Anne K. Bingaman Steven C.
Sunshine
Constance K. Robinson
UNITED STATES DEPARTMENT OF JUSTICE
10th & Constitution Avenue, N.W.
Washington, D.C. 20530
(202) 514-2401
John F. Greaney
N. Scott Sacks
Michael F. Bailey
Reid B. Horwitz
Kenneth W. Gaul
Antitrust Division
UNITED STATES DEPARTMENT OF JUSTICE
555 4th Street, N.W.
Room 9901
Washington, D.C. 20001
(202) 307-6200
Michael J. Yamaguchi
United States Attorney
OFFICE OF THE UNITED STATES ATTORNEY
450 Golden Gate Avenue
Box 36055
San Francisco, CA 94102
(415) 556-1126
Attorneys for Plaintiff United States of America
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF
CALIFORNIA
| | UNITED
STATES OF AMERICA,
Plaintiff,
v.
MICROSOFT CORPORATION, a
Washington corporation, and
INTUIT INC., a Delaware
corporation,
Defendants.
| )
)
) No. ___________
)
) (Antitrust)
)
) COMPLAINT FOR INJUNCTIVE RELIEF
) AGAINST COMBINATION IN
) VIOLATION OF SECTION 7 OF THE
) CLAYTON ACT
)
|
|
The United States of America, acting under the direction of the
Attorney General, brings
this civil action pursuant to Section 15 of the Clayton Act, as
amended, 15 U.S.C. § 25, to obtain
equitable and other relief to prevent a violation of Section 7 of the
Clayton Act, as amended, 15
U.S.C. § 18, and alleges:
Nature of the Action
1 . The United States brings this antitrust action to prevent the proposed
acquisition
by Microsoft Corporation, the world's largest and most powerful
personal computer software
company, of Intuit, Inc., the dominant producer of Personal
Finance/Checkbook
("PF/Checkbook") software. Microsoft is Intuit's most significant
competitor. The proposed
acquisition would eliminate competition between Microsoft and
Intuit, which has benefitted
consumers by leading to high quality, innovative products at low
prices.
2 . The PF/Checkbook Software Market is highly concentrated, with
Intuit's
"Quicken" product commanding a 1994 unit sales share of 69% and
a total installed base of more
than seven million customers. Microsoft's PF/Checkbook product,
"Microsoft Money," was
introduced in 1991, and the resulting competition led to lower
prices and increased innovation.
Microsoft is now the number two competitor in the PF/Checkbook
Software Market, with a 1994
unit sales market share of about 22%, and an installed user base of
about one million customers.
Absent the acquisition, Microsoft Money would likely continue to
compete successfully because
(a) Microsoft already has devoted substantial resources to the
Money product, which it would
increase even more substantially in the future, and (b) the
PF/Checkbook Software Market, for
the reasons explained below, is strategically important to
Microsoft.
1 . The effects of this proposed acquisition could reach well beyond
today's
PF/Checkbook Software Market. The acquisition threatens harm to
consumers in other
important areas of commerce, especially the area of personal
computer based ("PC-based") home
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banking, which is a relatively tiny part of the PF/Checkbook
Software Market today. Before the
acquisition, Microsoft and Intuit had independent plans to compete
in the field of electronic
commerce, starting with enhancement of their PF/Checkbook
software products to enter the
emerging home banking marketplace. Established PF/Checkbook
software products provide an
important asset to develop home banking, in part because existing
customers are likely
candidates for PC-based home banking. The special competitive
significance to Microsoft and
Intuit of dominating the present PF/Checkbook Software Market as
a strategic "cornerstone"
asset in that emerging business (and the likely effect of the
proposed acquisition) were
recognized by Intuit's Chairman, who wrote in a September 1994
memorandum to his board
about the proposed acquisition of Intuit by "Godzilla" (Intuit's code
name for Microsoft):
Our future vision is both vulnerable
to and would benefit from
Godzilla's strengths. . . . Our
combination gives FIs [Financial
Institutions] one clear option,
eliminating a bloody share war and
speeding adoption. --That, in turn
enriches the terms of trade we
can negotiate with FIs.
