A federal judge in the United States issued a potentially devastating finding against Microsoft, determining that the software giant had harmed consumers by exploiting its market dominance to squelch competition. The 207-page finding of fact from US District Court Judge Thomas Penfield Jackson was instantly hailed as "an important victory" by the US Justice Department, which has accused Microsoft of violating anti-trust law. The following is the selected abstract from this 207-page finding.
BACKGROUND
An "operating system" is a software program that controls the allocation and use of computer resources (such as central processing unit time, main memory space, disk space, and input/output channels). The operating system also supports the functions of software programs, called "applications," that perform specific useroriented tasks. The operating system supports the functions of applications by exposing interfaces, called "application programming interfaces," or "APIs." These are synapses at which the developer of an application can connect to invoke prefabricated blocks of code in the operating system. These blocks of code in turn 3 perform crucial tasks, such as displaying text on the computer screen. Because it supports applications while interacting more closely with the PC system's hardware, the operating system is said to serve as a "platform."
An Intelcompatible PC is one designed to function with Intel's 80x86/Pentium families of microprocessors or with compatible microprocessors manufactured by Intel or by other firms.
An operating system designed to run on an Intelcompatible PC will not function on a nonIntel?compatible PC, nor will an operating system designed for a nonIntelcompatible PC function on an Intelcompatible one. Similarly, an application that relies on APIs specific to one operating system will not, generally speaking, function on another operating system unless it is first adapted, or "ported," to the APIs of the other operating system.
Defendant Microsoft Corporation is organized under the laws of the State of Washington, and its headquarters are situated in Redmond, Washington. Since its inception, Microsoft has focused primarily on developing software and licensing it to various purchasers.
In 1981, Microsoft released the first version of its Microsoft Disk Operating System, commonly known as "MSDOS." The system had a character based user interface that required the user to type specific instructions at a command prompt in order to perform tasks such as launching applications and copying files. When the International Business Machines Corporation ("IBM'') selected MSDOS for preinstallation on its first generation of PCs, Microsoft's product became the predominant operating system sold for Intel?compatible PCs.
In 1985, Microsoft began shipping a software package called Windows. The product included a graphical user interface, which enabled users to perform tasks by selecting 4 icons and words on the screen using a mouse. Although originally just a userinterface, or "shell,'' sitting on top of MSDOS, Windows took on more operatingsystem functionality over time.
In 1995, Microsoft introduced a software package called Windows 95, which announced itself as the first operating system for Intelcompatible PCs that exhibited the same sort of integrated features as the Mac OS running PCs manufactured by Apple Computer, Inc. ("Apple"). Windows 95 enjoyed unprecedented popularity with consumers, and in June 1998, Microsoft released its successor, Windows 98.
Microsoft is the leading supplier of operating systems for PCs. The company transacts business in all fifty of the United States and in most countries around the world.
Microsoft licenses copies of its software programs directly to consumers. The largest part of its MSDOS and Windows sales, however, consists of licensing the products to manufacturers of PCs (known as "original equipment manufacturers" or "OEMs"), such as the IBM PC Company and the Compaq Computer Corporation ("Compaq"). An OEM typically installs a copy of Windows onto one of its PCs before selling the package to a consumer under a single price.
The Internet is a global electronic network, consisting of smaller, interconnected networks, which allows millions of computers to exchange information over telephone wires, dedicated data cables, and wireless links. The Internet links PCs by means of servers, which run specialized operating systems and applications designed for servicing a network environment.
The World Wide Web ("the Web") is a massive collection of digital information resources stored on servers throughout the Internet. These resources are typically provided in the 5 form of hypertext documents, commonly referred to as "Web pages," that may incorporate any combination of text, graphics, audio and video content, software programs, and other data. A user of a computer connected to the Internet can publish a page on the Web simply by copying it into a specially designated, publicly accessible directory on a Web server. Some Web resources are in the form of applications that provide functionality through a user's PC system but actually execute on a server.
Internet content providers ("ICPs") are the individuals and organizations that have established a presence, or "site," on the Web by publishing a collection of Web pages. Most Web pages are in the form of "hypertext"; that is, they contain annotated references, or "hyperlinks," to other Web pages. Hyperlinks can be used as crossreferences within a single document, between documents on the same site, or between documents on different sites.
Typically, one page on each Web site is the "home page," or the first access point to the site. The home page is usually a hypertext document that presents an overview of the site and hyperlinks to the other pages comprising the site.
