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UNITED STATES OF AMERICA v. MICROSOFT U.S District Court, November 4, 1999
These consolidated civil antitrust actions alleging violations of the Sherman Act, §§1 and 2, and various state statutes by the defendant Microsoft Corporation, were tried to the Court, sitting without a jury….[T]he Court finds the following facts to have been proved by a preponderance of the evidence…. I. BACKGROUND 2.
An
“operating
system”
…supports
the
functions
of
applications
by
exposing
interfaces,
called
“application
programming
interfaces,”
or
“APIs.”
These
are
synapses
at
which
the
developer
of
an
application
can
connect
to
invoke
pre-fabricated
blocks
of
code
in
the
operating
system.
These
blocks
of
code
in
turn
perform
crucial
tasks,
such
as
displaying
text
on
the
computer
screen… 10. Microsoft licenses copies of its software programs directly to consumers. The largest part of its MS-DOS and Windows sales, however, consists of licensing the products to manufacturers of PCs (known as “original equipment manufacturers” or “OEMs”)… An OEM typically installs a copy of Windows onto one of its PCs before selling the package to a consumer under a single price. II. THE RELEVANT MARKET 18. Currently there are no products…that a significant percentage of consumers world-wide could substitute for Intel-compatible PC operating systems without incurring substantial costs. Furthermore, no firm that does not currently market Intel-compatible PC operating systems could start doing so in a way that would, within a reasonably short period of time, present a significant percentage of consumers with a viable alternative to existing Intel-compatible PC operating systems. It follows that, if one firm controlled the licensing of all Intel-compatible PC operating systems world-wide, it could set the price of a license substantially above that which would be charged in a competitive market and leave the price there for a significant period of time without losing so many customers as to make the action unprofitable. Therefore…the relevant market is the licensing of all Intel-compatible PC operating systems world-wide. A. Demand Substitutability 20. …[F]or consumers who already own an Intel-compatible PC system, the cost of switching to a non-Intel compatible PC operating system includes the price of not only a new operating system, but also a new PC and new peripheral devices. It also includes the effort of learning to use the new system, the cost of acquiring a new set of compatible applications, and the work of replacing files and documents that were associated with the old applications. Very few consumers would incur these costs in response to the trivial increase in the price of an Intel-compatible PC system that would result from even a substantial increase in the price of an Intel-compatible PC operating system…. 21. The response to a price increase would be somewhat greater among consumers buying their first PC system…Apple does not license the Mac OS separately from its PC hardware, however, and the package of hardware and software comprising an Apple PC system is priced substantially higher than the average price of an Intel-compatible PC system. Furthermore, consumer demand for Apple PC systems suffers on account of the relative dearth of applications written to run on the Mac OS. It is unlikely, then, that a firm controlling the licensing of all Intel-compatible PC operating systems would lose so many new PC users to Apple as the result of a substantial, enduring price increase as to make the action unprofitable. It is therefore proper to define a relevant market that excludes the Mac OS. In any event,…including the Mac OS in the relevant market would not alter the Court’s conclusion as to the level of Microsoft’s market power. … 23. It is possible that, within the next few years, those consumers who otherwise would use an Intel-compatible PC system…might be able to choose a complementary set of information appliances...[T]he number of these consumers will, for the foreseeable future, remain small in comparison to the number of consumers deciding that they still need an Intel-compatible PC system….[F]or the foreseeable future, a firm controlling the licensing of all Intel-compatible PC operating systems could set prices substantially above competitive levels without losing an unacceptable amount of business to information appliances. … 26. Only a few firms currently market network computer systems, and the systems have yet to attract substantial consumer demand. In part, this is because PC systems…have decreased so much in price as to call into question the value proposition of buying a network computer system….If network computing becomes a viable alternative to PC-based computing, it will be because innovation by the proponents of the network computing model overcomes these problems…In any case, that day has not arrived, nor does it appear imminent. … 27. …[P]ortal” Web sites, which aggregate Web content and provide services such as search engines, E-mail, and travel reservation systems, could begin to host full lines of the server-based, personal-productivity applications that have begun to appear in small numbers on the Web. If so, increasing numbers of computer users equipped with Web browsers and ISP connections could begin to conduct a significant portion of their computing through these portals….The variety and ease of use of server-based applications accessible through browsers would have to increase a great deal from today’s levels, however, before the total costs of dispensing with an Intel-compatible PC operating system would decline sufficiently to impose a significant constraint on the pricing of those systems…. 28.
Operating
systems
are
not
the
only
software
programs
that
expose
APIs
to
application
developers.
The
Netscape
web
browser
and
Sun
Microsystems,
Inc.’s
Java
class
libraries
are
examples
of
non-operating
system
software
that
do
likewise.
Such
software
is
often
called
“middleware”
because
it
relies
on
the
interfaces
provided
by
the
underlying
operating
system
while
simultaneously
exposing
its
own
APIs
to
developers.
Currently
no
middleware
product
exposes
enough
APIs
to
allow
independent
software
vendors
(“ISVs”)
profitably
to
write
full-featured
personal
productivity
applications
that
rely
solely
on
those
APIs. B. The Possibility of Supply Responses 30. Firms that do not currently produce Intel-compatible PC operating systems could do so. What is more, once a firm had written the necessary software code, it could produce millions of copies of its operating system at relatively low cost. The ability to meet a large demand is useless, however, if the demand for the product is small, and signs do not indicate large demand for a new Intel-compatible PC operating system. To the contrary, they indicate that the demand for a new Intel-compatible PC operating system would be severely constrained by an intractable “chicken-and-egg” problem: The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of high-quality, full-featured applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed…. 31. The chicken-and-egg problem notwithstanding, a firm might reasonably expect to make a profit by introducing an Intel-compatible PC operating system …that satisfies the special interests of a particular subset of users….Still,…the chicken-and-egg problem (hereinafter referred to as the “applications barrier to entry”) would make it prohibitively expensive for a new Intel-compatible operating system to attract enough developers and consumers to become a viable alternative to a dominant incumbent in less than a few years. 32. To the extent that developers begin writing attractive applications that rely solely on servers or middleware instead of PC operating systems, the applications barrier to entry could erode….Even if such development were already flourishing, it would be several years before the applications barrier eroded enough to clear the way for the rapid emergence of a viable alternative…. III. MICROSOFT’s POWER IN THE RELEVANT MARKET 33.
Microsoft
enjoys
so
much
power
in
the
market
for
Intel-compatible
PC
operating
systems
that
if
it
wished
to
exercise
this
power
solely
in
terms
of
price,
it
could
charge
a
price
for
Windows
substantially
above
that
which
could
be
charged
in
a
competitive
market.
Moreover,
it
could
do
so
for
a
significant
period
of
time
without
losing
an
unacceptable
amount
of
business
to
competitors…. A. Market Share 35. …Every year for the last decade, Microsoft’s share of the market for Intel-compatible PC operating systems has stood above 90%. For the last couple of years the figure has been at least 95%, and analysts project that the share will climb even higher….Even if Apple’s Mac OS were included in the relevant market, Microsoft’s share would still stand well above 80%. B. The Applications Barrier to Entry … 37. Consumer interest in a PC operating system derives primarily from the ability of that system to run applications…..The fact that a vastly larger number of applications are written for Windows than for other PC operating systems attracts consumers to Windows, because it reassures them that their interests will be met as long as they use Microsoft’s product. 38. Software development is characterized by substantial economies of scale…. [A]pplication developers tend to write first to the operating system with the most users: Windows. Developers might then port their applications to other operating systems, but only to the extent that the marginal added sales justify the cost of porting. In order to recover that cost, ISVs that do go to the effort of porting frequently set the price of ported applications considerably higher than that of the original versions written for Windows. 39. Consumer demand for Windows enjoys positive network effects. A positive network effect is a phenomenon by which the attractiveness of a product increases with the number of people using it….The main reason…[for] positive network effects, however, is that the size of Windows’ installed base impels ISVs to write applications first and foremost to Windows, thereby ensuring a large body of applications from which consumers can choose. The large body of applications thus reinforces demand for Windows…thereby perpetuating ISV incentives to write applications principally for Windows. This self-reinforcing cycle is often referred to as a “positive feedback loop.” … 41. In deciding whether to develop an application for a new operating system, an ISV’s first consideration is the number of users it expects the operating system to attract. Out of this focus arises a collective-action problem: Each ISV realizes that the new operating system could attract a significant number of users if enough ISVs developed applications for it; but few ISVs want to sink resources into developing for the system until it becomes established. Since everyone is waiting for everyone else…the new operating system has difficulty attracting enough applications to generate a positive feedback loop…. 42. Counteracting the collective-action phenomenon is…the “first-mover incentive.” For an ISV…,there may be an advantage to offering the first and, for a while, only application in its category that runs on a new PC operating system. The user base of the new system may be small, but every user of that system who wants such an application will be compelled to use the ISV’s offering. Moreover, if demand for the new operating system suddenly explodes, the first mover will reap large sales before any competitors arrive….Once first-movers stake claims to the major categories of applications, however, there is a strong chance that the new operating system could stall…and there would no longer exist a first-mover incentive to attract additional ISVs….Although the upstart operating system might find itself with enough applications support to hold a fraction of the market, the collective-action phenomenon would still prevent the system from gaining the kind of positive feedback momentum that can turn a fringe entrant into a rival that would put competitive pressure on Windows. … 46. IBM’s inability to gain widespread developer support for its OS/2 Warp operating system illustrates how the massive Windows installed base makes it prohibitively costly for a rival operating system to attract enough developer support to challenge Windows. In late 1994, IBM…spent tens of millions of dollars in an effort to attract ISVs to develop applications for OS/2 and…to reverse- engineer, or “clone,” part of the Windows API set. …IBM could obtain neither significant market share nor ISV support for OS/2 [and] ultimately determined that the applications barrier prevented effective competition against Windows…. 47. The inability of Apple to compete effectively with Windows provides another example of the applications barrier to entry in operation. Although Apple’s Mac OS supports more than 12,000 applications, even [that] is not sufficient to…present a significant percentage of users with a viable substitute…. … 50. …[T]he Linux operating system…similarly fails to refute the existence of an applications barrier to entry….Although Linux has between 10 and 15 million users, the majority of them use the operating system to run servers, not PCs….[C]onsumers have…shown little inclination to abandon Windowsin favor of an operating system whose future in the PC realm is unclear…. … 52. Theoretically, the developer of a …PC operating system could circumvent the applications barrier to entry by cloning the APIs exposed by Windows. Applications written for Windows would then also run on the rival system….Translating this theory into practice is virtually impossible, however. First of all, cloning the thousands of APIs already exposed by Windows would be an enormously expensive undertaking. More daunting is the fact that Microsoft continually adds APIs to Windows through updates and new versions….Since the rival would never catch up, it would never be able to assure consumers that its operating system would run all of the applications written for Windows. IBM discovered this to its dismay in the mid-1990s when it failed, despite a massive investment, to clone a sufficiently large part of the 32-bit Windows APIs…. C. Viable Alternatives to Windows … 54. OEMs are the most important direct customers for operating systems for Intel-compatible PCs. Because competition among OEMs is intense, they pay particularly close attention to consumer demand. OEMs are thus not only important customers in their own right, they are also surrogates for consumers in identifying reasonably-available commercial alternatives to Windows. Without significant exception, all OEMs pre-install Windows on the vast majority of PCs that they sell, and they uniformly are of a mind that there exists no commercially viable alternative to which they could switch in response to a substantial and sustained price increase or its equivalent by Microsoft…. 