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Microsoft Monday, 3 April, 2000, 23:29 GMT 00:29 UK
Extracts from the guilty verdict
US v Microsoft: Excerpts from Judge Thomas Penfield Jackson's 43-page ruling
Judge Thomas Penfield Jackson

The Court concludes that Microsoft maintained its monopoly power by anticompetitive means and attempted to monopolize the Web browser market, both in violation of §2. Microsoft also violated § 1 of the Sherman Act by unlawfully tying its Web browser to its operating system.

The Microsoft Trial
The facts found do not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted unlawful exclusive dealing under criteria established by leading decisions under § 1.
The Court has already found, based on the evidence in this record, that there are currently no products - and that there are not likely to be any in the near future - that a significant percentage of computer users worldwide could substitute for Intel-compatible PC operating systems without incurring substantial costs.

Microsoft's campaign must be termed predatory

The Court has further found that no firm not currently marketing Intel-compatible PC operating systems could start doing so in a way that would, within a reasonably short period of time, present a significant percentage of such consumers with a viable alternative to existing Intel-compatible PC operating systems.
Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds ninety-five percent, and the firm's share would stand well above eighty percent even if the Mac OS were included in the market.
The proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power.
2. Maintenance of Monopoly Power by Anticompetitive Means
Microsoft early on recognized middleware as the Trojan horse that, once having, in effect, infiltrated the applications barrier, could enable rival operating systems to enter the market for Intel-compatible PC operating systems unimpeded.

Middleware [like Netscape's browser] threatened to demolish Microsoft's coveted monopoly power

Simply put, middleware threatened to demolish Microsoft's coveted monopoly power. Alerted to the threat, Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier.
Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits.
Because Microsoft achieved this result through exclusionary acts that lacked procompetitive justification, the Court deems Microsoft's conduct the maintenance of monopoly power by anticompetitive means.

a. Combating the Browser Threat

The same ambition that inspired Microsoft's efforts to induce Intel, Apple, RealNetworks and IBM to desist from certain technological innovations and business initiatives - namely, the desire to preserve the applications barrier - motivated the firm's June 1995 proposal that Netscape abstain from releasing platform-level browsing software for 32-bit versions of Windows.
This proposal, together with the punitive measures that Microsoft inflicted on Netscape when it rebuffed the overture, illuminates the context in which Microsoft's subsequent behavior toward PC manufacturers ("OEMs"), Internet access providers ("IAPs"), and other firms must be viewed.

When Netscape refused to abandon its efforts to develop Navigator into a substantial platform for applications development, Microsoft focused its efforts on minimizing the extent to which developers would avail themselves of interfaces exposed by that nascent platform.

Microsoft realized that the extent of developers' reliance on Netscape's browser platform would depend largely on the size and trajectory of Navigator's share of browser usage.

Microsoft thus set out to maximize Internet Explorer's share of browser usage at Navigator's expense.
i. The OEM Channel

With respect to OEMs, Microsoft's campaign proceeded on three fronts.

First, Microsoft bound Internet Explorer to Windows with contractual and, later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user's PC system, and to increase the costs attendant to installing and using Navigator on any PCs running Windows.

Second, Microsoft imposed stringent limits on the freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might enable OEMs to generate usage for Navigator in spite of the contractual and technological devices that Microsoft had employed to bind Internet Explorer to Windows.

Finally, Microsoft used incentives and threats to induce especially important OEMs to design their distributional, promotional and technical efforts to favor Internet Explorer to the exclusion of Navigator.

Microsoft's actions increased the likelihood that pre-installation of Navigator onto Windows would cause user confusion and system degradation, and therefore lead to higher support costs and reduced sales for the OEMs.

Internet Explorer is not demonstrably the current "best of breed" Web browser, nor is it likely to be so at any time in the immediate future

Not willing to take actions that would jeopardize their already slender profit margins, OEMs felt compelled by Microsoft's actions to reduce drastically their distribution and promotion of Navigator.

The substantial inducements that Microsoft held out to the largest OEMs only further reduced the distribution and promotion of Navigator in the OEM channel

The response of OEMs to Microsoft's efforts had a dramatic, negative impact on Navigator's usage share

The drop in usage share, in turn, has prevented Navigator from being the vehicle to open the relevant market to competition on the merits.
With respect to [Microsoft's] assertion [that Internet explorer is "best of breed"], Internet Explorer is not demonstrably the current "best of breed" Web browser, nor is it likely to be so at any time in the immediate future.

The fact that Microsoft itself was aware of this reality only further strengthens the conclusion that Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers and improve the efficiency of the software market generally, but rather as part of a larger campaign to quash innovation that threatened its monopoly position.
In sum, the efforts Microsoft directed at OEMs and IAPs successfully ostracized Navigator as a practical matter from the two channels that lead most efficiently to browser usage.

