The Court also held: "The United States presented no evidence suggesting that Windows 98 was not an 'Integrated Product' and thus exempt from the prohibitions of Section IV(E)(I).". Therefore, Java developers need to port their applications only to the extent that those applications rely directly on the APIs exposed by a particular operating system. Moreover, it could do so for a significant period of time without losing an unacceptable amount of business to competitors. The importance of these arrangements to Microsoft is evident in the fact that, in contrast to the restrictive terms in the Windows Referral Server agreements, Microsoft has never waived the terms that require the OLSs to distribute and promote Internet Explorer to the near exclusion of Navigator. The judge, Thomas Penfield Jackson of United States District Court, sided with the government on the most important points in its exhaustive … For a time, even among new users, Navigator was likely to win most choices between comparable browser software, because most people associated the Internet and cutting-edge browsing technology with Netscape rather than with Microsoft. Microsoft's proposal was not intended to advance, and would not have advanced, any legitimate procompetitive interest. 26-27); Internet browsers and operating systems perform different functions; and, Microsoft markets Internet Explorer for non-Windows operating systems, including operating systems produced by Apple Computer and Sun Microsystems. Microsoft's refusal to respect the user's choice of default browser fulfilled Brad Chase's 1995 promise to make the use of any browser other than Internet Explorer on Windows "a jolting experience." Microsoft introduced the Active Desktop, including the Channel Bar, as a feature of Internet Explorer 4.0, which it released on September 30, 1997. Microsoft thus opted for the higher price. Microsoft intends to offer only a single, bundled version of Windows 98 and to require, as a condition of licensing Windows 98, that OEMs license, install and distribute Microsoft's Internet browser software. If Gateway would replace Navigator with Internet Explorer, Microsoft would compensate Gateway for its investment in Netscape's product. There the process halted, however. 246. It follows that, for the foreseeable future, a firm controlling the licensing of all Intel-compatible PC operating systems could set prices substantially above competitive levels without losing an unacceptable amount of business to information appliances. Microsoft also agreed to provide AOL with significant engineering assistance and technical support to enable AOL to integrate Internet Explorer into AOL's proprietary access software. My conclusion is that we must leverage Windows more. 283. In addition to creating this incentive indirectly, by disadvantaging Navigator, Microsoft also targeted individual ISVs directly, extracting from them commitments to make their Web-centric applications reliant on technology specific to Internet Explorer. To date, though, legions of ISVs have not followed the lead of these first movers. United States v. Microsoft Corporation 253 F.3d 34 (D.C. Cir. Finally, Microsoft offered yet further reductions in referral fees to the IAPs using Microsoft-controlled technologies likely to stimulate developers to focus their attention on Windows-specific software interfaces rather than the cross- platform ones provided by Netscape and Sun. This is true because the average user, having chosen a browser product, is indisposed to undergo the trouble of switching to a different one. By January 1998, Cameron Myhrvold was able to report to Gates and the rest of Microsoft's executive committee that ninety-two percent of AOL's subscribers (who by then numbered over ten million) were using client access software that included Internet Explorer. . 133. 113. One of these issues was the extent to which Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS. . The large body of applications thus reinforces demand for Windows, augmenting Microsoft's dominant position and thereby perpetuating ISV incentives to write applications principally for Windows. As soon as Netscape released Navigator on December 15, 1994, the product began to enjoy dramatic acceptance by the public; shortly after its release, consumers were already using Navigator far more than any other browser product. Microsoft concluded in January 1997 that, for Windows 98, priority "#1 is to build IE 4 share via OEM distribution." 110. That the Court enter such other preliminary and permanent relief as is necessary and appropriate to restore competitive conditions in the markets affected by Microsoft's unlawful conduct. 