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January 28, 2002
Renata Hesse, Esq.
Dear Ms. Hesse: Pursuant to the instructions in the Competitive Impact Statement in United States v. Microsoft Corp., we are submitting to the Department of Justice as an attachment to this e-mail the Comments of SBC Communications Inc. on the Proposed Final Judgment. We would appreciate your sending a reply to this email at your earliest convenience to confirm your receipt of SBC's submission. In addition, to guard against the risk of a faulty email transmission, we are tonight sending a hard copy of SBC's Comments to you via U.S. Postal Service Express Mail. Thank you for your consideration. Very truly yours,
IN THE UNITED STATES DISTRICT COURT
COMMENTS OF SBC COMMUNICATIONS INC.
January 28, 2002
TABLE OF CONTENTS Index of Abbreviations Used to Refer to Court Decisions and Pleadings In This Case Index of Abbreviated Terms Used In These Comments
TABLE OF AUTHORITIESCases Ford Motor Co. v. United States, Hartford-Empire Co. v. United States, Int'l Salt Co. v. United States, N. Pac. Ry. v. United States, Nat'l Soc'y of Prof'l Eng'rs v. United States, Otter Tail Power Co. v. United States, Schine Chain Theaters, Inc. v. United States, United States v. Am. Tel. & Tel. Co., United States v. American Broadcasting Co., Inc., United States v. Business Inv. & Dev. Corp., United States v. Crescent Amusement Co., United States v. Delta Dental of R.I., United States v. E.I. du Pont de Nemours & Co., United States v. General Elec. Co., United States v. Glaxo Group Ltd., United States v. Greyhound, United States v. Grinnell Corp., United States v. GTE Corp., United States v. Microsoft Corp., United States v. Microsoft Corp., United States v. Playmobil USA, Inc., United States v. Republic Services, Inc., United States v. U.S. Gypsum Co., United States v. United Shoe Mach. Corp., 110 F. Supp. 295 United States v. United Shoe Mach. Corp., United States v. Western Elec. Co., United States v. Western Elec. Co., United States v. Western Electric Co., Zenith Radio Corp. v. Hazeltine Research, Inc. 395 U.S. 100 (1969)
15 U.S.C. § 16 11, 28, 29 42 U.S.C. §§ 251-59, 271
Benjamin Woodhead, Microsoft's Australian Monopoly? Let the U.S.
Handle It, Browser Bruiser, Chicago Sun Times, October 27, 2001 Byron Acohido, Challenging Microsoft? It Could Take Moxi, Byron Acohido, Microsoft Memo to Staff: Clobber Linux, USA Today, Jan. 4, 2002 T. Capers Jones, Estimating Software Costs Function Point Analysis:
Measurement David Garmus and David Herron, Function Point Analysis: Measurement
Practices Department of Justice, Antitrust Division Manual Don Clark, AOL Sues Microsoft Over Netscape in Case That Could Seek Billions, Wall Street Journal, Jan. 23, 2002 Experience the Connected Home: Share One or Many Computers (May
9, 2001), Is Apple Out of the Running in the Operating Systems War? (Jan. 8, 2002), at http://www.websidestory.com/cgibinwss.cgi?corporate&news&press_1_163. Jesse Berst, Office Suites for Free, ZDNet AnchorDesk (March 7, 1997), at http://www.zdnet.com/anchordesk/story/story_743.html Lee Gomes, Linux Campaign Is An Uphill Battle For Microsoft, Wall Street Journal, June 14, 2001 Microsoft Unveils New Home PC Experiences with "Freestyle"
and "Mira", MSN Shuts Out Other Browsers, Associated Press, October 28, 2001 Rebecca Buckman, Microsoft is Suing Linux Start-up Over Lindows
Name, Wayne Epperson, NT Insurance at a Premium, HostingTech (August 2001), at www.hostingtech.com/security/01_08_nt
INDEX OF ABBREVIATIONS USED TO REFER TO COURT DECISIONS AND PLEADINGS IN THIS CASE
INDEX OF
ABBREVIATED TERMS
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API |
Application Programming Interface |
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HTML |
Hypertext Markup Language |
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IAP |
Internet Access Provider |
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ICP |
Internet Content Provider |
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IE |
Internet Explorer |
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ISP |
Internet Service Provider |
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ISV |
Independent Software Vendor |
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JVM |
Java Virtual Machine |
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OEM |
Original Equipment Manufacturer |
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OLS |
Online Service Provider |
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PC |
Personal computer |
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PDA |
Personal Digital Assistant |
SBC Communications Inc. ("SBC") respectfully submits the following comments pursuant to Sections 2(b) and 2(d) of the Antitrust Procedures and Penalties Act, 15 U.S.C. § 16(b)-(h), relating to the revised proposed Final Judgment that was agreed to on November 6, 2001, by the United States and certain state plaintiffs in these actions on the one hand, and defendant Microsoft Corporation ("Microsoft") on the other (the "proposed settlement").
The history of Sherman Act enforcement has witnessed few unlawful monopolies as durable, resilient and exclusionary as Microsoft's. This much is clear from the trial record, the District Court's monopoly maintenance findings and the Court of Appeals' affirmance. Far from providing reassurance that changes in technology will end Microsoft's stranglehold over operating system and middleware competition, or that the company's monopoly will be subject to serious competitive pressures when the proposed settlement's five-year term expires, the record demonstrates the exact opposite. Microsoft's continuing ability to commingle its browser and operating system, which the settlement ignores, leaves Microsoft with the incentive and ability not only to destroy traditional middleware threats to its operating system monopoly, but also to exercise anticompetitive control over the Internet, where server networks currently not dependent on Windows pose the greatest threat to the Microsoft monopoly.
