IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA
______) STATE OF NEW YORK, et al., ) ) Plaintiffs, ) ) v. ) Civil Action No. 98-1233 (CKK) ) MICROSOFT CORPORATION ) ) Next Court Deadline: April 8, 2002 Defendant. ) Remedies Hearing ______)
DIRECT TESTIMONY OF PROFESSOR CARL SHAPIRO
(REMEDIES 2, 3, 4, 5, 6, 7, 8, 9, 10, 12, 13, 14, 16)
Direct Testimony of Carl Shapiro Table of Contents
I. Qualifications and Scope of Testimony...... 1
II. Economic Context & Key Provisions for Restoring Competition...... 2
III. Legal Principles of Remedy...... 4
IV. Microsoft Stifled a Rare and Serious Threat to its Monopoly ...... 6
V. “Restoring Competition” – An Economic Interpretation...... 9
A. Reducing the Barriers Facing Tomorrow’s Threats to Windows...... 9
B. The Need for Significant, Affirmative Remedial Provisions ...... 13
C. Restoring Potential Competition: Economic Principles...... 14
D. How Far Should the Remedy Go in Restoring Competition? ...... 15
E. Lowering Entry Barriers Without Impeding Competition by Microsoft ...... 16
VI. Benefits to Consumers and Impact on Innovation...... 17
VII. Microsoft’s Causation Arguments ...... 20
A. The Proven Effects of Microsoft’s Illegal Conduct...... 20
B. Uncertainty About the Effects of Microsoft’s Illegal Acts...... 22
C. Microsoft’s Extreme Position...... 23
D. Contemporaneous Assessments...... 25
E. Additional Evidence of Economic Effects ...... 27
VIII. Treatment of Microsoft’s Intellectual Property...... 30
IX. Potential Threats to Microsoft’s Monopoly ...... 33
A. Existing Rival Desktop Operating Systems...... 35 1. Apple Mac OS ...... 35 2. Linux...... 37
B. Cross-Platform Middleware...... 44 1. Browsers ...... 45 2. Java ...... 46 3. Other Middleware Threats...... 48 4. The States’ Proposed Remedy and Middleware...... 52 5. Middleware Summary...... 60
C. Server-Based Computing...... 60 1. The Growing Importance of Client-Server Networks...... 61 2. Microsoft Uses its Client Monopoly to Disadvantage Server Rivals ...... 64 3. Disclosure to Enable Server Interoperation with Windows Clients ...... 66
D. Handheld Computing Devices...... 68
X. Critique of Microsoft’s Proposed Remedy...... 70
A. Interoperability Disclosure in Microsoft’s Proposed Remedy is Flawed...... 70
B. Stifling of Fledgling Middleware ...... 72
C. Interference with Rival Middleware...... 75
D. Term of Microsoft’s Proposed Remedy...... 75
E. Enforceability of Microsoft’s Proposed Remedy...... 76
Direct Testimony of Carl Shapiro 5 April 2002
I. Qualifications and Scope of Testimony
1. I am Carl Shapiro, the Transamerica Professor of Business Strategy at the Haas School of Business at the University of California at Berkeley where I have taught since 1990. I also am Director of the Institute of Business and Economic Research at U.C. Berkeley. I have served as the Editor of the Journal of Economic Perspectives, a leading economics journal published by the American Economic Association. I am also a Senior Consultant with Charles River Associates, an economics consulting firm.
2. I am an economist who has been studying antitrust, innovation, and network industries for some twenty years. My recent book with Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy, discusses competitive strategy in the information economy, emphasizing the pricing of information, the creation of multiple versions of information products such as software, the switching costs and lock-in associated with information technology, and network economics. I also have published numerous articles over the past twenty years on competition and innovation, licensing, network effects and positive feedback, and antitrust economics. For example, my article with Michael L. Katz, “Antitrust in Software Markets,” discusses the economic characteristics of software markets and draws out their implications for antitrust enforcement.
3. I have considerable experience in the application of economics for the purposes of enforcing the antitrust laws. I served during 1995 and 1996 as the Deputy Assistant Attorney General for Economics in the Antitrust Division of the Department of Justice. I have served on several occasions as an expert witness or consultant to the Antitrust Division or the Federal Trade Commission. Over the years I have also consulted or served as an expert witness on numerous antitrust matters for private companies in a range of industries, including several companies in the computer hardware and software business. My curriculum vitae is attached as Appendix A.
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4. In this proceeding I have been asked by the Litigating States to offer an economic analysis of the likely effects of the States’ Proposed Remedy on competition, innovation, and ultimately the well-being of consumers.
II. Economic Context & Key Provisions for Restoring Competition
5. This case is about Microsoft’s illegal maintenance of its monopoly over PC operating systems. Therefore, I will pay close attention to the most promising direct competitors to Windows today: the Linux operating system and Apple’s Mac OS. But the nature of the software industry is that competitive threats to leading products often arise from products in adjacent markets.1 The threats to Windows posed by Netscape Navigator and Sun’s Java were of this nature: products that were not operating systems and yet could, over time, undermine the dominant position enjoyed by Windows.
6. Because threats to the Windows monopoly are likely to be mounted by companies with products in adjacent markets, an effective remedy necessarily will affect business in adjacent markets, most notably markets for middleware and server operating systems. As a general principle, an effective and efficient remedy should prevent Microsoft from using its Windows monopoly to disadvantage products in adjacent markets that could, over time, play a role in undermining the dominant position of Windows.
7. Microsoft’s illegal conduct significantly raised the entry barriers protecting its Windows desktop monopoly. The thrust of my testimony is that the remedy should restore competition by lowering entry barriers back down. In particular, the remedy should go beyond preventing the recurrence of Microsoft’s illegal acts and should include provisions designed affirmatively to restore competition in the market for PC operating systems.
8. Before launching into my full analysis, I would like to highlight here three provisions in the States’ Proposed Remedy that I believe are especially important for the purpose of
1 “What eventually displaces the leader is often not competition from another product within the same software category, but rather a technological advance that renders the boundaries defining the category obsolete.” Findings
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restoring competition. The first provision highlighted here directly attacks the applications barrier to entry that protects the Windows monopoly.
Provision #14, Making Office Available on Other Operating Systems: This provision directly attacks the applications barrier to entry by ensuring the continued availability of Office on the Macintosh and by making Office available on other operating systems such as Linux. The costs of porting Office to other operating systems will be borne by the companies who win the licenses to port Office, not by Microsoft. Consumers will clearly benefit from this provision, which will not disrupt Microsoft’s ability or incentive to improve its software.
9. As we look ahead, the threats to Windows are very likely to come from software that interoperates with Windows. Middleware running on Windows PCs clearly must interoperate with Windows to provide value to consumers; likewise, software delivered to the desktop from a server must interoperate with Windows. The second provision I highlight is designed to insure that these categories of software can interoperate effectively with Windows.
Provision #4, Disclosure of APIs, Communications Interfaces, and Technical Information: Requiring Microsoft to disclose various interfaces will enable a range of software to interoperate with Windows more effectively. Provision #4 will substantially enhance potential competition to Windows growing out of cross-platform middleware and server-based applications. Consumers will benefit directly from these improved products and technologies and indirectly from the enhanced competition for Windows. Provision #4 will promote innovation by Microsoft and by others.
10. To pose an effective challenge to Windows, non-Microsoft middleware must be able to obtain distribution and usage through the important OEM channel. The third provision I highlight falls into the category of preventing the recurrence of Microsoft’s illegal acts, specifically the restrictions Microsoft imposed on OEMs that impeded the distribution and usage of rival middleware.
