ÿWPC¡ ²ØiðÄgˆ-5ä³Vñì¹B0]<» çèÐSÆ´Öò–Å2šbëö{•PǹŠÔ½PýÑŸ«¯–PäÝ0MäÉA|i# L8˜ñ›µð~üz’d¿¬-%&¬gJmrÛ á倒Ӥ¶œÈú}Á¬hÌCNÛÈoбéîÞåU¥ñ©ÎPµ(cPú„ìþ‰gºÁd yŒOJaµðrðíK= ý®/G!NUmÆè ֔ö×)Gˆ*–©Õl~nîGjq:ù ø@¿KO(4©B^8_ü‘µÀø A|ÿÒ¿¶Ê/ž¡É€¨øÏe•óÄ®oQâ¤:ôÓáž&” H‰LÕ´Õóåñ%‰~wÞ!IEý[æÑ:‹°!5ÛæîŠ™ƒˆ×Ôš†uyVёͫ‹ÓjˆN+<ºÁÈx“­p›~T.A§ÌbP¢VÛɽÔã-®×@¢-ç# LNö1¡ëöÝ/ëy›þ“Þž/·l}èþÂa)v¾VðíÅC™'ÍŸ²ÍûOï}ed“¼«Uj#?ßñ@ƒN6Ki{¨]t QŸÂZœ®› /™Zy'Çz6Iì¤r8=éðÝpp€VŒ‡×ÆìDé, lžÄK2öé­ÍÕ,#!hU N‰ %× 0yÝ^ Vw@b4¢¶Å mÇÞ=Ææ 0Ie¬Æ 1u× 0wL 0ŠÃ 0 M 0´í 0Ç¡ 0eh 0½Í 0DŠ -Î Æû 0NÁN-<Æ> 0"g Æk 0:e1 0 g––––– Býýýý 1‡˜Acrobat PDFWriter,,,,0(ÀÊO Z‹6Times New Roman Regularõ(Q¿$¡¡Ñ  ÑÑ8€JØõõdÄõõdÄ8ÑÑ  Ñ[~e'c E !"D#DÜmM'ê:i¢Ø+003|x#ÍÿU‹ÿÀÀÀ A, B,Level 1Level 2Level 3Level 4Level 54#)Þ2Quick A.Úƒ ÚÚ  Ú.à0 àÛ€ ÛI., II.,Level 1Level 2Level 3Level 4Level 53#37=CIQYag­­1.a.i.(1)(a)(i)1)a)(Oé;$µµà0  àÔ2#ÔÚ  ÚaÚ  Ú.Ô3  Ôà0` (#(#à(b·¤$¶¶à0  àà0` (#(#àÔ2#ÔÚ  ÚÚ  Ú.Ô3  Ôà0¸ ` (#` (#à(xir$··à0  àà0` (#(#àà0¸ ` (#` (#àÔ2#Ô(Ú  Ú0Ú  Ú)Ô3  Ôà0¸ (#¸ (#à(ŒÜ$¸¸à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àÔ2#Ô(Ú  ÚaÚ  Ú)Ô3  Ôà0h(#(#à(ŸF$¹¹à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àÔ2#Ô(Ú  ÚÚ  Ú)Ô3  Ôà0Àh(#h(#à4#*n2Quick I.ÚƒÚÚ  Ú.à0 àÛ€Û(m(3=§$¤¤Ý ƒ¿!ÝÑ  ÑÑ8€ˆ!õõdÊdÊ8ÑÑ  ÑÝ  Ýà  àòòÚ  Ú0Ú  Úóó(#Ã$òòÚ  Ú0Ú  Úóó #Ñ#€\¬Xÿÿd#Ña, b, c,Level 1Level 2Level 3Level 4Level 5(ÍO$——ÔÿÔòòóóÔÿÔ #Ñ#€l“Xÿÿd#Ñ1, 2, 3,Level 1Level 2Level 3Level 4Level 56#-†4Quick a. ÚƒÚÚ  Ú.à0 àÛ€Ûi., ii., iii.,Level 1Level 2Level 3Level 4Level 54#.î2Quick 1.ÚƒÚÚ  Ú.à0 àÛ€Û6#/~4Quick i. Úƒ ÚÚ  Ú.à0 àÛ€ Û d(ehCEKQW]cioAutoList41.1.1.1.1.1.1.1.Ý ƒ¿!ÝÑ  ÑÑ8€ÚvõõdÉdÊ8ÑÑ  ÑÝ  ÝÔ_ÔÔ‡XˆXõõÔÓ  ÓÑ€{ÀÑÑ€{ÇÑà@@° ° ìàUNITED€STATES€DISTRICT€COURTÐ ° ÐFOR€THE€DISTRICT€OF€COLUMBIAÌÓ›Ó____________________________________Ìà  àà ` àà ¸ àà  àà h àà À à)ÌUNITED€STATES€OF€AMERICA,à0 h àà0Àh(#h(#à)ИèÀ(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ìà  àà ` àPlaintiff,à0  àà0h(#(#àà0Àh(#h(#à)ÐŒ ÜÀ(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ìà  àà ` àv.à0 ¸ àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#à)à0À(#À(#àCivil€Action€No.€98„1232€(Ô_ÔTPJÔ_Ô)Ѐ Ð(#(# Ðà  àà ` àà ¸ àà  àà h àà À à)ÌMICROSOFT€CORPORATION,à0 h àà0Àh(#h(#à)ÐtÄ À(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ìà  àà ` àDefendant.à0  àà0h(#(#àà0Àh(#h(#à)Ðh¸ À(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ì____________________________________)Ìà  àà ` àà ¸ àà  àà h àà À à)ÌSTATE€OF€NEW€YORK,€òòexóó€òòrelóó.à0 h àà0Àh(#h(#à)ÐP À(#À(# Ѐ€Attorney€General€ELIOT€Ô_ÔSPITZERÔ_Ô,à0 h à)ÐJšh(#h(# Ѐ€òòetóó€òòal.óó,à0  àà0` (#(#àà0¸ ` (#` (#àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#à)ÐD”À(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ìà  àà ` àPlaintiffs€andà0  àà0h(#(#àà0Àh(#h(#à)Ð8ˆÀ(#À(# Ðà  àà ` àCounterclaim„Defendants,à0 À à)Ð2‚À(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ìà  àà ` àv.à0 ¸ àà0¸ (#¸ (#àà0h(#(#àà0Àh(#h(#à)à0À(#À(#àCivil€Action€No.€98„1233€(Ô_ÔTPJÔ_Ô)Ð&v(#(# Ðà  àà ` àà ¸ àà  àà h àà À à)ÌMICROSOFT€CORPORATION,à0 h àà0Àh(#h(#à)ÐjÀ(#À(# Ðà  àà ` àà ¸ àà  àà h àà À à)Ì€€à0  àà0` (#(#àDefendant€andà0` (#` (#àà0h(#(#à)Ð^h(#h(# Ðà  àà ` àCounterclaim„Plaintiff.à0 h à)Ð Xh(#h(# Ð____________________________________)Ô#†õÚvõXXˆ|#ÔÐ !R ÐÌÓ  Óòòò òÔ€XˆXõõÚvÔÓÓÌFINDINGS€OF€FACTó óÐ ¹$ ! ÐóóÓ  Óà  àThese€consolidated€civil€antitrust€actions€alleging€violations€of€the€Sherman€Act,€ðððð€1€and€2,€andÐ ­&ý!# Ðvarious€state€statutes€by€the€defendant€Microsoft€Corporation,€were€tried€to€the€Court,€sitting€without€aÏjury,€between€October€19,€1998,€and€June€24,€1999.€€The€Court€has€considered€the€record€evidenceÏsubmitted€by€the€parties,€made€determinations€as€to€its€relevancy€and€materiality,€assessed€theÐ ‰,Ù') ÐÑ{ÀÑâ âÑ8€ˆXXdúõõdÉ8Ñâ âÑ  Ñcredibility€of€the€testimony€of€the€witnesses,€both€written€and€oral,€and€Ô_Ôascertained€for€its€purposes€theÐ ° Ðprobative€significance€of€the€documentary€and€visual€evidence€presented.€€Upon€the€record€before€theÏCourt€as€of€July€28,€1999,€at€the€close€of€the€admission€of€evidence,€pursuant€to€òòFed.€R.€Civ.€P.óó€52(a),Ð ˜è Ðthe€Court€finds€the€following€facts€to€have€been€proved€by€a€preponderance€of€the€evidence.€€TheÏCourt€shall€state€the€conclusions€of€law€to€be€drawn€therefrom€in€a€separate€Memorandum€and€OrderÏto€be€filed€in€due€course.Ìò òÌI.à0  àBACKGROUNDó óÐ\¬ (#(# Ðà  à1.à ` àA€ð ðpersonal€computerðð€(ð ðPCðð)€is€a€Ôf  ÔÔg ÔÔf  ÔÔg Ôdigital€information€processing€deviceÔf  ÔÔg Ô€designed€forÐ P  Ðuse€by€one€person€at€a€time.Ôf  ÔÔg Ô€€A€typical€PC€consists€of€central€processing€components€(òòe.g.óó,€aÐ D” Ðmicroprocessor€and€main€memory)€and€mass€data€storage€(such€as€a€hard€disk).€€A€typical€PC€systemÏconsists€of€a€PC,€certain€peripheral€input/output€devices€(including€a€monitor,€a€keyboard,€a€mouse,€andÏa€printer),€and€an€operating€system.€€Ôf  ÔÔg ÔPC€systems,€which€include€desktop€and€laptop€models,€can€beÏdistinguished€from€more€powerful,€more€expensive€computer€systems€known€as€ð ðservers,ðð€which€areÏdesigned€to€provide€Ôf  ÔÔg Ôdata,€Ôf  ÔÔg ÔservicesÔf  ÔÔg Ô,Ôf  ÔÔg Ô€and€functionality€through€aÔf  ÔÔg ÔÔf  ÔÔg Ô€digitalÔf  ÔÔg Ô€network€to€multiple€users.Ôf  ÔÔg ÔÔf  ÔÔg ÔØØÌÓb€ +(eh83bÓà  à2.à ` àAn€ð ðoperating€systemðð€is€a€software€program€that€controls€the€allocation€and€use€ofÐ ü!L ÐcomputerÔf  ÔÔg Ô€resources€(such€asÔf  ÔÔg Ô€central€processing€unit€time,€Ôf  ÔÔg ÔÔf  ÔÔg Ômain€memory€space,€disk€space,€andÏinput/output€channels).€€The€operating€system€also€supports€the€functions€of€software€programs,€calledÏð ðapplications,ðð€that€perform€specific€user„oriented€tasks.€€The€operating€system€supports€the€functionsÏof€applications€by€exposing€interfaces,€called€ð ðapplication€programming€interfaces,ðð€or€ð ðAPIs.ðð€€TheseÏare€synapses€at€which€the€developer€of€an€application€can€connect€to€invoke€pre„fabricated€blocks€ofÐ À+'( ÐÑ{ÇÑâ âÑ8€ˆXXdúXXdú8Ñâ âÑ  Ñcode€in€the€operating€system.€€These€blocks€of€code€in€Ô_Ôturn€perform€crucial€tasks,€such€as€displayingÏtext€on€the€computer€screen.€€Because€it€supports€applications€while€interacting€more€closely€with€theÏPC€systemððs€hardware,€the€operating€system€is€said€to€serve€as€a€ð ðplatform.ððÌà  à3.à ` àAn€Intel„compatible€PC€is€one€designed€to€function€with€Intelððs€80x86/Pentium€familiesÐ Œ Ü Ðof€microprocessors€or€with€compatible€microprocessors€manufactured€by€Intel€or€by€other€firms.Ôf  ÔÔg ÔÌà  à4.à ` àAn€operating€system€designed€to€run€on€an€Intel„compatible€PC€will€not€function€on€aÐ tÄ  ÐÔf  ÔÔg ÔÔf  ÔÔg Ônon„Intel„compatibleÔf  ÔÔg Ô€PC,€nor€will€an€operating€system€designed€for€Ôf  ÔÔg ÔÔf  ÔÔg Ôa€non„Intel„compatibleÔf  ÔÔg Ô€PC€functionÏon€an€Intel„compatible€one.€€Similarly,€an€application€that€relies€on€APIs€specific€to€one€operatingÏsystem€will€not,€generally€speaking,€function€on€another€operating€system€unless€it€is€first€adapted,€orÏð ðported,ðð€to€the€APIs€of€the€other€operating€system.Ìà  à5.à ` àDefendant€Microsoft€Corporation€is€organized€under€the€laws€of€the€State€ofÐ 8ˆ ÐWashington,€and€its€headquarters€are€situated€in€Redmond,€Washington.€€Since€its€inception,€MicrosoftÏhas€focused€primarily€on€developing€software€and€licensing€it€to€various€purchasers.Ìà  à6.à ` àIn€1981,€Microsoft€released€the€first€version€of€its€Microsoft€Disk€Operating€System,Ð d Ðcommonly€known€as€ð ðMS„DOS.ðð€€The€system€had€a€character„based€user€interface€that€required€theÏuser€to€type€specific€instructions€at€a€command€prompt€in€order€to€perform€tasks€such€as€launchingÏapplications€and€copying€files.€€When€the€International€Business€Machines€Corporation€(ð ðIBMðð)Ïselected€MS„DOS€for€pre„installation€on€its€first€generation€of€PCs,€Microsoftððs€product€became€theÏpredominant€operating€system€sold€for€Intel„compatible€PCs.Ìà  à7.à ` àIn€1985,€Microsoft€began€shipping€a€software€package€called€Windows.€€The€productÐ Ì)%& Ðincluded€a€graphical€user€interface,€which€enabled€users€to€perform€tasks€by€selecting€icons€and€wordsÐ À+'( Ðon€the€screen€using€a€mouse.€€Although€originally€just€a€user„interface,€or€ð ðshell,ðð€sitting€on€top€of€MS„¼DOS,€Windows€took€on€more€operating„system€functionality€over€time.Ìà  à8.à ` àIn€1995,€Microsoft€introduced€a€software€package€called€Windows€95,€whichÐ ˜è Ðannounced€itself€as€the€first€operating€system€for€Intel„compatible€PCs€that€exhibited€the€same€sort€ofÏintegrated€features€as€the€Mac€OS€running€PCs€manufactured€by€Apple€Computer,€Inc.€(ð ðAppleðð).€ÏWindows€95€enjoyed€unprecedented€popularity€with€consumers,€and€in€June€1998,€Microsoft€releasedÏits€successor,€Windows€98.Ìà  à9.à ` àMicrosoft€is€the€leading€supplier€of€operating€systems€for€PCs.€€The€company€transactsÐ \¬  Ðbusiness€in€all€fifty€of€the€United€States€and€in€most€countries€around€the€world.€Ìà  àØ€Ø10.à ` àMicrosoft€licenses€copies€of€its€software€programs€directly€to€consumers.€€The€largestÐ D” Ðpart€of€its€MS„DOS€and€Windows€sales,€however,€consists€of€licensing€the€products€to€manufacturersÏof€PCs€(known€as€ð ðoriginal€equipment€manufacturersðð€or€ð ðOEMsðð),€such€as€the€IBM€PC€Company€andÏthe€Compaq€Computer€Corporation€(ð ðCompaqðð).€€An€OEM€typically€installs€a€copy€of€Windows€ontoÏone€of€its€PCs€before€selling€the€package€to€a€consumer€under€a€single€price.Ìà  à11.à ` àThe€Internet€is€a€global€electronic€network,€consisting€of€smaller,€interconnectedÐ  X Ðnetworks,€which€allows€millions€of€computers€to€exchange€information€over€telephone€wires,€dedicatedÏdata€cables,€and€wireless€links.€€The€Internet€links€PCs€by€means€of€servers,€which€run€specializedÏoperating€systems€and€applications€designed€for€servicing€a€network€environment.Ìà  à12.à ` àThe€World€Wide€Web€(ð ðthe€Webðð)€is€a€massive€collection€of€digital€informationÐ Ø'(#$ Ðresources€stored€on€servers€throughout€the€Internet.€€These€resources€are€typically€provided€in€the€Ô_ÔformÏof€hypertext€documents,€commonly€referred€to€as€ð ðWeb€pages,ðð€that€may€incorporate€any€combinationÐ À+'( Ðof€text,€graphics,€audio€and€video€content,€software€programs,€and€other€data.€€A€user€of€a€computerÏconnected€to€the€Internet€can€publish€a€page€on€the€Web€simply€by€copying€it€into€a€speciallyÏdesignated,€publicly€accessible€directory€on€a€Web€server.€€Some€Web€resources€are€in€the€form€ofÏapplications€that€provide€functionality€through€a€userððs€PC€system€but€actually€execute€on€a€server.Ìà  à13.à ` àInternet€content€providers€(ð ðICPsðð)€are€the€individuals€and€organizations€that€haveÐ € Ð Ðestablished€a€presence,€or€ð ðsite,ðð€on€the€Web€by€publishing€a€collection€of€Web€pages.€€Most€WebÏpages€are€in€the€form€of€ð ðhypertextðð;€that€is,€they€contain€annotated€references,€or€ð ðhyperlinks,ðð€to€otherÏWeb€pages.€€Hyperlinks€can€be€used€as€cross„references€within€a€single€document,€between€documentsÏon€the€same€site,€or€between€documents€on€different€sites.Ìà  à14.à ` àTypically,€one€page€on€each€Web€site€is€the€ð ðhome€page,ðð€or€the€first€access€point€toÐ D” Ðthe€site.€€The€home€page€is€usually€a€hypertext€document€that€presents€an€overview€of€the€site€andÏhyperlinks€to€the€other€pages€comprising€the€site.Ìà  à15.à ` àPCs€typically€connect€to€the€Internet€through€the€services€of€Internet€access€providersÐ  p Ð(ð ðIAPsðð),€which€generally€charge€subscription€fees€to€their€customers€in€the€United€States.€€There€areÏtwo€types€of€IAPs.€€Online€services€(ð ðOLSsðð)€such€as€America€Online€(ð ðAOLðð),€Prodigy,€and€theÏMicrosoft€Network€(ð ðMSNðð)€offer,€in€addition€to€Internet€access,€various€services€and€an€array€ofÏproprietary€content.€€Internet€service€providers€(ð ðISPsðð)€such€as€MindSpring€and€Netcom,€on€the€otherÏhand,€offer€few€services€apart€from€Internet€access€and€relatively€little€of€their€own€content.Ìà  à16.à ` àA€ð ðWeb€clientðð€is€software€that,€when€running€on€a€computer€connected€to€the€Internet,Ð Ø'(#$ Ðsends€information€to€and€receives€information€from€Web€servers€throughout€the€Internet.€€Web€clientsÏand€servers€transfer€data€using€a€standard€known€as€the€Hypertext€Transfer€Protocol€(ð ðHTTPðð).€€AÐ À+'( Ðð ðWeb€browserðð€is€a€type€of€Web€client€that€enables€a€user€to€select,€retrieve,€and€perceive€resourcesÏon€the€Web.€€In€particular,€Web€browsers€provide€a€way€for€a€user€to€view€hypertext€documents€andÏfollow€the€hyperlinks€that€connect€them,€typically€by€moving€the€cursor€over€a€link€and€depressing€theÏmouse€button.Ìà  à17.à ` àØ€ØAlthough€certain€Web€browsers€provided€graphical€user€interfaces€as€far€back€as€1993,Ð € Ð Ðthe€first€widely„popular€graphical€browser€distributed€for€profit,€called€Navigator,€was€brought€toÏmarket€by€the€Netscape€Communications€Corporation€in€December€1994.€€Microsoft€introduced€itsÏbrowser,€called€Internet€Explorer,€in€July€1995.ÌØ€Øò òÌII.à  àTHE€RELEVANT€MARKETó óÐ D” Ðà  à18.à ` àCurrently€there€are€no€products,€nor€are€there€likely€to€be€any€in€the€near€future,€that€aÐ 8ˆ Ðsignificant€percentage€of€consumers€world„wide€could€substitute€for€Intel„compatible€PC€operatingÏsystems€without€incurring€substantial€costs.€€Furthermore,€no€firm€that€does€not€currently€market€Intel„¼compatible€PC€operating€systems€could€start€doing€so€in€a€way€that€would,€within€a€reasonably€shortÏperiod€of€time,€present€a€significant€percentage€of€consumers€with€a€viable€alternative€to€existing€Intel„¼compatible€PC€operating€systems.€€It€follows€that,€if€one€firm€controlled€the€licensing€of€all€Intel„¼compatible€PC€operating€systems€world„wide,€it€could€set€the€price€of€a€license€substantially€above€thatÏwhich€would€be€charged€in€a€competitive€market€and€leave€the€price€there€for€a€significant€period€ofÏtime€without€losing€so€many€customers€as€to€make€the€action€unprofitable.€€Therefore,€in€determining€theÏlevel€of€Microsoftððs€market€power,€the€relevant€market€is€the€licensing€of€all€Intel„compatible€PCÏoperating€systems€world„wide.Ð À+'( ÐÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ;ÝÚƒ ÚAÚ  Ú.à0 ` àÝ  ÝDemand€Substitutability݃ )Þ;,;ÝÛ€ یа` (#` (# ÐŒÝ  Ýà  àà ` à1.à0 ¸ àServer€Operating€Systemsó óФô¸ (#¸ (# Ðà  à19.à ` àConsumers€could€not€turn€from€Intel„compatible€PC€operating€systems€to€Intel„Ð ˜è Ðcompatible€server€operating€systems€without€incurring€substantial€costs,€since€the€latter€type€of€system€isÏsold€at€a€significantly€higher€price€than€the€former.€€A€consumer€intent€on€acquiring€a€server€operatingÏsystem€would€also€have€to€buy€a€computer€of€substantially€greater€power€and€price€than€an€Intel„¼compatible€PC,€because€server€operating€systems€generally€cannot€function€properly€on€PC€hardware.€ÏThe€price€of€an€Intel„compatible€PC€operating€system€accounts€for€only€a€very€small€percentage€of€theÏprice€of€an€Intel„compatible€PC€system.€€Thus,€even€a€substantial€increase€in€the€price€of€an€Intel„¼compatible€PC€operating€system€above€the€competitive€level€would€result€in€only€a€trivial€increase€in€theÏprice€of€an€Intel„compatible€PC€system.€€Very€few€consumers€would€purchase€expensive€servers€inÏresponse€to€a€trivial€increase€in€the€price€of€an€Intel„compatible€PC€system.€€Furthermore,€a€consumerÏwould€not€obtain€a€satisfactory€substitute€for€an€Intel„compatible€PC€operating€system€even€if€heÏpurchased€a€server,€since€server€operating€systems€lack€the€features€ð"ð€and€support€for€the€breadth€ofÏapplications€ð"ð€that€induce€users€to€purchase€Intel„compatible€PC€operating€systems.ÌØ€ØÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.î”AÝÚƒÚ2Ú  Ú.à0 ¸ àÝ  ÝNon„Intel„Compatible€PC€Operating€Systemsó ó݃!.î”AÊAÝÛ€ÛŒÐü!L¸ (#¸ (# ÐŒÝ  Ýà  à20.à ` àSince€only€Intel„compatible€PC€operating€systems€will€work€with€Intel„compatible€PCs,Ð ð#@  Ða€consumer€cannot€opt€for€a€non„Intel„compatible€PC€operating€system€without€obtaining€a€non„Intel„¼compatible€PC.€€Thus,€for€consumers€who€already€own€an€Intel„compatible€PC€system,€the€cost€ofÏswitching€to€a€non„Intel€compatible€PC€operating€system€includes€the€price€of€not€only€a€new€operatingÏsystem,€but€also€a€new€PC€and€new€peripheral€devices.€€It€also€includes€the€effort€of€learning€to€use€theÐ À+'( Ðnew€system,€the€cost€of€acquiring€a€new€set€of€compatible€applications,€and€the€work€of€replacing€filesÏand€documents€that€were€associated€with€the€old€applications.€€Very€few€consumers€would€incur€theseÏcosts€in€response€to€the€trivial€increase€in€the€price€of€an€Intel„compatible€PC€system€that€would€resultÏfrom€even€a€substantial€increase€in€the€price€of€an€Intel„compatible€PC€operating€system.€€For€example,Ïusers€of€Intel„compatible€PC€operating€systems€would€not€switch€in€large€numbers€to€the€Mac€OS€inÏresponse€to€even€a€substantial,€sustained€increase€in€the€price€of€an€Intel„compatible€PC€operatingÏsystem.Ìà  à21.à ` àThe€response€to€a€price€increase€would€be€somewhat€greater€among€consumers€buyingÐ \¬  Ðtheir€first€PC€system,€because€they€would€not€have€already€invested€time€and€money€in€an€Intel„¼compatible€PC€system€and€a€set€of€compatible€applications.€€Apple€does€not€license€the€Mac€OSÏseparately€from€its€PC€hardware,€however,€and€the€package€of€hardware€and€software€comprising€anÏApple€PC€system€is€priced€substantially€higher€than€the€average€price€of€an€Intel„compatible€PCÏsystem.€€Furthermore,€consumer€demand€for€Apple€PC€systems€suffers€on€account€of€the€relativeÏdearth€of€applications€written€to€run€on€the€Mac€OS.€€It€is€unlikely,€then,€that€a€firm€controlling€theÏlicensing€of€all€Intel„compatible€PC€operating€systems€would€lose€so€many€new€PC€users€to€Apple€asÏthe€result€of€a€substantial,€enduring€price€increase€as€to€make€the€action€unprofitable.€€It€is€thereforeÏproper€to€define€a€relevant€market€that€excludes€the€Mac€OS.€€In€any€event,€as€Section€III€of€theseÏfindings€demonstrates,€including€the€Mac€OS€in€the€relevant€market€would€not€alter€the€CourtððsÏconclusion€as€to€the€level€of€Microsoftððs€market€power.ÌÌò òà  àà ` à3.à0 ¸ àInformation€Appliancesó óÐÀ+'(¸ (#¸ (# Ðà  à22.à ` àNo€operating€system€designed€for€a€hand„held€computer,€a€ð ðsmartðð€wireless€telephone,Ð ° Ða€television€set„top€box,€or€a€game€console€is€capable€of€performing€as€an€adequate€operating€systemÏfor€an€Intel„compatible€PC.€€Therefore,€in€order€to€adopt€a€substitute€for€the€Intel„compatible€PCÏoperating€system€from€the€realm€of€ð ðinformation€appliances,ðð€a€consumer€must€acquire€one€or€more€ofÏthese€devices€in€lieu€of€an€Intel„compatible€PC€system.Ìà  à23.à ` àIt€is€possible€that,€within€the€next€few€years,€those€consumers€who€otherwise€would€useÐ tÄ  Ðan€Intel„compatible€PC€system€solely€for€storing€addresses€and€schedules,€for€sending€and€receiving€E„¼mail,€for€browsing€the€Web,€and€for€playing€video€games€might€be€able€to€choose€a€complementary€setÏof€information€appliances€over€an€Intel„compatible€PC€system€without€incurring€substantial€costs.€€ToÏthe€extent€this€substitution€occurs,€though,€it€will€be€the€result€of€innovation€by€the€producers€ofÏinformation€appliances,€and€it€will€occur€even€if€Intel„compatible€PC€operating€systems€are€priced€at€theÏsame€level€that€they€would€be€in€a€competitive€market.€€More€importantly,€while€some€consumers€mayÏdecide€to€make€do€with€one€or€more€information€appliances€in€place€of€an€Intel„compatible€PC€system,Ïthe€number€of€these€consumers€will,€for€the€foreseeable€future,€remain€small€in€comparison€to€theÏnumber€of€consumers€deciding€that€they€still€need€an€Intel„compatible€PC€system.€€One€reason€for€thisÏis€the€fact€that€no€single€type€of€information€appliance,€nor€even€all€types€in€the€aggregate,€provides€all€ofÏthe€features€that€most€consumers€have€come€to€rely€on€in€their€PC€systems€and€in€the€applications€thatÏrun€on€them.€€Thus,€most€of€those€who€buy€information€appliances€will€do€so€in€addition€to,€rather€thanÏinstead€of,€buying€an€Intel„compatible€PC€system.€€Not€surprisingly,€then,€sales€of€PC€systems€are€notÏexpected€to€suffer€on€account€of€the€growing€consumer€interest€in€information€appliances.€€It€followsÏthat,€for€the€foreseeable€future,€a€firm€controlling€the€licensing€of€all€Intel„compatible€PC€operatingÐ À+'( Ðsystems€could€set€prices€substantially€above€competitive€levels€without€losing€an€unacceptable€amountÏof€business€to€information€appliances.ÌØ€ØÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.î`UÝÚƒÚ4Ú  Ú.à0 ¸ àÝ  ÝNetwork€Computersó ó݃!.î`U–UÝÛ€ÛŒÐ˜è¸ (#¸ (# ÐŒÝ  Ýà  à24.à ` àA€network€computer€system€(sometimes€called€a€ð ðthin€clientðð)€typically€contains€centralÐ Œ Ü Ðprocessing€components€with€basic€capabilities,€certain€key€peripheral€devices€(such€as€a€monitor,€aÏkeyboard,€and€a€mouse),€an€operating€system,€and€a€browser.€€The€system€contains€no€mass€storage,Ïhowever,€and€it€processes€little€if€any€data€locally.€€Instead,€the€system€receives€processed€data€andÏsoftware€as€needed€from€a€server€across€a€network.€€A€network€computer€system€lacks€the€hardwareÏresources€to€support€an€Intel„compatible€PC€operating€system.€€It€follows€that€software€applicationsÏwritten€to€run€on€a€specific€Intel„compatible€PC€operating€system€will€not€run€on€a€network€computer.€ÏNetwork€computers€can€run€applications€residing€on€a€designated€server,€however.€€Moreover,€aÏnetwork€computer€system€typically€can€run€applications€residing€on€other€servers,€so€long€as€thoseÏapplications€are€accessible€through€Web€sites.€€The€ability€to€run€server„based€applications€is€notÏexclusive€to€network€computer€systems,€however.€€Generally€speaking,€any€PC€system€equipped€with€aÏbrowser€and€an€Internet€connection€is€capable€of€accessing€applications€hosted€through€Web€sites.€Ìà  à25.à ` àSince€the€network€computing€model€relies€heavily€on€the€processing€power€andÐ ü!L Ðmemory€of€servers,€the€requirements€for€the€userððs€hardware€(and€thus€the€price€of€that€hardware)€areÏlow€relative€to€those€of€an€Intel„compatible€PC€system.€€Still,€a€user€who€already€owns€a€relativelyÏexpensive€Intel„compatible€PC€system€is€not€likely€to€abandon€the€investment€and€acquire€less€powerfulÏhardware€just€because€one€of€the€least€expensive€components€of€his€PC€system€ð"ð€the€operating€systemÏð"ð€is€substantially€more€expensive€than€it€would€be€under€competitive€conditions.€€Just€as€does€the€MacÐ À+'( ÐOS,€the€network€computing€model€presents€a€somewhat€more€attractive€alternative€to€the€first„timeÏcomputer€buyer.€€But€as€in€the€case€where€a€prospective€purchaser€is€considering€acquiring€the€AppleÏalternative,€a€new€buyer€considering€the€network€computing€model€must€choose€between€types€ofÏcomputer€systems.€€If€the€consumer€opts€for€the€less€expensive€hardware€of€the€network€computer,€thatÏhardware€will€not€support€an€Intel„compatible€PC€operating€system;€and€if€the€new€buyer€opts€for€theÏmore€expensive€hardware€of€an€Intel„compatible€PC,€an€Intel„compatible€PC€operating€system€willÏalmost€certainly€come€pre„installed€(and€in€any€event€represent€very€little€additional€cost€relative€to€theÏprice€of€the€hardware).Ìà  à26.à ` àOnly€a€few€firms€currently€market€network€computer€systems,€and€the€systems€have€yetÐ P  Ðto€attract€substantial€consumer€demand.€€In€part,€this€is€because€PC€systems,€which€can€store€andÏprocess€data€locally€as€well€as€communicate€with€a€server,€have€decreased€so€much€in€price€as€to€callÏinto€question€the€value€proposition€of€buying€a€network€computer€system.€€This€fact€would€not€change€ifÏthe€price€of€an€Intel„compatible€PC€operating€system€rose€significantly,€because€the€resulting€change€inÏthe€price€of€an€Intel„compatible€PC€system€would€be€very€minor.€€Another€reason€for€the€limitedÏdemand€for€network€computer€systems€is€the€fact€that€few€consumers€are€in€a€position€to€turn€from€PCÏsystems€to€network€computer€systems€without€making€substantial€sacrifices;€for€the€network€computingÏoption€exhibits€significant€shortcomings€for€current€PC€owners€and€first„time€buyers€alike.€€TheÏproblems€of€latency,€congestion,€asynchrony,€and€insecurity€across€a€communications€network,€andÏcontention€for€limited€processing€and€memory€resources€at€the€remote€server,€can€all€result€in€aÏsubstantial€derogation€of€computing€performance.€€Moreover,€the€owner€of€a€network€computer€isÏrequired€to€enter€into€long„term€dependency€upon€the€owner€of€a€remote€server€in€order€to€obtainÐ À+'( Ðfunctionality€that€would€reside€within€his€control€if€he€owned€a€PC€system.€€If€network€computingÏbecomes€a€viable€alternative€to€PC„based€computing,€it€will€be€because€innovation€by€the€proponentsÏof€the€network€computing€model€overcomes€these€problems,€and€it€will€happen€even€if€Intel„compatibleÏPC€operating€systems€are€priced€at€competitive€levels.€€In€any€case,€that€day€has€not€arrived,€nor€doesÏit€appear€imminent.ÌÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îkgÝÚƒÚ5Ú  Ú.à0 ¸ àÝ  ÝServer„Based€Computing€Generallyó ó݃!.îkg¡gÝÛ€ÛŒÐtÄ ¸ (#¸ (# ÐŒÝ  Ýà  à27.à ` àAs€the€bandwidth€available€to€the€average€user€increases,€ð ðportalðð€Web€sites,€whichÐ h¸  Ðaggregate€Web€content€and€provide€services€such€as€search€engines,€E„mail,€and€travel€reservationÏsystems,€could€begin€to€host€full€lines€of€the€server„based,€personal„productivity€applications€that€haveÏbegun€to€appear€in€small€numbers€on€the€Web.€€If€so,€increasing€numbers€of€computer€users€equippedÏwith€Web€browsers€and€IAP€connections€could€begin€to€conduct€a€significant€portion€of€theirÏcomputing€through€these€portals.€€To€the€extent€they€might€do€so,€users€probably€would€not€regard€theÏMac€OSððs€limited€stock€of€compatible€applications€as€the€major€drawback€to€using€an€Apple€PCÏsystem€that€it€is€today,€and€they€might€be€increasingly€drawn€to€network€computer€systems€andÏinformation€appliances.€€The€variety€and€ease€of€use€of€server„based€applications€accessible€throughÏbrowsers€would€have€to€increase€a€great€deal€from€todayððs€levels,€however,€before€the€total€costs€ofÏdispensing€with€an€Intel„compatible€PC€operating€system€would€decline€sufficiently€to€impose€aÏsignificant€constraint€on€the€pricing€of€those€systems.€€Again,€that€day€is€not€imminent;€for€at€least€theÏnext€few€years,€the€overwhelming€majority€of€consumers€accessing€server„based€applications€will€do€soÏusing€an€Intel„compatible€PC€system€and€a€browser.ÌÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îÌmÝÚƒÚ6Ú  Ú.à0 ¸ àÝ  ÝMiddlewareó ó݃!.îÌmnÝÛ€ÛŒÐÀ+'(¸ (#¸ (# ÐŒÝ  Ýà  à28.à ` àOperating€systems€are€not€the€only€software€programs€that€expose€APIs€to€applicationÐ ° Ðdevelopers.€€The€Netscape€Web€browser€and€Sun€Microsystems,€Inc.ððs€Java€class€libraries€areÏexamples€of€non„operating€system€software€that€do€likewise.€€Such€software€is€often€calledÏð ðmiddlewareðð€because€it€relies€on€the€interfaces€provided€by€the€underlying€operating€system€whileÏsimultaneously€exposing€its€own€APIs€to€developers.€€Currently€no€middleware€product€exposesÏenough€APIs€to€allow€independent€software€vendors€(ð ðISVsðð)€profitably€to€write€full„featured€personalÏproductivity€applications€that€rely€solely€on€those€APIs.€€Ìà  à29.à ` àEven€if€middleware€deployed€enough€APIs€to€support€full„featured€applications,€itÐ \¬  Ðwould€not€function€on€a€computer€without€an€operating€system€to€perform€tasks€such€as€managingÏhardware€resources€and€controlling€peripheral€devices.€€But€to€the€extent€the€array€of€applicationsÏrelying€solely€on€middleware€comes€to€satisfy€all€of€a€userððs€needs,€the€user€will€not€care€whether€thereÏexists€a€large€number€of€other€applications€that€are€directly€compatible€with€the€underlying€operatingÏsystem.€€Thus,€the€growth€of€middleware„based€applications€could€lower€the€costs€to€users€of€choosingÏa€non„Intel„compatible€PC€operating€system€like€the€Mac€OS.€€It€remains€to€be€seen,€though,€whetherÏthere€will€ever€be€a€sustained€stream€of€full„featured€applications€written€solely€to€middleware€APIs.€€€InÏany€event,€it€would€take€several€years€for€middlware€and€the€applications€it€supports€to€evolve€from€theÏstatus€quo€to€a€point€at€which€the€cost€to€the€average€consumer€of€choosing€a€non„Intel€compatible€PCÏoperating€system€over€an€Intel„compatible€one€falls€so€low€as€to€constrain€the€pricing€of€the€latterÏsystems.Ìâ âÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞðuÝÚƒ ÚBÚ  Ú.à0 ` àÝ  ÝThe€Possibility€of€Supply€Responsesó ó݃ )ÞðuvÝÛ€ ÛŒÐÌ)%&` (#` (# ÐŒÝ  Ýà  à30.à ` àFirms€that€do€not€currently€produce€Intel„compatible€PC€operating€systems€could€doÐ ° Ðâ âso.€€What€is€more,€once€a€firm€had€written€the€necessary€software€code,€it€could€produce€millions€ofÏcopies€of€its€operating€system€at€relatively€low€cost.€€The€ability€to€meet€a€large€demand€is€useless,Ïhowever,€if€the€demand€for€the€product€is€small,€and€signs€do€not€indicate€large€demand€for€a€new€Intel„¼compatible€PC€operating€system.€€To€the€contrary,€they€indicate€that€the€demand€for€a€new€Intel„¼compatible€PC€operating€system€would€be€severely€constrained€by€an€intractable€ð ðchicken„and„eggððÏproblem:€€The€overwhelming€majority€of€consumers€will€only€use€a€PC€operating€system€for€which€thereÏalready€exists€a€large€and€varied€set€of€high„quality,€full„featured€applications,€and€for€which€it€seemsÏrelatively€certain€that€new€types€of€applications€and€new€versions€of€existing€applications€will€continue€toÏbe€marketed€at€pace€with€those€written€for€other€operating€systems.€€Unfortunately€for€firms€whoseÏproducts€do€not€fit€that€bill,€the€porting€of€applications€from€one€operating€system€to€another€is€a€costlyÏprocess.€€Consequently,€software€developers€generally€write€applications€first,€and€often€exclusively,€forÏthe€operating€system€that€is€already€used€by€a€dominant€share€of€all€PC€users.€€Users€do€not€want€toÏinvest€in€an€operating€system€until€it€is€clear€that€the€system€will€support€generations€of€applications€thatÏwill€meet€their€needs,€and€developers€do€not€want€to€invest€in€writing€or€quickly€porting€applications€forÏan€operating€system€until€it€is€clear€that€there€will€be€a€sizeable€and€stable€market€for€it.€€What€is€more,Ïconsumers€who€already€use€one€Intel„compatible€PC€operating€system€are€even€less€likely€than€first„¼time€buyers€to€choose€a€newcomer€to€the€field,€for€switching€to€a€new€system€would€require€these€usersÏto€scrap€the€investment€they€have€made€in€applications,€training,€and€certain€hardware.Ìà  à31.à ` àThe€chicken„and„egg€problem€notwithstanding,€a€firm€might€reasonably€expect€to€makeÐ Ì)%& Ða€profit€by€introducing€an€Intel„compatible€PC€operating€system€designed€to€support€a€type€ofÐ À+'( Ðapplication€that€satisfies€the€special€interests€of€a€particular€subset€of€users.€€For€example,€Be,€Inc.Ï(ððBeðð)€markets€an€Intel„compatible€PC€operating€system€called€BeOS€that€offers€superior€support€forÏmultimedia€applications,€and€the€operating€system€enjoys€a€certain€amount€of€success€with€the€segmentÏof€the€consumer€population€that€has€a€special€interest€in€creating€and€playing€multimedia€content€with€aÏPC€system.€€Still,€while€a€niche€operating€system€might€turn€a€profit,€the€chicken„and„egg€problemÏ(hereinafter€referred€to€as€the€ð ðapplications€barrier€to€entryðð)€would€make€it€prohibitively€expensive€forÏa€new€Intel„compatible€operating€system€to€attract€enough€developers€and€consumers€to€become€aÏviable€alternative€to€a€dominant€incumbent€in€less€than€a€few€years.Ìà  à32.à ` àTo€the€extent€that€developers€begin€writing€attractive€applications€that€rely€solely€onÐ P  Ðservers€or€middleware€instead€of€PC€operating€systems,€the€applications€barrier€to€entry€could€erode.€ÏAs€the€Court€finds€above,€however,€it€remains€to€be€seen€whether€server„€or€middleware„basedÏdevelopment€will€flourish€at€all.€€Even€if€such€development€were€already€flourishing,€it€would€be€severalÏyears€before€the€applications€barrier€eroded€enough€to€clear€the€way€for€the€relatively€rapid€emergenceÏof€a€viable€alternative€to€incumbent€Intel„compatible€PC€operating€systems.€€It€is€highly€unlikely,€then,Ïthat€a€firm€not€already€marketing€an€Intel„compatible€PC€operating€system€could€begin€marketing€oneÏthat€would,€in€less€than€a€few€years,€present€a€significant€percentage€of€consumers€with€a€viableÏalternative€to€incumbents.ÌÌÌâ âò òIII.à0  àMICROSOFTððS€POWER€IN€THE€RELEVANT€MARKETó óÐÌ)%&(#(# Ðà  à33.à ` àMicrosoft€enjoys€so€much€power€in€the€market€for€Intel„compatible€PC€operatingÐ ° Ðâ âsystems€that€if€it€wished€to€exercise€this€power€solely€in€terms€of€price,€it€could€charge€a€price€forÏWindows€substantially€above€that€which€could€be€charged€in€a€competitive€market.€€Moreover,€it€couldÏdo€so€for€a€significant€period€of€time€without€losing€an€unacceptable€amount€of€business€to€competitors.€ÏIn€other€words,€Microsoft€enjoys€monopoly€power€in€the€relevant€market.Ìà  à34.à ` àViewed€together,€three€main€facts€indicate€that€Microsoft€enjoys€monopoly€power.€Ð tÄ  ÐFirst,€Microsoftððs€share€of€the€market€for€Intel„compatible€PC€operating€systems€is€extremely€large€andÏstable.€€Second,€Microsoftððs€dominant€market€share€is€protected€by€a€high€barrier€to€entry.€€Third,€andÏlargely€as€a€result€of€that€barrier,€Microsoftððs€customers€lack€a€commercially€viable€alternative€toÏWindows.ÌØ€ ØÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞzŠÝÚƒ ÚAÚ  Ú.à0 ` àÝ  ÝMarket€Shareó ó݃ )ÞzФŠÝÛ€ ÛŒÐ8ˆ` (#` (# ÐŒÝ  Ýà  à35.à ` àMicrosoft€possesses€a€dominant,€persistent,€and€increasing€share€of€the€world„wideÐ ,| Ðmarket€for€Intel„compatible€PC€operating€systems.€€Every€year€for€the€last€decade,€Microsoftððs€shareÏof€the€market€for€Intel„compatible€PC€operating€systems€has€stood€above€ninety€percent.€€For€the€lastÏcouple€of€years€the€figure€has€been€at€least€ninety„five€percent,€and€analysts€project€that€the€share€willÏclimb€even€higher€over€the€next€few€years.€€Even€if€Appleððs€Mac€OS€were€included€in€the€relevantÏmarket,€Microsoftððs€share€would€still€stand€well€above€eighty€percent.ÌÌÌÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ¿ÝÚƒ ÚBÚ  Ú.à0 ` àÝ  ÝThe€Applications€Barrier€to€Entry݃ )Þ¿éÝÛ€ ÛŒÐÀ+'(` (#` (# ÐŒÝ  ÝØ€ØÝ‚!.îÿÝÝ  Ýà  àà ` àÝ‚!.îÆŽÝÚƒÚ1Ú  Ú.à0 ¸ àÝ  ÝDescriptionó ó€ò òof€the€Applications€Barrier€to€Entryó ó݃!.îÆŽùŽÝۀیа¸ (#¸ (# ÐŒÝ  Ýà  à36.à ` àMicrosoftððs€dominant€market€share€is€protected€by€the€same€barrier€that€helps€defineÐ ¤ô Ðthe€market€for€Intel„compatible€PC€operating€systems.€€As€explained€above,€the€applications€barrierÏwould€prevent€an€aspiring€entrant€into€the€relevant€market€from€drawing€a€significant€number€ofÏcustomers€away€from€a€dominant€incumbent€even€if€the€incumbent€priced€its€products€substantiallyÏabove€competitive€levels€for€a€significant€period€of€time.€€Because€Microsoftððs€market€share€is€soÏdominant,€the€barrier€has€a€similar€effect€within€the€market:€€It€prevents€Intel„compatible€PC€operatingÏsystems€other€than€Windows€from€attracting€significant€consumer€demand,€and€it€would€continue€to€doÏso€even€if€Microsoft€held€its€prices€substantially€above€the€competitive€level.Ìà  à37.à ` àConsumer€interest€in€a€PC€operating€system€derives€primarily€from€the€ability€of€thatÐ D” Ðsystem€to€run€applications.€€The€consumer€wants€an€operating€system€that€runs€not€only€types€ofÏapplications€that€he€knows€he€will€want€to€use,€but€also€those€types€in€which€he€might€develop€anÏinterest€later.€€Also,€the€consumer€knows€that€if€he€chooses€an€operating€system€with€enough€demand€toÏsupport€multiple€applications€in€each€product€category,€he€will€be€less€likely€to€find€himself€straitenedÏlater€by€having€to€use€an€application€whose€features€disappoint€him.€€Finally,€the€average€user€knowsÏthat,€generally€speaking,€applications€improve€through€successive€versions.€€He€thus€wants€an€operatingÏsystem€for€which€successive€generations€of€his€favorite€applications€will€be€released€ð"ð€promptly€at€that.€ÏThe€fact€that€a€vastly€larger€number€of€applications€are€written€for€Windows€than€for€other€PCÏoperating€systems€attracts€consumers€to€Windows,€because€it€reassures€them€that€their€interests€will€beÏâ âmet€as€long€as€they€use€Microsoftððs€product.Ð Ì)%& Ðà  à38.à ` àSoftware€development€is€characterized€by€substantial€economies€of€scale.€€The€fixedÐ ° Ðâ âcosts€of€producing€software,€including€applications,€is€very€high.€€By€contrast,€marginal€costs€are€veryÏlow.€€Moreover,€the€costs€of€developing€software€are€ð ðsunkðð€ð"ð€once€expended€to€develop€software,Ïresources€so€devoted€cannot€be€used€for€another€purpose.€€The€result€of€economies€of€scale€and€sunkÏcosts€is€that€application€developers€seek€to€sell€as€many€copies€of€their€applications€as€possible.€€AnÏapplication€that€is€written€for€one€PC€operating€system€will€operate€on€another€PC€operating€systemÏonly€if€it€is€ported€to€that€system,€and€porting€applications€is€both€time„consuming€and€expensive.€ÏTherefore,€application€developers€tend€to€write€first€to€the€operating€system€with€the€most€users€ð"ðÏWindows.€€Developers€might€then€port€their€applications€to€other€operating€systems,€but€only€to€theÏextent€that€the€marginal€added€sales€justify€the€cost€of€porting.€€In€order€to€recover€that€cost,€ISVs€thatÏdo€go€to€the€effort€of€porting€frequently€set€the€price€of€ported€applications€considerably€higher€than€thatÏof€the€original€versions€written€for€Windows.Ìà  à39.à ` àConsumer€demand€for€Windows€enjoys€positive€network€effects.€€A€positive€networkÐ  p Ðeffect€is€a€phenomenon€by€which€the€attractiveness€of€a€product€increases€with€the€number€of€peopleÏusing€it.€€The€fact€that€there€is€a€multitude€of€people€using€Windows€makes€the€product€more€attractiveÏto€consumers.€€The€large€installed€base€attracts€corporate€customers€who€want€to€use€an€operatingÏsystem€that€new€employees€are€already€likely€to€know€how€to€use,€and€it€attracts€academic€consumersÏwho€want€to€use€software€that€will€allow€them€to€share€files€easily€with€colleagues€at€other€institutions.€ÏThe€main€reason€that€demand€for€Windows€experiences€positive€network€effects,€however,€is€that€theÏsize€of€Windowsðð€installed€base€impels€ISVs€to€write€applications€first€and€foremost€to€Windows,Ïthereby€ensuring€a€large€body€of€applications€from€which€consumers€can€choose.€€The€large€body€ofÐ À+'( Ðapplications€thus€reinforces€demand€for€Windows,€augmenting€Microsoftððs€dominant€position€andÏthereby€perpetuating€ISV€incentives€to€write€applications€principally€for€Windows.€€This€self„reinforcingÏcycle€is€often€referred€to€as€a€ð ðpositive€feedback€loop.ððÌà  à40.à ` àWhat€for€Microsoft€is€a€positive€feedback€loop€is€for€would„be€competitors€a€viciousÐ Œ Ü Ðcycle.€€For€just€as€Microsoftððs€large€market€share€creates€incentives€for€ISVs€to€develop€applicationsÏfirst€and€foremost€for€Windows,€the€small€or€non„existent€market€share€of€an€aspiring€competitor€makesÏit€prohibitively€expensive€for€the€aspirant€to€develop€its€PC€operating€system€into€an€acceptableÏsubstitute€for€Windows.€€To€provide€a€viable€substitute€for€Windows,€another€PC€operating€systemÏwould€need€a€large€and€varied€enough€base€of€compatible€applications€to€reassure€consumers€that€theirÏinterests€in€variety,€choice,€and€currency€would€be€met€to€more„or„less€the€same€extent€as€if€they€choseÏWindows.€€Even€if€the€contender€attracted€several€thousand€compatible€applications,€it€would€still€lookÏlike€a€gamble€from€the€consumerððs€perspective€next€to€Windows,€which€supports€over€70,000Ïapplications.€€The€amount€it€would€cost€an€operating€system€vendor€to€create€that€many€applications€isÏprohibitively€large.€€Therefore,€in€order€to€ensure€the€availability€of€a€set€of€applications€comparable€toÏthat€available€for€Windows,€a€potential€rival€would€need€to€induce€a€very€large€number€of€ISVs€to€writeÏto€its€operating€system.€€Ìà  à41.à ` àIn€deciding€whether€to€develop€an€application€for€a€new€operating€system,€an€ISVððsÐ ð#@  Ðfirst€consideration€is€the€number€of€users€it€expects€the€operating€system€to€attract.€€Out€of€this€focusÏarises€a€collective„action€problem:€€Each€ISV€realizes€that€the€new€operating€system€could€attract€aÏsignificant€number€of€users€if€enough€ISVs€developed€applications€for€it;€but€few€ISVs€want€to€sinkÏresources€into€developing€for€the€system€until€it€becomes€established.€€Since€everyone€is€waiting€forÐ À+'( Ðeveryone€else€to€bear€the€risk€of€early€adoption,€the€new€operating€system€has€difficulty€attractingÏenough€applications€to€generate€a€positive€feedback€loop.€€The€vendor€of€a€new€operating€systemÏcannot€effectively€solve€this€problem€by€paying€the€necessary€number€of€ISVs€to€write€for€its€operatingÏsystem,€because€the€cost€of€doing€so€would€dwarf€the€expected€return.Ìà  à42.à ` àCounteracting€the€collective„action€phenomenon€is€another€known€as€the€ð ðfirst„moverÐ € Ð Ðincentive.ðð€€For€an€ISV€interested€in€attracting€users,€there€may€be€an€advantage€to€offering€the€first€and,Ïfor€a€while,€only€application€in€its€category€that€runs€on€a€new€PC€operating€system.€€The€user€base€ofÏthe€new€system€may€be€small,€but€every€user€of€that€system€who€wants€such€an€application€will€beÏcompelled€to€use€the€ISVððs€offering.€€Moreover,€if€demand€for€the€new€operating€system€suddenlyÏexplodes,€the€first€mover€will€reap€large€sales€before€any€competitors€arrive.€€An€ISV€thus€might€beÏdrawn€to€a€new€PC€operating€system€as€a€ð ðprotected€harbor.ðð€€Once€first„movers€stake€claims€to€theÏmajor€categories€of€applications,€however,€there€is€a€strong€chance€that€the€new€operating€system€couldÏstall;€it€would€not€support€the€most€familiar€applications,€nor€the€variety€and€number€of€applications,€thatÏattract€large€numbers€of€consumers,€and€there€would€no€longer€exist€a€first„mover€incentive€to€attractÏadditional€ISVs€to€the€important€application€categories.€€Although€the€upstart€operating€system€mightÏfind€itself€with€enough€applications€support€to€hold€a€fraction€of€the€market,€the€collective„actionÏphenomenon€would€still€prevent€the€system€from€gaining€the€kind€of€positive€feedback€momentum€thatÏcan€turn€a€fringe€entrant€into€a€rival€that€would€put€competitive€pressure€on€Windows.Ìà  à43.à ` àThe€cost€to€a€would„be€entrant€of€inducing€ISVs€to€write€applications€for€its€operatingÐ Ø'(#$ Ðsystem€exceeds€the€cost€that€Microsoft€itself€has€faced€in€inducing€ISVs€to€write€applications€for€itsÏoperating€system€products,€for€Microsoft€never€confronted€a€highly€penetrated€market€dominated€by€aÐ À+'( Ðsingle€competitor.€€Of€course,€the€fact€that€it€is€extremely€difficult€for€an€efficient€would„be€rival€toÏaccumulate€enough€applications€support€to€compete€with€Windows€does€not€mean€that€sustaining€itsÏown€applications€support€is€effortless€for€Microsoft.€€In€fact,€if€Microsoft€stopped€investing€theÏhundreds€of€millions€of€dollars€it€spends€each€year€inducing€ISVs€to€write€applications€for€Windows,€itÏmight€become€easier€than€it€currently€is€for€a€competitor€to€develop€its€own€positive€feedback€loop.€€ButÏgiven€that€Windows€today€enjoys€overwhelmingly€more€applications€support€than€any€other€PCÏoperating€system,€it€would€still€take€that€competitor€years€to€develop€the€necessary€momentum.€€Plus,Ïwhile€Microsoft€may€spend€more€on€platform€ð ðevangelization,ðð€even€in€relative€terms,€than€any€other€PCÏoperating„system€vendor,€it€is€not€difficult€to€understand€why€it€is€worthwhile€for€the€principalÏbeneficiary€of€the€applications€barrier€to€devote€more€resources€to€augmenting€it€than€aspiring€rivals€areÏwilling€to€expend€in€speculative€efforts€to€erode€it.Ìà  à44.à ` àMicrosoft€continually€releases€ð ðnew€and€improvedðð€versions€of€its€PC€operating€system.€Ð ,| ÐEach€time€it€does,€Microsoft€must€convince€ISVs€to€write€applications€that€take€advantage€of€newÏAPIs,€so€that€existing€Windows€users€will€have€incentive€to€buy€an€upgrade.€€Since€ISVs€are€usually€stillÏearning€substantial€revenue€from€applications€written€for€the€last€version€of€Windows,€Microsoft€mustÏconvince€them€to€write€for€the€new€version.€€Even€if€ISVs€are€slow€to€take€advantage€of€the€new€APIs,Ïthough,€no€applications€barrier€stands€in€the€way€of€consumers€adopting€the€new€system,€for€MicrosoftÏensures€that€successive€versions€of€Windows€retain€the€ability€to€run€applications€developed€for€earlierÏversions.€€In€fact,€since€ISVs€know€that€consumers€do€not€feel€locked€into€their€old€versions€ofÏWindows€and€that€new€versions€have€historically€attracted€substantial€consumer€demand,€ISVs€willÏgenerally€write€to€new€APIs€as€long€as€the€interfaces€enable€attractive,€innovative€features.€€MicrosoftÐ À+'( Ðsupplements€developersðð€incentives€by€extending€various€ððseals€of€approvalðð€ð"ð€visible€to€consumers,Ïinvestors,€and€industry€analysts€ð"ð€to€those€ISVs€that€promptly€develop€new€versions€of€theirÏapplications€adapted€to€the€newest€version€of€Windows.€€In€addition,€Microsoft€works€closely€withÏISVs€to€help€them€adapt€their€applications€to€the€newest€version€of€the€operating€system€ð"ð€a€processÏthat€is€in€any€event€far€easier€than€porting€an€application€from€one€vendorððs€PC€operating€system€toÏanotherððs.€€In€sum,€despite€the€substantial€resources€Microsoft€expends€inducing€ISVs€to€developÏapplications€for€new€versions€of€Windows,€the€company€does€not€face€any€obstacles€nearly€as€imposingÏas€the€barrier€to€entry€that€vendors€and€would„be€vendors€of€other€PC€operating€systems€mustÏovercome.ÌÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îJ¼ÝÚƒÚ2Ú  Ú.à0 ¸ àÝ  ÝEmpirical€Evidenceó ó€ò òof€the€Applications€Barrier€to€Entryó ó݃!.îJ¼€¼ÝÛ€ÛŒÐD”¸ (#¸ (# ÐŒÝ  Ýà  à45.à ` àThe€experiences€of€IBM€and€Apple,€Microsoftððs€most€significant€operating€systemÐ 8ˆ Ðrivals€in€the€mid„€and€late€1990s,€confirm€the€strength€of€the€applications€barrier€to€entry.ÌÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-†@¾ÝÚƒÚaÚ  Ú.à0  àÝ  ÝOS/2€Warpó ó݃-†@¾‚¾ÝۀیРp(#(# ÐŒÝ  Ýà  à46.à ` àIBMððs€inability€to€gain€widespread€developer€support€for€its€OS/2€Warp€operatingÐ d Ðsystem€illustrates€how€the€massive€Windows€installed€base€makes€it€prohibitively€costly€for€a€rivalÏoperating€system€to€attract€enough€developer€support€to€challenge€Windows.€€In€late€1994,€IBMÏintroduced€its€Intel„compatible€OS/2€Warp€operating€system€and€spent€tens€of€millions€of€dollars€in€anÏeffort€to€attract€ISVs€to€develop€applications€for€OS/2€and€in€an€attempt€to€reverse„engineer,€orÏð ðclone,ðð€part€of€the€Windows€API€set.€€Despite€these€efforts,€IBM€could€obtain€neither€significantÏmarket€share€nor€ISV€support€for€OS/2€Warp.€€Thus,€although€at€its€peak€OS/2€ran€approximatelyÏ2,500€applications€and€had€10%€of€the€market€for€Intel„compatible€PC€operating€systems,€IBMÐ À+'( Ðultimately€determined€that€the€applications€barrier€prevented€effective€competition€against€Windows€95.€ÏFor€that€reason,€in€1996€IBM€stopped€trying€to€convince€ISVs€to€write€for€OS/2€Warp.€€IBM€nowÏtargets€the€product€at€a€market€niche,€namely€enterprise€customers€(mainly€banks)€that€are€interested€inÏparticular€types€of€application€that€run€on€OS/2€Warp.€€The€fact€that€IBM€no€longer€tries€to€competeÏwith€Windows€is€evidenced€by€the€fact€that€it€prices€OS/2€Warp€at€about€two„and„one„half€times€theÏprice€of€Windows€98.ÌÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-†ÄÝÚƒÚbÚ  Ú.à0  àÝ  ÝThe€Mac€OSó ó݃-†ÄÃÄÝÛ€ÛŒÐh¸ (#(# ÐŒÝ  Ýà  à47.à ` àThe€inability€of€Apple€to€compete€effectively€with€Windows€provides€another€exampleÐ \¬  Ðof€the€applications€barrier€to€entry€in€operation.€€Although€Appleððs€Mac€OS€supports€more€than€12,000Ïapplications,€even€an€inventory€of€that€magnitude€is€not€sufficient€to€enable€Apple€to€present€a€significantÏpercentage€of€users€with€a€viable€substitute€for€Windows.€€The€absence€of€a€large€installed€base,€in€turn,Ïreinforces€the€disparity€between€the€applications€made€available€for€the€Mac€OS€and€those€madeÏavailable€for€Windows,€further€inhibiting€Appleððs€sales.€€The€applications€barrier€thus€prevents€the€MacÏOS€from€hindering€Microsoftððs€ability€to€control€price,€regardless€of€whether€the€Mac€OS€is€regardedÏas€being€in€the€relevant€market€or€not.ÌÌÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-†ÈÝÚƒÚcÚ  Ú.à0  àÝ  ÝFringe€Operating€Systemsó ó݃-†ÈÒÈÝÛ€ÛŒÐð#@ (#(# ÐŒÝ  Ýà  à48.à ` àThe€applications€barrier€to€entry€does€not€prevent€non„Microsoft,€Intel„compatible€PCÐ ä%4!" Ðoperating€systems€from€attracting€enough€consumer€demand€and€ISV€support€to€survive.€€It€does€notÏeven€prevent€vendors€of€those€products€from€making€a€profit.€€The€barrier€does,€however,€prevent€theÏproducts€from€drawing€a€significant€percentage€of€consumers€away€from€Windows.€Ð À+'( Ðà  à49.à ` àAs€discussed€above,€Be€markets€an€Intel„compatible€PC€operating€system,€calledÐ ° ÐBeOS,€that€is€specially€suited€to€support€multimedia€functions.€€The€operating€system€survives€on€aÏrelatively€minuscule€number€of€applications€(approximately€1,000)€and€a€user€base€which,€at€aroundÏ750,000,€is€trivial€compared€to€the€number€of€Windows€users.€€One€of€the€reasons€the€BeOS€can€evenÏattract€that€many€users€despite€its€small€base€of€applications€is€that€it€advertises€itself€as€a€complementÏto,€rather€than€as€a€substitute€for,€Windows.€€Although€the€BeOS€could€run€an€Intel„compatible€PCÏsystem€without€Windows,€it€is€almost€always€loaded€on€a€system€along€with€Windows.€€What€is€more,Ïwhen€these€dual„loaded€PC€systems€are€turned€on,€Windows€automatically€boots;€the€user€must€thenÏtake€affirmative€steps€to€invoke€the€BeOS.€€While€this€scheme€allows€the€BeOS€to€occupy€a€niche€inÏthe€market,€it€does€not€place€the€product€on€a€trajectory€to€replace€Windows€on€a€significant€number€ofÏPCs.€€The€special€multimedia€support€provided€by€the€BeOS€may,€for€a€small€number€of€users,Ïoutweigh€the€disadvantages€of€maintaining€two€large,€complex€operating€systems€on€one€PC.€€Of€thatÏgroup,€however,€it€is€likely€that€only€a€tiny€number€of€users€will€find€that€support€so€attractive€that€theyÏwould€be€willing€to€forego€Windows,€and€its€huge€base€of€compatible€applications,€altogether.€€Ìà  à50.à ` àThe€experience€of€the€Linux€operating€system,€a€version€of€which€runs€on€Intel„Ð  X Ðcompatible€PCs,€similarly€fails€to€refute€the€existence€of€an€applications€barrier€to€entry.€€Linux€is€anÏð ðopen€sourceðð€operating€system€that€was€created,€and€is€continuously€updated,€by€a€global€network€ofÏsoftware€developers€who€contribute€their€labor€for€free.€€Although€Linux€has€between€ten€and€fifteenÏmillion€users,€the€majority€of€them€use€the€operating€system€to€run€servers,€not€PCs.€€Several€ISVs€haveÏannounced€their€development€of€(or€plans€to€develop)€Linux€versions€of€their€applications.€€To€date,Ïthough,€legions€of€ISVs€have€not€followed€the€lead€of€these€first€movers.€€Similarly,€consumers€have€byÐ À+'( Ðand€large€shown€little€inclination€to€abandon€Windows,€with€its€reliable€developer€support,€in€favor€of€anÏoperating€system€whose€future€in€the€PC€realm€is€unclear.€€By€itself,€Linuxððs€open„source€developmentÏmodel€shows€no€signs€of€liberating€that€operating€system€from€the€cycle€of€consumer€preferences€andÏdeveloper€incentives€that,€when€fueled€by€Windowsðð€enormous€reservoir€of€applications,€prevents€non„¼Microsoft€operating€systems€from€competing.€ÌÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îÕÝÚƒÚ3Ú  Ú.à0 ¸ àÝ  ÝOpen„Source€Applications€Developmentó ó݃!.îÕÓÕÝÛ€ÛŒÐtÄ ¸ (#¸ (# ÐŒÝ  Ýà  à51.à ` àSince€application€developers€working€under€an€open„source€model€are€not€looking€toÐ h¸  Ðrecoup€their€investment€and€make€a€profit€by€selling€copies€of€their€finished€products,€they€are€free€fromÏthe€imperative€that€compels€proprietary€developers€to€concentrate€their€efforts€on€Windows.€€In€theory,Ïthen,€open„source€developers€are€at€least€as€likely€to€develop€applications€for€a€non„MicrosoftÏoperating€system€as€they€are€to€write€Windows„compatible€applications.€€In€fact,€they€may€be€disposedÏideologically€to€focus€their€efforts€on€open„source€platforms€like€Linux.€€Fortunately€for€Microsoft,Ïhowever,€there€are€only€so€many€developers€in€the€world€willing€to€devote€their€talents€to€writing,Ïtesting,€and€debugging€software€òòproóó€òòbonoóó€òòpublicoóó.€€A€small€corps€may€be€willing€to€concentrate€itsÐ d Ðefforts€on€popular€applications,€such€as€browsers€and€office€productivity€applications,€that€are€of€valueÏto€most€users.€€It€is€unlikely,€though,€that€a€sufficient€number€of€open„source€developers€will€commit€toÏdeveloping€and€continually€updating€the€large€variety€of€applications€that€an€operating€system€wouldÏneed€to€attract€in€order€to€present€a€significant€number€of€users€with€a€viable€alternative€to€Windows.