The consequences of failing to restrain an ever-expanding Microsoft operating system monopoly -- now at over 95% market share -- do not, however, fall solely upon software producers whose competitive assaults might erode that overwhelming market domination. Nothing in the proposed settlement would stop the threat that Microsoft's adjudicated and unlawfully-maintained monopoly poses to the very heart of consumer choice in the American economy. The settlement ignores Microsoft's ability to effectively destroy free consumer choice among the far greater array of businesses that use electronic means of communication -- such as telecommunications services (local, long distance and cellular), Internet access, voice messaging, instant messaging, video and music services, e-commerce, interactive games, to name a few. The settlement would allow Microsoft to abuse its illegally-maintained control of operating systems by becoming the ultimate "gatekeeper," controlling the bottleneck that both gives businesses in these critical related markets (whether established or still emerging) access to potential customers, and gives consumers the means to reach the providers that they choose to deal with.
Just as Microsoft has for years successfully imposed on consumers its own products and services, irrespective of the comparative merits of competing products it has excluded from the market, Microsoft will -- without the kind of strong relief required to break its operating system monopoly -- be in a position to repeat its anticompetitive strategy in other markets. Unchecked, Microsoft will favor its own and its partners' services, exclude competitors' products and services from access to consumers, and degrade its rivals' services and raise their costs (by charging a toll, imposing a fee for listing as an available service or creating an interoperability obstacle). Because potential customers will have to pass through a Microsoft operating system (whether embedded in a PC, a cellular phone, a set-top box or a PDA), Microsoft will retain the ability to exclude or marginalize all manner of telephone services, messaging products, video or music offerings, Internet services, and other "utilities" of modern life. In this way, the Microsoft monopoly threatens to destroy the vast panoply of consumer choice among the myriad sources that create and distribute communications and entertainment products and services. The proposed settlement does virtually nothing to lessen Microsoft's ability to maintain its operating system monopoly and to prevent its enhancement by Microsoft's impeding effective competition for all the products and services that will have to be accessed through Microsoft's monopoly platform.
SBC is one of the businesses that will be significantly impacted. Through its affiliates, SBC provides voice and data communications services throughout the United States and internationally. Some of these services are Internet-based; others are not. Some of SBC's services (such as its unified messaging service, discussed below) would erode Microsoft's operating system monopoly; others will not. All, however, are at risk if Microsoft is not prevented from maintaining and expanding its operating system monopoly. Thus, while SBC devotes a significant portion of its comments to explaining why curing the palpable deficiencies in the proposed settlement is essential to protect Internet-based services that could erode the Microsoft monopoly, including SBC's own ventures, those deficiencies are of equal importance to SBC's core communications businesses.
The reason why the effects of the Microsoft monopoly reach so far can be summed up in a single word -- "convergence." Convergence refers to the development, for home or office use, of devices or platforms that will provide consumers with multiple communications, computing and entertainment products and services. In order to perform these functions, all such devices or platforms -- including personal computers, PDAs, wireless phones and set-top boxes -- need to utilize operating systems, whether installed in the device itself or residing on Internet servers. By maintaining and expanding its operating system monopoly across platforms, Microsoft can establish its position as "gatekeeper" to all such forms of communications, computing and entertainment services. And as gatekeeper, Microsoft will be in a position to direct customers using these platforms toward its services, to degrade or block access to competitors' services, and to impose costs on those competitors it cannot completely eliminate. By controlling all of these communications gateways, Microsoft will not only preserve its operating system monopoly against all serious threats, it will substantially lessen competition in the provision of innovative new "convergent" services.
For example, competition is now growing to reach consumers, through "gateway" devices such as PCs or television set-top boxes, with broadband communications signals that can carry everything from TV programming to Internet content to telephone conversations. An estimated 10 million American homes may use such devices next year and 25 million by 2006. See Byron Acohido, Challenging Microsoft? It Could Take Moxi, USA Today, Jan. 16, 2002, at B-3. Microsoft has already announced that it is developing an extension to Windows XP that will allow PCs to function in this manner. Id.; Microsoft Unveils New Home PC Experiences with "Freestyle" and "Mira" (Jan. 7, 2002), at www.Microsoft.com/presspass/Press/2002/Jan02/01. Unfettered by the proposed settlement, Microsoft can thus use its illegal operating system monopoly to become the literal communications gateway into and out of the American home or office. It then will have enormous power over the products and services consumers use to communicate with each other, to do their work and to entertain themselves.
In this memorandum, SBC addresses the numerous ways in which the proposed settlement fails to meet a paramount goal of relief in this case: To "pry open to competition" in the PC operating system market that Microsoft has dominated for over a decade by using blatantly exclusionary tactics.
The following facts are now beyond dispute in this proceeding:
First, Microsoft's monopoly has been extraordinarily durable, having prospered for over a decade (D.Ct. at ¶ 35), having increased steadily to over a 95% share even during the litigation (CA at 54; D.Ct. at ¶ 35), and having enjoyed the continuing protection of significant barriers to entry. See CA at 54-56 ("Because the applications barrier to entry protects a dominant operating system irrespective of quality, it gives Microsoft power to stave off even superior new rivals"); D.Ct. at ¶¶ 36-44, 61 ("Microsoft could significantly restrict its investment in innovation and still not face a viable alternative to Windows for several years. . . .").
Second, Microsoft's monopoly has created not only the power, but also the incentive, to exclude competition: every technological innovation that emerged to challenge Microsoft's dominance was met with a successful strategy of anticompetitive exclusion. Microsoft was able to "extinguish," perhaps permanently, the two greatest innovative threats to its dominance that arose in the 1990's -- Netscape and Java. CIS at 16-17; see also CA at 76-80 ("Microsoft's ultimate objective was to thwart Java's [and Netscape's] threat to Microsoft's monopoly;" it adopted as strategic goals to "kill cross-platform Java" and interfere with the ability of Netscape's browser to interoperate with Microsoft products); D.Ct. at ¶¶ 68-77. So long as Microsoft retains the power and incentive to exclude the competitive threats of the 21st century, economic theory predicts, and history demonstrates, that it will seek to evade any regulatory barriers placed in its path. Thus, the prospect of innovation offers no solace to restoring competition, only a sure target for Microsoft's exclusionary conduct.
