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FINDINGS OF FACT U.S. District Court November 5, 1999
I. BACKGROUND
II. THE RELEVANT MARKET
A. Demand Substitutability
B. The Possibility of Supply Responses
III. MICROSOFT'S POWER IN THE RELEVANT MARKET
A. Market Share
B. The Applications Barrier to Entry
C. Viable Alternatives to Windows
D. Price Restraint Posed by Microsoft's Installed Base
E. Price Restraint Posed by Piracy
F. Price Restraint Posed by Long-Term Threats
G. Significance of Microsoft's Innovation
H. Microsoft's Pricing Behavior
I. Microsoft's Actions Toward Other Firms
IV. THE MIDDLEWARE THREATS
A. The Netscape Web browser
B. Sun's Implementation of the Java Technologies
C. Other Middleware Threats
V. MICROSOFT'S RESPONSE TO THE BROWSER THREAT
A. Microsoft's Attempt to Dissuade Netscape from Developing Navigator
as a Platform
B. Withholding Crucial Technical Information
C. The Similar Experiences of Other Firms in Dealing with Microsoft
D. Developing Competitive Web Browsing Software
E. Giving Internet Explorer Away and Rewarding Firms that Helped
Build Its Usage Share
F. Excluding Navigator from Important Distribution Channels
G. Microsoft's Success in Excluding Navigator from the Channels that
Lead Most Efficiently to Browser Usage
H. The Success of Microsoft's Effort to Maximize Internet Explorer's
Usage Share at Navigator's Expense
I. The Success of Microsoft's Effort to Protect the Applications
Barrier to Entry from the Threat Posed by Navigator
VI. MICROSOFT'S RESPONSE TO THE THREAT POSED BY SUN'S IMPLEMENTATION OF JAVA
A. Creating a Java Implementation for Windows that Undermined
Portability and Was Incompatible with Other Implementations
B. Inducing Developers to Use the Microsoft Implementation of Java
Rather than Sun-Compliant Implementations
C. Thwarting the Expansion of the Java Class Libraries
D. The Effect of Microsoft's Efforts to Prevent Java from Diminishing
the Applications Barrier to Entry
VII. THE EFFECT ON CONSUMERS OF MICROSOFT'S EFFORTS TO PROTECT THE
APPLICATIONS BARRIER TO ENTRY
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UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
________________________________________
)
UNITED STATES OF AMERICA, )
)
Plaintiff, )
)
v. ) Civil Action No. 98-1232 (TPJ)
)
MICROSOFT CORPORATION, )
)
Defendant. )
)
________________________________________ )
)
STATE OF NEW YORK, ex rel. )
Attorney General ELIOT SPITZER, )
et al., )
)
Plaintiffs and )
Counterclaim-Defendants, )
)
v. ) Civil Action No. 98-1233 (TPJ)
)
MICROSOFT CORPORATION, )
)
Defendant and )
Counterclaim-Plaintiff. )
________________________________________ )
FINDINGS OF FACT
These consolidated civil antitrust actions alleging violations of the
Sherman Act, 1 and 2, and various state statutes by the defendant
Microsoft Corporation, were tried to the Court, sitting without a
jury, between October 19, 1998, and June 24, 1999. The Court has
considered the record evidence submitted by the parties, made
determinations as to its relevancy and materiality, assessed the
credibility of the testimony of the witnesses, both written and oral,
and ascertained for its purposes the probative significance of the
documentary and visual evidence presented. Upon the record before the
Court as of July 28, 1999, at the close of the admission of evidence,
pursuant to Fed. R. Civ. P. 52(a), the Court finds the following facts
to have been proved by a preponderance of the evidence. The Court
shall state the conclusions of law to be drawn therefrom in a separate
Memorandum and Order to be filed in due course.
I. BACKGROUND
1. A "personal computer" ("PC") is a digital information processing
device designed for use by one person at a time. A typical PC consists
of central processing components (e.g., a microprocessor and main
memory) and mass data storage (such as a hard disk). A typical PC
system consists of a PC, certain peripheral input/output devices
(including a monitor, a keyboard, a mouse, and a printer), and an
operating system. PC systems, which include desktop and laptop models,
can be distinguished from more powerful, more expensive computer
systems known as "servers," which are designed to provide data,
services, and functionality through a digital network to multiple
users.
2. An "operating system" is a software program that controls the
allocation and use of computer resources (such as central processing
unit time, main memory space, disk space, and input/output channels).
The operating system also supports the functions of software programs,
called "applications," that perform specific user-oriented tasks. The
operating system supports the functions of applications by exposing
interfaces, called "application programming interfaces," or "APIs."
These are synapses at which the developer of an application can
connect to invoke pre-fabricated blocks of code in the operating
system. These blocks of code in turn perform crucial tasks, such as
displaying text on the computer screen. Because it supports
applications while interacting more closely with the PC system's
hardware, the operating system is said to serve as a "platform."
3. An Intel-compatible PC is one designed to function with Intel's
80x86/Pentium families of microprocessors or with compatible
microprocessors manufactured by Intel or by other firms.
4. An operating system designed to run on an Intel-compatible PC will
not function on a non-Intel-compatible PC, nor will an operating
system designed for a non-Intel-compatible PC function on an
Intel-compatible one. Similarly, an application that relies on APIs
specific to one operating system will not, generally speaking,
function on another operating system unless it is first adapted, or
"ported," to the APIs of the other operating system.
5. Defendant Microsoft Corporation is organized under the laws of the
State of Washington, and its headquarters are situated in Redmond,
Washington. Since its inception, Microsoft has focused primarily on
developing software and licensing it to various purchasers.
6. In 1981, Microsoft released the first version of its Microsoft Disk
Operating System, commonly 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 the International
Business Machines Corporation ("IBM") selected MS-DOS for
pre-installation on its first generation of PCs, Microsoft's product
became the predominant operating system sold for Intel-compatible PCs.
7. In 1985, Microsoft began shipping a software package called
Windows. The product included a graphical user interface, which
enabled users to perform tasks by selecting icons and words on the
screen using a mouse. Although originally just a user-interface, or
"shell," sitting on top of MS-DOS, Windows took on more
operating-system functionality over time.
8. In 1995, Microsoft introduced a software package called Windows 95,
which announced itself as the first operating system for
Intel-compatible PCs that exhibited the same sort of integrated
features as the Mac OS running PCs manufactured by Apple Computer,
Inc. ("Apple"). Windows 95 enjoyed unprecedented popularity with
consumers, and in June 1998, Microsoft released its successor, Windows
98.
9. Microsoft is the leading supplier of operating systems for PCs. The
company transacts business in all fifty of the United States and in
most countries around the world.
10. Microsoft licenses copies of its software programs directly to
consumers. The largest part of its MS-DOS and Windows sales, however,
consists of licensing the products to manufacturers of PCs (known as
"original equipment manufacturers" or "OEMs"), such as the IBM PC
Company and the Compaq Computer Corporation ("Compaq"). An OEM
typically installs a copy of Windows onto one of its PCs before
selling the package to a consumer under a single price.
11. The Internet is a global electronic network, consisting of
smaller, interconnected networks, which allows millions of computers
to exchange information over telephone wires, dedicated data cables,
and wireless links. The Internet links PCs by means of servers, which
run specialized operating systems and applications designed for
servicing a network environment.
12. The World Wide Web ("the Web") is a massive collection of digital
information resources stored on servers throughout the Internet. These
resources are typically provided in the form of hypertext documents,
commonly referred to as "Web pages," that may incorporate any
combination of text, graphics, audio and video content, software
programs, and other data. A user of a computer connected to the
Internet can publish a page on the Web simply by copying it into a
specially designated, publicly accessible directory on a Web server.
Some Web resources are in the form of applications that provide
functionality through a user's PC system but actually execute on a
server.
13. Internet content providers ("ICPs") are the individuals and
organizations that have established a presence, or "site," on the Web
by publishing a collection of Web pages. Most Web pages are in the
form of "hypertext"; that is, they contain annotated references, or
"hyperlinks," to other Web pages. Hyperlinks can be used as
cross-references within a single document, between documents on the
same site, or between documents on different sites.
14. Typically, one page on each Web site is the "home page," or the
first access point to the site. The home page is usually a hypertext
document that presents an overview of the site and hyperlinks to the
other pages comprising the site.
15. PCs typically connect to the Internet through the services of
Internet access providers ("IAPs"), which generally charge
subscription fees to their customers in the United States. There are
two types of IAPs. Online services ("OLSs") such as America Online
("AOL"), Prodigy, and the Microsoft Network ("MSN") offer, in addition
to Internet access, various services and an array of proprietary
content. Internet service providers ("ISPs") such as MindSpring and
Netcom, on the other hand, offer few services apart from Internet
access and relatively little of their own content.
16. A "Web client" is software that, when running on a computer
connected to the Internet, sends information to and receives
information from Web servers throughout the Internet. Web clients and
servers transfer data using a standard known as the Hypertext Transfer
Protocol ("HTTP"). A "Web browser" is a type of Web client that
enables a user to select, retrieve, and perceive resources on the Web.
In particular, Web browsers provide a way for a user to view hypertext
documents and follow the hyperlinks that connect them, typically by
moving the cursor over a link and depressing the mouse button.
17. Although certain Web browsers provided graphical user interfaces
as far back as 1993, the first widely-popular graphical browser
distributed for profit, called Navigator, was brought to market by the
Netscape Communications Corporation in December 1994. Microsoft
introduced its browser, called Internet Explorer, in July 1995.
II. THE RELEVANT MARKET
18. Currently there are no products, nor are there likely to be any in
the near future, that a significant percentage of consumers world-wide
could substitute for Intel-compatible PC operating systems without
incurring substantial costs. Furthermore, no firm that does not
currently market Intel-compatible PC operating systems could start
doing so in a way that would, within a reasonably short period of
time, present a significant percentage of consumers with a viable
alternative to existing Intel-compatible PC operating systems. It
follows that, if one firm controlled the licensing of all
Intel-compatible PC operating systems world-wide, it could set the
price of a license substantially above that which would be charged in
a competitive market and leave the price there for a significant
period of time without losing so many customers as to make the action
unprofitable. Therefore, in determining the level of Microsoft's
market power, the relevant market is the licensing of all
Intel-compatible PC operating systems world-wide.
A. Demand Substitutability
1. Server Operating Systems
19. Consumers could not turn from Intel-compatible PC operating
systems to Intel- compatible server operating systems without
incurring substantial costs, since the latter type of system is sold
at a significantly higher price than the former. A consumer intent on
acquiring a server operating system would also have to buy a computer
of substantially greater power and price than an Intel-compatible PC,
because server operating systems generally cannot function properly on
PC hardware. The price of an Intel-compatible PC operating system
accounts for only a very small percentage of the price of an
Intel-compatible PC system. Thus, even a substantial increase in the
price of an Intel-compatible PC operating system above the competitive
level would result in only a trivial increase in the price of an
Intel-compatible PC system. Very few consumers would purchase
expensive servers in response to a trivial increase in the price of an
Intel-compatible PC system. Furthermore, a consumer would not obtain a
satisfactory substitute for an Intel-compatible PC operating system
even if he purchased a server, since server operating systems lack the
features -- and support for the breadth of applications -- that induce
users to purchase Intel-compatible PC operating systems.
2. Non-Intel-Compatible PC Operating Systems
20. Since only Intel-compatible PC operating systems will work with
Intel-compatible PCs, a consumer cannot opt for a non-Intel-compatible
PC operating system without obtaining a non-Intel-compatible PC. Thus,
for consumers who already own an Intel-compatible PC system, the cost
of switching to a non-Intel compatible PC operating system includes
the price of not only a new operating system, but also a new PC and
new peripheral devices. It also includes the effort of learning to use
the new system, the cost of acquiring a new set of compatible
applications, and the work of replacing files and documents that were
associated with the old applications. Very few consumers would incur
these costs in response to the trivial increase in the price of an
Intel-compatible PC system that would result from even a substantial
increase in the price of an Intel-compatible PC operating system. For
example, users of Intel-compatible PC operating systems would not
switch in large numbers to the Mac OS in response to even a
substantial, sustained increase in the price of an Intel-compatible PC
operating system.
21. The response to a price increase would be somewhat greater among
consumers buying their first PC system, because they would not have
already invested time and money in an Intel-compatible PC system and a
set of compatible applications. Apple does not license the Mac OS
separately from its PC hardware, however, and the package of hardware
and software comprising an Apple PC system is priced substantially
higher than the average price of an Intel-compatible PC system.
Furthermore, consumer demand for Apple PC systems suffers on account
of the relative dearth of applications written to run on the Mac OS.
