Points especially relevant to our class have been bolded.
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
____________________________________
Civil Action No. 98-1232
(TPJ)
UNITED STATES OF AMERICA,
Plaintiff,
v.
MICROSOFT CORPORATION,
Defendant.
____________________________________
Civil Action No. 98-1233
(TPJ)
STATE OF NEW YORK, ex rel.
Attorney General ELIOT SPITZER,
et al.,
Plaintiffs and Counterclaim-Defendants,
v.
MICROSOFT CORPORATION,
Defendant and Counterclaim-Plaintiff.
____________________________________
FINDINGS OF FACT
These consolidated civil
antitrust actions alleging
violations of the Sherman
Act, SSSS 1 and 2, and
various state statutes by
the defendant Microsoft
Corporation, were tried
to the Court, sitting without a
jury, between October 19,
1998, and June 24, 1999.
The Court has considered
the record evidence
submitted by the parties,
made determinations as to its
relevancy and materiality,
assessed the credibility of
the testimony of the witnesses,
both written and oral,
and ascertained for its
purposes the probative
significance of the documentary
and visual evidence
presented. Upon the record
before the Court as of July
28, 1999, at the close of
the admission of evidence,
pursuant to FED. R. CIV.
P. 52(a), the Court finds the
following facts to have
been proved by a
preponderance of the evidence.
The Court shall state
the conclusions of law to
be drawn therefrom in a
separate Memorandum and
Order to be filed in due
course.
I. BACKGROUND
1. A "personal computer"
("PC") is a digital
information processing
device designed for use by one
person at a time. A typical
PC consists of central
processing components
(e.g., a microprocessor and
main memory) and mass
data storage (such as a hard
disk). A typical PC system
consists of a PC, certain
peripheral input/output
devices (including a monitor, a
keyboard, a mouse, and
a printer), and an operating
system. PC systems, which
include desktop and laptop
models, can be distinguished
from more powerful,
more expensive computer
systems known as "servers,"
which are designed to
provide data, services, and
functionality through
a digital network to multiple
users.
2. An "operating system"
is a software program that
controls the allocation
and use of computer resources
(such as central processing
unit time, main memory
space, disk space, and
input/output channels). The
operating system also
supports the functions of
software programs, called
"applications," that perform
specific user-oriented
tasks. The operating system
supports the functions
of applications by exposing
interfaces, called "application
programming
interfaces," or "APIs."
These are synapses at which the
developer of an application
can connect to invoke
pre-fabricated blocks
of code in the operating system.
These blocks of code
in turn perform crucial tasks, such as displaying text on the
computer screen. Because
it supports applications
while interacting more
closely with the PC system's
hardware, the operating
system is said to serve as a
"platform."
3. An Intel-compatible PC
is one designed to function
with Intel's 80x86/Pentium
families of microprocessors
or with compatible microprocessors
manufactured by
Intel or by other firms.
4. An operating system designed
to run on an
Intel-compatible PC will
not function on a
non-Intel-compatible PC,
nor will an operating system
designed for a non-Intel-compatible
PC function on an
Intel-compatible one. Similarly,
an application that
relies on APIs specific
to one operating system will
not, generally speaking,
function on another operating
system unless it is first
adapted, or "ported," to the
APIs of the other operating
system.
5. Defendant Microsoft Corporation
is organized under
the laws of the State of
Washington, and its
headquarters are situated
in Redmond, Washington.
Since its inception, Microsoft
has focused primarily on
developing software and
licensing it to various
purchasers.
6. In 1981, Microsoft released
the first version of its
Microsoft Disk Operating
System, commonly known as
"MS-DOS." The system had
a character-based user
interface that required
the user to type specific
instructions at a command
prompt in order to perform
tasks such as launching
applications and copying files.
When the International Business
Machines Corporation
("IBM") selected MS-DOS
for pre-installation on its
first generation of PCs,
Microsoft's product became the
predominant operating system
sold for Intel-compatible
PCs.
7. In 1985, Microsoft began
shipping a software
package called Windows.
The product included a
graphical user interface,
which enabled users to
perform tasks by selecting
icons and words on the
screen using a mouse. Although
originally just a
user-interface, or "shell,"
sitting on top of MS-DOS,
Windows took on more operating-system
functionality
over time.
8. In 1995, Microsoft introduced
a software package
called Windows 95, which
announced itself as the first
operating system for Intel-compatible
PCs that
exhibited the same sort
of integrated features as the
Mac OS running PCs manufactured
by Apple Computer,
Inc. ("Apple"). Windows
95 enjoyed unprecedented
popularity with consumers,
and in June 1998, Microsoft
released its successor,
Windows 98.
9. Microsoft is the leading
supplier of operating
systems for PCs. The company
transacts business in all
fifty of the United States
and in most countries around
the world.