Third, Microsoft's incentive to engage in calculated predation is so strong that it readily harms consumers and degrades its own products to achieve anticompetitive exclusion. D.Ct. at ¶ 174 (finding that by commingling "Microsoft has unjustifiably jeopardized the stability and security of the operating system"), ¶¶ 408-12 (highlighting harm inflicted upon consumers); CA at 62, 65 (affirming district court findings of consumer harm). It is also revealed in a "take no prisoners" approach in which deception, threats, attempts to conspire and degradation of middleware connections were used to stifle competition. CA at 73, 75-77. Nothing in the foreseeable future, much less in the monopoly maintenance record, suggests that marketplace or technological developments alone will suffice to curb Microsoft's market power, its incentive to exclude and its proven ability and willingness to do so ruthlessly.
Finally, Microsoft's monopoly affects the country's most powerful engine of national economic prosperity and productivity -- the processing and communication of information. Where monopolization has injured industries of comparable importance, the future of competition has never before been entrusted to illusory promises by the offending firm or to uncertain marketplace developments, unprotected by judicial supervision from recurrent acts of exclusion. See United States v. Am. Tel. & Tel. Co., 552 F. Supp. 131, 215-17 (D.D.C. 1982), aff'd sub nom. Maryland v. United States, 460 U.S. 1001 (1983) ("AT&T") (rejecting proposed consent decree and ordering its modification based, in part, on the "complexity and magnitude" of the decree and the decree's effect "on the largest corporation in the world . . . the entire telecommunications industry, the computer industry . . . and thus the interests of literally millions of individuals").
That is why in monopolization cases the law demands that relief must decisively end the anticompetitive practices, prevent their recurrence and extension into new markets, and restore competition. "Antitrust relief should unfetter a market from anticompetitive conduct and `pry open to competition a market that has been closed by defendants' illegal restraints.'" Ford Motor Co. v. United States, 405 U.S. 562, 577-78 (1972) (citation omitted). If a decree does not effectively pry a market open to competition, "the Government has won a lawsuit and lost a cause." Int'l Salt Co. v. United States, 332 U.S. 392, 401 (1947). To restore competition, therefore, the relief must take account of all the factors relevant to the offense, including in particular the likely duration of the monopoly power, which, of course, is the wellspring of the incentive as well as the ability to exclude. See Ford Motor Co., 405 U.S. at 575 (affirming ten-year ban on Ford's manufacture of spark plugs; prohibition was a "necessary step toward the restoration of the status quo ante" in the market).
The government has repeatedly embraced the foregoing standards in this case (see, e.g., Govt. D.Ct. Memo. at 24; CIS at 3), but its proposed settlement fails their purposes. The government has abandoned, without explanation, injunctive relief that it urged upon the District Court as essential to curb Microsoft's appetite for anticompetitive conduct and has agreed to a decree filled with loopholes. For example, although the Court of Appeals found commingling of browser and operating system code to be unlawful acts of monopoly maintenance, and the government advocated that such commingling be prohibited as "an especially potent competitive weapon for Microsoft . . . to target competing middleware threats," Gov't D.Ct. Reply Memo at 61, the proposed settlement does not prohibit such conduct. Similarly, although the Department of Justice Antitrust Division Manual provides that the government "should not negotiate any decree of less than ten years' duration" and the government in this case objected to Microsoft's initial proposal for a four-year decree because "there is no sound justification for entering a decree of shorter duration," the remedies in the proposed settlement are to last only five years.
The government's retreat from established antitrust policy and from its prior opposition to Microsoft's remedial proposals has grave implications for a competitive economy and for SBC. Not only is Microsoft allowed to repeat conduct, previously found anticompetitive, to protect its operating system monopoly from middleware sources of competition, but it is free to do so where the courts have already recognized an even more powerful threat exists, namely from the Internet. D.Ct. at ¶¶ 56, 59-60 (cited with approval in CA at 79). Since Internet servers can perform computing functions formerly accomplished only by PCs, networks of servers and PCs that freely interoperate (or "talk" to each other) -- regardless of the type of operating system software that they use -- are a platform for applications not dependent on Windows. This means that the combination of inexpensive computers or handheld devices (like a "dumb" PC, a cellphone, or a PDA) and smart server networks connected to the Internet can break the monopoly power of Microsoft's PC operating system by offering a server network alternative that will work with any operating system and provide more and better application choices at less cost. D.Ct. at ¶¶ 22-27 (cited with approval in CA at 52), ¶¶ 56, 59-60 ("[T]he rise of the Internet. . . has fueled the growth of server-based computing, middleware, and open-source software development. Working together, these nascent paradigms could oust the PC operating system from its position as the primary platform for applications development and the main interface between users and their computers.").
Yet nothing in the government's settlement prevents Microsoft from turning an open Internet into a closed Microsoft environment simply by doing two things: (1) commingling its browser, Internet Explorer ("IE"), with its Windows operating system; and (2) changing the protocol its browser uses to "talk" to Internet servers to an undisclosed proprietary standard that will only work effectively with Microsoft servers. Because of the dominance of Microsoft's browser (currently 91% of all browser usage), all web servers would then be forced to have a Microsoft server operating system in order for the servers, and the web sites they host, to be accessible to the vast majority of users. In turn, all consumers and businesses that wish to access the Internet will be forced to purchase a Windows operating system in order to utilize Microsoft's browser. Nothing in the decree prevents this scenario, because Microsoft is free to use its illegally maintained monopoly power to force servers to interoperate only with Windows, such that Microsoft becomes the Internet gatekeeper of a once open and competitive system. Microsoft's operating system monopoly would thereby become still more powerful and durable, as another threat to its dominance is destroyed. In this way, the applications barrier to entry that protects the Windows monopoly will extend to the Internet.
The reality of this threat for the future competitiveness of Internet-based businesses has a direct bearing on a wide range of Microsoft's potential and actual competitors, including SBC. Through its affiliates, SBC provides Internet access and Internet services to customers. SBC is currently developing several new Internet-based businesses, most importantly its Unified Messaging Service ("UMS"), which will compete directly with specific Microsoft products and services. UMS will allow retrieval of voice, e-mail and fax messages from anywhere in the world, using any computer or device running on any operating system. The proposed settlement, however, allows Microsoft to make SBC's UMS product significantly less competitive by taking the two simple steps outlined above. In these circumstances, only Microsoft server operating systems would be interoperable with the vast majority of other devices that access the Internet, and Microsoft would be able to use its server control to discriminate against its competitors.