. . . .
Vulnerability [of Intuit to Microsoft]
is a key question.
If we believe we are not overly
vulnerable, then we believe we can
succeed. Elimination of
competition will enhance that success,
perhaps greatly.
(Emphasis supplied).
2 . Microsoft's Manager, Business Development and Investments, reached a
similar
conclusion in an August 1994 analysis of the proposed
acquisition.
* Slade [a Microsoft code name for Intuit]
is the clear and
dominant leader in PF software and
the current installed base of
users would likely prefer to stay with
Quicken when they do
electronic transactions. MS owns
Windows and Marvel [a new
Microsoft on-line network] and
therefore is in a much better
position to access many millions of
users in the future with PF
service options. Since neither
company has both of these strengths,
the banks, credit card associations
and others are in a stronger
position to play us off against each
other. As a combination, we
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would be dominant.
(Emphasis supplied).
3 . Microsoft has agreed to acquire Intuit for what, as of Monday, April 24,
1995
would exceed $2 billion in Microsoft stock, more than twice
Intuit's preannouncement market
capitalization of $813 million. In an attempt to avoid an obvious
antitrust challenge, Microsoft
devised a planned "fix," whereby it has agreed simultaneously to
transfer part (but not all) of
Microsoft's Money business unit to a third party, Novell, Inc. The
purported fix would fail to
remedy the anticompetitive effects of the proposed Intuit
transaction. Novell, with the assets it is
supposed to receive from Microsoft, cannot be nearly as effective a
competitor with Money as
Microsoft is and would be absent the transaction.
4 . If consummated, the proposed transaction, even accounting for the asset
sale to
Novell, likely would add to the dominance of the number one
product (Quicken), would weaken
greatly the number two product (Money), and would substantially
increase concentration and
substantially reduce competition in the PF/Checkbook Software
Market. Because these products
are a crucial springboard into other important, but emerging, areas
of commerce, the effect on
consumers would likely be higher prices and lessened innovation
not only in PF/Checkbook
software products but in other related products and services, such
as PC-based home banking.
5 . Accordingly, the proposed acquisition violates Section 7 of the Clayton
Act, as
amended, 15 U.S.C. § 18.
Jurisdiction
6 . Microsoft sells
Microsoft Money and Intuit sells Quicken in interstate
commerce. Defendants' activities in developing, producing and
selling Money and Quicken also
substantially affect interstate commerce in other respects. The
Court has jurisdiction of this
action and jurisdiction over the parties pursuant to 15 U.S.C. § 22
and 28 U.S.C. §§ 1331 and
1337.
Page 5
Venue
7 . Both Microsoft and Intuit transact business in this District. Venue is
proper in
this District under 15 U.S.C. § 22 and 28 U.S.C. § 1391(c).
The Defendants
8 . Microsoft is a Washington corporation with its headquarters in
Redmond,
Washington. Microsoft's operating system software, particularly its
Disk Operating System
("DOS") and its associated Windows product, are by far the
dominant operating systems for Intel
x86 architecture personal computers (sometimes also called
"IBM-compatible" personal
computers), which in turn is the dominant platform for personal
computing. Microsoft also
develops, markets and sells applications software, including
applications software for use with
DOS and Windows on IBM-compatible personal computers.
Microsoft has announced that it
will introduce "Windows 95" in August of this year. Windows 95
will be the next upgraded
release of Microsoft's Windows operating system.
9 . Microsoft has a dominant position in operating systems for
IBM-compatible
personal computers. It also is the most powerful competitor in the
world for many categories of
applications software. Using its resources and operating system
position, Microsoft has
introduced new products to compete directly against, and has
secured the leading position over,
the previous leaders in the most significant business applications
software categories for IBM-
compatible personal computers, including spreadsheet software
(Microsoft's Excel has overtaken
Lotus 1-2-3), word processing software (Microsoft's Word has
overtaken WordPerfect), and
others. Intense competition against category leaders by the most
powerful competitor in the
industry has benefitted consumers by increasing the pace of
innovation and accelerating the price
decline of products in those categories.
