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COMMENTS OF AOL TIME WARNER
ON THE PROPOSED FINAL JUDGMENT
TABLE OF CONTENTS
ON THE PROPOSED FINAL JUDGMENT
Pursuant to Section 2(b) of the Antitrust Procedures and Penalties Act, 15 U.S.C. ï½§ 16, AOL Time Warner respectfully submits the following comments on the Proposed Final Judgment ("PFJ") in the above-referenced matter.
The Proposed Final Judgment sets forth a decree that is too limited in its objectives and too flawed in its execution to meet the Tunney Act's "public interest" test. It allows Microsoft to continue to bind and bundle its middleware applications with its Windows Operating System ("OS") - even though the Court of Appeals found Microsoft's actions in this regard to be illegal. And its patchwork of constraints on Microsoft's conduct is so loophole-ridden and exception-laden as to render its provisions ineffective. As a result, the PFJ is inadequate to promote competition and protect consumers, and the Court should refuse to find that its entry would be "in the public interest." 15 U.S.C. ï½§ 16(e).
The PFJ comes before the Court in an unprecedented posture for a Tunney Act proceeding. This proposed settlement was reached - not as the case was being flied, nor as it was being tried, nor even as it was being appealed - but rather, after the Court of Appeals for the District of Columbia Circuit unanimously affirmed a finding of illegal monopoly maintenance by Microsoft. Such circumstances surely require a more rigorous application of the "public interest" standard than when a case is settled before the first interrogatory is even served - the usual situation when a Tunney Act review is conducted. Helpfully, a readily available and judicially administrable measure of the "public interest" is available for use in this special circumstance: the four-part test for "a remedies decree" established by the D.C. Circuit in this very litigation. United States v. Microsoft, 253 F.3d 34, 103 (D.C. Cir. 2001). Applying this standard, we believe that the Court should find the PFJ to be in the "public interest" only if it (1) "unfetter[s] a market from anticompetitive conduct"; (2) "terminate[s] the illegal monopoly"; (3) "den[ies] to the defendant the fruits of its statutory violation"; and (4) "ensure[s] that there remain no practices likely to result in monopolization in the future." Id. (internal quotations omitted). We believe that there are at least three reasons why the Court should conclude that the PFJ does not meet this test.
First, since July 11, 2001 (for the browser) and December 16, 2001 (for other middleware), Microsoft has been implementing many of the PFJ's remedial provisions. Thus, the Court need not speculate about the impact these provisions would have on the industry if they were put in place; rather, it can seek submissions and review evidence on whether these critical provisions are beginning to work as they are being implemented by Microsoft. We believe that any such inquiry will reveal that the original equipment manufacturers ("OEMs") are not exercising the flexibility that the PFJ ostensibly provides them, because the loophole-ridden PFJ gives too few rights to the OEMs and does too little to protect the OEMs in the exercise of those rights. As a result, there is little reason to believe that the PFJ will prove effective in restoring competition, terminating Microsoft's monopoly, or stripping Microsoft of the fruits of its illegal acts.
Second, the PFJ fails to prohibit Microsoft's signature anticompetitive conduct: the binding of its middleware applications to its monopoly operating system, and its bundling of these products to further entrench its OS monopoly. The factual questions that surround these legal issues are quite complex, but here again, the Court has a powerful tool to employ: the extensive factual findings entered by the District Court. 1 These factual findings document Microsoft's purposeful commingling of middleware application code with the Windows OS to harm competition, as well as the contractual bundling of those applications with the OS, to force OEMs to distribute Microsoft's middleware, and to raise distribution hurdles for middleware rivals. Given the PFJ's failure to ban practices that the District Court and the Court of Appeals found to be at the center of Microsoft's illegal maintenance of its OS monopoly, the PFJ does not meet the "public interest" standard.
Third, even with regard to those limited objectives that the PFJ does attempt to achieve - i.e., the creation of "OEM flexibility" to promote desktop competition - the proposed decree is so ridden with loopholes, exceptions and carve-outs as to render it ineffective. These deficiencies are highlighted when the PFJ is compared to previous remedial plans considered in this case, including Judge Jackson's interim conduct remedies and the mediation proposal offered by Judge Richard Posner (which Microsoft apparently agreed to even before it had been found liable for antitrust violations).
Finally, we believe the Court will find the remedial proposal of the litigating state attorneys general ("Litigating States' Remedial Proposal" or "LSRP") - and the Court's consideration of that proposal - to be useful in its review of the PFJ. Most immediately, the LSRP provides a benchmark as to what one group of antitrust enforcers believes to be compelled by the "public interest" in order to achieve the case's remedial objectives. Moreover, the LSRP provides a helpful point of comparison for some specific aspects of the PFJ - i.e., a way to illustrate why particular PFJ provisions are ineffective, by comparison. And third, the Court's consideration of the LSRP will adduce testimony and other evidence that should be weighed in determining whether the PFJ should be approved. Taken as a whole, a comparison of the PFJ with the Litigating States' Remedial Proposal shows why the latter, and not the former, faithfully meets the remedial objectives set forth by the D.C. Circuit and serves the "public interest" as expressed in the nation's antitrust laws.
Passed by Congress in 1974, the Antitrust Procedures and Penalties Act, commonly known as the "Tunney Act," provides that a proposed consent decree may be entered in an antitrust case only if the district court determines that such entry is "in the public interest." See 15 U.S.C. ï½§ 16(e). Given that the Court will receive numerous submissions on this point, we do not provide here a recitation of the Tunney Act's provisions, or an extensive analysis of the standard of review under the Act. Instead, we focus on just one, overriding "procedural" question: How should the Court measure "the public interest" in this unique case? For reasons we will explain below, we believe that the measure of the "public interest" to be applied in reviewing the PFJ can be found in the remedial objectives set forth by the D.C. Circuit in its consideration of this litigation. See Microsoft, 253 F.3d at 103.
First, while the Tunney Act itself does not define "public interest," the case law makes clear that the Court must begin its analysis "by defining the public interest" in accordance with the basic purpose of the antitrust laws, which is to" `preserv[e] free and unfettered competition as the rule of trade.'" United States v. American Tel. & Tel. Co., 552 F. Supp. 131,149 (D.D.C. 1982) (quoting Northern Pacific Ry. Co. v. United States, 356 U.S. 1 (1958)). As a general rule, a court has discretion to reject a proposed consent decree that is ineffective because it fails to address or resolve the core competitive problems identified in the Department of Justice's complaint. United States v. Microsoft Corp., 56 F.3d 1448, 1457-62 (D.C. Cir. 1995). As this Court stated in United States v. Thomson Corp., 949 F. Supp. 907, 913 (D.D.C. 1996), the court has a responsibility "to compare the complaint filed by the government with the proposed consent decree and determine whether the remedies negotiated between the parties and proposed by the Justice Department clearly and effectively address the anticompetitive harms initially identified." A court should "hesitate" in the face of specific objections from directly affected third parties before concluding that a proposed final judgment is in the public interest. United States v. Microsoft, 56 F.3d at 1462. And it "should pay `special attention' to the clarity of the proposed consent decree and to the adequacy of its compliance mechanisms in order to assure that the decree is sufficiently precise and the compliance mechanisms sufficiently effective to enable the court to manage the implementation of the consent decree and resolve any subsequent disputes." Thomson Corp., 949 F. Supp. at 914 (citing United States v. Microsoft, 56 F.3d at 1461-62).
In the context of this proceeding, tremendous guidance as to the content of the public interest test can come from the earlier decision of the Court of Appeals in this case. In that decision, the D.C. Circuit wrote:
Microsoft, 253 F.3d at 103 (quoting Ford Motor Co. v. United States, 405 U.S. 562, 577 (1972) and United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968)). These words, in our view, form the essence of the public interest test to be applied by the Court in this Tunney Act proceeding.
First, on its face, this passage speaks of the object of a "remedies decree in an antitrust case," without differentiating between a decree that is achieved through negotiation and one achieved through litigation. Thus, the Court of Appeals' ruling would appear to be directly controlling here, insofar as it states the measure of adequacy for any remedial decree, however achieved. There is no apparent reason why the "remedies decree" negotiated by the Department of Justice with Microsoft should not have to meet the standard of adequacy generally set forth by the Court of Appeals in its decision. 2 This is particularly true given that the passage merely "defin[es] the public interest in accordance with the antitrust laws." Accord American Tel. & Tel. Co., 552 F. Supp. at 149. 3
Second, the four-part test established by the D.C. Circuit here would give the Court a clear and manageable standard on which to evaluate the proposed decree's adequacy. 4 Use of the D.C. Circuit's formulation thus avoids one of the principal bases of controversy and difficulty in Tunney Act reviews -i.e., the lack of a judicially manageable standard for assessing the public interest and the consequent risk that judges will inappropriately use standardless judgment to review an exercise of prosecutorial discretion. 5 Thus, unlike in other Tunney Act cases, where a court lacks an appropriate benchmark on which to measure the purported benefits of the settlement (and thus must be careful not to impose its judgment for that of the Justice Department), here, there is a clear benchmark for the Court to use: the standard set by the Court of Appeals with regard to a "remedies decree."
Moreover, to the extent that insisting that the PFJ meet the standard set by the Court of Appeals would result in a more exacting review than the review imposed in other Tunney Act proceedings, that would be appropriate in this circumstance. For while the overwhelming majority of decrees reviewed under the Tunney Act occur in a pre-trial context - where the court lacks a judicial finding of illegality against which to measure the efficacy of the proposed settlement - this proposed settlement was reached after an appellate affirmance of liability. Because the public has invested its resources and time, and taken the risk to win a judgment of liability and defend that judgment on appeal, it has a right to expect a more rigorous decree that meets a higher standard of review. Under these circumstances, the Court's review under the Tunney Act should not be deferential to the Justice Department; instead, the Court should apply the Court of Appeals' four-part test and determine if the PFJ meets that test.
As explained in more detail below, the PFJ fails to meet the D.C. Circuit's four-part test, because contrary to the claims of the Department of Justice, it will neither "provide a prompt, certain and effective remedy for consumers," nor "restore competitive conditions to the market." (See CIS at 2.) Specifically, it does not "unfetter [the] market from anticompetitive conduct," because it does not even try to stop Microsoft's illegal binding and bundling practices - or effectively limit Microsoft's ability to coerce OEM behavior to its liking. It does not "terminate the illegal monopoly" because it does not effectively promote rival middleware, and because its provisions are so laden with loopholes, exceptions and carve-outs. It does not "deny to the defendant the fruits of its statutory violation," because it allows Microsoft to continue to leverage its OS monopoly to gain market share in other markets. 6 And it does not "ensure that there remain no practices likely to result in monopolization in the future," because it leaves Microsoft free to exploit the OS monopoly to gain dominance in critical new markets. Failing to address the core anticompetitive wrongs that were found at trial and upheld on appeal against Microsoft, and failing to meet the four-part remedial test established by the D.C. Circuit, the PFJ is manifestly contrary to the public interest and should be rejected.
As noted above, the question before the Court is whether the PFJ is "in the public interest." 15 U.S.C. ï½§ 16(e). In making that determination, the statute indicates that the Court may want to consider, inter alia: (1) "the competitive impact" of the PFJ, (2) whether it results in the "termination of alleged violations," and (3) "the impact of [the PFJ] upon the public generally and individuals alleging specific injury." Id.
Fortunately, contrary to most other courts conducting Tunney Act reviews, this Court need not struggle with evaluating the "competitive impact" of the PFJ in a factual vacuum because Microsoft has been, according to its own statements, implementing some provisions found in the PFJ since last July, and the bulk of its provisions since December. That means the Court need not base its "public interest" judgment on abstract legal and economic analyses only; instead, the Court's analysis can (at least in part) be shaped by a consideration of how Microsoft is beginning to implement parts of the PFJ, and how the PFJ's provisions are starting to work in practice. 7 We believe that such a practical review will demonstrate that the portions of the PFJ in question show little prospect - if any- that they will "unfetter the market," "terminate the monopoly," or "deny" to Microsoft "the fruits of its violation."
In the joint stipulation filed with the Court on November 6, 2001, Microsoft stated that it would "begin complying with the [PFJ] as [if] it was in full force and effect starting on December 16, 2001." (Stipulation and Revised Proposed Final Judgment at 2 (November 6, 2001).) While provisions with specific timetables were exempted from this pledge - resulting in an excessive delay for some of the PFJ's competitive protections many of the PFJ's remedial provisions were covered by it. Thus, with regard to many provisions of the PFJ, the proposed decree has been "in effect" since mid-December. 8
Microsoft's stipulation offers the Court a unique opportunity to learn, not just how the PFJ would serve the public interest once implemented, but instead, whether the PFJ provisions already in effect are showing signs that they are likely to serve the public interest. These provisions have now effectively been in place for 43 days - and by the time of a likely hearing or other proceeding to consider this question (presumably, in March or April), will have been in effect for three to four months.
Microsoft may protest that a three- to four-month period in which parts of the PFJ will have been applied is inadequate to test those remedies. And that is doubtlessly true with regard to some measures of the PFJ's effectiveness, such as whether Microsoft's share of the OS market has shrunk from near absolute to anything less. But there are other measures of the PFJ's effectiveness that should be readily discernible even in this relatively short time.
Among the questions we believe that the court could determine, by the time of a heating in March or April, would be:
Based on our knowledge of industry developments, we believe that the answer to each of these questions is "no," with perhaps some very rare and isolated exceptions. 9 Thus, despite Microsoft's proclaimed implementation of large portions of the PFJ, there is scant evidence of OEMs even attempting, let alone succeeding, to offer consumers new choices with respect to middleware products. Even in a relatively short time frame of a few months, one would expect to find numerous OEMs reaching agreements to promote or carry multiple non-Microsoft products. But no such evidence exists. No doubt, that is why countless industry observers and analysts have concluded, after examining the PFJ, that "[t]he changes we will see are minute. Microsoft can control its own destiny. It can do whatever it wants." 10
Presumably, it cannot be in "the public interest" to settle a case after years and years of litigation - including a finding of liability for the government at trial, affirmed unanimously on appeal by the Court of Appeals (See Microsoft, 253 F.3d at 46) - for a remedial decree that effectuates only "minute" changes in the strategy the defendant was using to illegally maintain its monopoly. And yet, that is precisely what appears to be happening, as the effectiveness - or lack thereof- of parts of the PFJ are starting to be observed in application.
While we certainly agree with the Department of Justice that it will only be "over time" that any remedy could "help lower the applications barrier to entry," (see CIS at 29), that objective will never be achieved if the PFJ does not lead OEMs to even begin to "offer rival middleware to consumers and ... feature that middleware in ways that increase the likelihood that consumers will choose to use it." (Id.) That is: the pro-competitive journey of a thousand miles can never be completed if- as it appears to be the case - the PFJ does not create a market in which OEMs feel free to take that all-important first step. To the extent that much of the CIS suggests that the goal of the remedy is to create OEM flexibility for its own sake - i.e., to make sure that OEMs have the right to choose non-Microsoft products, whether or not they exercise that right - it misses the mark. The goal of this litigation is not to protect OEMs' rights, but rather to protect consumers' rights to enjoy a free and competitive market. In such a market, OEMs can be important surrogates for consumers, but only if they actually offer competitive choices. Likewise, to the extent that the other goal of the remedial proceeding is to reduce the applications barrier to entry, that objective is only achieved to the extent that the OEMs actually distribute and promote non-Microsoft middleware - it is not advanced by the unexercised presence of theoretical OEM choice.