Provision #2c, OEM and Third-Party Licensee Flexibility in Product Configuration: Under the States’ Proposed Remedy, a variety of cross-platform middleware products will be protected from the illegal tactics that Microsoft used against Navigator and Java. Microsoft’s Proposed Remedy gives far weaker protections for innovative non-Microsoft
of Fact, United States of America v. Microsoft Corporation, 98-1232, 5 November 1999, (hereafter, Findings of Fact), ¶59.
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middleware and will not reliably prevent a recurrence of Microsoft’s illegal conduct directed against cross-platform middleware.
III. Legal Principles of Remedy
11. My economic analysis begins with my understanding of the legal goals of this remedy proceeding, as indicated by the Court of Appeals in this case.2 The Court of Appeals succinctly summarized the goals of a remedy in an antitrust case:
The Supreme Court has explained that a remedies decree in an antitrust case must seek to “unfetter a market from anticompetitive conduct,” Ford Motor Co., 405 U.S. at 577, to “terminate the illegal monopoly, deny to the defendant the fruits of its statutory violation, and ensure that there remain no practices likely to result in monopolization in the future,” United States v. United Shoe Mach. Corp., 391 U.S. 244, 250 (1968); see also United States v. Grinnell Corp., 384 U.S. 563, 577 (1966).3
12. Given these instructions, all parties to this case appear to agree that the remedy should prevent the recurrence of Microsoft’s illegal conduct. It is true that there is some disagreement about how to characterize Microsoft’s illegal conduct and how to define the “penumbra” of that conduct. These issues are thorny, since the remedy must operate in the software industry, which is dynamic and involves highly malleable products. I comment below on the effectiveness of specific remedial provisions aimed at preventing Microsoft from repeating its anti-competitive conduct; while very important and the subject of considerable dispute, those issues are not the primary focus of my testimony.
13. The Court of Appeals also explicitly identified the goal in this case of “restoring competition to a dramatically changed, and constantly changing, marketplace.”4 The focus of my testimony is based on this goal of restoring competition in the monopolized market, namely the market for Intel-compatible PC operating systems. As I explain at length below, restoring competition in this case means affirmatively lowering entry barriers into the monopolized market.
2 United States of America v. Microsoft Corporation, 00-5212 (United States Court of Appeals, DC Circuit) (hereafter, Court of Appeals). 3 Court of Appeals, pp. 99-100.
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14. The Department of Justice also has articulated the goal of restoring competition in this case:
The goals of the government were to obtain relief that stops Microsoft from engaging in unlawful conduct, prevent any recurrence of that conduct in the future, and restore competition in the software market.5
15. Assistant Attorney General Charles James has further stated: “An antitrust remedy for a Section 2 violation must stop the offending conduct, prevent its recurrence, and restore competition.”6 The Justice Department’s economic expert, Professor David Sibley, asks whether a remedy is sufficient to “restore competitive conditions.”7 One of Microsoft’s economic experts, Professor Kevin Murphy, also articulates the goal of restoring competition: “Finally, to the extent that past anticompetitive acts have injured competition, the remedies should work to restore competition to a level comparable to what it would have been absent these illegal acts.”8 In sum, there does not appear to be any dispute that the remedy should seek to restore competition, although there is significant disagreement over just what that means in practice.
16. The central economic dispute in this proceeding, as I see it, is over the scope and nature of the remedial provisions needed to restore competition. I hope my expertise in antitrust economics, combined with my specialized interest in network economics, can help the Court resolve this dispute using sound economic principles. My primary message is simple: I strongly believe that restoring competition requires remedial provisions that will
4Court of Appeals, p. 11 (emphasis in original). 5 U.S. Department of Justice, “Department of Justice and Microsoft Corporation Reach Effective Settlement on Antitrust Lawsuit,” 2 November 2001 Press Release, http://www.usdoj.gov/atr/public/press_releases/2001/9463.htm visited 22 January 2002. 6 James, Charles A, “The Real Microsoft Case and Settlement,” Antitrust Magazine, vol. 16, no. 1, Fall 2001, (hereafter, “James, Antitrust Magazine”), p. 60. 7 Declaration of David S. Sibley, Appendix C to Memorandum of the United States in Support of Entry of the Proposed Final Judgment, United States of America v. Microsoft Corporation, 98-1232, 27 February 2002 (hereafter, Sibley Declaration), ¶3. 8 Expert Report of Professor Kevin M. Murphy, State of New York, et al. v. Microsoft Corporation, 98-1233 (hereafter, Murphy Report), p. 2 (footnote omitted). Microsoft’s other economic expert, Professor Kenneth Elzinga, adopts a different set of criteria that does not include the notion of restoring competition. I consider Professor Elzinga’s report below when I discuss the costs associated with the States’ Proposed Remedy.
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affirmatively lower the barriers to entry into the market for PC operating systems. The remedial provisions I endorse will serve that purpose and are likely to generate significant consumer benefits. In sharp contrast, Microsoft’s economic expert, Professor Murphy, states that “Specific remedies designed to restore competition are not required.”9
17. Since we are seeking to restore competition, we must begin with some assessment of how Microsoft’s illegal conduct harmed competition. For this purpose, I now provide a very brief synopsis of the liability findings in this case.
IV. Microsoft Stifled a Rare and Serious Threat to its Monopoly
18. The Court of Appeals found that Microsoft engaged in a number of illegal and anti- competitive acts to maintain its monopoly in the market for Intel-compatible PC operating systems. Microsoft’s anti-competitive conduct eliminated a significant threat to its PC operating systems monopoly, namely the threat posed by Netscape’s Navigator browser in conjunction with Sun’s Java technologies, both of which were fueled by the dramatic emergence of the Internet in the mid- to late-1990s. We cannot be certain that this threat would in fact have ended Microsoft’s monopoly, but we know that the threat was real and immediate circa 1995-1998. Numerous Findings of Fact indicate that Microsoft’s conduct had a material impact on the battle between Microsoft’s Internet Explorer (“IE”) and Netscape’s Navigator and greatly impeded Java’s ability to weaken the applications barrier to entry.10
19. We know that Microsoft’s conduct prevented Netscape from remaining the leader in browsing technology with the ability to expose Application Program Interfaces (“APIs”)
9 Murphy Report, p. 2. 10 See Findings of Fact ¶68 (description of middleware threat generally, and Netscape/Java specifically), ¶77 (identification of Netscape/Java as a middleware threat), ¶¶377-385 (effect of Microsoft conduct on Navigator threat) and ¶407 (effect on Java threat). More specifically, “In late 1995 and early 1996, Navigator seemed well on its way to becoming the standard software for browsing the Web. Within three years, however, Microsoft had successfully denied Navigator that status, and had thereby forestalled a serious potential threat to the applications barrier to entry.” Findings of Fact ¶377. Likewise, “Microsoft has succeeded in greatly impeding Java’s progress to [facilitate porting between Windows and other platforms enough to weaken the applications barrier to entry] with a series of actions whose sole purpose and effect were to do precisely that.” Findings of Fact ¶407.
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through a widely distributed product (and thus to serve as an alternative “platform”). We also know that Microsoft’s conduct greatly undermined the ability of cross-platform Java to lower porting costs for applications and thus to reduce the applications barrier to entry. We do not know – and can never know – whether Netscape and Java would in fact already have helped enable a full-fledged substitute to Windows. As found by the Court:
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. … There is insufficient evidence to find that, absent Microsoft’s actions, Navigator and Java already would have ignited genuine competition in the market for Intel-compatible PC operating systems. It is clear, however, that Microsoft has retarded, and perhaps altogether extinguished, the process by which these two middleware technologies could have facilitated the introduction of competition into an important market.11
20. Given the height of the applications barrier to entry, threats of this magnitude are few and far between. The Court spoke of how the dramatic emergence of the Internet, in conjunction with Netscape’s head start in browsers, created a rare opportunity for a weakening of Microsoft’s monopoly position and for a shift in leadership in the software industry. The key point is made in the Findings of Fact ¶60:
The exponential growth of the Internet represents an inflection point born of complementary technological advances in the computer and telecommunications industries. The rise of the Internet in turn has fueled the growth of server-based computing, middleware, and open-source software development. Working together, these nascent paradigms could oust the PC operating system from its position as the primary platform for applications development and the main interface between users and their computers.
