Microsoft is the world’s largest supplier of computer software for personal computers (PC’s), may have engaged in anti-competitive conduct and created anti-competitive effects of its past unlawful conduct. Microsoft sells and licenses PC operating systems throughout the United States and the world and delivers copies of its operating systems to PC manufacturers (often referred to as Original Equipment Manufacturers or “Memos”) and retail customers across state lines and international borders. Microsoft is engaged in, and its activities substantially affect, interstate and foreign commerce.
Microsoft may possess (and for several years may have possessed) monopoly power in the market for personal computer operating systems. Microsoft’s “Windows” pirating systems are used on over 80% of Intel-based PC’s, the dominant type of PC in the United States. More than 90% of new Intel-based PC’s are shipped with a version of Windows preinstall. Memos have no commercially reasonable alternative to Microsoft operating systems for the PC’s that they distribute. There are high barriers to entry in the market for PC operating systems.
One of the most important barriers to entry is the barrier created by the number of software applications that must run on an operating system in order to make the operating system attractive to end users. Because end users want a large number of applications available, because most applications today are written to run on Windows, and because it would be prohibitively difficult, time-consuming, and expensive to create an alternative operating system that would run the programs that run on Windows, a potential new operating system entrant faces a high barrier to successful entry.
Accordingly, the most significant potential threat to Microsoft’s operating system monopoly is not from a direct, frontal assault by existing or new operating systems, but from new software products that may support, or themselves become, alternative platforms” to which applications can be written, and which can be used in conjunction with multiple operating systems, including but not limited to Windows. To protect its valuable Windows monopoly against such potential competitive threats, and to extend its operating system monopoly into other software markets, Microsoft may have engaged in a series of anticompetitive activities.
Microsoft’s conduct includes Managerial Economics and Business Strategy, e Page 1 agreements tying other Microsoft software products to Microsoft’s Windows operating system; exclusionary agreements precluding companies from distributing, rumoring, buying, or using products of Microsoft’s software competitors or potential competitors; and exclusionary agreements restricting the right of companies to provide services or resources to Microsoft’s software competitors or potential competitors.
One important current source of potential competition for Microsoft’s Windows operating system monopoly comes from the Internet, described by Microsoft’s CEO, Bill Gates, in May 1995 as “the most important single development to come along since the IBM PC was introduced in 1981 . ” As Mr.. Gates recognized, the placement of competing Internet browsers specialized software programs that allow PC users to locate, access, display, and manipulate content and applications located on the Internet’s World Wide Web (“the web”) posed a serious potential threat to Microsoft’s Windows operating system monopoly.
Mr.. Gates warned his executives: A new competitor “born” on the Internet is Netscape. Their browser is dominant, with a 70% usage share, allowing them to determine which network extensions will catch on. They are pursuing a multi-platform strategy where they move the key API [applications programming interface] into the client to motorized the underlying operating system. Internet browsers pose a competitive threat to Microsoft’s potential operating system monopoly in two basic ways.
First, as discussed above, one of the most important barriers to the entry and expansion of potential competitors to Microsoft in supplying PC operating systems is the large number of software applications that will run on the Windows operating system (and not on other operating systems). If application programs could be written to run on multiple operating systems, competition in the market for operating systems could be revalidated.
The combination of browser technology and a new programming language known as “Java” hold out this promise. Java is designed in part to permit applications written in it to be run on different operating systems. As such, it threatens to reduce or eliminate one of the key barriers to entry protecting Microsoft’s potential operating system monopoly. Non-Microsoft browsers are perhaps the most significant vehicle for distribution of Java technology to end users.
Microsoft has recognized that the widespread use of browsers other than its own threatens to increase the distribution and use of Java, ND in so doing threatens Microsoft’s potential operating system monopoly. For this reason, a presentation to Microsoft CEO Bill Gates on January 5, 1997, on how to respond to the Java threat emphasized “Increase II share” as a key strategy. Second, Microsoft recognized that Netscape browser was itself a “platform” to which many applications were being written and to which (if it thrived) more and more applications would be written.
