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IN THE UNITED STATES DISTRICT COURT
TABLE OF AUTHORITIES CASES American Tobacco Co. v. United States, 328 U.S. 781 (1946) Aoude v. Mobile Oil Corp., 862 F.2d 890 (1st Cir. 1988) Associated for Intercollegiate Athletics for Women v. NCAA, 735 F.2d 577 (D.C. Cir. 1985) * Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985) Barry Wright v. ITT Grinnell Corp., 724 F.2d 227 (1st Cir. 1983) Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263 (2d Cir. 1979), cert. denied, 449 U.S. 1093 (1980) Chicago Board of Trade v. United States, 247 U.S. 231 (1918) Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690 (1962) Copperweld Corp. v. Independent Tube Corp., 467 U.S. 752 (1984) * Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451 (1992) Fortner Enterprises Inc. v. United States Steel Corp., 394 U.S. 495 (1969) Foster v. Maryland State Savs. & Loan Ass'n, 590 F.2d 928 (D.C. Cir. 1978) FTC v. Weyerhaeuser Co., 665 F.2d 1072 (D.C. Cir. 1981) Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792 (1st Cir. 1988) International Salt Co. v. United States, 332 U.S. 392 (1947) * Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 446 U.S. 2 (1984) Kelco Disposal v. Browning-Ferris Indus., 845 F.2d 404 (2d Cir. 1988), aff'd on other grounds, 492 U.S. 257 (1989) McGahee v. Northern Propane Gas Co., 858 F.2d 1487 (11th Cir. 1988) Mozart Co. v. Mercedez-Benz of N. Am., Inc., 833 F.2d 1342 (9th Cir. 1988) Multistate Legal Studies v. Harcourt Brace Joanovich Legal & Prof. Pubs., Inc., 63 F.3d 1540 (10th Cir. 1995) Population Institute v. McPerson, 797 F.2d 1062 (D.C. Cir. 1986) Ross-Whitney Corp. v. Smith Klein & French Labs., 207 F.2d 190 (9th Cir. 1953) SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056 (3d Cir.), cert. denied, 439 U.S. 838 (1978) Southern Pacific Comm. Co. v. AT&T, 740 F.2d 980 (D.C. Cir. 1984) Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447 (1993) Standard Oil Co. v. United States, 337 U.S. 293 (1949) Standard Oil Co. v. United States, 211 U.S. 1 (1911) Sullivan v. NFL, 34 F.3d 1091 (1st Cir. 1994), cert. denied, 513 U.S. 1190 (1995) Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961) Taylor v. Resolution Trust Corp ., 56 F.3d 1497 (D.C. Cir. 1995) Times-Picayune Publishing Co. v. United States, 345 U.S. 594 (1953) Toledo AA & NM Ry. v. Pennsylvania Co., 54 F. 730 (C.C.N.D. Ohio), appeal dismissed, 150 U.S. 393 (1893) United States v. Aluminum Co. of Am., 148 F.2d 416 (2d Cir. 1945) United States v. American Airlines, Inc., 743 F.2d 1114 (5th Cir. 1984), cert. dismissed, 474 U.S. 1001 (1985) United States v. Dairymen, Inc., 1985-1 Trade Cas. (CCH) ¶ 66,638 (6th Cir. 1985) (per curiam) United States v. E.I. duPont de Nemours & Co., 351 U.S. 377 (1956) * United States v. Griffith, 334 U.S. 100 (1948) United States v. Grinnell Corp., 384 U.S. 563 (1966) United States v. Loew's Inc., 371 U.S. 38 (1962) United States v. Microsoft Corp., 56 F.3d 1448 (D.C. Cir. 1995) United States v. Microsoft Corp., 980 F. Supp. 537 (D.D.C. 1997) United States v. National Soc'y of Prof. Eng'rs, 435 U.S. 679 (1978) * United States v. Siemens Corp., 621 F.2d 499 (2d Cir. 1980) United States v. United Shoe Mach. Corp., 110 F. Supp. 295 (D. Mass. 1953), aff'd per curiam., 348 U.S. 521 (1954) United States v. W.T. Grant Co., 345 U.S. 629 (1953) Washington Area Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841 (D.C. Cir. 1977) STATUTES 15 U.S.C. § 1 15 U.S.C. § 2 15 U.S.C. § 4 28 U.S.C. § 1331 28 U.S.C. § 1337 OTHER 11A Charles A. Wright et al., Federal Practice and Procedure (2d ed. 1995) 3 Phillip E. Areeda, Antitrust Law (rev. ed. 1996) 10 Phillip E. Areeda et al., Antitrust Law (1996) U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines (1992)
MEMORANDUM OF THE UNITED STATES IN SUPPORT OF
"Microsoft dominates the world market for operating systems software that runs on IBM-compatible personal computers." United States v. Microsoft Corp., 56 F.3d 1448, 1451 (D.C. Cir. 1995). On December 11, 1997, the U.S. District Court entered a preliminary injunction prohibiting Microsoft Corporation ("Microsoft") from requiring computer manufacturers to license and preinstall Microsoft's Internet browser software as a condition of licensing Microsoft's Windows 95 computer operating system software. The Court found, among other things: [T]he marketplace, and the public generally, will benefit from the issuance of a preliminary injunction. . . . Microsoft's licensing strategy is allegedly designed to overwhelm the developing competition in the browser market (which at the moment Microsoft does not dominate) before it becomes established, thereby perpetuating Microsoft's operating system monopoly. . . . [T]he probability that Microsoft will not only continue to reinforce its operating system monopoly by its licensing practices, but might also acquire yet another monopoly in the Internet browser market, is simply too great to tolerate indefinitely until the issue is finally resolved." 980 F. Supp. 537, 544 (D.D.C. 1997). The United States has filed today and served a complaint under Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1 and 2, seeking to enjoin Microsoft's continuing efforts (1) to maintain its operating system monopoly by exclusionary and predatory conduct, (2) to unreasonably restrain competition through various exclusionary and predatory practices, including tying and other exclusionary agreements, and (3) to attempt to monopolize the Internet browser market. The United States brings this motion for a preliminary injunction to preserve the competitive status quo during the pendency of this litigation -- in particular, to enjoin Microsoft from continuing to foreclose competition among Internet browsers by, among other things, tying its Internet browser ("Internet Explorer" or "IE") to Microsoft's Windows 98 operating system. Over the past two years, Microsoft has engaged in a pattern of illegal and exclusionary conduct designed to deny personal computer makers, Internet Service Providers, Internet Content Providers, independent software vendors, and consumers the freedom to choose the Internet products that are installed on their computers. Unless enjoined, Microsoft will carry out the next significant step in this continuing pattern of anticompetitive conduct. Microsoft's impending illegal actions, coupled with its ongoing exclusionary conduct, will maintain the software giant's existing monopoly power over personal computer operating systems and extend that monopoly to another critical market -- the market for Internet browsers. On or about June 25, 1998, Microsoft intends to release Windows 98, the successor to its Windows 95 personal computer ("PC") operating system, to the market. Today, Microsoft will provide the final code for Windows 98 to PC original equipment manufacturers ("OEMs") for preinstallation on PCs the OEMs sell. When it does so, Microsoft will once again use its monopoly power to require OEMs to license and distribute its Internet browser, even if those OEMs wish to distribute only a competing browser, or no browser at all, with their PCs. Microsoft's monopoly power in the market for personal computer operating systems is not subject to genuine dispute. As PC OEMs know, they have no commercially reasonable alternative to Microsoft's operating systems. The imminent release of Windows 98, in which Microsoft has intentionally hardened the illegal tie-in of its Internet browser to its operating system, creates an urgent need for a preliminary injunction:
Microsoft's operating system monopoly is protected by high barriers to entry, including the large number of software applications that will run on Windows but not on other operating systems. PC users generally want the most, and the most up-to-date, software applications available. Application programs must be able to connect to (be "compatible" with) an operating system in order to run. The operating system is in effect a necessary software layer (or "platform") between the PC hardware and the applications programs. Because it would be prohibitively difficult, time-consuming, and expensive to create an alternative operating system that would run the many applications that run on Windows, a potential new entrant faces a high barrier to successful entry. This applications programming barrier to entry tends to be self-perpetuating. Windows is the dominant operating system; as a consequence, more applications are written to run on it; and because more applications are written for Windows, Windows dominance is further entrenched -- which in turn leads to more application programs being written for it than for other operating systems, and so on. As Microsoft recognized in 1995, a potential threat to the continuation of the software applications barrier, and hence to the continuation of Microsoft's operating system monopoly itself, arose from the growing popularity of the Internet and the World Wide Web ("the web"). Internet browsers -- specialized software programs that allow PC users to locate, access, and display content and applications located on the web -- are essential for quick, easy, and efficient use of the web and have been instrumental in building the Internet's popularity. No other product duplicates or fully substitutes for their functionality. Because browsers can help to overcome the incompatibility between different operating systems by allowing applications to run on a variety of other operating systems, browsers can reduce or eliminate the key barrier to entry which protects Microsoft's operating system monopoly. Microsoft's CEO Bill Gates referred in May 1995 to this possibility as the threat that Netscape's Navigator would "commoditize" the operating system. Exhibit 2 (MS6 5004549-58), B. Gates 5/26/95 e-mail. Internet browsers pose a competitive threat to Microsoft's operating system monopoly in two basic ways. First, Netscape's browser is the most important means by which a new programming language known as "Java" is made available to computer users. Java is designed in part to permit applications written in it to be run on different operating systems (or "across platforms"). The more Java is distributed and used to write application programs, the more a critical barrier to entry protecting Microsoft's monopoly power is reduced. Microsoft has recognized that competing browsers can increase the proliferation and use of Java, and in so doing can threaten Microsoft's operating system monopoly. Second, Microsoft has also recognized that Netscape's "Navigator" browser is itself a platform to which many applications were being written, and to which (if it thrives) more and more applications would be written. Since Netscape's browser can be run on virtually any PC operating system, applications written to Netscape's browser can also be used with different operating systems. Accordingly, the success of Netscape's browser created an alternative platform that, standing alone, threatened to reduce or eliminate a key barrier protecting Microsoft's operating system monopoly. To respond to the competitive danger posed by Netscape and Java (and more broadly the promise of Internet computing as a substitute for the Windows monopoly), Microsoft embarked on an extensive campaign to market and distribute its own Internet browser, which it named "Internet Explorer" or "IE." Microsoft executives have described this campaign as a "jihad" to win the "browser war." A January 5, 1997, presentation to Microsoft CEO Bill Gates on how to respond to the Java threat emphasized "Increase IE share" as a key strategy. Exhibit 3 (MS7 005529-44). With its resources and programming technology, Microsoft was well positioned to develop and market a browser in competition with Netscape. Indeed, ongoing competition on the merits between Netscape Navigator and Microsoft Internet Explorer could have been expected to result in greater innovation and the development of better products at lower prices. The competitors had offsetting advantages -- Microsoft with its size and dominant position in desktop software, and Netscape with its position as the browser innovator and