21. Even Microsoft recognizes that such inflection points are infrequent. According to the direct testimony of Mr. Maritz, there have been four inflection points during the past twenty years: (1) the shift from mainframes to PCs in the early 1980s which was the enabling event for Microsoft itself ;12 (2) the shift to a Graphical User Interface (MS-DOS
11 Findings of Fact ¶411. 12 Direct Testimony of Paul Maritz, United States v. Microsoft Corporation, 98-1232, 20 January 1999 (hereafter, Maritz Direct Testimony), ¶14.
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to Windows) in the late 1980s;13 (3) the shift from 16-bit to 32-bit operating systems in the early 1990s;14 and (4) the Internet, during the mid- to late-1990s.15
22. When serious threats are relatively rare, eliminating one can enhance or extend monopoly power for a considerable period of time. The Findings of Fact clearly indicate that Microsoft’s monopoly is durable and protected by strong entry barriers in the market for PC operating systems. Microsoft has already enjoyed its dominant position for more than a decade.16 The DOJ also recognizes that Microsoft’s monopoly is durable.17 Microsoft’s monopoly over operating systems remains strong and durable today, protected fundamentally by the applications barrier to entry. Microsoft’s monopoly shows no signs of dissipating through the operation of market forces alone. On the contrary, the applications barrier to entry has been strengthened by Microsoft’s illegal conduct, most obviously by Microsoft’s gaining control over one of the most important applications in the era of the Internet, the browser.
23. In summary, Microsoft’s illegal conduct “has retarded, and perhaps altogether extinguished” the development of a pair of threatening technologies – Netscape’s Navigator and Sun’s Java – that were in the process of lowering the barriers to entry into the market monopolized by Microsoft Windows.18 In the language of economics, Microsoft’s illegal conduct raised the entry barriers protecting the Windows desktop monopoly.
13 Maritz Direct Testimony ¶15. 14 Maritz Direct Testimony ¶15. 15 Maritz Direct Testimony ¶16. Mr. Maritz also lists one possible inflection point prospectively: the move to “information appliances” and “set top boxes.” Maritz Direct Testimony ¶17. Another Microsoft witness, Mr. Gordon Eubanks, the President and CEO of Oblix Inc., cites the same list of “major changes” over the past twenty years. Trial Transcript of Gordon Eubanks, 16 June 1999 A.M. session, p. 26. 16 “Every year for the last decade, Microsoft’s share of the market for Intel-compatible PC operating systems has stood above ninety percent.” Findings of Fact ¶35. 17 “The Microsoft operating systems monopoly, fortified by the applications barrier to entry, is very durable, and gives Microsoft distinct advantages in competing in downstream markets for applications software, hardware, and Internet services.” James, Antitrust Magazine, p. 59. 18 Findings of Fact ¶411.
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24. By shoring up the entry barriers protecting Windows, Microsoft harmed competition and consumers in two distinct ways. First, the higher entry barriers have reduced the pressure on Microsoft in the short term to serve consumers. Second, higher entry barriers have reduced the likelihood that Microsoft’s monopoly will be ended by successful entry in the longer term. Harm to consumers is likely to continue unless competition is restored with effective remedial provisions.
V. “Restoring Competition” – An Economic Interpretation
25. As explained above, my guiding principle is that the remedy should seek to “restore competition” in the market for PC operating systems.19 What does it mean, though, to “restore competition” to a market that was monopolized prior to the illegal acts? The short answer is that the remedy should lower entry barriers and thus offset the harm to competition caused by Microsoft’s conduct which raised those barriers. A more accurate term might be “restoring potential competition.” By lowering entry barriers – by lowering the obstacles facing software that would threaten Windows – consumers can in principle be made whole despite the harm to competition that has taken place over the past six years.
26. As I now discuss, restoring competition by lowering entry barriers requires that a remedy do more than merely enjoin Microsoft from continuing its illegal conduct. The remedy must include affirmative provisions designed to lower entry barriers into the market for PC operating systems.
A. Reducing the Barriers Facing Tomorrow’s Threats to Windows
27. As an economist considering remedy, I see two key defining characteristics of the Microsoft case: (1) the case is about the illegal defense of a monopoly in the face of a threat that might have eliminated the monopoly power, not about the illegal creation of a
19 Although restoring competition by enabling entry into the monopolized market is central, I do not mean to imply that it is the sole consideration in evaluating a proposed remedy. A remedy should also serve the function of deterring future anti-competitive conduct by making it unprofitable for Microsoft in this case, and for companies generally, to violate the antitrust laws. Surely the public interest is harmed if monopolists can profit by violating the antitrust laws.
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monopoly; and (2) the marketplace and the specific technologies that pose a threat to the monopoly have changed dramatically since the violations took place and can be expected to change further in the years ahead.20
28. In this setting, the challenge facing the Court is to fashion a remedy that effectively will lower the entry barriers protecting Microsoft’s monopoly, recognizing that the threats to Windows change over time with shifts in technology. Today’s threats are technologically distinct from yesterday’s threats, and tomorrow’s threats are likely to be different still. Indeed, tomorrow’s threats are hard to identify with great confidence today. Under these circumstances, an effective remedy must be forward-looking and not merely focus on the particular products or technologies that posed a threat five years ago.
29. In thinking about lowering entry barriers, it makes no economic sense to restrict attention to threats that are in the relevant market or even to threats that are direct substitutes for Windows. After all, the threats that triggered Microsoft’s illegal conduct, Navigator and Java, were not themselves in the relevant market; nor were they operating systems. Nonetheless, as spelled out in detail in the Findings of Fact and by the Court of Appeals, Navigator and Java had the prospect of significantly lowering entry barriers into the market for PC operating systems. Competition from software outside the relevant market is central to both the States’ Proposed Remedy and to Microsoft’s Proposed Remedy. The dispute is over how to lower the entry barriers facing such software and which types of software should be included in the remedial provisions.
30. While it might be tempting to try to restore competition simply by “resetting the clock” and giving Netscape and Java a fresh chance, this option is not available. As a practical matter, six years later we cannot literally restore the Internet/Netscape/Java threat that Microsoft faced in 1996. As stated by Assistant Attorney General Charles James, “by most accounts, Microsoft had essentially won the browser war; relief to revive Netscape
20 The Court of Appeals stated in this case: “As the record in this case indicates, six years seems like an eternity in the computer industry. By the time a court can assess liability, firms, products, and the marketplace are likely to have changed dramatically.” Court of Appeals pp. 10-11.
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Navigator as a middleware threat may have been too little, too late.”21 The Justice Department’s economic expert, David Sibley, concurs: “However, there is general agreement that Microsoft has won the ‘browser war.’ Relief focusing only on this threat is thus likely to be ineffective.”22
31. While remedial provisions prohibiting Microsoft’s specific illegal conduct with respect to browsers are certainly appropriate and worthwhile, they cannot restore the competitive threat posed by Netscape (and Java) in the mid- to late-1990s. The confluence of events that engendered those cross-platform middleware threats has largely passed.23 We simply cannot replicate the powerful combination of factors that threatened Microsoft’s Windows monopoly six years ago. The clear implication: a broader remedy is required truly to restore competition.