10. Microsoft licenses copies
of its software programs
directly to consumers. The
largest part of its MS-DOS
and Windows sales, however,
consists of licensing the
products to manufacturers
of PCs (known as "original
equipment manufacturers"
or "OEMs"), such as the
IBM PC Company and the Compaq
Computer
Corporation ("Compaq").
An OEM typically installs a
copy of Windows onto one
of its PCs before selling the
package to a consumer under
a single price.
11. The Internet is a
global electronic network,
consisting of smaller,
interconnected networks, which
allows millions of computers
to exchange information
over telephone wires,
dedicated data cables, and
wireless links. The Internet
links PCs by means of
servers, which run specialized
operating systems and
applications designed
for servicing a network
environment.
12. The World Wide Web
("the Web") is a massive
collection of digital
information resources stored on
servers throughout the
Internet. These resources are
typically provided in
the form of hypertext documents,
commonly referred to
as "Web pages," that may
incorporate any combination
of text, graphics, audio
and video content, software
programs, and other data.
A user of a computer
connected to the Internet can
publish a page on the
Web simply by copying it into a
specially designated,
publicly accessible directory on a
Web server. Some Web
resources are in the form of
applications that provide
functionality through a user's
PC system but actually
execute on a server.
13. Internet content providers
("ICPs") are the
individuals and organizations
that have established a
presence, or "site,"
on the Web by publishing a
collection of Web pages.
Most Web pages are in the
form of "hypertext";
that is, they contain annotated
references, or "hyperlinks,"
to other Web pages.
Hyperlinks can be used
as cross-references within a
single document, between
documents on the same site,
or between documents
on different sites.
14. Typically, one page
on each Web site is the "home
page," or the first access
point to the site. The home
page is usually a hypertext
document that presents an
overview of the site
and hyperlinks to the other pages
comprising the site.
15. PCs typically connect
to the Internet through the
services of Internet
access providers ("IAPs"), which
generally charge subscription
fees to their customers in
the United States. There
are two types of IAPs. Online
services ("OLSs") such
as America Online ("AOL"),
Prodigy, and the Microsoft
Network ("MSN") offer, in
addition to Internet
access, various services and an
array of proprietary
content. Internet service providers
("ISPs") such as MindSpring
and Netcom, on the other
hand, offer few services
apart from Internet access and
relatively little of
their own content.
16. A "Web client" is
software that, when running on a
computer connected to
the Internet, sends information to
and receives information
from Web servers throughout
the Internet. Web clients
and servers transfer data using
a standard known as the
Hypertext Transfer Protocol
("HTTP"). A "Web browser"
is a type of Web client
that enables a user to
select, retrieve, and perceive
resources on the Web.
In particular, Web browsers
provide a way for a user
to view hypertext documents
and follow the hyperlinks
that connect them, typically
by moving the cursor
over a link and depressing the
mouse button.
17. Although certain Web
browsers provided graphical
user interfaces as far
back as 1993, the first
widely-popular graphical
browser distributed for
profit, called Navigator,
was brought to market by the
Netscape Communications
Corporation in December
1994. Microsoft introduced
its browser, called Internet
Explorer, in July 1995.
II. THE RELEVANT MARKET
18. Currently there are
no products, nor are there likely
to be any in the near
future, that a significant percentage
of consumers world-wide
could substitute for
Intel-compatible PC operating
systems without
incurring substantial
costs. Furthermore, no firm that
does not currently market
Intel-compatible PC
operating systems could
start doing so in a way that
would, within a reasonably
short period of time,
present a significant
percentage of consumers with a
viable alternative to
existing Intel-compatible PC
operating systems. It
follows that, if one firm controlled
the licensing of all Intel-compatible
PC operating
systems world-wide, it could
set the price of a license
substantially above that
which would be charged in a
competitive market and leave
the price there for a
significant period of time
without losing so many
customers as to make the
action unprofitable.
Therefore, in determining
the level of Microsoft's
market power, the relevant
market is the licensing of all
Intel-compatible PC operating
systems world-wide.
A. Demand Substitutability
1. Server Operating Systems
19. Consumers could not turn
from Intel-compatible PC
operating systems to Intel-compatible
server operating
systems without incurring
substantial costs, since the
latter type of system is
sold at a significantly higher
price than the former. A
consumer intent on acquiring a
server operating system
would also have to buy a
computer of substantially
greater power and price than
an Intel-compatible PC,
because server operating
systems generally cannot
function properly on PC
hardware. The price of an
Intel-compatible PC
operating system accounts
for only a very small
percentage of the price
of an Intel-compatible PC
system. Thus, even a substantial
increase in the price of
an Intel-compatible PC operating
system above the
competitive level would
result in only a trivial increase
in the price of an Intel-compatible
PC system. Very few
consumers would purchase
expensive servers in
response to a trivial increase
in the price of an
Intel-compatible PC system.