€€InÏpractice,€then,€the€open„source€model€of€applications€development€may€increase€the€base€ofÏapplications€that€run€on€non„Microsoft€PC€operating€systems,€but€it€cannot€dissolve€the€barrier€thatÏprevents€such€operating€systems€from€challenging€Windows.Ð À+'( ÐÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.î»ÜÝÚƒÚ4Ú  Ú.à0 ¸ àÝ  ÝCloning€the€32„Bit€Windows€APIsó ó݃!.î»ÜñÜÝۀیа¸ (#¸ (# ÐŒÝ  Ýà  à52.à ` àTheoretically,€the€developer€of€a€non„Microsoft,€Intel„compatible€PC€operating€systemÐ ¤ô Ðcould€circumvent€the€applications€barrier€to€entry€by€cloning€the€APIs€exposed€by€the€32„bit€versions€ofÏWindows€(Windows€9x€and€Windows€NT).€€Applications€written€for€Windows€would€then€also€run€onÏthe€rival€system,€and€consumers€could€use€the€rival€system€confident€in€that€knowledge.€€Translating€thisÏtheory€into€practice€is€virtually€impossible,€however.€€First€of€all,€cloning€the€thousands€of€APIs€alreadyÏexposed€by€Windows€would€be€an€enormously€expensive€undertaking.€€More€daunting€is€the€fact€thatÏMicrosoft€continually€adds€APIs€to€Windows€through€updates€and€new€versions.€€By€the€time€a€rivalÏfinished€cloning€the€APIs€currently€in€existence,€Windows€would€have€exposed€a€multitude€of€new€ones.€ÏSince€the€rival€would€never€catch€up,€it€would€never€be€able€to€assure€consumers€that€its€operatingÏsystem€would€run€all€of€the€applications€written€for€Windows.€€IBM€discovered€this€to€its€dismay€in€theÏmid„1990s€when€it€failed,€despite€a€massive€investment,€to€clone€a€sufficiently€large€part€of€the€32„bitÏWindows€APIs.€€In€short,€attempting€to€clone€the€32„bit€Windows€APIs€is€such€an€expensive,€uncertainÏundertaking€that€it€fails€to€present€a€practical€option€for€a€would„be€competitor€to€Windows.ÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ÷âÝÚƒ ÚCÚ  Ú.à0 ` àÝ  ÝViable€Alternatives€to€Windowsó ó݃ )Þ÷â!ãÝÛ€ یРX` (#` (# ÐŒÝ  Ýà  à53.à ` àThat€Microsoftððs€market€share€and€the€applications€barrier€to€entry€together€endow€theÐ ü!L Ðcompany€with€monopoly€power€in€the€market€for€Intel„compatible€PC€operating€systems€is€directlyÏevidenced€by€the€sustained€absence€of€realistic€commercial€alternatives€to€Microsoftððs€PC€operating„¼system€products.ÌØ€Øà  à54.à ` àOEMs€are€the€most€important€direct€customers€for€operating€systems€for€Intel„Ð Ì)%& Ðcompatible€PCs.€€Because€competition€among€OEMs€is€intense,€they€pay€particularly€close€attention€toÐ À+'( Ðconsumer€demand.€€OEMs€are€thus€not€only€important€customers€in€their€own€right,€they€are€alsoÏsurrogates€for€consumers€in€identifying€reasonably„available€commercial€alternatives€to€Windows.€ÏWithout€significant€exception,€all€OEMs€pre„install€Windows€on€the€vast€majority€of€PCs€that€they€sell,Ïand€they€uniformly€are€of€a€mind€that€there€exists€no€commercially€viable€alternative€to€which€they€couldÏswitch€in€response€to€a€substantial€and€sustained€price€increase€or€its€equivalent€by€Microsoft.€€ForÏexample,€in€1995,€at€a€time€when€IBM€still€placed€hope€in€OS/2's€ability€to€rival€Windows,€the€firmÏnevertheless€calculated€that€its€PC€company€would€lose€between€seventy€and€ninety€percent€of€its€salesÏvolume€if€failed€to€load€Windows€95€on€its€PCs.€€Although€a€few€OEMs€have€announced€their€intentionÏto€pre„install€Linux€on€some€of€the€computers€they€ship,€none€of€them€plan€to€install€Linux€in€lieu€ofÏWindows€on€any€appreciable€number€of€PC€(as€opposed€to€server)€systems.€€For€its€part,€Be€is€notÏeven€attempting€to€persuade€OEMs€to€install€the€BeOS€on€PCs€to€the€exclusion€of€Windows.Ìà  à55.à ` àOEMs€believe€that€the€likelihood€of€a€viable€alternative€to€Windows€emerging€any€timeÐ ,| Ðin€the€next€few€years€is€too€low€to€constrain€Microsoft€from€raising€prices€or€imposing€other€burdens€onÏcustomers€and€users.€€The€accuracy€of€this€belief€is€highlighted€by€the€fact€that€the€other€vendors€ofÏIntel„compatible€PC€operating€systems€do€not€view€their€own€offerings€as€viable€alternatives€toÏWindows.€€Microsoft€knows€that€OEMs€have€no€choice€but€to€load€Windows,€both€because€it€has€aÏgood€understanding€of€the€market€in€which€it€operates€and€because€OEMs€have€told€Microsoft€asÏmuch.€€Indicative€of€Microsoftððs€assessment€of€the€situation€is€the€fact€that,€in€a€1996€presentation€to€theÏfirmððs€executive€committee,€the€Microsoft€executive€in€charge€of€OEM€licensing€reported€that€piracyÏâ âcontinued€to€be€the€main€competition€to€the€companyððs€operating€system€products.€€Secure€in€thisÐ Ì)%& Ðknowledge,€Microsoft€did€not€consider€the€prices€of€other€Intel„compatible€PC€operating€systems€whenÏit€set€the€price€of€Windows€98.€Ìâ âà  à56.à ` àAs€the€Court€found€above,€the€growth€of€server„€and€middleware„based€applicationsÐ ˜è Ðdevelopment€might€eventually€weaken€the€applications€barrier€to€entry.€€This€would€not€only€make€itÏeasier€for€outside€firms€to€enter€the€market,€it€could€also€make€it€easier€for€non„Microsoft€firms€alreadyÏin€the€market€to€present€a€viable€alternative€to€Windows.€€But€as€the€Court€also€found€above,€it€is€notÏclear€whether€ISVs€will€ever€develop€a€large,€diverse€body€of€full„featured€applications€that€rely€solelyÏon€APIs€exposed€by€servers€and€middleware.€€Furthermore,€even€assuming€that€such€a€movement€hasÏalready€begun€in€earnest,€it€will€take€several€years€for€the€applications€barrier€to€erode€enough€to€enableÏa€non„Microsoft,€Intel„compatible€PC€operating€system€to€develop€into€a€viable€alternative€toÏWindows.ÌÌÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞPòÝÚƒ ÚDÚ  Ú.à0 ` àÝ  ÝPrice€Restraint€Posed€by€Microsoftððs€Installed€Baseó ó€Ýƒ )ÞPòzòÝÛ€ ÛŒÐd` (#` (# ÐŒÝ  Ýà  à57.à ` àSoftware€never€expires,€so€consumers€who€already€have€a€version€of€Windows€withÐ  X Ðwhich€they€are€content€and€who€are€not€shopping€for€a€new€PC€system€are€somewhat€reluctant€to€incurÏthe€cost€of€upgrading€to€a€new€version€of€Windows.€€Fortunately€for€Microsoft,€the€pace€of€innovationÏin€PC€hardware€is€rapid,€and€the€price€of€that€hardware€has€declined€steadily€in€recent€years.€€As€aÏresult,€existing€PC€users€buy€new€PC€systems€relatively€frequently,€and€OEMs€still€attract€at€a€healthyÏrate€buyers€who€have€never€owned€a€computer.€€The€license€for€one€of€Microsoftððs€operating€systemÏproducts€prohibits€the€user€from€transferring€the€operating€system€to€another€machine,€so€there€is€noÐ À+'( Ðlegal€secondary€market€in€Microsoft€operating€systems.€€This€means€that€any€consumer€who€buys€a€newÏIntel„compatible€PC€and€wants€Windows€must€buy€a€new€copy€of€the€operating€system.€€MicrosoftÏtakes€pains€to€ensure€that€the€versions€of€its€operating€system€that€OEMs€pre„install€on€new€PC€systemsÏare€the€most€current.€€It€does€this,€in€part,€by€increasing€the€price€to€OEMs€of€older€versions€ofÏWindows€when€the€newer€versions€are€released.€€Since€Microsoft€can€sell€so€many€copies€of€each€newÏoperating€system€through€the€sales€of€new€PC€systems,€the€average€price€it€sets€for€those€systems€isÏlittle€affected€by€the€fact€that€older€versions€of€Windows€never€wear€out.ÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞéøÝÚƒ ÚEÚ  Ú.à0 ` àÝ  ÝPrice€Restraint€Posed€by€Piracyó ó݃ )ÞéøùÝÛ€ ÛŒÐ\¬ ` (#` (# ÐŒÝ  Ýà  à58.à ` àAlthough€there€is€no€legal€secondary€market€for€Microsoftððs€PC€operating€systems,Ð P  Ðthere€is€a€thriving€illegal€one.€€Software€pirates€illegally€copy€software€products€such€as€Windows,Ïselling€each€copy€for€a€fraction€of€the€vendorððs€usual€price.€€One€of€the€ways€Microsoft€combats€piracyÏis€by€advising€OEMs€that€they€will€be€charged€a€higher€price€for€Windows€unless€they€drastically€limitÏthe€number€of€PCs€that€they€sell€without€an€operating€system€pre„installed.€€In€1998,€all€major€OEMsÏagreed€to€this€restriction.€€Naturally,€it€is€hard€to€sell€a€pirated€copy€of€Windows€to€a€consumer€who€hasÏalready€received€a€legal€copy€included€in€the€price€of€his€new€PC€system.€€Thus,€Microsoft€is€able€toÏeffectively€contain,€if€not€extinguish,€the€illegal€secondary€market€for€its€operating„system€products.€€SoÏeven€though€Microsoft€is€more€concerned€about€piracy€than€it€is€about€other€firmsðð€operating€systemÏproducts,€the€companyððs€pricing€is€not€substantially€constrained€by€the€need€to€reduce€the€incentives€forÏconsumers€to€acquire€their€copies€of€Windows€illegally.Ìâ âÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞHþÝÚƒ ÚFÚ  Ú.à0 ` àÝ  ÝPrice€Restraint€Posed€by€Long„Term€Threatsó ó݃ )ÞHþrþÝÛ€ ÛŒÐÌ)%&` (#` (# ÐŒÝ  Ýà  à59.à ` àThe€software€industry€in€general€is€characterized€by€dynamic,€vigorous€competition.€€InÐ ° Ðâ âmany€cases,€one€of€the€early€entrants€into€a€new€software€category€quickly€captures€a€lionððs€share€ofÏthe€sales,€while€other€products€in€the€category€are€either€driven€out€altogether€or€relegated€to€nicheÏpositions.€€What€eventually€displaces€the€leader€is€often€not€competition€from€another€product€within€theÏsame€software€category,€but€rather€a€technological€advance€that€renders€the€boundaries€defining€theÏcategory€obsolete.€€These€events,€in€which€categories€are€redefined€and€leaders€are€superseded€in€theÏprocess,€are€spoken€of€as€ð ðinflection€points.ððÌà  à60.à ` àThe€exponential€growth€of€the€Internet€represents€an€inflection€point€born€ofÐ \¬  Ðcomplementary€technological€advances€in€the€computer€and€telecommunications€industries.€€The€rise€ofÏthe€Internet€in€turn€has€fueled€the€growth€of€server„based€computing,€middleware,€and€open„sourceÏsoftware€development.€€Working€together,€these€nascent€paradigms€could€oust€the€PC€operatingÏsystem€from€its€position€as€the€primary€platform€for€applications€development€and€the€main€interfaceÏbetween€users€and€their€computers.€€Microsoft€recognizes€that€new€paradigms€could€arise€to€depreciateÏthe€value€of€selling€PC€operating€systems;€however,€the€fact€that€these€new€paradigms€already€exist€inÏembryonic€or€primitive€form€does€not€prevent€Microsoft€from€enjoying€monopoly€power€today.€€ForÏwhile€consumers€might€one€day€turn€to€network€computers,€or€Linux,€or€a€combination€of€middlewareÏand€some€other€operating€system,€as€an€alternative€to€Windows,€the€fact€remains€that€they€are€not€doingÏso€today.€€Nor€are€consumers€likely€to€do€so€in€appreciable€numbers€any€time€in€the€next€few€years.€ÏUnless€and€until€that€day€arrives,€no€significant€percentage€of€consumers€will€be€able€to€abandonÏWindows€without€incurring€substantial€costs.€€Microsoft€can€therefore€set€the€price€of€WindowsÏsubstantially€higher€than€that€which€would€be€charged€in€a€competitive€market€ð"ð€or€impose€otherÐ À+'( Ðburdens€on€consumers€ð"ð€without€losing€so€much€business€as€to€make€the€action€unprofitable.€€€IfÏMicrosoft€exerted€its€power€solely€to€raise€price,€the€day€when€users€could€turn€away€from€WindowsÏwithout€incurring€substantial€costs€would€still€be€several€years€distant.€€Moreover,€Microsoft€could€keepÏits€prices€high€for€a€significant€period€of€time€and€still€lower€them€in€time€to€meet€the€threat€of€a€newÏparadigm.€€Alternatively,€Microsoft€could€delay€the€arrival€of€a€new€paradigm€on€the€scene€byÏexpending€surplus€monopoly€power€in€ways€other€than€the€maintenance€of€high€prices.ÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þï ÝÚƒ ÚGÚ  Ú.à0 ` àÝ  ÝSignificance€of€Microsoftððs€Innovationó ó݃ )Þï  ÝÛ€ ÛŒÐh¸ ` (#` (# ÐŒÝ  Ýà  à61.à ` àThe€fact€that€Microsoft€invests€heavily€in€research€and€development€does€not€evidenceÐ \¬  Ða€lack€of€monopoly€power.€€Indeed,€Microsoft€has€incentives€to€innovate€aggressively€despite€itsÏmonopoly€power.€€First,€if€there€are€innovations€that€will€make€Intel„compatible€PC€systems€attractiveÏto€more€consumers,€and€those€consumers€less€sensitive€to€the€price€of€Windows,€the€innovations€willÏtranslate€into€increased€profits€for€Microsoft.€€Second,€although€Microsoft€could€significantly€restrict€itsÏinvestment€in€innovation€and€still€not€face€a€viable€alternative€to€Windows€for€several€years,€it€can€pushÏthe€emergence€of€competition€even€farther€into€the€future€by€continuing€to€innovate€aggressively.€€WhileÏMicrosoft€may€not€be€able€to€stave€off€all€potential€paradigm€shifts€through€innovation,€it€can€thwartÏsome€and€delay€others€by€improving€its€own€products€to€the€greater€satisfaction€of€consumers.ÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞœÝÚƒ ÚHÚ  Ú.à0 ` àÝ  ÝMicrosoftððs€Pricing€Behavioró ó݃ )ÞœÆÝÛ€ ÛŒÐð#@ ` (#` (# ÐŒÝ  Ýà  à62.à ` àMicrosoftððs€actual€pricing€behavior€is€consistent€with€the€proposition€that€the€firm€enjoysÐ ä%4!" Ðmonopoly€power€in€the€market€for€Intel„compatible€PC€operating€systems.€€The€companyððs€decisionÏnot€to€consider€the€prices€of€other€vendorsðð€Intel„compatible€PC€operating€systems€when€setting€theÏprice€of€Windows€98,€for€example,€is€probative€of€monopoly€power.€€One€would€expect€a€firm€in€aÐ À+'( Ðcompetitive€market€to€pay€much€closer€attention€to€the€prices€charged€by€other€firms€in€the€market.€ÏAnother€indication€of€monopoly€power€is€the€fact€that€Microsoft€raised€the€price€that€it€charged€OEMsÏfor€Windows€95,€with€trivial€exceptions,€to€the€same€level€as€the€price€it€charged€for€Windows€98€justÏprior€to€releasing€the€newer€product.€€In€a€competitive€market,€one€would€expect€the€price€of€an€olderÏoperating€system€to€stay€the€same€or€decrease€upon€the€release€of€a€newer,€more€attractive€version.€ÏMicrosoft,€however,€was€only€concerned€with€inducing€OEMs€to€ship€Windows€98€in€favor€of€the€olderÏversion.€€It€is€unlikely€that€Microsoft€would€have€imposed€this€price€increase€if€it€were€genuinelyÏconcerned€that€OEMs€might€shift€their€business€to€another€vendor€of€operating€systems€or€hasten€theÏdevelopment€of€viable€alternatives€to€Windows.€€Ìà  à63.à ` àFinally,€it€is€indicative€of€monopoly€power€that€Microsoft€felt€that€it€had€substantialÐ D” Ðdiscretion€in€setting€the€price€of€its€Windows€98€upgrade€product€(the€operating€system€product€it€sellsÏto€existing€users€of€Windows€95).€€A€Microsoft€study€from€November€1997€reveals€that€the€companyÏcould€have€charged€$49€for€an€upgrade€to€Windows€98€ð"ð€there€is€no€reason€to€believe€that€the€$49Ïprice€would€have€been€unprofitable€ð"ð€but€the€study€identifies€$89€as€the€revenue„maximizing€price.€ÏMicrosoft€thus€opted€for€the€higher€price.Ìà  à64.à ` àAn€aspect€of€Microsoftððs€pricing€behavior€that,€while€not€tending€to€prove€monopolyÐ ü!L Ðpower,€is€consistent€with€it€is€the€fact€that€the€firm€charges€different€OEMs€different€prices€forÏWindows,€depending€on€the€degree€to€which€the€individual€OEMs€comply€with€Microsoftððs€wishes.€ÏAmong€the€five€largest€OEMs,€Gateway€and€IBM,€which€in€various€ways€have€resisted€MicrosoftððsÏâ âefforts€to€enlist€them€in€its€efforts€to€preserve€the€applications€barrier€to€entry,€pay€higher€prices€thanÐ Ì)%& ÐCompaq,€Dell,€and€Hewlett„Packard,€which€have€pursued€less€contentious€relationships€withÏMicrosoft.Ìâ âà  à65.à ` àIt€is€not€possible€with€the€available€data€to€determine€with€any€level€of€confidenceÐ ˜è Ðwhether€the€price€that€a€profit„maximizing€firm€with€monopoly€power€would€charge€for€Windows€98Ïcomports€with€the€price€that€Microsoft€actually€charges.€€Even€if€it€could€be€determined€that€MicrosoftÏcharges€less€than€the€profit„maximizing€monopoly€price,€though,€that€would€not€be€probative€of€a€lackÏof€monopoly€power,€for€Microsoft€could€be€charging€what€seems€like€a€low€short„term€price€in€order€toÏmaximize€its€profits€in€the€future€for€reasons€unrelated€to€underselling€any€incipient€competitors.€€ForÏinstance,€Microsoft€could€be€stimulating€the€growth€of€the€market€for€Intel„compatible€PC€operatingÏsystems€by€keeping€the€price€of€Windows€low€today.€€Given€the€size€and€stability€of€its€market€share,ÏMicrosoft€stands€to€reap€almost€all€of€the€future€rewards€if€there€are€yet€more€consumers€of€Intel„¼compatible€PC€operating€systems.€€By€pricing€low€relative€to€the€short„run€profit„maximizing€price,Ïthereby€focusing€on€attracting€new€users€to€the€Windows€platform,€Microsoft€would€also€intensify€theÏpositive€network€effects€that€add€to€the€impenetrability€of€the€applications€barrier€to€entry.€€Ìà  à66.à ` àFurthermore,€Microsoft€expends€a€significant€portion€of€its€monopoly€power,€whichÐ  X Ðcould€otherwise€be€spent€maximizing€price,€on€imposing€burdensome€restrictions€on€its€customers€ð"ðÏand€in€inducing€them€to€behave€in€ways€ð"ð€that€augment€and€prolong€that€monopoly€power.€€ForÏexample,€Microsoft€attaches€to€a€Windows€license€conditions€that€restrict€the€ability€of€OEMs€toÏpromote€software€that€Microsoft€believes€could€weaken€the€applications€barrier€to€entry.€€MicrosoftÏalso€charges€a€lower€price€to€OEMs€who€agree€to€ensure€that€all€of€their€Windows€machines€areÏpowerful€enough€to€run€Windows€NT€for€Workstations.€€To€the€extent€this€provision€induces€OEMs€toÐ À+'( Ðconcentrate€their€efforts€on€the€development€of€relatively€powerful,€expensive€PCs,€it€makes€OEMs€lessÏlikely€to€pursue€simultaneously€the€opposite€path€of€developing€ð ðthin€clientðð€systems,€which€couldÏthreaten€demand€for€Microsoftððs€Intel„compatible€PC€operating€system€products.€€In€addition,ÏMicrosoft€charges€a€lower€price€to€OEMs€who€agree€to€ship€all€but€a€minute€fraction€of€their€machinesÏwith€an€operating€system€pre„installed.€€While€this€helps€combat€piracy,€it€also€makes€it€less€likely€thatÏconsumers€will€detect€increases€in€the€price€of€Windows€and€renders€operating€systems€not€pre„¼installed€by€OEMs€in€large€numbers€even€less€attractive€to€consumers.€€After€all,€a€consumerððs€interestÏin€a€non„Windows€operating€system€might€not€outweigh€the€burdens€on€system€memory€andÏperformance€associated€with€supporting€two€operating€systems€on€a€single€PC.€€Other€such€restrictionsÏand€incentives€are€described€below.ÌÌÌÝ‚*nÿÝÝ  Ýò òà  àÝ‚*nþ$ÝÚƒÚIÚ  Ú.à0 ` àÝ  ÝMicrosoftððs€Actions€Toward€Other€Firmsó ó݃*nþ$(%ÝۀیРp` (#` (# ÐŒÝ  Ýà  à67.à ` àMicrosoftððs€monopoly€power€is€also€evidenced€by€the€fact€that,€over€the€course€ofÐ d Ðseveral€years,€Microsoft€took€actions€that€could€only€have€been€advantageous€if€they€operated€toÏreinforce€monopoly€power.€€These€actions€are€described€below.ÌÌò òIV.à0  àTHE€MIDDLEWARE€THREATSÐä%4!"(#(# Ðà  àó ó68.ò òà ` àó óMiddleware€technologies,€as€previously€noted,€have€the€potential€to€weaken€theÐ Ø'(#$ Ðapplications€barrier€to€entry.€€Microsoft€was€apprehensive€that€the€APIs€exposed€by€middlewareÏtechnologies€would€attract€so€much€developer€interest,€and€would€become€so€numerous€and€varied,Ð À+'( Ðthat€there€would€arise€a€substantial€and€growing€number€of€full„featured€applications€that€relied€largely,Ïor€even€wholly,€on€middleware€APIs.€€The€applications€relying€largely€on€middleware€APIs€wouldÏpotentially€be€relatively€easy€to€port€from€one€operating€system€to€another.€€The€applications€relyingÏexclusively€on€middleware€APIs€would€run,€as€written,€on€any€operating€system€hosting€the€requisiteÏmiddleware.€€So€the€more€popular€middleware€became€and€the€more€APIs€it€exposed,€the€more€theÏpositive€feedback€loop€that€sustains€the€applications€barrier€to€entry€would€dissipate.€€Microsoft€wasÏconcerned€with€middleware€as€a€category€of€software;€each€type€of€middleware€contributed€to€theÏthreat€posed€by€the€entire€category.€€At€the€same€time,€Microsoft€focused€its€antipathy€on€twoÏincarnations€of€middleware€that,€working€together,€had€the€potential€to€weaken€the€applications€barrierÏseverely€without€the€assistance€of€any€other€middleware.€€These€were€Netscapeððs€Web€browser€andÏSunððs€implementation€of€the€Java€technologies.ÌÌØ€  ØÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þì,ÝÚƒ ÚAÚ  Ú.à0 ` àÝ  ÝThe€Netscape€Web€browseró ó݃ )Þì,-ÝÛ€ یРp` (#` (# ÐŒÝ  ÝØ€EØà  à69.à ` àNetscape€Navigator€possesses€three€key€middleware€attributes€that€endow€it€with€theÐ d Ðpotential€to€diminish€the€applications€barrier€to€entry.€€First,€in€contrast€to€non„Microsoft,€Intel„¼compatible€PC€operating€systems,€which€few€users€would€want€to€use€on€the€same€PC€systems€thatÏcarry€their€copies€of€Windows,€a€browser€can€gain€widespread€use€based€on€its€value€as€a€complementÏto€Windows.€€Second,€because€Navigator€exposes€a€set€(albeit€a€limited€one)€of€APIs,€it€can€serve€as€aÏplatform€for€other€software€used€by€consumers.€€A€browser€product€is€particularly€well€positioned€toÏserve€as€a€platform€for€network„centric€applications€that€run€in€association€with€Web€pages.€€Finally,ÏNavigator€has€been€ported€to€more€than€fifteen€different€operating€systems.€€Thus,€if€a€developer€writesÐ À+'( Ðan€application€that€relies€solely€on€the€APIs€exposed€by€Navigator,€that€application€will,€without€anyÏporting,€run€on€many€different€operating€systems.Ìà  à70.à ` àAdding€to€Navigatorððs€potential€to€weaken€the€applications€barrier€to€entry€is€the€factÐ ˜è Ðthat€the€Internet€has€become€both€a€major€inducement€for€consumers€to€buy€PCs€for€the€first€time€and€aÏmajor€occupier€of€the€time€and€attention€of€current€PCs€users.€€For€any€firm€looking€to€turn€its€browserÏproduct€into€an€applications€platform€such€to€rival€Windows,€the€intense€consumer€interest€in€all€thingsÏInternet„related€is€a€great€boon.Ìà  à71.à ` àMicrosoft€knew€in€the€fall€of€1994€that€Netscape€was€developing€versions€of€a€WebÐ \¬  Ðbrowser€to€run€on€different€operating€systems.€€It€did€not€yet€know,€however,€that€Netscape€wouldÏemploy€Navigator€to€generate€revenue€directly,€much€less€that€the€product€would€evolve€in€such€a€wayÏas€to€threaten€Microsoft.€€In€fact,€in€late€December€1994,€Netscapeððs€chairman€and€chief€executiveÏofficer€(ð ðCEOðð),€Jim€Clark,€told€a€Microsoft€executive€that€the€focus€of€Netscapeððs€business€would€beÏapplications€running€on€servers€and€that€Netscape€did€not€intend€to€succeed€at€Microsoftððs€expense.Ìà  à72.à ` àAs€soon€as€Netscape€released€Navigator€on€December€15,€1994,€the€product€began€toÐ d Ðenjoy€dramatic€acceptance€by€the€public;€shortly€after€its€release,€consumers€were€already€usingÏNavigator€far€more€than€any€other€browser€product.€€This€alarmed€Microsoft,€which€feared€thatÏNavigatorððs€enthusiastic€reception€could€embolden€Netscape€to€develop€Navigator€into€an€alternativeÏplatform€for€applications€development.€€In€late€May€1995,€Bill€Gates,€the€chairman€and€CEO€ofÏMicrosoft,€sent€a€memorandum€entitled€ð ðThe€Internet€Tidal€Waveðð€to€Microsoftððs€executives€describingÏNetscape€as€a€ð ðnew€competitor€ððbornðð€on€the€Internet.ðð€€He€warned€his€colleagues€within€MicrosoftÏthat€Netscape€was€ð ðpursuing€a€multi„platform€strategy€where€they€move€the€key€API€into€the€client€toÐ À+'( Ðcommoditize€the€underlying€operating€system.ðð€€By€the€late€spring€of€1995,€the€executives€responsibleÏfor€setting€Microsoftððs€corporate€strategy€were€deeply€concerned€that€Netscape€was€moving€itsÏbusiness€in€a€direction€that€could€diminish€the€applications€barrier€to€entry.Ìò òà  àB.à0 ` àSunððs€Implementation€of€the€Java€Technologiesó óÐŒ Ü` (#` (# Ðà  à73.à ` àThe€term€ð ðJavaðð€refers€to€four€interlocking€elements.€€First,€there€is€a€Java€programmingÐ € Ð Ðlanguage€with€which€developers€can€write€applications.€€Second,€there€is€a€set€of€programs€written€inÏJava€that€expose€APIs€on€which€developers€writing€in€Java€can€rely.€€These€programs€are€called€theÏð ðJava€class€libraries.ðð€€The€third€element€is€the€Java€compiler,€which€translates€the€code€written€by€theÏdeveloper€into€Java€ð ðbytecode.ðð€€Finally,€there€are€programs€called€ð ðJava€virtual€machines,ðð€or€ð ðJVMs,ððÏwhich€translate€Java€bytecode€into€instructions€comprehensible€to€the€underlying€operating€system.€€IfÏthe€Java€class€libraries€and€a€JVM€are€present€on€a€PC€system,€the€system€is€said€to€carry€a€ð ðJavaÏruntime€environment.ððÌà  à74.à ` àThe€inventors€of€Java€at€Sun€Microsystems€intended€the€technology€to€enableÐ  p Ðapplications€written€in€the€Java€language€to€run€on€a€variety€of€platforms€with€minimal€porting.€€AÏprogram€written€in€Java€and€relying€only€on€APIs€exposed€by€the€Java€class€libraries€will€run€on€any€PCÏsystem€containing€a€JVM€that€has€itself€been€ported€to€the€resident€operating€system.€€Therefore,€JavaÏdevelopers€need€to€port€their€applications€only€to€the€extent€that€those€applications€rely€directly€on€theÏAPIs€exposed€by€a€particular€operating€system.€€The€more€an€application€written€in€Java€relies€on€APIsÏexposed€by€the€Java€class€libraries,€the€less€work€its€developer€will€need€to€do€to€port€the€application€toÏdifferent€operating€systems.€€The€easier€it€is€for€developers€to€port€their€applications€to€differentÏoperating€systems,€the€more€applications€will€be€written€for€operating€systems€other€than€Windows.€€ToÐ À+'( Ðdate,€the€Java€class€libraries€do€not€expose€enough€APIs€to€support€the€development€of€full„featuredÏapplications€that€will€run€well€on€multiple€operating€systems€without€the€need€for€porting;€however,€theyÏdo€allow€relatively€simple,€network„centric€applications€to€be€written€cross„platform.€€It€is€SunððsÏultimate€ambition€to€expand€the€class€libraries€to€such€an€extent€that€many€full„featured,€end„user„¼oriented€applications€will€be€written€cross„platform.€€The€closer€Sun€gets€to€this€goal€of€ð ðwrite€once,€runÏanywhere,ðð€the€more€the€applications€barrier€to€entry€will€erode.Ìà  à75.à ` àSun€announced€in€May€1995€that€it€had€developed€the€Java€programming€language.€Ð h¸  ÐMid„level€executives€at€Microsoft€began€to€express€concern€about€Sunððs€Java€vision€in€the€fall€of€thatÏyear,€and€by€late€spring€of€1996,€senior€Microsoft€executives€were€deeply€worried€about€the€potentialÏof€Sunððs€Java€technologies€to€diminish€the€applications€barrier€to€entry.Ìà  à76.à ` àSunððs€strategy€could€only€succeed€if€a€Java€runtime€environment€that€complied€withÐ 8ˆ ÐSunððs€standards€found€its€way€onto€PC€systems€running€Windows.€€Sun€could€not€count€on€MicrosoftÏto€ship€with€Windows€an€implementation€of€the€Java€runtime€environment€that€threatened€theÏapplications€barrier€to€entry.€€Fortunately€for€Sun,€Netscape€agreed€in€May€1995€to€include€a€copy€ofÏSunððs€Java€runtime€environment€with€every€copy€of€Navigator,€and€Navigator€quickly€became€theÏprincipal€vehicle€by€which€Sun€placed€copies€of€its€Java€runtime€environment€on€the€PC€systems€ofÏWindows€users.Ìà  à77.à ` àThe€combined€efforts€of€Netscape€and€Sun€threatened€to€hasten€the€demise€of€theÐ ä%4!" Ðapplications€barrier€to€entry,€opening€the€way€for€non„Microsoft€operating€systems€to€emerge€asÏacceptable€substitutes€for€Windows.€€By€stimulating€the€development€of€network„centric€JavaÏapplications€accessible€to€users€through€browser€products,€the€collaboration€of€Netscape€and€Sun€alsoÐ À+'( Ðheralded€the€day€when€vendors€of€information€appliances€and€network€computers€could€present€usersÏwith€viable€alternatives€to€PCs€themselves.€€Nevertheless,€these€middleware€technologies€have€a€longÏway€to€go€before€they€might€imperil€the€applications€barrier€to€entry.€€Windows€98€exposes€nearly€tenÏthousand€APIs,€whereas€the€combined€APIs€of€Navigator€and€the€Java€class€libraries,€togetherÏrepresenting€the€greatest€hope€for€proponents€of€middleware,€total€less€than€a€thousand.€€Decision„¼makers€at€Microsoft€are€apprehensive€of€potential€as€well€as€present€threats,€though,€and€in€1995€theÏimplications€of€the€symbiosis€between€Navigator€and€Sunððs€Java€implementation€were€not€lost€onÏexecutives€at€Microsoft,€who€viewed€Netscapeððs€cooperation€with€Sun€as€a€further€reason€to€dread€theÏincreasing€use€of€Navigator.ÌÌÌØ€ ØÝ‚ )ÞÿÝÝ  ÝØ€EØò òà  àÝ‚ )ÞšMÝÚƒ ÚCÚ  Ú.à0 ` àÝ  ÝOther€Middleware€Threats݃ )ÞšMàMÝÛ€ ÛŒÐ,|` (#` (# ÐŒÝ  Ýà  àó ó78.ò òà ` àó óAlthough€they€have€been€the€most€prominent,€Netscapeððs€Navigator€and€Sunððs€JavaÐ  p Ðimplementation€are€not€the€only€manifestations€of€middleware€that€Microsoft€has€perceived€as€havingÏthe€potential€to€weaken€the€applications€barrier€to€entry.€€Starting€in€1994,€Microsoft€exhibitedÏconsiderable€concern€over€the€software€product€Notes,€distributed€first€by€Lotus€and€then€by€IBM.€ÏMicrosoft€worried€about€Notes€for€several€reasons:€€It€presented€a€graphical€interface€that€wasÏcommon€across€multiple€operating€systems;€it€also€exposed€a€set€of€APIs€to€developers;€and,€likeÏNavigator,€it€served€as€a€distribution€vehicle€for€Sunððs€Java€runtime€environment.€€Then€in€1995,ÏMicrosoft€reacted€with€alarm€to€Intelððs€Native€Signal€Processing€software,€which€interacted€with€theÏmicroprocessor€independently€of€the€operating€system€and€exposed€APIs€directly€to€developers€ofÐ À+'( Ðmultimedia€content.€€Finally,€in€1997€Microsoft€noted€the€dangers€of€Appleððs€and€RealNetworksððÏmultimedia€playback€technologies,€which€ran€on€several€platforms€(including€the€Mac€OS€andÏWindows)€and€similarly€exposed€APIs€to€content€developers.€€Microsoft€feared€all€of€theseÏtechnologies€because€they€facilitated€the€development€of€user„oriented€software€that€would€beÏindifferent€to€the€identity€of€the€underlying€operating€system.ÌÌØ€ ØÝ‚ )ÞÿÝÝ  Ýò òÝ‚ )Þ&TÝÚƒ ÚVÚ  Ú.à0  àÝ  ÝMICROSOFTððS€RESPONSE€TO€THE€BROWSER€THREATó ó݃ )Þ&TDTÝÛ€ ÛŒÐh¸ (#(# ÐŒÝ  ÝØ€ ØÝ‚ )ÞÿÝÝ  ÝÓÓò òà  àÝ‚ )Þ0UÝÚƒ ÚAÚ  Ú.à0 ` àÝ  ÝMicrosoftððs€Attempt€to€Dissuade€Netscape€from€Developing€Navigator€as€aÐ \¬  ÐPlatformó ó݃ )Þ0UlUÝÛ€ ÛŒÐV¦` (#` (# ÐŒÝ  ÝÌÓKUÓà  à79.à ` àMicrosoftððs€first€response€to€the€threat€posed€by€Navigator€was€an€effort€to€persuadeÐ Jš ÐNetscape€to€structure€its€business€such€that€the€company€would€not€distribute€platform„level€browsingÏsoftware€for€Windows.€€Netscapeððs€assent€would€have€ensured€that,€for€the€foreseeable€future,ÏMicrosoft€would€produce€the€only€platform„level€browsing€software€distributed€to€run€on€Windows.€ÏThis€would€have€eliminated€the€prospect€that€non„Microsoft€browsing€software€could€weaken€theÏapplications€barrier€to€entry.Ìà  à80.à ` àExecutives€at€Microsoft€received€confirmation€in€early€May€1995€that€Netscape€wasÐ !R Ðdeveloping€a€version€of€Navigator€to€run€on€Windows€95,€which€was€due€to€be€released€in€a€couple€ofÏmonths.€€Microsoftððs€senior€executives€understood€that€if€they€could€prevent€this€version€of€NavigatorÏfrom€presenting€alternatives€to€the€Internet„related€APIs€in€Windows€95,€the€technologies€branded€asÏNavigator€would€cease€to€present€an€alternative€platform€to€developers.€€Even€if€non„WindowsÏversions€of€Navigator€exposed€Internet„related€APIs,€applications€written€to€those€APIs€would€not€runÐ Æ*&' Ðon€the€platform€Microsoft€executives€expected€to€enjoy€the€largest€installed€base,€òòi.e.óó,€Windows€95.€Ð ° ÐSo,€as€long€as€the€version€of€Navigator€written€for€Windows€95€relied€on€Microsoftððs€Internet„relatedÏAPIs€instead€of€exposing€its€own,€developing€for€Navigator€would€not€mean€developing€cross„platform.€ÏDevelopers€of€network„centric€applications€thus€would€not€be€drawn€to€Navigatorððs€APIs€in€substantialÏnumbers.€€Therefore,€with€the€encouragement€and€support€of€Gates,€a€group€of€Microsoft€executivesÏcommenced€a€campaign€in€the€summer€of€1995€to€convince€Netscape€to€halt€its€development€ofÏplatform„level€browsing€technologies€for€Windows€95.Ìà  à81.à ` àIn€a€meeting€held€at€Microsoftððs€headquarters€on€June€2,€1995,€Microsoft€executivesÐ \¬  Ðsuggested€to€Jim€Clarkððs€replacement€as€CEO€at€Netscape,€James€Barksdale,€that€the€version€ofÏNavigator€written€for€Windows€95€be€designed€to€rely€upon€the€Internet„related€APIs€in€Windows€95Ïand€distinguish€itself€with€ð ðvalue„addedðð€software€components.€€The€Microsoft€executives€left€unsaid€theÏfact€that€value„added€software,€by€definition,€does€not€present€a€significant€platform€for€applicationsÏdevelopment.€€For€his€part,€Barksdale€informed€the€Microsoft€representatives€that€the€browserÏrepresented€an€important€part€of€Netscapeððs€business€strategy€and€that€Windows€3.1€and€Windows€95Ïwere€expected€to€be€the€primary€platforms€for€which€Navigator€would€be€distributed.Ìà  à82.à ` àAt€the€conclusion€of€the€June€2€meeting,€Microsoft€still€did€not€know€whether€or€notÐ ü!L ÐNetscape€intended€to€preserve€Navigatorððs€own€platform€capabilities€and€expand€the€set€of€APIs€that€itÏexposed€to€developers.€€In€the€hope€that€Netscape€could€still€be€persuaded€to€forswear€any€platformÏambitions€and€instead€rely€on€the€Internet€technologies€in€Windows€95,€Microsoft€acceptedÏBarksdaleððs€invitation€to€send€a€group€of€representatives€to€Netscapeððs€headquarters€for€a€technologyÏð ðbrainstorming€sessionðð€on€June€21.€€Netscapeððs€senior€executives€saw€the€meeting€as€an€opportunity€toÐ À+'( Ðask€Microsoft€for€access€to€crucial€technical€information,€including€certain€APIs,€that€Netscape€neededÏin€order€to€ensure€that€Navigator€would€work€well€on€systems€running€Windows€95.€€Ìà  à83.à ` àEarly€in€the€June€21€meeting,€Microsoft€representatives€told€Barksdale€and€the€otherÐ ˜è ÐNetscape€executives€present€that€they€wanted€to€explore€the€possibility€of€building€a€broader€and€closerÏrelationship€between€the€two€companies.€€To€this€end,€the€Microsoft€representatives€wanted€to€knowÏwhether€Netscape€intended€to€adopt€and€build€on€top€of€the€Internet„related€platform€that€MicrosoftÏplanned€to€include€in€Windows€95,€or€rather€to€expose€its€own€Internet„related€APIs,€which€wouldÏcompete€with€Microsoftððs.€€If€Netscape€was€not€committed€to€providing€an€alternative€platform€forÏnetwork„centric€applications,€Microsoft€would€assist€Netscape€in€developing€server„€and€(to€a€limitedÏextent)€PC„based€software€applications€that€relied€on€Microsoftððs€Internet€technologies.€€For€one€thing,Ïthe€representatives€explained,€Microsoft€would€be€content€to€leave€the€development€of€browserÏproducts€for€the€Mac€OS,€UNIX,€and€Microsoftððs€16„bit€operating€system€products€to€Netscape.€ÏAlternatively,€Netscape€could€license€to€Microsoft€the€underlying€code€for€a€Microsoft„brandedÏbrowser€to€run€on€those€platforms.€€The€Microsoft€representatives€made€it€clear,€however,€thatÏMicrosoft€would€be€marketing€its€own€browser€for€Windows€95,€and€that€this€product€would€rely€onÏMicrosoftððs€platform„level€Internet€technologies.€€If€Netscape€marketed€browsing€software€forÏWindows€95€based€on€different€technologies,€then€Microsoft€would€view€Netscape€as€a€competitor,Ïnot€a€partner.Ìà  à84.à ` àWhen€Barksdale€brought€the€discussion€back€to€the€particular€Windows€95€APIs€thatÐ Ø'(#$ ÐNetscape€actually€wanted€to€rely€on€and€needed€from€Microsoft,€the€representatives€from€MicrosoftÏexplained€that€if€Netscape€entered€a€ð ðspecial€relationshipðð€with€Microsoft,€the€company€would€treatÐ À+'( ÐNetscape€as€a€ð ðpreferred€ISV.ðð€€This€meant€that€Netscape€would€enjoy€preferential€access€to€technicalÏinformation,€including€APIs.€€They€intimated€that€Microsoftððs€internal€developers€had€already€createdÏthe€APIs€that€Netscape€was€seeking,€and€that€Microsoft€had€not€yet€decided€either€which€ISVs€wouldÏbe€privileged€to€receive€them€or€when€access€would€be€granted.€€The€Microsoft€representatives€madeÏclear€that€the€alacrity€with€which€Netscape€would€receive€the€desired€Windows€95€APIs€and€otherÏtechnical€information€would€depend€on€whether€Netscape€entered€this€ð ðspecial€relationshipðð€withÏMicrosoft.Ìà  à85.à ` àAfter€listening€to€Microsoftððs€proposal,€Barksdale€had€two€main€questions:€€First,€whereÐ \¬  Ðwould€the€line€between€platform€(Microsoftððs€exclusive€domain)€and€applications€(where€NetscapeÏcould€continue€to€function)€be€situated?€€Second,€who€would€get€to€decide€where€the€line€would€lie?€ÏAfter€all,€the€attractiveness€of€a€special€relationship€with€Microsoft€depended€a€great€deal€on€how€muchÏroom€would€remain€for€Netscape€to€innovate€and€seek€profit.€€The€Microsoft€representatives€repliedÏthat€Microsoft€would€incorporate€most€of€the€functionality€of€the€current€Netscape€browser€into€theÏWindows€95€platform,€perhaps€leaving€room€for€Netscape€to€distribute€a€user„interface€shell.€€WhereÏNetscape€would€have€the€most€scope€to€innovate€would€be€in€the€development€of€software€ð ðsolutions,ððÏwhich€are€applications€(mainly€server„based)€focused€on€meeting€the€needs€of€specific€types€ofÏcommercial€users.€€Since€such€applications€are€already€minutely€calibrated€to€the€needs€of€their€users,Ïthey€do€not€present€platforms€for€the€development€of€more€specific€applications.€€Although€theÏrepresentatives€from€Microsoft€assured€Barksdale€that€the€line€between€platform€and€solutions€wasÏfixed€by€a€collaborative€decision„making€process€between€Microsoft€and€its€ISV€partners,€thoseÏrepresentatives€had€already€indicated€that€the€space€Netscape€would€be€allowed€to€occupy€betweenÐ À+'( Ðthe€user€and€Microsoftððs€platform€domain€was€a€very€narrow€one.€€Simply€put,€if€Navigator€exposedÏAPIs€that€competed€for€developer€attention€with€the€Internet„related€APIs€Microsoft€was€planning€toÏbuild€into€its€platform,€Microsoft€would€regard€Netscape€as€a€trespasser€on€its€territory.Ìà  à86.à ` àThe€Microsoft€representatives€did€not€insist€at€the€June€21€meeting€that€NetscapeÐ Œ Ü Ðexecutives€accept€their€proposal€on€the€spot.€€For€his€part,€Barksdale€said€only€that€he€would€like€moreÏinformation€regarding€where€Microsoft€proposed€to€place€the€line€between€its€platform€and€NetscapeððsÏapplications.€€In€the€ensuing,€more€technical€discussions,€the€Netscape€executives€agreed€to€adopt€oneÏcomponent€of€Microsoftððs€platform„level€Internet€technology€called€Internet€Shortcuts.€€The€meetingÏended€cordially,€with€both€sides€promising€to€keep€the€lines€of€communication€open.Ìà  à87.à ` àThe€executive€who€led€Microsoftððs€contingent€on€June€21,€Daniel€Rosen,€emerged€fromÐ D” Ðthe€meeting€optimistic€that€Netscape€would€abandon€its€platform€ambitions€in€exchange€for€special€helpÏfrom€Microsoft€in€developing€solutions.€€His€sentiments€were€not€shared€by€another€MicrosoftÏparticipant,€Thomas€Reardon,€who€had€not€failed€to€notice€the€Netscape€executives€grow€tense€whenÏthe€Microsoft€representatives€referred€to€incorporating€Navigatorððs€functionality€into€Windows.€ÏReardon€predicted€that€Netscape€would€compete€with€almost€all€of€Microsoftððs€platform„level€InternetÏtechnologies.€€Once€he€heard€both€viewpoints,€Gates€concluded€that€Rosen€was€being€a€bit€naive€andÏthat€Reardon€had€assessed€the€situation€more€accurately.€€In€the€middle€of€July€1995,€Rosenððs€superiorsÏinstructed€him€to€drop€the€effort€to€reach€a€strategic€concord€with€Netscape.Ìà  à88.à ` àHad€Netscape€accepted€Microsoftððs€proposal,€it€would€have€forfeited€any€prospect€ofÐ Ø'(#$ Ðpresenting€a€comprehensive€platform€for€the€development€of€network„centric€applications.€€Even€if€theÏversions€of€Navigator€written€for€the€Mac€OS,€UNIX,€and€16„bit€Windows€had€continued€to€exposeÐ À+'( ÐAPIs€controlled€by€Netscape,€the€fact€that€Netscape€would€not€have€marketed€any€platform€softwareÏfor€Windows€95,€the€operating€system€that€was€destined€to€become€dominant,€would€have€ensuredÏthat,€for€the€foreseeable€future,€too€few€developers€would€rely€on€Navigatorððs€APIs€to€create€a€threatÏto€the€applications€barrier€to€entry.€€In€fact,€although€the€discussions€ended€before€Microsoft€wasÏcompelled€to€demarcate€precisely€where€the€boundary€between€its€platform€and€NetscapeððsÏapplications€would€lie,€it€is€unclear€whether€Netscapeððs€acceptance€of€Microsoftððs€proposal€would€haveÏleft€the€firm€with€even€the€ability€to€survive€as€an€independent€business.Ìà  à89.à ` àAt€the€time€Microsoft€presented€its€proposal,€Navigator€was€the€only€browser€productÐ \¬  Ðwith€a€significant€share€of€the€market€and€thus€the€only€one€with€the€potential€to€weaken€the€applicationsÏbarrier€to€entry.€€Thus,€had€it€convinced€Netscape€to€accept€its€offer€of€a€ð ðspecial€relationship,ððÏMicrosoft€quickly€would€have€gained€such€control€over€the€extensions€and€standards€that€network„¼centric€applications€(including€Web€sites)€employ€as€to€make€it€all€but€impossible€for€any€future€browserÏrival€to€lure€appreciable€developer€interest€away€from€Microsoftððs€platform.Ìò òà  àB.à0 ` àWithholding€Crucial€Technical€Informationó óÐd` (#` (# Ðà  à90.à ` àMicrosoft€knew€that€Netscape€needed€certain€critical€technical€information€andÐ  X Ðassistance€in€order€to€complete€its€Windows€95€version€of€Navigator€in€time€for€the€retail€release€ofÏWindows€95.€€Indeed,€Netscape€executives€had€made€a€point€of€requesting€this€information,€especiallyÏthe€so„called€Remote€Network€Access€(ð ðRNAðð)€API,€at€the€June€21€meeting.€€As€was€discussedÏabove,€the€Microsoft€representatives€at€the€meeting€had€responded€that€the€haste€with€which€NetscapeÏreceived€the€desired€technical€information€would€depend€on€whether€Netscape€entered€the€so„calledÏð ðspecial€relationshipðð€with€Microsoft.€€Specifically,€Microsoft€representative€J.€Allard€had€toldÐ À+'( ÐBarksdale€that€the€way€in€which€the€two€companies€concluded€the€meeting€would€determine€whetherÏNetscape€received€the€RNA€API€immediately€or€in€three€months.Ìà  à91.à ` àAlthough€Netscape€declined€the€special€relationship€with€Microsoft,€its€executivesÐ ˜è Ðcontinued,€over€the€weeks€following€the€June€21€meeting,€to€plead€for€the€RNA€API.€€DespiteÏNetscapeððs€persistence,€Microsoft€did€not€release€the€API€to€Netscape€until€late€October,€òòi.e.óó,€asÐ € Ð ÐAllard€had€warned,€more€than€three€months€later.€€The€delay€in€turn€forced€Netscape€to€postpone€theÏrelease€of€its€Windows€95€browser€until€substantially€after€the€release€of€Windows€95€(and€InternetÏExplorer)€in€August€1995.€€As€a€result,€Netscape€was€excluded€from€most€of€the€holiday€selling€season.Ìà  à92.à ` àMicrosoft€similarly€withheld€a€scripting€tool€that€Netscape€needed€to€make€its€browserÐ P  Ðcompatible€with€certain€dial„up€ISPs.€€Microsoft€had€licensed€the€tool€freely€to€ISPs€that€wanted€it,€andÏin€fact€had€cooperated€with€Netscape€in€drafting€a€license€agreement€that,€by€mid„July€1996,€neededÏonly€to€be€signed€by€an€authorized€Microsoft€executive€to€go€into€effect.€€There€the€process€halted,Ïhowever.€€In€mid„August,€a€Microsoft€representative€informed€Netscape€that€senior€executives€atÏMicrosoft€had€decided€to€link€the€grant€of€the€license€to€the€resolution€of€all€open€issues€between€theÏcompanies.€€Netscape€never€received€a€license€to€the€scripting€tool,€and€as€a€result,€was€unable€to€doÏbusiness€with€certain€ISPs€for€a€time.ÌØ€ ØÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ=‹ÝÚƒ ÚCÚ  Ú.à0 ` àÝ  ÝThe€Similar€Experiences€of€Other€Firms€in€Dealing€with€Microsoftó ó݃ )Þ=‹g‹ÝÛ€ ÛŒÐð#@ ` (#` (# ÐŒÝ  Ýà  à93.à ` àOther€firms€in€the€computer€industry€have€had€encounters€with€Microsoft€similar€to€theÐ ä%4!" Ðexperiences€of€Netscape€described€above.€€These€interactions€demonstrate€that€it€is€MicrosoftððsÏâ âcorporate€practice€to€pressure€other€firms€to€halt€software€development€that€either€shows€the€potentialÐ Ì)%& Ðto€weaken€the€applications€barrier€to€entry€or€competes€directly€with€Microsoftððs€most€cherishedÏsoftware€products.Ìâ âÌÌÌØ€ØÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îYŽÝÚƒÚ1Ú  Ú.à0 ¸ àÝ  ÝInteló ó݃!.îYŽŽÝÛ€ÛŒÐtÄ ¸ (#¸ (# ÐŒÝ  Ýà  à94.à ` àAt€the€same€time€that€Microsoft€was€trying€to€convince€Netscape€to€stop€developingÐ h¸  Ðcross„platform€APIs,€it€was€trying€to€convince€Intel€to€halt€the€development€of€software€that€presentedÏdevelopers€with€a€set€of€operating„system„independent€interfaces.Ìà  à95.à ` àAlthough€Intel€is€engaged€principally€in€the€design€and€manufacture€of€microprocessors,Ð D” Ðit€also€develops€some€software.€€Intelððs€software€development€efforts,€which€take€place€at€the€IntelÏArchitecture€Labs€(ð ðIALðð),€are€directed€primarily€at€finding€useful€ways€to€consume€moreÏmicroprocessor€cycles,€thereby€stimulating€demand€for€advanced€Intel€microprocessors.€€By€earlyÏ1995,€IAL€was€in€the€advanced€stages€of€developing€software€that€would€enable€Intel€80x86Ïmicroprocessors€to€carry€out€tasks€usually€performed€by€separate€chips€known€as€ð ðdigital€signalÏprocessors.ðð€€By€enabling€this€migration,€the€software,€called€Native€Signal€Processing€(ð ðNSPðð)Ïsoftware,€would€endow€Intel€microprocessors€with€substantially€enhanced€video€and€graphicsÏperformance.Ìà  à96.à ` àIntel€was€eager€for€software€developers€and€hardware€manufacturers€to€write€softwareÐ Ø'(#$ Ðand€build€peripheral€devices€that€would€implement€the€enhanced€capabilities€that€its€microprocessorsÏand€its€NSP€software€together€offered.€€Intel€did€not€believe,€however,€that€the€set€of€APIs€and€deviceÐ À+'( Ðdriver€interfaces€(ð ðDDIsðð)€in€Windows€had€kept€pace€with€the€growing€ability€of€IntelððsÏmicroprocessors€to€deliver€audio/visual€content.€€Consequently,€IAL€designed€its€NSP€software€toÏexpose€Intelððs€own€APIs€and€DDIs€that,€when€invoked€by€developers€and€hardware€manufacturers,Ïwould€demonstrate€the€multimedia€capabilities€of€an€Intel€microprocessor€utilizing€NSP.Ìà  à97.à ` àMicrosoft€reacted€to€Intelððs€NSP€software€with€alarm.€€First€of€all,€the€softwareÐ € Ð Ðthreatened€to€offer€ISVs€and€device€manufacturers€an€alternative€to€waiting€for€Windows€to€provideÏsystem„level€support€for€products€that€would€take€advantage€of€advances€in€hardware€technology.€ÏMore€troubling€was€the€fact€that€Intel€was€developing€versions€of€its€NSP€software€for€non„MicrosoftÏoperating€systems.€€The€different€versions€of€the€NSP€software€exposed€the€same€set€of€softwareÏinterfaces€to€developers,€so€the€more€an€application€took€advantage€of€interfaces€exposed€by€NSPÏsoftware,€the€easier€it€would€be€to€port€that€application€to€non„Microsoft€operating€systems.€€In€short,ÏIntelððs€NSP€software€bore€the€potential€to€weaken€the€barrier€protecting€Microsoftððs€monopoly€power.Ìà  à98.à ` àOver€time,€Microsoft€developed€additional€qualms€about€Intelððs€NSP€software.€€ForÐ  p Ðinstance,€Intel€initially€designed€the€NSP€software€to€be€compatible€with€only€Windows€3.1.€€At€theÏtime,€Microsoft€was€preparing€to€release€Windows€95,€and€the€company€did€not€want€anythingÏrekindling€the€interest€of€ISVs,€equipment€manufacturers,€and€consumers€in€the€soon„to„be€obsolescentÏversion€of€Windows.€€More€acute€was€Microsoftððs€concern€that€users€who€received€NSP€software€onÏtheir€Windows€3.1€systems€would€have€difficulty€upgrading€those€systems€to€Windows€95.€€By€JuneÏ1995,€Intel€had€completed€a€pre„release,€or€ð ðbeta,ðð€version€of€its€NSP€software€for€Windows€95,€butÏMicrosoft€worried€that€a€commercial€version€would€not€be€ready€by€the€time€OEMs€began€loadingÏWindows€95.€€Ð À+'( Ðà  à99.à ` àAlong€with€its€concerns€about€contemporaneous€compatibility,€Microsoft€alsoÐ ° Ðcomplained€that€Intel€had€not€subjected€its€software€to€sufficient€quality„assurance€testing.€€MicrosoftÏwas€quick€to€point€out€that€if€Windows€users€detected€problems€with€the€software€that€came€pre„¼installed€on€their€PC€systems,€they€would€blame€Microsoft€or€the€OEMs,€even€if€fault€lay€with€Intel.€ÏMicrosoftððs€concerns€with€compatibility€and€quality€were€genuine.€€Both€pre„dating€and€over„¼shadowing€these€transient€and€remediable€concerns,€however,€was€a€more€abiding€fear€at€MicrosoftÏthat€the€NSP€software€would€render€ISVs,€device€manufacturers,€and€(ultimately)€consumers€lessÏdependent€on€Windows.€€Without€this€fear,€Microsoft€would€not€have€subjected€Intel€to€the€level€ofÏpressure€that€it€brought€to€bear€in€the€summer€of€1995.Ìà  à100.à ` àMicrosoft€began€complaining€to€Intel€about€its€NSP€software€in€inter„companyÐ D” Ðcommunications€sent€in€the€spring€of€1995.€€In€May,€Microsoft€raised€the€profile€of€its€complaints€byÏsending€some€of€its€senior€executives€to€Intel€to€discuss€the€latterððs€incursion€into€Microsoftððs€platformÏterritory.€€Returning€from€the€May€meeting,€one€Microsoft€employee€urged€his€superiors€to€refuse€toÏallow€Intel€to€offer€platform„level€software,€even€if€it€meant€that€Intel€could€not€innovate€as€quickly€as€itÏwould€like.€€If€Intel€wished€to€enable€a€new€function,€the€employee€wrote,€its€only€ð ðwinning€pathðð€wouldÏbe€to€convince€Microsoft€to€support€the€effort€in€its€platform€software.€€At€any€rate,€ð ð[s]ometimes€IntelÏwould€have€to€accept€the€outcome€that€the€time€isnððt€right€for€[Microsoft].ðð€€In€the€first€week€of€July,ÏGates€himself€met€with€Intelððs€CEO,€Andrew€Grove,€to€discuss,€among€other€things,€NSP.€€In€aÏsubsequent€memorandum€to€senior€Microsoft€executives,€Gates€reported€that€he€had€tried€to€convinceÏGrove€ð ðto€basically€not€ship€NSPðð€and€more€generally€to€reduce€the€number€of€people€working€onÏsoftware€at€Intel.Ð À+'( Ðà  à101.à ` àThe€development€of€an€alternative€platform€to€challenge€Windows€was€not€the€primaryÐ ° Ðobjective€of€Intelððs€NSP€efforts.€€In€fact,€Intel€was€interested€in€providing€APIs€and€DDIs€only€to€theÏextent€the€effort€was€necessary€to€ensure€the€development€of€applications€and€devices€that€would€sparkÏdemand€for€Intelððs€most€advanced€microprocessors.€€Understanding€Intelððs€limited€ambitions,€MicrosoftÏhastened€to€assure€Intel€that€if€it€would€stop€promoting€NSPððs€interfaces,€Microsoft€would€accelerate€itsÏown€work€to€incorporate€the€functions€of€the€NSP€software€into€Windows,€thereby€stimulating€theÏdevelopment€of€applications€and€devices€that€relied€on€the€new€capabilities€of€Intelððs€microprocessors.€ÏAt€the€same€time,€Microsoft€pressured€the€major€OEMs€to€not€install€NSP€software€on€their€PCs€untilÏthe€software€ceased€to€expose€APIs.€€NSP€software€could€not€find€its€way€onto€PCs€without€theÏcooperation€of€the€OEMs,€so€Intel€realized€that€it€had€no€choice€but€to€surrender€the€pace€of€softwareÏinnovation€to€Microsoft.€€By€the€end€of€July€1995,€Intel€had€agreed€to€stop€promoting€its€NSPÏsoftware.€€Microsoft€subsequently€incorporated€some€of€NSPððs€components€into€its€operating„systemÏproducts.€€Even€as€late€as€the€end€of€1998,€though,€Microsoft€still€had€not€implemented€key€capabilitiesÏthat€Intel€had€been€poised€to€offer€consumers€in€1995.Ìà  à102.à ` àMicrosoft€was€not€content€to€merely€quash€Intelððs€NSP€software.€€At€a€second€meetingÐ  X Ðat€Intelððs€headquarters€on€August€2,€1995,€Gates€told€Grove€that€he€had€a€fundamental€problem€withÏIntel€using€revenues€from€its€microprocessor€business€to€fund€the€development€and€distribution€of€freeÏplatform„level€software.€€In€fact,€Gates€said,€Intel€could€not€count€on€Microsoft€to€support€Intelððs€nextÏgeneration€of€microprocessors€as€long€as€Intel€was€developing€platform„level€software€that€competedÏwith€Windows.€€Intelððs€senior€executives€knew€full€well€that€Intel€would€have€difficultly€selling€PCÏmicroprocessors€if€Microsoft€stopped€cooperating€in€making€them€compatible€with€Windows€and€ifÐ À+'( ÐMicrosoft€stated€to€OEMs€that€it€did€not€support€Intelððs€chips.€€Faced€with€Gatesðð€threat,€Intel€agreedÏto€stop€developing€platform„level€interfaces€that€might€draw€support€away€from€interfaces€exposed€byÏWindows.Ìà  à103.à ` àOEMs€represent€the€primary€customers€for€Intelððs€microprocessors.€€Since€OEMs€areÐ Œ Ü Ðdependent€on€Microsoft€for€Windows,€Microsoft€enjoys€continuing€leverage€over€Intel.€€To€illustrate,ÏGates€was€able€to€report€to€other€senior€Microsoft€executives€in€October€1995€that€ð ðIntel€feels€we€haveÏall€the€OEMs€on€hold€with€our€NSP€chill.ðð€€He€added:€ÌÓÓÓ XÓÓ XÓThis€is€good€news€because€it€means€OEMs€are€listening€to€us.€€Andy€[Grove]€believesÏIntel€is€living€up€to€its€part€of€the€NSP€bargain€and€that€we€should€let€OEMs€know€thatÏsome€of€the€new€software€work€Intel€is€doing€is€OK.€€If€Intel€is€not€sticking€totally€to€itsÏpart€of€the€deal€let€me€know.ÌÌÓ XN°ÓÓ X@°ÓÓ.°ÓÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.î¾±ÝÚƒÚ2Ú  Ú.à0 ¸ àÝ  ÝAppleó ó݃!.î¾±ô±ÝÛ€ÛŒÐ>ޏ (#¸ (# ÐŒÝ  Ýà  à104.à ` àQuickTime€is€Appleððs€software€architecture€for€creating,€editing,€publishing,€and€playingÐ 2‚ Ðback€multimedia€content€(òòe.g.óó,€audio,€video,€graphics,€and€3„D€graphics).€€Apple€has€created€versionsÐ &v Ðof€QuickTime€to€run€on€both€the€Mac€OS€and€Windows,€enabling€developers€using€the€authoringÏsoftware€to€create€multimedia€content€that€will€run€on€QuickTime€implementations€for€both€operatingÏsystems.€€QuickTime€competes€with€Microsoftððs€own€multimedia€technologies,€including€MicrosoftððsÏmultimedia€APIs€(called€ð ðDirectXðð)€and€its€media€player.€€Because€QuickTime€is€cross„platformÏmiddleware,€Microsoft€perceives€it€as€a€potential€threat€to€the€applications€barrier€to€entry.Ìà  à105.à ` àBeginning€in€the€spring€of€1997€and€continuing€into€the€summer€of€1998,€Microsoft€triedÐ Þ&."