32. But simply broadening the remedial provisions so that they apply to cross-platform middleware other than the browser will not “restore competition” either. Again, the key point is made by Mr. James: “The interim remedies had also been based upon a trial record developed largely in 1998 and 1999. The industry had changed significantly since then. … the character of potential middleware platforms had largely changed. It is unclear whether another general middleware threat like the browser will ever again emerge.”24
33. I am inclined to agree with Mr. James that today’s middleware threats are weaker than the ones illegally stifled by Microsoft. Despite an extensive investigation, I have been unable to identify any middleware threat today that is nearly as powerful as the combined threat to Windows posed by Navigator and Java six years ago. For just this reason, I doubt that any remedy today directed only at middleware could restore competition, i.e., create conditions giving rise to a threat as powerful as Microsoft faced six years ago. In this basic economic
21 James, Antitrust Magazine, p. 61. 22 Sibley Declaration ¶17. 23 The key aspects of threats that were the centerpiece of this case were: (1) the emergence of Netscape, (2) the emergence of Java, (3) the increase in popularity of the Internet, and (4) the element of surprise by which (1)-(3) took Microsoft. 24 James, Antitrust Magazine, p. 61.
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sense, Microsoft’s Proposed Remedy is, by design, too narrow to restore competition.25 In other words, even if Microsoft’s Proposed Remedy were fully effective at preventing the recurrence of Microsoft’s anti-competitive conduct directed at cross-platform middleware (and I do not believe it is), it would not restore competition.
34. This state of affairs presents the Court with a puzzle: if remedial provisions focused on middleware cannot restore competition, how can the Court achieve this important goal? I believe the answer is both clear and inescapable: the remedy must affirmatively facilitate competition not only by cross-platform middleware but by other routes as well. An effective remedy must lower entry barriers for the technologies that are most promising today and in the years ahead, not merely those that posed the greatest threat five or six years ago. As discussed below, the remedy should lower the entry barriers facing the Linux operating system and more generally by server-based computing.26 Servers present a promising platform from which applications can be delivered to desktop computers, especially those used in businesses. In my opinion, server-based computing poses a greater threat today to Windows than does cross-platform middleware running on PCs.
35. While an effective remedy must be forward-looking, it should not attempt to “engineer” the market. Since we cannot today identify with certainty the specific threats that are most likely to enable the emergence of a strong, direct substitute for Windows in the years
25 Assistant Attorney General Charles James has made it clear that Microsoft’s Proposed Remedy is specifically designed to restore the threat posed by middleware: “Thus, the task in the restoration aspect of the decree was to restore the potentiality of middleware.” James, Antitrust Magazine, p. 62. The Department of Justice’s economic expert also describes DOJ’s view of what Microsoft’s Proposed Remedy is intended to achieve: “Microsoft erected artificial entry barriers to slow or halt the natural tendency of the marketplace to provide certain alternative technologies (known as ‘middleware’) that have the potential to erode Microsoft’s operating system monopoly. The proposed decree aims to restore and enhance competitive conditions by removing technical barriers between Microsoft and rival middleware suppliers. This is the appropriate conduct to be remedied…” Sibley Declaration ¶5. “As discussed above, the SRPFJ’s focus is on restoring the competitive threat provided by middleware…” Sibley Declaration ¶52. 26 Server-based applications and Web-based applications have become much more prominent in the past several years than they were during the 1996-1998 time frame, making client-server networks all the more important in the years ahead. According to Microsoft, “The Company continues to face movements from PC-based applications to server-based applications or Web-based application hosting services, from proprietary software to open source software, and from PCs to Internet-based devices.” Microsoft Corporation Form 10-K filed with the U.S. Securities and Exchange Commission for the fiscal year ended 30 June 2001, (hereafter, Microsoft 2001 10-K), p. 9, http://www.microsoft.com/msft/sec/FY01/10k2001.doc visited 24 January 2002.
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ahead, remedial provisions must be broadly based and potentially helpful to a range of potential entrants into the PC operating system market in the years ahead. Lowering the entry barriers faced by a broad range of threats to the Windows monopoly is also consistent with the objective of restoring competition in the most efficient way possible. Rather than pick certain products or technologies, it is more efficient and less intrusive to lower entry barriers broadly and then let market forces take over.
B. The Need for Significant, Affirmative Remedial Provisions
36. As described above, Microsoft illegally stifled a rare and serious threat to its monopoly during the 1996-1998 time frame. One reason Microsoft found the Netscape/Java threat so worrisome was because Microsoft was caught off guard, surprised by the strength of the Internet Tidal Wave.
37. Five years later, we are faced with the task of restoring the opportunities that would have been available to those seeking to challenge Windows, had Microsoft not violated the antitrust laws. Clearly, we should insure Microsoft cannot repeat its antitrust violations. But that is quite plainly not sufficient to restore the conditions that would have existed, had Microsoft not resorted to illegal tactics to stifle a rare and powerful surprise attack. A prohibition on prior illegal conduct might be sufficient, if the same powerful surprise attack would soon be mounted again; but that is clearly not the case, since market conditions have changed significantly. The initial disruptive influences of the Internet are past, the element of surprise has been lost, and Microsoft has bolstered its Windows monopoly by gaining control over the browser. Restoring competition must mean more than merely enjoining the prior illegal conduct.
38. Netscape and Java might have significantly lowered the barriers to entry protecting Windows; perhaps competition to Windows would have been significantly stronger by now, if not for Microsoft’s antitrust violations. We just do not know. But this we do know: a narrow injunctive remedy will not afford tomorrow’s potential entrants into the market for PC operating systems the opportunities for easier entry that Navigator and Java might have provided them, if not for Microsoft’s illegal conduct.
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39. These conclusions are bolstered, not undermined, by the presence of technological change. The fact that software markets are rapidly evolving amplifies the need to take significant affirmative actions to erode the barriers to entry. Microsoft has by now embraced the very technologies that threatened it five years ago, thereby greatly reducing the ability of Netscape’s browser, or Java, or indeed any middleware, to threaten Microsoft’s monopoly power.
40. To summarize: restoring competition requires a remedy that not only enjoins Microsoft’s illegal conduct but affirmatively lowers the barriers to entry to the market for PC operating systems.
41. Now, Microsoft has correctly pointed out that remedial provisions designed affirmatively to lower entry barriers go beyond merely enjoining conduct that has already been determined to be illegal. Indeed, that would be my definition of provisions that affirmatively lower entry barriers. A good example is Provision #4 in the States’ Proposed Remedy, which requires Microsoft to disclose various APIs and Communications Interfaces. Provision #4 will help prevent the recurrence of Microsoft’s illegal conduct (the strategic disclosure of technical information, as in the First Wave Agreements), but my support for Provision #4 is based primarily on its role in affirmatively restoring competition. More generally, I favor imposing affirmative obligations such as Provision #4 on Microsoft if they are likely to (a) lower entry barriers in the market for PC operating systems commensurate with the illegal raising of these barriers, and (b) benefit consumers. The relevant economic analysis in assessing such provisions is not whether they correspond to specific anti-competitive conduct by Microsoft, but rather whether they are likely to have the effect of lowering entry barriers and promoting consumer welfare.
C. Restoring Potential Competition: Economic Principles
42. The economic goal of restoring competition implies the following specific operational principles for the design of a suitable remedy:
Economic Principle #1: The stronger were the threats to Microsoft’s monopoly that Microsoft illegally eliminated, the more must be done affirmatively to facilitate entry in order to restore (potential) competition to its pre-violation level.
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Economic Principle #2: To the extent that Microsoft has increased the applications barrier to entry through its illegal conduct (especially by gaining control of the browser and by impeding Java), the remedy must be even stronger so as to restore the level of (potential) competition that existed prior to Microsoft’s violations.
Economic Principle #3: The remedy should facilitate entry into the market for PC operating systems by whatever products and technologies will offer the most promising opportunities to challenge Microsoft’s monopoly in the years ahead.
Economic Principle #4: In the presence of rapid technological change, a remedy that primarily is relevant for threats from six years ago (such as certain cross-platform middleware) is unlikely to be effective at restoring competition in the future.