Furthermore, a consumer
would not obtain a satisfactory
substitute for an
Intel-compatible PC operating
system even if he
purchased a server, since
server operating systems lack
the features -- and support
for the breadth of
applications -- that induce
users to purchase
Intel-compatible PC operating
systems.
2. Non-Intel-Compatible PC Operating Systems
20. Since only Intel-compatible
PC operating systems
will work with Intel-compatible
PCs, a consumer
cannot opt for a non-Intel-compatible
PC operating
system without obtaining
a non-Intel-compatible PC.
Thus, for consumers who
already own an
Intel-compatible PC system,
the cost of switching to a
non-Intel compatible
PC operating system includes the
price of not only a new
operating system, but also a
new PC and new peripheral
devices. It also includes
the effort of learning to
use the new system, the cost of
acquiring a new set of compatible
applications, and the
work of replacing files
and documents that were
associated with the old
applications. Very few
consumers would incur these
costs in response to the
trivial increase in the
price of an Intel-compatible PC
system that would result
from even a substantial
increase in the price of
an Intel-compatible PC
operating system. For example,
users of
Intel-compatible PC operating
systems would not
switch in large numbers
to the Mac OS in response to
even a substantial, sustained
increase in the price of an
Intel-compatible PC operating
system.
21. The response to a price
increase would be
somewhat greater among consumers
buying their first
PC system, because they
would not have already
invested time and money
in an Intel-compatible PC
system and a set of compatible
applications. Apple
does not license the Mac
OS separately from its PC
hardware, however, and the
package of hardware and
software comprising an Apple
PC system is priced
substantially higher than
the average price of an
Intel-compatible PC system.
Furthermore, consumer
demand for Apple PC systems
suffers on account of the
relative dearth of applications
written to run on the
Mac OS. It is unlikely,
then, that a firm controlling the
licensing of all Intel-compatible
PC operating systems
would lose so many new PC
users to Apple as the
result of a substantial,
enduring price increase as to
make the action unprofitable.
It is therefore proper to
define a relevant market
that excludes the Mac OS. In
any event, as Section III
of these findings demonstrates,
including the Mac OS in
the relevant market would not
alter the Court's conclusion
as to the level of
Microsoft's market power.
3. Information Appliances
22. No operating system designed
for a hand-held
computer, a "smart" wireless
telephone, a television
set-top box, or a game console
is capable of performing
as an adequate operating
system for an Intel-compatible
PC. Therefore, in order
to adopt a substitute for the
Intel-compatible PC operating
system from the realm of
"information appliances,"
a consumer must acquire one
or more of these devices
in lieu of an Intel-compatible
PC system.
23. It is possible that,
within the next few years, those
consumers who otherwise
would use an
Intel-compatible PC system
solely for storing addresses
and schedules, for sending
and receiving E-mail, for
browsing the Web, and
for playing video games might
be able to choose a complementary
set of information
appliances over an Intel-compatible
PC system without
incurring substantial
costs. To the extent this
substitution occurs, though,
it will be the result of
innovation by the producers
of information appliances,
and it will occur even if
Intel-compatible PC operating
systems are priced at the
same level that they would be
in a competitive market.
More importantly, while some
consumers may decide to
make do with one or more
information appliances in
place of an Intel-compatible
PC system, the number of
these consumers will, for the
foreseeable future, remain
small in comparison to the
number of consumers deciding
that they still need an
Intel-compatible PC system.
One reason for this is the
fact that no single type
of information appliance, nor
even all types in the aggregate,
provides all of the
features that most consumers
have come to rely on in
their PC systems and in
the applications that run on
them. Thus, most of those
who buy information
appliances will do so in
addition to, rather than instead
of, buying an Intel-compatible
PC system. Not
surprisingly, then, sales
of PC systems are not expected
to suffer on account of
the growing consumer interest in
information appliances.
It follows that, for the
foreseeable future, a firm
controlling the licensing of
all Intel-compatible PC
operating systems could set
prices substantially above
competitive levels without
losing an unacceptable amount
of business to
information appliances.
4. Network Computers
24. A network computer
system (sometimes called a
"thin client") typically
contains central processing
components with basic
capabilities, certain key
peripheral devices (such
as a monitor, a keyboard, and
a mouse), an operating
system, and a browser. The
system contains no mass
storage, however, and it
processes little if any
data locally. Instead, the system
receives processed data
and software as needed from a
server across a network.
A network computer system
lacks the hardware resources
to support an
Intel-compatible PC operating
system. It follows that
software applications written
to run on a specific
Intel-compatible PC operating
system will not run on a
network computer. Network
computers can run
applications residing on
a designated server, however.