# Ðto€persuade€Apple€to€stop€producing€a€Windows€95€version€of€its€multimedia€playback€software,€whichÏpresented€developers€of€multimedia€content€with€alternatives€to€Microsoftððs€multimedia€APIs.€€If€AppleÐ Æ*&' Ðacceded€to€the€proposal,€Microsoft€executives€said,€Microsoft€would€not€enter€the€authoring€businessÏand€would€instead€assist€Apple€in€developing€and€selling€tools€for€developers€writing€multimediaÏcontent.€€Just€as€Netscape€would€have€been€free,€had€it€accepted€Microsoftððs€proposal,€to€market€aÏbrowser€shell€that€would€run€on€top€of€Microsoftððs€Internet€technologies,€Apple€would€have€beenÏpermitted,€without€hindrance,€to€market€a€media€player€that€would€run€on€top€of€DirectX.€€But,€like€theÏbrowser€shell€that€Microsoft€contemplated€as€acceptable€for€Netscape€to€develop,€Appleððs€QuickTimeÏshell€would€not€have€exposed€platform„level€APIs€to€developers.€€Microsoft€executives€acknowledgedÏto€Apple€their€doubts€that€a€firm€could€make€a€successful€business€out€of€marketing€such€a€shell.€€AppleÏmight€find€it€profitable,€though,€to€continue€developing€multimedia€software€for€the€Mac€OS,€and€that,Ïthe€executives€from€Microsoft€assured€Apple,€would€not€be€objectionable.€€As€was€the€case€with€theÏInternet€technologies€it€was€prepared€to€tolerate€from€Netscape,€Microsoft€felt€secure€in€the€convictionÏthat€developers€would€not€be€drawn€in€large€numbers€to€write€for€non„Microsoft€APIs€exposed€byÏplatforms€whose€installed€bases€were€inconsequential€in€comparison€with€that€of€Windows.€€Ìà  à106.à ` àIn€their€discussions€with€Apple,€Microsoftððs€representatives€made€it€clear€that,€if€AppleÐ d Ðcontinued€to€market€multimedia€playback€software€for€Windows€95€that€presented€a€platform€forÏcontent€development,€then€Microsoft€would€enter€the€authoring€business€to€ensure€that€those€writingÏmultimedia€content€for€Windows€95€concentrated€on€Microsoftððs€APIs€instead€of€Appleððs.€€TheÏMicrosoft€representatives€further€stated€that,€if€Microsoft€was€compelled€to€develop€and€marketÏauthoring€tools€in€competition€with€Apple,€the€technologies€provided€in€those€tools€might€very€well€beÏâ âinconsistent€with€those€provided€by€Appleððs€tools.€€Finally,€the€Microsoft€executives€warned,€MicrosoftÐ Ì)%& Ðwould€invest€whatever€resources€were€necessary€to€ensure€that€developers€used€its€tools;€its€investmentÏwould€not€be€constrained€by€the€fact€that€authoring€software€generated€only€modest€revenue.€€Ìâ âà  à107.à ` àIf€Microsoft€implemented€technologies€in€its€tools€that€were€different€from€thoseÐ ˜è Ðimplemented€in€Appleððs€tools,€then€multimedia€content€developed€with€Microsoftððs€tools€would€not€runÏproperly€on€Appleððs€media€player,€and€content€developed€with€Appleððs€tools€would€not€run€properlyÏon€Microsoftððs€media€player.€€If,€as€it€implied€it€was€willing€to€do,€Microsoft€then€bundled€its€mediaÏplayer€with€Windows€and€used€a€variety€of€tactics€to€limit€the€distribution€of€Appleððs€media€player€forÏWindows,€it€could€succeed€in€extinguishing€developer€support€for€Appleððs€multimedia€technologies.€ÏIndeed,€as€the€Court€discusses€in€Section€VI€of€these€findings,€Microsoft€had€begun,€in€1996,€to€useÏjust€such€a€strategy€against€Sunððs€implementation€of€the€Java€technologies.Ìà  à108.à ` àThe€discussions€over€multimedia€playback€software€culminated€in€a€meeting€betweenÐ 8ˆ Ðexecutives€from€Microsoft€and€Apple€executives,€including€Apple€CEO,€Steve€Jobs,€at€AppleððsÏheadquarters€on€June€15,€1998.€€Microsoftððs€objective€at€the€meeting€was€to€secure€AppleððsÏcommitment€to€abandon€the€development€of€multimedia€playback€software€for€Windows.€€At€theÏmeeting,€one€of€the€Microsoft€executives,€Eric€Engstrom,€said€that€he€hoped€the€two€companies€couldÏagree€on€a€single€configuration€of€software€to€play€multimedia€content€on€Windows.€€He€added,Ïsignificantly,€that€any€unified€multimedia€playback€software€for€Windows€would€have€to€be€based€onÏDirectX.€€If€Apple€would€agree€to€make€DirectX€the€standard,€Microsoft€would€be€willing€to€do€severalÏthings€that€Apple€might€find€beneficial.€€First,€Microsoft€would€adopt€Appleððs€ð ð.MOVðð€as€the€universalÏfile€format€for€multimedia€playback€on€Windows.€€Second,€Microsoft€would€configure€the€WindowsÏMedia€Player€to€display€the€QuickTime€logo€during€the€playback€of€ð ð.MOVðð€files.€€Third,€MicrosoftÐ À+'( Ðwould€include€support€in€DirectX€for€QuickTime€APIs€used€to€author€multimedia€content,€andÏMicrosoft€would€give€Apple€appropriate€credit€for€the€APIs€in€Microsoftððs€Software€Developer€Kit.Ìà  à109.à ` àJobs€reserved€comment€during€the€meeting€with€the€Microsoft€representatives,€but€heÐ ˜è Ðexplicitly€rejected€Microsoftððs€proposal€a€few€weeks€later.€€Had€Apple€accepted€Microsoftððs€proposal,ÏMicrosoft€would€have€succeeded€in€limiting€substantially€the€cross„platform€development€of€multimediaÏcontent.€€In€addition,€Appleððs€future€success€in€marketing€authoring€tools€for€Windows€95€would€haveÏbecome€dependent€on€Microsoftððs€ongoing€cooperation,€for€those€tools€would€have€relied€on€theÏDirectX€technologies€under€Microsoftððs€control.Ìà  à110.à ` àAppleððs€surrender€of€the€multimedia€playback€business€might€have€helped€users€in€theÐ P  Ðshort€term€by€resolving€existing€incompatibilities€in€the€arena€of€multimedia€software.€€In€the€long€run,Ïhowever,€the€departure€of€an€experienced,€innovative€competitor€would€not€have€tended€to€benefitÏusers€of€multimedia€content.€€At€any€rate,€the€primary€motivation€behind€Microsoftððs€proposal€to€AppleÏwas€not€the€resolution€of€incompatibilities€that€frustrated€consumers€and€stymied€content€development.€ÏRather,€Microsoftððs€motivation€was€its€desire€to€limit€as€much€as€possible€the€development€ofÏmultimedia€content€that€would€run€cross„platform.ÌÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îeÍÝÚƒÚ3Ú  Ú.à0 ¸ àÝ  ÝRealNetworksó ó݃!.îeÍ›ÍÝÛ€ÛŒÐü!L¸ (#¸ (# ÐŒÝ  Ýà  à111.à ` àRealNetworks€is€the€leader,€in€terms€of€usage€share,€in€software€that€supports€theÐ ð#@  Ðð ðstreamingðð€of€audio€and€video€content€from€the€Web.€€RealNetworksðð€streaming€software€presents€aÏset€of€APIs€that€competes€for€developer€attention€with€APIs€exposed€by€the€streaming€technologies€inÏMicrosoftððs€DirectX.€€Like€Apple,€RealNetworks€has€developed€versions€of€its€software€for€multipleÏoperating€systems.€€In€1997,€senior€Microsoft€executives€viewed€RealNetworksðð€streaming€softwareÐ À+'( Ðwith€the€same€apprehension€with€which€they€viewed€Appleððs€playback€software€ð"ð€as€competitiveÏtechnology€that€could€develop€into€part€of€a€middleware€layer€that€could,€in€turn,€become€broad€andÏwidespread€enough€to€weaken€the€applications€barrier€to€entry.Ìà  à112.à ` àAt€the€end€of€May€1997,€Gates€told€a€group€of€Microsoft€executives€that€multimediaÐ Œ Ü Ðstreaming€represented€strategic€ground€that€Microsoft€needed€to€capture.€€He€identified€RealNetworksÏas€the€adversary€and€authorized€the€payment€of€up€to€$65€million€for€a€streaming€software€company€inÏorder€to€accelerate€Microsoftððs€effort€to€seize€control€of€streaming€standards.€€Two€weeks€later,ÏMicrosoft€signed€a€letter€of€intent€for€the€acquisition€of€a€streaming€media€company€called€VXtreme.Ìà  à113.à ` àPerhaps€sensing€an€impending€crisis,€executives€at€RealNetworks€contacted€MicrosoftÐ P  Ðwithin€days€of€the€VXtreme€dealððs€announcement€and€proposed€that€the€two€companies€enter€aÏstrategic€relationship.€€The€CEO€of€RealNetworks€told€a€senior€vice€president€at€Microsoft€that€ifÏRealNetworks€were€presented€with€a€profitable€opportunity€to€move€to€value„added€software,€theÏcompany€would€be€amenable€to€abandoning€the€base€streaming€business.€€On€July€10,€a€MicrosoftÏexecutive,€Robert€Muglia,€told€a€RealNetworks€executive€that€it€would€indeed€be€in€the€interests€ofÏboth€companies€if€RealNetworks€limited€itself€to€developing€value„added€software€designed€to€run€onÏtop€of€Microsoftððs€fundamental€multimedia€platform.€€Consequently,€on€July€18,€Microsoft€andÏRealNetworks€entered€into€an€agreement€whereby€Microsoft€agreed€to€distribute€a€copy€ofÏRealNetworksðð€media€player€with€each€copy€of€Internet€Explorer;€to€make€a€substantial€investment€inÏRealNetworks;€to€license€the€source€code€for€certain€RealNetworks€streaming€technologies;€and€toÏâ âdevelop,€along€with€RealNetworks,€a€common€file€format€for€streaming€audio€and€video€content.€Ð Ì)%& ÐMuglia,€who€signed€the€agreement€on€Microsoftððs€behalf,€believed€that€RealNetworks€had€in€turnÏagreed€to€incorporate€Microsoftððs€streaming€media€technologies€into€its€products.€€Ìâ âà  à114.à ` àRealNetworks€apparently€understood€import€of€the€agreement€differently,€for€just€a€fewÐ ˜è Ðdays€after€it€signed€the€deal€with€Microsoft,€RealNetworks€announced€that€it€planned€to€continueÏdeveloping€fundamental€streaming€software.€€Indeed,€RealNetworks€continues€to€do€so€today.€€Thus,Ïthe€mid„summer€negotiations€did€not€lead€to€the€result€Microsoft€had€intended.€€Still,€MicrosoftððsÏintentions€toward€RealNetworks€in€1997,€and€its€dealings€with€the€company€that€summer,€show€thatÏdecision„makers€at€Microsoft€were€willing€to€invest€a€large€amount€of€cash€and€other€resources€intoÏsecuring€the€agreement€of€other€companies€to€halt€software€development€that€exhibited€discernibleÏpotential€to€weaken€the€applications€barrier.ÌÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.î'ÜÝÚƒÚ4Ú  Ú.à0 ¸ àÝ  ÝIBM݃!.î'Ü]ÜÝÛ€ÛŒÐ8ˆ¸ (#¸ (# ÐŒÝ  Ýà  àó ó115.ò òà ` àó óIBM€is€both€a€hardware€and€a€software€company.€€On€the€hardware€side,€IBMÐ ,| Ðmanufactures€and€licenses,€among€other€things,€Intel„compatible€PCs.€€On€the€software€side,€IBMÏdevelops€and€sells,€among€other€things,€Intel„compatible€PC€operating€systems€and€office€productivityÏapplications.€€The€IBM€PC€Company€relies€heavily€on€Microsoftððs€cooperation€to€make€a€profit,€forÏfew€consumers€would€buy€IBM€PC€systems€if€those€systems€did€not€work€well€with€Windows€and,Ïfurther,€if€they€did€not€come€with€Windows€included.ò ò€€ó óIBMððs€software€division,€on€the€other€hand,Ð ð#@  Ðcompetes€directly€with€Microsoft€in€other€respects.€€For€instance,€IBM€has€in€the€past€marketed€OS/2Ïas€an€alternative€to€Windows,€and€it€currently€markets€the€SmartSuite€bundle€of€office€productivityÏapplications€as€an€alternative€to€Microsoftððs€Office€suite.€€The€fact€that€IBMððs€software€division€marketsÏproducts€that€compete€directly€with€Microsoftððs€most€profitable€products€has€frustrated€the€efforts€ofÐ À+'( Ðthe€IBM€PC€Company€to€maintain€a€cooperative€relationship€with€the€firm€that€controls€the€productÏ(Windows)€without€which€the€PC€Company€cannot€survive.Ìà  à116.à ` àWhereas€Microsoft€tried€to€convince€Netscape€to€move€its€business€in€a€direction€thatÐ ˜è Ðwould€not€facilitate€the€emergence€of€products€that€would€compete€with€Windows,€Microsoft€tried€toÏconvince€IBM€to€move€its€business€away€from€products€that€themselves€competed€directly€withÏWindows€and€Office.€€Microsoft€leveraged€the€fact€that€the€PC€Company€needed€to€license€WindowsÏat€a€competitive€price€and€on€a€timely€basis,€and€the€fact€that€the€company€needed€Microsoftððs€supportÏin€many€more€subtle€ways.€€When€IBM€refused€to€abate€the€promotion€of€those€of€its€own€productsÏthat€competed€with€Windows€and€Office,€Microsoft€punished€the€IBM€PC€Company€with€higherÏprices,€a€late€license€for€Windows€95,€and€the€withholding€of€technical€and€marketing€support.Ìà  à117.à ` àIn€the€summer€of€1994,€the€IBM€PC€Company€told€Microsoft€that,€with€respect€toÐ 8ˆ Ðlicensing€Microsoftððs€operating„system€products,€it€wanted€to€be€quoted€terms€just€as€favorable€asÏthose€extended€to€IBMððs€competitor,€Compaq.€€It€was€IBMððs€belief€that€Compaq€paid€the€lowest€rateÏin€the€industry€for€Windows€and€enjoyed€unparalleled€marketing€and€technical€support€from€Microsoft.€ÏIn€response€to€the€IBM€PC€Companyððs€request,€Microsoft€proposed€that€the€companies€enter€into€aÏð ðFrontline€Partnershipðð€similar€to€the€one€that€existed€between€Microsoft€and€Compaq.€€Pursuant€toÏthat€proposal,€Microsoft€and€the€IBM€PC€Company€would€perform€joint€sales,€marketing,€andÏdevelopment€work,€and€the€PC€Company€would€receive€future€Microsoft€products€at€the€lowest€ratesÏin€the€industry.€€Ìà  à118.à ` àAt€the€same€time€that€it€offered€the€IBM€PC€Company€the€rather€general€terms€in€theÐ Ì)%& ÐFrontline€Partnership€Agreement,€Microsoft€also€offered€the€PC€Company€specific€reductions€in€theÐ À+'( Ðroyalty€rate€for€Windows€95€if€the€company€would€focus€its€marketing€and€distribution€efforts€onÏMicrosoftððs€new€operating€system.€€Specifically,€the€PC€Company€would€receive€an€$8€reduction€in€theÏper„copy€royalty€for€Windows€95€if€it€mentioned€no€other€operating€systems€in€advertisements€for€IBMÏPCs,€adopted€Windows€95€as€the€standard€operating€system€for€its€employees,€and€ensured€that€it€wasÏshipping€Windows€95€pre„installed€on€at€least€fifty€percent€of€its€PCs€two€months€after€the€release€ofÏWindows€95.€€Given€the€volume€of€IBMððs€PC€shipments,€the€discount€would€have€amounted€to€savingsÏof€between€$40€million€and€$48€million€in€one€year.€€Of€course,€accepting€the€terms€would€haveÏrequired€IBM,€as€a€practical€matter,€to€abandon€its€own€operating€system,€OS/2.€€After€all,€IBM€wouldÏhave€had€difficulty€convincing€customers€to€adopt€its€own€OS/2€if€the€company€itself€had€usedÏMicrosoftððs€Windows€95€and€had€featured€that€product€to€the€exclusion€of€OS/2€in€IBM€PCÏadvertisements.Ìà  à119.à ` àRepresentatives€from€IBM€and€Microsoft,€including€Bill€Gates,€met€to€discuss€theÐ ,| Ðrelationship€between€their€companies€at€an€industry€conference€in€November€1994.€€At€that€meeting,ÏIBM€informed€Microsoft€that,€rather€than€enter€into€the€Frontline€Partnership€with€Microsoft,€IBM€wasÏgoing€to€pursue€an€initiative€it€called€ð ðIBM€First.ðð€€Consistent€with€the€title€of€the€initiative,€IBM€wouldÏaggressively€promote€IBMððs€software€products,€would€not€promote€any€Microsoft€products,€andÏwould€pre„install€OS/2€Warp€on€all€of€its€PCs,€including€those€on€which€it€would€also€pre„installÏWindows.€€IBM€thus€rejected€the€terms€that€would€have€resulted€in€an€$8€reduction€in€the€per„copyÏroyalty€price€of€Windows€95.Ìà  à120.à ` àTrue€to€its€word,€IBM€began€vigorous€promotion€of€its€software€products.€€This€effortÐ Ì)%& Ðincluded€an€advertising€campaign,€starting€in€late€1994,€that€extolled€OS/2€Warp€and€disparagedÐ À+'( ÐWindows.€€IBMððs€drive€to€best€Microsoft€in€the€PC€software€venue€intensified€in€June€1995,€whenÏIBM€reached€an€agreement€with€the€Lotus€Development€Corporation€for€the€acquisition€of€thatÏcompany.€€As€a€consequence€of€the€acquisition,€IBM€took€ownership€of€the€Lotus€groupware€product,ÏLotus€Notes,€and€the€Lotus€SmartSuite€bundle€of€office€productivity€applications.€€Microsoft€hadÏalready€identified€Notes€as€a€middleware€threat,€because€it€presented€users€with€a€common€interface,Ïand€ISVs€with€a€common€set€of€APIs,€across€multiple€platforms.€€For€its€part,€SmartSuite€competedÏdirectly€with€Microsoft€Office.€€In€mid„July€1995,€IBM€announced€that€it€was€going€to€make€SmartSuiteÏits€primary€desktop€software€offering€in€the€United€States.Ìà  à121.à ` àMicrosoft€did€not€intend€to€capitulate.€€In€July,€Gates€called€an€executive€at€the€IBMÐ P  ÐPC€Company€to€berate€him€about€IBMððs€public€statements€denigrating€Windows.€€Just€a€few€daysÏlater,€Microsoft€began€to€retaliate€in€earnest€against€the€IBM€PC€Company.Ìà  à122.à ` àThe€IBM€PC€Company€had€begun€negotiations€with€Microsoft€for€a€Windows€95Ð ,| Ðlicense€in€late€March€1995.€€For€the€first€two€months,€the€negotiations€had€progressed€smoothly€and€atÏan€expected€pace.€€After€IBM€announced€its€intention€to€acquire€Lotus,€though,€the€MicrosoftÏnegotiators€began€canceling€meetings€with€their€IBM€counterparts,€failing€to€return€telephone€calls,€andÏdelaying€the€return€of€marked„up€license€drafts€that€they€received€from€IBM.€€Then,€on€July€20,€1995,Ïjust€three€days€after€IBM€announced€its€intention€to€pre„install€SmartSuite€on€its€PCs,€a€MicrosoftÏexecutive€informed€his€counterpart€at€the€IBM€PC€Company€that€Microsoft€was€terminating€furtherÏnegotiations€with€IBM€for€a€license€to€Windows€95.€€Microsoft€also€refused€to€release€to€the€PCÏCompany€the€Windows€95€ð ðgolden€masterðð€code.€€€The€PC€Company€needed€the€code€for€its€productÏplanning€and€development,€and€IBM€executives€knew€that€Microsoft€had€released€it€to€IBMððs€OEMÐ À+'( Ðcompetitors€on€July€17.€€Microsoftððs€purported€reason€for€halting€the€negotiations€was€that€it€wantedÏfirst€to€resolve€an€ongoing€audit€of€IBMððs€past€royalty€payments€to€Microsoft€for€several€differentÏoperating€systems.Ìà  à123.à ` àPrior€to€the€call€on€July€20,€neither€companyððs€management€had€ever€linked€the€ongoingÐ Œ Ü Ðaudit€to€IBMððs€negotiations€for€a€license€to€Windows€95.€€IBM€was€dismayed€by€the€abrupt€halt€in€theÏlicense€negotiations€and€the€prospect€that€it€might€not€get€a€license€for€Windows€95€until€the€auditÏprocess€concluded.€€IBMððs€executives€executives€surmised€that€all€of€its€major€competitors€had€alreadyÏsigned€licenses€for€Windows€95.€€The€PC€Company€would€lose€a€great€deal€of€business€to€thoseÏcompetitors€during€the€crucial€back„to„school€season€if€it€could€not€begin€pre„installing€Windows€95€onÏits€PCs€immediately.€€The€conclusion€of€the€audit€appeared€to€be€weeks,€if€not€months,€away.€€The€PCÏCompany€thus€faced€the€prospect€of€missing€the€holiday€selling€season€as€well.€€IBM€executivesÏpleaded€with€Microsoft€to€uncouple€the€license€negotiations€from€the€ongoing€audit€and€offeredÏMicrosoft€a€$10€million€bond€that€Microsoft€could€use€to€indemnify€itself€against€€any€discrepancies€thatÏthe€audit€might€ultimately€reveal.€€IBM€also€offered€to€add€a€term€to€any€Windows€95€license€agreementÏwhereby€IBM€would€pay€penalties€and€interest€if€any€future€audit€disclosed€under„reporting€of€royaltiesÏby€IBM.Ìà  àØ€{Ø124.à ` àOn€August€9,€1995,€a€senior€executive€at€the€IBM€PC€Company€went€to€Redmond€toÐ ð#@  Ðmeet€with€Joachim€Kempin,€the€Microsoft€executive€in€charge€of€the€firmððs€sales€to€OEMs.€€At€theÏmeeting,€Kempin€offered€to€accept€a€single,€lump„sum€payment€from€IBM€that€would€close€allÏoutstanding€audits.€€The€amount€of€this€payment€would€be€reduced€if€IBM€offered€a€concession€thatÏKempin€could€take€back€to€Gates.€€As€one€possibility,€Kempin€suggested€that€IBM€agree€to€not€bundleÐ À+'( ÐSmartSuite€with€its€PCs€for€a€period€of€six€months€to€one€year.€€He€explained€that€the€prospect€of€IBMÏbundling€SmartSuite€with€its€PCs€threatened€the€profit€margins€that€Microsoft€derived€from€Office€andÏconstituted€a€core€issue€in€the€relationship€between€the€two€companies.€€The€IBM€executive€rejectedÏKempinððs€suggestion.€€In€a€follow„up€letter,€Kempin€stated€that€Microsoft€would€require€approximatelyÏ$25€million€from€IBM€in€order€to€settle€all€outstanding€audits.€€Kempin€reiterated€that,€ÌÓÓÓ XÓÓ XÓIf€you€believe€that€the€amount€I€am€asking€for€is€too€much,€I€would€be€willing€to€tradeÏcertain€relationship€improving€measures€for€the€settlement€charges€and/or€convert€someÏof€the€amounts€into€marketing€funds€if€IBM€too€agrees€to€promote€Microsoftððs€softwareÏproducts€together€with€their€hardware€offerings.ÌÓ XfÓÓ XXÓÌÓFÓThe€message€was€clear:€€IBM€could€resolve€the€impasse€ostensibly€blocking€the€issuance€of€a€WindowsÏ95€license€ð"ð€the€royalties€audit€ð"ð€by€de„emphasizing€those€products€of€its€own€that€competed€withÏMicrosoft€and€instead€promoting€Microsoftððs€products.Ìà  à125.à ` àIBM€never€agreed€to€renounce€SmartSuite€or€to€increase€its€support€for€MicrosoftÐ 2‚ Ðsoftware,€and€in€the€end,€Microsoft€did€not€grant€IBM€a€license€to€pre„install€Windows€95€until€fifteenÏminutes€before€the€start€of€Microsoftððs€official€launch€event€on€August€24,€1995.€€That€same€day,€theÏfirms€brought€the€audit€issue€to€a€close€with€a€settlement€agreement€under€which€IBM€ultimately€paidÏMicrosoft€$31€million.€€The€release€of€Windows€95€had€been€postponed€more€than€once,€and€manyÏconsumers€apparently€had€been€postponing€buying€PC€systems€until€the€new€operating€system€arrived.€ÏThe€pent„up€demand€caused€an€initial€surge€in€the€sales€of€PCs€loaded€with€Windows€95.€€IBMððs€OEMÏcompetitors€reaped€the€fruits€of€this€surge,€but€because€of€the€delay€in€obtaining€a€license,€the€IBM€PCÏCompany€did€not.€€The€PC€Company€also€missed€the€back„to„school€market.€€These€lost€opportunitiesÏcost€IBM€substantial€revenue.Ð Æ*&' Ðà  à126.à ` àEven€once€the€companies€had€resolved€the€audit€dispute,€Microsoft€continued€to€treatÐ ° Ðthe€IBM€PC€Company€less€favorably€than€it€did€the€other€major€OEMs,€and€Microsoft€executivesÏcontinued€to€tell€PC€Company€executives€that€the€treatment€would€improve€only€if€IBM€refrained€fromÏcompeting€with€Microsoftððs€software€offerings.€€On€January€5,€1996,€Kempin€sent€a€letter€to€aÏcounterpart€at€the€IBM€PC€Company.€€In€it,€Kempin€expressed€his€belief€that€the€PC€Company€wouldÏenjoy€a€closer,€more€cooperative€relationship€with€Microsoft€if€only€IBMððs€software€arm€did€notÏcompete€as€aggressively€with€the€products€that€comprised€the€core€of€Microsoftððs€business:ÌÓÓÓ XÓÓ XÓà ` àAs€long€as€IBM€is€working€first€on€their€competitive€offerings€and€prefers€toÏfiercely€compete€with€us€in€critical€areas,€we€should€just€be€honest€with€each€other€andÏadmit€that€such€priorities€will€not€lead€to€a€most€exciting€relationship€and€might€not€evenÏmake€IBM€feel€good€when€selling€solutions€based€on€Microsoft€products.€.€.€.You€are€aÏvalued€OEM€customer€of€Microsoft,€with€whom€we€will€cooperate€as€much€as€yourÏself„imposed€restraints€allow€us€to€do.€€Please€understand€that€this€is€neither€my€choiceÏor€preferred€way€of€doing€business€with€an€important€company€like€IBM.€€In€addition,Ïwe€would€like€to€see€the€IBM€PC€company€being€more€actively€involved€in€assistingÏMicrosoft€to€bring€key€products€to€market€.€.€.€.€To€date€the€IBM€PC€company€has€notÏalways€been€an€active€participant€in€these€areas€„€understandable€given€your€ownÏinternal€product€priorities.€€I€hope€you€can€help€me€to€change€this.ÌÓ X± ÓÓ X£ ÓÌÓ‘ ÓIn€closing,€Kempin€wrote,€ð ðYou€get€measured€in€selling€more€hardware€and€I€firmly€believe€if€you€hadÏless€conflict€with€IBMððs€software€directions€you€actually€could€sell€more€of€it.ðð€€Ìà  à127.à ` àWhen€Kempin€spoke€to€the€same€executive€at€the€end€of€the€month,€he€repeated€aÐ ü!L Ðmessage€he€had€delivered€more€than€once€before:€€The€fact€that€the€IBM€PC€Company€pre„installedÏSmartSuite€on€its€PC€systems€made€Microsoft€reluctant€to€help€IBM€sell€more€PC€systems.€€After€all,Ïthe€more€PC€systems€IBM€sold€with€SmartSuite,€the€fewer€copies€of€Office€Microsoft€could€sell.€€ForÏthis€reason,€as€Kempin€explained€to€a€group€of€IBM€PC€Company€representatives€in€August€1996,ÏMicrosoft€refused€to€provide€IBM€press€releases€with€quotes€endorsing€any€PC€system€that€IBMÐ À+'( Ðshipped€with€SmartSuite.€€Microsoft€later€expanded€that€rule€to€cover€any€IBM€PCs€shipped€with€theÏWorld€Book€electronic€encyclopedia€instead€of€Microsoftððs€Encarta.€€IBM€might€have€been€lessÏconcerned€about€Microsoftððs€refusal€to€offer€endorsements€if€such€quotes€did€not€appear€frequently€andÏprominently€in€press€releases€announcing€new€PC€systems€from€other€OEMs€such€as€Compaq.€ÏMicrosoftððs€conspicuous€silence€with€respect€to€IBM€PCs€sent€the€message€to€customers€that€IBMððsÏPCs€did€not€support€Windows€as€well€as€PCs€manufactured€by€other€OEMs€did.Ìà  à128.à ` àMicrosoft€also€denied€the€IBM€PC€Company€access€to€the€so„called€ð ðenablingÐ h¸  Ðprogramsðð€that€Microsoft€ran€for€the€benefit€of€OEMs€such€as€Compaq,€Hewlett„Packard,€and€DEC,Ïeven€though€IBM€met€the€prescribed€objective€criteria€for€admission.€€Like€the€absence€of€publicÏendorsements,€IBMððs€exclusion€from€Microsoftððs€enabling€programs€led€customers€to€question€whetherÏthe€Microsoft€software€they€needed€would€work€optimally€with€IBMððs€PCs.€€IBM€learned€throughÏsurveys€it€conducted€that€the€firm€had€lost€between€seven€and€ten€large€accounts,€representing€aboutÏ$180€million€in€revenue€for€IBM,€because€the€tension€between€Microsoft€and€IBM€led€customers€toÏdoubt€that€Windows€would€not€work€as€well€with€IBM€PCs€as€with€PCs€produced€by€firms€with€whichÏMicrosoft€was€on€cordial€terms.€€Microsoft€justified€its€exclusion€of€the€PC€Company€from€the€enablingÏprograms€with€its€suspicion€that€IBM€might€use€the€programs€to€gain€òòentreóó€with€customers€and€thenÐ ü!L Ðattempt€to€sell€those€customers€IBM€software€instead€of€Microsoft€products.€€At€the€same€time,€aÏMicrosoft€executive€told€a€counterpart€at€IBM€that€the€PC€Company€would€be€admitted€to€theÏprograms€when€IBMððs€CEO€repaired€his€relationship€with€Bill€Gates.Ìà  à129.à ` àMicrosoftððs€executives€were€persistent€despite€IBMððs€repeated€refusals€to€sacrifice€itsÐ Ì)%& Ðown€software€ambitions€to€improve€its€relations€with€Microsoft.€€In€February€1997,€one€executive€fromÐ À+'( ÐMicrosoft€told€a€group€of€IBM€PC€Company€executives€that€Gates€might€relent€in€his€reluctance€toÏcooperate€with€their€company€if€IBM€moderated€its€support€for€Notes€and€SmartSuite.€€In€a€meetingÏheld€the€next€month,€Microsoft€representatives€conditioned€fulfillment€of€two€objects€of€IBMððs€desiresÏon€the€companyððs€willingness€to€pre„install€Microsoftððs€products€in€the€place€of€competing€applications,Ïsuch€as€SmartSuite,€and€objectionable€middleware,€such€as€Notes.€€The€first€inducement€that€theÏMicrosoft€representatives€blandished€before€the€PC€Company€was€early€access€to€Windows€sourceÏcode,€which€Compaq€and€a€handful€of€other€OEMs€enjoyed.€€IBM€wanted€this€early€access€in€order€toÏensure€its€hardwareððs€contemporaneous€compatibility€with€Microsoftððs€operating€system€products.€ÏNext,€Microsoft€offered€IBM€permission€to€certify€itself€as€being€compliant€with€certain€hardwareÏrequirements€that€Microsoft€imposed€(and€that€customers€had€come€to€look€for€as€a€sign€of€an€OEMððsÏability€to€support€Windows).€€Self„certification€would€have€decreased€the€time€it€took€IBM€PCs€toÏreach€the€market,€and€IBM€knew€that€the€privilege€was€already€being€extended€to€some€of€its€mainÏOEM€competitors.€€With€respect€to€both€benefits,€the€representatives€from€Microsoft€explained€thatÏMicrosoft€would€extend€them€to€the€PC€Company€on€the€condition€that€it€stop€loading€its€PC€systemsÏwith€software€that€threatened€Microsoftððs€interests.Ìà  à130.à ` àThe€discriminatory€treatment€that€the€IBM€PC€Company€received€from€Microsoft€onÐ ü!L Ðaccount€of€the€ð ðsoftware€directionsðð€of€its€parent€company€also€manifested€itself€in€the€royalty€price€thatÏIBM€paid€for€Windows.€€In€the€latter€half€of€the€1990s,€IBM€(along€with€Gateway)€paid€significantlyÏmore€for€Windows€than€other€major€OEMs€(like€Compaq,€Dell,€and€Hewlett„Packard)€that€were€moreÏâ âcompliant€with€Microsoftððs€wishes.Ð Ì)%& Ðà  à131.à ` àFinally,€Microsoft€made€its€frustration€known€to€IBM€by€reducing,€from€three€to€one,Ð ° Ðâ âthe€number€of€Microsoft€OEM€account€managers€handling€Microsoftððs€operational€relationship€with€theÏIBM€PC€Company.€€This€reduced€support€impaired€still€further€IBMððs€ability€to€test,€manufacture,€andÏship€its€PCs€on€schedule,€further€delaying€IBMððs€efforts€to€bring€its€PC€products€to€market€against€theÏcompetition€in€a€timely€manner.Ìà  à132.à ` àIn€sum,€from€1994€to€1997€Microsoft€consistently€pressured€IBM€to€reduce€its€supportÐ tÄ  Ðfor€software€products€that€competed€with€Microsoftððs€offerings,€and€it€used€its€monopoly€power€in€theÏmarket€for€Intel„compatible€PC€operating€systems€to€punish€IBM€for€its€refusal€to€cooperate.€ÏWhereas,€in€the€case€of€Netscape,€Microsoft€tried€to€induce€a€company€to€move€its€business€away€fromÏoffering€software€that€could€weaken€the€applications€barrier€to€entry,€Microsoftððs€primary€concern€withÏIBM€was€to€reduce€the€firmððs€support€for€software€products€that€competed€directly€with€MicrosoftððsÏmost€profitable€products,€namely€Windows€and€Office.€€That€being€said,€it€must€be€noted€that€one€ofÏthe€IBM€products€to€which€Microsoft€objected,€Notes,€was€like€Navigator€in€that€it€exposedÏmiddleware€APIs.€€In€any€event,€Microsoftððs€interactions€with€Netscape,€IBM,€Intel,€Apple,€andÏRealNetworks€all€reveal€Microsoftððs€business€strategy€of€directing€its€monopoly€power€toward€inducingÏother€companies€to€abandon€projects€that€threaten€Microsoft€and€toward€punishing€those€companiesÏthat€resist.ÌÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ1*ÝÚƒ ÚDÚ  Ú.à0 ` àÝ  ÝDeveloping€Competitive€Web€Browsing€Softwareó ó݃ )Þ1*[*ÝÛ€ ÛŒÐä%4!"` (#` (# ÐŒÝ  Ýà  à133.à ` àOnce€it€became€clear€to€senior€executives€at€Microsoft€that€Netscape€would€notÐ Ø'(#$ Ðabandon€its€efforts€to€develop€Navigator€into€a€platform,€Microsoft€focused€its€efforts€on€ensuring€thatÏfew€developers€would€write€their€applications€to€rely€on€the€APIs€that€Navigator€exposed.€€DevelopersÐ À+'( Ðwould€only€write€to€the€APIs€exposed€by€Navigator€in€numbers€large€enough€to€threaten€theÏapplications€barrier€if€they€believed€that€Navigator€would€emerge€as€the€standard€software€employed€toÏbrowse€the€Web.€€If€Microsoft€could€demonstrate€that€Navigator€would€not€become€the€standard,Ïbecause€Microsoftððs€own€browser€would€attract€just€as€much€if€not€more€usage,€then€developers€wouldÏcontinue€to€focus€their€efforts€on€a€platform€that€enjoyed€enduring€ubiquity:€the€32„bit€Windows€APIÏset.€€Microsoft€thus€set€out€to€maximize€Internet€Explorerððs€share€of€browser€usage€at€NavigatorððsÏexpense.Ìà  à134.à ` àMicrosoftððs€management€believed€that,€no€matter€what€the€firm€did,€Internet€ExplorerÐ \¬  Ðwould€not€capture€a€large€share€of€browser€usage€as€long€as€it€remained€markedly€inferior€to€NavigatorÏin€the€estimation€of€consumers.€€The€task€of€technical€personnel€at€Microsoft,€then,€was€to€makeÏInternet€Explorerððs€features€at€least€as€attractive€to€consumers€as€Navigatorððs.€€Microsoft€did€notÏbelieve€that€improved€quality€alone€would€depose€Navigator,€for€millions€of€users€appeared€to€beÏsatisfied€with€Netscapeððs€product,€and€Netscape€was€known€as€ððthe€Internet€company.ðð€€As€GatesÏwrote€to€Microsoftððs€executive€staff€in€his€May€1995€ð ðInternet€Tidal€Waveðð€memorandum,€ð ðFirst€weÏneed€to€offer€a€decent€client,ðð€but€ð ðthis€alone€wonððt€get€people€to€switch€away€from€Netscape.ðð€€Still,Ïonce€Microsoft€ensured€that€the€average€consumer€would€be€just€as€comfortable€browsing€with€InternetÏExplorer€as€with€Navigator,€Microsoft€could€employ€other€devices€to€induce€consumers€to€use€itsÏbrowser€instead€of€Netscapeððs.Ìà  à135.à ` àFrom€1995€onward,€Microsoft€spent€more€than€$100€million€each€year€developingÐ Ø'(#$ ÐInternet€Explorer.€€The€firmððs€management€gradually€increased€the€number€of€developers€working€onÏInternet€Explorer€from€five€or€six€in€early€1995€to€more€than€one€thousand€in€1999.€€Although€the€firstÐ À+'( Ðversion€of€Internet€Explorer€was€demonstrably€inferior€to€Netscapeððs€then„current€browser€productÏwhen€the€former€was€released€in€July€1995,€Microsoftððs€investment€eventually€started€to€payÏtechnological€dividends.€€When€Microsoft€released€Internet€Explorer€3.0€in€late€1996,€reviewersÏpraised€its€vastly€improved€quality,€and€some€even€rated€it€as€favorably€as€they€did€Navigator.€€AfterÏthe€arrival€of€Internet€Explorer€4.0€in€late€1997,€the€number€of€reviewers€who€regarded€it€as€theÏsuperior€product€was€roughly€equal€to€those€who€preferred€Navigator.ÌÓÓÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ×6ÝÚƒ ÚEÚ  Ú.à0 ` àÝ  ÝGiving€Internet€Explorer€Away€and€Rewarding€Firms€that€Helped€Build€ItsÐ h¸  ÐUsage€Shareó ó݃ )Þ×67ÝÛ€ ÛŒÐb² ` (#` (# ÐŒÝ  ÝÌÓÅ6Óà  à136.à ` àIn€addition€to€improving€the€quality€of€Internet€Explorer,€Microsoft€sought€to€increaseÐ V¦ Ðthe€productððs€share€of€browser€usage€by€giving€it€away€for€free.€€In€many€cases,€Microsoft€also€gaveÏother€firms€things€of€value€(at€substantial€cost€to€Microsoft)€in€exchange€for€their€commitment€toÏdistribute€and€promote€Internet€Explorer,€sometimes€explicitly€at€Navigatorððs€expense.€€WhileÏMicrosoft€might€have€bundled€Internet€Explorer€with€Windows€at€no€additional€charge€even€absent€itsÏdetermination€to€preserve€the€applications€barrier€to€entry,€that€determination€was€the€main€force€drivingÏits€decision€to€price€the€product€at€zero.€€Furthermore,€Microsoft€would€not€have€given€InternetÏExplorer€away€to€IAPs,€ISVs,€and€Apple,€nor€would€it€have€taken€on€the€high€cost€of€enlisting€firms€inÏits€campaign€to€maximize€Internet€Explorerððs€usage€share€and€limit€Navigatorððs,€had€it€not€been€focusedÏon€protecting€the€applications€barrier.Ìà  à137.à ` àIn€early€1995,€personnel€developing€Internet€Explorer€at€Microsoft€contemplatedÐ Þ&."# Ðcharging€OEMs€and€others€for€the€product€when€it€was€released.€€Internet€Explorer€would€have€beenÏincluded€in€a€bundle€of€software€that€would€have€been€sold€as€an€add„on,€or€ð ðfrosting,ðð€to€Windows€95.€Ð Æ*&' ÐIndeed,€Microsoft€knew€by€the€middle€of€1995,€if€not€earlier,€that€Netscape€charged€customers€toÏlicense€Navigator,€and€that€Netscape€derived€a€significant€portion€of€its€revenue€from€selling€browserÏlicenses.€€Despite€the€opportunity€to€make€a€substantial€amount€of€revenue€from€the€sale€of€InternetÏExplorer,€and€with€the€knowledge€that€the€dominant€browser€product€on€the€market,€Navigator,€wasÏbeing€licensed€at€a€price,€senior€executives€at€Microsoft€decided€that€Microsoft€needed€to€give€itsÏbrowser€away€in€furtherance€of€the€larger€strategic€goal€of€accelerating€Internet€Explorerððs€acquisition€ofÏbrowser€usage€share.€€Consequently,€Microsoft€decided€not€to€charge€an€increment€in€price€when€itÏincluded€Internet€Explorer€in€Windows€for€the€first€time,€and€it€has€continued€this€policy€ever€since.€€InÏaddition,€Microsoft€has€never€charged€for€an€Internet€Explorer€license€when€it€is€distributed€separatelyÏfrom€Windows.Ìà  à138.à ` àOver€the€months€and€years€that€followed€the€release€of€Internet€Explorer€1.0€in€JulyÐ 8ˆ Ð1995,€senior€executives€at€Microsoft€remained€engrossed€with€maximizing€Internet€Explorerððs€share€ofÏbrowser€usage.€€Whenever€competing€priorities€threatened€to€intervene,€decision„makers€at€MicrosoftÏreminded€those€reporting€to€them€that€browser€usage€share€remained,€as€Microsoft€senior€viceÏpresident€Paul€Maritz€put€it,€ð ðjob€#1.ðð€€For€example,€in€the€summer€of€1997,€some€mid„level€employeesÏbegan€to€urge€that€Microsoft€charge€a€price€for€at€least€some€of€the€components€of€Internet€ExplorerÏ4.0.€€This€would€have€shifted€some€anticipatory€demand€to€Windows€98€(which€was€due€to€be€releasedÏsomewhat€later€than€Internet€Explorer€4.0),€since€Windows€98€would€include€all€of€the€browser€at€noÏextra€charge.€€Senior€executives€at€Microsoft€rejected€the€proposal,€because€while€the€move€might€haveÏâ âincreased€demand€for€Windows€98€and€generated€substantial€revenue,€it€would€have€done€so€at€theÐ Ì)%& Ðunacceptable€cost€of€retarding€the€dissemination€of€Internet€Explorer€4.0.€€Maritz€reminded€those€whoÏhad€advocated€the€proposal€that€ð ðgetting€browser€share€up€to€50%€(or€more)€is€still€the€major€goal.ððÌâ âà  à139.à ` àThe€transcendent€importance€of€browser€usage€share€to€Microsoft€is€evident€in€what€theÐ ˜è Ðfirm€expended,€as€well€as€in€what€it€relinquished,€in€order€to€maximize€usage€share€for€Internet€ExplorerÏand€to€diminish€it€for€Navigator.€€Not€only€was€Microsoft€willing€to€forego€an€opportunity€to€attractÏsubstantial€revenue€while€enhancing€(albeit€temporarily)€consumer€demand€for€Windows€98,€but€theÏcompany€also€paid€huge€sums€of€money,€and€sacrificed€many€millions€more€in€lost€revenue€every€year,Ïin€order€to€induce€firms€to€take€actions€that€would€help€increase€Internet€Explorerððs€share€of€browserÏusage€at€Navigatorððs€expense.€€First,€even€though€Microsoft€could€have€charged€IAPs,€ISVs,€andÏApple€for€licenses€to€distribute€Internet€Explorer€separately€from€Windows,€Microsoft€priced€thoseÏlicenses,€along€with€related€technology€and€technical€support,€at€zero€in€order€to€induce€thoseÏcompanies€to€distribute€and€promote€Internet€Explorer€over€Navigator.€€Second,€although€MicrosoftÏcould€have€charged€IAPs€and€ICPs€substantial€sums€of€money€in€exchange€for€promoting€their€servicesÏand€content€within€Windows,€Microsoft€instead€bartered€Windowsðð€valuable€desktop€ð ðreal€estateðð€for€aÏcommitment€from€those€firms€to€promote€and€distribute€Internet€Explorer,€to€inhibit€promotion€andÏdistribution€of€Navigator,€and€to€employ€technologies€that€would€inspire€developers€to€write€Web€sitesÏthat€relied€on€Microsoftððs€Internet€technologies€rather€than€those€provided€by€Navigator.€€MicrosoftÏwas€willing€to€offer€such€prominent€placement€even€to€AOL,€which€was€the€principal€competitor€toÏMicrosoftððs€MSN€service.€€If€an€IAP€was€already€under€contract€to€pay€Netscape€a€certain€amount€forÏbrowser€licenses,€Microsoft€offered€to€compensate€the€IAP€the€amount€it€owed€Netscape.€€Third,ÏMicrosoft€also€reduced€the€referral€fees€that€IAPs€paid€when€users€signed€up€for€their€services€using€theÐ À+'( ÐInternet€Referral€Server€in€Windows€in€exchange€for€the€IAPsðð€efforts€to€convert€their€installed€bases€ofÏsubscribers€from€Navigator€to€Internet€Explorer.€€For€example,€Microsoft€entered€a€contract€with€AOLÏwhereby€Microsoft€actually€paid€AOL€a€bounty€for€every€subscriber€that€it€converted€to€accessÏsoftware€that€included€Internet€Explorer€instead€of€Navigator.€€Finally,€with€respect€to€OEMs,ÏMicrosoft€extended€co„marketing€funds€and€reductions€in€the€Windows€royalty€price€to€those€agreeingÏto€promote€Internet€Explorer€and,€in€some€cases,€to€abstain€from€promoting€Navigator.Ìà  à140.à ` àEven€absent€the€strategic€imperative€to€maximize€its€browser€usage€share€at€NetscapeððsÐ h¸  Ðexpense,€Microsoft€might€still€have€set€the€price€of€an€Internet€Explorer€consumer€license€at€zero.€€ItÏmight€also€have€spent€something€approaching€the€$100€million€it€has€devoted€each€year€to€developingÏInternet€Explorer€and€some€part€of€the€$30€million€it€has€spent€annually€marketing€it.€€After€all,Ïconsumers€in€1995€were€already€demanding€software€that€enabled€them€to€use€the€Web€with€ease,€andÏIBM€had€announced€in€September€1994€its€plan€to€include€browsing€capability€in€OS/2€Warp€at€noÏextra€charge.€€Microsoft€had€reason€to€believe€that€other€operating„system€vendors€would€do€the€same.Ìà  à141.à ` àStill,€had€Microsoft€not€viewed€browser€usage€share€as€the€key€to€preserving€theÐ d Ðapplications€barrier€to€entry,€the€company€would€not€have€taken€its€efforts€beyond€developing€aÏcompetitive€browser€product,€including€it€with€Windows€at€no€additional€cost€to€consumers,€andÏpromoting€it€with€advertising.€€Microsoft€would€not€have€absorbed€the€considerable€additional€costsÏassociated€with€enlisting€other€firms€in€its€campaign€to€increase€Internet€Explorerððs€usage€share€atÏNavigatorððs€expense.€€This€investment€was€only€profitable€to€the€extent€that€it€protected€the€applicationsÏbarrier€to€entry.€€Neither€the€desire€to€bolster€demand€for€Windows,€nor€the€prospect€of€ancillaryÏrevenues,€explains€the€lengths€to€which€Microsoft€has€gone.€€For€one€thing,€loading€Navigator€makesÐ À+'( ÐWindows€just€as€Internet„ready€as€including€Internet€Explorer€does.€€Therefore,€Microsoftððs€costlyÏefforts€to€limit€the€use€of€Navigator€on€Windows€could€not€have€stemmed€from€a€desire€to€bolsterÏconsumer€demand€for€Windows.€€Furthermore,€there€is€no€conceivable€way€that€Microsoftððs€costlyÏefforts€to€induce€Apple€to€pre„install€Internet€Explorer€on€Appleððs€own€PC€systems€could€haveÏincreased€consumer€demand€for€Windows.Ìà  à142.à ` àIn€pursuing€its€goal€of€maximizing€Internet€Explorerððs€usage€share,€Microsoft€actuallyÐ tÄ  Ðhas€limited€rather€severely€the€number€of€profit€centers€from€which€it€could€otherwise€derive€income€òòviaóóÐ h¸  ÐInternet€Explorer.€€For€example,€Microsoft€allows€the€developers€of€browser€shells€built€on€InternetÏExplorer€to€collect€ancillary€revenues€such€as€advertising€fees;€for€another,€Microsoft€permits€itsÏbrowser€licensees€to€change€the€browserððs€start€page,€thus€limiting€the€fees€that€advertisers€are€willing€toÏpay€for€placement€on€that€page€by€Microsoft.€€Even€if€Microsoft€maximized€its€ancillary€revenue,€theÏamount€of€revenue€realized€would€not€come€close€to€recouping€the€cost€of€its€campaign€to€maximizeÏInternet€Explorerððs€usage€share€at€Navigatorððs€expense.€€The€countless€communications€thatÏMicrosoftððs€executives€dispatched€to€each€other€about€the€companyððs€need€to€capture€browser€usageÏshare€indicate€that€the€purpose€of€the€effort€had€little€to€do€with€attracting€ancillary€revenues€andÏeverything€to€do€with€protecting€the€applications€barrier€from€the€threat€posed€by€Netscapeððs€NavigatorÏand€Sunððs€implementation€of€Java.€€For€example,€Microsoft€vice€president€Brad€Chase€told€theÏcompanyððs€assembled€sales€and€marketing€executives€in€April€1996€that€they€should€ð ðworry€about€yourÏbrowser€share[]€as€much€as€BillGðð€even€though€Internet€Explorer€was€ð ða€no€revenue€product,ðð€becauseÏâ âð ðwe€will€lose€[òòsicóó]€the€Internet€platform€battle€if€we€do€not€have€a€significant€user€installed€base.ðð€€HeÐ Ì)%& Ðtold€them€that€ð ðif€you€let€your€customers€deploy€Netscape€Navigator,€you€will€loose€[òòsicóó]€leadership€onÐ ° Ðthe€desktop.ððÌâ âÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ _ÝÚƒ ÚFÚ  Ú.à0 ` àÝ  ÝExcluding€Navigator€from€Important€Distribution€Channelsó ó݃ )Þ _3_ÝÛ€ یИè` (#` (# ÐŒÝ  Ýà  à143.à ` àDecision„makers€at€Microsoft€worried€that€simply€developing€its€own€attractiveÐ Œ Ü Ðbrowser€product,€pricing€it€at€zero,€and€promoting€it€vigorously€would€not€divert€enough€browser€usageÏfrom€Navigator€to€neutralize€it€as€a€platform.€€They€believed€that€a€comparable€browser€product€offeredÏat€no€charge€would€still€not€be€compelling€enough€to€consumers€to€detract€substantially€fromÏNavigatorððs€existing€share€of€browser€usage.€€This€belief€was€due,€at€least€in€part,€to€the€fact€thatÏNavigator€already€enjoyed€a€very€large€installed€base€and€had€become€nearly€synonymous€with€theÏWeb€in€the€publicððs€consciousness.€€If€Microsoft€was€going€to€raise€Internet€Explorerððs€share€ofÏbrowser€usage€and€lower€Navigatorððs€share,€executives€at€Microsoft€believed€they€needed€to€constrictÏNetscapeððs€access€to€the€distribution€channels€that€led€most€efficiently€to€browser€usage.ÌØ€{ØÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îËcÝÚƒÚ1Ú  Ú.à0 ¸ àÝ  ÝThe€Importance€of€the€OEM€and€IAP€Channelsó ó݃!.îËcdÝۀیРp¸ (#¸ (# ÐŒÝ  Ýà  à144.à ` àVery€soon€after€it€recognized€the€need€to€gain€browser€usage€share€at€NavigatorððsÐ d Ðexpense,€Microsoft€identified€pre„installation€by€OEMs€and€bundling€with€the€proprietary€clientÏsoftware€of€IAPs€as€the€two€distribution€channels€that€lead€most€efficiently€to€browser€usage.€€TwoÏmain€reasons€explain€why€these€channels€are€so€efficient.€€First,€users€must€acquire€a€computer€andÏconnect€to€the€Internet€before€they€can€browse€the€Web.€€Thus,€the€OEM€and€IAP€channels€leadÏdirectly€to€virtually€every€user€of€browsing€software.€€Second,€both€OEMs€and€IAPs€are€able€to€placeÏbrowsing€software€at€the€immediate€disposal€of€a€user€without€any€effort€on€the€part€of€the€user.€€If€anÏOEM€pre„installs€a€browser€onto€its€PCs€and€places€an€icon€for€that€browser€on€the€default€screen,€orÐ À+'( Ðð ðdesktop,ðð€of€the€operating€system,€purchasers€of€those€PCs€will€be€confronted€with€the€icon€as€soon€asÏthe€operating€system€finishes€loading€into€random€access€memory€(ð ðRAMðð).€€If€an€IAP€bundles€aÏbrowser€with€its€own€proprietary€software,€its€subscribers€will,€by€default,€use€the€browser€wheneverÏthey€connect€to€the€Web.€€In€its€internal€decision„making,€Microsoft€has€placed€considerable€relianceÏon€studies€showing€that€consumers€tend€strongly€to€use€whatever€browsing€software€is€placed€mostÏreadily€at€their€disposal,€and€that€once€they€have€acquired,€found,€and€used€one€browser€product,€mostÏare€reluctant€ð"ð€and€indeed€have€little€reason€ð"ð€to€expend€the€effort€to€switch€to€another.€€MicrosoftÏhas€also€relied€on€studies€showing€that€a€very€large€majority€of€those€who€browse€the€Web€obtain€theirÏbrowsing€software€with€either€their€PCs€or€their€IAP€subscriptions.Ìà  à145.à ` àIndeed,€no€other€distribution€channel€for€browsing€software€even€approaches€theÐ D” Ðefficiency€of€OEM€pre„installation€and€IAP€bundling.€€The€primary€reason€is€that€the€other€channelsÏrequire€users€to€expend€effort€before€they€can€start€browsing.€€The€traditional€retail€channel,€forÏexample,€requires€the€consumer€to€make€contact€with€a€retailer,€and€retailers€generally€do€not€distributeÏproducts€without€charging€a€price€for€them.€€Naturally,€once€Microsoft€and€Netscape€began€offeringÏbrowsing€software€for€free,€consumers€for€the€most€part€lost€all€incentive€to€pay€for€it.Ìà  à146.à ` àThe€relatively€few€users€who€already€have€a€browser€but€would€prefer€another€canÐ ü!L Ðavoid€the€retail€channel€by€using€the€Internet€to€download€new€browsing€software€electronically,€butÏthey€must€wait€for€the€software€to€transmit€to€their€PCs.€€This€process€takes€a€moderate€degree€ofÏsophistication€and€substantial€amount€of€time,€and€as€the€average€bandwidth€of€PC€connections€hasÏgrown,€so€has€the€average€size€of€browser€products.€€The€longer€it€takes€for€the€software€to€download,Ïthe€more€likely€it€is€that€the€userððs€connection€to€the€Internet€will€be€interrupted.€€As€a€vanguard€of€theÐ À+'( Ðð ðInternet€Age,ðð€Navigator€generated€a€tremendous€amount€of€excitement€in€its€early€days€amongÏtechnical€sophisticates,€who€were€willing€to€devote€time€and€effort€to€downloading€the€software.€ÏToday,€however,€the€average€Web€user€is€more€of€a€neophyte,€and€is€far€more€likely€to€be€intimidatedÏby€the€process€of€downloading.€€It€is€not€surprising,€then,€that€downloaded€browsers€now€make€up€onlyÏa€small€and€decreasing€percentage€of€the€new€browsers€(as€opposed€to€upgrades)€that€consumersÏobtain€and€use.Ìà  à147.à ` àThe€consumer€who€receives€a€CD„ROM€containing€a€free€browser€in€the€mail€or€as€aÐ h¸  Ðmagazine€insert€is€at€least€spared€the€time€and€effort€it€would€take€to€obtain€browsing€software€from€aÏretail€vendor€or€to€download€it€from€the€Web.€€But,€just€as€the€consumer€who€obtains€a€browser€atÏretail€or€off€the€Web,€the€consumer€who€receives€the€software€unsolicited€at€home€must€first€install€it€onÏa€PC€system€in€order€to€use€it,€and€merely€installing€a€browser€product€takes€time€and€can€be€confusingÏfor€novice€users.€€Plus,€a€large€percentage€of€the€unsolicited€disks€distributed€through€ð ðcarpet€bombingððÏreach€individuals€who€do€not€have€PCs,€who€already€have€pre„installed€browsing€software,€or€whoÏhave€no€interest€in€browsing€the€Web.€€In€practice,€less€than€two€percent€of€CD„ROM€disksÏdisseminated€in€mass„distribution€campaigns€are€used€in€the€way€the€distributor€intended.€€As€a€result,Ïthis€form€of€distribution€is€rarely€profitable,€and€then€only€when€undertaken€by€on„line€subscriptionÏservices€for€whom€a€sale€translates€into€a€stream€of€revenues€lasting€into€the€future.€€The€fact€that€anÏOLS€may€find€it€worthwhile€to€ð ðcarpet€bombðð€consumers€with€free€disks€obviously€only€helps€theÏvendor€of€browsing€software€whose€product€the€OLS€has€chosen€to€bundle€with€its€proprietaryÏâ âsoftware.€€So,€while€there€are€other€means€of€distributing€browsers,€the€fact€remains€that€to€a€firmÐ Ì)%& Ðinterested€in€browser€usage,€there€simply€are€no€channels€that€compare€in€efficiency€to€OEM€pre„¼installation€and€IAP€bundling.Ìâ âà  à148.à ` àKnowing€that€OEMs€and€IAPs€represented€the€most€efficient€distribution€channels€ofÐ ˜è Ðbrowsing€software,€Microsoft€sought€to€ensure€that,€to€as€great€an€extent€as€possible,€OEMs€and€IAPsÏbundled€and€promoted€Internet€Explorer€to€the€exclusion€of€Navigator.Ìà  àà ` àò ò2.à0 ¸ àExcluding€Navigator€from€the€OEM€Channeló óÐtÄ ¸ (#¸ (# ÐØ€ØÓÓÝ‚-†ÿÝÝ  ÝØ€Øò òà  àà ` àà ¸ àÝ‚-†¼zÝÚƒÚaÚ  Ú.à0  àÝ  ÝBinding€Internet€Explorer€to€Windowsó ó݃-†¼z{ÝÛ€ÛŒÐh¸ (#(# ÐŒÝ  ÝÌÓªzÓÝ‚"/~ÿÝÝ  Ýò òà  àà ` àà ¸ àà  àÝ‚"/~ø{ÝÚƒ ÚiÚ  Ú.à0 h àÝ  ÝThe€Status€of€Web€Browsers€as€Separate€Productsó ó݃"/~ø{F|ÝÛ€ ÛŒÐ\¬ h(#h(# ÐŒÝ  Ýà  à149.à ` àConsumers€determine€their€software€requirements€by€identifying€the€functionalities€theyÐ P  Ðdesire.€€While€consumers€routinely€evaluate€software€products€on€the€basis€of€the€functionalities€theÏproducts€deliver,€they€generally€lack€sufficient€information€to€make€judgements€based€on€the€designsÏand€implementations€of€those€products.€€Accordingly,€consumers€generally€choose€which€softwareÏproducts€to€license,€install,€and€use€on€the€basis€of€the€productsðð€functionalities,€not€their€designs€andÏimplementations.Ìà  à150.à ` àWhile€the€meaning€of€the€term€ð ðWeb€browserðð€is€not€precise€in€all€respects,€there€is€aÐ  X Ðconsensus€in€the€software€industry€as€to€the€functionalities€that€a€Web€browser€offers€a€user.€ÏSpecifically,€a€Web€browser€provides€the€ability€for€the€end€user€to€select,€retrieve,€and€perceiveÏresources€on€the€Web.€€There€is€also€a€consensus€in€the€software€industry€that€these€functionalities€areÏdistinct€from€the€set€of€functionalities€provided€by€an€operating€system.€Ìà  à151.à ` àMany€consumers€desire€to€separate€their€choice€of€a€Web€browser€from€their€choice€ofÐ Ì)%& Ðan€operating€system.€€Some€consumers,€particularly€corporate€consumers,€demand€browsers€andÐ À+'( Ðoperating€systems€separately€because€they€prefer€to€standardize€on€the€same€browser€across€differentÏoperating€systems.€€For€such€consumers,€standardizing€on€the€browser€of€their€choice€results€inÏincreased€productivity€and€lower€training€and€support€costs,€and€permits€the€establishment€of€consistentÏsecurity€and€privacy€policies€governing€Web€access.Ìà  à152.à ` àMoreover,€many€consumers€who€need€an€operating€system,€including€a€substantialÐ € Ð Ðpercentage€of€corporate€consumers,€do€not€want€a€browser€at€all.€€For€example,€if€a€consumer€has€noÏdesire€to€browse€the€Web,€he€may€not€want€a€browser€taking€up€memory€on€his€hard€disk€and€slowingÏhis€systemððs€performance.€€Also,€for€businesses€desiring€to€inhibit€employeesðð€access€to€the€InternetÏwhile€minimizing€system€support€costs,€the€most€efficient€solution€is€often€using€PC€systems€withoutÏbrowsers.Ìà  à153.à ` àBecause€of€the€separate€demand€for€browsers€and€operating€systems,€firms€have€foundÐ 8ˆ Ðit€efficient€to€supply€the€products€separately.€€A€number€of€operating€system€vendors€offer€consumersÏthe€choice€of€licensing€their€operating€systems€without€a€browser.€€Others€bundle€a€browser€with€theirÏoperating€system€products€but€allow€OEMs,€value„added€resellers,€and€consumers€either€to€not€install€itÏor,€if€the€browser€has€been€pre„installed,€to€uninstall€it.€€While€Microsoft€no€longer€affords€this€flexibilityÏ(it€is€the€only€operating€system€vendor€that€does€not),€it€has€always€marketed€and€distributed€InternetÏExplorer€separately€from€Windows€in€several€channels.€€These€include€retail€sales,€service€kits€for€ISVs,Ïfree€downloads€over€the€Internet,€and€bundling€with€other€products€produced€both€by€Microsoft€and€byÏthird„party€ISVs.ò ò€€ó óIn€order€to€compete€with€Navigator€for€browser€share,€as€well€as€to€satisfy€corporateÐ Ø'(#$ Ðâ âconsumers€who€want€their€diverse€PC€platforms€to€present€a€common€browser€interface€to€employees,Ð Ì)%& ÐMicrosoft€has€also€created€stand„alone€versions€of€Internet€Explorer€that€run€on€operating€systemsÏother€than€32„bit€Windows,€including€the€Mac€OS€and€Windows€3.x.ò òÐ ¤ô Ðâ âà  àó ó154.à ` àIn€conclusion,€the€preferences€of€consumers€and€the€responsive€behavior€of€softwareÐ ˜è Ðfirms€demonstrate€that€Web€browsers€and€operating€systems€are€separate€products.ò òÐ Œ Ü ÐÝ‚"/~ÿÝÝ  Ýà  àà ` àà ¸ àà  àÝ‚"/~Ü‹ÝÚƒ ÚiiÚ  Ú.à0 h àÝ  ÝMicrosoftððs€Actionsó ó݃"/~Ü‹'ŒÝÛ€ یЀ Ðh(#h(# ÐŒÝ  Ýà  à155.à ` àIn€contrast€to€other€operating€system€vendors,€Microsoft€both€refused€to€license€itsÐ tÄ  Ðoperating€system€without€a€browser€and€imposed€restrictions€ð"ð€at€first€contractual€and€later€technicalÏð"ð€on€OEMsðð€and€end€usersðð€ability€to€remove€its€browser€from€its€operating€system.€€As€its€internalÏcontemporaneous€documents€and€licensing€practices€reveal,€Microsoft€decided€to€bind€InternetÏExplorer€to€Windows€in€order€to€prevent€Navigator€from€weakening€the€applications€barrier€to€entry,Ïrather€than€for€any€pro„competitive€purpose.Ìà  à156.