leading browser supplier -- and the benefit to consumers of product differentiation could have been expected to sustain continued competition on the merits between these companies into the future. Microsoft, however, has been unwilling to compete purely on the merits. Instead, Microsoft began, and continues today, a pattern of anticompetitive practices designed (1) to stifle the potential competitive threat to its operating system monopoly, and (2) to extend its monopoly to the Internet browser market. In May 1995 Microsoft tried to convince Netscape to enter into an agreement not to compete and to divide the browser market. Microsoft proposed in part that Netscape provide the sole browser for non-Windows 95 operating systems and that Microsoft provide the sole browser for Windows 95 operating systems. When Netscape refused, Microsoft reacted -- it began a pattern of exclusive dealing arrangements, agreements to not distribute or promote competitive browsers, tie-ins, and other exclusionary and predatory conduct that excludes competition on the merits, robs OEMs and consumers of the opportunity to make their own choices, and deters innovation. Browsers often are installed as part of the software provided when purchasing a new computer from an OEM. PC users also frequently obtain browsers through their Internet Service Provider (or "ISP"). Microsoft recognizes that "the ISP channel and the OEM channel are the most important channels for distribution." C. Myhrvold Deposition Transcript Excerpts ("Myhrvold Dep."), p. 43, lines 7-18. Since May 1995, Microsoft has substantially foreclosed non-Microsoft browsers from the ISP channel by entering into agreements with Online Service Providers (including America Online and CompuServe) and other leading ISPs that require those providers to distribute and promote Internet Explorer and not to distribute and promote competitive browsers. These agreements require ISPs to:
Microsoft entered into similarly restrictive agreements with Internet Content Providers ("ICPs"). Even though it had cost Microsoft hundreds of millions of dollars to develop, test and promote Internet Explorer, Microsoft began to distribute Internet Explorer without charge even though Netscape, the leading browser supplier at that time, was charging OEMs for its browser. As Paul Maritz, Microsoft Group Vice President in charge of the Platforms Group, was quoted in the New York Times telling industry executives: "We are going to cut off their air supply. Everything they're selling, we're going to give away for free." Exhibit 4, New York Times 1/12/98. As reported in the Financial Times, Microsoft CEO Bill Gates likewise warned Netscape (and other potential Microsoft challengers) in June 1996: "Our business model works even if all Internet software is free. . . . We are still selling operating systems. What does Netscape's business model look like (if that happens)? Not very good." Exhibit 5, Financial Times 6/10/96. In fact, Mr. Gates did not stop at free distribution. Microsoft set out to do whatever it took to make sure that significant market participants did not distribute Netscape's browser. For example, Microsoft tried to convince Intuit, among the most significant application software developers in the United States, not to distribute Netscape's browser. Mr. Gates was blunt, as he reported in a July 1996 internal e-mail: I was quite frank with him [Scott Cook, CEO of Intuit] that if he had a favor we could do for him that would cost us something like $1M to do that in return for switching browsers in the next few months I would be open to doing that. Exhibit 6 (MS6 6007642-43), B. Gates 7/24/96 e-mail. Moreover, Microsoft tied its Internet Explorer browser to Windows 95, requiring OEMs to preinstall IE (and to agree not to remove all or part of it) as a condition of obtaining a license to Windows 95. Microsoft continued that tie until January 1998, when it came into compliance with the Court's Order of December 11, 1997, prohibiting such tying and barring Microsoft's use of its Windows monopoly to induce OEMs to select and distribute IE. Microsoft's anticompetitive conduct has been achieving its goal. Microsoft's share of the browser market increased dramatically from 3% or 4% in early 1996 to approximately 50% in early 1998. Microsoft's latest anticompetitive act is to tie its IE browser to Windows 98, the next version of its Windows operating system, which is being released to OEMs today and will be available to consumers on June 25, 1998. Microsoft will require OEMs as a condition of obtaining Windows 98 to agree not to remove IE or replace it with a competing browser. Microsoft's Windows 98 tie-in threatens to foreclose competing browsers from the OEM channel, the second of the two "most important channels of distribution" for browsers. It will be a commercial necessity for OEMs to install Windows 98, so virtually every new PC shipped to end users will come with Microsoft's browser. Microsoft's tie of its Internet browser to Windows 98 is illegal under both Sherman Act Section 1 (as a restraint of trade) and Section 2 (as unlawful maintenance of Microsoft's operating system monopoly and as attempted monopolization of the Internet browser market). Internet browser software is a separate product from operating systems. For example:
There is also demand for Internet browsers separate from the demand for operating systems. For example:
There is no reason grounded in efficiency or market demand for Microsoft to enforce its contractual restrictions that prohibit OEMs from offering consumers an unbundled version of Windows and Internet Explorer. In fact:
As the Court has previously found: Microsoft admits that it conditions its Windows 95 license agreements on OEMs agreeing to license and distribute IE, and the government has shown that there exists sufficient independent consumer demand for operating systems and Internet access software "so that it is efficient for a firm to provide" those products "separately," as Microsoft has concededly done. U.S. v. Microsoft, 980 F. Supp. at 544 (citing Eastman Kodak Co. v. Image Tech. Serv., Inc., 504 U.S. 451, 462 (1992)). Indeed, if the bundling of Windows and Internet Explorer were efficient, the combined product should thrive in a competitive market. But Microsoft has chosen to avoid the test of competition. Microsoft has deprived its customers of the competitive option of obtaining Windows 98 without IE or without a browser at all; if a user wants Windows 98, he or she must take IE. The result is to foreclose customers' access to competing browsers.
In the absence of preliminary relief, consumers will be deprived of their choice of browsers, and consumers and the public will be deprived of the benefits of competition during the pendency of this action. Relief at the conclusion of this case cannot remedy the damage done to consumers and the public during the interim. In the absence of preliminary relief, there would be severe harm to competition. Microsoft's rivals would be foreclosed from the most effective means of distributing their browser to customers who, during the pendency of this case, purchase new PCs with Windows 98. Moreover, in part because of "network effects" and increasing returns to scale, Microsoft's continued market share gains will so strengthen its position (and so weaken its rivals' position) that waiting until the end of this case would likely require much more far-reaching relief. Thus, Microsoft's conduct threatens in economic terms irreversibly to "tip" the market in its favor. As the Court previously held with respect to Windows 95, "the cost of a compulsory unbundling of Windows 95 and IE in the future could be prohibitive." 980 F. Supp. at 544. There will be no harm to Microsoft from the Court's granting the United States' requested preliminary relief. The Complaint and motion for preliminary injunction do not seek to prevent Microsoft from releasing and shipping Windows 98 on schedule. Nor do they seek to prohibit Microsoft from offering Windows 98 as Microsoft wishes to offer it -- combined with a browser -- to customers who voluntarily choose that combination. What the United States seeks is an Order during the pendency of this litigation enjoining Microsoft:
This preliminary relief is essential to preserving competition, and protecting consumers and the public, during the pendency of the litigation. The first form of preliminary relief (¶¶ 2a-d of the Complaint's Prayer for Relief) and the second form of preliminary relief (¶ 2f of the Prayer) are essential to suspend Microsoft's illegal conduct, and thus to prevent further competitive injury during the pendency of this action. The third form of preliminary relief (¶ 2e of the Prayer) is necessary to preserve the competitive status quo, and to prevent Microsoft from securing irreversible dominance of the browser market. The best preliminary relief would be to require Microsoft to directly unbundle its operating system and browser products. Microsoft, however, has taken the position that Windows 98 has been designed to make that difficult and time consuming. In order to avoid simply enjoining the distribution of a bundled version of Windows 98 at this time (and thereby perhaps substantially delay its distribution), the United States seeks the more limited remedy of requiring Microsoft to include Netscape's browser on the same basis of Internet Explorer. The equal treatment of Netscape's browser (either by unbundling Internet Explorer from Windows 98 or by bundling both Internet Explorer and Netscape's browser) is necessary to prevent Microsoft from conferring on its Internet Explorer browser a continued competitive advantage over its only significant browser rival, and thereby tip the browser market to Internet Explorer, during the pendency of this litigation.(6) Microsoft's public relations campaign notwithstanding, the company's plan to tie its Internet browser to Windows 98 and its exclusionary agreements with OEMs, ISPs, and ICPs are simply the raw use of Microsoft's monopoly power to foreclose consumer choice, to eliminate competition on the merits, to preserve and enhance its operating system monopoly by stifling a potential competitive threat, and to extend its monopoly to a vitally important new market. The Court should issue a preliminary injunction to prevent those competitive harms from arising while this litigation proceeds. The United States requests an expedited briefing schedule and an immediate hearing on its motion for a preliminary injunction to prevent irreparable harm pending resolution of this matter.
This Court has subject-matter jurisdiction pursuant to 28 U.S.C. §§ 1331, 1337. Section 4 of the Sherman Act, 15 U.S.C. § 4, confers jurisdiction on this Court to prevent and restrain violations of Sections 1 and 2 of the Sherman Act, 15 U.S.C. §§ 1, 2.
In an action brought by the United States to enforce the antitrust laws, a preliminary injunction is appropriate if the United States shows a likelihood of success on the merits and if the balance of equities tips in its favor. United States v. Siemens Corp., 621 F.2d 499, 506 (2d Cir. 1980). This Circuit traditionally considers and balances four factors when determining whether a preliminary injunction should be issued: (1) whether the plaintiff has a substantial likelihood of success on the merits; (2) whether the plaintiff will suffer irreparable harm if the injunction is denied; (3) whether the defendant will suffer a disproportionate injury if injunctive relief is granted; and (4) whether the public interest favors the issuance of the preliminary injunction. Taylor v. Resolution Trust Corp., 56 F.3d 1497, 1506 (D.C. Cir. 1995); Washington Metro. Area Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841, 843 (D.C. Cir. 1977). This Circuit has noted, though, that the four-part test is a "flexible one" and that "[i]njunctive relief may be granted with either a high likelihood of success and some injury, or vice versa." Population Institute v. McPherson, 797 F.2d 1062, 1078 (D.C. Cir. 1986). As demonstrated below, all four factors strongly support granting a preliminary injunction here.
