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COMPETITIVE
PROCESSES, ANTICOMPETITIVE
TABLE OF CONTENTS
LIST OF EXHIBITS
EXHIBIT ES-1: EXHIBIT ES-2: EXHIBIT II-1: EXHIBIT III-1: EXHIBIT V-1: EXHIBIT V-2: EXHIBIT IX-1: EXHIBIT XI-1: EXHIBIT XII-1:
THE MICROSOFT-DOJ PROPOSED FINAL JUDGMENT IS NOT IN THE PUBLIC INTEREST We find the Microsoft-Department of Justice final judgment proposal to be fundamentally flawed. By explaining the nature of competition in the software industry and describing Micorosoft's persistent, repeated pattern of anticompetive conduct this analysis shows that the Microsoft-DOJ Proposed Final Judgement (PFJ) fails to protect the public interest. It is as an entirely inadequate remedy to the sustained, egregious, illegal conduct engaged in by Microsoft to thwart competition in the software industry and protect and enhance its own monopolies. Because it fails to protect consumers, it fails to serve the public interest. It should be rejected by the District Court. The Tunney Act requires the Court to determine whether the Microsoft-DOJ proposal is in the "public interest." To make that determination the Court must-- consider the competitive impact of the proposal, including:
There is no need to accept a grossly inadequate quick fix when a strong, workable alternative remedy, advanced by the state attorneys general who continue to aggressively pursue the case, already has been submitted to the court for review. THE PUBLIC INTEREST TEST REQUIRES THAT FINAL JUDGMENT PROTECTS CONSUMERS Individual consumers, largely overlooked in this antitrust proceeding, ultimately pay -- both directly and indirectly-- for a continuation of the Microsoft monopoly. Any remedy endorsed by the Court needs to benefit consumers by restoring competition in those segments of the software industry that Microsoft has monopolized or is in danger of monopolizing. We acknowledge that, considering Microsoft's long-standing unfair business practices and deeply entrenched monopoly, such a task will not be easy. It is because of these same factors, however, that it is necessary. THE SOFTWARE INDUSTRY IS RIPE FOR COMPETITION AND DOES NOT LEND ITSELF NATURALLY TO MONOPOLY The analysis rejects claims that the software industry is prone to natural monopoly. Were that the case, Microsoft would not have had to engage in its systematically anti-competitive practices to maintain and extend its monopolies. The trial record and reams of trade press accounts bear testimony to the unnatural acts embraced by Microsoft to create and protect its monopoly power over the years. These include leveraging the Windows operating system, slowing or stopping its own deployment cycle, denying access to application interfaces, threatening to deny access to its operating system, threatening to stop developing software for competing platforms, bloating the operating system with unnecessary functionality, hiding prices in whole computer configurations, compelling original equipment manufacturers (OEMs) to use its browser, reaching pacts with other companies to deny the use of alternative browsers, and on and on. In our view, the software industry is ripe for competition. Competition would yield an explosion of innovation and consumer convenience. Consumers care about applications, not about operating systems. Furthermore, most consumers are inclined to invest time and money in functional applications that they reasonably feel will endure, be supported, and work compatibility with other programs and their hardware. Independent vendors are interested, therefore, in creating products that match consumer expectations. With the entrenched Microsoft monopoly, independent developers confront an applications barrier--Microsoft has such a significant lock on the computer platform and on applications used, that many developers are dissuaded from producing new products. Should the Microsoft monopoly be broken down, developers would look to create compatible, consumerfriendly products. In fact, that is what Netscape and Sun attempted to do with Navigator and Java--create software, known as "middleware" because they insert themselves between the operating system and applications running on top of the middleware. Because Netscape/Java were compatible across systems, they threatened Microsoft's control over the consumer. Microsoft's reaction was to crush Netscape and undermine Java. Because Microsoft illegally undertook to prevent competition, consumers were left with products that did not honestly earn their place in the marketplace. Microsoft products have not been disciplined for price and quality by competitors because of the company's anti-competitive practices. Remove the monopoly, and an avalanche of competition --aiming towards operable standards, innovative products, and better pricing-- will be unleashed. Such developments would provide undeniable benefit to consumers. The software market will support, and therefore the public interest demands, actual competition within and between markets. MICROSOFT'S DEEP-ROOTED ANTI-COMPETITIVE BUSINESS MODEL POSES A CONTINUAL THREAT TO COMPETITION Detailing Microsoft's anti-competitive business model is a nearly interminable task, though it was accomplished well by the District Court in its Findings of Fact, virtually all of which were upheld on appeal. The list of corporate victims is long, and includes not just Netscape and Sun, but also IBM, Intel, and Apple. Figure ES-1 summarizes in simple terms the barriers to competition that Microsoft has repeatedly erected. We reiterate that the Department of Justice and the Court should not lose sight of the fact that such practices ultimately negatively impact ind ividual consumers, in the forms of higher prices, reduced choice, and inferior products and service.
FIGURE ES-1: HOW MICROSOFT STOPS COMPETITION AND HARMS CONSUMERS
CONSUMERS ARE HARMED BY MICROSOFT'S ABUSE OF MARKET POWER Indeed, Microsoft's practices, which the Microsoft-DOJ proposal fails to correct, harm consumers both qualitatively and monetarily. The harms are sufficiently great to require that the Court avoid a "quick fix." It is much more important to devote a reasonable amount of time to get the final judgment right and protect consumers. Microsoft's anticompetitive practices deny consumers choice. Microsoft strictly forces computer manufacturers to buy one bundle with all of its programs preloaded and biases the screen location, start sequences and default options. As a result, it becomes substantially difficult to choose non-Microsoft products. Products tailored to meet individual consumer needs (consumer friendly configurations, small bundles) are unavailable and eventually competing products disappear from the market. Further, by foreclosing the primary channels of distribution with exclusive contracts and other deals, Microsoft forces consumers of non-Microsoft products to acquire them in time-consuming and inconvenient ways. Microsoft's practices impair quality and innovation. Because of Microsoft's leveraging of the operating system, superior products are delayed or driven from the marketplace. The Court noted at least six instances in which Microsoft sought to delay the development of competing products. It noted as well several instances in which it delayed the delivery of its own products to accomplish an anti-competitive purpose. Resources are denied to and investment is chilled in competing products, slowing advances in technology and rendering some libraries of content obsolete. In addition, in several instances the Court found that Microsoft had undermined the ability of software applications or middleware to function properly with the Windows operating system. Thus, Microsoft has been quite willing to undermine the quality of its own and of competing products to preserve its market dominance. In addition to qualitative harm, consumers have suffered monetary harm. The historical behavior of prices makes it possible to draw a direct line between competition and lower prices. Eliminating competition as Microsoft has, results in higher prices. The fact that the excess price results from a failure to pass cost reductions through to consumers does not change the fact that consumers are overcharged. Nor does the fact that consumers do not pay for the software directly. In fact, there was a substantial increase in the price of Microsoft products in the 1990s that consumers paid in the price of the PCs they purchased. Of course, consumers pay directly in the case of upgrades and for applications. The centerpiece of Microsoft's pricing strategy has been to increase operating system prices while other components of the delivered PC bundle have fallen. Evidence at trial gave explicit estimates of the price of operating systems. The average preinstalled price is given as $19 in 1990 and over $49 in 1996. Microsoft recognizes that it has been the beneficiary of volume growth created by the falling price of the PC, which masks its increasing prices. Thus, one of the key elements in Microsoft's business model is to bury its products in bundles. This hides the price from the public and allows Microsoft to hide behind the declining price of the total package. The Consumer Federation of America has estimated that in the five years between the start of the anticompetitive attack on the browser in 1995 and the District Court finding of liability, Microsoft overcharged consumers by about $20 billion. The economic analysis of other experts suggests overcharges of as much as $30 billion. In addition to direct monetary costs, indirect monetary costs of the Microsoft monopoly also present themselves. Though difficult to calculate, they are no less significant, and demand to be considered. Consumers, individual and corporate, have undoubtedly lost hundreds of millions of dollars due to such issues as training, rapid upgrade cycles, software crashes, bloated bundles, debugging, service, and hardware upgrades. WINDOWS XP/.NET, LEFT UNCHECKED, ENHANCES AND EXPANDS THE MICROSOFT MONOPOLY Microsoft's brazen disrespect for the antitrust laws is nowhere more readily apparent than in the design of its newest bundle of products ("Windows XP," and the ".NET" initiative, hereafter referred to as "Windows XP/.NET"). The product is so blatantly at odds with the Court's ruling Microsoft must have designed it on the mistaken assumption that Microsoft would prevail in its appeal. The extreme reliance of "Windows XP/.NET" on a huge bundle of entire applications and the continued reliance on contractual and technological bundling fly in the face of the Court's cautionary words. Windows XP and the .NET initiative are a bundle of services bolted together by technological links (code embedded in the operating system), contractual requirements, and marketing leverage. The software, applications, and services that Microsoft has bundled cover all of the functionalities that are converging on the Internet, including communications, commerce, applications, and service. Today these Internet activities are vigorously competitive, just as the browser was before Microsoft launched its attack against Netscape. In other words, the anticompetitive and illegal business practices Microsoft used to win the browser war are being extended to virtually every other application that consumers use. The bundle is built on commingled code, proprietary languages, and exclusive functionalities that are promoted by restrictive licenses, refusal to support competing applications, embedded links, and deceptive messages. A strong remedy, unlike the weak one proposed by Microsoft and the Justice Department, is needed before Microsoft becomes the monopolist of virtually all computer and Internet applications. THE PROPOSED FINAL JUDGMENT FAILS TO PROTECT INDEPENDENT SOFTWARE DEVELOPERS, COMPUTER MANUFACTURERS, AND CONSUMERS The history of the case and our analysis of the software industry show that in order for new software to have a fair chance to compete, the remedy must:
