionable and tried, unsuccessfully,
to convince Microsoft to make the terms less restrictive. AT&T
WorldNet's negotiator also told his Microsoft counterpart, Brad
Silverberg, that AT&T wanted to remain neutral as to browsing
software. Despite their reservations, the OLSs accepted Microsoft's
terms because they saw placement in the OLS folder as crucial,
and Microsoft made clear that it would only accord such placement
to OLSs that agreed to give Internet Explorer exclusive, or
at least extremely preferential, treatment. As one Microsoft
negotiator reported to Chase about AT&T WorldNet, "It's very
clear that they really really want to be in the Windows box."
The OLSs became even more desperate for inclusion in the OLS
folder once it was announced that their largest competitor,
AOL, had already won placement there. One Prodigy executive
wrote to another two weeks after his company signed the agreement
with Microsoft, "it was absolutely critical to Prodigy's business"
and "essential in order to remain competitive" that Prodigy
obtain Microsoft's agreement to include the Prodigy Internet
service icon in the OLS folder.
306. Although none of these OLSs possessed subscriber bases
approaching AOL's, they comprised, along with MSN, the most
significant OLSs other than AOL. By making arrangements with
them similar to the one it enjoyed with AOL, Microsoft ensured
that, for as long as the agreements remained in effect, the
overwhelming majority of OLS subscribers would use Internet
Explorer whenever they accessed the Internet. Since AOL owns
CompuServe, the acquisition of Netscape may affect CompuServe's
arrangement with Microsoft in the future; however, the acquisition
does not alter the incentives for the other OLSs to enter new
agreements with Microsoft similar to the ones signed in 1996.
- Effect of Microsoft's Actions in the IAP Channel
307. As described above, Microsoft gave valuable consideration
at no charge to IAPs that agreed to distribute and promote a product
that brought no revenue to Microsoft. By tendering additional valuable
perquisites (at the cost of lost revenue), Microsoft induced IAPs
to restrict drastically their distribution and promotion of Navigator.
With the offer of still other concessions, Microsoft induced IAPs
to turn subscribers already using Navigator into Internet Explorer
users.
308. As Microsoft hoped and anticipated, the inducements it gave
out gratis, as well as the restrictive conditions it tied to those
inducements, had, and continue to have, a substantial exclusionary
impact. First, many more copies of Internet Explorer have been distributed,
and many more IAPs have standardized on Internet Explorer, than
would have been the case if Microsoft had not invested great sums,
and sacrificed potential sources of revenue, with the sole purpose
of protecting the applications barrier to entry. Second, the restrictive
terms in the agreements have prevented IAPs from meeting consumer
demand for copies of non-Microsoft browsing software pre-configured
for those services. The IAPs subject to the most severe restrictions
comprise fourteen of the top fifteen access providers in North America
and account for a large majority of all Internet access subscriptions
in this part of the world.
309. Not surprisingly, the inducements that Microsoft gave out
and the restrictions it conditioned them upon have resulted in a
substantial increase in Internet Explorer's usage share. A study
Microsoft conducted shows that at the end of 1997, Internet Explorer
enjoyed a ninety- four percent weighted average share of shipments
of browsing software by ISPs that had agreed to make Internet Explorer
their default browser. By contrast, the study shows that Internet
Explorer had only a fourteen percent weighted average share of shipments
of browsing software by ISPs that had not agreed to make Internet
Explorer their default browser. The same study shows that Microsoft's
weighted average share of browser usage by subscribers to ISPs that
had made Internet Explorer their default browser was over sixty
percent at the end of 1997, whereas its weighted average share of
browser usage by subscribers to ISPs that did not make Internet
Explorer their default browser was less than twenty percent.
310. An appropriate use of the AdKnowledge hit data shows the
difference in Internet Explorer's success among categories of IAPs
subject to different levels of distribution and promotion restrictions
(see Section V.H.1., infra, for a description of the method by which
AdKnowledge collects data). One category was hits originating from
subscribers to IAPs that, according to a chart prepared by Microsoft
for its internal use, were not subject to any distribution or promotion
restrictions. Another category was hits originating from subscribers
to any IAP. A third category was hits originating from subscribers
to AOL and CompuServe. The hit data show that, from January 1997
to August 1998, Internet Explorer's usage share among subscribers
to IAPs that were uninhibited by restrictions rose ten points, from
about twenty to about thirty percent. Over the same period, Internet
Explorer's usage share among all IAP subscribers, including those
subject to restrictions, rose twenty-seven points, from twenty-two
to forty-nine percent. Finally, Internet's Explorer's usage share
among subscribers to two IAPs subject to the most severe restrictions,
AOL and CompuServe, rose sixty-five points, from twenty-two to eighty-seven
percent. The differences in the degree of Internet Explorer's success
in the three categories reveal the exclusionary effect of Microsoft's
interdiction of Navigator in the IAP channel.
- Inducing ICPs to Enhance Internet Explorer's Usage Share at Navigator's
Expense
311. ICPs create the content that fills the pages that make up the
Web. Because this content can include advertisements and links to download
sites, ICPs also provide a channel for the promotion and distribution
of Web browsing software. Executives at Microsoft recognized that ICPs
were not nearly as important a distribution channel for browsing software
as OEMs and IAPs. Nevertheless, protecting the applications barrier
to entry was of such high priority at Microsoft that its senior executives
were willing to invest significant resources to enlist even ICPs in
the effort. Executives at Microsoft determined that ICPs could aid Microsoft's
browser campaign in three ways. First, ICPs could help build Internet
Explorer's usage share by featuring advertisements and links for Internet
Explorer, to the exclusion of non-Microsoft browsing software, on their
Web pages. Second, those ICPs that distributed software as well as content
could bundle Internet Explorer, instead of Navigator, with those distributions.
Finally, ICPs could increase demand for Internet Explorer, and decrease
demand for Navigator, by creating their content with Microsoft technologies,
such as ActiveX, that would make the content more appealing in appearance
when accessed with Internet Explorer.
312. As early as the fall of 1995, Microsoft executives saw that they
could help reinforce the applications barrier to entry by inducing the
leading ICPs to focus on Microsoft's browsing technologies. In the October
1995 memorandum that Microsoft executives sent to Gates on Microsoft's
browser campaign, one of the suggestions was, "Get 80% of Top Web Sites
to Target Our Client." Specifically, the executives wrote:
Content drives browser adoption, and we need to go to the top five
sites and ask them, "What can we do to get you to adopt IE?" We should
be prepared to write a check, buy sites, or add features — basically
do whatever it takes to drive adoption.
313. By the middle of 1996, this proposal had become corporate policy.
Senior executives at Microsoft believed that inducing the ICPs responsible
for the most popular Web sites to concentrate their distributional,
promotional, and technical efforts on Internet Explorer to the exclusion
of Navigator would contribute significantly to maximizing Internet Explorer's
usage share at Navigator's expense. When Microsoft began, in late 1996,
to enlist the aid of the most popular ICPs, it used an inducement that
it had already successfully employed with the top IAPs: Microsoft created
an area on the ubiquitous Windows billboard for the promotion of ICPs
and then exchanged placement in that area at no charge for the commitment
of important ICPs to promote and distribute Internet Explorer exclusively
and to create their content with technologies that would make it appear
optimally when viewed with Internet Explorer. Microsoft executives referred
to this tactic as "strategic barter." As was the case with the IAPs,
neither the sacrifice that Microsoft made to enlist the aid of the top
ICPs nor the restrictions it placed on them can be explained except
as components of a campaign to protect the applications barrier to entry
against Navigator.
314. The Active Desktop was a Microsoft feature that, if enabled,
allowed the Windows user to position Web pages as open windows that
appear on the background, or "wallpaper" of the Windows desktop. If
the Web pages featured "push" technology, they would automatically update
themselves by downloading information from their respective servers
at times scheduled by the user. Thus, a user could position on his desktop
wallpaper Web pages that displayed periodically updated stock prices,
sports scores, and news headlines. The Channel Bar was a feature of
the Active Desktop. If enabled, the Channel Bar appeared as a rectangular
graphic on the desktop wallpaper. It was divided into pre-configured
links to the Web sites of certain ICPs that implemented push technology.
Microsoft introduced the Active Desktop, including the Channel Bar,
as a feature of Internet Explorer 4.0, which it released on September
30, 1997.
315. As pre-configured by Microsoft, the top channel on the Channel
Bar linked to a Microsoft Web site, called the "Active Channel Guide,"
that provided a list of sites enabled with push technology. The next
five channels were each labeled with a generic category such as "News
& Technology" or "Business." Clicking on one of these five channels
brought up a display of icons for specific Web sites. For example, clicking
on the "Sports" channel brought up a display including icons for sports-related
Web sites such as ESPN SportsZone and CNN SI. Below the five generic
category channels were branded ones, each of which would link the user
directly to a specific ICP's Web site.
316. Considering how ICPs generate revenue, it is not surprising that
they attached great value to placement on the Channel Bar. Most ICPs
charge fees for placing advertisements on their Web pages. In addition,
some ICPs display certain of their content only to users who pay a fee.
The higher the volume of user traffic an ICP's site attracts, the higher
the rates it can charge for the placement of advertising on its sites.
Higher volume also brings increased revenue to ICPs that charge users
for content. Microsoft pre-configured Internet Explorer 4.0 so that
the Active desktop and the Channel Bar would appear by default on a
user's Windows 95 PC system, and Microsoft forbade OEMs to disable either
feature. Microsoft and the ICPs consequently surmised that a very high
volume of user traffic would be driven to the Web sites for which channels
appeared on the Channel Bar. Intuit, for one, believed that placement
on the Windows desktop would provide it with unparalleled promotional
and distributional advantages. As a result, the company was prepared
to pay a substantial fee for placement on the Channel Bar. The managers
of ZDNet felt the same way, as did the executives responsible for Disney's
Internet content. Some ICPs, including Intuit, even admitted to Microsoft
that inclusion on the Channel Bar was critical to them and asked what
they would be obliged to pay to be included.
317. Based on the interest ICPs expressed, as well as Microsoft's
own assessment of the value of placement on the Channel Bar, executives
at Microsoft considered charging ICPs for inclusion on the Channel Bar.
They estimated that ICPs appearing directly on the Channel Bar would
pay as much as $10 million per year, and that even ICPs appearing under
the generic channels would pay a couple of million dollars each annually.
These estimates proved to comport well with the value that ICPs themselves
actually attached to inclusion in the Channel Bar, at least before the
feature had been tested in the marketplace. For example, in December
1996, more than nine months before the Active Desktop made its debut,
Microsoft signed an agreement with PointCast pursuant to which PointCast
agreed to pay $10 million for the first year that its channel would
appear directly on the Channel Bar.
