US v. Microsoft: Proposed Findings of Facts (2023)

I.background

1. On May 18, 1998, plaintiffs from the United States and twenty states and the District of Columbia filed complaintsActionsagainst the defendant Microsoft Corporation for alleged violations of the Sherman Act, 15 U.S.C. §§ 1 & 2, as well as the antitrust and consumer protection laws of the respective complaining states. Actions were consolidated and accelerated discovery ensued. The trial began on October 18, 1998 and ended on June 26, 1999.

2. Defendant Microsoft Corporation ("Microsoft") is a corporation organized under the laws of Washington State and has its principal place of business in Redmond, Washington.

1. Answer ¶ 41.

3. Microsoft's primary business is worldwide licensing of computer software. Microsoft licenses computer software in the United States and elsewhere and supplies operating systems to computer manufacturers and others across state and international borders, and its operations have had a significant impact on interstate commerce.

1. Answer ¶ 5.

4. Microsoft licenses, among other things, operating systems and application software for personal computers. The personal computer industry, which has experienced tremendous growth over the past decade, is an important, resilient sector of the US economy. Microsoft software dominates critical sectors of this industry.

1. See belowPart II (Microsoft has monopoly power over operating systems).
2. Tevanian Dir. ¶¶ 6, 14, 22, 35 (Microsoft also dominates in a number of applications, including Office productivity suites).

5. Apersonal computer("PC") means a computer designed for use by one person at a time.

1. Microsoft Press Computer Dictionary, at 361 (3rd ed. 1997) (GX 1050).

5.1 PCs (which include both desktop and laptop models) can be distinguished from more powerful, more expensive computers known asServerthat are designed to provide services and functionality to multiple users, either on the local network or over the Internet.

1. Warren-Boulton Dir. § 20.
2. Microsoft Press Computer Dictionary, at 430 (3rd ed. 1997) (GX 1050).

5.2 A typical PC system consists of a number of components including a microprocessor, dynamic memory, a hard disk, a keyboard, a monitor and an operating system.

1. Warren-Boulton Dir. § 20.

6. PCs are mainly built by companies known asoriginal equipment manufacturer("OEMs"). OEMs typically buy from various third parties and pre-install various hardware and software components for their systems, including the operating system and application software.

1. Warren-Boulton Dir. § 23.

7. OEMs develop and sell their PCs to consumers in a competitive market, and design their PCs and their hardware and software features to meet consumer demand.

1. See belowTel II.A; § 15.1.1.
2. Warren-Boulton Dir. § 24.

8. aoperating systemis the "central nervous system" of the PC.

1. Barksdale Dir. § 69.

8.1. An operating system performs two basic functions. First, the operating system allows the various components of the PC to communicate and function with each other; It provides "the software that controls the allocation and use of hardware resources such as memory, CPU time, disk space, and peripherals".

1. Microsoft Press Computer Dictionary, at 341 (3rd ed. 1997).
2. color you ¶ 11 (The operating system "controls the execution of programs on computer systems and can provide low-level services such as resource allocation, scheduling, and input-output control in a form sufficiently simple and general that these services are generally useful to software developers ").

8.2. Second, an operating system provides a "platform" by exposing itApplication programming interfaces("APIs"), which applications use to "call" the underlying software routines of the operating system to perform various functions, such as B. displaying a character on a monitor.

1. Schmalensee Dir. ¶¶ 93-94.

9. aapplicationis a software program "used to perform certain user-oriented tasks".

1. color yourself § 11.

9.1. Applications typically run on top of the operating system and utilize the services provided by the operating system's "platform".

1. Warren-Boulton Dir. § 22

9.2. The termplatformused in the software industry to describe software that "provides functions or services that can be used by software applications".

1. Schmalensee Dir. ¶ 93.

10. Microsoft manufactures a number of PC operating systems, including MS-DOS and subsequent versions of its Windows operating system, the latest version of which is Windows 98. Microsoft has dominated the PC operating systems market since at least the mid-1990s. As will be explained, Microsoft's market share has remained well over 90% over this period.

1. See belowPart II.B.2; § 21.

11. Applications are produced by numerous companies, including companies like Microsoft, which also produce operating systems and others known asIndependent Software Vendors("ISV's"). Microsoft's application software dominates in several key categories, most notably in office productivity suites.

1. See belowPart V.F.1.b.(1).; § 287.2.1.

12. All components of a PC system - the microprocessor and other hardware, the operating system and the application software - must be compatible with each other. For example, software, including the operating system and applications, must be designed to be compatible with the PC's microprocessor, and application software must be compatible with the operating system.

12.1. There are different types of PC systems.

12.1.1. OnIntel-compatiblePC is a personal computer designed to run on Intel's x86/Pentium family of microprocessors or compatible microprocessors manufactured by Intel or other companies. Microsoft's Windows operating system and various types of UNIX operating systems are examples of operating systems that run on Intel-compatible PCs.

1. fisherman you Section 62.

12.1.2. There are other types of PCs that use microprocessors that are not Intel compatible, such as B. the computer system Apple Macintosh. Operating systems designed to run on Intel-compatible PCs, known asIntel-compatible PC operating systems, will not work on an incompatible PC such as the Macintosh; and operating systems designed for an incompatible PC, such as the Macintosh, will not work on an Intel-compatible PC.

1. Gosling Dir. § 7.

12.2. Application programs are typically written to run on a specific operating system and cannot be run on other operating systems unless the developer takes the time and expense to "port" the program to the other operating system. For example, the version of Microsoft's popular Office productivity suite designed to run on Microsoft's Windows operating system cannot run on the Apple Macintosh or even other Intel-compatible operating systems.

1. See belowII.B.3.b.(1); § 26.1.2.

13. One of the most important applications today is aInternet Web browser("Browser").

13.1. A browser is a "client application that enables a user to view HTML documents on the World Wide Web, on another network, or on the user's computer, follow the hyperlinks between them, and transfer files." A browser "enables the user to examine, view, scan, and navigate information residing on the 'Web' over the Internet."

1. Microsoft Press Computer Dictionary, at 505 (3rd ed. 1997) (GX 1050).
2. color yourself § 11.

13.1.1. ThatInternetis a global network connecting many millions of PCs and a smaller number of servers. Started in the early 1960s, the Internet's popularity exploded with the advent of theWorld Wide Web("Web") in the mid-1990s.

1. Maritz you. €50.

13.1.2. "The Internet is a global network of computers built by piecing together many local area networks using very different media of communication such as phone lines, dedicated data cables, and wireless connections." The Internet connects PCs through servers running specialized operating systems and applications designed to service a networked environment.

1. felt you § 11.

13.1.3. Simply put, servers host and provide access to the content of the Internet. In the case of the web, this content consists primarily ofWeb pagesthat are created byInternet Content Providers("ICPs"). There are millions of websites residing on thousands of servers that make up the Internet.

1. See belowTeil V.E.1.a; § 255.

13.1.4. Through these thousands of servers, websites can be accessed from millions of PCs because the Internet uses a set of well-established standards. For example, web pages are usually writtenHypertext markup language(HTML) and are transmitted between servers and PCs using a common protocol known asHypertext Transfer Protocol(HTTP).

1. Felt you. ¶ 13. (The Web is "characterized by a set of standard data formats, including HyperText Markup Language ('HTML'), and a set of standard communication protocols, such as HyperText Transfer Protocol ('HTTP'), which together enable computers to Share multimedia documents that may contain links to other such documents.").

13.1.5. Consumers typically access the Internet through the services of a providerInternet access providerwhat a can beinternet provider("ISP"), such as Earthlink or AT&T Worldnet, or aOnlineservice("OLS"), such as America Online or Prodigy. Internet access providers are commercial companies that connect users to the network of servers that make up the Internet.

1. See belowVD1; § 213.

13.2. Although graphical web browsers have existed since 1993, the first widely used commercial graphical browser was developed and marketed by Netscape Communications in late 1994. Microsoft introduced its Internet Explorer browser in 1995.

1. See belowPart III.B.1; § 53.1.1; Part V.B.2.c; Section 126.

II.Microsoft ownsMonopoly power over operating systems

14. Microsoft has monopoly power over operating systems for Intel-compatible personal computers.

14.1. Microsoft's monopoly over Intel-compatible personal computers is illustrated by the lack of a commercially viable alternative to Windows for its customers and certain behaviors by Microsoft that only make sense where there is a monopoly to protect.See belowTel II.A; ¶¶ 15-16.

14.2. A traditional structural analysis, showing that Microsoft holds a dominant market share protected by immense barriers to entry, confirms Microsoft's monopoly position.See belowPart II.B; ¶¶ 17-32.

14.3. Microsoft's monopoly is also reflected in its ability to control price.See belowPart II.C; ¶¶ 33-38.

14.4. Dean Schmalensee's analysis that Microsoft lacks monopoly power contradicts the evidence, is inconsistent with his prior statements and writings, and is otherwise unreliable.See belowPart II.D; ¶¶ 39-50.

A. Microsoft's monopoly is demonstrated by direct evidence of its existence and operation

15. Microsoft's monopoly on operating systems is directly evidenced by the "continued lack of realistic commercial alternatives" to Microsoft's operating system product.

1. Fisher, 6/1/99, a 11:17-18.

15.1. Microsoft's main customers, the computer manufacturers (OEMs), lack commercially viable alternatives to Windows.

15.1.1. OEMs are the most important direct customers of operating systems. As competition among OEMs is intense, they respond to consumer demand. OEMs are thus not only important customers in their own right, but also act as proxies to identify the commercial alternatives that are reasonably available to consumers.

1. dr Warren-Boulton stated that "the vast majority of operating systems installed on personal computers are installed on new machines by OEMs". Warren-Boulton Dir. § 23;I would.in ¶ 23 n.7 (noting that in 1997 87.6% of all copies of Windows 95 were installed by OEMs).
2. Professor Fisher stated: “OEMs are, in a way, the consumers' representatives for specific purposes. They are in competition with each other. They win when they deliver what end users actually want. They wouldn't care about the restrictions placed on them if they thought it didn't matter in dealing with consumers." Fisher, 2/6/99 at 22:1-6.
3. Dean Schmalensee acknowledged that "OEMs are responding to consumer demand." Schmalensee, January 25, 1999, at 3:16 p.m. (sealed session).
4. See in additionrose you ¶ 17 ("If there were sufficient customer demand for another personal computer operating system, Compaq would consider licensing that operating system."); By Holle Dep., 1/13/99, at 299:15 - 300:1 ("If a viable alternative to Windows arose, Gateway would "evaluate" it because Gateway likes to "ensure that" its "customers have a . . . Choosing products to become popular in the market"); Ransom (played 12/16/1998), 71:20 - 72:4 ("If there was a product with a competitive advantage or a price advantage, frankly, would we're considering it. But it wasn't introduced to us.") .

15.1.2. OEMs consistently testify that they lack a commercially viable alternative to Windows:

1. The testimony of Garry Norris, former director of strategy and software at IBM Personal Computer Company, vividly illustrates the lack of commercially viable alternatives to Windows. Norris testified that "you couldn't be in the PC business without Windows 95." Norris 7/6/99 at 66:18-20. In fact, Norris explained, in the summer of 1995, IBM concluded that if it didn't get a license for Windows 95, it would lose "...anywhere between 30 and 90 percent" of its sales volume, and "the IBM PC company would it will be out of business" in "three to twelve months". Norris, 7/6/99 at 65:16-67:18.
2. The testimony of Microsoft's OEM witness, John Rose of Compaq, highlights OEMs' dependence on Windows. Compaq preinstalls Microsoft operating systems on over 90% of its PCs, including 100% of its popular Presario line, Rose 02/17/1999 12:25-15:3; rose you ¶ 17 (Since 1993, Compaq "has not consistently loaded any alternatives to Windows onto PCs it markets to consumers.") because Compaq has no commercially viable alternative to Windows. Rose, 02/17/1999 at 20:16-20.
3. Gateway's Penny Nash testified that it would be "suicide" for Gateway to stop licensing Microsoft operating systems. fisherman you § 63 (cited Nash Dep. 11/18/97, pages 5-6);see in additionFrom Holle Dep., 1/13/99, at 298:2-23, GX 357 (sealed); fisherman you § 63 (cited by Brown Dep., 3/5/98, pages 10-11).
4. Other OEMs made similar statements: Mal Ransom from Packard Bell, a leading OEM, stated that Packard Bell preinstalls Windows on 100% of its PCs and has done so for several years. Ransom (played on 12/16/98), at 68:14 - 69:23. Packard Bell loads Windows because it's "the only viable choice." Ransom (played 12/16/98), at 69:5. Frank Santos testified that Hewlett-Packard didn't consider any other operating system for its consumer PCs "because there aren't any." fisherman you § 63 (cited Santos Dep. 4/13/98, pages 7-8).

15.1.3. All three economists in this case agreed that there is no commercially viable alternative to Windows that a major OEM could switch to in response to a significant price increase or equivalent from Microsoft.

1. Professor Fisher testified that Microsoft's power is evidenced by evidence that "Microsoft's customers don't believe they have serious commercial alternatives to Windows." Fisher 6/1/99 at 11:9-19;see in additionfisherman you Section 63.
2. Dean Schmalensee acknowledged that there is no viable replacement for Windows that a major OEM could switch to and that Microsoft could raise the price of Windows in the short term. Schmalensee 1/20/99 at 33:3-8;see in addition1/13/99, at 68:17 - 69:2.
3. dr Warren-Boulton testified that OEMs view Windows as "commercially necessary" and "if faced with a 10% increase in their Windows license, they would not switch to operating system products for other hardware platforms." Warren-Boulton Dir. ¶ 39 (summary of OEM testimonials); Warren-Boulton 11/23/98, 70:9-12 (testifies that it is "commercially necessary to be able to offer the Microsoft operating system ... to end users").

15.1.4. Microsoft knows that OEMs have no choice but to load Windows.

15.1.4.1. Microsoft told OEMs they lacked alternatives to Windows and that Microsoft was actually "the only game in town."

1. IBM's Norris testified that Microsoft executives repeatedly tried to take advantage of the fact that IBM had no "commercially viable alternative" to Windows (Norris 06/07/99 at 66:18-20) and feared that access to Windows under Losing pressure led IBM to drop products that competed with Microsoft.See belowPart V.C.2.b.(3); ¶¶ 209-212. In fact, Norris testified, the Microsoft executive responsible for its relationship with the IBM PC company, told IBM bluntly during the negotiations, "'Where else are you going to go? This is the only game in town.'” Norris, 6/7/99 p.m., at 66:21 – 67:6.

15.1.4.2. OEMs told Microsoft they lacked a viable alternative to Windows.

1. Hewlett Packard's John Romano wrote to Microsoft when it imposed costly screen restrictions on Hewlett Packard: "If we had another supplier, I guarantee you would not be our preferred supplier." GX309.
2. Gateway prompted Microsoft-blackened-GX 357 (sealed).

15.1.4.3. Other operating system vendors know they don't offer a viable alternative to Windows.

1. IBM's John Soyring testified, "Because of the application and device support for Windows, I believe PC vendors have no commercially viable choice but to license Windows and offer it on the vast majority of the PCs they ship." Soyring Dir. § 11.
2. Apple Computer's Avadis Tevanian stated, "For the foreseeable future, Microsoft will hold over 90 percent market share of the desktop operating system market, a dominance that will allow it to continue to effectively control both price and technology." Tevanian Dir. § 14.
3. The CEO of Red Hat Linux also insists that Red Hat is not a serious competitor to Microsoft. In a Washington Post article, he said, "'It just shows you how desperately Microsoft is looking for a competitor that they are holding up a box of software made by 100 people in the hills of North Carolina.'" He also said, " 'We are absolutely not a viable competitor at this point. We have every intention of becoming one. But how long will it take? Realistically it will be twenty years.'" GX 1568.

15.1.5. Microsoft set Windows licensing fees recognizing that OEMs had no viable alternative to Windows.

1. Joachim Kempin, Microsoft's vice president of OEM sales, testified that the prices set by other operating system vendors played no role in setting Windows98 licensing fees. Kempin, 02/25/2019, at 97:24 - 98:23. On the contrary, Microsoft determined the license fee for Windows 98 by "comparing it to Windows 95".ID.at 98:6 (quoting from Kempin's testimony, 21:20 - 22:6);see in additionKempin 1999-02-25, 98:15-23 (citing Kempin's testimony, 22:10-22:6) (Kempin "did not consider 'competition in general' either").
2. Kempin said he didn't consider the prices of other operating system vendors because "when it comes to value propositions, Windows 95 or 98 just doesn't measure up to anything else. That said, I believe competitors are basically selling inferior-type products." Competitors' products are "inferior," explained Kempin, because "the number of applications, peripherals, and support on this platform is fundamentally so large that that the benefits of buying on this platform are enormous.” Kempin 25/02/1999, 98:24 – 99:5 (quoting from Kempin's testimony, 22:19-24).
3. Reflecting on "OEM pricing concerns," Kempin wrote that while it is conceivable that "[our] high prices could persuade a single OEM ... or a coalition to fund a competing effort," he considered it "dubious." “ stop. He concluded, “Can they convince customers to switch computing platforms is the real question. [sic]. GX365.

15.1.6. OEMs don't believe that alternatives to Windows are likely to emerge in the next few years, preventing Microsoft from raising the price or reducing the quality today.

1. Garry Norris testified that without a Windows 95 license, "the IBM PC company would be out of business in "three to twelve months". Norris 7/6/99 at 65:16 - 67:18.
2. Professor Fisher testified that there was no reason to believe "that OEMs would replace Microsoft's Windows operating system with other operating systems in favor of whatever is now on the horizon"; that is, in “the next few years.” Fisher, 6/1/99, at 69:23 - 70:1.

15.2. Both OEMs and application developers (ISVs) recognize their dependence on Microsoft and fear that Microsoft will use its monopoly position to harm them if they favor Microsoft's competitors.

1. When Microsoft released a Java development kit that reflected Microsoft's "move away from pure Java," Paul White of Symantec, an ISV, wrote that "it's better to say nothing than risk MS exploding." GX2078.
2. AOL's Barry Schuler testified that since its applications must run on Windows, "there is an absolute dependence on the future direction of that operating system". DX2810.
3. William Harris stated, “Intuit's dependency on the Windows operating system creates an additional dependency on the operating system supplier, Microsoft. We rely on Microsoft for the information, specifications, training, development support, and development tools necessary to develop our products effectively and in a timely manner." Harris dir. § 28.
4. John Romano of Hewlett Packard testified to that-blackened-DX 2582A (sealed).
5. A Compaq presentation entitled "Microsoft Meeting Preparation -- Portable and Software Marketing PC Division" dated January 13, 1993 states:-blackened-The presentation continued, "Verdict: How would they get their revenge?" and lists the possibilities as follows: "Price advantage -- Revenue from updates -- Access to early SDKs -- Field activities (Microsoft has ~900 field workers) -- Support and Training -- Inclusion in advertising -- Tone to Compaq in the press and with customers -- Selecting and highlighting other OEMs as leaders -- Making integration relationships even tighter than they are today -- Access to source code, ownership of modifications -- Proper information and Microsoft's plans -- customers." GX 433 (sealed).

16. Microsoft has repeatedly taken actions that make sense only because it has a monopoly power to protect.

1. Fisher, 01.06.1999, a 12:14-17.

16.1. Microsoft's costly efforts to gain a share of browser usage can only be explained as an effort to protect Microsoft's position in the operating system space, thus demonstrating significant and enduring market power.

1. As detailed below, Microsoft has embarked on a very costly tactic to gain a significant share of the Internet browser market.See belowTeil V.G.
2. This behavior is evidence of monopoly power, because as will be explained (see belowPart V.G.), Microsoft could not have expected to recoup its hundreds of millions of dollars in browser-related costs unless it thwarted threats to its operating system position, thereby increasing or prolonging its operating system monopoly profits.

16.2. Microsoft's monopoly is also reflected in its ability, over the past several years, to force other companies to cooperate in Microsoft's efforts to eliminate threats to its operating system dominance.

16.2.1. This behavior includes, but is not limited to:

1. Forcing OEMs to accept Microsoft's Internet Explorer as a condition of licensing Microsoft's Windows operating system.See belowPart V.B.
2. Forcing OEMs to agree to costly limitations on their ability to customize their PC systems; OEMs have agreed to these restrictions, according to one executive, because they have no "choice of another supplier." GX309.See belowPart V.C.1.
3. Threats of retaliation against OEMs that have favored products that threaten Microsoft's monopoly on operating systems.See belowPart V.C.2.
4. Threats of retaliation against Intel if Intel develops platform-level software or favors Netscape or Sun in various ways.See belowPart VI.

16.2.2. This behavior is part of a predatory behavior that doesn't make sense unless Microsoft expects it to lead to a monopoly reclamation in the operating system market. All of these actions reduced the value of Windows to end users. Microsoft would not rationally have reduced the value of Windows unless it believed that doing so would create or increase monopoly power and thereby allow it to make greater monopoly profits.

1. Professor Fisher testified: “Microsoft has clearly taken action, in my opinion, that only makes sense if they think they have a monopoly to protect. Those, of course, are the actions that are largely the subject of this case.” Fisher 6/1/1999 at 12:14-17.
2. Dean Schmalensee acknowledged that if a company can enforce a bond, "it implies that the company has some power over price." Schmalensee, 01/19/99, 40:12-22. Dean Schmalensee also previously wrote that "evidence that competitors have conspired to fix prices or share markets is taken as very good evidence that these competitors have market power" (GX 1514), and that such evidence "perhaps" relates to "monopoly power “ could point out. " Schmalensee, 1/14/99, at 46:14 - 47:6.
3. dr Warren-Boulton testified that "to the extent that evidence...is available to show that Microsoft...has used its position in the operating system market to foreclose competitors from either that market or from markets that would allow entry into that market by a company, then that is direct evidence of the ability to exclude” and “that alone is direct evidence of the existence of monopoly power.” Warren-Boulton, 12/1/98, at 32:3-20.

The monopoly position of B.Microsoft is also proven by a structural analysis

17. Microsoft's monopoly is confirmed by a conventional structural analysis, which shows that Microsoft has a dominant share of a well-defined market protected by immense barriers to entry.

1. Professor Fisher stated that "Microsoft's high market share is an indication that it has monopoly power. Analysis of barriers to entry confirms that monopoly power exists." fisherman you Section 65.
2. dr Warren-Boulton also testified that Microsoft "possesses monopoly power" because it "has had a market share in excess of 90% for several years and is likely to retain it for several years to come" and that share "is protected by significant barriers to entry." Warren-Boulton Dir § 7.

17.1. The standard method for determining monopoly power is to (1) determine whether a firm has a very large share of a well-defined market, and then (2) determine whether significant barriers to entry protect that share by impeding the ability of competitors to enter the market or expand.

1. Professor Fisher stated that "the usual way of dealing with an antitrust case is to define a market and look at market shares" and then determine whether there are significant barriers to entry. Fisher 6/1/99 at 12:2-13;see in additionFisher, 6/1/1999, 6:1-3 (explains that this is the "standard way" of determining monopoly power); fisherman you ¶¶ 32-39 (testifying that "monopoly power is traditionally addressed through the definition of the 'relevant market' and the assessment of shares in market share"); Warren-Boulton Dir. ¶¶ 18, 42-44.
2. Dean Schmalensee conceded, "'The traditional and most common approach in a case where you can define a relevant market for antitrust purposes'" is to "first look at the shares of that market and then, if the shares are large, move on to check entry conditions.'" Schmalensee, 13.01.1999, 24:9-25 (quoted GX 1526 (testimony from Schmalensee inBristol)).

17.2. A large proportion of a well-defined market, protected by significant barriers to entry, justifies the inference of monopoly power.

1. Professor Fisher stated that "a large share of a well-defined market" is indicative of the ability to exercise significant market power and that where "significant barriers to entry exist, monopoly power may exist". fisherman you ¶¶ 32-36, 39.
2. Dean Schmalensee acknowledged that if Microsoft's Windows operating system enjoyed significant barriers to entry, he could not conclude that Microsoft lacked monopoly power. Schmalensee, 01/14/99, 08:22 - 09:9.
3. dr Warren-Boulton testified that "market share is an indicator of monopoly power. It is one of several indicators of monopoly power.” Warren-Boulton 11/19/98 at 56:22-23.

1.Operating systems for Intel-compatible PCs constitute a relevant market

18. The purpose of defining markets is to determine whether significant and lasting market power can be exercised; Accordingly, a properly defined relevant market should encompass the product group over which a single entity, if it controlled the production of those products, could exercise significant market power.

1. Dean Schmalensee testified that a relevant market consists of the "smallest aggregation that could profitably be monopolized". Schmalensee, 6/24/99, 58:15-23.
2. dr Warren-Boulton stated that a properly defined cartel market encompasses the group of products over which a single firm, by controlling the production of those products, could exercise significant market power. Warren-Boulton Gov. ¶¶ 26-32.
3. Professor Fisher testified that the purpose of defining a market is to identify the "set of things that might limit the alleged monopolist's power". Fisher 6/1/99 at 9:17-24.

18.1. The relevant market should therefore only include reasonable substitutes that could, within a reasonable time, limit - and thus nullify - an attempt to exercise significant market power.

1. Professor Fisher stated that a relevant market "should include all products which are reasonably intended to restrain the alleged monopolist's conduct". fisherman you Article 32; Fisher, 6/1/1999, 9:18-21 (noting that "in defining a market and then examining market power, there are usually ... things considered that might limit the alleged monopolist's power").
2. dr Warren-Boulton also testified that a relevant market should include substitute products that might prevent the exercise of monopoly power. Warren-Boulton Dir. ¶¶ 27-28. He further testified that it "is important not to over-define the market" by including products that are not reasonable substitutes "since this may underestimate the power of the firm whose behavior is being studied." Warren-Boulton Gov. § 28.

18.2. These include:

18.2.1.demand answers. The relevant market should include products to which consumers could switch without major difficulties when companies in the candidate market attempt to exercise significant market power.

1. Professor Fisher testified that in defining a market one must consider “demand substitutability,” which “concerns what products or firms the alleged monopolist's customers might turn to in the event of a price increase. Fisher, 6/2/99, at 69:22-70:1; Fisher, 6/1/1999, 9:21-24 ("Demand substitutability" refers to "the set of products to which customers can turn when trying 'earning above-average profits' by the alleged monopolist); Fischer dir. ¶¶ 32-33 (equal).

18.2.2.provide answers. The relevant market should also include companies that do not currently manufacture the product in question or a reasonable substitute for it, but which could do so without significant difficulty if companies in the candidate market attempted to exercise significant market power.

1. Professor Fisher stated that when defining a market, one must look to "supply substitutability," which "refers to the ability of firms that do not currently manufacture demand-substitutable products to readily manufacture demand-substitutable products." Fisher 6/2/99 at 70:9-11; Fisher 1999-06-01 10:8-13 (same); fisherman you ¶¶ 32, 34 (same).

19. Operating systems for Intel-compatible PCs represent a relevant market as they lack good substitutes; that is, there is no substitute that could defeat in a reasonable amount of time --d.h., unprofitable -- an attempt by a monopolist over such operating systems to exert significant market power.

19.1. Other "platform" products such as web browsers and Java are not good replacements for operating systems because they cannot function without an operating system.

1. Jim Barksdale testified, “I'm not suggesting that the browser is a replacement for the operating system; Navigator still requires an operating system like Windows 98 to run under it, but Navigator can and will serve as a platform for certain network-centric applications." Barksdale Dir. § 82; Barksdale, 10/20/1998, 72-74 (Barksdale testified that Netscape could serve as a replacement for certain platform features, but he does not believe that Netscape could seriously replace all platform features).
2. James Clark, founder and former chairman of Netscape testified, “Netscape is not an operating system. It's not even a networked operating system... Netscape developed a platform. A platform is not the same as an operating system... ...The idea was to make it independent of the Microsoft operating system, but no attempt to supplant the Microsoft operating system." Clark Abt. (7/22/98) at 44: 25 - 46:16 (DX 2562) Clark stated that Netscape intended to provide a software layer that would run on otherwise incompatible operating systems and allow them to use network or web-based applications, but that "layer still relies on that underneath is some kind of machine and some kind of operating system." Clark Dept. (7/22/98) at 48:5 - 49:4 (DX 2562). Clark categorically denied that Netscape intended the browser to replace the operating systems on which it relied. Clark Dept. (7/22/98) at 48:5 - 50:4 (DX 2562).
3. Netscape's Richard Schell similarly testified that Netscape intended to be "operating system agnostic" (i.e., to work well with all operating systems), but not to replace operating systems. When Microsoft's attorney then asked if he considered "the idea that Navigator will replace Windows [as] a slightly ridiculous claim," Schell explained, "There are 14 million lines of code in Windows 9X. You must do something. So we thought replacing all of these would have taken a bit of imagination. We thought we could provide functionality that not only improves Windows but also Unix and the Macintosh and... for some developers and some users, which would become their primary environment, but we would never think that meant replacing Windows." Schell Dept. (9/15/98), at 103:17 - 104:22 (DX 2587).
4. Dean Schmalensee testified that he is not aware of any "software that just surfs and does nothing else and doesn't need any other software to run". Schmalensee 6/23/99 at 53:2-10;I would.at 57:14-17 (same for other "web-based applications").
5. Professor Fisher stated: “In the present case, the growth of the Netscape browser or the widespread use of native Java might well have broken down the application barrier to market and allowed other operating systems to compete. But it wouldn't be the other operating system systems then on the market...neither Netscape, the browser market, nor Sun because of Java." Fisher 6/1/99 at 18:5-11.

19.2. Intel-compatible server operating systems are not good replacements for Intel-based PC operating systems because they lack the features and range of applications that users demand, and are prohibitively expensive.

1. Novell's Sean Sanders testified that server operating systems do not compete with Windows. Sanders Dep. 01/13/1999 at 184:13 - 185:1. He further explained that converting Novell's server operating systems to desktop operating systems would require starting "from scratch" and building the operating system "from the ground up." "It doesn't easily translate to the 'desktop' role at all." DX2584.
2. Sun's Brian Croll testified that Sun's Solaris operating system does not compete with Windows. roll dep. (played on 12/15/2019), at 56:23 - 57:13.
3. Ron Rassmussen of Santa Cruz Operating Systems testified, "People aren't buying our operating system as a desktop as much as they used to be" and that it's "more effective for our strategy to move to a server-only role." DX 2581 (testifies that using SCO's OS for desktop use is prohibitively expensive for users).
4. Paul Maritz agreed, "The applications you find on a server are different than those you find on an Intel PC acting as a desktop." Maritz, 27.1.1999 at 28:18 - 29:1.
5. dr Warren-Boulton testified that "Intel-compatible operating system products designed ... to run 'servers' are not viable replacements for desktop operating systems" because they "are generally more expensive but don't offer the features that consumers want." require when purchasing PC operating systems." Warren-Boulton Dir. § 40.

19.3. Other devices running other (non-Intel-compatible) operating systems also do not limit the exercise of significant market power over Intel-compatible PC operating systems.

19.3.1. A PC operating system accounts for a very small percentage of the cost of a PC system; therefore, even a significant increase in the price of a PC operating system above competitive levels results in only an insignificant increase in the cost of a PC computer system to users.

1. Maritz testified that Windows licensing fees are "less than 5% of the price of a typical new computer." Maritz Dir. ¶¶ 21, 132.
2. Professor Fisher testified that a 10 percent increase in the price of a PC operating system results in only about a 1 percent increase in the price of the PC. Fisher 1999-06-01, 27:7-25.
3. dr Warren-Boulton similarly testified that "even a 10 percent increase in the price of the operating system would result in at most a 1 percent increase in the price of even cheap PCs." Warren-Boulton Gov. § 37.

19.3.2. A reasonable economic analysis therefore shows that users do not incur the significant costs of moving away from Intel-based PCs and hence Windows, even if the price of the operating system increases sharply.

1. Professor Fisher testified that the "issue at issue in assessing Microsoft's power is not whether a change - an increase in the price of the PC as a whole would cause people to turn to other non-PC devices, or what that concerns , to Apple”, but “whether an increase in the operating system price will lead to this”. Fisher 1999-06-01 at 27:1-6. He then concludes that this will not be the case, since even a 10 percent increase in the price of the operating system would result in "less than a 1 percent increase in the price of the PC". Fisher 6/1/99 at 27:14-16.
2. dr Warren-Boulton similarly noted that "even a 10 percent increase in the price of the operating system would result in at most a 1 percent increase in the price of even cheap PCs," and given the "cost to users moving to another platform, Wouldn't such a small increase in the price of the PC platform result in a large drop in demand for PCs, and therefore for PC operating systems." These facts led him to conclude "that PC operating systems are a separate market." Warren- Boulton Dir. ¶ 37;see in additionWarren-Boulton, 23.11.1998, at 8:20-25, 9:17-25.

19.3.3. The evidence confirms that a significant increase in the price of PC operating systems (an insignificant increase in the price of the PC) will not result in a departure from PC systems, and hence from PC operating systems, sufficient to make the significant operating system price increase unprofitable.

19.3.3.1.OEMs. As previously discussed, OEMs will not walk away from Windows (let alone start building other types of PCs) in response to a significant exercise of market power (e.g., increased restrictions or prices) over Intel-compatible PC operating systems.

1. See above§ 15.1.

19.3.3.2.Apple. The most obvious possible replacement for users are other personal computers, such as Apple's Macintosh. But even Apple -- the closest replacement for PCs -- isn't restricting its power over operating systems for Intel-based PCs.

1. Dean Schmalensee acknowledged that Microsoft's current operating system competitors, including Apple, are not "the main constraint on Microsoft's pricing." Schmalensee, 01/14/99, 24:16-25.
2. Although some PC users are migrating to the Macintosh, Apple's Avadis Tevanian said Apple still cannot win a significant share and therefore cannot compete effectively with Microsoft. Tevanian, 4/1/99 at 9:20 - 12:18.
3. Plaintiffs' economists testified that consumer migration from PCs to Macintoshes was not the result of the exercise of market power over PC operating systems and therefore did not constitute an effective constraint on Microsoft's ability to exercise significant market power. Warren-Boulton 11/23/1998 6:18-15:12;see in additionfisherman you ¶ 137 ("Apple represents the main potential alternative to desktop PCs running Microsoft's Windows. (Although this alternative is not sufficient to prevent Microsoft from attaining a monopoly.)"); Warren-Boulton 11/23/1998 at 20:20-25 (testifies that if the cost of the Windows operating system "increases by a small but significant amount...not enough people will decide...to switch to the Mac platform" to bring Mac into the market). The move to the Macintosh simply means that the value of Microsoft's monopoly is shifting, not that its monopoly power is eroding. Warren-Boulton 11/23/1998 13:3 - 15:12 (testifies that the question is: "What is the constraint on the monopoly prices of the operating system" and that the "fact that the demand for the product as a whole is increasing or decreasing , is not the relevant question'").

19.3.3.3.Other Information Devices. Likewise, there is no evidence that other information applications limit Microsoft's ability to exercise significant market power over operating systems for Intel-compatible personal computers.

19.3.3.3.1First, most of these devices are supplements rather than replacements for personal computers, so switching is unlikely.

1. Steve Case publicly stated and testified that "It's hard to imagine that personal computers won't be the dominant way people connect to the Internet for many years to come, and Microsoft has a pretty amazing lock on that business...Other devices will." It does come out, but I doubt anyone will challenge Windows." Case Dept. (played 4/6/99), at 44:17 - 45:4; Kt. Ex. 1.
2. AOL's Barry Schuler testified:-blackened-Schuler Dep. 5/5/99, 183:18-21 (sealed).-blackened-Schuler Dep. 5/5/99, 183:24-184:12 (sealed).
3. Professor Fisher testified that other devices are not currently good replacements for PCs. And you may well have a monopoly on operating systems for personal computers, despite the fact that there are, or could be, a number of operating systems for handheld devices, televisions, set-top boxes and so on." Fisher, 12/1/99, um 7:14-16 Fisher 12/1/99 at 7:19 - 8:7 Professor Fisher further testified that other information applications do not currently constrain Microsoft's conduct Fisher 6/2/99 at 83:20-23.
4. Bill Gates stated that “For most people at home and at work, the personal computer will remain the primary computing tool; You will still need a big screen and keyboard" for many applications and "for that you need a lot of local processing power graphics, games etc. But the PC also works together with other cool devices. You can share your data - files, appointments, calendar, E-mail, address book, etc. - share on different computers; and you don't have to think about it; it will be automatic." GX 2059 (Newsweek article 5/31/99). Similarly, IDC predicts that in personal computers and other information devices, "there will be some competition between these two categories of devices both devices will lift each other up on all ships, the growth of the internet as an important tool for communication, commerce and entertainment will provide ample justification for both form factors." DX 2423, at 35.
5. See in addition belowTeil VII.D.C.3; § 396.2.

19.3.3.3.2Seconds, even if other information devices become better substitutes for a wider range of PC functions in the future, a small increase in the price of PC systems caused by a large increase in the price of the operating system will not result in a significant switch to others Information lead home appliances. In other words, while other information devices may detract from the relative ubiquity of PCs and hence the value of Microsoft's monopoly on operating systems for Intel-based PC operating systems, these devices do not undermine the fact that there is a market for such operating systems that is monopolizable.

1. dr Warren-Boulton testified that a small increase in the price of the entire computer system will not result in a large number of users bearing the costs required to switch to other devices. Warren-Boulton 11/23/1998 at 14:16-23; Warren-Boulton Dir. ¶¶ 37-39.
2. Professor Fisher testified that for this reason the existence of other information devices is "basically completely irrelevant" to the analysis of monopoly power. Fisher 6/3/1999 at 65:1-7. “It is interesting that other devices are also becoming important, but by the way we are not talking about a monopoly of the PCs themselves. We are talking about a monopoly of the operating systems for PCs, and To believe that this has something to do with the erosion of Microsoft's monopoly When it comes to operating systems, you would have to believe that small changes in the price of the operating system for PCs would cause people to stop buying PCs and instead ship these other machines." Fisher, 06/03/1999, at 65:23 - 66: 6.See in additionFisher, 6/1/99, a 27:14-22.

19.3.3.3.3third, since the market definition is a question of whether a significant increase in the price of the operating system will lead to a migration away from PC operating systems (to other information devices with different operating systems or otherwise) to a sufficient extent to support this price increase achieve is unprofitable, there is no need to address the question of whether PCs themselves constitute a relevant market (i.e. whether a sharp increase in the price of a PC would become unprofitable as a result of switching).

1. Fisher, 1999-06-02, 30:2-13; 6/3/99, at 65:23 - 66:6.

20. Microsoft internal documents and court testimonies also support the definition of a market for Intel-based desktop operating systems.

1. Joachim Kempin testified that Microsoft is tracking the share of "[O]perating Systems for Intel PC[s]". Kempin, 02/25/1999, at 94:24 - 95:7.
2. Microsoft internal documents analyze other "x86 operating systems" — other Intel-based operating systems — as "competitors" but do not characterize other types of operating systems as competitors. GX401.

2.Microsoft owns a dominant, sustained and growing share of the market for operating systems for Intel-compatible PCs

21. Microsoft has a dominant, persistent and growing share of the relevant market.

21.1. Microsoft currently has a market share of over 90%.

1. By Professor Fisher and Dr. Warren-Boulton sponsored data shows that Microsoft's share of Intel-based PC operating systems is well over 90%. GX1.
2. Professor Fisher stated: “Microsoft's share of PC operating systems is very high and has remained stable over time. Microsoft's global share of Intel-based operating system shipments has been around 90 percent or more in recent years... systems for non-Intel-based computers are included in the market definition, Microsoft's share is still very high and stable." Fischer Dir. § 64.

21.2. This share, which Microsoft has held since at least the early 1990s, has remained stable through the many changes in the computer industry.

1. dr Warren-Boulton testified, "This high market share has been remarkably stable." Warren-Boulton Gov. § 45.
2. By Professor Fisher and Dr. Warren-Boulton sponsored data shows that Microsoft's share of Intel-based PC operating systems is expected to increase to 96% by 2001. G X 1
3. Professor Fisher testified: “Here, Microsoft's share of the PC operating system business has been high and stable for several years. It is also expected to remain high for several more years.” Fisher 6/1/99 at 12:2-8.
4. Microsoft North America FY96 Reviews, an internal financial report compiled in June 1996, reported that the-blackened-GX 402, under MS6 6001734 (sealed), GX 403, under MS6 6006356 (Microsoft North America FY97 Reviews) (sealed).

21.3. Microsoft's share is expected to grow even further over the next century.

1. Rational Software "believes its continued success will depend increasingly on its ability to support the Microsoft platform, including the Windows 95, Windows 98 and Windows NT operating systems." GX 1663 (SEC 10-Q), at 5. Mike Devlin, a Microsoft witness, testified that Rational's "increased dependence" on Microsoft will actually be the result of "the increasing market share of the Microsoft platform." Devlin 2/4/99 at 25:22 - 26:1; Devlin 4/2/99 at 14:8 - 15:9.
2. IBM's John Soyring testified that Microsoft's 92% market share will "remain at this level, if not increase," over the next two or three years. Soyring, 11/6 p.m., 71:24 - 72:4.
3. Professor Frank Fisher testified: "Here, Microsoft's share of the PC operating system business has been high and stable for a number of years and is expected to remain high for a number of years to come." Fisher 6/1/99 at 12:2-8.
4. dr Warren-Boulton testified that Microsoft's share of operating systems "has been in excess of 90% since at least the early 1990's and this dominance is projected to at least 2001". Warren-Boulton Gov. § 45;see in additionWarren-Boulton 11/19/1998 57:24 - 58:5 (referring to GX 1 which contains the IDC forecasts of "continuous and sustained and increasing market share").
5. A report prepared for Microsoft in September 1997 states: "Win32 penetration by primary domestic machines is currently 70% and is expected to reach 90% by December 1998." GX 447, MS7 001195.

22. In any event, an exact calculation of Microsoft's market share or the market contours is irrelevant.

22.1. Even if they brought other products to market - like "middleware" and other operating systems - Microsoft would still have a monopoly.

1. dr Warren-Boulton stated that "even if the market were defined more broadly to include operating system products for all personal computers -- such as those made by Apple or some UNIX-based operating system vendors that do not use an Intel-compatible microprocessor -- my conclusion is that Microsoft having a monopoly position in a relevant market would continue to exist." Warren-Boulton Dir. § 41.
2. Professor Fisher similarly testified that "even if operating systems for non-Intel-based computers are included in the market definition, Microsoft's share is still very high and stable". fisherman you Section 64.
3. Professor Fisher testified that Microsoft possesses monopoly power even when threats to its monopoly power such as Netscape and Java are included in the relevant market. Fisher 6/2/99 at 61:11-62:10; 6/1/99 at 46:12 - 47:19.

22.2. Market definition and market share calculations are intended only to help determine whether a firm has monopoly power, so an accurate calculation is not required if refinement and accuracy do not change the ultimate determination of monopoly power.

1. As Professor Fisher testified, 'there will often be no clear line between defining products as on the market' and 'omitting them, remembering that firms that do not manufacture them can get on fairly easily. But the lack of such a clear line does not become important as long as one considers that the market definition need not be precise and that its purpose is to help analyze the constraints on the alleged monopolist's behavior." Fischer dir. ¶ 36 ;seein additionFisher, 02.06.1999, 57:19–59:1 (Diskussion über Fisher, „Microecomomics: Essays in Theory and Applications“ (DX 2487)).

3.Microsoft's dominant market share reflects monopoly power as its position in operating systems is protected by high barriers to entry

23. Microsoft's dominant market share reflects monopoly power, as this share is both the source of and protected by immense barriers to entry that prevent competitors from entering or expanding.

a.Definition of barriers to entry

24. A barrier to entry is any factor that allows companies already in the market to achieve returns above competitive levels without inducing entry or expansion that would erode those returns.

1. Professor Fisher testified that a barrier to entry "allows incumbents" to "achieve exceptional profits without their business being forced away by the expansion of competitors or the entry of new firms." Fisher 6/1/99 at 52:20-23; Fisher 6/1/99 at 47:20-24.
2. Dean Schmalensee characterized as consistent with his definition of a barrier to entry "any factor that allows firms already in the market to achieve returns above competitive levels while discouraging outsiders from entering the market." Schmalensee, 1/14/1999 at 6:17 am - 7:19 (quoting Areeda & Hovenkamp).

b. The application barrier to entry protects Microsoft's dominance in operating systems

25. The most important barrier to entry for operating systems in this case is the barrier to entry for applications.

1. Professor Fisher testified that "Microsoft's operating system dominance is protected by the application programming barrier to entry". fisherman you Article 82; Fisher, 1999-06-01, 48:4-11.
2. dr Warren-Boulton testified that "the application barrier to entry maintains Microsoft's dominance, is a key contributor to its monopoly, and explains why other Intel-compatible operating systems such as OS/2 and Linux continue to have small market shares." Warren-Boulton Gov. § 56.

25.1. The barrier to entry for applications arises from a chicken-and-egg problem: users will not use an operating system other than Windows in large numbers unless it supports a set of applications comparable to those available for Windows, but ISVs are less likely to write comparable applications for other operating systems in large numbers because these operating systems lack a large number of users.

1. Avadis Tevanian stated that Microsoft's dominant position is based in part on "a commercial symbiosis that exists between application programs and the computer operating systems on which those programs run a sufficiently large installed base of computer systems. Similarly, the commercial viability of an operating system depends critically on the availability of application programs. . . .” Tevanian dir. ¶ fifteen.
2. dr Warren-Boulton testified that as an operating system becomes more popular, the incentive to develop software for the operating system increases, since the greater number of users for the operating system product implies a larger potential market for software developers. The development of even more applications for that operating system, in turn, increases the value of the operating system to end users, who, as explained, buy operating systems in a significant part based on the quality and variety of applications available for them." Warren-Boulton Dir. § 53.

25.2. In other words, Microsoft's very large market share and installed base of users - which incentivizes ISVs to write primarily to Windows rather than other operating systems - are themselves the source of an immense barrier to entry that keeps the share operating system competed low and protects Microsoft's monopoly position.

1. Professor Fisher stated that "Microsoft's high market share leads to more applications being written for its operating system, which strengthens and increases Microsoft's market share, which in turn leads to even more applications being written for Windows than for other operating systems , and so forth. Because of this pattern, Microsoft's "share is unlikely to be eroded by new market entrants as long as the application programming barrier to entry remains strong". Fischer dir. § 70.
2. dr Warren-Boulton testified that "an operating system product can rise to dominate the market, and once that dominance is achieved, it can maintain it, both because of the large number of complementary software applications available for it and the flood of new ones." Applications written to do so." Warren-Boulton Dir. § 54.

(1)Microsoft has a dominant market share because software developers have strong incentives to write applications primarily for Windows

26. The economic factors that create incentives to write applications primarily for Windows and reinforce Microsoft's dominant market share have three aspects.

26.1.First, Microsoft has a dominant share of PC operating systems because Windows runs a much greater breadth, depth, and number of applications than other operating systems.

26.1.1. Users require operating systems to run applications; and the greater the number, variety, and quality of applications available for a particular operating system, the greater the demand for that operating system.

1. In a June 22, 1996 Microsoft marketing plan titled "Winning @ Internet Content," Andrew Wright wrote, "Microsoft's past success asplatformBusiness was primarily driven by the availability of compelling applications for Microsoft operating systems. Operating systems, including Windows 95, Windows NT, etc., are a means to an end, not an end in themselves. End users buy computers and operating systems to run applications." GX 407.
2. Microsoft's Chris Jones wrote in August 1995: "While there are many factors that determine the purchase of an operating system, consumers generally buy the system that runs the coolest applications first and best." GX 523, for MS98 0103654.
3. Avadis Tevanian testified that "the commercial viability of an operating system depends critically on the availability of application programs - including well-accepted, widely used application programs - written for use on that system." Tevanian Dir. ¶ fifteen.
4. Microsoft acknowledged in its response that the "popularity of an operating system is, to some extent, a function of the number, variety, and quality of applications available for use with that operating system...". Answer ¶ 58.
5. Microsoft's pricing decisions reflect the fact that Windows is in demand precisely because of the number of applications written for Windows. Kempin testified that "essentially...competitors make inferior products" because "the number of applications written for [Windows] is so vast," an observation of the "result of application barriers to entry, and it's a pretty clear statement." Kempin , 2/25/1999, 98:15-99:5 (Quoted by Kempin, 21:20-22:6, 22:19-24) This, explained Professor Fisher, is exactly what one would expect from Kempin, a non-economist, would expect, instead of saying, "I am protected by the application admissions barrier and therefore have free pricing." Fisher, 06/01/1999, 17:15-18:5.

26.1.2. Applications written for one operating system generally do not run on another because each operating system has its own unique set of application programming interfaces ("APIs") for which applications are written.

1. Because operating systems have different APIs, "software applications written for one operating system will not run well on any other operating system". Barksdale Gov. § 71.
2. See in additionSoyring dir. ¶¶ 6-7 ("In order for an application to function properly on an operating system, it must be designed to work with that operating system's APIs."); Gosling dir. ¶ 12 (testifies that applications are largely “platform specific”); Tevanian Dir. ¶ 12 (“Application programs must be developed to be compatible with the APIs of the underlying operating system. For example, Microsoft’s popular word processor, Word for Windows, runs on the Windows operating system; it cannot run on the Mac OS Operating system").

26.1.3. A far greater number of applications are written for Windows than for other operating systems.

1. There are "tens of thousands" of applications that run on Windows. Martiz, 01/25/1999, at 22:10-13; Rose 2/17/1999 24:24 - 25:9 (testifies that there are over 70,000 applications available for Windows).
2. According to Microsoft's economics expert, the number of applications available for other operating systems is at least an order of magnitude smaller. DX 2098 at E2 (reported that around 12,000 applications are available for the Macintosh, 900 for BeOs and 250 for Linux).

26.1.4. As a result, Microsoft has a dominant share of the installed base of operating system users and the operating system market.

1. Microsoft's Brad Chase stated, “Content drives systems. Windows won the battle for desktop operating systems because it used to have more applications than any other platform.” GX 510, at MS7 004130.
2. Microsoft's Ben Slivka stated that "One advantage Windows has in the market today, and why customers prefer Windows today over Macintosh OS or some other operating system, is that there are a large number of applications that customers need... available mainly on Windows or Windows have their best expression on Windows." Slivka Dep., 01/13/99 at 717:22 - 718:4.
3. Microsoft's own witness, Compaq's John Rose, acknowledged that the sheer number of applications available for Windows compared to other operating systems is "certainly the main reason" that Compaq lacks a commercially viable alternative to Windows. Rose, 02/17/1999 at 7:21 - 8:20 p.m. As Rose pointed out (Rose 2/17/1999 at 24:24 - 25:9):

   Q: Now, can it be said that the lack of another operating system capable of running these 70,000 applications, or a majority of them, is the main reason you believe there is no commercially viable alternative to Windows at this time?

   A: Yes, that is part of it.

   F: Okay.

   A: The fact that other operating environments do not support this rich selection of applications used by hundreds of millions of PC users.

4. Joachim Kempin testified that he did not consider any other operating system when determining the license fees for Windows 95 or Windows 98 because of "the simple fact that the number of applications, peripherals and support on this platform is fundamentally so large , that the advantages of buying on this platform are enormous. As Professor Fisher pointed out, Kempin's statement reflects Microsoft's perception that it is "protected by the application barrier." Fisher 6/1/1999 17:13-18:5.
5. Packard-Bell's Mal Ransom testified: "There are suitable applications, be they games or training or reference, that work with the operating system. This is an important factor for us in the consumer business, that consumers can buy solutions that fit our operating system. And Windows has really become a worldwide standard in this respect." Ransom (played on 12/16/98), at 69:24 - 70:10.
6. For further evidence see Von Holle Dep., 1/13/99, at 298:2-23 (testifies that Gateway is not a commercially viable alternative to Windows because "there is not enough application support in the market for alternatives Operating Environments Runnable"); Tevanian, 11/4/98pm, 11:12 - 12:18 (testifying that "it is still the case that the vast majority of applications on the market do not run on, and from, the Macintosh reason most people will simply refuse to buy a Macintosh if they want security in the applications running on Windows").

26.2.SecondsBecause of the economic incentives they face, ISVs tend to write primarily for the operating system with the dominant share, namely Windows.

1. Professor Fisher testified that the main reason "ISVs are writing for Windows first" is that "there are economies of scale and it pays to write for the system that has the most users". Fisher, 6/1/99, at 54:2-5.

26.2.1. Software development is characterized by significant economies of scale. The fixed cost of creating software, including applications, is very high. The marginal costs, on the other hand, are very low. In addition, the cost of developing software is reduced; Resources once expended on software development cannot be used for other purposes.

1. Paul Maritz testified that “Software products can be mass produced and distributed very quickly. Once a software product is created, the cost of copying is nearly nil, and the product can be quickly distributed around the block or around the world over the Internet or other networks." Maritz Dir. § 115.
2. Intuit's William Harris stated that “the economics of software development make high sales critical to profitability. The fixed costs of software development - including, but not limited to, research, development, programming and testing - are very high and can only be offset. In contrast, the variable costs of producing software after it is developed are quite low. based software products, it is critical that the product is compatible with Windows. At Intuit, compatibility with Windows is so important that the company will focus on such compatibility even if it slows or halts development of software for use with other operating systems requires." Harris dir. § 25.
3. dr Warren-Boulton testified that "Operating systems in particular, and software in general, are characterized by economies of scale ('marginal costs') are quite small in comparison." Warren-Boulton Dir. § 47.

26.2.2. The result of economies of scale and sunk costs is that application developers try to sell the highest number of copies; for only by selling large numbers of copies (for which the marginal cost is low) can the large, sunk fixed costs required to develop software be recouped

1. Harris said. Section 25.
2. Professor Fisher testified that because of the "upfront cost of writing the software" and the fact that the marginal cost of distribution is "essentially zero," ISVs "will have a great incentive to write for the most popular operating system and for it first." to write because you have the opportunity to make many sales and that means your cost per sale will be very low." Fisher, 6/1/99 at 59:10-16.

26.2.3. This creates overwhelming incentives to write primarily for Windows, since writing for Windows - the operating system with the dominant share - offers application developers by far the highest expected return on the sunk costs incurred.

26.2.3.1. An application written for one operating system like Windows will not work on another operating system unless it is "ported" to that system. As numerous witnesses have testified, porting applications is both time-consuming and expensive.

1. John Soyring testified that it took IBM "about a year and a half to port Netscape Navigator from Netscape's Windows implementation to OS/2, and that meant having access to the Netscape source code and having the Netscape engineers working side-by-side with us in to let their labs work in California." Soyring, 01/18/1998, at 65:15 - 66:18; Soyring dir. ¶ 7 (Porting "can be both costly and time-consuming.").
2. Jim Barksdale stated that "However, it is time consuming and expensive to port application software developed for the Windows platform to the OS/2 or Macintosh platform or any other platform." Barksdale Gov. § 75.
3. James Gosling testified that the "tedious process known as 'porting' software to other platforms dramatically increases the cost of software programs and consumes scarce time and resources that could otherwise be devoted to developing innovative applications". Gosling dir. § 13.

26.2.3.2. Because of these factors, ISVs tend to write applications primarily for the highest volume platform, Windows.

1. Microsoft's Steve Ballmer wrote in July 1997: "It's important for us to keep our focus on the developers. And market share is an important part of that. If you don't have a good market share, you will lose developer interest." GX 679, at 8.
2. William Harris of iIntuit testified that "It is essential to the viability of most PC-based software products that the product be compatible with Windows. Developing software for use with other operating systems." Harris dir. § 25.
3. Jim Barksdale testified that because of Microsoft's large market share, "if someone wants to build a product, they build it first there version of Windows...if you're going to sell any product out there, you have to use that year's product, otherwise you can." you are not having reasonable success." Barksdale 10/27/98 at 70:18 - 71:9; Barksdale Dir. ¶ 73 (Barksdale states that "ISVs looking at this world quite reasonably most software for the platform with which write the broadest usage. This means that most applications are written for the Windows platform.).
4. dr Warren-Boulton testified that "market share...is overwhelmingly the critical issue in determining developers' decisions." Warren-Boulton 11/19/98 at 86:14-16; Warren-Boulton Dir. ¶ 53 (testifies that developing more applications for a given operating system "increases the value of the operating system to end users" who "purchase operating systems in significant part based on the quality and variety of applications available for them" The operating system's market share is increasing, "which in turn will likely result in software developers devoting even more resources to writing applications for this operating system").
5. Ron Rasmussen, Vice President of Santa Cruz Operation, testified that “All application vendors look at the market share and cost/benefit analysis of deploying that application on each operating system. So if it costs you more than you think you will get revenue from or if you think your revenue is just a trade from one operating system to another, there is no financial advantage to producing this application on other operating systems. Rasmussen Dep., (played 12/15/98), at 58:3-9.

26.3.third, the result of the above factors is that Windows has very strong network effects, which increases the demand for Windows.

26.3.1. A network effect is a phenomenon in which the attractiveness of a product increases with the use of that product by others.

1. fisherman you Article 42.

26.3.2. Windows has strong network effects because each user benefits from the fact that there are many other Windows users, Windows has a dominant market share, and therefore ISVs write to Windows primarily. The fact that ISVs write primarily for Windows, in turn, fuels demand for Windows, thereby reinforcing Microsoft's dominance and maintaining ISV incentives to write applications primarily for Windows; etc.

1. James Gosling testified that because of the incentives to write 'first' and often 'only' for Windows (Gosling Dir.¶ 15), “more software applications are available to Windows users, which in turn makes this platform even more attractive to customers the dominance of Windows and will lead to even more developers developing software for Windows.” Gosling Richt. § 18.
2. Intuit's William Harris stated, “The development of software that is compatible with the Windows operating system itself reinforces Windows' dominance as consumers look to buy the operating system that is compatible with the widest range of software applications. In turn, software vendors want their products to be compatible with the operating system most commonly used by consumers, creating a self-reinforcing cycle (sometimes referred to as the “network effect”) that tends to maintain and increase the dominance of the leading operating system strengthen. "Harris dir. § 27.
3. James Barksdale stated, "Because so much software is written for the Windows platform, consumers who want to take full advantage of their computers and have the widest possible selection of applications available continue to buy computers with the Windows operating system preinstalled. At the same time, the more personal computers are sold with Windows operating systems, the more ISVs continue to write applications for the Windows platform, ie sales of computers with Windows operating systems feed the development of software for the Windows platform, which in turn develops software, generates additional sales of computers with Windows operating systems." Barksdale Dir. § 74.
4. Professor Fisher summarized: "Microsoft's high market share leads to more applications being written for its operating system, which strengthens and increases Microsoft's market share, which in turn leads to even more applications being written for Windows than for other operating systems, and so forth. " Fischer dir. § 70.
5. dr Warren-Boulton stated that developing more applications for a given operating system "increases the value of the operating system to end users" who "purchase operating systems in significant part based on the quality and variety of applications available on them." As the operating system's market share increases, "that, in turn, will likely result in software developers devoting even more resources to writing applications for that operating system." Warren-Boulton Gov. § 53.

26.3.3. This self-reinforcing cycle is confirmed by the observed market facts: Windows' market share was and is much larger than that of the competition; most ISVs develop new applications first and in large numbers for Windows; and continuously maintaining a large, up-to-date inventory of applications for Windows ensures users are asking for Windows.

1. See above§ 26.1.3.
2. dr Warren-Boulton testified that "the barrier to entry for applications maintains Microsoft's dominance" and therefore "no competitor has been able to build a sustained effective threat to Microsoft's market dominance". Warren-Boulton Gov. § 56.
3. John Soyring testified that "OEMs have no commercially viable choice but to license Windows." While other operating systems exist, OEMs "cannot reasonably base their business on these alternatives, largely due to the lack of application and device support." Soyring dir. § 11.

(2) The same factors that fuel Microsoft's large market share prevent other operating systems from challenging Windows

27. Just as Microsoft's high market share incentivizes ISVs to develop applications primarily for Windows, the lack of a significant installed base for other operating systems makes it much more expensive - indeed prohibitive - to ensure the availability of a sufficient one Set of applications so that these operating systems can become a good replacement for Windows.

1. Professor Fisher stated that if a company gains a large market share due to network effects, "it will prove increasingly difficult for other companies to persuade customers to buy their products in the presence of a product that is widely available." The firm with a large stake may then be able to charge high prices or slow down innovation without having its business sold off." Fischer dir. § 43.
2. Dean Schmalensee agreed with John Soyring's statement that part of the reason OS/2 failed was that "IBM did not have a sufficient number of applications to compete effectively with Microsoft." Schmalensee, 01/14/99, 34:15-25. Similarly, noted Dr. Warren-Boulton that "IBM has found with OS/2 that it's simply impossible to compete effectively with Microsoft in the home computing market because it doesn't have enough applications." Warren-Boulton, 11/24/98, at 53:5-8. This competition between OS/2 and Windows illustrates how network effects work, where "the company with the largest market share gets bigger and the company with the smaller market share gets smaller". Warren-Boulton 11/24/98, 52:20-21.

27.1.First, contrary to Microsoft's claim that all it takes to create a rival for Windows are applications in a few key categories (Schmalensee 06/22/1999 at 60:12-20; Maritz 01/27/1999 at 22: 2 - 11:2), in order to provide a viable replacement for Windows, a competing operating system would need to both (1) offer a large, diverse, and frequently updated set of applications, and (2) provide users with assurances that such applications would be available will be in the future.

1. See above§ 26.2.3.
2. Although both Linux and Be OS, two relatively new Intel-based PC operating systems, support several hundred applications -- including applications in the categories users use most (like word processing, personal finance, and browsing) -- neither as Dean Schmalensee conceded one that Windows can be effectively replaced. (Schmalensee dir. ¶ 107, 108). The reason, as explained by Microsoft's own OEM witness, John Rose, is that such "operating environments do not support the rich array of applications used by hundreds of millions of PC users". Rose, 02/17/1999 24:24 - 25:9.
3. Avadis Tevanian testified that although Apple has thousands of applications, including applications in all "categories" that users use frequently, Apple cannot win users over from Microsoft because "it's still the case that the vast majority of applications are on The market doesn't run the Macintosh, and for that reason most people will simply refuse to buy a Macintosh, they want security in the applications that run on Windows." Tevanian, 11/4/98 at 11:12 - 12: 18
4. Paul Maritz acknowledged that other information appliances running other operating systems "cannot be real competitors" unless they support "a wide range of applications". Maritz, 1999-01-27, 11:3-24 (quoting Maritz' testimony).
5. Professor Fisher testified that a "beginner would have to be written for -- and shown that there was an assurance that it would remain so -- applications of the general number and breath for Windows, and I would assume that for the more popular applications, the applicant would probably need the same." Fisher 1999-01-13, 5:9-14; Fisher, 6/1/99, at 56:2-9 (similar).

27.2.Seconds, Microsoft's large installed base makes it prohibitively expensive for competing operating systems to acquire the wide range of applications required to effectively compete with Windows.

27.2.1. The sunk costs that an operating system manufacturer needs to build the required applications themselves are prohibitively large.

1. Dean Schmalensee admitted that no operating system manufacturer will develop the necessary applications alone. Schmalensee, 01/14/99, 15:23 - 16:9.
2. Professor Fisher testified that an applicant faced with significant sunk costs of an uncertain return "won't go in" because "he has to fight the incumbent and because he has to leave those hostages to the fortune". Fisher 6/1/1999 50:18-25.
3. dr Warren-Boulton testified that "competition between two vendors, each with very high fixed costs and very low marginal costs, would likely result in a price decrease, further reducing the profitability of entry for the prospective entrant." Entry into the head A direct operating system competition with Microsoft would therefore be time consuming, risky and costly; Profiting from such an entry would be highly uncertain at best and a long time coming." Warren-Boulton Gov. § 48.

27.2.2. Accordingly, in order to ensure the availability of a suite of applications comparable to that available for Windows, a potential competitor would need to induce a large number of ISVs to write to its operating system.

1. Dean Schmalensee testified that the question is whether "the ISV community can be persuaded to offer application programming for an alternative operating system". Schmalensee, 01/14/99, 15:23 - 16:9.
2. dr Warren-Boulton testified that in order to "offer a product that a significant number of consumers would want installed on their PCs," alternative operating system vendors would need to create, or cause others to create, an extensive set of compatible software Not only would that be expensive, it would also be very risky.” Warren-Boulton Gov. § 57.

27.2.3. The cost for a new entrant to get ISVs to write applications for their operating system exceeds the cost Microsoft faced in getting ISVs to write applications for the DOS and/or Windows operating system, since Microsoft is not involved faced a highly penetrated market dominated by a single competitor.

1. Professor Fisher testified, "After Microsoft's victory, the cost of convincing ISVs to build such a stock instead of writing for Windows must be much greater than it would have been for Microsoft to convince them in the first place." Fisher, 6/1/99, at 53:22 - 54:1.

27.2.3.1. When deciding whether to write for a particular operating system, an ISV considers the ROI they expect from sunk costs, and this depends on the number of users they anticipate using the operating system.

1. dr Warren-Boulton stated that investment decisions are not driven by the rate of return if the company succeeds, but by the expected rate of return, including risk, if the company fails. Warren-Boulton, 11/19/98, at 52:11 - 53:7, 70:2 - 71:10.
2. Dean Schmalensee testified that "ISVs do not write application software for an operating system unless they expect enough consumers to use that operating system." Schmalensee dir. ¶ 100; Schmalensee, June 23, 1999, 59:10-22 (same).

27.2.3.2. ISVs will not expect in large numbers that a niche (or new) operating system will successfully compete against Windows, as ISVs face a "collective action problem": A competing operating system cannot be successful without a large number of applications, but no single ISV can do this Rest assured that a sufficient number of ISVs will write all the applications required for competing operating systems to succeed. As a result, every single ISV will continue to write primarily for Windows because they expect their competitors to do so; and other operating systems will therefore not be able to gain a significant share of Windows.

1. Professor Fisher testified that in order for a new operating system vendor to be successful, it "needs a lot of people" to write applications. But in assembling this critical mass, “there is a collective action problem. That said, when deciding to write for a new system, any ISV will not consider the fact that its action "will have some impact on the success of the new operating system." Fisher, 6/1/99 at 58:10 -18
2. Tevanian testified of Apple's inability to convince developers to write for the proposed Rhapsody operating system: "Developers, including Microsoft, told Apple they were concerned that Apple would not be able to obtain a critical mass of application programs that were written to work with the new operating system Rhapsody APIs and that accordingly customers would not purchase computers with the new operating system." Tevanian Dir. § 19.
3. dr Warren-Boulton summarized the incentives for developers: “If you think of it as a Trojan horse, every single application writer looks at the operating system market and says, 'I'm writing for the PC platform. 90, 95 percent of the people who are likely to use my application use Windows, so making J/Direct an individual choice for me is worth it.' On the other hand, if you look at the interests of the resume writers overall, no one will write in cross-platform resumes if they all do that. So it's a dilemma. What is in the interest of the individual applicants? This may not be in the interests of the drafters of applications as a group." Warren-Boulton, 11/23/98 at 40:2-13.
4. Microsoft's Steve Ballmer wrote in July 1997: "It's important for us to keep our focus on the developers. And market share is an important part of that. If you don't have a good market share, you will lose developer interest." GX 679, at 8.
5. William Harris stated that due to Microsoft's dominating market share, Intuit "abandoned development of Macintosh-compatible versions of QuickBooks and drastically reduced development of Macintosh-compatible versions of Quicken and TurboTax." Harris dir. ¶¶ 25-26.

27.2.3.3. A competing operating system vendor cannot effectively solve this problem by paying the required number of ISVs to write their operating system because the sunk costs involved are massive relative to the expected return on investment.

