IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
UNITED STATES OF AMERICA,
Plaintiff,
v.
MICROSOFT CORPORATION,
Defendant.
STATE OF NEW YORK ex rel.
Attorney General DENNIS C. VACCO, et al.,
Plaintiffs,
v.
MICROSOFT CORPORATION,
Defendant.
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Civil Action No.
98-1232 (TPJ)
FILED UNDER SEAL
(Seal removed pursuant to court's
October 14, 1998 Order
Civil Action No.
98-1233 (TPJ) |
DIRECT TESTIMONY OF WILLIAM H. HARRIS
William Harris hereby declares as
follows:
I. BACKGROUND
- I am President and Chief Executive Officer of Intuit Inc. ("Intuit"). I assumed that
position August 1, 1998, after having been Executive Vice President since December 1993.
As Executive Vice President, I was responsible first for Intuit's tax preparation software
business, and later both the tax and consumer software businesses. Prior to joining Intuit, I
was President of ChipSoft, Inc., the predecessor to what became Intuit's tax business upon
the acquisition of ChipSoft in 1993. In these roles, I have gained substantial experience
overseeing the development, marketing and distribution of both software and online
products, content and services.
- Intuit operates in an industry where Microsoft has substantial power that affects the
way we do business, develop and market our products and interact with other participants in
the industry. The principal vehicle through which Microsoft has attained and exercised this
power is through its dominant desktop operating system, Windows. Because the
overwhelming majority of desktop PCs use Windows as the operating system to run the
computer, Windows has become a "choke point" that software application vendors and
providers of Internet related content and services must utilize in order to gain access to
customers and through which most computer users access computer products and services,
the Internet, and potentially all electronic commerce. The Windows operating
system is to
most computer users and providers of software applications or Internet services what
the dial tone is to businesses and customers using the telephone: it's the thing you must
have access to if you are going to communicate with each other.
II. SUMMARY OF TESTIMONY
- I intend to testify on the importance of the operating system and the ways in which
Microsoft has used its control of the operating system to influence the way Intuit has
conducted its business. I will explain how Microsoft obtained an exclusive distribution and
promotion agreement with Intuit, to the exclusion of Microsoft's principal competitor in the
browser business, Netscape. I will also describe the importance of the operating system to
our business, and Microsoft's ability to extend its power over the Windows desktop to
restrict the ability of software vendors and Internet content providers to reach potential
customers in the emerging new market known as the Internet.
- In the consumer software industry, Microsoft's Windows operating system is the
dominant operating system running on personal computers. Because Microsoft owns the
dominant operating system, Microsoft also controls the premier distribution mechanism for
any software application, which is distribution with the operating system itself. With this
unique method of distribution, Microsoft has the unparalleled power to favor one product
over another by tying competitive products to the operating system, as it has done by
distributing Internet Explorer with each copy of Windows.
- With the recent growth in popularity of the Internet, various Internet related products
and services have emerged. Many companies,
including Intuit and Microsoft, are using the
Internet to offer a wide variety of products and
services. Distribution of Internet Explorer with
each copy of Windows is helping to extend
Microsoft's control of the computing
environment by making Windows a gate keeper
for the Internet. As the distribution of Internet
Explorer with the operating system becomes
more widespread and entrenched, more and
more companies which offer new products and
services on the Internet will discover, as Intuit
has, the need to pass through the Windows
choke point to reach customers on the Internet.
- Intuit entered into an Agreement to
promote Microsoft Internet Explorer to
the
express exclusion of Netscape Navigator
and to forego any business
relationships with
Netscape, because Microsoft guaranteed
Intuit placement on the Windows
desktop for
Intuit's Internet-based products and
services. However, during the
negotiations it was made
clear to me that promotion of Intuit's
Internet content on the Windows
desktop was
conditioned on our agreement to forego
business relationships with Microsoft's
browser
competitor, Netscape, including our
then-existing arrangement to distribute
and promote
Navigator.
- Now that Microsoft is gaining control of
the Internet browser market, Microsoft
has in
its sole possession another prime piece of
desktop real estate, the browser start
page. Just
as it used its Windows desktop to favor
Internet Explorer to the detriment of
Navigator,
Microsoft has the exclusive ability to use the
browser start page to favor its own
Internet
content and services to the detriment of
competitors. Microsoft has the power
to be discriminatory (by giving
preferred placement to its own web
offerings or to those of favored
partners, or by charging fees to gain
access to this unique gateway to the
Internet), or even exclusionary (by
denying access altogether to certain
products or companies).
- Thus, I am testifying today both as a
witness of Microsoft's ability to
leverage its
desktop to extract exclusionary agreements,
and as a competitor of Microsoft. I
have first
hand knowledge about Intuit's experience
with Microsoft's use of this operating
system
desktop to prevent Intuit from doing
business with Netscape. Moreover, as a
competitor of
Microsoft, I am particularly concerned that
Microsoft has managed to expand its
operating
system choke point to include the browser
and the start page, and Microsoft's
resulting
power to limit customer choice by
controlling Internet product and
service providers' access
to customers. Unless this Court limits
Microsoft's ability to expand the
Windows choke
point into the Internet, Microsoft's ability to
be the gatekeeper of the Internet will
be
unchallenged, and competition on the
Internet will be constrained. Such a
result will have
implications far beyond the software
industry, as the Internet is rapidly
becoming a major
conduit for communications and commerce
generally. As Microsoft's control of the
gateway to the Internet increases, the
likelihood will decrease that new
content or services
will be successfully developed to compete
with content or services that have been
favored
by Microsoft with preferred and
near-ubiquitous access to customers.
- I am further concerned about Microsoft's
ability to continue to utilize the unique
distribution capabilities of its operating
system through subsequent
technological and market changes in
the software industry. To be effective
any remedy imposed by this Court
cannot be specific to a narrow set of
conduct presently being undertaken by
Microsoft. Rather, it is my view that
such remedy should be based on the
broad principle of "operating system
neutrality": that Microsoft should not
use its operating system control in a
manner which is discriminatory or
exclusionary in the development,
marketing and distribution of either its
own or third party content, services or
products. Further, I believe this
remedy should contain mechanisms to
permit this principle to be applied
against subsequent changes in
Microsoft's conduct in the context of
then current market conditions.
Without such a broad remedy,
Microsoft's ability to control customer
access will continue to increase, and
the competition and increased
customer choice that would have
otherwise resulted from future
technological innovations will be
substantially restricted and reduced.
III. DESCRIPTION OF INTUIT'S BUSINESS
- Intuit is a leading provider of accounting, tax, and personal finance software
and
services for individuals, small businesses and accounting professionals. Intuit's
mission is to use interactive technology to revolutionize the way these customers
manage their financial lives. Intuit sells a range of desktop software products,
Internet-based products and services, and financial supplies, in three primary
areas: (i) small business accounting software, financial supplies and related
services; (ii) personal, professional and small business tax preparation software
and services; and (iii) personal finance software and
services.
- Intuit's products include QuickBooks, the most popular small business accounting
software; TurboTax, the best-selling personal tax preparation software; and Quicken,
the
leading personal finance software. Intuit's Quicken.com web site on the Internet offers
a
comprehensive selection of personal finance news, information and tools.
