Appendix — Microsoft Corp. v. United States

(2) I. ED

No. 00 189 Jul 262000

OFECE OF THE CLERK

IN THE

Supreme Court of the United States

>>>

MICROSOFT CORPORATION,

Appellant,

\—

UNITED STATES OF AMERICA and STATE OF NEW YORK, et al.,

Appellees.

ON APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

APPENDIX TO JURISDICTIONAL STATEMENT

William H. Neukom John L. Warden

Thomas W. Burt Counsel of Record

David A. Heiner, Jr. Richard J. Urowsky

MICROSOFT CORPORATION Steven L. Holley

Richard C. Pepperman, II

Carter G. Phillips SULLIVAN & CROMWELL

SIDLEY & AUSTIN 125 Broad Street

: New York, New York 10004

Charles F. Rule (212) 558-4000

COVINGTON & BURLING

Counsel for Appellant

Microsoft Corporation

July 26, 2000

Index to Appendix

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Order Accompanying Conclusions of Law..................... A44

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Memorandum and Order

Accompanying Final Judgment ...................000ese0 A247

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Notice of Appeal with Respect to

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Notice of Appeal with Respect to

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Order of Certification Pursuant to

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Statutory Provisions Involved....................cccceeeeeeeeeeeees A286

Court of Appeals Order with Respect to

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Court of Appeals Order with Respect to

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UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

V. Civil Action

MICROSOFT CORPORATION, No. 98-1232 (TPJ)

Defendant.

STATE OF NEW YORK, e7 ai.,

Plaintiffs,

v.

MICROSOFT CORPORATION,

Defendant. Civil Action

MICROSOFT CORPORATION, No. 98-1233 (TPJ)

Counterclaim-Plaintiff,

v.

ELIOT SPITZER, attorney general of the}

State of New York, in his official

capacity, ef al.,

Counterclaim-Defendants.

CONCLUSIONS OF LAW

The United States, nineteen individual states, and the

District of Columbia (“the plaintiffs”) bring these

consolidated civil enforcement actions against defendant

Microsoft Corporation (“Microsoft”) under the Sherman

Antitrust Act, 15 U.S.C. §§ 1 and 2. The plaintiffs charge, in

essence, that Microsoft has waged an unlawful campaign in

Gaetano iedee gehen On eoentien

systems designed to run on Intel-compatible personal

computers (“PCs”). Specifically, the plaintiffs contend that

Microsoft violated § 2 of the Sherman Act by engaging in a

power, namely tying its browser to its operating system and

entering into exclusive deali

ae ng arrangements, violated § | of

Upon consideration of the Court’s Findings

(“Findings”), filed herein on November 5, 1999, as ea

on December 21, 1999, the proposed conclusions of law

submitted by the parties, the briefs of amici curiae, and the

argument of counsel thereon, the Court concludes that

Microsoft —_ maintained its . monopoly power by

anticompetitive means and attempted to monopolize the Web

browser market, both in violation of §2. Microsoft also

violated § 1 of the Sherman Act by unlawfully tying its Web

browser to its operating system. The facts found do not

support the conclusion, however, that the effect of

Microsoft $s marketing arrangements with other companies

constituted unlawful exclusive dealing under criteria

established by leading decisions under § 1.

The nineteen states and the District of Columbia

plaintiff states”) seek to ground liability additionally nh

their respective antitrust laws. The Court is persuaded that

the evidence in the record proving violations of the Sherman

Act also satisfies the elements of analogous causes of action

arising under the laws of each plaintiff state. For this reason,

and for others stated below, the Court holds Microsoft liable

under those particular state laws as well.

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I. SECTION TWO OF THE SHERMAN ACT

A. Maintenance of Monopoly Power

by Anticompetitive Means

Section 2 of the Sherman Act declares that it is

unlawful for a person or firm to “monopolize . . . any part of

the trade or commerce among the several States, or with

foreign nations ... .” 15 U.S.C. § 2. This language operates

to limit the means by which a firm may lawfully either

acquire or perpetuate monopoly power. Specifically, a firm

violates §2 if it attains or preserves monopoly power

through anticompetitive acts. See United States v. Grinnell

Corp., 384 U.S. 563, 570-71 (1966) (“The offense of

monopoly power under §2 of the Sherman Act has two

elements: (1) the possession of monopoly power in the

relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from growth or

development as a consequence of a superior product,

business acumen, or historic accident.”); Eastman Kodak Co.

v. Image Technical Services, Inc., 504 U.S. 451, 488 (1992)

(Scalia, J., dissenting) (“Our § 2 monopolization doctrines

are . . . directed to discrete situations in which a defendant’s

possession of substantial market power, combined with his

exclusionary or anticompetitive behavior, threatens to defeat

or forestall the corrective forces of competition and thereby

sustain or extend the defendant’s agglomeration of power.”).

1. Monopoly Power

The threshold element of a § 2 monopolization offense

being “the possession of monopoly power in the relevant

market,” Grinnell, 384 U.S. at 570, the Court must first

ascertain the boundaries of the commercial activity that can

be termed the “relevant market.” See Walker Process Equip.,

Inc. v. Food Mach. & Chem. Corp., 382 U.S. 172, 177

(1965) (“Without a definition of [the relevant] market there

is no way to measure [defendant’s] ability to lessen or

destroy competition.”). Next, the Court must the

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defendant’s actual power to control prices in—or to exclude

competition from—that market. See United States v. E. |. du

Pont de Nemours & Co., 351 U.S. 377, 391 (1956)

(“Monopoly power is the power to control prices or exclude

competition.”).

In this case, the plaintiffs postulated the relevant

market as being the worldwide licensing of Intel-compatible

PC operating systems. Whether this zone of commercial

activity actually qualifies as a market, “monopolization of

which may be illegal,” depends on whether it includes all

products “reasonably interchangeable by consumers for the

same purposes.” du Pont, 351 U.S. at 395. SeeRothery

Storage & Van Co. v. Atlas Van Lines, Inc., 792 F.2d 210.

218 (D.C. Cir. 1986) (“Because the ability of consumers to

turn to other suppliers restrains a firm from raising prices

above the competitive level, the definition of the ‘relevant

market’ rests on a determination of available substitutes.”).

The Court has already found, based on the evidence in

this record, that there are currently no products—and that

there are not likely to be any in the near future—that a

significant percentage of computer users worldwide could

substitute for Intel-compatible PC operating systems without

incurring substantial costs. Findings 4 18-29. The Court has

further found that no firm not currently marketing 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 such consumers with a

viable alternative to existing Intel-compatible PC operating

systems. /d. $18, 30-32. From these facts, the Court has

inferred that if a single firm or cartel controlled the licensing

of all Intel-compatible PC operating systems worldwide, 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. /d

{ 18. This inference, in turn, has led the Court to find that the

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licensing of all Intel-compatible PC operating systems

worldwide does in fact constitute the relevant market in the

context of the plaintiffs’ monopoly maintenance claim. /d.

The plaintiffs proved at trial that Microsoft possesses a

dominant, persistent, and increasing share of the relevant

market. Microsoft’s share of the worldwide market for Intel-

compatible PC operating systems currently exceeds ninety-

five percent, and the firm’s share would stand well above

eighty percent even if the Mac OS were included in the

market. Jd 435. The plaintiffs also proved that the

applications barrier to entry protects Microsoft’s dominant

market share. Jd. 36-52. This barrier ensures that no Intel-

compatible PC operating system other than Windows can

operate to the same effect even if Microsoft held its prices

substantially above the competitive level for a protracted

period of time. Jd Together, the proof of dominant market

share and the existence of a substantial barrier to effective

entry create the presumption that Microsoft enjoys monopoly

power. See United States v. AT&T Co., 524 F. Supp. 1336,

1347-48 (D.D.C. 1981) (“a persuasive showing . . . that

defendants have monopoly power . . . through various

barriers to entry, . . . in combination with the evidence of

market shares, suffice[s] at least to meet the government’s

initial burden, and the burden is then appropriately placed

upon defendants to rebut the existence and significance of

barriers to entry”), quoted with approval in Southern Pac.

Communications Co. v. AT&T Co., 740 F.2d 980, 1001-02

(D.C. Cir. 1984).

At trial, Microsoft attempted to rebut the presumption

of monopoly power with evidence of both putative

constraints on its ability to exercise such power and behavior

of its own that is supposedly inconsistent with the possession

of monopoly power. None of the purported constraints,

however, actually deprive Microsoft of “the ability (1) to

price substantially above the competitive level and (2) to

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persist in doing so for a significant period without erosion by

new entry or expansion.” IIA Phillip E. Areeda, Herbert

Hovenkamp & John L. Solow, fen Law 4501, at 86

(1995) (emphasis in original); see Findings {9 57-60.

Furthermore, neither Microsoft’s efforts at technical

innovation nor its pricing behavior is inconsistent with the

possession of monopoly power. /d. 94 61-66.

Even if Microsoft’s rebuttal had attenuated the

presumption created by the prima facie showing of

monopoly power, corroborative evidence of monopoly

power abounds in this record: Neither Microsoft nor its OEM

customers believe that the latter have—or will have anytime

soon—even a single, commercially viable alternative to

licensing Windows for pre-installation on their PCs. Id.

V9 53-55; cf Rothery, 792 F.2d at 219 n.4 (“we assume that

economic actors usually have accurate perceptions of

economic realities”). Moreover, over the past several years,

Microsoft pr Ae anery itself in a way that could only be

consistent with rational behavior for a fit-maximizi

firm if the firm knew that it possessed Pa aor power, _

if it was motivated by a desire to preserve the barrier to entry

protecting that power. Findings 4] 67, 99, 136, 141, 215-16,

241, 261-62, 286, 291, 330, 355, 393, 407.

In short, the proof of Microsoft’s dominant, persistent

market share protected by a substantial barrier payer

together with Microsoft's failure to rebut that prima facie

showing effectively and the additional indicia of monopoly

power, have compelled the Court to find as fact that

— enjoys monopoly power in the relevant market. Jd

2. Maintenance of Monopoly Power

by Anticompetitive Means

In a §2 case, once it is proved that the defendant

possesses monopoly power in a relevant market, liability for

monopolization depends on a showing that the defendant

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used anticompetitive methods to achieve or maintain its

position. See United States v. Grinnell, 384 U.S. 563, 570-71

(1966); Eastman Kodak Co. v. Image Technical Services,

Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting);

Intergraph Corp. v. Intel Corp., 195 F.3d 1346, 1353 (Fed.