As this example shows, the omissions and loopholes in the proposed settlement are of no small importance; they have drastic consequences for a competitive economy. So too does the decision to limit the settlement to only five years. The trial court recognized in findings sustained by the Court of Appeals that competitive alternatives to the Microsoft operating system, such as web portals, servers and middleware, take years to develop as viable threats, yet the proposed decree ends almost as soon as it starts -- in only five years overall, with some provisions in effect for only four years. No sensible competitor would invest in technology improvements to the maximum extent necessary to challenge Microsoft -- innovations that require years to succeed absent predation -- when the decree is neither strong enough, nor long enough, to protect them. Yet the government breaks with its own policy of requiring decrees with ten-year terms, despite the fact that Microsoft's monopoly has existed for more than a decade and its unlawful conduct has spanned a period nearly as long.
Equally important, there is nothing in the decree to jump start competition, much less to "pry open" the monopolized market to give consumers the benefit of competition that would have existed from the likes of Netscape and Java had Microsoft's exclusionary conduct not "extinguished" them. See Schine Chain Theaters, Inc. v. United States, 334 U.S. 110, 128 (1948) (an injunction against future violations is inadequate when it allows the monopolist to retain its "unlawfully built empires"). Under the Tunney Act, the "public interest," see 15 U.S.C. § 16(e), is not served by a settlement that allows a monopolist to pursue conduct already adjudicated illegal, that leaves open easy escape routes from the proposed decree's proscriptions, and that utterly fails to restore competition to the monopolized market.
When, as here, there is an adjudicated record of serious competitive harm (monopolization) and wrongdoing (anticompetitive exclusion), the responsibility to protect the public from an inadequate settlement is high, and a reviewing court has broad power to do so. AT&T, 552 F. Supp. at 151-53. As the District Court has said, "The Supreme Court has vested this court with large discretion to fashion appropriate restraints both to avoid a recurrence of the violation and to eliminate its consequences." United States v. Microsoft Corp., Civ. Nos. 98-1232, 98-1233 (CKK), Transcript of Proceedings at 9 (Sept. 28, 2001).
For the reasons set forth below, approval of the proposed decree cannot be squared with ten years of government litigation that culminated in resounding appellate holdings of major antitrust offenses. The fact that adverse antitrust consequences will result is clear from the face of the proposed settlement, as well as by comparison to the injunctive provisions defended by the government in its earlier proposed litigated judgment. In fact, adoption of this proposed settlement would be worse than no decree at all, for its negotiated omissions and concessions allow conduct found illegal in the past to continue -- such as commingling of code -- and thus would appear to prevent even the government from attacking such decree-sanctioned behavior during its term. Such ambiguity surrounding the government's enforcement intentions is in itself affirmatively harmful to the public interest.
The proposed settlement in this case must be evaluated in light of the Court of Appeals' affirmance of the District Court's conclusion, supported by an overwhelming factual record, that Microsoft is guilty of a panoply of illegal activities to maintain and extend its monopoly in the market for Intel-compatible PC operating systems. Microsoft's conduct inflicted significant harm on consumers and competition in violation of Section 2 of the Sherman Act. CA at 50-80.
Microsoft is the world's largest supplier of computer software for PCs and, in particular, dominates the market for Intel-compatible PC operating systems software world-wide. Although it has the second-largest market capitalization among American companies, Microsoft's importance extends beyond its financial success, because it is a linchpin of the computer industry (including hardware, peripherals, software and data services), and the computer industry is critical to the functioning of a competitive American economy. See, e.g., Henderson Decl. ¶¶ 87-98; Romer Decl. ¶ 17.
Microsoft's operating systems monopoly is an enduring one, persisting for over a decade despite what the Court of Appeals has described as a "technologically dynamic market." CA at 49. Over that same period, the government has been forced to spend resources on a continuous basis to investigate, and then to prosecute, Microsoft for its illegal conduct. The FTC began investigating Microsoft's acquisition and maintenance of monopoly power in the operating systems market in 1990, although it did not bring charges against the company. United States v. Microsoft Corp., 56 F.3d at 1448, 1458 (D.C. Cir. 1995). Using the FTC's extensive investigation file as a starting point, the Antitrust Division of the Justice Department initiated its own investigation, and in July 1994 filed a civil complaint under Sections 1 and 2 of the Sherman Act, charging, inter alia, that Microsoft unlawfully maintained a monopoly of operating systems for Intel-compatible PCs. Id. That case was settled by a consent decree, thereby avoiding trial on the merits.
Three years later, the Justice Department filed a civil contempt action against Microsoft on the ground that it had violated the decree. On appeal from the grant of a preliminary injunction, the Court of Appeals ruled that Microsoft had not violated the relevant provision of the consent decree, but reserved the question of whether the company's bundling of Internet Explorer with the Windows operating system violated the antitrust laws. United States v. Microsoft Corp., 147 F.3d 935, 950 n.14 (D.C. Cir. 1998). The complaint that gives rise to the instant proceeding was filed in May 1998 by the Justice Department and a group of State plaintiffs, again alleging, inter alia, unlawful maintenance of a monopoly in the PC operating system market in violation of Sherman Act § 2. CA at 47.
The Court of Appeals affirmed the District Court's finding that Microsoft's Windows operating system accounts for over 95% of the Intel-compatible PC operating system market. CA at 54. As the District Court found:
Microsoft possesses a dominant, persistent, and increasing share of the worldwide market for Intel-compatible PC operating systems. Every year for the last decade, Microsoft's share of the market ... has stood above 90 percent. For the last couple of years, the figure has been at least 95 percent, and analysts predict that the share will climb even higher over the next few years. Even if Apple's Mac OS were included in the relevant market, Microsoft's share would still stand well above 80 percent.