Since Netscape browser could be run on any PC operating system, the success of this alternative platform also threatened to reduce or eliminate a key barrier protecting Microsoft’s potential operating system monopoly. This is the threat that Microsoft’s CEO Bill Gates referred to as the threat that Netscape would “commoditized” the operating system. Page 2 Michael R. Baby To respond to the competitive threat posed by Netscape browser, Microsoft embarked on an extensive campaign to market and distribute Microsoft’s own Internet browser, which it named “Internet Explorer” or “E. Microsoft executives have described this campaign as a “Jihad” to win the “browser war. ” Because of its resources and programming technology, Microsoft was well positioned to develop and market a browser in competition with Netscape. Indeed, continued competition on the merits between Netscape Navigator and Microsoft’s Internet Explorer would have resulted in greater innovation and the development of better products at lower prices.
Moreover, in the absence of Microsoft’s anticompetitive conduct, the offsetting advantages of Microsoft’s size and dominant position in desktop software and Netscape position as the browser innovator and the leading browser supplier, and the benefit to consumers of product differentiation, could have been expected to sustain competition on the merits between these companies, and perhaps others hat have entered and might enter the browser market. Microsoft, however, has not been willing simply to compete on the merits.
For example, as Microsoft’s Christian Wildflower wrote in February 1997, Microsoft concluded that it would “be very hard to increase browser share on the merits of II 4 alone. It will be more important to leverage the SO asset to make people use II instead of Navigator. ” Thus, Microsoft might have began, and might continue today, a pattern of potential anticompetitive practices designed to thwart browser competition on the merits, to deprive customers of a choice between alternative rowers, and to exclude Microsoft’s Internet browser competitors.
Microsoft’s conduct with respect to browsers is a prominent and immediate example of the pattern of potentially anticompetitive practices undertaken by Microsoft with the purpose and effect of maintaining its PC operating system monopoly and extending that monopoly to other related markets. Initially, Microsoft attempted to eliminate competition from Netscape by seeking an express horizontal agreement not to compete.
In May 1995, Microsoft executives met with top Netscape personnel in an attempt to induce Netscape not to compete with Microsoft and to divide the browser market, with Microsoft becoming the sole supplier of browsers for use with Windows 95 and successor operating systems and with Netscape becoming the sole supplier of browsers for operating systems other than Windows 95 or its successors. Netscape refused to participate in Microsoft’s illegal scheme.
Having failed simply to stop competition by agreement, Microsoft set about to exclude Netscape and other browser rivals from access to the distribution, promotion, and resources they needed to offer their browser products to Memos and PC users pervasively enough to facilitate the widespread distribution of Java or to facilitate their browsers becoming an attractive programming platform in their own right. First, Microsoft invested hundreds of millions of dollars to develop, test, and promote Internet Explorer, a product which it distributes without separate charge.
As Paul Marital, Microsoft’s Group Vice President in charge of the Platforms Group, was quoted in the New York Times as telling industry executives: “We are going to cut off their air supply. Managerial Economics and Business Strategy, e Page 3 Everything they’re selling, we’re going to give away for free. ” As reported in the Financial Times, Microsoft CEO Bill Gates likewise warned Netscape (and other potential Microsoft challengers) in June 1996: “Our business model works even if all Internet software is free….
We are still selling operating systems. What does Netscape business model look like? Not very good. ” But Mr.. Gates did not stop at free distribution. Rather, Microsoft purposefully set out to do whatever it took to make sure significant market participants distributed and used Internet Explorer instead of Netscape browser including paying some customers to take II and using its unique control over Windows to induce others to do so. For example, in seeking the support of Intuit, a significant application software developer, Mr..
Gates was blunt, as he reported in a July 1996 internal e-mail: I was quite frank with him [Scott Cook, CEO of Intuit] that if he had a favor we could do for him that would cost us something like $1 M to do that in return for switching browsers in the next few months I would be open to doing that. Second, Microsoft unlawfully required PC manufacturers, as a condition of obtaining sciences for the Windows 95 operating system, to agree to license, preinstall, and distribute Internet Explorer on every Windows PC such manufacturers shipped.
By virtue of the monopoly position Windows enjoys, it was a commercial necessity for Memos to preinstall Windows 95 and, as a result of Microsoft’s illegal tie-in, Internet Explorer on virtually all of the PC’s they sold. Microsoft thereby unlawfully tied its Internet Explorer software to the Windows 95 version of its monopoly operating system and unlawfully leveraged its operating system monopoly to require PC manufacturers to license and distribute Internet Explorer on every PC those Memos shipped with Windows.
