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MICROSOFT’S MONOPOLY POWER IN THE RELEVANT MARKETS
Microsoft’s Monopoly Power in the Operating Systems Market
58. Since the mid-1980s, Microsoft has dominated the operating system software
market. For example, in the United States, its market share at times has
exceeded 95 percent. Beginning in the late-1980s and continuing through the
present, Microsoft engaged in a series of predatory acts designed to, and
which did, eliminate competition and prevent entry in the
operating system market. Software companies offering superior operating systems
and/or lower prices, namely, Digital Research, Inc. ("Digital Research") and
International Business Machines ("IBM"), were not able to compete with
Microsoft because of Microsoft’s unlawful conduct. Microsoft has had no
significant competitor in the operating system market since Digital Research
and IBM were eliminated as meaningful competitors in 1994. In addition,
Microsoft has possessed a dominant and persistent share of the Iowa market for
Intel-compatible PC operating system software. During most of the Class
Period, Microsoft’s share of this market has been at least 95 percent
(extrapolating from Microsoft’s share of the United States market for
Intel-compatible PC operating system software).
59. Throughout the Class Period, Microsoft has had monopoly power in the
relevant market for operating systems. Findings of Fact of ¶ 33. Microsoft can
and has exercised this power by charging a price for its Intel-compatible PC
operating system software that is substantially above that which could be
charged in a competitive market, and it can and has done so for a significant
period of time without losing business to competitors.
Microsoft’s Monopoly Power in the Word Processing Applications Market
60. Microsoft has possessed a dominant, persistent and increasing share of the
Iowa market for Intel-compatible PC word processing applications software
through its Microsoft Word product, which is most often bundled in its Office
suite. By the mid-1990s, Microsoft’s share of that market in the United States
exceeded 90%. Microsoft’s market share in Iowa is similar, on information and
belief.
61. It would be prohibitively expensive for new Intel-compatible word
processing applications software to attract enough consumers to become a
viable alternative to a dominant incumbent in less than a few years.
62. Throughout the Class Period, Microsoft has had monopoly power in the
relevant market for word processing applications software. Microsoft can and
has exercised this power by charging a price for its Intel-compatible PC word
processing applications software that is substantially above that which could
be charged in a competitive market, and it can and has done so for a
significant period of time without losing business to competitors.
Microsoft’s Monopoly Power in the Spreadsheet Applications Market
63. Microsoft has possessed a ’. dominant, persistent and increasing share of
the Iowa market for Intel-compatible PC spreadsheet applications software
through its Microsoft Excel product, which is most often bundled in its Office
suite. By the mid-1990s, Microsoft’s share of that market in the United States
exceeded 90%. Microsoft’s market share in Iowa is similar, on information and
belief.
64. It would be prohibitively expensive for new Intel-compatible spreadsheet
applications software to attract enough consumers to become a viable
alternative to a dominant incumbent in less than a few years.
65. Throughout the Class Period, Microsoft has had monopoly power in the
relevant market for spreadsheet applications software. Microsoft can and has
exercised this power by charging a price for its Intel-compatible PC
spreadsheet applications software that is substantially above that which could
be charged in a competitive market, and it can and has done so for a
significant period of time without losing business to competitors.
SOFTWARE DISTRIBUTION SYSTEM
66. Microsoft considers its software to be its exclusive intellectual property.
Consequently, as stated by Microsoft, it "does not technically ’sell’ the
software to anyone." Rather, it "licenses the software for specified purposes
only." Affidavit of Robert Vellone, dated
March 24, 2000, filed in Precision Billing Services, Inc. v. Microsoft Corp.,
No. 99-896-GPM (S.D. I11.), ¶ 6. With regard to operating system software,
Microsoft grants licenses to OEMs that permit them to pre-install it on PCs
sold to end-users, while Microsoft grants different licenses to end-users that
permit them to use the software on the PCs they purchase. The terms of
Microsoft’s written licenses are dictated and drafted solely by Microsoft.
67. Microsoft distributes its software licenses in the United States and
worldwide through multiple channels. Early on, Microsoft recognized the OEMs,
such as Dell and Compaq, as the single, most important channel for
distribution of operating system and applications software licenses. Microsoft
intentionally used its monopoly power in the operating system market to
capture, dominate, and exclusively control the OEM distribution channel to the
exclusion of ISVs. As a result, Microsoft’s captive OEM channel functions as
Microsoft’s distributor for the large majority of all Microsoft operating
system licenses with end-users of PCs. The remainder of Microsoft’s software
licenses are offered to end-users through retailers, such as CompUSA and
Staples, other distributors and resellers, and Microsoft itself.
68. Microsoft has used its monopoly in the operating system market to dictate
the terms and conditions trader which OEMs are engaged, on Microsoft’s behalf
and as Microsoft’s agent, to communicate Microsoft’s offers of end-user
licenses to purchasers of PCs. OEMs have no choice but to accede to
Microsoft’s demands. Because of Microsoft’s monopoly, both the OEMs and
Microsoft believe that there does not exist a single, commercially viable
alternative to the pre-installation of Microsoft operating systems on PCs
manufactured and sold by OEMs. Conclusions of Law, 87 F. Supp. 2d a 37.
Because OEMs have no other viable choice, Microsoft effectively forced OEMs to
preinstall Microsoft operating systems on their PCs and to jointly act with
Microsoft to offer end-user licenses for acceptance or rejection by customers
under terms strictly and exclusively dictated by Microsoft. As an example of
Microsoft's domination and control of the OEM distribution channel, Microsoft
strictly limits the freedom of OEMs to add to, delete from, or modify the
operating system, its start-up sequence, or the content and appearance of the
Windows desktop.
69. End-users can acquire Microsoft software licenses from the company by
calling a 1-800 telephone number or accessing Microsoft’s Interet Web site
at "shop.microsoft.com."
70. End-users were the targets and foreseeable victims of Microsoft’s
anti-competitive conduct alleged herein ad have paid artificially-inflated
prices for Microsoft’s software licenses. Microsoft requires endusers who
obtain Microsoft software pre-installed on a personal computer to enter into
an end-user license agreement with Microsoft. Microsoft dictates the terms of
agreements under which distributors and retailers are engaged, on Microsoft’s
behalf and as Microsoft’s agent, to communicate Microsoft's offers of end-user
licenses. These agreements provide, among other things, for a refund to be
paid to the end-user of the cost of the operating system or applications
software, as the case may be, if the end-user declines to enter into
Microsoft’s required license. The license also provides significant
restrictions on the use of the software by the licensee and grants Microsoft:
certain fights and remedies against the licensee for breach of the license
agreement.
71. Contrary to software industry practice and what had been Microsoft’s
practices prior to the Class Period, end-users who purchased new PCs through
the OEM distribution channel during the Class Period were anti-competitively
(a) prevented by Microsoft from effectively returning the Microsoft operating
system for a refund (notwithstanding the terms of Microsoft’s end-user
license), (b) prohibit by Microsoft from installing on their new PCs the
Windows operating system on their existing PC, and (c) prohibited by Microsoft
from re-selling
on a stand-alone basis the Windows operating system products which they
purchased with their new PCs.
GOVERNMENT ACTIONS AGAINST MICROSOFT
72. In the early 1990’s, the United States Department of Justice ("DOJ")
investigated (and subsequently brought a complaint concerning) Microsoft’s
illegal and anti-competitive practices in the operating system market in
United States v. Microsoft, Civ. No. 94-1564 (D. D.C., Petition filed July 15,
1994) ("Microsoft I"). The anti-competitive practices complained of in
Microsoft I included Microsoft’s requirement that OEMs enter into "per
processor" license agreements which required OEMs to pay operating systems
royalties to Microsoft on every machine the OEMs shipped regardless of whether
the machine contained MS-DOS, another operating system from a competing
developer (such as Digital Research’s DR-DOS), or no operating system at all.
Thus, the OEMS could only use a competing operating system if they were
willing to pay twice--once to Microsoft and once to Microsoft’s competitor.
The DOJ complaint also challenged other anticompetitive provisions in
Microsoft’s OEM licenses.
73. The United States District Court for the District of Columbia entered a
final judgment in Microsoft I on August-21, 1995, which barred several
anti-competitive terms in Microsoft’s agreements with OEMs. Prohibited
contract provisions included: "per processor" license provisions, license
terms exceeding one year in length, provisions prohibiting or restricting OEMs
from licensing or distributing non-Microsoft operating systems, provisions
conditioning an OEM’s license of one Microsoft operating system product upon
the license of another Microsoft product or upon the OEM not licensing a
non-Microsoft product, minimum commitment provisions, and provisions requiring
royalty payments to Microsoft other than on a per-copy or per-system basis. As
described in more detail below, Microsoft was able to devise
other anticompetitive provisions in its OEM and other agreements that had the
same exclusionary effect as the conduct prohibited in the 1995 final judgment.
74. In 1997, the United States sought to have Microsoft held in contempt for
violating the 1995 final judgment, in large part due to Microsoft’s
requirement that OEMs license and distribute Microsoft’s Internet Explorer
browser as a condition for obtaining a license to Windows 95 ("Microsoft II").
Despite the Federal District Court’s entry of a preliminary injunction on
December 11, 1997, Microsoft publicly announced on December 15, 1997 that any
OEM that did not agree to license and distribute Internet Explorer could not
obtain a license to the current version of Microsoft’s Windows operating
system. Subsequent proceedings led to a renewed complaint by the United
States. On May 18, 1998, the DOJ, joined by twenty states, including Iowa, and
the District of Columbia, filed suit against Microsoft alleging various
antitrust violations by the company ("Microsoft III"). Microsoft III
challenged Microsoft’s efforts to protect its Windows monopoly from the threat
posed by "middleware." Because middleware could support alternative platforms
or even become an alternative platform to which applications, could be
written, Microsoft understood the challenge this class of software posed to
Microsoft's operating systems monopoly. Indeed, according to the DOJ,
Microsoft viewed certain middleware--including Netscape’s Navigator web
browser and Sun Microsystems’ Java technologies--as the most significant
threat to its operating systems monopoly at the time.
75. The DOJ alleged that Microsoft, in order to protect its Windows monopoly
from various middleware threats, engaged in a series of anti-competitive
activities aimed at preventing widespread distribution of these middleware
products. Those activities included: agreements tying other Microsoft software
products to Microsoft’s Windows operating system; exclusionary
agreements which precluded companies from distributing, promoting or using
products of Microsoft’s software competitors; and exclusionary agreements
restricting the rights of companies to provide services or resources to
Microsoft’s software competitors. For eighteen months, the DOJ and Microsoft
vigorously litigated the merits of the DOJ’s allegations.
76. On November 5, 1999, Judge Thomas Penfield Jackson released his Findings of
Fact in Microsoft III, 84 F. Supp.2d 9 (D.D.C. 1999), based on the extensive
evidence presented during the bench trial. Judge Jackson’s Findings of Fact
concluded, inter alia, that "Intel- compatible PC operating systems" was a
relevant market for antitrust purposes and that Microsoft--by virtue of its
90-percent-plus market share combined with high barriers to entry--held (and
continues to hold) a monopoly in that market. The Findings of Fact also
catalogued an extensive list of anti-competitive activities by Microsoft
directed primarily at Netscape Navigator and Sun’s Java technologies, along
with conduct aimed at other nascent middleware threats--including, but not
limited to, Intel’s Native Signal Processing, RealNetwork’s Media Player and
Apple’s Quicktime. Microsoft’s conduct, according to the Findings of Fact, was
aimed at preserving the "applications barrier to entry" which protected
Microsoft’s operating systems monopoly.
