# Appendix — Microsoft Corp. v. United States

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URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0410%3A03

## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 2000
- **Citation:** 530 U.S. 1301

## Text

(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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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

AS

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-

A9

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

All

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385014_0410%3A03. Public record. Not legal advice.