à ` àBefore€it€decided€to€blunt€the€threat€that€Navigator€posed€to€the€applications€barrier€toÐ ,| Ðentry,€Microsoft€did€not€plan€to€make€it€difficult€or€impossible€for€OEMs€or€consumers€to€obtainÏWindows€without€obtaining€Internet€Explorer.€€In€fact,€the€companyððs€internal€correspondence€andÏexternal€communications€indicate€that,€as€late€as€the€fall€of€1994,€Microsoft€was€planning€to€includeÏlow„level€Internet€ð ðplumbing,ðð€such€as€a€TCP/IP€stack,€but€not€a€browser,€with€Windows€95.Ìà  à157.à ` àMicrosoft€subsequently€decided€to€develop€a€browser€to€run€on€Windows€95.€€As€lateÐ ð#@  Ðas€June€1995,€however,€Microsoft€had€not€decided€to€bundle€that€browser€with€the€operating€system.€ÏThe€plan€at€that€point,€rather,€was€to€ship€the€browser€in€a€separate€ð ðfrostingðð€package,€for€whichÏMicrosoft€intended€to€charge.€€By€April€or€May€of€that€year,€however,€Microsoftððs€top€executives€hadÏidentified€Netscapeððs€browser€as€a€potential€threat€to€the€applications€barrier€to€entry.€€Throughout€theÐ À+'( Ðspring,€more€and€more€key€executives€came€to€the€conclusion€that€Microsoftððs€best€prospect€ofÏquashing€that€threat€lay€in€maximizing€the€usage€share€of€Microsoftððs€browser€at€Navigatorððs€expense.€ÏThe€executives€believed€that€the€most€effective€way€of€carrying€out€this€strategy€was€to€ensure€thatÏevery€copy€of€Windows€95€carried€with€it€a€copy€of€Microsoftððs€browser,€then€code„named€ð ðOððHare.ðð€ÏFor€example,€two€days€after€the€June€21,€1995€meeting€between€Microsoft€and€Netscape€executives,ÏMicrosoftððs€John€Ludwig€sent€an€E„mail€to€Paul€Maritz€and€the€other€senior€executives€involved€inÏMicrosoftððs€browser€effort.€€ð ð[O]bviously€netscape€does€see€us€as€a€client€competitor,ðð€Ludwig€wrote.€Ïð ð[W]e€have€to€work€extra€hard€to€get€ohare€on€the€oem€disks.ððÌà  à158.à ` àMicrosoft€did€manage€to€bundle€Internet€Explorer€1.0€with€the€first€version€of€WindowsÐ P  Ð95€licensed€to€OEMs€in€July€1995.€€It€also€included€a€term€in€its€OEM€licenses€that€prohibited€theÏOEMs€from€modifying€or€deleting€any€part€of€Windows€95,€including€Internet€Explorer,€prior€toÏshipment.€€The€OEMs€accepted€this€restriction€despite€their€interest€in€meeting€consumer€demand€forÏPC€operating€systems€without€Internet€Explorer.€€After€all,€Microsoft€made€the€restriction€a€non„¼negotiable€term€in€its€Windows€95€license,€and€the€OEMs€felt€they€had€no€commercially€viableÏalternative€to€pre„installing€Windows€95€on€their€PCs.€€Apart€from€a€few€months€in€the€fall€of€1997,Ïwhen€Microsoft€provided€OEMs€with€Internet€Explorer€4.0€on€a€separate€disk€from€Windows€95€andÏpermitted€them€to€ship€the€latter€without€the€former,€Microsoft€has€never€allowed€OEMs€to€shipÏWindows€95€to€consumers€without€Internet€Explorer.€€This€policy€has€guaranteed€the€presence€ofÏInternet€Explorer€on€every€new€Windows€PC€system.Ìà  à159.à ` àMicrosoft€knew€that€the€inability€to€remove€Internet€Explorer€made€OEMs€lessÐ Ì)%& Ðdisposed€to€pre„install€Navigator€onto€Windows€95.€€OEMs€bear€essentially€all€of€the€consumerÐ À+'( Ðsupport€costs€for€the€Windows€PC€systems€they€sell.€€These€include€the€cost€of€handling€consumerÏcomplaints€and€questions€generated€by€Microsoftððs€software.€€Pre„installing€more€than€one€product€in€aÏgiven€category,€such€as€word€processors€or€browsers,€onto€its€PC€systems€can€significantly€increase€anÏOEMððs€support€costs,€for€the€redundancy€can€lead€to€confusion€among€novice€users.€€In€addition,€pre„¼installing€a€second€product€in€a€given€software€category€can€increase€an€OEMððs€product€testing€costs.€ÏFinally,€many€OEMs€see€pre„installing€a€second€application€in€a€given€software€category€as€aÏquestionable€use€of€the€scarce€and€valuable€space€on€a€PCððs€hard€drive.Ìà  à160.à ` àMicrosoftððs€executives€believed€that€the€incentives€that€its€contractual€restrictionsÐ \¬  Ðplaced€on€OEMs€would€not€be€sufficient€in€themselves€to€reverse€the€direction€of€Navigatorððs€usageÏshare.€€Consequently,€in€late€1995€or€early€1996,€Microsoft€set€out€to€bind€Internet€Explorer€moreÏtightly€to€Windows€95€as€a€technical€matter.€€The€intent€was€to€make€it€more€difficult€for€anyone,Ïincluding€systems€administrators€and€users,€to€remove€Internet€Explorer€from€Windows€95€and€toÏsimultaneously€complicate€the€experience€of€using€Navigator€with€Windows€95.€€As€Brad€Chase€wroteÏto€his€superiors€near€the€end€of€1995,€ð ðWe€will€bind€the€shell€to€the€Internet€Explorer,€so€that€runningÏany€other€browser€is€a€jolting€experience.ððÌà  à161.à ` àMicrosoft€bound€Internet€Explorer€to€Windows€95€by€placing€code€specific€to€WebÐ ü!L Ðbrowsing€in€the€same€files€as€code€that€provided€operating€system€functions.€€Starting€with€the€release€ofÏInternet€Explorer€3.0€and€ð ðOEM€Service€Release€2.0"€(ð ðOSR€2")€of€Windows€95€in€August€1996,ÏMicrosoft€offered€only€a€version€of€Windows€95€in€which€browsing„specific€code€shared€files€with€codeÏâ âupon€which€non„browsing€features€of€the€operating€system€relied.Ð Ì)%& Ðà  à162.à ` àThe€software€code€necessary€to€supply€the€functionality€of€a€modern€application€orÐ ° Ðâ âoperating€system€can€be€extremely€long€and€complex.€€To€make€that€complexity€manageable,Ïdevelopers€usually€write€long€programs€as€a€series€of€individual€ð ðroutines,ðð€each€ranging€from€a€fewÏdozen€to€a€few€hundred€lines€of€code,€that€can€be€used€to€perform€specific€functions.€€Large€programsÏare€created€by€ð ðknittingðð€together€many€such€routines€in€layers,€where€the€lower€layers€are€used€toÏprovide€fundamental€functionality€relied€upon€by€higher,€more€focused€layers.€€Some€preliminaryÏaspects€of€this€ð ðknittingðð€are€performed€by€the€software€developer.€€The€user€who€launches€a€program,Ïhowever,€is€ultimately€responsible€for€causing€routines€to€be€loaded€into€memory€and€executed€togetherÏto€produce€the€programððs€overall€functionality.Ìà  à163.à ` àRoutines€can€be€packaged€together€into€files€in€almost€any€way€the€designer€chooses.€Ð D” ÐRoutines€need€not€reside€in€the€same€file€to€function€together€in€a€seamless€fashion.€€Also,€a€developerÏcan€move€routines€into€new€or€different€files€from€one€version€of€a€program€to€another€without€changingÏthe€functionalities€of€those€routines€or€the€ability€to€combine€them€to€provide€integrated€functionality.Ìà  à164.à ` àStarting€with€Windows€95€OSR€2,€Microsoft€placed€many€of€the€routines€that€are€usedÐ d Ðby€Internet€Explorer,€including€browsing„specific€routines,€into€the€same€files€that€support€the€32„bitÏWindows€APIs.€€Microsoftððs€primary€motivation€for€this€action€was€to€ensure€that€the€deletion€of€anyÏfile€containing€browsing„specific€routines€would€also€delete€vital€operating€system€routines€and€thusÏcripple€Windows€95.€€Although€some€of€the€code€that€provided€Web€browsing€could€still€be€removed,Ïwithout€disabling€the€operating€system,€by€entering€individual€files€and€selectively€deleting€routines€usedÏonly€for€Web€browsing,€licensees€of€Microsoft€software€were,€and€are,€contractually€prohibited€fromÏreverse€engineering,€decompiling,€or€disassembling€any€software€files.€€Even€if€this€were€not€so,€it€isÐ À+'( Ðprohibitively€difficult€for€anyone€who€does€not€have€access€to€the€original,€human„readable€source€codeÏto€change€the€placement€of€routines€into€files,€or€otherwise€to€alter€the€internal€configuration€of€softwareÏfiles,€while€still€preserving€the€softwareððs€overall€functionality.Ìà  à165.à ` àAlthough€users€were€not€able€to€remove€all€of€the€routines€that€provided€Web€browsingÐ Œ Ü Ðfrom€OSR€2€and€successive€versions€of€Windows€95,€Microsoft€still€provided€them€with€the€ability€toÏuninstall€Internet€Explorer€by€using€the€ð ðAdd/Removeðð€panel,€which€was€accessible€from€the€WindowsÏ95€desktop.€€The€Add/Remove€function€did€not€delete€all€of€the€files€that€contain€browsing€specificÏcode,€nor€did€it€remove€browsing„specific€code€that€is€used€by€other€programs.€€The€Add/RemoveÏfunction€did,€however,€remove€the€functionalities€that€were€provided€to€the€user€by€Internet€Explorer,Ïincluding€the€means€of€launching€the€Web€browser.€€Accordingly,€from€the€userððs€perspective,Ïuninstalling€Internet€Explorer€in€this€way€was€equivalent€to€removing€the€Internet€Explorer€program€fromÏWindows€95.Ìà  à166.à ` àIn€late€1996,€senior€executives€within€Microsoft,€led€by€James€Allchin,€began€to€argueÐ  p Ðthat€Microsoft€was€not€binding€Internet€Explorer€tightly€enough€to€Windows€and€as€such€was€missing€anÏopportunity€to€maximize€the€usage€of€Internet€Explorer€at€Navigatorððs€expense.€€Allchin€first€made€hisÏcase€to€Paul€Maritz€in€late€December€1996.€€He€wrote:ÌÓÓÓ XÓÓ XÓI€donððt€understand€how€IE€is€going€to€win.€€The€current€path€is€simply€to€copyÏeverything€that€Netscape€does€packaging€and€product€wise.€€Letððs€[suppose]€IE€is€asÏgood€as€Navigator/Communicator.€€Who€wins?€€The€one€with€80%€market€share.€ÏMaybe€being€free€helps€us,€but€once€people€are€used€to€a€product€it€is€hard€to€changeÏthem.€€Consider€Office.€€We€are€more€expensive€today€and€weððre€still€winning.€€MyÏconclusion€is€that€we€must€leverage€Windows€more.€€Treating€IE€as€just€an€add„on€toÏWindows€which€is€cross„platform€[means]€losing€our€biggest€advantage€ð"ð€WindowsÏâ âmarketshare.€€We€should€dedicate€a€cross€group€team€to€come€up€with€ways€toÐ Æ*&' Ðleverage€Windows€technically€more.€.€.€.€We€should€think€about€an€integrated€solutionÏð"ð€that€is€our€strength.Ìâ âÌÓ X?²ÓÓ X1²ÓÓ²ÓAllchin€followed€up€with€another€message€to€Maritz€on€January€2,€1997:ÌÓ XÓÓ XÓÓÓà ` àYou€see€browser€share€as€job€1.€.€.€.€I€do€not€feel€we€are€going€to€win€on€ourÏcurrent€path.€€We€are€not€leveraging€Windows€from€a€marketing€perspective€and€weÏare€trying€to€copy€Netscape€and€make€IE€into€a€platform.€€We€do€not€use€our€strengthÏð"ð€which€is€that€we€have€an€installed€base€of€Windows€and€we€have€a€strong€OEMÏshipment€channel€for€Windows.€€Pitting€browser€against€browser€is€hard€sinceÏNetscape€has€80%€marketshare€and€we€have€<20%.€.€.€.€I€am€convinced€we€have€toÏuse€Windows€ð"ð€this€is€the€one€thing€they€donððt€have.€.€.€.€We€have€to€be€competitiveÏwith€features,€but€we€need€something€more€ð"ð€Windows€integration.Ìà ` àIf€you€agree€that€Windows€is€a€huge€asset,€then€it€follows€quickly€that€we€areÏnot€investing€sufficiently€in€finding€ways€to€tie€IE€and€Windows€together.€€This€mustÏcome€from€you.€.€.€.€Memphis€[Microsoftððs€code„name€for€Windows€98]€must€be€aÏsimple€upgrade,€but€most€importantly€it€must€be€killer€on€OEM€shipments€so€thatÏNetscape€never€gets€a€chance€on€these€systems.ÌÌÓ¶ÓÓ XÓÓ XÓà  à167.à ` àMaritz€responded€to€Allchinððs€second€message€by€agreeing€ð ðthat€we€have€to€makeÐ >Ž ÐWindows€integration€our€basic€strategyðð€and€that€this€justified€delaying€the€release€of€Windows€98€untilÏInternet€Explorer€4.0€was€ready€to€be€included€with€that€product.€€Maritz€recognized€that€the€delayÏwould€disappoint€OEMs€for€two€reasons.€€First,€while€OEMs€were€eager€to€sell€new€hardwareÏtechnologies€to€Windows€users,€they€could€not€do€this€until€Microsoft€released€Windows€98,€whichÏincluded€software€support€for€the€new€technologies.€€Second,€OEMs€wanted€Windows€98€to€beÏreleased€in€time€to€drive€sales€of€PC€systems€during€the€back„to„school€and€holiday€selling€seasons.€ÏNevertheless,€Maritz€agreed€with€Allchinððs€point€that€synchronizing€the€release€of€Windows€98€withÏInternet€Explorer€was€ð ðthe€only€thing€that€makes€sense€even€if€OEMs€suffer.ðð€Ìà  à168.à ` àOnce€Maritz€had€decided€that€Allchin€was€right,€he€needed€to€instruct€the€relevantÐ Ò("$% ÐMicrosoft€employees€to€delay€the€release€of€Windows€98€long€enough€so€that€it€could€be€shipped€withÐ Æ*&' ÐInternet€Explorer€4.0€tightly€bound€to€it.€€When€one€executive€asked€on€January€7,€1997€forÏconfirmation€that€ð ðmemphis€is€going€to€hold€for€IE4,€even€if€it€puts€memphis€out€of€the€xmas€oemÏwindow,ðð€Maritz€responded€affirmatively€and€explained,€ÌÓÓÓ XÓÓ XÓà ` àThe€major€reason€for€this€is€.€.€.€to€combat€Nscp,€we€have€to€[]€position€theÏbrowser€as€ð ðgoing€awayðð€and€do€deeper€integration€on€Windows.€€The€stronger€way€toÏcommunicate€this€is€to€have€a€ððnew€releaseðð€of€Windows€and€make€a€big€deal€out€of€it.€.Ï.€.€IE€integration€will€be€[the]€most€compelling€feature€of€Memphis.ÌÌÓ X ÀÓÓ Xû¿ÓÓé¿ÓThus,€Microsoft€delayed€the€debut€of€numerous€features,€including€support€for€new€hardware€devices,Ïthat€Microsoft€believed€consumers€would€find€beneficial,€simply€in€order€to€protect€the€applicationsÏbarrier€to€entry.Ìà  à169.à ` àAllchin€and€Maritz€gained€support€for€their€initiative€within€Microsoft€in€the€early€springÐ Jš Ðof€1997,€when€a€series€of€market€studies€confirmed€that€binding€Internet€Explorer€tightly€to€WindowsÏwas€the€way€to€get€consumers€to€use€Internet€Explorer€instead€of€Navigator.€€Reporting€on€one€study€inÏlate€February,€Microsoftððs€Christian€Wildfeuer€wrote:€€ÌÓÓÓ XÓÓ XÓThe€stunning€insight€is€this:€To€make€[users]€switch€away€from€Netscape,€we€need€toÏmake€them€upgrade€to€Memphis.€.€.€.€It€seems€clear€to€me€that€it€will€be€very€hard€toÏincrease€browser€market€share€on€the€merits€of€IE€4€alone.€€It€will€be€more€important€toÏleverage€the€OS€asset€to€make€people€use€IE€instead€of€Navigator.ÌÌÓ X6ÄÓÓ X(ÄÓÓÄÓMicrosoftððs€survey€expert,€Kumar€Mehta,€agreed.€€In€March€he€shared€with€a€colleague€his€ð ðfeeling,Ïbased€on€all€the€IE€research€we€have€done,€[that]€it€is€a€mistake€to€release€memphis€without€bundling€IEÏwith€it.ððÌà  à170.à ` àMicrosoftððs€technical€personnel€implemented€Allchinððs€ð ðWindows€integrationðð€strategyÐ Ø'(#$ Ðin€two€ways.€€First,€they€did€not€provide€users€with€the€ability€to€uninstall€Internet€Explorer€fromÏWindows€98.€€The€omission€of€a€browser€removal€function€was€particularly€conspicuous€given€thatÐ À+'( ÐWindows€98€did€give€users€the€ability€to€uninstall€numerous€features€other€than€Internet€Explorer€ð"ðÏfeatures€that€Microsoft€also€held€out€as€being€integrated€into€Windows€98.€€Microsoft€took€this€actionÏdespite€specific€requests€from€Gateway€that€Microsoft€provide€a€way€to€uninstall€Internet€Explorer€4.0Ïfrom€Windows€98.€€Ìà  à171.à ` àThe€second€way€in€which€Microsoftððs€engineers€implemented€Allchinððs€strategy€was€toÐ € Ð Ðmake€Windows€98€override€the€userððs€choice€of€default€browser€in€certain€circumstances.€€As€shippedÏto€users,€Windows€98€has€Internet€Explorer€configured€as€the€default€browser.€€While€Windows€98Ïdoes€provide€the€user€with€the€ability€to€choose€a€different€default€browser,€it€does€not€treat€this€choiceÏas€the€ð ðdefault€browserðð€within€the€ordinary€meaning€of€the€term.€€Specifically,€when€a€user€chooses€aÏbrowser€other€than€Internet€Explorer€as€the€default,€Windows€98€nevertheless€requires€the€user€toÏemploy€Internet€Explorer€in€numerous€situations€that,€from€the€userððs€perspective,€are€entirelyÏunexpected.€€As€a€consequence,€users€who€choose€a€browser€other€than€Internet€Explorer€as€theirÏdefault€face€considerable€uncertainty€and€confusion€in€the€ordinary€course€of€using€Windows€98.Ìà  à172.à ` àMicrosoftððs€refusal€to€respect€the€userððs€choice€of€default€browser€fulfilled€BradÐ d ÐChaseððs€1995€promise€to€make€the€use€of€any€browser€other€than€Internet€Explorer€on€Windows€ð ðaÏjolting€experience.ðð€€By€increasing€the€likelihood€that€using€Navigator€on€Windows€98€would€haveÏunpleasant€consequences€for€users,€Microsoft€further€diminished€the€inclination€of€OEMs€to€pre„installÏNavigator€onto€Windows.€€The€decision€to€override€the€userððs€selection€of€non„Microsoft€software€asÏthe€default€browser€also€directly€disinclined€Windows€98€consumers€to€use€Navigator€as€their€defaultÏâ âbrowser,€and€it€harmed€those€Windows€98€consumers€who€nevertheless€used€Navigator.€€In€particular,Ð Ì)%& ÐMicrosoft€exposed€those€using€Navigator€on€Windows€98€to€security€and€privacy€risks€that€are€specificÏto€Internet€Explorer€and€to€ActiveX€controls..Ìâ âà  à173.à ` àMicrosoftððs€actions€have€inflicted€collateral€harm€on€consumers€who€have€no€interest€inÐ ˜è Ðusing€a€Web€browser€at€all.€€If€these€consumers€want€the€non„browsing€features€available€only€inÏWindows€98,€they€must€content€themselves€with€an€operating€system€that€runs€more€slowly€than€ifÏMicrosoft€had€not€interspersed€browsing„specific€routines€throughout€various€files€containing€routinesÏrelied€upon€by€the€operating€system.€€More€generally,€Microsoft€has€forced€Windows€98€usersÏuninterested€in€browsing€to€carry€software€that,€while€providing€them€with€no€benefits,€brings€with€it€allÏthe€costs€associated€with€carrying€additional€software€on€a€system.€€These€include€performanceÏdegradation,€increased€risk€of€incompatibilities,€and€the€introduction€of€bugs.€€Corporate€consumersÏwho€need€the€hardware€support€and€other€non„browsing€features€not€available€in€earlier€versions€ofÏWindows,€but€who€do€not€want€Web€browsing€at€all,€are€further€burdened€in€that€they€are€denied€aÏsimple€and€effective€means€of€preventing€employees€from€attempting€to€browse€the€Web.Ìà  à174.à ` àMicrosoft€has€harmed€even€those€consumers€who€desire€to€use€Internet€Explorer,€andÐ d Ðno€other€browser,€with€Windows€98.€€To€the€extent€that€browsing„specific€routines€have€beenÏcommingled€with€operating€system€routines€to€a€greater€degree€than€is€necessary€to€provide€anyÏconsumer€benefit,€Microsoft€has€unjustifiably€jeopardized€the€stability€and€security€of€the€operatingÏsystem.€€Specifically,€it€has€increased€the€likelihood€that€a€browser€crash€will€cause€the€entire€system€toÏcrash€and€made€it€easier€for€malicious€viruses€that€penetrate€the€system€òòviaóó€Internet€Explorer€to€infectÐ Ø'(#$ Ðnon„browsing€parts€of€the€system.ÌÐ À+'( Ðà  àà ` àà ¸ àà  àò òiii.à0 h àLack€of€Justificationаh(#h(# Ðà  àó ó175.ò òà ` àó óNo€technical€reason€can€explain€Microsoftððs€refusal€to€license€Windows€95€withoutÐ ¤ô ÐInternet€Explorer€1.0€and€2.0.€€The€version€of€Internet€Explorer€(1.0)€that€Microsoft€included€with€theÏoriginal€OEM€version€of€Windows€95€was€a€separable,€executable€program€file€supplied€on€a€separateÏdisk.€€Web€browsing€thus€could€be€installed€or€removed€without€affecting€the€rest€of€Windows€95'sÏfunctionality€in€any€way.€€The€same€was€true€of€Internet€Explorer€2.0.€€Microsoft,€moreover,€created€anÏeasy€way€to€remove€Internet€Explorer€1.0€and€2.0€from€Windows€95€after€they€had€been€installed,€òòviaóóÐ h¸  Ðthe€ð ðAdd/Removeðð€panel.€€This€demonstrates€the€absence€of€any€technical€reason€for€MicrosoftððsÏrefusal€to€supply€Windows€95€without€Internet€Explorer€1.0€and€2.0.Ìà  à176.à ` àSimilarly,€there€is€no€technical€justification€for€Microsoftððs€refusal€to€license€WindowsÐ D” Ð95€to€OEMs€with€Internet€Explorer€3.0€or€4.0€uninstalled,€or€for€its€refusal€to€permit€OEMs€to€uninstallÏInternet€Explorer€3.0€or€4.0.€€Microsoftððs€decision€to€provide€users€with€an€ð ðuninstallðð€procedure€forÏInternet€Explorer€3.0€and€4.0€and€its€decision€to€promote€Internet€Explorer€on€the€basis€of€that€featureÏdemonstrate€that€there€was€no€technical€or€quality„related€reason€for€refusing€to€permit€OEMs€to€useÏthis€same€feature.€€Microsoft€would€not€have€permitted€users€to€uninstall€Internet€Explorer,€nor€wouldÏconsumers€have€demanded€such€an€option,€if€the€process€would€have€fragmented€or€degraded€the€otherÏfunctionality€of€the€operating€system.Ìà  à177.à ` àAs€with€Windows€95,€there€is€no€technical€justification€for€Microsoftððs€refusal€to€meetÐ ä%4!" Ðconsumer€demand€for€a€browserless€version€of€Windows€98.€€Microsoft€could€easily€supply€a€versionÏof€Windows€98€that€does€not€provide€the€ability€to€browse€the€Web,€and€to€which€users€could€add€theÏbrowser€of€their€choice.€€Indicative€of€this€is€the€fact€that€it€remains€possible€to€remove€Web€browsingÐ À+'( Ðfunctionality€from€Windows€98€without€adversely€affecting€non„Web€browsing€features€of€Windows€98Ïor€the€functionality€of€applications€running€on€the€operating€system.€€In€fact,€the€revised€version€ofÏProfessor€Feltenððs€prototype€removal€program€produces€precisely€this€result€when€run€on€a€computerÏwith€Windows€98€installed.Ìà  à178.à ` àIn€his€direct€testimony,€Felten€provides€a€full€technical€description€of€what€his€prototypeÐ € Ð Ðremoval€program€does.€€This€description€includes€a€list€of€the€twenty„one€methods€of€initiating€WebÏbrowsing€in€Windows€98€that€were€known€to€Felten€when€he€developed€his€program.€€When€theÏrevised€version€of€Feltenððs€program€is€run€on€a€computer€with€Windows€98€and€no€other€softwareÏinstalled,€Web€browsing€is€not€initiated€in€response€to€any€of€these€methods.Ìà  à179.à ` àJames€Allchin€tried€to€show€at€trial,€by€way€of€a€videotaped€demonstration,€that€theÐ D” Ðfunctionality€of€Internet€Explorer€could€still€be€enabled,€even€after€the€prototype€removal€program€hadÏbeen€run,€by€manually€adding€a€new€entry€to€the€Windows€Registry€database.€€During€Feltenððs€rebuttalÏtestimony,€one€of€Microsoftððs€attorneys€directed€Felten€to€perform€a€second€demonstration€intended€toÏshow€that€the€functionality€of€Internet€Explorer€could€still€be€enabled,€even€after€the€prototype€removalÏprogram€had€been€run,€by€hitting€the€ð ðcontrolðð€and€ð ðNðð€keys€simultaneously€after€running€the€WindowsÏUpdate€feature.€€Neither€of€these€methods€of€initiating€Web€browsing€was€among€the€twenty„oneÏdocumented€methods€known€to€Felten€when€he€developed€his€program.€€Furthermore,€the€latterÏdemonstration€was€hardly€a€reliable€test€of€Feltenððs€program,€because€the€Encompass€shell€browserÏand€other€applications€had€been€installed€on€the€Windows€98€PC€system€used€in€the€demonstration.€€AtÏmost,€the€two€demonstrations€indicate€that€Felten€did€not€know€all€of€the€methods€of€initiating€WebÏbrowsing€in€Windows€98€when€he€developed€his€program,€and€that€he€did€not€include€steps€in€hisÐ À+'( Ðprogram€to€prevent€the€invocation€of€Internet€Explorerððs€functionality€in€response€to€methods€of€whichÏhe€was€unaware.€€Microsoft€has€special€knowledge€of€its€own€products,€and€it€alone€chooses€whichÏfunctionalities€in€its€products€are€to€be€documented€and€which€are€to€be€left€undocumented.€€Felten€wasÏaware€of€this€fact,€and€he€himself€noted€that€his€own€documentation€of€initiation€methods€was€notÏexhaustive.Ìà  à180.à ` àAllchin€also€attempted€to€show€that€Feltenððs€program€causes€performance€degradationsÐ tÄ  Ðin€Windows€98,€as€well€as€malfunctions€in€certain€Windows€98€applications€and€the€Windows€UpdateÏfeature€of€Windows€98.€€Those€demonstrations,€however,€were€performed€on€a€PC€on€which€severalÏthird„party€software€programs€had€been€installed€in€addition€to€Windows€98,€and€which€had€beenÏconnected€to€the€Internet€òòviaóó€a€dial„up€connection.€€Feltenððs€program€was€not€intended€to€be€definitiveÐ D” Ðand€had€not€been€verified€under€preconditions€other€than€those€for€which€it€was€designed.€€Thus,€thereÏwas€no€reason€to€expect€that€his€program€would€operate€flawlessly€during€Allchinððs€demonstrations,Ïand€nothing€can€be€inferred€from€any€failure€to€do€so.Ìà  à181.à ` àIn€fact,€the€revised€version€of€Feltenððs€program€does€not€degrade€the€performance€orÐ d Ðstability€of€Windows€98€in€any€way.€€To€the€contrary,€according€to€several€standard€programs€used€byÏMicrosoft€to€measure€system€performance,€the€removal€of€Internet€Explorer€by€the€prototype€programÏslightly€improves€the€overall€speed€of€Windows€98.Ìà  à182.à ` àGiven€Microsoftððs€special€knowledge€of€its€own€products,€the€company€is€readily€ableÐ ä%4!" Ðto€produce€an€improved€implementation€of€the€concept€illustrated€by€Feltenððs€prototype€removalÏâ âprogram.€€In€particular,€Microsoft€can€easily€identify€browsing„specific€code€that€could€be€removedÐ Ì)%& Ðfrom€shared€files,€thereby€reducing€the€operating€systemððs€memory€and€hard€disk€requirements€andÏobtaining€performance€improvements€even€beyond€those€achieved€by€Felten.Ìâ âà  à183.à ` àMicrosoft€contends€that€Feltenððs€prototype€removal€program€does€not€remove€InternetÐ ˜è ÐExplorerððs€Web€browsing€functionalities,€but€rather€ð ðhidesðð€those€functionalities€from€the€perspective€ofÏthe€user.€€In€support€of€that€contention,€Microsoft€points€out€that€Feltenððs€program€removes€only€a€smallÏfraction€of€the€code€in€Windows€98,€so€that€the€hard€drive€still€contains€almost€all€of€the€code€that€hadÏbeen€executed€in€the€course€of€providing€Internet€Explorerððs€Web€browsing€functionalities.€€Some€ofÏthat€code€is€left€on€the€hard€drive€because€it€also€supports€Windows€98's€operating€systemÏfunctionalities.€€Microsoft€did€not€offer€any€analytical€basis,€however,€for€distinguishing€this€sharing€ofÏcode€from€the€code€sharing€that€exists€between€all€Windows€applications€and€the€operating€systemÏfunctionalities€in€Windows€98.Ìà  à184.à ` àWhile€Microsoftððs€observation€suggests€that€Feltenððs€program€does€not€greatly€reduceÐ ,| ÐWindows€98's€ð ðfootprintðð€on€the€hard€disk,€that€point€is€irrelevant€to€the€question€of€whether€FeltenððsÏprogram€removes€Internet€Explorerððs€functionalities€from€Windows€98.€€This€is€because€theÏfunctionalities€of€a€software€product€are€not€provided€by€the€mere€presence€of€code€on€a€computerððsÏhard€drive.€€For€software€code€to€provide€any€functionalities€at€all€the€code€must€be€loaded€into€theÏcomputerððs€dynamic€memory€and€executed.€€To€uninstall€a€software€program€or€to€remove€a€set€ofÏfunctionalities€from€a€software€program,€it€is€not€necessary€to€delete€all€of€the€software€code€that€isÏexecuted€in€the€course€of€providing€those€functionalities.€€It€is€sufficient€to€delete€and/or€modify€enoughÏâ âof€the€program€so€as€to€prevent€the€code€in€question€from€being€executed.Ð Ì)%& Ðà  à185.à ` àThis€deletion€and€modification€is€precisely€what€Feltenððs€program€does€to€Windows€98.€Ð ° Ðâ âAfter€Feltenððs€program€has€been€run,€the€software€code€that€formerly€had€been€executed€in€the€courseÏof€providing€Web€browsing€functionalities€is€no€longer€executed.€€Web€browsing€functionalities€are€notÏmerely€ð ðhiddenðð€from€the€user.€€To€the€contrary,€Feltenððs€program€deletes€and€modifies€enough€ofÏWindows€98€so€as€to€prevent€the€necessary€code€from€being€executed€altogether.€€Since€code€that€isÏnot€to€be€executed€does€not€need€to€be€loaded€into€memory,€Feltenððs€program€is€able€to€reduce€theÏmemory€allocated€to€Windows€98€by€approximately€twenty€percent.Ìà  à186.à ` àAs€an€abstract€and€general€proposition,€many€ð"ð€if€not€most€ð"ð€consumers€can€be€saidÐ \¬  Ðto€benefit€from€Microsoftððs€provision€of€Web€browsing€functionality€with€its€Windows€operating€systemÏat€no€additional€charge.€€No€consumer€benefit€can€be€ascribed,€however,€to€Microsoftððs€refusal€to€offerÏa€version€of€Windows€95€or€Windows€98€without€Internet€Explorer,€or€to€Microsoftððs€refusal€toÏprovide€a€method€for€uninstalling€Internet€Explorer€from€Windows€98.€€In€particular,€MicrosoftððsÏdecision€to€force€users€to€take€the€browser€in€order€to€get€the€non„Web€browsing€features€of€WindowsÏ98,€including€support€for€new€Internet€protocols€and€data€formats€is,€as€Allchin€put€it,€simply€a€choiceÏabout€ð ðdistribution.ððÌà  à187.à ` àAs€Feltenððs€program€demonstrated,€it€is€feasible€for€Microsoft€to€supply€a€version€ofÐ ü!L ÐWindows€98€that€does€not€provide€the€ability€to€browse€the€Web,€to€which€users€could€add€a€browserÏof€their€choice.€€Microsoft€could€then€readily€offer€ð ðintegratedðð€Internet€Explorer€Web€browsingÏfunctionality€as€well,€either€as€an€option€that€could€be€selected€by€the€end€user€or€the€OEM€during€theÏâ âWindows€98€setup€procedure,€or€as€a€ð ðservice€pack€upgrade.ððÐ Ì)%& Ðà  à188.à ` àUnlike€a€ð ðpocket€partðð€supplement€to€a€book,€a€software€upgrade€need€not€consist€onlyÐ ° Ðâ âof€new€material.€€A€service€pack€upgrade€may€install€a€combination€of€new€software€files€and/orÏreplacements€for€existing€software€files.€€The€use€of€such€service€packs€to€distribute€new€functionality€isÏa€standard€feature€of€Windows€applications€generally.€€Microsoft€could€offer€ð ðintegratedðð€InternetÏExplorer€Web€browsing€functionality€as€a€service€pack€upgrade€that€would€locate€the€relevant€softwareÏand€replace€it€with€the€current€Windows€98€software.€€In€this€way,€any€consumer€who€wished€to€do€soÏcould€easily€acquire€all€of€the€functionality,€features,€and€performance€of€the€current€version€ofÏWindows€98€by€obtaining€the€browserless€operating€system€package€and€the€service€pack€upgrade€andÏthen€installing€them€together.Ìà  à189.à ` àMicrosoft€contends€that€a€service€pack€must€necessarily€be€deemed€part€of€theÐ D” Ðoperating€system€when€it€replaces€and€adds€a€large€number€of€core€operating€system€files€in€the€processÏof€upgrading€the€operating€system€to€a€higher€level€of€functionality.€€This€contention€is€false.€€BothÏMicrosoft€Word,€an€application€program,€and€Norton€Utilities,€a€suite€of€utility€and€applicationÏprograms,€replace€and€add€files€to€Windows€without€thereby€becoming€part€of€the€operating€system.Ìà  à190.à ` àMicrosoftððs€actual€use€of€a€service€pack€upgrade€to€offer€integrated€Internet€ExplorerÐ  X ÐWeb€browsing€functionality€(Internet€Explorer€4.0)€separately€from€the€Windows€95€operating€systemÏillustrates€the€feasibility€of€this€approach.€€In€fact,€it€produces€results€remarkably€similar€to€those€thatÏcould€be€achieved€by€offering€integrated€Internet€Explorer€Web€browsing€functionality€as€a€separateÏservice€pack€upgrade€to€a€browserless€Windows€98€operating€system.€€When€installed€together€by€theÏend€user,€the€combined€software€provides€nearly€all€of€the€features€that€Microsoft€attributes€to€theÏð ðintegratedðð€design€of€Windows€98.€€Of€the€missing€features,€all€but€WebTV€for€Windows€can€beÐ À+'( Ðobtained€by€thereafter€installing€a€separately€obtained€copy€of€Internet€Explorer€5.0.€€Microsoft€hasÏpresented€no€evidence€that€the€WebTV€functionality€could€not€easily€be€included€in€the€stand„aloneÏversion€of€Internet€Explorer€5.0.Ìà  à191.à ` àTherefore,€Microsoft€could€offer€consumers€all€the€benefits€of€the€current€Windows€98Ð Œ Ü Ðpackage€by€distributing€the€products€separately€and€allowing€OEMs€or€consumers€themselves€toÏcombine€the€products€if€they€wished.€€In€fact,€operating€system€vendors€other€than€Microsoft€currentlyÏsucceed€in€offering€ð ðintegratedðð€features€similar€to€those€that€Microsoft€advertises€in€Windows€98€whileÏstill€permitting€the€removal€of€the€browser€from€the€operating€system.€€If€consumers€genuinely€prefer€aÏversion€of€Windows€bundled€with€Internet€Explorer,€they€do€not€have€to€be€forced€to€take€it;€they€canÏchoose€it€in€the€market.Ìà  à192.à ` àWindows€98€offers€some€benefits€unrelated€to€browsing€that€a€consumer€cannot€obtainÐ 8ˆ Ðby€combining€Internet€Explorer€with€Windows€95.€€For€example,€Windows€98€includes€support€forÏnew€hardware€technologies€and€data€formats€that€consumers€may€desire.€€While€nevertheless€preferringÏto€do€without€Web€browsing,€Microsoft€has€forced€Windows€users€who€do€not€want€Internet€ExplorerÏto€nevertheless€license,€install,€and€use€Internet€Explorer€to€obtain€the€unrelated€benefits.€€AlthoughÏsome€consumers€might€be€inclined€to€go€without€Windows€98's€new€non„browsing€features€in€order€toÏavoid€Internet€Explorer,€OEMs€are€unlikely€to€facilitate€that€choice,€because€they€want€consumers€toÏuse€an€operating€system€that€supports€the€new€hardware€technologies€they€seek€to€sell.Ìà  à193.à ` àMicrosoftððs€argument€that€binding€the€browser€to€the€operating€system€is€reasonablyÐ Ø'(#$ Ðnecessary€to€preserve€the€ð ðintegrityðð€of€the€Windows€platform€is€likewise€specious.€€First,€concern€withÏthe€integrity€of€the€platform€cannot€explain€Microsoftððs€original€decision€to€bind€Internet€Explorer€toÐ À+'( ÐWindows€95,€because€Internet€Explorer€1.0€and€2.0€did€not€contain€APIs.€€Second,€concern€with€theÏintegrity€of€the€platform€cannot€explain€Microsoftððs€refusal€to€offer€OEMs€the€option€of€uninstallingÏInternet€Explorer€from€Windows€95€and€Windows€98€because€APIs,€like€all€other€shared€files,€are€leftÏon€the€system€when€Internet€Explorer€in€uninstalled.€€Third,€Microsoftððs€contention€that€offering€OEMsÏthe€choice€of€whether€or€not€to€install€certain€browser„related€APIs€would€fragment€the€WindowsÏplatform€is€unpersuasive€because€OEMs€operate€in€a€competitive€market€and€thus€have€ample€incentiveÏto€include€APIs€(including€non„Microsoft€APIs)€required€by€the€applications€that€their€customersÏdemand.€€Fourth,€even€if€there€were€some€potential€benefit€associated€with€the€forced€licensing€of€aÏsingle€set€of€APIs€to€all€OEMs,€such€justification€could€not€apply€in€this€case,€because€Microsoft€itselfÏprecipitates€fragmentation€of€its€platform€by€continually€updating€various€portions€of€the€WindowsÏinstalled€base€with€new€APIs.€€ISVs€have€adapted€to€this€reality€by€redistributing€needed€APIs€withÏtheir€applications€in€order€to€ensure€that€the€necessary€APIs€are€present€when€the€programs€areÏlaunched.€€To€the€same€end,€Microsoft€makes€the€APIs€it€ships€with€Internet€Explorer€available€to€third„¼party€developers€for€distribution€with€their€own€products.€€Moreover,€Microsoft€itself€bundles€APIs€ð"ðÏincluding€those€distributed€with€Internet€Explorer€ð"ð€with€a€number€of€the€applications€that€it€distributesÏseparately€from€Windows.Ìà  à194.à ` àMicrosoft€also€contends€that€by€providing€ð ðbest€of€breedðð€implementations€of€variousÐ ð#@  Ðfunctionalities,€a€vendor€of€a€popular€operating€system€can€benefit€consumers€and€improve€the€efficiencyÏof€the€software€market€generally,€because€the€resulting€standardization€allows€ISVs€to€concentrate€theirÏefforts€on€developing€complementary€technologies€for€the€industry€leaders.€€Microsoftððs€refusal€to€offerÏa€version€of€Windows€98€in€which€its€Web€browser€is€either€absent€or€removable,€however,€had€noÐ À+'( Ðsuch€purpose.€€Rather,€it€had€the€purpose€and€effect€of€quashing€innovation€that€exhibited€the€potentialÏto€facilitate€the€emergence€of€competition€in€the€market€for€Intel„compatible€PC€operating€systems.Ìà  à195.à ` àFurthermore,€there€is€only€equivocal€support€for€the€proposition€that€Microsoft€willÐ ˜è Ðultimately€prove€to€be€the€source€of€a€ð ðbest€of€breedðð€Web€browser.€€In€fact,€there€is€considerableÏevidence€to€the€contrary.€€Both€Microsoft€and€the€plaintiffs€have€used€product€evaluations€to€supportÏtheir€claims€about€the€relationship€between€innovations€in€Web€browser€technology€and€consumerÏchoices€regarding€the€use€of€Web€browsers.€€These€product€evaluations€generally€compare€InternetÏExplorer€with€Navigator€by€identifying€the€beneficial€and€detrimental€features€of€each.€€Because€theÏevaluations€disagree€as€to€which€features€are€most€important,€there€is€no€consensus€as€to€which€is€theÏbest€browser€overall.€€When€read€together,€the€evaluations€also€do€not€identify€any€existing€WebÏbrowser€as€being€ð ðbest€of€breedðð€in€the€sense€of€being€at€least€as€good€as€all€others€in€all€significantÏrespects.€€Moreover,€there€is€nothing€in€the€evaluations,€nor€anywhere€else€in€the€evidence,€to€suggestÏthat€further€innovation€efforts€by€vendors€other€than€Microsoft€in€the€field€of€Web€browser€technologyÏare€no€longer€necessary€or€desirable.€€To€the€contrary,€many€of€the€product€reviews€suggest€furtherÏinnovations€in€both€Microsoft€and€non„Microsoft€Web€browsers€that€would€benefit€consumers.Ìà  à196.à ` àDespite€differences€in€emphasis,€the€product€evaluations€do€generally€concur€as€toÐ ü!L Ðwhich€browser€features€are€beneficial,€which€browser€features€are€detrimental,€and€why.€€Thus,€theÏevaluations€provide€extensive€detailed€information€about€consumer€preferences€that€can€be€used€toÏpredict€likely€directions€in€the€evolution€of€Web€browser€technology.Ìà  à197.à ` àFirst,€the€evaluations€suggest€that,€although€most€Web€publishers€charge€nothing€forÐ Ì)%& Ðaccess€to€their€sites,€consumers€recognize€that€there€are€search€and€communication€costs€associatedÐ À+'( Ðwith€Web€transactions.€€Accordingly,€consumers€prefer,€and€benefit€from,€innovations€in€Web€browserÏtechnology€that€reduce€these€costs.€€Second,€consumers€recognize€that€the€Web€contains€a€vast€andÏgrowing€range€of€digital€information€resources,€many€of€which€contain€viruses€that€are€capable€ofÏcausing€devastating€and€irreversible€harm€to€their€security€and€privacy€interests.€€Accordingly,Ïconsumers€prefer,€and€benefit€from,€innovations€in€Web€browser€technology€that€help€them€identify€andÏavoid€harmful€Web€resources.€€Third,€consumers€recognize€that€they€frequently€lack€adequateÏinformation€to€enable€them€to€assess€accurately€the€costs,€risks,€and€benefits€of€performing€a€particularÏWeb€transaction.€€Accordingly,€consumers€prefer,€and€benefit€from,€innovations€in€Web€browserÏtechnology€that€help€them€assess€these€costs,€risks,€and€benefits€prior€to€performing€the€transaction.Ìà  à198.à ` àThe€reduction€of€search€and€communication€costs,€the€identification€and€avoidance€ofÐ D” Ðharmful€Web€resources,€and€the€provision€of€more€accurate€information€as€to€the€costs,€risks,€andÏbenefits€of€performing€Web€transactions€are€just€three€of€the€many€possible€areas€of€innovation€in€theÏfield€of€Web€browser€technology.€€Far€from€demonstrating€that€Internet€Explorer€is€currently€a€ð ðbest€ofÏbreedðð€Web€browser,€the€evidence€reveals€Microsoftððs€awareness€of€the€need€for€continuousÏimprovement€of€its€products.€€For€example,€Microsoft€frequently€releases€ð ðpatchesðð€to€address€securityÏand€privacy€vulnerabilities€in€Internet€Explorer€as€they€are€discovered.€€In€sum,€there€is€no€indicationÏthat€Microsoft€is€destined€to€provide€a€ð ðbest€of€breedðð€Web€browser€that€makes€continuing,Ïcompetitively€driven€innovations€unproductive.ÌÌâ âà  àà ` àà ¸ àà  àò òiv.à0 h àThe€Market€for€Web€Browsing€Functionalityó óÐÌ)%&h(#h(# Ðà  à199.à ` àSince€the€World€Wide€Web€was€introduced€to€the€public€in€1991,€the€resourcesÐ ° Ðâ âavailable€on€the€Web€have€multiplied€at€a€near„exponential€rate.€€The€Internet€is€becoming€a€true€massÏmedium.€€Every€day€Web€resources€are€published,€combined,€modified,€moved,€and€deleted.€€MillionsÏof€individuals€and€organizations€have€published€Web€sites,€and€Web€site€addresses€are€pervasive€inÏadvertising,€promotion,€and€corporate€identification.Ìà  à200.à ` àThe€economics€of€the€Internet,€along€with€the€flexible€structure€of€Web€pages,€haveÐ tÄ  Ðmade€the€Web€the€leading€trajectory€for€the€ongoing€convergence€of€mass€communications€media.€ÏMany€television€and€radio€stations€make€some€or€all€of€their€transmissions€available€on€the€Web€in€theÏform€of€static€multimedia€files€or€streaming€media.€€Many€newspapers,€magazines,€books,€journals,Ïpublic€documents,€and€software€programs€are€also€published€on€the€Web.€€Multimedia€files€on€the€WebÏhave€emerged€as€viable€substitutes€for€many€pre„recorded€audio€and€video€entertainment€products.€ÏWeb„based€E„mail,€discussion€lists,€news€groups,€ð ðchat€rooms,ðð€paging,€instant€messaging,€andÏtelephony€are€all€in€common€use.€€In€addition€to€subsuming€all€other€digital€media,€the€Web€also€offersÏpopular€interactive€and€collaborative€modes€of€communication€that€are€not€available€through€otherÏmedia.Ìà  à201.à ` àThe€use€of€Web€browsers€to€conduct€Web€transactions€has€grown€at€pace€with€theÐ ü!L Ðgrowth€of€the€Web,€reflecting€the€immense€value€that€subsists€in€the€digital€information€resources€thatÏhave€become€available€on€the€Web.€€Consumer€demand€for€software€functionality€that€facilitates€WebÏtransactions,€and€the€response€by€browser€vendors€to€that€demand,€creates€a€market€for€Web€browsingÏâ âfunctionality.€€Although€Web€browsers€are€now€generally€not€licensed€at€a€positive€price,€all€WebÐ Ì)%& Ðtransactions€impose€significant€costs€on€consumers,€and€all€browser€vendors,€including€Microsoft,€haveÏsignificant€economic€interests€in€maximizing€usage€of€the€browsing€functionality€they€control.Ìâ âÓÓÝ‚-†ÿÝÝ  Ýà  àà ` àà ¸ àò òÝ‚-†72ÝÚƒÚbÚ  Ú.à0  àÝ  ÝPreventing€OEMs€from€Removing€the€Ready€Means€ofÐ ˜è ÐAccessing€Internet€Explorer€and€from€Promoting€Navigatoró ó€ò òinÐ ’ â Ðthe€Boot€Sequenceó ó݃-†72y2ÝۀیЌ Ü(#(# ÐŒÝ  ÝÌØ€ÏØÓ%2Óà  à202.à ` àSince€the€release€of€Internet€Explorer€1.0€in€July€1995,€Microsoft€has€distributed€everyÐ € Ð Ðversion€of€Windows€with€Internet€Explorer€included.€€Consequently,€no€OEM€has€ever€(with€theÏexception€of€a€few€months€in€late€1997)€been€able€to€license€a€copy€of€Windows€95€or€Windows€98Ïthat€has€not€come€with€Internet€Explorer.€€Refusing€to€offer€OEMs€a€browserless€(and€appropriatelyÏdiscounted)€version€of€Windows€forces€OEMs€to€take€(and€pay€for)€Internet€Explorer,€but€it€does€notÏprevent€a€determined€OEM€from€nevertheless€offering€its€consumers€a€different€Web€browser.€€EvenÏMicrosoftððs€additional€refusal€to€allow€OEMs€to€uninstall€(without€completely€removing)€InternetÏExplorer€from€Windows€does€not€completely€foreclose€a€resourceful€OEM€from€offering€consumersÏanother€browser.€€For€example,€an€OEM€with€sufficient€technical€expertise€(which€all€the€larger€OEMsÏcertainly€possess)€could€offer€its€customers€a€choice€of€browsers€while€still€minimizing€user€confusion€ifÏthe€OEM€were€left€free€to€configure€its€systems€to€present€this€choice€the€first€time€a€user€turned€on€aÏnew€PC€system.€€If€the€user€chose€Navigator,€the€system€would€automatically€remove€the€mostÏprominent€means€of€accessing€Internet€Explorer€from€Windows€(without€actually€uninstalling,€òòi.e.óó,Ð ð#@  Ðremoving€all€means€of€accessing,€Internet€Explorer)€before€the€desktop€screen€appeared€for€the€firstÏtime.€€Ìà  à203.à ` àIf€OEMs€removed€the€most€visible€means€of€invoking€Internet€Explorer,€and€pre„Ð Ì)%& Ðinstalled€Navigator€with€facile€methods€of€access,€Microsoftððs€purpose€in€forcing€OEMs€to€take€InternetÐ À+'( ÐExplorer€ð"ð€capturing€browser€usage€share€from€Netscape€ð"ð€would€be€subverted.€€The€same€wouldÏbe€true€if€OEMs€simply€configured€their€machines€to€promote€Navigator€before€Windows€had€a€chanceÏto€promote€Internet€Explorer,€€Decision„makers€at€Microsoft€believed€that€as€Internet€Explorer€caughtÏup€with€Navigator€in€quality,€OEMs€would€ultimately€conclude€that€the€costs€of€pre„installing€andÏpromoting€Navigator,€and€removing€easy€access€to€Internet€Explorer,€outweighed€the€benefits.€€Still,Ïthose€decision„makers€did€not€believe€that€Microsoft€could€afford€to€wait€for€the€several€large€OEMsÏthat€represented€virtually€all€Windows€PCs€shipped€to€come€to€this€desired€conclusion€on€their€own.€ÏTherefore,€in€order€to€bring€the€behavior€of€OEMs€into€line€with€its€strategic€goals€quickly,€MicrosoftÏthreatened€to€terminate€the€Windows€license€of€any€OEM€that€removed€Microsoftððs€chosen€icons€andÏprogram€entries€from€the€Windows€desktop€or€the€ð ðStartðð€menu.€€It€threatened€similar€punishment€forÏOEMs€who€added€programs€that€promoted€third„party€software€to€the€Windows€ð ðbootðð€sequence.€ÏThese€inhibitions€soured€Microsoftððs€relations€with€OEMs€and€stymied€innovation€that€might€have€madeÏWindows€PC€systems€more€satisfying€to€users.€€Microsoft€would€not€have€paid€this€price€had€it€notÏbeen€convinced€that€its€actions€were€necessary€to€ostracize€Navigator€from€the€vital€OEM€distributionÏchannel.Ìà  à204.à ` àAlthough€Microsoftððs€original€Windows€95€licenses€withheld€from€OEMs€permission€toÐ ü!L Ðimplement€any€modifications€to€the€Windows€product€not€expressly€authorized€by€Microsoftððs€ð ðOEMÏPre„Installation€Kit,ðð€or€ð ðOPK,ðð€it€had€always€been€Microsoftððs€practice€to€grant€certain€OEMsÏrequesting€it€some€latitude€to€make€modifications€not€specified€in€the€OPK.€€But€when€OEMs€began,€inÏthe€summer€of€1995,€to€request€permission€to€remove€the€Internet€Explorer€icon€from€the€WindowsÏdesktop€prior€to€shipping€their€PCs,€Microsoft€consistently€and€steadfastly€refused.€€As€CompaqÐ À+'( Ðlearned€in€the€first€half€of€1996,€Microsoft€was€prepared€to€enforce€this€prohibition€against€even€itsÏclosest€OEM€allies.Ìà  à205.à ` àIn€August€1995,€Compaq€entered€into€a€ð ðPromotion€and€Distribution€Agreementðð€withÐ ˜è ÐAOL€whereby€Compaq€agreed€to€ð ðposition€AOL€Services€above€all€other€Online€Services€within€theÏuser€interface€of€its€Products.ðð€€An€addendum€to€the€agreement€provided€that€Compaq€would€place€anÏAOL€icon€ð"ð€and€no€OLS€icons€not€controlled€by€AOL€ð"ð€on€the€desktop€of€its€PCs.€€Pursuant€to€itsÏobligations,€Compaq€began€in€late€1995€or€early€1996€to€ship€its€Presario€PCs€with€the€MSN€iconÏremoved€and€the€AOL€icon€added€to€the€Windows€desktop.€€At€the€same€time,€Compaq€removed€theÏInternet€Explorer€icon€from€the€desktop€of€its€Presarios€and€replaced€it€with€a€single€icon€representingÏboth€the€Spry€ISP€and€the€browser€product€that€Spry€bundled,€òòi.e.óó,€Navigator.€€Compaq€added€thisÐ D” Ðicon€in€part€because€it€recognized€Navigator€to€be€the€most€popular€browser€product€with€itsÏconsumers;€it€removed€the€Internet€Explorer€icon€because€it€did€not€want€its€PCs€desktops€to€confuseÏnovice€users€with€a€clutter€of€Internet„related€icons.Ìà  à206.à ` àWhen€Microsoft€learned€of€Compaqððs€plans€for€the€Presario,€it€informed€Compaq€thatÐ d Ðit€considered€the€removal€of€the€MSN€and€Internet€Explorer€icons€to€be€a€violation€of€the€OPK€processÏby€which€Compaq€had€previously€agreed€to€abide.€€For€its€part,€AOL€informed€Compaq€that€it€viewedÏthe€addition€of€an€icon€for€Spry€as€a€violation€of€their€1995€agreement.€€AOL€did€not€object€to€theÏpresence€of€a€Navigator€icon;€what€concerned€AOL€was€the€fact€that€clicking€on€this€icon€brought€theÏuser€to€the€Spry€ISP.€€Despite€the€protests€from€Microsoft€and€AOL,€Compaq€refused€to€reconfigureÏthe€Presario€desktop.€€Finally,€after€months€of€unsuccessful€importunity,€Microsoft€sent€Compaq€a€letterÏon€May€31,€1996,€stating€its€intention€to€terminate€Compaqððs€license€for€Windows€95€if€Compaq€didÐ À+'( Ðnot€restore€the€MSN€and€Internet€Explorer€icons€to€their€original€positions.€€Compaqððs€executivesÏopined€that€their€firm€could€not€continue€in€business€for€long€without€a€license€for€Windows,€so€in€JuneÏCompaq€restored€the€MSN€and€IE€icons€to€the€Presario€desktop.€€Ìà  à207.à ` àMicrosoft€did€not€further€condition€its€withdrawal€of€the€termination€notice€on€theÐ Œ Ü Ðremoval€of€the€AOL€and€Navigator€icons;€AOL,€however,€did€protest€both€the€continued€presence€of€aÏSpry€icon€and€the€reappearance€of€the€MSN€icon.€€After€AOL€sent€Compaq€a€formal€notice€of€itsÏintent€to€terminate€the€Promotion€and€Distribution€Agreement€in€September€1996,€Compaq€removedÏthe€Spry/Navigator€icon.€€For€reasons€discussed€below,€Compaq€did€not€then€replace€theÏSpry/Navigator€icon€with€an€icon€solely€for€Navigator.Ìà  à208.à ` àIn€its€confrontation€with€Compaq,€Microsoft€demonstrated€that€it€was€prepared€to€go€toÐ D” Ðthe€brink€of€losing€all€Windows€sales€through€its€highest„volume€OEM€partner€in€order€to€enforce€itsÏprohibition€against€removing€Microsoftððs€Internet„related€icons€from€the€Windows€desktop.€€Ìà  à209.à ` àIf€the€only€prohibition€had€been€against€removing€Microsoft€icons€and€program€entries,Ð  p ÐOEMs€partial€to€Navigator€still€would€have€been€able€to€recruit€users€to€Navigator€by€configuring€theirÏPCs€to€promote€it€before€the€Windows€desktop€first€presented€itself.€€This€is€true€because€the€averageÏuser,€having€chosen€a€browser€product,€is€indisposed€to€undergo€the€trouble€of€switching€to€a€differentÏone.€€With€the€release€of€Windows€95,€some€of€the€high„volume€OEMs€began€to€customize€theÏWindows€boot€sequence€so€that,€the€first€time€users€turned€on€their€new€PCs,€certain€OEM„designedÏtutorials€and€registration€programs,€as€well€as€ð ðsplashðð€screens€that€simply€displayed€the€OEMððs€brand,Ïâ âwould€run€before€the€users€were€presented€with€the€Windows€desktop.Ð Ì)%& Ѐ€à  à210.à ` àPromoting€non„Microsoft€software€and€services€was€not€the€only,€or€even€the€primary,Ð ° Ðâ âpurpose€of€the€OEM€introductory€programs.€€The€primary€purpose,€rather,€was€to€make€the€experienceÏof€setting€up€and€learning€to€use€a€new€PC€system€easier€and€less€confusing€for€users,€especiallyÏnovices.€€By€doing€so,€the€OEMs€believed,€they€would€increase€the€value€of€their€systems€and€minimizeÏboth€product€returns€and€costly€support€calls.€€Since€just€three€calls€from€a€consumer€can€erase€theÏentire€profit€that€an€OEM€earned€selling€a€PC€system€to€that€consumer,€OEMs€have€an€acute€interest€inÏmaking€their€systems€self„explanatory€and€simple€to€use.€€A€secondary€purpose€motivating€OEMs€toÏinsert€programs€into€the€boot€sequence€was€to€differentiate€their€products€from€those€of€theirÏcompetitors.€€Finally,€OEMs€perceived€an€opportunity€to€collect€bounties€from€IAPs€and€ISVs€inÏexchange€for€the€promotion€of€their€services€and€software€in€the€boot€sequence.€€Thus,€among€theÏprograms€that€many€OEMs€inserted€into€the€boot€sequence€were€Internet€sign„up€procedures€thatÏencouraged€users€to€choose€from€a€list€of€IAPs€assembled€by€the€OEM.€€In€many€cases,€a€consumerÏsigning€up€for€an€IAP€through€an€OEM€program€would€automatically€become€a€user€of€whicheverÏbrowser€that€IAP€bundled€with€its€proprietary€software.€€In€other€cases,€the€IAP€would€present€the€userÏwith€a€choice€of€browsers€in€the€course€of€collecting€from€the€user€the€information€necessary€to€start€aÏsubscription.Ìà  à211.à ` àIn€addition€to€tutorials,€sign„up€programs,€and€splash€screens,€a€few€large€OEMsÐ ð#@  Ðdeveloped€programs€that€ran€automatically€at€the€conclusion€of€a€new€PC€systemððs€first€boot€sequence.€ÏThese€programs€replaced€the€Windows€desktop€either€with€a€user€interface€designed€by€the€OEM€orÏâ âwith€Navigatorððs€user€interface.€€The€OEMs€that€implemented€automatically€loading€alternative€userÐ Ì)%& Ðinterfaces€did€so€out€of€the€belief€that€many€users,€particularly€novice€ones,€would€find€the€alternateÏinterfaces€less€complicated€and€confusing€than€the€Windows€desktop.Ìâ âà  à212.à ` àWhen€Gates€became€aware€of€what€the€OEMs€were€doing,€he€expressed€concern€toÐ ˜è ÐKempin,€the€Microsoft€executive€in€charge€of€OEM€sales.€€On€January€6,€1996,€Gates€wrote€toÏKempin:€ð ðWinning€Internet€browser€share€is€a€very€very€important€goal€for€us.€€Apparently€a€lot€ofÏOEMs€are€bundling€non„Microsoft€browsers€and€coming€up€with€offerings€together€with€InternetÏService€providers€that€get€displayed€on€their€machines€in€a€FAR€more€prominent€way€than€MSN€or€ourÏInternet€browser.ðð€€Less€than€three€weeks€later,€Kempin€delivered€his€semi„annual€report€on€OEMÏsales€to€his€superiors.€€In€the€report,€he€identified€ð ðControl€over€start„up€screens,€MSN€and€IEÏplacementðð€as€one€interest€that€Microsoft€had€neglected€over€the€previous€six€months.€€The€ongoingÏimbroglio€with€Compaq€was€prominent€in€Kempinððs€thinking,€but€he€also€recognized€that€establishingÏcontrol€over€the€boot€process€was€necessary€to€ensure€preferential€positioning€for€MSN€and€InternetÏExplorer.Ìà  à213.à ` àIn€an€effort€to€thwart€the€practice€of€OEM€customization,€Microsoft€began,€in€the€springÐ d Ðof€1996,€to€force€OEMs€to€accept€a€series€of€restrictions€on€their€ability€to€reconfigure€the€Windows€95Ïdesktop€and€boot€sequence.€€There€were€five€such€restrictions,€which€were€manifested€either€asÏamendments€to€existing€Windows€95€licenses€or€as€terms€in€new€Windows€98€licenses.€€First,ÏMicrosoft€formalized€the€prohibition€against€removing€any€icons,€folders,€or€ð ðStartðð€menu€entries€thatÏMicrosoft€itself€had€placed€on€the€Windows€desktop.€€Second,€Microsoft€prohibited€OEMs€fromÏmodifying€the€initial€Windows€boot€sequence.€€Third,€Microsoft€prohibited€OEMs€from€installingÏprograms,€including€alternatives€to€the€Windows€desktop€user€interface,€which€would€launchÐ À+'( Ðautomatically€upon€completion€of€the€initial€Windows€boot€sequence.€€Fourth,€Microsoft€prohibitedÏOEMs€from€adding€icons€or€folders€to€the€Windows€desktop€that€were€not€similar€in€size€and€shape€toÏicons€supplied€by€Microsoft.€€Finally,€when€Microsoft€later€released€the€Active€Desktop€as€part€ofÏInternet€Explorer€4.0,€it€added€the€restriction€that€OEMs€were€not€to€use€that€feature€to€display€third„¼party€brands.Ìà  à214.à ` àThe€several€OEMs€that€in€the€aggregate€represented€over€ninety€percent€of€Intel„Ð tÄ  Ðcompatible€PC€sales€believed€that€the€new€restrictions€would€make€their€PC€systems€more€difficult€andÏmore€confusing€to€use,€and€thus€less€acceptable€to€consumers.€€They€also€anticipated€that€theÏrestrictions€would€increase€product€returns€and€support€costs€and€generally€lower€the€value€of€theirÏmachines.