- Intuit distributes its products through direct, retail and OEM channels. Over the last
few years, there has been an increasing recognition of distribution through OEMs as an
important vehicle to reach new users. Moreover, our experience has shown that the
relative
prominence of an application's placement on a new computer system will significantly
affect
the likelihood of a user's trying the application, and such trials are a key determinant of
ultimate adoption. Because every OEM must include Windows with its systems,
Microsoft
has direct power to influence Intuit's distribution on OEM machines. For example,
Intuit
has been directly prevented from implementing various placement and promotion
strategies
as a result of Microsoft's contractual restrictions on an OEM's ability to customize the
Windows desktop.
- In addition to traditional software distribution, the Internet has become essential to
Intuit's continued long-term growth. A principal focus of Intuit's current strategic
efforts
has been to establish Intuit as a premier provider of personal and small business
financial
information and services on the Internet. While Intuit's revenue from Internet products
and
services was about 6% of the company's total revenue for fiscal 1998, the dramatic
growth
of the Internet and of Intuit's Internet
businesses promises to make the
Internet a meaningful source of Intuit's
revenues within a few years.
- For the type of Internet-based products
and services that Intuit sells -- that is,
Internet
content products and services -- the most
critical factors for competitive success
are speed
in getting those new products and services
to market, the ability to distribute them
effectively, the ability to generate web site
traffic, and the quality of the products
and
services.
- An Internet web site generates income in
three principal ways. First, the owner
of a
web site can sell advertising and
sponsorships on the site. Second, the
owner of a web site
can earn transaction fees from third parties
that sell services through the web site.
Third,
the owner of a web site can earn user fees
directly from the customer. Intuit does
all three.
- Volume of customers at a web site is the
single most important factor in
determining
advertising rates that the web site owner
can charge for space on the web site.
Similarly,
customer volume will normally bear
directly on the volume of transaction
and user fees that
can be earned by a web site owner. Thus,
the success and viability of an Internet
web site
depends on the ability to draw computer
users to that site.
- One of the most valuable tools for
drawing customers to a web site is the
placement of
a message, icon or logo on an active
computer screen that permits a
computer user to move
directly to a web site without the need for
intermediate steps or general searches
on the
Internet. Such product placement does more
than advertise a web site, it provides a
direct
link to the web site and the content and services of that site. It is well understood
in our industry, as in others, that customers are generally more likely to access
what they see and can easily reach than what they need to search for. The more
steps that must be taken to reach a web site, the less likely it is that a customer
will travel to the web site.
- The importance to Intuit of product placement for its web sites is reflected in the
business deals the company has made to ensure such prominent placement. For
example:
- On February 17, 1998, Intuit announced a three-year agreement with America
Online,
a prominent provider of online services, pursuant to which Intuit will pay America
Online
$30 million for the right to have America Online promote to its members Intuit's web
sites
and online services. Among other things, the agreement provides that icons and
messages
for Intuit's web sites and services will appear on the "front pages" of AOL and
AOL.com
(the default home page for Internet access by AOL members). That is, Intuit has
become a
major "anchor tenant" of AOL's Personal Finance and WorkPlace Channels.
- On June 11, 1997, Intuit invested $40 million in Excite, a leading content aggregator
and navigation hub, or "search engine," on the Internet. An agreement between the
companies provided, among other things, that Intuit would become the primary
provider
and aggregator of financial content on Excite's Internet search services, thereby
helping to
direct computer users to Intuit web sites and services. Within one month of
implementing
the Excite agreement, our web traffic more than doubled.
- Given the nature of its businesses, Intuit can be characterized as both an
independent
software vendor, or "ISV," and a provider of Internet content (an "ICP" as defined in the
Plaintiff's Complaint in this action).
IV. INTUIT'S BUSINESS DEPENDS UPON THE WINDOWS OPERATING
SYSTEM
- The operating system is (a) essential and (b) unique. It is essential, because all other
software applications depend upon it to operate. It is unique, because no other piece of
software has the same centrality and necessity. Software developers are dependent
upon the
operating system not only for basic functionality but, increasingly, for distribution and
promotion as well.
- The operating system is the essential foundation upon which all other software
functionality is built. It controls the basic operations of a computer, and it defines and
regulates what can be done and how it can be done. Intuit, and other software
application
developers, are dependent upon the operating system for the basic facilities necessary
for the
operation of our products and services. Without the operating system, none of our
applications can run.
- Microsoft Windows is the Dominant Personal Computer Operating
System
- Windows, the proprietary operating system developed by Microsoft, now
operates an
overwhelming majority of the personal computers operating worldwide. I thus believe,
and
it is my experience, that consumer software vendors such as Intuit have no practical
choice
but to focus software product development primarily -- if not exclusively -- on
software for
use with Windows.
- This is so because the economics of software development make high volume sales
critical to profitability. The fixed costs of developing software -- including, among
other
things, research, development, programming and testing -- are very large and can only
be
offset by high volume sales. By contrast, the variable costs of manufacturing software
once
it has been developed are quite low. Thus, it is essential for profitability of most
PC-based
software products that the product be compatible with Windows. At Intuit,
compatibility
with Windows is so critical that the company will focus on such compatibility even if
this
requires slowing or abandoning development of software for use with other operating
systems.
- For example, Intuit has discontinued DOS-compatible versions of its major software
products (Quicken, QuickBooks and TurboTax), has abandoned development of
Macintosh-compatible versions of QuickBooks, and has dramatically reduced development of
Macintosh-compatible versions of Quicken and TurboTax. In our most recent fiscal
year,
more than 95% of Intuit's revenues came from users of the Windows operating system.
Intuit is therefore highly dependent upon Windows from a business, as well as a
technical,
point of view.
- The development of software that is compatible with the Windows operating system
itself reinforces the dominance of Windows, because consumers seek to purchase the
operating system that is compatible with the greatest number of software applications.
In
turn, software producers want their products to be compatible with the operating
system
that is most widely used by consumers. This creates a self-reinforcing cycle
(sometimes referred to as a "network effect"), which tends to perpetuate and
enhance the dominance of the leading operating system.
- Intuit's dependence on the Windows operating system creates additional
dependence
on the supplier of the operating system, Microsoft. We depend on Microsoft for the
information, specifications, training, development assistance and development tools
necessary to develop our products in an effective and timely manner.
- Over time, increasing functionality has been included with Microsoft's operating
system. Early versions of Microsoft DOS (which stands for "Disk Operating System")
had
only basic operating system functionality, such as facilities for managing processor
instructions, memory and input-output devices. Subsequent versions of DOS and
Windows
(which is an incremental evolution of DOS) included various functionality which had
previously been developed and distributed separately, such as disk defragmentation
and disk
compression.
- Such functionality can be either (a) distributed separately from the operating system
or
(b) distributed with the operating system. To the extent that it is distributed with the
operating system, and particularly when it is distributed with the operating system at
little or
no incremental cost, it tends to displace similar functionality distributed separately
from the
operating system. Therefore, distribution with the operating system - particularly the
dominant operating system -- is a very important advantage to a software developer.
- The Windows Desktop Provides Unmatched Distribution and
Promotion Opportunities
- With the shift from DOS to Windows, which includes its own graphical user
interface,
a new dependency began to arise. Because the operating system can determine the
initial
interface presented to the user, that interface can be used to preferentially promote
various
products or services. Because Windows is so dominant, the value of preferential
promotion
in the Windows operating system is also a very important advantage.
- Technology changes quickly, and the form of that initial interface has
changed as well.
The Windows Desktop (the default interface presented upon starting a PC), the Active
Desktop (an Internet-style interface alternatively presented upon starting a
PC), and the Start Page (the default interface presented upon starting the
browser bundled with the operating system) are all examples of initial
interfaces presented to the user as he or she initiates a computing session.