1. Professor Fisher testified that “You could pay ISVs to write to your operating system. Fisher, 06/01/99, at 55:23 - 56:1. He further testified that to challenge Windows this is not feasible due to the very collective action issue that prevents ISVs from doing it alone. He explained: “There is a collective action problem. That is, when deciding to write for a new system, any ISV will not take into account the fact that its action will have something to do with the success of ... will affect the success of the new operating system, because he will not get all the fruits of it to harvest. It takes a lot of people doing this to make it work. Fisher, 1999-06-01, 59:2-18.
2. John Soyring stated that "Microsoft's massive installed base, combined with the wealth of applications and hardware support for Windows mentioned above, makes it difficult for IBM or any other company to successfully launch a new operating system for desktop and mobile PCs. Any company trying to do this would have to spend an enormous amount of money and time on development, marketing, and support." He further noted that this "task would be easier if there was a sane way to ensure that all applications now running on Windows would run on the new product. Unfortunately there aren't any." Soyring Dir. § 13.
3. MCI's David Limp testified that "it would be difficult to break into the PC realm" because: "There is a lot of homegrown application development written directly for Windows and Win - not for the languages ​​of the Web, but for Windows languages , that's taking off - you know, I've been trying eight years of my life at Apple, it's just a very difficult problem, and it takes a lot of resources, and no one has succeeded, well, I mean, only if you run your business -Put your hat on, let's get down to the simpler problem, shall we? And that's a difficult problem. IBM couldn't make it. Sun is having a hard time. Apple basically couldn't do it, so it's an uphill battle and we chose to fight our competition in an area that was wider open that we could define ourselves, meaning we could redefine the playing field. Limp Dep. 7/30/98, 143:6-25 (DX 2576).
4. James Gosling testified that “It is very difficult for a developer to financially justify developing software for a platform like Solaris, which is very small in volume, a hundred to one different, and yet the engineering effort is about the same . Gosling, 12/10/98 at 26:16 - 27:3.

(3)The persistence of Microsoft's huge market share is itself evidence of high barriers to entry

28. The fact that Microsoft's monopoly is protected by high entry barriers is demonstrated by the fact that Microsoft has held a dominant market share in recent years, while other operating systems have only acquired insignificant market shares.

1. dr Warren-Boulton testified that "the application barrier to entry maintains Microsoft's dominance, is a key contributor to its monopoly, and explains why other Intel-compatible operating systems such as OS/2 and Linux continue to have small market shares." Warren-Boulton Gov. § 56.

(4) The statements by Apple and IBM illustrate the strength of the application barrier to entry

29. The experience of Microsoft's main operating system competitors of the mid and late 1990s, IBM and Apple, confirms the strength of the application barrier to entry.

30. IBM's inability to obtain widespread developer support for its OS/2 Warp operating system shows how the massive Windows install base makes it prohibitively expensive for competing operating systems to attract applications sufficient to replace Windows.

30.1. IBM introduced its Intel-based OS/2 Warp operating system in 1994, aimed at the consumer market, and spent tens of millions of dollars attracting ISVs and making an unsuccessful attempt to clone part of the Windows API set.

1. Soyring testified that IBM "spent tens of millions of dollars working with ISVs around the world... to try to convince them to build OS/2." Soyring 11/18/98 at 58:20 - 60:1, 66:19 - 67:8.
2. Soyring further testified that IBM invested significant resources in an ultimately unsuccessful attempt to clone part of the Windows API set. Soyring, 11/18/98, at 61:15 - 62:1.

30.2. Despite these efforts, IBM was unable to gain significant market share or ISV support for OS/2 Warp.

1. Soyring testified that even when "it would have made commercial sense for an ISV to port their application to OS/2, they often felt that those programmers could be better off developing new features or new applications for Windows because it offers a potential for more economic return for them" and because of "the larger number of ... users of Windows applications". Soyring 11/18/98 at 67:11-24.
2. As Soyring summarized, IBM found that it was “caught in a vicious circle. First, the limited number and type of OS/2 applications has resulted in limited demand for OS/2 to ship with OS/2, and that the installed base of OS/2 is relatively small. This relatively small installed base of OS/ 2 installations has further reduced the incentive for application developers to expend the necessary resources to port their existing applications to OS/2 and then to offer and support them on OS/2." Soyring dir. § 9.
3. OEMs - including IBM's PC business - will not pre-install OS/2 and the reason for this is the lack of applications. Romano Dep. (played 12/16/98), at 33:4-19 (Hewlett Packard "didn't seriously" consider installing OS/2); Ransom Dep. (played 1998-12-16), 70:11 - 71:8 (OS/2 was trying to "break into the consumer market. And the big problem with that is that we needed OS/2 plus Windows because OS/2 didn't the compatibility. OS/2 was an operating system and worked well on the systems, but you needed Windows for the compatibility of all contenders. So it didn't make sense resource-wise -- and resource-wise, I don't mean just double-loading, but the resources of the machine to have two operating systems on it."); Romano Abt. (played 12/16/1998), at 72:5-23 (Due to the lack of applications compatible with OS/2, it was not a viable choice for Packard Bell.).

30.3. Although OS/2 was running approximately 2,500 applications at its peak and had 10% of the market, IBM found that the application entry barrier was too high to compete with Windows in the consumer segment of the market and for this reason in 1996 ISVs stopped buying it to convince to write on OS/2.

1. Soyring dir. § 5; Soyring 11/18/98 at 61:2-4.
2. Soyring testified that IBM determined that it "would not be able" to compete against Windows because the "application barrier was just too high for us to compete" by "promoting OS/2 Warp 3 for home users would". Soyring, 11/18/98, at 99:22 - 100:5. Therefore, he explained, IBM stopped getting developers to write to OS/2's APIs in 1996 because it was unable to compete with Windows. Soyring 11/18/98 at 93:19-21.
3. Dean Schmalensee agreed with Soyring's statement that part of the reason OS/2 failed was that "IBM didn't have a sufficient number of applications to compete effectively with Microsoft." Schmalensee, 01/14/99, 34:15-25.
4. dr Warren-Boulton testified that "With OS/2, IBM found it simply impossible to compete effectively with Microsoft in the home computing market because it didn't have enough applications." Warren-Boulton, 11/24/98, at 53:5-8. This competition between OS/2 and Windows illustrates how network effects work, where "the company with the largest market share gets bigger and the company with the smaller market share gets smaller". Warren-Boulton 11/24/98 at 52:20-21.

30.4. Microsoft's contention that the failure of OS/2 was a result of IBM's own mistakes is misplaced because it confuses the reasons for the failure of early versions of OS/2 with the reason - the application's barrier to entry - that OS/2 Warp can't win a significant market share today.

1. According to Soyring, IBM fixed many of the problems with OS/2 by the time OS/2 Warp was released. Soyring explained that "the size reductions we made in the operating system program were so large that it became very competitive in terms of the amount of memory required, so it turned out to be quite suitable, and we had quite a bit of success initially selling the products to at least a certain subset of home users." Soyring 11/18/98, 58:25 - 59:7.
2. Microsoft suggested that OS/2 Warp failed because IBM did not spend enough to attract developers. Soyring, 11/18/98, at 92:20 - 93:1. However, this is entirely consistent with the applications' barrier to entry. As Soyring testified, the cost was prohibitive for IBM due to Microsoft's installed base to attract developer interest. Soyring dir. § 13.

31. Apple's inability to compete effectively with Windows also demonstrates the functioning of the application barrier to entry.

31.1. Although Apple's Macintosh operating system supports more than 12,000 applications, this inventory of applications is insufficient to allow Apple to replace Windows for a large number of users.

1. Avadis Tevanian stated that “the vast majority of applications on the market don't run on the Macintosh, and for that reason most people will simply refuse to buy a Macintosh. They want security in the applications that run on Windows. Or in some cases, they must be running Windows. For example, almost every company in the world has them running certain applications that run only on Windows.” Despite the fact that the iMac is selling well, “By and large, there's still the Windows monopoly that there's a situation is where people need to run Windows applications and buy Windows computers.” Tevanian 11/4/98 at 11:21-12:13.
2. dr Warren-Boulton testified that there are approximately 12,000 applications available to Macintosh operating system users, but that Apple cannot limit Microsoft's ability to exercise market power. Warren-Boulton 11/23/1999 at 16:7-13.

31.2. The lack of a large installed base, in turn, exacerbates the discrepancy between the applications available for the Macintosh operating system and those available for Windows, further inhibiting Apple sales.

1. Microsoft's Paul Maritz acknowledged that "fewer software developers are developing products for the Apple Macintosh because there are fewer Apple Macintosh customers buying such products." Maritz Dir. § 179.
2. Apple's Avadis Tevanian stated that an "application program is doomed to commercial failure unless it runs reliably on the operating system of a sufficiently large installed base of computer systems. Application programs - including well-accepted, widely used application programs - written for use on that system." ." Tevanian Dir. ¶ 15. Thus, "Apple has learned through experience" that "the symbiosis between operating system[s] and application programs creates significant barriers to the adoption and growth of competing operating systems."ID.at § 16.

31.3. Also illustrative is Apple's inability to obtain developer support for its Rhapsody operating system in 1997.

31.3.1. Rhapsody offered users new, attractive technologies; but to take advantage of these technologies, ISVs would have had to significantly rewrite their applications, a process that required significant investment and therefore significant revenue volume to recoup.

1. Avie Tevanian testified that "the main reason" ISVs wouldn't write Rhapsody applications was because "they needed an economic incentive, they needed to know that they could sell many copies of their applications and they could sell many copies of theirs." Applications, they needed to know that there would be many copies of the operating system, and they just didn't think Apple stood a chance of selling many copies of that operating system." Tevanisch, 11/4/98 at 44:5-13.

31.3.2. The developers refused to make this investment because they didn't think Apple could gain significant volume over Windows to make the additional sunk costs worthwhile.

1. Tevanian testified that the developers "didn't see Apple ever getting enough volume for Rhaspody that they thought they'd get an economic return on their investment." Tevan 11/4/98 at 83:20-23.
2. Tevanian explained that the installed base of Windows was why developers thought Apple had "no chance of reaching significant volume with a new operating system." Tevan 11/4/98 at 85:19-23.

31.3.3. Other reasons may have contributed to Rhapsody's failure - Apple's financial difficulties and Microsoft's refusal to support its ability to run on Windows NT - do not detract from Rhapsody's illustration of the application barrier to entry.

1. The very document that Microsoft produced to support its claim that Apple's financial distress hurt Rhapsody actually shows the developers' concerns about whether Apple could win enough of a share to make their investment worthwhile. DX 1769 ("For developers, Rhapsody's ramp is not irrelevant.");see in additionTevanian, 4.11.98, a 96:23 - 99:23.
2. The strength of the application barrier to entry is demonstrated by the steps Apple took after Rhapsody's initial failure. Apple incorporated some of the Rhapsody technology into its new Macintosh operating system in a way that ISVs didn't have to significantly rewrite their applications. As Tevanian stated, this significantly reduced the cost of supporting Rhapsody for developers because: “The economic model for them is very simple. They just keep their existing investments.” Tevanisch 11/4/98 at 91:13-21. In short, ISVs are willing to develop for Apple if they can recoup their previous investments. However, due to the installed base of Windows, they are generally unwilling to make the significant investments required to "break into new areas". Tevan 11/4/98 at 83:2-7.

c.Other barriers to entry increase the barrier to entry for applications

32. Although the application barrier to entry is an important factor preventing other operating systems from becoming viable replacements for Windows, other factors also inhibit the ability of other operating systems to enter the market or expand.

32.1.conversion costs. Moving to a new operating system requires users of existing systems to abandon existing investments in applications, training, and specific hardware.

1. dr Warren-Boulton testified that computer users are "reluctant to switch from Windows to another operating system, even to another PC operating system, because it requires replacing application software, converting files, and learning how to use the new software." A change often also means replacing or changing hardware. Businesses may face even higher switching costs as they integrate PCs with the new operating systems and application software into their PC networks and train their employees to use the new software." Warren-Boulton Dir. § 49;I would.§ 36.
2. James Gosling testified that a Windows user who switches to the Apple iMac "would have to repurchase all software". Gosling, 12/10/98 at 19:15 - 20:1.

32.2.Other network effects. In addition to incentivizing ISVs to write for Windows, Microsoft's high market share adds value to Windows in other ways. These include, but are not limited to, common file formats and low training costs due to user familiarity.

1. Professor Fisher stated that the ubiquity of Windows “can allow companies to avoid training costs when moving staff within the company or hiring new staff from outside. This gives companies an incentive to have the same user interface on all their own computers and the same interface that is widely used by other companies. Other network effects are the easy exchange of files and the opportunity to learn from others.” Fischer dir. Section 67.
2. dr Warren-Boulton stated that those moving to another platform "would have to spend time and money learning how to use a computer designed for a different processor. And both migrating and new users would have to incur costs resulting from incompatibility or compromised compatibility between their computers and PCs used by colleagues or others with whom the users might want to communicate or share files." Warren- Boulton Gov. § 17.
3. dr Warren-Boulton also testified that the barrier to entry for applications “is complemented by other barriers to entry that arise from network community effects for their users. Users can share files and perhaps more easily use their computers to communicate with other members of the group installed at work will result in users choosing to use the same operating system product at home." Warren-Boulton Dir. § 55.
4. "It is important that they are able to use a web browser class - for example a training session - for all the different users of that browser, so that they can take advantage of the features of that browser as much as possible, look and feel and act and work." regardless of whether the employee is running a Unix workstation or an Intel-based PC." Weadock, 11/17/1998, 19:25-20:6 (discussion on GX 217, MS98 0109146) (Companies "want a common platform for Web -Apps, similarity in basic end-user functionality, Simship, and that's the main reason Corps and ISPs don't maintain or choose IE as their default browser")

32.3.Sunk costs of developing an operating system. As with other software, operating system development requires significant sunk costs (although actual production costs are low), and the significant sunk costs required to develop an operating system discourage entry.

1. dr Warren-Boulton testified, "If you build an operating system and it fails, you can't take the operating system and do a lot of other things with it. The money is gone. And that makes it a very risky business. And economists in general realize that the higher the percentage of sunk costs, the greater the barrier to entry in this business, which makes real sense." Warren-Boulton, 12/1/98 at 31:2 - 31:8.

C. Microsoft's ability to control the price of Windows proves its monopoly

33. Microsoft's monopoly is also reflected in its ability to control the price of its operating systems.

1. Professor Fisher testified that a firm's "considerable ability to vary and actually raise prices" "without fear that its customers will turn elsewhere" can be evidence of monopoly power. Fisher 6/1/1999 11:14-12:17.

1.Microsoft does not consider competing operating systems when pricing Windows 95 or Windows 98

34. Microsoft does not consider competitors when pricing Windows98, and Microsoft is not concerned that an increase in the price of Windows will cause its customers to look elsewhere.

1. See aboveTel II.A; § 15.1.5.

2.Microsoft has increased prices for outdated versions of Windows

35. Microsoft's significant pricing discretion is also reflected in its ability to increase the license fee for older versions of Windows, which Microsoft has labeled as 'obsolete', after the release of new versions.

a.Microsoft increased the price of Windows 95 when it released Windows 98

36. After the release of Windows 98, Microsoft increased the price of Windows 95 to the same level as Windows 98.

1. Professor Fisher testified to that-blackened-Fisher, 12.01.1999, bei 47:2-9 (Sealed Session).
2. Dean Schmalensee acknowledged that Microsoft-blackened-Schmalensee, 01/25/1999, 51:25 - 52:12 (sealed session); Schmalensee, 01/25/1999, 44:22 - 45:9 (sealed session).
3. Current OEM licenses include license fees for-blackened- See e.g., GX 461 at MS98 0009500 (IBM License) (sealed); GX 1190 at MS98 0008922 (Compaq Licensed) (sealed).See in additionSchmalensee, 25.01.99, 51:25 - 52:7-blackened-(sealed session).
4. The average actual price of a standard Windows 95 license-blackened-GX 1404 (Price Table sponsored by Professor Fisher) (sealed); DX 2330 (License Data Map sponsored by Dean Schmalensee) (admitted in sealed session).

36.1. Microsoft's increase in the Windows 95 license fee to the same level as the Windows 98 license fee is not consistent with a competitive market.

1. Microsoft witnesses have said so repeatedly-blackened-Schmalensee, 01/25/99, 3:6-6 p.m-blackened-(sealed session); Rose 2/17/1999 at 12:14 p.m-blackened-;I would.at 30:9-31:11 (same) (sealed session).
2. -blackened-Fisher, 1/12/99pm at 45:16-22 (sealed session).-blackened-Fisher, 1/12/99pm at 46:21-22 (sealed session). If operating systems were "a competitive market and Microsoft had no power over price, then you would expect the price of the older product to at least stay the same and possibly go down as the better product comes out, but it didn't. It went up.” Fisher, 1/11/1999, at 43:9-13.

36.1.1. Dean Schmalensee proves that-blackened-(Schmalensee 1999-01-25 at 27:9-11 (sealed session)) is false, and he finally admitted that he had not investigated whether

1. Professor Fisher presented a diagram showing this-blackened-GX 1404 (sealed); Fisher 11/1/99 at 19:18-22 (sealed session). These numbers contain-blackened-Fisher, 1/12/99pm, um 46:16-25 (Sealed Session)
2. Dean Schmalensee presented no comparative evidence-blackened-In fact, he conceded-blackened-Schmalensee, 25.01.1999, um 49:21 - 51:24 (Sealed Session).
3. Instead, Dean Schmalensee presented a diagram that shows-blackened-Schmalensee, 01/25/1999, at 31:18 - 32:7 (sealed session); DX 2332 (allowed in sealed session).
4. Dean Schmalensee also claimed that "Microsoft has not actually increased the price ofWindows 95/98after December 1997.” Schmalensee Dir. ¶ 164. But he himself introduced a horoscope display-blackened-DX 2330 (sealed).-blackened-;z.B., GX 1190, at MS98 000892, MS98 0008930 (sealed);compareGX 449, and MSV 0002629 (1995-blackened-(sealed). Dean Schmalensee seemed to justify his erroneous assertion with that-blackened-(Schmalensee, 1999-01-25, 50:3-9) (sealed session);-blackened-Dean Schmalensee admitted he hadn't investigated whether-blackened- ID.at 54:21 - 55:4.

b.Microsoft threatened to withhold discounts on Windows 95 to double the price IBM was charged for Windows 3.1 after Windows 95 was released

37. Similar evidence of significant and enduring market power over Intel-compatible personal computer operating systems is Microsoft's threat to withhold significant price discounts for Windows 95 in order to force IBM to accept a doubling of its Windows 3.11 license fee.

37.1. Microsoft has given IBM the choice of forgoing its cheap Windows 3.11 license fee or forgoing commercially important Windows 95 MDA discounts.

1. Garry Norris testified that IBM received a $9 license fee for Windows 3.11, in part for its help in developing the product. Norris 6/7/99 at 8:18-23, 12:8-18; 06/08/99 at 81:23 - 82:19; GX 2194, at 90353. IBM's contract with Microsoft guaranteed IBM this rate until September 1997. Norris, 6/7/99pm, at 8:18-23.
2. In April 1996, Norris testified, Microsoft proposed to IBM what Microsoft called its "Windows Desktop Family Deal." Norris, 06/07/1999 at 14:13 - 15:4. The proposed agreement consisted of a single contract covering a range of Microsoft operating system products including Windows 95, Windows 3.11 and Windows NT. Through this agreement, Microsoft made significant discounts on Windows 95 and a license for Microsoft's latest version of Windows NT conditional on IBM giving up its cheap Windows 3.11 price and accepting a much higher price (originally proposed at $62). Norris, 6/7/99 at 8:13 - 9:16, 1:16 - 2:4. IBM could sign a Windows 95 license without giving up its cheap Windows 3.11 plan, but if it did, Microsoft would retain $75 million per year in MDA rebates on Windows 95. Norris 6/7/99 at 9:4-9, 10:21-25.

37.1.1. Microsoft attempted to increase IBM's license fees for Windows 3.11, thereby migrating its installed base to Windows 95 to ensure Microsoft's continued market dominance.

1. Norris testified that Microsoft told IBM that it made rebates, which are critical to IBM PC Company's business, conditional on IBM dropping its low-cost Windows 3.11 plan because Microsoft "wanted more customers to Windows 95 and more customers are moving to Windows NT". Norris 6/7/99 at 12:1-7, 39:20 - 40:2.
2. like dr Warren-Boulton testified that one way Microsoft is increasing the barrier to entry for applications is by "migrating" its "installed base" of users -- those already using Windows operating systems -- to newer versions of its operating system. The increase in the number of Windows 95 users increases the incentives for ISVs to develop for Windows 95, increasing the barrier to entry for applications. Warren-Boulton, 11/23/98, at 75:13 - 77:7.

37.1.2. Microsoft also told IBM that even if it signed Microsoft's proposed agreement, it would not do as well as IBM's competitor Compaq because IBM (unlike Compaq) was competing against Microsoft.

1. See belowPart V.C.2.b(3); ¶ 209.2.1.

37.1.3. IBM eventually gave in to Microsoft's demands and waived its $9 license fee for Windows 3.11 because there was no viable commercial alternative to Windows95 and the rebates Microsoft threatened to withhold were necessary for IBM to compete against OEM competitors .

1. Norris testified that IBM gave in to Microsoft's demands because IBM "had no choice. We didn't have anywhere else to go "by $75 million" a year. Norris, 6/7/99pm, at 13:9-25, 40:3-15 (same).
2. Norris further testified that a Microsoft account executive told IBM that accepting these terms was the "cost of doing business with Microsoft." GX2186; Norris, 6/7/99, 74:20 - 75:10.

37.1.4. Although IBM was able to negotiate down the originally offered $62 license fee that Microsoft had proposed for Windows 3.11 to an effective license fee of about $19.50, Microsoft threatened to withhold MDA rebates of the same amount of $75 million and its ability to increase the price IBM was being charged for its inferior Windows 3.11. demonstrate significant market power.

37.1.4.1. IBM's agreement to Microsoft's claims demonstrates that Microsoft has significant pricing discretion when it comes to Windows 95. Microsoft threatened $75 million in rebates to hasten the day a viable alternative to Windows emerges.

1. Professor Fisher testified that Microsoft's monopoly power is evidenced by the fact that its "customers don't think they have serious commercial alternatives to Windows." Fisher 6/1/99 at 11:9-19.

37.1.4.2. The price IBM paid for Windows 3.11 would have increased even further if IBM had not kept its Windows 3.11 shipments below 8% of all Microsoft operating systems shipped. Microsoft's ability to vary the Windows 3.11 license fee based on IBM's support for Microsoft's goal of migrating users to Windows 95 is further evidence of monopoly.

1. GX 2186 (document discussing IBM's royalty payments to Microsoft states as "Special Condition One" that "If win 3.11 vol.
2. Garry Norris testified that there was a two-part agreement under which "Microsoft offered IBM an incentive, and the incentive was that if IBM's shipments of Windows 3.11 fell below eight percent of its total operational shipments from Microsoft, Microsoft would give IBM 5 million." US dollars would be refunded. dollars agreed in an earlier settlement agreement in 1995. The second aspect of this was that after shipments had actually dropped below eight percent, the price of Windows 3.11 would receive an additional $6 discount.” Norris 06/07/1999 at 37:10-20;see in additionNorris, 6/9/99pm, at 48:9 - 49:5 (same).

3. Other aspects of Microsoft's pricing of Windows are consistent with monopoly

38. Other aspects of Microsoft's pricing of Windows are consistent with Microsoft's monopoly position.

38.1.The rising price of Windows. Unlike other components of a personal computer (which have come down in price significantly), Windows has been increasing in price both in absolute and relative terms over the last several years.

38.1.1. The price that OEMs pay for Microsoft operating systems has increased in absolute terms in recent years.

1. Professor Fisher testified that he “has seen what has happened to Microsoft's operating system price over time and it's not falling, and I don't think it's falling, even on a quality-adjusted basis. And it's not even constant. It's rising.” Fisher 11/11/1999 at 41:24-42:3;see in additionGX 1404 (sealed) (Diagram sponsored by Professor Fisher shows
2. The kingship-blackened-Rose, 17.02.1999, 30:9-18 (Sealed Session).
3. -blackened-GX 1430 (sealed).
4. -blackened- See aboveTel II.C.2.a; § 32.
5. Kempin recognized this-blackened-Kempin 25-02-1999 126:5-128:13 (Sealed Session); GX 1506 (sealed); GX 1508 (sealed).

38.1.2. The price that OEMs pay for Microsoft's operating systems has increased relatively in recent years.

1. Kempin wrote to Gates in December 1997 that the price of Microsoft's operating systems for OEMs "has increased over the last decade" while "other components" of PC systems "have deteriorated and continue to fall". GX 365 under MS7 007194.
2. SeeRomano Abt. (played 12/16/98), at 33:20 - 34:21 (which proves that the prices of all components of the PC have decreased, except for the operating system, the price of which has increased); Warren-Boulton 12/1/98 at 26:16-30:9; GX 439 (Microsoft chart shows price increase); GX 1430 (diagram based on GX 439) (sealed); Warren-Boulton Gov. § 61.
3. CompareSchmalensee, June 23, 1999, 2:15 p.m. (Testimony: "Hardware costs are falling")withDX 2301 (approved in sealed session) (Diagram sponsored by Dean Schmalensee shows

38.1.3. Although Dean Schmalensee claimed so-blackened-+ (Schmalensee 1999-01-25 at 11:11 - 15:18) (sealed session), this claim is not supported by evidence:

1. As previously explained, Microsoft has increased the price of Windows 95 to the same level as Windows 98. But Microsoft didn't increase the quality of Windows 95 at the same time.See aboveTel II.C.2.a; § 36.1.
2. According to Professor Fisher, this relative increase in the price of Windows should "at least make us suspicious" of Microsoft's claim that its price increases merely reflect adjustments for higher product quality. Fisher 1999-01-11 at 43:14-23; Fisher 1/13/99 at 39:13 - 41:9.
3. See above¶ 38.1.2 (the price of the operating system has increased compared to other components of the PC system).

38.2.Microsoft's pricing for its Windows 98 upgrade. Microsoft's pricing for its Windows 98 upgrade is also consistent with Microsoft's monopoly position.

38.2.1. The evidence shows that Microsoft had significant discretion in setting the price of its Windows 98 upgrade product, the operating system product that it sells to existing Windows 95 users.

1. A concurrent study by Microsoft shows that the company could have charged $49 for the product - and there's no reason to believe the price would have been unprofitable - but concluded that at $89 it Dollar could make higher profits. Warren-Boulton 12/1/98 at 24:8-25:13; GX 1371, MS7 003730, MS7 003748.
2. The existence of a price range over which Microsoft believed it could profitably sell its upgraded product is at least consistent with its significant market power. Warren-Boulton 12/1/98 at 24:8-25:13.

38.3.Microsoft's ability to price discriminate. Microsoft's continued ability to price discriminate is evidence of market power and is therefore consistent with monopoly power.

38.3.1. Price discrimination is evidence of the existence of market power and is therefore consistent with monopoly power.

1. Price discrimination is the practice of setting different prices for the same product for different customers. Schmalensee, 01/21/99, 30:11-16. Dean Schmalensee testified that he continued to agree with his statement in his 1982 Harvard Law Review article that "it is a standard textbook thesis that in order for a salesperson to practice price discrimination profitably, he must have some control over price, some Monopoly power ." GX 1514. Dean Schmalensee says that by "some monopoly power" in this quote he meant "market power". Schmalensee, 1/14/99, 47:7-14;see in additionSchmalensee, am 21.1.99, 4:22 - 5:4.
2. Professor Fisher testified that Microsoft's ability to price discriminate indicates its ability to generate above-average profits from OEMs that don't pay the low price. Fisher 1/11/99 41:17-23. Since monopoly power is a "high and sustained degree of market power," Professor Fisher testified, evidence that Microsoft has market power helps inform his belief that Microsoft has monopoly power. Fisher 1/13/99 at 26:16-22.
3. Microsoft introduced an excerpt from a recent economics textbook stating that in order for a company to price discriminate, it must have some market power. The book goes on to say, "While all firms would like to price discriminate, many cannot." DX 2271, at page 434.

38.3.2. Microsoft practices price discrimination by charging different OEMs different prices for Windows.

1. Professor Fisher testified to that-blackened-Fisher 11/1/99 18:14 - 19:8 (sealed session).
2. Summarizing the charts he sponsored, Professor Fisher testified that price differences between OEMs cannot be explained except in light of Microsoft's exercise of market power. Fisher 1999-01-13, 57:16-58:9.
3. As Professor Fisher's diagrams show,-blackened-

   For example, show GX 1403 (sealed), GX1432 (sealed), and GX 1433 (sealed).-blackened-GX 1405 (sealed), GX 1406 (sealed), GX 1407 (sealed)-blackened-GX 1416 (sealed), GX 1417 (sealed), GX 1419 (sealed) and GX 1420 (sealed).-blackened-GX 1408 (sealed), GX 1409 (sealed), GX 1410 (sealed), GX 1412 (sealed), GX 1414 (sealed) and GX 1415 (sealed).-blackened-GX 1422 (sealed), GX 1423 (sealed), GX 1426 (sealed) and GX 1428 (sealed).-blackened-

4. Professor Fisher testified with reference to his charts-blackened-Fisher 11/1/99 at 20:12-18 (sealed session).
5. Additionally, Professor Fisher testified that Microsoft's price discrimination is part of a system that tends to boost Microsoft's future revenues and reinforce the barriers to entry that protect Microsoft's monopoly. Fisher 11/11/1999 at 44:3-45:13.-blackened-Fisher, 11.11.1999, a 44:3–45:13.-blackened-Fisher 1999-01-11 at 30:8-11 (sealed session).
6. -blackened-DX2307.
7. Dean Schmalensee emphasizes again and again-blackened-DX2306; Schmalensee, 1999-01-25, 29:6-11 (sealed session). But his chart DX 2307 shows-blackened-DX2307; Schmalensee, 01/25/1999, 22:17-22 (sealed session).

38.3.3. Among the five largest OEMs,-blackened-

1. According to a chart sponsored by Dean Schmalensee,-blackened-DX2307.
2. According to Dean Schmalensee-blackened-DX 2307. In October 1997, Gates wrote to Kempin, Microsoft's vice president of OEM relations: “Overall, we will never have the same relationship with IBM because of their software as we have with Compaq, Dell, and even HP Ambition. I could handle them just fine if they weren't such rabid JAVA supporters." GX257.
3. Professor Fisher demonstrated this by focusing on the same mix of languages ​​and time period as Dean Schmalensee-blackened-GX 1432 (sealed).

The contrary analysis by D. Dean Schmalensee is unreliable

39. Dean Schmalensee testified that Microsoft has no monopoly power. Dean Schmalensee refused to define a relevant market, arguing that Microsoft cannot be a monopolist because it doesn't act like a monopolist. Dean Schmalensee's analysis is deeply flawed. It is based on assumptions that contradict both the evidence and common sense, and contradict his previous writings and statements.

1. Dean Schmalensee's approach to market definition is flawed

40. Dean Schmalensee testified that there is no purpose in defining a market in which Microsoft sells operating systems (Schmalensee 1999-01-13, pp. 37:12-22). The reasons given by Dean Schmalensee for refusing to define a market and his objections to the market defined by the plaintiffs are not credible and not credible.

40.1.First, Dean Schmalensee testified that evaluating market share "is not helpful in an industry like software" because "entry is possible from many known and unknown sources" and a software industry is too "dynamic" to use the traditional tools of cartel analysis (Schmalensee Dir § 187). This reason for refusing to define a market contradicts what Dean Schmalensee said in theCalderacase, his earlier writings and solid analysis.

40.1.1. ImCalderaIn the case where Microsoft is being sued by a competing operating system maker, Dean Schmalensee has defined a market for Intel-compatible desktop operating systems - the very market he testifies to here is useless.

1. Schmalensee, 13.1.99, 29:9-14.

40.1.2. Dean Schmalensee's refusal to define a relevant market in this case also contradicts his earlier writings.

1. In a paper entitled "Diagnosing Monopoly Power in Antitrust Cases," Dean Schmalensee wrote that "market share has long been the legal touchstone for determining whether a firm has market power," and that any weaknesses in this approach "do not constitute a reason abandoning the traditional concern for market share." GX 2335, at page 1.
2. in oneHarvard Law ReviewArticle entitled "Another Look At Market Power", Dean Schmalensee quoted an article by Landes & Posner as saying that the "standard method of demonstrating market power in antitrust cases involves first defining a relevant market in which the defendant's market share is calculated , and then calculating that share, and then deciding whether it's large enough to infer the required level of market power." GX 1514, at 5. Schmalensee endorsed "Landes & Posner's fundamental approach," saying that calculating market shares "can provide information about the importance of market power, but markets are very diverse and shares should be interpreted in the light of market elasticities." and other conditions." GX 1514, at 9.

40.1.3. In any case, Dean Schmalensee's analysis is not well-founded. The definition of markets and the valuation of shares are appropriate here, and Dean Schmalensee's refusal leads to analytical errors.

1. Professor Fisher testified that while "the question of what is a relevant market in this case and in most cases is not a question with very definite answers" it is useful because it "is a way of getting at the summary of what there are the things one needs to understand" to determine "the constraints of the putative monopolist". Fisher 6/1/1999 7:17-8:5.
2. Professor Fisher testified that because the crucial question in this case is whether Microsoft has a "monopoly power in personal computer operating systems" - the product that Microsoft sells - it is reasonable to begin the analysis by determining whether others Products that may limit Microsoft's ability to exercise power over PC operating systems; that is to determine whether PC operating systems are a relevant market. Fisher 1999-06-01 7:23-8:10;see in additionfisherman you ¶¶ 8-9.
3. In contrast, Dean Schmalensee's refusal to define a relevant market led to an erroneous assessment of the barriers to entry. By "not initially focusing on market definition," Professor Fisher testified, Dean Schmalensee wrongly focused on the ease of entry "into the microcomputer software industry" rather than the difficulty of entering Intel-based PC operating systems. Fisher 6/1/99 at 9:3-12. Whether it is easy to enter the microcomputer "industry" says nothing about whether it is easy to offer a product that can effectively compete against Microsoft's operating system. Fisher 06/01/1999 08:21 - 11:8.

40.2.Seconds, Dean Schmalensee claimed that the market definition here does not make sense because it is "illogical" to exclude other "platform" products that threaten Microsoft's position in operating systems - including Internet browsers and Java - and platforms are "too heterogeneous" in a market ( Schmalensee Dir. ¶ 336; Schmalensee, 13.1.99, 32:3-17; Schmalensee, 23.6.99, 58:15 - 59:21). This argument is badly flawed.

40.2.1. It is Dean Schmalensee's analysis that is illogical. He argued that a market could never be defined - even if it included all products (like PC operating systems) that replace and compete with each other - as long as there are complements to those products (like browsers or other platform software) that other companies use to develop new substitutes or to strengthen existing substitutes.

1. According to Dean Schmalensee's reasoning, it would be illogical not to place in the same relevant market:
   1. an oil refinery in California and a railroad company planning to build a new line to California if the railroad could threaten the oil refinery's position by facilitating the entry of oil refined in other states into the California market. Fisher, 06/01/1999, 15:13 - 17:21 (as an example of a manufacturer of bulky goods); or
   2. a maker of automobiles and a producer of methanol when methanol threatens the automaker's position by facilitating the development of cars that run on methanol. Fisher 6/1/99 at 16:5-12.
2. In these examples, as Professor Fisher pointed out, a product (like trains or methanol) is rightly not included in the relevant market - because it is not an adequate substitute for products on the market (oil and cars) - even though it poses a threat to the To increase competition within this market as it is an important addendum that can facilitate the growth or entry of products that compete with products in the market. Fisher 6/1/99 at 15:7 - 18:11. In contrast, according to Dean Schmalensee, it would not make sense to define a market under such circumstances. Schmalensee, 6/22/99, 25:7 - 26:7. Dean Schmalensee's position is untenable because, for example, a market for oil refining can be clearly defined even though railroads can threaten an oil refining company's market power. Fisher 6/1/99 at 15:7 - 18:11.

40.2.2. Although platform products such as Netscape and Java complement operating systems, they are not replacements for operating systems. Therefore, although they threaten Microsoft's dominant position in the market for PC operating systems, they are not present on this market.

1. See above§ 19.1.
2. Dean Schmalensee acknowledged "conceptually there is a difference, and an important difference" between operating systems and platforms. Schmalensee, 6/21/99, 20:7-10. "An operating system runs the computer...runs the drive, runs the printer, manages the interfaces, and so on." Schmalensee, 6/21/99, 20:4-6. In contrast, a "platform" provides "a set of APIs" that "can be used by other software developers." Schmalensee, 6/21/99, 7:15 p.m.
3. Therefore, although "operating systems are typically platforms" and "many platforms are operating systems" Schmalensee 6/21/99 at 8:7 pm, platforms cannot completely replace operating systems;see in additionGosling Dir. § 8.
4. Java and Internet browsers threaten Microsoft's position in operating systems, not because they can evolve into another operating system, but because the platform they provide could undermine the application entry barrier and facilitate the entry and extension of another operating system. Schmalensee 1999-01-13, 35:5-12 (agrees that "middleware" is a competitive threat to Windows, although a company that supplies middleware "is not a potential entrant into the business of providing operating systems that compete with Microsoft would ").
5. Just as a railroad cannot threaten an oil refinery monopoly unless there is another oil refinery that the railroad can facilitate entry into, so Java and Internet browsers cannot threaten Microsoft's position in operating systems unless there are other operating systems on which these "middleware" products can run. Fisher 6/1/1999 18:5-11 ("In the present case, the growth of the Netscape browser or the widespread use of original Java might very well have broken down the application entry barrier and made other operations possible. But it would be the other operating systems that were on the market then... either Netscape, for the browser market, or Sun for Java."); Schmalensee, 06/23/999, 57:14 - 58:3 (admission that an operating system is currently essential for accessing web-based applications).

40.2.3. There is no evidence that Java and Netscape limit Microsoft's ability to exercise monopoly power today. So even if, as Dean Schmalensee wrongly points out, the market should contain "every significant restriction" for "the alleged monopolist" (Schmalensee, 6/24/1999, 60:10-20), Java and Netscape should not be included in the market .

1. Dean Schmalensee acknowledged that what he characterizes as Microsoft's existing competitors does not constitute a material constraint on Microsoft's ability to exercise market power. Schmalensee, 01/14/99, at 23:5-18, 24:16-21.
2. dr Warren-Boulton testified that "under the particular economic conditions in this market, I would not expect that the prospect of such a threat" to Microsoft's monopoly "in the future would materially affect Microsoft's current prices." Warren-Boulton, 11/19/98, at 33:6-14.

40.3.third, Dean Schmalensee claimed that market shares in an industry characterized by significant protection of intellectual property and low marginal costs do not make sense (Schmalensee, 01/20/1999, 63:21 - 65:4). This argument ignores both the relevant question - whether Microsoft's behavior is constrained by competition from others - and the importance of other barriers to entry.

1. Professor Fisher testified that "the application barrier to entry" protects Microsoft "independent" of its intellectual property rights in Windows. Fisher 6/2/99 at 14:24 - 15:4. Although a copyrighted movie cannot prevent new movies from being written, the application's barrier to entry prevents the entry and expansion of other Intel-based PC operating systems. Fisher 6/2/99 at 13:20 - 15:4.

2.Dean Schmalensee's opinion that Microsoft does not have monopoly power because of low entry barriers is wrong

41. Dean Schmalensee testified that Microsoft lacks monopoly power because "Microsoft is not protected by any significant barriers to entry" (Schmalensee, 01/14/1999, 8:22 - 9:9). Dean Schmalensee's reasoning for the absence of economically significant barriers to entry is flawed and contradicts the evidence.

a. Dean Schmalensee is wrong that the entry hurdle for applications is low

42. Dean Schmalensee claimed that "the facts are irreconcilable" with the existence of a high admission barrier (Schmalensee, 06/22/1999, page 56:9-12). But the evidence speaks against it.

42.1. Dean Schmalensee admitted virtually all of the critical facts underlying the admission barrier.

1. Dean Schmalensee acknowledged that operating systems looking to replace Windows face a "chicken and egg problem... Consumers will not use an operating system if there aren't enough applications written on it." ISVs will not write application software for an operating system unless they expect enough customers to use that operating system." Schmalensee Dir. ¶ 100; Schmalensee, 6/23/99, 58:10 - 59:24.
2. Dean Schmalensee acknowledged that most applications are "written for Windows first, and sometimes only" for Windows. Schmalensee, 1/13/99, at 61:22 - 62:4.
3. Dean Schmalensee acknowledged that Windows has a much larger portfolio of applications than are available for other PC operating systems and "that the rich selection of applications available for Windows adds significantly to the appeal of this platform and that . .. alone gives it an edge over other platforms." Schmalensee 1/19/99 at 50:3-12.
4. Dean Schmalensee acknowledged that "to garner as much attention as Microsoft for a brand new entrant, you might have to spend more money than Microsoft does. Schmalensee, 01/14/99, 16:10-25.
5. Dean Schmalensee acknowledged that due to the lack of sufficient applications available for other operating systems, there is currently no operating system that a major OEM can switch to and that Microsoft could raise the price of Windows in the short term. Schmalensee, 1/13/99, at 42:16-22, 46:10-12; 6/23/1999, at 60:9 - 61:4; Schmalensee, 1999-01-20, 38:13-17 (agreement that "if Microsoft increased its prices now by 10 percent or 15 percent or 20 percent, it would increase its short-term profits").
6. Dean Schmalensee acknowledged that "switching costs and network effects can be greater for some operating systems than for many application programs." Schmalensee dir. Section 130.
7. Dean Schmalensee acknowledged that ISVs will not commit to a specific operating system unless they believe the expected return will cover the costs that ISVs need to reduce. Schmalensee dir. § 105; Schmalensee, 1999-01-13, 61:10-13 (stating that the "reasons for not porting or not writing for a particular operating system" are "usually business reasons". You write for an operating system when you think it likely is to be profitable.").
8. Dean Schmalensee acknowledged "that the application programming barrier to entry ... is something that actually makes it difficult for people to get into the business of supplying operating systems." Schmalensee, 01/14/99, 09:10-18.

42.2. Despite these concessions, Dean Schmalensee argued that the barrier to entry for applications is low as there is no evidence that competitors face higher costs to compete effectively than Microsoft does and that any cost disadvantage is not significant (Schmalensee dir. ¶¶ 105, 132; 1/14/99, at 16:14-25; 23.6.99, at 11:22). The evidence contradicts this argument.

1. As previously discussed, the expected gain for ISVs from writing to other operating systems is less than the gain from writing to Windows due to Microsoft's massive installed base. other operating system vendors therefore face higher costs when they get large numbers of ISVs to write to their operating systems.See abovePart II.B.3., § 27.
2. Due to the problem of collective action mentioned above, it is very unlikely that ISVs will write to other operating systems in sufficient numbers to allow those operating systems to become viable replacements for Windows.See abovePart II.B.3., § 27.2.3.2 -.3.
3. Dean Schmalensee did not analyze "what it would take for someone with a hypothetical attractive operating system" to get enough developer support to duplicate the applications available for Windows. Schmalensee, 01/14/99, 2:23 - 3:22 p.m.

42.3. In support of his argument that other operating systems have no cost disadvantage when attracting ISVs that prevent effective competition with Microsoft in PC operating systems, Dean Schmalensee pointed to the recent success of several niche operating systems, including Linux and BeOS (Schmalensee Dir. ¶¶ 138-40, 158). But the ability of Linux and BeOS to capture both developer attention and consumer interest has been limited, thus confirming rather than undermining the existence of the application barrier to entry.

42.3.1. BeOS is marketed as a specialized complement to Windows because it lacks the breadth of applications necessary to replace Windows.

1. BeOS founder Jean Louis Gassée stated, "'We don't want to compete directly with Microsoft to be the sole operating system on the PC...but we can be complementary.'" GX 568 (quoting Gassée). dr Warren-Boulton testified that BeOS is more of a complement than a replacement for Windows. Warren-Boulton, 12/1/98 at 45:5 - 49:10.
2. As such, OEMs will not load BeOS instead of Windows, but instead load it alongside Windows "as a 'dual boot', allowing users to switch between the two as needed". GX568.
3. Although Dean Schmalensee claimed that BeOS's strategy of becoming a complement to Windows through "dual boot" was just a springboard to challenge Windows (Schmalensee, 1/13/99pm, at 54:8-25), this testimony undermined by his later testimony that there is no appreciable demand for dual-boot systems. Schmalensee, 6/23/99, at 62:2-23.

42.3.2. Linux is marketed primarily as a server operating system, and its use as a desktop operating system is limited to specialized tasks as it lacks applications comparable to Windows.

1. The CEO of Red Hat, a major Linux vendor, explained that Red Hat Linux "is now used almost exclusively to run specialized server computers that distribute data on the Internet or on internal corporate networks." GX 1568. He added, “Just because we exist doesn't mean Microsoft doesn't have a monopoly on desktops. It's like a phone company executive holding up a walkie-talkie and saying that this is a competitor to the local phone service. "GX1568.
2. The President and CEO of Caldera, another Linux vendor, testified that Caldera's OpenLinux product does not compete with Windows 95 and that Caldera does not "have the application base to truly compete with Windows as a desktop." Warren-Boulton, 12/1/1998, 50:4 - 51:15 (Sparks Deposition game);see in additionWarren-Boulton 12/1/98 56:17 - 57:16 (To the extent that Linux competes with Microsoft, it competes in the server market; Caldera does not see itself as a competitor in the desktop market because it does not have the requisite inventory of applications available).
3. An IBM executive said, "The limiting factor for Linux's current breakthrough in the desktop space is simply the lack of available applications written for the operating system." GX 2091. He explained that "users tend to use Linux for smaller, simpler tasks rather than for huge, enterprise-scale transactions." GX 2091. Another IBM executive added that while "it's technically possible to run Linux on to install on an IBM Thinkpad", there "simply not enough applications to make it worthwhile". GX2091.
4. Dean Schmalensee admitted that Linux "is not a big competitor today". Schmalensee, 1/13/99, 45:23. Although Dean Schmalensee also claimed that "the majority of sales of Linux" were "for desktops" (01/13/1999, 73:18-19), he later contradicted this statement and conceded that the "mass" of Linux users "currently" use Linux on "servers". 6/23/99, at 66:5 - 67:5.
5. Although a small number of OEMs offer Linux on some parts of their product line (DX 2434 (reported that Dell offers Linux)), a representative from another prominent OEM stated: "We currently see Linux as more of a server phenomenon than a desktop phenomenon." GX2091.

42.3.3. As a result, although Linux and BeOS have attracted some developer attention, they have not attracted enough developer attention to provide an effective replacement for Windows for a large number of users.

1. As mentioned, BeOS and Linux have thousands fewer applications available than Windows.See abovePart II.B.3., ¶26.1.3.
2. dr Warren-Boulton testified that while BeOS is a viable "specialized" niche operating system, it cannot effectively replace users because it lacks the "extraordinary breadth of applications available...on Windows." Warren-Boulton 11/23/98 at 18:8-22. dr Warren-Boulton further testified that the lack of applications is preventing Linux from gaining significant market share and that only the emergence of a large pool of cross-platform applications can provide Linux with significant competition to Windows. Warren-Boulton, 12/1/98, at 57:8-59:4.
3. Bill Gates reportedly said of Linux, "As with many free products, you get a loyal following, although small. GX1378.
4. Bryan Sparks testified that Linux cannot compete effectively with Windows because it "simply" doesn't "have the application base to truly compete as a desktop". Warren-Boulton, 12/1/98, at 51:12-15 (playing Spark's deposition).
5. One IBM executive stated, "The limiting factor for Linux's current breakthrough in the desktop space is simply the lack of available applications written for the operating system." GX 2091. Another added that although "it's technically possible to install Linux on an IBM Thinkpad", there "just aren't enough applications to make it worthwhile". GX2091.
6. Professor Fisher testified that "Linux will remain a fairly successful niche operating system for some time and will not actually pose a serious threat to Microsoft." Fisher 6/3/1999 at 25:14-17.

42.3.4. The existence of niche operating systems such as Linux and BeOS is entirely consistent with Microsoft's monopoly; and Dean Schmalensee is wrong when he argues that when the barrier to entry for applications is high, other operating system vendors or vendors of other platform products that may also be complements to Windows "waste their time" trying to attract developers (Schmalensee, 6/ 23/99 at 23:16 - 27:10; 1/13/99 at 55:1-22).

1. Professor Fisher testified: "It is generally accepted that one company can have monopoly power over a number of competitors." Fisher, 06/01/1999, 22:4-17.
2. Professor Fisher further stated that breaking the application barrier to entry is not enough, "that there are some ISVs or even many ISVs that are writing to operating systems other than Windows" because "what makes the application barrier to entry so severe". "The breadth and depth of the many applications being written for Windows." Fisher 6/1/1999 55:15-56:19.
3. dr Warren-Boulton testified that the fact that companies are porting to Linux shows that they are betting that Linux will be profitable, not that Linux will replace Windows. Warren-Boulton, 11/19/98, at 99:7 - 100:4.
4. dr Warren-Boulton testified that "the existence of fringe competitors in the operating system market in no way means that Microsoft does not have monopoly power" since the applications have a barrier to entry. Warren Boulton, 11/19/99 at 19:16 - 20:3.

42.3.5. Any threat Linux and BeOS pose to Microsoft's position is speculative and does not prevent Microsoft from enjoying monopoly power today.

1. The CEO of Red Hat, a leading Linux vendor, stated, "We are absolutely not a viable competitor 'from Windows' right now. We have every intention of becoming one, but how long will that take? Realistically, it will be 20 years." ." GX1568.
2. Dean Schmalensee acknowledged that Linux today does not represent a material limitation on Microsoft's ability to exercise power and cannot predict when it will exercise such a limitation. Schmalensee, 1/13/99, at 52:25 - 53:8; 01/14/99 at 23:16-25. He acknowledged that he had made no estimate of how many PCs now have Linux preinstalled or will have Linux preinstalled in the future. Schmalense 6/23/99 at 65:17-24. Dean Schmalensee testified that he did not "pretend to be able to predict" whether there would be significant demand for Linux in the future. Schmalensee 6/23/99 at 73:7-12.
3. dr Warren-Boulton testified, "I have absolutely no evidence that Microsoft's pricing" of Windows "is constrained by perceived or actual competition," including "the availability of Linux." Warren-Boulton, 11/19/98, at 96:20 - 97:1.

42.4. Dean Schmalensee is wrong that even if other operating system vendors are facing significantly higher costs than Microsoft is today, this is not a barrier to entry, since a barrier to entry only exists if the cost of a competing operating system today is greater than the cost Microsoft incurred when it entered (Schmalensee, 06/22/1999, at 62:8-20).

42.4.1. For one thing, this definition of a barrier to entry contradicts the approach to barriers to entry that Dean Schmalensee uses elsewhere in his testimony and earlier writings.

1. Dean Schmalensee described as "broadly consistent" with his definition of barriers to entry, stating that a barrier to entry is any factor that "enables a company already in the market to achieve returns above competitive levels while discouraging others from entering". GX1516; Schmalensee, 1/14/99, 6:17 - 7:19. And he testified that a barrier to entry exists when there are factors that put "firms at a disadvantage that would otherwise be able to compete efficiently." Schmalensee 1/21/99, at 33:2-5; 6/22/1999 at 70:3-24 (testifies that a barrier to entry exists if the rival cannot "attract the resources to expand and become competitive").
2. Dean Schmalensee previously wrote, "In general, a clear low barrier signal is just an effective, viable entry that captures a non-trivial market share...". GX 1513 ((Richard Schmalensee,Easy entry: Was the concept applied too quickly?, 56 Antitrust L. J. 41, 42 (1987)).

42.4.2. In addition, successfully getting started with PC operating systems is much more difficult today than it was 15 years ago. The network effects underlying the application barrier to entry are much larger today than when Microsoft entered, as PC penetration (the percentage of potential PC users already using PCs) is higher and Microsoft is an established incumbent with a dominant market share is.

1. Professor Fisher testified: “When Microsoft was winning the network battle, when Windows became the dominant operating system, there were … far fewer PCs, and there was no established operating system of equal power and importance. Other operating systems had to be fought, and there were other operating systems that had to be overcome, so to speak. One of these, of course, was Microsoft's own operating system, DOS. The cost after... after Microsoft's victory... of convincing ISVs to build such a stock instead of writing for Windows has to be much larger than it was for Microsoft to convince them to "for Microsoft at all." writing operating systems". Fisher, 6/1/99, at 53:6 - 54:1. In other words, "the economies of scale" underlying the applications' barriers to entry "is now greater." Fisher 1999-06-01, 54:2-10.See in additionFisher 6/1/99 56:14 - 58:18 (Although there might be some incentive for ISVs to enter the market to write for new operating systems, that is not enough to induce ISVs in general to write for others Operating systems to write systems in such a way that they can replace Windows.)
2. Microsoft's own documents show the proliferation of personal computers, showing that operating system shipments increased from 11.4 million units in 1990 to 51.9 million units in 1996. GX 439.
3. dr Warren-Boulton testified that when Microsoft entered the operating system market, the barrier to entry for applications was not comparable to that faced by potential new entrants today. He explained, "Contrast the difficulties there to the difficulties today, where you're faced with an established company with tens of thousands of APIs and a vast application inventory - trying to catch up at this point is just very difficult." Warren-Boulton , 11/24/98, at 48:17 - 49:6.

42.5. Dean Schmalensee's contention that the history of operating system competition shows that the category is easily contestable and that "tipping points" that crowd out competitors often occur is also contradicted by the evidence and his earlier writings.

42.5.1. Dean Schmalensee has previously stated that "the fact that entry has occurred in the past does not mean that there are no barriers to entry or that entry is necessarily easy".

1. GX1513 (Simple inputarticle).

42.5.2. The evidence does not show, as Dean Schmalensee claims, the frequent displacement of a dominant company, but rather Microsoft's proven ability to maintain its market power.

1. Microsoft has been the dominant PC operating system since at least the late 1980s, according to Dean Schmalensee's own analysis. Schmalensee dir. ¶¶ 118-119.
2. Microsoft has maintained this dominance despite the development of, among other things, (i) the graphical user interface; (ii) the migration of PC operating systems from 16-bit to 32-bit chip architecture; and (iii) the advent of the Internet, all of which Microsoft refers to as "Turning Points." Maritz, 15.
3. Professor Fisher, when asked about the history of users' operating systems switching, testified that "it is true that users would switch to [another] operating system if they saw a significant advantage in doing so", but the "problem in the Network effects, or what is sometimes referred to as the application barrier to entry, is unlikely to be noticed by users in the current Windows environment. And Microsoft is doing its best to make sure that's not the case." Fisher, 6/1/99 at 81:25 - 82:10.

42.6. The fact that Microsoft, like other operating system vendors, must continue to attract the attention of ISVs and improve its product (Schmalensee Dir. ¶ 160; Maritz, 01/28/1999, at 6:13 - 7:9) is quite consistent with high application traffic Market entry barrier and market power.

42.6.1. Because of its large installed base, the cost for Microsoft to attract enough ISVs to make its operating system attractive to users overall is far less than the cost to its competitors.

1. See abovePart II.B.3., ¶¶ 25-27.

42.6.2. Its ability to provide "backward compatibility" allows Microsoft to migrate its installed base between its operating system versions, thus maintaining its advantage and therefore the application barrier to entry.

1. Rational's Mike Devlin stated that "because Microsoft strives to make its operating system product 'backwards compatible', we (and our customers) know that if we write a program using the APIs for a Microsoft operating system, it's likely to run on its Successor will run.” Devlin Dir. ¶ fifteen.
2. Microsoft executive Ben Slivka wrote: "Notwithstanding all the cool, attractive features in OS/2 (multitasking, better graphics API, memory protection), upgrading from MS-DOS was no small feat -- customers had to do itgive up somethingto switch to OS/2: your existing software! It's not until Windows 95 (where we've put an amazing amount of focus on compatibility) that we'll finally be able to move customers away from MS-DOS." GX 21, at MS98 0102396 (emphasis in original).

42.6.2.1. Microsoft's efforts to attract ISVs are consistent with monopoly power because monopoly power does not mean unlimited power, because even a monopolist has an incentive to drive demand for its product, and because attracting ISVs increases the barrier to entry for applications.

1. See below€ 50.

b. Dean Schmalensee's claim that entering the microcomputer software industry is easy is a red herring

43. Dean Schmalensee argues that "there are no barriers in the microcomputer software industry preventing new entry" (Schmalensee Dir. ¶ 37). But whether it is easy to enter the microcomputer software industry as a whole is beside the point, because the relevant question is not whether it is easy to enter the "industry" or whether it is easy to make a PC operating system, but whether to make an operating system With enough applications, it's easy to challenge Windows.

1. Professor Fisher testified: “This case … revolves around the monopoly in the PC operating system market. The question of entry into the microcomputer software industry in general is not relevant.” Fisher, 6/1/99 at 9:3-17; Fisher 06/01/1999, 23:6-20.
2. As Professor Fisher further explained, there is no evidence that the microcomputer industry in general limits or could limit Microsoft's ability to exercise significant market power over personal computer operating systems. “To take a simple but telling example, Nintendo makes games. Games are part of the microcomputer software industry," but they are "not a limitation on Microsoft's power in pricing its Windows operating system." Fisher 6/1/99 at 10:3-7.
3. Nor is the fact that others in the microcomputer industry might hire programmers and produce a PC operating system. These companies "will not be able to produce an operating system with these programmers or with other programmers that can overcome the necessary economies of scale and network externalities". These companies "will not be able to produce an operating system that attracts a very large number of application authors, enough to overcome Microsoft's very dominant lead." Fisher 6/1/1999 10:23-11:6.

44. The factors which, according to Dean Schmalensee (Schmalensee Dir. ¶ 95), facilitate entry into the "microcomputer software industry" are not sufficient to overcome the application barrier for entry into PC operating systems.

44.1. That the microcomputer software industry has plentiful skilled programmers and a ready supply of capital cannot, as Microsoft suggests (Schmalensee-Dir. ¶¶¶39-44), overcome the economies of scale that create the barrier to entry for applications.

1. As explained above, the evidence shows that despite the ready availability of programmers and capital, the economic incentives to write for niche operating systems are insufficient to justify reducing the enormous costs required to build an operating system and suite of applications to develop that can replace Windows a large number of users.See abovePart II.B.3.b; ¶¶ 25-31.
2. Professor Fisher testified that "if there were no other barrier to entry for operating systems... sourcing programmers, funding, and so forth would not be a problem," but there is "a very significant barrier to entry nonetheless. I suppose it would be harder to get in if it wasn't easy to get programmers, but getting good programmers is nowhere near enough to get into the PC operating system business." Fisher, 06/01/1999, um 23:21-24:4.
3. dr Warren-Boulton testified that while there appears to be no barrier to entry for capital (Warren-Boulton 19/11/1998 at 65:25 - 66:6), the barrier to entry for applications is a huge barrier to entry. Warren-Boulton Gov. § 59.

44.2. Microsoft's argument that competitors could break the application barrier to entry by mimicking the Windows UI and cloning the Windows APIs contradicts the evidence. In contrast, cloning the Windows APIs is not feasible because the number of APIs is very large and constantly changing.

1. IBM's John Soyring stated, “Not only is it difficult to reliably duplicate the function of each API, another company cannot realistically duplicate the function of all APIs as Microsoft continues to introduce new APIs. Applications will not function properly if they use APIs whose functions have not been duplicated. Therefore, there is always a risk that an application that is important to a user now or in the future will fail. This uncertainty significantly reduces the chance of long-term success. Given the cost, time and uncertainty involved, I do not believe that supporting Windows applications on another desktop or mobile operating system is a reasonable opportunity for a positive financial return, and I would not recommend that IBM attempt to provide additional support for Windows applications on OS/2." Soyring dir. ¶ 13. Soyring further testified that IBM could not ensure that Windows applications would run on OS/2 because of IBM's "technical or legal capabilities Lacking "rights" to Microsoft's Windows 95 source code. Soyring 11/17/98 at 76:4-20.
2. Caldera's Bryan Sparks, a Linux vendor, stated that “It is very difficult to write a Windows-compatible operating system that can run Windows applications without the operating system provided by Microsoft. We tried this for a while at a sister company when I was at Novell, and we've just realized that the breadth of the APIs is amazing" and that Microsoft is "adding APIs at what we think is an incredible rate, and that it's very, it is very difficult to keep up with this API and develop a compatible product. And even if you did create that, you would have a hard time branding it an acceptable platform because of the breadth of the API." Sparks Dept. (played 12/1/98) at 52:15 - 53:25.
3. Microsoft's Joachim Kempin noted in December 1997 that cloning the Windows APIs "would be a lot of work and potentially" "pose patent problems for anyone who attacks us". GX 61. Bill Gates understood that the more difficult a technology was to clone, the more control Microsoft would have over it; Discussing Microsoft's strategy for its HTML rendering engine (codenamed "Trident"), Gates wrote, "I think we want to make Trident extremely difficult to clone. I think we want to patent elements of Trident. I think we want to continue making extensions to Trident." GX351.
4. dr Warren-Boulton testified, "At this point in time, cloning ... in the sense of developing an operating system that exposes the full set of APIs of Windows 98 is certainly almost physically impossible, and as a practical business matter, is not reasonable." Warren-Boulton Boulton 11/19/1998 at 29:13-21.

c. Dean Schmalensee is wrong when he argues that the existence of potential threats to Windows shows that the barriers to entry are low

45. Dean Schmalensee argued that the threat of Internet browsers and Java to the barriers to entry for applications is inconsistent with the conclusion that the barriers to entry are high (Schmalensee, 1999-06-22, 71:6-74:17). This testimony is wrong.

1. As Professor Fisher testified, the fact that barriers to entry may one day be eroded, whether by Internet browsers, Java, or other known or unknown threats, does not affect whether Microsoft has a monopoly today. Fisher 6/1/99 at 14:9-15:6; 06/01/99, at 25:25 - 26:18.
2. Dean Schmalensee's position, as Professor Fisher testified, proves too much. It implies that "any monopolist taking action to preserve his monopoly and seeing a threat worth taking can successfully argue that the fact that he took the action means that he cannot have monopoly power". Fisher 6/1/99 at 13:12-20.
3. Microsoft has taken steps to ensure that these threats cannot breach the application's barriers to entry, and its behavior has increased the already significant barriers to entry. Fisher 6/1/99 at 12:9-17; Fisher 6/1/99 at 60:4 - 62:2; Fisher, 6/1/99, at 66:9-25.

46. ​​The possibility that other information applications might eventually take some business away from personal computers also does not show, as Microsoft argues (Maritz ¶¶ 104, 275-77), that the barriers to entry are low.

46.1.Firstother devices, as explained, do not limit Microsoft's ability to exercise power over PC operating systems and therefore do not affect whether Microsoft has a monopoly.

1. SeeabovePart II.B.2; § 19.

46.2.Seconds, even if other devices became better substitutes for some PC uses and gained wider adoption, it would only affect the value or magnitude of Microsoft's monopoly power, not its existence. In any case, the evidence shows that demand for PCs, and with it the value of Microsoft's monopoly, is more likely to increase.

1. See abovePart II.B.2; § 19.
2. Steve Ballmer recently stated that "we think the PC will remain a very important central device in the way computers work for the next ten years or so." GX 2301, at 4. He further commented that he “could accept the introduction of new devices. I just don't accept the idea of ​​the PC going away. And while other things, other environments are maturing faster, the PC remains important."ID.a 5.
3. Bill Gates wrote in an opinion piece for Newsweek on May 31, 1999 that "despite pundits predicting the end of personal computers, sales continue to rise". He concluded: "For most people at home and at work, the PC will remain the primary computing tool." GX2059.
4. The very report Microsoft has submitted to support its claim that information device shipments will soon overtake PC shipments actually shows the opposite. It states: "When viewed at its overall scale, with all form factors and all customer segments, PCs far outperform information appliances on a unit basis... and eclipse the market in terms of value." DX 2423, at page 6. As Professor Fisher testified, the report shows "that the PC is not going away" but on the contrary "will remain extremely important" and that Microsoft's "[monopoly] over PC operating systems will remain, therefore." remains important." Fisher 06/03/1999 at 69:14-18;see in additionGX 2082 (IDC chart showing that PC unit shipments are expected to continue growing significantly through at least 2002 and that despite somewhat faster growth in information appliance shipments in 2002, tens of millions more PC units were still shipped will ); GX 2083 (IDC chart showing expected value of PC units shipped will remain significantly higher than expected value of other information equipment shipments until at least 2002).
5. Steve Case testified, "It's hard to imagine that personal computers won't be the dominant way people connect to the internet for years to come, and Microsoft has a pretty amazing lock on that business... Other devices will emerge, but I doubt anyone will challenge Windows.'” Fisher, 6/4/99am, at 44:17 - 45:4 (citing Case Dep. (citing Ct. Ex. 1) (citation omitted)). Case further testified that AOL "has no intention of fighting Microsoft's core business" and "has no illusion that [AOL] in any way interferes with, shapes, or can shape Microsoft's monopoly in the operating system business.'" Fisher, 6/4/99 , 43:19 - 44:16 (quoting Case Dep. (quoting Ct. Ex. 1)).

46.3.third, other devices could only threaten Microsoft's monopoly if personal computers were effectively eliminated as important computing devices. The evidence shows just the opposite: Demand for PCs will remain robust for the foreseeable future.

1. Professor Fisher stated that "as long as personal computers remain an important computing device and a device that has the quality that you need it for certain applications", "no one can imagine" that "a small change in the price of the Windows operating system will leading a lot of people to abandon personal computers and switch to these other devices." Fisher, 06/03/1999 at 82:4-19, 65:23 - 66:6. Professor Fisher dismissed the assertion that "the possible innovations in various other devices” will “reduce the problem of Microsoft's monopoly.” Fisher 6/1/99 at 28:12-15.
2. Professor Fisher further testified: “Microsoft has monopoly power over operating systems for personal computers. The question of the influence of other devices, in this case information application devices, would only become relevant to Microsoft's monopoly power over PC operating systems if it did either of two things, and I don't think both will happen. One is that the shipments of information appliances are becoming so large and so widespread that people would be distributing... personal computers. "This DX 2423 chart shows that PC shipments are growing and growing, and it supports the apparently reasonable assumption that PCs will continue to be important, and even very important." Fisher 6/3/1999 at 65:9-22.
3. Further evidence that PCs will continue to matter is the fact that non-PC devices cannot be used to do tasks that require PCs. For example, Microsoft has pointed to gaming consoles as a source of potential competition with PCs (Fisher, 6/2/99pm, at 72:21 - 76:19); but the very exhibit Microsoft presented states that "'the new Sony machine will not process text or calculate a budget.'" Fisher, 6/3/1999, 72:15-17 (cited DX 2553). It continues: "Sony executives went to some lengths today to claim that their new machine is not a competitor to Wintel, the combination of Microsoft Corporation's Windows operating system and Intel's Pentium microprocessors that power the personal computer industry dominates." DX2553.
4. Dean Schmalensee has no reason to believe that the existence of other devices will destroy Microsoft's monopoly. When asked if he had come to a conclusion on "how far" the "PC operating system will continue to be a major business in the future," he replied that he was tempted to "prophecy again," and so on "of of everything" he "has seen for at least a few years - and it would be hard to say how many - ... a lot of work will be done on the desktop with desktop equipment. I don't know how much, how fast, how the trends will go, but it seems clear to me that for some time "the PC operating system" will be an important business. Schmalensee, 6/23/99, at 41:15 - 42:14.

47. Dean Schmalensee's speculation that OS-neutral, web-based applications developed on the Internet might one day break the barrier to entry for applications (Schmalensee, 6/23/99 at 36:15 - 41:22) also means nothing that Microsoft has no monopoly power.

47.1.First, the possible development of any number of web-based applications remotely comparable to those available for Windows is entirely speculative.

