VII.Through its predatory and anticompetitive conduct, Microsoft has
maintained its operating system monopoly, dangerously threatened
monopolization of the browser market, and inflicted substantial and far-reaching consumer harm
357. Microsoft has achieved its anticompetitive objectives and, in doing so, has
inflicted, and likely will continue to inflict, substantial and enduring harm on competition
357.1. By gaining a substantial share of the browser market and
weakening rivals, Microsoft has blunted the browser theat to the applications barrier to
entry and thereby maintained its operating system monopoly. See infra Part VII.A; ¶¶
357.2. Microsoft's course of conduct also dangerously threatened
monopolization of the browser market. See infra Part VII.B; ¶¶ 376-384.
357.3. AOL's acquisition of Netscape will not undo the harm to
competition wrought by Microsoft. In the wake of Microsoft's predatory and
anticompetitive campaign, AOL will neither resurrect the browser threat nor seek to
erode the applications barrier to entry in other ways. See infra Part VII.C; ¶¶ 393-396.
357.4. Microsoft further entrenched its operating system monopoly by
enhancing its control over standards, in particular network-based standards, and by
gaining a reputation as a predator, which is likely to deter other threats to the
applications barrier to entry. See infra Part VII.D; ¶¶ 397-403.
357.5. Microsoft's campaign to maintain and extend its operating system
monopoly has caused, and will continue to cause, substantial and far-reaching
consumer harm. See infra Part VII.E; ¶¶ 404-410.
357.5.1. Consumers have been deprived of the benefits increased
competition in operating system might bring and have been directly harmed by the
strategies Microsoft employed in its scheme to eliminate potential rivals.
357.5.2. Most important, Microsoft will continue to have the power
and incentive to distort the pace and direction of innovation in ways that protect its
monopoly power rather than serving the interests of consumers.
A. Microsoft's campaign to blunt the browser threat further entrenched
Microsoft's operating system monopoly
358. Microsoft has maintained its operating system monopoly by blunting the
browser threat to the applications barrier to entry. By gaining a substantial position in
browsers and weakening rivals, Microsoft has ensured that non-Microsoft browsers do
not threaten Microsoft's control over the APIs to which developers write, the source of
the principle barrier to entry that protects Microsoft's monopoly position.
6. Microsoft could maintain its operating system monopoly
without monopolizing the browser market because, by gaining
merely a substantial share of browsers (and denying a large
share to rivals), it was able significantly to reduce the
likelihood that its monopoly power would be eroded
359. Crippling the browser threat to its monopoly did not require Microsoft to
monopolize the browser market; rather, Microsoft could defeat that threat merely by
ensuring that no single rival obtained (or maintained) a sufficient share of the browser
market to develop into an alternative platform.
359.1. As explained, non-Microsoft browsers threaten Microsoft's
operating system monopoly because they expose APIs to which developers could write
operating system-independent applications.
- See supra Part III.B.1., ¶¶ 53.2, 53.3.
- . Bill Gates put it best: "A new competitor 'born' on the Internet is
Netscape. Their browser is dominant, with 70% usage share,
allowing them to determine which network extensions will catch on.
They are pursuing a multi-platform strategy where they move the
key API into the client to commoditize the underlying operating
system." GX 20.
359.2. The magnitude of the browser threat is directly related to the share
of the browser market obtained by Microsoft's rivals; ISVs will write applications in large
numbers only to browsers that obtain a very large share of the browser market.
- After a meeting between Bill Gates and Intel executives on August
2, 1995, Ron Whittier of Intel, reporting on the meeting to Andy
Grove and others, wrote: "BG: On the 30/70 use of 3rd party
technologies, Intel using Netscape in Windows environment is not
a problem (provided we do not set up the 'positive feedback loop'
for Netscape that allows it to grow to defacto std.)" GX 279.
Steven McGeady of Intel confirmed this conversation; Gates feared
Netscape would attract a "few leading-edge application developers"
which would make "that environment that much more attractive
both for end users and for other application developers. And so
more applications developers come up which brings more users to
it and more application developers, that's the positive feedback
loop. That's what he wanted to prevent happening." McGeady,
11/9/98pm, at 58:9-61:6. He later testified that Gates was "very
clear" when he expressed this sentiment at the meeting.
McGeady, 11/12/98pm, at 19:5 - 20:20.
- Brad Chase confirmed Gates' fears in an April 1996 memo entitled
"Winning the Internet Platform Battle:" "This is a no revenue
product, but you should worry about your browser share, as much
as BillG because: we will loose [sic] the Internet platform battle if
we do not have a significant user installed base. The industry
would simply ignore our standards. Few would write Windows
apps without the Windows user base." Chase characterized the
situation as a "make or break" moment because Netscape was
planning to "focus resources on making Java the platform." GX 39.
- In April 1995, Paul Maritz recognized that if Netscape Navigator
gained "significant market share . . . content providers could see
more to be gained in exploiting unique features of Netscape clients
than in trying to be 'generic' across all clients. This feedback loop
drives Netscape's share higher . . . . Eventually they become a
real 'platform', and they are eating 'per PC' revenue that would
otherwise go to the OS or to the Apps." GX 498.
359.3. Preventing the browser threat from materializing thus did not
require Microsoft to eliminate other browsers entirely -- or even to monopolize the
browser market. Rather, Microsoft needed only to prevent any one browser rival from
obtaining a large market share.
- Cusumano and Yoffie report that Gates understood that the key to
Microsoft's success lay in preventing Web masters from committing en
masse to customize their sites for Netscape Navigator and that, initially,
"Microsoft only needed to gain enough market credibility to convince
Web masters that they should wait for a clear winner to emerge before
committing irreversibly to either browser. Once Microsoft achieved that
goal with the 30 percent threshhold, Gates believed that victory would just
be a matter of time." GX 1372, at 111.
- In an e-mail string among Microsoft executives on which Bill Gates
is copied, Yusuf Mehdi stated that Microsoft's browser share goal
in July 1997 was to "surpass 50% share." Moshe Dunie wrote in
response that Microsoft should surpass 50% share "before we pull
the plug" and stop shipping shell integration mode for free [Mehdi
never directly says this, although dunie does in response], rather
than charging for it in Windows 98. Paul Maritz agreed that it was
"tempting" to charge for the browser shell, but that "getting browser
share up to 50% (or more) is still the major goal." GX 514.
- Professor Fisher testified that "what's required for the preservation
of Microsoft's Windows monopoly or operating system monopoly, is
that the paradigm shift not take place, that Netscape not succeed
sufficiently, that the browser can grow into an alternative platform
and, perhaps, for the operating system. That's not the same as
whether you have to eliminate Netscape entirely. It means you
have to be sufficiently big in the browser business so that people
don't have a serious incentive to go on and write programs for
Netscape browser APIs rather than for you." Fisher, 1/11/99pm, at
57:18 - 58:20.
- Dr. Warren-Boulton concluded that "anticompetitive foreclosure"
does not require that "Netscape be wholly unable to distribute its
product or unable profitably to maintain indefinitely a significant
share of the browser market." Microsoft, he testified, can preserve
its monopoly "simply by discouraging or preventing ISVs from
developing a stock of cross-platform applications sufficient to
encourage the development of an alternative platform and thus of
competing operating systems." Therefore, "Microsoft can foreclose
competition in the operating system market by foreclosing
Netscape from only a small share of the browser market." Warren-Boulton ¶ 153.
- An internal Microsoft document states that "we set out on this
mission 2 years ago to not let netscape dictate standards and
control the browser api's." GX 515. And this is what Microsoft
believes it has accomplished. Even though it has not yet
completely eliminated Netscape and others as browser
competitors, Microsoft believes that the browser war is over. See
infra Part VII.A.4., ¶ 371.
359.4. Therefore, the competitive impact of Microsoft's conduct depends
upon whether that conduct substantially impeded rivals' efforts to gain a substantial
share of the browser market; the browser threat diminishes as Internet Explorer's
market share increases in relation to the market shares of its rivals, in particular
- Maritz admitted that the higher Internet Explorer's share, the less of
a threat browser rivals posed. He testified that, "clearly when
you're in competition with another platform, the more that your
platform gets used versus the competitor's platform, it stands to
reason that you will be better off." Maritz, 1/25/99 pm, at 32:4-10.
- A presentation on "API Strategy" from Bob Muglia reports that a
"new, non-MS platform is emerging, driven by Internet distribution"
which is "Java-based, cross-platform, and Windows agnostic."
Microsoft "requires leadership in Browser marketshare" so that
developers will "target MS API extensions" and "focus on
Windows." These developments mean that Microsoft's "ability to
lead Java developers is largely driven/limited by IE share." GX
470, at MS6 5006842, 87, 62.
- Dr. Warren-Boulton testified: "By reducing the market share of
competing browsers to low levels, Microsoft could significantly
diminish the possibility that applications developers will write to
those browsers' APIs. Microsoft's browser dominance also would
impede the distribution of cross-platform Java technologies."
Warren-Boulton Dir. ¶ 88.
- Professor Fisher similarly testified that the proper question to ask is
"whether IE now has so many users or Netscape so few, relatively
few, that the threat to Microsoft's monopoly that was presented by
Netscape has effectively been thwarted." Fisher, 1/7/99pm, at
36:23 - 37:4.
360. Because of the nature of the threat posed by non-Microsoft browsers, the
most appropriate measure of browser market share is usage of underlying web
browsing technology, and in particular share of new usage.
360.1. Usage share measures intensity of use, not simply the number of
browsers in existence or the number of users of a particular browser.
- Professor Fisher testified that usage share measures "the amount
of use" of a particular browser, rather than "the share of browsers
in use or the share of people using browsers." Fisher, 6/1/99pm, at
360.2. Usage is what developers principally consider in determining
which web-site standards to adopt and which APIs to target.
- Brad Chase testified that "Usage" is important to Microsoft because
"usage is what impacts what developers do." Chase explained that
developers, in making decisions, look to whether there are a lot of
people "using" a "platform." Fisher, 6/1/99pm, at 22:9 - 23:17
(quoting Chase Dep., 3/25/98, at 96:11 - 97:5).
- Professor Fisher explained that the key issue is browser usage
because software developers do not care about APIs that are not in
use. Fisher, 1/5/99pm, at 67:13 - 68:1. Professor Fisher later
testified, "software developers always want to write applications
that will get used; that's the way they make money. They're going
to look to see what browsers are being used, what are the APIs
that people will be able to access or will want to access quite a lot.
What's going to matter there is the extent of usage of the browser,
not how many there are out there . . . The amount of use really
matters." Fisher, 6/1/99/pm, at 20:19 - 22:8.
- Dean Schmalensee concedes in his direct testimony that "ISVs will
not write application software for an operating system unless they
expect enough consumers to use that operating system."
Schmalensee Dir. ¶ 100.
360.2.1. Microsoft for this reason tracks "usage share" in the
ordinary course of its business.
- Bill Gates testified in his deposition that he considers
browser market share to be "usage share of browsers on the
World Wide Web." Gates Dep. (played 12/15/98am), at
21:6-13. This understanding was evident in his concern
that Netscape's browser, in 1995, was dominant, with a
"70% usage share." The large share of usage, Gates
believed, would allow Netscape to determine which "network
extensions will catch on." GX 20 (emphasis added).
- James Allchin, when asked if Microsoft had a goal between
1996 and 1997 to increase its browser market share with
respect to Netscape, responded, "usage . . . . If you talk
about it that way, I would agree." Allchin, 2/3/99am, at 54:24
- Chase, in March 1998, made clear that increasing Internet
Explorer's share continued to be an objective for FY99.
- redacted -
GX 828 (sealed). Chase also wrote: "distribution is not
sufficient, as we found out when we put MS Mail in Windows
for Workgroups or MSN and the Exchange client in Windows
95 for instance. We should measure browser and email
client share in terms of usage and not just distribution." GX
510, at MS7 004127.
- When asked about market share objectives, William Poole testified
that he was referring to "usage share" (Poole, 2/8/99pm, at 45:13-22), and confirmed that when he talks about "browser share or
browser market share," the "typical" use of that term refers to
"usage share." Poole, 2/8/99am, at 17:11-25.
- See also GX 681 (Cole writes "top priority is IE4 market
share as measured by browser usage"); GX 716 (Microsoft
tracked browser share based on Internet Explorer's share of
hits to top web-sites, which measures usage); Myhrvold,
2/9/99pm, at 47:23 - 48:19 (conceding he thinks of browser market
share as "usage share, not distribution"); Allchin, 2/3/99am, at
54:24 - 55:3 (agreeing Microsoft's goal in 1996 and 1997
was to increase "usage" share); Mehdi, 1/13/99pm, at
635:25 - 636:2 (testifying that Microsoft has "learned over
time that usage of people using the software is the more
relevant metric about things that we want to measure").
360.3. A browser can be a platform threat only if it uses non-Microsoft
technology; usage share of so-called "shell browsers" built on top of Internet Explorer is
thus properly attributed to Internet Explorer.
- Dean Schmalensee agreed that shell browsers such as the
Encompass browser use Internet Explorer APIs.
Schmalensee, 6/21/99am, at 37:15-20; 6/24/99pm, at 51:23
- Paul Maritz conceded that, unlike Netscape Navigator, the
Encompass browser does not have the capability to develop
into an alternative platform and therefore "is not going to be
viewed as a serious competitive threat to Microsoft." Maritz,
1/25/99pm, 29:22 - 30:19.
- Professor Fisher testified that the AdKnowledge data
includes shell browsers such as Encompass in Microsoft's
browser's share because "the purpose for which we are
using the share estimates from AdKnowledge has to do with
the extent to which the platform threat from Netscape is
being suppressed. That has to do with the extent to which
Internet Explorer and its technologies are being distributed.
It doesn't have anything to do with whether or not IE is
labeled 'IE' or whether it's labeled 'Ncompass' [sic]. In terms
of thwarting Netscape from gaining the kind of network
externality in browsers that would lead to browsers
undermining the application barriers to entry in operating
systems, all IE ought to be counted the same." Fisher,
1/12/99am, at 36:8 - 37:15.
- See also supra Part V.C.1.b.(2), ¶ 185.2.
360.4. Share of new usage ("flow") is a more useful guide to the
competitive impact of Microsoft's conduct than share of the installed base ("stock")
because flow shows where the installed base is headed.
- Dr. Warren-Boulton testified that flow measurements are a more
accurate "forecast of the installed base" because they indicate the
direction of the market and trends in market share. Warren-Boulton, 12/1/98pm, at 23:24 - 25:25 (referring to GX 261).
- Thus, although the stock and the flow are "complementary" and
one would in an ideal world like to look at them together, the flow
rate is very important. Warren-Boulton, 11/19/98am, at 16:10-15.
Dr. Warren-Boulton testified: "For purposes of evaluating many of
the consequences of Microsoft's anticompetitive restraints, a 'flow'
based share of new users is the more appropriate measure."
Warren-Boulton Dir. ¶ 139.
360.4.1. Flow matters because ISVs and website developers look
at it to decide what browsers to support.
- Testifying that developers pay attention primarily to the flow,
rather than the stock, of complementary software in deciding
what software to write, Dean Schmalensee asserted that
"the real question isn't what's the stock, if you will, of
applications for different systems . . . the question for entry
is, if you will, what's the flow? Can new promising platforms
attract applications writers to bring them into a competitive
platform?" Schmalensee, 1/22/99pm, 63:1-7.
360.4.2. Looking only at the changes in the installed base
dramatically understates the impact on usage share of Microsoft's anticompetitive
practices; share of the installed base will eventually rise or fall to the level of the "flow,"
but only over a long period of time.
- Professor Fisher explained that examining stock (or present
usage shares) will "significantly understate Microsoft's share
of current browser acquisitions" (Fisher Dir. ¶ 231) and
understate the effect of Microsoft's conduct. Because
Netscape started out with a large share, changes in the
installed base will "take a much longer time" than changes in
the share of shipments of new browsers (although changes
will eventually show up in the installed base itself). Fisher,
1/5/99pm, at 65:21 - 66:18.
- Dr. Warren-Boulton explained that looking at the share of
new browsers (flow) is "like the normal market share
numbers that economists would normally look at. We don't
normally look at the stock out there. We look at what's
General Motor's share of new cars." Flow is important
because it tells "what the potential market is for people, and
also because, of course, it gives you a view as to what the
stock is going to look like in the future." Warren-Boulton,
12/1/98pm, at 24:2 - 25:25.
- James Barksdale, having attempted to keep Netscape a
viable independent company during a time in which
Netscape's share continued to decrease, explained that
numbers showing Netscape's falling market share
"understate the true effects of Microsoft's conduct, because
our large installed base slows the statistical drop in overall
market share, even as Netscape's market share of new
browser users plummets. In fact, Netscape's share of new
users has dropped much more significantly while Microsoft's
share increased dramatically during the same period."
Barksdale Dir. ¶ 222.
7. Microsoft's conduct significantly hindered rivals' ability to
obtain and retain browser usage
361. Microsoft gained a substantial share of browsers principally by raising
rivals' costs. By either blocking or substantially increasing the costs to Netscape (or
other potential rivals that never had the opportunity to materialize) of utilizing the most
efficient distribution channels, while at the same time giving away Internet Explorer at a
predatory price, Microsoft hindered rivals' ability to obtain or retain browser usage
a. The OEM and ISP/OLS channels are the most efficient
channels for obtaining usage
362. The OEM and the ISP/OLS channels are the two most important browser
- Dr. Warren-Boulton concluded that distribution through the OEM channel
is the least expensive and is "very, very effective." Warren-Boulton,
11/23/98am, at 25:15 - 26:12; Warren-Boulton, 11/30/98am, at 13:16-24
(testifying that most recent figures from Microsoft show that the OEM
channel is the most important).
- Professor Fisher testified that "ISPs and the OLSs are, after OEMs, the
largest distributors of browsers." Fisher Dir. ¶ 169.
- Thus, Dr. Warren-Boulton testified: "Control over the OEM and ISP
channels was critical for Microsoft's gains in browser user share."
Warren-Boulton Dir. ¶ 138.
362.1. Microsoft, through its internal documents and analyses and the
testimony of its witnesses, recognizes that the OEM and ISP/OLS channels are the
most important browser distribution channels.
- Dean Schmalensee testified that Cameron Myhrvold's testimony
that the OEM and ISP channels are the two most important
browser distribution channels is consistent with his understanding.
Schmalensee 1/19/99pm, at 50:3-17.
- Joachim Kempin testified the OEM channel is one of the two most
important channels for browser distribution. Kempin, 2/25/99pm, at
- In the ordinary course of business, Microsoft tracked Internet
Explorer's success in, and thus recognized the importance of,
these channels. Microsoft data gathered in October and November
of 1997 show that 25% of browser users obtained their browser
from an access provider and 20% of users obtained it with their
computer. GX 218.
- See supra Part V.B.2.b., ¶ 124-126; Part V.C.1.a., ¶176-77; Part
V.D.1., ¶ 213.
362.2. Indeed, Microsoft believed that securing distribution for Internet
Explorer in these channels was essential to winning the browser war.
- Kumar Mehta, in March 1997 before the release of Windows 98,
concluded that Internet Explorer must be included with the
operating system in order to maintain its OEM distribution channel
and ensure that Netscape Navigator users switched to it. He
wrote: "80% of those who do not use IE say they have no plans to
switch to it. Which means that if we take away IE from the o/s,
most nav users will never switch to us." Web professionals came
to the same conclusion and have recognized that the bundling of
Internet Explorer with Windows will hinder Navigator: "from all our
research with IS and web professionals we know that they
eventually expect us to win the browser war because Ie [sic] will be
bundled with the operating system and they will have no real
reason to purchase navigator." GX 204.
- In a March 1997 email, Bob Foulon concluded that, "since only
30% of internet users have ever downloaded a new browser (they
use what comes with their pc or comes with their ISP sign up kit),
the only real chance IE has of getting them to switch is thru a new
pc, an OS upgrade or a new ISP kit." GX 736.
- After reviewing data on where users got their browser in October
and November 1997, Jonathan Roberts concluded that "we are
better off with a tighter tie to Windows. The only thing that requires
independent branding is retail or magazine, and that simply doesn't
matter." GX 219; GX 218 (containing same e-mail thread as GX
- Jonathan Roberts reported to James Allchin: "The proliferation of internet
usage means these products are reaching the masses: users who would be
happy not to have to think about browsers or downloading new versions.
The same users who currently say 'why should I bother downloading a
new browser, switching, learning something new' will have the same
reasons to use an integrated IE 4, and abandon Netscape." GX 355.
- Microsoft's IE5 OEM Marketing Review reported that "It came with
my computer' is the #1 reason people switch to IE." This led to the
following: "Conclusion: OEM's are a great vehicle to gain browser
share." GX 233 (emphasis in original); GX 174 (draft of same
document). See also Barksdale, 10/27/98pm, at 11:6-9 (GX 233
"proves what I have been saying here for a week, and it proves that
Microsoft knew what I had been saying for a week was true").
- Microsoft's Randy Haas explained in an e-mail to Brad Chase
discussing the importance of various modes of browser distribution:
"A critical success factor in gaining browser share is continued
focus on ISP's, OEM's and corporate deployments to target the
growth of new users." GX 515; GX 310 (iterations of same e-mail
- An internal Microsoft focus group report found that most users said
that they would not switch to Internet Explorer and "would not want
to download IE 4 to replace their Navigator browser. However,
once everything is in the OS and right there, integrated into the OS,
'in their face' so to speak, then they would use it b/c there would be
no more need to use something 'separate' . . . . Therefore, the key
takeaway from these focus groups seems to be clear: We need to
strengthen our key asset and our key brand which is Windows to
win the Internet war on the desktop side. . . . we can leverage
these assets to convert the Navigator installed base and eclipse
Netscape's browser market share leadership. But if we rely on IE 4
alone to achieve this, we will fail." GX 202 (emphasis in original).
363. The OEM and the ISP/OLS channels are the most important browser
distribution channels because they are the most efficient and effective means of
- James Barksdale explained why the OEM and ISP/OLS channels are
effective: "A user signs up with an ISP specifically for the purpose of
getting connected to the Internet. If his or her ISP offers a browser, that
user is highly likely to continue to use that browser. Likewise, many
consumers purchase new computers just to get connected to the Internet.
In this case, the new user is likely to use whatever browser comes already
loaded on the computer. Even if a computer purchaser did not buy the
computer specifically to connect to the Internet, that individual is likely to
use the OEM-installed or bundled browser for the obvious reason that it is
there. Adding an additional browser takes more work and, if the first
browser can not be removed, uses additional computer memory, as well."
Barksdale Dir. ¶ 125.
- Professor Fisher testified that "OEMs and ISPs are critical to browser
distribution because many users get their browser from one or the other -
and because few users switch from one browser to another unless they
buy a new computer or switch ISPs." The result of Microsoft's
anticompetitive actions in these channels has been that "virtually all new
users receive Microsoft's browser either with their PC or from their ISP or
both," effectively excluding "Netscape and other browser competitors from
the market" and "limiting them to a declining base of existing users."
Fisher Dir. ¶¶ 214, 212.
363.1. Obtaining browser usage requires not merely offering a quality
browser, but also being able to distribute browsers through effective channels.
- See infra Part VII.A.2.c; ¶ 366.
363.2. Obtaining browser usage for a non-Microsoft browser also
requires browser producers to overcome the costs (today, largely non-monetary) of
persuading users to switch browsers. These costs, which are typically higher for novice
users, include among other things the time and effort necessary to acquire another
browser, the complexity of installing and using another browser, and users' inertia.
- William Harris testified that "it is generally understood in the
computer industry, that consumers have a high proclivity to accept
default settings and configurations on software and computer-based services. Even with the advent of many highly-advertised
and content-rich sites on the Internet, three of the five most
frequently visited sites, according to numerous industry market
research services, have generally been the default pages that a
user is directed to when launching Netscape, Microsoft, or AOL
browsers." Harris Dir. ¶ 92.
- Professor Fisher explained: "Generally speaking, what's happened here
is that IE has been offered as the browser which the consumer will get. In
order to get a different browser, consumers have to do something else.
They have to do something deliberate, something at least time-consuming,
sometimes troublesome, and it's become just a lot harder for any other
browser to be chosen." Fisher, 1/12/99pm, at 9:13-19.
- Barksdale testified: "Less sophisticated computer users in particular
are much more likely to use the browser that comes on their
computers, or that comes as part of their Internet access service,
than to download from the Internet. OEM and ISP distribution
constitutes the primary means through which most users -
particularly home and unsophisticated users - have gotten their
browsers in recent years. Moreover, once a user starts with a
given product, he or she tends to stick with that product. This
means that if a new user is not presented with a choice of browsers
at the time they buy a new computer or subscribe to an ISP
service, and are only offered Internet Explorer, it becomes that
much more difficult to convince them at a later time even to try the
Netscape browser." Barksdale Dir. ¶ 32.
- Cameron Myhrvold sponsored a video for use at trial that shows
the costs to an end user of acquiring and installing software. After
demonstrating the difficulty of installing the retail version of with
Internet Explorer and setting up an Internet connection, the narrator
says, "and that does not include the time that was required to drive
to a retail store, pay money for a product, return home and begin
the installation. Nor does it factor into the equation the time and
effort and knowledge needed to run the setup program, which for a
large number of users would actually be cumbersome and not
straightforward." DX 2166.
363.3. The costs necessary to convince users to switch or use browsers
are minimized in the OEM and ISP/OLS channels.
363.3.1. The OEM channel is effective because, when a user is
presented with a browser preinstalled on the desktop, he is likely to use it.
- Barksdale summarized the benefit of having distribution
through the OEM channel by testifying that the OEM
channel is very "sticky" because users are likely to continue
to use the browser that they receive with their machines.
Barksdale, 10/27/98pm, at 7:9-21.
- Allchin, in attempting to explain the benefits of having
Internet Explorer shipped with Windows, testified that "the
impression is around Microsoft that assembly is not
required" and that from the consumer's perspective, a
"single install" is a "huge" benefit. Allchin, 2/2/99am, at 31:6
- Professor Fisher testified that the OEM channel is
particularly effective because, if people get their browsers
with their computers, they are likely to use that browser.
Fisher, 6/4/99am, at 35:4 - 36:15.
- See also GX 204 ("if we take away IE from the o/s, most nav
users will never switch to us"); GX 233 ("'It came with my
computer' is the #1 reason people switch to IE," OEMs are
thus "the best vehicle to gain browser share.").
363.3.2. The ISP/OLS channel is also particularly effective
because users commonly employ an ISP or OLS to access the Internet and are readily
able to use the browsers their ISPs or OLSs provide.
- See supra Part V.D.1., ¶ 204.2.
- ISPs are important to Microsoft's "Internet mission," Bjorn
Hovstadius wrote, because, if a user has a good experience
with the browser he initially receives from his ISP, he is less
likely to switch browsers later. Hovstadius argues that "for a
new user," an ISP "is probably their first exposure to the
Internet" and thus this first association with a browser is
vitally important. The memo summarizes this strategy: "If
you think about it, this is very much like how we established
Windows as the standard platform by working closely with
OEMs." GX 93.
363.4. The OEM and ISP/OLS channels thus provide the lowest-cost
means for browser producers to obtain browser usage.
363.4.1. When products are evenly matched in features, browser
share becomes largely a function of access to the most efficient and effective browser
distribution channels, the OEM and ISP channels.
- Myhrvold conceded: "distribution is a necessary but
insufficient condition for increasing usage share" (Myhrvold,
2/9/99pm, at 49:12-17), and Microsoft "certainly wants
distribution that will actually result in usage." Myhrvold,
2/9/99pm, at 62:7 - 63:18.
- Microsoft understood that "with IE a standard feature on
Windows 98 machines everywhere, Communicator needs to
stand out to survive." DX 2183.
- Jonathan Roberts reported to Allchin that Internet Explorer
had a much better chance of "'winning'" once it was
"integrated" into the operating system: "An integrated
browser makes Netscape a non-issue -- a superfluous
product for all but the most committed Netscape user."
GX 355 (emphasis added).
- Netscape Navigator's decreasing market share is especially
acute with new home users, who "generally acquire their
browsers through purchasing an OEM built computer or
through their ISP." Barksdale Dir. ¶ 35. Barksdale cited a
September 1998 IDC study to support this fact: Netscape's
browser market share among new home users had declined
from 51% in 1996 to 35% as of September 1998. Barksdale
Dir. ¶ 35. He explained: "The reason people get their
product today is because it comes with the computer from
the store. Or the reason they get it today is because it's
given to them or presented to them by their internet service
provider." Barksdale, 10/27/98am, at 76:10-13.
- Professor Fisher testified that, once "Microsoft had produced
a satisfactory browser relative to Netscape, there was little
reason for people who got IE with their computer to bother
acquiring Netscape. Netscape Navigator didn't offer
something so much better that it was reasonable for them to
make any effort to load it at all." Fisher, 6/4/99am, at 36:23 -
363.4.2. Conversely, distribution does not matter if the product is
not one a significant number of users want. For instance, Microsoft's mass distribution
of Internet Explorer 1 and 2 with Windows did not translate into a large usage share
because Internet Explorer was then not comparable in quality to Navigator.
- Dean Schmalensee's analysis of product reviews concludes
that Internet Explorer 1 and 2 received consistently (and far)
lower reviews than Netscape Navigator. Schmalensee Dir.
- Myhrvold testified: "If you don't have a great product, people
aren't going to use your browser, in this case, no matter how
much distribution you have." Myhrvold, 2/9/99pm, at 59:15-17.
- Brad Chase wrote: "distribution is not sufficient, as we found
out when we put MS Mail in Windows for Workgroups or
MSN and the Exchange client in Windows 95 for instance.
We should measure browser and email client share in terms
of usage and not just distribution." GX 510, at MS7 004127.
b. Microsoft's anticompetitive and predatory conduct
substantially raised the cost to browser rivals of
obtaining usage through the OEM and ISP/OLS channels
364. Through its predatory and anticompetitive conduct, Microsoft significantly
raised the costs to Netscape and other browser rivals of obtaining effective browser
distribution and, ultimately, usage through the OEM channel.
364.1. Microsoft's tying arrangement and prohibition on removing the
browser or any part of it raised rivals' costs.
- See supra Part V.B.4.b., ¶ 168.
364.2. Microsoft's screen restrictions and other coercive conduct directed
toward OEMs raised rivals' costs.
- See supra Part V.C.1.b.(2), ¶ 181.
- See supra Part V.C.2.b.(1), ¶ 205, Part V.C.2.b.(2), ¶ 206,
Part V.C.2.b.(3), ¶ 210.3.
364.3. The raising of rivals' costs is evidenced by the fact that Netscape
now has to pay OEMs to distribute its browser.
- Prior to Microsoft's initiation of its predatory campaign, OEMs paid
licensing fees to Netscape. Barksdale Dir. ¶ 20.
- Dr. Warren-Boulton concluded, after providing some examples, that
Microsoft's tying of Internet Explorer to Windows has made it "more
costly and burdensome for OEMs to install other browsers and has
thus significantly, although not completely, deterred OEMs from
doing so." Warren-Boulton Dir. ¶ 92.
- Netscape now pays Compaq for distribution on its Presario line of
PCs. Professor Fisher testified: "Netscape is actually paying
Compaq in order to get its . . . browser on the desktop. It was
paying them advertising something supposed to be worth over
$700,000. Now, there isn't any doubt, I suppose, that if Netscape
were willing to pay sufficient money, it could, in fact, get OEM's to
put it on the desktop. That would not mean that it is not severely
disadvantaged. That's called raising rivals' costs." Fisher
- Mal Ransom of Packard Bell also testified that, with the required
inclusion of Internet Explorer, in order for Packard Bell to consider
distributing Netscape Navigator, Netscape would have to offer
Packard Bell additional incentives, such as financial payments to
Packard Bell. Ransom Dep. (played 12/16/98pm), at 78:13 - 79:15.
364.4. The impact of Microsoft's conduct was not only to increase the
costs to Netscape of obtaining distribution with OEMs, but also to reduce Netscape's
presence on the Windows desktop, the most effective means of acquiring usage
through the OEM channel.
364.4.1. Before 1996, Netscape's presence on the Windows
desktop was substantial.
- James Barksdale asserted that, "Netscape experienced
early successes in getting OEMs to distribute the browser
with computers. . . . OEMs were anxious to enter into
agreements with Netscape because it allowed them to
differentiate their machines from those of other
manufacturers and to add value for consumers." Barksdale
Dir. ¶¶ 159-160. Barksdale also stated that Netscape had
distribution agreements with between ten and twenty OEMs
in 1995. Barksdale, 10/20/98pm, at 85:7-20.
364.4.2. Netscape's ability to gain distribution and usage through
OEMs was substantially hampered once Microsoft initiated its most significant predatory
- Microsoft, in June 1996, compiled
- redacted - GX 405, at MS6
- By January 1998, after Microsoft had, among other things,
(1) produced a higher quality browser with IE3 which it
continued to tie to the operating system and give away for
free; (2) initiated its anticompetitive agreements with ISPs,
OLSs, and ICPs; and (3) augmented its OEM restrictions,
Microsoft reported that of the 60 PC distribution
opportunities for browsers (15 PC manufacturers offering
models in four markets: corporate desktop, consumer and
small business, notebook, and workstation), Netscape was
shipped on only four. GX 421, at MS7 000680.