PCs typically connect to the Internet through the services of Internet access providers "IAPs"), which generally charge subscription fees to their customers in the United States. There are two types of IAPs. Online services ("OLSs") such as America Online ("AOL"), Prodigy, and the Microsoft Network ("MSN") offer, in addition to Internet access, various services and an array of proprietary content. Internet service providers ("ISPs") such as MindSpring and Netcom, on the other hand, offer few services apart from Internet access and relatively little of their own content. 6
A "Web client" is software that, when running on a computer connected to the Internet, sends information to and receives information from Web servers throughout the Internet. Web clients and servers transfer data using a standard known as the Hypertext Transfer Protocol ("HTTP"). A "Web browser" is a type of Web client that enables a user to select, retrieve, and perceive resources on the Web. In particular, Web browsers provide a way for a user to view hypertext documents and follow the hyperlinks that connect them, typically by moving the cursor over a link and depressing the mouse button.
Although certain Web browsers provided graphical user interfaces as far back as 1993, the first widelypopular graphical browser distributed for profit, called Navigator, was brought to market by the Netscape Communications Corporation in December 1994. Microsoft introduced its browser, called Internet Explorer, in July 1995.
THE RELEVANT MARKET
Operating systems are not the only software programs that expose APIs to application developers. The Netscape Web browser and Sun Microsystems, Inc.'s Java class libraries are examples of nonoperating system software that do likewise. Such software is often called "middleware" because it relies on the interfaces provided by the underlying operating system while simultaneously exposing its own APIs to developers. Currently no middleware product exposes enough APIs to allow independent software vendors ("ISVs") profitably to write full featured personal productivity applications that rely solely on those APIs.
Even if middleware deployed enough APIs to support full featured applications, it would not function on a computer without an operating system to perform tasks such as managing hardware resources and controlling peripheral devices. But to the extent the array of applications relying solely on middleware comes to satisfy all of a user''s needs, the user will not care whether there exists a large number of other applications that are directly compatible with the underlying operating system. Thus, the growth of middleware?based applications could lower the costs to users of choosing a nonIntelcompatible PC operating system like the Mac OS. It remains to be seen, though, whether there will ever be a sustained stream of full?featured applications written solely to middleware APIs. In any event, it would take several years for middlware and the applications it supports to evolve from the status quo to a point at which the cost to the average consumer of choosing a non?Intel compatible PC operating system over an Intel?compatible one falls so low as to constrain the pricing of the latter systems.
The Possibility of Supply Responses
The chickenandegg problem notwithstanding, a firm might reasonably expect to make a profit by introducing an Intelcompatible PC operating system designed to support a type of application that satisfies the special interests of a particular subset of users. For example, Be, Inc. ("Be") markets an Intelcompatible PC operating system called BeOS that offers superior support for multimedia applications, and the operating system enjoys a certain amount of success with the segment of the consumer population that has a special interest in creating and playing multimedia content with a PC system. Still, while a niche operating system might turn a profit, the chickenandegg problem (hereinafter referred to as the "applications barrier to entry") would make it prohibitively expensive for a new Intelcompatible operating system to attract enough developers and consumers to become a viable alternative to a dominant incumbent in less than a few years.
To the extent that developers begin writing attractive applications that rely solely on servers or middleware instead of PC operating systems, the applications barrier to entry could erode. As the Court finds above, however, it remains to be seen whether server or middleware based development will flourish at all. Even if such development were already flourishing, it would be several years before the applications barrier eroded enough to clear the way for the relatively rapid emergence of a viable alternative to incumbent Intel?compatible PC operating systems. It is highly unlikely, then, that a firm not already marketing an Intel?compatible PC operating system could begin marketing one that would, in less than a few years, present a significant percentage of consumers with a viable alternative to incumbents.
MICROSOFT'S POWER IN THE RELEVANT MARKET
Microsoft enjoys so much power in the market for Intelcompatible PC operating systems that if it wished to exercise this power solely in terms of price, it could charge a price for Windows substantially above that which could be charged in a competitive market. Moreover, it could do so for a significant period of time without losing an unacceptable amount of business to competitors. In other words, Microsoft enjoys monopoly power in the relevant market.
Viewed together, three main facts indicate that Microsoft enjoys monopoly power. First, Microsoft's share of the market for Intelcompatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.