77. On April 3, 2000, Judge Jackson issued his Conclusions of Law in Microsoft
III.
87 F. Supp. 2d 30 (D.D.C. 2000), in which he stated, inter alia,
that "Microsoft maintained its monopoly power [in the operating systems
market] by anti-competitive means.., in violation of" the antitrust laws,
including the Iowa Competition Law, Iowa Star. § 553.01 et seq. Conclusions of
Law, 87 F. Supp. 2d at 35.
78. In the remedy stage, proposals submitted to the court in Microsoft III by
the DOJ asked the court to split Microsoft into two different companies--with
one company retaining the
Windows operating system business and the other taking the rest of Microsoft’s
business, including software applications and Internet software. The DOJ
reorganization plan was recommended, in large part, to restrict Microsoft’s
wrongful exercise of its combined monopoly power over operating system and
applications software, and to prevent it from continuing to leverage its
monopoly power in the operating system market to exert control over and raise
barriers to entry in the software applications markets, and thereby reinforce
the applications barrier to entry in the operating systems market.
79. On June 6, 2000, the Microsoft III court approved the DOJ proposal and
directed that Microsoft be split into two separate Companies. However, the
court stayed implementation of the divestiture order pending an appeal by
Microsoft.
80. On June 28, 2001, the United States Court of Appeals for the District of
Columbia upheld the District Court’s conclusions that Microsoft enjoyed
monopoly power in the market for Intel-compatible PC operating systems and
that Microsoft illegally maintained that monopoly in violation of Section 2 of
the Sherman Act, 15 U.S.C. § 2, and analogous state law (including the Iowa
Competition Law). According to the D.C. Circuit, Microsoft’s illegal conduct
included, inter alia: imposing overly-restrictive licensing terms on OEMs in
order to inhibit the distribution of Netscape’s Navigator browser; commingling
Internet Explorer code with Windows so end-users could not remove the browser
from the operating system; entering exclusive contracts with ISPs to restrict
Netscape’s access to those valuable distribution channels; threatening to
caned development of Microsoft Office for the Macintosh unless Apple Computer
agreed to make Internet Explorer its default browser; creating a "polluted"
version of Java and then deceiving Java developers into creating applications
that would not properly function on platforms other than Windows; and coercing
Intel into abandoning efforts to create
certain cross-platform technologies. Microsoft 1II, 253 F.3d 34 (D.C. Cir.
2001).
81. The Court of Appeals vacated the District Court’s divestiture remedy in
part because of modifications by the D.C. Circuit to Judge Jackson’s liability
determinations in the Conclusions of Law. The D.C. Circuit remanded the matter
to the District Court for further proceedings, including remedies hearings. On
November 1, 2002, Judge Colleen Kollar-Kotelly entered final judgments in the
DOJ and state actions which largely tracked a proposed settlement entered into
between Microsoft and the DOJ in November 2001.
82. Notwithstanding the final judgment in Microsoft III, the economic effects
of Microsoft’s anti-competitive conduct alleged herein continue unabated.
Indeed, nothing in the final judgment required Microsoft to lower prices for
its operating systems software or otherwise eliminate the embedded overcharge
in the operating systems market resulting from years of monopolistic conduct,
and there is no indication that Microsoft has undertaken such a price
reduction of its own volition. To the extent the final judgment has any effect
in lowering the applications barrier to entry (and perhaps re-injecting
competition in the operating systems market), any tangible impact on prices
for operating systems is years away, at best.
83. Moreover, the final judgment did not even terminate all of Microsoit’s
conduct held to be illegal by the D.C. Circuit. For instance, Microsoft is not
required under the final judgment to end its anti-competitive price of
commingling operating system and browser code. Microsoft has given no
indication that browser and operating systems code does not continue to be
commingled in its most recent operating systems releases: Windows XP Home
Edition and Windows XP Professional.
84. Microsoft’s conduct has also been held to be in violation of the
competition laws of the European Communities by the European Commission
("Commission"). The Commission
is a politically independent institution which, among other duties and
responsibilities, enforces European Union ("EU") competition rules on
restrictive business practices and abuses of monopoly power for the whole of
the European Union when cross-border trade and competition are affected.
85. In December 1998, the Commission received a complaint from Sun Microsystems
that Microsoft had refused to provide interface information necessary for Sun
to be able to develop products that would be properly compatible with the
ubiquitous Windows operating system, and hence be able to compete on an equal
footing in the market for workgroup server operating systems. The Commission’s
investigation revealed that Sun was not the only company that had been refused
this information by Microsoft, and that these non-disclosures by Microsoft
were part of a broader strategy designed to foreclose competitors from the
market.
86. In 2000, the Commission enlarged its investigation, on its own initiative,
to study the effects of the tying of Microsoft’s Windows Media Player with the
company’s Windows operating system.
87. On March 24, 2004, following a comprehensive investigation of Microsoft’s
conduct, the Commission concluded that Microsoft had violated the competition
laws of the European Communities. In a 302-page decision, the Commission held
that Microsoft had been in continual violation of Article 82 of the European
Communities’ competition laws and imposed a fine against Microsoft of
497,196,304 euros (roughly equivalent to US $613,000,000).
88. In its ruling, the Commission concluded that Microsoft had abused, and
continues to abuse, its monopoly in the PC operating system market by (a)
refusing to provide competitors producing workgroup server operating systems
sot’wcare technical information they need to interoperate with Microsoft’s PC
operating systems and (b) integrating its PC operating system
code and its workgroup server code. The purpose and effect of Microsoft’s
actions, the Commission declared, has been to foreclose competition among
workgroup server operating system software and thereby further entrench its
monopoly of the PC operating system market. The Commission further noted that
these violations are ongoing.
89. The Commission concluded that Microsoft has a monopoly of the world market
for PC operating systems and that, as a result of its exclusionary conduct,
now has a virtual monopoly of the workgroup server operating system market.
The Commission rejected Microsoft’s repeated argument that it had an absolute
fight to withhold information about its operating system, even if to prevent
rival applications from interoperating with Windows, and that to require such
disclosure would eliminate its "incentive to innovate."
90. The Commission also held that Microsoft had abused, and continues to abuse,
its monopoly of the PC operating system market by tying its media player
software to its operating system. The purpose and effect of Microsoft’s tying,
the Commission determined, has been to foreclose competition in the media
player software market and thereby further entrench its monopoly of the
operating system market. The Commission further noted that these violations
are ongoing.
BACKGROUND
The Road to Microsoft’s Monopoly In the Operating System Software Market
91. In 1981, Microsoft released the first version of its Microsoft Disk
Operating System for Intel-compatible PCs, known as "MS-DOS." The system had a
character-based user interface that required the user to type specific
instructions at a command prompt in order to perform tasks such as launching
applications and copying files. When International Business Machines
Corporation ("IBM") selected MS-DOS for pre-installation on its first
generation of
PCs, Microsoft’s software became the dominant operating system for
Intel-compatible PCs.
92. In 1985, Microsoft began marketing an operating system for Intel-compatible
PCs called Windows. This software included a GUI, which enabled users to
perform tasks by selecting icons and words on the computer monitor’s screen
with a mouse. Windows 3.0, released in 1990, was the first version of Windows
to gain widespread adoption in the market.
93. In 1995, Microsoft introduced Windows 95, which Microsoft advertised was
the first operating system for Intel-compatible PCs that had the same kinds of
integrated features as the MacOS operating system for PCs manufactured by
Apple Computer, Inc. ("Apple"). (Prior versions, while having some
characteristics of an operating system, required the presence of DOS to run.)
In reality, however, Windows 95 was little more than Windows 4.0 running atop
MS-DOS 7.0 (more like previous versions of Windows than like the Mac OS). In
June 1998, Microsoft launched its successor, Windows 98, followed later by
Windows 98 SE and Windows Me.
94. At the same time Microsoft was developing and marketing its
consumer-oriented Windows products such as Windows 3.1 and Windows 95/98,
Microsoft was also developing and marketing the Windows NT operating system.
Windows NT 3.1 was released in July 1993. According to Microsoft, "the desktop
version [of Windows NT] was well received by developers because of its
security, stability, and rich Microsoft Win32® application programming
interface (API)." Later versions of Windows NT included Windows NT 3.5
Workstation, Windows NT 4.0 Workstation, and Windows 2000 Professional.
95. In October 2001, Microsoft released its most current version of the Windows
operating system, dubbed Windows XP. Two desktop versions of Windows XP are
available: Windows XP Home Edition and Windows XP Professional (as well as
Windows XP Media
Center Edition, a "superset" of Windows XP Professional). According to
Microsoft: "Windows XP is a unifying leap forward for desktop operating
systems. With the release of Windows XP Home Edition and Windows XP
Professional ....Microsoft succeeded in merging its two Windows operating
system lines for consumers and businesses, uniting them around the Windows NT
and Windows 2000 code base."
96. Microsoft possesses--and at all relevant times has possessed a dominant,
stable, and increasing monopoly share of the market for operating systems for
Intel-compatible PCs. Over the last decade, Microsoft’s share of the market
for operating systems for Intel-compatible PCs has exceeded 90 percent and,
more recently, it has exceeded 95 percent. It has been projected that
Microsoft’s share of the market will increase over the next few years.
97. Microsoft’s pricing behavior demonstrates that Microsoft possesses monopoly
power in the operating systems market. As the recent government action against
Microsoft established, Microsoft did not even consider the prices of
competitors’ operating systems for Intel-compatible PCs when it set the price
of Windows 98. Findings of Fact ¶ 62. Microsoft was able to exercise
unfettered discretion in setting the price for the license of its Windows 98
upgrade product. According to an internal Microsoft study from November 1997,
Microsoft could have charged $49.00 for an upgrade to Windows 98, and there
was no reason to believe that the $49.00 price would have been unprofitable
for Microsoft. The study, however, determined that a price of $89.00 would
maximize revenues for Microsoft.
Findings of Fact ¶ 63. Because of its monopoly power, Microsoft was able to
charge the higher price. Moreover, Microsoft raised the price that it charged
OEMs of Intel-compatible PCs for Windows 95, with few exceptions, to the same
level as the price it charged for Windows 98 prior to its release.
Findings of Fact ¶ 62. In a competitive market, it would be expected that the
price of an older
operating system would stay the same or decrease upon the release of a newer,
more attractive version. Microsoft, however, was only concerned with inducing
OEMs to install Windows 98 in favor of the older version. Microsoft wotald not
have imposed this price increase if it were at all concerned that OEMs might
shift their business to another vendor of an operating system for
Intel-compatible PCs.
Microsoft’s Windows Monopoly: The Applications Barrier to Entry
98. There are several high and strong barriers to entry into the market for
operating systems for Intel-compatible PCs. Perhaps the most daunting barrier
to entry is created by the number of software applications that must run on an
operating system in order to make the operating system attractive to end
users. As the District Court in Microsoft III found--and as the D.C. Circuit
agreed--Microsoft’s monopoly power in the operating systems market derives in
part from the "applications barrier to entry." Microsoft went to great lengths
(as established below) to destroy the competitive position of any software
product that threatened to weaken or eliminate that barrier.
99. The applications barrier to entry results from the "chicken and egg" nature
of the demand for PC operating systems. Consumers tend to be more interested
in an operating system for which there is a substantial library of existing
software applications. The fact that a vastly larger number of applications
have been written to run on Microsoft operating systems than on other PC
operating systems has attracted consumers to Microsoft’s operating system; end
users assume that their interests in applications Will be met as long as they
use Microsoft’s product.
100. Software development is characterized by substantial economies of scale.
The fixed costs of producing software, including applications, are very high.