The Microsoft-Department of Justice settlement is an abysmal failure at all three levels and will not deter Microsoft from continuing its anticompetitive business practices. Independent software vendors and competing platform developers will get little relief from Microsoft's continual practice of hiding and manipulating interfaces. Microsoft has the unreviewable ability under the proposed settlement to define Windows itself. It therefore controls whether and how independent software developers will be able to write programs that run on top of the operating system. The definitions of software products and functionalities and the decisions about how to configure applications programming interfaces (APIs) are left in the hands of Microsoft to an extreme extent. As a consequence, the company will be encouraged to embed critical technical specifications deeply into the operating system and thereby prevent independent software developers from seeing them. To the extent that Microsoft would actually be required to reveal anything, it would be so late in the product development cycle that independent software developers would never be able to catch up to Microsoft's favored developers. Furthermore, the Court of Appeals recognized that the Microsoft monopoly is protected by a large barrier to entry, as many crucial applications are available only for Windows. The proposed settlement does nothing to eliminate this "applications barrier to entry," such as by requiring the porting of Microsoft Office to other PC platforms. Rather than restore competition, the Microsoft-DOJ proposal all but legalizes Microsoft's previous anticompetitive strategy and institutionalizes the Windows monopoly. The Microsoft-DOJ proposed final judgment (PFJ) does not shield computer manufacturers from Microsoft retaliation. The restriction on retaliation against computer manufacturers leaves so many loopholes that any OEM who actually offended Microsoft's wishes would be committing commercial suicide. Microsoft is given free reign to favor some, at the expense of others, through incentives and joint ventures. It is free to withhold access to its other two monopolies (the browser and Microsoft Office) as an inducement to favor the applications that Microsoft is targeting at new markets, inviting a repeat of the fiasco in the browser wars. Retaliation in any way, shape, fit, form, or fashion should be illegal. Any adequate remedy, unlike the Microsoft-DOJ proposal, must include a prohibition on retaliation that specifically identifies price and non-price discrimination, as well as applying to all monopoly products. Because the proposed settlement requires no removal of applications, only the hiding of icons, Microsoft preserves the ability to neuter consumer choice. The boot screen and desktop remain entirely tilted against competition. Microsoft retains the ability to be the pervasive default option and is allowed to harass consumers who switch to non-Microsoft applications. Furthermore, it still gets to sweep third party applications off the desktop, forcing consumers to choose them over and over. GIVEN MICROSOFT'S PAST BEHAVIOR, ENFORCEMENT MUST BE SWIFT WITH SUBSTANTIAL SANCTIONS FOR NON-COMPLIANCE, BUT THE PFJ PROVIDES NO SUCH MECHANISMS After the District Court identifies remedies that can address these problems, it must enforce them swiftly and aggressively. Microsoft has shown --through a decade of investigations, consent decrees and litigation-- that it will not easily be deterred from defending and extending its monopoly. Microsoft behaves as though it believes it has the right to do anything to eradicate competition. Every one of the illegal acts that led to the District Court findings of liability, unanimously upheld on appeal, took place after Microsoft signed its last consent decree. With three monopolies to use against its potential competitors (the Windows operating system, the Internet Explorer browser, and Office in desktop applications), enforcement must be swift and sure, or competition will never have a chance to take root. The proposed settlement offers virtually nothing in this regard. The technical committee set up to (maybe) hear complaints can be easily tied up in knots by Microsoft because of the vague language that creates it. Because of the delay in its implementation, the key element of access to APIs would be in place for as little as four years. If Microsoft violates the settlement, nothing happens to the company, except that it must "endure" the annoyance of this weak settlement for two additional years. Virtually every specific measure of the proposed settlement is either riddled with ambiguities or put under the sole discretion of Microsoft. In other words, Microsoft defines its own sanctions. The Department of Justice and the Court must not forget that independent software vendors were the targets of Microsoft's campaign and that the competitive process in the software market was its victim. When we review the question of whether the proposed settlement will lift the yoke of anticompetitive practices from this market, we find that it will not (see Figure ES-2). Under the proposed settlement, Microsoft preserves immense market power and discretion. The settlement cannot work to restore competition because independent software developers will not be freed to produce software products in a competitively neutral environment. As a result, consumers will continue to suffer at the hands of the Microsoft monopolies. The proposed settlement does not serve the public interest and must be rejected.
FIGURE ES-2: SOFTWARE COMPETITION WILL NOT BE RESTORED BECAUSE THE SETTLEMENT DOES NOT CREATE A LEVEL PLAYING FIELD FOR INDEPENDENT SOFTWARE VENDORS
In order to ascertain whether the Microsoft-DOJ Proposed Final Judgment (PFJ) is in the public interest, the District Court must answer two interrelated questions: Does it effectively address the anticompetitive problem identified at trial? Will it help the consumer? The questions are interrelated because, as the Court of Appeals noted, the antitrust laws are founded upon, and a transgression of the antitrust laws is assumed to violate, a close, direct relationship between competition and consumer welfare.
From a century of case law on monopolization under section 2 several principles do emerge. First, to be condemned as exclusionary, a monopolist's act must have an "anticompetitive effect." That is, it must harm the competitive process and thereby harm consumers. In contrast, harm to one or more competitors will not suffice.[Footnote 1: 1 U.S. v. Microsoft, 253 F.3d 34, 103 (D.C. Cir. 2001)(en banc) (hereafter, En banc).] Moreover, because this case has been litigated and upheld on appeal, a remedy that only "improves" the situation is not in the public interest. The remedy must faithfully execute the purpose of the antitrust laws: it must restore competition and prevent further abuse. The remedy must provide a proper and full resolution of the transgression. Again, the words of the Court of Appeals are instructive. Even in remanding the remedy, it reminded the District Court of the strict standards set by the Supreme Court for rectification of a violation of the Sherman Act. The Supreme Court has explained that a remedies decree in an antitrust case must seek to 'unfetter a market from anticompetitive conduct,' Ford Motor Co., 405 U.S. at 577, to 'terminate the illegal monopoly, deny to the defendant the fruits of its statutory violation, and ensure that there remain no practices likely to result in monopolization in the future,' United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968); see also United States v. Grinnell Corp., 384 U.S. 563, 577 (1966).[Footnote 2: U.S. v. Microsoft, 253 F.3d 34, 26 (D.C. Cir. 2001)(en banc).] Because the case was fully litigated, the District Court has a clear and precise depiction of the transgressions. The claim by Microsoft and others that the court record will not support a strong remedy is simply wrong. The Court of Appeals reaffirmed the charge of monopolization with a unanimous, en banc ruling. It explicitly affirmed Microsoft's liability under Section 2 of the Sherman Act, the vast bulk of the specific conduct challenged by the Department of Justice, and nearly every one of the trial court's hundreds of factual findings. As a result, it held a broad array of anticompetitive Microsoft practices to be illegal, constituting a massive violation of the antitrust law. Exhibit II-1 identifies those anticompetitive practices that were directly linked to the violations of law. Despite this clear court mandate, the PFJ fails miserably to resolve these problems. It does not address the underlying anticompetitive problem and, therefore, it will not promote consumer welfare.
Because this is the third time that Microsoft has appeared before the District Court on similar and related matters, the Court has substantial experience with which to judge whether the enforcement mechanisms are adequate to elicit the appropriate responses from Microsoft. The Court cannot assume that Microsoft will behave; it has already been convicted of misbehaving. Moreover, all of the acts judged illegal in this proceeding took place after Microsoft had signed a
EXHIBIT II-1 ABUSIVE BUSINESS PRACTICES IDENTIFIED IN THE FINDINGS OF FACT AND CONCLUSIONS OF LAW UPHELD BY THE APPEALS COURT
prior consent decree. While we cannot call the company a repeat offender (since prior disputes ended in a settlement before trial), we can say that it has a tendency to push the limits of, and haggle over its obligations under, the law--as evidenced in numerous court cases with both private and public parties. It is evident therefore that effective enforcement is the key to ensuring that consumers will benefit from the restoration of competition in the industry. Enforcement as contemplated by the proposed settlement is weak and ineffective, and would deny consumers effective competition. In short, the PFJ fails to address the underlying problem in an effective manner and will not significantly benefit consumers. The Court should find that it is not in the public interest. The settling plaintiffs should be ordered to renegotiate or rejoin the ongoing litigation. A number of procedural questions also surround the development of the PFJ. These include a sharp about face by the Department of Justice as well as Microsoft's attempt to hide a number of meetings between its representatives and government officials, among others, that raise que stions about the propriety of the process by which the PFJ was crafted. Though these acts cast further doubt on the PFJ, these comments focus on the substantive issues before the Court.
In order to appreciate the gross inadequa cy of the PFJ, this analysis addresses the two central issues before the Court. First, it demonstrates why competition is in the public interest by showing how Microsoft's anticompetitive business model has frustrated competition and hurt consumers. Second, it demonstrates why the PFJ is inadequate to restore competition, protect consumers, and promote the public interest. Section III explains why the claim that monopoly is the "natural" state of affairs in the software industry should be rejected. Section IV discusses the complex competitive processes in the software industry that must be restored to promote the public interest. The Court must understand how the competition works in order to restore it. Section V describes Microsoft's anticompetitive model as determined by the Court. These are the offensive practices that must be terminated if Final Judgment in this case is to serve the public interest. Section VI looks to the trade, economic, and popular press for other examples of anticompetitive conduct that stretch even farther back in time, and which show how deeply these business practices are embedded in Microsoft's DNA. It brings additional examples to bear from a longer period of time to remind the Court of the deep seated nature of these business practices. The Court can and should look backward to gain a better understanding of what must be done to effectively terminate anticompetitive practices in the future. Section VII presents a discussion of the past consumer harm inflicted by Microsoft's anticompetitive model. These are the stakes for consumers. Estimating these costs demonstrates that settling for a quick, inadequate fix is not in the public interest. Eliminating anticompetitive practices that give rise to consumer harm is a fo rward looking process. The Court may look backward for instruction, it take steps "to ensure that there remain no practices likely to result in monopolization. As the Court of Appeals noted, the remedy must prevent the recurrence of the monopoly. Section VIII presents our concerns about the latest generation of Microsoft's software and services bundles (i.e., Windows XP/.NET). After examining the examples of actual and nascent competition that Microsoft has snuffed out with its anticompetitive practices, we conclude in Section IX that competition is in the public interest. Consumers do not have to settle for monopolists who claim to be competing for the whole market. The market will support, and therefore the public interest demands, actual competition within and between markets. With a thorough understanding of the nature and magnitude of the anticompetitive problem, the final two chapters demonstrated that the PFJ is totally inadequate to restore competition and protect the public interest. Section X presents a general discussion of the weaknesses of the PFJ in four areas, enforcement, computer manufacturer protections, independent software vendor protections, and provisions for consumer choice. Section XI presents a detailed critique of the PFJ, demonstrating that it does not create a level playing field for independent software developers, who are the key competitors who Microsoft has repeatedly attacked. Since it will not restore the competitive process in the industry, consumers will not benefit from the settlement. Section XII notes that the court already has before it a far superior set of remedies the litigating states remedial proposals.[Footnote 3: Plaintiff Litigating States' Remedial Proposals, United States of America v. Microsoft Corporation, State of New York, et al., v. Microsoft, Civil Action Nos. 998-1232 (CKK0, 98-1233 (CKK), December 7, 2001.]