- The ubiquity of these initial interfaces create great advantage for products
and services
which are promoted on them. It is well understood in our industry, as in others, that
customers are more likely to purchase or use what they see first and what they see by
default (without making an explicit choice). For example, in the magazine industry in
which
I used to work, large sums of money were paid to obtain product placement at the
supermarket checkout stand, which is analogous to the initial interface on the PC in
that it is
the one place through which all customers must pass. Similarly, the makers of
breakfast cereal, soft drinks and other retail products strategically place their
goods on store shelves and end-caps for immediate visibility. Indeed, the three
most important success factors often cited by many types of retailers in the
physical world are "location, location, location". The same holds true in the
electronic world.
- In fact, I believe that the importance of prominent placement is even greater in the
electronic world than in the physical world. This is because the Internet is an
interactive
medium, which can provide both advertising and fulfillment functions. In other words,
a
customer can both learn of and order a product on the Internet. Thus, for instance, it
can
serve the functions of both television advertising and supermarket distribution in the
traditional physical world.
- It is a primary goal of Intuit, and other Internet content providers, to ensure that the
message, icon or logo of its web site appears as soon as possible after a computer user
logs
on to his or her computer. Generally, the first opportunities for such a web site prompt
to
appear are in the screens generated by the computer's operating system or the screens
that
appear when a user first accesses an Internet browser.
- Through its Windows operating system and the Internet Explorer browser,
Microsoft
has the power to control product placement for access to Internet web sites. Creating a
"bias" on the screen in front of the computer user gives Microsoft substantial power to
direct users to particular products, services and web sites
- Thus, Microsoft's control of the operating system give it substantial power
over other
software developers and Internet content providers not only in terms of utilizing
operating
system capabilities, but also in terms of preferential distribution and preferential
promotion.
- The Characteristics of the Operating System Market make
Microsoft's Windows Operating System Unique
- The operating system is unique, because it is essential and central to all other
computing. Because the operating system creates an environment in which all other
functionality operates, it is extremely rare that end users would operate more than one
operating system. In addition, computers are not useful for any relevant purpose
without an
operating system, whereas they can be and are useful without any individual
application,
such as Quicken.
- Once an operating system is established - and particularly if it becomes dominant -
the
network of dependencies which are built upon it by both end users and developers
make it
difficult to switch to a different operating system. Therefore, for most users and
developers,
there are no practical substitutes for Windows.
- For example, let me compare Windows to our own Quicken product. A high
proportion of users of personal finance software use Quicken, just as a high proportion
of
PC users run the Windows operating system. However, the switching costs are vastly
different. To switch from Windows to the Macintosh operating system requires many
hundreds or thousands of dollars in new hardware costs, a completely new set of
software
applications, and the hassle of relearning both the new operating system and the
new software. Because so many things depend upon the operating system,
switching to a new operating system requires all those things to change as well.
- By contrast, switching from Quicken to Microsoft Money requires only a copy of
Money. In Microsoft's own words, Quicken data can "painlessly and seamlessly" be
imported into Money, Microsoft "makes it a snap" for Quicken users to use Money, and
Money is "easy to use and learn." Therefore, the barriers to switching are relatively low.
(See, Gov'tEx 1112, www.microsoft.com/moneyzone/mrmon/quicken)
- Because the switching barriers are low, Quicken must compete with Microsoft
Money
(or other personal finance software packages) on a price and performance basis.
Whichever
company delivers the better value will ultimately gain the most customers.
- However, the network of external dependencies now surrounding the Windows
operating system help insulate it from having to compete on a price and performance
basis.
Because so many things depend upon the operating system, switching to a new
operating
system requires all those things to change as well. Even if a software developer
developed a
comparable operating system and gave it away free, few users would adopt it because
there
would be few applications, and few software companies would write applications
because
there would be few users.
- Because the switching cost are so high, there are no effective substitutes for
Microsoft's operating system for most users. Therefore, there is scant competition in the
PC operating system market, and even less competition on price. Given the
dramatic increase in the quantity of operating system licenses sold over the past
eight years, the fact that the cost of an operating system license has not declined
significantly during this period is one indication of the absence of effective price
competition.
- Another indication of the lack of effective competition is Microsoft's astonishing
profitability. As a basis of comparison, I prepared an analysis of the average pre-tax
profitability, as a percent of revenue, for the 473 U.S. companies with annual revenues
greater than $3 billion, based on the most recent public financial statements on file (See,
Gov. Ex 1216, Financial data from PeerScape website). The average pre-tax profitability
of
these large companies is 9%. (Intuit's profitability is also in about this range.) Very few
companies - less than eight percent of all large companies in America - exceed 20%
profitability. Only five companies exceed 30% profitability. But Microsoft exceeds all
the
others with the record-high profitability for a large corporation in the modern era: 49%,
and
steadily climbing (See, Gov. Ex. 1217, Financial History Pivot Table). As a
businessperson,
I find it hard to explain such abnormally high profitability, except in a market
substantially
insulated from effective competition.
- Thus, I believe the operating system is unique in that it is (a) necessary and central to
all other computing functions, and (b) insulated from effective competition by an
extensive
network of dependencies.
V. INTUIT HAS BEEN DIRECTLY IMPACTED BY MICROSOFT'S EXERCISE OF OPERATING SYSTEM LEVERAGE
- Because Intuit (or any PC software developer) is so dependent upon the
operating
system, we have been concerned about the potential use of the operating system as a
competitive weapon against our businesses for a number of years. This exists as a
theoretical possibility at all times, but Intuit has experienced three major episodes
during
which we have been directly impacted by Microsoft's power to leverage their
operating
system control: (1) WinATM in 1994, (2) the Active Desktop in 1997, and (3) the Start
Page in 1998.
- Microsoft's Acquisition Attempt of Intuit and Planned Inclusion of
"WinATM" in Windows
- In 1994, Intuit was approached repeatedly by Bill Gates at Microsoft regarding his
interest in acquiring Intuit. In our internal deliberations, important consideration was
given
to the ways in which Microsoft could compete with us if we resisted the acquisition
offer.
At that time, Microsoft already had a history of bundling into the operating system
various
software functionality that had previously been sold separately by other companies.
This
had seriously impacted the businesses of software developers such as Symantec,
Central
Point, Stac, and others.
- We were therefore concerned that Microsoft might similarly bundle personal
finance
functionality with the operating system. In fact, we had heard rumors that they were
working on such a project. Such bundling would have seriously impacted our ability
to sell
Quicken, which was then our largest and most profitable business. In addition, we
were then investing very significant resources in building an online banking
network, which would electronically connect PC users to their financial
institutions. If Microsoft bundled online banking functionality with the operating
system, thereby making it the default service available to all Windows users, it
would have seriously impacted our ability to attract PC users or financial
institutions to our service.
- Intuit's evaluation of an acquisition by Microsoft was influenced by these
considerations. For instance, in a confidential memo to Intuit's Board of Directors in the
summer of 1994, Intuit founder and chairman Scott Cook wrote the following:
Microsoft
"can attack us in either or both of two ways: (1) Traditional way: develop and market
financial products reasonably independently of their other assets, and (2) All-out
attack:
make full use of their many and unique assets, such as the OS [operating system], other
application software, and Marvel [the Microsoft Network]. We fear the second
approach.
That's the focus of this assessment."
