US v. Microsoft

U.S. v. MICROSOFT CORP.
9
Cite as 84 F.Supp.2d 9 (D.D.C. 1999)
consequences. For example, what is ed States Envtl. Protection Agency, 732
EPA’s obligation if it approves one TMDL F.2d 1167, 1177 (3d Cir.1984); Oregon
but disapproves a TMDL for a different Natural Resources Council v. United
body of water? Having found the provi- States Forest Serv., 834 F.2d 842, 851 (9th
sion to be ambiguous, the Court has little Cir.1987) (‘‘Where the plaintiffs may other-
difficulty finding that EPA’s interpretation wise proceed under the citizen suit provi-
is ‘‘reasonable and consistent with the sion, they should not be allowed to bypass
statutory scheme and legislative history.’’ the explicit requirements of the [CWA]
Cleveland v. United States Nuclear Regu- established by Congress through resort to
latory Comm’n, 68 F.3d 1361, 1367 TTT the APA.’’); American Canoe, 30
(D.C.Cir.1995); see also Chevron U.S.A. F.Supp.2d at 922–23 (‘‘Since claim 4 [under
Inc. v. Natural Resources Defense Coun- the citizen-suit provision of the CWA] sur-
cil, 467 U.S. 837, 845, 104 S.Ct. 2778, 81 vives, claim 5, pleading in the alternative
L.Ed.2d 694 (1984) (holding that if an that EPA’s failure to act is an abuse of
agency’s interpretation ‘‘represents a rea- discretion reviewable under the Adminis-
sonable accommodation TTT, we should not trative Procedure Act, must be dis-
disturb it unless it appears from the stat- missed.’’). Accordingly, Count V shall be
ute or its legislative history that the ac- dismissed.
commodation is not one that Congress
would have sanctioned’’). III. CONCLUSION
For the foregoing reasons, EPA’s Mo-
D. Since jurisdiction is proper under tion to Dismiss shall be denied with re-
the citizen-suit provision of the spect to Count IV and granted with re-
CWA, Plaintiffs’ claims under the spect to Count V.
APA must be dismissed.
[3] Plaintiffs’ Count V, which articu-
lates several claims under Section 10(e) of ,
the Administrative Procedure Act
(‘‘APA’’), 5 U.S.C. § 702(1)-(2), must be
dismissed because they are duplicative of UNITED STATES of America,
the claims that have been validly asserted Plaintiff,
in Count IV under the citizen-suit provi- v.
sion of the CWA. It is well established that
‘‘Congress did not intend the general grant MICROSOFT CORPORATION,
of review in the APA to duplicate existing Defendant.
procedures for review of agency action.’’ State of New York, ex rel. Attorney Gen-
Bowen v. Massachusetts, 487 U.S. 879, eral Eliot Spitzer et al., Plaintiffs and
903, 108 S.Ct. 2722, 101 L.Ed.2d 749 Counterclaim–Defendants,
(1988); see also Middlesex County Sewer-
v.
age Auth. v. National Sea Clammers
Ass’n, 453 U.S. 1, 20, 101 S.Ct. 2615, 69 Microsoft Corporation, Defendant
L.Ed.2d 435 (1981). Indeed, Section 10(c) and Counterclaim–Plaintiff.
of the APA expressly subjects to judicial Nos. CIV. A. 98–1232(TPJ),
review only agency action ‘‘for which there CIV. A. 98–1233(TPJ).
is no other adequate remedy in a court.’’ United States District Court,
APA § 10(c), 5 U.S.C. § 704. As many District of Columbia.
federal courts have held, ‘‘[t]he [CWA]
provides an adequate remedy for plaintiff Nov. 5, 1999.
in the circumstances here TTTT [Thus,]
preclusion of the APA remedy is proper.’’ After bench trial in consolidated civil
Allegheny County Sanitary Auth. v. Unit- state and federal antitrust actions against
10 84 FEDERAL SUPPLEMENT, 2d SERIES
software manufacturer, the District Court, thin-client network system merely because
Jackson, J., issued findings of fact, which monopoly price was being charged for OS,
included findings that: (1) relevant market and, since majority of software developers
was licensing of operating systems (OSs) wrote and would continue to write applica-
for personal computers (PCs) that were tions for defendant’s OS, there were signif-
compatible with chips produced by leading icant barriers to entry for developers of
manufacturer of microprocessors; (2) de- competing OSs.
fendant enjoyed monopoly power in rele-
vant market; (3) defendant restricted abili- 2. Monopolies O12(1.3, 2)
ty of original equipment manufacturers For purposes of civil antitrust action
and end users to remove defendant’s In- against software manufacturer in which
ternet Web browser from its OS in order relevant market was licensing of operating
prevent developers of rival Web browser systems (OSs) for personal computers
from weakening barriers of entry to OS (PCs) that were compatible with chips pro-
market by enabling development of cross- duced by largest microprocessor manufac-
platform or network-centric applications; turer, defendant enjoyed monopoly power
and (4) defendant developed its own ver- in relevant market, where defendant had
sion of Java runtime environment and vir- market share of 95%, due to defendant’s
tual machine that optimized porting to its market share, vast majority of existing
OS in order maintain barriers to entry into software was written for its OS and would
OS market by making it more difficult to continue to be written for its OS, thereby
develop cross-platform Java applications creating barriers to entry for new OS de-
that could port from defendant’s OS to velopers, any attempts by developer of
other OSs. competing OS to clone application pro-
Findings of fact issued. gramming interfaces (APIs) exposed by
defendant’s OS would be unsuccessful, and
vast majority of original equipment manu-
1. Monopolies O12(1.3, 2)
facturers (OEMs) pre-installed defendant’s
Relevant market for determining mar- OS on PCs.
ket power in civil antitrust action against
software manufacturer was the licensing of 3. Monopolies O12(1.3, 2)
operating systems (OSs) for personal com- Fact that software company with 95%
puters (PCs) that were compatible with share of relevant personal computer (PC)
chips produced by leading microprocessor operating system (OS) market invested
manufacturer; monopoly price could be heavily in research and development did
charged in market for significant period of not evidence lack of monopoly power in
time without losing so many customers OS market; company had incentives to in-
that monopoly pricing became unprofitable novate despite its monopoly power, since
because OS accounted for small percent- innovations made OS more attractive to
age of total cost of PC system, consumers consumers, thereby making them less sen-
could not switch from PC systems to ser- sitive to monopoly pricing, and improve-
ver systems without incurring substantial ments to OS would delay shift from PCs
costs, PC systems that were not compati- to thin-client or network computers.
ble with leading chips were more expen-
sive, there were fewer applications written 4. Monopolies O12(2)
to run on OS developed non-compatible Fact that, in setting price for new
systems, and switching to non-compatible version of its personal computer (PC) op-
systems required purchase of new periph- erating system (OS), software company did
erals and transfer of files, user of compati- not consider prices charged by other OS
ble PC system was unlikely to abandon vendors, and fact that, shortly before it
investment in that system by switching to released new version of OS, software com-
U.S. v. MICROSOFT CORP. 11
pany increased price original equipment OSs, thereby preserving high barriers to
manufacturers (OEMs) were charged for entry into OS market that existed in virtue
old version of OS to price charged for new of fact that majority of software developed
version, was indicative of company’s mo- ran only on software company’s OS.
nopoly power in relevant OS market.
5. Monopolies O12(2)
Even if software company was charg- Dennis C. Vacco, Attorney General of
ing less than profit-maximizing monopoly the State of New York, New York, NY,
price for its personal computer (PC) oper- Christopher Crook, U.S. Dept. of Justice,
ating systems (OSs), this was not probative San Francisco, CA, A. Douglas Melamed,
of lack of monopoly power in relevant OS U.S. Dept. of Justice, Washington DC, for
market, since company could have been plaintiff United States in case 1:98cv01232.
charging lower short-term price to expand
Alan R. Kusinitz, Attorney General of
its user base in order to take advantage, in
the State of New York, New York, NY, for
long-term, of high barriers to entry for
plaintiffs in case 1:98cv01233.
competing OSs and prohibitive costs of
customers’ substituting another OS. David Paul Murray, Willkie Farr &
Gallagher, Washington, DC, for movant
Bloomberg News.
Software company refused to license
its personal computer (PC) operating sys- Daryl Andrew Libow, Sullivan & Crom-
tems (OSs) without its Internet Web brow- well, Washington, DC, John Lehman War-
ser, bundled browser with OS, restricted den, Sullivan & Cromwell, New York, NY,
ability of original equipment manufactur- for defendant Microsoft Corp.
ers (OEMs) and end users to remove
browser from OS, threatened to penalize Donald Manwell Falk, Mayer, Brown &
OEMs that pre-installed or promoted rival Platt, Washington, DC for Network Com-
browser, provided its browser to custom- puter Inc.
ers free of charge, and provided Internet Joseph Jay Simons, Rogers & Wells,
access providers with incentives to distrib- L.L.P., Washington, DC for Sun Microsys-
ute its browser, in order to preserve its tems, Inc.
monopoly power in OS market by prevent-
ing developers of rival Web browser, which Samuel R. Miller, Folger, Levin &
would enable development of cross-plat- Kahn, L.L.P., San Francisco, CA, and Tri-
form or network-centric software that sa Jean Thompson, Dell Computer Corpo-
could run on different OSs, from weaken- ration, Round Rock, TX, for Dell Comput-
ing barriers to entry into OS market that er Corporation.
existed in virtue of fact that majority of Junius Carlisle McElveen, Jr., Jones,
existing software could run only on soft- Day, Reavis & Pogue, Washington, DC for
ware company’s OS. IBM.
Allen Roger Snyder, Hogan & Hartson,
Software company developed its own
L.L.P., Washington, DC for movant Net-
version of Java runtime environment and
scape Communications Corp.
virtual machine (VM), which optimized
porting Java applications to its operating Lee J. Levine, Levine Sullivan & Koch,
system (OS), in order to preserve its mo- LLP, Washington, DC, for movants Se-
nopoly power in relevant OS market by attle Times, ZDTV, ZDNET, The Wash-
making it more difficult to develop cross- ington Post Co., Associated Press, Dow
platform Java applications that could port Jones & Co., New York Times Co., Ameri-
from its OS to other potentially competing can Lawyer Media, and USA Today.
Niki Kuckes, Miller, Cassidy, Larroca & have been proved by a preponderance of
Lewin, L.L.P., Washington DC for movant the evidence. The Court shall state the
Reuter America, Inc. conclusions of law to be drawn therefrom
Robert A. Gutkin, Pillsbury, Madison & in a separate Memorandum and Order to
Sutro, L.L.P., Washington, DC for movant be filed in due course.
San Jose Mercury News, Inc.
I. BACKGROUND
Jerry L. Robinett and Roy A. Day, mov-
ants pro se. 1. A ‘‘personal computer’’ (‘‘PC’’) is a
Richard Joseph Favretto, Mayer, Brown digital information processing device de-
& Platt, Washington, DC for movant Ora- signed for use by one person at a time. A
cle Corp. typical PC consists of central processing
components (e.g., a microprocessor and
William Dean Coston, Venable, Baetjer,
main memory) and mass data storage
Howard & Civiletti, L.L.P., Washington,
(such as a hard disk). A typical PC sys-
DC for movant Compaq Computer Corp.
tem consists of a PC, certain peripheral
Benjamin S. Sharp, Perkins, Cote, input/output devices (including a monitor,
L.L.P., Washington DC for movant Boeing a keyboard, a mouse, and a printer), and
Co. an operating system. PC systems, which
Jay Ward Brown, Levine Sullivan & include desktop and laptop models, can be
Koch, L.L.P., Washington, DC for movant distinguished from more powerful, more
Associated Press. expensive computer systems known as
‘‘servers,’’ which are designed to provide
Carl Richard Schenker, Jr., O’Melveny
data, services, and functionality through a
& Myers, L.L.P., Washington, DC for
digital network to multiple users.
movant Bristol Technology Inc.
Robert Stephen Berry, Berry & Left- 2. An ‘‘operating system’’ is a software
wich, Washington, DC for movant Gravity, program that controls the allocation and
Inc. use of computer resources (such as central
processing unit time, main memory space,
JACKSON, District Judge. disk space, and input/output channels).
The operating system also supports the
FINDINGS OF FACT functions of software programs, called
‘‘applications,’’ that perform specific user-
These consolidated civil antitrust actions
oriented tasks. The operating system
alleging violations of the Sherman Act,
supports the functions of applications by
§§ 1 and 2, and various state statutes by
exposing interfaces, called ‘‘application
the defendant Microsoft Corporation were
programming interfaces,’’ or ‘‘APIs.’’
tried to the Court, sitting without a jury,
These are synapses at which the developer
between October 19, 1998, and June 24,
of an application can connect to invoke
1999. The Court has considered the rec-
pre-fabricated blocks of code in the oper-
ord evidence submitted by the parties,
ating system. These blocks of code in
made determinations as to its relevancy
turn perform crucial tasks, such as dis-
and materiality, assessed the credibility of
playing text on the computer screen. Be-
the testimony of the witnesses, both writ-
cause it supports applications while inter-
ten and oral, and ascertained for its pur-
acting more closely with the PC system’s
poses the probative significance of the doc-
hardware, the operating system is said to
umentary and visual evidence presented.
serve as a ‘‘platform.’’
Upon the record before the Court as of
July 28, 1999, at the close of the admission 3. An Intel-compatible PC is one de-
of evidence, pursuant to Fed.R.Civ.P. signed to function with Intel’s 80x86/Penti-
52(a), the Court finds the following facts to um families of microprocessors or with
compatible microprocessors manufactured Apple Computer, Inc. (‘‘Apple’’). Windows
by Intel or by other firms. 95 enjoyed unprecedented popularity with
4. An operating system designed to consumers, and in June 1998, Microsoft
run on an Intel-compatible PC will not released its successor, Windows 98.
function on a non-Intel-compatible PC, nor 9. Microsoft is the leading supplier of
will an operating system designed for a operating systems for PCs. The company
non-Intel-compatible PC function on an In- transacts business in all fifty of the United
tel-compatible one. Similarly, an applica- States and in most countries around the
tion that relies on APIs specific to one world.
operating system will not, generally speak-
ing, function on another operating system 10. Microsoft licenses copies of its soft-
unless it is first adapted, or ‘‘ported,’’ to ware programs directly to consumers.
the APIs of the other operating system. The largest part of its MS–DOS and Win-
5. Defendant Microsoft Corporation is dows sales, however, consists of licensing
organized under the laws of the State of the products to manufacturers of PCs
Washington, and its headquarters are situ- (known as ‘‘original equipment manufac-
ated in Redmond, Washington. Since its turers’’ or ‘‘OEMs’’), such as the IBM PC
inception, Microsoft has focused primarily Company and the Compaq Computer Cor-
on developing software and licensing it to poration (‘‘Compaq’’). An OEM typically
various purchasers. installs a copy of Windows onto one of its
PCs before selling the package to a con-
6. In 1981, Microsoft released the first
sumer under a single price.
version of its Microsoft Disk Operating
System, commonly known as ‘‘MS–DOS.’’ 11. The Internet is a global electronic
The system had a character-based user network, consisting of smaller, intercon-
interface that required the user to type nected networks, which allows millions of
specific instructions at a command prompt computers to exchange information over
in order to perform tasks such as launch- telephone wires, dedicated data cables, and
ing applications and copying files. When wireless links. The Internet links PCs by
the International Business Machines Cor- means of servers, which run specialized
poration (‘‘IBM’’) selected MS–DOS for operating systems and applications de-
pre-installation on its first generation of signed for servicing a network environ-
PCs, Microsoft’s product became the pre- ment.
dominant operating system sold for Intel-
12. The World Wide Web (‘‘the Web’’)
compatible PCs.
is a massive collection of digital informa-
7. In 1985, Microsoft began shipping a tion resources stored on servers through-
software package called Windows. The out the Internet. These resources are
product included a graphical user inter- typically provided in the form of hypertext
face, which enabled users to perform tasks documents, commonly referred to as ‘‘Web
by selecting icons and words on the screen pages,’’ that may incorporate any combina-
using a mouse. Although originally just a tion of text, graphics, audio and video con-
user-interface, or ‘‘shell,’’ sitting on top of tent, software programs, and other data.
MS–DOS, Windows took on more operat- A user of a computer connected to the
ing-system functionality over time. Internet can publish a page on the Web
8. In 1995, Microsoft introduced a soft- simply by copying it into a specially desig-
ware package called Windows 95, which nated, publicly accessible directory on a
announced itself as the first operating sys- Web server. Some Web resources are in
tem for Intel-compatible PCs that exhibit- the form of applications that provide func-
ed the same sort of integrated features as tionality through a user’s PC system but
the Mac OS running PCs manufactured by actually execute on a server.
13. Internet content providers 17. Although certain Web browsers

(‘‘ICPs’’) are the individuals and organiza- provided graphical user interfaces as far
tions that have established a presence, or back as 1993, the first widely-popular
‘‘site,’’ on the Web by publishing a collec- graphical browser distributed for profit,
tion of Web pages. Most Web pages are called Navigator, was brought to market
in the form of ‘‘hypertext’’; that is, they by the Netscape Communications Corpora-
contain annotated references, or ‘‘hyper- tion (‘‘Netscape’’) in December 1994. Mi-
links,’’ to other Web pages. Hyperlinks crosoft introduced its browser, called In-
can be used as cross-references within a ternet Explorer, in July 1995.
single document, between documents on
the same site, or between documents on II. THE RELEVANT MARKET
different sites. [1] 18. Currently there are no prod-
14. Typically, one page on each Web ucts, nor are there likely to be any in the
site is the ‘‘home page,’’ or the first access near future, that a significant percentage
point to the site. The home page is usual- of consumers worldwide could substitute
ly a hypertext document that presents an for Intel-compatible PC operating systems
overview of the site and hyperlinks to the without incurring substantial costs. Fur-
other pages comprising the site. thermore, no firm that does not currently
market Intel-compatible PC operating sys-
15. PCs typically connect to the Inter- tems could start doing so in a way that
net through the services of Internet access would, within a reasonably short period of
providers (‘‘IAPs’’), which generally charge time, present a significant percentage of
subscription fees to their customers in the consumers with a viable alternative to ex-
United States. There are two types of isting Intel-compatible PC operating sys-
IAPs. Online services (‘‘OLSs’’) such as tems. It follows that, if one firm con-
America Online (‘‘AOL’’), Prodigy, and the trolled the licensing of all Intel-compatible
Microsoft Network (‘‘MSN’’) offer, in addi- PC operating systems worldwide, it could
tion to Internet access, various services set the price of a license substantially
and an array of proprietary content. In- above that which would be charged in a
ternet service providers (‘‘ISPs’’) such as competitive market and leave the price
MindSpring and Netcom, on the other there for a significant period of time with-
hand, offer few services apart from Inter- out losing so many customers as to make
net access and relatively little of their own the action unprofitable. Therefore, in de-
content. termining the level of Microsoft’s market
16. A ‘‘Web client’’ is software that, power, the relevant market is the licensing
when running on a computer connected to of all Intel-compatible PC operating sys-
the Internet, sends information to and re- tems worldwide.
ceives information from Web servers
A. Demand Substitutability
throughout the Internet. Web clients and
servers transfer data using a standard 1. Server Operating Systems
known as the Hypertext Transfer Protocol 19. Consumers could not turn from In-
(‘‘HTTP’’). A ‘‘Web browser’’ is a type of tel-compatible PC operating systems to In-
Web client that enables a user to select, tel-compatible server operating systems
retrieve, and perceive resources on the without incurring substantial costs, since
Web. In particular, Web browsers provide the latter type of system is sold at a
a way for a user to view hypertext docu- significantly higher price than the former.
ments and follow the hyperlinks that con- A consumer intent on acquiring a server
nect them, typically by moving the cursor operating system would also have to buy a
over a link and depressing the mouse but- computer of substantially greater power
ton. and price than an Intel-compatible PC,
because server operating systems general- sustained increase in the price of an Intel-
ly cannot function properly on PC hard- compatible PC operating system.
ware. The price of an Intel-compatible PC 21. The response to a price increase
operating system accounts for only a very would be somewhat greater among con-
small percentage of the price of an Intel- sumers buying their first PC system, be-
compatible PC system. Thus, even a sub- cause they would not have already invest-
stantial increase in the price of an Intel- ed time and money in an Intel-compatible
compatible PC operating system above the PC system and a set of compatible applica-
competitive level would result in only a tions. Apple does not license the Mac OS
trivial increase in the price of an Intel- separately from its PC hardware, however,
compatible PC system. Very few consum- and the package of hardware and software
ers would purchase expensive servers in comprising an Apple PC system is priced
response to a trivial increase in the price substantially higher than the average price
of an Intel-compatible PC system. Fur- of an Intel-compatible PC system. Fur-
thermore, a consumer would not obtain a thermore, consumer demand for Apple PC
satisfactory substitute for an Intel-compat- systems suffers on account of the relative
ible PC operating system even if he pur- dearth of applications written to run on the
chased a server, since server operating Mac OS. It is unlikely, then, that a firm
systems lack the features—and support for controlling the licensing of all Intel-com-
the breadth of applications—that induce patible PC operating systems would lose
users to purchase Intel-compatible PC op- so many new PC users to Apple as the
erating systems. result of a substantial, enduring price in-
crease as to make the action unprofitable.
2. Non–Intel–Compatible PC It is therefore proper to define a relevant
Operating Systems market that excludes the Mac OS. In any
20. Since only Intel-compatible PC op- event, as Section III of these Findings
erating systems will work with Intel-com- demonstrates, including the Mac OS in the
patible PCs, a consumer cannot opt for a relevant market would not alter the
non-Intel-compatible PC operating system Court’s conclusion as to the level of Micro-
without obtaining a non-Intel-compatible soft’s market power.
PC. Thus, for consumers who already own 3. Information Appliances
an Intel-compatible PC system, the cost of 22. No operating system designed for a
switching to a non-Intel compatible PC hand-held computer, a ‘‘smart’’ wireless
operating system includes the price of not telephone, a television set-top box, or a
only a new operating system, but also a game console is capable of performing as
new PC and new peripheral devices. It an adequate operating system for an Intel-
also includes the effort of learning to use compatible PC. Therefore, in order to
the new system, the cost of acquiring a adopt a substitute for the Intel-compatible
new set of compatible applications, and the PC operating system from the realm of
work of replacing files and documents that ‘‘information appliances,’’ a consumer must
were associated with the old applications. acquire one or more of these devices in
Very few consumers would incur these lieu of an Intel-compatible PC system.
costs in response to the trivial increase in 23. It is possible that, within the next
the price of an Intel-compatible PC system few years, those consumers who otherwise
that would result from even a substantial would use an Intel-compatible PC system
increase in the price of an Intel-compatible solely for storing addresses and schedules,
PC operating system. For example, users for sending and receiving E-mail, for
of Intel-compatible PC operating systems browsing the Web, and for playing video
would not switch in large numbers to the games might be able to choose a comple-
Mac OS in response to even a substantial, mentary set of information appliances over
an Intel-compatible PC system without in- lows that software applications written to

curring substantial costs. To the extent run on a specific Intel-compatible PC op-
this substitution occurs, though, it will be erating system will not run on a network
the result of innovation by the producers computer. Network computers can run
of information appliances, and it will occur applications residing on a designated ser-
even if Intel-compatible PC operating sys- ver, however. Moreover, a network com-
tems are priced at the same level that they puter system typically can run applica-
would be in a competitive market. More tions residing on other servers, so long as
importantly, while some consumers may those applications are accessible through
decide to make do with one or more infor- Web sites. The ability to run server-
mation appliances in place of an Intel- based applications is not exclusive to net-
compatible PC system, the number of work computer systems, however. Gener-
these consumers will, for the foreseeable ally speaking, any PC system equipped
future, remain small in comparison to the with a browser and an Internet connection
number of consumers deciding that they is capable of accessing applications hosted
still need an Intel-compatible PC system. through Web sites.
One reason for this is the fact that no
single type of information appliance, nor 25. Since the network computing model
even all types in the aggregate, provides relies heavily on the processing power and
all of the features that most consumers memory of servers, the requirements for
have come to rely on in their PC systems the user’s hardware (and thus the price of
and in the applications that run on them. that hardware) are low relative to those of
Thus, most of those who buy information an Intel-compatible PC system. Still, a
appliances will do so in addition to, rather user who already owns a relatively expen-
than instead of, buying an Intel-compatible sive Intel-compatible PC system is not
PC system. Not surprisingly, then, sales likely to abandon the investment and ac-
of PC systems are not expected to suffer quire less powerful hardware just because
on account of the growing consumer inter- one of the least expensive components of
est in information appliances. It follows his PC system—the operating system—is
that, for the foreseeable future, a firm substantially more expensive than it would
controlling the licensing of all Intel-com- be under competitive conditions. Just as
patible PC operating systems could set does the Mac OS, the network computing
prices substantially above competitive lev- model presents a somewhat more attrac-
els without losing an unacceptable amount tive alternative to the first-time computer
of business to information appliances. buyer. But as in the case where a pro-
4. Network Computers spective purchaser is considering acquiring
24. A network computer system (some- the Apple alternative, a new buyer consid-
times called a ‘‘thin client’’) typically con- ering the network computing model must
tains central processing components with choose between types of computer sys-
basic capabilities, certain key peripheral tems. If the consumer opts for the less
devices (such as a monitor, a keyboard, expensive hardware of the network com-
and a mouse), an operating system, and a puter, that hardware will not support an
browser. The system contains no mass Intel-compatible PC operating system;
storage, however, and it processes little if and if the new buyer opts for the more
any data locally. Instead, the system re- expensive hardware of an Intel-compatible
ceives processed data and software as PC, an Intel-compatible PC operating sys-
needed from a server across a network. tem will almost certainly come pre-install-
A network computer system lacks the ed (and in any event represent very little
hardware resources to support an Intel- additional cost relative to the price of the
compatible PC operating system. It fol- hardware).
26. Only a few firms currently market have begun to appear in small numbers on
network computer systems, and the sys- the Web. If so, increasing numbers of com-
tems have yet to attract substantial con- puter users equipped with Web browsers
sumer demand. In part, this is because and IAP connections could begin to con-
PC systems, which can store and process duct a significant portion of their comput-
data locally as well as communicate with a ing through these portals. To the extent
server, have decreased so much in price as they might do so, users probably would not
to call into question the value proposition regard the Mac OS’s limited stock of com-
of buying a network computer system. patible applications as the major drawback
This fact would not change if the price of to using an Apple PC system that it is
an Intel-compatible PC operating system today, and they might be increasingly
rose significantly, because the resulting drawn to network computer systems and
change in the price of an Intel-compatible information appliances. The variety and
PC system would be very minor. Another ease of use of server-based applications
reason for the limited demand for network accessible through browsers would have to
computer systems is the fact that few con- increase a great deal from today’s levels,
sumers are in a position to turn from PC however, before the total cost of dispens-
systems to network computer systems ing with an Intel-compatible PC operating
without making substantial sacrifices; for system would decline sufficiently to impose
the network computing option exhibits sig- a significant constraint on the pricing of
nificant shortcomings for current PC own- those systems. Again, that day is not
ers and first-time buyers alike. The prob- imminent; for at least the next few years,
lems of latency, congestion, asynchrony, the overwhelming majority of consumers
and insecurity across a communications accessing server-based applications will do
network, and contention for limited pro- so using an Intel-compatible PC system
cessing and memory resources at the re- and a browser.
mote server, can all result in a substantial 6. Middleware
derogation of computing performance. 28. Operating systems are not the only
Moreover, the owner of a network comput- software programs that expose APIs to
er is required to enter into long-term de- application developers. Netscape’s Web
pendency upon the owner of a remote ser- browser and Sun Microsystems, Inc.’s
ver in order to obtain functionality that Java class libraries are examples of non-
would reside within his control if he owned operating system software that do like-
a PC system. If network computing be- wise. Such software is often called ‘‘mid-
comes a viable alternative to PC-based dleware,’’ because it relies on the inter-
computing, it will be because innovation by faces provided by the underlying operating
the proponents of the network computing system while simultaneously exposing its
model overcomes these problems, and it own APIs to developers. Currently no
will happen even if Intel-compatible PC middleware product exposes enough APIs
operating systems are priced at competi- to allow independent software vendors
tive levels. In any case, that day has not (‘‘ISVs’’) profitably to write full-featured
arrived, nor does it appear imminent. personal productivity applications that rely
5. Server–Based Computing Generally solely on those APIs.
27. As the bandwidth available to the 29. Even if middleware deployed
average user increases, ‘‘portal’’ Web sites, enough APIs to support full-featured ap-
which aggregate Web content and provide plications, it would not function on a com-
services such as search engines, E-mail, puter without an operating system to per-
and travel reservation systems, could be- form tasks such as managing hardware
gin to host full lines of the server-based, resources and controlling peripheral de-
personal-productivity applications that vices. But to the extent the array of
applications relying solely on middleware costly process. Consequently, software