55. …Indicative of Microsoft’s assessment of the situation is the fact that…the Microsoft executive in charge of OEM licensing reported that piracy continued to be the main competition to the company’s operating system products. Secure in this knowledge, Microsoft did not consider the prices of other Intel-compatible PC operating systems when it set the price of Windows 98. … 57. Software never expires, so consumers who already have a version of Windows…are somewhat reluctant to incur the cost of upgrading to a new version…. Fortunately for Microsoft, the pace of innovation in PC hardware is rapid, and the price of that hardware has declined steadily in recent years. As a result, existing PC users buy new PC systems relatively frequently, and OEMs still attract at a healthy rate buyers who have never owned a computer. The license for one of Microsoft’s operating system products prohibits the user from transferring the operating system to another machine, so there is no legal secondary market in Microsoft operating systems….Since Microsoft can sell so many copies of each new operating system through the sales of new PC systems, the average price it sets for those systems is little affected by…older versions of Windows. 58. ...One of the ways Microsoft combats piracy is by advising OEMs that they will be charged a higher price for Windows unless they drastically limit the number of PCs that they sell without an operating system pre-installed….Naturally, it is hard to sell a pirated copy of Windows to a consumer who has already received a legal copy….Thus, Microsoft is able to effectively contain, if not extinguish, the illegal secondary market for its operating-system products… 59. The software industry in general is characterized by dynamic, vigorous competition….What eventually displaces the leader is often not competition from …the same software category, but rather a technological advance that renders the boundaries defining the category obsolete. These events…are spoken of as “inflection points.” 60. The exponential growth of the Internet represents an inflection point….The rise of the Internet..has fueled the growth of server-based computing, middleware, and open-source software development. …[T]hese nascent paradigms could oust the PC operating system from its position as the primary platform for applications development and the main interface between users and their computers….[H]owever, the fact that these new paradigms already exist in embryonic…form does not prevent Microsoft from enjoying monopoly power today. … 61. The fact that Microsoft invests heavily in research and development does not evidence a lack of monopoly power. Indeed, Microsoft has incentives to innovate aggressively despite its monopoly power…. 62. Microsoft’s actual pricing behavior is consistent with the proposition that the firm enjoys monopoly power in the market for Intel-compatible PC operating systems. The company’s decision not to consider the prices of other vendors’ Intel-compatible PC operating systems when setting the price of Windows 98, for example, is probative of monopoly power. One would expect a firm in a competitive market to pay much closer attention to the prices charged by other firms in the market. Another indication of monopoly power is the fact that Microsoft raised the price that it charged OEMs for Windows 95, with trivial exceptions, to the same level as the price it charged for Windows 98 just prior to releasing the newer product. In a competitive market, one would expect the price of an older operating system to stay the same or decrease upon the release of a newer, more attractive version. …. 63. Finally, it is indicative of monopoly power that Microsoft felt that it had substantial discretion in setting the price of its Windows 98 upgrade product (the operating system product it sells to existing users of Windows 95)…. 64. An aspect of Microsoft’s pricing behavior that, while not tending to prove monopoly power, is consistent with it is the fact that the firm charges different OEMs different prices for Windows, depending on the degree to which the individual OEMs comply with Microsoft’s wishes…. 65. …Even if it could be determined that Microsoft charges less than the profit-maximizing monopoly price, that would not be probative of a lack of monopoly power, for Microsoft could be charging what seems like a low short-term price in order to maximize its profits in the future…. 66. Furthermore, Microsoft expends a significant portion of its monopoly power, which could otherwise be spent maximizing price, on imposing burdensome restrictions on its customers and in inducing them to behave in ways that augment and prolong that monopoly power. For example, Microsoft attaches to a Windows license conditions that restrict the ability of OEMs to promote software that Microsoft believes could weaken the applications barrier to entry. Microsoft also charges a lower price to OEMs who agree to ensure that all of their Windows machines are powerful enough to run Windows NT for Workstations. To the extent this provision induces OEMs to concentrate their efforts on the development of relatively powerful, expensive PCs, it makes OEMs less likely to pursue simultaneously the opposite path of developing “thin client” systems, which could threaten demand for Microsoft’s Intel-compatible PC operating system products.….Other such restrictions and incentives are described below. 67. Microsoft’s monopoly power is also evidenced by the fact that, over the course of several years, Microsoft took actions that could only have been advantageous if they operated to reinforce monopoly power. These actions are described below. IV. THE MIDDLEWARE THREATS 68. ….[A]pplications relying largely on middleware APIs would potentially be relatively easy to port from one operating system to another. Applications relying exclusively on middleware APIs would run, as written, on any operating system hosting the requisite middleware.…Microsoft focused its antipathy on two incarnations of middleware that, working together, had the potential to weaken the applications barrier severely….These were Netscape’s Web browser and Sun’s implementation of the Java technologies. A. The Netscape Web Browser 69. Netscape Navigator possesses three key middleware attributes that endow it with the potential to diminish the applications barrier to entry. First,…a browser can gain widespread use based on its value as a complement to Windows. Second, because Navigator exposes a set (albeit a limited one) of APIs, it can serve as a platform for other software used by consumers….Finally, Navigator has been ported to more than 15 different operating systems. Thus, if a developer writes an application that relies solely on the APIs exposed by Navigator, that application will, without any porting, run on many different operating systems. … 72. …In late May 1995, Bill Gates…sent a memorandum…[warning] that Netscape was “pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system.”… B. Sun’s Implementation of the Java Technologies 73. The term “Java” refers to four interlocking elements. First, there is a Java programming language….Second, there is a set of [“Java class libraries”] that expose APIs on which developers writing in Java can rely….The third element is the Java compiler, which translates the code written by the developer into Java “bytecode.” Finally, there are programs called “Java virtual machines,” or “JVMs,” which translate Java bytecode into instructions comprehensible to the underlying operating system. If the Java class libraries and a JVM are present on a PC system, the system is said to carry a “Java runtime environment.” 74. The inventors of Java at Sun Microsystems intended the technology to enable applications written in the Java language to run on a variety of platforms with minimal porting….The closer Sun gets to this goal of “write once, run anywhere,” the more the applications barrier to entry will erode. … 76. Sun’s strategy could only succeed if a Java runtime environment…found its way onto PC systems running Windows. Sun could not count on Microsoft to ship with Windows an implementation of the Java runtime environment….Fortunately for Sun, Netscape agreed o include a copy of Sun’s Java runtime environment with every copy of Navigator, and Navigator quickly became the principal vehicle by which Sun placed copies of its Java…on the PCs of Windows users. … C. Other Middleware Threats 78. …Netscape’s Navigator and Sun’s Java implementation are not the only manifestations of middleware that Microsoft has perceived as having the potential to weaken the applications barrier to entry. …[The court describes Microsoft’s efforts to discourage IBM’s Notes software and the multimedia software developed by Apple and RealNetworks.] V. MICROSOFT’s RESPONSE TO THE BROWSER THREAT A. The Attempt to Dissuade Netscape from Developing Navigator as a Platform 79. Microsoft’s first response to the threat posed by Navigator was an effort to persuade Netscape to structure its business such that the company would not distribute platform- level browsing software for Windows…. [The Court describes Microsoft’s unsuccessful attempts to induce Netscape’s acquiescence in a “special relationship.”] 89. …[H]ad it convinced Netscape to accept its offer of a “special relationship,” Microsoft quickly would have gained such control over the extensions and standards that network-centric applications (including Web sites) employ as to make it all but impossible for any future browser rival to lure appreciable developer interest away from Microsoft’s platform. B. Withholding Crucial Technical Information 90. Microsoft knew that Netscape needed certain critical technical information and assistance in order to complete its Windows 95 version of Navigator in time for the retail release of Windows 95. [Microsoft representatives said] that the haste with which Netscape received the desired technical information would depend on whether Netscape entered the so-called “special relationship.” 91. …Microsoft did not release the API to Netscape until late October…The delay…forced Netscape to postpone the release of its Windows 95 browser until substantially after the release of Windows 95 in August 1995. As a result, Netscape was excluded from most of the holiday selling season. 92. Microsoft similarly withheld a scripting tool that Netscape needed to make its browser compatible with certain dial-up ISPs….[S]enior executives at Microsoft had decided to link the grant of the license to the resolution of all open issues between the companies. Netscape never received a license to the scripting tool, and as a result, was unable to do business with certain ISPs for a time. C. The Similar Experiences of Other Firms in Dealing with Microsoft 93. Other firms in the computer industry have had encounters with Microsoft similar to the experiences of Netscape described above. These interactions demonstrate that it is Microsoft’s corporate practice to pressure other firms to halt software development that either shows the potential to weaken the applications barrier to entry or competes directly with Microsoft’s…software products. … 95. …By early 1995, Intel was in the advanced stages of developing…Native Signal Processing (“NSP”) software, [that] would endow Intel microprocessors with substantially enhanced video and graphics performance. 96. …Intel did not believe, however, that the set of APIs and device driver interfaces (“DDIs”) in Windows had kept pace with the growing ability of Intel’s microprocessors….Consequently, Intel designed its NSP software to expose Intel’s own APIs and DDIs that…would demonstrate the multimedia capabilities of an Intel microprocessor utilizing NSP. 97. Microsoft reacted to Intel’s NSP software with alarm. First of all, the software threatened to offer ISVs and device manufacturers an alternative to waiting for Windows to provide system-level support for products that would take advantage of advances in hardware technology. More troubling was the fact that Intel was developing versions of its NSP software for non-Microsoft operating systems. The different versions of the NSP software exposed the same set of software interfaces to developers, so the more an application took advantage of interfaces exposed by NSP software, the easier it would be to port that application to non-Microsoft operating systems…. … 101. …Microsoft pressured the major OEMs to not install NSP software on their PCs until the software ceased to expose APIs. NSP software could not find its way onto PCs without the cooperation of the OEMs, so Intel realized that it had no choice but to surrender the pace of software innovation to Microsoft…. Even as late as the end of 1998…Microsoft still had not implemented key capabilities that Intel had been poised to offer consumers in 1995. 102. Microsoft was not content to merely quash Intel’s NSP software….Gates said Intel could not count on Microsoft to support Intel’s next generation of microprocessors as long as Intel was developing platform-level software that competed with Windows….Intel would have difficultly selling PC microprocessors if Microsoft stopped cooperating in making them compatible with Windows and if Microsoft stated to OEMs that it did not support Intel’s chips. Faced with Gates’ threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows. 103. OEMs represent the primary customers for Intel…Since OEMs are dependent on Microsoft…, Microsoft enjoys continuing leverage over Intel…. 104. QuickTime is Apple’s software architecture…for multimedia content.…Because QuickTime is cross-platform middleware, Microsoft perceives it as a potential threat to the applications barrier to entry. 105. Beginning in the spring of 1997…, Microsoft tried to persuade Apple to stop producing a Windows 95 version of its multimedia playback software, which presented developers…with alternatives to Microsoft’s multimedia APIs. If Apple acceded to the proposal, Microsoft executives said, Microsoft would not enter the authoring business and would instead assist Apple in developing and selling tools for developers writing multimedia content…. [The court describes Microsoft’s unsuccessful attempts to persuade Apple to abandon its multimedia initiatives.] 111. RealNetworks is the leader…in software that supports the “streaming” of audio and video content from the Web. RealNetworks’ streaming software presents a set of APIs that competes for developer attention with APIs exposed by the streaming technologies in Microsoft’s DirectX….In 1997, senior Microsoft executives viewed RealNetworks’ streaming software with the same apprehension with which they viewed Apple’s playback software–as competitive technology that could develop into part of a middleware layer that could, in turn, become broad and widespread enough to weaken the applications barrier to entry. … 113. …[In July, 1997], a Microsoft executive…told a RealNetworks executive that it would indeed be in the interests of both companies if RealNetworks limited itself to developing value-added software designed to run on top of Microsoft’s fundamental multimedia platform. Consequently, on July 18, Microsoft and RealNetworks entered into an agreement whereby Microsoft agreed to distribute a copy of RealNetworks’ media player with each copy of Internet Explorer; to make a substantial investment in RealNetworks; to license the source code for certain RealNetworks streaming technologies; and to develop, along with RealNetworks, a common file format for streaming audio and video content. [Microsoft] believed that RealNetworks had in turn agreed to incorporate Microsoft’s streaming media technologies into its products. 114.