Underlying all of the United States' allegations in this case are Microsoft's anticompetitive and exclusionary efforts to hinder opportunities of competing Internet browsers as a way to maintain and extend its operating system monopoly. Microsoft's anticompetitive agreements violate Section 1 of the Sherman Act; and its conduct, viewed both individually and in the aggregate, also violates Section 2 of the Sherman Act.
To establish monopolization in violation of Section 2, the United States must show two elements: (1) the possession of monopoly power in the relevant market, and (2) the willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. United States v. Grinnell Corp., 384 U.S. 563, 570-71 (1966); see also Southern Pacific Comm. Co. v. AT&T, 740 F.2d 980, 1000 (D.C. Cir. 1984). The first element of a monopolization claim -- monopoly power -- is "the power to control market prices or exclude competition." United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 391 (1956). "[T]he material consideration in determining whether a monopoly exists is not that prices are raised and that competition actually is excluded, but that power exists to raise prices or to exclude competition when it is desired to do so." American Tobacco Co. v. United States, 328 U.S. 781, 811 (1946). The second element of a monopolization action is "the willful acquisition or maintenance of [monopoly] power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident." Grinnell, 384 U.S. at 570-71. This requires the Court to determine whether the monopolist "impaired competition in an unnecessarily restrictive way." Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585, 605 (1985). "If a firm has been attempting to exclude rivals on some basis other than efficiency, it is fair to characterize its behavior as predatory." Ibid. (internal quotations omitted). Furthermore, "[w]here a defendant maintains substantial market power, his activities are examined through a special lens: Behavior that might otherwise not be of concern to the antitrust laws -- or that might even be viewed as procompetitive -- can take on exclusionary connotations when practiced by a monopolist." Eastman Kodak Co. v. Image Tech. Servs, Inc., 504 U.S. 451, 488 (1992) (Scalia, J., dissenting) (citing 3 P. Areeda & D. Turner, Antitrust Law ¶ 813, at 300-02 (1978)). A monopolist also violates Section 2 when it enters into anticompetitive agreements that serve to maintain its market power. Such agreements also violate Section 1 of the Sherman Act, and it is settled that a monopolist violates Section 2 if the monopolist has "maintained his strategic position, or sought to expand his monopoly, or expanded it by means of those restraints of trade which are cognizable under [Sherman Act] § 1." United States v. Griffith, 334 U.S. 100, 106 (1948); United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 342 (D. Mass. 1953), aff'd per curiam, 348 U.S. 521 (1954); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 239 (1st Cir. 1983). Here, Microsoft's agreements with ICPs, ISPs (including Online Service Providers ("OLSs")), and OEMs, unlawfully maintain Microsoft's monopoly power in violation of Section 2 on both grounds: They draw on Microsoft's monopoly power to exclude competition on a basis other than efficiency, thereby tightening Microsoft's grasp on the operating system market; and they violate Section 1's proscription on employing anticompetitive agreements to maintain monopoly power.
Microsoft has monopoly power in a well recognized market -- operating systems for Intel-compatible personal computers. Microsoft's "Windows" monopoly is shown by its high market share, with Windows 95 installed on almost all consumer PCs sold over the last three years and with Windows 98 to be preinstalled on virtually all personal computers sold beginning in June 1998. The barriers to entry in this market are very high.
A relevant product market consists of "products that have reasonable interchangeability for the purpose for which they are produced." United States v. E.I. duPont de Nemours & Co., 351 U.S. 377, 404 (1956); see also SmithKline Corp. v. Eli Lilly & Co., 575 F.2d 1056, 1063 (3d Cir.) (the relevant product market consists of "those groups of producers which, because of the similarity of their products, have the ability, actual or potential, to take significant amounts of business away from each other"), cert. denied, 439 U.S. 838 (1978). The relevant product market in this case is the market for "desktop" (as distinguished from "server" operating systems, ordinarily used to control the operation of servers coordinating the operation of networks of personal computers) PC operating systems that are run on Intel x86/Pentium (or Intel-compatible) microprocessors. Competition from non-Intel compatible operating systems does not effectively constrain the pricing of Intel compatible operating systems. Declaration of David Sibley ("Sibley Decl."), ¶ 8. Most, if not all, PC OEMs see no alternative to preinstalling Intel-compatible operating systems on the PCs they build and sell.(7) The relevant geographic market is worldwide.
Microsoft develops and licenses a variety of software products, including operating system products. The current Microsoft desktop operating system product is Windows 95. Windows 98, the newest update to the Windows desktop family, is on the verge of release.
High market shares are sufficient to support an inference of monopoly power unless the market is characterized by factors such as ease of entry that would negate the inference. Grinnell, 384 U.S. at 571; United States v. Aluminum Co. of Am., 148 F.2d 416, 424 (2d Cir. 1945); American Tobacco Co. v. United States, 328 U.S. 781, 785 (1946). Here, Microsoft has long possessed a dominant share of the personal computer operating system market. Microsoft's market share has remained stable at approximately 90% for the last seven years, despite the efforts of experienced and well capitalized entrants such as IBM. Sibley Decl., ¶ 14 & Table 1. Indeed, even if the product market were defined to include operating systems for all PCs, not just those that are Intel-compatible, Microsoft's market share would be only slightly less, and it would still possess monopoly power. Sibley Decl.¶¶ 8,14 n. 20. In mid-1996, Microsoft estimated that 80% of the 23 million PCs projected to be sold in the United States from mid-1996 to mid-1997 would have Microsoft operating system products preinstalled on them by PC OEMs, while only 6% would have competing operating system products preinstalled. Microsoft projected that its OEM-installed operating system market share would be almost 86% by the end of mid-1997, while its competitors' shares would be only 2%.(8) These high market shares are themselves sufficient to raise a presumption of market power. Aluminum Co. Of Am., 148 F.2d at 424.
Extremely high barriers to entry in the PC operating system market secure and reinforce Microsoft's monopoly power in that market. These barriers include: the considerable time and expense required to develop, test and market a new PC operating system; the lack of a sufficient installed base of users of the new operating system; and the difficulty in convincing OEMs to offer and promote a non-Microsoft operating system. These barriers are magnified and reinforced by "network effects" and "increasing returns in consumption" which result from the fact that the value to users of a particular good or service increases with the use of that good or service by others. Sibley Decl. ¶¶ 11-13. Network effects are substantial in the operating system market. The more users a particular operating system has, the more applications software developers will write for that operating system; and that, in turn, will make the operating system more attractive to more users, resulting in positive feedback reinforcing its dominance. Declaration of Franklin Fisher ("Fisher Decl."), ¶ III.A.3 These network effects give Microsoft a tremendous advantage. Applications written for one operating system will not work on another. Thus, the vast majority of users demand Windows because there are many times more applications written for Windows than for any other operating system. Exhibit 28 (MS6 5003780-3786), Bob Muglia e-mail re: '97 Tools Vision ("The Windows franchise is fueled by application development which is focused on our core APIs");(9) Exhibit 29 (MS6 5005721), Winning the Internet Platform Battle, Brad Chase, 4/4/96 ("Windows won the desktop OS battle because it had more applications earlier than any other platforms."). In turn, Windows' huge installed base compels software developers to develop applications for Windows first, and often for Windows exclusively, refueling the positive feedback loop.(10)
Because of Microsoft's monopoly power, customers expect to receive Windows with the PCs they buy and, therefore, OEMs see no choice but to ship PCs with Windows.(11) Even IBM, which makes its own competing operating system, has chosen to preinstall Microsoft's operating system rather than its own on all of its consumer PCs. Kozel Dep., p. 11, lines 5-24. OEMs recognize that their dependence on Windows gives Microsoft substantial leverage over them. As one executive at a major PC OEM put it: "They have established a dominant market share position in the marketplace where we distribute our products, and there's really no option or choice to Microsoft products in these areas." Von Holle 9/97 Dep., p. 37, lines 11-15. An executive of another major OEM wrote to Microsoft: "If we had a choice of another supplier, based on your actions in this area, I assure you [sic] would not be our supplier of choice." Romano Dep., p. 49, line 15 - p. 50, line 3. Of course, as the executive later testified, "absolutely there's no choice," Id. at p. 50, line 7.
Windows 98, the successor to Windows 95, will become the dominant operating system for new shipments upon its release, particularly in the OEM channel. Because customers demand not only Windows, but the latest versions of Windows, Decker Dep., p.11, line 22 - p. 12, line 16, OEMs will have no commercially viable alternative to Windows 98. See ibid.; Ransom 10/97 Dep., p.11, lines 4-19; W. McKinney Deposition Transcript Excerpts ("McKinney Dep.), p.12, lines 1-8. Because Windows 98 will be compatible with Windows 95 applications, it will immediately inherit the huge and commercially critical base of available software programs for users to run on it.