- Mr. Gates' acquisition proposal to Intuit came at about the time Microsoft
was
finalizing a consent decree with the Department of Justice which prohibited certain
conduct
by Microsoft. In his conversations with Intuit, Mr. Gates indicated that he felt his
settlement with the government had cleared up potential uncertainty as to his ability to
move
forward aggressively on numerous fronts, including an acquisition such as Intuit. In the
same memo to the Board, Mr. Cook said of Microsoft: "Recently overcame last barrier
to
OS [operating system] monopoly. My judgement: Yet to see full benefits from
OS monopoly."
- Intuit signed a definitive agreement to be acquired by Microsoft in October 1994.
Microsoft's settlement with the Department of Justice was subsequently and
unexpectedly
challenged by Judge Sporkin, which re-ignited public and regulatory concern over
Microsoft's conduct. In the heat of this re-ignited concern, the Department of Justice
challenged Microsoft's proposed acquisition, which Microsoft decided to abandon.
- After Microsoft abandoned its attempt to acquire Intuit, we were told by Pete Kight,
the CEO of CheckFree Corporation, that Microsoft had in fact approached CheckFree
and
MasterCard International with plans to create a product they called "WinATM". Mr.
Kight
disclosed this information to me because Intuit subsequently became CheckFree's
largest
shareholder, and I am Intuit's representative to the CheckFree Board of Directors.
According to Mr. Kight, WinATM was to have been created by starting with Microsoft
Money, Microsoft's personal finance software, and stripping away some non-essential
features. In fact, the WinATM project was run by the Microsoft Money team. WinATM
was to include (1) checkbook register functionality (the fundamental customer benefit
in a
product such as Microsoft Money or Quicken), (2) electronic data download
functionality
(the ability to get account balance and statement data electronically from financial
institutions), and (3) electronic bill payment functionality (the electronic equivalent of
writing a check). WinATM was to be bundled with the operating system, so that it
would
be universally and freely available and be the default option for personal finance
and online banking and payment activities for all users of the Windows operating
system.
- Mr. Kight told us that, in early 1994, there had been numerous meetings at
Microsoft's
headquarters in Redmond between representatives of Microsoft, CheckFree and
MasterCard. The most senior level meeting was attended by Nathan Myrvold and,
briefly,
Steve Balmer of Microsoft; Pete Hart, CEO of MasterCard; and Mr. Kight. Microsoft
proposed to connect to MasterCard's national ATM network for electronic data access
and
to CheckFree for electronic bill payment services. Microsoft representatives explained
to
Mr. Kight that, by bundling this functionality into the operating system, they would
automatically enable every Windows PC user with the functionality, thus: (1) making
any
competitive offerings irrelevant, and (2) giving the banks "no choice" but to work with
them. The Microsoft representatives wanted to move quickly, in order to be able to
bundle
the functionality into the upcoming "Win95" version of the operating system, which
was
ultimately released in August 1995.
- According to Mr. Kight, after the Intuit acquisition agreement was announced,
representatives from the Microsoft Money team said that Mr. Gates had decided that, if
Microsoft was going to bundle personal finance functionality with the operating
system, he
preferred to do so using the most popular such product (Quicken).
- During the period Microsoft's proposed acquisition of Intuit was under review, both
Intuit and Microsoft avoided sharing non-public information on their business or plans.
Therefore, Intuit did not have any direct conversations with Mr. Gates or others at
Microsoft about their plans for the marketing and distribution of personal finance
functionality. Mr. Kight's later disclosures, though, were consistent with our
assumptions and experience. In fact, during the acquisition negotiations, Mike
Maples of Microsoft had informed us that Microsoft had another deal very close to
consummation with MasterCard that they would need to delicately unravel as a
result of the agreement to acquire Intuit. Consequently, we believed - and continue
to believe -- that the information provided by Mr. Kight regarding WinATM was
true, and our subsequent actions have been based on that belief. Specifically, our
belief in the likelihood of Microsoft's bundling or promoting its own financial
functionality with the Windows operating system was one of the prime
motivations for our entering the Active Desktop agreement.
- Microsoft's Use of Its "Active Desktop" to Prevent Intuit from Working
with Netscape
- In a move that was publicly described as an attempt to make the desktop
interface of
the Windows operating system become the primary gateway to the Internet, in
1997 Microsoft developed a feature in Internet Explorer called the Active Desktop.
The Active Desktop was intended to be a new user interface for Windows that
would, among other things: (a) permit direct access to the Internet; (b) provide a
choice of Internet web sites that could be directly accessed from the desktop; and
(c) permit the user to view Internet content on the desktop itself without
separately opening the browser. With the Active Desktop,
Microsoft aimed to turn the Windows desktop into a Microsoft-controlled gateway
to the Internet - a gateway that would be seen by almost every PC user.
- The Active Desktop would promote select web sites by placing icons and links to the
web site's content and by distributing select content and functionality from Microsoft
and its
favored partners with the operating system itself. The icons were located in a pre-configured "channel bar" that was placed directly on the Windows desktop. The
channel bar
included direct links to Microsoft content as well as various third party content
providers
selected by Microsoft, such as Disney and Time Warner. The channel bar also included
"category channels" such as News, Business, Technology, and Entertainment, that
contained
links to topic-specific content from select ICPs. Distribution of select content with the
operating system was by inclusion on CD-ROM and OEM versions of Windows.
- For Intuit, this represented the same threat we had considered during the WinATM
episode - the possibility that Microsoft would bundle its own financial products with
the
operating system. We believed it was critical for us to have our financial products
distributed with the operating system, as well.
- Because the channel bar provided a direct link between web sites and the Windows
desktop, and thereby to the vast majority of PC users, this feature offered Microsoft and
a
select few ICPs unparalleled distributional and promotional privileges. Intuit
recognized the
compelling potential value of such prominent placement, and expected that placement
on the
Active Desktop would promote Intuit web sites to every PC user running Windows 95
with
Internet Explorer 4.0 or running what ultimately became Windows 98.
Appearance of a Quicken.com logo on the Active Desktop would not only
promote Intuit's web site, but would also permit every PC user simply to "click" on
the logo and go directly to the Quicken.com site. Microsoft's proprietary control of
the Windows operating system gave Microsoft the unique opportunity to offer this
Active Desktop service.
- Placement on that portal was critical to Intuit because it meant potentially having
access to millions of PC users. Also, not having such placement would mean that Intuit
would no longer be on equal footing with the competing financial sites of Microsoft or
its
favored partners. During negotiations of an agreement by which Intuit could obtain
priority
placement for its web sites on the Active Desktop, however, Intuit learned that any
such
agreement would require, as a condition, that Intuit forego any business relationships
with
Netscape, Microsoft's principal competitor in the browser market. Because placement
on
Microsoft's Active Desktop was believed by Intuit at the time to be critical to the
success of
its web sites, Intuit felt constrained to agree to this condition.
- As part of the arrangement, Microsoft also offered to distribute one megabyte of our
code with the operating system. We tried to negotiate for more space, because we knew
our existing financial products required more. Ultimately, we were unable to reduce
our
existing products down to a size that would fit within the limit, so we had to build new
and
highly simplified functionality for such distribution.
- Negotiations Leading Up to the Agreement
- On June 14, 1997, Intuit and Microsoft entered an agreement which granted Intuit's
web sites prominent placement in the Active Desktop's channel bar (the "Active
Desktop
Agreement"). (See, Gov't. Ex. 1156 Internet Explorer Marketing, Distribution &
Promotion Agreement). Eric Dunn, Intuit's Chief Technical Officer, and I negotiated
the
agreement on behalf of Intuit, and I signed the agreement on behalf of Intuit in my
then-
current capacity as Intuit's Executive Vice President.