Cir. 1999). Prior cases have established an analytical

approach to determining whether challenged conduct should

be deemed anticompetitive in the context of a monopoly

maintenance claim. The threshold question in this analysis is

whether the defendant’s conduct is “exclusionary”—that is,

whether it has restricted significantly, or threatens to restrict

significantly, the ability of other firms to compete in the

relevant market on the merits of what they offer customers.

See Eastman Kodak, 504 U.S. at 488 (Scalia, J., dissenting)

(§ 2 is “directed to discrete situations” in which the behavior

of firms with monopoly power “threatens to defeat or

forestall the corrective forces of competition”).'

If the evidence reveals a significant exclusionary

impact in the relevant market, the defendant’s conduct will

be labeled “anticompetitive”—and liability will attach—

unless the defendant comes forward with specific,

procompetitive business motivations that explain the full

extent of its exclusionary conduct. See Eastman Kodak, 504

U.S. at 483 (declining to grant defendant’s motion for

summary judgment because factual questions remained as to

whether defendant's asserted justifications were sufficient to

explain the exclusionary conduct or were instead merely

pretextual); see also Aspen Skiing Co. v. Aspen Highlands

Skiing Corp., 472 U.S. 585, 605 n.32 (1985) (holding that

the second element of a monopoly maintenance claim is

' Proof that the defendant’s conduct was motivated by a desire to

prevent other firms from competing on the merits can contribute to a

finding that the conduct has had, or will have, the intended, exclusionary

effect. See United States v. United States Gypsum Co., 438 U.S. 422, 436

n.13 (1978) (“consideration of intent may play an important role in

divining the actual nature and effect of the alleged anticompetitive

conduct”).

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satisfied by proof of “‘behavior that not only (1) tends to

impair the opportunities of rivals, but also (2) either does not

further competition on the merits or does so in an

unnecessarily restrictive way’”’) (quoting III Phillip E.

Areeda & Donald F. Turner, Antitrust Law § 626b, at 78

(1978)).

If the defendant with monopoly power consciously

antagonized its customers by making its products less

attractive to them—or if it incurred other costs, such as large

outlays of development capital and forfeited opportunities to

derive revenue from it—with no prospect of compensation

other than the erection or preservation of barriers against

competition by equally efficient firms, the Court may deem

the defendant’s conduct “predatory.” As the D.C. Circuit

stated in Neumann v. Reinforced Earth Co.,

[P]redation involves aggression against business

rivals through the use of business practices that

would not be considered profit maximizing

except for the expectation that (1) actual rivals

will be driven from the market, or the entry of

potential rivals blocked or delayed, so that the

predator will gain or retain a market share

sufficient to command monopoly profits, or (2)

rivals will be chastened sufficiently to abandon

competitive behavior the predator finds

threatening to its realization of monopoly

profits.

786 F.2d 424, 427 (D.C. Cir. 1986).

Proof that a profit-maximizing firm took predatory

action should suffice to demonstrate the threat of substantial

exclusionary effect; to hold otherwise would be to ascribe

irrational behavior to the defendant. Moreover, predatory

conduct, by definition as well as by nature, lacks

procompetitive business motivation. See Aspen Skiing, 472

U.S. at 610-11 (evidence indicating that defendant’s conduct-

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was “motivated entirely by a decision to avoid providing any

benefits” to a rival supported the inference that defendant’s

conduct “was not motivated by efficiency concerns”). In

other words, predatory behavior is patently anticompetitive.

Proof that a firm with monopoly power engaged in such

behavior thus necessitates a finding of liability under § 2.

In this case, Microsoft early on recognized middleware

as the Trojan horse that, once having, in effect, infiltrated the

applications barrier, could enable rival operating systems to

enter the market for Intel-compatible PC operating a

unimpeded. S put, middleware threatened to

Microsoft’s aoa monopoly power. Alerted to the threat,

Microsoft strove over a period of approximately four years to

prevent middleware technologies from fostering the

development of enough fiull-featured, cross-platform

applications to erode the applications barrier. In pursuit of

this goal, Microsoft sought to convince developers to

concentrate on Windows-specific APIs and ignore interfaces

exposed by the two incarnations of middleware that posed

the greatest threat, namely, Netscape’s Navigator Web

browser and Sun’s implementation of the Java technology.

Microsoft’s campaign succeeded in preventing—for several

years, and perhaps permanently—Navigator and Java from

fulfilling their potential to open the market for Intel-

compatible PC operating systems to competition on the

merits. Findings ¢] 133, 378. Because Microsoft achieved

this result through exclusionary acts that lacked

procompetitive justification, the Court deems Microsoft’s

conduct the maintenance of monopoly power by

anticompetitive means.

a. Combating the Browser Threat

The same ambition that inspired Microsoft’s efforts to

induce Intel, Apple, RealNetworks and IBM to desist from

certain technological innovations and business initiatives—

namely, the desire to preserve the applications barrier—

motivated the firm’s June 1995 proposal that Netscape

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abstain from releasing platform-level browsing software for

32-bit versions of Windows. See id 4 79-80, 93-132. This

proposal, together with the punitive measures that Microsoft

inflicted on Netscape when it rebuffed the overture,

illuminates the context in which Microsoft's subsequent

behavior toward PC manufacturers (“OEMs”), Internet

access providers (“IAPs”), and other firms must be viewed.

When Netscape refused to abandon its efforts to

develop Navigator into a_ substantial platform for

applications development, Microsoft focused its efforts on

minimizing the extent to which developers would avail

themselves of interfaces exposed by that nascent platform.

Microsoft realized that the extent of developers’ reliance on

Netscape’s browser platform would depend largely on the

size and trajectory of Navigator's share of browser usage.

Microsoft thus set out to maximize Internet Explorer's share

of browser usage at Navigator's expense. /d. $4 133, 359-61.

The core of this strategy was ensuring that the firms

comprising the most effective channels for the generation of

browser usage would devote their distributional and

promotional efforts to Internet Explorer rather than

Navigator. Recognizing that pre-installation by OEMs and

bundling with the proprietary software of IAPs led more

directly and efficiently to browser usage than any other

practices in the industry, Microsoft devoted major efforts to

usurping those two channels. /d. 4 143.

i. The OEM Channel

With respect to OEMs, Microsoft's campaign

proceeded on three fronts. First, Microsoft bound Internet

Explorer to Windows with contractual and, later,

technological shackles in order to ensure the prominent (and

ultimately permanent) presence of Internet Explorer on every

Windows user’s PC system, and to increase the costs

attendant to installing and using Navigator on any PCs

running Windows. /d. ¥¥ 155-74. Second, Microsoft imposed

stringent limits on the freedom of OEMs to reconfigure or

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modify Windows 95 and Windows 98 in ways that might

enable OEMs to generate usage for Navigator in spite of the

contractual and technological devices that Microsoft had

employed to bind Internet Explorer to Windows. /d. {¥ 202-

29. Finally, Microsoft used incentives and threats to induce

especially important OEMs to design their distributional,

promotional and technical efforts to favor Internet Explorer

to the exclusion of Navigator. /d. $j 230-38.

Microsoft's actions increased the likelihood that pre-

installation of Navigator onto Windows would cause user

confusion and system degradation, and therefore lead to

higher support costs and reduced sales for the OEMs. /d.

99 159, 172. Not willing to take actions that would

jeopardize their already slender profit margins, OEMs felt

compelled by Microsoft's actions to reduce drastically their

distribution and promotion of Navigator. /d. FJ 239, 241. The

substantial inducements that Microsoft held out to the largest

OEMs only further reduced the distribution and promotion of

Navigator in the OEM channel. Jd $230, 233. The

response of OEMs to Microsoft's efforts had a dramatic,

negative impact on Navigator's usage share. /d. 4 376. The

drop in usage share, in turn, has prevented Navigator from

being the vehicle to open the relevant market to competition

on the merits. Jd. $7] 377-78, 383.

Micror~ft fails to advance any legitimate business

objectives that actually explain the full extent of this

significant exclusionary impact. The Court has already found

that no quality-related or technical justifications fully explain

Microsoft's refusal to license Windows 95 to OEMs without

version 1.0 through 4.0 of Internet Explorer, or its refusal to

permit them to uninstall versions 3.0 and 4.0. Jd. ¥¥ 175-76.

The same lack of justification applies to Microsoft’s decision

not to offer a browserless version of Windows 98 to

consumers and OEMs, id. § 177, as well as to its claim that it

could offer “best of breed” implementations of

functionalities in Web browsers. With respect to the latter

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assertion, Internet Explorer is not demonstrably the current

“best of breed” Web browser, nor is it likely to be so at any

time in the immediate future. The fact that Microsoft itself

was aware of this reality only further strengthens the

conclusion that Microsoft’s decision to tie Internet Explorer

to Windows cannot truly be explained as an attempt to

benefit consumers and improve the efficiency of the software

market generally, but rather as part of a larger campaign to

ped — that threatened its monopoly position. /d

To the extent that Microsoft still asserts a copyright

defense, relying upon federal copyright law as a justification

for be various restrictions on OEMs, that defense neither

explains nor operates to immunize Microsoft’s conduct

under the Sherman Act. As a general proposition, Microsoft

argues that the federal Copyright Act, 17 U.S.C. § 101 ef

seq., endows the holder of a valid copyright in software with

an absolute right to prevent licensees, in this case the OEMs,

from shipping modified versions of its product without its

express permission. In truth, Windows 95 and Windows 98

are covered by copyright registrations, Findings 4 228, that

constitute prima facie evidence of the validity of the

copyright.” 17 U.S.C. §410(c). But the validity of

Microsoft’s copyrights has never been in doubt; the issue is

what, precisely, they protect.

Microsoft has presented no evidence that the

contractual (or the technological) restrictions it placed on

OEMs’ ability to alter Windows derive from any of the

enumerated rights explicitly granted to a copyright holder

under the Copyright Act. Instead, Microsoft argues that the

restrictions “simply restate” an expansive right to preserve

the “integrity”of its copyrighted software against any

‘distortion,” “truncation,” or “alteration,” a right nowhere

mentioned among the Copyright Act’s list of exclusive

rights, 17 U.S.C. § 106, thus raising some doubt as to its

existence. See Twentieth Century Music Corp. v. Aiken, 422

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U.S. 151, 155 (1973) (not all uses of a work are within

copyright holder’s control; rights limited to specifically

granted “exclusive rights”); cf 17 U.S.C. §501(a)

(infringemen t means violating specifically enumerated

rights).