318. Following the signing of its agreement with PointCast, Microsoft
proceeded to enter similar "Top Tier" or "Platinum" agreements with
twenty-three other ICPs, all in the summer and early fall of 1997. Microsoft
used the term "Top Tier" to refer to the four non- Microsoft ICPs (including
PointCast) given placement directly on the Channel Bar and the term
"Platinum" to describe the twenty ICPs included in the five generic
categories accessible from the Channel Bar. Although the agreements
were individually negotiated and their terms varied to some extent,
the typical agreement obligated Microsoft to promote the ICP's business
in three ways. First, Microsoft agreed to include on the Channel Bar
(or in one of the lists accessible directly from the Channel Bar) a
link that would send a user directly to the ICP's "push" site. Second,
Microsoft agreed to promote the ICP's content in national public-relations
and computer-industry events, as well as on Microsoft Web sites. Finally,
Microsoft agreed to include introductory content from the ICP with certain
distributions of Windows and Internet Explorer.
319. The agreements did not obligate the Top Tier and Platinum ICPs
to pay money to Microsoft in exchange for any of the benefits, including
placement on the Windows desktop, that Microsoft extended to them. Rather,
the agreements obligated the ICPs to compensate Microsoft in other ways.
Although the agreement that PointCast signed purported to call for a
payment of ten million dollars to Microsoft, it entitled PointCast to
a discount on the full amount if it behaved as other ICPs undertook
to do in their own Top Tier and Platinum agreements with Microsoft.
320. The first obligation that the ICPs undertook was to distribute
Internet Explorer and no "Other Browser" in connection with any custom
Web browsing software or CD-ROM content that they might offer. The term
"Other Browser" was defined in the agreements as Web browsing software
that ranked first or second by organizations in the business of measuring
the usage of browsing software. This obligation was pertinent only to
the six Top Tier and Platinum ICPs that distributed Web browsing software
during the term of the agreements: PointCast, CNet, Intuit, AOL, Disney,
and National Geographic.
321. The Top Tier and Platinum agreements also required the signatory
ICPs to promote Internet Explorer and no "Other Browser" as their "browser
of choice." In particular, the ICPs were required to display a logo
for Internet Explorer and no "Other Browser" on the home page of the
sites specified in the agreements and on any other pages on which the
ICP typically displayed such links. The ICPs were also required to place
Internet Explorer download links on their Web sites and to remove any
links to Navigator's download site. Aggregating the Web sites offered
by the twenty-four Top Tier and Platinum ICPs, the number of Web sites
affected by this provision was thirty-one.
322. A third provision that the ICPs accepted in return for placement
on the Channel Bar was a prohibition against their entering agreements
with a vendor of an "Other Browser" whereby the ICPs would pay money
or provide other consideration to the vendor in exchange for the vendor's
promotion of the ICP's branded content. Finally, the agreements required
the ICPs, in designing their Web sites, to employ certain Microsoft
technologies such as Dynamic HTML and ActiveX. Some of the agreements
actually required the ICPs to create "differentiated content" that was
either available only to Internet Explorer users or would be more attractive
when viewed with Internet Explorer than with any "Other Browser." For
example, the agreement with Intuit provided: "Some differentiated content
may be available only to IE users, some may simply be ‘best when used
with IE,' with acceptable degradation when used with other browsers."
323. The ICPs were so intent on gaining placement on the Channel Bar
that they even complied, albeit reluctantly, when Microsoft imposed
restrictions not contained in the Top Tier and Platinum agreements.
For example, Microsoft demanded that Disney remove its distinctive branding
from its link on Navigator's user interface and threatened to remove
Disney from the Channel Bar if it did not accede. Executives at Disney
believed that such a requirement went beyond the language of the Top
Tier agreement that Disney had signed with Microsoft, but they saw no
recourse in making an issue of the matter, for Microsoft could keep
the Disney icon off the Channel Bar during the pendency of the dispute,
and Microsoft would be less amenable to promotional opportunities for
Disney in the future. Therefore, Disney capitulated. In a similar fashion,
a Microsoft employee told a counterpart at Wired Digital that even if
the agreement between the companies did not technically prohibit it,
Wired Digital would be violating the spirit of its agreement if it placed
a link to any of its subsidiary sites on Navigator's user interface.
What Microsoft wanted to avoid were announcements suggesting that any
of Microsoft's ICP partners were also cooperating with Netscape.
324. Intuit is a leading developer of software designed to help individuals
and small businesses manage their finances. A consumer can use one of
Intuit's popular products by purchasing a copy of the software, but
Intuit makes additional features available through its Quicken.com Web
site. Thus, Intuit is both an ISV and an ICP. Beginning in late 1995,
Intuit distributed Navigator with its products in order to ensure that
its users could access the features provided through Quicken.com. In
1996, Microsoft commenced the process of converting Intuit from a Netscape
partner to a distributor of Internet Explorer. In July of that year,
Gates reported to other Microsoft executives on his attempt to convince
Intuit's CEO to distribute Internet Explorer instead of Navigator:
I made it clear to him that beyond giving him the best browser technology
for no cost that we were only will[ing] to do some very modest favors
in addition to that. . . . I was quite frank with him that if he had
a favor we could do for him that would cost us something like $1M
to do that in return for switching browsers in the next few months
I would be open to doing that.
325. Intuit did not accept Gates' offer immediately, but less than
a year later, in June 1997, Intuit became one of the ICPs to sign a
Platinum agreement with Microsoft. This allowed Intuit to place a link
to Quicken.com under the "Business" heading on Microsoft's Channel Bar.
In return, however, the agreement required Intuit to distribute Internet
Explorer, and no "Other Browser," with its software products, including
those not distributed through the Channel Bar. Intuit also agreed to
the other terms, relating to the promotion of browsing technologies,
business relationships with Netscape, and the adoption of Internet Explorer
technologies, that applied to the other Top Tier and Platinum ICPs.
326. Microsoft would have granted Intuit a license to distribute the
componentized version of Internet Explorer at no charge even if Intuit
had not entered a Platinum Agreement. In the absence of the agreement's
restrictive terms, in fact, Intuit likely would have distributed the
componentized version of Internet Explorer with its products while simultaneously
promoting Navigator and distributing to consumers who requested it a
version of Navigator specially- configured for Intuit's products. The
only way Intuit could gain a place on the Channel Bar, however, was
by agreeing to the provisions that required it to limit its promotion
of Navigator, to cease distributing that browser altogether, and to
refuse to pay Netscape to promote Intuit products on Netscape's Web
sites. Intuit accepted these terms reluctantly, for Navigator remained
a popular product with consumers, and Netscape's Web sites still attracted
a great deal of traffic.
327. In addition to the Top Tier and Platinum agreements, Microsoft
entered into two other types of agreements with ICPs. First, Microsoft
signed so-called "Gold" agreements with between thirty and fifty ICPs.
Pursuant to these agreements, Microsoft included ICPs in the "Active
Channel Guide" Web site, which appeared whenever a Windows user clicked
on the top link on the Channel Bar. In exchange for this promotion,
the Gold-agreement ICPs agreed to promote Internet Explorer on at least
equal footing with other browsing technology, including Navigator.
328. Second, Microsoft entered into IEAK agreements with between eight
and twelve ICPs devoted to business-related content. Under the typical
IEAK agreement, Microsoft agreed to include functionality in the IEAK
that would facilitate the inclusion of a link to the ICP's Web site
under the "Business" category of the Channel Bar. In exchange, the ICPs
committed to distributing Internet Explorer exclusively (to the extent
they distributed any browsing software), to promote Internet Explorer
as their "browser software of choice," to refrain from promoting any
"Other Browser" (defined as in the other ICP agreements) on their Web
sites, and to create content that could be accessed optimally only with
Internet Explorer. 329. Cross-marketing arrangements in competitive
markets do not necessarily make those markets less competitive; however,
four characteristics distinguish this case from situations in which
such agreements are benign. First, Microsoft was able to offer ICPs
an asset whose value competitors could not hope, on account of Microsoft's
monopoly power, to match. Second, Microsoft bartered that asset not
to increase demand for a revenue-generating product, but rather to suppress
the distribution and diminish the attractiveness of technology that
Microsoft saw as a potential threat to its monopoly power. Third, and
more specifically, Microsoft prohibited the ICPs from compensating Netscape
for promotion of their products even while not attempting to prohibit
the promotion itself. This reveals that Microsoft's motivation was not
simply a desire to generate brand associations with Internet Explorer.
Finally, Microsoft went beyond encouraging ICPs to take advantage of
innovations in Microsoft's technology, explicitly requiring them to
ensure that their content appeared degraded when viewed with Navigator
rather than Internet Explorer. Microsoft's desire to lower demand for
Navigator was thus independent of, and far more malevolent than, a simple
desire to increase demand for Internet Explorer.
330. The terms of Microsoft's agreements with ICPs cannot be explained
in customary economic parlance absent Microsoft's obsession with obliterating
the threat that Navigator posed to the applications barrier to entry.
Absent that obsession, Microsoft would not have given ICPs at no charge
licenses to distribute Internet Explorer. What is more, Microsoft would
not have incurred the cost of componentizing Internet Explorer and then
licensed that version to Intuit at no charge. By sacrificing opportunities
to cover its costs and even make a profit, Microsoft advanced its strategic
goal of maximizing Internet Explorer's usage share at Navigator's expense.
Whereas Microsoft might have developed the Channel Bar without ulterior
motive as a matter of product improvement, it would not have exchanged
placement on the Channel Bar for terms as highly and broadly restrictive
as the ones it actually extracted from ICPs. Nevertheless, and to Microsoft's
dismay, circumstances prevented these restrictions from having a large
impact on the relative usage shares of Internet Explorer and Navigator.
331. Despite Microsoft's and the ICPs' expectations to the contrary,
consumers showed little interest in the Channel Bar, or in the Active
Desktop in general, when the features debuted in the fall of 1997. Moreover,
reviews of the Channel Bar in computer-related publications were generally
unfavorable. The Channel Bar may not have attracted consumer interest,
but the ICP agreements relating to the Channel Bar did attract controversy.
Indeed, Gates faced pointed questions about them when he appeared before
the Senate Judiciary Committee in March 1998. Microsoft took several
measures to quell the public criticism in early April 1998. First, it
waived the most restrictive terms in the Top Tier and Platinum agreements;
thereafter, the agreements required ICPs merely to promote Internet
Explorer in a manner at least equal to their promotion of Navigator.