Third, Microsoft intends now unlawfully to tie its Internet browser software to its new Windows 98 operating system, the successor to Windows 95. Microsoft has made clear that, unless restrained, it will continue to misuse its operating system monopoly to artificially exclude browser competition and deprive customers of a free choice between browsers. Microsoft designed Windows 98 so that removal of Internet Explorer by Memos or end users is operationally more difficult than it was in Windows 5.
Although it is nevertheless technically feasible and practicable to remove Microsoft’s Internet browser software from Windows 98 and to substitute other Internet browser software, Memos are prevented from doing so by Microsoft’s contractual tie-in. Internet browsers are separate products competing in a separate product market from PC operating systems, and it is efficient to supply the two products separately.
Indeed, Microsoft itself has consistently offered, promoted, and distributed its Internet browser as a stand-alone product separate from, and not as a impotent of, Windows, and intends to continue to do so after the release of Windows 98. For example, Microsoft will make available separately the same Internet browser that is bundled with Windows 98, through an upgraded version of Internet Explorer 4 that will be distributed and installed wholly apart from Windows 98, including for non-Windows, non-Microsoft operating systems.
In addition Microsoft already plans to introduce a subsequent version of II (Internet Explorer 5) Page 4 that also will be distributed and installed separately from Windows 98, including for indoors, non-Microsoft operating systems. Microsoft’s tying of its Internet browser to its potential monopoly operating system reduces the ability of customers to choose among competing browser products because it forces Memos and other purchasers to license or acquire the tied combination whether they want Microsoft’s Internet browser or not.
Microsoft’s tying which it can accomplish because of its monopoly power in Windows impairs the ability of its browser rivals to compete to have their browsers preinstall by Memos on new PC’s and thus substantially forecloses those rivals from an important channel of browser distribution. Microsoft executives have repeatedly recognized the significant advantage that Microsoft (and only Microsoft) receives by tying its Internet browser to its operating system, rather than having to compete on the merits.
As Microsoft Senior Vice President James Allelic wrote to Microsoft Group Vice-President Paul Marital on January 2, 1997: You see browser share as Job 1 . I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective…. We do not use our strength which is that we have an installed base of Windows and we have a strong MOM shipment channel for Windows. Pitting browser against browser is hard since Netscape has 80% market share and we have I am convinced we have to use Windows -? this is the one thing they don’t have (emphasis added) Fourth, Microsoft has possibly misused its Windows operating system monopoly by requiring PC Memos to agree, as a condition of acquiring a license to the Windows operating system, to adopt the uniform “boot-up” sequence and “desktop” screen specified by Microsoft. This sequence determines the screens that every user sees upon turning on a Windows PC.
Microsoft’s exclusionary restrictions forbid, among there things, any changes by an MOM that would remove from the PC any part of Microsoft’s Internet Explorer software (or any other Microsoft-dictated software) or that would add to the PC a competing browser (or other competing software) in any more prominent or visible way (including by highlighting as part of the startup sequence or by more prominent placement on the desktop screen) than the way Microsoft requires Internet Explorer to be presented.
Virtually every new PC that comes with Windows, no matter which MOM has built it, presents users with the same screens and software specified by Microsoft. As a result of Microsoft’s restrictive boot-up and desktop screen agreements, Memos are deprived of the freedom to make competitive choices about which browser or other software product should be offered to their customers, the ability to determine for themselves the design and configuration of the initial screens displayed on the computers they sell, and the ability to differentiate their products to serve their perceptions of consumers’ needs.
These restrictive agreements also maintain, and enhance the importance of, Microsoft’s ability to provide preferential placement on the desktop (or in the boot-up sequence) to various Internet Service Providers (“Sips”) and Internet Content Providers Managerial Economics and Business Strategy, e Page 5 (“Sips”), in return for those firms’ commitments to give preferential distribution and promotion to Internet Explorer and to restrict their distribution and promotion of competing browsers.
As a result, these restrictions further exclude competing Internet browsers from the most important channels of distribution, substantially reduce Memos’ incentives and abilities to innovate and differentiate their products in ways that could facilitate intention between Microsoft products and competing software products, and enhance Microsoft’s ability to use the near-ubiquity of its Windows operating system monopoly to gain dominance in both the Internet browser market and other software markets.