By contrast, marginal costs are very low. Moreover, much o the cost of
developing software is "sunk"---once
expended, such resources cannot be used for another purpose. The result of
economies of scale and sunk costs is that developers write their applications
only to those operating systems that have a large enough installed base to
generate sufficient sales to justify the developers’ development costs.
101. An application that is written for one PC operating system will operate on
another operating system only if it is converted (or "ported") to run on the
other platform. Porting applications is both time-consuming and expensive.
Therefore, applications developers tend to write first to the operating system
with the most users. Developers might then convert their applications to other
operating systems, but only to the extent that the added sales justify the
cost of conversion, including opportunity costs. In order to recover those
costs, ISVs that go to the effort of converting these products frequently set
the prices of the ported applications considerably higher than the prices for
the original versions.
102. The applications barrier to entry also results from the positive network
effect associated with computer software. That is, the attractiveness of an
operating system increases with the number of people using it. As a result of
the multitude of people using MS-DOS or Windows, ISVs have tended to write
applications first and foremost to run on those Microsoft operating systems,
thereby ensuring a large body of applications for that platform. The large
body of applications for MS-DOS and Windows in turn reinforces demand for
Microsoft’s operating systems. This self-reinforcing "positive feedback loop"
augments Microsoft’s dominant position in the operating systems market and
perpetuates ISV incentives to write applications principally for MS-DOS and
Windows.
103. The small or non-existent market share of an aspiring competitor makes it
prohibitively expensive for a potential entrant to develop its PC operating
system into an
acceptable substitute for MS-DOS or Windows. To provide a viable substitute for
MS-DOS or Windows, another PC operating system would need a large and varied
base of compatible applications that were comparable to Microsoft’s library in
size and variety. Even if the aspirant attracted several thousand compatible
applications, the alternative operating system would still look like a gamble
from the consumer’s perspective next to MS-DOS and Windows, which support tens
of thousands of applications. The amount it would cost an operating system
software vendor to make that many applications available would be
prohibitively large.
104. In deciding whether to develop an application for a new operating system,
an ISV’s first consideration is the number ofusers it expects the operating
system to attract. Out of this focus arises a collective-action problem: each
ISV realizes that the new operating system could attract a significant number
of users if enough ISVs developed applications for it; but few ISVs are
willing to sink resources into development for the platform until it becomes
established. Since everyone is waiting for everyone else to bear the risk of
early adoption, the new operating system has difficulty attracting enough
applications to generate a positive feedback loop. The vendor of a new
operating system cannot effectively solve this problem by paying the necessary
number of ISVs to write for its operating system, because the cost of doing so
would dwarf the expected return.
105. The experiences of IBM and Apple, Microsoft’s only significant operating
system rivals in the 1990s, demonstrate the strength of the applications
barrier to entry that Microsoft created and maintains.
106. IBM introduced its OS/2 Warp operating system for Intel-compatible PCs in
late 1994, and subsequently spent tens of millions of dollars in an effort to
attract ISVs to develop applications for the operating system. In a related
effort, IBM also undertook efforts to reverse-
engineer key aspects of Windows APIs. Despite these efforts and expenditures,
IBM could not obtain either significant market share or ISV support for OS/2
Warp. The enormous Windows installed base made it prohibitively expensive for
IBM to continue attempting to attract enough software developer support to
challenge Windows. Although at its peak OS/2 Warp accounted for approximately
ten percent of the market for Intel-compatible PC operating systems and ran
about 2,500 applications, IBM ultimately determined that the applications
barrier to entry enjoyed by Microsoft prevented effective competition against
Windows 95. For that reason, IBM in 1996 ceased its efforts to have ISVs write
applications for OS/2 Warp. IBM now targets OS/2 Warp at a market niche,
consisting mainly of banks that use particular kinds of applications that run
on OS/2 Warp.
107. Apple provides another example of the strength of the applications barrier
to entry enjoyed by Microsoft (although Apple’s Mac OS does not run on
Intel-compatible microprocessors and therefore is not within the same relevant
market as Windows). Apple’s Mac OS operating system supports more than 12,000
applications. Nevertheless, even an inventory of that magnitude is not
sufficient to enable Apple to present a significant percentage of users with a
realistic substitute for Windows. The absence of a large enough installed base
of Mac OS users reinforces the disparity between the applications made
available for Mac OS and those made available for Windows, further inhibiting
Apple’s sales.
108. As Microsoft has consistently been aware, its dominant share of the market
for operating systems for Intel-compatible PCs has been the principal
contributing force in creating and maintaining the applications barrier to
entry into that market. As Microsoft has also consistently been aware, it is
directly due to the applications barrier to entry into the operating systems
market that Microsoft was able to establish the supra-competitive prices for
its operating
systems software. The experience with Windows 98 licenses, as set forth above,
provides a telling example. Microsoft established the price for Windows 98
licenses without regard to competition, at a monopoly price in excess of what
Microsoft would have been able to charge in a competitive market. Plaintiffs
and the other members of the Class were forced to pay those monopoly prices.
109. While the applications barrier to entry has been formidable, it is not
necessarily insurmountable or permanent. As described further below,
middleware products appeared in the market in the late 1980s and in the 1990s
that threatened to eliminate that barrier. Microsoft, however, was vigilant
and successfully undertook anti-competitive acts and practices to forestall
and eliminate middleware and similar threats and retain the full force of the
applications barrier.
110. All of Microsoft’s unlawful actions in maintaining the applications
barrier to entry have had as their ultimate unlawful purpose, and have had the
resulting unlawful effect of, enabling Microsoft unlawfully to exercise its
monopoly power by licensing its operating systems for Intel-compatible PCs
without regard to competition and at a monopoly price in excess of what
Microsoft would have been able to charge in a competitive market, to the
injury of Plaintiffs and members of the Classes.
MICROSOFT’S ANTI-COMPETITIVE ACTIVITIES IN THE OPERATING SYSTEM MARKET
Overview
111. As a result of its predatory conduct, Microsoft successfully fended off
challenges to its operating system monopoly. The first challenge came directly
from competing operating systems such as Digital Research’s DR-DOS, and IBM’s
OS/2, and later from Be, Inc.’s ("Be") BeOS, Go Corporation’s ("Go") Pen
Point, and the "open source" GNU/Linux operating system.
DR-DOS and OS/2 were positioned to compete vigorously against MS-DOS and early
versions of Windows. Through a series of predatory acts from 1988 through
1994, however, Microsoft essentially eliminated both DR-DOS and OS/2 from the
market. BeOS, on the other hand, emerged later (around 1998), long after
Microsoft had established its monopoly power in the operating systems market.
When Be threatened Microsoft’s hegemony by pursuing a "dual boot" strategy to
overcome the applications barrier to entry, Microsoft responded with a series
of anti-competitive acts which drove Be from the market.
112. The second type of challenge to Microsoft’s monopoly was posed by several
middleware products which from 1988 to 1998 threatened to weaken or circumvent
the applications barrier to entry that insulated Microsoft from competition.
Following the elimination of DR-DOS and OS/2 as viable alternatives to its
operating systems, Microsoft realized that the most significant potential
threat to its Windows monopoly did not come from a direct attack by existing
or new operating systems. Microsoft recognized that, instead, applications
barrier to entry could be seriously eroded--and Microsoft’s operating system
monopoly correspondingly threatened---by new software products that could
support, or even themselves become, alternative platforms to which
applications could be written and which could be used in conjunction with
multiple operating systems including, but not limited to, Windows.
113. In 1981, Microsoft became a significant supplier of PC operating system
software when it contracted with IBM to design and develop operating system
software for the IBM personal computer. By the mid-1980s, Microsoft’s MS-DOS
operating system had become entrenched as the standard for Intel-compatible
personal computers.
114. By 1987, several OEMs, whose computers were sold with operating systems
pre-
installed, approached Digital Research, a Microsoft competitor, about
developing a better operating system than MS-DOS. In 188, Digital Research
released its operating system software under the name DR-DOS. Given the
relative lack of complexity of MS-DOS at that time, Digital Research was
readily able to clone Microsoft’s software (i.e., DR-DOS could support the
same applications software as MS-DOS supported). In addition, DR-DOS included
features that MS-DOS lacked. DR-DOS received numerous industry awards and was
sold at a lower price than MS-DOS.
115. Unable or unwilling to legitimately compete with DR-DOS by attempting to
offer a better or lower-priced product, Microsoft instead embarked on a series
of unlawful predatory acts designed to drive Digital Research from the market.
These predatory acts focused largely on the OEM channel, which distributed the
vast majority of operating system software by pre-installing it on computers.
By controlling this critical distribution channel to the exclusion of DR-DOS,
Microsoft made Digital Research’s competitive position untenable, and by 1994
Digital Research was forced to exit the market.
116. Microsoft realized by the mid-1980s that MS-DOS was becoming obsolete and
therefore began working with IBM to develop the next generation operating
system. The first version of Microsoft and IBM’s joint efforts was released in
1987 under the name OS/2. However, by 1990 Microsoft’s Windows software (which
contained some of the graphical user interface ("GUI") elements that Microsoft
had been developing for OS/2), was gaining popularity, and Microsoft decided
to focus its efforts on Windows to the exclusion of OS/2. IBM took over
exclusive development of OS/2. The second generation of IBM’s OS/2 won over
many Window 3.x users because of its superior performance.
117. Again, unable or unwilling to compete on the merits, Microsoft resorted to
a
course of anti-competitive conduct directed at OS/2. By the end of 1994,
Microsoft’s predatory conduct had the desired effect of eliminating OS/2 as a
significant competitor. Many of Microsoft’s anti-competitive acts were the
same as or similar to those targeted at DR-DOS.
118. With Microsoft’s two main competitors essentially out of the market, any
challenge to Microsoft’s monopoly could only come from a new entrant. But--as
noted above--any potential competitor faced the applications barrier to entry.
By 1994, moreover, a new competitor could not circumvent the applications
barrier by cloning Windows since Microsoft’s software had become much too
complex to be cloned.
119. Since at least the late 1980s, part of Microsoft’s strategy has been to
protect its operating system monopoly by unlawfully maintaining the
applications barrier. The most serious threat to the applications barrier ’has
come from middleware, which exposes APIs (or their equivalent) that can
substitute for or enhance some of the functionality of the operating system.
Applications written to middleware APIs, therefore, can run on any of several
operating systems. Thus, middleware has the capacity to weaken or eliminate
the applications barrier to entry by, as Bill Gates stated, "commoditizing"
the operating system. Whenever middleware has threatened to undermine or
eliminate the barrier, Microsofi’s response has been swi and predatory.
120. An early threat came from Mirrors, Micrographx’s software developer tool
that allowed applications designed to run on MS-DOS to also run on OS/2.
Microsoft’s exclusionary conduct, however, drove Mirrors from the market.
121. Borland International, Inc.’s ("Borland") developer tools (which were the
market leader in the early 1990s) allowed software developers to easily
convert applications from one operating system to another. As with Mirrors,
Microsoft engaged in anti-competitive conduct
that essentially eliminated Borland’s product from the market.
122. The Micrographx and Borland threats were followed in the mid-1990s by a
string of middleware and other products that threatened to diminish the
applications barrier to entry: (1) a software product called Notes,
distributed first by Lotus and then by IBM, (2) Netscape’s Navigator web
browser, (3) Java technologies, a programming language and related software
developed by Sun Microsystems, (4) Intel’s Native Signal Processing software,
(5)Apple’s, Burst.com’s and RealNetwork’s multimedia playback technologies,
and (6) workgroup servers and similar products from Sun Microsystems, Novell,
and Samba.