As Microsoft's top executives recognize, Internet browsers(12) and related technologies represent the most serious existing or potential threat to Microsoft's continued dominance of the PC operating system market. Like Windows, the browser products produced by Netscape contain application programming interfaces that enable ISVs to write software applications or "plug-ins" to the browser. In this sense, the Netscape browser is an alternative platform to which software applications can be written. The Netscape browser works on numerous operating systems without having to have the applications' developers go through the time and expense of "porting" (i.e., rewriting) the application for different operating systems. One particular way in which a browser with a large number of users can become an alternate platform for application development is for it to be combined with Sun Microsystems' cross-platform programming language, Java. Java enables applications to run on any platform or operating system, as long as they are written in Java and run on a Java Virtual Machine (JVM). Non-Microsoft browsers, including Netscape Navigator, serve as the distribution package and host for a cross-platform JVM.(13) Maritz Dep. Tr. at p. 175, line 18 - p. 178, line 25. The widespread distribution of alternative APIs and cross-platform JVMs threaten the very source of Microsoft's monopoly. The more applications written directly to the browser or the JVM that it hosts, the more fungible the underlying operating system becomes. Because browsers such as Netscape Navigator are cross-platform (that is, they will run on any operating system, not just Windows) and have the ability to host cross-platform applications, they pose a significant threat to Windows. See, e.g., B. Tierkel Declaration, ¶¶ 4-9; P. Backes Declaration, ¶¶ 3-8; Fisher Decl. ¶ III.B. With a browser running on a computer and applications interacting directly with the browser, the underlying operating system could become less important. In that event, Windows' monopoly power would diminish, or perhaps ultimately be ended altogether. As early as 1995, Bill Gates recognized the threat Netscape posed: "They are pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system." Exhibit 2 (MS6 5004549-4558). Over the past three years, numerous Microsoft executives have reiterated concerns about the threat posed by competing browser products:
Microsoft executives have continued to acknowledge Netscape as a threat to its Windows operating system dominance. For example, Joachim Kempin, Microsoft's Senior Vice President for OEM Sales, pointed out that wide distribution of competing browsers might cause customers to "not know if they are on a UNIX machine, on a Macintosh, or a Windows machine anymore. Because the next browser might have a totally different interface, and it just can't be in our interest to promote that other interface." Kempin 10/97 Dep., p. 44, lines 20-23. Similarly, Paul Maritz, Group Vice President for Platforms and Applications, explained how Netscape Navigator posed a threat to Windows by being a major distribution vehicle for the Sun JVM. Maritz Dep., p. 175, line 18 - p. 178, line 23. Senior Vice President Jim Allchin, the executive in charge of Windows 98 development, explained that Netscape Navigator threatens to make it "trivial" to replace Windows by creating "a layer that hides the APIs of Windows." J. Allchin Deposition Transcript Excerpts (Allchin Dep.), p. 125, line 3 - p. 126, line 16. At this juncture, it is clear that non-Microsoft browsers remain a threat to Microsoft's operating system monopoly. Microsoft perceives browsers as a threat; Netscape, by both continuing to develop and widely distribute browser technology as an application platform and as a host for Java, continues to threaten to provide competitive alternatives to Windows; and application developers continue to see promise in a browser-based, cross-platform programming environment.
In reaction to the threat posed by non-Microsoft browsers, Microsoft has engaged, and plans to continue to engage, in a variety of exclusionary and predatory practices to protect its operating system monopoly.
Section 2 prohibits a firm from "wield[ing]" its monopoly power "to tighten its hold on the market." Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 275 (2d Cir. 1979), cert. denied, 449 U.S. 1093 (1980). "A variety of techniques may be employed to achieve this end -- predatory pricing, lease-only policies, and exclusive buying arrangements, to list a few." Id. at 274. Tying arrangements are another. By using monopoly power to compel a customer to purchase a product it might prefer to purchase elsewhere, a monopolist "forecloses competition on the merits in a product market distinct from the market for the tying item." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 22 (1984). "By doing so, the [monopolist] may build a strong position in [the tied product market]; and that position [in the tied product market], in turn, may increase its power" in its monopoly product. Grappone, Inc. v. Subaru of New England, Inc., 858 F.2d 792, 795 (1st Cir. 1988). Microsoft's use of its monopoly power in Windows 98 to coerce OEMs to license Internet Explorer implicates precisely this core Section 2 concern. By compelling OEMs to license Internet Explorer with Windows 98, Microsoft will continue to foreclose competition in a separate market -- the market for Internet browsers. Because of the threat that browsers pose to Microsoft's PC operating systems monopoly, this foreclosure of competition on the merits serves to maintain Microsoft's monopoly power. As the Supreme Court has stated, it is unlawful for a monopolist to "employ[] market power as a trade weapon against . . . competitors." Griffith, 334 U.S. at 107 (1948); see also ibid. ("[T]he use of monopoly power, however lawfully acquired, to foreclose competition, to gain a competitive advantage, or to destroy a competitor, is unlawful."). Although Microsoft will bundle Internet Explorer with Windows 98, it has gone well beyond linking the two products together. Indeed, it has contractually restrained its OEM licensees -- the conduits through which most copies of Windows are distributed -- from separating the two products. These agreements in and of themselves violate Sections 1 and 2 of the Sherman Act. Microsoft's contracts prohibit OEMs from "modify[ing] or delet[ing] any aspects of the Product software" licensed pursuant to Windows 95 (and Windows 98) license agreements. See infra, section IV.A.3(c). Microsoft has previously made clear that these licensing restrictions require OEMs to ship Internet Explorer with Windows 95, see Kempin 10/97 Dep., p. 16, lines 10-22, and OEMs likewise will not have the freedom under their license agreements to remove Internet Explorer from Windows 98.(14) See J. Kempin 3/98 Deposition Transcript Excerpts ("Kempin 3/98 Dep.), p. 36, line 12 - p. 37, line 8. Based on their understanding of the Windows 95 license agreements, OEMs recognize that they are not permitted to remove Internet Explorer.(15) See, e.g., Kies Dep., p. 9, line 21 - p. 10, line 5; Von Holle 9/97 Dep., p. 14, lines 3-24; Exhibit 18, Gateway 2000, Inc. 9/19/97 Answers to Interrogatories, p. 8. Similarly, they understand that Microsoft will not permit the removal of Internet Explorer from Windows 98. See, e.g., Kies Dep., p. 14, line 25 - p. 15, line 5.
The effect of Microsoft's tying of its Internet browser to Windows 98 will be, as it was with Windows 95, to impair competition on the merits in the market for Internet browsers(16) and thereby significantly to reduce the major threat to Microsoft's dominance of the operating system market. Where, as here, products in the tied product market are potential "partial substitutes" for the tying product, antitrust concerns about anticompetitive effects are heightened because tying agreements not only reduce competition in the tied market, but also reinforce market power in the tying market. See, e.g., 10 Areeda et al., Antitrust Law ¶ 1747 a-c, at 230-33 (1996). The economic consequences of tying arrangements are straightforward. Customers, if compelled to obtain a particular product from a monopolist, are unlikely to obtain a competing product from the monopolist's rival, even if they would otherwise have preferred to do so. See Jefferson Parish, 466 U.S. at 12. This is true with Internet browsers as with other products. Many OEMs who are contractually required to preinstall Internet Explorer along with Windows will not preinstall another browser on the PCs they sell because, among other reasons:
Indeed, Microsoft's Senior Vice President of OEM Sales noted that OEMs "should be" wary of installing two browsers on their machines. Kempin 10/97 Dep., p. 31, lines 13-17. "If the OEM wants to install the other browser, he can do it. And it's just a matter of how much cost he is willing to have. Because he will probably have to test all our product first then he has to test the other products . . ." Kempin 10/97 Dep., p. 34, lines 13-17 (emphasis added). Using this argument, Microsoft has actually dissuaded some OEMs from shipping another browser because Microsoft's browser is already on the machine: Q: . . . [D]oes Microsoft sometimes essentially make this argument to [OEMs]: Why do you need to incur the extra testing costs and the extra user education and maybe undergo the longer loading time -- Kempin 10/97 Dep., p. 37, lines 10-19. Because a user's first experience with software is determined by what comes preinstalled on his computer, see, e.g., Von Holle 9/97 Dep., p. 23, line 14 - p. 24, line 7; Ransom 3/98 Dep., p. 11, line 12 - p. 12, line 3, distribution through the OEM channel provides Microsoft a significant opportunity to distort users' software choices. As Microsoft's Joachim Kempin has admitted, this is precisely why tying Internet Explorer to Windows forecloses competitive opportunities for non-Microsoft browsers: It's known that if people have just one browser on a PC, they would probably at least start out with it. If they decide to go to another one, they would probably -- and they can easily do that, I can't control that. But maybe I can give them the original experience at least once. Kempin 10/97 Dep., p. 38, line 22 - p. 39, line 2. Microsoft also recognizes that competing browsers are significantly foreclosed by its tying of IE to Windows. See Exhibit 36 (MS7 1033-48), 1/14/97 Presentation (explaining that for Windows 98, priority "#1 is to build IE4 share via OEM distribution"). Distribution of browsers through preinstallation on PCs has been one of the two most significant avenues through which computer users obtain their browser. Myhrvold Dep., p. 43, lines 7-18; see, e.g., Exhibit 37 (MS7 006063), K. Mehta 3/27/97 e-mail (25% of IE users obtained it with their computer). As a result, internal Microsoft documents leave little doubt that the foreclosure of competing browsers caused by the forced distribution of Internet Explorer with Windows -- rather than any possible improvement of Windows that might be thought to result from the bundling of the two products -- is a critical factor in Microsoft's effort to win the browser war: Most of IEUs [focus group] were Navigator users. They said they would not switch, would not want to download IE4 to replace their Navigator browser. However, once everything is in the OS and right there, integrated into the OS, in their face so to speak, then they said they would use it because there would be no more need to use something "separate." The stunning insight is this: To make then switch away from Netscape, we need to make them to upgrade to Memphis. . . Exhibit 23 (MS7 004343), C. Wildfeuer 2/24/97 e-mail. As Microsoft's Megan Bliss wrote: I thought our #1 strategic imperative was to get IE share (they've been stalled and their best hope is tying tight to Windows, esp. on OEM machines). That is, unless I've woken up in an alternate state and now work for Netscape. Exhibit 38 (TXAG 0009634), M. Bliss 3/25/97 e-mail re: Closure on Memphis action items from 3YO and Billg Memphis review. Internal Microsoft presentations assessing Microsoft's competitive advantage against Netscape list the "huge OEM channel advantage" and note that Microsoft "own[s] the client OS." Exhibit 39 (MS6 6012195), Developer Relations Group Public Internet Plan (draft version 0.975). As Carl Stork makes clear, Microsoft used its "OEM channel advantage:" "Browser Share is Job 1 at this company, and OSR2 [a version of Windows 95 distributed by OEMs] is the vehicle to get IE3 onto these machines." Exhibit 40 (MS0009363A). Given the importance of the OEM channel for browser distribution, Microsoft's tying of Internet Explorer to Windows has had, and will have, a significant anticompetitive effect. Moreover, as discussed below, this effect is not limited to substantial foreclosure of competitive opportunities to distribute non-Microsoft browsers on new PCs. It also reinforces and augments the anticompetitive effects of Microsoft's other exclusionary conduct.