1
Page 6
10 . In the field of consumer software for
IBM-compatible personal computers,
Microsoft also has competed vigorously and successfully. It has
the leading applications in
several categories, including a combined word
processing/spreadsheet/database product
(Microsoft Works), a low-end desktop publishing product
(Microsoft Publisher), a CD-ROM
encyclopedia (Microsoft Encarta) and others. As with business
applications, Microsoft has
directly challenged the leader in some categories (such as desktop
publishing and CD-ROM
encyclopedias), and has competed successfully to a leading
position. Such competition has
benefitted consumers through greater innovation and lower
prices.
11 . Intuit is a Delaware corporation with its
headquarters in Menlo Park, California.
Intuit has concentrated its efforts on the development and sale of
financial applications software.
Intuit's Quicken is the leader in the PF/Checkbook Software
Market by a substantial margin. Intuit also owns the category
leader in personal tax preparation software (Turbo Tax, a recently
acquired product) and the co-leader in small business accounting
software (Quickbooks).
Relevant
Product Market
12 . Some 30% of households in the United States
now have a home personal
computer (a "home PC"). The vast majority of home PCs now
being sold are IBM-compatible
personal computers. All IBM-compatible personal computers can
run Microsoft's DOS or
Windows operating systems, and an overwhelming majority (well
in excess of 80%) now are
being sold with a Microsoft operating system. Because
applications are written to work with
specific operating systems, applications programs for
IBM-compatible personal computers must,
as a practical matter, be written to run on Windows or, to a lesser,
waning extent, on DOS
without Windows.
13 . One important application for home PCs is
PF/Checkbook software. Intuit's
Quicken product was the number one selling home PC software
product in 1994, topping all
others, including even the most popular entertainment programs.
PF/Checkbook software is
Page 7
designed to give the home PC user electronic control over an
integrated set of personal finance
records and transactions. Currently, the core integrated functions
of PF/Checkbook software
products include an "electronic checkbook," which automates
check writing and check register
record keeping, household budgeting, personal asset and liability
tracking and reporting,
including features such as loan tracking, stock and bond portfolio
tracking, home inventories,
cash and retirement account tracking and personal financial
statements, and "front end" software
for automated bill-paying in association with a bill-paying service.
The term "front end" means
that only the initiating part of the function resides in home PC
software. To complete the
function, there must also be a communication channel or "switch"
(usually a service using the
telephone network) and a "back end," consisting of software and
associated equipment at the
other end of the line to receive and process each transaction (in
this example, the other end of the
line would be located at a bill-paying service, but for home
banking it would be at the bank).
14 . Importantly, the checkbook, automated bill
paying, asset tracking and other
functions in PF/Checkbook software are linked together so that
transactions are automatically
accounted for wherever affected assets appear in the program.
That integration allows the
consumer to track all transactions across account, financial and
tax files.
15 . The core functions of PF/Checkbook software
have increased in both number and
quality over the past several years, as Microsoft and Intuit have
battled to attract new customers
through better and more useful products. Competition to improve
old functions and to add new
ones is an important part of the rivalry between Intuit and
Microsoft.
16 . There has been substantial innovation in the
market for Personal
Finance/Checkbook software. Within the past year, a potentially
important new function, front
end software for home banking, has been developed and
incorporated into some PF/Checkbook
software products. Microsoft's 1994 release of Microsoft Money
(version 3.0) included a home
banking feature. This year, Intuit plans to add home banking in its
1995 release of Quicken
Page 8
products. As with the functions discussed above, home banking is
linked to the rest of the
program so that home banking transactions are accounted for
automatically wherever affected
assets appear in the program.
17 . PF/Checkbook software is targeted principally
for sale to owners of home PCs. It
is sold through two major distribution channels, the "OEM
channel" and the "retail channel."
The OEM channel consists of personal computer manufacturers
who pre-install operating
systems and applications programs on their personal computers.
The retail channel consists both
of sales through retail stores that sell software products and direct
sales to consumers who order
from a catalog or over telephone lines.