comes to satisfy all of a user’s needs, the developers generally write applications
user will not care whether there exists a first, and often exclusively, for the operat-
large number of other applications that are ing system that is already used by a domi-
directly compatible with the underlying op- nant share of all PC users. Users do not
erating system. Thus, the growth of mid- want to invest in an operating system until
dleware-based applications could lower the it is clear that the system will support
costs to users of choosing a non-Intel- generations of applications that will meet
compatible PC operating system like the their needs, and developers do not want to
Mac OS. It remains to be seen, though, invest in writing or quickly porting appli-
whether there will ever be a sustained cations for an operating system until it is
stream of full-featured applications written clear that there will be a sizeable and
solely to middleware APIs. In any event, it stable market for it. What is more, con-
would take several years for middleware sumers who already use one Intel-compati-
and the applications it supports to evolve ble PC operating system are even less
from the status quo to a point at which the likely than first-time buyers to choose a
cost to the average consumer of choosing a
newcomer to the field, for switching to a
non-Intel compatible PC operating system
new system would require these users to
over an Intel-compatible one falls so low as
scrap the investment they have made in
to constrain the pricing of the latter sys-
applications, training, and certain hard-
tems.
ware.
B. The Possibility of Supply Re- 31. The chicken-and-egg problem not-
sponses withstanding, a firm might reasonably ex-
30. Firms that do not currently pro- pect to make a profit by introducing an
duce Intel-compatible PC operating sys- Intel-compatible PC operating system de-
tems could do so. What is more, once a signed to support a type of application that
firm had written the necessary software satisfies the special interests of a particu-
code, it could produce millions of copies of lar subset of users. For example, Be, Inc.
its operating system at relatively low cost. (‘‘Be’’) markets an Intel-compatible PC op-
The ability to meet a large demand is erating system called BeOS that offers
useless, however, if the demand for the superior support for multimedia applica-
product is small, and signs do not indicate tions, and the operating system enjoys a
large demand for a new Intel-compatible certain amount of success with the seg-
PC operating system. To the contrary, ment of the consumer population that has
they indicate that the demand for a new a special interest in creating and playing
Intel-compatible PC operating system multimedia content with a PC system.
would be severely constrained by an in- Still, while a niche operating system might
tractable ‘‘chicken-and-egg’’ problem: The turn a profit, the chicken-and-egg problem
overwhelming majority of consumers will (hereinafter referred to as the ‘‘applica-
only use a PC operating system for which tions barrier to entry’’) would make it pro-
there already exists a large and varied set hibitively expensive for a new Intel-com-
of high-quality, full-featured applications, patible operating system to attract enough
and for which it seems relatively certain developers and consumers to become a
that new types of applications and new viable alternative to a dominant incumbent
versions of existing applications will con- in less than a few years.
tinue to be marketed at pace with those
written for other operating systems. Un- 32. To the extent that developers begin
fortunately for firms whose products do writing attractive applications that rely
not fit that bill, the porting of applications solely on servers or middleware instead of
from one operating system to another is a PC operating systems, the applications
barrier to entry could erode. As the ket for Intel-compatible PC operating sys-
Court finds above, however, it remains to tems has stood above ninety percent. For
be seen whether server- or middleware- the last couple of years, the figure has
based development will flourish at all. been at least ninety-five percent, and ana-
Even if such development were already lysts project that the share will climb even
flourishing, it would still be several years higher over the next few years. Even if
before the applications barrier eroded Apple’s Mac OS were included in the rele-
enough to clear the way for the relatively vant market, Microsoft’s share would still
rapid emergence of a viable alternative to stand well above eighty percent.
incumbent Intel-compatible PC operating
systems. It is highly unlikely, then, that a B. The Applications Barrier to Entry
firm not already marketing an Intel-com- 1. Description of the Applications
patible PC operating system could begin Barrier to Entry
marketing one that would, in less than a 36. Microsoft’s dominant market share
few years, present a significant percentage is protected by the same barrier that helps
of consumers with a viable alternative to define the market for Intel-compatible PC
incumbents. operating systems. As explained above,
the applications barrier would prevent an
III. MICROSOFT’S POWER IN THE aspiring entrant into the relevant market
RELEVANT MARKET from drawing a significant number of cus-
[2] 33. Microsoft enjoys so much tomers away from a dominant incumbent
power in the market for Intel-compatible even if the incumbent priced its products
PC operating systems that if it wished to substantially above competitive levels for a
exercise this power solely in terms of significant period of time. Because Micro-
price, it could charge a price for Windows soft’s market share is so dominant, the
substantially above that which could be barrier has a similar effect within the mar-
charged in a competitive market. More- ket: It prevents Intel-compatible PC oper-
over, it could do so for a significant period ating systems other than Windows from
of time without losing an unacceptable attracting significant consumer demand,
amount of business to competitors. In and it would continue to do so even if
other words, Microsoft enjoys monopoly Microsoft held its prices substantially
power in the relevant market. above the competitive level.
34. Viewed together, three main facts 37. Consumer interest in a PC operat-
indicate that Microsoft enjoys monopoly ing system derives primarily from the abil-
power. First, Microsoft’s share of the ity of that system to run applications. The
market for Intel-compatible PC operating consumer wants an operating system that
systems is extremely large and stable. runs not only types of applications that he
Second, Microsoft’s dominant market knows he will want to use, but also those
share is protected by a high barrier to types in which he might develop an inter-
entry. Third, and largely as a result of est later. Also, the consumer knows that
that barrier, Microsoft’s customers lack a if he chooses an operating system with
commercially viable alternative to Win- enough demand to support multiple appli-
dows. cations in each product category, he will be
less likely to find himself straitened later
A. Market Share by having to use an application whose fea-
35. Microsoft possesses a dominant, tures disappoint him. Finally, the average
persistent, and increasing share of the user knows that, generally speaking, appli-
worldwide market for Intel-compatible PC cations improve through successive ver-
operating systems. Every year for the sions. He thus wants an operating system
last decade, Microsoft’s share of the mar- for which successive generations of his fa-
vorite applications will be released— them to share files easily with colleagues
promptly at that. The fact that a vastly at other institutions. The main reason
larger number of applications are written that demand for Windows experiences pos-
for Windows than for other PC operating itive network effects, however, is that the
systems attracts consumers to Windows, size of Windows’ installed base impels
because it reassures them that their inter- ISVs to write applications first and fore-
ests will be met as long as they use Micro- most to Windows, thereby ensuring a large
soft’s product. body of applications from which consumers
38. Software development is character- can choose. The large body of applications
ized by substantial economies of scale. thus reinforces demand for Windows, aug-
The fixed costs of producing software, in- menting Microsoft’s dominant position and
cluding applications, is very high. By con- thereby perpetuating ISV incentives to
trast, marginal costs are very low. More- write applications principally for Windows.
over, the costs of developing software are This self-reinforcing cycle is often referred
‘‘sunk’’—once expended to develop soft- to as a ‘‘positive feedback loop.’’
ware, resources so devoted cannot be used 40. What for Microsoft is a positive
for another purpose. The result of econo- feedback loop is for would-be competitors
mies of scale and sunk costs is that appli- a vicious cycle. For just as Microsoft’s
cation developers seek to sell as many large market share creates incentives for
copies of their applications as possible. ISVs to develop applications first and fore-
An application that is written for one PC most for Windows, the small or non-exis-
operating system will operate on another tent market share of an aspiring competi-
PC operating system only if it is ported to tor makes it prohibitively expensive for the
that system, and porting applications is aspirant to develop its PC operating sys-
both time-consuming and expensive. tem into an acceptable substitute for Win-
Therefore, application developers tend to dows. To provide a viable substitute for
write first to the operating system with Windows, another PC operating system
the most users—Windows. Developers would need a large and varied enough base
might then port their applications to other of compatible applications to reassure con-
operating systems, but only to the extent sumers that their interests in variety,
that the marginal added sales justify the choice, and currency would be met to
cost of porting. In order to recover that more-or-less the same extent as if they
cost, ISVs that do go to the effort of chose Windows. Even if the contender
porting frequently set the price of ported attracted several thousand compatible ap-
applications considerably higher than that plications, it would still look like a gamble
of the original versions written for Win- from the consumer’s perspective next to
dows. Windows, which supports over 70,000 ap-
39. Consumer demand for Windows en- plications. The amount it would cost an
joys positive network effects. A positive operating system vendor to create that
network effect is a phenomenon by which many applications is prohibitively large.
the attractiveness of a product increases Therefore, in order to ensure the availabil-
with the number of people using it. The ity of a set of applications comparable to
fact that there is a multitude of people that available for Windows, a potential ri-
using Windows makes the product more val would need to induce a very large
attractive to consumers. The large install- number of ISVs to write to its operating
ed base attracts corporate customers who system.
want to use an operating system that new 41. In deciding whether to develop an
employees are already likely to know how application for a new operating system, an
to use, and it attracts academic consumers ISV’s first consideration is the number of
who want to use software that will allow users it expects the operating system to
attract. Out of this focus arises a collec- would put competitive pressure on Win-
tive-action problem: Each ISV realizes dows.
that the new operating system could at- 43. The cost to a would-be entrant of
tract a significant number of users if inducing ISVs to write applications for its
enough ISVs developed applications for it; operating system exceeds the cost that
but few ISVs want to sink resources into Microsoft itself has faced in inducing ISVs
developing for the system until it becomes to write applications for its operating sys-
established. Since everyone is waiting for tem products, for Microsoft never con-
everyone else to bear the risk of early fronted a highly penetrated market domi-
adoption, the new operating system has nated by a single competitor. Of course,
difficulty attracting enough applications to the fact that it is extremely difficult for an
generate a positive feedback loop. The efficient would-be rival to accumulate
vendor of a new operating system cannot enough applications support to compete
effectively solve this problem by paying with Windows does not mean that sustain-
the necessary number of ISVs to write for ing its own applications support is effort-
its operating system, because the cost of less for Microsoft. In fact, if Microsoft
doing so would dwarf the expected return. stopped investing the hundreds of millions
42. Counteracting the collective-action of dollars it spends each year inducing
phenomenon is another known as the ISVs to write applications for Windows, it
‘‘first-mover incentive.’’ For an ISV inter- might become easier than it currently is
ested in attracting users, there may be an for a competitor to develop its own posi-
advantage to offering the first and, for a tive feedback loop. But given that Win-
while, only application in its category that dows today enjoys overwhelmingly more
runs on a new PC operating system. The applications support than any other PC
user base of the new system may be small, operating system, it would still take that
but every user of that system who wants competitor years to develop the necessary
such an application will be compelled to momentum. Plus, while Microsoft may
use the ISV’s offering. Moreover, if de- spend more on platform ‘‘evangelization,’’
mand for the new operating system sud- even in relative terms, than any other PC
denly explodes, the first mover will reap operating-system vendor, it is not difficult
large sales before any competitors arrive. to understand why it is worthwhile for the
An ISV thus might be drawn to a new PC principal beneficiary of the applications
operating system as a ‘‘protected harbor.’’ barrier to devote more resources to aug-
Once first-movers stake claims to the ma- menting it than aspiring rivals are willing
jor categories of applications, however, to expend in speculative efforts to erode it.
there is a strong chance that the new 44. Microsoft continually releases ‘‘new
operating system could stall; it would not and improved’’ versions of its PC operating
support the most familiar applications, nor system. Each time it does, Microsoft
the variety and number of applications, must convince ISVs to write applications
that attract large numbers of consumers, that take advantage of new APIs, so that
and there would no longer exist a first- existing Windows users will have incentive
mover incentive to attract additional ISVs to buy an upgrade. Since ISVs are usual-
to the important application categories. ly still earning substantial revenue from
Although the upstart operating system applications written for the last version of
might find itself with enough applications Windows, Microsoft must convince them to
support to hold a fraction of the market, write for the new version. Even if ISVs
the collective-action phenomenon would are slow to take advantage of the new
still prevent the system from gaining the APIs, though, no applications barrier
kind of positive feedback momentum that stands in the way of consumers adopting
can turn a fringe entrant into a rival that the new system, for Microsoft ensures that
successive versions of Windows retain the part of the Windows API set. Despite
ability to run applications developed for these efforts, IBM could obtain neither
earlier versions. In fact, since ISVs know significant market share nor ISV support
that consumers do not feel locked into for OS/2 Warp. Thus, although at its peak
their old versions of Windows and that OS/2 ran approximately 2,500 applications
new versions have historically attracted and had 10% of the market for Intel-
substantial consumer demand, ISVs will compatible PC operating systems, IBM ul-
generally write to new APIs as long as the timately determined that the applications
interfaces enable attractive, innovative fea- barrier prevented effective competition
tures. Microsoft supplements developers’ against Windows 95. For that reason, in
incentives by extending various ‘‘seals of 1996 IBM stopped trying to convince ISVs
approval’’—visible to consumers, investors, to write for OS/2 Warp. IBM now targets
and industry analysts—to those ISVs that the product at a market niche, namely
promptly develop new versions of their enterprise customers (mainly banks) that
applications adapted to the newest version are interested in particular types of appli-
of Windows. In addition, Microsoft works cation that run on OS/2 Warp. The fact
closely with ISVs to help them adapt their that IBM no longer tries to compete with
applications to the newest version of the Windows is evidenced by the fact that it
operating system—a process that is in any prices OS/2 Warp at about two-and-one-
event far easier than porting an applica- half times the price of Windows 98.
tion from one vendor’s PC operating sys- b. The Mac OS
tem to another’s. In sum, despite the
substantial resources Microsoft expends 47. The inability of Apple to compete
inducing ISVs to develop applications for effectively with Windows provides another
new versions of Windows, the company example of the applications barrier to en-
does not face any obstacles nearly as im- try in operation. Although Apple’s Mac
posing as the barrier to entry that vendors OS supports more than 12,000 applica-
and would-be vendors of other PC operat- tions, even an inventory of that magnitude
ing systems must overcome. is not sufficient to enable Apple to present
a significant percentage of users with a vi-
2. Empirical Evidence of the Appli- able substitute for Windows. The absence
cations Barrier to Entry of a large installed base, in turn, reinforces
45. The experiences of IBM and Apple, the disparity between the applications
Microsoft’s most significant operating sys- made available for the Mac OS and those
tem rivals in the mid- and late 1990s, made available for Windows, further inhib-
confirm the strength of the applications iting Apple’s sales. The applications bar-
barrier to entry. rier thus prevents the Mac OS from hin-
dering Microsoft’s ability to control price,
a. OS/2 Warp
regardless of whether the Mac OS is re-
46. IBM’s inability to gain widespread garded as being in the relevant market or
developer support for its OS/2 Warp oper- not.
ating system illustrates how the massive
c. Fringe Operating Systems
Windows installed base makes it prohibi-
tively costly for a rival operating system to 48. The applications barrier to entry
attract enough developer support to chal- does not prevent non-Microsoft, Intel-com-
lenge Windows. In late 1994, IBM intro- patible PC operating systems from attract-
duced its Intel-compatible OS/2 Warp oping enough consumer demand and ISV
erating system and spent tens of millions support to survive. It does not even pre-
of dollars in an effort to attract ISVs to vent vendors of those products from mak-
develop applications for OS/2 and in an ing a profit. The barrier does, however,
attempt to reverse-engineer, or ‘‘clone,’’ prevent the products from drawing a sig-
nificant percentage of consumers away tions. To date, though, legions of ISVs
from Windows. have not followed the lead of these first
49. As discussed above, Be markets an movers. Similarly, consumers have by and
Intel-compatible PC operating system, large shown little inclination to abandon
called BeOS, that is specially suited to Windows, with its reliable developer sup-
support multimedia functions. The oper- port, in favor of an operating system
ating system survives on a relatively mi- whose future in the PC realm is unclear.
nuscule number of applications (approxi- By itself, Linux’s open-source development
mately 1,000) and a user base which, at model shows no signs of liberating that
around 750,000, is trivial compared to the operating system from the cycle of con-
number of Windows users. One of the sumer preferences and developer incen-
reasons BeOS can even attract that many tives that, when fueled by Windows’ enor-
users despite its small base of applications mous reservoir of applications, prevents
is that it advertises itself as a complement non-Microsoft operating systems from
to, rather than as a substitute for, Win- competing.
dows. Although BeOS could run an Intel- 3. Open–Source Applications
compatible PC system without Windows, it Development
is almost always loaded on a system along 51. Since application developers work-
with Windows. What is more, when these ing under an open-source model are not
dual-loaded PC systems are turned on, looking to recoup their investment and
Windows automatically boots; the user make a profit by selling copies of their
must then take affirmative steps to invoke finished products, they are free from the
BeOS. While this scheme allows BeOS to imperative that compels proprietary devel-
occupy a niche in the market, it does not opers to concentrate their efforts on Win-
place the product on a trajectory to re- dows. In theory, then, open-source devel-
place Windows on a significant number of opers are at least as likely to develop
PCs. The special multimedia support pro- applications for a non-Microsoft operating
vided by BeOS may, for a small number of system as they are to write Windows-com-
users, outweigh the disadvantages of main- patible applications. In fact, they may be
taining two large, complex operating sys- disposed ideologically to focus their efforts
tems on one PC. Of that group, however, it on open-source platforms like Linux. For-
is likely that only a tiny number of users tunately for Microsoft, however, there are
will find that support so attractive that only so many developers in the world will-
they would be willing to forego Windows, ing to devote their talents to writing, test-
and its huge base of compatible applica- ing, and debugging software pro bono pub-
tions, altogether. lico. A small corps may be willing to
50. The experience of the Linux oper- concentrate its efforts on popular applica-
ating system, a version of which runs on tions, such as browsers and office produc-
Intel-compatible PCs, similarly fails to re- tivity applications, that are of value to
fute the existence of an applications barri- most users. It is unlikely, though, that a
er to entry. Linux is an ‘‘open source’’ sufficient number of open-source develop-
operating system that was created, and is ers will commit to developing and continu-
continuously updated, by a global network ally updating the large variety of applica-
of software developers who contribute tions that an operating system would need
their labor for free. Although Linux has to attract in order to present a significant
between ten and fifteen million users, the number of users with a viable alternative
majority of them use the operating system to Windows. In practice, then, the open-
to run servers, not PCs. Several ISVs have source model of applications development
announced their development of (or plans may increase the base of applications that
to develop) Linux versions of their applica- run on non-Microsoft PC operating sys-
tems, but it cannot dissolve the barrier larly close attention to consumer demand.
that prevents such operating systems from OEMs are thus not only important custom-
challenging Windows. ers in their own right, they are also surro-
4. Cloning the 32–Bit Windows APIs gates for consumers in identifying reason-
52. Theoretically, the developer of a ably-available commercial alternatives to
non-Microsoft, Intel-compatible PC operat- Windows. Without significant exception,
ing system could circumvent the applica- all OEMs pre-install Windows on the vast
tions barrier to entry by cloning the APIs majority of PCs that they sell, and they
exposed by the 32–bit versions of Windows uniformly are of a mind that there exists
(Windows 9x and Windows NT). Applica- no commercially viable alternative to which
tions written for Windows would then also they could switch in response to a substan-
run on the rival system, and consumers tial and sustained price increase or its
could use the rival system confident in that equivalent by Microsoft. For example, in
knowledge. Translating this theory into 1995, at a time when IBM still placed hope
practice is virtually impossible, however. in OS/2’s ability to rival Windows, the firm
First of all, cloning the thousands of APIs nevertheless calculated that its PC compa-
already exposed by Windows would be an ny would lose between seventy and ninety
enormously expensive undertaking. More percent of its sales volume if it failed to
daunting is the fact that Microsoft continu- load Windows 95 on its PCs. Although a
ally adds APIs to Windows through up- few OEMs have announced their intention
dates and new versions. By the time a to pre-install Linux on some of the com-
rival finished cloning the APIs currently in puters they ship, none of them plan to
existence, Windows would have exposed a install Linux in lieu of Windows on any
multitude of new ones. Since the rival appreciable number of PC (as opposed to
would never catch up, it would never be server) systems. For its part, Be is not
able to assure consumers that its operating even attempting to persuade OEMs to in-
system would run all of the applications stall BeOS on PCs to the exclusion of
written for Windows. IBM discovered this Windows.
to its dismay in the mid–1990s when it 55. OEMs believe that the likelihood of
failed, despite a massive investment, to a viable alternative to Windows emerging
clone a sufficiently large part of the 32–bit any time in the next few years is too low to
Windows APIs. In short, attempting to constrain Microsoft from raising prices or
clone the 32–bit Windows APIs is such an imposing other burdens on customers and
expensive, uncertain undertaking that it users. The accuracy of this belief is high-
fails to present a practical option for a lighted by the fact that the other vendors
would-be competitor to Windows. of Intel-compatible PC operating systems
do not view their own offerings as viable
C. Viable Alternatives to Windows
alternatives to Windows. Microsoft knows
53. That Microsoft’s market share and that OEMs have no choice but to load
the applications barrier to entry together Windows, both because it has a good un-
endow the company with monopoly power derstanding of the market in which it oper-
in the market for Intel-compatible PC op- ates and because OEMs have told Micro-
erating systems is directly evidenced by soft as much. Indicative of Microsoft’s
the sustained absence of realistic commer- assessment of the situation is the fact that,
cial alternatives to Microsoft’s PC operat- in a 1996 presentation to the firm’s execu-
ing-system products. tive committee, the Microsoft executive in
54. OEMs are the most important di- charge of OEM licensing reported that
rect customers for operating systems for piracy continued to be the main competi-
Intel-compatible PCs. Because competition tion to the company’s operating system
among OEMs is intense, they pay particu- products. Secure in this knowledge, Mi-
crosoft did not consider the prices of other on new PC systems are the most current.
Intel-compatible PC operating systems It does this, in part, by increasing the
when it set the price of Windows 98. price to OEMs of older versions of Win-
56. As the Court found above, the dows when the newer versions are re-
growth of server- and middleware-based leased. Since Microsoft can sell so many
applications development might eventually copies of each new operating system
weaken the applications barrier to entry. through the sales of new PC systems, the
This would not only make it easier for average price it sets for those systems is
outside firms to enter the market, it could little affected by the fact that older ver-
also make it easier for non-Microsoft firms sions of Windows never wear out.
already in the market to present a viable
alternative to Windows. But as the Court E. Price Restraint Posed by Piracy
also found above, it is not clear whether 58. Although there is no legal second-
ISVs will ever develop a large, diverse ary market for Microsoft’s PC operating
body of full-featured applications that rely systems, there is a thriving illegal one.
solely on APIs exposed by servers and Software pirates illegally copy software
middleware. Furthermore, even assuming products such as Windows, selling each
that such a movement has already begun copy for a fraction of the vendor’s usual
in earnest, it will take several years for the price. One of the ways Microsoft combats
applications barrier to erode enough to piracy is by advising OEMs that they will
enable a non-Microsoft, Intel-compatible be charged a higher price for Windows
PC operating system to develop into a unless they drastically limit the number of
viable alternative to Windows. PCs that they sell without an operating
system pre-installed. In 1998, all major
D. Price Restraint Posed by Micro- OEMs agreed to this restriction. Natural-
soft’s Installed Base ly, it is hard to sell a pirated copy of
57. Software never expires, so consum- Windows to a consumer who has already
ers who already have a version of Windows received a legal copy included in the price
with which they are content and who are of his new PC system. Thus, Microsoft is
not shopping for a new PC system are able to effectively contain, if not extin-
somewhat reluctant to incur the cost of guish, the illegal secondary market for its
upgrading to a new version of Windows. operating-system products. So even
Fortunately for Microsoft, the pace of in- though Microsoft is more concerned about
novation in PC hardware is rapid, and the piracy than it is about other firms’ operat-
price of that hardware has declined steadi- ing–system products, the company’s pric-
ly in recent years. As a result, existing ing is not substantially constrained by the
PC users buy new PC systems relatively need to reduce the incentives for consum-
frequently, and OEMs still attract at a ers to acquire their copies of Windows
healthy rate buyers who have never owned illegally.
a computer. The license for one of Micro-
soft’s operating system products prohibits F. Price Restraint Posed by Long–
the user from transferring the operating Term Threats
system to another machine, so there is no 59. The software industry in general is
legal secondary market in Microsoft oper- characterized by dynamic, vigorous compe-
ating systems. This means that any con- tition. In many cases, one of the early
sumer who buys a new Intel-compatible entrants into a new software category
PC and wants Windows must buy a new quickly captures a lion’s share of the sales,
copy of the operating system. Microsoft while other products in the category are
takes pains to ensure that the versions of either driven out altogether or relegated to
its operating system that OEMs pre-install niche positions. What eventually displaces
the leader is often not competition from threat of a new paradigm. Alternatively,
another product within the same software Microsoft could delay the arrival of a new
category, but rather a technological ad- paradigm on the scene by expending sur-
vance that renders the boundaries defining plus monopoly power in ways other than
the category obsolete. These events, in the maintenance of high prices.
which categories are redefined and leaders
are superseded in the process, are spoken G. Significance of Microsoft’s Inno-
of as ‘‘inflection points.’’ vation
60. The exponential growth of the In-
ternet represents an inflection point born [3] 61. The fact that Microsoft in-
of complementary technological advances vests heavily in research and development
in the computer and telecommunications does not evidence a lack of monopoly pow-
industries. The rise of the Internet in er. Indeed, Microsoft has incentives to
turn has fueled the growth of server-based innovate aggressively despite its monopoly
computing, middleware, and open-source power. First, if there are innovations that
software development. Working together, will make Intel-compatible PC systems at-
these nascent paradigms could oust the PC tractive to more consumers, and those con-
operating system from its position as the sumers less sensitive to the price of Win-
primary platform for applications develop- dows, the innovations will translate into
ment and the main interface between users increased profits for Microsoft. Second,
and their computers. Microsoft recognizes although Microsoft could significantly re-
that new paradigms could arise to depreci- strict its investment in innovation and still
ate the value of selling PC operating sys- not face a viable alternative to Windows
tems; however, the fact that these new for several years, it can push the emer-
paradigms already exist in embryonic or gence of competition even farther into the
primitive form does not prevent Microsoft future by continuing to innovate aggres-
from enjoying monopoly power today. sively. While Microsoft may not be able to
For while consumers might one day turn stave off all potential paradigm shifts
to network computers, or Linux, or a com- through innovation, it can thwart some and
bination of middleware and some other delay others by improving its own prod-
operating system, as an alternative to Win- ucts to the greater satisfaction of consum-
dows, the fact remains that they are not ers.
doing so today. Nor are consumers likely
to do so in appreciable numbers any time H. Microsoft’s Pricing Behavior
in the next few years. Unless and until
that day arrives, no significant percentage [4] 62. Microsoft’s actual pricing be-
of consumers will be able to abandon Win- havior is consistent with the proposition
dows without incurring substantial costs. that the firm enjoys monopoly power in
Microsoft can therefore set the price of the market for Intel-compatible PC oper-
Windows substantially higher than that ating systems. The company’s decision
which would be charged in a competitive not to consider the prices of other vendors’
market—or impose other burdens on con- Intel-compatible PC operating systems
sumers—without losing so much business when setting the price of Windows 98, for
as to make the action unprofitable. If example, is probative of monopoly power.
Microsoft exerted its power solely to raise One would expect a firm in a competitive
price, the day when users could turn away market to pay much closer attention to the
from Windows without incurring substan- prices charged by other firms in the mar-
tial costs would still be several years dis- ket. Another indication of monopoly pow-
tant. Moreover, Microsoft could keep its er is the fact that Microsoft raised the
prices high for a significant period of time price that it charged OEMs for Windows
and still lower them in time to meet the 95, with trivial exceptions, to the same
level as the price it charged for Windows maximizing monopoly price, though, that
98 just prior to releasing the newer prod- would not be probative of a lack of monop-
uct. In a competitive market, one would oly power, for Microsoft could be charging
expect the price of an older operating sys- what seems like a low short-term price in
tem to stay the same or decrease upon the order to maximize its profits in the future
release of a newer, more attractive ver- for reasons unrelated to underselling any
sion. Microsoft, however, was only con- incipient competitors. For instance, Mi-
cerned with inducing OEMs to ship Win- crosoft could be stimulating the growth of
dows 98 in favor of the older version. It is the market for Intel-compatible PC oper-
unlikely that Microsoft would have im- ating systems by keeping the price of Win-
posed this price increase if it were genu- dows low today. Given the size and stabil-
inely concerned that OEMs might shift ity of its market share, Microsoft stands to
their business to another vendor of operat- reap almost all of the future rewards if
ing systems or hasten the development of there are yet more consumers of Intel-
viable alternatives to Windows. compatible PC operating systems. By
63. Finally, it is indicative of monopoly pricing low relative to the short-run profit-
power that Microsoft felt that it had sub- maximizing price, thereby focusing on at-
stantial discretion in setting the price of its tracting new users to the Windows plat-
Windows 98 upgrade product (the operat- form, Microsoft would also intensify the
ing system product it sells to existing positive network effects that add to the
users of Windows 95). A Microsoft study impenetrability of the applications barrier
from November 1997 reveals that the com- to entry.
pany could have charged $49 for an up-
66. Furthermore, Microsoft expends a
grade to Windows 98—there is no reason
significant portion of its monopoly power,
to believe that the $49 price would have
which could otherwise be spent maximizing
been unprofitable—but the study identifies
price, on imposing burdensome restrictions
$89 as the revenue-maximizing price. Mi-
on its customers—and in inducing them to
crosoft thus opted for the higher price.
behave in ways—that augment and pro-
64. An aspect of Microsoft’s pricing be- long that monopoly power. For example,
havior that, while not tending to prove Microsoft attaches to a Windows license
monopoly power, is consistent with it is the conditions that restrict the ability of
fact that the firm charges different OEMs OEMs to promote software that Microsoft
different prices for Windows, depending on believes could weaken the applications bar-
the degree to which the individual OEMs rier to entry. Microsoft also charges a
comply with Microsoft’s wishes. Among lower price to OEMs who agree to ensure
the five largest OEMs, Gateway and IBM, that all of their Windows machines are
which in various ways have resisted Micro- powerful enough to run Windows NT for
soft’s efforts to enlist them in its efforts to Workstations. To the extent this provi-
preserve the applications barrier to entry, sion induces OEMs to concentrate their
pay higher prices than Compaq, Dell, and efforts on the development of relatively
Hewlett–Packard, which have pursued less powerful, expensive PCs, it makes OEMs
contentious relationships with Microsoft. less likely to pursue simultaneously the
[5] 65. It is not possible with the opposite path of developing ‘‘thin client’’
available data to determine with any level systems, which could threaten demand for
of confidence whether the price that a Microsoft’s Intel-compatible PC operating–
profit-maximizing firm with monopoly pow- system products. In addition, Microsoft
er would charge for Windows 98 comports charges a lower price to OEMs who agree
with the price that Microsoft actually to ship all but a minute fraction of their
charges. Even if it could be determined machines with an operating system pre-
that Microsoft charges less than the profit- installed. While this helps combat piracy,
it also makes it less likely that consumers that, working together, had the potential
will detect increases in the price of Win- to weaken the applications barrier severely
dows and renders operating systems not without the assistance of any other middle-
pre-installed by OEMs in large numbers ware. These were Netscape’s Web brow-
even less attractive to consumers. After ser and Sun’s implementation of the Java
all, a consumer’s interest in a non-Win- technologies.
dows operating system might not outweigh
the burdens on system memory and per- A. The Netscape Web Browser
formance associated with supporting two 69. Netscape Navigator possesses
operating systems on a single PC. Other three key middleware attributes that en-
such restrictions and incentives are de- dow it with the potential to diminish the
scribed below. applications barrier to entry. First, in
contrast to non-Microsoft, Intel-compatible
I. Microsoft’s Actions Toward Other PC operating systems, which few users
Firms would want to use on the same PC sys-
67. Microsoft’s monopoly power is also tems that carry their copies of Windows, a
evidenced by the fact that, over the course browser can gain widespread use based on
of several years, Microsoft took actions its value as a complement to Windows.
that could only have been advantageous if Second, because Navigator exposes a set
they operated to reinforce monopoly pow- (albeit a limited one) of APIs, it can serve
er. These actions are described below. as a platform for other software used by
consumers. A browser product is particu-
IV. THE MIDDLEWARE THREATS larly well positioned to serve as a platform
for network-centric applications that run
68. Middleware technologies, as previ-
in association with Web pages. Finally,
ously noted, have the potential to weaken
Navigator has been ported to more than
the applications barrier to entry. Micro-
fifteen different operating systems. Thus,
soft was apprehensive that the APIs ex-
if a developer writes an application that
posed by middleware technologies would
relies solely on the APIs exposed by Navi-
attract so much developer interest, and
gator, that application will, without any
would become so numerous and varied,
porting, run on many different operating
that there would arise a substantial and
systems.
growing number of full-featured applica-
tions that relied largely, or even wholly, on 70. Adding to Navigator’s potential to
middleware APIs. The applications relying weaken the applications barrier to entry is
largely on middleware APIs would poten- the fact that the Internet has become both
tially be relatively easy to port from one a major inducement for consumers to buy
operating system to another. The applica- PCs for the first time and a major occupier
tions relying exclusively on middleware of the time and attention of current PC
APIs would run, as written, on any operat- users. For any firm looking to turn its
ing system hosting the requisite middle- browser product into an applications plat-
ware. So the more popular middleware form such to rival Windows, the intense
became and the more APIs it exposed, the consumer interest in all things Internet-
more the positive feedback loop that sus- related is a great boon.
tains the applications barrier to entry 71. Microsoft knew in the fall of 1994
would dissipate. Microsoft was concerned that Netscape was developing versions of a
with middleware as a category of software; Web browser to run on different operating
each type of middleware contributed to the systems. It did not yet know, however,
threat posed by the entire category. At that Netscape would employ Navigator to
the same time, Microsoft focused its antip- generate revenue directly, much less that
athy on two incarnations of middleware the product would evolve in such a way as
to threaten Microsoft. In fact, in late bytecode into instructions comprehensible
December 1994, Netscape’s chairman and to the underlying operating system. If the
chief executive officer (‘‘CEO’’), Jim Clark, Java class libraries and a JVM are present
told a Microsoft executive that the focus of on a PC system, the system is said to
Netscape’s business would be applications carry a ‘‘Java runtime environment.’’
running on servers and that Netscape did 74. The inventors of Java at Sun Mi-
not intend to succeed at Microsoft’s ex- crosystems intended the technology to en-
pense. able applications written in the Java lan-
72. As soon as Netscape released Navi- guage to run on a variety of platforms with
gator on December 15, 1994, the product minimal porting. A program written in
began to enjoy dramatic acceptance by the Java and relying only on APIs exposed by
public; shortly after its release, consumers the Java class libraries will run on any PC
were already using Navigator far more system containing a JVM that has itself
than any other browser product. This been ported to the resident operating sys-
alarmed Microsoft, which feared that Navi- tem. Therefore, Java developers need to
gator’s enthusiastic reception could embol- port their applications only to the extent
den Netscape to develop Navigator into an that those applications rely directly on the
alternative platform for applications devel- APIs exposed by a particular operating
opment. In late May 1995, Bill Gates, the system. The more an application written
chairman and CEO of Microsoft, sent a in Java relies on APIs exposed by the Java
memorandum entitled ‘‘The Internet Tidal class libraries, the less work its developer
Wave’’ to Microsoft’s executives describing will need to do to port the application to
Netscape as a ‘‘new competitor ‘born’ on different operating systems. The easier it
the Internet.’’ He warned his colleagues is for developers to port their applications
within Microsoft that Netscape was ‘‘pur- to different operating systems, the more
suing a multi-platform strategy where they applications will be written for operating
move the key API into the client to com- systems other than Windows. To date,
moditize the underlying operating system.’’ the Java class libraries do not expose
By the late spring of 1995, the executives enough APIs to support the development
responsible for setting Microsoft’s corpo- of full-featured applications that will run
rate strategy were deeply concerned that well on multiple operating systems without
Netscape was moving its business in a the need for porting; however, they do
direction that could diminish the applica- allow relatively simple, network-centric ap-
tions barrier to entry. plications to be written cross-platform. It
is Sun’s ultimate ambition to expand the
B. Sun’s Implementation of the Java class libraries to such an extent that many
Technologies full-featured, end-user-oriented applica-
73. The term ‘‘Java’’ refers to four in- tions will be written cross-platform. The
terlocking elements. First, there is a Java closer Sun gets to this goal of ‘‘write once,
programming language with which devel- run anywhere,’’ the more the applications
opers can write applications. Second, barrier to entry will erode.
there is a set of programs written in Java 75. Sun announced in May 1995 that it
that expose APIs on which developers had developed the Java programming lan-
writing in Java can rely. These programs guage. Mid-level executives at Microsoft
are called the ‘‘Java class libraries.’’ The began to express concern about Sun’s Java
third element is the Java compiler, which vision in the fall of that year, and by late
translates the code written by the develop- spring of 1996, senior Microsoft executives
er into Java ‘‘bytecode.’’ Finally, there were deeply worried about the potential of
are programs called ‘‘Java virtual ma- Sun’s Java technologies to diminish the
chines,’’ or ‘‘JVMs,’’ which translate Java applications barrier to entry.
76. Sun’s strategy could only succeed if only manifestations of middleware that Mi-
a Java runtime environment that complied crosoft has perceived as having the poten-
with Sun’s standards found its way onto tial to weaken the applications barrier to
PC systems running Windows. Sun could entry. Starting in 1994, Microsoft exhibit-
not count on Microsoft to ship with Win- ed considerable concern over the software
dows an implementation of the Java run- product Notes, distributed first by Lotus
time environment that threatened the ap- and then by IBM. Microsoft worried about
plications barrier to entry. Fortunately Notes for several reasons: It presented a
for Sun, Netscape agreed in May 1995 to graphical interface that was common
include a copy of Sun’s Java runtime envi- across multiple operating systems; it also
ronment with every copy of Navigator, and exposed a set of APIs to developers; and,
Navigator quickly became the principal ve- like Navigator, it served as a distribution
hicle by which Sun placed copies of its vehicle for Sun’s Java runtime environ-
Java runtime environment on the PC sys- ment. Then in 1995, Microsoft reacted
tems of Windows users. with alarm to Intel’s Native Signal Pro-
77. The combined efforts of Netscape cessing software, which interacted with the
and Sun threatened to hasten the demise microprocessor independently of the oper-
of the applications barrier to entry, open- ating system and exposed APIs directly to
ing the way for non-Microsoft operating developers of multimedia content. Finally,
systems to emerge as acceptable substi- in 1997 Microsoft noted the dangers of
tutes for Windows. By stimulating the Apple’s and RealNetworks’ multimedia
development of network-centric Java appli- playback technologies, which ran on sever-
cations accessible to users through brow- al platforms (including the Mac OS and
ser products, the collaboration of Netscape Windows) and similarly exposed APIs to
and Sun also heralded the day when ven- content developers. Microsoft feared all
dors of information appliances and net- of these technologies because they facili-
work computers could present users with tated the development of user-oriented
viable alternatives to PCs themselves. software that would be indifferent to the
Nevertheless, these middleware technolo- identity of the underlying operating sys-
gies have a long way to go before they tem.
might imperil the applications barrier to
entry. Windows 98 exposes nearly ten V. MICROSOFT’S RESPONSE TO
thousand APIs, whereas the combined THE BROWSER THREAT
APIs of Navigator and the Java class li-
braries, together representing the greatest A. Microsoft’s Attempt to Dissuade
hope for proponents of middleware, total Netscape from Developing Navi-
less than a thousand. Decision-makers at gator as a Platform
Microsoft are apprehensive of potential as 79. Microsoft’s first response to the
well as present threats, though, and in threat posed by Navigator was an effort to
1995 the implications of the symbiosis be- persuade Netscape to structure its busi-
tween Navigator and Sun’s Java imple- ness such that the company would not
mentation were not lost on executives at distribute platform-level browsing soft-
Microsoft, who viewed Netscape’s coopera- ware for Windows. Netscape’s assent
tion with Sun as a further reason to dread would have ensured that, for the foresee-
the increasing use of Navigator. able future, Microsoft would produce the
only platform-level browsing software dis-
C. Other Middleware Threats tributed to run on Windows. This would
78. Although they have been the most have eliminated the prospect that non-Mi-
prominent, Netscape’s Navigator and crosoft browsing software could weaken
Sun’s Java implementation are not the the applications barrier to entry.
80. Executives at Microsoft received 82. At the conclusion of the June 2
confirmation in early May 1995 that Net- meeting, Microsoft still did not know
scape was developing a version of Naviga- whether or not Netscape intended to pre-
tor to run on Windows 95, which was due serve Navigator’s platform capabilities and
to be released in a couple of months. Mi- expand the set of APIs that it exposed to
crosoft’s senior executives understood that developers. In the hope that Netscape
if they could prevent this version of Navi- could still be persuaded to forswear any
gator from presenting alternatives to the platform ambitions and instead rely on the
Internet-related APIs in Windows 95, the Internet technologies in Windows 95, Mi-
technologies branded as Navigator would crosoft accepted Barksdale’s invitation to
cease to present an alternative platform to
send a group of representatives to Net-
developers. Even if non-Windows ver-
scape’s headquarters for a technology
sions of Navigator exposed Internet-relat-
‘‘brainstorming session’’ on June 21. Net-
ed APIs, applications written to those
scape’s senior executives saw the meeting
APIs would not run on the platform Micro-
as an opportunity to ask Microsoft for
soft executives expected to enjoy the larg-
est installed base, i.e., Windows 95. So, as access to crucial technical information, in-
long as the version of Navigator written cluding certain APIs, that Netscape need-
for Windows 95 relied on Microsoft’s In- ed in order to ensure that Navigator would
ternet-related APIs instead of exposing its work well on systems running Windows 95.
own, developing for Navigator would not 83. Early in the June 21 meeting, Mi-
mean developing cross-platform. Develop- crosoft representatives told Barksdale and
ers of network-centric applications thus
the other Netscape executives present that
would not be drawn to Navigator’s APIs in
they wanted to explore the possibility of
substantial numbers. Therefore, with the
building a broader and closer relationship
encouragement and support of Gates, a
between the two companies. To this end,
group of Microsoft executives commenced
the Microsoft representatives wanted to
a campaign in the summer of 1995 to
know whether Netscape intended to adopt
convince Netscape to halt its development
of platform-level browsing technologies for and build on top of the Internet-related
Windows 95. platform that Microsoft planned to include
in Windows 95, or rather to expose its own
81. In a meeting held at Microsoft’s
Internet-related APIs, which would com-
headquarters on June 2, 1995, Microsoft
pete with Microsoft’s. If Netscape was
executives suggested to Jim Clark’s re-
not committed to providing an alternative
placement as CEO at Netscape, James
platform for network-centric applications,
Barksdale, that the version of Navigator
written for Windows 95 be designed to rely Microsoft would assist Netscape in devel-
upon the Internet-related APIs in Win- oping server- and (to a limited extent) PC-
dows 95 and distinguish itself with ‘‘value- based software applications that relied on
added’’ software components. The Micro- Microsoft’s Internet technologies. For
soft executives left unsaid the fact that one thing, the representatives explained,
value-added software, by definition, does Microsoft would be content to leave the
not present a significant platform for ap- development of browser products for the
plications development. For his part, Mac OS, UNIX, and Microsoft’s 16–bit
Barksdale informed the Microsoft repre- operating system products to Netscape.
sentatives that the browser represented an Alternatively, Netscape could license to
important part of Netscape’s business Microsoft the underlying code for a Micro-
strategy and that Windows 3.1 and Win- soft-branded browser to run on those plat-
dows 95 were expected to be the primary forms. The Microsoft representatives
platforms for which Navigator would be made it clear, however, that Microsoft
distributed. would be marketing its own browser for
Windows 95, and that this product would applications (mainly server-based) focused
rely on Microsoft’s platform-level Internet on meeting the needs of specific types of
technologies. If Netscape marketed commercial users. Since such applications
browsing software for Windows 95 based are already minutely calibrated to the
on different technologies, then Microsoft needs of their users, they do not present
would view Netscape as a competitor, not platforms for the development of more
a partner. specific applications. Although the repre-
84. When Barksdale brought the dis- sentatives from Microsoft assured Barks-
cussion back to the particular Windows 95 dale that the line between platform and
APIs that Netscape actually wanted to solutions was fixed by a collaborative deci-
rely on and needed from Microsoft, the sion-making process between Microsoft
representatives from Microsoft explained and its ISV partners, those representa-
that if Netscape entered a ‘‘special rela- tives had already indicated that the space
tionship’’ with Microsoft, the company Netscape would be allowed to occupy be-
would treat Netscape as a ‘‘preferred tween the user and Microsoft’s platform
ISV.’’ This meant that Netscape would en- domain was a very narrow one. Simply
joy preferential access to technical infor- put, if Navigator exposed APIs that com-
mation, including APIs. They intimated peted for developer attention with the In-
that Microsoft’s internal developers had ternet-related APIs Microsoft was plan-
already created the APIs that Netscape ning to build into its platform, Microsoft
was seeking, and that Microsoft had not would regard Netscape as a trespasser on
yet decided either which ISVs would be its territory.
privileged to receive them or when access 86. The Microsoft representatives did
would be granted. The Microsoft repre- not insist at the June 21 meeting that
sentatives made clear that the alacrity Netscape accept their proposal on the
with which Netscape would receive the spot. For his part, Barksdale said only
desired Windows 95 APIs and other tech- that he would like more information re-
nical information would depend on whether garding where Microsoft proposed to place
Netscape entered this ‘‘special relation- the line between its platform and Net-
ship’’ with Microsoft. scape’s applications. In the ensuing, more
85. After listening to Microsoft’s pro- technical discussions, the Netscape execu-
posal, Barksdale had two main questions: tives agreed to adopt one component of
First, where would the line between plat- Microsoft’s platform-level Internet tech-
form (Microsoft’s exclusive domain) and nology called Internet Shortcuts. The
applications (where Netscape could contin- meeting ended cordially, with both sides
ue to function) be situated? Second, who promising to keep the lines of communica-
would get to decide where the line would tion open.
lie? After all, the attractiveness of a spe- 87. The executive who led Microsoft’s
cial relationship with Microsoft depended a contingent on June 21, Daniel Rosen,
great deal on how much room would re- emerged from the meeting optimistic that
main for Netscape to innovate and seek Netscape would abandon its platform am-
profit. The Microsoft representatives re- bitions in exchange for special help from
plied that Microsoft would incorporate Microsoft in developing solutions. His
most of the functionality of the current sentiments were not shared by another
Netscape browser into the Windows 95 Microsoft participant, Thomas Reardon,
platform, perhaps leaving room for Net- who had not failed to notice the Netscape
scape to distribute a user-interface shell. executives grow tense when the Microsoft
Where Netscape would have the most representatives referred to incorporating
scope to innovate would be in the develop- Navigator’s functionality into Windows.
ment of software ‘‘solutions,’’ which are Reardon predicted that Netscape would
compete with almost all of Microsoft’s plat- tion and assistance in order to complete its
form-level Internet technologies. Once he Windows 95 version of Navigator in time
heard both viewpoints, Gates concluded for the retail release of Windows 95. In-
that Rosen was being a bit naive and that deed, Netscape executives had made a
Reardon had assessed the situation more point of requesting this information, espe-
accurately. In the middle of July 1995, cially the so-called Remote Network Ac-
Rosen’s superiors instructed him to drop
cess (‘‘RNA’’) API, at the June 21 meeting.
the effort to reach a strategic concord with
As was discussed above, the Microsoft rep-
Netscape.
resentatives at the meeting had responded
88. Had Netscape accepted Microsoft’s
that the haste with which Netscape re-
proposal, it would have forfeited any pros-
ceived the desired technical information
pect of presenting a comprehensive plat-
form for the development of network-cen- would depend on whether Netscape en-
tric applications. Even if the versions of tered the so-called ‘‘special relationship’’
Navigator written for the Mac OS, UNIX, with Microsoft. Specifically, Microsoft
and 16–bit Windows had continued to ex- representative J. Allard had told Barks-
pose APIs controlled by Netscape, the fact dale that the way in which the two compa-
that Netscape would not have marketed nies concluded the meeting would deter-
any platform software for Windows 95, the mine whether Netscape received the RNA
operating system that was destined to be- API immediately or in three months.
come dominant, would have ensured that,
for the foreseeable future, too few develop- 91. Although Netscape declined the
ers would rely on Navigator’s APIs to special relationship with Microsoft, its ex-
create a threat to the applications barrier ecutives continued, over the weeks follow-
to entry. In fact, although the discussions ing the June 21 meeting, to plead for the
ended before Microsoft was compelled to RNA API. Despite Netscape’s persistence,
demarcate precisely where the boundary Microsoft did not release the API to Net-
between its platform and Netscape’s appli- scape until late October, i.e., as Allard had
cations would lie, it is unclear whether warned, more than three months later.
Netscape’s acceptance of Microsoft’s pro- The delay in turn forced Netscape to post-
posal would have left the firm with even
pone the release of its Windows 95 brow-
the ability to survive as an independent
ser until substantially after the release of
business.
Windows 95 (and Internet Explorer) in
89. At the time Microsoft presented its August 1995. As a result, Netscape was
proposal, Navigator was the only browser
excluded from most of the holiday selling
product with a significant share of the
season.
market and thus the only one with the
potential to weaken the applications barri- 92. Microsoft similarly withheld a
er to entry. Thus, had it convinced Net- scripting tool that Netscape needed to
scape to accept its offer of a ‘‘special rela- make its browser compatible with certain
tionship,’’ Microsoft quickly would have
dial-up ISPs. Microsoft had licensed the
gained such control over the extensions
tool freely to ISPs that wanted it, and in
and standards that network-centric appli-
fact had cooperated with Netscape in
cations (including Web sites) employ as to
make it all but impossible for any future drafting a license agreement that, by mid-
browser rival to lure appreciable developer July 1996, needed only to be signed by an
interest away from Microsoft’s platform. authorized Microsoft executive to go into
effect. There the process halted, however.
B. Withholding Crucial Technical In mid-August, a Microsoft representative
Information informed Netscape that senior executives
90. Microsoft knew that Netscape at Microsoft had decided to link the grant
needed certain critical technical informa- of the license to the resolution of all open
issues between the companies. Netscape capabilities that its microprocessors and
never received a license to the scripting its NSP software together offered. Intel
tool and, as a result, was unable to do did not believe, however, that the set of
business with certain ISPs for a time. APIs and device driver interfaces
(‘‘DDIs’’) in Windows had kept pace with
C. The Similar Experiences of Other the growing ability of Intel’s microproces-
Firms in Dealing with Microsoft sors to deliver audio/visual content. Con-
93. Other firms in the computer indus- sequently, IAL designed its NSP software
try have had encounters with Microsoft to expose Intel’s own APIs and DDIs that,
similar to the experiences of Netscape de- when invoked by developers and hardware
scribed above. These interactions demon- manufacturers, would demonstrate the
strate that it is Microsoft’s corporate multimedia capabilities of an Intel micro-
practice to pressure other firms to halt processor utilizing NSP.
software development that either shows 97. Microsoft reacted to Intel’s NSP
the potential to weaken the applications software with alarm. First of all, the soft-
barrier to entry or competes directly with ware threatened to offer ISVs and device
Microsoft’s most cherished software prod- manufacturers an alternative to waiting for
ucts. Windows to provide system-level support
1. Intel for products that would take advantage of
advances in hardware technology. More
94. At the same time that Microsoft troubling was the fact that Intel was devel-
was trying to convince Netscape to stop oping versions of its NSP software for
developing cross-platform APIs, it was non-Microsoft operating systems. The dif-
trying to convince Intel to halt the devel- ferent versions of the NSP software ex-
opment of software that presented devel- posed the same set of software interfaces
opers with a set of operating-system-inde- to developers, so the more an application
pendent interfaces. took advantage of interfaces exposed by
95. Although Intel is engaged princi- NSP software, the easier it would be to
pally in the design and manufacture of port that application to non-Microsoft op-
microprocessors, it also develops some erating systems. In short, Intel’s NSP
software. Intel’s software development ef- software bore the potential to weaken the
forts, which take place at the Intel Archi- barrier protecting Microsoft’s monopoly
tecture Labs (‘‘IAL’’), are directed primar- power.
ily at finding useful ways to consume more 98. Over time, Microsoft developed ad-
microprocessor cycles, thereby stimulating ditional qualms about Intel’s NSP soft-
demand for advanced Intel microproces- ware. For instance, Intel initially de-
sors. By early 1995, IAL was in the ad- signed the NSP software to be compatible
vanced stages of developing software that with only Windows 3.1. At the time, Mi-
would enable Intel 80x86 microprocessors crosoft was preparing to release Windows
to carry out tasks usually performed by 95, and the company did not want anything
separate chips known as ‘‘digital signal rekindling the interest of ISVs, equipment
processors.’’ By enabling this migration, manufacturers, and consumers in the soon-
the software, called Native Signal Process- to-be obsolescent version of Windows.
ing (‘‘NSP’’) software, would endow Intel More acute was Microsoft’s concern that
microprocessors with substantially en- users who received NSP software on their
hanced video and graphics performance. Windows 3.1 systems would have difficulty
96. Intel was eager for software devel- upgrading those systems to Windows 95.
opers and hardware manufacturers to By June 1995, Intel had completed a pre-
write software and build peripheral de- release, or ‘‘beta,’’ version of its NSP soft-
vices that would implement the enhanced ware for Windows 95, but Microsoft wor-
ried that a commercial version would not and more generally to reduce the number
be ready by the time OEMs began loading of people working on software at Intel.
Windows 95. 101. The development of an alternative
99. Along with its concerns about con- platform to challenge Windows was not
temporaneous compatibility, Microsoft also the primary objective of Intel’s NSP ef-
complained that Intel had not subjected its forts. In fact, Intel was interested in pro-
software to sufficient quality-assurance viding APIs and DDIs only to the extent
testing. Microsoft was quick to point out the effort was necessary to ensure the de-
velopment of applications and devices that
that if Windows users detected problems
would spark demand for Intel’s most ad-
with the software that came pre-installed
vanced microprocessors. Understanding
on their PC systems, they would blame
Intel’s limited ambitions, Microsoft has-
Microsoft or the OEMs, even if fault lay
tened to assure Intel that if it would stop
with Intel. Microsoft’s concerns with com-
promoting NSP’s interfaces, Microsoft
patibility and quality were genuine. Both
would accelerate its own work to incorpo-
pre-dating and over-shadowing these tran-
rate the functions of the NSP software
sient and remediable concerns, however,
into Windows, thereby stimulating the de-
was a more abiding fear at Microsoft that
velopment of applications and devices that
the NSP software would render ISVs, de-
relied on the new capabilities of Intel’s mi-
vice manufacturers, and (ultimately) con-
croprocessors. At the same time, Micro-
sumers less dependent on Windows.
soft pressured the major OEMs to not
Without this fear, Microsoft would not
install NSP software on their PCs until
have subjected Intel to the level of pres-
the software ceased to expose APIs. NSP
sure that it brought to bear in the summer
software could not find its way onto PCs
of 1995.
without the cooperation of the OEMs, so
100. Microsoft began complaining to Intel realized that it had no choice but to
Intel about its NSP software in inter-com- surrender the pace of software innovation
pany communications sent in the spring of to Microsoft. By the end of July 1995,
1995. In May, Microsoft raised the profile Intel had agreed to stop promoting its
of its complaints by sending some of its NSP software. Microsoft subsequently in-
senior executives to Intel to discuss the corporated some of NSP’s components into
latter’s incursion into Microsoft’s platform its operating-system products. Even as
territory. Returning from the May meet- late as the end of 1998, though, Microsoft
ing, one Microsoft employee urged his su- still had not implemented key capabilities
periors to refuse to allow Intel to offer that Intel had been poised to offer con-
platform-level software, even if it meant sumers in 1995.
that Intel could not innovate as quickly as 102. Microsoft was not content to
it would like. If Intel wished to enable a merely quash Intel’s NSP software. At a
new function, the employee wrote, its only second meeting at Intel’s headquarters on
‘‘winning path’’ would be to convince Mi- August 2, 1995, Gates told Grove that he
crosoft to support the effort in its platform had a fundamental problem with Intel us-
software. At any rate, ‘‘[s]ometimes Intel ing revenues from its microprocessor busi-
would have to accept the outcome that the ness to fund the development and distribu-
time isn’t right for [Microsoft].’’ In the tion of free platform-level software. In
first week of July, Gates himself met with fact, Gates said, Intel could not count on
Intel’s CEO, Andrew Grove, to discuss, Microsoft to support Intel’s next genera-
among other things, NSP. In a subsequent tion of microprocessors as long as Intel
memorandum to senior Microsoft execu- was developing platform-level software
tives, Gates reported that he had tried to that competed with Windows. Intel’s sen-
convince Grove ‘‘to basically not ship NSP’’ ior executives knew full well that Intel
would have difficulty selling PC micropro- sented developers of multimedia content