RealNetworks
apparently
understood
the…agreement
differently,
for…RealNetworks
announced
that
it
planned
to
continue
developing
fundamental
streaming
software….Still,
Microsoft’s…dealings…show
that
decision-makers
at
Microsoft
were
willing
to
invest
a
large
amount
of
cash
and
other
resources
into
securing
the
agreement
of
other
companies
to
halt
software
development
that
exhibited
discernible
potential
to
weaken
the
applications
barrier. 115. IBM is both a hardware and a software company…. 116. …Microsoft leveraged the fact that the PC Company [IBM’s hardware division] needed to license Windows at a competitive price and on a timely basis, and the fact that the company needed Microsoft’s support in many more subtle ways. When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support….[The court describes a series of practices that it believes were designed to stifle competition from IBM.] … 132.
In
sum,
from
1994
to
1997
Microsoft
consistently
pressured
IBM
to
reduce
its
support
for
software
products
that
competed
with
Microsoft’s
offerings,
and
it
used
its
monopoly
power
in
the
market
for
Intel-compatible
PC
operating
systems
to
punish
IBM
for
its
refusal
to
cooperate.
Whereas,
in
the
case
of
Netscape,
Microsoft
tried
to
induce
a
company
to
move
its
business
away
from
offering
software
that
could
weaken
the
applications
barrier
to
entry,
Microsoft’s
primary
concern
with
IBM
was
to
reduce
the
firm’s
support
for
software
products
that
competed
directly
with
Microsoft’s
most
profitable
products,
namely
Windows
and
Office.
That
being
said,
it
must
be
noted
that
one
of
the
IBM
products
to
which
Microsoft
objected,
Notes,
was
like
Navigator
in
that
it
exposed
middleware
APIs.
In
any
event,
Microsoft’s
interactions
with
Netscape,
IBM,
Intel,
Apple,
and
RealNetworks
all
reveal
Microsoft’s
business
strategy
of
directing
its
monopoly
power
toward
inducing
other
companies
to
abandon
projects
that
threaten
Microsoft
and
toward
punishing
those
companies
that
resist. D. Developing Competitive Web Browsing Software 133. Once it became clear…that Netscape would not abandon its efforts to develop Navigator into a platform, Microsoft focused its efforts on ensuring that few developers would write their applications to rely on the APIs that Navigator exposed. Developers would only write to the APIs exposed by Navigator in numbers large enough to threaten the applications barrier if they believed that Navigator would emerge as the standard software employed to browse the Web. If Microsoft could demonstrate that Navigator would not become the standard, because Microsoft’s own browser would attract just as much if not more usage, then developers would continue to focus their efforts on the Windows API set…. … E.
Giving
Internet
Explorer
Away
and
Rewarding
Firms
that
Helped
Build
Its
Usage
Share 136.
In
addition
to
improving
the
quality
of
Internet
Explorer,
Microsoft
sought
to
increase
the
product’s
share
of
browser
usage
by
giving
it
away
for
free.
In
many
cases,
Microsoft
also
gave
other
firms
things
of
value
(at
substantial
cost
to
Microsoft
)
in
exchange
for
their
commitment
to
distribute
and
promote
Internet
Explorer,
sometimes
explicitly
at
Navigator’s
expense.
While
Microsoft
might
have
bundled
Internet
Explorer
with
Windows
at
no
additional
charge
even
absent
its
determination
to
preserve
the
applications
barrier
to
entry,
that
determination
was
the
main
force
driving
its
decision
to
price
the
product
at
zero.
Furthermore,
Microsoft
would
not
have
given
Internet
Explorer
away
to
IAPs,
ISVs,
and
Apple,
nor
would
it
have
taken
on
the
high
cost
of
enlisting
firms
in
its
campaign
to
maximize
Internet
Explorer’s
usage
share
and
limit
Navigator’s,
had
it
not
been
focused
on
protecting
the
applications
barrier.
… 139.
The
transcendent
importance
of
browser
usage
share
to
Microsoft
is
evident
in
what
the
firm
expended,
as
well
as
in
what
it
relinquished,
in
order
to
maximize
usage
share
for
Internet
Explorer
and
to
diminish
it
for
Navigator….
First,
even
though
Microsoft
could
have
charged
IAPs,
ISVs,
and
Apple
for
licenses
to
distribute
Internet
Explorer
separately
from
Windows,
Microsoft
priced
those
licenses…at
zero
in
order
to
induce
those
companies
to
distribute
and
promote
Internet
Explorer
over
Navigator.
Second,
although
Microsoft
could
have
charged
IAPs
and
ICPs
substantial
sums
of
money
in
exchange
for
promoting
their
services
and
content
within
Windows,
Microsoft
instead
bartered
Windows’
valuable
desktop
“real
estate”
for
a
commitment
from
those
firms
to
promote
and
distribute
Internet
Explorer,
to
inhibit
promotion
and
distribution
of
Navigator,
and
to
employ
technologies
that
would
inspire
developers
to
write
Web
sites
that
relied
on
Microsoft’s
Internet
technologies
rather
than
those
provided
by
Navigator….Third,
Microsoft
also
reduced
the
referral
fees
that
IAPs
paid
when
users
signed
up
for
their
services
using
the
Internet
Referral
Server
in
Windows
in
exchange
for
the
IAPs’
efforts
to
convert
their
installed
bases
of
subscribers
from
Navigator
to
Internet
Explorer….Finally,
with
respect
to
OEMs,
Microsoft
extended
co-marketing
funds
and
reductions
in
the
Windows
royalty
price
to
those
agreeing
to
promote
Internet
Explorer
and,
in
some
cases,
to
abstain
from
promoting
Navigator. … 141. …[H]ad Microsoft not viewed browser usage share as the key to preserving the applications barrier to entry, the company would not have taken its efforts beyond developing a competitive browser product, including it with Windows at no additional cost to consumers, and promoting it with advertising. Microsoft would not have absorbed the considerable additional costs associated with enlisting other firms in its campaign to increase Internet Explorer’s usage share at Navigator’s expense. This investment was only profitable to the extent that it protected the applications barrier to entry…. … F.