Thus, the determination of whether the PFJ will be effective in promoting its purported ends - i.e., fostering OEMs in making those choices and creating opportunities for competition - need not be left for some subsequent proceeding or for antitrust scholars in future years. It can be ascertained now from the submissions that the Court is receiving, or, if those submissions are inadequate, it could be resolved by the Court in a proceeding where evidence is taken and testimony is heard. See Section V.B, infra. The manner in which Microsoft is already implementing portions of the PFJ is among the most probative considerations the Court can weigh in determining how - it at all - the proposed settlement will promote competition in the years to come.
In addition to the general applicability of the PFJ's provisions, several of its provisions have been in place - as they relate to the Internet browser - since Microsoft took steps to implement them after the Court of Appeals' decision last June. As with the more general PFJ provisions discussed above, the Court should examine whether these browser-specific remedial provisions - which will have been in place for eight months by mid-March - have been effective to date. Again, we believe that the evidence to date shows that the provisions are showing no sign of effectuating change in the market; thus, the PFJ - which (with regard to browsers) does little more than codify these unilateral Microsoft actions does not meet the "public interest" standard.
On July 11, 2001, in response to the decision of the Court of Appeals, Microsoft announced a program of "greater OEM flexibility for Windows." See Press Release, Microsoft Corporation, Microsoft Announces Greater OEM Flexibility For Windows, July 11, 2001. Specifically, Microsoft announced that it would amend its OEM license agreements to provide that:
PC manufacturers will have the option to remove the Start menu entries and icons that provide end users with access to Internet Explorer from previous versions of Windows, including Windows 98, Windows 2000 and Windows Me ....
Consumers will be able to use the Add-Remove Programs feature in Windows XP to remove end-user access to the Internet Explorer components of the operating system .... Id.
These provisions mirror the browser-related provisions found in Sections III.C.1 and III.H.1 of the PFJ. Indeed, they comprise almost the entirety of all browser-related remedial provisions found in the PFJ.
Thus, the question of whether the PFJ fulfills the Department of Justice's promise of an effective remedy for "restor[ing] the competitive threat that middleware products posed prior to Microsoft's unlawful undertakings," can easily be assessed - at least with regard to the browser threat, which was such an extensive part of the Court of Appeals' decision - by seeing how effective these unilateral Microsoft actions, taken in July of 2001, have been to date. And unlike the provisions discussed above, which were put in place only in December, it cannot be argued that these browser-related provisions have not yet been tested in the marketplace; rather, they were in place for the launch of Windows XP, which Bill Gates recently dubbed the "best-selling release of Windows ever, and one that is creating great opportunities for PC manufacturers and our other partners in the industry." 11 In the simplest terms, as we note above, these "remedies" will have been in place for eight months by mid-March of 2002. 12
We believe that the initial evidence shows that these provisions are completely ineffective. We are unaware of a single OEM that has used the "flexibility" provided to it by Microsoft to remove Internet Explorer from the Start menu, or from any of its multiple promotional placements on the PC desktop. Nor are we aware of any OEM that has elected to use any competitor to Internet Explorer as a default browser, or to promote alternative browsers to Internet Explorer in any way.
Moreover, there is no indication - more than six months after Microsoft's July 11th announcement and four months after the first shipments of Windows XP - that Internet Explorer's commanding market share in the browser market has fallen in any measurable way. If the provisions of the PFJ are strong enough to "restore" competition to the marketplace, which DOJ claims they are (see CIS at 3 ("[t]he requirements and prohibitions [of the PFJ] will ... restore the competitive threat that middleware products posed prior to Microsoft's unlawful undertakings")), one would expect to see that the market shares of Microsoft's browser competitors have increased during this time frame. There is simply no evidence of that. Not only is there a dearth of evidence suggesting that the PFJ's provisions are going to restore competition to the level enjoyed by Microsoft's rivals prior to its illegal conduct, but there is no evidence to suggest they are affecting the market at all.
A remedial provision that has no market impact cannot be said to be in the "public interest," especially in a case like this where the damage from Microsoft's illegal campaign to eliminate rival middleware has already been done. In other words, because Microsoft has illegally driven down the market shares of its rival middleware developers, restoring competition to the marketplace requires much more than simply eliminating the illegal practices: only if the status quo ante is restored would OEM freedom of choice be meaningful. And yet, the evidence suggests that the PFJ provisions that relate to the browser will have no market impact, given the practical experience with highly similar proposals put in place by Microsoft last July. This is important evidence for the Court to consider when reviewing the PFJ.
In this submission - and doubtlessly in the many others the Court will receive - we identify a number of specific deficiencies in the PFJ. See Section IV, infra and Attachment B. But one omission stands out above all others: the failure of the PFJ to limit Microsoft's ongoing and insidious efforts to maintain its monopoly - and leverage and entrench that monopoly - by tying its middleware applications to the Windows OS. This conduct - found illegal by the District Court and upheld as illegal by the Court of Appeals (See Microsoft, 253 F.3d at 67) - is left unchecked by the PFJ. By contrast, a remedy to address this practice appeared in the interim conduct remedies offered by the District Court, 13 as well as the remedial proposal designed by Judge Richard Posner ("Posner Proposal"). 14 The practice is also addressed extensively in the litigating states' proposed remedy. By failing to remedy one of Microsoft's "signature" anticompetitive acts, the PFJ - even before reaching its many other defects - falls far short of the four-part remedial standard set by the Court of Appeals, and by the same token, fails to meet the public interest test established by the Tunney Act.
In explaining why it did not seek to limit Microsoft's tying of middleware applications to Windows in the PFJ, the Justice Department has suggested that there was no basis for such a remedy because of the Court of Appeals' reversal of the District Court's finding of liability under Section 1 of the Sherman Act, and the appellate court's direction that the remedy here should "focus on the specific practices that the court had ruled unlawful." 15 This analysis fundamentally misapprehends the implications of the Court of Appeals' ruling: contrary to DOJ's view, the Court of Appeals did not suggest that an anti-tying remedy was inappropriate or unnecessary here; indeed, much of the Court of Appeals' decision is a strong declaration of how Microsoft's various forms of tying violated Section 2 of the Sherman Act. See, e.g., Microsoft 253 F.3d at 65-67. A remedy that truly "focused on the specific practices that the court had ruled unlawful" would have to address the tying practices that the Court of Appeals "ruled unlawful"; the PFJ does not.
Because Microsoft's various forms of middleware applications tying are critical tactics that it uses to maintain its illegal monopoly, they must be ended if the remedy is to "terminate the monopoly." 16 (See Microsoft's Tying Strategies To Maintain Monopoly Power In Its Operating System ("Mathewson & Winter Report"), attached hereto as Attachment A.) Furthermore, the opportunity to gain market share as a result of such tying is one of the principal fruits of Microsoft's illegality, and should therefore be denied to it. 17 As a result, the failure of the PFJ to address Microsoft's tying is a fundamental flaw that alone merits rejection of the proposed decree.
Importantly, we note that the legal and economic arguments presented below are reinforced by the empirical observations set forth in Section II, supra. That is, the legal and economic analysis below which suggests that a remedy without a ban on tying will be ineffective in theory, is supported by the fact that such a remedy - imposed in part since July, and more substantially since December - is proving to be ineffective in practice.
In affirming the District Court's findings of fact concerning Microsoft's practice of commingling the code for its own middleware products with the code for the Windows OS, the Court of Appeals made clear that such commingling was an unlawful act in violation of Section 2 of the Sherman Act. See Microsoft, 253 F.3d at 65-67. Specifically, the Court of Appeals concluded that Microsoft's "commingling has an anticompetitive effect ... [and] constitute[s] exclusionary conduct, in violation of ï½§ 2." Microsoft, 253 F.3d at 6667 (emphasis added). 18 According to the appeals court, Microsoft's "commingling deters OEMs from pre-installing rival browsers, thereby reducing the rivals' usage share and, hence, developers' interest in rivals' APIs as an alternative to the API set exposed by Microsoft's operating system." Id. at 66. Moreover, the Court of Appeals affirmed the District Court's finding that such commingling was done, deliberately and intentionally, to advance Microsoft's anticompetitive aims. Id.
Notwithstanding these clear declarations by the Court of Appeals, this practice is not prohibited by the PFJ. Such a prohibition was omitted despite the finding that it is illegal - and despite the Justice Department's recognition that the first remedial objective in a decree should be to "end the unlawful conduct." (See CIS at 24.) Thus, Microsoft remains free to bind its middleware applications, including the browser, to its Windows OS 19 - making it impossible for an OEM, or a consumer, to remove that application from a PC without doing damage to that PC's operating system.
Microsoft's suggestion that competition is adequately served by allowing OEMs to pre-install rival middleware and to remove end-user access to Microsoft middleware - instead of banning commingling- is incorrect for several reasons. First, as the District Court found and the Court of Appeals affirmed, commingling of code strongly deters - and may even prevent - OEMs and consumers from using middleware products offered by Microsoft's competitors (because the Microsoft product is inextricably intertwined with the OS and is thus both easier to use and harder to remove). 20 Why would an OEM include a competing middleware product that will cost money to install and use up valuable space on the hard drive when Microsoft's product is already there and has been so tightly knit with the OS that it cannot be removed without doing damage to the OS? As the Court of Appeals noted (citing the District Court's holding), Microsoft's commingling has
Microsoft, 253 F.3d at 64 (citations omitted).
As long as commingling is permitted, OEMs and other third party licensees will have no incentive to take advantage of the limited freedom provided by the PFJ and will continue to use Microsoft's middleware products at the expense of its competitors. As a result, commingling reduces Microsoft's distribution costs for its middleware applications to zero. It also raises the distribution costs of rival middleware application makers -who not only must pay for something that Microsoft gets for free (i.e., distribution via OEMs), but must also pay an added bounty to persuade OEMs to install their applications as the second such application on a PC. This, of course, assumes that such an added payment strategy for such middleware would even be plausible (which is highly doubtful, except in rare cases) and would not be defeated by Microsoft, a rival with roughly $39 billion in cash available to deter the prospect of being outbid by other middleware developers for PC access.
The other way in which code commingling illegally enhances the position of Microsoft middleware is by encouraging applications programmers to write their programs to Microsoft's products. (Mathewson & Winter Report at ï½¶ï½¶14-16.) Third party developers decide how to write their applications based upon what APIs they believe will be available on the broadest number of computers and will enable their products to function most smoothly. See Microsoft, 253 F.3d at 55. Because the PFJ will allow Microsoft to continue commingling its middleware and OS code, it essentially guarantees that Microsoft's application programming interfaces ("APIs") are universally available in all Windows environments (in other words, on virtually all PCs) - and that software developers who write their applications to Microsoft's APIs can write directly to the OS. This is true regardless of whether or not end-user access to the middleware product is visible. As a result, third party software developers (whose business interests are to develop successful applications, not to challenge Microsoft's monopoly) will almost always write their programs to Microsoft middleware. 21 Thus, Microsoft's commingling practices only exacerbate the "applications barrier to entry" that already encourages developers to create software that runs on Microsoft's dominant OS and interoperates with Microsoft's middleware products. (See Mathewson & Winter Report at ï½¶ 16.)
Thus, in the end, as both the Court of Appeals and the District Court concluded here, commingling itself deters OEMs from installing rival middleware. See Microsoft, 253 F.3d at 66; Findings of Fact, 84 F. Supp. 2d at 49-50, ï½¶ 159. No doubt this is why every other remedial plan contemplated in this litigation - from the Posner Proposal, 22 to Judge Jackson's interim remedial order, 23 to the proposal set forth by the Litigating States 24 - has prominently included a ban on code commingling (or, at the very least, a requirement that Microsoft make available a non-commingled version of Windows). Yet, despite that, despite the Court of Appeals' holding, and despite the District Court's factual findings, the PFJ fails to prohibit or limit this practice in any manner whatsoever.
Microsoft has already demonstrated its willingness and ability to fend off threats from competing middleware products by illegally commingling code with the Windows OS. 25 As currently drafted, the PFJ gives the company a green light to continue this anticompetitive and illegal practice. The public interest requires that Microsoft's practice of tying its middleware and operating system, via code commingling, be prohibited.
The Justice Department's insistence that the remedy in this case should not include a general tying prohibition because the government abandoned its Section 1 tying claim is logically flawed. Contrary to DOJ's assertions, as discussed at length above, the ultimate remedy in this case must "terminate" Microsoft's illegally maintained monopoly- and that can only happen if the remedy addresses those behaviors that anticompetitively maintain the Windows monopoly.
The bundling, or contractual tying, of Microsoft's middleware products to its Windows OS is clearly such an anticompetitive behavior: it is the signature tactic used by Microsoft to maintain its monopoly and fend off competitive challenges, and it has been expressly found to be illegal by the Court of Appeals. See, e.g., Microsoft, 253 F.3d at 61 (the restriction in Microsoft's licensing agreements that prevents OEMs from removing or uninstalling IE "protects Microsoft's monopoly from the competition that middleware might otherwise present. Therefore, we conclude that the license restriction at issue is anticompetitive.") (emphasis added); see also Mathewson & Winter Report at ï½¶ï½¶ 13-33. Put another way, various tying practices were found by the Court of Appeals to illegally reinforce Microsoft's OS monopoly and thus must be banned in order to realize the remedial mandate of the Court of Appeals and the public interest objectives of the Tunney Act.
The anticompetitive nature of tying is apparent on its face: it reduces competition and consumer choice, making it less likely for Windows consumers to acquire and use non-Microsoft middleware products for reasons unrelated to the merits of those products. See Microsoft, 253 F.3d at 60 (upholding District Court's conclusion that contractually restricting OEMs' ability to remove IE "prevented many OEMs from distributing browsers other than IE"); see also Mathewson & Winter Report at ï½¶ 23. Microsoft only makes Windows available for license to OEMs in a bundle that includes a number of its middleware applications (e.g., Internet Explorer, Windows Media Player, Windows Messenger, MSN). Microsoft also contractually prohibits OEMs from removing its applications from the bundled offering.
As explained in the attached economic report from Professors Frank Mathewson and Ralph Winter, such tying is anticompetitive and should fall under the purview of these remedy proceedings for four principal reasons: (1) it reinforces Microsoft's monopoly by increasing the applications barrier to entry against OS competitors; (2) it reinforces Microsoft's monopoly by deterring direct challenges to the OS itself as the platform of choice for software developers; (3) it weakens the greatest current competitor to Windows - prior versions of Windows; and (4) Microsoft's more recent practice of tying the Windows Media Player to the OS creates a new variant of the applications barrier to entry problem for potential OS rivals: a content-encoding barrier to entry. (See Mathewson & Winter Report, passim.)
First, tying anticompetitively strengthens Microsoft's OS monopoly by reinforcing the applications barrier to entry against OS competitors. (Id. at ï½¶ï½¶ 14-16.) The dominance of the Windows standard in a wide range of applications, including a few particularly important applications, hampers entry into the operating system market because an entrant has to offer both a new operating system and a full set of applications, or hope that applications will quickly develop once the new operating system becomes available. See Microsoft, 253 F.3d at 55 (applications barrier to entry stems, in part, from the fact that "most developers prefer to write for operating systems that already have a substantial consumer base"). This is referred to as the applications barrier to entry, and the District Court found that it served to protect Microsoft against an OS challenge from IBM in the 1990s. Id. (upholding District Court's finding that "IBM's difficulty in attracting a larger number of software developers to write for its platform seriously impeded OS/2's success"). 26
By engaging in tying to gain dominance in key applications markets, Microsoft can turn the already-daunting applications barrier to entry into a virtually insurmountable shield. As the Court of Appeals explained, "Microsoft's efforts to gain market share in one market (browsers) served to meet the threat to Microsoft's monopoly in another market (operating systems) by keeping rival browsers from gaining the critical mass of users necessary to attract developer attention away from Windows as the platform for software development." Microsoft, 253 F.3d at 60. If Microsoft controls the key applications, it can unilaterally decide not to make those applications available for even the most-promising rival operating systems. Microsoft's tying thus anticompetitively advantages its position in the middleware applications market and sustains its OS monopoly as well. (See Mathewson & Winter Report at ï½¶ 66.) 27
Consider, for example, Microsoft Office. At one point, companies such as Corel and Lotus provided the most popular versions of these applications. At that time, to compete with Microsoft's Windows, rival operating systems needed to persuade Corel and Lotus to port their applications to those rival systems. Now that Microsoft has successfully leveraged Windows to obtain dominance in the Office suite of applications, however, rival OS providers would have to persuade Microsoft to port Office to rival systems.