123. Microsoft understood that each of these Middleware and other products
facilitated the development of applications programs that would be indifferent
to the identity of the underlying operating system. Consequently, Microsoft
responded predatorily to each such product.
124. During the late 1990’s, Microsoft confronted a new operating system
entrant in Be’s BeOS. BeOS was developed as a powerful, graphical, easy to use
computer operating system capable of handling the vast streams of data
required by multimedia applications. From the time of its release in the Fall
1998, :BeOS for Intel-compatible PCs received widespread praise from
journalists and industry leaders for its technical capabilities, speed and
ease of use.
125. Recognizing that the applications barrier to entry made any immediate
attempt to displace Windows prohibitively expensive Be attempted to position
BeOS as a "complement" to Windows and thus adopted a "dual boot" strategy.
Microsoft, however, used anti-competitive OEM licensing terms, coupled with
threats, to force OEMs not to pre-install BeOS alongside Windows on their PC
products.
Exclusion of DR-DOS
126. In 1981, Microsoft contracted with IBM to design and develop the operating
system software for the IBM PC. Microsoft acquired fights from another company
for a product called "QDOS," which borrowed heavily from an operating system
developed by Digital Research called CP/M. Microsoft changed the name of QDOS
to MS-DOS and licensed it to IBM and others.
127. By the mid-1980s, MS-DOS had become entrenched as the standard in the
Intel-compatible PC operating systems market. The price of MS-DOS in the OEM
channel escalated from $2-$5 per copy in the 1981-1982 period to $25-$28 per
copy by 1988.
128. Because of Microsoft’s apparent decision not to innovate or extend the
capabilities of MS-DOS, a number of OEMs approached Digital Research to
develop an improved version of DOS. In addition, a number of OEMs who simply
could not get Microsoft to deal with them expressed an interest in Digital
Research as an alternative DOS software supplier. Accordingly, in 1987 Digital
Research began planning a new version of DOS to be called DR-DOS.
129. The result of Digital Research’s efforts was a product designated as
DR-DOS 3.31, introduced in 1988. That version was followed by an enhanced
DR-DOS 5.0 in 1990 and DR-DOS 6.0 in 1991. Those DOS versions were
significantly superior to then-existing versions of MS-DOS in many areas,
receiving numerous industry awards and enthusiastic reviews. DR-DOS was
offered at prices below the inflated price levels of MS-DOS products.
130. Microsoft responded to the DR-DOS threat with a number of anti-competitive
practices, including:
a. Microsoft constructed a wall of per processor licenses beginning in 1988
when DR-DOS was released. Microsoft OEM status reports contained repeated
references to these practices, such as: "Opus agreement has finally been signed
by Redmond. Another DRII prospect bites the dust with a per processor DOS
agreement," or "DRI visited Hyundai executives and pricing issue was raised
again. The new license is a per processor deal, which allowed us to completely
kick out DRI." One OEM, U.S. Micro Express, stated with respect to a per
processor license that "We were not given the option of licensing MS-DOS on
any other basis";
b. Microsoft also entered into long term "take or pay" minimum commitment
licenses. Even though the life cycle of a DOS release was somewhat less than
two years, Microsoft pushed for agreements of two or three years in duration.
This was a key part of the "Strategy Against DRI" presented in June 1991 to
the Microsoft OEM sales force;
c. Furthermore, Microsoft required prepaid balances from OEMs, tying them to
Microsoft through the threat that they would forfeit any prepaid amount not
used during a contract period unless a new license was signed;
d. In order to deter end users from running Windows on top of DR-DOS, Microsoft
implemented a "DOS clone check" in 1989 on foreign versions of Windows, as
evidenced by this message from the Microsoft Korean subsidiary: Bill Gates
ordered all application business units to include checking routines of
operating environments and if it is Microsoft DOS, nothing will happen. But if
it is non MS-DOS (such as DR-DOS), application will display messages saying
that "This application has been developed and tested for MICROSOFT MS-DOS.
Since you use different environment, this application may.’ not work
correctly .... "
A similar DR-DOS detection and warning was implemented in Microsoft’s
QuickPascal, with a message that warned that use of the product with another
operating system "may void valuable warranty protection by Microsoft... ";
e. Microsoft made false, misleading and premature announcements such as the one
in June 1990 (within a week of Digital Research’s announcement of DR-DOS 5.0)
that Microsoft intended to release by September 1990 MS-DOS 5.0, that would
have all the technical advantages of DR-DOS 5.0. In the end, MS-DOS 5.0 was
not released until June 1991--over one year after Microsoft’s
announcement--and it was released without the promised features. Microsoft
made similar preemptive "vaporware" announcements of MS-DOS 6.0, MS-DOS 7.0
(which never came to market as a stand-alone product) and Windows 95, in
direct response to DR-DOS 6.0 and Novell DOS 7.0. (Novell acquired Digital
Research in 1991.) Microsoft knew these announcements were false and
misleading when made and essentially stalled the market for DR-DOS as
consumers waited for the "features" which did not exist at the time of
announcement, nor when the products were finally released;
f. Microsoft engaged in merger discussions with Novell immediately after
Novell’s acquisition of Digital Research, and insisted as a part of the
proposed merger that Novell divest Digital Research, with the ulterior purpose
of causing Novell to slow down its integration of DR-DOS. When Microsoft’s
merger discussions broke down in 1992, Microsoft fatally wounded DR-DOS as a
competitor;
g. In Fall 1991, Microsoft announced that DR-DOS would not be compatible with
the next release of Windows, scheduled for release in April 1992. To reinforce
the impression of incompatibility, Microsoft released "beta" (i.e. test)
versions of
Windows containing code that generated misleading error messages when Windows
ran on top of DRDOS;
h. Microsoft created deliberate incompatibilities between Windows and DR-DOS,
so that Windows would not run properly on DR-DOS;
i. Microsoft unleashed a "FUD" campaign to create "fear, uncertainty and doubt"
in the OEM and retail channel regarding the use of DR-DOS. In May 1991, Sergio
Pineda of Microsoft circulated to all OEM account managers the following
regarding the theme of the campaign:
Any degree of incompatibility is enough to create fear, uncertainty & doubt
among end users when it comes time to buy new systems -- this suggests that PC
OEMs will take on a big risk if they ship DR-DOS with their systems. We
recommend that we "informally" plant the bug of FUD in their ears.
j. As part of its FUD campaign, Microsoft reported supposed flaws in DR-DOS to
the media as crippling "bugs," while not mentioning to the media that MS-DOS
releases had such severe bugs that Microsoft was required immediately to
release "patches" to cure them. & July 1991 memo from a Microsoft executive
states: "We are engaged in a FUD campaign to let the press know about some of
the bugs. We’ll provide info a few bugs at a time to stretch it out";
k. Microsoft put Novell on a "beta blacklist," refusing to provide a Windows
3.1 beta to Novell’s DR-DOS development team, and thereby hampering Novell’s
ability to offer a Windows 3.11-compatible release of DR-DOS;
1. Microsoft inserted secret, encrypted code into the final Windows 3.1 (beta)
version that triggered a false error message whenever a computer was running
DR-DOS with Windows. This AARD Code had the intended effect of creating concern
among OEMs about DR-DOS. The code was removed from the final (nonbeta) version
of Windows 3.1;
m. Microsoft informed certain OEMs that they could not obtain Windows or be
given access to essential information, product support and service, if they
did not purchase and ship MS-DOS to the exclusion of DR-DOS or enter into per
processor licenses for MS-DOS and Windows;
n. Microsoft retaliated against industry participants that supported DR-DOS.
For example, when Z-Nix Inc. bundled DR-DOS 6.0 and Microsoft Windows 3.1,
proclaiming no incompatibilities, Microsoft’s Brad Silverberg wrote: "look
what znix is doing! cut those fuckers off." Within three weeks, Microsoft
demanded an audit of Z-Nix’s entire business and then commenced a copyright
and trademark infringement action. Z-Nix was forced to file for bankruptcy in
or around 1995;
o. Microsoft established a pricing structure for Windows that made it
prohibitively expensive to buy that product without also buying MS-DOS.
Microsoft often instructed some of its OEM account managers to inform their
OEMs that the price for Windows alone would be higher than the price of
Windows and MS-DOS combined.\
131. In its efforts to unfairly compete with DR DOS, Microsoft was willing to
misappropriate Stac Electronics Inc.’s innovative STACKER disk compression
technology. DR DOS already included disk compression technology, while MS-DOS
did not.
132. In September 1994, as a result of Microsoft’s anti-competitive conduct,
Novell announced that it would cease the marketing and development of DR-DOS.
After Novell’s
announcement, the price of Windows increased. Microsoft had succeeded in
eliminating the one competitor that, because its DOS program had the same
original source as Microsoft, was not affected by the applications barrier to
entry.
Virtual Elimination of OS/2
133. In the mid-1980s, Microsoft and IBM decided to collaborate on a new
operating system that would replace MS-DOS. The product, which was later sold
under the name OS/2, was intended to be a state-of-the-art, GUI-based
operating system. However, as Microsoft’s Windows software became more
successful and as Microsoft’s monopoly position became more entrenched by
Microsoft’s per-processor licensing and other exclusionary tactics, the
company lost interest in collaborating with IBM. In 1991, IBM and Microsoft
terminated their joint development agreement, leaving IBM to continue
development of OS/2 alone.
134. After Microsoft’s relationship with IBM ended, Microsoft launched a
predatory campaign to drive OS/2 from the market. It pursued a course of
conduct very similar to the one it used to exclude DR-DOS from the market.
Thus, Microsoft relied on restrictive OEM licenses that effectively cut off
IBM from the critical OEM channel; it made false and misleading vaporware
announcements and pre-announcements; it refused to write its applications to
run on OS/2; it engaged in FUD campaigns and product disparagement in an
effort to devalue OS/2 in the minds of applications developers, OEMs and
consumers; and it created deliberate incompatibilities between Windows and
OS/2.
135. Microsoft required developers that wanted to obtain a "Designed for
Windows 95" logo to make certain that their product also worked with Windows
NT. In addition, as alleged below, Microsoft engaged in exclusionary conduct
to drive a number of developer tools from the market that had enabled
applications originally written to run on Microsoft’s operating
systems to be ported to OS/2. This limited the number of developers writing
applications for 0S/2.
Microsoft’s Predatory Campaign Against Go.
136. Go was the developer of PenPoint, a PC operating system designed primarily
for what was then known as "pen based computing" and is now known as "tablet
computing." Go’s technology was sufficiently promising and innovative to catch
the attention of the leading microprocessor manufacturer, Intel, which sought
to engender some competition in the market dominated by Microsoft. Intel
initially offered to provide Go with substantial financing and a valuable
endorsement of Go’s technology. When Microsoft learned of Intel’s prospective
support of a rival operating system, its CEO, Bill Gates, personally
approached Intel and demanded that Intel withdraw its support of Go’s
technology. Intel did so, by withdrawing its endorsement and dramatically
scaling back its investment. Microsoft also forced Compaq to license
Microsoft’s "Pen Windows" instead of Go’s software. (Microsoft’s collaboration
with Intel and Compaq was almost identical to Microsoft’s more recent
collaboration with the same firms against Linux.) As a result of those
restraints, together with Microsoft’s unauthorized use of Go’s valuable trade
secrets and other predatory acts directed at Go, Microsoft put Go out of
business.
Microsoft’s Predatory Conduct Toward Be
137. Be was founded in 1990 for the purpose of creating a powerful, graphical,
easy to use operating system capable of handling, on low-cost personal
computers, the vast streams of data required in multimedia applications, in
Fall 1998, Be---in collaboration with Intel---created a version of BeOS for
Intel-compatible PC$ which received widespread praise in the industry.
