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KENNETH M. FRANKEL
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
COMMENTS OF RED HAT, INC. TO REVISED PROPOSED FINAL
JUDGMENT AND COMPETITIVE IMPACT STATEMENT IN UNITED STATES V. MICROSOFT CORP., CIVIL NO. 98-1232, IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
Pursuant to the Antitrust Procedures and Penalties Act, 15 U.S.C. {} 16, Red Hat, Inc. ("Red Hat") files comments to the revised Proposed Final Judgment, filed November 6, 2001, and the Competitive Impact Statement, filed November 15, 2001, in United States v. Microsoft Corp., Civil No. 98-1232, in the United States District Court for the District of Columbia. Red Hat files these comments because the Proposed Final Judgment will not remedy the anti-competitive effects of Microsoft's antitrust violations that were upheld by the United States Court of Appeals for the District of Columbia Circuit in its June 23, 2001 decision. As a result, the market for PC-compatible operating systems -- in which Microsoft unlawfully maintained its monopoly -- will not return to a competitive environment, and the mandate of the District of Columbia Court of Appeals will be thwarted.1
It is no exaggeration to say that Linux is the operating system that provides the most serious and fastest growing competition to the Microsoft operating system. Linux is the PC-compatible open source operating system based on the kernel developed by Mr. Linus Torvalds in the early 1990s, and in the short amount of time that it has been in the marketplace, the Linux operating system has become a viable competitor to other operating systems. Red Hat, which began in 1994, offers the Red Hat version of the Linux operating system with support and software applications and is the largest distributor of open source Linux. In order for the Proposed Final Judgment to have an effect in restoring the competitive nature of the PC-compatible operating system market, Red Hat believes that each and every provision must be viewed with the overall perspective of whether the provision provides a level playing field for companies such as Red Hat, which offer direct competition in the injured market, or whether the provision directly or indirectly will enable Microsoft to perpetuate the monopoly it has been found to have maintained illegally. In order to provide a background for these comments to the Proposed Final Judgment, a brief overview of open source, and Red Hat Linux follows. Open source and free software is distinct from traditional (proprietary) software in that it is produced by a generally voluntary, collaborative process, and accompanied by a license that pants users the right to:
Many open source and free software licenses also embody the concept known as copyleft. Simply put, this is the condition that all versions of the product, including derivative works, be distributed along with, and subject to, the conditions and rights in the license under which they were received. This concept is central to the ability of a licensor to ensure that its product remains open source or free software. The underlying principle is that improvements to a product are given back to the open source and free software community. In this way, open source and free software is continually improved, with the modifications being made available to all. Without the ability to impose this condition on further distribution, a copy, or a derivative work made pursuant to the authorization granted in the license, could be distributed without the right to copy, modify, distribute or have the source code -- in effect it would be transformed into a proprietary work. It would cease to be "free." The benefits of open source and free software are numerous. In practical and commercial terms, open source and free software is stable, high quality software, which users are free to tailor to their own purposes. As the source code is available to all, a user is free to remedy any bugs it may find, maintain the software itself, or hire a third party to do so. The availability of the source code also allows the creation of complementary and interoperable programs by anyone and everyone, with no need to reverse engineer the product. As an element in the competitive environment, open source software provides an almost pure form of competition in the software (and, of course, operating system) competitive environment. Improvements are quickly available and users are able to make product-quality based choices, unfettered by many of the considerations that occur in other competitive markets. Moreover, because of the size of the community that participates in the open source arena, products are quickly debugged, refined and improved; greatly benefiting the ultimate end user. From a company with only $482,000 in revenue in 1995, Red Hat has grown to over $100 million in revenue in 2001. The vast majority of Red Hat's revenues are derived from the services it offers around its well-known Linux distribution, not from license fees or royalties. Despite its rapid growth, however, until last year Red Hat Linux was not considered an effective competitor with either Sun Microsystems or Microsoft in the server market. With increasing success, Red Hat has now penetrated that market, demonstrating that it can be an effective competitor where no illegal monopoly exists. The same cannot be said for the desktop operating system market, the subject of many of the claims and findings against Microsoft in this matter. Because of Microsoft's stranglehold on that market, with over a 94% marketshare -- a stranglehold unlawfully maintained -- Red Hat has elected not to attempt to compete until a level playing field can be established. Any efforts by Red Hat toward competing would be utterly fruitless and an unjustified use of corporate resources. Microsoft has made no secret of the fact that it considers companies such as Red Hat to be potential competitive threats in the marketplace. According to Microsoft's own executives, Microsoft has contacted "U.S. lawmakers" in an effort to curtail the spread of the Linux operating system. Microsoft Executive says Linux Threatens Innovation, Feb. 14, 2001, Bloomberg News, at http://news.cnet.com/investor/news/newsitem/0-99001028-4825719-RHAT.html. (Ex. A attached hereto.) Microsoft's CEO, Steve Ballmer has described Linux as a "cancer that attaches itself in an intellectual property sense to everything it touches." Microsoft CEO takes lunch break with the Sun-Times, Chicago Sun Times, June 1, 2001, at http://www.suntimes.com/output/tech/cst-fin-micro01.html(Ex. B attached hereto.); see also Joe Wilcox & Stephen Shankland, Why, Microsoft is wary of open source, CNET News.com, June 18,2001, at http://news.com.corn/21001001-268520.html (Ex. C attached hereto.); Stephen Shankland, Microsoft license spurns open source, CNET News.com, June 22, 2001, at http://news.com.com/2100-1001268889.html (Ex. D attached hereto.); Mike Ricciuti, Microsoft memo touts Linux, CNET News.com, Nov. 5, 1998, at http://news.com.com/2100-1001-217563.html (Ex. E attached hereto.); Joe Wilcox & David Becker, Microsoft sues Linux start-up over name, CNET News.com, Dec. 20, 200l, at http://news.com.com/2100-1001-277314.html (Ex. F attached hereto.). From these comments, it is clear, that, unless the Proposed Final Judgment protects the ability of non-Microsoft operating systems such as Red Hat Linux to gain access to, and compete for, software developers and users, and to compete, the remedies aspect of this lawsuit will be a failure. Therefore, in order for the Department of Justice to effect a remedy scheme that will address the findings of the Court of Appeals, the Department of Justice must ensure the ability of companies such as Red Hat to compete. A review of the Proposed Final Judgment, however, shows little to no attention paid to the very companies that directly compete in the market in which Microsoft unlawfully has maintained its monopoly. Unfortunately, this is despite the clear intent of the Competitive Impact Statement, in which the Department of Justice states: Appropriate injunctive relief in an antitrust case should: (1) end the unlawful conduct; (2) "avoid a recurrence of the violation" and others like it; and (3) undo its anticompetitive consequences. See Nat'l Soc'y of Prof'l Eng'rs v. United States, 435 U.S. 679, 697 (1978); United States v. E.I du Pont de Nemours & Co., 366 U.S. 316, 326 (1961); Int'l Salt Co. v. United States, 332 U.S. 392,401 (1947); United States v/Microsoft Corp., 253 F.3d 34, 103, 107 (D.C. Cir. 2001) Restoring competition is the "key to the whole question of an antitrust remedy," du Pont, 366 U.S. at 326. Competition was injured in this case principally because Microsoft's illegal conduct maintained the applications barrier to entry into the personal computer operating system market by thwarting the success of middleware that would have assisted competing operating systems in gaining access to applications and other needed complements. Thus, the key to the proper remedy in this case is to end Microsoft's restrictions on potentially threatening middleware, prevent it from hampering similar nascent threats in the future and restore the competitive conditions created by similar middleware threats. The Proposed Final Judgment imposes a series of prohibitions on Microsoft's conduct that are designed to accomplish these critical goals of an antitrust remedy. Competitive Impact Statement filed in U.S. v. Microsoft (D.D.C. Nov. 15, 2001) at 9. It is with consideration being given to the findings of the Court of Appeals and the realistic impact of the Proposed Final Judgment that Red Hat files these comments.