18 . PF/Checkbook software for IBM-compatible
personal computers (the
PF/Checkbook Software Market) is a relevant product market
under the Clayton Act.
PF/Checkbook software offers a group of linked features that
make it a superior product for
personal financial asset tracking and for which there are no close
substitutes. Purchasers and
potential purchasers of IBM-compatible PF/Checkbook software
would not turn to any alternate
product if the price of PF/Checkbook software increased by a
small but significant amount.
Relevant Geographic Market
19 . The relevant geographic market is the United
States. Monetary, language,
financial industry, and other differences outside the United States
prevent PF/Checkbook
software products suitable for other foreign markets from being
reasonable substitutes for a U.S.
version.
Competition and Entry
20 . The principal competitors in the
PF/Checkbook Software Market are Intuit with
Quicken and Microsoft with Money. H&R Block Financial's
"Managing Your Money" and
Computer Associates' "Simply Money" also are sold in the
market, but have little competitive
Page 9
significance. Managing Your Money was a significant participant
several years ago, but its
importance as a competitive influence has declined. The product
recently has been offered for
sale by H&R Block at least partly as a result of the announcement
of the proposed Intuit
acquisition. Similarly, Computer Associates, a major supplier of
mainframe computer software,
attempted unsuccessfully to enter and establish a meaningful
presence in the market by "giving
away" more than a million free copies of Simply Money for only a
shipping and handling charge.
A low percentage of "free copy" recipients actually use the
software and Computer Associates has little, if any, competitive
influence in the market.
21 . The PF/Checkbook Software Market is highly
concentrated. Quicken's unit
market share of 1994 sales was about 69%. Microsoft Money's
unit share was about 22%. Unit
shares for Managing Your Money and Simply Money were less
than 5% each. From a 1994
revenue perspective, Quicken's lead in the market was even more
substantial: Quicken, 85%;
Microsoft Money, 7%; Managing Your Money, 5%; and Simply
Money, 2%.
22 . Entry into the PF/Checkbook Software Market
is difficult. Between them, Intuit
and Microsoft control more than 90% of the market, and both are
daunting competitors in the
market. A substantial installed user base with an established,
successful product (such as Intuit's
seven million customer installed base for Quicken) creates a
revenue stream of profitable
upgrade sales to the installed base. The upgrade revenue stream
can justify low initial pricing by
market leaders with a proven product, particularly in the OEM
market. Such pricing, and the
prospect of such pricing, discourages new entry, because a
potential competitor with an unproven
product would know that it would at best be faced with years of
losses, with no assurance of ever
generating enough upgrade revenue to recoup its losses. Writing
adequate software "code" even
to match today's successful products would be no easy task--as
witnessed by Microsoft's own
four-year effort to achieve feature parity with Quicken. Even with
the code, entry into the
PF/Checkbook Software Market would be difficult, expensive and
slow. Microsoft's own
Page 10
attempt to enter the market with its Microsoft Money product has
been slow and expensive.
After four years, it still has not achieved a positive return on its
investment, but has incurred
substantial losses.
23 . Most OEMs and retail customers in the
PF/Checkbook Software Market will
purchase only products with an established reputation for
reliability, performance and customer
support. At a minimum, it takes years and a significant
investment of resources to build such a
reputation.
24 . In sum, a new competitor would not be likely
to enter successfully the
PF/Checkbook Software Market within any reasonable time with
a product offering the core
functions necessary to compete effectively. No such entry could
be expected, within any
reasonable time, to deter or counteract a small but significant
price increase resulting from the
acquisition.
The Proposed
Acquisition
25 . Microsoft has agreed to acquire all the stock
of Intuit from Intuit's shareholders in
exchange for 1.336 shares of Microsoft stock for each share of
Intuit stock, with a minimum
price of $1.4 billion. If the transaction closed today, the price
would be approximately $2 billion.
There is no ceiling on the purchase price, which ultimately could
be higher.