1. Bill Gates wrote regarding AOL's acquisition of Netscape: "Platform threat - AOL does not have it in its genes to attack us in the platform space." GX 2241, at MS98 0231890 (sealed; quoted portion published).
2. Dean Schmalensee acknowledged that he had not conducted any study or analysis to determine how many web-based applications exist or how much has been invested in this area. Schmalensee, 6/23/99, 49:16 - 50:23; Schmalensee, 6/23/99, 37:15 - 38:10.
3. Dean Schmalensee acknowledged that he hadn't conducted a study of the number of web-based applications that require Windows. Schmalensee, 6/23/99, 54:21 - 55:9.
4. When asked if "there will come a time in the future when people will put as much effort into developing web-based applications as they do into developing applications for Windows," Dean Schmalensee replied, "I'm not a prophet...I can not, while I am sitting here, declare that I know what will happen in this regard in the future." Schmalensee, 23.6.1999, at 38:18 - 39:2; Schmalensee, 23.06.1999, 39:13 - 40 :1 ("In this line of business it is very risky to extrapolate current trends, and as I said, I am not a prophet").
5. Dean Schmalensee acknowledged that he couldn't and couldn't predict the number of web-based applications that would exist in the next few years. Schmalensee, 6/23/99, 50:24 - 51:7.
6. Professor Fisher testified that he did not conduct a study on the number of web-based applications because "however interesting these applications are, they fall far short of breaking the . . . application barrier for entry into operating systems for PCs". Fisher 6/3/1999 at 81:6-15.

47.2.Seconds, since web-based applications require a browser, Microsoft could counter this potential threat by gaining a significant share of browsers and then using proprietary extensions.

1. See belowTeil VII.D.

48. Dean Schmalenee also wrongly argues that the possibility of entry should be examined "over a long period of time", beyond the next few years (Schmalnesee Dir. ¶ 184).

1. As Professor Fisher pointed out, this argument confuses the question of how long Microsoft could recoup predatory investment to maintain its monopoly with whether that power exists. For example, according to Dean Schmalensee, one could not determine whether AT&T was a monopolist in 1980 without "considering the telephone industry well into the next millennium because it is possible that if it were able to drive MCI out, it would still drive it." Would rake in money for 30 years later." Fisher 6/1/1999 6:12-8:10-3 p.m.

3. Dean Schmalensee's claim that "long-term threats" are preventing Microsoft from exercising monopoly power today is flawed

49. Dean Schmalensee bases his argument that barriers to entry are low and therefore Microsoft does not have monopoly power mainly on his claim that Microsoft's pricing of Windows is severely constrained by largely unknown long-term threats to its position. Dean Schmalensee argues that if Microsoft were a monopolist, it would charge more than $1,800 for Windows instead of the roughly $70 it actually charges, and concludes that Microsoft engages in massive price caps in order to Exclude threats that have not yet emerged (Schmalensee, 01/21/99 at 11:17-18, 13:11-19, 23:25 - 24:5). However, the evidence contradicts Dean Schmalensee's argument.

49.1.First, Price capping—lowering the price today, sacrificing revenue to prevent entry tomorrow—is irrational when potential competitors know the firm can lower the price later as competition arises. In this case, competitors are deterred by the prospect of price reductions in response to competition, and there would be no reason for the monopolist to sacrifice revenue from price reductions today. Dean Schmalensee's limit pricing analysis must therefore assume that Microsoft cannot credibly threaten future price reductions. However, Microsoft clearly has the power to lower prices in the future if and when competition arises.

1. Professor Fisher and Dr. Warren-Boulton both testified that it was not plausible that Microsoft would price Windows significantly lower than Microsoft would otherwise do to prevent entry, since Microsoft could lower its price should such an entry occur. Prospective entrants evaluate the prizes they would receive upon participation, and they acknowledge that Microsoft's price is not now a guide to what Microsoft would charge - and therefore what prizes are available to the participant - if participation actually occurs would. Fisher 6/2/99 at 6:2-7:14; Warren-Boulton, 12/1/98 at 43:14 - 45:5.
2. Microsoft can credibly lower the price tomorrow in response to entry because, as Dean Schmalensee himself testified, the marginal cost to Microsoft of manufacturing and selling additional copies of Windows through an OEM is "zero." Schmalensee, 1/20/99, at 68:5-20; Warren-Boulton 11/19/98 at 58:25-59:3; Schmalensee dir. Section 85.
3. Dean Schmalensee claimed that the biggest threats to Windows dominance come not from other PC operating systems but from "paradigm shifts". Schmalensee, 1/13/99, at 65:7-24. But there's no reason to believe that the possibility of "paradigm shifts" will be affected by the prices Microsoft is charging today. Fisher 1999-01-11 at 47:19-48:17.

49.2.Seconds, Dean Schmalensee's hypothesis that Microsoft participates in massive limit prices is also incompatible with how Microsoft sees the limitations in Windows pricing.

1. Kempin testified that he did not consider competing operating systems or "competition in general" when setting Windows 98 licensing fees.See aboveTel II.A; § 15.1.5.
2. Kempin's memorandum on Microsoft's Windows 98 pricing, sent to Bill Gates, does not identify any long-term threats as a constraint on Microsoft's Windows pricing. Instead, long-term threats are described as opportunities that could derail Microsoft's strategy. GX365.
3. Based on this evidence, Professor Fisher testified that long-term market entry is not a major consideration in Microsoft's pricing choice for Windows. Fisher 1999-01-13 23:5-14 (it's doubtful "long-term entry...is...at the forefront of Microsoft's corporate philosophy").

49.3.third, the analysis put forward by Dean Schmalensee says nothing about whether Microsoft has monopoly power. On the contrary, the analysis by Dean Schmalensee (Schmalensee, 6/23/99, 6:3 - 9:17) shows at best that Microsoft does not intend to maximize its short-term profits solely through license fees for operating systems.

1. Professor Fisher testified that Dean Schmalensee's analysis could only show that Microsoft was not measuring its monopoly position on the short-term price of Windows. Fischer, 01/12/1999, 4:12 p.m. - 5:17 p.m. But it would tell you "nothing about the Force itself. It wouldn't tell you if Microsoft had power. It would tell you if it exercised power in a particular way.” Fisher, 6/1/1999 at 9:3-12; Fisher 1999-01-11 48:13 - 50:19 (even concluding that Microsoft set a price to prevent future market entry would not necessarily mean that Microsoft does not have monopoly power today).

49.3.1. An analysis that focuses solely on short-term prices is inappropriate, as it ignores the fact that Microsoft may charge an apparently "low" short-term price to maximize its profits in the future for reasons unrelated to entry deterrence .

49.3.1.1. By keeping the price low today and "growing" the market, Microsoft will generate greater supplemental revenue in the future.

1. Paul Maritz testified, “Microsoft licenses operating system products on a large scale to computer manufacturers at attractive prices (typically less than 5% of the price of a new computer). Such broad licensing encourages the adoption and use of Microsoft's operating system products, which in turn encourages the development of a wide range of useful complementary hardware and software products compatible with Windows, and thus with other Windows-related products." Maritz Dir. § 132.
2. Professor Fisher testified that a monopolist like Microsoft has a greater incentive than a non-monopolist to set a low price to encourage the general popularity of computers, since only the monopolist reaps the full future rewards of greater popularity. Fisher, 1999-01-12, 66:4-67:9, with reference to the colloquium in Fisher, 1999-01-12, 24:13-25:21.
3. Professor Fisher further stated that because Windows users often purchase upgrades and other complementary products from Microsoft years after their initial Windows purchase, and because the number of copies of Windows sold is increasing each year, Microsoft is generating more incremental revenue per copy of Windows be captured as possible in Dean Schmalensee's equation. Fisher 6/4/99 at 13:23-15:3. Dean Schmalensee incorrectly compared current Windows earnings to current ancillary product earnings. Fisher 6/4/99 at 13:23-15:3.
4. In fact, Dean Schmalensee hasn't researched the additional revenue Microsoft gets from selling Windows. Rather, he accepted his employees' account that Microsoft "recorded operating system sales by hand on paper" and therefore lacked "a sophisticated internal accounting system" that would allow him to estimate expected complementary revenues. Schmalensee, 1/20/99, at 46:3 - 49:8.

49.3.1.2. Finally, Dean Schmalensee acknowledged that Microsoft may be pricing low today to gain long-term benefits that depend on network effects.

1. Dean Schmalensee testified that Microsoft "keeps the price low so that a lot of people use Windows, and I can attract application vendors for both reasons, both because a lot of people are using it and because there are more applications for it." Schmalensee, 6/22/99, 39:13-18.
2. In this regard, Dean Schmalensee's statement is consistent with Professor Fisher's statement that Microsoft “has an overriding interest in maintaining the application barrier to entry and exploiting network effects. If it sells Windows, the more Windows it sells, the more the network. Incidentally, that's one reason for keeping the price of Windows lower than it otherwise would be, and there are other reasons as well.” Fisher, 12/1/99, at 21:8-14.

49.3.1.3. Dean Schmalensee's focus on near-term price also overlooks the fact that Microsoft receives some of its monopoly returns not in the form of cash payments, but in costly restrictions on its customers and commitments to behaviors that expand the company and preserve monopoly power from Microsoft.

1. Professor Fisher testified that Microsoft "takes some of its profits in the form of protecting its monopoly." Fisher 12/1/99 at 19:20-21. Professor Fisher further testified that there are examples in other industries of sellers with monopoly power choosing to exercise that power in ways other than charging the highest possible price for the monopolized product; In the late 1970s, for example, the two airlines that owned computer reservation systems found it more profitable - before the Civil Aeronautics Board intervened - to increase the cost of competing airlines by influencing the systems' flight displays than to increase the price on those airlines to participate in the systems. Fisher 12/1/99 at 14:11 - 17:3.
2. -blackened-GX 1498, at GW 019843 (sealed).
3. IBM's Garry Norris testified that some of Microsoft's MDA milestones require IBM to take steps that exclude potential Microsoft competitors. Indeed, citing the language in his contemporaneous notes from their March 6, 1997 meeting, Norris testified that Microsoft's Bengt Akerlind told IBM "to get no Netscape and more MDA dollars across the PC company" and IBM threatened with "MDA repercussions" unless IBM agreed to exclusively promote IE. Akerlind told Norris that Microsoft could impose these effects,d.h., increase the price of Windows to IBM, either by changing MDA milestones themselves or by using their discretionary power to determine whether IBM has met their MDA milestones. GX2164; Norris 8/6/99 at 29:19 - 30:23; Norris 6/8/99 at 31:24 - 32:12.
4. -blackened-GX 1436 (sealed).-blackened-Fisher 12.01.1999, 41:19 - 43:20 (Sealed Session).
5. Microsoft offered significant MDA discounts to IBM to reduce support for OS/2; Had IBM accepted the commissions offered by Microsoft, Microsoft's annual Windows revenue from IBM would have fallen by $40 million to $48 million, considering the volume of Windows shipments from IBM at the time. Norris 7/6/99 at 10:16-18. Norris testified that Microsoft offered to reduce the price IBM paid for Windows 95 if IBM agreed, in Microsoft's words, to "adopt Windows 95 as IBM's standard operating system" and make it the "only... mentioned operating system”. Norris 06/07/1999, 20:1 - 23:5 (citing GX 2132). IBM did not agree to these and other provisions because they would have had the effect in the market of "burying" their own OS/2 operating system product. Norris 6/9/99 at 10:18-24.
6. Kempin recognized that one tactic Microsoft could use to effectively lower the cost of Windows is to "reduce some of the more stringent licensing requirements that drive up costs for OEMs." GX365.

49.3.2. Dean Schmalensee's analysis is also flawed because it leads to absurd results.

1. Professor Fisher showed that given Dean Schmalensee's unchallenged assumption that Microsoft's marginal run-run cost of Windows is zero, the elasticity of demand for Windows must be 1 for a price that would maximize Microsoft's short-run profits. Item Ex. 2-A; Item Ex. 2-B; Fisher 1/12/1999 at 1:16-4:19 p.m.
2. If Microsoft believes it's operating at a point on the demand curve where the elasticity of demand for Windows equals one, Microsoft has to believe that a 10 percent increase in the price of Windows -- about $5 -- would result in about 10 % decrease in the number of copies of Windows sold. As Professor Fisher stated: “If you look at what OEMs are saying and just think about it, there's no way it can be true. You can't believe this. They would think they would lose 10% if they increased the price by just $5, and the OEMs have no other choice." Fisher, 1/12/99pm, at 16:16 - 17:8 (Testimony about the Microsoft pricing).

49.4.Fourth, by itself, Dean Schmalensee's calculation of a "short-term" monopoly price for Windows of more than $1,800 is incorrect.

49.4.1. Dean Schmalensee's calculation depends on his assumptions about three variables, all measured in the same year:

1. the average hardware price of a PC minus the price of Windows;
2. the elasticity of demand for PCs and
3. the average revenue Microsoft earns from the sale of other complementary products (GX 1960).

49.4.1.1.Average price of a PC. Dean Schmalensee used $2,000 as the average price for a PC, although this average was calculated taking into account higher priced computers such as workstations and does not reflect that Microsoft takes into account the downward trend in PC prices when setting its prices.

1. Dean Schmalensee acknowledged that his $2,000 number includes significantly more expensive servers and that "probably" the correct number would be one that only includes desktops. Schmalensee, 6/24/99, at 71:23 - 73:9.
2. Professor Fisher testified that the $2,000 figure that Dean Schmalensee used for the average price of a PC (including Windows) in January significantly overstates today's true average price, whether that price actually includes monitors or not. Fisher 6/4/99 at 6:5-21; DX 2492 (priced at $953).
3. The average price of PCs has fallen significantly in recent years and continues to fall. Fisher 6/4/99, 11:10-12:3. In February 1999, PC Data reported, PCs under $600 (excluding monitors) were the fastest growing retail segment, accounting for 19.9% ​​of all retail sales. DX 2493. Even the IDC study cited by Dean Schmalensee as the source for his estimate of the average PC price shows that PC prices are falling historically and for the foreseeable future. GX2300;see in additionDX 2498, 22. Dean Schmalensee acknowledged that it was appropriate to account for the decline in hardware prices and lowered the average price of a PC in his formula from $2,000 in his January testimony to $1,800 in his June testimony. Schmalensee, 6/23/99, 2:11-17.
4. In contrast to Dean Schmalensee's $2,000 figure, Microsoft executives looked to the PC's expected future price when setting the Windows license fee, and Joachim Kempin's December 1997 memorandum to Bill Gates discusses how Microsoft's pricing will support the growth of the PC PC market below $1,000 segment should be considered. GX365.

49.4.1.2.Elasticity of demand for PCs. Dean Schmalensee assumed that the demand elasticity for PCs is 2 (Schmalensee, 01/21/1999, 10:19-20; Schmalensee, 06/24/1999, 62:17-19), but he gave the reasons for doing so arbitrary and unwise.

1. Dean Schmalensee claimed that an elasticity of 2 followed from plaintiffs' claim that personal computers were a market (Schmalensee 1/21/99 at 10:5-7; Schmalensee 1/20/99 at 39:1-3; Schmalensee, 01/20/2019, at 40:22-23). But neither the plaintiffs nor their experts took the position that personal computers were a market. Neither Dr. Neither Warren-Boulton nor Professor Fisher have testified that there is a market for operating systems for Intel-based PCs, and Professor Fisher made it clear that the conclusion does not require defining a market for PCs. Fisher, 1999-06-02, 30:2-13; Fisher, 06/03/1999, at 65:23 - 66:6.
2. Dean Schmalensee gave conflicting statements about his own views on the plausible range of elastics.
   1. In his October 1998 testimony, he testified that there is a plausible range one could imagine and that "numbers below one are quite implausible. Numbers above five and six are quite implausible based on the elasticities encountered, but that's quite a long range, economically, and I don't think I know enough to narrow it down.'” Schmalensee, 6/24/1999, at 63:16-20 (quoting Schmalensee's testimony).
   2. In his testimony, Dean Schmalensee stated that since his testimony he had not carried out any work estimating price elasticity for PC systems and had not seen any estimates in the literature. Schmalensee, 1/20/99, at 39:8-11.
   3. But in his refuting direct testimony, when asked if he had previously testified "that a range of up to 6 is plausible," he replied, "No, it isn't. I went back and looked at everything I've said on here further on the subject and I don't think that aligns with what I said... I never said 4 is plausible and I don't believe it .” Schmalensee, 23.6.99, 18:16-24.
   4. Dean Schmalensee attempted to reconcile this conflicting testimony by characterizing his testimony as an "outlier" among his statements on the subject. He claimed that his January testimony was consistent with his current claim that an elasticity of four is "completely implausible" in this market. Schmalensee, 6/24/99, 64:12-23;I would. at 67:23 - 69:6.
3. Dean Schmalensee arbitrarily assumes an elasticity of demand for PCs of 2, although he testified that the elasticity could plausibly go as high as five or six, and although he has not cited any PC industry studies by himself or others to support it to justify its acceptance. Schmalensee, 6/24/99, 63:16 - 65:15.

49.4.1.3.Supplemental Revenue. Dean Schmalensee used a falsely low and arbitrarily derived estimate of Microsoft's supplemental revenue from Windows sales.

1. Dean Schmalensee derived his estimate of complementary revenue by arbitrarily dividing Microsoft's application group revenue (which he believed to be the source of complementary revenue) by Microsoft's platform group revenue (which he believed to represent revenue from the sale of Windows). , and then he doubled that number to arrive at what he called a "generous" estimate of about $100 in additional revenue per copy of Windows. Schmalensee dir. apartment B, at B-4 No. 11; Schmalensee, 01/21/1999, 11:23 - 12:1 (characterizes this estimate as "generous"); Schmalensee, January 21, 1999, 5:25 - 6:25 p.m. (explanation of the methodology).
2. To correct Dean Schmalensee's mistakes, Professor Fisher estimated Microsoft's actual complementary earnings at $160, before doubling for conservative reasons—that is, more than triple Dean Schmalensee's estimate. Fisher 6/1/1999 at 15:16-17:5. Quite apart from the fact that Dean Schmalensee does not fully consider future complementary income due to the short-term nature of his formula.See above§ 49.1.

49.4.2. Despite the conceptual flaws in Dean Schmalensee's formula, as Professor Fisher testified, it is still possible, using plausible estimates of each of the variables in the formula, to estimate a short-run profit-maximizing price for Windows that is close to the price Microsoft actually charges .

1. Professor Fisher testified that Dean Schmalensee's equation using an elasticity of demand for four PCs (within the range testified to by Dean Schmalensee as "plausible"), a current price per PC of $1,000 and a revised estimate of ancillary revenue of $160 shows this The price of Windows that would maximize Microsoft's profits is $65 - very close to the actual price of Windows. Fischer, 06/01/1999, 17:17-18:2. Using an elasticity of five - also within Dean Schmalensee's range - would yield a profit-maximizing price of $40, according to Dean Schmalensee's analysis, which is actually below the actual price of Windows. Fisher 6/1/1999 at 18:3-6;see in additionFisher, 1.6.1999, 11:8-23.
2. Professor Fisher further testified that, according to Dean Schmalensee's analysis, performing the same exercise with the significantly higher price per PC that was typical in 1996 or 1997 still yields estimates that are within a few hundred dollars of the actual price of Windows per year 1996 or 1997 are Fisher, 6/2/99, 31:13-21.

4. Dean Schmalensee is wrong that Microsoft's other behavior is not compatible with monopoly power

50. Dean Schmalenssee argued that Microsoft is not a monopolist because it does not "behave like a monopoly company" (Schmalensee Dir. ¶ 180 (emphasis omitted)), but his analysis is flawed.

50.1. First, Schmalensee's approach is flawed because it implicitly but wrongly assumes that monopoly power means unlimited power and ignores that a monopolist has an incentive to increase monopoly profits by improving product quality.

1. dr Warren-Boulton stated that "For an economist, every monopolist faces competition. Every monopolist faces competition from potential entry... So there's something out there, whether it's entry, whether demand just falls away, or for whatever reason, there's a reason "a monopolist" won't keep raising the price , when he already raises it. Warren-Boulton 11/19/98 at 38:23 - 39:18.
2. dr Warren-Boulton also testified, "Nothing about monopoly power suggests that a profit-maximizing monopolist has any incentive not to listen to his customers." Warren-Boulton, 11/30/98 at 29:22 - 30:11. >
3. Professor Fisher testified that even a monopolist has an incentive to increase demand for its product. Fisher 12/1/1999 at 19:1 - 20:15.

50.2. Microsoft's overall innovation efforts are therefore consistent with monopoly power, even if without innovation, Microsoft may lose its monopoly power (seeMaritz you. ¶153).

1. Professor Fisher testified that “you cannot look at an industry or a market and … conclude from the mere fact that innovation is taking place that monopoly power cannot exist”. Fisher, 01/12/1999 at 7-8 p.m.; 6/3/99 at 8:11-14.
2. dr Warren-Boulton stated that "there's always an opportunity for a company to simply stop technological innovation...I just don't understand why anyone would want to do that...I'm not inferring whether 'Microsoft' is a monopoly or not. A monopolist also has the same incentive to innovate as a competitive firm." Warren-Boulton, 11/19/98 at 79:12-25.
3. dr Warren-Boulton went on to state that "if Microsoft would just...shut down its R&D version...it would probably lose its monopoly power within a reasonable period of time," but that's entirely consistent with Microsoft's monopoly ownership today. Warren-Boulton 11/19/98 at 41:8 - 43:14.

50.3. Microsoft's efforts (which total hundreds of millions of dollars a year) to get ISVs to write applications that run on Windows are also consistent with monopoly power.

50.3.1. Getting ISVs to write more and better applications makes Microsoft's operating system more attractive, thereby increasing the monopoly profits Microsoft can make.

1. Paul Maritz testified that Microsoft's efforts to work with developers resulted in "great applications for Microsoft's Windows family of operating system products," which in turn increases Windows' appeal to consumers. Maritz Dir. ¶¶ 127, 136.
2. See above§ 26.1.

50.3.2. Getting ISVs to write more and better applications for Windows also raises the barrier to entry for applications as it increases the attractiveness of the Windows platform, which increases ISVs' incentives to write primarily for Windows and reduces resources , which ISVs can devote to writing other operating systems.

1. dr Warren-Boulton testified that getting ISVs to develop for Windows is "an investment in creating barriers to application entry." Warren-Boulton 11/24/98 at 39:13-14.

50.4. Microsoft's argument that the existing installed base of Windows users and piracy together prevent Microsoft from exercising monopoly power (Schmalensee, 01/14/1999 at 25:4-22; Maritz Dir. ¶ 123) is also flawed.

50.4.1. The evidence shows that whatever constraint Microsoft imposes, price piracy is not substantial and does not prevent Microsoft from enjoying monopoly power.

50.4.1.1. Microsoft discourages piracy by penalizing OEMs through MDAs for shipping naked machines.

1. Dean Schmalensee testified that Microsoft's MDAs have fined OEMs for shipping naked machines and that the purpose of the fine is to reduce piracy. Schmalensee, 6/23/99, at 67:13 - 70:17; 69:7 - 70:18.
2. -blackened-

50.4.1.2. There is no evidence that piracy prevents Microsoft from exercising significant monopoly power. On the contrary, the evidence shows that despite the possibility of piracy, Microsoft has significant and enduring discretion in how Windows is priced.

1. See abovePart II.C., ¶¶ 33-38.

50.4.2. The evidence similarly shows that the modest constraint created by its installed base does not prevent Microsoft from enjoying monopoly power.

1. As Professor Fisher testified, Microsoft prohibits licensees from porting operating systems to new computers; so there is no "secondary market" for operating systems. fisherman you Section 77.
2. Installed base cannot affect the price of operating systems purchased through OEM sales. “New operating systems are purchased primarily in connection with the purchase of new computers and only secondarily in connection with upgrades. At best, Microsoft's installed-base argument relates to upgrade pricing. It does not apply to the more important channel of new computers." Fischer dir. § 75; Warren-Boulton, 11/19/98, 64:18-66:8 (testifies that consumers buying an operating system with a new PC and a " Upgrade" operating system have different demand characteristics).
3. And like dr. Warren-Boulton explained that Microsoft's upgrade pricing constraints are light because software, while "never wears out" (Maritz Dir. ¶ 202), can become obsolete. Warren-Boulton 11/19/98 at 64:7-17. In fact, as discussed above, Microsoft's pricing of its Windows 98 upgrade product demonstrates significant pricing discretion and thus a monopoly position even in this segment of the market.See above§ 36.

III.Alternate platform levelTechnologies, especially Internet browsers and Java, threaten Microsoft's operating system monopoly

A.Middleware technologies have the potential to lower application barriers to entry and facilitate competition between operating systems

51. The barrier to entry for applications, as explained, is the result of a chicken and egg problem: an operating system cannot and cannot attract a large enough number of applications to challenge Windows without a large installed base with which to attract ISVs no one can get a large installed base without a large and attractive set of applications.

1. See abovePart II.B.3; ¶¶ 23-32.

52. Middleware technologies - mainly web browsers and Java designed to run on an operating system - threaten to facilitate competition with Windows by reducing the importance of Windows APIs and thereby undermining the barrier to entry for applications.

1. As Chris Jones described in an August 1995 e-mail: “We are so dominant in every other aspect of the market that we can never be ousted by a full frontal attack. However, when we leave a gap in our strategy, there are many companies eager to enter that hole and try to use that hole to grow into our other businesses, and they've succeeded: you just have to Browsing the web to see NetScape, Sun, Apple, Adobe and MacroMedia building a presence. Our business includes solutions like Java, which represent a different programming model than Windows and are attracting the attention of developers and content providers alike. This platform offering is evolving rapidly , with two main players moving forward with their offerings and evangelism: alongside Java, NetScape has announced an interface for embedding various types of documents, while Apple, for its part, is building a programmable browser using OpenDoc. The result – people don't write into our interfaces. The solutions that the people have implemented benefit tag n not only from Windows – they work equally well on all platforms. More importantly, these solutions are being driven by other companies rather than ourselves—particularly NetScape and Sun. Without an alternative to this platform, we will lose control of a critical segment of the developer (and consumer) market." GX 523, at MS98 0103658.
2. Paul Maritz testified, "Of course, if a middleware product provides software developers with a set of APIs that make them more productive and enable them to build better software products, the value of an underlying operating system is greatly reduced." Maritz Dir. § 236.
3. dr Warren-Boulton testified that a competitive threat to Microsoft's operating system monopoly is less likely to come from other operating system products than from extensions to complements of Windows, which can also serve as platforms on which ISVs write application programs. . . The wide distribution of the complement among PC end-users means that application developers can reach a broader base of potential customers by writing to it than if they were writing to an operating system that competes directly with Windows 95/98 and starts with very low market penetration and will be installed base." Warren-Boulton Dir. ¶¶ 65-66;see in additionSchmalensee you. § 136; Tevanian Dir. Article 46.

B. threatened the widespread use of non-Microsoft Internet browsers undermine the barrier to entry for applications and Microsoft's monopoly position

1. The nature of the browser threat

53. Internet browsers, including Netscape Navigator, possess three key middleware characteristics that make them a threat to Microsoft's operating system monopoly that traditional operating systems without middleware support are not.

53.1.FirstUnlike Windows' traditional operating system competitors, their value as a complement to Windows allows Internet browsers to find (and have) widespread use without first having to compete against Windows as a replacement.

1. dr Warren-Boulton testified, "Although a PC operating system cannot successfully compete against Microsoft's operating systems without first overcoming daunting barriers to entry, the situation with a product is different (z.B., browser, or Java technology) that, from the end-user perspective, is both an initial complement and a potential replacement for the Windows 95/98 platform on which application developers can write. Since applications written for such an addition are compatible with Windows, their developers can sell their applications to users of the Windows operating system. Eventually, a sufficient number of such applications may become available to support an alternative platform to Windows. " Warren-Boulton Dir. ¶ 65;see in additionWarren-Boulton, 12/1/98, at 67:19 - 68:8.

53.1.1. With the advent of widespread use of the Internet in 1994-95, browser products became a widespread complement to Windows. Netscape Navigator became the browser market leader and quickly attracted a large installed base of users.

1. As Netscape CEO James Barksdale stated, “Netscape Navigator 1.0 was commercially released on December 15, 1994. By the end of the second quarter of 1995, Netscape had accumulated over $10 million in revenue generated from the browser alone that 1995 had Netscape earned approximately $45 million in browser revenue" (Barksdale Dir. ¶ 18) had "over 70 percent market share for Internet clients and had distributed 15 million browsers around the world through a variety of channels including ISPs, OEMs , and resellers, and via the Internet." Barksdale Dir. § 66.
2. James Clark, founder and former CEO of Netscape, testified that Netscape had achieved an "85 percent market share". Clark Dep. 7/22/98, pp. 39:3-9 (DX 2562).

53.1.2. Netscape was successful early on with its innovative browser.

1. Barksdale testified that Netscape Navigator "hid the technological complexities of the Internet from the end user. Its introduction to the market had a profound impact; the product was an immediate and huge success precisely because of its ease of use and its ability to bring so much new multimedia information to the consumer." Barksdale Gov. § 12;see in additionSchmalensee, 23.6.99, 47:23 - 48:3.
2. In an April 1996 presentation, Brad Silverberg, Microsoft senior vice president, made it clear that Netscape and Sun are "intelligent, aggressive, and unifyingbig lead. This isn't Novell or IBM we're competing with." GX 40 (emphasis in original).
3. In fact, in May 1996, Mr. Gates had conveyed his impressions of Netscape as a strong competitor to top Microsoft executives: “During this Thinkweek I had the opportunity to play with a number of Netscape products. This reinforced the impression that I all agree that Netscape is a pretty formidable competitor. They're moving at full speed." GX 41, at MS6 6012952.

53.2.SecondsBecause Internet browser products, including Netscape Navigator, provide APIs for ISVs to write on, Internet browsers can serve as a "platform" for other software used by consumers.

1. Gates recognized that Netscape exposed Navigator APIs:-blackened-Gates Dep. 8/27/98, 54:4-12 (DX 2568A) (sealed);see in additionGoals Dept. (played on 12/02/98), at 21:25 - 22:18.
2. As Apple's Avadis Tevanian explained, "Internet-related technologies such as browsers are important for the development of future software platforms that could run 'on' different operating systems. These software platforms could be used to run various applications, such as viewers, editing, manipulating and broadcasting various types of content." Tevanian Dir. § 45.
3. Microsoft's James Allchin stated that middleware products such as browsers running on a traditional operating system can serve as a platform for other software. All in Dir. § 35; Dertouzos Dep. 01/13/99 at 427:18-428:4; Slivka Dep., 01/13/99, at 712:21 - 715:6.
4. Allchin acknowledged that browser products like Netscape expose "certainly hundreds, maybe thousands" of APIs to application developers without being included in an operating system. Allchin 2/3/1999 at 10:1;see in additionMaritz 1999-01-25 29:22 - 30:19 (distinguishing Netscape's browser from browser "shells" built on top of Internet Explorer, since Netscape's browser had the ability to evolve into an alternative platform); GX 489, under MS6 6000311 ("Navigator/NetOne offers a new API set - in the short/medium term Navigator offers the volume platform for ISVs and Corps.").
5. Barksdale testified that Netscape was trying to "allow people to build applications on our browser using something called NSAPI, the Netscape Application Programmer Interface," Barksdale, 10/27/98, 73:11-25. As a result, “The browser is not only useful for surfing the web, but can also serve as a platform for developing all sorts of network-centric software applications, such as online banking software products. These network-centric applications sit on top of the browser and take advantage of its web-centric functionality." Barksdale Dir. ¶ Fifteen;see in additionColburn you. Section 8; Andreessen Abt. (played on 1.12.98), at 63:22 - 66:1; Clark Dep., 7/22/98, at 44:25–46:16 (DX 2562); Schell Dep., 15.9.98, 103:17–104:22 (DX 2562).
6. Professor Fisher stated: “Netscape's browsers contain their own set of APIs (as well as a set of Java APIs) for which application developers can write applications. As a result, applications can be developed that run on browsers independent of the underlying operating system." Fischer dir. ¶ 84;see in additionWarren-Boulton Dir. § 69; Warren-Boulton, 23.11.1998, um 34:12–35:13.

53.3.third, Internet browsers, including Netscape Navigator, have been ported to multiple operating systems, allowing application developers to write cross-platform applications using browser APIs. Applications written for the browser run on multiple operating systems.

1. dr Tevanian described the importance of Internet-facing platforms, including browsers: "What is important is that applications written for such platforms can run on any computer that has the software platform, regardless of the underlying operating system." Tevanian Dir. Article 45.
2. As Professor Fisher summarized, "The browsers produced by Netscape run on many different operating systems, including Windows, the Apple Macintosh operating system, and various flavors of the UNIX operating system." fisherman you ¶ 83; GX 13 (Lists 22 operating systems running Netscape Navigator);see in additionSchmalensee, 06/21/1999, 20:10 - 21:7 (explains how the web and the browser serve as a platform).
3. Microsoft's Paul Maritz, among others, recognized that Netscape's browser provides an alternative platform for ISVs to write cross-platform programs for. Maritz, 01/25/1999 at 28:7-11;see in additionMcGeady, 11/9/98pm, at 56:4-25 (description of Maritz's comments to Intel about how Netscape's browsers pose a "cross-platform threat").
4. Andreessen testified that "because Navigator or Communicator tends to support more operating system platforms, it's easier to write a cross-platform application." Andreessen Dep. 7/15/98 at 165:11-166:6 (DX 2555);see in additionClark Dep. 7/22/98 48:21-49:21 (DX 2562) (explains that Netscape's goal was to provide "a computer and operating system independent layer for developing applications that were network-based").
5. dr Warren-Boulton testified, “The problem isn't Netscape as a standalone alternative to Windows. The problem is...the existence of an independent browser industry supporting cross-platform standards to support a range of applications large enough for anyone to provide a platform." Warren-Boulton, 11/23/98, at 80:8-13.

54. Internet browsers, in particular Netscape Navigator, thus posed a threat to Microsoft's operating system monopoly because they threatened to lower application barriers; In the words of Bill Gates, non-Microsoft browsers threatened to "commodify" Windows.

1. Bill Gates, „The Internet Tidal Wave“, 26. Mai 1995. GX 20, MS98 01128763.
2. Barksdale summarized the threat Netscape posed to Microsoft's Windows monopoly: “These innovations that came out of the evolution of browser technology, particularly Navigator, eventually caught the eye of Microsoft. The possibility of a vast library of applications written in Java or other OS-neutral languages, coupled with independent user interfaces and platforms such as those offered by Navigator, posed a serious threat to the Windows monopoly." Barksdale Dir. § 85.
3. As Barksdale pointed out, given the APIs, large or small, exposed by Netscape Navigator, the "major threat" to Microsoft would be "that if developers started developing for the browser, and because, as I mentioned, it Going across these 19 platforms, it then has the potential that OEMs could install different types of operating systems on their machines since the other programs and applications in the general market could run on the browser and wouldn't pay attention to what operating system is installed with the PC." Barksdale 10/27/1998 at 4:19 - 5:9;see in additionBarksdale, 10/27/98, 74:10-16 (explaining that Netscape's browser, if successful, might "might marginalize or commercialize the platform characteristics of the underlying operating system").
4. Professor Fisher stated: "To the extent that browsers support applications independent of the operating system, they could undermine the application programming barrier to entry that protects Microsoft's monopoly on operating systems." Fischer dir. Article 82; fisherman you ¶¶ 85-86, 90 (collection of internal MS documents; citing GX 354, GX 473, GX 510, GX 1016); Fisher 1999-01-12 68:20 - 69:2 (explains that OS and Java threaten to facilitate entry of a substitute).

55. Non-Microsoft browsers posed a particularly serious threat as network-based computing in general and the Internet in particular have rapidly become a very important way in which users use their PCs; If Microsoft were unable to control the standards and interfaces that are central to network-based computing, other companies could develop competing platforms that use those standards and interfaces and would be able to break through the application's barriers to entry .

1. In his May 1995 memo, "The Web is the Next Platform," Microsoft's Ben Slivka wrote that "we should extend the Web with as many Microsoft technologies as possible, even if we have to modify those technologies in unoriginal ways [sic] intended by their designers." He concluded, "If Microsoft doesn't improve the web, there's a nightmare scenario where an OS-neutral web platform emerges, and then a company like Matsushita or Siemens could come out with a $500 'web box.' that runs web applications (no need for Windows or MS-DOS compatibility or Intel compatibility) and consumers are making the obvious choice between a $2000 Windows PC and the $500 web box from Windows.GX21, MS98 0102397.
2. A Microsoft marketing report from June 1996, "Winning @ Internet Content," states: "The rise of the Internet has been fueled by the success of a number of 'platforms' that use these protocols at their core and provide a number of APIs for ISVs to use build on. By far the most successful platform to date has been Netscape, with Netscape Navigator on the browser and Netscape Suite Spot on the server. The main threat to Microsoft is this platform's potential to abstract the Win32 API. For example, if Netscape continues its success in getting ISVs and ICVs to develop applications for Netscape's client/server APIs, in the future those APIs could become the key APIs and threaten the platform position of Win32 and Microsoft." GX 407, at MS6 5005709.
3. See in addition belowTeil VII.D.

2.Microsoft recognized the threat that Internet browsers, particularly Netscape Navigator, posed to its operating system monopoly

56. Microsoft has recognized that Internet browsers not controlled by Microsoft could threaten its monopoly by undermining the application barrier to entry.

56.1. The contemporaneous documents show that Microsoft executives recognized the browser threat and developed their business strategy to respond to it.

1. In a May 26, 1995 memo titled "The Internet Tidal Wave", Gates announced to the rest of Microsoft that he "places the highest importance on the Internet". In this memo, I want to make it clear that our focus on the Internet is critical to every part of our business. The Internet is the most important single development since the introduction of the IBM PC in 1981. It is even more important than the introduction of the graphical user interface (GUI). Gates identified "a new competitor who was 'born' on the Internet" - Netscape. "Their browser dominates with a usage share of 70%, which allows them to dictate which network extensions will prevail. They have a multi-platform strategy where they move the key API to the client to market the underlying operating system .” GX20, at MS98 0112876;see in additionGX16; GX17; GX 336, at MS7 007443; Gates, 1/13/99, 460:15 - 461:10, 407:9-18 (Gates stated that Netscape "is developing a product that would either diminish the value of the Windows operating system or eliminate demand for the Windows operating system, if they would continue to improve and we have not further improved our product.")
2. iMcGeady described what Microsoft executives, including Mr. Gates, told Intel in 1995 about their view of Netscape: "When you start having a couple of senior application developers developing for the Netscape environment, it makes that environment that much better attractive to both end users and other application developers. And so more application developers come up [sic], which brings more users and more application developers, that's the positive feedback loop. He didn't want to do that, kind of a feedback loop that everyone in this industry is looking for... When independent software developers started writing applications or plug-ins that worked directly with the browser, at first they couldn't—they could don't write them anymore so they work directly with Windows, but more importantly, then Netscape starts to be the one that defines those application programming interfaces that we discussed earlier, and Netscape is then much m We have more control over the rate of innovation and the kinds of innovations that are taking place for these applications, and Microsoft has correspondingly less control." McGeady, 11/9/98 at 59:22-60:11;see in additionMcGeady 9/11/98 57:10-58:8; GX 279, MS CID 00077 (notes of meeting with Mr. Gates, August 2, 1995).
3. Maritz wrote to other senior Microsoft executives in May 1995 that "we all agree...that the Internet poses a major threat/opportunity to our current businesses" and that "Use Priority # /titles. O'Hare needs to evolve into an extensible client that encourages "online applications" to take full advantage of Windows and other MS resources." GX 148. Maritz 1999-01-28 56:20 - 57:1 (Maritz explains, that Navigator poses a threat to Windows, "as more and more application programs rely on Navigator and not Windows for their services, the perceived value of Windows will decrease, and the ability to move these applications to other platforms will also increase");see in additionGX 503, for MS6 6008248.
4. In his May 1995 memo, "The Web is the Next Platform," Ben Slivka wrote: "The Web is an application platform (complete with APIs, data formats, and protocols) that threatens Windows — many enterprise developers and ISVs could develop and co-deliver their solutions." the Web to a wider audience faster than with Windows or MSN as it exists today." GX21, at MS98 0102395;see in additionGX329; GX 399, at MS98 0103343 (Ben Slivka wrote, "The Web could make Windows irrelevant for years to come."); GX 521, at MS98 0103337; Slivka Dep., 1/13/99, at 724:1-8 (Slivka testified, "You know, whether it was Navigator 1 or Navigator 2 or Navigator 3, the point wasn't that this thing, like it was then was going to kill Windows instantly... The point was, this thing could grow and prosper and provide an application development platform that was more popular than Windows.")
5. Brad Chase, in an April 1996 planning memo, described how Microsoft would lose "the Internet platform battle" if it did not increase consumer use of Internet Explorer: "The industry would simply ignore our standards. Few would write Windows apps without the Windows user base. . . .” GX 39, under MS6 5005720. He continues, “Netscape is already entrenched in our markets around the world. The situation today iscreepy." GX 39, at MS6 5005724 (emphasis in original);see in additionGX 510, MS7 004127 (Chase warned that competing internet browsers could eventually "obsolete" Windows); GX 59 (Chase noted in April 1997 that "the IE portion is critical. Without it, we lose the desktop, which translates into Windows and Office revenue over time."); GX 828, MS98 0118367 (In March 1998 Chase noted:-blackened-") (sealed); GX 40, under MS6 6005550 (Silverberg writes: "Our competitors are trying to create an alternative platform to Windows."); GX 407, under MS6 5005716; GX 475.
6. In a May 1997 Internet Explorer 5 planning document, Chris Jones analyzed Netscape's approach as follows: “Netscape Communicator defines a new platform that takes advantage of the lessons learned from Visual Basic, Visual C++, Java and Web content. They are totally focused on turning their application framework (HTML, object model, scripting and JFC) into the primary way developers deliver Internet-centric applications." GX 494, at MS7 004614. Mr. Jones also testified, that "as soon as the internet came along...it was clear that you could take and create something that would expand and improve on what was available on the internet and a range of services that exist to create HTML and create an alternative environment which Windows no longer needs, which abstracts all the value that Windows provides and makes it a general purpose - to quote a Netscape vice president - partially debugged device drivers You know, I'm not in the business of shipping partially debugged device drivers ." Jones Dep., 1/13/99, at 574:24 - 575:22, 578:2-14 ("If you mean we thought the Netscape browser was a platform threat, the answer to that question is yes, because the services offered were compelling alternatives to the services on Windows.").
7. Microsoft's Yusuf Mehdi agrees that “Letting users use our software…is an important goal for us to defend Windows market share and provide a platform for these developers to write on. And as such, Netscape would have a more popular platform that people wrote to and used instead, that would be a business threat to Microsoft's Windows business." Mehdi Dep., 01/13/99, at 637:14-638:22.
8. like dr Warren-Boulton summarized: "Microsoft clearly viewed Netscape, particularly initially, as a direct threat to its operating system in the sense that Netscape could actually become... a full and direct competitor." Warren-Boulton 12/1/98 at 42:14-20;see in additionWarren-Boulton Dir. ¶ 87 (Collection of quotes from Microsoft employees citing GXs 20, 39-40, 503, 510).

56.2. During the trial, Microsoft's witnesses acknowledged that Netscape Navigator posed a competitive threat to Windows because it provided an application platform that threatened to undermine the application barrier to entry.

1. Dean Schmalensee testified that "Netscape apparently intended to pursue a middleware strategy to compete with Windows. Netscape Navigator relied on APIs in Windows and in that sense was an application. and encouraged ISVs to write to them, providing APIs and other "hooks" and services and software tools offered. . .” Schmalensee Dir. § 137; Schmalensee 1999-01-13 33:21 - 34:5 (agrees that Netscape and Java are a threat to Microsoft because applications written for these platforms "can run cross-platform"); Schmalensee, 1/13/99, at 35:5-14; Schmalensee, 06/21/1999, 23:10-19 ("I believe that Netscape was a potential platform competitor, and Java was certainly over -- was and is, by definition, an actual platform competitor.").
2. Allchin agreed that Netscape's browser posed a platform threat to Windows. Allchin 2/1/1999 at 55:22; Allchin, 2/1/1999, 60:23-25 ​​(acknowledging that the "web application platform" is a threat to Windows and that the integration of the browser into Windows was a response to that threat); Allchin 2/1/1999 at 60:3-4 ("they were a competitor to the platform, absolutely"); Allchin 02/03/1999 20:20-22 (reviews GX 47: "By this point it was clear to me that Netscape was certainly adding enough APIs for this to be Windows' competitor."); Allchin, 2/3/99pm, at 9:1-8, 10:9-15, 28:12-15.
3. Maritz said he views Netscape as both an actual platform competitor "in terms of how people might structure applications" and a "potential" platform competitor. Maritz, 01/26/1999, at 28:13-23; Maritz 1999-01-26, 30:4-6 (Microsoft's "initial concerns about Netscape centered on their ability to provide APIs and their ability to expose new facilities for web sites"); Maritz, 01/25/1999, 26:20 - 27:19 ("During the first half of calendar year 1995," Microsoft came to believe that "Netscape became a platform ... on which other software could rely and expand its ability as a platform.And one of the natures of a software platform is that it exists to enable other software, and if the other software depends on your competitor's platform, even if it runs on your own platform, over time that may Fall in value of the platform . . . . ").

C.Cross-Platform Java also posed a middleware threat to Microsoft's operating system monopoly

57. Cross-platform Java is another middleware technology that has the potential to break down the application barrier to entry by gaining widespread use of APIs without directly competing with Windows as an operating system.

1. The nature of the Java threat

58. James Gosling and others at Sun Microsystems developed Java in large part to give developers a choice between writing cross-platform applications and writing applications that depend on a particular operating system.

58.1. Java consists of a set of interlocking elements designed to facilitate the creation of cross-platform applications.d.h.Applications that can run on multiple operating systems.

1. Gosling stated, "Java technology is intended to make it possible to develop software applications that are not dependent on any particular operating system or computer hardware... A primary goal of Java technology is to ensure that a Java-based program -- in Unlike a traditional software application -- is no longer tied to a specific operating system and hardware platform, and does not require the developer to port the program to different platforms, which is time-consuming and expensiveThe Java programming language, "Software developers who create applications in Java benefit from developing code once and not having to 'port' their applications to every software and hardware platform." . . . Because Java technology enables developers to create software applications that can run on different JVMs on multiple platforms, it promises consumers a wider choice of applications, operating systems, and hardware. Java technology has the potential not only to free individual consumers from worrying about whether the software they want to run is supported by a particular operating system, but also to allow businesses and Internet users to connect different types of computer systems on a network more easily to mix." Gosling Dir. ¶¶ 20-29(b);see in additionGosling, 3.12.98, bei 6:3-6.
2. Gosling noted this issue in internal documents as early as August 1995: “The problem with making developers independent of CPU and operating system is that they can port to Sun or to Windows Success are apps. Apps are the key to volume. Java enables developers to reduce their dependency on Intel and Microsoft." DX1285;see in additionDX 2012, under SUN 87 001685 ("Sun seeks to establish Java as a viable computing platform that is hardware and operating system independent.").
3. In his June 1999 counterstatement, Dean Schmalensee acknowledged, “Java is used for a variety of things. This is how my son learned computer programming for the first time. It has been used to run on a variety of platforms. That's obviously one of Sun's key selling points." Schmalensee, 6/23/99 at 50:5-11.
4. As the District Court for the Northern District of California stated, "Sun's JAVA technology includes a standardized application programming environment that enables software developers to create and distribute a single version of programming code that runs on many different, otherwise incompatible, system platforms and browsers . Most computer systems implement platform-dependent programming environments, such as Microsoft's Win32 programming environment. Programs designed to run on one platform will not work on another platform. Therefore, a software developer must choose the platforms for which it is appropriate to develop and support different versions of the same program. Sun's platform-independent JAVA technology, which can be implemented on many different system platforms and browsers, eliminates the need to create and support different versions of the same program."Sun Microsystems, Inc.v.Microsoft Corp., 999 F. Supp. 1301, 1302 (ND Cal. 1998).

58.1.1. Java provides ISVs with a programming language that they can use to write applications. Java also includes a set of "class libraries", a collection of programs written in Java that provide APIs that ISVs can use to develop software applications.

1. Microsoft's Paul Maritz summarized the various aspects of Java: “Java, the programming language; Java, the virtual machine you need to run Java programs; and then there is this collection of other programs written in Java, which I call the Java classes. It is this collection of software that is proposed by Sun and Netscape has announced its intention to work with Sun, which forms another middleware, I'm worried about." Maritz, 01/26/99, at 18:22 - 19:23.
2. As the District Court for the Northern District of California summarized, "The Java programming environment enables software developers to create a single version of program code that runs on any platform that has a compatible implementation of the Java runtime environment." Programming environment includes (1) Sun's specification for the Java language, (2) Sun's specification for the Java class libraries, and (3) the Java compiler."Sun Microsystems, Inc.v.Microsoft Corp., 21 F. Supp. 2d 1109, 1112 (N.D. Cal. 1998).

58.1.2. The Java programming environment also provides software developers with a "Java Virtual Machine" (JVM) which, when ported to different operating systems, serves as a "host" or "adapter" on which programs written in the Java language run independently can run the underlying operating system. Together, the Java class libraries and the virtual machine are often referred to as the "Java Runtime Environment" (JRE).

1. As Gosling explained, Java makes it much easier for ISVs to develop cross-platform software because Java programs “don't have to run by interacting with a specific operating system's APIs. Instead, they typically interact with a Java Virtual Machine ('JVM'). is an intermediate software layer that translates the Java-based program for the specific operating system and hardware platform on which the Java virtual machine is running. Essentially, the Java-based program views the JVM as an operating system, and the operating system views the JVM JVM as a traditional application...once a JVM has been developed for a software platform and the JVM is fully compliant with the Java specs...should they run most Java-based programs without the need to recompile or otherwise modify the programs... Such programs can therefore be run on any personal computer, any other type of computer, or even devices that are not traditionally considered computers (e.g. mobile phones) provided that the Mach Ines have compatible JVMs installed on them.";see in additionGosling dir. ¶¶ 24, 25, 28; Gosling, 12/2/98, 55:5-11 (any Java program, if properly written and properly compiled into bytecodes, should run equivalently on any properly designed and implemented Java virtual machine, regardless of the underlying platform); Gosling, 12/10/98, 21:8-14 (description of the JVM as an adapter).
2. Sean Sanders, an executive at Novell Corporation, stated, "The Java Virtual Machine is essentially another layer of software that enables people to run Java-based applications and help them—give them the tools they need to build and and to -- to optimize other Java applications they might want to develop." Sanders Dep. 01/13/99 at 188:18-189:15.
3. The District Court for the Northern District of California described the Java architecture as follows: "Sun's JAVA technology is what is known as a 'class-based' language because its functionality is determined by the Java classes available to the programmer. Therefore new functionality requires the development of new Java classes. Programs written in the Java programming language are compiled into intermediate statements called bytecodes or applets. These bytecodes, or applets, are then "interpreted" by another computer program that emulates a hypothetical CPU called the Java Virtual Machine. The Java Virtual Machine translates the applets into instructions that are understood by the specific computer CPU running the Java Virtual Machine is running. Therefore, a specific interpreter or virtual machine is required for each computer CPU running the Java program."Sun Microsystems, Inc.v. Microsoft Corp., 999 F.Supp. 1301, 1302-03 (N.D. Cal. 1998) (citations omitted.).

58.2. Because Java offers alternative APIs, applications written using standard Java programming tools and class libraries can run on any operating system that has a Java Virtual Machine. Widespread adoption of a cross-platform Java programming environment could reduce computer users' dependence on the Windows operating system.

1. As Gosling explained, “As more and more new Java-based programs are developed, distributed, and used, new operating systems can be developed to take advantage of existing Java-based software. In other words, potential developers of new operating systems and hardware platforms need not be put off by the lack of platform-specific programs for their new systems, as long as a JVM is available to run existing Java programs on the systems. This can be done with new operating systems and hardware platforms a chance to compete in markets previously dominated by a particular vendor." Gosling Dir. ¶ 29; Gosling 1998-12-10, 28:20-29:2 ("Once the APIs that developers develop for are ones that are implemented on many different operating systems, then those operating systems can compete with Windows, and that would lead to somehow a smaller -- smaller role for Windows because they would have to compete with those operating systems for the operating system's merits and not about the lock inherent in APIs and binary compatibility.").
2. Soyring erklärte IBMs Begründung für die Unterstützung von Java: „In erster Linie wegen des Werts, den es IBMs Kunden bietet, und des Werts, den es IBM bietet. Wie Sie wahrscheinlich wissen, hat IBM eine Vielzahl von Betriebssystemen, hauptsächlich vier verschiedene. Viele unserer Kunden haben dies viele dieser unterschiedlichen -- mehrere -- eines oder mehrere dieser Betriebssysteme installiert.Es ist für sie weniger teuer und weniger zeitaufwändig, eine Anwendung oder ein Softwareprodukt zu kaufen, das sie kaufen, warten und unterstützen können aber auf verschiedenen Betriebssystemplattformen ausführen." Der Erfolg von plattformübergreifendem Java würde die Wettbewerbsfähigkeit anderer Betriebssysteme verbessern. . . . Was die Nachfrage nach dem Verkauf von Betriebssystemen antreibt, ist die Verfügbarkeit von Anwendungen. Und wenn es eine große Installationsbasis von Java gibt, die konsequent implementiert wird, schafft dies eine wirtschaftliche Gelegenheit für kommerzielle Softwareentwickler, eine kommerzielle Softwareanwendung mit Java zu entwickeln und sie dann für den Verkauf und die Ausführung auf vielen verschiedenen verfügbar zu machen Betriebssystemen statt nur auf einem." Soyring, 18.11.98, bei 54:8 - 55:10;see in additionSoyring dir. ¶ 28 (“Sun's Java technology was designed to allow Java-compatible application programs to run on a variety of different hardware and operating systems. This would provide users with the benefits of a larger number of applications and reduce costs for ISVs to run multiple applications to develop operating systems. This property of Java also has the potential to undermine the application advantage of Windows . . . . ").
3. Barksdale testified that "Java's cross-platform advantages enabled the development of software applications that were more web-centric than desktop-centric and therefore had the potential to serve as a partial replacement for the Windows operating system as a development platform." Barksdale Dir . ¶ fifteen;see in additionSasaki Abt. (played 12/16/1998), 31:24 - 32:7 (explaining that Java has the potential to level the playing field among operating systems).
4. Dean Schmalensee readily acknowledged that cross-platform Java technology poses a competitive threat to Windows as underlying operating systems become potentially less important: "Sun's Java has potentially serious competitive implications for Windows ... less important in the market, and the important standards." would be determined by Sun, which vigorously defends its control over the Java language." Schmalensee dir. ¶¶ 141-142;see in additionWarren Boulton 11/19/98 31:8-12 (ending "an increasing number of users can simply do without Windows altogether").

2.Microsoft has detected the Java threat

59. Microsoft understood the threat that Java posed to its monopoly. Java offered ISVs the ability to build a robust set of cross-platform applications that could lower the application barrier to entry.

59.1. Java provided software developers with a platform to create applications that could run on various operating systems and hardware platforms.

1. Eubanks testified, "One of the great things about Java is that when you build a Java application, it runs on any machine that has a Java virtual machine." Eubanks 1999-06-16, 68:11-20.
2. Gosling, who has worked with numerous application developers and has a career as a developer himself, made it clear that Java's “write once, run anywhere” motto is extremely attractive to developers. Developers want this more than anything else you can imagine." Gosling, 12/3/98 at 32:10-12.
3. Soyring testified, "'Write once run anywhere' ... has for many years been the programming holy grail of being able to write an application once and then run it on many different operating systems or hardware platforms, and we find that Java is a technology , which is by far the closest to any other technology, and we have successfully demonstrated with a number of our customers that with Java technology it is possible to write an application once, compile it once and then run the exact same one Code on a variety of different operating systems, allowing our customers to choose between different operating systems and different hardware platforms." Soyring 11/18/98 at 51:18 - 52:6;see in additionSanders Dep., 1/13/99, at 186:20 - 187:3 (stating that Java "offers the advantage of an application execution environment that allows users to run applications regardless of the operating systems or CPU type limitations they face may currently be suspended").
4. Barksdale stated that "Java enables software developers to write cross-platform applications that run on any operating system, increasing flexibility and ease of use for consumers while reducing the development costs associated with writing one application and porting it to run on different operating systems are connected. . . . Java programming technology solves the problem of platform dependency that has plagued software development for so long. Programs written in Java can be run on any platform that has a Java virtual machine and Java class libraries, which Navigator does." Barksdale Dir. ¶¶ 15, 83.

59.2. Microsoft recognized and continues to recognize the competitive threat that Java poses to Windows by providing an attractive cross-platform programming environment that could eliminate the application programming barrier to entry.

1. dr Warren-Boulton summarized the evidence for Microsoft's perception of the competitive threat posed by Java: “Microsoft recognized almost from the start that the clearest threat to this monopoly power is the emergence of Java technologies combined with an independent browser market. Their response to this threat was to try to adopt this technology and instead of making it cross-platform, it was to convert this technology to a technology that is Windows specific to prevent the emergence of a large stock of applications , which could be used on any operating system . . . ." Warren-Boulton, 12/1/98, 19:24 - 20:8.
2. dr Fisher similarly summarized the evidence that Microsoft viewed Java as a significant competitive threat to Windows. fisherman you ¶¶ 204-207.

59.2.1. Microsoft executives have viewed cross-platform Java as a serious threat to Microsoft's operating system dominance for the past four years.

1. In a June 1996 email to Microsoft executives, Paul Maritz focused on the need to "fundamentally dampen the Java/AWT momentum and reassess ActiveX and non-Java approaches as a viable strategy for structuring software establish". The reason Mr. Maritz gave for this goal was: “Protect our core capital Windows-- the thing we get paid dollars for. While Java per se is not the problem, if everything and everyone switches to Java as the language, it will be much easier for AWT to become the API, and Windows will be broken." GX 42, at MS6 6010347 (emphasis in original);see in additionGX473, under MS6 6006237 ("Java. Wins as a scripting language... Class libraries define 'API'. Becomes 'brand' for software components."); GX504, MS98 0169096 (Maritz writes: "Java. Sun's goal is: -- Java class library/runtime = new OS API -- use this new API to replace Windows with JavaOS.")
2. In August 1996, Bob Muglia wrote, "When a Java developer writes to AWT, he is writing to Sun APIs, and his application can easily run on competing platforms." GX 466, for MS6 5003781;see in additionMuglia 2/26/1999 10:5 - 11:22 (By offering an alternative platform, Sun was able to get developers to write on the Java platform rather than Windows, and therefore the applications they wrote would not be Windows-oriented be ).
3. In September 1996, Adam Bosworth emailed Bill Gates and others talking about Java. Bosworth remarked, "I think it's important to understand that Java isn't just a language. If it were just a language, it wouldn't be a threat to us. We would and could just build and be the best implementation of that language.” done. But it is much more. It is an alternative to COM....Java is on Unix and requires no messing with setup, install, uninstall or anything else. So it's really easy to understand how a system for building web pages dynamically on the server that depended on Java objects rather than COM objects would have broader appeal." Gates replies, "That scares me to death. It's still very unclear to me what our operating system will offer the Java client application code that will make them unique enough to maintain our market position. Understanding this is so important that it deserves top priority." GX 983, MS7 032895.
4. In January 1997, an internal Microsoft analysis described the "platform challenge" posed by Java: "Possible emergence of a set of APIs and underlying system software resulting in little or no role for Windows." GX51, MS7 005534.
5. In a February 1997 email to Jim Allchin, Mr. Gates again addressed the cross-platform threat posed by Java: “What will we have that the Java Runtime won't have? ... The fact is that applications can be run on the server against an HTML client... Most applications in the future will have very little client code... The fact is that there will be many machines running HTML/a Java -Level is all they will have in common Devices and old PCs will be like that. It makes it very easy for people to think that they should just program on it... Let's work together to find the solution to this. I can say I'm more scared than you, but that's not what's going to help us figure out where to go." GX475;see in additionGX 590 (Gates writes: "Java is our biggest threat and I certainly shouldn't be doing Apple events unless we get help from us.").

59.2.2. Microsoft's witnesses in this lawsuit acknowledged that Java poses a significant potential threat to Windows.

1. Gates repeatedly stated that he perceived Java as a threat to Windows: Gates Dep., (played 12/2/98), 22:19 - 23:1. Gates explained, "We've viewed Java APIs as competing with us for the attention of ISVs as to whether or not they'll take advantage of Windows' advanced features." Goals Dept. (played on 12/2/98), at 24:15-22;see in additionGates Dep., 27.8.98, 90:12-19 (DX 2568).
2. Muglia also testified that Microsoft viewed Java as a serious cross-platform threat: "Although Java was a new and unproven technology, Microsoft took Sun's claims seriously. . . . Sun's business strategy is to transform the Java programming language into a complete operating environment and software development platform. A key requirement of Sun's strategy is to meet its WORA claim - that programs written in Java for the Java development platform run without modification on any underlying platform for which a JVM exists.” Muglia Dir. ¶¶ 8, 10 ;see in additionMuglia, 2/26/99pm, at 4:8-18 (Muglia believed in 1995 and 1996 that Java posed a serious threat to Microsoft's operating system business); Muglia 26-02-1999 7:2-19 (explained that the cross-platform threat consisted of the JVM and Java class libraries); Muglia 2/26/1999 21:3-21 (explained: "They were trying to get developers to write on this alternative platform. So even if - even if a developer wrote a Java program and that program runs on Windows , even if it runs on Windows, it's not written in Microsoft's programming interfaces. So when I said they're squeezing in their platform, I meant they could essentially make anything other than our platform irrelevant, thereby replacing Windows and sort of making it obsolete could become.").
3. Maritz also testified, "If this were successful, software developers could write programs that ran on Sun's technology, and neither Windows nor any other operating system would provide significant value to customers." Maritz Gov. § 243; Maritz 1999-01-26 20:23 - 21:3 (the Java Foundation Classes posed a potentially serious threat to the platform); Maritz 1999-01-28 59:10 - 60:17, 62:3 - 63:17 (Maritz explained that Java is a form of middleware. Sun's goal was to provide most operating system services through the Java runtime. The browser and Java have the potential to serve as a virtual operating system.).
4. Dean Schmalensee also acknowledged the cross-platform threat that Java poses to Windows: “Sun wants ISVs to write pure Java so their applications can run basically anywhere. Microsoft wants ISVs to develop applications that run on Windows. It matters to these companies what choice the ISV makes, provided it is a good application." Schmalensee, 6/22/99, 23:23 - 24:7.
5. Slivka also testified regarding the Java threat: "My memory was that he [Bill Gates] was very unhappy with this cross-OS Java platform stuff that we were trying to do with AFC." "He thought that would be a major threat to Windows." Slivka Dep. 9/4/98 at 367:13-369:3 (DX 2591);see in addition, Slivka, 1/13/99, at 735:13 - 736:4 ("All of this comes back to Windows and the threat, you know, Sun's very direct threat to our Windows platform and the success of Windows on the client. So that seemed like the library space was fragmented, the 'write once, run anywhere' I guess as Sun actually called it that would be much less likely... I guess the end was protecting the windows franchise, not to thwart the 'write once, run anywhere'").

D. The web browser and Java threats to Microsoft's monopoly are mutually reinforcing and could be instrumental in the emergence of other platform-level threats to Microsoft's operating system monopoly

60. The competitive threats posed by non-Microsoft Internet browsers and cross-platform Java are to a significant extent interdependent.

60.1. The proliferation of Java Virtual Machines and Java Runtime Environments, which are not controlled by Microsoft, depends to a large extent on the proliferation of non-Microsoft Internet browsers.

60.1.1. Industry witnesses acknowledge that Internet browsers are the primary distribution vehicle for Java Virtual Machines and JREs, and that because Microsoft only distributes its own (not cross-platform, as discussed below) implementation of the JRE with its browser, Netscape Navigator, is the primary distribution vehicle for cross-platform Java.

1. IBM's John Soyring testified that Netscape has been a major distributor of Java virtual machines: "Netscape is a vehicle for the distribution of very large volumes of Java virtual machines on operating systems other than OS/2." Soyring 11/18/98 at 89:8-12;see in additionSoyring dir. ¶¶ 28 ("The reason this refers to browsers is that Netscape Navigator was the main distribution vehicle for Sun's Java technology, while Internet Explorer contains the Microsoft version of Java.").
2. Barksdale testified that "the widespread adoption of Netscape Navigator facilitated the widespread adoption of the Java programming language developed at Sun Microsystems." Barksdale Dir. ¶ fifteen;see in additionSasaki Abt. (played 12/16/98), at 31:6-8; 32:8-11.

60.1.2. Microsoft acknowledged, both in contemporaneous documents and through its court witnesses, that Internet browsers are essential for the distribution of JVMs and Java class libraries and that Netscape in particular was the primary distribution vehicle for a cross-platform Java runtime environment.

1. Muglia admitted in court that Netscape was "one of the highest-volume distributors of JVMs." Muglia dir. ¶ fifteen.
2. Maritz acknowledged that in May and June 1995, Netscape "was a major distributor of Java APIs". Maritz, 01/26/1999, at 59:21 - 60:6; Maritz, 01/26/99, at 30:10 - 31:2.
3. Documents written by Maritz in 1997 explicitly link Netscape and Java as a threat. GX 52, MS7 003270 (Microsoft presentation January 1997 identifies itself as "Scenario: Emergence of a new API" and states that "Sun AWT provides a basic cross-platform API" and further that "Navigator/NetOne provides: Additional API's" and " a volume platform for ISVs and corporations since the runtime is delivered with Navigator"); GX113; GX 514, at MS7 007509 ("If we continue to consider Java/JFC as our main threat, then Nscp is the main distribution tool.").

60.2. Conversely, the ability of Internet browsers to provide an attractive set of APIs is enhanced by the viability of cross-platform Java APIs. The browser and Java API sets together can provide the foundation for developers wishing to write cross-platform applications, particularly network and Internet-facing applications.

1. Contemporaneous Microsoft documents describe the interdependence of competing browser and Java products.Z.B., GX 466, under MS6 5003781 ("Without question, the Java platform APIs have surpassed the Macintosh as the #2 platform for software development. In parallel, Netscape has its own offering of platform APIs called Netscape One, which it also builds upon Java. Together, these two initiatives represent the most serious threat to our core Windows business that Microsoft has seen in years. The Windows franchise is driven by application development that focuses on our core APIs. Even if a developer creates an application for AWT writes that if they use Windows and Visual J++ they don't support our platform, instead they fuel Sun's momentum and potentially open the door for our competitor to introduce its own operating system offering." ); GX 485, under MS6 5005195 ("The Internet challenge is critical as Netscape, Sun and others seek to develop a non-Microsoft platform alternative.").
2. Gosling also summarized how browsers and Java technology together can be of particular importance for Internet-facing applications: "Because Java technology is particularly useful for running software that is downloaded over a network such as the Internet, we Technology adapted to work in conjunction with web browsing programs known as "browsers". . . . Essentially, Java technology allows certain software programs to run in browsers. Java-based programs can be downloaded from the Internet or other network onto a user's computer, regardless of what operating system or hardware is installed.” Gosling dir. ¶¶ 34-35.
3. dr Warren-Boulton also explained that over time, competing browsers may tend to threaten the Windows monopoly as a complement and distribution vehicle for Java rather than as a standalone independent platform. Warren-Boulton 12/1/98 at 42:7-43:10;see in additionWarren-Boulton 11/19/98 48:13-24 (Java an implicit complement to browsers).

61. Due to the growing importance of network computing (via the Internet and otherwise), Internet browsers and Java combined posed a serious threat to application barriers to entry.

1. See belowTeil VII.D; ¶¶398-400.

62. The success of cross-platform browser and Java products could also facilitate innovation in new forms of computing hardware.

1. As Professor Fisher explained: “Similarly, browsers could reduce the power of the operating system monopoly by facilitating the expansion of network computing, where 'thin client' users use a network to access applications residing on a server computer , instead of hosting the application on the PC itself." Fischer dir. § 87.
2. In an April 1997 memo entitled "Preserving the Desktop Paradise," Brad Chase commented that Netscape and Sun could not only reinvigorate software competition for operating systems, but also encourage the success of low-cost hardware: "Our competitors are still working hard on it to do this obsolete Windows. More people than ever believe in it. Netscape and Sun are striving to make the operating system a standard product and get developers to adopt their technologies and APIs. This is truer now than ever, and it is precisely these technologies that can make the NC viable. " GX 512, at MS7 004149;see alsoDX 1490, under MS7 007476 (identifies network computers as a "competitive threat").
3. Maritz also focused his review on the potential for new hardware development facilitated by browsers and Java. Maritz Dir. ¶¶ 31, 259 ("threatening competition from so-called 'network computers'").
4. As Microsoft's Ben Slivka noted in his testimony, a "nightmare scenario is that the web grows into a rich application platform in an OS-neutral manner, and then a company like Siemens or Matsushita comes out with a $500 'WebMachine' that attaches to a TV ." Slivka Dep., 1/13/99, at 712:6-11 (comment on GX 1016).
5. This was also confirmed by AOL's Barry Schuler-blackened-To achieve that,-blackened-Schuler Dep. 5/5/99, 159:12-160:4 (DX 2810A) (sealed).