Fifth, Microsoft has entered into anticompetitive agreements with virtually all of the nation’s largest and most popular Sips, including particularly Online Service Providers (“Loss”), firms which provide the communications link between a subscriber’s PC and the Internet and sometimes related services and content as well.
Windows 95 (and non Windows 98) presents PC users with “folders” or lists including the names of certain of these Sips that have entered into agreements with Microsoft and enable users readily to subscribe to their services. Because Windows is preinstall on nearly all PC’s in the United States, inclusion in these folders and lists is of substantial value to Sips. As a result, almost all of the largest and most significant Sips in the United States have sought placement on the Windows desktop.
Microsoft’s agreements with Sips allow Microsoft to leverage its operating system monopoly by conditioning these Sips’ inclusion in Windows’ lists on such Sips’ agreement to offer Microsoft’s Internet Explorer browser primarily or exclusively as the browser they distribute; not to promote or even mention to any of their subscribers the existence, availability, or compatibility of a competing Internet browser; and to use on their own Internet sites Microsoft-specific programming extensions and tools that make those sites look better when viewed through Internet Explorer than when viewed through competing Internet browsers.
Microsoft’s anticompetitive agreements with Sips have substantially foreclosed competing browsers from this major channel of browser distribution. Over thirty recent of Internet browser users have obtained their browsers from Sips. Microsoft has recently modified certain of its ISP agreements to reduce some of these restrictions. However, Page 6 the modifications do not affect Microsoft’s illegal agreements with On-Line Service Providers (e. G. America Online, CompuServe), which serve the majority of Internet users in the United States; even the modified agreements remain unlawful in other respects; the modifications do not address the anticompetitive effects such agreements have already caused; and there is no assurance that Microsoft will not re-impose the restrictions in the future. Sixth, Microsoft has entered into anticompetitive agreements with Internet Content Providers (“Sips”). Prominent “channel buttons” advertising and providing direct Internet access to select Sips appear on the “Active Desktop” feature that is shipped with the Windows operating system.
Microsoft’s agreements condition an Sips placement on one of these buttons on the Sips agreement to not pay or otherwise compensate Microsoft’s primary Internet browser competitors (including by distributing their browsers) for the distribution, marketing, or promotion of the Sips content; to not promote any browser produced y any of Microsoft’s primary browser competitors; to not allow any of Microsoft’s primary browser competitors to promote and highlight the Sips “channel” content on or for their browsers; and to design its web sites using Microsoft-specific, proprietary programming extensions so that those sites look better when viewed with Internet Explorer than when viewed through a competing browser. These illegal agreements further inhibit competition on the merits between Internet Explorer and other Internet browsers. As with some of its restrictive ISP agreements, Microsoft has recently announced retain modifications of its anticompetitive ICP agreements. However, these modifications do not remedy the anticompetitive effects such agreements have had and do not prevent Microsoft from entering into the same or similar agreements in the future. Collectively, Microsoft’s contracts with Memos, Sips, and Sips may have unreasonably restrained and may continue to unreasonably restrain competition in the market for Internet browsers.
They artificially increase the share of the market held by Microsoft’s Internet Explorer, and they threaten to “tip” the market permanently to Internet Explorer, not because Memos or PC customers have freely hoses Microsoft’s product in a competitive marketplace, but because of the illegal exercise of monopoly power by Microsoft. This case challenges Microsoft’s concerted attempts to maintain its monopoly in operating systems and to achieve dominance in other markets, not by innovation and other competition on the merits, but by tie-ins, exclusive dealing contracts, and other anticompetitive agreements that deter innovation, exclude competition, and rob customers of their right to choose among competing alternatives.
Microsoft’s conduct may adversely affect innovation, including by: ; impairing the incentive of Microsoft’s competitors and potential competitors to undertake research and development, because they know that Microsoft will be able to limit the rewards from any resulting innovation; impairing the ability of Microsoft’s competitors and potential competitors to obtain financing for research and development; inhibiting Microsoft’s competitors that nevertheless succeed in developing promising innovations from effectively marketing their improved products to customers; reducing the incentive and ability of Memos to innovate and differentiate their products in ways that would appeal to customers; and Reducing competition and the spur to innovation by Microsoft and others that only competition can provide.