Moreover, a network computer
system typically can run
applications residing on
other servers, so long as those
applications are accessible
through Web sites. The
ability to run server-based
applications is not exclusive
to network computer systems,
however. Generally
speaking, any PC system
equipped with a browser and
an Internet connection is
capable of accessing
applications hosted through
Web sites.
25. Since the network computing
model relies heavily
on the processing power
and memory of servers, the
requirements for the user's
hardware (and thus the price
of that hardware) are low
relative to those of an
Intel-compatible PC system.
Still, a user who already
owns a relatively expensive
Intel-compatible PC
system is not likely to
abandon the investment and
acquire less powerful hardware
just because one of the
least expensive components
of his PC system -- the
operating system -- is substantially
more expensive than
it would be under competitive
conditions. Just as does
the Mac OS, the network
computing model presents a
somewhat more attractive
alternative to the first-time
computer buyer. But as in
the case where a prospective
purchaser is considering
acquiring the Apple
alternative, a new buyer
considering the network
computing model must choose
between types of
computer systems. If the
consumer opts for the less
expensive hardware of the
network computer, that
hardware will not support
an Intel-compatible PC
operating system; and if
the new buyer opts for the
more expensive hardware
of an Intel-compatible PC, an
Intel-compatible PC operating
system will almost
certainly come pre-installed
(and in any event represent
very little additional cost
relative to the price of the
hardware).
26. Only a few firms currently
market network
computer systems, and
the systems have yet to attract
substantial consumer
demand. In part, this is because
PC systems, which can
store and process data locally
as well as communicate
with a server, have decreased
so much in price as to
call into question the value
proposition of buying
a network computer system. This
fact would not change if
the price of an
Intel-compatible PC operating
system rose
significantly, because the
resulting change in the price
of an Intel-compatible PC
system would be very minor.
Another reason for the limited
demand for network
computer systems is the
fact that few consumers are in a
position to turn from PC
systems to network computer
systems without making substantial
sacrifices; for the
network computing option
exhibits significant
shortcomings for current
PC owners and first-time
buyers alike. The problems
of latency, congestion,
asynchrony, and insecurity
across a communications
network, and contention
for limited processing and
memory resources at the
remote server, can all result in
a substantial derogation
of computing performance.
Moreover, the owner of a
network computer is required
to enter into long-term
dependency upon the owner of a
remote server in order to
obtain functionality that
would reside within his
control if he owned a PC
system. If network computing
becomes a viable
alternative to PC-based
computing, it will be because
innovation by the proponents
of the network computing
model overcomes these problems,
and it will happen
even if Intel-compatible
PC operating systems are
priced at competitive levels.
In any case, that day has
not arrived, nor does it
appear imminent.
5. Server-Based Computing Generally
27. As the bandwidth available
to the average user
increases, "portal" Web
sites, which aggregate Web
content and provide services
such as search engines,
E-mail, and travel reservation
systems, could begin to
host full lines of the
server-based,
personal-productivity
applications that have begun to
appear in small numbers
on the Web. If so, increasing
numbers of computer users
equipped with Web
browsers and IAP connections
could begin to conduct a
significant portion of
their computing through these
portals. To the extent
they might do so, users probably
would not regard the
Mac OS's limited stock of
compatible applications
as the major drawback to using
an Apple PC system that
it is today, and they might be
increasingly drawn to
network computer systems and
information appliances.
The variety and ease of use of
server-based applications
accessible through browsers
would have to increase a
great deal from today's levels,
however, before the total
costs of dispensing with an
Intel-compatible PC operating
system would decline
sufficiently to impose a
significant constraint on the
pricing of those systems.
Again, that day is not
imminent; for at least the
next few years, the
overwhelming majority of
consumers accessing
server-based applications
will do so using an
Intel-compatible PC system
and a browser.
6. Middleware
28. Operating systems
are not the only software
programs that expose
APIs to application developers.
The Netscape Web browser
and Sun Microsystems,
Inc.'s Java class libraries
are examples of
non-operating system
software that do likewise. Such
software is often called
"middleware" because it relies
on the interfaces provided
by the underlying operating
system while simultaneously
exposing its own APIs to
developers. Currently
no middleware product exposes
enough APIs to allow
independent software vendors
("ISVs") profitably to
write full-featured personal
productivity applications
that rely solely on those APIs.
29. Even if middleware deployed
enough APIs to
support full-featured applications,
it would not function
on a computer without an
operating system to perform
tasks such as managing hardware
resources and
controlling peripheral devices.
But to the extent the
array of applications relying
solely on middleware
comes to satisfy all of
a user's needs, the user will not
care whether there exists
a large number of other
applications that are directly
compatible with the
underlying operating system.