It is unlikely, then, that a firm controlling the licensing of all
Intel-compatible PC operating systems would lose so many new PC users
to Apple as the result of a substantial, enduring price increase as to
make the action unprofitable. It is therefore proper to define a
relevant market that excludes the Mac OS. In any event, as Section III
of these findings demonstrates, including the Mac OS in the relevant
market would not alter the Court's conclusion as to the level of
Microsoft's market power.
3. Information Appliances
22. No operating system designed for a hand-held computer, a "smart"
wireless telephone, a television set-top box, or a game console is
capable of performing as an adequate operating system for an
Intel-compatible PC. Therefore, in order to adopt a substitute for the
Intel-compatible PC operating system from the realm of "information
appliances," a consumer must acquire one or more of these devices in
lieu of an Intel-compatible PC system.
23. It is possible that, within the next few years, those consumers
who otherwise would use an Intel-compatible PC system solely for
storing addresses and schedules, for sending and receiving E-mail, for
browsing the Web, and for playing video games might be able to choose
a complementary set of information appliances over an Intel-compatible
PC system without incurring substantial costs. To the extent this
substitution occurs, though, it will be the result of innovation by
the producers of information appliances, and it will occur even if
Intel-compatible PC operating systems are priced at the same level
that they would be in a competitive market. More importantly, while
some consumers may decide to make do with one or more information
appliances in place of an Intel-compatible PC system, the number of
these consumers will, for the foreseeable future, remain small in
comparison to the number of consumers deciding that they still need an
Intel-compatible PC system. One reason for this is the fact that no
single type of information appliance, nor even all types in the
aggregate, provides all of the features that most consumers have come
to rely on in their PC systems and in the applications that run on
them. Thus, most of those who buy information appliances will do so in
addition to, rather than instead of, buying an Intel-compatible PC
system. Not surprisingly, then, sales of PC systems are not expected
to suffer on account of the growing consumer interest in information
appliances. It follows that, for the foreseeable future, a firm
controlling the licensing of all Intel-compatible PC operating systems
could set prices substantially above competitive levels without losing
an unacceptable amount of business to information appliances.
4. Network Computers
24. A network computer system (sometimes called a "thin client")
typically contains central processing components with basic
capabilities, certain key peripheral devices (such as a monitor, a
keyboard, and a mouse), an operating system, and a browser. The system
contains no mass storage, however, and it processes little if any data
locally. Instead, the system receives processed data and software as
needed from a server across a network. A network computer system lacks
the hardware resources to support an Intel-compatible PC operating
system. It follows that software applications written to run on a
specific Intel-compatible PC operating system will not run on a
network computer. Network computers can run applications residing on a
designated server, however. Moreover, a network computer system
typically can run applications residing on other servers, so long as
those applications are accessible through Web sites. The ability to
run server-based applications is not exclusive to network computer
systems, however. Generally speaking, any PC system equipped with a
browser and an Internet connection is capable of accessing
applications hosted through Web sites.
25. Since the network computing model relies heavily on the processing
power and memory of servers, the requirements for the user's hardware
(and thus the price of that hardware) are low relative to those of an
Intel-compatible PC system. Still, a user who already owns a
relatively expensive Intel-compatible PC system is not likely to
abandon the investment and acquire less powerful hardware just because
one of the least expensive components of his PC system -- the
operating system -- is substantially more expensive than it would be
under competitive conditions. Just as does the Mac OS, the network
computing model presents a somewhat more attractive alternative to the
first-time computer buyer. But as in the case where a prospective
purchaser is considering acquiring the Apple alternative, a new buyer
considering the network computing model must choose between types of
computer systems. If the consumer opts for the less expensive hardware
of the network computer, that hardware will not support an
Intel-compatible PC operating system; and if the new buyer opts for
the more expensive hardware of an Intel-compatible PC, an
Intel-compatible PC operating system will almost certainly come
pre-installed (and in any event represent very little additional cost
relative to the price of the hardware).
26. Only a few firms currently market network computer systems, and
the systems have yet to attract substantial consumer demand. In part,
this is because PC systems, which can store and process data locally
as well as communicate with a server, have decreased so much in price
as to call into question the value proposition of buying a network
computer system. This fact would not change if the price of an
Intel-compatible PC operating system rose significantly, because the
resulting change in the price of an Intel-compatible PC system would
be very minor. Another reason for the limited demand for network
computer systems is the fact that few consumers are in a position to
turn from PC systems to network computer systems without making
substantial sacrifices; for the network computing option exhibits
significant shortcomings for current PC owners and first-time buyers
alike. The problems of latency, congestion, asynchrony, and insecurity
across a communications network, and contention for limited processing
and memory resources at the remote server, can all result in a
substantial derogation of computing performance. Moreover, the owner
of a network computer is required to enter into long-term dependency
upon the owner of a remote server in order to obtain functionality
that would reside within his control if he owned a PC system. If
network computing becomes a viable alternative to PC-based computing,
it will be because innovation by the proponents of the network
computing model overcomes these problems, and it will happen even if
Intel-compatible PC operating systems are priced at competitive
levels. In any case, that day has not arrived, nor does it appear
imminent.
5. Server-Based Computing Generally
27. As the bandwidth available to the average user increases, "portal"
Web sites, which aggregate Web content and provide services such as
search engines, E-mail, and travel reservation systems, could begin to
host full lines of the server-based, personal-productivity
applications that have begun to appear in small numbers on the Web. If
so, increasing numbers of computer users equipped with Web browsers
and IAP connections could begin to conduct a significant portion of
their computing through these portals. To the extent they might do so,
users probably would not regard the Mac OS's limited stock of
compatible applications as the major drawback to using an Apple PC
system that it is today, and they might be increasingly drawn to
network computer systems and information appliances. The variety and
ease of use of server-based applications accessible through browsers
would have to increase a great deal from today's levels, however,
before the total costs of dispensing with an Intel-compatible PC
operating system would decline sufficiently to impose a significant
constraint on the pricing of those systems. Again, that day is not
imminent; for at least the next few years, the overwhelming majority
of consumers accessing server-based applications will do so using an
Intel-compatible PC system and a browser.
6. Middleware
28. Operating systems are not the only software programs that expose
APIs to application developers. The Netscape Web browser and Sun
Microsystems, Inc.'s Java class libraries are examples of
non-operating system software that do likewise. Such software is often
called "middleware" because it relies on the interfaces provided by
the underlying operating system while simultaneously exposing its own
APIs to developers. Currently no middleware product exposes enough
APIs to allow independent software vendors ("ISVs") profitably to
write full-featured personal productivity applications that rely
solely on those APIs.
29. Even if middleware deployed enough APIs to support full-featured
applications, it would not function on a computer without an operating
system to perform tasks such as managing hardware resources and
controlling peripheral devices. But to the extent the array of
applications relying solely on middleware comes to satisfy all of a
user's needs, the user will not care whether there exists a large
number of other applications that are directly compatible with the
underlying operating system. Thus, the growth of middleware-based
applications could lower the costs to users of choosing a
non-Intel-compatible PC operating system like the Mac OS. It remains
to be seen, though, whether there will ever be a sustained stream of
full-featured applications written solely to middleware APIs. In any
event, it would take several years for middlware and the applications
it supports to evolve from the status quo to a point at which the cost
to the average consumer of choosing a non-Intel compatible PC
operating system over an Intel-compatible one falls so low as to
constrain the pricing of the latter systems.
B. The Possibility of Supply Responses
30. Firms that do not currently produce Intel-compatible PC operating
systems could do so. What is more, once a firm had written the
necessary software code, it could produce millions of copies of its
operating system at relatively low cost. The ability to meet a large
demand is useless, however, if the demand for the product is small,
and signs do not indicate large demand for a new Intel-compatible PC
operating system. To the contrary, they indicate that the demand for a
new Intel-compatible PC operating system would be severely constrained
by an intractable "chicken-and-egg" problem: The overwhelming majority
of consumers will only use a PC operating system for which there
already exists a large and varied set of high-quality, full-featured
applications, and for which it seems relatively certain that new types
of applications and new versions of existing applications will
continue to be marketed at pace with those written for other operating
systems. Unfortunately for firms whose products do not fit that bill,
the porting of applications from one operating system to another is a
costly process. Consequently, software developers generally write
applications first, and often exclusively, for the operating system
that is already used by a dominant share of all PC users. Users do not
want to invest in an operating system until it is clear that the
system will support generations of applications that will meet their
needs, and developers do not want to invest in writing or quickly
porting applications for an operating system until it is clear that
there will be a sizeable and stable market for it. What is more,
consumers who already use one Intel-compatible PC operating system are
even less likely than first-time buyers to choose a newcomer to the
field, for switching to a new system would require these users to
scrap the investment they have made in applications, training, and
certain hardware.
31. The chicken-and-egg problem notwithstanding, a firm might
reasonably expect to make a profit by introducing an Intel-compatible
PC operating system designed to support a type of application that
satisfies the special interests of a particular subset of users. For
example, Be, Inc. ("Be") markets an Intel-compatible PC operating
system called BeOS that offers superior support for multimedia
applications, and the operating system enjoys a certain amount of
success with the segment of the consumer population that has a special
interest in creating and playing multimedia content with a PC system.
Still, while a niche operating system might turn a profit, the
chicken-and-egg problem (hereinafter referred to as the "applications
barrier to entry") would make it prohibitively expensive for a new
Intel-compatible operating system to attract enough developers and
consumers to become a viable alternative to a dominant incumbent in
less than a few years.
32. To the extent that developers begin writing attractive
applications that rely solely on servers or middleware instead of PC
operating systems, the applications barrier to entry could erode. As
the Court finds above, however, it remains to be seen whether server-
or middleware-based development will flourish at all. Even if such
development were already flourishing, it would be several years before
the applications barrier eroded enough to clear the way for the
relatively rapid emergence of a viable alternative to incumbent
Intel-compatible PC operating systems. It is highly unlikely, then,
that a firm not already marketing an Intel-compatible PC operating
system could begin marketing one that would, in less than a few years,
present a significant percentage of consumers with a viable
alternative to incumbents.
III. MICROSOFT'S POWER IN THE RELEVANT MARKET
33. Microsoft enjoys so much power in the market for Intel-compatible
PC operating systems that if it wished to exercise this power solely
in terms of price, it could charge a price for Windows substantially
above that which could be charged in a competitive market. Moreover,
it could do so for a significant period of time without losing an
unacceptable amount of business to competitors. In other words,
Microsoft enjoys monopoly power in the relevant market.
34. Viewed together, three main facts indicate that Microsoft enjoys
monopoly power. First, Microsoft's share of the market for
Intel-compatible PC operating systems is extremely large and stable.
Second, Microsoft's dominant market share is protected by a high
barrier to entry. Third, and largely as a result of that barrier,
Microsoft's customers lack a commercially viable alternative to
Windows.
A. Market Share
35. Microsoft possesses a dominant, persistent, and increasing share
of the world- wide market for Intel-compatible PC operating systems.
Every year for the last decade, Microsoft's share of the market for
Intel-compatible PC operating systems has stood above ninety percent.
For the last couple of years the figure has been at least ninety-five
percent, and analysts project that the share will climb even higher
over the next few years. Even if Apple's Mac OS were included in the
relevant market, Microsoft's share would still stand well above eighty
percent.
B. The Applications Barrier to Entry
1. Description of the Applications Barrier to Entry
36. Microsoft's dominant market share is protected by the same barrier
that helps define the market for Intel-compatible PC operating
systems. As explained above, the applications barrier would prevent an
aspiring entrant into the relevant market from drawing a significant
number of customers away from a dominant incumbent even if the
incumbent priced its products substantially above competitive levels
for a significant period of time. Because Microsoft's market share is
so dominant, the barrier has a similar effect within the market: It
prevents Intel-compatible PC operating systems other than Windows from
attracting significant consumer demand, and it would continue to do so
even if Microsoft held its prices substantially above the competitive
level.
37. Consumer interest in a PC operating system derives primarily from
the ability of that system to run applications. The consumer wants an
operating system that runs not only types of applications that he
knows he will want to use, but also those types in which he might
develop an interest later. Also, the consumer knows that if he chooses
an operating system with enough demand to support multiple
applications in each product category, he will be less likely to find
himself straitened later by having to use an application whose
features disappoint him. Finally, the average user knows that,
generally speaking, applications improve through successive versions.
He thus wants an operating system for which successive generations of
his favorite applications will be released -- promptly at that. The
fact that a vastly larger number of applications are written for
Windows than for other PC operating systems attracts consumers to
Windows, because it reassures them that their interests will be met as
long as they use Microsoft's product.