cessors if Microsoft stopped cooperating in with alternatives to Microsoft’s multimedia
making them compatible with Windows APIs. If Apple acceded to the proposal,
and if Microsoft stated to OEMs that it did Microsoft executives said, Microsoft would
not support Intel’s chips. Faced with not enter the authoring business and
Gates’ threat, Intel agreed to stop develop- would instead assist Apple in developing
ing platform-level interfaces that might and selling tools for developers writing
draw support away from interfaces ex- multimedia content. Just as Netscape
posed by Windows. would have been free, had it accepted Mi-
103. OEMs represent the primary cus- crosoft’s proposal, to market a browser
tomers for Intel’s microprocessors. Since shell that would run on top of Microsoft’s
OEMs are dependent on Microsoft for Internet technologies, Apple would have
Windows, Microsoft enjoys continuing been permitted, without hindrance, to mar-
leverage over Intel. To illustrate, Gates ket a media player that would run on top
was able to report to other senior Micro- of DirectX. But, like the browser shell
soft executives in October 1995 that ‘‘Intel that Microsoft contemplated as acceptable
feels we have all the OEMs on hold with for Netscape to develop, Apple’s Quick-
our NSP chill.’’ He added: Time shell would not have exposed plat-
This is good news because it means form-level APIs to developers. Microsoft
OEMs are listening to us. Andy executives acknowledged to Apple their
[Grove] believes Intel is living up to its doubts that a firm could make a successful
part of the NSP bargain and that we business out of marketing such a shell.
should let OEMs know that some of the Apple might find it profitable, though, to
new software work Intel is doing is OK. continue developing multimedia software
If Intel is not sticking totally to its part for the Mac OS, and that, the executives
of the deal let me know. from Microsoft assured Apple, would not
be objectionable. As was the case with the
2. Apple Internet technologies it was prepared to
104. QuickTime is Apple’s software ar- tolerate from Netscape, Microsoft felt se-
chitecture for creating, editing, publishing, cure in the conviction that developers
and playing back multimedia content (e.g., would not be drawn in large numbers to
audio, video, graphics, and 3–D graphics). write for non-Microsoft APIs exposed by
Apple has created versions of QuickTime platforms whose installed bases were in-
to run on both the Mac OS and Windows, consequential in comparison with that of
enabling developers using the authoring Windows.
software to create multimedia content that 106. In their discussions with Apple,
will run on QuickTime implementations for Microsoft’s representatives made it clear
both operating systems. QuickTime com- that, if Apple continued to market mul-
petes with Microsoft’s own multimedia timedia playback software for Windows 95
technologies, including Microsoft’s mul- that presented a platform for content de-
timedia APIs (called ‘‘DirectX’’) and its velopment, then Microsoft would enter the
media player. Because QuickTime is authoring business to ensure that those
cross-platform middleware, Microsoft per- writing multimedia content for Windows
ceives it as a potential threat to the appli- 95 concentrated on Microsoft’s APIs in-
cations barrier to entry. stead of Apple’s. The Microsoft represen-
105. Beginning in the spring of 1997 tatives further stated that, if Microsoft
and continuing into the summer of 1998, were compelled to develop and market au-
Microsoft tried to persuade Apple to stop thoring tools in competition with Apple,
producing a Windows 95 version of its the technologies provided in those tools
multimedia playback software, which pre- might very well be inconsistent with those
provided by Apple’s tools. Finally, the play the QuickTime logo during the play-
Microsoft executives warned, Microsoft back of ‘‘.MOV’’ files. Third, Microsoft
would invest whatever resources were nec- would include support in DirectX for
essary to ensure that developers used its QuickTime APIs used to author multime-
tools; its investment would not be con- dia content, and Microsoft would give Ap-
strained by the fact that authoring soft- ple appropriate credit for the APIs in Mi-
ware generated only modest revenue. crosoft’s Software Developer Kit.
107. If Microsoft implemented technol- 109. Jobs reserved comment during
ogies in its tools that were different from the meeting with the Microsoft representa-
those implemented in Apple’s tools, then tives, but he explicitly rejected Microsoft’s
multimedia content developed with Micro- proposal a few weeks later. Had Apple
soft’s tools would not run properly on Ap- accepted Microsoft’s proposal, Microsoft
ple’s media player, and content developed would have succeeded in limiting substan-
with Apple’s tools would not run properly tially the cross-platform development of
on Microsoft’s media player. If, as it im- multimedia content. In addition, Apple’s
plied it was willing to do, Microsoft then future success in marketing authoring
bundled its media player with Windows tools for Windows 95 would have become
and used a variety of tactics to limit the dependent on Microsoft’s ongoing coopera-
distribution of Apple’s media player for tion, for those tools would have relied on
Windows, it could succeed in extinguishing the DirectX technologies under Microsoft’s
developer support for Apple’s multimedia control.
technologies. Indeed, as the Court dis- 110. Apple’s surrender of the mul-
cusses in Section VI of these findings, timedia playback business might have
Microsoft had begun, in 1996, to use just helped users in the short term by resolv-
such a strategy against Sun’s implementa- ing existing incompatibilities in the arena
tion of the Java technologies. of multimedia software. In the long run,
108. The discussions over multimedia however, the departure of an experi-
playback software culminated in a meeting enced, innovative competitor would not
between executives from Microsoft and have tended to benefit users of multime-
Apple, including Apple’s CEO, Steve Jobs, dia content. At any rate, the primary
at Apple’s headquarters on June 15, 1998. motivation behind Microsoft’s proposal to
Microsoft’s objective at the meeting was to Apple was not the resolution of incompat-
secure Apple’s commitment to abandon the ibilities that frustrated consumers and
development of multimedia playback soft- stymied content development. Rather,
ware for Windows. At the meeting, one of Microsoft’s motivation was its desire to
the Microsoft executives, Eric Engstrom, limit as much as possible the develop-
said that he hoped the two companies ment of multimedia content that would
could agree on a single configuration of run cross-platform.
software to play multimedia content on 3. RealNetworks
Windows. He added, significantly, that 111. RealNetworks is the leader, in
any unified multimedia playback software terms of usage share, in software that
for Windows would have to be based on supports the ‘‘streaming’’ of audio and vid-
DirectX. If Apple would agree to make eo content from the Web. RealNetworks’
DirectX the standard, Microsoft would be streaming software presents a set of APIs
willing to do several things that Apple that competes for developer attention with
might find beneficial. First, Microsoft APIs exposed by the streaming technolo-
would adopt Apple’s ‘‘.MOV’’ as the univer- gies in Microsoft’s DirectX. Like Apple,
sal file format for multimedia playback on RealNetworks has developed versions of
Windows. Second, Microsoft would con- its software for multiple operating sys-
figure the Windows Media Player to dis- tems. In 1997, senior Microsoft executives
viewed RealNetworks’ streaming software that RealNetworks had in turn agreed to

with the same apprehension with which incorporate Microsoft’s streaming media
they viewed Apple’s playback software—as technologies into its products.
competitive technology that could develop
114. RealNetworks apparently under-
into part of a middleware layer that could,
stood the import of the agreement differ-
in turn, become broad and widespread
ently, for just a few days after it signed
enough to weaken the applications barrier
the deal with Microsoft, RealNetworks an-
to entry.
nounced that it planned to continue devel-
112. At the end of May 1997, Gates oping fundamental streaming software.
told a group of Microsoft executives that Indeed, RealNetworks continues to do so
multimedia streaming represented strate- today. Thus, the mid-summer negotia-
gic ground that Microsoft needed to cap- tions did not lead to the result Microsoft
ture. He identified RealNetworks as the had intended. Still, Microsoft’s intentions
adversary and authorized the payment of toward RealNetworks in 1997, and its deal-
up to $65 million for a streaming software ings with the company that summer, show
company in order to accelerate Microsoft’s that decision-makers at Microsoft were
effort to seize control of streaming stan- willing to invest a large amount of cash
dards. Two weeks later, Microsoft signed and other resources into securing the
a letter of intent for the acquisition of a agreement of other companies to halt soft-
streaming media company called VXtreme. ware development that exhibited discerni-
113. Perhaps sensing an impending cri- ble potential to weaken the applications
sis, executives at RealNetworks contacted barrier.
Microsoft within days of the VXtreme
4. IBM
deal’s announcement and proposed that
the two companies enter a strategic rela- 115. IBM is both a hardware and a
tionship. The CEO of RealNetworks told software company. On the hardware side,
a senior vice president at Microsoft that if IBM manufactures and licenses, among
RealNetworks were presented with a prof- other things, Intel-compatible PCs. On the
itable opportunity to move to value-added software side, IBM develops and sells,
software, the company would be amenable among other things, Intel-compatible PC
to abandoning the base streaming busi- operating systems and office productivity
ness. On July 10, a Microsoft executive, applications. The IBM PC Company re-
Robert Muglia, told a RealNetworks exec- lies heavily on Microsoft’s cooperation to
utive that it would indeed be in the inter- make a profit, for few consumers would
ests of both companies if RealNetworks buy IBM PC systems if those systems did
limited itself to developing value-added not work well with Windows and, further,
software designed to run on top of Micro- if they did not come with Windows includ-
soft’s fundamental multimedia platform. ed. IBM’s software division, on the other
Consequently, on July 18, Microsoft and hand, competes directly with Microsoft in
RealNetworks entered into an agreement other respects. For instance, IBM has in
whereby Microsoft agreed to distribute a the past marketed OS/2 as an alternative
copy of RealNetworks’ media player with to Windows, and it currently markets the
each copy of Internet Explorer; to make a SmartSuite bundle of office productivity
substantial investment in RealNetworks; applications as an alternative to Micro-
to license the source code for certain Real- soft’s Office suite. The fact that IBM’s
Networks streaming technologies; and to software division markets products that
develop, along with RealNetworks, a com- compete directly with Microsoft’s most
mon file format for streaming audio and profitable products has frustrated the ef-
video content. Muglia, who signed the forts of the IBM PC Company to maintain
agreement on Microsoft’s behalf, believed a cooperative relationship with the firm
that controls the product (Windows) with- Specifically, the PC Company would re-
out which the PC Company cannot survive. ceive an $8 reduction in the per-copy roy-
116. Whereas Microsoft tried to con- alty for Windows 95 if it mentioned no
vince Netscape to move its business in a other operating systems in advertisements
direction that would not facilitate the for IBM PCs, adopted Windows 95 as the
emergence of products that would compete standard operating system for its employ-
with Windows, Microsoft tried to convince ees, and ensured that it was shipping
IBM to move its business away from prod- Windows 95 pre-installed on at least fifty
ucts that themselves competed directly percent of its PCs two months after the
with Windows and Office. Microsoft lever- release of Windows 95. Given the volume
aged the fact that the PC Company need- of IBM’s PC shipments, the discount
ed to license Windows at a competitive would have amounted to savings of be-
price and on a timely basis, and the fact tween $40 million and $48 million in one
that the company needed Microsoft’s sup- year. Of course, accepting the terms
port in many more subtle ways. When would have required IBM, as a practical
IBM refused to abate the promotion of matter, to abandon its own operating sys-
those of its own products that competed tem, OS/2. After all, IBM would have had
with Windows and Office, Microsoft pun- difficulty convincing customers to adopt
ished the IBM PC Company with higher its own OS/2 if the company itself had
prices, a late license for Windows 95, and used Microsoft’s Windows 95 and had fea-
the withholding of technical and marketing tured that product to the exclusion of
support. OS/2 in IBM PC advertisements.
117. In the summer of 1994, the IBM 119. Representatives from IBM and
PC Company told Microsoft that, with re- Microsoft, including Bill Gates, met to dis-
spect to licensing Microsoft’s operating- cuss the relationship between their compa-
system products, it wanted to be quoted nies at an industry conference in Novem-
terms just as favorable as those extended ber 1994. At that meeting, IBM informed
to IBM’s competitor, Compaq. It was Microsoft that, rather than enter into the
IBM’s belief that Compaq paid the lowest Frontline Partnership with Microsoft, IBM
rate in the industry for Windows and en- was going to pursue an initiative it called
joyed unparalleled marketing and technical ‘‘IBM First.’’ Consistent with the title of
support from Microsoft. In response to the initiative, IBM would aggressively pro-
the IBM PC Company’s request, Microsoft mote IBM’s software products, would not
proposed that the companies enter into a promote any Microsoft products, and
‘‘Frontline Partnership’’ similar to the one would pre-install OS/2 Warp on all of its
that existed between Microsoft and Com- PCs, including those on which it would also
paq. Pursuant to that proposal, Microsoft pre-install Windows. IBM thus rejected
and the IBM PC Company would perform the terms that would have resulted in an
joint sales, marketing, and development $8 reduction in the per-copy royalty price
work, and the PC Company would receive of Windows 95.
future Microsoft products at the lowest 120. True to its word, IBM began vig-
rates in the industry. orous promotion of its software products.
118. At the same time that it offered This effort included an advertising cam-
the IBM PC Company the rather general paign, starting in late 1994, that extolled
terms in the Frontline Partnership Agree- OS/2 Warp and disparaged Windows.
ment, Microsoft also offered the PC Com- IBM’s drive to best Microsoft in the PC
pany specific reductions in the royalty software venue intensified in June 1995,
rate for Windows 95 if the company would when IBM reached an agreement with the
focus its marketing and distribution ef- Lotus Development Corporation for the
forts on Microsoft’s new operating system. acquisition of that company. As a conse-
quence of the acquisition, IBM took own- to Microsoft for several different operating
ership of the Lotus groupware product, systems.
Lotus Notes, and the Lotus SmartSuite 123. Prior to the call on July 20, nei-
bundle of office productivity applications. ther company’s management had ever
Microsoft had already identified Notes as linked the ongoing audit to IBM’s negotia-
a middleware threat, because it presented tions for a license to Windows 95. IBM
users with a common interface, and ISVs was dismayed by the abrupt halt in the
with a common set of APIs, across multi- license negotiations and the prospect that
ple platforms. For its part, SmartSuite it might not get a license for Windows 95
competed directly with Microsoft Office. until the audit process concluded. IBM’s
In mid-July 1995, IBM announced that it executives surmised that all of its major
was going to make SmartSuite its primary competitors had already signed licenses for
desktop software offering in the United Windows 95. The PC Company would lose
States. a great deal of business to those competi-
tors during the crucial back-to-school sea-
121. Microsoft did not intend to capitu-
son if it could not begin pre-installing Win-
late. In July, Gates called an executive at
dows 95 on its PCs immediately. The
the IBM PC Company to berate him about
conclusion of the audit appeared to be
IBM’s public statements denigrating Win-
weeks, if not months, away. The PC Com-
dows. Just a few days later, Microsoft
pany thus faced the prospect of missing
began to retaliate in earnest against the
the holiday selling season as well. IBM
IBM PC Company.
executives pleaded with Microsoft to un-
122. The IBM PC Company had begun couple the license negotiations from the
negotiations with Microsoft for a Windows ongoing audit and offered Microsoft a $10
95 license in late March 1995. For the million bond that Microsoft could use to
first two months, the negotiations had pro- indemnify itself against any discrepancies
gressed smoothly and at an expected pace. that the audit might ultimately reveal.
After IBM announced its intention to ac- IBM also offered to add a term to any
quire Lotus, though, the Microsoft negoti- Windows 95 license agreement whereby
ators began canceling meetings with their IBM would pay penalties and interest if
IBM counterparts, failing to return tele- any future audit disclosed under-reporting
phone calls, and delaying the return of of royalties by IBM.
marked-up license drafts that they re- 124. On August 9, 1995, a senior execu-
ceived from IBM. Then, on July 20, 1995, tive at the IBM PC Company went to
just three days after IBM announced its Redmond to meet with Joachim Kempin,
intention to pre-install SmartSuite on its the Microsoft executive in charge of the
PCs, a Microsoft executive informed his firm’s sales to OEMs. At the meeting,
counterpart at the IBM PC Company that Kempin offered to accept a single, lump-
Microsoft was terminating further negotia- sum payment from IBM that would close
tions with IBM for a license to Windows all outstanding audits. The amount of this
95. Microsoft also refused to release to payment would be reduced if IBM offered
the PC Company the Windows 95 ‘‘golden a concession that Kempin could take back
master’’ code. The PC Company needed to Gates. As one possibility, Kempin sug-
the code for its product planning and de- gested that IBM agree to not bundle
velopment, and IBM executives knew that SmartSuite with its PCs for a period of six
Microsoft had released it to IBM’s OEM months to one year. He explained that
competitors on July 17. Microsoft’s pur- the prospect of IBM bundling SmartSuite
ported reason for halting the negotiations with its PCs threatened the profit margins
was that it wanted first to resolve an ongo- that Microsoft derived from Office and
ing audit of IBM’s past royalty payments constituted a core issue in the relationship
between the two companies. The IBM to tell PC Company executives that the
executive rejected Kempin’s suggestion. treatment would improve only if IBM re-
In a follow-up letter, Kempin stated that frained from competing with Microsoft’s
Microsoft would require approximately $25 software offerings. On January 5, 1996,
million from IBM in order to settle all Kempin sent a letter to a counterpart at
outstanding audits. Kempin reiterated the IBM PC Company. In it, Kempin
that, expressed his belief that the PC Company
If you believe that the amount I am would enjoy a closer, more cooperative
asking for is too much, I would be will- relationship with Microsoft if only IBM’s
ing to trade certain relationship improv- software arm did not compete as aggres-
ing measures for the settlement charges sively with the products that comprised
and/or convert some of the amounts into the core of Microsoft’s business:
marketing funds if IBM too agrees to As long as IBM is working first on their
promote Microsoft’s software products competitive offerings and prefers to
together with their hardware offerings. fiercely compete with us in critical areas,
The message was clear: IBM could re- we should just be honest with each other
solve the impasse ostensibly blocking the and admit that such priorities will not
issuance of a Windows 95 license—the roy- lead to a most exciting relationship and
alties audit—by de-emphasizing those might not even make IBM feel good
products of its own that competed with when selling solutions based on Micro-
Microsoft and instead promoting Micro- soft productsTTTT You are a valued
soft’s products. OEM customer of Microsoft, with whom
125. IBM never agreed to renounce we will cooperate as much as your self-
SmartSuite or to increase its support for imposed restraints allow us to do.
Microsoft software, and in the end, Micro- Please understand that this is neither
soft did not grant IBM a license to pre- my choice or preferred way of doing
install Windows 95 until fifteen minutes business with an important company like
before the start of Microsoft’s official IBM. In addition, we would like to see
launch event on August 24, 1995. That the IBM PC company being more ac-
same day, the firms brought the audit tively involved in assisting Microsoft to
issue to a close with a settlement agree- bring key products to marketTTTT To
ment under which IBM ultimately paid date the IBM PC company has not al-
Microsoft $31 million. The release of Win- ways been an active participant in these
dows 95 had been postponed more than areas—understandable given your own
once, and many consumers apparently had internal product priorities. I hope you
been postponing buying PC systems until can help me to change this.
the new operating system arrived. The In closing, Kempin wrote, ‘‘You get mea-
pent-up demand caused an initial surge in sured in selling more hardware and I firm-
the sales of PCs loaded with Windows 95. ly believe if you had less conflict with
IBM’s OEM competitors reaped the fruits IBM’s software directions you actually
of this surge, but because of the delay in could sell more of it.’’
obtaining a license, the IBM PC Company 127. When Kempin spoke to the same
did not. The PC Company also missed the executive at the end of the month, he
back-to-school market. These lost oppor- repeated a message he had delivered more
tunities cost IBM substantial revenue. than once before: The fact that the IBM
126. Even once the companies had re- PC Company pre-installed SmartSuite on
solved the audit dispute, Microsoft contin- its PC systems made Microsoft reluctant
ued to treat the IBM PC Company less to help IBM sell more PC systems. After
favorably than it did the other major all, the more PC systems IBM sold with
OEMs, and Microsoft executives continued SmartSuite, the fewer copies of Office Mi-
crosoft could sell. For this reason, as 129. Microsoft’s executives were per-
Kempin explained to a group of IBM PC sistent despite IBM’s repeated refusals to
Company representatives in August 1996, sacrifice its own software ambitions to im-
Microsoft refused to provide IBM press prove its relations with Microsoft. In
releases with quotes endorsing any PC February 1997, one executive from Micro-
system that IBM shipped with SmartSuite. soft told a group of IBM PC Company
Microsoft later expanded that rule to cover executives that Gates might relent in his
any IBM PCs shipped with the World reluctance to cooperate with their company
Book electronic encyclopedia instead of if IBM moderated its support for Notes
Microsoft’s Encarta. IBM might have and SmartSuite. In a meeting held the
been less concerned about Microsoft’s re- next month, Microsoft representatives con-
fusal to offer endorsements if such quotes ditioned fulfillment of two objects of IBM’s
did not appear frequently and prominently desires on the company’s willingness to
in press releases announcing new PC sys- pre-install Microsoft’s products in the
tems from other OEMs such as Compaq. place of competing applications, such as
Microsoft’s conspicuous silence with re- SmartSuite, and objectionable middleware,
spect to IBM PCs sent the message to such as Notes. The first inducement that
customers that IBM PCs did not support the Microsoft representatives blandished
Windows as well as did PCs manufactured before the PC Company was early access
by other OEMs. to Windows source code, which Compaq
and a handful of other OEMs enjoyed.
128. Microsoft also denied the IBM PC
IBM wanted this early access in order to
Company access to the so-called ‘‘enabling
ensure its hardware’s contemporaneous
programs’’ that Microsoft ran for the bene-
compatibility with Microsoft’s operating
fit of OEMs such as Compaq, Hewlett–
system products. Next, Microsoft offered
Packard, and DEC, even though IBM met
IBM permission to certify itself as being
the prescribed, objective criteria for ad-
compliant with certain hardware require-
mission. Like the absence of public en-
ments that Microsoft imposed (and that
dorsements, IBM’s exclusion from Micro-
customers had come to look for as a sign of
soft’s enabling programs led customers to
an OEM’s ability to support Windows).
question whether the Microsoft software
Self-certification would have decreased the
they needed would work optimally with
time it took IBM PCs to reach the market,
IBM’s PCs. IBM learned through surveys
and IBM knew that the privilege was al-
it conducted that the firm had lost between
ready being extended to some of its main
seven and ten large accounts, representing
OEM competitors. With respect to both
about $180 million in revenue for IBM,
benefits, the representatives from Micro-
because the tension between Microsoft and
soft explained that Microsoft would extend
IBM led customers to doubt that Windows
them to the PC Company on the condition
would work as well with IBM PCs as with
that it stop loading its PC systems with
PCs produced by firms with which Micro-
software that threatened Microsoft’s inter-
soft was on cordial terms. Microsoft justi-
ests.
fied its exclusion of the PC Company from
the enabling programs with its suspicion 130. The discriminatory treatment that
that IBM might use the programs to gain the IBM PC Company received from Mi-
entrée with customers and then attempt to crosoft on account of the ‘‘software di-
sell those customers IBM software instead rections’’ of its parent company also mani-
of Microsoft products. At the same time, fested itself in the royalty price that IBM
a Microsoft executive told a counterpart at paid for Windows. In the latter half of the
IBM that the PC Company would be ad- 1990s, IBM (along with Gateway) paid sig-
mitted to the programs when IBM’s CEO nificantly more for Windows than other
repaired his relationship with Bill Gates. major OEMs (like Compaq, Dell, and Hew-
lett–Packard) that were more compliant Developers would only write to the APIs
with Microsoft’s wishes. exposed by Navigator in numbers large
131. Finally, Microsoft made its frus- enough to threaten the applications barrier
tration known to IBM by reducing, from if they believed that Navigator would
three to one, the number of Microsoft emerge as the standard software employed
OEM account managers handling Micro- to browse the Web. If Microsoft could
soft’s operational relationship with the demonstrate that Navigator would not be-
IBM PC Company. This reduced support come the standard, because Microsoft’s
impaired still further IBM’s ability to test, own browser would attract just as much if
manufacture, and ship its PCs on schedule, not more usage, then developers would
further delaying IBM’s efforts to bring its continue to focus their efforts on a plat-
PC products to market against the compe- form that enjoyed enduring ubiquity: the
tition in a timely manner. 32–bit Windows API set. Microsoft thus
set out to maximize Internet Explorer’s
132. In sum, from 1994 to 1997, Micro-
share of browser usage at Navigator’s ex-
soft consistently pressured IBM to reduce
pense.
its support for software products that com-
peted with Microsoft’s offerings, and it 134. Microsoft’s management believed
used its monopoly power in the market for that, no matter what the firm did, Internet
Intel-compatible PC operating systems to Explorer would not capture a large share
punish IBM for its refusal to cooperate. of browser usage as long as it remained
Whereas, in the case of Netscape, Micro- markedly inferior to Navigator in the esti-
soft tried to induce a company to move its mation of consumers. The task of techni-
business away from offering software that cal personnel at Microsoft, then, was to
could weaken the applications barrier to make Internet Explorer’s features at least
entry, Microsoft’s primary concern with as attractive to consumers as Navigator’s.
IBM was to reduce the firm’s support for Microsoft did not believe that improved
software products that competed directly quality alone would depose Navigator, for
with Microsoft’s most profitable products, millions of users appeared to be satisfied
namely Windows and Office. That being with Netscape’s product, and Netscape
said, it must be noted that one of the IBM was known as ‘‘the Internet company.’’ As
products to which Microsoft objected, Gates wrote to Microsoft’s executive staff
Notes, was like Navigator in that it ex- in his May 1995 ‘‘Internet Tidal Wave’’
posed middleware APIs. In any event, Mi- memorandum, ‘‘First we need to offer a
crosoft’s interactions with Netscape, IBM, decent client,’’ but ‘‘this alone won’t get
Intel, Apple, and RealNetworks all reveal people to switch away from Netscape.’’
Microsoft’s business strategy of directing Still, once Microsoft ensured that the aver-
its monopoly power toward inducing other age consumer would be just as comfortable
companies to abandon projects that threat- browsing with Internet Explorer as with
en Microsoft and toward punishing those Navigator, Microsoft could employ other
companies that resist. devices to induce consumers to use its
browser instead of Netscape’s.
D. Developing Competitive Web 135. From 1995 onward, Microsoft
Browsing Software spent more than $100 million each year
133. Once it became clear to senior developing Internet Explorer. The firm’s
executives at Microsoft that Netscape management gradually increased the num-
would not abandon its efforts to develop ber of developers working on Internet Ex-
Navigator into a platform, Microsoft fo- plorer from five or six in early 1995 to
cused its efforts on ensuring that few de- more than one thousand in 1999. Al-
velopers would write their applications to though the first version of Internet Ex-
rely on the APIs that Navigator exposed. plorer was demonstrably inferior to Net-
scape’s then-current browser product gator, and that Netscape derived a signifi-
when the former was released in July cant portion of its revenue from selling
1995, Microsoft’s investment eventually browser licenses. Despite the opportunity
started to pay technological dividends. to make a substantial amount of revenue
When Microsoft released Internet Explor- from the sale of Internet Explorer, and
er 3.0 in late 1996, reviewers praised its with the knowledge that the dominant
vastly improved quality, and some even browser product on the market, Navigator,
rated it as favorably as they did Navigator. was being licensed at a price, senior execu-
After the arrival of Internet Explorer 4.0 tives at Microsoft decided that Microsoft
in late 1997, the number of reviewers who needed to give its browser away in fur-
regarded it as the superior product was therance of the larger strategic goal of
roughly equal to those who preferred Nav- accelerating Internet Explorer’s acquisi-
igator. tion of browser usage share. Consequent-
ly, Microsoft decided not to charge an
E. Giving Internet Explorer Away increment in price when it included Inter-
and Rewarding Firms that net Explorer in Windows for the first time,
Helped Build Its Usage Share and it has continued this policy ever since.
136. In addition to improving the quali- In addition, Microsoft has never charged
ty of Internet Explorer, Microsoft sought for an Internet Explorer license when it is
to increase the product’s share of browser distributed separately from Windows.
usage by giving it away for free. In many 138. Over the months and years that
cases, Microsoft also gave other firms followed the release of Internet Explorer
things of value (at substantial cost to Mi- 1.0 in July 1995, senior executives at Mi-
crosoft) in exchange for their commitment crosoft remained engrossed with maximiz-
to distribute and promote Internet Explor- ing Internet Explorer’s share of browser
er, sometimes explicitly at Navigator’s ex- usage. Whenever competing priorities
pense. While Microsoft might have bun- threatened to intervene, decision-makers
dled Internet Explorer with Windows at at Microsoft reminded those reporting to
no additional charge even absent its deter- them that browser usage share remained,
mination to preserve the applications bar- as Microsoft senior vice president Paul
rier to entry, that determination was the Maritz put it, ‘‘job # 1.’’ For example, in
main force driving its decision to price the the summer of 1997, some mid-level em-
product at zero. Furthermore, Microsoft ployees began to urge that Microsoft
would not have given Internet Explorer charge a price for at least some of the
away to IAPs, ISVs, and Apple, nor would components of Internet Explorer 4.0.
it have taken on the high cost of enlisting This would have shifted some anticipatory
firms in its campaign to maximize Internet demand to Windows 98 (which was due to
Explorer’s usage share and limit Naviga- be released somewhat later than Internet
tor’s, had it not been focused on protecting Explorer 4.0), since Windows 98 would in-
the applications barrier. clude all of the browser at no extra charge.
137. In early 1995, personnel develop- Senior executives at Microsoft rejected the
ing Internet Explorer at Microsoft con- proposal, because while the move might
templated charging OEMs and others for have increased demand for Windows 98
the product when it was released. Inter- and generated substantial revenue, it
net Explorer would have been included in would have done so at the unacceptable
a bundle of software that would have been cost of retarding the dissemination of In-
sold as an add-on, or ‘‘frosting,’’ to Win- ternet Explorer 4.0. Maritz reminded
dows 95. Indeed, Microsoft knew by the those who had advocated the proposal that
middle of 1995, if not earlier, that Net- ‘‘getting browser share up to 50% (or
scape charged customers to license Navi- more) is still the major goal.’’
139. The transcendent importance of a contract with AOL whereby Microsoft
browser usage share to Microsoft is evi- actually paid AOL a bounty for every sub-
dent in what the firm expended, as well as scriber that it converted to access software
in what it relinquished, in order to maxim- that included Internet Explorer instead of
ize usage share for Internet Explorer and Navigator. Finally, with respect to
to diminish it for Navigator. Not only was OEMs, Microsoft extended co-marketing
Microsoft willing to forego an opportunity funds and reductions in the Windows roy-
to attract substantial revenue while en- alty price to those agreeing to promote
hancing (albeit temporarily) consumer de- Internet Explorer and, in some cases, to
mand for Windows 98, but the company abstain from promoting Navigator.
also paid huge sums of money, and sacri-
140. Even absent the strategic impera-
ficed many millions more in lost revenue
tive to maximize its browser usage share
every year, in order to induce firms to take
at Netscape’s expense, Microsoft might
actions that would help increase Internet
still have set the price of an Internet Ex-
Explorer’s share of browser usage at Navi-
plorer consumer license at zero. It might
gator’s expense. First, even though Mi-
also have spent something approaching the
crosoft could have charged IAPs, ISVs,
$100 million it has devoted each year to
and Apple for licenses to distribute Inter-
developing Internet Explorer and some
net Explorer separately from Windows,
part of the $30 million it has spent annual-
Microsoft priced those licenses, along with
ly marketing it. After all, consumers in
related technology and technical support,
1995 were already demanding software
at zero in order to induce those companies
that enabled them to use the Web with
to distribute and promote Internet Explor-
ease, and IBM had announced in Septem-
er over Navigator. Second, although Mi-
ber 1994 its plan to include browsing capa-
crosoft could have charged IAPs and ICPs
bility in OS/2 Warp at no extra charge.
substantial sums of money in exchange for
Microsoft had reason to believe that other
promoting their services and content with-
operating-system vendors would do the
in Windows, Microsoft instead bartered
same.
Windows’ valuable desktop ‘‘real estate’’
for a commitment from those firms to pro- 141. Still, had Microsoft not viewed
mote and distribute Internet Explorer, to browser usage share as the key to preserv-
inhibit promotion and distribution of Navi- ing the applications barrier to entry, the
gator, and to employ technologies that company would not have taken its efforts
would inspire developers to write Web beyond developing a competitive browser
sites that relied on Microsoft’s Internet product, including it with Windows at no
technologies rather than those provided by additional cost to consumers, and promot-
Navigator. Microsoft was willing to offer ing it with advertising. Microsoft would
such prominent placement even to AOL, not have absorbed the considerable addi-
which was the principal competitor to Mi- tional costs associated with enlisting other
crosoft’s MSN service. If an IAP was firms in its campaign to increase Internet
already under contract to pay Netscape a Explorer’s usage share at Navigator’s ex-
certain amount for browser licenses, Mi- pense. This investment was only profit-
crosoft offered to compensate the IAP the able to the extent that it protected the
amount it owed Netscape. Third, Micro- applications barrier to entry. Neither the
soft also reduced the referral fees that desire to bolster demand for Windows, nor
IAPs paid when users signed up for their the prospect of ancillary revenues, explains
services using the Internet Referral Ser- the lengths to which Microsoft has gone.
ver in Windows in exchange for the IAPs’ For one thing, loading Navigator makes
efforts to convert their installed bases of Windows just as Internet-ready as includ-
subscribers from Navigator to Internet ing Internet Explorer does. Therefore,
Explorer. For example, Microsoft entered Microsoft’s costly efforts to limit the use of
Navigator on Windows could not have F. Excluding Navigator from Impor-