- Barksdale testified that, by the fall of 1998: "The Netscape
browser" was "effectively not distributed at all through the
largest OEMs (Dell, Compaq), or on Packard Bell, Acer,
Toshiba, or Micron." Barksdale Dir. ¶ 173. Barksdale
further testified that only about 10% of all PCs shipped
worldwide had Navigator preinstalled as of the time of
Barksdale's testimony. Barksdale, 10/27/98pm, at 12:8-13.
- In March 1997 Kumar Mehta reported that 20% of all
Internet Explorer home users got it with their PC, while only
13% of all Navigator home users acquired it with their PC.
At the same time, 24% of all Internet Explorer office users
got it with their PC, while only 14% of Navigator office users
acquired it with their PC. GX 736.
- Dr. Warren-Boulton testified that 26% of Internet Explorer
users got their browser from an OEM and only 13%-14% of
Netscape Navigator users got their browser from an OEM,
leading him to conclude that the effects of Microsoft's
restrictions appear to have had a significant impact on the
OEM channel. Warren-Boulton, 11/30/98am, at 13:16-24.
- A poll taken of Chief Information Officers during a Forrester
Research Inc. conference, Barksdale reported, asked "'If
Microsoft's Internet Explorer browser was not bundled free
with Windows, would your company be less likely to use it?'"
Eighty- one percent of the 203 respondents to that question,
according to Barksdale, answered "yes." Barksdale Dir. ¶ 6.
364.4.3. Indeed, by the beginning of January 1999, Netscape was
present on the desktop on only 1% of PCs OEMs shipped.
- Professor Fisher testified that the fraction of all OEM sales
accounted for, as of January 5, 1999, by machines that featured
Netscape Navigator on the desktop (as opposed to preinstalled in
any manner) -- as Internet Explorer always is featured -- is "way
under 1 percent." Fisher, 1/7/99am, at 8:1-10.
- Consistent with Barksdale's testimony, Professor Fisher
testified that the fraction of shipments by OEMs that ship
Netscape in any form (apart from on the desktop) is also
"quite low." Fisher, 1/12/99pm, at 9:7-12. See also Fisher,
6/4/99pm, at 23:16 - 29:2 (testifying that Barksdale's
testimony is consistent with his own conclusions).
- This and other evidence led Professor Fisher to conclude
that "Microsoft has succeeded in effectively excluding Netscape
almost completely from the personal computer OEM distribution
channel-one of the most important channels of browser
distribution." Fisher Dir. ¶ 215.
364.4.4. The distribution through the OEM channel that Netscape
did manage to obtain was less favorable than placement on the Windows desktop
(which it was generally unable to obtain) and thus less likely to garner usage.
- As explained, placement on the desktop -- from which
computer users easily access programs -- is much more
effective for gaining users than placement hidden in folders
or elsewhere. See supra Part V.D.3.b.(1), ¶ 228.
- Professor Fisher explained, drawing on his expert
experience testifying about the airline reservation industry,
that the importance of placement is a well known
phenomenon. American and United discovered that "the
flights that got presented first were the ones that tended to
be chosen" (Fisher, 1/12/99am, at 15:19-25), because travel
agents "by and large" did the "simplest thing and the
timesaving thing," which was "to start at the top of the list
and say to the customer, 'How's this one?' . . . And you
never got, in the very large majority of the cases, to the ones
that were buried down beneath." Fisher, 1/12/99am, at
17:18 - 18:4.
- Professor Fisher further testified that "a similar phenomenon
is involved here. You have a browser on the desktop,
typically IE. You could find another browser, if you looked
for it" by downloading or other mechanisms. But, Professor
Fisher explained, "it takes some effort," and users "typically
won't bother to go and find something which gives
essentially the same service but requires some difficulty."
Fisher, 1/12/99am, at 18:5-17.
- Barksdale testified: "Today, Netscape has limited distribution
agreements with some OEMs. None of these agreements
provide effective mass distribution outlets, as all of our
agreements are engineered around Microsoft restrictions."
Barksdale Dir. ¶ 173. Barksdale gave as examples: (1) that
IBM offers Netscape Navigator on the Aptiva and ThinkPad
lines but without a desktop icon; (2) that Gateway provides
Netscape through a separate compact disk; and (3) that
Sony offers Netscape on some limited lines but without a
desktop icon, among others. Id. Barksdale further testified
that IBM, Gateway, Sony, Apple and NEC all ship Navigator
with their PCs, but "as an additional disk or in other ways,"
and not as an icon on the desktop. Barksdale, 10/26/98pm,
at 9:15 - 10:6.
365. Through its predatory and anticompetitive conduct, Microsoft significantly
raised the costs to Netscape and other browser rivals of obtaining browser usage
through the ISP/OLS channel.
365.1. Microsoft's exclusionary restrictions and other conduct
substantially reduced the ability of key ISPs and OLSs to promote or distribute
Netscape and hampered users' ability successfully to obtain and use Netscape.
- See supra Part V.D.4.a; ¶ 241.
365.2. The AdKnowledge data, which show a close relationship between
the degree of contractual preference for Internet Explorer by a particular ISP or OLS
and Internet Explorer's share, demonstrate the substantial degree to which Microsoft's
restrictions raised Netscape's costs and excluded it from the ISP/OLS channel.
- See supra Part V.D.4.b.(2); ¶ 247.
c. The channels to which Microsoft relegated Netscape are
markedly inferior and cannot compensate for
Netscape's substantial exclusion from the OEM and
366. Microsoft argued that Netscape has available to it numerous browser
distribution channels and implied -- through among other things a depiction of browsers
dropping down to users by parachute and arriving at users through (to name a few)
canals, boats, bridges, and railroad tracks (DX 2098, C1) -- that all channels of
distribution are equally open and effective. This is not true. The distribution strategies
to which Microsoft forced Netscape to resort are demonstrably less effective at
garnering browser usage than the OEM and ISP/OLS channels.
- Professor Fisher testified that Microsoft's relegation of competitors "to
distribution through decidedly inferior channels has serious consequences
in foreclosing its competitors and raising their costs." Fisher Dir. ¶ 191.
- Professor Fisher testified that "by ensuring that virtually all new users
receive Microsoft's browser either with their PC or from their ISP or both,
Microsoft effectively excludes Netscape and other browser competitors
from the market, limiting them to a declining base of existing users."
Fisher Dir. ¶ 212. Given Microsoft's exclusionary conduct, Fisher testified,
it is not surprising to learn that "Netscape is distributing 160 million
browsers a year, and still its usage share is declining." Fisher, 6/4/99am,
at 32:25 - 34:11.
- James Barksdale testified: "No other distribution channel can make up for
the loss of the OEM and ISP channels. While Netscape achieved
significant successes in distribution channels other than the OEM and ISP
channels in the early years of the Internet, each alternative distribution
method now suffers from several flaws or limitations." Barksdale Dir. ¶
366.1. Microsoft's browser rivals' ability to disseminate browsers widely,
especially through expensive and ineffective channels of gaining browser usage, does
not mean that rivals' costs have not been improperly raised.
- Barksdale testified that, although Netscape launched an "Unlimited
Distribution" program through which it devoted "tremendous"
resources to "utilizing all available channels of distribution," its
overall market share has continued to drop. This confirmed his
view that "there is no substitute for the OEM and ISP channels of
distribution," which "Microsoft has largely blocked." Barksdale Dir.
- Dr. Warren-Boulton testified: "If, indeed, you're forced to distribute
200 million to get a relatively small number of users, then the cost
per user is going to be very high, and people won't choose that
distribution mechanism unless it's the only alternative that's left to
them." Warren-Boulton, 11/23/98am, at 26:2-12.
- Professor Fisher testified, when confronted with a statement by a
Netscape representative regarding the "Netscape Everywhere"
program, that: "If he means are there a lot of copies available and can lots
of people get it, the answer to that is sure, that's true. If he means by that
so that a lot of people are signing up for it and actually acquiring it and
using it, I think the answer to that is no. That's not a remarkably
successful program." Fisher, 1/6/99am, at 39:17-23.
- The exceedingly high number of copies of Navigator distributed by
Netscape supports this conclusion. As Professor Fisher testified,
Netscape's internal figures indicate that the company distributed
approximately 2.5 copies of Navigator per Internet user. DX 2440
- redacted - and, as Professor Fisher argued, simply means that Netscape is distributing
millions of CDs which "ended up as coasters . . . or in the garbage."
Fisher, 6/4/99am, at 29:22 - 31:15 (referring to DX 2440)(sealed).
366.2. Carpet bombing -- sending unsolicited disks containing software
to customers -- is not an effective alternative to the ISP/OLS or OEM channels.
366.2.1. Carpet bombing is disproportionately expensive and
much less effective compared to other means of obtaining browser usage.
- David Colburn testified that, even for AOL, distribution
through mass mailing is a more expensive method of
distribution and requires "more effort by the consumer to
access AOL" than is required for consumers to access MSN,
which is included with Windows. Colburn Dir. ¶ 17.
- Myhrvold, in arguing that distribution alone does not
determine usage share, agreed that carpet-bombing is not a
very effective form of distribution and that hanging browsers
on the door might not be the most effective way for
distribution. Myhrvold, 2/9/99pm, at 60:3 - 61:20. Myhrvold
testified that Microsoft wants distribution that will actually
translate into usage. Myhrvold, 2/9/99pm, at 62:7 - 63:18.
- A representative of US West testified that US West's
marketing strategy is not one where it really wants to use
"carpet-bombing" tactics, which he called "basically just
unsolicited distribution" of a software package. Such
distribution is not a cost effective way to solicit customers
because of the low take rates and unfocused approach.
For instance, paying for the production of 23 million pieces
of software to send to each of US West's customers, and
sending out the 23 million pieces of software is not cost
effective, knowing that more than 50 percent of the
recipients do not have computers and that, of the ones who
do, probably 80 percent already have a service provider.
Bozich Dep., 9/10/98, at 40:17 - 41:16 (DX 2559).
- A representative of Ameritech testified that directly mailing
CDs to potential ISP subscribers is not a very effective
subscriber acquisition method. For instance, in a three
month period during which Ameritech sent out CDs with its
software in "high" numbers, the percentage of people who
actually subscribers was "very low." This, he explained, is
because "CD drops are one of the most expensive forms of
promotion for us because the take rates, meaning those that
convert to paying customers, is extremely low." On average,
he guessed, the take rate was less than 1 percent. Rys
Dep., 9/8/98, at 42:22 - 44:5 (DX 2583).
- A representative of Bell Atlantic Internet Solutions testified
- redacted - Beran Dep., 8/5/98, at
79:19 - 80:2 (DX 2557A) (sealed).
- Barksdale testified that carpet bombing is "not an effective
means of distribution for a browser company" because it is
"extremely expensive" and that the " high costs of carpet
bombing are compounded by the fact that carpet bombing
traditionally results in only a 1-2% adoption rate. Most
unsolicited CD-ROMs end up in the trash, or as coasters
that serve no purpose other than keeping the recipients'
coffee cups from staining their desk." Barksdale Dir. ¶ 228.
366.2.2. Carpet bombing is also less likely to garner browser
usage because it requires users to take extra steps to install the software.
- Microsoft's Carl Stork conceded that "pre-installation is best
for customers" because the setup procedure from a CD-ROM has the "potential for errors" and requires users to
answer questions. Stork Dep., 1/13/99, at 761:24 - 762:3.
- Professor Fisher testified that carpet-bombing is an
"inefficient distribution method" because "customers must
take the time and trouble to install the software." Therefore,
"even to the extent that distribution by mail is a means of
getting new browser users, it is a substantially more costly
method. Relegating Netscape to such a method is an
example of raising rival's costs." Fisher Dir. ¶ 222.
366.2.3. That other firms with different revenue models find it
profitable to carpet bomb is beside the point.
3220.127.116.11. Firms such as AOL receive a continuing stream
of subscription fees when a user signs up for their service; by contrast, because of
Microsoft's predatory conduct, Netscape and other browser suppliers receive at best
modest ancillary revenues.
- Barry Schuler of AOL testified:
- redacted -
Dep., 5/5/99, at 180:7-181:2
(DX 2810A) (sealed).
- Barksdale testified that "Netscape has never carpet
bombed and has no plans to do so in the future."
Barksdale Dir. ¶ 228. This is because "'carpet
bombing'" is "disproportionately expensive" for a
company like Netscape that "does not have an
expectation of a future stream of associated monthly
usage fees to offset the cost." Barksdale Dir. ¶ 32.
- Professor Fisher also explained the economics that
make carpet bombing an infeasible method of
distribution to browser producers. Netscape does not
actually distribute its browser by CD-ROM; only
Netscape's 10,000 distribution partners distribute
Navigator software through this channel. Fisher Dir. ¶
221. He noted that these partners and companies
such as AOL have "the obvious fact going with it that
when it signs up someone through carpet bombing, it
obtains a stream of revenues from the subscription
that the user pays . . . . That makes it worth spending
money to do this. When Netscape does that,
Netscape not only doesn't obtain a stream of
revenues; Netscape doesn't obtain any revenue
anymore from its browsers. That makes this a
possibly profitable proposition for AOL, but a much
much more doubtful proposition for Netscape."
Fisher, 1/13/99am, at 19:3-19.
318.104.22.168. Even if carpet bombing can in some
circumstances be profitable for browser suppliers, it nonetheless cannot compensate
for losing more effective channels.
- Barksdale testified that, although Netscape launched
an "Unlimited Distribution" program in January 1998
through which it devoted "tremendous" resources to
"utilizing all available channels of distribution," its
overall market share has continued to drop. This
confirmed his view that "there is no substitute for the
OEM and ISP channels of distribution," which
"Microsoft has largely blocked." Barksdale Dir. ¶ 230.
- David Colburn testified that, even for AOL, distribution
through mass mailing is not the most optimal channel
of distribution, and certainly not as advantageous as
distribution directly with the computer. For instance,
mass mailing of software is a more expensive method
of distribution through Windows and requires "more
effort by the consumer to access AOL" than is
required for consumers to access MSN, which is
included with Windows. Colburn Dir. ¶ 17.
366.3. Downloading is not an effective alternative to the ISP/OLS or OEM
- Professor Fisher testified: "What is important is not whether users
can download a competitor's browser, but whether users will
download a competitor's browser under prevailing market
conditions." Fisher Dir. ¶ 220 (emphasis in original).
- The data sponsored by Brad Chase at trial indicate that
downloading is an increasingly ineffective distribution channel since
the number of downloaded browsers is stable while the number of
users continues to rise. GX 1845, GX 1846.
366.3.1. Downloading imposes a significant nonmonetary expense
upon end users, who must go through the time, energy, and effort to download
alternate software. This expense to end users translates into increased costs of
- After studying statistics showing that 66% of all people on
the Web have never downloaded a browser and that 60% of
all people have never downloaded anything off of the Web,
Kumar Mehta concluded: "my sense is that these people
are not very likely to download anything, let alone a browser
that takes 2 hours to download, from the web." GX 204.
- A Microsoft focus group report found that "despite the fact
that we repeatedly hammered home the message" that
users would get all the features of Internet Explorer for free
"if they downloaded it off the web," "this did not stick." The
author attributes this to the fact that "some do not like
downloads. They think it is clumsy and slow, and are afraid
of viruses." GX 202, at MS7 004346.
- In a March 1997 e-mail, Bob Foulon, based on the above
data, concluded: "since only 30% of internet users have
ever downloaded a new browser (they use what comes with
their pc or comes with their ISP sign up kit), the only real
chance IE has of getting them to switch is thru a new pc, an
OS upgrade or an new ISP kit." GX 736 (emphasis in
- Jonathan Roberts reported to Allchin that some users will ask,
when Internet Explorer is "integrated" into Windows, "why should
I bother downloading a new browser/switching/learning something
new," and will simply abandon Netscape and use Internet Explorer.
- Microsoft's Joe Belfiore testified: "There's tons of feedback that
suggest that downloading IE takes too long, is too hard. You can
go read pretty much any press reviews, just go talk to any people
or experience it yourself and you'll find that the number of hours
that it takes to download these components over a phone line is
incredibly discouraging to people, often fails, and the result is that
people don't get an improved user experience at all." Belfiore Dep.
(played 2/11/99am), at 39:17-24. Belfiore conceded that the same
phenomenon applies to people attempting to download Netscape
Communicator. Belfiore Dep., 1/13/99, at 345:16 - 346:15.
- See also Stork Dep., 1/13/99, at 760:23 - 762:3 (testifying
that preinstallation results in "fewer support calls, the least
time expended by the customer, the greatest satisfaction"
and that receiving the browser on physical media such as
CD-ROM and installing it "will be more desirable than
attempting to download over a phone line certainly");
Barksdale, 10/21/98am, at 69:18 - 70:1 (testifying that
downloading is not an effective channel because "today,
people who are less sophisticated or are newer users and
are not early adopters tend to use that method less because
it's more cumbersome and because they have other
avenues of getting the product now"); Fisher Dir. ¶ 217
("consumers pay in terms of time and trouble to download a
browser from the Internet"); Fisher Dir. ¶ 219 (based on
Microsoft's studies and Carl Stork's testimony, Fisher
concludes that users are unlikely to download browsers).
322.214.171.124. Many users encounter technical difficulties
before the long download process is completed or may not even know how to download
and install software in the first place.
- US West's Eric Bozich testified that the average
browser download time in a typical residential setting
is 45 minutes and in the "worst-case scenario" could
take hours. He stated "it is not common for a
download of that size to be successful the first time . .
. in the majority of our attempts . . . something goes
wrong, something happens, and you have to start
over." Bozich Dep., 1/13/99, at 122:9 - 124:9.
- Barksdale testified: "Downloading is not an effective
mass distribution mechanism today, because it takes a
substantial amount of time and users have to be fairly
sophisticated actually to download and install a browser. In
the early days, most Internet users were quite sophisticated
technically, and downloading a browser was feasible for
them. Today's new users are, by and large, much less
technically proficient, and the download process is
daunting." Barksdale Dir. ¶ 227.
- For a "large" number of users, Chase conceded, "it
would be cumbersome and not straightforward to try
and install [a] browser themselves." Chase,
2/11/99pm, at 16:17 - 17:2. Chase expressed this
view in an e-mail giving ideas for IE 5, where he wrote
that the set-up process for browser installation is "too
hard for users to figure out" and that only a little more
than half of the people who download actually
succeed in installing the software. Chase concluded:
"I think they don't figure out what to do once they
download the set-up stub." GX 214.
- Stork of Microsoft explained that a "setup process has
questions to answer and has the potential for errors,
especially if the customer has moved files or done
other strange things." Stork Dep., 1/13/99, at 761:24
- Chase also conceded that, in addition to the set-up
process being "cumbersome and not straightforward,"
a lot of problems can occur to interrupt the
downloading process, including losing the connection
and interruption in the phone line. Chase, 2/11/99am,
at 37:9 - 38:3.
- Stork also testified that downloading takes a long time
and often fails. Because installing software is
"complicated," Stork concluded that distribution
channels other than installation with the computer are
difficult and costly. For example, "the effort to
download IE 3 was painstaking, to be honest, and at
least partially fraught with risk if the phone connection
wasn't very reliable." Stork Dep., 1/13/99, at 760:10 -
366.3.2. Downloading has become increasingly difficult and time
consuming as browsers have increased in size.
- Belfiore testified: "A piece of customer feedback that we've heard
about downloading IE components from the web is that
downloading IE components today takes too long, it's too big,
there's too much stuff. So one of the principles, trying to make IE5
meet customer expectations and be easier for customers to install,
is to make it smaller and include less stuff." Belfiore Dep.,
1/13/99, at 345:4-15.
- Jones conceded that the size of the browser itself (in this
case Internet Explorer) is "certainly a blocker for some
people." This is because "The bigger things are, the harder they
are to go get to. It takes a lot of time, and depending on your
server, it can take a really long time to get things downloaded."
Jones Dep., 1/13/99, at 545:13-14, 20-25.
- Netscape is aware that "downloading today can take a long
time to complete" and "requires some level of computer
knowledge and sophistication." Barksdale Dir. ¶ 32.
- Disney, after assessing Internet Explorer 4.0 (which shipped
with the Active Desktop), also came to the conclusion that
the size of the browser makes downloading too time
consuming: "Finally, the download of IE is 11 MB at a
minimum. That means about 2 hours to a 28.8 modem user.
Until this thing ships in the box, I'm not sure how many home
users are going to download IE." GX 359.
- See also GX 214 (Chase wrote in November 1997, that
Internet Explorer had become "to [sic] big to download);
Warren-Boulton, 11/23/98 am, at 31:3-32:23 (recounting his
own "difficult" personal experience with downloading and
citing Microsoft's data showing that the percentage of people
obtaining their browser through downloads is "trending
steadily downwards . . . because it's becoming an
increasingly difficult way to acquire a browser").
366.3.3. Data about the supposed numbers of browsers
downloaded often include failed download and installation attempts.
- Although Microsoft quotes Barksdale as saying that 40
million customers have downloaded Netscape Navigator
during a 19 month period (Chase Dir. ¶ 167) Microsoft's own
data (cited right after the Barksdale quotation) show that
only a fraction of these 40 million "downloads" were
successful. Indeed, according to Microsoft's data, the
largest number of Navigator users who, at a given time had
attained their browser through downloading. Chase Dir. ¶
- Professor Fisher testified that he does not doubt Netscape
statistics that say it had "1.8 million downloads" but that "You
cannot tell from that how many were repeated attempts to
download the same thing. And you cannot tell from that how
many are downloads of upgrades" or how many are from
failures. Fisher, 6/3/99am, at 40:21 - 42:1.
366.4. Other distribution strategies are also demonstrably inferior to
seeking usage through the ISP/OLS and OEM channels.
- Netscape, for instance, distributes its products "to some extent
through ISVs, peripherals manufacturers, Value Added Resellers,
or VARs, systems integrators and possibly others." But the limited
success in these channels, Barksdale testified, "must be put in
context. Even a successful distribution arrangement with a
peripherals manufacturers [sic]-- say, for example, a printer
manufacturer -- will result in a very limited number of new browser
users and is not going to make up for being excluded from
distributing our product through the world's largest OEMs and
ISPs." Barksdale Dir. ¶ 229.
- Barksdale explained that "retail distribution of a free software
product is economically impractical." Barksdale Dir. ¶ 32. He also
testified that, compared to the OEM or ISP/OLS channels,
downloading and distributing browsers at retail are
disproportionately expensive and economically impractical.
Barksdale Dir. ¶¶ 227-228.
- Microsoft's Bill Veghte expected in January 1998 that "IE
marketshare gains" are "based primarily on Windows retail
business, Windows OEM business, and deals like the AOL one, not
the stand-alone retail product." This prediction was confirmed by
an Oct/Nov 1997 browser study which found that only 4% of users
obtained their browser in the mail or from a magazine and 2% of
users obtained their browser from a retail store. GX 219.
- Dean Schmalensee conceded that "retail was indeed a minor
distribution channel." Schmalensee Dir. App. D ¶ 36.
d. Microsoft's other exclusionary and predatory conduct
reinforced the impact of excluding Netscape from the
most important distribution channels
367. Microsoft's other predatory and exclusionary conduct magnified the impact
of its efforts to raise Netscape's costs to obtain usage through the most important
367.1. Microsoft's predatory pricing reinforced Microsoft's exclusionary
367.1.1. Microsoft's predatory pricing deprived Netscape of
revenues needed to compensate for the extent to which its costs had been increased.
- See supra Part V.G.1; ¶ 298.
367.1.2. Microsoft's predatory pricing improperly increased Internet
Explorer's share at rivals (in particular Netscape's) expense.
- See supra Part V.G.5.a; ¶ 307.
- Two Netscape accounts told Netscape in June 1996 that
they "would prefer to distribute Netscape," but were going to
distribute Internet Explorer because it was free. GX 1236.
- - redacted -
GX 828, at
MS98 0118367 (sealed).
367.2. Microsoft's other exclusionary agreements also magnified the
impact of Netscape's substantial exclusion from the ISP/OLS and OEM channels.
367.2.1. Microsoft's exclusionary agreement with Apple impeded
Netscape's ability to obtain and retain usage share on the Macintosh.
- See supra Part V.F,.
367.2.2. Microsoft's ICP agreements and First Wave agreements
served to exclude Netscape.
- See supra Part V.E; V.F.3; ¶ 295.
367.2.3. Microsoft's efforts to dissuade firms, such as Intel and
RealNetworks, from working with and supporting Netscape served to weaken Netscape
and hampered its ability to obtain usage.
- See supra Part V.F.
368. Microsoft's efforts to impede Netscape's ability to gain usage are magnified
by network efffects.
368.1. The impact of Microsoft's efforts to impede Netscape's ability to
gain usage through particular channels are mutually reinforcing; hindering rival
browsers reduces their attractiveness to customers and, hence, to firms that would
- Southwestern Bell (SBC) ultimately chose to distribute Netscape
Navigator, but only after assessing -- inaccurately, in retrospect --
whether Navigator would continue to achieve distribution through
important channels. Ray Solnik of SBC testified that, after having
made the decision to distribute Navigator with the expectation that
it would be included on a lot of OEM machines, SBC has been
disappointed. Netscape has been unable to get bundled on PCs
and to give SBC the distribution (through the Navigator referral
server) that SBC expected. Solnik Dep., 1/13/99, at 266:7 - 267:1.
- Professor Fisher testified that "Microsoft relied on its increasing
browser market share, and the expected continued increase due to
its practices, in trying to convince ICPs to abandon Netscape and
agree to Microsoft's exclusivity provisions. For example, Microsoft,
using forecasts from the Giga Information Group, told ICPs that its
browser share had increased from 20 percent to 45 percent from
1996 to 1997, and it would increase to 65 percent in 1998 and 75%
in 1999." Fisher Dir. ¶ 234 (referring to GX 208).
- Even the perception that Microsoft was challenging Netscape's
ability to compete in this market could discourage browser
customers and distributors from dealing with Netscape. Barksdale
testified, "Microsoft's comments about Netscape appeared
designed to create doubts about Netscape's ability to compete in
the market. Given the power that Microsoft, and in particular, Mr.
Gates, has in influencing the computer industry and analysts,
Microsoft's negative comments, as intended, directly affected
Netscape's ability to compete effectively. It was not a totally
uncommon event for a customer to question whether it made sense
to do business with Netscape because of Microsoft's public position
that it was going to crush Netscape's business." Barksdale Dir. ¶
368.2. Similarly, Microsoft's efforts to hinder Netscape in the consumer
segment of the market has impaired Netscape's overall competitive position because of
network effects; users tend to demand the same browser across market segments; for
this reason, browser share in one segment can influence share in others.
- See infra Part VII.B; ¶¶ 385-371.
- The ability of browser producers to obtain usage in one channel
impacts browser usage in other channels. For instance,
Netscape's model for generating demand for the browser from
business customers depended in part on the extent of Navigator's
use elsewhere. Warren-Boulton, 11/23/98am, at 37:24 - 38:6. Dr.
Warren-Boulton thus concluded, based on this and other evidence,
that "the most meaningful share to look at is the overall share in the
overall market." Warren-Boulton, 11/23/98am, at 75:10-22.
8. As a result of Microsoft's predatory and anticompetitive
conduct, Microsoft's share of browsers has risen dramatically
at rivals' (principally Netscape's) expense
369. During the period of Microsoft's predatory campaign, Internet Explorer's
share has dramatically increased, Netscape Navigator's has decreased, and no other
potential browser rival has materialized.
369.1. The AdKnowledge data show this dramatic reversal of browser
usage share, whether that share is measured in terms of stock or flow.
369.1.1. First, the AdKnowledge data show that Internet Explorer's
browser usage share of the entire installed base (or the "stock") has substantially
increased while Netscape's has declined.
- A summary of browser usage shares based on the
AdKnowledge data shows that Internet Explorer's share had
risen from 20% in January 1997 to 49% by August 1998.
During this same time period, Netscape's share fell from
77% to 48%. GX 4; GX 5; Warren-Boulton Dir. ¶146; Fisher
369.1.2. Second, the AdKnowledge data, together with other data,
show an even more dramatic increase for Internet Explorer, and decrease for Netscape,
when changes in the installed base ("flow") are considered.
3126.96.36.199. Dr. Warren-Boulton determined, using the
AdKnowledge data in conjunction with Microsoft's estimate of the "size of the Internet"
and the rate at which users switch brands of browsers, that Microsoft's share of new
browser installations (known as the "flow") has doubled and Netscape's has declined by
more than half.
- While Microsoft's share of new browser installations
increased from approximately 28% in the second
quarter of 1997 to approximately 60% in the third
quarter of 1998, Netscape's decreased from
approximately 70% to just over 30% in this same time
period. GX 261; GX 337; Warren-Boulton Dir. ¶¶
141-143; Warren-Boulton, 11/19/98am, at 17:14-25.
- Dr. Warren-Boulton explained: "The flow measure of
user market shares shows that Netscape's share of
new users has declined dramatically since the second
quarter of 1997 and is far less than its current 48
percent share of the installed base. Similarly, IE's
flow-based share has increased dramatically over the
same period, and is well above its stock-based share
of the installed base." Warren-Boulton Dir. ¶ 141.
3188.8.131.52. Using the AdKnowledge data, Professor Fisher
estimated that Microsoft's incremental share of browser usage is much higher than
- Professor Fisher testified that: "Incremental share of
browser usage is defined as the change in IE 'hits'
divided by the change in all 'hits.'" Fisher Dir. ¶ 233,
- Professor Fisher estimated that Microsoft's
incremental share of browser usage for the twenty
months between the first quarter of 1997 and the third
quarter of 1998 was 57%, compared to Netscape's
share of 40%. GX 6, GX 7 (summary tables of
AdKnowledge data); Fisher Dir. ¶ 233.
- This incremental share was the same regardless of
whether the incremental usage share was measured
as the change in usage from the first three months
(January - March 1997) to the last three months (June
- August 1998) or measured as the change in the
share of usage from the first month (Jan. 1997) to the
last month (Aug. 1998). GX 6; GX 7; Fisher Dir. ¶
- Microsoft calculated similar estimates of its
incremental share of browser users for the last six
months of 1997. According to Microsoft's own
documents, Internet Explorer has captured 57% of
the incremental users, while Netscape Navigator has
only 39% of incremental users. GX 8; Fisher Dir. ¶
369.1.3. Third, the AdKnowledge data, if anything, understate the
increase in Internet Explorer's share because of "caching." When corrected for
caching, the AdKnowledge data show Microsoft's share of usage as even higher.
- Adjusting for caching, the increase in Internet Explorer's
share, by August 1998, is about 5% higher than the
unadjusted increase. GX 1316.
- GX 5, which demonstrates the increase in Internet Explorer's
share and the decline in Netscape Navigator's share in the
twenty months from January 1997 through August 1998,
does not correct for caching and so underweighs AOL (the
most important OLS/ISP that caches). It therefore
underestimates Internet Explorer's increase in share by
approximately 5%. GX 5; GX 1316.
369.2. Microsoft's internal tracking of browser market share, and the
testimony of its witnesses, similarly show a dramatic increase in Internet Explorer's
share and a corresponding decrease in Netscape's.
- Microsoft's documents confirm that, as of February 1998, Internet
Explorer's "run rate" (the percentage of new Internet connections
that use a particular browser) was 62%. Microsoft projected that
Internet Explorer's run rate will increase to 70% for home users and
60% for work users by 2001. On the basis of these "run rates,"
Microsoft projected that Internet Explorer's share of the installed
base by 2001 will range from 59% (the "Low Case") to 67% (the
"High Case"). GX 14; GX 310; GX 711; Warren-Boulton Dir. ¶ 13;
Warren-Boulton ¶ 137; Warren-Boulton, 11/23/98am, at 53:18-54:12 (explaining Microsoft's definition of a "run rate.").
- By May 1998, Microsoft's internal estimate of Internet Explorer's
"run rate" among "Top Account" ISPs was 76%, as compared to
Netscape's share of 24%, and was expected to increase to
approximately 88% by December 31, 1998. GX 2 (graph based on
GX 173); GX 173; Fisher Dir. ¶ 233.
- In April 1998, Randy Haas reported to Yusef Mehdi that "IE share
figures," including AOL, stood at 48% based on survey data and
45% based on hit data. GX 713. This information led Mehdi to
conclude that "48 is a big number and implies that we have caught
Netscape (barring my seeing the other data). obviously this is huge
news that i want to deliver in the most impactful and timely way. In
addition there is some legal issues that i must synch with heiner
before doing any of this." GX 713.
- The data Brad Chase sponsored at trial show that Internet
Explorer's share of people reporting they used it as their primary
browser rose by almost 50% between just the first and third
quarters of 1998. Over the same period, Navigator's share
increased less than a third as much. GX 1845; GX 1846. Based
on these data, Professor Fisher explained that, for the first three
quarters of 1998, Internet Explorer's incremental share of new
browsers was more than 75%. Fisher, 6/1/99pm, at 53:18 - 54:21.