38. Software development is characterized by substantial economies of
scale. The fixed costs of producing software, including applications,
is very high. By contrast, marginal costs are very low. Moreover, the
costs of developing software are "sunk" -- once expended to develop
software, resources so devoted cannot be used for another purpose. The
result of economies of scale and sunk costs is that application
developers seek to sell as many copies of their applications as
possible. An application that is written for one PC operating system
will operate on another PC operating system only if it is ported to
that system, and porting applications is both time-consuming and
expensive. Therefore, application developers tend to write first to
the operating system with the most users -- Windows. Developers might
then port their applications to other operating systems, but only to
the extent that the marginal added sales justify the cost of porting.
In order to recover that cost, ISVs that do go to the effort of
porting frequently set the price of ported applications considerably
higher than that of the original versions written for Windows.
39. Consumer demand for Windows enjoys positive network effects. A
positive network effect is a phenomenon by which the attractiveness of
a product increases with the number of people using it. The fact that
there is a multitude of people using Windows makes the product more
attractive to consumers. The large installed base attracts corporate
customers who want to use an operating system that new employees are
already likely to know how to use, and it attracts academic consumers
who want to use software that will allow them to share files easily
with colleagues at other institutions. The main reason that demand for
Windows experiences positive network effects, however, is that the
size of Windows' installed base impels ISVs to write applications
first and foremost to Windows, thereby ensuring a large body of
applications from which consumers can choose. The large body of
applications thus reinforces demand for Windows, augmenting
Microsoft's dominant position and thereby perpetuating ISV incentives
to write applications principally for Windows. This self-reinforcing
cycle is often referred to as a "positive feedback loop."
40. What for Microsoft is a positive feedback loop is for would-be
competitors a vicious cycle. For just as Microsoft's large market
share creates incentives for ISVs to develop applications first and
foremost for Windows, the small or non-existent market share of an
aspiring competitor makes it prohibitively expensive for the aspirant
to develop its PC operating system into an acceptable substitute for
Windows. To provide a viable substitute for Windows, another PC
operating system would need a large and varied enough base of
compatible applications to reassure consumers that their interests in
variety, choice, and currency would be met to more-or-less the same
extent as if they chose Windows. Even if the contender attracted
several thousand compatible applications, it would still look like a
gamble from the consumer's perspective next to Windows, which supports
over 70,000 applications. The amount it would cost an operating system
vendor to create that many applications is prohibitively large.
Therefore, in order to ensure the availability of a set of
applications comparable to that available for Windows, a potential
rival would need to induce a very large number of ISVs to write to its
operating system.
41. In deciding whether to develop an application for a new operating
system, an ISV's first consideration is the number of users 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 want to sink resources
into developing for the system 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.
42. Counteracting the collective-action phenomenon is another known as
the "first- mover incentive." For an ISV interested in attracting
users, there may be an advantage to offering the first and, for a
while, only application in its category that runs on a new PC
operating system. The user base of the new system may be small, but
every user of that system who wants such an application will be
compelled to use the ISV's offering. Moreover, if demand for the new
operating system suddenly explodes, the first mover will reap large
sales before any competitors arrive. An ISV thus might be drawn to a
new PC operating system as a "protected harbor." Once first-movers
stake claims to the major categories of applications, however, there
is a strong chance that the new operating system could stall; it would
not support the most familiar applications, nor the variety and number
of applications, that attract large numbers of consumers, and there
would no longer exist a first-mover incentive to attract additional
ISVs to the important application categories. Although the upstart
operating system might find itself with enough applications support to
hold a fraction of the market, the collective-action phenomenon would
still prevent the system from gaining the kind of positive feedback
momentum that can turn a fringe entrant into a rival that would put
competitive pressure on Windows.
43. The cost to a would-be entrant of inducing ISVs to write
applications for its operating system exceeds the cost that Microsoft
itself has faced in inducing ISVs to write applications for its
operating system products, for Microsoft never confronted a highly
penetrated market dominated by a single competitor. Of course, the
fact that it is extremely difficult for an efficient would-be rival to
accumulate enough applications support to compete with Windows does
not mean that sustaining its own applications support is effortless
for Microsoft. In fact, if Microsoft stopped investing the hundreds of
millions of dollars it spends each year inducing ISVs to write
applications for Windows, it might become easier than it currently is
for a competitor to develop its own positive feedback loop. But given
that Windows today enjoys overwhelmingly more applications support
than any other PC operating system, it would still take that
competitor years to develop the necessary momentum. Plus, while
Microsoft may spend more on platform "evangelization," even in
relative terms, than any other PC operating-system vendor, it is not
difficult to understand why it is worthwhile for the principal
beneficiary of the applications barrier to devote more resources to
augmenting it than aspiring rivals are willing to expend in
speculative efforts to erode it.
44. Microsoft continually releases "new and improved" versions of its
PC operating system. Each time it does, Microsoft must convince ISVs
to write applications that take advantage of new APIs, so that
existing Windows users will have incentive to buy an upgrade. Since
ISVs are usually still earning substantial revenue from applications
written for the last version of Windows, Microsoft must convince them
to write for the new version. Even if ISVs are slow to take advantage
of the new APIs, though, no applications barrier stands in the way of
consumers adopting the new system, for Microsoft ensures that
successive versions of Windows retain the ability to run applications
developed for earlier versions. In fact, since ISVs know that
consumers do not feel locked into their old versions of Windows and
that new versions have historically attracted substantial consumer
demand, ISVs will generally write to new APIs as long as the
interfaces enable attractive, innovative features. Microsoft
supplements developers' incentives by extending various 'seals of
approval' -- visible to consumers, investors, and industry analysts --
to those ISVs that promptly develop new versions of their applications
adapted to the newest version of Windows. In addition, Microsoft works
closely with ISVs to help them adapt their applications to the newest
version of the operating system -- a process that is in any event far
easier than porting an application from one vendor's PC operating
system to another's. In sum, despite the substantial resources
Microsoft expends inducing ISVs to develop applications for new
versions of Windows, the company does not face any obstacles nearly as
imposing as the barrier to entry that vendors and would-be vendors of
other PC operating systems must overcome.
2. Empirical Evidence of the Applications Barrier to Entry
45. The experiences of IBM and Apple, Microsoft's most significant
operating system rivals in the mid- and late 1990s, confirm the
strength of the applications barrier to entry.
a. OS/2 Warp
46. IBM's inability to gain widespread developer support for its OS/2
Warp operating system illustrates how the massive Windows installed
base makes it prohibitively costly for a rival operating system to
attract enough developer support to challenge Windows. In late 1994,
IBM introduced its Intel-compatible OS/2 Warp operating system and
spent tens of millions of dollars in an effort to attract ISVs to
develop applications for OS/2 and in an attempt to reverse-engineer,
or "clone," part of the Windows API set. Despite these efforts, IBM
could obtain neither significant market share nor ISV support for OS/2
Warp. Thus, although at its peak OS/2 ran approximately 2,500
applications and had 10% of the market for Intel-compatible PC
operating systems, IBM ultimately determined that the applications
barrier prevented effective competition against Windows 95. For that
reason, in 1996 IBM stopped trying to convince ISVs to write for OS/2
Warp. IBM now targets the product at a market niche, namely enterprise
customers (mainly banks) that are interested in particular types of
application that run on OS/2 Warp. The fact that IBM no longer tries
to compete with Windows is evidenced by the fact that it prices OS/2
Warp at about two-and-one-half times the price of Windows 98.
b. The Mac OS
47. The inability of Apple to compete effectively with Windows
provides another example of the applications barrier to entry in
operation. Although Apple's Mac OS supports more than 12,000
applications, even an inventory of that magnitude is not sufficient to
enable Apple to present a significant percentage of users with a
viable substitute for Windows. The absence of a large installed base,
in turn, reinforces the disparity between the applications made
available for the Mac OS and those made available for Windows, further
inhibiting Apple's sales. The applications barrier thus prevents the
Mac OS from hindering Microsoft's ability to control price, regardless
of whether the Mac OS is regarded as being in the relevant market or
not.
c. Fringe Operating Systems
48. The applications barrier to entry does not prevent non-Microsoft,
Intel-compatible PC operating systems from attracting enough consumer
demand and ISV support to survive. It does not even prevent vendors of
those products from making a profit. The barrier does, however,
prevent the products from drawing a significant percentage of
consumers away from Windows.
49. As discussed above, Be markets an Intel-compatible PC operating
system, called BeOS, that is specially suited to support multimedia
functions. The operating system survives on a relatively minuscule
number of applications (approximately 1,000) and a user base which, at
around 750,000, is trivial compared to the number of Windows users.
One of the reasons the BeOS can even attract that many users despite
its small base of applications is that it advertises itself as a
complement to, rather than as a substitute for, Windows. Although the
BeOS could run an Intel-compatible PC system without Windows, it is
almost always loaded on a system along with Windows. What is more,
when these dual-loaded PC systems are turned on, Windows automatically
boots; the user must then take affirmative steps to invoke the BeOS.
While this scheme allows the BeOS to occupy a niche in the market, it
does not place the product on a trajectory to replace Windows on a
significant number of PCs. The special multimedia support provided by
the BeOS may, for a small number of users, outweigh the disadvantages
of maintaining two large, complex operating systems on one PC. Of that
group, however, it is likely that only a tiny number of users will
find that support so attractive that they would be willing to forego
Windows, and its huge base of compatible applications, altogether.
50. The experience of the Linux operating system, a version of which
runs on Intel- compatible PCs, similarly fails to refute the existence
of an applications barrier to entry. Linux is an "open source"
operating system that was created, and is continuously updated, by a
global network of software developers who contribute their labor for
free. Although Linux has between ten and fifteen million users, the
majority of them use the operating system to run servers, not PCs.
Several ISVs have announced their development of (or plans to develop)
Linux versions of their applications. To date, though, legions of ISVs
have not followed the lead of these first movers. Similarly, consumers
have by and large shown little inclination to abandon Windows, with
its reliable developer support, in favor of an operating system whose
future in the PC realm is unclear. By itself, Linux's open-source
development model shows no signs of liberating that operating system
from the cycle of consumer preferences and developer incentives that,
when fueled by Windows' enormous reservoir of applications, prevents
non-Microsoft operating systems from competing.
3. Open-Source Applications Development
51. Since application developers working under an open-source model
are not looking to recoup their investment and make a profit by
selling copies of their finished products, they are free from the
imperative that compels proprietary developers to concentrate their
efforts on Windows. In theory, then, open-source developers are at
least as likely to develop applications for a non-Microsoft operating
system as they are to write Windows-compatible applications. In fact,
they may be disposed ideologically to focus their efforts on
open-source platforms like Linux. Fortunately for Microsoft, however,
there are only so many developers in the world willing to devote their
talents to writing, testing, and debugging software pro bono publico.
A small corps may be willing to concentrate its efforts on popular
applications, such as browsers and office productivity applications,
that are of value to most users. It is unlikely, though, that a
sufficient number of open-source developers will commit to developing
and continually updating the large variety of applications that an
operating system would need to attract in order to present a
significant number of users with a viable alternative to Windows. In
practice, then, the open-source model of applications development may
increase the base of applications that run on non-Microsoft PC
operating systems, but it cannot dissolve the barrier that prevents
such operating systems from challenging Windows.
4. Cloning the 32-Bit Windows APIs
52. Theoretically, the developer of a non-Microsoft, Intel-compatible
PC operating system could circumvent the applications barrier to entry
by cloning the APIs exposed by the 32-bit versions of Windows (Windows
9x and Windows NT). Applications written for Windows would then also
run on the rival system, and consumers could use the rival system
confident in that knowledge. Translating this theory into practice is
virtually impossible, however. First of all, cloning the thousands of
APIs already exposed by Windows would be an enormously expensive
undertaking. More daunting is the fact that Microsoft continually adds
APIs to Windows through updates and new versions. By the time a rival
finished cloning the APIs currently in existence, Windows would have
exposed a multitude of new ones. Since the rival would never catch up,
it would never be able to assure consumers that its operating system
would run all of the applications written for Windows. IBM discovered
this to its dismay in the mid-1990s when it failed, despite a massive
investment, to clone a sufficiently large part of the 32-bit Windows
APIs. In short, attempting to clone the 32-bit Windows APIs is such an
expensive, uncertain undertaking that it fails to present a practical
option for a would-be competitor to Windows.
C. Viable Alternatives to Windows
53. That Microsoft's market share and the applications barrier to
entry together endow the company with monopoly power in the market for
Intel-compatible PC operating systems is directly evidenced by the
sustained absence of realistic commercial alternatives to Microsoft's
PC operating-system products.