€€Those€OEMs€that€had€already€spent€millions€of€dollars€developing€and€implementing€tutorialÏand€registration€programs€and/or€automatically„loading€graphical€interfaces€in€the€Windows€bootÏsequence€lamented€that€their€investment€would,€as€a€result€of€Microsoftððs€policy,€be€largely€wasted.€ÏGateway,€Hewlett„Packard,€and€IBM€communicated€their€opposition€forcefully€and€urged€Microsoft€toÏlift€the€restrictions.€€Emblematic€of€the€reaction€among€large€OEMs€was€a€letter€that€the€manager€ofÏresearch€and€development€at€Hewlett„Packard€sent€to€Microsoft€in€March€1997.€€He€wrote:ÌÓÓÓ XÓÓ XÓà ` àMicrosoftððs€mandated€removal€of€all€OEM€boot„sequence€and€auto„startÏprograms€for€OEM€licensed€systems€has€resulted€in€significant€and€costly€problems€forÏthe€HP„Pavilion€line€of€retail€PCððs.€€Ìà ` àOur€data€(as€of€3/10/97)€shows€a€10%€increase€in€W[indows]95€calls€as€a€%Ïof€our€total€customer€support€calls€.€.€.€.€€Ìà ` àOur€registration€rate€has€also€dropped€from€the€mid„80%€range€to€the€low€60%Ïrange.€€Ìà ` àThere€is€also€subjective€data€from€several€channel€partners€that€our€systemÏreturn€rate€has€increased€from€the€lowest€of€any€OEM€(even€lower€than€Apple)€to€aÏlevel€comparable€to€the€other€Microsoft€OEM€PC€vendors.€€This€is€a€major€concern€inÏthat€we€are€taking€a€step€backward€in€meeting€customer€satisfaction€needs.Ð À+'( Ðà ` àThese€three€pieces€of€data€confirm€that€we€have€been€damaged€by€the€edictsÏthat€[]€Microsoft€issued€last€fall.€.€.€.€€Ìà ` àFrom€the€consumer€perspective,€we€are€hurting€our€industry€and€our€customers.€ÏPCððs€can€be€frightening€and€quirky€pieces€of€technology€into€which€they€invest€a€largeÏsum€of€their€money.€€It€is€vitally€important€that€the€PC€suppliers€dramatically€improveÏthe€consumer€buying€experience,€out€of€box€experience€as€well€as€the€longer€termÏproduct€usability€and€reliability.€€The€channel€feedback€as€well€as€our€own€data€showsÏthat€we€are€going€in€the€wrong€direction.€€This€causes€consumer€dissatisfaction€inÏcomplex€telephone€support€process,€needless€in„home€repair€visits€and€ultimately€inÏproduct€returns.€€Many€times€the€cause€is€user€misunderstanding€of€a€product€thatÏpresents€too€much€complexity€to€the€common€user.€.€.€.€Ìà ` àOur€Customers€hold€HP€accountable€for€their€dissatisfaction€with€our€products.€ÏWe€bear€[]€the€cost€of€returns€of€our€products.€€We€are€responsible€for€the€cost€ofÏtechnical€support€of€our€customers,€including€the€33%€of€calls€we€get€related€to€the€lackÏof€quality€or€confusion€generated€by€your€product.€€And€finally€we€are€responsible€forÏour€success€or€failure€in€the€retail€PC€market.Ìà ` àWe€must€have€more€ability€to€decide€how€our€system€is€presented€to€our€endÏusers.Ìà ` àIf€we€had€a€choice€of€another€supplier,€based€on€your€actions€in€this€area,€IÏassure€you€[that€you]€would€not€be€our€supplier€of€choice.Ìà ` àI€strongly€urge€you€to€have€your€executives€review€these€decisions€and€toÏchange€this€unacceptable€policy.ÌÓ XBhÓÓ X4hÓÓ"hÓÓÓÌÓÓà  à215.à ` àEven€in€the€face€of€such€strident€opposition€from€its€OEM€customers,€Microsoft€refusedÐ &v Ðto€relent€on€the€bulk€of€its€restrictions.€€It€did,€however,€grant€Hewlett„Packard€and€other€OEMsÏdiscounts€off€the€royalty€price€of€Windows€as€compensation€for€the€work€required€to€bring€theirÏrespective€alternative€user€interfaces€into€compliance€with€Microsoftððs€requirements.€€Despite€the€highÏcosts€that€Microsoftððs€demands€imposed€on€them,€the€OEMs€obeyed€the€restrictions€because€theyÏperceived€no€alternative€to€licensing€Windows€for€pre„installation€on€their€PCs.€€Still,€the€restrictionsÏlowered€the€value€that€OEMs€attached€to€Windows€by€the€amount€of€the€costs€that€the€restrictionsÏimposed€on€them.€€Furthermore,€Microsoftððs€intransigence€damaged€the€goodwill€between€it€andÏseveral€of€the€highest„volume€OEMs.€€Ð Æ*&' Ðà  à216.à ` àMicrosoft€was€willing€to€sacrifice€some€goodwill€and€some€of€the€value€that€OEMsÐ ° Ðattached€to€Windows€in€order€to€exclude€Netscape€from€the€crucial€OEM€distribution€channel.€ÏMicrosoftððs€restrictions€succeeded€in€raising€the€costs€to€OEMs€of€pre„installing€and€promotingÏNavigator.€€These€increased€costs,€in€turn,€were€in€some€cases€significant€enough€to€deter€OEMs€fromÏpre„installing€Navigator€altogether.€€In€other€cases,€as€is€discussed€in€the€next€section,€OEMs€decidedÏnot€to€pre„install€Navigator€after€Microsoft€brought€still€more€pressure€to€bear.Ìà  à217.à ` àMicrosoftððs€license€agreements€have€never€prohibited€OEMs€from€pre„installingÐ h¸  Ðprograms,€including€Navigator,€on€their€PCs€and€placing€icons€and€entries€for€those€programs€on€theÏWindows€desktop€and€in€the€ð ðStartðð€menu.€€The€icons€and€entries€that€Microsoft€itself€places€on€theÏdesktop€and€in€the€ð ðStartðð€menu€have€always€left€room€for€OEMs€to€insert€more€icons€and€programÏentries€of€their€own€choosing.€€In€fact,€Microsoft€leaves€enough€space€for€an€OEM€to€add€more€thanÏforty€icons€to€the€Windows€desktop.€€Still,€the€availability€of€space€for€added€icons€did€not€makeÏincluding€a€Navigator€icon€inexpensive€for€OEMs.€€Given€the€unavoidable€presence€of€the€InternetÏExplorer€and€MSN€icons,€adding€a€Navigator€icon€would€increase€the€amount€of€Internet„relatedÏclutter€on€the€desktop.€€This€would€lead€to€confusion€among€novice€users,€which€would€in€turn€increaseÏthe€incidence€of€support€calls€and€product€returns.€€Microsoft€made€this€very€point€clear€to€OEMs€in€itsÏattempts€to€persuade€them€not€to€pre„install€Navigator€on€their€PCs.€€Furthermore,€OEMs€recognizedÏthat€including€multiple€Navigator€icons€in€an€attempt€to€draw€usersðð€attention€away€from€InternetÏExplorer€would€only€increase€the€amount€of€clutter€on€the€desktop,€thus€adding€to€user€confusion.€ÏAlthough€the€Windows€98€OEM€license€does€not€forbid€the€OEM€to€set€Navigator€as€the€defaultÏbrowsing€software,€doing€so€would€fail€to€forestall€user€confusion€since,€as€the€Court€found€in€theÐ À+'( Ðprevious€section,€Windows€98€launches€Internet€Explorer€in€certain€situations€even€if€Navigator€is€set€asÏthe€default.Ìà  à218.à ` àThe€restrictions€on€modifying€the€Windows€boot€sequence,€including€the€prohibitionÐ ˜è Ðagainst€automatically€loading€alternate€user€interfaces,€deprived€OEMs€of€the€principal€devices€by€whichÏto€lure€users€to€Navigator€over€the€high„profile€presence€of€Internet€Explorer€in€the€Windows€userÏinterface.€€An€OEM€remained€free€to€place€an€icon€on€the€desktop€that€a€user€could€click€to€invoke€anÏalternate€user€interface.€€Plus,€once€invoked,€the€interface€could€be€configured€to€load€automatically€theÏnext€time€the€PC€was€turned€on.€€This€mode€of€presentation€proved€to€be€much€less€effective€than€theÏone€Microsoft€foreclosed,€however,€for€studies€showed€that€users€tended€not€to€trouble€with€selectingÏan€alternate€user€interface;€they€were€content€to€use€the€interface€that€loaded€automatically€the€first€timeÏthey€turned€on€their€PCs.€€Furthermore,€while€Microsoftððs€restrictions€never€extended€to€the€intervalÏbetween€the€time€when€the€PC€was€turned€on€and€the€time€when€Windows€began€loading€from€the€hardÏdrive€into€RAM,€developing€anything€more€complicated€than€a€simple€splash€screen€to€run€in€that€periodÏwould€have€involved,€at€a€minimum,€the€writing€of€a€DOS€utility€and,€at€the€maximum,€the€pre„¼installation€of€a€second€operating€system.€€Such€measures€were€simply€not€worth€the€cost.€€Finally,Ïalthough€the€Windows€98€license€does€not€prohibit€an€OEM€from€including€on€the€keyboard€of€its€PCsÏa€button€that€takes€users€directly€to€an€OEM„maintained€site€containing€promotion€for€Navigator,€suchÏa€configuration€is€extremely€costly€for€an€OEM€to€implement,€and€it€represents€a€less€effective€form€ofÏpromotion€than€automatically€advertising€Navigator€in€the€initial€boot€process.Ìà  à219.à ` àIn€the€spring€of€1998,€Microsoft€began€gradually€to€moderate€certain€of€the€restrictionsÐ Ì)%& Ðdescribed€above.€€The€first€sign€of€relaxation€came€when€Microsoft€permitted€some€fifty€OEMs€toÐ À+'( Ðinclude€ISPs€of€their€choice€in€Microsoftððs€Internet€Connection€Wizard.€€Then,€in€late€May€and€earlyÏJune€1998,€Microsoft€informed€seven€of€the€highest„volume€OEMs€that€it€was€granting€them€theÏprivilege€of€inserting€their€own€registration€and€Internet€sign„up€programs€into€the€initial€Windows€98Ïboot€sequence.€€If€the€user€selected€an€IAP€using€the€OEM€program,€Microsoftððs€Internet€ConnectionÏWizard€would€not€run€in€the€boot€sequence.€€Microsoft€subsequently€extended€these€same€privileges€toÏseveral€other€OEMs,€upon€their€request.Ìà  à220.à ` àIt€is€important€to€note€that€Microsoftððs€tractability€emerged€only€after€the€restrictionsÐ h¸  Ðhad€been€in€place€for€over€a€year,€and€only€after€Microsoft€had€managed€to€secure€favorable€promotionÏfor€Internet€Explorer€through€the€most€important€IAPs.€€Furthermore,€while€Microsoft€permitted€theÏOEMs€to€include€in€their€registration€and€sign„up€programs€promotions€for€their€own€productsÏ(including€OEM„branded€shell€browsers€built€upon€Internet€Explorer)€and€for€ISPs€(but€only€if€andÏwhen€those€ISPs€were€selected€by€consumers€in€the€sign„up€process),€Microsoft€continued€to€prohibitÏpromotions€for€any€other€non„Microsoft€products,€including€Navigator.€€In€a€single€exception,€MicrosoftÏgranted€Gatewayððs€request€that€it€be€permitted€to€give€consumers€who€used€Gatewayððs€sign„up€processÏand€selected€Gateway.net€as€their€ISP€an€opportunity€to€choose€Navigator€as€their€browser.€€MicrosoftÏgranted€this€permission€orally,€and€it€did€not€extend€similar€privileges€to€any€other€OEMs.Ìà  à221.à ` àMicrosoft€asserts€that€the€restrictions€it€places€on€the€ability€of€OEMs€to€modify€theÐ ð#@  ÐWindows€desktop€and€boot€sequence€are€merely€intended€to€prevent€OEMs€from€compromising€theÏquality€and€consistency€of€Windows€after€the€code€leaves€Microsoftððs€physical€control,€but€before€PCÏconsumers€first€begin€to€experience€the€product.€€In€truth,€however,€the€OEM€modifications€thatÏMicrosoft€prohibits€would€not€compromise€the€quality€or€consistency€of€Windows€any€more€than€theÐ À+'( Ðmodifications€that€Microsoft€currently€permits.€€Furthermore,€to€the€extent€that€certain€OEMÏmodifications€did€threaten€to€impair€the€quality€and€consistency€of€Windows,€Microsoftððs€response€hasÏbeen€more€restrictive€than€necessary€to€abate€the€threat.€€Microsoft€would€not€have€imposedÏprohibitions€that€burdened€OEMs€and€consumers€with€substantial€costs,€lowered€the€value€of€Windows,Ïand€harmed€the€companyððs€relations€with€major€OEMs€had€it€not€felt€that€the€measures€were€necessaryÏto€maximize€Internet€Explorerððs€share€of€browser€usage€at€Navigatorððs€expense.Ìà  à222.à ` àMicrosoft€asserts€that€it€restricts€the€freedom€of€OEMs€to€remove€icons,€folders,€orÐ h¸  Ðð ðStartðð€menu€entries€that€Microsoft€places€on€the€Windows€desktop€in€order€to€ensure€that€consumersÏwill€enjoy€ready€access€to€the€features€that€Microsoftððs€advertising€has€led€them€to€expect.€€TheÏWindows€trademark€would€be€blemished,€Microsoft€argues,€if€consumers€could€not€easily€find€theÏfeatures€that€impelled€them€to€purchase€a€Windows„equipped€€PC.€€At€the€same€time€that€it€has€putÏforward€this€justification,€however,€Microsoft€has€permitted€OEMs€to€de„activate€Microsoftððs€ActiveÏDesktop€and€its€associated€ð ðchannelsðð€prior€to€shipment.€€More€significant€is€the€fact€that€MicrosoftððsÏlicense€agreements€require€OEMs€to€bear€product€support€costs.€€So€if€a€consumer€has€difficultyÏlocating€a€feature€that€he€wants€to€use,€he€will€call€a€customer€service€representative€employed€by€theÏOEM€that€manufactured€his€PC.€€Since€only€a€few€calls€erase€the€profit€earned€from€selling€a€PCÏsystem,€OEMs€are€loathe€to€do€anything€that€will€lead€to€consumer€questions€and€complaints.€ÏTherefore,€if€market€research€indicates€that€consumers€want€and€expect€to€see€a€certain€icon€on€theÏWindows€desktop,€OEMs€will€not€remove€it.€€Since€OEMs€share€Microsoftððs€interest€in€ensuring€thatÏconsumers€can€easily€find€the€features€they€want€on€their€Windows€PC€systems,€Microsoft€would€notÏhave€prohibited€OEMs€from€removing€icons,€folders,€or€ð ðStartðð€menu€entries€if€its€only€concern€hadÐ À+'( Ðbeen€consumer€satisfaction.€€In€fact,€by€forbidding€OEMs€to€remove€the€most€obvious€means€ofÏinvoking€Internet€Explorer,€Microsoft€diminished€the€value€of€Windows€PC€systems€to€those€corporateÏcustomers,€for€example,€who€did€not€intend€for€their€employees€to€browse€the€Web€and€did€not€want€aÏbrowser€taking€up€hardware€resources.€€Incidentally,€there€is€no€merit€in€the€hypothesis€that€OEMsÏmight€cause€problems€in€the€functioning€of€the€rest€of€Windows€by€removing€Internet€ExplorerððsÏdesktop€icon€and€program€entry,€because€Microsoft€still€allows€users€to€do€exactly€that.Ìà  à223.à ` àAccording€to€Microsoft,€its€restrictions€on€the€ability€of€OEMs€to€insert€programs€intoÐ h¸  Ðthe€initial€Windows€boot€sequence€are€meant€to€ensure€that€all€Windows€users€experience€the€productÏthe€way€Microsoft€intended€it€the€first€time€they€turn€on€their€PC€systems;€after€all,€there€would€be€littleÏincentive€to€develop€a€high„quality€operating„system€product€if€OEMs€were€free€to€alter€it€for€the€worseÏbefore€handing€it€over€to€consumers.€€This€argument€might€be€availing€were€it€not€for€the€fact€thatÏMicrosoft€currently€allows€several€of€the€largest„volume€OEMs€to€make€major€modifications€to€theÏinitial€Windows€98€boot€sequence.€€Microsoft€permits€each€of€these€OEMs€to€configure€its€own€splashÏscreens,€tutorials,€registration€wizards,€Internet€sign„up€wizards,€and€utilities€so€that€they€runÏautomatically€when€the€consumer€first€turns€on€a€new€PC€system.€€Either€Microsoft€stopped€caringÏabout€the€consistency€of€the€Windows€experience€in€1998,€when€it€tempered€its€restrictions€onÏmodifications€to€the€boot€sequence,€or€preserving€consistency€was€never€Microsoftððs€true€motivationÏfor€imposing€those€restrictions€in€the€first€place.€€With€all€the€variety€that€Microsoft€now€tolerates€in€theÏboot€sequence,€including€the€promotion€of€OEM„branded€browser€shells,€it€is€difficult€to€comprehendÏhow€allowing€OEMs€to€promote€Navigator€in€their€tutorials€and€Internet€sign„up€programs€wouldÏfurther€compromise€Microsoftððs€purported€interest€in€consistency.Ð À+'( Ðà  à224.à ` àAlthough€Microsoft€has€tolerated€a€variety€of€OEM€modifications€to€the€Windows€bootÐ ° Ðsequence,€it€has€never€acquiesced€to€an€alternate€user€interface€that€automatically€obscures€theÏWindows€desktop€after€the€PC€system€has€finished€booting€for€the€first€time.€€In€demanding€the€removalÏof€such€automatically€loading€user€interfaces,€Microsoft€has€postulated€that€consumers€who€purchaseÏWindows€PCs€expect€to€see€the€Windows€desktop€when€their€PC€systems€finish€booting€for€the€firstÏtime.€€If€consumers€instead€see€a€different€user€interface,€they€will€be€confused€and€disappointed.€€WhatÏis€more,€Microsoft€asserts,€OEM€shells€have€tended€to€be€of€lower€quality€than€Windows.€€OneÏOEMððs€version€allegedly€even€disabled€the€ability€of€a€Windows€user€to€invoke€functionality€by€clickingÏthe€right€button€of€his€mouse.€€Ìà  à225.à ` àThe€alternate€shells€that€OEMs€have€developed€may€or€may€not€be€of€lower€qualityÐ D” Ðthan€Windows.€€One€thing€is€clear,€however:€€If€an€OEM€develops€a€shell€that€users€do€not€like€as€muchÏas€Windows,€and€if€the€OEM€causes€that€shell€to€load€as€the€default€user€interface€the€first€time€its€PCsÏare€turned€on,€consumer€wrath€will€fall€first€upon€the€OEM,€and€demand€for€that€OEMððs€PC€systemsÏwill€decline€commensurately€with€the€resulting€user€dissatisfaction.€€The€market€for€Intel„compatible€PCsÏis,€by€all€accounts,€a€competitive€one.€€Consequently,€any€OEM€that€tries€to€force€an€unwanted,€low„¼quality€shell€on€consumers€will€do€so€at€its€own€peril.€€Had€Microsoftððs€sole€concern€been€consumerÏsatisfaction,€it€would€have€relied€more€on€the€power€of€the€market€ð"ð€and€less€on€its€own€market€powerÏð"ð€to€prevent€OEMs€from€making€modifications€that€lead€to€consumer€disappointment.Ìà  à226.à ` àAt€times,€Microsoft€has€argued€that€the€limitations€it€imposes€on€the€ability€of€OEMs€toÐ Ø'(#$ Ðmodify€Windows€originate€in€a€desire€to€prevent€its€platform€from€becoming€fragmented,€like€UNIX.€ÏMicrosoft€believes€that€ISVs€benefit€from€the€fact€that€Windows€presents€the€same€platform€forÐ À+'( Ðapplications€development,€irrespective€of€the€underlying€hardware.€€Certainly,€Microsoft€has€a€legitimateÏinterest€in€ensuring€that€OEMs€do€not€take€Windows€under€license,€alter€its€API€set,€and€then€ship€theÏaltered€version.€€This€fact€does€not€add€credibility€to€Microsoftððs€stated€justification,€though,€for€twoÏreasons.€€First,€Microsoft€itself€creates€some€degree€of€instability€in€its€supposedly€uniform€platform€byÏreleasing€updates€to€Internet€Explorer€more€frequently€than€it€releases€new€versions€of€Windows.€€AsÏthings€stand,€ISVs€find€it€necessary€to€redistribute€Microsoftððs€Internet„related€APIs€with€theirÏapplications€because€of€nonuniformity€that€Microsoft€has€created€in€its€own€installed€base.€€MoreÏimportant,€however,€is€the€fact€that€none€of€the€modifications€that€OEMs€are€known€to€have€proposedÏmaking€would€have€removed€or€altered€any€Windows€APIs.Ìà  à227.à ` àTo€the€extent€Microsoft€is€apprehensive€that€OEMs€might,€absent€restrictions,€changeÐ D” Ðthe€set€of€APIs€exposed€by€the€software€on€their€PCs,€the€concern€is€not€that€OEMs€would€modify€theÏWindows€API€set.€€Rather,€the€worry€is€that€OEMs€would€pre„install,€on€top€of€Windows,€otherÏsoftware€exposing€additional€APIs€not€controlled€by€Microsoft.€€In€the€case€of€alternate€user€interfaces,ÏMicrosoft€is€fearful€that,€if€these€programs€loaded€automatically€the€first€time€users€turned€on€their€PCs,Ïthe€programs€would€attract€so€much€usage€that€developers€would€be€encouraged€to€take€advantage€ofÏany€APIs€that€the€programs€exposed.€€Indeed,€one€user€interface€in€particular€that€OEMs€couldÏconfigure€to€load€automatically€and€obscure€the€Windows€desktop€ð"ð€Navigator€ð"ð€exposes€aÏsubstantial€number€of€APIs.€€Therefore,€Microsoftððs€real€concern€has€not€been€that€OEM€modificationsÏwould€fragment€the€Windows€platform€to€the€detriment€of€developers€and€consumers.€€What€hasÏâ âmotivated€Microsoftððs€prohibition€against€automatically€loading€shells€is€rather€the€fear€ð"ð€once€again€ð"ðÐ Ì)%& Ðthat€OEMs€would€pre„install€and€give€prominent€placement€to€middleware€that€could€weaken€theÏapplications€barrier€to€entry.Ìâ âà  à228.à ` àLike€most€other€software€products,€Windows€95€and€Windows€98€are€covered€byÐ ˜è Ðcopyright€registrations.€€Since€they€are€copyrighted,€Microsoft€distributes€these€products€to€OEMsÏpursuant€to€license€agreements.€€By€early€1998,€Microsoft€had€made€these€licenses€conditional€onÏOEMsðð€compliance€with€the€restrictions€described€above.€€Notwithstanding€the€formal€inclusion€ofÏthese€restrictions€in€the€license€agreements,€the€removal€of€the€Internet€Explorer€icon€and€the€promotionÏof€Navigator€in€the€boot€sequence€would€not€have€compromised€Microsoftððs€creative€expression€orÏinterfered€with€its€ability€to€reap€the€legitimate€value€of€its€ingenuity€and€investment€in€developingÏWindows.€€More€generally,€the€contemporaneous€Microsoft€documents€reflect€concern€with€theÏpromotion€of€Navigator€rather€than€the€infringement€of€a€copyright.€€Also€notable€is€the€fact€thatÏMicrosoft€did€not€adjust€its€OEM€pricing€guidelines€when€it€lifted€certain€of€the€restrictions€in€the€springÏof€1998.Ìà  à229.à ` àFinally,€it€is€significant€that,€while€all€vendors€of€PC€operating€systems€undoubtedlyÐ d Ðshare€Microsoftððs€stated€interest€in€maximizing€consumer€satisfaction,€the€prohibitions€that€MicrosoftÏimposes€on€OEMs€are€considerably€more€restrictive€than€those€imposed€by€other€operating€systemÏvendors.€€For€example,€Apple€allows€its€retailers€to€remove€applications€that€Apple€has€pre„installedÏand€to€reconfigure€the€Mac€OS€desktop.€€For€its€part,€IBM€allows€its€OEM€licensees€to€override€theÏentire€OS/2€desktop€in€favor€of€a€customized€shell€or€to€set€an€application€to€start€automatically€the€firstÏtime€the€PC€is€turned€on.€€The€reason€is€that€these€firms€do€not€share€Microsoftððs€interest€in€protectingÏthe€applications€barrier€to€entry.Ð À+'( ÐÓÓÝ‚-†ÿÝÝ  Ýà  àà ` àà ¸ àò òÝ‚-†o·ÝÚƒÚcÚ  Ú.à0  àÝ  ÝPressuring€OEMs€to€Promote€Internet€Explorer€and€to€not€Pre„Ð ° ÐInstall€or€Promote€Navigatoró óÓ]·Ó݃-†o·±·ÝۀیЪú(#(# ÐŒÝ  Ýà  à230.à ` àMicrosoftððs€restrictions€on€modifications€to€the€boot€sequence€and€the€configuration€ofÐ žî Ðthe€Windows€desktop€ensured€that€every€Windows€user€would€be€presented€with€ready€means€ofÏaccessing€Internet€Explorer.€€Although€the€restrictions€also€raised€the€costs€attendant€to€pre„installingÏand€promoting€Navigator,€senior€executives€at€Microsoft€were€not€confident€that€those€higher€costsÏalone€would€induce€all€of€the€major€OEMs€to€focus€their€promotional€efforts€on€Internet€Explorer€to€theÏexclusion€of€Navigator.€€Therefore,€Microsoft€used€incentives€and€threats€in€an€effort€to€secure€theÏcooperation€of€individual€OEMs.Ìà  à231.à ` àFirst,€Microsoft€rewarded€with€valuable€consideration€those€large„volume€OEMs€thatÐ Jš Ðtook€steps€to€promote€Internet€Explorer.€€For€example,€Microsoft€gave€reductions€in€the€royalty€priceÏof€Windows€to€certain€OEMs,€including€Gateway,€that€set€Internet€Explorer€as€the€default€browser€onÏtheir€PC€systems.€€In€1997,€Microsoft€gave€still€further€reductions€to€those€OEMs€that€displayedÏInternet€Explorerððs€logo€and€links€to€Microsoftððs€Internet€Explorer€update€page€on€their€own€homeÏpages.€€That€same€year,€Microsoft€agreed€to€give€OEMs€millions€of€dollars€in€co„marketing€funds,€asÏwell€as€costly€in„kind€assistance,€in€exchange€for€their€carrying€out€other€promotional€activities€forÏInternet€Explorer.Ìà  à232.à ` àMicrosoft€went€beyond€giving€OEMs€incentives€to€promote€Internet€Explorer.€€TheÐ ê$: ! Ðcompanyððs€dealings€with€Compaq€in€1996€and€1997€demonstrate€that€Microsoft€was€willing€toÏexchange€valuable€consideration€for€an€OEMððs€commitment€to€curtail€its€distribution€and€promotion€ofÏNavigator.€€In€early€1996,€at€around€the€same€time€that€Compaq€was€removing€the€MSN€and€InternetÐ Æ*&' ÐExplorer€icons€and€program€entries€from€the€Presario€desktop,€Compaq€announced€its€intention€toÏwork€with€Netscape€for€its€internal€Internet€needs€and€on€Internet€server€initiatives.€€In€response,ÏMicrosoft€insisted€that€Compaq€support€Microsoftððs€Internet€initiatives€throughout€its€business.€€ToÏmake€its€displeasure€felt,€Microsoft€initiated€a€series€of€cooperative€ventures€with€some€of€CompaqððsÏcompetitors,€including€DEC€and€Hewlett„Packard.Ìà  à233.à ` àWhen€Compaq€eventually€agreed€to€restore€the€MSN€and€Internet€Explorer€icons€andÐ tÄ  Ðprogram€entries€to€the€Presario€desktop,€it€did€so€because€its€senior€executives€had€decided€that€theÏfirm€needed€to€do€what€was€necessary€to€restore€its€special€relationship€with€Microsoft.€€On€May€13,Ï1996,€Compaq€signed€an€addendum€extending€the€firmsðð€Frontline€Partnership€to€the€realm€of€network„¼related€products.€€Pursuant€to€the€addendum,€Compaq€agreed€to€ship€Internet€Explorer€as€the€defaultÏbrowser€product€on€all€of€its€desktop€and€server€systems,€to€adopt€and€promote€Internet€ExplorerÏinternally,€and€to€focus€the€majority€of€Compaqððs€key€network„oriented€announcements€and€marketingÏactivities€on€Microsoftððs€technologies€and€strategy.€€In€September€of€the€same€year,€Compaq€agreed€toÏoffer€Internet€Explorer€as€the€preferred€browser€product€for€its€Internet€products€and€to€use€two€orÏmore€of€Microsoftððs€hypertext€markup€language€(ð ðHTMLðð)€extensions€in€the€home€page€for€each€ofÏthose€products.€€Then€in€February€1997,€Compaq€committed€itself€to€promote€Internet€ExplorerÏexclusively€for€its€PC€products€in€exchange€for€Microsoftððs€agreement€to€pay€Compaq€a€bounty€forÏeach€user€that€signed€up€for€Internet€access€using€a€Compaq€PC.€€Despite€the€view€of€some€withinÏCompaq€that€the€firmððs€goal€should€be€ð ðto€feature€the€brand€leader€Netscape,ðð€Compaq€elected€not€toÏresume€the€pre„installation€of€Navigator€on€its€Presario€PCs€after€it€removed€the€joint€Spry/NavigatorÏicon.€€In€fact,€Compaq€stopped€pre„installing€Navigator€on€all€but€very€small€percentage€of€its€PCs.€€Ð À+'( Ðà  à234.à ` àIn€return€for€Compaqððs€capitulation€and€revival€of€its€commitment€to€supportÐ ° ÐMicrosoftððs€Internet€strategy,€Microsoft€has€guaranteed€Compaq€that€the€prices€it€pays€for€WindowsÏwill€continue€to€be€significantly€lower€than€the€prices€paid€by€other€OEMs.€€Specifically,€the€operatingÏsystem€licenses€signed€by€Compaq€and€Microsoft€in€March€1998€gave€Compaq€ð ð[g]uaranteed€betterððÏpricing€than€any€other€OEM€for€Windows€95,€Windows€98,€and€Windows€NT€Workstation€(versionsÏ4€and€5)€until€April€2000.€€Compaqððs€license€fee€for€Windows€is€so€low€that€other€OEMs€would€stillÏpay€substantially€more€than€Compaq€even€if€they€qualified€for€all€of€the€royalty€reductions€listed€inÏMicrosoftððs€Market€Development€Agreements€(ð ðMDAsðð).€€What€is€more,€while€Microsoft€requiresÏother€OEMs€to€verify€actual€compliance€with€particular€milestones€in€order€to€receive€Windows€98Ïroyalty€reductions,€Microsoft€has€secretly€agreed€to€provide€the€full€amount€of€those€discounts€toÏCompaq€regardless€of€whether€it€actually€satisfies€the€specified€conditions.ò ò€€ó óIn€addition€to€a€guaranteedÐ 8ˆ Ðmost„favorable€price€on€Windows,€Compaq€has€enjoyed€free€internal€use€of€all€Windows€products€forÏPCs€since€March€1998.Ìà  à235.à ` àMicrosoftððs€relations€with€Compaq€beginning€in€late€1996€illustrate€the€blandishmentsÐ d Ðthat€Microsoft€is€willing€to€extend€to€OEMs€that€ally€with€it€to€help€it€capture€browser€share.€ÏMicrosoftððs€relations€with€Gateway€and€the€IBM€PC€Company,€by€contrast,€reveal€the€pressure€thatÏMicrosoft€is€willing€to€apply€to€OEMs€that€show€reluctance€to€cooperate€on€this€front.Ìà  à236.à ` àIn€February€1997€a€Microsoft€account€representative€told€his€counterpart€at€GatewayÐ ä%4!" Ðthat€Gatewayððs€use€of€Navigator€on€its€own€corporate€network€was€a€serious€issue€at€Microsoft.€€HeÏadded€that€Microsoft€would€not€do€any€co„marketing€and€sales€campaigns€with€Gateway€if€the€firmÏappeared€to€be€anything€but€pro„Microsoft.€€If€Gateway€would€replace€Navigator€with€InternetÐ À+'( ÐExplorer,€Microsoft€would€compensate€Gateway€for€its€investment€in€Netscapeððs€product.€€If€GatewayÏrefused,€Microsoft€might€be€compelled€to€audit€Gatewayððs€internal€use€of€Microsoft€products.€ÏGateway€was€separately€told€by€Microsoft€representatives€that€its€decision€to€ship€Navigator€with€itsÏPCs€could€affect€its€business€relationship€with€Microsoft.€€Despite€the€pressure€from€Microsoft,ÏGateway€refused€to€switch€its€internal€use€to€Internet€Explorer€or€to€stop€shipping€Navigator€with€itsÏPCs.€€Although€Microsoft€did€not€implement€its€more€specific€threats,€Gateway€has€consistently€paidÏhigher€prices€for€Windows€than€its€competitors.€€Microsoftððs€actions€not€only€corroborate€the€evidenceÏof€its€interest€in€suppressing€the€usage€of€Navigator,€they€also€demonstrate€its€ability€to€threatenÏrecalcitrant€customers€without€losing€their€business.Ìà  à237.à ` àSimilarly,€in€early€1997,€Microsoft€tried€to€convince€the€IBM€PC€Company€to€promoteÐ D” Ðand€distribute€the€upcoming€release€of€its€new€browser,€Internet€Explorer€4.0.€€At€a€meeting€with€IBMÏexecutives€in€March€1997,€Microsoft€representatives€threatened€that,€if€IBM€did€not€pre„load€andÏpromote€Internet€Explorer€4.0€to€the€exclusion€of€Navigator€on€its€PCs,€it€would€suffer€ð ðMDAÏrepercussions.ðð€€One€of€the€Microsoft€representatives€in€attendance,€Bengt€Ackerlind,€stated€that€inÏreturn€for€IBM€shipping€its€systems€without€any€software€that€competed€with€Microsoft,€IBM€wouldÏreceive€ð ðsoft€dollars,ðð€marketing€assistance,€improved€access€to€the€source€code€of€Windows€95€andÏMicrosoftððs€BackOffice€product,€and€the€ability€to€self„certify€for€Microsoftððs€Windows€HardwareÏQuality€Lab€provisions.€€In€a€follow„up€meeting€three€weeks€later,€Microsoft€representatives€againÏinsisted€that€IBM€distribute€and€promote€Internet€Explorer€exclusively€and€again€offered€soft€dollars,Ïmarketing€assistance,€and€MDA€reductions€in€return.€€Later€that€day,€in€a€smaller€meeting€thatÏMicrosoft€referred€to€as€ð ðsecret€discussions,ðð€Ackerlind€stated€Microsoftððs€desire€that€IBM€promoteÐ À+'( ÐInternet€Explorer€4.0€exclusively€and€warned€that€if€IBM€pre„installed€Navigator€on€its€PCs,€ð ðWe€haveÏa€problem.ððÌà  à238.à ` àThe€IBM€PC€Company€refused€to€promote€Internet€Explorer€4.0€exclusively,€and€it€hasÐ ˜è Ðcontinued€to€pre„install€Navigator€on€its€PCs.€€The€difference€in€the€ways€that€Compaq€and€IBMÏresponded€to€Microsoftððs€Internet„related€overtures€in€1996€and€1997€contributed€to€the€stark€contrastÏin€the€treatment€the€two€firms€have€since€received€from€Microsoft.ÌÓÓÝ‚-†ÿÝÝ  Ýò òà0  àà0` (#(#àà0¸ ` (#` (#àÝ‚-†7ÛÝÚƒÚdÚ  Ú.à0¸ (#¸ (#àÝ  ÝEffect€of€Microsoftððs€Actions€in€the€OEM€Channeló ó݃-†7Û‰ÛÝÛ€ÛŒÐh¸ (#(# ÐŒÝ  ÝÌÓ%ÛÓà  à239.à ` àMicrosoft€has€largely€succeeded€in€exiling€Navigator€from€the€crucial€OEM€distributionÐ \¬  Ðchannel.€€Even€though€a€few€OEMs€continue€to€offer€Navigator€on€some€of€their€PCs,€Microsoft€hasÏcaused€the€number€of€OEMs€offering€Navigator,€and€the€number€of€PCs€on€which€they€offer€it,€toÏdecline€dramatically.€€Before€1996,€Navigator€enjoyed€a€substantial€and€growing€presence€on€theÏdesktop€of€new€PCs.€€Over€the€next€two€years,€however,€Microsoftððs€actions€forced€the€number€ofÏcopies€of€Navigator€distributed€through€the€OEM€channel€down€to€an€exiguous€fraction€of€what€it€hadÏbeen.€€By€January€1998,€Kempin€could€report€to€his€superiors€at€Microsoft€that,€of€the€sixty€OEM€sub„¼channels€(15€major€OEMs€each€offering€corporate€desktop,€consumer/small€business,€notebook,€andÏworkstation€PCs),€Navigator€was€being€shipped€through€only€four.€€Furthermore,€most€of€the€PCsÏshipped€with€Navigator€featured€the€product€in€a€manner€much€less€likely€to€lead€to€usage€than€if€its€iconÏappeared€on€the€desktop.€€For€example,€Sony€only€featured€Navigator€in€a€folder€rather€than€on€theÏdesktop,€and€Gateway€only€shipped€Navigator€on€a€separate€CD„ROM€rather€than€pre„installed€on€theÏhard€drive.€€By€the€beginning€of€January€1999,€Navigator€was€present€on€the€desktop€of€only€a€tinyÏpercentage€of€the€PCs€that€OEMs€were€shipping.€Ð À+'( Ðà  à240.à ` àTo€the€extent€Netscape€is€still€able€to€distribute€Navigator€through€the€OEM€channel,Ð ° ÐMicrosoft€has€substantially€increased€the€cost€of€that€distribution.€€Although€in€January€1999€(in€theÏmidst€of€this€trial),€Compaq€suddenly€decided€to€resume€the€pre„installation€of€Navigator€on€its€PresarioÏPCs,€Compaqððs€reversal€came€only€after€Netscape€agreed€to€provide€Compaq€with€approximatelyÏ$700,000€worth€of€free€advertising.Ìà  à241.à ` àIn€sum,€Microsoft€successfully€secured€for€Internet€Explorer€ð"ð€and€foreclosed€toÐ tÄ  ÐNavigator€ð"ð€one€of€the€two€distribution€channels€that€leads€most€efficiently€to€the€usage€of€browsingÏsoftware.€€Even€to€the€extent€that€Navigator€retains€some€access€to€the€OEM€channel,€Microsoft€hasÏrelegated€it€to€markedly€less€efficient€forms€of€distribution€than€the€form€vouchsafed€for€InternetÏExplorer,€namely,€prominent€placement€on€the€Windows€desktop.€€Microsoft€achieved€this€feat€byÏusing€a€complementary€set€of€tactics.€€First,€it€forced€OEMs€to€take€Internet€Explorer€with€WindowsÏand€forbade€them€to€remove€or€obscure€it€ð"ð€restrictions€which€both€ensured€the€prominent€presence€ofÏInternet€Explorer€on€usersðð€PC€systems€and€increased€the€costs€attendant€to€pre„installing€andÏpromoting€Navigator.€€Second,€Microsoft€imposed€additional€technical€restrictions€to€increase€the€costÏof€promoting€Navigator€even€more.€€Third,€Microsoft€offered€OEMs€valuable€consideration€inÏexchange€for€commitments€to€promote€Internet€Explorer€exclusively.€€Finally,€Microsoft€threatened€toÏpenalize€individual€OEMs€that€insisted€on€pre„installing€and€promoting€Navigator.€€Although€MicrosoftððsÏcampaign€to€capture€the€OEM€channel€succeeded,€it€required€a€massive€and€multifarious€investment€byÏMicrosoft;€it€also€stifled€innovation€by€OEMs€that€might€have€made€Windows€PC€systems€easier€to€useÏâ âand€more€attractive€to€consumers.€€That€Microsoft€was€willing€to€pay€this€price€demonstrates€that€itsÐ Ì)%& Ðdecision„makers€believed€that€maximizing€Internet€Explorerððs€usage€share€at€Navigatorððs€expense€wasÏworth€almost€any€cost.Ìâ âØ€ÏØÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.îˆêÝÚƒÚ3Ú  Ú.à0 ¸ àÝ  ÝExcluding€Navigator€from€the€IAP€Channeló ó݃!.îˆê¾êÝÛ€ÛŒÐ˜è¸ (#¸ (# ÐŒÝ  Ýà  à242.à ` àBy€late€1995,€Microsoft€had€identified€bundling€with€the€client€software€of€IAPs€as€theÐ Œ Ü Ðother€of€the€two€most€efficient€channels€for€distributing€browsing€software.€€By€that€time,€however,Ïseveral€of€the€most€popular€IAPs€were€shipping€Navigator.€€Recognizing€that€it€was€starting€fromÏbehind,€Microsoft€devised€an€aggressive€strategy€to€capture€the€IAP€channel€from€Netscape.€€InÏFebruary€1996,€Cameron€Myhrvold,€the€Microsoft€executive€in€charge€of€the€firmððs€relations€with€ISPs,Ïoutlined€the€strategy€in€a€memorandum€to€his€colleagues€and€superiors€within€the€company:ÌÓ XÓÓ XÓÓ XÓÓÓItððs€essential€we€increase€the€share€of€our€browser.€€Network€operatorsÏ[(IAPs,€plus€the€telephone€and€cable€companies€providing€Internet€access€services)]Ïare€important€distributors€and€we€will€license€at€no€cost€the€Internet€Explorer€forÏdistribution€with€their€Internet€access€business€to€maximize€the€distribution/adoption€ofÏIE€as€browser€of€choice.€€We€will€attempt€exclusive€arrangements,€fight€for€preferredÏstatus,€but€settle€for€parity€with€NetScape.€€Even€offering€IE€for€free€will€not€win€usÏevery€sale.€€In€the€U.S.€we€will€offer€IE€broadly€to€net[work€]op[erator]s€and€IAPsÏincluding€the€many€hundreds€of€smaller€IAPs.ÌÐ d ÐÓ XîÓÓ XùíÓÓ XîÓÓ#îÓIn€the€first€step€of€this€strategy,€Microsoft€enticed€ISPs€with€small€subscriber€bases€to€distribute€InternetÏExplorer€and€to€make€it€their€default€browsing€software€by€offering€for€free€both€a€license€to€distributeÏInternet€Explorer€and€a€software€kit€that€made€it€easy€for€ISPs€with€limited€resources€to€adapt€InternetÏExplorer€for€bundling€with€their€services.Ìà  à243.à ` àThose€who€planned€and€implemented€Microsoftððs€IAP€campaign€believed€that,€if€IAPsÐ Þ&."# Ðgave€new€subscribers€a€choice€between€Internet€Explorer€and€Navigator,€most€of€them€would€pickÏNavigator€ð"ð€both€because€Netscapeððs€brand€had€become€nearly€synonymous€with€the€Web€in€theÐ Æ*&' Ðpublic€consciousness€and€because€Navigator€had€developed€a€much€better€reputation€for€quality€thanÏInternet€Explorer.€€To€compensate€for€Navigatorððs€advantage,€Microsoft€reinforced€its€free€distributionÏof€Internet€Explorer€licenses€and€the€access€kits€with€three€tactics€designed€to€induce€IAPs€with€largeÏsubscriber€bases€not€only€to€distribute€and€promote€Internet€Explorer,€but€also€to€constrain€severelyÏtheir€distribution€and€promotion€of€Navigator€and€to€convert€those€of€their€subscribers€already€usingÏNavigator€to€Internet€Explorer.€€Ìà  à244.à ` àMicrosoftððs€first€tactic€was€to€develop€and€include€with€Windows€an€Internet€sign„upÐ h¸  Ðprogram€that€made€it€simple€for€users€to€download€access€software€from,€and€subscribe€to,€any€IAPÏappearing€on€a€list€assembled€by€Microsoft.€€In€exchange€for€their€inclusion€on€this€list,€the€leading€IAPsÏagreed,€at€Microsoftððs€insistence,€to€distribute€and€promote€Internet€Explorer,€to€refrain€from€promotingÏnon„Microsoft€Web€browsing€software,€and€to€ensure€that€they€distributed€non„Microsoft€browsingÏsoftware€to€only€a€limited€percentage€of€their€subscribers.€€Although€the€percentages€varied€by€IAP,€theÏmost€common€figure€was€seventy„five€percent.€Ìà  à245.à ` àIn€a€similar€tactic€aimed€at€a€more€important€IAP€sub„channel,€Microsoft€created€anÐ d Ðð ðOnline€Services€Folderðð€and€placed€an€icon€for€that€folder€on€the€Windows€desktop.€€In€exchange€forÏthe€pre„installation€of€their€access€software€with€Windows€and€for€the€inclusion€of€their€icons€in€theÏOnline€Services€Folder,€the€leading€OLSs€agreed,€again€at€Microsoftððs€insistence,€to€distribute€andÏpromote€Internet€Explorer,€to€refrain€from€promoting€non„Microsoft€Web€browsing€software,€and€toÏdistribute€non„Microsoft€browsing€software€to€no€more€than€fifteen€percent€of€their€subscribers.€€Ìà  à246.à ` àFinally,€Microsoft€gave€IAPs€incentives€to€upgrade€the€millions€of€subscribers€alreadyÐ Ì)%& Ðusing€Navigator€to€proprietary€access€software€that€included€Internet€Explorer.€€To€IAPs€included€in€theÐ À+'( ÐWindows€Internet€sign„up€list,€Microsoft€offered€the€incentive€of€reductions€in€the€referral€fees€itÏcharged€for€inclusion€in€the€list.€€To€OLSs€in€the€Online€Services€Folder,€Microsoft€offered€cashÏbounties.Ìà  à247.à ` àIn€sum,€Microsoft€made€substantial€sacrifices,€including€the€forfeiture€of€significantÐ Œ Ü Ðrevenue€opportunities,€in€order€to€induce€IAPs€to€do€four€things:€to€distribute€access€software€that€cameÏwith€Internet€Explorer;€to€promote€Internet€Explorer;€to€upgrade€existing€subscribers€to€InternetÏExplorer;€and€to€restrict€their€distribution€and€promotion€of€non„Microsoft€browsing€software.€€TheÏrestrictions€on€the€freedom€of€IAPs€to€distribute€and€promote€Navigator€were€far€broader€than€theyÏneeded€to€be€in€order€to€achieve€any€economic€efficiency.€€This€is€especially€true€given€the€fact€thatÏMicrosoft€never€expected€Internet€Explorer€to€generate€any€revenue.€€Ultimately,€the€inducements€thatÏMicrosoft€offered€IAPs€at€substantial€cost€to€itself,€together€with€the€restrictive€conditions€it€imposed€onÏIAPs,€did€the€four€things€they€were€designed€to€accomplish:€€They€caused€Internet€Explorerððs€usageÏshare€to€surge;€they€caused€Navigatorððs€usage€share€to€plummet;€they€raised€Netscapeððs€own€costs;Ïand€they€sealed€off€a€major€portion€of€the€IAP€channel€from€the€prospect€of€recapture€by€Navigator.€ÏAs€an€ancillary€effect,€Microsoftððs€campaign€to€seize€the€IAP€channel€significantly€hampered€the€abilityÏof€consumers€to€make€their€choice€of€Web€browser€products€based€on€the€features€of€those€products.ÌØ€ØÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-†}ÝÚƒÚaÚ  Ú.à0  àÝ  ÝThe€Internet€Explorer€Access€Kit€Agreementsó ó݃-†}¿ÝÛ€ÛŒÐð#@ (#(# ÐŒÝ  Ýà  à248.à ` àIn€September€1996,€Microsoft€announced€the€availability€of€the€ð ðInternet€ExplorerÐ ä%4!" ÐAccess€Kit,ðð€or€ð ðIEAK.ðð€€By€simply€accessing€the€correct€page€on€Microsoftððs€Web€site€and€clickingÏon€a€box€to€indicate€agreement€with€the€license€terms,€any€IAP€could€download€the€IEAK,€whichÏincluded€a€copy€of€Internet€Explorer.€€With€their€technical€knowledge,€sophisticated€equipment,€andÐ À+'( Ðhigh„bandwidth€connections,€IAPs€found€it€very€convenient€to€download€Internet€Explorer€and€theÏIEAK€from€Microsoftððs€Web€site.€€Ìà  à249.à ` àUsing€the€IEAK,€an€IAP€could€create€a€distinctive€identity€for€its€service€in€as€little€as€aÐ ˜è Ðfew€hours€by€customizing€the€title€bar,€icon,€start€and€search€pages,€and€ð ðfavoritesðð€in€Internet€Explorer.€ÏThe€IEAK€also€made€the€installation€process€easy€for€IAPs.€€With€the€IEAK,€IAPs€could€avoidÏpiecemeal€installation€of€various€programs€and€instead€create€an€automated,€comprehensive€installationÏpackage€in€which€all€settings€and€options€were€pre„configured.€€In€addition€to€ease€of€customization€andÏinstallation,€the€IEAK€enabled€each€IAP€to€preset€the€default€home€page€so€that€customers€would€beÏtaken€to€the€IAPððs€Web€site€whenever€they€logged€onto€the€Internet.€€This€was€important€to€IAPsÏbecause€setting€the€userððs€home€page€to€the€IAPððs€Web€site€gave€the€IAPs€advertising€and€promotionalÏopportunities.€€Netscape,€by€contrast,€refused€to€allow€its€IAP€licensees€to€move€Navigatorððs€homeÏpage€from€Netscapeððs€NetCenter€portal€site.Ìà  à250.à ` àMany€IAPs€would€have€paid€for€the€right€to€distribute€Internet€Explorer.€€Indeed,Ð  p ÐNetscape€was€charging€IAPs€between€fifteen€and€twenty€dollars€per€copy€of€Navigator€theyÏdistributed.€€Because€of€the€features€and€convenience€it€offered,€the€IEAK€significantly€increased€theÏprice€that€IAPs€would€have€been€willing€to€pay.€€Nevertheless,€Microsoft€licensed€the€IEAK,€includingÏInternet€Explorer,€to€IAPs€at€no€charge.€€At€the€time€Microsoft€released€the€IEAK,€Netscape€did€notÏoffer€IAPs€an€analogous€tool.€€Although€Netscape€eventually€followed€Microsoftððs€lead€by€introducingÏa€tool€kit€similar€to€the€IEAK€known€as€Mission€Control,€that€kit€was€not€made€available€to€IAPs€untilÏJune€1997€ð"ð€a€full€nine€months€after€the€release€of€the€IEAK.€€Whereas€IAPs€could€obtain€the€IEAKÏfor€free,€Netscape€initially€charged€$1,995€for€each€copy€of€Mission€Control.Ð À+'( Ðà  à251.à ` àApproximately€2,500€IAPs€executed€an€electronic€copy€of€a€license€agreement€for€theÐ ° ÐIEAK.€€Included€in€that€number€were€the€eighty€IAPs€that€together€accounted€for€ninety„five€percent€ofÏall€Internet€access€subscribers€in€the€United€States.€€The€IAPs€that€executed€an€IEAK€licenseÏagreement€agreed€to€make€Internet€Explorer€their€ð ðpreferredðð€browsing€software.€€The€term€ð ðpreferredððÏwas€not€defined€in€the€license,€and€Microsoft€did€not€investigate€the€extent€to€which€Internet€ExplorerÏwas€in€fact€enjoying€ð ðpreferredðð€status€in€the€client€software€of€its€IEAK€licensees.€€In€fact,€other€than€toÏprovide€information€and€respond€to€technical€questions,€Microsoft€made€no€effort€to€maintain€regularÏdirect€contact€with€the€vast€majority€of€the€IAPs€that€had€executed€licenses.Ìà  à252.à ` àWhether€or€not€IEAK€licensees€actually€gave€Internet€Explorer€preferred€status,Ð P  ÐMicrosoftððs€decision€to€license€Internet€Explorer€and€the€IEAK€to€IAPs€at€no€charge€beguiled€manyÏsmall€ISPs€that€otherwise€would€not€have€done€so€into€distributing€Internet€Explorer€to€theirÏsubscribers.€€By€giving€up€the€opportunity€to€charge€for€Internet€Explorer,€and€also€by€developing€theÏIEAK€at€substantial€cost€and€offering€it€at€no€charge,€Microsoft€thus€increased€the€flow€of€InternetÏExplorer€through€the€crucial€IAP€channel.ÌÌÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-†ôÝÚƒÚbÚ  Ú.à0  àÝ  ÝThe€Referral€Server€Agreementsó ó݃-†ô6ÝÛ€ÛŒÐü!L(#(# ÐŒÝ  Ýà  à253.à ` àIn€the€late€summer€of€1996,€at€around€the€time€that€it€announced€the€availability€of€theÐ ð#@  ÐIEAK,€Microsoft€also€introduced€the€Internet€Connection€Wizard€(ð ðICWðð)€as€a€feature€in€Windows€95ÏOSR€2.€€If€a€user€clicked€on€the€ICW€icon€appearing€on€the€Windows€95€desktop,€the€program€wouldÏautomatically€dial€into€a€computer€maintained€by€Microsoft€called€the€Windows€Referral€Server.€€TheÏReferral€Server€would€then€transmit€to€the€userððs€computer€a€list€of€IAPs€that€provided€connections€toÐ À+'( Ðthe€Internet€in€the€userððs€geographic€locale.€€Included€in€this€list€would€be€information€about€each€IAPððsÏservice,€including€its€prices.€€If€the€user€then€indicated€a€desire€to€sign€up€for€one€of€the€listed€IAPs€byÏclicking€on€the€appropriate€entry,€the€user€would€be€connected€to€an€IAP„maintained€server€that€wouldÏautomatically€configure€the€userððs€PC€to€work€properly€with€the€IAP€service.Ìà  à254.à ` àFor€several€reasons,€IAPs€viewed€inclusion€in€the€Windows€95€Referral€Server€as€aÐ € Ð Ðvaluable€form€of€promotion.€€First,€the€ICW€icon€appeared€prominently€on€the€desktop€of€every€PCÏrunning€Windows€95€(from€OSR€2€onwards),€which,€by€the€middle€of€1996,€accounted€for€the€vastÏmajority€of€all€new€PCs€being€shipped.€€Because€Microsoft€prohibited€OEMs€from€removing€any€of€theÏicons€that€it€placed€on€the€Windows€desktop,€IAPs€knew€that€the€ICW€would€confront€all€users€ofÏWindows€95€PCs€the€first€time€they€turned€on€their€systems.€€Second,€inclusion€in€the€Referral€ServerÏwas€a€highly€focused€form€of€promotion,€because€the€IAP€list€provided€by€the€Referral€ServerÏpresented€itself€to€users€who€had€already€indicated€some€interest€in€signing€up€for€Internet€access.€ÏThird,€the€easy„to„use€features€of€the€ICW€heightened€the€probability€that€a€user€who€started€using€theÏprogram€would€complete€the€process€of€subscribing€to€an€IAP.€€Finally,€inclusion€in€the€Referral€ServerÏwas€a€relatively€inexpensive€means€of€distribution€because,€unlike€ð ðcarpet€bombingðð€with€CD„ROMs,€itÏdid€not€require€the€production€and€dissemination€of€anything€tangible.Ìà  à255.à ` àDespite€the€value€that€IAPs€attached€to€placement€in€the€Windows€95€Referral€Server,Ð ð#@  ÐMicrosoft€elected€to€charge€those€that€it€granted€placement€a€low€bounty€price€that€merely€went€to€payÏdown€the€cost€of€maintaining€the€necessary€server€computers€and€leasing€the€network€they€ran€on.€ÏAlthough€it€could€have€been€exchanged€for€large€bounties€from€IAPs,€Microsoft€decided€to€exchangeÏplacement€in€the€Referral€Server,€along€with€other€valuable€consideration,€for€the€agreement€of€theÐ À+'( Ðselected€IAPs€to€promote€and€distribute€Internet€Explorer€preferentially€over€Navigator€and€to€convertÏexisting€subscribers€from€Navigator€to€Internet€Explorer.Ìà  à256.à ` àBetween€July€1996€and€September€1997,€Microsoft€entered€into€Referral€ServerÐ ˜è Ðagreements€with€fourteen€IAPs.€€These€were€AOL,€AT&T€WorldNet,€Brigadoon,€Concentric,€Digex,ÏEarthLink,€GTE,€IDT,€MCI,€MindSpring,€Netcom,€Prodigy,€Sprint,€and€Spry.€€Three€of€theseÏcompanies€did€not€take€the€technical€steps€necessary€to€appear€in€the€Referral€Server€even€though€theyÏhad€signed€agreements€with€Microsoft.€€Brigadoon€failed€to€take€those€steps€because€it€filed€forÏbankruptcy.€€For€its€part,€Digex€left€the€ISP€business€to€focus€exclusively€on€Web€hosting.€€GTE,€on€theÏother€hand,€decided€to€enter€promotion€agreements€directly€with€OEMs€rather€than€abide€by€theÏconditions€Microsoft€attached€to€inclusion€in€the€Referral€Server.€€Although€AOL€eventually€entered€aÏlisting€into€the€Referral€Server,€it€waited€until€November€1998,€after€the€release€of€Windows€98.€€TheÏremaining€IAPs€in€the€Windows€95€Referral€Server€represented€ten€of€the€top€fifteen€Internet€accessÏproviders€in€the€North€America.Ìà  à257.à ` àPursuant€to€the€terms€of€the€agreements€it€signed€with€these€ten€IAPs,€MicrosoftÐ d Ðprovided€each€with€a€listing€in€the€Windows€95€Referral€Server€and€mentioned€them€in€press€releasesÏand€marketing€activities€relating€to€the€ICW.€€Microsoft€also€licensed€Internet€Explorer€to€them€at€noÏcharge,€and€assisted€them€in€customizing€Internet€Explorer€for€use€with€their€services.€€In€exchange,€theÏlisted€IAPs€agreed€to€offer€Internet€Explorer€as€the€ð ðstandard,ðð€ð ðdefault,ðð€or€ð ðpreferredðð€browsingÏsoftware€with€their€services.€€For€example,€Microsoftððs€agreement€with€EarthLink€required€it€to€ð ð[o]fferÏâ âthe€Microsoft€Internet€Explorer€as€the€standard€web€browser€for€[EarthLinkððs]€ISP€Service.ðð€€Ð Ì)%& Ðà  à258.à ` àThe€agreements€also€imposed€several€restrictions€on€the€ability€of€the€IAPs€in€theÐ ° Ðâ âReferral€Server€to€promote€and€distribute€non„Microsoft€browsing€software.€€First,€the€agreementsÏrequired€the€IAPs€to€limit€their€promotion€of€browser€products€other€than€Internet€Explorer.€€ForÏexample,€the€agreements€prohibited€the€IAPs€from€providing€any€links€or€other€promotions€forÏNetscape€on€their€servicesðð€home€pages.€€In€fact,€an€IAP€listed€in€the€Referral€Server€was€notÏpermitted,€either€in€its€Referral€Server€entry€or€elsewhere,€to€express€or€imply€to€its€subscribers€thatÏthey€could€use€a€browser€other€than€Internet€Explorer€with€the€IAPððs€service.€€Second,€the€agreementsÏprohibited€the€ten€IAPs€from€providing€non„Microsoft€browsing€software€to€their€customers€unless€aÏsubscriber€specifically€requested€it.€€Third,€the€agreements€gave€Microsoft€the€right€to€remove€from€theÏReferral€Server€any€IAP,€that€in€two€consecutive€calendar€quarters,€allowed€non„Microsoft€browsingÏsoftware€to€climb€above€a€specific€percentage€of€all€browsing€software€distributed€by€that€IAP.€€Thus,Ïeven€if€the€IAP€ensured€that€all€users€subscribing€to€its€service€through€the€Internet€Connection€WizardÏreceived€only€Internet€Explorer€with€their€subscriptions,€Microsoft€could€nevertheless€remove€the€ISPÏfrom€the€Referral€Server€if€copies€of€Navigator€made€up€more€than€the€specified€percentage€of€theÏbrowsing€software€that€the€IAP€distributed€through€all€sub„channels.€€Twenty„five€percent€was€theÏfigure€specified€in€most€of€the€agreements.€€For€Netcom€and€Sprint,€the€figure€was€fifty€percent,€whileÏfor€IDT€it€was€fifteen.Ìà  à259.à ` àIn€addition€to€conditioning€placement€in€the€Referral€Server€on€an€IAPððs€undertaking€toÐ ä%4!" Ðlimit€its€promotion€and€distribution€of€non„Microsoft€browsing€software,€Microsoft€through€its€ReferralÏServer€agreements€exchanged€valuable€consideration€for€the€commitment€of€the€ten€IAPs€to€convertÏexisting€subscribers€from€Navigator€to€Internet€Explorer.€€Microsoft€also€compensated€them€forÐ À+'( Ðemploying€Internet€Explorer„specific€technologies€whose€dissemination€would€encourage€theÏdevelopers€of€network„centric€applications€to€focus€on€APIs€controlled€by€Microsoft,€as€opposed€toÏNetscape€or€Sun.€€For€example,€in€exchange€for€Netcomððs€commitment€to€offer€deals€to€its€customersÏencouraging€them€to€upgrade€their€software€to€the€newest€version€that€bundled€Internet€Explorer,ÏMicrosoft€subtracted€nine€dollars€from€the€referral€fee.€€Microsoft€also€deposited€one€dollar€into€a€co„¼marketing€fund€for€each€Netcom€subscriber€who€actually€upgraded€to€client€software€that€bundledÏInternet€Explorer.€€Ìà  à260.à ` àWhere€the€agreement€with€Microsoft€required€the€IAP€to€abandon€a€distributionÐ \¬  Ðagreement€already€entered€with€Netscape,€Microsoft€compensated€the€IAP€with€additionalÏconsideration.€€For€instance,€in€response€to€a€representation€from€MCI€that€it€had€already€committed€toÏpay€Netscape€between€five€and€ten€million€dollars€for€Web€browsing€software,€Microsoft€agreed€toÏgrant€MCI€a€credit€of€five€dollars€toward€a€co„marketing€fund€(not€to€exceed€five€million€dollars)€forÏeach€copy€of€Internet€Explorer€that€MCI€distributed€to€an€MCI€Internet€access€customer€who€had€notÏalready€received€a€copy.€€Finally,€Microsoft€offered€yet€further€reductions€in€referral€fees€to€the€IAPsÏusing€Microsoft„controlled€technologies€likely€to€stimulate€developers€to€focus€their€attention€onÏWindows„specific€software€interfaces€rather€than€the€cross„platform€ones€provided€by€Netscape€andÏSun.€€For€example,€Microsoft€offered€to€reduce€EarthLinkððs€per„copy€referral€fee€by€ten€dollars€inÏexchange€for€EarthLinkððs€use€of€at€least€two€ActiveX€controls€in€the€design€of€its€home€page€and€theÏuse€of€Microsoft€FrontPage€server€extensions€on€its€Web€hosting€servers.Ìà  à261.à ` àMicrosoft€could€have€covered€the€cost€of€developing€and€maintaining€the€ICW€and€theÐ Ì)%& ÐWindows€Referral€Server,€and€even€made€a€profit,€by€charging€higher€referral€fees€than€it€did€to€theÐ À+'( Ðfavored€IAPs.€€Instead,€Microsoft€bartered€away€so€much€of€the€referral€fees€it€otherwise€could€haveÏcharged€that€the€costs€of€running€the€Windows€Referral€Server€have€thus€far€exceeded€the€paymentsÏMicrosoft€has€received€from€the€favored€IAPs.€€Microsoft€readily€made€this€sacrifice€in€order€to€induceÏthe€important€IAPs€to€take€actions€that€aided€Microsoftððs€effort€to€exclude€Navigator€from€the€IAPÏchannel.Ìà  à262.à ` àMicrosoftððs€motivation€for€the€limits€it€placed€on€the€distribution€of€non„MicrosoftÐ tÄ  Ðbrowsing€software€by€IAPs€in€the€Windows€95€Referral€Server€could€not€have€been€simply€a€desire€toÏensure€that€IAPs€did€not€promote€competing€browsing€software€to€subscribers€acquired€withÏMicrosoftððs€help.€€The€agreements€gave€Microsoft€the€right€to€dismiss€an€IAP€that€either€told€itsÏsubscribers€they€could€choose€Navigator€or€distributed€too€many€copies€of€non„Microsoft€browserÏproducts.€€This€was€true€even€if€the€IAP€never€mentioned€Navigator€in€its€Referral€Server€entry€andÏdistributed€nothing€but€Internet€Explorer€to€the€new€subscribers€it€garnered€from€the€ICW.€€In€light€ofÏthat€fact,€the€Windows€95€Referral€Server€agreements€emerge€as€something€very€different€from€typicalÏcross„marketing€arrangements.€€Furthermore,€while€facilitating€for€consumers€the€process€of€connectingÏto€the€Internet€may€have€been€one€motivation€for€developing€the€Internet€Connection€Wizard,€thatÏmotivation€cannot€explain€the€exclusionary€terms€in€the€Referral€Server€agreements.