Excluding
Navigator
from
Important
Distribution
Channels 143. …If Microsoft was going to raise Internet Explorer's share of browser usage and lower Navigator's share, executives at Microsoft believed they needed to constrict Netscape's access to the distribution channels that led most efficiently to browser usage. … 145. …[N]o other distribution channel for browsing software even approaches the efficiency of OEM pre-installation and IAP bundling. The primary reason is that the other channels require users to expend effort…. … 148. Knowing that OEMs and IAPs represented the most efficient distribution channels of browsing software, Microsoft sought to ensure that…OEMs and IAPs bundled and promoted Internet Explorer to the exclusion of Navigator. … 151. Many consumers desire to separate their choice of a Web browser from their choice of an operating system…. 152. Moreover, many consumers who need an operating system…do not want a browser at all. For example, if a consumer has no desire to browse the Web, he may not want a browser taking up memory on his hard disk and slowing his system’s performance. Also, for businesses desiring to inhibit employees’ access to the Internet while minimizing system support costs, the most efficient solution is often using PC systems without browsers. 153. Because of the separate demand for browsers and operating systems, firms have found it efficient to supply the products separately. A number of operating system vendors offer consumers the choice of licensing their operating systems without a browser. Others bundle a browser with their operating system products but allow OEMs, value-added resellers, and consumers either to not install it or, if the browser has been pre- installed, to uninstall it…. 154. In conclusion, the preferences of consumers and the responsive behavior of software firms demonstrate that Web browsers and operating systems are separate products. 155. In contrast to other operating system vendors, Microsoft both refused to license its operating system without a browser and imposed restrictions–at first contractual and later technical–on OEMs’ and end users’ ability to remove its browser from its operating system. As its internal contemporaneous documents and licensing practices reveal, Microsoft decided to bind Internet Explorer to Windows in order to prevent Navigator from weakening the applications barrier to entry, rather than for any pro-competitive purpose. … 157. …As late as June 1995, [Microsoft planned] to ship the browser in a separate “frosting” package, for which Microsoft intended to charge. By April or May of that year, however, Microsoft’s top executives had identified Netscape’s browser as a potential threat to the applications barrier to entry…. 158. Microsoft [decided to] bundle Internet Explorer 1.0 with the first version of Windows 95. It also included a term in its OEM licenses that prohibited the OEMs from modifying or deleting any part of Windows 95, including Internet Explorer, prior to shipment. The OEMs accepted this restriction despite their interest in meeting consumer demand for PC operating systems without Internet Explorer. After all, Microsoft made the restriction a non-negotiable term…. … 160. Microsoft’s executives believed that…its contractual restrictions placed on OEMs would not be sufficient in themselves to reverse the direction of Navigator’s usage share. Consequently…Microsoft set out to bind Internet Explorer more tightly to Windows 95 as a technical matter. The intent was to make it more difficult for anyone, including systems administrators and users, to remove Internet Explorer from Windows 95 and to simultaneously complicate the experience of using Navigator with Windows 95. As Brad Chase wrote to his superiors near the end of 1995, “We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience.” … 164. …Microsoft placed many of the routines that are used by Internet Explorer…into the same files that support the 32-bit Windows APIs. Microsoft’s primary motivation for this action was to ensure that the deletion of any file containing browsing-specific routines would also delete vital operating system routines and thus cripple Windows 95…. 165. …Microsoft still provided [users] with the ability to uninstall Internet Explorer by using the “Add/Remove” panel, which was accessible from the Windows 95 desktop…. 166. In late 1996, senior executives within Microsoft, led by James Allchin, began to argue that Microsoft was not binding Internet Explorer tightly enough to Windows and as such was missing an opportunity to maximize the usage of Internet Explorer at Navigator’s expense. Allchin first made his case to Paul Maritz in late December 1996…. 167. Maritz responded…by agreeing “that we have to make Windows integration our basic strategy” and that this justified delaying the release of Windows 98 until Internet Explorer 4.0 was ready to be included with that product. Maritz recognized that the delay would disappoint OEMs for two reasons. First, while OEMs were eager to sell new hardware technologies to Windows users, they could not do this until Microsoft released Windows 98, which included software support for the new technologies. Second, OEMs wanted Windows 98 to be released in time to drive sales of PC systems during the back-to-school and holiday selling seasons. Nevertheless, Maritz agreed with Allchin’s point that synchronizing the release of Windows 98 with Internet Explorer was “the only thing that makes sense even if OEMs suffer.” … 170. Microsoft’s technical personnel implemented Allchin’s “Windows integration” strategy in two ways. First, they did not provide users with the ability to uninstall Internet Explorer from Windows 98. The omission of a browser removal function was particularly conspicuous given that Windows 98 did give users the ability to uninstall numerous features other than Internet Explorer–features that Microsoft also held out as being integrated into Windows 98. Microsoft took this action despite specific requests from Gateway that Microsoft provide a way to uninstall Internet Explorer 4.0 from Windows 98. 171. The second way in which Microsoft’s engineers implemented Allchin’s strategy was to make Windows 98 override the user’s choice of default browser in certain circumstances.…As a consequence, users who choose a browser other than Internet Explorer as their default face considerable uncertainty and confusion in the ordinary course of using Windows 98. 172. …The decision to override the user’s selection of non-Microsoft software as the default browser also…harmed those Windows 98 consumers who nevertheless used…Navigator on Windows 98 [by exposing them] to security and privacy risks that are specific to Internet Explorer and to ActiveX controls. 173. …Microsoft has forced Windows 98 users uninterested in browsing to…[bear] all the costs associated with carrying additional software on a system. These include performance degradation, increased risk of incompatibilities, and the introduction of bugs. Corporate consumers…are denied a simple and effective means of preventing employees from attempting to browse the Web. 174. Microsoft has harmed even those consumers who desire to use Internet Explorer, and no other browser, with Windows 98. To the extent that browsing-specific routines have been commingled with operating system routines to a greater degree than is necessary to provide any consumer benefit, Microsoft has unjustifiably…increased the likelihood that a browser crash will cause the entire system to crash and made it easier for malicious viruses that penetrate the system via Internet Explorer to infect non-browsing parts of the system. 175. No technical reason can explain Microsoft’s refusal to license Windows 95 without Internet Explorer 1.0 and 2.0…. 176. Similarly, there is no technical justification for Microsoft’s refusal to license Windows 95 to OEMs with Internet Explorer 3.0 or 4.0 uninstalled, or for its refusal to permit OEMs to uninstall Internet Explorer 3.0 or 4.0…. 177. …Microsoft could easily supply a version of Windows 98 that does not provide the ability to browse the Web, and to which users could add the browser of their choice. Indicative of this is the fact that it remains possible to remove Web browsing functionality from Windows 98 without adversely affecting non-Web browsing features of Windows 98 or the functionality of applications running on the operating system….Professor Felten’s prototype removal program produces precisely this result…. … 186. As an abstract and general proposition, many–if not most–consumers can be said to benefit from Microsoft’s provision of Web browsing functionality with its Windows operating system at no additional charge. No consumer benefit can be ascribed, however, to Microsoft’s refusal to offer a version of Windows 95 or Windows 98 without Internet Explorer, or to Microsoft’s refusal to provide a method for uninstalling Internet Explorer from Windows 98…. 187. As [DOJ witness] Felten’s program demonstrated, it is feasible for Microsoft to supply a version of Windows 98 that does not provide the ability to browse the Web, to which users could add a browser of their choice. Microsoft could then readily offer “integrated” Internet Explorer Web browsing functionality as well, either as an option that could be selected by the end user or the OEM during the Windows 98 setup procedure, or as a “service pack upgrade.” … 192. Windows 98 offers some benefits unrelated to browsing that a consumer cannot obtain by combining Internet Explorer with Windows 95. For example, Windows 98 includes support for new hardware technologies and data formats ….Microsoft has forced Windows users who do not want Internet Explorer to nevertheless license, install, and use Internet Explorer to obtain the unrelated benefits. Although some consumers might be inclined to go without Windows 98's new non-browsing features in order to avoid Internet Explorer, OEMs are unlikely to facilitate that choice, because they want consumers to use an operating system that supports the new hardware technologies they seek to sell. 193. Microsoft’s argument that binding the browser to the operating system is reasonably necessary to preserve the “integrity” of the Windows platform is likewise specious. First, concern with the integrity of the platform cannot explain Microsoft’s original decision to bind Internet Explorer to Windows 95, because Internet Explorer 1.0 and 2.0 did not contain APIs. Second, concern with the integrity of the platform cannot explain Microsoft’s refusal to offer OEMs the option of uninstalling Internet Explorer…because APIs, like all other shared files, are left on the system when Internet Explorer is uninstalled. Third, Microsoft’s contention that offering OEMs the choice of whether or not to install certain browser-related APIs would fragment the Windows platform is unpersuasive because OEMs operate in a competitive market and thus have ample incentive to include APIs…required by the applications that their customers demand. Fourth, even if there were some potential benefit associated with the forced licensing of a single set of APIs to all OEMs, such justification could not apply in this case, because Microsoft itself precipitates fragmentation of its platform by continually updating various portions of the Windows installed base with new APIs…. 194. Microsoft also contends that…providing “best of breed” implementations of various functionalities…can benefit consumers and improve the efficiency of the software market generally, because the resulting standardization allows ISVs to concentrate their efforts on developing complementary technologies for the industry leaders. Microsoft’s refusal to offer a version of Windows 98 in which its Web browser is either absent or removable, however, had no such purpose. Rather, it had the purpose and effect of quashing innovation that exhibited the potential to facilitate the emergence of competition in the market for Intel-compatible PC operating systems. … 202. …Refusing to offer OEMs a browserless… Windows forces OEMs to take (and pay for) Internet Explorer, but it does not prevent a determined OEM from nevertheless offering its consumers a different Web browser…. 203. If OEMs removed the most visible means of invoking Internet Explorer, and pre-installed Navigator…Microsoft’s purpose in forcing OEMs to take Internet Explorer–capturing browser usage share from Netscape would be subverted. The same would be true if OEMs simply configured their machines to promote Navigator before Windows had a chance to promote Internet Explorer. Decision-makers at Microsoft believed that as Internet Explorer caught up with Navigator in quality, OEMs would ultimately conclude that the costs of pre-installing and promoting Navigator…outweighed the benefits. Still, those decision-makers did not believe that Microsoft could afford to wait for the large OEMs…to come to this desired conclusion on their own. Therefore…Microsoft threatened to terminate the Windows license of any OEM that removed Microsoft’s chosen icons and program entries from the Windows desktop or the “Start” menu. It threatened similar punishment for OEMs who added programs that promoted third-party software to the Windows “boot” sequence. These inhibitions soured Microsoft’s relations with OEMs and stymied innovation that might have made Windows PC systems more satisfying to users. Microsoft would not have paid this price had it not been convinced that its actions were necessary to ostracize Navigator from the vital OEM distribution channel. … 209. …Some of high-volume OEMs began to customize the Windows boot sequence so that certain OEM-designed tutorials and registration programs…would run before the users were presented with the Windows desktop. 