For intellectual property reasons, the Proposed Final Judgment would fail to remedy Microsoft's monopolization of the operating systems market and fail to accomplish the goal to restore competitive conditions to the market. It would fail because it would permit Microsoft to block software and hardware developers, users, and vendors from developing, using, distributing, or promoting competitive operating systems by threatening or bringing suits for infringement of Microsoft's extensive intellectual property portfolio. To provide an effective remedy and accomplish that goal, the narrow scope of licenses to Microsoft's intellectual property fights required by the Proposed Final Judgment must, at a minimum, be expanded to allow those persons to engage in that competitive conduct without the threat of an infringement suit by Microsoft. More specifically, the Proposed Final Judgment would prohibit Microsoft from retaliating against software and hardware developers, users, and vendors if they were to develop, use, distribute, or promote operating systems or middleware that competes with Microsoft's Windows operating system or middleware. But giving with its right hand and taking with its left, the Proposed Final Judgment would exempt from prohibited retaliation -- and expressly allow -- Microsoft to sue those persons for infringement of Microsoft's intellectual property fights if they engage in that conduct. Two primary effects would flow from this exemption. First, Microsoft would remain free to assert its intellectual property fights to stop developers and vendors of competitive operating systems and middleware from developing, using, distributing, or promoting their software. In that event, the downstream software and hardware developers, users, and vendors who want to use and work with competitive operating systems and middleware would not have any competitive operating systems or middleware to use, distribute, or promote. Second, Microsoft would remain free to assert the same intellectual property rights to stop those downstream developers, users, and vendors from using, distributing, or promoting such competitive operating systems and middleware. If no competitive operating systems and middleware were available or if the downstream developers, users, and vendors could not use, distribute, or promote competitive operating systems or middleware because Microsoft threatens or brings intellectual property infringement suits, the Proposed Final Judgment cannot accomplish its purpose: to remedy Microsoft's unlawfully maintenance of its monopoly and restore competitive conditions to the market Microsoft in which Microsoft's monopoly was unlawfully maintained. The antitrust remedy should at least remove this exemption and define retaliation to include threatening or bringing suit for infringement of Microsoft's intellectual property portfolio. Such a remedy would be proper and consistent with both Supreme Court and Justice Department precedent.
The district court held, and the court of appeals affirmed, that Microsoft had illegally "maintained a monopoly in the market for Intel-compatible PC operating systems in violation of [Sherman Act] º 2." United States v. Microsoft Corp., 253 F.3d 34, 45, 50 (D.C. Cir. 2001). The remedy in this case should at the very least restore competition to that market, because that was the only district court holding that the court of appeals affirmed. See id. at 46. Unless the remedy restores competition within that market, the courts' holdings, and the Justice Department's and States' efforts in proving that antitrust violation, will be nullities.
Controlling case law and the Justice Department both recognize that the purpose of the remedy in a Section 2 case is to end the monopoly and restore competition to the market that the defendant monopolized. As the Supreme Court explained, and as the Court of Appeals recognized in Microsoft, in a monopolization case "it is the duty of the court to prescribe relief which will terminate the illegal monopoly, deny to the defendant the fruits of its statutory violation, and ensure that there remain no practices likely to result in monopolization in the future." United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968); see Microsoft, 346 F.3d at 103 (quoting United Shoe). Indeed, the goal of relief is to make sure that competition results, not just to end a lawsuit. As the Supreme Court instructed: In an equity suit, the end to be served is not punishment of past transgression, nor is it merely to end specific illegal practices. A public interest served by such civil suits is that they effectively pry open to competition a market that has been closed by defendants' illegal restraints. If this proposed Final Judgment accomplishes less than that, the Government has won a lawsuit and lost a cause. International Salt Co. v. United States, 332 U.S. 392, 401 (1947). In accordance, the Justice Department explained that its purpose in entering into the Proposed Final Judgment was to "restore competitive conditions to the market." Competitive Impact Statement at 2. Likewise, the Justice Department told the public in its press release that the "settlement will bring effective relief to the market and ensure that consumers will have more choices in meeting their computer needs." Press Release, U.S. Justice Department, Department of Justice and Microsoft Corporation Reach Effective Settlement on Antitrust Lawsuit, Nov. 2, 2001, at http://www.usdoj.gov/opa/pr/2001/November/01_at_569.htm (Ex. G attached hereto.).
The Proposed Final Judgment would protect certain groups of software or hardware developers, users, and vendors (OEMs, ISVs, and IHVs)2 from undefined "retaliation" by Microsoft if the groups were to work with operating systems or middleware that compete with Microsoft's Windows or middleware. It would provide that Microsoft shall not "retaliate" against those groups if they engage in certain conduct with any "software that competes with Microsoft Platform Software," which the Proposed Final Judgment defines to include Microsoft's Windows operating system "and/or a Microsoft Middleware Product."3 For example, the Proposed Final Judgment would provide that Microsoft "shall not retaliate" against an:
While the term "retaliate" is undefined, the Proposed Final Judgment contradictorily exempts from the scope of prohibited retaliation -- and therefore expressly permits -- suits for infringement of Microsoft's intellectual property rights. More specifically, the provisions banning retaliation against OEMs, ISVs, and IHVs are followed by an exemption: Nothing in this provision shall prohibit Microsoft from enforcing.., any intellectual property right that is not inconsistent with this Final Judgment. Proposed Final Judgment Section III.A; see Section III.F.3. While the term "inconsistent" also is undefined, it is clear from a later section that a suit to enforce intellectual property rights against conduct that is protected from Microsoft's retaliation nevertheless is "not inconsistent with" the Proposed Final Judgment. The later section, Section III.I, provides that Microsoft must offer to license its intellectual property rights to the groups if those rights are required to exercise an option expressly provided under the Proposed Final Judgment. If it stopped there, the provision would be fine. But an exemption to that license provision emphasizes that the required license is very narrow, and that Microsoft could still bring infringement suits if the groups engage in the very conduct that is protected from Micros0ft's retaliation: I. Microsoft shall offer to license to ISVs, IHVs,... and OEMs any intellectual property rights owned or licensable by Microsoft that are required to exercise any of the options or alternatives expressly provided to them under this Final Judgment, provided that Proposed Final Judgment, Section III.I (emphasis added). In accordance, the Justice Department's November 15, 2001 Competitive Impact Statement explains that a purpose of this provision is to "[permit] Microsoft to take legitimate steps to prevent unauthorized use of its intellectual property." Competitive Impact Statement at 49. "Unauthorized use" would include infringement. A patent, for example, provides the patent owner the exclusive fights to make, use, sell, and offer to sell the patented subject matter. 35 U.S.C. § 271(a). Those exclusive fights cover developing, distributing, promoting, using, and selling. Thus, while earlier sections of the Proposed Final Judgment say Microsoft could not "retaliate" against that conduct (Proposed Final Judgment Sections III.A.1, III.F.1.a), this later section contradictorily provides that Microsoft could retaliate against the conduct -- by lawsuits (Proposed Final Judgment Section III.1.2). To illustrate the problem, apply the specific example quoted above, from Section III.I.2 of the Proposed Final Judgment, to an ISV that promotes an operating system that competes with Windows, and assume that Microsoft has patents that arguably cover that competitive operating system. Under the Proposed Final Judgment, Microsoft would be prohibited from "retaliat[ing]" if the ISV were "promoting" the competitive operating system, such as by offering it for sale. Proposed Final Judgment Section III.F.1.a. But the exemption provides that the option to promote the software without retaliation "shall not confer any rights to any Microsoft intellectual property rights [e.g., patents] infringed by that" competitive operating system. Proposed Final Judgment Section III.I.2. Thus, Microsoft could sue the ISV for infringing its patents by promoting the competitive software. Consequently, the Proposed Final Judgment would prohibit Microsoft from "retaliating" against an ISV or IHV for "developing, using, distributing, [or] promoting" the competitive operating system -- but Microsoft could sue the ISV or IHV for patent infringement for the same acts: making (developing), using, selling (distributing), or offering to sell (promoting) that system. Likewise, it would prohibit Microsoft from "retaliating" against an OEM for "developing, distributing, promoting, using, or selling" a competitive operating system -- but Microsoft nonetheless could sue the OEM for patent infringement for that conduct. Thus, while Microsoft could not "retaliate," it could sue for infringement, thereby completely eviscerating the ban on retaliation.