- See also GX 233 (May 1998 Microsoft marketing review reporting
that "IE has around 50% browser share" and is "gaining ground"
and that a "large portion of new users are using IE"); GX 495
(based on "millions of hits to popular sites," Kumar Mehta
summarized the changes in Internet Explorer's and Netscape
Navigator's shares. In January 1997, Internet Explorer's share was
24.2% while Netscape Navigator's was 67%. By November 1997,
the respective numbers were 36.3% and 55.2%); GX 708 (Mehta
reports in January 1998 that "IE has picked up another 2 points and
nav has dropped by a point and a half. All data sources I look at
are showing pretty decent IE gains").
- Cameron Myhrvold confirms that in early 1996 Internet Explorer's
"usage share hovered in the low single digits." Myhrvold Dir. ¶ 27.
Myhrvold also testified that in late 1995 and early 1996, Netscape's
share was "above 80%." Myrhvold Dir. ¶¶26-27.
- Brad Chase testified that as of January 1996, Internet Explorer's
market share was "around 5%" (Chase Dir. ¶ 27) and that it had
climbed to 52% as of January 1999. Chase Dir. ¶ 94.
369.3. Even the data Microsoft presented, although unreliable for
reasons discussed below, show a dramatic increase in Internet Explorer's share over
the relevant period.
- The MDC data show a dramatic increase in Internet Explorer's
share. According to those data, Microsoft's browser share
increased from 7% in the first quarter of 1996 to 21% in the first
quarter of 1997, and to 52% by the third quarter of 1998.
Schmalensee Dir. App. D, Fig. D-3.
- The wide range of sources showing similar trends in browser
market share led Professor Fisher to conclude that "regardless . . .
of how share is measured, it is clear that Microsoft's browser share
has increased dramatically, and Netscape's browser share has
fallen sharply, over the past two years." Fisher Dir. ¶ 232.
370. The substantial increase in Internet Explorer's share, and decrease in
Netscape's, is due to Microsoft's predatory campaign.
370.1. First, Internet Explorer's ascendency at Netscape and other rivals'
expense is the predictable result of Microsoft's efforts to raise rivals' costs and engage
- Professor Fisher testified: "There is a well recognized phenomenon
recognized in the economics literature called 'raising rivals' costs'
through which firms gain power. That's one way of describing
what's going on here." Fisher, 1/11/99pm, at 77:9 - 78:6.
370.2. Second, this is precisely the effect Microsoft expected its
exclusionary conduct and predatory pricing to have.
- See supra Part V.B.2.b; ¶¶ 121-125; Part V.B.2.d.(1); ¶129; Part
V.B.2.e.(1); ¶¶ 145-47; Part V.C.1.b.(1); ¶ 178.
370.3. Third, the ISP group analysis confirms that Microsoft's restrictions,
quite apart from Microsoft's other exclusionary conduct, had a substantial effect on
Internet Explorer's overall market share.
- See supra Part V.D.2.d; ¶¶ 221-223; Part V.D.4.b; ¶ 243.
370.4. Fourth, Netscape's share has remained higher in channels, and
among customers, that have been less affected by Microsoft's exclusionary and
predatory practices. The differences in Netscape's success in different channels and
among different customer groups confirms the impact of Microsoft's practices on
browser usage share.
370.4.1. Netscape's ability to maintain a higher share in the
enterprise market demonstrates the impact of Microsoft's exclusionary restrictions.
3184.108.40.206. Netscape maintained a higher browser share
than Internet Explorer longer in the enterprise segment, which was less susceptible to
Microsoft's anticompetitive conduct, than in the consumer segment.
- Most corporations can order their PCs preconfigured
with Windows 95, Windows 3.1 and other products.
They can order operating systems without an
"integrated" browser. Barksdale, 10/26/98pm, at
47:20 - 48:14. Indeed, some corporations have
continued to buy Windows 95 (and thereby forfeited
some technological advances in Windows 98)
precisely in order to avoid Internet Explorer and
standardize on Netscape Navigator. Weadock Dir.
¶1; Weadock Dir. ¶27; Weadock Dir. ¶40.
- Microsoft, during trial, pointed to an October 1998
Zona research report indicating that in 1998
Netscape's share was larger in the corporate market
than among home users. Approximately 60% of
corporate users surveyed by Zona used Netscape's
browser, and about 40% used Microsoft's. DX 60
(article on the October 1998 Zona report); DX 1867
(October 1998 Zona report).
- Dr. Warren-Boulton testified that the Zona survey was
consistent with his understanding that Netscape had
been least affected by Microsoft's practices in the
corporate network. "So to the extent that there's a
level playing field in terms of the quality of the
browser, you're probably looking at it as close as
we're going to get here. And what this shows is on a
relatively level playing field, the Netscape-IE split
seems to be about 60-40." Warren-Boulton,
11/23/98am, at 38:13 - 47:6.
3220.127.116.11. Netscape's ability to retain a higher share in this
less-constrained segment evidences that, absent Microsoft's efforts to exclude
Netscape, its share would be significantly higher.
- Barksdale testified that the Zona report "proves the
point I'm making in this whole complaint issue here,
where we have more access to the market, we are
doing much better than where we have been
estopped from half of the distribution channels." He is
"very proud of" the Zona report: "When we get to
compete head to head, we do pretty good."
Barksdale, 10/26/98pm, at 47:13-9.
- Dr. Warren-Boulton testified that the latest IDC data
(as of November 1998) show that "Netscape has had
a very large loss of market share in the browser
industry and has had the least effect -- and perhaps
even it's sort of breaking even -- in large businesses,
which is precisely the area in which it has the least
disadvantage because of what Microsoft is doing in
terms of its exclusive, you know, practices." He
concluded that "Netscape can still go over to a big
business and knock on the door and there's nobody
saying, 'you can't come in.'" Warren-Boulton,
11/23/98am, at 36:13 - 37:3.
318.104.22.168. Even Netscape's share in the enterprise market,
however, has been reduced as a result of, among other things, Microsoft's predatory
pricing, welding of the browser to the operating system, and network effects between
- The new Zona research study, from May 1999, shows
that Navigator's share has decreased among
enterprises. GX 2055 (Zona report). An article
summarizing the research reports: "Zona Research .
. . reports in its latest browser study that Microsoft's
Internet Explorer has widely surpassed Netscape's
Navigator as the primary browser in use in the
enterprise. . . . These results are in sharp contrast
with the company's October 1998 browser study
findings which showed Microsoft's IE trailing
Netscape's Navigator by twenty percentage points."
- Navigator's share is decreasing in the corporate
segment even though that is supposed to be "the part
of the business on which Netscape is concentrating
and might be expected to do best." Fisher, 6/1/99pm,
at 52:20-25. This led Professor Fisher to conclude
that Microsoft's actions continue to have an effect,
even in a place where Netscape might be expected to
do particularly well. Fisher, 6/1/99 pm, at 53:9-17.
- The October 1998 Zona report observed that the "84
percent of IE in use as the primary browser" is "due in
large part to the fact that IE 4.0 is an integral part of
Windows 98." DX 60
- Microsoft was also aware that its zero pricing of
Internet Explorer would eventually affect Navigator in
the corporate segment. Brad Chase, in an April 1996
planning memo, wrote that corporate browser
licensing is "one of the biggest potential revenue
opportunities for Netscape. . . we should have
absolute dominant browser share in the corporate
space." The sales team "must make it very clear that
it does not make sense" for these customers "to buy
Netscape Navigator." GX 39, at MS6 5005720.
370.4.2. Netscape maintained a higher share among other
segments and in other distribution channels not as immediately affected by Microsoft's
contracts and bundling.
- A Microsoft presentation reported that the educational
market was Microsoft's "weakest segment," with Internet
Explorer capturing only eight percent of users. GX 233, at
- An "Internet Explorer Marketing Plan Review" stated that
"business/Intranet share is lower than consumer share." GX
411, at MS6 6007075.
- Microsoft's own estimates of Internet Explorer's "run rate"
(share of new browser shipments) illustrated that Internet
Explorer fared much better with users who had received
their browser through constrained access providers. At year
end 1997, Microsoft (according to its own estimate) enjoyed
a 94 percent weighted average share of the browser
shipments by ISPs who agreed to make Internet Explorer
their default browser, compared with a 14 percent weighted
average share of the browser shipments by ISPs who did
not make Internet Explorer their default browser. Fisher Dir.
¶ 224. This distribution disparity between constrained and
unconstrained ISPs, of course, translated into severely
disparate browser usage rates, with Internet Explorer
enjoying a usage rate of over 60 percent at the end of 1997
among subscribers to constrained ISPs, and a rate of less
than 20 percent among subscribers of ISPs who had a free
choice of browsers. Fisher Dir. ¶ 224.
- Microsoft presentation slides showed that Netscape
Navigator outsells Internet Explorer by 1 million copies at
retail, while at the same time "Bundling with other MS s/w
helps IE." GX 415, at MSV 10551.
4. Microsoft's garnering of a substantial position in browsers
through its predatory and anticompetitive conduct has
succeeded in blunting the browser threat and maintaining its
operating system monopoly
371. Microsoft's garnering of a large share of Internet browsers through its
predatory campaign has further entrenched its dominant position in operating systems.
Because of Microsoft's large market share and Netscape's significantly reduced share,
neither Netscape nor any other browser rival has a realistic chance of inducing a large
set of developers to use its APIs, which is the key to reducing the applications barrier to
entry that protects Microsoft's operating system monopoly. Indeed, Microsoft believes
that, in this respect, the "browser battle" has been won.
- In January 1997, James Allchin wrote in an email to Paul Maritz that "You
see browser share as job 1. The real issue deals with not losing control of
the APIs on the client and not losing control of the end-user experience.
For Netscape, this is synonymous with winning the browser battle. That is
because they don't have Windows. We have an asset which has APIs
and control the end-user experience: Windows." GX 48.
- In February of 1998, Kumar Mehta told Brad Chase: "my PERSONAL
opinion is that the browser battle is close to over. We set out on this
mission 2 years ago to not let netscape dictate standards and control the
browser api's. All evidence today says that they don't." GX 515, at MS98
020313. Chase joked that with a projection that Microsoft would get
between 60 - 68 % browser share in three years, maybe he "should spend
less money on browser share marketing :)." GX 515, at MS98 020313;
- Professor Fisher referred to GX 515 in arguing that the maintenance of
Microsoft's operating system monopoly "does not require the complete
destruction of Netscape." Instead, "what's required for the preservation of
Microsoft's Windows monopoly or operating system monopoly, is that the
paradigm shift not take place, that Netscape not succeed sufficiently, that
the browser can grow into an alternate platform and, perhaps, for the
operating system. That's not the same as whether you have to eliminate
Netscape entirely. It means you have to be sufficiently big in the browser
business so that people don't have a serious incentive to go on and write
programs for Netscape browser APIs rather than for you." Professor
Fisher argues that Mehta's comments clearly show that "This is not a case
about the destruction of Netscape. This isn't a suit being brought by
Netscape. This is a case about the destruction of competition." Fisher,
1/11/99pm, at 57:15 - 58:20.
- At the time that Kumar Mehta reached his conclusion that the browser war
was over, Microsoft (according to its own browser share model) had less
than a 50% share of the browser market, and it was apparent that
Netscape was not approaching a zero share any time soon. Indeed,
Microsoft projected reaching only between a range of 60 - 68% share in
three years. GX 515, at MS98 0203010.
- In April 1998, Yusuf Mehdi wrote that a 48% share for Internet Explorer
was a "big number" that "implies that we have caught Netscape." He
recognized that this large Internet Explorer share carried with it "some
legal issues" that must be resolved with Microsoft's in-house counsel
before quoting browser share for the press. GX 713.
- Professor Fisher concluded that Microsoft has effectively thwarted the
browser threat to its monopoly power. He testified, "The real question is
not what's going to happen to Netscape or what has happened to
Netscape. It's the question of whether IE now has so many users or
Netscape so few, relatively few, that the threat to Microsoft's monopoly
that was presented by Netscape has effectively been thwarted. I believe
that's happened and Microsoft believes it's happened." Fisher, 1/7/99pm,
at 36:21 - 37:4.
- Dr. Warren-Boulton also concluded that Microsoft has "won" the browser
war in the sense that it has frustrated a cross-platform challenge. Warren-Boulton, 11/23/98am, at 82:3 - 84:24.
- Not even Dean Schmalensee believes that Netscape will offer "a
significant number of APIs sufficient to make it an attractive platform for
ISVs" in the future. Schmalensee, 1/21/99pm, at 68:8 - 69:21.
5. Dean Schmalensee's conclusion that Microsoft's predatory
and anticompetitive conduct neither materially hindered
browser rivals nor harmed competition is flawed and
372. Dean Schmalensee's (and other Microsoft witnesses') contention that
Microsoft's actions aimed at non-Microsoft browsers did not significantly harm
competition is based on a flawed understanding of the facts, unreliable data, and
fundamental misconceptions concerning how Microsoft's conduct maintains its
operating system monopoly power.
a. Dean Schmalensee improperly analyzes the impact of
Microsoft's predatory practices.
373. Dean Schmalensee's conclusion that Microsoft's conduct aimed at
Netscape did not, and could not, facilitate maintenance of its operating system
monopoly by hindering Netscape and other browser rivals is badly flawed.
373.1. First, Dean Schmalensee argues that Microsoft has not affected
the ability of Netscape's browser to threaten its operating system monopoly because
Netscape's browser still maintains a substantial share and an increasing total number of
users (Schmalensee Dir. ¶ 538). But this analysis is misconceived. Microsoft, as
explained, has maintained its operating system monopoly by denying to rivals the
browser market share that is necessary in order for them to offer an alternative platform
that is capable of eroding Microsoft's operating system monopoly. That Netscape
remains "viable" and the number of users using it (as is the case with all browsers) is
growing is beside the point.
- See supra Part VII.A.1.; ¶¶ 359-360.
373.2. Second, Dean Schmalensee is wrong when he argues that
whatever actions Microsoft took to harm competition in the browser market could not
maintain Microsoft's monopoly because there are many other threats to Microsoft's
operating system monopoly (Schmalensee Dir. ¶ 627).
373.2.1. Microsoft maintains its monopoly by reducing the
probability that the most likely threats will come to pass; that is precisely what is has
done in browsers.
- See supra Part V.G.1.; ¶ 298; Part II.B.3.b.(2); ¶ 27.
373.2.2. Microsoft, through its predatory conduct to thwart the
browser threat and its increasing control over standards, will gain a reputation as a
predator and deter other threats from arising.
- See infra Part VII.D.2-3; ¶¶ 402-403.
b. Dean Schmalensee's conclusion that Microsoft's
practices did not have a material impact on Netscape or
other browser rivals is unreliable because it rests on
flawed methodology and unreliable MDC survey data
374. Dean Schmalensee further argues that Microsoft's practices did not
significantly impact browser rivals because Netscape's share, he says, declined only
5% from early 1996 to late 1998 (Schmalensee Dir. Exec. Sum. ¶ 16; Schmalensee,
1/19/99pm, at 60:12-23). This argument is badly flawed.
374.1. First, Dean Schmalensee's focus on the decline in Netscape's
share over time (Schmalensee Dir. ¶ 538) does not properly capture the exclusionary
impact of Microsoft's practices.
374.1.1. Because Microsoft can maintain its monopoly simply by
denying rivals a substantial share of browsers, the actual decline in Netscape's share is
not itself important. What matters is whether Microsoft, by increasing Internet
Explorer's share or otherwise, prevents Netscape or another browser from itself
obtaining and maintaining a large enough share to become a viable alternative
- Professor Fisher testified: "This is a case about Microsoft's
protection of its monopoly in operating systems. And what
matters there is the degree to which Microsoft succeeded in
preventing the platform threat from materializing. For that
purpose, what matters is how successful IE was. It doesn't
matter, for that purpose, whether the remaining part of the
browser share was Netscape, someone else, or divided
among them." Fisher, 6/2/99am, at 17:18 - 18:8.
- See also supra Part VII.A.1; ¶ 359.
374.1.2. Considering this issue, even Dean Schmalensee's own
data demonstrate the same pattern as the plaintiffs': IE's share has increased
dramatically, and Microsoft has thus succeeded in denying to any potential browser
rival the ability to gain a very large share.
- Dean Schmalensee testified that Microsoft's share of users
of web-browsing software increased from 8 percent in the
second quarter of 1996 to 52 percent in the third quarter of
1998. Schmalensee Dir., Exec. Sum. ¶ 9 and Fig. E-1.
374.2. Second, Dean Schmalensee's analysis depends on the use of
survey data collected by a company called "Market Decision Corporation" (MDC). Dean
Schmalensee uses MDC data, among other purposes, to conclude:
- That Netscape's share fell only 5% from the first quarter of 1996
through the third quarter of 1998. Schmalensee Dir. Exec. Sum. ¶
16; Schmalensee Dir. ¶ 290.
- That rival's costs were not raised, because other distribution
channels are good substitutes for the OEM and ISP/OLS channels
and because these channels remained available to them.
Schmalensee Dir. ¶¶ 379-383; Schmalensee Dir. ¶¶ 389-392.
- That Netscape was not substantially excluded from ISPs with
whom Microsoft had restrictive contracts. DX 2758; Schmalense,
6/21/99pm, 18:6 - 20:14.
- That the number of Netscape browsers in use has dramatically
increased in the past several years. Schmalensee Dir. Exhibit C-2;
Schmalensee Dir. ¶ 219.
- That Internet Explorer's share of users increased from 8 percent in
the first quarter of 1996 to 52 percent in the third quarter of 1998,
and that Netsape's share declined because of increases in Internet
Explorer's quality. Schmalensee Dir. Exec. Sum. ¶ 9 & Fig. E-1,
¶ 24 & Fig. E-4; Schmalensee Dir. ¶¶ 288-289 & Fig. 4. See also
DX 2098, C-4 & C-5.
374.3. Dean Schmalensee's reliance on the MDC survey data is
misplaced. The MDC data measure the wrong thing, are themselves unreliable, and
were put to flawed and misleading uses by Microsoft.
(1) The MDC data measure only the number of users
of a primary browser
375. The MDC survey data measure the number of users of primary browsers,
rather than the usage of those browsers. As explained above, the appropriate measure
of competitive impact is usage, not simply number of browsers or users, because the
threat that software developers would write to an alternative platform depends on usage
of the platform. Dean Schmalensee's argument that measuring users is more
appropriate than measuring usage (Schmalensee Dir. ¶ 301; Schmalensee Dir. App. D
¶ 12) is thus wrong.
- See supra Part VII.A.1., ¶ 360.
- Dean Schmalensee repeatedly described his analyses of MDC data as
showing "share of use" -- for example, he titled Figure E-1 in his written
testimony "Microsoft's Share of Web-Browsing Software Use Increased as
Internet Explorer Improved" -- but in fact, and as he acknowledged
elsewhere, the MDC data measure only the number of users of browsers,
not the intensity of usage of those browsers. Schmalensee Dir. Exec.
Sum. Fig. E-1; Schmalensee Dir. ¶ 299.
- Even Dean Schmalensee recognized that usage affects development
standards (at least for Web-pages), and he stated that "if one were
interested in developing Web ads optimized for different types of
browsers, hit measures might be more appropriate than survey measures
of use." Schmalensee Dir. App. D ¶ 14.
- This is precisely why Microsoft, as Brad Chase testified, tracks usage.
See supra Part VII.A.1., ¶ 360.2.
- Professor Fisher concluded that developers will want to write applications
that will get used and therefore look to see what browsers are being used
in determining to which browser to write. Fisher, 6/1/99pm, at 20:17 -
(2) Survey data in general suffer from intrinsic
difficulties, including biased questioning and
methodology, that Dean Schmalensee did not take
care to avoid
376. The MDC data are survey data. Although well-designed surveys, carefully
used in appropriate circumstances, can sometimes inform economic analysis, surveys
inherently pose problems because they depend on respondents understanding, and
accurately answering, the questions posed. Moreover -- as the Microsoft survey on
which Dean Schmalensee relied demonstrates -- the questioner can manipulate the
376.1. Because surveys measure what people say they do, rather than
measuring directly what people actually do, surveys can be plagued by problems of
- William Svendson testified: "If you do market research long
enough, you cease to be surprised by any misinterpretation that
people - that someone could make . . . ." Svendson Dep. (read
6/1/99pm), at 32:12-16.
- Professor Fisher testified that survey data present a potential
problem "because they're what people say they did or what people
said they would do and not a measure directly of what people
actually do. And so, there is always a problem about how, to use
an old-fashioned term, valid surveys really are. Are they actually
measuring what they purport to measure?" Fisher, 6/1/99pm, at
376.2. Surveys can also be manipulated to provide biased and unreliable
answers, as Microsoft itself recognized.
- In February 1998, Kumar Mehta, representatives of Microsoft's
public relations firm, and Microsoft's internal public relations
employees exchanged a string of e-mails about "Browser in the
OS." As part of that email exchange, Ann Redmond, commenting
on whether a Microsoft survey it was "defensible," wrote:
"Overall its [sic] looks fine and could be quoted in our favor on the
issue, however . . . I wouldn't refer to it as unbiased, and wouldn't
refer to it as an opinion poll. An unbiased question would have
been more along the lines of : Based on what you know or
experience today, would you agree or disagree that a browser
integrated into the OS is beneficial to your business (or SW vendor
community or users). I would have then proceeded to state our
case and rationale for the broswer's [sic] integration and the value
to the developer and user and see if that improves their
agree/disagree on the same question. You could have captured
better understanding of what information you were providing
(various standard services of browser integration) that shifts their
agreement in our favor. What you have now is their response to
our rationale. Not entirely unbiased. It is also a complicated and
long question which can distort response -- I would avoid releasing
the Q. to the press." GX 666 (emphasis in original).
376.3. Dean Schmalensee's reliance on a survey Microsoft manipulated
to support Gates' testimony in front of Congress and Microsoft's legal position
(Schmalensee Dir. ¶ 285) illustrates the pitfalls of relying on survey data and
undermines the reliability of Dean Schmalensee's testimony.
- Microsoft manipulated the survey by not using the word "browser"
because the word "suggests a separate thing." GX 377.
- Gates, on February 14, 1998, sent an e-mail to Microsoft's senior
executives and in-house counsel discussing "Browser in the OS."
In that e-mail, he wrote that he wanted "to get a survey done where
ISVs declare whether they think having the browser in the
operating system the way we are planning to do it makes sense
and is good." Referring to his March 3, 1998, appearance in front
of the Senate, he wrote: "It would HELP ME IMMENSLY [sic] to
have a survey showing that 90% of developers believe that putting
the browser into the OS makes sense. I am sure we will get like
60% before we explain our plans. Once we explain our plans
properly I think we will get more like 90%." GX 377.
- Microsoft's Nathan Myhrvold responded: "It is a GREAT idea to get
as much quotable data as possible - both for Bill's testimony and
for other press work." By "quotable data," he included "Surveys we
can use." As to the survey, Myhrvold concluded that it was
"CRUCIAL" to make sure the "statement we ask people about in
the survey" is "worded properly." As an example, he wrote: "Saying
'put the browser in the OS' is already a statement that is prejudicial
to us. The name 'Browser' suggests a separate thing. I would
NOT phrase the survey, or other things only in terms of 'put the
browser in the OS.'" GX 377. Attached to these emails, as part of
GX 377, is a draft of the February 1998 survey questionaire entitled
"Impact of Browser Integration on the Software Industry."
- When shown the e-mails discussing the purpose and manipulation
of the survey, Dean Schmalensee testified that it did not "strike"
him as "insidious" that Gates would like evidence to support his
Senate testimony and that he did not find anything "insidious" about
Nathan Myhrvold's awareness that "the way you phrase a question
can influence the response." Schmalensee, 1/14/99pm, at 54:10 -
55:10. He went on to testify that, even if he had known the
purpose of the survey and had examined GX 377 which discusses
the wording of the survey, he still would have relied upon it
(Schmalensee, 1/14/99pm, at 57:17 - 59:11) even though he did
not "pursue the matter in depth" of whether it was a balanced,
unbiased survey (Schmalensee, 1/14/99pm, at 53:7-10) and even
though he is "not a survey expert." Schmalensee, 1/14/99pm, at
(3) The MDC data in particular cannot be relied upon
for the purposes for which Dean Schmalensee
377. The MDC data have particularly serious defects that make them unreliable
for the purposes for which they were used by Dean Schmalensee.
377.1. First, the MDC data, contrary to Dean Schmalensee's analysis
(Schmalensee Dir. Exec. Sum. ¶ 16), cannot be relied upon to demonstrate that
Netscape's share fell only 5%.
377.1.1. Dean Schmalensee's analysis depends on his estimate
that Netscape's share in the first quarter of 1996 was only 49%, and that estimate is
based on MDC survey data.
- He concluded, based on the MDC data, that Navigator's
share in the first quarter of 1996 was only 49%, and that
Navigator's share had declined only 5% between the first
quarter of 1996 and the third quarter of 1998 (when
Navigator's share was 44%). Schmalensee Dir. App. D. ¶
42 & Fig. D-3.
377.1.2. Dean Schmalensee's argument is inconsistent with the
testimony of Microsoft's other witnesses that Navigator's share has fallen drastically
during Microsoft's predatory campaign.
- Chase testified: "In early 1996, Microsoft needed the AOL
promotion because "Netscape Navigator had established a
commanding Web browsing software usage share of
approximately 80% to 90%, while Internet Explorer's usage
share languished around 5%." Chase Dir. ¶ 27.
- Myhrvold confirms Chase's testimony: "Netscape had a
usage share that was above 80%" before Microsoft
introduced the Internet Connection Wizard in 1996.
Myhrvold Dir. ¶ 27.
- Maritz gave the following testimony about Navigator's early
market share: "I do not believe however that Netscape
should have expected that the 80%-90% share of browsing
usage that it obtained almost overnight in late 1994 would
last forever." Maritz Dir. ¶ 62.
- Dean Schmalensee did not explore whether the MDC data
were consistent with Microsoft's witnesses' other testimony
or the statistics on which Microsoft relied in the ordinary
course of its business. Schmalensee, 1/19/99pm, at 64:19-25.
377.1.3. Dean Schmalensee's estimate is flawed because the
MDC data do not accurately estimate the number of Web browser users in the first
quarter of 1996.
322.214.171.124. The flaw in estimating browser shares in 1996
results from including in the browser share numbers AOL users who were not
accessing the Web and therefore not using an Internet browser to browse the Web.
AOL subscribers who remain within AOL and never access the Internet should not be
counted in the measure of browser market share.
- Professor Fisher testified that AOL users who "remain
within AOL and never access the Internet . . . should
not be counted" in determining browser market share
"because they're not generating the Internet usage
that developers will see." Fisher, 6/1/99pm, at 41:18-23; Fisher, 6/2/99pm, at 91:9-19.
- Dean Schmalensee understood that, in order for the
respondent to give a correct answer to the MDC
questions upon which Dean Schmalensee based his
browser share data, the respondent should not say
that he was using a browser if he was not on the Web
and was only accessing the AOL proprietary service.
Schmalensee, 1/19/99pm, at 85:14-21. He admitted
that a user accessing only AOL proprietary content
that "didn't claim to be part of the Net" should "not be
counted" as browsing: "It's not a browser."
Schmalensee, 1/19/99pm, at 86:6-21.
3126.96.36.199. Therefore, for the MDC survey data to be useful,
the users answering the questions -- in particular AOL users -- must be able to
distinguish when they are browsing the Internet from when they are not. But many AOL
users -- especially novice users that comprise a large proportion of AOL's subscriber
base -- do not know when they are accessing the Internet's World Wide Web (and
therefore using an Internet browser) or are accessing AOL's proprietary service (and
therefore are not using a browser).
- A December 1997 AOL study concluded: "The most
alarming fact discovered in the Novice group is that
most do not know the difference between being on
AOL and being on the Internet. Those Novice users
thought that once they signed on to AOL, they had
already accessed the Internet. Sometimes even
mistaking AOL channels for actual web sites. It's
evident that the Novice user will sign on to AOL,
browse through three AOL channels (never actually
visiting the World Wide Web) and think they have just
visited three different web sites." GX 1062 at p. 2
(AOL Web Browser Usability Test).
- Professor Fisher, after having examined the AOL
Web Browser Usability Test, concluded that it
provides "an example of how perfectly reasonable
questions asked of perfectly reasonable people lead
to mistaken results because the people don't, in fact,
know the right answers." Fisher, 6/4/99pm, at 19:24 -
- As further evidence that users are often confused
about whether they accessed the Web and how they
accessed the Web, 20% of total respondents to MDC
screening questions "said they has not accessed an
OLS 'such as American Online, Compuserve,
Prodigy, or the Microsoft Network' but reported using
one of the following OLSs to access the Internet." GX
2347A ("Internet Access Method Reported by MDC
Survey Respondents Who Claimed in Response to a
Prior Question that They Had Not Accessed an
3188.8.131.52. Correcting Dean Schmalensee's estimate of
Netscape's share of users in the first quarter of 1996, by using his own estimate of the
proportion of AOL users who browsed the Internet (as opposed to merely accessing
AOL's proprietary content), shows that Netscape's market share was substantially
higher than 49% -- in fact, on the order of 65%. Accordingly, Dean Schmalensee's
conclusion that Netscape's share fell only 5% is wrong; it actually fell closer to 20%
(from 65% in 1996 to 45% in 1998).
- Professor Fisher was able to make this correction by
using data contained in Dean Schmalensee's
testimony. Dean Schmalensee testified that, for
some quarters in 1996 (including the first quarter),
only about 11% of AOL subscribers accessed the
Internet. Schmalensee Dir. D-54 n.7; Fisher,
6/1/99pm, at 42:13 - 43:20.
- Using Dean Schmalensee's figure, Professor Fisher
determined that the MDC data overweighted AOL
users, a large number of whom reported using
"AOL's" browser. Fisher, 6/1/99pm, at 42:13 - 43:20.
- This correction, depicted in GX 1956, shows that
Dean Scmalensee greatly underestimated Navigator's
share as of the first quarter of 1996. Fisher,
6/1/99pm, at 40:8 - 41:4. Taking into account Dean
Schmalensee's error, and separating from the data
set those AOL users who did not access the Web,
Navigator's share declined from "something on the
order of 65 percent to 45 percent, a considerably
bigger amount." Fisher, 6/1/99pm, at 40:8 - 41:4.
3184.108.40.206. Dean Schmalensee's assertion that the MDC
data sufficiently screened out users who did not understand the questions
(Schmalensee, 6/21/99pm, at 23:21 - 27:13) is flawed and, in any event, unsupported
by any evidence.
- Dean Schmalensee's only effort to challenge GX
1956, which shows a sharp decrease in Navigator's
share during Microsoft's predatory campaign after
correcting for the AOL users who never accessed the
Internet with a browser, was to point to a screening
question in the MDC surveys. The screening
question asks whether users had accessed the
Internet in the past two weeks. Schmalensee,
6/21/99pm, at 25:8 - 26:12; GX 2084 (March 1996
MDC survey); DX 2552 (August 1996 MDC survey).
- However, Dean Schmalensee never addressed the
issue whether the respondents properly answered the
screening question. To answer this question, Dean
Schmalensee would have had to -- but did not -- rebut
the evidence that AOL users are confused about
whether or not they are on the Internet and, therefore,
are not likely to answer the MDC screening question
correctly. GX 1062.
- When asked whether he "had any basis" to conclude
that the March 1996 survey (upon which the first
quarter 1996 results were based) included users who
never went to the Internet but who would have been
screened out by later MDC surveys, Dean
Schmalensee merely testified that he is "not a survey
design expert," and that he could not "stare" at the
screening questions to determine "whether there
would be an effect or big effect." Schmalensee,
6/21/99pm, at 25:13 - 26:12.
377.2. Second, Dean Schmalensee relied upon the MDC data to
conclude that Microsoft's restrictive agreements with ISPs and OLSs did not have
significant impact on Netscape's ability to gain users through the ISP channel. That
conclusion, too, is unreliable.
377.2.1. The MDC data about how users access the Internet
critically underlie Dean Schmalensee's and Brad Chase's assertions (Chase Dir. ¶ 176;
Chase Dir. ¶ 180; Chase Dir. ¶¶ 182-83) that Microsoft's conduct did not have a
significant impact in the ISP/OLS channel.
- Dean Schmalensee presented an exhibit entitled
"Netscape's Share Among ISP Subscribers Has Remained
High." This exhibit represented that Netscape's share
among all ISP subscribers remains at 59% (as of May 1999)
and that, among those subscribers who obtained their
browser from their ISP, Netscape's share was 69%. DX
2758. The exhibit is based on a "subset of the data that
relates to those individuals who identified themselves as ISP
subscribers. So, in particular for this purpose, subscribers to
AOL and other online services were excluded, since I
wanted to focus on the restrictive ISP agreements for the
purposes of this study." Schmalensee, 6/21/99pm, at 16:16 -
- Similarly, Brad Chase's contention that 22 percent of AOL
users employed Navigator in the third quarter of 1998 relies
upon the MDC survey. Chase, 2/16/99am, at 52:2-9.