As a condition of licensing Windows 98, Microsoft has prohibited OEMs from adding to the sequence of screens every user sees when first turning on a new PC with Windows preinstalled (the "boot-up" sequence) and from modifying the default "desktop" screen (or "user interface") displayed to the user when the PC is first turned on.(19) OEMs cannot remove folders or icons from the Windows desktop, cannot create icons or folders larger than those placed by Microsoft on the desktop, and cannot alter the boot-up sequence by, for instance, presenting an OEM-created screen or "shell" that would highlight a choice of Internet browsers or the OEM's own Internet offerings. Microsoft's restrictions mean that virtually every new PC will present the same screens and the same set of Microsoft-dictated software -- including Microsoft's browser -- to new users when they first turn the machine on, regardless of which OEM built it and what other choices that OEM wanted to make.(20) The Microsoft desktop screen and boot-up sequence restrictions produce several anticompetitive effects that significantly impede the successful distribution of competing browsers in the most important channels for getting browsers to end users. First, by barring OEMs from removing all or part of Microsoft's browser product, the restrictions provide the mechanism Microsoft uses to enforce its tie of Internet Explorer to Windows. Second, the restrictions deprive PC OEMs of the freedom to configure their computers in a way that presents or positions competing software products more prominently than Microsoft's bundled (and contractually non-removable) products such as Internet Explorer. By using its monopoly power simultaneously to require both preinstallation and unrivaled positioning of its browser, Microsoft effectively ensures that no competing browser can ever receive better placement or treatment on any PC. Moreover, users are particularly likely to select the Internet services they will use (including browsers and their choice of ISP's) the first time they turn on the PC: In order to protect our position on the desktop and increase the likelihood that IE gets the prominent position with the end user we should move the Sign Up Wizard into the boot-sequence somewhere, before we give control over to the OEM. This way we can increase the likelihood that an end user gets the option to sign up for solutions that promote IE before they get into the desktop or any customized shell that features other browser solutions. Exhibit 43 (MSV 9136A-9139A), B. Chase 3/1/96 e-mail. Microsoft has done just this, moving its Internet Connection Wizard into the Windows 98 startup sequence. Both Microsoft's executives and others in the industry expect that the Internet Connection Wizard will become an even more important means by which users select their ISP or OLS, and thus often their browser, than it was in Windows 95. See, e.g., B. Chase Dep., p. 184, line 13 - p. 185, line 6; J. Allchin Depo., p. 83, line 15 - p. 86, line 22; D. Colburn Deposition Transcript Excerpts ("Chase Dep."), p. 47, lines 9-19. Microsoft's boot-up sequence and screen restrictions, of course, deny OEMs similar freedom to create a more "prominent position" for non-Microsoft browsers. Indeed, more generally, Microsoft's screen restrictions block OEMs from entering into innovative partnerships with non-Microsoft software vendors to provide new or different software options and interfaces to consumers. This thwarts OEMs' abilities to differentiate their products by highlighting competing Internet software or service offerings, as they did before Microsoft imposed its screen restrictions. For example, one major OEM would like the flexibility to give its customers a choice of Internet access providers as part of the PC boot-up sequence, see Exhibit 44 (GW 026420-24); R.. Brownrigg Dep., p. 41, line 1 - p. 44, line 22, p. 49, line 5 - p. 51, line 2; J. Von Holle 4/98 Dep., p. 13, line 3 - line 25, and in the process offer those users a choice of browsers when they register with the selected service. Brownrigg Dep., p. 49, line 15 - p. 50, line 13; J. Von Holle 4/30/98 Dep., p. 14, line 15 - p. 14, line 22. In essence, it wishes to define its own Internet software and service partners and arrange direct business relationships with them in order to offer its customers additional options. Microsoft's restrictions, however, have prevented it from meeting what it perceives to be consumer demand. Other OEMs have been similarly thwarted from offering users similar choices of software and services during the boot-up sequence. See, e.g., McKinney Dep., p. 14, line 12 - p. 15, line 24, p. 19, line 17 - p. 21, line 19; Romano Dep., p. 40, line 21 - p. 43, line 18. Microsoft will continue to deny this basic OEM and consumer choice when it releases Windows 98. OEMs already have requested that Microsoft give them flexibility to highlight their own competitive offerings, but Microsoft has made clear it intends to continue to impose and enforce its screen restrictions.(21) F. Santos Dep., p. 19, line 11 - p.20, line 13; J. Von Holle 4/30/98 Dep., p. 14, line 23 - p. 15, line 24. Internal Microsoft documents written before it imposed the restrictions amply illustrate the OEM choice that Microsoft feared -- and that it eliminated through the boot-up and screen restrictions. For example, Microsoft CEO Bill Gates wrote of his concern that OEMs were bundling non-Microsoft browsers and "coming up with offerings together with Internet Service Providers that get displayed on their machines in a FAR more prominent way than . . . our Internet browser" and that those offerings were interfering with the "very very important goal" of "[w]inning Internet browser share." Exhibit 45 (MSV 9445A), 1/5/96 B. Gates e-mail. At the same time, Group Vice President Paul Maritz reported to Mr. Gates that ISPs (which at that time did not generally distribute Internet Explorer) were already included in OEM shells (i.e., OEM-created screens that provide access to applications) that were "invariably positioned on the desktop more strongly by our OEMs than any Microsoft offering." Exhibit 46 (MSV 0009360A-61A), Paul Maritz 1/6/96 e-mail to Bill Gates. Microsoft's screen restrictions eliminate these opportunities for competing browsers and Internet Services because they "protect [Microsoft's] position on the desktop." As will be seen below, Microsoft's ability to prevent OEMs from deleting or overshadowing its products allows Microsoft to assure IAPs, ICPs, and ISVs that, if they agree to exclude and foreclose competing browsers from their services and products, Microsoft will provide them distribution and favorable promotion on every Windows desktop -- an offer few ignore. See, e.g., R. Brownrigg Dep., p. 54, line 19 - p. 57, line 15.
Microsoft has entered into agreements with the largest and most important ISPs and OLSs (sometimes collectively called Internet Access Providers, or "IAPs"), including America Online, CompuServe, Prodigy, and MCI, that exclude rival Internet browsers from the single most important browser distribution channel.
Microsoft has entered into a series of contracts with nearly all the nation's leading IAPs for placement of access to their services in two places on the Windows desktop: the Internet Connection Wizard ("ICW") and the Online Services Folder. These agreements are exclusionary: They expressly and significantly restrict consumers' access to, and even their ability to be told about, non-Microsoft browsers that their service providers might otherwise distribute and promote.(22) These contracts have the purpose and effect of excluding the Netscape Navigator browser from distribution through the vast majority of U.S. IAPs, which are the single most important channel through which users acquire their browsers. In particular, the agreements require that:
While Microsoft has recently announced, after coming under intense scrutiny and on the eve of likely antitrust enforcement action, that it will waive some of the restrictions for ISPs, the most exclusionary restrictions remain for the most important IAPs -- the OLSs, including AOL, CompuServe, and Prodigy.(25)
Microsoft is able to induce IAPs to enter into these restrictive agreements as a condition of the IAPs' placement on the Windows desktop, which is an unusually attractive distribution and promotional mechanism for software providing access to IAP services.(26) As Brad Silverberg, former head of Microsoft's Internet Group, told AT&T during negotiations: You want to be part of the Windows box [desktop], you're going to have to do something special for us. There are very, very few people we allow to be in the Windows box. If you want that preferential treatment from us, which is extraordinary treatment, we're going to want something very extraordinary from you. Silverberg Dep., p. 159, lines 10-16. The "something very extraordinary" Microsoft was demanding was exactly what the United States here challenges: an explicit agreement to restrict the distribution, advertisement, promotion, or even mention of non-Microsoft browsers.(27) Few facts illustrate the critical importance to Microsoft of gaining preferred or exclusive distribution for Internet Explorer better than Microsoft's decision to place AOL on the Windows desktop. AOL was and is the fiercest competitor to Microsoft's own online service, MSN, on which the company had already spent many millions of dollars and given a preferred position on the Windows 95 desktop. Bill Gates initially strongly opposed giving AOL access to the Windows desktop, stating that doing so would be tantamount to "putting a bullet through MSN's head." Silverberg Dep., p. 187, lines 2-7. Nevertheless, Gates and other top Microsoft executives decided to place AOL in the Online Services Folder. Microsoft's motivation for such an extraordinary step was clear: trade the attractiveness of access to the Windows desktop for AOL's agreement to distribute Internet Explorer essentially exclusively to its millions of users.(28) Indeed, nearly all significant U.S. IAPs have agreed to the exclusionary restrictions, in many cases because doing so was Microsoft's "price" for access to the Windows Microsoft desktop. See, e.g., K. Knott Deposition Transcript Excerpts ("Knott Dep."), pp. 14, 21-22; D. Colburn Dep., p. 29, line 4 - p. 30, line 6; p. 33, lines 14-21; p. 33, line 14 - p. 34, line 23. Significantly, these IAPs agreed to exclude Netscape and other browsers despite their preference not to be locked into exclusive or near-exclusive browser distribution arrangements. For example, CompuServe, the nation's second largest OLS, preferred "to have flexibility in software" that it distributes, but nevertheless agreed not to ship, market, or physically distribute any non-Microsoft browser with its online service and branded services unless expressly requested by a customer, and not to distribute more than a small percentage of non-Microsoft browsers even upon a customer request. K. Knott Dep., p. 21, line 6 - p. 23, line 20; p. 25, lines 4-5. MCI, a significant ISP, also would have liked to "have had the flexibility to be able to promote other browsers should there be a marketing advantage to do so," S. Von Rump Deposition Transcript Excerpts ("Von Rump Dep.")., p. 11, line 11 - p. 12, line 8, but it too agreed to restrictions partly as the price of being included in Windows. Id. at p. 14, line 12 - p. 15, line 14. Similarly, AT&T executives told Microsoft that it wanted to remain "browser neutral," and that the "level of exclusivity" demanded by Microsoft was problematic for its partnership with Netscape. Nevertheless, AT&T ultimately agreed to Microsoft's restrictions and eliminated browser neutrality in order to gain access to Windows. Exhibit 58 (MS6 6006096), D. Steele 4/14/96 e-mail; B. Silverberg Dep., p. 159, line 8 - p. 160, line 10; p. 170, line 21 - p. 171, line 5.