What should the software market look like? Does the Court of Appeals' ruling provide an adequate legal foundation for creating that market? Is it worth the effort? What specific remedies are necessary to get the job done? Our analysis of the Microsoft case over four years leads us to clear answers.[Footnote 4: The Consumer Case Against Microsoft (October 1998); The Consumer Cost of the Microsoft Monopoly: $10 Billion and Counting (January 1999); Economic Evidence in the Antitrust Trial: The Microsoft Defense Stumbles Over the Facts (March 18, 1999); Facts Law and Antirust Remedies: Time for Microsoft to be Held Accountable for its Monopoly Abuses (May 2000); Mark Cooper, "Antitrust as Consumer Protection in the New Economy: Lessons from the Microsoft Case," Hasting Law Journal, 52 (April 2001); Windows XP/.NET: Microsoft's Expanding Monopoly, How it Can Harm Consumers and What the Courts Must Do to Preserve Competition (September 26, 2001).] We reject the claim that consumers must accept monopoly in the software industry. Real competition can work in the software market, but it will never get a chance if Microsoft is not compelled to abandon the pervasive pattern of anticompetitive practices it has used to dominate product line after product line. The antitrust case has revealed a massive violation of the antitrust laws. A unanimous decision of the Court of Appeals points the way to restoring competition. The public interest demands that we try.
The defenders of the Microsoft monopoly say that consumers cannot hope for competition within software markets because this is a "winner-take-all," new economy industry. They claim that in this product space companies always win the whole market or most of it, so anything goes. In fact, Microsoft's expert witness has written in a scholarly journal that: With "winner take most" markets [If] there can be only one healthy survivor, the incumbent market leader must exclude its competition or die There is no useful non-exclusion baseline, which the traditional test for predation requires By that standard, if a monopolist burns down the facilities of a potential competitor, it might be guilty of arson and other civil crimes, but it would not be guilty of violating the antitrust laws. Consumers should be thankful that both the trial court and the Court of Appeals flatly rejected this theory of the inevitability of monopoly and upheld the century old standard of competition.[Footnote 6: En banc, at 11-13.]
The evidence at trial teaches us that software markets are ripe for competition. If a monopoly were really the natural state of affairs in this market, then Microsoft would not have engaged in so many unnatural acts to preserve it. Microsoft resorted to repeated, welldocumented and protracted campaigns of anti-competitive behaviors to quash its competition. If network externalities would have been sufficient to entrench Microsoft, the immense amount of managerial time and effort and the hundreds of millions, if not billions, of dollars it burned up foreclosing the market to competing products were wasted.[Footnote 7: United States v. Microsoft Corp., 84 F. Supp. 2d 9 52-57 (D.D.C. 1999) (Hereafter, Findings, references are to paragraphs). United States v. Microsoft Corp., 87 F. Supp. 2d 30 25 (D.D.C. 2000) (Hereafter, Conclusions).] It should not have needed to use all of these illegal business strategies. Rather, it could have relied simply on delivering a better product in a networked industry.
The trial also showed that Microsoft's claims to pursuing consumer friendly business tactics that serve the public were contradicted by its actions. If expanding demand for Windows by promoting a complementary product had been Microsoft's concern, it would not have had to spend hundreds of millions of dollars making sure the dominant browser was Explorer and not Netscape Navigator. Since innovation would be the key to any such "system" effects, Microsoft should never have slowed its own products or prevented other products from getting to market, since all innovation stimulates demand for Windows. Microsoft should not have cared which brand was used. It should certainly not have spent so much effort on forcing Navigator out of the Apple Macintosh market. If bundling were important to expanding demand by creating convenience and lowering costs, Microsoft should not have cared which complements were bundled, since the better they all worked, the greater the demand. Yet it repeatedly sought to prevent any product, other than its own, from being bundled on new PCs. If improved functionality and ease of use through integration of complementary products were critical to stimulating demand, Microsoft should never have threatened to or actually withheld access to interfaces or jolted non-Microsoft products since they needed to function well to expand demand. If Microsoft were seeking to increase revenues by steering customers through its browser to its portal, it should never have given AOL equal standing with MSN on the boot screen at no charge or allowed OEMs to direct customers to their portals provided they used Explorer, not Navigator. If a pleasing consumer experience were important to expanding demand, Microsoft would have heeded the entreaties of OEMs to simplify and modify boot sequences, when they faced the wrath of dissatisfied consumers. Instead it payed them to put up with consumer hassles. It wo uld not have compromised the stability of the operating system with excessive integration. Microsoft illegally eliminated competition to defend and extend its monopoly and imposed a heavy price on the public. Consequently, application of traditional antitrust rules will achieve exactly the reverse of what Microsoft claims it would--it will promote innovation by allowing potential competitors, who would otherwise be quickly eliminated by the giant's anticompetitive behaviors, to have a fair chance to enter the market and eventually discipline the price and the quality of Microsoft products. In fact, the products against which Microsoft has directed its most violent anticompetitive attacks represent the best form of traditional competition: compatible products that operate on top of existing platforms and which seek to gain market share by enhancing functionality and expanding consumer choice. Microsoft fears these products and seeks to destroy them, not compete against them, precisely because they represent uncontrolled compatibility, rampant interoperability and, over the long-term, potential alternatives to the Windows operating system These examples illustrate how Microsoft's behavior hurts the public and undercut its claim that it was not abusing market power. They remind us that the link between competition and consumer welfare is more complex in this industry than in many others because of its network characteristics and its platform nature. As the Court pointed out and the Court of Appeals affirmed, three sets of producers must interact to deliver a product to the consumer in this industry. Independent software vendors (ISVs, like Netscape and Sun) must be able to write applications (like Navigator) that operate on top of the Microsoft monopoly Windows operating system. Computer manufacturers (original equipment manufacturers, or OEMs, like IBM) must be free to offer non-Microsoft products in the IBM-compatible personal computers (PCs) that they sell to the public. Consumers must be able to choose products in an unbiased environment so that competition on the merits determines which products survive and thrive. There is every reason to believe that consumers would receive better products at lower prices if Microsoft's anticompetitive practices were eliminated. Developers are remarkably capable of creating compatible products, but Microsoft has proven even more adept at devising anticompetitive schemes to drive them from the market. These facts alone undermine Microsoft's claim, and lays to rest any fears, that competition will cause computing to become more difficult or confusing.
The evidence at trial focused on Microsoft's battle to prevent Netscape/Java from becoming a threat to the Microsoft monopoly through insertion into the middle of the market.[Footnote 8: Findings, at 28-29.] Although the evidence indicates that the abusive business model affected many products and markets, Bill Gates, as head of the company, made it clear that the browser was a competitive threat to Microsoft's dominant position.
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.[Footnote 9: Government Exhibit #20: Memorandum from Bill Gates, The Internet Tidal Wave, dated May 26, 1995, United States v. Microsoft, 84 F. Supp. 2d 9 (D.D.C. 1999) (Nos. CIV. A. 98-1232, 98-1233) [hereinafter Internet Tidal Wave]. This was the competition that Microsoft set out to kill.
The key to understanding Microsoft's campaign to defend its monopoly against Netscape's web browser as discussed in the Court's Findings of Fact is to recognize the leverage that the huge number of already-available Windows operating systems and applications gave the company. The key role the operating system plays in the computer "platform," as well as the applications already in use, gave Microsoft the ability to strangle competition (see Exhibit III-1). The analysis starts with the consumer, who uses the computer, and works backward down the value chain. As the Court pointed out, consumers care about applications and the things they can do with them, not operating systems. Competitors face a "chicken-and-egg" problem, referred to as the applications barrier to entry. The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of high-quality, full- featured applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed at pace with those written for other operating systems.[Footnote 10: Fact, at 30.]
EXHIBIT III-1: THE ROLES OF APPLICATIONS AND MIDDLEWARE IN COMPUTER PLATFORMS
Microsoft's domination of the industry rests on the huge base and monopoly position[Footnote 11: Fact, at 35, En banc, at 13.] in its operating systems in PCs and applications[Footnote 12: Fact, at 36-44.] in which consumers ha ve invested substantial financial resources and time. An "operating system" is a software program that controls "the allocation and use of computer resources (such as central processing unit time, main memory space, disk space, and input/output channels)."[Footnote 13: Fact, at 2.] The purpose is to support "the functions of software programs, called "applications," that perform specific user-oriented tasks,"[Footnote 14: Fact, at 2.] like displaying text one the screen. The operating system supports the functions of applications by exposing interfaces, called "application programming interfaces," or "APIs."[Footnote 15: Fact, at 2, 30.] Programmers are not likely to write applications for non-Microsoft operating systems because of this installed base. Consumers are not likely to switch operating systems if their old applications will not run on the new operating system.[Footnote 16: Fact, 30. Unfortunately for firms whose products do not fit that bill, the porting of applications from one operating system to another is a costly process. Consequently, software developers generally write applications first, and often exclusively, for the operating system that is already used by a dominant share of all PC users. Users do not want to invest in an operating system until it is clear that the system will support generations of applications that will meet their needs, and developers do not want to invest in writing or quickly porting applications for an operating system until it is clear that there will be a sizeable and stable market for it. What is more, consumers who already use one Intel-compatible PC operating system are even less likely than first-time buyers to choose a newcomer to the field, for switching to a new system would require these users to scrap the investment they have made in applications, training, and certain hardware.] As the person responsible for establishing prices for Microsoft's most important customers (computer manufacturers put)[Footnote 17: See Mary Jo Foley, Who is Microsoft's Secret Power Broker?, ZDNET, Feb. 1, 1998 (describing Joachim Kempin by saying "he has the final sign-off on all Microsoft licensing contracts with all hardware makers . . . and he is the Microsoft official around whom swirls most of the current Microsoft vs. DOJ fireworks").] put it in a memo to Bill Gates in late 1997, "the existing investments in training, infrastructure and applications in windows computing are huge and will create a lot of inertia."[Footnote 18: Government Exhibit #365: Memorandum from Joachim Kempin to Bill Gates, dated Dec. 16, 1997, United States v. Microsoft, 84 F. Supp. 2d 9 (D.D.C. 1999) (Nos. CIV. A. 98-1232, 98-1233);]
As Microsoft saw it, Netscape/JAVA could weaken its hold on the market because they were able to insert themselves between the Windows operating system and the applications that ran on top of it. They are "middleware."[Footnote 19: Fact, at 28. Operating systems are not the only software programs that expose APIs to application developers. The Netscape Web browser and Sun Microsystems, Inc.'s Java class libraries are examples of non-operating system software that do likewise. Such software is often called "middleware" because it relies on the interfaces provided by the underlying operating system while simultaneously exposing its own APIs to developers. Currently no middleware product exposes enough APIs to allow independent software vendors ("ISVs") profitably to write full-featured personal productivity applications that rely solely on those APIs.] The threat that Microsoft saw lay in "a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system."[Footnote 20: Fact, at 72.] Compatibility was the
threat and Microsoft executives "were deeply concerned that Netscape was moving its business
in a direction that could diminish the applications barrier to entry."[Footnote 21: Fact, at 72, 75; See also Findings at 29.