54. OEMs are the most important direct customers for operating systems
for Intel- compatible PCs. Because competition among OEMs is intense,
they pay particularly close attention to consumer demand. OEMs are
thus not only important customers in their own right, they are also
surrogates for consumers in identifying reasonably-available
commercial alternatives to Windows. Without significant exception, all
OEMs pre-install Windows on the vast majority of PCs that they sell,
and they uniformly are of a mind that there exists no commercially
viable alternative to which they could switch in response to a
substantial and sustained price increase or its equivalent by
Microsoft. For example, in 1995, at a time when IBM still placed hope
in OS/2's ability to rival Windows, the firm nevertheless calculated
that its PC company would lose between seventy and ninety percent of
its sales volume if failed to load Windows 95 on its PCs. Although a
few OEMs have announced their intention to pre-install Linux on some
of the computers they ship, none of them plan to install Linux in lieu
of Windows on any appreciable number of PC (as opposed to server)
systems. For its part, Be is not even attempting to persuade OEMs to
install the BeOS on PCs to the exclusion of Windows.
55. OEMs believe that the likelihood of a viable alternative to
Windows emerging any time in the next few years is too low to
constrain Microsoft from raising prices or imposing other burdens on
customers and users. The accuracy of this belief is highlighted by the
fact that the other vendors of Intel-compatible PC operating systems
do not view their own offerings as viable alternatives to Windows.
Microsoft knows that OEMs have no choice but to load Windows, both
because it has a good understanding of the market in which it operates
and because OEMs have told Microsoft as much. Indicative of
Microsoft's assessment of the situation is the fact that, in a 1996
presentation to the firm's executive committee, the Microsoft
executive in charge of OEM licensing reported that piracy continued to
be the main competition to the company's operating system products.
Secure in this knowledge, Microsoft did not consider the prices of
other Intel-compatible PC operating systems when it set the price of
Windows 98.
56. As the Court found above, the growth of server- and
middleware-based applications development might eventually weaken the
applications barrier to entry. This would not only make it easier for
outside firms to enter the market, it could also make it easier for
non-Microsoft firms already in the market to present a viable
alternative to Windows. But as the Court also found above, it is not
clear whether ISVs will ever develop a large, diverse body of
full-featured applications that rely solely on APIs exposed by servers
and middleware. Furthermore, even assuming that such a movement has
already begun in earnest, it will take several years for the
applications barrier to erode enough to enable a non-Microsoft,
Intel-compatible PC operating system to develop into a viable
alternative to Windows.
D. Price Restraint Posed by Microsoft's Installed Base
57. Software never expires, so consumers who already have a version of
Windows with which they are content and who are not shopping for a new
PC system are somewhat reluctant to incur the cost of upgrading to a
new version of Windows. Fortunately for Microsoft, the pace of
innovation in PC hardware is rapid, and the price of that hardware has
declined steadily in recent years. As a result, existing PC users buy
new PC systems relatively frequently, and OEMs still attract at a
healthy rate buyers who have never owned a computer. The license for
one of Microsoft's operating system products prohibits the user from
transferring the operating system to another machine, so there is no
legal secondary market in Microsoft operating systems. This means that
any consumer who buys a new Intel-compatible PC and wants Windows must
buy a new copy of the operating system. Microsoft takes pains to
ensure that the versions of its operating system that OEMs pre-install
on new PC systems are the most current. It does this, in part, by
increasing the price to OEMs of older versions of Windows when the
newer versions are released. Since Microsoft can sell so many copies
of each new operating system through the sales of new PC systems, the
average price it sets for those systems is little affected by the fact
that older versions of Windows never wear out.
E. Price Restraint Posed by Piracy
58. Although there is no legal secondary market for Microsoft's PC
operating systems, there is a thriving illegal one. Software pirates
illegally copy software products such as Windows, selling each copy
for a fraction of the vendor's usual price. One of the ways Microsoft
combats piracy is by advising OEMs that they will be charged a higher
price for Windows unless they drastically limit the number of PCs that
they sell without an operating system pre-installed. In 1998, all
major OEMs agreed to this restriction. Naturally, it is hard to sell a
pirated copy of Windows to a consumer who has already received a legal
copy included in the price of his new PC system. Thus, Microsoft is
able to effectively contain, if not extinguish, the illegal secondary
market for its operating-system products. So even though Microsoft is
more concerned about piracy than it is about other firms' operating
system products, the company's pricing is not substantially
constrained by the need to reduce the incentives for consumers to
acquire their copies of Windows illegally.
F. Price Restraint Posed by Long-Term Threats
59. The software industry in general is characterized by dynamic,
vigorous competition. In many cases, one of the early entrants into a
new software category quickly captures a lion's share of the sales,
while other products in the category are either driven out altogether
or relegated to niche positions. What eventually displaces the leader
is often not competition from another product within the same software
category, but rather a technological advance that renders the
boundaries defining the category obsolete. These events, in which
categories are redefined and leaders are superseded in the process,
are spoken of as "inflection points."
60. The exponential growth of the Internet represents an inflection
point born of complementary technological advances in the computer and
telecommunications industries. The rise of the Internet in turn has
fueled the growth of server-based computing, middleware, and
open-source software development. Working together, these nascent
paradigms could oust the PC operating system from its position as the
primary platform for applications development and the main interface
between users and their computers. Microsoft recognizes that new
paradigms could arise to depreciate the value of selling PC operating
systems; however, the fact that these new paradigms already exist in
embryonic or primitive form does not prevent Microsoft from enjoying
monopoly power today. For while consumers might one day turn to
network computers, or Linux, or a combination of middleware and some
other operating system, as an alternative to Windows, the fact remains
that they are not doing so today. Nor are consumers likely to do so in
appreciable numbers any time in the next few years. Unless and until
that day arrives, no significant percentage of consumers will be able
to abandon Windows without incurring substantial costs. Microsoft can
therefore set the price of Windows substantially higher than that
which would be charged in a competitive market -- or impose other
burdens on consumers -- without losing so much business as to make the
action unprofitable. If Microsoft exerted its power solely to raise
price, the day when users could turn away from Windows without
incurring substantial costs would still be several years distant.
Moreover, Microsoft could keep its prices high for a significant
period of time and still lower them in time to meet the threat of a
new paradigm. Alternatively, Microsoft could delay the arrival of a
new paradigm on the scene by expending surplus monopoly power in ways
other than the maintenance of high prices.
G. Significance of Microsoft's Innovation
61. The fact that Microsoft invests heavily in research and
development does not evidence a lack of monopoly power. Indeed,
Microsoft has incentives to innovate aggressively despite its monopoly
power. First, if there are innovations that will make Intel-compatible
PC systems attractive to more consumers, and those consumers less
sensitive to the price of Windows, the innovations will translate into
increased profits for Microsoft. Second, although Microsoft could
significantly restrict its investment in innovation and still not face
a viable alternative to Windows for several years, it can push the
emergence of competition even farther into the future by continuing to
innovate aggressively. While Microsoft may not be able to stave off
all potential paradigm shifts through innovation, it can thwart some
and delay others by improving its own products to the greater
satisfaction of consumers.
H. Microsoft's Pricing Behavior
62. Microsoft's actual pricing behavior is consistent with the
proposition that the firm enjoys monopoly power in the market for
Intel-compatible PC operating systems. The company's decision not to
consider the prices of other vendors' Intel-compatible PC operating
systems when setting the price of Windows 98, for example, is
probative of monopoly power. One would expect a firm in a competitive
market to pay much closer attention to the prices charged by other
firms in the market. Another indication of monopoly power is the fact
that Microsoft raised the price that it charged OEMs for Windows 95,
with trivial exceptions, to the same level as the price it charged for
Windows 98 just prior to releasing the newer product. In a competitive
market, one would expect the price of an older operating system to
stay the same or decrease upon the release of a newer, more attractive
version. Microsoft, however, was only concerned with inducing OEMs to
ship Windows 98 in favor of the older version. It is unlikely that
Microsoft would have imposed this price increase if it were genuinely
concerned that OEMs might shift their business to another vendor of
operating systems or hasten the development of viable alternatives to
Windows.
63. Finally, it is indicative of monopoly power that Microsoft felt
that it had substantial discretion in setting the price of its Windows
98 upgrade product (the operating system product it sells to existing
users of Windows 95). A Microsoft study from November 1997 reveals
that the company could have charged $49 for an upgrade to Windows 98
-- there is no reason to believe that the $49 price would have been
unprofitable -- but the study identifies $89 as the revenue-maximizing
price. Microsoft thus opted for the higher price.
64. An aspect of Microsoft's pricing behavior that, while not tending
to prove monopoly power, is consistent with it is the fact that the
firm charges different OEMs different prices for Windows, depending on
the degree to which the individual OEMs comply with Microsoft's
wishes. Among the five largest OEMs, Gateway and IBM, which in various
ways have resisted Microsoft's efforts to enlist them in its efforts
to preserve the applications barrier to entry, pay higher prices than
Compaq, Dell, and Hewlett-Packard, which have pursued less contentious
relationships with Microsoft.
65. It is not possible with the available data to determine with any
level of confidence whether the price that a profit-maximizing firm
with monopoly power would charge for Windows 98 comports with the
price that Microsoft actually charges. Even if it could be determined
that Microsoft charges less than the profit-maximizing monopoly price,
though, that would not be probative of a lack of monopoly power, for
Microsoft could be charging what seems like a low short-term price in
order to maximize its profits in the future for reasons unrelated to
underselling any incipient competitors. For instance, Microsoft could
be stimulating the growth of the market for Intel-compatible PC
operating systems by keeping the price of Windows low today. Given the
size and stability of its market share, Microsoft stands to reap
almost all of the future rewards if there are yet more consumers of
Intel-compatible PC operating systems. By pricing low relative to the
short-run profit-maximizing price, thereby focusing on attracting new
users to the Windows platform, Microsoft would also intensify the
positive network effects that add to the impenetrability of the
applications barrier to entry.
66. Furthermore, Microsoft expends a significant portion of its
monopoly power, which could otherwise be spent maximizing price, on
imposing burdensome restrictions on its customers -- and in inducing
them to behave in ways -- that augment and prolong that monopoly
power. For example, Microsoft attaches to a Windows license conditions
that restrict the ability of OEMs to promote software that Microsoft
believes could weaken the applications barrier to entry. Microsoft
also charges a lower price to OEMs who agree to ensure that all of
their Windows machines are powerful enough to run Windows NT for
Workstations. To the extent this provision induces OEMs to concentrate
their efforts on the development of relatively powerful, expensive
PCs, it makes OEMs less likely to pursue simultaneously the opposite
path of developing "thin client" systems, which could threaten demand
for Microsoft's Intel-compatible PC operating system products. In
addition, Microsoft charges a lower price to OEMs who agree to ship
all but a minute fraction of their machines with an operating system
pre-installed. While this helps combat piracy, it also makes it less
likely that consumers will detect increases in the price of Windows
and renders operating systems not pre-installed by OEMs in large
numbers even less attractive to consumers. After all, a consumer's
interest in a non-Windows operating system might not outweigh the
burdens on system memory and performance associated with supporting
two operating systems on a single PC. Other such restrictions and
incentives are described below.
I. Microsoft's Actions Toward Other Firms
67. Microsoft's monopoly power is also evidenced by the fact that,
over the course of several years, Microsoft took actions that could
only have been advantageous if they operated to reinforce monopoly
power. These actions are described below.
IV. THE MIDDLEWARE THREATS
68. Middleware technologies, as previously noted, have the potential
to weaken the applications barrier to entry. Microsoft was
apprehensive that the APIs exposed by middleware technologies would
attract so much developer interest, and would become so numerous and
varied, that there would arise a substantial and growing number of
full-featured applications that relied largely, or even wholly, on
middleware APIs. The applications relying largely on middleware APIs
would potentially be relatively easy to port from one operating system
to another. The applications relying exclusively on middleware APIs
would run, as written, on any operating system hosting the requisite
middleware. So the more popular middleware became and the more APIs it
exposed, the more the positive feedback loop that sustains the
applications barrier to entry would dissipate. Microsoft was concerned
with middleware as a category of software; each type of middleware
contributed to the threat posed by the entire category. At the same
time, Microsoft focused its antipathy on two incarnations of
middleware that, working together, had the potential to weaken the
applications barrier severely without the assistance of any other
middleware. These were Netscape's Web browser and Sun's implementation
of the Java technologies.
A. The Netscape Web browser
69. Netscape Navigator possesses three key middleware attributes that
endow it with the potential to diminish the applications barrier to
entry. First, in contrast to non-Microsoft, Intel-compatible PC
operating systems, which few users would want to use on the same PC
systems that carry their copies of Windows, a browser can gain
widespread use based on its value as a complement to Windows. Second,
because Navigator exposes a set (albeit a limited one) of APIs, it can
serve as a platform for other software used by consumers. A browser
product is particularly well positioned to serve as a platform for
network-centric applications that run in association with Web pages.
