Findings of Fact - U.S.A. vs. Microsoft

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Findings of Fact - United States of America v. Microsoft Corporation, C.A. 98-1232; State of New York, ex rel Eliot Spitzer, et al., v. Microsoft Corporation, C.A. 98-1233

November 5, 1999

Background (paragraphs 1-17)

Definitions of terms.

The Relevant Market (paragraphs 18-32)

"...in determining the level of Microsoft's market power, the relevant market is the licensing of all Intel-compatible PC operating systems worldwide."

Demand Substitutability (19-29)

In which these items are deemed non-competitive.

Server Operating Systems (19)

Non-Intel-Compatible Operating Systems (20-21)

Information Appliances (22-23)

Network Computers (24-26)

Server-Based Computing Generally (27)

The judge feels that if portal Web sites were to expenad their offerings beyond email and Net activities, such sites might offer a computing alternative. However, that's not imminent.

Middleware (28-29)

Middleware — software which uses the underlying operating system's APIs (application programming interfaces) to function, but in turn offers APIs that other programs might piggyback onto — play a major role in the findings of fact. However, there are no middleware products currently providing competition, and thereby hangs the tale.

The Possibility of Supply Responses (30-32)

Microsoft's Power In The Relevant Market (paragraphs 33-67)

"...three main facts indicate that Microsoft enjoys monopoly power."

Market Share (35)

The Applications Barrier To Entry (36-52)

Description Of The Application Barriers To Entry (36-44)

This is the barrier faced by a company offering a new operating system. The primary barrier to entry is the availability of applications of interest to consumers: the more apps available, the more viable the OS, which makes more developers want to write apps for it, which makes more apps available, which... In any case, the barrier to competing against Microsoft, which has at least a 95 percent share of the PC market, is dreadful.

Empirical Evidence Of The Applications Barrier To Entry (45-50)

OS/2 Warp (46)

The Mac OS (47)

Fringe Operating Systems [BeOS, Linux] (48-50)

Open-Source Applications Development (51)

"Fortunately for Microsoft...there are only so many developers in the world willing to devote their talents to writing, testing, and debugging software pro bono publico."

Cloning The 32-Bit Windows APIs (52)

Viable Alternatives To Windows (53-56)

Price Restraint Posed By Microsoft's Installed Base (57)

Price Restraint Posed By Privacy (58)

"...Microsoft is more concerned about privacy than it is about other firms' operating systems...", which is why they make it highly problematic for computer vendors to sell end-users a PC without Windows pre-installed.

Price Restraint Posed By Long-Term Threats (59-60)

The Internet could be a long-term threat, eventually making the PC operating system irrelevant. However, "the fact that these new paradigms already exist in embryonic or primitive form does not prevent Microsoft from enjoying monopoly power today."

Significance Of Microsoft's Innovation (61)

Microsoft's Pricing Behavior (62-66)

Microsoft's Actions Toward Other Firms (67)

The Middleware Threats (paragraphs 68-78)

Middleware, particularly the efforts made by Netscape and Sun (Java), is at the heart of much of Microsoft's concern. Redmond's push for the Internet can be understood as a response to the threat that middleware could make to the rule of operating systems and to the applications barrier to entry.

The Netscape Web Browser (69-72)

Sun's Implementation Of The Java Technologies (73-77)

Other Middleware Threats (78)

These include the former Lotus Notes, Intel's Native Signal Processing software, and even multimedia-oriented items such as QuickTime (Apple) and RealNetworks' streaming technology.

Microsoft's Response To The Browser Threat (paragraphs 79-385)

Microsoft's Attempt To Dissuade Netscape From Developing Navigator As A Platform (79-89)

Microsoft followed a pattern here that held more or less true for all the "similar experiences" listed here. First they attempted to assimilate Netscape's most crucial technology, offering support and even ownership of some of the less-interesting market niches; in exchange, Microsoft's technology would become the underpinnings of Netscape's browser, and Netscape would leave it to Microsoft to do a Win95 (32-bit) browser.

Withholding Crucial Technical Information (90-92)

When the assimilation carrot didn't work, out came the stick: non-cooperation on critical APIs and licenses.

The Similar Experiences Of Other Firms In Dealing With Microsoft (93-132)

Intel (94-103)

Apple (104-110)

RealNetworks (111-114)

Of all these companies, RealNetworks is the only one who managed to best Microsoft at the bargaining table and walk away basically unscathed; it's the only example given of a company signing a contract with Microsoft and yet managing to stay the course it had set for itself. They're also the only other Puget Sound denizen represented. Makes you wonder, doesn't it, whether the long-simmering cultural conflict between the great Pacific Northwest and those Californian quiche-eaters in Silicon Valley has more to do with all this insanity than meets the eye.

IBM (115-132)

Developing Competitive Web Browsing Software (133-135)

Giving Internet Explorer Away And Rewarding Firms That Helped Build Its Usage Share (136-142)

Excluding Navigator From Important Distribution Channels (143-356)

The Importance Of The OEM And IAP Channels (144-148)

Excluding Navigator From The OEM Channel (149-241)

There are many in the industry who will argue that no matter how badly Microsoft tore at the flesh of Netscape, bad management and bad ideas had as much to do with Netscape's downfall as anything. However, if Netscape was the victim of what we might call self-inflicted murder, the computer vendors Microsoft uses to do much of their dirty work are still genuinely innocent victims. Many believe that Microsoft did the consumer universe a huge favor by forcing ISPs to keep margins razor-slim; however, there are dangers to that, as this section shows.