Even when viewed independently, these two prongs of Microsoft's campaign threatened to "forestall the corrective forces of competition" and thereby perpetuate Microsoft's monopoly power in the relevant market.
b. Combating the Java Threat

As part of its grand strategy to protect the applications barrier, Microsoft employed an array of tactics designed to maximize the difficulty with which applications written in Java could be ported from Windows to other platforms, and vice versa.

To prevent the development of easily portable Java applications, Microsoft used its monopoly power to prevent firms ... from aiding in the creation of cross-platform interfaces.

The first of these measures was the creation of a Java implementation for Windows that undermined portability and was incompatible with other implementations.

Microsoft then induced developers to use its implementation of Java rather than Sun-compliant ones. It pursued this tactic directly, by means of subterfuge and barter, and indirectly, through its campaign to minimize Navigator's usage share.

In a separate effort to prevent the development of easily portable Java applications, Microsoft used its monopoly power to prevent firms such as Intel from aiding in the creation of cross-platform interfaces.

Microsoft's tactics induced many Java developers to write their applications using Microsoft's developer tools and to refrain from distributing Sun-compliant JVMs to Windows users.

This stratagem has effectively resulted in fewer applications that are easily portable.
It is not clear whether, absent Microsoft's machinations, Sun's Java efforts would by now have facilitated porting between Windows and other platforms to a degree sufficient to render the applications barrier to entry vulnerable.

It is clear, however, that Microsoft's actions markedly impeded Java's progress to that end.

The evidence thus compels the conclusion that Microsoft's actions with respect to Java have restricted significantly the ability of other firms to compete on the merits in the market for Intel-compatible PC operating systems.

Microsoft's actions to counter the Java threat went far beyond the development of an attractive alternative to Sun's implementation of the technology. Specifically, Microsoft successfully pressured Intel, which was dependent in many ways on Microsoft's good graces, to abstain from aiding in Sun's and Netscape's Java development work.

Microsoft also deliberately designed its Java development tools so that developers who were opting for portability over performance would nevertheless unwittingly write Java applications that would run only on Windows.

c. Microsoft's Conduct Taken As a Whole

Microsoft mounted a deliberate assault upon entrepreneurial efforts

As the foregoing discussion illustrates, Microsoft's campaign to protect the applications barrier from erosion by network-centric middleware can be broken down into discrete categories of activity, several of which on their own independently satisfy the second element of a § 2 monopoly maintenance claim. But only when the separate categories of conduct are viewed, as they should be, as a single, well-coordinated course of action does the full extent of the violence that Microsoft has done to the competitive process reveal itself.
In essence, Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems.

While the evidence does not prove that they would have succeeded absent Microsoft's actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market.

More broadly, Microsoft's anticompetitive actions trammeled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers.

Viewing Microsoft's conduct as a whole also reinforces the conviction that it was predacious. Microsoft paid vast sums of money, and renounced many millions more in lost revenue every year, in order to induce firms to take actions that would help enhance Internet Explorer's share of browser usage at Navigator's expense.
Microsoft's campaign must be termed predatory.

Since the Court has already found that Microsoft possesses monopoly power, the predatory nature of the firm's conduct compels the Court to hold Microsoft liable under § 2 of the Sherman Act.

B. Attempting to Obtain Monopoly Power in a Second Market by Anticompetitive Means
The plaintiffs assert that Microsoft's anticompetitive efforts to maintain its monopoly power in the market for Intel-compatible PC operating systems warrant additional liability as an illegal attempt to amass monopoly power in "the browser market."

The Court agrees.
Microsoft's June 1995 proposal that Netscape abandon the field to Microsoft in the market for browsing technology for Windows, and its subsequent, well-documented efforts to overwhelm Navigator's browser usage share with a proliferation of Internet Explorer browsers inextricably attached to Windows, clearly meet the first element of the offense.
While Microsoft's top executives never expressly declared acquisition of monopoly power in the browser market to be the objective, they knew, or should have known, that the tactics they actually employed were likely to push Internet Explorer's share to those extreme heights.

Navigator's slow demise would leave a competitive vacuum for only Internet Explorer to fill.
The Court is nonetheless compelled to express its further conclusion that the predatory course of conduct Microsoft has pursued since June of 1995 has revived the dangerous probability that Microsoft will attain monopoly power in a second market.

Internet Explorer's share of browser usage has already risen above fifty percent, will exceed sixty percent by January 2001, and the trend continues unabated.

The plaintiffs allege that Microsoft's combination of Windows and Internet Explorer by contractual and technological artifices constitute unlawful tying to the extent that those actions forced Microsoft's customers and consumers to take Internet Explorer as a condition of obtaining Windows.