Economic Principle #5: The shorter is the time period over which the remedy operates, the stronger must be its provisions in order effectively to restore (potential) competition in the operating systems market.
43. These principles are only strengthened by taking into account the additional goal of deterring anti-competitive conduct by denying Microsoft the fruits of its illegal conduct and thus insuring that Microsoft does not profit from its illegal conduct. Some five or six years have passed since Microsoft began engaging in conduct found to be illegal by the Court: already Microsoft has succeeded in maintaining its monopoly, and thus extending its ability to capture the associated monopoly profits, for a number of years.
44. Following these economic principles, remedial provisions designed to lower entry barriers should apply broadly enough that new products or technologies from a range of sources can effectively challenge Microsoft’s monopoly. In other words, to the extent possible, the remedy should be “technology neutral,” leaving it to market forces to identify the most promising future threats to Microsoft’s monopoly.
D. How Far Should the Remedy Go in Restoring Competition?
45. Having established the principle that the remedy should affirmatively lower the entry barriers faced by tomorrow’s most promising threats to Windows, we are faced next with the question of how far the remedy should go in lowering entry barriers.
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46. In principle, entry barriers should be lowered to compensate consumers for the elevation of entry barriers that has resulted from Microsoft’s illegal conduct. In practice, since we lack a precise measure of the height of the entry barriers in the market for PC operating systems, we cannot hope for more than a rough adherence to this principle. This is where assessing the effects of Microsoft’s illegal conduct is relevant: the more Navigator and Java would have lowered entry barriers into the market for PC operating systems, the more should the remedy now lower them to restore competition. Our genuine uncertainty about just how much Microsoft illegally raised entry barriers does not alter this conclusion; it merely implies that we should use our best estimate of the elevation of entry barriers caused by Microsoft’s illegal conduct.27 In this respect, we should bear in mind that the browser, the centerpiece of Microsoft’s illegal acts, has proven to be an enormously important application – indeed, it is a gateway – as more and more PCs are connected to the Internet, and as new uses of the Internet continue to appear.
47. In my view, Microsoft’s illegal conduct significantly raised entry barriers, so the remedy should significantly lower them. (I return to causation issues at greater length below.) I emphatically reject the view put forward by the Department of Justice that no affirmative remedial provisions are warranted unless a showing can be made that the monopoly would already have ended, but for the illegal conduct.28 In my opinion, that position has no economic merit and would fail to restore competition in a great many cases.
E. Lowering Entry Barriers Without Impeding Competition by Microsoft
48. How is the goal of restoring competition by lowering entry barriers best achieved? Again, economics gives a clear answer, at least in principle: the remedy should lower entry barriers in the most efficient and effective way, without preventing Microsoft from improving its own software or otherwise engaging in legitimate competition. My
27 More precisely, affirmative efforts to restore competition should be calibrated to the expected value of the elevated entry barriers, and the resulting harm to consumers, caused by Microsoft’s conduct. 28 “When it comes to the remedy, given that liability finding, the plaintiffs are entitled, as a matter of course, to an injunction against the specific illegal acts, but to get beyond that, the Court of Appeals has said, there must be proof of a causal connection between those acts and the maintenance of the monopoly. In other words, that but for those
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operational principle for restoring competition is simple to state: employ remedial provisions that lower the barriers to entry into the market for PC operating systems faced by today’s and tomorrow’s most promising technologies without harming consumers by impeding Microsoft’s ability or incentive to compete legitimately.
49. Put differently, restoring competition efficiently means lowering the entry barriers faced by actual and potential competitors to Microsoft without unnecessarily imposing costs upon Microsoft or undermining Microsoft’s incentives to innovate and otherwise compete legitimately. This principle follows from the fact that the remedy ultimately should be judged based on its impact on consumers, as all of the economic experts in this case agree. Below I consider possible costs associated with the various provisions in the States’ Proposed Remedy, including possible inefficiencies related to Microsoft’s ability or incentive to develop improved software.
50. In crafting remedial provisions, there will inevitably be tradeoffs between two important goals: (1) swift and predictable enforceability of the remedial provisions, and (2) flexibility so that Microsoft’s anti-competitive conduct is enjoined without impeding pro-competitive conduct. Simply requiring Microsoft to comply with the antitrust laws in the future would not meet goal (1); likewise, overly broad provisions that encompass activities wholly unrelated to Microsoft’s Windows monopoly would not satisfy goal (2). Given the complex and dynamic nature of software markets, some judgment will need to be exercised to best manage the inevitable tradeoff between these two goals.
VI. Benefits to Consumers and Impact on Innovation
51. As noted above, both of Microsoft’s economic experts and I agree that remedies ultimately should be judged based on their impact on consumers. Professor Elzinga’s overriding principle is that a sound antitrust remedy should “enhance and not reduce consumer
acts the monopoly would have dissipated.” Phillip Beck on behalf of the United States of America, Tunney Act Hearing, 6 March 2002, pp. 25-26.
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welfare.”29 Professor Murphy writes: “The goal of restoring competition, then, is to restore the prospects for consumer welfare to what they would be in the but-for world.”30 While I do not believe that Professors Elzinga and Murphy are faithful to the principle that consumer interests are paramount, I hope that our agreement in principle on this point will be useful to the Court in evaluating my analysis, and theirs.
52. The goals of lowering the applications barrier to entry and restoring competition described above align very closely with promoting the interests of consumers, who have been denied the benefits of greater competition.31 Consumers especially stand to benefit if the remedy enhances consumer choice and promotes innovation in the software industry. Consumers benefit in two general ways when the threats facing Microsoft are strengthened: (1) consumers benefit directly from innovative products such as Netscape Navigator and Sun’s Java circa 1996; (2) consumers benefit indirectly as Microsoft responds legitimately with its own improved products (e.g., when Microsoft improved Internet Explorer to compete against Navigator) and lower prices.
53. The direct benefits to consumers associated with new products are obvious and likely to be substantial. To cite just two examples from the middleware category, consumers have benefited greatly from the innovations in browsers triggered by Netscape and in media players triggered by Real Networks. Looking at operating systems themselves, Apple has long been an innovator, offering a graphical user interface before Microsoft introduced Windows. In addition, Linux now offers the promise of an open, secure, and highly stable platform for both servers and PCs.32 To the extent that the remedy encourages third parties to invest in software development, consumers stand to benefit greatly from similar new
29 Expert Report of Kenneth G. Elzinga, State of New York, et al. v. Microsoft Corporation, 98-1233, 25 January 2002 (hereafter, Elzinga Report), p. 2 30 Murphy Report, p. 2. 31 By “consumers,” I ultimately have in mind end users of personal computers. To the extent that the computer assembly business is perfectly competitive, OEMs will pass along any benefits from better products and lower input prices (such as the price of the operating system) to their customers, namely, end users. 32 Whether Linux in fact can offer superior value to Windows on the desktop to large numbers of users remains to be seen. An effective remedy will insure that Windows faces a true market test in this regard.
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products. Consumers also will benefit from a remedy that enables third-party software to interoperate more effectively and efficiently with Windows.
54. Microsoft’s rallying cry in this case has been “freedom to innovate.” An effective remedy will insure that Microsoft’s rivals also are free to innovate.
55. A remedy that effectively lowers the applications barrier to entry also can generate enormous indirect consumer benefits as Microsoft is pressed to improve its own products. Just as competition from Apple helped spur Microsoft to introduce its own improved graphical user interface (Windows), and just as competition from Netscape motivated Microsoft to improve Internet Explorer, so will tomorrow’s competitive threats elevate Microsoft’s incentives to improve its own software offerings. Looking ahead, there is every reason to believe that greater threats to Microsoft’s monopoly will spur Microsoft to innovate more rapidly. Indeed, Microsoft has emphasized its need to innovate to maintain its current position of leadership.33 Mr. Brian Valentine of Microsoft notes that middleware competition “keeps us on our toes.”34 Mr. Valentine also agrees that direct competition from rival operating systems spurs Microsoft to innovate.