138. Be recognized the obstacle posed by the applications barrier to entry, and
consequently Be offered to license BeOS to OEMs for pre-installation on PCs in
a "dual boot" configuration. Such a configuration would allow the end user to
choose which operating system (BeOS or Windows) to load when the computer was
turned on. Be’s "dual boot" strategy would circumvent the applications barrier
by allowing consumers to use BeOS if they wanted to take advantage of its
multimedia capabilities but then boot into Windows if they needed to write a
letter, create a spreadsheet or take advantage of other applications for the
Windows platform. Be predicted that as its operating system became more widely
deployed on "dual boot" computers, its growing user base would make it a more
attractive platform for application developers.
139. Like Microsoft, Be recognized the importance of pre-installation in the
OEM channel. Indeed, overcoming the applications barrier required BeOS to be
installed on as many Intel-compatible PCs as possible. To that end, Be
eventually offered to license BeOS to OEMs for "dual-boot" installation at no
cost.
140. In September 1998, Hitachi verbally committed to Be that it would
pre-install BeOS alongside Windows on a line of its personal computers. In
November 1998, however, Hitachi informed Be that it could not install Be’s
boot manager or BeOS launcher on its computers; instead, BeOS would have to be
booted from a floppy disk (which would significantly impede end user access to
the operating system). Hitachi eventually explained that the terms of its
license with Microsoft prevented it from offering another operating system in
a "dual-boot" configuration. Hitachi also informed Be that after it had
notified Microsoft of its intent to pre-install BeOS, Microsoft sent two
managers to Japan to express Microsoft’s anger over the arrangement. Microsoft
also threatened to raise the price of Windows to Hitachi if Hitachi installed
Be’s boot manager on its computers.
141. Be’s attempts to market BeOS to other OEMs confronted similar
anticompetitive obstacles. Despite backing from Intel, the technical
superiority of BeOS for multimedia applications, and the fact that Be
eventually offered to license BeOS without royalty, Be was unable to convince
even a single major OEM to risk Microsoft’s ire by offering a dual boot PC
with BeOS pre-installed. Be has thus been excluded from the market.
Microsoft’s Preflatory Response to GNU/Linux
142. GNU/Linux is an "open source" operating system that runs on
Intel-compatible PCs. Microsoft has targeted the competing operating system by
pressuring Intel, as well as various major OEMs such as Dell and Compaq, to
boycott Linux. In late 2000, for instance, Microsoft executive Joachim Kempin
described his plan of retaliation and coercion to shut down competition from
Linux: "I am thinking of hitting the OEM harder than in the past with
anti-Linux actions" and will "further try to restrict source code deliveries
where possible and be less gracious when interpreting agreements - again
without being obvious about it," continuing "this will be a delicate dance."
143. LindowsOS (now known as Linspire), which is developed and marketed by
Lindows.com, Inc., is an Intel-compatible PC operating system based on Linux
and which competes directly with Microsoft on the. PC desktop. On information
and belief, Microsoft interfered with Lindows.com, Inc.’s ability to
distribute its product through the OEM channel. Microsoft also initiated a
lawsuit against Lindows.com, Inc. that adversely affected Lindows.com, Inc.’s
ability to exist, obtain; funding and conduct business.
Microsoft’s Anti-competltive Agreements With OEMs to Foreclose Competition
144. Microsoft Chairman and former CEO, Bill Gates, reportedly summarized the
effects of the DOJ’s 1995 consent decree--which banned "per processor"
licenses, among other
exclusionary licensing terms as "nothing." Microsoft was able to devise other
restrictive OEM agreements to foreclose competition in there.
145. A "per system" license was the practical equivalent of the "per processor"
license. Under the "per system" license, the OEM had to pay royalties to
Microsoft for every computer of a particular "model" or "system" that it
shipped--again, as with the "per processor" contracts, regardless of whether
the PC contained Microsoft’s operating system. Microsoft defined "system"
and "model" so broadly in its contracts that virtually all of an OEM’s
production was subject to Microsoft’s "double tax" if the OEM wanted to give
the consumer a choice of operating systems. Microsoft did not agree to give up
its "per system" licenses in the 1995 consent decree, even though the
Department of Justice warned the federal district court that "per system
licenses, if not properly fenced in, could be used by Microsoft to accomplish
anticompetitive ends similar to ’per processor’ licenses"--and in fact were.
146. Another way that Microsoft found to circumvent the federal court’s 1995
injunction forbidding its use of "minimum commitment/per processor" licenses
was what Microsoft calls its "Market Development Agreements" ("MDAs").
Microsoft contrived the MDA as a device to evade the Court’s decree
prohibiting Microsoft from requiring OEMs to adhere to "minimum commitments."
As Steve Ballmer (Microsoft’s current CEO) acknowledged: "We have always given
better prices to customers who work with us to make the market. Those used to
take the form of commits [i.e., minimum commitments] which we do not do
anymore as a result of the [federal court’s] decree but we still believe in
rewarding people who help us create demand. Hence the MDA." Under the MDAs,
Microsoft granted large discriminatory price concessions to those OEMs that
would agree to market and promote Microsoft’s Windows to the exclusion of any
rival operating system. These discounts were
calibrated so as to force the OEM to sell most of its computers with a
Microsoft operating system in order to obtain the lowest price.
147. Because the OEM market is so competitive and profit margins are so thin,
every OEM had to get the lowest price it could from Microsoft in order to
survive. In March 2002, a Gateway marketing executive (Anthony Fama) testified
before Judge Kollar-Kotelly in State of New York et al. v. Microsoft, Case No.
98-1233 (CKK), about how Microsoft used its MDA program in order to force OEMs
to market Microsoft’s operating system exclusively: "Given the substantial
nature of these discounts, participation in the MDA, as a practical matter, is
not optional. In other words, not receiving :these discounts would put Gateway
at a substantial competitive disadvantage, and Gateway has communicated that
self-evident proposition to Microsoft." Microsoft also used its MDAs to lock
OEMs in and competitors out by offering a discriminatory price to the OEM in a
later year provided (a) the OEM reached Microsoft’s imposed goal of Windows
sales over competitive sales in the prior year and (b) renewed its
exclusionary contract with Microsoft for ,the later year. This placed the OEM
on a perpetual treadmill, eliminating competition indefinitely. Microsoft
continued these exclusionary terms at least past April 2002.
148. One method for encouraging competition in the operating systems market
would have been the sale by OEMs of "naked machines" (i.e., computers that are
sold without a predetermined suite of software forced upon the
consumer). "Naked machines" would allow consumers to choose their computer’s
software configuration from an array of competitive software products, either
for preinstallation by the OEM or installation by the end user. Microsoft
sought and obtained the agreement of the OEMs to refrain from selling "naked
machines." Instead, OEMs universally agree to "bundle" Microsoft applications
and operating
systems with their computer hardware, effectively depriving consumers of any
competitive choices. These restrictive agreements exited before 2000 but, in
2000, Microsoft ratcheted the restriction up so that OEMs are forced to
forfeit all discounts otherwise earned if they ship any "naked machines" to
consumers. This heightened restriction, which (on information and belief)
continues to the present, prohibits PC users and PC retailers from buying and
installing lower priced or better quality operating systems of their choice.
Microsoft’s Anti-Competitive Maintenance of the Applications Barrier to Entry
149. By 1994, Microsoft had destroyed its two most significant competitors in
the operating systems market as well as Go. Moreover, by that time Microsoft
was secure that it would not encounter new competition from another clone
operating system like DR-DOS since Windows had simply become too complex to be
cloned. Only a non-clone, therefore, could potentially enter the operating
system market. However, the applications barrier to entry--for reasons
discussed above--made successful entry by a non-clone prohibitively expensive.
150. In addition to the exclusionary conduct intended to drive DR-DOS and OS/2
from the market, Microsoft’s unlawful conduct also consisted of predatory
responses to the growing popularity of software products that threatened to
weaken or eliminate the applications barrier to entry. A succession of such
products appeared on the market between 1988 and 1998, and each product was
met with a rapid, strong and predatory response by Microsoft. Microsoft
engaged in continuing violations of the Iowa Competition Law by means of such
exclusionary, predatory conduct and other conduct through which it
specifically intended to create market conditions in which end users were
forced to purchase Microsoft products and were deprived of competitive
substitutes therefore.
Microsoft’s Predatory Response to Micrographx’s Mirrors
151. In the late 1980s, Micrographx offered a developer tool called Mirrors
that allowed Windows applications readily to be ported to OS/2 and vice versa.
Mirrors therefore had the capacity to substantially weaken the applications
barrier to entry. Microsoft engaged in anti-competitive acts to eliminate the
Mirrors threat.
152. Microsoft induced Micrographx to share its confidential intellectual
property on the representation that Microsoft was interested in licensing
Mirrors for its applications programmers, and Microsoft signed a
non-disclosure agreement. However, Microsoft then stopped pursuing such a
license and eventually developed developer tools similar to Mirrors that it
incorporated into its operating system, essentially eliminating demand for
Mirrors as a stand-alone product.
153. Promptly after Microsoft declined to license Mirrors, Micrographx sought
to license the product to IBM. To avoid the prospect that IBM would obtain the
Mirrors technology and be able to port Windows applications to run on OS/2,
Microsoft took predatory actions designed to, and which did, prevent that
result.
Microsoft’s Predatory Response to Borland’s C++
154. In the early 1990s Borland’s C++ was the most popular programming language
among PC applications developers. Borland’s C++ had an Object Windows Library
("OWL") that enabled programmers to write applications that were platform
independent, i.e., the applications could be written to OWL’s, not the
operating system’s, APIs. Eventually, Borland innovated OWL to the point where
it could be used to write applications that could be ported to Windows, OS/2,
Macintosh, and UNIX with virtually no conversion effort.
155. Seeing the threat that OWL posed to the applications barrier to entry,
Microsoft embarked on a campaign to cripple Borland’s C++. Microsoft
prematurely announced the
release of new versions of its competing developer tools and made
false "vaporware" claims, to deprive Borland of the advantages of being the
first mover and having the superior product.
156. Furthermore, Microsoft refused to renew the license for its software
developer kit ("SDK") to Borland unless Borland’s C++ also carried and
supported Microsoft Foundation Classes ("MFC"), which was Microsoft’s
counterpart to OWL. Borland literally could not sell C++ without SDK; on the
other hand, if it shipped MFC in addition to OWL, developers would choose MFC
as it would be the only library available as part of both the Borland and
Microsoft developer tools. Borland had no choice but to choose the latter
option. Microsoft’s developer tools soon became dominant and its MFC, which
carried the Windows APIs, perpetuated the applications barrier to entry.
Microsoft’s Predatory Response to Intel’s Native Signal Processing
157. Microsoft’s quashing of Intel’s Native Signal Processing ("NSP") is yet
another example of Microsoft’s relentless campaign to eliminate all threats to
its operating system monopoly.
158. By 1995, Intel had developed NSP software which promised to "endow Intel
microprocessors with substantially enhanced video and graphics performance."
Findings of Fact at ¶ 95. But because NSP had the potential to serve as a
platform on which applications could be developed, Microsoft forced Intel into
ceasing NSP development, flatly precluding that innovation from reaching
consumers. Findings of Fact at 94-103. The District Court in Microsoft III
found that "as late as the end of 1998... Microsoft still had not implemented
key capabilities that Intel had been poised to offer consumers in 1995."
Findings of Fact at ¶ 101. Even after quashing the threat of Intel’s NSP
software, Bill Gates told Intel at a meeting in August 1995 that Intel could
not count on Microsoft to support Intel’s next generation of
microprocessors if Intel was developing platform-level software that competed
with Windows.