Microsoft's exclusionary contracts with IAPs deny its browser competitors access to the most important avenue for browser distribution and promotion. Microsoft has estimated that at least 31% of Internet users get their browsers from an IAP. Exhibit 53 (MS6 5003741-43), Chase 9/9/96 e-mail. See also Myhrvold Dep. p. 49, lines 3-9 (in 1997, Microsoft estimated this figure at 35%). As Microsoft's executive in charge of dealing with ISPs recently explained, "it is logical to me that the company providing you with Internet access is a prime place to get the browser from which you do that Internet access." Id. at 46-49. The IAPs that have entered into restrictive agreements as a condition of placement in the Windows Online Services folder -- AOL, CompuServe, Prodigy, AT&T WorldNet, and MSN -- account for the majority of Internet access. In 1997, Microsoft estimated that 43% of home users access the Internet through AOL alone. Exhibit 54 (MSV 10540-77), April 1997 IE Market Review. Because the percentage of Internet use via AOL is so high, Microsoft described the deal through which AOL agreed to exclusively use Internet Explorer in its client software as a "coup" and an "opportunity to help establish -- establish a Microsoft platform. . ." Exhibit 55 (MS6 5003676); Silverberg Dep., p. 124, lines 16-24. Microsoft's restrictive agreements injure consumers not only by restricting their choice of browsers but also by limiting the flow of information about competing browsers. Microsoft imposes a gag rule on IAPs by preventing them from expressing or implying to subscribers that an alternate browser is available with their services and by greatly restricting the IAPs' abilities to advertise or promote any non-Microsoft browser.(29) As a result of the contracts, many IAPs no longer mention, or provide users the ability to download, Netscape Navigator. See, e.g., Stephen Von Rump Depo at p. 10, line 6 - p. 11, line 10. Finally, Microsoft offered payment -- both in the form of "reverse bounties"(30) and direct cash incentives -- to secure a high level of exclusivity for Internet Explorer and to convert current users of Netscape Navigator. The "reverse bounties," which Microsoft conceded entailed foregoing revenue it otherwise would have received, were offered for what Microsoft termed "competitive upgrades." See, e.g., Exhibit 50 (MS6 5001140), Spry agreement , Exhibit C,) p. 28; C. Myhrvold Dep. p.128, line 11-p.129, line 4 . Microsoft even offered to pay off AT&T's $17 million minimum commitment to Netscape, in the form of reductions from the bounties AT&T would pay Microsoft for subscriber referrals, in return for a "high level of exclusivity" for Internet Explorer. Exhibit 58, Dan Steele 3/14/96 e mail (MS6 6006096). In addition, Microsoft actually gave some IAPs funding in order to switch their installed base to Internet Explorer. Myhrvold Dep. at p. 129, line 18 - p. 130, line 25. Thus, Microsoft bought exclusion both indirectly, by using the promise of distribution through Windows, and directly, by paying for it.
Microsoft's agreements with ICPs add to the competitive harm that Microsoft's agreements with OEMs and IAPs cause. ICPs provide content that consumers view on the web. In return for the placement of a "channel" button(31) on the Windows desktop, Microsoft's agreements limit ICPs' distribution, support, and promotion of non-Microsoft browsers. As with Microsoft's agreements with IAPs, Microsoft has used its attractive Windows desktop real estate to induce ICPs to agree to exclude its browser rivals Microsoft's contracts with the largest and most popular ICPs require those ICPs to promote their Microsoft channel exclusively and restrict the ICPs' abilities to deal with "Other Browsers":(32)
In addition to limiting arbitrarily the definition of "Other Browser" to its top two browser competitors, Microsoft has made clear to its ICP signatories that its restrictions are aimed at Netscape. For instance, a Microsoft representative warned HotWired that there should be no Wired branded presence on any Other Browser, and that Microsoft didn't even want to see a Netscape Netcaster press release that mentions the word "HotWired" or even "Wired." Exhibit 62 (WD000221), Wired's Lisa Gerhauser 6/5/97 e-mail.
As with its agreements with IAPs, Microsoft has been able to secure these exclusionary ICP terms because of its ability to provide ubiquitous distribution through Windows. Microsoft's promotional pitch to some ICPs explicitly spelled out the appeal of incorporation with Windows, which Microsoft called its "crown jewel." Declaration of Steve Wadsworth ¶ 5; see also Exhibit 63 (SPORT 000086), 5/29/97 "Benefits of becoming a Platinum partner." Microsoft's own documents even list "Windows distribution -- for IE, and as draw for partners" as a "competitive lever" over Netscape. See Exhibit 65 (MS6 6003202-3227), Internet Client and Collaboration 3 Year Business Outlook, 2/11/97; see also Exhibit 92 (MS6 000601346) (key Microsoft assets include placement on the Active Desktop). One of the major business imperatives of a content provider is to reach the broadest audience possible, and thereby increase the value of its websites to Internet-based advertisers. Nonetheless, many ICPs acquiesced to exclusionary agreements which included requirements that they design websites that would not be viewed as well with Netscape Navigator specifically in order to gain access to the Windows real estate. See, e.g., Declaration of Steve Wadsworth at ¶¶ 3, 4; Declaration of Harry Chandler at ¶ 5. As one ICP put it: "The way I've been looking at this is that a preferred position on the active desktop -- which means being bundled into the operating system -- is of almost incalculable value. . ." (emphasis added). Exhibit 67 (ZD 0127), ZDNET's David Shnaider 1/5/97 e-mail.
The importance of these contracts to Microsoft is illustrated by the length to which Microsoft has gone to enforce them. For example, Disney was able to carve out an exception that allowed it to have a Netcaster channel (but only on Microsoft's condition that it not compensate Netscape for, or promote the existence of, the channel).(36) Microsoft has demanded that even the Disney logos and characters that Disney wished to appear on Netscape's Netcaster channel bar be removed as a prohibited promotion of Netcaster. Rather than enmesh itself in a legal battle with Microsoft and risk being removed from the Active Desktop, Disney redesigned its Netcaster channel to have text only.(37) Declaration of Steve Wadsworth ¶¶ 12-13. Other content providers, such as Hollywood Online, also did not enter into certain arrangements with Netscape, partly because of restrictive contracts with Microsoft. Declaration of Harry Chandler ¶ 6. Similarly, Intuit, one of the largest ICPs and leading producers of application software in the United States,(38) entered into a contract with Microsoft that prevented it from shipping or promoting Netscape Navigator with Quicken, Turbo Tax, and QuickBooks, its popular and widely used financial software. Microsoft required Intuit to remove all "Netscape Now" buttons for downloading Netscape from many of its top web pages; prevented Intuit from entering into an agreement with Netscape for the promotion of Intuit content in exchange for some economic value; and required Intuit to place "Best Viewed with IE" logos on its home pages; Exhibit 68 (INT 00001-25), Internet Marketing Distribution and Promotion Agreement §§ 2.2. Intuit agreed to these anticompetitive terms partly because it felt it was important to be on the Windows desktop. Dunn Dep., p. 23, line 1 - p. 24, line 1; p. 45, line 23 - p. 46, line 3. Absent the agreement, according to its Senior Vice President and Chief Technology Officer, Intuit "would have already entered into an agreement with Netscape to provide financial content on Netscape Web Sites," Dunn Dep., p. 41, line 15 - p. 42, line 19, and would have continued to promote Netscape Navigator on its sites. Id. at p. 39, lines 10-24. Finally, absent the prohibition on shipping Navigator with its products, Intuit would probably have continued to distribute it with Quicken, as it had done since 1995. Id. at p. 37, line 17 - p. 38, line 11. In addition to the harm to competition caused by Microsoft's distortion of ICPs' dealings with non-Microsoft browser producers, Microsoft's contracts threaten to harm competition by requiring that ICPs adopt certain Microsoft-specific technologies. Rather than allowing the market to determine, based on the merits, which competing standard or technology will prevail, Microsoft instead requires that ICPs adopt "Active Platform"(39) and design a certain number of their websites with Windows-specific technologies, making those sites less attractive when viewed with competing browsers. See, e.g., Exhibit 31, Disney Active Desktop Agreement §§2.3, 2.4, Exhibit A; Exhibit 68, Intuit Internet Explorer Marketing, Distribution & Promotion Agreement, Exhibit A. As Microsoft executive John Ludwig wrote Bill Gates in July 1997: We have seen very little adoption of the technology tho [sic]. Finally with ie4 we have our top tier of content partners using the technology (because we force them to in our contracts with them). Exhibit 72 (MS7 015728), J. Ludwig 7/23/97 e mail. Microsoft's ICP contracts threaten to tip the browser battle decisively in Internet Explorer's favor and to eliminate the single most significant threat to Microsoft's operating system monopoly. Accordingly, Microsoft exclusionary agreements with ICPs, which have no legitimate business justification, see infra, section IV.A.5(c), constitute an unlawful attempt by a monopolist to insulate its monopoly from competition. See, e.g,. Lorain Journal Co. v. United States, 342 U.S. 143, 149 (1951).