D.Ct. at ¶ 35.1
The Court of Appeals held that not only was Microsoft's operating system monopoly virtually complete as measured by market share, but also that the monopoly's increasing power and scope derives from a structural barrier -- the "applications barrier to entry" -- that protects the company's future monopoly position even as against superior rivals. The Court held that this barrier to entry
stems from two characteristics of the software market: (1) most consumers prefer operating systems for which a large number of applications have already been written; and (2) most developers prefer to write for operating systems that already have a substantial consumer base. This "chicken-and-egg" situation ensures that applications will continue to be written for the already dominant Windows, which in turn ensures that consumers will continue to prefer it over other operating systems.
CA at 55 (citations omitted). The Court of Appeals went on to hold that even if Windows may have gained its initial dominance through superior foresight or quality, Microsoft had maintained its position through means other than competition on the merits. "Because the applications barrier to entry protects a dominant operating system irrespective of quality, it gives Microsoft power to stave off even superior new rivals." CA at 56.
The Court of Appeals affirmed the District Court's findings regarding a variety of anticompetitive acts by Microsoft that were designed to maintain its monopoly by preventing the effective distribution and use of middleware products -- including Netscape's "Navigator" browser and the Java cross-platform technologies -- that might threaten the Windows operating system monopoly. The Court of Appeals noted with approval the District Court's conclusion that Microsoft's monopoly gives the firm incentives to perpetuate the monopoly by a pattern of exclusionary conduct. CA at 58. As the District Court concluded, "over the past several years, Microsoft has comported itself in a way that could only be consistent with rational behavior for a profit-maximizing firm if the firm knew that it possessed monopoly power, and if it was motivated by a desire to preserve the barrier to entry protecting that power." D.Ct. CL at 37.
In its successful efforts to thwart Netscape and Java, Microsoft demonstrated its ability to extinguish competitive threats to its monopoly as fast as they emerged in a rapidly changing technological environment. Microsoft's conduct also evidenced a remarkable willingness to hurt consumers and degrade its own products where necessary to accomplish the exclusion of competitive threats to its dominance.
Both Netscape and Java threatened to facilitate competition in operating systems by permitting software applications developers to write programs for the application programming interfaces (APIs) exposed by these middleware products, which in turn were capable of running not only on Windows, but on other operating systems. If such middleware were permitted to thrive, such "cross-platform" applications would have the potential to overcome the applications barrier to entry upon which Microsoft's operating system monopoly rests. CA at 53, 60.
The Court of Appeals upheld the District Court's findings and conclusions that Microsoft engaged in the following unlawful conduct in violation of Section 2 of the Sherman Act for the purpose of maintaining its PC operating system monopoly:
Sun Microsystems created Java2, a type of middleware that would support all applications regardless of the operating system they were written for. CA at 74. Programs calling upon Java's APIs will run on any computer that itself is configured for Java; thus, Java enabled software developers to write applications programs that could be run on different operating systems with relative ease. In May 1995, Netscape agreed with Sun to distribute Java with every copy of Navigator, which at that time was the dominant browser. Microsoft violated §2 in three separate ways in a successful effort to extinguish Java as a competing middleware platform:
As the government acknowledges in the Competitive Impact Statement, appropriate injunctive relief here must accomplish three things: "(1) end the unlawful conduct; (2) `avoid a recurrence of the violation' and others like it; and (3) undo its anticompetitive consequences." CIS at 24 (citing Nat'l Soc'y of Prof'l Eng'rs v. United States, 435 U.S. 679, 697 (1978); United States v. E.I. du Pont de Nemours & Co., 366 U.S. 316, 326 (1961); Int'l Salt Co., 332 U.S. at 401); CA at 107. See also Gov't D.Ct. Memo at 24 ("Permanent injunctive relief ordered in a Sherman Act case must be both forward-looking and remedial. The decree must (i) end the violation, (ii) `avoid a recurrence of the violation' and others like it and (iii) restore competition to the market."). Any remedy must be broad in scope and prophylactic in nature so that competition is restored and Microsoft is effectively precluded from further exercise of its monopoly power, even as new products are developed and circumstances in the market change.
Any settlement here must be structured to end anticompetitive practices and not merely to prevent repetition of the same illegal conduct. As the Court of Appeals pointedly instructed:
[A] remedies decree . . . must seek to "unfetter a market from anti-competitive conduct, ... 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."
CA at 103 (citations omitted) (quoting Ford Motor Co., 405 U.S. 562; United States v. United Shoe Mach. Corp., 391 U.S. 244 (1968)). In the proceedings on remand, the District Court has already recognized that any remedy, in order to be adequate, must go beyond merely prohibiting the conduct in which Microsoft has previously engaged:
The Supreme Court long ago stated that it's entirely appropriate for a district court to order a remedy which goes beyond a simple prescription against the precise conduct previously pursued . . . . [T]he remedy may range broadly through the practices connected with the acts actually found to be illegal. The Supreme Court has vested this court with large discretion to fashion appropriate restraints both to avoid a recurrence of the violation and to eliminate its consequences.
Microsoft, Transcript of Proceedings at 9 (paraphrasing Nat'l Soc'y of Prof'l Eng'rs, 435 U.S. at 697; and United States v. U.S. Gypsum Co., 340 U.S. 76, 88-89 (1950)).
The public interest is not served merely by eliminating past anticompetitive practices; the remedy must eliminate the future recurrence of illegal conduct:
[T]he end to be served is not punishment of past transgression, nor is it merely to end specific illegal practices. A public interest served by such civil suits is that they effectively pry open to competition a market that has been closed by defendants' illegal restraints. If [the] decree accomplishes less than that, the Government has won a lawsuit and lost a cause.
Int'l Salt Co., 332 U.S. at 401 (emphasis added).
A trial court upon a finding of . . . a monopoly has the duty to compel action . . . that will, so far as practicable, cure the ill effects of the illegal conduct, and assure the public freedom from its continuance. . . . Acts entirely proper when viewed alone may be prohibited.