Microsoft’s Predatory Response to Netscape’s Navigator
159. Microsoft III addressed actions taken by Microsoft to maintain the
applications barrier to entry--and thus protect its monopoly power in the
operating systems market---once Microsoft had successfully eliminated threats
from DR-DOS and OS/2. The course of Microsoft’s misconduct directed at
Netscape’s Navigator web browser is the subject of numerous conclusively
established factual findings and legal conclusions from the government action,
as detailed in this section.
160. Netscape Navigator possessed middleware attributes that gave it the
potential to diminish Microsoft’s applications barrier to entry. First, it was
a complement to (not a substitute for) Windows, and therefore could gain
widespread use. Second, it could serve as a platform for other software,
particularly network-centric applications that work in association with Web
pages. Third, Navigator had been ported to more than fifteen different
operating systems. If a developer wrote an application that relied on the APIs
exposed by Navigator, that application would, without any porting of its own,
run on many different operating systems.
161. As was established in Microsoft III, Navigator began to enjoy tremendous
public acceptance shortly after its release in December 1994. Microsoft soon
thereafter recognized the damage Navigator could cause its operating system
monopoly. In a May 1995 memorandum, Bill Gates, the Chairman and CEO of
Microsoft, described Netscape as a "new competitor ’born’ on the Internet." He
warned that Netscape was "pursuing a multi-platform strategy where they move
the key API into the client to commoditize the underlying operating system."
In other words, Netscape’s browsers threatened to reduce or eliminate the key
barrier to entry that protected Microsoft’s monopoly power in flat operating
systems software market.
162. As noted above, the applications barrier to entry, consisting of the large
number of software applications that will run On the Windows operating system
but not on other operating systems, has precluded potential developers of
alternative operating systems from effectively competing with Windows on the
desktop. If, however, applications could be written to run on multiple
operating systems, then competition in the market for Intel-compatible PC
operating systems could be reinstated. Microsoft recognized that browser
technology, in combination with Sun Microsystems’ Java technologies, held out
exactly that prospect, a threat which was altogether ominous for Microsoft
when Mr. Gates wrote his "Internet Tidal Wave" memorandum in May 1995.
163. Java was designed to permit applications written in its language to be run
on multiple operating systems for Intel-compatible PCs, including but not
limited to Windows. Given that facility, Java-based applications are not
restricted to Windows as their only operating system, as was previously the
case with other applications. That daunting restriction has constituted the
very foundation of the applications barrier to entry into the market for
operating systems for Intel-compatible PCs that Microsoft created and
continues to enjoy. The distribution of Java through Internet browsers that
compete with Microsoft’s Internet Explorer therefore threatened to eliminate
the applications barrier to entry protecting Microsoft’s monopoly of operating
systems for Intel-compatible PCs. It correspondingly threatened to obliterate
Microsoft’s power to license its Windows operating systems for
Intel-compatible PCs at monopoly prices, without regard to competition, in
excess of what Microsoft would be able to charge in a competitive market.
164. At the time Microsoft began its anti-competition campaign against
Netscape, non-Microsoft Interact browsers were the most significant means of
distributing Java technology to
end users. Microsoft recognized that the widespread use of browsers other than
its own Internet Explorer threatened to increase the distribution and use of
Java, and in so doing threatened Microsoft's operating system monopoly by
weakening the applications barrier to entry. Microsoft therefore determined
aggressively to use its Internet Explorer to counter the threat to Microsoft’s
operating system monopoly presented by Java. A presentation to Microsoft
Chairman Bill Gates on January 5, 1997, discussing how to respond to the Java
threat, emphasized "Increase IE share" as a key Microsoft strategy.
165. Microsoft separately recognized that Netscape’s Navigator browser was
itself a "platform" to which many applications were being written. Microsoft
realized that if Navigator thrived, more and more applications would be
written using Navigator as a platform. Because Navigator could be run on
various PC operating systems (including numerous non-Microsoft operating
systems), the success of this alternative platform also threatened to reduce
or eliminate the applications barrier to entry which protected Microsoft’s
operating system monopoly. Navigator--alone and in conjunction width
Java---also threatened Microsoft’s monopolies in word processing and
spreadsheet applications software.
166. To respond to the competitive threat to Microsoft’s operating system
monopoly posed by Netscape’s Navigator browser, both as a platform and as a
vehicle for distributing Java, Microsoft determined to embark on an extensive
and aggressive campaign to market and distribute Microsoft’s Internet Explorer
browser and to impede the distribution of Navigator. Microsoft described its
campaign as a "jihad" to win the "browser war." Microsoft embarked on
that "jihad" because winning the "browser war" was essential to its ability to
preserve the applications barrier to entry and to thereby preserve Microsoft's
power to license its Windows operating systems at monopoly prices. Itwas also
necessary to preserve Microsoft’s ability to
license its Word and Excel applications at, supra-competitive prices.
167. On information and belief Microsoft’s exclusionary campaign against
Netscape continued even after the trial in Microsoft III.
Attempted Allocation of Browser Market
168. Microsoft first attempted to eliminate competition from Netscape by
soliciting an express horizontal agreement not to compete. Microsoft
executives met with Netscape executives for the purpose of inducing Netscape
not to compete with Microsoft and to divide the browser market under the
proposal it presented to Netscape. Microsoft would be the sole supplier of
browsers for use with Windows 95 and successor operating systems, and that
Netscape would be the sole supplier of browsers for operating systems other
than Windows 95 and its successors. Netscape refused to participate in
Microsoft’s patently unlawful market allocation scheme.
169. Microsoft refused to abandon its anticompetitive strategy. Instead, it
escalated its predatory course of conduct aimed at eliminating the browser
threat to the Windows operating system monopoly. Microsoft thereupon Set out
to exclude Netscape and other browser rivals from access to the distribution,
promotion, and resources that they needed in order to be competitive. To be
successful, browser rivals such as Netscape would need to be able to offer
their browser products to OEMs and PC users at a level sufficiently pervasive
to facilitate the widespread distribution of Java, or to facilitate their
browsers becoming an attractive programming platform in their own fight. As
has been shown above, those two potential scenarios would, either alone or in
combination, erode the applications barrier to entry that is the basis of
Microsoft’s operating system monopoly. Microsoft was determined not to let
either scenario come to pass.
170. Microsoft sank hundreds of millions of dollars into the testing and
promotion of Internet Explorer, and then distributed that product without
separate charge. Such actions would only make sense to a predatory monopolist.
As if any further explanation of that behavior were necessary, Microsoft’s
Vice President in Charge of the Platforms Group told industry executives: "We
are going to cut off [Netscape’s] air supply. Everything they’re selling,
we’re going to give away for free." And Microsoft’s Chairman Bill Gates
boasted in June 1996: "Our business model works even if all [of Microsoft’s]
Internet software is free .... We are still selling operating systems. What
does Netscape’s business model look like? Not very good."
171. In addition to free distribution of Internet Explorer, Microsoft did
whatever it took to make sure significant market participants distributed and
used Internet Explorer instead of Netscape’s Navigator, including paying some
customers to take IE and using its Windows monopoly power to induce others to
do so. Mr. Gates was blunt in seeking the support of Intuit, a significant
application software developer, as he reported in a July 1996 Microsoft
e-mail: I was quite frank with him [Scott Cook, Chairman of Intuit] that if he
had a favor we could do for him that would cost Us something like $1M to do
that in return for switching browsers in the next few months I would be open
to doing that.
172. All told, Microsoft’s campaign against Netscape ultimately involved a
range of anti-competitive acts, including, inter alia:
a. After Netscape refused Microsoft’s offer to divide the Web browsing market,
Microsoft withheld crucial technical information from Netscape. At a meeting
in June 1995, Netscape representatives requested technical information from
Microsoft. A Microsoft representative indicated that Netscape’s response to
Microsoft’s offer of a "special relationship" would determine whether Netscape
received this information immediately or in three months. Subsequently,
despite
Netscape’s repeated requests for this information, Microsoft withheld it until
late October, more than three months later. The delay forced Netscape to
postpone the release of its Windows 95 browser, causing it to miss most of the
holiday selling season;
b. Microsoft withheld a scripting tool that Netscape needed to make its browser
compatible with certain ISPs. In mid-August 1995, a Microsoft representative
informed Netscape that Microsoft was linking the grant of a license for the
scripting tool to the resolution of all open issues. Netscape never received
the license and, as a result, was unable for a time to do business with
certain ISPs;
c. Microsoft conditioned the placement of an Internet Service Provider on
the "Internet Connection Wizard" screens or in the Online Services folder in
Windows 95 on the ISP’s agreement to deny most or all of its subscribers a
choice of Internet browser. At the time, approximately one-third of Interact
browser users obtained their browsers from their service provider, so
Microsoft’s exclusionary agreements with these firms had a substantial
foreclosure effect on Netscape Navigator and other browsers;
d. Microsoft entered into exclusionary agreements with Internet Content
Providers such as Disney, Hollywood Online, and CBS Sportsline, which provide
news, entertainment, and other information from sites on the Web. In order to
achieve priority placement on the Windows desktop screen after installation of
Internet Explorer, Microsoft required ICPs to agree: (i) not to compensate
manufacturers of "other browsers" (defined as either of the two top
non-Microsoft browsers) by distributing its browser or by payments to the
other browser for distributing,
marketing, or promoting the ICP content; (ii) not to promote any other browser;
(iii) not to allow any other browser to promote the ICP channel content; and
(iv) to design the ICP Web sites using Microsoft-specific programming
extensions so that the sites looked better with Internet Explorer than with a
competing browser;
e. Microsoft imposed license restrictions that prevented OEMs from altering the
Windows 95 boot-up sequence. These restrictions increased Microsoft’s ability
to require preferential treatment for Internet Explorer from ISPs and ICPs in
return for access to the Windows desktop. These restrictions also limited an
OEM’s ability to substitute or feature a non-Microsoft browser or other
application;
f. Microsoft bundled Internet Explorer with Windows 95 in licensing agreements
with OEMs, in order to foreclose choice by OEMs;
g. Microsoft tied, both contractually and technically, Internet Explorer to
Windows 98 and subsequent versions of Windows.
173. The result of Microsoft’s campaign against Netscape Navigator was a
dramatic reversal in market share. Navigator’s share fell from above 80
percent in January 1996 to 55 percent in November 1997, and Internet
Explorer’s share rose from five percent to 36 percent over the same period.
Internet Explorer’s share by the latter part of 1998 had reached approximately
50 percent. IE’s share has been steadily rising as Windows 95 users have
converted to Windows 98 and to subsequent versions of the operating system.
Recent estimates place Internet Explorer’s share at more than 90 percent of
the market.
Microsoft’s Licenses Issued to Original Equipment Manufacturers
174. In its continuing "jihad" to win the "browser war" Microsoft has gone to
the extreme of controlling the content of the computer screen that the PC end
user sees, To that end,
Microsoft abused its Windows operating system monopoly by requiring OEMs to
agree, as a condition of acquiring a license to the Windows operating system,
to adopt the uniform "boot-up" sequence and "desktop" screen that Microsoft
has dictated. The "boot" sequence determines the screens that every user sees
upon turning on a Windows-based PC. Microsoft’s exclusionary restrictions also
prohibited, among other things, any changes by an OEM that would remove from
the PC any part of Microsoft’s Internet Explorer software. OEMs were also
prohibited by Microsoft from adding to the PC a competing browser in any more
prominent or visible way than the way Microsoft required Internet Explorer to
be presented.