Even taken individually, each of Microsoft's anticompetitive practices impairs a significant avenue by which consumers obtain non-Microsoft Internet browsers, and by which Microsoft's browser rivals attempt to satisfy the demands of those consumers. But rather than assess each practice separately, the Court should consider their cumulative effects in assessing the likelihood of anticompetitive harm under Section 2. See, e.g., Continental Ore Co. v. Union Carbide & Carbon Corp., 370 U.S. 690, 699 (1962) (plaintiffs "should be given the full benefit of their proof without tightly compartmentalizing the various components and wiping the slate clean after scrutiny of each"). Considered in this context, Microsoft's conduct has particularly significant anticompetitive effects. It directly forecloses opportunities for non-Microsoft browsers in what Microsoft executives recognize as "the two most important channels for distribution of browsers" -- the OEM and IAP channels, see Myhrvold Dep., p. 43, line 7-15 -- and substantially biases other distribution channels (e.g., promotion by ICPs, including downloads from many of the most visited websites in the United States, and bundling with ISV software). Moreover, such other avenues of distribution are becoming less significant over time. Historically, one of the most important methods of distributing browsers other than through IAPs or OEMs is via direct "download" over the Internet. However, Microsoft itself recognizes the decreasing viability of browser distribution through downloads as browsers increase in complexity and, more importantly size, resulting in inordinately long download times and a high rate of failure. See, e.g., Myhrvold Dep., p. 152, line 19 - p. 153, line 4; J. Belfiore Dep., p. 45, lines 2-16; Exhibit 73 (MS7 004715), B. Chase 11/19/97 e-mail ("only a little more than half of the people that download the active set-up end up installing the browser. I think they don't figure out what to do once they download the set-up stub"); Exhibit 20 (MS7 004273), K. Mehta 3/27/97 e-mail ("Overall 34% of all surfers (not just IE users) have ever downloaded a browser. That means 66% of everybody on the web has never downloaded a browser. . . . Almost 60% of surfers have never downloaded any software from the web. [M]y sense is that these people are not very likely to download anything, let alone a browser that takes 2 hours to download, from the web.") Therefore, with Microsoft moving increasingly aggressively to dominate the OEM and IAP channels, Microsoft's restrictive contracts in the OEM, IAP, ICP and ISV channels threaten even greater foreclosure in the future. The cumulative impact of Microsoft's conduct is also greater than the sum of its individual parts. Indeed, each practice tends to reinforce the others, making the foreclosure of competition in each channel even more important than it would be if Microsoft had not foreclosed other channels that might otherwise be available to competing browsers. Microsoft's tie of Internet Explorer to Windows, coupled with its restrictions on OEM freedom to prominently feature other browsers, affects not only competition for browser distribution in the OEM channel, but also ripples into the IAP, ICP, and ISV channels by increasing the likelihood that IAPs will deal with Microsoft to secure preferential positioning on PCs (something they can do only by agreeing to license and distribute Internet Explorer) and, in turn, decreases the further availability of alternative distribution channels for competing browsers.(40) In turn, this skewing of ICP and ISV support for proprietary, programming extensions is likely to affect end user, OEMs' and IAPs' (and ICPs' and ISVs') decisionmaking about browsers by making content designed specifically for IE -- and either not available, or available only in inferior form, to end users who visit the affected websites. By unreasonably biasing and influencing distribution, investment, and technology standards decisions, Microsoft's conduct, considered in the aggregate, is substantially likely to entrench Microsoft's operating system monopoly and harm competition -- even if Microsoft does not foreclose all avenues of distribution for competing browsers, and even if Microsoft's conduct does not give it a monopoly position in the browser market (though there is a dangerous probability this will occur, see infra, section IV.C.4). By restricting competition in critical channels of browser distribution, Microsoft's conduct directly reduces the ability of such products to acquire and retain substantial enough distribution and usage to fulfill their promise as application platforms and interfaces to an extent sufficient to pose a competitive threat to Microsoft's monopoly. See Fisher Decl., ¶ III.D; Sibley Decl., ¶ 52. Any alternative to the Microsoft operating system platform requires a critical mass of consumer usage. Microsoft thus can insulate its monopoly from competition by preventing the browser and Java alternatives from obtaining that critical mass, even if it does not exclude them from the market altogether. Accordingly, Microsoft's conduct, unless restrained by the Court, is substantially likely to enable Microsoft to destroy the incipient browser-based threat to its operating system monopoly.
Conduct that excludes rivals and lacks legitimate business justification -- either because it does not advance competition on the merits or because it excludes competitors in an unnecessarily restrictive way -- violates Section 2. See, e.g., Eastman Kodak Co. v. Image Tech. Servs., Inc., 502 U.S. 452 (1992); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 587 (1985). Microsoft's use of its monopoly power to tie Internet Explorer to Windows and to coerce screen restrictions from OEMs, as well as Microsoft's restrictive agreements with IAPs and ICPs, lack legitimate business justification.
Microsoft's enforcement of contractual restrictions that force OEMs to take Internet Explorer lack justification. Some consumers prefer the latest operating system release without Internet Explorer attached, and some OEMs wish to meet the demand. There is no reason related to efficiency for preventing this natural accommodation from occurring. To the contrary, the only objective Microsoft's contractual restrictions serve is to thwart consumer choice and to impair competition in the browser market. As explained below, customers demand, and OEMs seek to supply, PCs that offer Windows but not Internet Explorer. See infra, section IV.B.1(a). It is not difficult for OEMs to remove the software that provides access to the Internet browser functionality that end users regard as the separate browser product from Windows 98.(41) By prohibiting OEMs from doing so, Microsoft makes both OEMs and consumers who prefer Windows without IE worse off. Just as the evidence in Aspen Skiing showed that the defendant "was not motivated by efficiency concerns and . . . was willing to sacrifice short-run benefits . . . in exchange" for "reducing competition . . . over the long run," 472 U.S. at 602-03, so too the evidence here demonstrates that Microsoft is denying consumers options they prefer. Microsoft's actions are driven by its overriding, strategic objective of maintaining its monopoly by winning the browser war. Its refusal to provide alternatives customers want results from its effort to exclude competitors and preserve its operating system monopoly. See Sibley Decl., ¶¶ 48, 49.
The usual (and usually unsuccessful) argument of the typical antitrust defendant is that its restrictions are justified by quality control concerns. But the facts will not support such an argument here. Any such claim by Microsoft would be pretextual and therefore cannot save its exclusionary conduct. See Eastman Kodak, 504 U.S. at 484-86. A quality control defense is implausible here for several reasons. Microsoft requires OEMs to bear the costs of providing post-sale support costs for the computers they sell (including the cost of responding to customer problems or inquiries with respect to Windows). See, e.g., McKinney Dep., p. 18, line 25 - p. 19, line 6; Romano Dep., p. 21, lines 9-20. Accordingly, OEMs are unlikely to take any action that will do anything that increases the likelihood that customers will call them for technical support. This includes making software modifications that will crash the system, slow its operation, or create a confusing sequence of displays -- the very things Microsoft is likely to claim as the harms its boot-up and screen restrictions seek to prevent. Indeed, after Microsoft enforced the restrictions against one major OEM that had inserted a customized user interface providing a tutorial and a simplified menu of application choices (including Internet software), the OEM discovered that the removal of the interface significantly increased support calls. See Romano Dep., p. 18, line 23- p.19, line 17; Exhibit 99 (HP-MSN 0784-785). Even after the OEM brought this to Microsoft's attention, Microsoft refused to relax the restrictions. Ibid. Notably, without quality control objections, Microsoft permits OEM modifications that do not threaten its monopoly. For example, in Windows 98 Microsoft will grant exceptions to the screen restrictions for some OEM tutorials and "system check" applications, even though these modifications may result in an inconsistent user experience with Windows. See Kempin 3/98 Dep., p. 58, line 24 - p. 59, line 25. Similarly, Microsoft will permit substantial modifications if the OEM agrees to make such modifications using proprietary Microsoft technology. For instance, Microsoft will permit OEMs to preinstall large, dynamic icons and displays on the Windows desktop, but only if (1) the OEM uses the Active Desktop, and (2) limits its conduct to OEM-specific (and not third party) promotions. See Exhibit 98, The Windows Experience Phase II (MSV 0009404A) (OEMs will be allowed to add OEM-branding to the boot-up process provided that no third party advertising occurs; Microsoft will only allow third party service providers into the Windows "feature set" if they help Microsoft "strategically"); Exhibit 76 (MS7 004364), 4/3/97 K. Kolb e-mail. By contrast, Microsoft prohibits modifications it perceives will foster competitive threats. One recent Microsoft document explains that the addition of utilities such as virus scans and device driver installers are "minor issues" and a "common exception," but that one OEM's design of an icon for the OEMs' Internet referral service offering that is more prominent than Microsoft's Internet Connection Wizard icon is a "serious breach." See Exhibit 77 (MS7 007108), K. Kolb 12/1/97 e-mail. Because Microsoft has enforced the boot-up sequence and screen restrictions principally when it suits its purpose of excluding rivals, any quality control justification advanced by Microsoft should be rejected here.
Microsoft may contend that its IAP and ICP contracts were merely designed to provide Internet Explorer additional promotional and distributional opportunities. Myhrvold Dep., p. 75, lines 10-22; Chase Dep., p. 213, lines 1-7, p. 216, lines 5-12. This explanation, however, does not address the exclusive (or near-exclusive) nature of the contracts. Microsoft could have secured distributional opportunities for Internet Explorer, including a requirement that Internet Explorer be distributed to new subscribers generated through distribution with Windows, without restricting the distribution of third party browsers. See Sibley Decl., ¶ 41. Microsoft's executives have confirmed that Microsoft's agreements are intended to exclude rivals. Cameron Myhrvold, for instance, explained that Microsoft was "concerned" that if IAPs shipped Internet Explorer "side by side with Navigator," a user might become confused about which browser was "preferred" and select Navigator. Myhrvold Dep., p. 89, lines 6-20, p. 92, lines 3-21, p. 99, lines 9-25. Indeed, Mr. Myhrvold credited some of these exclusionary provisions to Microsoft simply "getting aggressive" -- indeed, "overly so" -- and crafting creative ways "to advantage and promote IE." Id at p. 103, lines 6-7; p. 75, lines 16-17. Similarly, any business explanation Microsoft could plausibly claim for the ICP restrictions is inconsistent with limiting the restrictions to only the top two "Other Browsers." In other words, Microsoft's agreements are intended to undercut competitive threats and are not designed simply to aid Microsoft in any legitimate effort to compete on the merits against whomever else (other than rival browser producers) might compete with Microsoft for ICP support.(42) Indeed, in the course of negotiations relating to the restrictions, ICPs understood that the restrictions were specifically aimed at Netscape. See, e.g., Colburn Dep., p. 49, line 9 - p. 50, line 12; Declaration of Steve Wadsworth ¶ 8. Because Microsoft's exclusionary conduct lacks any legitimate business justification, that conduct violates Section 2 of the Sherman Act. But even if Microsoft advanced some explanation for its conduct, it would still amount to unlawful maintaince of monopoly power. It is settled that a monopolist violates Section 2 if it "maintain[s] monopoly [power] by means of those restraints of trade which are cognizable under [Sherman Act] § 1." United States v. Griffith, 334 U.S. 100, 106 (1948); United States v. United Shoe Mach. Corp., 110 F. Supp. 295, 342 (D. Mass. 1953), aff'd per curiam, 348 U.S. 521 (1954); Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d 227, 239 (1st Cir. 1983). As explained below, Microsoft's conduct independently violates Section 1 of the Sherman Act; and because that conduct threatens to contribute to Microsoft's monopoly power these Section 1 violations each independently establish a violation of Sherman Act Section 2.
Without exception, Microsoft implements the exclusionary conduct challenged in this case through agreements with OEMs, IAPs, and ICPs. Because its restrictive conduct is therefore not "wholly unilateral," Copperweld Corp. v. Independent Tube Corp., 467 U.S. 752, 768 (1984) (internal quotations omitted), it is subject to scrutiny under Section 1 of the Sherman Act, which prohibits "unreasonable restraints of trade". Some of this conduct -- Microsoft's tying of Internet Explorer to Windows -- is illegal per se (that is, conclusively unreasonable if proven). Other conduct -- Microsoft's agreements with IAPs and ICPs, and its OEM boot-up sequence and screen restrictions -- require analysis under the "rule of reason," and are illegal under Section 1 because they injure competition without offsetting procompetitive benefits. See United States v. National Soc'y of Prof. Eng'rs, 435 U.S. 679, 687-92 (1978); Chicago Board of Trade v. United States, 247 U.S. 231, 238 (1918); Standard Oil Co. v. United States, 211 U.S. 1, 60-61 (1911).