Market Share
The Applications Barrier to Entry
Consumer interest in a PC operating system derives primarily from the ability of that system to run applications. The consumer wants an operating system that runs not only types of applications that he knows he will want to use, but also those types in which he might develop an interest later. Also, the consumer knows that if he chooses an operating system with enough demand to support multiple applications in each product category, he will be less likely to find himself straitened later by having to use an application whose features disappoint him. Finally, the average user knows that, generally speaking, applications improve through successive versions. He thus wants an operating system for which successive generations of his favorite applications will be released --- promptly at that. The fact that a vastly larger number of applications are written for Windows than for other PC operating systems attracts consumers to 18 Windows, because it reassures them that their interests will be met as long as they use Microsoft's product.
Software development is characterized by substantial economies of scale. The fixed costs of producing software, including applications, is very high. By contrast, marginal costs are very low. Moreover, the costs of developing software are "sunk" --- once expended to develop software, resources so devoted cannot be used for another purpose. The result of economies of scale and sunk costs is that application developers seek to sell as many copies of their applications as possible. An application that is written for one PC operating system will operate on another PC operating system only if it is ported to that system, and porting applications is both time?consuming and expensive. Therefore, application developers tend to write first to the operating system with the most users --- Windows. Developers might then port their applications to other operating systems, but only to the extent that the marginal added sales justify the cost of porting. In order to recover that cost, ISVs that do go to the effort of porting frequently set the price of ported applications considerably higher than that of the original versions written for Windows.
The cost to a would be entrant of inducing ISVs to write applications for its operating system exceeds the cost that Microsoft itself has faced in inducing ISVs to write applications for its operating system products, for Microsoft never confronted a highly penetrated market dominated by a single competitor. Of course, the fact that it is extremely difficult for an efficient would?be rival to accumulate enough applications support to compete with Windows does not mean that sustaining its own applications support is effortless for Microsoft. In fact, if Microsoft stopped investing the hundreds of millions of dollars it spends each year inducing ISVs to write applications for Windows, it might become easier than it currently is for a competitor to develop its own positive feedback loop. But given that Windows today enjoys overwhelmingly more applications support than any other PC operating system, it would still take that competitor years to develop the necessary momentum. Plus, while Microsoft may spend more on platform "evangelization," even in relative terms, than any other PC operating system vendor, it is not difficult to understand why it is worthwhile for the principal beneficiary of the applications barrier to devote more resources to augmenting it than aspiring rivals are willing to expend in speculative efforts to erode it.
Microsoft continually releases "new and improved" versions of its PC operating system. Each time it does, Microsoft must convince ISVs to write applications that take advantage of new APIs, so that existing Windows users will have incentive to buy an upgrade. Since ISVs are usually still earning substantial revenue from applications written for the last version of Windows, Microsoft must convince them to write for the new version. Even if ISVs are slow to take advantage of the new APIs, though, no applications barrier stands in the way of consumers adopting the new system, for Microsoft ensures that successive versions of Windows retain the ability to run applications developed for earlier versions. In fact, since ISVs know that consumers do not feel locked into their old versions of Windows and that new versions have historically attracted substantial consumer demand, ISVs will generally write to new APIs as long as the interfaces enable attractive, innovative features. Microsoft supplements developers'' incentives by extending various `seals of approval'' --- visible to consumers, investors, and industry analysts --- to those ISVs that promptly develop new versions of their applications adapted to the newest version of Windows. In addition, Microsoft works closely with ISVs to help them adapt their applications to the newest version of the operating system --- a process that is in any event far easier than porting an application from one vendor''s PC operating system to another's. In sum, despite the substantial resources Microsoft expends inducing ISVs to develop applications for new versions of Windows, the company does not face any obstacles nearly as imposing as the barrier to entry that vendors and would be vendors of other PC operating systems must overcome.
(As an example) The experience of the Linux operating system, a version of which runs on Intel compatible PCs, similarly fails to refute the existence of an applications barrier to entry. Linux is an "open source" operating system that was created, and is continuously updated, by a global network of software developers who contribute their labor for free. Although Linux has between ten and fifteen million users, the majority of them use the operating system to run servers, not PCs. Several ISVs have announced their development of (or plans to develop) Linux versions of their applications. To date, though, legions of ISVs have not followed the lead of these first movers. Similarly, consumers have by and large shown little inclination to abandon Windows, with its reliable developer support, in favor of an operating system whose future in the PC realm is unclear. By itself, Linux''s open source development model shows no signs of liberating that operating system from the cycle of consumer preferences and developer incentives that, when fueled by Windows'' enormous reservoir of applications, prevents non?Microsoft operating systems from competing.