stemmed from a desire to bolster consum- tant Distribution Channels
er demand for Windows. Furthermore, 143. Decision-makers at Microsoft
there is no conceivable way that Micro- worried that simply developing its own at-
soft’s costly efforts to induce Apple to pre- tractive browser product, pricing it at
install Internet Explorer on Apple’s own zero, and promoting it vigorously would
PC systems could have increased consum- not divert enough browser usage from
er demand for Windows. Navigator to neutralize it as a platform.
They believed that a comparable browser
142. In pursuing its goal of maximizing product offered at no charge would still
Internet Explorer’s usage share, Microsoft not be compelling enough to consumers to
actually has limited rather severely the detract substantially from Navigator’s ex-
number of profit centers from which it isting share of browser usage. This belief
could otherwise derive income via Internet was due, at least in part, to the fact that
Explorer. For example, Microsoft allows Navigator already enjoyed a very large in-
the developers of browser shells built on stalled base and had become nearly synon-
Internet Explorer to collect ancillary reve- ymous with the Web in the public’s con-
nues such as advertising fees; for another, sciousness. If Microsoft was going to
Microsoft permits its browser licensees to raise Internet Explorer’s share of browser
change the browser’s start page, thus lim- usage and lower Navigator’s share, execu-
iting the fees that advertisers are willing tives at Microsoft believed they needed to
to pay for placement on that page by constrict Netscape’s access to the distribu-
Microsoft. Even if Microsoft maximized tion channels that led most efficiently to
browser usage.
its ancillary revenue, the amount of reve-
nue realized would not come close to re- 1. The Importance of the OEM
couping the cost of its campaign to maxim- and IAP Channels
ize Internet Explorer’s usage share at 144. Very soon after it recognized the
Navigator’s expense. The countless com- need to gain browser usage share at Navi-
munications that Microsoft’s executives gator’s expense, Microsoft identified pre-
dispatched to each other about the compa- installation by OEMs and bundling with
ny’s need to capture browser usage share the proprietary client software of IAPs as
indicate that the purpose of the effort had the two distribution channels that lead
little to do with attracting ancillary reve- most efficiently to browser usage. Two
main reasons explain why these channels
nues and everything to do with protecting
are so efficient. First, users must acquire
the applications barrier from the threat
a computer and connect to the Internet
posed by Netscape’s Navigator and Sun’s
before they can browse the Web. Thus, the
implementation of Java. For example, Mi-
OEM and IAP channels lead directly to
crosoft vice president Brad Chase told the
virtually every user of browsing software.
company’s assembled sales and marketing Second, both OEMs and IAPs are able to
executives in April 1996 that they should place browsing software at the immediate
‘‘worry about your browser share[ ] as disposal of a user without any effort on the
much as BillG’’ even though Internet Ex- part of the user. If an OEM pre-installs a
plorer was ‘‘a no revenue product,’’ be- browser onto its PCs and places an icon
cause ‘‘we will loose [sic] the Internet plat- for that browser on the default screen, or
form battle if we do not have a significant ‘‘desktop,’’ of the operating system, pur-
user installed base.’’ He told them that ‘‘if chasers of those PCs will be confronted
you let your customers deploy Netscape with the icon as soon as the operating
Navigator, you will loose [sic] leadership system finishes loading into random access
on the desktop.’’ memory (‘‘RAM’’). If an IAP bundles a
browser with its own proprietary software, willing to devote time and effort to down-
its subscribers will, by default, use the loading the software. Today, however, the
browser whenever they connect to the average Web user is more of a neophyte,
Web. In its internal decision-making, Mi- and is far more likely to be intimidated by
crosoft has placed considerable reliance on the process of downloading. It is not sur-
studies showing that consumers tend prising, then, that downloaded browsers
strongly to use whatever browsing soft- now make up only a small and decreasing
ware is placed most readily at their dispos- percentage of the new browsers (as op-
al, and that once they have acquired, posed to upgrades) that consumers obtain
found, and used one browser product, most and use.
are reluctant—and indeed have little rea- 147. The consumer who receives a CD–
son—to expend the effort to switch to ROM containing a free browser in the mail
another. Microsoft has also relied on or as a magazine insert is at least spared
studies showing that a very large majority the time and effort it would take to obtain
of those who browse the Web obtain their browsing software from a retail vendor or
browsing software with either their PCs or to download it from the Web. But, just as
their IAP subscriptions. the consumer who obtains a browser at
145. Indeed, no other distribution retail or off the Web, the consumer who
channel for browsing software even ap- receives the software unsolicited at home
proaches the efficiency of OEM pre-instal- must first install it on a PC system in
lation and IAP bundling. The primary order to use it, and merely installing a
reason is that the other channels require browser product takes time and can be
users to expend effort before they can confusing for novice users. Plus, a large
start browsing. The traditional retail percentage of the unsolicited disks distrib-
channel, for example, requires the consum- uted through ‘‘carpet bombing’’ reach indi-
er to make contact with a retailer, and viduals who do not have PCs, who already
retailers generally do not distribute prod- have pre-installed browsing software, or
ucts without charging a price for them. who have no interest in browsing the Web.
Naturally, once Microsoft and Netscape In practice, less than two percent of CD–
began offering browsing software for free, ROM disks disseminated in mass-distribu-
consumers for the most part lost all incen- tion campaigns are used in the way the
tive to pay for it. distributor intended. As a result, this
146. The relatively few users who al- form of distribution is rarely profitable,
ready have a browser but would prefer and then only when undertaken by on-line
another can avoid the retail channel by subscription services for whom a sale
using the Internet to download new brows- translates into a stream of revenues last-
ing software electronically, but they must ing into the future. The fact that an OLS
wait for the software to transmit to their may find it worthwhile to ‘‘carpet bomb’’
PCs. This process takes a moderate de- consumers with free disks obviously only
gree of sophistication and substantial helps the vendor of browsing software
amount of time, and as the average band- whose product the OLS has chosen to bun-
width of PC connections has grown, so has dle with its proprietary software. So,
the average size of browser products. The while there are other means of distributing
longer it takes for the software to down- browsers, the fact remains that to a firm
load, the more likely it is that the user’s interested in browser usage, there simply
connection to the Internet will be inter- are no channels that compare in efficiency
rupted. As a vanguard of the ‘‘Internet to OEM pre-installation and IAP bundling.
Age,’’ Navigator generated a tremendous 148. Knowing that OEMs and IAPs
amount of excitement in its early days represented the most efficient distribution
among technical sophisticates, who were channels of browsing software, Microsoft
sought to ensure that, to as great an ex- 152. Moreover, many consumers who
tent as possible, OEMs and IAPs bundled need an operating system, including a sub-
and promoted Internet Explorer to the stantial percentage of corporate consum-
exclusion of Navigator. ers, do not want a browser at all. For
2. Excluding Navigator from example, if a consumer has no desire to
the OEM Channel browse the Web, he may not want a brow-
a. Binding Internet Explorer ser taking up memory on his hard disk and
to Windows slowing his system’s performance. Also,
for businesses desiring to inhibit employ-
i. The Status of Web Browsers ees’ access to the Internet while minimiz-
as Separate Products
ing system support costs, the most effi-
149. Consumers determine their soft- cient solution is often using PC systems
ware requirements by identifying the func- without browsers.
tionalities they desire. While consumers
routinely evaluate software products on 153. Because of the separate demand
the basis of the functionalities the products for browsers and operating systems, firms
deliver, they generally lack sufficient infor- have found it efficient to supply the prod-
mation to make judgments based on the ucts separately. A number of operating
designs and implementations of those system vendors offer consumers the choice
products. Accordingly, consumers gener- of licensing their operating systems with-
ally choose which software products to li- out a browser. Others bundle a browser
cense, install, and use on the basis of the with their operating system products but
products’ functionalities, not their designs allow OEMs, value-added resellers, and
and implementations. consumers either to not install it or, if the
150. While the meaning of the term browser has been pre-installed, to uninstall
‘‘Web browser’’ is not precise in all re- it. While Microsoft no longer affords this
spects, there is a consensus in the software flexibility (it is the only operating system
industry as to the functionalities that a vendor that does not), it has always mar-
Web browser offers a user. Specifically, a keted and distributed Internet Explorer
Web browser provides the ability for the separately from Windows in several chan-
end user to select, retrieve, and perceive nels. These include retail sales, service
resources on the Web. There is also a kits for ISVs, free downloads over the
consensus in the software industry that Internet, and bundling with other products
these functionalities are distinct from the produced both by Microsoft and by third-
set of functionalities provided by an oper- party ISVs. In order to compete with Nav-
ating system. igator for browser share, as well as to
151. Many consumers desire to sepa- satisfy corporate consumers who want
rate their choice of a Web browser from their diverse PC platforms to present a
their choice of an operating system. Some common browser interface to employees,
consumers, particularly corporate consum- Microsoft has also created stand-alone ver-
ers, demand browsers and operating sys- sions of Internet Explorer that run on
tems separately because they prefer to operating systems other than 32–bit Win-
standardize on the same browser across dows, including the Mac OS and Windows
different operating systems. For such 3.x.
consumers, standardizing on the browser
of their choice results in increased produc- 154. In conclusion, the preferences of
tivity and lower training and support costs, consumers and the responsive behavior of
and permits the establishment of consis- software firms demonstrate that Web
tent security and privacy policies govern- browsers and operating systems are sepa-
ing Web access. rate products.
ii. Microsoft’s Actions after the June 21, 1995 meeting between
[6] 155. In contrast to other operat- Microsoft and Netscape executives, Micro-
ing system vendors, Microsoft both re- soft’s John Ludwig sent an E-mail to Paul
fused to license its operating system with- Maritz and the other senior executives in-
out a browser and imposed restrictions—at volved in Microsoft’s browser effort.
first contractual and later technical—on ‘‘[O]bviously netscape does see us as a
OEMs’ and end users’ ability to remove its client competitor,’’ Ludwig wrote. ‘‘[W]e
browser from its operating system. As its have to work extra hard to get ohare on
internal contemporaneous documents and the oem disks.’’
licensing practices reveal, Microsoft decid- 158. Microsoft did manage to bundle
ed to bind Internet Explorer to Windows Internet Explorer 1.0 with the first version
in order to prevent Navigator from weak- of Windows 95 licensed to OEMs in July
ening the applications barrier to entry, 1995. It also included a term in its OEM
rather than for any pro-competitive pur- licenses that prohibited the OEMs from
pose. modifying or deleting any part of Windows
156. Before it decided to blunt the 95, including Internet Explorer, prior to
threat that Navigator posed to the appli- shipment. The OEMs accepted this re-
cations barrier to entry, Microsoft did not striction despite their interest in meeting
plan to make it difficult or impossible for consumer demand for PC operating sys-
OEMs or consumers to obtain Windows tems without Internet Explorer. After all,
without obtaining Internet Explorer. In Microsoft made the restriction a non-nego-
fact, the company’s internal correspon- tiable term in its Windows 95 license, and
dence and external communications indi- the OEMs felt they had no commercially
cate that, as late as the fall of 1994, Mi- viable alternative to pre-installing Win-
crosoft was planning to include low-level dows 95 on their PCs. Apart from a few
Internet ‘‘plumbing,’’ such as a TCP/IP months in the fall of 1997, when Microsoft
stack, but not a browser, with Windows provided OEMs with Internet Explorer 4.0
95. on a separate disk from Windows 95 and
157. Microsoft subsequently decided to permitted them to ship the latter without
develop a browser to run on Windows 95. the former, Microsoft has never allowed
As late as June 1995, however, Microsoft OEMs to ship Windows 95 to consumers
had not decided to bundle that browser without Internet Explorer. This policy
with the operating system. The plan at has guaranteed the presence of Internet
that point, rather, was to ship the browser Explorer on every new Windows PC sys-
in a separate ‘‘frosting’’ package, for which tem.
Microsoft intended to charge. By April or 159. Microsoft knew that the inability
May of that year, however, Microsoft’s top to remove Internet Explorer made OEMs
executives had identified Netscape’s brow- less disposed to pre-install Navigator onto
ser as a potential threat to the applications Windows 95. OEMs bear essentially all of
barrier to entry. Throughout the spring, the consumer support costs for the Win-
more and more key executives came to the dows PC systems they sell. These include
conclusion that Microsoft’s best prospect the cost of handling consumer complaints
of quashing that threat lay in maximizing and questions generated by Microsoft’s
the usage share of Microsoft’s browser at software. Pre-installing more than one
Navigator’s expense. The executives be- product in a given category, such as word
lieved that the most effective way of carry- processors or browsers, onto its PC sys-
ing out this strategy was to ensure that tems can significantly increase an OEM’s
every copy of Windows 95 carried with it a support costs, for the redundancy can lead
copy of Microsoft’s browser, then code- to confusion among novice users. In addi-
named ‘‘O’Hare.’’ For example, two days tion, pre-installing a second product in a
given software category can increase an liminary aspects of this ‘‘knitting’’ are per-
OEM’s product testing costs. Finally, formed by the software developer. The
many OEMs see pre-installing a second user who launches a program, however, is
application in a given software category as ultimately responsible for causing routines
a questionable use of the scarce and valu- to be loaded into memory and executed
able space on a PC’s hard drive. together to produce the program’s overall
160. Microsoft’s executives believed functionality.
that the incentives that its contractual re- 163. Routines can be packaged togeth-
strictions placed on OEMs would not be er into files in almost any way the designer
sufficient in themselves to reverse the di- chooses. Routines need not reside in the
rection of Navigator’s usage share. Con- same file to function together in a seam-
sequently, in late 1995 or early 1996, Mi- less fashion. Also, a developer can move
crosoft set out to bind Internet Explorer routines into new or different files from
more tightly to Windows 95 as a technical one version of a program to another with-
matter. The intent was to make it more out changing the functionalities of those
difficult for anyone, including systems ad- routines or the ability to combine them to
ministrators and users, to remove Internet
provide integrated functionality.
Explorer from Windows 95 and to simulta-
neously complicate the experience of using 164. Starting with Windows 95 OSR 2,
Navigator with Windows 95. As Brad Microsoft placed many of the routines that
Chase wrote to his superiors near the end are used by Internet Explorer, including
of 1995, ‘‘We will bind the shell to the browsing-specific routines, into the same
Internet Explorer, so that running any files that support the 32–bit Windows
other browser is a jolting experience.’’ APIs. Microsoft’s primary motivation for
161. Microsoft bound Internet Explor- this action was to ensure that the deletion
er to Windows 95 by placing code specific of any file containing browsing-specific
to Web browsing in the same files as code routines would also delete vital operating
that provided operating system functions. system routines and thus cripple Windows
Starting with the release of Internet Ex- 95. Although some of the code that pro-
plorer 3.0 and ‘‘OEM Service Release 2.0’’ vided Web browsing could still be re-
(‘‘OSR 2’’) of Windows 95 in August 1996, moved, without disabling the operating
Microsoft offered only a version of Win- system, by entering individual files and
dows 95 in which browsing-specific code selectively deleting routines used only for
shared files with code upon which non- Web browsing, licensees of Microsoft soft-
browsing features of the operating system ware were, and are, contractually prohibit-
relied. ed from reverse engineering, decompiling,
or disassembling any software files. Even
162. The software code necessary to
if this were not so, it is prohibitively diffi-
supply the functionality of a modem appli-
cult for anyone who does not have access
cation or operating system can be ex-
to the original, human-readable source
tremely long and complex. To make that
code to change the placement of routines
complexity manageable, developers usually
into files, or otherwise to alter the internal
write long programs as a series of individ-
configuration of software files, while still
ual ‘‘routines,’’ each ranging from a few
preserving the software’s overall function-
dozen to a few hundred lines of code, that
ality.
can be used to perform specific functions.
Large programs are created by ‘‘knitting’’ 165. Although users were not able to
together many such routines in layers, remove all of the routines that provided
where the lower layers are used to provide Web browsing from OSR 2 and successive
fundamental functionality relied upon by versions of Windows 95, Microsoft still
higher, more focused layers. Some pre- provided them with the ability to uninstall
Internet Explorer by using the ‘‘Add/Re- Windows from a marketing perspective
move’’ panel, which was accessible from and we are trying to copy Netscape and
the Windows 95 desktop. The Add/Re- make IE into a platform. We do not
move function did not delete all of the files use our strength—which is that we have
that contain browsing specific code, nor an installed base of Windows and we
did it remove browsing-specific code that have a strong OEM shipment channel
is used by other programs. The Add/Re- for Windows. Pitting browser against
move function did, however, remove the browser is hard since Netscape has 80%
functionalities that were provided to the marketshare and we have ¢20%TTTT I
user by Internet Explorer, including the am convinced we have to use Windows—
means of launching the Web browser. Ac- this is the one thing they don’t haveTTTT
cordingly, from the user’s perspective, We have to be competitive with features,
uninstalling Internet Explorer in this way but we need something more—Windows
was equivalent to removing the Internet integration.
Explorer program from Windows 95. If you agree that Windows is a huge
166. In late 1996, senior executives asset, then it follows quickly that we are
within Microsoft, led by James Allchin, not investing sufficiently in finding ways
began to argue that Microsoft was not to tie IE and Windows together. This
binding Internet Explorer tightly enough must come from youTTTT Memphis [Mi-
to Windows and as such was missing an crosoft’s code-name for Windows 98]
opportunity to maximize the usage of In- must be a simple upgrade, but most
ternet Explorer at Navigator’s expense. importantly it must be killer on OEM
Allchin first made his case to Paul Maritz shipments so that Netscape never gets a
in late December 1996. He wrote: chance on these systems.
I don’t understand how IE is going to 167. Maritz responded to Allchin’s sec-
win. The current path is simply to copy ond message by agreeing ‘‘that we have to
everything that Netscape does packag- make Windows integration our basic strat-
ing and product wise. Let’s [suppose] egy’’ and that this justified delaying the
IE is as good as Navigator/Communica- release of Windows 98 until Internet Ex-
tor. Who wins? The one with 80% plorer 4.0 was ready to be included with
market share. Maybe being free helps that product. Maritz recognized that the
us, but once people are used to a prod- delay would disappoint OEMs for two rea-
uct it is hard to change them. Consider sons. First, while OEMs were eager to
Office. We are more expensive today sell new hardware technologies to Win-
and we’re still winning. My conclusion dows users, they could not do this until
is that we must leverage Windows more. Microsoft released Windows 98, which in-
Treating IE as just an add-on to Win- cluded software support for the new tech-
dows which is cross-platform [means] nologies. Second, OEMs wanted Windows
losing our biggest advantage—Windows 98 to be released in time to drive sales of
marketshare. We should dedicate a PC systems during the back-to-school and
cross group team to come up with ways holiday selling seasons. Nevertheless,
to leverage Windows technically Maritz agreed with Allchin’s point that
moreTTTT We should think about an synchronizing the release of Windows 98
integrated solution—that is our with Internet Explorer was ‘‘the only thing
strength. that makes sense even if OEMs suffer.’’
Allchin followed up with another message 168. Once Maritz had decided that All-
to Maritz on January 2, 1997: chin was right, he needed to instruct the
You see browser share as job 1TTTT I relevant Microsoft employees to delay the
do not feel we are going to win on our release of Windows 98 long enough so that
current path. We are not leveraging it could be shipped with Internet Explorer
4.0 tightly bound to it. When one execu- 98. The omission of a browser removal
tive asked on January 7, 1997 for confir- function was particularly conspicuous giv-
mation that ‘‘memphis is going to hold for en that Windows 98 did give users the
IE4, even if it puts memphis out of the ability to uninstall numerous features oth-
xmas oem window,’’ Maritz responded af- er than Internet Explorer—features that
firmatively and explained, Microsoft also held out as being integrated
The major reason for this is TTT to into Windows 98. Microsoft took this ac-
combat Nscp, we have to [ ] position the tion despite specific requests from Gate-
browser as ‘‘going away’’ and do deeper way that Microsoft provide a way to unin-
integration on Windows. The stronger stall Internet Explorer 4.0 from Windows
way to communicate this is to have a 98.
‘‘new release’’ of Windows and make a
big deal out of itTTTT IE integration 171. The second way in which Micro-
will be [the] most compelling feature of soft’s engineers implemented Allchin’s
Memphis. strategy was to make Windows 98 override
the user’s choice of default browser in
Thus, Microsoft delayed the debut of nu-
certain circumstances. As shipped to
merous features, including support for new
hardware devices, that Microsoft believed users, Windows 98 has Internet Explorer
consumers would find beneficial, simply in configured as the default browser. While
order to protect the applications barrier to Windows 98 does provide the user with the
entry. ability to choose a different default brow-
ser, it does not treat this choice as the
169. Allchin and Maritz gained support
‘‘default browser’’ within the ordinary
for their initiative within Microsoft in the
meaning of the term. Specifically, when a
early spring of 1997, when a series of
user chooses a browser other than Inter-
market studies confirmed that binding In-
net Explorer as the default, Windows 98
ternet Explorer tightly to Windows was
nevertheless requires the user to employ
the way to get consumers to use Internet
Explorer instead of Navigator. Reporting Internet Explorer in numerous situations
on one study in late February, Microsoft’s that, from the user’s perspective, are en-
Christian Wildfeuer wrote: tirely unexpected. As a consequence,
users who choose a browser other than
The stunning insight is this: To make
Internet Explorer as their default face
[users] switch away from Netscape, we
need to make them upgrade to Mem- considerable uncertainty and confusion in
phisTTTT It seems clear to me that it the ordinary course of using Windows 98.
will be very hard to increase browser 172. Microsoft’s refusal to respect the
market share on the merits of IE 4 user’s choice of default browser fulfilled
alone. It will be more important to Brad Chase’s 1995 promise to make the
leverage the OS asset to make people use of any browser other than Internet
use IE instead of Navigator. Explorer on Windows ‘‘a jolting experi-
Microsoft’s survey expert, Kumar Mehta, ence.’’ By increasing the likelihood that
agreed. In March he shared with a col- using Navigator on Windows 98 would
league his ‘‘feeling, based on all the IE have unpleasant consequences for users,
research we have done, [that] it is a mis- Microsoft further diminished the inclina-
take to release memphis without bundling tion of OEMs to pre-install Navigator onto
IE with it.’’ Windows. The decision to override the
170. Microsoft’s technical personnel user’s selection of non-Microsoft software
implemented Allchin’s ‘‘Windows inte- as the default browser also directly disin-
gration’’ strategy in two ways. First, they clined Windows 98 consumers to use Navi-
did not provide users with the ability to gator as their default browser, and it
uninstall Internet Explorer from Windows harmed those Windows 98 consumers who
nevertheless used Navigator. In particu- without Internet Explorer 1.0 and 2.0.
lar, Microsoft exposed those using Naviga- The version of Internet Explorer (1.0) that
tor on Windows 98 to security and privacy Microsoft included with the original OEM
risks that are specific to Internet Explorer version of Windows 95 was a separable,
and to ActiveX controls. executable program file supplied on a sep-
173. Microsoft’s actions have inflicted arate disk. Web browsing thus could be
collateral harm on consumers who have no installed or removed without affecting the
interest in using a Web browser at all. If rest of Windows 95’s functionality in any
these consumers want the non-browsing way. The same was true of Internet Ex-
features available only in Windows 98, plorer 2.0. Microsoft, moreover, created
they must content themselves with an op- an easy way to remove Internet Explorer
erating system that runs more slowly than 1.0 and 2.0 from Windows 95 after they
if Microsoft had not interspersed brows- had been installed, via the ‘‘Add/Remove’’
ing-specific routines throughout various panel. This demonstrates the absence of
files containing routines relied upon by the any technical reason for Microsoft’s refusal
operating system. More generally, Micro- to supply Windows 95 without Internet
soft has forced Windows 98 users uninter- Explorer 1.0 and 2.0.
ested in browsing to carry software that, 176. Similarly, there is no technical
while providing them with no benefits, justification for Microsoft’s refusal to li-
brings with it all the costs associated with cense Windows 95 to OEMs with Internet
carrying additional software on a system. Explorer 3.0 or 4.0 uninstalled, or for its
These include performance degradation, refusal to permit OEMs to uninstall Inter-
increased risk of incompatibilities, and the net Explorer 3.0 or 4.0. Microsoft’s deci-
introduction of bugs. Corporate consum- sion to provide users with an ‘‘uninstall’’
ers who need the hardware support and procedure for Internet Explorer 3.0 and
other non-browsing features not available 4.0 and its decision to promote Internet
in earlier versions of Windows, but who do Explorer on the basis of that feature dem-
not want Web browsing at all, are further onstrate that there was no technical or
burdened in that they are denied a simple quality-related reason for refusing to per-
and effective means of preventing employ- mit OEMs to use this same feature. Mi-
ees from attempting to browse the Web. crosoft would not have permitted users to
174. Microsoft has harmed even those uninstall Internet Explorer, nor would con-
consumers who desire to use Internet Ex- sumers have demanded such an option, if
plorer, and no other browser, with Win- the process would have fragmented or de-
dows 98. To the extent that browsing- graded the other functionality of the oper-
specific routines have been commingled ating system.
with operating system routines to a great- 177. As with Windows 95, there is no
er degree than is necessary to provide any technical justification for Microsoft’s refus-
consumer benefit, Microsoft has unjustifi- al to meet consumer demand for a brow-
ably jeopardized the stability and security serless version of Windows 98. Microsoft
of the operating system. Specifically, it could easily supply a version of Windows
has increased the likelihood that a browser 98 that does not provide the ability to
crash will cause the entire system to crash browse the Web, and to which users could
and made it easier for malicious viruses add the browser of their choice. Indica-
that penetrate the system via Internet Ex- tive of this is the fact that it remains
plorer to infect non-browsing parts of the possible to remove Web browsing function-
system. ality from Windows 98 without adversely
iii. Lack of Justification affecting non-Web browsing features of
175. No technical reason can explain Windows 98 or the functionality of applica-
Microsoft’s refusal to license Windows 95 tions running on the operating system. In
fact, the revised version of Professor Fel- which functionalities in its products are to
ten’s prototype removal program produces be documented and which are to be left
precisely this result when run on a com- undocumented. Felten was aware of this
puter with Windows 98 installed. fact, and he himself noted that his own
178. In his direct testimony, Felten documentation of initiation methods was
provides a full technical description of not exhaustive.
what his prototype removal program does. 180. Allchin also attempted to show
This description includes a list of the twen- that Felten’s program causes performance
ty-one methods of initiating Web browsing degradations in Windows 98, as well as
in Windows 98 that were known to Felten malfunctions in certain Windows 98 appli-
when he developed his program. When cations and the Windows Update feature
the revised version of Felten’s program is of Windows 98. Those demonstrations,
run on a computer with Windows 98 and however, were performed on a PC on
no other software installed, Web browsing which several third-party software pro-
is not initiated in response to any of these grams had been installed in addition to
methods. Windows 98, and which had been connect-
179. James Allchin tried to show at ed to the Internet via a dial-up connection.
trial, by way of a videotaped demonstra- Felten’s program was not intended to be
tion, that the functionality of Internet Ex- definitive and had not been verified under
plorer could still be enabled, even after the preconditions other than those for which it
prototype removal program had been run, was designed. Thus, there was no reason
by manually adding a new entry to the to expect that his program would operate
Windows Registry database. During Fel- flawlessly during Allchin’s demonstrations,
ten’s rebuttal testimony, one of Microsoft’s and nothing can be inferred from any fail-
attorneys directed Felten to perform a ure to do so.
second demonstration intended to show 181. In fact, the revised version of Fel-
that the functionality of Internet Explorer ten’s program does not degrade the per-
could still be enabled, even after the proto- formance or stability of Windows 98 in any
type removal program had been run, by way. To the contrary, according to sever-
hitting the ‘‘Control’’ and ‘‘N’’ keys simul- al standard programs used by Microsoft to
taneously after running the Windows Up- measure system performance, the removal
date feature. Neither of these methods of of Internet Explorer by the prototype pro-
initiating Web browsing was among the gram slightly improves the overall speed
twenty-one documented methods known to of Windows 98.
Felten when he developed his program.
Furthermore, the latter demonstration was 182. Given Microsoft’s special knowl-
hardly a reliable test of Felten’s program, edge of its own products, the company is
because the Encompass shell browser and readily able to produce an improved imple-
other applications had been installed on mentation of the concept illustrated by
the Windows 98 PC system used in the Felten’s prototype removal program. In
demonstration. At most, the two demon- particular, Microsoft can easily identify
strations indicate that Felten did not know browsing-specific code that could be re-
all of the methods of initiating Web brows- moved from shared files, thereby reducing
ing in Windows 98 when he developed his the operating system’s memory and hard
program, and that he did not include steps disk requirements and obtaining perfor-
in his program to prevent the invocation of mance improvements even beyond those
Internet Explorer’s functionality in re- achieved by Felten.
sponse to methods of which he was un- 183. Microsoft contends that Felten’s
aware. Microsoft has special knowledge of prototype removal program does not re-
its own products, and it alone chooses move Internet Explorer’s Web browsing
functionalities, but rather ‘‘hides’’ those from being executed altogether. Since
functionalities from the perspective of the code that is not to be executed does not
user. In support of that contention, Mi- need to be loaded into memory, Felten’s
crosoft points out that Felten’s program program is able to reduce the memory
removes only a small fraction of the code allocated to Windows 98 by approximately
in Windows 98, so that the hard drive still twenty percent.
contains almost all of the code that had 186. As an abstract and general propo-
been executed in the course of providing sition, many—if not most—consumers can
Internet Explorer’s Web browsing func- be said to benefit from Microsoft’s provi-
tionalities. Some of that code is left on the sion of Web browsing functionality with its
hard drive because it also supports Win- Windows operating system at no additional
dows 98’s operating system functionalities. charge. No consumer benefit can be as-
Microsoft did not offer any analytical ba- cribed, however, to Microsoft’s refusal to
sis, however, for distinguishing this shar- offer a version of Windows 95 or Windows
ing of code from the code sharing that 98 without Internet Explorer, or to Micro-
exists between all Windows applications soft’s refusal to provide a method for unin-
and the operating system functionalities in stalling Internet Explorer from Windows
Windows 98. 98. In particular, Microsoft’s decision to
184. While Microsoft’s observation sug- force users to take the browser in order to
gests that Felten’s program does not get the non-Web browsing features of
greatly reduce Windows 98’s ‘‘footprint’’ on Windows 98, including support for new
the hard disk, that point is irrelevant to Internet protocols and data formats is, as
the question of whether Felten’s program Allchin put it, simply a choice about ‘‘dis-
removes Internet Explorer’s functionalities tribution.’’
from Windows 98. This is because the 187. As Felten’s program demonstrat-
functionalities of a software product are ed, it is feasible for Microsoft to supply a
not provided by the mere presence of code version of Windows 98 that does not pro-
on a computer’s hard drive. For software vide the ability to browse the Web, to
code to provide any functionalities at all which users could add a browser of their
the code must be loaded into the comput- choice. Microsoft could then readily offer
er’s dynamic memory and executed. To ‘‘integrated’’ Internet Explorer Web
uninstall a software program or to remove browsing functionality as well, either as an
a set of functionalities from a software option that could be selected by the end
program, it is not necessary to delete all of user or the OEM during the Windows 98
the software code that is executed in the setup procedure, or as a ‘‘service pack
course of providing those functionalities. upgrade.’’
It is sufficient to delete and/or modify 188. Unlike a ‘‘pocket part’’ supple-
enough of the program so as to prevent ment to a book, a software upgrade need
the code in question from being executed. not consist only of new material. A ser-
185. This deletion and modification is vice pack upgrade may install a combina-
precisely what Felten’s program does to tion of new software files and/or replace-
Windows 98. After Felten’s program has ments for existing software files. The use
been run, the software code that formerly of such service packs to distribute new
had been executed in the course of provid- functionality is a standard feature of Win-
ing Web browsing functionalities is no dows applications generally. Microsoft
longer executed. Web browsing function- could offer ‘‘integrated’’ Internet Explorer
alities are not merely ‘‘hidden’’ from the Web browsing functionality as a service
user. To the contrary, Felten’s program pack upgrade that would locate the rele-
deletes and modifies enough of Windows vant software and replace it with the cur-
98 so as to prevent the necessary code rent Windows 98 software. In this way,
any consumer who wished to do so could tures similar to those that Microsoft adver-
easily acquire all of the functionality, fea- tises in Windows 98 while still permitting
tures, and performance of the current ver- the removal of the browser from the oper-
sion of Windows 98 by obtaining the brow- ating system. If consumers genuinely
serless operating system package and the prefer a version of Windows bundled with
service pack upgrade and then installing Internet Explorer, they do not have to be
them together. forced to take it; they can choose it in the
189. Microsoft contends that a service market.
pack must necessarily be deemed part of 192. Windows 98 offers some benefits
the operating system when it replaces and unrelated to browsing that a consumer
adds a large number of core operating cannot obtain by combining Internet Ex-
system files in the process of upgrading plorer with Windows 95. For example,
the operating system to a higher level of Windows 98 includes support for new
functionality. This contention is false. hardware technologies and data formats
Both Microsoft Word, an application pro- that consumers may desire. Microsoft has
gram, and Norton Utilities, a suite of utili- forced Windows users who do not want
ty and application programs, replace and Internet Explorer to nevertheless license,
add files to Windows without thereby be- install, and use Internet Explorer in order
coming part of the operating system. to obtain these unrelated benefits. Al-
190. Microsoft’s actual use of a service though some consumers might be inclined
pack upgrade to offer integrated Internet to go without Windows 98’s new non-
Explorer Web browsing functionality (In- browsing features in order to avoid Inter-
ternet Explorer 4.0) separately from the net Explorer, OEMs are unlikely to facili-
Windows 95 operating system illustrates tate that choice, because they want con-
the feasibility of this approach. In fact, it sumers to use an operating system that
produces results remarkably similar to supports the new hardware technologies
those that could be achieved by offering they seek to sell.
integrated Internet Explorer Web brows- 193. Microsoft’s argument that bind-
ing functionality as a separate service pack ing the browser to the operating system
upgrade to a browserless Windows 98 op- is reasonably necessary to preserve the
erating system. When installed together ‘‘integrity’’ of the Windows platform is
by the end user, the combined software likewise specious. First, concern with
provides nearly all of the features that the integrity of the platform cannot ex-
Microsoft attributes to the ‘‘integrated’’ plain Microsoft’s original decision to bind
design of Windows 98. Of the missing Internet Explorer to Windows 95, be-
features, all but WebTV for Windows can cause Internet Explorer 1.0 and 2.0 did
be obtained by thereafter installing a sepa- not contain APIs. Second, concern with
rately obtained copy of Internet Explorer the integrity of the platform cannot ex-
5.0. Microsoft has presented no evidence plain Microsoft’s refusal to offer OEMs
that the WebTV functionality could not the option of uninstalling Internet Ex-
easily be included in the stand-alone ver- plorer from Windows 95 and Windows 98
sion of Internet Explorer 5.0. because APIs, like all other shared files,
191. Therefore, Microsoft could offer are left on the system when Internet Ex-
consumers all the benefits of the current plorer is uninstalled. Third, Microsoft’s
Windows 98 package by distributing the contention that offering OEMs the choice
products separately and allowing OEMs or of whether or not to install certain brow-
consumers themselves to combine the ser-related APIs would fragment the
products if they wished. In fact, operating Windows platform is unpersuasive be-
system vendors other than Microsoft cur- cause OEMs operate in a competitive
rently succeed in offering ‘‘integrated’’ fea- market and thus have ample incentive to
include APIs (including non-Microsoft and consumer choices regarding the use of
APIs) required by the applications that Web browsers. These product evaluations
their customers demand. Fourth, even if generally compare Internet Explorer with
there were some potential benefit associ- Navigator by identifying the beneficial and
ated with the forced licensing of a single detrimental features of each. Because the
set of APIs to all OEMs, such justifica- evaluations disagree as to which features
tion could not apply in this case, because are most important, there is no consensus
Microsoft itself precipitates fragmentation as to which is the best browser overall.
of its platform by continually updating When read together, the evaluations also
various portions of the Windows installed do not identify any existing Web browser
base with new APIs. ISVs have adapted as being ‘‘best of breed’’ in the sense of
to this reality by redistributing needed being at least as good as all others in all
APIs with their applications in order to significant respects. Moreover, there is
ensure that the necessary APIs are pres- nothing in the evaluations, nor anywhere
ent when the programs are launched. To else in the evidence, to suggest that fur-
the same end, Microsoft makes the APIs ther innovation efforts by vendors other
it ships with Internet Explorer available than Microsoft in the field of Web browser
to third-party developers for distribution technology are no longer necessary or de-
with their own products. Moreover, Mi- sirable. To the contrary, many of the
crosoft itself bundles APIs—including product reviews suggest further innova-
those distributed with Internet Explor- tions in both Microsoft and non-Microsoft
er—with a number of the applications Web browsers that would benefit consum-
that it distributes separately from Win- ers.
dows. 196. Despite differences in emphasis,
194. Microsoft also contends that by the product evaluations do generally con-
providing ‘‘best of breed’’ implementations cur as to which browser features are bene-
of various functionalities, a vendor of a ficial, which browser features are detri-
popular operating system can benefit con- mental, and why. Thus, the evaluations
sumers and improve the efficiency of the provide extensive detailed information
software market generally, because the re- about consumer preferences that can be
sulting standardization allows ISVs to con- used to predict likely directions in the
centrate their efforts on developing com- evolution of Web browser technology.
plementary technologies for the industry 197. First, the evaluations suggest
leaders. Microsoft’s refusal to offer a ver- that, although most Web publishers charge
sion of Windows 98 in which its Web brow- nothing for access to their sites, consumers
ser is either absent or removable, however, recognize that there are search and com-
had no such purpose. Rather, it had the munication costs associated with Web
purpose and effect of quashing innovation transactions. Accordingly, consumers pre-
that exhibited the potential to facilitate the fer, and benefit from, innovations in Web
emergence of competition in the market browser technology that reduce these
for Intel-compatible PC operating systems. costs. Second, consumers recognize that
195. Furthermore, there is only equivo- the Web contains a vast and growing
cal support for the proposition that Micro- range of digital information resources,
soft will ultimately prove to be the source many of which contain viruses that are
of a ‘‘best of breed’’ Web browser. In fact, capable of causing devastating and irre-
there is considerable evidence to the con- versible harm to their security and privacy
trary. Both Microsoft and the plaintiffs interests. Accordingly, consumers prefer,
have used product evaluations to support and benefit from, innovations in Web
their claims about the relationship between browser technology that help them identify
innovations in Web browser technology and avoid harmful Web resources. Third,
consumers recognize that they frequently the form of static multimedia files or
lack adequate information to enable them streaming media. Many newspapers,
to assess accurately the costs, risks, and magazines, books, journals, public docu-
benefits of performing a particular Web ments, and software programs are also
transaction. Accordingly, consumers pre- published on the Web. Multimedia files on
fer, and benefit from, innovations in Web the Web have emerged as viable substi-
browser technology that help them assess tutes for many pre-recorded audio and vid-
these costs, risks, and benefits prior to eo entertainment products. Web-based E-
performing the transaction. mail, discussion lists, news groups, ‘‘chat
198. The reduction of search and com- rooms,’’ paging, instant messaging, and te-
munication costs, the identification and lephony are all in common use. In addi-
avoidance of harmful Web resources, and tion to subsuming all other digital media,
the provision of more accurate information the Web also offers popular interactive and
as to the costs, risks, and benefits of per- collaborative modes of communication that
forming Web transactions are just three of are not available through other media.
the many possible areas of innovation in
201. The use of Web browsers to con-
the field of Web browser technology. Far
duct Web transactions has grown at pace
from demonstrating that Internet Explor-
with the growth of the Web, reflecting the
er is currently a ‘‘best of breed’’ Web
immense value that subsists in the digital
browser, the evidence reveals Microsoft’s
information resources that have become
awareness of the need for continuous im-
available on the Web. Consumer demand
provement of its products. For example,
for software functionality that facilitates
Microsoft frequently releases ‘‘patches’’ to
Web transactions, and the response by
address security and privacy vulnerabili-
browser vendors to that demand, creates a
ties in Internet Explorer as they are dis-
market for Web browsing functionality.
covered. In sum, there is no indication
Although Web browsers are now generally
that Microsoft is destined to provide a
not licensed at a positive price, all Web
‘‘best of breed’’ Web browser that makes
transactions impose significant costs on
continuing, competitively driven innova-
consumers, and all browser vendors, in-
tions unproductive.
cluding Microsoft, have significant econom-
iv. The Market for Web Browsing ic interests in maximizing usage of the
Functionality browsing functionality they control.
199. Since the World Wide Web was
b. Preventing OEMs from Removing
introduced to the public in 1991, the re-
the Ready Means of Accessing In-
sources available on the Web have multi-
plied at a near-exponential rate. The In- ternet Explorer and from Promot-
ternet is becoming a true mass medium. ing Navigator in the Boot Sequence
Every day Web resources are published, 202. Since the release of Internet Ex-
combined, modified, moved, and deleted. plorer 1.0 in July 1995, Microsoft has dis-
Millions of individuals and organizations tributed every version of Windows with
have published Web sites, and Web site Internet Explorer included. Consequent-
addresses are pervasive in advertising, ly, no OEM has ever (with the exception of
promotion, and corporate identification. a few months in late 1997) been able to
200. The economics of the Internet, license a copy of Windows 95 or Windows
along with the flexible structure of Web 98 that has not come with Internet Explor-
pages, have made the Web the leading er. Refusing to offer OEMs a browserless
trajectory for the ongoing convergence of (and appropriately discounted) version of
mass communications media. Many televi- Windows forces OEMs to take (and pay
sion and radio stations make some or all of for) Internet Explorer, but it does not
their transmissions available on the Web in prevent a determined OEM from never-
theless offering its consumers a different grams that promoted third-party software
Web browser. Even Microsoft’s additional to the Windows ‘‘boot’’ sequence. These
refusal to allow OEMs to uninstall (without inhibitions soured Microsoft’s relations
completely removing) Internet Explorer with OEMs and stymied innovation that
from Windows does not completely fore- might have made Windows PC systems
close a resourceful OEM from offering more satisfying to users. Microsoft would
consumers another browser. For exam- not have paid this price had it not been
ple, an OEM with sufficient technical ex- convinced that its actions were necessary
pertise (which all the larger OEMs cer- to ostracize Navigator from the vital OEM
tainly possess) could offer its customers a distribution channel.
choice of browsers while still minimizing
user confusion if the OEM were left free to 204. Although Microsoft’s original Win-
configure its systems to present this choice dows 95 licenses withheld from OEMs per-
the first time a user turned on a new PC mission to implement any modifications to
system. If the user chose Navigator, the the Windows product not expressly autho-
system would automatically remove the rized by Microsoft’s ‘‘OEM Pre–Installa-
most prominent means of accessing Inter- tion Kit,’’ or ‘‘OPK,’’ it had always been
net Explorer from Windows (without actu- Microsoft’s practice to grant certain OEMs
ally uninstalling, i.e., removing all means of requesting it some latitude to make modifi-
accessing, Internet Explorer) before the cations not specified in the OPK. But when
desktop screen appeared for the first time. OEMs began, in the summer of 1995, to
203. If OEMs removed the most visible request permission to remove the Internet
means of invoking Internet Explorer, and Explorer icon from the Windows desktop
pre-installed Navigator with facile methods prior to shipping their PCs, Microsoft con-
of access, Microsoft’s purpose in forcing sistently and steadfastly refused. As
OEMs to take Internet Explorer—captur- Compaq learned in the first half of 1996,
ing browser usage share from Netscape— Microsoft was prepared to enforce this
would be subverted. The same would be prohibition against even its closest OEM
true if OEMs simply configured their ma- allies.
chines to promote Navigator before Win-
dows had a chance to promote Internet 205. In August 1995, Compaq entered
Explorer. Decision-makers at Microsoft into a ‘‘Promotion and Distribution Agree-
believed that as Internet Explorer caught ment’’ with AOL whereby Compaq agreed
up with Navigator in quality, OEMs would to ‘‘position AOL Services above all other
ultimately conclude that the costs of pre- Online Services within the user interface of
installing and promoting Navigator, and its Products.’’ An addendum to the agree-
removing easy access to Internet Explor- ment provided that Compaq would place
er, outweighed the benefits. Still, those an AOL icon—and no OLS icons not con-
decision-makers did not believe that Mi- trolled by AOL—on the desktop of its
crosoft could afford to wait for the several PCs. Pursuant to its obligations, Compaq
large OEMs that represented virtually all began in late 1995 or early 1996 to ship its
Windows PCs shipped to come to this de- Presario PCs with the MSN icon removed
sired conclusion on their own. Therefore, and the AOL icon added to the Windows
in order to bring the behavior of OEMs desktop. At the same time, Compaq re-
into line with its strategic goals quickly, moved the Internet Explorer icon from the
Microsoft threatened to terminate the desktop of its Presarios and replaced it
Windows license of any OEM that re- with a single icon representing both the
moved Microsoft’s chosen icons and pro- Spry ISP and the browser product that
gram entries from the Windows desktop or Spry bundled, i.e., Navigator. Compaq
the ‘‘Start’’ menu. It threatened similar added this icon in part because it recog-
punishment for OEMs that added pro- nized Navigator to be the most popular
browser product with its consumers; it OEM partner in order to enforce its prohi-
removed the Internet Explorer icon be- bition against removing Microsoft’s Inter-
cause it did not want its PCs desktops to net-related icons from the Windows desk-
confuse novice users with a clutter of In- top.
ternet-related icons. 209. If the only prohibition had been
206. When Microsoft learned of Com- against removing Microsoft icons and pro-
paq’s plans for the Presario, it informed gram entries, OEMs partial to Navigator
Compaq that it considered the removal of still would have been able to recruit users
the MSN and Internet Explorer icons to to Navigator by configuring their PCs to
be a violation of the OPK process by which promote it before the Windows desktop
Compaq had previously agreed to abide. first presented itself. This is true because
For its part, AOL informed Compaq that the average user, having chosen a browser
it viewed the addition of an icon for Spry product, is indisposed to undergo the trou-
as a violation of their 1995 agreement. ble of switching to a different one. With
AOL did not object to the presence of a the release of Windows 95, some of the
Navigator icon; what concerned AOL was high-volume OEMs began to customize the
the fact that clicking on this icon brought Windows boot sequence so that, the first
the user to the Spry ISP. Despite the time users turned on their new PCs, cer-
protests from Microsoft and AOL, Compaq tain OEM-designed tutorials and registra-
refused to reconfigure the Presario desk- tion programs, as well as ‘‘splash’’ screens
top. Finally, after months of unsuccessful that simply displayed the OEM’s brand,
importunity, Microsoft sent Compaq a let- would run before the users were presented
ter on May 31, 1996, stating its intention to with the Windows desktop.
terminate Compaq’s license for Windows
210. Promoting non-Microsoft software
95 if Compaq did not restore the MSN and
and services was not the only, or even the
Internet Explorer icons to their original
primary, purpose of the OEM introductory
positions. Compaq’s executives opined
programs. The primary purpose, rather,
that their firm could not continue in busi-
was to make the experience of setting up
ness for long without a license for Win-
and learning to use a new PC system
dows, so in June Compaq restored the
easier and less confusing for users, espe-
MSN and IE icons to the Presario desk-
cially novices. By doing so, the OEMs
top.
believed, they would increase the value of
207. Microsoft did not further condi- their systems and minimize both product
tion its withdrawal of the termination no- returns and costly support calls. Since
tice on the removal of the AOL and Navi- just three calls from a consumer can erase
gator icons; AOL, however, did protest the entire profit that an OEM earned sell-
both the continued presence of a Spry icon ing a PC system to that consumer, OEMs
and the reappearance of the MSN icon. have an acute interest in making their
After AOL sent Compaq a formal notice of systems self-explanatory and simple to
its intent to terminate the Promotion and use. A secondary purpose motivating
Distribution Agreement in September OEMs to insert programs into the boot
1996, Compaq removed the Spry/Naviga- sequence was to differentiate their prod-
tor icon. For reasons discussed below, ucts from those of their competitors. Fi-
Compaq did not then replace the nally, OEMs perceived an opportunity to
Spry/Navigator icon with an icon solely for collect bounties from IAPs and ISVs in
Navigator. exchange for the promotion of their ser-
208. In its confrontation with Compaq, vices and software in the boot sequence.
Microsoft demonstrated that it was pre- Thus, among the programs that many
pared to go to the brink of losing all OEMs inserted into the boot sequence
Windows sales through its highest-volume were Internet sign-up procedures that en-
couraged users to choose from a list of 213. In an effort to thwart the practice
IAPs assembled by the OEM. In many of OEM customization, Microsoft began, in
cases, a consumer signing up for an IAP the spring of 1996, to force OEMs to ac-
through an OEM program would automati- cept a series of restrictions on their ability
cally become a user of whichever browser to reconfigure the Windows 95 desktop
that IAP bundled with its proprietary soft- and boot sequence. There were five such
ware. In other cases, the IAP would pres- restrictions, which were manifested either
ent the user with a choice of browsers in as amendments to existing Windows 95
the course of collecting from the user the licenses or as terms in new Windows 98
information necessary to start a subscrip- licenses. First, Microsoft formalized the
tion. prohibition against removing any icons,
211. In addition to tutorials, sign-up folders, or ‘‘Start’’ menu entries that Mi-
programs, and splash screens, a few large crosoft itself had placed on the Windows
OEMs developed programs that ran auto- desktop. Second, Microsoft prohibited
matically at the conclusion of a new PC OEMs from modifying the initial Windows
system’s first boot sequence. These pro- boot sequence. Third, Microsoft prohibit-
grams replaced the Windows desktop ei- ed OEMs from installing programs, includ-
ther with a user interface designed by the ing alternatives to the Windows desktop
OEM or with Navigator’s user interface. user interface, which would launch auto-
The OEMs that implemented automatical- matically upon completion of the initial
ly loading alternative user interfaces did so Windows boot sequence. Fourth, Micro-
out of the belief that many users, particu- soft prohibited OEMs from adding icons or
larly novice ones, would find the alternate folders to the Windows desktop that were
interfaces less complicated and confusing not similar in size and shape to icons sup-
than the Windows desktop. plied by Microsoft. Finally, when Micro-
soft later released the Active Desktop as
212. When Gates became aware of
part of Internet Explorer 4.0, it added the
what the OEMs were doing, he expressed
restriction that OEMs were not to use that
concern to Kempin, the Microsoft execu-
feature to display third-party brands.
tive in charge of OEM sales. On January
6, 1996, Gates wrote to Kempin: ‘‘Winning 214. The several OEMs that in the ag-
Internet browser share is a very very im- gregate represented over ninety percent of
portant goal for us. Apparently a lot of Intel-compatible PC sales believed that the
OEMs are bundling non-Microsoft brow- new restrictions would make their PC sys-
sers and coming up with offerings together tems more difficult and more confusing to
with Internet Service providers that get use, and thus less acceptable to consumers.
displayed on their machines in a FAR They also anticipated that the restrictions
more prominent way than MSN or our would increase product returns and sup-
Internet browser.’’ Less than three weeks port costs and generally lower the value of
later, Kempin delivered his semi-annual their machines. Those OEMs that had
report on OEM sales to his superiors. In already spent millions of dollars develop-
the report, he identified ‘‘Control over ing and implementing tutorial and regis-
start-up screens, MSN and IE placement’’ tration programs and/or automatically-
as one interest that Microsoft had neglect- loading graphical interfaces in the Win-
ed over the previous six months. The dows boot sequence lamented that their
ongoing imbroglio with Compaq was prom- investment would, as a result of Micro-
inent in Kempin’s thinking, but he also soft’s policy, be largely wasted. Gateway,
recognized that establishing control over Hewlett–Packard, and IBM communicated
the boot process was necessary to ensure their opposition forcefully and urged Mi-
preferential positioning for MSN and In- crosoft to lift the restrictions. Emblemat-
ternet Explorer. ic of the reaction among large OEMs was
a letter that the manager of research and cost of technical support of our custom-
development at Hewlett–Packard sent to ers, including the 33% of calls we get
Microsoft in March 1997. He wrote: related to the lack of quality or confu-
Microsoft’s mandated removal of all sion generated by your product. And
OEM boot-sequence and auto-start pro- finally we are responsible for our suc-
grams for OEM licensed systems has cess or failure in the retail PC market.
resulted in significant and costly prob- We must have more ability to decide
lems for the HP–Pavilion line of retail how our system is presented to our end
PC’s. users.
Our data (as of 3/10/97) shows a 10%
If we had a choice of another supplier,
increase in W[indows]95 calls as a % of
based on your actions in this area, I
our total customer support callsTTTT
assure you [that you] would not be our
Our registration rate has also dropped supplier of choice.
from the mid–80% range to the low 60%
I strongly urge you to have your execu-
range.
tives review these decisions and to
There is also subjective data from sever-
change this unacceptable policy.
al channel partners that our system re-
turn rate has increased from the lowest 215. Even in the face of such strident
of any OEM (even lower than Apple) to opposition from its OEM customers, Mi-
a level comparable to the other Micro- crosoft refused to relent on the bulk of its
soft OEM PC vendors. This is a major restrictions. It did, however, grant Hew-
concern in that we are taking a step lett–Packard and other OEMs discounts
backward in meeting customer satisfac- off the royalty price of Windows as com-
tion needs. pensation for the work required to bring
These three pieces of data confirm that their respective alternative user interfaces
we have been damaged by the edicts into compliance with Microsoft’s require-
that [ ] Microsoft issued last fall. ments. Despite the high costs that Micro-
From the consumer perspective, we are soft’s demands imposed on them, the
hurting our industry and our customers. OEMs obeyed the restrictions because
PC’s can be frightening and quirky they perceived no alternative to licensing
pieces of technology into which they in- Windows for pre-installation on their PCs.
vest a large sum of their money. It is Still, the restrictions lowered the value
vitally important that the PC suppliers that OEMs attached to Windows by the
dramatically improve the consumer buy- amount of the costs that the restrictions
ing experience, out of box experience as imposed on them. Furthermore, Micro-
well as the longer term product usability soft’s intransigence damaged the goodwill
and reliability. The channel feedback as between it and several of the highest-vol-
well as our own data shows that we are ume OEMs.
going in the wrong direction. This 216. Microsoft was willing to sacrifice
causes consumer dissatisfaction in com- some goodwill and some of the value that
plex telephone support process, needless OEMs attached to Windows in order to
in-home repair visits and ultimately in exclude Netscape from the crucial OEM
product returns. Many times the cause distribution channel. Microsoft’s restric-
is user misunderstanding of a product tions succeeded in raising the costs to
that presents too much complexity to OEMs of pre-installing and promoting
the common userTTTT Navigator. These increased costs, in turn,
Our Customers hold HP accountable for were in some cases significant enough to
their dissatisfaction with our products. deter OEMs from pre-installing Navigator
We bear [ ] the cost of returns of our altogether. In other cases, as is discussed
products. We are responsible for the in the next section, OEMs decided not to
pre-install Navigator after Microsoft user could click to invoke an alternate user
brought still more pressure to bear. interface. Plus, once invoked, the inter-
217. Microsoft’s license agreements face could be configured to load automati-
have never prohibited OEMs from pre- cally the next time the PC was turned on.
installing programs, including Navigator, This mode of presentation proved to be
on their PCs and placing icons and entries much less effective than the one Microsoft
for those programs on the Windows desk- foreclosed, however, for studies showed
top and in the ‘‘Start’’ menu. The icons that users tended not to trouble with se-
and entries that Microsoft itself places on lecting an alternate user interface; they
the desktop and in the ‘‘Start’’ menu have were content to use the interface that load-
always left room for OEMs to insert more ed automatically the first time they turned
icons and program entries of their own on their PCs. Furthermore, while Micro-
choosing. In fact, Microsoft leaves enough soft’s restrictions never extended to the
space for an OEM to add more than forty interval between the time when the PC
icons to the Windows desktop. Still, the was turned on and the time when Windows
availability of space for added icons did not began loading from the hard drive into
make including a Navigator icon inexpen- RAM, developing anything more compli-
sive for OEMs. Given the unavoidable cated than a simple splash screen to run in
presence of the Internet Explorer and that period would have involved, at a mini-
MSN icons, adding a Navigator icon would mum, the writing of a DOS utility and, at
increase the amount of Internet-related the maximum, the pre-installation of a sec-
clutter on the desktop. This would lead to ond operating system. Such measures
confusion among novice users, which would were simply not worth the cost. Finally,
in turn increase the incidence of support although the Windows 98 license does not
calls and product returns. Microsoft made prohibit an OEM from including on the
this very point clear to OEMs in its at- keyboard of its PCs a button that takes
tempts to persuade them not to pre-install users directly to an OEM-maintained site
Navigator on their PCs. Furthermore, containing promotion for Navigator, such a
OEMs recognized that including multiple configuration is extremely costly for an
Navigator icons in an attempt to draw OEM to implement, and it represents a
users’ attention away from Internet Ex- less effective form of promotion than auto-
plorer would only increase the amount of matically advertising Navigator in the ini-
clutter on the desktop, thus adding to user
tial boot process.
confusion. Although the Windows 98
OEM license does not forbid the OEM to 219. In the spring of 1998, Microsoft
set Navigator as the default browsing soft- began gradually to moderate certain of the
ware, doing so would fail to forestall user restrictions described above. The first
confusion since, as the Court found in the sign of relaxation came when Microsoft
previous section, Windows 98 launches In- permitted some fifty OEMs to include
ternet Explorer in certain situations even ISPs of their choice in Microsoft’s Internet
if Navigator is set as the default. Connection Wizard. Then, in late May
218. The restrictions on modifying the and early June 1998, Microsoft informed
Windows boot sequence, including the pro- seven of the highest-volume OEMs that it
hibition against automatically loading al- was granting them the privilege of insert-
ternate user interfaces, deprived OEMs of ing their own registration and Internet
the principal devices by which to lure sign-up programs into the initial Windows
users to Navigator over the high-profile 98 boot sequence. If the user selected an
presence of Internet Explorer in the Win- IAP using the OEM program, Microsoft’s
dows user interface. An OEM remained Internet Connection Wizard would not run
free to place an icon on the desktop that a in the boot sequence. Microsoft subse-
quently extended these same privileges to felt that the measures were necessary to
several other OEMs, upon their request. maximize Internet Explorer’s share of
220. It is important to note that Micro- browser usage at Navigator’s expense.
soft’s tractability emerged only after the 222. Microsoft asserts that it restricts
restrictions had been in place for over a the freedom of OEMs to remove icons,
year, and only after Microsoft had man- folders, or ‘‘Start’’ menu entries that Mi-
aged to secure favorable promotion for crosoft places on the Windows desktop in
Internet Explorer through the most im- order to ensure that consumers will enjoy
portant IAPs. Furthermore, while Micro- ready access to the features that Micro-
soft permitted the OEMs to include in soft’s advertising has led them to expect.
their registration and sign-up programs The Windows trademark would be blem-
promotions for their own products (includ- ished, Microsoft argues, if consumers could
ing OEM-branded shell browsers built not easily find the features that impelled
upon Internet Explorer) and for ISPs (but them to purchase a Windows-equipped PC.
only if and when those ISPs were selected At the same time that it has put forward
by consumers in the sign-up process), Mi- this justification, however, Microsoft has
crosoft continued to prohibit promotions permitted OEMs to de-activate Microsoft’s
for any other non-Microsoft products, in- Active Desktop and its associated ‘‘chan-
cluding Navigator. In a single exception, nels’’ prior to shipment. More significant
Microsoft granted Gateway’s request that is the fact that Microsoft’s license agree-
it be permitted to give consumers who ments require OEMs to bear product sup-
used Gateway’s sign-up process and select- port costs. So if a consumer has difficulty
ed Gateway.net as their ISP an opportuni- locating a feature that he wants to use, he
ty to choose Navigator as their browser. will call a customer service representative
Microsoft granted this permission orally, employed by the OEM that manufactured
and it did not extend similar privileges to his PC. Since only a few calls erase the
any other OEMs. profit earned from selling a PC system,
221. Microsoft asserts that the restric- OEMs are loathe to do anything that will
tions it places on the ability of OEMs to lead to consumer questions and com-
modify the Windows desktop and boot se- plaints. Therefore, if market research in-
quence are merely intended to prevent dicates that consumers want and expect to
OEMs from compromising the quality and see a certain icon on the Windows desktop,
consistency of Windows after the code OEMs will not remove it. Since OEMs
leaves Microsoft’s physical control, but be- share Microsoft’s interest in ensuring that
fore PC consumers first begin to experi- consumers can easily find the features
ence the product. In truth, however, the they want on their Windows PC systems,
OEM modifications that Microsoft prohib- Microsoft would not have prohibited
its would not compromise the quality or OEMs from removing icons, folders, or
consistency of Windows any more than the ‘‘Start’’ menu entries if its only concern
modifications that Microsoft currently per- had been consumer satisfaction. In fact,
mits. Furthermore, to the extent that cer- by forbidding OEMs to remove the most
tain OEM modifications did threaten to obvious means of invoking Internet Ex-
impair the quality and consistency of Win- plorer, Microsoft diminished the value of
dows, Microsoft’s response has been more Windows PC systems to those corporate
restrictive than necessary to abate the customers, for example, who did not intend
threat. Microsoft would not have imposed for their employees to browse the Web and
prohibitions that burdened OEMs and con- did not want a browser taking up hard-
sumers with substantial costs, lowered the ware resources. Incidentally, there is no
value of Windows, and harmed the compa- merit in the hypothesis that OEMs might
ny’s relations with major OEMs had it not cause problems in the functioning of the
rest of Windows by removing Internet Ex- pect to see the Windows desktop when
plorer’s desktop icon and program entry, their PC systems finish booting for the
because Microsoft still allows users to do first time. If consumers instead see a
exactly that. different user interface, they will be con-
223. According to Microsoft, its restric- fused and disappointed. What is more,
tions on the ability of OEMs to insert Microsoft asserts, OEM shells have tended
programs into the initial Windows boot to be of lower quality than Windows. One
sequence are meant to ensure that all Win- OEM’s version allegedly even disabled the
dows users experience the product the way ability of a Windows user to invoke func-
Microsoft intended it the first time they tionality by clicking the right button of his
turn on their PC systems; after all, there mouse.
would be little incentive to develop a high- 225. The alternate shells that OEMs
quality operating-system product if OEMs have developed may or may not be of
were free to alter it for the worse before lower quality than Windows. One thing is
handing it over to consumers. This argu- clear, however: If an OEM develops a
ment might be availing were it not for the shell that users do not like as much as
fact that Microsoft currently allows several Windows, and if the OEM causes that shell
of the largest-volume OEMs to make ma- to load as the default user interface the
jor modifications to the initial Windows 98 first time its PCs are turned on, consumer
boot sequence. Microsoft permits each of wrath will fall first upon the OEM, and
these OEMs to configure its own splash demand for that OEM’s PC systems will
screens, tutorials, registration wizards, In- decline commensurately with the resulting
ternet sign-up wizards, and utilities so that user dissatisfaction. The market for Intel-
they run automatically when the consumer compatible PCs is, by all accounts, a com-
first turns on a new PC system. Either petitive one. Consequently, any OEM
Microsoft stopped caring about the consis- that tries to force an unwanted, low-quality
tency of the Windows experience in 1998, shell on consumers will do so at its own
when it tempered its restrictions on modi- peril. Had Microsoft’s sole concern been
fications to the boot sequence, or preserv- consumer satisfaction, it would have relied
ing consistency was never Microsoft’s true more on the power of the market—and
motivation for imposing those restrictions less on its own market power—to prevent
in the first place. With all the variety that OEMs from making modifications that
Microsoft now tolerates in the boot se- lead to consumer disappointment.
quence, including the promotion of OEM- 226. At times, Microsoft has argued
branded browser shells, it is difficult to that the limitations it imposes on the abili-
comprehend how allowing OEMs to pro- ty of OEMs to modify Windows originate
mote Navigator in their tutorials and In- in a desire to prevent its platform from
ternet sign-up programs would further becoming fragmented, like UNIX. Micro-
compromise Microsoft’s purported interest soft believes that ISVs benefit from the
in consistency. fact that Windows presents the same plat-
224. Although Microsoft has tolerated form for applications development, irre-
a variety of OEM modifications to the spective of the underlying hardware. Cer-
Windows boot sequence, it has never ac- tainly, Microsoft has a legitimate interest
quiesced to an alternate user interface that in ensuring that OEMs do not take Win-
automatically obscures the Windows desk- dows under license, alter its API set, and
top after the PC system has finished boot- then ship the altered version. This fact
ing for the first time. In demanding the does not add credibility to Microsoft’s stat-
removal of such automatically loading user ed justification, though, for two reasons.
interfaces, Microsoft has postulated that First, Microsoft itself creates some degree
consumers who purchase Windows PCs ex- of instability in its supposedly uniform
platform by releasing updates to Internet described above. Notwithstanding the for-