6. Thus none of the characteristics of the AdKnowledge data invalidate it as a useful measure of browser usage share. A study Microsoft conducted shows that at the end of 1997, Internet Explorer enjoyed a ninety- four percent weighted average share of shipments of browsing software by ISPs that had agreed to make Internet Explorer their default browser. If the user chose Navigator, the system would automatically remove the most prominent means of accessing Internet Explorer from Windows (without actually uninstalling, i.e., removing all means of accessing, Internet Explorer) before the desktop screen appeared for the first time. From 1995 onward, Microsoft spent more than $100 million each year developing Internet Explorer. Microsoft recognizes that new paradigms could arise to depreciate the value of selling PC operating systems; however, the fact that these new paradigms already exist in embryonic or primitive form does not prevent Microsoft from enjoying monopoly power today. Microsoft did not offer any analytical basis, however, for distinguishing this sharing of code from the code sharing that exists between all Windows applications and the operating system functionalities in Windows 98. Rather, the Complaint challenges only Microsoft's concerted attempts to maintain its monopoly in operating systems and to achieve dominance in other markets, not by innovation and other competition on the merits, but by tie-ins, exclusive dealing contracts, and other anticompetitive agreements that deter innovation, exclude competition, and rob customers of their right to choose among competing alternatives. To the contrary, AOL made it relatively difficult for new subscribers to obtain a version of Navigator that would work with its client software, and it pressured existing subscribers who used Navigator to abandon it in favor of client software that included Internet Explorer. Internet Explorer's success in gaining usage share, together with the lack of contenders other than Navigator, has simultaneously sent the clear message to developers that no platform for network-centric applications can compete for ubiquity with the 32-bit Windows API set. . 265. Faced with Gates' threat, Intel agreed to stop developing platform-level interfaces that might draw support away from interfaces exposed by Windows. In December 1998, during a meeting convened to analyze the implications of the AOL/Netscape/Sun transactions, Gates declared to the assembled Microsoft executives, "AOL doesn't have it in their genes to attack us in the platform space.". 5. Beginning in or around June 1998, Microsoft will introduce to the market the latest version of its operating system for Intel-based PCs, Windows 98. These exclusionary restrictions are not reasonably necessary to further any legitimate, procompetitive purpose. Once first-movers stake claims to the major categories of applications, however, there is a strong chance that the new operating system could stall; it would not support the most familiar applications, nor the variety and number of applications, that attract large numbers of consumers, and there would no longer exist a first-mover incentive to attract additional ISVs to the important application categories. Therefore, most users who upgraded their Macintosh systems to Mac OS 8.5 were unable to access Navigator without doing a customized installation. But for all intents and purposes it is true, AOL will be moving its 5M customers to a new client integrated with Internet Explorer 3 starting this summer/fall.". Because this content can include advertisements and links to download sites, ICPs also provide a channel for the promotion and distribution of Web browsing software. 27. Furthermore, most of the PCs shipped with Navigator featured the product in a manner much less likely to lead to usage than if its icon appeared on the desktop. 110. OEMs (including Micron, Hewlett Packard, and Gateway) have requested that Microsoft allow them to provide new PC purchasers with an alternative user interface, boot-up sequence, or initial or default screens, but Microsoft has refused. Microsoft and the ISVs all read this requirement to obligate the ISVs to ensure that their Java applications were compatible with Microsoft's version of the Windows JVM. For any firm looking to turn its browser product into an applications platform such to rival Windows, the intense consumer interest in all things Internet-related is a great boon. This reveals that Microsoft's motivation was not simply a desire to generate brand associations with Internet Explorer. Rather, the agreements obligated the ICPs to compensate Microsoft in other ways. 78. Just a few days later, Microsoft began to retaliate in earnest against the IBM PC Company. Nor are consumers likely to do so in appreciable numbers any time in the next few years. Microsoft's conduct includes agreements tying other Microsoft software products to Microsoft's Windows operating system; exclusionary agreements precluding companies from distributing, promoting, buying, or using products of Microsoft's software competitors or potential competitors; and exclusionary agreements restricting the right of companies to provide services or resources to Microsoft's software competitors or potential competitors. The company transacts business in all fifty of the United States and in most countries around the world. Microsoft has also relied on studies showing that a very large majority of those who browse the Web obtain their browsing software with either their PCs or their IAP subscriptions. Netscape's refusal of Microsoft's proposed scheme meant that its competing browser would continue to have the potential to become an alternative platform to Windows; would continue to facilitate the development and distribution of other software with the