Since application developers working under an open source model are not looking to recoup their investment and make a profit by selling copies of their finished products, they are free from the imperative that compels proprietary developers to concentrate their efforts on Windows. In theory, then, open?source developers are at least as likely to develop applications for a non Microsoft operating system as they are to write Windows compatible applications. In fact, they may be disposed ideologically to focus their efforts on open source platforms like Linux. Fortunately for Microsoft, however, there are only so many developers in the world willing to devote their talents to writing, testing, and debugging software pro bono publico. A small corps may be willing to concentrate its efforts on popular applications, such as browsers and office productivity applications, that are of value to most users. It is unlikely, though, that a sufficient number of open source developers will commit to developing and continually updating the large variety of applications that an operating system would need to attract in order to present a significant number of users with a viable alternative to Windows. In practice, then, the open? source model of applications development may increase the base of applications that run on non Microsoft PC operating systems, but it cannot dissolve the barrier that prevents such operating systems from challenging Windows.
Software never expires, so consumers who already have a version of Windows with which they are content and who are not shopping for a new PC system are somewhat reluctant to incur the cost of upgrading to a new version of Windows. Fortunately for Microsoft, the pace of innovation in PC hardware is rapid, and the price of that hardware has declined steadily in recent years. As a result, existing PC users buy new PC systems relatively frequently, and OEMs still attract at a healthy rate buyers who have never owned a computer. The license for one of Microsoft''s operating system products prohibits the user from transferring the operating system to another machine, so there is no legal secondary market in Microsoft operating systems. This means that any consumer who buys a new Intelcompatible PC and wants Windows must buy a new copy of the operating system. Microsoft takes pains to ensure that the versions of its operating system that OEMs pre install on new PC systems are the most current. It does this, in part, by increasing the price to OEMs of older versions of Windows when the newer versions are released. Since Microsoft can sell so many copies of each new operating system through the sales of new PC systems, the average price it sets for those systems is little affected by the fact that older versions of Windows never wear out.
Microsoft's Pricing Behavior
Finally, it is indicative of monopoly power that Microsoft felt that it had substantial discretion in setting the price of its Windows 98 upgrade product (the operating system product it sells to existing users of Windows 95). A Microsoft study from November 1997 reveals that the company could have charged $49 for an upgrade to Windows 98 --- there is no reason to believe that the $49 price would have been unprofitable --- but the study identifies $89 as the revenue?maximizing price. Microsoft thus opted for the higher price.
As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy dramatic acceptance by the public; shortly after its release, consumers were already using Navigator far more than any other browser product. This alarmed Microsoft, which feared that Navigator's enthusiastic reception could embolden Netscape to develop Navigator into an alternative platform for applications development. In late May 1995, Bill Gates, the chairman and CEO of Microsoft, sent a memorandum entitled "The Internet Tidal Wave" to Microsoft''s executives describing Netscape as a "new competitor born'' on the Internet." He warned his colleagues within Microsoft that Netscape was "pursuing a multiplatform strategy where they move the key API into the client to commoditize the underlying operating system." By the late spring of 1995, the executives responsible for setting Microsoft's corporate strategy were deeply concerned that Netscape was moving its business in a direction that could diminish the applications barrier to entry.
The combined efforts of Netscape and Sun threatened to hasten the demise of the applications barrier to entry, opening the way for nonMicrosoft operating systems to emerge as acceptable substitutes for Windows. By stimulating the development of network centric Java applications accessible to users through browser products, the collaboration of Netscape and Sun also heralded the day when vendors of information appliances and network computers could present users with viable alternatives to PCs themselves. Nevertheless, these middleware technologies have a long way to go before they might imperil the applications barrier to entry. Windows 98 exposes nearly ten thousand APIs, whereas the combined APIs of Navigator and the Java class libraries, together representing the greatest hope for proponents of middleware, total less than a thousand. Decision?makers at Microsoft are apprehensive of potential as well as present threats, though, and in 1995 the implications of the symbiosis between Navigator and Sun''s Java implementation were not lost on executives at Microsoft, who viewed Netscape's cooperation with Sun as a further reason to dread the increasing use of Navigator.