377.2.2. This use of the MDC data depends on users accurately
answering questions concerning how they access the Internet. But the MDC data
themselves demonstrate that respondents do not answer such questions consistently,
thus undermining both the reliability of the data and the conclusions Dean
Schmalensee drew from them.
3220.127.116.11. According to the MDC data, 20% of respondents
gave answers concerning how they access the Internet that make no sense. These
respondents said both that they had not "connected to an online service" and that they
had "accessed the Internet" through an online service.
- From August 1996 through August 1997, the MDC
surveys asked a series of screening questions to
determine which respondents should be given the
- Among the screening questions appeared the
following: "In the past two weeks, have you,
or has anyone in your household connected to
an online service such as American Online,
Compuserve, Prodigy, or the Microsoft
Network?" DX 2552, at Question S8A.
- This question was followed by the question:
"In the past two weeks, have you, or has
anyone in your household accessed the
Internet or World Wide Web?" DX 2552, at
- In addition, the surveys after December 1996
asked separately for home, work, and school
whether the respondent had accessed the
Internet from that location in the past two
weeks. GX 2347A.
- If the respondent said she had accessed the
Internet in the past two weeks, the survey
continued. If not, it was terminated.
- Once the respondent had said that she had
accessed the Internet in the past two weeks,
the respondent was asked, "The last time you
connected to the Internet or the World Wide
Web, either from home or from work, which if
any, of the following online services or Internet
access providers did you use?" The user was
then prompted with a list of choices that
included, among others, America Online,
Compuserve, Prodigy, and the Microsoft
Network. DX 2552, at Question 1.
- Of those respondents who initially reported that they
had not "connected to an online service" (i.e. who
answered "no" to question S8A) but said they
"accessed the Internet" (i.e. who answered "yes" to
Question S8B), 20 percent later responded to
Question 1 by saying that they used an online service
to connect to the Internet. GX 2347A.
- Dean Schmalensee confirmed the accuracy of the
data represented by GX 2347A and conceded that
the responses appear to be inconsistent.
Schmalensee, 6/24/99am, at 9:2-3.
318.104.22.168. Dean Schmalensee's attempt to minimize the
implications of the inconsistent responses is unsound.
- Dean Schmalensee's explanation of this
inconsistency boils down to the contention that it is
"plausible" that, in answering the first screening
question ("In the past two weeks, have you, or has
anyone in your household connected to an online
service such as American Online, Compuserve,
Prodigy, or the Microsoft Network?"), individuals were
distinguishing between accessing the proprietary
content on an online service and using that online
service as an ISP to access the Internet.
Schmalensee, 6/24/99am, at 9:8 - 10:5.
- This explanation, however, assumes that AOL users
are able to distinguish between using the proprietary
portion of the AOL service and the Web. That is not
the case. See supra Part VII.A.5.b.(3); ¶ 377.1.3.
377.3. Third, Dean Schmalensee relied on a question in the MDC data about
where users acquired their browser to conclude that Microsoft's conduct neither
significantly raised Netscape's costs nor materially excluded Netscape from the most
efficient browser distribution channels. But reliance on the MDC data for these
conclusions was similarly flawed.
377.3.1. Dean Schmalensee heavily relied on MDC responses to
questions asking users how they acquired their browser to draw a number of
conclusions critical to his analysis.
- Exhibit C3, allegedly showing that AIncreasing Number of Users
Have Obtained Netscape's through Allegedly Foreclosed
Channels," requires that respondents correctly answer the browser
acquisition question. DX 2098, C3.
- Dean Schmalensee relied upon the browser acquisition question to
determine the number of Internet Explorer browsers obtained
through the download channel after the release of Internet Explorer
3.0 and to conclude that this number increased dramatically.
Schmalensee Dir. ¶ 292; Schmalensee Dir. Tbl. 8.
- Dean Schmalensee's conclusion that "the highest rate of growth
was in the distribution channels from which, under the theory
advanced by Professor Fisher and Dr. Warren-Boulton, Netscape
was most thoroughly excluded@ depends upon the browser
acquisition question. Schmalensee Dir ¶¶ 382-83; Schmalensee
Dir. Fig. 6.
- Dean Schmalensee's conclusion that the MDC data show that Athe
number of Netscape main browsers" obtained with the user's
computer "has grown dramatically@ depends upon the browser
acquisition question. Schmalensee Dir. ¶ 389; Schmalensee Dir.
- Dean Schmalensee's conclusion that downloading is still an
important distribution channel and that the MDC data provides
additional evidence of Internet Explorer 4.0's quality relative to
Netscape Navigator crucially depends the browser acquisition
question. Schmalensee Dir ¶ 391; Schmalensee Dir. Fig. 8.
- The estimates made by Dean Schmalensee in Appendix D of his
written testimony of the number of Amain browsers@ acquired
through various distribution channels require that
respondents actually remember and/or are able to identify
how they acquired their browsers. Schmalensee Dir. App.
- Dean Schmalensee's testimony that Microsoft's restrictive
agreements with ISPs did not appear to affect Netscape's
ability to distribute its browser through the ISP channel relies
upon the browser acquisition question. Schmalensee,
6/21/99pm, at 16:7 -20:14; DX 2758.
- See also DX 2290 (purporting to show the large number of
Netscape users who obtained their browser with their
computer); DX 2489 (extending DX 2290 to 1st quarter
1999); DX 2761 (extending DX 2290 to 2d quarter 1999); DX
377.3.2. Reliance on the MDC data for these conclusions,
however, is misplaced for at least five reasons.
322.214.171.124. First, the poorly-worded survey questions upon
which Dean Schmalensee relied to determine how users obtain their browser can have
multiple "correct" answers; the answers therefore cannot be relied upon for inferences
about the impact of Microsoft's practices on Netscape's ability to gain users through
particular distribution channels.
- The MDC survey question upon which Dean
Schmalensee relies to determine how a user obtained
his/her browser is "Where did you obtain that
browser?" It first appeared as Question 2a in the
April-June 1996 MDC surveys. GX 2506. The
question, labeled Q6, was identically worded in the
July - August 1996 surveys. DX 2552. Except for the
September 1996 survey, GX 2507, this question was
identically worded in all subsequent MDC surveys.(5)
- The survey taker does not prompt the respondent for
answer; rather, the survey script lists the following
categories from which the respondent can choose:
"Came with my computer," "Came with subscription to
AOL, COMPUSERVE, PRODIGY, etc.," "Downloaded
it," "Came in the mail or in a magazine," "Retail store,"
"Gift/ from a friend/ relative/ co-worker," "Got it at
work," "Other Specify," and "Don't Know." DX
- Professor Fisher testified that, based on these answer
choices, a user could "perfectly well have had IE with
his computer but believed he got it downloading from
AOL because he subscribed to AOL." This confusion
about the proper answer choice, he concluded, is a
"serious problem" with this survey. Fisher, 6/1/99pm,
- In response to a question about some Oct/Nov. 1997
MDC survey results on the issue of how people
acquired their browser, Microsoft's Bill Veghte wrote:
"Let me be more specific, I buy a new PC and want to
get connected to the Internet. As a result, I sign up
for AOL by going to the Online Services Folder or
ICW. Is that a function of Windows preinstallation of
online service? In this context, I would say it is a
function of Windows because this a bundle deal with
Windows not AOL out drumming up business with
direct mail pieces. This is an important distinction
when we think about how our browser share is
generated. We should understand how that number
was generated." GX 219.
- William Svendson, who works for MDC,
acknowledged this confusion. In response to a
deposition question about the proper response to the
"Where did you obtain that browser?" question, he
agreed that a user who actually received Internet
Explorer with his computer might believe that he had
downloaded it if the browser pops up after America
Online asks him: "Do you want the Internet."
"And, I mean, who knows? Any time you got
somebody that doesn't really know what the answer is
and they're just guessing -- I mean, you're describing
a situation where somebody -- where the proper
response to the question is 'Don't Know,' but they're
taking a guess as to what they think it was."
Svendson concluded that "rather than saying 'I Don't
Know,' they're trying to be helpful." Therefore, users
will try to tell MDC "how they think they got it." This
means that, if "they just say 'I just downloaded it,' it's
just going to go in, boom, to code 13." Svendson
Dep., (read 6/1/99pm), at 31:15 - 33:9.
- Professor Fisher concluded that Svendson was
"describing fairly clearly one of the problems, or a
basic problem with this kind of survey or their survey
in particular" -- that in connection with the question of
where the user got his browser, "the user may not, in
fact, know or that user may guess one answer
applies, when, in fact, it could be another." Fisher,
6/1/99pm, at 33:12-17. For instance, Professor
Fisher explained, a user who signed up to an ISP or
an OLS during the initial boot procedure of a
computer that has Windows 98 as its operating
system may believe that the Internet Explorer browser
was downloaded onto the computer from the ISP
when in reality it comes bundled with the Windows 98
operating system. Fisher, 6/1/99pm, at 36:20 - 37:6.
- Professor Fisher concluded that "the taker of the
survey is well-aware of the proposition that the
respondents may, in fact, be confused in answering
certain of the questions . . . and the survey taker
doesn't attempt to correct for that." Fisher, 6/1/99pm,
3126.96.36.199. Second, the reliability of the answers to the MDC
surveys is questionable because respondents may not remember how they acquired
their browser or may not be the person in the household who acquired the browser.
- Dean Schmalensee testified: "The questionnaires
were carefully designed, focusing on browser use in
the past two weeks to minimize the problems
respondents may have in recalling their actions over
longer periods." Schmalensee Dir. App. D ¶ 29.
- But the browser acquisition question asks users to
remember where they acquired their browser over a
much longer period than two weeks. Professor Fisher
testified that the MDC in fact asks "questions about
how they acquired their browser, and those are
events that happened typically well over two weeks
ago and may, in fact, be a failure of memory." Fisher,
6/1/99pm, at 27:12 - 27:19.
- Furthermore, the questions are asked of the "head of
household." Fisher, 6/1/99pm, at 27:12-19. This
person "may not be able to give accurate information
about which browsers are in use or where they were
obtained from." Fisher, 6/1/99pm, at 28:12-16.
3188.8.131.52. Third, Dean Schmalensee's reliance on the MDC
survey data to determine how users acquired their browser is also unwarranted
because Microsoft was aware that the survey questions were confusing and could lead
to unreliable results but nonetheless continued to rely on the surveys.
- Roper-Starch, another firm that Microsoft used from
August 1997 through January of 1998, asked the very
same browser acquisition source question as the
MDC surveys. Roper-Starch's Question 7 was
phrased just like the MDC question -- "Where did you
obtain that browser?" -- with virtually the same
answer choices as the MDC surveys. See, e.g., GX
2372, GX 2500, GX 2505, GX 2504, GX 2503, GX
2502, GX 2501 (Roper-Starch Browser Tracking
- In response to an email from Kumar Mehta, Roper-Starch explained several problems caused by the
wording of question 7:(6)
"John and I have been talking further about question
7. We think the issue relates to the question wording:
'How did you obtain that browser?' Some people are
interpreting the question as being WHERE they got it;
others HOW they got it; still others, FROM WHOM did
you get it. A person who got the AOL browser could
answer 'came with my AOL subscription' or they
could answer 'came in the mail' or 'got it at work' if
they copied and AOL workplace program" or they
could even have 'downloaded it" if they were
upgrading from an earlier AOL program. They might
also have had it built into their computer. [sic]
Hence we've got an apples and oranges here--different frames of reference, depending on the
We recommend that the question be re-written to
prompt only for those mutually exclusive categories
that we care about--it was on the computer when
purchased, it was downloaded, bought it with my
operating system, or got it some other way." GX
- An examination of the MDC survey questions shows
that, despite this recommendation from one of their
survey firms, Microsoft never had the question re-written. See supra Part VII.A.5.b.(3), ¶ 3184.108.40.206.
- In deciding which survey firm to use for purposes of
supporting Microsoft's case, NERA and Microsoft
decided to stay with MDC. GX 2025.
3220.127.116.11. Fourth, reliance on the MDC data to determine
the impact of Microsoft's predatory and exclusionary conduct is flawed because the
surveys permit users to give answers that actually avoid determining the channel
through which the browser was distributed.
- The MDC survey includes "work/school" as a method
by which users obtain their browsers. See
Schmalensee Dir. App. D Tbls D-14, D-15, D-16.
Dean Schmalensee describes "work/school" as a
"Method of Distribution." Schmalensee Dir. Appendix
D, ¶ 36.
- But "Work/school" is not a channel of distribution.
Professor Fisher explained: "Sometimes MDC
answers include a moderately large number of people
that so say 'I got it at work,' but you don't know how
the workplace got it or, as the case might be, how the
school got it. So that doesn't help a lot." Fisher,
6/1/99pm, at 35:1 - 35:12.
- These browsers listed as having come from
"Work/school" could have come from any number of
channels, including with the user's computer or with a
Windows 95 or Windows 98 upgrade. Fisher,
6/1/99pm, at 35:21 - 36:1.
318.104.22.168. Fifth, that reliance on the MDC data to determine
how users obtained their browsers is misplaced is illustrated by the wholly illogical
results that the data set produces. The MDC data, for instance, report that fewer than
20% of Windows 98 users who use Internet Explorer 4 say they got Internet Explorer 4
with their computer, despite the fact that every Windows 98 user received Internet
Explorer 4 with Windows 98 as a consequence of Microsoft's tying arrangement.
- GX 1957, a tabulation of the answers of Windows
98/IE4 users to the MDC browser acquisition source
survey question for the third quarter of 1998, presents
the percentage of respondents who gave the different
answer choices. Fisher, 6/1/99pm, at 34:21-25.
Because Windows 98 was released in the summer of
1998, Professor Fisher had available to him MDC
data on the responses of Windows 98 users only from
that quarter. Fisher, 6/1/99pm, at 47:18-22 (counsel's
- According to GX 1957, fewer than 20% of Windows
98 users who use Internet Explorer 4 say Internet
Explorer 4 came with their computer. GX 1957.
- Approximately 40% of the Windows 98 / Internet
Explorer 4 users listed "download" and "came with
ISP/OLS subscription" as their browser acquisition
source. GX 1957. Therefore, even eliminating all of
the users who listed "other" as their browser
acquisition source (which was around 40% of the
respondents), less than 60% of the respondents gave
answers that are consistent with the proposition that
everybody who gets Windows 98 got Internet
Explorer 4 with it. Fisher, 6/1/99pm, at 34:21 - 37:9.
377.4. Fourth, Microsoft has two survey data sets, covering the same time frame
and asking the same questions, with inconsistent results. There are statistically
significant differences between the Roper-Starch survey data, a data set Microsoft and
Dean Schmalensee's consulting firm (NERA) considered using but specifically declined
to use in this case, and the MDC survey data. The existence of statistically significantly
inconsistent data demonstrates the unreliability of survey data such as the MDC data
on which Dean Schmalensee relied.
- Professor Fisher testified that the Roper-Starch survey data, which
Microsoft specifically declined to use, reported results that were
"statistically significantly different from the MDC data." Fisher, 6/1/99pm,
at 27:1-7; GX 2025.
- Dean Schmalensee did not examine the Roper-Starch data set. Indeed,
when handed the results of a Roper-Starch browser tracking study, GX
2372, Dean Schmalensee confirmed he had never seen it before and had
not discussed it with anyone. Schmalensee, 6/24/99am, at 52:23 - 53:13.
He added: "We examined, of course, whether the Roper-Starch data
were in line with the MDC data. And for the key issue, the Netscape
share, they're very close, where comparisons can be made."
Schmalensee, 6/23/99pm, at 8:14-17. Dean Schmalensee conceded,
however: "For smaller questions where the sample sizes are smaller,
there may well be differences between Roper-Starch and MDC where
comparisons are possible." Schmalensee, 6/23/99pm, at 8:22 - 9:3.
- Nevertheless, Dean Schmalensee relied upon the MDC data for much
more than Netscape's decline in share. To take one example, Dean
Schmalensee used the MDC data to form conclusions about where users
acquired their browser and about the share of Navigator users among
ISPs. See DX 2290; DX 2761; DX 2805 ("The Number of Main Browsers
in Use Acquired with Computer" (plotted separately for Netscape and
Internet Explorer)); DX 2758 (Netscape's share among individuals who
access the Internet using an ISP); DX 2758 (Netscape's share among
individuals who access the Internet using an ISP and acquired their
browser with their subscription); DX 2098, C3 (Increasing Numbers of
Users Have Obtained Netscape's Web-Browsing Software Through
Allegedly Foreclosed Channels (i.e., with computers and with
subscription); Schmalensee Dir. Tbl. D-15 (How Internet Explorer Users
Obtained Their Copies); Schmalensee Dir. Tbl. D-16 (How Netscape
Users Obtained Their Copies).
(4) Dean Schmalensee presented the MDC data in a
378. Dean Schmalensee not only improperly relied on the MDC data, but also
presented the data in a misleading form. In particular, his exhibits graphically present a
stock-based measure of the data to look as if it were the flow of new users (without, in
some cases, specifying that the exhibit depicts answers about the installed base).
Dean Schmalensee's exhibits thus understate the competitive impact of Microsoft's
- DX 2290 is misleading. Dean Schmalensee presented an exhibit
entitled "Number of Browsers Obtained with Computer" that shows the
number of Netscape Navigator's and Internet Explorer's in the installed
base of browsers that were acquired with the user's computer. DX 2290.
But the exhibit never states it is a measure of the installed base. The
design of the exhibit makes it appear as though it shows the actual
number of browsers distributed during each quarter. Professor Fisher
pointed out: "It says 'Number of Main Browsers Obtained with Computer'
and if you looked at the chart and thought no more about it, you would
think that this was, for each other quarter, the number of main browsers
obtained with the computer in that quarter. That is not, in fact, what it is at
all." Moreover, the exhibit connects the installed base measurements with
a line, which implies that it is measuring the numbers of users who said
they had obtained their browser with their computers in those quarters.
Professor Fisher "can know of no purpose for connecting the dots on this
thing other than to suggest to the eye that this is what's going on in each
quarter, and it absolutely is not." Fisher, 6/1/99pm, at 44:2 - 45:6.
Professor Fisher concluded that the exhibit "seems to me to be very
misleading." Fisher, 6/1/99pm, at 44:25 - 45:6.
- Figure 6 is misleading. Similarly, in Figure 6 Dean Schmalensee again
presented MDC data on how users of the installed base of Navigator
users (covering all Navigator users, regardless which version of Navigator
or when the browser was acquired) said they acquired their browser. The
figure displays a bar graph that shows the number of Netscape browsers
in the second quarter of 1996 and the third quarter of 1998 and how users
acquired those browsers. Schmalensee Dir. 196 (Figure 6). The figure
does not indicate that the data presented is of the stock of users. Instead,
it presents the data as if these Navigator users had acquired their browser
through the various distribution channels during the second quarter of
1996 and third quarter of 1998, respectively.
- DX 2489 is misleading. DX 2489 extends the analysis, presented in DX
2290, of the number of survey respondents who said they obtained their
main browsers with their computer. Although, unlike DX 2290, DX 2489
mentions in a footnote that the estimates are based on the stock of
browsers (Fisher, 6/3/99pm, at 36:17-23), it still presents the data as if it
were the number of people who obtained Navigator through their
computers during each period. Professor Fisher had trouble looking at
DX 2489 because, as he explained it, "One has to remember that this is
not the number of people who obtained it each period. It's the total
number of people who say they obtained it ever." Fisher, 6/3/99pm, at
36:17-24. Furthermore, he testified, because the graph displays the stock
of browsers and not the flow, it's unsurprising that the line rises in the
graph. Fisher, 6/3/99pm, at 36:20 - 37:12 ("That is a number which one,
generally speaking, expects to rise.").
- DX 2761 and DX 2805 are similarly misleading. DX 2761 and DX 2805
extend the above analysis to the second quarter of 1999. Although they
too (unlike DX 2290) note in footnotes that the estimates relate to the
stock of browsers and not to the number of new browsers, the data are
again presented in such a way to look as if they depict the number of new
browsers obtained during each quarter with computers.
(5) Dean Schmalensee compounded the flaws in the
MDC survey data by improperly combining them
with other data
379. Apart from the flaws in the MDC data themselves and Dean
Schmalensee's misleading presentation of it, Dean Schmalensee further compounded
the problems with his analysis by improperly combining the MDC data with data from
379.1. Dean Schmalensee bases significant exhibits and arguments on
this combination of data.
- Exhibits Dean Schmalensee bases on this combination of data
include DX 2098, C2 (asserting that the number of Netscape users
has "more Than Doubled in Less Than Three Years."); DX 2092,
C3 ("Increasing Number of Users Have Obtained Netscape's
Browser through Allegedly Foreclosed Channels."); DX 2290
("Number of Browsers Obtained with Computer"; see supra Part
VII.A.5.b.(4), ¶ 378); DX 2489 (extending DX 2290 to the 1st
quarter of 1999); DX 2761; DX 2805 (same for 2d quarter 1999).
- Dean Schmalensee uses the combination of Dataquest and MDC
data to conclude: "Despite the small decline in its share of the total,
the number of Netscape browsers in use have more than tripled in
the past 2.5 years." Schmalensee Dir. ¶ 291.
- Dean Schmalensee uses this combination of data sources to
conclude that the number of Internet Explorer's obtained through
the download channel after the release of Internet Explorer 3.0
increased dramatically. Schmalensee Dir. ¶ 292 & Tbl. 8.
- Dean Schmalensee uses this combination of data sources to
conclude that there was "an annual growth rate of just over 60
percent" in the number of Netscape users from the second quarter
of 1996 through the first quarter of 1998. Schmalensee Dir. ¶ 379.
- Dean Schmalensee uses this combination of data sources to
examine the number of "main browsers" obtained with computers.
He argues that these data show that "the number of Netscape main
browsers obtained this way has grown dramatically." Schmalensee
Dir. ¶ 389 & Fig. 7.
- Dean Schmalensee uses this combination of data sources to
conclude that "the highest rate of growth was in the distribution
channels from which, under the theory advanced by Professor
Fisher and Dr. Warren-Boulton, Netscape was most throughly
excluded." Schmalensee Dir. ¶¶ 382-83 & Fig. 6.
- Dean Schmalensee uses this combination of data sources to
conclude that downloading is still an important distribution channel.
Schmalensee Dir. ¶ 390 & Fig. 8.
- Dean Schmalensee uses this combination of data sources to
conclude that Microsoft's success "has not prevented Netscape
from developing a competing software platform," based on
estimates that there are more than 28 million uses of Netscape's
browser. Schmalensee Dir. ¶ 633.
379.2. The above conclusions and exhibits are based on unreliable
population estimates and, in particular, a likely overestimate of the number of "Main
Browsers" in use.
379.2.1. The unreliability results from the combination of MDC
and Dataquest data. MDC and Dataquest have two different units of measure.
Therefore, multiplying the MDC unit of measure (number of users who responded to the
MDC survey) by the Dataquest unit of measure (number of desktop computers in North
America) does not, as Dean Schmalensee implicitly assumes, provide information from
which to make inferences based on the number of "Main Browsers" in use.
- MDC surveys browser information from the "head of
household," which is a measure of one person per home
who says he uses a particular browser. DX 2522; GX 2084;
GX 2506; GX 2507; GX 2508; GX 2509; GX 2510; GX 2511;
GX 2512; GX 2513; GX 2514; GX 2515 (MDC surveys
asking to speak to the head of household).
- Dataquest estimates "Internet Size" based on the "number of
desktop computers in North America used to access the
Internet on a regular basis (at least once every two weeks)."
Schmalensee Dir., App. D, Tbl. D-2.
- Professor Fisher testified that different members of the
household may use different browsers. Therefore, it is
impossible to make reliable inferences, as Dean
Schmalensee attempts, about browser population numbers
by multiplying these two units of measure: "Assuming for
the moment that I am the head of the household, the fact
that I happen to use, principally, a Netscape browser is
going to be attributed also as part of my wife's behavior,
where it isn't true. She uses IE. I'm sure Microsoft will be
glad to know this. As a result, Netscape's share will be
overcounted. Now, I don't know that systematically this
overcounts Netscape's share, but I do know that you can't
make a reliable inference from things like this." Fisher,
6/1/99pm, at 47:7-15.
379.2.2. In particular, the combination of the MDC data and
Dataquest data will likely result in an overestimate of the number of "Main Browsers" in
- Professor Fisher testified that the answers to the MDC
survey "had been multiplied by the number of computers
accessing the Internet. And whatever that produces, it
produces something which extends a survey of Heads of
households and main browsers to all users and main
browsers, and that's likely to be quite peculiar and too big in
number." Fisher, 6/1/99pm, at 46:7-12.
c. Dean Schmalensee's conclusion that Microsoft's
conduct did not materially raise rivals' costs or
predatorily hinder rivals is flawed
(1) Dean Schmalensee's contention that rivals' costs
have not been raised is contrary to the evidence
380. Dean Schmalensee testified there is no evidence that "Microsoft's actions
reduced competition by increasing Netscape's distribution costs" (Schmalensee,
1/21/99pm, at 26:3-18). This contention is contrary to the evidence and is based on the
unreliable MDC survey data.
380.1. First, Dean Schmalensee argues that competition has not been
harmed on the ground that Netscape is free to pay for additional distribution through the
OEM and ISP channels (Schmalensee, 1/21/99pm, at 29-30; Schmalensee Dir. ¶ 376).
But this argument ignores both the fact that Microsoft's conduct has significantly raised
Netscape's (and other rivals') costs by, among other things, restricting the ability of
OEMs and ISPs to distribute rival browsers and using predatory conduct to deprive
Netscape of revenue to purchase additional distribution.
- See supra Part VII.A.2.b., ¶ 363.
- Professor Fisher testified: "Now, there isn't any doubt, I suppose,
that if Netscape were willing to pay sufficient money, it could, in
fact, get OEM's to put it on the desktop. That would not mean that
it is not severely disadvantaged. That's called raising rivals' costs."
Fisher, 6/1/99pm, at 56:13-17.
380.2. Second, Dean Schmalensee conceded that he studied only
whether Netscape could distribute its product, not whether Microsoft's conduct had
diminished its presence in the OEM channel.
- Dean Schmalensee conceded he did not study the number
of OEMs that preinstalled Netscape during 1998, despite the
fact he sponsored charts (in particular, DX 2290) designed
to show that Microsoft's conduct did not impact Netscape's
ability to gain distribution through the OEM channel during
- Dean Schmalensee conceded that he did not examine the
percentage of OEM machines that were shipped with
Navigator because it was "not relevant" to his conclusions.
What Dean Schmalensee "thought was very important was
whether Netscape could distribute its product, not the
precise distribution choices it made." Schmalensee,
1/21/99pm, at 62:4-24.
380.3. Third, Dean Schmalensee contends that Netscape's ability to
acquire market share through the OEM channel remains substantial because
Netscape today is shipped on a large number of OEMs' machines and
- the MDC
survey data show that the total number of Netscape users who obtain their browser with
their computer is rising. Both of these points are misconceived.
380.3.1. Dean Schmalensee's assertion that Netscape's presence
in the OEM channel remains robust is contrary to the evidence. Dean Schmalensee did
not rebut Professor Fisher's testimony that Netscape, as of January 1999, was
preinstalled on the desktop on fewer than 1% of PCs shipped by OEMs (See supra Part
V.A.1.b., ¶ 370.4.3.). The evidence Dean Schmalensee and Microsoft did present was
highly misleading, lacks foundation, and, in any event, does not indicate whether
Microsoft has substantially hindered Netscape's presence in the OEM channel.
322.214.171.124. The Compaq deal. Microsoft points to the fact
that Compaq is now apparently loading Netscape Navigator on its Presario consumer
line of machines (DX 2279, DX 2300). But Compaq's mid-trial loading of Netscape
Navigator neither alters the conclusion that Microsoft's conduct has had a substantial
anticompetitive effect in the OEM channel nor is inconsistent with Professor Fisher's
- Compaq, for whatever reason, announced that it was
loading Netscape Navigator the very day that
Professor Fisher took the stand, January 5, 1999. DX
2279, at 2 and passim (Compaq Web site, updated
January 5, 1999, showing Netscape Navigator on
- Professor Fisher, having been asked by Microsoft to
answer the question about the percentage of all OEM
shipments that include Navigator on the desktop
using information available to him as of the time he
took the stand, did not include Compaq's late-breaking announcement in the calculation. Fisher,
1/6/99pm, at 76:18 - 77:13 (asking Professor Fisher
to go through materials that he has relied upon to
date); Fisher, 6/1/99pm, at 55:18 - 56:6 (explaining
that Compaq announced the Netscape deal on
January 5, 1999, after Professor Fisher had taken the
- John Rose testified that having two applications in the
same category on a machine causes customer
confusion and is costly for Compaq: "Question: Does
Compaq generally load two applications in a similar
software category on its personal computers?
Answer: I don't believe so . . .because it's back to the
simplification process for the customer, and it's based
on the sophistication of the customer." Rose Dep.,
2/18/99pm, at 48:3-10.
- Consistent with this testimony, that it is costly to have
two applications, Netscape is paying Compaq to be
loaded on the Presario line. Fisher, 6/1/99pm, at
56:1-12. Professor Fisher testified that this
demonstrates, not the absence of competitive harm,
but rather that Netscape's costs have been raised
through Microsoft's anticompetitive conduct. Fisher,
6/1/99pm, at 56:13-17.
3126.96.36.199. Microsoft's 31% figure. Microsoft presented a
chart alleging that Netscape is shipped on 31% of all OEM consumer machines (DX
2300; Schmalensee, 1/21/99pm, 43:22 - 45:15). But this chart, and Dean
Schmalensee's testimony concerning it, were highly misleading and, in critical respects,
- First, DX 2300, while noting that Netscape is present
on the Compaq Presario desktop, fails to explain that
Netscape has to pay for that placement or that
Compaq just started to load Navigator in January
1999, after the harm to Netscape's ability to mount a
platform threat had been done. As Professor Fisher
testified, the exhibit is misleading in suggesting that
Compaq's actions show the absence of
anticompetitive raising of rivals' costs. Fisher,
6/1/99pm, at 56:7-19.
- Second, DX 2300 notes that Netscape is being
distributed by Packard Bell on a "CD in" the "box,"
and states that this accounts for "10% of U.S.
consumer sales." This is, in some respects, simply
wrong; in others, it is highly misleading.
Packard Bell ships the Navigator CD in the box
only on its Versa line, which is primarily a
business line of computers. Fisher, 6/1/99pm,
at 57:8-9. DX 2300 implies that it is a
- Even counting all of the Versa line as
consumer machines, that line accounts for only
about 10 % of Packard Bell's sales, which
means that the conclusion should be that
Navigator is being distributed with machines
accounting for 1% of U.S. consumer sales, not,
as DX 2300 says, 10%. Fisher, 6/1/99pm, at
57:10-16. In other words, "Packard-Bell may,
in fact, account for ten percent of U.S.
consumer sales, but Netscape is not, in fact,
being shipped by Packard-Bell with the
computers that account for ten percent of
consumer sales." Fisher, 6/1/99pm, at 57:1-9.
See also Kies Dep., 9/11/98, at 56:12 - 57:24
- - redacted - (DX 2575A) (sealed).
- Apart from this error, DX 2300 is misleading
because the only reason Packard Bell is
shipping Netscape is that Packard Bell,
pursuant to the stipulation entered in January
1998, was able to remove Internet Explorer
from the Windows desktop, something DX
2300 fails to note. Kies Dep., 12/16/98am,
5:22 - 6:21. In other words, Packard Bell is
shipping Netscape only because it was given
the otherwise unavailable option of removing
Internet Explorer and avoiding the costs of two
browsers on the desktop. Fisher, 6/1/99pm, at
57:17 - 58:11.
3188.8.131.52. The 22% figure. Microsoft also cited a Goldman
Sachs due diligence report that estimates, for Navigator distribution through the OEM
channel, that the DX 2440
(sealed). This estimate is irrelevant to whether Microsoft's conduct had a substantial
- First, the 22% figure lacks foundation. Professor
Fisher testified: "I don't actually know where the 22
percent number comes from." Fisher, 6/4/99am, at
- Second, the 22% figure is reasonably read to include
all shipments of Netscape, even those where
Netscape receives -- as the document states --
"minimal promotion," such as not being included on
the desktop. Fisher, 6/4/99am, at 28:2-4. This, of
course, is consistent with Barksdale's testimony that
Netscape has obtained distribution through OEMs,
but only in "limited," less effective ways. Barksdale
Dir. ¶ 173; Barksdale, 10/26/98pm, at 9:15 - 10:6.
- Third, the 22% figure may refer to the percentage of
all machines shipped with English-language Windows
that are shipped by OEMs who ship Netscape on at
least some machines. Fisher, 6/4/99am, at 28:5-19.