Thus, the growth of
middleware-based applications
could lower the costs
to users of choosing a non-Intel-compatible
PC
operating system like the
Mac OS. It remains to be
seen, though, whether there
will ever be a sustained
stream of full-featured
applications written solely to
middleware APIs. In any
event, it would take several
years for middlware and
the applications it supports to
evolve from the status quo
to a point at which the cost
to the average consumer
of choosing a non-Intel
compatible PC operating
system over an
Intel-compatible one falls
so low as to constrain the
pricing of the latter systems.
B. The Possibility of Supply Responses
30. Firms that do not
currently produce
Intel-compatible PC operating
systems could do so.
What is more, once a
firm had written the necessary
software code, it could
produce millions of copies of
its operating system
at relatively low cost. The ability
to meet a large demand
is useless, however, if the
demand for the product
is small, and signs do not
indicate large demand
for a new Intel-compatible PC
operating system. To
the contrary, they indicate that the
demand for a new Intel-compatible
PC operating
system would be severely
constrained by an intractable
"chicken-and-egg" problem:
The overwhelming
majority of consumers
will only use a PC operating
system for which there
already exists a large and varied
set of high-quality,
full-featured applications, and for
which it seems relatively
certain that new types of
applications and new
versions of existing applications
will continue to be marketed
at pace with those written
for other operating systems.
Unfortunately for firms
whose products do not fit
that bill, the porting of
applications from one operating
system to another is a
costly process. Consequently,
software developers
generally write applications
first, and often
exclusively, for the operating
system that is already
used by a dominant share
of all PC users. Users do not
want to invest in an operating
system until it is clear
that the system will support
generations of applications
that will meet their needs,
and developers do not want
to invest in writing or
quickly porting applications for
an operating system until
it is clear that there will be a
sizeable and stable market
for it. What is more,
consumers who already use
one Intel-compatible PC
operating system are even
less likely than first-time
buyers to choose a newcomer
to the field, for switching
to a new system would require
these users to scrap the
investment they have made
in applications, training, and
certain hardware.
31. The chicken-and-egg problem
notwithstanding, a
firm might reasonably expect
to make a profit by
introducing an Intel-compatible
PC operating system
designed to support a type
of application that satisfies
the special interests of
a particular subset of users. For
example, Be, Inc. (`Be")
markets an Intel-compatible
PC operating system called
BeOS that offers superior
support for multimedia applications,
and the operating
system enjoys a certain
amount of success with the
segment of the consumer
population that has a special
interest in creating and
playing multimedia content with
a PC system. Still, while
a niche operating system
might turn a profit, the
chicken-and-egg problem
(hereinafter referred to
as the "applications barrier to
entry") would make it prohibitively
expensive for a
new Intel-compatible operating
system to attract enough
developers and consumers
to become a viable
alternative to a dominant
incumbent in less than a few
years.
32. To the extent that developers
begin writing
attractive applications
that rely solely on servers or
middleware instead of PC
operating systems, the
applications barrier to
entry could erode. As the Court
finds above, however, it
remains to be seen whether
server- or middleware-based
development will
flourish at all. Even if
such development were already
flourishing, it would be
several years before the
applications barrier eroded
enough to clear the way for
the relatively rapid emergence
of a viable alternative to
incumbent Intel-compatible
PC operating systems. It is
highly unlikely, then, that
a firm not already marketing
an Intel-compatible PC operating
system could begin
marketing one that would,
in less than a few years,
present a significant percentage
of consumers with a
viable alternative to incumbents.
III. MICROSOFT'S POWER IN
THE RELEVANT
MARKET
33. Microsoft enjoys so
much power in the market for
Intel-compatible PC operating
systems that if it wished
to exercise this power
solely in terms of price, it could
charge a price for Windows
substantially above that
which could be charged
in a competitive market.
Moreover, it could do so
for a significant period of
time without losing an unacceptable
amount of business
to competitors. In other
words, Microsoft enjoys
monopoly power in the relevant
market.
34. Viewed together, three
main facts indicate that
Microsoft enjoys monopoly
power. First, Microsoft's
share of the market for
Intel-compatible PC operating
systems is extremely
large and stable. Second,
Microsoft's dominant
market share is protected by a
high barrier to entry.
Third, and largely as a result of
that barrier, Microsoft's
customers lack a commercially
viable alternative to
Windows.
A. Market Share
35. Microsoft possesses a
dominant, persistent, and
increasing share of the
world-wide market for
Intel-compatible PC operating
systems. Every year for
the last decade, Microsoft's
share of the market for
Intel-compatible PC operating
systems has stood above
ninety percent. For the
last couple of years the figure
has been at least ninety-five
percent, and analysts
project that the share will
climb even higher over the
next few years. Even if
Apple's Mac OS were included
in the relevant market,
Microsoft's share would still
stand well above eighty
percent.