These intellectual property exemptions could permit Microsoft to completely prevent any competition from other operating systems or middleware, both at the development level and downstream throughout the development and distribution chain. ISVs, i.e., non-Microsoft entities that develop or market software products, would include developers and vendors of competitive operating systems. See Proposed Final Judgment Section VI.I.4 A patent suit against such a developer or vendor for infringement of Microsoft's patents covering competitive operating systems could result in an injunction against making, using, selling, or offering to sell the competitive system, as well as damages (which could be trebled) and attorney fees for any sales. See 35 U.S.C. §§ 283-285. If that occurred, downstream ISVs, IHVs, and OEMs would not have any competitive operating systems with which they could work. ISVs also would include downstream developers and vendors of middleware or applications software. A patent suit against them for infringement of Microsoft's patents would prevent them from, e.g., using a competitive operating systems to develop their software. Downstream IHVs and OEMs would include developers and vendors of personal computers. A patent suit against them for infringement of those Microsoft patents would prevent them from, e.g., making or selling any computers using competitive operating systems. The same would apply to competitive middleware. A patent suit against an ISV that develops competitive middleware would preclude the availability of competitive middleware. A patent suit against downstream developers or vendors of applications software would preclude them from using competitive middleware to develop their software. And a patent suit against downstream IHVs and OEMs would preclude them from making or selling computers using competitive middleware. Microsoft has amassed a large portfolio of numerous patents and other intellectual property that potentially covers competitive operating systems and middleware. While any infringement analysis must be specific to a particular software, it is clear that Microsoft has numerous patents that potentially could be asserted against that competitive software. The chart attached as Exhibit H lists over 1400 patents owned by Microsoft in December 2001 that are in Patent and Trademark Office classes that include operating systems and middleware software. Additional Microsoft patents covering operating systems and middleware may be in other classes. If Microsoft were to bring suit on multiple patents, the accused infringer would have to win against every patent to avoid an injunction and damages. The odds of losing are so great that only the most well financed competitive operating system or middleware developer or vendor could consider fighting that battle. The result would be the same downstream. If the competitive operating system or middleware developer or vendor indemnified its downstream customers (ISVs, IHVs, OEMs, and ultimate consumers), it would face the same problem. If it did not indemnify the downstream customers, those customers would face the problem directly. As a result, a threat of suit by Microsoft could be enough to stop the making, using, selling, or offering to sell competitive operating systems and middleware at all levels in the development-distribution chain.
Microsoft clearly declared its intent to enforce its intellectual property rights against competitors by including the exemption for infringement suits in Section III.I of the Proposed Final Judgment and by arguing that the non-settling states were seeking to confiscate its intellectual property. See, Defendant Microsoft Corporation's Remedial Proposal at 2. (Dec. 12, 2001) ("Microsoft Remedial Proposal"). Similarly, Craig Mundie, Microsoft's Senior Vice President of Advanced Strategies, reportedly told the audience at an Open Source convention last July: Well, at the end of the day, if you have a patent, you enforce the patent if it's valuable to you. And so I think that Microsoft and other people who have patents will ultimately decide to enforce those patents. Shared Source v. Open Source: Panel Discussion, O'Reilly Network, Aug. 9, 2001, at http://linux.oreillynet.com/pub/a/linux/2001/08/09/oscon panel.html (Ex. I attached hereto.). The threat of Microsoft's patent enforcement has caused concern among the open-source community, as reported last August. Galli, Peter, "Microsoft Patents a Threat to Open Source," eWEEK, Aug. 28, 2001, at http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2808548.00.html ("Members of the open-source community are becoming increasingly concerned by ongoing moves from Microsoft Corp. to acquire a range of software patents that the company can potentially use down the line to attack and try to restrict the development and distribution of open-source software.") (Ex. J attached hereto.).
The Proposed Final Judgment should define "retaliate" in Section VI of the Proposed Final Judgment. While the term should remain broad to bar any type of retaliation, it can specifically include bringing infringement suits: "Retaliate" means any type of retaliation and is intended to be construed broadly. It specifically includes threatening or bringing a suit for infringement of any intellectual property rights owned or licensable by Microsoft. In addition, the exemption sections should be modified to prevent infringement suits against the protected groups for engaging in conduct that the Proposed Final Judgment would prohibit Microsoft from retaliating against: For OEMs, Section III.A should be modified as follows -- after the sentence "Nothing in this provision shall prohibit Microsoft from enforcing any provision of any license with any OEM or any intellectual property right that is not inconsistent with this Final Judgment," add the following: Acts that would be inconsistent with this Final Judgment include, but are not limited to, threatening or bringing suit for infringement of any intellectual property rights that would restrict the OEM from developing, distributing, promoting, using, selling, or licensing any software that competes with Microsoft Platform Software or any product or service that distributes or promotes any Non-Microsoft Middleware. For ISVs and IHVs, Section III.F.3 should be modified as follows -- after the sentence "Nothing in this section shall prohibit Microsoft from enforcing any provision of any agreement with any ISV or IHV, or any intellectual property right, that is not inconsistent with this Final Judgment," add the following: Acts that would be inconsistent with this Final Judgment include, but are not limited to, threatening or bringing suit for infringement of any intellectual property rights that would restrict the ISV or IHV from developing, using, distributing, promoting, or supporting any software that competes with Microsoft Platform Software or any software that runs on any software that competes with Microsoft Platform Software, or exercising any of the options or alternatives provided for under this Final Judgment. Also, Section II1.1.2. should be deleted and replaced as follows -- the scope of any such license (and the intellectual property rights licensed thereunder) need be no broader than is necessary to ensure that an ISV, IHV, IAP, ICP or OEM is able to exercise the options or alternatives expressly provided under this Final Judgment, and to engage in conduct against which this Final Judgment prohibits Microsoft from retaliating; To enable those third parties to obtain those licenses, Section VIII of the Proposed Final Judgment should be modified as follows: Nothing in this Final Judgment is intended to confer upon any other persons any rights or remedies of any nature whatsoever hereunder or by reason of this Final Judgment, except as provided in Section III.I.
The proposed modifications would require Microsoft to license certain of its intellectual property: that which potentially covers competitive operating systems, middleware, or other software or hardware and is necessary to ensure that the protected groups are free to engage in the conduct against which the Proposed Final Judgment would prohibit Microsoft from retaliating. Compulsory licensing of intellectual property to remedy monopolization is consistent with Supreme Court and Justice Department precedent, including the Proposed Final Judgment as it now stands, even though abuse of intellectual property rights was not found to be predatory conduct. To achieve the goal of restoring competitive conditions to the marketplace discussed above, the court has "'large discretion' to fit the decree to the special needs of the individual case." Ford Motor Co. v. United States, 405 U.S. 562, 573 (1972) (quoting International Salt Co. v. United States, 332 U.S. 392, 401 (1947)). That discretion includes prohibiting acts that may otherwise be valid, if necessary to correct the effects of the violation. "Equity has power to eradicate the evils of a condemned scheme by prohibition of the use of admittedly valid parts of an invalid whole." United States v. Bausch & Lomb Optical Co., 321 U.S. 707, 814 (1944). As the Court similarly instructed in United States v. Paramount Pictures, Inc., 334 U.S. 131,148 (1948), to achieve effective relief a court can include restrictions on otherwise lawful conduct: "[E]quity has the power to uproot all parts of an illegal scheme -- the valid as well as the invalid -- in order to rid the trade or commerce of all taint of the conspiracy." Compulsory licensing of patents was ordered to remedy monopolization in, for example, United States v. United Shoe Mach. Corp., 110 F. Supp. 295 (D. Mass. 1953), aff'd, 347 U.S. 521 (1954), even though enforcement of the patents was not an alleged predatory act. The court concluded that the defendant had not improperly asserted its patents, but they were a barrier to entry into the monopolized market. See 110 F. Supp. at 297,332-33. In determining the remedy, the court's goals were not only to eliminate specific predatory practices that had caused or would cause monopolization, but also "to restore workable competition in the market." Id. at 346-47. The court explained that licensing of patents was proper as part of the remedy to reduce the effects of the defendant's monopolization caused by non-patent predatory business practices: Defendant is not being punished for abusive practices respecting patents, for it engaged in none .... It is being required to reduce the monopoly power it has, not as a result of patents, but as a result of business practices. And compulsory licensing, on a reasonable royalty basis, is in effect a partial dissolution, on a non-confiscatory basis. Id. at 351. Fifteen years later, the Supreme Court again concluded that the relief granted was within the proper scope of relief for an antitrust violation. United States v. United Shoe Mach. Corp., 391 U.S. 244, 251 (1968). Similarly, the Justice Department has required compulsory licensing of intellectual property as part of the remedy in proposed final judgments in antitrust cases. One of the latest examples, and perhaps the most pertinent, is this Proposed Final Judgment's requirement that "Microsoft shall offer to license to ISVs, IHVs .... and OEMs any intellectual property rights owned or licensable by Microsoft that are required to exercise any of the options or alternatives expressly provided to them under this Final Judgment .... "(Proposed Final Judgment Section III.I.) Indeed, the Competitive Impact Statement provides that some of those provisions "are designed specifically to prevent Microsoft from using its intellectual property rights to frustrate the intended effectiveness of the Proposed Final Judgment's disclosure provisions." Competitive Impact Statement at 49. The exemption from retaliation by infringement suits, however, allows that frustration. The issue, therefore, is not whether the remedy can properly include compulsory licensing of Microsoft's intellectual property. Instead, the issue is the scope of the licensing required. As shown above, the scope of the proposed modifications to the intellectual property provisions is reasonable and required to remedy the monopolization and restore competition to the market. The proposed modifications would not "result in... wholesale confiscation of Microsoft's intellectual property," a criticism that Microsoft wrongly asserted against the non-settling states' proposed remedy. Microsoft Remedial Proposal at 2. It would require only licensing that is necessary to prevent frustration of the anti-retaliation provisions. Moreover, the licenses could include royalties or other consideration on a reasonable and non-discriminatory basis, as provided in Section III.I. 1. Nor would the proposed modifications be a significant disincentive to innovation by Microsoft. Since the Proposed Final Judgment would expire in five years (see Proposed Final Judgment, Section V), the obligation to license would exist only for that limited time period. Any future innovation by Microsoft also would be free of this obligation after those five years. Any arguable effect on Microsoft's incentives to innovate during those five years would be limited and only to the extent necessary to provide effective relief from Microsoft's monopolization. In opposing the non-settling states' proposed relief, Microsoft pointed to the Court of Appeals' comment that the relief in this case "`should be tailored to fit the wrong creating the occasion for the remedy.'" Microsoft Remedial Proposal at 5 (quoting Microsoft, 253 F.3d at 107). Microsoft also relied upon this Court's statement that the "'scope of any proposed remedy must be carefully crafted so as to ensure that the enjoin[ed] conduct falls within the penumbra of behavior which was found to be anticompetitive.'" Microsoft Remedial Proposal at 6 (quoting Sept. 8, 2001 Tr. at 8). Removing the infringement suit exemption and defining retaliation to include threatening or bringing suit for infringement of Microsoft's intellectual property portfolio would fall well within that scope.