Finally, Navigator has been ported to more than fifteen different
operating systems. Thus, if a developer writes an application that
relies solely on the APIs exposed by Navigator, that application will,
without any porting, run on many different operating systems.
70. Adding to Navigator's potential to weaken the applications barrier
to entry is the fact that the Internet has become both a major
inducement for consumers to buy PCs for the first time and a major
occupier of the time and attention of current PCs users. For any firm
looking to turn its browser product into an applications platform such
to rival Windows, the intense consumer interest in all things
Internet-related is a great boon.
71. Microsoft knew in the fall of 1994 that Netscape was developing
versions of a Web browser to run on different operating systems. It
did not yet know, however, that Netscape would employ Navigator to
generate revenue directly, much less that the product would evolve in
such a way as to threaten Microsoft. In fact, in late December 1994,
Netscape's chairman and chief executive officer ("CEO"), Jim Clark,
told a Microsoft executive that the focus of Netscape's business would
be applications running on servers and that Netscape did not intend to
succeed at Microsoft's expense.
72. As soon as Netscape released Navigator on December 15, 1994, the
product began to enjoy dramatic acceptance by the public; shortly
after its release, consumers were already using Navigator far more
than any other browser product. This alarmed Microsoft, which feared
that Navigator's enthusiastic reception could embolden Netscape to
develop Navigator into an alternative platform for applications
development. In late May 1995, Bill Gates, the chairman and CEO of
Microsoft, sent a memorandum entitled "The Internet Tidal Wave" to
Microsoft's executives describing Netscape as a "new competitor 'born'
on the Internet." He warned his colleagues within Microsoft that
Netscape was "pursuing a multi-platform strategy where they move the
key API into the client to commoditize the underlying operating
system." By the late spring of 1995, the executives responsible for
setting Microsoft's corporate strategy were deeply concerned that
Netscape was moving its business in a direction that could diminish
the applications barrier to entry.
B. Sun's Implementation of the Java Technologies
73. The term "Java" refers to four interlocking elements. First, there
is a Java programming language with which developers can write
applications. Second, there is a set of programs written in Java that
expose APIs on which developers writing in Java can rely. These
programs are called the "Java class libraries." The third element is
the Java compiler, which translates the code written by the developer
into Java "bytecode." Finally, there are programs called "Java virtual
machines," or "JVMs," which translate Java bytecode into instructions
comprehensible to the underlying operating system. If the Java class
libraries and a JVM are present on a PC system, the system is said to
carry a "Java runtime environment."
74. The inventors of Java at Sun Microsystems intended the technology
to enable applications written in the Java language to run on a
variety of platforms with minimal porting. A program written in Java
and relying only on APIs exposed by the Java class libraries will run
on any PC system containing a JVM that has itself been ported to the
resident operating system. Therefore, Java developers need to port
their applications only to the extent that those applications rely
directly on the APIs exposed by a particular operating system. The
more an application written in Java relies on APIs exposed by the Java
class libraries, the less work its developer will need to do to port
the application to different operating systems. 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. To date, the Java class libraries do not expose enough APIs
to support the development of full-featured applications that will run
well on multiple operating systems without the need for porting;
however, they do allow relatively simple, network-centric applications
to be written cross-platform. It is Sun's ultimate ambition to expand
the class libraries to such an extent that many full-featured,
end-user-oriented applications will be written cross-platform. The
closer Sun gets to this goal of "write once, run anywhere," the more
the applications barrier to entry will erode.
75. Sun announced in May 1995 that it had developed the Java
programming language. Mid-level executives at Microsoft began to
express concern about Sun's Java vision in the fall of that year, and
by late spring of 1996, senior Microsoft executives were deeply
worried about the potential of Sun's Java technologies to diminish the
applications barrier to entry.
76. Sun's strategy could only succeed if a Java runtime environment
that complied with Sun's standards found its way onto PC systems
running Windows. Sun could not count on Microsoft to ship with Windows
an implementation of the Java runtime environment that threatened the
applications barrier to entry. Fortunately for Sun, Netscape agreed in
May 1995 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 its Java runtime environment on
the PC systems of Windows users.
77. The combined efforts of Netscape and Sun threatened to hasten the
demise of the applications barrier to entry, opening the way for
non-Microsoft operating systems to emerge as acceptable substitutes
for Windows. By stimulating the development of network-centric Java
applications accessible to users through browser products, the
collaboration of Netscape and Sun also heralded the day when vendors
of information appliances and network computers could present users
with viable alternatives to PCs themselves. Nevertheless, these
middleware technologies have a long way to go before they might
imperil the applications barrier to entry. Windows 98 exposes nearly
ten thousand APIs, whereas the combined APIs of Navigator and the Java
class libraries, together representing the greatest hope for
proponents of middleware, total less than a thousand. Decision-makers
at Microsoft are apprehensive of potential as well as present threats,
though, and in 1995 the implications of the symbiosis between
Navigator and Sun's Java implementation were not lost on executives at
Microsoft, who viewed Netscape's cooperation with Sun as a further
reason to dread the increasing use of Navigator.
C. Other Middleware Threats
78. Although they have been the most prominent, Netscape's Navigator
and Sun's Java implementation are not the only manifestations of
middleware that Microsoft has perceived as having the potential to
weaken the applications barrier to entry. Starting in 1994, Microsoft
exhibited considerable concern over the software product Notes,
distributed first by Lotus and then by IBM. Microsoft worried about
Notes for several reasons: It presented a graphical interface that was
common across multiple operating systems; it also exposed a set of
APIs to developers; and, like Navigator, it served as a distribution
vehicle for Sun's Java runtime environment. Then in 1995, Microsoft
reacted with alarm to Intel's Native Signal Processing software, which
interacted with the microprocessor independently of the operating
system and exposed APIs directly to developers of multimedia content.
Finally, in 1997 Microsoft noted the dangers of Apple's and
RealNetworks' multimedia playback technologies, which ran on several
platforms (including the Mac OS and Windows) and similarly exposed
APIs to content developers. Microsoft feared all of these technologies
because they facilitated the development of user-oriented software
that would be indifferent to the identity of the underlying operating
system.
V. MICROSOFT'S RESPONSE TO THE BROWSER THREAT
A. Microsoft's Attempt to Dissuade Netscape from Developing Navigator
as a Platform
79. Microsoft's first response to the threat posed by Navigator was an
effort to persuade Netscape to structure its business such that the
company would not distribute platform- level browsing software for
Windows. Netscape's assent would have ensured that, for the
foreseeable future, Microsoft would produce the only platform-level
browsing software distributed to run on Windows. This would have
eliminated the prospect that non-Microsoft browsing software could
weaken the applications barrier to entry.
80. Executives at Microsoft received confirmation in early May 1995
that Netscape was developing a version of Navigator to run on Windows
95, which was due to be released in a couple of months. Microsoft's
senior executives understood that if they could prevent this version
of Navigator from presenting alternatives to the Internet-related APIs
in Windows 95, the technologies branded as Navigator would cease to
present an alternative platform to developers. Even if non-Windows
versions of Navigator exposed Internet-related APIs, applications
written to those APIs would not run on the platform Microsoft
executives expected to enjoy the largest installed base, i.e., Windows
95. So, as long as the version of Navigator written for Windows 95
relied on Microsoft's Internet-related APIs instead of exposing its
own, developing for Navigator would not mean developing
cross-platform. Developers of network-centric applications thus would
not be drawn to Navigator's APIs in substantial numbers. Therefore,
with the encouragement and support of Gates, a group of Microsoft
executives commenced a campaign in the summer of 1995 to convince
Netscape to halt its development of platform-level browsing
technologies for Windows 95.
81. In a meeting held at Microsoft's headquarters on June 2, 1995,
Microsoft executives suggested to Jim Clark's replacement as CEO at
Netscape, James Barksdale, that the version of Navigator written for
Windows 95 be designed to rely upon the Internet-related APIs in
Windows 95 and distinguish itself with "value-added" software
components. The Microsoft executives left unsaid the fact that
value-added software, by definition, does not present a significant
platform for applications development. For his part, Barksdale
informed the Microsoft representatives that the browser represented an
important part of Netscape's business strategy and that Windows 3.1
and Windows 95 were expected to be the primary platforms for which
Navigator would be distributed.
82. At the conclusion of the June 2 meeting, Microsoft still did not
know whether or not Netscape intended to preserve Navigator's own
platform capabilities and expand the set of APIs that it exposed to
developers. In the hope that Netscape could still be persuaded to
forswear any platform ambitions and instead rely on the Internet
technologies in Windows 95, Microsoft accepted Barksdale's invitation
to send a group of representatives to Netscape's headquarters for a
technology "brainstorming session" on June 21. Netscape's senior
executives saw the meeting as an opportunity to ask Microsoft for
access to crucial technical information, including certain APIs, that
Netscape needed in order to ensure that Navigator would work well on
systems running Windows 95.
83. Early in the June 21 meeting, Microsoft representatives told
Barksdale and the other Netscape executives present that they wanted
to explore the possibility of building a broader and closer
relationship between the two companies. To this end, the Microsoft
representatives wanted to know whether Netscape intended to adopt and
build on top of the Internet-related platform that Microsoft planned
to include in Windows 95, or rather to expose its own Internet-related
APIs, which would compete with Microsoft's. If Netscape was not
committed to providing an alternative platform for network-centric
applications, Microsoft would assist Netscape in developing server-
and (to a limited extent) PC-based software applications that relied
on Microsoft's Internet technologies. For one thing, the
representatives explained, Microsoft would be content to leave the
development of browser products for the Mac OS, UNIX, and Microsoft's
16-bit operating system products to Netscape. Alternatively, Netscape
could license to Microsoft the underlying code for a Microsoft-branded
browser to run on those platforms. The Microsoft representatives made
it clear, however, that Microsoft would be marketing its own browser
for Windows 95, and that this product would rely on Microsoft's
platform-level Internet technologies. If Netscape marketed browsing
software for Windows 95 based on different technologies, then
Microsoft would view Netscape as a competitor, not a partner.
84. When Barksdale brought the discussion back to the particular
Windows 95 APIs that Netscape actually wanted to rely on and needed
from Microsoft, the representatives from Microsoft explained that if
Netscape entered a "special relationship" with Microsoft, the company
would treat Netscape as a "preferred ISV." This meant that Netscape
would enjoy preferential access to technical information, including
APIs. They intimated that Microsoft's internal developers had already
created the APIs that Netscape was seeking, and that Microsoft had not
yet decided either which ISVs would be privileged to receive them or
when access would be granted. The Microsoft representatives made clear
that the alacrity with which Netscape would receive the desired
Windows 95 APIs and other technical information would depend on
whether Netscape entered this "special relationship" with Microsoft.
85. After listening to Microsoft's proposal, Barksdale had two main
questions: First, where would the line between platform (Microsoft's
exclusive domain) and applications (where Netscape could continue to
function) be situated? Second, who would get to decide where the line
would lie? After all, the attractiveness of a special relationship
with Microsoft depended a great deal on how much room would remain for
Netscape to innovate and seek profit. The Microsoft representatives
replied that Microsoft would incorporate most of the functionality of
the current Netscape browser into the Windows 95 platform, perhaps
leaving room for Netscape to distribute a user-interface shell. Where
Netscape would have the most scope to innovate would be in the
development of software "solutions," which are applications (mainly
server-based) focused on meeting the needs of specific types of
commercial users. Since such applications are already minutely
calibrated to the needs of their users, they do not present platforms
for the development of more specific applications. Although the
representatives from Microsoft assured Barksdale that the line between
platform and solutions was fixed by a collaborative decision-making
process between Microsoft and its ISV partners, those representatives
had already indicated that the space Netscape would be allowed to
occupy between the user and Microsoft's platform domain was a very
narrow one. Simply put, if Navigator exposed APIs that competed for
developer attention with the Internet-related APIs Microsoft was
planning to build into its platform, Microsoft would regard Netscape
as a trespasser on its territory.
86. The Microsoft representatives did not insist at the June 21
meeting that Netscape executives accept their proposal on the spot.
For his part, Barksdale said only that he would like more information
regarding where Microsoft proposed to place the line between its
platform and Netscape's applications. In the ensuing, more technical
discussions, the Netscape executives agreed to adopt one component of
Microsoft's platform-level Internet technology called Internet
Shortcuts. The meeting ended cordially, with both sides promising to
keep the lines of communication open.
87. The executive who led Microsoft's contingent on June 21, Daniel
Rosen, emerged from the meeting optimistic that Netscape would abandon
its platform ambitions in exchange for special help from Microsoft in
developing solutions. His sentiments were not shared by another
Microsoft participant, Thomas Reardon, who had not failed to notice
the Netscape executives grow tense when the Microsoft representatives
referred to incorporating Navigator's functionality into Windows.