210. …The primary purpose…was to make the experience of setting up and learning to use a new PC system easier and less confusing for users, especially novices. By doing so, the OEMs believed, they would increase the value of their systems and minimize both product returns and costly support calls….A secondary purpose motivating OEMs to insert programs into the boot sequence was to differentiate their products from those of their competitors. Finally, OEMs perceived an opportunity to collect bounties from IAPs and ISVs in exchange for the promotion of their services and software in the boot sequence…. … 213. In an effort to thwart OEM customization, Microsoft began, in the spring of 1996, to force OEMs to accept a series of restrictions on their ability to reconfigure the…desktop and boot sequence. There were five such restrictions… First, Microsoft formalized the prohibition against removing any icons, folders, or “ Start” menu entries that Microsoft itself had placed on the Windows desktop. Second, Microsoft prohibited OEMs from modifying the initial boot sequence. Third, Microsoft prohibited OEMs from installing programs, including alternatives to the Windows desktop user interface, which would launch automatically upon completion of the initial boot sequence. Fourth, Microsoft prohibited OEMs from adding icons or folders to the Windows desktop that were not similar in size and shape to icons supplied by Microsoft. Finally, when Microsoft later released the Active Desktop as part of Internet Explorer 4.0, it added the restriction that OEMs were not to use that feature to display third-party brands. … 216. Microsoft was willing to sacrifice some goodwill and some of the value that OEMs attached to Windows in order to exclude Netscape from the crucial OEM distribution channel. Microsoft’s restrictions succeeded in raising the costs to OEMs of pre-installing and promoting Navigator. These increased costs, in turn, were in some cases significant enough to deter OEMs from pre-installing Navigator altogether. In other cases, as is discussed in the next section, OEMs decided not to pre-install Navigator after Microsoft brought still more pressure to bear. … 219. In the spring of 1998, Microsoft began gradually to moderate certain of the restrictions described above… 220. It is important to note that Microsoft’s tractability emerged only after the restrictions had been in place for over a year, and only after Microsoft had managed to secure favorable promotion for Internet Explorer through the most important IAPs… 221. Microsoft asserts that the restrictions it places on the ability of OEMs to modify the Windows desktop and boot sequence are merely intended to prevent OEMs from compromising the quality and consistency of Windows….In truth, however, the OEM modifications that Microsoft prohibits would not compromise the quality or consistency of Windows any more than the modifications that Microsoft currently permits. Furthermore, to the extent that certain OEM modifications did threaten to impair the quality and consistency of Windows, Microsoft’s response has been more restrictive than necessary to abate the threat. Microsoft would not have imposed prohibitions that burdened OEMs and consumers with substantial costs, lowered the value of Windows, and harmed the company’s relations with major OEMs had it not felt that the measures were necessary to maximize Internet Explorer’s share of browser usage at Navigator’s expense. 222. Microsoft asserts that it restricts the freedom of OEMs to remove icons, folders, or “Start” menu entries that Microsoft places on the Windows desktop in order to ensure that consumers will enjoy ready access to the features that Microsoft’s advertising has led them to expect…. Since OEMs share Microsoft’s interest in ensuring that consumers can easily find the features they want…Microsoft would not have prohibited OEMs from removing icons, folders, or “Start” menu entries if its only concern had been consumer satisfaction… 223. According to Microsoft, its restrictions on the ability of OEMs to insert programs into the initial Windows boot sequence are meant to ensure that all Windows users experience the product the way Microsoft intended it…This argument might be availing were it not for the fact that Microsoft currently allows several of the largest-volume OEMs to make major modifications to the initial boot sequence….Either Microsoft stopped caring about the consistency of the Windows experience in 1998, when it tempered its restrictions on modifications to the boot sequence, or preserving consistency was never Microsoft’s true motivation for imposing those restrictions in the first place. With all the variety that Microsoft now tolerates…it is difficult to comprehend how allowing OEMs to promote Navigator in their tutorials and Internet sign-up programs would further compromise Microsoft’s purported interest in consistency. … 227. To the extent Microsoft is apprehensive that OEMs might…change the set of APIs exposed by the software on their PCs, the concern is not that OEMs would modify the Windows API set. Rather, the worry is that OEMs would pre-install…other software exposing additional APIs not controlled by Microsoft…. Microsoft’s real concern has not been that OEM modifications would fragment the Windows platform to the detriment of developers and consumers. What has motivated Microsoft’s prohibition against automatically loading shells is rather the fear–once again–that OEMs would pre-install and give prominent placement to middleware that could weaken the applications barrier to entry. … 229….[W]hile all vendors of PC operating systems undoubtedly share Microsoft’s stated interest in maximizing consumer satisfaction, the prohibitions that Microsoft imposes on OEMs are considerably more restrictive than those imposed by other operating system vendors….The reason is that these firms do not share Microsoft’s interest in protecting the applications barrier to entry. 230. …Although the [configuration] restrictions raised the costs attendant to pre-installing and promoting Navigator, senior executives at Microsoft were not confident that those higher costs alone would induce all of the major OEMs to focus their promotional efforts on Internet Explorer to the exclusion of Navigator. Therefore, Microsoft used incentives and threats in an effort to secure the cooperation of individual OEMs. 231. First, Microsoft rewarded with valuable consideration those large-volume OEMs that took steps to promote Internet Explorer. …Microsoft gave reductions in the royalty price of Windows to certain OEMs…that set Internet Explorer as the default browser…. Microsoft gave still further reductions to those OEMs that displayed Internet Explorer’s logo and links to Microsoft’s Internet Explorer update page on their own home pages. Microsoft agreed to give OEMs millions of dollars in co-marketing funds, as well as costly in-kind assistance, in exchange for their carry out of other promotional activities for Internet Explorer. 232. Microsoft went beyond giving OEMs incentives to promote Internet Explorer. The company’s dealings with Compaq in 1996 and 1997 demonstrate that Microsoft was willing to exchange valuable consideration for an OEM’s commitment to curtail its distribution and promotion of Navigator. In early 1996, at around the same time that Compaq was removing the MSN and Internet Explorer icons and program entries from the Presario desktop, Compaq announced its intention to work with Netscape for its internal Internet needs and on Internet server initiatives. In response, Microsoft insisted that Compaq support Microsoft’s Internet initiatives throughout its business. To make its displeasure felt, Microsoft initiated a series of cooperative ventures with some of Compaq’s competitors, including DEC and Hewlett-Packard. 233. When Compaq eventually agreed to restore the MSN and Internet Explorer icons and program entries to the Presario desktop, it did so because its senior executives had decided that the firm needed to do what was necessary to restore its special relationship with Microsoft…. 234. In return for Compaq’s capitulation and revival of its commitment to support Microsoft’s Internet strategy, Microsoft has guaranteed Compaq that the prices it pays for Windows will continue to be significantly lower than the prices paid by other OEMs…. 235. Microsoft’s relations with Compaq beginning in late 1996 illustrate the blandishments that Microsoft is willing to extend to OEMs that ally with it to help it capture browser share. Microsoft’s relations with Gateway and the IBM PC Company, by contrast, reveal the pressure that Microsoft is willing to apply to OEMs that show reluctance to cooperate on this front. [The court describes the unfavorable business terms that it believes were imposed on Gateway and IBM due to their failure to cooperate with Microsoft’s strategy.] … 239.
Microsoft
has
largely
succeeded
in
exiling
Navigator
from
the
crucial
OEM
distribution
channel.
Even
though
a
few
OEMs
continue
to
offer
Navigator
on
some
of
their
PCs,
Microsoft
has
caused
the
number
of
OEMs
offering
Navigator,
and
the
number
of
PCs
on
which
they
offer
it,
to
decline
dramatically…. 242. By late 1995, Microsoft had identified bundling with the client software of IAPs as the other of the two most efficient channels for distributing browsing software. By that time, however, several of the most popular IAPs were shipping Navigator. Recognizing that it was starting from behind, Microsoft devised an aggressive strategy to capture the IAP channel from Netscape…. 243. Those who planned and implemented Microsoft’s IAP campaign believed that, if IAPs gave new subscribers a choice between Internet Explorer and Navigator, most of them would pick Navigator…. To compensate for Navigator’s advantage, Microsoft reinforced its free distribution of Internet Explorer licenses and the access kits with [additional measures]…. 247. …Microsoft made substantial sacrifices, including the forfeiture of significant revenue opportunities, in order to induce IAPs to do four things: to distribute access software that came with Internet Explorer; to promote Internet Explorer; to upgrade existing subscribers to Internet Explorer; and to restrict their distribution and promotion of non-Microsoft browsing software. The restrictions on the freedom of IAPs to distribute and promote Navigator were far broader than they needed to be in order to achieve any economic efficiency. This is especially true given the fact that Microsoft never expected Internet Explorer to generate any revenue. Ultimately, the inducements that Microsoft offered IAPs at substantial cost to itself, together with the restrictive conditions it imposed on IAPs, did the four things they were designed to accomplish: They caused Internet Explorer’s usage share to surge; they caused Navigator’s usage share to plummet; they raised Netscape’s own costs; and they sealed off a major portion of the IAP channel from the prospect of recapture by Navigator. As an ancillary effect, Microsoft’s campaign to seize the IAP channel significantly hampered the ability of consumers to make their choice of Web browser products based on the features of those products. 248. In September 1996, Microsoft announced the availability of the “Internet Explorer Access Kit,” or “IEAK.”… 249. Using the IEAK [“Internet Explorer Access Kit,”], an IAP could create a distinctive identity for its service in as little as a few hours by customizing the title bar, icon, start and search pages, and “favorites” in Internet Explorer. The IEAK also made the installation process easy for IAPs…. 250. Many IAPs would have paid for the right to distribute Internet Explorer. Indeed, Netscape was charging IAPs between fifteen and twenty dollars per copy of Navigator they distributed. Because of the features and convenience it offered, the IEAK significantly increased the price that IAPs would have been willing to pay. Nevertheless, Microsoft licensed the IEAK, including Internet Explorer, to IAPs at no charge. … 251. …The IAPs that executed an IEAK license agreement agreed to make Internet Explorer their “preferred” browsing software… 252. …Microsoft’s decision to license Internet Explorer and the IEAK to IAPs at no charge beguiled many small ISPs that otherwise would not have done so into distributing Internet Explorer to their subscribers. By giving up the opportunity to charge for Internet Explorer, and also by developing the IEAK at substantial cost and offering it at no charge, Microsoft thus increased the flow of Internet Explorer through the crucial IAP channel. 253. …Microsoft also introduced the Internet Connection Wizard (“ICW”) as a feature in Windows 95 OSR 2. If a user clicked on the ICW icon …the program would automatically dial into a computer maintained by Microsoft called the Windows Referral Server. The Referral Server would then transmit to the user’s computer a list of IAPs that provided connections to the Internet in the user’s geographic locale….If the user then indicated a desire to sign up for one of the listed IAPs, [the ICW] would automatically configure the user’s PC…. 254. …IAPs viewed inclusion in the Windows 95 Referral Server as a valuable form of promotion…. 255. …Although it could have been exchanged for large bounties from IAPs, Microsoft decided to exchange placement in the Referral Server…for the agreement of the selected IAPs to promote and distribute Internet Explorer preferentially over Navigator and to convert existing subscribers from Navigator… … 261. …Microsoft readily made this sacrifice in order to induce the important IAPs to take actions…to exclude Navigator from the IAP channel. 262. Microsoft’s motivation for the limits it placed on the distribution of non-Microsoft browsing software by IAPs in the Windows 95 Referral Server could not have been simply a desire to ensure that IAPs did not promote competing browsing software to subscribers acquired with Microsoft’s help. The agreements gave Microsoft the right to dismiss an IAP that either told its subscribers they could choose Navigator or distributed too many copies of non-Microsoft browser products. This was true even if the IAP never mentioned Navigator in its Referral Server entry and distributed nothing but Internet Explorer to the new subscribers it garnered from the ICW. In light of that fact, the Windows 95 Referral Server agreements emerge as something very different from typical cross-marketing arrangements…. … 268. In April 1998, coincident with rising public criticism, the impending appearance of Bill Gates before a Congressional panel on competition in the computer industry, and the imminent filing of these lawsuits, Microsoft unilaterally waived the most restrictive provisions in the Referral Server agreements…. … 271. By both lifting restrictions in its agreements and ceding control over the IAP sign-up process to OEMs, in the spring of 1998, Microsoft relaxed the strictures that it had imposed in the fall of 1996 on the distribution and promotion of Web browsing software by the most popular IAPs. In the year-and-a-half that they were in full force, however, the restrictive terms in the Referral Server agreements induced the major IAPs to customize their client software for Internet Explorer, gear their promotional and marketing activities to Microsoft’s technologies, and convert substantial portions of their installed bases from Navigator to Internet Explorer. They may have welcomed more flexibility to distribute Navigator to those subscribers that expressed demand for it, but they had no incentive to launch an expensive campaign to reverse the tide that Microsoft’s restrictions had already generated….Furthermore, one of the reasons Microsoft felt comfortable relaxing the controls on IAPs in the spring of 1998 was that it had achieved–and planned to maintain–control over the distribution and promotion of Web browsing software by AOL and the other major OLSs, whose combined subscriber base comprised most of North America’s Internet users. 272. In late 1995 and early 1996, senior executives at Microsoft recognized …that if they could convince AOL to distribute Internet Explorer with its client software instead of Navigator, Microsoft would–in a single coup–capture a large part of the IAP channel for Internet Explorer. In the early spring of 1996, therefore, Microsoft exchanged favorable placement on the Windows desktop, as well as other valuable consideration, for AOL’s commitment to distribute and promote Internet Explorer to the near exclusion of Navigator. AOL’s acceptance of this arrangement has caused an enormous surge in Internet Explorer’s usage share and a concomitant decline in Navigator’s share. To supplement the effects of the AOL deal, Microsoft entered similar agreements with other OLSs. The importance of these arrangements to Microsoft is evident in the fact that, in contrast to the restrictive terms in the Windows Referral Server agreements, Microsoft has never waived the terms that require the OLSs to distribute and promote Internet Explorer to the near exclusion of Navigator. … 291.