B. The Applications Barrier to Entry
1. Description of the Applications Barrier to Entry
36. Microsoft's dominant
market share is protected by
the same barrier that helps
define the market for
Intel-compatible PC operating
systems. As explained
above, the applications
barrier would prevent an
aspiring entrant into the
relevant market from drawing a
significant number of customers
away from a dominant
incumbent even if the incumbent
priced its products
substantially above competitive
levels for a significant
period of time. Because
Microsoft's market share is so
dominant, the barrier has
a similar effect within the
market: It prevents Intel-compatible
PC operating
systems other than Windows
from attracting significant
consumer demand, and it
would continue to do so even
if Microsoft held its prices
substantially above the
competitive level.
37. Consumer interest in
a PC operating system derives
primarily from the ability
of that system to run
applications. The consumer
wants an operating system
that runs not only types
of applications that he knows he
will want to use, but also
those types in which he might
develop an interest later.
Also, the consumer knows
that if he chooses an operating
system with enough
demand to support multiple
applications in each
product category, he will
be less likely to find himself
straitened later by having
to use an application whose
features disappoint him.
Finally, the average user
knows that, generally speaking,
applications improve
through successive versions.
He thus wants an
operating system for which
successive generations of
his favorite applications
will be released -- promptly at
that. The fact that a vastly
larger number of applications
are written for Windows
than for other PC operating
systems attracts consumers
to Windows, because it
reassures them that their
interests will be met as long as
they use Microsoft's product.
38. Software development
is characterized by
substantial economies
of scale. The fixed costs of
producing software, including
applications, is very
high. By contrast, marginal
costs are very low.
Moreover, the costs of
developing software are "sunk"
-- once expended to develop
software, resources so
devoted cannot be used
for another purpose. The result
of economies of scale and
sunk costs is that application
developers seek to sell
as many copies of their
applications as possible.
An application that is written
for one PC operating system
will operate on another PC
operating system only if
it is ported to that system, and
porting applications is
both time-consuming and
expensive. Therefore, application
developers tend to
write first to the operating
system with the most users --
Windows. Developers might
then port their
applications to other operating
systems, but only to the
extent that the marginal
added sales justify the cost of
porting. In order to recover
that cost, ISVs that do go to
the effort of porting frequently
set the price of ported
applications considerably
higher than that of the
original versions written
for Windows.
39. Consumer demand for
Windows enjoys positive
network effects. A positive
network effect is a
phenomenon by which the
attractiveness of a product
increases with the number
of people using it. The fact
that there is a multitude
of people using Windows
makes the product more
attractive to consumers. The
large installed base attracts
corporate customers who
want to use an operating
system that new employees are
already likely to know how
to use, and it attracts
academic consumers who want
to use software that
will allow them to share
files easily with colleagues at
other institutions. The
main reason that demand for
Windows experiences positive
network effects,
however, is that the size
of Windows' installed base
impels ISVs to write applications
first and foremost to
Windows, thereby ensuring
a large body of
applications from which
consumers can choose. The
large body of applications
thus reinforces demand for
Windows, augmenting Microsoft's
dominant position
and thereby perpetuating
ISV incentives to write
applications principally
for Windows. This
self-reinforcing cycle
is often referred to as a "positive
feedback loop."
40. What for Microsoft
is a positive feedback loop is
for would-be competitors
a vicious cycle. For just as
Microsoft's large market
share creates incentives for
ISVs to develop applications
first and foremost for
Windows, the small or non-existent
market share of an
aspiring competitor makes
it prohibitively expensive
for the aspirant to develop
its PC operating system into
an acceptable substitute
for Windows. To provide a
viable substitute for Windows,
another PC operating
system would need a large
and varied enough base of
compatible applications
to reassure consumers that
their interests in variety,
choice, and currency would be
met to more-or-less the
same extent as if they chose
Windows. Even if the contender
attracted several
thousand compatible applications,
it would still look
like a gamble from the consumer's
perspective next to
Windows, which supports
over 70,000 applications.
The amount it would cost
an operating system vendor to
create that many applications
is prohibitively large.
Therefore, in order to ensure
the availability of a set of
applications comparable
to that available for
Windows, a potential rival
would need to induce a very
large number of ISVs to
write to its operating system.
41. In deciding whether to
develop an application for a
new operating system, an
ISV's first consideration is
the number of users it expects
the operating system to
attract. Out of this
focus arises a collective-action
problem: Each ISV realizes
that the new operating
system could attract
a significant number of users if
enough ISVs developed
applications for it; but few
ISVs want to sink resources
into developing for the
system until it becomes
established. Since everyone is
waiting for everyone
else to bear the risk of early
adoption, the new operating
system has difficulty
attracting enough applications
to generate a positive
feedback loop. The
vendor of a new operating system
cannot effectively solve
this problem by paying the
necessary number of ISVs
to write for its operating
system, because the cost
of doing so would dwarf the
expected return.