Second, Microsoft made no attempt to renew the Gold and IEAK agreements,
which had expired by their own terms in March 1998. Third, Microsoft
authorized its OEM licensees to configure the Windows 98 desktop so
that the Channel Bar would not appear by default, and nearly every major
OEM availed itself of the permission. Deeming the Channel Bar more trouble
than it was worth, Microsoft decided to eliminate the feature entirely
from future versions of Windows, including Windows 98 updates. Therefore,
the provisions requiring ICPs to exclusively distribute and promote
Internet Explorer had all expired within seven months of the Channel
Bar's release. All of the Top Tier and Platinum agreements had expired
by their own terms by December 31, 1998. In light of its decision to
discontinue the Channel Bar, Microsoft did not seek to renew any of
them.
332. For a period of about eight months, however, agreements with
Microsoft had prohibited approximately thirty-four ICPs from distributing
Navigator and from promoting Navigator in all but a few ways. For an
overlapping period of between a year and a year-and-a- half, those thirty-four
ICPs, plus between thirty and fifty more, were required to promote Internet
Explorer at least as prominently as they promoted Navigator. Although
the affected Web sites made up only a tiny percentage of those existing
on the Web, they comprised the offerings of all but a few of the most
popular ICPs. If the estimation of one Microsoft employee in June 1996
can be considered accurate, the affected ICPs accounted for a significant
percentage of the Web traffic in North America. Still, there is not
sufficient evidence to support a finding that Microsoft's promotional
restrictions actually had a substantial, deleterious impact on Navigator's
usage share. For one thing, only six of the affected ICPs distributed
any Web browsing software bundled with their products during the period
in which Microsoft's distributional restrictions remained in effect.
AOL obviously distributed a substantial volume of Web browsing software
during this period, but since AOL was separately precluded under its
Online Services Folder agreement from distributing virtually any non-Microsoft
browsing software, AOL would not have distributed a significant number
of Navigator copies even if it had not entered a Top Tier agreement
with Microsoft.
333. Pursuant to its agreement with Microsoft, Intuit distributed
over five million copies of Internet Explorer with the 1998 versions
of its products. Microsoft had offered Intuit a componentized browser
while Netscape had not, and it stands to reason that Intuit would in
all probability have distributed close to the same number of Internet
Explorer copies even absent the distributional restrictions imposed
by its contract. Still, Intuit had distributed over five million copies
of Navigator with the 1997 versions of its products. Unconstrained by
its agreement with Microsoft, Intuit might have distributed with its
1998 products a sum approaching that number of Navigator copies along
with the componentized version of Internet Explorer (particularly if
the CD-ROM represented its primary distribution vehicle). Of the affected
ICPs (excluding AOL), Intuit almost certainly distributed the most Web
browsing software bundled with its products.
334. All of the Top Tier, Platinum, and IEAK ICPs were capable of
including download links on their Web pages. While many of these ICPs
had included such links for Navigator prior to entering agreements with
Microsoft, only Internet Explorer download links were allowed while
the restrictive terms were in effect. On the whole, it is reasonable
to deduce from the evidence that the restrictions Microsoft imposed
on ICPs prevented the distribution and installation of a significant
quantity, but certainly less than ten million, copies of Navigator.
335. The terms Microsoft imposed did prevent a number of the ICPs
otherwise inclined to do so from compensating Netscape for its promotion
of the ICPs' content in Navigator or on Netscape's Web sites. While
they were in effect, Microsoft's restrictions probably deprived Netscape
of revenue measured in millions of dollars, but nowhere near $100 million.
336. It appears that, at the time the obligation expired, Microsoft
had not yet begun to enforce its requirement that the Top Tier, Platinum,
and IEAK ICPs develop content that would appear more attractive when
viewed with Internet Explorer than when viewed with Navigator. Moreover,
there is no evidence that any ICP other than Disney developed any "differentiated
content" in response to its agreement with Microsoft. Therefore, there
is insufficient evidence to find that the requirements that Microsoft
sought to impose with respect to the use of Microsoft- specific browsing
technologies had any discernible, deleterious impact on Navigator's
usage share.
- Directly Inducing ISVs to Rely on Microsoft's Browsing Technologies
Rather than APIs Exposed by Navigator
337. Since 1995, more and more ISVs have, like Intuit, enhanced the
features of their applications by designing them to take advantage of
the type of content and functionality accessible through browsing software.
An increasing number of these applications actually rely on browsing
software to function. Microsoft's efforts to maximize Internet Explorer's
share of browser usage at Navigator's expense were intended to encourage
developers to use Windows- specific technologies when they wrote their
applications to rely on a browser. In addition to creating this incentive
indirectly, by disadvantaging Navigator, Microsoft also targeted individual
ISVs directly, extracting from them commitments to make their Web-centric
applications reliant on technology specific to Internet Explorer.
338. Because of the importance of "time-to-market" in the software
industry, ISVs developing software to run on Windows products seek to
obtain beta releases and other technical information relating to Windows
as early and as consistently as possible. Since Microsoft decides which
ISVs receive betas and other technical support, and when they will receive
it, the ability of an ISV to compete in the marketplace for software
running on Windows products is highly dependent on Microsoft's cooperation.
Netscape learned this lesson in 1995.
339. In dozens of "First Wave" agreements signed between the fall
of 1997 and the spring of 1998, Microsoft has promised to give preferential
support, in the form of early Windows 98 and Windows NT betas, other
technical information, and the right to use certain Microsoft seals
of approval, to important ISVs that agree to certain conditions. One
of these conditions is that the ISVs use Internet Explorer as the default
browsing software for any software they develop with a hypertext-based
user interface. Another condition is that the ISVs use Microsoft's "HTML
Help," which is accessible only with Internet Explorer, to implement
their applications' help systems.
340. By exchanging its vital support for the agreement of leading
ISVs to make Internet Explorer the default browsing software on which
their products rely, Microsoft has ensured that many of the most popular
Web-centric applications will rely on browsing technologies found only
in Windows and has increased the likelihood that the millions of consumers
using these products will use Internet Explorer rather than Navigator.
Microsoft's relations with ISVs thus represent another area in which
it has applied its monopoly power to the task of protecting the applications
barrier to entry.
- Foreclosing Apple as a Distribution Channel for Navigator
341. In the summer of 1995, Microsoft had been willing to cede to
Netscape the development of browsing software for the Mac OS, provided
that Netscape would stop competing with the platform-level browsing
technologies that Microsoft was developing for its 32-bit Windows products.
The genesis of this offer had been Microsoft's belief that Netscape
could never become the leading platform for network-centric software
development if it did not distribute a middleware layer for the soon-to-be
dominant 32-bit Windows platform. But once Netscape confirmed its determination
to offer a middleware layer that would expose the same set of APIs on
Windows, the Mac OS, and other platforms, Microsoft recognized that
it needed to stifle the attention that developers would be inclined
to devote to those APIs, even when the they rested on top of a non-Windows
platform like the Mac OS. After all, if Navigator became so popular
on the Mac OS that developers made extensive use of the APIs exposed
by that version of Navigator, those developers would be disposed to
take advantage of identical APIs exposed by the version of Navigator
written for the dominant platform, Windows. Microsoft therefore set
out to convince developers that applications relying on APIs exposed
by Navigator would not reach as many Mac OS users as applications that
invoked platform technologies found exclusively in Windows. Therefore,
Microsoft set out to recruit Mac OS users to Internet Explorer, and
to minimize Navigator's usage share among Mac OS users.
342. Just as pre-installation and promotion by OEMs is one of the
most effective means of raising the usage share of browsing software
among users of Intel-compatible PC systems, pre-installation and promotion
by Apple is one of the most effective means of raising the usage share
of browsing software among the users of Apple PC systems. Recognizing
this, Bill Gates consistently urged Microsoft executives to persuade
Apple to pre-install the Mac OS version of Internet Explorer on its
PC systems and to feature it more prominently than the Mac OS version
of Navigator.
343. By the summer of 1996, Apple was already shipping Internet Explorer
with the Mac OS, but it was pre-installing Navigator as the default
browsing software. After a meeting with Apple in June 1996, Gates wrote
to some of his top executives: "I have 2 key goals in investing in the
Apple relationship - 1) Maintain our applications share on the platform
and 2) See if we can get them to embrace Internet Explorer in some way."
Later in the same message, Gates expressed his desire that Apple "agree
to immediately ship IE on all their systems as the standard browser."
344. One point of leverage that Microsoft held over Apple was the
fact that ninety percent of Mac OS users running a suite of office productivity
applications had adopted Microsoft's Mac Office. In 1997, Apple's business
was in steep decline, and many doubted that the company would survive
much longer. Observing Apple's poor performance in the marketplace and
its dismal prospects for the future, many ISVs questioned the wisdom
of continuing to spend time and money developing applications for the
Mac OS. Had Microsoft announced in the midst of this atmosphere that
it was ceasing to develop new versions of Mac Office, a great number
of ISVs, customers, developers, and investors would have interpreted
the announcement as Apple's death notice.
345. Recognizing the importance of Mac Office to Apple's survival,
Microsoft threatened to cancel the product unless Apple compromised
on a number of outstanding issues between the companies. One of these
issues was the extent to which Apple distributed and promoted Internet
Explorer, as opposed to Navigator, with the Mac OS.
346. At the end of June 1997, the Microsoft executive in charge of
Mac Office, Ben Waldman, sent a message to Gates and Microsoft's Chief
Financial Officer, Greg Maffei. The message reflected Waldman's understanding
that Microsoft was threatening to cancel Mac Office:
The pace of our discussions with Apple as well as their recent unsatisfactory
response have certainly frustrated a lot of people at Microsoft. The
threat to cancel Mac Office 97 is certainly the strongest bargaining
point we have, as doing so will do a great deal of harm to Apple immediately.
I also believe that Apple is taking this threat pretty seriously .
. . .
347. Waldman was actually an advocate for releasing Mac Office 97
promptly, and he pressed for that outcome in his message to Gates and
Maffei. Although they applauded Waldman's devotion to the product, Gates
and Maffei made clear that the threat of canceling Mac Office was too
valuable a source of leverage to give up before Microsoft had extracted
acceptable concessions from Apple. Maffei wrote Waldman, "Ben - great
mail, but [we] need a way to push these guys and this is the only one
that seems to make them move." In his response to Waldman, Gates asked
whether Microsoft could conceal from Apple in the coming month the fact
that Microsoft was almost finished developing of Mac Office 97.