€€After€all,Ïcontractually€limiting€the€distribution€of€non„Microsoft€browsing€software€by€IAPs€did€nothing€to€helpÏconsumers€gain€easy€access€to€the€Internet.€€The€real€motivation€behind€the€exclusionary€terms€in€theÏReferral€Server€agreements€was€Microsoftððs€conviction€that€even€if€IAPs€were€compelled€to€promoteÏand€distribute€Internet€Explorer,€the€majority€of€their€subscribers€would€nevertheless€elect€to€useÏNavigator€if€the€IAPs€made€it€readily€available€to€them.€€Microsoft€therefore€paid€a€high€price€to€induceÐ À+'( Ðthe€most€popular€IAPs€to€encourage€their€customers€to€use€Internet€Explorer€and€discourage€them€fromÏusing€Navigator.Ìà  à263.à ` àAbsent€the€conditions€Microsoft€placed€on€inclusion€in€the€Referral€Server,€the€IAPsÐ ˜è Ðwould€have€had€no€reason€to€limit€the€percentage€of€subscribers€that€used€one€particular€browser€orÏanother.€€As€Cameron€Myhrvold€explained€to€colleagues€within€Microsoft€in€April€1997,€ð ðISPs€areÏagnostic€on€the€browser.€€It€is€against€their€nature€to€favor€a€browser€or€even€a€platform.€€This€has€beenÏdamn€hard€for€us€to€influence.ðð€€In€fact,€Myhrvold€told€the€same€colleagues€that€he€ð ðhad€a€hard€timeÏguiding€the€ISPs€to€IE€loyalty€even€when€I€make€them€sign€explicit€terms€and€conditions€in€a€legalÏcontract.ððÌà  à264.à ` àMicrosoft€monitored€the€extent€of€compliance€of€IAPs€in€the€Referral€Server€with€theÐ D” Ðshipment€restrictions€contained€in€their€agreements.€€It€did€this€by€periodically€asking€each€of€the€tenÏIAPs€to€send€Microsoft€estimates€of€the€number€of€copies€of€Internet€Explorer€ð"ð€and€non„MicrosoftÏbrowsing€software€ð"ð€they€were€shipping.€€When,€from€time€to€time,€various€IAPs€in€the€Windows€95ÏReferral€Server€(specifically€Netcom,€Concentric,€and€EarthLink)€fell€below€the€shipment€quotasÏspecified€in€their€agreements€with€Microsoft,€executives€at€Microsoft€reacted€by€contacting€the€derelictÏcompanies€and€urging€them€to€meet€their€obligations.€€Concentric€and€Earthlink€eventually€(by€MayÏ1998,€if€not€sooner)€reduced€their€Navigator€shipments€enough€to€bring€them€below€the€requiredÏpercentage.€€Microsoft€never€formally€removed€an€IAP€from€the€Referral€Server.€€€For€a€time€after€theÏrelease€of€Internet€Explorer€4.0,€however,€no€entry€for€Netcom€appeared€in€the€new€version€of€ReferralÏServer.€€This€was€at€least€in€part€due€to€Netcomððs€failure€to€ensure€that€Internet€Explorer€accounted€forÏfifty€percent€of€the€browsing€software€it€shipped.€€Ð À+'( Ðà  à265.à ` àIn€addition€to€failing,€for€a€time,€to€meet€the€required€shipment€quotas,€Concentric€andÐ ° ÐEarthLink€occasionally€promoted€Navigator€in€ways€that€were€arguably€prohibited€by€the€ReferralÏServer€agreements.€€Despite€their€delinquency,€Microsoft€never€removed€Concentric€and€EarthLinkÏfrom€the€Referral€Server.€€Of€much€less€concern€to€Microsoft€than€the€shipment€and€promotion€ofÏNavigator€by€IAPs€having€signed€Referral€Server€agreements€was€the€fact€that€Concentric€andÏEarthLink,€along€with€Netcom€and€three€of€the€other€IAPs€in€the€Windows€95€Referral€Server,€alsoÏappeared€in€Netscapeððs€referral€server.€€This€did€not€violate€either€the€letter€or€the€spirit€of€theirÏagreements€with€Microsoft,€for€while€the€agreements€prohibited€the€IAPs€in€the€Windows€95€ReferralÏServer€from€promoting€Navigator,€they€did€not€purport€to€hinder€Netscape€in€promoting€those€IAPs.€ÏAt€any€rate,€Microsoft€did€not€have€reason€to€be€concerned€with€the€appearance€of€its€IAP€partners€inÏNetscapeððs€referral€server,€whose€main€exposure€was€to€existing€Navigator€users€interested€in€switchingÏtheir€IAPs.€€A€listing€in€Netscapeððs€referral€server€did€not€help€Netscape€get€its€software€on€usersððÏsystems,€and€pursuant€to€their€agreements€with€Microsoft,€the€six€ISPs€in€both€Microsoftððs€andÏNetscapeððs€referral€servers€were€actually€placing€Navigator€on€far€fewer€usersðð€systems€than€theyÏwould€have€in€the€absence€of€their€agreements€with€Microsoft.Ìà  à266.à ` àIn€reaction€to€Microsoftððs€Referral€Server€agreements,€Netscape€entered€intoÐ ü!L Ðagreements€of€its€own€with€five€of€the€Regional€Bell€Operating€Companies€(RBOCs).€€Under€theÏNetscape€agreements,€the€RBOCs€agreed€to€make€Navigator€their€default€Web€browsing€software€inÏall€cases,€except€those€in€which€subscribers€affirmatively€requested€other€browsing€software.€€InÏexchange,€Netscape€agreed€to€list€the€RBOCs€first€among€the€IAPs€included€in€Netscapeððs€referralÏserver.€€In€contrast€to€Microsoftððs€agreements,€Netscapeððs€agreements€with€the€RBOCs€imposed€noÐ À+'( Ðrestrictions€on€their€ability€to€distribute€other€browsing€software,€such€as€Internet€Explorer,€whether€inÏresponse€to€customer€requests€or€otherwise.€€Furthermore,€Netscapeððs€contracts€with€the€RBOCsÏrequired€them€to€set€Navigator€as€the€default€only€so€long€as€AT&T€and€MCI€were€both€restricted€byÏtheir€agreements€with€Microsoft€from€providing€Navigator€to€their€customers€on€par€with€InternetÏExplorer.€€In€any€event,€the€RBOCs€currently€deliver€Internet€access€to€less€than€five€percent€of€theÏInternet€access€subscribers€in€North€America.Ìà  à267.à ` àMicrosoftððs€Windows€95€Referral€Server€agreements€were€of€relatively€short€duration.€Ð h¸  ÐFor€example,€Microsoftððs€agreement€with€EarthLink€provided€that€it€would€expire€two€years€from€itsÏsigning€in€August€1996€unless€either€party€elected€to€terminate€it€sooner,€and€both€Microsoft€andÏEarthLink€were€free€to€terminate€the€agreement€for€any€reason€on€thirty€daysðð€written€notice.€€The€otherÏReferral€Server€agreements€were€similarly€short€in€term.€Ìà  à268.à ` àIn€April€1998,€coincident€with€rising€public€criticism,€the€impending€appearance€of€BillÐ ,| ÐGates€before€a€Congressional€panel€on€competition€in€the€computer€industry,€and€the€imminent€filing€ofÏthese€lawsuits,€Microsoft€unilaterally€waived€the€most€restrictive€provisions€in€the€Windows€95€ReferralÏServer€agreements.€€Specifically,€Microsoft€waived€the€provisions€that€restricted€the€IAPsðð€ability€toÏdistribute€non„Microsoft€Web€browsing€software.€€With€respect€to€promotion,€the€revised€agreementsÏmerely€required€the€IAPs€to€promote€Internet€Explorer€at€least€as€prominently€as€they€promoted€non„¼Microsoft€browsers.€€Notably,€however,€the€agreements€still€required€the€IAPs€to€make€InternetÏExplorer€their€default€browser.€€Ìà  à269.à ` àBy€the€end€of€September€1998,€all€of€the€Windows€95€Referral€Server€agreements€hadÐ Ì)%& Ðexpired€by€their€own€terms.€€Microsoftððs€Windows€98€Referral€Server€agreements€do€not€contain€anyÐ À+'( Ðprovisions€requiring€that€Internet€Explorer€make€up€any€particular€percentage€of€the€IAPsðð€shipments.€ÏFurthermore,€the€Windows€98€Referral€Server€agreements€offer€no€discounts€on€the€referral€feesÏpredicated€on€the€IAPsðð€adoption€of€any€particular€Microsoft€technology€or€licensing€any€MicrosoftÏproduct.€€With€regard€to€promotion,€the€agreements€require€only€that€the€IAPs€promote€InternetÏExplorer€no€less€favorably€than€non„Microsoft€Web€browsing€software.€€Still,€for€those€IAPsÏconcerned€with€the€costs€associated€with€supporting€two€browser€products,€this€parity€requirement€isÏenough€to€compel€them€not€to€not€make€Navigator€readily€available€to€their€subscribers.€€The€newÏagreements€have€a€one„year€term€and€are€terminable€at€will€by€the€IAP€on€ninety€daysðð€notice.Ìà  à270.à ` àIAPs€no€longer€value€placement€in€the€Windows€Referral€Server€as€much€as€they€did€inÐ P  Ð1996.€€For€one€reason,€the€ICW€has€apparently€not€been€responsible€for€as€many€new€IAPÏsubscriptions€as€either€Microsoft€or€the€IAPs€anticipated.€€In€fact,€from€the€third€quarter€of€1996Ïthrough€the€third€quarter€of€1998,€only€2.1%€of€new€users€of€the€Internet€became€IAP€subscribersÏthrough€the€Windows€Referral€Server.€€Partially€on€account€of€this€realization,€Microsoft€began€in€theÏspring€of€1998€to€surrender€significant€control€over€the€Internet€sign„up€process€to€OEMs.€€AsÏdescribed€above,€Microsoft€gave€the€top€fifty€OEMs€in€the€world€the€right€to€select€both€the€IAPs€(upÏto€five)€that€appear€in€the€Windows€98€Referral€Server€on€the€PC€systems€they€sell€and€to€determineÏthe€order€in€which€those€IAPs€appear.€€Microsoft€also€permits€the€fifty€OEMs€to€keep€any€bounties€thatÏthe€IAPs€pay€them€for€inclusion€in€the€Referral€Server.€€The€OEMs€simply€pay€Microsoft€a€nominal€feeÏ(a€flat€fee€of€approximately€$10,000€plus€thirty€cents€per€subscriber)€to€defray€the€costs€of€operating€theÏReferral€Server€program.€€Furthermore€(as€is€also€discussed€above),€Microsoft€has€allowed€seven€ofÏthe€highest„volume€OEMs€to€supplant€the€ICW€altogether.€€Ð À+'( Ðà  à271.à ` àBy€both€lifting€restrictions€in€its€agreements€and€ceding€control€over€the€IAP€sign„upÐ ° Ðprocess€to€OEMs,€in€the€spring€of€1998,€Microsoft€relaxed€the€strictures€that€it€had€imposed€in€the€fallÏof€1996€on€the€distribution€and€promotion€of€Web€browsing€software€by€the€most€popular€IAPs.€€In€theÏyear„and„a„half€that€they€were€in€full€force,€however,€the€restrictive€terms€in€the€Referral€ServerÏagreements€induced€the€major€IAPs€to€customize€their€client€software€for€Internet€Explorer,€gear€theirÏpromotional€and€marketing€activities€to€Microsoftððs€technologies,€and€convert€substantial€portions€ofÏtheir€installed€bases€from€Navigator€to€Internet€Explorer.€€They€may€have€welcomed€more€flexibility€toÏdistribute€Navigator€to€those€subscribers€that€expressed€demand€for€it,€but€they€had€no€incentive€toÏlaunch€an€expensive€campaign€to€reverse€the€tide€that€Microsoftððs€restrictions€had€already€generated.€ÏConsequently,€few€ISPs€have€responded€to€Microsoftððs€contractual€dispensations€by€increasingÏsignificantly€their€distribution€and€promotion€of€Navigator.€€Furthermore,€one€of€the€reasons€MicrosoftÏfelt€comfortable€relaxing€the€controls€on€IAPs€in€the€spring€of€1998€was€that€it€had€achieved€ð"ð€andÏplanned€to€maintain€ð"ð€control€over€the€distribution€and€promotion€of€Web€browsing€software€by€AOLÏand€the€other€major€OLSs,€whose€combined€subscriber€base€comprised€most€of€North€AmericaððsÏInternet€users.ÌÌÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-† eÝÚƒÚcÚ  Ú.à0  àÝ  ÝThe€Online€Services€Folder€Agreementsó ó݃-† eOeÝÛ€ÛŒÐð#@ (#(# ÐŒÝ  Ýà  à€272.à ` àIn€late€1995€and€early€1996,€senior€executives€at€Microsoft€recognized€that€AOLÐ ä%4!" Ðaccounted€for€a€substantial€portion€of€all€existing€Internet€access€subscriptions€and€that€it€attracted€aÏvery€large€percentage€of€new€IAP€subscribers.€€Indeed,€AOL€was€and€is€the€largest€and€most€importantÏIAP.€€The€Microsoft€executives€thus€realized€that€if€they€could€convince€AOL€to€distribute€InternetÐ À+'( ÐExplorer€with€its€client€software€instead€of€Navigator,€Microsoft€would€ð"ð€in€a€single€coup€ð"ð€capture€aÏlarge€part€of€the€IAP€channel€for€Internet€Explorer.€€In€the€early€spring€of€1996,€therefore,€MicrosoftÏexchanged€favorable€placement€on€the€Windows€desktop,€as€well€as€other€valuable€consideration,€forÏAOLððs€commitment€to€distribute€and€promote€Internet€Explorer€to€the€near€exclusion€of€Navigator.€ÏAOLððs€acceptance€of€this€arrangement€has€caused€an€enormous€surge€in€Internet€Explorerððs€usageÏshare€and€a€concomitant€decline€in€Navigatorððs€share.€€To€supplement€the€effects€of€the€AOL€deal,ÏMicrosoft€entered€similar€agreements€with€other€OLSs.€€The€importance€of€these€arrangements€toÏMicrosoft€is€evident€in€the€fact€that,€in€contrast€to€the€restrictive€terms€in€the€Windows€Referral€ServerÏagreements,€Microsoft€has€never€waived€the€terms€that€require€the€OLSs€to€distribute€and€promoteÏInternet€Explorer€to€the€near€exclusion€of€Navigator.ÌØ€ ØÝ‚"/~ÿÝÝ  ÝØ€Øò òà  àà ` àà ¸ àà  àÝ‚"/~ÃkÝÚƒ ÚiÚ  Ú.à0 h àÝ  ÝAOLó ó݃"/~Ãk-lÝÛ€ ÛŒÐ8ˆh(#h(# ÐŒÝ  Ýà  à273.à ` àPrior€to€1995,€OLS€subscribers€used€proprietary€access€software€to€view€only€theirÐ ,| ÐOLSððs€specialized€content.€€Beginning€in€1994,€however,€the€public€became€increasingly€interested€inÏaccessing€information€on€the€Web.€€So€to€keep€from€losing€subscribers€and€to€attract€new€ones,€OLSsÏupgraded€their€services€to€provide€access€to€the€Web.€€In€November€1994,€for€example,€AOLÏpurchased€BookLink€and€incorporated€its€Web€browsing€software€into€AOLððs€proprietary€accessÏsoftware€to€enable€AOLððs€subscribers€to€access€and€view€Web€content.Ìà  à274.à ` àWhile€public€awareness€of€the€Web€was€taking€hold,€companies€like€Netscape€andÐ ä%4!" ÐMicrosoft€were€hard€at€work€developing€Web€browsing€software.€€By€the€fall€of€1995,€a€number€ofÏOLSs,€including€AOL,€had€decided€not€to€devote€the€considerable€resources€that€would€have€beenÏrequired€to€keep€up€with€this€rapid€pace€of€innovation.€€They€chose€instead€to€license€state„of„the„artÐ À+'( ÐWeb€browsing€technology€from€a€separate€supplier.€€Microsoft€saw€AOL,€with€its€subscriber€base€thenÏapproaching€five€million,€as€a€potential€breakthrough€opportunity€ð"ð€a€way€for€Microsoft€quickly€toÏobtain€credibility€in€Web€browsing€technology€as€well€as€usage€share€for€the€current€version€of€itsÏbrowsing€software,€Internet€Explorer€3.0.Ìà  à275.à ` àIn€November€1995,€David€Cole€of€AOL€advised€Pete€Higgins€of€Microsoft€that€AOLÐ € Ð Ðwas€looking€for€Web€browsing€software€to€license€and€incorporate€into€future€versions€of€itsÏproprietary€access€software.€€Bill€Gates€and€AOLððs€Chairman,€Steve€Case,€subsequently€spoke€severalÏtimes€on€the€telephone.€€In€those€conversations,€Gates€urged€that€AOL€representatives€meet€withÏMicrosoft€technical€personnel€in€order€to€get€a€better€sense€of€the€quality€and€features€of€InternetÏExplorer€3.0.€€For€his€part,€Case€told€Gates€that€he€wanted€Microsoft€to€include€AOLððs€client€softwareÏwith€Windows€such€that€AOL€received€the€same€desktop€promotion€that€MSN€enjoyed.€€GatesÏinsisted€that€such€favorable€treatment€of€AOL€within€Windows€was€out€of€the€question.Ìà  à276.à ` àLower€down€in€Microsoftððs€chain€of€command,€executives€took€issue€with€GatesððÐ  p Ðreluctance€to€grant€AOL€favorable€placement€in€Windows.€€In€October€1995,€before€Gates€and€CaseÏbegan€talking,€a€group€of€Microsoft€executives€prepared€for€Gates€a€memorandum€on€the€companyððsÏInternet€Explorer€efforts€entitled,€ð ðHow€to€Get€to€30%€Share€in€12€Months.ðð€€The€executives€wrote€that€ÌÓÓÓ XÓÓ XÓwe€need€to€remove€barriers€to€browser€adoption€by€Online€Services€and€InternetÏAccess€Providers.€€Today€MSN€is€an€access€service€.€.€.€,€an€online€service€.€.€.€,€andÏan€Internet€site€.€.€.€;€in€other€words,€it€competes€with€everyone.€€By€bundling€MSN€inÏthe€Windows€box,€we€are€threatening€ISVððs€in€each€of€these€areas,€who€in€turn€have€noÏincentive€to€promote€our€Internet€Browser.ÌÌÓ X*wÓÓ XwÓÓ wÓà  à277.à ` àOne€of€the€proposals€the€executives€put€forward€was€that€Microsoft€ð ðOpen€Up€theÐ Ì)%& ÐWindows€Box.ðð€€In€other€words,€the€executives€believed€that,€in€exchange€for€favorable€treatment€ofÐ À+'( ÐInternet€Explorer,€Microsoft€should€include€the€client€software€of€IAPs€in€Windows€and€give€thoseÏservices€prominent€placement€on€the€desktop,€even€if€such€placement€drew€attention€away€from€MSN.€ÏOver€the€months€that€followed,€senior€Microsoft€executives€came€to€the€conclusion€that€opening€up€theÏWindows€box€to€MSNððs€competitors€was€a€necessary€price€to€pay€for€increasing€Internet€ExplorerððsÏshare€of€browser€usage.Ìà  à278.à ` àCase€ultimately€agreed€to€visit€Microsoftððs€Redmond€campus€in€January€1996.€€InÐ tÄ  Ðpreparation€for€that€meeting,€Microsoft€purchased€PC€systems€from€five€different€OEMs€(Compaq,ÏHewlett„Packard,€IBM,€Packard€Bell,€and€NEC)€at€retail€outlet€stores.€€When€they€turned€theseÏsystems€on,€employees€at€Microsoft€discovered€that€the€OEMs€were€already€shipping€AOLððs€softwareÏpre„installed€on€their€PCs€and€giving€the€AOL€service€more€prominent€placement€than€MSN€on€theÏWindows€desktop.€€From€the€fact€that€AOL€was€already€enjoying€broad€distribution€and€promotion€onÏthe€Windows€desktop€through€agreements€with€OEMs,€several€senior€Microsoft€executives,€inÏparticular€Paul€Maritz€and€Brad€Chase,€concluded€that€Microsoft€would€not€be€giving€up€all€that€much€ifÏit€traded€placement€on€the€Windows€desktop€for€AOLððs€commitment€to€promote€and€distribute€InternetÏExplorer.€€At€least€initially,€Gates€took€a€different€lesson€from€the€experiment€with€the€five€PC€systems.€ÏHe€seems€to€have€felt€that€Microsoft€should€react€not€by€ððopening€up€the€Windows€box,ðð€but€rather€byÏclamping€down€on€the€ability€of€OEMs€to€configure€the€Windows€desktop.€€Indeed,€the€discovery€thatÏOEMs€were€promoting€AOL€on€the€Windows€desktop€was€one€of€the€things€that€led€him€to€complainÏto€Joachim€Kempin€on€January€6,€1996€about€OEMs€that€were€bundling€non„Microsoft€InternetÏservices€and€software€and€displaying€it€on€their€PCs€ð ðin€a€FAR€more€prominent€way€than€MSN€or€ourÏInternet€browser.ððÐ À+'( Ðà  à279.à ` àCaseððs€insistence€that€Microsoft€promote€AOL€on€the€Windows€desktop€stemmedÐ ° Ðpartly€from€factors€other€than€the€additional€subscriptions€expected€to€come€from€the€OLS€folder.€ÏAfter€all,€AOL€already€enjoyed€distribution€agreements€with€major€OEMs€that€placed€an€AOL€icon€onÏthe€desktop€of€millions€of€new€PC€systems.€€But€given€that€its€OEM€agreements€tended€to€be€short„¼term€and€somewhat€tenuous,€and€considering€how€sensitive€the€OEMs€were€to€Microsoftððs€will,€AOLÏexecutives€realized€that€AOLððs€position€on€the€Windows€desktop€would€be€more€secure€if€it€met€withÏsome€degree€of€contractual€acquiescence€from€Microsoft.€€After€all,€whereas€Microsoft€retaliated€inÏsubtle€and€not„so„subtle€ways€against€OEMs,€such€as€IBM,€that€pre„installed€software€on€their€PCsÏthat€Microsoft€found€minatory,€it€pronounced€more€extreme€sanctions€against€OEMs,€such€as€Compaq,Ïthat€had€the€temerity€to€remove€icons€and€program€entries€from€the€Windows€desktop€that€MicrosoftÏhad€placed€there.€€Case€had€reason€to€see€value,€then,€in€shifting€AOL€from€being€a€source€of€softwareÏat€whose€promotion€Microsoft€took€umbrage€to€the€dispenser€of€software€whose€placement€on€theÏWindows€desktop€Microsoft€guaranteed.€€Moreover,€obtaining€Microsoftððs€commitment€to€include€theÏAOL€client€software€and€prominent€promotion€for€AOL€in€every€copy€of€Windows€would€place€AOLÏon€all€Windows€95€PC€systems,€including€those€sold€by€the€multitude€of€OEMs€whose€shipmentÏvolumes€were€too€low€to€warrant€the€negotiation€of€separate€distribution€deals.€€Furthermore,Ïplacement€on€the€desktop€in€some€fashion€would€improve€AOLððs€negotiating€position€when€it€askedÏindividual€large€OEMs€to€place€an€AOL€icon€directly€on€the€desktop€of€their€PC€systems.€€WhateverÏthe€reason,€and€irrespective€of€the€considerable€value€that€Microsoft€offered€AOL€apart€from€desktopÏâ âplacement,€Case€made€clear€to€Gates€his€sincere€conviction€that€AOL€would€not€recruit€its€subscribersÐ Ì)%& Ðto€Internet€Explorer€unless€Microsoft€included€AOLððs€client€software€in€Windows€and€promoted€AOLÏin€some€form€on€the€Windows€desktop.€€Ìâ âà  à280.à ` àFour€days€before€Case€was€due€to€arrive€at€Microsoftððs€campus,€Gates€sent€an€E„mailÐ ˜è Ðoutlining€Microsoftððs€goals€in€negotiating€a€deal€with€AOL€to€the€responsible€Microsoft€executives.€€HeÏwrote:ÌÓÓÓ XÓÓ XÓWhat€we€want€from€AOL€is€that€for€a€period€of€time€ð"ð€say€2€years€ð"ð€the€browserÏthat€they€give€out€to€their€customers€and€the€one€they€mention€and€put€on€their€pagesÏand€the€one€they€exploit€is€ours€and€not€Netscape[ðð]s.€€We€need€for€them€to€make€ourÏbrowser€available€as€the€browser€to€existing€and€new€customers.€€We€have€to€be€sureÏthat€we€donððt€allow€them€to€promote€Netscape€as€well.€€We€want€all€the€hits€that€comeÏoff€of€AOL€to€register€on€servers€as€our€browser€so€people€can€start€seeing€us€asÏhaving€measurable€browser€share.ÌÌÓ X@‹ÓÓ X2‹ÓÓ ‹ÓGates€understood€that€if€AOL€gave€assurance€that€its€subscribers€used€Internet€Explorer€whenÏbrowsing€the€Web,€the€measure€of€browser€usage€share€data€to€which€application€developers€paidÏmost€attention€ð"ð€òòi.e.óó,€server€ð ðhitðð€data€ð"ð€would€show€a€significant€rise€in€Internet€Explorerððs€usageÐ ,| Ðshare.€€Gates€also€realized€that€such€a€commitment€by€AOL€was€worth€seeking€even€if€it€lasted€for€onlyÏa€couple€of€years.Ìà  à281.à ` àOn€January€18,€1996,€Case€arrived€at€Microsoftððs€campus€with€three€other€AOLÐ  X Ðexecutives.€€During€the€first€meeting,€Microsoft€described€the€componentized€architecture€of€InternetÏExplorer€3.0€that€would€allow€AOL€to€embed€the€browsing€software€into€AOLððs€access€software.€€TheÏAOL€executives€viewed€componentization€as€a€highly€attractive€feature,€because€AOL€wanted€itsÏsubscribers€to€feel€they€were€using€an€AOL€service€whether€they€were€viewing€proprietary€AOLÏcontent€or€browsing€content€on€the€Web.€€In€fact,€Case€and€the€other€AOL€representatives€told€theirÏMicrosoft€hosts€that€AOL€wanted€total€control€over€the€ð ðbrowser€frameðð€(the€windows€in€which€WebÐ À+'( Ðcontent€is€displayed)€to€make€it€distinctive€to€AOL.€€In€other€words,€AOL€wanted€no€menus,€dialogÏboxes,€or€other€visible€signs€that€would€alert€AOL€users€to€the€fact€that€they€were€using€Web€browsingÏsoftware€supplied€by€a€company€other€than€AOL.€Ìà  à282.à ` àAt€the€end€of€the€meeting,€Case€expressly€acknowledged€the€attractiveness€ofÐ Œ Ü ÐMicrosoftððs€componentized€approach.€€Notably,€Netscape€had€not€yet€developed€a€componentizedÏversion€of€Navigator.€€Netscape€had€assured€AOL€that€it€would€do€so,€and€AOL€believed€thatÏNetscape€was€capable€of€eventually€making€good€on€its€pledge,€but€the€fact€remained€that€MicrosoftÏhad€already€completed€a€componentized€version€of€Internet€Explorer.€€Case€was€impressed€enoughÏwith€Internet€Explorer€3.0€that€when€he€returned€to€AOL€he€told€a€number€of€fellow€executives€that,Ïwhen€it€came€to€AOLððs€technical€considerations,€Microsoft€perhaps€enjoyed€an€edge€over€Netscape.€ÏStill,€the€AOL€executives€saw€Navigator€as€enjoying€better€brand€recognition€and€demonstratedÏsuccess€in€the€marketplace.Ìà  à283.à ` àLater€in€the€day€on€January€18,€Case€and€his€team€also€met€with€Gates,€Chase,€andÐ  p ÐChaseððs€direct€superior,€Brad€Silverberg,€to€discuss€the€business€aspects€of€a€potential€AOL„MicrosoftÏalliance.€€At€one€point€during€the€meeting,€Case€again€told€Gates€that€AOL€needed€inclusion€of€its€clientÏsoftware€in€Windows€and€prominent€placement€on€the€Windows€desktop€if€there€was€to€be€a€closerÏrelationship€between€the€two€companies.€€Gates€expressed€frustration€that€Case€continued€to€insist€onÏgetting€an€AOL€icon€on€the€Windows€desktop€in€addition€to€the€technology,€engineering€assistance,€andÏtechnical€support€Microsoft€was€offering€AOL.€€Despite€the€obvious€importance€that€Case€attached€toÏâ âdesktop€placement,€Gates€said€he€would€not€agree€to€that€condition.Ð Ì)%& Ðà  à284.à ` àA€week€after€the€January€18€meeting,€Chase€and€Silverberg€met€with€Gates.€€TheyÐ ° Ðâ âreiterated€that,€whether€Gates€liked€it€or€not,€an€AOL€icon€already€appeared€on€the€desktop€of€theÏmajor€OEMsðð€PCs.€€Given€that€òòfaitóó€òòaccomplióó,€they€argued,€Microsoft€would€gain€much€more€than€itÐ ˜è Ðwould€lose€by€agreeing€to€place€AOL€on€the€Windows€desktop€in€exchange€for€AOLððs€commitment€toÏpromote€and€distribute€Internet€Explorer.€€This€time,€Gates€agreed€to€give€AOL€some€sort€of€promotionÏin€Windows.€€He€continued€to€insist,€however,€that€Microsoft€not€place€an€AOL€icon€directly€on€theÏWindows€desktop.€€Rather,€Gates€agreed€to€include€AOL,€along€with€other€OLSs,€in€a€generic€ð ðOnlineÏServices€Folder,ðð€an€icon€for€which€would€reside€on€the€desktop.€€Since€MSN€enjoyed€a€branded€iconÏdirectly€on€the€desktop,€including€AOL€in€the€OLS€folder€would€maintain€its€inferior€status€toÏMicrosoftððs€service.Ìà  à285.à ` àStill,€Gates€viewed€the€concession€as€a€significant€one;€he€understood€that€it€meantÐ 8ˆ Ðundermining€MSNððs€success€in€the€pursuit€of€browser€share.€€As€he€told€an€interviewer€in€the€spring€ofÏ1996:ÌÓ XÓÓ XÓÓÓà ` àWe€have€had€three€options€for€how€to€use€the€ð ðWindows€Boxðð:€First,€we€canÏuse€it€for€the€browser€battle,€recognizing€that€our€core€assets€are€at€risk.€€Second,€weÏcould€monetize€the€box,€and€sell€the€real€estate€to€the€highest€bidder.€€Or€third,€weÏcould€use€the€box€to€sell€and€promote€internally€content€assets.€€I€recognize€that,€byÏchoosing€to€do€the€first,€we€have€leveled€the€playing€field€and€reduced€our€opportunitiesÏfor€competitive€advantage€with€MSN.ÓžÓ¹Ó X¦žÓÓ X´žÓà  à286.à ` àIn€light€of€AOLððs€success€in€having€gained€access€to€the€Windows€desktop€through€theÐ ê$: ! Ðexpedient€of€OEM€pre„installation€without€Microsoftððs€acquiescence,€Gatesðð€abiding€reluctance€to€grantÏAOL€access€through€Microsoftððs€front€door€may€have€stemmed€from€a€preoccupation€with€the€messageÏsuch€a€move€would€send€ð"ð€both€to€other€firms€in€the€computer€industry€and€to€consumers€decidingÐ Æ*&' Ðwhich€Internet€service€to€use.€€€Although€Gates€viewed€it€as€a€significant€concession,€he€acquiesced€inÏgranting€AOL€a€place€in€Windows€because€he€believed€that€Microsoft€could€not€pass€up€theÏopportunity€AOL€presented€to€drive€Internet€Explorerððs€usage€share€dramatically€upward€and€toÏexclude€Navigator€from€a€substantial€part€of€the€IAP€distribution€channel.Ìà  à287.à ` àThe€negotiations€between€Microsoft€and€AOL€proceeded€throughout€February€andÐ € Ð Ðearly€March€1996.€€On€March€11,€1996,€AOL€announced€that€it€had€selected€Navigator€as€the€primaryÏWeb€browsing€software€for€GNN,€which€was€AOLððs€basic€ISP€service€at€the€time€and€had€aÏsubscriber€base€only€two€to€three€percent€the€size€of€the€subscriber€base€of€AOLððs€flagship€onlineÏservice.€€The€GNN€arrangement€was€thus€eclipsed€the€following€day€when€AOL€announced€that€it€hadÏchosen€Internet€Explorer€as€the€primary€Web€browsing€software€for€its€flagship€service.Ìà  à288.à ` àUnder€the€March€12€agreement,€Microsoft€gave€AOL€access€to,€and€the€right€toÐ 8ˆ Ðmodify,€Internet€Explorer€source€code€in€order€to€customize€it€for€use€with€AOLððs€proprietary€accessÏsoftware.€€This€concession€went€far€beyond€the€freedom€that€the€IEAK€granted€IAPs€to€place€theirÏown€branding€on€Internet€Explorer.€€Microsoft€also€agreed€to€provide€AOL€with€significant€engineeringÏassistance€and€technical€support€to€enable€AOL€to€integrate€Internet€Explorer€into€AOLððs€proprietaryÏaccess€software.€€Further,€Microsoft€agreed€to€provide€AOL€with€certain€specific€features€of€InternetÏExplorer€3.0€by€precise€target€dates€and€to€ensure€that€future€versions€of€its€Web€browsing€softwareÏwould€possess€the€latest€available€Internet„related€technology€features,€capabilities,€and€standards.€ÏFinally,€Microsoft€granted€AOL€free€world„wide€distribution€rights€to€Internet€Explorer€and€agreed€toÏdistribute€AOLððs€proprietary€access€software€in€Windows€and€to€place€an€AOL€icon€in€the€OLS€folderÏon€the€Windows€desktop.Ð À+'( Ðà  à289.à ` àIn€return€for€Microsoftððs€commitments,€AOL€agreed€to€base€the€proprietary€accessÐ ° Ðsoftware€of€its€flagship€online€service€for€Windows€and€the€Mac€OS€on€Internet€Explorer€3.0€and€toÏupdate€that€software€as€newer€versions€of€Internet€Explorer€were€released.€€Another€provision€in€theÏagreement€provided€that€ð ðAOL€and€AOL€Affiliates€will,€with€respect€to€Third€Party€Browsers,Ïexclusively€promote,€market€and€distribute,€and€have€promoted,€marketed€and€distributed,€InternetÏExplorer€on€or€for€use€by€subscribers€to€the€AOL€Flagship€Service.ðð€€Specifically,€AOL€agreed€toÏensure€that€in€successive€six„month€periods,€neither€the€number€of€copies€of€non„Microsoft€WebÏbrowsing€software€it€shipped€(through€any€sub„channel,€including€GNN),€nor€the€number€of€newÏsubscribers€accessing€AOL€(including€GNN)€with€non„Microsoft€Web€browsing€software,€wouldÏexceed€fifteen€percent€of€the€total€number€of€copies€of€proprietary€access€software€that€AOLÏdistributed€through€any€channel€(òòi.e.óó,€through€the€Windows€desktop€or€otherwise).€€AOL€retained€theÐ 8ˆ Ðright€to€distribute€non„Microsoft€Web€browsing€software€to€subscribers€who€affirmatively€requested€it,Ïas€long€as€doing€so€did€not€did€not€raise€the€relevant€shipment€quotients€above€fifteen€percent.€€AOLÏalso€retained€the€right€to€provide€a€link€within€its€service€through€which€its€subscribers€could€reach€aÏWeb€site€from€which€they€could€download€a€version€of€Navigator€customized€for€the€AOL€service.€€AtÏthe€same€time,€however,€the€agreement€prohibited€AOL€from€expressing€or€implying€to€subscribers€orÏprospective€subscribers€that€they€could€use€Navigator€with€AOL.€€Nor€did€it€allow€AOL€to€include,€onÏits€default€page€or€anywhere€else,€instructions€telling€subscribers€how€to€reach€the€Navigator€downloadÏsite.€€In€any€event,€as€the€Court€has€found€above,€downloading€large€programs€over€the€InternetÏinvolves€considerable€time,€and€frequently€some€frustration,€for€the€average€user€with€average€hardwareÏand€an€analog€connection.€€The€prospects€were€slim€that€many€AOL€users€(who€tend€to€be€noviceÐ À+'( Ðusers€with€average€equipment)€would€expend€the€effort€to€download€Navigator€when€they€already€hadÏbrowsing€software€that€worked€well€with€the€AOL€service.€€Finally,€while€the€agreement€permittedÏAOL€(subject€again€to€the€fifteen„percent€shipment€quotas)€to€distribute€non„Microsoft€Web€browsingÏsoftware€when€requested€by€third„party€providers,€distributors,€and€corporate€accounts,€it€obligatedÏAOL€to€use€all€reasonable€efforts€to€cause€the€third€party€to€distribute€that€software€on€its€own€and€toÏminimize€the€use€of€AOLððs€brand€name€with€the€distribution.Ìà  à290.à ` àThe€Microsoft€executives€responsible€for€closing€the€deal€with€AOL€recognized€thatÐ h¸  ÐAOL€had€agreed€to€distribute€and€promote€Internet€Explorer€to€the€virtual€exclusion€of€Navigator.€ÏTwo€days€after€Microsoft€signed€the€agreement€with€AOL,€Chase€sent€to€Microsoftððs€executive€staff€aÏmemorandum€answering€questions€he€thought€the€executives€might€have€about€the€agreement.€€OneÏsuch€question€was,€ð ðI€find€it€hard€to€believe€that€AOL€is€using€Internet€Explorer€as€its€browser.€€AreÏthere€exceptions?ðð€€Chase€responded:€ð ðYes€the[re]€are€some€but€they€are€pretty€remote.€€An€AOLÏcustomer€could€choose€to€use€Navigator€and€it€will€be€available€to€be€downloaded€from€the€AOL€site,Ïthough€not€in€a€prominent€way.€€There€are€some€circumstances€with€3òòrdóó€party€distribution€deals€whereÐ d ÐAOL€has€some€limited€flexibility.€€On€its€GNN€service,€AOL€can€do€what€it€wants.€€But€for€all€intentsÏand€purposes€it€is€true,€AOL€will€be€moving€its€5M€customers€to€a€new€client€integrated€with€InternetÏExplorer€3€starting€this€summer/fall.ððÌà  à291.à ` àAs€with€the€restrictive€provisions€in€the€Referral€Server€agreements,€the€provisions€inÐ ä%4!" Ðthe€March€1996€agreement€constraining€AOLððs€distribution€and€promotion€of€Navigator€had€noÏpurpose€other€than€maximizing€Internet€Explorerððs€usage€share€at€Navigatorððs€expense.€€ConsideringÏthat€the€restrictions€applied€to€AOLððs€proprietary€access€software€regardless€of€the€sub„channelÐ À+'( Ðthrough€which€it€was€distributed,€and€that€Microsoft€collected€no€revenue€from€Internet€Explorer,€theÏrestrictions€accomplished€no€efficiency.€€They€affected€consumers€only€by€encumbering€their€ability€toÏchoose€between€competing€browsing€technologies.€€In€order€to€gain€AOLððs€acceptance€of€theseÏrestrictions,€Microsoft€accorded€AOL€free€desktop€placement€that€undermined€its€own€MSN,€in€whichÏMicrosoft€had€invested€hundreds€of€millions€of€dollars.€€Significantly,€Microsoft€did€not€waive€any€of€theÏterms€of€its€agreement€with€AOL€(nor€of€its€agreements€with€other€OLSs)€when€it€waived€some€of€theÏrestrictive€provisions€in€its€Referral€Server€agreements€in€April€1998.€€The€reason€was€MicrosoftððsÏrecognition€that€holding€OLSs,€particularly€AOL,€to€exclusive€distribution€and€promotion€terms€wasÏmore€important€to€maximizing€Internet€Explorerððs€usage€share€than€holding€ISPs€to€similar€terms.Ìà  à292.à ` àMicrosoft€closely€monitored€AOLððs€compliance€with€the€restrictive€provisions€in€theÐ D” ÐMarch€1996€agreement.€€Microsoft€employees€periodically€inspected€AOLððs€service€for€any€sign€ofÏpromotions€for€Netscape.€€The€scrutiny€was€close€enough€to€prompt€an€AOL€executive€to€writeÏMicrosoftððs€Chase:€ð ðWe€are€not€selling€NS€advertising€around€its€browser€or€otherwise€ð"ð€letððs€moveÏon.€.€.€.€[I]t€is€not€time€to€be€paranoid€.€.€.€.ððÌà  à293.à ` àEver€since€the€negotiations€with€Microsoft€intensified€in€early€1996,€it€had€been€AOLððsÐ  X Ðintention€to€select€one€firmððs€Web€browsing€software€and€then€to€work€closely€with€that€firm€toÏincorporate€its€browsing€technology€seamlessly€into€the€AOL€flagship€client€software.€€Regardless€ofÏwhich€software€it€chose€as€its€primary€offering,€though,€AOL€still€wanted€the€ability€to€satisfy€consumerÏdemand€for€competing€Web€browsing€software.€€AOL€did€not€want€users€who€preferred€a€certainÏbrand€of€Web€browsing€software€to€have€to€go€to€a€competing€OLS€in€order€to€obtain€it.€€Therefore,Ïeven€once€it€selected€Internet€Explorer€as€the€software€that€it€would€integrate€seamlessly€into€its€client,Ð À+'( ÐAOL€would€have€preferred€to€make€an€AOL„configured€version€of€Navigator€readily€available€toÏsubscribers€and€potential€subscribers.€€Ìà  à294.à ` àDespite€its€preference,€however,€AOL€did€not€make€Navigator€readily€available€toÐ ˜è Ðsubscribers€after€the€agreement€with€Microsoft€took€effect.€€To€the€contrary,€AOL€made€it€relativelyÏdifficult€for€new€subscribers€to€obtain€a€version€of€Navigator€that€would€work€with€its€client€software,Ïand€it€pressured€existing€subscribers€who€used€Navigator€to€abandon€it€in€favor€of€client€software€thatÏincluded€Internet€Explorer.€€In€essence,€AOL€contravened€its€natural€inclination€to€respond€to€consumerÏdemand€in€order€to€obtain€the€free€technology,€close€technical€support,€and€desktop€placement€offeredÏby€Microsoft.Ìà  à295.à ` àOn€October€28,€1996,€Microsoft€and€AOL€entered€into€an€additional€agreement€calledÐ D” Ðthe€Promotional€Services€Agreement,€whereby€AOL€agreed€to€promote€its€new€proprietary€accessÏsoftware€that€included€Internet€Explorer€to€existing€AOL€subscribers,€and€Microsoft€agreed€to€payÏAOL€for€such€promotion€based€on€results.€€Specifically,€Microsoft€agreed€to€pay€AOL€$500,000,€plusÏtwenty„five€cents€(up€to€one€million€dollars)€for€each€subscriber€who€upgraded€from€older€versions€ofÏAOLððs€proprietary€access€software€to€the€version€that€included€Internet€Explorer,€plus€$600,000€ifÏAOL€succeeded€in€upgrading€5.25€million€subscribers€by€April€1997.€€In€addition,€AOLððs€ReferralÏServer€agreement€with€Microsoft€provided€that€AOL€would€receive€a€two„dollar€credit€on€referral€feesÏfor€each€new€subscriber€who€used€Internet€Explorer.€€So€while€the€March€12,€1996€agreement€ensuredÏthat€nearly€all€new€AOL€subscribers€would€use€Internet€Explorer,€the€Promotional€Services€andÏReferral€Server€agreements€enlisted€AOL€in€the€effort€to€convert€the€OLSððs€millions€of€existingÏsubscribers€to€Internet€Explorer.€€In€fulfillment€of€these€agreements,€AOL€began€to€prompt€itsÐ À+'( Ðsubscribers€to€download€the€latest€version€of€its€client€access€software,€complete€with€InternetÏExplorer,€every€time€they€logged€off€the€service.Ìà  à296.à ` àIt€is€not€surprising,€given€the€terms€of€the€1996€agreements€between€Microsoft€andÐ ˜è ÐAOL,€that€the€percentage€of€AOL€subscribers€using€a€version€of€the€client€software€that€includedÏInternet€Explorer€climbed€steeply€throughout€1997.€€By€January€1998,€Cameron€Myhrvold€was€able€toÏreport€to€Gates€and€the€rest€of€Microsoftððs€executive€committee€that€ninety„two€percent€of€AOLððsÏsubscribers€(who€by€then€numbered€over€ten€million)€were€using€client€access€software€that€includedÏInternet€Explorer.€€A€year€earlier,€the€same€type€of€data€had€shown€that€only€thirty„four€percent€ofÏAOL€subscribers€were€using€AOL€client€software€that€included€Internet€Explorer.€€The€markedÏincrease€resulted€in€no€small€part€from€AOLððs€efforts€to€convert€its€existing€subscribers€to€the€newestÏversion€of€its€client€software.€€Ìà  à297.à ` àEven€if€an€AOL€subscriber€obtains€the€new€client€software€that€includes€InternetÐ ,| ÐExplorer,€he€can€still€browse€the€Web€using€any€browsing€software,€including€Navigator,€that€happenedÏto€be€installed€on€his€hard€drive.€€It€is€unlikely€that€many€users€will€go€to€this€effort,€however,€given€theÏease€of€browsing€with€the€software€that€comes€with€AOLððs€client€software.€€The€average€AOL€user,Ïbeing€perhaps€less€technically€sophisticated€than€the€average€IAP€subscriber,€is€particularly€unlikely€toÏexpend€any€effort€to€use€browsing€software€other€than€that€which€comes€included€with€the€AOLÏsoftware.€€AOL,€acting€pursuant€to€the€provisions€of€the€March€1996€agreement,€has€not€made€it€easyÏfor€its€subscribers€to€locate,€download,€and€install€a€version€of€Navigator€configured€for€its€service.€ÏConsequently,€those€AOL€subscribers€who€did€not€already€have€Navigator€on€their€systems€by€the€timeÏthat€agreement€took€effect€were€even€less€likely€to€use€Navigator.€€Ð À+'( Ðà  à298.à ` àSo€when€Microsoft€executives€learned€that€ninety„two€percent€of€AOL€subscribersÐ ° Ðwere€using€client€software€that€included€Internet€Explorer,€they€could€rest€assured€that€virtually€the€sameÏpercentage€of€AOLððs€subscribers€were€using€Internet€Explorer€whenever€they€connected€to€the€InternetÏwith€AOL.€€In€fact,€an€examination€of€the€ð ðhitðð€data€collected€by€AdKnowledge€indicates€that€as€ofÏearly€1999,€only€twelve€percent€of€AOL€subscribers€were€using€Navigator€when€they€browsed€theÏWeb€(òòseeóó€Section€V.H.1.,€òòinfraóó,€for€a€description€of€the€method€by€which€AdKnowledge€collects€data).€Ð tÄ  ÐAOL€(and€its€CompuServe€subsidiary),€in€turn,€accounted€for€a€very€large€percentage€of€all€IAPÏsubscribers.€€In€fact,€according€to€data€Microsoft€collected€and€used€internally,€AOL€and€CompuServeÏaccounted€for€sixty„five€percent€of€the€combined€subscriber€base€of€the€top€eighty€IAPs€in€late€1997.€€ItÏis€thus€a€reasonable€deduction€that€the€restrictive€terms€Microsoft€induced€AOL€to€accept€in€1996€pre„¼empted€a€substantial€part€of€the€IAP€channel€for€Internet€Explorer.Ìà  à299.à ` àOn€November€24,€1998,€AOL€and€Netscape€agreed€that€AOL€would€acquireÐ ,| ÐNetscape€for€4.3€billion€dollarsðð€worth€of€AOL€stock.€€In€a€related€transaction,€AOL€entered€into€aÏthree„year€strategic€alliance€with€Sun,€pursuant€to€which€Sun€would€develop€and€market€both€its€andÏNetscapeððs€server€software€and€would€manage€the€companiesðð€joint€efforts€in€the€area€of€electronicÏcommerce.€€AOL€purchased€Netscape€not€just€for€its€browsing€technology,€but€also€for€its€electronicÏcommerce€business,€its€portal€site,€its€brand€recognition,€and€its€talented€work€force.€€To€the€extentÏAOL€was€paying€for€Netscapeððs€browser€business,€its€primary€goal€was€not€to€compete€for€user€shareÏagainst€Internet€Explorer.€€Rather,€AOL€was€interested€in€Navigator€to€the€extent€that€it€drove€WebÏtraffic€to€Netscapeððs€popular€portal€site,€NetCenter.€€AOL€was€also€interested€in€ensuring€that€anÏalternative€to€Internet€Explorer€remained€viable;€it€wanted€the€option€of€dropping€Internet€Explorer€toÐ À+'( Ðretain€enough€vitality€so€that€it€would€not€be€at€the€mercy€of€Microsoft€for€software€upon€which€theÏsuccess€of€its€online€service€largely€depended.€€Finally,€AOL€was€interested€in€keeping€Navigator€aliveÏin€order€to€ensure€that€Microsoft€did€not€gain€total€control€over€Internet€standards.Ìà  à300.à ` àAOL€had€the€right€under€its€agreement€with€Microsoft€to€terminate€the€distribution€andÐ Œ Ü Ðpromotion€provisions€relating€to€Internet€Explorer€on€December€31,€1998.€€If€AOL€had€decided€toÏterminate€those€provisions,€the€March€1996€agreement€would€otherwise€have€remained€in€effect,€andÏAOL€could€have€continued€to€base€its€proprietary€access€software€on€Internet€Explorer,€takingÏadvantage€of€Microsoftððs€engineering€and€technical€support.€€Microsoft,€however,€would€have€had€theÏoption€of€removing€AOL€from€the€OLS€folder.€€What€is€more,€Chase€informed€AOL€that€MicrosoftÏmight€react€to€AOLððs€termination€of€the€restrictive€provisions€by€discontinuing€the€OLS€folderÏaltogether,€which€would€have€disadvantaged€the€AOLððs€subsidiary€OLS,€CompuServe,€which€alsoÏenjoyed€a€place€in€the€OLS€folder.€€Ìà  à301.à ` àDespite€its€acquisition€of€Netscape,€AOL€did€not€exercise€its€right€to€terminate€theÐ  p Ðexclusivity€provisions€of€its€agreement€with€Microsoft€at€the€end€of€1998.€€AOL€executives€made€theÏreasons€clear€to€AOLððs€board€of€directors€on€November€17,€1998,€when€they€presented€theÏNetscape/Sun€transactions€for€the€boardððs€approval.€€They€wrote:ÌÓÓÓ XÓÓ XÓà ` àIn€exchange€for€using€IE€as€our€primary€browser€component,€Microsoft€bundlesÏ[AOL]€in€the€ð ðOnline€Services€Folderðð€on€the€Windows€desktop.€€This€is€an€important,Ïvalued€source€of€new€customers€for€us,€and€therefore€something€we€are€inclined€toÏcontinue.€€Microsoft€has€made€it€clear€that€they€will€not€continue€to€include€us€inÏWindows€if€we€donððt€agree€to€continue€our€ð ðvirtual€exclusivityðð€provisions€for€use€of€IEÏwithin€[AOL].€.€.€.€There€are€benefits€to€[Netscape]€of€replacing€IE€with€the€[Netscape]Ïbrowser€ð"ð€it€would€dramatically€shift€browser€market€share€(from€about€50/50€todayÏâ âto€65/35€in€favor€of€[Netscape]).€€However,€our€present€intent€is€to€continue€with€IE,Ð Æ*&' Ðpartly€to€get€the€continued€marketing€benefits€of€Windows€bundling,€and€partly€toÏmaximize€the€likelihood€of€continued€ð ðdtenteðð€with€Microsoft.Ìâ âÌÓ X€âÓÓ XrâÓÓ`âÓBy€not€exercising€its€right€to€terminate€the€ð ðvirtual€exclusivityðð€provisions€in€the€agreement€withÏMicrosoft,€AOL€commited€itself€to€abide€by€those€restrictions€until€January€1,€2001.€Ìà  à302.à ` àAOL€does€not€believe€that€it€must€make€every€possible€use€of€Netscapeððs€browsingÐ † Ö Ðsoftware,€and€maximize€Navigatorððs€usage€share,€in€order€to€justify€its€purchase€of€Netscape.€€Now€thatÏAOL€has€the€capability€to€produce€its€own€state„of„the„art€componentized€browsing€software,Ïhowever,€the€fact€remains€that,€of€the€various€advantages€Microsoft€currently€offers€AOL€in€exchangeÏfor€its€agreement€to€distribute€and€promote€Internet€Explorer€with€near€exclusivity,€the€only€one€likely€toÏstill€be€of€great€value€to€AOL€at€the€beginning€of€the€new€millennium€is€the€inclusion€of€AOLððs€clientÏsoftware,€and€the€promotion€of€its€service,€within€Windows.€€Assuming€Microsoft€continues€to€offer€thatÏplacement€to€AOL€after€January€1,€2001,€the€extent€to€which€AOL€continues€to€distribute€and€promoteÏInternet€Explorer€to€the€exclusion€of€other€browsing€software€will€depend€largely€on€the€value€that€AOLÏassigns€to€that€placement€and€to€any€new€forms€of€consideration€Microsoft€offers.€€With€respect€to€theÏvalue€of€placement€in€the€OLS€folder,€AOL€registered€approximately€970,000€new€subscribers€throughÏthe€OLS€folder€in€the€fiscal€year€ending€in€June€1998.€€This€represented€eleven€percent€of€the€newÏsubscriptions€AOL€gained€that€year,€and€it€was€enough€to€prompt€AOL€executives€in€November€1998Ïto€describe€the€OLS€folder€to€the€AOL€board€as€an€ð ðimportant,€valued€source€of€new€customers€forÏus.ððÌà  à303.à ` àIf€AOL€were€to€halt€its€distribution€and€promotion€of€Internet€Explorer,€the€effect€onÐ Ò("$% ÐInternet€Explorerððs€usage€share€would€be€significant,€for€AOLððs€subscribers€currently€account€for€overÐ Æ*&' Ðone€third€of€Internet€Explorerððs€installed€base.€€But€even€if€AOL€stops€distributing€Internet€ExplorerÏafter€January€1,€2001€and€updates€its€entire€subscriber€base€to€client€software€that€includes€its€own€orÏsome€other€proprietary€browsing€software,€Microsoft€will€still€have€ensured€that,€over€the€precedingÏfour€years€(AOL€subscribers€began€using€proprietary€access€software€based€on€Internet€Explorer€inÏNovember€1996),€a€very€large€majority€of€AOL€subscribers€used€Internet€Explorer€whenever€theyÏbrowsed€the€Web€through€the€AOL€service.€€This€period€is€significantly€longer€than€the€two€years€GatesÏthought€AOLððs€obligations€would€have€to€last€in€order€for€the€deal€to€be€worthwhile€to€Microsoft.Ìà  à304.à ` àAOLððs€subscribers€now€number€sixteen€million,€and€a€substantial€part€of€all€WebÐ \¬  Ðbrowsing€is€done€through€AOLððs€service.€€By€granting€AOL€valuable€desktop€real€estate€(to€MSNððsÏdetriment)€and€other€valuable€consideration,€Microsoft€succeeded€in€capturing€for€Internet€Explorer,Ïand€holding€for€a€minimum€of€four€years,€one€of€the€single€most€important€channels€for€the€distribution€ofÏbrowsing€software.€€Starting€the€day€Microsoft€announced€the€March€1996€agreement€with€AOL,€andÏlasting€at€least€until€AOL€announced€its€acquisition€of€Netscape€in€November€1998,€developers€hadÏreason€to€look€into€the€foreseeable€future€and€see€that€non„Microsoft€software€would€not€attain€statureÏas€the€standard€platform€for€network„centric€applications.€€Microsoft€exploited€that€interval€to€enhanceÏdependence€among€developers€on€Microsoftððs€proprietary€interfaces€for€network„centric€applicationsÏð"ð€dependence€that€will€continue€to€inure€to€Microsoftððs€benefit€even€if€AOL€stops€distributing€InternetÏExplorer€in€the€future.€€The€AOL€coup,€which€Microsoft€accomplished€only€at€tremendous€expense€toÏitself€and€considerable€deprivation€of€consumersðð€freedom€of€choice,€thus€contributed€to€extinguishingÏthe€threat€that€Navigator€posed€to€the€applications€barrier€to€entry.Ìò òà0  àà0` (#(#àà0¸ ` (#` (#àà  àii.à0h¸ (#¸ (#àOther€Online€Servicesó óÐÀ+'(h(#h(# Ðà  à305.à ` àIn€the€summer€and€fall€of€1996,€Microsoft€entered€into€agreements€with€three€otherÐ ° ÐOLSs,€namely,€AT&T€WorldNet,€Prodigy,€and€AOLððs€subsidiary,€CompuServe.€€The€provisions€ofÏthese€agreements€were€substantially€the€same€as€those€contained€in€the€March€1996€agreementÏbetween€Microsoft€and€AOL.€€As€with€the€AOL€agreement,€Microsoft€did€not€deign€to€waive€theÏrestrictive€terms€in€these€OLS€agreements€when€it€waived€similar€terms€in€the€Referral€ServerÏagreements€in€the€spring€of€1998.€€The€OLSs€were€discontented€with€the€provisions€that€limited€theirÏability€to€distribute€and€promote€non„Microsoft€browsing€software.€€Prodigy,€for€one,€found€thoseÏprovisions€objectionable€and€tried,€unsuccessfully,€to€convince€Microsoft€to€make€the€terms€lessÏrestrictive.€€AT&T€WorldNetððs€negotiator€also€told€his€Microsoft€counterpart,€Brad€Silverberg,€thatÏAT&T€wanted€to€remain€neutral€as€to€browsing€software.€€Despite€their€reservations,€the€OLSsÏaccepted€Microsoftððs€terms€because€they€saw€placement€in€the€OLS€folder€as€crucial,€and€MicrosoftÏmade€clear€that€it€would€only€accord€such€placement€to€OLSs€that€agreed€to€give€Internet€ExplorerÏexclusive,€or€at€least€extremely€preferential,€treatment.€€As€one€Microsoft€negotiator€reported€to€ChaseÏabout€AT&T€WorldNet,€ð ðItððs€very€clear€that€they€really€really€want€to€be€in€the€Windows€box.ðð€€TheÏOLSs€became€even€more€desperate€for€inclusion€in€the€OLS€folder€once€it€was€announced€that€theirÏlargest€competitor,€AOL,€had€already€won€placement€there.€€One€Prodigy€executive€wrote€to€anotherÏtwo€weeks€after€his€company€signed€the€agreement€with€Microsoft,€ð ðit€was€absolutely€critical€toÏProdigyððs€businessðð€and€ð ðessential€in€order€to€remain€competitiveðð€that€Prodigy€obtain€MicrosoftððsÏagreement€to€include€the€Prodigy€Internet€service€icon€in€the€OLS€folder.Ìà  à306.à ` àAlthough€none€of€these€OLSs€possessed€subscriber€bases€approaching€AOLððs,€theyÐ Ì)%& Ðcomprised,€along€with€MSN,€the€most€significant€OLSs€other€than€AOL.€€By€making€arrangements€withÐ À+'( Ðthem€similar€to€the€one€it€enjoyed€with€AOL,€Microsoft€ensured€that,€for€as€long€as€the€agreementsÏremained€in€effect,€the€overwhelming€majority€of€OLS€subscribers€would€use€Internet€ExplorerÏwhenever€they€accessed€the€Internet.€€Since€AOL€owns€CompuServe,€the€acquisition€of€Netscape€mayÏaffect€CompuServeððs€arrangement€with€Microsoft€in€the€future;€however,€the€acquisition€does€not€alterÏthe€incentives€for€the€other€OLSs€to€enter€new€agreements€with€Microsoft€similar€to€the€ones€signed€inÏ1996.ÌÓÓÝ‚-†ÿÝÝ  Ýò òà  àà ` àà ¸ àÝ‚-†®ÝÚƒÚdÚ  Ú.à0  àÝ  ÝEffect€of€Microsoftððs€Actions€in€the€IAP€Channeló ó݃-†®ðÝÛ€ÛŒÐh¸ (#(# ÐŒÝ  ÝÌÓœÓà  à307.à ` àAs€described€above,€Microsoft€gave€valuable€consideration€at€no€charge€to€IAPs€thatÐ \¬  Ðagreed€to€distribute€and€promote€a€product€that€brought€no€revenue€to€Microsoft.€€By€tenderingÏadditional€valuable€perquisites€(at€the€cost€of€lost€revenue),€Microsoft€induced€IAPs€to€restrictÏdrastically€their€distribution€and€promotion€of€Navigator.€€With€the€offer€of€still€other€concessions,ÏMicrosoft€induced€IAPs€to€turn€subscribers€already€using€Navigator€into€Internet€Explorer€users.€€Ìà  à308.à ` àAs€Microsoft€hoped€and€anticipated,€the€inducements€it€gave€out€òògratisóó,€as€well€as€theÐ  p Ðrestrictive€conditions€it€tied€to€those€inducements,€had,€and€continue€to€have,€a€substantial€exclusionaryÏimpact.€€€First,€many€more€copies€of€Internet€Explorer€have€been€distributed,€and€many€more€IAPsÏhave€standardized€on€Internet€Explorer,€than€would€have€been€the€case€if€Microsoft€had€not€investedÏgreat€sums,€and€sacrificed€potential€sources€of€revenue,€with€the€sole€purpose€of€protecting€theÏapplications€barrier€to€entry.€€Second,€the€restrictive€terms€in€the€agreements€have€prevented€IAPs€fromÏmeeting€consumer€demand€for€copies€of€non„Microsoft€browsing€software€pre„configured€for€thoseÏâ âservices.€€The€IAPs€subject€to€the€most€severe€restrictions€comprise€fourteen€of€the€top€fifteen€accessÐ Ì)%& Ðproviders€in€North€America€and€account€for€a€large€majority€of€all€Internet€access€subscriptions€in€thisÏpart€of€the€world.Ìâ âà  à309.à ` àNot€surprisingly,€the€inducements€that€Microsoft€gave€out€and€the€restrictions€itÐ ˜è Ðconditioned€them€upon€have€resulted€in€a€substantial€increase€in€Internet€Explorerððs€usage€share.€€AÏstudy€Microsoft€conducted€shows€that€at€the€end€of€1997,€Internet€Explorer€enjoyed€a€ninety„fourÏpercent€weighted€average€share€of€shipments€of€browsing€software€by€ISPs€that€had€agreed€to€makeÏInternet€Explorer€their€default€browser.€€By€contrast,€the€study€shows€that€Internet€Explorer€had€only€aÏfourteen€percent€weighted€average€share€of€shipments€of€browsing€software€by€ISPs€that€had€notÏagreed€to€make€Internet€Explorer€their€default€browser.€€The€same€study€shows€that€MicrosoftððsÏweighted€average€share€of€browser€usage€by€subscribers€to€ISPs€that€had€made€Internet€Explorer€theirÏdefault€browser€was€over€sixty€percent€at€the€end€of€1997,€whereas€its€weighted€average€share€ofÏbrowser€usage€by€subscribers€to€ISPs€that€did€not€make€Internet€Explorer€their€default€browser€wasÏless€than€twenty€percent.Ìà  à310.à ` àAn€appropriate€use€of€the€AdKnowledge€hit€data€shows€the€difference€in€InternetÐ d ÐExplorerððs€success€among€categories€of€IAPs€subject€to€different€levels€of€distribution€and€promotionÏrestrictions€(òòseeóó€Section€V.H.1.,€òòinfraóó,€for€a€description€of€the€method€by€which€AdKnowledge€collectsÐ ü!L Ðdata).€€One€category€was€hits€originating€from€subscribers€to€IAPs€that,€according€to€a€chart€preparedÏby€Microsoft€for€its€internal€use,€were€not€subject€to€any€distribution€or€promotion€restrictions.€€AnotherÏcategory€was€hits€originating€from€subscribers€to€any€IAP.€€A€third€category€was€hits€originating€fromÏsubscribers€to€AOL€and€CompuServe.€€The€hit€data€show€that,€from€January€1997€to€August€1998,ÏInternet€Explorerððs€usage€share€among€subscribers€to€IAPs€that€were€uninhibited€by€restrictions€roseÐ À+'( Ðten€points,€from€about€twenty€to€about€thirty€percent.€€Over€the€same€period,€Internet€Explorerððs€usageÏshare€among€all€IAP€subscribers,€including€those€subject€to€restrictions,€rose€twenty„seven€points,€fromÏtwenty„two€to€forty„nine€percent.€€Finally,€Internetððs€Explorerððs€usage€share€among€subscribers€to€twoÏIAPs€subject€to€the€most€severe€restrictions,€AOL€and€CompuServe,€rose€sixty„five€points,€fromÏtwenty„two€to€eighty„seven€percent.€€The€differences€in€the€degree€of€Internet€Explorerððs€success€in€theÏthree€categories€reveal€the€exclusionary€effect€of€Microsoftððs€interdiction€of€Navigator€in€the€IAPÏchannel.ÌØ€ØÓÓÝ‚!.îÿÝÝ  Ýò òà  àà ` àÝ‚!.î%ÝÚƒÚ4Ú  Ú.à0 ¸ àÝ  ÝInducing€ICPs€to€Enhance€Internet€Explorerððs€Usage€Share€atÐ \¬  ÐNavigatorððs€Expense݃!.î%[ÝۀیР¸ (#¸ (# ÐŒÝ  ÝÌó óÓÓà  à311.à ` àICPs€create€the€content€that€fills€the€pages€that€make€up€the€Web.