This interpretation would be consistent with
Barksdale's testimony. Professor Fisher explained,
"if you take the companies listed by Mr. Barksdale on
page 92 of his direct testimony, and you look at their
total percent of shipments, given all their machines,
those add up to 22 percent, approximately -- at least
for English-language licenses." Fisher, 6/4/99am, at
380.3.2. In any event, even if Netscape has recently been able to
secure additional distribution on the desktop from OEMs -- placement for which it must
pay, as it paid Compaq -- that would not demonstrate the absence of competitive harm
from Microsoft's conduct. Microsoft, as explained, has been able through its
anticompetitive conduct to garner substantial browser market share and, by doing so, to
vitiate the threat to its operating system monopoly that Netscape's browser posed.
- Professor Fisher testified, concerning Compaq's late-breaking loading of Navigator, that: "It's an interesting fact,
but, basically, Microsoft succeeded in thwarting the threat
from Netscape that it would become--that its browser would
become the source of middleware that would lead to the
diminution in the applications barrier to entry. Netscape, in
that sense, is no longer a big player. It may not matter
anymore." Fisher, 1/13/99am, at 55:20-25.
- Professor Fisher testified that Dean Schmalensee's DX 2300
does not describe "the difficulties that Netscape has" and
does not matter to the "appropriate conclusion" that
"Netscape isn't being shipped any longer on enough
machines so that using this channel of distribution is likely to
provide a platform-shifting event, which could lead to the
challenging of Microsoft's operating system monopoly."
Fisher, 6/1/99pm, at 58:16 - 59:2; see also supra
Part VII.A.5.c.(1), ¶ 3184.108.40.206.
- Professor Fisher testified: "Netscape is actually paying
Compaq in order to get its . . . browser on the desktop. It
was paying them advertising, something supposed to be
worth over $700,000. Now, there isn't any doubt, I suppose,
that if Netscape were willing to pay sufficient money, it could,
in fact, get OEMs to put it on the desktop. That would not
mean that it is not severely disadvantaged. That's called
raising rivals' costs." Fisher, 6/1/99pm, 55:18 - 56:19.
380.3.3. Dean Schmalensee relied on the MDC data to show that
the number of users who reported they received Netscape with their computer has
increased over time, a result Dean Schmalensee asserts is inconsistent with the
conclusion that rivals' costs have in fact been raised by Microsoft's anticompetitive
conduct. This contention, too, is flawed.
3220.127.116.11. Dean Schmalensee's analysis is based on the
MDC data, which are flawed for this purpose for the reasons described above.
318.104.22.168. Even if the MDC data did not have intractable
defects, Dean Schmalensee's contention is still misplaced because, as described
above, those data measure stock, not flow. It is entirely consistent with Microsoft's
conduct having raised rivals' costs that the total number of users who report having
received Netscape with their computer is rising because that number includes the entire
installed base. Because the size of the Internet and the total number of browsers are
increasing, the absolute number of Netscape browsers might also be increasing. But
that fact says nothing about the flow, or change, in Netscape's share of browser usage.
- Netscape's share is continuing to decline even
though the absolute number of Netscape users is
increasing. Fisher, 6/1/99pm, 53:16-17, 54:10-13;
Fisher, 1/7/99pm, 35:20 - 37:4; see also Fisher,
6/3/99pm, at 36:23 - 37:12.
- See also supra Part VII.A.1., ¶ 359.
322.214.171.124. By contrast to the MDC data, the data Microsoft
used in the ordinary course of its business are consistent with the conclusion that
Netscape's ability to gain share through the OEM channel has markedly declined, while
the importance of the OEM channel as a source of new users for Internet Explorer has
- Dr. Warren-Boulton testified that Microsoft's data
show that more Internet Explorer users receive their
browser through the OEM channel than Netscape
Navigator users. "The last number I saw showed that
26 percent of IE users get their browser from an
OEM--only 13 percent, 13 to 14 percent at most of
Netscape users. So that the effects of these
restrictions do appear to have had a significant impact
on the extent to which uses get their browsers
through the OEM channel . . . ." Warren-Boulton,
11/30/98am, at 13:16-24.
- Microsoft has pointed to Mike Homer's (possibly
incomplete) quotation to the Mercury News in August
1997 that fewer than 10% of browser users received
the software bundled on the hard disk, as opposed to
the 70% that got the software either by downloading
or through an independent purchase choice. This
makes sense, as Barksdale explained, for Navigator
users, who must acquire their browser through a
(relatively) non-foreclosed channel if they want to use
Navigator. Barksdale, 10/26/98pm, at 73:15 - 74:13
(although he "would probably take issue" with
Homer's quotation, he concedes that these figures
might be true for Navigator users).
380.4. Fourth, based on the MDC data, Dean Schmalensee contends
that Microsoft's conduct did not materially impact Netscape's ability to acquire usage
through the ISP channel. That analysis is unreliable for the reasons described above.
- See supra Part VII.A.5.b; ¶ 373.
380.5. Fifth, Dean Schmalensee (and other Microsoft witnesses) argue
that, because Netscape may continue to distribute its browsers in massive quantities
(through carpet bombing or other mechanisms (DX 2098, C-1)), Microsoft has not
foreclosed Netscape from distributing its browser. But Netscape's ability to distribute a
large number of browsers is irrelevant because, as explained, what is relevant is
distribution that translates into usage; the evidence Microsoft presented concerning the
raw number of copies Netscape has been able to distribute confirms that the mere
ability to distribute browsers correlates poorly with gaining either users or usage.
- DX 2440, the due diligence report by Goldman Sachs on the
Netscape/AOL transaction, estimates that Netscape will distribute
or has distributed (it is not clear from the face of the document) 160
million clients per year. If that number were correct, Professor
Fisher calculated using estimates of the number of computers that
are attached to the Internet, every computer attached to the
Internet would have approximately two and a half Netscape
browsers. Fisher, 6/4/99am, at 29:23 - 30:14. If such distribution
continued for more than a year, it would "have to mean that they
have something like five Netscape browsers." Professor Fisher
concluded, "That is obviously not true. That number is way too
big." Indeed, the data elsewhere in DX 2440 and all of the other
evidence available show that Netscape's share is dropping. Fisher,
6/4/99am, at 29:3 - 30:24. As Professor Fisher explained, plainly a
large number of copies of Netscape "ended up as coasters."
Fisher, 6/4/99am, at 31:8-11.
- James Barksdale testified that, although Netscape launched an
"Unlimited Distribution" program through which it devoted
"tremendous" resources to "utilizing all available channels of
distribution," its overall market share has continued to drop. This
confirmed his view that "there is no substitute for the OEM and ISP
channels of distribution," which "Microsoft has largely blocked."
Barksdale Dir. ¶ 230.
- Professor Fisher further testified, when confronted with a statement
by a Netscape representative regarding the Netscape Everywhere
program, that: "If he means are there a lot of copies available and can lots
of people get it, the answer to that is sure, that's true. If he means by that
so that a lot of people are signing up for it and actually acquiring it and
using it, I think the answer to that is no. That's not a remarkably
successful program." Fisher, 1/6/99am, at 39:17-23.
- Dean Schmalensee confirmed that, while distribution is an
important "input" into browser use, he has not seen any Microsoft
document that uses share of distribution as the relevant measure of
share. Schmalensee, 1/19/99pm, at 53:10 - 54:8.
- Cameron Myhrvold conceded: "Distribution is a necessary but
insufficient condition for increasing usage share," Myhrvold,
2/9/99pm, at 49:12-17, and one wants distribution that will actually
result in usage. Myhrvold, 2/9/99pm, at 62:7 - 63:18.
- Dr. Warren-Boulton explained: "If, indeed, you're forced to
distribute 200 million to get a relatively small number of users, then
the cost per user is going to be very high, and people won't choose
that distribution mechanism unless it's the only alternative that's left
to them." Warren- Boulton, 11/13/98am, at 26:2-12; see also
Warren-Boulton, 11/23/98am, at 25:8 - 26:9.
380.6. Sixth, Microsoft's witnesses argued that Netscape's ability to
distribute its product effectively has not been impaired because downloading is an
effective method of browser distribution (Chase Dir. ¶ 167; Schmalensee Dir. ¶ 390).
This argument is contrary to the vast amount of evidence that downloading is not an
adequate channel for distributing browsers and, therefore, for obtaining browser usage.
380.6.1. Microsoft's own data show that downloading has
drastically diminished in importance, even as the number of browsers in use continues
- Brad Chase's data show that, between the first and third
quarters of 1998, as the installed bases of Netscape
Navigator and Internet Explorer increased, the total number
of users who had obtained their browsers by downloading
stayed the same for Netscape Navigator and declined for
Internet Explorer. GX 1845; GX 1846; Chase, 2/11/99pm, at
4:6 - 6:20.
- Professor Fisher testified that the charts based upon
Chase's data do not suggest that "downloading was a
seriously important channel distribution for Netscape." The
fact that only 6.7 million Netscape Navigator users as of the
first quarter of 1998 had acquired Navigator by downloading,
and the fact that this number was virtually unchanged by the
third quarter of 1998, shows that"it can't be true that a lot of
people download in between these two quarters . . . In fact,
these exhibits fly right in the face of the suggestion that
downloading is an important channel of distribution for
browsers any longer." Fisher, 6/1/99pm, at 60:16 - 61:16.
380.6.2. Brad Chase's testimony that downloading is an effective
alternative -- including his videotape, which purported to show the ease of downloading
but instead used an internal corporate connection and skipped the entire installation
process -- is contradicted by the contemporaneous evidence, lacks support, and was
- Chase's video tape, DX 2162, does not accurately depict the
entire download and installation process. The video
depicted a download using a 10MB internal corporation
connection. This fast connection concealed the fact that it
would take a person with an ordinary modem as long as 50
minutes to download Netscape Navigator (as opposed to the
10 minutes cited by the narrator of the video). Chase,
2/11/99am, at 26:18 - 27:18.
- In addition, the video skipped the installation process
altogether. Chase acknowledged the installation process
has a number of steps. Chase, 2/11/99pm, at 7:11 - 8:16.
See supra Part VII.A.2.c; ¶ 366. This is the same process
that Myhrvold's video called "cumbersome and not
straightforward," (DX 2166) (video tape), a statement with
which Chase did not disagree. Chase, 2/11/99pm, at
16:17-21. Indeed, Chase himself wrote regarding users'
confusion about the installation process that his video
skipped: "I think they don't figure out what to do once they
download the set-up stub." GX 214.
- Chase's attempt during the trial to distance himself from
internal memoranda that he had written in the ordinary
course of business is, like the video, not credible. In
attempting to explain the plain language expressing his
opinions in GX 214, where Chase wrote that the installation
process is "too hard for users to figure out" and Internet
Explorer is "too big to download" (Chase, 2/16/99am, at
6:14-23), Chase claimed that he was merely being
"dramatic" and taking "extreme" positions. Chase,
2/16/99am, 45:2-22. Chase claimed -- without providing any
backup data -- to have "found out later" that the failure rate
for browser installations was not "quite that bad" as the 50
percent failure rate that he originally estimated and that
"more work" -- unexplained -- led him to discover that the
failure rate was actually "10 to 20 percent". Chase,
2/11/99pm, at 85:10-20; Chase, 2/16/99am, at 44:23 -
- Chase also attempted to distance himself from an internal
email written by another Microsoft employee, Yusuf Mehdi,
who reports to Chase. Mehdi's observation that users are
not likely to spend the time to download browsers (GX 204)
is, according to Chase, based on outdated information and
(like Chase's memos) is also "dramatic." Chase, 2/11/99am,
at 44:19 - 45:14; 64:1-8.
- Chase also attempted to explain away Belfiore's deposition
testimony that "downloading Internet Explorer takes too
long, is too hard . . . [and] often fails" by discounting it as a
manifestation of "Microsoft's culture . . . of self-critiquing."
Chase, 2/11/99am, at 40:10 - 41:16 (discussing Belfiore
380.6.3. Microsoft's use of Netscape marketing material to show
that downloading is an equally effective alternative is also unreliable, because
Netscape's numbers include failed download attempts and, are therefore not
- Barskdale testified that Netscape's reported numbers
represent download attempts that often fail for technical
reasons and do not reflect whether the attempts resulted in
successful installations. Barksdale Dir. ¶ 227.
- Professor Fisher testified: "Download statistics tend to come in
a form that makes it hard to be serious about this. Let me explain.
A download--an attempt to download will be recorded often as a
download, whether it is successfully completed or not. On that
basis, I, myself, have downloaded IE--well, I now have IE 4, which
I didn't download, and I forget whether it's IE 4 or IE 3 that I
attempted to download twice unsuccessfully. On that basis, I
counted for two downloads, and I wouldn't count myself in any
reasonable sense as any." Fisher, 1/7/99pm, at 38:14-24.
- Although Chase testified that Netscape announced that
more than 12 million copies of Communicator were
downloaded in July and August of 1998 (Chase Dir. ¶ 170),
he also recognized that only 6.7 million Netscape users said
in the third quarter of 1998 that they got their browser by
downloading. Chase Dir. ¶ 171. Chase testified that
unsuccessful download attempts accounted for some of that
discrepancy. Chase, 2/11/99am, 56:16-25.
(2) Dean Schmalensee's conclusion that quality
increases explain Internet Explorer's rise and
Netscape's decline is inaccurate and ignores the
impact of Microsoft's predatory campaign
381. Dean Schmalensee argued that the significant rise in Internet Explorer's
share can be attributed to its increasing quality, a conclusion he sought to buttress
through a sample of product reviews that purportedly showed Internet Explorer 3 to be
comparable in quality to Netscape, but Internet Explorer 4 and Internet Explorer 5 to be
superior (DX 2098, A-2 (summarizing browser reviews); Schmalensee, 1/20/99am, at
38:10 - 39:5). But the evidence is contrary to Dean Schmalensee's analysis.
381.1. First, the increases in Internet Explorer's share correlate, not with
new releases of Internet Explorer (as Dean Schmalensee's analysis presupposes), but
rather with Microsoft's implementation of new predatory practices.
- Professor Fisher testified "at length" that "you could look at either
Professor Schmalensee's charts or the AdKnowledge data and
what one discovers is the big effect on Microsoft's share occurs
before the so-called superior technology is introduced." He goes
on to specify that the significant increase in Microsoft's browser
share occurred "after AOL begins to distribute the technology" and
"before the introduction of IE 4." Fisher, 6/4/99pm, at 5:18 - 7:6.
- Barksdale testified that, although Internet Explorer 4 has narrowed
the quality gap among the browsers, the evidence shows that
Internet Explorer attained most of its share between the Fall of
1996 and the Spring of 1997. By the time Internet Explorer 4 was
released, "the damage was done." Barksdale, 10/27/98am, at 75:4
- Dr. Warren-Boulton testified that the AdKnowledge browser market
share data after January 1997 show that when either Microsoft or
Netscape release a new version of the browser, there is an
associated "small" increase in the "run rate" or share: "So when
Netscape 4.0 comes out, there is a slight increase in the new rate
for Netscape. When Internet Explorer 4.0 comes out, that's
matched. Basically, as far as I can see in the data, the net effect
between the two of them introducing new varieties cancels out."
Warren-Boulton, 12/1/98am, at 7:6-21.
381.2. Second, that Internet Explorer increased in quality is entirely
consistent with Microsoft's predatory and exclusionary conduct having caused the
significant changes in market share.
381.2.1. Raising rivals' costs is likely to have relatively little impact
if the rivals' product is clearly superior, so Dean Schmalensee is wrong to infer from
Internet Explorer 1 and 2's lack of success that Microsoft's conduct did not affect
- Dean Schmalensee testified that Internet Explorer 1 and
Internet Explorer 2 received poorer reviews in most industry
publications than the contemporaneous versions of
Netscape Navigator. Schmalensee Dir. Tbl. F-1.
- Myhrvold testified: "If you don't have a great product, people
aren't going to use your browser, in this case, no matter how
much distribution you have." Myhrvold, 2/9/99pm, at 59:15-17.
- See supra Part VII.A.2.a; ¶ 363.4.
381.2.2. Similarly, predation cannot succeed unless the predator
creates a quality product. Giving away, or even bribing customers to take, a product no
one wants is unlikely to garner substantial share. By contrast, giving away a quality
product at a predatory price can be -- and in the case of Microsoft has been --
- Barksdale testified that, even if Internet Explorer 4.0 had
achieved parity with Navigator, "such parity does not and
could not explain the marked reduction in revenue and
market share that Netscape suffered as a result of
Microsoft's exclusionary and other anticompetitive
practices." Barksdale Dir. ¶ 37.
- Professor Fisher does not disagree that the quality of
Microsoft browsing software has improved; in fact, "an
improved IE was required to make Microsoft's strategy
succeed. Predatory pricing, to succeed, has got to be the
offering of an unprofitable low price for a product that, at the
low price, consumers will want. That means you've got to
have an adequate product that consumers will really want at
the low price. So long as IE was quite inferior . . . offering it
at a zero price would not be sufficient to persuade
consumers to take it. So that it is not a surprise that you
begin to see action here only after IE was sufficiently
improved, so that it became a possible choice for a lot of
consumers." Fisher, 6/2/99am, at 7:19 - 8:17.
381.3. Third, Dean Schmalensee's analysis of product reviews is
incomplete; conflicts with more reliable evidence and the testimony of Microsoft's
witnesses; and, as Dean Schmalensee ultimately admitted, does not support the
proposition for which it was introduced.
381.3.1. Dean Schmalensee's analysis of product reviews ignored
reviews less favorable to Internet Explorer.
- Dean Schmalensee conceded (Schmalensee, 1/20/99am,
at 39:6-13) that he did not cite or review other publications
that reviewed Netscape Navigator more favorably than
Internet Explorer, including Internet Explorer 4 (GXs 1262-1292 (comparative browser reviews, generally favoring
Netscape Navigator)). Examples of some of those reviews
- A June 1998 (well after the release of Internet
Explorer 4) report on a survey of resellers entitled
"Netscape an easy browser winner sweeps all eight
areas in survey" summarized: "Netscape swept all
eight survey areas to win the Web browser category
of the Channel Champions reseller poll for the second
year in a row." GX 1286.
- An October 22, 1998 Wall Street Journal review
entitled "Netscape Takes Lead in Race to Build Better
Web Browser" also reviewed Navigator 4 more
favorably than Internet Explorer 4. GX 1290.
- A ZDNet Browser User Survey found that over two-thirds of survey respondents prefer Netscape
Communicator 4.0 to Internet Explorer 4.0. GX 1278.
- A C/NET review of versions 4 of both Internet
Explorer and Communicator concluded: "In short,
both browsers are better than they used to be, but
Netscape Communicator is our new choice. We
originally gave our editor's choice award to Internet
Explorer based on its innovative features and fast
performance. Over time, however, our experience
and those of our readers showed that the demands IE
4 places on systems can cause some serious
problems." GX 1280, at 1.
381.3.2. Other evidence shows that Netscape Navigator and
Internet Explorer, even following Internet Explorer 4's release, have remained roughly
comparable in quality.
- In September 1997, well after the release of Internet
Explorer 3, Brad Chase reported about a study of "Web
professionals" that "Consistent with other leading studies,
Netscape is still perceived among this audience as having
'the best browser' and 'setting standards on the Internet.'"
GX 361. According to Chase's testimony, there were
approximately 800,000 Web professionals surveyed in this
study. Chase, 2/16/99pm, at 55:12-24. And although he
said that those Web professionals when asked were simply
likely to choose what they were already using and used to
(Chase, 2/16/99pm, at 56:22 - 57:18), he conceded that
those "Web professionals" would generally be "more
technically competent and more knowledgeable than the
average computer user." Chase, 2/16/99pm, at 56:1-6.
When Microsoft surveyed them, they believed that Navigator
was the best browser. Chase, 2/16/99pm, at 56:7-10.
- A February 10, 1998, Microsoft 3 Year Business Outlook for
Platforms-Desktop presentation lists
- redacted - GX 428, at MS7 000366 (sealed).
- A May 1998 Microsoft Browser Marketing Fiscal Year 1999
review, which Dean Schmalensee testified "appears to be a
fairly high-level presentation" (Schmalensee, 1/20/99am, at
40:3 - 41:1), reports under "Learnings This Quarter," that
"IE4 is fundamentally not compelling, not differentiated from
Netscape version 4 -- seen as a commodity." GX 173. The
conclusion that "IE4 is fundamentally not compelling" and
"not differentiated from Netscape version 4," Dean
Schmalensee testified, is "broadly" consistent with the
browser reviews comparing Internet Explorer 4 and
Netscape Navigator 4. Schmalensee, 1/20/99am, at 41:5-17. There is not a "dramatic difference" between the two
products. Schmalensee, 1/20/99am, at 41:2-20.
- The Chief Information Officer of AMEX TRS wrote in
January 1997 that: "We went with Microsoft not because of
their technology, because yours is better, but because they
could be a better distribution channel for me. I can put my
stuff on every copy of Windows95 or 97 or whatever." GX
- America Online, in August 1997, detailed its continuing
complaints about Internet Explorer, including: "MS IE4
browser is huge . . . and is tangled up with the OS in Win98
product;" "MS HTML browser/authoring engine lacks many
ease-of-use features, including integrated spellchecker,
email filters, and dynamic fonts;" and "MS has weak 'open
standards' story." In contrast, among the benefits of
Netscape are listed: "NS has Rich HTML Authoring
Environment, Including Tables;" "NS has Many Unique
Ease-of-Use Features;" "NS has Stronger Standards Story;"
and "NS has Stronger Security Story." GX 818.
- Evaluating the relative merits of the two browsers in July
1998 after the release of Internet Explorer 4 -- Scott Vesey
of Boeing wrote: "Browser functional equivalence. Both
Microsoft and Netscape browsers have similar capabilities.
These capabilities are not always implemented using similar
techniques." GX 638, at TBC 000412. Another document
detailing Boeing's "Browser Decision History" concludes
that, with respect to Internet Explorer and Netscape
Navigator versions 3, Internet Explorer was "almost
functionally competitive," but lacked cross platform
capabilities and posed security risks. GX 631.
381.3.3. Dean Schmalensee ultimately conceded that his product
review analysis could not be used for the proposition that Internet Explorer 4 and 5 are
markedly superior to Netscape's comparable releases.
- Dean Schmalensee testified that the reviews that he
examined did not say Internet Explorer 4 was "significantly
better" than Netscape version 4. The reviews, he said,
simply said "better." He concluded that "the differences
between them are not great," which is "consistent with my
understanding." Schmalensee, 1/20/99am, at 41:21 - 42:6.
Schmalensee acknowledges that this is "probably not
consistent with Microsoft's corporate position."
Schmalensee, 1/20/99am, at 41:21 - 42:6. He added: "And
as I said, the browser reviews, as I read them, didn't talk
about extraordinary differences. They are both good
products. But the reviews said what they said."
Schmalensee, 1/20/99am, at 42:14-16. Because the
differences between the two products are "not dramatic,"
Schmalensee concluded that "they are seen as being close
substitutes." Schmalensee, 1/20/99am, at 43:22 - 44:4.
381.4. Fourth, the argument that Internet Explorer's increased quality
accounts for the entire increase in its share in any event contradicted by the evidence.
381.4.1. Microsoft imposed the restrictions on access providers
precisely because it was concerned that given a side by side choice, users would pick
- Cameron Myrhvold testified: "we did specifically ask that
ISPs distribute Internet Explorer by itself when they
distributed Internet Explorer, so that we would not lose all of
those side-by-side user choices." Myhrvold, 2/10/99am, at
381.4.2. Internet Explorer's share is lower in channels and among
subscribers to firms that are relatively unconstrained by Microsoft's conduct.
- See supra Part VII.A.3., ¶ 376.4.2.
(3) Dean Schmalensee's criticisms of the
Adknowledge data, and of the inferences
plaintiffs' economists drew from that data, are
382. Dean Schmalensee criticized plaintiffs' economists' reliance on the
AdKnowledge data by arguing that they are not reliable hit data and that Professor
Fisher and Dr. Warren Boulton used the data improperly in demonstrating the
exclusionary impact of Microsoft's agreements. Neither of these argument is supported
by the evidence.
382.1. The AdKnowledge data are a reliable source of hit data and
provide a reliable -- even conservative -- estimate of Internet Explorer's increase in
share during the period of Microsoft's exclusionary contracts.
382.1.1. The AdKnowledge data are used by members of the
industry in the ordinary course of business and are consistent with Microsoft's own hit
- AdKnowledge is used by AOL, among others in the industry,
in the ordinary course of its business. DX 2512 (AOL
tracking browser share trends using hit data from
- The AdKnowledge data are consistent with other hit data,
including hit data from the University of Illinois at Urbana-Champaign. GX 1954 (exhibit comparing hit data from
AdKnowledge and from the University of Illinois).
- Dean Schmalensee noted that the hit data he examined
show that the "AdKnowledge estimates are generally similar
to the Netscape and Microsoft hit data." Schmalensee Dir.
App. D ¶ 59.
382.1.2. Because the AdKnowledge data include access
providers that store Web pages on their servers (otherwise known as "caching"), and
because those access providers that cache have entered into exclusionary agreements
with Microsoft, the AdKnowledge data will, if anything, underestimate the increase in
Internet Explorer's share (and thus underestimate the impact of Microsoft's exclusionary
- When an ISP or OLS "caches," it temporarily stores a
particular Web page on its local server. When one of its
subscribers requests that page, it is served from the local
server rather than retrieved out on the Web from the site that
published it. The "hits" by the subscriber on the cached
Web page are not counted by AdKnowledge. Warren-Boulton, 12/1/98pm, at 26:18 - 27:18. If an ISP caches, the
AdKnowledge data will undercount usage of browsers by its
subscribers. Gildor Dep., 10/6/98, at 62:22 - 63:13 (DX
- The largest ISPs and OLSs, such as AOL, are those that
might engage in caching. Warren-Boulton, 12/1/98pm, at
26:18 - 27:18; Fisher, 1/6/99am, at 40:15-22. However,
there is no evidence that any access provider other than
AOL caches. Daniel Gildor from AdKnowledge testified that
he knows of only one access provider that caches, and that
is AOL. Gildor Dep., 10/6/98, at 64:10-19 (DX 2569).
- Microsoft has exclusionary agreements with the largest
ISPs, including AOL. AOL distributes only Internet Explorer
and does not promote other browsers. Fisher, 1/5/99am, at
52:10-20; GX 1092, at MS98 0112834.
- Dr. Warren-Boulton explained the impact of caching on
estimated browser share by adjusting the AdKnowledge
data. He demonstrated that the AdKnowledge data
underestimated the amount by which Netscape's browser
share fell. GX 1316. Had Dr. Warren-Boulton adjusted for
caching by access providers other than AOL, the data would
have shown an even greater increase in Internet
Explorer's share. Warren-Boulton, 12/1/98pm, at 103:15 -
104:4, 35:5 - 36:9. Fisher Dir. ¶ 226 n.6.
382.1.3. The conclusion that caching results in an
underestimation of Internet Explorer's increase in share after Microsoft entered into its
contracts with access providers is not altered by AdKnowledge's implementation of
"cache fooling technology."
- "Cache fooling" technology is technology that advertisers
have implemented to fool a proxy server into actually going
out and requesting an original copy of the ad, rather than
storing it on the Web site stored on the access provider's
server. AdKnowledge has implemented some of these
techniques that make the server think that the request it is
receiving is for content that it does not have in its cache.
Gildor Dep., 10/6/98, at 59:16 - 60:6 (DX 2569).
- Dr. Warren-Boulton examined the possibility that cache
fooling technology could bias the results by altering the
relative weights of the access providers that cache. He did
this by comparing the ratio of AOL subscribers to the
number of AOL hits recorded by AdKnowledge. Based on
this comparison, Dr. Warren-Boulton testified that "If, indeed,
it were the case that cache-fooling technology introduced by
AdKnowledge would, over the 1998 period, have
significantly affected the results, then one would expect to
see a change in the ratio of users to usage for AOL. I have
looked at that, plotted that, and there is no significant
change." Warren-Boulton, 12/1/98pm, at 88:7-20.
382.1.4. The fact that the AdKnowledge data do exclude browser
activity on the proprietary portion of online services and on internal corporate networks
does not make them unreliable.
3126.96.36.199. Use of browsers that never access the Internet
does not impact what developers do and is thus not relevant for the purposes of
determining whether Microsoft has thwarted the browser threat.
- Dean Schmalensee acknowledged that all "hit" data
excludes activity on the proprietary portion of
networks operated by Online Services such as AOL.
Schmalensee Dir. App. D ¶ 44.
- Professor Fisher explained why this exclusion is
proper: "Subscribers who remain within AOL and
never access the Internet don't -- shouldn't be
counted in any of this because they're not generating
the Internet usage that developers will see." Fisher,
6/1/99pm, at 41:18 - 41:23. What developers see is
critical to their decision for which platform to develop
applications. See infra Part VII.A.1., ¶ 357.2.
- Schmalensee testified that, in designing the MDC
survey, Microsoft attempted to screen out those users
who never accessed the Internet but only accessed
the proprietary content of a provider's network.
Schmalensee, 6/21/99pm, at 26:21 - 27:13.
382.1.5. In any event, including browsers used only on internal
networks would not alter the conclusions based on the AdKnowledge data because
very few browsers are actually used only on intranets.
- Microsoft's estimates confirm that browsers that are used
only on intranets represent a small proportion of browsers in
use. GX 411, at MS6 6007075.
- Schmalensee had access to MDC data that would have
provided an estimate of intranet-only users of browsers. GX
2511; GX 2512; GX 2513; GX 2514; GX 2515 (surveys with
screen questions for access to intranet only). Dean
Schmalensee did not calculate the number of such
browsers. His assertion that the omission of intranet-only
users is "a serious problem" in the AdKnowledge data is
unsupported. (Schmalensee Dir. ¶¶ 296, 310; Schmalensee
Dir. App. D.)
3188.8.131.52. The omission of non-commercial sites from the
AdKnowledge data (Schmalensee Dir. ¶ 308, App. D ¶ 8) does not impact the
conclusions Professor Fisher and Dr. Warren-Boulton drew from the data.
- Professor Fisher showed that browser share
estimates based on "hits" from a particular non-commercial site, a site at the University of Illinois in
Urbana-Champaign, are essentially the same as the
browser share estimates made using the
AdKnowledge data. GX 1954 (graphing hits from
AdKnowledge and the University of Illinois); Fisher
6/1/99pm, at 19:10 - 20:12 ("Certainly, the conclusion
to be drawn from them is the same.") Indeed, unless
one believes that users of browsers who visit non-commercial sites are somehow systematically
different than users of browsers who visit commercial
sites, one would not expect there to be a difference
between browser shares and usage patterns amongst
the two. Fisher, 1/5/99pm, at 22:6 - 23:11.
- Dean Schmalensee did not present any evidence that
the share of "hits" by particular browsers to non-commercial sites will differ in any way from the share
of "hits" by particular browsers to commercial sites.
382.1.6. The AdKnowledge data are not flawed because
commercial sites might have "rotating ads."
- Dean Schmalensee presented no evidence that the
sites tracked by AdKnowledge have rotating ads.
- Even if they did have rotating ads, the estimates of
browser share would not be biased. In order for there
to be a bias, users of either Internet Explorer or
Netscape Navigator would have to have a particular
propensity to sit around and watch the ads rotate,
such that the data would be systematically skewed in
favor of one or the other. As Professor Fisher
testified, there is no reason to believe this is the case.
Fisher, 1/5/99pm, at 22:9 - 23:11.
382.1.7. The AdKnowledge data accurately track the usage
patterns of AOL subscribers and, in particular, of Navigator's browser share in early
- Dean Schmalensee argued, based on his MDC
survey results, that the AdKnowledge data somehow
misrepresent the AOL experience because users of
AOL in 1996 registered a high usage of Netscape
Navigator, causing AdKnowledge's estimate of
Navigator's share to be approximately 76% in 1997.
Schmalensee Dir. App. D ¶ 95. Dean Schmalensee
cited only one source of support for this claim: the
MDC data. That data estimates Navigator's share in
1996 to be 49%. Schmalensee Dir. App. D ¶ 42.
- However, as discussed above, the MDC data are an
unreliable indicator of browser use among AOL users
because those users often confuse visiting the
proprietary portion of the AOL service with the
Internet. See supra Part VII.A.5.b.(3), ¶ 377.1.3.
There is evidence that a vast majority of AOL users in
1996 did not visit the Internet, and should not have
been included in estimates of browser share.
See supra Part VII.A.5.b.(3), ¶ 3184.108.40.206. Therefore,
AOL users who only used the AOL browser but did
not visit the Internet are likely to have been
improperly included in the MDC survey data's
estimate of browser share. This results in an
underestimation of Navigator's share. See supra Part
VII.A.5.b.(3), ¶ 383.1.3..
- Microsoft's documents and its other witnesses'
testimony show that Microsoft, consistent with the
AdKnowledge data and inconsistent with the MDC
data, believed Netscape's share to be higher than
49% in 1996. Indeed, Myhrvold testified that in late
1995 and early 1996, Navigator's usage share was
above 80%. Myhrvold Dir. ¶¶ 26-27.