- During negotiations of the Agreement, Intuit had understood the extent to which
Microsoft would seek to retain control of the Active Desktop, the features it would
offer,
and the web sites to which it would give placement. William Poole of Microsoft had
told
Mr. Dunn and me that Internet Explorer 4.0 ("Internet Explorer 4.0") would be shipped
with next version of Windows. At the time, the next version of Windows was expected
to
ship at the end of 1997 and was called "Windows 97". The product actually shipped in
the
summer of 1998, and was called "Windows 98". Mr. Poole said that Microsoft planned
to
use the Active Desktop as the standard configuration for both Windows 98 and
versions of
Windows 95 containing Internet Explorer 4.0. Mr. Poole made clear that Microsoft,
rather
than OEMs, would determine what features would be included in the Active Desktop,
with
the exception of one sub-channel that would be offered to the OEM to communicate
electronically with its customers. As a result, Intuit had understood during the
negotiations
that Microsoft would take steps to ensure that the Active Desktop channel bar would
be
turned on and visible to new Windows users. Additionally, Microsoft explained to Mr.
Dunn and me that the Active Desktop would eventually become the default
desktop for Windows 98. This would mean, in short, that when a computer user
would boot up Windows for the first time, Active Desktop and its channel bar
would be the first screen visible to the user.
- Under the agreement, Microsoft granted, among other things, placement of our
Quicken.com service on the Active Desktop. Microsoft agreed to place the
Quicken.com
icon in a directory called "Business." The directory appeared in the channel bar and
included other finance-related content providers, such as Microsoft Investor
(Microsoft's
web site dedicated to investing information and services), Fortune, and The Wall
Street
Journal. Although Quicken.com appeared in the folder with a number of competing
services, Intuit still viewed Quicken.com's presence in the channel bar as very
valuable
because it allowed for a level playing field for it to compete with Microsoft and its
partners
on the basis of each site's quality and content. In fact, Intuit would have been prepared
to
pay a substantial fee for the placement, even greater than what Intuit has paid other
portals
and web sites for prominent position, but Microsoft offered us this placement instead
in
return for our agreement to forego future business dealings with Netscape.
- Mr. Poole said he was not able to negotiate the placement of Intuit's Quicken.com
channel on the Active Desktop without getting an approval from Microsoft's personal
finance group, which was responsible for Microsoft Money, Microsoft Investor, and
other
financial products, many of which compete against Intuit's products and services. He
later
came back and said that we could have a placement, but that he would have to
give Microsoft Investor a similar placement next to ours on the "Business"
Channel, in addition to their previously-determined position on the "Microsoft
Network" Channel.
- In addition, Microsoft offered as part of the Active Desktop Agreement to include
one
megabyte (and make reasonable efforts to include an additional one-half megabyte) of
Intuit
code with the next version of Windows. This would enable Intuit to get much broader
distribution of some of our financial functionality, which would in turn drive customers
to
our products and content. As with placement on the Active Desktop, only Microsoft
could
provide such ubiquitous distribution.
- During the negotiations, Mr. Poole advised me that Bill Gates had personally stated
two preconditions for any agreements that would give an Internet content provider like
Intuit access to preferential position on the Active Desktop. First, the agreement could
only
be one year in duration. (In an internal email to me from Eric Dunn dated March 27,
1997,
Eric Dunn stated, "[Poole] claims that Bill Gates has ordained the "first year only" rule,
and
that [Poole] can't consider anything longer. (See, Gov. Ex. 1044, March 27, 1997, Eric
Dunn Email) Second, the agreement would have to preclude the Internet content
provider
from dealing with Netscape. (At the final meeting between Mr. Poole and myself, which
took place in a conference room at the San Francisco Airport in April or May of 1997, I
argued hard for a relaxation of the restrictions on dealing with Netscape - indeed, that
was a
major purpose of the face-to-face meeting. Mr. Poole reiterated that he had no ability to
negotiate on this point, because Mr. Gates had mandated that all preferred
participants on the Active Desktop must agree to cease working with Netscape as
a condition of that participation.)
- At the time I negotiated the agreement, it was generally understood by me,
and the
industry generally, that Microsoft viewed increasing browser share as an important
goal and
that Microsoft sought to surpass Netscape in browser share. Microsoft executives had
spoken publicly about the importance Microsoft placed on increasing browser share.
At
about that time, Bill Gates said in a public forum at which Intuit was represented, that
there
was one and only one measure of Microsoft Corporation's success in the coming year:
"browser share". Moreover, during the course of the negotiations, Microsoft's
representatives asked about the number of copies of Intuit's software that Intuit
expected to
distribute with Internet Explorer. My understanding was that Microsoft wanted to
estimate
the impact the agreement between Intuit and Microsoft would have on Microsoft's
browser
market share. For all of these reasons, I believed that the restrictions placed on Intuit in
the
agreement between Intuit and Microsoft related to Microsoft's goal of increasing its
share
of the browser market at Netscape's expense.
- Description of the Active Desktop Agreement
- The agreement between Intuit and Microsoft contained several specific
restrictions
concerning Intuit's ability to deal with Microsoft's competitors. Specifically, the
agreement
placed limitations on Intuit's ability to work and deal with "Other Browsers".
Microsoft's
agreement defined "Other Browser" as: "Third Party software and related
technology for any Platform that (i) is designed to view, render, browse, hear or
otherwise interact with Content on the Internet, the Web and/or other public
networks . . .; and (ii) ranks in the top two (exclusive of Internet Explorer) most
widely used browsers . . . ." (See, Gov.t Ex. 1156, Section 1.23) Netscape Navigator
was certainly one of those top two browsers, and neither Will Poole nor I knew
without checking which browser would be the second one to fall into that
definition. As a practical matter, that other browser was not of any business
significance. At the time of the agreement, and as remains true today, the principal
browsers available to Internet content providers have been Microsoft Internet
Explorer and Netscape Navigator.
- The Active Desktop Agreement prevented Intuit from promoting Netscape on
Intuit's
web sites, or allowing Intuit's web site customers to access Netscape's products or
services.. For example, prior to the agreement, Intuit had promoted Netscape by
placing a
Netscape Navigator download button and link on Intuit's web site. The agreement
required
Intuit to take those buttons and links off the web site, and replace them with download
buttons and links for Microsoft Internet Explorer. In the absence of that requirement,
Intuit
would have continued to promote Netscape's download buttons and links on its web
site.
- The agreement also required Intuit to distribute "Internet Explorer and no Other
Browser as an integral part of the release of any and all new and major releases of Intuit
Products . . . ."(See Gov.'t Ex. 1156, Section 2.2(a)). Prior to this agreement, Intuit had
been distributing Netscape Navigator with Quicken, TurboTax, and QuickBooks,
on both the Windows and Macintosh platforms. The agreement thus precluded
Intuit from further including Netscape Navigator in copies of Intuit's applications.
- The agreement also required Intuit to deploy certain Microsoft-specific technologies,
such as Microsoft's Channel Definition Format, Dynamic HTML, and ActiveX. Content
developed with those technologies can be viewed through Internet Explorer, but will
not be
accessible by other browsers. Intuit generally tries to design its web site so that it is
accessible from any browser, to insure that it can be accessed by the largest possible
number
of customers. Thus, the requirement in the Active Desktop agreement to utilize
Microsoft-specific technologies was an exception to Intuit's general practice of making its content
broadly accessible.