As
with
the
restrictive
provisions
in
the
Referral
Server
agreements,
the
provisions
in
the
March
1996
agreement
constraining
AOL’s
distribution
and
promotion
of
Navigator
had
no
purpose
other
than
maximizing
Internet
Explorer’s
usage
share
at
Navigator’s
expense.
Considering
that
the
restrictions
applied
to
AOL’s
proprietary
access
software
regardless
of
the
sub-channel
through
which
it
was
distributed,
and
that
Microsoft
collected
no
revenue
from
Internet
Explorer,
the
restrictions
accomplished
no
efficiency.
They
affected
consumers
only
by
encumbering
their
ability
to
choose
between
competing
browsing
technologies.
In
order
to
gain
AOL’s
acceptance
of
these
restrictions,
Microsoft
accorded
AOL
free
desktop
placement
that
undermined
its
own
MSN,
in
which
Microsoft
had
invested
hundreds
of
millions
of
dollars…. … 304. …By granting AOL valuable desktop real estate (to MSN’s detriment) and other valuable consideration, Microsoft succeeded in capturing for Internet Explorer, and holding for a minimum of four years, one of the single most important channels for the distribution of browsing software….Microsoft exploited that interval to enhance dependence among developers on Microsoft’s proprietary interfaces for network-centric applications–dependence that will continue to inure to Microsoft’s benefit even if AOL stops distributing Internet Explorer in the future. The AOL coup, which Microsoft accomplished only at tremendous expense to itself and considerable deprivation of consumers” freedom of choice, thus contributed to extinguishing the threat that Navigator posed to the applications barrier to entry. 305. In the summer and fall of 1996, Microsoft entered into agreements with three other OLSs, namely, AT&T WorldNet, Prodigy, and AOL’s subsidiary, CompuServe. The provisions of these agreements were substantially the same as those contained in the March 1996 agreement between Microsoft and AOL… 1. Effect of Microsoft’s Actions in the IAP Channel 307.
As
described
above,
Microsoft
gave
valuable
consideration
at
no
charge
to
IAPs
that
agreed
to
distribute
and
promote
a
product
that
brought
no
revenue
to
Microsoft.
By
tendering
additional
valuable
perquisites
(at
the
cost
of
lost
revenue),
Microsoft
induced
IAPs
to
restrict
drastically
their
distribution
and
promotion
of
Navigator.
With
the
offer
of
still
other
concessions,
Microsoft
induced
IAPs
to
turn
subscribers
already
using
Navigator
into
Internet
Explorer
users. … 311. ICPs create the content that fills the pages that make up the Web…. Executives at Microsoft recognized that ICPs were not nearly as important a distribution channel for browsing software as OEMs and IAPs. Nevertheless, protecting the applications barrier to entry was of such high priority at Microsoft that its senior executives were willing to invest significant resources to enlist even ICPs in the effort. Executives at Microsoft determined that ICPs could aid Microsoft’s browser campaign in three ways. First, ICPs could help build Internet Explorer’s usage share by featuring advertisements and links for Internet Explorer, to the exclusion of non-Microsoft browsing software…Second, those ICPs that distributed software as well as content could bundle Internet Explorer, instead of Navigator, with those distributions. Finally, ICPs could increase demand for Internet Explorer, and decrease demand for Navigator, by creating their content with Microsoft technologies, such as ActiveX, that would make the content more appealing in appearance when accessed with Internet Explorer. … 318. …Microsoft proceeded to enter…agreements with 24 ICPs, all in the summer and early fall of 1997.…Although the agreements were individually negotiated and their terms varied to some extent, the typical agreement obligated Microsoft to promote the ICP’s business in three ways. First, Microsoft agreed to include on the Channel Bar (or in one of the lists accessible directly from the Channel Bar) a link that would send a user directly to the ICP’s “push” site. Second, Microsoft agreed to promote the ICP’s content in national public-relations and computer-industry events, as well as on Microsoft Web sites. Finally, Microsoft agreed to include introductory content from the ICP with certain distributions of Windows and Internet Explorer. 319. The agreements did not obligate the ICPs to pay money to Microsoft in exchange for any of the benefits…that Microsoft extended to them. Rather, the agreements obligated the ICPs to compensate Microsoft in other ways…. 320. The first obligation that the ICPs undertook was to distribute Internet Explorer and no “Other Browser” in connection with any custom Web browsing software or CD-ROM content that they might offer…. 321. The agreements also required the signatory ICPs to promote Internet Explorer and no “Other Browser” as their “browser of choice.” In particular, the ICPs were required to display a logo for Internet Explorer and no “Other Browser” on the home page of the sites specified in the agreements and on any other pages on which the ICP typically displayed such links. The ICPs were also required to place Internet Explorer download links on their Web sites and to remove any links to Navigator’s download site…. 322. A third provision…was a prohibition against entering agreements with a vendor of an “Other Browser” whereby the ICPs would pay money or provide other consideration…for the vendor’s promotion of the ICP’s branded content. Finally, the agreements required the ICPs, in designing their Web sites, to employ certain Microsoft technologies such as Dynamic HTML and ActiveX. Some of the agreements actually required the ICPs to create “differentiated content” that was either available only to Internet Explorer users or would be more attractive when viewed with Internet Explorer than with any “Other Browser.”… … [The court describes other restrictive agreements with ICPs.] 329. Cross-marketing arrangements in competitive markets do not necessarily make those markets less competitive; however, four characteristics distinguish this case from situations in which such agreements are benign. First, Microsoft was able to offer ICPs an asset whose value competitors could not hope, on account of Microsoft’s monopoly power, to match. Second, Microsoft bartered that asset not to increase demand for a revenue-generating product, but rather to suppress the distribution and diminish the attractiveness of technology that Microsoft saw as a potential threat to its monopoly power. Third, and more specifically, Microsoft prohibited the ICPs from compensating Netscape for promotion of their products even while not attempting to prohibit the promotion itself. This reveals that Microsoft’s motivation was not simply a desire to generate brand associations with Internet Explorer. Finally, Microsoft went beyond encouraging ICPs to take advantage of innovations in Microsoft’s technology, explicitly requiring them to ensure that their content appeared degraded when viewed with Navigator rather than Internet Explorer. Microsoft’s desire to lower demand for Navigator was thus independent of, and far more malevolent than, a simple desire to increase demand for Internet Explorer. 330. The terms of Microsoft’s agreements with ICPs cannot be explained in customary economic parlance absent Microsoft’s obsession with obliterating the threat that Navigator posed to the applications barrier to entry…. … 332. For a period of about eight months…agreements with Microsoft had prohibited approximately 34 ICPs from distributing Navigator and from promoting Navigator in all but a few ways. For an overlapping period of between a year and a year-and-a-half, those 34 ICPs, plus between 30 and 50 more, were required to promote Internet Explorer at least as prominently as they promoted Navigator…. … 337. …Microsoft’s efforts to maximize Internet Explorer’s share of browser usage at Navigator’s expense were intended to encourage developers to use Windows-specific technologies when they wrote their applications to rely on a browser. In addition to creating this incentive indirectly, by disadvantaging Navigator, Microsoft also targeted individual ISVs directly, extracting from them commitments to make their Web-centric applications reliant on technology specific to Internet Explorer. 338. …Since Microsoft decides which ISVs receive betas and other technical support, and when they will receive it, the ability of an ISV to compete in the marketplace for software running on Windows products is highly dependent on Microsoft’s cooperation….In dozens of “First Wave” agreements…Microsoft has promised to give preferential support…and the right to use certain Microsoft seals of approval to important ISVs that agree to certain conditions. One of these conditions is that the ISVs use Internet Explorer as the default browsing software for any software they develop with a hypertext-based user interface. Another condition is that the ISVs use Microsoft’s “HTML Help,” which is accessible only with Internet Explorer, to implement their applications” help systems. 340. …Microsoft has [thus] ensured that many of the most popular Web-centric applications will rely on browsing technologies found only in Windows and has increased the likelihood that the millions of consumers using these products will use Internet Explorer rather than Navigator. Microsoft’s relations with ISVs thus represent another area in which it has applied its monopoly power to the task of protecting the applications barrier to entry. 341. …[O]nce Netscape confirmed its determination to offer a middleware layer that would expose the same set of APIs on Windows, the Mac OS, and other platforms, Microsoft recognized that it needed to stifle the attention that developers would be inclined to devote to those APIs, even when the they rested on top of a non-Windows platform like the Mac OS….Therefore, Microsoft set out to recruit Mac OS users to Internet Explorer, and to minimize Navigator’s usage share among Mac OS users. … 343. …Apple was already shipping Internet Explorer with the Mac OS, but it was pre-installing Navigator as the default browsing software…. 344. One point of leverage that Microsoft held…was that 90% of Mac OS users…had adopted Microsoft’s Mac Office. In 1997, Apple’s business was in steep decline…Had Microsoft announced…that it was ceasing to develop new versions of Mac Office, a great number of ISVs, customers, developers, and investors would have interpreted the announcement as Apple’s death notice. 345. Recognizing the importance of Mac Office to Apple’s survival, Microsoft threatened to cancel the product unless Apple compromised on a number of outstanding issues between the companies. One of these issues was the extent to which Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS. … 350. …[T]he two companies…settled all outstanding issues between them…on August 7, 1997. Under the…“Technology Agreement,” which remains in force today, Microsoft’s primary obligation is to continue releasing up-to-date versions of Mac Office for at least 5 years. Among the obligations that the Technology Agreement places on Apple are several relating to browsing software. 351. First, Apple has agreed…to “bundle the most current version of Microsoft’s Internet Explorer for Macintosh …with all system software releases for Macintosh Computers (“MacOS”) sold by Apple.” The Technology Agreement also provides: “While Apple may bundle browsers other than Internet Explorer with such Mac OS system software releases, Apple will make Internet Explorer for Macintosh the default selection in the choice of all included internet browsers (i.e., when the user invokes the “Browse the Internet” or equivalent icon, the Mac OS will launch Internet Explorer for Macintosh).”