[Linux] is a very serious competitive threat to us in the server space. … Number one, it's competitive at the platform level, which is fine. Makes us work harder and build better value at that space.35
An effective remedy will put greater pressure on Microsoft to innovate to fend off those who would end Microsoft’s dominance (while clearly prohibiting Microsoft from using anti-competitive means to defend its monopoly).
33 Defendant Microsoft Corporation’s Proposed Findings of Fact, United States of America v. Microsoft Corporation, 98-1232, 10 August 1999 (hereafter, Microsoft’s Proposed Findings of Fact), ¶99. 34 “Traditionally what we've done in the platform is say if somebody wants to build a service that's already provided in the platform, then go build a competitive service. Hallelujah. The more services are out there -- I think competition is great from that perspective because then it keeps us on our toes, its allows for richer services for the customers to use on my platform and those type of things.” Deposition of Brian Valentine, State of New York, et al. v. Microsoft Corporation, 98-1233, 29 January 2002 (hereafter, Valentine Deposition), p. 123. 35 Valentine Deposition, p. 96.
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56. Microsoft’s rallying cry in this case has been “freedom to innovate.” An effective remedy will impose on Microsoft competitive “pressure to innovate.”
57. The beauty of this approach to remedy – based on lowering the entry barriers protecting the Windows desktop monopoly – is that consumers will benefit from the resulting competition, whether or not the resulting threats to Microsoft’s monopoly prove successful. In other words, consumers will benefit from the added pressure placed on Microsoft’s monopoly by a range of products and technologies, whether or not the various threats ultimately succeed in ending the Microsoft monopoly.
VII. Microsoft’s Causation Arguments
58. How far should a remedy go in lowering entry barriers? As noted above, my economic principle is simple: the remedy should affirmatively lower entry barriers just as much as Microsoft’s illegal conduct raised them. Unfortunately, economists cannot measure entry barriers as precisely as engineers can measure the height of a fortress wall. But the same basic principle applies.
59. Microsoft’s economic expert on causation, Professor Murphy, appears to accept this principle, but reaches a very different conclusion based on his assertion that Microsoft’s illegal conduct did not, in fact, harm competition in the market for PC operating systems. Here I address Microsoft’s and Professor Murphy’s assertions regarding causation and remedy.
A. The Proven Effects of Microsoft’s Illegal Conduct
60. The Findings of Fact and the Court of Appeals decision in this case make it very clear that Microsoft’s illegal conduct had significant effects on Netscape Navigator and on Sun’s Java platform. Here is a sampling:
Summary of Effects on Distribution: “…Microsoft undertook a number of anticompetitive actions that seriously reduced the distribution of Navigator, and the
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District Court found that those actions thereby seriously impeded distribution of Sun’s JVM.”36
IAP Exclusive Deals: “By ensuring that the ‘majority’ of all IAP subscribers are offered IE either as the default browser or as the only browser, Microsoft’s deals with the IAPs clearly have a significant effect in preserving its monopoly; they help keep usage of Navigator below the critical level necessary for Navigator or any other rival to pose a real threat to Microsoft’s monopoly.”37
First Wave Agreements: “While the District Court did not enter precise findings as to the effect of the First Wave Agreements upon the overall distribution of rival JVMs, the record indicates that Microsoft’s deals with the major ISVs had a significant effect upon JVM promotion.”38
Effect of Apple Deal on Netscape: “Navigator needed high usage share among Mac OS users if it was ever to enable the development of a substantial body of cross-platform software not dependent on Windows. By extracting from Apple terms that significantly diminished the usage of Navigator on the Mac OS, Microsoft severely sabotaged Navigator’s potential to weaken the applications barrier to entry.”39
Deception of Users of Java Tools: “As a result, even Java ‘developers who were opting for portability over performance … unwittingly [wrote] Java applications that [ran] only on Windows.’ Conclusions of Law, at 43. That is, developers who relied upon Microsoft’s public commitment to cooperate with Sun and who used Microsoft’s tools to develop what Microsoft led them to believe were cross-platform applications ended up producing applications that would run only on the Windows operating system.”40
Pressure on Intel to Stop Developing a High-Performance JVM: “Microsoft’s internal documents and deposition testimony confirm both the anticompetitive effect and intent of its actions.”41
36 Court of Appeals, p. 54. 37 Court of Appeals, p. 46. 38 Court of Appeals, p. 54. 39 Findings of Fact ¶356. 40 Court of Appeals, p. 55. 41 Court of Appeals, p. 57. Mr. McGeady, formerly Vice President at Intel, has now provided testimony that makes these effects even more clear: “Microsoft told Intel that if it wished to continue working with Microsoft, it must align its JVM with Microsoft’s version of Java and forbid Intel from providing Netscape with any of its JVM work. This pressure mounted, and by the summer of 1996 Intel had turned over its JVM implementation to Sun and ceased Java development and participation in Java multimedia standards development.” Direct Testimony of Steven McGeady, State of New York, et al. v. Microsoft Corporation, 98-1233, ¶85.
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61. Professor Murphy appears to start his analysis by rejecting many of these findings. He states that “there is no evidence that the illegal acts had a substantial impact on the distribution or use of Netscape.”42 He further states that “The anticompetitive acts have had negligible impact on relevant usage [of Java].”43 Professor Murphy’s faulty starting point provides one significant reason why he and I reach such different conclusions regarding the impact of Microsoft’s illegal acts on competition.
B. Uncertainty About the Effects of Microsoft’s Illegal Acts
62. Professor Murphy and I agree that the strength of the affirmative remedies needed to “restore competition” depends upon how greatly Microsoft’s illegal acts harmed competition. To see where and why he and I further part company, I believe it is useful to contrast three types of causation evidence one might have in monopoly maintenance cases.
Monopoly Would Already Have Ended, If Not For Illegal Conduct: The impact of the illegal acts was significant, and the monopoly would already have ended but for the illegal conduct.
Uncertainty Regarding Lasting Harm to Competition: The impact of the illegal acts was significant at the time, while their ongoing effects are very difficult to assess.
No Lasting Harm to Competition: The impact of the illegal acts was minimal and transitory.
63. The first situation we might call “Strong Causation Evidence.” In this situation restoring competition literally requires that the remedy affirmatively and promptly end the monopoly, presumably with some type of divestiture. Surely it is rare for the government to have evidence this strong in a monopoly maintenance case.
64. The second situation we might call “Uncertain Causation Evidence.” In this situation the principle of restoring competition does not warrant a divestiture to terminate the illegal monopoly by force. I consider the current case to fall into this category. As I have
42 Murphy Report, p. 7. 43 Murphy Report, p. 7.
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explained, “restoring competition” in this situation requires provisions that affirmatively lower entry barriers, but not a divestiture forcing the end to the monopoly.
65. The third situation, where it has been proven that the ongoing strength of the monopoly was unaffected by the illegal acts, we might call “Absence of Causation.” In this situation, competition has not been harmed in any lasting way, so it is sufficient to enjoin the types of conduct found to be illegal – including fencing in the illegal conduct in a manner that reflects changed market conditions – and to prevent their recurrence.