382.2. Second, Dean Schmalensee's various criticisms of Professor
Fisher's and Dr. Warren-Boulton's use of the AdKnowledge data to demonstrate the
exclusionary impact of Microsoft's agreements are also misplaced.
382.2.1. Plaintiffs' economists used the proper weighting scheme
in creating the various classifications of ISPs/OLSs to compare against one another in
order to measure the exclusionary impact of Microsoft's contracts.
- Dean Schmalensee argues that there is a significant degree
of variability in the share of total "hits" across ISPs in
different months, and that the variability is too large to be
related to changes in the number of subscribers. According
to Dean Schmalensee, this variability could cause the
estimate of the percentage change in browser shares
amongst the different ISP groups to be very different from
(and not reflect) the changes in browser usage of any of the
individual ISPs, or the change overall within any of the
groups. Schmalensee Dir. App. D. ¶¶ 103-106, 111.
- Professor Fisher responded to this argument by explaining
that, when examining the effect of Microsoft's restrictive
contracts on browser usage by customers of a particular
group of ISPs subject to the same basic set of contractual
restrictions, the only important issue is how browser usage
changed over time for the entire set of ISPs. Therefore, the
fact that some ISPs' subscriber base grew relative to others
is irrelevant. Fisher, 1/5/99pm, at 55:6 - 56:25; Fisher,
1/12/99pm, at 25:2 - 26:25. See also Fisher, 1/12/99pm, at
26:11 - 26:25; GX 1480; GX 1445.
- Dean Schmalensee applied fixed weights to the various ISP
groups proposed by Dr. Warren-Boulton to correct the
problem he alleged. But an examination of Schmalensee's
application of fixed weights to these groups shows that such
an application has no impact on the conclusions Dr. Warren-Boulton drew from the data. Dean Schmalensee's own
chart shows that the various weighting schemes he
proposed had very little impact on the change in Netscape's
share for three of the groups: "Parity," "Netscape Partners,"
and "IE Preferred." Schmalensee Dir. App. D Fig. D-19.
The only group affected by the substitution of Dean
Schmalensee's weighting scheme for the weighting scheme
used by Dr. Warren-Boulton was the "Shipment Restrictions"
group. Schmalensee Dir. App. D Fig. D-19, D-20.
- Even using Dean Schmalensee's weighting scheme, the
estimated increase in Internet Explorer's share is about a
third greater (22%) than the estimated decrease in Netscape
Navigator's share (15%). Dean Schmalensee, in applying
the fixed weights, focused on the change in Netscape's
share, which increased the apparent effect of weighting on
estimating the change in share within the "shipment
restrictions" group. But focusing solely on Navigator's
decline in share underestimates the anticompetitive impact
of Microsoft's restrictions. Schmalensee Dir. App. D Fig. D-20. See supra Part VII.A.5.b., ¶ 373.1.
382.2.2. The use of multiple domain names by ISPs that were not
in the "IE Parity" group has no substantive impact on the analysis based on the
- Dean Schmalensee claims that some ISPs may use multiple
domain names, or that they may have changed or added
domain names over time. Schmalensee Dir. App. D ¶ 84.
He does not cite evidence that this might be a problem, but
guesses (without providing support) that hits from a
particular domain name might not be representative
(Schmalensee Dir. App. D ¶ 85), or that a particular domain
name (such as AOL) may be favored by Navigator users
(Schmalensee Dir. App. D ¶ 96).
- There is no evidence that any ISP that used multiple domain
names, and was included in either Dr. Warren-Boulton's or
Professor Fisher's analyses of browser share broken down
by ISP type, rooted particular browsers in particular domain
names. See Fisher, 1/5/99pm, at 41:22 - 43:3 (testifying
that the use of multiple domain names by an ISP would be a
problem only if an ISP roots particular browsers in particular
domain names and if that is one of the domain names in the
AdKnowledge data); Fisher, 1/5/99pm, at 25:15 - 26:11
(testifying that, because each ISP in the "IE Parity" group
had only one domain name from which users could
originate, any potential problem stemming from the use of
multiple domain names could not affect the estimate of the
change in Internet Explorer's share among the ISPs in the
"IE Parity" control group).
382.2.3. The use of a contractually neutral control group of ISPs
identified as the "IE Parity"group was appropriate in determining the exclusionary
impact of Microsoft's restrictions. The choice of browsers made by those ISPs reflects
what consumers demand. Therefore, the fact that many of those ISPs chose Navigator
is not a flaw in control group, but rather is precisely the point of the control group.
- Dean Schmalensee criticizes the use of the "IE Parity"
control group because "[f]or the most part, it appears that
the ISPs in the group favor Netscape" and one ISP in the
control group did not even know what Internet Explorer was.
Schmalensee Dir. ¶ 464.
- This, Professor Fisher testified, is exactly the point. That is
precisely why the "IE Parity" control group is appropriate. It
is a group with no contractual restrictions, and it is used to
measure the browser ISPs preference in the absence of
such restrictions. Fisher, 6/2/99am, at 10:23 - 11:4.
- The choice of browser made by those ISPs ( reflected on the
"parity" line in GX 3 and GX 4) reflects consumer demand
and not Microsoft's contractual restrictions. Fisher,
6/2/99am, at 10:23 - 11:15.
382.2.4. By contrast, Dean Schmalensee's control group is inappropriate
because it includes ISPs that are constrained by Microsoft control and ISPs that cannot
be identified as contractually neutral.
- Dean Schmalensee used as a "control" group something he called
an "unclassified" group. Schmalensee Dir. App. D ¶ 114 & Fig. D-20.
- However, this group contains access providers that are in fact
under some sort of constraint or influence from Microsoft. It
includes MSN and WebTV, both owned by Microsoft. Professor
Fisher testified that, if the objective is to determine what companies
responding solely to consumer demand will distribute, this is an
inappropriate control group. Fisher, 6/2/99am, at 12:4-16.
B. Microsoft's anticompetitive conduct created a dangerous probability
that Microsoft would monopolize the market for Internet browsers
383. Microsoft's ability to thwart the browser threat to its operating system
monopoly, as explained, did not require it to obtain monopoly power in Internet
browsers. Nonetheless, Microsoft's predatory campaign against browser rivals also
threatened to enable it to monopolize the browser market and continues to do so.
1. Internet browsers comprise a relevant antitrust market
384. Internet browsers comprise a relevant antitrust market because there are
no good substitutes for browsers.
384.1. Internet browsers perform a specialized function (web browsing)
that is not performed by other software.
- See supra Part V.B.
384.2. Internet browsers are thus recognized to be a distinct product
- See supra Part V.B.
384.3. Internet browsers are a distinct product market even though
today, as a result of Microsoft's conduct, browsers are not sold at a positive price.
- Professor Fisher testified: "There is a market for Internet
browsers. Before Microsoft gave away its browser for free, a
price for browsers was determined in this market and the
market could have continued to perform this function."
Fisher Dir. ¶ 80.
- Before Microsoft forced it to drop its price to zero, Netscape
charged for its browsers and intended to continue to do so.
See supra Part V.G.
- Before Microsoft forced the prices of browsers to zero, other
browser producers intended to market their browsers at
retail. See supra Part V.G.
- Some browsers are, in fact, sold at a positive price. Warren-Boulton, 11/23/98am, at 82:1-2.
2. Microsoft specifically intended to monopolize the browser
385. Microsoft's campaign to gain browser market share, aimed principally at
thwarting the platform threat, also had as its objective monopolization of the browser
- In an internal e-mail dated July 1997, Microsoft marketing executive Yusuf
Mehdi wrote: "we are far from done on the browser front. We are just at
30% but Netscape has shipped a good product far ahead of us and is still
very savvy and very interested in keeping their stock price up. We need
to execute on IE4, surpass 50% share, and be setup to continue the
share gain via great distribution and product before we pull the plug." GX
514. Paul Maritz later responded that, although changing strategy to drive
Win98 upgrades instead was "tempting," "we have to remember that
getting browser share up to 50% (or more) is still the major goal." GX
- In the Internet Client and Collaboration 3 Year Business Plan dated
February 11, 1997, on a slide titled 'metrics,' in the section called
'objectives'-- "Be number 1 in IB browser share" with IB meaning Installed
base" -- Microsoft listed its numerical goal at that time was to "Grow IE IB
to 60% by FY00." GX 413, at MS6 6003203.
- Six months later in August 1997, David Cole, in an e-mail whose subject
was listed as "post IE4 thinking (long but please read)," said, "Number 1
goal for IE continues to be market share. Let's not forget that. We should
be agressive here to force ourselves to think about breakthrough ways to
gain share. We should be after 50% by the end of FY98 (June 98) and
75% by the end of FY99 which is June 99." GX 60.
3. Microsoft's predatory and exclusionary conduct was
reasonably likely to result in Microsoft's obtaining monopoly
power over Internet browsers
a. Microsoft anticipated that its conduct would result in its
obtaining a dominant position in Internet browsers
386. At the time it undertook its predatory campaign to protect its operating
system monopoly, Microsoft anticipated that its share of browsers (both flow and stock)
would reach dominant levels.
386.1. Microsoft projected, including through its own internal "Browser
Share Model," that its exclusionary and predatory conduct would lead to its obtaining a
dominant share of the browser market.
- Microsoft's internal "Web-Viewing Share Model" projected, in
February 1998, that Internet Explorer's overall share would range
anywhere from 67% ("High Case") to 59% ("Low Case") in FY 2001
and assumed that Internet Explorer would have a "run rate on new
internet connections" for home users of between 70% and 75%.
- Kumar Mehta, reporting to Brad Chase on the results of this model,
wrote: "The most important point in this model . . . is that no matter
how much you change the assumptions; our share in 3 years is
going to be between a conservative estimate of 60% to an
aggressive estimate of 68% or so. This is of course barring
something radically different happening in the market. We have
tried playing with improving and decreasing switch rates; run rates
etc; but the model is pretty constant in staying in the 60%+ range."
- Dr. Warren-Boulton testified regarding Microsoft's model that "the
most meaningful share to look at is the overall share in the overall
market" and that the February 1998 projections reflected "a very
conservative statement" concerning "Microsoft's overall projections
of its overall market share" because the model, among other
things, included only the United States. Warren-Boulton,
11/23/98am, at 75:7 - 76:6. If the worldwide market was used
instead of the United States, the "Base Case" projection would rise
"from 62 percent to 67 percent." Warren-Boulton, 11/23/98am, at
- In a document titled "Browser Marketing FY99" that is dated May
1998, Microsoft estimated that Internet Explorer's current "run rate"
was approximately 76% and was projected to increase to
approximately 88%. GX 173 (sealed). A "run rate" is the
percentage of new Internet connections that use a particular
browser. Warren-Boulton Dir. ¶ 13; GX 711.
- Microsoft's prediction led Dr. Warren-Boulton to conclude that
"Microsoft expected to gain browser market share in the aftermath
of its anticompetitive practices." Using an internal forecasting
model, he explained, Microsoft estimated its browser sales and
shares to increase, reaching a share of 65% by the end of Fiscal
Year 2001. Warren-Boulton Dir. ¶¶ 136-137 (referencing GX 14).
386.2. Microsoft used projections forecasting a large future share of the
browser market to seek to convince firms to abandon Netscape and switch to Internet
- Professor Fisher testified: "Microsoft relied on its increasing
browser market share, and the expected continued increase due to
its practices, in trying to convince ICPs to abandon Netscape and
agree to Microsoft's exclusivity provisions. For example, Microsoft,
using forecasts from the Giga Information Group, told ICPs that its
browser share had increased from 20 percent to 45 percent from
1996 to 1997, and would increase to 65 percent in 1998 and 75%
in 1999." Fisher Dir. ¶ 234 (citing GX 208; GX 15).
- The Giga estimates showed that Microsoft's browser market share
increased from 20% in 1996 to 45% in 1997. The estimates
projected that Microsoft's browser share would increase to 75% in
1999. GX 15; GX 208.
b. Because browsers exhibit network effects, it was likely
that Microsoft's initial gains in browser market share
would lead to further increases
387. Browsers exhibit network effects that can reinforce the share of the
dominant browser providers.
387.1. The technologies used in web sites by developers can favor a
particular browser and can thereby result in "positive feedback" that reinforces the
share of the leading browser supplier.
- Paul Maritz wrote on June 20, 1996: "Without browser share,
everything is very hard. So job #1 is browser share. We also have
to persuade approx 5 million persons to start using IE over the next
6 months. We have to stop the Nav-Web site reinforcement cycle
with IE3 and shift it in the direction of ActiveX. We thus have to get
significant share BEFORE Nav 4 ships, and in so doing prevent
Web sites from automatically shifting to exclusively exploit it as they
did on Nav2." GX 42.
- Bill Gates told Intel that "using Netscape in a Windows environment
is not a problem," provided Intel "does not set up the 'positive
feedback loop' for Netscape that allows it to grow" into a "defacto"
standard. GX 279.
- Jim Barksdale testified that, because Netscape had a large
installed base of users, "developers began developing for our
browser, and that helped create the need for more browsers from
us." Barksdale, 10/22/98pm, at 78:2-9.
- Dr. Warren-Boulton testified: "Browsers, like operating systems,
exhibit not only economies of scale, but also network effects.
Websites can be written to standards that favor one browser over
another. For instance, websites can use technologies that are
accessible only by a particular browser or work better with that
browser. If Microsoft were to gain a dominant share of the browser
market, it might succeed in inducing website developers to write
their content using Microsoft-specific technologies." "If a large
number of websites are written to such a technology, more end
users would switch to IE, which in turn would increase the
incentives of website developers to embrace Microsoft-specific
technology. The consequence of this instance of 'positive
feedback' is that the browser market could tip to a Microsoft
monopoly, in which the installed base of Microsoft specific web
sites, along with switching costs, create barriers to entry." Warren-Boulton Dir. ¶ 89; see also Warren-Boulton Dir. ¶ 89; Warren-Boulton, 11/24/98pm, at 51:6-18 (testifying that "one of the reasons
why many of those web site developers may be using Microsoft-specific technologies is because Microsoft is either paying to do it
or is providing them with special inducements")
- Gates noted in May 1995 that Netscape's "browser is dominant,
with 70% usage share," which allows "them to determine which
network extensions will catch on." GX 20.
387.2. In addition, users tend to demand the same browser across
operating systems and for use both at work and at home; obtaining a large share of
browsers for the dominant operating system or segment can thus reinforce demand for
that browser elsewhere.
- See supra Part V.B.1.(b)(2); ¶ 108.
- A Microsoft focus group study in November 1997 shows that
"Win32 browser qualities are reflected on to other platform version
in users' minds" and users' desire "is for one 'core browser' with
similar UI and same content and feature support across platforms."
- Dr. Warren-Boulton testified that Microsoft developed non-Windows
versions of Internet Explorer "because that was a way to get a
higher proportion of sales of IE . . . on Windows computers."
Warren-Boulton, 11/24/98pm, at 33:19 - 34:1.
c. Microsoft already has more than half the browser
market, and its share is increasing
388. Microsoft already has the largest share of Internet browsers, and its share
388.1. Microsoft's share of Internet browsers has risen to over 50% of the
- See supra Part VII.A.
388.2. Microsoft's share is increasing and projected to rise even further.
- Even the MDC data shows a clear upward trend in Internet
Explorer's share with a 44 percentage point increase from early
1996 to late 1998. Schmalensee Dir. App. D ¶ 42 and Fig. D-3;
Schmalensee Dir. Exec. Sum. ¶ 9 & Fig. E-1; Schmalensee Dir. ¶
289-290, Fig. 4 & Tbl. 7.
- Giga Information Group prepared graphs illustrating Netscape and
Microsoft's actual and projected shares of the Browser market.
The graphs estimated Netcape's share as 70 percent in 1996 and
20 percent in 1999. Giga Information Group predicted Microsoft's
share of the Browser market to be approximately 20 percent in
1996 and 75 percent in 1999. GX 15; GX 208.
d. Substantial barriers to entry would ensure that Microsoft
could exercise monopoly power in browsers
389. Microsoft had reasonable prospects of obtaining monopoly power in
browsers, not only because it was likely to obtain a dominant market share, but also
because substantial entry barriers would secure Microsoft's dominant position.
- Professor Fisher testified: "If Microsoft succeeds in acquiring a monopoly
in Internet browsers, the monopoly will be protected by substantial
barriers to entry. With ownership of the desktop, Microsoft can easily
control the most common browser distribution channels, including
distribution through OEMs and ISPs. Without an effective method of
distribution, competitors' browsers pose little threat to IE. Moreover,
natural barriers to entry would protect Microsoft's browser market share.
Developers would tend to create Web sites that accommodate the
dominant IE technology, which would increase users' demand for IE,
generating a cycle that would reinforce IE's monopoly in the browser
market." Fisher Dir. ¶ 239.
389.1. First, developing a quality browser requires incurring significant
sunk costs, which is a substantial entry barrier.
- Brad Chase testified that the "cost of rebuilding" Internet Explorer
2.0 into Internet Explorer 3.0 was "high. We dedicated a team of
more than 100 developers to the Internet Explorer 3.0 effort. . . .
And this level of investment was not a guarantee of success."
Chase Dir. ¶ 20.
- Microsoft represented that its development costs for Internet
Explorer were approximately 100 million dollars a year. See supra
Part V.G (describing the large costs associated with developing a
389.2. Second, a new entrant competing against Microsoft's browser
would have to overcome network effects that tend to entrench incumbents.
- In an internal Microsoft email dated April 1997, Chase wrote:
"Content drives systems. Windows won the desktop OS battle
because it had more applications earlier than any other platforms."
He stated, "We must make sure that the best Web applications and
content becomes available for IE users first." GX 510, at MS7
004130; GX 39, at MS6 500571 (same).
- Professor Fisher testified: "If Microsoft's conduct is not checked it
is very likely to create a world in which entry into browsers is
difficult or impossible (partially as a result of network effects)."
Fisher Dir. ¶ 23.
- Professor Fisher further testified: "Barriers to entry (including
network effects and the results of Microsoft's conduct) exist which
prevent companies that might be able to produce a browser from
entering the browser market." Fisher Dir. ¶ 81.
389.3. Third, Microsoft's demonstrated willingness to engage in predatory
conduct -- including raising the costs of using key distribution channels -- to prevent
firms from gaining a substantial share of Internet browsers has deterred, and is likely to
continue to deter, firms from entering the browser market.
- Sun dropped its plans to promote its browser as a stand-alone
product following Microsoft's forcing of browser prices to zero. See
supra Part V.G.5.a; ¶ 307.
- See also Fisher, 1/5/99pm, at 79:15-17 ("I do not know . . . of any
sort of serious entrant into the browser market, period."); Fisher Dir.
¶ 22 ("Microsoft's conduct has created, preserved, and increased
barriers to entry into both the PC operating system market and the
Internet browser market."); Fisher Dir. ¶ 81 (explaining that, "by
bundling its browser with its operating system and giving away its
browser for 'free,' Microsoft effectively prevents companies from
successfully entering the browser market unless they successfully
enter the operating system market at the same time.").
389.4. Fourth, Microsoft's ability to enter successfully against Netscape is
not to the contrary because Microsoft was able to use assets other entrants would lack
-- including its operating system monopoly -- and because the browser market was not
mature, and penetration of the market was low, when Microsoft entered.
- "Despite the huge browser-related costs it was incurring, Microsoft
distributed its browser at a negative price. The IE browser was not
only given away free; companies were given valuable concessions
to accept, use, distribute, and promote IE." Fisher Dir. ¶ 123.
e. Microsoft was reasonably likely to acquire monopoly
power in Internet browsers
390. Regardless whether Microsoft was likely to drive other browser producers
out of business altogether, Microsoft was likely to acquire a large enough share of the
browser market to enable it to exercise monopoly power.
390.1. Obtaining monopoly power requires only a durable, dominant
share, not 100%, of the browser market.
- Professor Fisher estimated that, if Microsoft gets fifty percent share
in the browser market, the company "will certainly have some
degree of monopoly power." Fisher, 1/6/99pm, at 35:5-12.
- Dr. Warren-Boulton testified that, although he could not give an
exact number, "Given the characteristics of the browser market, I
would expect that reaching a share on the order of about 70
percent is, if I had to pick a number, likely to be the level at which I
would expect to see Microsoft able to exert monopoly power in the
browser market." Warren-Boulton, 12/1/98am, at 15:9-16.
390.2. Microsoft was reasonably likely to obtain a sufficient share to
enable it to exercise monopoly power in browsers.
- Professor Fisher testified: "It is probable that in the absence of
intervention, Microsoft will obtain monopoly power in the market for
Internet browsers." Fisher Dir. ¶ 79. He elaborated: "Microsoft is
using its monopoly power over PC operating systems to secure
monopoly power over Internet browsers. While Microsoft has not
yet succeeded in monopolizing browsers, Microsoft's browser
market share grew significantly and Netscape's browser market
share declined significantly from 1996 to the middle of 1998. As
described in detail above, several sources indicate that Microsoft
enjoys a browser market share of about 50 percent or more."
Fisher Dir. ¶ 238.
- Dr. Warren-Boulton testified, based on among other things
Microsoft's own browser share model, that "there is a dangerous
probability that Microsoft will gain monopoly power in the browser
market." Warren-Boulton Dir. ¶ 152; Warren-Boulton Dir. ¶ 16(6)
(testifying that "under current conditions, Microsoft's share of
browser usage can be expected to continue to increase rapidly.
Should Microsoft's anticompetitive conduct continue, there is a
dangerous probability that Microsoft will monopolize the browser
4. Microsoft's monopolization of the browser market would
increase the harm to competition already caused by
Microsoft's effort to blunt the browser threat
391. Microsoft's monopolization of the browser market would exacerbate the
harm to competition caused by Microsoft's campaign to blunt the browser threat.
391.1. Microsoft's monopolization of the browser market would further
deter and impede entry into and competition in that market.
- Professor Fisher further testified: "If Microsoft's conduct is not
checked, it is very likely to create a world in which entry into
browsers is difficult or impossible (partially as a result of network
effects). In that world, platforms that do not use a Microsoft
standard will never prosper, and a critical opportunity for innovation
that reduces or eliminates Microsoft's power will have been lost."
Fisher Dir. ¶ 23.
391.2. Microsoft's tighter grip over the browser market would augment its
ability to blunt threats to the applications barrier to entry that depend on a browser (or
browser-based client) and increase its ability to project its monopoly power into related
markets, such as the market for server operating systems.
- See infra Part VII.D.
C. AOL's acquisition of Netscape will not undo the harm to competition
caused by Microsoft's predatory and anticompetitive conduct
392. The acquisition of Netscape by America Online in November 1998 will not
eliminate the competitive harm caused by Microsoft's course of conduct.
1. AOL acquired Netscape for reasons other than its browser
393. Rather than demonstrating that the Netscape/AOL combination is a robust
platform threat, AOL's acquisition of Netscape itself evidences the harm to Netscape's
browser business caused by Microsoft's predatory campaign. Netscape was acquired
because it had been damaged by Microsoft's campaign.
393.1. AOL acquired Netscape despite the browser business, not
because of it.
- Steve Case, AOL's CEO and Chairman, testified that AOL "did not
buy Netscape because of the browser business. Indeed, we
bought Netscape, to some extent, despite the browser business."
Case Dep. (played 6/4/99am), at 46:7-12.
- Barry Schuler, AOL's President of Interactive Services, testified
that Netscape's browser business "wasn't something that we were
really focused on. The browser market share played a very small
role in our overall evaluation." Schuler Dep., 5/5/98, at 81:4-8 (DX
- Schuler further testified: "I was relatively lukewarm about the idea"
of acquiring Netscape. "I felt that there was a part of their business
which was compatible with ours and another part that was outside
of our core competency. And I felt that the browser part of their
business as a business was dead." Schuler Dep., 5/5/98, at 31:12
- 32:6 (DX 2810).
393.1.1. AOL believed that Netscape's browser business was
declining, and likely to decline further, as a result of Microsoft's anticompetitive conduct.
- Case said that AOL "believed that the Netscape browser
business that was flourishing three or four years ago was in
a state of significant decline." Case Dep., (played
6/4/99am), at 46:7 - 47:6; Case Dep., (played 6/4/99am), at
- Schuler testified that "we knew we were in a market where
browser share was declining." Schuler Dep., (played
6/22/99am), at 11:14 - 12:4; Schuler Dep., 5/5/98, at 54:14-17 (DX 2810); Schuler Dep., 5/5/98, at 54:20 - 55:7 (DX
- According to an internal AOL analysis, Netscape's "share
has declined over the past two years from 80 percent, and is
expected to decline further to approximately 35 percent to
50 percent over the coming two years in the face of
Microsoft browser being increasingly tightly integrated with
Windows 98." DX 2518, at AOL NO150025; Schmalensee,
6/24/99am, at 72:7-15.
393.1.2. AOL believed that the weakened state of Netscape's
browser significantly increased the transaction's risk.
- Steve Case testified that AOL knew that Netscape's
"browser market share would likely to decline. One of the
concerns we had in pursuing the" Netscape acquisition "was,
to the extent" Netscape's browser market share "was
declining on our watch, it might reflect poorly on AOL, and
that bothered us. But we thought that on balance, inheriting
that risk, since the browser was not in and of itself a
business, and focusing people's attention on the businesses
we care about, which were portals and E-commerce, and the
other assets we cared about, which was the brand name
and the team, on balance it made sense for us to pursue this
acquisition." Case Dep., (played 6/4/99am), at 46:7 - 47:6.
- Barry Schuler testified that "We didn't want the metrics of the
America Online business to be measured in terms of
browser share from a Wall Street market perception point of
view." Schuler Dep., (played 6/22/99am), at 11:14 - 12:4.
- As an internal AOL document on the AOL/Netscape
transaction points out: "Making the situation even more
difficult, outside parties are going to highlight the [AOL]
versus Microsoft scenario repeatedly, no matter what we say
or do. The clearest way to counterbalance this negative
drumbeat would be to announce, right before going public
with the [Netscape] acquisition that, [AOL] has renewed its
Internet Explorer agreement through August 2000 and, if
possible, renegotiate now beyond 2000 (which would permit
[AOL] to retain its presence on the Windows 95 and
Windows 98 operating systems." DX 2445 (sealed); see
also Colburn, 6/22/99am, at 7:22 - 8:6.
393.2. AOL instead purchased Netscape because of Netscape's portal,
server and e-commerce products.
- Case testified that Netscape's value to AOL was that AOL was
"largely missing in action in the portal space" and that, "in
evaluating the various alternatives building it ourselves, acquiring
something, we concluded that Netcenter was the best option,
particularly given the price." Case Dep., (played 6/4/99am), at
- In an internal AOL e-mail, Case wrote:
- redacted -
GX 2112 (sealed); Fisher,
6/4/99am, 47:17 - 48:6 (testifying that GX 2112 "confirms the
proposition that the purchase of Netscape was not because of the
- Schuler testified that the portal and e-commerce aspects of the
transaction "were the components of the business that were of
value to America Online." Schuler Dep., 5/5/98, at 51:24 - 52:5
(DX 2810); Schuler further testified that: "The transaction was
analyzed really in two components, and that was the portal
business and their enterprise E-commerce business." Schuler
Dep., 5/5/98, at 19:4-8 (DX 2810).
- David Colburn also testified: "I think we had basic reasons why we
did the deal, being the portal, the e-commerce, capturing the
Netscape name and the Netscape people." Colburn, 6/14/99pm,
7:22 - 8:6; Colburn, 6/14/99pm, at 9:5-20.
- An internal AOL document reads: "This acquisition and alliance is
about using Netscape's portal and e-commerce development
businesses and Sun's hardware, platforms and distribution
channels to build on America Online's portal strategy and take e-commerce to the next level." DX 2522; 6/22/99am, at 6:2-17.
393.3. To the extent AOL valued the browser, it was only as a means of
feeding traffic to Netscape's portal site, not for its potential to develop into an alternative
- Schuler also testified that the importance of Netscape's browser to
the acquisition related to Netscape's ability to transform its
"decimated" browser business into an Internet portal business.
Schuler described Netscape's transformation of its browser into a
"client" by linking the browser to Netcenter, its Internet portal, as a
"strategy that Netscape . . . pursued once their standalone browser
business was no longer a viable P&L product line." Schuler Dep.,
5/5/98, at 52:14-19 (DX 2810).
- Colburn testified that acquisition of Netscape does give AOL "an
additional client to use and to attach to the portal." Colburn,
6/14/99pm, 36:7-20. He also testified that "Part of the interest in
the portal was that it was tied to the browser client, and that helped
drive traffic and things like that." Colburn, 6/14/99pm, at 7:22 - 8:6;
see also Colburn, 6/14/99pm, at 9:5-20.
- Professor Fisher concluded that the transaction was "certainly not
about . . . AOL wishing to use the Netscape browser instead of the
Microsoft browser." Fisher, 6/2/99pm, at 44:16-22.
393.4. Relative to what it would have cost to acquire other firms with
significant Internet portals, AOL was able to acquire Netscape cheaply.
- Case testified that portal "Companies like Yahoo and others were
doing quite well in that space. And we thought having a different
brand focused on that particular segment was important. And in
evaluating the various alternatives building it ourselves, acquiring
something, we concluded that Netcenter was the best option,
particularly given the price." Case Dep., (played 6/4/99am), at
- Professor Fisher concluded, after comparing the price AOL paid for
Netscape to the prices paid in two other unrelated transactions in
which firms with portals were acquired: "If one looks at those
transactions and then tries to measure the importance of the portal
by various measures, sort of how much advertising really was
involved by using the portal and so forth, one comes to the
conclusion -- and does the same for Netscape -- one comes to the
conclusion that Netscape was acquired, if anything, cheaply."
Fisher, 06/01/99am, at 65:13-19.
2. AOL will not, in the wake of Microsoft's predatory campaign,
seek to resuscitate the browser threat; indeed, Microsoft
remains likely to achieve dominance in browsers
394. AOL will not seek to revive the platform threat that Netscape's browser
once presented and that Microsoft went to great lengths to crush.
394.1. First, Microsoft's predatory campaign against Netscape has
signaled to AOL (and other would-be browser rivals) that Microsoft will engage in
anticompetitive actions to prevent the browser threat from arising again and thereby
deters AOL and others from seeking to revive the browser threat.
- See infra Part VII.D.
394.1.1. AOL -- well aware of this history -- has no intention of
reviving the threat Netscape posed to the applications barrier to entry.
- An internal AOL document says that the acquisition of
Netscape and the alliance with Sun is "not about Microsoft.
We have always considered Microsoft both a tough
competitor and an important partner. This deal doesn't
change that. Our intention is to continue to use Microsoft's
Internet Explorer within the AOL service, because we
believe it is important to have AOL bundled with Windows."
Colburn, 6/22/99am, at 6:2-17; DX 2522.
- An internal AOL document reads: "beyond the initial reaction
to the acquisition, there will be a future overhang on [AOL] if
the company appears to be committed to a strategy of
competing directly with Microsoft (in Microsoft's, and not
[AOL's] business). For the record, no company with such a
strategy has been successful." Colburn, 6/22/99am, 7:7-16;
DX 2445 (sealed); Fisher, 6/4/99am, 52:15 - 53:10 (testifying
that this document supports his conclusion that the AOL
acquisition has no significance for Microsoft's monopoly
- An internal AOL document discussing
- redacted - DX 2474 (sealed).
394.1.2. AOL remains highly dependent on Microsoft and for that
additional reason is unlikely to mount a platform challenge.
- Barry Schuler testified that AOL is an application software
company whose success is based on running on top of
Windows and is thus "very dependent from the standpoint
that Microsoft controls the feature direction of the operating
system. And it kind of goes both ways. We depend upon
the operating system to run our software upon." Schuler
Dep., 6/22/99am, at 18:20 - 19:7.
- Schuler testified: "Right now the major part of AOL Inc.'s
revenue stream is derived from our flagship AOL online
service product running on top of the Windows operating
system. To the extent that product would be disadvantaged
in any way, it could have negative impact on our business."
Schuler Dep. (played 6/22/99am), at 18:20 - 19:7.
- Bob Pittman, AOL's President, explained that it was
essential for AOL to maintain its relationship with Microsoft:
"I do think MSFT is too strong to throw them out of the tent
-- they can hurt us if they think they have no other option. I
think we need to stay in business with them, create a need
for them to need us . . . and then leave ourselves the
flexibility to always accommodate them to a certain extent."
Colburn, 6/14/99am, 40:5-19; GX 2240.
394.2. Second, AOL would be able to mount a serious platform threat
only if it were able to obtain a large share of browsers. That could happen only if,
among other things, AOL ceased distributing Internet Explorer as its principal client and
substituted Netscape instead. That is very unlikely to occur, in part because AOL's
acquisition of Netscape does not change AOL's incentives with respect to whether to
accept Microsoft's inducements to promote and distribute Internet Explorer as the
standard browser with AOL's software.
394.2.1. AOL was permitted under its contract with Microsoft to
terminate its exclusionary OLS agreement in January 1999, a little more than a month
after it announced its acquisition of Netscape; but AOL chose not to do so because of
the importance to it of remaining featured in the Online Windows Services Folder.
