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