42. Counteracting the
collective-action phenomenon is
another known as the
"first-mover incentive." For an
ISV interested in attracting
users, there may be an
advantage to offering
the first and, for a while, only
application in its category
that runs on a new PC
operating system. The
user base of the new system may
be small, but every user
of that system who wants such
an application will be compelled
to use the ISV's
offering. Moreover, if demand
for the new operating
system suddenly explodes,
the first mover will reap
large sales before any competitors
arrive. An ISV thus
might be drawn to a new
PC operating system as a
"protected harbor." Once
first-movers stake claims to
the major categories of
applications, however, there is
a strong chance that the
new operating system could
stall; it would not support
the most familiar
applications, nor the variety
and number of
applications, that attract
large numbers of consumers,
and there would no longer
exist a first-mover incentive
to attract additional ISVs
to the important application
categories. Although the
upstart operating system might
find itself with enough
applications support to hold a
fraction of the market,
the collective-action
phenomenon would still prevent
the system from
gaining the kind of positive
feedback momentum that
can turn a fringe entrant
into a rival that would put
competitive pressure on
Windows.
43. The cost to a would-be
entrant of inducing ISVs to
write applications for its
operating system exceeds the
cost that Microsoft itself
has faced in inducing ISVs to
write applications for its
operating system products, for
Microsoft never confronted
a highly penetrated market
dominated by a single competitor.
Of course, the fact
that it is extremely difficult
for an efficient would-be
rival to accumulate enough
applications support to
compete with Windows does
not mean that sustaining
its own applications support
is effortless for Microsoft.
In fact, if Microsoft stopped
investing the hundreds of
millions of dollars it spends
each year inducing ISVs to
write applications for Windows,
it might become
easier than it currently
is for a competitor to develop its
own positive feedback loop.
But given that Windows
today enjoys overwhelmingly
more applications
support than any other PC
operating system, it would
still take that competitor
years to develop the necessary
momentum. Plus, while Microsoft
may spend more on
platform "evangelization,"
even in relative terms, than
any other PC operating-system
vendor, it is not difficult
to understand why it is
worthwhile for the principal
beneficiary of the applications
barrier to devote more
resources to augmenting
it than aspiring rivals are
willing to expend in speculative
efforts to erode it.
44. Microsoft continually
releases "new and improved"
versions of its PC operating
system. Each time it does,
Microsoft must convince
ISVs to write applications that
take advantage of new APIs,
so that existing Windows
users will have incentive
to buy an upgrade. Since ISVs
are usually still earning
substantial revenue from
applications written for
the last version of Windows,
Microsoft must convince
them to write for the new
version. Even if ISVs are
slow to take advantage of the
new APIs, though, no applications
barrier stands in the
way of consumers adopting
the new system, for
Microsoft ensures that successive
versions of Windows
retain the ability to run
applications developed for
earlier versions. In fact,
since ISVs know that
consumers do not feel locked
into their old versions of
Windows and that new versions
have historically
attracted substantial consumer
demand, ISVs will
generally write to new APIs
as long as the interfaces
enable attractive, innovative
features. Microsoft
supplements developers'
incentives by extending
various `seals of approval'
-- visible to consumers,
investors, and industry
analysts -- to those ISVs that
promptly develop new versions
of their applications
adapted to the newest version
of Windows. In addition,
Microsoft works closely
with ISVs to help them adapt
their applications to the
newest version of the operating
system -- a process that
is in any event far easier than
porting an application from
one vendor's PC operating
system to another's. In
sum, despite the substantial
resources Microsoft expends
inducing ISVs to develop
applications for new versions
of Windows, the
company does not face any
obstacles nearly as
imposing as the barrier
to entry that vendors and
would-be vendors of other
PC operating systems must
overcome.
........................................ Paragraphs 49 to 407 available here ........................................
VII. THE EFFECT ON CONSUMERS OF
MICROSOFT'S EFFORTS TO PROTECT
THE
APPLICATIONS BARRIER TO
ENTRY
408. The debut of Internet
Explorer and its rapid
improvement gave Netscape
an incentive to improve
Navigator's quality at
a competitive rate. The inclusion
of Internet Explorer
with Windows at no separate
charge increased general
familiarity with the Internet
and reduced the cost
to the public of gaining access to
it, at least in part
because it compelled Netscape to
stop charging for Navigator.
These actions thus
contributed to improving
the quality of Web browsing
software, lowering its
cost, and increasing its
availability, thereby
benefitting consumers.