€€Because€this€contentÐ Jš Ðcan€include€advertisements€and€links€to€download€sites,€ICPs€also€provide€a€channel€for€the€promotionÏand€distribution€of€Web€browsing€software.€€Executives€at€Microsoft€recognized€that€ICPs€were€notÏnearly€as€important€a€distribution€channel€for€browsing€software€as€OEMs€and€IAPs.€€Nevertheless,Ïprotecting€the€applications€barrier€to€entry€was€of€such€high€priority€at€Microsoft€that€its€seniorÏexecutives€were€willing€to€invest€significant€resources€to€enlist€even€ICPs€in€the€effort.€€Executives€atÏMicrosoft€determined€that€ICPs€could€aid€Microsoftððs€browser€campaign€in€three€ways.€€First,€ICPsÏcould€help€build€Internet€Explorerððs€usage€share€by€featuring€advertisements€and€links€for€InternetÏExplorer,€to€the€exclusion€of€non„Microsoft€browsing€software,€on€their€Web€pages.€€Second,€thoseÏICPs€that€distributed€software€as€well€as€content€could€bundle€Internet€Explorer,€instead€of€Navigator,Ïâ âwith€those€distributions.€€Finally,€ICPs€could€increase€demand€for€Internet€Explorer,€and€decreaseÐ Ò("$% Ðdemand€for€Navigator,€by€creating€their€content€with€Microsoft€technologies,€such€as€ActiveX,€thatÏwould€make€the€content€more€appealing€in€appearance€when€accessed€with€Internet€Explorer.Ìâ âà  à312.à ` àAs€early€as€the€fall€of€1995,€Microsoft€executives€saw€that€they€could€help€reinforce€theÐ ˜è Ðapplications€barrier€to€entry€by€inducing€the€leading€ICPs€to€focus€on€Microsoftððs€browsingÏtechnologies.€€In€the€October€1995€memorandum€that€Microsoft€executives€sent€to€Gates€onÏMicrosoftððs€browser€campaign,€one€of€the€suggestions€was,€ð ðGet€80%€of€Top€Web€Sites€to€Target€OurÏClient.ðð€€Specifically,€the€executives€wrote:ÌÓ XÓÓ XÓÓÓContent€drives€browser€adoption,€and€we€need€to€go€to€the€top€five€sites€and€ask€them,Ïð ðWhat€can€we€do€to€get€you€to€adopt€IE?ðð€€We€should€be€prepared€to€write€a€check,Ïbuy€sites,€or€add€features€ð"ð€basically€do€whatever€it€takes€to€drive€adoption.ÌÌÓ X¾ÓÓ X°ÓÓÌÓà  à313.à ` àBy€the€middle€of€1996,€this€proposal€had€become€corporate€policy.€€Senior€executivesÐ D” Ðat€Microsoft€believed€that€inducing€the€ICPs€responsible€for€the€most€popular€Web€sites€to€concentrateÏtheir€distributional,€promotional,€and€technical€efforts€on€Internet€Explorer€to€the€exclusion€of€NavigatorÏwould€contribute€significantly€to€maximizing€Internet€Explorerððs€usage€share€at€Navigatorððs€expense.€ÏWhen€Microsoft€began,€in€late€1996,€to€enlist€the€aid€of€the€most€popular€ICPs,€it€used€an€inducementÏthat€it€had€already€successfully€employed€with€the€top€IAPs:€Microsoft€created€an€area€on€theÏubiquitous€Windows€billboard€for€the€promotion€of€ICPs€and€then€exchanged€placement€in€that€area€atÏno€charge€for€the€commitment€of€important€ICPs€to€promote€and€distribute€Internet€Explorer€exclusivelyÏand€to€create€their€content€with€technologies€that€would€make€it€appear€optimally€when€viewed€withÏInternet€Explorer.€€Microsoft€executives€referred€to€this€tactic€as€ð ðstrategic€barter.ðð€€As€was€the€caseÏâ âwith€the€IAPs,€neither€the€sacrifice€that€Microsoft€made€to€enlist€the€aid€of€the€top€ICPs€nor€theÐ Ì)%& Ðrestrictions€it€placed€on€them€can€be€explained€except€as€components€of€a€campaign€to€protect€theÏapplications€barrier€to€entry€against€Navigator.Ìâ âà  à€314.à ` àThe€Active€Desktop€was€a€Microsoft€feature€that,€if€enabled,€allowed€the€WindowsÐ ˜è Ðuser€to€position€Web€pages€as€open€windows€that€appear€on€the€background,€or€ð ðwallpaperðð€of€theÏWindows€desktop.€€If€the€Web€pages€featured€ð ðpushðð€technology,€they€would€automatically€updateÏthemselves€by€downloading€information€from€their€respective€servers€at€times€scheduled€by€the€user.€ÏThus,€a€user€could€position€on€his€desktop€wallpaper€Web€pages€that€displayed€periodically€updatedÏstock€prices,€sports€scores,€and€news€headlines.€€The€Channel€Bar€was€a€feature€of€the€ActiveÏDesktop.€€€If€enabled,€the€Channel€Bar€appeared€as€a€rectangular€graphic€on€the€desktop€wallpaper.€€ItÏwas€divided€into€pre„configured€links€to€the€Web€sites€of€certain€ICPs€that€implemented€pushÏtechnology.€€Microsoft€introduced€the€Active€Desktop,€including€the€Channel€Bar,€as€a€feature€ofÏInternet€Explorer€4.0,€which€it€released€on€September€30,€1997.Ìà  à315.à ` àAs€pre„configured€by€Microsoft,€the€top€channel€on€the€Channel€Bar€linked€to€aÐ  p ÐMicrosoft€Web€site,€called€the€ð ðActive€Channel€Guide,ðð€that€provided€a€list€of€sites€enabled€with€pushÏtechnology.€€The€next€five€channels€were€each€labeled€with€a€generic€category€such€as€ð ðNews€&ÏTechnologyðð€or€ð ðBusiness.ðð€€Clicking€on€one€of€these€five€channels€brought€up€a€display€of€icons€forÏspecific€Web€sites.€€For€example,€clicking€on€the€ð ðSportsðð€channel€brought€up€a€display€including€iconsÏfor€sports„related€Web€sites€such€as€ESPN€SportsZone€and€CNN€SI.€€Below€the€five€generic€categoryÏchannels€were€branded€ones,€each€of€which€would€link€the€user€directly€to€a€specific€ICPððs€Web€site.Ìà  à316.à ` àConsidering€how€ICPs€generate€revenue,€it€is€not€surprising€that€they€attached€greatÐ Ì)%& Ðvalue€to€placement€on€the€Channel€Bar.€€Most€ICPs€charge€fees€for€placing€advertisements€on€theirÐ À+'( ÐWeb€pages.€€In€addition,€some€ICPs€display€certain€of€their€content€only€to€users€who€pay€a€fee.€€TheÏhigher€the€volume€of€user€traffic€an€ICPððs€site€attracts,€the€higher€the€rates€it€can€charge€for€theÏplacement€of€advertising€on€its€sites.€€Higher€volume€also€brings€increased€revenue€to€ICPs€that€chargeÏusers€for€content.€€Microsoft€pre„configured€Internet€Explorer€4.0€so€that€the€Active€desktop€and€theÏChannel€Bar€would€appear€by€default€on€a€userððs€Windows€95€PC€system,€and€Microsoft€forbadeÏOEMs€to€disable€either€feature.€€Microsoft€and€the€ICPs€consequently€surmised€that€a€very€high€volumeÏof€user€traffic€would€be€driven€to€the€Web€sites€for€which€channels€appeared€on€the€Channel€Bar.€ÏIntuit,€for€one,€believed€that€placement€on€the€Windows€desktop€would€provide€it€with€unparalleledÏpromotional€and€distributional€advantages.€€As€a€result,€the€company€was€prepared€to€pay€a€substantialÏfee€for€placement€on€the€Channel€Bar.€€The€managers€of€ZDNet€felt€the€same€way,€as€did€theÏexecutives€responsible€for€Disneyððs€Internet€content.€€Some€ICPs,€including€Intuit,€even€admitted€toÏMicrosoft€that€inclusion€on€the€Channel€Bar€was€critical€to€them€and€asked€what€they€would€be€obligedÏto€pay€to€be€included.€€Ìà  à317.à ` àBased€on€the€interest€ICPs€expressed,€as€well€as€Microsoftððs€own€assessment€of€theÐ d Ðvalue€of€placement€on€the€Channel€Bar,€executives€at€Microsoft€considered€charging€ICPs€for€inclusionÏon€the€Channel€Bar.€€They€estimated€that€ICPs€appearing€directly€on€the€Channel€Bar€would€pay€asÏmuch€as€$10€million€per€year,€and€that€even€ICPs€appearing€under€the€generic€channels€would€pay€aÏcouple€of€million€dollars€each€annually.€€These€estimates€proved€to€comport€well€with€the€value€thatÏICPs€themselves€actually€attached€to€inclusion€in€the€Channel€Bar,€at€least€before€the€feature€had€beenÏâ âtested€in€the€marketplace.€€For€example,€in€December€1996,€more€than€nine€months€before€the€ActiveÐ Ì)%& ÐDesktop€made€its€debut,€Microsoft€signed€an€agreement€with€PointCast€pursuant€to€which€PointCastÏagreed€to€pay€$10€million€for€the€first€year€that€its€channel€would€appear€directly€on€the€Channel€Bar.Ìâ âà  à318.à ` àFollowing€the€signing€of€its€agreement€with€PointCast,€Microsoft€proceeded€to€enterÐ ˜è Ðsimilar€ð ðTop€Tierðð€or€ð ðPlatinumðð€agreements€with€twenty„three€other€ICPs,€all€in€the€summer€and€earlyÏfall€of€1997.€€Microsoft€used€the€term€ð ðTop€Tierðð€to€refer€to€the€four€non„Microsoft€ICPs€(includingÏPointCast)€given€placement€directly€on€the€Channel€Bar€and€the€term€ð ðPlatinumðð€to€describe€the€twentyÏICPs€included€in€the€five€generic€categories€accessible€from€the€Channel€Bar.€€Although€the€agreementsÏwere€individually€negotiated€and€their€terms€varied€to€some€extent,€the€typical€agreement€obligatedÏMicrosoft€to€promote€the€ICPððs€business€in€three€ways.€€First,€Microsoft€agreed€to€include€on€theÏChannel€Bar€(or€in€one€of€the€lists€accessible€directly€from€the€Channel€Bar)€a€link€that€would€send€aÏuser€directly€to€the€ICPððs€ð ðpushðð€site.€€Second,€Microsoft€agreed€to€promote€the€ICPððs€content€inÏnational€public„relations€and€computer„industry€events,€as€well€as€on€Microsoft€Web€sites.€€Finally,ÏMicrosoft€agreed€to€include€introductory€content€from€the€ICP€with€certain€distributions€of€WindowsÏand€Internet€Explorer.Ìà  à319.à ` àThe€agreements€did€not€obligate€the€Top€Tier€and€Platinum€ICPs€to€pay€money€toÐ  X ÐMicrosoft€in€exchange€for€any€of€the€benefits,€including€placement€on€the€Windows€desktop,€thatÏMicrosoft€extended€to€them.€€Rather,€the€agreements€obligated€the€ICPs€to€compensate€Microsoft€inÏother€ways.€€Although€the€agreement€that€PointCast€signed€purported€to€call€for€a€payment€of€tenÏmillion€dollars€to€Microsoft,€it€entitled€PointCast€to€a€discount€on€the€full€amount€if€it€behaved€as€otherÏâ âICPs€undertook€to€do€in€their€own€Top€Tier€and€Platinum€agreements€with€Microsoft.Ð Ì)%& Ðà  à320.à ` àThe€first€obligation€that€the€ICPs€undertook€was€to€distribute€Internet€Explorer€and€noÐ ° Ðâ âð ðOther€Browserðð€in€connection€with€any€custom€Web€browsing€software€or€CD„ROM€content€thatÏthey€might€offer.€€The€term€ð ðOther€Browserðð€was€defined€in€the€agreements€as€Web€browsing€softwareÏthat€ranked€first€or€second€by€organizations€in€the€business€of€measuring€the€usage€of€browsingÏsoftware.€€This€obligation€was€pertinent€only€to€the€six€Top€Tier€and€Platinum€ICPs€that€distributedÏWeb€browsing€software€during€the€term€of€the€agreements:€€PointCast,€CNet,€Intuit,€AOL,€Disney,€andÏNational€Geographic.Ìà  à321.à ` àThe€Top€Tier€and€Platinum€agreements€also€required€the€signatory€ICPs€to€promoteÐ \¬  ÐInternet€Explorer€and€no€ð ðOther€Browserðð€as€their€ð ðbrowser€of€choice.ðð€€In€particular,€the€ICPs€wereÏrequired€to€display€a€logo€for€Internet€Explorer€and€no€ð ðOther€Browserðð€on€the€home€page€of€the€sitesÏspecified€in€the€agreements€and€on€any€other€pages€on€which€the€ICP€typically€displayed€such€links.€ÏThe€ICPs€were€also€required€to€place€Internet€Explorer€download€links€on€their€Web€sites€and€toÏremove€any€links€to€Navigatorððs€download€site.€€Aggregating€the€Web€sites€offered€by€the€twenty„fourÏTop€Tier€and€Platinum€ICPs,€the€number€of€Web€sites€affected€by€this€provision€was€thirty„one.Ìà  à322.à ` àA€third€provision€that€the€ICPs€accepted€in€return€for€placement€on€the€Channel€BarÐ  X Ðwas€a€prohibition€against€their€entering€agreements€with€a€vendor€of€an€ð ðOther€Browserðð€whereby€theÏICPs€would€pay€money€or€provide€other€consideration€to€the€vendor€in€exchange€for€the€vendorððsÏpromotion€of€the€ICPððs€branded€content.€€Finally,€the€agreements€required€the€ICPs,€in€designing€theirÏWeb€sites,€to€employ€certain€Microsoft€technologies€such€as€Dynamic€HTML€and€ActiveX.€€Some€ofÏthe€agreements€actually€required€the€ICPs€to€create€ð ðdifferentiated€contentðð€that€was€either€availableÏonly€to€Internet€Explorer€users€or€would€be€more€attractive€when€viewed€with€Internet€Explorer€thanÐ À+'( Ðwith€any€ð ðOther€Browser.ðð€€For€example,€the€agreement€with€Intuit€provided:€ð ðSome€differentiatedÏcontent€may€be€available€only€to€IE€users,€some€may€simply€be€ððbest€when€used€with€IE,ðð€withÏacceptable€degradation€when€used€with€other€browsers.ððÌà  à323.à ` àThe€ICPs€were€so€intent€on€gaining€placement€on€the€Channel€Bar€that€they€evenÐ Œ Ü Ðcomplied,€albeit€reluctantly,€when€Microsoft€imposed€restrictions€not€contained€in€the€Top€Tier€andÏPlatinum€agreements.€€For€example,€Microsoft€demanded€that€Disney€remove€its€distinctive€brandingÏfrom€its€link€on€Navigatorððs€user€interface€and€threatened€to€remove€Disney€from€the€Channel€Bar€if€itÏdid€not€accede.€€Executives€at€Disney€believed€that€such€a€requirement€went€beyond€the€language€of€theÏTop€Tier€agreement€that€Disney€had€signed€with€Microsoft,€but€they€saw€no€recourse€in€making€an€issueÏof€the€matter,€for€Microsoft€could€keep€the€Disney€icon€off€the€Channel€Bar€during€the€pendency€of€theÏdispute,€and€Microsoft€would€be€less€amenable€to€promotional€opportunities€for€Disney€in€the€future.€ÏTherefore,€Disney€capitulated.€€In€a€similar€fashion,€a€Microsoft€employee€told€a€counterpart€at€WiredÏDigital€that€even€if€the€agreement€between€the€companies€did€not€technically€prohibit€it,€Wired€DigitalÏwould€be€violating€the€spirit€of€its€agreement€if€it€placed€a€link€to€any€of€its€subsidiary€sites€onÏNavigatorððs€user€interface.€€What€Microsoft€wanted€to€avoid€were€announcements€suggesting€that€anyÏof€Microsoftððs€ICP€partners€were€also€cooperating€with€Netscape.Ìà  à324.à ` àIntuit€is€a€leading€developer€of€software€designed€to€help€individuals€and€smallÐ ð#@  Ðbusinesses€manage€their€finances.€€A€consumer€can€use€one€of€Intuitððs€popular€products€by€purchasing€aÏcopy€of€the€software,€but€Intuit€makes€additional€features€available€through€its€Quicken.com€Web€site.€ÏThus,€Intuit€is€both€an€ISV€and€an€ICP.€€Beginning€in€late€1995,€Intuit€distributed€Navigator€with€itsÏproducts€in€order€to€ensure€that€its€users€could€access€the€features€provided€through€Quicken.com.€€InÐ À+'( Ð1996,€Microsoft€commenced€the€process€of€converting€Intuit€from€a€Netscape€partner€to€a€distributorÏof€Internet€Explorer.€€In€July€of€that€year,€Gates€reported€to€other€Microsoft€executives€on€his€attemptÏto€convince€Intuitððs€CEO€to€distribute€Internet€Explorer€instead€of€Navigator:ÌÓÓÓ XÓÓ XÓI€made€it€clear€to€him€that€beyond€giving€him€the€best€browser€technology€for€no€costÏthat€we€were€only€will[ing]€to€do€some€very€modest€favors€in€addition€to€that.€.€.€.€€I€wasÏquite€frank€with€him€that€if€he€had€a€favor€we€could€do€for€him€that€would€cost€usÏsomething€like€$1M€to€do€that€in€return€for€switching€browsers€in€the€next€few€months€IÏwould€be€open€to€doing€that.ÌÌÓ÷JÓÓ XKÓÓ X KÓà  à325.à ` àIntuit€did€not€accept€Gatesðð€offer€immediately,€but€less€than€a€year€later,€in€June€1997,Ð h¸  ÐIntuit€became€one€of€the€ICPs€to€sign€a€Platinum€agreement€with€Microsoft.€€This€allowed€Intuit€to€placeÏa€link€to€Quicken.com€under€the€ð ðBusinessðð€heading€on€Microsoftððs€Channel€Bar.€€In€return,€however,Ïthe€agreement€required€Intuit€to€distribute€Internet€Explorer,€and€no€ð ðOther€Browser,ðð€with€its€softwareÏproducts,€including€those€not€distributed€through€the€Channel€Bar.€€Intuit€also€agreed€to€the€other€terms,Ïrelating€to€the€promotion€of€browsing€technologies,€business€relationships€with€Netscape,€and€theÏadoption€of€Internet€Explorer€technologies,€that€applied€to€the€other€Top€Tier€and€Platinum€ICPs.€€Ìà  à326.à ` àMicrosoft€would€have€granted€Intuit€a€license€to€distribute€the€componentized€version€ofÐ d ÐInternet€Explorer€at€no€charge€even€if€Intuit€had€not€entered€a€Platinum€Agreement.€€In€the€absence€ofÏthe€agreementððs€restrictive€terms,€in€fact,€Intuit€likely€would€have€distributed€the€componentized€versionÏof€Internet€Explorer€with€its€products€while€simultaneously€promoting€Navigator€and€distributing€toÏconsumers€who€requested€it€a€version€of€Navigator€specially„configured€for€Intuitððs€products.€€The€onlyÏway€Intuit€could€gain€a€place€on€the€Channel€Bar,€however,€was€by€agreeing€to€the€provisions€thatÏrequired€it€to€limit€its€promotion€of€Navigator,€to€cease€distributing€that€browser€altogether,€and€toÏrefuse€to€pay€Netscape€to€promote€Intuit€products€on€Netscapeððs€Web€sites.€€Intuit€accepted€theseÐ À+'( Ðterms€reluctantly,€for€Navigator€remained€a€popular€product€with€consumers,€and€Netscapeððs€WebÏsites€still€attracted€a€great€deal€of€traffic.Ìà  à327.à ` àIn€addition€to€the€Top€Tier€and€Platinum€agreements,€Microsoft€entered€into€two€otherÐ ˜è Ðtypes€of€agreements€with€ICPs.€€First,€Microsoft€signed€so„called€ð ðGoldðð€agreements€with€betweenÏthirty€and€fifty€ICPs.€€Pursuant€to€these€agreements,€Microsoft€included€ICPs€in€the€ð ðActive€ChannelÏGuideðð€Web€site,€which€appeared€whenever€a€Windows€user€clicked€on€the€top€link€on€the€ChannelÏBar.€€In€exchange€for€this€promotion,€the€Gold„agreement€ICPs€agreed€to€promote€Internet€Explorer€onÏat€least€equal€footing€with€other€browsing€technology,€including€Navigator.Ìà  à328.à ` àSecond,€Microsoft€entered€into€IEAK€agreements€with€between€eight€and€twelve€ICPsÐ P  Ðdevoted€to€business„related€content.€€Under€the€typical€IEAK€agreement,€Microsoft€agreed€to€includeÏfunctionality€in€the€IEAK€that€would€facilitate€the€inclusion€of€a€link€to€the€ICPððs€Web€site€under€theÏð ðBusinessðð€category€of€the€Channel€Bar.€€In€exchange,€the€ICPs€committed€to€distributing€InternetÏExplorer€exclusively€(to€the€extent€they€distributed€any€browsing€software),€to€promote€InternetÏExplorer€as€their€ð ðbrowser€software€of€choice,ðð€to€refrain€from€promoting€any€ð ðOther€BrowserððÏ(defined€as€in€the€other€ICP€agreements)€on€their€Web€sites,€and€to€create€content€that€could€beÏaccessed€optimally€only€with€Internet€Explorer.Ìà  à329.à ` àCross„marketing€arrangements€in€competitive€markets€do€not€necessarily€make€thoseÐ ð#@  Ðmarkets€less€competitive;€however,€four€characteristics€distinguish€this€case€from€situations€in€whichÏsuch€agreements€are€benign.€€First,€Microsoft€was€able€to€offer€ICPs€an€asset€whose€value€competitorsÏcould€not€hope,€on€account€of€Microsoftððs€monopoly€power,€to€match.€€Second,€Microsoft€barteredÏthat€asset€not€to€increase€demand€for€a€revenue„generating€product,€but€rather€to€suppress€theÐ À+'( Ðdistribution€and€diminish€the€attractiveness€of€technology€that€Microsoft€saw€as€a€potential€threat€to€itsÏmonopoly€power.€€Third,€and€more€specifically,€Microsoft€prohibited€the€ICPs€from€compensatingÏNetscape€for€promotion€of€their€products€even€while€not€attempting€to€prohibit€the€promotion€itself.€ÏThis€reveals€that€Microsoftððs€motivation€was€not€simply€a€desire€to€generate€brand€associations€withÏInternet€Explorer.€€Finally,€Microsoft€went€beyond€encouraging€ICPs€to€take€advantage€of€innovationsÏin€Microsoftððs€technology,€explicitly€requiring€them€to€ensure€that€their€content€appeared€degradedÏwhen€viewed€with€Navigator€rather€than€Internet€Explorer.€€Microsoftððs€desire€to€lower€demand€forÏNavigator€was€thus€independent€of,€and€far€more€malevolent€than,€a€simple€desire€to€increase€demandÏfor€Internet€Explorer.€€Ìà  à330.à ` àThe€terms€of€Microsoftððs€agreements€with€ICPs€cannot€be€explained€in€customaryÐ D” Ðeconomic€parlance€absent€Microsoftððs€obsession€with€obliterating€the€threat€that€Navigator€posed€to€theÏapplications€barrier€to€entry.€€Absent€that€obsession,€Microsoft€would€not€have€given€ICPs€at€no€chargeÏlicenses€to€distribute€Internet€Explorer.€€What€is€more,€Microsoft€would€not€have€incurred€the€cost€ofÏcomponentizing€Internet€Explorer€and€then€licensed€that€version€to€Intuit€at€no€charge.€€By€sacrificingÏopportunities€to€cover€its€costs€and€even€make€a€profit,€Microsoft€advanced€its€strategic€goal€ofÏmaximizing€Internet€Explorerððs€usage€share€at€Navigatorððs€expense.€€Whereas€Microsoft€might€haveÏdeveloped€the€Channel€Bar€without€ulterior€motive€as€a€matter€of€product€improvement,€it€would€notÏhave€exchanged€placement€on€the€Channel€Bar€for€terms€as€highly€and€broadly€restrictive€as€the€ones€itÏactually€extracted€from€ICPs.€€Nevertheless,€and€to€Microsoftððs€dismay,€circumstances€prevented€theseÏâ ârestrictions€from€having€a€large€impact€on€the€relative€usage€shares€of€Internet€Explorer€and€Navigator.Ð Ì)%& Ðà  à331.à ` àDespite€Microsoftððs€and€the€ICPsðð€expectations€to€the€contrary,€consumers€showedÐ ° Ðâ âlittle€interest€in€the€Channel€Bar,€or€in€the€Active€Desktop€in€general,€when€the€features€debuted€in€theÏfall€of€1997.€€Moreover,€reviews€of€the€Channel€Bar€in€computer„related€publications€were€generallyÏunfavorable.€€The€Channel€Bar€may€not€have€attracted€consumer€interest,€but€the€ICP€agreementsÏrelating€to€the€Channel€Bar€did€attract€controversy.€€Indeed,€Gates€faced€pointed€questions€about€themÏwhen€he€appeared€before€the€Senate€Judiciary€Committee€in€March€1998.€€Microsoft€took€severalÏmeasures€to€quell€the€public€criticism€in€early€April€1998.€€First,€it€waived€the€most€restrictive€terms€inÏthe€Top€Tier€and€Platinum€agreements;€thereafter,€the€agreements€required€ICPs€merely€to€promoteÏInternet€Explorer€in€a€manner€at€least€equal€to€their€promotion€of€Navigator.€€Second,€Microsoft€madeÏno€attempt€to€renew€the€Gold€and€IEAK€agreements,€which€had€expired€by€their€own€terms€in€MarchÏ1998.€€Third,€Microsoft€authorized€its€OEM€licensees€to€configure€the€Windows€98€desktop€so€that€theÏChannel€Bar€would€not€appear€by€default,€and€nearly€every€major€OEM€availed€itself€of€the€permission.€ÏDeeming€the€Channel€Bar€more€trouble€than€it€was€worth,€Microsoft€decided€to€eliminate€the€featureÏentirely€from€future€versions€of€Windows,€including€Windows€98€updates.€€Therefore,€the€provisionsÏrequiring€ICPs€to€exclusively€distribute€and€promote€Internet€Explorer€had€all€expired€within€sevenÏmonths€of€the€Channel€Barððs€release.€€All€of€the€Top€Tier€and€Platinum€agreements€had€expired€by€theirÏown€terms€by€December€31,€1998.€€In€light€of€its€decision€to€discontinue€the€Channel€Bar,€MicrosoftÏdid€not€seek€to€renew€any€of€them.Ìà  à332.à ` àFor€a€period€of€about€eight€months,€however,€agreements€with€Microsoft€hadÐ Ø'(#$ Ðprohibited€approximately€thirty„four€ICPs€from€distributing€Navigator€and€from€promoting€Navigator€inÏall€but€a€few€ways.€€For€an€overlapping€period€of€between€a€year€and€a€year„and„a„half,€those€thirty„Ð À+'( Ðfour€ICPs,€plus€between€thirty€and€fifty€more,€were€required€to€promote€Internet€Explorer€at€least€asÏprominently€as€they€promoted€Navigator.€€Although€the€affected€Web€sites€made€up€only€a€tinyÏpercentage€of€those€existing€on€the€Web,€they€comprised€the€offerings€of€all€but€a€few€of€the€mostÏpopular€ICPs.€€If€the€estimation€of€one€Microsoft€employee€in€June€1996€can€be€considered€accurate,Ïthe€affected€ICPs€accounted€for€a€significant€percentage€of€the€Web€traffic€in€North€America.€€Still,Ïthere€is€not€sufficient€evidence€to€support€a€finding€that€Microsoftððs€promotional€restrictions€actually€hadÏa€substantial,€deleterious€impact€on€Navigatorððs€usage€share.€€For€one€thing,€only€six€of€the€affectedÏICPs€distributed€any€Web€browsing€software€bundled€with€their€products€during€the€period€in€whichÏMicrosoftððs€distributional€restrictions€remained€in€effect.€€AOL€obviously€distributed€a€substantialÏvolume€of€Web€browsing€software€during€this€period,€but€since€AOL€was€separately€precluded€underÏits€Online€Services€Folder€agreement€from€distributing€virtually€any€non„Microsoft€browsing€software,ÏAOL€would€not€have€distributed€a€significant€number€of€Navigator€copies€even€if€it€had€not€entered€aÏTop€Tier€agreement€with€Microsoft.€€Ìà  à333.à ` àPursuant€to€its€agreement€with€Microsoft,€Intuit€distributed€over€five€million€copies€ofÐ d ÐInternet€Explorer€with€the€1998€versions€of€its€products.€€Microsoft€had€offered€Intuit€a€componentizedÏbrowser€while€Netscape€had€not,€and€it€stands€to€reason€that€Intuit€would€in€all€probability€haveÏdistributed€close€to€the€same€number€of€Internet€Explorer€copies€even€absent€the€distributionalÏrestrictions€imposed€by€its€contract.€€Still,€Intuit€had€distributed€over€five€million€copies€of€NavigatorÏwith€the€1997€versions€of€its€products.€€Unconstrained€by€its€agreement€with€Microsoft,€Intuit€mightÏhave€distributed€with€its€1998€products€a€sum€approaching€that€number€of€Navigator€copies€along€withÏthe€componentized€version€of€Internet€Explorer€(particularly€if€the€CD„ROM€represented€its€primaryÐ À+'( Ðdistribution€vehicle).€€Of€the€affected€ICPs€(excluding€AOL),€Intuit€almost€certainly€distributed€the€mostÏWeb€browsing€software€bundled€with€its€products.€€Ìà  à334.à ` àAll€of€the€Top€Tier,€Platinum,€and€IEAK€ICPs€were€capable€of€including€downloadÐ ˜è Ðlinks€on€their€Web€pages.€€While€many€of€these€ICPs€had€included€such€links€for€Navigator€prior€toÏentering€agreements€with€Microsoft,€only€Internet€Explorer€download€links€were€allowed€while€theÏrestrictive€terms€were€in€effect.€€On€the€whole,€it€is€reasonable€to€deduce€from€the€evidence€that€theÏrestrictions€Microsoft€imposed€on€ICPs€prevented€the€distribution€and€installation€of€a€significantÏquantity,€but€certainly€less€than€ten€million,€copies€of€Navigator.Ìà  à335.à ` àThe€terms€Microsoft€imposed€did€prevent€a€number€of€the€ICPs€otherwise€inclined€toÐ P  Ðdo€so€from€compensating€Netscape€for€its€promotion€of€the€ICPsðð€content€in€Navigator€or€onÏNetscapeððs€Web€sites.€€While€they€were€in€effect,€Microsoftððs€restrictions€probably€deprived€NetscapeÏof€revenue€measured€in€millions€of€dollars,€but€nowhere€near€$100€million.Ìà  à336.à ` àIt€appears€that,€at€the€time€the€obligation€expired,€Microsoft€had€not€yet€begun€toÐ  p Ðenforce€its€requirement€that€the€Top€Tier,€Platinum,€and€IEAK€ICPs€develop€content€that€would€appearÏmore€attractive€when€viewed€with€Internet€Explorer€than€when€viewed€with€Navigator.€€Moreover,Ïthere€is€no€evidence€that€any€ICP€other€than€Disney€developed€any€ð ðdifferentiated€contentðð€in€responseÏto€its€agreement€with€Microsoft.€€Therefore,€there€is€insufficient€evidence€to€find€that€the€requirementsÏthat€Microsoft€sought€to€impose€with€respect€to€the€use€of€Microsoft„specific€browsing€technologiesÏhad€any€discernible,€deleterious€impact€on€Navigatorððs€usage€share.ÌÓÓÝ‚!.îÿÝÝ  Ýà  àà ` àò òÝ‚!.îm{ÝÚƒÚ5Ú  Ú.à0 ¸ àÝ  ÝDirectly€Inducing€ISVs€to€Rely€on€Microsoftððs€Browsing€TechnologiesÐ Ì)%& ÐRather€than€APIs€Exposed€by€Navigator݃!.îm{£{ÝۀیР¸ (#¸ (# ÐŒÝ  Ýà  àà ` àÐ À+'( ÐÓ[{Óà  àó ó337.à ` àSince€1995,€more€and€more€ISVs€have,€like€Intuit,€enhanced€the€features€of€theirÐ ° Ðapplications€by€designing€them€to€take€advantage€of€the€type€of€content€and€functionality€accessibleÏthrough€browsing€software.€€An€increasing€number€of€these€applications€actually€rely€on€browsingÏsoftware€to€function.€€Microsoftððs€efforts€to€maximize€Internet€Explorerððs€share€of€browser€usage€atÏNavigatorððs€expense€were€intended€to€encourage€developers€to€use€Windows„specific€technologiesÏwhen€they€wrote€their€applications€to€rely€on€a€browser.€€In€addition€to€creating€this€incentive€indirectly,Ïby€disadvantaging€Navigator,€Microsoft€also€targeted€individual€ISVs€directly,€extracting€from€themÏcommitments€to€make€their€Web„centric€applications€reliant€on€technology€specific€to€Internet€Explorer.€ÏÌà  à338.à ` àBecause€of€the€importance€of€ð ðtime„to„marketðð€in€the€software€industry,€ISVsÐ D” Ðdeveloping€software€to€run€on€Windows€products€seek€to€obtain€beta€releases€and€other€technicalÏinformation€relating€to€Windows€as€early€and€as€consistently€as€possible.€€Since€Microsoft€decidesÏwhich€ISVs€receive€betas€and€other€technical€support,€and€when€they€will€receive€it,€the€ability€of€anÏISV€to€compete€in€the€marketplace€for€software€running€on€Windows€products€is€highly€dependent€onÏMicrosoftððs€cooperation.€€Netscape€learned€this€lesson€in€1995.Ìà  à339.à ` àIn€dozens€of€ð ðFirst€Waveðð€agreements€signed€between€the€fall€of€1997€and€the€spring€ofÐ ü!L Ð1998,€Microsoft€has€promised€to€give€preferential€support,€in€the€form€of€early€Windows€98€andÏWindows€NT€betas,€other€technical€information,€and€the€right€to€use€certain€Microsoft€seals€ofÏapproval,€to€important€ISVs€that€agree€to€certain€conditions.€€One€of€these€conditions€is€that€the€ISVsÏâ âuse€Internet€Explorer€as€the€default€browsing€software€for€any€software€they€develop€with€a€hypertext„Ð Ì)%& Ðbased€user€interface.€€Another€condition€is€that€the€ISVs€use€Microsoftððs€ð ðHTML€Help,ðð€which€isÏaccessible€only€with€Internet€Explorer,€to€implement€their€applicationsðð€help€systems.Ìâ âà  à340.à ` àBy€exchanging€its€vital€support€for€the€agreement€of€leading€ISVs€to€make€InternetÐ ˜è ÐExplorer€the€default€browsing€software€on€which€their€products€rely,€Microsoft€has€ensured€that€manyÏof€the€most€popular€Web„centric€applications€will€rely€on€browsing€technologies€found€only€in€WindowsÏand€has€increased€the€likelihood€that€the€millions€of€consumers€using€these€products€will€use€InternetÏExplorer€rather€than€Navigator.€€Microsoftððs€relations€with€ISVs€thus€represent€another€area€in€which€itÏhas€applied€its€monopoly€power€to€the€task€of€protecting€the€applications€barrier€to€entry.ÌÝ‚!.îÿÝÝ  Ýà  àà ` àò òÝ‚!.î$ˆÝÚƒÚ6Ú  Ú.à0 ¸ àÝ  ÝForeclosing€Apple€as€a€Distribution€Channel€for€Navigator݃!.î$ˆZˆÝÛ€ÛŒÐP ¸ (#¸ (# ÐŒÝ  Ýà  àó ó341.ò òà ` àó óIn€the€summer€of€1995,€Microsoft€had€been€willing€to€cede€to€Netscape€theÐ D” Ðdevelopment€of€browsing€software€for€the€Mac€OS,€provided€that€Netscape€would€stop€competingÏwith€the€platform„level€browsing€technologies€that€Microsoft€was€developing€for€its€32„bit€WindowsÏproducts.€€The€genesis€of€this€offer€had€been€Microsoftððs€belief€that€Netscape€could€never€become€theÏleading€platform€for€network„centric€software€development€if€it€did€not€distribute€a€middleware€layer€forÏthe€soon„to„be€dominant€32„bit€Windows€platform.€€But€once€Netscape€confirmed€its€determination€toÏoffer€a€middleware€layer€that€would€expose€the€same€set€of€APIs€on€Windows,€the€Mac€OS,€and€otherÏplatforms,€Microsoft€recognized€that€it€needed€to€stifle€the€attention€that€developers€would€be€inclined€toÏdevote€to€those€APIs,€even€when€the€they€rested€on€top€of€a€non„Windows€platform€like€the€Mac€OS.€ÏAfter€all,€if€Navigator€became€so€popular€on€the€Mac€OS€that€developers€made€extensive€use€of€theÏAPIs€exposed€by€that€version€of€Navigator,€those€developers€would€be€disposed€to€take€advantage€ofÏidentical€APIs€exposed€by€the€version€of€Navigator€written€for€the€dominant€platform,€Windows.€Ð À+'( ÐMicrosoft€therefore€set€out€to€convince€developers€that€applications€relying€on€APIs€exposed€byÏNavigator€would€not€reach€as€many€Mac€OS€users€as€applications€that€invoked€platform€technologiesÏfound€exclusively€in€Windows.€€Therefore,€Microsoft€set€out€to€recruit€Mac€OS€users€to€InternetÏExplorer,€and€to€minimize€Navigatorððs€usage€share€among€Mac€OS€users.Ìà  à342.à ` àJust€as€pre„installation€and€promotion€by€OEMs€is€one€of€the€most€effective€means€ofÐ € Ð Ðraising€the€usage€share€of€browsing€software€among€users€of€Intel„compatible€PC€systems,€pre„¼installation€and€promotion€by€Apple€is€one€of€the€most€effective€means€of€raising€the€usage€share€ofÏbrowsing€software€among€the€users€of€Apple€PC€systems.€€Recognizing€this,€Bill€Gates€consistentlyÏurged€Microsoft€executives€to€persuade€Apple€to€pre„install€the€Mac€OS€version€of€Internet€ExplorerÏon€its€PC€systems€and€to€feature€it€more€prominently€than€the€Mac€OS€version€of€Navigator.Ìà  à343.à ` àBy€the€summer€of€1996,€Apple€was€already€shipping€Internet€Explorer€with€the€MacÐ 8ˆ ÐOS,€but€it€was€pre„installing€Navigator€as€the€default€browsing€software.€€After€a€meeting€with€Apple€inÏJune€1996,€Gates€wrote€to€some€of€his€top€executives:€€ð ðI€have€2€key€goals€in€investing€in€the€AppleÏrelationship€„€1)€Maintain€our€applications€share€on€the€platform€and€2)€See€if€we€can€get€them€toÏembrace€Internet€Explorer€in€some€way.ðð€€Later€in€the€same€message,€Gates€expressed€his€desire€thatÏApple€ð ðagree€to€immediately€ship€IE€on€all€their€systems€as€the€standard€browser.ððÌà  à344.à ` àOne€point€of€leverage€that€Microsoft€held€over€Apple€was€the€fact€that€ninety€percent€ofÐ ð#@  ÐMac€OS€users€running€a€suite€of€office€productivity€applications€had€adopted€Microsoftððs€Mac€Office.€ÏIn€1997,€Appleððs€business€was€in€steep€decline,€and€many€doubted€that€the€company€would€surviveÏmuch€longer.€€Observing€Appleððs€poor€performance€in€the€marketplace€and€its€dismal€prospects€for€theÏfuture,€many€ISVs€questioned€the€wisdom€of€continuing€to€spend€time€and€money€developingÐ À+'( Ðapplications€for€the€Mac€OS.€€Had€Microsoft€announced€in€the€midst€of€this€atmosphere€that€it€wasÏceasing€to€develop€new€versions€of€Mac€Office,€a€great€number€of€ISVs,€customers,€developers,€andÏinvestors€would€have€interpreted€the€announcement€as€Appleððs€death€notice.Ìà  à345.à ` àRecognizing€the€importance€of€Mac€Office€to€Appleððs€survival,€Microsoft€threatened€toÐ Œ Ü Ðcancel€the€product€unless€Apple€compromised€on€a€number€of€outstanding€issues€between€theÏcompanies.€€One€of€these€issues€was€the€extent€to€which€Apple€distributed€and€promoted€InternetÏExplorer,€as€opposed€to€Navigator,€with€the€Mac€OS.Ìà  à346.à ` àAt€the€end€of€June€1997,€the€Microsoft€executive€in€charge€of€Mac€Office,€BenÐ \¬  ÐWaldman,€sent€a€message€to€Gates€and€Microsoftððs€Chief€Financial€Officer,€Greg€Maffei.€€The€messageÏreflected€Waldmanððs€understanding€that€Microsoft€was€threatening€to€cancel€Mac€Office:ÌÓ XÓÓ XÓÓÓThe€pace€of€our€discussions€with€Apple€as€well€as€their€recent€unsatisfactory€responseÏhave€certainly€frustrated€a€lot€of€people€at€Microsoft.€€The€threat€to€cancel€Mac€OfficeÏ97€is€certainly€the€strongest€bargaining€point€we€have,€as€doing€so€will€do€a€great€deal€ofÏharm€to€Apple€immediately.€€I€also€believe€that€Apple€is€taking€this€threat€prettyÏseriously€.€.€.€.ÓmšÓ¹Ó X_šÓÓ XQšÓà  à347.à ` àWaldman€was€actually€an€advocate€for€releasing€Mac€Office€97€promptly,€and€heÐ d Ðpressed€for€that€outcome€in€his€message€to€Gates€and€Maffei.€€Although€they€applauded€WaldmanððsÏdevotion€to€the€product,€Gates€and€Maffei€made€clear€that€the€threat€of€canceling€Mac€Office€was€tooÏvaluable€a€source€of€leverage€to€give€up€before€Microsoft€had€extracted€acceptable€concessions€fromÏApple.€€Maffei€wrote€Waldman,€ð ðBen€„€great€mail,€but€[we]€need€a€way€to€push€these€guys€and€this€isÏthe€only€one€that€seems€to€make€them€move.ðð€€In€his€response€to€Waldman,€Gates€asked€whetherÏMicrosoft€could€conceal€from€Apple€in€the€coming€month€the€fact€that€Microsoft€was€almost€finishedÏdeveloping€of€Mac€Office€97.Ð À+'( Ðà  à348.à ` àIn€order€to€assure€his€superiors€that€he€was€pursuing€corporate€policy€despite€hisÐ ° Ðpersonal€convictions,€Waldman€reported€to€Maffei€in€his€June€1997€message€that€he€had€recently€toldÏhis€counterpart€at€Apple€that€Maffei€ð ðwould€be€recommending€to€Bill€[Gates]€that€we€cancel€MacÏOffice€97.ðð€€Waldman€believed€that€his€counterpart€ð ðgot€the€message€that€we€would,€in€fact,€cancel.ðð€ÏWaldman€went€on€to€write€that€when€his€counterpart€had€asked€what€specific€problems€Microsoft€hadÏwith€Appleððs€recent€response€to€Microsoftððs€proposals,€Waldman€had€replied€by€mentioning€fourÏissues,€including€ð ðIE€equal€access.ðð€€By€that,€Waldman€meant€Microsoftððs€demand€that€the€Mac€OSÏmake€Internet€Explorer€just€as€available€to€its€users€as€it€made€Navigator.€€According€to€Waldman,€theÏApple€employee€had€responded€that€Apple€would€not€be€able€to€change€the€Mac€OSððs€default€browserÏfrom€Navigator€until€it€released€the€next€version€of€the€operating€system€product€in€the€summer€of€1998.Ìà  à349.à ` àA€few€days€after€the€exchange€with€Waldman,€Gates€informed€those€MicrosoftÐ 8ˆ Ðexecutives€most€closely€involved€in€the€negotiations€with€Apple€that€the€discussions€ð ðhave€not€beenÏgoing€well€at€all.ðð€€One€of€the€several€reasons€for€this,€Gates€wrote,€was€that€ð ðApple€let€us€down€on€theÏbrowser€by€making€Netscape€the€standard€install.ðð€€Gates€then€reported€that€he€had€already€calledÏAppleððs€CEO€(who€at€the€time€was€Gil€Amelio)€to€ask€ð ðhow€we€should€announce€the€cancellation€ofÏMac€Office€.€.€.€.ððÌà  à350.à ` àWithin€a€month€of€Gatesðð€call€to€Amelio,€Steve€Jobs€was€once€again€Appleððs€CEO,€andÐ ð#@  Ðthe€two€companies€had€settled€all€outstanding€issues€between€them€in€three€agreements,€all€of€whichÏwere€signed€on€August€7,€1997.€€Under€the€agreement€titled€ð ðTechnology€Agreement,ðð€which€remainsÏâ âin€force€today,€Microsoftððs€primary€obligation€is€to€continue€releasing€up„to„date€versions€of€MacÐ Ì)%& ÐOffice€for€at€least€five€years.€€Among€the€obligations€that€the€Technology€Agreement€places€on€AppleÏare€several€relating€to€browsing€software.Ìâ âà  à351.à ` àFirst,€Apple€has€agreed,€for€as€long€as€Microsoft€remains€in€compliance€with€itsÐ ˜è Ðobligation€to€support€Mac€Office,€to€ð ðbundle€the€most€current€version€of€Microsoftððs€Internet€ExplorerÏfor€Macintosh€.€.€.€with€all€system€software€releases€for€Macintosh€Computers€(ððMacOSðð)€sold€byÏApple.ðð€€The€Technology€Agreement€also€provides:€ð ðWhile€Apple€may€bundle€browsers€other€thanÏInternet€Explorer€with€such€Mac€OS€system€software€releases,€Apple€will€make€Internet€Explorer€forÏMacintosh€the€default€selection€in€the€choice€of€all€included€internet€browsers€(òòi.e.óó,€when€the€userÐ \¬  Ðinvokes€the€ð ðBrowse€the€Internetðð€or€equivalent€icon,€the€Mac€OS€will€launch€Internet€Explorer€forÏMacintosh).ðð€€In€fulfillment€of€this€requirement,€Apple€did€not€include€Navigator€in€the€default€installationÏof€the€Mac€OS€8.5€upgrade€product.€€In€other€words,€Navigator€is€not€installed€on€the€computer€hardÏdrive€during€the€default€installation,€which€is€the€type€of€installation€most€users€elect€to€employ.€ÏTherefore,€most€users€who€upgraded€their€Macintosh€systems€to€Mac€OS€8.5€were€unable€to€accessÏNavigator€without€doing€a€customized€installation.€€Having€already€installed€an€altogether€adequateÏbrowser€(Internet€Explorer)€when€the€Mac€OS€8.5€upgrade€completed€its€default€installation€process,Ïhowever,€most€users€are€unlikely€to€trouble€to€install€Navigator€as€well.Ìà  à352.à ` àThe€Technology€Agreement€further€provides€that€ð ð[a]ny€other€internet€browsersÐ ð#@  Ðbundled€in€the€Mac€OS€system€software€sold€by€Apple€shall€be€placed€in€folders€in€the€software€asÏreleased.ðð€€In€other€words,€Apple€may€not€position€icons€for€non„Microsoft€browsing€software€on€theÏdesktop€of€new€Macintosh€PC€systems€or€Mac€OS€upgrades.€€Moreover,€the€agreement€states€thatÏð ðApple€will€not€be€proactive€or€initiate€actions€to€encourage€users€to€swap€out€Internet€Explorer€forÐ À+'( ÐMacintosh.ðð€€Both€Apple€and€Microsoft€read€this€term€to€prohibit€Apple€from€promoting€non„MicrosoftÏbrowsing€software.€€The€agreement€even€states€that€Apple€will€ð ðencourage€its€employees€to€useÏMicrosoft€Internet€Explorer€for€Macintosh€for€all€Apple„sponsored€events€and€will€not€promote€anotherÏbrowser€to€its€employees.ðð€€Pursuant€to€this€provision,€Appleððs€management€has€instructed€the€firmððsÏemployees€to€not€use€Navigator€in€demonstrations€at€trade€shows€and€other€public€events.€€Also€withÏregard€to€the€promotion€of€browser€technology,€the€agreement€requires€Apple€to€display€the€InternetÏExplorer€logo€on€ð ðall€Apple„controlled€web€pages€where€any€browser€logo€is€displayed.ðð€€Finally,€theÏagreement€grants€Microsoft€the€right€of€first€refusal€to€supply€the€default€browsing€software€for€any€newÏoperating€system€product€that€Apple€develops€during€the€term€of€the€agreement.Ìà  à353.à ` àAt€the€same€time€that€it€entered€the€Technology€Agreement,€Microsoft€concluded€aÐ D” Ðð ðPreferred€Stock€Purchase€Agreementðð€and€a€ð ðPatent€Cross€License€Agreementðð€with€Apple.€€TheseÏlatter€two€agreements€place€obligations€on€Microsoft€that€are€unrelated€to€Mac€Office,€and€they€bindÏApple€in€areas€other€than€browsing€software.€€The€fact€that€Microsoft€and€Apple€entered€two€otherÏagreements€at€the€same€time€that€they€entered€the€Technology€Agreement€does€not€change€the€fact€thatÏMicrosoftððs€commitment€to€continue€developing€Mac€Office€was€at€least€partial€consideration€forÏAppleððs€commitment€to€distribute€and€promote€Internet€Explorer€more€favorably€than€Navigator.€ÏIndeed,€the€language€of€the€agreements€themselves€demonstrates€that€Microsoft€and€Apple€saw€theÏMac€Office€and€Internet€Explorer€obligations€as€more€closely€linked€to€each€other€than€to€any€otherÏobligations€the€parties€simultaneously€undertook:€€Whereas€the€provision€in€the€Technology€AgreementÏsetting€forth€Appleððs€obligations€relating€to€browsing€software€explicitly€states€that€those€obligations€willÏlast€as€long€as€Microsoft€complies€with€its€obligation€to€continue€supporting€Mac€Office,€the€provisionsÐ À+'( Ðin€the€other€two€agreements€describing€the€patent€cross„license€and€Microsoftððs€purchase€of€AppleÏstock€mention€neither€browsing€software€nor€Mac€Office.€€Ìà  à354.à ` àThat€the€Mac€Office€and€browsing€software€obligations€are€tied€to€each€other€isÐ ˜è Ðhighlighted€by€the€fact€that€the€Microsoft€executives€who€negotiated€the€agreement€believe€thatÏMicrosoftððs€remedy,€were€Apple€to€fail€to€meet€its€obligations€with€respect€to€browsing€software,€wouldÏbe€to€discontinue€Mac€Office.€€When,€in€February€1998,€a€Microsoft€employee€proposed€giving€AppleÏan€HTML€control€in€exchange€for€Appleððs€agreement€to€use€Internet€Explorer€as€its€standard€browserÏinternally,€Waldman€informed€the€employee€that€Apple€was€already€obligated€to€use€Internet€ExplorerÏas€its€standard€browser€internally€and€that€Microsoft€would€revive€the€threat€to€discontinue€Mac€OfficeÏif€Apple€failed€to€comply€with€its€obligation.€€In€Waldmanððs€words:ÌÓÓÓ XÓÓ XÓSounds€like€we€give€them€the€HTML€control€for€nothing€except€making€IE€theÏð ðstandard€browser€for€Apple?ðð€€I€think€they€should€be€doing€this€anyway.€€Though€theÏlanguage€of€the€agreement€uses€the€word€ð ðencourage,ðð€I€think€that€the€spirit€is€thatÏApple€should€be€using€it€everywhere€and€if€they€donððt€do€it,€then€we€can€use€Office€as€aÏclub.ÌÓ X$¼ÓÓ X¼ÓÓ¼ÓÓÓà  àÌÓÓFor€at€least€a€year€after€the€Technology€Agreement€went€into€effect,€Waldman€and€other€MicrosoftÏemployees€continued€to€use€the€threat€of€reduced€commitment€to€Mac€Office€in€holding€Apple€to€itsÏcommitments€to€support€Internet€Explorer.Ìà  à355.à ` àApple€increased€its€distribution€and€promotion€of€Internet€Explorer€not€because€of€aÐ ð#@  Ðconviction€that€the€quality€of€Microsoftððs€product€was€superior€to€Navigatorððs,€or€that€consumerÏdemand€for€it€was€greater,€but€rather€because€of€the€òòinóó€òòterroremóó€effect€of€the€prospect€of€the€loss€ofÐ Ø'(#$ ÐMac€Office.€€To€be€blunt,€Microsoft€threatened€to€refuse€to€sell€a€profitable€product€to€Apple,€aÏproduct€in€whose€development€Microsoft€had€invested€substantial€resources,€and€which€was€virtuallyÐ À+'( Ðready€for€shipment.€€Not€only€would€this€ploy€have€wasted€sunk€costs€and€sacrificed€substantial€profit,€itÏalso€would€have€damaged€Microsoftððs€goodwill€among€Appleððs€customers,€whom€Microsoft€had€led€toÏexpect€a€new€version€of€Mac€Office.€€The€predominant€reason€Microsoft€was€prepared€to€make€thisÏsacrifice,€and€the€sole€reason€that€it€required€Apple€to€make€Internet€Explorer€its€default€browser€andÏrestricted€Appleððs€freedom€to€feature€and€promote€non„Microsoft€browsing€software,€was€to€protectÏthe€applications€barrier€to€entry.€€More€specifically,€the€requirements€and€restrictions€relating€toÏbrowsing€software€were€intended€to€raise€Internet€Explorerððs€usage€share,€to€lower€Navigatorððs€share,Ïand€more€broadly€to€demonstrate€to€important€observers€(including€consumer,€developers,€industryÏparticipants,€and€investors)€that€Navigatorððs€success€had€crested.€€Had€Microsoftððs€only€interest€inÏdeveloping€the€Mac€OS€version€of€Internet€Explorer€been€to€enable€organizational€customers€usingÏmultiple€PC€operating„system€products€to€standardize€on€one€user€interface€for€Web€browsing,ÏMicrosoft€would€not€have€extracted€from€Apple€the€commitment€to€make€Internet€Explorer€the€defaultÏbrowser€or€imposed€restrictions€on€its€use€and€promotion€of€Navigator.Ìà  à356.à ` àMicrosoft€understands€that€PC€users€tend€to€use€the€browsing€software€that€comes€pre„Ð d Ðinstalled€on€their€machines,€particularly€when€conspicuous€means€of€easy€access€appear€on€the€PCÏdesktop.€€By€guaranteeing€that€Internet€Explorer€is€the€default€browsing€software€on€the€Mac€OS,€byÏrelegating€Navigator€to€less€favorable€placement,€by€requiring€Navigatorððs€exclusion€from€the€defaultÏinstallation€for€the€Mac€OS€8.5€upgrade,€and€by€otherwise€limiting€Appleððs€promotion€of€Navigator,ÏMicrosoft€has€ensured€that€most€users€of€the€Mac€OS€will€use€Internet€Explorer€and€not€Navigator.€ÏAlthough€the€number€of€Mac€OS€users€is€very€small€compared€to€the€Windows€installed€base,€the€MacÏOS€is€nevertheless€the€most€important€consumer„oriented€operating€system€product€next€to€Windows.€Ô_ÔÐ À+'( ÐNavigator€needed€high€usage€share€among€Mac€OS€users€if€it€was€ever€to€enable€the€development€of€aÏsubstantial€body€of€cross„platform€software€not€dependent€on€Windows.€€By€extracting€from€AppleÏterms€that€significantly€diminished€the€usage€of€Navigator€on€the€Mac€OS,€Microsoft€severelyÏsabotaged€Navigatorððs€potential€to€weaken€the€applications€barrier€to€entry.ÌÌØ€ ØÓÓò òà  àG.à0 ` àMicrosoftððs€Successó ó€ò òin€Excluding€Navigator€from€the€Channels€that€Lead€MostÐ tÄ  ÐEfficiently€to€Browser€Usageó óÐn¾ ` (#` (# ÐÌÓ/ËÓà  à357.à ` àThe€cumulative€effect€of€the€stratagems€described€above€was€to€ensure€that€the€easiestÐ b²  Ðand€most€intuitive€paths€that€users€could€take€to€the€Web€would€lead€to€Internet€Explorer,€the€gateÏcontrolled€by€Microsoft.€€Microsoft€did€not€actually€prevent€users€from€obtaining€and€using€NavigatorÏ(although€it€tried€to€do€as€much€in€June€1995),€but€Microsoft€did€make€it€significantly€less€convenient€forÏthem€to€do€so.€€Once€Internet€Explorer€was€seen€as€providing€roughly€the€same€browsing€experience€asÏNavigator,€relatively€few€PC€users€showed€any€inclination€to€expend€the€effort€required€to€obtain€andÏinstall€Navigator.€€Netscape€could€still€carpet€bomb€the€population€with€CD„ROMs€and€makeÏNavigator€available€for€downloading.€€In€reality,€however,€few€new€users€(òòi.e.óó,€ones€not€merelyÐ ^ Ðupgrading€from€an€old€version€of€Navigator€to€a€new€one)€had€any€incentive€to€install€ð"ð€much€lessÏdownload€and€install€ð"ð€software€to€replicate€a€function€for€which€OEMs€and€Ô_ÔIAPsÔ_Ô€were€alreadyÏplacing€perfectly€adequate€browsing€software€at€their€disposal.€€The€fact€that€Netscape€was€forced€toÏdistribute€tens€of€millions€of€copies€of€Navigator€through€high„cost€carpet„bombing€in€order€to€obtain€aÏrelatively€small€number€of€new€users€only€discloses€the€extent€of€Microsoftððs€success€in€excludingÏNavigator€from€the€channels€that€lead€most€effectively€to€browser€usage.Ð Æ*&' ÐÔ_ÔØ€ ØÝ‚ )ÞÿÝÝ  ÝÓÓò òà0  àÝ‚ )ÞÒÝÚƒ ÚHÚ  Ú.à0` (#(#àÝ  ÝThe€Success€of€Microsoftððs€Effort€to€Maximize€Internet€Explorerððs€UsageÐ ° ÐShare€at€Navigatorððs€Expenseó ó݃ )ÞÒWÒÝÛ€ یЪú` (#` (# ÐŒÝ  Ýà0  àÐ (#(# ÐÓ6ÒÓà  à358.à ` àMicrosoftððs€efforts€to€maximize€Internet€Explorerððs€share€of€browser€usage€atÐ žî ÐNavigatorððs€expense€have€done€just€that.€€The€period€since€1996€has€witnessed€a€large€increase€in€theÏusage€of€Microsoftððs€browsing€technologies€and€a€concomitant€decline€in€Navigatorððs€share.€€ThisÏreversal€of€fortune€might€not€have€occurred€had€Microsoft€not€improved€the€quality€of€InternetÏExplorer,€and€some€part€of€the€reversal€is€undoubtedly€attributable€to€Microsoftððs€decision€to€distributeÏInternet€Explorer€with€Windows€at€no€additional€charge.€€The€relative€shares€would€not€have€changedÏnearly€as€much€as€they€did,€however,€had€Microsoft€not€devoted€its€monopoly€power€and€monopolyÏprofits€to€precisely€that€end.ÌØ€Øò òÝ‚!.îÿÝÝ  Ýà  àà ` àÝ‚!.îÝÖÝÚƒÚ1Ú  Ú.à0 ¸ àÝ  ÝThe€Change€in€the€Usage€Shares€of€Internet€Explorer€and€Navigator݃!.îÝÖ×ÝÛ€ÛŒÐ>ޏ (#¸ (# ÐŒÝ  Ýó óà  à359.à ` àA€developer€of€network„centric€applications€wants€as€many€consumers€as€possible€toÐ 2‚ Ðacquire€and€use€its€products.€€It€knows€that€only€consumers€running€a€browser€that€exposes€theÏrequisite€APIs€will€be€able€to€use€network„centric€applications€that€rely€on€those€APIs.€€So€in€decidingÏwhether€to€concentrate€its€development€work€on€APIs€exposed€by€Netscapeððs€Web€browsing€softwareÏor€Microsoftððs,€one€of€the€questions€a€developer€will€ask€is€how€much€Navigator€is€being€used€inÏrelation€to€Internet€Explorer.€€Dividing€the€total€usage€of€each€browser€product€by€the€total€usage€of€allÏbrowsing€software€(òòi.e.óó,€usage€of€the€installed€base)€answers€this€question,€for€it€reveals€the€proportionÐ ê$: ! Ðof€total€usage€accounted€for€by€each€product.€€The€relative€attractiveness€to€developers€of€NavigatorÏâ âand€Internet€Explorer€thus€depends€to€a€large€extent€on€their€relative€shares€of€all€browser€usage.€€Ð Ò("$% Ðà  à360.à ` àAccording€to€estimates€that€Microsoft€executives€cited€to€support€their€testimony€in€thisÐ ° Ðâ âtrial,€and€those€on€which€Microsoft€relied€in€the€course€of€its€business€planning,€the€shares€of€all€browserÏusage€enjoyed€by€Navigator€and€Internet€Explorer€changed€dramatically€in€favor€of€Internet€ExplorerÏafter€Microsoft€began€its€campaign€to€protect€the€applications€barrier€to€entry.€€These€estimates€showÏthat€Navigatorððs€share€fell€from€above€eighty€percent€in€January€1996€to€fifty„five€percent€in€NovemberÏ1997,€and€that€Internet€Explorerððs€share€rose€from€around€five€percent€to€thirty„six€percent€over€theÏsame€period.€€In€April€1998,€Microsoft€relied€on€measurements€for€internal€planning€purposes€thatÏplaced€Internet€Explorerððs€share€of€all€browser€usage€above€forty„five€percent.€€These€figures€areÏbroadly€consistent€with€ones€AOL€relied€on€in€evaluating€its€acquisition€of€Netscape:€€AOL€determinedÏthat€Navigatorððs€share€had€fallen€from€around€eighty€percent€at€the€end€of€1996€to€the€ð ðmid€50%€rangeððÏin€July€1998€and€that€Internet€Explorerððs€share€had€climbed€to€between€forty„five€and€fifty€percent€ofÏthe€domestic€market€by€late€1998.Ìà  à361.à ` àBefore€a€developer€sinks€costs€into€writing€applications€that€rely€on€APIs€exposed€byÐ  p ÐNavigator€or€Internet€Explorer,€the€developer€will€also€want€to€know€what€share€of€browser€usage€eachÏof€the€competing€platforms€will€enjoy€in€the€future,€when€the€developerððs€applications€will€reach€theÏmarketplace,€and€even€farther€into€the€future,€when€the€developer€will€try€to€sell€updated€versions€ofÏthose€applications.€€Dividing€the€new€usage€of€each€browser€product€by€the€new€usage€of€all€browsingÏsoftware€(òòi.e.óó,€incremental€usage)€helps€to€formulate€a€prediction.€€If€a€browser€productððs€current€shareÐ ä%4!" Ðof€all€browser€usage€is€fifty€percent,€and€its€share€of€incremental€browser€usage€is€thirty€percent,€theÏproductððs€share€of€all€browser€usage€will,€assuming€the€share€of€incremental€usage€does€not€rise,Ïgradually€approach€thirty€percent,€as€the€size€of€the€population€of€browser€users€grows€and€currentÐ À+'( Ðusers€update€their€PC€systems.€€So€Navigatorððs€and€Internet€Explorerððs€relative€attractiveness€asÏplatforms€also€depends€greatly€on€their€relative€shares€of€incremental€browser€usage.€€MicrosoftððsÏtactics€were€focused€on€channels€for€the€distribution€of€new€browsing€software.€€Moreover,€excludingÏthe€installed€base€from€the€calculation€heightens€the€sensitivity€with€which€share€of€incremental€browserÏusage€reacts€to€contemporaneous€forces.€€Microsoft€was€thus€particularly€interested€in€share€ofÏincremental€browser€usage,€not€only€as€an€indication€of€Navigatorððs€and€Internet€Explorerððs€relativeÏattractiveness€as€platforms,€but€also€as€a€sensitive€reading€of€the€impact€that€its€actions€were€having.Ìà  à362.à ` àAccording€to€data€on€which€Microsoft€relied€in€the€course€of€its€business,€InternetÐ \¬  ÐExplorer€was,€by€late€1997,€capturing€a€larger€share€of€incremental€browser€usage€than€Navigator.€ÏSpecifically,€data€that€the€company€then€deemed€reliable€showed€that€fifty„seven€percent€of€the€newÏusers€of€browsing€software€in€the€last€six€months€of€1997€used€Internet€Explorer,€while€only€thirty„nineÏpercent€used€Navigator.€€By€February€1998,€Microsoftððs€data€showed€that€sixty„two€percent€of€theÏnew€Internet€connections€over€the€previous€six€months€were€using€Internet€Explorer,€versus€thirty„eightÏpercent€for€Navigator.€€Since€there€is€no€indication€that€Navigator€users€as€a€group€employ€theirÏbrowsers€more€than€Internet€Explorer€users,€these€data€indicate€that€Internet€Explorerððs€share€ofÏincremental€usage€had€exceeded€Navigatorððs€by€late€1997.€€This€meant€that€Internet€Explorerððs€share€ofÏall€browser€usage€was€moving€to€surpass€Navigatorððs.€€To€Microsoft,€these€numbers€not€only€marked€aÏsignificant€decline€in€Navigatorððs€attractiveness€as€a€platform,€they€also€reflected€the€substantial€impactÏof€Microsoftððs€actions.Ìà  à363.