It is also well settled that a copyright holder is not by

reason thereof entitled to employ the perquisites in ways that

directly threaten competition. See, e.g., Eastman Kodak, 504

U.S. at 479 n.29 (“The Court has held many times that power

gained through some natural and legal advantage such as a. .

. copyright, . . . can give rise to liability if ‘a seller exploits

his dominant position in one market to expand his empire

into the next.’”) (quoting Times-Picayune Pub. Co. v. United

States, 345 U.S. 594, 611 (1953)); Square D Co. v. Niagara

Frontier Tariff Bureau, Inc., 476 U.S. 409, 421 (1986); Data

General Corp. v. Grumman Systems Support Corp., 36 F.3d

1147, 1186 n.63 (1st Cir. 1994) (a copyright does not exempt

its holder from antitrust inquiry where the copyright is used

as part of a scheme to monopolize); see also image

Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d

1195, 1219 (9th Cir. 1997), cert. denied, 523 U.S. 1094

(1998) (“Neither the aims of intellectual property law, nor

the antitrust laws justify allowing a monopolist to rely upon

a pretextual business justification to mask anticompetitive

conduct.”). Even constitutional privileges confer no

immunity when they are abused for anticompetitive

purposes. See Lorain Journal Co. v. United States, 342 U.S.

143, 155-56 (1951). The Court has already found that the -

true impetus behind Microsoft’s restrictions on OEMs was

2 While Microsoft is correct that some courts have also recognized

the right of a copyright holder to preserve the “integrity” of artistic works

in addition to those rights enumerated in the Copyright Act, the Court

nevertheless concludes that those cases, being actions for infringement

without antitrust implications, are inapposite to the one currently before

it. See, e.g., WGN Continental Broadcasting Co. v. United Video, Inc.,

693 F.2d 622 (7th Cir. 1982); Gilliam v. ABC, Inc., 538 F.2d 14 (2d Cir.

1976).

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not its desire to maintain a somewhat amorphous quality it

refers to as the “integrity” of the Windows platform, nor

even to ensure that Windows afforded a uniform and stable

platform for applications development. Microsoft itself

engendered, or at least countenanced, instability and

inconsistency by permitting Microsoft-friendly modifications

to the desktop and boot sequence, and by releasing updates

to Internet Explorer more frequently than it released new

versions of Windows. Findings 4 226. Add to this the fact

that the modifications OEMs desired to make would not have

removed or altered any Windows APIs, and thus would not

have disrupted any of Windows’ functionalities, and it is

apparent that Microsoft’s conduct is effectively explained by

its foreboding that OEMs would pre-install and give

prominent placement to middleware like Navigator that

could attract enough developer attention to weaken the

applications barrier to entry. Jd. 4 227. In short, if Microsoft

was truly inspired by a genuine concern for maximizing

consumer satisfaction, as well as preserving its substantial

investment in a worthy product, then it would have relied

more on the power of the very competitive PC market, and

less on its own market power, to prevent OEMs from making

modifications that consumers did not want. Jd 7 225, 228-

29.

ii. The IAP Channel

Microsoft adopted similarly aggressive measures to

ensure that the IAP channel would generate browser usage

share for Internet Explorer rather than Navigator. To begin

with, Microsoft licensed Internet Explorer and the Internet

Explorer Access Kit to hundreds of IAPs for no charge. /d.

#9] 250-51. Then, Microsoft extended valuable promotional

treatment to the ten most important IAPs in exchange for

their commitment to promote and distribute Internet Explorer

and to exile Navigator from the desktop. Jd. 99 255-58, 261,

272, 288-90, 305-06. Finally, in exchange for efforts to

upgrade existing subscribers to client software that came

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bundled with Internet Explorer instead of Navigator,

Microsoft granted rebates—and in some cases made outright

payments—to those same IAPs. /d. 4] 259-60, 295. Given

the importance of the [AP channel to browser usage share, it

is fair to conclude that these inducements and restrictions

contributed significantly to the drastic changes that have in

fact occurred in Internet Explorer's and Navigator's

respective usage shares. /d. {J 144-47, 309-10. Microsoft's

actions in the IAP channel thereby contributed significantly

to preserving the applications barrier to entry.

There are no valid reasons to justify the full extent of

Microsoft's exclusionary behavior in the IAP channel. A

desire to limit free riding on the firm’s investment in

consumer-oriented features, such as the Referral Server and

the Online Services Folder, can, in some circumstances,

qualify as a procompetitive business motivation; but that

motivation does not explain the full extent of the restrictions

that Microsoft actually imposed upon IAPs. Under the terms

of the agreements, an IAP’s failure to keep Navigator

shipments below the specified percentage primed

Microsoft's contractual right to dismiss the [AP from its own

favored position in the Referral Server or the Online Services

Folder. This was true even if the IAP had refrained from

promoting Navigator in its client software included with

Windows, had purged all mention of Navigator from any

Web site directly connected to the Referral Server, and had

distributed no browser other than Internet Explorer to the

new subscribers it gleaned from the Windows desktop. /d.

77 258, 262, 289. Thus, Microsoft's restrictions closed off a

substantial amount of distribution that would not have

constituted a free ride to Navigator.

Nor can an ostensibly procompetitive desire to “foster

brand association” explain the full extent of Microsoft’s

restrictions. If Microsoft’s only concern had been brand

association, restrictions on the ability of IAPs to promote

Navigator likely would have sufficed. It is doubtful that

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Microsoft would have paid IAPs to induce their existing

subscribers to drop Navigator in favor of Internet Explorer

unless it was motivated by a desire to extinguish Navigator

as a threat. See id. F¥ 259, 295. More generally, it is crucial

to an understanding of Microsoft's intentions to recognize

that Microsoft paid for the fealty of IAPs with large

investments in software development for their benefit.

conceded opportunities to take a profit, suffered competitive

disadvantage to Microsoft's own OLS, and gave outright

bounties. /d. J 259-60, 277, 284-86, 295. Considering that

Microsoft never intended to derive appreciable revenue from

Internet Explorer directly, id. $9 136-37, these sacrifices

could only have represented rational business judgments to

the extent that they promised to diminish Navigator's share

of browser usage and thereby contribute Significantly to

eliminating a threat to the applications barrier to entry. /d

7 291. Because the full extent of Microsoft's exclusionary

initiatives in the IAP channel can only be explained by the

desire to hinder competition on the merits in the relevant

market, those initiatives must be labeled anticompetitive.

In sum, the efforts Microsoft directed at OEMs and

IAPs successfully ostracized Navigator as a practical matter

~~ from the two channels that lead most efficiently to browser

usage. Even when viewed independently, these two prongs

of Microsoft's campaign threatened to “forestall the

corrective forces of competition” and thereby perpetuate

Microsoft's monopoly power in the relevant market.

Eastman Kodak Co. v. Image Technical Services, Inc. , 504

U.S. 451, 488 (1992) (Scalia, J.. dissenting). Therefore,

whether they are viewed separately or together, the OEM

and IAP components of Microsoft's anticompetitive

campaign merit a finding of liability under § 2.

iii, ICPs, ISVs and Apple

No other distribution channels for browsing software

approach the efficiency of OEM pre-installation and LAP

bundling. Findings 4¥ 144-47. Nevertheless, protecting the

Al7

applications barrier to entry was so critical to Microsoft that

the firm was willing to invest substantial resources to enlist

ICPs, ISVs, and Apple in its campaign against the browser

threat. By extracting from Apple terms that significantly

diminished the usage of Navigator on the Mac OS, Microsoft

helped to ensure that developers would not view Navigator

as truly cross-platform middleware. /d { 356. By granting

ICPs and ISVs free licenses to bundle Internet Explorer with

their offerings, and by exchanging other valuable

inducements for their agreement to distribute, promote and

rely on Internet Explorer rather than Navigator, Microsoft

directly induced developers to focus on its own APIs rather

than ones exposed by Navigator. /d $7 334-35, 340. These

measures supplemented Microsoft's efforts in the OEM and

IAP channels.

Just as they fail to account for the measures that

Microso teen ys. a mem

the full extent of Microsoft's actions in the ICP channel. /d.

77 329-30. With respect to the ISV agreements, Microsoft

has put forward no procompetitive business ends whatsoever

to justify their exclusionary terms. See id. FJ 339-40. Finally,

Microsoft's willingness to make the sacrifices involved in

cancelling Mac Office, and the concessions relating to

browsing software that it demanded from Apple, can only be

explained by Microsoft's desire to protect the applications

barrier to entry from the threat posed by Navigator. /d. 4 355.

Thus, once again, Microsoft is unable to justify the full

extent of its restrictive behavior.

b. Combating the Java Threat

As part of its grand strategy to protect the applications

barrier, Microsoft employed an array of tactics designed to

maximize the difficulty with which applications written in

Java could be ported from Windows to other platforms, and

vice versa. The first of these measures was the creation of a

Java implementation for Windows that undermined

Al8

portability and was incompatible -with other

implementations. /d J 387-93. Microsoft then induced

developers to use its implementation of Java rather than Sun-

compliant ones. It pursued this tactic directly, by means of

subterfuge and barter, and indirectly, through its campaign to

minimize Navigator's usage share. /d 17 394, 396-97, 399-

400, 401-03. In a separate effort to prevent the development

of easily portable Java applications, Microsoft used its

monopoly power to prevent firms such as Intel from aiding

in the creation of cross-platform interfaces. Id 17 404-06.

Microsoft’s tactics induced many Java developers to

write their applications using Microsoft's developer tools

and to refrain from distributing Sun-compliant JVMs to

Windows users. This stratagem has effectively resulted in

fewer applications that are easily portable. Jd. 4 398. What is

more, Microsoft’s actions interfered with the development of

new cross-platform Java interfaces. Jd 4 406. It is not clear

whether, absent Microsoft’s machinations, Sun’s Java efforts

would by now have facilitated porting between Windows

and other platforms to a degree sufficient to render the

applications barrier to entry vulnerable. It is clear, however,

that Microsoft’s -actions markedly impeded Java’s progress

to that end. /d 1407. The evidence thus compels the

on the merits in *he market for Intel-compatible PC operating

systems.