Binding Internet Explorer To Windows (149-201)

The Status Of Web Browsers As Separate Products (149-154)

Microsoft's Actions (154-174)

Those annoyed by not being able to uninstall IE should read paragraphs 169-170; those annoyed by IE's insistence on popping up even when Netscape is the default browser should read paragraph 171. Harm to consumers at Microsoft's hands is explicitly discussed in paragraphs 173-174.

Lack Of Justification (175-198)

Those particularly interested in the testimony of Professor Felten, who uninstalled the browser (more or less), shoudl read paragraphs 177-185.

The Market For Web Browsing Functionality (199-201)

Preventing OEMs From Removing The Ready Means Of Accessing Explorer And From Promoting Navigator In The Boot Sequence (202-229)

An excellent discussion of why Microsoft and computer vendors struggle for the right to determine what appears onscreen the first time a user fires up a new computer. Did you know that on average, it takes only three phone calls to tech support for a consumer to cost a computer vendor its entire profit on a new machine?

Pressuring OEMs To Promote Internet Explorer And To Not Pre-Install OR Promote Navigator (230-238)

As in the section above (115-132), the description of the IBM-Microsoft relationship (238) is fascinating, not unlike a train wreck. For a glimpse of just how much influence Microsoft has on even internal company matters at the computer vendors, see paragraphs 234 and 236.

Effect Of Microsoft's Actions In The OEM Channel (239-241)

Excluding Navigator From The IAP Channel (242-310)

The Internet Explorer Access Kit Agreements (248-252)

Here's an interesting passage, in which Microsoft offers Internet service providers some of the freedom of configuration that they denied the computer vendors. The IEAK must have looked like a great deal to struggling ISPs, especially when Netscape charged nearly $2000 for the same functionality.

The Referral Server Agreements (253-271)

Interesting fact here: Microsoft signed dozens of ISPs for its various easy-signup and loyalty plans, but Netscape landed five of the RBOCs, the regional Bell phone companies. Surely that looked like a good deal at the time; in fact, back in the mid-90s many of us expected the phone companies to be very prominent Net-access providers. It's possible that for Netscape, with everything else that was going on, either end of this lollipop woudlhave been the fuzzy one.

The Online Services Folder Agreements (272-306)

AOL (273-304)

In AOL we have one of the few companies that can conclusively be said to have fought Microsoft and won; however, testimony revealed that Microsoft was essentially ready to gut MSN to protect IE (285). Then again, AOL gutted GNN, the venerable online service lately come into their care — and the agreement that put AOL back on the Windows desktop did much to seal the fate of Netscape. Warning: AOL alleges that Microsoft made it "contravene its natural inclination" to act in certain ways (294). The mental image of Steve Case on the stand whining that Bill made him perform unnatural acts will stay with you much too vividly...

Other Online Services (305-306)

Effect Of Microsoft's Actions In The IAP Channel (307-310)

Inducing ICPs To Enhance Internet Explorer's Usage Share At Navigator's Expense (311-336)

Directly Inducing ISVs To Rely On Microsoft's Browsing Techniques Rather Than APIs Exposed By Navigator (337-340)

Foreclosing Apple As A Distribution Channel For Navigator (341-356)

It seems ironic to casual observers that one of the best-selling software packages for the Mac is published by Microsoft, and software vendors such as Claris probably have their own thoughts on what it's like to compete with Redmond. However, the Office for Mac connection went from odd to nightmarish when Microsoft threatened to stop development on new versions of Office — an action industry observers would have considered a sign of Apple's impending collapse. And that, gentle readers, is why your Mac is likely sporting IE now. See paragraph 349 for an example of truly nasty, quotable, monopoly-type behavior. And then Gates wonders why so many people were many people were taking personal glee from Friday's events...

Microsoft's Success In Excluding Navigator From The Channels That Lead Most Efficiently To Browser Usage (357)

The Success Of Microsoft's Effort To Maximize Internet Explorer's Usage Share At Microsoft's Expense (358-385)

The Change In The Usage Shares Of Internet Explorer And Navigator (359-374)

The Cause Of The Change In Usage Shares (375-376)

The Success Of Microsoft's Effort To Protect The Applications Barrier To Entry From The Threat Posed By Netscape (377-385)

In a nutshell, thorough but not total. Much depends on AOL, who now owns Netscape (even though they've expressed interest mainly in scarfing up the traffic to its home page, an asset that Microsoft indirectly had a hand in with IAEK).

Microsoft's Response To The Threat Posed By Sun's Implementation Of Java (paragraphs 386-407)

Much of the damage done to Java was mitigated in earlier court decisions dating from November 1998.

Creating A Java Implementation For Windows That Undermined Portability And Was Incompatible With Other Implementations (387-394)

Code jockey beware! Microsoft bet, at least in part, that less-than-savvy programmers would unknowingly help to propagate Microsoft-created incompatibilities in Java by using Microsoft's developer tools.

Inducing Developers To Use The Microsoft Implementation Of Java Rather Than Sun-Compliant Implementations (395-403)

Thwarting The Expansion Of The Java Class Libraries (404-406)

The Effect Of Microsoft's Efforts To Prevent Java From Diminishing The Applications Barrier To Entry (407)

The Effect On Consumers Of Microsoft's Efforts To Protect The Applications Barrier To Entry (paragraphs 408-412)

Paragraph 408 contains the bits of praise Microsoft quoted at the November 5 press conference.

Read the full FOF.

 
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