potential to support applications regardless of the identity of the underlying operating system; and would, thus, continue to threaten to "commoditize" the operating system and ultimately reduce or eliminate Microsoft's monopoly power. We will attempt exclusive arrangements, fight for preferred status, but settle for parity with NetScape. First, Microsoft formalized the prohibition against removing any icons, folders, or "Start" menu entries that Microsoft itself had placed on the Windows desktop. I. 260. Microsoft markets a variety of PC operating systems, including MS-DOS, Windows 3.11, Windows For Workgroups, Windows NT Workstation, and Windows 95. Although the Windows 98 OEM license does not forbid the OEM to set Navigator as the default browsing software, doing so would fail to forestall user confusion since, as the Court found in the previous section, Windows 98 launches Internet Explorer in certain situations even if Navigator is set as the default. Second, Microsoft recognized that Netscape's browser was itself a "platform" to which many applications were being written -- and to which (if it thrived) more and more applications would be written. Defendant Microsoft Corporation is organized under the laws of the State of Washington, and its headquarters are situated in Redmond, Washington. Microsoft felt it was worth obstructing the development of Windows-compatible applications where those applications would have been easy to port to other platforms. 91. 300. For example, in exchange for Netcom's commitment to offer deals to its customers encouraging them to upgrade their software to the newest version that bundled Internet Explorer, Microsoft subtracted nine dollars from the referral fee. Chase responded: "Yes the[re] are some but they are pretty remote. In dozens of "First Wave" agreements signed between the fall of 1997 and the spring of 1998, Microsoft has promised to give preferential support, in the form of early Windows 98 and Windows NT betas, other technical information, and the right to use certain Microsoft seals of approval, to important ISVs that agree to certain conditions. The software code necessary to supply the functionality of a modern application or operating system can be extremely long and complex. Indeed, continued competition on the merits between Netscape's Navigator and Microsoft's Internet Explorer would have resulted in greater innovation and the development of better products at lower prices. More significant is the fact that Microsoft's license agreements require OEMs to bear product support costs. The durability of Microsoft's market power in part reflects the fact that the PC operating system market is characterized by certain economies of scale in production and by significant "network effects." We must have more ability to decide how our system is presented to our end users. 29. Microsoft intends to continue marketing the Internet Explorer browser separately through retail outlets. 2. To this end, the Microsoft representatives wanted to know whether Netscape intended to adopt and build on top of the Internet-related platform that Microsoft planned to include in Windows 95, or rather to expose its own Internet-related APIs, which would compete with Microsoft's. In Waldman's words: Sounds like we give them the HTML control for nothing except making IE the "standard browser for Apple?" Not only was Microsoft willing to forego an opportunity to attract substantial revenue while enhancing (albeit temporarily) consumer demand for Windows 98, but the company also paid huge sums of money, and sacrificed many millions more in lost revenue every year, in order to induce firms to take actions that would help increase Internet Explorer's share of browser usage at Navigator's expense. 322. Particularly because of the market's network effects, the significant increase in Microsoft's share of the browser market that will result in the absence of preliminary relief will tip the market in Microsoft's favor and accelerate its dominance and competition's demise. So, as matters stand at present, while Microsoft has succeeded in forestalling the development of enough full-featured, cross-platform, network- centric applications to render the applications barrier penetrable, it is not likely to drive non- Microsoft PC Web browsing software from the marketplace altogether. Maffei wrote Waldman, "Ben - great mail, but [we] need a way to push these guys and this is the only one that seems to make them move." At the time Microsoft presented its proposal, Navigator was the only browser product with a significant share of the market and thus the only one with the potential to weaken the applications barrier to entry. The fact that an OLS may find it worthwhile to "carpet bomb" consumers with free disks obviously only helps the vendor of browsing software whose product the OLS has chosen to bundle with its proprietary software. 138. If Apple would agree to make DirectX the standard, Microsoft would be willing to do several things that Apple might find beneficial. 