The scope of the required intellectual property licensing under the Proposed Final Judgment is far too narrow to remedy the monopolization of, and restore competitive conditions to, the market the courts held Microsoft monopolized -- Intel-compatible operating systems. The modifications to the scope proposed above would be no broader than that which is necessary to allow the groups protected under the Proposed Final Judgment to engage in the specific conduct that the Proposed Final Judgment allows them to engage in without fear of retaliation from Microsoft. As shown above, unless the scope of the licensing is expanded, and the exemptions for infringement suits removed, "the Government has won a lawsuit and lost a cause." International Salt, 332 U.S. at 401.
A focus of any final judgment in this litigation must be to put in place safeguards and protections against future actions by Microsoft that may not fit the known pattern, but that will obtain a familiar result -- unlawful continuation of the Microsoft monopoly. An important aspect of this focus is to make sure that the participants in the marketplace are given a chance at viability in a competitive marketplace. As worded, Section III does not provide the safeguards and protections that are necessary. Prohibiting actual retaliatory conduct by Microsoft is simply insufficient to obtain the goals of the final judgment.
The Department of Justice set forth a clear intent for the impact of Section III.A. As stated in the Competitive Impact Statement, the perceived effect of Section III.A is to "ensure[] that OEMs have the contractual and economic freedom to make decisions about distributing and supporting non-Microsoft software products that have the potential to weaken Microsoft's personal computer operating system monopoly without fear of coercion or retaliation by Microsoft." Competitive Impact Statement at 9. Unfortunately, Section III.A fails to protect the ability of OEMs to make business choices in a non-coercive atmosphere, for reasons in addition to those discussed above concerning intellectual property. The conduct that is prohibited in Section III.A is actual retaliatory action by Microsoft against OEMs for, inter alia, dual booting personal computers with other operating systems. More specifically, Section III.A provides that "Microsoft shall not retaliate against an OEM by altering Microsoft's commercial relations with that OEM, or by withholding newly introduced forms of non-monetary Consideration (including but not limited to new versions of existing forms of non-monetary Consideration) from that OEM, because it is known to Microsoft that the OEM is or is contemplating .... " Proposed Final Judgment, Section III.A. As worded, the only point at which injunctive relief is available is after an OEM can show actual retaliation. The problem with prohibiting only action "after the fact," is that it provides for enforcement only after Microsoft has taken negative action against an OEM. It is no secret that Microsoft is an important business partner to may OEMs and even the potential or implication of the change in an OEMs business relationship with an OEM can be sufficient to prevent action. Section III.A does not remove the business threat that will prevent OEMs from "crossing" Microsoft. Therefore, the parameters of the prohibitions on Microsoft's conduct need to be extended so that enforcement is not triggered only after an OEM has been harmed. By then, it may be too late and an OEM may find itself competitively or financially crippled by an impairment in its relationship with Microsoft. Moreover, by the time the retaliation is remedied, the OEM may even be out of the market. Ideally, Microsoft must be prohibited from maintaining the intimidating business environment that it has created -- an environment that inhibits OEMs from the free exercise of competitive decision making. The language of the Proposed Final Judgment ignores what the Competitive Impact Statement and the Court of Appeals have acknowledged. Thus, the actions prohibited under Section III.A must encompass a range of activities and not just after the fact retaliation in order to ensure that Microsoft does not continue to maintain unlawfully its monopoly. A possible modification of Section III.A is as follows: A. Microsoft shall not retaliate against an OEM by threatening to or altering Microsoft's commercial relations with that OEM, or by threatening to or withholding newly introduced forms of non-monetary Consideration (including but not limited to new versions of existing forms of non-monetary Consideration) from that OEM, because it is known to Microsoft that the OEM is or is contemplating: ....
An underlying premise of the Proposed Final Judgment is that if middleware software developers are able to develop and market middleware that can be used on either Microsoft or non-Microsoft operating systems or "that would have assisted competing operating systems in gaining access to applications and other needed complements" (Competitive Impact Statement at 9), then the competitive harm to the operating system market caused by Microsoft's unlawful maintenance of its monopoly will be remedied. With respect to Section III.D, the Competitive Impact Statement indicates an intent by the Department of Justice to: ensure[ ] that developers of competing middleware -- software that over time could begin to erode Microsoft's Operating System monopoly -- will have full access to the same interfaces and related information as Microsoft Middleware has to interoperate with Windows Operating Products. Microsoft will not be able to hamper the development or operation of potentially threatening software by withholding interface information or permitting its own products to use hidden or undisclosed interfaces. Competitive Impact Statement at 12. The Proposed Final Judgment makes an effort to provide the interface and related technical information "transparency" to the entities that the Department of Justice believes will need access to Microsoft software in order to develop software compatible with Microsoft and non-Microsoft operating systems. While the named entities include ISVs, however, they do not specifically include entities that provide non-Microsoft Operating Systems. An argument can be made that the definition for "ISVs" appears to be broad enough to include providers of non-Microsoft operating systems because under the definition "'ISV'" means an entity other than Microsoft engaged in the development or marketing of software products." Proposed Final Judgment, Section VI.I. The question and possible loophole remains, however, that Microsoft might argue that the transparency extends only to entities that develop middleware, but not to entities such as Red Hat -- entities that provide non-Microsoft operating systems. In order to ensure that the protections are as inclusive as possible, the definition of "Independent Software Vendor" can be supplemented to include specifically entities that compete in the operating system market. Thus, under the Section VI -- Definitions -- "ISV" would be modified to mean an entity other than Microsoft that is engaged in the development, marketing or providing of software products or services, including Operating System Providers.
According to the Competitive Impact Statement, Section III.F "redresses conduct by Microsoft specifically found unlawful by the District Court and the Court of Appeals." By addressing only actual retaliatory conduct, however, Section III.F suffers from the same infirmity as Section III.A, and may provide injunctive relief only after Microsoft has taken action that will harm a business entity. Microsoft must not be prohibited only from actual retaliation, but must also be prohibited from intimidating, threatening to withhold business from, coercing or retaliating against any ISV or IHV because of activities that will further competing middleware or operating systems. See comment on Section III.A, supra.