Microsoft’s actions to counter the Java threat went far

beyond the development of an attractive alternative to Sun’s

implementation of the technology. Specifically, Microsoft

successfully pressured Intel, which was dependent in man

ways on Microsoft's good graces, to abstain from aiding in

Sun’s and Netscape’s Java development work. Jd 4 396,

406. Microsoft also deliberately designed its Java

development tools so that developers who were opting for

portability over performance would nevertheless unwittingly

Al9

write Java applications that would run only on Windows. /d.

4 394. Moreover, Microsoft's of luring developers to

its Java implementation included maximizing Internet

Explorer’s share of browser usage at Navigator’s expense in

ways the Court has already held to be anticompetitive. See

supra, § 1.A.2.a. Finally, Microsoft impelled ISVs, which are

dependent upon Microsoft for technical information and

certifications relating to Windows, to use and distribute

Microsoft’s version of the Windows JVM rather than any

Sun-compliant version. /d. ¥] 401-03.

These actions cannot be described as competition on

the merits, and they did not benefit consumers. In fact,

Microsoft’s actions did not even benefit Microsoft in the

short run, for the firm’s efforts to create incompatibility

between its JYM for Windows and others’ JVMs for

Windows resulted in fewer total applications being able to

run on Windows than otherwise would have been written.

Microsoft was willing nevertheless. to obstruct the

development of Windows-compatible applications if they

would be easy to port to other platforms and would thus

diminish the applications barrier to entry. /d. { 407.

ce. Microsoft’s Conduct

Taken As a Whole

As the foregoing discussion illustrates, Microsoft's

campaign to protect the applications barrier from erosion by

network-centric middleware can be broken down into

discrete categories of activity, several of which on their own

independently satisfy the second element of a § 2 monopoly

maintenance claim. But only when the separate categories of

conduct are viewed, as they should be, as a single, well-

coordinated course of action does the full extent of the

violence that Microsoft has done to the competitive process

reveal itself. See Continental Ore Co. v. Union Carbide &

Carbon Corp., 370 U.S. 690, 699 (1962) (counseling that in

Sherman Act cases “plaintiffs should be given the full

benefit of their proof without tightly compartmentalizing the

A20

various factual components and wiping the slate clean after

scrutiny of each”). In essence, Microsoft mounted a

deliberate assault upon entrepreneurial efforts that, left to

rise or fall on their own merits, could well have enabled the

evidence does not prove that they would have succeeded

absent Microsoft's actions, it does reveal that Microsoft

placed an oppressive thumb on the scale of competitive

fortune, thereby effectively guaranteeing its continued

dominance in the relevant market. More broadly, Microsoft's

anticompetitive actions trammeled the competitive process

re align the — software industry generally

innovation

tama eta conduces to the optimum benefit

Viewing Microsoft’s conduct as a

reinforces the conviction that it was BB.

paid vast sums of money, and renounced many millions

more in lost revenue every year, in order to induce firms to

take actions that would help enhance Internet Explorer’s

bolster demand for Windows nor the

Prospect of ancil

ee Internet Explorer can explain io tes 0

h Microsoft has gone. In fact, Microsoft has expended

potential rivals” into the market for Intel-com j

patible PC

operating systems will be “blocked or delayed,” Neumann vy.

Reinforced Earth Co., 786 F.2d 424, 427 (D.C. Cir. 1986),

A2l

Microsoft’s campaign must be termed predatory. Since the

Court has already found that Microsoft possesses monopoly

power, see supra, §1.A.1, the predatory nature of the firm’s

conduct compels the Court to hold Microsoft liable under § 2

of the Sherman Act.

B. Attempting to Obtain Monopoly

Power in a Second Market by

Anticompetitive Means

In addition to condemning actual monopolization, § 2

of the Sherman Act declares that it is unlawful for a person

or firm to “attempt to monopolize . . . any part of the trade or

commerce among the several States, or with foreign nations ..

...” 15 U.S.C. § 2. Relying on this language, the plaintiffs

assert that Microsoft’s anticompetitive efforts to maintain its

monopoly power in the market for Intel-compatible PC

operating systems warrant additional liability as an illegal

attempt to amass monopoly power in “the browser market.”

The Court agrees.

In order for liability to attach for attempted

monopolization, a plaintiff generally must prove “(1) that the

defendant has engaged in predatory or anticompetitive

conduct with (2) a specific intent to monopolize,” and (3)

that there is a “dangerous probability” that the defendant will

succeed in achieving monopoly power. Spectrum Sports Inc.

v. McQuillan, 506 U.S. 447, 456 (1993). Microsoft’s June

1995 proposal that Netscape abandon the field to Microsoft

in the market for browsing technology for Windows, and its

subsequent, well-documented efforts to overwhelm

Navigator's browser usage share with a proliferation oi

Internet Explorer browsers inextricably attached to

Windows, clearly meet the first element of the offense.

The evidence in this record also satisfies the

requirement of specific intent. Microsoft’s effort to convince

Netscape to stop developing platform-level browsing

software for the 32-bit versions of Windows was made With

A22

full knowledge that Netscape’s acquiescence in this market

allocation scheme would, without more, have left Internet

Explorer with such a large share of browser usage as to

endow Microsoft with de facto monopoly power in the

browser market. Findings f] 79-89.

When Netscape refused to abandon the development of

browsing software for 32-bit versions of Windows,

Microsoft’s strategy for protecting the applications barrier

became one of expanding Internet Explorer’s share of

browser usage—and simultaneously depressing Navigator’s

share—to an extent sufficient to demonstrate to developers

that Navigator would never emerge as the standard software

employed to browse the Web. /d. 4 133. While Microsoft’s

top executives never expressly declared acquisition of

monopoly power in the browser market to be the objective,

they knew, or should have known, that the tactics they

actually employed were likely to push Internet Explorer’s

share to those extreme heights. Navigator’s slow demise

would leave a competitive vacuum for only Internet Explorer

to fill. Yet, there is no evidence that Microsoft tried—or

even considered trying—to prevent its anticompetitive

campaign from achieving overkill. Under these

circumstances, it is fair to presume that the wrongdoer

intended “the probable consequences of its acts.” IIIA Phillip

E. Areeda & Herbert Hofenkamp, Antitrust Law { 805b, at

324 (1996); see also Spectrum Sports, 506 U.S. at 459 (proof

of “‘predatory’ tactics . 1. may be sufficient to prove the

necessary intent to monopolize, which is something more

than an intent to compete vigorously”). Therefore, the facts

of this case suffice to prove the element of specific intent.

Even if the first two elements of the offense are met,

however, a defendant may not be held liable for attempted

monopolization absent proof that its anticompetitive conduct

created a dangerous probability of achieving the objective of

monopoly power in a relevant market. Jd The evidence

A23

supports the concl j : ’ : .

such a danger. usion that Microsoft’s actions did pose

At the time Microsoft presented its market al i

proposal to Netscape, Navigator’s share of Siar Gas

stood well above seventy percent, and no other browser

enjoyed more than a fraction of the remainder. Findings

bl 89, 372. Had Netscape accepted Microsoft’s offer, nearly

l of its share would have devolved upon Microsoft, because

at that point, no potential third-party competitor could either

claim to rival Netscape’s stature as a browser company or

match Microsoft’s ability to leverage monopoly power in the

market for Intel-compatible PC operating systems. In the

time it would have taken an aspiring entrant to launch a

serious effort to compete against Internet Explorer

Microsoft could have erected the same type of barrier that

protects its existing monopoly power by adding proprietary

extensions to the browsing software under its control and by

extracting commitments from OEMs, IAPs and others

similar to the ones discussed in § ].A.2, supra. In shc.t,

Netscape’s assent to Microsoft’s market division proposal

would have, instanter, resulted in Microsoft’s attainment of

1118-19 (Sth Cir. 1984) (fact that two executives “

{ es “arguably”

= et implemented market-allocation scheme A

| - engendered monopoly power was sufficient for

finding 0 dangerous probability). Altough the dangerous

probability was no longer imminent with Netscape’s

op ae bmp a gran “the probability of success

é occur” is the measure by which liabili

is determined. /d. at 1118. ” deed

This conclusion alone is sufficient to finding

. *ge Support °

of liability for attempted monopolization. The Court is

pene compelled to express its further conclusion that

predatory course of conduct Microsoft has pursued since

A24

June of 1995 has revived the dangerous probability that

Microsoft will attain monopoly power in a second market.

Internet Explorer’s share of browser usage has already risen

above fifty percent, will exceed sixty percent by January

2001, and the trend continues unabated. Findings fj 372-73;

see M&M Medical Supplies & Serv., Inc. v. Pleasant Valley

Hosp., Inc., 981 F.2d 160, 168 (4th Cir. 1992) (en banc) (“A

rising share may show more probability of success than a

falling share. . . . [C]laims involving greater than 50% share

should be treated as attempts at monopolization when the

other elements for attempted monopolization are also

satisfied.”) (citations omitted); see also IIIA Phillip E.

Areeda & Herbert Hovenkamp, Antitrust Law § 807d, at 354-

55 (1996) (acknowledging the significance of a large, rising

market share to the dangerous probability element).

Il. SECTION ONE OF THE SHERMAN ACT

Section 1 of the Sherman Act prohibits “every contract,

combination . . . , or conspiracy in restraint of trade or

commerce... .” 15 U.S.C. § 1. Pursuant to this statute,

courts have condemned commercial stratagems that

constitute unreasonable restraints on competition. See

Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49

(1977); Chicago Board of Trade v. United States, 246 U.S.

231, 238-39 (1918), among them “tying arrangements” and

“exclusive dealing” contracts. Tying arrangements have been

found unlawful where sellers exploit their market power over

one product to force unwilling buyers into acquiring another.

See Jefferson Parish Hospital District No. 2 v. Hyde, 466

U.S. 2, 12 (1984); Northern Pac. Ry. Co. v. United States,

356 U.S. 1, 6 (1958); Times-Picayune Pub. Co. v. United

States, 345 U.S. 594, 605 (1953). Where agreements have

been challenged as unlawful exclusive dealing, the courts

have condemned only those contractual arrangements that

substantially foreclose competition in a relevant market by

significantly reducing the number of outlets available to a

competitor to reach prospective consumers of the

A25

— product. See Tampa Electric Co. v. Nashville

: — ny 320, 327 (1961); Roland Machinery Co

sser .

com tries, Inc., 749 F.2d 380, 393 (7th Cir.