24. All signs point to the fact that Internet Explorer's share has continued to rise — and Navigator's has continued to decline — since the late summer of 1998. AdKnowledge's attempt to implement "cache- fooling" measures has not eliminated the effects of caching. First, in contrast to non-Microsoft, Intel-compatible PC operating systems, which few users would want to use on the same PC systems that carry their copies of Windows, a browser can gain widespread use based on its value as a complement to Windows. Users do not want to invest in an operating system until it is clear that the system will support generations of applications that will meet their needs, and developers do not want to invest in writing or quickly porting applications for an operating system until it is clear that there will be a sizeable and stable market for it. The same was true of Internet Explorer 2.0. To date the IBM PC company has not always been an active participant in these areas - understandable given your own internal product priorities. Before it decided to blunt the threat that Navigator posed to the applications barrier to entry, Microsoft did not plan to make it difficult or impossible for OEMs or consumers to obtain Windows without obtaining Internet Explorer. 317. The real motivation behind the exclusionary terms in the Referral Server agreements was Microsoft's conviction that even if IAPs were compelled to promote and distribute Internet Explorer, the majority of their subscribers would nevertheless elect to use Navigator if the IAPs made it readily available to them. 378. 51. It follows that software applications written to run on a specific Intel-compatible PC operating system will not run on a network computer. . IBM also offered to add a term to any Windows 95 license agreement whereby IBM would pay penalties and interest if any future audit disclosed under-reporting of royalties by IBM. 30. By contrast, the study shows that Internet Explorer had only a fourteen percent weighted average share of shipments of browsing software by ISPs that had not agreed to make Internet Explorer their default browser. Microsoft's management believed that, no matter what the firm did, Internet Explorer would not capture a large share of browser usage as long as it remained markedly inferior to Navigator in the estimation of consumers. The scrutiny was close enough to prompt an AOL executive to write Microsoft's Chase: "We are not selling NS advertising around its browser or otherwise — let's move on. The reduction of search and communication costs, the identification and avoidance of harmful Web resources, and the provision of more accurate information as to the costs, risks, and benefits of performing Web transactions are just three of the many possible areas of innovation in the field of Web browser technology. 306. With the offer of still other concessions, Microsoft induced IAPs to turn subscribers already using Navigator into Internet Explorer users. He continued to insist, however, that Microsoft not place an AOL icon directly on the Windows desktop. Many newspapers, magazines, books, journals, public documents, and software programs are also published on the Web. OEMs will begin shipping most PCs, particularly for non-corporate users, with the Windows 98 operating system as soon as it is released. For instance, IBM has in the past marketed OS/2 as an alternative to Windows, and it currently markets the SmartSuite bundle of office productivity applications as an alternative to Microsoft's Office suite. However, the continuing anticompetitive effect of the agreements is substantial; the modified agreements are themselves anticompetitive and there is a serious threat that, unless enjoined, Microsoft will reimpose the unlawful terms that it has only recently expressed an intention not to enforce. other PC customers want an up-to-date Windows operating system together with non-Microsoft browsers. This sequence determines the screens that every user sees upon turning on a Windows PC. 354. While public awareness of the Web was taking hold, companies like Netscape and Microsoft were hard at work developing Web browsing software. The actions that Microsoft took against Navigator hobbled a form of innovation that had shown the potential to depress the applications barrier to entry sufficiently to enable other firms to compete effectively against Microsoft in the market for Intel-compatible PC operating systems. Since MSN enjoyed a branded icon directly on the desktop, including AOL in the OLS folder would maintain its inferior status to Microsoft's service. A "Web browser" is a type of Web client that enables a user to select, retrieve, and perceive resources on the Web. 210. . .)" Emblematic of the reaction among large OEMs was a letter that the manager of research and development at Hewlett- Packard sent to Microsoft in March 1997. Opening statement of John Warden for Microsoft: October 20, p.m. Cross examination of James Barksdale: October 21, a.m. Having failed simply to stop competition by agreement, Microsoft set about to exclude Netscape and other browser rivals from access to the distribution, promotion, and resources they needed to offer their browser products to OEMs and PC users pervasively enough to facilitate the widespread distribution of Java or to facilitate their browsers becoming an attractive programming platform in their own right. 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