Managerial Economics and Business Strategy, e page 7 The purpose and effect of Microsoft’s conduct with respect to Internet browsers have been and, if not restrained, might be: to preclude competition on the merits between Microsoft’s browser and other browsers; to preclude potential competition with Microsoft’s operating system from competing browsers and from other companies and software whose use is facilitated by these to extend Microsoft’s Windows operating system monopoly to the Internet browser racket; and To maintain Microsoft’s Windows operating system monopoly. HISTORY OF CASES AGAINST MICROSOFT The July 1994 Monopolizing Case On July 15, 1994, the United States commenced an action against Microsoft for unlawfully maintaining its monopoly in the market for PC operating systems. The complaint alleged, among other things, that Microsoft had engaged in anticompetitive agreements and marketing practices directed at Memos. These agreements included agreements that required Memos to pay Microsoft for each non- Microsoft operating system that they distributed and long-term agreements that squired unreasonably large minimum commitments from Memos.
The effect of Microsoft’s practices and agreements was unlawfully to maintain its monopoly in the PC operating system market. The Final Judgment prohibited Microsoft from continuing the challenged practices and agreements and prohibited Microsoft from engaging in certain other conduct that could have similar anticompetitive results, including enjoining Microsoft from conditioning licenses to its operating system on an Memo’s either licensing another Microsoft product or agreeing not to license or distribute a non-Microsoft product. The purpose of this part of the Judgment was to prevent Microsoft from conditioning access to its monopoly operating system in order to protect or extend that monopoly.
On October 20, 1997, the United States petitioned the court to show why Microsoft should not be found in civil contempt for violating the 1995 Final Judgment by requiring Memos to license and distribute Microsoft’s Internet browser as a condition of obtaining a license for Microsoft’s Windows 95 operating system. On December 1 1, 1997, the Court entered a preliminary injunction enjoining Microsoft “from the practice of licensing the use of any Microsoft personal computer pirating system software (including Windows 95 or any successor version thereof) on the condition, express or implied, that the licensee also license and preinstall any Microsoft Internet browser software (including Internet Explorer 3. 0, 4. 0, or any successor versions thereof) pending further order of Court. The December 1997 Contempt Proceeding Page 8 On December 15, 1997, Microsoft without seeking any modification or clarification of the Court’s order and without consulting the United States publicly announced that any MOM that did not agree to license and distribute Microsoft’s Internet Explorer could not obtain a license to a working, current version of Microsoft’s Windows operating system. Microsoft announced that the only versions of Windows 95 available to Memos that declined to license and distribute Microsoft’s Internet browser would be (1) a version of Windows 95 that Microsoft itself admitted would not work and (2) a two-and-alfalfa-year-old version of Windows 95 that Microsoft admitted was not commercially viable. On December 17, 1997, the United States moved to have Microsoft held in contempt for this clear violation of the Court’s December 1 1, 1997 Order.
On January 21, 1998, the United States entered an order hat required Microsoft to provide Memos with two options in addition to those previously provided by Microsoft: the option of installing on their PC’s a version of Windows 95 that was the same as the current December 1997 version of Windows 95 (MOM Service Release 2. 5) “with the sole exception of Internet Explorer 4. 0 functionality’ not included; and the option of shipping their PC’s after removing the Internet Explorer “icon” from the desktop and from the “Start menu” within Windows 95. The Appeal of the Court’s December 1997 Order Microsoft appealed the Court’s December 1997 order, arguing that since the United
States had there brought an action for contempt and for permanent injunctive relief and not explicitly for a preliminary injunction, it was improper for the Court to have entered a preliminary injunction (even though the restraint of a preliminary injunction was less than the restraint that would have been imposed by a finding of contempt); that since the United States was there seeking to enforce the Final Judgment and had not commenced a new action under the antitrust laws, the alleged “integration” of Windows 95 and Microsoft’s II browser was a complete defense; and hat antitrust tie-in principles and precedents could not be used to construe the Final Judgment. Microsoft believed the Court’s December Order “prima facie applied to Windows 98. ” Nevertheless, Microsoft did not seek a “further order” of the Court regarding Windows 98, nor did it plan to offer an unbundled version of Windows 98.