IV.Microsoft tried to step inMarket-sharing agreements to eliminate platform-level software that threatened the operating system monopoly

A.Microsoft attempted to eliminate the browser threat by proposing an unfunded market-sharing agreement to Netscape

63. Microsoft first attempted to eliminate the threat that non-Microsoft browsers posed to the application barrier by attempting to bribe Netscape and later threatening to abandon its core Windows 95 web browsing business. Had Netscape accepted Microsoft's market-sharing proposal, Microsoft would have managed to kill the browser threat in its infancy and likely would have acquired a monopoly over browsers.

1.Microsoft initially tried unsuccessfully to buy or license Netscape's browser software code

64. Before fully recognizing the threat that Internet browsers posed to its operating system monopoly, Microsoft unsuccessfully attempted to buy or license the software code for Netscape's Navigator browser.

64.1. When Microsoft decided in late 1994 to offer its own Internet browser product, it entered into discussions with several companies, including Netscape, to license browser software code.

1. Microsoft's Thomas Reardon "contacted Netscape in early fall 1994 and stated his desire to investigate whether Netscape would be willing to consider some sort of license agreement for the first release of its Web browsing software." roses you ¶13 (citing Reardon Dep., 9/9/98, at 153-54, 224).

64.2. Netscape representatives rejected Microsoft's proposal.

1. Barksdale testified that Netscape did not want to sell their software "at the price they [Microsoft] offered. They offered a flat fee of a few million dollars to take us out of the game. And that would have killed our product in their area." Barksdale, 10/21/98 at 28:6-10; Barksdale Dir. ¶ 96 ("These discussions proved unfruitful as Netscape was not interested in Microsoft's proposal to use the Navigator code for a payment to be purchased from Netscape as a low flat fee.").

64.3. In late December 1994, during what he described as "a moment of weakness" -- unbeknownst to the rest of Netscape's board of directors -- Netscape's then-CEO James Clark attempted to resume these discussions, but was rebuffed by Microsoft. Discussions went no further and were not renewed.

1. Barksdale Dir. § 97.
2. According to Barksdale, Clark said he reached out to Microsoft because "a small company was afraid to look in the eyes of the most powerful software company in the world and somehow felt that if we licensed them, they could help us somehow." would". Barksdale, 10/27/98, at 49:22 - 50:1.
3. Clark Dep., 22.7.98, bei 58:6 - 60:18 (DX 2562)

2. When Microsoft recognized the threat that Netscape's browser posed to its monopoly, Microsoft set out to eliminate the threat by obtaining Netscape's agreement not to compete and share the browser market

a.Microsoft realized it could cripple the browser threat by eliminating Netscape as the browser vendor for Windows 95

65. With the dramatic success of Netscape in early 1995, Microsoft recognized that Internet browsers, particularly Netscape, posed a serious threat to the application barrier that protects Microsoft's monopoly. Microsoft also recognized that if Netscape were to abandon its efforts to develop platform-level browsing software for Windows 95, the browser threat to its operating system monopoly would be eliminated.

65.1.In June 1995, Microsoft recognized that Netscape was a major competitor in Internet browsers and therefore posed a threat to Microsoft's operating system monopoly.

1. See aboveTel III.B.2; § 56.1.

65.2.In the first half of 1995, Microsoft and other industry participants expected that Windows 95 would do this quickly became the dominant PC operating system after its release.

1. Barksdale Dir. ¶ 110 (At the June 21, 1995 meeting between representatives of Netscape and Microsoft, "we all assumed" that Windows 95 "would soon be the dominant operating system".)

65.3. Microsoft therefore understood that by convincing Netscape not to make its browser available as an alternative platform for developing Internet software on Windows 95, it could eliminate the platform threat posed by Netscape's browser. Convincing Netscape not to offer a competitive browser platform on Windows 95 was Microsoft's primary goal in negotiations with Netscape.

1. On April 14, 1995, Daniel Rosen, the person at Microsoft most responsible for negotiating a deal with Netscape (Rosen Dir. ¶7), wrote to Paul Maritz and other Microsoft executives about “the possible structure of a [Microsoft ] relationship with Netscape ." Rosen wrote that the "acceleration of Internet-related activity makes it critical that we begin making these decisions as soon as possible, or they will be made for us... With Netscape, we face a small, aggressive, FOCUSED on competitors or allies Their focus is both good news and bad news They can succeed, concurrent with our success if we can choose what we want... Will they adopt our tools?Will they leave us to the customers and their standards?" GX 18 (emphasis added).
2. This goal was reiterated on May 15, 1995, when Rosen wrote to Maritz et al that "our goal should be to wrest leadership of client development from [Netscape]". GX 331, at MS98 0103672. On May 25, Thomas Reardon was even more forthright, writing in an email to Rosen et al that any agreement to exchange "protocol specifications" with Netscape was "really adisguised efforts on our part to remove them from the Windows client." GX 952 (emphasis added).
3. A week later, Maritz wrote to Bill Gates and Rosen that he viewed Microsoft's "principle of making sure we remain in control of the standard Internet client APIs and protocols first" that to do so, Microsoft "would have to co-opt Netscape." , and that he was open to any strategy that would achieve this result.
4. Microsoft's intent to eliminate Netscape's competition was expressed again the same day by Thomas Reardon, who sent Maritz and other Microsoft executives a list of "working goals" for the Microsoft-Netscape relationship. These goals included "removing Netscape from the Win32 Internet client space" and "avoiding a cold or hot war with Netscape. Keeping them from sabotaging our platform development." Reardon also wrote that Dan Rosen "points out that we need to offer them [Netscape] a story of how to slowly move away from the core client business, or at least from the core Win32 client business " and that "Dan thinks it reasonable to hope to engage Netscape in a long-term strategic collaboration in which Netscape could run with the Mac and Win16 clients." GX24.
5. In these discussions there is no significant difference between the terms "Internet client" and "browser". Rosen 2/22/1999, 30:10-17 ("The client...focused on all the things needed to connect a PC to the Internet to do useful things."); GX 20, at 5 (Long Gates memo dated May 26, 1995 refers to "O'Hare" which became Internet Explorer 1.0 in the same paragraph as both "our Internet client" and "our browser"); GX 22 (May 31, 1995, e-mail to Maritz et al states that "Netscape has a great deal of influence over what happens to clients"); Rosen 02/22/1999, 20:23-25 ​​("I think it would be fair to say" that Microsoft's Internet client would "include certain components that shipped with the browser at the time, but not necessarily all. ") ; Rosen 02/23/1999, 6:20-7:3 (Definition of Windows "client code" as "TCP/IP, Internet shortcuts, HTTP and HTML rendering, among others").

b.Microsoft first proposed at a meeting on June 2, 1995 that Netscape should not compete in the Windows 95 browser business

66. Microsoft began to discuss Netscape's Windows 95 browser schedules a June 2, 1995 meeting with James Barksdale. At that meeting, Microsoft suggested that Netscape should consider abandoning its independent platform-level browser code base on Windows 95 and building solely on Microsoft's code.

66.1. James Barksdale visited Microsoft and met with Daniel Rosen, Nathan Myrhvold and Paul Maritz. Both sides discussed possible technical points and other collaboration.

1. The meeting "explored potential areas of collaboration between the two companies." Barksdale Dir. ¶ 101. "Microsoft was primarily interested in getting "Netscape" to consider adopting certain security protocols, integrating certain viewers into Navigator that would enhance Microsoft content, and other technologies..." Barksdale Gov. § 101;see in additionGX 25 (Rosen summary: Microsoft wants Netscape to "support STT"); GX 26 (Microsoft offered to allow Netscape "early disclosure of all 'standards and protocols' that would allow Netscape to improve its browser to allow it to work with MSN content, and Microsoft suggested that Netscape "preferred or maybe exclusive to developers of these kinds of products"). There has also been discussion of Microsoft possibly bundling Netscape server software. GX25, at MS98 0009972;see alsoGX26.
2. The meeting was "very friendly, not threatening," GX 26;see in additionBarksdale Gov. § 101; GX 25 (Rosen's notes: "a heartfelt, frank discussion of issues and direction."); roses you Section 64.

66.2. Microsoft's goal at the time of the meeting was to "remove Netscape from the Win32 Internet client space". Rather than confronting James Barksdale directly about this plan on June 2, Microsoft initially suggested that Netscape should consider not entering competitions and instead "use Microsoft's underlying code for its browser and toss their value-added components on top." .

1. Rosen's notes of the meeting, headed "What Microsoft Wants from Netscape," that Microsoft asked Barksdale for "strong support for Win95 and its evolutionary path" (stronger support than for other products like Acrobat or Java). Microsoft's underlying code for its browser, which adds its value-adding components above." GX 25, at MS98 0009972.
2. Thomas Reardon acknowledged that Netscape's "core client" already included an HTML renderer, but noted, "There are many things of added value in the Navigator product that go beyond HTML rendering." Reardon Dep., 9/9/98, 347:20-25 (DX2606). A value-added application was “about anything that uses an API. It is an application of technology and programs running above or alongside HTML independently, the HTML rendering itself." Reardon Dep. 9/9/98 at 343:23-345:10 (DX 2606).

66.3. James Barksdale responded by emphasizing the importance of Netscape's forthcoming Windows 95 browser to Netscape's plans. Until the later meeting on June 21, he did not fully appreciate the importance of Microsoft's statements that Netscape should simply take Microsoft's underlying code and add value-added components to it.

1. Barksdale "wanted to emphasize the importance of the customer to Netscape's business strategy." Barksdale Dir. § 101. He informed Microsoft participants that Netscape plans to release a retail version of Navigator for Windows 95 shortly and that Windows 95 and Windows 3.1 are Netscape's primary browser distribution platforms. GX 25, for MS98 0009972(Rose's Remarks).When the parties discussed the "browser collaboration," Barksdale responded that "he would like to explore ways of working together, but he still wants to add value in the browser code." In fact, Barksdale once suggested that Microsoft "distribute its browser." GX 25, for MS98 009972.
2. Barksdale told Microsoft attendees that Netscape plans to charge everyone but students and nonprofit customers for its retail browser product, that they "sell a lot of site licenses for browsers," and that they're happy with the revenue they're getting from the licensing of browser and server software to companies. GX 25, for MS98 at 0009972.

66.4. Microsoft's internal discussions after the June 2 meeting further show that Microsoft's primary goal for any "strategic relationship" was to persuade Netscape to abandon the Windows 95 Internet client market.

1. On June 5, 1995, Daniel Rosen distributed his transcripts of the June 2 Netscape meeting to Bill Gates, Paul Maritz, and other Microsoft executives, and gave an optimistic assessment of the potential for a "broad strategic relationship" between Microsoft and Netscape. GX 25, at MS98 0009973. Maritz replied that he did not believe "Netscape is 'ready for a broad strategic relationship'". It was clear that he/she saw the customer as a key part of making money because this "hook is so important for selling additional software". Barksdale was primarily interested in us distributing his client and server…” GX27.

c.At a June 21, 1995 meeting, Microsoft specifically proposed an unfunded market-sharing agreement to prevent Netscape from offering a competing platform

67. At a subsequent meeting on 21 June 1995, Microsoft proposed to Netscape, on the pretext of exploring forms of complementary cooperation, that the two companies should split up the browser market and Netscape should stop developing its independent browser for the Windows 95 market.

67.1. On June 21, 1995, Microsoft representatives Daniel Rosen, Chris Jones, Thomas Reardon, Richard Wolf, Anthony Bay, James Allard, and Barb Fox joined Netscape for a follow-up meeting to the June 2, 1995 meeting.

1. roses you ¶¶ 70-75 (list of Microsoft attendees, who they were and what Rosen expected them to discuss at the meeting); GX 32 (formal agenda for the meeting).

67.2. On the morning of June 21, 1995, before meeting Netscape,Microsoft representatives met ahead of time at the St. Claire Hotel in San Jose to discuss their goals for the meeting. The consensus from this discussion was that Microsoft's primary goals for the meeting were to determine whether Netscape intended to compete with Microsoft at the platform level, and if so, to persuade Netscape not to do so.

1. Rosen testified that he "had asked the group of Microsoft representatives to meet in a conference room...rented at the St. Claire Hotel in San Jose." roses you ¶ 79. Jones attended the meeting as a representative of the platform group at Microsoft (Rosen, 1999-02-22, 55:5-6) and "given the best summary of the purpose and objectives of the meeting," during the pre-meeting discussion," so we nominated him to make our goal statement." roses you Section 82.
2. When asked at the briefing whether he recalled "any discussion of the desire of anyone on Microsoft's part who participated to be able to persuade or influence Netscape not to compete with Microsoft," Jones testified: " Absolutely." Jones Dep. 1/13/99, 582:10-18.See in additionJones Dep., 27.10.98, a 39:25 - 40:17.
3. Discussion at the pre-meeting focused on the "solutions/platform line" and how to convince Netscape to stay on the solutions side of that line on Windows 95. Jones Dep., 1/13/99, at 581:4-19. When asked if there had been "any discussion of influencing Netscape in any way to either move to one side of the line or stay on one side of the line...rather than simply figuring out where they intended to do business to do," Jones replied, "It was both." Jones Dep. 10/27/98 at 39:24 - 40:11.

67.3. After their preliminary meeting, the Microsoft delegation met with Janes Barksdale, Marc Andreessen, Mike Homer and Ram Shriram for about four hours. The discussion covered a wide range of technical issues from the pre-agreed agenda.

67.4. In addition, the Microsoft team, led by its spokesman-designate Chris Jones, informed Netscape representatives that Netscape should not develop a browser for Windows 95 because Microsoft intends to develop its own Windows 95 browser. Microsoft suggested that the two companies agree not to compete by drawing a "line" between what Microsoft called "the platform" and what it called "solutions," which Netscape agreed not to cross to compete on the platform side of the line. In exchange for Netscape agreeing to give up a Windows 95 browser and stay on the solution side, Microsoft offered not to compete with Netscape in browsers that ran on operating systems other than Windows 95 and in platform-agnostic solutions that ran over it from Windows 95 and Internet Explorer.

1. James Barksdale testified, "I experienced something I had never experienced in my more than thirty years of experience with major US corporations...Microsoft apparently came to Netscape with a single goal: to convince Netscape not to use its Windows 95 compete browser product, Internet Explorer Microsoft proposed a browser market sharing between our companies: if Netscape agreed not to produce a Windows 95 browser that would compete with Internet Explorer, Microsoft would allow Netscape to continue producing cross-platform versions of the browser for the relatively small market of non-Windows 95 platforms: namely Windows 3.1, Macintosh and UNIX. Furthermore, Microsoft made it clear that if Netscape did not agree to its plan to carve up the browser market, Microsoft would crush Netscape with its operating system monopoly, by freeing all the functionality of Netscape products in Windows i be integrated." Barksdale Gov. § 25.
2. "Microsoft officials made it clear that they thought Netscape should work with them on areas other than a browser for Windows 95, but that we should not develop our own browser for Windows 95 because they intended to use a Microsoft browser for the Windows 95 operating system. They proposed drawing a "line" between the area in which we develop products and compete and the area in which they develop products. Microsoft proposed that we develop products based on operating system and browser would run Windows 95. They offered us to continue developing browsers for other operating systems as long as we didn't try to compete with them in developing a browser for the Windows 95 platform." Barksdale Gov. § 110.
3. Netscape's Marc Andreessen, "who is an exceptionally fast typist," took detailed notes on his laptop during the meeting. Barksdale Dir. ¶¶ 108, 112. These contemporaneous notes show that Microsoft asked Netscape, "Would you be interested in a partnership where NS gets all the non-Win95 stuff and MS gets all the Win95 stuff? If NS doesn't want that, then that's one thing. If NS wants it, then we can have our special relationship. THE THREAT THAT MS WILL OWN THE WIN95 CLIENT MARKET AND THAT NETSCAPE SHOULD STAY AWAY.' GX 33, at NSC 017100 (emphasis in original).
4. Microsoft's Chris Jones, when asked if "there was a discussion at the meeting with the Netscape folks that essentially Microsoft was going to take over, in some sort of deal or partnership, the portion of the business that pertains to Windows 95 and Netscape could handle the remaining parts of the business, for example the cross-platform customers" replied, "Oh, I think there was such a discussion, yes." Jones Dept. (played 10/27/98), at 40: 19-41:3.
5. Microsoft made it clear that it intended to persuade Netscape to agree to stop the competition. Andreessen testified: “I felt that I was being visited by a power that was extremely strong in the space I was operating in and that I was basically being given the terms on which an agreement would be reached , where, among other things, the market would be segmented and our company would be allowed to succeed in certain limited areas and Microsoft would be allowed to succeed in areas that it has defined itself." Andreessen Dep., 15.7. 98, 429:10-20 (DX 2555) He wrote in a June 21 email: "Much of the conversation revolved around a discussion of how the line would be drawn between the platform and its added value." GX535.
6. Chris Jones opened the meeting by noting that Microsoft "believes" that there are "a number of things that are provided in Internet servers and browsers that are included with the core operating systems or are given away with the operating systems as a facility like that." Win32 API What MS needs is someone -- a partner -- to take over these core services and build on them and develop solutions for customers. All the points of the relationship revolve around the crucial fact -- Netscape is the kind of company that goes with MS in that regard will work together or not?Will MS & NS be able to work together and agree on the line where to draw etc. If not the companies will compete. When this is the case, an “aligned interests” arrangement can be very beneficial'." GX 33, at NSC 017098 (Andreessen's Notes) (emphasis added).

67.5. In addition to offering not to compete with Netscape for non-Windows 95 browsers and for "solutions", Microsoft also offered to make Netscape a "preferred" ISV and give Netscape preferential access to technical information on how its Products can work better Microsoft operating systems.

1. "Microsoft officials said that if we agreed to the 'special relationship' they were proposing by making Netscape a 'preferred' ISV, Microsoft would support us if it could be resolved, '[d]whichever way we go today leave this room.' If we agreed to the "special relationship" they proposed, the Microsoft reps said we would be the first ISV to receive the technical information... Barksdale Dir. § 110. Regarding Barksdale's repeated requests for the RAS-" Dialer" APIs requested by Netscape, Rosen replied, "We can fix this problem. In a perfect world, anyone can connect to it. I'll be the first to hook it up." GX 33, at NSC 017101. Microsoft has effectively stated that if Netscape agrees not to compete, "then we [Netscape] can have our special relationship".ID.
2. Microsoft offered to "consider giving us the ability to turn Navigator into a container," but only "IN THE CONTEXT OF THE BIGGER DEAL," stating that the required APIs would "be placed in a layer above the normal Office-compatible program have been abstracted and people who want to use them are specifically chosen by MS and are arbitrary - MS reserves the right to say who's in and who's out, we can't help it." GX 33, at NSC 017099 ( (Andreessen's notes.) Microsoft has also offered to help Netscape "tightly integrate" with MSN, but only on the condition that the two companies have a "close relationship"... If we didn't have a closer relationship, you'd be back at what a regular ISV can do that." GX 33, at NSC 017100. Microsoft also suggested that MSN content "could actually be hosted on a Netscape server" but "they refuse to talk about it until we've made the broader relationship". GX 33, at NSC 017100-1.

67.6. Microsoft made it clear that all that preferential treatment and its own willingness not to compete on non-Windows 95 browsers and "solutions" on Internet Explorer depended on Netscape's agreement not to compete and partition markets, and that if Netscape declined the offer, "Microsoft they would destroy."

1. To Barksdale and Netscape,"The main goal of this meeting was to gain access to specific codes and APIs required for...product development...." Barksdale asked "whether the receipt of these things was tied to... acceptance of that 'special relationship' that Microsoft had proposed...". Microsoft responded that Netscape's "procurement of the necessary technical information is 'certainly not independent'" of Netscape's acceptance. "Microsoft made it very clear that they would try to break up 'Netscape' by trying to own the client." Barksdale Dir. ¶¶ 110-112.See in additionGX 34 (AOL email dated June 22, 1995 detailing Andreessen's account, a day after the meeting, of Microsoft's threat that "if Netscape didn't make the deal, Microsoft would break them up.")
2. Microsoft "implicitly" hinted that it would "use the full force of all its energies to crush us in the marketplace... [presumably] using many of the same tactics they've used over the past three years to ensure that." that being the case, we didn't have the opportunity to succeed as an independent company." Among the "tactics" Microsoft would use were squeeze-out deals with ISVs and OEMs and "the release of full-fledged competing products or even cloned products whose price would be at a level that would make it impossible for [Netscape] to compete, which happened later". Andreessen Dep., 7/15/98, at 429:10 - 431:8 (DX 2555).

67.7. Testimony by James Barksdale and Marc Andreessen on Microsoft's June 21 market sharing proposal is credible and consistent with available contemporary documents from Netscape, Microsoft and third parties such as America Online.

1. See above§ 67.2, 67.4, 67.8-.9.

67.8. Microsoft's internal discussions following the June 21, 1995 meeting leave no doubt that Microsoft has proposed an agreement not to compete and to share markets.

1. On the evening of the June 21 meeting, Dan Rosen prepared a summary and sent it to the other Microsoft attendees for comment. Although the summary is "naive" (GX 537), it is broadly consistent with Marc Andreessen's notes and James Barksdale's reminiscence of the meeting, and makes it clear that Microsoft's goal was to prevent platform-level competition. GX535.
   • Rosen wrote in part that "ChrisJo summed up the purpose well: 'We need to understand whether you're going to adopt our platform and build on it, or if you're going to compete with us at the platform level.'" GX 535.
   • Rosen also wrote, "Much of the conversation revolved around a discussion of how the lines would be drawn between the platform and its added value (the toolbar, cool places, or ads) into the platform; they seemed to agree with this concept." GX535.
2. Thomas Reardon responded to Rosen's draft the next morning with a more skeptical assessment, but one that clearly confirms that ousting Netscape from the Windows 95 browser market was Microsoft's central goal for the meeting. He wrote that Netscape "was trying to preempt ohare with their own win95 product.I don't think they will be pushed out of the Win95 client arena that easily, continue down the path of selling/giving away a 'premium' browser for win95." GX 535 (emphasis added).
3. Richard Wolf's comments on Rosen's draft agreed with Rosen that Netscape "would not compete with us in defining a platform...". However, he was skeptical that Netscape would be willing to "drop a diversified customer in favor of vertical markets". GX501.
4. Chris Jones began his response to Rosen's draft with a list of "Microsoft's goals, in order of priority." Number one on this list was Microsoft's own client platform. Jones accurately confirmed Barksdale and Andreessen's descriptions of the meeting, writing: "The crucial question is: do they want to align with us strategically or not? Are you willing to bet that we will be successful and will you make the commitment and changes necessary in your strategy to do so?Because of our priority to have our own client and server platform if they can agree to use our client code on Win 95, and use our BackOffice and NT APIs and advertise them as solutions, then they've adapted to our businesses and we have a deal." GX 557 (emphasis added).
5. After collecting these comments from the other Microsoft attendees, Rosen sent a revised draft to Bill Gates, Nathan Myhrvold, Paul Maritz, and 17 others on the afternoon of June 22, 1995ToreWent to the meeting (in order of priority): 1.Establish Microsoft ownership of the Internet client platform for Win95." He also echoed Jones' view that "the crucial question" is whether Netscape would be willing to "align strategically with us . . .The test of this alignment will be Netscape's agreement to use Microsoft's client code on Windows 95." Rosen, ignoring Reardon's more skeptical assessment, ended instead with the optimistic conclusion that Netscape "appeared to adopt this strategy at the meeting." GX 536, at MS98 009585, MS98 0009587 (emphasis added).
6. Reardon disagreed, responding with an email entitled, "Netscape meeting: reality." Following an eight-point list about the meeting that Rosen felt he missed, Reardon wrote: “1) Netscape beats O'Hare. We sent them a list of about thirty talking points about shipping their Win95 browser." Reardon also described Rosen's view that Netscape "agreed with this concept" that Microsoft was sucking browser functionality into the platform as "nonsense... There was a noticeable spike of the tension level," Reardon wrote, "when that kind of language was used, a stark quote came from Barksdale: 'All we want is our God-given 95% market share for the browser.' He said this with a wink, but I don't know what could be clearer." Reardon concluded, "We're going to compete on pretty much every technology... maybe I'm an asshole, but there's no deal here." GX 536, at MS98 0009584 - 0009585.
7. Microsoft top management agreed that Rosen was inaccurate. Brad Silverberg forwarded Reardon's "reality" email to Bill Gates, who replied, "I think Thomas reads the situation pretty well. I think Dan is great, but I agree he's a little naive on this one is." GX537.
8. In a telephone conversation with Dan Rosen on July 12, 1995, James Barksdale discussed a possible server joint venture for Windows. After a series of internal messages, Paul Maritz summarized recent events regarding Netscape: "My thoughts:We originally hoped that there would be a way to leverage a relationship with Netscape based on a business model where they would be willing to cede the customer to us, or at least give us a major advantage, if we could give them a big advantage in server space. They're not willing to give us any significant customer advantage (neither for O'Hare nor for MSN), so we should treat them like an ISV, but not much more." As Rosen ventured that Netscape "might be willing to give us one to give customer benefit," Maritz wrote that "they're built on top of our browser, I'm very skeptical they would agree to that. Your story is too [sic] closely tied to the browser — this is Andreessen's company, after all." Rosen replied, "Given your message, I understand that you see no need to continue discussions with Netscape at a 'strategy' level." Maritz responded with one word: "Right." GX 540 (emphasis added).

67.9. The report of the June 21 meeting contained in Microsoft and Netscape records is also corroborated by a contemporaneous memorandum in America Online's files.

1. On June 22, 1995, the day after the meeting, AOL's David Kaiser reported that Marc Andreessen told him that "Microsoft was at Netscape yesterday... They wanted:
   • Equity capital
   • a board seat
   • Netscape renounces the network as a platform
   • Netscape wants to disclose all plans to Microsoft
   • Netscape to restrict access to APIs

And in return, Netscape would be Microsoft's special partner, get inside information, and so on. . and if Netscape didn't make the deal, Microsoft would crush them." GX 34.

3. Microsoft's subsequent claim that its market-sharing proposal merely explored forms of legitimate cooperation is bogus and contradicts the evidence

a.Microsoft's claim that it did not attempt to pry Netscape out of the browser business is incorrect and based on a misleading play on words

68. The Microsoft witnesses did not actually dispute the substance of Barksdale's and Andreessen's testimonies about the June 21 meeting; Instead, they attempted to make the suggestion not to enter the competition less sinister by manipulating the word "browser." Although Microsoft negotiators Barksdale and Andreessen made it clear that Microsoft wanted Netscape out of the Win32 browser business, Microsoft now claims that it simply wanted Netscape to build what Microsoft calls a "browser" based on " Microsoft Technologies”. This assertion contradicts the contemporary documents and is in any case irrelevant. Even by Microsoft's version of the facts, its proposal to Netscape was an open attempt to eliminate platform-level competition and partition markets.

68.1. Mr. Rosen testified that Microsoft's goal for the June 21, 1995 meeting was to persuade Netscape to develop software products based on the "Microsoft technologies" or "browsing software" that Microsoft built into Windows.

1. Daniel Rosen admitted that: "We wanted to persuade Netscape engineers to develop browsers and other software offerings on top of Windows 95" (Rosen Dir. ¶ 127) and that Microsoft "made it clear that there would be browsing software in Windows 95 and so on we expected users to use this software." Rosen dir. § 128;see in additionroses you ¶50; Rosen, 02/22/1999 at 10:2-10.
2. Thomas Reardon testified, “I knew we would provide Internet APIs for HTML rendering, HTTP, and so on. I wanted Netscape to use these APIs. So easy.' Reardon Dep. 9/9/98 at 343:23 - 349:9 (DX 2606) (sealed).

68.1.1. But Mr. Rosen's testimony on this point was contradictory.

68.1.1.1. Mr. Rosen testified at times that Microsoft wanted Netscape to continue building a Windows 95 "browser" as part of a joint venture with Microsoft.

1. roses you ¶ 127 ("We wanted to convince Netscape engineers to develop browsers and other software offerings on top of Windows 95."); Rosen, Dir. ¶ 50 (Microsoft did not want Netscape to agree to stop developing browser software for use on Windows); Rosen, 02/22/99, 08:12-24 (reportedly in the spring of 1995, Microsoft "took considerable effort to persuade Netscape to build and market" a browser that runs under Windows 95.);see in additionRosen, 02/22/1999, 11:13-18 (same).

68.1.1.2. At other times, Mr. Rosen testified that because Microsoft was supposedly building "browsing software" into Windows 95 (Rosen Dir. ¶ 128), it was instead suggested that Netscape focus on "higher-level client-side applications (like groupware and multimedia extensions)" (Rosen Dir. ¶ 59).

1. Rosen testified that when James Barksdale said he wanted to "continue to add value in browser code" at the 2nd meeting and multimedia enhancements) I described above." Rosen dir. § 59.
2. Rosen testified that Microsoft encouraged Netscape to develop "cool-looking and sounding applications" that take full advantage of the Internet-related features of Windows 95." Rosen dir. ¶ 50 (citing DX 734).

68.1.1.3. In the end, Mr. Rosen didn't present a clear explanation of what kind of software he envisioned Netscape being part of a deal, simply repeating the vague words "cool looking and sounding apps."

1. Rosen testified that Microsoft's "primary interest - making Windows more desirable - is best servedencouragingNetscape remains in the client software business, developing what Mr. Reardon has described as "cool-looking and sounding apps" that take full advantage of the Internet-related capabilities of Windows 95.” Rosen Dir. ¶ 50 (with DX 734).
2. Rosen testified that "It was very much in Microsoft's self-interestencourageNetscape will continue to 'add value' to Windows, that is, accept the invitation publicly issued by Thomas Reardon in Germany in April 1995 to become one of the preferred 'Web ISVs' for Windows 95. Let Netscape continue to develop what Mr. Reardon called "cool looking and sounding apps" for Windows 95 that we think would drive demand for Windows 95." Rosen Dir. ¶ 124.

68.1.1.4. Under cross-examination, Mr. Rosen appeared to agree on a story that Microsoft wanted Netscape to build some sort of "browser" on top of the browser code that Microsoft now says will be built into Windows 95.

1. Rosen, 02/22/1999, 10:2-10 (there was "a lot of discussion about whether they would adopt the Microsoft technologies that we built into Windows 95 to build such a product, or whether they would try to do more do things for themselves").

68.1.2. The contemporary documents reflect no such understanding within Microsoft at the time and make it clear that nothing was communicated to Netscape. Microsoft never said, and Netscape never understood, what type of software, if any, Microsoft wanted built on the Windows 95 platform.

1. Barksdale testified of Microsoft's suggestion that Netscape build software in the form of vertical applications "that I never realized what that was." Barkdale 10/21/98 at 42:16-18.
2. Barksdale testified that "it would be a bit difficult to figure out what that might be unless you go to the server..." and that "it got really, really confusing for me because the line seemed to automatically rule out what we did considered one of our very best products." Barksdale 10/22/1998 at 37:13 - 38:2.

68.2. Mr. Rosen's apparent claim that Netscape was free to build a "browser" on the "Microsoft technologies" in Windows 95 is just a play on words.

68.2.1. There was no meaningful distinction between the "technologies" that Mr. Rosen said Microsoft now wanted to reserve for itself and Microsoft's browser, Internet Explorer. The contemporaneous documents make it clear that the "platform" technologies Microsoft said it would build into Windows would duplicate all of the functionality of Netscape's browser product, with the possible exception of "the toolbar, cool places, or Advertising".

1. According to Rosen's notes, "Much of the conversation revolved around a discussion of how the lines would be drawn between the platform and its added value (the toolbar, cool places, or advertising) into the platform; they seemed to agree with this concept." GX535.
2. Andreessen's notes reflect Microsoft asking if Netscape "would be interested in a partnership where NS gets all the non-Win95 stuff and MS gets all the Win95 stuff? ... threat that MS will own the Win95 client market and that Netscape should remain ONE WAY." GX 33 (emphasis in original).

68.2.2. In any event, building on these "Microsoft technologies" would have resulted in Netscape abandoning its independent platform-level browser and associated APIs, and with it any hope of competing with Microsoft at the platform level.

68.2.2.1. Several companies have recently written specialized browsing programs in addition to the so-called Internet "technologies" that Microsoft distributes with Windows 95 and Windows 98; Often referred to as "shell browsers," they consist of a small amount of user interface code that relies on Internet Explorer to do the actual work of connecting to the Internet and displaying the information it retrieves.

1. See belowV.C.1.c; § 187.2

68.2.2.2. Because the underlying code that a shell browser relies on is from Internet Explorer, such a browser does not offer platform competition to Internet Explorer.

1. Rosen acknowledged that if Netscape adopted all of Microsoft's underlying technologies for its browser, they would no longer pose a platform threat. Rosen 22.2.1999 at 31:9-12; Rosen 02/23/1999 at 54:3-6. (similar).
2. Maritz acknowledged that if Netscape adopted Microsoft technologies for its browser, it would "mitigate" the platform threat. Maritz 1999-01-26 at 49:3-10;see in additionMaritz 1/26/99 at 29:19-22 (Netscape's APIs made it a threat); Maritz, 1999-01-26 at 30:4-6 (same); Maritz, 1/26/99pm, at 53:9-12 (Microsoft's goal was to maintain control of the browser APIs).
3. When asked if "a browser like Encompass that leverages Microsoft platform technologies isn't considered a serious competitive threat to Microsoft," Maritz replied, "Right." Maritz, 01/25/1999 at 30:5-8;see in additionMaritz, 25.1.1999, um 30:14-19.
4. Professor Fisher testified that, for the purposes of his conclusions, there was "absolutely no difference" between shell browsers and Internet Explorer in this case. Fisher, 1/5/99 at 20:4-23.

b.Rosen's other statements, both in relation to the June 21, 1995 meeting and in general, are evasive and misleading

69. To the extent that Mr. Rosen's testimony regarding the June 21 meeting differed more than semantically from James Barksdale's testimony, Mr. Rosen's testimony was incredible. Mr. Rosen's conduct on the witness stand was evasive and unhelpful, and his testimony was riddled with conflicting and implausible allegations.

69.1.First, Mr. Rosen testified that he never considered Netscape a competitive threat in early 1995 and was not aware of a single person within Microsoft who did (Rosen 2/22/1999 at 48:13). This allegation is totally inconsistent with the contemporaneous documents, the testimonies of other Microsoft witnesses, and Mr. Rosen's role in the Netscape discussions.

1. See aboveTel III.B.2; § 56.1.
2. Rosen wrote a memo in May 1995 that "a threat by another company (Netscape was mentioned by many) to use their Internet WWW browser as a development base could jeopardize a significant portion of Microsoft's future revenues". GX331.
3. When confronted with this note under cross-examination, Rosen initially claimed that he did not believe what he had written even as he wrote it and that he had never sent the note to those to whom it was addressed (Rosen, 22.2.99 at 23:24 - 27:18). Rosen's testimony was proven to be false, and he was quick to admit that his testimony was untrue, acknowledging that he must have sent the memo to Ben Slivka. Rosen, 02/22/1999 at 4:22 - 5:9.

69.2.Seconds, Mr. Rosen testified that Netscape always viewed its leadership position in Internet client software as a financial impasse and a waste of development resources, and was therefore eager to cede responsibility for client technologies on Windows95 to Microsoft (Rosen Dir. ¶44; Rosen , 1999-02-22, at 41:3-4). But the record shows that everyone at Microsoft, including Rosen, understands that client innovation is an important part of Netscape's business strategy.

1. Rosen's notes from the June 2, 1995 meeting with James Barksdale report that Netscape "so far has been pleased with its ability to sell servers and browsers to corporations...". that they "sell many site licenses for browsers... Windows 95 and Win 3.1 are their primary browser development platforms." Rosen also reported that "Netscape feels it must be free to support, without restriction, whatever protocol, API, etc., that becomes popular." And on the subject of browser collaboration, Barksdale said that "he'd love to explore ways to collaborate, but he still wants to add value in the browser code." GX25.
2. Responding to Rosen's notes from the June 2 meeting, Maritz commented, “It was clear that s/he sees the customer as a key money-making point because that 'hook is so important for selling additional software.' Barksdale was primarily interested in us distributing his client and server." GX27.
3. Commenting on Rosen's draft of his June 21 meeting notes, Thomas Reardon suggested that he "add something about Barksdale's jokes about 95% market share, I think it's a bit revealing... Win95 client arena, go further down the road of selling/giving away a 'premium' browser for Win95.” GX535.
4. Rosen wrote on May 15, 1995 that Microsoft "the ringGuiding the client evolution of "Netscape. GX 331 (emphasis added).

69.3.thirdDuring cross-examination, Mr. Rosen deliberately evaded the meaning of the words "browser" and "client" in his testimony.

1. Rosen testified that when Richard Wolf used the word "client" in DX 771, he meant "browser." Rosen, 2/23/1999 at 30:7-21, 59:19-21.
2. But when Rosen used the word "customer" two hours later in GX 23, he meant something else entirely. Rosen, 02/23/1999, at 47:4-8.
3. Rosen acknowledged that Internet Explorer is "Microsoft's Internet client." Rosen 22-02-1999 at 42:11-13. And when asked if "Netscape had the Internet client lead across different platforms..." Rosen replied, "Yes." Rosen 02/22/1999 at 40:1-3.

69.4.Fourth, Rosen claimed that Microsoft was not building its own browser in mid-1995 (Rosen 02/22/1999, 15:1-23), that he had never heard any mention of a "browser battle" between Microsoft and Netscape (Rosen, 02/22/1999, 17 :1-18) and that he did not know that one of Microsoft's goals was to gain browser market share (Rosen, 02/22/1999, 18:2-5). These statements are wrong. They are contradicted by the rest of the trial transcript and testimonies from other Microsoft witnesses.

69.4.1. Mr. Rosen testified that the June 21, 1995 meeting was "primarily a technical 'brainstorming session' to seek areas of collaboration on technologies, protocols and the like" (Rosen Dir. ¶ 68), rather than a ' Relationships' discussion" (Rosen Dir. ¶ 55) at which issues of general business strategy and direction would have been discussed. This assertion is contradicted by the contemporaneous documents.

1. Rosen's own notes from the earlier meeting on June 2, 1995 suggested that the "next steps" should be for each side to "prepare a list of things they want and are willing to give in order to build a relationship" and came to the conclusion that "Netscape is open to a broad strategic relationship with Microsoft." GX25.
2. And when Rosen sent Microsoft's list to Netscape, it included customer terms, server terms, author terms, technology terms, service terms, marketing terms, and general terms, including the possibility of Microsoft investing in Netscape and a seat on Netscape's board of directors. GX556.

69.4.2. There is no contemporaneous evidence that anyone at Microsoft, including Mr. Rosen, ever discussed or considered a proposal that Microsoft would license Netscape's cross-platform browsers and market them under the Microsoft brand name (Rosen Dir. ¶¶ 97 , 99). In the light of the documents, Mr. Rosen's earlier testimony and the clear and credible testimony of James Barksdale, Mr. Rosen's testimony on this point is neither credible nor convincing.

1. At most, the internal documents suggest that Microsoft discussed allowing Netscape to "run with the Mac and Win16 clients" (GX 24) in exchange for Netscape's agreement to vacate the Windows 95 market.
2. In contrast, Rosen testified in court that what Barksdale and Andreessen remember as an offer to sell the non-Windows 95 browser business to Netscape was in fact such an offer, and attempted to present that offer as merely a "continuation ' of Microsoft's December 1994 discussion of the possibility of Microsoft licensing Netscape's browser code for Windows 95. Rosen Dir. ¶ 97. This characterization of events first appeared in Rosen's court testimony.

69.4.3. Mr. Rosen's statement that the discussion of the "line" between Windows 95 and the browser at the June 21 meeting was initiated and driven by Netscape, not Microsoft (Rosen Dir. ¶¶ 85-88, 95), also contradicts the proof.

1. When asked in his testimony who "the keynote speakers on this subject of the line" were, Rosen replied that "it was mainly Thomas Reardon and possibly some discussions with Chris Jones." Rosen Dep. 02/22/1999 at 56:16-21.
2. Chris Jones testified that the topic of "the line" was discussed at length at the Microsoft pre-meeting, which was not attended by Netscape personnel. Jones Dep. 2/22/1999 at 40:14-22, 49:5-20.

69.4.4. Mr. Rosen's testimony that Microsoft wanted Netscape to continue making products that expose APIs to independent software developers is entirely inconsistent with the contemporaneous documents and the testimonies of other Microsoft witnesses.

1. See abovePart III.B; ¶ 56 (describes Microsoft's realization that Netscape might develop APIs that could threaten the application's barrier to entry).

c. Microsoft's claim that it engaged in legitimate joint venture talks with Netscape contradicts the evidence

70. Microsoft asserts more generally that the June 21, 1995 meeting was merely an attempt by Microsoft to find ways in which Microsoft and Netscape could work together (Rosen Dir. ¶¶ 54, 77, 79). But the evidence shows that Microsoft's offers to support or work with Netscape were merely a smokescreen to secure Netscape's approval of Microsoft's proposal to share the naked market, and that these offers were not really aimed at promoting a pro-competitive cooperation promote between the two companies.

70.1.First, contemporaneous Microsoft documents make it clear that their goal at the June 21, 1995 meeting was to eliminate the browser threat to the applications' barrier to entry, and that any proposed "joint venture" was merely a ploy to counter Microsoft's anti-competitive to disguise intentions.

70.1.1. Microsoft's internal correspondence both before and after the June 21, 1995 meeting leaves no doubt that Microsoft's primary objective for that meeting was to secure Netscape's agreement not to engage with Microsoft in the Windows 95 market. browsers to compete. These issues caught the attention of top-level Microsoft executives and were the subject of extensive discussion.

1. See above¶¶ 66.2, 66.4, 67.2, 67.8.
2. In a June 1, 1995 email to Bill Gates and other Microsoft executives, Thomas Reardon wrote, "Dan points out that we need to tell you a story about how you're slowly moving away from the core client business, or at least the Win32 client can remove business . . . " GX 24.

70.1.2. Netscape knew that Microsoft's proposal would put Netscape out of business.

1. Marc Andreessen testified that "the proposal...would result in Netscape being crippled as a potential competitor to Microsoft and indeed as an independent company." Andreessen Dep., (played 10/27/98), at 25:11 - 18:14.
2. Barksdale agreed with Andreessen's assessment that Microsoft intended to carve up the market and effectively "cripple" Netscape. Barksdale 10/27/98 at 11:17 p.m.
3. Barksdale testified, "Most of the matters to which Netscape would have confined its work were not commercially valuable." Barksdale Gov. § 113.

70.1.3. Microsoft quickly abandoned any plans to work with Netscape when Netscape refused to share the market.

1. Paul Maritz wrote: "Originally, we were hoping that there would be a way to leverage a relationship with Netscape based on a business model where they would be willing to cede the customer to us, or at least give us a major advantage if we gave them one." could give big advantage in server area. They're unwilling to give us any significant customer benefit (neither for O'Hare nor MSN), so we should treat them as an ISV, but not much more." GX540.
2. Dan Rosen gleaned from Maritz's email that Maritz no longer "saw the need to continue discussions with Netscape on a 'strategic' level." GX540.

70.2.Seconds, the only aspect of Microsoft's offer that was clear - Microsoft's offer not to compete with Netscape in the Macintosh, Unix and 16-bit Windows segments of the browser market - would not have supported legitimate, pro-competitive cooperation between the two companies and was nothing more as a naked bribe aimed at securing Netscape's approval of the market-sharing scheme.

70.2.1. One of the incentives Microsoft offered in exchange for Netscape agreeing to go out of business with Windows 95 browsers was a promise not to compete with Netscape's browser on other platforms.

1. See above§ 67.4.
2. At least as early as June 1, 1995, Microsoft was considering "a long-term strategic collaboration in which Netscape could run with the Mac and Win16 clients." GX 24;see in additionGX33; Jones Dep., 28.10.98, um 40:18 - 41:3.

70.2.2. The contemporaneous documents do not indicate that Microsoft contemplated any technical or marketing efficiencies from such an agreement.

1. See above¶¶ 67.2, 67.4, 67.8.

70.3.thirdThat the characterization of Microsoft as a "joint venture" is a sham is corroborated by the fact that Netscape's departure as a browser supplier would have reduced the value of Windows and thus the demand for Windows and was entirely unnecessary to a legitimate purpose to reach.

70.3.1. Microsoft makes money from selling copies of its operating systems, and its legitimate business interests are to maximize consumer demand for that software. Browsers are additions to operating systems; A good Windows 95 browser would therefore have increased demand for Windows and thus Microsoft's profits, regardless of whether that browser was made by Microsoft.

1. Fisher testified, "If browsers are supplements to operating systems... it shouldn't matter who makes that supplement." Fischer dir. ¶ 129(b).
2. Warren-Boulton stated that "Microsoft has a vested interest in ensuring that Windows users can purchase high-quality browsers at low prices, as this would increase demand for Microsoft's operating system." Warren-Boulton Gov. § 187.
3. Rosen testified that "It was very much in Microsoft's self-interestencouragenetscape . . .” to create applications for Windows 95 because those applications “would increase the demand for Windows 95.” Rosen Dir. ¶124 (emphasis in original).

70.3.2. This general principle was particularly true of Netscape's web browser in late 1994 and 1995. Netscape's browser was the "killer app" of 1995, generating tremendous consumer excitement and demand for PCs.

1. Barksdale specifically described Netscape's Navigator, which would run on Windows 95, as "the killer app of 1995". Barksdale 10/27/98 at 71:6-11.
2. See abovePart III; ¶ 53.1.2..
3. Barksdale testified that at the time of the June 21, 1995 meeting, Netscape's browser software "performed incomparably better than other browsers available at the time" and that consumers preferred it by a wide margin. Barksdale Gov. § 231.
4. Barksdale described Netscape's final version of Navigator 1.0 as a product that delivered "a multiple of the power of other browsers available at the time" with countless innovative features. Barksdale Gov. § 54
5. Barksdale testified that Netscape's browser was available on many different platforms, including Mac, OS/2, and various "flavors" of UNIX. Barksdale Dir. ¶ 80. Additionally, the cross-platform availability of Netscape Navigator was of great value to companies looking to standardize their software and training efforts, Barksdale Dir. § 80;belowPart V.B.1.b.(2); ¶ 107, and for independent software vendors looking to maximize the attractiveness of their programming efforts, Barksdale ¶ 85.

70.3.3. In contrast, Microsoft's first version of Internet Explorer for Windows 95 was still under development and was only released in July 1995. Cross-platform versions of Internet Explorer only became available for the Macintosh and UNIX operating systems much later. And when Internet Explorer 1.0 was finally released for Windows 95, it was clearly inferior to Netscape's then-current browser software.

1. Barksdale testified that the release of Navigator 1.0 "delivered incomparably better performance than other browsers available at the time"; More specifically, "Microsoft's 1.0 version of Internet Explorer was significantly inferior to the 1.0 version of Navigator." Barksdale ¶¶ 231-232.
2. Reviews in the trade press have consistently concluded that Netscape Navigator is faster and more functional than Internet Explorer. Schmalensee dir. apartment F Table F-1 (all publications Dean Schmalensee listed selected Netscape over Internet Explorer in 1995).
3. Realizing this performance difference, consumers overwhelmingly preferred Netscape Navigator to Internet Explorer in late 1995 (Myhrvold Dir. ¶ 26-27), even though Navigator was $39 to license and Microsoft was giving Internet Explorer away for free. Schmalensee dir. § 275; Myhrvold Dir. ¶ 104. In fact, as late as January 1997, consumers preferred Navigator to Internet Explorer by almost four to one. GX 5
4. Barksdale testified that Netscape's browser share was about 84 percent in January 1996. Barksdale, 10/21/98, at 33:1-4.

70.3.4. Furthermore, by June 21, 1995, Netscape had already invested millions of dollars to develop a new version of its browser for Windows 95; These investments promised to further increase the value of Windows and thus offered significant benefits to consumers.

1. A May 11, 1995 email from Dan Rosen to Microsoft's Tom Johnston asking to "borrow/copy the new Netscape Win95 client they gave us" makes it clear that Microsoft intends to more than a month a beta version of Netscape's Windows 95 browser had the meeting. GX 1892.
2. Barksdale testified, "At the same time that Microsoft was releasing Internet Explorer, Netscape was well on its way to its 2.0 version of Navigator." Barksdale ¶ 233.

70.3.5. The tremendous consumer enthusiasm for software and Internet browsing in late 1995, and clear consumer preference for Netscape's browser at the time, demonstrates that consumers would have been harmed had Netscape caved in to Microsoft's demands and its Windows95 Web browser would have given up.

1. James Barksdale described Navigator as a "separate" product that helps Microsoft sell Windows, adding: "A lot of people buy computers because they want to run Netscape Navigator. It would help them to work with companies like ours." Barksdale, 10/27/98, at 71:23 - 72:1.
2. Barksdale testified: "That's why they wouldn't have asked us to get rid of it immediately. We wanted to release the product in about a month. It would be great for Windows 95. It would help them sell a lot more because Navigator is a hot application that ran on Windows 95. It was the killer app of 1995." Barksdale, 10/27/98, at 71:6-11.

70.4.Fourth, the bogus nature of any joint venture proposal is also illustrated by the fact that Microsoft has threatened to withhold the technical support Netscape needs to add "value" to the Microsoft platform and has fought back against Netscape by withholding this support when Netscape rejected the market's partition proposal.

70.4.1. Microsoft retaliated against Netscape by withholding the dialer API.

70.4.1.1. Microsoft knew that Netscape needed certain critical technical information and support to complete its Windows 95 browser in time for the retail release of Windows 95; indeed, Netscape had repeatedly asked Microsoft for a version of the dialer API, and obtaining it was Netscape's primary goal at the June 21, 1995 meeting.

1. Beginning in March 1995, Netscape's technical staff corresponded repeatedly with Microsoft to discuss the technologies required to develop a Netscape browser that would work efficiently on Windows 95. Barksdale Gov. § 95; Barksdale Dir ¶ 106; DX728
2. Reardon wrote in a June 23, 1995 email string to Maritz and others entitled "Netscape meeting: reality": "We sent them a list of about thirty discussion points. They sent back ten, almost all about the delivery of their Win95 browser ." GX536.
3. On July 7, 1995, Mike Homer wrote to Daniel Rosen: “I know we've discussed this with you before, but I wanted to reiterate how urgently we need the following information: 1. RNA (Remote Network Access) phone book -API. Currently the only way to create/edit phone book entries is through the WIN 95 user interface. Our product needs to create an RNA phone book entry for the registration server (this would be done during installation) and also configure the customer's new account once the account is set up was created. To make these calls we need an API that will allow him to configure the necessary information. We first requested this at the beginning of June. . . ." Barksdale added, "Dan – this is big business, please help us." GX240.
4. Barksdale testified that regarding the meeting with Microsoft, "Our top priority was to obtain APIs and other technical information that we needed from Microsoft to release a browser compatible with the Windows 95 operating system." Barksdale Gov. § 105 .

70.4.1.2. At the June 21 meeting, Microsoft officials informed Netscape that Microsoft has a secret internal dialer API and that if Netscape is sufficiently cooperative in other matters, this technology could be immediately made available to Netscape.

1. Andreessen's notes reflect that when asked by Barksdale about the RAS "dialer" APIs that Netscape had requested, Rosen replied, "We can fix this problem. In a perfect world, anyone can connect to it. I'll be the first to plug it in." Rosen also explained, "We have to give you code. Our alternative is to give you things that weren't designed for that purpose. There are internal things that implement internal APIs, and these APIs are only known within Microsoft.” J. Allard then added, “'Depending on how we leave this room today, we have a solution to your problem...' or 3 months otherwise.” Rosen concluded saying, "If we had a special relationship, you wouldn't be in this position." GX33.
2. Barksdale testified that Microsoft's message was essentially, "'Depending on how we get on here today, you can have this thing right now and we'll all be good friends, and if not, go our way, then you must maybe wait a while for that.'" Barksdale, 10/27/98, at 53:3-8;see in additionBarksdale, 10/27/98, um 54:20-23.

70.4.1.3. Microsoft officials at the June 21, 1995 meeting repeatedly threatened that if Netscape did not agree to the proposed "special relationship" with Microsoft, Microsoft would delay, if at all, release this technology.

1. For example, Marc Andreessen's notes from his time note that Microsoft offered to "consider the possibility of licensing us to turn Navigator into a container," but only "IN THE CONTEXT OF THE LARGER DEAL." GX 33 (emphasis in original). Andreessen's notes also reflect Microsoft stating that "[t]here are things we can do when we work together that we couldn't do otherwise" and that Microsoft has offered to help Netscape "tightly integrate" with it to help MSN, but only on the condition that the two companies have a "close relationship"; "If we didn't have a closer relationship, you'd be back to what a regular ISV can do." GX33.
2. Barksdale testified that in the weeks leading up to the meeting, Netscape repeatedly asked Microsoft to provide "dialer" APIs that would allow Netscape's Windows 95 browser to access the Internet through a dial-up ISP. Barksdale Dir. ¶¶ 106, 111
3. Andreessen's notes show that when James Barksdale raised the issue at the June 21 meeting, Daniel Rosen acknowledged that Microsoft had an internal fix for the dialer problem and offered to make these internal APIs available to Netscape, but only under on condition that Netscape agree to the previously outlined "special relationship". "We can fix this problem. In a perfect world, anyone can connect to it. With a special relationship with you, you will be the first to connect with it. Others will be in the future.” GX33.
4. Andreessen's notes reflect that Microsoft rep J. Allard then clarified that "[t]he depending on how we leave this room today, we have a solution to your problem... or else in 3 months" and that Dan Rosen added , "[i]If we had a special relationship, you wouldn't be in this position." GX33.

70.4.1.4. Microsoft made good on its threat. When Netscape rejected Microsoft's market-sharing proposal, Microsoft -- despite Netscape's repeated requests for assistance -- held back a working version of the dialer API until October, a little longer than James Allard's June 21 meeting threatened "3 months." The delay delayed the release of Netscape's browser until well after the release of Windows95 (and Internet Explorer) and caused Netscape to miss most of the holiday sales season.

1. On July 7, 1995, Mike Homer wrote to Daniel Rosen: “I know we've discussed this with you before, but I wanted to reiterate how urgently we need the following information: 1. RNA (Remote Network Access) phone book -API. . . We first requested these in early June. . . Barksdale added, "Dan – this is big business, please help us." GX240.
2. On July 18, 1996, Rick Schell wrote to Paul Maritz that Netscape "repeatedly asked for the API set that would allow us to make phonebook entries. Microsoft didn't make these APIs available until October 1995, causing us to miss most of the holiday season. However, these APIs were previously used by Microsoft's Plus Pack, which was available at the time Win95 was introduced." GX241.
3. Barksdale testified that "we didn't get the APIs and other technical information we were looking for until October of 1995...or about three months later, which was well after Windows 95 launched and was exactly what Microsoft was looking for June 21 had threatened meeting." Barksdale Dir. ¶114.See in additionGX240; GX241; Barksdale, 10/22/98, um 53:14-18.

70.4.2. Microsoft also retaliated against Netscape by refusing to license to Netscape a scripting tool required for Netscape to allow its Windows 95 users to access certain Internet Service Providers.

70.4.2.1. In 1996, Netscape attempted to negotiate a license for a readily available scripting tool that Netscape needed to make its browser compatible with some dial-up ISPs.

1. Barksdale Dir. ¶207.
2. Barksdale testified that Netscape "believed that the scripting engine was readily available. John Freeborg, a Netscape employee, confirmed this fact by making up the name of an ISP and subscribing to Microsoft's ISP mailing list using his home address On June 28, 1996, Freeborg received a package from Microsoft stating that the scripting engine we requested was available to ISPs for redistribution on a royalty-free basis if the ISP signed a Microsoft license that covered the ISP under others committed to making Internet Explorer the 'preferred web browser'.” Barksdale Gov. § 208.See in additionGX239; GX243; GX245.

70.4.2.2. A license agreement for the scripting tool was approved by both Netscape's legal department and Microsoft, and Netscape forwarded a signed copy to Microsoft for signature on July 18, 1996.

1. Barksdale testified, “By mid-July, both Netscape's legal department and Microsoft's legal department had approved the license agreement under which we sought the scripting tool. Rick Schell signed the agreement on behalf of Netscape on July 18, 1996. The agreement was forwarded to Microsoft for signature." Barksdale Dir. § 209
2. Julie Herendeen wrote on July 26, 1996: "John sent the contract to Microsoft's Ed Mitchell for signature last Thursday. GX243.

70.4.2.3. Microsoft responded by writing a letter to Netscape refusing to discuss the scripting license unless Netscape cooperated with Microsoft on other, unrelated matters.

1. On August 14, 1996, Netscape's John Freeborg wrote that Microsoft's Will Poole "informed us that Paul Maritz wrote a letter to Rick listing all outstanding issues between Microsoft and Netscape (one of which will be the script license), where both agree parties could be more cooperative. He wouldn't go into details, but they're not willing to keep the Win 95 script license as a separate edition. GX248.

70.4.2.4. Netscape never obtained a license for the scripting tool, and as such was unable to do business with certain ISPs for a time.

1. Barksdale testified that "we were never able to license the scripting tool" and that "Microsoft's refusal to license us the scripting tool - a tool that was freely available for others to redistribute on a royalty-free basis - Netscape for a Period of dealings with these ISPs, such as B. Sprynet, which required scripting." Barksdale Dir. § 213

70.4.3. Microsoft has also taken a stand against Netscape by embarking on a relentless campaign to prevent other computer industry companies from supporting Netscape in any way.

70.4.3.1. Microsoft threatened retaliation against PC OEMs who did business with Netscape by changing the terms of their Windows 95 license agreements.

1. Barksdale testified that "Microsoft has made it clear through its words and actions that PC computer manufacturers should not get too close to Netscape as doing so could have negative consequences in dealing with Microsoft. This was serious business for these OEMs; without a Windows license and without cooperation from Microsoft in general, their PC businesses are worthless." Barksdale Dir. § 30.
2. Barksdale testified that "I have been told that senior Microsoft executives, including Bill Gates, have called the CEOs of certain OEMs to warn them that doing business with Netscape would have adverse consequences." Barksdale Gov. § 163.
3. When NCR placed a Netscape logo on its home page, a Microsoft representative told NCR that Netscape was Microsoft's "No. 1 competitor" and that NCR's "licensing relationship" with Microsoft "is going to get much more difficult." GX192.
4. An employee of Netscape's Japanese subsidiary reported on November 12, 1996: "I have heard many times from our partners who have an OEM agreement with us to bundle Navigator in their PCs that MS is threatening them that MS is trying to grow if they use our navigator as an OEM license license for Windows." GX199; Barksdale Dir. § 172 (same).
5. See in addition belowPart V.C.2.b; ¶¶ 205-208 (Microsoft threatened to fine companies that preferred Netscape).

70.4.3.2. Microsoft executives also threatened ISPs and ISVs that had entered into collaboration agreements with Netscape.

1. Barksdale testified that when Pacific Bell announced a joint venture with Netscape, Microsoft executive Steve Ballmer called to "express displeasure at the announcement" and say that Pacific Bell had become "an enemy" of Microsoft by Doing business with Netscape." Barksdale Dir. § 164.
2. In an email dated June 14, 1996, Autodesk told Netscape that they are suffering "a lot of heartache (phone calls, email threats, etc.)" from Microsoft "for having worked so closely with you". GX76.
3. When Microsoft learned that Attachmate was bundling Netscape Navigator with its products and was planning to develop a TCP/IP gateway, Microsoft threatened to bundle its own 3720 emulation software (which competes directly with another Attachmate product) into the operating system. Attachmate abandoned its TCP/IP project and stopped selling Navigator. GX91.

4. Adoption of Microsoft's market-sharing proposal would have resulted in both the retention of Microsoft's operating system monopoly and a Microsoft monopoly in the browser market

71. Had Netscape accepted Microsoft's outspoken proposal to share the browser market, Microsoft would have been able to thwart the browser threat in its infancy and eliminate what Microsoft perceived as the main threat to its operating system monopoly.

71.1. Netscape's acceptance of Microsoft's offer would have eliminated the threat to Microsoft's operating system monopoly that Netscape posed in 1995.

71.1.1. Netscape was the only major browser vendor in 1995, making it the only major potential browser threat to Microsoft's operating system monopoly. Consequently, had Microsoft convinced Netscape to accept its offer, Microsoft would have quickly gained a sufficient share of browsers to ensure that no other browser competitors controlled browser-related APIs.

1. Professor Fisher testified that Microsoft's market-sharing proposal "is significant, first, because Microsoft would have been able to eliminate its only serious browser competitor and monopolize the market for browsers had Netscape agreed." fisherman you Article 99.
2. Fisher testified that Netscape has always been Microsoft's "only serious browser competitor" since the introduction of Internet Explorer 1.0. fisherman you Article 99.
3. Barksdale testified that "at the end of 1995 Netscape had a market share of over 70 percent of Internet clients". Barksdale Gov. § 66.

71.1.2. Had Netscape accepted Microsoft's offer, Netscape would have been relegated to a small and shrinking share of the overall browser market.

1. Marc Andreessen testified that "the proposal...would result in Netscape being crippled as a potential competitor to Microsoft and indeed as an independent company." Andreessen Abt. (played on 10/27/98), at 25:11 - 18:14.
2. Barksdale agreed with Andreessen's assessment that acceptance of Microsoft's proposal would have crippled Netscape as an independent company. Barksdale 10/27/98 at 11:17 p.m.
3. Barksdale testified, "Most of the matters to which Netscape would have confined its work were not commercially valuable." Barksdale Gov. § 113.
4. Andreessen also testified that he believed, "Furthermore, it is very unlikely that Microsoft would have chosen to honor its side of the deal, because once we were put in such a state of weakness we would have had no market power whatsoever, and ours." Wishes would have been irrelevant." Andreessen Abt. (played on 10/27/98), at 26:23 - 27:3.

71.1.3. By quickly acquiring a sizable stake in the browser business, Microsoft would have ensured that browser competitors could not garner enough usage to get application developers to write on their platform rather than Windows, thereby maintaining its operating system monopoly.

1. Warren-Boulton stated that "By reducing the market share of competing browsers to low levels, Microsoft could significantly reduce the likelihood that application developers would write to these browsers' APIs". Warren-Boulton Gov. § 88.

72. Microsoft would also have quickly monopolized the browser market.

72.1. As will be explained, there is a separate product market for internet browsers.

1. See belowTeil VII.B.1; § 384.

72.2. Had Netscape accepted Microsoft's proposal, Microsoft would have quickly gained a dominant share of browsers.

1. See above§ 71.1.1.

72.3. Microsoft's large share of the browser market would have been protected by significant barriers to entry, including Microsoft's control over the standards and extensions that website developers use.

1. dr Fisher stated that "if IE were the dominant browser and Microsoft decided to support only Windows-based technology, developers would have little incentive to develop applications that are not Windows-based." fisherman you Section 95.
2. See in addition belowTeil VII.D.1; ¶¶ 398-400.

72.4. This would have given Microsoft a monopoly over browsers.

1. See belowPart VII.B.3.e; ¶ 390.

B.Microsoft's proposal for market-sharing agreements Eliminating other potentially threatening middleware confirms the anti-competitive nature of their behavior towards the browser

2.Microsoft similarly attempted to share markets with Apple

73. Microsoft has made other efforts to share markets with competitors at the platform level. These efforts establish a pattern and practice of attempts to eliminate competition through agreements with competitors.

74. Microsoft attempted to share markets with Apple to eliminate competing technology at the platform level.

a.Apple's QuickTime multimedia software, like the browser, is platform-level software that Microsoft saw as a potential threat to its operating system monopoly

75. Apple Computer's QuickTime is its software architecture for the creation, editing, publishing and playback of multimedia content (e.g. audio, video, graphics and 3D) on the Macintosh and Windows operating systems. QuickTime is cross-platform; Developers using QuickTime technology can create multimedia content that runs on QuickTime implementations for Windows and Macintosh.

1. Tevanian Dir. ¶¶ 47, 50-51, 54, 57-59, 67-68; Tevanian 11/5/99 at 27:1-7; 11/4/99, 45:3 - 46:6 (statement regarding QuickTime's API and cross-platform capabilities).

76. Apple competes with Microsoft, among others, via QuickTime in providing multimedia functions for Windows users.

1. Tevanian testified that QuickTime competes with Microsoft's multimedia technologies, including Microsoft's multimedia APIs (DirectX) and media players (Windows Media Player). Tevanian Dir. ¶¶ 69-70.See generallyTevanic ¶¶ 57, 60-65.
2. Eric Engstrom, a former general manager of multimedia at Microsoft, acknowledged that Apple competes with Microsoft to varying degrees when it comes to convincing developers to use their respective multimedia APIs, codecs, and file formats for their respective players. Engstrom, 02/23/1999 at 35:24 - 36:10, 79:4 - 84:6See in additionTevanian Dir. ¶¶ 57, 60-65 (explaining APIs, file formats, protocols, codecs). Engstrom also acknowledged that Apple's QuickTime multimedia player is cross-platform, while Microsoft's Direct X multimedia technology is not. Engstrom, 02/23/1999, at 97:18 - 98:2.

77. Because QuickTime is cross-platform middleware, Microsoft viewed QuickTime as a potential, albeit remote, threat to its control over platform-level interfaces and standards relied on by developers, and hence to its monopoly.

1. Microsoft's Ben Slivka testified that Microsoft views streaming audiovisual technologies as part of a "growing collection of technologies" that "pose a threat to the Windows platform" because they may reduce the application advantage of Windows today. Slivka Dep., 9/3/98, at 243:20 - 245:8 (DX 2591).
2. dr Avadis Tevanian, Apple Computer's senior vice president of software engineering, also recognized the threat that QuickTime could pose to Microsoft's operating system monopoly, testifying, "The widespread popularity and use of QuickTime poses a significant threat to Microsoft's platform capability of QuickTime promises to weaken the symbiotic relationship between the operating system and applications that forms the basis of Microsoft's monopoly position and which is such a significant barrier to competition in the operating system market." Tevanian Dir. § 75;see in additionTevanian Dir. ¶¶ 51, 57-59 (describes QuickTime's cross-platform capabilities).
3. In his May 1995 "Internet Tidal Wave" memo to his employees about the threat the Internet posed to Microsoft's operating system position, Bill Gates specifically expressed concern about the popularity of QuickTime formats on the Internet, which he attributed in part to that QuickTime's evil platform and difficulty in supplanting established formats, and directed its staff to develop a competitive strategy. GX 20 at 4, 6.
4. Professor Fisher testified that "With Apple's QuickTime technology, Microsoft was presented with platform-level software for which application programs could be written" and that the "platform-level APIs closed the application programming barrier for entry into PC operating systems threatened to undermine". supporting application programs that could be used with multiple operating systems." Fischer dir. ¶ 118, at (a) and (b).
5. Warren-Boulton testified that it is "now rather the combination of browsers with cross-platform technologies" that are "considered to be a threat...". Warren-Boulton 11/19/98 at 48:13-24.
6. See below§ 84.

b. As with Netscape, Microsoft has attempted to share markets with Apple to eliminate the threat that QuickTime's platform-level components could pose

78. In order to avoid the possibility that the platform-level components of QuickTime would become part of a platform that could threaten Microsoft's operating system monopoly, Microsoft attempted to share markets with Apple in a manner conspicuously resembling the attempt to share markets with Netscape was similar.