A. Tying

Liability for tying under § 1 exists where (1

separate “products” are involved; (2) the Pe surtigs Pare

its customers no choice but to take the tied product in order

to obtain the tying product; (3) the arrangement affects a

substantial volume of interstate commerce; and (4) the

defendant has “market power” in the tying product market.

Jefferson Parish, 466 U.S. at 12-18. The Supreme Court has

Fee ane this test in Eastman Kodak Co. v. Image

: C. Services, Inc., 504 U.S. 451, 461-62 (1992). All

our elements are required, whether the arrangement is

subjected to a per se or Rule of Reason analysis.

The plaintiffs allege that Microsoft’s smaet

. combination of

Windows and Internet Explorer by contractual so

the U.S. Court of Appeals for the D.C. Circuit j ose

‘od t

related case, and must therefore be explained in ae z

The decision of the D.C. Circuit in ion i

States v. Microsoft Corp., 147 F.3d 935 (DC. Cir. ‘me

(“Microsoft If’) which is itself related to an earlier decision

$ the same Circuit, United States v. Microsoft Corp., 56

3d 1448 (D.C. Cir. 1995) (“Microsoft I”). The history of

the controversy is sufficiently set forth in the appellate

opinions and need not be recapitulated here, except to state

A26

that those decisions anticipated the instant case, and that

Microsoft II sought to guide this Court, insofar as

practicable, in the further proceedings it fully expected to

ensue on the tying issue. Nevertheless, upon reflection this

Court does not believe the D.C. Circuit intended Microsoft I]

to state a controlling rule of law for purposes of this case. As

the Microsoft II court itself acknowledged, the issue before it

was the construction to be placed upon a single provision of

a consent decree that, although animated by antitrust

considerations, was nevertheless still primarily a matter of

determining contractual intent. The court of appeals’

observations on the extent to which software product design

decisions may be subject to judicial scrutiny in the course of

§ 1 tying cases are in the strictest sense obiter dicta, and are

thus not formally binding. Nevertheless, both prudence and

the deference this Court owes to pronouncements of its own

Circuit oblige that it follow in the direction it is pointed until

the trail falters.

The majority opinion in Microsoft I] evinces both an

extraordinary degree of respect for changes (including

“integration”) instigated by designers of technological

products, such as software, in the name of product

“improvement,” and a corresponding lack of confidence in

the ability of the courts to distinguish between improvements

in fact and improvements in name only, made for

anticompetitive purposes. Read literally, the D.C. Circuit’s

opinion appears to immunize any product design (or, at least,

software product design) from antitrust scrutiny, irrespective

of its effect upon competition, if the software developer can

postulate any “plausible claim” of advantage to its

arrangement of code. 147 F.3d at 950.

This undemanding test appears to this Court to be

inconsistent with the pertinent Supreme Court precedents in

at least three respects. First, it views the market from the

defendant’s perspective, or, more precisely, as the defendant

would like to have the market viewed. Second, it ignores

A27

pan = claim of advantage need only be plausible; it

—_ proved. Third, it dispenses with any balancing of

effects. ee: . re

to have violated the anti-tying rules evidence

\ unless the

established that patients, i.e. consumers, perceived the

PP a geen gees for which they desired a choice

that the package had the effect of forcing the patients to

Eastman Kodak the Supreme Court held that a manufacturer

sell replacement parts for its machines onl

to

customers who also agreed to purchase repair se-viees fren.

it as well, would be guilty of tying if the evidence at trial

established the existence of consumer demand for parts and

services separately. 504 U.S. at 463.

Both defendants asserted, as Microsoft d

oes here, that

the tied and tying products were in reality only a single

. . 3

A28

competition in the equipment market precluded the

possibility of the use of market power anticompetitively in

any after-markets for parts or services: Sales of machines,

parts, and services were all responsive to the discipline of the

larger equipment market. The Supreme Court declined to

accept this premise in the absence of evidence of “actual

market realities,” 504 U.S. at 466-67, ultimately holding that

“the proper market definition in this case can be determined

only after a factual inquiry into the ‘commercial realities’

faced by consumers.” /d. at 482 (quoting United States v.

Grinnell Corp., 384 U.S. 563, 572 (1966)).*

In both Jefferson Parish and Eastman Kodak, the

Supreme Court also gave consideration to certain theoretical

“valid business reasons” proffered by the defendants as to

why the arrangements should be deemed benign. In Jefferson

Parish, the hospital asserted that the combination of hospital

and anesthesia services eliminated multiple problems of

scheduling, supply, performance standards, and equipment

maintenance. 466 U.S. at 43-44. The manufacturer in

Eastman Kodak contended that quality control, inventory

management, and the prevention of free riding justified its

decision to sell parts only in conjunction with service. 504

U.S. at 483. In neither case did the Supreme Court find those

justifications sufficient if anticompetitive effects were

proved. /d. at 483-86; Jefferson Parish, 466 U.S. at 25 n.42.

Thus, at a minimum, the admonition of the D.C. Circuit in

Microsoft II to refrain from any product design assessment as

to whether the “integration” of Windows and Internet

Explorer is a “net plus,” deferring to Microsoft’s “plausible

claim” that it is of “some advantage” to consumers, is at

odds with the Supreme Court’s own approach.

The significance of those cases, for this Court’s

purposes, is to teach that resolution of product and market

* In Microsoft Il the D.C. Circuit acknowledged it was without

benefit of a complete factual record which might alter its conclusion that

the “Windows 95/IE package is a genuine integration.” 147 F.3d at 952.

in terms of files of

Code or any other taxonomy. Id. Fj 149-50, 162-63, 187-9].

Proceeding in line with the Supreme Court cases,

controlling, this Court first concludes

was foreclosed to competitors as a result of Microsoft's

decision to bundle Internet Explorer with Windows. The

of business” that is “substantial

enough in terms of dollar-volume so as not to be merely de

minimis” is foreclosed. Fortner, 394 US. at 501; of

International Salt Co. v. United States, 332 U.S. 392, 396

(1947) (unreasonable per se to foreclose competitors from

substantial market by a tying arrangement).

Although the Court’s Findings do not specify a dollar

amount of business that has been foreclosed to any i

or i competitor of Microsoft in the relevant

market including Netscape, the Court did find that

Microsoft’s bundling practices caused Navigator's usage

share to drop substantially from 1995 to 1998, and that as a

direct result Netscape suffered a severe drop in revenues

any

the Supreme Court's de minimis

threshold. See Digidyne Corp. v. Data General Corp., 734

F.2d 1336, 1341 (9th Cir. 1984) (citing Fortner).

The facts of this case also prove the elements of the

forced bundling requirement. Indeed, the Supreme Court has

stated that the “essential characteristic” of an illegal tying

is a seller’s decision to exploit its market power

i “to force the buyer into the purchase

of a tied product that the buyer either did not want at all, or

might have preferred to purchase elsewhere on different

: Most of the quantitative evidence was presented in units other thar

monetary, but numbered the units in millions, whatever their nature.

OEMs for Windows 98 i Proposed

» See Microsoft’

Conclusions of Law at 12-13, 0 gendiiciee Goes Oe

og ae . Microsoft Corp., Nos. CIV. A. 98-1232,

96-1233, 1998 WL 614485, *12 (D.D.C., Sept. 14, 1998

Philip E. Areeda & Herbert Hovenkamp, Antitrust —

firms on the basis of an increment in price attributable to the

tied product. See Fortner, 394 U.S. at 512-14 (1969);

Jefferson Parish, 466 U.S. at 12-13.

As for the crucial requirement that Windows and

Internet Explorer be deemed “separate products” for a

finding of technological tying li ility, this Court’s Findings

mandate such a conclusion. Considering the “character of

demand” for the two products, as opposed to their

“functional relation,” id. at 19, Web browsers and operating

systems are “distinguishable in the eyes of buyers.” /d;

Findings J 149-54. Consumers often base their choice of

which browser should reside on their operating system on

their individual demand for the specific functionalities or

characteristics of a particular browser, separate and apart

from the functionalities afforded by the operating system

itself. Id. $j 149-51. Moreover, the behavior of other, lesser

software vendors confirms that it is certainly efficient to

provide an operating system and a browser separately, or at

least in separable form. Jd. ¢ 153. Microsoft is the only firm

to refuse to license its operating system without a browser.

Id. see Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d

263, 287 (2d Cir. 1979). This Court concludes that

Microsoft’s decision to offer only the bundied—

“integrated”—version of Windows and Internet Explorer

derived not from technical necessity or business efficiencies,

rather, it was the result of a deliberate and purposeful choice

to quell incipient competition before it reached truly

minatory proportions.

The Court is fully mindful of the reasons for the

admonition of the D.C. Circuit in Microsoft II of the perils

$34, 542-43 (9th Cir. 1983); Response |

. ; of Carolina, Inc. y.

Leasco Response, Inc., 537 F.2d 1307, 1330 (Sth Cir. 1976).

Telex Corp. v. IB

1973). orp. v. IBM Corp., 367 F. Supp. 258, 347 (N.D. Okla

A34

B. Exclusive Dealing Arrangements

Microsoft’s various contractual agreements with some

OLSs, ICPs, ISVs, Compaq and Apple are also called into

question by plaintiffs as exclusive dealing arrangements

under the language in § 1 prohibiting “contract[s] . . . in

restraint of trade or commerce... .” 15 U.S.C. § 1. As

detailed in §1.A.2, supra, each of these agreements with

Microsoft required the other party to promote and distribute

Internet Explorer to the partial or complete exclusion of

Navigator. In exchange, Microsoft offered, to some or all of

these parties, promotional patronage, substantial financial

subsidies, technical support, and other valuable

consideration. Under the clear standards established by the

Supreme Court, these types of “vertical restrictions” are

subject to a Rule of Reason analysis. See Continental T.V.,

Inc. v. GTE Sylvania Inc., 433 U.S. 36, 49 (1977); Jefferson

Parish, 466 U.S. at 44-45 (O’Connor, J., concurring); cf

Business Elecs. Corp. v. Sharp Elecs. Corp., 485 U.S. 717,

724-26 (1988) (hoiding that Rule of Reason analysis

presumptively applies to cases brought under §1 of the

Sherman Act).

Acknowledging that some _ exclusive dealing

arrangements may have benign objectives and may create

significant economic benefits, see Tampa Electric Co. v.

Nashville Coal Co., 365 U.S. 320, 333-35 (1961), courts

have tended to condemn under the § 1 Rule cf Reason test

only those agreements that have the effect of foreclosing a

competing manufacturer’s brands from the relevant market.