409. To the detriment
of consumers, however,
Microsoft has done much
more than develop innovative
browsing software of
commendable quality and offer it
bundled with Windows
at no additional charge. As has
been shown, Microsoft
also engaged in a concerted
series of actions designed
to protect the applications
barrier to entry, and
hence its monopoly power, from a
variety of middleware
threats, including Netscape's
Web browser and Sun's
implementation of Java. Many
of these actions have
harmed consumers in ways that
are immediate and easily
discernible. They have also
caused less direct, but
nevertheless serious and
far-reaching, consumer
harm by distorting competition.
410. By refusing to offer
those OEMs who requested it
a version of Windows
without Web browsing software,
and by preventing OEMs
from removing Internet
Explorer -- or even the
most obvious means of invoking
it -- prior to shipment,
Microsoft forced OEMs to
ignore consumer demand
for a browserless version of
Windows. The same actions
forced OEMs either to
ignore consumer preferences
for Navigator or to give
them a Hobson's choice
of both browser products at the
cost of increased confusion,
degraded system
performance, and restricted
memory. By ensuring that
Internet Explorer would
launch in certain circumstances
in Windows 98 even if
Navigator were set as the
default, and even if
the consumer had removed all
conspicuous means of
invoking Internet Explorer,
Microsoft created confusion
and frustration for
consumers, and increased
technical support costs for
business customers. Those
Windows purchasers who
did not want browsing software
-- businesses, or
parents and teachers, for
example, concerned with the
potential for irresponsible
Web browsing on PC
systems -- not only had
to undertake the effort necessary
to remove the visible means
of invoking Internet
Explorer and then contend
with the fact that Internet
Explorer would nevertheless
launch in certain cases;
they also had to (assuming
they needed new,
non-browsing features not
available in earlier versions
of Windows) content themselves
with a PC system that
ran slower and provided
less available memory than if
the newest version of Windows
came without browsing
software. By constraining
the freedom of OEMs to
implement certain software
programs in the Windows
boot sequence, Microsoft
foreclosed an opportunity for
OEMs to make Windows PC
systems less confusing
and more user-friendly,
as consumers desired. By
taking the actions listed
above, and by enticing firms
into exclusivity arrangements
with valuable
inducements that only Microsoft
could offer and that the
firms reasonably believed
they could not do without,
Microsoft forced those consumers
who otherwise
would have elected Navigator
as their browser to
either pay a substantial
price (in the forms of
downloading, installation,
confusion, degraded system
performance, and diminished
memory capacity) or
content themselves with
Internet Explorer. Finally, by
pressuring Intel to drop
the development of
platform-level NSP software,
and otherwise to cut back
on its software development
efforts, Microsoft
deprived consumers of software
innovation that they
very well may have found
valuable, had the innovation
been allowed to reach the
marketplace. None of these
actions had pro-competitive
justifications.
411. Many of the tactics
that Microsoft has employed
have also harmed consumers
indirectly by unjustifiably
distorting competition.
The actions that Microsoft took
against Navigator hobbled
a form of innovation that had
shown the potential to
depress the applications barrier
to entry sufficiently
to enable other firms to compete
effectively against Microsoft
in the market for
Intel-compatible PC operating
systems. That
competition would have conduced
to consumer choice
and nurtured innovation.
The campaign against
Navigator also retarded
widespread acceptance of
Sun's Java implementation.
This campaign, together
with actions that Microsoft
took with the sole purpose
of making it difficult for
developers to write Java
applications with technologies
that would allow them
to be ported between Windows
and other platforms,
impeded another form of
innovation that bore the
potential to diminish the
applications barrier to entry.
There is insufficient evidence
to find that, absent
Microsoft's actions, Navigator
and Java already would
have ignited genuine competition
in the market for
Intel-compatible PC operating
systems. It is clear,
however, that Microsoft
has retarded, and perhaps
altogether extinguished,
the process by which these two
middleware technologies
could have facilitated the
introduction of competition
into an important market.
412. Most harmful of all
is the message that Microsoft's
actions have conveyed
to every enterprise with the
potential to innovate
in the computer industry. Through
its conduct toward Netscape,
IBM, Compaq, Intel, and
others, Microsoft has demonstrated
that it will use its
prodigious market power
and immense profits to harm
any firm that insists on
pursuing initiatives that could
intensify competition against
one of Microsoft's core
products. Microsoft's past
success in hurting such
companies and stifling innovation
deters investment in
technologies and businesses
that exhibit the potential to
threaten Microsoft. The
ultimate result is that some
innovations that would
truly benefit consumers never
occur for the sole reason
that they do not coincide with
Microsoft's self-interest.
___________/s/_______________
Thomas Penfield Jackson
U.S. District Judge
Date: November 5, 1999