As worded, Section III.J provides exceptions to Microsoft's disclosure obligations that have a serious potential to defeat the intent of the Proposed Final Judgment. The Competitive Impact Statement makes it clear that the exception to Microsoft's disclosure obligations is meant to be a "narrow exception limited to specific end-user implementations of security items such as actual keys, authorization tokens or enforcement criteria, the disclosure of which would compromise the security of a `particular installation or group of installations' of the listed security features." Competitive Impact Statement at 18. The nature of security, however, requires that Section III.J should be modified so that there is a detailed specification of what Microsoft must provide under the mandates of the Proposed Final Judgment, rather than what it is excluded from providing within the context of security. Because of the potentially wide-ranging negative impact of this Section, Red Hat believes some background on the nature of security is required. All security experts agree that there is no such thing as perfect security, and indeed this pessimistic view extends to the field of computer security. In his book "Secrets and Lies: Digital Security in a Networked World", noted security expert Bruce Schneier explains "modem systems have so many components and connections -- some of them not even known by the systems' designers, implementers, or users -- that insecurities always remain. No system is perfect." If no computer system can be made perfectly secure, then any computer system can potentially suffer a security compromise. Moreover, it is not knowable whether the security compromise will be a result of people having access to information about a security weakness (which they can exploit) or people not having access to such information (which allows others to exploit something one might otherwise be able to defend against). Thus, on the one hand, one could argue that divulging any information whatsoever could lead to a security compromise, but on the other hand, that not divulging any information of any kind could also lead to a security compromise. Such is the nature of computer security (indeed, all security). One of the main issues in the antitrust case against Microsoft is the fact that Microsoft has controlled information about and permission to use system APIs, Documentation, licenses, and Communications Protocols to discriminate against or retaliate against one or more parties (or classes of parties), and has done so strategically to protect, extend, and indeed abuse its monopoly powers. Certainly any valid remedy for this anti-trust case would enjoin Microsoft from such conduct in the future. While the Proposed Final Judgment attempts to set guidelines under which Microsoft would be required to document, disclose, or license to third parties portions of APIs or Documentation or portions or layers of Communications Protocols, Section III.J(1) carves out a specific exemption: the case where the disclosure of such would compromise the security of anti-piracy, anti-virus, software licensing, digital fights management, encryption or authentication systems, including without limitation, keys, authorization tokens or enforcement criteria. While this may sound like a fair and reasonable exemption, it is not because Microsoft could legitimately argue that any requirement to document, disclose, or license anything to third parties could, in theory, result in a security compromise of one or more of these systems. Such is the nature of computer security. Thus, Section III.J(1) grants Microsoft legal protection for the very behavior that this Proposed Final Judgment was designed to remedy. As noted, the Competitive Impact Statement interprets Section III.J(1) as being an extremely limited exemption, essentially only extending to specific keys and security tokens, not to technologies, interfaces or interoperability. This interpretation, however, is not carried over to the language of the Proposed Final Judgment, which gives almost blanket permission to Microsoft to invoke the exemption. An appropriate modification of Section III.J(1) -- other than removing it entirely-- is as follows: No provision of this Final Judgment shall: 1. Require Microsoft to disclose to any specific end-user implementations of security items such as actual end-user keys, authorization tokens, or enforcement criteria, the disclosure of which would compromise the security of a particular installation or group of installations of the security item. Notwithstanding the foregoing, if any such implementation of a security item requires a specific end-user key, authorization token, enforcement criteria, or analogous information to fully and equitably interoperate with Microsoft Platform Software, Microsoft Middleware, APIs, Communication Protocols, Microsoft applications software, or Microsoft network services (such as e-commerce or internet services), then Microsoft must either (a) disclose such specific end-user key, authorization token, enforcement criteria, or analogous information, (b) provide alternative end-user keys, authorization tokens, enforcement criteria, or analogous information that enable third parties to fully and equitably interoperate with those software, products, or services, or (c) disclose how to make such end-user keys, authorization tokens, enforcement criteria, or analogous information that will fully and equitably interoperate with such software, products, or services; Microsoft must disclose or provide such keys, authorization tokens, enforcement criteria, or analogous information to third parties upon request and in a nondiscriminatory manner. In no event, however, shall Microsoft reserve to itself any functionality for such keys, authorization tokens, enforcement criteria, or analogous information.
Section III.J(2) presents another loophole that Microsoft can manipulate to avoid disclosure of necessary information. Under the provisions of Section III.J(2), Microsoft is permitted to require a certification of the "authenticity and viability" of any business seeking a license of "any API, Documentation or Communications Protocol related to anti-piracy systems, anti-virus technologies, license enforcement mechanisms, authentication/authorization security, or third party intellectual property protection mechanisms of any Microsoft Product." Although the certification is required to be pursuant to "reasonable and objective standards," those standards are established by Microsoft and there is no independent third party approval either of the development or of the implementation of those standards. The Competitive Impact Statements indicates that: the requirements of this subsection cannot be used as a pretext for denying disclosure or licensing, but instead are limited to the narrowest scope of what is necessary and reasonable, and are focused on screening out only individuals or firms that should not have access to or use of the specified security-related information either because they have a history of engaging in unlawful conduct related to computer software (e.g., they have been found to have engaged in a series of willful violations of intellectual property rights or of one more violations consisting of conduct such as counterfeiting), do not have any legitimate basis for needing the information, or are using the information in a way that threatens the proper operation and integrity of the systems and mechanisms to which they relate. Competitive Impact Statement at 19. This will not be the case if there is no safeguard on the development or implementation of the standards. For example, Microsoft may decide to include financial or organizational requirements in order for a (1) an entity to be considered a "business" and (2) an entity to be considered an "authentic and "viable" business. Microsoft may decide to require that, in order for an entity to be a "business," it must operate in the market in a currently "traditional" manner, such as Microsoft operates, but not as many open source companies operate. Will a company need to undertake its own software development? Will a company need to own and license its software? Unless Microsoft is held to certain independent guidelines or policing, this provision may gut the intent of the Proposed Final Judgment. The potential for abuse with this provision is particular Feat when considering the open source development community. Most open source software is not developed or owned by a for-profit business entity. It is the result of collaborative development, with software code contributed by its author for the benefit of all. The restrictive language of Section III.J(2) would expressly permit Microsoft to deny access to such open source development projects.
A fair reading of the Proposed Final Judgment supports that the protections extend to the direct participants in the market in which Microsoft was found to have unlawfully maintained its monopoly -- the providers of competing operating systems. The Proposed Final Judgment, however, needs to ensure that the protections extend to all possible readings. It cannot be ignored that the clear finding Upheld by the Court of Appeals is that Microsoft unlawfully maintained its monopoly in the PC-compatible operating system market. Thus, if there is any possibility that Microsoft can find a loophole, that possible loophole should be closed. It is in this vein that we recommend that the definitions should be expanded to include providers of competing operating systems -- the participants in the market in which Microsoft unlawfully has maintained its monopoly. Operating System Providers, then, should be specifically included within the "ISV" definition -- as recommended, supra. Furthermore, a proposed definition for Operating System Providers follows: "OSP" means an operating system provider that provides a non-Microsoft software code that, inter alia, (i) controls the allocation and usage of hardware resources (such as the microprocessor and various peripheral devices) of a Personal Computer, (ii) provides a platform for developing applications by exposing functionality to ISVs through APIs, and (iii) supplies a user interface that enables users to access functionality of the operating system and in which they can run applications.
By not providing for the appointment of a Special Master to ensure enforcement of the Proposed Final Judgment, the Justice Department has left the injunctive relief toothless. There is absolutely nothing in the Proposed Final Judgment that provides a speedy vehicle for the resolution of complaints from an independent third party, such as Red Hat, that Microsoft has violated the Proposed Final Judgment. As suggested by the Litigating States in their proposed final judgment, the appointment of a Special Master could be made pursuant to Rule 53 of the Federal Rules of Civil Procedure.
The Technical Committee ("TC") as constituted and mandated has no real authority or ability to address quickly and thoroughly third-party complaints regarding Microsoft's compliance with the Proposed Final Judgment. Moreover, it is structured as a committee of compromise and not enforcement. One of the members of the TC is to be selected by Microsoft, one of the members is selected by the plaintiffs and the third member is a joint selection. All of the members are to be "experts in software design and programming." This narrowly restricts the scope of the TC to technical interpretations. It takes out of the realm of the TC's expertise issues relating to business practices and acts that may have a competitive impact on the market. The TC should be supplemented with or assisted by a Special Master with the authority to order compliance with the Proposed Final Judgment. The Special Master will be able to address complaints relating to business practices as well as complaints relating to software disclosure or use.