Explorer more frequently than it releases mal inclusion of these restrictions in the
new versions of Windows. As things license agreements, the removal of the In-
stand, ISVs find it necessary to redistrib- ternet Explorer icon and the promotion of
ute Microsoft’s Internet-related APIs with Navigator in the boot sequence would not
their applications because of nonuniformity have compromised Microsoft’s creative ex-
that Microsoft has created in its own in- pression or interfered with its ability to
stalled base. More important, however, is reap the legitimate value of its ingenuity
the fact that none of the modifications that and investment in developing Windows.
OEMs are known to have proposed mak- More generally, the contemporaneous Mi-
ing would have removed or altered any crosoft documents reflect concern with the
Windows APIs. promotion of Navigator rather than the
227. To the extent Microsoft is appre- infringement of a copyright. Also notable
hensive that OEMs might, absent restric- is the fact that Microsoft did not adjust its
tions, change the set of APIs exposed by OEM pricing guidelines when it lifted cer-
the software on their PCs, the concern is tain of the restrictions in the spring of
not that OEMs would modify the Windows 1998.
API set. Rather, the worry is that OEMs 229. Finally, it is significant that, while
would pre-install, on top of Windows, other all vendors of PC operating systems un-
software exposing additional APIs not con- doubtedly share Microsoft’s stated interest
trolled by Microsoft. In the case of alter- in maximizing consumer satisfaction, the
nate user interfaces, Microsoft is fearful prohibitions that Microsoft imposes on
that, if these programs loaded automatical- OEMs are considerably more restrictive
ly the first time users turned on their PCs, than those imposed by other operating
the programs would attract so much usage system vendors. For example, Apple al-
that developers would be encouraged to lows its retailers to remove applications
take advantage of any APIs that the pro- that Apple has pre-installed and to recon-
grams exposed. Indeed, one user inter- figure the Mac OS desktop. For its part,
face in particular that OEMs could config- IBM allows its OEM licensees to override
ure to load automatically and obscure the the entire OS/2 desktop in favor of a cus-
Windows desktop—Navigator—exposes a tomized shell or to set an application to
substantial number of APIs. Therefore, start automatically the first time the PC is
Microsoft’s real concern has not been that turned on. The reason is that these firms
OEM modifications would fragment the do not share Microsoft’s interest in pro-
Windows platform to the detriment of de- tecting the applications barrier to entry.
velopers and consumers. What has moti- c. Pressuring OEMs to Promote Inter-
vated Microsoft’s prohibition against auto- net Explorer and to not Pre–In-
matically loading shells is rather the stall or Promote Navigator
fear—once again—that OEMs would pre- 230. Microsoft’s restrictions on modifi-
install and give prominent placement to cations to the boot sequence and the con-
middleware that could weaken the applica- figuration of the Windows desktop ensured
tions barrier to entry. that every Windows user would be pre-
228. Like most other software prod- sented with ready means of accessing In-
ucts, Windows 95 and Windows 98 are ternet Explorer. Although the restrictions
covered by copyright registrations. Since also raised the costs attendant to pre-
they are copyrighted, Microsoft distributes installing and promoting Navigator, senior
these products to OEMs pursuant to li- executives at Microsoft were not confident
cense agreements. By early 1998, Micro- that those higher costs alone would induce
soft had made these licenses conditional on all of the major OEMs to focus their pro-
OEMs’ compliance with the restrictions motional efforts on Internet Explorer to
the exclusion of Navigator. Therefore, 13, 1996, Compaq signed an addendum
Microsoft used incentives and threats in an extending the firms’ Frontline Partnership
effort to secure the cooperation of individ- to the realm of network-related products.
ual OEMs. Pursuant to the addendum, Compaq
231. First, Microsoft rewarded with agreed to ship Internet Explorer as the
valuable consideration those large-volume default browser product on all of its desk-
OEMs that took steps to promote Internet top and server systems, to adopt and pro-
Explorer. For example, Microsoft gave mote Internet Explorer internally, and to
reductions in the royalty price of Windows focus the majority of Compaq’s key net-
to certain OEMs, including Gateway, that work-oriented announcements and market-
set Internet Explorer as the default brow- ing activities on Microsoft’s technologies
ser on their PC systems. In 1997, Micro- and strategy. In September of the same
soft gave still further reductions to those year, Compaq agreed to offer Internet Ex-
OEMs that displayed Internet Explorer’s plorer as the preferred browser product
logo and links to Microsoft’s Internet Ex- for its Internet products and to use two or
plorer update page on their own home more of Microsoft’s hypertext markup lan-
pages. That same year, Microsoft agreed guage (‘‘HTML’’) extensions in the home
to give OEMs millions of dollars in co- page for each of those products. Then in
marketing funds, as well as costly in-kind February 1997, Compaq committed itself
assistance, in exchange for their carrying to promote Internet Explorer exclusively
out other promotional activities for Inter- for its PC products in exchange for Micro-
net Explorer. soft’s agreement to pay Compaq a bounty
232. Microsoft went beyond giving for each user that signed up for Internet
OEMs incentives to promote Internet Ex- access using a Compaq PC. Despite the
plorer. The company’s dealings with view of some within Compaq that the
Compaq in 1996 and 1997 demonstrate firm’s goal should be ‘‘to feature the brand
that Microsoft was willing to exchange leader Netscape,’’ Compaq elected not to
valuable consideration for an OEM’s com- resume the preinstallation of Navigator on
mitment to curtail its distribution and pro- its Presario PCs after it removed the joint
motion of Navigator. In early 1996, at Spry/Navigator icon. In fact, Compaq
around the same time that Compaq was stopped pre-installing Navigator on all but
removing the MSN and Internet Explorer very small percentage of its PCs.
icons and program entries from the Pre- 234. In return for Compaq’s capitula-
sario desktop, Compaq announced its in- tion and revival of its commitment to sup-
tention to work with Netscape for its inter- port Microsoft’s Internet strategy, Micro-
nal Internet needs and on Internet server soft has guaranteed Compaq that the
initiatives. In response, Microsoft insisted prices it pays for Windows will continue to
that Compaq support Microsoft’s Internet be significantly lower than the prices paid
initiatives throughout its business. To by other OEMs. Specifically, the operating
make its displeasure felt, Microsoft initi- system licenses signed by Compaq and
ated a series of cooperative ventures with Microsoft in March 1998 gave Compaq
some of Compaq’s competitors, including ‘‘[g]uaranteed better’’ pricing than any oth-
DEC and Hewlett–Packard. er OEM for Windows 95, Windows 98, and
233. When Compaq eventually agreed Windows NT Workstation (versions 4 and
to restore the MSN and Internet Explorer 5) until April 2000. Compaq’s license fee
icons and program entries to the Presario for Windows is so low that other OEMs
desktop, it did so because its senior execu- would still pay substantially more than
tives had decided that the firm needed to Compaq even if they qualified for all of the
do what was necessary to restore its spe- royalty reductions listed in Microsoft’s
cial relationship with Microsoft. On May Market Development Agreements
(‘‘MDAs’’). What is more, while Microsoft strate its ability to threaten recalcitrant
requires other OEMs to verify actual com- customers without losing their business.
pliance with particular milestones in order 237. Similarly, in early 1997, Microsoft
to receive Windows 98 royalty reductions, tried to convince the IBM PC Company to
Microsoft has secretly agreed to provide promote and distribute the upcoming re-
the full amount of those discounts to Com- lease of its new browser, Internet Explor-
paq regardless of whether it actually satis- er 4.0. At a meeting with IBM executives
fies the specified conditions. In addition in March 1997, Microsoft representatives
to a guaranteed most-favorable price on threatened that, if IBM did not pre-load
Windows, Compaq has enjoyed free inter- and promote Internet Explorer 4.0 to the
nal use of all Windows products for PCs exclusion of Navigator on its PCs, it would
since March 1998. suffer ‘‘MDA repercussions.’’ One of the
Microsoft representatives in attendance,
235. Microsoft’s relations with Compaq
Bengt Ackerlind, stated that in return for
beginning in late 1996 illustrate the bland-
IBM shipping its systems without any soft-
ishments that Microsoft is willing to ex-
ware that competed with Microsoft, IBM
tend to OEMs that ally with it to help it
would receive ‘‘soft dollars,’’ marketing as-
capture browser share. Microsoft’s rela- sistance, improved access to the source
tions with Gateway and the IBM PC Com- code of Windows 95 and Microsoft’s Back-
pany, by contrast, reveal the pressure that Office product, and the ability to self-certi-
Microsoft is willing to apply to OEMs that fy for Microsoft’s Windows Hardware
show reluctance to cooperate on this front. Quality Lab provisions. In a follow-up
236. In February 1997, a Microsoft ac- meeting three weeks later, Microsoft rep-
count representative told his counterpart resentatives again insisted that IBM dis-
at Gateway that Gateway’s use of Naviga- tribute and promote Internet Explorer ex-
tor on its own corporate network was a clusively and again offered soft dollars,
serious issue at Microsoft. He added that marketing assistance, and MDA reductions
Microsoft would not do any co-marketing in return. Later that day, in a smaller
and sales campaigns with Gateway if the meeting that Microsoft referred to as ‘‘se-
cret discussions,’’ Ackerlind stated Micro-
firm appeared to be anything but pro-
soft’s desire that IBM promote Internet
Microsoft. If Gateway would replace Nav-
Explorer 4.0 exclusively and warned that if
igator with Internet Explorer, Microsoft
IBM pre-installed Navigator on its PCs,
would compensate Gateway for its invest-
‘‘We have a problem.’’
ment in Netscape’s product. If Gateway
refused, Microsoft might be compelled to 238. The IBM PC Company refused to
audit Gateway’s internal use of Microsoft promote Internet Explorer 4.0 exclusively,
products. Gateway was separately told by and it has continued to pre-install Naviga-
Microsoft representatives that its decision tor on its PCs. The difference in the ways
to ship Navigator with its PCs could affect that Compaq and IBM responded to Mi-
its business relationship with Microsoft. crosoft’s Internet-related overtures in 1996
Despite the pressure from Microsoft, Gate- and 1997 contributed to the stark contrast
way refused to switch its internal use to in the treatment the two firms have since
Internet Explorer or to stop shipping Nav- received from Microsoft.
igator with its PCs. Although Microsoft did d. The Effect of Microsoft’s Actions
not implement its more specific threats, in the OEM Channel
Gateway has consistently paid higher 239. Microsoft has largely succeeded in
prices for Windows than its competitors. exiling Navigator from the crucial OEM
Microsoft’s actions not only corroborate distribution channel. Even though a few
the evidence of its interest in suppressing OEMs continue to offer Navigator on some
the usage of Navigator, they also demon- of their PCs, Microsoft has caused the
number of OEMs offering Navigator, and Microsoft achieved this feat by using a
the number of PCs on which they offer it, complementary set of tactics. First, it
to decline dramatically. Before 1996, Nav- forced OEMs to take Internet Explorer
igator enjoyed a substantial and growing with Windows and forbade them to remove
presence on the desktop of new PCs. Over or obscure it—restrictions which both en-
the next two years, however, Microsoft’s sured the prominent presence of Internet
actions forced the number of copies of Explorer on users’ PC systems and in-
Navigator distributed through the OEM creased the costs attendant to pre-install-
channel down to an exiguous fraction of ing and promoting Navigator. Second,
what it had been. By January 1998, Kem- Microsoft imposed additional technical re-
pin could report to his superiors at Micro- strictions to increase the cost of promoting
soft that, of the sixty OEM sub-channels Navigator even more. Third, Microsoft
(fifteen major OEMs each offering corpo- offered OEMs valuable consideration in
rate desktop, consumer/small business, no- exchange for commitments to promote In-
tebook, and workstation PCs), Navigator ternet Explorer exclusively. Finally, Mi-
was being shipped through only four. crosoft threatened to penalize individual
Furthermore, most of the PCs shipped OEMs that insisted on pre-installing and
with Navigator featured the product in a promoting Navigator. Although Micro-
manner much less likely to lead to usage soft’s campaign to capture the OEM chan-
than if its icon appeared on the desktop. nel succeeded, it required a massive and
For example, Sony only featured Naviga- multifarious investment by Microsoft; it
tor in a folder rather than on the desktop, also stifled innovation by OEMs that might
and Gateway only shipped Navigator on a have made Windows PC systems easier to
separate CD–ROM rather than pre-install- use and more attractive to consumers.
ed on the hard drive. By the beginning of That Microsoft was willing to pay this
January 1999, Navigator was present on price demonstrates that its decision-mak-
the desktop of only a tiny percentage of ers believed that maximizing Internet Ex-
the PCs that OEMs were shipping. plorer’s usage share at Navigator’s ex-
240. To the extent Netscape is still pense was worth almost any cost.
able to distribute Navigator through the 3. Excluding Navigator from
OEM channel, Microsoft has substantially the IAP Channel
increased the cost of that distribution. Al- 242. By late 1995, Microsoft had identi-
though in January 1999 (in the midst of fied bundling with the client software of
this trial), Compaq suddenly decided to IAPs as the other of the two most efficient
resume the pre-installation of Navigator channels for distributing browsing soft-
on its Presario PCs, Compaq’s reversal ware. By that time, however, several of
came only after Netscape agreed to pro- the most popular IAPs were shipping Nav-
vide Compaq with approximately $700,000 igator. Recognizing that it was starting
worth of free advertising. from behind, Microsoft devised an aggres-
241. In sum, Microsoft successfully se- sive strategy to capture the IAP channel
cured for Internet Explorer—and foreclos- from Netscape. In February 1996, Cam-
ed to Navigator—one of the two distribu- eron Myhrvold, the Microsoft executive in
tion channels that leads most efficiently to charge of the firm’s relations with ISPs,
the usage of browsing software. Even to outlined the strategy in a memorandum to
the extent that Navigator retains some his colleagues and superiors within the
access to the OEM channel, Microsoft has company:
relegated it to markedly less efficient It’s essential we increase the share of
forms of distribution than the form vouch- our browser. Network operators
safed for Internet Explorer, namely, prom- [ (IAPs, plus the telephone and cable
inent placement on the Windows desktop. companies providing Internet access
services) ] are important distributors leading IAPs agreed, at Microsoft’s insis-