U.S. Gypsum Co., 340 U.S. at 90 (citations omitted); see also United Shoe Mach. Corp., 391 U.S. at 252 (relief should "render impotent the monopoly"); Nat'l Soc'y of Prof'l Engn'rs, 435 U.S. at 697 ("the District Court was empowered to fashion appropriate restraints on the Society's future activities to avoid a recurrence of the violation and eliminate its consequences").
In this case, the government has recognized the need to go beyond enjoining current violations to assure that Microsoft's violations do not recur. See Gov't D.Ct. Memo at 24 ("Forbidding the continuance of the violation -- here, for example, the anticompetitive bundling of Internet Explorer with the Windows operating system -- is necessary but not sufficient to rectify the harm caused and threatened by Microsoft's illegal conduct.").
As the government has acknowledged, "[r]estoring competition is the `key to the whole question of an antitrust remedy.'" CIS at 24 (quoting E.I. du Pont de Nemours & Co., 366 U.S. at 697); see also U.S. Gypsum, 340 U.S. at 90 ("The conspirators should, so far as practicable, be denied future benefits from their forbidden conduct."); United States v. Grinnell Corp., 384 U.S. 563, 577 (1966) ("We start from the premise that adequate relief in a monopolization case should . . . deprive the defendants of any of the benefits of the illegal conduct, and break up or render impotent the monopoly power found to be in violation of the Act."); CA at 103 (a remedies decree must "deny to the defendant the fruits of its statutory violation") (citations omitted). As the Supreme Court put it in a holding that is particularly cogent here:
[A]n injunction against future violations is not adequate to protect the public interest. If all that was done was to forbid a repetition of the illegal conduct, those who had unlawfully built their empires could preserve them intact. They could retain the full dividends of their monopolistic practices and profit from the unlawful restraint of trade which they had inflicted on competitors. Such a course would make enforcement of the Act a futile thing unless, perchance, the United States moved in at the incipient stages of the unlawful project.
Schine Chain Theaters, Inc., 334 U.S. at 128.
A decree must "break up or render impotent the monopoly power found to be in violation of the Act." Grinnell Corp., 384 U.S. at 577. It must "leave the defendant without the ability to resume the actions which constituted the antitrust violations in the first place." AT&T, 552 F. Supp. at 150.
Because an antitrust remedy, in order to be adequate, must neutralize the monopolist's power to resume the action constituting the adjudicated violation, any remedy "must effectively foreclose the possibility that antitrust violations will occur or recur." Id. at 150. Again, the Supreme Court has given instruction that is directly relevant here:
When the purpose to restrain trade appears from a clear violation of law, it is not necessary that all of the untraveled roads to that end be left open and that only the worn one be closed. The usual ways to the prohibited goal may be blocked against the proven transgressor and the burden put upon him to bring any proper claims for relief to the court's attention.
Int'l Salt Co., 332 U.S. at 400. As the District Court has recognized, even practices not found to be unlawful should be prohibited where necessary to avoid recurrence of monopolization. AT&T, 552 F. Supp. at 150 n.80 (citing United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 346-47 (D. Mass. 1953), aff'd, 347 U.S. 521 (1954)). Similarly, the court must impose additional restraints to allow development of new competition in the relevant market. Id. (citing Ford Motor Co., 405 U.S. at 575).
Given the record in this case, the remedy must anticipate new forms of exclusion such that, in view of Microsoft's incentive to exclude and demonstrated willingness to do so, the company may not further restrain trade illegally and is prevented from repeating its past unlawful practices in new contexts.
Where the monopoly in question is as powerful and persistent as that maintained over the last decade by Microsoft, there is a real danger that the monopolist will evade the particular provisions of any consent decree that is entered. In order to cope with the threat of regulatory evasion, antitrust judgments must contain broad proscriptions of anticompetitive conduct that will, by their generality, cover new forms of exclusion. See, E.I. du Pont, 366, U.S. at 1254 (An "injunction can hardly be detailed enough to cover in advance all the many fashions in which improper influence may manifest itself."); AT&T, 552 F. Supp. at 167 (approving consent decree ordering divestiture, preclusion from specific markets, and compulsory, royalty-free licensing) ("it is unlikely that, realistically, an injunction could be drafted that would be both sufficiently detailed to bar specific anticompetitive conduct yet sufficiently broad to prevent the various conceivable kinds of behavior that AT&T might employ in the future"); Zenith Radio Corp. v. Hazeltine Research, Inc. 395 U.S. 100, 132 (1969) (court may exercise its "broad power to restrain acts which are of the same type or class as the unlawful acts which the court has found to be committed or whose commission in the future, unless enjoined, may fairly be anticipated from the defendant's conduct in the past"); CA at 103 (court must "ensure that there remain no practices likely to result in monopolization in the future"). The "broad power" the Court has to fashion an effective remedy includes the authority to prohibit exploitation of monopoly power in any manner and to order provisions designed to create and foster new competition, including the disclosure of proprietary information, mandatory licensing, exclusive dealing bans and many other remedies. Gov't. D.Ct. Memo at 26 (citing United States v. Crescent Amusement Co., 323 U.S. 173 (1944); Hartford-Empire Co. v. United States, 323 U.S. 386 (1945); United States v. Glaxo Group Ltd., 410 U.S. 52 (1973); Int'l Salt Co., 332 U.S. 392; Ford Motor Co., 405 U.S. at 572).
In order to prevent evasion of antitrust proscriptions put in place by a consent decree, courts routinely retain jurisdiction in order to modify decrees, resolve disputes, and ensure there is a forum for timely adjudicating whether defendants are in compliance. See, e.g., Int'l Salt Co., 332 U.S. at 401-02; Otter Tail Power Co. v. United States, 410 U.S. 366, 381-82 (1973); United Shoe Mach. Corp., 391 U.S. at 251-52; AT&T, 552 F. Supp. at 215-17 (ordering modification of proposed consent decree to include provisions relating to Court's continuing ability to enforce decree).