If Microsoft can gain dominance with key middleware applications such as Office, MSN Messenger, and Windows Media Player, it can ensure that rival operating systems cannot meet customers' demands for the most popular applications. That is, when Microsoft's browser, Microsoft's media player, and Microsoft's instant messenger are dominant in those applications markets, Microsoft may choose not to write its applications to interoperate with a potential rival OS - making it much more difficult for nascent operating systems to compete with Windows. 28 Thus, Microsoft's tying, over time, takes today's very high "applications barrier to entry," and raises it immeasurably higher. (See Mathewson & Winter Report at ï½¶ 66.)
Second, tying reinforces Microsoft's monopoly by deterring direct challenges to the OS itself as the platform of choice for software developers. (Id. at ï½¶ï½¶ 17-19.) A clear incentive for Microsoft to tie its Internet Explorer browser with Windows was the threat that Netscape - on its own, or combined with Java software - would eliminate Microsoft's network advantages in the operating system by providing middleware that would offer a competing platform for software developers. As the District Court and Court of Appeals found, Netscape and Java were particular threats to Microsoft's dominance in operating systems because they potentially represented a platform/programming environment in which software applications could be developed without regard to the underlying operating system. See Microsoft, 253 F.3d at 74. With middleware, the success of a new operating system no longer depended on the development of new code by every application developer. (See Mathewson & Winter Report at ï½¶ 19.)
If rivals develop valuable, widely distributed middleware, software vendors could very well begin to write most of their applications directly to that middleware, and the applications barrier to entry would disappear. By using anticompetitive tying to dominate each promising field of middleware, Microsoft ensures that software developers face a unified field of proprietary Microsoft OS and middleware interfaces. (Id.) Thus, Microsoft's tying practices serve, in this way too, to reinforce and entrench its illegal OS monopoly.
Third, tying weakens the greatest current competitor to Windows - prior versions of Windows. (Id. at ï½¶ï½¶ 27-30.) 29 Existing versions of Windows provide competitive constraints on Microsoft for a simple reason: if new versions of Windows are insufficiently innovative or too expensive, consumers will choose to retain their older versions of the product. Through tying, however, Microsoft weakens this source of competition in two ways. First, new versions of Windows are marketed as much for new applications as for new OS features. Windows XP, for example, is being marketed in part for its inclusion of new applications, such as Windows Media Player 8.0 - not just based on innovations and improvements to the OS itself. Second, middleware applications such as Internet Explorer, Windows Media Player (with the attendant Microsoft Digital Rights Management), and MSN allow Microsoft to track consumer usage. Microsoft's binding of these products to Windows thus creates a total product that lends itself to usage and leasing fees. By gradually reducing the price of Windows and increasing the usage fees on its tied applications, Microsoft can shift to a usage or leasing revenue model, rather than a revenue model based on sales. This eliminates the competitive threat from previous versions of Windows 30 (in addition to providing Microsoft with the fruits of its illegal behavior, as discussed in Section III.C, below). (See Id. at ï½¶ 28.)
Fourth, in addition to these three general ways in which Microsoft's contractual tying reinforces the OS monopoly, Microsoft's more recent tying of its media player to the OS creates yet another special and highly significant reinforcement of the Windows monopoly. (See Mathewson & Winter Report at ï½¶ 36.) This problem results from the close connection between the media player and Microsoft's proprietary media encoding format, Windows Media Audio ("WMA"). Because Microsoft does not license the WMA format to some rival media players - including, most notably, the only other media player with substantial market presence, Real Player - Microsoft's media player is the only major player that can play content encoded in Microsoft's format. As Microsoft's format becomes more and more widespread - it is currently growing in use at a rate ten times that of its rivals - more and more content will become viewable and playable only via Microsoft's media player, which is only distributed via Microsoft's OS.
In such a market, then, a rival OS would have to overcome not only today's applications barrier to entry to compete with Windows - that is to say, it would have to persuade application writers to write their applications to interoperate with their OS - it would also have to overcome a new, even more daunting "content encoding barrier to entry" - i.e., it would have to persuade owners of thousands (or perhaps even millions) of pieces of multi-media content to re-encode their content in formats that the media player used by the rival OS could read. (Id. at ï½¶ï½¶ 37-38.) This barrier to entry applies not only to rival PC operating systems, but also to evolving operating systems for handheld and mobile communications devices, since consumers will want to access the best streaming content using those devices. Thus, the currently daunting applications barrier to entry is raised many times higher by virtue of the tying of the Windows Media Player (and its related proprietary formats) to the Windows OS. 31
All four of these anticompetitive effects are mutually reinforcing, because of the network effects operating between the applications sector and the operating system market. (Id. at ï½¶ï½¶ 31-33.) Achieving dominance in applications (through tying) strengthens the dominance of the OS, because buyers in the OS market are more assured of available applications. The greater dominance in the OS market in turn feeds back into greater dominance in applications, since the tying strategies take the form of imposing an artificial advantage relative to applications of the dominant OS supplier. The greater Microsoft's share across all middleware applications markets, the greater the applications barrier to entry.
Thus, a remedy that does not forbid Microsoft's anticompetitive tying leaves in place one of Microsoft's most powerful tools to maintain its OS dominance - and as a result, does not "unfetter" the market or "terminate" the illegal monopoly. For this reason, the PFJ's failure to include a ban on bundling is not in the public interest.
The Court of Appeals made clear that one necessary element of any remedy in this case was to "deny to [Microsoft] the fruits of its violation." See Microsoft, 253 F.3d at 103 (quoting United Shoe Mach. Corp., 391 U.S. at 250). This is in accord with the prevailing doctrine in this area. See Grinnell Corp., 384 U.S. at 577; 2 P. Areeda & H. Hovenkamp, Antitrust Laws ï½¶ 325(c) (2d ed. 2000).
The Court of Appeals found that Microsoft illegally maintained its OS monopoly by engaging in anticompetitive practices. See Microsoft, 253 F.3d at 51, 66. Here, because of the nature of its monopoly, one of the most lucrative fruits of Microsoft's illegal behavior is the ability to bundle its other software products with the OS and reap gains in those markets as well. In this way, the PFJ's failure to ban such tying clearly renders it deficient, because without such a prohibition it will fail to prevent future violations of Section 2, as discussed above - and also fail to prevent Microsoft from reaping the benefits of the OS monopoly that it illegally maintained. Without such a prohibition, Microsoft will be able to continue profiting from its anticompetitive behavior and will have evaded any real punishment for breaking the law.
For these reasons, as with the ban on code commingling discussed above, every other remedial proposal considered in this litigation included a ban on Microsoft's contractual tying via bundling. A formulation of such a ban was found in Judge Jackson's interim conduct remedies, which - in addition to the ban on binding middleware products to the OS - would also have prohibited Microsoft from "conditioning the granting of a Windows Operating System Product license ... on an OEM or other licensee agreeing to license, promote, or distribute any other Microsoft software product that Microsoft distributes separately from the Windows Operating System Product in the retail channel or through Internet access providers, Internet content providers, ISVs or OEMs." United States v. Microsoft, 97 F. Supp. 2d 59, 68 (D.D.C. 2000). Judge Posner's proposal would have prohibited tying any middleware product with the OS unless Microsoft offered a version of the OS without the middleware application, and did so at a reduced price. See Posner Proposal ï½§ 3(9). The litigating states also have proposed a very similar remedial approach. (See LSRP at 4-6.) Thus, it is only the PFJ, among the various proposals, that has failed to take this essential step to terminate Microsoft's OS monopoly, and deny Microsoft the fruit of its illegal acts. A remedy without such a provision cannot be in the public interest. 32
As demonstrated above, the PFJ fails to address Microsoft's anticompetitive tying of middleware applications to the Windows OS, and consequently fails to fulfill the remedial mandate of the Court of Appeals. Yet, even for those anticompetitive acts that the PFJ does attempt to address, it does not provide an adequate remedy for Microsoft's illegal conduct. Indeed, the PFJ is so replete with carefully crafted carve-outs and exceptions that many of its provisions, though well intentioned, are rendered meaningless. The result is that the PFJ will do little, if anything, either to terminate Microsoft's monopoly or constrain its ability to fend off middleware threats in the future. And, as we argue above, the preliminary experience with these provisions - since the onset of their implementation by Microsoft provides little reason to believe that the PFJ will be effective in practice. See Section II, supra.
While any conduct remedy will, of course, have limitations and the potential for evasion, none of the major defects in the PFJ are inherent in the nature of this sort of remedy. The Litigating States' Remedial Proposal provides a useful contrast on this point. Unlike the PFJ, the LSRP does not leave certain of Microsoft's anticompetitive acts unaddressed or leave Microsoft with the ability to perpetuate its operating system monopoly by illegally eliminating competitive threats from middleware developers. The Litigating States' Remedial Proposal prevents Microsoft from continuing its anticompetitive practices, is designed to restore the competitive balance in the marketplace, and seeks to ensure that competitive threats may emerge in the future unhindered by Microsoft's anticompetitive conduct. As such, it fully comports with the Court of Appeals' decision and provides this Court with a clear roadmap of what the public interest requires in this case.
To avoid undue length or repetition, we do not here provide a comprehensive list of all the numerous inconsistencies, loopholes, and shortcomings of the PFJ; we have included, in Attachment B, a more complete listing for the Court's benefit. (See A Detailed Critique of the Proposed Final Judgment in U.S. v. Microsoft, Attachment B.) In this Section, instead, we focus on six critical deficiencies in remedies that (unlike tying) are purportedly addressed in the PFJ: (1) the PFJ's failure to prevent Microsoft's discriminatory licensing practices; (2) its limited and slow-moving API disclosure provisions; (3) its inadequate protections for OEMs from retaliation; (4) its failure to promote distribution of Java; (5) its "gerrymandered" definition of middleware; and (6) its complete lack of an effective enforcement mechanism. Where helpful, we contrast the relevant provision in the litigating states' proposal for comparison's sake. By comparing the two proposals on a few central issues, it should be clear why the LSRP, and not the PFJ, addresses Microsoft illegal conduct in manner that both comports with the Court of Appeals' decision and serves the "public interest" under prevailing antitrust law.
One of the ways in which the District Court found, and the Court of Appeals upheld, that Microsoft illegally protects its operating system monopoly from rival middleware is through discriminatory and restrictive licensing provisions. Specifically, the Court of Appeals found that Microsoft uses its licenses not only to reward OEMs that utilize and promote its products (and to discriminate against those OEMs that wish to promote non-Microsoft products), but also to restrict the manner in which OEMs can distribute rivals' products. See Microsoft, 253 F.3d at 61-67.
Despite these findings, the PFJ permits Microsoft to continue to employ discriminatory and restrictive licensing agreements to curtail the use of its competitors' products. As currently structured, the PFJ allows Microsoft to continue its use of discriminatory and restrictive licensing provisions to fend off nascent threats from middleware competitors in several ways. First, the PFJ explicitly allows Microsoft to provide market development allowances to favored OEMs; it likewise allows Microsoft to enter into "joint ventures" with OEMs, that, in practice, are little more than shells for arrangements by Microsoft to shower financial rewards on OEMs that are willing to refuse to deal with Microsoft's competitors. Given the intense competition and low margins in the OEM industry, these rewards would create a decisive competitive disadvantage for "disfavored" OEMs, forcing them to accede to Microsoft's restrictive terms.
The PFJ's mechanisms for enabling these anticompetitive tactics are surprisingly explicit. Under Section III.B.3 of the PFJ, Microsoft is allowed to pay OEMs "market development allowances" to promote Windows products. Thus, OEMs that promote Microsoft products apparently can receive de facto cash rebates on their Windows shipments, while OEMs that deal with Microsoft's rivals will pay full list price. This preferential behavior in the browser market was found illegal by both the District Court and the Court of Appeals. See Microsoft, 253 F.3d at 60-61. Microsoft should be allowed to engage in legitimate pricing decisions, but those decisions should be limited to volume-based discounts published in its price lists. 33
Second, under Section III.G.2 of the PFJ, Microsoft may use "joint ventures" to escape any restrictions the proposed settlement would place on its licensing practices. For example, Microsoft may join an OEM in a joint venture for any "new product, technology or service" or improvement to any existing "product, technology or service," provided that the OEM contributes significant developer "or other resources." (See PFJ at Section III.G.2.) In such an arrangement, Microsoft can seek, and obtain, a pledge that its partner be "prohibit[ed] ... from competing with the object of the joint venture ... for a reasonable period of time." (Id. at III.G.) Thus, Microsoft could enter into a "joint development" project for the "new product" of "Windows X for Preferred OEM Y." The OEM's contribution could be entirely in marketing and distribution. Yet, under the language of the PFJ, it appears that Microsoft would have the ability to contractually prohibit OEMs in such joint ventures from offering products or services that compete with Microsoft. Given Microsoft's history of abusive and coercive behavior toward OEMs, it should not be allowed to enter into joint ventures with OEMs that result in exclusive agreements. Otherwise, in no time at all, Microsoft will use the opportunity to squelch competition.
Third, the PFJ purports to provide OEMs with the freedom and flexibility to configure the computers they sell in a way that does not discriminate against non-Microsoft products. Under Section III.C, the PFJ ostensibly prohibits Microsoft from entering into an agreement that would - among other things - restrict an OEM's ability to remove or install desktop icons, folders and Start menus, and modify the initial boot sequence for non-Microsoft middleware. However, the PFJ contains carve-out provisions that may render these prohibitions effectively meaningless. Under the express terms of Section III.C.1 of the PFJ, Microsoft may retain control of desktop configuration by being able to prohibit OEMs from installing or displaying icons or other shortcuts to a non-Microsoft product or service, if Microsoft does not provide the same product or service. Thus, for example, if Microsoft does not include a media player shortcut inside its "My Music" folder, it can forbid an OEM from doing the same. This turns innovation - and the premise that OEMs be permitted to differentiate their products - on its head: under the PFJ, rivals can "compete" with Microsoft, but they are never allowed a chance to bring a product to market first, to offer a functionality before Microsoft does, or to benefit from their innovations before Microsoft determines that it is ready to meet (and if history is a guide, extinguish) these competitive challenges.
Additionally, under the PFJ, Microsoft can control the extent to which non-Microsoft middleware is promoted on the desktop by virtue of a limitation that OEMs may promote such software at the conclusion of a boot sequence or an Internet hook-up only if they display no user interface or a user interface that is "of similar size and shape to the user interface provided by the corresponding Microsoft middleware." (See PFJ at III.C.3.) And OEMs are allowed to offer Internet Access Provider ("IAP") promotions at the end of a boot sequence, but only for their own IAP offerings (whatever that ambiguous limitation means). (See id. at III.C.5.) Thus, under the PFJ, Microsoft maintains the ability to set the parameters for competition and user interface.
In order to promote competition from rival middleware, Microsoft must be prohibited from entering into restrictive and discriminatory contractual agreements with its licensees. Although remedial proposals could have been crafted to address these anticompetitive practices, the PFJ falls short of this mark.