Reardon predicted that Netscape would compete with almost all of
Microsoft's platform-level Internet technologies. Once he heard both
viewpoints, Gates concluded that Rosen was being a bit naive and that
Reardon had assessed the situation more accurately. In the middle of
July 1995, Rosen's superiors instructed him to drop the effort to
reach a strategic concord with Netscape.
88. Had Netscape accepted Microsoft's proposal, it would have
forfeited any prospect of presenting a comprehensive platform for the
development of network-centric applications. Even if the versions of
Navigator written for the Mac OS, UNIX, and 16-bit Windows had
continued to expose APIs controlled by Netscape, the fact that
Netscape would not have marketed any platform software for Windows 95,
the operating system that was destined to become dominant, would have
ensured that, for the foreseeable future, too few developers would
rely on Navigator's APIs to create a threat to the applications
barrier to entry. In fact, although the discussions ended before
Microsoft was compelled to demarcate precisely where the boundary
between its platform and Netscape's applications would lie, it is
unclear whether Netscape's acceptance of Microsoft's proposal would
have left the firm with even the ability to survive as an independent
business.
89. At the time Microsoft presented its proposal, Navigator was the
only browser product with a significant share of the market and thus
the only one with the potential to weaken the applications barrier to
entry. Thus, had it convinced Netscape to accept its offer of a
"special relationship," Microsoft quickly would have gained such
control over the extensions and standards that network-centric
applications (including Web sites) employ as to make it all but
impossible for any future browser rival to lure appreciable developer
interest away from Microsoft's platform.
B. Withholding Crucial Technical Information
90. Microsoft knew that Netscape needed certain critical technical
information and assistance in order to complete its Windows 95 version
of Navigator in time for the retail release of Windows 95. Indeed,
Netscape executives had made a point of requesting this information,
especially the so-called Remote Network Access ("RNA") API, at the
June 21 meeting. As was discussed above, the Microsoft representatives
at the meeting had responded that the haste with which Netscape
received the desired technical information would depend on whether
Netscape entered the so-called "special relationship" with Microsoft.
Specifically, Microsoft representative J. Allard had told Barksdale
that the way in which the two companies concluded the meeting would
determine whether Netscape received the RNA API immediately or in
three months.
91. Although Netscape declined the special relationship with
Microsoft, its executives continued, over the weeks following the June
21 meeting, to plead for the RNA API. Despite Netscape's persistence,
Microsoft did not release the API to Netscape until late October,
i.e., as Allard had warned, more than three months later. The delay in
turn forced Netscape to postpone the release of its Windows 95 browser
until substantially after the release of Windows 95 (and Internet
Explorer) in August 1995. As a result, Netscape was excluded from most
of the holiday selling season.
92. Microsoft similarly withheld a scripting tool that Netscape needed
to make its browser compatible with certain dial-up ISPs. Microsoft
had licensed the tool freely to ISPs that wanted it, and in fact had
cooperated with Netscape in drafting a license agreement that, by
mid-July 1996, needed only to be signed by an authorized Microsoft
executive to go into effect. There the process halted, however. In
mid-August, a Microsoft representative informed Netscape that senior
executives at Microsoft had decided to link the grant of the license
to the resolution of all open issues between the companies. Netscape
never received a license to the scripting tool, and as a result, was
unable to do business with certain ISPs for a time.
C. The Similar Experiences of Other Firms in Dealing with Microsoft
93. Other firms in the computer industry have had encounters with
Microsoft similar to the experiences of Netscape described above.
These interactions demonstrate that it is Microsoft's corporate
practice to pressure other firms to halt software development that
either shows the potential to weaken the applications barrier to entry
or competes directly with Microsoft's most cherished software
products.
1. Intel
94. At the same time that Microsoft was trying to convince Netscape to
stop developing cross-platform APIs, it was trying to convince Intel
to halt the development of software that presented developers with a
set of operating-system-independent interfaces.
95. Although Intel is engaged principally in the design and
manufacture of microprocessors, it also develops some software.
Intel's software development efforts, which take place at the Intel
Architecture Labs ("IAL"), are directed primarily at finding useful
ways to consume more microprocessor cycles, thereby stimulating demand
for advanced Intel microprocessors. By early 1995, IAL was in the
advanced stages of developing software that would enable Intel 80x86
microprocessors to carry out tasks usually performed by separate chips
known as "digital signal processors." By enabling this migration, the
software, called Native Signal Processing ("NSP") software, would
endow Intel microprocessors with substantially enhanced video and
graphics performance.
96. Intel was eager for software developers and hardware manufacturers
to write software and build peripheral devices that would implement
the enhanced capabilities that its microprocessors and its NSP
software together offered. Intel did not believe, however, that the
set of APIs and device driver interfaces ("DDIs") in Windows had kept
pace with the growing ability of Intel's microprocessors to deliver
audio/visual content. Consequently, IAL designed its NSP software to
expose Intel's own APIs and DDIs that, when invoked by developers and
hardware manufacturers, would demonstrate the multimedia capabilities
of an Intel microprocessor utilizing NSP.
97. Microsoft reacted to Intel's NSP software with alarm. First of
all, the software threatened to offer ISVs and device manufacturers an
alternative to waiting for Windows to provide system-level support for
products that would take advantage of advances in hardware technology.
More troubling was the fact that Intel was developing versions of its
NSP software for non-Microsoft operating systems. The different
versions of the NSP software exposed the same set of software
interfaces to developers, so the more an application took advantage of
interfaces exposed by NSP software, the easier it would be to port
that application to non-Microsoft operating systems. In short, Intel's
NSP software bore the potential to weaken the barrier protecting
Microsoft's monopoly power.
98. Over time, Microsoft developed additional qualms about Intel's NSP
software. For instance, Intel initially designed the NSP software to
be compatible with only Windows 3.1. At the time, Microsoft was
preparing to release Windows 95, and the company did not want anything
rekindling the interest of ISVs, equipment manufacturers, and
consumers in the soon-to-be obsolescent version of Windows. More acute
was Microsoft's concern that users who received NSP software on their
Windows 3.1 systems would have difficulty upgrading those systems to
Windows 95. By June 1995, Intel had completed a pre-release, or
"beta," version of its NSP software for Windows 95, but Microsoft
worried that a commercial version would not be ready by the time OEMs
began loading Windows 95.
99. Along with its concerns about contemporaneous compatibility,
Microsoft also complained that Intel had not subjected its software to
sufficient quality-assurance testing. Microsoft was quick to point out
that if Windows users detected problems with the software that came
pre-installed on their PC systems, they would blame Microsoft or the
OEMs, even if fault lay with Intel. Microsoft's concerns with
compatibility and quality were genuine. Both pre-dating and
over-shadowing these transient and remediable concerns, however, was a
more abiding fear at Microsoft that the NSP software would render
ISVs, device manufacturers, and (ultimately) consumers less dependent
on Windows. Without this fear, Microsoft would not have subjected
Intel to the level of pressure that it brought to bear in the summer
of 1995.
100. Microsoft began complaining to Intel about its NSP software in
inter-company communications sent in the spring of 1995. In May,
Microsoft raised the profile of its complaints by sending some of its
senior executives to Intel to discuss the latter's incursion into
Microsoft's platform territory. Returning from the May meeting, one
Microsoft employee urged his superiors to refuse to allow Intel to
offer platform-level software, even if it meant that Intel could not
innovate as quickly as it would like. If Intel wished to enable a new
function, the employee wrote, its only "winning path" would be to
convince Microsoft to support the effort in its platform software. At
any rate, "[s]ometimes Intel would have to accept the outcome that the
time isn't right for [Microsoft]." In the first week of July, Gates
himself met with Intel's CEO, Andrew Grove, to discuss, among other
things, NSP. In a subsequent memorandum to senior Microsoft
executives, Gates reported that he had tried to convince Grove "to
basically not ship NSP" and more generally to reduce the number of
people working on software at Intel.
101. The development of an alternative platform to challenge Windows
was not the primary objective of Intel's NSP efforts. In fact, Intel
was interested in providing APIs and DDIs only to the extent the
effort was necessary to ensure the development of applications and
devices that would spark demand for Intel's most advanced
microprocessors. Understanding Intel's limited ambitions, Microsoft
hastened to assure Intel that if it would stop promoting NSP's
interfaces, Microsoft would accelerate its own work to incorporate the
functions of the NSP software into Windows, thereby stimulating the
development of applications and devices that relied on the new
capabilities of Intel's microprocessors. At the same time, Microsoft
pressured the major OEMs to not install NSP software on their PCs
until the software ceased to expose APIs. NSP software could not find
its way onto PCs without the cooperation of the OEMs, so Intel
realized that it had no choice but to surrender the pace of software
innovation to Microsoft. By the end of July 1995, Intel had agreed to
stop promoting its NSP software. Microsoft subsequently incorporated
some of NSP's components into its operating-system products. Even as
late as the end of 1998, though, Microsoft still had not implemented
key capabilities that Intel had been poised to offer consumers in
1995.
102. Microsoft was not content to merely quash Intel's NSP software.
At a second meeting at Intel's headquarters on August 2, 1995, Gates
told Grove that he had a fundamental problem with Intel using revenues
from its microprocessor business to fund the development and
distribution of free platform-level software. In fact, Gates said,
Intel could not count on Microsoft to support Intel's next generation
of microprocessors as long as Intel was developing platform-level
software that competed with Windows. Intel's senior executives knew
full well that Intel would have difficultly selling PC microprocessors
if Microsoft stopped cooperating in making them compatible with
Windows and if Microsoft stated to OEMs that it did not support
Intel's chips. Faced with Gates' threat, Intel agreed to stop
developing platform-level interfaces that might draw support away from
interfaces exposed by Windows.
103. OEMs represent the primary customers for Intel's microprocessors.
Since OEMs are dependent on Microsoft for Windows, Microsoft enjoys
continuing leverage over Intel. To illustrate, Gates was able to
report to other senior Microsoft executives in October 1995 that
"Intel feels we have all the OEMs on hold with our NSP chill." He
added:
This is good news because it means OEMs are listening to us. Andy
[Grove] believes Intel is living up to its part of the NSP bargain
and that we should let OEMs know that some of the new software work
Intel is doing is OK. If Intel is not sticking totally to its part
of the deal let me know.
2. Apple
104. QuickTime is Apple's software architecture for creating, editing,
publishing, and playing back multimedia content (e.g., audio, video,
graphics, and 3-D graphics). Apple has created versions of QuickTime
to run on both the Mac OS and Windows, enabling developers using the
authoring software to create multimedia content that will run on
QuickTime implementations for both operating systems. QuickTime
competes with Microsoft's own multimedia technologies, including
Microsoft's multimedia APIs (called "DirectX") and its media player.
Because QuickTime is cross-platform middleware, Microsoft perceives it
as a potential threat to the applications barrier to entry.
105. Beginning in the spring of 1997 and continuing into the summer of
1998, Microsoft tried to persuade Apple to stop producing a Windows 95
version of its multimedia playback software, which presented
developers of multimedia content with alternatives to Microsoft's
multimedia APIs. If Apple acceded to the proposal, Microsoft
executives said, Microsoft would not enter the authoring business and
would instead assist Apple in developing and selling tools for
developers writing multimedia content. Just as Netscape would have
been free, had it accepted Microsoft's proposal, to market a browser
shell that would run on top of Microsoft's Internet technologies,
Apple would have been permitted, without hindrance, to market a media
player that would run on top of DirectX. But, like the browser shell
that Microsoft contemplated as acceptable for Netscape to develop,
Apple's QuickTime shell would not have exposed platform-level APIs to
developers. Microsoft executives acknowledged to Apple their doubts
that a firm could make a successful business out of marketing such a
shell. Apple might find it profitable, though, to continue developing
multimedia software for the Mac OS, and that, the executives from
Microsoft assured Apple, would not be objectionable. As was the case
with the Internet technologies it was prepared to tolerate from
Netscape, Microsoft felt secure in the conviction that developers
would not be drawn in large numbers to write for non-Microsoft APIs
exposed by platforms whose installed bases were inconsequential in
comparison with that of Windows.
106. In their discussions with Apple, Microsoft's representatives made
it clear that, if Apple continued to market multimedia playback
software for Windows 95 that presented a platform for content
development, then Microsoft would enter the authoring business to
ensure that those writing multimedia content for Windows 95
concentrated on Microsoft's APIs instead of Apple's. The Microsoft
representatives further stated that, if Microsoft was compelled to
develop and market authoring tools in competition with Apple, the
technologies provided in those tools might very well be inconsistent
with those provided by Apple's tools. Finally, the Microsoft
executives warned, Microsoft would invest whatever resources were
necessary to ensure that developers used its tools; its investment
would not be constrained by the fact that authoring software generated
only modest revenue.