C. Microsoft’s Extreme Position
66. Microsoft would have the Court believe that the current case fits into the “Absence of Causation” category. Professor Murphy states this position quite clearly. He asserts that “the degree of competition [in the market for operating systems] has not been materially altered” by Microsoft’s illegal acts.44 In other words, Professor Murphy sees no causal connection between Microsoft’s illegal conduct and the current strength of its monopoly position.45
67. I consider Microsoft’s position extreme, in the light of the Findings of Fact in this case regarding Microsoft’s strategy to defend its monopoly and the effects of Microsoft’s illegal acts. Unlike Professor Murphy, I do not believe we can determine with any great confidence just how competition would have played out over the past five or six years, had Microsoft not illegally impeded the middleware threats posed by Navigator and Java. My view is similar to that of the Court of Appeals, which stated:
But the underlying proof problem is the same--neither plaintiffs nor the court can confidently reconstruct a product's hypothetical technological development in a world
44 Murphy Report, p. 2. 45 Professor Murphy also states: “Remedies that prevent the anticompetitive acts will typically, in and of themselves, accomplish this third objective [restoring competition].” Murphy Report, p. 2. I find this statement surprising, indeed revealing, and disagree with Professor Murphy on this point. I believe that affirmative steps will typically be required to restore competition after a monopolist violates the antitrust laws and stifles actual or potential competition.
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absent the defendant's exclusionary conduct. To some degree, “the defendant is made to suffer the uncertain consequences of its illegal conduct.”46
68. Our ability to reconstruct the evolution of software markets and software technologies in the absence of the illegal conduct is especially poor since software markets are often subject to networks effects and positive feedback.47 Considerable research in the area of network economics teaches us that outcomes in markets subject to network effects can be highly sensitive to strategic tactics, including precisely the types of tactics that Microsoft employed illegally.48
69. The Court of Appeals went on to say:
[I]t would be inimical to the purpose of the Sherman Act to allow monopolists free reign to squash nascent, albeit unproven, competitors at will--particularly in industries marked by rapid technological advance and frequent paradigm shifts. … the District Court made ample findings that both Navigator and Java showed potential as middleware platform threats.49
70. In short, (1) Navigator and Java showed potential as middleware platform threats at an early stage in their evolution; (2) Microsoft, peering into the technological future, viewed these nascent threats with alarm; and (3) Microsoft’s illegal conduct greatly impeded their development. In particular, Navigator and Java enjoyed considerable momentum and were in the process of lowering entry barriers into the market for PC operating systems when they suffered from Microsoft’s illegal conduct. Under these circumstances, I do not believe Professor Murphy, or anyone, can “conclude” that these threats were in fact impotent and would have failed to lower entry barriers in the absence of Microsoft’s illegal tactics. Indeed, Microsoft’s other economic expert, Professor Kenneth Elzinga,
46 Court of Appeals, p. 60, citing Areeda and Hovenkamp. 47 Network effects refers to the fact that some products, such as Microsoft Windows, are more valuable to consumers if they are more widely used. Positive feedback refers to situations where success breeds success in a “virtuous cycle,” while early setbacks can lead to failure in a “vicious cycle.” See my book with Hal Varian, Information Rules: A Strategic Guide to the Network Economy, especially Chapter 7, “Networks and Positive Feedback.” 48 See, for example, my book with Hal Varian, Information Rules: A Strategic Guide to the Network Economy, Chapter 7, “Networks and Positive Feedback.” 49 Court of Appeals, p. 61.
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acknowledges that one cannot go back and “unravel” how Netscape Navigator would have developed in the absence of Microsoft’s illegal conduct.50
D. Contemporaneous Assessments
71. Given the impossibility of reconstructing the technological development of Navigator and Java absent the illegal acts, I place considerable weight on the contemporaneous assessments of Microsoft executives.
72. There should be no doubt at this stage in these proceedings that Microsoft was gravely concerned by the Internet/Netscape/Java threat; the “Internet Tidal Wave” was truly a revolution in computing and communications. Bill Gates, for example, wrote to Microsoft’s Executive Staff that:
The Internet is the most important single development to come along since the IBM PC was introduced in 1981. It is even more important than the arrival of graphical user interface (GUI).51
[Netscape] are pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system…One scary possibility being discussed by Internet fans is whether they should get together and create something far less expensive than a PC which is powerful enough for Web browsing.52
Another place for integration is to eliminate today’s Help and replace it with the format our browser accepts including exploiting our unique extensions so there is another reason to use our browser…Without unification we will lose to Netscape/HotJava.53
50 See the Deposition of Kenneth G. Elzinga, State of New York., et al. v. Microsoft Corporation, 98-1233, 20 February 2002, p. 72: “Q: Does ending Microsoft's anticompetitive conduct directed at Netscape, in your view, restore Netscape to the competitive presence it would have had, but for the violation of Section 2? A: I don't think anyone, at least under oath, can say exactly what Netscape's future would have been had it not faced competition from Microsoft. .… Now how a remedy would go back and say, all right, Microsoft had certain conduct with regard to the Internet Explorer that the court found anticompetitive, and -- but we also need to factor in the fact that Netscape did not improve its product as rapidly, and charged a higher price. How you would unravel that, I don't know, other than to repeat what I said earlier.” 51 GX 20, Memo from Bill Gates to Executive Staff and direct reports, “The Internet Tidal Wave,” 26 May 1995, p. 1. 52 GX 20, Memo from Bill Gates to Executive Staff and direct reports, “The Internet Tidal Wave,” 26 May 1995, p. 4. 53 GX 20, Memo from Bill Gates to Executive Staff and direct reports, “The Internet Tidal Wave,” 26 May 1995, p. 5.
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73. The proven facts also reveal Microsoft’s own assessment that it could not overtake Netscape without resorting to the tactics that have now been found illegal. Mr. Allchin of Microsoft provided this assessment of Microsoft’s battle with Netscape in December 1996:
I don't understand how IE is going to win. The current path is simply to copy everything that Netscape does packaging and product wise. Let’s [suppose] IE is as good as Navigator/Communicator. Who wins? The one with 80% market share. Maybe being free helps us, but once people are used to a product it is hard to change them. Consider Office. We are more expensive today and we’re still winning. My conclusion is that we must leverage Windows more.54
74. I also place considerable weight on the fact that Microsoft expended significant resources to defuse the cross-platform middleware threats it found so threatening five to seven years ago. Here are two examples of such expenditures from the Findings of Fact:
In sum, Microsoft made substantial sacrifices, including the forfeiture of significant revenue opportunities, in order to induce IAPs to do four things: to distribute access software that came with Internet Explorer; to promote Internet Explorer; to upgrade existing subscribers to Internet Explorer; and to restrict their distribution and promotion of non-Microsoft browsing software.55
Although Gates viewed it as a significant concession, he acquiesced in granting AOL a place in Windows because he believed that Microsoft could not pass up the opportunity AOL presented to drive Internet Explorer’s usage share dramatically upward and to exclude Navigator from a substantial part of the IAP distribution channel.56
75. I find it especially ironic that Microsoft, after arguing at trial that it faces threats right and left and thus lacks monopoly power, now insists that the strongest threat it faced during the mid- to late-1990s, cross-platform middleware, was in fact impotent. My view is roughly in the middle of the two views Microsoft has expressed during the two phases of this trial: Microsoft has strong monopoly power and faces serious threats relatively rarely; the strongest recent threat was posed by Navigator and Java, which Microsoft illegally defused.
54 Findings of Fact ¶166 (quoting James Allchin). 55 Findings of Fact ¶247. 56 Findings of Fact ¶286.
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E. Additional Evidence of Economic Effects
76. Even though I place great weight on ex ante information here – the contemporaneous assessments of Microsoft’s executives combined with the substantial expenditures Microsoft made to confront the threat posed by Navigator and Java – I recognize that using some ex post information can be a valid part of assessing harm to competition. Of course, market outcomes subsequent to Microsoft’s antitrust violations are affected by those violations, so great care must be taken in making inferences based on such evidence.