Although they have been the most prominent, Netscape's Navigator and Sun's Java implementation are not the only manifestations of middleware that Microsoft has perceived as having the potential to weaken the applications barrier to entry. Starting in 1994, Microsoft exhibited considerable concern over the software product Notes, distributed first by Lotus and then by IBM. Microsoft worried about Notes for several reasons: It presented a graphical interface that was common across multiple operating systems; it also exposed a set of APIs to developers; and, like Navigator, it served as a distribution vehicle for Sun''s Java runtime environment. Then in 1995, Microsoft reacted with alarm to Intel's Native Signal Processing software, which interacted with the microprocessor independently of the operating system and exposed APIs directly to developers of multimedia content. Finally, in 1997 Microsoft noted the dangers of Apple's and RealNetworks' multimedia playback technologies, which ran on several platforms (including the Mac OS and Windows) and similarly exposed APIs to content developers. Microsoft feared all of these technologies because they facilitated the development of useroriented software that would be indifferent to the identity of the underlying operating system.
MICROSOFT''S RESPONSE TO THE BROWSER THREAT
In a meeting held at Microsoft's headquarters on June 2, 1995, Microsoft executives suggested to Jim Clark's replacement as CEO at Netscape, James Barksdale, that the version of Navigator written for Windows 95 be designed to rely upon the Internet?related APIs in Windows 95 and distinguish itself with "value added" software components. The Microsoft executives left unsaid the fact that value added software, by definition, does not present a significant platform for applications development. For his part, Barksdale informed the Microsoft representatives that the browser represented an important part of Netscape's business strategy and that Windows 3.1 and Windows 95 were expected to be the primary platforms for which Navigator would be distributed.
At the conclusion of the June 2 meeting, Microsoft still did not know whether or not Netscape intended to preserve Navigator's own platform capabilities and expand the set of APIs that it exposed to developers. In the hope that Netscape could still be persuaded to forswear any platform ambitions and instead rely on the Internet technologies in Windows 95, Microsoft accepted Barksdale's invitation to send a group of representatives to Netscape's headquarters for a technology "brainstorming session" on June 21. Netscape''s senior executives saw the meeting as an opportunity to ask Microsoft for access to crucial technical information, including certain APIs, that Netscape needed in order to ensure that Navigator would work well on systems running Windows 95.
Early in the June 21 meeting, Microsoft representatives told Barksdale and the other Netscape executives present that they wanted to explore the possibility of building a broader and closer relationship between the two companies. To this end, the Microsoft representatives wanted to know whether Netscape intended to adopt and build on top of the Internet related platform that Microsoft planned to include in Windows 95, or rather to expose its own Internet related APIs, which would compete with Microsoft's. If Netscape was not committed to providing an alternative platform for network centric applications, Microsoft would assist Netscape in developing server and (to a limited extent) PCbased software applications that relied on Microsoft''s Internet technologies. For one thing, the representatives explained, Microsoft would be content to leave the development of browser products for the Mac OS, UNIX, and Microsoft's 16 bit operating system products to Netscape. Alternatively, Netscape could license to Microsoft the underlying code for a Microsoft branded browser to run on those platforms. The Microsoft representatives made it clear, however, that Microsoft would be marketing its own browser for Windows 95, and that this product would rely on Microsoft's platform level Internet technologies. If Netscape marketed browsing software for Windows 95 based on different technologies, then Microsoft would view Netscape as a competitor, not a partner.
When Barksdale brought the discussion back to the particular Windows 95 APIs that Netscape actually wanted to rely on and needed from Microsoft, the representatives from Microsoft explained that if Netscape entered a "special relationship" with Microsoft, the company would treat Netscape as a "preferred ISV." This meant that Netscape would enjoy preferential access to technical information, including APIs. They intimated that Microsoft's internal developers had already created the APIs that Netscape was seeking, and that Microsoft had not yet decided either which ISVs would be privileged to receive them or when access would be granted. The Microsoft representatives made clear that the alacrity with which Netscape would receive the desired Windows 95 APIs and other technical information would depend on whether Netscape entered this "special relationship" with Microsoft.
After listening to Microsoft's proposal, Barksdale had two main questions: First, where would the line between platform (Microsoft's exclusive domain) and applications (where Netscape could continue to function) be situated? Second, who would get to decide where the line would lie? After all, the attractiveness of a special relationship with Microsoft depended a great deal on how much room would remain for Netscape to innovate and seek profit. The Microsoft representatives replied that Microsoft would incorporate most of the functionality of the current Netscape browser into the Windows 95 platform, perhaps leaving room for Netscape to distribute a user interface shell. Where Netscape would have the most scope to innovate would be in the development of software "solutions," which are applications (mainly server based) focused on meeting the needs of specific types of commercial users. Since such applications are already minutely calibrated to the needs of their users, they do not present platforms for the development of more specific applications. Although the representatives from Microsoft assured Barksdale that the line between platform and solutions was fixed by a collaborative decision?making process between Microsoft and its ISV partners, those representatives had already indicated that the space Netscape would be allowed to occupy between the user and Microsoft''s platform domain was a very narrow one. Simply put, if Navigator exposed APIs that competed for developer attention with the Internet?related APIs Microsoft was planning to build into its platform, Microsoft would regard Netscape as a trespasser on its territory.