107. If Microsoft implemented technologies in its tools that were
different from those implemented in Apple's tools, then multimedia
content developed with Microsoft's tools would not run properly on
Apple's media player, and content developed with Apple's tools would
not run properly on Microsoft's media player. If, as it implied it was
willing to do, Microsoft then bundled its media player with Windows
and used a variety of tactics to limit the distribution of Apple's
media player for Windows, it could succeed in extinguishing developer
support for Apple's multimedia technologies. Indeed, as the Court
discusses in Section VI of these findings, Microsoft had begun, in
1996, to use just such a strategy against Sun's implementation of the
Java technologies.
108. The discussions over multimedia playback software culminated in a
meeting between executives from Microsoft and Apple executives,
including Apple CEO, Steve Jobs, at Apple's headquarters on June 15,
1998. Microsoft's objective at the meeting was to secure Apple's
commitment to abandon the development of multimedia playback software
for Windows. At the meeting, one of the Microsoft executives, Eric
Engstrom, said that he hoped the two companies could agree on a single
configuration of software to play multimedia content on Windows. He
added, significantly, that any unified multimedia playback software
for Windows would have to be based on DirectX. If Apple would agree to
make DirectX the standard, Microsoft would be willing to do several
things that Apple might find beneficial. First, Microsoft would adopt
Apple's ".MOV" as the universal file format for multimedia playback on
Windows. Second, Microsoft would configure the Windows Media Player to
display the QuickTime logo during the playback of ".MOV" files. Third,
Microsoft would include support in DirectX for QuickTime APIs used to
author multimedia content, and Microsoft would give Apple appropriate
credit for the APIs in Microsoft's Software Developer Kit.
109. Jobs reserved comment during the meeting with the Microsoft
representatives, but he explicitly rejected Microsoft's proposal a few
weeks later. Had Apple accepted Microsoft's proposal, Microsoft would
have succeeded in limiting substantially the cross-platform
development of multimedia content. In addition, Apple's future success
in marketing authoring tools for Windows 95 would have become
dependent on Microsoft's ongoing cooperation, for those tools would
have relied on the DirectX technologies under Microsoft's control.
110. Apple's surrender of the multimedia playback business might have
helped users in the short term by resolving existing incompatibilities
in the arena of multimedia software. In the long run, however, the
departure of an experienced, innovative competitor would not have
tended to benefit users of multimedia content. At any rate, the
primary motivation behind Microsoft's proposal to Apple was not the
resolution of incompatibilities that frustrated consumers and stymied
content development. Rather, Microsoft's motivation was its desire to
limit as much as possible the development of multimedia content that
would run cross-platform.
3. RealNetworks
111. RealNetworks is the leader, in terms of usage share, in software
that supports the "streaming" of audio and video content from the Web.
RealNetworks' streaming software presents a set of APIs that competes
for developer attention with APIs exposed by the streaming
technologies in Microsoft's DirectX. Like Apple, RealNetworks has
developed versions of its software for multiple operating systems. In
1997, senior Microsoft executives viewed RealNetworks' streaming
software with the same apprehension with which they viewed Apple's
playback software -- as competitive technology that could develop into
part of a middleware layer that could, in turn, become broad and
widespread enough to weaken the applications barrier to entry.
112. At the end of May 1997, Gates told a group of Microsoft
executives that multimedia streaming represented strategic ground that
Microsoft needed to capture. He identified RealNetworks as the
adversary and authorized the payment of up to $65 million for a
streaming software company in order to accelerate Microsoft's effort
to seize control of streaming standards. Two weeks later, Microsoft
signed a letter of intent for the acquisition of a streaming media
company called VXtreme.
113. Perhaps sensing an impending crisis, executives at RealNetworks
contacted Microsoft within days of the VXtreme deal's announcement and
proposed that the two companies enter a strategic relationship. The
CEO of RealNetworks told a senior vice president at Microsoft that if
RealNetworks were presented with a profitable opportunity to move to
value-added software, the company would be amenable to abandoning the
base streaming business. On July 10, a Microsoft executive, Robert
Muglia, told a RealNetworks executive that it would indeed be in the
interests of both companies if RealNetworks limited itself to
developing value-added software designed to run on top of Microsoft's
fundamental multimedia platform. Consequently, on July 18, Microsoft
and RealNetworks entered into an agreement whereby Microsoft agreed to
distribute a copy of RealNetworks' media player with each copy of
Internet Explorer; to make a substantial investment in RealNetworks;
to license the source code for certain RealNetworks streaming
technologies; and to develop, along with RealNetworks, a common file
format for streaming audio and video content. Muglia, who signed the
agreement on Microsoft's behalf, believed that RealNetworks had in
turn agreed to incorporate Microsoft's streaming media technologies
into its products.
114. RealNetworks apparently understood import of the agreement
differently, for just a few days after it signed the deal with
Microsoft, RealNetworks announced that it planned to continue
developing fundamental streaming software. Indeed, RealNetworks
continues to do so today. Thus, the mid-summer negotiations did not
lead to the result Microsoft had intended. Still, Microsoft's
intentions toward RealNetworks in 1997, and its dealings with the
company that summer, show that decision-makers at Microsoft were
willing to invest a large amount of cash and other resources into
securing the agreement of other companies to halt software development
that exhibited discernible potential to weaken the applications
barrier.
4. IBM
115. IBM is both a hardware and a software company. On the hardware
side, IBM manufactures and licenses, among other things,
Intel-compatible PCs. On the software side, IBM develops and sells,
among other things, Intel-compatible PC operating systems and office
productivity applications. The IBM PC Company relies heavily on
Microsoft's cooperation to make a profit, for few consumers would buy
IBM PC systems if those systems did not work well with Windows and,
further, if they did not come with Windows included. IBM's software
division, on the other hand, competes directly with Microsoft in other
respects. For instance, IBM has in the past marketed OS/2 as an
alternative to Windows, and it currently markets the SmartSuite bundle
of office productivity applications as an alternative to Microsoft's
Office suite. The fact that IBM's software division markets products
that compete directly with Microsoft's most profitable products has
frustrated the efforts of the IBM PC Company to maintain a cooperative
relationship with the firm that controls the product (Windows) without
which the PC Company cannot survive.
116. Whereas Microsoft tried to convince Netscape to move its business
in a direction that would not facilitate the emergence of products
that would compete with Windows, Microsoft tried to convince IBM to
move its business away from products that themselves competed directly
with Windows and Office. Microsoft leveraged the fact that the PC
Company needed to license Windows at a competitive price and on a
timely basis, and the fact that the company needed Microsoft's support
in many more subtle ways. When IBM refused to abate the promotion of
those of its own products that competed with Windows and Office,
Microsoft punished the IBM PC Company with higher prices, a late
license for Windows 95, and the withholding of technical and marketing
support.
117. In the summer of 1994, the IBM PC Company told Microsoft that,
with respect to licensing Microsoft's operating-system products, it
wanted to be quoted terms just as favorable as those extended to IBM's
competitor, Compaq. It was IBM's belief that Compaq paid the lowest
rate in the industry for Windows and enjoyed unparalleled marketing
and technical support from Microsoft. In response to the IBM PC
Company's request, Microsoft proposed that the companies enter into a
"Frontline Partnership" similar to the one that existed between
Microsoft and Compaq. Pursuant to that proposal, Microsoft and the IBM
PC Company would perform joint sales, marketing, and development work,
and the PC Company would receive future Microsoft products at the
lowest rates in the industry.
118. At the same time that it offered the IBM PC Company the rather
general terms in the Frontline Partnership Agreement, Microsoft also
offered the PC Company specific reductions in the royalty rate for
Windows 95 if the company would focus its marketing and distribution
efforts on Microsoft's new operating system. Specifically, the PC
Company would receive an $8 reduction in the per-copy royalty for
Windows 95 if it mentioned no other operating systems in
advertisements for IBM PCs, adopted Windows 95 as the standard
operating system for its employees, and ensured that it was shipping
Windows 95 pre-installed on at least fifty percent of its PCs two
months after the release of Windows 95. Given the volume of IBM's PC
shipments, the discount would have amounted to savings of between $40
million and $48 million in one year. Of course, accepting the terms
would have required IBM, as a practical matter, to abandon its own
operating system, OS/2. After all, IBM would have had difficulty
convincing customers to adopt its own OS/2 if the company itself had
used Microsoft's Windows 95 and had featured that product to the
exclusion of OS/2 in IBM PC advertisements.
119. Representatives from IBM and Microsoft, including Bill Gates, met
to discuss the relationship between their companies at an industry
conference in November 1994. At that meeting, IBM informed Microsoft
that, rather than enter into the Frontline Partnership with Microsoft,
IBM was going to pursue an initiative it called "IBM First."
Consistent with the title of the initiative, IBM would aggressively
promote IBM's software products, would not promote any Microsoft
products, and would pre-install OS/2 Warp on all of its PCs, including
those on which it would also pre-install Windows. IBM thus rejected
the terms that would have resulted in an $8 reduction in the per-copy
royalty price of Windows 95.
120. True to its word, IBM began vigorous promotion of its software
products. This effort included an advertising campaign, starting in
late 1994, that extolled OS/2 Warp and disparaged Windows. IBM's drive
to best Microsoft in the PC software venue intensified in June 1995,
when IBM reached an agreement with the Lotus Development Corporation
for the acquisition of that company. As a consequence of the
acquisition, IBM took ownership of the Lotus groupware product, Lotus
Notes, and the Lotus SmartSuite bundle of office productivity
applications. Microsoft had already identified Notes as a middleware
threat, because it presented users with a common interface, and ISVs
with a common set of APIs, across multiple platforms. For its part,
SmartSuite competed directly with Microsoft Office. In mid-July 1995,
IBM announced that it was going to make SmartSuite its primary desktop
software offering in the United States.
121. Microsoft did not intend to capitulate. In July, Gates called an
executive at the IBM PC Company to berate him about IBM's public
statements denigrating Windows. Just a few days later, Microsoft began
to retaliate in earnest against the IBM PC Company.
122. The IBM PC Company had begun negotiations with Microsoft for a
Windows 95 license in late March 1995. For the first two months, the
negotiations had progressed smoothly and at an expected pace. After
IBM announced its intention to acquire Lotus, though, the Microsoft
negotiators began canceling meetings with their IBM counterparts,
failing to return telephone calls, and delaying the return of
marked-up license drafts that they received from IBM. Then, on July
20, 1995, just three days after IBM announced its intention to
pre-install SmartSuite on its PCs, a Microsoft executive informed his
counterpart at the IBM PC Company that Microsoft was terminating
further negotiations with IBM for a license to Windows 95. Microsoft
also refused to release to the PC Company the Windows 95 "golden
master" code. The PC Company needed the code for its product planning
and development, and IBM executives knew that Microsoft had released
it to IBM's OEM competitors on July 17. Microsoft's purported reason
for halting the negotiations was that it wanted first to resolve an
ongoing audit of IBM's past royalty payments to Microsoft for several
different operating systems.
123. Prior to the call on July 20, neither company's management had
ever linked the ongoing audit to IBM's negotiations for a license to
Windows 95. IBM was dismayed by the abrupt halt in the license
negotiations and the prospect that it might not get a license for
Windows 95 until the audit process concluded. IBM's executives
executives surmised that all of its major competitors had already
signed licenses for Windows 95. The PC Company would lose a great deal
of business to those competitors during the crucial back-to-school
season if it could not begin pre-installing Windows 95 on its PCs
immediately. The conclusion of the audit appeared to be weeks, if not
months, away. The PC Company thus faced the prospect of missing the
holiday selling season as well. IBM executives pleaded with Microsoft
to uncouple the license negotiations from the ongoing audit and
offered Microsoft a $10 million bond that Microsoft could use to
indemnify itself against any discrepancies that the audit might
ultimately reveal. IBM also offered to add a term to any Windows 95
license agreement whereby IBM would pay penalties and interest if any
future audit disclosed under-reporting of royalties by IBM.