- Finally, the agreement effectively precluded Intuit from entering into a business
relationship with Netscape to promote or distribute Intuit's content through any
Netscape
Internet service or browser product. Specifically, the agreement required that Intuit
not
enter into any "Content Promotion Agreements." A content promotion agreement was
defined as:
"an agreement with (i) a company (or its Affiliates) which produces
Other Browsers or (ii) an agreement with any third party in which
economic and other benefits are passed through materially
unchanged to a company which produces Other Browsers and in
which the third party performs no
substantive function with respect to the agreement except to be a
pass-through entity . . ., which agreement is to exchange money or
other material and valuable consideration (such as the promotion,
marketing or distribution of Other Browsers) in return for
distribution, transmission, marketing or promotion . . . of Intuit
Content or logos . . . ." (See Gov't. Ex. 1156, Section 2.2 (d)).
- Thus, while the agreement on its face appears to permit Intuit to allow
Netscape to
distribute Intuit's content, it made it uneconomic to do so, as it prohibited either party
from
conveying to the other, either directly or indirectly, any payment or other
consideration.
- Access to the Active Desktop Precluded Intuit's Ability to Deal with
Netscape
- If not for the terms of the agreement, Intuit would have worked very diligently to
enter into an agreement with Netscape to provide financial content on Netscape web
sites.
Netscape's Navigator has many users. Intuit would have strongly preferred to have
had the
ability to enter into a business relationship with Netscape in order to direct potential
Navigator users to Intuit's web site.
- At the time Intuit began discussions with Microsoft concerning Active Desktop,
Intuit
was working with both Microsoft and Netscape on the possible inclusion of certain
components of Internet Explorer or Navigator in the next release of its flagship
product,
Quicken 98, which components would enable Quicken users to access information from
the
Internet without leaving the Quicken application or Quicken interface. During the
Quicken
98 development cycle, there were two build versions of Quicken, one which used
Internet Explorer as the embedded browser and one which used the Netscape
Nevigator embedded browser. These parallel versions were maintained over at
least a three month period, with quality assurance testing performed on both
versions. Microsoft and Netscape each was eager to have Intuit use its browser,
and at no time did Microsoft condition such use on Intuit's participation on the
Active Desktop. Intuit would have been able to distribute Internet Explorer even
if it had not entered the Active Desktop agreement. In fact, Microsoft grants
royalty-free distribution rights of Internet Explorer to almost anyone who asks.
However, in order to be granted preferential placement on the Active Desktop,
Intuit had no option but to bundle Internet Explorer with our products, and not
bundle Netscape Navigator. As a result, we discontinued testing of the Netscape
nevigator variant of Quicken 98 when the Active Desktop Agreement was signed.
- At the time Intuit was considering a browser for Quicken 98, both Internet
Explorer
and Netscape Navigator had certain advantages and disadvantages. For example,
Microsoft was further along than Netscape in its development of a solution that
would address Intuit's desires for Quicken 98 - specifically to create
"componentized" browser capability which would allow us to render an HTML
screen within the Quicken interface rather than within the traditional browser
window. Our technical evaluation was that both companies could deliver such
functionality, but Netscape would be delivering this capability later in our
development and would effect integration and testing. The recommendation from
our
technical team was to use the Internet Explorer. On the other hand, there were
significant business and strategic considerations in favor of Netscape. I preferred
working with Netscape, because Netscape was not a competitor to Intuit while
Microsoft was. Netscape Navigator enjoyed a larger installed base of customers
than Internet Explorer, and Netscape had been a significant partner of Intuit for
about two years. In addition, Intuit had distributed Netscape's Navigator with a
number of Intuit software products, including Quicken.
- However, only Microsoft could offer placement on the Windows desktop and
distribution of our code with the operating system. No other company could provide
that
level of exposure to computer users. Because of this, I felt we had no practical
alternative
but to agree to Microsoft's restrictions in order to gain access to the desktop. If not for
the
restrictions imposed by the Active Desktop Agreement, I believe Intuit would have
shipped
both Netscape Navigator and Microsoft Internet Explorer with its products. However,
Intuit was not permitted by the terms of the Active Desktop Agreement to ship both
browsers.
- At the most basic level, the exclusion of Netscape Navigator from Intuit's products
resulted in a significant decrease in the number of units of Navigator distributed to
consumers either directly or through retailers. For example, a total of over five million
copies of Netscape Navigator were distributed with the 1997 versions of Quicken,
TurboTax, and QuickBooks, but over five million copies of Internet Explorer were
distributed with the 1998 versions of those products. Further, these numbers do not
include the copies of Netscape Navigator that were downloaded from Intuit's web
sites prior to the time the download capability was removed pursuant to the Active
Desktop Agreement.
- The Nature of Software Design Would Have Enabled Intuit to Use
Either Internet Explorer or Navigator
- For the reasons I have stated, Intuit ultimately designed the most recent versions of
Quicken to utilize Internet Explorer's browsing capabilities. When a Quicken user
accesses
Internet-related functions from within Quicken, Quicken launches a browser window
from
within Quicken. The browsing functionality is actually provided by Internet Explorer,
but
the user continues to see the Quicken interface. The user might not realize that another
application has just been executed because the user is viewing Internet content from
within
Quicken's interface, rather than the browser's interface.
- Software development is inherently flexible. There are numerous ways in which to
design a program to achieve the same functionality or effect. Similarly, a developer can
combine, or separate, any two or more software products or components. It is typically
the
goal to combine such products or components in such a way as to appear "seamless" to
the
user, in other words to make the two products appear like one. A good example of this
is
what Intuit has done with Quicken and Internet Explorer.
- Intuit designed Quicken to operate with Internet Explorer to provide our customers
with a seamless experience. Although the customer may not be able to tell where
Quicken ends and Internet Explorer begins, neither Intuit nor Microsoft consider
Quicken and Internet Explorer to constitute a single product, and it has always
been the case that they are two distinct products developed by two distinct
software companies.
- In a similar vein, in the same way that a software developer can combine or link two
or
more products or components, the developer can design products in such a way as to
make
it difficult to separate the companion products or components from each other.
Software
applications are made up of bits of code; it is this code that provides the computer with
the
necessary instructions to enable the application to perform the intended functionality.
Software developers can manipulate that code in countless ways--and one way is to
do so in
a way that makes divorcing the products or components from each other very difficult.
- The combination, or separation, of software products or components will almost
always have some potential advantages and some potential disadvantages. For Intuit,
in
particular, distributing a browser with our products, rather than as part of the
operating
system, has some real advantages. The fact that Intuit currently distributes a version of
Internet Explorer with Quicken is illustrative of this point. Intuit has exerted hundreds
of
hours testing and verifying that Quicken will operate with the specific version of
Internet
Explorer that comes with Quicken. If a Quicken customer does not already have a
compatible version of Internet Explorer, Quicken will install the version of Internet
Explorer
that comes with Quicken. This ensures that Quicken will work the way it was intended
and
tested.
- Moreover, removing an application does not mean removing all components
of the
application, in other words it does not require deleting components shared by other
applications. Quicken, like most applications, utilize shared components of software
code,
or "DLLs". Any time multiple applications share a DLL, and you remove one of the
applications and the shared DLL along with it, the other application will no longer
work
properly. So for example, if Quicken called on a DLL that was used by another
application,
like Internet Explorer, and an end user removed Quicken and the shared DLL, the
other
application would not work properly. This is easily avoided, though, by retaining the
shared
DLL when removing or uninstalling an application.