Section D sets forth the actual procedures for the Technical Committee to follow in the event that a third party makes a complaint regarding Microsoft's compliance with the Proposed Final Judgment. The procedures are general and the intent is to resolve complaints, not handle issues of enforcement. The Justice Department states that "It]his dispute resolution function reflects the recognition that the market will benefit from rapid, consensual resolution of issues, where possible. It complements, but does not supplant, Plaintiffs' other methods of enforcement. If the TC concludes that a complaint is meritorious, the TC will so advise Plaintiffs and Microsoft and propose a remedy." Competitive Impact Statement at 20. Despite this statement, the provision does nothing to ensure a resolution of issues. There is no requirement that Microsoft accept the remedy and no sanctions if Microsoft does not accept the remedy. In effect, there appears to be no ultimate control on Microsoft's conduct except for a separate action or convincing the Justice Department to seek an order to enforce the Proposed Final Judgment. This dispute resolution provision should be removed from the TC. The Special Master should administer the process for resolving third party complaints and have the authority to develop and administer a speedy process for resolving complaints and to order compliance if Microsoft is found to have violated the Proposed Final Judgment.
Dated: January 28, 2002
FOOTNOTES
1. The Litigating States have filed their own Proposed Final Judgment and, to the extent it contains additional modifications to DOJ's revised proposed Final Judgment, Red Hat supports those modifications. 2. Under the Proposed Final Judgment: OEM is an "original equipment manufacturer of Personal Computers that is a licensee of a Windows Operating System Product"; ISV is an "entity other than Microsoft that is engaged in the development or marketing of software products"; and IHV is an "independent hardware vendor that develops hardware to be included in or used with a Personal Computer running a Windows Operating System Product." See Proposed Final Judgment, Sections VI.O, I, II. 3. "Microsoft Platform Software" is defined as including "a Windows Operating System Product" (either alone or with a middleware product), which in turn is defined as "the software code.., distributed commercially by Microsoft for use with Personal Computers as Windows 2000 Professional .... " Proposed Final Judgment, Section VI.L, U. An Operating System is defined as "the software code that, inter alia, (i) controls the allocation and usage of hardware resources ... of a Personal Computer, (ii) provides a platform for developing applications by exposing functionality to ISVs through APIs, and (iii) supplies a user interface that enables users to access functionality of the operating system and in which they can run applications." Id., Section VI? 4. See. also, discussion in Parts IV.B. and V, infra, concerning the definition of ISVs.
Exhibit A
Microsoft Executive Says Linux Threatens Innovation (Update1) Redmond, Washington, Feb. 14 (Bloomberg) -- Microsoft Corp.'s Windows operating-system chief, Jim Allchin, says that freely distributed software code such as rival Linux could stifle innovation and that legislators need to understand the threat. The result will be the demise of both intellectual property rights and the incentive to spend on research and development, he said yesterday, after the company previewed its latest version of Windows. Microsoft has told U.S. lawmakers of its concern while discussing protection of intellectual property rights. Linux is developed in a so-called open-source environment in which the software code generally isn't owned by any one company. That, as well as programs such as music-sharing software from Napster Inc., means the world's largest software maker has to do a better job of talking to policymakers, he said. ''Open source is an intellectual-property destroyer,'' Allchin said. ''I can't imagine something that could be worse than this for the software business and the intellectual-property business.'' Microsoft distributes some of its programs without charge to customers, although it generally doesn't release its programming code, and it retains the ownership rights to that code. Linux is the most widely known open-source product, though other programs including the popular Apache system for Web server computers also are developed the same way. Corel Inquiry Allchin made his comments several hours before Microsoft confirmed that its $135 million investment in software maker Corel Corp. last October is being reviewed by the U.S. Justice Department. Corel said last month it willl drop efforts to develop the Linux operating system, though it will continue to make Linux applications. Corel said it hadn't consulted with Microsoft before making that decision. Brian Behlendorf, founder of open-source company CollabNet Inc., said most companies that use the open-source development model do retain the rights to some of their intellectual property. ''I think Microsoft is trying to paint the open-source community as being fascist; that all software have has to be free, or none of it can be,'' said Behlendorf, whose company helps businesses run their own open-source projects. Allchin said he's concerned that the open-source business model could stifle initiative in the computer industry. ''I'm an American, I believe in the American Way,'' he said. ''I worry if the government encourages open source, and I don't think we've done enough education of policy makers to understand the threat.'' Linux Adoption Some leading computer companies including International Business Machines Corp. and Hewlett-Packard Co. are selling Linux- based products and working on open-source projects, noted Jeremy Allison, a VA Linux Systems Inc. software developer. He's also a leader in a project develop an open-source file and printer server program. Microsoft only began significant lobbying efforts in the last few years. The Redmond, Washington-based company also talks to lawmakers about issues including the need for more visas for people with computer skills and computer privacy and security. Linux is the fastest-growing operating system program for running server computers, according to research firm IDC. It accounted for 27 percent of unit shipments of server operating systems in 2000. Microsoft's Windows was the most popular on that basis, with 41 percent. Despite Linux's success in some markets, Allchin says he isn't concerned about sales competition from the product. Microsoft provides support to change and develop products based on its operating system software that Linux companies don't, he said. Companies that use Linux in their products then must pay someone else for support, he said. ''We can build a better product than Linux,'' he said. ''There is always something enamoring about thinking you can get something for free". Copyright ©1995-2002 CNET Networks, Inc. All rights reserved.
Exhibit B
Microsoft CEO takes launch break with the Sun-Times
June 1, 2001
It's hard to find a computer that doesn't run a Microsoft product, particularly in Chicago. Microsoft's Chicago-based Midwest district office, which covers Illinois, Indiana and Wisconsin, is the tech giant's biggest moneymaker in the country, with more than 500 customers generating $500 million in revenue annually for Microsoft.
It should come as no surprise, then, that the Seattle-area company sent its No. 2 man, CEO Steve Ballmer, for the official launch of its new Office XP software Thursday at the United Center (yes, Bill Gates went to New York).
Between appointments in a whirlwind visit to Chicago--which included a lunch with 100 local companies and back-to-back-to-back media interviews--Ballmer sat down with Chicago Sun-Times reporter Dave Newbart to discuss the local tech economy, Microsoft's dominance in the market, the federal antitrust case, Microsoft's new licensing requirements and the open-source movement (in effect, free software on the Web, which he called a ''cancer'').
Q: Boeing recently moved to Chicago. Why doesn't Microsoft relocate here?
A: [laughs] We are quite comfortable with our headquarters in Seattle. Chicago is a great city. I'm from Detroit. I like it here. But we have 20,000 people comfortably ensconced in Seattle.
Q: More seriously, in Chicago we do seem to have an inferiority complex about our place in the tech world. Rankings frequently put us toward the bottom among major cities in terms of our tech presence. How do you view the state of our tech economy?
A: I think there is a lot of great stuff going on in Chicago. There are a lot of innovative users in the Chicago area, which is exciting. We have a lot of great partners. I'll be on stage with a company called Genesis [Consulting], which I'm very excited about. We have a local partner named Calypso [Systems]. We literally have dozens of partners doing very innovative work with customers here.
I don't know what the national surveys say. Other than Silicon Valley, I think it's hard to point to any one place and say, "That's where it's all happening."
Q: Microsoft's market dominance and financial position are stronger than ever, despite the government's antitrust case and the weakening economy. Has the government's case had any impact on the way you do business?
A: There has been no legal ruling put into effect. We have and continue to innovate within the spirit and letter of the law. We continue to do what we have always done, because we think it's 100 percent correct. We add new capabilities to our product, we keep our prices low, we try to offer our customers better and better values. The laws were designed to encourage that and protect that behavior, because it's good for consumers.
Q: Microsoft has expanded to a number of markets, especially with the development of the Xbox and a smart phone. What's next, and is there any area that you don't see yourself entering?
A: We have a lot on our plate. We have a big dream about what XML (a markup language for documents containing structured information, such as words and graphics) can do for the world. The way software gets built will change over the years, which we are pursuing with our .Net platform. But we are hardly trying to do everything. I won't sit here and try to rule out that we might do other things in the future, but we have a few clear priorities.
Q: The new Windows XP software, I've seen a trial version, contains a number of free products--media player, a CD burner, an Internet firewall. Could that bundling hurt smaller competitors who make stand-alone software? Isn't this kind of bundling that you offered with Windows and Internet Explorer?
A: Just as with Internet Explorer, our job is to offer customers what they want. We are trying to provide more functionality at the same or better prices every day. [A]ll the new capabilities of Windows XP are open to software developers to add onto, to build value around. I think Windows XP ought to be a real boon to the kinds of innovations that come from smaller companies. The inclusion of Internet Explorer with Windows has been absolutely great ... for innovation in the software industry. Whether it was great for Netscape is a different question.
Q: Independent analyses of your new licensing policy indicate that unless a company upgrades its software every two years, it could face costs from one-third to double what they are paying now to upgrade. What do you think of the criticism that says Microsoft is forcing companies to upgrade to Windows XP by October or face much higher costs later?