348. In order to assure his superiors that he was pursuing corporate
policy despite his personal convictions, Waldman reported to Maffei
in his June 1997 message that he had recently told his counterpart at
Apple that Maffei "would be recommending to Bill [Gates] that we cancel
Mac Office 97." Waldman believed that his counterpart "got the message
that we would, in fact, cancel." Waldman went on to write that when
his counterpart had asked what specific problems Microsoft had with
Apple's recent response to Microsoft's proposals, Waldman had replied
by mentioning four issues, including "IE equal access." By that, Waldman
meant Microsoft's demand that the Mac OS make Internet Explorer just
as available to its users as it made Navigator. According to Waldman,
the Apple employee had responded that Apple would not be able to change
the Mac OS's default browser from Navigator until it released the next
version of the operating system product in the summer of 1998.
349. A few days after the exchange with Waldman, Gates informed those
Microsoft executives most closely involved in the negotiations with
Apple that the discussions "have not been going well at all." One of
the several reasons for this, Gates wrote, was that "Apple let us down
on the browser by making Netscape the standard install." Gates then
reported that he had already called Apple's CEO (who at the time was
Gil Amelio) to ask "how we should announce the cancellation of Mac Office
. . . ."
350. Within a month of Gates' call to Amelio, Steve Jobs was once
again Apple's CEO, and the two companies had settled all outstanding
issues between them in three agreements, all of which were signed on
August 7, 1997. Under the agreement titled "Technology Agreement," which
remains in force today, Microsoft's primary obligation is to continue
releasing up-to-date versions of Mac Office for at least five years.
Among the obligations that the Technology Agreement places on Apple
are several relating to browsing software.
351. First, Apple has agreed, for as long as Microsoft remains in
compliance with its obligation to support Mac Office, to "bundle the
most current version of Microsoft's Internet Explorer for Macintosh
. . . with all system software releases for Macintosh Computers (‘MacOS')
sold by Apple." The Technology Agreement also provides: "While Apple
may bundle browsers other than Internet Explorer with such Mac OS system
software releases, Apple will make Internet Explorer for Macintosh the
default selection in the choice of all included internet browsers (i.e.,
when the user invokes the "Browse the Internet" or equivalent icon,
the Mac OS will launch Internet Explorer for Macintosh)." In fulfillment
of this requirement, Apple did not include Navigator in the default
installation of the Mac OS 8.5 upgrade product. In other words, Navigator
is not installed on the computer hard drive during the default installation,
which is the type of installation most users elect to employ. Therefore,
most users who upgraded their Macintosh systems to Mac OS 8.5 were unable
to access Navigator without doing a customized installation. Having
already installed an altogether adequate browser (Internet Explorer)
when the Mac OS 8.5 upgrade completed its default installation process,
however, most users are unlikely to trouble to install Navigator as
well.
352. The Technology Agreement further provides that "[a]ny other internet
browsers bundled in the Mac OS system software sold by Apple shall be
placed in folders in the software as released." In other words, Apple
may not position icons for non-Microsoft browsing software on the desktop
of new Macintosh PC systems or Mac OS upgrades. Moreover, the agreement
states that "Apple will not be proactive or initiate actions to encourage
users to swap out Internet Explorer for Macintosh." Both Apple and Microsoft
read this term to prohibit Apple from promoting non-Microsoft browsing
software. The agreement even states that Apple will "encourage its employees
to use Microsoft Internet Explorer for Macintosh for all Apple- sponsored
events and will not promote another browser to its employees." Pursuant
to this provision, Apple's management has instructed the firm's employees
to not use Navigator in demonstrations at trade shows and other public
events. Also with regard to the promotion of browser technology, the
agreement requires Apple to display the Internet Explorer logo on "all
Apple-controlled web pages where any browser logo is displayed." Finally,
the agreement grants Microsoft the right of first refusal to supply
the default browsing software for any new operating system product that
Apple develops during the term of the agreement.
353. At the same time that it entered the Technology Agreement, Microsoft
concluded a "Preferred Stock Purchase Agreement" and a "Patent Cross
License Agreement" with Apple. These latter two agreements place obligations
on Microsoft that are unrelated to Mac Office, and they bind Apple in
areas other than browsing software. The fact that Microsoft and Apple
entered two other agreements at the same time that they entered the
Technology Agreement does not change the fact that Microsoft's commitment
to continue developing Mac Office was at least partial consideration
for Apple's commitment to distribute and promote Internet Explorer more
favorably than Navigator. Indeed, the language of the agreements themselves
demonstrates that Microsoft and Apple saw the Mac Office and Internet
Explorer obligations as more closely linked to each other than to any
other obligations the parties simultaneously undertook: Whereas the
provision in the Technology Agreement setting forth Apple's obligations
relating to browsing software explicitly states that those obligations
will last as long as Microsoft complies with its obligation to continue
supporting Mac Office, the provisions in the other two agreements describing
the patent cross-license and Microsoft's purchase of Apple stock mention
neither browsing software nor Mac Office.
354. That the Mac Office and browsing software obligations are tied
to each other is highlighted by the fact that the Microsoft executives
who negotiated the agreement believe that Microsoft's remedy, were Apple
to fail to meet its obligations with respect to browsing software, would
be to discontinue Mac Office. When, in February 1998, a Microsoft employee
proposed giving Apple an HTML control in exchange for Apple's agreement
to use Internet Explorer as its standard browser internally, Waldman
informed the employee that Apple was already obligated to use Internet
Explorer as its standard browser internally and that Microsoft would
revive the threat to discontinue Mac Office if Apple failed to comply
with its obligation. In Waldman's words:
Sounds like we give them the HTML control for nothing except making
IE the "standard browser for Apple?" I think they should be doing
this anyway. Though the language of the agreement uses the word "encourage,"
I think that the spirit is that Apple should be using it everywhere
and if they don't do it, then we can use Office as a club.
For at least a year after the Technology Agreement went into effect,
Waldman and other Microsoft employees continued to use the threat of
reduced commitment to Mac Office in holding Apple to its commitments
to support Internet Explorer.
355. Apple increased its distribution and promotion of Internet Explorer
not because of a conviction that the quality of Microsoft's product
was superior to Navigator's, or that consumer demand for it was greater,
but rather because of the in terrorem effect of the prospect of the
loss of Mac Office. To be blunt, Microsoft threatened to refuse to sell
a profitable product to Apple, a product in whose development Microsoft
had invested substantial resources, and which was virtually ready for
shipment. Not only would this ploy have wasted sunk costs and sacrificed
substantial profit, it also would have damaged Microsoft's goodwill
among Apple's customers, whom Microsoft had led to expect a new version
of Mac Office.
The predominant reason Microsoft was prepared to make this sacrifice,
and the sole reason that it required Apple to make Internet Explorer
its default browser and restricted Apple's freedom to feature and promote
non- Microsoft browsing software, was to protect the applications barrier
to entry. More specifically, the requirements and restrictions relating
to browsing software were intended to raise Internet Explorer's usage
share, to lower Navigator's share, and more broadly to demonstrate to
important observers (including consumer, developers, industry participants,
and investors) that Navigator's success had crested. Had Microsoft's
only interest in developing the Mac OS version of Internet Explorer
been to enable organizational customers using multiple PC operating-system
products to standardize on one user interface for Web browsing, Microsoft
would not have extracted from Apple the commitment to make Internet
Explorer the default browser or imposed restrictions on its use and
promotion of Navigator.
356. Microsoft understands that PC users tend to use the browsing
software that comes pre-installed on their machines, particularly when
conspicuous means of easy access appear on the PC desktop. By guaranteeing
that Internet Explorer is the default browsing software on the Mac OS,
by relegating Navigator to less favorable placement, by requiring Navigator's
exclusion from the default installation for the Mac OS 8.5 upgrade,
and by otherwise limiting Apple's promotion of Navigator, Microsoft
has ensured that most users of the Mac OS will use Internet Explorer
and not Navigator. Although the number of Mac OS users is very small
compared to the Windows installed base, the Mac OS is nevertheless the
most important consumer-oriented operating system product next to Windows.
Navigator needed high usage share among Mac OS users if it was ever
to enable the development of a substantial body of cross-platform software
not dependent on Windows. By extracting from Apple terms that significantly
diminished the usage of Navigator on the Mac OS, Microsoft severely
sabotaged Navigator's potential to weaken the applications barrier to
entry.
- Microsoft's Success in Excluding Navigator from the Channels that Lead
Most Efficiently to Browser Usage
357. The cumulative effect of the stratagems described above was to ensure
that the easiest and most intuitive paths that users could take to the Web
would lead to Internet Explorer, the gate controlled by Microsoft. Microsoft
did not actually prevent users from obtaining and using Navigator (although
it tried to do as much in June 1995), but Microsoft did make it significantly
less convenient for them to do so. Once Internet Explorer was seen as providing
roughly the same browsing experience as Navigator, relatively few PC users
showed any inclination to expend the effort required to obtain and install
Navigator. Netscape could still carpet bomb the population with CD-ROMs
and make Navigator available for downloading. In reality, however, few new
users (i.e., ones not merely upgrading from an old version of Navigator
to a new one) had any incentive to install — much less download and install
— software to replicate a function for which OEMs and IAPs were already
placing perfectly adequate browsing software at their disposal. The fact
that Netscape was forced to distribute tens of millions of copies of Navigator
through high-cost carpet-bombing in order to obtain a relatively small number
of new users only discloses the extent of Microsoft's success in excluding
Navigator from the channels that lead most effectively to browser usage.
- The Success of Microsoft's Effort to Maximize Internet Explorer's Usage
Share at Navigator's Expense
358. Microsoft's efforts to maximize Internet Explorer's share of browser
usage at Navigator's expense have done just that. The period since 1996
has witnessed a large increase in the usage of Microsoft's browsing technologies
and a concomitant decline in Navigator's share. This reversal of fortune
might not have occurred had Microsoft not improved the quality of Internet
Explorer, and some part of the reversal is undoubtedly attributable to Microsoft's
decision to distribute Internet Explorer with Windows at no additional charge.
The relative shares would not have changed nearly as much as they did, however,
had Microsoft not devoted its monopoly power and monopoly profits to precisely
that end.
- The Change in the Usage Shares of Internet Explorer and Navigator
359. A developer of network-centric applications wants as many consumers
as possible to acquire and use its products. It knows that only consumers
running a browser that exposes the requisite APIs will be able to use
network-centric applications that rely on those APIs. So in deciding
whether to concentrate its development work on APIs exposed by Netscape's
Web browsing software or Microsoft's, one of the questions a developer
will ask is how much Navigator is being used in relation to Internet
Explorer. Dividing the total usage of each browser product by the total
usage of all browsing software (i.e., usage of the installed base) answers
this question, for it reveals the proportion of total usage accounted
for by each product. The relative attractiveness to developers of Navigator
and Internet Explorer thus depends to a large extent on their relative
shares of all browser usage.