- Microsoft Subsequently Waived Certain Terms of the Active
Desktop Agreement
- On April 9, 1998, Microsoft informed Intuit that it was unilaterally waiving
certain
exclusivity portions of the Active Desktop agreement. Also, Microsoft informed Intuit
that
it plans to give OEMs the option to disable the Active Desktop channel bar and that the
channel bar will no longer be a default feature in future revisions of Windows 98. I
understood these actions to be a response to governmental inquiries into Microsoft's
conduct, in part because of two emails we received from Will Poole. In an email dated
March 3, 1998, Mr. Poole stated that "At the Senate hearings today, Bill Gates was
barraged with questions regarding the terms of Microsoft's relationships with Active
Desktop content partners... [T]he DOJ, the Senate Judiciary and the press are
searching for issues to highlight."(See, Gov't. Ex. 871, March 3, 1998, Will Poole
Email) And in the April 9, 1998 email which contained the waiver notification, Mr.
Poole stated that "Microsoft is amending these agreements in order to set aside
any lingering questions regarding the business relationship between Microsoft
and its [Internet Content Providers]." (See Gov't. Ex. 872, April 9, 1998, Will Poole
Email)
- Shortly after receiving this waiver notification, Intuit began discussions with
Netscape
toward establishing promotional and distribution arrangements. In addition, Intuit has
entered into an agreement with Excite to facilitate a relationship with Netscape.
- Despite the waiver, Intuit continues to be concerned about Microsoft's ability to use
its control over the Windows desktop in order to get companies, like Intuit, to agree to
terms which limit its ability to deal with Microsoft's competitors. Placement on the
Windows desktop remains tremendously valuable. Nothing prevents Microsoft from
developing a new feature which leverages the value of the desktop to provide ICPs, or
Microsoft exclusively, with prominent placement in front of the millions of PC users.
ICPs
that are not able to gain access to that placement, or that refuse to agree to Microsoft's
terms, will be placed at a disadvantage in the marketplace.
- The Next Stage - Microsoft's Use of Windows and Internet Explorer
as a "Portal" to the Internet
- Microsoft has announced that it is creating a new portal to the Internet called
"Microsoft Start," which will became Internet Explorer's new default home page.
Recent news reports indicate that Microsoft recognizes the importance of such
portals as points of entry to the Internet. In a recent interview reported in the
TechWeb Internet site, Microsoft's lead product manager of its Interactive Media
Group, Ed Graczyk, stated: "From our perspective, a portal is like the Windows
desktop is to your PC computing experience. If you think of your Windows
desktop as the place you go to start and manage what you do on your PC, a
portal site is where you go to start and manage what you do on the Internet." Mr.
Graczyk also stated that for Internet-related services provided by or through
Microsoft, "Start will be the entry point for people who want to get to those
services." (See, Gov't. Ex. 1091, TechWeb Interview of Ed Graczyk).
- The creation of the new Start page reflects what Microsoft can do when it
leverages
the power of its ownership of the Windows operating system into successive
adjacent positions of influence or control. First, Microsoft used its control over the
PC desktop to position Active Desktop as a unique gateway between PC users
and content providers. Second, Microsoft used agreements, like the Active
Desktop Agreement, to help secure a substantial share of the Internet browser
market at the expense of its competitors. Third, after obtaining a substantial share
of the browser market, Microsoft created a new product, the Start page, that
would enable Microsoft to use its new power in the browser market to direct
customers to Microsoft proprietary or preferred web sites and services. Fourth,
Microsoft announced that it is de-emphasizing the Active Desktop that was the
vehicle
through which Intuit and others were to have maintained prominent product
placement in the Windows and Internet Explorer environments. Fifth, when Intuit
asked Microsoft about getting prominent placement for Intuit on the Start Page, I
was told that prominence was being reserved for Microsoft's services and not our
competing ones.
- It has been the experience of Intuit, and it is generally understood in the computer
industry, that consumers have a high proclivity to accept default settings and
configurations
on software and computer-based services. Even with the advent of many
highly-advertised
and content-rich sites on the Internet, three of the five most frequently visited sites,
according to numerous industry market research services, have generally been the
default
pages that a user is directed to when launching the Netscape, Microsoft, or AOL
browser.
- As a result of Microsoft's bundling Internet Explorer with Windows 98, Internet
Explorer will become the default browser and, in turn, the Microsoft Start page will
become
the default portal in the Windows operating system. Despite the fact that it is currently
possible for a user to reconfigure Windows 98 to use a different browser or reconfigure
the
browser to use a different home page, it requires knowledge and extra work on the part
of
the user. Moreover, Microsoft now has an incentive over time to make such
reconfiguration
even less likely. One example of how they can do that is to promote proprietary web
standards that will not operate in other browsers, as they have done in the Active
Desktop
Agreement. Another example is to create a warning, as they have done, when a user
tries to
remove Microsoft's Internet icon from the Windows desktop.
- Moreover, with the rise in popularity of personalized start pages, Microsoft has the
ability to affect the likelihood that even experienced computer users will change
defaults.
For example, by using the registration features of the operating system to automatically
populate information in a user's Start page, Microsoft can raise the barriers to
switching.
This is because once a user has a personalized Start page, he or she would face the
added
hassle of retyping or transferring such information to a new portal.
- The combination of Microsoft's new Start page and the bundling or inclusion of
Internet Explorer in Windows thus will enable Microsoft to preferentially direct almost
all
personal computer users to its own web sites, or the sites of Microsoft's favored
partners,
and deny competitors such as Intuit similar favored access to such users.
- This is of particular concern to Intuit because, among other things, Microsoft owns, in
addition to Microsoft Money, several Internet web sites that provide content and
functionality that compete directly with content and functionality provided by Intuit's
products and web sites, including Microsoft Investor, TransPoint (the bill presentment
and
payment joint venture with First Data Corporation), Microsoft Money Insider and
Microsoft
HomeAdvisor.
- This will become of particular concern to many, if not most, companies and
organizations in America, as the Internet becomes more and more central to our lives.
With
rapid speed, the Internet is starting to alter the economic landscape. It is becoming the
central artery for most electronic commerce and electronic communication in this
country.
And while the importance of electronic forms of commerce and
communication are still modest today, they are quickly starting to displace
traditional forms.
- Control of the dominant computer operating system can thus be leveraged into
significant influence over and/or actual control of major areas of electronic commerce
and
communications. For example, by exclusively promoting MSNBC (Microsoft's news
service) on the Start page, Microsoft has now made MSNBC the default news provider
on
the dominant operating system. This will enable Microsoft to preferentially direct
almost all
personal computer users to its own flavor of news coverage, and deny similar favored
access
to other news sources such as ABC, CBS, CNN, Knight Ridder, Time Warner, the New
York Times, the Washington Post, and others throughout the country.
- As further examples, by exclusively promoting Microsoft Expedia on the Start page,
Microsoft has now made it the default travel booking service on the dominant
operating
system. By exclusively promoting Microsoft CarPoint, Microsoft has now made it the
default car buying service. By exclusively promoting Microsoft HotMail, Microsoft has
now made it the default electronic mail system. By exclusively promoting Microsoft
Investor, Microsoft has now made it the default investment service. By stating that it
will
exclusively promote TransPoint (formerly MSFDC), Microsoft has indicated that it
intends
to make it the default electronic billing and bill payment service.