A: We are trying to simplify our licensing practices in many ways. We are clearly providing some incentive to upgrade more regularly. Your better customers get a better price. An analysis we've done, 80 percent of our customers are going to see the same or lesser prices, and 20 percent are going to see very small to somewhat larger increases.
Q: The new software also allows a user to install it only twice. You have recently cracked down on corporate piracy and large-scale pirating operations. Are home users next?
A: Intellectual property should be protected. That's the only way that a newspaper or a software company or record company or artist can get a fair return on their work. Our goal is to try to educate people on what it means to protect intellectual property and pay for it properly. We are trying to help customers understand when they are crossing the line by putting some bumps in the road so they can't do the wrong thing.
Q: Do you view Linux and the open-source movement as a threat to Microsoft?
A: Yeah. It's good competition. It will force us to be innovative. It will force us to justify the prices and value that we deliver. And that's only healthy. The only thing we have a problem with is when the government funds open-source work. Government funding should be for work that is available to everybody. Open source is not available to commercial companies. The way the license is written, if you use any open-source software, you have to make the rest of your software open source. If the government wants to put something in the public domain, it should. Linux is not in the public domain. Linux is a cancer that attaches itself in an intellectual property sense to everything it touches. That's the way that the license works.
Q: You've been on this job [as CEO] almost 18 months. What has it been like replacing Bill Gates?
A: [I]n a weird and strange way I probably feel more pressure now, no reason I should, but I feel a little more pressure, responsibility. The great thing is we get a chance to do two things. Bill gets a chance to put the highest possible percentage of time into our strategy. My particular capability and focus are really about building a management team, the business processes, etc. Bill and I are going to be around for a lot of years, but we are not going to be around forever. In some senses I'll put a little more time and energy into setting us up so the business is a business that doesn't depend on one guy, even a guy who is as talented as Bill Gates.
Copyright 2000, Digital Chicago Inc.
Exhibit C
Why Microsoft is wary of open source
By Joe Wilcox and Stephen Shankland update There's more to Microsoft's recent attacks on the open-source movement than mere rhetoric: Linux's popularity could hinder the software giant in its quest to gain control of a server market that's crucial to its long-term goals. Recent public statements by Microsoft executives have cast Linux and the open-source philosophy that underlies it as, at the minimum, bad for competition, and, at worst, a "cancer" to everything it touches. Behind the war of words, analysts say, is evidence that Microsoft is increasingly concerned about Linux and its growing popularity. The Unix-like operating system "has clearly emerged as the spoiler that will prevent Microsoft from achieving a dominant position" in the worldwide server operating-system market, IDC analyst Al Gillen concludes in a forthcoming report. While Microsoft's overall operating-system market leadership is by no means in jeopardy, Linux's continued gains make it harder for Microsoft to further its core plan for the future, Microsoft.Net. The plan is a software-as-a-service initiative similar to plans from competitors including Hewlett-Packard, IBM and Sun Microsystems. One of the cornerstones of .Net is HailStorm, which is built around the company's Passport authentication service. Microsoft.Net and HailStorm make use of XML (Extensible Markup Language) to pass information between computers based on Windows and computers using other operating systems. However, many .Net components--such as Passport and server-based software including the company's SQL Server database software and BizTalk e-commerce server--run only on Windows. "The infrastructure to operate XML Web services relies on the Windows operating system and the .Net Enterprise Servers," Microsoft's marketing literature states. Microsoft needs to control the server operating-system market if HailStorm and all the .Net services and subscriptions associated with it are to succeed, analysts say. "HailStorm itself by definition needs Microsoft-provided or -partnered services, which means Microsoft's or its partners' servers," said Gartner analyst David Smith. "In that sense, Linux is a threat to .Net." Microsoft is expected to spend hundreds of millions of dollars marketing and developing .Net. Virtually every product from the company ties in to the plan at some point. While Linux hasn't displaced Windows, it has made serious inroads. Linux accounted for 27 percent of new worldwide operating-system licenses in 2000, and Microsoft captured 41 percent of new licenses, according to IDC. Overall, Gartner estimates Linux runs on nearly 9 percent of U.S. servers shipped in the third quarter of 2000, with worldwide projected Linux server sales of nearly $2.5 billion in 2001 and about $9 billion in 2005. But Linux continues to gain credibility, particularly because of the massive support provided by IBM, which has pledged to spend $1 billion on Linux development. In attacking Linux and open source, Microsoft finds itself competing "not against another company, but against a grassroots movement," said Paul Dain, director of application development at Emeryville, Calif.-based Wirestone, a technology services company. "My guess is that they are now under pressure to defend themselves against the criticism from the open-source and free-software communities--whether it's justified or not--as well as companies like IBM that are aggressively marketing Linux," Dain said. "In order to combat that, they have to use strong language to get their point across." Increasing Linux use makes it more difficult to spread the .Net message. That, in turn, has led to a string of comments from Microsoft executives publicly denouncing Linux and open source. "Linux is a cancer that attaches itself in an intellectual property sense to everything it touches," Chief Executive Steve Ballmer said in an interview with the Chicago Sun-Times. Despite Microsoft's criticism, the company still uses open-source code in some products. Servers for the company's Hotmail e-mail service use FreeBSD for some DNS (domain name server) functions. "This is a legacy issue that came from Hotmail when we originally got it," said Microsoft spokesman Rick Miller. "We haven't gone out, purchased and put into place FreeBSD. It came when we purchased other companies. We didn't build any of our infrastructure on FreeBSD. We build it on Windows." In the mid 1980s, Microsoft licensed its TCP/IP (transmission control protocol/Internet protocol) networking stack from another company that used open-source code. "You could say it had its genesis in FreeBSD, but it's now absolutely Windows," Miller said. The code first appeared in Windows NT and also was used in Windows 2000.
Critical of change Other open-source projects, such as FreeBSD, allow changes that are kept proprietary. That provision was one reason FreeBSD proved appealing to Wind River Systems, the dominant seller of operating systems for non-PC "embedded" computing devices such as network routers. Microsoft's open-source attacks come at a time when the company has been putting the pricing squeeze on customers. In early May, Microsoft revamped software licensing, raising upgrades between 33 percent and 107 percent, according to Gartner. A large percentage of Microsoft business customers could in fact be compelled to upgrade to Office XP before Oct. 1 or pay a heftier purchase price later on. The action "will encourage--'force' may be a more accurate term--customers to upgrade much sooner than they had otherwise planned," Gillen noted in the IDC report. "Once the honeymoon period runs out in October 2001, the only way to 'upgrade' from a product that is not considered to be current technology is to buy a brand-new full license.'" This could make open-source Linux's GPL more attractive to some customers feeling trapped by the price hike, Gillen said. "Offering this form of 'upgrade protection' may motivate some users to seriously consider alternatives to Microsoft technology." Ray Bailey, information services manager at The Bergquist Company, said a recent meeting with Microsoft changed the technology direction of his company, which manufactures electronic components and other goods. "Our IS team agreed that, due to Microsoft's changing of the licensing rules and the manner in which they have given us less-than-adequate time to process those changes, we are seriously looking at other platforms," he said. "Linux is a strong contender for our next server because of the low-cost nature of the licensing." Internally, Microsoft seems somewhat torn on how to approach the open-source movement. While the company denounces the move toward free software, it does recognize at least some of the value of open-source development. "Microsoft views open source as a competitor, but it's hard to treat it as a competitor," Gartner's Smith said. "So they have to attack basic tenets, mentality, way of life and thought processes." Since last year, Microsoft has made available to hundreds of its larger customers copies of its closely guarded Windows source code. The company hopes its best customers can help it improve Windows. Microsoft has been touting plans to broaden Windows source-code access to business partners in an initiative it calls its "shared-source philosophy." In particular, Microsoft wants to emulate the spirit of cooperation that has spawned groups of volunteer Linux programmers. "Having a sense of community is a good thing. It's one thing we've watched with interest," Craig Mundie, senior vice president of advanced strategies at Microsoft, said in a recent interview. "The more of that we can foster in our community, the better."