1. Professor Fisher explicitly drew the parallel between Microsoft's behavior in relation to Netscape and Apple: confronted with platform-level software that developers could target and thus reduce barriers to entry in the operating system market, Microsoft "reacted by trying to close the alternative platform vendor win to withdraw from the offering and instead focus on products that did not offer platform potential" and "was willing to counteract the vendor ... preventing it from offering the platform, 'even if such actions were from a business standpoint.'" Fisher Dir. ¶ 118, at (c) and (d).

78.1. In a series of communications with Apple in 1997 and 1998, Microsoft urged Apple to stop competing with Microsoft in multimedia playback on Windows in exchange for Microsoft supporting QuickTime as a multimedia authoring solution. Microsoft's proposal was strikingly similar to its proposal to Netscape: in both cases, Microsoft offered the company that made platform-level software Microsoft's support and a free hand on a complementary product in exchange for not having platform-level client software for Windows; and in both cases Microsoft threatened to damage the other company's business if it did not agree to the proposal.

78.1.1. Microsoft first proposed its market-sharing scheme to Apple in 1997 and continued efforts to secure Apple's approval throughout the year.

1. In April 1997, Microsoft's Eric Engstrom and Christopher Phillips proposed to Apple that it cede the multimedia playback market to Microsoft and focus solely on the "authoring" portion of multimedia, ie enabling such tools. Tevanian Dir. Article 78; Schaaff Dep., 1/13/99, at 192:8 - 196:1 (At a meeting between Apple's Tim Schaaff and Microsoft's Eric Engstrom and Chris Phillips, MS suggested that Apple expand its efforts in multimedia playback on Windows should scale back return for MS support for QuickTime as a multimedia authoring solution). Microsoft didn't offer any multimedia authoring functions or APIs at the time. Schaaff Dep. 13.1.99, pp. 193:13-21.
2. Later in 1997, Microsoft repeatedly pressured Apple to cede the multimedia playback market to Microsoft. At an August 1997 meeting between Apple and Microsoft, Microsoft "urged Apple to withdraw from the multimedia playback market". Tevanian Dir. Section 80.
3. The following month, Mr. Engstrom "again urged Apple to focus on the authoring segment and cede the playback business to Microsoft." Tevanian Dir. ¶¶81-83; Schaaff Dept. 01/13/99 at 196:3-199:4;see below§ 78.2.
4. In October 1997, at another Apple-Microsoft meeting, Microsoft stated that it would "allow Apple to continue with QuickTime playback for the Mac operating system, but would require Apple to relinquish the QuickTime playback feature in Windows". Tevanian Dir. ¶ 84. At this meeting, Mr. Phillips again encouraged Apple to discontinue QuickTime as the playback technology for Windows. In return, Phillips offered support for QuickTime as an authoring technology. Schaaff Dep., 1/13/99 at 200:16-206:11. Phillips also offered to support QuickTime in some way on the Windows CE operating system. Schaaff Dept., 01/13/99 at 206:15-207:14.
5. Engstrom admitted that one of his goals in all his discussions with Apple was for Apple to agree on a single audio/video playback runtime for Windows based on Microsoft's Direct X, and that he told Apple that Microsoft QuickTime supported as an authoring solution on Windows was dependent on this agreement. Engstrom, 02/24/99, at 25:16 - 28:12; 36:20 - 37:15. Engstrom also admitted that he hoped to "move the locus of competition upstream," in other words, away from competition in audiovisual playback on Windows. Engstrom, 02/24/1999, at 36:6-19. Engstrom also acknowledged that if Apple accepted Microsoft's proposal, it would be pointless to continue offering its own multimedia runtime environment for Windows. Engstrom, 02/24/1999 at 40:6 - 42:13; 55:6-23.

78.1.2. Microsoft proposed well into 1998 to split the multimedia business between the companies - including giving Apple a free hand in authoring.

1. On February 13, 1998, Dr. Tevanian met with Microsoft's Don Bradford to discuss the technical problems Windows and Internet Explorer were causing with QuickTime and to discuss threatening comments from Microsoft employees. Tevanian Dir. ¶¶ 85-87. At that meeting, Mr. Bradford presented “the same proposal that Microsoft has presented in the past. In particular, if Apple were to abandon the playback segment of the business, Microsoft would be willing to support QuickTime as a solution for the authoring portion. Mr. Bradford told me that Mr. Gates thought this was a way to resolve our dispute. Tevanian Dir. ¶¶ 88-89. dr Tevanian testified that Bradford's response to Tevanian was “very simple, and although he did it in a less threatening way, he said — he basically said, 'Well, let's fix this; we want to be able to work together and Bill wonders if one way to solve this is for us to do the playback and you to do the creation.' And I just said to him, 'No, that's not acceptable.'” Tevanian, 11/5/98, 29:10-25.
2. Phillip Schiller, Apple's vice president of marketing, testified that in a telephone conversation with Eric Engstrom in April 1998, Engstrom offered to assist Apple with multimedia authoring, but clarified that such assistance was contingent on Apple gaining competition in multimedia -Playback on Windows stopped. Engstrom told Schiller that Apple had to "give up playback on Windows." Schiller Dept. 1/13/99 at 240:19-242:22;see in additionTevanian Dir. ¶¶ 90-92 (Engstrom tells Schiller that Apple "would have to give up multimedia playback on Windows" to collaborate with Microsoft on authoring.).
3. Mr. Engstrom admitted that he had told Apple that if Apple agreed to use Microsoft's DirectX as the runtime environment for Windows, Microsoft would support Apple's authoring technology and that Microsoft would jump into the authoring technology if Apple agreed to use the Adoption of the DirectX runtime environment would not agree business. Engstrom 02/24/1999 at 37:16-39:25. Although Engstrom denied that he had offered to stay out of authoring, he did admit that he had told Apple that if Apple were to base their authoring solution on Microsoft's DirectX, he "wouldn't likely invest in that solution as quickly as we did." otherwise". Engstrom, 02/24/1999 at 39:15-25.
4. At a June 15, 1998 meeting attended by both Eric Engstrom and Dr. Tevanian and Apple CEO Steve Jobs, Microsoft suggested that "Microsoft would take over the Windows playback market while allowing Apple to control the much smaller Windows playback business for the Macintosh." Tevanian Dir. ¶¶ 93- 94. Microsoft's proposal included, inter alia, its acquisition by Apple
   1. DirectX as runtime environment for Windows,
   2. Microsoft's proprietary streaming technology and
   3. Microsoft's AAF file format for authoring, the Dr. Tevanian considered everyone inferior. Tevanian Dir. Section 95.

   dr Tevanian testified that "Microsoft's proposal amounted to a forced abandonment of one of Apple's most successful and innovative products" and the acquisition of Microsoft's playback, streaming and authoring technology. Tevanian Dir. ¶ 96. Microsoft's agenda for the meeting suggests that Microsoft's Direct X will be the only runtime on Windows: "Run-time is Direct X on Windows, QuickTime on Mac." GX912;see in additionGX 908 (Waldman email dated July 6, 1998 to Gates et al.) (summary of Mr. Jobs' view of the proposal: "essentially 'Apple should abandon QT and use [Microsoft's] stuff'").

78.2. To force Apple to accept its market-sharing proposal, Microsoft told Apple that if Apple did not agree to Microsoft's offer of a free authoring hand, Microsoft would engage in predatory behavior.

1. In September 1997, Engstrom of Microsoft "again urged Apple to focus on the authoring segment and cede the playback business to Microsoft". Tevanian Dir. ¶¶ 81-83.At a meeting at the Fairmont Hotel in San Jose, California, Mr. Engstrom told Apple's Schaaff that Microsoft intends to control multimedia playback on Windows and that Microsoft would devote 100-150 authoring engineers if that were to help control the multimedia playback is required. Engstrom also told Schaaff that Bill Gates doesn't believe authoring is a significant business opportunity for Microsoft, but that Microsoft is willing to invest whatever it takes to drive multimedia playback, "even if it is from a business perspective." don't make any sense. Schaaff, 01/13/99, at 196:3 - 199:24.
2. Schaaff took this as a threat that unless Apple "pushed out" of the Windows playback business, Microsoft would double or significantly increase the size of its team in order to be competitive in both the playback and authoring spaces. Schaaff Dept. 1/13/99, at 196:3 - 199:24; Tevanian Dir. ¶ 83 ("Mr. Engstrom remarked at the meeting that Microsoft's Bill Gates was not interested in an authoring program because the market for that product was too small. However, he assured Apple officials that if Microsoft made an investment in providing of authoring tools to force Apple out of the playback market, Microsoft would devote all resources necessary to achieve that goal.").
3. The interpretation of Dr. Tevanian was the same as Mr. Schaaff's: “What Mr. Engstrom said was that he made us an offer, that is, if we gave up the playback market, he would give us the author market. And if we didn't accept this offer, he would immediately use engineers to simply kill us in this room as well. Tevanian 11/5/98 at 82:19-23. "The threat was that they would use their other advantages in the market and harass us in any way they could." Tevan 11/5/98 at 84:2-4. Engstrom admitted that he had said that developing an authored solution was "not the highest return on this particular investment." Engstrom 02/24/1999 at 38:22-24.
4. Professor Fisher explained Microsoft's anti-competitive intent by threatening to get into the multimedia authoring business: "Microsoft wanted to put 100 to 150 engineers in it to compete with Apple, although according to the Microsoft representative, it made no business sense to threaten me." . It doesn't sound like one company saying to another, "You know, we're going to keep at it hard." That's saying we're going to do our best to hurt you. Fisher, 1/6/99pm, at 70:14-21. Professor Fisher further noted, "If it doesn't make business sense, you have to ask what the possible motive is, and here's the motive, Apple to encourage cooperation.” Fisher, 1/6/99pm, at 73:11-14;see in additionfisherman you ¶117, 118 (Microsoft's actions regarding Apple's multimedia playback technology show that Microsoft "was willing to take action to prevent the vendor of a potential platform-level software from successfully offering the platform, even if such Actions 'don't make sense from a business perspective'" and "Microsoft will act immediately to prevent other companies from writing software at the platform level, even if that software lacks the functionality and performance, and therefore the demand for Windows based PCs." .
5. Engstrom admitted that he told Schiller that if Microsoft and Apple weren't working together on multimedia software for Windows, then Microsoft would have to offer authoring solutions that might not be compatible with Apple's, that he was "baffled by Apple's insistence to go it alone in the development and commercialization of a multimedia runtime environment for Windows, and that Microsoft was likely to be successful in authoring technology "given Microsoft's resources and expertise". Engstrom Dir. ¶ 68.

c. Microsoft's purpose in proposing a market partition to Apple was to ensure Microsoft's continued control over platform-level interfaces

79. Microsoft's intent in attempting to share markets with Apple as in its attempt to share markets with Netscape,was to prevent Apple from successfully establishing platform-level software that could reduce Microsoft's control over the interfaces and standards used by developers, thereby undermining the barriers to entry for the operating system market.

79.1.First, Microsoft's purpose is evident both from its contemporaneous documents and from the testimonies of its witnesses.

1. Engstrom's manager, David Cole, clarified in an email to Gates, Engstrom, and Waldman that Microsoft's primary goal in its discussions with Apple was "to get Apple to give up a runtime on Windows." GX 270 (4/28/98 Cole email).
2. Even Engstrom, who claimed he never specifically asked Apple to give up its Windows runtime, admitted in court that everyone knew it wouldn't make sense for Apple to continue offering its own multimedia runtime on Windows when it was Microsoft's Accepted proposal to use Microsoft's Direct X runtime. Engstrom, 02/24/1999 at 40:6 - 42:13; 55:6-23 ("If they want to adopt our runtime, they must at some level mentally and emotionally give up building these dual ministries because it wouldn't make sense for them to build a ministry on top of ours that uses our ministries, while they're still building a service that -- you know, that they see as their hope for the future that's sitting next to this piece of Windows.") .

79.2.Seconds, Microsoft has explicitly communicated to Apple its purpose of controlling software at the platform level.

1. Timothy Schaaff testified that Microsoft Multimedia chief Eric Engstrom told him and other executives that "Microsoft wanted control of the user interface... and that Microsoft was determined that the core APIs that formed the basis of the operating system should all be developed by Microsoft should originate and not originate from a third party." Schaaff Dept., 01/13/99, at 194:21–195:18; Schaaff Dep., 8/28/98, at 283:21 – 284:11 ("They stated that it was Microsoft's opinion that they intend to control APIs for playing multimedia content on the Windows platform and therefore they didn't want to see proliferation or competition with Microsoft with a separate set of APIs...im Playback range") (DX 2506).
2. dr Tevanian testified that "Engstrom bluntly warned Mr. Schiller: 'We will compete fiercely in multimedia playback and we will not allow anyone to play on Windows. We're looking at that part of the operating system, so you'll have to forego multimedia playback on Windows.'" Tevanian Dir. § 91; Schiller Dept., 1/13/99, at 240:19-242:22. Dr. Tevanian recounted: "What they were proposing at all levels - and sometimes very direct threats - was to effectively kill QuickTime... And Mr. Hoddie said, 'Do you want us to stab the baby?' his words. 'Knife the baby' means kill QuickTime . And Mr. Phillips repeated to him, 'Yes, we're talking about stabbing the baby.'" Tevanian, 11/5/98 at 28:15 - 30:4.
3. Steve Jobs confronted Microsoft about Microsoft's public statements that Microsoft was using its power in the PC operating system market to kill QuickTime. In an email to Bill Gates, Steve Jobs stated, "There is one thing that threatens to be quite divisive and that is the recent behavior of the Microsoft NetShow team. They'll do anything to say they intend to kill QuickTime, while being quite menacing and rude... We intend to fight and win with QuickTime, and I hope this honest and fair effort doesn't end up being nefarious and dirty tactics and harsh rhetoric from the NetShow group -- it could really tarnish our entire budding relationship." GX904;see in additionGX 897 (In a January 1998 email to Gates and others regarding the "Steve Jobs Call," Don Bradford reported on a phone call he received from Jobs. "Steve called back to express his concern about NetShow's public message about the shutdown Expressed by QuickTime.”). dr Tevanian testified that Jobs was referring to statements by Microsoft's Netshow team that Microsoft would kill QuickTime because Microsoft's technology was everywhere because it was bundled with Windows and with Internet Explorer on the Macintosh, but Microsoft would never let QuickTime survive on Windows. Tevanian 11/5/98 at 94:16 - 95:8.

79.3.third, Microsoft's goal is evident from the nature of the proposal: Microsoft wanted Apple to stop developing complementary software that runs well on Windows (an activity it usually encourages); Microsoft's proposal, if accepted, would have reduced demand for Windows and is therefore only useful to eliminate potential competition to Microsoft's operating system monopoly.

1. See below€ 300.

80. Had Apple accepted Microsoft's proposal, Microsoft's efforts to pressure Apple to cease competition on the Windows platform would likely have reduced competition and innovation in multimedia playback, particularly in the development of cross-platform ones APIs.

1. dr Tevanian testified, “Yes, it is true that Microsoft's proposal was that Apple should cede the Windows multimedia playback market. But from our point of view, that essentially meant ditching him for everything, because remember how we talked about it yesterday, one of QuickTime's goals was to be cross-platform, so you can create content and on Windows, Macintosh or anyone else operating system can run. If we couldn't bring this technology to Windows - if we had to cede that to Microsoft, it would have undermined one of the primary goals of the entire product. Having it on the Macintosh would have been irrelevant." Tevanian 5/11/98 at 27:1-11.
2. Microsoft's efforts to persuade Apple to abandon QuickTime multimedia playback on Windows would not only have forced Apple to stop innovating in multimedia playback on Windows, but would also have hampered Apple's ability to innovate on the authoring side, since they would be limited to using the Windows playback mechanism. Schaaff, 01/13/99, at 203:3 - 205:3.
3. Mr. Engstrom acknowledged that if Apple had accepted Microsoft's proposal and not continued to ship a multimedia runtime environment for Windows, it would have been dependent on Microsoft to run Apple's authoring solutions. Engstrom, 02/24/1999, at 48:5 - 49:1.

i.e. Microsoft retaliated against Apple, just as it did with Netscape, when Apple refused to accept Microsoft's proposal

81. When Apple refused to accept Microsoft's proposal to end multimedia competition on Windows, Microsoft retaliated against Apple. The retaliations ranged from inserting misleading error messages into Windows to offering or refusing to support Apple when it was in line with Microsoft's strategic goals.

81.1. Microsoft introduced misleading error messages in Windows that urged users to replace QuickTime with Microsoft technology.

1. dr Tevanian testified that Microsoft placed misleading error messages in Windows informing users that they might not be able to play certain multimedia files and asking users if they would like to reconfigure their systems to use Microsoft's Active Movie technology instead of Apple's QuickTime to use technology. Tevanian Dir. ¶¶ 108-110 and Exhibit 5; GX917; GX918; Tevanian 11/4/98 at 27:12 - 28:22.
2. dr Tevanian, a veteran software engineer, testified that such error messages are unlikely to be thrown inadvertently. Tevan 11/4/99 at 61:17 - 62:5.

81.2. When Microsoft made changes to Internet Explorer 4.0 and Windows that disrupted QuickTime's functionality, Microsoft responded opportunistically to Apple's requests for assistance, fixing the problem when it was in Microsoft's strategic interests and refusing to provide meaningful fixes to provide support when this was not the case.

81.2.1. With the release of Internet Explorer 4.0, Microsoft changed the way Windows interacts with Internet Explorer so that data in certain media files is preferentially routed to Internet Explorer for playback. The changes prevented QuickTime from processing the data and frustrated users' attempts to access certain content. QuickTime also had additional difficulties operating with Internet Explorer 4.0 and Windows 98. These problems arose just as Microsoft was attempting to persuade Apple to abandon its software at the multimedia platform level.

1. dr Tevanian testified: "When Microsoft produced its first plug-in-capable browser [Internet Explorer 3.0] and had to compete in a Netscape-dominated market by technological compatibility, Microsoft used Netscape's plug-in architecture and stuck with it. As Microsoft's browser market share grew by bundling Internet Explorer and Microsoft multimedia software with Windows, Microsoft reduced the compatibility between its browser and the Netscape open standard, beginning with the introduction of Internet Explorer 4.0." Tevanian Direct ¶ 102.
2. Tevanian further stated, "With the successive releases of Microsoft's Internet Explorer 4.0, Microsoft Windows 98, and Microsoft multimedia software, Apple has noticed a steady degradation in QuickTime's ability to play a variety of QuickTime-compatible media file formats while working with Microsoft's Internet Explorer works runs on the Windows operating system." Tevanian Dir. ¶ 100;see in additionTevanian Direct ¶ 101 & Appendix 4 (chart of test results with different formats); Tevanian, 11/4/98am, at 28:23 - 29:13 ("In this case, when a user surfs the Internet, views web pages and finds QuickTime content, files based on QuickTime would happen instead of playing with QuickTime , played Internet Explorer even with QuickTime installed and tried to play it using Microsoft technology, which often failed. Therefore, QuickTime was not allowed to actually access the data and play it correctly, the user would not know that it was broken , and many times the webpage showed that it needed QuickTime, but QuickTime wasn't invoked after release - sorry, after installation. And we had no way of solving that, as far as we knew.").
3. Schaaff testified that when Microsoft introduced Internet Explorer 3.0, it promoted its compatibility with the Netscape browser plug-in APIs. Because QuickTime already supported the Netscape browser plug-in API, Apple was able to ensure that QuickTime was generally compatible and worked properly with both Navigator and Internet Explorer 3.0. With the release of Internet Explorer 4.0, certain file types that were previously routed to QuickTime were no longer routed to QuickTime. Apple's investigation found that the largely undocumented mechanism for passing media types in the Windows operating system, the Windows registry, did not pass media types to QuickTime as expected. Depending on the file type, this can result in the user not being able to access the content or only being able to do so to a limited extent. Schaaff 13.1.99 at 211:16 - 222:5; Tevanian Dir. ¶¶ 102-106. Apple's efforts to reverse engineer the Windows registry software to fix the problem had limited success. Tevanian Dir. Section 105.
4. dr Tevanian testified that introducing incompatibilities could undermine the establishment of Apple's multimedia platform. Tevanian 11/4/98 at 45:3 - 46:12. It's also clear that these problems coincided with Microsoft's public campaign to convince developers that Microsoft's multimedia technology would "kill" QuickTime on the Windows platform. Tevanian, 11/5/98, at 94:3 - 95:17.
5. Microsoft emails confirm that "support for the Windows file types is built into IE itself", that the Windows registry favors Microsoft's ActiveX controls, and that Microsoft has stopped Apple from writing their own ActiveX controls to to route playback from both Microsoft formats and industry standards such as MIDI. GX911; GX274.

81.2.2. When Apple first requested Microsoft's assistance, Microsoft corrected one of the issues caused by the redesign, as it was in line with its strategic goal of mitigating other platform-level threats.

1. In August 1997, Dr. Tevanian emailed Bill Gates explaining that Internet Explorer 4.0 had QuickTime and QuickTimeVR disabled on Windows, and that IE4 had set the default for ".mov" media files to Microsoft's ActiveMovie and not QuickTime. GX 265 (8/8/97 Tevan email to Gates).
2. Without the knowledge of Dr. Tevanian forwarded Mr. Gates Tevanian's email to Paul Maritz. Mr. Gates tried to ensure that the problem was used to Microsoft's advantage; He instructed Mr. Maritz: “I want to get as much as possible out of our browser and JAVA relationship here. In other words, a real advantage over SUN and Netscape. Who should Avie work with? Do we have a clear plan? What are we going to do at Apple to undermine SUN?" GX 265 (8/8/97 Gates email to Maritz).
3. dr Tevanian testified that Microsoft responded to his request to Gates by correcting the file associations for the specific file type he mentioned. Tevan 11/4/98 at 29:14-22, 54:9-22.
4. Internal Microsoft emails confirm that Microsoft has provided a method that overrides the ActiveX preference for MOV and QT (MOV is the format Dr. Tevanian Gates asked for), but that Microsoft does not do this for other file formats wanted to. GX 911 (08/05/98 Perry email; 08/06/98 Larkin email); GX 265 (8/8/97 Tevan email to Gates).

81.2.3. On the other hand, when Apple rejected Microsoft's proposal to allocate multimedia technology, Microsoft gave up meaningful efforts to help Apple solve the compatibility problems.

1. dr Tevanian stated that he didn't understand why MS could and did fix the .mov problem correctly but not the other problems. Tevanian 11/4/98 at 31:9-32:9, 54:9-22.
2. dr Tevanian also testified that Microsoft has delayed responding to Apple's complaints. Tevanian 11/4/98 29:14-22 ("We contacted Microsoft. I remember back when we first noticed this I contacted Bill Gates directly and asked him to fix the problem in a particular case area what he did. He sort of fixed it. But in many other areas it never got fixed. We tried to interact with Microsoft. We were about to ship QuickTime 3. We didn't get responses fast enough. We did tried to solve it ourselves. We couldn't solve it. And that was the end of that story."); Tevanian, 11/5/98pm, at 77:8-15 ("our engineers have the data they got from Microsoft received, questioned Here we are again, in context, a full year - in fact, it's almost a year to the date after I first notified Mr. Gates that we were having problems, and with this one notification, Microsoft was somehow able to delete one of the file types pen and we just couldn't understand why if they fixed one of them they didn't fix all of them.").
3. dr Tevanian testified that after months of trying to get information or support from Microsoft to fix the problems and receiving an inadequate response, Apple received the Windows Media Player beta a few days before shipping the final product had what was extremely insufficient time to identify and rectify any problems that might have arisen. Tevanian 11/4/98 at 36:22 - 38:10.
4. Concurrent documents confirm Apple's repeated attempts to persuade Microsoft to fix the problem with Windows taking over QuickTime file associations. For example, on July 21, 1998, Tim Schaaff sent a lengthy email to Microsoft's Engstrom and Cristiano Pierry, detailing the problems and noting that the fixes Microsoft allegedly provided by Apple did not solve the problems. Schaaff explained in part, "To the extent that Internet Explorer 4 relies on this undocumented information from the Windows registry to determine which software to invoke to process various MIME types on the webpage, third-party developers like Apple get hurt... It's unacceptable that every time a new version of Media Player, Direct X, or Windows itself is installed, QuickTime is overwritten by your software.” GX 272. Schaaff sent this mail a week later, having received no reply again. GX 272 (7/28/98 Schaaff email)
5. Another week later, on August 4, 1998, after still not receiving a response, Apple CEO Steve Jobs again requested Microsoft's assistance in solving the file association problem. GX 911 (8/4/98 job mail to Maffei).
6. Finally, on August 5, 1998, Microsoft's Pierry responded by only suggesting that Apple develop an ActiveX control, a proprietary Microsoft technology, but at the same time discouraging Apple from doing so. GX272.
7. In an internal Microsoft email to Jim Allchin, Pierry explained Microsoft's behavior. First, he noted that the reason QuickTime was able to play .mov files was because Microsoft had made every effort to provide an overwrite method. GX 911. 8/5/98 Pierry email) Pierry stated "I really don't want to provide a similar mechanism to allow you to play" other file types. GX 911. Pierry then explained that his “response to Apple is now excused, but support for Windows file types is (sic) built into Internet Explorer itselfonly way to take over and wediscourageKeeping you from doing this is writing your own Active-X control. Turns out they can probably just unregister our MIME types, then IE would have to use the plugin. But that would be a very wrong thing for them and it would cause app compatibility issues for them." GX 911 (8/5/98 Pierry email) (emphasis added).
8. None of the email exchanges with Apple mention the undocumented "enable plug-in flag" that Microsoft wrote to enable .mov and .qt to play properly. Engstrom 2/24/99 at 12:21-25. The e-mail traffic does not mention the alleged deficiencies in Apple's plug-in instructions either Microsoft stated in court as the cause of the problem. Engstrom, 02/24/1999 at 8:25 - 9:20 p.m.

81.3. Microsoft also retaliated against Apple by tricking third parties into not supporting QuickTime on Windows.

1. Tevanian testified that Microsoft has prohibited third-party hardware vendor TrueVision from marketing or promoting QuickTime for Windows driver software or from writing QuickTime for Windows driver software that works with more than the Final Cut product. Tevanian Dir. ¶¶ 134-138; Schiller Dept., 01/13/99, at 243:15 - 247:12.
2. Engstrom admitted that Microsoft entered into a deal with TrueVision that banned TrueVision from developing or promoting non-Microsoft interfaces for its driver software for about four months. Engstrom Dir. § 120.

e. As with Netscape, Microsoft's proposal was unrelated to efficiency-enhancing technology sharing

82. Microsoft's efforts to force Apple to exit the Windows playback market were unrelated to the achievement of efficiencies or consumer-friendly advantages.

82.1.First, Microsoft claims it was just looking for a way to increase consumer satisfaction by providing uniform standards for multimedia. Engstrom Dir. ¶ 46-47. But forcing Apple to leave the playback market on Windows wasn't reasonably necessary to achieve workable standards, achieved through cross-licensing of codecs (and other software) and/or collaboration on standards and protocols for data creation, storage and transmission could have been achieved. while retaining the consumer benefits and innovations offered by the competition.

1. Tevanian testified that by licensing each other, Microsoft and Apple could “level the playing field. We thought it was important to have open standards where customers could buy technology and vendors could have different implementations of the technology.” Tevanian, 11/5/99 at 60:4-13.
2. Tevanian explained that a "one-size-fits-all approach" has benefits, but ending competition isn't necessary to achieve them: "We have a different take on how to do this than Microsoft does. In particular, we see the way to achieve this as establishing open standards where anyone can compete with different implementations, and they could compete based on the quality of implementations or other metrics that would be important to consumers. In the Microsoft model, the goal was to control it, so not only would they control the interfaces, but they would control the implementations. . . . While it appeared it would have benefited consumers, we disagreed with the way they wanted to achieve it.” Tevanian, 11/5/99pm at 31:8 - 32:11.
3. Timothy Schaaff testified to Apple personnel-blackened-DX2586; Schaaff Dep. 8/28/98 at 508:7 - 512:10 (DX 2586A) (sealed). Mr. Schaaff also testified about discussions internally and with Microsoft about other agreements with potential consumer benefits that are not contingent on eliminating competition in the playback market. DX's 2586; Schaaff Dep. 8/28/99 at 337:19 - 338:15 (DX 2586) (license codecs) (sealed), 353:15 - 354:3-blackened-361:18 - 365:2 (same).
4. In its June 15 written proposal, Microsoft listed a number of items such as: B. Cross-licensing codecs that would improve compatibility and interoperability issues, but do not inherently require the two companies to agree to stop competing. GX912.

82.2.Seconds, the concurrent evidence shows that Microsoft's primary goal was to control the APIs that developers write to, far from benefiting consumers by improving compatibility assurance.

1. See above§ 78.
2. Engstrom wrote that it was important to convince Intel not to support Sun in writing Java multimedia APIs, "especially those that run well on Windows, i.e. native implementations". GX235.
3. Microsoft told Intel that it was attempting to eliminate platform-level threats through a strategy of "embracing" platform-level standards, "extending" them in Microsoft-dependent ways, thereby "erasing" the threat to Microsoft's control over standards .See abovePart V.A.3; Section 91
4. See below§ 84.

83. Engstrom's statement (Engstrom Dir. ¶ 49) that he never told Apple that it had to give up its runtime on Windows is not credible.

83.1. Engstrom's testimony contrasts with the more reliable testimonies of Schaaff and Schiller and contradicts contemporary documents.

1. See above¶¶ 78.2, 79.2
2. Microsoft's David Cole has made it clear to Mr. Gates and Mr. Engstrom that the elimination of Apple's QuickTime runtime environment is Microsoft's ultimate goal: "If we can get Apple to give up a runtime environment on Windows..." GX270.

83.2. Finally, Engstrom conceded that if Apple accepted Microsoft's offer, it would have little incentive to develop a runtime environment.

1. Engstrom testified that "none of the presentations...were based on the fact that they needed to be finished," and offered a QuickTime runtime environment for Windows (Engstrom 24/02/1999 at 51:22-24), but later conceded that if this were the case Apple has adopted the Microsoft runtime environment, "they're going to have to give up on some level mentally and emotionally to build this duplicating suite of services because it wouldn't make sense..." Engstrom, 02/24/1999, at 55 :6-23. What Mr. Engstrom seems to mean by duplicating is competing. Engstrom 24/02/1999 at 51:14-21; 35:24 - 36:13.

2.Microsoft also attempted to carve out markets with RealNetworks, using the same carrot-and-stick approach as other potential platform competitors

84. Microsoft made a similar attempt to share markets with RealNetworks as part of its pattern and practice of seeking anti-competitive agreements to eliminate potential threats to the applications' barrier to entry.

84.1. Microsoft recognized that RealNetworks' (then known as Progressive Networks) multimedia streaming software had the potential to become a platform threat, at least in the multimedia space.

1. On June 5, 1997, Microsoft's Jim Durkin reported on an internal Microsoft strategy meeting attended by Messrs. Gates, Maritz and Muglia. GX 1576 (6/5/97 Durkin email). Durkin quoted Microsoft Vice President Muglia as saying, RealNetworks "is like Netscape. The only difference is that we have a chance to start this fight earlier in the game." GX 1576. Durkin also reported that Gates and Maritz made the decision that "winning the streaming battle means three things — winning the file format war, winning the client architecture war, and winning the server wars." GX1576.
2. Mr. Maritz testified that in June 1997, Gates believed streaming was a strategic area that Microsoft needed to win. Maritz, 01/27/99, 56:25 - 57:10; GX1576.
3. Mr. Maritz also admitted that while he believed in June 1997 that RealNetworks did not pose the same type of threat as Netscape, it "had the potential to evolve into a software platform over time." @ Maritz, 01/27/1999, 57:15 - 58:4.
4. Mr. Engstrom testified that RealNetworks presented a set of APIs that competed with Microsoft's APIs for developer attention (Engstrom 23/02/1999 35:24 - 36:10; 83:21 - 84:6) and that the RealNetworks technology works cross platform (Engstrom 23/02/1999 98:3-25).

84.2. Microsoft informed RealNetworks that it considers the "core" multimedia streaming functionality on the client to be part of the operating system and asked RealNetworks to stop competing with Microsoft in offering this functionality.

1. Bruce Jacobsen, RealNetworks' chief operating officer and a former Microsoft employee, said he met with Microsoft vice president Robert Muglia in the summer of 1997 to discuss, among other things, Microsoft's distribution of RealNetworks software with Windows and Internet Explorer. Jacobsen Dep. 1/13/99 at 153:2-158:25; See GX 1369 (sealed) (7/18/97 agreement between Progressive Networks and Microsoft); GX 884 (sealed) (6/17/97 agreement between Progressive Networks and Microsoft).
2. Mr. Jacobsen recorded a summary of the meeting shortly after the meeting. GX 1368. Mr. Jacobsen summed up the meeting as follows: AWas cordial but sharp. His basic message was that [sic] wanted us out of Core AV. He said MSFT concluded that fundamental data types such as words and numbers are essentially a core part of the operating system. . . He said he thinks video is one of the most exciting types of data - since monitors are visual things, video [sic] has to be like "words". and Microsoft had to control that franchise. He said that everyone who went up against MSFT with the operating system was "lost" -- that there were only two people in town who were still going against msft as potential operating system vendors -- Sun and Oracle -- and the The rest had been wiped out and MSFT was targeting the last two. He referenced their scalability tag as part of killing Sun. So the message, if we wanted to add value in addition to its video, was fine; If not, we would be an OS contender and msft would target us for obliteration. He quoted PeopleSoft as ok - he said Adobe had a claim on OS but basically backed out. @ GX 1368.

84.3. To get RealNetworks to stop competing in core streaming, Microsoft suggested that if RealNetworks stopped competing in streaming at the base level, Microsoft would give RealNetworks its full support as a value-added software provider. but if RealNetworks continued to compete, Microsoft would use its resources to harm it.

1. Mr. Jacobsen testified that Muglia stated that if RealNetworks continued to compete in the fundamentals of audiovisual streaming, Microsoft would seek to damage RealNetworks' business. Jacobsen Dep. 01/13/99 at 155:4-158:25. Mr. Jacobsen quotes Muglia as saying that Microsoft has won most of the operating system wars and the only remaining threats are Oracle and Sun. Jacobsen Dep. 01/13/99 at 156:22 - 157:4. Muglia said Microsoft is "trying to reduce the economic viability of these companies so they don't have the wherewithal to invest and position themselves as Microsoft's operating system competitors." Jacobsen Dep. 01/13/99 at 156:22 - 157:4. Muglia told Jacobsen that a company like Adobe had "operating system shams" or "claims" at one point, but had been forced out of that space. Jacobsen Dep., 1/13/99, at 157:5-10. Muglia told Jacobsen that Microsoft wanted RealNetworks to be like PeopleSoft, a value-added vendor that builds applications on top of operating systems but doesn't threaten a core part of Microsoft's environment. Jacobsen Dep. 01/13/99 at 157:11-158:8. Muglia continued, "On the other hand, if you're trying to learn the basics of streaming audio and video, we would consider you our main competitor and use all our resources to hurt you in your core businesses." Jacobsen Dep., 1 /13/ 99, 157:18-22; 158:9-25 (Jacobsen asked Muglia if Microsoft was asking RealNetworks to abandon core streaming of audio and video, and Muglia replied in the affirmative).
2. Mr. Muglia warned RealNetworks, Jacobsen testified that "Microsoft would attack us aggressively as a company and use all of Microsoft's resources if we stayed in audio and video...Bob said so too, and I agree with him that Microsoft has been successful at that before." been targeting companies and having serious economic impacts on them. Bob didn't use Borland as an example, but Borland certainly came to mind... The phrase running through the industry is that Microsoft performed a caseectomy on Borland, that it lowered the prices of its product, leading to severe disruption in Borland's cash flow and also in its share price, which prompted Borland to take a number of significant moves, including the divestment of some products that had historically been significant competitors of Microsoft's products... The example he used by Adobe... where Microsoft had a very significant effort and success in changing the fortunes of a company... So, it was very clear news that they wanted us to leave the room and there would be consequences , if we didn't. Jacobsen Dep., 01/13/99, at 161:20 - 163:1.
3. GX 1368 (cited above).
4. Muglia Supp. Dir. ¶ 26 (Muglia denies mentioning PeopleSoft but admits to citing SAP, another software company built on top of Windows but not competing with Windows, as a model for what Microsoft expects RealNetworks to do).

84.4. Microsoft caused RealNetworks to enter into a deal that limited its ability to work with other potential platform-level competitors to Microsoft, Sun, and Netscape.

1. See belowPart V.F.2; Section 286.

84.5. As with Netscape and Apple, RealNetworks' product encountered new technical problems working with Windows when RealNetworks refused to abandon its core streaming business.

1. Mr. Jacobsen testified that Windows Media Player inherited Microsoft's MIME types without giving users a choice, overwrote Real Networks' software without giving users a choice, and essentially left the user using what was previously installed Players for $29.95. Some, but not all, of these issues have been resolved, according to Mr. Glaser's testimony before the United States Senate. Jacobsen Dep. 1/13/99 at 163:3-167:21, 173:8-174:8.

v.Microsoft engagedIn a predatory campaign to crush the browser threat to its operating system monopoly

85. With the browser threat to its operating system monopoly still potent after failing to share markets with Netscape, Microsoft launched a calculated campaign to protect its monopoly by preventing the widespread introduction of competing browsers - Products foiled. The goal of this campaign was to increase Microsoft's share of the browser market and weaken Netscape and other competitors enough to ensure that non-Microsoft browsers (or other middleware) did not become a major platform for developers to write applications, that ran on PCs.

A. After Netscape rejected Microsoft's offer to carve up the browser market, Microsoft launched a predatory campaign to eliminate the browser threat

3.Microsoft has made the acquisition of browser shares a core business objective

86. The failure to share the browser market with Netscape frustrated Microsoft's goal of eliminating the threat that widely used non-Microsoft browsers, particularly the Netscape browser, posed to Microsoft's operating system monopoly.

87. Microsoft has nevertheless recognized that it could mitigate the browser threat by weakening competitors and gaining browser market share.

1. In an April 6, 1995 internal memorandum entitled "Netscape as Netware", Paul Maritz explained the threat of Netscape when Netscape had a high market share. Maritz explained that if Netscape Navigator gains a "significant market share," then "content providers see more gain in exploiting unique characteristics of Netscape clients than in trying to be 'generic' across all clients." Maritz explained, “This feedback loop drives Netscape's market share higher (as content providers encourage its use) to the point where Netscape can become 'proprietary'... Eventually they become a true 'platform' and they eat 'per PC'. Revenue that would otherwise go to the operating system or apps." GX 498, at MS98 0168614.
2. In an internal Microsoft memorandum dated April 4, 1996, entitled "FY97 Planning Memo 'Winning the Internet Platform Battle'," Brad Chase wrote: "Decide on the maximum browser share.Why should you care?This is a non-revenue product, but you should worry about your browser share as much as BillG does because: We will lose the Internet platform battle if we don't have a significant installed base of users. The industry would simply ignore our standards. Few would write Windows apps without the Windows user base. -- at your level, if you let your customers use Netscape Navigator, you lose [sic] leadership on the desktop." GX 39, at MS6 5005720 (emphasis in original).

88. Microsoft recognized the importance of increasing browser market share and made winning browser market share a key business objective. This "very important" and "#1" goal of increasing browser market share - formulated by Bill Gates and his executives, among others - has been a central focus of Microsoft's corporate strategy from 1995 to the present.

1. In his memorandum "Netscape as Netware", Paul Maritz wrote: "I think the most important thing we can do is not lose control of the web client. By controlling the client, you also control the servers. We shouldn't allow any web client to reach high volume. That means (i) not creating a vacuum and (ii) making sure we get widespread adoption for our web client." GX 498, for MS98 0168614.
2. Bill Gates wrote in January 1996 that "gaining share of Internet browsers is a very, very important goal for us". GX295.
3. Paul Maritz repeated in June 1996: “Everything is difficult without a browser share. So job #1 is browser share.” GX 42, on MS6 6010346.
4. Microsoft executive Carl Stork wrote in September 1996: "Browse sharing is Job 1 in this company, and OSR2 is the means to bring IE3 to these machines." GX44.
5. In an internal Microsoft email exchange on March 25, 1997 between Stork, Megan Bliss and others, Bliss wrote: "I thought our #1 strategic imperative was to get IE shares (they got stalled and their best hope is closely related to Windows, especially on OEM machines). That is, unless I woke up in an alternate state and now work for Netscape." GX 56, at TXAG 0009634.
6. An April 1998 marketing plan for IE5 lists as concrete, the document read:-blackened-GX 432 (sealed).

4.Microsoft has engaged in predatory and anti-competitive behavior to gain browser shares

89. To achieve its goal of weakening browser competitors and protecting its operating system monopoly, Microsoft launched a campaign to gain market share in browsers through predatory and anti-competitive means. Microsoft's practices included giving away its browser "free forever", forcing third parties not to deal with or endorse competing browsers, and running its browser in ways that disadvantaged competitors, customers, and retailers pay other browser providers, do not carry other browsers or only do so on disadvantageous terms. Among other things:

89.1. Microsoft, without legitimate justification and to mitigate the browser threat, has tied its Internet Explorer browser to Windows and has refused to offer an unbundled option, despite the apparent separate demand for browsers and operating systems.See belowPart V.B.

89.2. Microsoft imposed anti-competitive restrictions on OEMs' ability to change the Windows desktop and start-up screens, even though it reduced the value of Windows.See belowPart V.C.1.

89.3. Microsoft gave OEMs favors that supported Microsoft's exclusion strategy, penalized OEMs that didn't, and contractually restricted OEMs from removing the browser.See belowPart V.C.2.

89.4. Microsoft entered into exclusion agreements with ISPs and OLSs, which account for the majority of consumer Internet access in the United States, with the aim and effect of restricting competitors' use of browsers and increasing competitors' costs.See belowTeil V.D.

89.5. Microsoft entered into exclusionary agreements with ICPs that contained restrictive terms that cannot be explained except as components of a predatory campaign designed to shut out browser competitors and protect Microsoft's operating system monopoly.See belowTeil V.E.

89.6. Microsoft has entered into an exclusionary agreement with Apple aimed at restricting competitors' use of browsers, increasing competitors' costs and increasing the use of Internet Explorer on the MacIntosh operating system.See belowPart V.F.

89.7. After Microsoft investigated Netscape's revenue streams and in order to cut off Netscape's "air supply", Microsoft invested hundreds of millions of dollars in the development, promotion and distribution of its Internet Explorer browser, although it planned to make the browser "free forever" and did not collect any browser-related side income.See belowTeil V.G.

90. Microsoft had no plan or expectation that these acts would be profitable or make business sense, except by preventing rival browsers from developing into a rival development platform and thereby preserving Microsoft's operating system monopoly.

1. In an internal memorandum that Bill Gates sent to his senior staff on May 19, 1996, he outlined a strategy against Netscape in the "browser war." Gates indicated that Microsoft would offer many of Microsoft's Internet products "for free." After laying out his strategy, Gates concluded, "At some point, financially oriented analysts will start thinking about how much of a revenue stream Netscape can generate." GX 41, for MS6 6012954-56.
2. Paul Maritz emphasized that Microsoft's goal of increasing browser share is more important than generating revenue from the browser. In an internal Microsoft email dated July 11, 1997, Maritz wrote: "There's been talk of getting more money from the 1,000+ people we work on browser-related stuff, but I haven't lost sight of the fact , that Browser Share continues to be an overwhelming goal. You may notice that I've kept marketing spend on IE toveryhigh level until FY'98. and resisted pressure to downsize or switch to other products. I also said 'no' to the suggestion that the shell be charged separately.” GX 112; Maritz, 01/26/1999 at 18:25 – 20:8, 21:22 – 22:22 (Maritz testified that he had rejected a proposal to split IE4 and charge a price for one of the parts because "it with would conflict with the "goal" he "had, which was to get more people to use Internet Explorer").
3. See in additionbelowTeil V.G.

3. Microsoft's efforts to pressure Intel to stop developing or supporting platform-level software illustrate Microsoft's predatory intentions and tactics

91. At various meetings in 1995, Microsoft (i) forced Intel not to support competing software at the platform level, and (ii) openly articulated its predatory plan to use its monopoly position and other predatory means to thwart the browser threat. Microsoft's use of its monopoly power to pressure Intel not to support Netscape or to offer Intel's proprietary technologies at the platform level illustrates both Microsoft's predatory intent and the anti-competitive practices it employs to defend against threats to its operating system.

a.In an August 1995 meeting, Microsoft pressured Intel not to resume platform-level software and not to support Netscape and Java

91.1. As discussed below (Part VI.B.2.), Intel had developed software that Microsoft viewed as platform-level software that could one day compete with Windows. In response to this potential threat, Microsoft launched a campaign to force Intel not to ship its software, then known as NSP. These efforts culminated in a meeting on August 2, 1995, where Bill Gates - in a blunt use of Microsoft's monopoly power - threatened to withdraw support for Intel's microprocessors if Intel did not end support for platform-level software efforts and in Microsoft's Internet would cooperate strategies.

1. In May 1995, Microsoft Vice Presidents Paul Maritz, Brad Silverberg, and Microsoft Carl Stork met with Intel executives to discuss Intel's NSP program. Microsoft executives complained that Intel's NSP project was pushing the software frontiers by writing software that Microsoft considered part of its operating system division. GX275; McGeady, 11/9/98 at 23:3 - 26:23. In Microsoft's view, NSP made Intel a competitor in the operating system space to Microsoft. GX275; McGeady 11/9/98 at 26:25 - 27:11.
2. Bill Gates told Intel's Andy Grove that Intel's attempts to compete with Microsoft on software rather than follow it are unacceptable: "The problem we have is that when it comes to software-related issues, we kind of have to choose which one companies lead and which one will follow. With chips it is very clear. With software, you have a group that doesn't allow us to lead and has all the credibility (sic) and profits of Intel to push it forward. GX277.
3. In an internal Microsoft email dated July 7, 1995, Gates reported that he had tried to persuade Grove "to not ship NSP as a matter of principle". GX278; Maritz Dir. ¶ 320. Gates predicted that Intel would put less pressure on to ship NSP 1995, but that "it will take a lot of effort to persuade them to back down." Gates went on to say that Microsoft is the "software company here and we will not have an equal relationship with Intel when it comes to software." GX278.
4. In an August 28, 1995 memorandum summarizing the meeting, Steven McGeady wrote: "On August 2, 1995, in a meeting of Intel and MS executives, Bill Gates requested Intel CEO Andy Grove to close the Intel architecture labs shut down." GX 280. According to McGeady, Gates was upset that Intel was "making investments in software of any kind" because "he felt anything Intel was doing in software was competitive." McGeady 11/9/98 at 10:10 - 14:3.
5. McGeady explained the reason why Intel abandoned its NSP development: "Intel failed to bring NSP to the market because Microsoft, specifically Bill Gates, said the main reason Andy Grove was that MS didn't want NSP to market", and because "Microsoft helped...in our business interests by threatening to withhold support for other microprocessors in the meantime." McGeady, 11/10/98, at 81:6-23.
6. See in addition belowPart VI.B.2; ¶¶ 347-350.

91.2. During this August 2, 1995 meeting, Microsoft not only informed Intel that it wished Intel to stop developing platform-level software, but also that Intel should not support any other platform-level software running on Windows, particularly the browsers of Netscape and Sun Java technologies in any way that might contribute to their development as a competing platform.

1. Gates made it clear to Intel executives on August 2, 1995 that "Microsoft" would not support Intel's "next processor offerings unless we could get Intel and Microsoft to agree on platform issues" and on communications issues.d.h., internet problems. McGeady 11/9/98 at 14:14-15:4; GX 279 ("Gates would not allow processors/operating system programs to proceed unencumbered by platform communications program problems.").
2. Not only did Gates set boundaries for Intel's software efforts, but he also addressed "Internet issues." GX 279, at MS CID 00078. Gates warned that Microsoft is “very sensitive to what Intel might be doing on the client side. Example: JAVA, a showstopper.”ID.(By "client" Gates meant "browser". Maritz, 1999-01-27, 27:12-21).
3. McGeady said Gates also told Intel to focus "70%" of its "resources on working with Microsoft technology and 3% on third-party technologies" like Netscape. McGeady, 11/12/98 p.m., 7:5-8:9. Gates further explained that in relation to this "30/70 usage of 3^rdparty technologies" that "Intel has no problem using Netscape in a Windows environment (assuming we [Intel] don't set up a 'positive feedback loop' for Netscape to allow it to grow to the de facto standard )." GX 279, at MS CID 00078.
4. As McGeady testified, Gates allowed Intel's internal use of the Netscape browser as a standalone application on Windows, but "he didn't want 'Intel' to do anything that would encourage developers to switch to Netscape, thereby increasing Netscape's value in doing so." Platform to create this positive feedback loop, this rising yield situation at Netscape." McGeady, 11/12/98, 19:5 - 20:9. McGeady also testified that "it was very clear that Bill didn't want to "that we're doing any development or technology work with Netscape that would improve the viability of Netscape Navigator in the marketplace just as a standalone product. He would agree, but he didn't want us to do any technical work with it. McGeady 11 /12/98 PM, 20:10-20; GX 279 (Whittier's log) ("BG: SupportingsecureThird party offers will be a problem. . . we need to consider in the context of their (ubiquitous) internet program to ensure we don't unknowingly step on any of their key strategies!").

b. In subsequent meetings in the fall of 1995, Microsoft told Intel that its strategy was to kill Netscape and control Internet standards

91.3. After Microsoft used its monopoly power to prevent Intel from developing its own platform-level software, Microsoft continued to pressure Intel not to support Netscape's browser, bluntly describing Intel's predatory scheme and goal. At a November 9, 1995 meeting, Microsoft executive Paul Maritz met with Intel executives and specifically told Intel that Microsoft's strategy was to kill Netscape and control Internet standards.

91.3.1. During that meeting, Paul Maritz told Intel that Microsoft would "cut off Netscape's air supply" — in other words, that by "giving away free browsers" Microsoft would stifle Netscape's revenue streams and delay its ability to invest in developing its technology.

1. McGeady testified that Maritz told Intel that Microsoft planned to "cut off Netscape's airflow," or in other words, "by giving away free browsers, Microsoft would prevent Netscape from getting off the ground." McGeady 11/9/98 at 53:6-23; GX1640.
2. McGeady testified that Maritz explained Microsoft's strategy, "First of all, was to free up (sic)'s browser, prevent Netscape from deriving any revenue from it, and that was their specific air supply disruption. In other words, Don allow them to run out of revenue to keep paying their engineers to develop new products." McGeady, 11/9/98 at 54:21 - 55:16.
3. Maritz's contradictory testimony is not credible. When asked if he told Intel that Microsoft's plan was to "cut off Netscape's air supply," Maritz testified that "it's possible, but I just don't remember it," Maritz, 01/25/1999, 74: 18-75:16, but in court, Maritz testified unequivocally and contradictingly that he "never said in the presence of Intel personnel or otherwise that Microsoft would turn off Netscape's air supply or said words to that effect." Maritz 1999-01-25 at 72:21-73:16; Maritz Dir. ¶ 333. And while he claimed he had said no "words in effect" of Microsoft's intent to "cut off Netscape's air supply," he testified that he "may have occasionally pointed out that the fundamental Internet technologies, we wanted to integrate the browser and the Internet servers into Windows and not calculate them separately." Maritz, 01/26/1999, 7:22 - 8:1. Maritz also admitted that he had told Intel "on many occasions that it was the Microsoft's strategy is to integrate Internet support into its operating system and not charge for it separately.” Maritz, 01/26/1999, 7:22 - 8:8.

91.3.2. Paul Maritz also explained to Intel officials that Microsoft's response to the browser threat was to "embrace, expand, obliterate"; in other words, Microsoft planned to "embrace" existing Internet standards, "extending" them in incompatible ways, thereby "wiping out" competitors.

1. McGeady testified that Maritz told Intel that Microsoft's strategy was to "encompass, expand, obliterate." McGeady 9/11/98 at 53:17-54:8; McGeady 11/10/98 at 21:22-23:19; GX564.
2. McGeady testified that Microsoft would extend Internet standards such as HTML "to the point where it is incompatible with the Netscape browser and encourage people to develop their version of HTML so that pages cannot be read by Netscape's browser ." McGeady, 11/9/98, at 55:7-14.
3. Russell Barck, an Intel executive, testified in his testimony that "regarding Netscape ... Maritz ... said the term 'embrace and smother' in relation to a strategy relating to Netscape." Maritz, 1999-01-26, 55:19-57:1.
4. Rob Sullivan testified that Maritz said the phrase "hug and smother." Maritz 1/26/09 57:2-11. When asked about his understanding of the meaning of the hug and smother concept, Sullivan testified that he "understood this concept to mean that Microsoft intended to deprive Netscape of revenue and profitability". Microsoft would achieve this "by giving away its products, embracing Internet standards and extending them to favor the Windows platform." Maritz, 01/26/99, 58:16 - 59:8.

91.3.3. Paul Maritz also told Intel officials that another aspect of Microsoft's strategy to combat Netscape was to create dependencies between the operating system and the browser.

1. McGeady testified that based on the meeting with Maritz, Microsoft planned to "create several different layers of dependencies between the operating system and the browser that would favor their browser differently." McGeady 11/9/98 at 54:15-55:14; GX564.

91.4. Microsoft continued to monitor to ensure Intel expressed no public support for Netscape, even to the point of regulating Intel's internal browser use.

1. In an internal e-mail dated June 6, 1996, Bill Gates reported to other executives that he had spoken to Intel's CEO Andy Grove, and Bill Gates reported, "I said it's important that Intel never say publicly that they use Netscape browsers standardize.” McGeady 9/11/98 49:3-50:2; GX289.

92. Microsoft's efforts to ensure that Intel did not support Netscape and its blunt warning that it would "cut off" Netscape's "air supply" were neither isolated events nor normal competitive banter or "locker room talk". Rather, they were part of a calculated, multi-faceted predatory plan, the details of which are set out below.

B.Microsoft tied its Internet Explorer browser to Windows 95 and Windows 98 to hamper browser competitors like Netscape, and for no legitimate purpose

93. A key part of Microsoft's hijacking campaign to prevent Netscape's browser from evolving into a platform that could undermine application barriers to entry was Microsoft's tying and refusal of its Internet Explorer browser to Windows 95 and Windows 98 , to offer or allow to offer to OEMs, an unbundled option.

93.1. Internet browsers and PC operating systems are separate products. Consumers view browsers and operating systems as separate products and demand one without the other. In response to this separate demand, Microsoft and other software companies have found it efficient to promote and sell browsers and operating systems separately.See belowPart V.B.1; ¶¶ 96-119.

93.2. Despite this separate demand for browsers and operating systems, Microsoft has tied its browser to its Windows operating system and has refused to offer an unbundled option to hamper the development of Netscape and other browsers.See belowPart V.B.2; ¶¶ 120-149.

93.2.1. Microsoft tied Internet Explorer 1 and 2 to Windows 95 by requiring OEMs to purchase Internet Explorer to get Windows 95 and forbidding OEMs to remove Internet Explorer.

93.2.2. Subsequently, fearing that its mere contractual commitment was not enough to eliminate the threat that Netscape's browser posed to its operating system monopoly, Microsoft subsequently changed its product design to Internet Explorer 3 and 4 to mix browser and operating system code. Still, Microsoft recognized users' desire to have the Windows95 operating system without Internet Explorer and advertised an easy way for users to remove the browser. However, Microsoft refused to provide a version of Windows 95 with the browser removed or allow OEMs to remove the browser from the PCs they sold.

93.2.3. Microsoft designed Windows 98 to further implement the binding arrangement by eliminating the end user's ability to "uninstall" Internet Explorer and interfering with their ability to choose a different default browser.

93.3. There is no reasonable justification for Microsoft tying Internet Explorer to Windows.See belowPart V.B.3; ¶¶ 150-167.

93.4. The tying agreement and Microsoft's contractual ban on unbundling severely harmed competition and consumers.See belowPart V.B.4; ¶¶ 168-176.

1. Internet Explorer and Windows operating systems are separate products

94. Internet browsers and operating systems, including Internet Explorer and Windows, are separate products sold in separate product markets. There is a separate demand for browsers and operating systems that vendors need to meet efficiently.

a. Browsers and operating systems are generally recognized as separate products by industry participants

(1) An Internet browser enables surfing on the Internet

95. An internet web browser (“Internet browser”) is a software program that

allows the user to view, access and manipulate content from the World Wide Web and other networks of the Internet (hereinafter "Web Browsing").

1. Microsoft's dictionary defines a "web browser" as a "client application that enables a user to view HTML documents on the World Wide Web, on another network, or on the user's computer, following the hyperlinks between them and files." transferred to". Microsoft Press, Computer Dictionary (3rd ed. 1997), at 505 (GX 1050).
2. Professor Franklin Fisher defined a browser as "the application that enables users to access and browse the World Wide Web or other networks". Fisher 6/1/99 at 5:3-5.
3. dr Warren-Boulton defined a browser as "software that enables computer users to navigate and display content on the World Wide Web". Warren-Boulton Gov. § 68.

(2) Industry participants see a browser as an application and not as part of an operating system

96. Industry participants – including consumers, other operating system vendors, ISVs, corporate IT officers, academic computer scientists and the industry press (including Microsoft's own computer dictionary) – generally view web browsers as application programs separate from the underlying operating system.

96.1. Other operating system vendors, even those that bundle a browser or browsers with their operating system products, have always considered the browser as a separate application.

1. Apple Computer's Avadis Tevanian stated, "The fact that Internet Explorer and Navigator are bundled with Mac OS does not make them part of the operating system. The Mac OS operating system will continue to function if one or both of these browsers are removed. . . [and] we give value-added resellers the flexibility to . . . remove browser or other applications . . . .” Tevanian dir. ¶ 26;see in additionTevanian Dir. ¶¶ 8-9 (explaining the difference between operating systems and applications).
2. IBM's John Soyring testified that "IBM did not find it technically necessary to integrate the browser into the operating system - the browser worked well under the operating system as would any application." Soyring Dir. § 18.
3. Sun officials consistently describe Sun's "HotJava" browser as an "application that performs web browsing functions." Sasaki Abt. (played 12/16/98), at 22:5-18.
4. Brian Croll testified that the browser that Sun bundles with the Solaris operating environment is “an application that runs on top of the environment. roll dep. (played on 12/15/2019), at 38:12-14. Croll later defined an "application" as "a piece of software that sits on top of the operating system that users use and perform a function they are looking for".ID.at 66:11-16.
5. Ron Rasmussen of The Santa Cruz Operation testified that SCO "bundles" Netscape Navigator with its OpenServer and Unixware products (Rasmussen Dep. (played 12/15/98) at 54:10 - 56:25), but that " In our view, the browser is an application." Rasmussen Abt. (played 12/15/98), at 64:20. Rasmussen also testified that "when SCO says 'we are bundling a feature', it means that a feature that is not part of the core functionality of the base operating system, whose primary function is to serve applications, continues to function properly ." Rasmussen Abt. (played 12/15/98), at 55:14-19.

96.2. Consumers also view browsers as applications and not as parts of an operating system product.

1. Jon Kies, Senior Product Manager at Packard Bell/NEC, stated that "browsers are viewed as third-party applications by most of our customers." Gravel Dept. (played 12/16/98), at 7:19-20.
2. Glenn Weadock concluded from his research and interviews that enterprise information managers "typically think of browser software as application software, like email or word processing, rather than as an operating system or as part of a specific operating system." Weadock dir. ¶ 22 (Collection of Illustrative Statements by Company Directors). Weadock further testified: "No company PC manager, in fact nobody outside of the Microsoft organization, has done thisisdescribed to me a web browser as operating system software or as part of Windows 95 or some other operating system.” Weadock Dir. ¶22 (emphasis in original).
3. Boeing's Scott Vesey testified, "From my perspective, I would consider them software applications because they are tools used to interpret data and not what I would normally consider to be the operating system that runs the components of the software." are used directly Manipulate the hardware that makes up this PC. The applications are used to interpret or analyze data. Vesey Dep., 01/13/99, at 284:15 - 285:9.
4. Netscape's Jim Barksdale testified that "Consumers have no problem recognizing that browsers are separate products" and "still demand Netscape Navigator and Netscape Communicator separately from all operating system products." Barksdale Dir. ¶90.

96.3. When the trade press or potential customers evaluate the features and quality of Internet Explorer, they invariably compare it to Netscape's Navigator browser application, and not to any operating system.

1. Barksdale stated that “the industry as a whole recognizes browsers as separate products from operating systems. Browser market share is tracked (separately from operating system market share) by many third party organizations such as IDC and DataQuest to the commercial battle between Netscape Navigator and Microsoft Internet Explorer, is widely reported in the press. I've seen many product reviews comparing Navigator to Internet Explorer; I have never seen a product review comparing Navigator to any Windows operating system." Barksdale Dir. § 90.
2. A March 1997 Gateway internal presentation contains a detailed "Basic Feature Comparison" between "Netscape and Microsoft Browser Products". GX 357 (sealed).
3. Many press reports on browsers directly and explicitly compare Internet Explorer to Netscape Navigator and Communicator, speaking of them as applications that are independent of any particular operating system.See e.g., GX 1262 (1996 ZDNet review); GX1272 (1997 CMPnet Review); GX 1274 (1997 PC Week online review); GX 1285 (1997 review by ComputerShopper.com); GX 1287 (1998 PC Magazine online review); GX 1288 (1998 ZDNet News review).

96.4. Software design experts describe browsers as applications and not as parts of an operating system.

1. James Gosling of Sun Microsystems testified that "The browser is best understood as a software application, not as part of a computer's operating system. In terms of both function and software design, browsers perform tasks for the end user related to retrieving and displaying content on the Internet or other networks. Users may want to choose a specific Internet browser that best suits their needs or when they don't need to surf the Internet. maybe no browser at all. Technically, browsers are treated like any other application by the computer. In virtually every operating system I'm familiar with, the special files that enable browsing are loaded into memory and used in the same way as other software. Even in Windows 98, where Microsoft obviously loads some browser-related files into memory, itself when the user may never need this functionality, these files are loaded in the same way as other software applications. Essentially, Microsoft is simply shifting the time it takes browser code to load from when it is first needed by the user to every time the computer boots up.” Gosling Dir. ¶¶ 38-39.
2. Gosling also stated: “A browser is an application that runs like a JVM on the operating system installed on a user's computer. It enables the user to access information encoded in Hypertext Markup Language or HTML and other types of content found on the Internet or other networks and to navigate those networks." Gosling Dir. § 34; Gosling, 12/9/98 at 41:20-23.
3. Professor Felten testified that "Internet Explorer is part of the distribution that Microsoft sells under the name Windows 98. However, your Internet Explorer is an application that can be separated from Windows 98." Felten 12/14/98 at 30:21-24.
4. Marc Andreessen testified: “I can't say I ever thought that a browser was necessarily separate from everything. But it would certainly be fair to say that I think the browser was separate from an operating system, for example.” Andreessen Dep., 7/15/98, at 122:20 - 123:7 (DX 2555).
5. also dr Michael Dertouzos, Director of the Computer Science Laboratory at M.I.T. and formerly on Microsoft's witness list, agreed: "Historically and today, browsers are treated as applications." Dertouzos Dep., 1/13/99, at 414:2-4.

(3) Microsoft, in the ordinary course of business, treats Internet Explorer as a separate product

97. Microsoft similarly treats Internet Explorer as a separate product from its Windows line of operating system products.

(a) Microsoft promotes Internet Explorer as a product, positions it to compete with other Internet browsers, and tracks its market share relative to other browsers

97.1. Microsoft sells Internet Explorer separately from Windows through a variety of different channels, including retail sales, service kits for ISVs, free downloads over the Internet, and with other products manufactured by both Microsoft and third-party ISVs.

1. Under cross-examination, Microsoft's Cameron Myhrvold admitted that Internet Explorer was distributed separately from Windows in "many, many ways." Myhrvold, 2/9/99 PM, at 37:7 - 38:7.
2. An internal Microsoft "Timeline Summary"-blackened-GX 669 (sealed).
3. When asked if Microsoft released "something called Internet Explorer 3 separate from OSR2 around the time OSR2 was released," Carl Stork replied that Microsoft "released it on the web, and I think we've got it on some kind of internet -Retail starter kit also issued by the product." Stork Dep., 8/11/98, at 38:18-23 (DX 2595).

97.2. From the introduction of Internet Explorer 1.0 in mid-1995 to the present, Microsoft has always promoted and marketed Internet Explorer as a separate product from Windows.

1. Soyring testified that "Microsoft itself has at times treated Internet Explorer as separate from Windows. Soyring dir. § 19.
2. Describing Microsoft's marketing plans for Internet Explorer in August 1995, Yusuf Mehdi wrote that Microsoft "would treat it as a standalone product in the sense of establishing clear goals for news, reviews and features". GX153.

97.3. Microsoft's internal strategy documents dealing with Internet Explorer described Netscape Navigator (rather than any of Microsoft's traditional operating system competitors) as Internet Explorer's "principal competitor" and identified gaining "browser share" over Netscape as the primary goal for the Internet Explorer Marketing Efforts.

1. A November 1995 "Internet Product Management Strategy" identified Netscape as its "principal competitor" and listed its goal as "making IE people's Web browser of choice through aggressive distribution and promotion." GX 673, for MS6 6005881.
2. In notes from an offsite meeting of the Internet Explorer project team in November 1997, Microsoft's Chris Jones describes the Internet Explorer team's role as "winning the browser's share." GX 364, MS7 004722.
3. In December 1996, Microsoft's David Cole wrote: "There's still a message here that Internet Explorer is still a browser where Nav is groupware. No credit for netmeeting, mail, messages, etc. We need to change that perception.” Microsoft's Yusuf Mehdi replied, “It's probably a good example of the need for a single group to do the communicator, otherwise we'll never get the full message across . I've been thinking more about our conversation and I strongly believe that you need a single group and product that you market against Communicator. It makes sense to me that this would use the IE brand and team because of their equity, experience and relevance in terms of product, team and marketing. The group would market IE4, which includes: Active Desktop, Browser, Mail, News, Netmeeting, FrontPad, Admin Kit, etc." GX 658, at MS6 6010327.
4. In June 1997, Chris Jones sent Bill Gates a memo entitled "How to get to 30% share in 12 months". The memo contains a lengthy discussion of how Microsoft should design and market Internet Explorer to take market share away from Netscape. GX 334, for MS98 0104679.

97.4. Internal Microsoft assessments of Internet Explorer's success invariably compared its features, performance, and market penetration to those of Netscape Navigator.

1. A March 1997 Microsoft "Competitive Guide" compared the features of Internet Explorer 4.0 to those of Netscape Communicator. GX 477, MS7 004179.
2. Chris Jones' notes from an Internet Explorer team meeting in November 1997 claim that "[w]e have won every head-to-head test against Netscape". GX 364, MS7 004719.

97.5. In fact, the contemporaneous documents show that Microsoft regularly tracks Internet Explorer's market share relative to Netscape Navigator's.

1. A January 1998 slide presentation by IE International Business Review breaks down browser market shares in 1997 in both the domestic and international markets. GX 815, for MS98 0202889.
2. An October 1996 email from Yusef Mehdi to Paul Maritz and others reports current browser sharing as measured by weekly views, shares on random sites, and Internet Explorer downloads. GX344.
3. See in addition z.B., GX 713 (April 1998 Mehdi email comparing Internet Explorer and the Navigator release, noting that "48 is a large number and implies we got Netscape"); GX 495 (Comparing Internet Explorer and Navigator Stock); GX 700 (same); GX 708 (same); GX 713 (same); GX 714 (same); GX 714A (same); GX 716 (same).

(b)Microsoft treated Internet Explorer and Windows separately until the issue arose in litigation

(1) Prior to the lawsuit, Microsoft referred to Internet Explorer as a browser in the ordinary course of business

98. In the ordinary course of its business, Microsoft has often referred to Internet Explorer as a browser application and not as part of the operating system.