… 352. The Technology Agreement further provides that…Apple may not position icons for non- Microsoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades. Moreover, the agreement states that “Apple will not be proactive or initiate actions to encourage users to swap out Internet Explorer for Macintosh.” Both Apple and Microsoft read this term to prohibit Apple from promoting non-Microsoft browsing software…. … 355. Apple increased its distribution and promotion of Internet Explorer not because of a conviction that the quality of Microsoft’s product was superior to Navigator’s, or that consumer demand for it was greater, but rather because of the in terrorem effect of the prospect of the loss of Mac Office. To be blunt, Microsoft threatened to refuse to sell a profitable product to Apple, a product in whose development Microsoft had invested substantial resources, and which was virtually ready for shipment. Not only would this ploy have wasted sunk costs and sacrificed substantial profit, it also would have damaged Microsoft’s goodwill among Apple’s customers, whom Microsoft had led to expect a new version of Mac Office. The predominant reason Microsoft was prepared to make this sacrifice, and the sole reason that it required Apple to make Internet Explorer its default browser and restricted Apple’s freedom to feature and promote non-Microsoft browsing software, was to protect the applications barrier to entry… … H. The Success of Microsoft's Effort to Maximize Internet Explorer's Usage Share at Navigator's Expense 358. …The period since 1996 has witnessed a large increase in the usage of Microsoft’s browsing technologies and a concomitant decline in Navigator’s share. This reversal of fortune might not have occurred had Microsoft not improved the quality of Internet Explorer, and some part of the reversal is undoubtedly attributable to Microsoft’s decision to distribute Internet Explorer with Windows at no additional charge. The relative shares would not have changed nearly as much as they did, however, had Microsoft not devoted its monopoly power and monopoly profits to precisely that end. 361. Before a developer sinks costs into writing applications that rely on APIs exposed by Navigator or Internet Explorer, the developer will also want to know what share of browser usage each of the competing platforms will enjoy in the future…So Navigator’s and Internet Explorer’s relative attractiveness as platforms…depends greatly on their relative shares of incremental browser usage. 372. …[Data presented at trial] provide an adequate basis for two findings: First, from early 1996 to the late summer of 1998, Navigator’s share of all browser usage fell from above 70% to around 50%, while Internet Explorer’s share rose from about 5% to around 50%; second, by 1998, Navigator’s share of incremental browser usage had fallen below 40% while Internet Explorer’s share had risen above 60%. All signs point to the fact that Internet Explorer’s share has continued to rise–and Navigator’s has continued to decline–since the late summer of 1998. It is safe to conclude, then, that Internet Explorer’s share of all browser usage now exceeds 50%, and that Navigator’s share has fallen below that mark. … 374. Navigator’s large and continuing decline in usage share has demonstrated to developers the product’s failure to mature as the standard software used to browse the Web. Internet Explorer’s success in gaining usage share, together with the lack of contenders other than Navigator, has simultaneously sent the clear message to developers that no platform for network-centric applications can compete for ubiquity with the 32-bit Windows API set. … I. The Success of Microsoft's Effort to Protect the Applications Barrier to Entry from the Threat Posed by Navigator 377. In late 1995 and early 1996, Navigator seemed well on its way to becoming the standard software for browsing the Web. Within three years, however, Microsoft had successfully denied Navigator that status, and had thereby forestalled a serious potential threat to the applications barrier to entry…. … 379. Not only did Microsoft prevent Navigator from undermining the applications barrier to entry, it inflicted considerable harm on Netscape’s business in the process.… After Microsoft started licensing Internet Explorer at no charge, …Netscape was forced to follow suit.…Microsoft could still defray the massive costs it was undertaking to maximize usage share with the vast profits earned licensing Windows. Because Netscape did not have that luxury, it could ill afford the dramatic drop in revenues from Navigator, much less to pay for the inefficient modes of distribution to which Microsoft had consigned it. The financial constraints also deterred Netscape from undertaking technical innovations that it might otherwise have implemented in Navigator. Microsoft was not altogether surprised, then, when it learned in November 1998 that Netscape had surrendered itself to acquisition by another company. … 384. Although the suspicion lingers, the evidence is insufficient to find that Microsoft’s ambition is a future in which most or all of the content available on the Web would be accessible only through its own browsing software. The evidence does, however, reveal an intent to ensure that if and when full-featured, server-based applications begin appearing in large numbers on the Web, the number of them relying solely on middleware APIs (such as those exposed by Navigator) will be too few to attenuate the applications barrier to entry. 385. …So, as matters stand at present, while Microsoft has succeeded in forestalling the development of enough full-featured, cross-platform, network-centric applications to render the applications barrier penetrable, it is not likely to drive non-Microsoft PC Web browsing software from the marketplace altogether. VI. MICROSOFT’s RESPONSE TO THE THREAT POSED BY SUN’s IMPLEMENTATION OF JAVA A. Creating a Java Implementation for Windows that Undermined Portability and Was Incompatible with Other Implementations … 387. Although Sun intended Java technologies eventually to allow developers to write applications that would run on multiple operating systems without any porting, Java developers have thus [far] always needed to rely on platform-specific APIs in order to write applications with advanced functionality. Recognizing this, Sun sponsored a…method that would allow developers writing in Java to rely directly upon APIs exposed by a particular operating system in a way that would nevertheless allow them to port their applications with relative ease to JVMs running on different operating systems. 388. On March 12, 1996, Sun signed an agreement granting Microsoft the right to distribute and make certain modifications to Sun’s Java technologies. Microsoft used this license to create its own Java development tools and its own Windows-compatible Java runtime environment. Because the motivation behind the Sun-sponsored effort ran counter to Microsoft’s interest in preserving the difficulty of porting, Microsoft independently developed methods for enabling “calls” to “native” Windows code that made porting more difficult than the method that Sun was striving to make standard. Microsoft implemented these different methods in its developer tools and in its JVM. Microsoft also discouraged its business allies from aiding Sun’s effort. For example, Gates told Intel’s CEO in June 1996 that he did not want the Intel Architecture Labs cooperating with Sun to develop methods for calling upon multimedia interfaces in Windows. 389. …[T]he native methods that Microsoft produced were slightly easier for developers to use…and Java applications using Microsoft’s methods tended to run faster than ones calling upon Windows APIs with Sun’s method. If a developer relied on Microsoft’s methods rather than Sun’s, however, his Java application would be much more difficult to port from the Windows-compatible JVM to JVMs designed to run on different operating systems. 390. Microsoft easily could have implemented Sun’s native method along with its own in its developer tools and its JVM, thereby allowing Java developers to choose between speed and portability; however, it elected instead to implement only the Microsoft methods. The result was that if a Java developer used the Sun method for making native calls, his application would not run on Microsoft’s version of the Windows JVM, and if he used Microsoft’s native methods, his application would not run on any JVM other than Microsoft” s version. Far from being the unintended consequence of an attempt to help Java developers more easily develop high-performing applications, incompatibility was the intended result of Microsoft’s efforts…. 391. …In 1997, Sun added a class library called Remote Method Invocation, or “RMI,” which allowed Java applications written to call upon it to communicate with each other in certain useful ways…. Microsoft…refused to include RMI as a standard component of the Java runtime environment for Windows that it shipped with Internet Explorer 4.0. 392. The license agreement it had signed with Sun the previous year obligated Microsoft to offer RMI, at a minimum, on its developer Web site. Microsoft did so, but …buried the link in an obscure location and neglected to include an entry for it in the site’s index…. [A] Microsoft employee wrote to his approving manager, “They’ll have to stumble across it to know it’s there….I’d say it’s pretty buried.” … 394. In a further effort intended to increase the incompatibility between Java applications written for its Windows JVM and other Windows JVMs, and to increase the difficulty of porting Java applications from the Windows environment to other platforms, Microsoft designed its Java developer tools to encourage developers to write their Java applications using certain “keywords” and “compiler directives” that could only be executed properly by Microsoft’s version of the Java runtime environment for Windows…. B. Inducing Developers to Use the Microsoft Implementation of Java Rather than Sun-Compliant Implementations 395. If all Microsoft had done to combat the growth of easily portable Java applications had been to increase the incompatibility between its Java implementation and ones complying with Sun’s standards, the effect might have been limited. For if Sun could have assured developers that a Windows- compatible Java runtime environment that complied with Sun’s standards would be installed on as many Windows PCs as Microsoft’s version, and that it would run Java applications as well as Microsoft’s, developers might have considered the cost in portability associated with relying on Microsoft-specific technologies and instead written their Java applications using Sun’s developer tools…. 396. Determined to induce developers to write Java applications that relied on its version of the runtime environment for Windows rather than on Sun-compliant ones, Microsoft made a large investment of engineering resources to develop a high-performance Windows JVM. This made Microsoft’s version of the runtime environment attractive on its technical merits. To hinder Sun and Netscape from improving the quality of the Windows JVM shipped with Navigator, Microsoft pressured Intel, which was developing a high-performance Windows-compatible JVM, to not share its work with either Sun or Netscape, much less allow Netscape to bundle the Intel JVM with Navigator…By the spring of 1996, Intel had developed a JVM designed to run well on Intel- based systems while complying with Sun’s cross-platform standards. Microsoft executives approached Intel in April of that year and urged that Intel not take any steps toward allowing Netscape to ship this JVM with Navigator. 397. By bundling its version of the Windows JVM with every copy of Internet Explorer and expending some of its surplus monopoly power to maximize the usage of Internet Explorer at Navigator’s expense, Microsoft endowed its Java runtime environment with the unique attribute of guaranteed, enduring ubiquity across the enormous Windows installed base….Partly as a result of the damage that Microsoft’s efforts against Navigator inflicted on Netscape’s business, Netscape decided in 1998 that it could no longer afford to do the engineering work necessary to continue bundling up-to-date JVMs with Navigator. Consequently, it announced that, starting with version 5.0, Navigator would cease to be a distribution vehicle for JVMs compliant with Sun’s standards. 398.