Building a better community Though Microsoft will be expanding how it engages directly with those who see its source code, the company isn't going to extend the right granted to many members of the open-source community--the power to change the software. People may submit bug fixes, but "customers aren't trying to buy the rights to produce derivatives," Mundie said. "In general, we're going to control that reintegration. We worry a lot about uniformity and avoiding fragmentation." But how far Microsoft is willing to go with open source appears limited, said Smith, who noted that while attacking Linux, the company promises to support the Unix variant through .Net. It's "a nice PR story for Microsoft to talk about the possibilities about .Net on Linux," he said. "It is true that Linux can participate in those .Net services, but don't expect Microsoft to provide any incentive or anything else that would make that possible." Dain said Microsoft's attacks on Linux and open source may in the long run benefit technology buyers. "Personally, I think the talk on both sides--Microsoft vs. open source--will end up benefiting consumers in the workplace and at home. There definitely is competition in the marketplace, and this battle simply proves the point." And while Microsoft may have the advantage in the consumer market with Windows, it's still the underdog in the large-scale business server market. "To many people, including myself, implementing a Microsoft solution is a much more cost-effective way to go than a Sun or other high-end Unix/mainframe solution," Dain said. Copyright ©1995-2002 CNET Networks, Inc. All rights reserved.
Exhibit D
Microsoft license spurns open source
By Stephen Shankland Microsoft lawyers have joined the company's campaign against open-source software, restricting how developers may use what it terms "viral software" in connection with Microsoft programming tools. The license of the second beta version of Microsoft's Mobile Internet Toolkit--software used so programmers can create server software to connect with handheld computers over the Internet--prohibits customers from using the Microsoft software in conjunction with "potentially viral software." In describing this category of software, Microsoft includes the most common licenses used for publishing open-source software, such as the Linux operating system. Licenses specifically excluded by Microsoft include the General Public License, the Lesser General Public License, the Mozilla Public License and the Sun Industry Standards License. While the provision in Microsoft's license isn't surprising, Fenwick & West intellectual property attorney Dana Hayter said the company could have picked a more neutral term, such as "open software." "The choice of the term says more about Microsoft's view than the rest of it," Hayter said. "I think it's a pejorative and misleading term. To suggest that open-source software is somehow 'viral' is to confuse harm to your customers' machines and data with harm to Microsoft's profits." Microsoft representatives weren't immediately available for comment. The license provision, posted Thursday at Linux Today, is the latest step in an increasingly vocal campaign by Microsoft Chairman Bill Gates, Senior Vice President Craig Mundie and Chief Executive Steve Ballmer to disparage open-source software. The campaign, in which the executives have compared open-source software to viruses and cancer, comes at a time when some observers believe Microsoft is worried that Linux--the best-known open-source project--will undermine the Microsoft.Net strategy for joining desktop computer users with sophisticated Internet services. Some open-source fans weren't happy with Microsoft's view of the software world and its use of the term "viral software." "The GPL is not a virus, it is a vaccine, an inoculation against later abuse of your code by having someone, such as Microsoft, take your hard work, incorporate it into a proprietary product which is then extended and kept closed, marginalizing your project in the process," said one comment at discussion site Slashdot. The Microsoft license seeks to prevent the possibility that a program that links both to Microsoft and open-source software components could force Microsoft to expose the now-secret source code of its software, Hayter said. "They're saying you cannot use (Microsoft) software in a way that would create in Microsoft any obligations to do anything with (Microsoft's) code, for example to make the source public," Hayter said. One example of a forbidden move would be to create software that used prepackaged components called libraries from Microsoft as well as a library covered by the GPL, Hayter said. Under the terms of the GPL, software covered by it may be directly incorporated only into other GPL software. But a legally grayer area is creating software that merely calls upon such libraries rather than incorporating the library code directly. The Free Software Foundation created the LGPL license for precisely such occasions; this license allows links to proprietary software. One example is the use of a library called "readline" that lets people use arrow keys and perform some other tasks when typing information into a computer, said PostgreSQL database developer Bruce Momjian. Because PostgreSQL is released under a BSD-style license that has different terms than the GPL, GPL code may not be freely mixed within PostgreSQL. "If we required the readline library, then the entire PostgreSQL software would have to be GPL'd," Momjian said, noting that programs such as the BSD-licensed libedit software offer an alternative. "If you use (readline) in any application, your entire application is GPL." Regardless of the legalities involved, the provision in the license is significant, Hatyer said. "This demonstrates they're taking open source seriously." Copyright ©1995-2002 CNET Networks, Inc. All rights reserved.
Exhibit E
Microsoft memo touts Linux
By Mike Ricciuti Microsoft engineers see Linux as a "best-of-breed" Unix that outperforms the company's own Windows NT operating system and is a "credible alternative" to commercially developed servers, according to an internal memo posted to the Web this week. The admission, contained in the second so-called Halloween memo posted to the Web this week by programmer Eric Raymond, is counter to the company's public statements downplaying the significance of Linux, and its suggestions that Fortune 1,000 companies have little interest in open source software (OSS). The new memo also contains a single sentence suggesting that the company may investigate the use of patents and copyrights to combat Linux. Microsoft representatives were not immediately available to comment further on the statement. In a preface to the memo, Raymond states that the document had been leaked to him by a former Microsoft employee. A Microsoft representative today said the document appears to be authentic, and said it is the second in "what could be a series" of similar memos posted to the Web. Yesterday, a Microsoft representative downplayed the significance of the initial memo. According to the new memo, written by Microsoft engineer Vinod Valloppillil, Linux "represents a best-of-breed Unix, that is trusted in mission critical applications, and--due to its open source code--has a long term credibility which exceeds many other competitive OS's." In what the memo's author considers the "worst case" scenario for Microsoft, Linux will "provide a mechanism for server OEMs to provide integrated, task-specific products and completely bypass Microsoft revenues in this space." Another new revelation contained in the new memo is that Microsoft considers Linux to be a threat on both server and client systems. "Long term, my simple experiments do indicate that Linux has a chance at the desktop market..," the memo states. The initial memo only cited the server market as a competitive battleground between Linux and Windows NT, now renamed Windows 2000. The first memo, posted to the Web over the weekend, showed that Microsoft executives fear that the growing popularity of Linux and other open source software poses a direct threat to the company's revenue stream, and suggests the company could respond by modifying open Internet protocols to become proprietary technologies that tie consumers and developers to Microsoft products. In the new memo, some of the reasons for the company's fears are more clearly defined. The memo states:
The author of the memo also writes that he believes consumers "love" Linux. Copyright ©1995-2002 CNET Networks, Inc. All rights reserved.
Exhibit F
Microsoft sues Linux start-up over name
By Joe Wilcox and David Becker update Microsoft asked a court on Thursday to stop a Linux start-up from using a name the software giant contends infringes on the Windows trademark. The Redmond, Wash.-based software giant filed a motion with the U.S. Court for the Western District of Washington against Lindows, which is developing a version of the Linux operating system that will run popular applications written for Microsoft's Windows OS. Microsoft contends the company, which plans to formally release its product next year, purposely is trying to confuse Lindows with Windows. The suit asks the court to order the start-up to stop using the Lindows name and also seeks unspecified monetary damages. "We're not asking the court to stop the company from making their products," said Microsoft spokesman Jon Murchinson. "What we're saying is they should not use a name that could confuse the public and infringe on our valuable trademark." Lindows is based on the Wine project, an open-source effort to mimic the commands that Windows programs use. The San Diego-based Lindows company was launched earlier this year by Michael Robertson, former CEO of digital music site MP3.com. Robertson characterized the move as another attempt by Microsoft to thwart a viable threat to its Windows empire. "If they're alleging that people are going to be confusing Microsoft Corp. with Lindows.com, I think there's zero potential of that happening," he said. "If people are confused, just remember that we're not the convicted monopolist." Murchinson said Microsoft considered legal action a last resort. "Clearly we prefer to work with them to resolve this problem voluntarily. Their product name infringes on our trademark," Murchinson said. "We hope they will work with us to resolve this problem without the need for legal action." Robertson said he had heard from nobody at Microsoft regarding the name dispute. "They just filed lawsuits," he said. Microsoft has been involved in an increasingly fractious war of words with Linux supporters this year, with Microsoft executives castigating the open-source distribution model behind Linux as a sure road to commercial failure and on blight for software development. Emmett Stanton, an attorney at Palo Alto, Calif.-based Fenwick & West, said Microsoft has not been overzealous in the past about protecting its trademark, allowing spoof sites and others to go unchallenged. "They're not the type to sue at the drop of a hat," he said, concluding that there appears to be solid ground for the Lindows complaint. "Superficially, you would have to say there's some potential for confusion, and the defendant may be trying to trade on Microsoft's position in the marketplace." Robertson said he hoped to have a preview version of Lindows ready for download by next week, with a full version ready early next year. He said the company is targeting small and medium-sized business that might be interested in switching to a less expensive operating system but have invested in Windows applications such as Office. "We're trying to give consumers a choice, where there's really no choice today," he said. Copyright ©1995-2002 CNET Networks, Inc. All rights reserved.
Exhibit H
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