1. In a July 1995 memo to OEMs, Microsoft described Internet Explorer as a "32-bit Windows 95 World Wide Web browser and graphical FTP utility." GX36.
2. In December 1995, Brad Silverberg wrote to Bill Gates and Paul Maritz that Internet Explorer 3.0 "is a standalone web browser running on Win95." GX37.
3. See in additionGX 141 (Windows 95 would include "[all] necessary installations" to access the Internet, including a TCP/IP stack and support for the PPP and SLIP protocols, and that it would "support popular third-party[] Internet applications like Mosaic").

99. Microsoft also had extensive agreements with PC OEMs, ISVs, ISPs and ICPs regarding the placement and promotion of Internet Explorer that were separate from any Windows license agreement, and all of which referred to Internet Explorer as a "browser". not as part of the operating system.

1. A September 1996 amendment to a May 1996 license agreement with Compaq required Compaq to "offer Microsoft Internet Explorer as the worldwide preferred Web browser for users of all COMPAQ Internet products listed in Appendix B [Support Software CD for Compaq Desktop, Portable and Workstation Products and Compaq Resource Kit for Microsoft Windows NT]." GX 1130, at MSV 0005706 (Ex. D, Amd. 1).
2. A July 1996 license and distribution agreement with Compaq required Compaq to "offer Microsoft Internet Explorer as the preferred worldwide web browser for users of the Support Software CD for Compaq desktop products." GX 1137, at MSV 005747.
3. The Internet Sign Up Wizard Referral and Microsoft Internet Explorer License and Distribution Agreement with AT&T dated July 23, 1996,-blackened-GX 1212, for MS6 5000435 (Ex. B, §6) (sealed).
4. The Internet Login Assistant Referral Agreement with CompuServe of August 1995-blackened-GX 1144, at MS6 5001138 (Appendix B, Section 5) (sealed).
5. The December 1995 source license and distribution agreement for Internet Explorer with CompuServe required that CompuServe "ship Internet Explorer as its primary web browser software client for Windows 95...". GX1125, for MS6 5000091.
6. An August 1996 Internet Login Assistant Advisory and License and Distribution Agreement for Microsoft Internet Explorer with Earthlink-blackened-GX 1141, at MS6 5000015 (Annex C, § 6) (sealed).
7. A May 1996 Internet Explorer Addendum to the Strategic Relationship Framework Agreement with MCI-blackened-GX 1132, for MS6 6008292 (sealed).
8. A September 1996 promotion and distribution agreement with Prodigy-blackened-GX 1148, for MS6 50010000 (Section 3.1) (sealed).
9. Numerous memoranda of understanding that Microsoft signed with major OEMs in July and August 1997 provided those OEMs with significant incentives to promote and sell Microsoft's forthcoming Internet Explorer 4 browser, which was originally offered and sold entirely separately from each operating system version.See e.g., GX 163 (under seal) (8/29/97 "Memorandum of Understanding ("MOU") re: Internet Explorer 4.0,"-blackened-GX 1166 (seal) (7/21/97 Letter of Intent with DEC, similar wording); GX 1168 (under seal) (8/8/97 MOU with Packard-Bell, similar language); GX 1171 (under seal) (8/20/97 MOU with Dell, similar language).
10. See in addition z.B., GX 856, at MS98 0100300 (Section 2.3(d)) (Disney Active Desktop Agreement of July 1997); GX 1159 under TM 000057 (Hollywood Online Active Desktop agreement dated June 1997); GX 1157, at MS98 0100570 (Section 2.2) (Intuit Agreement June 1997); GX 1153, at MS98 0100811 (Section 2.1(a)) (December 1996 Pointcast Agreement); GX 855, under WD 0004 (Section 2.3) (Wired Digital Active Desktop Agreement dated July 1997); GX 1166 (July 1997 IE4 Launch Event Agreement).

100. Similar references to Internet Explorer as "browser" appear to this day in Microsoft's internal and external correspondence.

1. Microsoft describes Internet Explorer 5.0 as a "smaller, faster and more stable browser". GX688.
2. A May 1998 Internet Explorer 5 OEM Marketing Review claims that "IE has about 50% browser share" and that end users "regard both browsers as equal products". GX 233, for MS98 0125654.

(2) However, since the litigation began, Microsoft has made a concerted effort to change its language to support its legal position

101. Recently, however, Microsoft officials, in order to substantiate their litigation that Internet Explorer and Windows 98 are the same product, have undertaken a concerted effort to reposition Internet Explorer and change the terminology used by Microsoft employees.

1. In March 1998, as Bill Gates prepared to testify before the Senate, he sent an email to top Microsoft executives arguing for the need for a "poll...in which ISVs explain whether they believe the browser in the operating system having it as we plan makes sense and is good." GX 377, MS98 0122148. Nathan Myrhvold responded that the poll was "a GREAT idea" but that "it's CRUCIAL to make the statement...get it right for us detrimental. The name "browser" suggests otherwise. I would NOT phrase the survey or anything like "integrate the browser into the operating system" Instead you need to ask a more neutral question about how Internet technology needs to merge with local computing. I've tried this on various journalists and industry representatives with some success." GX 377, at MS98 0122146 (emphasis in the original).
2. In the same month, James Allchin wrote to Yusuf Mehdi that he was "very concerned about the way IE is presented in Win98 (and NT5). Even the simple things like the about box make it appear separate. Also, our IE website needs an overhaul. . . where we make sure it's clear that [at]IE is just a feature of Windows. . . .” GX 378. Mehdi replied that they are “making good progress in reviewing the language of ie as a Windows feature with the web team. (We don't refer to it as a product or browser, we refer to it as browsing software).” GX378.

b. The recognition that browsers and operating systems are separate products reflects the market reality that consumers are demanding separate operating systems and Internet browsers for a variety of reasons

102. Consistent with the general recognition that browsers and operating systems are separate products and that different browsers have different characteristics, many consumers wish to separate their choice of operating system from their choice of browser.

1. Professor Fisher testified: “There is a market for internet browsers. Before Microsoft gave away its browser for free, the market set a price for browsers, and the market could have continued to serve that function. So there is a significant demand for browsers independent of the demand for operating systems. Browsers are sold separately from the operating system by ISPs and retailers. There is a demand for browserless operating systems and for operating systems with a choice of browsers." Fischer dir. § 80.
2. A February 1998 Compaq survey of 283 US business PC makers found that "Approximately 80% of businesses erase or reformat the hard drives on new desktops... The operating systems most frequently reinstalled are OSR2 and the retail version of Windows 95. Large companies tend to go for the "retail version of Windows 95", which does not include a browser. GX 1242, at 7.
3. Dell's Joseph Kanicki stated, “Some corporate and government customers prefer not to have Internet Explorer preinstalled on their computers because, first, the customer has their own software or software standards that do not include the latest version of Internet Explorer; second, the customer may want to install a competing browser instead of Internet Explorer; or third, the customer may want to prevent its employees from accessing or attempting to access the Internet or the World Wide Web.'" Kanicki Dep., 1/13/99, at 332:12 – 333:22 (quoting Kanicki Decl ¶ 2).

(1) Some consumers require separate browsers and operating systems because different browsers have different functions and they prefer to purchase a PC that contains only the browser they want

103. Although Netscape Navigator and Internet Explorer offer roughly comparable functionality to the end user, they are not identical. Each program has unique characteristics that may appeal to different audiences, and there is significant contention as to which product is superior implementing even their common features.

1. See belowPart V.B.3.c.(1)(a); Part V.B.4.c.

(2)Some consumers, especially enterprise customers, require separate browsers and operating systems, preferring to standardize the same browser on many PCs and across different operating systems

104. Many companies use a variety of different hardware and operating system platforms in different departments of their organization.

1. Boeing's Scott Vesey testified that "Boeing is a multi-platform company and it supports computers running a number of different operating systems," including Unix, Macintosh, and a variety of Windows platforms. Vesey Dep. 01/13/99 at 269:13-270:24.
2. Weadock testified that "Some executives (including those at Informix, Ford, Federal Express, Boeing, and Morgan Stanley/Dean Witter) indicated in his interviews that their organizations use a variety of operating systems and hardware platforms and therefore prefer a browser with larger cross-platform availability and compatibility." Weadock Dir. § 24a.

105. Such organizations experience significant benefits in terms of increased productivity and reduced training and support costs by standardizing on one browser across their diverse hardware and operating system platforms.

1. Vesey testified that the "various browser standardization or browser purchasing decisions that Boeing has made" "were made separately from decisions about operating system acquisitions" and that he would "prefer" "the possibility." to have the ability to continue to choose what The web browser Boeing uses regardless of any decisions Boeing might make about the operating system to use." Vesey Dept. (played 11/17/98), at 52:12 - 53:14 .
2. An internal Boeing presentation entitled "ARR 525 Recommendation: Windows Browser Evaluation" by Scott Vesey in October 1997 identified "[p]latform support" as a key issue, stating that "Solaris, HP-UX ... and AIX standard UNIX - Variants are within Boeing and that IE 4.0 for UNIX/Solaris would not go into production until Q1 98. In contrast, Communicator 4.0 was available on all platforms.” GX 634, at TBC 000537.
3. Vesey testified that "The Netscape browser was a product that we could run on all platforms that we currently had installed at the Boeing company, on both Windows, Macintosh and Unix workstations, using a common software product was used with a common user interface." Vesey Dep. 1/13/99, 271:6-24.
4. Microsoft's Joe Belfiore testified that Microsoft is making the user interface of cross-platform versions of Internet Explorer consistent with the Windows version to reduce training costs. Belfiore Dep., 01/13/99, at 369:13 - 370:21.
5. Discussing the benefits to organizations of using a standard word processor, spreadsheet, or web browser, Weadock testified that “[t]here are a lot of benefits, a lot of cost savings and configuration savings. They have benefits for the user in terms of productivity. You will not be distracted. They -- they can learn an application and use it to do word processing or surf the web. There are also advantages in terms of technical support. You don't have to educate your tech support staff about dual browser support. You can teach them how to support a browser, since that is the standard in the company." Weadock, 11/17/98 at 70:11-15;see in additionWeadock Richt. ¶¶ 38-39.
6. Dell Computer's Joe Kanicki explained that in Dell's experience, companies often want to standardize on a single browser for "stability and support." The total cost of ownership for the company stabilizes. The more frequently products are revised, the more expensive they are or possibly it could be for a company to keep up with those revisions. Kanicki Dep., 1/13/99, at 331:3 - 332:10

106. Standardizing on a browser also allows an organization to develop specialized internal applications or viewable content more cost-effectively and with the certainty that these resources are compatible with all of its internal systems that are Internet-focused.

1. Vesey testified that "the only defining characteristic" that makes the web valuable to Boeing is the ability "to put an electronic document in one place and make it accessible to virtually anyone, regardless of platform." Vesey Abt. (played 11/17/98), at 23:13-19.
2. Vesey testified that if Boeing had to provide both Navigator and Internet Explorer, support costs "would be higher because of a few things. Probably primarily would be the potential for a web application developer to develop an application that depends specifically on a particular website, from an end user perspective that would be possibly the biggest impact. You should know... if I rate this particular website, I must use this particular browser. And then if they tried going to this site with an alternative browser, they wouldn't be able to display the content available there. The other reason, the other main reason, would have to do with... using the software locally Windows 95 -Desktop there is a default browser setting. And the default browser behavior, in general, if you have IE 4 and Netscape 4 installed, you can set the default browser between the two. . . . In some cases, these d The default browser settings get confused and can make it difficult for the user to configure a specific browser as the default browser. This can become confusing for end users." Vesey Dep., 1/13/99, at 288:2 - 289:11.
3. Glenn Weadock stated that "Companies often develop intranets that are designed to work with a specific browser." He also testified that "if something works and looks right in Navigator, it may not work and may not look right to employees using Internet Explorer". Weadock 11/17/98 at 73:15-19.
4. Weadock testified that sometimes users "develop their own applications which (if useful and well designed) can spread throughout an organization. The development of intranets and internal corporate networks based on Internet technologies has accelerated this trend. The greater the level of software standardization, the greater the likelihood that such user-developed applications will function properly across the enterprise. Weadock dir. Article 38.
5. Weadock testified that "some organizations develop their own custom software that only works with a specific browser, and compatibility with that custom software can provide continued motivation to use that specific browser." Weadock dir. Article 24c.

107. For these reasons, a company wishing to standardize a single browser across several different hardware and operating system platforms will want to make its browser choice independent of the decision to purchase any operating system.

1. Weadock said: "When a company decides, at least in part, which browser to standardize on based on a variety of hardware platforms in the organization running different operating systems, then it's a very short logical leap to say that companies make that browser decision." regardless of the decision they make about a particular operating system." Weadock 11/17/98 at 16:8-15.
2. Based on his research and interviews with corporate information managers, Glenn Weadock testified that companies generally want to make browser and operating system decisions separately. Weadock dir. ¶ 21;see in additionVesey Abt. (played 11/17/98), at 52:12 - 53:14 (Boeing). Weadock testified that there is significant demand for the original (retail) version of Windows 95 from businesses "because they have the most control over what applications they can install on it because it's the cleanest version of Windows 95 and doesn't contain any." software they don't want. And most importantly, it doesn't include Internet Explorer, which you might not want.” Weadock 11/17/98 at 62:12-20; Weadock 11/16/98 24:23 - 25:4 (testifying that some users may forgo the technological advances of later versions of Windows and use the retail version of Windows 95 because it didn't come with a web browser).

108. Microsoft recognized this separate need for browser standardization across and independent of the demand for operating systems.

1. David Cole urged his Win32 Internet Explorer 4 team to support the teams working on the Win16, Unix and Mac versions of Internet Explorer because "getting the cross-platform versions up is the key to gaining market share on all platforms, including Win32, is". GX60, MS7 004624.
2. A January 1998 draft transition plan for Internet Explorer 5 for Macintosh stated: “Microsoft has now released multiple versions of Internet Explorer on multiple platforms. and large increases in market share, the cross-platform versions have not made the same market share gains. While the lack of cross-platform market share is troubling, the negative impact on win32 IE's market share is unacceptable. . . . As we speak to more and more customers, it's becoming increasingly clear that the cross-platform browsers are directly affecting the overall IE market share exponentially." GX 370, at MS98 0121263.
3. In November 1997, Brian Hall reported on a focus group study of Internet Explorer 4 and Navigator 4 users in which he listed as a "key takeaway" that "the desire for a 'core browser' with similar user interface and content and feature support across platforms consists ." GX 219, at MS7 006361.
4. Paul Maritz wrote in an e-mail in June 1996: "We have no desire to sell anything on UNIX. However, due to customer demand, we need to provide an IE solution on UNIX." GX 653, for MS98 0156372.
5. According to Microsoft, "companies want our offerings to be as consistent as possible" "to avoid confusion among their users and support staff... [t]hey want consistency in build, deployment, management, and overall browser UI." " GX 217, for MS98 0109147.

(3) Some consumers request browsers and operating systems separately because they may want to update one without updating the other

109. Many consumers and OEMs require separate browsers and operating systems, including Internet Explorer and Windows, to update the operating system without switching browsers.

1. Microsoft's Bill Veghte testified that Microsoft was considering shipping Windows 98 with Internet Explorer 3 instead of Internet Explorer 4 because of OEM demand for hardware-related improvements, such as USB support, that could be included before IE4 was finalized. Veghte Dep., 1/13/99, at 783:2 - 786:8.
2. Gateway's James Von Holle testified that Gateway asked Microsoft to release support for new hardware devices, including "AGP graphics, DVD hard drives, and dual displays" for Windows 95 rather than keeping those features for Windows 98. By Holle Dep., 1/13/99, at 302:6 - 303:12.
3. An internal gateway list-blackened-GX 357, at GW 026522 (sealed).
4. Dell's Joseph Kanicki stated that customers who do not have the current version of Internet Explorer and are upgrading their operating system may not want to upgrade to the new version of Internet Explorer. Kanicki Dep., 1/13/99, at 335:17 - 336:2.

110. Conversely, consumers may want to upgrade their browser application software without changing their operating system.

1. As Glenn Weadock testified, "Modifying the operating system software carries greater potential for problems than modifying a single application because all applications rely on the operating system" and modifying the operating system "can still cause unwanted problems with other applications running on it." system, or confusion among users who are now faced with OS changes." Weadock dir. €32g.
2. Microsoft's Chris Jones acknowledged that customers might want "the latest browsing technology," but their "Start menu and taskbar...remain the same." Jones Dep. 1/13/99, 552:22-24.
3. Veghte said it's still important for Microsoft to ship Internet Explorer 5 as a separate product, "because there's going to be a class of customers who want to keep those featureswithout updating your operating system." Veghte Dep., 1/13/99, at 787:5-13 (emphasis added).

(4)Some customers require separate browsers and operating systems because they do not want web browsing functionality at all

111. Some consumers require separate browsers and operating systems, including Windows and Internet Explorer, because they do not want web browsing functionality at all. Not all PC users want browsers, but all need operating systems.

1. Microsoft's David Cole acknowledged that Microsoft "had feedback from enterprise customers who wanted to block access to the internet, so when they buy a new machine from a PC manufacturer, they want the ability to give their employees easy access to the internet." , you know, don't spend their time on the Internet doing anything." Cole Dep. 1999-01-13, pp. 395:1-20.
2. Dell's Joseph Kanicki testified that he believed some Dell customers did not want Internet Explorer because "the customer may want to prevent their employees from accessing or attempting to access the Internet or the World Wide Web." Kanicki Dep., 1/13/99 at 333:11-22.
3. Weadock testified that some organizations "wish to restrict access to the public Internet for certain employees in order to reduce the unproductive time employees spend surfing the Internet on topics unrelated to their work on the World Wide Web." Internets is impractical." Weadock dir. § 23a.
4. Sun's Curtis Sasaki testified that "many corporate customers ... want to restrict their users' access to the Internet" and that Sun has been told by various customers, including the Florist Trade Bureau and several universities, that "many of their employees have access to web browsing." Sasaki Abt. (played 12/16/98), at 26:25 - 28:22.
5. Soyring testified that "[some] enterprise customers want to control the applications that can be used by employees in the enterprise and do not want employees to spend time surfing the Internet." Soyring Dir. § 17.
6. When asked if he was "aware of customers who didn't want to install the web browser because they didn't want their customers to surf the web," IBM's Jeffrey Howard replied, "I'm aware that we've had inquiries from our sales force, who spoke to the major customers who had contacted use that they wanted to limit what applications customers could access and in particular having their employees sit and surf the internet during working hours was a concern that was sometimes expressed. " Howard Dep., 8/31/98, at 115:20 - 116:6 (DX 2572).
7. Packard Bell/NEC's Mal Ransom testified that "our corporate customers typically don't want or don't necessarily want access to the Internet or a browser on their employees' computers, giving them a choice about what they do." Ransom (played on 12/16/98), at 74:4-8.
8. Compaq's John Rose estimates that only 70% of businesses run a web browser on their desktops. Rose, 02/18/1999, at 53:22 - 54:3.
9. Sun's James Gosling testified that on non-display systems like a server, a customer would have no use for a browser. Gosling, 12/10/98, at 60:17 - 61:2.

111.1. Even in organizations that use the Internet regularly, there are usually at least some employees who do not need browsing functionality.

1. IBM's John Soyring, for example, testified that some IBM customers wanted OS/2 without a browser for "systems used by baggage handlers or bank employees". Soyring dir. § 17.
2. Weadock testified that "even if we look at a company that's investing heavily in intranet technology, like Federal Express, ... they don't necessarily have browsing software or browsers on all of their PCs. There are only a few categories of users who may not need access to an intranet or the Internet." Weadock 11/16/98 at 3:15-25.

111.2. Although a company may restrict an employee's access to the internet in other ways, e.g. For example, by removing the modem or Ethernet port from certain PCs, or by restricting Internet access to a proxy server, such alternatives are often less efficient than simply using a PC without a browser.

1. Weadock testified that an employee may need an installed modem for teleworking, even if the employer wanted to restrict his or her access to the Internet. Weadock 11/17/98 at 41:17 - 42:16.
2. Weadock also testified that "These methods do not address the resource usage issues associated with browsers on the ... PCs. Nor do they address the issues of user confusion that might result from trying to run software that is there and may be accessible, although I tried to remove it but couldn't and then picked up the phone and the Called the helpdesk and said, "Hey, what's this?" So there are many reasons, aside from resource usage, why companies don't want to have browser software on a PC. It's generally accepted practice among IT managers in companies large and small to install as little software on a computer as possible that their users need to do . You just save on all sorts of costs that way, from resource usage to support and training." Weadock 11/17/98 at 42:3-16.
3. Jeffrey Howard testified that there are other ways to prevent users from surfing the web from OS/2, but that "most customers, especially in the Warp Version 3 and Warp Connect era, typically find disk space to be scarce and tried to have the minimum amount of code that they could install on the desktop machine itself, just from an administrative and support standpoint, because they needed the space available for swap files and paging etc. Howard Dep. 8/31/98 at 118:21 - 119:4 (DX 2572).

(5)OEMs are end-user proxies; and therefore also require separate browsers and operating systems for the reasons mentioned above

112. Because the PC OEM industry is highly competitive and OEMs need to meet consumer demand to stay in business, OEMs also require browsers and operating systems, including Internet Explorer and Windows, separately.

1. Gateway repeatedly asked Microsoft for a version of Windows 98 with web browsing uninstalled, in part because they were "concerned that installing the full MS product (including channels) would result in much slower system performance if the customer had an alternative browser." selects installation on IE4." GX 1073, at MS 98 0204593.
2. Jon Kies testified that Packard Bell/NEC took advantage of the workaround agreed in January 1998 to offer some of its PC models without Internet Explorer. Gravel Dept. (played 12/16/98), at 6:11-19.
3. Kanicki testified that Dell's license agreement with Microsoft allows "a competing browser to be installed on a computer that ships with Windows 95 or Windows 98" because Dell's customers "may want to install a competing browser instead of Internet Explorer." . Kanicki Dep., 1/13/99 at 336:4-19.
4. Mal Ransom testified that many of Packard-Bell/NEC's "commercial customers" "do not want access to the Internet or browsers on their employees' computers" for the Versa line of notebook computers, those customers "have a choice pre-install which browser they use", if any. Ransom (played 12/16/98), at 73:13 - 74:11.
5. Compaq also struggled to meet customer demand for browsers other than Internet Explorer.See belowPart V.B.2.c; § 130.1.

c.To meet this separate demand, companies - including Microsoft - have found it efficient to offer browsers and operating systems separately

113. To meet this separate demand, both operating system suppliers and browser suppliers offer browsers and operating systems separately.

(1)Internet Explorer and other browsers were and are shipped separately from operating systems

113.1. Browser vendors have found it efficient to offer browsers separately from operating systems.

1. Netscape's Barksdale testified, "Indeed, Netscape does not sell operating system products and has been able to sell millions of browser licenses to consumers and businesses, regardless of operating system." Barksdale Gov. § 90.
2. James Gosling testified: “The HotJava browser is a software application released by Sun in 1995. When the HotJava browser was being developed, Sun considered making the necessary revisions and improvements to make it a competitive product for desktop computers like Windows, but after Microsoft announced that its Internet Explorer browser would always be given away for free, came along Sun concluded that, at this time, it made little business sense to vigorously compete to sell a consumer browser application to compete against a giveaway product for free." Gosling Dir. ¶ 37; Gosling, 12/3 /98pm, at 80:17 - 81:3 (testifies that Sun never sold HotJava "as a commercial browser" because "since the market price for browsers seemed zero at the time, it hardly seemed like a sensible thing to do").
3. dr Warren-Boulton noted that "Opera, which has limited presence in some distribution channels, is distributed independently of an operating system product." Warren-Boulton Gov. § 76.

113.2. Microsoft found and continues to find it efficient to offer its browser separately from its operating system products through numerous channels.

113.2.1. Microsoft has consistently offered its Internet Explorer browser as a standalone version through retail, download, and ISPs, OLSs, and ISVs.

1. See aboveTel V.B.1.a.(3); § 99.

113.2.2. In response to competition from other browsers and to meet the demand for a standard browser product that runs on multiple operating systems, and thereby increase Internet Explorer's market share, Microsoft has also developed standalone versions of Internet Explorer that run on other Operating systems and earlier versions can run from Windows.

1. A November 1997 Microsoft focus group study shows that "Win32 browser qualities in users' minds are being carried over to other platform versions" and that users' desire is "a 'core browser' with similar user interface and content and feature support across platforms." GX 218, MS7 006353.
2. Chris Jones wrote in November 1995: "To compete with Netscape, we need cross-platform (Win3.1, Win32, Mac) clients that support the NT server (login, security, etc.)." GX 334, for MS98 0104685.
3. Barksdale testified, "To compete with Netscape, Microsoft began offering cross-platform versions of Internet Explorer." Barksdale Gov. § 91.
4. James Allchin explained that Internet Explorer for the Macintosh is an application and not part of an operating system. Allchin 2/2/1999 at 13:8-12.
5. Dean Schmalensee testified that Internet Explorer for the Macintosh and for Windows 3.x are applications and not part of the operating system. Schmalensee, 01/20/99, 20:14 - 21:9.

113.2.3. Aside from minor differences to comply with the user interface guidelines for these other systems, and demonstrating that they respond to the same separate internet browser demand, the non-Windows versions of Internet Explorer offer the same browsing functionality and "look and feel". for end users as Internet Explorer for Windows 95/98.

1. Professor Edward Felten stated: "The Windows 98 and Solaris versions of IE Web Browsing offer nearly identical user interfaces, and the MacOS version offers the same user interface modified to meet the user interface guidelines set by Apple for Macintosh software." Felt you. Article 75; Felt you. ¶ 82 (testifies that a user's web browsing experience is essentially similar with versions of Internet Explorer running on Sun Solaris, Apple Macintosh, and Windows 98).
2. Joe Belfiore testified that Microsoft is developing cross-platform Internet Explorer to appeal to companies with non-Windows operating systems and that the cross-platform versions have the same user interface as the Windows version to reduce training costs. Belfiore Dep., 01/13/99, at 369:13 - 370:21.
3. Microsoft designed the cross-platform versions of Internet Explorer specifically for businesses that want to use the same browser on multiple platforms.See abovePart V.B.1.b.(2); Section 110.

(2) Operating system vendors - at least those who, unlike Microsoft, lack market power - offer operating systems separately from browsers

114. Operating systems are efficiently provided separately from browsers, and every operating system vendor other than Microsoft provides operating systems separately.

(a) Some operating system vendors offer consumers the option to license the operating system without a browser

115. A number of operating system vendors offer consumers the option to license the operating system without a browser.

115.1. Sun does not bundle a browser with its JavaOS operating system.

1. Sasaki testified that Sun licenses its JavaOS product separately from its HotJava browser; "The Java OS product is shipped to our licensees, our licensees can also license the browser technology [called HotJava] and it's up to them to decide whether or not to include it in their product." Sasaki Abt. (played on 12/16/98), at 21:25 - 23:6. Sasaki also testified that the price of JavaOS does not include a browser (Sasaki Dep. (played 12/16/1998) 26:8-16) and that only 21 of Sun's 36 JavaOS licensees also licensed the HotJava browser. Sasaki Abt. (played 12/16/98), at 26:17-24.

115.2. Lucent offers an unbundled option.

1. James Frasca testified that Lucent "believes that the web browser is part of the application suite and not the operating system" and that Lucent has licensed non-web browser versions of Inferno. Frasca Dep., 1/13/99, at 137:15-19; Frasca Dep. 1/13/99, pp. 141:19-22; Frasca Dep. 1/13/99, pp. 143:8-9; Frasca Dep., 1/13/99, at 144:16 - 145:9 (Lucent would license a hardware OEM a version of the Inferno product without the browser if the OEM wanted to distribute a third-party browser).

115.3. Santa Cruz Operation offers an unbundled version of its operating system.

1. With Unixware 7, a multi-user product, SCO only bundles "a single-user license for the administrator to read online doc and manage the web server". Additional browser licenses for additional users must either be purchased “as an optional product” from SCO or otherwise acquired. Rasmussen Abt. (played on 12/15/98), at 59:23 - 60:15.

115.4. Caldera offers an unbundled version of its operating system.

1. Bryan Sparks testified that Caldera allows OEMs to offer an unbundled version of its operating system. He explained, "It doesn't make sense for us" to require OEMs to integrate the browser. He continued: “The reseller knows what the customer needs better than we do. He is closer to the customer. We'll let him decide. He buys the boxed product and has the browser, but we don't require him to install or configure it if he doesn't want to." Sparks Dept. (played 12/16/98), at 50:12-23.

(b) Sometimes operating system vendors other than Microsoft Bundle one or more browsers with their systems but allow VARs, OEMs, or end users to remove or not install them

116. Operating system vendors, lacking Microsoft's monopoly and thus the incentive to engage in anti-competitive behavior that hampers consumer demand, do not place contractual or technical restrictions on the ability of OEMs or end users to remove a browser.

116.1. No OS vendor other than Microsoft restricts their customers' ability to remove an unwanted browser.

1. Allchin testified, "As I sit here today, I know of no other" operating system vendor other than Microsoft that forbids its customers to remove browsers. Allchin 2/3/99 at 45:11-19.

116.2. Even when other vendors offer a browser with their operating system, they allow OEMs and end users to remove or not install it.

116.2.1. Although IBM includes a browser as an application in its OS/2 Warp Version 4 operating system package, the installation process allows the user to choose whether or not to install it. IBM also allows any other OEM or value-added reseller (VAR) that sells computers running OS/2 to remove the browser before selling.

116.2.1.1. IBM does not consider the browser to be part of the operating system.

1. John Soyring testified under cross-examination that IBM's Web Explorer "is not part of the OS/2 operating system itself... We developed it separately as a separate program. It's included in the OS/2 Warp product package, we're setting it up as a selectively installable and selectively removable application program that can either be used with OS/2 or not." Soyring 11/18/98 at 21:12 - 22:2 ;see in additionSoyring Dir. ¶¶ 14-18.
2. Soyring also testified that OS/2 works flawlessly as an operating system, regardless of whether a web browser is installed or not. Soyring 11/18/98 at 78:5-7.

116.2.1.2. IBM allows users not to install or remove their browsers.

1. Soyring testified that users of IBM's OS/2 operating system were always free not to install "Web Explorer", remove that browser after installation, and install a competing browser if they wished. Soyring 11/18/98 at 77:12-17.
2. IBM's Dana O'Neal testified: "-blackened-O'Neal Dep. 8/31/98, 72:3-7 (DX 2578A) (sealed).

116.2.1.3. IBM makes the browser removable from its operating system because it recognizes that there is a separate demand for browsers and operating systems.

1. Jeffrey Howard testified that he was "aware that we were having requests from our field staff speaking to these large customers, who reported to us that they wanted to limit what applications customers could access, and specifically their employees who sitting and surfing the Internet during working hours was a concern sometimes expressed." Howard Dep., 8/31/98, at 115:20 - 116:6 (DX 2572).

116.2.1.4. IBM includes a browser in its OS/2 package for the same reason it bundles other applications like a word processor: because it helps convince customers that key OS/2 applications exist, which is necessary to to overcome the entry barrier of the applications .

1. Soyring testified that IBM decided to bundle Netscape Navigator with some later versions of OS/2 in particular, "because its brand was the most popular brand recognition in the industry at the time. And again it goes back to the problem we had. Having faced before that unpopular applications just weren't built for OS/2, we thought, firstly, to deliver to customers earlier and secondly, to bring a big brand to go with it Getting OS/2 recognized and adopted by offering a product would be an added incentive -- or stimulus to sell more OS/2 copies. So we signed a license agreement. We spent millions of dollars with Netscape to make this possible, and we packaged it as part of the next generation of OS/2 Warp, which is OS/2 Warp 4 in the shrink-wrapped product." Soyring, 11/18/98, at 39: 3-19; Soyring 1998-11-18, 44:9-45:1 (explaining that the same reasoning led IBM to bundle word processing, spreadsheet, database and personal information management applets into OS/2); Soyring, 11/18/1998, 75:10-21 (discussing users' perceptions that they would "have a difficult time finding applications" for OS/2).

116.2.2. Apple bundles both Internet Explorer and Netscape Navigator with MacOS, but allows both end users and resellers to delete one or both.

116.2.2.1. Apple does not consider a browser to be part of the operating system.

1. Tevanian's definition of an operating system says nothing about browsing capability. He defined an operating system as “the primary software that controls a computer. The operating system provides various basic services for a computer, such as process management, user interaction, data management for the hard disk, network interfaces, and control of peripheral devices such as printers and keyboards." Tevanian Dir. § 8.

116.2.2.2. Apple allows users and resellers to remove either Navigator or Internet Explorer or both if they wish, and nothing is "hard-coded" in its operating system to require the use of a specific browser.

1. Apple's Tevanian stated: "The Mac OS operating system will continue to function if one or both of these browsers are removed. As noted above, we allow value-added resellers ("VARs") the flexibility to reconfigure our systems to serve their direct customers "We offer VARs the flexibility to remove browsers or other applications and redesign the Macintosh desktop configured to meet the needs of their customers." Tevanian Dir. § 26.
2. After the court asked Tevanian whether it "is possible for you to remove your browser from the operating system without otherwise affecting the operation of the system," Tevanian replied, "Yes, except that you cannot surf the Internet." Tevan 11/5/98 at 67:10-15; Tevanian, 11/5/98pm, at 70:9-17 (testifies that the operating system would remain intact).

116.2.2.3. Apple allows users to remove the bundled browsers because it understands there is a separate demand for browsers and operating systems.

1. When asked if he thought there was a "separate market" for internet browsers, Tevanian said he thought "it's fair to say there is a market. There are some people who would choose the operating system first, then they might choose the browser and don't want to make the decision together. So in that sense it's separate from the desktop computer market in general." Tevanian, 11/4/98pm at 18:3-22.

116.2.3. Sun bundles its "HotJava" browser with its Solaris operating system, but allows end users to remove this application.

116.2.3.1. Sun does not consider a browser to be part of the operating system.

1. Curtis Sasaki's definition of an operating system says nothing about providing browsing capabilities. He says that an operating system "contains a kernel that controls how things are managed in terms of memory. It also controls the I/O functionality, such as B. communicating with a network, communicating with your keyboard, seeing things on the screen. So, this is called device driver. So all of that I would call an operating system, plus a set of APIs on top that application developers write to.” Sasaki Dept. (played 12/16/98) at 17:16-25; Sasaki Abt. (played 12/16/1998) 26:8-10 ("Q: Is the browser part of the operating system? A: No. It's separate. Q: When -- is -- the price for Java OS- Product includes a browser? A: No. Q: Are there separate pricing for browsers? A: That's right.").
2. Sun's James Gosling similarly excludes browsing capabilities from his definition of an operating system. He says that an “operating system has two main functions: (1) to interact with and control the computer's processor and other hardware (monitors, keyboards, disk drives, etc.); and (2) interact with it and execute instructions, software applications, generally through a set of application programming interfaces known as 'APIs.'” Gosling Dir. ¶ 8. Based on this definition, Gosling concludes that “the Browser is best understood as a software application, not as part of a computer's operating system". Gosling dir. Article 38; Gosling, 12/9/98 at 30:23-31:9.

116.2.3.2. Sun allows and makes it easy for end users, VARs and OEMs to remove bundled browsers from the operating system if they wish and does not "hard-code" anything into its operating system to require the use of a specific browser.

1. Gosling testified that Sun included the "HotJava" browser on the CD-ROM with its Solaris operating system, but "it was absolutely a pluggable, repluggable application that happened to be there. Customers can and do substitute almost anything.” Gosling, 12/9/98 at 38:16-25.
2. Brian Croll testified that an OEM or VAR that licenses Solaris 2.6 is not required to ship the HotJava browser to its end customers. Sun offers OEMs and VARs two options for offering an unbundled version of the operating system: "At one level, you can choose not to add the package that includes the Java browser and other things if that is the first choice. Then the second it's your choice, once you've loaded it you can go through the uninstall process to take it with you." Rolling Dep. (played 12/15/98), at 66:22 - 68:4.
3. Additionally, Croll stated that OEMs and VARs are allowed to ship their end-user customers additional browsers or a different browser if they so choose because "there is no reason for us to stop them." roll dep. (played 12/15/98), at 68:5-13.
4. Curtis Sasaki stated that when the Java operating system is used on a network, "the system administrator can ... remove the browser without affecting the Java operating system". Sasaki Abt. (played 12/16/98), at 29:3 - 30:7.

116.2.3.3. Sun allows users, VARs and OEMs to remove bundled browsers because it understands there is a separate demand for browsers and operating systems.

1. James Gosling testified that he "can't think of any plausible technical reason for designing Windows 98 to make it difficult to remove Internet Explorer". In contrast, Gosling suggested several reasons "why it would be desirable to design the operating system in such a way that the browser could be removed", including that users may want to use their operating systems without displays (e.g. as servers). want to replace their browsers with superior products or use special browsers, such as B. a browser designed for people with visual impairments. Gosling, 12/10/98 p.m., at 60:10 - 62:1.
2. Croll testified that the Solaris OS Web Start and Answer Book 2 features do not require the use of the HotJava browser bundled with the OS to function "because we anticipate that after the OS is initially loaded that customers want other browsers." roll dep. (played 12/15/98), at 64:23 - 65:12.

116.2.4. The Santa Cruz Operation (SCO) bundles Netscape Navigator with their products, but gives customers the choice to install or remove it.

116.2.4.1. SCO does not consider a browser to be part of the operating system.

1. When asked if a browser product is part of the core of an SCO operating system product, Ron Rasmussen answered no. "In our view, the browser is an application." Rasmussen Abt. (played 12/15/98), at 64:13-20.
2. Rasmussen testified that SCO "bundles" Netscape Navigator with its OpenServer and Unixware products (Rasmussen Dep. (played 12/15/98) 54:10 - 56:18), but that "in our view the browser is an application is ." Rasmussen Dep., (played 12/15/98), at 64:20. Rasmussen also testified that "when SCO says 'we are bundling a feature', it means that a feature that is not part of the core functionality of the base operating system, whose main function is to serve applications, continues to function properly." ." Rasmussen Abt. (played 12/15/98), at 55:14-19.

116.2.4.2. SCO allows end users, VARs and OEMs to remove bundled browsers from the operating system if they wish and does not "hardcode" anything in its operating system to require the use of a specific browser.

1. Rasmussen stated that there are a number of ways to remove Unixware 2.1.3's bundled browser: "The first way is during the installation of the operating system, the browser can be deselected so that it is never installed on the system - on the computer's hard drive." Additionally, "[i]if you chose to install Navigator as part of the operating system installation, you can come back with a utility to remove the software, and you can do it again -- you'll get a point- and pick list and she can select it for removal." Rasmussen Abt. (played 12/15/98), at 60:21 - 62:7.
2. Rasmussen further testified that Navigator is uninstallable and/or removable from Unixware 7 "in the same way" as from Unixware 2.1.3. Rasmussen Dept. (played 12/15/98), at 62:15-24.
3. Similarly, Rasmussen testified that Navigator is also optional on Open Server Release 5: the browser can be "both removed at the time of initial system load, so that it never gets on the system, and removed afterwards if you log in during the initial system loading decided to install." Rasmussen Dept. (played 12/15/98), at 62:25 - 63:6.

116.2.4.3. SCO allows users, VARs and OEMs to remove bundled browsers as it understands there is a separate demand for browsers and operating systems.

1. Rasmussen testified that the reason SCO offers its users these web browser options is this: “Not everyone wants the functionality in the operating system, so we give them the option to remove or install it at a later time .” Rasmussen Abt. (played 12/15/98), at 62:25 – 63:18. Rasmussen went on to explain that “People buy the operating systems to run applications, and if their application doesn't require a web browser, then they might not want a web browser there. So if you're running an accounting application and you don't need the web browser, maybe you don't want to install it to save disk space, or in some cases resellers have told us that they consider the web browser an unproductive tool since people surfing the internet rather than doing their job." Rasmussen Abt. (played 12/15/98) at 63:19 - 64:6.

116.2.5. Operating system provider Be, Inc. bundles the only browser currently available with its BeOS, but allows users to remove it.

116.2.5.1. Be does not consider a browser to be part of the operating system.

1. Although both Be and Microsoft's James Allchin describe the Net Positive browser as an "integrated browser", Be refers to Net Positive as an application and lists it in the "apps" directory on the computer. Allchin 2/2/99 at 14:3-11.

116.2.5.2. Be allows end users, VARs and OEMs to remove bundled browsers from the operating system if they wish and does not "hardcode" anything in its operating system to require the use of a specific browser.

1. The Net Positive Browser can be removed from the BeOS. Although Be's help system will not fully function without a browser, the help system will work if another browser or HTML renderer is installed after Net Positive has been removed. Allchin 2/2/99 at 10:4 - 21:4.
2. Allchin acknowledged that removing the Net Positive browser from the application directory frees up 1.3 megabytes of RAM in the BeOS application directory. Allchin 2/2/99 at 13:5 - 19:20; GX1771.

116.2.6. Novell bundles a browser with Netware but allows the user to remove it and use a third-party browser.

116.2.6.1. Novell does not consider a browser to be part of the operating system.

1. Novell's Sean Sanders defined "a desktop operating system" in a way that says nothing about its ability to browse. He defined it as "a special set of computer programs that allow management of ... computer resources that a specific end user would use on his desktop PC of the physical computer, such as management of the RAM, hard disk drive, and some other technical aspects used in included in the box, but it also provides a sort of general user-friendly front end to the system that the user can manipulate to make better use of their software programs and the resources that are generally available specifically for the desktop." Sanders Dept. (played 1/13/99), at 185:13 - 186:3.

116.2.6.2. Novell allows end users, VARs and OEMs to remove bundled browsers from the operating system if they wish and does not codify anything in its operating system to require the use of a specific browser.

1. David Wright testified that the Netware 5.0 operating system will work without the browser. Wright Dept. 9/18/98, 16:4-12 (DX 2601). Even if the browser is first installed and then uninstalled, the operating system will continue to function. Wright Dep. 9/18/98 16:13-18 (DX 2601).
2. When asked how the relationship between Novell's browser products and Netware differed from the relationship between Internet Explorer and Windows 98, Weadock stated, "It differs in several fundamental ways. For example, Netware as an operating system is not dependent on any particular browser. The browser included on the Netware CD is used, for example, to access help and documentation for the Netware product. Users - customers who choose not to use that browser to use with Netware can remove it Users who choose to use a different browser, a different browser, can install a different browser They can install Internet Explorer if they wish So in these key areas we see differences between the type and The way Novell bundles Netware and a browser -- I mean, it's very loose bundling, and it gives the customer a lot of choice -- with what Microsoft is doing with Windows 98, where the browser isn't removable, where the with files associated with the browser actually deactivate the browser operating system if you delete them one by one , and in this case the customer is not entirely free to install an alternative browser, as there are hard-wired methods in the Windows 98 user interface that will still invoke Internet Explorer regardless of the actions the customer may have reversed that choice or disabled." Weadock, 11/17/98, at 47:1 - 48:1;see in additionWeadock, 11/16/98, a 84:13-23.

116.2.6.3. Novell allows users, VARs and OEMs to remove bundled browsers because it understands there is a separate demand for browsers and operating systems.

1. Sanders testified that when a user installs the intra-Netware product, they have a choice of whether or not to install Netscape Navigator. Sanders Dep. 1/13/99, pp. 186:10-16. Sanders explains that Novell is giving users this choice for the following reasons: "Some users do not have a desire to use all of the features included in the entire intra-Netware bundle, so we are offering them the opportunity to do this." Decisions about what they would and would not use." Sanders Dep. 1/13/99 at 190:18-191:2.

116.2.7. Caldera offers users a choice of multiple browsers with its OpenLinux product, but makes them easily and completely removable.

1. Caldera bundles the KDE browser on its OpenLinux operating system; Also, "Netscape comes preinstalled on these systems by default." Felten 10/6/99 at 26:1-20.

116.2.7.1. Caldera does not consider a browser to be part of the operating system.

1. Sparks stated that he does not consider any browser to be "part of the Linux operating system". Sparks Dept. (played 12/16/98), at 50-8-11.

116.2.7.2. Caldera allows end users, VARs and OEMs to remove bundled browsers from the operating system if they wish and does not "hardcode" anything in its operating system to require the use of a specific browser.

1. Professor Edward Felten testified that Caldera's KDE browser is "separable and removable and replaceable". Felten 10/6/99 at 25:12-17. When asked what his basis for saying the browser is separate from the operating system was, Professor Felten replied: "Well, there are several reasons for that. First, the KDE browser is developed by a different organization than the one that develops the Linux operating system... In addition, the Linux operating system works with other browsers. In fact, OpenLinux works seamlessly with Netscape, and Netscape comes preinstalled on these systems by default. Also, the KDE browser runs on other operating systems such as Solaris, HP-UX and IRIX." Felten 10/6/99 at 26:1-18.
2. Allchin acknowledged that the browser bundled by Caldera is from another organization, KDE (Allchin, 2/1/1999, 73:5-15), and that the operating system will continue to function if it is removed. Allchin 2/1/99 at 73:25 - 74:13.

116.2.7.3. Caldera allows users, VARs and OEMs to remove bundled browsers because it understands there is a separate demand for browsers and operating systems.

1. Bryan Sparks testified that Caldera allows OEMs to sell a browserless version of OpenLinux because, “Why shouldn't we? As long as we had a contract, so if they want to adjust it, they'd be happy to do it.” Sparks Dept. (played 12/16/98), at 50:24 - 51:8.

(c) Until recently, Microsoft also complied with this separate request by allowing users to remove Internet Explorer from Windows

117. Although Microsoft required OEMs and users to purchase Internet Explorer in order to obtain Windows, Microsoft nevertheless, until recently, recognized the separate demand for a browserless operating system by providing end users (but not OEMs) with a means to remove or "uninstall" the browser.

1. See belowTel V.B.2.d.(4).(a); § 139.

2.Microsoft tied Internet Explorer to Windows to hamper browser competitors and protect its operating system monopoly

118. Unlike other operating system vendors, Microsoft both refused to license its browser-less Windows operating system and placed restrictions, first contractual and later technical, on the ability of OEMs and end users to remove its browser from Windows. As its internal contemporary documents and licensing practices show, Microsoft decided to merge Internet Explorer and Windows to prevent Netscape from becoming a significant threat to Microsoft's operating system monopoly, rather than for pro-competitive reasons.

a.Before deciding to stop the browser threat, Microsoft didn't plan to tie its browser to Windows

119. Microsoft argues that it made the decision to develop its own browser and bundle it with Windows 95 at an April 1994 retreat devoted to Internet issues (Allchin Dir. ¶¶ 225-227). This argument is at odds with the evidence, which instead shows that Microsoft had no firm plans to bundle its browser with the operating system at the time.

119.1. Microsoft's internal correspondence and external communications from early to mid-1994 show that Microsoft intended at most to bundle low-level Internet "installations" such as a TCP/IP stack, but not applications such as a browser, with Windows 95.

1. When asked how to handle press and OEM inquiries about Microsoft's Internet plans, Alec Saunders replied in April 1994: "It's getting very confusing and right now there's a lot of outside people asking if we're going to ship Internet apps to ours position so far is that Chicago [Windows 95] has everything you need to connect to the Internet -- but cool apps like Mosaic are stuff you have to get from third parties." GX124.
2. A February 1994 email by David Cole to Bill Gates and other senior executives reporting "Chicago Beta 1 content" provides a detailed description of Windows 95's features, but makes no mention of Web integration or bundling -Browsing features. The only mention of Internet support is a link under the Networking title to Full TCP/IP support. A fast protmode stack without low memory requirements. A full set of TCP utilities apps. DHCP support for "plug-and-play" TCP/IP networks." GX 597, at MS98 0010791.
3. Steven Sinofsky wrote in June 1994: "We are not currently planning any other client software [in the upcoming version of Windows 95], especially something like Mosaic or Cello." In fact, Microsoft's goal at the time was "to get as many third parties as possible to write as much Internet stuff as possible on WinSock, including as many WWW, Gopher, TN3270, etc. clients as they could afford can". GX125.
4. A November 1994 draft "Communications History" for the marketing of Windows 95 made no mention of the inclusion of an Internet browser and only claimed that Windows 95 "supports popular Internet applications such as Mosaic, WinWAIS or WinGopher". Brad Chase replied: "I don't think we deliver what you say. I think integration is important, but we don't really integrate. For example, they still use a telephone. You'll need to get a third-party program to actually have an interface to the web." GX601.

119.2. Microsoft publicly stated in 1994 that Windows 95 would not include a browser.

1. A November 1994 marketing brochure entitled "Microsoft Windows 95 Questions and Answers" answers the question "Can Windows 95 connect to the Internet?" as follows: "Yes. Windows 95 includes the networking support you need to connect to the Internet. It includes a fast, robust 32-bit TCP/IP stack...as well as PPP or 'dial-in' support Windows 95 supports the large number of tools used to connect to the Internet, such as Mosaic, WinWAIS, and WinGopher, through the Windows Sockets programming interface. Windows 95 also includes standard Internet support, such as Telnet and FTP." GX 398, MS98 0107100.

119.3. The testimony of Phillip Barrett, a former Microsoft employee responsible for the early development of Internet Explorer, confirms that Microsoft had no serious plans to bundle a browser with Windows 95 in 1994.

1. Barrett testified that he attended the "Offsite" in April 1994, which was about "What Would Microsoft Do With the Internet." (Barrett Dep. 1/13/99, page 100:3-14) and attended a "breakout" session conducted by Bill Gates, which was also attended by Brad Silverberg and John Ludwig (Barrett Dep. 1/13/99 , at 101:14-18), which focused on “the Internet service providers and the necessary installations—the installation is the infrastructure—to enable large numbers of people to get online and use the Internet.” Barrett Dep. 01/13/99 101:21-25.
2. Barrett testified, "Plans were to include a TCP/IP package...and then dial-up modem support in Windows 95 or a subsequent service pack." Barrett Dep. 1/13/99 at 106:9-14. Barrett "does not recall discussions" about building a web browser into Windows 95 (Barrett Dep., 1/13/99, at 107:2-4) and testified that to the best of his knowledge no such plans were as of completion of the retreat has been made. Barrett Dep. 01/13/1999 at 107:24. Barrett testified that Bill Gates' claim at the April 1994 exam that Microsoft decided to include a web browser in Windows 95 "does not tally with my recollection of the exam." Barrett Dep. 1/13/99 at 111:9-10.
3. Barrett testified that he moved to the Windows group after the retreat "to focus on internet technology." Barrett Dep. 1/13/99, 108:2-7. Barrett's new job was to develop a strategy for developing a web browser. Barrett Dep. 1/13/99, 108:13-16. Barrett testified that he and his group had not developed a web browser and that at the time he left Microsoft in October 1994 he was not aware of any plans to develop a browser for inclusion in Windows 95. Barrett Dep., 1/13/99, at 108:21 - 109:9. Barrett also testified that Microsoft could not have had such formal plans without his knowledge because they "would have fallen into [his] purview." Barrett Dep. 1/13/99, 109:11-21.

120. Even after Microsoft became aware of the Netscape browser threat and as late as June 1995, Microsoft had no firm plans to bundle its browser with Windows 95. Instead, Microsoft planned to ship its browser in a separate "frosting" package (eventually dubbed Microsoft "Plus"), for which a fee was planned.

1. A draft press release from January 1995 announcing the purchase of the Mosaic code stated: "At this time there are no plans to ... ship the Mosaic software in the Windows 95 box when it is released in August shipping this year... Our plan is to ship this feature shortly after Windows 95 ships." GX 138, at MS6 600545.
2. A document entitled "Top 20 Features Microsoft Windows 95" lists "Plumbing for the Internet" as number 13, stating that "Windows 95 ... has built all the necessary 'plumbing' into the operating system and gave you all the necessary 32-bit Drivers such as TCP/IP for accessing the Internet, dial-up protocols such as [PPP and SLIP and] built-in tools and utilities for making basic connections such as FTP and Telnet Now you can access the Internet directly through the Microsoft network, or add WEB browsing capabilities by installing Microsoft Plus! add to Windows 95." GX152.
3. In an email exchange with Ben Slivka on June 15, 1995, Brad Chase stated that "efforts are still being made to get this [Internet Explorer/O'Hare] thrown into Windows 95". Slivka replied that "the upgrade schedule is quite tight" and that "[i]if we don't participate in the upgrade, it makes our life easier and we get more plus earnings... :-)" GX 149.
4. Ben Slivka suggested to Brad Silverberg in April 1995 that Microsoft might not want to include Internet Explorer in the Windows 95 box due to size limitations. "Inserting into the web browser is possible, but it's 475KB (compressed 170KB) and it's not useful unless you're already online and already having trouble fitting onto 12 disks." GX146.
5. A June 28, 1995 update to Microsoft executives on the testing process for adding O'Hare to the OEM version of Windows 95 states that "we still don't have firm permission to do this' becomes 'let's go ahead and get into it.' meet two more days.'" GX 151.
6. Based on Microsoft's internal contemporary documents and other evidence, Professor Fisher concluded that Microsoft made the decision to bundle Internet Explorer with Windows "no earlier than mid-1995." Fisher, 1/6/99pm at 26:7-8.

b.Microsoft changed its plans and decided to tie its browser to Windows to hinder Netscape

121. However, in late 1994 and early 1995, Microsoft executives began to recognize that the popularity of the Netscape browser posed a serious threat to Microsoft's operating system monopoly.

1. See aboveTel III.B.2; § 56.

122. As a result, Microsoft decided that capturing a large share of the market for using Windows 95 browsers was the best way to prevent Navigator from becoming a truly competitive competing platform.

1. See abovePart V.A.

123. Microsoft considered various strategies for quickly gaining a large share of the browser market and, as explained, tried to force Netscape to give up its Windows 95 browser business altogether.

1. See aboveTel IV.A.

124. But in early 1995, Microsoft executives also began to consider bundling Internet Explorer with the forthcoming release of Windows 95 and forcing OEMs to adopt it.

1. In an April 1995 e-mail, Brad Silverberg told Ben Slivka and John Ludwig that "I've spoken to Paulma and he agrees that we should roll out our internet client as widely as possible as soon as possible. That means I want Ohare in Win95." GX608.
2. A June 1995 summary of a meeting at which the problem was discussed, prepared by John Gray, reports that they "[t]enatively decided to proceed on the path of moving Ohare and Rome into initial OEM products, but NOT into retail bring". GX 612, for MS98 0122185.

125. Microsoft's motive for tying Internet Explorer to Windows 95 (ie refusing to offer OEMs the option to license Windows without the browser) was to thwart the platform threat posed by Netscape's browser.

1. On June 23, 1995, John Ludwig wrote to Paul Maritz and others that “netscape obviously sees us as client competitors. I'm glad you didn't share a lot of details with them OEM hard drives." GX623.
2. In April 1995, Microsoft's Rick Rashid wrote to Paul Maritz: "Just as they [Netscape] are a threat to us, we are a threat to them. .” GX 521.
3. Allchin acknowledged that he believes that integrating Internet Explorer into the OEM version of Windows 95 is a way to increase Internet Explorer's market share. Allchin 3/2/99 at 56:7-11. “The sooner we made it available to everyone, the better off we would be. That was absolutely believed. And we wanted to spread it over every vehicle we could.” Allchin Dept. (played 2/3/99), at 58-2-5; Allchin 3/2/99 at 58:9-22.
4. dr Warren-Boulton testified that "if Windows 98 were indeed provided separately and clearly without browser functionality, that is to be understood given what I consider to be a cost, additional cost of providing it separately and given what I understand to be potential demand is that it would be profitable to sell the product separately." However, "due to Microsoft's incentive to control the browser market, what would otherwise be profitable to be sold as a separate product is not being sold as a separate product." Warren-Boulton , 11/24/1998, at 37:3 - 38:2 "An operating system monopolist has a particular incentive not to allow the market, if you will, to have a level playing field." Warren-Boulton, 11/24/98, um 59:10-12.
5. Based on the contemporaneous internal Microsoft documents and other evidence, Professor Fisher concluded that "Microsoft made its decision not to combine its browser and operating system to achieve efficiency, but to foreclose competition." fisherman you § 143; Fisher 1999-01-12 22:21-11:3 (testifies that "It's all over the Microsoft docs. They did this to thwart the platform threat, to prevent the possibility of Netscape and Java taking the lead would lead to a situation where the application barrier to entry into operating systems would be eroded.").

c.Microsoft used its operating system monopoly to force OEMs licensing Windows 95 to also license Internet Explorer 1 and 2

126. Due to Microsoft's very late decision to tie Internet Explorer to Windows to combat the threat posed by the Netscape platform, the initial retail release of Windows 95 did not include Internet Explorer. Microsoft only offered Internet Explorer on a separate "Plus Pack" CD that was distributed entirely separately from Windows 95.

1. James Allchin testified that "Microsoft included Internet Explorer 1.0 in the OEM version of Windows 95, but not in the original retail version. Rather, Internet Explorer 1.0 was included in the retail channel in the Plus! package, a set of software enhancements that Microsoft is offering to customers who upgrade to Windows 95. All in Dir. ¶ 247.
2. David Cole acknowledged that later releases of Windows 95 shipped with Internet Explorer 1.0 and 2.0 on a separate hard drive; the primary hard drive contained the original version of Windows 95, which was commercially available in July 1995. Cole Dep., 1/13/99, at 401:10-402:25.

127. In contrast, Microsoft required OEMs to license a version of Windows 95 that included Internet Explorer 1 and later Internet Explorer 2. Microsoft required OEMs to install Internet Explorer on all PCs that had Windows 95 installed, and contractually prohibited those OEMs from removing the browser.

1. Addendum #2 to the Microsoft OEM License Agreement for Operating Systems with Dell Computer Corporation,-blackened-GX 1121 (sealed).
2. Compaq's John Rose acknowledged that Microsoft's terms of contract required Compaq to include Internet Explorer in the PCs it shipped. Rose, 02/18/1999 at 8:25 - 10:1.
3. Microsoft operating system license agreement with Gateway,-blackened-GX 458, at MS98 0009146 (sealed); GX 652 (Gateway Response to a CID) (sealed); GX 1129 (Packard-Bell Operating System License Amendment No. 1 with nearly identical terms in the "Additional Terms", Sections (a)(1) and (a)(1)(C)); GX 1183, MS98 0009095-0009096 (Licensed from Hewlett-Packard with nearly identical terms in “Supplemental Identification Key” (Sections (q)(a) and (q)(a)(iii)) (sealed).

128. Since the OEMs had no commercially viable alternative to Windows 95, Microsoft managed to force them to agree to the tying agreement, despite the OEMs' clear request for Windows without Internet Explorer.

128.1. For example, Compaq partially removed the Internet Explorer icon to show Netscape; but when Microsoft threatened to terminate Compaq's Windows license, Compaq quickly caved to Microsoft's demands to restore the icon.

128.1.1. In late 1995, Compaq removed the Internet Explorer (and MSN) icons from the Windows 95 desktop on its Presario line of personal computers to offer Netscape.

1. John Rose acknowledged, "I am aware that in early 1996 Compaq removed the Internet Explorer icon (as opposed to the Internet Explorer software) from the standard Windows 95 desktop on its Presario line of PCs for some consumer products." Rose dir. § 25.
2. Rose also acknowledged that Compaq has a strategy of offering Netscape with AOL. Rose 19-02-1999, 64:14-23.
3. See in additionPart V.C.2.a.(1); § 202.2.

128.1.2. Microsoft responded to the removal of the Internet Explorer (and MSN) icons by threatening to terminate Compaq's Windows license.

1. Microsoft's Don Hardwick and Microsoft's internal legal counsel, Peter Miller, both sent letters to Compaq expressing Microsoft's intention to terminate the Windows 95 license agreement between the companies if Compaq did not restore the icons to their original states . GX649; GX650.
2. See in additionPart V.2.a.(1); § 202.3.

128.1.3. In response to Microsoft's threat, Compaq restored the icons on the desktop.

1. On June 21, 1996, Compaq gave in to Microsoft's demands. Celeste Dunn sent a letter to Hardwick stating that Compaq "has made the changes you requested to the Windows 95 desktop on the current version of the Compaq Presario systems. We have replaced the Microsoft Network and Internet Explorer icons on the Windows 95 desktop as executable icons. So they look and work exactly as we originally received them from Microsoft and have the icons for the Microsoft network, the Internet Explorer and the Internet Setup Assistant are placed in their original locations under the Start button on the Windows 95 desktop.” The letter also noted that icons for AOL and for Netscape have moved to the Windows 95 desktop for Presario systems were. GX645.
2. On June 25, 1996, Microsoft sent Compaq a letter withdrawing its intent to terminate Compaq's Windows operating system license agreement based on Compaq's statements. GX301.

128.2. Other OEMs realized they had no choice but to license Internet Explorer with Windows.

1. See above§ 129.

d.Microsoft next tied Internet Explorer 3 and 4 to Windows 95

(1) Microsoft concluded that simply tying Internet Explorer to Windows was not enough to defeat Netscape, and that to win the browser war it must make the separation of Windows and Internet Explorer more difficult

129. Microsoft eventually concluded that its purely contractual relationship between Windows 95 and Internet Explorer would not be sufficient to prevent Netscape from evolving into a serious threat to the applications' barrier to entry. It therefore decided to make the separation of Windows and Internet Explorer more difficult.

1. In a 1996 marketing plan entitled "How to get to 30% Share in 12 Months," Brad Chase wrote, "Shell integration. The Internet is part of Windows. We will bind the shell to Internet Explorer so that all other browsers run is a shocking experience. The shell/browser user model will be the same." GX 684, on MS6 6007119.
2. A review of Internet Explorer 3's marketing plans states: "What we can do that Netscape can't -- Building on our Windows advantages -- Integration, customer acquisition, we can do better -- Other technological advantages (direct, active, etc. ) -- Incentives." GX 488, at MS6 5005758.
3. A Microsoft presentation from January 1996 describes as Response Summary to Cross-Platform Java: Increased Internet Explorer approval, integration with Windows. GX 52, MS7 003270.

(2) To achieve this goal, Microsoft tied Internet Explorer 3 to Windows by merging the code that provides Internet browsing with the code that provides operating system functions, forcing OEMs to license this product and have refused to offer an unbundled option

130. To support its efforts to win the browser war, Microsoft only offered its operating system as part of a software package (which it calls "Windows 95" or "Windows 98") that also included Internet Explorer 3 (and eventually Internet Explorer 4) and where much of the underlying software code that provides web browsing and operating system functionality is contained within the same files. So not only did Microsoft use its monopoly position to force OEMs (and end users) to take the browser with the operating system, but it also made the separation of browser and operating system more difficult. Microsoft did this despite the fact that it had significant software design discretion in how it packaged its browser and operating system products. Microsoft made a strategic design decision and not a design decision driven by demand and cost considerations.

(a) Software routines and files do not need to be developed or distributed together to achieve seamless integration of their functions

131. Microsoft had significant discretion because whether different software products are delivered by one or more code groups is a matter of packaging rather than technology.

131.1. Software is a set of detailed instructions for the various components of a computer. It is usually written in one of many specialized artificial languages ​​designed to be understandable to human programmers, and then "compiled" into a form that interacts directly with the hardware.

1. Professor David Farber testified that a "compiler translates instructions (written in a programmer-efficient language) into the language understood by the computer hardware". color you § 19.

131.1.1. The software code required to provide the functionality of a modern application or operating system can be extremely lengthy and complex.

1. Professor Farber stated: "The applications can be extensive and often involve a very large number of routines." color you § 17.
2. Microsoft estimates that the set of instructions it calls Windows 98 consists of about 18 million individual lines of code. Allchin 2/2/99 at 41:12-17.

131.1.2. To make this complexity manageable, modern software is typically written as a series of discrete routines, each ranging from a few dozen to a few hundred lines of code, that perform specific functions. Large programs are built by "knitting together" many such simple routines with higher-level routines.

1. Professor Farber stated that routines "typically contain tens to hundreds of lines of code each." color you § 13.
2. Professor Farber stated that “every software product is made up of simple, low-level routines that are then called by routines at a higher compositional level. Routines at each level are called by routines at even higher levels until the desired functionality of the end product is achieved. In this way, the entire software is built layer by layer through the use of an often large number of routines, each with a limited complexity. color you § 14.
3. Joe Belfiore stated that "when we develop a good software architecture, we are able to decompose a complex and very complete set of functions into meaningful components, each of which can be self-contained and implement the work that it does on." to do in a very efficient manner. And if you do it really well, then each of these separate components is very useful for other parties who want to benefit from it.” Belfiore Dep., 1/13/99, at 377:2-11.

131.2. Due to its modular structure, modern software is extremely adaptable. Underlying routines can be packaged together in essentially any way the designer chooses.

1. "As a result of this layering," Professor Farber testified, "software has an inherently malleable and modular structure that gives software developers great freedom to combine (i.e., bundle) different functions into software products." Farber dir. ¶ fifteen.
2. Glenn Weadock testified that software designers have great flexibility "in how they can combine the atomic units of code, called subroutines or functions, to create files (or "libraries") on disk... They can create what's called a 'monolith ' create ' program consisting of a single, large file; you can create a highly modular program that uses hundreds of different library files (called DLLs, for Dynamic Linked Library) to contain thousands of different subroutines; or you can choose between them any intermediate degree choose two extremes." Weadock dir. § 29.
3. Belfiore acknowledged that the organization of files in different DLLs can be changed or designed with specific goals in mind. Belfiore Dep., 1/13/99, at 153:23 - 154:4.
4. Hadi Partovi testified that Microsoft moved functionality in one DLL to other DLLs in subsequent versions of the product. Partovi Dep., 1/13/99 at 659:7-23.
5. Weadock testified, "A software designer with access to source code may choose to place an application subroutine in a file that contains operating system subroutines...located in the same library files as other code needed to run Windows 98 or even Windows 95." ." Weadock dir. § 30.
6. Professor Edward Felten testified that SHDOCVW.DLL “is a great example of what I want to say about packaging functions into files. This SHDOCVW file is really a bunch of separate Start Menu features. It includes some features specifically related to web browsing, and it also includes some general interface features. And to talk about this file as if it does one thing or is part of a product is really wrong." Felten, 12/14/98, at 60:18 - 61:2.
7. Professor Felten stated: "Due to the malleability of software, functions can be moved from one DLL to another, or a single DLL can be disaggregated into two DLLs." Felten dir. Section 60.

131.3. Software routines don't have to be in the same file to work perfectly seamlessly together. Except for the extremes, the way a software developer organizes routines in specific files is a matter of packaging rather than technical necessity.

1. Professor Farber stated that "a software developer is free (subject to minimal restrictions not relevant here) to change the partitioning of routines between files at any time without altering their function or correct operation if the files are changed during execution be combined with an end user's computer. Therefore, there is generally no technical reason why a given routine needs to be included in the same file with another routine, as long as the routines are appropriately compiled and linked on the end user's computer.” Farber dir. § 18.
2. Professor Felten testified that as part of the transition from Internet Explorer 4 to Internet Explorer 5, Microsoft split the SHDOCVW.DLL file into two parts, SHDOCVW.DLL and a new file called BROWSEUI.DLL. He also stated that Microsoft moved code from SHDOCVW.DLL to SHELL32.DLL. Felten 10/6/99 at 49:4-15.
3. William Harris testified that software development "is inherently flexible. There are numerous ways to design a program to achieve the same functionality or effect. Likewise, a developer can combine or separate two or more software products or components. That's it typically the goal of combining such products or components in such a way that they appear "seamless" to the user, in other words, the two products appear as one. A good example of this is what Intuit did with Quicken and Internet Explorer." Harris dir. § 82.

131.4. Software routine files do not need to be shipped or even designed together to achieve seamless integration of their functions. Whether the necessary files are shipped along with the operating system, installed by an OEM before a computer is sold in the retail channel, or accumulated by the end user by purchasing separate products from multiple companies, the functionality ultimately delivered to the consumer can be exactly the same .