By contrast, the Litigating States' Remedial Proposal would bring Microsoft's unlawful behavior to an end and thus provide competing middleware the opportunity to receive effective distribution through the important OEM channel. Under the LSRP, Microsoft would be required, at a minimum, to offer uniform and non-discriminatory license terms to OEMs and other third-party licensees. The LSRP would also require Microsoft to permit its licensees to customize Windows to include whatever Microsoft middleware or competing middleware the licensee wishes to sell to consumers. (See LSRP at 7-9.)
In addition, the LSRP specifically prohibits Microsoft from employing market development allowances, including special discounts based on joint development projects. 34 It also gives OEMs and other third-party licensees the flexibility to feature non-Microsoft products in ways that increase the likelihood that consumers will use them, without providing broad exceptions that enable Microsoft to avoid its obligations.35 Thus, it is the LSRP - and not the PFJ - that meets the Tunney Act's "public interest" standard.
Another key element of the government's case against Microsoft was the company's withholding of the operating system's API information from rivals, so as to illegally degrade the performance of rival applications. In any market where Microsoft is allowed to withhold APIs, rival software will perform imperfectly in the Windows environment, and Microsoft will illegally gain dominance. Accordingly, in order to promote competition from rival middleware developers, it is essential that Microsoft be required to provide timely access to all technical information required to permit non-Microsoft middleware to achieve interoperability with Microsoft software.
Section III.D of the PFJ imposes an obligation on Microsoft to disclose to Independent Software Vendors ("ISVs"), and others, the APIs that Microsoft middleware uses to interoperate with any Windows OS product. However, the PFJ's requirement for API disclosure is drawn much too narrowly to allow non-Microsoft middleware to compete fairly with Microsoft middleware. Here again, a comparison with the proposal of the litigating states is instructive.
First, the PFJ's disclosure requirement fails to prevent "future monopolization," because it fails to apply to critical technologies that Microsoft is likely to use to maintain the power of its OS monopoly in the future. Because nascent threats to Microsoft's monopoly operating system currently exist beyond the middleware platform resident on the same computer, any effective API disclosure requirement must apply to all technologies that could provide a competitive platform challenge to Windows, including network servers, web servers, and hand-held devices. The PFJ does not; by contrast, the Litigating States' Remedial Proposal expressly provides that Microsoft must disclose all APIs, technical information, and other communications interfaces so that Microsoft software installed on one computer (including personal computers, servers, handheld computing devices and set-top boxes) can interoperate with Microsoft platform software installed on another computer. (See LSRP at 11.)
Second, the PFJ creates an apparent exception for Microsoft's API disclosure requirement in the emerging areas of identity authentication and digital rights management ("DRM") - critical applications that are also important to the prospects of Microsoft's "future monopolization." Section III.J. 1 .(a) appears to exempt Microsoft from disclosing any API or interface protocol "the disclosure of which would compromise the security of ... digital rights management ... or authentication systems, including without limitation, keys, authorization tokens or enforcement criteria." This exception is written much more broadly than any of the limits on Microsoft behavior, and could easily be used to protect Microsoft's APIs relating to DRM and identity authentication applications. The implication of this is that any rival DRM or authentication software will not function as well as Microsoft's DRM, Passport, and .Net My Services (formerly known as Hailstorm). Thus, under the PFJ, Microsoft may be able to degrade the performance of any rivals to any of these services.
These markets, however, are just as important to the next stage of the industry's evolution as browsers were to the last stage. DRM solutions, for example, allow content vendors to sell audio and video content over the Internet on a "pay for play" basis. Since the most prevalent use of media players in the years ahead will be in playing content that is protected in this fashion, if non-Microsoft media players cannot interoperate with Windows' DRM solution, those media players will be virtually useless except for "freeware" content. 36 Thus, if DRM is exempt from API disclosures under the PFJ, Microsoft can destroy the competitive market for one of the most vital forms of middleware - media players.
The authentication exemption is potentially even more far-reaching. Most experts agree that the future of computing lies with server-based applications that consumers will access from a variety of devices. Indeed, Microsoft's ".Net" and ".Net My Services" (formerly known as Hailstorm) are evidence that Microsoft certainly holds this belief. These services, when linked with Microsoft's Passport, may allow Microsoft to participate in a substantial share of consumer e-commerce transactions over the Internet, irrespective of which device is used to access the Internet (cell phones, handheld computers, etc.). If Microsoft prevents competition with its Passport standard, it may be able to realize its stated goal of charging a fee for every single e-commerce transaction on the Internet. 37
Under the guise of security, Microsoft has obtained a loophole in the PFJ that undercuts a critical disclosure requirement. Microsoft's legitimate security concerns which, of course, are shared by all of its major business rivals - do not require this loophole. Section III.J.2 of the PFJ excludes from disclosure rights any company with a history of software counterfeiting or piracy or willful violation of intellectual property rights, or any company that does not demonstrate an authentic and viable business that requires the APIs. This means that Microsoft only has to disclose to bona fide software rivals whose interests in security and stability are as great as Microsoft's. As added protection, Section III.J. 1 .(b) of the PFJ allows Microsoft to refrain from any disclosure simply by persuading an impartial government body, on a case-by-case basis, that a specific disclosure would put system security at risk. Together, these provisions provide Microsoft with all the room it needs to take legitimate security precautions.
Once again, the litigating states' proposal provides a useful contrast. It contains no disclosure "carve out" to exempt DRM and identity-authentication from the general disclosure obligation imposed on Microsoft. (See LSRP at 11.) Instead, it creates a regime of timely, complete, and comprehensive API disclosure that will allow competitors an opportunity to challenge Microsoft's efforts to entrench its OS monopoly in a market where distributed computing is the dominant model - an opportunity that was sadly missed as the browser became critical to Internet-related applications, due to Microsoft's anticompetitive refusals to share technical information. Thus, once again, it is the LSRP, not the PFJ, that would meet the Court of Appeals' objectives and the public interest standard.
The District Court found, and the Court of Appeals upheld, that in order to create a competitive market structure in which non-Microsoft middleware products are able to compete effectively with Microsoft products, licensees, such as OEMs, must have the ability to distribute and promote non-Microsoft products without fear of coercion or interference from Microsoft. Recognizing the central role that OEMs play in the distribution and ultimate usage of non-Microsoft middleware products, the PFJ includes an anti-retaliation provision which is intended to protect those entities that support or promote non-Microsoft products. According to the Department of Justice, this anti-retaliation provision "broadly prohibits any sort of Microsoft retaliation against an OEM based on the OEM's contemplated or actual decision to support non-Microsoft software." (See CIS at 25.)
Unfortunately, the PFJ does not provide the broad protection from Microsoft's retaliation that the government claims it does. Indeed, the PFJ's anti-retaliation provision is so narrow that it will do little, if anything, to protect OEMs that wish to distribute or promote non-Microsoft products. The PFJ's anti-retaliation provision is deficient in numerous respects. First, it appears to create only a narrow range of procompetitive activities that OEMs can engage in without being subject to Microsoft retaliation. For example, the PFJ prohibits retaliation for OEMs that promote rival middleware, but does not appear to prohibit retaliation against OEMs that promote any other type of rival software (which, under the PFJ's language, probably includes rivals to Passport, MS Money, Windows Movie Maker, and MSN Messenger, just to name a few). Even if this glitch were unintentional, the ambiguity might still be sufficient to allow Microsoft to coerce OEMs into avoiding Microsoft rivals.
Second, even within the scope of protected OEM activities, the PFJ appears to bar only certain types of Microsoft retaliation. The PFJ prohibits Microsoft from withholding "newly introduced forms of non-monetary Consideration" from OEMs, but is less clear about whether Microsoft may use already-existing forms of consideration to retaliate against OEMs. (See PFJ at III.A.) More importantly, while the PFJ prohibits Microsoft retaliation via an alteration of commercial agreements, it does not appear to prohibit any other form of Microsoft retaliation (e.g., product disparagement) that Microsoft can imagine. 38
In addition, under Section III.A of the PFJ, Microsoft may, sua sponte, terminate an OEM's Windows license after sending the OEM two notices stating that it believes the manufacturer is violating its license. There need not be any adjudication or determination by any independent tribunal that Microsoft's claims are correct. All that is required are two notices; after that, Microsoft may terminate an OEM's license. This provision means that the OEMs are, at any time, just two registered letters away from unannounced economic calamity; after all, given Microsoft's monopoly on the operating system, termination of an OEM's Windows license is a death sentence for an OEM's business.
Again, such inadequate safeguards are not inherent in an effective non-retaliation protection. For instance, the Litigating States' Remedial Proposal prevents Microsoft from taking any action that directly or indirectly adversely affects OEMs or other third-party licensees that in any way develop, distribute, support or promote competing products, thereby providing the type of protection contemplated by the Court of Appeals. (See LSRP at 13-14.) Thus, the Litigating States' Remedial Proposal clearly prohibits Microsoft retaliation for any procompetitive OEM behavior and prohibits all forms of Microsoft retaliation. Importantly, the LSRP also prohibits Microsoft from retaliating against any individual or entity for participating in any capacity in any phase of this litigation. Again, it is the LSRP that meets the Court of Appeals' objectives for this case - not the PFJ.
Yet another aspect of the trial court's decision that was upheld on appeal by the D.C. Circuit was the District Court's finding that Microsoft's actions in eliminating the threat posed by Sun Microsystems' Java technology were unlawful under Section 2 of the Sherman Act. See Microsoft, 253 F.3d at 74-75. The PFJ, however, omits any remedy for this core abuse. Thus, unlike either the District Court's remedy or the remedy Judge Posner suggested, the PFJ does not protect those specific products, such as Java, that actually compete with Windows today and offer alternatives to Microsoft's dominance.
The Litigating States' Remedial Proposal addresses this deficiency by requiring that Microsoft distribute Java with its platform software for a period of ten years. (See LSRP at 17-18.) The LSRP recognizes, as did the District Court and Judge Posner, that in order to ensure that rival products such as Java can compete with Microsoft, they must receive the widespread distribution that they could have obtained absent Microsoft's unlawful behavior.
The requirement that Microsoft distribute Java with its operating system and Internet Explorer browser takes on even greater importance in light of Microsoft's recent behavior. For example, although the Court of Appeals upheld the trial court's finding that Microsoft targeted and destroyed independent threats from the Java programming language, see Microsoft, 253 F.3d at 53-56, 60, Microsoft announced less than a month later that it was dropping any support for Java from Windows XP. As The Wall Street Journal reported at the time, "This favors Microsoft's new technologies, and will inconvenience consumers.... [I]f you want your Web page accessible to the largest number of people, you may want to drop Java' and switch to Microsoft's competing set of products, which is under development and is known as .NET." 39 Thus, notwithstanding the Court of Appeals' holding that Microsoft illegally maintained its monopoly by requiring major independent software vendors to promote Microsoft's JVM exclusively (i.e., by requiring developers, as a practical matter, to make Microsoft's JVM the default in the software they developed), Microsoft is again acting illegally to maintain - and further entrench - its operating system monopoly against Java's middleware threat.
To remedy the specific and extensive anticompetitive tactics aimed at Java, as found by the District Court and affirmed by the Court of Appeals, Microsoft should be ordered - as outlined in the Litigating States' Remedial Proposal - to distribute with its platform software a current version of the Java middleware. This would ensure that Java receives widespread distribution, thus increasing the likelihood that it can serve as a viable competitive platform to Windows. Although rivals such as Java will likely remain small players compared to the dominant Windows OS, their existence on the competitive fringe is critical to provide some competitive discipline to Microsoft on pricing and coercion matters. Moreover, the existence of these rivals creates a base for future developments that might one day provide true alternatives to Windows.
Though not readily apparent, the effectiveness, or lack thereof, of the PFJ's restrictions on Microsoft's behavior heavily depends on the proposed agreement's definition of "middleware." Under the proposed settlement, OEMs are protected from retaliation and can promote competitive alternatives to Microsoft products only in the area of middleware. Thus, if rival software falls outside of the definition of middleware, Microsoft can essentially use its coercive might to prevent that software from being distributed via OEMs. Conversely, if a Microsoft product is not classified as middleware, Microsoft is permitted to use coercion to force its adoption and promotion.
The PFJ adopts a new, and greatly narrowed, definition of middleware, both in terms of "Microsoft Middleware Products" and "non-Microsoft Middleware." The result is significant because under the newly created definition, Microsoft may be able to subvert many of the PFJ's restrictions. The Litigating States' Remedial Proposal defines middleware in a manner consistent with the definition adopted by both the District Court and the Court of Appeals. 40 It thus prevents Microsoft from using a definitional shell game to avoid changing its unlawful behavior.
The District Court and the Court of Appeals adopted the same definition of middleware: software products that expose their own APIs; are written to interoperate with a variety of applications; and are written for Windows as well as multiple operating systems. See Microsoft, 253 F.3d at 53; see also Findings of Fact, 84 F. Supp. 2d at 17-18, ¶¶ 28-29. Thus, while the D.C. Circuit discussed browsers and the Java technologies as leading examples of middleware, Microsoft, 253 F.3d at 59-78, it never adopted an exclusive list limited to specific products (as the PFJ does). 41 Importantly, the Court of Appeals also agreed with the District Court that the appropriate category of "middleware" applications that merit protection against Microsoft's anticompetitive conduct includes any application that could operate separately or together with other such applications to create even the "nascent" potential for alternative platforms that could compete with Microsoft's OS monopoly. Id. at 52-54, 59-60, 74.
These standard definitions of middleware were also endorsed in the Posner Proposal, which, as noted above, Microsoft was reportedly ready to accept last year. Section 2(3) of the Posner Proposal defined middleware broadly, to include any "software that operates between two or more types of software ... and could, if ported to multiple operating systems, enable software products written for that middleware to be run on multiple operating systems." Moreover, the substantive portion of the Posner Proposal, in Section 3(8)(c), explicitly included not just enumerated products, but also any "middleware distributed with such operating system installed on one personal computer to interoperate with any of the following software installed on a different personal computer or on a server: (i) Microsoft applications, (ii) Microsoft middleware, or (iii) Microsoft client or server operating systems."
The PFJ departs significantly from these established definitions of middleware and instead adopts wholly new definitions for both "Microsoft Middleware Products," and "non-Microsoft Middleware." These definitions include several flaws that Microsoft may be able to use to anticompetitively advantage its applications, continue to profit from the fruits of its illegally maintained monopoly, and evade the practical consequence of the PFJ for many product lines.
To start, the PFJ's definition of "Microsoft Middleware Products" appears to limit this category to five specifically-listed existing products and their direct successors. 42 This makes no sense for two reasons. First, why define the most critical term in the proposed settlement narrowly when Microsoft has already demonstrated its skill at evading consent judgments? And second, why does the list include certain Microsoft products, but arguably not their virtually indistinguishable cousins: i.e., Outlook Express, but not Outlook; Windows Messenger, but not MSN Messenger; the Microsoft JVM, but not MSN RunTime; Internet Explorer, but not MSN Explorer. Likewise, Microsoft middleware applications such as the MSN client software and Passport appear to be excluded. The significance of these omissions cannot be overstated. For example, although Microsoft must allow OEMs, under the PFJ, to remove end-user access to Internet Explorer, the decree's language appears to allow Microsoft to ban any effort to replace MSN Explorer with a competitor. This is a step backwards from the status quo.