and we will license at no cost the Inter- tence, to distribute and promote Internet
net Explorer for distribution with their Explorer, to refrain from promoting non-
Internet access business to maximize the Microsoft Web browsing software, and to
distribution/adoption of IE as browser of ensure that they distributed non-Microsoft
choice. We will attempt exclusive ar- browsing software to only a limited per-
rangements, fight for preferred status, centage of their subscribers. Although the
but settle for parity with NetScape. percentages varied by IAP, the most com-
Even offering IE for free will not win us mon figure was twenty-five percent.
every sale. In the U.S. we will offer IE 245. In a similar tactic aimed at a more
broadly to net[work] op[erator]s and important IAP sub-channel, Microsoft cre-
IAPs including the many hundreds of ated an ‘‘Online Services Folder’’ and
smaller IAPs. placed an icon for that folder on the Win-
In the first step of this strategy, Microsoft dows desktop. In exchange for the pre-
enticed ISPs with small subscriber bases installation of their access software with
to distribute Internet Explorer and to Windows and for the inclusion of their
make it their default browsing software by icons in the Online Services Folder, the
offering for free both a license to distrib- leading OLSs agreed, again at Microsoft’s
ute Internet Explorer and a software kit insistence, to distribute and promote Inter-
that made it easy for ISPs with limited net Explorer, to refrain from promoting
resources to adapt Internet Explorer for non-Microsoft Web browsing software, and
bundling with their services. to distribute non-Microsoft browsing soft-
243. Those who planned and imple- ware to no more than fifteen percent of
mented Microsoft’s IAP campaign believed their subscribers.
that, if IAPs gave new subscribers a choice 246. Finally, Microsoft gave IAPs in-
between Internet Explorer and Navigator, centives to upgrade the millions of sub-
most of them would pick Navigator—both scribers already using Navigator to pro-
because Netscape’s brand had become prietary access software that included
nearly synonymous with the Web in the Internet Explorer. To IAPs included in
public consciousness and because Naviga- the Windows Internet sign-up list, Micro-
tor had developed a much better reputa- soft offered the incentive of reductions in
tion for quality than Internet Explorer. the referral fees it charged for inclusion
To compensate for Navigator’s advantage, in the list. To OLSs in the Online Ser-
Microsoft reinforced its free distribution of vices Folder, Microsoft offered cash
Internet Explorer licenses and the access bounties.
kits with three tactics designed to induce 247. In sum, Microsoft made substan-
IAPs with large subscriber bases not only tial sacrifices, including the forfeiture of
to distribute and promote Internet Explor- significant revenue opportunities, in order
er, but also to constrain severely their to induce IAPs to do four things: to dis-
distribution and promotion of Navigator tribute access software that came with In-
and to convert those of their subscribers ternet Explorer; to promote Internet Ex-
already using Navigator to Internet Ex- plorer; to upgrade existing subscribers to
plorer. Internet Explorer; and to restrict their
244. Microsoft’s first tactic was to de- distribution and promotion of non-Micro-
velop and include with Windows an Inter- soft browsing software. The restrictions
net sign-up program that made it simple on the freedom of IAPs to distribute and
for users to download access software promote Navigator were far broader than
from, and subscribe to, any IAP appearing they needed to be in order to achieve any
on a list assembled by Microsoft. In ex- economic efficiency. This is especially
change for their inclusion on this list, the true given the fact that Microsoft never
expected Internet Explorer to generate the IAP’S Web site gave the IAPs adver-
any revenue. Ultimately, the inducements tising and promotional opportunities.
that Microsoft offered IAPs at substantial Netscape, by contrast, refused to allow its
cost to itself, together with the restrictive IAP licensees to move Navigator’s home
conditions it imposed on IAPs, did the four page from Netscape’s NetCenter portal
things they were designed to accomplish: site.
They caused Internet Explorer’s usage 250. Many IAPs would have paid for
share to surge; they caused Navigator’s the right to distribute Internet Explorer.
usage share to plummet; they raised Net- Indeed, Netscape was charging IAPs be-
scape’s costs; and they sealed off a major tween fifteen and twenty dollars per copy
portion of the IAP channel from the pros- of Navigator they distributed. Because of
pect of recapture by Navigator. As an the features and convenience it offered,
ancillary effect, Microsoft’s campaign to the IEAK significantly increased the price
seize the IAP channel significantly ham- that IAPs would have been willing to pay.
pered the ability of consumers to make Nevertheless, Microsoft licensed the IEAK
their choice of Web browser products including Internet Explorer, to IAPs at no
based on the features of those products. charge. At the time Microsoft released
a. The Internet Explorer Access the IEAK, Netscape did not offer IAPs an
Kit Agreements analogous tool. Although Netscape even-
248. In September 1996, Microsoft an- tually followed Microsoft’s lead by intro-
nounced the availability of the ‘‘Internet ducing a tool kit similar to the IEAK
Explorer Access Kit,’’ or ‘‘IEAK.’’ By sim- known as Mission Control, that kit was not
ply accessing the correct page on Micro- made available to IAPs until June 1997—a
soft’s Web site and clicking on a box to full nine months after the release of the
indicate agreement with the license terms, IEAK. Whereas IAPs could obtain the
any IAP could download the IEAK, which IEAK for free, Netscape initially charged
included a copy of Internet Explorer. $1,995 for each copy of Mission Control.
With their technical knowledge, sophisti- 251. Approximately 2,500 IAPs execut-
cated equipment, and high-bandwidth con- ed an electronic copy of a license agree-
nections, IAPs found it very convenient to ment for the IEAK. Included in that num-
download Internet Explorer and the IEAK ber were the eighty IAPs that together
from Microsoft’s Web site. accounted for ninety-five percent of all In-
249. Using the IEAK, an IAP could ternet access subscribers in the United
create a distinctive identity for its service States. The IAPs that executed an IEAK
in as little as a few hours by customizing license agreement agreed to make Inter-
the title bar, icon, start and search pages, net Explorer their ‘‘preferred’’ browsing
and ‘‘favorites’’ in Internet Explorer. The software. The term ‘‘preferred’’ was not
IEAK also made the installation process defined in the license, and Microsoft did
easy for IAPs. With the IEAK IAPs could not investigate the extent to which Inter-
avoid piecemeal installation of various pro- net Explorer was in fact enjoying ‘‘pre-
grams and instead create an automated, ferred’’ status in the client software of its
comprehensive installation package in IEAK licensees. In fact, other than to
which all settings and options were pre- provide information and respond to techni-
configured. In addition to ease of customi- cal questions, Microsoft made no effort to
zation and installation, the IEAK enabled maintain regular direct contact with the
each IAP to preset the default home page vast majority of the IAPs that had execut-
so that customers would be taken to the ed licenses.
IAP’s Web site whenever they logged onto 252. Whether or not IEAK licensees
the Internet. This was important to IAPs actually gave Internet Explorer preferred
because setting the user’s home page to status, Microsoft’s decision to license In-
ternet Explorer and the IEAK to IAPs at users who had already indicated some in-
no charge beguiled many small ISPs that terest in signing up for Internet access.
otherwise would not have done so into Third, the easy-to-use features of the ICW
distributing Internet Explorer to their heightened the probability that a user who
subscribers. By giving up the opportunity started using the program would complete
to charge for Internet Explorer, and also the process of subscribing to an IAP. Fi-
by developing the IEAK at substantial nally, inclusion in the Referral Server was
cost and offering it at no charge, Microsoft a relatively inexpensive means of distribu-
thus increased the flow of Internet Explor- tion because, unlike ‘‘carpet bombing’’ with
er through the crucial IAP channel. CD–ROMs, it did not require the produc-
b. The Referral Server Agreements tion and dissemination of anything tangi-
253. In the late summer of 1996, at ble.
around the time that it announced the 255. Despite the value that IAPs at-
availability of the IEAK, Microsoft also tached to placement in the Windows 95
introduced the Internet Connection Wiz- Referral Server, Microsoft elected to
ard (‘‘ICW’’) as a feature in Windows 95 charge those that it granted placement a
OSR 2. If a user clicked on the ICW icon low bounty price that merely went to pay
appearing on the Windows 95 desktop, the down the cost of maintaining the necessary
program would automatically dial into a server computers and leasing the network
computer maintained by Microsoft called they ran on. Although it could have been
the Windows Referral Server. The Refer- exchanged for large bounties from IAPs,
ral Server would then transmit to the Microsoft decided to exchange placement
user’s computer a list of IAPs that provid- in the Referral Server, along with other
ed connections to the Internet in the user’s valuable consideration, for the agreement
geographic locale. Included in this list of the selected IAPs to promote and dis-
would be information about each IAP’s tribute Internet Explorer preferentially
service, including its prices. If the user over Navigator and to convert existing
then indicated a desire to sign up for one subscribers from Navigator to Internet
of the listed IAPs by clicking on the appro- Explorer.
priate entry, the user would be connected 256. Between July 1996 and September
to an IAP-maintained server that would 1997, Microsoft entered into Referral Ser-
automatically configure the user’s PC to ver agreements with fourteen IAPs. These
work properly with the IAP service. were AOL, AT & T WorldNet, Brigadoon,
254. For several reasons, IAPs viewed Concentric, Digex, EarthLink, GTE, IDT,
inclusion in the Windows 95 Referral Ser- MCI, MindSpring, Netcom, Prodigy,
ver as a valuable form of promotion. Sprint, and Spry. Three of these compa-
First, the ICW icon appeared prominently nies did not take the technical steps neces-
on the desktop of every PC running Win- sary to appear in the Referral Server even
dows 95 (from OSR 2 onwards), which, by though they had signed agreements with
the middle of 1996, accounted for the vast Microsoft. Brigadoon failed to take those
majority of all new PCs being shipped. steps because it filed for bankruptcy. For
Because Microsoft prohibited OEMs from its part, Digex left the ISP business to
removing any of the icons that it placed on focus exclusively on Web hosting. GTE,
the Windows desktop, IAPs knew that the on the other hand, decided to enter pro-
ICW would confront all users of Windows motional agreements directly with OEMs
95 PCs the first time they turned on their rather than abide by the conditions Micro-
systems. Second, inclusion in the Referral soft attached to inclusion in the Referral
Server was a highly focused form of pro- Server. Although AOL eventually entered
motion, because the IAP list provided by a listing into the Referral Server, it waited
the Referral Server presented itself to until November 1998, after the release of
Windows 98. The remaining IAPs in the the Internet Connection Wizard received
Windows 95 Referral Server represented only Internet Explorer with their subscrip-
ten of the top fifteen Internet access pro- tions, Microsoft could nevertheless remove
viders in the North America. the ISP from the Referral Server if copies
257. Pursuant to the terms of the of Navigator made up more than the speci-
agreements it signed with these ten IAPs, fied percentage of the browsing software
Microsoft provided each with a listing in that the IAP distributed through all sub-
the Windows 95 Referral Server and men- channels. Twenty-five percent was the
tioned them in press releases and market- figure specified in most of the agreements.
ing activities relating to the ICW. Micro- For Netcom and Sprint, the figure was
soft also licensed Internet Explorer to fifty percent, while for IDT it was fifteen.
them at no charge, and assisted them in 259. In addition to conditioning place-
customizing Internet Explorer for use with ment in the Referral Server on an IAP’s
their services. In exchange, the listed undertaking to limit its promotion and
IAPs agreed to offer Internet Explorer as distribution of non-Microsoft browsing
the ‘‘standard,’’ ‘‘default,’’ or ‘‘preferred’’ software, Microsoft through its Referral
browsing software with their services. Server agreements exchanged valuable
For example, Microsoft’s agreement with consideration for the commitment of the
EarthLink required it to ‘‘[o]ffer the Mi- ten IAPs to convert existing subscribers
crosoft Internet Explorer as the standard from Navigator to Internet Explorer.
web browser for [EarthLink’s] ISP Ser- Microsoft also compensated them for em-
vice.’’ ploying Internet Explorer-specific tech-
258. The agreements also imposed sev- nologies whose dissemination would en-
eral restrictions on the ability of the IAPs courage the developers of network-centric
in the Referral Server to promote and applications to focus on APIs controlled
distribute non-Microsoft browsing soft- by Microsoft, as opposed to Netscape or
ware. First, the agreements required the Sun. For example, in exchange for Net-
IAPs to limit their promotion of browser com’s commitment to offer deals to its
products other than Internet Explorer. customers encouraging them to upgrade
For example, the agreements prohibited their software to the newest version that
the IAPs from providing any links or other bundled Internet Explorer, Microsoft sub-
promotions for Netscape on their services’ tracted nine dollars from the referral fee.
home pages. In fact, an IAP listed in the Microsoft also deposited one dollar into a
Referral Server was not permitted, either co-marketing fund for each Netcom sub-
in its Referral Server entry or elsewhere, scriber who actually upgraded to client
to express or imply to its subscribers that software that bundled Internet Explorer.
they could use a browser other than Inter- 260. Where the agreement with Micro-
net Explorer with the IAP’s service. Sec- soft required the IAP to abandon a distri-
ond, the agreements prohibited the ten bution agreement already entered with
IAPs from providing non-Microsoft brows- Netscape, Microsoft compensated the IAP
ing software to their customers unless a with additional consideration. For in-
subscriber specifically requested it. Third, stance, in response to a representation
the agreements gave Microsoft the right to from MCI that it had already committed to
remove from the Referral Server any IAP pay Netscape between five and ten million
that, in two consecutive calendar quarters, dollars for Web browsing software, Micro-
allowed non-Microsoft browsing software soft agreed to grant MCI a credit of five
to climb above a specified percentage of all dollars toward a co-marketing fund (not to
browsing software distributed by that IAP. exceed five million dollars) for each copy of
Thus, even if the IAP ensured that all Internet Explorer that MCI distributed to
users subscribing to its service through an MCI Internet access customer who had
not already received a copy. Finally, Mi- consumers the process of connecting to the
crosoft offered yet further reductions in Internet may have been one motivation for
referral fees to the IAPs using Microsoft- developing the Internet Connection Wiz-
controlled technologies likely to stimulate ard, that motivation cannot explain the
developers to focus their attention on Win- exclusionary terms in the Referral Server
dows-specific software interfaces rather agreements. After all, contractually limit-
than the cross-platform ones provided by ing the distribution of non-Microsoft
Netscape and Sun. For example, Microsoft browsing software by IAPs did nothing to
offered to reduce EarthLink’s per-copy re- help consumers gain easy access to the
ferral fee by ten dollars in exchange for Internet. The real motivation behind the
EarthLink’s use of at least two ActiveX exclusionary terms in the Referral Server
controls in the design of its home page and agreements was Microsoft’s conviction that
the use of Microsoft FrontPage server ex- even if IAPs were compelled to promote
tensions on its Web hosting servers. and distribute Internet Explorer, the ma-
261. Microsoft could have covered the jority of their subscribers would neverthe-
cost of developing and maintaining the less elect to use Navigator if the IAPs
ICW and the Windows Referral Server, made it readily available to them. Micro-
and even made a profit, by charging high- soft therefore paid a high price to induce
er referral fees than it did to the favored the most popular IAPs to encourage their
IAPs. Instead, Microsoft bartered away so customers to use Internet Explorer and
much of the referral fees it otherwise could discourage them from using Navigator.
have charged that the costs of running the 263. Absent the conditions Microsoft
Windows Referral Server have thus far placed on inclusion in the Referral Server,
exceeded the payments Microsoft has re- the IAPs would have had no reason to
ceived from the favored IAPs. Microsoft limit the percentage of subscribers that
readily made this sacrifice in order to in- used one particular browser or another.
duce the important IAPs to take actions As Cameron Myhrvold explained to col-
that aided Microsoft’s effort to exclude leagues within Microsoft in April 1997,
Navigator from the IAP channel. ‘‘ISPs are agnostic on the browser. It is
262. Microsoft’s motivation for the lim- against their nature to favor a browser or
its it placed on the distribution of non- even a platform. This has been damn
Microsoft browsing software by IAPs in hard for us to influence.’’ In fact, Myhr-
the Windows 95 Referral Server could not vold told the same colleagues that he ‘‘had
have been simply a desire to ensure that a hard time guiding the ISPs to IE loyalty
IAPs did not promote competing browsing even when I make them sign explicit terms
software to subscribers acquired with Mi- and conditions in a legal contract.’’
crosoft’s help. The agreements gave Mi- 264. Microsoft monitored the extent of
crosoft the right to dismiss an IAP that compliance of IAPs in the Referral Server
either told its subscribers they could with the shipment restrictions contained in
choose Navigator or distributed too many their agreements. It did this by periodi-
copies of non-Microsoft browser products. cally asking each of the ten IAPs to send
This was true even if the IAP never men- Microsoft estimates of the number of cop-
tioned Navigator in its Referral Server ies of Internet Explorer—and non-Micro-
entry and distributed nothing but Internet soft browsing software—they were ship-
Explorer to the new subscribers it gar- ping. When, from time to time, various
nered from the ICW. In light of that fact, IAPs in the Windows 95 Referral Server
the Windows 95 Referral Server agree- (specifically Netcom, Concentric, and
ments emerge as something very different EarthLink) fell below the shipment quotas
from typical cross-marketing arrange- specified in their agreements with Micro-
ments. Furthermore, while facilitating for soft, executives at Microsoft reacted by
contacting the derelict companies and urg- 266. In reaction to Microsoft’s Referral
ing them to meet their obligations. Con- Server agreements, Netscape entered into
centric and Earthlink eventually (by May agreements of its own with five of the
1998, if not sooner) reduced their Naviga- Regional Bell Operating Companies
tor shipments enough to bring them below (RBOCs). Under the Netscape agree-
the required percentage. Microsoft never ments, the RBOCs agreed to make Navi-
formally removed an IAP from the Refer- gator their default Web browsing software
ral Server. For a time after the release of in all cases, except those in which subscrib-
Internet Explorer 4.0, however, no entry ers affirmatively requested other browsing
for Netcom appeared in the new version of software. In exchange, Netscape agreed
the Referral Server. This was at least in to list the RBOCs first among the IAPs
part due to Netcom’s failure to ensure that included in Netscape’s referral server. In
Internet Explorer accounted for fifty per- contrast to Microsoft’s agreements, Net-
cent of the browsing software it shipped. scape’s agreements with the RBOCs im-
posed no restrictions on their ability to
265. In addition to failing, for a time, to
distribute other browsing software, such as
meet the required shipment quotas, Con-
Internet Explorer, whether in response to
centric and EarthLink occasionally pro-
customer requests or otherwise. Further-
moted Navigator in ways that were argu-
more, Netscape’s contracts with the
ably prohibited by the Referral Server
RBOCs required them to set Navigator as
agreements. Despite their delinquency,
the default only so long as AT & T and
Microsoft never removed Concentric and
MCI were both restricted by their agree-
EarthLink from the Referral Server. Of
ments with Microsoft from providing Navi-
much less concern to Microsoft than the
gator to their customers on par with Inter-
shipment and promotion of Navigator by
net Explorer. In any event, the RBOCs
IAPs having signed Referral Server agree-
currently deliver Internet access to less
ments was the fact that Concentric and
than five percent of the Internet access
EarthLink, along with Netcom and three
subscribers in North America.
of the other IAPs in the Windows 95 Re-
ferral Server, also appeared in Netscape’s 267. Microsoft’s Windows 95 Referral
referral server. This did not violate either Server agreements were of relatively short
the letter or the spirit of their agreements duration. For example, Microsoft’s agree-
with Microsoft, for while the agreements ment with EarthLink provided that it
prohibited the IAPs in the Windows 95 would expire two years from its signing in
Referral Server from promoting Naviga- August 1996 unless either party elected to
tor, they did not purport to hinder Net- terminate it sooner, and both Microsoft
scape in promoting those IAPs. At any and EarthLink were free to terminate the
rate, Microsoft did not have reason to be agreement for any reason on thirty days’
concerned with the appearance of its IAP written notice. The other Referral Server
partners in Netscape’s referral server, agreements were similarly short in term.
whose main exposure was to existing Navi- 268. In April 1998, coincident with ris-
gator users interested in switching their ing public criticism, the impending appear-
IAPs. A listing in Netscape’s referral ser- ance of Bill Gates before a Congressional
ver did not help Netscape get its software panel on competition in the computer in-
on users’ systems, and pursuant to their dustry, and the imminent filing of these
agreements with Microsoft, the six ISPs in lawsuits, Microsoft unilaterally waived the
both Microsoft’s and Netscape’s referral most restrictive provisions in the Windows
servers were actually placing Navigator on 95 Referral Server agreements. Specifi-
far fewer users’ systems than they would cally, Microsoft waived the provisions that
have in the absence of their agreements restricted the IAPs’ ability to distribute
with Microsoft. non-Microsoft Web browsing software.
With respect to promotion, the revised on the PC systems they sell and to deter-
agreements merely required the IAPs to mine the order in which those IAPs ap-
promote Internet Explorer at least as pear. Microsoft also permits the fifty
prominently as they promoted non-Micro- OEMs to keep any bounties that the IAPs
soft browsers. Notably, however, the pay them for inclusion in the Referral
agreements still required the IAPs to Server. The OEMs simply pay Microsoft
make Internet Explorer their default a nominal fee (a flat fee of approximately
browser. $10,000 plus thirty cents per subscriber) to
269. By the end of September 1998, all defray the costs of operating the Referral
of the Windows 95 Referral Server agree- Server program. Furthermore (as is also
ments had expired by their own terms. discussed above), Microsoft has allowed
Microsoft’s Windows 98 Referral Server seven of the highest-volume OEMs to sup-
agreements do not contain any provisions plant the ICW altogether.
requiring that Internet Explorer make up
any particular percentage of the IAPs’ 271. By both lifting restrictions in its
shipments. Furthermore, the Windows 98 agreements and ceding control over the
Referral Server agreements offer no dis- IAP sign-up process to OEMs, in the
counts on the referral fees predicated on spring of 1998, Microsoft relaxed the stric-
the IAPs’ adoption of any particular Mi- tures that it had imposed in the fall of 1996
crosoft technology or licensing any Micro- on the distribution and promotion of Web
soft product. With regard to promotion, browsing software by the most popular
the agreements require only that the IAPs IAPs. In the year-and-a-half that they
promote Internet Explorer no less favor- were in full force, however, the restrictive
ably than non-Microsoft Web browsing terms in the Referral Server agreements
software. Still, for those IAPs concerned induced the major IAPs to customize their
with the costs associated with supporting client software for Internet Explorer, gear
two browser products, this parity require- their promotional and marketing activities
ment is enough to compel them not to not
to Microsoft’s technologies, and convert
make Navigator readily available to their
substantial portions of their installed bases
subscribers. The new agreements have a
from Navigator to Internet Explorer.
one-year term and are terminable at will
They may have welcomed more flexibility
by the IAP on ninety days’ notice.
to distribute Navigator to those subscrib-
270. IAPs no longer value placement in ers that expressed demand for it, but they
the Windows Referral Server as much as
had no incentive to launch an expensive
they did in 1996. For one reason, the
campaign to reverse the tide that Micro-
ICW has apparently not been responsible
soft’s restrictions had already generated.
for as many new IAP subscriptions as
Consequently, few ISPs have responded to
either Microsoft or the IAPs anticipated.
Microsoft’s contractual dispensations by
In fact, from the third quarter of 1996
through the third quarter of 1998, only increasing significantly their distribution
2.1% of new users of the Internet became and promotion of Navigator. Further-
IAP subscribers through the Windows Re- more, one of the reasons Microsoft felt
ferral Server. Partially on account of this comfortable relaxing the controls on IAPs
realization, Microsoft began in the spring in the spring of 1998 was that it had
of 1998 to surrender significant control achieved—and planned to maintain—con-
over the Internet sign-up process to trol over the distribution and promotion of
OEMs. As described above, Microsoft gave Web browsing software by AOL and the
the top fifty OEMs in the world the right other major OLSs, whose combined sub-
to select both the IAPs (up to five) that scriber base comprised most of North
appear in the Windows 98 Referral Server America’s Internet users.
c. The Online Services 274. While public awareness of the
Folder Agreements Web was taking hold, companies like Net-
272. In late 1995 and early 1996, senior scape and Microsoft were hard at work
executives at Microsoft recognized that developing Web browsing software. By
AOL accounted for a substantial portion of the fall of 1995, a number of OLSs, includ-
all existing Internet access subscriptions ing AOL, had decided not to devote the
and that it attracted a very large percent- considerable resources that would have
age of new IAP subscribers. Indeed, AOL been required to keep up with this rapid
was and is the largest and most important pace of innovation. They chose instead to
IAP. The Microsoft executives thus real- license state-of-the-art Web browsing tech-
ized that if they could convince AOL to nology from a separate supplier. Micro-
distribute Internet Explorer with its client soft saw AOL, with its subscriber base
software instead of Navigator, Microsoft then approaching five million, as a poten-
would—in a single coup—capture a large tial breakthrough opportunity—a way for
part of the IAP channel for Internet Ex- Microsoft quickly to obtain credibility in
plorer. In the early spring of 1996, there- Web browsing technology as well as usage
fore, Microsoft exchanged favorable place- share for the current version of its brows-
ment on the Windows desktop, as well as ing software, Internet Explorer 3.0.
other valuable consideration, for AOL’s
275. In November 1995, David Cole of
commitment to distribute and promote In-
AOL advised Pete Higgins of Microsoft
ternet Explorer to the near exclusion of
that AOL was looking for Web browsing
Navigator. AOL’s acceptance of this ar-
software to license and incorporate into
rangement has caused an enormous surge
future versions of its proprietary access
in Internet Explorer’s usage share and a
software. Bill Gates and AOL’s Chair-
concomitant decline in Navigator’s share.
man, Steve Case, subsequently spoke sev-
To supplement the effects of the AOL deal,
eral times on the telephone. In those
Microsoft entered similar agreements with
conversations, Gates urged that AOL rep-
other OLSs. The importance of these ar-
resentatives meet with Microsoft technical
rangements to Microsoft is evident in the
personnel in order to get a better sense of
fact that, in contrast to the restrictive
the quality and features of Internet Ex-
terms in the Windows Referral Server
plorer 3.0. For his part, Case told Gates
agreements, Microsoft has never waived
that he wanted Microsoft to include AOL’s
the terms that require the OLSs to distrib-
client software with Windows such that
ute and promote Internet Explorer to the
AOL received the same desktop promotion
near exclusion of Navigator.
that MSN enjoyed. Gates insisted that
i. AOL such favorable treatment of AOL within
273. Prior to 1995, OLS subscribers Windows was out of the question.
used proprietary access software to view
only their OLS’s specialized content. Be- 276. Lower down in Microsoft’s chain
ginning in 1994, however, the public be- of command, executives took issue with
came increasingly interested in accessing Gates’ reluctance to grant AOL favorable
information on the Web. So to keep from placement in Windows. In October 1995,
losing subscribers and to attract new ones, before Gates and Case began talking, a
OLSs upgraded their services to provide group of Microsoft executives prepared for
access to the Web. In November 1994, for Gates a memorandum on the company’s
example, AOL purchased BookLink and Internet Explorer efforts entitled, ‘‘How to
incorporated its Web browsing software Get to 30% Share in 12 Months.’’ The
into AOL’s proprietary access software to executives wrote that
enable AOL’s subscribers to access and we need to remove barriers to browser
view Web content. adoption by Online Services and Inter-
net Access Providers. Today MSN is an ing up the Windows box,’’ but rather by
access service TTT, an online service TTT, clamping down on the ability of OEMs to
and an Internet site TTT; in other configure the Windows desktop. Indeed,
words, it competes with everyone. By the discovery that OEMs were promoting
bundling MSN in the Windows box, we AOL on the Windows desktop was one of
are threatening ISV’s in each of these the things that led him to complain to
areas, who in turn have no incentive to Joachim Kempin on January 6, 1996 about
promote our Internet Browser. OEMs that were bundling non-Microsoft
277. One of the proposals the execu- Internet services and software and dis-
tives put forward was that Microsoft playing it on their PCs ‘‘in a FAR more
‘‘Open Up the Windows Box.’’ In other prominent way than MSN or our Internet
words, the executives believed that, in ex- browser.’’
change for favorable treatment of Internet 279. Case’s insistence that Microsoft
Explorer, Microsoft should include the promote AOL on the Windows desktop
client software of IAPs in Windows and stemmed partly from factors other than
give those services prominent placement the additional subscriptions expected to
on the desktop, even if such placement come from the OLS folder. AOL already
drew attention away from MSN. Over the enjoyed distribution agreements with ma-
months that followed, senior Microsoft ex- jor OEMs that placed an AOL icon on the
ecutives came to the conclusion that open- desktop of millions of new PC systems.
ing up the Windows box to MSN’s compet- But given that its OEM agreements tend-
itors was a necessary price to pay for ed to be short-term and somewhat tenu-
increasing Internet Explorer’s share of ous, and considering how sensitive the
browser usage. OEMs were to Microsoft’s will, AOL exec-
278. Case ultimately agreed to visit Mi- utives realized that AOL’s position on the
crosoft’s Redmond campus in January Windows desktop would be more secure if
1996. In preparation for that meeting, it met with some degree of contractual
Microsoft purchased PC systems from five acquiescence from Microsoft. After all,
different OEMs (Compaq, Hewlett–Pack- whereas Microsoft retaliated in subtle and
ard, IBM, Packard Bell, and NEC) at re- not-so-subtle ways against OEMs, such as
tail outlet stores. When they turned these IBM, that pre-installed software on their
systems on, employees at Microsoft discov- PCs that Microsoft found minatory, it pro-
ered that the OEMs were already shipping nounced more extreme sanctions against
AOL’s software pre-installed on their PCs OEMs, such as Compaq, that had the te-
and giving the AOL service more promi- merity to remove icons and program en-
nent placement than MSN on the Windows tries from the Windows desktop that Mi-
desktop. From the fact that AOL was crosoft had placed there. Case had reason
already enjoying broad distribution and to see value, then, in shifting AOL from
promotion on the Windows desktop being a source of software at whose pro-
through agreements with OEMs, several motion Microsoft took umbrage to the dis-
senior Microsoft executives, in particular penser of software whose placement on the
Paul Maritz and Brad Chase, concluded Windows desktop Microsoft guaranteed.
that Microsoft would not be giving up all Moreover, obtaining Microsoft’s commit-
that much if it traded placement on the ment to include the AOL client software
Windows desktop for AOL’s commitment and prominent promotion for AOL in ev-
to promote and distribute Internet Explor- ery copy of Windows would place AOL on
er. At least initially, Gates took a differ- all Windows 95 PC systems, including
ent lesson from the experiment with the those sold by the multitude of OEMs
five PC systems. He seems to have felt whose shipment volumes were too low to
that Microsoft should react not by ‘‘open- warrant the negotiation of separate distri-
bution deals. Furthermore, placement on ing software into AOL’s access software.
the desktop in some fashion would improve The AOL executives viewed componentiza-
AOL’s negotiating position when it asked tion as a highly attractive feature, because
individual large OEMs to place an AOL AOL wanted its subscribers to feel they
icon directly on the desktop of their PC were using an AOL service whether they
systems. Whatever the reason, and irre- were viewing proprietary AOL content or
spective of the considerable value that Mi- browsing content on the Web. In fact,
crosoft offered AOL apart from desktop Case and the other AOL representatives
placement, Case made clear to Gates his told their Microsoft hosts that AOL want-
sincere conviction that AOL would not re- ed total control over the ‘‘browser frame’’
cruit its subscribers to Internet Explorer (the windows in which Web content is dis-
unless Microsoft included AOL’s client played) to make it distinctive to AOL. In
software in Windows and promoted AOL other words, AOL wanted no menus, dia-
in some form on the Windows desktop. log boxes, or other visible signs that would
280. Four days before Case was due to alert AOL users to the fact that they were
arrive at Microsoft’s campus, Gates sent using Web browsing software supplied by
an E-mail outlining Microsoft’s goals in a company other than AOL.
negotiating a deal with AOL to the respon- 282. At the end of the meeting, Case
sible Microsoft executives. He wrote: expressly acknowledged the attractiveness
What we want from AOL is that for a of Microsoft’s componentized approach.
period of time—say 2 years—the brow- Notably, Netscape had not yet developed a
ser that they give out to their customers componentized version of Navigator. Net-
and the one they mention and put on scape had assured AOL that it would do
their pages and the one they exploit is so, and AOL believed that Netscape was
ours and not Netscape[’]s. We need for capable of eventually making good on its
them to make our browser available as pledge, but the fact remained that Micro-
the browser to existing and new custom- soft had already completed a componen-
ers. We have to be sure that we don’t tized version of Internet Explorer. Case
allow them to promote Netscape as well. was impressed enough with Internet Ex-
We want all the hits that come off of plorer 3.0 that when he returned to AOL
AOL to register on servers as our brow- he told a number of fellow executives that,
ser so people can start seeing us as when it came to AOL’s technical consider-
having measurable browser share. ations, Microsoft perhaps enjoyed an edge
Gates understood that if AOL gave assur- over Netscape. Still, the AOL executives
ance that its subscribers used Internet saw Navigator as enjoying better brand
Explorer when browsing the Web, the recognition and demonstrated success in
measure of browser usage share data to the marketplace.
which application developers paid most at- 283. Later in the day on January 18,
tention—i.e., server ‘‘hit’’ data—would Case and his team also met with Gates,
show a significant rise in Internet Explor- Chase, and Chase’s direct superior, Brad
er’s usage share. Gates also realized that Silverberg, to discuss the business aspects
such a commitment by AOL was worth of a potential AOL–Microsoft alliance. At
seeking even if it lasted for only a couple one point during the meeting, Case again
of years. told Gates that AOL needed inclusion of its
281. On January 18, 1996, Case arrived client software in Windows and prominent
at Microsoft’s campus with three other placement on the Windows desktop if
AOL executives. During the first meet- there was to be a closer relationship be-
ing, Microsoft described the componen- tween the two companies. Gates ex-
tized architecture of Internet Explorer 3.0 pressed frustration that Case continued to
that would allow AOL to embed the brows- insist on getting an AOL icon on the Win-
dows desktop in addition to the technology, Gates’ abiding reluctance to grant AOL
engineering assistance, and technical sup- access through Microsoft’s front door may
port Microsoft was offering AOL. Despite have stemmed from a preoccupation with
the obvious importance that Case attached the message such a move would send—
to desktop placement, Gates said he would both to other firms in the computer indus-
not agree to that condition. try and to consumers deciding which In-
284. A week after the January 18 ternet service to use. Although Gates
meeting, Chase and Silverberg met with viewed it as a significant concession, he
Gates. They reiterated that, whether acquiesced in granting AOL a place in
Gates liked it or not, an AOL icon already Windows because he believed that Micro-
appeared on the desktop of the major soft could not pass up the opportunity
OEMs’ PCs. Given that fait accompli, they AOL presented to drive Internet Explor-
argued, Microsoft would gain much more er’s usage share dramatically upward and
than it would lose by agreeing to place to exclude Navigator from a substantial
AOL on the Windows desktop in exchange part of the IAP distribution channel.
for AOL’s commitment to promote and 287. The negotiations between Micro-
distribute Internet Explorer. This time, soft and AOL proceeded throughout Feb-
Gates agreed to give AOL some sort of ruary and early March 1996. On March
promotion in Windows. He continued to 11, 1996, AOL announced that it had se-
insist, however, that Microsoft not place an lected Navigator as the primary Web
AOL icon directly on the Windows desk- browsing software for GNN, which was
top. Rather, Gates agreed to include AOL’s basic ISP service at the time and
AOL, along with other OLSs, in a generic had a subscriber base only two to three
‘‘Online Services Folder,’’ an icon for which percent the size of the subscriber base of
would reside on the desktop. Since MSN AOL’s flagship online service. The GNN
enjoyed a branded icon directly on the arrangement was thus eclipsed the follow-
desktop, including AOL in the OLS folder ing day when AOL announced that it had
would maintain its inferior status to Micro- chosen Internet Explorer as the primary
soft’s service. Web browsing software for its flagship
285. Still, Gates viewed the concession service.
as a significant one; he understood that it 288. Under the March 12 agreement,
meant undermining MSN’s success in the Microsoft gave AOL access to, and the
pursuit of browser share. As he told an right to modify, Internet Explorer source
interviewer in the spring of 1996: code in order to customize it for use with
We have had three options for how to AOL’s proprietary access software. This
use the ‘‘Windows Box’’: First, we can concession went far beyond the freedom
use it for the browser battle, recognizing that the IEAK granted IAPs to place their
that our core assets are at risk. Second, own branding on Internet Explorer. Mi-
we could monetize the box, and sell the crosoft also agreed to provide AOL with
real estate to the highest bidder. Or significant engineering assistance and
third, we could use the box to sell and technical support to enable AOL to inte-
promote internally content assets. I grate Internet Explorer into AOL’s pro-
recognize that, by choosing to do the prietary access software. Further, Micro-
first, we have leveled the playing field soft agreed to provide AOL with certain
and reduced our opportunities for com- specific features of Internet Explorer 3.0
petitive advantage with MSN. by precise target dates and to ensure that
286. In light of AOL’s success in hav- future versions of its Web browsing soft-
ing gained access to the Windows desktop ware would possess the latest available
through the expedient of OEM pre-instal- Internet-related technology features, capa-
lation without Microsoft’s acquiescence, bilities, and standards. Finally, Microsoft
granted AOL free world-wide distribution grams over the Internet involves consider-
rights to Internet Explorer and agreed to able time, and frequently some frustration,
distribute AOL’s proprietary access soft- for the average user with average hard-
ware in Windows and to place an AOL icon ware and an analog connection. The pros-
in the OLS folder on the Windows desk- pects were slim that many AOL users
top. (who tend to be novice users with average
289. In return for Microsoft’s commit- equipment) would expend the effort to
ments, AOL agreed to base the proprie- download Navigator when they already
tary access software of its flagship online had browsing software that worked well
service for Windows and the Mac OS on with the AOL service. Finally, while the
Internet Explorer 3.0 and to update that agreement permitted AOL (subject again
software as newer versions of Internet Ex- to the fifteen-percent shipment quotas) to
plorer were released. Another provision distribute non-Microsoft Web browsing
in the agreement provided that ‘‘AOL and software when requested by third-party
AOL Affiliates will, with respect to Third providers, distributors, and corporate ac-
Party Browsers, exclusively promote, mar- counts, it obligated AOL to use all reason-
ket and distribute, and have promoted, able efforts to cause the third party to
marketed and distributed, Internet Ex- distribute that software on its own and to
plorer on or for use by subscribers to the minimize the use of AOL’s brand name
AOL Flagship Service.’’ Specifically, AOL with the distribution.
agreed to ensure that in successive six-
month periods, neither the number of cop- 290. The Microsoft executives respon-
ies of non-Microsoft Web browsing soft- sible for closing the deal with AOL recog-
ware it shipped (through any sub-channel, nized that AOL had agreed to distribute
including GNN), nor the number of new and promote Internet Explorer to the vir-
subscribers accessing AOL (including tual exclusion of Navigator. Two days
GNN) with non-Microsoft Web browsing after Microsoft signed the agreement with
software, would exceed fifteen percent of AOL, Chase sent to Microsoft’s executive
the total number of copies of proprietary staff a memorandum answering questions
access software that AOL distributed he thought the executives might have
through any channel (i.e., through the about the agreement. One such question
Windows desktop or otherwise). AOL re- was, ‘‘I find it hard to believe that AOL is
tained the right to distribute non-Microsoft using Internet Explorer as its browser.
Web browsing software to subscribers who Are there exceptions?’’ Chase responded:
affirmatively requested it, as long as doing Yes the [re] are some but they are pret-
so did not raise the relevant shipment ty remote. An AOL customer could
quotients above fifteen percent. AOL also choose to use Navigator and it will be
retained the right to provide a link within available to be downloaded from the
its service through which its subscribers AOL site, though not in a prominent
could reach a Web site from which they way. There are some circumstances
could download a version of Navigator cus- with 3rd party distribution deals where
tomized for the AOL service. At the same AOL has some limited flexibility. On its
time, however, the agreement prohibited GNN service, AOL can do what it wants.
AOL from expressing or implying to sub- But for all intents and purposes it is
scribers or prospective subscribers that
true, AOL will be moving its 5M custom-
they could use Navigator with AOL. Nor
ers to a new client integrated with Inter-
did it allow AOL to include, on its default
net Explorer 3 starting this summer/fall.
page or anywhere else, instructions telling
subscribers how to reach the Navigator 291. As with the restrictive provisions
download site. In any event, as the Court in the Referral Server agreements, the
has found above, downloading large pro- provisions in the March 1996 agreement
constraining AOL’s distribution and pro- competing Web browsing software. AOL
motion of Navigator had no purpose other did not want users who preferred a certain
than maximizing Internet Explorer’s usage brand of Web browsing software to have to
share at Navigator’s expense. Consider- go to a competing OLS in order to obtain
ing that the restrictions applied to AOL’s it. Therefore, even once it selected Inter-
proprietary access software regardless of net Explorer as the software that it would
the sub-channel through which it was dis- integrate seamlessly into its client, AOL
tributed, and that Microsoft collected no would have preferred to make an AOL-
revenue from Internet Explorer, the re- configured version of Navigator readily
strictions accomplished no efficiency. available to subscribers and potential sub-
They affected consumers only by encum- scribers.
bering their ability to choose between com- 294. Despite its preference, however,
peting browsing technologies. In order to AOL did not make Navigator readily avail-
gain AOL’s acceptance of these restric- able to subscribers after the agreement
tions, Microsoft accorded AOL free desk- with Microsoft took effect. To the con-
top placement that undermined its own trary, AOL made it relatively difficult for
MSN, in which Microsoft had invested new subscribers to obtain a version of
hundreds of millions of dollars. Signifi- Navigator that would work with its client
cantly, Microsoft did not waive any of the software, and it pressured existing sub-
terms of its agreement with AOL (nor of scribers who used Navigator to abandon it
its agreements with other OLSs) when it in favor of client software that included
waived some of the restrictive provisions in Internet Explorer. In essence, AOL con-
its Referral Server agreements in April travened its natural inclination to respond
1998. The reason was Microsoft’s recogni- to consumer demand in order to obtain the
tion that holding OLSs, particularly AOL, free technology, close technical support,
to exclusive distribution and promotion and desktop placement offered by Micro-
terms was more important to maximizing soft.
Internet Explorer’s usage share than hold-
295. On October 28, 1996, Microsoft
ing ISPs to similar terms.
and AOL entered into an additional agree-
292. Microsoft closely monitored ment called the Promotional Services
AOL’s compliance with the restrictive pro- Agreement, whereby AOL agreed to pro-
visions in the March 1996 agreement. Mi- mote its new proprietary access software
crosoft employees periodically inspected that included Internet Explorer to existing
AOL’s service for any sign of promotions AOL subscribers, and Microsoft agreed to
for Netscape. The scrutiny was close pay AOL for such promotion based on
enough to prompt an AOL executive to results. Specifically, Microsoft agreed to
write Microsoft’s Chase: ‘‘We are not sell- pay AOL $500,000, plus twenty-five cents
ing NS advertising around its browser or (up to one million dollars) for each sub-
otherwise—let’s move onTTTT [I]t is not scriber who upgraded from older versions
time to be paranoidTTTT’’ of AOL’s proprietary access software to
293. Ever since the negotiations with the version that included Internet Explor-
Microsoft intensified in early 1996, it had er, plus $600,000 if AOL succeeded in up-
been AOL’s intention to select one firm’s grading 5.25 million subscribers by April
Web browsing software and then to work 1997. In addition, AOL’s Referral Server
closely with that firm to incorporate its agreement with Microsoft provided that
browsing technology seamlessly into the AOL would receive a two-dollar credit on
AOL flagship client software. Regardless referral fees for each new subscriber who
of which software it chose as its primary used Internet Explorer. So while the
offering, though, AOL still wanted the March 12, 1996 agreement ensured that
ability to satisfy consumer demand for nearly all new AOL subscribers would use
Internet Explorer, the Promotional Ser- service. Consequently, those AOL sub-
vices and Referral Server agreements en- scribers who did not already have Naviga-
listed AOL in the effort to convert the tor on their systems by the time that
OLS’s millions of existing subscribers to agreement took effect were even less likely
Internet Explorer. In fulfillment of these to use Navigator.
agreements, AOL began to prompt its sub- 298. So when Microsoft executives
scribers to download the latest version of learned that ninety-two percent of AOL
its client access software, complete with subscribers were using client software that
Internet Explorer, every time they logged included Internet Explorer, they could rest
off the service. assured that virtually the same percentage
296. It is not surprising, given the of AOL’s subscribers were using Internet
terms of the 1996 agreements between Explorer whenever they connected to the
Microsoft and AOL, that the percentage of Internet with AOL. In fact, an examination
AOL subscribers using a version of the of the ‘‘hit’’ data collected by AdKnowledge
client software that included Internet Ex- indicates that as of early 1999, only twelve
plorer climbed steeply throughout 1997. percent of AOL subscribers were using
By January 1998, Cameron Myhrvold was Navigator when they browsed the Web
able to report to Gates and the rest of (see Section V.H. 1., infra, for a description
Microsoft’s executive committee that nine- of the method by which AdKnowledge col-
ty-two percent of AOL’s subscribers (who lects data). AOL (and its CompuServe
by then numbered over ten million) were subsidiary), in turn, accounted for a very
using client access software that included large percentage of all IAP subscribers.
Internet Explorer. A year earlier, the In fact, according to data Microsoft collect-
same type of data had shown that only ed and used internally, AOL and Compu-
thirty-four percent of AOL subscribers Serve accounted for sixty-five percent of
were using AOL client software that in- the combined subscriber base of the top
cluded Internet Explorer. The marked eighty IAPs in late 1997. It is thus a
increase resulted in no small part from reasonable deduction that the restrictive
AOL’s efforts to convert its existing sub- terms Microsoft induced AOL to accept in
scribers to the newest version of its client 1996 pre-empted a substantial part of the
software. IAP channel for Internet Explorer.
297. Even if an AOL subscriber ob- 299. On November 24, 1998, AOL and
tains the new client software that includes Netscape agreed that AOL would acquire
Internet Explorer, he can still browse the Netscape for 4.3 billion dollars’ worth of
Web using any browsing software, includ- AOL stock. In a related transaction, AOL
ing Navigator, that happens to be installed entered into a three-year strategic alliance
on his hard drive. It is unlikely that many with Sun, pursuant to which Sun would
users will go to this effort, however, given develop and market both its and Net-
the ease of browsing with the software scape’s server software and would manage
that comes with AOL’s client software. the companies’ joint efforts in the area of
The average AOL user, being perhaps less electronic commerce. AOL purchased
technically sophisticated than the average Netscape not just for its browsing technol-
IAP subscriber, is particularly unlikely to ogy, but also for its electronic commerce
expend any effort to use browsing soft- business, its portal site, its brand recogni-
ware other than that which comes included tion, and its talented work force. To the
with the AOL software. AOL, acting pur- extent AOL was paying for Netscape’s
suant to the provisions of the March 1996 browser business, its primary goal was not
agreement, has not made it easy for its to compete for usage share against Inter-
subscribers to locate, download, and install net Explorer. Rather, AOL was interest-
a version of Navigator configured for its ed in Navigator to the extent that it drove
Web traffic to Netscape’s popular portal agree to continue our ‘‘virtual exclusivi-
site, NetCenter. AOL was also interested ty’’ provisions for use of IE within
in ensuring that an alternative to Internet [AOL]TTTT There are benefits to [Net-
Explorer remained viable; it wanted the scape] of replacing IE with the [Net-
option of dropping Internet Explorer to scape] browser—it would dramatically
retain enough vitality so that it would not shift browser market share (from about
be at the mercy of Microsoft for software 50/50 today to 65/35 in favor of [Net-
upon which the success of its online service scape] ). However, our present intent is
largely depended. Finally, AOL was in- to continue with IE, partly to get the
terested in keeping Navigator alive in or- continued marketing benefits of Win-
der to ensure that Microsoft did not gain dows bundling, and partly to maximize
total control over Internet standards. the likelihood of continued ‘‘deitente’’
300. AOL had the right under its with Microsoft.
agreement with Microsoft to terminate the By not exercising its right to terminate the
distribution and promotion provisions re- ‘‘virtual exclusivity’’ provisions in the
lating to Internet Explorer on December agreement with Microsoft, AOL commited
31, 1998. If AOL had decided to termi- itself to abide by those restrictions until
nate those provisions, the March 1996 January 1, 2001.
agreement would otherwise have remained 302. AOL does not believe that it must
in effect, and AOL could have continued to make every possible use of Netscape’s
base its proprietary access software on browsing software, and maximize Naviga-
Internet Explorer, taking advantage of Mi- tor’s usage share, in order to justify its
crosoft’s engineering and technical sup- purchase of Netscape. Now that AOL has
port. Microsoft, however, would have had the capability to produce its own state-of-
the option of removing AOL from the OLS the-art componentized browsing software,
folder. What is more, Chase informed however, the fact remains that, of the vari-
AOL that Microsoft might react to AOL’s ous advantages Microsoft currently offers
termination of the restrictive provisions by AOL in exchange for its agreement to
discontinuing the OLS folder altogether, distribute and promote Internet Explorer
which would have disadvantaged AOL’s with near exclusivity, the only one likely to
subsidiary OLS, CompuServe, which also still be of great value to AOL at the begin-
enjoyed a place in the OLS folder. ning of the new millennium is the inclusion
301. Despite its acquisition of Net- of AOL’s client software, and the pro-
scape, AOL did not exercise its right to motion of its service, within Windows. As-
terminate the exclusivity provisions of its suming Microsoft continues to offer that
agreement with Microsoft at the end of placement to AOL after January 1, 2001,
1998. AOL executives made the reasons the extent to which AOL continues to dis-
clear to AOL’s board of directors on No- tribute and promote Internet Explorer to
vember 17, 1998, when they presented the the exclusion of other browsing software
Netscape/Sun transactions for the board’s will depend largely on the value that AOL
approval. They wrote: assigns to that placement and to any new
In exchange for using IE as our primary forms of consideration Microsoft offers.
browser component, Microsoft bundles With respect to the value of placement in
[AOL] in the ‘‘Online Services Folder’’ the OLS folder, AOL registered approxi-
on the Windows desktop. This is an mately 970,000 new subscribers through
important, valued source of new custom- the OLS folder in the fiscal year ending in
ers for us, and therefore something we June 1998. This represented eleven per-
are inclined to continue. Microsoft has cent of the new subscriptions AOL gained
made it clear that they will not continue that year, and it was enough to prompt
to include us in Windows if we don’t AOL executives in November 1998 to de-
scribe the OLS folder to the AOL board as in the future. The AOL coup, which Mi-
an ‘‘important, valued source of new cus- crosoft accomplished only at tremendous
tomers for us.’’ expense to itself and considerable depriva-
303. If AOL were to halt its distribution of consumers’ freedom of choice, thus
tion and promotion of Internet Explorer, contributed to extinguishing the threat
the effect on Internet Explorer’s usage that Navigator posed to the applications
share would be significant, for AOL’s sub- barrier to entry.
scribers currently account for over one ii. Other Online Services
third of Internet Explorer’s installed base. 305. In the summer and fall of 1996,
But even if AOL stops distributing Inter- Microsoft entered into agreements with
net Explorer after January 1, 2001 and three other OLSs, namely, AT & T World-
updates its entire subscriber base to client Net, Prodigy, and AOL’s subsidiary, Com-
software that includes its own or some puServe. The provisions of these agree-
other proprietary browsing software, Mi- ments were substantially the same as
crosoft will still have ensured that, over those contained in the March 1996 agree-
the preceding four years (AOL subscribers ment between Microsoft and AOL. As with
began using proprietary access software the AOL agreement, Microsoft did not
based on Internet Explorer in November deign to waive the restrictive terms in
1996), a very large majority of AOL sub- these OLS agreements when it waived
scribers used Internet Explorer whenever similar terms in the Referral Server
they browsed the Web through the AOL agreements in the spring of 1998. The
service. This period is significantly longer OLSs were discontented with the provi-
than the two years Gates thought AOL’s sions that limited their ability to distribute
obligations would have to last in order for and promote non-Microsoft browsing soft-
the deal to be worthwhile to Microsoft. ware. Prodigy, for one, found those provi-
304. AOL’s subscribers now number sions objectionable and tried, unsuccessful-
sixteen million, and a substantial part of ly, to convince Microsoft to make the
all Web browsing is done through AOL’s terms less restrictive. AT & T World-
service. By granting AOL valuable desk- Net’s negotiator also told his Microsoft
top real estate (to MSN’s detriment) and counterpart, Brad Silverberg, that AT & T
other valuable consideration, Microsoft wanted to remain neutral as to browsing
succeeded in capturing for Internet Ex- software. Despite their reservations, the
plorer, and holding for a minimum of four OLSs accepted Microsoft’s terms because
years, one of the single most important they saw placement in the OLS folder as
channels for the distribution of browsing crucial, and Microsoft made clear that it
software. Starting the day Microsoft an- would only accord such placement to OLSs
nounced the March 1996 agreement with that agreed to give Internet Explorer ex-
AOL, and lasting at least until AOL an- clusive, or at least extremely preferential,
nounced its acquisition of Netscape in No- treatment. As one Microsoft negotiator
vember 1998, developers had reason to reported to Chase about AT & T World-
look into the foreseeable future and see Net, ‘‘It’s very clear that they really really
that non-Microsoft software would not at- want to be in the Windows box.’’ The
tain stature as the standard platform for OLSs became even more desperate for
network-centric applications. Microsoft inclusion in the OLS folder once it was
exploited that interval to enhance depen- announced that their largest competitor,
dence among developers on Microsoft’s AOL, had already won placement there.
proprietary interfaces for network-centric One Prodigy executive wrote to another
applications—dependence that will contin- two weeks after his company signed the
ue to inure to Microsoft’s benefit even if agreement with Microsoft, ‘‘it was abso-
AOL stops distributing Internet Explorer lutely critical to Prodigy’s business’’ and
‘‘essential in order to remain competitive’’ prevented IAPs from meeting consumer