360. According to estimates that Microsoft executives cited to support
their testimony in this trial, and those on which Microsoft relied in
the course of its business planning, the shares of all browser usage
enjoyed by Navigator and Internet Explorer changed dramatically in favor
of Internet Explorer after Microsoft began its campaign to protect the
applications barrier to entry. These estimates show that Navigator's
share fell from above eighty percent in January 1996 to fifty-five percent
in November 1997, and that Internet Explorer's share rose from around
five percent to thirty-six percent over the same period. In April 1998,
Microsoft relied on measurements for internal planning purposes that
placed Internet Explorer's share of all browser usage above forty-five
percent. These figures are broadly consistent with ones AOL relied on
in evaluating its acquisition of Netscape: AOL determined that Navigator's
share had fallen from around eighty percent at the end of 1996 to the
"mid 50% range" in July 1998 and that Internet Explorer's share had
climbed to between forty-five and fifty percent of the domestic market
by late 1998.
361. Before a developer sinks costs into writing applications that
rely on APIs exposed by Navigator or Internet Explorer, the developer
will also want to know what share of browser usage each of the competing
platforms will enjoy in the future, when the developer's applications
will reach the marketplace, and even farther into the future, when the
developer will try to sell updated versions of those applications. Dividing
the new usage of each browser product by the new usage of all browsing
software (i.e., incremental usage) helps to formulate a prediction.
If a browser product's current share of all browser usage is fifty percent,
and its share of incremental browser usage is thirty percent, the product's
share of all browser usage will, assuming the share of incremental usage
does not rise, gradually approach thirty percent, as the size of the
population of browser users grows and current users update their PC
systems. So Navigator's and Internet Explorer's relative attractiveness
as platforms also depends greatly on their relative shares of incremental
browser usage. Microsoft's tactics were focused on channels for the
distribution of new browsing software. Moreover, excluding the installed
base from the calculation heightens the sensitivity with which share
of incremental browser usage reacts to contemporaneous forces. Microsoft
was thus particularly interested in share of incremental browser usage,
not only as an indication of Navigator's and Internet Explorer's relative
attractiveness as platforms, but also as a sensitive reading of the
impact that its actions were having.
362. According to data on which Microsoft relied in the course of
its business, Internet Explorer was, by late 1997, capturing a larger
share of incremental browser usage than Navigator. Specifically, data
that the company then deemed reliable showed that fifty-seven percent
of the new users of browsing software in the last six months of 1997
used Internet Explorer, while only thirty-nine percent used Navigator.
By February 1998, Microsoft's data showed that sixty-two percent of
the new Internet connections over the previous six months were using
Internet Explorer, versus thirty-eight percent for Navigator. Since
there is no indication that Navigator users as a group employ their
browsers more than Internet Explorer users, these data indicate that
Internet Explorer's share of incremental usage had exceeded Navigator's
by late 1997. This meant that Internet Explorer's share of all browser
usage was moving to surpass Navigator's. To Microsoft, these numbers
not only marked a significant decline in Navigator's attractiveness
as a platform, they also reflected the substantial impact of Microsoft's
actions.
363. The "hit" data collected by AdKnowledge comport with the share
estimates on which Microsoft and AOL relied internally. AdKnowledge
is a company that markets Web advertising services. Once the proprietor
of a Web site sells space on its pages to an advertiser, AdKnowledge
stores the advertisements on its servers and delivers them to the appropriate
pages when they are accessed by users. One day every month, AdKnowledge
monitors the number of times that each of the advertisements appears
on users' screens. Each appearance of an advertisement on a user's screen
is called a "hit." As part of the hit data it collects, AdKnowledge
logs the type of Web browsing software used to access the pages on which
the particular advertisements appear. Thus, the AdKnowledge data can
be used to calculate monthly snapshots of the shares of usage that particular
types of Web browsing software attract from the population of users
accessing the Web pages that AdKnowledge monitors. To the extent AdKnowledge
can detect the IAPs through which individual users access the monitored
sites, the data can also be used to calculate estimates of the usage
shares that particular types of browsing software attract from the subscriber
bases of particular IAPs.
364. The AdKnowledge data show that Internet Explorer's share of hits
to the monitored Web sites rose from twenty percent in January 1997
to forty-nine percent in August 1998 and that Navigator's share fell
from seventy-seven to forty-eight percent over the same period. Dividing
the change in the respective numbers of Internet Explorer and Navigator
hits from the first quarter of 1998 to the third quarter of 1998 by
the change in the number of total hits over that same period yields
a fifty-seven percent share of incremental browser usage for Internet
Explorer and a forty percent share for Navigator. These figures are
again consistent with the estimates on which Microsoft and AOL relied
internally.
365. When a user accessing the Internet through AOL moves from one
Web page to another, AOL temporarily stores, or "caches," the first
Web page on a local server. When the subscriber seeks to return to the
first page, AOL delivers it from the local server rather than returning
to the Web for a refreshed version of the page. AdKnowledge only counts
a hit when one of the monitored advertisements is served to a users'
computer from the Web. Thus, AdKnowledge undercounts hits by AOL users.
AdKnowledge's attempt to implement "cache- fooling" measures has not
eliminated the effects of caching. Largely as a result of the restrictive
terms Microsoft prevailed upon AOL to accept, Internet Explorer enjoys
a very high share of browser usage by AOL subscribers. Consequently,
Internet Explorer's share of all hits detected by AdKnowledge is lower
than its actual share of all usage. Correcting for the effects of caching
results in virtually no change to the AdKnowledge-based calculation
of relative browser usage shares in early 1997; however, it raises by
approximately five percent the figure representing Internet Explorer's
share of browser usage in the third quarter of 1998.
366. Although AdKnowledge only monitors hits to commercial Web pages,
there is no indication that certain types of Web browsing software are
used more than others to access commercial, versus non-commercial Web
sites. Furthermore, the same share trends reflected in the AdKnowledge
data appear in data collected from a prominent academic site. The University
of Illinois at Urbana-Champlain monitors, on a weekly basis, the browsing
software accessing its popular engineering Web site. The resulting data,
which AOL found important enough to rely on in evaluating the purchase
of Netscape, yield virtually the same usage share figures as do the
AdKnowledge data.
367. AdKnowledge does not undertake to collect data on the use of
browsing software to navigate proprietary OLS content or intra-enterprise
networks ("intranets"). This does not detract from the value of the
AdKnowledge data as a measure of usage share for developers' purposes,
however, for most developers of network-centric applications look to
write applications that will run through Web sites, not through OLS
proprietary content or pages on an intranet. Most developers will therefore
pay most attention to estimates of the extent to which a particular
type of browsing software is being used to browse the Web. Moreover,
only a very small percentage of the copies of Web browsing software
in operation are used exclusively to navigate intranets.
368. The advertisement banners on some Web sites alternate between
different advertisements. Assuming that AdKnowledge delivers these advertisements,
a single visit to a Web site could register with AdKnowledge as multiple
hits as the advertisements "rotate" on the user's screen. This phenomenon
does not spoil the essential reliability of the AdKnlowledge data as
a reporter of browser usage share, though. In order for there to be
a bias of significant proportions, users of either Internet Explorer
or Navigator would have to exhibit a special propensity to keep pages
open as the advertisements rotate. There is no reason to believe that
this is the case.
369. Thus none of the characteristics of the AdKnowledge data invalidate
it as a useful measure of browser usage share. It is understandable,
therefore, that in evaluating the purchase of Netscape, AOL viewed AdKnowledge's
hit data as one of the more reliable indicators of trends in the relative
shares of all browser usage enjoyed by Navigator and Internet Explorer.
370. Microsoft's economic witness, Richard Schmalensee, testified
survey data collected by Market Decisions Corporation ("MDC") provide
a more accurate measure of the usage shares enjoyed by different brands
of Web browsing software than AdKnowledge's hit data. The calculations
that Schmalensee made using the MDC data lead to results that differ,
in one main respect, from the results generated with hit data. Whereas
the AdKnowledge data show Navigator's share falling from seventy-five
to fifty-six percent from the first to the third quarter of 1997, the
MDC data show Navigator's share holding steady at fifty-five or fifty-six
percent over the same period. Although both sources show Internet Explorer's
share gaining steadily throughout that period, the MDC data indicate
that Internet Explorer's rise was coming not at Navigator's expense,
but rather at the expense of other browser products, which, according
to the MDC data, collectively enjoyed a substantial share into 1997.
The AdKnowledge data, by contrast, indicate that the share of usage
attributable to browsers other than Internet Explorer and Navigator
has never been substantial and that Internet Explorer's rise has always
been at Navigator's expense.
371. The MDC estimates of the shares attributable to Navigator and
other non- Microosft browser products in 1996 differ markedly from those
on which Microsoft and AOL relied in the course of making business judgments.
Notably, in August 1996, four months after it commissioned the first
MDC survey, Microsoft continued to estimate Navigator's share as exceeding
eighty percent. In fact, the senior Microsoft executives who testified
in this trial still believed at the time of their testimony that Navigator's
usage share in late 1995 and early 1996 had exceeded eighty percent.
To the extent the MDC estimates differ from those which Microsoft and
AOL used internally, and which senior Microsoft executives still embrace,
the Court is inclined to trust the latter estimates. More broadly, the
sets of questions contained in the MDC surveys and the internally inconsistent
responses they evoked reveal that a substantial percentage of the respondents
misunderstood some of the patently ambiguous questions they were asked,
and that a large number responded to questions when they were unsure
of, or even clearly misinformed regarding, the answers. The Court accordingly
gives no weight to any of the conclusions that Microsoft draws from
MDC survey data.
372. In summary, the estimates on which Microsoft and AOL relied and
the measurements made by AdKnowledge and the University of Illinois
provide an adequate basis for two findings: First, from early 1996 to
the late summer of 1998, Navigator's share of all browser usage fell
from above seventy percent to around fifty percent, while Internet Explorer's
share rose from about five percent to around fifty percent; second,
by 1998, Navigator's share of incremental browser usage had fallen below
forty percent while Internet Explorer's share had risen above sixty
percent. All signs point to the fact that Internet Explorer's share
has continued to rise — and Navigator's has continued to decline — since
the late summer of 1998. It is safe to conclude, then, that Internet
Explorer's share of all browser usage now exceeds fifty percent, and
that Navigator's share has fallen below that mark.
373. These trends will continue. In February 1998, Kumar Mehta, the
Microsoft employee responsible for tracking browser share, told Brad
Chase that Microsoft's best model projected that Internet Explorer's
usage share in early 2001 would stand between sixty and sixty- eight
percent. This comports with the forecast on which AOL relied in deciding
to purchase Netscape: The report presented to AOL's board of directors
prior to their vote on the transaction predicted that Navigator's usage
share would fall to between thirty-five and forty percent by late 2000.