à ` àThe€ð ðhitðð€data€collected€by€AdKnowledge€comport€with€the€share€estimates€on€whichÐ Ì)%& ÐMicrosoft€and€AOL€relied€internally.€€AdKnowledge€is€a€company€that€markets€Web€advertisingÐ À+'( Ðservices.€€Once€the€proprietor€of€a€Web€site€sells€space€on€its€pages€to€an€advertiser,€AdKnowledgeÏstores€the€advertisements€on€its€servers€and€delivers€them€to€the€appropriate€pages€when€they€areÏaccessed€by€users.€€One€day€every€month,€AdKnowledge€monitors€the€number€of€times€that€each€of€theÏadvertisements€appears€on€usersðð€screens.€€Each€appearance€of€an€advertisement€on€a€userððs€screen€isÏcalled€a€ð ðhit.ðð€€As€part€of€the€hit€data€it€collects,€AdKnowledge€logs€the€type€of€Web€browsing€softwareÏused€to€access€the€pages€on€which€the€particular€advertisements€appear.€€Thus,€the€AdKnowledge€dataÏcan€be€used€to€calculate€monthly€snapshots€of€the€shares€of€usage€that€particular€types€of€WebÏbrowsing€software€attract€from€the€population€of€users€accessing€the€Web€pages€that€AdKnowledgeÏmonitors.€€To€the€extent€AdKnowledge€can€detect€the€IAPs€through€which€individual€users€access€theÏmonitored€sites,€the€data€can€also€be€used€to€calculate€estimates€of€the€usage€shares€that€particularÏtypes€of€browsing€software€attract€from€the€subscriber€bases€of€particular€IAPs.Ìà  à364.à ` àThe€AdKnowledge€data€show€that€Internet€Explorerððs€share€of€hits€to€the€monitoredÐ ,| ÐWeb€sites€rose€from€twenty€percent€in€January€1997€to€forty„nine€percent€in€August€1998€and€thatÏNavigatorððs€share€fell€from€seventy„seven€to€forty„eight€percent€over€the€same€period.€€Dividing€theÏchange€in€the€respective€numbers€of€Internet€Explorer€and€Navigator€hits€from€the€first€quarter€of€1998Ïto€the€third€quarter€of€1998€by€the€change€in€the€number€of€total€hits€over€that€same€period€yields€a€fifty„¼seven€percent€share€of€incremental€browser€usage€for€Internet€Explorer€and€a€forty€percent€share€forÏNavigator.€€These€figures€are€again€consistent€with€the€estimates€on€which€Microsoft€and€AOL€reliedÏinternally.Ìà  à365.à ` àWhen€a€user€accessing€the€Internet€through€AOL€moves€from€one€Web€page€toÐ Ì)%& Ðanother,€AOL€temporarily€stores,€or€ð ðcaches,ðð€the€first€Web€page€on€a€local€server.€€When€theÐ À+'( Ðsubscriber€seeks€to€return€to€the€first€page,€AOL€delivers€it€from€the€local€server€rather€than€returning€toÏthe€Web€for€a€refreshed€version€of€the€page.€€AdKnowledge€only€counts€a€hit€when€one€of€theÏmonitored€advertisements€is€served€to€a€usersðð€computer€from€the€Web.€€Thus,€AdKnowledgeÏundercounts€hits€by€AOL€users.€€AdKnowledgeððs€attempt€to€implement€ð ðcache„foolingðð€measures€hasÏnot€eliminated€the€effects€of€caching.€€Largely€as€a€result€of€the€restrictive€terms€Microsoft€prevailedÏupon€AOL€to€accept,€Internet€Explorer€enjoys€a€very€high€share€of€browser€usage€by€AOLÏsubscribers.€€Consequently,€Internet€Explorerððs€share€of€all€hits€detected€by€AdKnowledge€is€lowerÏthan€its€actual€share€of€all€usage.€€Correcting€for€the€effects€of€caching€results€in€virtually€no€change€toÏthe€AdKnowledge„based€calculation€of€relative€browser€usage€shares€in€early€1997;€however,€it€raisesÏby€approximately€five€percent€the€figure€representing€Internet€Explorerððs€share€of€browser€usage€in€theÏthird€quarter€of€1998.Ìà  à366.à ` àAlthough€AdKnowledge€only€monitors€hits€to€commercial€Web€pages,€there€is€noÐ ,| Ðindication€that€certain€types€of€Web€browsing€software€are€used€more€than€others€to€accessÏcommercial,€versus€non„commercial€Web€sites.€€Furthermore,€the€same€share€trends€reflected€in€theÏAdKnowledge€data€appear€in€data€collected€from€a€prominent€academic€site.€€The€University€of€IllinoisÏat€Urbana„Champlain€monitors,€on€a€weekly€basis,€the€browsing€software€accessing€its€popularÏengineering€Web€site.€€The€resulting€data,€which€AOL€found€important€enough€to€rely€on€in€evaluatingÏthe€purchase€of€Netscape,€yield€virtually€the€same€usage€share€figures€as€do€the€AdKnowledge€data.Ìà  à367.à ` àAdKnowledge€does€not€undertake€to€collect€data€on€the€use€of€browsing€software€toÐ Ø'(#$ Ðnavigate€proprietary€OLS€content€or€intra„enterprise€networks€(ð ðintranetsðð).€€This€does€not€detract€fromÏthe€value€of€the€AdKnowledge€data€as€a€measure€of€usage€share€for€developersðð€purposes,€however,Ð À+'( Ðfor€most€developers€of€network„centric€applications€look€to€write€applications€that€will€run€throughÏWeb€sites,€not€through€OLS€proprietary€content€or€pages€on€an€intranet.€€Most€developers€willÏtherefore€pay€most€attention€to€estimates€of€the€extent€to€which€a€particular€type€of€browsing€software€isÏbeing€used€to€browse€the€Web.€€Moreover,€only€a€very€small€percentage€of€the€copies€of€WebÏbrowsing€software€in€operation€are€used€exclusively€to€navigate€intranets.Ìà  à368.à ` àThe€advertisement€banners€on€some€Web€sites€alternate€between€differentÐ tÄ  Ðadvertisements.€€Assuming€that€AdKnowledge€delivers€these€advertisements,€a€single€visit€to€a€Web€siteÏcould€register€with€AdKnowledge€as€multiple€hits€as€the€advertisements€ð ðrotateðð€on€the€userððs€screen.€ÏThis€phenomenon€does€not€spoil€the€essential€reliability€of€the€AdKnlowledge€data€as€a€reporter€ofÏbrowser€usage€share,€though.€€In€order€for€there€to€be€a€bias€of€significant€proportions,€users€of€eitherÏInternet€Explorer€or€Navigator€would€have€to€exhibit€a€special€propensity€to€keep€pages€open€as€theÏadvertisements€rotate.€€There€is€no€reason€to€believe€that€this€is€the€case.€€Ì€à  à369.à ` àThus€none€of€the€characteristics€of€the€AdKnowledge€data€invalidate€it€as€a€usefulÐ  p Ðmeasure€of€browser€usage€share.€€It€is€understandable,€therefore,€that€in€evaluating€the€purchase€ofÏNetscape,€AOL€viewed€AdKnowledgeððs€hit€data€as€one€of€the€more€reliable€indicators€of€trends€in€theÏrelative€shares€of€all€browser€usage€enjoyed€by€Navigator€and€Internet€Explorer.Ìà  à370.à ` àMicrosoftððs€economic€witness,€Richard€Schmalensee,€testified€survey€data€collected€byÐ ð#@  ÐMarket€Decisions€Corporation€(ð ðMDCðð)€provide€a€more€accurate€measure€of€the€usage€sharesÏenjoyed€by€different€brands€of€Web€browsing€software€than€AdKnowledgeððs€hit€data.€€The€calculationsÏthat€Schmalensee€made€using€the€MDC€data€lead€to€results€that€differ,€in€one€main€respect,€from€theÏresults€generated€with€hit€data.€€Whereas€the€AdKnowledge€data€show€Navigatorððs€share€falling€fromÐ À+'( Ðseventy„five€to€fifty„six€percent€from€the€first€to€the€third€quarter€of€1997,€the€MDC€data€showÏNavigatorððs€share€holding€steady€at€fifty„five€or€fifty„six€percent€over€the€same€period.€€Although€bothÏsources€show€Internet€Explorerððs€share€gaining€steadily€throughout€that€period,€the€MDC€data€indicateÏthat€Internet€Explorerððs€rise€was€coming€not€at€Navigatorððs€expense,€but€rather€at€the€expense€of€otherÏbrowser€products,€which,€according€to€the€MDC€data,€collectively€enjoyed€a€substantial€share€intoÏ1997.€€The€AdKnowledge€data,€by€contrast,€indicate€that€the€share€of€usage€attributable€to€browsersÏother€than€Internet€Explorer€and€Navigator€has€never€been€substantial€and€that€Internet€Explorerððs€riseÏhas€always€been€at€Navigatorððs€expense.Ìà  à371.à ` àThe€MDC€estimates€of€the€shares€attributable€to€Navigator€and€other€non„MicroosftÐ P  Ðbrowser€products€in€1996€differ€markedly€from€those€on€which€Microsoft€and€AOL€relied€in€the€courseÏof€making€business€judgments.€€Notably,€in€August€1996,€four€months€after€it€commissioned€the€firstÏMDC€survey,€Microsoft€continued€to€estimate€Navigatorððs€share€as€exceeding€eighty€percent.€€In€fact,Ïthe€senior€Microsoft€executives€who€testified€in€this€trial€still€believed€at€the€time€of€their€testimony€thatÏNavigatorððs€usage€share€in€late€1995€and€early€1996€had€exceeded€eighty€percent.€€To€the€extent€theÏMDC€estimates€differ€from€those€which€Microsoft€and€AOL€used€internally,€and€which€seniorÏMicrosoft€executives€still€embrace,€the€Court€is€inclined€to€trust€the€latter€estimates.€€More€broadly,€theÏsets€of€questions€contained€in€the€MDC€surveys€and€the€internally€inconsistent€responses€they€evokedÏreveal€that€a€substantial€percentage€of€the€respondents€misunderstood€some€of€the€patently€ambiguousÏquestions€they€were€asked,€and€that€a€large€number€responded€to€questions€when€they€were€unsure€of,Ïor€even€clearly€misinformed€regarding,€the€answers.€€The€Court€accordingly€gives€no€weight€to€any€ofÏthe€conclusions€that€Microsoft€draws€from€MDC€survey€data.Ð À+'( Ðà  à372.à ` àIn€summary,€the€estimates€on€which€Microsoft€and€AOL€relied€and€the€measurementsÐ ° Ðmade€by€AdKnowledge€and€the€University€of€Illinois€provide€an€adequate€basis€for€two€findings:€€First,Ïfrom€early€1996€to€the€late€summer€of€1998,€Navigatorððs€share€of€all€browser€usage€fell€from€aboveÏseventy€percent€to€around€fifty€percent,€while€Internet€Explorerððs€share€rose€from€about€five€percent€toÏaround€fifty€percent;€second,€by€1998,€Navigatorððs€share€of€incremental€browser€usage€had€fallenÏbelow€forty€percent€while€Internet€Explorerððs€share€had€risen€above€sixty€percent.€€All€signs€point€to€theÏfact€that€Internet€Explorerððs€share€has€continued€to€rise€ð"ð€and€Navigatorððs€has€continued€to€decline€ð"ðÏsince€the€late€summer€of€1998.€€It€is€safe€to€conclude,€then,€that€Internet€Explorerððs€share€of€all€browserÏusage€now€exceeds€fifty€percent,€and€that€Navigatorððs€share€has€fallen€below€that€mark.Ìà  à373.à ` àThese€trends€will€continue.€€In€February€1998,€Kumar€Mehta,€the€Microsoft€employeeÐ D” Ðresponsible€for€tracking€browser€share,€told€Brad€Chase€that€Microsoftððs€best€model€projected€thatÏInternet€Explorerððs€usage€share€in€early€2001€would€stand€between€sixty€and€sixty„eight€percent.€€ThisÏcomports€with€the€forecast€on€which€AOL€relied€in€deciding€to€purchase€Netscape:€€The€reportÏpresented€to€AOLððs€board€of€directors€prior€to€their€vote€on€the€transaction€predicted€that€NavigatorððsÏusage€share€would€fall€to€between€thirty„five€and€forty€percent€by€late€2000.€€The€most€reasonableÏprediction,€then,€is€that€by€January€2001,€Internet€Explorerððs€usage€share€will€exceed€sixty€percentÏwhile€Navigatorððs€share€will€have€fallen€below€forty€percent.Ìà  à374.à ` àNavigatorððs€large€and€continuing€decline€in€usage€share€has€demonstrated€to€developersÐ ä%4!" Ðthe€productððs€failure€to€mature€as€the€standard€software€used€to€browse€the€Web.€€Internet€ExplorerððsÏâ âsuccess€in€gaining€usage€share,€together€with€the€lack€of€contenders€other€than€Navigator,€hasÐ Ì)%& Ðsimultaneously€sent€the€clear€message€to€developers€that€no€platform€for€network„centric€applicationsÏcan€compete€for€ubiquity€with€the€32„bit€Windows€API€set.Ìâ âÝ‚!.îÿÝÝ  Ýà  àà ` àò òÝ‚!.îÝÚƒÚ2Ú  Ú.à0 ¸ àÝ  ÝThe€Cause€of€the€Change€in€Usage€Sharesó ó݃!.îMÝÛ€ÛŒÐ˜è¸ (#¸ (# ÐŒÝ  Ýà  à375.à ` àThe€changes€in€usage€share€described€above€would€likely€not€have€occurred€hadÐ Œ Ü ÐMicrosoft€not€improved€its€browsing€software€to€the€point€that,€by€late€1996,€the€average€user€couldÏnot€discern€a€significant€difference€in€quality€and€features€between€the€latest€versions€of€InternetÏExplorer€and€Navigator.€€As€Microsoftððs€top€executives€predicted,€however,€Internet€Explorerððs€qualityÏand€features€have€never€surpassed€Navigatorððs€to€such€a€degree€as€to€compel€a€significant€part€ofÏNavigatorððs€installed€base€to€switch€to€Internet€Explorer.€€An€internal€Microsoft€presentation€concludedÏin€February€1998€that€ð ð[m]any€customers€see€MS€and€NS€as€parity€products;€no€strong€reason€toÏswitch,ðð€and€another€internal€review€three€months€later€reported,€ð ðIE4€is€fundamentally€not€compellingððÏand€ð ð[n]ot€differentiated€from€Netscape€v[ersion]4€ð"ð€seen€as€a€commodity.ðð€€For€a€time,€even€amongÏnew€users,€Navigator€was€likely€to€win€most€choices€between€comparable€browser€software,€becauseÏmost€people€associated€the€Internet€and€cutting„edge€browsing€technology€with€Netscape€rather€thanÏwith€Microsoft.€€So,€if€Microsoft€had€taken€no€action€other€than€improving€the€quality€and€features€of€itsÏbrowser,€Internet€Explorerððs€share€of€usage€would€have€risen€far€less€and€far€more€slowly€than€itÏactually€did.€€While€Internet€Explorerððs€increase€in€usage€share€accelerated€and€began€to€cut€deeply€intoÏNavigatorððs€share€after€Microsoft€released€the€first€version€of€Internet€Explorer€(3.0)€to€offer€qualityÏand€features€approaching€those€of€Navigator,€the€acceleration€occurred€months€before€MicrosoftÏâ âreleased€the€first€version€of€Internet€Explorer€(4.0)€to€win€a€significant€number€of€head„to„head€productÐ Ì)%& Ðreviews€against€Navigator.€€This€indicates€that€superior€quality€was€not€responsible€for€the€dramatic€riseÏInternet€Explorerððs€usage€share.Ìâ âà  à376.à ` àIncluding€Internet€Explorer€with€Windows€at€no€additional€charge€likely€helped€theÐ ˜è Ðusage€share€of€Microsoftððs€browsing€software.€€It€did€not,€however,€prevent€OEMs€from€meetingÏdemand€for€Navigator,€which€remained€higher€than€demand€for€Internet€Explorer€well€into€1998.€ÏMoreover,€bundling€Internet€Explorer€with€Windows€had€no€effect€on€the€distribution€and€promotion€ofÏbrowsing€software€by€IAPs€or€through€any€of€the€other€channels€that€Microsoft€sought€to€pre„empt€byÏother€means.€€Had€Microsoft€not€offered€distribution€licenses€for€Internet€Explorer€ð"ð€and€other€thingsÏof€great€value€ð"ð€to€other€firms€at€no€charge;€had€it€not€prevented€OEMs€from€removing€the€prominentÏmeans€of€accessing€Internet€Explorer€and€limited€their€ability€to€feature€Navigator;€and€had€MicrosoftÏnot€taken€all€the€other€measures€it€used€to€maximize€Internet€Explorerððs€usage€share€at€NavigatorððsÏexpense,€its€browsing€software€would€not€have€weaned€such€a€large€amount€of€usage€share€fromÏNavigator,€much€less€overtaken€Navigator€in€three€years.ÌÓÓÝ‚ )ÞÿÝÝ  Ýà  àò òÝ‚ )Þ$ÝÚƒ ÚIÚ  Ú.à0 ` àÝ  ÝThe€Success€of€Microsoftððs€Effort€toó ó€ò òProtect€the€Applications€Barrier€to€EntryÐ d Ðfrom€the€Threat€Posed€by€Navigatoró ó݃ )Þ$H$ÝÛ€  ÛŒÐ^` (#` (# ÐŒÝ  ÝÌÓÓà  à377.à ` àIn€late€1995€and€early€1996,€Navigator€seemed€well€on€its€way€to€becoming€theÐ !R Ðstandard€software€for€browsing€the€Web.€€Within€three€years,€however,€Microsoft€had€successfullyÏdenied€Navigator€that€status,€and€had€thereby€forestalled€a€serious€potential€threat€to€the€applicationsÏbarrier€to€entry.€€Indeed,€Microsoftððs€Kumar€Mehta€felt€comfortable€expressing€to€Brad€Chase€inÏâ âFebruary€1998€his€ð ðPERSONAL€opinionðð€that€ð ðthe€browser€battle€is€close€to€over.ðð€€Mehta€continued:Ð Ò("$% Ðð ðWe€set€out€on€this€mission€2€years€ago€to€not€let€netscape€dictate€standards€and€control€the€browserÏapiððs€[òòsicóó].€€All€evidence€today€says€they€donððt.ððÐ ¤ô Ðâ âà  à378.à ` àThe€population€of€browser€users€is€expanding€so€quickly€that€Navigatorððs€installed€baseÐ ˜è Ðhas€grown€even€as€its€usage€share€has€fallen.€€In€fact,€AOL€credited€an€estimate€stating€that€NavigatorððsÏinstalled€base€in€the€United€States€alone€grew€from€fifteen€million€in€1996€to€thirty„three€million€inÏDecember€1998.€€By€all€indications,€Navigatorððs€installed€base€will€continue€to€grow.€€This€does€notÏmean,€however,€that€Navigator€is€ð"ð€or€will€be€ð"ð€an€attractive€enough€platform€for€the€development€ofÏnetwork„centric€applications€to€weaken€the€applications€barrier€to€entry.€€As€discussed€above,€theÏAPIs€that€Navigator€exposes€could€only€attract€enough€developer€attention€to€threaten€the€applicationsÏbarrier€to€entry€if€Navigator€became€ð"ð€or€appeared€destined€to€become€ð"ð€the€standard€software€usedÏto€browse€the€Web.€€Navigatorððs€installed€base€may€continue€to€grow,€but€Internet€Explorerððs€installedÏbase€is€now€larger€and€growing€faster.€€Consequently,€the€APIs€that€Navigator€exposes€will€not€attractÏenough€developer€attention€to€spawn€a€body€of€cross„platform,€network„centric€applications€largeÏenough€to€dismantle€the€applications€barrier€to€entry.Ìà  à379.à ` àNot€only€did€Microsoft€prevent€Navigator€from€undermining€the€applications€barrier€toÐ  X Ðentry,€it€inflicted€considerable€harm€on€Netscapeððs€business€in€the€process.€€By€ensuring€that€the€firmsÏcomprising€the€channels€that€lead€most€efficiently€to€browser€usage€distributed€and€promoted€InternetÏExplorer€to€the€virtual€exclusion€of€Navigator,€Microsoft€relegated€Netscape€to€more€costly€and€lessÏeffective€methods€of€distributing€and€promoting€its€browsing€software.€€After€Microsoft€started€licensingÏInternet€Explorer€at€no€charge,€not€only€to€OEMs€and€consumers,€but€also€to€IAPs,€ISVs,€ICPs,€andÏeven€Apple,€Netscape€was€forced€to€follow€suit.€€Despite€the€fact€that€it€did€not€charge€for€InternetÐ À+'( ÐExplorer,€Microsoft€could€still€defray€the€massive€costs€it€was€undertaking€to€maximize€usage€share€withÏthe€vast€profits€earned€licensing€Windows.€€Because€Netscape€did€not€have€that€luxury,€it€could€illÏafford€the€dramatic€drop€in€revenues€from€Navigator,€much€less€to€pay€for€the€inefficient€modes€ofÏdistribution€to€which€Microsoft€had€consigned€it.€€The€financial€constraints€also€deterred€Netscape€fromÏundertaking€technical€innovations€that€it€might€otherwise€have€implemented€in€Navigator.€€Microsoft€wasÏnot€altogether€surprised,€then,€when€it€learned€in€November€1998€that€Netscape€had€surrendered€itselfÏto€acquisition€by€another€company.€€Ìà  à380.à ` àWere€AOL€ever€to€attempt€to€revive€Navigatorððs€usage€share€with€the€intention€ofÐ \¬  Ðbuilding€it€into€a€significant€platform€for€the€development€of€network„centric€applications,€that€effortÏwould€not€make€any€headway€before€January€1,€2001,€when€AOLððs€obligation€to€distribute€InternetÏExplorer€on€a€preferential€basis€expires.€€In€fact,€there€is€presently€no€indication€that€AOL€will€try€evenÏafter€that€date€to€raise€Navigatorððs€usage€share€substantially.€€First€of€all,€as€explained€above,€AOLÏneed€not€revive€Navigatorððs€usage€share€in€order€to€achieve€an€adequate€return€on€its€investment€inÏNetscape.€€Secondly,€while€the€due„diligence€summary€and€board„of„directors€presentation€thatÏpreceded€the€Netscape€acquisition€discuss€AOLððs€commitment€to€invest€ññfunds€œññand€other€ññññmarketing€resources€in€ññanÏeffortññññorderññ€to€stem€the€slide€in€Navigatorððs€share,€neither€report€indicates€any€intention€on€AOLððs€part€toÏinvest€in€actually€raising€Navigatorððs€share.Ìà  à381.à ` àAlso€detracting€from€the€notion€that€AOL€is€committed€to€reviving€the€middlewareÐ ä%4!" Ðthreat€through€Navigator€is€the€fact€that€AOL€included€in€the€November€1998€agreement€with€Sun€aÏprovision€making€clear€that€the€new€partnership€with€Sun€in€no€way€obligated€AOL€to€drop€InternetÏExplorer€from€its€client€software€in€favor€of€Navigator.€€The€provision€states€that€ð ðAOL€has€no€presentÐ À+'( Ðintention€to€make€any€such€replacement€or€use€and€shall€have€no€obligation€to€make€any€suchÏreplacement€or€use,€and€that€it€is€AOLððs€present€expectation€that€it€.€.€.€may€seek€to€renew€and/orÏextend€and€expand€its€present€agreement€with€Microsoft€Corporation€to€continue€to€distribute€InternetÏExplorer.ððÌà  à382.à ` àBill€Gates€himself,€who€is€not€one€to€underestimate€threats€to€Microsoftððs€business,Ð € Ð Ðapparently€concluded€after€reviewing€the€November€1998€transactions€that€AOL€would€not€seek€toÏdevelop€a€platform€that€would€compete€with€Microsoftððs€network„centric€interfaces.€€In€DecemberÏ1998,€during€a€meeting€convened€to€analyze€the€implications€of€the€AOL/Netscape/Sun€transactions,ÏGates€declared€to€the€assembled€Microsoft€executives,€ð ðAOL€doesnððt€have€it€in€their€genes€to€attack€usÏin€the€platform€space.ððÌà  à383.à ` àFinally,€if€its€coveted€placement€in€the€Online€Services€Folder€fails€to€entice€AOL€intoÐ 8ˆ Ðextending€its€agreement€with€Microsoft€past€January€2001,€Microsoft€assuredly€has€the€wherewithal€toÏoffer€AOL€additional€inducements€in€exchange€for€yet€more€commitments€that€will€preclude€aÏresurgence€of€Navigatorððs€usage€share.€€Even€if,€despite€the€absence€of€signs€to€that€effect,€AOL€dropsÏInternet€Explorer€and€adopts€Navigator€with€a€mind€to€reviving€Navigatorððs€usage€share€after€JanuaryÏ1,€2001,€Navigatorððs€transformation€into€a€platform€attractive€enough€to€threaten€the€applicationsÏbarrier€would€be€a€chimerical€aspiration,€especially€considering€Microsoftððs€increasing€influence€overÏnetwork„centric€standards.€€In€any€event,€nothing€that€happens€after€January€1,€2001€will€change€theÏfact€that€Microsoft€has€succeeded€in€forestalling€for€several€years€Navigatorððs€evolution€in€that€direction.Ø€Øò òÐ Ø'(#$ Ðó óà  à384.à ` àAlthough€the€suspicion€lingers,€the€evidence€is€insufficient€to€find€that€MicrosoftððsÐ Ì)%& Ðambition€is€a€future€in€which€most€or€all€of€the€content€available€on€the€Web€would€be€accessible€onlyÐ À+'( Ðthrough€its€own€browsing€software.€€The€evidence€does,€however,€reveal€an€intent€to€ensure€that€if€andÏwhen€full„featured,€server„based€applications€begin€appearing€in€large€numbers€on€the€Web,€the€numberÏof€them€relying€solely€on€middleware€APIs€(such€as€those€exposed€by€Navigator)€will€be€too€few€toÏattenuate€the€applications€barrier€to€entry.€€Ìà  à385.à ` àAt€least€partly€because€of€Navigatorððs€substantial€usage€share,€most€developersÐ € Ð Ðcontinue€to€insist€that€their€Web€content€be€more„or„less€as€attractive€when€accessed€with€Navigator€asÏit€is€when€accessed€with€Internet€Explorer.€€Navigator€will€retain€an€appreciable€usage€share€through€theÏend€of€2000.€€After€that€point,€AOL€may€be€able€and€willing€to€prevent€Internet€Explorerððs€share€fromÏachieving€such€dominance€that€a€critical€mass€of€developers€will€cease€to€concern€themselves€withÏensuring€that€their€Web€content€at€least€be€accessible€through€non„Microsoft€browsing€software.€€So,Ïas€matters€stand€at€present,€while€Microsoft€has€succeeded€in€forestalling€the€development€of€enoughÏfull„featured,€cross„platform,€network„centric€applications€to€render€the€applications€barrier€penetrable,Ïit€is€not€likely€to€drive€non„Microsoft€PC€Web€browsing€software€from€the€marketplace€altogether.Ìà  àÌò òÓÓVI.à0  àMICROSOFTððS€RESPONSE€TO€THE€THREAT€POSED€BY€SUNððSÐ  X ÐIMPLEMENTATION€OF€JAVAó óÐ!R(#(# ÐÌÓdFÓà  à386.à ` àFor€Microsoft,€a€key€to€maintaining€and€reinforcing€the€applications€barrier€to€entry€hasÐ ö"F Ðbeen€preserving€the€difficulty€of€porting€applications€from€Windows€to€other€platforms,€and€vice€versa.€ÏIn€1996,€senior€executives€at€Microsoft€became€aware€that€the€number€of€developers€writing€network„¼centric€applications€in€the€Java€programming€language€had€become€significant,€and€that€Java€was€likelyÏto€increase€in€popularity€among€developers.€€Microsoft€therefore€became€interested€in€maximizing€theÐ Æ*&' Ðdifficulty€with€which€applications€written€in€Java€could€be€ported€from€Windows€to€other€platforms,€andÏvice€versa.ÌØ€  ØÓÓÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )ÞùIÝÚƒ ÚAÚ  Ú.à0 ` àÝ  ÝCreating€a€Java€Implementation€for€Windows€that€Undermined€Portability€andÐ ˜è ÐWas€Incompatible€with€Other€Implementationsó ó݃ )ÞùI#JÝÛ€ یВ â` (#` (# ÐŒÝ  Ýà  àÌÓçIÓà  à387.à ` àAlthough€Sun€intended€Java€technologies€eventually€to€allow€developers€to€writeÐ † Ö Ðapplications€that€would€run€on€multiple€operating€systems€without€any€porting,€the€Java€class€librariesÏhave€never€exposed€enough€APIs€to€support€full„featured€applications.€€Java€developers€have€thusÏalways€needed€to€rely€on€platform„specific€APIs€in€order€to€write€applications€with€advancedÏfunctionality.€€Recognizing€this,€Sun€sponsored€a€process€for€the€creation€of€a€software€method€thatÏwould€allow€developers€writing€in€Java€to€rely€directly€upon€APIs€exposed€by€a€particular€operatingÏsystem€in€a€way€that€would€nevertheless€allow€them€to€port€their€applications€with€relative€ease€toÏJVMs€running€on€different€operating€systems.Ìà  à388.à ` àOn€March€12,€1996,€Sun€signed€an€agreement€granting€Microsoft€the€right€to€distributeÐ &v Ðand€make€certain€modifications€to€Sunððs€Java€technologies.€€Microsoft€used€this€license€to€create€itsÏown€Java€development€tools€and€its€own€Windows„compatible€Java€runtime€environment.€€Because€theÏmotivation€behind€the€Sun„sponsored€effort€ran€counter€to€Microsoftððs€interest€in€preserving€theÏdifficulty€of€porting,€Microsoft€independently€developed€methods€for€enabling€ð ðcallsðð€to€ð ðnativeððÏWindows€code€that€made€porting€more€difficult€than€the€method€that€Sun€was€striving€to€makeÏstandard.€€Microsoft€implemented€these€different€methods€in€its€developer€tools€and€in€its€JVM.€Ïâ âMicrosoft€also€discouraged€its€business€allies€from€aiding€Sunððs€effort.€€For€example,€Gates€told€IntelððsÐ Ò("$% ÐCEO€in€June€1996€that€he€did€not€want€the€Intel€Architecture€Labs€ññto€cooperateññññcooperatingññ€with€Sun€to€developÏmethods€for€calling€upon€multimedia€interfaces€in€Windows.€€Ìâ âà  à389.à ` àSince€they€were€custom„built€for€enabling€native€calls€to€Windows,€and€because€theyÐ ˜è Ðwere€developed€by€the€firm€with€the€most€intimate€knowledge€of€Windows,€the€native€methods€thatÏMicrosoft€produced€were€slightly€easier€for€developers€to€use€than€the€method€that€derived€from€theÏSun„sponsored€effort,€and€Java€applications€using€Microsoftððs€methods€tended€to€run€faster€than€onesÏcalling€upon€Windows€APIs€with€Sunððs€method.€€If€a€developer€relied€on€Microsoftððs€methods€ratherÏthan€Sunððs,€however,€his€Java€application€would€be€much€more€difficult€to€port€from€the€Windows„¼compatible€JVM€to€JVMs€designed€to€run€on€different€operating€systems.€€Ìà  à390.à ` àMicrosoft€easily€could€have€implemented€Sunððs€native€method€along€with€its€own€in€itsÐ D” Ðdeveloper€tools€and€its€JVM,€thereby€allowing€Java€developers€to€choose€between€speed€andÏportability;€however,€it€elected€instead€to€implement€only€the€Microsoft€methods.€€The€result€was€that€ifÏa€Java€developer€used€the€Sun€method€for€making€native€calls,€his€application€would€not€run€onÏMicrosoftððs€version€of€the€Windows€JVM,€and€if€he€used€Microsoftððs€native€methods,€his€applicationÏwould€not€run€on€any€JVM€other€than€Microsoftððs€version.€€Far€from€being€the€unintended€consequenceÏof€an€attempt€to€help€Java€developers€more€easily€develop€high„performing€applications,€incompatibilityÏwas€the€intended€result€of€Microsoftððs€efforts.€€In€fact,€Microsoft€would€subsequently€threaten€to€use€theÏsame€tactic€against€Appleððs€QuickTime.€€Microsoft€continued€to€refuse€to€implement€Sunððs€nativeÏmethod€until€November€1998,€when€a€court€ordered€it€to€do€so.€€It€then€took€Microsoft€only€a€fewÏâ âweeks€to€implement€Sunððs€native€method€in€its€developer€tools€and€JVM.Ð Ì)%& Ðà  à391.à ` àAlthough€the€Java€class€libraries€have€yet€to€provide€enough€functionality€to€support€full„Ð ° Ðâ âfeatured€applications,€they€have€gradually€expanded€toward€that€goal.€€In€1997,€Sun€added€a€classÏlibrary€called€Remote€Method€Invocation,€or€ð ðRMI,ðð€which€allowed€Java€applications€written€to€callÏupon€it€to€communicate€with€each€other€in€certain€useful€ways.€€Microsoft€was€not€willing€to€stand€byÏand€allow€Java€developers€to€rely€on€new€Java€class€libraries€unimpeded.€€The€more€that€JavaÏdevelopers€were€able€to€satisfy€their€need€for€functionality€by€calling€upon€the€Java€class€libraries,€theÏmore€portable€their€applications€would€become.€€Microsoft€had€developed€a€set€of€Windows„specificÏinterfaces€to€provide€functionality€analogous€to€the€functionality€RMI€offered;€it€wanted€Java€developersÏto€rely€on€this€Windows„specific€technology€rather€than€Sunððs€cross„platform€interface.€€Microsoft€thusÏrefused€to€include€RMI€as€a€standard€component€of€the€Java€runtime€environment€for€Windows€that€itÏshipped€with€Internet€Explorer€4.0.Ìà  à392.à ` àThe€license€agreement€it€had€signed€with€Sun€the€previous€year€obligated€Microsoft€toÐ ,| Ðoffer€RMI,€at€a€minimum,€on€its€developer€Web€site.€€Microsoft€did€so,€but€with€respect€to€the€RMIÏbeta€release,€it€buried€the€link€in€an€obscure€location€and€neglected€to€include€an€entry€for€it€in€the€siteððsÏindex.€€Referring€to€RMI€and€any€Java€developers€who€might€access€Microsoftððs€site€looking€for€it,€aÏMicrosoft€employee€wrote€to€his€approving€manager,€ð ðTheyððll€have€to€stumble€across€it€to€know€itððsÏthere.€.€.€.€Iððd€say€itððs€pretty€buried.ððÌà  à393.à ` àIt€is€unclear€whether€Microsoft€ultimately€placed€RMI€in€a€more€prominent€place€on€itsÐ ä%4!" Ðdeveloper€Web€site.€€Even€if€it€did,€the€fact€that€RMI€was€not€shipped€with€Microsoftððs€Java€runtimeÏenvironment€for€Windows€meant€that€Java€developers€could€not€rely€on€its€being€installed€onÏconsumersðð€PC€systems.€€If€developers€wanted€their€Java€applications€to€call€upon€communicationsÐ À+'( Ðinterfaces€guaranteed€to€be€present€on€Windows€usersðð€systems,€they€had€no€choice€but€to€rely€on€theÏMicrosoft„specific€interfaces€instead€of€RMI.€€Microsoft€undertook€the€effort€to€remove€RMI€from€theÏrest€of€the€Java€class€libraries,€instead€of€simply€leaving€it€in€place€and€allowing€developers€to€chooseÏbetween€it€and€Windows„specific€interfaces,€for€the€sole€purpose€of€making€it€more€difficult€for€JavaÏdevelopers€to€write€easily€portable€applications.Ìà  à394.à ` àIn€a€further€effort€intended€to€increase€the€incompatibility€between€Java€applicationsÐ tÄ  Ðwritten€for€its€Windows€JVM€and€other€Windows€JVMs,€and€to€increase€the€difficulty€of€porting€JavaÏapplications€from€the€Windows€environment€to€other€platforms,€Microsoft€designed€its€Java€developerÏtools€to€encourage€developers€to€write€their€Java€applications€using€certain€ð ðkeywordsðð€and€ð ðcompilerÏdirectivesðð€that€could€only€be€executed€properly€by€Microsoftððs€version€of€the€Java€runtime€environmentÏfor€Windows.€€Microsoft€encouraged€developers€to€use€these€extensions€by€shipping€its€developer€toolsÏwith€the€extensions€enabled€by€default€and€by€failing€to€warn€developers€that€their€use€would€result€inÏapplications€that€might€not€run€properly€with€any€runtime€environment€other€than€Microsoftððs€and€thatÏwould€be€difficult,€and€perhaps€impossible,€to€port€to€JVMs€running€on€other€platforms.€€This€actionÏcomported€with€the€suggestion€that€Microsoftððs€Thomas€Reardon€made€to€his€colleagues€in€NovemberÏ1996:€ð ð[W]e€should€just€quietly€grow€j++€[Microsoftððs€developer€tools]€share€and€assume€that€peopleÏwill€take€more€advantage€of€our€classes€without€ever€realizing€they€are€building€win32„only€java€apps.ðð€ÏMicrosoft€refused€to€alter€its€developer€tools€until€November€1998,€when€a€court€ordered€it€to€disableÏits€keywords€and€compiler€directives€by€default€and€to€warn€developers€that€using€Microsoftððs€JavaÏâ âextensions€would€likely€cause€incompatibilities€with€non„Microsoft€runtime€environments.Ð Ì)%& ÐÓÓÝ‚ )ÞÿÝÝ  Ýò òà  àÝ‚ )Þ‡jÝÚƒ ÚBÚ  Ú.à0 ` àÝ  ÝInducing€Developers€to€Use€the€Microsoft€Implementation€of€Java€Rather€thanÐ ° Ðâ âSun„Compliant€Implementationsó ó݃ )Þ‡j±jÝÛ€ یЪú` (#` (# ÐŒÝ  Ýà  àÌÓujÓà  à395.à ` àIf€all€Microsoft€had€done€to€combat€the€growth€of€easily€portable€Java€applications€hadÐ žî Ðbeen€to€increase€the€incompatibility€between€its€Java€implementation€and€ones€complying€with€SunððsÏstandards,€the€effect€might€have€been€limited.€€€For€if€Sun€could€have€assured€developers€that€aÏWindows„compatible€Java€runtime€environment€that€complied€with€Sunððs€standards€would€be€installedÏon€as€many€Windows€PCs€as€Microsoftððs€version,€and€that€it€would€run€Java€applications€as€well€asÏMicrosoftððs,€developers€might€have€considered€the€cost€in€portability€associated€with€relying€onÏMicrosoft„specific€technologies€and€instead€written€their€Java€applications€using€Sunððs€developer€tools.€ÏWhen€Netscape€announced€in€May€1995€that€it€would€include€with€every€copy€of€Navigator€a€copy€ofÏa€Windows€JVM€that€complied€with€Sunððs€standards,€it€appeared€that€Sunððs€Java€implementationÏwould€achieve€the€necessary€ubiquity€on€Windows.€€Ìà  à396.à ` àDetermined€to€induce€developers€to€write€Java€applications€that€relied€on€its€version€ofÐ &v Ðthe€runtime€environment€for€Windows€rather€than€on€Sun„compliant€ones,€Microsoft€made€a€largeÏinvestment€of€engineering€resources€to€develop€a€high„performance€Windows€JVM.€€This€madeÏMicrosoftððs€version€of€the€runtime€environment€attractive€on€its€technical€merits.€€To€hinder€Sun€andÏNetscape€from€improving€the€quality€of€the€Windows€JVM€shipped€with€Navigator,€MicrosoftÏpressured€Intel,€which€was€developing€a€high„performance€Windows„compatible€JVM,€to€not€share€itsÏwork€with€either€Sun€or€Netscape,€much€less€allow€Netscape€to€bundle€the€Intel€JVM€with€Navigator.€ÏGates€was€himself€involved€in€this€effort.€€During€the€August€2,€1995€meeting€at€which€he€urged€Intel€toÏhalt€IALððs€development€of€platform„level€software,€Gates€also€announced€that€Intelððs€cooperation€withÐ Æ*&' ÐSun€and€Netscape€to€develop€a€Java€runtime€environment€for€systems€running€on€IntelððsÏmicroprocessors€was€one€of€the€issues€threatening€ññto€undermine€ññcooperation€between€Intel€andÏMicrosoft.€€By€the€spring€of€1996,€Intel€had€developed€a€JVM€designed€to€run€well€on€Intel„basedÏsystems€while€complying€with€Sunððs€cross„platform€standards.€€Microsoft€executives€approached€IntelÏin€April€of€that€year€and€urged€that€Intel€not€take€any€steps€toward€allowing€Netscape€to€ship€this€JVMÏwith€Navigator.€€Ìà  à397.à ` àBy€bundling€its€version€of€the€Windows€JVM€with€every€copy€of€Internet€Explorer€andÐ h¸  Ðexpending€some€of€its€surplus€monopoly€power€to€maximize€the€usage€of€Internet€Explorer€atÏNavigatorððs€expense,€Microsoft€endowed€its€Java€runtime€environment€with€the€unique€attribute€ofÏguaranteed,€enduring€ubiquity€across€the€enormous€Windows€installed€base.€€As€one€internal€MicrosoftÏpresentation€from€January€1997€put€it,€the€companyððs€response€to€cross„platform€Java€entailedÏð ð[i]ncreased€IE€share€ð"ð€integrat[ion]€with€Windows.ðð€€Partly€as€a€result€of€the€damage€that€MicrosoftððsÏefforts€against€Navigator€inflicted€on€Netscapeððs€business,€Netscape€decided€in€1998€that€it€could€noÏlonger€afford€to€do€the€engineering€work€necessary€to€continue€bundling€up„to„date€JVMs€withÏNavigator.€€Consequently,€it€announced€that,€starting€with€version€5.0,€Navigator€would€cease€to€be€aÏdistribution€vehicle€for€JVMs€compliant€with€Sunððs€standards.Ìà  à398.à ` àThe€guaranteed€presence€of€Microsoftððs€runtime€environment€on€every€Windows€PCÐ ð#@  Ðand€the€decreasing€likelihood€that€the€primary€host€of€the€Sun„compliant€runtime€environmentÏ(Navigator)€would€be€present,€induced€many€Java€developers€to€write€their€applications€usingÏMicrosoftððs€developer€tools,€for€doing€so€guaranteed€that€those€applications€would€run€in€the€JavaÏenvironment€most€likely€to€be€installed€on€a€Windows€userððs€PC.€€Owing€to€Microsoftððs€deliberateÐ À+'( Ðdesign€decisions,€more€developers€using€Microsoftððs€Java€developer€tools€meant€that€more€JavaÏapplications€would€rely€on€the€Windows„specific€technologies€in€Microsoftððs€runtime€environment€andÏthus€would€not€be€portable.Ìà  à399.à ` àMicrosoft€was€not€content€to€rely€solely€on€its€anti„Navigator€efforts€to€ensure€that€itsÐ Œ Ü ÐJava€runtime€environment€would€be€the€only€one€guaranteed€to€be€present€on€Windows€PC€systems.€ÏAfter€all,€Netscape€was€not€the€only€ISV€capable€of€placing€copies€of€a€runtime€environment€on€usersððÏsystems.€€Many€developers€of€network„centric€applications€were€just€as€capable€of€bundlingÏcompatible€runtime€environments€with€their€applications€as€they€were€of€bundling€browsing€software.€€IfÏthe€right€runtime€environment€already€came€bundled€with€the€right€browsing€software,€all€the€moreÏconvenient€for€the€ISV.€€If€not€(as€would€increasingly€be€the€case€after€Netscape€stopped€bundling€aÏruntime€environment€with€Navigator),€though,€the€ISV€could€still€separately€obtain€the€desired€runtimeÏenvironment€and€bundle€it€with€every€copy€of€its€product.€€Ìà  à400.à ` àRecognizing€ISVs€as€a€channel€through€which€Java€runtime€environments€that€compliedÐ  p Ðwith€Sunððs€standards€could€find€their€way€onto€Windows€PC€systems,€Microsoft€induced€ISVs€toÏdistribute€Microsoftððs€version€instead€of€a€Sun„compliant€one.€€First,€Microsoft€made€its€JVM€availableÏto€ISVs€separately€from€Internet€Explorer€so€that€those€uninterested€in€bundling€browsing€softwareÏcould€nevertheless€bundle€Microsoftððs€JVM.€€Microsoftððs€David€Cole€revealed€the€motivation€for€thisÏstep€in€a€message€he€wrote€ññto€ññJim€Allchin€in€July€1997:€ð ð[W]eððve€agreed€that€we€must€allow€ISVs€toÏredistribute€the€Java€VM€standalone,€without€IE.€€ISVs€that€do€this€are€bound€into€Windows€becauseÏâ âthatððs€the€only€place€the€VM€works,€and€it€keeps€them€away€from€Sunððs€APIs.ðð€€Ð Ì)%& Ðà  à401.à ` àMicrosoft€took€the€further€step€of€offering€valuable€things€to€ISVs€that€agreed€to€useÐ ° Ðâ âMicrosoftððs€Java€implementation.€€Specifically,€in€the€First€Wave€agreements€that€it€signed€with€dozensÏof€ISVs€in€1997€and€1998,€Microsoft€conditioned€early€Windows€98€and€Windows€NT€betas,€otherÏtechnical€information,€and€the€right€to€use€certain€Microsoft€seals€of€approval€on€the€agreement€of€thoseÏISVs€to€use€Microsoftððs€version€of€the€Windows€JVM€as€the€ð ðdefault.ðð€€Microsoft€and€the€ISVs€allÏread€this€requirement€to€obligate€the€ISVs€to€ensure€that€their€Java€applications€were€compatible€withÏMicrosoftððs€version€of€the€Windows€JVM.€€The€only€effective€way€to€ensure€compatibility€withÏMicrosoftððs€JVM€was€to€use€Microsoftððs€Java€developer€tools,€which€in€turn€meant€using€MicrosoftððsÏmethods€for€making€native€calls€and€(unless€the€developers€were€especially€wary€and€sophisticated)ÏMicrosoftððs€other€Java€extensions.€€Thus,€a€very€large€percentage€of€the€Java€applications€that€the€FirstÏWave€ISVs€wrote€would€run€only€on€Microsoftððs€version€of€the€Windows€JVM.€€With€that€in€mind,€theÏFirst€Wave€ISVs€would€not€have€any€reason€to€distribute€with€their€Java€applications€any€JVM€otherÏthan€Microsoftððs.€€So,€in€exchange€for€costly€technical€support€and€other€blandishments,€MicrosoftÏinduced€dozens€of€important€ISVs€to€make€their€Java€applications€reliant€on€ññMicrosoftññññWindowsññ„specificÏtechnologies€and€to€refrain€from€distributing€to€Windows€users€JVMs€that€complied€with€SunððsÏstandards.€€The€record€contains€no€evidence€that€the€relevant€provision€in€the€First€Wave€agreementsÏhad€any€purpose€other€than€to€maximize€the€difficulty€of€porting€Java€applications€between€WindowsÏand€other€platforms.€€Microsoft€remained€free€to€hold€the€First€Wave€ISVs€to€this€provision€until€a€courtÏenjoined€its€enforcement€in€November€1998.Ìà  à402.à ` àIn€addition€to€the€First€Wave€agreements,€Microsoft€entered€an€agreement€with€at€leastÐ Ì)%& Ðone€ISV€that€explicitly€required€it€to€redistribute€Microsoftððs€JVM€to€the€exclusion€of€any€other€and€toÐ À+'( Ðrely€upon€Microsoftððs€native€methods€to€the€exclusion€of€any€other€methods.€€Such€agreements€wereÏalso€prohibited€by€the€November€1998€injunction.Ìà  à403.à ` àMicrosoft€anticipated€that€the€Java€language€would€become€a€popular€medium€in€theÐ ˜è Ðmultimedia€arena.€€It€thus€wanted€to€ensure€that€the€Java€software€created€to€deliver€multimedia€contentÏwould€not€rely€on€Java€implementations€that€fostered€portability.€€RealNetworks€developed€the€mostÏpopular€software€for€the€creation€and€play„back€of€streaming€multimedia€content.€€Therefore,€MicrosoftÏsought€to€ensure€that,€to€the€extent€Java€developers€relied€on€RealNetworksðð€technologies,€they€wouldÏnot€be€relying€on€a€Java€implementation€that€complied€with€Sunððs€standards.€€So,€in€the€July€18,€1997Ïagreement€that€it€entered€with€RealNetworks,€Microsoft€conditioned€its€agreement€to€distributeÏRealNetworksðð€media€player€with€Internet€Explorer€on€RealNetworksðð€agreement€to€exert€its€bestÏefforts€to€ensure€that€its€player€primarily€use€Windows„specific€technology,€rather€than€any€analogousÏinterfaces€that€Sun€or€Netscape€might€develop,€to€display€multimedia€content.€€Absent€this€obligation,Ïthere€would€have€been€no€technical€reason€why€RealNetworks€could€not€have€designed€its€mediaÏplayer€to€support€both€Microsoftððs€technologies€and€ones€developed€by€Sun€or€Netscape.€€AlthoughÏRealNetworks€subsequently€announced€that€it€planned€to€continue€developing€its€own€fundamentalÏstreaming€software,€the€July€18€agreement€limited€the€extent€to€which€that€software€would€include€JavaÏtechnologies€that€complied€with€Sunððs€standards.Ìò òÝ‚ )ÞÿÝÝ  Ýà  àÝ‚ )Þo’ÝÚƒ ÚCÚ  Ú.à0 ` àÝ  ÝThwarting€the€Expansion€of€the€Java€Class€Librariesó ó݃ )Þo’–’ÝÛ€ ÛŒÐä%4!"` (#` (# ÐŒÝ  Ýà  à404.à ` àAs€discussed€above,€Microsoftððs€effort€to€lock€developers€into€its€Windows„specificÐ Ø'(#$ ÐJava€implementation€included€actions€designed€to€discourage€developers€from€taking€advantage€of€JavaÏclass€libraries€such€as€RMI.€€Microsoft€went€further€than€ññthisññññthatññ,€however.€€In€pursuit€of€its€goal€ofÐ À+'( Ðminimizing€the€portability€of€Java€applications,€Microsoft€took€steps€to€thwart€the€very€creation€ofÏcross„platform€Java€interfaces.€€The€incorporation€of€greater€functionality€into€the€Java€class€librariesÏwould€have€increased€the€portability€of€the€applications€that€relied€on€them,€while€simultaneouslyÏencouraging€developers€to€use€Sun„compliant€implementations€of€Java.€€In€one€instance€of€this€effort€toÏstunt€the€growth€of€the€Java€class€libraries,€Microsoft€used€threats€to€withhold€Windows€operating„¼system€support€from€Intelððs€microprocessors€and€offers€to€include€Intel€technology€in€Windows€in€orderÏto€induce€Intel€to€stop€aiding€Sun€in€the€development€of€Java€classes€that€would€support€innovativeÏmultimedia€functionality.Ìà  à405.à ` àIn€November€1995,€Microsoftððs€Paul€Maritz€told€a€senior€Intel€executive€that€IntelððsÐ P  Ðoptimization€of€its€multimedia€software€for€Sunððs€Java€standards€was€as€inimical€to€Microsoft€asÏMicrosoftððs€support€for€non„Intel€microprocessors€would€be€to€Intel.€€It€was€not€until€1997,€though,Ïthat€Microsoft€prevailed€upon€Intel€to€not€support€Sunððs€development€of€Java€classes€that€would€haveÏallowed€developers€to€include€certain€multimedia€features€in€their€Java€applications€without€sacrificingÏportability.€€Ìà  à406.à ` àIn€February€1997,€one€of€Intelððs€competitors,€called€AMD,€solicited€support€fromÐ  X ÐMicrosoft€for€its€ð ð3DXðð€technology,€which€provided€sophisticated€multimedia€support€for€games.€ÏMicrosoftððs€Allchin€asked€Gates€whether€Microsoft€should€support€3DX,€despite€the€fact€that€IntelÏwould€oppose€it.€€Gates€responded:€ð ðIf€Intel€has€a€real€problem€with€us€supporting€this€then€they€willÏhave€to€stop€supporting€Java€Multimedia€the€way€they€are.€€I€would€gladly€give€up€supporting€this€if€theyÏwould€back€off€from€their€work€on€JAVA€which€is€terrible€for€Intel.ðð€€Near€the€end€of€March,€AllchinÏsent€another€message€to€Gates€and€Maritz.€€In€it€he€wrote,€ð ðI€am€positive€that€we€must€do€a€directÐ À+'( Ðattack€on€Sun€(and€probably€Oracle).€.€.€.€Between€ourselves€and€our€partners,€we€can€certainly€hurtÏtheir€(certainly€Sunððs)€revenue€base.€.€.€.€We€need€to€get€Intel€to€help€us.€€Today,€they€are€not.ðð€€TwoÏmonths€later,€Eric€Engstrom,€a€Microsoft€executive€with€responsibility€for€multimedia€development,Ïwrote€to€his€superiors€that€one€of€Microsoftððs€goals€was€getting€ð ðIntel€to€stop€helping€Sun€create€JavaÏMultimedia€APIs,€especially€ones€that€run€well€(ie€native€implementations)€on€Windows.ðð€€EngstromÏproposed€achieving€this€goal€by€offering€Intel€the€following€deal:€€Microsoft€would€incorporate€into€theÏWindows€API€set€any€multimedia€interfaces€that€Intel€agreed€to€not€help€Sun€incorporate€into€the€JavaÏclass€libraries.€€Engstromððs€efforts€apparently€bore€fruit,€for€he€testified€at€trial€that€Intelððs€IALÏsubsequently€stopped€helping€Sun€to€develop€class€libraries€that€offered€cutting„edge€multimediaÏsupport.Ìò òÓÓÝ‚ )ÞÿÝÝ  Ýà  àÝ‚ )ÞÏ ÝÚƒ ÚDÚ  Ú.à0 ` àÝ  ÝThe€Effect€of€Microsoftððs€Efforts€to€Prevent€Java€from€Diminishing€theÐ 8ˆ ÐApplications€Barrier€to€Entryó ó݃ )ÞÏ ö ÝÛ€ ÛŒÐ2‚` (#` (# ÐŒÝ  Ýà  àÌÓ½ Óà  à407.à ` àHad€Microsoft€not€been€committed€to€protecting€and€enhancing€the€applications€barrierÐ &v Ðto€entry,€it€might€still€have€developed€a€high„performance€JVM€and€enabled€Java€developers€to€callÏupon€Windows€APIs.€€Absent€this€commitment,€though,€Microsoft€would€not€have€taken€efforts€toÏmaximize€the€difficulty€of€porting€Java€applications€written€to€its€implementation€and€to€drastically€limitÏthe€ability€of€developers€to€write€Java€applications€that€would€run€in€both€Microsoftððs€version€of€theÏWindows€runtime€environment€and€versions€complying€with€Sunððs€standards.€€Nor€would€MicrosoftÏhave€endeavored€to€limit€Navigatorððs€usage€share,€to€induce€ISVs€to€neither€use€nor€distribute€non„¼Microsoft€Java€technologies,€and€to€impede€the€expansion€of€the€Java€class€libraries,€had€it€not€beenÏdetermined€to€discourage€developers€from€writing€applications€that€would€be€easy€to€port€betweenÐ Æ*&' ÐWindows€and€other€platforms.€€Microsoftððs€dedication€to€the€goal€of€protecting€the€applications€barrierÏto€entry€is€highlighted€by€the€fact€that€its€efforts€to€create€incompatibility€between€its€JVM€and€othersÏresulted€in€fewer€applications€being€able€to€run€on€Windows€than€otherwise€would€have.€€Microsoft€feltÏit€was€worth€obstructing€the€development€of€Windows„compatible€applications€where€thoseÏapplications€would€have€been€easy€to€port€to€other€platforms.€€It€is€not€clear€whether,€absentÏMicrosoftððs€interference,€Sunððs€Java€efforts€would€by€now€have€facilitated€porting€between€WindowsÏand€other€platforms€enough€to€weaken€the€applications€barrier€to€entry.€€What€is€clear,€however,€is€thatÏMicrosoft€has€succeeded€in€greatly€impeding€Javaððs€progress€to€that€end€with€a€series€of€actions€whoseÏsole€purpose€and€effect€were€to€do€precisely€that.ÌØ€ ØÓÓÌÓu©ÓÓÓà  àÌÓÓò òÓÓVII.à0  àTHE€EFFECT€ON€CONSUMERS€OF€MICROSOFTððS€EFFORTS€TO€PROTECTÐ 8ˆ ÐTHE€APPLICATIONS€BARRIER€TO€ENTRYó óÐ2‚(#(# ÐÌÓÒ©Óà  à408.à ` àThe€debut€of€Internet€Explorer€and€its€rapid€improvement€gave€Netscape€an€incentiveÐ &v Ðto€improve€Navigatorððs€quality€at€a€competitive€rate.€€The€inclusion€of€Internet€Explorer€with€WindowsÏat€no€separate€charge€increased€general€familiarity€with€the€Internet€and€reduced€the€cost€to€the€publicÏof€gaining€access€to€it,€at€least€in€part€because€it€compelled€Netscape€to€stop€charging€for€Navigator.€ÏThese€actions€thus€contributed€to€improving€the€quality€of€Web€browsing€software,€lowering€its€cost,Ïand€increasing€its€availability,€thereby€benefitting€consumers.Ìà  à409.à ` àTo€the€detriment€of€consumers,€however,€Microsoft€has€done€much€more€than€developÐ Þ&."# Ðinnovative€browsing€software€of€commendable€quality€and€offer€it€bundled€with€Windows€at€noÏadditional€charge.€€As€has€been€shown,€Microsoft€also€engaged€in€a€concerted€series€of€actionsÐ Æ*&' Ðdesigned€to€protect€the€applications€barrier€to€entry,€and€hence€its€monopoly€power,€from€a€variety€ofÏmiddleware€threats,€including€Netscapeððs€ñ ñbrowsing€softwareñ ññ ñWeb€browserñ ñ€and€Sunððs€implementation€of€Java.€€Many€ofÏthese€actions€have€harmed€consumers€in€ways€that€are€immediate€and€easily€discernible.€€They€haveÏalso€caused€less€direct,€but€nevertheless€serious€and€far„reaching,€consumer€harm€by€distortingÏcompetition.Ìà  à410.à ` àBy€refusing€to€offer€those€OEMs€who€requested€it€a€version€of€Windows€without€WebÐ tÄ  Ðbrowsing€software,€and€by€preventing€OEMs€from€removing€Internet€Explorer€ð"ð€or€even€the€mostÏobvious€means€of€invoking€it€ð"ð€prior€to€shipment,€Microsoft€forced€OEMs€to€ignore€consumer€demandÏfor€a€browserless€version€of€Windows.€€The€same€actions€forced€OEMs€either€to€ignore€consumerÏpreferences€for€Navigator€or€to€give€them€a€Hobsonððs€choice€of€both€browser€products€at€the€cost€ofÏincreased€confusion,€degraded€system€performance,€and€restricted€memory.€€By€ensuring€that€InternetÏExplorer€would€launch€in€certain€circumstances€in€Windows€98€even€if€Navigator€were€set€as€theÏdefault,€and€even€if€the€consumer€had€removed€all€conspicuous€means€of€invoking€Internet€Explorer,ÏMicrosoft€created€confusion€and€frustration€for€consumers,€and€increased€technical€support€costs€forÏbusiness€customers.€€Those€Windows€purchasers€who€did€not€want€browsing€software€ð"ð€businesses,Ïor€parents€and€teachers,€for€example,€concerned€with€the€potential€for€irresponsible€Web€browsing€onÏPC€systems€ð"ð€not€only€had€to€undertake€the€effort€necessary€to€remove€the€visible€means€of€invokingÏInternet€Explorer€and€then€contend€with€the€fact€that€Internet€Explorer€would€nevertheless€launch€inÏcertain€cases;€they€also€had€to€(assuming€they€needed€new,€non„browsing€features€not€available€inÏearlier€versions€of€Windows)€content€themselves€with€a€PC€system€that€ran€slower€and€provided€lessÏavailable€memory€than€if€the€newest€version€of€Windows€came€without€browsing€software.€€Ô_ÔByÐ À+'( Ðconstraining€the€freedom€of€OEMs€to€implement€certain€software€programs€in€the€Windows€bootÏsequence,€Microsoft€foreclosed€an€opportunity€for€OEMs€to€make€Windows€PC€systems€lessÏconfusing€and€more€user„friendly,€as€consumers€desired.€€By€taking€the€actions€listed€above,€and€byÏenticing€firms€into€exclusivity€arrangements€with€valuable€inducements€that€only€Microsoft€could€offerÏand€that€the€firms€reasonably€believed€they€could€not€do€without,€Microsoft€forced€those€consumersÏwho€otherwise€would€have€elected€Navigator€as€their€browser€to€either€pay€a€substantial€price€(in€theÏformñ!ñsñ!ñ€of€downloading,€installation,€confusion,€degraded€system€performance,€and€diminished€memoryÏcapacity)€or€content€themselves€with€Internet€Explorer.€€Finally,€by€pressuring€Intel€to€drop€theÏdevelopment€of€platform„level€Ô_ÔNSPÔ_Ô€software,€and€otherwise€to€cut€back€on€its€software€developmentÏefforts,€Microsoft€deprived€consumers€of€software€innovation€that€they€very€well€may€have€foundÏvaluable,€had€the€innovation€been€allowed€to€reach€the€marketplace.€€None€of€these€actions€had€pro„¼competitive€justifications.Ìà  à411.à ` àMany€of€the€tactics€that€Microsoft€has€employed€have€also€harmed€consumers€indirectlyÐ  p Ðby€unjustifiably€distorting€competition.€€The€actions€that€Microsoft€took€against€Navigator€hobbled€aÏform€of€innovation€that€had€shown€the€potential€to€depress€the€applications€barrier€to€entry€sufficiently€toÏenable€other€firms€to€compete€effectively€against€Microsoft€in€the€market€for€Intel„compatible€PCÏoperating€systems.€€That€competition€would€have€conduced€to€consumer€choice€and€nurturedÏinnovation.€€The€campaign€against€Navigator€also€retarded€widespread€acceptance€of€Sunððs€JavaÏimplementation.€€This€campaign,€together€with€actions€that€Microsoft€took€with€the€sole€purpose€ofÏmaking€it€difficult€for€developers€to€write€Java€applications€with€technologies€that€would€allow€them€toÏbe€ported€between€Windows€and€other€platforms,€impeded€another€form€of€innovation€that€bore€theÐ À+'( Ðpotential€to€diminish€the€applications€barrier€to€entry.€€There€is€insufficient€evidence€to€find€that,€absentÏMicrosoftððs€actions,€Navigator€and€Java€already€would€have€ignited€genuine€competition€in€the€marketÏfor€Intel„compatible€PC€operating€systems.€€It€is€clear,€however,€that€Microsoft€has€retarded,€andÏperhaps€altogether€extinguished,€the€process€by€which€these€two€Ô_ÔmiddlewareÔ_Ô€technologies€could€haveÏfacilitated€the€introduction€of€competition€into€an€important€market.Ìà  à412.à ` àMost€harmful€of€all€is€the€message€that€Microsoftððs€actions€have€conveyed€to€everyÐ tÄ  Ðenterprise€with€the€potential€to€innovate€in€the€computer€industry.€€Through€its€conduct€towardÏNetscape,€IBM,€Compaq,€Intel,€and€others,€Microsoft€has€demonstrated€that€it€will€use€its€prodigiousÏmarket€power€and€immense€profits€to€harm€any€firm€that€insists€on€pursuing€initiatives€that€couldÏintensify€competition€against€one€of€Microsoftððs€core€products.€€Microsoftððs€past€success€in€hurting€suchÏcompanies€and€stifling€innovation€deters€investment€in€technologies€and€businesses€that€exhibit€theÏpotential€to€threaten€Microsoft.€€The€ultimate€result€is€that€some€innovations€that€would€truly€benefitÏconsumers€never€occur€for€the€sole€reason€that€they€do€not€coincide€with€Microsoftððs€self„interest.ñ"ñÌÌñ"ñÌÌÓ*°,X‡Xì“X°œX*Óà  àà ` àà ¸ àÌÓÓà  àà ` àà ¸ àà  àà h àà À à__________________________Ìà  àà ` àà ¸ àà  àà h àà À àà ì àThomas€Ô_ÔPenfieldÔ_Ô€JacksonÌà  àà ` àà ¸ àà  àà h àà À àà ì àà  àU.S.€District€Judgeñ#ñÌÌÌÌÌÌñ#ñÌÌÌÌDate:à0  à__________________________