that Prodigy obtain Microsoft’s agreement demand for copies of non-Microsoft brows-
to include the Prodigy Internet service ing software pre-configured for those ser-
icon in the OLS folder. vices. The IAPs subject to the most se-
306. Although none of these OLSs vere restrictions comprise fourteen of the
possessed subscriber bases approaching top fifteen access providers in North
AOL’s, they comprised, along with MSN, America and account for a large majority
the most significant OLSs other than of all Internet access subscriptions in this
AOL. By making arrangements with part of the world.
them similar to the one it enjoyed with 309. Not surprisingly, the inducements
AOL, Microsoft ensured that, for as long that Microsoft gave out and the restric-
as the agreements remained in effect, the tions it conditioned them upon have result-
overwhelming majority of OLS subscrib- ed in a substantial increase in Internet
ers would use Internet Explorer whenev- Explorer’s usage share. A study Micro-
er they accessed the Internet. Since soft conducted shows that at the end of
AOL owns CompuServe, the acquisition 1997, Internet Explorer enjoyed a ninety-
of Netscape may affect CompuServe’s ar- four percent weighted average share of
rangement with Microsoft in the future; shipments of browsing software by ISPs
however, the acquisition does not alter that had agreed to make Internet Explor-
the incentives for the other OLSs to en- er their default browser. By contrast, the
ter new agreements with Microsoft simi- study shows that Internet Explorer had
lar to the ones signed in 1996. only a fourteen percent weighted average
d. Effect of Microsoft’s Actions share of shipments of browsing software
in the IAP Channel by ISPs that had not agreed to make
307. As described above, Microsoft Internet Explorer their default browser.
gave valuable consideration at no charge to The same study shows that Microsoft’s
IAPs that agreed to distribute and pro- weighted average share of browser usage
mote a product that brought no revenue to by subscribers to ISPs that had made
Microsoft. By tendering additional valu- Internet Explorer their default browser
able perquisites (at the cost of lost reve- was over sixty percent at the end of 1997,
nue), Microsoft induced IAPs to restrict whereas its weighted average share of
drastically their distribution and pro- browser usage by subscribers to ISPs that
motion of Navigator. With the offer of did not make Internet Explorer their de-
still other concessions, Microsoft induced fault browser was less than twenty per-
IAPs to turn subscribers already using cent.
Navigator into Internet Explorer users. 310. An appropriate use of the Ad-
308. As Microsoft hoped and anticipat- Knowledge hit data shows the difference in
ed, the inducements it gave out gratis, as Internet Explorer’s success among catego-
well as the restrictive conditions it tied to ries of IAPs subject to different levels of
those inducements, had, and continue to distribution and promotion restrictions
have, a substantial exclusionary impact. (see Section V.H. 1., infra, for a description
First, many more copies of Internet Ex- of the method by which AdKnowledge col-
plorer have been distributed, and many lects data). One category was hits origi-
more IAPs have standardized on Internet nating from subscribers to IAPs that, ac-
Explorer, than would have been the case if cording to a chart prepared by Microsoft
Microsoft had not invested great sums, for its internal use, were not subject to any
and sacrificed potential sources of revenue, distribution or promotion restrictions. An-
with the sole purpose of protecting the other category was hits originating from
applications barrier to entry. Second, the subscribers to any IAP. A third category
restrictive terms in the agreements have was hits originating from subscribers to
AOL and CompuServe. The hit data show demand for Navigator, by creating their
that, from January 1997 to August 1998, content with Microsoft technologies, such
Internet Explorer’s usage share among as ActiveX, that would make the content
subscribers to IAPs that were uninhibited more appealing in appearance when ac-
by restrictions rose ten points, from about cessed with Internet Explorer.
twenty to about thirty percent. Over the 312. As early as the fall of 1995, Micro-
same period, Internet Explorer’s usage soft executives saw that they could help
share among all IAP subscribers, including reinforce the applications barrier to entry
those subject to restrictions, rose twenty- by inducing the leading ICPs to focus on
seven points, from twenty-two to forty- Microsoft’s browsing technologies. In the
nine percent. Finally, Internet’s Explor- October 1995 memorandum that Microsoft
er’s usage share among subscribers to two executives sent to Gates on Microsoft’s
IAPs subject to the most severe restric- browser campaign, one of the suggestions
tions, AOL and CompuServe, rose sixty- was, ‘‘Get 80% of Top Web Sites to Target
five points, from twenty-two to eighty-sev- Our Client.’’ Specifically, the executives
en percent. The differences in the degree wrote:
of Internet Explorer’s success in the three Content drives browser adoption, and
categories reveal the exclusionary effect of we need to go to the top five sites and
Microsoft’s interdiction of Navigator in the ask them, ‘‘What can we do to get you to
IAP channel. adopt IE?’’ We should be prepared to
4. Inducing ICPs to Enhance Internet write a check, buy sites, or add fea-
Explorer’s Usage Share at tures—basically do whatever it takes to
Navigator’s Expense drive adoption.
311. ICPs create the content that fills 313. By the middle of 1996, this pro-
the pages that make up the Web. Because posal had become corporate policy. Senior
this content can include advertisements executives at Microsoft believed that in-
and links to download sites, ICPs also ducing the ICPs responsible for the most
provide a channel for the promotion and popular Web sites to concentrate their dis-
distribution of Web browsing software. tributional, promotional, and technical ef-
Executives at Microsoft recognized that forts on Internet Explorer to the exclusion
ICPs were not nearly as important a dis- of Navigator would contribute significantly
tribution channel for browsing software as to maximizing Internet Explorer’s usage
OEMs and IAPs. Nevertheless, protecting share at Navigator’s expense. When Mi-
the applications barrier to entry was of crosoft began, in late 1996, to enlist the aid
such high priority at Microsoft that its of the most popular ICPs, it used an in-
senior executives were willing to invest ducement that it had already successfully
significant resources to enlist even ICPs in employed with the top IAPs: Microsoft
the effort. Executives at Microsoft deter- created an area on the ubiquitous Windows
mined that ICPs could aid Microsoft’s billboard for the promotion of ICPs and
browser campaign in three ways. First, then exchanged placement in that area at
ICPs could help build Internet Explorer’s no charge for the commitment of impor-
usage share by featuring advertisements tant ICPs to promote and distribute Inter-
and links for Internet Explorer, to the net Explorer exclusively and to create
exclusion of non-Microsoft browsing soft- their content with technologies that would
ware, on their Web pages. Second, those make it appear optimally when viewed
ICPs that distributed software as well as with Internet Explorer. Microsoft execu-
content could bundle Internet Explorer, tives referred to this tactic as ‘‘strategic
instead of Navigator, with those distribu- barter.’’ As was the case with the IAPs,
tions. Finally, ICPs could increase de- neither the sacrifice that Microsoft made
mand for Internet Explorer, and decrease to enlist the aid of the top ICPs nor the
restrictions it placed on them can be ex- pages. In addition, some ICPs display
plained except as components of a cam- certain of their content only to users who
paign to protect the applications barrier to pay a fee. The higher the volume of user
entry against Navigator. traffic an ICP’s site attracts, the higher
314. The Active Desktop was a Micro- the rates it can charge for the placement
soft feature that, if enabled, allowed the of advertising on its sites. Higher volume
Windows user to position Web pages as also brings increased revenue to ICPs that
open windows that appear on the back- charge users for content. Microsoft pre-
ground, or ‘‘wallpaper’’ of the Windows configured Internet Explorer 4.0 so that
desktop. If the Web pages featured the Active desktop and the Channel Bar
‘‘push’’ technology, they would automati- would appear by default on a user’s Win-
cally update themselves by downloading dows 95 PC system, and Microsoft forbade
information from their respective servers OEMs to disable either feature. Microsoft
at times scheduled by the user. Thus, a and the ICPs consequently surmised that a
user could position on his desktop wallpa- very high volume of user traffic would be
per Web pages that displayed periodically driven to the Web sites for which channels
updated stock prices, sports scores, and appeared on the Channel Bar. Intuit, for
news headlines. The Channel Bar was a one, believed that placement on the Win-
feature of the Active Desktop. If enabled, dows desktop would provide it with unpar-
the Channel Bar appeared as a rectangu- alleled promotional and distributional ad-
lar graphic on the desktop wallpaper. It vantages. As a result, the company was
was divided into pre-configured links to prepared to pay a substantial fee for place-
the Web sites of certain ICPs that implement on the Channel Bar. The managers
mented push technology. Microsoft intro- of ZDNet felt the same way, as did the
duced the Active Desktop, including the executives responsible for Disney’s Inter-
Channel Bar, as a feature of Internet Ex- net content. Some ICPs, including Intuit,
plorer 4.0, which it released on September even admitted to Microsoft that inclusion
30, 1997. on the Channel Bar was critical to them
315. As pre-configured by Microsoft, and asked what they would be obliged to
the top channel on the Channel Bar linked pay to be included.
to a Microsoft Web site, called the ‘‘Active 317. Based on the interest ICPs ex-
Channel Guide,’’ that provided a list of pressed, as well as Microsoft’s own assess-
sites enabled with push technology. The ment of the value of placement on the
next five channels were each labeled with a Channel Bar, executives at Microsoft con-
generic category such as ‘‘News & Tech- sidered charging ICPs for inclusion on the
nology’’ or ‘‘Business.’’ Clicking on one of Channel Bar. They estimated that ICPs
these five channels brought up a display of appearing directly on the Channel Bar
icons for specific Web sites. For example, would pay as much as $10 million per year,
clicking on the ‘‘Sports’’ channel brought and that even ICPs appearing under the
up a display including icons for sports- generic channels would pay a couple of
related Web sites such as ESPN SportsZ- million dollars each annually. These esti-
one and CNN SI. Below the five generic mates proved to comport well with the
category channels were branded ones, value that ICPs themselves actually at-
each of which would link the user directly tached to inclusion in the Channel Bar, at
to a specific ICP’s Web site. least before the feature had been tested in
316. Considering how ICPs generate the marketplace. For example, in Decem-
revenue, it is not surprising that they at- ber 1996, more than nine months before
tached great value to placement on the the Active Desktop made its debut, Micro-
Channel Bar. Most ICPs charge fees for soft signed an agreement with PointCast
placing advertisements on their Web pursuant to which PointCast agreed to pay
$ 10 million for the first year that its offer. The term ‘‘Other Browser’’ was de-
channel would appear directly on the fined in the agreements as Web browsing
Channel Bar. software that ranked first or second by
318. Following the signing of its agree- organizations in the business of measuring
ment with PointCast, Microsoft proceeded the usage of browsing software. This obli-
to enter similar ‘‘Top Tier’’ or ‘‘Platinum’’ gation was pertinent only to the six Top
agreements with twenty-three other ICPs, Tier and Platinum ICPs that distributed
all in the summer and early fall of 1997. Web browsing software during the term of
Microsoft used the term ‘‘Top Tier’’ to the agreements: PointCast, CNet, Intuit,
refer to the four non-Microsoft ICPs (in- AOL, Disney, and National Geographic.
cluding PointCast) given placement direct- 321. The Top Tier and Platinum agree-
ly on the Channel Bar and the term ‘‘Plati- ments also required the signatory ICPs to
num’’ to describe the twenty ICPs included promote Internet Explorer and no ‘‘Other
in the five generic categories accessible Browser’’ as their ‘‘browser of choice.’’ In
from the Channel Bar. Although the particular, the ICPs were required to dis-
agreements were individually negotiated play a logo for Internet Explorer and no
and their terms varied to some extent, the ‘‘Other Browser’’ on the home page of the
typical agreement obligated Microsoft to sites specified in the agreements and on
promote the ICP’s business in three ways. any other pages on which the ICP typical-
First, Microsoft agreed to include on the ly displayed such links. The ICPs were
Channel Bar (or in one of the lists accessi- also required to place Internet Explorer
ble directly from the Channel Bar) a link download links on their Web sites and to
that would send a user directly to the remove any links to Navigator’s download
ICP’s ‘‘push’’ site. Second, Microsoft site. Aggregating the Web sites offered
agreed to promote the ICP’s content in by the twenty-four Top Tier and Platinum
national public-relations and computer-in- ICPs, the number of Web sites affected by
dustry events, as well as on Microsoft Web this provision was thirty-one.
sites. Finally, Microsoft agreed to include
322. A third provision that the ICPs
introductory content from the ICP with
accepted in return for placement on the
certain distributions of Windows and In-
Channel Bar was a prohibition against
ternet Explorer.
their entering agreements with a vendor of
319. The agreements did not obligate an ‘‘Other Browser’’ whereby the ICPs
the Top Tier and Platinum ICPs to pay would pay money or provide other consid-
money to Microsoft in exchange for any of eration to the vendor in exchange for the
the benefits, including placement on the vendor’s promotion of the ICP’s branded
Windows desktop, that Microsoft extended content. Finally, the agreements required
to them. Rather, the agreements obligat- the ICPs, in designing their Web sites, to
ed the ICPs to compensate Microsoft in employ certain Microsoft technologies such
other ways. Although the agreement that as Dynamic HTML and ActiveX. Some of
PointCast signed purported to call for a the agreements actually required the ICPs
payment of ten million dollars to Micro- to create ‘‘differentiated content’’ that was
soft, it entitled PointCast to a discount on either available only to Internet Explorer
the full amount if it behaved as other ICPs users or would be more attractive when
undertook to do in their own Top Tier and viewed with Internet Explorer than with
Platinum agreements with Microsoft. any ‘‘Other Browser.’’ For example, the
320. The first obligation that the ICPs agreement with Intuit provided: ‘‘Some
undertook was to distribute Internet Ex- differentiated content may be available
plorer and no ‘‘Other Browser’’ in connec- only to IE users, some may simply be ‘best
tion with any custom Web browsing soft- when used with IE,’ with acceptable deg-
ware or CD–ROM content that they might radation when used with other browsers.’’
323. The ICPs were so intent on gain- I made it clear to him that beyond giv-
ing placement on the Channel Bar that ing him the best browser technology for
they even complied, albeit reluctantly, no cost that we were only will[ing] to do
when Microsoft imposed restrictions not some very modest favors in addition to
contained in the Top Tier and Platinum thatTTTT I was quite frank with him
agreements. For example, Microsoft de- that if he had a favor we could do for
manded that Disney remove its distinctive him that would cost us something like
branding from its link on Navigator’s user $1M to do that in return for switching
interface and threatened to remove Disney browsers in the next few months I would
from the Channel Bar if it did not accede. be open to doing that.
Executives at Disney believed that such a
requirement went beyond the language of 325. Intuit did not accept Gates’ offer
the Top Tier agreement that Disney had immediately, but less than a year later, in
signed with Microsoft, but they saw no June 1997, Intuit became one of the ICPs
recourse in making an issue of the matter, to sign a Platinum agreement with Micro-
for Microsoft could keep the Disney icon soft. This allowed Intuit to place a link to
off the Channel Bar during the pendency Quicken.com under the ‘‘Business’’ heading
of the dispute, and Microsoft would be less on Microsoft’s Channel Bar. In return,
amenable to promotional opportunities for however, the agreement required Intuit to
Disney in the future. Therefore, Disney distribute Internet Explorer, and no ‘‘Oth-
capitulated. In a similar fashion, a Micro- er Browser,’’ with its software products,
soft employee told a counterpart at Wired including those not distributed through the
Digital that even if the agreement between Channel Bar. Intuit also agreed to the
the companies did not technically prohibit other terms, relating to the promotion of
it, Wired Digital would be violating the browsing technologies, business relation-
spirit of its agreement if it placed a link to ships with Netscape, and the adoption of
any of its subsidiary sites on Navigator’s Internet Explorer technologies, that ap-
user interface. What Microsoft wanted to plied to the other Top Tier and Platinum
avoid were announcements suggesting that ICPs.
any of Microsoft’s ICP partners were also 326. Microsoft would have granted In-
cooperating with Netscape.
tuit a license to distribute the componen-
324. Intuit is a leading developer of tized version of Internet Explorer at no
software designed to help individuals and charge even if Intuit had not entered a
small businesses manage their finances. A Platinum Agreement. In the absence of
consumer can use one of Intuit’s popular the agreement’s restrictive terms, in fact,
products by purchasing a copy of the soft- Intuit likely would have distributed the
ware, but Intuit makes additional features componentized version of Internet Explor-
available through its Quicken.com Web er with its products while simultaneously
site. Thus, Intuit is both an ISV and an promoting Navigator and distributing to
ICP. Beginning in late 1995, Intuit distrib- consumers who requested it a version of
uted Navigator with its products in order Navigator specially-configured for Intuit’s
to ensure that its users could access the products. The only way Intuit could gain
features provided through Quicken.corn. a place on the Channel Bar, however, was
In 1996, Microsoft commenced the process by agreeing to the provisions that required
of converting Intuit from a Netscape part- it to limit its promotion of Navigator, to
ner to a distributor of Internet Explorer. cease distributing that browser altogether,
In July of that year, Gates reported to and to refuse to pay Netscape to promote
other Microsoft executives on his attempt Intuit products on Netscape’s Web sites.
to convince Intuit’s CEO to distribute In- Intuit accepted these terms reluctantly, for
ternet Explorer instead of Navigator: Navigator remained a popular product
with consumers, and Netscape’s Web sites power. Third, and more specifically, Mi-
still attracted a great deal of traffic. crosoft prohibited the ICPs from compen-
327. In addition to the Top Tier and sating Netscape for promotion of their
Platinum agreements, Microsoft entered products even while not attempting to pro-
into two other types of agreements with hibit the promotion itself. This reveals
ICPs. First, Microsoft signed so-called that Microsoft’s motivation was not simply
‘‘Gold’’ agreements with between thirty a desire to generate brand associations
and fifty ICPs. Pursuant to these agree- with Internet Explorer. Finally, Micro-
ments, Microsoft included ICPs in the ‘‘Ac- soft went beyond encouraging ICPs to
tive Channel Guide’’ Web site, which ap- take advantage of innovations in Micro-
peared whenever a Windows user clicked soft’s technology, explicitly requiring them
on the top link on the Channel Bar. In to ensure that their content appeared de-
exchange for this promotion, the Gold- graded when viewed with Navigator rather
agreement ICPs agreed to promote Inter- than Internet Explorer. Microsoft’s de-
net Explorer on at least equal footing with sire to lower demand for Navigator was
other browsing technology, including Navi- thus independent of, and far more malevo-
gator. lent than, a simple desire to increase de-
328. Second, Microsoft entered into mand for Internet Explorer.
IEAK agreements with between eight and 330. The terms of Microsoft’s agree-
twelve ICPs devoted to business-related ments with ICPs cannot be explained in
content. Under the typical IEAK agree- customary economic parlance absent Mi-
ment, Microsoft agreed to include function- crosoft’s obsession with obliterating the
ality in the IEAK that would facilitate the threat that Navigator posed to the applica-
inclusion of a link to the ICP’s Web site tions barrier to entry. Absent that obses-
under the ‘‘Business’’ category of the sion, Microsoft would not have given ICPs
Channel Bar. In exchange, the ICPs at no charge licenses to distribute Internet
agreed to distribute Internet Explorer ex- Explorer. What is more, Microsoft would
clusively (to the extent they distributed not have incurred the cost of componentiz-
any browsing software), to promote Inter- ing Internet Explorer and then licensed
net Explorer as their ‘‘browser software of that version to Intuit at no charge. By
choice,’’ to refrain from promoting any sacrificing opportunities to cover its costs
‘‘Other Browser’’ (defined as in the other and even make a profit, Microsoft ad-
ICP agreements) on their Web sites, and vanced its strategic goal of maximizing
to create content that could be accessed Internet Explorer’s usage share at Navi-
optimally only with Internet Explorer. gator’s expense. Whereas Microsoft
329. Cross-marketing arrangements in might have developed the Channel Bar
competitive markets do not necessarily without ulterior motive as a matter of
make those markets less competitive; product improvement, it would not have
however, four characteristics distinguish exchanged placement on the Channel Bar
this case from situations in which such for terms as highly and broadly restrictive
agreements are benign. First, Microsoft as the ones it actually extracted from
was able to offer ICPs an asset whose ICPs. Nevertheless, and to Microsoft’s dis-
value competitors could not hope, on ac- may, circumstances prevented these re-
count of Microsoft’s monopoly power, to strictions from having a large impact on
match. Second, Microsoft bartered that the relative usage shares of Internet Ex-
asset not to increase demand for a reve- plorer and Navigator.
nue-generating product, but rather to sup- 331. Despite Microsoft’s and the ICPs’
press the distribution and diminish the expectations to the contrary, consumers
attractiveness of technology that Microsoft showed little interest in the Channel Bar,
saw as a potential threat to its monopoly or in the Active Desktop in general, when
the features debuted in the fall of 1997. percentage of those existing on the Web,
Moreover, reviews of the Channel Bar in they comprised the offerings of all but a
computer-related publications were gener- few of the most popular ICPs. If the esti-
ally unfavorable. The Channel Bar may mation of one Microsoft employee in June
not have attracted consumer interest, but 1996 can be considered accurate, the af-
the ICP agreements relating to the Chan- fected ICPs accounted for a significant
nel Bar did attract controversy. Indeed, percentage of the Web traffic in North
Gates faced pointed questions about them America. Still, there is not sufficient evi-
when he appeared before the Senate Judi- dence to support a finding that Microsoft’s
ciary Committee in March 1998. Micro- promotional restrictions actually had a
soft took several measures to quell the substantial, deleterious impact on Naviga-
public criticism in early April 1998. First, tor’s usage share. For one thing, only six
it waived the most restrictive terms in the of the affected ICPs distributed any Web
Top Tier and Platinum agreements; there- browsing software bundled with their
after, the agreements required ICPs mere- products during the period in which Micro-
ly to promote Internet Explorer in a man- soft’s distributional restrictions remained
ner at least equal to their promotion of in effect. AOL obviously distributed a
Navigator. Second, Microsoft made no at- substantial volume of Web browsing soft-
tempt to renew the Gold and IEAK agree- ware during this period, but since AOL
ments, which had expired by their own was separately precluded under its Online
terms in March 1998. Third, Microsoft Services Folder agreement from distribut-
authorized its OEM licensees to configure ing virtually any non-Microsoft browsing
the Windows 98 desktop so that the Chan- software, AOL would not have distributed
nel Bar would not appear by default, and a significant number of Navigator copies
nearly every major OEM availed itself of
even if it had not entered a Top Tier
the permission. Deeming the Channel
agreement with Microsoft.
Bar more trouble than it was worth, Mi-
crosoft decided to eliminate the feature 333. Pursuant to its agreement with
entirely from future versions of Windows, Microsoft, Intuit distributed over five mil-
including Windows 98 updates. Therefore, lion copies of Internet Explorer with the
the provisions requiring ICPs to exclusive- 1998 versions of its products. Microsoft
ly distribute and promote Internet Explor- had offered Intuit a componentized brow-
er had all expired within seven months of ser while Netscape had not, and it stands
the Channel Bar’s release. All of the Top to reason that Intuit would in all probabili-
Tier and Platinum agreements had expired ty have distributed close to the same num-
by their own terms by December 31, 1998. ber of Internet Explorer copies even ab-
In light of its decision to discontinue the sent the distributional restrictions imposed
Channel Bar, Microsoft did not seek to by its contract. Still, Intuit had distribut-
renew any of them. ed over five million copies of Navigator
332. For a period of about eight with the 1997 versions of its products.
months, however, agreements with Micro- Unconstrained by its agreement with Mi-
soft had prohibited approximately thirty- crosoft, Intuit might have distributed with
four ICPs from distributing Navigator and its 1998 products a sum approaching that
from promoting Navigator in all but a few number of Navigator copies along with the
ways. For an overlapping period of be- componentized version of Internet Explor-
tween a year and a year-and-a-half, those er (particularly if the CD–ROM represent-
thirty-four ICPs, plus between thirty and ed its primary distribution vehicle). Of
fifty more, were required to promote In- the affected ICPs (excluding AOL), Intuit
ternet Explorer at least as prominently as almost certainly distributed the most Web
they promoted Navigator. Although the browsing software bundled with its prod-
affected Web sites made up only a tiny ucts.
334. All of the Top Tier, Platinum, and applications actually rely on browsing soft-
IEAK ICPs were capable of including ware to function. Microsoft’s efforts to
download links on their Web pages. While maximize Internet Explorer’s share of
many of these ICPs had included such browser usage at Navigator’s expense
links for Navigator prior to entering were intended to encourage developers to
agreements with Microsoft, only Internet use Windows-specific technologies when
Explorer download links were allowed they wrote their applications to rely on a
while the restrictive terms were in effect. browser. In addition to creating this in-
On the whole, it is reasonable to deduce centive indirectly, by disadvantaging Navi-
from the evidence that the restrictions Mi- gator, Microsoft targeted individual ISVs
crosoft imposed on ICPs prevented the directly, extracting from them commit-
distribution and installation of a significant ments to make their Web-centric applica-
quantity, but certainly less than ten mil- tions reliant on technology specific to In-
lion, copies of Navigator. ternet Explorer.
335. The terms Microsoft imposed did 338. Because of the importance of
prevent a number of the ICPs otherwise
‘‘time-to-market’’ in the software industry,
inclined to do so from compensating Net-
ISVs developing software to run on Win-
scape for its promotion of the ICPs’ con-
dows products seek to obtain beta releases
tent in Navigator or on Netscape’s Web
and other technical information relating to
sites. While they were in effect, Micro-
Windows as early and as consistently as
soft’s restrictions probably deprived Net-
possible. Since Microsoft decides which
scape of revenue measured in millions of
ISVs receive betas and other technical
dollars, but nowhere near $100 million.
support, and when they will receive it, the
336. It appears that, at the time the ability of an ISV to compete in the market-
obligation expired, Microsoft had not yet place for software running on Windows
begun to enforce its requirement that the products is highly dependent on Micro-
Top Tier, Platinum, and IEAK ICPs devel- soft’s cooperation. Netscape learned this
op content that would appear more attrac- lesson in 1995.
tive when viewed with Internet Explorer
than when viewed with Navigator. More- 339. In dozens of ‘‘First Wave’’ agree-
over, there is no evidence that any ICP ments signed between the fall of 1997 and
other than Disney developed any ‘‘differen- the spring of 1998, Microsoft has promised
tiated content’’ in response to its agree- to give preferential support, in the form of
ment with Microsoft. Therefore, there is early Windows 98 and Windows NT betas,
insufficient evidence to find that the re- other technical information, and the right
quirements that Microsoft sought to im- to use certain Microsoft seals of approval,
pose with respect to the use of Microsoft- to important ISVs that agree to certain
specific browsing technologies had any dis- conditions. One of these conditions is that
cernible, deleterious impact on Navigator’s the ISVs use Internet Explorer as the
usage share. default browsing software for any software
5. Directly Inducing ISVs to Rely on they develop with a hypertext-based user
Microsoft’s Browsing Technologies interface. Another condition is that the
Rather than APIs Exposed by Navi- ISVs use Microsoft’s ‘‘HTML Help,’’ which
gator is accessible only with Internet Explorer,
to implement their applications’ help sys-
337. Since 1995, more and more ISVs
tems.
have, like Intuit, enhanced the features of
their applications by designing them to 340. By exchanging its vital support
take advantage of the type of content and for the agreement of leading ISVs to make
functionality accessible through browsing Internet Explorer the default browsing
software. An increasing number of these software on which their products rely, Mi-
crosoft has ensured that many of the most minimize Navigator’s usage share among
popular Web-centric applications will rely Mac OS users.
on browsing technologies found only in 342. Just as pre-installation and pro-
Windows and has increased the likelihood motion by OEMs is one of the most effec-
that the millions of consumers using these tive means of raising the usage share of
products will use Internet Explorer rather browsing software among users of Intel-
than Navigator. Microsoft’s relations with compatible PC systems, pre-installation
ISVs thus represent another area in which and promotion by Apple is one of the most
it has applied its monopoly power to the effective means of raising the usage share
task of protecting the applications barrier of browsing software among the users of
to entry. Apple PC systems. Recognizing this, Bill
6. Foreclosing Apple as a Distribution Gates consistently urged Microsoft execu-
Channel for Navigator tives to persuade Apple to pre-install the
341. In the summer of 1995, Microsoft Mac OS version of Internet Explorer on
had been willing to cede to Netscape the its PC systems and to feature it more
development of browsing software for the prominently than the Mac OS version of
Mac OS, provided that Netscape would Navigator.
stop competing with the platform-level 343. By the summer of 1996, Apple was
browsing technologies that Microsoft was already shipping Internet Explorer with
developing for its 32–bit Windows prod- the Mac OS, but it was pre-installing Navi-
ucts. The genesis of this offer had been gator as the default browsing software.
Microsoft’s belief that Netscape could nev- After a meeting with Apple in June 1996,
er become the leading platform for net- Gates wrote to some of his top executives:
work-centric software development if it did ‘‘I have 2 key goals in investing in the
not distribute a middleware layer for the Apple relationship—1) Maintain our appli-
soon-to-be dominant 32–bit Windows plat- cations share on the platform and 2) See if
form. But once Netscape confirmed its we can get them to embrace Internet Ex-
determination to offer a middleware layer plorer in some way.’’ Later in the same
that would expose the same set of APIs on message, Gates expressed his desire that
Windows, the Mac OS, and other plat- Apple ‘‘agree to immediately ship IE on all
forms, Microsoft recognized that it needed their systems as the standard browser.’’
to stifle the attention that developers 344. One point of leverage that Micro-
would be inclined to devote to those APIs, soft enjoyed in its relations with Apple was
even when they rested on top of a non- the fact that ninety percent of Mac OS
Windows platform like the Mac OS. After users running a suite of office productivity
all, if Navigator became so popular on the applications had adopted Microsoft’s Mac
Mac OS that developers made extensive Office. In 1997, Apple’s business was in
use of the APIs exposed by that version of steep decline, and many doubted that the
Navigator, those developers would be dis- company would survive much longer. Ob-
posed to take advantage of identical APIs serving Apple’s poor performance in the
exposed by the version of Navigator writ- marketplace and its dismal prospects for
ten for the dominant platform, Windows. the future, many ISVs questioned the wis-
Microsoft thus committed itself to convinc- dom of continuing to spend time and mon-
ing developers that applications relying on ey developing applications for the Mac OS.
APIs exposed by Navigator would not Had Microsoft announced in the midst of
reach as many Mac OS users as applica- this atmosphere that it was ceasing to
tions that invoked technologies found ex- develop new versions of Mac Office, a
clusively in Microsoft’s browsing platform. great number of ISVs, customers, develop-
To this end, Microsoft set out to recruit ers, and investors would have interpreted
Mac OS users to Internet Explorer, and to the announcement as Apple’s death notice.
345. Recognizing the importance of ommending to Bill [Gates] that we cancel
Mac Office to Apple’s survival, Microsoft Mac Office 97.’’ Waldman believed that
threatened to cancel the product unless his counterpart ‘‘got the message that we
Apple compromised on a number of out- would, in fact, cancel.’’ Waldman went on
standing issues between the companies. to write that when his counterpart had
One of these issues was the extent to asked what specific problems Microsoft
which Apple distributed and promoted In- had with Apple’s recent response to Micro-
ternet Explorer, as opposed to Navigator, soft’s proposals, Waldman had replied by
with the Mac OS. mentioning four issues, including ‘‘IE
346. At the end of June 1997, the Mi- equal access.’’ By that, Waldman meant
crosoft executive in charge of Mac Office, Microsoft’s demand that the Mac OS make
Ben Waldman, sent a message to Gates Internet Explorer just as available to its
and Microsoft’s Chief Financial Officer, users as it made Navigator. According to
Greg Maffei. The message reflected Waldman, the Apple employee had re-
Waldman’s understanding that Microsoft sponded that Apple would not be able to
was threatening to cancel Mac Office: change the Mac OS’s default browser from
The pace of our discussions with Apple Navigator until it released the next version
as well as their recent unsatisfactory of the operating system product in the
response have certainly frustrated a lot summer of 1998.
of people at Microsoft. The threat to 349. A few days after the exchange
cancel Mac Office 97 is certainly the with Waldman, Gates informed those Mi-
strongest bargaining point we have, as crosoft executives most closely involved in
doing so will do a great deal of harm to the negotiations with Apple that the dis-
Apple immediately. I also believe that cussions ‘‘have not been going well at all.’’
Apple is taking this threat pretty seri- One of the several reasons for this, Gates
ouslyTTTT wrote, was that ‘‘Apple let us down on the
347. Waldman was actually an advocate browser by making Netscape the standard
for releasing Mac Office 97 promptly, and install.’’ Gates then reported that he had
he pressed for that outcome in his message already called Apple’s CEO (who at the
to Gates and Maffei. Although they ap- time was Gil Amelio) to ask ‘‘how we
plauded Waldman’s devotion to the prod- should announce the cancellation of Mac
uct, Gates and Maffei made clear that the OfficeTTTT’’
threat of canceling Mac Office was too
valuable a source of leverage to give up 350. Within a month of Gates’ call to
before Microsoft had extracted acceptable Amelio, Steve Jobs was once again Apple’s
concessions from Apple. Maffei wrote CEO, and the two companies had settled
Waldman, ‘‘Ben—great mail, but [we] need all outstanding issues between them in
a way to push these guys and this is the three agreements, all of which were signed
only one that seems to make them move.’’ on August 7, 1997. Under the agreement
In his response to Waldman, Gates asked titled ‘‘Technology Agreement,’’ which re-
whether Microsoft could conceal from Ap- mains in force today, Microsoft’s primary
ple in the coming month the fact that obligation is to continue releasing up-to-
Microsoft was almost finished developing date versions of Mac Office for at least five
Mac Office 97. years. Among the obligations that the
Technology Agreement places on Apple
348. In order to assure his superiors
are several relating to browsing software.
that he was pursuing corporate policy de-
spite his personal convictions, Waldman 351. First, Apple has agreed, for as
reported to Maffei in his June 1997 mes- long as Microsoft remains in compliance
sage that he had recently told his counter- with its obligation to support Mac Office,
part at Apple that Maffei ‘‘would be rec- to ‘‘bundle the most current version of
Microsoft’s Internet Explorer for Macin- agement has instructed the firm’s employ-
tosh TTT with all system software releases ees to not use Navigator in demonstrations
for Macintosh Computers (‘MacOS’) sold at trade shows and other public events.
by Apple.’’ The Technology Agreement Also with regard to the promotion of brow-
also provides: ‘‘While Apple may bundle ser technology, the agreement requires
browsers other than Internet Explorer Apple to display the Internet Explorer
with such Mac OS system software releas- logo on ‘‘all Apple-controlled web pages
es, Apple will make Internet Explorer for where any browser logo is displayed.’’ Fi-
Macintosh the default selection in the nally, the agreement grants Microsoft the
choice of all included internet browsers right of first refusal to supply the default
(i.e., when the user invokes the ‘Browse browsing software for any new operating
the Internet’ or equivalent icon, the Mac system product that Apple develops during
OS will launch Internet Explorer for Ma- the term of the agreement.
cintosh).’’ In fulfillment of this require-
ment, Apple did not include Navigator in 353. At the same time that it entered
the default installation of the Mac OS 8.5 the Technology Agreement, Microsoft con-
upgrade product. In other words, Naviga- cluded a ‘‘Preferred Stock Purchase
tor is not installed on the computer hard Agreement’’ and a ‘‘Patent Cross License
drive during the default installation, which Agreement’’ with Apple. These latter two
is the type of installation most users elect agreements place obligations on Microsoft
to employ. Therefore, most users who that are unrelated to Mac Office, and they
upgraded their Macintosh systems to Mac bind Apple in areas other than browsing
OS 8.5 were unable to access Navigator software. The fact that Microsoft and Ap-
without doing a customized installation. ple entered two other agreements at the
Having already installed an altogether ad- same time that they entered the Technolo-
equate browser (Internet Explorer) when gy Agreement does not change the fact
the Mac OS 8.5 upgrade completed its that Microsoft’s commitment to continue
default installation process, however, most developing Mac Office was at least partial
users are unlikely to trouble to install Nav- consideration for Apple’s commitment to
igator as well. distribute and promote Internet Explorer
352. The Technology Agreement fur- more favorably than Navigator. Indeed,
ther provides that ‘‘[a]ny other internet the language of the agreements them-
browsers bundled in the Mac OS system selves demonstrates that Microsoft and
software sold by Apple shall be placed in Apple saw the Mac Office and Internet
folders in the software as released.’’ In Explorer obligations as more closely linked
other words, Apple may not position icons to each other than to any other obligations
for non-Microsoft browsing software on the parties simultaneously undertook:
the desktop of new Macintosh PC systems Whereas the provision in the Technology
or Mac OS upgrades. Moreover, the Agreement setting forth Apple’s obli-
agreement states that ‘‘Apple will not be gations relating to browsing software ex-
proactive or initiate actions to encourage plicitly states that those obligations will
users to swap out Internet Explorer for last as long as Microsoft complies with its
Macintosh.’’ Both Apple and Microsoft obligation to continue supporting Mac Of-
read this term to prohibit Apple from pro- fice, the provisions in the other two agree-
moting non-Microsoft browsing software. ments describing the patent cross-license
The agreement even states that Apple will and Microsoft’s purchase of Apple stock
‘‘encourage its employees to use Microsoft mention neither browsing software nor
Internet Explorer for Macintosh for all Mac Office.
Apple-sponsored events and will not pro-
mote another browser to its employees.’’ 354. That the Mac Office and browsing
Pursuant to this provision, Apple’s man- software obligations are tied to each other
is highlighted by the fact that the Micro- inant reason Microsoft was prepared to
soft executives who negotiated the agree- make this sacrifice, and the sole reason
ment believe that Microsoft’s remedy, that it required Apple to make Internet
were Apple to fail to meet its obligations Explorer its default browser and restricted
with respect to browsing software, would Apple’s freedom to feature and promote
be to discontinue Mac Office. When, in non-Microsoft browsing software, was to
February 1998, a Microsoft employee pro- protect the applications barrier to entry.
posed giving Apple an HTML control in More specifically, the requirements and
exchange for Apple’s agreement to use restrictions relating to browsing software
Internet Explorer as its standard browser were intended to raise Internet Explorer’s
internally, Waldman informed the employ- usage share, to lower Navigator’s share,
ee that Apple was already obligated to use and more broadly to demonstrate to im-
Internet Explorer as its standard browser portant observers (including consumer, de-
internally and that Microsoft would revive velopers, industry participants, and inves-
the threat to discontinue Mac Office if tors) that Navigator’s success had crested.
Apple failed to comply with its obligation. Had Microsoft’s only interest in developing
In Waldman’s words: the Mac OS version of Internet Explorer
Sounds like we give them the HTML been to enable organizational customers
control for nothing except making IE using multiple PC operating-system prod-
the ‘‘standard browser for Apple?’’ I ucts to standardize on one user interface
think they should be doing this anyway. for Web browsing, Microsoft would not
Though the language of the agreement have extracted from Apple the commit-
uses the word ‘‘encourage,’’ I think that ment to make Internet Explorer the de-
the spirit is that Apple should be using fault browser or imposed restrictions on its
it everywhere and if they don’t do it, use and promotion of Navigator.
then we can use Office as a club. 356. Microsoft understands that PC
For at least a year after the Technology users tend to use the browsing software
Agreement went into effect, Waldman and that comes pre-installed on their machines,
other Microsoft employees continued to particularly when conspicuous means of
use the threat of reduced commitment to easy access appear on the PC desktop.
Mac Office in holding Apple to its commit- By guaranteeing that Internet Explorer is
ments to support Internet Explorer. the default browsing software on the Mac
355. Apple increased its distribution OS, by relegating Navigator to less favor-
and promotion of Internet Explorer not able placement, by requiring Navigator’s
because of a conviction that the quality of exclusion from the default installation for
Microsoft’s product was superior to Navi- the Mac OS 8.5 upgrade, and by otherwise
gator’s, or that consumer demand for it limiting Apple’s promotion of Navigator,
was greater, but rather because of the in Microsoft has ensured that most users of
terrorem effect of the prospect of the loss the Mac OS will use Internet Explorer and
of Mac Office. To be blunt, Microsoft not Navigator. Although the number of
threatened to refuse to sell a profitable Mac OS users is very small compared to
product in whose development the compa- the Windows installed base, the Mac OS is
ny had already invested substantial re- nevertheless the most important consum-
sources, and which was virtually ready for er-oriented operating system product next
shipment. Not only would this ploy have to Windows. Navigator needed high us-
wasted sunk costs and sacrificed substan- age share among Mac OS users if it was
tial profit, it also would have damaged ever to enable the development of a sub-
Microsoft’s goodwill among Apple’s cus- stantial body of cross-platform software
tomers, whom Microsoft had led to expect not dependent on Windows. By extracting
a new version of Mac Office. The predom- from Apple terms that significantly dimin-
ished the usage of Navigator on the Mac that. The period since 1996 has witnessed
OS, Microsoft severely sabotaged Naviga- a large increase in the usage of Microsoft’s
tor’s potential to weaken the applications browsing technologies and a concomitant
barrier to entry. decline in Navigator’s share. This rever-
sal of fortune might not have occurred had
G. Microsoft’s Success in Excluding Microsoft not improved the quality of In-
Navigator from the Channels that ternet Explorer, and some part of the
Lead Most Efficiently to Browser reversal is undoubtedly attributable to Mi-
Usage crosoft’s decision to distribute Internet
357. The cumulative effect of the strat- Explorer with Windows at no additional
agems described above was to ensure that charge. The relative shares would not
the easiest and most intuitive paths that have changed nearly as much as they did,
users could take to the Web would lead to however, had Microsoft not devoted its
Internet Explorer, the gate controlled by monopoly power and monopoly profits to
Microsoft. Microsoft did not actually pre- precisely that end.
vent users from obtaining and using Navi- 1. The Change in the Usage Shares of
gator (although it tried to do as much in Internet Explorer and Navigator
June 1995), but Microsoft did make it sig- 359. A developer of network-centric
nificantly less convenient for them to do applications wants as many consumers as
so. Once Internet Explorer was seen as possible to acquire and use its products.
providing roughly the same browsing ex- It knows that only consumers running a
perience as Navigator, relatively few PC browser that exposes the requisite APIs
users showed any inclination to expend the will be able to use network-centric applica-
effort required to obtain and install Navi- tions that rely on those APIs. So in decid-
gator. Netscape could still carpet bomb ing whether to concentrate its develop-
the population with CD–ROMs and make ment work on APIs exposed by Netscape’s
Navigator available for downloading. In Web browsing software or Microsoft’s, one
reality, however, few new users (i.e., ones of the questions a developer will ask is how
not merely upgrading from an old version much Navigator is being used in relation
of Navigator to a new one) had any incen- to Internet Explorer. Dividing the total
tive to install—much less download and usage of each browser product by the total
install—software to replicate a function for usage of all browsing software (i.e., usage
which OEMs and IAPs were already plac- of the installed base) answers this ques-
ing perfectly adequate browsing software tion, for it reveals the proportion of total
at their disposal. The fact that Netscape usage accounted for by each product. The
was forced to distribute tens of millions of relative attractiveness to developers of
copies of Navigator through high-cost car- Navigator and Internet Explorer thus de-
pet-bombing in order to obtain a relatively pends to a large extent on their relative
small number of new users only discloses shares of all browser usage.
the extent of Microsoft’s success in exclud- 360. According to estimates that Mi-
ing Navigator from the channels that lead crosoft executives cited to support their
most effectively to browser usage. testimony in this trial, and those on which
Microsoft relied in the course of its busi-
H. The Success of Microsoft’s Effort ness planning, the shares of all browser
to Maximize Internet Explorer’s usage enjoyed by Navigator and Internet
Usage Share at Navigator’s Ex- Explorer changed dramatically in favor of
pense Internet Explorer after Microsoft began
358. Microsoft’s efforts to maximize In- its campaign to protect the applications
ternet Explorer’s share of browser usage barrier to entry. These estimates show
at Navigator’s expense have done just that Navigator’s share fell from above
eighty percent in January 1996 to fifty-five interested in share of incremental browser
percent in November 1997, and that Inter- usage, not only as an indication of Naviga-
net Explorer’s share rose from around five tor’s and Internet Explorer’s relative at-
percent to thirty-six percent over the same tractiveness as platforms, but also as a
period. In April 1998, Microsoft relied on sensitive reading of the impact that its
measurements for internal planning pur- actions were having.
poses that placed Internet Explorer’s
share of all browser usage above forty-five 362. According to data on which Micro-
percent. These figures are broadly consis- soft relied in the course of its business,
tent with ones AOL relied on in evaluating Internet Explorer was, by late 1997, cap-
its acquisition of Netscape: AOL deter- turing a larger share of incremental brow-
mined that Navigator’s share had fallen ser usage than Navigator. Specifically,
from around eighty percent at the end of data that the company then deemed reli-
1996 to the ‘‘mid 50% range’’ in July 1998 able showed that fifty-seven percent of the
and that Internet Explorer’s share had new users of browsing software in the last
climbed to between forty-five and fifty per- six months of 1997 used Internet Explorer,
cent of the domestic market by late 1998. while only thirty-nine percent used Navi-
361. Before a developer sinks costs gator. By February 1998, Microsoft’s data
into writing applications that rely on APIs showed that sixty-two percent of the new
exposed by Navigator or Internet Explor- Internet connections over the previous six
er, the developer will also want to know months were using Internet Explorer, ver-
what share of browser usage each of the sus thirty-eight percent for Navigator.
competing platforms will enjoy in the fu- Since there is no indication that Navigator
ture, when the developer’s applications will users as a group employ their browsers
reach the marketplace, and even farther more than Internet Explorer users, these
into the future, when the developer will try data indicate that Internet Explorer’s
to sell updated versions of those applica- share of incremental usage had exceeded
tions. Dividing the new usage of each Navigator’s by late 1997. This meant that
browser product by the new usage of all Internet Explorer’s share of all browser
browsing software (i.e., incremental usage) usage was moving to surpass Navigator’s.
helps to formulate a prediction. If a brow- To Microsoft, these numbers not only
ser product’s current share of all browser marked a significant decline in Navigator’s
usage is fifty percent, and its share of attractiveness as a platform, they also re-
incremental browser usage is thirty per- flected the substantial impact of Micro-
cent, the product’s share of all browser soft’s actions.
usage will, assuming the share of incre-
mental usage does not rise, gradually ap- 363. The ‘‘hit’’ data collected by Ad-
proach thirty percent, as the size of the Knowledge comport with the share esti-
population of browser users grows and mates on which Microsoft and AOL relied
current users update their PC systems. internally. AdKnowledge is a company
So Navigator’s and Internet Explorer’s that markets Web advertising services.
relative attractiveness as platforms also Once the proprietor of a Web site sells
depends greatly on their relative shares of space on its pages to an advertiser, Ad-
incremental browser usage. Microsoft’s Knowledge stores the advertisements on
tactics were focused on channels for the its servers and delivers them to the appro-
distribution of new browsing software. priate pages when they are accessed by
Moreover, excluding the installed base users. One day every month, AdKnow-
from the calculation heightens the sensitiv- ledge monitors the number of times that
ity with which share of incremental brow- each of the advertisements appears on
ser usage reacts to contemporaneous users’ screens. Each appearance of an
forces. Microsoft was thus particularly advertisement on a user’s screen is called
a ‘‘hit.’’ As part of the hit data it collects, caching. Largely as a result of the re-
AdKnowledge logs the type of Web brows- strictive terms Microsoft prevailed upon
ing software used to access the pages on AOL to accept, Internet Explorer enjoys a
which the particular advertisements ap- very high share of browser usage by AOL
pear. Thus, the AdKnowledge data can be subscribers. Consequently, Internet Ex-
used to calculate monthly snapshots of the plorer’s share of all hits detected by Ad-
shares of usage that particular types of Knowledge is lower than its actual share of
Web browsing software attract from the all usage. Correcting for the effects of
population of users accessing the Web caching results in virtually no change to
pages that AdKnowledge monitors. To the AdKnowledge-based calculation of rel-
the extent AdKnowledge can detect the ative browser usage shares in early 1997;
IAPs through which individual users ac- however, it raises by approximately five
cess the monitored sites, the data can also percent the figure representing Internet
be used to calculate estimates of the usage Explorer’s share of browser usage in the
shares that particular types of browsing third quarter of 1998.
software attract from the subscriber bases
of particular IAPs. 366. Although AdKnowledge only mon-
itors hits to commercial Web pages, there
364. The AdKnowledge data show that
is no indication that certain types of Web
Internet Explorer’s share of hits to the
browsing software are used more than oth-
monitored Web sites rose from twenty
ers to access commercial, versus non-com-
percent in January 1997 to forty-nine per-
mercial Web sites. Furthermore, the
cent in August 1998 and that Navigator’s
same share trends reflected in the Ad-
share fell from seventy-seven to forty-
Knowledge data appear in data collected
eight percent over the same period. Di-
from a prominent academic site. The Uni-
viding the change in the respective num-
versity of Illinois at Urbana–Champlain
bers of Internet Explorer and Navigator
monitors, on a weekly basis, the browsing
hits from the first quarter of 1998 to the
software accessing its popular engineering
third quarter of 1998 by the change in the
Web site. The resulting data, which AOL
number of total hits over that same period
found important enough to rely on in eval-
yields a fifty-seven percent share of incre-
uating the purchase of Netscape, yield vir-
mental browser usage for Internet Explor-
tually the same usage share figures as do
er and a forty percent share for Navigator.
the AdKnowledge data.
These figures are again consistent with the
estimates on which Microsoft and AOL 367. AdKnowledge does not undertake
relied internally. to collect data on the use of browsing
365. When a user accessing the Inter- software to navigate proprietary OLS con-
net through AOL moves from one Web tent or intra-enterprise networks (‘‘intran-
page to another, AOL temporarily stores, ets’’). This does not detract from the val-
or ‘‘caches,’’ the first Web page on a local ue of the AdKnowledge data as a measure
server. When the subscriber seeks to re- of usage share for developers’ purposes,
turn to the first page, AOL delivers it from however, for most developers of network-
the local server rather than returning to centric applications look to write applica-
the Web for a refreshed version of the tions that will run through Web sites, not
page. AdKnowledge only counts a hit through OLS proprietary content or pages
when one of the monitored advertisements on an intranet. Most developers will
is served to a users’ computer from the therefore pay most attention to estimates
Web. Thus, AdKnowledge undercounts of the extent to which a particular type of
hits by AOL users. AdKnowledge’s at- browsing software is being used to browse
tempt to implement ‘‘cache-fooling’’ mea- the Web. Moreover, only a very small per-
sures has not eliminated the effects of centage of the copies of Web browsing
software in operation are used exclusively but rather at the expense of other browser
to navigate intranets. products, which, according to the MDC
368. The advertisement banners on data, collectively enjoyed a substantial
some Web sites alternate between differ- share into 1997. The AdKnowledge data,
ent advertisements. Assuming that Ad- by contrast, indicate that the share of us-
Knowledge delivers these advertisements, age attributable to browsers other than
a single visit to a Web site could register Internet Explorer and Navigator has nev-
with AdKnowledge as multiple hits as the er been substantial and that Internet Ex-
advertisements ‘‘rotate’’ on the user’s plorer’s rise has always been at Naviga-
screen. This phenomenon does not spoil tor’s expense.
the essential reliability of the AdKnlow- 371. The MDC estimates of the shares
ledge data as a reporter of browser usage attributable to Navigator and other non-
share, though. In order for there to be a Microsoft browser products in 1996 differ
bias of significant proportions, users of markedly from those on which Microsoft
either Internet Explorer or Navigator and AOL relied in the course of making
would have to exhibit a special propensity business judgments. Notably, in August
to keep pages open as the advertisements 1996, four months after it commissioned
rotate. There is no reason to believe that the first MDC survey, Microsoft continued
this is the case. to estimate Navigator’s share as exceeding
369. Thus none of the characteristics of eighty percent. In fact, the senior Micro-
the AdKnowledge data invalidate it as a soft executives who testified in this trial
useful measure of browser usage share. It still believed at the time of their testimony
is understandable, therefore, that in evalu- that Navigator’s usage share in late 1995
ating the purchase of Netscape, AOL and early 1996 had exceeded eighty per-
viewed AdKnowledge’s hit data as one of cent. To the extent the MDC estimates
the more reliable indicators of trends in differ from those which Microsoft and
the relative shares of all browser usage AOL used internally, and which senior Mi-
enjoyed by Navigator and Internet Ex- crosoft executives still embrace, the Court
plorer. is inclined to trust the latter estimates.
370. Microsoft’s economic witness, More broadly, the sets of questions con-
Richard Schmalensee, testified that survey tained in the MDC surveys and the inter-
data collected by Market Decisions Corpo- nally inconsistent responses they evoked
ration (‘‘MDC’’) provide a more accurate reveal that a substantial percentage of the
measure of the usage shares enjoyed by respondents misunderstood some of the
different brands of Web browsing software patently ambiguous questions they were
than do AdKnowledge’s hit data. The cal- asked, and that a large number responded
culations that Schmalensee made using the to questions when they were unsure of, or
MDC data lead to results that differ, in even clearly misinformed regarding, the
one main respect, from the results gener- answers. The Court accordingly gives no
ated with hit data. Whereas the AdKnow- weight to any of the conclusions that Mi-
ledge data show Navigator’s share falling crosoft draws from MDC survey data.
from seventy-five to fifty-six percent from 372. In summary, the estimates on
the first to the third quarter of 1997, the which Microsoft and AOL relied and the
MDC data show Navigator’s share holding measurements made by AdKnowledge and
steady at fifty-five or fifty-six percent over the University of Illinois provide an ade-
the same period. Although both sources quate basis for two findings: First, from
show Internet Explorer’s share gaining early 1996 to the late summer of 1998,
steadily throughout that period, the MDC Navigator’s share of all browser usage fell
data indicate that Internet Explorer’s rise from above seventy percent to around fifty
was coming not at Navigator’s expense, percent, while Internet Explorer’s share
rose from about five percent to around late 1996, the average user could not dis-
fifty percent; second, by 1998, Navigator’s cern a significant difference in quality and
share of incremental browser usage had features between the latest versions of In-
fallen below forty percent while Internet ternet Explorer and Navigator. As Micro-
Explorer’s share had risen above sixty soft’s top executives predicted, however,
percent. All signs point to the fact that Internet Explorer’s quality and features
Internet Explorer’s share has continued to have never surpassed Navigator’s to such
rise—and Navigator’s has continued to de- a degree as to compel a significant part of
cline—since the late summer of 1998. It is Navigator’s installed base to switch to In-
safe to conclude, then, that Internet Ex- ternet Explorer. An internal Microsoft
plorer’s share of all browser usage now presentation concluded in February 1998
exceeds fifty percent, and that Navigator’s that ‘‘[m]any customers see MS and NS as
share has fallen below that mark. parity products; no strong reason to
373. These trends will continue. In switch,’’ and another internal review three
February 1998, Kumar Mehta, the Micro- months later reported, ‘‘IE4 is fundamen-
soft employee responsible for tracking tally not compelling’’ and ‘‘[n]ot differenti-
browser share, told Brad Chase that Mi- ated from Netscape v[ersion]4—seen as a
crosoft’s best model projected that Inter- commodity.’’ For a time, even among new
net Explorer’s usage share in early 2001 users, Navigator was likely to win most
would stand between sixty and sixty-eight choices between comparable browser soft-
percent. This comports with the forecast ware, because most people associated the
on which AOL relied in deciding to pur- Internet and cutting-edge browsing tech-
chase Netscape: The report presented to nology with Netscape rather than with Mi-
AOL’s board of directors prior to their crosoft. So, if Microsoft had taken no
vote on the transaction predicted that action other than improving the quality
Navigator’s usage share would fall to be- and features of its browser, Internet Ex-
tween thirty-five and forty percent by late plorer’s share of usage would have risen
2000. The most reasonable prediction, far less and far more slowly than it actual-
then, is that by January 2001, Internet ly did. While Internet Explorer’s increase
Explorer’s usage share will exceed sixty in usage share accelerated and began to
percent while Navigator’s share will have cut deeply into Navigator’s share after Mi-
fallen below forty percent. crosoft released the first version of Inter-
net Explorer (3.0) to offer quality and
374. Navigator’s large and continuing
features approaching those of Navigator,
decline in usage share has demonstrated to
the acceleration occurred months before
developers the product’s failure to mature
Microsoft released the first version of In-
as the standard software used to browse
ternet Explorer (4.0) to win a significant
the Web. Internet Explorer’s success in
number of head-to-head product reviews
gaining usage share, together with the lack
against Navigator. This indicates that su-
of contenders other than Navigator, has
perior quality was not responsible for the
simultaneously sent the clear message to
dramatic rise Internet Explorer’s usage
developers that no platform for network-
share.
centric applications can compete for ubiq-
uity with the 32–bit Windows API set. 376. Including Internet Explorer with
Windows at no additional charge likely
2. The Cause of the Change in Usage helped the usage share of Microsoft’s
Shares browsing software. It did not, however,
375. The changes in usage share de- prevent OEMs from meeting demand for
scribed above would likely not have oc- Navigator, which remained higher than de-
curred had Microsoft not improved its mand for Internet Explorer well into 1998.
browsing software to the point that, by Moreover, bundling Internet Explorer
with Windows had no effect on the distri- enough platform for the development of
bution and promotion of browsing software network-centric applications to weaken the
by IAPs or through any of the other chan- applications barrier to entry. As dis-
nels that Microsoft sought to pre-empt by cussed above, the APIs that Navigator ex-
other means. Had Microsoft not offered poses could only attract enough developer
distribution licenses for Internet Explor- attention to threaten the applications bar-
er—and other things of great value—to rier to entry if Navigator became—or ap-
other firms at no charge; had it not pre- peared destined to become—the standard
vented OEMs from removing the promi- software used to browse the Web. Naviga-
nent means of accessing Internet Explorer tor’s installed base may continue to grow,
and limited their ability to feature Naviga- but Internet Explorer’s installed base is
tor; and had Microsoft not taken all the now larger and growing faster. Conse-
other measures it used to maximize Inter- quently, the APIs that Navigator exposes
net Explorer’s usage share at Navigator’s will not attract enough developer attention
expense, its browsing software would not to spawn a body of cross-platform, net-
have weaned such a large amount of usage work-centric applications large enough to
share from Navigator, much less over- dismantle the applications barrier to entry.
taken Navigator in three years.
379. Not only did Microsoft prevent
I. The Success of Microsoft’s Effort Navigator from undermining the applica-
to Protect the Applications Barri- tions barrier to entry, it inflicted consider-
er to Entry from the Threat Posed able harm on Netscape’s business in the
by Navigator process. By ensuring that the firms com-
377. In late 1995 and early 1996, Navi- prising the channels that lead most effi-
gator seemed well on its way to becoming ciently to browser usage distributed and
the standard software for browsing the promoted Internet Explorer to the virtual
Web. Within three years, however, Micro- exclusion of Navigator, Microsoft relegated
soft had successfully denied Navigator that Netscape to more costly and less effective
status, and had thereby forestalled a seri- methods of distributing and promoting its
ous potential threat to the applications browsing software. After Microsoft start-
barrier to entry. Indeed, Microsoft’s Ku- ed licensing Internet Explorer at no
mar Mehta felt comfortable expressing to charge, not only to OEMs and consumers,
Brad Chase in February 1998 his ‘‘PER- but also to IAPs, ISVs, ICPs, and even
SONAL opinion’’ that ‘‘the browser battle Apple, Netscape was forced to follow suit.
is close to over.’’ Mehta continued: ‘‘We Despite the fact that it did not charge for
set out on this mission 2 years ago to not Internet Explorer, Microsoft could still de-
let netscape dictate standards and control fray the massive costs it was undertaking
the browser api’s [sic]. All evidence today to maximize usage share with the vast
says they don’t.’’ profits earned licensing Windows. Be-
378. The population of browser users is cause Netscape did not have that luxury, it
expanding so quickly that Navigator’s in- could ill afford the dramatic drop in reve-
stalled base has grown even as its usage nues from Navigator, much less to pay for
share has fallen. In fact, AOL credited an the inefficient modes of distribution to
estimate stating that Navigator’s installed which Microsoft had consigned it. The
base in the United States alone grew from financial constraints also deterred Net-
fifteen million in 1996 to thirty-three mil- scape from undertaking technical innova-
lion in December 1998. By all indications, tions that it might otherwise have imple-
Navigator’s installed base will continue to mented in Navigator. Microsoft was not
grow. This does not mean, however, that altogether surprised, then, when it learned
Navigator is—or will be—an attractive in November 1998 that Netscape had sur-
rendered itself to acquisition by another cember 1998, during a meeting convened