But to the extent the array of applications relying solely on middleware comes to satisfy all of a user's
needs, the user will not care whether there exists a large number of other applications that are directly
compatible with the underlying operating system. Thus, the growth of middleware-based applications
could lower the costs to users of choosing a non-Intel-compatible PC operating system like the Mac OS.
Middleware offers independent software vendors (ISVs) the chance to write applications that can work with many operating systems. They do this by making available to programmers the applications programming interfaces (APIs). When APIs are exposed, programmers can "call" them to develop new applications. Because they hope to be compatible with numerous operating systems and hope to support many applications, these "middleware" programs make consumers indifferent to which operating system is used. This threatens to weaken Microsoft's hold on the market. In Microsoft's apt terms, it "commoditizes" its core product. If a competitor can create a stock of compatible applications, he can advertise that the new operating system can run all the existing programs, undermining the economic leverage of Windows. If the installed base of platforms and browsers are out there, the Windows operating system could be bypassed. By capturing the browser market, however, Microsoft precluded that possibility. The campaign against Netscape simultaneously extended the monopoly into the browser market and defended the monopoly in the operating system market by preserving the barrier to entry.[Footnote 22: The Court of Appeals reversed the claim to illegal monopolization of the browser market on the technical grounds that the plaintiffs had not properly defined the browser market. With Microsoft's market share exceeding 85 percent, it far surpasses the legal standard for monopoly.]
A review of the economic and trade literature, evidence in court cases, and popular accounts demonstrate that Microsoft has developed a business model that is predicated on anticompetitive conduct. Exhibit V-1[Footnote 23: . For other products see generally Jennifer Edstrom & Marlin Eller, Barbarians Led by Bill Gates (1998); Wendy Goldman Rohm, The Microsoft File (1998); Randall E. Stross, The Microsoft Way (1997); John Wallace & Jim Erickson, Hard Drive (1992), and the discussion below.] lists each of the questionable business practices noted by the Court (and affirmed by the Court of Appeals) and identifies the specific products that were the target of these practices over more than a decade. Exhibit V-2 presents a simple, nontechnical summary of the key barriers to competition that Microsoft erected in the browser war.
Microsoft's first response to the growth of the Internet and the development of the browser as a threat to its operating monopoly appears to have been to attempt to divide the market or gain a mutual non-aggression agreement.[Footnote 24: Fact, at 79.] That is, it sought to convince a competitor to go in one direction, while it went in another. When the market division proposal was turned down, Microsoft threatened to go into the competitors' line of business more vigorously. There are at least four examples in the evidence in which Microsoft sought to divide the market. This was not the only middleware threat that it extinguished, as will be discussed below. The trial fully documented a campaign to cut off a competitor's air supply by making it difficult to sell, find, or use his products, by shutting down distribution channels, by denying advertising and promotion channels, by undermining its functionality, by denying it resources, and by causing it to expend resources. Microsoft carried out its war against this and other middleware threats by attempting to ensure that no PC industry participants would in any way support or assist Netscape/JAVA. As was its practice, when Microsoft's overture to divide the market with Netscape was rebuffed, it set out to market a browser of its own using its well-tested strategy of tying applications to its operating system product. There is no evidence that Microsoft's Internet browser was superior in any way to those of its competitors.[Footnote 25: Fact, at 166-169.]
EXHIBIT V-1 EXAMPLES OF ABUSIVE BUSINESS PRACTICES
DESKTOP = covers the individual programs as well as the suites including Lotus, Corel, Novell, WordPerfect, Borland; DR-DOS = Novell's DR-DOS; ECOMMERCE = covers the range of transaction involving commercial transactions on the Internet; NAV = Netscape Navigator; JV=JAVA
EXHIBIT V-2: HOW MICROSOFT STOPS COMPETITION AND HARMS CONSUMERS
The preservation of its operating system monopoly was the driving force in Microsoft's entry into the browser market.[Footnote 26: Fact, at 170-171.] This is the core of the case against Microsoft. Being an innovative leader was not how this battle was to be won,[Footnote 27: Fact,. at 160.] leverage and tying were key,[Footnote 28: Fact At 166.] including efforts to undermine the quality of the competing product.
Microsoft's executives believed that the incentives that its contractual restrictions placed on OEMs would not be sufficient in themselves to reverse the direction of Navigator's usage share. Microsoft set out to bind Internet Explorer more tightly to Windows 95 as a technical matter. The intent was to make it more difficult for anyone, including systems administrators and users, to remove Internet Explorer from Windows 95 and to simultaneously complicate the experience of using Navigator with Windows 95. As Brad Chase, Vice President for developers and windows marketing, wrote to his superiors near the end of 1995, "We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience."[Footnote 29: Fact at 160] Thus, integration was a business strategy[Footnote 30: Fact at 167.] to foreclose a competitor. This strategy could go so far as to require a delay in the release of Windows 98 until Internet Explorer 4.0 was ready to be included with that product, even though it hurt Microsoft's most important customers, the OEMs.[Footnote 31: Fact, at 167.] At the heart of Microsoft's anti-competitive practices are three categories of abuses. First, it took steps to make it harder for consumers to find, install or use competing products, directly by restricting the consumer's ability to swap out Microsoft products and indirectly by pressing computer manufacturers to install only Microsoft products.[Footnote 32: Fact, at 171-172.] Microsoft took steps to prevent competitors from getting the same access to users of computers or services who had entered into an agreement with Microsoft. If OEMs,[Footnote 33: Fact, at 202-241.] ISPs,[Footnote 34: Fact, at 272-310.] or ICPs[Footnote 35: Fact, at 311-338.] were inclined to install other browsers, Microsoft sought to ensure that no browser would have equal placement. Second, it sought to foreclose distribution channels to other browsers altogether. Contracting parties were required to ship Internet Explorer (IE), and dissuaded from shipping competing browsers. Third, it took actions intended to ensure IE's quality was superior to browsers operating on Windows machines. Contracts required use of software that gave Microsoft a superior presentation, while the underlying software also disabled competitors. There were conditions to prevent competitors from garnering resources directly and indirectly. Microsoft's executives clearly believed that if they did not leverage their market power in the operating system, they would lose the browser war.[Footnote 36: .Fact at 167-168.] Not only did Microsoft manipulate the operating system to give its product an advantage, it denied or slowed access to its operating system to prevent Netscape from improving and delivering its own product.[Footnote 37: Fact, at 90-92.] The Court concluded that under the weight of the anti-competitive onslaught, Microsoft's competitors were forced to give up. Squeezed out of the market and drained of resources, they could no longer afford to devote resources to the product. The key to Microsoft's strategy was the cross-subsidy from the monopoly rents earned on the operating system.[Footnote 38: Fact, at 379.]
Despite the fact that it did not charge for Internet Explorer, Microsoft could still defray the massive costs it was undertaking to maximize usage share with the vast profits earned licensing Windows. Because Netscape did not have that luxury, it could ill afford the dramatic drop in revenues from Navigator, much less to pay for the inefficient modes of distribution to which Microsoft had consigned it. The financial constraints also deterred Netscape from undertaking technical innovations that it might otherwise have implemented in Navigator. Microsoft was not altogether surprised, then, when it learned in November 1998 that Netscape had surrendered itself to acquisition by another company
Microsoft was quick to quash any hint of competition from products that could act as middleware by exposing APIs. Microsoft attacked Intel's contemplation of developing software applications, denying consumers functionalities for years.[Footnote 39: Fact, at 94-103.]
Microsoft's prevented Intel from developing software by using its key leverage over computer manufacturers. In an oft-repeated pattern, Microsoft "pressured the major OEMs to not install NSP software on their PCs until the software ceased to expose APIs."[Footnote 40: Fact, at 101] Intel's "software could not find its way onto PCs without the cooperation of the OEMs."[Footnote 41: Fact, at 101] As a result "Intel realized that it had no choice but to surrender the pace of software innovation to Microsoft."[Footnote 42: Fact, at 101.] Microsoft's ability to control the activity of computer manufacturers was demonstrated in this incident and has played a key role in many of its anticompetitive campaigns.[Footnote 43: Fact, at 103. OEMs represent the primary customers for Intel's microprocessors. Since OEMs are dependent on Microsoft for Windows, Microsoft enjoys continuing leverage over Intel. To illustrate, Gates was able to report to other senior Microsoft executives in October 1995 that "Intel feels we have all the OEMs on hold with our NSP chill." He added: "This is good news because it means OEMs are listening to us. Andy [Grove] believes Intel is living up to its part of the NSP bargain and that we should let OEMs know that some of the new software work Intel is doing is OK. If Intel is not sticking totally to its part of the deal let me know. (101-103)"] When Microsoft uses its control over operating systems to close the OEM channel to potential competitors a power it was not shy to use even giants like Intel must abandon the effort to compete.
Microsoft was not content to merely quash Intel's NSP software. At a second meeting at Intel's headquarters on August 2, 1995, Gates told Grove that he had a fundamental problem with Intel using revenues from its microprocessor business to fund the development and distribution of free platform- level software. As was the case in a number of other instances, part of Microsoft's goal was not only to keep its product space free of actual competitors, but also to send a strong signal to potential competitors to vacate the field. "Gates said, Intel could not count on Microsoft to support Intel's next generation of microprocessors as long as Intel was developing platform- level software that competed with Windows."[Footnote 45: Fact, at 102] These same tactics were later used against Intel to force it to stop supporting Netscape/Java.