The most reasonable prediction, then, is that by January 2001, Internet
Explorer's usage share will exceed sixty percent while Navigator's share
will have fallen below forty percent.
374. Navigator's large and continuing decline in usage share has demonstrated
to developers the product's failure to mature as the standard software
used to browse the Web. Internet Explorer's success in gaining usage
share, together with the lack of contenders other than Navigator, has
simultaneously sent the clear message to developers that no platform
for network-centric applications can compete for ubiquity with the 32-bit
Windows API set.
- The Cause of the Change in Usage Shares
375. The changes in usage share described above would likely not have
occurred had Microsoft not improved its browsing software to the point
that, by late 1996, the average user could not discern a significant
difference in quality and features between the latest versions of Internet
Explorer and Navigator. As Microsoft's top executives predicted, however,
Internet Explorer's quality and features have never surpassed Navigator's
to such a degree as to compel a significant part of Navigator's installed
base to switch to Internet Explorer. An internal Microsoft presentation
concluded in February 1998 that "[m]any customers see MS and NS as parity
products; no strong reason to switch," and another internal review three
months later reported, "IE4 is fundamentally not compelling" and "[n]ot
differentiated from Netscape v[ersion]4 — seen as a commodity." For
a time, even among new users, Navigator was likely to win most choices
between comparable browser software, because most people associated
the Internet and cutting-edge browsing technology with Netscape rather
than with Microsoft. So, if Microsoft had taken no action other than
improving the quality and features of its browser, Internet Explorer's
share of usage would have risen far less and far more slowly than it
actually did. While Internet Explorer's increase in usage share accelerated
and began to cut deeply into Navigator's share after Microsoft released
the first version of Internet Explorer (3.0) to offer quality and features
approaching those of Navigator, the acceleration occurred months before
Microsoft released the first version of Internet Explorer (4.0) to win
a significant number of head-to-head product reviews against Navigator.
This indicates that superior quality was not responsible for the dramatic
rise Internet Explorer's usage share.
376. Including Internet Explorer with Windows at no additional charge
likely helped the usage share of Microsoft's browsing software. It did
not, however, prevent OEMs from meeting demand for Navigator, which
remained higher than demand for Internet Explorer well into 1998. Moreover,
bundling Internet Explorer with Windows had no effect on the distribution
and promotion of browsing software by IAPs or through any of the other
channels that Microsoft sought to pre-empt by other means. Had Microsoft
not offered distribution licenses for Internet Explorer — and other
things of great value — to other firms at no charge; had it not prevented
OEMs from removing the prominent means of accessing Internet Explorer
and limited their ability to feature Navigator; and had Microsoft not
taken all the other measures it used to maximize Internet Explorer's
usage share at Navigator's expense, its browsing software would not
have weaned such a large amount of usage share from Navigator, much
less overtaken Navigator in three years.
I. The Success of Microsoft's Effort to Protect the Applications Barrier
to Entry from the Threat Posed by Navigator
377. In late 1995 and early 1996, Navigator seemed well on its way to
becoming the standard software for browsing the Web. Within three years,
however, Microsoft had successfully denied Navigator that status, and had
thereby forestalled a serious potential threat to the applications barrier
to entry. Indeed, Microsoft's Kumar Mehta felt comfortable expressing to
Brad Chase in February 1998 his "PERSONAL opinion" that "the browser battle
is close to over." Mehta continued: "We set out on this mission 2 years
ago to not let netscape dictate standards and control the browser api's
[sic]. All evidence today says they don't."
378. The population of browser users is expanding so quickly that Navigator's
installed base has grown even as its usage share has fallen. In fact, AOL
credited an estimate stating that Navigator's installed base in the United
States alone grew from fifteen million in 1996 to thirty- three million
in December 1998. By all indications, Navigator's installed base will continue
to grow. This does not mean, however, that Navigator is — or will be — an
attractive enough platform for the development of network-centric applications
to weaken the applications barrier to entry. As discussed above, the APIs
that Navigator exposes could only attract enough developer attention to
threaten the applications barrier to entry if Navigator became — or appeared
destined to become — the standard software used to browse the Web. Navigator's
installed base may continue to grow, but Internet Explorer's installed base
is now larger and growing faster. Consequently, the APIs that Navigator
exposes will not attract enough developer attention to spawn a body of cross-platform,
network-centric applications large enough to dismantle the applications
barrier to entry.
379. Not only did Microsoft prevent Navigator from undermining the applications
barrier to entry, it inflicted considerable harm on Netscape's business
in the process. By ensuring that the firms comprising the channels that
lead most efficiently to browser usage distributed and promoted Internet
Explorer to the virtual exclusion of Navigator, Microsoft relegated Netscape
to more costly and less effective methods of distributing and promoting
its browsing software. After Microsoft started licensing Internet Explorer
at no charge, not only to OEMs and consumers, but also to IAPs, ISVs, ICPs,
and even Apple, Netscape was forced to follow suit. Despite the fact that
it did not charge for Internet Explorer, Microsoft could still defray the
massive costs it was undertaking to maximize usage share with the vast profits
earned licensing Windows. Because Netscape did not have that luxury, it
could ill afford the dramatic drop in revenues from Navigator, much less
to pay for the inefficient modes of distribution to which Microsoft had
consigned it. The financial constraints also deterred Netscape from undertaking
technical innovations that it might otherwise have implemented in Navigator.
Microsoft was not altogether surprised, then, when it learned in November
1998 that Netscape had surrendered itself to acquisition by another company.
380. Were AOL ever to attempt to revive Navigator's usage share with the
intention of building it into a significant platform for the development
of network-centric applications, that effort would not make any headway
before January 1, 2001, when AOL's obligation to distribute Internet Explorer
on a preferential basis expires. In fact, there is presently no indication
that AOL will try even after that date to raise Navigator's usage share
substantially. First of all, as explained above, AOL need not revive Navigator's
usage share in order to achieve an adequate return on its investment in
Netscape. Secondly, while the due-diligence summary and board-of- directors
presentation that preceded the Netscape acquisition discuss AOL's commitment
to invest marketing resources in an effort to stem the slide in Navigator's
share, neither report indicates any intention on AOL's part to invest in
actually raising Navigator's share.
381. Also detracting from the notion that AOL is committed to reviving
the middleware threat through Navigator is the fact that AOL included in
the November 1998 agreement with Sun a provision making clear that the new
partnership with Sun in no way obligated AOL to drop Internet Explorer from
its client software in favor of Navigator. The provision states that "AOL
has no present intention to make any such replacement or use and shall have
no obligation to make any such replacement or use, and that it is AOL's
present expectation that it . . . may seek to renew and/or extend and expand
its present agreement with Microsoft Corporation to continue to distribute
Internet Explorer."
382. Bill Gates himself, who is not one to underestimate threats to Microsoft's
business, apparently concluded after reviewing the November 1998 transactions
that AOL would not seek to develop a platform that would compete with Microsoft's
network-centric interfaces. In December 1998, during a meeting convened
to analyze the implications of the AOL/Netscape/Sun transactions, Gates
declared to the assembled Microsoft executives, "AOL doesn't have it in
their genes to attack us in the platform space."
383. Finally, if its coveted placement in the Online Services Folder fails
to entice AOL into extending its agreement with Microsoft past January 2001,
Microsoft assuredly has the wherewithal to offer AOL additional inducements
in exchange for yet more commitments that will preclude a resurgence of
Navigator's usage share. Even if, despite the absence of signs to that effect,
AOL drops Internet Explorer and adopts Navigator with a mind to reviving
Navigator's usage share after January 1, 2001, Navigator's transformation
into a platform attractive enough to threaten the applications barrier would
be a chimerical aspiration, especially considering Microsoft's increasing
influence over network-centric standards. In any event, nothing that happens
after January 1, 2001 will change the fact that Microsoft has succeeded
in forestalling for several years Navigator's evolution in that direction.
384. Although the suspicion lingers, the evidence is insufficient to find
that Microsoft's ambition is a future in which most or all of the content
available on the Web would be accessible only through its own browsing software.
The evidence does, however, reveal an intent to ensure that if and when
full-featured, server-based applications begin appearing in large numbers
on the Web, the number of them relying solely on middleware APIs (such as
those exposed by Navigator) will be too few to attenuate the applications
barrier to entry.
385. At least partly because of Navigator's substantial usage share, most
developers continue to insist that their Web content be more-or-less as
attractive when accessed with Navigator as it is when accessed with Internet
Explorer. Navigator will retain an appreciable usage share through the end
of 2000. After that point, AOL may be able and willing to prevent Internet
Explorer's share from achieving such dominance that a critical mass of developers
will cease to concern themselves with ensuring that their Web content at
least be accessible through non-Microsoft browsing software. So, as matters
stand at present, while Microsoft has succeeded in forestalling the development
of enough full-featured, cross-platform, network- centric applications to
render the applications barrier penetrable, it is not likely to drive non-
Microsoft PC Web browsing software from the marketplace altogether.
VI.
MICROSOFT'S RESPONSE TO THE THREAT POSED BY SUN'S IMPLEMENTATION OF JAVA
386. For Microsoft, a key to maintaining and reinforcing the applications
barrier to entry has been preserving the difficulty of porting applications
from Windows to other platforms, and vice versa. In 1996, senior executives
at Microsoft became aware that the number of developers writing network-centric
applications in the Java programming language had become significant, and that
Java was likely to increase in popularity among developers. Microsoft therefore
became interested in maximizing the difficulty with which applications written
in Java could be ported from Windows to other platforms, and vice versa.
- Creating a Java Implementation for Windows that Undermined Portability
and Was Incompatible with Other Implementations
387. Although Sun intended Java technologies eventually to allow developers
to write applications that would run on multiple operating systems without
any porting, the Java class libraries have never exposed enough APIs to
support full-featured applications. Java developers have thus always needed
to rely on platform-specific APIs in order to write applications with advanced
functionality. Recognizing this, Sun sponsored a process for the creation
of a software method that would allow developers writing in Java to rely
directly upon APIs exposed by a particular operating system in a way that
would nevertheless allow them to port their applications with relative ease
to JVMs running on different operating systems.
388. On March 12, 1996, Sun signed an agreement granting Microsoft the
right to distribute and make certain modifications to Sun's Java technologies.