Had Netscape accepted Microsoft's proposal, it would have forfeited any prospect of presenting a comprehensive platform for the development of network?centric applications. Even if the versions of Navigator written for the Mac OS, UNIX, and 16 bit Windows had continued to expose APIs controlled by Netscape, the fact that Netscape would not have marketed any platform software for Windows 95, the operating system that was destined to become dominant, would have ensured that, for the foreseeable future, too few developers would rely on Navigator''s APIs to create a threat to the applications barrier to entry. In fact, although the discussions ended before Microsoft was compelled to demarcate precisely where the boundary between its platform and Netscape''s applications would lie, it is unclear whether Netscape''s acceptance of Microsoft's proposal would have left the firm with even the ability to survive as an independent business.
At the time Microsoft presented its proposal, Navigator was the only browser product with a significant share of the market and thus the only one with the potential to weaken the applications barrier to entry. Thus, had it convinced Netscape to accept its offer of a "special relationship," Microsoft quickly would have gained such control over the extensions and standards that network centric applications (including Web sites) employ as to make it all but impossible for any future browser rival to lure appreciable developer interest away from Microsoft's platform
Microsoft knew that Netscape needed certain critical technical information and assistance in order to complete its Windows 95 version of Navigator in time for the retail release of Windows 95. Indeed, Netscape executives had made a point of requesting this information, especially the so- called Remote Network Access ("RNA") API, at the June 21 meeting. As was discussed above, the Microsoft representatives at the meeting had responded that the haste with which Netscape received the desired technical information would depend on whether Netscape entered the so-called "special relationship" with Microsoft. Specifically, Microsoft representative J. Allard had told Barksdale that the way in which the two companies concluded the meeting would determine whether Netscape received the RNA API immediately or in three months.
Although Netscape declined the special relationship with Microsoft, its executives continued, over the weeks following the June 21 meeting, to plead for the RNA API. Despite Netscape's persistence, Microsoft did not release the API to Netscape until late October, i.e., as Allard had warned, more than three months later. The delay in turn forced Netscape to postpone the release of its Windows 95 browser until substantially after the release of Windows 95 (and Internet Explorer) in August 1995. As a result, Netscape was excluded from most of the holiday selling season.
Microsoft similarly withheld a scripting tool that Netscape needed to make its browser compatible with certain dial-up ISPs. Microsoft had licensed the tool freely to ISPs that wanted it, and in fact had cooperated with Netscape in drafting a license agreement that, by mid-July 1996, needed only to be signed by an authorized Microsoft executive to go into effect. There the process halted, however. In mid August, a Microsoft representative informed Netscape that senior executives at Microsoft had decided to link the grant of the license to the resolution of all open issues between the companies. Netscape never received a license to the scripting tool, and as a result, was unable to do business with certain ISPs for a time.
Other firms in the computer industry have had encounters with Microsoft similar to the experiences of Netscape described above. These interactions demonstrate that it is Microsoft's corporate practice to pressure other firms to halt software development that either shows the potential to weaken the applications barrier to entry or competes directly with Microsoft's most cherished software products.
At the same time that Microsoft was trying to convince Netscape to stop developing cross platform APIs, it was trying to convince Intel to halt the development of software that presented developers with a set of operating system independent interfaces. Although Intel is engaged principally in the design and manufacture of microprocessors, it also develops some software. Intel's software development efforts, which take place at the Intel Architecture Labs ("IAL"), are directed primarily at finding useful ways to consume more microprocessor cycles, thereby stimulating demand for advanced Intel microprocessors. Microsoft reacted to Intel's NSP software with alarm. First of all, the software threatened to offer ISVs and device manufacturers an alternative to waiting for Windows to provide system level support for products that would take advantage of advances in hardware technology. More troubling was the fact that Intel was developing versions of its NSP software for non Microsoft operating systems. The different versions of the NSP software exposed the same set of software interfaces to developers, so the more an application took advantage of interfaces exposed by NSP software, the easier it would be to port that application to non Microsoft operating systems. In short, Intel's NSP software bore the potential to weaken the barrier protecting Microsoft''s monopoly power. . . . . .