IBM was a particular target for Microsoft efforts to seal off its market.[Footnote 46: Fact, at 115.] Acting on its desire to protect its monopoly "from 1994 to 1997 Microsoft consistently pressured IBM to reduce its support for software products that competed with Microsoft's offerings."[Footnote 47: Fact, at 132] When Microsoft wanted a competitor to cease it could withhold access to its monopoly products. Thus, "just three days after IBM announced its intention to pre- install SmartSuite on its PCs, a Microsoft executive informed his counterpart at the IBM PC Company that Microsoft was terminating further nego tiations with IBM for a license to Windows 95."[Footnote 48: Fact, at 102 Then, on July 20, 1995Microsoft also refused to release to the PC Company the Windows 95 "golden master" code. The PC Company needed the code for its product planning and development, and IBM executives knew that Microsoft had released it to IBM's OEM competitors on July 17. Microsoft's purported reason for halting the negotiations was that it wanted first to resolve an ongoing audit of IBM's past royalty payments to Microsoft for several different operating systems.] Simultaneously, it withheld access to its product, setting back IBM's development of its product and causing it to miss the most critical sales season. Over this period, IBM's ability and intention to preinstall an office suite brought retaliation from Microsoft and reduced its shipment of computers substantially. As in the case of the browser, Microsoft centered its attention on denying a competing product the easiest means of distribution -- preinstallation. Microsoft sought to prevent IBM from preinstalling its office suite on its computers. Interestingly, this battle to convince IBM not to preinstall its office suite was essentially an attempt to divide the market, to have IBM focus on being a hardware company and stay out of the software business. The instruments that Microsoft used to undermine IBM's preinstallation of a competing product are familiar--delay and desupport by leveraging the operating system. This is not the only reason that Microsoft's Office came to dominate the office suite market, but it was a landmark on Microsoft's abusive timeline. This was a crucial moment to prevent a competitor from gaining an installed base. Microsoft's advantage came from leveraging the operating system and impairing the ability of the most important competitor to ship its product. Microsoft executives certainly thought that the leverage was helping. When a senior Microsoft executive argued for leveraging the operating system more to win the browser wars, he pointed to the office suite market as an example of how leverage works. His words on leverage are so strikingly clear that no court could ignore them.
Let's [suppose] IE is as good as Navigator/Communicator. Who wins? The one with 80% market share. Maybe being free helps us, but once people are used to a product it is hard to change them. Consider Office. We are more expensive today and we're still winning. My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform [means] losing our biggest advantage--Windows market share.[Footnote 49: Fact, at 166.]
Apple's software efforts also prompted Microsoft to preserve its monopoly and divide markets.[Footnote 50: Fact, at 166.] The Court noted that the force used to keep Navigator out of Apple computers could serve no positive purpose for Microsoft, since "there is no conceivable way that Microsoft's costly efforts to induce Apple to preinstall Internet Explorer on Apple's own PC system could have increased consumer demand for Windows."[Footnote 51: Fact, at 141.] The tools used by Microsoft in its dealings were blunt, especially where it saw that Apple could provide an avenue for competition.[Footnote 52: As Time Magazine, "Mine All Mine," June 5, 1995, put it summarizing court papers, "Gates personally threatened to stop developing applications software for the Macintosh if Apple continued working on a programming tool that would compete with Microsoft's."] As we have seen, compatible cross-platform software was the trigger for its anticompetitive efforts "Because QuickTime is cross-platform middleware, Microsoft perceives it as a potential threat to the applications barrier to entry."[Footnote 53: Fact, at 104.] Microsoft launched a year long campaign in which it "tried to persuade Apple to stop producing a Windows 95 version of its multimedia playback software, which presented developers of multimedia content with an alternative to Microsoft's multimedia APIs."[Footnote 54: Fact, at 105.]
Microsoft backed its effort to drive Apple out of developing applications for the Windows environment with threats that it "would enter the authoring business to ensure that those writing multimedia content for Windows 95 concentrated on Microsoft's APIs instead of Apple's."[Footnote 55: Fact, at 106.] Microsoft went on to suggest that incompatibilities would occur since "the technologies provided in those tools might very well be inconsistent with those provided by Apple's tools."[Footnote 56: Fact, at 106.] The threat was backed up with the cross-subsidies available when the "Microsoft executives warned, Microsoft would invest whatever resources were necessary to ensure that developer used its tools; its investment would not be constrained by the fact that authoring software generated only modest revenue."[Footnote 57: Fact, at 107.] Thus Microsoft's ability to threaten, leverage and retaliate against large, long-standing companies like Apple was immense. The Court conc ludes that any benefits that might have accrued from the "short term by resolving existing incompatibilities in the arena of multimedia software, paled in comparison to the long term cost, since "the departure of an experience, innovative competitor would not have tended to benefit users of multimedia content."[Footnote 58: Fact, at 110.] Microsoft would later use the same threats to withhold support for applications to force Apple to ship Internet Explorer and exclude Navigator.[Footnote 59: Fact, at 341-356.]
By studying the examples of the use of leverage in the trial, we learn the key pressure points that must be relieved if competition is to be restored to the industry. There are other examples frequently noted in the trade and other press.[Footnote 60: Specific examples have been offered involving a number of different technologies and products. The list includes DR-DOS, GO, and Intuit, in addition to Netscape (Time, June 5, 1995, p. 49). Fueling the debate and industry gossip mills are fresh details of Microsoft's hard-nosed business dealings. In a new book called Startup for example GO Crop. Founder Jerry Kaplan tells how in 1989 his company, hoping to persuade Microsoft to write some software for GO's penbased computer system, gave Gates and his developers a demonstration of how it worked. Microsoft said it wasn't interested. But two years later, the company unveiled a competing system called Pen Windows that bore an uncanny resemblance to GO's design using the same "gestures" to insert and delete characters... But such a thing would not be out of character. In a complaint filed in April as part of the Intuit suit, the Justice Department quoted a memo, directed to Gates, in which a Microsoft vice president told how he had tried to pressure Intuit chairman Scott Cook into accepting a $1 billion buyout offer by hinting that Microsoft might spend the money attacking Intuit in the marketplace. Rohm, pp. 148, points to another example, " Clow testified Microsoft had threatened that if Stac didn't give it the technology, it would do it anyway and put Stac out of business." See, also, Wallace and Erickson, p. 316, who recount an incident in which "Gates demanded that Sculley cancel the project and sign over to Microsoft rights to the MacBASIC name. As a lever, Gates told Sculley he would not renegotiate the license for Apple to use Microsoft's BASIC on the best-selling Apple II."] These reinforce the understanding of how anticompetitive leverage works in this industry, as well as demonstrate just how deeply embedded this business model is in Microsoft's behavior[Footnote 61: Gleick, supra note 64, at 88. In 1991, Mike Maples, a senior Microsoft executive, described the company's goals in the aggressive style that its top executives use to favor: If someone thinks we're not after Lotus and after WordPerfect and after Borland, they're confused. . . . My job is to get a fair share of the software applications market, and to me that's 100 percent. Wallace and Erickson, p. 211, find this attitude much farther back in the company's history.. One day in late 1981, Gates approached Richard Leeds, project manager for COBOL, one of the languages that Microsoft delivered to IBM for the PC, in the hallway of the Northrup building outside of Leeds' office. Gates was trying to get the word out about what he considered Microsoft's top priority. And what was on his mind was Microsoft's operating systems strategy. "We're going to put Digital Research out of Business," he told Leeds, slamming his fist into the palm of his hand. He would issue a similar vow twice more during the next year, according to Leeds, promising to put MicroPro and Lotus out of business, each time emphasizing his promise by smashing his fist into his hand. .. It was clearly not enough for Microsoft to beat the competition; Gates wanted to eliminate his opponents from the playing field. "Bill learned early on that killing the competition is the name of the game," said a Microsoft executive who was with the company in the early 1980s. "There just aren't as many people later to take you on. In game theory, you improve the probability you are going to win if you have fewer competitors.] and how far back in its history it reaches.[Footnote 62: The practice of tying was deeply embedded in the very beginnings of the company approach. Wallace and Erickson, p. 212, give an example from 1982. Sometimes, he used strong-arm tactics bordering on the unethical. One such case involved the Rainbow computer introduced by Digital Equipment Corporation in 1982. At the time, DEC dominated the minicomputer market with its famous PDP series of machines. The Rainbow was the company's first attempt at a personal computer. The Rainbow was unique in that it had dual processors enabling it to run 8-bit and 16-bit software. According to a knowledgeable industry source, the Rainbow was originally intended to run only on CP/M. But Gates "persuaded" DEC to eventually include DOS as an option. According to this source, DEC wanted to be able to offer Microsoft Word with the Rainbow. This word processing application was under development at Microsoft in 1982, but was not officially released until the following year. Although versions of Word were designed to work on computers that ran either on CP/M or DOS, Gates insisted that Digital Equipment's deal for Word also include his operating system.] Some of these examples are extremely important, like the battle against DR-DOS, as will be discussed below.