The
guaranteed
presence
of
Microsoft’s
runtime
environment
on
every
Windows
PC
and
the
decreasing
likelihood
that
the
primary
host
of
the
Sun-compliant
runtime
environment
(Navigator)
would
be
present,
induced
many
Java
developers
to
write
their
applications
using
Microsoft’s
developer
tools,
for
doing
so
guaranteed
that
those
applications
would
run
in
the
Java
environment
most
likely
to
be
installed
on
a
Windows
user’s
PC.
Owing
to
Microsoft’s
deliberate
design
decisions,
more
developers
using
Microsoft’s
Java
developer
tools
meant
that
more
Java
applications
would
rely
on
the
Windows-specific
technologies
in
Microsoft’s
runtime
environment
and
thus
would
not
be
portable. 400. Recognizing ISVs as a channel through which Java runtime environments that complied with Sun’s standards could find their way onto Windows PC systems, Microsoft induced ISVs to distribute Microsoft’s version instead of a Sun-compliant one. First, Microsoft made its JVM available to ISVs separately from Internet Explorer so that those uninterested in bundling browsing software could nevertheless bundle Microsoft’s JVM….. 401. Microsoft took the further step of offering valuable things to ISVs that agreed to use Microsoft’s Java implementation. Specifically,…Microsoft conditioned…betas, other technical information, and the right to use certain Microsoft seals of approval on the agreement of those ISVs to use Microsoft’s version of the Windows JVM as the “default.” Microsoft and the ISVs all read this requirement to obligate the ISVs to ensure that their Java applications were compatible with Microsoft’s version of the Windows JVM.…Thus, a very large percentage of the Java applications that the First Wave ISVs wrote would run only on Microsoft’s version of the Windows JVM.…The record contains no evidence that the…agreements had any purpose other than to maximize the difficulty of porting Java applications between Windows and other platforms…. … 403. …Microsoft sought to ensure that, to the extent Java developers relied on RealNetworks’ technologies, they would not be relying on a Java implementation that complied with Sun’s standards. So, in the 1997 agreement…Microsoft conditioned its agreement to distribute RealNetworks’ media player with Internet Explorer on RealNetworks’ agreement to exert its best efforts to ensure that its player primarily use Windows-specific technology, rather than any analogous interfaces that Sun or Netscape might develop…. C. Thwarting the Expansion of the Java Class Libraries 404. …In pursuit of its goal of minimizing the portability of Java applications, Microsoft took steps to thwart the very creation of cross-platform Java interfaces. …Microsoft used threats to withhold Windows operating-system support from Intel’s microprocessors and offers to include Intel technology in Windows in order to induce Intel to stop aiding Sun in the development of Java classes that would support innovative multimedia functionality. … D. The Effect of Microsoft’s Efforts to Prevent Java from Diminishing the Applications Barrier to Entry 407. Had Microsoft not been committed to protecting and enhancing the applications barrier to entry, it might still have developed a high-performance JVM and enabled Java developers to call upon Windows APIs. Absent this commitment, though, Microsoft would not have taken efforts to maximize the difficulty of porting Java applications written to its implementation and to drastically limit the ability of developers to write Java applications that would run in both Microsoft’s version of the Windows runtime environment and versions complying with Sun’s standards. Nor would Microsoft have endeavored to limit Navigator’s usage share, to induce ISVs to neither use nor distribute non-Microsoft Java technologies, and to impede the expansion of the Java class libraries, had it not been determined to discourage developers from writing applications that would be easy to port between Windows and other platforms…. VII. THE EFFECT ON CONSUMERS OF MICROSOFT’s EFFORTS TO PROTECT THE APPLICATIONS BARRIER TO ENTRY … 409.
…Microsoft
has
done
much
more
than
develop
innovative
browsing
software
of
commendable
quality
and
offer
it
bundled
with
Windows
at
no
additional
charge.
As
has
been
shown,
Microsoft
also
engaged
in
a
concerted
series
of
actions
designed
to
protect
the
applications
barrier
to
entry,
and
hence
its
monopoly
power,
from
a
variety
of
middleware
threats,
including
Netscape’s
Web
browser
and
Sun’s
implementation
of
Java.
Many
of
these
actions
have
harmed
consumers
in
ways
that
are
immediate
and
easily
discernible.
They
have
also
caused
less
direct,
but
nevertheless
serious
and
far-reaching,
consumer
harm
by
distorting
competition. 410. …Microsoft forced OEMs to ignore consumer demand for a browserless version of Windows….By ensuring that Internet Explorer would launch in certain circumstances in Windows 98 even if Navigator were set as the default …Microsoft created confusion and frustration for consumers, and increased technical support costs for business customers. Those Windows purchasers who did not want browsing software…also had to…content themselves with a PC system that ran slower and provided less available memory….By constraining the freedom of OEMs to implement certain software programs in the Windows boot sequence, Microsoft foreclosed an opportunity for OEMs to make Windows PC systems less confusing and more user-friendly, as consumers desired. By taking the actions listed above, and by enticing firms into exclusivity arrangements with valuable inducements that only Microsoft could offer and that the firms reasonably believed they could not do without, Microsoft forced those consumers who otherwise would have elected Navigator as their browser to either pay a substantial price (in the forms of downloading, installation, confusion, degraded system performance, and diminished memory capacity) or content themselves with Internet Explorer. Finally, by pressuring Intel to drop the development of platform-level NSP software, and otherwise to cut back on its software development efforts, Microsoft deprived consumers of software innovation that they very well may have found valuable, had the innovation been allowed to reach the marketplace. None of these actions had pro-competitive justifications. 411. Many of the tactics that Microsoft has employed have also harmed consumers indirectly by unjustifiably distorting competition. The actions that Microsoft took against Navigator hobbled a form of innovation that had shown the potential to depress the applications barrier to entry sufficiently to enable other firms to compete effectively against Microsoft in the market for Intel-compatible PC operating systems. That competition would have conduced to consumer choice and nurtured innovation. The campaign against Navigator also retarded widespread acceptance of Sun’s Java implementation. This campaign, together with actions that Microsoft took with the sole purpose of making it difficult for developers to write Java applications with technologies that would allow them to be ported between Windows and other platforms, impeded another form of innovation that bore the potential to diminish the applications barrier to entry…. Microsoft has retarded, and perhaps altogether extinguished, the process by which these two middleware technologies could have facilitated the introduction of competition into an important market. 412. Most harmful of all is the message that Microsoft’s actions have conveyed to every enterprise with the potential to innovate in the computer industry. …Microsoft has demonstrated that it will use its prodigious market power and immense profits to harm any firm that insists on pursuing initiatives that could intensify competition against one of Microsoft’s core products. Microsoft’s past success in hurting such companies and stifling innovation deters investment in technologies and businesses that exhibit the potential to threaten Microsoft. The ultimate result is that some innovations that would truly benefit consumers never occur for the sole reason that they do not coincide with Microsoft’s self-interest. 1. Upon the release of these finding, some press accounts cited the possibility that Microsoft might yet prevail in a “more sympathetic” Court of Appeals. Which, if any, of the findings might appear vulnerable to reversal? (What is the standard for reversal?) On balance, how would you assess Microsoft’s chances of getting substantially “off the hook” via the appellate process? 2. What test is being used to determine the existence of market power? 3. What connection is there between the treatment of Microsoft’s back-versions and an issue in the Alcoa case? 4. Re-read carefully the court’s analysis of “applications barriers to entry.” Is this “problem” just a particular form of natural monopoly? If so, didn’t Judge Posner say in Marshfield Clinic that natural monopoly was not the sort of “monopolizing” of concern under §2? 5. Microsoft defended many of its practices as simply being the result of competitive “hard bargaining,” similar to that hypothesized in Ch. 1 in connec-tion with the Aspen Skiing case. Is what Microsoft did distinguishable from mere hard bargaining? Does tough bargaining with companies who are also in some sense one’s competitors inevitably implicate antitrust risk? Can such bargaining always be characterized in terms of “raising rivals’ costs”? 6. What standard does Judge Jackson seem to be using to identify practices that would satisfy the “bad conduct” element of a §2 violation? Are these practices “predatory”? 7. How would you rate this case in terms of the relative risk of Type I and Type II error? If antitrust courts “get it wrong,” how are consumers affected? 8. This litigation was originally widely perceived in terms of a classic tying case (between the operating system and the web browser). Does it still seem to be characterizable accurately in those terms? Why? 9. Assuming that the court’s assessment of Microsoft’s conduct is correct, what does this imply about desirable remedial measures? 10. The Microsoft case is remarkable for many reasons, not the least the way in which Judge Jackson is issuing his decision piece-meal: first the findings of fact, followed by conclusions of law some weeks later, and finally the court’s decision on remedies. It is popularly supposed this staggering release of the full decision was intended to encourage the parties to settle. How does this piece-by-piece process encourage settlement? [Hint: recall the final point discussed in the Grinnell case, involving defendant’s attempts to pry advance information out of the trial judge.] Would settlement chances improve if he were simply to announce his factual findings, legal conclusions and remedy all at once? |