175. Beginning in or about August 1996, Microsoft prohibited sellers of
personal computers from altering the Windows 95 boot sequence. Specifically,
Microsoft’s license agreements prohibited OEMs from:
a. Modifying or obscuring the sequence or appearance of any screens displayed
by Windows from the time the user first begins the boot-up process with a new
personal computer until the "Welcome to Windows" screens have run and the
Windows desktop screen first appears;
b. Modifying or obscuring the sequence or appearance of any screens displayed
by Windows on all subsequent boot-ups unless the purchaser initiates some
action to change the sequence;
c. Displaying any content, including visual displays, sound, welcome or
tutorial screens, until after the Windows desktop screen first appears;
d. Modifying or obscuring the appearance of the Windows desktop screen, beyond
a narrowly limited range of permitted changes; or
e. Adding a screen that would automatically appear after the initial boot-up
sequence or in place of the Windows desktop screen.
176. These anti-competitive restrictions preserved the advantageous desktop
position that Microsoft secured for Internet Explorer and other Microsoft or
Microsoft-designated software. The restrictions also foreclosed competing
Interact browsers from securing preferential placement on PC desktops, and
foreclosed OEMs from choosing among competing browsers on the merits. The
effect of these restrictions was significantly to restrict the access of
competing browsers to the important OEM channel and thereby fortify
Microsoft's personal computer operating systems monopoly.
177. As described above, several OEMs (including MicronPC, Hewlett-Packard, and
Gateway) requested that Microsoft allow them to provide new personal computer
purchasers with an alternative user interface, boot-up sequence, or initial or
default screens. Microsoft refused these requests.
178. Microsoft recognized that its control over the desktop screen gave
Microsoft a strategic advantage in the provision of software, advertising and
promotion. Microsoft intended by its anti-competitive restrictions to
consolidate that power.
179. As the D.C. Circuit recognized in Microsoft III, these exclusionary
restrictions (with the minor exception of the prohibition against launching
user interfaces that "automatically prevent[ed] the Windows desktop from ever
being seen") were not reasonably necessary to further any legitimate,
pro-competitive purpose and furthermore impaired competition in an
unnecessarily restrictive way.
180. Microsoft’s exclusionary contracts thereby foreclosed Netscape from access
to customers, and further impeded their ability to distribute Java and other
software capable of
eroding Microsoft’s operating systems monopoly. Such exclusionary conduct also
suppressed the development of newer secure browsers.
Contractual and Technological Bundling of Internet Explorer with Windows
181. Internet Explorer is recognized by both Microsoft and the industry as a
distinct product separate and apart from Windows, For example:
a. Microsoft has sold Internet Explorer separately at retail, distributed it
separately through the Internet, and paid for it to be distributed separately;
b. Microsoft has distributed Internet Explorer as a separate product through
Internet Service Providers and other channels and has conditioned the access
of numerous companies (e.g., Internet Content Providers and Internet Service
Providers) to Windows facilities on such companies’ distribution of Internet
Explorer as a separate product;
c. Microsoft and the industry have separately tracked browser market share and
operating system software market share;
d. Microsoft has bundled stand-alone versions of Internet Explorer with other
application programs (e.g., Word, Works, Enema);
e. Microsoft has promoted, and has enlisted others to promote, the distribution
and use of Interact Explorer as a separate product;
f. Internet Service Providers consider Internet Explorer to be a separate
product from Windows and, recognizing the demand for a browser separate from
the operating system software, Microsoft has deliberately marketed it as such
to Internet Service Providers;
g. Interact browsers and operating system software perform different functions;
and
h. Microsoft has marketed--and continues to market--Interact Explorer for
non-Windows operating system software, including operating system software
produced by Apple. Indeed, Microsoft devoted substantial effort in developing
these versions of its Interact Explorer in order to foreclose opportunities
for non-Microsoft browsers to establish themselves).
182. There is demand for Internet browsers that is separate from the demand for
Microsoft’s operating system software. For example:
a. Many personal computer Users (who, of course, require an operating system)
do not need or want a browser;
b. For many customers, the forced inclusion of a browser with the operating
system software is a significant negative---including corporate customers who
do not want their employees connected to the Internet and customers that would
prefer a different browser. Microsoft has acknowledged that some sellers of
personal computers and personal computer users want to be able to delete
Interact Explorer from Windows and previously provided the ability, through
the "Add/Remove" utility, for them to do so; and
c. Other personal computer, customers want an up-to-date Windows operating
system together with non-Microsoft browsers.
183. Microsoft recognized that it could not compete with Netscape on the
merits. As Microsoft’s Christian Wilfeuer wrote in February, 1997, Microsoft
had concluded that it would "be very hard to increase browser share on the
merits of [Internet Explorer] alone. It will be more important to leverage the
[operating system] asset to make people use [Interact Explorer] instead of
Navigator." To leverage its operating system, Microsoft tied the
implementation of
Windows 98 (and subsequent versions of Windows) with Internet Explorer, so that
IE could not be simply uninstalled. Moreover, even if Netscape Navigator is
chosen as a default browser, Windows 98 (and subsequent versions of Windows)
is written to override the user’s choice in certain circumstances. As Brad
Chase of Microsoft wrote to his superiors near the end of 1995, "We will bind
the shell to the Interact Explorer, so that running any other browser is a
jolting experience."
184. Even before it bound Internet Explorer to Windows with "technological
shackles," though, Microsoft began tying Internet Explorer to Windows
with "contractual shackles." Microsoft unlawfully required OEMs, as a
condition of obtaining licenses for the Windows 95 operating system, to agree
to license and pre-install Interact Explorer on every Intel-compatible PC that
they shipped with Windows 95 pre-installed. Windows’ monopoly position made it
a commercial necessity for OEMs to pre-install Windows 95 on virtually all of
the PCs they sold. Microsoft thereby unlawfully leveraged its operating system
monopoly to require PC manufacturers to license and distribute Interact
Explorer on every PC those OEMs shipped with Windows, with the purpose and
effect of foreclosing Netscape’s Web browser, which (as described above)
threatened to erode the applications barrier to entry sustaining Microsoft’s
operating systems monopoly.
185. Microsoft bundled its Internet Explorer software with Windows 95 not
because Microsoft believed the market wanted only a bundled product but rather
to foreclose choice by personal computer sellers and ultimately their
customers.
186. Microsoft recognized that such restrictions were necessary to build
Interact Explorer’s market share and to foreclose the important OEM channel to
Navigator. By foreclosing personal computer choice, Microsoft substantially
foreclosed Netscape from a
significant channel of distribution, and as a consequence suppressed
competition with the Windows operating system software monopoly.
187. These exclusionary restrictions were not reasonably necessary to further
any legitimate pro-competitive purpose and furthermore the restrictions
impaired competition in an unnecessarily restrictive way. Microsoft has
distributed--and continues to distribute Internet Explorer separately from its
Windows operating system software, and it is efficient for it to do so.
Microsoft could also efficiently distribute or permit the distribution of
Windows without Microsoft’s Internet browser software.
188. Recognizing that its contractual restrictions on OEMs "would not be
sufficient in themselves to reverse the direction of Navigator’s usage
share... Microsoft set out to bind [Internet Explorer] more tightly to Windows
95 as a technical matter." Findings of Fact ¶ 160.
189. Microsoft designed Windows 98 (and subsequent versions of Windows) so that
removal of Internet Explorer by OEMs or end users is operationally more
difficult than it was in Windows 95. Microsoft undertook several measures to
bind "Internet Explorer to Windows with.., technological shackles."
Conclusions of Law at 39. These included, inter alia, excluding Internet
Explorer from the Add/Remove Programs utility in Windows and commingling code
relating to browsing with other code in the same files so that any attempt to
delete the files containing Internet Explorer would cripple the operating
system.
190. Although it is nevertheless technically feasible and practicable to remove
Microsoft’s Internet Explorer browser software from Windows and to substitute
other Internet browser software, OEMs were prevented from doing so by
Microsoft’s contractual tie-in. Microsoft has thus continued this practice,
begun with Windows 95, with the unlawful purpose and effect of foreclosing
Netscape’s Web browser, thereby preserving the applications barrier to
entry sustaining Microsoft’s operating systems monopoly. The net result of this
unlawful activity is higher prices for Plaintiffs and members of the Classes.
Exclusionary Agreements with Internet Access Providers (ISPs)
191. Microsoft entered into anti-competitive agreements with major Internet
Access Providers for the exclusive or nearly exclusive distribution of
Internet Explorer.
192. Starting in early 1996, as a condition for placement of an ISP on
the "Internet Connection Wizard" screens or the Online Services folder in
Windows 95, Microsoft began to require Internet Access Providers to agree to
deny most or all of their subscribers a choice of Internet browser.
193. Microsoft’s restrictions on the ability of OEMs to modify the boot
sequence or otherwise alter the appearance of Windows enhanced Microsoft's
ability to provide preferential placement on the desktop and in the boot-up
sequence to various Internet Access Providers in return for those firms’
commitments to give preferential distribution and promotion to Internet
Explorer and to restrict their distribution and promotion of competing
browsers.
194. As a result, these restrictions further exclude competing Internet
browsers from the most important channels of distribution, and are therefore
other means by which Microsoft has used the virtual universality of its
Windows operating system monopoly to maintain the applications barrier to
entry that competing Internet browsers have threatened to erode by
distributing Java and becoming platforms that could substitute for Windows.
195. In its agreements with ISPs, Microsoft leveraged its operating system
monopoly by imposing the requirements that the ISPs offer Microsoft’s Interact
Explorer browser primarily or exclusively as the browser they distribute; that
they refrain from promoting or mentioning to their subscribers the existence,
availability, or compatibility of any competing Internet browser;
and that they use on their own Internet Sites Microsoft-specific programming
that makes those sites look better when viewed through Internet Explorer than
when viewed through competing Internet browsers; that they eliminate links on
their web sites from which their subscribers could download a competing
browser over the Internet; that they include Internet Explorer as the only
browser they ship with their access software (i.e., the software that enables
a personal computer user to subscribe to the service) most or all of the time;
and that they limit the percentage of competing browsers they distribute, even
in response to specific requests from customers.
196. Microsoft’s agreements with Interact Access Providers also required the
IAPs to use Microsoft-specific programming extensions and tools in connection
with the ISP’s own web sites. Web sites developed with these
Microsoft-specific programming extensions and tools will consequently look
better when they are viewed with Internet Explorer than with a non-Microsoft
browser.
197. Under Microsoft’s ISP contracts, the penalty for promoting a competing
browser, for distributing a competing browser more than permitted by
Microsoft, or for otherwise failing to provide preferential treatment for
Microsoft’s Interact browser, was deletion from the Windows desktop. Even the
largest Interact Access Providers were unwilling to risk this penalty.
198. Microsoft recognized the importance to Internet Access Providers of
favorable placement on Windows screens. For example, Brad Silverberg
(Microsoft's former Senior Vice-President of its Applications and Internet
Client Group) described such placement as "a distribution facility" for
service providers that is of "tremendous value to them."
199. Approximately one-third of Internet browser users obtained their browsers
from their service provider; hence Microsoft’s exclusionary agreements with
those firms substantially
foreclosed Microsoft’s browser competitors from a vital means of distribution.
200. The exclusionary restrictions in Microsoi’s IAP agreements were not
reasonably necessary to further any legitimate procompetitive purpose and
impaired competition in an unnecessarily restrictive way.
201. Microsoft’s exclusionary ISP contracts, expressly targeted at its primary
Internet browser competitors, further foreclosed non-Microsoft browser
developers from access to customers and further impeded their ability to
distribute Java and other software capable of eroding Microsoft’s operating
systems monopoly.