Using the operating system as the core of its market power, Microsoft erects barriers to entry. It freezes out competitors with incompatibilities,[Footnote 63: The practice was deeply embedded in the business strategy, although it was refined over time. Wallace and Erickson offer the following example from 1982-83 (p. 233). Still, for a very brief time in early 1983, Multiplan did enjoy an advantage over 1-2-3. Microsoft released its upgrade for he IBM PC/XT, causing problems for 1-2-3 on the updated operating system. According to one Microsoft programmer, the problems encountered by Lotus were not unexpected. A few of the key people working on DOS 2.0, he claimed, had a saying at the time, DOS isn't done until Lotus won't run." They managed to code a few hidden bugs into DOS 2.0 that caused Lotus to break down when it loaded. "There were as few as three or four people who knew what was being done," he said. He felt the highly competitive Gates was the ringleader. The art had apparently been refined by the early 1990s (Wallace, p. 38-39). "He denied there was a Chinese Wall at Microsoft," Schmidt wrote in his notebook, "and clearly stated that the software groups throughout all of Microsoft's Corporation talked to all others. He claimed that the use of hidden APIs was an error by the team" The hidden APIs referred to by Schmidt are applications programming interfaces, or "calls," programming codes integrated into an operating system such as Windows to allow it to respond to commands from an application program. If competitors don't know about these hidden or undocumented calls, their applications will not work as well as Microsoft's Microsoft had long denied that it deliberately designed hidden calls into its operating systems, but in the summer of 1992, Andrew Schulman, a programming expert living in Cambridge, Massachusetts, published a book Undocumented Windows, which confirmed that Microsoft had lied. Microsoft later acknowledged that Excel and Word used at least 16 APIs that had been hidden in Windows.] builds in features to impede or disable competing programs, and withdraws support for competitor programs. The practices span at least three generations of operating systems. It began with the "scare message" in Windows 3.1 to makes DR-DOS users "feel uncomfortable and when he has bugs, suspect the problem is DRDOS and then go out and buy MS-DOS or decide not to take the risk for the other machines he has to buy for his office."[Footnote 64: ROHM, supra note 23, at 89.] Windows 95 and Windows 98 have apparently disabled competitors' programs rather than warn about possible incompatibilities.[Footnote 65: See James Gleick, Making Microsoft Safe for Capitalism, 1996 ANTITRUST L. & ECON. REV. 71, 81; "The setup routine for Microsoft's new Windows 98 operating system deliberately disables files used by competitors' software and installs different versions of those files for the use of Windows 98." Windows 98 Disables Microsoft Competitors' Software, CNET, July 4, 1998l.] As discussed below, Microsoft has gone back to misleading warnings with its Windows XP offering. Threatened loss of support was used for at least a decade.[Footnote 66: Wallace and Erickson cite an example from 1985, p. 315. When Apple threatened to sue Microsoft in 1985 over Windows for copyright violations, Gates said he would stop development of Excel and Word for Mac, which at the time were desperately needed software applications which Apple hoped would spur sagging sales of the Macintosh. Apple had no choice but to back down on its threat to take legal action. Instead, it signed a licensing agreement giving Microsoft royalty-free rights to use the graphical display technology developed for the Macintosh. SEE ALSO ROHM, supra note 23, at 69, 70; Mine All Mine, TIME, June 5, 1995.] Several examples came up in the court case and they have recurred with respect to the Windows XP offering. The practice of imposing proprietary standards on previously open standards has become so clearly identifiable as a business strategy that they have been given a name--embrace and extend.[Footnote 67: The extension of this strategy to the Internet is the occasion for the current battle over Microsoft's business practices. As PC Week Online, June 8, 1998, put it. Microsoft's strategy, also known as "embrace and extend," is not new. Gates first mentioned it publicly on Dec. 7, 1995, when Microsoft let it be known that the Internet threatened the domination of Windows on the desktop. Since then, Windows has "embraced" the Web right into the operating system. Fair enough, but the case isn't completely about putting a browser into Windows. It's about not allowing someone else's browser to have a fair shake in the only operating system most users have access to. Microsoft also has extended the Java programming language with extensions that render applications developed with it unable to execute, as intended, across multiple operating systems. And, there's this week's news: Microsoft is working on extensions to Dynamic HTML that would make that cross-platform solution incompatible with browsers other than its own Internet Explorer. Wallace, p. 149, notes that "those two words would eventually become the centerpiece of Microsoft's Internet strategy."] These practices make it difficult for competitors to design products that operate well as the operating system is manipulated and changed.[Footnote 68: EDSTROM & ELLER, at 117. ROHM, supra note 63, at 187 recounts the complaints about the desktop applications. Gleick, supra note 72, at 87 notes a similar phenomenon with respect to the Internet. The Microsoft Network as an on-line service has its problems performance is sluggish and the content thin but as new computers stream into the marketplace with Windows 95 already installed, millions of newcomers will find their way to the Internet by clicking that Microsoft icon. Hence the extra annoyance of its competitors over the little matter of Windows 95's disabling their users existing Internet access. Many users who had installed the widely popular Netscape browser and then tried Microsoft's Internet Explorer discovered that Netscape would no longer work In the Microsoft version of events, Windows 95 does not "disable" anything. It just happens that some companies' applications cease functioning they "use nonstandard components" and "need special configuration." Those companies violated Microsoft's published guidelines, he says: they have realized their error and are preparing new versions of the software to repair the problem. ELLER & EDSTROM, supra note 23, at 42-43; WALLACE & ERICKSON, supra note 63, at 240-48; Wallace and Erickson, p. 257, offered the following characterization. In October 10 1983 VisiCorp announced that it planned to start shipping VisiOn. Gates' boast nine months before that Microsoft would be the first to market with a graphical user interface evaporated like so much hot air. VisiCorp's bombshell was followed by one from Quarterdeck, a startup software publisher that announced it, too, would build a graphical user interface, named DESQ. The market was becoming more crowded, and Microsoft began to take on the look of an also-ran. Gates was furious. To steal some of the spotlight from VisiCorp and Quarterdeck, he ordered that Windows be formally announced. Within two weeks, MacGregor was airborne with Gates headed for New York. Gates felt he couldn't afford to keep Windows under wraps any longer. He had learned that one way to prevent potential customers from flocking to a competitor's product was to announce that your company was working on something even better. An interesting observation in this debate is offered by Orrison, p. 45, who distinguishes vaporware, which is part of a strategy to hold customers, from fumbleware, which is a genuine prediction error.]
The truth is not so innocent. Most Internet dial-up software written for Windows relies on a piece of software called "winsock." Everyone's winsock is supposed to be more or less interchangeable with everyone else's, but differences do exist. Many vendors put their winsock into the Windows directory of the user's computer a friendly practice, since it is then available to other software that might need it, but a risky one, too. If Windows 95 sees a non-Microsoft winsock, it carefully and explicitly replaces it He acknowledges that the specification for using the operating system's new dialer were slow in coming but says they are now available to all who want them. And for that matter, he asserts, if Microsoft chose to keep such specifications private, to give a competitive advantage to its many software departments, that would be the company's privilege. It does own the operating system, after all. CNET, July 4, 1998. Windows 98 includes a new utility, the Version Conflict Manager, or VCM, to keep track of disabled files and provide a way for users to switch the files back. But the Win98 setup routine does not provide any notice to users that he files are being changed or that the Version Conflict Manager is available if a competitors' software no longer operates The applications .. may no longer work properly, or it may no longer work at all The Version Conflict Manager lets the user select a file and trade the older version for the newer version. But a Win98 user typically has no knowledge of what applications use which shared files or which version of each file would be "better." Moreover, the utility is unlikely to be found routinely by users because it is buried deep within Win98's menu structure: Click Start, Program, Accessories, System Tools, System Information, Tools, Version Conflict Manager then you will find it] The essence of the Microsoft business strategy is not simply to make it easy to use Microsoft products, but to make it hard to find and hard to use competing products. Microsoft locks customers in with constant imitation of competing products[Footnote 69: See Willow A. Sheremata, Barriers to Innovation: A Monopoly, Network Externalities, and the Speed of Innovation, 42 ANTITRUST BULL. 937, 941, 964, 967 (1997) [hereinafter Sheremata, Barriers to Innovation.] or promises to imitate them.[Footnote 70: The preannouncement issue received considerable attention during the first federal action against Microsoft. There also have been charges of back room campaigns of intimidation,[Footnote 71: ROHM, supra note 23, at 148, 237, 270.] abrogation of contracts or patent infringement,[Footnote 72: The line between imitation and abrogation of contracts or patent infringement has never been very clear in Microsoft's business model and has resulted in repeated disputes including court cases involving Stac Electronics, ROHM, supra note 23, at 147-151, as well as settlements of similar claims including CPM, see JOHN WALLACE, OVERDRIVE 41 (1997) and ROHM, supra note 23, at 41, and others such as pen-based systems, see ROHM, supra note 23, at 93-101, and hardware, see WALLACE & ERICKSON, supra note 63, at 390. ON claims of patent infringement See ROHM, supra note 23, at 93-101, 147-51; Alan Akin, Microsoft and 3D Graphics: A Case Study in Suppressing Innovation and Competition, July 16, 1997 (posted on Boycott Microsoft available at http://www.vcnet.com/bms/features/); Microsoft's strategy, also known as "embrace and extend," is not new. Gates first mentioned it publicly in Mine All Mine, TIME, June 5, 1998.] and predatory pricing, in which profits from the operating system monopoly are used to drive competitors out of other software lines.[Footnote 73: WALLACE, at 162-65.] 73
Netscape/Java was not the first middleware threat that Microsoft perceived and eliminated. In the early 1990s, Microsoft was already attacking other "middleware" to ensure its dominance in the applications market.[Footnote 74: Edstrom and Eller, pp. 113-114. Established partly to promote code and resource sharing between Microsoft's Word and Excel Application groups, Whitten's team was also a reaction to a new software product from Hewlett Packard called NewWave. NewWave ran on top of Windows 2.03 and was part of HP's glowing vision of how the office of the future would work: orchestrated information sharing among different applications. If HP were successful, it could end up owning the application programming interfaces, or APIs, dictating how applications would run on a PC. If HP succeeded, instead of writing to Microsoft's Windows APIs, developers might write to HP's. This was an immediate threat.] The critical role of control APIs to frustrate middleware development is central to the preservation of the monopoly. Nathan Myhrvold wrote of Microsoft's need to control API's in order to maintain its stranglehold on the operating systems business.[Footnote 75: Edstrom and Eller, pp. 113-114. The relationship of an application to the system API is similar to the relationship that the roots of a tree have with the ground--it is very complicated and makes it difficult for third parties to clone. This helps prevent competitors from dislodging a successful operating system. Evolution and innovation provide another barrier as well as upgrade revenue. The system must evolve its APIs and implementation over time in order to remain successful. This gives ISVss more features to exploit, makes it more difficult to clone, and it gives users a reason to pay for an upgrade. The applications architecture group sprang forth immediately, and from it sprang object linking and embedding (ole). It was heavily criticized for making the overall windows system fat and bloated. Ole consumed memory, process cycles, and not surprisingly, was difficult for developers to support. Applications compatibility introduced a whole other set of constraints on applications developers. But that was exactly what it was designed to do. As eller argued, ole was supposed to be fat and bloated. Integration was all about making monolithic applications slowly trade components among each other. Ole was designed to protect developers of big applications who were afraid of being scooped by slick applets, little applications being crafted by much smaller development companies. Microsoft didn't want a lot of other companies writing code that could compete. It wanted to keep barriers to entry very high. The idea, in fact, was to keep raising the bar, putting in more layers of software and apis, which developers would then have to support. Microsoft wanted to make it so gnarly that anybody who couldn't devote a team of one hundred programmers to every windows application would be out of the game. EDSTROM & ELLER, at 117. Rohm recounts the complaints about the desktop applications, p. 187. Under subpoena by the Justice Department, WordPerfect, Lotus, Novell, Borland and others had shown federal attorneys that Gates was attempting to restraint trade by restricting access to essential operating system specifications to software developers making applications programs for Chicago. Microsoft would not provide access to any company developing products for standards not owned by Microsoft. Gleick, p. 87, notes a similar phenomenon with respect to the Internet. Microsoft responds that the specifications are freely available; its own Windows implementation of those specifications, however, is proprietary and available for those who wish to pay for a license, possibly on a per transaction basis. It has become a familiar scenario: Microsoft claims an architecture is public and open; its competitors say the crucial details are reserved to Microsoft alone.]
Another middleware product that makes a brief appearance in the court case, but is now a much more important issue, is RealNetworks, whose software facilitates the Web-based "streaming" of audio and video content. RealNetworks' software is middleware because it "presents a set of APIs that competes for developers attention with APIs exposed by the streaming technologies in Microsoft's DirectX."[Footnote 76: Fact, at 111-114.] RealNetworks seeks to offer a cross-platform compatible product and has developed various versions for different operating systems. Microsoft executives saw this as another threat viewing it "with the same apprehension with which they viewed Apple's playback software as a competing technology that could develop into part of a middleware layer that could, in turn, become broad and widespread enough to weaken the applications barrier to entry."[Footnote 77:Fact, at 111.]