26 . If the proposed acquisition of Intuit closes,
Microsoft has agreed to transfer to
Novell some of its Microsoft Money business assets--but not
enough to allow it to compete
anywhere near the level provided by Microsoft before the
proposed Intuit acquisition. The
transfer to Novell would include only the Microsoft Money
computer code, associated
intellectual property and documentation, the Microsoft Money
customer list and some technical
assistance from a few members of the Microsoft Money team
during a brief transition period.
The Microsoft Money team itself, including all product managers,
developers, programmers and
sales and marketing personnel, apparently will remain with
Microsoft. In contrast, Microsoft has
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described the Intuit people as the most important resource it will
acquire if the transaction closes.
Novell had no plans to enter the PF/Checkbook Software Market
as an owner/developer of such software before Microsoft offered
Microsoft Money to it in connection with this proposed
transaction. Instead, Novell proposed to become a Quicken
customer, intending to resell
Quicken as part of a package of home computer software
products.
27 . Although Microsoft considered the Microsoft
Money business to be important
enough to justify devoting significant resources--many millions of
dollars--as a business in its
own right and as the cornerstone of a significant emerging market,
the up-front purchase price to
be paid by Novell for those Microsoft Money assets that
Microsoft has agreed to transfer would
be zero. Novell would thereafter pay to Microsoft a ten percent
royalty on its first year of net
sales of Money, which would be less than a million dollars even if
Novell were as successful as
Microsoft expected to be in 1995. To induce Novell to enter into
the proposed transaction,
Microsoft has given Novell certain other guarantees that could
require Microsoft to pay millions
of dollars to Novell if it does not succeed with Money.
28 . Before the proposed transaction was
announced, part of the vigorous competition
between Intuit Quicken and Microsoft Money was competition for
OEM customers and for PC-
based home banking strategic allies. Microsoft has an existing
business relationship with two
important OEMs, Packard-Bell and Gateway 2000. Both
currently pre-install on their Home PCs
a "bundle" of Microsoft consumer applications software that
includes Microsoft Money. Shortly
before the acquisition was announced, Microsoft received a
signed letter of intent from
MasterCard, under which Microsoft Money and derivative
products of Microsoft Money would
have been used as part of a "Master Banking" home banking
program in a strategic alliance
between Microsoft and MasterCard. Both relationships were
valuable to Microsoft's Money
business. The Microsoft Money relationships with Packard-Bell,
Gateway and MasterCard
would be of critical importance to Novell's ability to compete with
Money. Microsoft did not
Page 12
agree to transfer those relationships to Novell, but agreed instead
not to use Quicken to compete
with Novell in relationships with Packard-Bell, Gateway or
MasterCard through March 1996.
Harm To Competition
29 . The effect of the proposed acquisition of Intuit
by Microsoft may be substantially
to lessen competition in the PF/Checkbook Software Market.
30 . Actual and potential competition between
Microsoft and Intuit, the two strongest
and most significant competitors in the PF/Checkbook Software
Market, will be eliminated.
Competition from Novell against Quicken will be at best a weak
replacement for the lost
competition from Microsoft. Microsoft, the strongest competitor
in the software industry, has the
resources, ability and resolve to challenge Intuit's leading market
position (in both the OEM and
retail channels), while Novell does not. Absent the acquisition,
competition between Quicken
and Microsoft Money would increase. Microsoft's reason for
proposing the acquisition of Intuit
was its identification of the PF/Checkbook Software Market as
strategically important to
Microsoft as a leading home PC application today, as a front end
for home banking tomorrow,
and as a front end more generally for on-line financial transactions
in the more distant future.
31 . But for the proposed acquisition, Microsoft
would compete aggressively against
Intuit for sales in the PF/Checkbook Software Market. In fact,
Microsoft advised Intuit that
Microsoft would substantially increase its competitive efforts
against Quicken if Intuit did not
agree to be acquired. Microsoft's Executive Vice President
reported to Microsoft's Chairman:
I tried to tell him [Intuit's
Chairman] what else we could do since we have
decided this is such an important area and we had not organized
or staff[ed]
adequately. I tried to tell him how much we could do with a $1
billion. I tried to
be non threatening, but let him know we would do something
aggressively.