Additionally, Section III.H.2 of the PFJ explicitly limits OEM flexibility to set non-Microsoft Middleware as a default so that it can be automatically invoked: the PFJ appears to allow OEMs to do so only with competitors of "Microsoft Middleware Products" that (1) appear in separate Top-Level Windows, with (2) separate end-user interfaces or trademarks. Thus, Microsoft might be able to avoid the PFJ's provisions simply by embedding Microsoft middleware with other middleware, or not branding it with a trademark. That means Microsoft - not the OEMs, and certainly not the market - would determine the scope of desktop competition and the pace of desktop innovation.
Conversely, the definition of the rivals to Microsoft Middleware Products "non Microsoft Middleware Product" - is also jury-rigged to advantage Microsoft. Under Section IV.N of the PFJ, protected middleware products are limited to those applications "of which at least one million copies were distributed in the United States within the previous year." Thus, developers have no protection from Microsoft's well-honed predatory tactics until they can obtain substantial distribution.
The PFJ's middleware definition also does not explicitly include web-based services, the most important future platform challenge to the Windows monopoly. These web-based services represent an important and growing type of middleware, and the PFJ's failure to explicitly cover them may allow Microsoft to recreate and extend its desktop monopoly to new platforms. 43
The newly created and narrowly crafted definitions of middleware in the PFJ pave the way for Microsoft to avoid many of the prohibitions on its conduct. The middleware definitions in the LSRP, on the other hand, are consistent with those endorsed by the District Court and Court of Appeals, and ensure that the protections from Microsoft's illegal conduct are extended to Microsoft's competitors in critical middleware markets.
For any remedy against Microsoft to be effective, it must include a strong, timely, and meaningful enforcement mechanism. The PFJ creates an extraordinarily weak enforcement authority - one that likely will be overwhelmed and co-opted by Microsoft. More specifically, as currently drafted, there are two principal problems with the PFJ's enforcement mechanism.
First, the proposed decree leaves all enforcement to a single, three-person Technical Committee ("TC"). With no looming antitrust proceedings to put pressure on Microsoft to behave, Microsoft will have every incentive to hinder the efforts of the TC. Moreover, Microsoft will have substantial insights and influence over the TC - Microsoft will appoint at least one member of the TC (the first two members will appoint the third); the TC will be stationed full-time on Microsoft premises; and the TC will rely for many types of enforcement on a compliance officer hired and paid for by Microsoft. In light of all this, it would be easy to imagine a situation where the TC, during the entirety of its existence, never took a single action critical of or hostile to Microsoft, no matter what behaviors Microsoft engaged in.
Second, the enforcement authority has no power other than the authority to investigate. The TC cannot expedite claims, assess fines, or otherwise move quickly to redress Microsoft's illegal behavior. If the TC finds any abuse, its only recourse will be to the courts, through mini-retrials of United States v. Microsoft. Moreover, under Section W.D.4.(d) of the PFJ, the TC is prohibited from using any of its work product, findings, or recommendations in any court proceedings. Thus, even if the TC eventually refers a matter to the courts, the proceedings will have to start from scratch. The history of the 1994 consent decree shows the futility of this type of approach.
By contrast, the Litigating States' Remedial Proposal recommends the creation of a Special Master who is empowered and equipped to investigate Microsoft's behavior in a manner that is prompt and resolute. The appointment of a Special Master with defined remedial powers is essential if Microsoft's unlawful behavior is to be curbed and competition restored to the marketplace. Thus, the creation of a Special Master provides for a mechanism that is much more effective in ensuring Microsoft's compliance with the settlement decree, and does not suffer from the defects identified above in the PFJ's TC proposal.
First, unlike the TC in the PFJ, a Special Master, as selected by the Court, would be independent. He or she would not be dependent on Microsoft for resources, appointment, or other needs.
Second, under the Litigating States' Remedial Proposal, the Special Master would have the authority to identify, investigate, and quickly resolve enforcement disputes. For example, under the States' proposal, the Special Master would have the power and authority to take any and all acts necessary to ensure Microsoft's compliance. (See States' Proposed Text ¶ 18(b).) The Special Master would have the benefit of both business and technical experts. (See id. ¶ 18(d).) Upon receipt of a complaint, it would be required to make an initial determination of whether an investigation is required within fourteen days. After notifying Microsoft and the complainant of its decision to investigate, Microsoft would then have fourteen days to respond. After Microsoft's response, the Special Master would be required to schedule a hearing within twenty-one days, and fifteen days after the hearing, would be required to file with the Court its factual findings and a proposed order. (See id. ¶ 18(f).)
Unlike the enforcement mechanism in the PFJ, the creation of a Special Master as outlined by the States would prevent disputes over Microsoft's compliance from becoming wars of attrition that would drain the system and guarantee Microsoft victory. The history of this case, and of antitrust regulation in general, suggest the need for an enforcement mechanism that can ensure the timely resolution of any disputes and minimize any demand on judicial resources. The enforcement provisions contained in the Litigating States' Remedial Proposal accomplish these objectives.
We believe, for the reasons presented above, that the PFJ fails the Tunney Act's "public interest" test and should be rejected. At the very least, however, there is ample basis for the Court to conclude that a rigorous hearing is needed to air the objections to the PFJ and resolve the doubts that the Court hopefully has about the proposed decree. While it need not be a lengthy proceeding, the Court may also want to consider accepting evidence and taking testimony- or alternatively, making use of record evidence it will receive in the upcoming proceeding concerning the LSRP. The question of what can be learned about the PFJ's prospects for effectiveness, since its partial implementation began in July (and, in other respects, December), is especially critical, and would benefit from additional fact-finding by the Court.
Of all the cases in which courts have reviewed proposed consent decrees to make a public interest determination under the Tunney Act, the case most similar to the present action is American Tel. & Tel. Co., 552 F. Supp. at 131, aff'd sub nom Maryland v. United States, 460 U.S. 1001 (1983), in which Judge Greene subjected the government's proposed consent decree with AT&T to intense judicial review. 44 In AT&T, the court recognized that the proposed settlement not only would dispose of "what is the largest and most complex antitrust action brought since the enactment of the Tunney Act, but  itself raises what may well be an unprecedented number of public interest questions of concern to a very large number of interested persons and organizations." American Tel. & Tel. Co., 552 F. Supp. at 145. 45 In light of the size and the complexity of the case, 46 as well as its "unfortunate history" and the interests of third parties, the court held an extensive hearing to address key issues raised by the consent decree and the comments of interested parties. Id. at 147, 152. The case for an extensive hearing on the PFJ in this proceeding is overwhelming for similar reasons.
First, this is an extremely complicated case, to say nothing of the profound consequences any settlement will ultimately have on the computer and Internet industries. The economic significance of the computer industry is unquestioned. In such an environment, expert economic analysis is critical to help the Court not only understand the incentives that will drive Microsoft's response to any proposed settlement, but also assess whether the PFJ will succeed in bringing the monopolist's unlawful behavior to an end and promoting competition in a market that has long been restricted. Given the complexity of this case, the Court should not approve the PFJ without an adequate hearing to consider the many - and often technical - objections to it that will doubtlessly be raised in the Tunney Act submissions.
Second, in terms of the impact that any proposed settlement in this case will have on the public, Judge Greene's depiction of the AT&T case is, once again, more than fitting here: "[t]his is not an ordinary antitrust case." Id. at 151. Microsoft is one of our nation's largest corporations. It plays a central role in one of the country's most critical and important industries, and thus in our country's economy. Any settlement that addresses Microsoft's illegal conduct in a manner that is consistent with the Court of Appeals' decision and prevailing antitrust law will have far-reaching consequences on numerous organizations, both public and private, as well as on Microsoft, its employees, shareholders, competitors, and most importantly, consumers. Thus, a hearing to consider the breadth and depth of these consequences is in order before the PFJ is approved.
Third, a hearing should be held to require the Justice Department to answer the many questions surrounding the PFJ - raised here, and doubtlessly elsewhere - that the Competitive Impact Statement ignores or fails to adequately address. Why was a new, "gerrymandered" definition of middleware used in the PFJ - instead of the definition used by both the trial and appellate courts, and in every other remedial proposal? Why was a Java-related remedy omitted, when that was such a key part of the case? Why were only some forms of retaliation, for only some procompetitive acts, prohibited? And most importantly, why does the PFJ not address all of the anticompetitive wrongs that were found at trial, and upheld on appeal - including, most especially, Microsoft's unlawful tying? These questions are not answered by the CIS, as the Tunney Act directs and the public interest demands, and as the Court would surely desire. A full review of these questions, and many others, is needed by the Court before it can approve the PFJ (if it is inclined to approve the PFJ).
Thus, in light of the specific objections from third parties revealing the PFJ's numerous deficiencies - and the oddity of the differing remedial proposals now before the Court - the Court should hear oral argument and, if necessary, take additional testimony. Giving the government an opportunity to explain the omissions in its proposed settlement, and third parties the opportunity to demonstrate the efficacy of the litigating states' proposal, will afford the Court the necessary basis on which to make its public interest determination in this important and unprecedented case.
A second rationale for a hearing is to develop a factual record concerning the point we make in Section II, supra: namely, that the Court can assess the prospects for the likely effectiveness of the PFJ by seeing how those provisions that have been implemented are starting to work - or not - in practice.
Above, we have suggested that the empirical record developed in the PC industry since Microsoft's July 11, 2001 announcement of "greater OEM flexibility for Windows," and since Microsoft began to implement many of the PFJ's remedial provisions on December 16, 2001, should be examined carefully by this Court as it determines whether the PFJ is in the "public interest." We also express the view that these provisions have, in fact, been ineffectual in promoting competition and are showing no signs that they will yield change in the competitive position of non-Microsoft middleware - and as a result, cannot be said to be in the public interest.
At the same time - while we doubt it, seriously - we recognize it is theoretically possible that there may be reasons why these provisions have not yet shown signs of effectiveness, but would be effective over time. At least, that is what Microsoft and the Justice Department are likely to assert. If the Court is inclined to give these assertions any credence, that is all the more reason for the Court to conduct a proceeding - taking evidence and hearing testimony, if necessary- to make a determination on such claims based on empirical evidence, rather than relying upon hypothetical contentions or abstract theories. Such a proceeding is authorized by the Tunney Act, see 15 U.S.C. § 16(f), and would be appropriate in this instance.
Evidence and testimony from the OEMs can make clear whether they are taking advantage of the "new flexibility" ostensibly being provided under the PFJ - and if not, why not. Given the OEMs' likely fears of retaliation from testifying in such a proceeding - as reflected by their apparent (and understandable) reluctance to testify in the remedial proceeding - the Court may want to consider appointing a Special Master to take evidence from the OEMs confidentially.47 Likewise, evidence and testimony from non-Microsoft middleware companies can indicate how the provisions of the PFJ, after they have been in place for several months, are - or are not - enabling them to compete with Microsoft. The same can be said for OS rivals to Microsoft.
The point is that while we firmly believe that the publicly available information and reports all indicate that the PFJ's provisions, as implemented since December 16th (and the browser-related PFJ provisions, as implemented since July 11th), have done little or nothing to promote competition, the Court may wish to base such a conclusion upon a judicially developed record that would allow both proponents and opponents to offer explanations and evidence in support of their views. Such a proceeding could be of a more informal nature, i.e., the Court could solicit comments from the relevant parties and industry experts; or it could be conducted by a Special Master, as we suggest above; or it could be a more formal, trial-type undertaking. All of these approaches are authorized under the Tunney Act, which grants wide discretion to the court to adopt whatever form of proceeding it considers most effective. See 15 U.S.C. § 16, passim.
But on one point, the Act, or at least its legislative history, is rather firm: "[T]he court must obtain the necessary information to make [a] determination that the proposed consent decree is in the public interest." 1974 U.S.C.C.A.N. 6535, 6538-39 (H.R. Rep. 93-1463, quoting S. Rep. 93-298, at 6-7 (1973)) (emphasis added). Some sort of proceeding to examine these questions is justified in these circumstances,48 and could be helpful to the Court in its consideration of the practical effects of the PFJ.
Finally, the Court should take advantage of the Tunney Act's broad procedural flexibility to use the record evidence that will be amassed in the upcoming remedial proceeding as it make its "public interest" determination in this review. The Court's Tunney Act review of the PFJ in this proceeding can be substantially assisted by the record developed in the forthcoming proceeding on the LSRP. As we have argued, the Court's objectives in both proceedings are the same - namely, to terminate Microsoft's illegal conduct, prevent the recurrence of such conduct, and create a market structure in which competition does not simply exist in theory, but actually yields real alternatives to Microsoft's products. Moreover, the Court's analysis in both proceedings is guided by the same legal principles. See Section I, supra.49
Many of the questions the Court must answer in the course of reviewing the PFJ - e.g., What sort of anti-retaliation provisions are needed to empower OEMs and foster real competition? Must third parties be empowered to promote competition through offering alternatives to the 'Windows bundle' for a remedy to be effective? - will be addressed, in whole or in part, in the remedial proceeding. To the extent that these questions can only be answered by hearing testimony from some of the same individuals and the same sources in the remedial proceeding, the Court's reliance on that evidence in this proceeding would result in a more comprehensively informed review, streamline the Court's resolution of the issues, and lead to a much more efficient use of judicial resources.
The Tunney Act itself grants the Court wide discretion to undertake any procedures it "may deem appropriate" in making its public interest determination. 15 U.S.C. § 16(f)(5). This includes using evidence from another proceeding. See American Tel. & Tel. Co., 522 F. Supp. at 136. As the court noted in AT&T, "[i]n a Tunney Act proceeding the Court is not limited by the rules of evidence but may take into account facts and other considerations from many different sources." Id. at 136 n. 7 (emphasis added). In that case, the court relied on a report by the Antitrust Subcommittee of the House Committee on the Judiciary, which had conducted an investigation of the matter, to fill in gaps left in the court record. Id. at 136. If a court can weigh an evidentiary record compiled by the Congress, it surely can weigh an evidentiary record of its own creation in a related proceeding.50
The Court is currently overseeing a wide range of discovery, both written and oral, in the remedial proceeding. Testimony will presumably be taken from a host of witnesses that will establish, among other things: how Microsoft deals with OEMs, including how various Microsoft practices limit OEM flexibility in configuring the desktop;51 how Microsoft has used the commingling of code, and other forms of binding its middleware to the OS, to reinforce the applications barrier to entry; how Microsoft has used discriminatory and anticompetitive licensing agreements to limit the distribution and use of rival products; how Microsoft's illegal conduct has worked to destroy Java; how Microsoft's .Net initiative repeats the illegal monopoly leveraging tactics it successfully used to decimate Netscape; how Microsoft's concealment of APIs degrades the performance of non-Microsoft products and services; and how Microsoft has manipulated industry standards and developed proprietary standards and formats that limit the interoperability of competing products.
This evidence, which will be presented during the Court's remedial hearing later this Spring, will form the basis on which the Court crafts its remedy in the ongoing litigation. It is our view that this evidence will affirmatively demonstrate why the LSRP, and not the PFJ, fulfills the mandate of the Court of Appeals and comports with well settled antitrust law. By the same token, it will also demonstrate why the PFJ fails to redress Microsoft's illegal behavior in a manner consistent with the public interest.
Because many of the questions the Court faces in this proceeding mirror those in the remedial proceeding, the Court should take the record evidence from the remedial proceeding into account in conducting its Tunney Act review of the PFJ. Simply put, by utilizing this evidence, the Court will adduce the information it needs to make its "public interest" determination in a manner that encourages greater efficiency and avoids unnecessary delay or duplication.
The Court should refuse to find that entry of the PFJ is "in the public interest." The PFJ does not unfetter the market from Microsoft's dominance; it does not terminate the illegal monopoly; it does not deny to Microsoft the fruits of its statutory violations; and it does not end Microsoft's practices that are likely to result in monopolization in the future.