Microsoft used this license to create its own Java development tools and
its own Windows-compatible Java runtime environment. Because the motivation
behind the Sun-sponsored effort ran counter to Microsoft's interest in preserving
the difficulty of porting, Microsoft independently developed methods for
enabling "calls" to "native" Windows code that made porting more difficult
than the method that Sun was striving to make standard. Microsoft implemented
these different methods in its developer tools and in its JVM. Microsoft
also discouraged its business allies from aiding Sun's effort. For example,
Gates told Intel's CEO in June 1996 that he did not want the Intel Architecture
Labs cooperating with Sun to develop methods for calling upon multimedia
interfaces in Windows.
389. Since they were custom-built for enabling native calls to Windows,
and because they were developed by the firm with the most intimate knowledge
of Windows, the native methods that Microsoft produced were slightly easier
for developers to use than the method that derived from the Sun-sponsored
effort, and Java applications using Microsoft's methods tended to run faster
than ones calling upon Windows APIs with Sun's method. If a developer relied
on Microsoft's methods rather than Sun's, however, his Java application
would be much more difficult to port from the Windows-compatible JVM to
JVMs designed to run on different operating systems.
390. Microsoft easily could have implemented Sun's native method along
with its own in its developer tools and its JVM, thereby allowing Java developers
to choose between speed and portability; however, it elected instead to
implement only the Microsoft methods. The result was that if a Java developer
used the Sun method for making native calls, his application would not run
on Microsoft's version of the Windows JVM, and if he used Microsoft's native
methods, his application would not run on any JVM other than Microsoft's
version. Far from being the unintended consequence of an attempt to help
Java developers more easily develop high- performing applications, incompatibility
was the intended result of Microsoft's efforts. In fact, Microsoft would
subsequently threaten to use the same tactic against Apple's QuickTime.
Microsoft continued to refuse to implement Sun's native method until November
1998, when a court ordered it to do so. It then took Microsoft only a few
weeks to implement Sun's native method in its developer tools and JVM.
391. Although the Java class libraries have yet to provide enough functionality
to support full-featured applications, they have gradually expanded toward
that goal. In 1997, Sun added a class library called Remote Method Invocation,
or "RMI," which allowed Java applications written to call upon it to communicate
with each other in certain useful ways. Microsoft was not willing to stand
by and allow Java developers to rely on new Java class libraries unimpeded.
The more that Java developers were able to satisfy their need for functionality
by calling upon the Java class libraries, the more portable their applications
would become. Microsoft had developed a set of Windows-specific interfaces
to provide functionality analogous to the functionality RMI offered; it
wanted Java developers to rely on this Windows- specific technology rather
than Sun's cross-platform interface. Microsoft thus refused to include RMI
as a standard component of the Java runtime environment for Windows that
it shipped with Internet Explorer 4.0.
392. The license agreement it had signed with Sun the previous year obligated
Microsoft to offer RMI, at a minimum, on its developer Web site. Microsoft
did so, but with respect to the RMI beta release, it buried the link in
an obscure location and neglected to include an entry for it in the site's
index. Referring to RMI and any Java developers who might access Microsoft's
site looking for it, a Microsoft employee wrote to his approving manager,
"They'll have to stumble across it to know it's there. . . . I'd say it's
pretty buried."
393. It is unclear whether Microsoft ultimately placed RMI in a more prominent
place on its developer Web site. Even if it did, the fact that RMI was not
shipped with Microsoft's Java runtime environment for Windows meant that
Java developers could not rely on its being installed on consumers' PC systems.
If developers wanted their Java applications to call upon communications
interfaces guaranteed to be present on Windows users' systems, they had
no choice but to rely on the Microsoft-specific interfaces instead of RMI.
Microsoft undertook the effort to remove RMI from the rest of the Java class
libraries, instead of simply leaving it in place and allowing developers
to choose between it and Windows-specific interfaces, for the sole purpose
of making it more difficult for Java developers to write easily portable
applications.
394. In a further effort intended to increase the incompatibility between
Java applications written for its Windows JVM and other Windows JVMs, and
to increase the difficulty of porting Java applications from the Windows
environment to other platforms, Microsoft designed its Java developer tools
to encourage developers to write their Java applications using certain "keywords"
and "compiler directives" that could only be executed properly by Microsoft's
version of the Java runtime environment for Windows. Microsoft encouraged
developers to use these extensions by shipping its developer tools with
the extensions enabled by default and by failing to warn developers that
their use would result in applications that might not run properly with
any runtime environment other than Microsoft's and that would be difficult,
and perhaps impossible, to port to JVMs running on other platforms. This
action comported with the suggestion that Microsoft's Thomas Reardon made
to his colleagues in November 1996: "[W]e should just quietly grow j++ [Microsoft's
developer tools] share and assume that people will take more advantage of
our classes without ever realizing they are building win32-only java apps."
Microsoft refused to alter its developer tools until November 1998, when
a court ordered it to disable its keywords and compiler directives by default
and to warn developers that using Microsoft's Java extensions would likely
cause incompatibilities with non-Microsoft runtime environments.
- Inducing Developers to Use the Microsoft Implementation of Java Rather
than Sun-Compliant Implementations
395. If all Microsoft had done to combat the growth of easily portable
Java applications had been to increase the incompatibility between its Java
implementation and ones complying with Sun's standards, the effect might
have been limited. For if Sun could have assured developers that a Windows-compatible
Java runtime environment that complied with Sun's standards would be installed
on as many Windows PCs as Microsoft's version, and that it would run Java
applications as well as Microsoft's, developers might have considered the
cost in portability associated with relying on Microsoft-specific technologies
and instead written their Java applications using Sun's developer tools.
When Netscape announced in May 1995 that it would include with every copy
of Navigator a copy of a Windows JVM that complied with Sun's standards,
it appeared that Sun's Java implementation would achieve the necessary ubiquity
on Windows.
396. Determined to induce developers to write Java applications that relied
on its version of the runtime environment for Windows rather than on Sun-compliant
ones, Microsoft made a large investment of engineering resources to develop
a high-performance Windows JVM. This made Microsoft's version of the runtime
environment attractive on its technical merits. To hinder Sun and Netscape
from improving the quality of the Windows JVM shipped with Navigator, Microsoft
pressured Intel, which was developing a high-performance Windows- compatible
JVM, to not share its work with either Sun or Netscape, much less allow
Netscape to bundle the Intel JVM with Navigator. Gates was himself involved
in this effort. During the August 2, 1995 meeting at which he urged Intel
to halt IAL's development of platform-level software, Gates also announced
that Intel's cooperation with Sun and Netscape to develop a Java runtime
environment for systems running on Intel's microprocessors was one of the
issues threatening to undermine cooperation between Intel and Microsoft.
By the spring of 1996, Intel had developed a JVM designed to run well on
Intel-based systems while complying with Sun's cross-platform standards.
Microsoft executives approached Intel in April of that year and urged that
Intel not take any steps toward allowing Netscape to ship this JVM with
Navigator.
397. By bundling its version of the Windows JVM with every copy of Internet
Explorer and expending some of its surplus monopoly power to maximize the
usage of Internet Explorer at Navigator's expense, Microsoft endowed its
Java runtime environment with the unique attribute of guaranteed, enduring
ubiquity across the enormous Windows installed base. As one internal Microsoft
presentation from January 1997 put it, the company's response to cross-platform
Java entailed "[i]ncreased IE share — integrat[ion] with Windows." Partly
as a result of the damage that Microsoft's efforts against Navigator inflicted
on Netscape's business, Netscape decided in 1998 that it could no longer
afford to do the engineering work necessary to continue bundling up-to-date
JVMs with Navigator. Consequently, it announced that, starting with version
5.0, Navigator would cease to be a distribution vehicle for JVMs compliant
with Sun's standards.
398. The guaranteed presence of Microsoft's runtime environment on every
Windows PC and the decreasing likelihood that the primary host of the Sun-compliant
runtime environment (Navigator) would be present, induced many Java developers
to write their applications using Microsoft's developer tools, for doing
so guaranteed that those applications would run in the Java environment
most likely to be installed on a Windows user's PC. Owing to Microsoft's
deliberate design decisions, more developers using Microsoft's Java developer
tools meant that more Java applications would rely on the Windows-specific
technologies in Microsoft's runtime environment and thus would not be portable.
399. Microsoft was not content to rely solely on its anti-Navigator efforts
to ensure that its Java runtime environment would be the only one guaranteed
to be present on Windows PC systems. After all, Netscape was not the only
ISV capable of placing copies of a runtime environment on users' systems.
Many developers of network-centric applications were just as capable of
bundling compatible runtime environments with their applications as they
were of bundling browsing software. If the right runtime environment already
came bundled with the right browsing software, all the more convenient for
the ISV. If not (as would increasingly be the case after Netscape stopped
bundling a runtime environment with Navigator), though, the ISV could still
separately obtain the desired runtime environment and bundle it with every
copy of its product.
400. Recognizing ISVs as a channel through which Java runtime environments
that complied with Sun's standards could find their way onto Windows PC
systems, Microsoft induced ISVs to distribute Microsoft's version instead
of a Sun-compliant one. First, Microsoft made its JVM available to ISVs
separately from Internet Explorer so that those uninterested in bundling
browsing software could nevertheless bundle Microsoft's JVM. Microsoft's
David Cole revealed the motivation for this step in a message he wrote to
Jim Allchin in July 1997: "[W]e've agreed that we must allow ISVs to redistribute
the Java VM standalone, without IE. ISVs that do this are bound into Windows
because that's the only place the VM works, and it keeps them away from
Sun's APIs."
401. Microsoft took the further step of offering valuable things to ISVs
that agreed to use Microsoft's Java implementation. Specifically, in the
First Wave agreements that it signed with dozens of ISVs in 1997 and 1998,
Microsoft conditioned early Windows 98 and Windows NT betas, other technical
information, and the right to use certain Microsoft seals of approval on
the agreement of those ISVs to use Microsoft's version of the Windows JVM
as the "default." Microsoft and the ISVs all read this requirement to obligate
the ISVs to ensure that their Java applications were compatible with Microsoft's
version of the Windows JVM. The only effective way to ensure compatibility
with Microsoft's JVM was to use Microsoft's Java developer tools, which
in turn meant using Microsoft's methods for making native calls and (unless
the developers were especially wary and sophisticated) Microsoft's other
Java extensions. Thus, a very large percentage of the Java applications
that the First Wave ISVs wrote would run only on Microsoft's version of
the Windows JVM. With that in mind, the First Wave ISVs would not have any
reason to distribute with their Java applications any JVM other than Microsoft's.