3220.127.116.11. Because Netscape had developed a
componentized browser, code named Raptor/Gecko, AOL was technically capable of
replacing Internet Explorer AOL's online service software.
- Barry Schuler testified that, during the summer of
1998, AOL had assessed the technical viability of
using a componentized browser Netscape was
developing and was "trying to determine" whether the
Netscape componentized technology was a viable
option to Internet Explorer. Schuler Dep., 5/5/98, at
26:20 - 27:11 (DX 2810). DX 2668 (indicating AOL
had received a demonstration of Netscape's
- An internal AOL document reads:
- redacted -
DX 2513, at AOL/N 0121999 (sealed).
318.104.22.168. AOL nonetheless concluded that the benefits of
continued placement in the OLS folder, both the promotion it receives and the added
leverage it gives AOL in negotiating with OEMs, outweighed any benefits from adopting
Netscape's browser as its principal browser.
- Steve Case stated, after the acquisition was
announced, that we "plan to continue using Internet
Explorer within AOL, because we do want" Microsoft
"to continue to be bundled our AOL software with
Windows . . . .The point I was making about IE and
AOL, is we do believe it's important to continue to
have AOL software bundled with the Windows
Desktop, and therefore we are continuing . . . to plan
to continue to have IE built into the AOL software."
- Schuler explained why AOL decided to renew its
agreement with Microsoft, including the exclusionary
provisions: He stated: "our position in the Online
Services folder as a part of the desktop of Windows is
a very important contributor, a very important part of
our member acquisition program, and represents a
fairly large percentage of our overall acquisitions.
And so the strength of that position inside of the
operating system is very, very important to us."
Schuler Dep. (played 6/22/99am), at 17:3-9; Schuler
Dep., 5/5/98, at 60:17 - 61:5 (DX 2810).
- An internal AOL document reads: "In exchange for
using IE as our primary browser component,
Microsoft bundles [AOL] in the 'Online Services
Folder' on the Windows desktop. This is an
important, valued source of new customers for us,
and therefore something we are inclined to continue.
Microsoft has made it clear that they will not continue
to include us in Windows if we don't agree to continue
our 'virtual exclusivity' provisions for use of IE within
Apollo." Colburn, 6/22/99am, at 16:1-18, DX 2518
(sealed); DX 2451.
- Colburn explained that the Internet Explorer
agreement with Microsoft is valuable to AOL
- redacted -
Colburn, 6/14/99pm, at
97:14 - 98:7 (sealed session). See also Case Dep.,
5/21/99, at 50:6 - 51:20 (DX 2811).
394.2.2. AOL is unlikely to surrender the benefits of placement in
the OLS Folder in the foreseeable future and, therefore, is likely to remain subject to
Microsoft's restrictions on AOL's ability to promote and distribute non-Microsoft
- In the final "Strategic Development and Marketing
Agreement" between AOL and Sun Microsystems,
- redacted - DX 2463, § 6.5 (sealed);
Colburn, 6/14/99pm, at 90:15 - 91:20 (sealed session).
394.2.3. If independent browsers were still a threat to Microsoft's
operating system monopoly, Microsoft would have a tremendous incentive to continue
to induce AOL, whether through inducements like the OLS Folder or otherwise, not to
drop Internet Explorer and to disfavor Microsoft's browser rivals.
- Professor Fisher testified that the value Microsoft derives from its
agreement with AOL is the "ability to seriously prevent -- ward off
the" platform "threat or ward off the possible paradigm shift." Fisher,
6/3/99 am, at 21:3-9. Professor Fisher also testified that the AOL
agreement benefits Microsoft because "a good deal of the value
open to Microsoft in distributing its technology more widely is the
maintenance of the application barriers to entry." Fisher, 6/3/99am,
- Professor Fisher explained: "if Microsoft could, in either money or
other inducements, outbid Netscape, it can make it, and will make
it, to the combined companies' advantage not to combine the
browser, not to push the browser." Fisher, 1/11/99pm, at 60:4-7.
- In discussing whether Microsoft would (after the Netscape
acquisition) still be able to induce AOL to use Internet Explorer
exclusively, Dr. Warren-Boulton testified that "if it was worth it for
Microsoft to make an offer to AOL that would enable it to preserve
its position in the operating system market" before AOL's
acquisition of Netscape, "Microsoft still has the same incentive to
outbid anyone else for that. It's clearly worth more to Microsoft
than to anyone else." Warren-Boulton, 11/23/98am, 65:20 - 66:14.
394.3. Third, even if AOL did adopt Netscape
as its principal client at some point in the future, that would neither resurrect the threat
that Internet browsers posed nor undo the harm to consumers that Microsoft has
inflicted in the browser market and by maintaining its operating system monopoly.
- Professor Fisher testified that, even if AOL chose to make the
Netscape browser into a platform and managed to attract
developers to write for the platform, developers "will write first and
foremost for" Internet Explorer "that has the other 66 percent"
browser market share, "and approximately somewhere over 200
million users . . . . And a platform-shifting event -- a paradigm-shifting event will not occur." Fisher, 6/3/99am, at 61:15 - 62:6.
Professor Fisher testified that: "Microsoft, in fact, succeeded in
having IE out to a sufficient extent that . . . it was no longer seen
likely that there was going to be a paradigm-shifting event causing
people no longer to care very much about the underlying operating
system." "This occurs when Microsoft's IE share is up around 50
percent." Fisher, 6/2/99am, at 17:18 - 18:17.
- Professor Fisher testified: "it's too late and I think Microsoft believes
it's too late. It's not necessary to have driven Netscape to zero in
order for Microsoft to prevent the platform-shifting even or the
platform-threatening event that might threaten their operating
system monopoly. It's enough for Microsoft to have obtained a
high share of the browser business, and that they've done." Fisher,
6/1/99pm, at 66:3-21.
- An internal AOL document stated:
- redacted -
395. AOL's acquisition of Netscape does not eliminate the dangerous probability
that Microsoft will monopolize the browser market, as Microsoft suggests (Schmalensee
Dir. ¶ 3, 634). To the contrary, AOL executives believe that Microsoft will achieve
dominance in browsers.
- According to internal AOL analysis: "[Netscape] currently has
approximately 50 percent browser share with 60 plus percent share of
international market. This share has declined over the past two years
from 80 percent, and is expected to decline further to approximately 35
percent to 50 percent over the coming two years in the face of Microsoft
browser being increasingly tightly integrated with Windows 98."
Schmalensee, 6/24/99am, 72:7-15; DX 2518, at AOL/N 150025 (sealed).
- Dean Schmalensee relied on this document
- redacted -
Schmalensee, 6/24/99am, 73:2-10.
3. AOL is unlikely to challenge Microsoft's monopoly in other
ways, and the other devices it may develop would not affect
Microsoft's operating system monopoly
396. Microsoft argued that, even if AOL's acquisition of Netscape will not
reinvigorate the browser threat, Microsoft's actions designed to vitiate the browser
threat did no lasting harm to competition because AOL can challenge Microsoft's
operating system monopoly in other ways. This argument is contrary to the evidence.
396.1. First, AOL has no plans to compete against Microsoft by
developing a rival operating system or platform that it would position as an alternative to
396.1.1. AOL has no intention of challenging Microsoft in operating
systems, either directly by producing an operating system or indirectly by seeking to
create a platform to which ISVs would write instead of to Windows.
- Case stated publicly and testified that AOL has no intentions
of competing with Microsoft's core business. Mr. Case
further stated and testified: "AOL's merger with Netscape
has no bearing on the Microsoft case, as nothing we're
doing is competitive with Windows. . . . We have no flight of
fancy that we can dent in any way, shape or form what is a
Microsoft monopoly in the operating system business. Case
Dep. (played 6/4/99am), at 43:13 - 44:16; Court Ex. 1; see
also Fisher, 1/6/99am, at 44:13 - 45:21 testifying that Mr.
Case's comments are consistent with his understanding of
the impact of the Netscape acquisition, insofar as
developing viable competition to Microsoft's monopoly).
- Dean Schmalensee testified that he found no reference in
any of AOL's internal documents of any intent by AOL to
develop an operating system that would be available to
OEM's as an alternative to preloading Windows on PCs.
Schmalensee, 6/24/99am, at 67:2-9.
- An internal AOL document reads: AOL "is not in the
operating system business and has no plans to enter that
business. Our strategy is to work with multiple vendors
where possible, so we are not totally reliant on any one." DX
2518, at AOL/N 015094 (sealed); Colburn, 6/14/99am, at
60:4-15; Colburn, 6/22/99am, at 17:20 - 18:2; DX 2451.
- Schuler testified that he did not consider AOL's client
software to be an operating system and that AOL has no
plans to develop and market an operating system. Schuler
Dep., 6/22/99am, at 18:6-8, 17-20. Schuler stated: AOL is
"an application software company that does software and
also has online software services. And our success has
been based on running on top of Windows and Macintosh.
And we're in the application software business and that's
what all of our future plans are predicated on." Schuler
Dep., 6/22/99am, at 18:9-16.
- Colburn testified that the deal "has nothing to do" with
"operating systems. I think everybody has made it clear
we're not in the operating system business, and we do
encourage, and we give them functionality that we think is
appropriate for an online world and what our customers
want." Colburn, 6/14/99pm, at 27:1 - 28:5.
- An internal AOL analysis reads:
- redacted -
DX 2474 (sealed).
396.1.2. Microsoft itself does not regard AOL, even after the
acquisition, as a significant operating system or platform threat.
- During a presentation on or about December 14, 1998, Bill
Gates, discussing potential competitive effects of AOL's
acquisition of Netscape and specifically the topic of "platform
threats," expressed the view that "AOL doesn't have it in
their genes to attack us in the platform space." GX 2241
(sealed; cited portion published); Schmalensee, 6/24/99am,
at 65:3-9, 66:4-7.
396.1.3. Although AOL briefly contemplated developing a low-cost
alternative to the PC, the "AOL PC," it quickly abandoned the idea.
- Colburn described two different AOL plans for an "AOL PC." He
testified: "One would be where it runs on Windows, and really it's
the only application that's there beyond what Windows requires.
And that's what we call an AOL PC." The second "might be in a
sort of PC functionality, but that could conceivably run on a
different operating system. As to the second, . . . I think we've had
some limited discussions with . . . some OEMs on this, or relatively
few, but its never come to fruition in any way. It just seems to hard
to do." Colburn, 6/14/99am, at 61:7 - 62:5.
- Colburn further testified: "I think pretty much the latter type of AOL
PC and building a PC-type functionality that is really an alternative
to Windows are largely dead. I don't know any current ones going
on." Colburn, 6/14/99am, at 62:6-11.
- Colburn also testified that, with regard to the "AOL PC," AOL was
"looking to figure out a way to create . . . the lowest cost PC we
could. Our sense was if you could strip away most of the guts and
just have a very thin operating system in it with AOL client running
on it, you could drive the cost of the PC down." However, "this has
never come to fruition, at least in part because . . . that PCs have
come down substantially in price." Colburn, 6/14/99am, at 69:1-20.
See also Colburn, 6/14/99am, at 62:20 - 63:4 ("the real goal was to
bring the price down on the machine...And then what has
happened in the price has sort of fallen out in the PC market
anyway, so the real need to come up with an alternative had sort of
- Case made clear that AOL has no plans to compete with Microsoft
in the PC business. Mr. Case testified: "I've heard the term 'AOL
PC', but that doesn't mean we're necessarily focusing on that as a
major part of our strategy. . . . We want to really make AOL
available in many ways. But we don't think being in the PC
business makes sense for AOL. We think partnering with
companies in that business is a better approach. And obviously all
those companies will be working closely with Microsoft." Case
Dep., 5/21/99, 78:17 - 79:2 (DX 2811).
396.2. Second, the information appliances AOL is pursuing are
complements to the PCs, rather than substitutes for it.
- Case stated publicly and testified that: "It's harder to imagine that
PCs won't be the dominant way people connect with the Internet
for many years to come, and Microsoft has a pretty amazing lock
on that business. . . . Other devices will emerge, but I doubt any will
challenge Windows." Case Dep., 6/4/99am, at 44:17 - 45:4.
- Schuler testified that AOL views information appliance devices, like
the Palm Pilot, Windows CE devices, NCs and set top boxes. as
companions and not replacements to desktop PCS. He testified
- redacted -
DX 2810A (sealed).
- AOL is not the only firm in the industry with this view. On May 31,
1999, Bill Gates stated in an article he wrote for Newsweek: "For
most people at home and at work, the PC will remain the primary
computing tool . . . . But the PC will also work in tandem with other
cool devices. You'll be able to share your data -- files, schedule,
calendar, email, address book, etc. -- across different machines;
you won't have to think about it; it will be automatic." GX 2059.
- Professor Fisher testified that "PCs are a separate object. PCs
share some functions with . . . certain hand-held devices, but the
hand-held devices really aren't substitutes for PCs. And you can
perfectly well have a monopoly in operating systems for PCs,
despite the fact that there are or may be a number of operating
systems for hand-held devices, TV set-top boxes, and so on."
Fisher, 1/12/99am, 7:4-16.
396.3. Third, even if, as Microsoft asserts, AOL were to develop
substitutes for PCs and support the development of server-based, operating system-independent applications, Microsoft's ability to influence network-centric standards will
ensure that such applications do not erode the applications barrier to entry or its
operating system monopoly.
- See infra, Part VII.D.
D. Microsoft's entire course of conduct has caused, and will continue to
cause, substantial and far-reaching harm to competition
397. Microsoft's blunting of the browser threat substantially reduced the
probability of a paradigm shift that could erode the applications barrier to entry and by
itself maintained Microsoft's operating system monopoly. Microsoft's campaign against
the browser threat, however, was part of a broader course of conduct against
middleware. That broader effort had as its objective reinforcing the applications barrier
to entry even further by extending Microsoft's ability to influence and control the
standards used in rapidly-developing Internet and network-based computing. Through
its anticompetitive scheme, Microsoft has largely succeeded in its objective and is
poised to continue its effort to extend its monopoly power.
1. Microsoft's anticompetitive conduct aimed at blunting
middleware threats reinforced the applications barrier to entry
by extending Microsoft's ability to influence or control
398. The rise of the Internet, and more generally network-based computing,
presented a special threat to the applications barrier to entry into the operating system
market. Network-based computing rapidly both became an important way users
employed their PCs (such as by using the Internet or a local LAN) and threatened to
develop new interfaces and standards that Microsoft did not control. Browsers and
other platform-level components of network-based computing quickly became
extremely strong complements to Windows, and the platform they could present to
developers thus posed an especially powerful threat to the applications barrier to entry.
- In April 1995, with the rise of the Internet, an internal Microsoft e-mail to
Bill Gates, Nathan Myhrvold, Paul Maritz, and others, warned: "The
Internet defines formats and architectures that MS had no control over
and very little say in." The email discussed Microsoft's strategies for
maintaining control over Internet standards and protocols, including giving
the "viewer" (the browser) away in order to "shift" momentum "to MS
formats and architecture." Russell Siegelman, the Microsoft executive
then in charge of MSN, concluded that "I don't think that the way to fight
back is simply with a 'better Web browser' either." He continued: "And
there are some interesting questions about the viewer/client side,
integration with Ohare, Office and Blackbird that need to be worked out."
GX 16, at MS98 0107183-84.
- In May 1995, Ben Slivka warned Microsoft executives and others within
Microsoft that "The Web is the Next Platform." He wrote a detailed
memorandum asking "Why is the Web a Threat to Windows?," and
making recommendations for how Microsoft should blunt the threat. He
described that threat as follows: "The Web (as I will loosely refer to the
Internet and it's evolving data formats and protocols) exists today as a
collection of technologies that deliver some interesting solutions today,
and will grow rapidly in the coming years into a full-fledged platform that
will rival -- and even surpass -- Microsoft Windows." GX 21, at MS98
0102394 (emphasis in original).
- Bill Gates summarized his apprehension about the threat posed by
Internet standards and network based computing in his May 26, 1995,
memorandum on "The Internet Tidal Wave." Among other standards,
Gates believed that "HTML with extensions will be the standard that
defines how information will be presented." GX 20, at MS98 0112876.
He later concluded that Microsoft needs to make sure to "output
information" in standard HTML and "in the extended forms" promoted by
Microsoft. GX 20, at MS98 0112876.5.
- In April 1995, an e-mail from Rich Rashid to Bill Gates, Craig Mundle,
Nathan Myhrvold, and Russell Siegelman details the threat posed to
Windows by HTML as a user interface. He writes: "It is dangerous from
our prespective [sic] of wanting to make and preserve valuable
standards." GX 17.
- See also Maritz Dir. ¶¶ 259-60; DX 1490; GX 52, at MS7 003270,
MS7 003272; Fisher Dir. ¶ 86.
399. Microsoft recognized that controlling Internet-based standards and
interfaces (for instance, by encouraging or forcing the use of Microsoft-specific
extensions) and hindering technologies that could advance those standards in ways not
controlled by Microsoft (in particular, the browser) were critical to maintaining the
applications barrier to entry.
- Ron Whittier of Intel reported that Maritz told Intel, in the August 2, 1995,
meeting, that the Internet is a platform. Maritz, Whittier reported, said that
"standards engender end user values, which engenders more standards
with more end user value-- 'feedback mechanism'" and "is the key is to
win the client (patch up the server later)." GX 279, at 2.
- In his extensive May 1995 memo, "The Web is the Next Platform,"
Microsoft's Ben Slivka wrote that "we should be extending the web with as
many Microsoft technologies as possible, even if we have to modify those
technologies in ways not original [sic] intended by their designers." He
concluded that, "If Microsoft doesn't enhance the Web, there is a
nightmare scenario where an OS-neutral Web platform arises, and then a
company like Matsushita or Siemens could come out with a $500 'Web
Box' that runs web applications (with no need for Windows, or MS-DOS
compatibility, or Intel compatibility), and consumers make the obvious
choice between a $2000 Windows PC and the $500 Web Box. Say good-bye to Windows." GX 21, at 4.
- A June 1996 Microsoft marketing report, "Winning @ Internet Content,"
states: "The rise of the Internet has been driven by the success of a
series of 'platforms' that utilize these protocols at their core and provide a
set of APIs for ISVs to develop on top of. By far the most successful
platform to date has been Netscape's, with Netscape Navigator on the
browser and Netscape Suite Spot on the server. The core threat for
Microsoft is the potential for this platform to abstract the Win32 API. For
example, if Netscape continues its success in getting ISVs and ICVs to
develop applications for Netscape's client/server Api's, these API's could
be the most important API's in the future, putting Win32 and Microsoft's
platform position in jeopardy." GX 407, at MS6 5005709.
- Professor Fisher testified that "control over the way in which P.C.'s access
the world wide web has a good deal to do with maintaining Microsoft's
monopoly in operating systems." Fisher, 1/6/99am, at 12:8-11.
400. Microsoft thus strove to impede not only the browser threat, but also more
generally other potentially significant middleware platforms. Doing so facilitated
Microsoft's control over standards, in particular network-centric and Internet-related
- Steven McGeady testified that Paul Maritz told Intel that Microsoft's
strategy was to "embrace, extend, extinguish." McGeady, 11/9/98pm, at
53-55; McGeady, 11/10/98am, at 22:6-7; GX 564, at 477MSC1D00273.
- McGeady testified that Microsoft was going to take Internet standards, like
HTML, "and extend it to the point where it was incompatible with the
Netscape browser and encourage people to develop to their version of
HTML so that pages couldn't be read with Netscape's browser."
McGeady, 11/9/98pm, at 55:7-14.
- In a January 1997 e-mail to Maritz and other top staff, Gates wrote that it
is "wrong" to conclude that Microsoft would not make unilateral extensions
to HTML and that, unless Microsoft intends to use its browser in a
proprietary manner, Microsoft would have to "stop viewing HTML as
central to our strategy and get on another strategy" to avoid having
middleware take over the operating system. GX 351.
401. To maintain control over network-centric computing and standards,
therefore, Microsoft engaged in a broad course of conduct designed to prevent a
substantial middleware platform from emerging; Microsoft's campaign to blunt the
browser threat did not occur in a vacuum.
401.1. Microsoft used anticompetitive means, as explained, to impede
cross-platform Java and encourage use of its Windows-specific version of Java instead.
- See supra Part VI.A.
401.2. Microsoft required applications developers, in return for
commercially necessary early access to Windows releases, to use Microsoft standards
and Microsoft's version of Java as the default technology in their applications.
- See supra Part V.F; Part VI.A.
401.3. Microsoft used anticompetitive means to hinder Intel's efforts to
develop platform-level software because Microsoft viewed such software as a long-term
threat to its control over APIs.
- See supra Part VI.B.
401.4. Microsoft repeatedly made clear to other firms, including among
others Apple and RealNetworks, that efforts to develop potentially rival middleware
software was unacceptable to Microsoft.
- See supra Part IV.B
2. Microsoft has achieved its objective of retaining significant
influence over network-based standards and application
402. Microsoft's anticompetitive conduct, which blunted the browser threat and
impeded other middleware threats from developing, including network-based platforms,
achieved its objective of gaining significant influence over network-based standards and
reinforcing the applications barrier to entry.
402.1. Microsoft's large browser share gives it substantial influence over
network-based standards because, the larger Internet Explorer's share of browser
usage, the more influence Microsoft has over Web-development standards.
- Applications developers will not likely base features upon a
browser with a low usage share. Microsoft had difficulty, when
Internet Explorer's share was approximately 30%, convincing its
own developers in the Office group to target "XL and Access
publishing features only at IE4 . . ." It was a "hard decision for
them (based on IE's current market share)." GX 514, at MS7
- In 1995, Maritz wrote to Gates and other top executives of his
concern that Netscape -- if it gained a "significant" market share --
could benefit from a "feedback loop" allowing it to introduce
"protected features (via IP protection and/or via 'secure'
handshakes between clients and servers)." GX 498, at MS98
402.2. Microsoft's efforts to impede other cross-platform technologies
and to encourage the use of Microsoft-dictated standards also hindered the
development of Microsoft-independent interfaces that could be an important component
or complement to a network-based platform.
- For evidence demonstrating Microsoft's anticompetitive efforts to
encourage and force use of its Windows-specific implementation of
Java, see supra Part VI.A.
- For evidence demonstrating Microsoft's anticompetitive effort to
force use of Windows-specific standards, see supra Part IV.B.
- Professor Warren-Boulton testified that the platform that Microsoft's
conduct prevented "all indicators are, is not just Netscape. It is a
large set of applications which are cross-platform. . . . The
concern, if you like, that is created by increasing share by Microsoft
of the browser market is the frustration of something which is we
don't know for sure exactly what it's going to be." Warren-Boulton,
11/23/98am, at 80:13-21.
402.3. At some point, Microsoft's control over standards is likely to
- Dr. Warren-Boulton testified that: "Websites can be written to standards
that favor one browser over another. For instance, websites can use
technologies that are accessible only by a particular browser or work better
with that browser. If Microsoft were to gain a dominant share of the
browser market, it might succeed in inducing website developers to write
their content using Microsoft-specific technologies. If a large number of
websites are written to such a technology, more end users would switch to
IE, which in turn would increase the incentives of website developers to
embrace Microsoft-specific technology. The consequence of this instance
of 'positive feedback' is that the browser market could tip to a Microsoft
monopoly. . . ." and this would "mark the death knell of the threat posed
by non-Microsoft browsers." Warren-Boulton Dir. ¶ 89.
- See also supra Part VII.B (attempt to monopolize)
3. Microsoft's effort to blunt threats to its control over standards,
and to extend that control, will inhibit the emergence of other
possible paradigm shifts
403. The combined effect of Microsoft efforts to ensure no other firm controls
standards, in particular Internet-related standards, and its development of a reputation
as a predator is to decrease substantially the likelihood that a serious platform-level
threat, such as Netscape's browser, can arise in the future.
403.1. The anticompetitive tactics Microsoft employed served its goal of
preserving the applications barrier to entry not only by creating additional power over
standards, but also by deterring other firms from developing platform-level software that
could challenge Microsoft's operating system monopoly.
- Professor Fisher testified: "Microsoft has given signals to the
world," both through its actions with regard to browsers and Java,
"and through its actions as regards Apple and Intel, Microsoft cares
a lot about whether there are going to be innovations that might, in
one way or another, present a platform threat; and that if you want
to make innovations in that direction, you're going to have to deal
with Microsoft in a very, very serious way. That is also a way of
blunting or preventing future platform threats." Fisher, 1/12/99pm,
at 22:10-18; see also Fisher, 6/2/99am, at 25:16 - 26:3 (similar).
- Microsoft made public statements that were intended to and did
send notice, if any was needed, to potential competitors that
Microsoft would deprive potential competitors of revenue. Top
Microsoft executives were quoted in the press questioning
Netscape's business model and its potential for survival in light of
Microsoft's pricing policy. GX 71, at 4 (6/95 Financial Times article
quoting Gates "Our business model works even if all Internet
software is free. We are still selling operating systems. What does
Netscape's business model look like if that happens? Not very
good."); GX 83 (7/3/99 Financial Times article quoting Gates to
same effect); GX 103, at 2 (Forbes quoting Microsoft's Steve
Ballmer, regarding Netscape: "We are giving away a pretty good
browser as part of the operating system. How long can they survive
- Barksdale testified: "The software industry is watching this case closely,
for if Microsoft is permitted to use its Windows-derived monopoly power
to 'cut off the air supply' of innovative products that threaten Windows
and innovative companies that compete with Microsoft, there are few, if
any, other companies that will try to do what Netscape has done. If this
occurs, consumers and innovation will surely suffer." Barksdale Dir. ¶
403.2. Although Microsoft has suggested that network-centric
applications (those based in web-pages, on servers, or on other network) pose a threat
to the applications barrier to entry (Schmalensee, 6/23/99am, at 36:15-25), such
applications cannot threaten Microsoft's monopoly power as long as Microsoft controls
a substantial share of browser usage.
403.2.1. Web-centric applications require a browser.
- Inergy, a firm creating Web-based applications, requires that
users access its applications with a browser. Dean
Schmalensee testified that in order to access the WebDesk
2000 product, users must have a browser. Schmalensee,
6/23/99am, at 28:21-25; DX 2554, at 4 ("Inergy software
services require only an Internet connected device and a
403.2.2. Microsoft's substantial share of browsers gives it control
over browser technology and thus the power to discourage the development of
- Paul Maritz testified that browsers using Microsoft's
technology are not a platform threat (Maritz, 1/26/99pm, at
48:22 - 49:7) a conclusion with which Dean Schmalensee
agreed. Schmalensee, 6/24/99am, at 51:23 - 52:16.
- Ron Rasmussen, an executive with operating system
supplier Santa Cruz Operation, testified that "in the network
computing model that is part of our core strategy, the
browser and the Java that it can run will be the user
interface for the application on the server. And so if there is
one person or one company who controlled the browser and
its look and feel and how it presented applications, it could
severely enhance or detract from the application
functionality of the -- on the server." Rasmussen Dep.
(played 12/15/98am), at 67:14 - 68:3.
- Nathan Myhrvold wrote Bill Gates in April 1995 that "the
world of the Internet is rapidly becoming Windows centric
because Windows will be the most popular client operating
system by a wide margin." GX 611, at MS98 0157820.
- Professor Fisher recognized that "if IE were the dominant browser
and Microsoft decided to support only Windows-based technology,
developers would have little incentive to create applications that
were not Windows-based." Fisher Dir. ¶ 95. He concluded: "If
Microsoft minimizes competition from other browsers and
chooses to support only Windows-based technology,
Microsoft can maintain its monopoly power in operating
systems with little threat of entry." Fisher Dir. ¶ 236.
- Dean Schmalensee conceded that "if one company controlled the
browser and its look and feel and how it presented applications, it
could severely enhance or detract from the application
functionality of programs or applications running on the server."
Schmalensee, 6/24/99pm, at 46:19 - 47:10. This would be because
"the browser and the Java that can run will be the user interface for
the application on the server." Rasmussen Dep., 6/24/99pm, at
403.3. Microsoft's weakening of cross-platform Java also diminishes the
likelihood that a robust set of cross-platform network-centric applications could emerge.
- Barksdale described the importance of browsers and Java to development
of a new breed of applications focused on the Internet: "Netscape's
browser, using Java, provided both the technical means and the broad
distribution to offer a new 'super-platform' for developers of network-centric applications. This platform aspect of the browser, and the cross-platform benefits of Java, allowed for the development of software
applications that were directed more to the Internet than to the desktop,
and thus had the potential to serve as a partial substitute for the Windows
OS as a development platform." Barksdale Dir. ¶ 15.
- Barksdale also testified: "If ISVs began writing a number of programs
in such languages, computer users with a browser could launch
those programs from the browser platform without regard to the
underlying operating system. In other words, it would not matter to
the consumer whether the computer had a Windows operating
system, Macintosh, OS/2, UNIX, or any other operating system.
The rise of the Internet and browser technology, coupled with Java
and other new languages, promised the development of 'platform
independent' software. ISVs would be able to write a program
once, and it would run on any computer." Barksdale Dir. ¶ 85.
403.4. Microsoft's establishment of a substantial position in browsers
may also enable it to impair competition and seek to control standards in related
markets, such as servers and applications that employ browsers.
- Brad Chase wrote: "In summary, we must keep our focus on
browser share. This is central to the success of Windows and
central to the success of Office. By focusing on IE today, we not
only secure the desktop and secure future Windows sales, but also
gain a user base that we can upgrade to Outlook and then Office."
GX 510, at MS7 004127.
- Paul Maritz, in an April 1995 document entitled "Netscape as
Netware," wrote: "I think the most important thing we can do is to
'not lose control' of the Web client. By controlling the client, you
also control the servers. We should not allow any one Web client
to get to high volume. This means (i) not letting a vacuum open up,
and (ii) ensuring that we get broad distribution for our Web client.
This would mean that: -- MS Web client gets bundled with
Windows (not just Frosting?) at earliest opportunity." GX 498, at
MS98 0168614. At trial, Maritz agreed that by "controlling the
client, you would also control the servers" and that Microsoft "did
not want to allow any one web client to get the high volume."
Maritz, 1/28/99pm, at 45:5-15.
E. Microsoft's conduct has caused, and will continue to cause,
substantial and far-reaching consumer harm
404. Microsoft's predatory and anticompetitive course of conduct to blunt the
browser threat, to impede other middleware platforms, and to extend its control over
standards has caused, and will continue to cause, substantial and far-reaching harm to
1. Microsoft's maintenance of its operating system monopoly
has deprived, and will continue to deprive, consumers of the
benefits of greater competition in operating systems.
405. As detailed above, Microsoft's conduct eliminated the possibility that
browsers could lead to a paradigm shift that would erode the applications barrier to
entry and dissipate Microsoft's monopoly power. Microsoft also hindered other
middleware threats, including Java and NSP. Microsoft's maintenance of its operating
system monopoly has thus harmed consumers by denying them the prospect of the
substantial consumer benefits that the success of these threats might bring.
a. Microsoft has deprived consumers of the possible
development of greater choice in operating systems
405.1. The fuller development of cross-platform applications, whether
running on browsers, the Java runtime environment, or other middleware, could have
increased competition and innovation in operating systems and resulted in substantial
- Steven McGeady testified: "If Netscape managed to get into a
position where they were a credible threat to Microsoft. . . . that
would not only directly bring benefit to the marketplace, but it would
goad Microsoft in increased competition" and provide more
opportunities for other vendors to bring applications to market more
quickly. Consumers would benefit by more choice and by a faster
rate of innovation. McGeady, 11/9/98pm, at 62:19 - 63:16.
- Caldera concluded, based on a Harvard Business School case
study: "Rivalry within the Desktop OS industry is brutal to the point
of illegality. The existence of Microsoft in the Desktop market has,
to this time, prevented any other competitors from having any hope
of long-term profitability." Therefore: "The Desktop OS industry
appears to be a very good industry to be in, except for the brutal
competition within the industry. Because this competition has
become extremely monopolistic, entry of other viable players is
highly unlikely. This will result in very strong profits for the
dominant player, but quickly reduces customer satisfaction and
technological innovation." GX 342, at 6.
- Dr. Warren-Boulton testified that Microsoft's conduct reduces the
set of cross-platform applications and so "makes development of
new operating systems, and extensions of the operating systems,
and innovation in operating systems, and in the variety of operating
systems less profitable" and so less likely. Warren-Boulton,
12/1/98am, at 60:12 - 61:4.
- Professor Fisher confirmed that Microsoft's thwarting of the
browser threat and maintenance of its operating system has
deprived consumers the benefit of competition: "In the future, the
competition in operating systems that might have been fostered by
Netscape or Netscape and Java together--that threat has receded and, to
that extent, consumers will not benefit from competition." Fisher,
1/13/99am, at 62:25 - 63:4.
405.2. Consumers would enjoy greater choice in operating systems if
greater competition and innovation had occurred.
- Gateway's James Von Holle testified that "if a viable alternative
emerged" to Windows, Gateway "would evaluate" it because
Gateway likes "to make sure that" its "customers are offered a . . .
choice of products that become popular in the market place." Von
Holle Dep., 1/13/99, at 299:15 - 300:1.