Microsoft’s Predatory Response to Sun Microsystems’ Java Technologies
202. Sun Microsystems, Inc. announced in May 1995 that it had developed the
Java programming language. The inventors of Java intended the technology to
enable applications written in the Java language to run on a Variety of
platforms with minimal porting. This was a significant development because the
easier it is for developers to port their applications to different operating
systems, the more applications will be written for operating systems other
than Windows.
203. Microsoft executives almost immediately became deeply worried about the
potential of Sun’s Java technologies to diminish the applications barrier to
entry protecting Microsoft’s operating systems monopoly. In May 1995, Netscape
agreed to include a copy of Sun’s Java runtime environment with every copy of
Navigator, and Navigator quickly became the principal vehicle by which Sun
placed copies of Java on the PC systems of Windows users.
204. In 1996, senior executives at Microsoft became aware that the number of
developers writing network-centric applications in the Java programming
language had become significant and that Java was likely to increase in
popularity among developers. Microsoft
therefore became interested in maximizing the difficulty with which
applications written in Java could be ported from Windows to other platforms,
and vice versa. Microsoft engaged in various anti-competitive acts to
accomplish this purpose, including:
a. Microsoft discouraged developers from using Java. In 1997, Sun added a class
library called Remote Method Invocation ("RMI"), which allowed Java
applications written upon it to communicate with each other in certain useful
ways. Microsoft’s license agreement with Sun required Microsoft to offer RMI.
However, because this would allow Java developers to make applications more
portable, Microsoft took action to prevent access to RMI. Microsoft buried the
RMI link in an obscure location and did not include an entry for it in the
site’s index. Referring to Java developers who might access Microsoft’s site
looking for RMI, a Microsoft employee wrote to his approving manager "They’ll
have to stumble across it to know it’s there ....I’d say it’s pretty buried.";
b. Microsoft licensed and then corrupted Java, by creating Microsoft-specific
Java development tools and a Windows-compatible Java runtime environment that
made porting more difficult than with the Sun version of Java. Microsoft
continued to refuse to implement Sun’s RMI method until November 1998, when a
court ordered it to do so;
c. Microsoft discouraged business allies, such as Intel, from cooperating with
Sun, threatening that cooperation would jeopardize the business relationship
between Microsoft and the ally; and
d. In agreements signed with ISVs in 1997 and 1998, Microsoft conditioned early
Windows 98 and Windows NT betas, other technical information, and the right to
use certain Microsoft seals: of approval, on the agreement of those ISVs to use
Microsoft’s version of the Windows Java as the "default." Microsoft entered
into an agreement with at least one ISV that explicitly required it to
redistribute Microsoft’s Java to the exclusion of any other. Microsoft’s
anti-competitive attacks upon Java, coupled with its limitation of a primary
distribution vehicle, Netscape Navigator, effectively eliminated the Java
threat to the applications barrier.
205. Microsoft continues to engage in various anticompetitive acts designed to
further eliminate competition in the operating systems market. For instance,
Microsoft refuses to distribute any implementation of the Java runtime on its
Windows XP operating system. Unless OEMs separately install a JVM, the first
time that a consumer running Windows XP encounters a web page requiring a JVM,
Windows XP generates a notice that in order to display the web page correctly,
the user must download and install the Microsoft Windows-compatible Java
runtime environment. If the consumer then selects the download option, the
user has automatically been directed to a Microsoft web site from which the
Microsoft Windows-compatible Java runtime environment is downloaded and
installed.
206. Having illegally debilitated the vendor-independent Navigator/Java
middleware platforms that threatened its PC operating system monopoly,
Microsoft is now exploiting its illegal monopolies to leverage market share
for its own middleware platform, one that, in sharp contrast to the
Navigator/Java middleware platforms, is Microsoft specific. Microsoft refers
to its new Microsoft-specific middleware platform as the .NET framework. When
the potential of the Navigator and Java platforms to capitalize on the
Interact paradigm became apparent, Microsoft was neither poised nor
well-suited to provide a competitive alternative to those
platforms. Now that it has illegally crushed the threat poised by the Navigator
and Java middleware platforms, and thereby bought itself years of time to
clone much of the functionality of the Java platform, Microsoft has touted the
belated introduction of its new .NET middleware platform as its most important
initiative, one that will fundamentally transform its own business and the
Internet in general. Just as it developed the Windows platform on top of
MS-DOS in order to encourage developers to write to the new platform,
Microsoft now will provide the .NET Framework as a middleware layer on top of
Windows, and encourage developers to increasingly write their applications to
this new platform, gradually obsolescing the Windows platform and transferring
Microsof's monopoly from the PC operating system to the middleware layer.
Microsoft hopes to use its ill-gotten .NET market share to leverage market
share in the increasingly important realm of server-based computing, a realm
that currently poses the greatest threat to Microsoft’s desktop hegemony. By
infusing .NET with Microsoft-specific interfaces and protocols shared by the
Microsoft servers facilitating dynamic web services, Microsoft threatens to
control, and render Microsoft-specific, the market for dynamic web services
and other server-based computing. Microsoft also hopes to leverage its .NET
market power to increase its market share in the adjacent market of embedded
devices.
Streaming Media Technologies
207. Just as it perceived a threat from web browsers, Microsoft also saw a
threat from streaming media software. As the district court found in Microsoft
III: In 1997, senior Microsoft executives viewed RealNetworks’ streaming
[media] software with the same apprehension with which they viewed Apple’s
[QuickTime] playback software--as competitive technology that could develop
into part of a middleware layer that todd, in turn, become broad and
widespread enough to weaken the applications barrier to entry [which protected
Mierosoft’s operating systems monopoly].
Findings of Fact ¶ 111, 84 F. Supp. 2d at 37
208. RealNetworks is a pioneer in the field of digital media, particularly
streaming media--a technology for delivering audio and video content over
networks like the intemet. In 1995, RealNetworks became the first company to
offer commercially internet streaming media players and servers. RealNetwork’s
digital media players have been available on various platforms, including
Apple’s MaeOS, Hewlett-Packard’s HP UX, Sun’s Solaris, IBM’s AIX, and Linux.
209. In response to the threat posed by RealNetworks’ streaming media
technologies, Microsoft utilized many of the same antieompetitive tactics that
it employed against Netscape’s Navigator. In January 1999, Microsoft executive
Anthony Bay sent Bill Gates an email outlining a plan for Microsoft to
dominate the market for streaming media--and thereby protect its Windows
operating system monopoly. Mr. Bay recommended that Microsoft "reposition
streaming media battle from NetShow versus Real to Windows versus Real"
and "follow the [Internet Explorer] strategy wherever appropriate."
210. As part of its anticompetitive campaign against RealNetworks, Microsoft
has given away its Windows Media products or even paid customers to take them.
Microsoft has offered financial incentives to encourage OEMs to install
Windows Media Player on their PCs. It has tied the Windows Media Server
(recently renamed "Windows Media Services") to its Windows server operating
system products. Microsoft has also tied its Windows Media software to its
Windows PC operating system
211. Microsoft has also refused to provide RealNetworks with technical
information concerning the Windows operating system that would allow
RealNetworks to make its media player fully competitive with Microsoft’s
Windows Media Player. For instance, Microsoft has
refused to disclose, or delayed disclosing, ithe APIs and other technical
information required for RealNetworks’ software to make use of the Secure
Audio Pathway or "SAP." Microsoft has also disclosed needed technical
information in a discriminatory manner.
212. Microsoft has also engaged in anticompetitive conduct against Burst.com as
part of its efforts to maintain the applications barrier to entry protecting
its operating systems monopoly. Burst.com was the developer 0fcore video
streaming technology that would enable a provider to perform
faster-than-real-time transmissions of time-based media over networks. As it
has done with other smaller competitors, Microsoft was determined to "embrace,
extend and extinguish" Burst.
Microsoft’s Predatory Response to Opera
213. Opera Software, a Norwegian-based ISV, developed the Opera Web browser, a
high-quality, multi-platform product for a wide range of platforms, operating
systems and embedded Interact products. A version of the Opera Web browser is
available for the Windows platform.
214. In keeping with its efforts to undermine Navigator, Microsoft has engaged
in an anti-competitive campaign against Opera as well. In October 2001, for
example, users of the Opera Web browser--as well as other alternative
non-Microsoft browsers such as Mozilla---discovered that they had been "locked
out" from Microsoft’s MSN website. Instead, users of non-Microsoft browsers
were given the option of downloading a version of Microsoft’s Internet
Explorer.
215. More recently, in February 2002, Microsoft began sending users of the
Opera Web browser a faulty style sheet which determines the presentation of
graphics and text in a browser window. When people using Opera 7 browser
sottware visited MSN.com (which is
published by Microsoft) some of the site content is obscured. Opera 7 received
a style sheet very different from the style sheets used by the Microsoft and
Netscape browsers. The Opera Web browser was explicitly instructed to move
content off the side of its container, thus creating the impression that there
is something wrong with Opera 7. Not only did the code sent to Opera users not
work in Opera 7, it did not function in Microsoft’s own Internet Explorer 6.
216. On information and belief, Microsoft’s anti-competitive actions directed
at Opera (consistent with its FUD campaigns against DR-DOS and others) were
intended to create the belief among end users that the Opera Web browser was
to blame for the problem. The actions were further intended to prevent the
cross-platform Opera Web browser from gaining the critical mass necessary to
pose a threat to the applications barrier to entry.
Microsoft’s Predatory Conduct In The Workgroup Server Market.
217. As the District Court for the District of Columbia observed in November
2002, "the Court concludes that one of the technologies identified by
Plaintiffs, server/network computing, has the capacity to function in a role
akin to middleware, and thereby increase competition in the relevant [PC OS]
market." Microsoft also recognized the threat posed by workgroup server
operating systems and in a manner essentially identical to its attacks on
applications, middleware and PC operating system competitors, developed a
strategy to monopolize the workgroup server market.
218. Microsott implemented a three-pronged strategy for eliminating competition
in the workgroup server market. First, Microsoft used its logo and
certification programs for its PC operating system to coerce developers to
write applications that would also run on its workgroup server operating
system. Second, Microsoft intentionally acted to lock out rivals like Sun and
Samba from the workgroup server operating system market by refusing to
disclose technical
information necessary to interoperation and by degrading the limited
interoperability that previously existed in the marketplace between
Microsoft’s PC operating system and non-Microsoft workgroup server operating
systems. Third, Microsoft bundled critical networking functions and features
into its PC operating system products, but then designed those functions and
features so that customers cannot ftdly use that functionality unless they
also purchase Microsoff’s workgroup server operating systems. As a result,
consumers could not substitute a non-Windows server operating system if they
wished to use all of the Windows PC functionality they purchased as part of
their PC operating system. In short, Microsoft has designed its PC operating
system monopoly products to require Microsoft workgroup server operating
systems in order to access and utilize the full functionality contained in the
PC operating system.
219. By intentionally denying non-Microsoft workgroup servers the same ability
to interoperate with the functions and features of the PC operating system
that are necessary and central to interoperation with workgroup servers, while
making those same functions and features fully accessible only to MicrosOft
workgroup servers, Microsoft has increased the switching costs for consumers
by increasing the products that must be replaced from the PC operating system
alone to the PC operating system and every Microsoft device or product that
connects to it. As Michael Tiemann, Chief Technology Officer with Red Hat,
Inc.--a Linux developer--testified in the remedies proceedings in New York v.
Microsoft Corp., Microsoft’s conduct in the workgroup server market raised
barriers to Linux gaining acceptance on the PC desktop.
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