Here again, Microsoft sought to prevent competition by diminishing compatibility, trying to convince RealNetworks "to limit itself to developing value-added software designed to run on top of Microsoft's fundamental multimedia platform."[Footnote 78:Fact, at 113] Although an agreement was reached, there was apparently a misunderstanding, since RealNetwork continued "developing fundamental streaming software."[Footnote 79:Fact, at 114.] As we shall see below, Microsoft's struggle to undermine this type of cross-platform middleware continues.
Although it has been a long time since Microsoft gained undisputed control of the PC operating system market, a look back at how it drove its last competitor out of the PC market is instructive. If we go back to the late 1980s and early 1990s, we find conduct in the operating system war with DR-DOS that was as prominent as it was in the Browser case. The company's most intense reaction is always to a threat to the underlying monopoly in the operating system.[Footnote 80:Rohm, pp. 4066. Gate's pal Ballmer knew how paranoid Gates was about DR-DOS. Ballmer had read the e-mail Gates had shot off to him, railing about the competing product Retail sales of the product had started to outstrip those of Microsoft DOS. It was all but a companywide policy to kill DR-DOS using every possible means Vobis was the largest computer manufacturer in Germany all of Europe for that matter and at the beginning of 1991, 100 percent of the computers it sold were being shipped with DR-DOS. The edict had been handed down from Gates through the ranks: We want DR-DOS not to exist in this account. They had even set a date for her to meet the goal that the company be selling "no DR-DOS" but all Microsoft DOS and at least 50 percent Windows.]
The victory over DR-DOS did not rest on a quality advantage.[Footnote 81: Sheremata, Barriers to Innovation, at 942. At the time DR-DOS 5.0 received much critical acclaim as the superior product. However 1 month after DRI introduced DR-DOS 5.0, Microsoft preannounced a similar set of features for MS-DOS. Although Microsoft did not ship these features until over 1 year later, by 1993 market share for DR-DOS had fallen to 3%. MS-DOS share rose to 79%. However, MS-DOS technology was based on CP/M which was an earlier version of DR-DOS. This lends credence to reports that DR-DOS was the product with superior quality. Apparently, Microsoft successfully applied its monopoly power to forestall competitive innovation.] Rather, Microsoft imposed contract conditions on suppliers that foreclosed and deterred competition relying on now familiar tactics like withdrawing support "CEO Lieven complained that Microsoft had threatened to cut off technical support and access to information if Vobis continued to sell DRDOS."[Footnote 82:Rohm, pp. 69, 70] The early use of contracts to secure the operating system monopoly against its rival, DRDOS, is central to Microsoft's dominance in the 1990s.[Footnote 83: ROHM, at 41. By 1991 account managers would read the terms of the licensing policy in their OEM manuals in brief form. The new licensing terms had started in the Far East, when low-cost clone vendors were happy to increase their slim profit margins by using a cheaper but better version of DOS--from DRI. Microsoft had implemented what eventually became known as "per processor" licenses, which effectively locked computer makers into contracts that required them to pay for the Microsoft operating system on every computer] At the same time Microsoft was leveraging DR-DOS out of the market, it was leveraging competing desktop applications out of the market.[Footnote 84: Id. at 71, 77, 78. Gates, Lieven, Huels, and Reichel now discussed, among other things, an agreement "to get DRI/Novell out of Vobis," a strategic partnership between the two companies, and a commitment that Vobis would agree to sell "no Novell NetWare Lite" but instead would contract for 25,000 copies of Windows for Workgroups--a new product for Microsoft in the market for computer networks in which it had no presence. . . . Among the e-mail messages not produced to the feds from the computers of Microsoft Germany was one that Bernard Vergnes sent to a number of other Microsoft executives on September 7, 1992. Along with documenting the Vobis deal, it showed Microsoft's intent to use its DOS contracts to leverage computer makers into buying Microsoft applications software in place of that from Lotus and others. . . . In April 1991, Ballmer and Lieven had met in Nice. Ballmer had discussed other "inducements," as Lieven would testify, involving bundling Microsoft applications software with an operating system deal. A Microsoft Word/Excel combination was suggested as part of the DOS/Windows deal. . . . After noting the success of Gates' meeting with Lieven, and the strong market presence of Vobis--number one in market share, over IBM--the memo said: Lieven . . . is willing to no longer offer DRI-DOS or Network Lied [sic] . . . As you know, Lotus and Borland have been aggressively approaching our OEMs, and Vobis is no exception.] As with the browser, these earlier cases of leveraging involved more than just shutting down distribution channels. The full range of technical and economic weapons was used to drive competing software from the market and to undermine its attractiveness to consumers. Microsoft leveraged the operating system by creating incompatibilities. From the outset, the process of building incompatibilities was driven by preservation of the monopoly on the operating system.
Among the findings that the Court of Appeals left in place, and indeed reiterated in a number of instances, were the consumer harm findings of the District Court. The Courts have now concluded and affirmed that Microsoft abused its monopoly power. Relying on the leverage of the operating system and the power it conveys over computer manufacturers, as well as the cross subsidies that sustain Microsoft while its competitors are strangled, Microsoft avoids the typical pressure in a competitive market. It is not pressed to provide high quality[Footnote 85: The problem is endemic as Wallace and Erickson observed, p. 245. Microsoft would eventually get Word right, but it took several major revisions. This would become a pattern with most of the company's initial application products from IBM PC and compatible computers. Vern Raburn, former president of Microsoft's Consumer Products Division, discussed this aspect of Microsoft in Fortune magazine: "With few exceptions, they've never shipped a good product in its first version. But they never give up and eventually get it right. Bill is too willing to compromise to get going in a business. Gleick, p. 82. Time and again its strategy has been to enter a market fast with an inferior product to establish a foothold, create a standard and grab market share.] or customer service.[Footnote 86: Gleick, p. 88, goes on to note (p. 88) that unlike its competitors in applications, Microsoft did not have toll free hotlines.] From the public policy perspective, the monopolist is insulated from paying the price of shipping inferior goods, while the public bears the burden.[Footnote 87: As an article in Computer, July 1998, put it, Fast versioning leads to success in the software industry. High-quality products lose out to quickand- dirty products because Joe Sixpack isn't a discerning consumer. Also, enough brain-dead Larry Lemmings will follow the market leader, so Microsoft could produce a lot of Gonzo Products before its bottom line began to sink.] Bundling allows prices to be hidden from the public, since the software is packaged with the computer and multiple applications are bundled together.[Footnote 88: New York Times, June 5, 1998, D-1. One way or another, the consumer pays for this additional product it is built into the retail prices of the computer whether the buyer wants it or not. This gives Microsoft an unfair advantage in the fiercely competitive Internet-access market, where there are plenty of lean and efficient rivals. Such "tying arrangements" in which a consumer is compelled to buy one product as a condition of buying another, are the hoariest of antitrust abuses, considered, illegal per se] The pricing terms and conditions are highly secret,[Footnote 89: Business Week, June 15, 1998 And while the retail price will be the same, Microsoft does not publish a price list for PC makers, so it's hard to detect changes. For this reason it is doubtful that any PC maker will go public with gripes. Says one: "No one wants to testify in front of a Senate Panel for fear that Microsoft would turn around and raise your price." Rohm, p. 105, notes the role that his secrecy plays in enabling Microsoft exercise power over the firms with which it deals.] locked in the contracts between Microsoft and the companies that actually sell to the public. With no competition, Microsoft upgrades, which are sold to the public, become extremely high margin products.[Footnote 90: New York Times, June 5, 1998, p. D-1. David Rearderman, an analyst at Nationsbank Montgomery Securities, estimates that operating system revenues in 1997 were $4.6 billion and produced gross profit margins of 90 percent. New York Times, December 1 1997, p. D-4 [I]n contrast to product-development cycles in old-style manufacturing businesses, like automaking, extensive changes to an operating system and the subsequent upgrades they force throughout the chain require no costly retooling of assembly lines and no new raw materials. The main cost is human capital some months of programmers' time.] Microsoft's charges are excessive and consumers are forced to purchase superfluous functionality.[Footnote 91: New York Times, December 1, 1997, D-4. The key to Microsoft's success is its strategy of linking its Windows operating systems the foundation of a PC's operations to its productivity applications, to the Internet, to its consumer products, to its programming tools and to hardware manufactures in a tight, interdependent chain. Whenever it makes a significant modification to Windows as it did in the step from Windows 3.1 to Windows 95, for example everything in the chain has to change, too... Customers are caught in the competitive spiral, being constantly pressured to upgrade "obsolete" software though the definition of obsolescence is debatable.] Consumers pay more than they should for more functionalities that are bundled into packages of software than they should, and find themselves forced to buy bigger machines to accommodate the bloated package.[Footnote 92: Gleick, p. 83. Anecdotally, it is clear that millions of high-end users have bought the upgrade but that millions of corporate customers have chosen to delay the inevitable heartache, particularly when most existing hardware lacks the speed and memory to run it well. It does not matter. In the long run virtually every desktop computer will run Windows 95 and its successors. New computers shipping now have Windows 95 preinstalled by default. Applications developers have either stopped developing for DOS and Windows 3.1 or soon will.] What the court case provides is a strikingly clear picture of how Microsoft uses it market power. Microsoft executives knew full well there were "huge" barriers to entry into the operating system market. In a December 1997 memorandum, the Senior VP responsible for pricing to Microsoft's most important customers--computer manufacturers (original equipment manufacturers or OEMs)--concluded that Microsoft's high prices were protected by a variety of barriers to entry. Although computer manufacturers had an incentive to compete in operating systems because of Microsoft's high prices, they faced problems of consumer switching costs.[Footnote 93: Government Exhibit #365: Memorandum from Joachim Kempin to Bill Gates, dated Dec. 16, 1997, United States v. Microsoft, 84 F. Supp. 2d 9 (D.D.C. 1999) (Nos. CIV. A. 98-1232, 98-1233). Our high price could get a single OEM or a coalition to fund a competing effort. While this possibility exists I consider it doubtful even if they could get a product out that they can market it successfully, leapfrog us and would not deviate them from their own standard. Could they convince customers to change their computing platform is the real question. The existing investments in training, infrastructure and applications in windows computing are huge and will create a lot of inertia..] Software vendors were stymied by compatibility problems.[Footnote 94: Id. SUN and its coalition with Java. For the next 2-3 years the barriers are huge. . . In addition there is the compatibility barrier. . . [Netscape] may come from the browser side, but I consider them too weak to succeed alone--so they are only dangerous if they team up with SUN. Again compatibility and yet another platform are the biggest inhibitors.] Even Intel could not compete in operating systems,[Footnote 95: Id. This could be an INTEL led and funded coalition--say with Compaq and Netscape. I am convinced they have been thinking about this for some time. They could buy SUN SOFT or start a skunk work project on their own. If they decide to sell the Operating System for $1 and the CPU for $200 they will get the OEMs on their side. The customer inertia argument remains and that will prevent them to build momentum easily.] since Microsoft could respond to such a threat by using its deep pockets to buy a chip manufacturer and bolt its operating system onto the CPU, leveraging control of compatibility to defend and extend its monopoly.[Footnote 96: Id. Our reaction could be to buy National semiconductor or AMD or both and own the CPU and the SW business--while both stocks are taking a dive. We would sell SW at $100 and CPU at cost +1. How sure are we of our partnership and how fast could we react if needed? We could bring compatibility to another platform better than anybody else and we would have the money to fund the fabrication capacity.] So much for the claim that a brilliant computer science major in his garage can displace Microsoft.[Footnote 97: Report of Direct Testimony of Richard Schmalensee, p. 47.] Not even the combination of Intel, Compaq, Sun and Netscape can overcome these barriers to entry.