While the Court agrees with plaintiffs, and thus holds that Microsoft is liable for illegal tying under § 1, this conclusion is arguably at variance with a decision of the U.S. Court of Appeals for the D.C. Circuit in a closely related case, and must therefore be explained in some detail. Whether the decisions are indeed inconsistent is not for this Court to say.
The majority opinion in Microsoft II evinces both an extraordinary degree of respect for changes (including "integration") instigated by designers of technological products, such as software, in the name of product "improvement," and a corresponding lack of confidence in the ability of the courts to distinguish between improvements in fact and improvements in name only, made for anticompetitive purposes.

Read literally, the D.C. Circuit's opinion appears to immunize any product design (or, at least, software product design) from antitrust scrutiny, irrespective of its effect upon competition, if the software developer can postulate any "plausible claim" of advantage to its arrangement of code.

This undemanding test appears to this Court to be inconsistent with the pertinent Supreme Court precedents in at least three respects.

First, it views the market from the defendant's perspective, or, more precisely, as the defendant would like to have the market viewed.

Second, it ignores reality: The claim of advantage need only be plausible; it need not be proved.

Third, it dispenses with any balancing of the hypothetical advantages against any anticompetitive effects.
The facts of this case also prove the elements of the forced bundling requirement. Indeed, the Supreme Court has stated that the "essential characteristic" of an illegal tying arrangement is a seller's decision to exploit its market power over the tying product "to force the buyer into the purchase of a tied product that the buyer either did not want at all, or might have preferred to purchase elsewhere on different terms."

In that regard, the Court has found that, beginning with the early agreements for Windows 95, Microsoft has conditioned the provision of a license to distribute Windows on the OEMs' purchase of Internet Explorer.

The agreements prohibited the licensees from ever modifying or deleting any part of Windows, despite the OEMs' expressed desire to be allowed to do so.

As a result, OEMs were generally not permitted, with only one brief exception, to satisfy consumer demand for a browserless version of Windows 95 without Internet Explorer.

The fact that Microsoft ostensibly priced Internet Explorer at zero does not detract from the conclusion that consumers were forced to pay, one way or another, for the browser along with Windows.

Similarly, Microsoft refused to license Windows 98 to OEMs unless they also agreed to abstain from removing the icons for Internet Explorer from the desktop. Consumers were also effectively compelled to purchase Internet Explorer along with Windows 98 by Microsoft's decision to stop including Internet Explorer on the list of programs subject to the Add/Remove function and by its decision not to respect their selection of another browser as their default.

The fact that Microsoft ostensibly priced Internet Explorer at zero does not detract from the conclusion that consumers were forced to pay, one way or another, for the browser along with Windows.

Despite Microsoft's assertion that the Internet Explorer technologies are not "purchased" since they are included in a single royalty price paid by OEMs for Windows 98, it is nevertheless clear that licensees, including consumers, are forced to take, and pay for, the entire package of software and that any value to be ascribed to Internet Explorer is built into this single price.
This Court concludes that Microsoft's decision to offer only the bundled - "integrated" - version of Windows and Internet Explorer derived not from technical necessity or business efficiencies; rather, it was the result of a deliberate and purposeful choice to quell incipient competition before it reached truly minatory proportions.

Notwithstanding the extent to which (...) "exclusive" distribution agreements preempted the most efficient channels for Navigator to achieve browser usage share, however, the Court concludes that Microsoft's multiple agreements with distributors did not ultimately deprive Netscape of the ability to have access to every PC user worldwide to offer an opportunity to install Navigator.

Navigator can be downloaded from the Internet. It is available through myriad retail channels. It can (and has been) mailed directly to an unlimited number of households.

How precisely it managed to do so is not shown by the evidence, but in 1998 alone, for example, Netscape was able to distribute 160 million copies of Navigator, contributing to an increase in its installed base from 15 million in 1996 to 33 million in December 1998.

As such, the evidence does not support a finding that these agreements completely excluded Netscape from any constituent portion of the worldwide browser market, the relevant line of commerce.

The fact that Microsoft's arrangements with various firms did not foreclose enough of the relevant market to constitute a § 1 violation in no way detracts from the Court's assignment of liability for the same arrangements under § 2.

As noted above, all of Microsoft's agreements, including the non-exclusive ones, severely restricted Netscape's access to those distribution channels leading most efficiently to the acquisition of browser usage share. They thus rendered Netscape harmless as a platform threat and preserved Microsoft's operating system monopoly, in violation of § 2.

But virtually all the leading case authority dictates that liability under § 1 must hinge upon whether Netscape was actually shut out of the Web browser market, or at least whether it was forced to reduce output below a subsistence level. The fact that Netscape was not allowed access to the most direct, efficient ways to cause the greatest number of consumers to use Navigator is legally irrelevant to a final determination of plaintiffs' § 1 claims.
Thomas Penfield Jackson
U.S. District Judge


See also:

03 Apr 00 | Business
03 Apr 00 | Business
03 Apr 00 | Business
03 Apr 00 | Business
22 Feb 00 | Microsoft
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