The applications barrier to entry that Microsoft enjoys through its operating system monopoly will, as the District Court found (and the Court of Appeals agreed), make it extraordinarily difficult for a new operating system to attract enough developers and consumers to be a viable alternative to Windows in any reasonable time frame. D.Ct. at ¶¶ 30-31; D.Ct. CL at 36; CA at 54-56. The overwhelming majority of consumers will only use Windows because there are already a large variety of applications written for that operating system. Given that it is expensive to port applications from one operating system to another, software developers will generally write applications only for the operating system that is used by the dominant share of PC users.
Software developers and ISPs are now forced, given the economics of the industry, to use Windows, an operating system that they would not necessarily choose, but that is virtually the sole conduit available to deliver their product to the end-user. Given these circumstances, "it remains to be seen whether server or middleware-based development will flourish at all." D.Ct. at ¶ 32.
In order to allow alternative operating systems to develop, the public interest demands a decree that will "pry open to competition a market that [is] closed" by the enormous applications barrier to entry and by Microsoft's continuous course of illegal conduct. See Int'l Salt Co., 332 U.S. at 401. Given the time necessary for a competitive operating system or middleware product to overcome the applications barrier to entry (if it is possible at all), any sustainable decree must assure consumers, programmers and potential competitors of a lengthy time frame in which to develop new products that can compete with Windows. Without an adequate time frame for competing products to take hold, consumers will be unwilling to scrap the investment in applications, training, and hardware that they have already made in Windows.
Without a decree that is broad enough to ensure that Microsoft does not continue to benefit from its past practices and erect new barriers to market entry, the very purpose of antitrust relief in monopolization cases will be thwarted. Without a strong and long-lasting decree, Microsoft's entrenched dominance and the threat of further exclusionary conduct will preclude entrepreneurs and other innovators from improving products and services. As the government has acknowledged, "an injunction which simply bars the precise illegal conduct proven at trial would leave the defendant with the full dividends of [its] monopolistic practices and profit from the unlawful restraints of trade which [it] has inflicted on competitors." Gov't D.Ct. Reply Memo at 10 (quoting Schine Chain Theaters, 334 U.S. at 128 (internal quotation marks omitted)).
If the decree leaves any room for doubt whether Microsoft will retain its freedom and power to exclude competitors, then software developers will, in their economic self-interest, continue what they have been doing for years -- writing applications that operate solely on Microsoft's platform -- thereby perpetuating the very monopoly that this case has found to be illegal. Such a result violates the fundamental tenet that an antitrust remedy must effectively "restore future freedom of trade." See U.S. Gypsum, 340 U.S. at 90 (reversing an injunction limited to sale of gypsum board in Eastern United States and directing entry of injunction covering all gypsum products throughout the country because the "relief, to be effective, must go beyond the narrow limits of the violation"); see also Glaxo Group Ltd., 410 U.S. at 64 (ordering compulsory patent licensing on appeal where necessary to assure "the public freedom from . . . continuance of the illegal conduct").
Rather than being narrowly drawn, the remedy in this case must be broad, prophylactic, flexible and forward-looking in order to provide competition a safe harbor from Microsoft's exclusionary power.
Pursuant to the Tunney Act, 15 U.S.C. § 16, in evaluating an antitrust settlement, a court may not "rubber stamp" a proposed consent decree, but must instead "make an independent determination as to whether or not entry of a proposed consent decree [is] in the public interest." Microsoft Corp., 56 F.3d at 1458 (quoting S. Rep. No. 298, 93d Cong., 1st Sess. 5 (1973)); accord AT&T, 552 F. Supp. at 149 & n.74.3
In determining whether the consent decree is in the public interest, the Court must begin by defining the public interest in accordance with the antitrust laws, AT&T, 552 F. Supp. at 149 (citing S.Rep. No. 93-298 at 3; H.R. Rep. No. 93-1463 11-12), and ensure that the provisions of the decree will "preserve free and unfettered competition as the rule of trade." Id. (citing N. Pac. Ry. v. United States, 365 U.S. 1 (1958)). The consent decree's provisions must "break up or render impotent the monopoly power found to be in violation of the Act." Id. at 150 (quoting Grinnell Corp., 384 U.S. at 577) and "must leave the defendant without the ability to resume the actions which constituted the antitrust violation in the first place," id. Not only must the decree remedy past violations, "it must also effectively foreclose the possibility that antitrust violations will occur or recur." Id.; see also id. at 151 ("[I]t does not follow that courts must unquestionably accept a proffered decree as long as it somehow, and however inadequately, deals with the antitrust and other public policy problems implicated in the lawsuit.").
In its first decision involving Microsoft, the Court of Appeals recognized that a more deferential review standard is appropriate under the Tunney Act in cases where there has been no trial and hence "there are no findings that the defendant has actually engaged in illegal practices." Microsoft Corp., 56 F.3d at 1460-61. It follows, therefore, that where there are express findings based on a full trial record "that the defendant has actually engaged in illegal practices," id., a more intensive Tunney Act review is required. Accord AT&T, 552 F. Supp. at 152. In the instant case, there have been both a lengthy trial on the merits and exhaustive findings of illegal monopoly maintenance by Microsoft -- findings that the Court of Appeals expressly affirmed. Thus, unlike in more routine Tunney Act proceedings involving settlements without adjudicated findings of liability, the proposed consent decree in this case is subject to a more searching standard of review by the trial court. See also U. S. Gypsum Co., 340 U.S. at 89 ("[C]ourts should give weight to the fact of conviction as well as the circumstances under which the illegal acts occur. Acts in disregard of law call for repression by sterner measures than where the steps could reasonably have been thought permissible.").
The AT&T case provides strong support for applying a higher degree of scrutiny in this case than in the typical Tunney Act proceeding. In AT&T, while noting that ordinarily a degree of deference to the Department of Justice's view that a settlement is in the public interest is appropriate, the District Court held that such deference was not warranted where the court had heard "what probably amounts to well over ninety percent of the parties' evidence both quantitatively and qualitatively, as well as all of [the parties'] legal arguments." 552 F. Supp. at 152. The District Court thus concluded that it was "in a far better position than are the courts in the usual consent decree cases to evaluate the specific details of the settlement." Id. The Court of Appeals, in its first Microsoft opinion, embraced this distinction and specifically contrasted the AT&T consent decree proceeding with the first Microsoft decree, which was presented before any evidence had been taken. See Microsoft Corp., 56 F.3d at 1461.