More specifically, the PFJ does not even attempt to address, let alone end, Microsoft's illegal binding and bundling practices that have done so much to fortify its OS monopoly and to harm desktop competition. And its limited provisions are so filled with loopholes and exceptions that they are rendered ineffective.
At the very least, the Court should refuse to approve the PFJ until after it has concluded an extensive review, including an inquiry into whether the PFJ's provisions - as implemented by Microsoft since last year - are showing signs of effectively restoring competition to the marketplace. The Court could conduct an evidentiary hearing, appoint a Special Master, and/or rely upon the record that will be adduced in the trial on the Litigating States' Remedial Proposal to meet its evidentiary needs.
In the end, it is the proposal of the litigating states - not the PFJ - that meets the public interest standard. The Court should reject the PFJ, and impose a strong, effective and forward-looking remedy that addresses Microsoft's proven anticompetitive conduct in a manner consistent with the mandate of the Court of Appeals and the nation's antitrust laws.
ATTORNEYS FOR AOL TIME WARNER, INC.
1. These factual findings were affirmed on appeal. See Microsoft, 253 F.3d at 51-78. In addition, the Court recently held that the factual findings of the District Court "in support of the liability findings" should be considered "undisputed" for the purpose of this proceeding. (See Transcript of January 7, 2002, at 31.)
2. This is not to say that the Court should reject the PFJ if it finds only that it differs in some respects from the remedy that the Court would impose at the end of litigation. For while the public is entitled to a very robust remedy here, especially given the fact that this case has been litigated through trial and affirmed on appeal with judgments against Microsoft, a settlement clearly does not have to match precisely the outcome that would have been achieved in litigation to be deemed acceptable under the Tunney Act's public interest test. How wide a "gap" between a hypothetical litigated result and the proposed settlement is permissible in these circumstances is a question that need not be answered here because the PFJ falls so very short of meeting any reasonable understanding of the "public interest," given its failure to address many of Microsoft's illegal acts and its loophole-ridden provisions in the areas that it does purport to cover.
3. This approach generally comports with other Tunney Act cases, which conclude that an antitrust remedy, including a consent decree, must "`effectively pry open to competition a market that has been closed by defendants' illegal restraints.'" Id. at 150 (quoting International Salt Co. v. United States, 332 U.S. 392,401 (1947); see also 2 P. Areeda & D. Turner, Antitrust Laws ï½§ 327 (1978)). A decree "must `break up or render impotent the monopoly power found to be in violation of the Act,' that is, it must leave the defendant without the ability to resume the actions which constituted the antitrust violation in the first place." American Tel. & Tel., 552 F. Supp. at 150 (quoting United States v. Grinnell Corp., 384 U.S. 563, 577 (1966)). "It must also effectively foreclose the possibility that antitrust violations will occur or recur." Id. As the Supreme Court noted in International Salt Co., 332 U.S. at 400:
Additionally, "antitrust violations should be remedied `with as little injury as possible to the interest of the general public' and to relevant private interests." Id. (quoting United States v. American Tobacco Co., 221 U.S. 106, 185 (1911)).
4. While the Department of Justice urges the Court to adopt a much more lax review, even the government acknowledges that the Court's "review of the decree is informed not merely by the allegations contained in the Complaint, but also by the extensive factual and legal record resulting from the district and appellate court proceedings." (See Competitive Impact Statement ("CIS") at 68 (November 15, 2001).)
5. It was precisely the lack of a judicial finding of liability that caused Chief Justice Rehnquist to question the constitutionality of the Tunney Act. See Maryland v. United States, 460 U.S. 1001, 1004 (1982) (Rehnquist, J., dissenting). This argument does not apply in the present case where there has been both a judicial finding of liability (at trial and affirmed on appeal), and there is a standard for review established by an appellate court.
6. Indeed, Microsoft has actually seen its share of the browser market grow since being found liable for illegal monopoly maintenance. For example, Microsoft's share of the work browser market increased from 69.3 percent in April 2000 (when Judge Jackson issued his finding of liability) to 79.5 percent in November 2001. Over the same period, Microsoft's share of the home browser market increased from 75.7 percent to 81.8 percent. See Browser Trended Reach Report, Jupiter Media Metrix, January 2002.
7. If the Court finds that the submissions made to date are inadequate to assess this question, it can, of course, under the Tunney Act, take whatever testimony or evidence is needed to make such a determination. See 15 U.S.C. ï½§ 16(f); Section V.B, infra.
8. Some examples of PFJ provisions Microsoft has ostensibly been complying with since December 16, 2001, include: Section III.A (anti-retaliation); Section III.B (uniform licensing); Section III.C (OEM licenses); Section III.G (anticompetitive agreements); and Section III.I (licensing of intellectual property).
9. Although Compaq and RealNetworks reached an agreement in December 2001, whereby Compaq would place Real's player on its personal computers, see RealNetworks Sets Deal With Compaq, The Los Angeles Times, December 13, 2001, it is unclear, among other things, what the terms of the agreement are, what impact it will have on competition and consumer choice, and whether the agreement was motivated, in whole or in part, by the purported "flexibility" of the proposed settlement. While the Court should certainly give the Compaq agreement some consideration in its public interest review, the agreement's mere existence is probative of nothing more than the compelling need for a hearing so the Court can explore how, if at all, the PFJ is already affecting the marketplace.
10. See Jeff O'Heir, Analysis: MS & DOJ Reach Agreement, P.C. Dealer, November 12, 2001 (quoting Roland Pinto); see also Randy Barrett, MS-DOJ Pact Disappoints, Interactive Week, Nov. 8, 2001 (quoting Roger Frizzell, Compaq Spokesman, "Basically, we don't feel there's a big difference between where we're standing today and where we were last week."); Id. (quoting Mike Griffin, "We don't anticipate any changes at all.").
11. See GM Plans White-Collar Cuts, Financial Briefs, The Washington Post, January 9, 2002, at E02.
12. Given that the length of the PFJ is only 60 months, see Section V.A of the PFJ, an assessment of the effectiveness of a provision after eight months would be highly significant.
13. We use the interim conduct remedies as a point of reference - notwithstanding the fact that they were vacated on appeal - because the Department of Justice stated publicly that it would "seek an order that is modeled after the interim conduct-related provisions of the Final Judgment previously ordered in the case." See Press Release, Department of Justice, Justice Department Informs Microsoft of Plans for Further Proceedings in the District Court, September 6, 2001; see also, John Hendren, New Judge Puts Heat on Feds, Microsoft,' Quick Settlement Urged to Aid Ailing Economy, The Seattle Times, September 29, 2001 ("Government lawyers have said they intended to model their proposed remedy on an interim conduct order by the previous district judge who oversaw the case, Judge Thomas Penfield Jackson.").
14. A draft of the mediation proposal, Mediator's Draft #18 (April 5, 2000) (referred to herein as the "Posner Proposal"), is available at www.ccianet.org/legal/ms/draft18.php3. At the time, several news reports indicated that Microsoft had agreed to the provisions in the Posner Proposal. See, e.g., Joe Wilcox, Hard to Gauge Extent, Effectiveness of Microsoft Concessions, CNET News.com, March 30, 2000 (the "software giant has tentatively agreed to sweeping restrictions on how it does business with its partners").
15. See Testimony of Assistant Attorney General Charles James, Senate Judiciary Committee (December 12, 2001); see also Q&A: Charles James Defends The Deal, Business Week, Nov. 19, 2001 ("People who suggest that [the decree should have ordered Microsoft to sell a stripped-down version of Windows] are not recognizing that the tying claim was eliminated from the case by the appeals court.").
16. See Microsoft, 253 F.3d at 46; 15 U.S.C. ï½§ 16(e) (in a Tunney Act proceeding, the court is authorized to consider whether the proposed settlement results in the "termination of alleged violations"); see also Grinnell Corp., 384 U.S. at 577 (a decree must "break up or render impotent the monopoly power found to be in violation of the Act").
17. See Microsoft, 253 F.3d at 51, 103.
18. In its Conclusions of Law, the District Court broadly condemned Microsoft's decision to bind "Internet Explorer to Windows with ... technological shackles." United States v. Microsoft, 87 F. Supp. 2d at 30, 39 (D.D.C. 2000) ("Conclusions of Law"). Specifically, the District Court denounced Microsoft's decision to bind Internet Explorer to the Windows OS "by placing code specific to Web browsing in the same files as code that provided operating system functions." United States v. Microsoft, 84 F. Supp. 2d at 50, 161 (D.D.C. 1999) ("Findings of Fact").
19. The danger of according Microsoft this power is exacerbated - and reinforced - by the PFJ's definition of the Windows Operating System Product ("Definition U"), which states that the software code that comprises the Windows Operating System Product "shall be determined by Microsoft in its sole discretion." Thus, Microsoft can, over time, render all the protections for middleware meaningless, by binding and commingling code, and redefining the OS to include the bound/commingled applications.
20. See, e.g., Findings of Fact, 84 F. Supp. 2d at 49-50, ï½¶ 159 ("Microsoft knows that the inability to remove Internet Explorer made OEMs less disposed to pre-install Navigator .... Pre-installing more than one product in a given category ... can significantly increase an OEM's support costs, for the redundancy can lead to confusion among novice users. In addition, pre-installing a second product in a given software category can increase an OEM's product testing costs. Finally, many OEMs see pre-installing a second application in a given software category as a questionable use of the scarce and valuable space on a PC's hard drive.").
21. For example, a developer that creates music search software is far more likely to develop a program that runs on Windows Media Player than RealPlayer, knowing that the new program would interoperate more readily with the OS if it runs on Microsoft's program and would have fewer glitches.
22. See Posner Proposal ï½§ 3(9) (Microsoft is enjoined from "tying or combining any middleware product to or with a Windows operating system unless Microsoft offers a version of that operating system without such middleware product at a reduced price that reasonably reflects the relative costs of the operating system and the excluded middleware.").
23. See United States v. Microsoft, 97 F. Supp. 2d 59, 68 (D.D.C. 2000) ("Microsoft shall not, in any Operating System Product distributed six or more months after the effective date of this Final Judgment, Bind any Middleware Product to a Windows Operating System .... ").
24. The Litigating States' Remedial Proposal would prevent Microsoft from unlawfully reducing the competitive threat from non-Microsoft middleware products by commingling middleware and operating system code. The Litigating States' Remedial Proposal would prohibit the practice of commingling altogether or, alternatively, require Microsoft to offer, upon written request from OEMs or other third party licensees, its operating system on an unbundled basis:
(See Proposed Text ï½¶ 1 (hereinafter "States' Proposed Text"), attached as Exhibit A to Litigating States' Remedial Proposal (December 7, 2001).)
25. Note that Microsoft's options for exploiting technological means to advance its tying ends are not limited to code commingling. Code commingling, of course, is an extreme version of such tying, in that it prevents OEMs and consumers from removing applications without threatening the integrity of the OS. Other examples discussed during trial include deliberately harming the interoperability of Netscape's Navigator browser, see, e.g., Findings of Fact, 84 F. Supp. 2d at 31, ï½¶ 84 (finding that Microsoft executives explicitly offered preferred access to APIs to Netscape as an inducement to them to not expose their own APIs); id. at 33, ï½¶ï½¶ 90-91 (finding that when Netscape refused this offer, Microsoft withheld necessary Windows APIs from Netscape, delaying Netscape's Windows 95 browser launch until after the holiday selling season); id. at 50, ï½¶ 160 ("We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience."); and working aggressively to degrade the performance and desirability of Sun's Java software, id. at 109-110, ï½¶ï½¶ 404-406 (finding that Microsoft harmed development of Java class libraries and cross-platform Java interfaces).
26. See Findings of Fact, 84 F. Supp. 2d at 19-22, ï½¶ï½¶ 36-44.
27. See Microsoft, 253 F.3d at 59-60 (citing District Court's finding that "Microsoft's imposition of [licensing] provisions (like many of Microsoft's other actions at issue in this case) serves to reduce usage share of Netscape's browser and, hence, protect Microsoft's operating system monopoly").
28. This fear is not theoretical: the District Court found that Microsoft made just such a threat to Apple, with regard to Microsoft Office. See Findings of Fact, 84 F. Supp. 2d at 95-97, ï½¶ï½¶ 345-356.
29. The District Court's Findings of Fact, 84 F. Supp. 2d at 25, ï½¶ 57, maintain that the Windows leasing agreement prohibits the user from transferring the OS to another machine so that "there is no legal secondary market in Microsoft operating systems." The Findings of Fact then note at ï½¶ 58 that there is a thriving illegal market. To limit this, Microsoft charges a higher price for Windows to OEMs that do not limit the number of PCs they sell without the OS pre-installed. One might argue that the durable-goods monopoly problem is eliminated by Microsoft's refusal to allow OEMs to install (without penalty) old versions of Windows. As explained in the attached Mathewson & Winter Report, this is incorrect for two reasons: "(i) increases in the price of the new version of Windows will reduce overall demand for new PCs, as users invoke the option to keep existing PCs with the old version, and (ii) there is a retail market for new versions of Windows software for installation on existing PCs. Both (i) and (ii) provide channels through which the existing stock of Windows software provides some competition for a new version of Windows (i.e., it increases the elasticity of demand for the new version). If the price of a new version is increased, the demand for the new version is reduced because fewer consumers will purchase new PCs as the price increase for Windows raises the price of the overall package of the PC and the (mandated by Microsoft) new version of Windows, and because some consumers who would have purchased Windows to install on their old PCs will now refuse to do so." (See Mathewson & Winter Report at 12 n. 10.)
30. See Jeremy Bulow, "Durable-Goods Monopolists," Journal of Political Economy 90(2): 314-332 (explaining how leasing, rather than selling, solves the monopolists' "problem" of competition from previously existing stocks of goods); id. at 330 (a durable-goods monopolist may be able to achieve the leasing result through extending its monopoly to service contracts).
31. This same theory applies to Microsoft's identity-authentication application, known as "Passport." If Microsoft can leverage its OS monopoly to make Passport ubiquitous, it can persuade e-commerce sites to adopt Passport as the sole identity-authentication standard. If that were to happen, a nascent OS competitor would not only have to develop its own identity-authentication application; it would also have to persuade thousands of e-commerce sites to adopt that application for use on their web sites. Thus, Microsoft's tying of Passport to the Windows OS could potentially create yet another barrier to entry in the OS market.
32. We have argued elsewhere that there could be alternatives to a ban on contractual tying that might, over time, also prove effective. For example, if a remedial plan included a strong provision to permit licensing of Windows, not just to OEMs, but to third parties as well, and such a regime became effective - so that there was active and effective retail competition for bundled OS/applications offerings - then the necessity for banning Microsoft's contractual tying would be somewhat lessened. In such an instance, Microsoft's potential for abusive tying could be disciplined by competition from competing bundles. However, absent such competition - which the PFJ does not create - a ban on contractual tying is absolutely essential to achieve the remedial objectives of this case - and thus, the PFJ's failure to include such a provision is fatal.
33. Less explicitly, but perhaps even more nefariously, the same provision that authorizes continuation of "market development allowances" (i.e., III.B.3) says that Microsoft may also maintain "programs ... in connection with Windows [OS] products." This appears to be a carefully veiled reference to Microsoft's use of "Marketing Development Funds" - highly discretionary, highly targeted payments to OEMs that can be yet another means of effectively rendering the list price of Windows economically irrelevant. While the PFJ ostensibly says that these "programs" must have "objective criteria," "neutral" criteria can be easily formulated that have the effect of rewarding favored players and punishing less cooperative OEMs, given the small number of major OEMs in existence.
34. (See States' Proposed Text ï½¶ 2(a) ("Microsoft shall license, to Covered OEMs and Third-Party Licensees, Windows Operating System Products .... pursuant to uniform license agreements with uniform terms and conditions. Microsoft shall not employ Market Development Allowances or other discounts, including special discounts based on involvement or any joint development process... ").)