124. On August 9, 1995, a senior executive at the IBM PC Company went
to Redmond to meet with Joachim Kempin, the Microsoft executive in
charge of the firm's sales to OEMs. At the meeting, Kempin offered to
accept a single, lump-sum payment from IBM that would close all
outstanding audits. The amount of this payment would be reduced if IBM
offered a concession that Kempin could take back to Gates. As one
possibility, Kempin suggested that IBM agree to not bundle SmartSuite
with its PCs for a period of six months to one year. He explained that
the prospect of IBM bundling SmartSuite with its PCs threatened the
profit margins that Microsoft derived from Office and constituted a
core issue in the relationship between the two companies. The IBM
executive rejected Kempin's suggestion. In a follow-up letter, Kempin
stated that Microsoft would require approximately $25 million from IBM
in order to settle all outstanding audits. Kempin reiterated that,
If you believe that the amount I am asking for is too much, I would
be willing to trade certain relationship improving measures for the
settlement charges and/or convert some of the amounts into
marketing funds if IBM too agrees to promote Microsoft's software
products together with their hardware offerings.
The message was clear: IBM could resolve the impasse ostensibly
blocking the issuance of a Windows 95 license -- the royalties audit
-- by de-emphasizing those products of its own that competed with
Microsoft and instead promoting Microsoft's products.
125. IBM never agreed to renounce SmartSuite or to increase its
support for Microsoft software, and in the end, Microsoft did not
grant IBM a license to pre-install Windows 95 until fifteen minutes
before the start of Microsoft's official launch event on August 24,
1995. That same day, the firms brought the audit issue to a close with
a settlement agreement under which IBM ultimately paid Microsoft $31
million. The release of Windows 95 had been postponed more than once,
and many consumers apparently had been postponing buying PC systems
until the new operating system arrived. The pent-up demand caused an
initial surge in the sales of PCs loaded with Windows 95. IBM's OEM
competitors reaped the fruits of this surge, but because of the delay
in obtaining a license, the IBM PC Company did not. The PC Company
also missed the back-to-school market. These lost opportunities cost
IBM substantial revenue.
126. Even once the companies had resolved the audit dispute, Microsoft
continued to treat the IBM PC Company less favorably than it did the
other major OEMs, and Microsoft executives continued to tell PC
Company executives that the treatment would improve only if IBM
refrained from competing with Microsoft's software offerings. On
January 5, 1996, Kempin sent a letter to a counterpart at the IBM PC
Company. In it, Kempin expressed his belief that the PC Company would
enjoy a closer, more cooperative relationship with Microsoft if only
IBM's software arm did not compete as aggressively with the products
that comprised the core of Microsoft's business:
As long as IBM is working first on their competitive offerings and
prefers to fiercely compete with us in critical areas, we should
just be honest with each other and admit that such priorities will
not lead to a most exciting relationship and might not even make
IBM feel good when selling solutions based on Microsoft products. .
. .You are a valued OEM customer of Microsoft, with whom we will
cooperate as much as your self-imposed restraints allow us to do.
Please understand that this is neither my choice or preferred way
of doing business with an important company like IBM. In addition,
we would like to see the IBM PC company being more actively
involved in assisting Microsoft to bring key products to market . .
. . To date the IBM PC company has not always been an active
participant in these areas - understandable given your own internal
product priorities. I hope you can help me to change this.
In closing, Kempin wrote, "You get measured in selling more hardware
and I firmly believe if you had less conflict with IBM's software
directions you actually could sell more of it."
127. When Kempin spoke to the same executive at the end of the month,
he repeated a message he had delivered more than once before: The fact
that the IBM PC Company pre-installed SmartSuite on its PC systems
made Microsoft reluctant to help IBM sell more PC systems. After all,
the more PC systems IBM sold with SmartSuite, the fewer copies of
Office Microsoft could sell. For this reason, as Kempin explained to a
group of IBM PC Company representatives in August 1996, Microsoft
refused to provide IBM press releases with quotes endorsing any PC
system that IBM shipped with SmartSuite. Microsoft later expanded that
rule to cover any IBM PCs shipped with the World Book electronic
encyclopedia instead of Microsoft's Encarta. IBM might have been less
concerned about Microsoft's refusal to offer endorsements if such
quotes did not appear frequently and prominently in press releases
announcing new PC systems from other OEMs such as Compaq. Microsoft's
conspicuous silence with respect to IBM PCs sent the message to
customers that IBM's PCs did not support Windows as well as PCs
manufactured by other OEMs did.
128. Microsoft also denied the IBM PC Company access to the so-called
"enabling programs" that Microsoft ran for the benefit of OEMs such as
Compaq, Hewlett-Packard, and DEC, even though IBM met the prescribed
objective criteria for admission. Like the absence of public
endorsements, IBM's exclusion from Microsoft's enabling programs led
customers to question whether the Microsoft software they needed would
work optimally with IBM's PCs. IBM learned through surveys it
conducted that the firm had lost between seven and ten large accounts,
representing about $180 million in revenue for IBM, because the
tension between Microsoft and IBM led customers to doubt that Windows
would not work as well with IBM PCs as with PCs produced by firms with
which Microsoft was on cordial terms. Microsoft justified its
exclusion of the PC Company from the enabling programs with its
suspicion that IBM might use the programs to gain entre with customers
and then attempt to sell those customers IBM software instead of
Microsoft products. At the same time, a Microsoft executive told a
counterpart at IBM that the PC Company would be admitted to the
programs when IBM's CEO repaired his relationship with Bill Gates.
129. Microsoft's executives were persistent despite IBM's repeated
refusals to sacrifice its own software ambitions to improve its
relations with Microsoft. In February 1997, one executive from
Microsoft told a group of IBM PC Company executives that Gates might
relent in his reluctance to cooperate with their company if IBM
moderated its support for Notes and SmartSuite. In a meeting held the
next month, Microsoft representatives conditioned fulfillment of two
objects of IBM's desires on the company's willingness to pre-install
Microsoft's products in the place of competing applications, such as
SmartSuite, and objectionable middleware, such as Notes. The first
inducement that the Microsoft representatives blandished before the PC
Company was early access to Windows source code, which Compaq and a
handful of other OEMs enjoyed. IBM wanted this early access in order
to ensure its hardware's contemporaneous compatibility with
Microsoft's operating system products. Next, Microsoft offered IBM
permission to certify itself as being compliant with certain hardware
requirements that Microsoft imposed (and that customers had come to
look for as a sign of an OEM's ability to support Windows).
Self-certification would have decreased the time it took IBM PCs to
reach the market, and IBM knew that the privilege was already being
extended to some of its main OEM competitors. With respect to both
benefits, the representatives from Microsoft explained that Microsoft
would extend them to the PC Company on the condition that it stop
loading its PC systems with software that threatened Microsoft's
interests.
130. The discriminatory treatment that the IBM PC Company received
from Microsoft on account of the "software directions" of its parent
company also manifested itself in the royalty price that IBM paid for
Windows. In the latter half of the 1990s, IBM (along with Gateway)
paid significantly more for Windows than other major OEMs (like
Compaq, Dell, and Hewlett-Packard) that were more compliant with
Microsoft's wishes.
131. Finally, Microsoft made its frustration known to IBM by reducing,
from three to one, the number of Microsoft OEM account managers
handling Microsoft's operational relationship with the IBM PC Company.
This reduced support impaired still further IBM's ability to test,
manufacture, and ship its PCs on schedule, further delaying IBM's
efforts to bring its PC products to market against the competition in
a timely manner.
132. In sum, from 1994 to 1997 Microsoft consistently pressured IBM to
reduce its support for software products that competed with
Microsoft's offerings, and it used its monopoly power in the market
for Intel-compatible PC operating systems to punish IBM for its
refusal to cooperate. Whereas, in the case of Netscape, Microsoft
tried to induce a company to move its business away from offering
software that could weaken the applications barrier to entry,
Microsoft's primary concern with IBM was to reduce the firm's support
for software products that competed directly with Microsoft's most
profitable products, namely Windows and Office. That being said, it
must be noted that one of the IBM products to which Microsoft
objected, Notes, was like Navigator in that it exposed middleware
APIs. In any event, Microsoft's interactions with Netscape, IBM,
Intel, Apple, and RealNetworks all reveal Microsoft's business
strategy of directing its monopoly power toward inducing other
companies to abandon projects that threaten Microsoft and toward
punishing those companies that resist.
D. Developing Competitive Web Browsing Software
133. Once it became clear to senior executives at Microsoft that
Netscape would not abandon its efforts to develop Navigator into a
platform, Microsoft focused its efforts on ensuring that few
developers would write their applications to rely on the APIs that
Navigator exposed. Developers would only write to the APIs exposed by
Navigator in numbers large enough to threaten the applications barrier
if they believed that Navigator would emerge as the standard software
employed to browse the Web. If Microsoft could demonstrate that
Navigator would not become the standard, because Microsoft's own
browser would attract just as much if not more usage, then developers
would continue to focus their efforts on a platform that enjoyed
enduring ubiquity: the 32-bit Windows API set. Microsoft thus set out
to maximize Internet Explorer's share of browser usage at Navigator's
expense.
134. Microsoft's management believed that, no matter what the firm
did, Internet Explorer would not capture a large share of browser
usage as long as it remained markedly inferior to Navigator in the
estimation of consumers. The task of technical personnel at Microsoft,
then, was to make Internet Explorer's features at least as attractive
to consumers as Navigator's. Microsoft did not believe that improved
quality alone would depose Navigator, for millions of users appeared
to be satisfied with Netscape's product, and Netscape was known as
'the Internet company.' As Gates wrote to Microsoft's executive staff
in his May 1995 "Internet Tidal Wave" memorandum, "First we need to
offer a decent client," but "this alone won't get people to switch
away from Netscape." Still, once Microsoft ensured that the average
consumer would be just as comfortable browsing with Internet Explorer
as with Navigator, Microsoft could employ other devices to induce
consumers to use its browser instead of Netscape's.
135. From 1995 onward, Microsoft spent more than $100 million each
year developing Internet Explorer. The firm's management gradually
increased the number of developers working on Internet Explorer from
five or six in early 1995 to more than one thousand in 1999. Although
the first version of Internet Explorer was demonstrably inferior to
Netscape's then-current browser product when the former was released
in July 1995, Microsoft's investment eventually started to pay
technological dividends. When Microsoft released Internet Explorer 3.0
in late 1996, reviewers praised its vastly improved quality, and some
even rated it as favorably as they did Navigator. After the arrival of
Internet Explorer 4.0 in late 1997, the number of reviewers who
regarded it as the superior product was roughly equal to those who
preferred Navigator.
E. Giving Internet Explorer Away and Rewarding Firms that Helped Build
Its Usage Share
136. In addition to improving the quality of Internet Explorer,
Microsoft sought to increase the product's share of browser usage by
giving it away for free. In many cases, Microsoft also gave other
firms things of value (at substantial cost to Microsoft) in exchange
for their commitment to distribute and promote Internet Explorer,
sometimes explicitly at Navigator's expense. While Microsoft might
have bundled Internet Explorer with Windows at no additional charge
even absent its determination to preserve the applications barrier to
entry, that determination was the main force driving its decision to
price the product at zero. Furthermore, Microsoft would not have given
Internet Explorer away to IAPs, ISVs, and Apple, nor would it have
taken on the high cost of enlisting firms in its campaign to maximize
Internet Explorer's usage share and limit Navigator's, had it not been
focused on protecting the applications barrier.
137. In early 1995, personnel developing Internet Explorer at
Microsoft contemplated charging OEMs and others for the product when
it was released. Internet Explorer would have been included in a
bundle of software that would have been sold as an add-on, or
"frosting," to Windows 95. Indeed, Microsoft knew by the middle of
1995, if not earlier, that Netscape charged customers to license
Navigator, and that Netscape derived a significant portion of its
revenue from selling browser licenses. Despite the opportunity to make
a substantial amount of revenue from the sale of Internet Explorer,
and with the knowledge that the dominant browser product on the
market, Navigator, was being licensed at a price, senior executives at
Microsoft decided that Microsoft needed to give its browser away in
furtherance of the larger strategic goal of accelerating Internet
Explorer's acquisition of browser usage share. Consequently, Microsoft
decided not to charge an increment in price when it included Internet
Explorer in Windows for the first time, and it has continued this
policy ever since. In addition, Microsoft has never charged for an
Internet Explorer license when it is distributed separately from
Windows.
138. Over the months and years that followed the release of Internet
Explorer 1.0 in July 1995, senior executives at Microsoft remained
engrossed with maximizing Internet Explorer's share of browser usage.
Whenever competing priorities threatened to intervene, decision-makers
at Microsoft reminded those reporting to them that browser usage share
remained, as Microsoft senior vice president Paul Maritz put it, "job
#1." For example, in the summer of 1997, some mid-level employees
began to urge that Microsoft charge a price for at least some of the
components of Internet Explorer 4.0. This would have shifted some
anticipatory demand to Windows 98 (which was due to be released
somewhat later than Internet Explorer 4.0), since Windows 98 would
include all of the browser at no extra charge. Senior executives at
Microsoft rejected the proposal,