More specifically, courts are concerned with those exclusive

and pernicious than the typical tie. See X Phillip E. Areeda, Einer

Elhauge & Herbert Hovenkamp, Antitrust Law 41747 (1996). A company

able to leverage its substantial power in the tying product market in order

to force consumers to accept a tie of partial substitutes is thus able to

spread inefficiency from one market to the next, id at 232, and thereby

“sabotage a nascent technology that might compete with the tying

product but for its foreclosure from the market.” II] Phillip E. Areeda &

Herbert Hovenkamp, Antitrust Law 4 1746.1d at 495 (Supp. 1999).

A35

dealing arrangements that work to

market's available distribution Hon at ae

single firm as to make it difficult for other firms to continue

to compete effectively, or even to exist, j the relevant

market. See U.S. Healthcare Inc. v. Healthsource, Inc., 986

F-2d 589, 595 (Ist Cir. 1993); Interface Group, Inc y

tts Port Authority, 816 F.2d 9, 11 (1st Cir. 1987)

means for achieving the same benefits. See ampa

Electric, 365 U.S. at 326-35; Roland Machinery oe ¥

Dresser Industries, Inc., 749 F.2d 380, 392-95 (7th Cir

J; see also XI Herbert Hovenkamp, Antitrust Log

declined to assign liability. See. ¢

. » €&g., id. 1821; ;

Healthcare, 986 F.2d at 596-97; Roland Mach. a 749 bee

at 394 (failure of plaintiff to meet threshold

burden of

Proving that exclusive dealing arrangement is like ly to eon

A36

at least one significant competitor from doing business in

relevant market dictates no liability under § 1). This Court

has previously observed that the case law suggests that,

unless the evidence demonstrates that Microsoft’s

agreements excluded Netscape altogether from access to

roughly forty percent of the browser market, the Court

should decline to find such agreements in violation of §1.

See United States v. Microsoft Corp., Nos. CIV. A. 98-1232,

98-1233, 1998 WL 614485, at *19 (D.D.C. Sept. 14, 1998)

(citing cases that tended to converge upon forty percent

foreclosure rate for finding of § | liability).

The only agreements revealed by the evidence which

could be termed so “exclusive” as to merit scrutiny under the

§ 1 Rule of Reason test are the agreements Microsoft signed

with Compaq, AOL and several other OLSs, the top ICPs,

the leading ISVs, and Apple. The Findings of Fact also

establish that, among the OEMs discussed supra, Compaq

was the only one to fully commit itself to Microsoft’s terms

for distributing and promoting Internet Explorer to the

exclusion of Navigator. Beginning with its decisions in 1996

and 1997 to promote Internet Explorer exclusively for its PC

products, Compaq essentially ceased to distribute or pre-

install Navigator at a!l in exchange for significant financial

remuneration from Microsoft. Findings {j 230-34. AOL’s

March 12 and October 28, 1996 agreements with Microsoft

also guaranteed that, for all practical purposes, Internet

Explorer would be AOL’s browser of choice, to be

distributed and promoted through AOL’s dominant, flagship

online service, thus leaving Navigator to fend for itself. Id.

4] 287-90, 293-97. In light of the severe shipment quotas and

promotional restrictions for third-party browsers imposed by

the agreements, the fact that Microsoft still permitted AOL

to offer Navigator through a few subsidiary channels does

not negate this conclusion. The same conclusion as to

exclusionary effect can be drawn with respect to Microsoft’s

agreements with AT&T WorldNet, Prodigy and

CompuServe, since those contract terms were almost

A37

identical to the ones contai

tained ,

agreement. Id. $9 305-06. in AOL’s March 1996

Microsoft also successfully j

induced

Hv ghonn and ISVs to acews: 6 to worthless

= or Explorer technologies exclusively in their

a te pep for valuable placement on the

hg = a technical Support. Specifically, the

(uoP Tier” and “Platinum” agreements. that Microsoft

pre mies 3 ~four of the most popular ICPs on the Web

— a was effectively shut out of these

#9 317-22 asd oe, In spear sig ita a

7-22, » 332. same way, Mi ’s “Fi

} cl ype — crucial sachatead > te Aa

eading s that agreed to make their W

centric applications completely reliant on shihieal ot

arrangement eliminated all meaningful avenues of

entuan . a extent to which these “exclusive”

channels for Navi Preempted the most efficient

neereccem a avigator to achieve browser usage share

, Court concludes that Microsoft's multiple

A38

million in December 1998. Jd. 4 378. As such, the evidence

does not support a finding that these agreements completely

excluded Netscape from any constituent portion of the

worldwide browser market, the relevant line of commerce.

The fact that Microsoft’s arrangements with various

firms did not foreclose enough of the relevant market to

constitute a § 1 violation in no way detracts from the Court’s

assignment of liability for the same arrangements under § 2.

As noted above, all of Microsoft's agreements, including the

non-exclusive ones, severely restricted Netscape’s access to

those distribution channels leading most efficiently to the

acquisition of browser usage share. They thus rendered

Netscape harmless as a platform threat and preserved

Microsoft’s operating system monopoly, in violation of § 2.

But virtually all the leading case authority dictates that

liability under § 1 must hinge upon whether Netscape was

actually shut out of the Web browser market, or at least

whether it was forced to reduce output below a subsistence

level. The fact that Netscape was not allowed access to the

most direct, efficient ways to cause the greatest number of

consumers to use Navigator is legally irrelevant to a final

determination of plaintiffs’ § 1 claims.

Other courts in similar contexts have declined to find

liability where alternative channels of distribution are

available to the competitor, even if those channels are not as

efficient or reliable as the channels foreclosed by the

defendant. In Omega Environmental, Inc. v. Gilbarco, Inc.,

127 F.3d 1157 (9th Cir. 1997), for example, the Ninth Circuit

found that a manufacturer of petroleum dispensing

equipment “foreclosed roughly 38% of the relevant market

for sales.” 127 F.3d at 1162. Nonetheless, the Court refused

to find the defendant liable for exclusive dealing because

“potential alternative sources of distribution” existed for its

competitors. Jd. at 1163. Rejecting plaintiff's argument

(similar to the one made in this case) that these alternatives

were “inadequate substitutes for the existing distributors,”

A39

ading Corp

924 F.2d 1555, 1572-73 (IlthCir. 1991),

Il. THE STATE LAW CLAIMS

In their amended complaint, the plaintiff

tha the same facts establishing liability under §§ 1 and 2 of

7

See Cal. Bus. & Prof. Code §§ 16

720, 16

Conn. Gen. Stat. § 35-27 (1999); D.C. Code § anew

ch. $01 204(1), 542.19 (1999) 140 M, Comp. Stun. 103 (en 1990.

mong yd ng 997%; Kan. Stat. §§ 50-101 et seq. (1994); K =

Sut. $567.1 7.175 (Michie 1996), La. Rev. Stat. §§ 31-123,

1405 ( ext 1986); Md. Com. Law Il Code Ann. § 11-204 (1990)

Mass Gen. Laws ch. 93A. § 2: Mich. Comp. Laws § 445.773 (1989)

Mina. Si fms (1998); N.M. Stat. § 57-1-2 (Michie 1995); N.Y.

Se Bus, Law § 340 (McKinney 1998); N.C. Gen. Stat. §§ 75-1. 15-

21 Game . Code §§ 1331.01, 1331.02 (Anderson 1993): |

Code § 76-10-914 (1999, W.Va. Code § 47-18-4 (1999), oo

33.032) (West 1989 & Supp. 1998) ee

a ‘See Cal. Bus. & Prof: Code § 17200 (West 1999); Conn. Gen.

oa 53 (1999); D.C. Code § 28-4503 (1996); Fla. Stat

rea OR ie en

Stat. §§ 367.170, 367.175 ont tom, te ee my. Row

$1:1405 (West 1986); Md. Com. Law I

ae ton Gen. Laws ch. 93A, § 2; Mich. Comp. Laws

199% Mian Stat. § 325D.52 (1998); N.M. Stat. _

rey : — Bus. Law § 340 (McKinney 1988); N.C. Gen.

1, 75-2.1 (1999); Ohio Rev. Code §§ 1331.01 hy

F

g

f

.

:

A40

facts establishing that Microsoft instituted an improper tying

arrangement in violation of § 1°

The plaintiff states concede that their laws do not

condemn any act proved in this case that fails to warrant

liability under the Sherman Act. States’ Reply in Support of

their Proposed Conclusions of Law at 1. Accordingly, the

Court concludes that, for reasons identical to those stated in

§ 11.B, supra, the evidence in this record does not warrant

finding Microsoft liable for exclusive dealing under the laws

of any of the plaintiff states.

Microsoft contends that a plaintiff cannot succeed in an

antitrust claim under the laws of California, Louisiana,

Maryland, New York, Ohio, or Wisconsin without proving

an element that is not required under the Sherman Act,

namely, intrastate impact. Assuming that each of those states

has, indeed, expressly limited the application of its antitrust

laws to activity that has a significant, adverse effect on

competition within the state or is otherwise contrary to state

interests, that element is manifestly proven by the facts

presented here. The Court has found that Microsoft is the

leading supplier of operating systems for PCs and that it

transacts business in all fifty of the United States. Findings

(Anderson 1993); Utah Code § 16-10-914 (1999); W.Va. Code § 47-18-4

(1999); Wis. Stat. § 133.03(2) (West 1989 & Supp. 1998).

9 “See Cal. Bus. & Prof. Code §§ 16727, 17200 (West 1999); Conn.

Gen. Stat. §§ 35-26, 35-29 (1999); D.C. Code § 28-4502 (1996); Fla.

Stat. chs. 501.204(1), 542.18 (1999); 740 Ill. Comp. Stat. 10/3(4) (West

1999); lowa Code § 553.4 (1997); Kan. Stat. §§ 50-101 ef seg. (1994),

Ky. Rev. Stat. §§ 367.170, 367.175 (Michie 1996); La. Rev. Stat.

§§ 51:122, 51:1405 (West 1986); Md. Com. Law II Code Ann. § 11-

204(a1) (1990); Mass. Gen. Laws ch. 93A, § 2; Mich. Comp. Laws

§ 445.772 (1989); Minn. Stat. § 325D.52 (1998); N.M. Stat. § 57-1-1

(Michie 1995); N.Y. Gen. Bus. Law § 340 (McKinney 1988); N.C. Gen.