company. to analyze the implications of the AOL/net-
380. Were AOL ever to attempt to re- scape/Sun transactions, Gates declared to
vive Navigator’s usage share with the in- the assembled Microsoft executives, ‘‘AOL
tention of building it into a significant doesn’t have it in their genes to attack us
platform for the development of network- in the platform space.’’
centric applications, that effort would not 383. Finally, if its coveted placement in
make any headway before January 1, the Online Services Folder fails to entice
2001, when AOL’s obligation to distribute AOL into extending its agreement with
Internet Explorer on a preferential basis Microsoft past January 2001, Microsoft as-
expires. In fact, there is presently no in- suredly has the wherewithal to offer AOL
dication that AOL will try even after that additional inducements in exchange for yet
date to raise Navigator’s usage share sub- more commitments that will preclude a
stantially. First of all, as explained above, resurgence of Navigator’s usage share.
AOL need not revive Navigator’s usage Even if, despite the absence of signs to
share in order to achieve an adequate re- that effect, AOL drops Internet Explorer
turn on its investment in Netscape. Sec-
and adopts Navigator with a mind to reviv-
ondly, while the due-diligence summary
ing Navigator’s usage share after January
and board-of-directors presentation that
1, 2001, Navigator’s transformation into a
preceded the Netscape acquisition discuss
platform attractive enough to threaten the
AOL’s commitment to invest marketing
applications barrier would be a chimerical
resources in an effort to stem the slide in
aspiration, especially considering Micro-
Navigator’s share, neither report indicates
soft’s increasing influence over network-
any intention on AOL’s part to invest in
centric standards. In any event, nothing
actually raising Navigator’s share.
that happens after January 1, 2001 will
381. Also detracting from the notion change the fact that Microsoft has suc-
that AOL is committed to reviving the ceeded in forestalling for several years
middleware threat through Navigator is Navigator’s evolution in that direction.
the fact that AOL included in the Novem-
ber 1998 agreement with Sun a provision 384. Although the suspicion lingers, the
making clear that the new partnership evidence is insufficient to find that Micro-
with Sun in no way obligated AOL to drop soft’s ambition is a future in which most or
Internet Explorer from its client software all of the content available on the Web
in favor of Navigator. The provision would be accessible only through its own
states that ‘‘AOL has no present intention browsing software. The evidence does,
to make any such replacement or use and however, reveal an intent to ensure that if
shall have no obligation to make any such and when full-featured, server-based appli-
replacement or use, and that it is AOL’s cations begin appearing in large numbers
present expectation that it TTT may seek to on the Web, the number of them relying
renew and/or extend and expand its pres- solely on middleware APIs (such as those
ent agreement with Microsoft Corporation exposed by Navigator) will be too few to
to continue to distribute Internet Explor- attenuate the applications barrier to entry.
er.’’ 385. At least partly because of Naviga-
382. Bill Gates himself, who is not one tor’s substantial usage share, most devel-
to underestimate threats to Microsoft’s opers continue to insist that their Web
business, apparently concluded after re- content be more-or-less as attractive when
viewing the November 1998 transactions accessed with Navigator as it is when ac-
that AOL would not seek to develop a cessed with Internet Explorer. Navigator
platform that would compete with Micro- will retain an appreciable usage share
soft’s network-centric interfaces. In De- through the end of 2000. After that point,
AOL may be able and willing to prevent Sun sponsored a process for the creation
Internet Explorer’s share from achieving of a software method that would allow
such dominance that a critical mass of developers writing in Java to rely directly
developers will cease to concern them- upon APIs exposed by a particular operat-
selves with ensuring that their Web con- ing system in a way that would neverthe-
tent at least be accessible through non- less allow them to port their applications
Microsoft browsing software. So, as mat- with relative ease to JVMs running on
ters stand at present, while Microsoft has different operating systems.
succeeded in forestalling the development
of enough full-featured, cross-platform, 388. On March 12, 1996, Sun signed an
network-centric applications to render the agreement granting Microsoft the right to
applications barrier penetrable, it is not distribute and make certain modifications
likely to drive non-Microsoft PC Web to Sun’s Java technologies. Microsoft
browsing software from the marketplace used this license to create its own Java
altogether. development tools and its own Windows-
compatible Java runtime environment.
VI. MICROSOFT’S RESPONSE TO Because the motivation behind the Sun-
THE THREAT POSED BY SUN’S sponsored effort ran counter to Microsoft’s
IMPLEMENTATION OF JAVA interest in preserving the difficulty of port-
ing, Microsoft independently developed
[7] 386. For Microsoft, a key to main-
methods for enabling ‘‘calls’’ to ‘‘native’’
taining and reinforcing the applications
Windows code that made porting more
barrier to entry has been preserving the
difficult than the method that Sun was
difficulty of porting applications from Win-
striving to make standard. Microsoft im-
dows to other platforms, and vice versa.
plemented these different methods in its
In 1996, senior executives at Microsoft be-
developer tools and in its JVM. Microsoft
came aware that the number of developers
also discouraged its business allies from
writing network-centric applications in the
aiding Sun’s effort. For example, Gates
Java programming language had become
told Intel’s CEO in June 1996 that he did
significant, and that Java was likely to
not want the Intel Architecture Labs coop-
increase in popularity among developers.
erating with Sun to develop methods for
Microsoft therefore became interested in
calling upon multimedia interfaces in Win-
maximizing the difficulty with which appli-
dows.
cations written in Java could be ported
from Windows to other platforms, and vice 389. Since they were custom-built for
versa. enabling native calls to Windows, and be-
cause they were developed by the firm
A. Creating a Java Implementation with the most intimate knowledge of Win-
for Windows that Undermined dows, the native methods that Microsoft
Portability and Was Incompatible produced were slightly easier for develop-
with Other Implementations ers to use than the method that derived
387. Although Sun intended Java tech- from the Sun-sponsored effort, and Java
nologies eventually to allow developers to applications using Microsoft’s methods
write applications that would run on multi- tended to run faster than ones calling upon
ple operating systems without any porting, Windows APIs with Sun’s method. If a
the Java class libraries have never exposed developer relied on Microsoft’s methods
enough APIs to support full-featured ap- rather than Sun’s, however, his Java appli-
plications. Java developers have thus al- cation would be much more difficult to port
ways needed to rely on platform-specific from the Windows-compatible JVM to
APIs in order to write applications with JVMs designed to run on different operat-
advanced functionality. Recognizing this, ing systems.
390. Microsoft easily could have imple- for Windows that it shipped with Internet
mented Sun’s native method along with its Explorer 4.0.
own in its developer tools and its JVM, 392. The license agreement it had
thereby allowing Java developers to choose signed with Sun the previous year obligat-
between speed and portability; however, it ed Microsoft to offer RMI, at a minimum,
elected instead to implement only the Mi- on its developer Web site. Microsoft did
crosoft methods. The result was that if a so, but with respect to the RMI beta re-
Java developer used the Sun method for lease, it buried the link in an obscure
making native calls, his application would location and neglected to include an entry
not run on Microsoft’s version of the Win- for it in the site’s index. Referring to
dows JVM, and if he used Microsoft’s na- RMI and any Java developers who might
tive methods, his application would not run access Microsoft’s site looking for it, a
on any JVM other than Microsoft’s ver- Microsoft employee wrote to his approving
sion. Far from being the unintended con- manager, ‘‘They’ll have to stumble across
sequence of an attempt to help Java devel- it to know it’s thereTTTT I’d say it’s pretty
opers more easily develop high-performing buried.’’
applications, incompatibility was the in- 393. It is unclear whether Microsoft
tended result of Microsoft’s efforts. In ultimately placed RMI in a more promi-
fact, Microsoft would subsequently threat- nent place on its developer Web site.
en to use the same tactic against Apple’s Even if it did, the fact that RMI was not
QuickTime. Microsoft continued to refuse shipped with Microsoft’s Java runtime en-
to implement Sun’s native method until vironment for Windows meant that Java
November 1998, when a court ordered it to developers could not rely on its being in-
do so. It then took Microsoft only a few stalled on consumers’ PC systems. If de-
weeks to implement Sun’s native method velopers wanted their Java applications to
in its developer tools and JVM. call upon communications interfaces guar-
391. Although the Java class libraries anteed to be present on Windows users’
have yet to provide enough functionality to systems, they had no choice but to rely on
support full-featured applications, they the Microsoft-specific interfaces instead of
have gradually expanded toward that goal. RMI. Microsoft undertook the effort to
In 1997, Sun added a class library called remove RMI from the rest of the Java
Remote Method Invocation, or ‘‘RMI,’’ class libraries, instead of simply leaving it
which allowed Java applications written to in place and allowing developers to choose
call upon it to communicate with each oth- between it and Windows-specific inter-
er in certain useful ways. Microsoft was faces, for the sole purpose of making it
not willing to stand by and allow Java more difficult for Java developers to write
developers to rely on new Java class li- easily portable applications.
braries unimpeded. The more that Java 394. In a further effort intended to in-
developers were able to satisfy their need crease the incompatibility between Java
for functionality by calling upon the Java applications written for its Windows JVM
class libraries, the more portable their ap- and other Windows JVMs, and to increase
plications would become. Microsoft had the difficulty of porting Java applications
developed a set of Windows-specific inter- from the Windows environment to other
faces to provide functionality analogous to platforms, Microsoft designed its Java de-
the functionality RMI offered; it wanted veloper tools to encourage developers to
Java developers to rely on this Windows- write their Java applications using certain
specific technology rather than Sun’s ‘‘keywords’’ and ‘‘compiler directives’’ that
cross-platform interface. Microsoft thus could only be executed properly by Micro-
refused to include RMI as a standard com- soft’s version of the Java runtime environ-
ponent of the Java runtime environment ment for Windows. Microsoft encouraged
developers to use these extensions by ship- achieve the necessary ubiquity on Win-
ping its developer tools with the extensions dows.
enabled by default and by failing to warn
developers that their use would result in 396. Determined to induce developers
applications that might not run properly to write Java applications that relied on its
with any runtime environment other than version of the runtime environment for
Microsoft’s and that would be difficult, and Windows rather than on Sun-compliant
perhaps impossible, to port to JVMs run- ones, Microsoft made a large investment of
ning on other platforms. This action com- engineering resources to develop a high-
ported with the suggestion that Microsoft’s performance Windows JVM. This made
Thomas Reardon made to his colleagues in Microsoft’s version of the runtime environ-
November 1996: ‘‘[W]e should just quietly ment attractive on its technical merits. To
grow jvv [Microsoft’s developer tools] hinder Sun and Netscape from improving
share and assume that people will take the quality of the Windows JVM shipped
more advantage of our classes without with Navigator, Microsoft pressured Intel,
ever realizing they are building win32–only which was developing a high-performance
java apps.’’ Microsoft refused to alter its Windows-compatible JVM, to not share its
developer tools until November 1998, when work with either Sun or Netscape, much
a court ordered it to disable its keywords less allow Netscape to bundle the Intel
and compiler directives by default and to JVM with Navigator. Gates was himself
warn developers that using Microsoft’s involved in this effort. During the August
Java extensions would likely cause incom- 2, 1995 meeting at which he urged Intel to
patibilities with non-Microsoft runtime en- halt IAL’s development of platform-level
vironments. software, Gates also announced that Intel’s
cooperation with Sun and Netscape to de-
B. Inducing Developers to Use the velop a Java runtime environment for sys-
Microsoft Implementation of Java tems running on Intel’s microprocessors
Rather than Sun–Compliant Im- was one of the issues threatening to under-
plementations mine cooperation between Intel and Micro-
395. If all Microsoft had done to com- soft. By the spring of 1996, Intel had
bat the growth of easily portable Java developed a JVM designed to run well on
applications had been to increase the in- Intel-based systems while complying with
compatibility between its Java implemen- Sun’s cross-platform standards. Microsoft
tation and ones complying with Sun’s stan- executives approached Intel in April of
dards, the effect might have been limited. that year and urged that Intel not take
For if Sun could have assured developers any steps toward allowing Netscape to
that a Windows-compatible Java runtime ship this JVM with Navigator.
environment that complied with Sun’s
standards would be installed on as many 397. By bundling its version of the
Windows PCs as Microsoft’s version, and Windows JVM with every copy of Internet
that it would run Java applications as well Explorer and expending some of its sur-
as Microsoft’s, developers might have con- plus monopoly power to maximize the us-
sidered the cost in portability associated age of Internet Explorer at Navigator’s
with relying on Microsoft-specific technolo- expense, Microsoft endowed its Java run-
gies and instead written their Java applica- time environment with the unique attrib-
tions using Sun’s developer tools. When ute of guaranteed, enduring ubiquity
Netscape announced in May 1995 that it across the enormous Windows installed
would include with every copy of Naviga- base. As one internal Microsoft presenta-
tor a copy of a Windows JVM that com- tion from January 1997 put it, the compa-
plied with Sun’s standards, it appeared ny’s response to cross-platform Java en-
that Sun’s Java implementation would tailed ‘‘[i]ncreased IE share—integrat[ion]
with Windows.’’ Partly as a result of the 400. Recognizing ISVs as a channel

damage that Microsoft’s efforts against through which Java runtime environments
Navigator inflicted on Netscape’s business, that complied with Sun’s standards could
Netscape decided in 1998 that it could no find their way onto Windows PC systems,
longer afford to do the engineering work Microsoft induced ISVs to distribute Mi-
necessary to continue bundling up-to-date crosoft’s version instead of a Sun-compli-
JVMs with Navigator. Consequently, it ant one. First, Microsoft made its JVM
announced that, starting with version 5.0, available to ISVs separately from Internet
Navigator would cease to be a distribution Explorer so that those uninterested in
vehicle for JVMs compliant with Sun’s bundling browsing software could never-
standards. theless bundle Microsoft’s JVM. Micro-
398. The guaranteed presence of Mi- soft’s David Cole revealed the motivation
crosoft’s runtime environment on every for this step in a message he wrote to Jim
Windows PC and the decreasing likelihood Allchin in July 1997: ‘‘[W]e’ve agreed that
that the primary host of the Sun-compliant we must allow ISVs to redistribute the
runtime environment (Navigator) would be Java VM standalone, without IE. ISVs
present induced many Java developers to that do this are bound into Windows be-
write their applications using Microsoft’s cause that’s the only place the VM works,
developer tools, for doing so guaranteed and it keeps them away from Sun’s APIs.’’
that those applications would run in the 401. Microsoft took the further step of
Java environment most likely to be install- offering valuable things to ISVs that
ed on a Windows user’s PC. Owing to agreed to use Microsoft’s Java implemen-
Microsoft’s deliberate design decisions, tation. Specifically, in the First Wave
more developers using Microsoft’s Java agreements that it signed with dozens of
developer tools meant that more Java ap- ISVs in 1997 and 1998, Microsoft condi-
plications would rely on the Windows-spe- tioned early Windows 98 and Windows NT
cific technologies in Microsoft’s runtime betas, other technical information, and the
environment and thus would not be porta- right to use certain Microsoft seals of ap-
ble. proval on the agreement of those ISVs to
399. Microsoft was not content to rely use Microsoft’s version of the Windows
solely on its anti-Navigator efforts to en- JVM as the ‘‘default.’’ Microsoft and the
sure that its Java runtime environment ISVs all read this requirement to obligate
would be the only one guaranteed to be the ISVs to ensure that their Java applica-
present on Windows PC systems. After tions were compatible with Microsoft’s
all, Netscape was not the only ISV capable version of the Windows JVM. The only ef-
of placing copies of a runtime environment fective way to ensure compatibility with
on users’ systems. Many developers of Microsoft’s JVM was to use Microsoft’s
network-centric applications were just as Java developer tools, which in turn meant
capable of bundling compatible runtime using Microsoft’s methods for making na-
environments with their applications as tive calls and (unless the developers were
they were of bundling browsing software. especially wary and sophisticated) Micro-
If the right runtime environment already soft’s other Java extensions. Thus, a very
came bundled with the right browsing soft- large percentage of the Java applications
ware, all the more convenient for the ISV. that the First Wave ISVs wrote would run
If not (as would increasingly be the case only on Microsoft’s version of the Win-
after Netscape stopped bundling a runtime dows JVM. With that in mind, the First
environment with Navigator), though, the Wave ISVs would not have any reason to
ISV could still separately obtain the de- distribute with their Java applications any
sired runtime environment and bundle it JVM other than Microsoft’s. So, in ex-
with every copy of its product. change for costly technical support and
other blandishments, Microsoft induced RealNetworks could not have designed its
dozens of important ISVs to make their media player to support both Microsoft’s
Java applications reliant on Windows-spe- technologies and ones developed by Sun or
cific technologies and to refrain from dis- Netscape. Although RealNetworks subse-
tributing to Windows users JVMs that quently announced that it planned to con-
complied with Sun’s standards. The rec- tinue developing its own fundamental
ord contains no evidence that the relevant streaming software, the July 18 agreement
provision in the First Wave agreements limited the extent to which that software
had any purpose other than to maximize would include Java technologies that com-
the difficulty of porting Java applications plied with Sun’s standards.
between Windows and other platforms.
Microsoft remained free to hold the First C. Thwarting the Expansion of the
Wave ISVs to this provision until a court Java Class Libraries
enjoined its enforcement in November 404. As discussed above, Microsoft’s
1998. effort to lock developers into its Win-
402. In addition to the First Wave dows-specific Java implementation includ-
agreements, Microsoft entered an agree- ed actions designed to discourage devel-
ment with at least one ISV that explicitly opers from taking advantage of Java
required it to redistribute Microsoft’s JVM class libraries such as RMI. Microsoft
to the exclusion of any other and to rely went further than that, however. In pur-
upon Microsoft’s native methods to the suit of its goal of minimizing the portabil-
exclusion of any other methods. Such ity of Java applications, Microsoft took
agreements were also prohibited by the steps to thwart the very creation of
November 1998 injunction. cross-platform Java interfaces. The in-
403. Microsoft anticipated that the corporation of greater functionality into
Java language would become a popular the Java class libraries would have in-
medium in the multimedia arena. It thus creased the portability of the applications
wanted to ensure that the Java software that relied on them, while simultaneously
created to deliver multimedia content encouraging developers to use Sun-com-
would not rely on Java implementations pliant implementations of Java. In one in-
that fostered portability. RealNetworks stance of this effort to stunt the growth
developed the most popular software for of the Java class libraries, Microsoft used
the creation and play-back of streaming threats to withhold Windows operating-
multimedia content. Therefore, Microsoft system support from Intel’s microproces-
sought to ensure that, to the extent Java sors and offers to include Intel technolo-
developers relied on RealNetworks’ tech- gy in Windows in order to induce Intel to
nologies, they would not be relying on a stop aiding Sun in the development of
Java implementation that complied with Java classes that would support innova-
Sun’s standards. So, in the July 18, 1997 tive multimedia functionality.
agreement that it entered with RealNet- 405. In November 1995, Microsoft’s
works, Microsoft conditioned its agree- Paul Maritz told a senior Intel executive
ment to distribute RealNetworks’ media that Intel’s optimization of its multimedia
player with Internet Explorer on RealNet- software for Sun’s Java standards was as
works’ agreement to exert its best efforts inimical to Microsoft as Microsoft’s sup-
to ensure that its player primarily use port for non-Intel microprocessors would
Windows-specific technology, rather than be to Intel. It was not until 1997, though,
any analogous interfaces that Sun or Net- that Microsoft prevailed upon Intel to not
scape might develop, to display multimedia support Sun’s development of Java classes
content. Absent this obligation, there that would have allowed developers to in-
would have been no technical reason why clude certain multimedia features in their
Java applications without sacrificing porta- enabled Java developers to call upon Win-
bility. dows APIs. Absent this commitment,
406. In February 1997, one of Intel’s though, Microsoft would not have taken
competitors, called AMD, solicited support efforts to maximize the difficulty of porting
from Microsoft for its ‘‘3DX’’ technology, Java applications written to its implemen-
which provided sophisticated multimedia tation and to drastically limit the ability of
support for games. Microsoft’s Allchin developers to write Java applications that
asked Gates whether Microsoft should would run in both Microsoft’s version of
support 3DX, despite the fact that Intel the Windows runtime environment and
would oppose it. Gates responded: ‘‘If versions complying with Sun’s standards.
Intel has a real problem with us support- Nor would Microsoft have endeavored to
ing this then they will have to stop sup- limit Navigator’s usage share, to induce
porting Java Multimedia the way they are. ISVs to neither use nor distribute non-
I would gladly give up supporting this if Microsoft Java technologies, and to impede
they would back off from their work on the expansion of the Java class libraries,
JAVA which is terrible for Intel.’’ Near had it not been determined to discourage
the end of March, Allchin sent another developers from writing applications that
message to Gates and Maritz. In it he would be easy to port between Windows
wrote, ‘‘I am positive that we must do a and other platforms. Microsoft’s dedica-
direct attack on Sun (and probably Ora- tion to the goal of protecting the applica-
cle)TTTT Between ourselves and our part- tions barrier to entry is highlighted by the
ners, we can certainly hurt their (certainly fact that its efforts to create incompatibili-
Sun’s) revenue baseTTTT We need to get ty between its JVM and others resulted in
Intel to help us. Today, they are not.’’ fewer applications being able to run on
Two months later, Eric Engstrom, a Mi- Windows than otherwise would have. Mi-
crosoft executive with responsibility for crosoft felt it was worth obstructing the
multimedia development, wrote to his su- development of Windows-compatible appli-
periors that one of Microsoft’s goals was cations where those applications would
getting ‘‘Intel to stop helping Sun create have been easy to port to other platforms.
Java Multimedia APIs, especially ones It is not clear whether, absent Microsoft’s
that run well (ie native implementations) interference, Sun’s Java efforts would by
on Windows.’’ Engstrom proposed achiev- now have facilitated porting between Win-
ing this goal by offering Intel the following dows and other platforms enough to weak-
deal: Microsoft would incorporate into the en the applications barrier to entry. What
Windows API set any multimedia inter- is clear, however, is that Microsoft has
faces that Intel agreed to not help Sun succeeded in greatly impeding Java’s prog-
incorporate into the Java class libraries. ress to that end with a series of actions
Engstrom’s efforts apparently bore fruit, whose sole purpose and effect were to do
for he testified at trial that Intel’s IAL precisely that.
subsequently stopped helping Sun to de-
velop class libraries that offered cutting- VII. THE EFFECT ON CONSUMERS
edge multimedia support. OF MICROSOFT’S EFFORTS TO
PROTECT THE APPLICATIONS
D. The Effect of Microsoft’s Efforts BARRIER TO ENTRY
to Prevent Java from Diminishing 408. The debut of Internet Explorer
the Applications Barrier to Entry and its rapid improvement gave Netscape
407. Had Microsoft not been commit- an incentive to improve Navigator’s quality
ted to protecting and enhancing the appli- at a competitive rate. The inclusion of
cations barrier to entry, it might still have Internet Explorer with Windows at no
developed a high-performance JVM and separate charge increased general famil-
iarity with the Internet and reduced the example, concerned with the potential for
cost to the public of gaining access to it, at irresponsible Web browsing on PC sys-
least in part because it compelled Net- tems—not only had to undertake the effort
scape to stop charging for Navigator. necessary to remove the visible means of
These actions thus contributed to improv- invoking Internet Explorer and then con-
ing the quality of Web browsing software, tend with the fact that Internet Explorer
lowering its cost, and increasing its avail- would nevertheless launch in certain cases;
ability, thereby benefitting consumers. they also had to (assuming they needed
409. To the detriment of consumers, new, non-browsing features not available
however, Microsoft has done much more in earlier versions of Windows) content
than develop innovative browsing software themselves with a PC system that ran
of commendable quality and offer it bun- slower and provided less available memory
dled with Windows at no additional charge. than if the newest version of Windows
As has been shown, Microsoft also en- came without browsing software. By con-
gaged in a concerted series of actions de- straining the freedom of OEMs to imple-
signed to protect the applications barrier ment certain software programs in the
to entry, and hence its monopoly power, Windows boot sequence, Microsoft fore-
from a variety of middleware threats, in- closed an opportunity for OEMs to make
cluding Netscape’s Web browser and Sun’s Windows PC systems less confusing and
implementation of Java. Many of these more user-friendly, as consumers desired.
actions have harmed consumers in ways By taking the actions listed above, and by
that are immediate and easily discernible. enticing firms into exclusivity arrange-
They have also caused less direct, but nev- ments with valuable inducements that only
ertheless serious and far-reaching, con- Microsoft could offer and that the firms
sumer harm by distorting competition. reasonably believed they could not do
without, Microsoft forced those consumers
410. By refusing to offer those OEMs
who otherwise would have elected Naviga-
who requested it a version of Windows
tor as their browser to either pay a sub-
without Web browsing software, and by
stantial price (in the forms of downloading,
preventing OEMs from removing Internet
installation, confusion, degraded system
Explorer—or even the most obvious means
performance, and diminished memory ca-
of invoking it—prior to shipment, Micro-
pacity) or content themselves with Inter-
soft forced OEMs to ignore consumer de-
net Explorer. Finally, by pressuring Intel
mand for a browserless version of Win-
to drop the development of platform-level
dows. The same actions forced OEMs
NSP software, and otherwise to cut back
either to ignore consumer preferences for
on its software development efforts, Micro-
Navigator or to give them a Hobson’s
soft deprived consumers of software inno-
choice of both browser products at the cost
vation that they very well may have found
of increased confusion, degraded system
valuable, had the innovation been allowed
performance, and restricted memory. By
to reach the marketplace. None of these
ensuring that Internet Explorer would
actions had pro-competitive justifications.
launch in certain circumstances in Win-
dows 98 even if Navigator were set as the 411. Many of the tactics that Microsoft
default, and even if the consumer had re- has employed have also harmed consumers
moved all conspicuous means of invoking indirectly by unjustifiably distorting com-
Internet Explorer, Microsoft created con- petition. The actions that Microsoft took
fusion and frustration for consumers, and against Navigator hobbled a form of inno-
increased technical support costs for busi- vation that had shown the potential to
ness customers. Those Windows purchas- depress the applications barrier to entry
ers who did not want browsing software— sufficiently to enable other firms to com-
businesses, or parents and teachers, for pete effectively against Microsoft in the
market for Intel-compatible PC operating

systems. That competition would have Hakan LANS, Plaintiff,
conduced to consumer choice and nurtured
v.
innovation. The campaign against Naviga-
tor also retarded widespread acceptance of GATEWAY 2000, INC., Defendant.
Sun’s Java implementation. This cam- No. CIV.A. 97–2523(JGP).
paign, together with actions that Microsoft
took with the sole purpose of making it United States District Court,
difficult for developers to write Java appli- District of Columbia.
cations with technologies that would allow
them to be ported between Windows and Nov. 23, 1999.
other platforms, impeded another form of
innovation that bore the potential to dimin- Assignor of patent for computer
ish the applications barrier to entry.
graphics technology sued computer manu-
There is insufficient evidence to find that,
facturer for infringement. On defendant’s
absent Microsoft’s actions, Navigator and
motion to dismiss, and plaintiff’s motion to
Java already would have ignited genuine
amend complaint, the District Court, Penn,
competition in the market for Intel-com-
J., held that: (1) plaintiff would not be
patible PC operating systems. It is clear,
allowed to amend complaint to substitute
however, that Microsoft has retarded, and
patent assignee as new plaintiff; (2) plain-
perhaps altogether extinguished, the pro-
tiff would not be allowed to amend com-
cess by which these two middleware tech-
plaint so as to substitute assignee as real
nologies could have facilitated the intro-
party in interest; and (3) plaintiff, having
duction of competition into an important
assigned all title in patent to another,
market.
lacked standing to sue for infringement.
412. Most harmful of all is the message
Defendant’s motion granted; plaintiff’s
that Microsoft’s actions have conveyed to
motion denied.
every enterprise with the potential to inno-
vate in the computer industry. Through
its conduct toward Netscape, IBM, Com- 1. Federal Civil Procedure O1742(1)
paq, Intel, and others, Microsoft has dem-
Any defect in plaintiff’s standing cre-
onstrated that it will use its prodigious
ates defect in subject matter jurisdiction,
market power and immense profits to
necessitating dismissal. Fed.Rules Civ.
harm any firm that insists on pursuing
Proc.Rule 12(b)(1), 28 U.S.C.A.
initiatives that could intensify competition
against one of Microsoft’s core products. 2. Patents O310.11
Microsoft’s past success in hurting such Patent assignor, suing for infringe-
companies and stifling innovation deters ment, would not be allowed to amend com-
investment in technologies and businesses plaint to substitute patent assignee as new
that exhibit the potential to threaten Mi- plaintiff in order to cure lack of jurisdic-
crosoft. The ultimate result is that some tion caused by assignor’s lack of standing;
innovations that would truly benefit con- plaintiff could not create jurisdiction by
sumers never occur for the sole reason amendment when none existed. 28
that they do not coincide with Microsoft’s U.S.C.A. § 1653; Fed.Rules Civ.Proc.Rule
self-interest. 15(a), 28 U.S.C.A.
3. Federal Civil Procedure O351
, When plaintiff never had standing to

assert claim against defendant, plaintiff
may not substitute new plaintiff, new de-

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U.S. v. MICROSOFT CORP.

13. Internet content providers 17. Although certain Web browsers

an Intel-compatible PC system without in- lows that software applications written to

applications relying solely on middleware costly process. Consequently, software

would have difficulty selling PC micropro- sented developers of multimedia content

viewed RealNetworks’ streaming software that RealNetworks had in turn agreed to

Navigator on Windows could not have F. Excluding Navigator from Impor-

platform by releasing updates to Internet described above. Notwithstanding the for-

services) ] are important distributors leading IAPs agreed, at Microsoft’s insis-

‘‘essential in order to remain competitive’’ prevented IAPs from meeting consumer

rendered itself to acquisition by another cember 1998, during a meeting convened

with Windows.’’ Partly as a result of the 400. Recognizing ISVs as a channel

market for Intel-compatible PC operating

3. Federal Civil Procedure O351

, When plaintiff never had standing to

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