The Court identified several general ways in which consumers have been harmed by Microsoft's ability to undermine the competitive process. These fall into two broad categories, qualitative and monetary. Denial of choice: Microsoft's anticompetitive practices have the effect of denying consumers choice.[Footnote 98:Findings, 247, 410; Conclusions, 11.] Microsoft forces computer manufacturers to buy one bundle with all of its programs preloaded[Footnote 99:Findings, 159, 170, 198; Conclusion, 4, 11, 12, 31.] and biases the screen location, start sequences and default options.[Footnote 100:Findings, 139, 272, 301; Conclusions, 17, 20.] As a result, it is difficult if not impossible to choose non-Microsoft products.[Footnote 101: Fats, 133, 143, 203-206, 239-240, 247, 309-311, 357, 359-361; Conclusions, 10, 11, 15.] Products tailored to meet individual consumer needs (consumer friendly configurations, small bundles) are unavailable.[Footnote 102: Fact, 167-168, 210-216, 225-226, 247, 410; Conclusions, 11, 14.] Eventually, competing products disappear from the market.[Footnote 103: Fact, 132, 395, 412; Conclusions, 10, 18, 19.]
Microsoft imposed strict discipline on companies shipping Windows to prevent them from altering the configuration of Windows and proprietary icons.[Footnote 104: Fact, at 203.] The Court was struck by the extent to which Microsoft was willing to inconvenience consumers to preserve its hold on the market and the inconvenience created by Microsoft's steadfast control of the boot screen.[Footnote 105: Fact, at 214; 410.] The Court took special note of the fact that the OEMs were the ones who actually dealt with the public and they perceived a significant problem in Microsoft's refusal to allow modification of the boot screen. The costs they perceived were substantial.[Footnote 106: Fact, at 210-216.] Forcing Consumers to Buy Non-Microsoft Products in Inconvenient Ways: By foreclosing the primary channels of distribution with exclusive contracts and other deals, Microsoft forces consumers of non-Microsoft products to acquire them in time-consuming and inconvenient ways.[Footnote 107: Fact, at 133, 143, 203 206, 239 240, 309-311, 357, 359-361.] Impairment of Quality and Innovation: Because of Microsoft's leveraging of the operating system, superior products are delayed or driven from the marketplace.[Footnote 108: Fact, identifies general problems of product delay or restrictions (90-91, 93, 132, 411), as well as six products that were delayed or undermined by Microsoft's anti-competitive practices (Navigator, 81-88; IBM's OS/SmartSuite, 116-118, 125-130; Sun's Java, 397-403; RealNetworks, 111-114; Apple's Quicktime, 104-110; Intel's Native Signal Processing, 94-103).] The Court noted at least six instances in which Microsoft sought to delay the development of competing products.[Footnote 109: Fact, at 81-88, 94-103, 116-118, 135, 111-114,] It noted several instances in which it delayed the delivery of its own products to accomplish an anti-competitive outcome.[Footnote 110: Fact, at 167-168.] Existing libraries of content (documents, movies, audio files) are rendered obsolete.[Footnote 111: Fact,, 90, 92, 122, 128-129, 160, 170-172; 192, 330, 339, -340, 90-91, 93, 132, 411] Resources are denied to and investment is chilled in competing products so advances in technology are slowed.[Footnote 112: Fact, at 240, 357, 379, 396-406,412; Conclusions, 31.] Undermining Compatibility and functionality: There were also several instances in which Microsoft undermined the ability of software applications or middleware to function properly with the operating system.[Footnote 113: Fact, at 92, 128-129, 160, 171-172, 330, 339, 340, 387-396.] Microsoft was quite willing to undermine the quality of its own and of competing products to preserve its market dominance.
Microsoft imposed monetary harm on consumers in direct and indirect ways. Increases in Direct Costs: Because of its monopoly, Microsoft is able to charge more for the bundled package than it would in a competitive market.[Footnote 114: Because of the nature of the case no penalties could be imposed so calculating exactly how large the overcharges were was not a focal point of attention. The District Court did make findings on pricing, see Findings, 75, 62-63, 66; Conclusions, 6; which the Court of Appeals noted and left in place (Appeals, pp. 24-25).] Indirect Costs: Microsoft also imposes a variety of indirect costs on consumers including an accelerated upgrade cycle for both software and PC hardware,[Footnote 115: Fact, 57, 66. See also Charles H. Ferguson, High St@kes No Prisoners: A Winner's Tale of Greed and Glory in the Internet Wars (Three Rivers Press ed., 1999), p. 309. Microsoft also uses another technique, the forced upgrade cycling of its installed base, which increases its revenues but imposes huge costs on consumers by forcing them to replace their hardware more frequently than necessary. Clearly, the rapid progress of computer hardware technology helps ease the pain of the high rate of obsolescence Microsoft creates, but there is considerable pain nonetheless. The pace of updates and sheer number of new features results in the often bug-ridden bloatware that consumers and businesses are forced into accepting. With each new round of updates, Microsoft generally discontinues or at least deemphasizes sales and support for older versions. . . . The introduction of backward incompatible new features, even if each feature is used by only a small percentage of users, will quickly result in a high fraction of new documents being unreadable by older versions of the application. The whole user base is therefore forced into a kind of perpetual motion machine of rapid version updating. . . . This forced version cycle imposes enormous costs on users that are probably beginning to approach, or even exceed, the size of the benefits discussed earlier. First, users must buy new hardware more frequently. Even larger, however, are the increased installation, service and maintenance costs imposed by this regime.] forcing excessive functionalities into its bundles.[Footnote 116: Findings, 173-179, 210-216; Conclusions, 6, 11, 32; Furgeson, p. 310, Since there is rapid technological progress in semiconductors, plus genuine competition in the hardware sector, PC costs have been flat to falling. Recently, direct and Internet retailing have further reduced manufacturing and distribution costs to extraordinarily low levels. As a result Microsoft has been able to pursue its strategy without causing unacceptable increases in hardware prices. Nonetheless, even $599 PCs are probably $100 more expansive than they would be if Microsoft wrote products more carefully and without artificial feature increases. More important, people would not need to replace their comp uters as frequently or spend as much money servicing them. These costs affect everyone, but they probably affect poor people and the developing world more than the average business user.] It imposes various transaction costs on non-Microsoft products in its efforts to make them less readily available to consumers.[Footnote 117: See note 8, above.]
The historical behavior of prices makes it possible to draw a direct line between competition and lower prices.[Footnote 118: Rohm, p. 85, 263. DR-DOS had Gates going ballistic when it came out with DR-DOS 5.0 in April 1990, and now only months later his sales team was locking computer makers into contracts for Microsoft's version of the product, which it had publicly stated would appear also in 1990 (It would not appear until June 1991.) Meanwhile, in e-mail after e-mail, Gates had complained to Ballmer that DR-DOS had made it impossible for him to keep prices high. How could he continue to be profitable with DR-DOS around? A few weeks earlier Susman had deposed Gates while Palumbo had deposed Brad Chase. Microsoft's counsel Steve Holly had been present. Susman had confronted Gates with an e-mail message to Steve Ballmer in which Gates had railed on about the fact that DR-DOS was cutting into his ability to keep prices for MS-DOS high. Rohm, p. 183, notes similar potential with respect to applications. Gates then went on to itemize the key impacts of Novell's move on each area of his business. His concern was how the merged company would impact Microsoft Office, Microsoft's office productivity suite, fretting that Novell could turn its own office suite into "a serious contender" which could force price and volume cuts in our office business. Rohm, p. 80. By 1994, after DR-DOS was pretty much dead, Microsoft had doubled the price of DOS. There was no alternative on the market. Like a classic monopolist, once it had eliminated competition, prices soared.] Eliminating competition results in prices being higher than they should be. The fact that the excess price results from a failure to pass cost reductions through to consumers does not change the fact that consumers are overcharged.[Footnote 119: Ferguson, p. 309, While there are new functions in Windows, the unit costs are spread over unit volumes that have increased dramatically, and that continue to increase perhaps 25 percent per year. Microsoft's average costs in marketing, distribution, and sales have also declined sharply. The steady increase in its unit volumes, the conversion from floppy discs to inexpensive CD-ROMs, and the shift toward PC preloading, Internet-based distribution, and high-volume corporate licensing agreements have all been driving down unit costs and driving up margins, for both Windows and Office. In fact, Microsoft profits have consistently increased much faster than its revenue over the last decade.] Nor does the fact that consumers do not pay for the software directly. In fact, there was a substantial increase in the 1990s and consumers do pay directly in the case of upgrades and for applications. This phenomenon does not apply only to the consumer PC market. The centerpiece of Microsoft's pricing strategy has been to increase operating system prices at the same time that other components of the delivered PC bundle have been falling. As Microsoft conceded in evidence admitted in the trial, While we have increased our prices over the last 10 years other component prices have come down and continue to come down.[Footnote 120: Government Exhibit #365: Memorandum from Joachim Kempin to Bill Gates, dated Dec. 16, 1997, United States v. Microsoft, 84 F. Supp. 2d 9 (D.D.C. 1999) (Nos. CIV. A. 98-1232, 98-1233)..] Other evidence at trial gave explicit estimates of the price of operating systems. The average preinstalled price is given as $19 in 1990 and over $49 in 1996.[Footnote 121: Government Exhibit #439: PC Value Analysis Cy 1990 Cy 1996, Mar. 4, 1996, United States v. Microsoft, 84 F. Supp. 2d 9 (D.D.C. 1999) (Nos. CIV. A. 98-1232, 98-1233).] During that time span the average Microsoft revenue for preinstalled software rose from $25 to $62.[Footnote 122: Id.] Microsoft recognized that it has been the beneficiary of |