So, in exchange for costly technical support and other blandishments, Microsoft
induced dozens of important ISVs to make their Java applications reliant
on Windows-specific technologies and to refrain from distributing to Windows
users JVMs that complied with Sun's standards. The record contains no evidence
that the relevant provision in the First Wave agreements had any purpose
other than to maximize the difficulty of porting Java applications between
Windows and other platforms. Microsoft remained free to hold the First Wave
ISVs to this provision until a court enjoined its enforcement in November
1998.
402. In addition to the First Wave agreements, Microsoft entered an agreement
with at least one ISV that explicitly required it to redistribute Microsoft's
JVM to the exclusion of any other and to rely upon Microsoft's native methods
to the exclusion of any other methods. Such agreements were also prohibited
by the November 1998 injunction.
403. Microsoft anticipated that the Java language would become a popular
medium in the multimedia arena. It thus wanted to ensure that the Java software
created to deliver multimedia content would not rely on Java implementations
that fostered portability. RealNetworks developed the most popular software
for the creation and play-back of streaming multimedia content. Therefore,
Microsoft sought to ensure that, to the extent Java developers relied on
RealNetworks' technologies, they would not be relying on a Java implementation
that complied with Sun's standards. So, in the July 18, 1997 agreement that
it entered with RealNetworks, Microsoft conditioned its agreement to distribute
RealNetworks' media player with Internet Explorer on RealNetworks' agreement
to exert its best efforts to ensure that its player primarily use Windows-specific
technology, rather than any analogous interfaces that Sun or Netscape might
develop, to display multimedia content. Absent this obligation, there would
have been no technical reason why RealNetworks could not have designed its
media player to support both Microsoft's technologies and ones developed
by Sun or Netscape. Although RealNetworks subsequently announced that it
planned to continue developing its own fundamental streaming software, the
July 18 agreement limited the extent to which that software would include
Java technologies that complied with Sun's standards.
- Thwarting the Expansion of the Java Class Libraries
404. As discussed above, Microsoft's effort to lock developers into its
Windows- specific Java implementation included actions designed to discourage
developers from taking advantage of Java class libraries such as RMI. Microsoft
went further than that, however. In pursuit of its goal of minimizing the
portability of Java applications, Microsoft took steps to thwart the very
creation of cross-platform Java interfaces. The incorporation of greater
functionality into the Java class libraries would have increased the portability
of the applications that relied on them, while simultaneously encouraging
developers to use Sun-compliant implementations of Java. In one instance
of this effort to stunt the growth of the Java class libraries, Microsoft
used threats to withhold Windows operating-system support from Intel's microprocessors
and offers to include Intel technology in Windows in order to induce Intel
to stop aiding Sun in the development of Java classes that would support
innovative multimedia functionality.
405. In November 1995, Microsoft's Paul Maritz told a senior Intel executive
that Intel's optimization of its multimedia software for Sun's Java standards
was as inimical to Microsoft as Microsoft's support for non-Intel microprocessors
would be to Intel. It was not until 1997, though, that Microsoft prevailed
upon Intel to not support Sun's development of Java classes that would have
allowed developers to include certain multimedia features in their Java
applications without sacrificing portability.
406. In February 1997, one of Intel's competitors, called AMD, solicited
support from Microsoft for its "3DX" technology, which provided sophisticated
multimedia support for games. Microsoft's Allchin asked Gates whether Microsoft
should support 3DX, despite the fact that Intel would oppose it. Gates responded:
"If Intel has a real problem with us supporting this then they will have
to stop supporting Java Multimedia the way they are. I would gladly give
up supporting this if they would back off from their work on JAVA which
is terrible for Intel." Near the end of March, Allchin sent another message
to Gates and Maritz. In it he wrote, "I am positive that we must do a direct
attack on Sun (and probably Oracle). . . . Between ourselves and our partners,
we can certainly hurt their (certainly Sun's) revenue base. . . . We need
to get Intel to help us. Today, they are not." Two months later, Eric Engstrom,
a Microsoft executive with responsibility for multimedia development, wrote
to his superiors that one of Microsoft's goals was getting "Intel to stop
helping Sun create Java Multimedia APIs, especially ones that run well (ie
native implementations) on Windows." Engstrom proposed achieving this goal
by offering Intel the following deal: Microsoft would incorporate into the
Windows API set any multimedia interfaces that Intel agreed to not help
Sun incorporate into the Java class libraries. Engstrom's efforts apparently
bore fruit, for he testified at trial that Intel's IAL subsequently stopped
helping Sun to develop class libraries that offered cutting-edge multimedia
support.
- The Effect of Microsoft's Efforts to Prevent Java from Diminishing the
Applications Barrier to Entry
407. Had Microsoft not been committed to protecting and enhancing the
applications barrier to entry, it might still have developed a high-performance
JVM and enabled Java developers to call upon Windows APIs. Absent this commitment,
though, Microsoft would not have taken efforts to maximize the difficulty
of porting Java applications written to its implementation and to drastically
limit the ability of developers to write Java applications that would run
in both Microsoft's version of the Windows runtime environment and versions
complying with Sun's standards. Nor would Microsoft have endeavored to limit
Navigator's usage share, to induce ISVs to neither use nor distribute non-Microsoft
Java technologies, and to impede the expansion of the Java class libraries,
had it not been determined to discourage developers from writing applications
that would be easy to port between Windows and other platforms. Microsoft's
dedication to the goal of protecting the applications barrier to entry is
highlighted by the fact that its efforts to create incompatibility between
its JVM and others resulted in fewer applications being able to run on Windows
than otherwise would have. Microsoft felt it was worth obstructing the development
of Windows-compatible applications where those applications would have been
easy to port to other platforms. It is not clear whether, absent Microsoft's
interference, Sun's Java efforts would by now have facilitated porting between
Windows and other platforms enough to weaken the applications barrier to
entry. What is clear, however, is that Microsoft has succeeded in greatly
impeding Java's progress to that end with a series of actions whose sole
purpose and effect were to do precisely that.
VII.
THE EFFECT ON CONSUMERS OF MICROSOFT'S EFFORTS TO PROTECT THE APPLICATIONS
BARRIER TO ENTRY
408. The debut of Internet Explorer and its rapid improvement gave Netscape
an incentive to improve Navigator's quality at a competitive rate. The inclusion
of Internet Explorer with Windows at no separate charge increased general familiarity
with the Internet and reduced the cost to the public of gaining access to it,
at least in part because it compelled Netscape to stop charging for Navigator.
These actions thus contributed to improving the quality of Web browsing software,
lowering its cost, and increasing its availability, thereby benefitting consumers.
409. To the detriment of consumers, however, Microsoft has done much more
than develop innovative browsing software of commendable quality and offer it
bundled with Windows at no additional charge. As has been shown, Microsoft also
engaged in a concerted series of actions designed to protect the applications
barrier to entry, and hence its monopoly power, from a variety of middleware
threats, including Netscape's Web browser and Sun's implementation of Java.
Many of these actions have harmed consumers in ways that are immediate and easily
discernible. They have also caused less direct, but nevertheless serious and
far-reaching, consumer harm by distorting competition.
410. By refusing to offer those OEMs who requested it a version of Windows
without Web browsing software, and by preventing OEMs from removing Internet
Explorer — or even the most obvious means of invoking it — prior to shipment,
Microsoft forced OEMs to ignore consumer demand for a browserless version of
Windows. The same actions forced OEMs either to ignore consumer preferences
for Navigator or to give them a Hobson's choice of both browser products at
the cost of increased confusion, degraded system performance, and restricted
memory. By ensuring that Internet Explorer would launch in certain circumstances
in Windows 98 even if Navigator were set as the default, and even if the consumer
had removed all conspicuous means of invoking Internet Explorer, Microsoft created
confusion and frustration for consumers, and increased technical support costs
for business customers. Those Windows purchasers who did not want browsing software
— businesses, or parents and teachers, for example, concerned with the potential
for irresponsible Web browsing on PC systems — not only had to undertake the
effort necessary to remove the visible means of invoking Internet Explorer and
then contend with the fact that Internet Explorer would nevertheless launch
in certain cases; they also had to (assuming they needed new, non-browsing features
not available in earlier versions of Windows) content themselves with a PC system
that ran slower and provided less available memory than if the newest version
of Windows came without browsing software.
By constraining the freedom of OEMs to implement certain software programs
in the Windows boot sequence, Microsoft foreclosed an opportunity for OEMs to
make Windows PC systems less confusing and more user-friendly, as consumers
desired. By taking the actions listed above, and by enticing firms into exclusivity
arrangements with valuable inducements that only Microsoft could offer and that
the firms reasonably believed they could not do without, Microsoft forced those
consumers who otherwise would have elected Navigator as their browser to either
pay a substantial price (in the forms of downloading, installation, confusion,
degraded system performance, and diminished memory capacity) or content themselves
with Internet Explorer.
Finally, by pressuring Intel to drop the development of platform-level NSP
software, and otherwise to cut back on its software development efforts, Microsoft
deprived consumers of software innovation that they very well may have found
valuable, had the innovation been allowed to reach the marketplace. None of
these actions had pro-competitive justifications.
411. Many of the tactics that Microsoft has employed have also harmed consumers
indirectly by unjustifiably distorting competition. The actions that Microsoft
took against Navigator hobbled a form of innovation that had shown the potential
to depress the applications barrier to entry sufficiently to enable other firms
to compete effectively against Microsoft in the market for Intel-compatible
PC operating systems. That competition would have conduced to consumer choice
and nurtured innovation. The campaign against Navigator also retarded widespread
acceptance of Sun's Java implementation.
This campaign, together with actions that Microsoft took with the sole purpose
of making it difficult for developers to write Java applications with technologies
that would allow them to be ported between Windows and other platforms, impeded
another form of innovation that bore the potential to diminish the applications
barrier to entry. There is insufficient evidence to find that, absent Microsoft's
actions, Navigator and Java already would have ignited genuine competition in
the market for Intel-compatible PC operating systems. It is clear, however,
that Microsoft has retarded, and perhaps altogether extinguished, the process
by which these two middleware technologies could have facilitated the introduction
of competition into an important market.
412. Most harmful of all is the message that Microsoft's actions have conveyed
to every enterprise with the potential to innovate in the computer industry.
Through its conduct toward Netscape, IBM, Compaq, Intel, and others, Microsoft
has demonstrated that it will use its prodigious market power and immense profits
to harm any firm that insists on pursuing initiatives that could intensify competition
against one of Microsoft's core products. Microsoft's past success in hurting
such companies and stifling innovation deters investment in technologies and
businesses that exhibit the potential to threaten Microsoft. The ultimate result
is that some innovations that would truly benefit consumers never occur for
the sole reason that they do not coincide with Microsoft's self-interest.
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__________/s/_________
Thomas Penfield Jackson
U.S. District Judge
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Date: November 5, 1999
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