35. (See States' Proposed Text ï½¶ 2(c) ("Microsoft shall not restrict (by contract or otherwise, including but not limited to granting or withholding consideration) an OEM or Third-Party Licensee from modifying the BIOS, boot sequence, startup folder, smart folder (e.g., MyMusic or MyPhotos), links, internet connection wizard, desktop, preferences, favorites, start page, first screen, or other aspect of any Middleware in that product.").)
36. See Brad King, Microsoft Poised for Music Domination, Wired, June 14, 2001.
37. As Nathan Myrhvold, Microsoft's former chief technology officer, put it, Microsoft's strategy is to "get a `vig,' or `vigorish,' on every transaction over the Internet that uses Microsoft's technology." David Bank, Microsoft Moves To Rule On-Line Sales, The Wall Street Journal, June 5, 1997, at B1. The term refers to a gambling house's "cut" on all bets placed in the establishment.
38. For example, the PFJ does not appear to foreclose a Microsoft strategy whereby OEMs would be told that senior Microsoft executives and spokespeople will opine that the product of OEM X works better than the product of OEM Y, if OEM Y refuses to install only Microsoft applications.
39. John R. Wilke and Don Clark, Microsoft Pulls Back Its Support for Java: New Windows XP System Won't Include Software Needed to Run Programs, The Wall Street Journal, July 18, 2001.
40. (See States' Proposed Text ¶ 22(w).)
41. See also Microsoft, 253 F.3d at 59 (referring to browsers as exemplary of "any middleware product, for that matter"); id. at 74 (Java is a set of technologies that "is another type of middleware posing a potential threat to Windows' position as the ubiquitous platform for software development").
42. The PFJ does contain a generic middleware definition, see Section VI.K.2, but this applies only to new products, and therefore does not capture any product now in existence.
43. See Rebecca Buckman, Microsoft Says Its Future Lies in Subscriptions, The Wall Street Journal, May 31, 2001.
44. Similar to the case at hand, Judge Greene in AT&T had a well-developed factual record on which to base his public interest determination. In AT&T, the parties reached their settlement following a period of discovery, pretrial motions, and an eleven-month trial. Shortly before the evidence phase was to end, the Department of Justice and the defendant agreed upon, and submitted to the court, a proposed final judgment. Here, of course, the proposed consent decree was reached after a full trial on the merits, as well as an affirmance by the Court of Appeals, upholding the District Court's findings of liability against Microsoft.
45. The court also acknowledged that if approved, the proposed decree "would have significant consequences for an unusually large number of ratepayers, shareholders, bondholders, creditors, employees and competitors," and would affect "a vast and crucial sector of the economy." Id. at 152.
46. The Senate sponsor of the Tunney Act, Senator Tunney, specifically cited a case's complexity as a factor militating in favor of conducting a hearing on the adequacy of a decree. See 119 Cong. Rec. S3453 (daily ed. February 6, 1973) (statement of Sen. Tunney).
47. The Court is authorized to appoint a Special Master to conduct inquiries as part of this Tunney Act proceeding. See 15 U.S.C. § 16(0(2). Making a determination as to why OEMs have failed to use their "new found freedoms" - and whether they are likely to do so in the future - would seem to be a task well suited to a Special Master.
48. While Congress made clear, in enacting the Tunney Act, that such hearings were to be the exception, and not the rule, see 1974 U.S.C.C.A.N. 6535, 6539 (quoting S. Rep. 93-298, at 7 (1973)), this may well be one of those cases where an evidentiary inquiry is called for.
49. This is not to say that the PFJ should be rejected merely because it is not identical to the remedy that the Court might impose in the remedial proceeding. See supra note 2. Conversely, acceptance of the PFJ would not preclude the Court from imposing a different remedy in the proceeding being pressed by the litigating states.
50. Although the circumstances in which the AT&T court considered the subcommittee's report are different from those here, the Tunney Act clearly allows this Court to rely on evidence from a variety of sources. The legislative history of the Act makes clear that Congress did not intend to limit the techniques a court could use to make its public interest determination. See 1974 U.S.C.C.A.N. 6535, 6539 (quoting S. Rep. No. 93-298, at 6 (1973)) ("Section 2(f) sets forth some techniques which the court may utilize in its discretion in making its public interest determination. It is not the intent of the Committee to in any way limit the court to the techniques enumerated."). Indeed, Congress anticipated that by giving trial courts wide discretion to collect evidence and conduct procedures in the way they saw fit, courts would be able to adduce the necessary information in the least complicated and most efficient manner possible. See id. ("The Committee recognizes that the court must have broad discretion to accommodate a balancing of interests... It is anticipated that the trial judge will adduce the necessary information through the least complicated and least time-consuming means possible.").
51. As we note above, the OEMs appear understandably reluctant to testify in the remedial proceeding. This is all the more reason to use a Special Master (or other procedural device) to ascertain confidentially their views of the PFJ's provisions and the likely effectiveness of those provisions. See supra note 47 and accompanying text.
TABLE OF CONTENTS
ATTACHMENT A FOOTNOTES
1. Mathewson is a Professor of Economics and Director of the Institute for Policy Analysis at the University of Toronto and Winter is a Professor of Economics and Finance at the University of Toronto. Both are Senior Consultants to Charles River Associates. Our curriculum vitae are attached as appendices to this report.
2. Middleware and operating systems, i.e., any software which exposes APIs so that higher level applications run on top of the software, are together referred to as platform software.
3. See U.S. v. Microsoft, 84 F. Supp. 2d 9 (D.D.C. 1999) ("U.S. Findings of Fact"), ¶¶ 36-44.
4. In the economics literature, modem theories of anti-competitive exclusion, including tying as exclusionary, are linked by the theme that exclusionary contracts have an impact on individuals outside an individual buyer-seller contract. See Dennis Carlton and Michael Waldman (2001) "The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries," unpublished working paper; Eric Rasmussen et al., (1991) "Naked Exclusion," American Economic Review 81(5): 1137-1145; Michael Whinston (1990) "Tying, Foreclosure, and Exclusion," American Economic Review 80(4): 837-859; and Philippe Aghion and Patrick Boulton (1987) "Contracts as a Barrier to Entry," American Economic Review 77(3): 388-401.
5. "Microsoft's Java virtual machine ... allowed for all programs written for the original ("pure") Java to be run on it. Thus it preserved backward compatibility with the original Java that ran on all operating systems. Because of that, Microsoft's actions were not anti-competitive." Nicholas Economides, "The Microsoft Antitrust Case," Journal of Industry, Competition and Trade: From Theory to Policy, March 2001, p. 20 of working paper version.
6. In a 1995 memo to his "Executive Staff and direct reports," Microsoft CEO Bill Gates stated that Netscape was "pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system." (5/26/95 "The Internet Tidal Wave," PI. Ex.20, p. MS98 0112876.3.)
7. This idea is developed formally in J.P. Choi and C. Stefandis (2001), "Tying, Investment and the Dynamic Leverage Theory," The RAND Journal of Economics 32(1): 52-74.
8. See U.S. Findings of Fact ¶¶ 33-35, 60-64.
9. Network effects or network economies refer to the positive value that any single user derives from the number of other users adopting the same operating system. See U.S. Findings of Fact ¶¶ 39-42 and ¶¶ 65-66 for application to Microsoft. For a general description of networks and positive feedback, see Carl Shapiro and Hal Varian (1999) Information Rules Boston: Harvard Business School Press, pp. 173-225.
10. The District Court's Findings of Fact maintain that the Windows leasing agreement prohibits the user from transferring the OS to another machine so that "there is no legal secondary market in Microsoft operating systems" (¶57). The Findings of Fact then note (¶58) that there is a thriving illegal market. To limit this, Microsoft advises OEMs that Microsoft will charge a higher price for Windows to OEMs that do not limit the number of PCs they sell without the OS pre-installed. One might argue that the durable goods monopoly problem is eliminated by Microsoft's refusal to allow OEMs to install (without penalty) old versions of Windows. This is incorrect for two reasons: (i) increases in the price of the new version of Windows will reduce overall demand for new PCs, as users invoke the option to keep existing PCs with the old version, and (ii) there is a retail market for new versions of Windows software for installation on existing PCs. Both (i) and (ii) provide channels through which the existing stock of Windows software provides some competition for a new version of Windows (i.e., it increases the elasticity of demand for the new version). If the price of a new version is increased, the demand for the new version is reduced because fewer consumers will purchase new PCs as the price increase for Windows raises the price of the overall package of the PC and the (mandated by Microsoft) new version of Windows, and because some consumers who would have purchased Windows to install on their old PCs will now refuse to do so.
11. See Jeremy Bulow "Durable-Goods Monopolists," Journal of Political Economy 90(2): 314-332 or Jean Tirole (1988) The Theory of Industrial Organization, Cambridge: MIT Press, p. 81.
12. See Jeremy Bulow (1982:330) who suggests that a durable-goods monopolist may be able to achieve the leasing result through extending its monopoly to service contracts; these are analogous in principle to the application restrictions in the matter at hand.
13. The term "vig" or "vigorish," a term used by Microsoft, refers to a gambling house's "cut" on all bets placed in the establishment. See Allen Myerson, Rating The Bigshots: Gates vs. Rockefeller, The New York Times, May 24, 1998, at 4 ("The Gates crowd speaks... of collecting a `vigorish' or 'vig'.... Now Microsoft wants to collect a vig on Internet access too.").
14. See U.S. Findings of Fact ¶¶ 68-72.
15. Note that licensing at a monopoly royalty would have a similar effect of foreclosing competition.
16. Microsoft's action with respect to inducing media content providers to code exclusively with Microsoft's proprietary formatting (in Windows Media Audio) is analogous to Microsoft's attempt in the browser market to induce Internet content and services providers to optimize their content for its Internet Explorer software instead of the competing browser of Netscape. See U.S. Findings of Fact ¶¶ 311,328, and 337.
17. Microsoft has already established general strategies for obtaining control over e-commerce standards. These connections are the Microsoft Passport, .Net, and .Net My Services initiatives.
18. Of course, that monopolist competition will only occur if the first monopolist is not permitted to use anticompetitive tactics to foreclose the market for unintegrated rivals.
19. See U.S. Findings of Fact ¶ 93.
20. Microsoft has a track record of placing code for Microsoft applications in the same files as code providing functions for its OS in order to achieve its anti-competitive ends. This includes the illegal commingling of code for Microsoft's Internet Explorer with the operating code and the tying of IE with the OS. See U.S. Findings of Fact ¶¶ 161-229.
21. See U.S. Findings of Fact ¶ 357, relating to Microsoft's attempts through tying and other means to induce users to select Microsoft's Internet Explorer as the preferred, perhaps only, path to the web. It is possible for consumers to incur the cost to change defaults, but the incentives to do this are very small.
22. See Steven Vaughan Nichols, Resisting the Windows XP Message, ZDNet, May 9, 2001 ("I can't help but wonder if... independent software vendors will have trouble getting that all-important signature for [their] programs .... [W]hy do I feel certain that giving Microsoft absolute power over all XP apps probably doesn't spell good news for anyone in the tech business - except Microsoft?").
23. See U.S. Findings of Fact ¶ 112.
24. "In June ... seven appeals judges ruled unanimously that Microsoft was a monopoly that had violated the antitrust laws by integrating its Web browser into its Windows operating system in an effort to freeze out other browsers. [The Court of Appeals ruled that] Microsoft shouldn't be allowed to design Windows in a way that limits consumer choice - the ability of users to discover and easily use other companies' products and services. [Despite this,] the company went on to launch a new version of Windows - Windows XP - that continued to integrate tightly into the operating system new features that are crucial to extending Microsoft's monopoly onto the next battleground: Internet-based services. And it added these features in a way that hinders consumer choice." Walter S. Mossberg, For Microsoft, 2001 Was a Good Year, But At Consumers' Expense, The Wall Street Journal, December 27, 2001.
25. See U.S. Findings of Fact ¶ 160.
26. See Ted Bridis, Technology Industry Aims to Render MP3 Obsolete, The Wall Street Journal, Apr. 12, 2001, at A3. ("Under Microsoft's new restrictions ... MP3 music 'sounds like somebody in a phone booth underwater,' says P.J. McNealy, an analyst who researches Internet audio issues for Gartner Inc .... early testers of beta versions of Windows XP already complain that the most popular MP3 recording applications - which compete with Microsoft's format - don't seem to function properly, apparently because of changes Microsoft made to how data are written on CD-ROMs under Windows XP. Microsoft says that while other software vendors' products may not be `optimized' to run with Windows XP, those products should run acceptably with the operating system.").
27. This is similar to the screening function that upscale department stores provide in selecting high-quality products. Intermediaries in retail markets invest in establishing brand names or trust on the part of consumers.
28. See U.S. Findings of Fact ¶¶ 33 - 35, 53, 60, and 62-64.
Ph.D. Stanford University
B.Com. University of Toronto
HONORS AND FELLOWSHIPS
"The Analysis of Efficiencies in Superior Propane: Correct Criterion Incorrectly Applied." With Ralph Winter. Canadian Competition Record, Fall 2000, 20(2): 88-97.
"Professional Corporations and Limited Liability." With Michael Smart, in Peter Newman (ed.) Palgrave Dictionary in Economics and the Law, 140-143 London: MacMillan Reference Limited, 1999.
"Law Firms." With Jack Carr, in Peter Newman (ed.) Palgrave Dictionary in Economics and the Law, 497-500, London: MacMillan Reference Limited, 1998
"Canadian Bank Mergers: Efficiency and Consumer Gain versus Market Power" With Neil Quigley CD Howe Institute, Occasional Paper, No. 108, June 1998.
"To Merge or not to Merge: Is that the Question?" With Neil Quigely. CD Howe Institute. Occasional Paper, No. 108, 1998.
"The Law and Economics of Resale Price Maintenance." With Ralph Winter. Review of Industrial Organization, 13:1-2, 57-84, April 1998.
"What's Essential, What's Prudential, What Can Competition Provide?" With Neil Quigley. Canadian Competition Record 18:2, 11-28, 1997.
"Reforming the Bank Act: Regulation, Public Policy, and the Market" With Neil Quigley. Canadian Business Law Journal 29:1, 1-16, 1997.
"Ensuring Competition: Bank Distribution of Insurance Products: Prospects and Implications for Canada." With Ignatious Horstmann and Neil Quigley. Toronto: CD Howe Institute, 1996.
"Buyer Groups and Exclusivity: Towards a Theory of Managed Competition." With Ralph Winter. International Journal of Industrial Organization 15:2, 137-164, 1997. (Presented at the EARIE Conference, Tel Aviv, Israel, 1993.)
"Tying As a Response to Demand Uncertainty." With Ralph Winter. The RAND Journal of Economics 28:3, 566-583, 1997. (Presented at the EARIE Conference, Lisbon, Portugal, 1990.)
"Stability in the Absence of Deposit Insurance: The Canadian Banking System 1890-1966." With Jack Carr and Neil Quigley. Journal of Money, Credit and Banking 27:4, 1137-1158, 1995.
"Ensuring Failure." With Jack Carr and Neil Quigley. Toronto: CD Howe Institute, 1994.
"Territorial Rights in Franchise Contracts." With Ralph Winter. Economic Inquiry 32:2, 181-192, 1994. (Presented at the EARIE Conference, Budapest, Hungary, 1989.)
"Reply to R. Gilson." With Jack Carr. Journal of Political Economy 99:2, 426- 428, 1991.