"A tying arrangement is 'an agreement by a party to sell one product but only on the condition that the buyer also purchase a different (or tied) product, or at least agrees that he will not purchase that product from another supplier.'" Eastman Kodak Co. v. Image Tech. Servs., Inc., 504 U.S. 451, 461 (1992) (quoting Northern Pac. R. Co. v. United States, 356 U.S. 1, 5-6 (1958)). Such arrangements are unlawful per se when the seller "exploits its market power" in the tying product market "to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms." Jefferson Parish Hosp. Dist. No. 2 v. Hyde, 466 U.S. 2, 12-14 (1984). Accordingly, to establish per se illegality, the United States need demonstrate (1) the existence of two separate products; (2) the sale of one product (the tying product) conditioned on the purchase of the other product (the tied product); (3) the seller's possession of sufficient market power to compel acceptance of the tied product; and (4) the foreclosure of a not insubstantial amount of commerce in the tied product market. See Eastman Kodak, 504 U.S. at 462; see also Foster v. Maryland State Savs. & Loan Ass'n., 590 F.2d 928, 931 (D.C. Cir. 1978).
Whether a package consists of one or more separate products depends not on the functional relationship between the components, but rather on the "character of demand" for them. Jefferson Parish, 466 U.S. at 19. Two products exist for tying law purposes if "there [is] sufficient consumer demand so that it is efficient for a firm to provide" them separately. Eastman Kodak, 504 U.S. at 462 (internal quotations omitted). As explained below, Microsoft's forced licensing of Internet Explorer with Windows 98 impermissibly links together "two separate product markets." Jefferson Parish, 466 U.S. at 21.
There is plainly substantial consumer demand for browsers independent of operating systems. In fact, even though Microsoft's forced licensing of Internet Explorer (among other things) has made the OEM channel a significant one for browser distribution, most computer users have obtained their Internet browser separately, and at different times, from the Windows operating system. Microsoft recognizes the separate demand for the two products by engaging in a wide variety of marketing conduct directed specifically at its browser. It has given its browser a separate name and regularly calls it a "product," not a component of or update to Windows.(43) Indeed, Microsoft never represented to its customers that Internet Explorer is an update to or component of its operating system rather than a separate product until the United States brought an action to enforce the terms of the 1995 Final Judgment.(44) To the contrary, it has engaged in a concerted, massive advertising campaign for Internet Explorer; entered into numerous marketing relationships with OEMs, ISPs, and content providers specifically to promote Internet Explorer 4.0;(45) separately tracked the market penetration and usage of Windows and Internet Explorer in what it sees and often describes as two separate markets, comparing them to a wholly different set of competitors;(46) distributed IE as a product distinct from Windows through a variety of channels, including distribution through ISPs and OLS, bundled with other hardware and software products, at retail in packages Microsoft labels as the Internet Explorer Plus (IE 4.0) and the Internet Explorer Starter Kit (IE 3.02), and even in the OEM channel, in which it has licensed Internet Explorer separately from Windows for distribution on product support CDS.(47) Moreover, even after the release of Windows 98 Microsoft will continue to release new versions of Internet Explorer, thus recognizing that there will be continuing demand for browser products apart from operating system purchases. Indeed, Microsoft has publicly stated that it will release Internet Explorer 5.0 later this year, enabling end users to update the browser without switching to Windows 98.(48) However, the most clear and unambiguous indication of Microsoft's recognition of demand for browsers separate from operating systems is the fact that Microsoft has made each version of Internet Explorer available for non-Microsoft operating systems and plans to continue doing so after the release of Windows 98. Internet Explorer 3.0 has been ported to Apple Computer's Macintosh operating systems (as well as Microsoft's Windows 3.1 operating system, with which Internet Explorer is not bundled); Internet Explorer 4.0 is now available for Windows 3.1, the Macintosh, and Sun Microsystems' Solaris (a version of Unix) operating systems and will soon be available for other versions of Unix, including HP-UX, IBM AIX, and SGI IRIX; and Microsoft will make Internet Explorer 5.0 available for users of Windows 3.1, Macintosh, and Unix. See, e.g., Chase Dep., p. 98, line 12 - p. 99, line 1; Jones Dep., p. 115, line 10 - p. 116, line 14. The non-Windows versions of Internet Explorer, in addition to sharing a name with the Windows 95 version, look and feel essentially the same as that version to end users.(49) See, e.g., Myhrvold Dep., p. 37, line 25 - p. 38, line 25. Indeed, one of Microsoft's primary motivations for developing non-Windows versions of Internet Explorer has been its recognition of the need to meet specific customer demand for such versions, wholly apart from Windows. See Chase Dep., p. 99, lines 2-18; Myhrvold Dep., p. 35, line 20 - p. 39, line 9. And in tracking Internet Explorer market share, Microsoft aggregates across platforms, including those versions of Internet Explorer for other operating systems in its calculus. See Exhibit 54 (MSV 10545). Indeed, Microsoft's efforts to separately port versions of Internet Explorer for other operating systems, and to distribute those versions to ISPs and ISVs (as well as directly through other operating system vendors), demonstrate that there is "sufficient consumer demand so that it is efficient" for Microsoft to provide its browser products separately from its operating system products.(50) Eastman Kodak, 504 U.S. at 462.
There is also substantial consumer demand for Windows (and, more generally, for operating systems) apart from Internet browsers. Indeed, Microsoft specifically recognized this demand and took steps to meet it. David Cole, a Vice President of Microsoft in charge of the development of Internet Explorer, conceded in proceedings before the Court that Microsoft chose to disseminate instructions for "uninstalling" Internet Explorer through the Add/Remove Programs utility in Windows 95 precisely because of demand from corporate customers who want Windows but not Internet Explorer. January 14, 1998 A.M. Hearing Transcript, pp. 4, 48-50; D. Cole Dep., p. 50, line 2 - p. 51, line 24.(51) Microsoft is not alone in recognizing and seeking to satisfy demand for Windows without a browser. OEMs recognize that their customers sometimes want to purchase PCs with an operating system but no browser, see Declaration of Richard Dean Williams, 4/29/98, ¶ 6; Ransom 3/19/98 Dep., p. 9, line 11 - p. 10, line 4, a fact Microsoft executives acknowledge, see Chase Dep. p. 80, lines 10-17, Exhibit 17 (MSV 09129A), C. Jones (1/15/96) e-mail ("Some [OEMs] want to remove the icon from the desktop -- our response should be that it is not allowed"). Indeed, one major OEM expressly requested that Microsoft amend its Windows 95 license agreement to permit it not to ship Internet Explorer preinstalled with Windows 95. One of its executives explained this request as follows: Some business and government customers prefer not to have Internet Explorer preinstalled on their computers because: (1) the customer may have its own software or software standards which do not include the latest version of Internet Explorer; (2) the customer may wish to install a competitive browser instead of Internet Explorer; or (3) the customer may wish to prevent its employees from accessing or attempting to access the Internet or World Wide Web. Declaration of Joseph J. Kanicki, 4/29/98, ¶ 2. Unlike its course of action with respect to any other major OEM, see infra, section IV.B.1(b), Microsoft granted this OEM's request, requiring it to ship Internet Explorer with its Windows 95 PCs "[u]nless specifically requested to the contrary by the end user . . . ." See Exhibit 89 (MSV 0000749-65), Amendment 2 to License Agreement for Operating Systems, 5/2/96. Notably, since the request was granted, a number of customers have in fact either requested the removal of Internet Explorer or provided master "images" of the software, not including IE, they wish installed on numerous PCs to be purchased by the customer. See Exhibit 90, Response of Dell Computer Corporation to U.S. Department of Justice CID 18016, April 14, 1998, p. 1.(52) Demand for Windows without a preinstalled browser, moreover, extends beyond the preferences of corporate customers. As discussed above, some OEMs wish to offer their customers only a single browser -- selected by the OEM rather than by Microsoft -- to avoid potential desktop "clutter"; to avoid customer confusion caused by having multiple browsers preinstalled and visible on the desktop; to avoid increased technical support costs resulting from offering two browsers; or to minimize product testing costs. See supra, section IV.A.3(b). Based on various combinations of these considerations, over the past three years several of the largest OEMs in the United States have deleted or requested the ability to delete at least the Internet Explorer icon from the Windows desktop. See, e.g., Romano Dep., p. 33, line 14 - p. 43, line 19; Browning Decl. ¶8; Exhibit 18, Gateway 2000, Inc. 9/19/97 Answers to Interrogatories, p. 8; Decker Dep., p. 18, line 21 - p. 21, line 6.(53) Moreover, since the United States and Microsoft entered into the January 22, 1998 Stipulation, which provided OEMs the freedom to remove Internet Explorer from Windows, several OEMs have taken steps to invoke this freedom. See Kies Dep., p. 10, line 12 - p. 11, line 22; Brownrigg 3/98 Dep., p. 30, line 7 - p. 31, line 20. As noted above, Microsoft responded to consumer demand for Windows 95 without a browser by disseminating instructions for "uninstalling" Internet Explorer using Windows' Add/Remove program utility.(54) Microsoft does not intend to provide a comparable option for removing Internet Explorer from Windows 98, although OEM witnesses have testified that demand for Windows without a Internet browser persists. As one OEM executive explained: This is, of course, exactly the freedom of choice sought by the United States in this case.
OEMs' interest in the option of shipping Windows 98 PCs without IE preinstalled, see,
e.g., Kies Dep. at p. 15, lines 6-18, is particularly understandable given the fact (as well as
OEMs' perception) that Windows 98 updates Windows 95 in a variety of ways unrelated to the
browser (e.g., support for an expanded array of hardware devices), and that customers (including
customers who do not want Internet Explorer preinstalled) will likely demand these new
features. See id., p. 15, line 6 - p. 17, line 11; Kempin 3/98 Dep., p. 20, lines 8-17, p. 21, line 14
- p. 23, line 12; Veghte Dep., p. 36, line 25 - p. 37, line 15.
Not surprisingly, at least one major OEM has already explored the possibility of
eliminating Internet Explorer from the Windows 98 desktop in connection with providing
customers a choice of browsers, and has inquired whether it may have the freedom to eliminate
at least (and perhaps more |