- Today, there are no effective governors on the extent to which this power to
promote,
or even to exclude, will be used over time as computing - and the Windows operating
system -- becomes even more pervasive in our lives.
- An un-level playing field in an area as increasingly pervasive as computing,
is
detrimental to businesses and consumers alike. For businesses, it tends to reduce
effective
competition by creating artificial barriers and conferring powerful advantage to one
company. For consumers, it is my belief that this reduced competition will ultimately
mean
less choice and higher prices - even in the event that low prices are offered initially as a
mechanism to creating dominant market positions more quickly. My colleagues and I
at
Intuit sincerely want a world that fosters innovation. But we would like to see a world
that
fosters innovation for all companies - not just one company - and for the benefit of all
consumers.
VI. POSSIBLE REMEDIES TO ANTI-COMPETITIVE USE OF THE
OPERATING SYSTEM.
- Based on my experience in the software industry, I believe specific remedies
targeted
at a narrow set of conduct would be ineffective in moderating Microsoft's ability to
exercise
its power over the operating system to the advantage of its own initiatives in other
markets.
In my opinion, a remedy to preserve competition will only be effective if it
removes the ability and/or the incentive for Microsoft to use its control of the
operating system to restrict competitors in other markets, as they are today and as
they will evolve.
- There are probably a number of ways this goal could be accomplished. I
understand
that one possible approach would be to require Microsoft to separate its operating
system business from its other businesses in some fashion. Another approach that
I believe could have a lasting effect, without requiring such separation, is a
remedy based on the broad principle of operating system neutrality. This would
include ensuring that all customers and users of the operating system - including -
ISVs, ICPs, IAPs, OEMs and others - are afforded access to technology and
placement on a basis that does not exclude, and does not discriminate.
- The Principle of Operating System Neutrality
- Since the operating system is essential to computing, and since the Windows
operating
system is the dominant PC operating system, access to the Windows operating system
capabilities is essential for computing. Therefore, I believe it would be highly beneficial
for
all users - both consumers and companies - to have equal access to the dominant
operating
system. The only way to insure this is to guarantee the "neutrality" of the operating
system;
in other words, to insure that the operating system does not favor one competitive
product
over another.
- The principle of operating system neutrality would protect against two general
classes
of anti-competitive behavior: (1) exclusion and (2) discrimination. Exclusionary
behavior
would not permit certain consumers or companies from utilizing particular capabilities
of the
operating system. Discriminatory behavior would treat certain consumers or
companies
less favorably than others with respect to such utilization.
- To illustrate the meaning of these two classes of behavior, I will present some
hypothetical examples. An example of exclusionary behavior would be Microsoft's
addition
of code to the operating system which prevented users from accessing any news other
than
Microsoft's own news service (or that of selected partners.) An example of
discriminatory
behavior would be Microsoft use of it's own news as the default screen shown every
time a
user turned on a PC. Users seeking other news sources would have to remember the
appropriate URL (Internet address) from the infinite number of possible URL's on the
net.
Another example of discriminatory behavior would be Microsoft's imposition of access
fees
on other news providers for prominent placement on the operating system.
- An example of exclusionary behavior in the area of electronic commerce would be
Microsoft's addition of code to the operating system preventing the use of any credit
card,
other than Microsoft's own credit card (or credit cards from Microsoft's chosen
partners),
when a user purchased something over the Internet. An example of discriminatory
behavior
would be Microsoft's use of its own credit card as the default every time a user tried to
make a purchase, while users seeking to use other credit cards would have to
remember the
credit card number and other details. Another example of discriminatory behavior
would be
Microsoft's imposition of access fees on other credit card providers for visible
placement on
the operating system.
- It is my understanding that the Justice Department's 1995 consent decree was in part
a
recognition of the need to ensure that Microsoft's operating system not be exclusionary
or
discriminatory with regard to other applications. The reasons for needing this
neutrality have become self-evident, given the difficulties created by the fact that
Microsoft is both the sole supplier of the dominant operating system and a
provider of applications that run upon it.
- With the growth of the Internet, I believe it is now important that the
operating system
(and its extensions, the browser and the Start page) be neutral not only with respect to
applications, but also with respect to Internet-based content and services.
Internet-based
content and services increasingly offer functionality that either replaces, supplements
or
enhances traditional desktop applications. In my opinion, the 1995 consent decree's
objective of application neutrality is subverted if Microsoft is permitted the unfettered
discretion to place links on the Windows desktop (or on any browser or start page
bundled
with Windows) which direct users to specific Internet-based functionality that replaces
functionality previously only offered by desktop applications.
- Any Remedy Must Accommodate Change in Technology and Markets.
- It is to be expected that Microsoft will continue to try to maintain its operating
system
choke point despite subsequent technological and market changes in the software
industry.
Its extension of that choke point from the operating system to the browser and soon to
the
Start Page is a reaction to the change in market conditions represented by the Internet.
- While Microsoft's tactics adjust to industry change, the 1995 Consent Decree does
not. In an apparent effort to preserve competition and customer choice in specific
markets,
the 1995 Consent Decree was focused on the hardware OEM market and
application products It is my understanding that it prevented Microsoft from
conditioning OEM's access to the operating system on the requirement that the
OEM license a Microsoft product or not license a non-Microsoft product. The
Internet now offers Microsoft the opportunity to condition an OEM's access to the
operating system on the requirement that it distribute the operating system with
mandatory links to Internet content or services. And the Internet now enables
Microsoft to condition other industry participants (ICPs and IAPs) access to critical
placement within the operating system on the requirement not to do business with
Microsoft competitors (or on the requirement to otherwise favor Microsoft
products and services).
- While the software industry has broadened to include both products and services,
and
ICPs and IAPs now want access to placement on the operating system, one thing is the
same
as it was in 1995: OEMs and others cannot really negotiate with Microsoft for access to
the
operating system choke point, as there is still no practical substitute for the dominant
operating system.
- The 1995 Consent Decree was drafted to reflect current conduct exercised under
then-
current market conditions. To be effective, any remedy imposed by this Court cannot
be
specific to a narrow set of conduct presently being undertaken by Microsoft. Rather,
such
remedy must continually prevent Microsoft from using the operating system choke
point as
an exclusionary marketing and distribution vehicle to discriminate in favor of its own
content, services or products or as a bargaining chip in negotiations to otherwise
obtain favorable terms for itself. This requires a remedy premised on the principle
of operating system neutrality. Further, this remedy must contain mechanisms to
permit this principle to be applied against subsequent changes in Microsoft's
conduct in the context of the then-current state of the market and technology.
- Summary
- In my years of experience working with and competing against Microsoft, I have
formed a genuine respect for the company and its employees. Those I have met are
generally smart, hard-working people who make good products. And those products
have
contributed significantly to the technical advancement of this country and the world.
- But Microsoft is, just as Intuit is, a profit-driven company. It will, and should be
expected to, attempt to maximize its profits. In a competitive environment, the drive to
maximize profits is channeled into more innovation and better value for consumers.
But in
the absence of effective competition, especially in a market where the product is
essential
and for which there are no practical substitutes, the drive to maximize profits has no
natural
regulator.
- Computing is becoming a necessity in our society. Like electricity and telephone
service, almost every business and every consumer depends upon access to computing
capabilities in their daily lives. Accordingly, I believe that we must insure unbiased
access to
these fundamental computing capabilities, without exclusion and without
discrimination.
I declare under penalty of perjury under the laws of the United States of
America that the foregoing is true and correct. Executed October 13, 1998.
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William H. Harris, Jr.
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