- Hewlett Packard's Dave Wright wrote, in conclusion to a letter
protesting Microsoft's "Windows Experience" restrictions: "If we had
a choice of another supplier, based on your actions in this area, I
assure you [you] would not be our supplier of choice." GX 309.
b. Microsoft has deprived consumers of lower prices that
might have resulted from greater choice in operating
405.3. The diminished probability that Microsoft will lose its monopoly
power has deprived consumers of the benefits of lower prices that would result from the
elimination of Microsoft's power over price.
- Professor Fisher testified that "there is a substantial probability that
Microsoft's anti-competitive actions will permit Microsoft to retain its
power over price in operating systems and will inhibit development of
Microsoft-independent innovations. Both would harm consumer welfare."
Fisher Dir., ¶ 235. Because Microsoft has thwarted the browser
threat and other threats to its operating system monopoly,
"Microsoft's freedom to charge high prices for the operating system
will not be dissipated." Fisher, 1/12/99am, at 29:6-11.
- Dr. Warren-Boulton testified that the development of cross-platform
technologies "can be expected to reduce the price that end users
pay for operating systems" by lowering the applications barrier to
entry and widening the range of operating systems that users could
choose without losing access to a variety of applications. Warren-Boulton Dir. ¶ 198.
- Further, he testified that if competition emerges "between the
Windows operating system and other operating systems as
substitutes, if that competition takes place and flourishes as in
other markets, we would expect prices to fall and costs to
consumers to go down." Warren-Boulton, 12/1/98pm, at 50:20 -
c. Microsoft has deprived consumers of benefits from
innovation in markets related to operating systems
405.4. The Microsoft's maintenance of its operating system monopoly
has deprived consumers of innovations in hardware and other complements to cross-platform applications.
- As Microsoft's Ben Slivka stated in his deposition, a "nightmare
scenario is that the web grows into a rich application platform in an
operating-system neutral way, and then a company like Siemens or
Matsushita comes out with a $500 'WebMachine' that attaches to a
TV". Slivka Dep., 1/13/99pm, at 712:6-11 (commenting on GX
- A February 1997 Microsoft memo makes clear that protecting
Windows would affect the success of the hardware and software
for network computers (NCs), which are not Windows-based:
"Windows is facing the biggest competitive threat since its
inception. If the NC is successful, it could mean a catastrophic
downside in Windows revenue . . . which would also have
substantial negative impact on our server business, given NC's
require a specific server." DX 1490, at MS7 007476.
d. Microsoft has deprived consumers of benefits from
other potential paradigm shifts that Microsoft's conduct
405.5. Microsoft's conduct deters new developments that could provide
consumers the benefits of competition in the future.
- Barksdale testified that "consumers are directly affected by
Microsoft's practices. By trying to destroy innovative companies
like Netscape, Microsoft has sent a message to the industry -- if
Microsoft perceives that your success has the potential to
undermine Windows in any way, Microsoft will do everything in its
power to destroy you. The end result is reduced innovation, and
thus, fewer choices for consumers." Barksdale Dir. ¶ 36.
- Professor Fisher testified that Microsoft "will take very, very
aggressive action against you if what you're doing is producing
innovations that might lead to something that threatens their
operating system monopoly. . . It rather discourages, I should
think, people from thinking of ways to provide -- to innovate in ways
that would threaten the operating system monopoly. The lessons
are out there. . . . As I said in January, we're going to live in a
Microsoft world. Innovation is going to go in the direction that
Microsoft thinks is good for it." Fisher, 6/2/99am, at 25:12-25; see
also Fisher, 1/12/99pm, at 22:10-18 (similar).
e. Microsoft's obtaining of a monopoly over browsers
would result in further harm to consumers
405.6. Microsoft's monopolization of the browser market, dangerously
threatened by Microsoft's effort to blunt the browser threat, would result in additional
injury to consumers.
- Vesey testified that browser competition "benefits Boeing in that it
forces both vendors to be mindful of standards organizations and
hopefully providing support for well-documented, publicly
documented standard technologies." Vesey Dep., 1/13/99, at
286:3 - 287:2.
- Professor Fisher testified that "if Microsoft is permitted to use its
existing monopoly power over PC operating systems to monopolize
the market for Internet browsers (and, thereby, to put itself in the
position to control and ultimately exact a monopoly toll for efficient
access to the Internet), the economic costs to consumers and the
economy will again be substantial." Fisher Dir. ¶ 15.
2. The tactics Microsoft has employed in its anticompetitive and
predatory course of conduct harmed consumers
406. The tactics Microsoft used to blunt the threats to its operating system
monopoly, in particular its campaign to gain browser share, themselves harmed
406.1. First, Microsoft's efforts to blunt the browser threat reduced
customers' choice among browsers.
- Microsoft's anticompetitive and predatory conduct substantially
reduced the distribution of Netscape's browser. See supra VII.A.
- Professor Fisher explained: "There is evidence in the record that
OEMs would, other things being equal, often prefer the choice of
browsers. Now, it may be true that it's easier for the OEMs if they
don't have to think about it. And it may also be true that it would be
easier for consumers if they didn't have to think about it. And if
Henry Ford had had a monopoly, we'd all be driving black cars.
The customer could have any car he wants so long as it's black.
And that might have been easier for customers. . . . If Microsoft
forced upon the world one browser, that would make it really
simple. That's not what competition is about. . . . Microsoft has
influenced the choice so that they end up in one place. . . And
we're going to live in a Microsoft world, and it may be a nice world,
but it's not a competitive world, and it's not a world that's ultimately
consumer-driven." Fisher, 1/7/99am, at 27:12 - 28:3.
- Professor Fisher further explained that being deprived of choice
harms consumers: "What's happened here is consumers have been
deprived of an opportunity to choose. And where they are not literally
deprived of the ability, it's been made less likely that they will make
certain choices. Their choices have been conditioned in certain ways.
And deprivation of choice, directly or indirectly, is a harm to consumers."
Fisher 1/12/99pm, at 10:5-10; see also Fisher, 1/13/99am, at 62:6-9
(although most harm is in the future, Microsoft's present limitation of
consumer choice -- in the form of limited choices and informed choices --
has harmed consumers).
- Dr. Warren-Boulton concluded that "the impairment of rivals caused
by Microsoft's agreements matters; Microsoft's constriction of
distribution channels has significantly impaired the ability of
Netscape and other non-Microsoft browsers to effectively offer
consumers a choice between their browser and Microsoft's."
Warren-Boulton Dir. ¶ 13.
406.2. Second, Microsoft's actions to maintain its operating system
monopoly have harmed competition and innovation in browsers.
- Barksdale testified that Microsoft's predatory pricing inhibited
browser innovation. Because Netscape could not maintain its
browser revenues, it canceled plans to introduce more advanced
features of the product. Barksdale, 10/21/98pm, at 55:3-20. By
making it "noneconomic," Microsoft has discouraged anyone who
might have innovated in the browser area. Although browsers
have "improved in many ways," Barksdale testified that they have
certainly not improved "as much as they could have." Barksdale,
10/21/98pm, at 59:2-16.
- Marc Andreessen testified about the direction in which browsers at
one point in time were headed. The "evolutionary track that
browsers were on for at least a period of time was towards
becoming more and more general-purpose platforms." Developers
had asked for browsers to expose more APIs, so that it would be
"easier to build a much broader range of applications." Andreessen
Dep. (played 12/1/98am), at 64:5-14.
- This new direction, as Andreessen further testified, has not been
taken because of Microsoft's anticompetitive actions: "But as the
pricing pressure on browsers became clear and as, for example, it
became clear that we were not going to have access to a P.C.
OEM channel, to the extent that it became clear that Microsoft was
engaging in a broad range of sales and marketing and
development tactics designed to discourage or make very difficult
development of software applications on or for platforms other than
Windows, it became clear to us in the '96-'97 timeframe that it was
not an economically feasible proposition to continue that
development path. We would never generate a return."
Andreessen Dep. (played 12/1/98am), at 64:1 - 65:11.
406.3. Third, other elements of Microsoft's anticompetitive and predatory
scheme to impede browsers and other middleware technologies injured consumers.
406.3.1. The various ways in which Microsoft tied its browser to
Windows, including making it nonremovable, caused substantial consumer harm.
406.3.1.1. Microsoft harmed consumers by requiring OEMs
to make software decisions that did not reflect consumers' demand.
- Microsoft raised support and testing costs borne by
OEMs, and ultimately by consumers, by requiring
OEMs to preinstall Internet Explorer even if they
preinstalled Navigator. See supra Part V.B.4.a.(1); ¶¶
- Microsoft increased clutter on OEMs' desktops by
requiring OEMs to preinstall Internet Explorer even if
they preinstalled Navigator. See supra Part
V.B.4.a.(3); ¶ 167.4.
- Consumers have been offered less diverse browser
options by OEMs because Microsoft requires OEMs
to preinstall Internet Explorer, thereby discouraging
them from also preinstalling Navigator. See supra
Part V.B.4.b; ; ¶ 168.
406.3.1.2. Microsoft harmed consumers by hard-coding
Internet Explorer with Windows 98.
- Microsoft decided to frustrate the user's choice of
default browser in Windows 98 by forcing the use of
Internet Explorer in certain situations. See supra Part
V.B.4.c.(2); ¶ 170.4.
- Microsoft's hard-coding of Internet Explorer to
Windows 98 raises the costs to organizations of
standardizing their desktops on a non-Microsoft
browser. See supra Part V.B.4.c.(2); ¶ 170.5. As
Weadock testified, "Therefore, the organization's
browser decision is influenced by factors other than
the merits of the product." Weadock Dir. ¶ 43. See
supra Part V.B.4.c.(2); ¶ 170.5.
- Microsoft's hard-coding of Internet Explorer to
Windows 98 has forced some corporate customers
who do not want Internet Explorer to install instead an
older and less feature-rich version of Windows
without a welded browser. See supra Part
V.B.4.c.(2); ¶ 170.6.2.
- Microsoft's commingling of the code that supplies
browsing and operating system functionality can
create conflicts with some applications and create
increased security risks. See supra Part V.B.4.d.(2);
406.3.1.3. Microsoft harmed consumers by commingling the
code that supplies browsing and operating system functionality, thereby reducing
system performance for consumers who do not want to browse the web with Internet
- Microsoft harmed consumers who do not want to
browse the Web with Internet Explorer by requiring
them to accept substantial amounts of unwanted
code, which takes up memory resources and disk
space. See supra Part V.B.4.c.(1); ¶ 170.1.
- Requiring customers to take unwanted code can
create stability problems, increase end-user
confusion, and raise support costs. See supra Part
V.B.4.(c)(1); ¶ 170.3.
- As Maritz acknowledged, "in certain circumstances,
applications in general, not just Netscape's browser,
can run slower on Windows 98 versus Windows 95 in
memory-constrained situations." Maritz, 1/27/99pm,
406.3.2. Microsoft's screen restrictions, imposed for the purpose
and with the effect of impeding the browser threat, also caused significant inefficiencies
and harmed consumers.
- Microsoft's screen restrictions forced OEMs to scrap
welcome screens and other features that, as Microsoft at
times acknowledged, made computers less confusing and
easier to use. See supra Part V.C.1.b.(1); ¶ 178.1.
- By preventing OEMs from implementing their own welcome
screens and other features to assist consumers, Microsoft
raised the support costs OEMs bore. See supra Part
V.C.1.b.(1); ¶ 178.1.
- Microsoft increased clutter on OEMs' desktops, and thereby
increased consumer confusion, by requiring OEMs to
include the Internet Explorer icon even if they also included
the Netscape Navigator icon. See supra Part V.C.1.b.(2); ¶
179.1; Part V.B.4.a.(1); ¶ 167.4.
- By requiring OEMs to include the Internet Explorer icon,
Microsoft increased the support costs to consumers of
standardizing on a non-Microsoft borwser. See supra Part
V.C.1.b.(2); ¶ 180; Part V.B.4.d.(1); ¶ 170.5.
406.3.3. Microsoft's efforts fragment Java harmed consumers.
- Microsoft harmed consumers by successfully pressuring
third parties, including Intel, not to develop Java
technologies that would have enhanced the performance of
applications that run on Windows. See supra Part
VI.A.3.c.(1); ¶ 333.
406.3.4. Microsoft's elimination of platform-level NSP deprived
consumers of the benefits of those technologies.
- Microsoft harmed consumers by forcing Intel to abandon
platform-level NSP and other software initiatives, depriving
consumers of innovative hardware and software. See supra
Part VI.B.4; ¶ 353.
3. Microsoft's incentive to distort innovation to protect its
operating system monopoly will continue to harm consumers
407. Microsoft has caused particularly acute consumer harm by using its
monopoly power to innovate in ways designed to protect its operating system monopoly
and to impede efforts by others to innovate in different ways.
a. Microsoft's maintenance of its operating system
monopoly preserves its control over innovation, to the
detriment of consumers
408. Microsoft's maintenance of its monopoly power preserves its continued
control, to the detriment of consumers, of the pace and direction of innovation.
408.1. Control over innovation by one firm rather than by market forces
is presumptively harmful to consumers.
- Professor Fisher testified that Microsoft's continued monopoly
power over operating systems means that, "in this area, it won't be a
consumer-driven society; it will be a Microsoft-driven society. Microsoft
will determine what it charges for different products, and for certain of
those products there won't be a choice. Microsoft will determine what
innovations are successful and what innovations are not successful, and
consumers won't get the choice. I used last week the analogy of Henry
Ford and the black car. Another way of describing this is Microsoft's
advertising slogan 'Where do you want to go today?' Where you want to
go today is going to be where Microsoft is willing to take you or where
you choose to go, given the way Microsoft has restricted your choice.
And you are certainly going to have to use the means of transportation
Microsoft provides. Those may be nice means of transportation. You
may, in fact, want to go to these places, but that's not consistent with the
kind of . . . consumer-driven market choices . . . that a competitive policy
relies on." Fisher, 1/12/99am, at 30:21 - 31:4.
- Professor Fisher testified: "The economics of antitrust policy is
based upon the proposition that competition ends up, in one way or
another, always being good for consumers. That proposition is the
central proposition of microeconomics." Fisher, 6/2/99am, 20:14-19.
- Professor Fisher testified: "Q: It is proved that competition will lead
to an efficient allocation of resources, and that will benefit
consumers? Professor Fisher: Yes. Q: Will competition for
consumer sets like OEMs, that are not themselves ultimate
consumers, advance that efficient allocation of resources?
Professor Fisher: Yes, it will." Fisher, 6/2/99am, 24:13-20.
- Professor Fisher testified: "The general presumption is that it ought
to be competition on the merits that decides what kind of innovation
is good." Fisher, 6/2/99am, 25:5 - 26:3.
408.2. Demonstrating the reason for this presumption, and consistent
with its possession of monopoly power, Microsoft has at times failed to provide
innovations that would have met and expanded consumer demand.
408.2.1. New hardware and software advances for personal
computers are dependent upon Windows support and subject to Microsoft's schedule.
- Microsoft's Carl Stork bluntly explained in May 1995 that, if a
firm wants to enable a new function not supported by the
Windows operating system, the only "winning path" is to
convince Microsoft to support and resource the effort. If the
proposal does not fit with Microsoft's priorities, the firm must
simply "accept the outcome that the time isn't right for us."
Stork recognized that Intel did not "want to have to rely on
us to meet our commitments. They have a list of
commitments we have missed." GX 921, at MS98 0168653,
- Microsoft Senior Vice President Brad Silverberg agreed with
Stork: "certainly we have been remiss in not advancing the
hw [hardware] platform faster." Intel was "understandably
impatient with our pace." GX 921, at MS98 0168652.
- Microsoft Vice-President David Cole then wrote: "These
guys are tired of waiting for Windows releases to make
advances in hardware. They feel the need to write system
extensions to do this. We don't want em to." GX 921, at
- According to a contemporaneous email by Netscape's Marc
Andreessen, reporting on a meeting with Intel's McGeady,
Intel recognized that the success of Netscape was good for
the industry because if Intel only has "Microsoft as a single
channel to innovate on the PC platform, then Microsoft
controls the rate of innovation and slows things down to suit
Microsoft's interests." DX 1619, at 1.
408.2.2. This dependence on Microsoft's willingness to implement
new technologies injures consumers.
- Steven McGeady of Intel testified about the frustration and
harm to end users resulting from Microsoft's control over the
pace of innovation: "The hardware vendors . . . both at the
time and now, continue to be frustrated . . . because they
had more ideas about new ways and interesting ways to do
things that would have benefit for the end user than they
were able to get pushed up through the operating system
layers." McGeady, 11/9/98pm, at 47:4-10; see generally
McGeady, 11/9/98pm, at 45:13 - 47:20 (citing examples).
- McGeady also testified: "The more competitive and diverse a
software environment -- application development
environment is, the more innovation occurs and the more
different options are presented to consumers.
Correspondingly, as the software environment has become
more of a monoculture around Microsoft, the rate of
innovation appears to be slowing, and the number of
different and varied options presented to the consumer is
diminishing." McGeady, 11/9/98pm, at 61:24 - 62:7.
- Microsoft employees admitted that Microsoft had "completely
missed the boat on developing a compelling state of the art
media subsystem for Windows95." GX 563. In addition,
Microsoft's Eric Engstrom testified that Windows support for
game software had stagnated for 10 years. Engstrom,
2/23/99pm, at 39:10-14.
b. Microsoft distorted innovation in order to protect its
operating system monopoly, thereby harming
409. Microsoft's control over innovation harms consumers not only because
Microsoft rather than the market determines what innovations consumers receive, but
also because Microsoft has incentives to innovate in ways that protect its operating
system monopoly rather than respond to consumer demand.
409.1. First, Microsoft innovated, or failed to innovate, in ways designed
to protect its operating system monopoly, even though consumers would have been
better off had Microsoft undertaken other obvious (in most cases carefully studied)
409.1.1. Microsoft delayed releasing its own innovations in its
effort to weld its browser and operating system.
- When it became obvious within Microsoft that Internet
Explorer 4.0 was behind schedule, Kempin made clear to
Allchin that he wanted to ship to Microsoft's OEM customers
an upgraded Windows product "with all the new hardware
support" without waiting for the forthcoming Internet Explorer
4.0 to be incorporated. GX 159.
- In a March 1997 email, Roberts argued in favor of holding
Memphis (which became Windows 98) until Internet Explorer
4.0 was ready, even though doing so would mean delaying
the new hardware support. He concluded that shipping
Memphis without Internet Explorer 4.0 would "cause users
to step back and evaluate the Netscape alternative" and so
impair Microsoft's goal of "IE penetration." GX 355, at MS7
- Microsoft's customers, including Gateway, told Microsoft that
the delay in releasing Windows 98 due to the browser
"integration" was hurting innovation. Von Holle of Gateway
wrote that Gateway needed, in order to persuade Microsoft
to release Memphis without the browser, to send the
message that Microsoft is "slowing the pace of new product
introduction in the industry." He wrote: "They have a
responsibility to the industry because of their dominant
market share in the core operating system." GX 357,at GW
026522 (sealed); Von Holle Dep., 1/13/99, at 303:9-304:15
(testifying about GX 357).
- Microsoft ultimely withheld Windows 98 from the market,
with its new hardware support, until the Internet Explorer 4.0
browser was "integrated" into Windows 98. See supra Part
V.B.2.e; ¶¶ 144-145.
409.1.2. Microsoft's welding of its browser to its operating system
prevented or delayed consumers from taking advantage of innovative technologies in
- In his interviews with computer managers at large
corporations, Glenn Weadock found that many companies
such as Boeing, "having standardized on Windows 95 for a
large portion of their operating system needs, have sought,
at some cost, to remove Internet Explorer from their PCs by
either deleting the means of access to Internet Explorer or
standardizing on the original version of Windows 95, which
did not come with Internet Explorer at all." Weadock Dir. ¶ 1.
But standardizing on the original version of Windows 95 to
avoid Internet Explorer has its own costs: "However, in that
case, the organization would either forego or incur additional
costs of trying to reassemble various technological advances
. . . provided by later versions of Windows 95." Weadock
Dir. ¶ 40.
- Scott Vesey of Boeing testified that Boeing would continue
for now to deploy Windows 95, in order to standardize on
Netscape Navigator, but that in the long term, Boeing would
not have a choice of browsers if it wanted to take advantage
of new hardware support in Windows 98. Vesey Dep.,
1/13/99, at 277:4 - 281:12.
- As recently as 1998, a survey by Compaq of U.S.
companies found that "About 80% of companies wipe or
reformat the hard drives of new desktops . . . . The operating
system re-installed most often are OSR2 and the retail
version of Windows 95. Large businesses lean more toward
the retail version of Windows 95," which does not include a
browser. GX 1242, at 7.
409.2. Second, Microsoft deterred or eliminated innovations by third
parties (such as Intel) that could have developed into a threat to its operating system
monopoly, even when those innovations would have benefitted Microsoft and
consumers by increasing demand for Windows.
409.2.1. Microsoft induced other firms not to support cross-platform Java, in order to protect its operating system monopoly.
- See supra Part VI.A.
409.2.2. Microsoft forced Intel to abandon platform-level NSP in
order to protect its operating system monopoly.
- See supra Part VI.B.
409.3. Third, Microsoft used its monopoly power and other
anticompetitive devices to ensure that third parties innovated in ways that secured
Microsoft's monopoly position and did not assist potential rivals.
409.3.1. Microsoft's coercive "First Wave" agreements condition
access to beta releases of Microsoft's operating system on employing Microsoft-dictated standards.
- For example, Symantec's First Wave agreement requires
each of Symantec's applications to set Internet Explorer 4.0
as the default browser, to use HTMLHelp to implement its
help system, and to use Microsoft's JVM as the default JVM,
all as conditions of receiving early beta releases of
Windows. GX 2071, at ¶ B.3 (sealed). See also e.g., GX
2463 (sealed) (same).
409.3.2. Microsoft told Intel not to innovate in ways that favored
- Microsoft discouraged Intel from helping Sun write Java
multimedia APIs, "esp. ones that run well (ie, native
implementations) on Windows." GX 235.
- Microsoft made efforts to prevent Intel from providing its
Java implementation, which was optimized for the
Windows/Intel platform, to Netscape. GX 566.
c. Microsoft's continued incentive to protect its operating
system monopoly can be expected to result in further
strategic innovation that does not serve the interests of
410. Microsoft's demonstrated willingness, and continued incentive, to preserve
its operating system monopoly can be expected to result in the continued distortion and
strategic use of innovation in the future.
410.1. By gaining a reputation as a predator, Microsoft has signaled that
it will encourage only innovations that do not threaten its monopoly position in operating
systems. It thus will continue to deter innovations (such as those in browsers) that firms
might fear Microsoft would perceive as threats.
- Professor Fisher testified: "Microsoft's anti-competitive actions are
aimed at hindering the success of non-IE browsers, but they are
likely to send a message to all software developers: Microsoft will
impede any innovation that threatens Microsoft's monopoly in
operating systems. This will lessen developers' incentives to
develop products that provide alternatives to the Windows
platform." Fisher Dir. ¶ 237.
- Professor Fisher also testified that, "if Microsoft is successful in its
anti-competitive actions, that success will serve as a disincentive to
other firms to innovate in areas that Microsoft may stake out as its
own property. If software developers believe that Microsoft will
engage in anti-competitive acts to impede any innovation that
threatens its monopoly, they will have substantially reduced
incentives to innovate in competition with Microsoft. As a result,
the range of software products from which consumers can choose
will be limited, ultimately further reducing consumer welfare."
Fisher Dir. ¶ 24.
- See also supra Part VII.D.
410.2. Microsoft can be expected to continue to use its power over
operating systems, and its increasingly strong position in browsers, to innovate and
affect innovation in ways designed to preserve its operating system monopoly.
410.2.1. Microsoft's control over standards will allow it to deter
threats that require interoperability with either browsers and operating systems, to the
detriment of consumers.
- See supra Part VII.D.3; ¶ 403.
410.2.2. Microsoft retains the incentive and ability to innovate
strategically in other ways that protect Microsoft's interests yet are not in the best
interests of consumers.
- Professor Fisher testified: "One of the principal effects on
consumers from Microsoft's actions, if unchecked, relates to what I
said last week. Microsoft has shown that it will decide the ways in
which innovation takes place in this industry, and that any
innovation which threatens Microsoft's platform monopoly will be
squashed. We will live, as it were, in a Microsoft world in which
choices are the choices that Microsoft makes. I don't think that's
good for consumers, but those effects have only just begun."
Fisher, 1/12/99am, at 30:4-10.
Joel I. Klein
Assistant Attorney General
Mark S. Popofsky
Senior Counsel to the Assistant
A. Douglas Melamed
Principal Deputy Assistant
Rebecca P. Dick
Deputy Director of Civil Non-
Jeffrey H. Blattner
Special Counsel for Information
U.S. Department of Justice
950 Pennsylvania Avenue, N.W.
Washington, D.C. 20530-0001
Christopher S Crook
Phillip R. Malone
Steven C. Holtzman
Karma M. Giulianelli
Michael C. Wilson
John F. Cove, Jr.
Jeremy D. Feinstein
U.S. Department of Justice
450 Golden Gate Avenue
San Francisco, CA 94102
Special Trial Counsel
Stephen D. Houck
New York State Department of Law
120 Broadway Street, Suite 2601
New York, New York 10271
August 10, 1999
CERTIFICATE OF SERVICE
I hereby certify that two copies of the foregoing PLAINTIFFS'S JOINT PROPOSED
FINDINGS OF FACT, redacted public version, were served by hand addressed to the
following counsel for Defendant Microsoft Corporation on August 10, 1999:
John L. Warden, Esq.
Sullivan & Cromwell
1701 Pennsylvania Avenue, N.W.
Washington, D.C. 20006
and one copy by overnight courier upon:
William H. Neukom, Esq.
One Microsoft Way
Redmond, Washington 98052
Phillip R. Malone
WITNESSES WHO PROVIDED TESTIMONY IN THESE ACTIONS
||General Manager, OEM Multinational Group, Microsoft
||General Manager, Network Business Unit, Microsoft Corporation|
||Senior Vice President, Personal and Business Systems Group,
||Executive Vice President, Products and Marketing, Netscape
Communications Corporation |
||Business Developer, Intel Corporation|
||Former President and CEO, Netscape Communications
||Senior Vice President, Media Technologies Group, Real
Networks, and a former Microsoft employee|
||Group Program Manager for Windows User Interface Design,
||President, BAIS and the Electric Commerce Services Company|
||Vice President, US Field Sales for The Santa Cruz Operation|
||President, Bristol Technology Incorporated|
||General Manager of the Product Division for IBM Corporation|
||Engineering Manager for Websphere Applications Server and
Studio Tools, IBM Corporation|
||Chief Engineer, Internet Initiatives, Gateway 2000|
||Chairman and CEO, America Online Incorporated|
||Vice President, Marketing and Software Developer Relations for
Personal and Business Systems Group, Microsoft Corporation|
||Senior Software Engineer, Netscape Communications
||Director, Independent Software Vendor Recruitment, Novell
||Former CEO, Netscape Communications Corporation|
||Senior Vice President, Business Affairs, America Online
|Cole, David W.
||Vice President, Windows Client and Collaboration Division,
||Director, Product Marketing for the Solaris Operating System,
Sun Microsystems, Incorporated|
||Former Chief Financial Officer, Netscape Communications
||Director, Software Procurement, Compaq Computer Corporation|
||Professor, Massachusetts Institute of Technology|
||President, Rational Software Company|
||Former Vice President, Consumer Division for Compaq
||General Manager, Windows Client and Collaboration Division,
Multimedia, Microsoft Corporation|
||CEO, Oblix Incorporated; former CEO, Symantec Corporation|
||Alfred Fitler Moore Professor of Telecommunication Systems at
the Moore School of Engineering of the University of
||Assistant Professor of Computer Science, Princeton University|
||Professor of Economics, Massachusetts Institute of Technology
and Director, National Bureau of Economic Research|
||Director, Product's Law Group, Apple Computer, Incorporated|
||Chief Technical Officer, Lucent Technologies|
||President and CEO, Microsoft Corporation|
||Senior Consultant, AdKnowledge|
||Chief Scientist of Java Software Division, Vice President and
Sun Fellow, Sun Microsystems Incorporated|
||OEM Group Manager, Microsoft Corporation|
||CEO, Intuit Incorporated|
||Director of Solutions Marketing, Novell Corporation|
||Former Executive Vice President of Sales and Marketing,
Netscape Communications Corporation|
||OS/2 Brand Manager, IBM Corporation|
||Chief Operating Officer and President, RealNetworks
Incorporated, and a former Microsoft employee|
||Product Unit Manager of the Internet Explorer Team, Microsoft
||Vice President of Research, Sun Microsystems Incorporated|
||Senior Manager in Worldwide Procurement, Dell Computer
||Vice President of Java Platform Products, Sun Microsystems
||Senior Vice President of OEM Sales Group, Microsoft
||Senior Product Manager for Packard Bell, NEC Incorporated|
||Senior Software Engineer, IBM Corporation|
||Vice President of Marketing, Network Computer Incorporated|
||Group Vice President, Platforms and Applications, Microsoft
||Account Manager in the OEM Division, Microsoft Corporation|
||Vice President in the Content Group, Intel Corporation|
||General Manager of the Home Products Division, Hewlett
||Director of Marketing, Internet and Applications Client Groups,
||Vice President of the Operating Systems Group, Novell
||Senior Vice President of Application and Tools Group, Microsoft
||Vice President of the Internet Customer Unit, Strategic
Relationships, Microsoft Corporation|
||Former Program Director of Software Strategy and Strategic
Relations for the IBM PC Company|
||Second-Line Software Development Manager in the Network
Computer Division, IBM Corporation|
||Group Program Manager for the Internet Explorer Project,
||Business Development Manager, Microsoft Corporation|
||Senior Director of Windows Business Development, Microsoft
||Vice President and COO of Staff Operations, Sun Microsystems
||Senior Vice President of Marketing, Packard Bell NEC
||Vice President of the Volume Systems Group, The Santa Cruz
||Program Manager in the Interactive Media Group, Microsoft
||Operating Manager for the Asia Pacific Region, Home Products
Division of Hewlett Packard|
||Former Senior Vice President and General Manager, Enterprise
Computing Group, Compaq Computer Corporation|
||General Manager of New Technology, Microsoft Corporation|
|Rys, A. Stephen
||Vice President of Business and Product Development, Ameritech
||Vice President of the Security and Assistance Business Unit,
||Product Line Manager for the NetWare 4 and NetWare 3 Product
Lines, Novell Corporation|
||Group Marketing Manager for Consumer and Embedded
Technologies, Sun Microsystems Incorporated|
||Senior Director of the Interactive Media Group, Apple Computer
||Former Senior Vice President of Server Technology, Netscape
||Vice President of Worldwide Product Marketing, Apple Computer
||Gordon Y. Billard Professor of Economics and Dean of the
Massachusetts Institute of Technology Sloan School of
||Chairman of the Board and Chief Executive Officer, Novell
||President of the Interactive Services Group, America Online
||Director of Strategy and Alliances with BellSouth.net, BellSouth
||Former Vice President of OEM and Web Sales, Netscape
||Currently on leave, formerly Senior Vice President of the
Applications and Internet Client Group, Microsoft Corporation|
||General Manager of the Office Group, Microsoft Corporation|
||General Manager in the Windows Team, Microsoft Corporation|
||Vice President of Business and Strategy for the Internet
||Director of Network Computing Software Services, IBM
||Business Relationship Manager, IBM Corporation|
||President and CEO, Caldera Corporation|
||General Manager of Hardware Evangelism and Business
Development, Microsoft Corporation|
||Director of Content Technology, Intel Corporation|
||Market Analyst, Market Decisions Corporation|
||Senior Vice President of Software Engineering, Apple Computer
||General Manager, Windows 9x, Microsoft Corporation|
||Windows Web Browser Product Manager, The Boeing Company|
||Director of Software and Internet Services, Gateway 2000|
|Von Rump, Stephen
||Vice President of Enterprise Services, MCI Corporation|
||Vice President of Buena Vista Internet Group, Walt Disney
|Principal with MiCRA (Microeconomic Consulting and Research
||President, Independent Software Incorporated|
||General Manager of the Content Group, Intel Corporation|
||OEM Account Manager, Microsoft Corporation|
||Group Program Manager for NetDocs Group, Microsoft
||Business Development Director, Novell Corporation|
5. This question was labeled Q6 in the November 1996 survey. GX 2508. It was
Q6h, Q6w, and Q6s (depending on whether the respondent accessed the Internet
through a home, work or school computer, respectively) in the December 1996 through
August 1997 surveys. GX 2509; GX 2510. It was Q6M, Q6O1, and Q6O2 (depending
on whether the location was the respondents "main" or other access locations) in the
October 1997 through July 1998 surveys. GX 2511, GX 2512, GX 2513, GX 2514, GX
6. The email refers to the correct question but incorrectly states its wording.