1. Professor Farber stated: "All routines called directly or indirectly by a program should be available when the program is used. But whether these routines come from a particular software program or another is irrelevant to the performance of the functions so long as the software is written and installed to make the programs work together." Farber dir. § 18.
2. Professor Farber also testified that "Software has an inherently malleable and modular structure that gives software developers broad freedom in combining (i.e., bundling) different functions into software products. This malleability also gives a software developer two related types of design freedom: (1) to integrate two separate CD-ROMs, since the functions on a particular CD-ROM can be integrated with functions on another CD-ROM by an OEM or retail end-user , and (2) to determine which features should be included in software sold as one product and which should be separated and sold as a different product, whether made by the same or a different software developer, for installation together and Use by a retail end user." Farber dir. ¶ fifteen.
3. Professor Felten stated: “The mere fact that two functions are implemented in the same file, or that two products are 'integrated' into a single product, does not imply that they must be implemented in this way; Functions can be separated into separate files, or 'integrated' products can be separated into separate products without loss of capability.” Felten dir. § 31.
4. Professor Felten stated: “In some cases in Windows 95 and IE 4, functions used in web browsing and functions not related to web browsing are implemented in the same executable. That these functions are implemented in the same file does not mean that these functions are inevitably intertwined." Felten dir. § 31.
5. Professor Felten testified that Windows Explorer is configured to allow other, entirely separate applications to display information in its embedded tabs. “This 'Active Documents' specification that Microsoft has released allows anyone to write software that can display anything in an embedded tab like this like Microsoft Word or an ISV application can display anything in that embedded tab implies not that Microsoft Word or this ISV application is part of Windows Explorer. It just says it can display something within that window frame that Windows Explorer puts up. " Felten 12/14/98, 50:4-14.
6. Weadock testified that Novell "developed an HTML-based help system that works with multiple browsers. It works with navigator. It works with Internet Explorer.” Weadock 11/17/98 at 48:14 - 49:5.

(b) Although Microsoft recognized that it could have taken a different approach, Microsoft made the separation of Internet Explorer 3 and Windows difficult, offering only a bundled version to OEMs and end users

132. Although recognizing its possibility to take other approaches, starting with Internet Explorer 3, Microsoft placed the routines that provide both the operating system functionality and the web browsing functionality in the same files and Microsoft refused to give the OEMs the option to combine the two products yourself .

132.1. The OSR 2.0 version of Windows 95, released in August 1996, updated DLLs that provided both Internet browsing and other functionality.

1. Microsoft Vice President David Cole stated that "Internet Explorer 3.0 is an integral part of OEM Service Release 2.0 (or 'OSR 2.0') a wide range of product enhancements in addition to Internet Explorer 3.0, such as: B. support for larger hard drives, improved multimedia support, a variety of network improvements, new power management features and many others." Cole Decl. ¶¶ 41-42 (DX 2220).
2. Weadock testified that a software developer "can place an application subroutine in a file that contains operating system subroutines...Microsoft, for example, decided to design Internet Explorer so that some of the code it uses comes with the same library files as other code needed to run Windows 98 or even Windows 95." Weadock Dir. § 30.
3. Professor Felten testified that there is "other software code specific to IE web browsing that could be deleted from these shared libraries". Felt you. Article 58.
4. Felten testified that SHDOCVW.DLL "is really a bunch of separate functions. It contains some functions that are related to how the Start menu is displayed. It contains some functions that are specifically related to web browsing, and it contains some general user interface functions like Well And to talk about this file as if it does one thing or is part of a product is really wrong Felten 12/14/98 at 60:15 - 61:2.

132.2. Microsoft hasn't offered OEMs a version of Windows without web browsing. Microsoft refused to do this, although it offered Internet Explorer 3 separately for end users in a way that, when combined with an earlier version of Windows 95, offered exactly the same functionality.

1. When asked if he considered the retail version of Internet Explorer 3 "integrated" with Windows 95, Carl Stork replied, "Once it's installed, I consider it integrated... There's been a lot of development going on as we develop our operating system upgrades, would be." the end result an integrated whole. And it's just a matter of deployment." Stork Dep. 8/11/98 at 53:18 - 54:14 (DX 2594).

133. In addition to offering OEMs Windows only with Internet Explorer already installed, Microsoft contractually prohibited OEMs from removing any aspect of the browser from the Windows software package.

1. See abovePart V.B.2.c.; Section 127.

134. Since OEMs have no viable commercial alternative to Windows, Microsoft's refusal to offer an unbundled option forced OEMs to license the browser as a condition of licensing Windows.

1. See abovePart II.A; ¶ fifteen; Part V.B.2.c; Section 130.

(3) Microsoft tied Internet Explorer 4 to Windows in a similar way

135. Microsoft also used its monopoly position to force OEMs to license and distribute Internet Explorer 4 as a condition of licensing Windows.

135.1. Microsoft initially offered Internet Explorer 4 to OEMs on a separate disk from Windows 95 in September 1997, and gave OEMs the option to license Windows 95 without it. Microsoft recognized that Internet Explorer 4 could be distributed separately from Windows and that once added to the system by OEMs or end users it would have the same functionality as if it was originally bundled with Windows.

1. A letter from Microsoft to OEMs dated December 11, 1997 notes that Microsoft originally shipped IE 4.0 to OEMs as part of a "supplemental release of updated Windows features" in late September. GX 1064, for MS6 6013683.
2. When asked if installing the web-available version of Internet Explorer 4 would in any way result in a different experience for the user than if Windows 95 and Internet Explorer 4 were delivered "integrated" on a new computer, Storch replied " I have not heard anything." Stork, 8/11/98, at 48:9 - 52:24 (DX 2594).

135.2. However, by December 1997, Microsoft withdrew this option and instead required OEMs to license and install Internet Explorer 4 as a condition of Windows 95 licensing.

1. GX 418 (Microsoft Terms and Conditions with Toshiba) (sealed); GX 410 (Microsoft Terms and Conditions with Digital Equipment Corp.) (sealed); GX 538 (Microsoft Terms and Conditions with Packard Bell NEC, Inc.) (sealed); GX 625 (Microsoft Terms and Conditions with Micron Electronics, Inc.) (sealed); GX 588 (Microsoft Terms and Conditions with Gateway 2000 Inc.) (sealed); GX 697 (Microsoft's Terms of Business with Sony Corporation) (sealed); GX 1059 (Microsoft Terms and Conditions with Hitachi LTD) (sealed).
2. In May 1997, David Cole wrote to Paul Maritz and Moshe Dunie that "the overriding priority is to gain market share. Bringing IE4 to Memphis is one of them." GX626.

(4)Microsoft also tied the browser to the operating system by refusing to license OEMs and refusing to offer OEMs Windows with Internet Explorer "uninstalled" to their customers.

136. Although Microsoft designed Internet Explorer and Windows to be difficult to separate and forced OEMs to license the combined product, it nonetheless provides users with a ready-made means to remove the browser or to "uninstall". But Microsoft denied OEMs the ability to license Windows 95 with Internet Explorer uninstalled, and prohibited OEMs from offering such a version of Windows to their customers.

(a)Microsoft has configured Internet Explorer to "uninstall" in response to prompting for Windows without Internet Explorer

137. Microsoft configured both Internet Explorer 3 and 4 to "uninstall" Windows 95 through the Add/Remove Control Panel.

137.1. The Uninstall feature removes the end user's ability to browse the Internet using Internet Explorer, but does not adversely affect other software installed on the computer.

1. Professor Felten testified that Internet Explorer 3 can be removed from Windows 95 using Microsoft's Add/Remove control panel. Felt you. ¶¶ 23-24 (explaining the process);see in additionGX 1202 (videotaped demonstration of this process). Professor Felten also testified that this process has "no apparent impact on Windows 95's non-web browsing capabilities". Felten Dir. § 27.
2. A Microsoft Technical Support article entitled "Cannot uninstall Microsoft Internet Products in OSR 2" describes a two-step process to remove IE 3 from OSR 2 using the Add/Remove Programs control panel. The article does not describe any adverse effects of removing Internet Explorer 3 on non-browsing features provided by Windows 95. GX 1367.
3. Professor Felten testified that Internet Explorer 4 can also be removed from Windows 95 using the Add/Remove Control Panel. This operation causes the system to revert to the previous version of Internet Explorer that is installed on the system (or Internet Explorer 3 in the case of an OEM version of Windows 95 that originally came with Internet Explorer 4). Internet Explorer Browsing can then be completely removed from the system by following the "Removal" procedure for that earlier version. Felt you. Article 32; GXs 165, 166, and 172 (Microsoft Knowledgebase articles describing this process).
4. After experimenting with versions of Windows 95 and IE, Glenn Weadock concluded: "There are two convenient ways to remove Internet Explorer 3.02 from a Windows 95 machine (Note that this option does not appear to work for OSR2 user is available, but its effects can be simulated by reinstalling Internet Explorer 3.02 using the downloadable version from Microsoft's website and then uninstalling it as you would on a previous version of Windows 95.) Alternatively, one could reset the system , so it contains the original versions of the DLL files that the Internet Explorer 3.02 installation improves. Although both methods will result in a fully functional Windows 95 system. The second method may result in removing improvements that some vendors of Use application software for their convenience in providing Internet-related functions for Be user." DX 1715, at ATR 22876.
5. Microsoft's Allchin acknowledged that there are "many ways" to remove Internet Explorer from Windows 95. Allchin, 2.2.1999, 16:21-24.

137.2. Microsoft has configured Internet Explorer to "uninstall" in response to requests for an operating system without Internet Explorer. In fact, Microsoft advertised to end users that the Add/Remove control panel could be used to remove Internet Explorer from Windows 95.

1. A web page from Microsoft's website entitled "The IE Challenge" encourages customers to install and use Internet Explorer 3.0, stating: "IE is easily uninstalled if you are using a newer version or just want to get rid of it (and so is Navigator !) ." GX352.
2. The Microsoft website describes "How to Uninstall Internet Explorer 4.0" and lists situations when a user might want to perform this action. GX164;see in additionGX 165 (describes another method); GX 166 (describes how to "manually" uninstall Internet Explorer 4.0); GX 170 (Microsoft technical article describing how to uninstall Internet Explorer 4.0 in Win95 and WinNT using Add/Remove); GX 172 (describes how to remove Internet Explorer 4.0 from Win95 using IEREMOVE.EXE).
3. David Cole testified that Microsoft developed Internet Explorer 3 to add/remove Windows 95 because "users have given us feedback that they would like to choose what they see on their desktop and what they don't see on their desktop, and in this particular case we received feedback from enterprise customers who wanted to prevent access to the internet. So when they buy a new machine from a PC manufacturer, they want the ability to remove easy access to the internet so their employees, you know, are. They don't spend their time on the Internet doing anything." Cole then testified that the Add/Remove feature solved this problem by removing "the obvious, user-accessible means of doing it — running Internet Explorer." Cole Dep., 1/13/99 at 395:7-396:6.

(b) "Uninstalling" Internet Explorer removes the Internet Browser Product

138. Software products routinely share code. A single file—called a dynamically linked library in the case of Windows 95 and 98—can be used by many different programs, regardless of how the file was originally installed on the system.

138.1. An operating system such as Windows makes shared code available for use by all applications on the system. Microsoft designed Windows so that many of the files that perform basic functions, such as B. drawing a window on the monitor, can be used by third-party software applications.

1. Professor Farber testified that software developers “write their programs with the expectation that certain functions can and will be performed by the operating system of the computer on which the software will be used. The connection is called an application programming interface (API)." Farber dir. § 20.
2. Professor Felten testified that "IE web browsing uses code that is specific to IE web browsing and code that is shared (i.e., supports other features on top of IE web browsing) . There is nothing unique about IE web browsing in this regard: virtually all PC applications use application-specific code and shared code that comes with Windows." Felten dir. § 61.
3. Professor Felten testified that "It is a mistake to say that because code is called in some cases, that code is specific [sic] to what is happening in that case. The code that detects keystrokes, for example, is used by almost every application. So if you wanted to infer that this code was part of the web browser, you probably could, but you would also have to infer that it's part of the personal finance package, it's part of the multimedia player, it's part of the word processor, and everything else . You need to take a little closer look to see if this code is being used to run this function or not. " Felten 12/14/98, at 59:6-18; Felten 12/14/1998, 6:22 - 7:14 ("To use a different example than the one I used this morning, another example, would You look at the code that can draw windows in general, draw windows on the screen This code is used by virtually every application, and while every application uses it, it's not really accurate to say that it's part of every application is.").

138.2. However, shared code is not the exclusive domain of operating systems. Application programs can also share code with other application programs and routinely do so.

1. Professor Felten testified: "When I use the word 'platform', at least I just mean that this is software that offers APIs - software that offers services to other software. And whether something is a platform or not doesn't say anything about whether it's part of the operating system, whether it has to ship with the operating system, or anything like that. I previously described that all third-party products would serve as platforms on Windows. Professor Felten also testified that the availability of platform-level services saves work for other software developers "regardless of who offers that platform service and regardless of whether it's bundled with the operating system". Felten, 12/14/98, at 52:13 - 53:5.
2. Professor Felten testified that "many or most application programs today offer APIs and are of course not part of any operating system". Felten, 10/6/99, at 53:25 - 54:2.
3. Microsoft's David Cole acknowledged that "system services," defined as "code modules that provide functionality to other code modules," can be found in any software package, not just operating systems." Cole Dep., 1/13/99, at 390 :2-14.
4. Michael Devlin acknowledged that Rational's products draw on APIs provided by Microsoft applications such as Microsoft Access and even third-party applications, in addition to the APIs provided by Windows. Devlin, 4/2/99, at 41:6 - 42:3.
5. Richard Schell testified that the fact that Internet Explorer contains DLLs does not change his conclusion that it is an application. "Well, there are two problems here. One is: Doesn't the fact that it's made up of DLLs make it an application? And the answer to that is no. A lot of applications are made up of DLLs along with a main program. I mean, you can get every application that's out there. There are many, many DLLs that come with them. You just go down -- get Windows 95, go through the -- you know, with the explorer that you can find DLLs for any application, so the fact that there are DLLs that make up the application doesn't make it an application.The fact that they are randomly distributed with the operating system doesn't make it an application either.Microsoft can, does, has DLLs distributed with the operating system that are helpers for other things, and it's their choice to distribute those things.The unfortunate fact is that Microsoft, as a monopolist, chooses what they distribute, the operating system, whenever it suits them like it, and then you say, well, it's part of the operating system." Schell Dep. 9/15/98 at 252:5-254:3 (DX 2587).

138.2.1. The various applications that make up Microsoft's suite of office productivity software, for example, share much of the code.

1. Robert Muglia testified that Microsoft Office is "an integrated package" consisting of distinct applications known as Word and Excel "designed to be integrated together into Office" but that Microsoft nevertheless distributes Word and Excel separately. "I could say that Office is an integrated package overall. It was designed to be integrated. We have developed a separate word processor which we have derived from the integrated overall office because our customers would like that package and a separate spreadsheet program." Muglia, 02/26/1999, 67:17 - 70:3.

138.2.2. Java virtual machines are shipped in the Java Runtime Environment with Java "class libraries" that are freely available for use by anyone programming in Java.

1. James Gosling testified that Java virtual machines contain a collection of code called Java classes that provide basic building blocks (or "APIs") that Java developers can use in their programs. Gosling 12/2/98 at 47:14 - 49:10.
2. Gosling testified that Sun and other developers also provide additional Java class libraries for free, which must then ensure that they are present on the end user's computer. Gosling 12/2/98 at 56:23 - 57:16.

139. Because applications can share code between themselves and with the operating system, when an application is added to Windows, the corresponding shared code may or may not be loaded, and when the application is removed, shared code is generally left behind.

139.1. When an application is added to Windows, it routinely checks for the presence of any shared program libraries or DLLs that the application calls. Normally, if any of these DLLs are missing or in an outdated version, the application will install them.

1. Weadock testified that applications that modify Windows DLLs are widespread. Weadock, 11/17/98 25:15 - 26:10.
2. Boeing's Scott Vesey testified that "many applications make changes in the Windows system subdirectory." Vesey Dep., 1/13/99, at 153:21-23 (DX 2596).
3. Carl Bass, Autodesk's chief technical officer and vice president of engineering, testified that Autodesk's flagship product, AutoCAD, uses the WININET file included with Internet Explorer 3.0 and 4.0 and that "if the required version is not present or if the version of WININET on the user's PC is older than the version included with AutoCAD, the program will install the version of WININET bundled with AutoCAD." Fischer ¶ 165.

139.2. Conversely, it is generally accepted, including by Microsoft, that shared DLLs should be left behind when software products are removed from a multi-product system.

1. Professor Felten testified that "leaving shared files that perform other functions is the usual way software application programs are removed". Felt you. Article 57.
2. Page 29 of Microsoft's Applications Guide suggests: "User data files should remain on disk, including the following: Resources that other programs may be using, such as shareable DLLs, shareable fonts, and shareable registry entries other applications. If you are unsure whether removing a DLL might harm other applications, you'd better leave it." GX 431, May 29th, 2009.

140. Accordingly, it is common to refer to a product as “removed” from a multi-product system, even if the common code used and distributed by that product and others remains.

1. William Harris stated that "Removing an application does not mean removing all components of the application, in other words, it does not require deleting components shared by other applications. Quicken, like most applications, uses shared software code components or "DLLs". Any time multiple applications share a DLL and you remove one of the applications and the shared DLL along with it, the other application will stop working properly. For example, if Quicken calls a DLL that was being used by another application, such as Internet Explorer and an end user removed Quicken and the shared DLL, the other application would not function properly. However, this is easily avoided by preserving the shared DLL when removing or uninstalling an application." Harris dir. § 86.
2. Professor Felten testified: “The code that recognizes keystrokes, for example, is used by almost every application. So if you wanted to infer that this code was part of the web browser, you could, but you would also have to infer that it's part of the personal finance package, it's part of the multimedia player, it's part of the word processor, and everything else. " Felten 12/14/98, at 59:6-18; Felten 12/14/98, 6:22 - 7:14 ("To use an example different from the one I used this morning, an example "You would look at the code that can draw windows in general, draw windows on the screen. This code is used by virtually every application. And while every application uses it, it's not really accurate to say that it's part every application is.").

141. Because they share code both with the operating system and with each other, software products are typically defined, including by Microsoft, by the functionality they provide to the consumer and not by the code they distribute.

1. Glenn Weadock testified that “both industry professionals and computer consumers view a software product as something that enables a set of related functions, rather than as a collection of specific files. The reviewer typically focuses on the product's functional scope. . . . The list of files that come with the box, or the list of code units that contain those files, is rarely, if ever, provided. Weadock dir. ¶ fifteen.
2. Weadock also testified that defining software products "as a specific collection of files is ultimately impossible when units of code within the same file are shared, either by multiple applications or by a single application and operating system... Attempting to define software strictly as A collection of files is a fruitless exercise when some of those files are doing double duty in different contexts. Weadock dir. § 14.
3. John Rose stated that "Consumers want to buy a personal computer that will enable them to view, communicate with or manipulate graphics displayed on the personal computer screen, whether the data or the software code that responds to the manipulation." , stored on the hard disk of the personal computer. drive, a CD-ROM, or on a computer that may be continents away. For fundamental functions of the computing experience, it is irrelevant to users whether the function is built into application or operating system software." Rose dir. § 22.
4. Jones described Internet Explorer for the Macintosh as "the thing that enables [our customers] to deploy and consume the services and computing on the Internet." Jones also testified that the Internet Explorer 5 package "includes a set of features that people can use to surf the web, that ISVs can target, and ICPs can target." Jones Dep. 01/13/99 at 555:18-556:7.
5. Carl Stork testified, "If you tried to say that the browser just looks at web pages, it really wouldn't be very interesting to end users because the Internet is so much more than that," including "communications installations, things like TCP/IP stacks , dial-up networking, PPP, maybe proxy servers, things like URL resolution, HTML rendering, playing with different formats, whether it's things like active server pages or ActiveX controls, Java outputs, media streams, supporting protocols to Sending and receiving email The ability - possibly the ability to transfer via things like FTP I don't know if I mentioned the ability to have Java applets I mean for an internet experience - for things to be attractive, things must to work seamlessly, which means you need a wide range of features." Stork Dep. 01/13/99 at 759:10 - 760:8.
6. Professor Felten testified that because there is a long code path necessary to perform almost every function in a modern computer, "It would be a mistake to say that because something is on that code path, it is necessarily part of the application that the user is using." Felten, 12/14/98, 57:20 - 58:19.
7. Weadock pointed out that "Microsoft's word processing software product, Word for Windows, ships with a COMCTL32.DLL file, but this file is also used by Windows 95." Weadock dir. § 14.
8. Weadock testified that applications that modify shared libraries or DLLs that come with Windows are common. These applications include Norton Utilities and Microsoft Word. "I don't know anyone who believes that Microsoft Word or Norton Utilities or Microsoft Golf or any of these other various products that may contain updated DLLs are part of Windows. They are separate applications. The fact that an application contains Windows DLL's or DLL updates does not therefore make it part of the operating system." Weadock 11/17/98 25:15 - 26:10.
9. Professor Felten testified that Windows Explorer is configured to allow other, entirely separate applications to display information in its embedded tabs. But "the fact that an entirely separate application like Microsoft Word or an ISV application can display something in this embedded tab does not mean that Microsoft Word or that ISV application is part of Windows Explorer. It just says it can display something in that window frame that Windows Explorer is showing." Felten 12/14/98 at 49:25 - 50:14; Felten 12/14/98 50:15-25 ("F: And does the fact that other applications like Microsoft Word or maybe third party ISV applications can use the embedded window as a viewer to display things say anything about whether that application is part of the operating system or not?” A: No. If so were the case, one would have to safely conclude from this image that Microsoft Word is part of the operating system, and we know that it is not.").

142. Consequently, whether a product, including Internet Explorer, exists on a PC from the end-user's point of view depends on whether its functionality is easily accessible and not on whether some of the code necessary to provide those functions , this allows to be present.

142.1. It is common in the computer industry for the underlying code required to use a software product to be installed on a computer, but in a disabled and unusable form. When the end user actually purchases the product, he or she receives an "activation key" or password that activates the dormant feature.

1. Weadock testified that "It is possible, and sometimes a matter of business practice, to have software that exists on a hard drive or PC in the sense that its code modules are physically present, but do not exist in any practical way from the user's point of view because the software is hidden, protected, or otherwise disabled." Weadock Dir. ¶ 19 (Collecting Examples).
2. Weadock testified that software as a variation on the same theme is often promoted by making trial versions freely available for download from the Internet. This software works for a trial period but then deactivates itself if the user does not purchase an activation key. "Expired trialware or shareware is physically present in the form of bits and bytes on the PC, but once it expires the program is effectively non-existent until the user pays for it." Weadock dir. § 19.
3. Phillip Barrett testified that the way Real Networks' Player and PlayerPlus products connect is fundamentally that there is a player. The PlayerPlus features are activated by a license key obtained by coming to our website, going through a secure form and purchasing that license key." Barrett Dep., 01/13/99, at 112:17 - 113:2.

142.2. Accordingly, it is generally accepted in the industry that a software product does not exist on a given machine unless the end user has access to the functionality it provides.

1. Weadock testified: "The existence of a software product on a given PC - that is, whether or not it actually exists from the customer's perspective - depends both on the presence of the software that enables the functionality of the product and on the means of using it this feature set." Weadock Dir. § 18.
2. Weadock testified that company technical support managers consider "locking down the user-accessible means of accessing a software product (e.g., an icon on the 'Desktop' screen of the user interface or entries in program options menus) is the same Effect, from a support cost standpoint, of removing a program entirely... Since removing the user-accessible means of using a browser product causes the product to disappear from the user's perspective, support costs are significantly reduced. . . . " Weadock Dir. § 28b.
3. Barrett testified that although a user can have the code bits that installed the Player Plus functionality on their computer, "from the user's point of view, what they have is the default player" until they buy one Paid upgrade key because he can't access Player Plus features. Barrett Dep., 01/13/99, at 113:11 - 114:4 (GX 1450).

142.3. Thus, removing the ability to browse the Internet using Internet Explorer effectively removes the Internet Explorer product.

1. Jon Kies testified that "when we offer 'Windows 95' without Internet Explorer in the menu item, customers feel that no browser is installed, whether the actual code is subsurface or UI or not." " Gravel Dept. (played 12/16/98), at 27-1-16.
2. Professor Felten testified: "Once you've removed the ability to surf the web, for the user, surfing the web is - the web browser is gone." Felten, 12/14/98, at 33:5-14.
3. Professor Fisher stated that "A browser consists of the ability to do the things I've described. Well, to the extent that removing the visible access means removes that capability, it could probably be said that without the visible access means there isn't a browser." Fisher, 6/1/99 at 8:19-24. Fisher further testified that Microsoft's association of Internet Explorer and Windows 98 would "disappear" "from an economic standpoint" if "Microsoft removed any ability to access Internet Explorer code or software technology within the Windows 98 product as Microsoft designed it" Fisher 6/1/99 at 9:21-10:4.
4. Microsoft's Cole testified that when a user invokes Microsoft's add/remove process to remove a software product, "at a minimum" they could expect the visible aspects of the program, or updates, or whatever it is happening to stop are present, so could appear to be gone from the end user's perspective." Cole Dep. 1/13/99, 394:4-9 (GX 1465).

(c)Microsoft used its operating system monopoly to deny OEMs the ability to license or sell Windows with Internet Explorer uninstalled

143. Although Microsoft provided an out-of-the-box way for users to remove Internet Explorer from Windows 95 through the "uninstall" capability, Microsoft refused to allow OEMs to purchase or license Windows to their customers with Internet Explorer uninstalled.

143.1. Microsoft denied Gateway's request for a version of Windows from which Internet Explorer had been uninstalled.

1. In a letter to Gateway, addressing Gateway's earlier statement that "We would like IE to be uninstalled (as much code as can be removed without disabling the system)," Microsoft responds by saying that "Internet Explorer technologies are an integral part of Windows 98 and cannot be uninstalled. . . . Consequently, the concept of 'uninstallation' lacks practical meaning in this context." GX 1073, at MS98 0204593.

143.2. Microsoft prohibited OEMs from selling PCs with Windows installed and Internet Explorer uninstalled.

1. See abovePart V.B.2.c; ¶¶ 127, 129, 132, 135.

143.3. Microsoft also prevented OEMs from removing the Internet Explorer icon or other aspects of the browser.

1. See belowPart V.C.1.a; § 177; Part V.C.2.a.(1); Section 199.

e.Microsoft has also tied Internet Explorer to Windows 98

144. Microsoft found that it could better exclude Netscape by continuing its browser-OS merging and further making the products inseparable. With Windows 98 it was like that.

(1)Microsoft concluded that defeating Netscape required tying its browser more tightly to the operating system

145. In late 1996 and early 1997, Microsoft designed, tested and considered shipping a version of Windows 98 that, like Windows 95, was merely bundled with Internet Explorer 3 components and not more tightly 'integrated' with Internet Explorer 4.

1. In December 1996, David Cole and his Internet Explorer development team discussed "decoupling" the Internet Explorer 4 browser from the Windows shell. According to Cole: "After thinking about this for the past few days, it's clear to me (and others) that we need to decouple the browser from ActiveDesktop and shell integration features. ActiveDesktop and the new shell user interface must be a fully optional component for users and companies. The default is the IE 4 browser without the shell enhancements. When the user installs the new shell, they have to learn a few things and pay a performance price. By coupling these elements, I think the overall effort has suffered. We have a compromised new shell design that I believe is trying to be Windows 95 shell compatible. We don't have HTML on the desktop because we're concerned about performance. But even in compatibility mode, performance will degrade and there will be differences that could hold back browser platform adoption... What I really want is a browser and ActiveDesktop that doesn't change Shell32 at all, or at most some cautious [sic] Hooks are added and we ship it everywhere. I don't understand why most of ActiveDesktop cannot run at all without shell changes." A member of the development team replied: "It's good to make such a decision. We need to thoroughly investigate what we're losing [sic] if we don't even update the shell32.dll in the full IE 4.0 install - it's an option we never considered. It will definitely simplify our test metrix and is a good way to reduce development/testing costs." GX 46.
2. In March 1997, Jim Allchin reported to Paul Maritz on the status of Internet Explorer 4 and Memphis, listing options including "Delete IE 4 from Memphis and NT 5. There is strong pressure to do this. We're wasting hundreds of people's time on builds that don't work, etc. Honestly, we might still need to do that to make progress. If we drop it, then we know we're going to end up either without IE 4 in the final have to, or we have to be honest both systems will take maybe half a year because we would have to decide the quality/performance/size later and do beta testing much later.” GX110.
3. In March 1997, Megan Bliss asked Carl Stork if "IE 4 and Memphis are connected at the hip". Stork replied, "We currently have no closure on the issues listed below... IE 4 is not being developed to connect to Memphis at the hip - currently Memphis is an afterthought. It is not one of the four main test platforms for IE4. We are encouraged by the IE4 team to release Memphis Beta 1 with the old shell. We need to reconsider the plans and make sure we have a plan that makes sense. I wouldn't tell anyone today that it could ship an IE4/Memphis integrated product in 1997." GX160.
4. Bill Veghte acknowledged that Microsoft considered shipping Windows 98 with Internet Explorer 3 instead of Internet Explorer 4 due to OEM demand for hardware-related enhancements (such as USB support) that were ready for inclusion in Memphis, before Internet Explorer 4 was ready. He also testified that they released a version of Memphis without Internet Explorer 4 outside of Microsoft. Veghte Dep., 1/13/99, at 783:2 - 786:8 (GX 1477).
5. Chris Jones also testified that Microsoft shipped a pre-beta version of Windows 98 to hardware manufacturers that didn't have Internet Explorer 4 installed. Jones Dep., 1/13/99, at 536:8-537:3.
6. Jonathan Roberts wrote to Allchin, Dunie and Stork in March '97 to discuss options regarding the proposed bundling of Internet Explorer 4 and Windows 98. One of those options was to "pair Memphis and IE and ship Memphis in July/August and with IE in the OEM channel when it ships." Carl Stork replied, "Right now IE4 is so immature (and big, slow and vulnerable for compatibility errors), that our self-hosting process is threatening to become meaningless to the OS. We're also finding increasing resistance from the team to install the builds because things aren't working. I've gotten to a point where I don't recommend anything with IE4 built-in to release under the name of a Memphis Beta Customers would experience too many problems and the performance would also be unacceptable - it would be so bad as to damage the reputation of Microsoft and of Windows... More importantly, at this point Validity stands in the way of development testing and repro work for Memphis." Roberts summed up the exchange: "I'm depressed. I didn't realize things were going so badly with IE. That makes the following trade-off very painful, hardware support for Spring machines and some TCO advantages over IE penetration. " GX 355, for MS7 003001.

146. However, Microsoft eventually concluded that in order to win the 'browser war' it needed to create a stronger bond between Internet Explorer and Windows than its OEM licensing practices achieved with Windows 95. The contemporaneous documents show that Microsoft's decision to further bind Internet Explorer and Windows 98 was not driven by the technical merits of such integration, but by a strategic desire to increase Internet Explorer's market share over Netscape Navigator.

1. In December 1996, James Allchin wrote to Paul Maritz in an email entitled "Concerned about our future": "Make sure we use Windows. I don't understand how IE will win in terms of packaging and product... Maybe being free will help us, but once people get used to a product it's hard to change... Mine The bottom line is that we need to use Windows more. Treating IE as just an add-on to Windows, which is cross-platform, we lose our biggest advantage - Windows' market share." GX47; GX 655, at MS7 003375 (One of the "Goals for Memphis Release" is "to provide a marine vehicle for strategic Internet components").
2. On January 2, 1997, Allchin wrote to Maritz, "You see browser sharing as task 1...I don't think we're going to win on our current path. We're not using Windows from a marketing perspective and we're trying to copy Netscape and make IE a platform. We're not playing to our strength - that is, we have an installed base of Windows and we have a strong OEM supply channel for Windows... I'm convinced we need to use Windows... That's the only thing they don't have... We need to be competitive with features, but we need something more: Windows integration... If you agree that Windows is a big advantage, it quickly follows that we are not investing enough in finding ways to connect IE and Windows." "Memphis has to be an easy upgrade, but most importantly it has to be stunning in OEM shipments for Netscape to never gets a chance with these systems." GX48.
3. Maritz responded to Allchin's January 2, 1997 (GX 48) e-mail by agreeing "that we must make Windows integration our fundamental strategy" and suggesting that Microsoft coincide the release of Memphis (Windows 98) with the IE4 would "sync". GX 49. Allchin agreed with this plan, arguing that instead of "letting people think about it, Microsoft should use Nav/Communicator vs ZAW [Zero Administration Windows] etc. as a reason for using the IE." GX 50. Allchin also argued that integration "is the only thing that makes sense, even if OEMs suffer" GX50.
4. In a January 1997 internal MS presentation on the "NC and Java Challenge", in a section called "Summary of Responses", the first bullet point is "Increasing IE - Integration with Windows". GX 51, MS7 005536.
5. In an email to Bill Gates and Paul Maritz on February 18, 1997, Allchin wrote: "I am convinced that the path we are on is the wrong one towards the browser battle, where we have only small market shares, instead of focusing the fight on getting things into Windows where we have market share and a great distribution channel." GX354.
6. Christian Wildfeuer, reporting the results of a focus group study on the upcoming release of Windows 98 in February 1997, noted that most of the study group were "Navigator users". They said they wouldn't switch, didn't want to download IE 4 to replace their Navigator browser. However, once everything is in the OS and right there, built into the OS, 'in their face' so to speak, then they said they would use it because there was no need to use anything 'individually.' The startling realization is this: to get them to move away from Netscape, we have to get them to move to Memphis... It seems clear that it will be very difficult to increase browser market share based solely on the merits of IE 4 more important to leverage the operating system asset to get people to use IE instead of Navigator." GX 202, at MS7 004343.
7. Jonathan Roberts wrote to Allchin, Dunie and Stork in March 1997 to discuss options regarding the proposed bundling of Internet Explorer 4 and Windows 98 into the Spring line of machines and generating about twenty million dollars more in RUP upgrades compared to the Promote IE 4.0 penetration and a simpler customer offering. Based on my understanding of business priorities, let's settle on the plan of record and keep it in sync. . . Hold Memphis for IE 4.0 and ship in August-December. Pros: This is absolutely the best way to push IE 4.0 penetration. Customer feedback, including feedback from over 200 people in over 15 focus groups, shows that people want the two when they're apart, Navigator has a good chance of winning. In a browser match, victory goes to the incumbent." GX 355, at MS7 003000.
8. In a January 7, 1997 email to Allchin, Maritz argued that Microsoft should hold back Windows 98 for IE 4 even if it pushed the release date to August or September. “The main reason for this is the fight against Netscape. We need to position the browser to make it disappear and integrate deeper with Windows. The stronger way to communicate this is to have a new version of Windows and make a big deal out of it. We will therefore position Memphis as Windows 98. IE integration will be the most compelling feature of Memphis." GX53;see in additionAllchin, 2/3/98pm at 27:12-17 (Agrees with email from Maritz).
9. Kumar Mehta reported in March 1997 that "based on all the IE research we've done", he feels "it's a mistake to release Memphis without bundling IE with it". Because "IE users are more likely than other browser users to get it with their computers...we would effectively take away the distribution channel from almost a quarter of all IE users." Additionally, “80% of those who don't use IE say they don't plan to switch to it. This means that if we take IE out of the operating system, most Navi users will never switch to us. Also from all our research on IS and web pros we know that ultimately they expect us to win the browser war because Ie will be bundled with the operating system and they will have no real reason to buy the navigator." Jonathan Roberts replied that Mehta's report "confirms why it's important to keep IE at Memphis" GX205; GX 736, at MS98 0128504.
10. In an email to Allchin on March 20, 1997, Roberts wrote, "Internet Explorer has a much better chance of winning once it's built into the operating system of the most dedicated Netscape user." GX 355, at MS7 003002.
11. In June 1997, Chris Jones sent Bill Gates a memo entitled "How to get to 30% share in 12 months". Among other things, Jones wrote: "We will bind the shell to Internet Explorer, so running any other browser will be a stuttery experience." GX 334, for MS98 0104683.
12. In July 1997, Microsoft executive Moshe Dunie commented on a proposal to stop shipping the Windows 98 shell with Internet Explorer 4 after the release of Windows 98, noting that such a proposal "would certainly increase sales of Win98 upgrades significantly Browser share counterargument... But it's an intriguing thought..." He received the following response from Paul Maritz: "It's tempting, but we must remember that it's still possible to use browser share to increase to 50% (or more) the big goal." (Ellipses in the original). GX113.
13. In December 1997, Allchin wrote to Cole, Dunie and other executives: "We have multiple goals from my perspective as a company - no matter where the work is done. That's why it's tough. We need to keep beating them Netscape on the browser. This means we need to consider downlevel and xplatform solutions. Also, it's possible (although that's yet to be proven for me) that we might need to ship more than once a year. At the same time, we need more integration with Windows - both technically and marketing-wise. We need this for business reasons (ignoring the DOJ's perception issue. I see this as critical. It's a difficult balance, but I feel we need to make things much more Windows-centric while still achieving the other goal versus Netscape ." GX480.

(2) To achieve this goal, Microsoft has made the separation of the browser and the Windows 98 operating system more difficult, including eliminating the "uninstall" feature and preventing users from setting other browsers as the default

147. To achieve its goal of further hampering browser competitors, Microsoft made the separation of Internet Explorer 4 and Windows 98 more difficult.

147.1. With Windows 98, Microsoft continued to ship Windows and Internet Explorer in a form in which the underlying web browsing routines and other routines were already combined in the same DLLs.

147.2. The only functional difference between Windows 98 on the one hand and Windows 95 in combination with Internet Explorer 4 on the other hand is a few features that Microsoft could easily ship separately and which can now be obtained through the combination of Windows 95 and Internet Explorer 5.

1. See belowPart V.B.3.c.(1).(b); ¶¶ 159-161.

147.3. However, there are other differences between Windows 95 and Windows98. Among other things, Microsoft eliminated the end user's ability to "uninstall" Internet Explorer from Windows 98, although the uninstall option was retained for many other features.

1. Professor Felten testified that although the web browsing experience in Windows 95 OSR 2.5 and Windows 98 is very similar, Microsoft does not provide a mechanism to remove Internet Explorer web browsing from Windows 98. Felten Dir. ¶¶ 35-37, 52.
2. GX 1366 is a series of screenshots of Windows 98's "Add/Remove" feature, showing dozens of features that can be added or removed by the user, including but not limited to Internet tools, desktop wallpaper, mouse pointer, dial-up networks, virtual private networks and hyperterminals. Internet Explorer is not one of them.
3. James Allchin testified that Microsoft provides a ready-made tool for removing many files and features that Microsoft considers "built-in" features of Windows (Allchin, 2/2/99pm, at 5:2-5), such as: the TCP/IP stack (Allchin, 02/02/1999, 19:12-15) and dial-up networking, Netmeeting and the personal web server (Allchin, 02/02/1999, 10:3 - 11:11).
4. When asked to estimate "how many of the components of Windows 98 can be easily removed using procedures Microsoft provides," Allchin testified that "if you take all the approaches for, the number will be quite high already know which drivers or file systems you are using and so on. You know, one of the great things about Windows is that it's so configurable...” Allchin 2/2/1999 at 11:12-22.

147.4. Microsoft was aware that its customers wanted the ability to remove web browsing functionality from Windows 98, but still chose to eliminate this feature in order to force the adoption of Internet Explorer.

1. Gateway specifically asked Microsoft to provide a way to uninstall Internet Explorer from Windows 98, in part because it was "concerned that installing the full MS product (including channels) would result in much slower system performance if the customer did so." selects an alternative browser Full install on IE4." Microsoft declined. GX 1073, at MS98 0204593 (letter of 4/24/98 from Microsoft to Gateway).
2. . In response to a CID, Gateway stated the following:-blackened-GX 652, at ATR 30008 (sealed).
3. Joe Belfiore stated that he was concerned that omitting an add/remove option for Internet Explorer in Windows 98 would create a "customer satisfaction problem," in part because some users would have applications that weren't compatible with Internet Explorer 4. Belfiore Dep. , 1/13/98, 366:8-11.
4. OEMs unanimously believed they had no choice but to license Windows 98. Ransom testified that Packard Bell must "preinstall 100 percent of its consumer devices with Windows 98" because it is "the only viable choice." Ransom (played 12/16/98), at 68:25 - 69:5;see in addition abovePart II.A; § 15.1 (Collection of Similar Statements by Compaq, IBM, Gateway and Hewlett-Packard Executives). In addition, Microsoft's Windows 98 licenses prohibit OEMs from removing Internet Explorer or its icon. GX 1190 (sealed); GX 660 (sealed); GX 458 (sealed);see in addition belowPart V.C.1.a; ¶ 177 (collecting citations to other OEM licenses). Therefore, OEMs were forced to distribute Internet Explorer.

147.5. Microsoft also designed Windows 98 to override the user's default browser selection under certain circumstances.

1. Professor Felten stated: "In all versions of Windows released before OSR 2.5, the default browser is activated whenever the user wants to start surfing the Internet." Felten dir. €50
2. However, Professor Felten also testified that in some cases “Windows 98 uses IE 4 web browsing even if the user has specified a different browser as the default browser. There are several situations where this can happen After the Help facility described in Section 36 and selecting the option to click the "Support Online" link, the system will always initiate IE web browsing instead of launching the default browser to go to the Support Online website. Second, certain menus in Windows Explorer contain URL links created by Microsoft. A user selecting the "Homepage" or "Browse Web" URL shortcut from the Go menu in Windows Explorer always initiates IE web browsing to go to a specific website, rather than the default browser Third, if a user places a web page on the Active Desktop and then clicks a web link on that page, that action will again initiate IE web browsing, even if the user has designated a different brow to serve as the default browser. Finally, Windows Explorer allows a user to type a command in the address bar to search the web. Typing the word "Go" followed by a phrase or word that a user wants to search for on the web initiates IE web browsing to display the answer to the search query, regardless of the user's choice of default browser. This is an example of what the industry calls "hard-coding", in this case forcing the use of IE web browsing." Felten Dir. ¶ 51.
3. Both Professor Felten and Professor Farber described the significant problems for PC users caused by Internet Explorer ignoring or overriding the choice of Navigator as the default browser. For example, Professor Farber testified that "the way Microsoft packages and distributes Internet Explorer has caused real problems. My personal experience I think is a good example of this. I've tried using Netscape, I install it and keep seeing IE pop up in weird places and it bothers me. As a product, therefore, it is very difficult to use. I'm not a person who wants to use multiple browsers. I'm concentrating on one, such as I'm concentrating on a word processor. It's just too difficult to use one, and then when you suddenly fail, you're faced with another.” Farber, 12/9/98, at 53:3-16; Felten 12/14/98 at 27:11-19, 29:11-17; Felten 12/14/98 at 14:7-11.

3. There is no technical or commercial justification for Microsoft to link Internet Explorer and Windows

148. Microsoft argues that the forced licensing of Internet Explorer is justified by a number of advantages that depend either on its so-called 'integrated' design or on its contractual limitations. However, contemporary evidence shows that Microsoft's behavior was motivated by a desire to thwart competitors and protect its operating system monopoly rather than benefiting consumers, and other evidence shows that Microsoft's justifications are bogus.

a.Microsoft's "welding" of its browser has thwarted the significant demand for Windows without an Internet browser

149. First, Microsoft's refusal to offer either Windows 95 or Windows 98 without web browsing, and its contractual ban on OEMs from supplying such a product, has frustrated consumer demand for a browserless operating system.

1. See abovePart V.B.1.b.(4); Section 111.

150. This reduced the value of Windows for customers who preferred a browserless operating system. As detailed below, Microsoft's tying agreement has caused significant inefficiencies and consumer harm to a number of customers.

1. dr Warren-Boulton stated, "Even if Internet Explorer is preferred by some users, not all users will prefer it. Buyers will also take an unwanted product or make it difficult or expensive for them to obtain a related product they want." Warren-Boulton Dir § 158.

b.There is no technical reason for Microsoft's refusal to meet demand for Windows without web browsing

151. There is no reason - other than its campaign to protect its operating system monopoly from flagging browser competitors - for Microsoft's steadfast refusal to meet demand for Windows without Internet Explorer. Microsoft could easily have offered the option of Windows 95 or 98 without web browsing, or allowed OEMs to offer it.

(1)Microsoft could have easily deployed Windows 95 without web browsing

151.1.First, no technical reason can explain Microsoft's refusal to license Windows 95 without Internet Explorer 1 or 2.

151.1.1. The version of Internet Explorer (1.0) that Microsoft shipped with the "Plus Pack" and the original OEM version of Windows 95 was a separate executable program file provided on a separate disk. Web browsing could thus be installed or removed without affecting the rest of Windows 95's functionality in any way. The same was true for Internet Explorer 2.0.

1. Professor Felten testified in relation to Windows 95 that he "found that removing IE1 from that version of Windows was as simple as removing the IE1 executable file (sometimes referred to as the 'executable') and removing all icons on the Windows Desktop and Windows Start menu items related to IE1 can be achieved. After that, a user can no longer browse the Internet without adding other software to the system, but the functionality of the operating system remains unaffected." Felt you. ¶¶21, 22 (same for IE2).
2. In a July 3, 1995 notice to OEMs, Microsoft stated that it had "decided" to include Internet Explorer (among other things) in the OEM version of Windows 95. Microsoft acknowledged that it "would have been possible for the OEM to integrate these tools into their manufacturing process themselves," but Microsoft said it preinstalled Explorer to "save any OEM the time and hassle" doing this would require. GX36.
3. Glenn Weadock testified, "The operating system does not require a browser to function, as demonstrated by Microsoft when it released the original retail version of Windows 95, which, as we have discussed, does not include a browser." Weadock, 11/16/1999, at 92:16-22.

151.1.2. Microsoft has also created an easy way to remove Internet Explorer 1.0 and 2.0 from Windows 95 after they have been installed, using the Add/Remove feature on the Windows 95 "Start" menu. Again, this shows that there is no technical reason for Microsoft's refusal to add Web browsing to Windows 95.

1. Professor Fisher testified that “Microsoft has argued that it must force OEMs to adopt IE since the absence of IE can undermine the quality of the operating system to the detriment of users. However, several facts contradict this proposal. For example, Microsoft provided ways to remove IE in Windows 95 - a feature that most likely would not have been provided if it resulted in a degradation in the quality of the operating system." Fischer dir. § 159.

151.2.Seconds, there is no technical reason for Microsoft's refusal to license Windows 95 to non-web browsing OEMs, either by providing a version of Windows 95 with Internet Explorer 3 or 4 uninstalled, or by allowing OEMs to install Internet Explorer 3 or 4 to uninstall.

151.2.1. Microsoft's decision to provide end users with an "uninstall" procedure for Internet Explorer 3 and 4 and to promote Internet Explorer based on this feature shows that there was no technical or qualitative reason to deny OEMs the use of the procedure. Microsoft would not have allowed end users to uninstall Internet Explorer, and consumers would not have requested such an option if this process fragmented or disrupted other functionality of the operating system.

1. Professor Fisher testified, "Microsoft provided ways to remove IE in Windows 95 - a feature that most likely would not have been provided if it had resulted in a degradation in the quality of the operating system." Fisher dir. Section 159.
2. Compaq's Celeste Dunn testified that when Compaq planned to remove the Internet Explorer and MSN icons from the desktop, Microsoft tested Compaq's Windows configuration and found no technical problems. Dunn Dep. 10/23/98, 187:12-25 (DX 2566).

151.2.2. Microsoft's January 1998 agreement to provide OEMs with an uninstall option also shows that there was never any real technical justification for Microsoft's refusal to license Windows 95 with Internet Explorer "uninstalled".

1. Jon Kies testified that Packard Bell/NEC took advantage of the workaround agreed in January 1998 to offer some of their PC models without the Internet Explorer Kies Dep. (played 12/16/99), at 6:11-19.
2. Professor Fisher testified that “OEMs would not negotiate the removal of IE if the operating system was compromised because a malfunctioning computer would reflect badly on the OEM and would likely increase the number of customer service calls; likewise, large customers would not request an operating system with IE removed if they felt that this system would be adversely affected." Fischer dir. § 163.

(2)Microsoft could have easily shipped Windows 98 without web browsing and allowed OEMs and users to "uninstall" the browser.

152. As with Windows 95, there is no technical justification for Microsoft's refusal to meet the demand for a browserless version of Windows 98.

153. As Professor Felten pointed out, Microsoft could easily provide a non-browsing version of Windows 98 to which users could add the browser of their choice. In fact, Professor Felten's prototype removal program, although only a concept program developed in a relatively short period of time and without the benefit of Microsoft's in-house expertise, gives exactly this result when run on a computer with Windows 98 installed.

1. Professor Felten testified that his "analysis shows that it is possible for Microsoft to split Windows 98 into two programs, one that replicates the functionality of the current version of Windows 98 except that Internet surfing is removed, and another that Browsing IE 4 adds the first program, so an OEM or user installing the two programs one at a time would end up with software functionally identical to today's version of Windows 98. Microsoft, with its intimate knowledge of its own products little difficulty in accomplishing this task." Felten dir. Section 66.
2. Professor Felten also testified that his "prototype removal tool removes Internet Explorer. It removes the ability to browse the Internet and prepares the computer to accept installation of another web browser was removed and nothing was put in its place, then all web browsing functions and features will be gone; and in particular the ability to view a webpage in an embedded tab is gone. . . . Felten, 12/14/98, at 46:14 - 48:2.
3. Professor Felten testified that his "programs show that Microsoft can deliver a version of Windows 98 with the IE web browser removed, and they can deliver it in a way that leverages the non-web browsing functionality of Windows 98 is not affected. . ...Microsoft can then create an IE installer that actually returns the system to what it is in today's Windows 98." Felten 10/6/99 at 9:4-12.

154. Professor Felten's program does not affect the performance or stability of Windows 98 in any way.

154.1. Professor Felten has repeatedly and credibly testified that he had used a Windows 98 machine running his program for more than seven months with no discernible loss of performance or stability.

1. Professor Felten testified: "I have to tell you that I have been using a PC that has had Internet Explorer removed and Netscape replaced for seven and a half months - that's since April 23rd^rdApril - on my primary desktop computer at work. And since I'm a computer scientist, I use this machine quite extensively. I haven't seen any problems during this time. My primary desktop computer at home I've been using Windows 98 in the same configuration with remote web browsing and Netscape since mid-August. My testimony in this case was written on this machine and I have never seen a problem - other than the Windows Update problem I described to you earlier, Your Honor." Felten 12/14/1998 at 42:13 - 43 :2; Felten, 12/14/98, at 43:15-20 (same); Felten 12/14/98 at 52:1-17 (same).

154.2. Professor Felten also testified that he ran several performance test programs provided by Microsoft and found that removing Internet Explorer from Windows 98 via the prototype removal tool did in fact result in a modest performance gain.

1. Professor Felten testified: "Microsoft gave us a set of ten performance measurement programs that they use to measure the performance of various Microsoft software, specifically to measure performance related to what Mr. Allchin calls the core IE DLLs." Felten, 6/10/99pm, at 13:17-22.
2. Professor Felten testified that "Broadly speaking, these performance tests found that removing the Internet Explorer browser from Windows makes Windows a little faster." Felten, 6/10/99 at 14:17-19.
3. Professor Felten testified that “there were ten tests and on one of the tests there was no statistically significant difference between the two systems. In six of the tests, there was a performance improvement due to the removal of Internet Explorer - the Internet Explorer browser. And three of the tests experienced a slight performance hit due to the removal of the IE web browser. And I want to point out that the three performance penalties are significantly smaller than the six performance improvements in the other test. So overall what we're seeing is a slight performance improvement due to the removal of IE." Felten, 6/10/99pm, at 15:2-13.
4. Professor Felten testified that Windows 98 uses less dynamic memory (RAM) after running the deprototyping, which has a positive impact on system performance. Professor Felten testified that “in the browser, the amount of memory allocated after boot was 35.6 megabytes. And in the other scenario where the IE web browser was removed, the amount of memory allocated was 29.8 megabytes. That's a difference of about six megabytes, or about 20 percent, in Windows memory usage." Felten, 6/10/99 at 20:16-21.

154.3. Most of the performance issues that Microsoft claims with Windows 98 after running Professor Felten's program were merely confirmation that Professor Felten had indeed successfully removed Internet surfing from the system. For example, Microsoft argues that Professor Felten's program deprives the user of the ability to type a web page from the "Start" menu or place content from a web page on the "active desktop." Felten 12/14/98 at 29:1-8; Felten, 12/14/98, at 30:19 - 31:7. Such observations merely show that Professor Felten's program is doing what it is supposed to be doing.

154.4. Microsoft tried to demonstrate that Professor Felten's program degrades the overall performance of Windows 98 in a way unrelated to web browsing, but the video demonstration that Microsoft offered as proof didn't prove what it was supposed to prove pretended.

154.4.1. On the videotape, Microsoft employee Yusuf Mehdi performed a guided demonstration of a Windows 98 machine connecting to Microsoft's Windows Update Web site. DX 2161. Mehdi said Microsoft "didn't make any other changes to this computer or Windows 98 other than Dr. To carry out Felten's program as described in his report and written direct testimony". DX 2161 (played 2/1/1999), at 5:13-20. He also said that the computer took an unusually long time to complete this process because "performance decreased due to running the Felten program."

1. Mehdi explained: "As you can see at the bottom of the page here, we actually connect to the internet and pull that data. However, it takes a very long time - an unusually long time - to access this website. This is a result of the performance degradation experienced by running the Felten program." DX 2161 (played 2/1/1999), at 7:12-18.
2. Mehdi explained that "Dr. Felten has chosen to allow customers to access this one website, which is being built using IE code in Windows 98, including MSHTML, URLMON and WININET, among other files. Dr. Felten's making changes but access is very slow." DX 2161 (played 2/1/99), at 7:21-25.
3. Mehdi explained: "As I have already shown how slowly the Windows Update site loads, the performance of the government version of Windows 98 is much slower." DX 2161 (played 2/1/1999), at 15:17-20.

154.4.2. In fact, however, almost nothing about the alleged demonstration was accurate or truthful.

154.4.2.1. First, Microsoft's witness for the videotape, James Allchin, acknowledged that there were serious discrepancies in the appearance of certain title bar screens on the "demonstration PC" in the video. This initially gave him the impression that Professor Felten's program had not actually run on this machine, contrary to what was claimed in the video, although he later gave a different explanation.

1. CompareGX 1688 (Screenshot of an unmodified Windows 98 machine attempting to access Windows Update with "Microsoft Windows Update - Microsoft Internet Explorer" displayed at the top)withGX 1689 (screenshot from a machine running Professor Felten's program, showing "Microsoft Windows Update - Windows 98" at the top),andGX 1692 (Screenshot of DX 2161, shows "Microsoft Windows Update" above).
2. In cross-examination, Allchin first testified that Professor Felten's program apparently hadn't even been shown on the projection machine. Allchin, 2/2/98am, at 27:8-18 (testifying that "From what I'm looking at right now, I believe this was done on a pre-Felten system, although the point still stands . It's having performance issues and Windows Update isn't working, but I think from what I see here they filmed the wrong system."); Allchin, 02/02/1998, 28:23-24 ("In this particular case...I didn't think the Felten program was done").

154.4.2.2. In addition, as Mr. Allchin conceded under cross-examination, Microsoft's account was that it "had made no other modifications to this computer or Windows 98 other than to run Dr. Felten's program, as indicated in his expert report and written direct testimony." was incorrect (DX 2161 (played 2/1/1999), at 5:13-20). On the contrary, the videotape demonstration appears to have been put together by stitching together footage from several different machines, some of which had both extensive additional software installed and several inexplicable manual changes to the Windows registry.

1. Allchin testified that “I believe some of these machines had Office installed, for example, and some of them had some of the other browsers that were ready. They weren't all the same machines, and they didn't all do exactly the same thing." Allchin 2/2/99 at 29:24 - 30:5.
2. When asked if "some of the machines -- at least sometimes someone manually changed the registry," Allchin replied, "Yes. There's a part of the film that shows they apparently repeated the test a couple of times filming, and they had added - it's very easy to add empty entries to the registry." Allchin 2/2/99 at 36:5-23.
3. Allchin acknowledged that if you installed Felten's program on a virgin machine and did nothing else, the registry changes shown on the tape would not be there. Allchin Dept. (played 2/2/98), at 40:16-21.
4. Allchin admitted that the statement on the tape that nothing was done on the machine but Professor Felten's program was not true because "they had gone through a rehearsal". Allchin, 2/3/99pm, at 57:5-19.
5. Allchin acknowledged that although the narration on the videotape claims that "we have not made any other changes to this computer" other than running Professor Felten's program, in fact the number of icons visible on the desktop changes several times during the video what it is clearly demonstrated that changes have been made or that more than one PC must have been used for the so-called "demonstration". Allchin, 2/3/99pm, at 64:3-19.

154.4.2.3. Allchin also conceded under cross-examination that under the circumstances allegedly depicted in the video it was not technically possible anyway to measure the type of alleged reduction in performance. The entire premise of the demonstration was therefore inaccurate and misleading.

1. Allchin 02/02/1999 21:17-22 ("The test that we know of shows that the performance must be performed under controlled circumstances. You cannot demonstrate the performance slowdown when connected to the Internet. You can only If you prove it in a controlled situation, we test the derating.").

c. There is no technical reason for Microsoft not to meet the demand for Windows 95 or Windows 98 without web browsing by offering a further separation between browser and operating system

155. Apart from the simple possibility of allowing OEMs and users to "uninstall" Internet Explorer, there is no technical reason for Microsoft's refusal to offer OEMs and users the option of a further separation between browser and operating system.

(1)Microsoft could easily ship versions of Windows 95 and Windows 98 without the routines that make Internet browsing possible, and still offer users the same purported benefits of its "built-in" features and design

156. Although Microsoft claims that removing the browsing-only routines from Windows 95 or Windows 98 would deprive consumers of the benefits of its 'integrated' design and features, that claim is deeply flawed. First, such "integration" could never bring meaningful benefits to consumers who don't want to surf the Internet with Internet Explorer. Second, supplying an unbundled version of Windows 98 to these consumers would not prevent Microsoft from offering an "integrated" version to those consumers who wanted it. Because of the adaptable nature of software, the "integration" required to achieve such benefits could just as effectively be achieved by OEMs or end users installing a separately sold product. Whether Microsoft calls this product a "browser" or an "operating system upgrade" is immaterial from both a technical and commercial perspective.

(a) Bundling the browser with the operating system is inefficient for users who don't want the browser

157. Bundling browsing-only routines in large system DLLs is inefficient for users who do not want web browsing functionality.

157.1. Microsoft has never claimed (and could not plausibly claim) that having browse-only routines in its large DLLs improves system performance, even if those routines are never called from any code path on the system. Routines that are not running are just dead weight and affect system performance.

1. Professor Felten stated that: "Any code in a DLL that supports only one function of the DLL may be removed without compromising other functions of the DLL. For example, code that supports only IE web browsing functionality may be removed without compromising the non-web browsing functionality of Windows 98." Felten dir. § 62.
2. See belowPart V.B.4.c.(1); Section 170.

157.2. It can therefore be efficient to place routines used only for web browsing in large system DLLs only if the system is designed to provide web browsing functionality. And for the same reason, it is not inefficient for Microsoft to disaggregate browsing-only routines from files like SHDOCVW.DLL in the versions of Windows 98 that it ships without web browsing functionality.

1. Professor Felten testified that Microsoft split certain DLLs from Internet Explorer 4 to Internet Explorer 5, which "obviously shows that these DLL files are not atomic and are not fixed in the same DLL and therefore we cannot separate them incorrect." Felten, 10/6/99, at 51:23 - 52:2.
2. Hadi Partovi testified that Microsoft moved functionality in one DLL to other DLLs in subsequent versions of the product. Partovi Dep., 1/13/99 at 659:7-23.
3. Professor Felten testified that SHDOCVW.DLL “is a great example of what I want to say about packaging functions in files. This SHDOCVW file is really a bunch of separate functions. It contains some functions related to the display of the start It contains some functions specifically related to web browsing and it also contains some general user interface functions. And it's really wrong to talk about this file as doing one thing or being part of a product. Felten, 12/14/98, at 60:18 - 61:2.

157.3. In fact, bundling routines into large system DLLs creates significant inefficiencies for users who do not wish to take advantage of the functionality provided by those routines.

157.3.1. Installing software on a system that the end user does not want and will not use degrades performance by unnecessarily consuming system resources, increasing the likelihood of software conflicts, and increasing user interface complexity. These problems are exacerbated when the unwanted software is integrated into the operating system, since the operating system code is often loaded into the "working set" in dynamic memory, while unused applications typically lie dormant on the hard drive.

1. See belowPart V.B.4.c.(1); ¶¶ 164.1-2.

157.3.2. Microsoft was aware that its decision to "integrate" Internet Explorer into Windows 98 would severely impact Windows 98's performance for those users who wish to browse the Internet with Netscape Navigator or not at all.

ISee abovePart V.B.2.3; ¶¶ 145-47.

157.3.3. As Microsoft acknowledges, bundling new features into the operating system can also make testing more difficult and slow the rate of innovation.

1. In August 1996, Hank Vigil emailed Paul Maritz titled "Gravity or Anti-Gravity," stating, "Once something is pulled into the operating system, the demands for quality, compatibility breadth, and scope mean that there are many dependencies and trades." arise -offs happen. The end result is that the monolithic code base is shipped in long cycles after many tests. There is also a tendency to be all-inclusive: to be everything for every consumer. Despite the benefits of getting more and more functionality built into the operating system, there seem to be areas that could/would benefit from moving away from the operating system so that they can develop richer functionality faster. This allows groups to discover customer needs in a way , which is difficult to redefine and exploit when teams believe in this operating system. Gravity is the central law." GX 157, at MS98 0167387.
2. Commenting on the email, Brad Silverberg agreed: "This is a very good and important point. For me, the optimal strategy is something in between: key components evolve and improve and are deployed independently of OS release cycles, and then sync when there is an OS release, providing additional integration. Clearly, the requirements of many components require that they be released in much faster cycles than the operating system itself. The most obvious example is the browser. Yes, it is integrated into the operating system, and ie4 integrates deeply enough to take over the operating system's user interface; but it has a much faster release schedule. We'd be dead if we had to synchronize with the operating systems. GX 157, for MS98 0167387.
3. Maritz testified, “Integrating things into your operating system comes at a cost. Maritz, 1999-01-27, 47:6-12.
4. Jonathan Roberts wrote to James Allchin, Moshe Dunie, and Carl Stork in March 1997 to discuss options regarding the proposed bundling of IE 4 and Windows 98 to join IE in the OEM channel when it ships." Stork replied, " Currently IE4 is so immature (and big, slow and prone to compatibility bugs) that it hampers our self-hosting process on the OS. We're also finding more and more resistance from the team to install the builds because things aren't working. I'm on got to a point where I wouldn't recommend releasing anything with IE4 built-in under the name of a Memphis Beta... Customers would experience too many problems and the performance would be unacceptable too - it would be so bad that the reputation of Microsoft and Windows would be corrupted... More importantly, it stands in the way of valid development at this point, testing and repro work for Memphis." GX355.

157.3.4. And even Microsoft engineers have expressed skepticism about Microsoft's decision to bundle more and more independent functions into Internet Explorer DLLs.

1. In an August 1997 email, Christian Fortini wrote: "We must stop adding non-browsing features to Trident and start removing some of the existing ones. We should streamline Trident's core code base to a very lightweight (and fast) HTML rendering and manipulation engine, and hopefully limit the number of people in that code base." GX 1377, at MS7 004591. "Trident" is Microsoft's codename for the File MSHTML.DLL.Felten, 10/6/99 at 46:23-24.
2. In a comment on GX 1377, Professor Felten testified that Fortini "apparently seems to think there are non-browsing related features in it, and advocates removing them... And he seems to say so, if." that has happened will result in the HTML rendering engine becoming faster and more compact. In other words, he seems to think it is desirable for technical reasons." Felten, 10/6/99 at 47:4-12.

(b) Binding the browser to the operating system is not required to achieve the benefits sought by users who desire both the operating system and the Internet Explorer browser

158. Microsoft is entirely free to offer a bundled version of the operating system and browser to OEMs and users who wish; It doesn't have to require OEMs and users to use this version to offer it to those who want it.

1. See belowTeil V.B.3.d.(3); § 165.2.

159. Even if Microsoft could not offer a bundled version, and even if it were most efficient if web browsing routines were placed in large DLLs, operating system functions and web browsing functions can still efficiently be sold or distributed separately. Microsoft may ship web browsing functionality separately in the form of updated DLLs to those who so desire.

159.1. As explained earlier, the malleability of software has two important implications.

159.1.1.FirstExcept for the extremes, software routines don't have to be in the same file to work together in a perfectly seamless or "integrated" way. The organization of routines in files (including DLLs) is therefore largely a matter of design judgment, as opposed to technical necessity.

1. See aboveTel V.B.2.d.(2)(a); § 131.

159.1.2.SecondsAlthough there are technical advantages to placing certain routines in the same files, it is not necessary for those routines to be shipped together to achieve this advantage. Users can be supplied with files containing some of the routines, and if they also want the others, they can receive another file containing the additional, related routines.

1. See aboveTel V.B.2.d.(2)(a); § 126.4.

159.2. Therefore, there is no technical reason why Microsoft couldn't even provide fully "integrated" web browsing capabilities as a separate product that could be installed on Windows 98.

1. James Gosling stated that "regardless of whether a given file is installed on a computer with the original operating system or installed separately by a computer manufacturer or an end user installing a program, the computer works the same way". Gosling dir. Article 42
2. Professor Farber testified that: “Microsoft alleges in its memoranda filed in this court that certain 'efficiencies' result from the 'integration' of some of the files (or DLLs) included in its product Internet Explorer (IE) as part of Windows are 98... Claims that efficiencies result from this combination of functions are misleading. Although the combination can provide certain efficiencies, the same efficiencies can be achievedwithoutBundling web browser software with what Microsoft calls its Windows operating system. This is because there are no technical barriers preventing Microsoft from developing and selling its Windows operating system as a standalone product separate from its browser software. . . . Windows 98 (like any other software) is necessarily made up of modules that are malleable and separable. By combining Microsoft's browser software with the rest of the software, which is sold as Windows 98, there are no technical efficiencies for users that could not be achieved by writing two programs in a way that could later be either loaded by the retail end user and Could be "integrated" (i.e., the same way end users install any other application that runs on Windows) or by an OEM." Farber Dir. ¶ 24.
3. Professor Felten testified that "The nature of software is such that it is easy to group unrelated functions together in the same file, or to 'integrate' separate products into a single product. The mere fact that two functions are implemented in the same file, or that two products are "integrated" into a single product, does not mean that they must be implemented that way; due to the nature of software, functions can be separated into separate files or "integrated" products into separate products without loss of performance." Felten dir. § 31.

159.3. Microsoft admits that the version of Internet Explorer distributed separately over the Internet does its "integration" in exactly this way.

1. See below§ 159.4.
2. Carl Stork testified that Microsoft distributed Internet Explorer 3 separately from Windows 95 because "Internet Explorer 3 represented significant customer improvements over previous Internet Explorer generations. And we wanted to make that available to as many of our customers as possible. Previously released advancements to components that are also part of the operating system separate from the operating system. Another example of this would be DirectX, which is often both made available on the web and shipped with applications. And there are others where I could quote the same." Stork Dep. 8/11/98 at 40:19 - 41:7 (DX 2594).

159.4. As Microsoft's Jim Allchin acknowledged, all the benefits of Internet Explorer's "integration" into Windows 98 can already be achieved by an end user installing the latest, separately downloaded version of Internet Explorer on a version of Windows without Internet Explorer .

159.4.1. The separate delivery of Internet Explorer 4 and the original retail version of Windows 95 without a browser provides almost all of the web-related features of Windows 98; As Mr. Allchin acknowledged when asked about 19 separate features of Windows 98, Microsoft's decision to include the routines that provide those features in Windows rather than in a separate browser product is simply a "distribution" decision.