3 . The proposed transaction would weaken Money greatly, which
would further
enhance the dominance of Quicken in Microsoft's hands. As a
senior Microsoft official
responsible for Microsoft Money wrote in approximately June
1994:
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If we were to try to buy Intuit and had to sell our offerings in [the
core
PF/Checkbook functions], who would be willing to buy us
out and be a serious
competitor. If it was known that we were buying Intuit's
offerings in [the core
PF/Checkbook functions], then I can't imagine anyone would
be stupid enough
too [sic]--not only would they be way, way far behind
competitively[,] I think
they would imagine that we'd
never be allowed to do it.
(Emphasis supplied).
1 . Potential new competitors, if any, would find
it even more daunting to compete
against Quicken, the number one product in the market, if it were
in Microsoft's hands.
Microsoft would retain many of the advantages that made
Microsoft Money a powerful number
two competitor against Quicken. Instead of using those
advantages to compete against Quicken,
Microsoft would be able to use the combined advantages of both
to dominate potential customers
and strategic partners more thoroughly than Intuit could do with
Quicken or Microsoft could do
with Microsoft Money--especially if the two had to compete with
each other.
2 . As spelled out in defendants' documents
(quoted in Paragraphs 3 and 4), the
proposed transaction creates an appreciable risk that future
PC-based home banking services will
have to use a Microsoft Quicken front end at higher prices than
would prevail in the absence of
the acquisition.
3 . Novell would be a substantially weaker
competitor with Money against Microsoft
Quicken than Microsoft has been (and would continue to be)
against Intuit Quicken. For
example, because of the market power that Microsoft will acquire
if the acquisition is
consummated and Novell's lack of comparable advantages,
MasterCard, Gateway and Packard-
Bell, which Microsoft and Novell agreed were crucial to Novell's
ability to compete with Money
in the marketplace, will not commit to arrangements with Money
in Novell's hands that are
comparable to the arrangements they had or proposed to have with
Microsoft Money.
4 . Novell lacks important assets, resources and
commitment to the product that give
Microsoft competitive strength with Money and make the
PF/Checkbook category strategically
Page 14
important to Microsoft. Novell was not willing to pay any
up-front purchase price to obtain
Money. The category is not as strategically important to Novell as
it is to Microsoft. Novell may
ultimately conclude not to continue funding the extended losses
that would be required, with
little chance of success, to compete vigorously enough to provide
price, quality and innovation
discipline in the PF/Checkbook Software Market comparable to
Microsoft's competition in the
absence of the proposed acquisition.
39. Unless restrained, the proposed acquisition will violate Section 7
of the Clayton
Act.
Requested Relief
The United States requests (a) adjudication that Microsoft's
proposed acquisition of Intuit
would violate Section 7 of the Clayton Act, (b) preliminary and
permanent injunctive relief
preventing consummation of the proposed acquisition, (c) an
award to the United States of the
costs of this action, and (d) such other relief as is just and
proper.
Page 15
Dated: April 27, 1995
__________________________________ _________________________________
ANNE K. BINGAMAN MICHAEL F. BAILEY
Assistant Attorney General REID B. HORWITZ
KENNETH W. GAUL
United States Department of Justice
555 4th Street, N.W.
Room 9901
__________________________________ Washington, D.C. 20001
STEVEN C. SUNSHINE (202) 307-6200
Deputy Assistant Attorney General
__________________________________
CONSTANCE K. ROBINSON
MICHAEL J. YAMAGUCHI
Director of Operations United States Attorney
By
___________________________
__________________________________
JOHN F. GREANEY
Assistant United States Attorney
Chief, Computers and Finance Section Office of the
United States Attorney
Northern District of California
450 Golden Gate Avenue
Box 36055
San Francisco, California 94102
_________________________________ (415) 556-1126
N. SCOTT SACKS
Assistant Chief, Computers and Finance Section
FOOTNOTES
1 The United
States takes no position in this complaint as to whether all of Microsoft's practices were lawful
under the antitrust laws.
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