The circumstances now justify a searching and demanding review of whether the decree is in the public interest. The settlement here is not before the Court "in the first instance," or even with "ninety percent of the parties' evidence" presented (as in AT&T,) but rather after a full trial on the merits and multiple findings that Microsoft violated the Sherman Act. The District Court now has before it all of the trial evidence, as well as Findings of Fact and Conclusions of Law, affirmed by the Court of Appeals, regarding the relevant market and Microsoft's illegal, anticompetitive conduct. The Court may therefore make a fully informed and independent determination concerning whether the settlement is truly in the public interest.
As in AT&T, close scrutiny of the settlement is also necessary because of its importance to the national economy. In refusing to narrow the scrutiny given the consent decree, the District Court in AT&T noted that given the "potential impact of the proposed decree on a vast and crucial sector of the economy and on such general public interest as the cost and availability of local telephone service, the technological development of a vital part of the national economy, national defense, and foreign trade, the Court would be derelict in its duty if it adopted a narrow approach to its public interest review responsibilities." AT&T, 552 F. Supp. at 152.
The proposed settlement here is of no less importance. This settlement has broad ramifications for the national economy, especially in technology development, and impacts millions of American consumers -- ramifications with little precedent in the history of antitrust jurisprudence. In such circumstances, the Court's careful, independent review is essential to ensure the decree serves the public interest.
Finally, the proposed settlement also requires heightened scrutiny because half of the States that joined in prosecuting the case do not agree that the settlement would protect the interests of their citizens. The government is now expressing views substantially inconsistent with its expressed positions at earlier stages of the case. Where elected representatives of the public are sharply divided on whether the settlement actually serves the public interest, any questions concerning whether the settlement is fair to the public must be subject to exacting scrutiny. "None of this means, of course, that the Court would be justified in simply substituting its views for those of the parties. But it does mean that the decree [should] receive closer scrutiny than that which might be appropriate to a decree proposed in a more routine antitrust case." AT&T, 522 F. Supp. at 153.
The Court of Appeals affirmed findings that Microsoft extinguished all tangible threats to its operating systems monopoly. CA at 79; D.Ct. at ¶¶ 68-77. The findings also support the conclusion that if Microsoft had pursued competition on the merits rather than anticompetitive conduct, significant erosion of its monopoly would have occurred. See generally CA at 58-79. Certainly, that is what Microsoft's CEO believed when he envisioned the Windows operating system being "commoditized" by Netscape. D.Ct. at ¶ 72. The proposed settlement does nothing to deprive Microsoft of either the "fruits" or the source of its successful strategy of extinguishing competition, nor does it restore to consumers the benefits of the choices that they would have had if Microsoft's illegal conduct had never occurred.
At this stage of the proceedings, the government states that its goal is merely to "restore the competitive threat that middleware products posed prior to Microsoft's unlawful undertakings." CIS at 3. These were, as the government admits, merely "nascent threats," id. at 24, 25, not the fully-developed alternatives that would have existed today but for Microsoft's conduct. The competitive threats to the Microsoft monopoly were stillborn, not as a result of fair competition but, as the government acknowledges, because of Microsoft's predation:
Through its actions against Navigator and Java, Microsoft retarded, and perhaps extinguished altogether, the process by which these two middleware technologies could have facilitated the introduction of competition into the market for Intel-compatible personal computer operating systems.
CIS at 16-17. Although the CIS acknowledges that merely prohibiting future instances of Microsoft's past exclusionary, monopolistic conduct is not sufficient to restore competition, in reality that is all the proposed settlement attempts to do, and even those minimal efforts are unavailing.
Indeed, in the earlier remedy proceedings, the government characterized Microsoft's view of appropriate relief (which the government has now largely adopted) as a "crabbed view of antitrust remedies:"
[E]specially in an industry like the software industry, which as Microsoft has repeatedly emphasized is rapidly changing, a remedy limited to barring repetition of the precise acts in the precise contexts that were at issue in the trial could not possibly serve the required purposes of preventing recurrence of the violations and restoring competition.
Gov't D.Ct. Reply Memo at 49. It is therefore ironic that the government now embraces in the proposed settlement many of the same substantive decree provisions it earlier dismissed as woefully inadequate.
Presaging the current dispute over remedies, the government stated in a pleading before the District Court almost two years ago:
In crafting an effective Sherman Act remedy, a court must use the record of a backward-looking trial to fashion forward-looking relief. Looking forward, the Court must anticipate that Microsoft, unless restrained by appropriate equitable relief, likely will continue to perpetuate its monopoly by the same anticompetitive methods revealed at trial, although directed at whatever new competitive threat arises. Neither the Netscape browser nor Java continues to have the prospect of lowering the applications barrier to entry, and it is not certain where future threats to Microsoft's operating system will arise.
Gov't D.Ct. Memo at 27-28. The government then went on to describe as potential middleware or platform threats to Microsoft's operating system monopoly such products and technologies as Microsoft's own Office suite; applications such as voice recognition software, media streaming technology and email programs; server operating systems (and the need for interoperability between PCs and servers); and non-PC devices such as PDAs and hand-held computers. See id. at 28-29.
A settlement such as this one, which limits itself to protecting the next generation of emerging threats instead of "prying open" the monopolized market (thereby effectively blessing the extinction of the first generation and the preservation of Microsoft's monopoly), cannot claim to serve even this minimal goal without anticipating and prohibiting, with both specificity and generality, the many ways in which Microsoft can thwart new forms of competition from novel or different technologies, such as those listed by the government.
In this regard, it is noteworthy that the Court of Appeals, like the District Court, found that Microsoft's commingling of its browser and operating system codes constituted illegal monopoly maintenance. CA at 64-67. Yet the settlement would allow such conduct to continue. And