News Update
WASHINGTON, Nov 7 -- Microsoft would prefer an out-of-court deal with the Justice Department, after a judge ruled that the company enjoys monopoly power, chief operating officer Robert Herbold said Sunday. Judge Thomas Penfield Jackson Friday concluded that Microsoft enjoys monopoly power in the market for PC operating systems and has tried to stifle competition to protect its monopoly. Herbold told ''Fox News Sunday'' that both parties to the legal dispute, Microsoft and the Justice Department, are bound by an agreement not to comment publicly on any out-of-court talks.
However, ''There's nothing that we would like more than to settle this thing, we've been saying that from day one,'' he added.
Jackson's findings are but ''one step in the process,'' Herbold said, while insisting that Microsoft's practices have benefited consumers. ''The consumers are winning. Ask your neighbors, they love these technologies,'' Herbold said on ABC. ''Input from the consumers'' has been lacking in the court case, he said. But however much Microsoft this weekend sought to downplay its significance, Jackson's ruling strengthened the Justice Department's negotiating position for a settlement by raising the possibility of a break-up of Microsoft to separate out the Windows operating system from its Internet products.
Jackson's 207-page ''finding of fact'' (presented partly above) -- that is the judge's interpretation of evidence presented to him in the trial -- set the stage for a ruling from Jackson on whether Microsoft's actions actually violated US laws aimed at ensuring fair business competition. But an out-of-court settlement with the Justice Department's anti-trust specialists could spare Microsoft from seeing Jackson's findings converted into a firm ruling. If no out-of-court settlement is reached and Jackson then rules that the company had indeed broken the law, a third legal procedure would be set in motion, during which the court and the Justice Department would craft remedies to eliminate the illegal effects of the Microsoft monopoly.
The department fielded in television interviews Sunday the assistant attorney for its anti-trust division, Joel Klein, who told an ABC interviewer that the break-up dismemberment of the monopoly previously enjoyed by telecom operator AT and T, had been a ''success story.'' Microsoft was ''a different case,'' he added. An out-of-court ''settlement is an option and the government has made clear that we are prepared to discuss a settlement,'' but it must be one that would defend consumers' interests, Klein said. He said the government is not interested in any financial penalty that it could exact from Microsoft. ''There are serious issues here about law enforcement and the anti-trust laws, and of course if Microsoft were prepared to engage on those issues, we would be prepared as well,'' Klein said.
Jackson in his findings conceded that Microsoft's decision to include in Windows its Internet browser, Microsoft Internet Explorer, at no separate charge did increase consumers' familiarity with the internet, and initially meant reduced costs to the public, not least because it obliged Netscape to stop charging for its own Navigator browser. But Jackson concluded that Microsoft had tried to protect its monopoly power, and harmed consumer interests in the process.
Meanwhile, the New York Times reported Sunday that Microsoft has made 600,000 dollars in political contributions, split relatively evenly divided between Republicans and Democrats in Congress. The total was significantly less than the 1.3 million dollars of contributions in 1998.
A "personal computer" ("PC") is a digital information processing device designed for use by one person at a time. A typical PC consists of central processing components (e.g., a microprocessor and main memory) and mass data storage (such as a hard disk). A typical PC system consists of a PC, certain peripheral input/output devices (including a monitor, a keyboard, a mouse, and a printer), and an operating system. PC systems, which include desktop and laptop models, can be distinguished from more powerful, more expensive computer systems known as ``servers,'' which are designed to provide data, services, and functionality through a digital network to multiple users.
Currently there are no products, nor are there likely to be any in the near future, that a significant percentage of consumers worldwide could substitute for Intelcompatible PC operating systems without incurring substantial costs. Furthermore, no firm that does not currently market Intelcompatible PC operating systems could start doing so in a way that would, within a reasonably short period of time, present a significant percentage of consumers with a viable alternative to existing Intelcompatible PC operating systems. It follows that, if one firm controlled the licensing of all Intelcompatible PC operating systems worldwide, it could set the price of a license substantially above that which would be charged in a competitive market and leave the price there for a significant period of time without losing so many customers as to make 7 the action unprofitable. Therefore, in determining the level of Microsoft's market power, the relevant market is the licensing of all Intelcompatible PC operating systems worldwide. ........