Stat. §§ 75-1.1, 75-2.1 (1999), Ohio Rev. Code §§ 1331.01, 1331.02

(Anderson 1993); Utah Code § 76-10-914 (1999); W.Va. Code § 47-18-3

(1999); Wis. Stat. § 133.03(1) (West 1989 & Supp. 1998).

A4l

19."° It is common and universal knowledge that millions

9 . .

citizens of, and hundreds, if not thousands, of enterprises in

Micereoh ets that have been adversely affected by

a $ anticompetitive campaign—a list that includes

Hewlett-Packard, Intel, Netscape, Sun, and many

others—transact busi i ,

—tr business in, and employ citizens of, each £

the plaintiff states. These compel the conclusion that, in

Microsoft once again invokes the federal opyri

. . . fe C

Act in defending against state claims seeking to vindieen ‘nx

these claims do not encroach on Microsoft’s federally

under the Supremacy Clause. The Court alread

mi § mene supra, that Microsoft’s decision > cae te

mobs id impose first-boot and start-up screen restrictions

a mad independent violations of § 2 of the Sherman Act

t foll as a matter of course that the same actions merit

liability under the plaintiff states’ antitrust and unfai

— tion laws. Indeed, the parties agree that the standards

or liability under the several plaintiff states’ antitrust and

— eden peg my laws are, for the purposes of this case

aor to those expressed in the federal statute States’

Mictesof Se heeit Proposed Conclusions of Law at 1;

a s ur-Reply in Response to the States’ Reply at 2

. - Thus, these state laws cannot “stand[] as an obstacle to”

Oversight on the part of the Court; Microsoft obvious conducts

in the District of Columbia as well. ’ —

A42

312 US. 52, 67 (1941). The Copyright Act’s own

preemption clause provides that “(nothing in this title annuls

or limits any rights or remedies under the common law or

statutes of any State with respect to . . . activities violating

legal or equitable rights that are not equivalent to any of the

exclusive rights within the general scope of copyright as

specified by section 106... .” 17 U.S.C. § 301(b)3).

Moreover, the Supreme Court has recognized that there is

“nothing either in the language of the copyright laws or in

the history of their enactment to indicate any congressional

purpose to deprive the states, either in whole or in part, of

their long-recognized power to regulate combinations in

restraint of trade.” Watson v. Buck, 313 U.S. 387, 404

(1941). See also Allied Artists Pictures Corp. v. Rhodes, 496

F. Supp. 408, 445 (S.D. Ohio 1980), aff'd in relevant part,

679 F.2d 656 (6th Cir. 1982) (drawing upon similarities

between federal and state antitrust laws in support of notion

that authority of states to regulate market practices dealing

with copyrighted subject matter is well-established); cf.

Hines, 312 U.S. at 67 (holding state laws preempted when

they “stand{] as an obstacle to the accomplishment and

execution of the full purposes and objectives of Congress”).

The Court turns finally to the counterclaim that

Microsoft brings against the attorneys general of the plaintiff

states under 42 U.S.C. § 1983. In support of its claim,

Microsoft argues that the attorneys general are seeking relief

on the basis of state laws, repeats its assertion that the

imposition of this relief would deprive it of rights granted to

it by the Copyright Act, and concludes with the contention

that the attorneys general are, “under color of” state law,

seeking to deprive Microsoft of rights secured by federal

law—a classic violation of 42 U.S.C. § 1983.

Having already addressed the issue of whether granting

the relief sought by the attorneys general would entail

conflict with the Copyright Act, the Court rejects Microsoft’s

counterclaim on yet more fundamental grounds as well: It is

A43

a nang wey 42 U.S.C. § 1983. Consequently, Microsoft’

Une ete judgment against the states under 28

.S.C. and 2202 is denied, and the

> | counterclaim is

/s/

Thomas Penfield Jackson

U.S. District Judge

A44

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

v. Civil Action

MICROSOFT CORPORATION, No. 98-1232 (TPJ)

Defendant.

STATE OF NEW YORK, et al., fled Apr 3 - 2000

Plaintiffs, Nancy Mayer

a Whittington, Clerk

MICROSOFT CORPORATION, U.S. District Court

Defendant. Civil Action

MICROSOFT CORPORATION, No. 98-1233 (TPJ)

Counterclaim-Plaintiff,

Vv.

ELIOT SPITZER, attorney general of the

State of New York, in his official

capacity, ef al.,

Counterclaim-Defendants.

ORDER

In accordance with the Conclusions of Law filed herein

this date, it is, this 3rd_ day of April, 2000,

ORDERED, ADJUDGED, and DECLARED, that

Microsoft has violated §§ 1 and 2 of the Sherman Act, 15

U.S.C. §§ 1, 2, as well as the following state law provisions:

Cal. Bus. & Prof. Code §§ 16720, 16726, 17200; Conn. Gen.

Stat. §§ 35-26, 35-27, 35-29; D.C. Code §§ 28-4502, 28-

4503; Fla. Stat. chs. 501.204(1), 542.18, 542.19; 740 Ii.

Comp. Stat. ch. 10/3; lowa Code §§ 553.4, 553.5; Kan. Stat.

§§ 50-101 ef seq.; Ky. Rev. Stat. §§ 367.170, 367.175; La.

A45

68 $1:122, $1:123, $1:1405; Md.

-204; Mass. Gen. Laws ch. ; Mi

Comp. Laws §§ 445.772, 445,773: Minn. ay fo

.M. Stat. §§ 57-1-1, $7-1-2; N.Y. Gen. Bus. Law § 340.

C. Gen. Stat. §§75-1.1, 75-21; Ohio Rev. Code

§§ 1331.01, 1331.02; Utah Code § 76-10-914: W.Va. Code

§§ 47-18-3, 47-18-4; Wis. Stat. § 133.03(1)-(2): and it is

FURTHER ORDERED. that j i

. judgment is entered

the United States on its second, third, and fourth claims fn

relief in Civil Action No. 98-1232; and it is

Civil Action No. 98-1232 is dismissed with coke and it

fourth, twenty-fifth, and twenty-sixth claims ief ji

Civil Action No. 98-1233; and it is : =e

FURTHER ORDERED, that the fifth clai relief i

Civil Action No. 98-1233 is dismissed ree ath

A46

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF COLUMBIA

UNITED STATES OF AMERICA,

Plaintiff,

v. _}Civil Action

MICROSOFT CORPORATION, No. 98-1232 (TPJ)

Defendant.

STATE OF NEW YORK, ex rel. led Nov 05 1

Attorney General ELIOT Nancy Mayer-

Plaintiffs and S. District Court

Counterclaim-Defendants,

v. Civil Action

MICROSOFT CORPORATION, No. 98-1233 (TPJ)

Defendant and

Counterclaim-Plaintiff.

FINDINGS OF FACT

These consolidated civil antitrust actions alleging

violations of the Sherman Act, §§ 1 and 2, and various state

statutes by the defendant Microsoft Corporation were tried to

the Court, sitting without a jury, between October 19, 1998,

and June 24, 1999. The Court has considered the record

evidence submitted by the parties, made determinations as to

its relevancy and materiality, assessed the credibility of the

testimony of the witnesses, both written and oral, and

ascertained for its purposes the probative significance of the

documentary and visual evidence presented. Upon the record

before the Court as of July 28, 1999, at the close of the

admission of evidence, pursuant to FED. R. Civ. P. 52(a), the

Court finds the following facts to have been proved by a

preponderance of the evidence. The Court shall state the

A47

conclusions of law to be drawn therefrom i separate

Memorandum and Order to be filed in due course.

I. BACKGROUND

components (eg, a microprocessor and main memory

mass data storage (such as a hard disk). A typical PC cyetem

consists of a PC, certain peripheral input/ -

(including a monitor, a keyboard, a mouse, ra , oo

microprocessors or with compatible microprocessors

A48

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,” sittir~

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

A49

95 enjoyed unprecedented populari ith consumers, and

. th

June 1998, Microsoft released its successor Windows 98 z

(“Compaq”). An OEM typicall i )

y installs a copy of Windo

onto f i as

— its rs before selling the package to a consumer

11. The Internet is a global electronic network,

* . =

ar interconnected networks, which allows

millions _ computers to exchange information over

AS50

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

ASI

Explorer, in July 1995,

Il. THE RELEVANT MARKET

could start doing so in a way that would, within a reasonably

short period of time, Present a significant percentage of

ee » it could set the price of a license

tially 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

: — unprofitable. Therefore, in determining the level

: — “ ae power, the relevant market is the

ee | compatible PC operating systems

A. Demand Substitutability

1. Server Operating Systems

19. Consumers could not turn from Inte ,

, l-compatible

PC operating systems to Intel-compatible server operating

systems without incurring substantial costs. si

{pe of system is soldat a significantly higher price than the

A52

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

»ypport 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

A53

system, because they would not have already i

: invested time

and money in an Intel-compatible PC system and a set of

PC users to Apple as the result of a substantial

pice incree a 10 make the son profit, I

Mee OS en enine @ relevant market that excludes the

would not alter | meager Mac OS in the relevant market

Microsoft’ the $s conclusion as to the level of

s market power.

3. Information Appliances

more of these devices in li ‘

devices in lieu of an Intel-compatible PC

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

dalinhintiet is oF ae en © aoe

ible set of information appliances over an Intel-

cambatible PC system without incurring substantial costs. To

extent this substitution occurs, though, it will be the

AS4

result of innovation by the producers of information

appliances, and it will occur even if Intel-compatible PC

operating sysiems 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

A5S5

computer. Network computers can run applications residi

on a designated server, however. a a sone

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,

— Generally speaking, any PC system equipped with

browser and an Internet connection is capable of accessing

applications hosted through Web sites.

requirements for the user’s hardware (and thus the j

that hardware) are low relative to those of Agel

compatible PC system. Still, a user who already owns a

relatively expensive Intel-compatible PC system is not likel

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 substantial]

more expensive than it would be under ideas

alternative, a new buyer considering the network computing

network computer, that hardware will not

» thi support an Intel-

reg as 43 PC operating system; and if the new buyer opts

or the more expensive hardware of an Intel-compatible PC

an Intel-compatible PC operating system will almos

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 current!

y market network

computer systems, and the systems have yet to attract

ne concn dates . In part, this is because PC

sy " ch can store and process data locally as well as

AS56

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.