"The Economics of Law Firms: A Study in the Legal Organization of the Firm." With Jack Carr. Journal of Law and Economics 33:2, 307-330, 1990.
"The Economic Effects of Automobile Dealer Regulation." With Ralph Winter. Annales d'Economie et de Statistique 15/16, 409- 426, Juillet-Decembre 1989.
"Unlimited Liability and Free Banking in Scotland: A Note." With Jack Cart and S. Glied. Journal of Economic History 49:4, 974-978, 1989.
"Vertical Restraints and the Law: A Reply." With Ralph Winter. RAND Journal of Economics, 19:2, 298-301, Summer 1988.
"Unlimited Liability as a Barrier to Entry." With Jack Carr. Journal of Political Economy 96:4, 766-784, August 1988.
"Is Exclusive Dealing Anti-Competitive?" With Ralph Winter. American Economic Review 77:5, 1057-1062, December 1987.
"Advertising and Consumer Learning." With Y. Kotowitz in FTC Conference Volume, Consumer Protection Economics, 1986. (Paper presented at the FTC Conference on Advertising, Washington, 1984.)
"Competition Policy and Vertical Exchange." With Ralph Winter. Royal Commission on the Economic Union and Development Prospects for Canada, University of Toronto Press, 1985.
"The Economics of Franchise Contracts." With Ralph Winter. Journal of Law and Economics 3, 503-526, October 1985. (Paper presented at the EARIE Conference, Fontainebleau, 1984.)
"The Economics of Life Insurance Regulation: Valuation Constraints." With Ralph Winter in J. Finsinger and M. Pauly (eds.), The Economics of Insurance Regulation, MacMillan and Company Limited, 1986. (Paper presented at IIM Conference on Regulation in Insurance Markets, Berlin, 1984.)
"The Economics of Vertical Restraints in Distribution." With Ralph Winter in J. Stiglitz and G.F. Mathewson (eds.), New Developments in the Analysis of Market Structure, MIT Press, 1986.
"An Economic Theory of Vertical Restraints." With Ralph Winter. RAND Journal of Economics 15:1, 27-38, Spring 1984. (Reprinted in The Economics of Marketing, Cheltenham, UK: Edward Elgar Publishing Limited, 1998.)
"Information, Search and Price Variability of Individual Life Insurance Contracts." Journal of Industrial Economics 32:2, 131-148, December 1983. (Paper presented at the Canadian Economics Association Meetings, Montreal, 1980.)
"The Incentives for Resale Price Maintenance." With Ralph Winter. Economic Inquiry 21:3, 337-348, July 1983. (Paper presented at the Western Economic Association Meetings, San Francisco, 1981.)
"Vertical Integration by Contractual Restraints in Spatial Markets." With Ralph Winter. Journal of Business 56:4, 497-518, October 1983.
"Entry, Size Distribution, Scale, and Scope Economies in the Life Insurance Industry." With S. Kellner. Journal of Business 56:1, 25-44, January 1983.
"Regulation of Canadian Markets for Life Insurance." With Ralph Winter. Department of Consumer and Corporate Affairs, Government of Canada, 1983.
"The Rationale for Government Regulation of Quality" and "Policy Alternatives in Quality Regulation." With D. Dewees and M. Trebilcock. "Markets for Insurance: A Selective Survey of Economic Issues," in D. Dewees (ed.), The Regulation of Quality, Toronto: Butterworths, 1983.
"An Economic Theory of Union-Controlled Firms." With Y. Kotowitz. Economica 49:196, 421433, November 1982. (Paper presented at the Canadian Economics Association Meetings, Quebec City, 1978.)
"Advertising, Consumer Information and Product Quality." With Y. Kotowitz. Bell Journal of Economics 10:2, 566-588, Fall 1979. (Paper presented at the European Econometric Society Meetings, Geneva, 1978.)
"Informative Advertising and Welfare." With Y. Kotowitz. American Economic Review 69:3, 284-294, June 1979.
"Information, Entry and Regulation in Markets for Life Insurance." Ontario Economic Council Research Studies, University of Toronto Press, 1982.
"Some Issues on Public Advertising." With Y. Kotowitz. Journal of Contemporary Business 7:4, 123-124, 1979.
"Economics of Fiscal Transfer Pricing in Multinational Corporations." With G.D. Quirin. Ontario Economic Council Research Studies, University of Toronto Press, 1978.
"The Residential Demand for Electrical Energy and Natural Gas: A Model Estimated for Canada." With R. Hyndman and Y. Kotowitz in W.T. Ziemba et al. (eds.), Energy Policy Modelling: United States and Canadian Experiences, Martinus Nijhoff Press, 86-102, 1980. (Paper presented at the Canadian Energy Policy Modelling Conference, Vancouver, 1978.)
"Economies of Scale in Financial Institutions: Reply." With P. Halpern. Journal of Monetary Economics 3, 127-131, 1977.
"The Benefits and Costs of Rate of Return Regulation." With J. Callen and H. Mohring. American Economic Review 66:5,290-297, June 1976.
"Economies of Scale in Financial Institutions: A General Model Applied to Insurance." With P. Halpern. Journal of Monetary Economics 1:2, 203-220, April 1975.
"Price Effects of Market Power in the Canadian Newspaper Industry: Reply." Canadian Journal of Economics 7:1, 13 0-132, February 1974.
Cents and Nonsense.' The Economics of Canadian Policy Issues. With J. Carr and J. McManus. Holt, Rinehart, and Winston, 1972.
"Metering Costs and Marginal Cost Pricing in Public Utilities." With G.D. Quirin. Bell Journal of Economics 3:1,335-339, May 1972.
"A Note on the Price Effects of Market Power in the Canadian Newspaper Industry." Canadian_ Journal of Economics 5:2, 298-301, May 1972.
"A Consumer Theory of Demand for the Media." Journal of Business 45:2, 212-224, April 1972.
Ph.D. Economics, University of California at Berkeley
M.A. Statistics, University of California at Berkeley
B.Sc. Mathematics and Economics (with honors), University of British Columbia
HONORS AND FELLOWSHIPS
"Efficiency as a Goal of Competition Policy," in Canadian Competition Policy: Preparing for the Future, forthcoming, 2002.
"Efficiency Analysis in Superior Propane: Correct Criterion Incorrectly Applied," forthcoming, Canadian Competition Record, 2001, with G.F. Mathewson.
The Law and Economics of Canadian Competition Policy, forthcoming 2001, with M.J. Trebilcock, E. Iacobucci, and P. Collins, University of Toronto Press.
"Remarks on Recent Developments in Canadian Competition Policy," in Critical Issues in Mergers and Acquisitions, Queen's Annual Business Law Symposium, 2000, 59-67.
"The State of Efficiencies in Canadian Competition Policy," Canadian Competition Record, Winter 2000, pp. 106-114, with M.J. Trebilcock.
"Optimal Insurance under Moral Hazard," in Handbook of Insurance, G. Dionne, editor, Kluwer Academic Publishers, 2000. pp. 155-186.
"Substantial lessening of Competition in Canadian Competition Law", in Competition Law for the 21st Century, Canadian Bar Association 1998.
"Resale Price Maintenance and the Canadian Competition Act", Review of Industrial Organization, 1998.
"Colluding on Relative Prices", Rand Journal of Economics Vol. 28, No.2, (Summer 1997): 359372.
"Tying as a Response to Demand Uncertainty", Rand Journal of Economics Autumn 1997 (with Frank Mathewson).
"Exclusivity Restrictions and Intellectual Property" in Competition Policy and Intellectual Policy, Anderson and Gallini, eds. 1998 (with Patrick Rey).
"Buying Groups and Exclusivity: Towards a Theory of Managed Competition" (with GF Mathewson): International Journal of Industrial Organization, 1997.
"The Economics of Liability for Nuclear Accidents" (with M.J. Trebilcock), International Review of Law and Economics, 1997.
"Output Shares in Bilateral Agency Problems", with H. Neary, Journal of Economic Theory 1995.
"The Dynamics of Competitive Insurance Markets", Journal of Financial Intermediation (1994), 379-415.
"Territorial Restrictions in Franchise Contracts", with G.F. Mathewson, Economic Inquiry, 1994.
"Vertical Control and Price versus Non-Price Competition," Quarterly Journal of Economics, CVIII(1), February 1993: 61-78.
"Moral Hazard in Insurance Contracts", in G. Dionne, Ed., Insurance Economics, 1992.
"The Liability Insurance Market," Journal of Economics Perspectives, Summer 1991: 115-136.
"Solvency Regulation and the Insurance Cycle," Economic Inquiry, XXIX(3), July 1991: 458472.
"The Law and Economics of Vertical Restraints," in M. Trebilcock, ed., Competition Policy in Canada, Vancouver: The Fraser Institute, 1990. With G.F. Mathewson.
"The Economic Effects of Automobile Dealer Regulation," Annales d'Economie et de Statistique, 15/16, Juillet-Decembre 1989: 409-426. With G.F. Mathewson.
"Vertical Restraints and the Law: A Reply," Rand Journal of Economics, 19(2), Summer 1988: 298-301. With G.F. Mathewson.
"The Liability Crisis and the Dynamics of Competitive Insurance Markets," Yale Journal on Regulation, 1988: 455-500.
"Currency Options, Forward Markets and the Hedging of Foreign Exchange Risk," Journal of International Economics, 25, 1988: 291-302. With R. Ware.
"The Competitive Effects of Vertical Agreements: Comment," American Economic Review, 77(5), December 1987: 1057-1062. With G.F. Mathewson.
"The Role of Options in the Resolution of Agency Problems: Comment," Journal of Finance, December 1986:1157-1174. With R. Farmer.
"R&D with Observable Outcomes," Journal of Economic Theory, December 1986:1336-1351. With M. Peters.
"Public Pricing Under Imperfect Competition," International Journal of Industrial Organization, 4 (1), March 1986: 87-100. With R. Ware.
"The Economics of Life Insurance Regulation: Valuation Constraints," in J. Finsinger and M. Pauley (eds.), The Economics of Insurance Regulation, MacMillan and Company Limited, 1986. With G.F. Mathewson.
Review of Blair and Kaserman's" Law and Economics of Vertical Control", Journal of Economic Literature, 1986.
Competition Policy and the Economics of Vertical Exchange, book published by The Royal Commission on Canada's Economic Prospects, 1986, 167pp. (with G.F. Mathewson).
"The Economics of Franchise Contracts," Journal of Law and Economics, October 1985: 503526. With G.F. Mathewson.
"Licensing in the Theory of Innovation," Rand Journal of Economics, Summer 1985: 237-253. With N.T. Gallini.
"The Economics of Vertical Restraints on Distribution," in G.F. Mathewson and J.E. Stiglitz (eds.), New Developments in the Analysis of Market Structure, MIT Press, 1985. With G.F. Mathewson.
"An Economic Theory of Vertical Restraints," The Rand Journal of Economics, 1 (1), Spring 1984: 27-38. With G.F. Mathewson.
Regulation of Canadian Markets for Life Insurance, Consumer and Corporate Affairs, Ottawa, 1984. (With G.F. Mathewson, T. Gussman and C. Campbell).
"The Incentives for Resale Price Maintenance under Imperfect Information," Economic Inquiry, XXXI(3), June 1983: 337-348. With G.F. Mathewson.
"Market Equilibrium and the Resolution of Uncertainty," Canadian Journal of Economics, XVI(3), August 1983: 381-390. With M. Peters.
"Vertical Integration by Contractual Restraints in Spatial Markets," Journal of Business, 56(4), October 1983:497-519. With G.F. Mathewson.
"Vertical Control in Monopolistic Competition," International Journal of Industrial Organization, 1(3), 1983: 275-286. With N.T. Gallini.
"On the Choice of an Index for Disclosure in the Life Insurance Market: An Axiomatic Approach," Journal of Risk and Insurance, XLIX(4), December 1982:513-549.
"An Alternative Test of the Capital Asset Pricing Model: Comment", American Economic Review, Vol. 72, No. 5, December 1982:1194-96. (With S.M. Turnbull).
"Majority Voting and the Objective Function of the Firm under Uncertainty: Note," Bell Journal of Economics, 12(1), Spring 1981: 335-337.
"On the Rate Structure of the American Life Insurance Industry", Journal of Finance. Vol. 36, No. 1, March 1981: 81-97.
A DETAILED CRITIQUE OF THE
PROPOSED FINAL JUDGMENT IN
U.S. v. MICROSOFT
Ronald A. Klain
TABLE OF CONTENTS
This Court may approve the parties' Proposed Final Judgment ("PFJ"), but only if it first determines that the proposed decree is "in the public interest." In reviewing the PFJ, we acknowledge that there are some beneficial and important restrictions put on Microsoft's unlawful conduct. In too many instances, however, these restraints are inevitably swallowed up by broad exceptions and grants of power to Microsoft. The result is that the proposed settlement will do little, if anything, to eliminate Microsoft's illegal practices, prevent recurrence of those acts, and promote competition in the marketplace. The public interest requires more, and the Court should thus reject the proposed settlement.
The purpose of this document is to expose - on a point-by-point, provision-by-provision basis - the many loopholes, "trap doors," and other critical deficiencies in the PFJ. We present the issues in an order that tracks the proposed decree itself so that they may be easily followed. We also provide "real world" examples where helpful.
In general, the PFJ suffers from several global, overarching flaws. First, in critical places, the language used in the PFJ to define the protections for competition are not broad enough to cover behavior the Court of Appeals held to be unlawful. Rather, only specific rights are granted, only specific competitive products are protected, and only specific anticompetitive practices are banned. In many cases, the rights and limitations are further clawed-back through carefully crafted carve-outs that benefit Microsoft.
Second, the proposed decree relies too heavily on the personal computer ("PC") manufacturers (original equipment manufacturers or "OEMs") to implement design changes - particularly in the critical area of middleware - without sufficiently ensuring their independence from Microsoft's tight clasp. The PFJ also follows timelines that are too loose and too generous to a company with the engineering resources and product-update capabilities of Microsoft.
Third, in too many places, the constraints on Microsoft (once the exceptions are taken into account) devolve into a mandate that Microsoft act "reasonably." Aside from the obvious concern about Microsoft's willingness to do so given its track record, this formulation is problematic for other reasons. It does little more than restate existing antitrust law (such provisions cannot be said to be "remedial" if they, in essence, are merely directives to refrain from future illegal acts). And, in terms of enforcement, alleged violations of such "be reasonable" provisions can only be arrested through proceedings that will become, in essence, mini-retrials of U.S. v. Microsoft itself.
In sum, a consent decree that causes little or no change in the defendant's behavior cannot be found to advance the public interest, especially when the defendant's conduct has been found by both the district and appellate courts to be in violation of the law. As such, based on the numerous shortcomings outlined below, the Court should disapprove the PFJ.
C. OEM Licenses
D. API Disclosure
G. Anticompetitive Agreements
H. Desktop Customization
I. Licensing Provisions
J. "Security and Anti-Piracy" Exception to API Disclosure
A. Enforcement Authority
B. Technical Committee / D. Voluntary Dispute Resolution
A. Five-Year Limit
B. Two-Year Extension
K. Microsoft Middleware Product
N. Non-Microsoft Middleware Product
R. Timely Manner
U. Windows Operating System Product
The scope of Microsoft's disclosure obligations under the agreement are determined in large part by the meaning of "Windows Operating System Product." The definition of Windows Operating System Product leaves Microsoft free to determine in "its sole discretion" what software code comprises a "Windows Operating System Product." In other words, Microsoft's disclosure obligation is subject entirely to its discretion.
Added Definitions - Bind, Interoperate, Technical Information and Web-Based Service
1. Note that the number of "beta testers" will be much smaller than the number of "beta copies" of a product that is being prepared for release.