Firms that do not currently produce Intelcompatible PC operating systems could do so. What is more, once a firm had written the necessary software code, it could produce millions of copies of its operating system at relatively low cost. The ability to meet a large demand is useless, however, if the demand for the product is small, and signs do not indicate large demand for a new Intelcompatible PC operating system. To the contrary, they indicate that the demand for a new Intelcompatible PC operating system would be severely constrained by an intractable "chickenandegg" problem: The overwhelming majority of consumers will only use a PC operating system for which there already exists a large and varied set of high quality, full featured applications, and for which it seems relatively certain that new types of applications and new versions of existing applications will continue to be marketed at pace with those written for other operating systems. Unfortunately for firms whose products do not fit that bill, the porting of applications from one operating system to another is a costly process. Consequently, software developers generally write applications first, and often exclusively, for the operating system that is already used by a dominant share of all PC users. Users do not want to invest in an operating system until it is clear that the system will support generations of applications that will meet their needs, and developers do not want to invest in writing or quickly porting applications for an operating system until it is clear that there will be a sizeable and stable market for it. What is more, consumers who already use one Intelcompatible PC operating system are even less likely than first?time buyers to choose a newcomer to the field, for switching to a new system would require these users to scrap the investment they have made in applications, training, and certain hardware
Microsoft possesses a dominant, persistent, and increasing share of the world wide market for Intelcompatible PC operating systems. Every year for the last decade, Microsoft''s share of the market for Intelcompatible PC operating systems has stood above ninety percent. For the last couple of years the figure has been at least ninety five percent, and analysts project that the share will climb even higher over the next few years. Even if Apple''s Mac OS were included in the relevant market, Microsoft's share would still stand well above eighty percent.
Microsoft's dominant market share is protected by the same barrier that helps define the market for Intelcompatible PC operating systems. As explained above, the applications barrier would prevent an aspiring entrant into the relevant market from drawing a significant number of customers away from a dominant incumbent even if the incumbent priced its products substantially above competitive levels for a significant period of time. Because Microsoft's market share is so dominant, the barrier has a similar effect within the market: It prevents Intel?compatible PC operating systems other than Windows from attracting significant consumer demand, and it would continue to do so even if Microsoft held its prices substantially above the competitive level.
Microsoft's actual pricing behavior is consistent with the proposition that the firm enjoys monopoly power in the market for Intelcompatible PC operating systems. The company's decision not to consider the prices of other vendors'' Intel?compatible PC operating systems when setting the price of Windows 98, for example, is probative of monopoly power. One would expect a firm in a competitive market to pay much closer attention to the prices charged by other firms in the market. Another indication of monopoly power is the fact that Microsoft raised the price that it charged OEMs for Windows 95, with trivial exceptions, to the same level as the price it charged for Windows 98 just prior to releasing the newer product. In a competitive market, one would expect the price of an older operating system to stay the same or decrease upon the release of a newer, more attractive version. Microsoft, however, was only concerned with inducing OEMs to ship Windows 98 in favor of the older version. It is unlikely that Microsoft would have imposed this price increase if it were genuinely concerned that OEMs might shift their business to another vendor of operating systems or hasten the development of viable alternatives to Windows.
Microsoft's Attempt to Dissuade Netscape from Developing Navigator as a Platform Microsoft's first response to the threat posed by Navigator was an effort to persuade Netscape to structure its business such that the company would not distribute platform level browsing software for Windows. Netscape's assent would have ensured that, for the foreseeable future, Microsoft would produce the only platform level browsing software distributed to run on Windows. This would have eliminated the prospect that non Microsoft browsing software could weaken the applications barrier to entry. Executives at Microsoft received confirmation in early May 1995 that Netscape was developing a version of Navigator to run on Windows 95, which was due to be released in a couple of months. Microsoft's senior executives understood that if they could prevent this version of Navigator from presenting alternatives to the Internet related APIs in Windows 95, the technologies branded as Navigator would cease to present an alternative platform to developers. Even if non Windows versions of Navigator exposed Internet related APIs, applications written to those APIs would not run on the platform Microsoft executives expected to enjoy the largest installed base, i.e., Windows 95. So, as long as the version of Navigator written for Windows 95 relied on Microsoft's Internet related APIs instead of exposing its own, developing for Navigator would not mean developing cross platform. Developers of network centric applications thus would not be drawn to Navigator's APIs in substantial numbers. Therefore, with the encouragement and support of Gates, a group of Microsoft executives commenced a campaign in the summer of 1995 to convince Netscape to halt its development of platform?level browsing technologies for Windows 95.
From CNET NEWS.COM (Tehnology News) November 5 and AFP, November 7, 1999.