1. When asked if a user could achieve the "integration of Internet technologies" achieved by Windows 98 by "combining a retail version of Windows 95 and a retail version of Internet Explorer 4, both of which are purchased separately," Allchin replied, " Yes. IE replaces core Windows files, and it becomes a modified Windows system that includes this integration." Allchin 2/1/1999 at 37:15-25.
2. When asked whether Windows 98 was "just a sales vehicle" for the technologies that Microsoft also sold as Windows 95 and Internet Explorer 4, Allchin replied: "It's the same code out of Windows." The United States Attorney then asked, "It's the same code, and all we're talking about, in your words, are different distribution vehicles; correct, sir?" Allchin replied, "Yes, that's what I said, yes." Allchin 1.2.1999 at 39:18-25.
3. When asked again if "a user who bought Windows 95 from a retail store and added the retail bought IE 4 would have exactly the same experience", Allchin again replied: "Yes, for exactly the same reason,d.h., it replaces core system files no matter how you got it." Allchin, 2/1/1999 at 41:9-14.
4. Allchin agreed "that you can obtain these benefits either by purchasing Windows 98 or by purchasing an original retail version of Windows 95 to which you have added IE 4, either downloaded or retailed or otherwise obtained. " Allchin 2/1/1999 at 45:9-25.
5. Carl Stork testified that the Internet Explorer 4 team developed its "set of technologies" for several different "ships," one containing "a retail upgrade for Windows 95" and another "In Memphis." Stork Dep., 1/13/99 at 772:1-6.
6. Summarizing the results of the February 1997 focus groups for Internet Explorer 4 and Windows 98, Christian Wildfeuer discussed the response to the new "WebView" user interface available with both products: "Interestingly, they attributed these new features to Windows and not to the Internet researcher,and this despite the fact that we repeatedly hammered the message that if you downloaded it from the Internet you would get all this in IE 4 for free." GX 202 (emphasis added).

159.4.2. The remaining functions can be obtained by combining a separately available Internet Explorer 5 and a version of Windows 95 with Internet Explorer 4 installed.

1. Professor Felten testified that Allchin "mentioned three features: HTML Help, Update Windows and WebTV for Windows" that were available in Windows 98 but not for a Windows 95 user with Internet Explorer 4. Felten, 06/10/99, um 18:00: 18-19. Professor Felten further testified that the HTML Help and Windows Update functionality is provided by the version of Internet Explorer 5 that Microsoft currently provides separately from Windows 98. Felten, 06/10/99, at 19:10-16.
2. Professor Felten testified that the separately downloadable version of Internet Explorer 5 does not include WebTV functionality, "but that doesn't mean it can't. In fact, if you look at Windows 98, you will see that WebTV for Windows is an optional feature, meaning the user has the option to install it or not. And if user installed it, user can remove it at any time. Felten, 10/6/99, at 19:20 - 20:2.

159.5. Microsoft's claim that a user cannot derive the same benefits from combining Netscape with Windows is beside the point; The important point is that Microsoft doesn't need to bundle Windows and Internet Explorer so the users who want both can take advantage of both.

1. Professor Felten testified that Allchin's claim - that installing Navigator on the original retail version of Windows 95 results in the loss of 19 or 20 different features available on the built-in Windows 98 - "isn't really related to the question", whether Internet Explorer must be included with Windows. Felten continued, "If you want to understand the relationship between Windows 98 and Internet Explorer, you cannot do so by looking at the relationship between two different products, Windows 95 and Netscape Navigator. So I don't see the relevance of the argument that IE must ship with Windows 98." Felten, 10/6/99 at 16:13-23.
2. Instead, Professor Felten stated that "The relevant comparison is what happens when you combine the original retail version of Windows 95 - that is the version that came without a browser - what happens when you combine that with the separately sold IE 4 or maybe the IE combined 5 distributed separately." Felten, 6/10/99, at 17:2-6.

159.6. Industry participants, including Microsoft, routinely describe software products as seamlessly “integrated” even when they are not shipped together or even manufactured by the same company.

159.6.1. For example, Microsoft describes Office as "integrated" with the operating system and each of its separate components, although the functionality provided to the end user is identical whether the components are purchased together or separately.

1. Robert Muglia testified that Microsoft Office is "an integrated package" in which separate applications known as Word and Excel "were designed to be integrated together into Office" but that Microsoft nevertheless distributes Word and Excel separately. "I could say that Office is an integrated package overall. It was designed to be integrated. We have developed a separate word processor which we have derived from the integrated overall office because our customers would like that package and a separate spreadsheet program." Muglia, 02/26/1999, 67:17 - 70:3.
2. In response to Muglia's comments on Office, Professor Felten testified: "In this case, Microsoft makes Word and Excel available separately for those users who want them in a single installation. So, in other words, Microsoft can give the user whatever choices they want... The same goes for Internet Explorer and Windows. Microsoft could provide a single installation for those users who want both Windows and Internet Explorer without taking away the other options like buying just Internet Explorer." Felten, 6/10/99pm at 12:1-17.

159.6.2. Intuit describes a browser as "integrated" with Quicken, although Intuit must source a browser from another company.

1. William Harris testified that in early 1995 Intuit was interested in "the possibility of bundling a browser and with easy integration". This meant creating a "mechanism" "by which one could instantiate the browser within the Quicken product and instruct the browser on the URL that should be displayed". Harris, 4/1/99 at 8:23-9:5.

159.7. Other operating system and browser vendors offer similar benefits, describing their products as seamlessly "integrated" even though they can be sold and installed separately.

159.7.1. For example, the Caldera Open Linux product that Allchin itself demonstrated offers "built-in" functionality, but is fully removable and swappable, just like any application that gets installed on the operating system.

159.7.1.1. Caldera OpenLinux combined with the "KDE" browser provides "integrated" functionality similar to that provided by the combination of Windows 98 (or, as mentioned above, the combination of retail Windows 95 and Internet Explorer 4 or 5 ).

1. Professor Felten testified that the video demonstration produced by Allchin "claimed to show... that Caldera OpenLinux shipped a browser that Mr. Allchin said was integrated, and that that browser had some of the features that Mr. Allchin said were advantages of integrating IE into." Windows. In other words, it claimed to show that Caldera was acting in a sense like Microsoft, allegedly achieving these benefits by incorporating an integrated browser. Felten 10/6/99 at 23:7-14.
2. During James Allchin's cross-examination, the government produced a still-screenshot of Microsoft's video presentation showing that the combination of Caldera OpenLinux and the KDE browser offers built-in features similar to Windows 98 and IE, including 1) single window navigation (also known as Unified Viewing) between the web and local files, including the use of back and forward buttons to allow Customer to manage local files and folders and Internet content; 2) unified favorites list; and 3) unified history list. See GX 1707 (still screen shot of Microsoft video demo reproduced in recording in Allchin 2/1/99 at 61:1 - 66:21); see also Felten 10/6/99 23:20 - 24:21 (examination of GX 1707).

159.7.1.2. The KDE browser is completely separate from the OpenLinux operating system; it is made by another company; it can be easily replaced with another operating system installed on OpenLinux; Consumers can uninstall it at any time.

1. The KDE browser is manufactured separately from the OpenLinux operating system by a different company. Felten 10/6/99 at 26:5-14.
2. The KDE browser can easily be replaced with other browsers that are installed separately on OpenLinux and then provide the same built-in functionality. Felten, 10/6/99, at 26:15-18.
3. OpenLinux customers can choose not to install the KDE browser or uninstall it at any time. Felten 10/6/99 at 26:22-25.
4. The KDE browser offers similar integration when installed separately on other operating systems to which it is ported, but not bundled with. Felten, 06/10/1999, 26:19-20 ("KDE browser runs on other operating systems such as Solaris, HP-UX and IRIX"); Felten, 6/10/99am, at 27:1-11 (The KDE browser offers built-in features when installed on other operating systems).
5. For all these reasons, Professor Felten testified: "The Caldera example contradicts 'Allchin's statement (Allchin Dir. ¶ 3)' because the KDE browser is an add-on product and is from a third party, and yet these advantages are achieved by the integration that Mr. Allchin says can only be achieved by bolting the browser onto the operating system." Felten, 10/6/99 at 28:4-8. He continued, "What we're seeing at Caldera is, if you will, a pair of products - the Linux and KDE browsers - that work well together and are integrated in that sense, but not inseparable.” Felten 6/10/99 at 29:9-12.

159.7.2. The Be OS product also offers integrated functionality using a removable, swappable browser application that is installed on top of the operating system.

1. During his video demonstration, Microsoft employee Vinod Vallipolil stated, "The demonstration will show that the Be OS includes browsing and multimedia functionality built directly into the operating system and that no third-party code is required to exercise this functionality. " Allchin 2/1/99 at 58:11-15.
2. GX 1771 (a series of screenshots showing that the browser on Be, Net Positive, is an application that is listed in the "Apps" directory and can be removed by clicking on it and dragging it to the trash; the removal results in a reduction in size occupied by applications from 4.3 megabytes to 3.0 megabytes -- a reduction of 1.3 megabytes);see in additionAllchin, 2/2/99, 13:5 - 19:13 (Boies goes through GX 1771 with Allchin).
3. The Net Positive Browser can be removed from the Be OS. Removing the Net Positive browser from the applications directory frees 1.3 megabytes of RAM in the Be OS applications directory. Allchin 2/2/99 at 13:5 - 19:13; GX1771.
4. Although Be's help system will not fully function without a browser, if another browser is installed after Net Positive has been removed, the help system will work. Allchin 2/2/99 at 20:5 - 21:4.

160. Accordingly, even if Microsoft's design brings benefits to some users, it is entirely unnecessary to force all of its customers to use an "integrated" browser in order to achieve those benefits; Microsoft's decision to force users to grab the browser to get the operating system is, as Mr. Allchin put it, simply a "distribution" decision.

1. Professor Fisher stated of the two meanings of 'integrated': 'One is to say that two software elements are integrated when they converge seamlessly... The second is integration in the sense that it is impossible or very difficult to separate them . Now, whether that's anti-competitive, I think you have to think again: the consumer benefit doesn't come from... the fact that the code was designed that way, the consumer benefit comes from the seamless operation. Microsoft designed Internet Explorer, specifically Internet Explorer 4.0, and Windows 95 in Windows 95 to work seamlessly together and be integrated in this way, and there is, you know, evidence that they would have designed Windows 98 and Internet Explorer perfectly on top of it can also function seamlessly without what I the other day referred to as a welded feature, the difficulty of taking it apart. If so, then I think yes, it was probably anti-competitive...because they would have put it on a less restrictive basis wisely." Fisher 1999-01-12 4:5-6:20 p.m.
2. Professor Fisher testified: “There is substantial evidence from Microsoft witnesses...that the consumer benefits of combining Windows 98 and IE...could be as significant as using Windows 95 and IE separately without the two, so to speak welded tight as in Windows 98." Fisher, 6/1/99 at 42:17-23. This statement, Professor Fisher explained, led him to conclude that "there's no particular benefit to the consumer in putting things together , as opposed to getting them separately, but there aren't any particular benefits - I mean economic cost benefits for Microsoft in shipping them together, rather than just shipping them separately." Fisher 6/1/1999 at 44:23 - 45:3.

(2)Microsoft's enforced licensing of its browser is not required to provide OEMs and users with other benefits, such as B. new file formats and data protocols

161. There is also no technical reason to force users to use the browser with the operating system in order to offer them the other consumer benefits identified by Microsoft. Each of these benefits can be provided separately by the browser and operating system.

161.1.Non-Browsing Features. Microsoft notes that Windows 98 includes non-web browsing features such as DVD and USB support (Allchin Dir. ¶¶ 119-120). However, there is no reason to force users to use routines that enable web browsing to get these features.

1. Professor Felten testified that “there are a lot of things in Windows 98 that aren't related to browsing that aren't in Windows 95. Lots of features. For example, support for new types of hardware devices.” Felten 10/6/99 at 34:7-10. Professor Felten further testified that there is no technical reason why users need to use Internet Explorer to get these features. Felten 10/6/99 at 39:11-15.

161.2.Support for new Internet protocols and data formats. Even providing support for new data formats and Internet protocols, as Microsoft proposes (Allchin Dir. ¶¶ 212-213), is no justification for forcing users and OEMs to use Microsoft's browser.

161.2.1. File formats are usually supplied separately. For example, Adobe Acrobat Reader, a third-party application provided entirely separately from Windows, provides support for the popular "PDF" file format, often used to view text retrieved from the Internet.

1. Professor Felten testified: “An example is the Adobe PDF viewer. 'PDF' stands for Portable Document Format. And it's a very common format for describing documents, so you can move them from computer to computer, print them, and view them on your screen, etc. And Adobe provides some programs with names like PDF Reader or PDF Viewer, which are commonly used for viewing and printing PDF documents... It may come with some OEMs, but I don't know of any case where an OEM is forced to take it or a user is forced to take it. " Felten 10/6/99 at 42:11-23.
2. Professor Felten testified: "Again, in general there really is no connection between offering to allow users to support a new protocol or format - there is no connection between that and forcing a particular software product to be supported use.” Felten 10/6/99 at 43:3-6.

161.2.2. Likewise, Microsoft does not have to force customers to use their web browser to provide support for HTML.

161.2.2.1. It would be enough to just include an HTML rendering engine in its operating system - an option that Microsoft explicitly considered but rejected.

1. Microsoft has a file that contains, among other things, an HTML rendering engine; this file is MSHTML.DLL. Felten 10/6/99 at 44:20-22. When asked if there was any inherent reason to group different functions - HTML rendering and other functions - in the same DLL, Professor Felten testified: "There are many ways functions can be grouped in DLLs... You could make a decision." based on whether things fit in a certain way, "like you would when organizing grocery bags," but the fact that the ice cream and carrots are in the same bag doesn't necessarily mean they're related in any way . . . . It is possible to put unrelated functions in the same DLL." Felten, 10/6/99 at 45:6-19.
2. Referring specifically to MSHTML.DLL, Professor Felten stated, “You have the function of an HTML rendering engine there, and you have other things as well. Those things could be separated, but they aren't.” He further explained that the rendering engine could be removed from the DLL, or alternatively the other things could be removed. Felten, 10/6/99, at 45:21 - 46:4.
3. In a March 1997 email, Allchin similarly discussed the idea of ​​separating the "shell" from the "browser" (IE 4). In doing so, he presented a few development options, including the following: “Move the shell—but not the browser—to the OS team. This was my previous recommendation as you know. It might not be what you want to do for other reasons, but it's right for the operating system (both Memphis and NT).IE 4 would simply latch into the environment." GX 616 (emphasis added).
4. See in addition abovePart V.B.3.c(1)(c); Section 161.

161.2.2.2. In fact, other OS vendors - who lack Microsoft's monopoly - include a separate HTML rendering engine even when bundling a removable browser.

1. Apple's Avadis Tevanian testified that there are "several HTML renderers" in the Mac OS, including "one that is independent of Netscape Navigator and Internet Explorer technologies." Tevanian 11/5/98 at 67:20 - 68:4.

d.DiePost hocThe economic justifications given by Microsoft's witnesses for tying Internet Explorer to Windows contradict the evidence

162. Microsoft's economic justifications for forcing users to use the browser with the operating system and making it difficult to separate the two cannot be reconciled with the evidence.

(1) Microsoft's behavior was not plausibly designed or intended to increase demand for Windows

163. Microsoft's tying of Internet Explorer to Windows and its decision not to make it removable should not increase demand for Windows.

163.1. Although creating an appealing new add-on can increase demand for a product, it maximizes a product's value by helping consumers use the add-on of their choice, including add-ons (like browsers) made by other companies.

1. Professor Fisher testified that "if browsers are a complement to operating systems, such that sales of browsers that can be used with Windows increases demand for Windows, it shouldn't matter who makes the complement." fisherman you ¶ 129(b).
2. Professor Fisher testified that if Microsoft were really trying to maximize demand for Windows, "I don't know that Microsoft would have an interest in promoting the Netscape browser, but Microsoft certainly wouldn't have an interest in restricting its distribution since People Who Wanted Using the Netscape browser with Windows would make people happier with Windows. To some extent, this would increase sales of Windows." Fisher, 6/1/99, at 66:3-8.

163.2. However, Microsoft didn't try to help consumers who wanted a non-Microsoft browser. On the contrary, it has taken willful, active, and costly steps to impair the distribution and use of Netscape Navigator, including increasing the cost to both OEMs and consumers of supporting and using Navigator through its binding agreement and associated ones contractual restrictions.

1. Binding Internet Explorer to Windows itself made it difficult for users to obtain other browsers.See below¶¶ 169-171.
2. Professor Fisher said: "If browsers are supplements to operating systems, so that selling browsers that can be used with Windows increases demand for Windows, it shouldn't matter who makes the supplement. But Microsoft cared a lot about who made the browsers used with Windows." Fischer dir. ¶ 129(b)
3. Professor Fisher testified that "Microsoft even attempted to prevent Netscape from offering Netscape's browsers for use with Windows - an action inconsistent with the fact that browsers are a complement to Windows, which Microsoft wanted to maximize the spread of." fisherman you ¶ 129(c).
4. Professor Fisher testified that “Microsoft was not concerned with increasing overall browser sales, but with Microsoft'sSplitof browser sales. In fact, Microsoft has been researching and attempting to implement ways to disable netscpe and reduce overall browser sales. This behavior "doesn't make good business sense" if browsers are seen as a way to increase Windows revenue. But this behavior makes perfect sense when browsers are viewed as a competitive threat to Microsoft's Windows monopoly.” Fisher Dir. ¶129(e).
5. When asked if Microsoft actually tried to restrict distribution of the Netscape browser, Fisher testified, "Oh, you bet it will. To cite a specific example, in its contracts with ISPs, Microsoft not only requires that the ISP ship a certain minimum number - I think it's usually around 85% - of Internet Explorers to the ISP's subscribers. This requirement alone would have allowed the ISP to ship both IE and Netscape Navigator. In fact, the contracts require that the ISP not ship more than, in this example, 15 percent of other browsers to the ISPs. This is a limitation of Netscape. If Microsoft was really interested in selling Windows, it wouldn't be interested. And it can have no interest in doing this to protect their, citation, sales of IE, end citation, because it has no, citation, sales of IE, end citation. It is a non-revenue product. Fisher 1999-06-01, 66:12-25.
6. dr Warren-Boulton testified that "Microsoft's ... efforts to increase IE's share by excluding Netscape and making it more difficult for users to obtain Netscape's browser could only diminish the value of its operating system to consumers." Warren-Boulton Section 187.

(2)Microsoft's involvement and its associated limitations were not reasonably necessary to preserve the integrity of the Windows platform

164. Microsoft's argument that the binding of the browser to the operating system is reasonably necessary to preserve the 'integrity' of the Windows platform (Allchin Dir. § 85; Kempin Dir. § 29) is a pretense.

164.1.First, Concerns about the "integrity" of the platform cannot explain Microsoft's original decision to tie Internet Explorer to Windows 95, since Internet Explorer 1 and 2 did not contain APIs.

1. See belowTeil V.G.6.a; § 312.1.

164.2.Seconds, Concerns about the integrity of the platform cannot explain Microsoft's refusal to offer OEMs the option of Windows 95 or 98 with Internet Explorer uninstalled or equivalent, since APIs remain on the system like all other shared files when Internet Explorer is uninstalled .

1. Professor Felten testified that "I implemented the prototype removal program to further support the ability of ISVs to use all the shared libraries that come with Windows 98 when surfing the Internet without adding another software program like AOL's access software or Intuit's Quicken personal finance software. Microsoft could have produced a version of Windows 98 without browsing the Internet in a way that would not have affected the functionality of ISV applications." Felten dir. § 56.
2. Professor Felten testified that leaving shared files "consistent with the usual way software application programs are removed" as well as the instructions that Microsoft itself gives to application developers. See Felten Dir. ¶ 57 (citing GX 431, Microsoft's Applications Handbook, p. 29).
3. dr Warren-Boulton testified that "Microsoft's goal of providing ISVs with a consistent platform provides no economic justification for OEMs' bias in choosing which browser to deploy" because "Microsoft's design choice was arbitrary; Microsoft would have included 'platform files' [like shared files] entirely in the operating system and no such files in its browser product. Warren-Boulton Dir. § 165;I would.¶¶ 166-167.

164.3.third, Microsoft's concern about giving OEMs a choice about whether to install certain browser-related APIs that would fragment Windows platforms (Kempin Dir. ¶ 29) is unfounded, as OEMs operating in a competitive market are plentiful Incentives APIs (including non-Microsoft APIs) for applications that their customers demand.

1. Professor Fisher testified that Microsoft's concern to offer developers a stable, up-to-date platform is unfounded because "it is not obvious that these APIs need to be Microsoft's APIs in order for developers to be offered a stable set of APIs." Fisher 6/3/1999 9:21-10:20 p.m.

164.4.Fourth, even if there was a potential benefit in forcing a single set of APIs to be licensed for all OEMs, such justification could not apply in this case as Microsoft itself continues to fragment the platform.

1. dr Warren-Boulton stated, "There are millions of PCs running earlier versions of Windows that lack the latest versions of Windows 95 or Windows 98. To ensure that the software they develop runs regardless of which version of Windows a PC contains, ISVs have redistributed the necessary shared program libraries along with their software. In short, Microsoft's own practice of continually updating its platform means that application developers have a Having to replicate part of the platform with the software they distribute and therefore the impact on an OEM of removing certain parts of the 'platform' is likely to be small.” Warren-Boulton Dir. § 170.

164.4.1. Because Microsoft frequently releases new APIs with its updated versions of Internet Explorer and Windows, the installed base of Windows PCs have vastly different sets of APIs. Microsoft's practice of continually updating these APIs perpetuates this fragmentation.

1. Professor Fisher testified that "Microsoft's APIs are actually not stable. They change. And ISVs still need to embed and ship parts of the relevant APIs in their own software." Fisher 6/3/99 at 22:11-14. He also testified that "ISVs have to redistribute IE code anyway because Microsoft has come out with so many different releases." fisherman you §165.
2. dr Warren-Boulton stated, "There are millions of PCs running earlier versions of Windows that lack the latest versions of Windows 95 or Windows 98. To ensure that the software they develop runs no matter what version of Windows a PC has, ISVs typically redistribute the required shared libraries with their software. In short, Microsoft's own practice of continually updating its platform means that application developers must replicate part of the platform with the software they distribute..." Warren-Boulton Dir. ¶170.
3. John Gailey, director of engineering at Novell, stated, "As Microsoft continues to change and update the system services provided by Windows 95, Novell bundles some of these operating system services with GroupWise to ensure that all users have access to the latest version of the system service, the GroupWise calls." fisherman you ¶165 (cited Gailey Decl. 11/17/97).

164.4.2. ISVs have adapted to this reality by redistributing required APIs with their applications to ensure the APIs are installed on the user's PC; To facilitate this, Microsoft makes the APIs that come with Internet Explorer available to third-party developers to distribute with their products.

1. Microsoft's David Cole testified that many ISVs redistribute Internet Explorer to "bring the operating system up to the level they need to run their application... It's a very common practice." Cole Dep. 1/13/99, pp. 390:20-24.
2. James Allchin testified that "Microsoft licenses developers whose products are based on Internet Explorer technologies to ship them with their products so that older versions of Windows can be upgraded to the required level of functionality." Allchin Dir. ¶ 135. Allchin testified that “we do this for graphics and everything else. We bring the system to the installed base, provide pieces of software that update software ... called DirectX. So we either updated Windows 95, we put it on the website or even had people, ISVs, vendors, ship that software. So it's just a matter of how far we go to add new features to the system for the installed base.” Allchin, 2/1/99, 47:10-19;see in additionMaritz Direct ¶ 171; Jones Dep., 13.1.99, at 535:6–536:6.
3. William Harris testified: "The combination or separation of software products or components will almost always have some potential advantages and some potential disadvantages. For Intuit in particular, distributing a browser with our products, rather than as part of the operating system, has some real advantages. The fact that Intuit currently distributes a version of Internet Explorer with Quicken illustrates the point Test and verify that Quicken works with the specific version of Internet Explorer that comes with Quicken. If a Quicken customer does not already have a compatible version of Internet Explorer, Quicken will install the version of Internet Explorer that comes with Quicken. This will ensure Quicken works as intended and tested.” Harris dir. Section 85.
4. Professor Fisher testified that "ISVs will have to redistribute IE code anyway because MS has released so many different versions." fisherman you § 165;see in additionThe Field, 6.10.99, um 61:10-14.
5. Glenn Weadock testified that applications that update Windows DLLs are widespread. Weadock, 11/17/98 25:15 - 26:10.
6. Robert Muglia testified that due to differences in Java implementation, ISVs similarly redistribute Java Virtual Machines with their Java programs to ensure that those programs function properly. Muglia Dir. ¶¶ 87, 104, 107.

164.4.3. The same is true for Microsoft, which distributes APIs - including those distributed with Internet Explorer - with a number of Microsoft applications.

1. Muglia testified that Microsoft will distribute Internet Explorer with Office 2000: “There are updated Windows features that we need to take advantage of. So to ensure that the functionality is present on the user's computer, we are distributing it with Office 2000, just as other ISVs are able to do so." Muglia 26/02/1999 at 67:3-11;see in additionGX 727 (Microsoft Office97 redistributes all Internet Explorer 3 and installs certain Internet Explorer components required for proper functioning).
2. Professor Felten testified that Microsoft itself redistributes various components of Internet Explorer with its Office 97, Money 98, Money 99, Frontpage 98, Visual Studio 6.0, MSN and Plus 98 application products. Felten 6/10/99 at 62:13-fifteen.
3. GX 2220 (Series of screenshots captured from the start of the Visual Studio installation process) ("Visual Studio ships with the latest version of Internet Explorer 4.01. The updated version of Internet Explorer 4.01 is an essential component of Visual Studio 6.0 Enterprise Edition and installation required.");see in additionThe Field, 6.10.99, bei 67:12 - 71:4.

164.5. Although Gordon Eubanks testified that redistributing software components was inefficient for ISVs, he acknowledged that Symantec did in fact routinely redistribute Internet Explorer components as part of its normal business operations.

1. Eubanks testified that until recently, Symantec "shipped a rendering engine with Norton Utilities so we could display HTML because we couldn't count on every customer having a browser." Eubanks 06/16/1999 76:25-77:3.
2. Eubanks has certified that we have distributed this HTML rendering DLL in the past and that it was used by components of Norton Utilities." Eubanks, 1999-06-16, page 74:5-8.

(3) Microsoft's quality-related justifications are pretended

165. Microsoft's quality-related justifications are similarly advanced.

165.1. As discussed above, Microsoft's design of Windows 98 does not provide end users with any technical advantage (other than the ability to surf the Internet) that could not be achieved in a version without web browsing.

1. See belowPart V.B.2.e.(3)(b); ¶¶ 151-154.

165.2. Microsoft's concerns that meeting demand for Windows without Internet browsing would degrade product quality or its reputation are unfounded anyway, because if consumers really preferred the version of Windows bundled with Internet Explorer, they would choose it in the marketplace.

1. Professor Fisher stated that "if consumers prefer seamless operations, they would choose it in a competitive market" and that "competition leads to consumer-driven regulation of what is produced, what is distributed and so on. If welded together actually yielded benefits, then consumers would choose the welded version over a separate version and be willing to pay more.” Fisher, 01/12/1999 at 6:3 - 7:7.
2. Professor Fisher testified: “The consumer gets the same benefits by buying … these two things separately. In that case, there's no reason why Microsoft shouldn't consistently offer them separately and let consumers decide whether the really good benefits they want to purchase." Fisher, 6/1/99, at 44:6- 12.
3. dr Warren-Boulton testified that if the removal of Internet Explorer from Windows 98 "affected the way Windows 98 works either by itself without a browser or with Netscape, it would mean that people in the market would look at this would look at the product and say "I don't like this product very much." And what would happen is that people wouldn't choose it and actually the result of the test would be that people would say that I don't like the two products separately would like to have." Warren-Boulton 11/24/1998 at 22:25-23:7.
4. dr Warren-Boulton testified, "I don't think Microsoft -- there's some reason Microsoft can't inform customers that this is a non-IE Windows 98 product." Warren-Boulton, 11/24/1998 at 23:15-20.

165.3. Ensuring a simple pre-installation and similar configuration of the product cannot justify the involvement of Microsoft.

165.3.1. OEMs can provide the benefit of pre-installation and configuration to end users as effectively as Microsoft, and those OEMs who want Microsoft to run this service can obtain a bundled version from Microsoft.

1. When asked if "some customers might want to open up a new PC, plug it in and just connect it to the internet," Professor Felten said, "Absolutely. I also think these customers would prefer the browser of their choice preinstalled on the system. And I'm not saying that OEMs shouldn't be free to do so. The whole point I'm trying to make in my statement, and the whole point of the deprototype program, is that this choice could be made available to the end users, the OEMs and the entire supply chain so that users can get what they want." Felten, 12/14/98, 28:2-13.
2. Professor Farber testified that none of his testimonials "deny the possible convenience or preference of some users for 'one-stop shopping' for bundled products such as the current version of Windows 98 sold by Microsoft as a product, if you think so." are that this convenience outweighs any technical inefficiencies described here, you can certainly still choose to buy Windows 98 as it now exists." Farber dir. § 28.
3. Muglia acknowledged that the inconvenience of multiple setup procedures for customers is not a reason not to offer an unbundled version of Microsoft Office; "Sure, of course not. Again, we only offer our customers choices. We say if people just want to buy a word processor or spreadsheet, they have an opportunity to do so.” Muglia Abt. (played 6/10/99) at 11:17-21.
4. IBM's John Soyring testified that PC vendors "generally have sufficient capabilities to integrate applications such as a browser with an operating system and load this combined set of products onto their machines". Soyring dir. ¶ 21;see in addition I would.¶ 22 ("[PC suppliers] may install browsers on the operating system on computers they supply, so long as they receive appropriate information from the browser supplier and receive from the browser supplier or from the browser supplier all information specific to the respective operating system are operating system suppliers").
5. When asked if the convenience of a single installation procedure is "a compelling reason for people to use Internet Explorer with Windows," Professor Felten replied, "No, it isn't. If a user wants both Windows and Internet Explorer then – Microsoft can offer them this option with the single install. But a user who just wants Windows without Internet Explorer can get this in a single installation.” Felten, 6/10/99pm, at 5:19 - 6:1.
6. Professor Felten testified that "Microsoft could offer a single install for those users who want both Windows and Internet Explorer, without taking away the other choices of buying just Windows or just buying Internet Explorer." Felten, 6/10/99pm, at 12:14-17.

165.3.2. Microsoft offers users the ability to install or uninstall other programs that it distributes with Windows or other software packages.

1. A series of screenshots from Windows 98 shows that the operating system has menus from which various software programs other than IE can be installed or uninstalled from Windows. GX1700.
2. WebTV for Windows can be optionally installed or removed on Windows 98, although it comes with Internet Explorer 5 built-in. Felten, 06/10/99, 19:24 - 20:20 (WebTV falls under Remove" Control Panel on Windows 98).
3. In the case of Microsoft Office, Microsoft offers an optional single installation with no assembly required, allowing users to choose to receive all programs bundled in Office at the same time or separately.See above§ 165.3.1; The Field, 6/10/99pm, at 11:22 - 12:17.

4.Microsoft's tying of Internet Explorer to Windows has caused significant marginalization effects and consumer harm

166. Microsoft's forcible binding of Internet Explorer to Windows increased the cost of using other browsers, aided Microsoft's goal of preventing Netscape from becoming a viable threat to the application barrier to entry, and thereby harmed consumers and consumers supported Microsoft in its goal of maintaining its operating system monopoly.

a. Installing a second product in a software category will incur costs for OEMs

167. Microsoft's behavior increased the cost for OEMs to distribute Netscape or other browser products.

(1)Increased technical support costs

167.1. OEMs bear essentially all of the customer support costs for the computers they sell, including the cost of Windows, even though Windows is a Microsoft product.

1. Microsoft's license agreements with PC OEMs require this-blackened-GX 418 (Toshiba) (sealed);see alsoGX 410 (DEC), at MS98 0008841 (sealed).
2. Joseph Kanicki testified that Dell bears the support costs for the computers sold. Kanicki Dep. 01/13/1999 at 342:5-7.
3. Gayle McClain testified that Gateway provides customer support for the machines they sell and that "a new user could call about almost anything," including the confusion caused by desktop clutter. McClain also testified that there is no mechanism for Microsoft to reimburse them for these support costs. McClain Dep. 01/13/1999 at 616:15-617:12.
4. both the hardware and the software of the PCs sold. Rose 02/18/1999 at 41:23 - 42:11;see in additionrose you ¶ 15 ("Many of our consumer customers don't care about knowing the individual components (or even the brand names of the components). They rather buy the "out of the box" experience. They want their computers to be simple and easy to use operate out of the box, and they rely on the Compaq brand to make that experience a good one.").
5. Soyring stated, “Software suppliers often offer better prices to PC suppliers if the PC supplier responds to customers' support calls and does the initial analysis of potential problems. This activity can range from simple to very complex and may even involve reviewing and analyzing the source code for the software in question." Soyring Dir. § 20.

167.2. Adding a second product in a particular category, including a browser or the visible means of accessing the browser, can significantly increase these support costs.

1. When asked if Compaq's support costs would increase if they installed more than one browser on a PC, Rose testified, "I would expect support costs to increase as the number of multiple things increases." Rose, 02/18/1999, at 42:12-22. Rose testified that Compaq evaluated the relative costs and benefits of preinstalling more than one product in a given software category and came to the following conclusions: "'It's expensive, places a higher cost burden on Compaq, adds complexity, increases complexity and increases complexity. causing confusion among customers, particularly consumer customers who are not experienced in personal computing.'" Rose Dep. (read 02/18/1999) at 45:25 - 47:13;see in additionRose, 18.02.1999, a 47:25 - 48:14.
2. Soyring stated that "even if there is a customer demand for a different browser, the PC supplier must consider the cost of the second browser. Even if the other browser vendor offers it to the PC vendor for free, the PC vendor will incur significant additional costs, including additional testing, distribution and support costs." Soyring dir. § 27.
3. Soyring also testified: "Whenever manufacturers install an additional program, there are usually additional costs, not only the license fee, but also the training of their employees to create the image pre-installed on the hard drive or the medium they have chosen to carry it to train support staff, as contracts with software manufacturers usually stipulate that the first two levels of customer contact for support problems take place at the PC manufacturer; therefore additional training costs are incurred. There are costs that go into their marketing programs to explain the different products they have installed and the value to their customer. So yes, there are additional costs.” Soyring 11/18/98 70:15 - 71:1.
4. Microsoft's Gayle McClain testified that having multiple icons or "functional redundancy in various places" was confusing for end users (McClain Dep., 1/13/99pm, at 623:6 - 624:11) and that Gateway wanted to remove icons from Windows 98 over concerns about screen clutter. McClain Dep. 01/13/1999 at 614:5 - 615:9.
5. According to John Kies, senior product manager for the Packard-Bell/NEC Versa notebook line, Packard-Bell/NEC would not pre-install Navigator if Internet Explorer is already pre-installed because "there would be no point in having two very large programs installed have used up the hard drive and it might be confusing to the end user why two of the same applications were included." Kies Dept. (played 11/17/98), at 68:13-21.
6. Based on this statement and other evidence, Professor Fisher concluded that "some OEMs preferred to load only one browser to avoid user confusion and the resulting consumer support costs and increased testing costs." fisherman you €150
7. dr Warren-Boulton clarified OEM claims that Internet Explorer increases the cost and reduces the benefits of a second browser (Warren-Boulton 11/24/98, 59:18 - 59:25); he also testified that the cost of supporting Internet Explorer is a significant cost for OEMs. Warren-Boulton 11/24/1998 at 26:19-27:10.

(2)Additional testing costs

167.3. Pre-installing a second product in a particular software category can also increase OEM testing costs.

1. dr Warren-Boulton stated that when OEMs buy Windows "already with IE on it, you need to test to make sure your system is compatible with the Windows IE bundle. If it didn't come with IE, then you would only have to test it with Netscape. So the point is, as Mr. Kempin said, if you're using IE, you only need to test it once. If you want to use Netscape, you have to do it has to test it twice." Warren-Boulton 11/30/98 at 14:16-24.
2. Professor Fisher stated that "some OEMs preferred to load only one browser to avoid user confusion and the resulting consumer support costs and increased testing costs." fisherman you €150
3. Weadock said, "It's certainly also important that we avoid the testing costs associated with supporting a dual-browser end-user environment, or an environment where users click somewhere and run one browser and click somewhere else and run another browser." . That adds to the organization's testing costs, because now they have to -- they can't rely on Navigator being the only browser users activate." Weadock 11/17/98, at 74:3-11.

(3)opportunity cost

167.4. Also, preinstalling a second application in a certain software category takes up scarce and valuable space on the computer's hard drive and desktop.

1. According to John Kies, senior product manager for the Packard-Bell/NEC Versa notebook line, Packard-Bell/NEC would not pre-install Navigator if Internet Explorer is already pre-installed because "there would be no point in having two very large programs installed have used up the hard drive and it might be confusing to the end user why two of the same applications were included." Kies Dept. (read 11/17/98), at 68:13-21.
2. Stephen Decker testified that Compaq stopped preinstalling Netscape on the computers it sold because "with Microsoft's inclusion of Internet Explorer, that category is already filled, because that product was included as part of the operating system, and then also, to actually license the additional browser, which would both require time for Compaq to make this particular agreement, we would have another product that would take up space on our hard drive, and, you know, there might be some additional licensing fees, and we would have done it to pay for that technology. . . .” Decker Dept. (read 1999-02-18), at 61:8-21.
3. Professor Fisher stated that "some OEMs viewed desktop and/or hard disk space as a scarce asset and were generally reluctant to preinstall more than one software title in each functional category." Fisherman ¶ 151.

b. Microsoft involvement and the associated contractual restrictions increased costs for OEMs and thus discouraged OEMs from preinstalling Netscape and other non-Microsoft browsers

168. Microsoft's behavior discouraged OEMs from loading Netscape (and other browser competitors) and thus contributed significantly to Microsoft's plan to increase competitors' costs and win a share of browser usage.

1. A Microsoft OEM sales executive, Candace Grisdale, responded to a May 1998 news article that suggested that Hewlett-Packard might bundle Navigator across all of its PC lines: "HP, which we knew was NSCP was close, but every time we've asked them about their plans, they've said they don't want to carry the burden of two browsers unless the customer segment demands it." GX323.
2. Mal Ransom testified that Netscape approached Packard Bell about preinstalling Navigator. Packard Bell seriously considered this, but decided against it because Packard Bell didn't want to carry the burden of two browsers on their machines. Ransom (played 12/16/98), at 74:12 - 75:6.
3. Compaq removed Netscape after Microsoft forced it to restore the Internet Explorer icon to the desktop due to the increased cost of supporting a second browser.See belowpart V.C.1.b.(2); Section 179.
4. Professor Fisher testified that "since Microsoft's binding agreement ensures that IE is present on every Windows PC, the result is a significant exclusionary effect that ensures that IE is theonly Browsers on most PCs shipped by OEMs.” Fisher Dir. ¶152;see in additionFisher, 1/6/99pm at 12:21 - 13:2 (OEMs do not find it profitable to install Navigator because Internet Explorer is already present).
5. dr Warren-Boulton testified that the fact that IE users were more likely to source their browsers through the OEM channel than Netscape users suggests a significant foreclosure effect. Warren-Boulton 11/24/1998 at 58:16-59:12.
6. See generally belowPart VII.A (which describes both the increase in competitors' costs and their impact on Navigator's OEM promotion).

c. Microsoft's behavior similarly increased end-user costs for using non-Microsoft browsers

169. Microsoft's behavior similarly increases costs for end users by using non-Microsoft browsers.

(1) For a consumer who wants a certain type of browser, it is undesirable for another browser to be pre-installed on his PC

170. For a consumer wishing to use a particular browser, the presence of another browser preinstalled on the PC is not only superfluous but also undesirable for a number of reasons.

1. Professor Felten stated: "Providing code that people actually use is efficient, but providing code that isn't being used, or packaging code that isn't being used, or code that the user doesn't want with code that the user doesn't want the user wants, as Microsoft has done in this case, is inefficient and makes the situation worse for users." Felten, 12/14/98, at 51:14-21.
2. Professor Felten also testified that "generally, if you know the user doesn't want something, it can only be inefficient to force them to take it." And you'll find that, in terms of the Internet Explorer in Windows 98 talks about forcing the user to install software they don't want on their hard drive. When they boot Windows, this software, which they don't want, is loaded into RAM. And as Professor Farber explained, in some cases this software will even run and Internet Explorer will pop up even though the user doesn't want it to. This is certainly inefficient. I would also like to point out that as a computer scientist I use it in the broadest sense when I speak of efficiency. That's, I include – I include inefficiencies that arise due to, for example, user confusion from undesirable behavior.” Mr. Weadock talked about the cost of support calls and lost productivity from these cases, and these apply to Windows as well 98 and IE." Felten, 12/14/98, at 11:16 - 12:9.
3. Weadock testified, "If an organization wants to standardize on a particular browser for reasons of cross-platform access, then they might want to choose a browser like Navigator, as opposed to a browser like Internet Explorer, in which case they don't want Internet Explorer." on the computer." Weadock 11/17/98 at 43:5-10.

170.1. Unused software on a PC, especially a program as large as a modern browser, occupies scarce and valuable disk space on the user's hard drive and can therefore increase hardware resource demands.

1. Professor Felten stated: "Forcing some users or OEMs to use software they don't want is inefficient as the unwanted software unnecessarily consumes resources such as disk space and memory and increases the complexity of the user interface by filling it with unwanted icons and Menus crowded items and programs." Felten dir. § 67.
2. Weadock testified that "if a user wants Windows 98, doesn't want Internet Explorer, and wants Netscape, then mixing code between Windows 98 and IE can result in an overall package that requires more memory and more disk space than if Microsoft didn't." mixed Internet Explorer and Windows 98 would have done. So it's not an advantage for everyone.” Weadock 11/16/98 at 44:16-23.
3. Weadock stated that "The hardware resources required can increase significantly when an operating system integrates application software" and that "Windows 98 requires much more disk space and significantly more RAM than Windows 95, primarily due to the Internet Explorer software." Weadock dir. Section 32d.

170.2. A system's load of additional unwanted software increases when that software is somehow "integrated" into the computer's operating system, since code used by the operating system is more likely to consume critical dynamic memory, or RAM, in addition to memory on the hard drive. For this reason, the "integration" of certain additional software into the operating system tends to lead to stability problems.

1. Weadock stated: "The likelihood of an application failure affecting the operating system can increase when code is shared between the two." For example: "I have found in my own experiments with Windows 98 that the failure of an Internet Explorer window may cause the entire desktop to malfunction." Weadock dir. Section 32a.
2. Weadock stated: "An application that modifies operating system files could create conflicts with other applications and with proprietary applications (and in the case of Internet Explorer this has been documented in some cases). Weadock dir. Section 32b.
3. Finally, Weadock testified, "It can become more difficult to enforce security when an operating system integrates application software." incorporated.” Weadock dir. Section 32e.
4. John Soyring testified that "Integration may be inefficient and disadvantageous for customers" because, for example, "Integration generally increases the size of the operating system and thus the size of the hardware required to run it effectively. In addition, it may be slow to use other applications and may provide features that certain customers do not want." Soyring Dir. § 25.
5. James Gosling testified that "in Windows 98...Microsoft appears to load some browser-related files into memory, even though the user may never need that functionality...Essentially, Microsoft is simply shifting the time it takes for browser code to load from first use." by the user until each boot of the computer." Gosling dir. § 37.
6. Felten testified that "the system has to do complicated things to keep all programs running as more memory is consumed, and so using more memory generally means decreased performance." Felten, 6/10/99 PM, at 18:16-20.
7. In an email by Jonathan Roberts to Bill Gates and others in July 1997, Roberts points out that a 16MB Navigator user "will have a much slower experience on 98 than on 95" because "when in Explorer accessing the help or an HTML page or in "My Computer" they load the IE HTML rendering engine and increase the working set significantly." GX725.
8. In December 1996, David Cole and his Internet Explorer development team discussed "decoupling" IE4 from the Windows shell, in part because "when the user installs the new shell, there are a few things to learn and a performance price to pay. By coupling these together I think the overall effort has suffered. We have a compromised new shell design that I believe is trying to be Windows 95 shell compatible. We don't have HTML on the desktop because we're concerned about performance. But even in compatibility mode, the performance degrades and there are differences that could block the acceptance of the browser platform." GX46.
9. Professor Felten also testified: “There are two costs of loading unnecessary code into memory. First, it takes time to read this code from disk, and that means that the response time of some operations will be slower because you're spending extra time loading that data into memory. Also, the unwanted code takes up space in memory, and memory is a limited resource. Something else may need to be moved out of memory or something else may not work because the system has been running. The user could ultimately be forced to run out and buy more RAM or upgrade their PC to get enough RAM to run to load the undesired code along with the actually desired code.” Felten, 12/14/98, 57:10-22.
10. AOL's Barry Schuler testified to that-blackened-Schuler Dep. 5/5/99, 136:21-137:6 (DX 2810A) (sealed).

170.3. Unused software can also increase consumer confusion and support costs by unnecessarily increasing user interface complexity.

1. Professor Felten testified that "In general, if you know the user doesn't want something, it can only be inefficient to force them to take it... I also want to mention that, when I speak of efficiency as a computer scientist, I use it in the broadest sense. That is, I include -- I include inefficiencies that arise, for example, due to user confusion from undesirable behavior. Mr. Weadock spoke about the cost of support calls and lost productivity due to these cases, and these apply in the case of Windows 98 and IE as well." Felten 12/14/98 at 11:15 - 12:9.
2. Weadock testified that "It is generally accepted practice among IT managers in businesses large and small to install the least amount of software on a computer that does what its users need to do. That way you just save on all kinds of costs from resource usage to support and training." Weadock 11/17/98 at 41:17 - 42:16.
3. Weadock stated that the mixing of operating system and application code can lead to user confusion. For example, Microsoft's merger of Windows Explorer and Internet Explorer can confuse consumers as to whether they are viewing local or remote data. Weadock dir. Section 32c.

(2) Internet Explorer hard-coding reduces the likelihood that users will use Netscape with Windows 98

170.4. Microsoft's decision to defeat the user's choice of default browser in Windows 98 by forcing the use of Internet Explorer in certain situations reduces the value of other browsers to end users.

1. Professor Felten testified that a user can install Netscape Navigator on Windows 98, "but there is a problem with using it." And Professor Farber recently described this. He talked about what happened when he tried to install Navigator on his Windows 98 PC, as he put it, Internet Explorer kept cropping up for him. That's the kind of phenomenon I described in my testimony as hard-coding access Internet Explorer 4 point where you want to go." Felten 14.12.98, 27:8-19;see in additionFelten 12/14/98, 29:6-17 ("there are also situations where IE shows up when a user doesn't want it"); Felten, 12/14/98, 44:12-17 (although "Windows 98 gives the user more choices than Windows 95...there is one area where the user has fewer choices and that is surfing the Internet").
2. dr Warren-Boulton testified that he personally bought a Windows 98 machine but "never intended to use IE and ended up installing Windows Navigator." Nonetheless, "IE keeps popping up. It might be that more tech-savvy people could avoid it, but I can't avoid coming across IE." Warren-Boulton 11/24/1998 at 30:22-31:4.
3. Dean Schmalensee acknowledged that if the integration of a software product into the operating system degrades the performance of another product or makes that product less convenient for users to use, it would harm consumers. Schmalensee, 01/19/99, 39:21 - 40:3.

170.5. Microsoft's "hard-coding" of Internet Explorer on Windows 98 is particularly cumbersome for organizations looking to standardize on a non-Microsoft browser.

1. When asked whether organizations remain "free to standardize on Netscape Navigator if they want to," Weadock replied, "Not in the case of Windows 98. They are not free to standardize on Navigator entirely because Windows 98 requires certain user actions." forced to invoke Internet Explorer, so I'd say no, they were entirely free to standardize a product if in some cases the operating system dictated the use of an alternative, non-preferred product." Weadock, 11/17/98, 19:17 - 8:2.
2. When asked how the fact that Windows 98 comes with Internet Explorer would impact a company standardized on Navigator, Packard Bell/NEC's John Kies explained that "the end user will uninstall Internet Explorer 4.0 or Netscape Communicator alongside it would have to install. And that - then they would have two browsers on it where most companies would rather only support one browser and again would come back to the training issue and most companies would prefer not to have articles on the user interface that they can't support. " Gravel Dept. (played 11/17/98), at 72:8-19;see in additionKies Abt. (played on 11/17/98) at 72:8 - 73:7.
3. In a presentation titled "Why Internet Explorer 5.0?" Scott Vesey of Boeing wrote: “We have no choice. Internet ExplorerWilleinstalled as a component of our next-generation desktop operating system. It needs to be determined to what extent we might be able to decouple it. operating system integration. Microsoft is unlikely to back down from its commitment to integrate the web browser into the operating system." Under "Risks," Vesey noted, "Two browsers on all Wintel machines. IE is included in the operating system and is available as a browser. Netscape would have to be installed separately. Browser cannot be completely disabled. It may be possible to remove the IE icon from the desktop (to be determined). Windows Explorer can still be used to access Internet protocols: (e.g. http and ftp). It is difficult to enforce Netscape as 'the browser' in the Wintel environment." GX 638, at TBC 000412.
4. A "Win98 Browser Choices Matrix" prepared by Vesey included (among other things) the following option: "Accept Win98 unmodified with full Internet Explorer integration. Use IE as 'default' browser. Install Netscape Communicator as an 'alternate' browser." Under "Impact/Risk" of this option, Vesey wrote "Possible problems with DLL and registry conflicts. Confusing users about which browser should be accessed." Another option presented is "Remove Internet Explorer desktop icon, disable browser functionality for documents delivered over the Internet" and "Install Netscape Communicator as "default" browser". The impact /the risk of this option is "The extent to which it will be possible to disable Internet Explorer" GX633.
5. In the same document, Vesey suggests the following: “Installing Netscape as an alternative browser can lead to user confusion as to which browser to use. Some sites may require a specific browser. We have worked to minimize this possibility, but this risk still exists. - -- Removing Explorer (or disabling web access features) will likely prove impractical or impossible. This probably leaves us with 3 alternatives: install both browsers, let the user choose which browser to use. - Install only explorer, all websites required to be completely neutral. -- Remove Explorer (or disable all web access features) and install Communicator for web access." GX633.
6. An internal Boeing document describing Boeing's "Browser Decision History" discusses the 1999 plan, stating: "Internet Explorer v5 will be so deeply embedded in NTW 5, Office 2000 and Outlook 2000 that we won't be able to to detach it -- This is why both Netscape and Internet Explorer browsers are installed on Windows desktops -- Netscape will continue to be the default web browser, the next step will be to determine how to restrict the use of Internet Explorer as a browser may -- continue to evaluate 1999 browser direction." GX631.
7. In an internal Boeing presentation entitled "Enterprise-wide Web Browsers for the Desktop" by Scott Vesey in March 1998, it was stated: "Installing both web browsers can: Confuse users about which browser to use. Increase support costs for end users.” GX 635, at 11;see in additionGX637.

170.6. Because of this cost, many businesses must choose between a preferred non-Microsoft browser such as Netscape and Windows 98.

170.6.1. Many customers feel intense pressure to use Windows 98 as their operating system for a variety of reasons, including the desire to remain compatible with other users and the desire to use new hardware or peripherals that Windows 95 does not support. Many of these customers will probably not install Netscape Navigator (or other browsers) on their computers.

1. Weadock testified that "many customers (depending on their size or profile) feel strong pressure to use Windows 98 for a variety of reasons, including the following: (a) the organization's customers, suppliers, or customers are likely to use it, and there are business reasons to use the same software that customers, suppliers or customers use (b) Windows 98 brings new technological advantages such as a more efficient file system, support for new types of hardware such as high-capacity optical disks, support for new hardware devices such as printers and network cards; better control of power saving features on desktop and portable PCs; year 2000 compliance; and a bunch of new and improved housekeeping utilities that Microsoft claims (and I agree) can reduce support costs. ... (c) The organization relies on hardware that is discontinued by the manufacturer and replaced with hardware that does not work with Windows 95 but does work with Windows 98 ... At some point in the life cycle of an outdated operating system, computer hardware manufacturers tend to put no resources on it to make their latest products compatible with this outdated operating system." Weadock dir. § 42.
2. Boeing's Scott Vesey testified that Boeing could not continue to use Windows 95 "in the long term" but would have to "later move on to a new operating system version as the hardware is not supported by Windows 95". Vesey, 1/13/99, 280:13-16.
3. Vesey wrote: “The main reasons for moving to Internet Explorer 5.0 in 2/3. Quarter 1999 of the 18-month tactical plan are:We have no choice. . . . The integration between Internet Explorer and the desktop operating system cannot be completely disabled. . . . Our only choice is whether to install two browsers or just install Internet Explorer." GX 637 (emphasis in original).

170.6.2. A number of companies have instead opted for the costly option of forgoing Windows 98 and its non-browser benefits in favor of using the browser of their choice, and have returned to the original retail version of Windows 95 (which does not include Internet Explorer) returned ).

1. Glenn Weadock testified that "Some companies reject or choose not to use Windows 98 in large part or in part because it would force them to have a dual-browser desktop (e.g. Chrysler, where the Manager of Performance and Cost Management did so stated two browsers would increase support costs)." Weadock dir. § 41.
2. Weadock testified that many companies have reverted to the retail version of Windows 95, although it comes with various costs, because "because it's the cleanest version of Windows 95, they have the most control over what applications they can install on it. It doesn't include any software they don't want. And most importantly, it doesn't include Internet Explorer, which you might not want.” Weadock 11/17/98 at 62:12-20;see in additionWeadock 11/17/98 at 27:9-20 ("Boeing returned to the original retail version of Windows 95")
3. A February 1998 Compaq survey of 283 US business PC makers found that "Approximately 80% of businesses erase or reformat the hard drives on new desktops... The operating systems most frequently reinstalled are OSR2 and the retail version of Windows 95. Large companies are more inclined towards the retail version of Windows 95.” GX 1242, at 34.

i.e. Microsoft's behavior has caused other significant inefficiencies and consumer harm

(1)Microsoft's mixing of browser and operating system reduces system performance

171. Microsoft's mixing of the code that provides browsing and other operating system functions reduces system performance for customers who do not wish to surf the Internet using Internet Explorer.

1. See aboveTeil V.B.4.c(1); § 169.
2. Professor Felten testified that Windows 98 uses about 20% less dynamic memory after the prototype remover removed Internet Explorer web browsing, which measurably improved performance. SeeabovePart V.B.3.b(2); § 154.2;see in additionThe Field, 14.12.98, bei 56:3-13.
3. In an email from Jonathan Roberts to Bill Gates and others in July 1997, Roberts states: "Even with the option to turn off Active Desktop loading by default, Windows 98 is inevitably the most attractive plan for the Internet Explorer user, and the plan is Win 98 with." Web integration converts a huge base, but a die-hard 16MB Nav user is hard to move. If you access the help or an HTML page while in Explorer or My Computer, you will see the IE HTML Load the rendering engine and increase the working set significantly. This means that the 16MB navigation user will have a much slower experience on 98 than on 95 in many scenarios. GX725.
4. Paul Maritz acknowledged that "under certain circumstances, applications in general, not just Netscape's browser, can run slower on Windows 98 than on Windows 95 in memory-constrained situations; in other words, when running a machine with less memory. " Maritz 1999-01-27 at 4:7-16;see in additionMaritz, 27.1.1999, 4:17-23.
5. Chris Jones' notes from a November 1997 offsite meeting between members of the Internet Explorer project team report that “overall performance, particularly with the shell integrated, is an issue. both in terms of memory usage (working set) and disk space requirements (installation size). The integrated shell adds additional requirements and customers do not deploy on 32MB NT systems. GX 364, MS7 004719.
6. Gateway expressed concern to Microsoft in April 1998 that "installing the full MS product (including channels) results in much slower system performance if the customer chooses an alternative browser after the full installation on IE4". GX320.
7. Weadock stated that “when we look at Windows 98, we see a situation where Internet Explorer cannot be removed, it consumes memory resources, it takes up disk space. If a company can't remove that and then gets -- use your word -- Netscape Navigator, since there's already so much RAM, disk, and processor overhead associated with the non-removable Internet Explorer in Windows 98 that they can't get Navigator get it and get it running on their system without a significant performance hit. I believe one of the Microsoft employees raised a concern in one of the emails I saw." Weadock, 11/16/98 at 63:1-11.
8. Professor Farber stated that "Combining applications with an operating system into a single product available with all features introduces technical inefficiencies for OEMs, other software developers and retail end users, including redundancy, performance degradation of unused software and increased risk from 'Bugs'; and ... any feature provided by an operating system (as distinct from higher-level files) that does not meet the criteria of simplicity, general applicability, and accessibility reduces the efficiency of the operating system environment and the applications that use it. color you § 27.

(2)Microsoft's hybridization of browser and operating system introduces unwanted system complexity, incompatibilities, and security concerns

172. Microsoft's merging of browser and operating system also introduces undesirable system complexity and incompatibilities with other software.

1. An internal Microsoft memo by Brian Hall in November 1997 quotes participants in Internet Explorer user focus groups as saying, "Why do we need to see local files through our web browser? It's like a whole different version of Windows Explorer in a web browser. Need one or the other, don't need both." GX218.
2. One of the recommendations from an ISP focus group consulted by Microsoft was: “Turn off Active Desktop. I didn't like a browser introducing UI changes - they didn't want to be in the business of training people [sic] how to use the UI when it's really a part of the operating system." GX375.
3. Weadock stated that: "User confusion can result from the combination of application code and operating system code, such as Microsoft did with Windows 98 and the 'Single Explorer'." Weadock Dir ¶ 32c. "An application that modifies operating system files could be created (and in the case of Internet Explorer it has been documented in some cases to cause conflicts with other applications and with applications developed by companies." Weadock Dir. ¶ 32b;see in additionWeadock 17.11.98, 37:24 - 38:13.
4. Professor Felten testified that “In general, if you know the user doesn't want something, it can only be inefficient to force them to take it. Users install software they don't want on their hard drive. When they boot Windows, this software, which they don't want, is loaded into RAM. And as Professor Farber explained, in some cases this software will even run and Internet Explorer will pop up even though the user doesn't want it to. This is certainly inefficient. I would also like to point out that as a computer scientist, when I speak of efficiency, I use it in the broadest sense. That is, I include -- I include inefficiencies that arise, for example, due to user confusion from undesired behavior. Mr. Weadock spoke about the cost of support calls and lost productivity due to these cases, and these apply to the case of Windows 98 and IE as well." Felten 12/14/98 at 11:15 - 12:9.
5. Professor Farber stated that "Combining applications with an operating system into a single product available with all features introduces technical inefficiencies for OEMs, other software developers and retail end users, including redundancy, performance degradation of unused software and increased risk from 'Bugs'; and ... any feature provided by an operating system (as distinct from higher-level files) that does not meet the criteria of simplicity, general applicability, and accessibility reduces the efficiency of the operating system environment and the applications that use it. color you § 27.
6. In a Boeing planning document written in July 1998 regarding the delivery of version 5.0 browsers beginning in 1999, Scott Vesey noted the following about IE4: "The problem for Internet Explorer 4.0 is that it modified the DLLs of the Windows 95 operating system . Several conflicts have been identified with commercial software packages. All known conflicts have been resolved, either by the software vendor or by a Microsoft patch. However, there are concerns about conflicts with Boeing custom applications. Because of these concerns, and because there was no compelling technological reason to change the default web browser vendors, the Netscape browser was chosen as the browser default." GX637; see in additionGX632; GX634; GX635; Vesey Dept. (played 11/17/98), at 90-6-14.
7. Professor Felten stated that “it is technically efficient to give users or OEMs a choice of which web browser software, if any, they want to have on their systems. While some users or OEMs may benefit from the bundling of separate software products that those users or OEMs desire, significant inefficiencies may arise for others as well. Forcing some users or OEMs to grab software they don't want is inefficient as the unwanted software unnecessarily consumes resources like disk space and memory and increases the complexity of the user interface by cluttering it with unwanted icons, menu items and programs. Had Microsoft originally developed a version of Windows 98 without web browsing, that version would have been significantly smaller than the version actually released." Felten dir. § 67.

173. Bundling a browser or other application software with an operating system increases the system's vulnerability to viruses or unauthorized use.

1. The following conversation took place between the court and Professor Felten: “THE COURT: ... Are there security problems when choosing a browser or whether one should get a browser at all? ... It seems obvious to me, but maybe it's not the case that having a browser increases the risk of a virus or something similar invading. THE WITNESS: Sure, if you're in the position of a computer systems administrator in a large organization, for example, and you're concerned that you might inadvertently inject a virus or something into less-skilled users - you might well choose not to allow browsers on your users' computers to prevent this type of virus spread. Felten, 10/6/99, at 39:18 - 40:7.
2. Weadock stated: "It can become more difficult to enforce security when an operating system integrates application software." For example: "Securing the system against users running programs that management does not want them to run becomes more difficult when application software is integrated into the operating system will.” Weadock dir. Section 32e.

The statement by e.Dean Schmalenseee that Microsoft's behavior did not result in significant damage to competition and consumers is unreliable

174. Microsoft's statement that consumers benefited from its tying agreement and associated contractual restrictions (Z.B., Schmalensee, 6/21/99, 10:5 - 11:5, 36:18 - 37:11), is based on false assumptions.

174.1.FirstDean Schmalensee acknowledged that he had not investigated whether Internet Explorer could be removed from Windows 98 or why Microsoft had not made it removable.

1. When asked if he had researched which features of Windows 98 are removable, Schmalensee replied, "Absolutely not. It seemed to me that the main question was whether users had a choice about what software they used, and whether it had to be removed or just not used seemed irrelevant to me." Schmalensee, 01/20/99, 5:24 - 6:5;see in additionSchmalensee, 01/20/1999, 10:5-9 (same).
2. When asked if he "looked at any internal Microsoft documents to determine why Microsoft decided not to make Internet Explorer removable from Windows 98," Schmalensee said, "No. I didn't. I asked , not what they did - as we have said several times, not what they said about what they do." Schmalensee, 01/20/99, 14:19-24.

174.2.SecondsDean Schmalensee also acknowledged that he had not investigated the consequences of mixing software code in the same files.

1. Schmalensee admitted that he didn't have a "quantitative answer" as to how much common code there was between Windows 95 and Internet Explorer and Windows 98 and Internet Explorer. Schmalensee, 1/19/99, 31:4-8.See generallySchmalensee, 01/19/1999, 32:10-18 (similarly, he admits that he doesn't know how many DLLs contained shared code in Windows 95 and Windows 98).
2. When asked what percentage of Internet Explorer code in Windows 98 is shared between other operating system features, Schmalensee said, "I don't have that breakdown. I don't know." Schmalensee, 01/20/99, 11:11-14;see in additionSchmalensee, 1/20/99, 12:9-14 ("I cannot answer this question. And I have not examined it because it is not important for the reasons I have given you several times.").

174.3.third, Dean Schmalensee implicitly assumes (Schmalensee Dir. ¶ 232), contrary to the evidence, that a user can consistently enforce his or her choice of default browser in Windows 98.

1. See abovePart V.B.2.e(2); § 147.5.

174.4.Fourth, the assertion by Dean Schmalensee and other Microsoft witnesses that Microsoft merely offered an additional selection of browsers (Schmalensee, 01/21/99, at 37:24 - 38:8, Schmalensee, 06/21/99, at 37:4-7) is wrong. While the development of Internet Explorer itself gave users additional options, binding the browser to the operating system denied users the ability to forgo Internet Explorer and increased their costs of using other browsers.

1. See abovePart V.B.4; ¶¶ 166-175.

C.Microsoft has imposed a variety of other anti-competitive restrictions on the OEM channel to hamper competitors like Netscape

1.Microsoft imposed exceptional restrictions on the ability of OEMs to change the Windows desktop and boot sequence

175. In addition to its tying agreement, Microsoft forced OEMs to agree to restrictions on their ability to change the Windows desktop and boot sequence. As with the tying agreement, Microsoft's OEM desktop and launch restrictions increased competitors' costs, hurt consumers, and can only be explained as part of Microsoft's effort to mitigate the threat to its operating system monopoly from non-Microsoft browsers.

a.Microsoft imposed the "Windows Experience" restrictions in response and to prevent OEMs from offering Netscape Navigator more prominently than Internet Explorer.

176. When Microsoft first released Windows 95, OEMs customized the Windows 95 desktop and boot sequence in various ways to meet consumer demand; and they did so with Microsoft's express or implied consent.

176.1. OEMs operate in a competitive environment; To be successful, OEMs must deliver what their customers want, differentiate their products, minimize their support costs, and offer easy-to-use PCs.

1. Professor Fisher explained: “OEMs are, in a sense, consumers' representatives for specific purposes. They are in competition with each other. They win when they deliver what end users actually want. They would not care about the restrictions placed on them if they did not believe that dealing with consumers matters." Fisher, 2/6/99 at 22:1-6.
2. dr Warren-Boulton testified, “As Microsoft has acknowledged, OEMs are in the business of keeping their customers happy. Warren-Boulton Gov. § 160.
3. Garry Norris testified that IBM tried to "distinguish PCs supplied by IBM from those supplied by competitors" to ensure that new users, "a large percentage", of whom "are newbies" , understanding "how they navigate...their PC." Norris, 6/7/99, at 42:14-25. "The reason 'IBM' invested the millions of dollars...was in fact to make the IBM Aptiva' Out-of-box 'experience and end-user experience different from that of our competitors.'" Norris, 6/7/99pm, at 56:10-18. Norris further testified that if IBM has "a confusing or bad" product drafted, IBM would be adversely affected “in the market.” Norris, 6/7/99 at 69:2-14.
4. A Hewlett-Packard executive told Microsoft, "PCs can be scary and whimsical pieces of technology that 'consumers' are investing a large sum of their money in, as well as the longer-term ease of use and reliability of the product." GX309.
5. Compaq's Celeste Dunn testified that the consumer PC segment "is a really tough market segment because there's a lot of pricing pressure." Dunn Dep. 10/23/98 26:19-25 (DX 2566).

176.2. With the release of Windows 95, OEMs attempted to meet these goals -- and meet consumer demand -- by, among other things, customizing the Windows boot sequence to include tutorials and other features that ran at "boot." or "startup" process before the user is presented with the Windows desktop.

1. IBM. IBM developed an "out-of-box" experience (Norris 6/7/99 at 46:18-48:25) that included the "IBM Welcome Center" in the launch sequence that introduced users to basic educated their PCs like "how to use a mouse, how to run windows 95" and "what an icon is". Norris, 6/7/99, at 42:9 - 43:9. IBM placed the Welcome Center in the starting order because usability studies showed that "a large percentage of new users are novices" and IBM "wanted to make sure they understood how to sort of navigate their PC." Norris, 6/7/99 at 42:14 - 43:3. By making new users more "self-sufficient" before they first hit the Windows desktop, the Welcome Center helped IBM reduce support costs. Norris 6/7/99pm, at 59:1-15; GX 2191 (the Aptiva "Windows Guide" enhanced "the consumer's experience of new features in their computer system"); GX 2187 ("If anything, our Welcome program helps familiarize the user with the computer, the mouse, and Windows, and gently brings them to the Windows desktop.")
2. Hewlett Packard.Hewlett-Packard also developed an "out-of-box experience" that placed multiple screens in the boot process. Romano Dep., (played 12/16/98), at 38:7-14.
3. Dell. Dell PCs automatically completed setup of all software during the boot sequence. Kanicki Dep., (played 12/16/98), at 65-3-18.
4. Compaq. Microsoft allowed Compaq to "add Compaq splash screens and non-MS advertising." GX292.

176.3. Although Microsoft's original Windows 95 licenses prohibited certain OEM modifications,

1. Microsoft's Windows 95 licenses are typically provided:-blackened-
2. However, a letter from Microsoft to Hewlett-Packard confirmed that HP allowed users to choose an alternative desktop "skin" in addition to the graphical user interface of the usual Windows desktop. GX294.

177. On the other hand, when OEMs customized their PCs in ways that threatened Microsoft's goal of winning a share of browser usage, Microsoft acted quickly to both enforce and expand its restrictions.

177.1. Microsoft has designed its licenses to prevent OEMs from removing the Internet Explorer icon from the desktop.