AS7

To the extent they might do so, users probably | Id

regard the Mac OS’s limited stock of eenuidite

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

deal from today’s levels, however, before the total cout af

dispensing with an Intel-compatible PC operating system

would decline sufficiently to impose a significant constraint

6. Middleware

exposing its own APIs to developers. Current!

. y no

middleware product exposes enough APIs to allow

ee softw.re vendors (“ISVs”) profitably to write

-featured personal productivity applications that rely

29. Even if middleware deployed enough API

support full-featured applications, it would not function on «

computer without an operating system to perform tasks such

AS8

underlying opevating 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 i 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

particular subset of users. For example, Be ‘

A60

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.

Ill. 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 worldwide 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

1 Description of the Applications

Barrier to Entry

36. Microsoft’s dominant share is

an operating system with enough demand to support

t0 find himaelf surinened ‘Ince oe agri ea likely

eve ; ving to use

application whose features disappoint him. Finally the

mpreee theo MS that, generally speaking, applications

Perating spaBh successive versions. He thus wants an

Operating system or which successi generations :

favorite applications will be released—promptly at ther Th

number of applications

A6é2

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

40. What for Microsoft is a Positive feedback loop is

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

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

enya malin aaners —ag rival would need to

. ery number of ISVs to write to its operating

significant number of users if enough ISVs developed

* * * .

applications for it; but few ISVs want to sink resources tro

developing for the system until it becomes established. Since

A64

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

A65

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

mught become easier than it currently is for a competitor to

' elop its own positive feedback loop. But given that

Windows today enjoys overwhelmi more applications

support than any other PC operating system, it would stil]

platform “ elization,” even in relative

evangelization, terms, than an

ia stem vendor, it is not difficult t»

understand vhy it is worthwhile for the principal benefici

° the barrier to devote more atemonamayrd

it candace pon

rosie edewceen nane © eead in

44. Microsoft continuall ‘

improved” versions of its PC poe i poomwel Each aoe

rue Microsoft must convince ISVs to write applications

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

pe ety last version of Windows, Microsoft must

el to write for the new version. Even if ISVs are

» 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

— of Windows retain the ability to run applications

eloped for earlier versions. In fact, since ISVs know that

mr do not feel locked into their old versions of

2 Bers that new versions have historically attracted

—a consumer demand, ISVs will generally write to

APIs as long as the interfaces enable attractive

Innovative features. Microsoft supplements developers’

A66

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

A67

barrier prevented effective

For that reason, in 1996 IBM stopped trying to a

compatible PC operating system, called BeOS. that is

specially suited to support multimedia functions The

operating system survives on a relatively minuscule number

A68

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 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 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 BeOS. While this scheme allows 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 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

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

paar eng In fact, they may be disposed ideologically to

ocus their efforts on open-source platforms like Linux

Fortunately for Microsoft, however, there are only so man

developers in the world willing to devote their talents “4

— testing, and debugging software pro bono publico. A

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

— then, the open-source model of applications

opment may increase the base of applications that run

4. Cloning the 32-Bit Windows APIs

52. Theoretically, the devel

» th oper of a non-Microsoft,

pte arth operating system could circumvent the

applications barrier to entry by cloning the APIs exposed by

A70

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

A7l

mind that there exists no commercially viable alternative to

which they could switch in response to a substantial and

ample, pice increase or its equivalent by Microsoft. For

— in » at a time when IBM still placed hope in

poms» Baad rival Wi the firm nevertheless

— that its PC company would lose between seventy

Windge ce eem Of its sales volume if it failed to load

maows 95 on its PCs. Although a few OEMs have

announced intention to pre-install Linux on some of the

eee ney Ship, none of them plan to install Linux in

indows on any appreciable number of PC (as

opposed to server) systems. For its part, Be is not even

attempting to persuade OEMs to install BeOS on PCs to the

years is too low to constrain Microsoft from raising prices

imposing other burdens on customers and users The

accuracy of this belief is highlighted by the fact that the other

products. Secure in this knowledge, Mi )

consider , » Microsoft did not

the prices of other Intel-compatible PC operating

systems when it set the price of Windows 98.

eventually weaken the applications barri

; er to entry. i

would not only make it easier for outside firme to eer th

A72

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-Microsofi, 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-

instal] 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.

operating-system products, the company’s pricing is not

on constrained by the need to reduce the incentives

consumers to acquire their copies of Windows illegally.

60. The exponential growth of the Intemet represents

an inflection point born of complementary tec ,

advances in the computer and telecommunicagione imine

A74

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 Gu. 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

A75

less sensitive to the price of Windows, the innovations will

translate into increased profits for Microsoft. Second,

vendors’ Intel-compatible PC operating systems

setting the price of Windows 98, for example, is probative af

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 changed 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

ays ing 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 developmen

alternatives to Windows. te vite

A76

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

li :" sly the opposite path of developing “thin

crent systems, which could threaten demand fi

Microsoft’s Intel-compatible PC operating-syst ed

an operating system pre-installed. Whi j

piracy, it also makes it less likely Rerprmnben Ay me

increases in the price of Windows and renders operating

enn ant qrocemiies by OEMs in large numbers even

ina aauauve {0 consumers. After all, a consumer's interest

Windows operating system might not outweigh the

supporting two operating systems on a single Other

restrictions and incentives are described —" sans

A78

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

A79

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 Navi

gator on

December 15, 1994, the product began to enjoy dramatic

acceptance by the public; shortly after its release, consumers

A80

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

‘ts 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

A81

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

eaten fee Anaghaghadb nor viga hoa ag operating

more an application written in j

APIs exposed by the Java class libraries, ie ook ie

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

enough APIs to support the development of full-featured

applications that will run well on multiple operating systems

pens 4, need for porting; however, they do allow

vely 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

nseo-cclented applications will be written cross-platform. The

closer Sun gets to this goal of “write once, run anywhere,”

more the applications barrier to entry will erode.

75. Sun announced in May 1995 that it

! had

a the Java programming language. Mid-level

ecutives 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 onl i

; y succeed if a Ja

prsare environment that complied with Sun’s inant

ound its way onto PC systems running Windows. Sun could

iadines of en et ee

implementation _ the Java runtime environment that

[oa the applications barrier to entry. Fortunately for

my etscape agreed in May 1995 to include a copy of

aa 8 Java runtime environment with every copy of

avigator, and Navigator quickly became the principal

A82

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,

A83

Microsoft reacted with alarm to Intel’s Native Sj

Processing software, which interacted with —

microprocessor independently of the operating

exposed APIs directly to developers of Saintes

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 Netsca

pe

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

Nnccrstood that if they could prevent this version of

avigator 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

A84

to enjoy the largest installed base, i.c., 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 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

A85

information, including certain APIs, that Netscape needed in

to ensure that Navigator would work well on systems

include in Windows 95, or rather to expose its own Internet.

related APIs, which would compete with Microsoft’s. If

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

84 When Barksdale brought the discussion back to

the particular Windows 95 APIs thet 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

A86

information, including APIs. They intimated that Microsoft’s

internal developers had already created the APiIs 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

A88

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

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

RNA API. Despite Netscape’s persistence, Microsoft di

. ft did not

release the API to Netscape until late October, i¢., as Allard

warned, more than three months later. The delay in turn

(and Internet Explorer) in August 1995. As a

was excluded from most of the holiday nea

92. Microsoft similarly withheld a scripti

Namape anced ae os eng te ta

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

mio ‘effect. There the process halted, however. In mid-

ugust, 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

TOOT ahd ne a nape never received a license to the scripting

chin was unable to do business with certain

C. The Similar Experiences of Other

Firms in Dealing with Microsoft

93. Other firms in the computer industry ha

: had

encounters with Microsoft similar to the experiences of

raccaPe described above. These interactions demonstrate

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

A90

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

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

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

oe the interest of ISVs, equipment man

Microsoft was quick to point out that if Windows userg

detected problems with the software that came pre-installed

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

however, was a more abiding fear at Microsoft that the NSP

A92

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

A93

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 merel ,

NSP software. At a second meeting at Intel’s co eo .

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, Inte!

= +o stop developing platform-level interfaces that

~ ,

ra support away from interfaces exposed by

; 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:

A94

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 Méicrosoft’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 Méicrosoft’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

A9S5

QuickTime shell would not have exposed platf

APIs to developers. Microsoft executives nnebtaaee

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

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

were 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,

tools would not run properly on Apple’s media pl

ayer, 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

A%%6

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, including Apple’s 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 tc 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

A97

marketing authoring tools for Windows~95 would have

those tools would io “ vn : row

; 8 ve relied on the DirectX i

under Microsoft’s control. ae

110. Apple’s surrender of the multimedia layback

business might have helped users in the short term by

resolving existing incompatibilities in the arena f

multimedia software. In the long run, however, the .

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

Microsoft’s motivation was its desire to limit as

' much as

possible the development of multimedi

- = 1a content that would

3. RealNetworks

111. RealNetworks is the leader, in terms of e

share, in software that supports the “streaming” of aatie ont

video content from the Web. RealNetworks’ streaming

software presents a set of APIs that competes for developer

Microsoft’s DirectX. Like Apple, RealNetworks has

developed versions of its software for multiple operating

apprehension with which they viewed Apple’s back

software—as competitive technology that could ‘nu into

part of a middleware layer that could, in turn, become broad

entry sPread enough to weaken the applications barrier to

«a2, 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

A9%8

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. Conse-

quently, 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 the 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

A99

RealNetworks in 1997, and its deali i

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

4. IBM

applications. The IBM PC Company relies heavi

Microsoft's cooperation to make a profit, ieee

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

relationship with the firm that controls the product

Microsoft tried to convince IBM to move its business

fon) roc tht emsees compte ety ni

Windows and Office. Microsoft leveraged the fact that the

PC Company needed to license Windows at a competitive

needed Microsoft's support in many more subtle ways.

A100

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 Compag.

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.

Al0l

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

including Bill Gates, met to discuss the relationship hereoe’

their companies at an industry conference in November

120. True to its word, IBM began vi oti

; gorous promotion

of its software products. This effort included an advertisi ing

campaign, starting in late 1994, that extolled OS/2 W

disparaged Windows. IBM’s drive to best ieee fe an

PC software venue intensified in June 1995, when IBM

platforms. For its part, SmartSuite competed directly wi

, 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. |

Gates called an executive at the IBM PC Company to bere

A102

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

This text is long and has been trimmed here. Open the source document for the complete record.