77. While ex post information can prove useful, I believe it should be used with great caution, especially in cases such as this one where the contemporaneous evidence is so clear. As a general principle, the goal of restoring competition is better served if moderate remedies based on contemporaneous assessments are used rather than extreme remedies based on contested hypothetical ex post reconstructions of events. After a monopolist illegally rebuffs an attack that had the prospect to lower entry barriers significantly, the suitable and moderate remedy would impose provisions that affirmatively lower entry barriers. If, instead, the Court were to try to predict the market outcome in the absence of the illegal conduct, the remedies imposed by the Court may depend dramatically upon just how the Court performs its ex post reconstruction.
78. In this case, were the Court to base its remedy on an ex post reconstruction, the Court’s remedy would depend dramatically on its assessment of how Netscape’s Navigator and Sun’s Java technologies would have developed in the absence of Microsoft’s illegal conduct. If the Court were to conclude that these technologies would have facilitated entry into the monopolized market, the remedy would need to forcibly and rapidly terminate the Windows monopoly, a difficult task indeed, and one that goes well beyond the States’ Proposed Remedy. Alternatively, if the Court were to conclude that Navigator and Java would not have lowered entry barriers into the monopolized market, the Court might elect to enjoin the types of conduct found to be illegal – including fencing in the illegal conduct in a manner that reflects changed market conditions – and to prevent their recurrence.
79. Microsoft, asserting that Netscape and Java were in fact impotent as platform threats, now points to certain weaknesses or limitations of Navigator and Java. With respect to
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Navigator, Microsoft points out that Navigator had relatively few APIs and questions whether Netscape was truly a “platform” for software development. Concerning Java, Microsoft notes that certain Java development efforts on the desktop ran into difficulties, and Microsoft claims that Java had inherent drawbacks based on its cross-platform nature. By and large, these assertions do not involve new information; Microsoft made similar points at trial, and proposed similar findings of fact, which were not adopted by the Court.57 Fully aware of these assertions, the District Court concluded in the Findings of Fact that Netscape and Java were indeed genuine threats to Windows, and the Court of Appeals affirmed this conclusion:
[T]he District Court made ample findings that both Navigator and Java showed potential as middleware platform threats. Findings of Fact ¶ ¶ 68-77. Counsel for Microsoft admitted as much at oral argument. 02/26/01 Ct. Appeals Tr. at 27.58
80. Despite these clear findings, and largely based on information that was available to the Court of Appeals, Professor Murphy now asserts that “With the benefit of hindsight, it is apparent that Netscape was not a platform threat.”59
81. More fundamentally, however, Microsoft is criticizing Navigator and Java based on possible shortcomings of early versions of those software products. As Microsoft well knows, computer software is wonderfully capable of evolving and gaining capabilities over time, especially if it begins to attract a following. Indeed, Microsoft itself has succeeded by making impressive improvements to early versions of software that were sharply limited and much criticized.60
57 Microsoft’s Proposed Findings of Fact included the following propositions that Microsoft is now using to claim that its conduct has not affected competition in the market for PC operating systems: (1) that cross-platform applications are inherently limited, ¶864; (2) that Java is poorly suited for desktop applications, ¶865; (3) that there are incompatible implementations of Java in the market, ¶866; and (4) that Netscape’s JVM did not fully comply with Sun’s Java specifications, ¶867. 58 Court of Appeals, p. 61. 59 Murphy Report, p. 6. 60 For example, early versions of Windows and Internet Explorer had significant performance limitations. Over time, Microsoft made great improvements to each of these products.
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82. Furthermore, Navigator and Java clearly had the prospect of benefiting from network effects. Both products enjoyed substantial momentum circa 1995-1996, when Microsoft’s illegal conduct began. With widespread distribution of Navigator and of compatible Java Runtime Environments (“JREs”), developers could well have been attracted to these platforms, which would in turn make them more attractive to users and speed their improvement. Microsoft feared the positive feedback associated with this “virtuous cycle,” a cycle that Microsoft explicitly and successfully disrupted. Several of Microsoft’s illegal tactics had the purpose and effect of denying Navigator and Java the ability to take advantage of self-reinforcing favorable network effects.61 One of the central pieces of learning in network economics is that such virtuous cycles can be fragile.
83. My conclusion that Navigator and Java could have matured into, or helped enable, significant competition for Windows is further supported by the evolution of the software industry over the past few years, as exemplified by Microsoft’s own strategy. Browsing functionality has proven to be terribly important as more and more consumers are connected to the Internet and as more and more content and applications are accessed through the browser. Microsoft’s Common Language Runtime (CLR) technology and .NET initiative support the view that the runtime environment concept pioneered by the Java platform is very promising, based in part on its security and portability advantages. Microsoft plans to add CLR to Longhorn, the successor to Windows XP.62 Microsoft recognizes that Java is a competitor to Microsoft’s .NET platform.63 Microsoft’s illegal
61 For example: “Starting the day Microsoft announced the March 1996 agreement with AOL, and lasting at least until AOL announced its acquisition of Netscape in November 1998, developers had reason to look into the foreseeable future and see that non-Microsoft software would not attain stature as the standard platform for network- centric applications. Microsoft exploited that interval to enhance dependence among developers on Microsoft’s proprietary interfaces for network-centric applications - dependence that will continue to inure to Microsoft’s benefit even if AOL stops distributing Internet Explorer in the future. The AOL coup, which Microsoft accomplished only at tremendous expense to itself and considerable deprivation of consumers’ freedom of choice, thus contributed to extinguishing the threat that Navigator posed to the applications barrier to entry.” Findings of Fact ¶304. 62 Deposition of James Allchin, State of New York, et al. v. Microsoft Corporation, 98-1233, 13 February 2002 (hereafter, Allchin Deposition), p. 76. Valentine Deposition, pp. 254-255. 63 “Java is a platform just like .NET is a platform and Windows is a platform. And Java is a competitor to Microsoft. There's no question. It's a competitor in some senses to Windows, in other senses it's a competitor to .Net. Do they provide the same sets of services? No, they don't. And they take a different approach to providing services than we do with either Windows or with .NET. But, I mean, I could go through the differences if you'd
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tactics gave Microsoft time to catch up with and overtake Navigator in the browser war and to take critical momentum away from Java. We will never know how the Netscape and Java platforms would have evolved in the absence of Microsoft’s illegal conduct. The fact that Netscape and Java faced certain disadvantages back in 1996 does not alter this conclusion.
VIII. Treatment of Microsoft’s Intellectual Property
84. As we seek to restore competition, the treatment of Microsoft’s intellectual property will inevitably arise. This should not be surprising: in the software industry, as in the entertainment industry, copyrighted works and the people who create those works are highly valued. Microsoft strenuously objects to a number of the provisions in the States’ Proposed Remedy as invading Microsoft’s intellectual property rights, including Provision #4 (Disclosure of Interfaces), Provision #12 (Open Source Browser), Provision #14 (Mandatory Provision of Office on Other Operating Systems), and Provision #15 (Necessary Intellectual Property Licenses). Rather than address intellectual property issues piecemeal below, where I discuss the various proposed remedial provisions, I pause here to explain to the Court my overall approach to intellectual property issues in this remedy proceeding.
85. To begin with, there is no economic reason why copyrights and patents should receive any special treatment in comparison with other commercial assets. So long as we adhere to the goal of restoring competition, there is no economic reason whatsoever to rule out mandatory licenses of Microsoft’s intellectual property, any more than one would rule out the mandatory licensing of intellectual property as a means of “fixing” a merger that would otherwise harm competition. In my experience, the Federal Trade Commission and the Department of Justice often require the licensing of intellectual property as a condition for approving mergers that would otherwise harm competition.
like, but they are competitive, yes. People can substitute one for another in various places, but they're not equivalent in all ways.” Deposition of Robert Muglia, State of New York, et al. v. Microsoft Corporation, 98-1233, 24 February 2002, p. 51. “In the marketplace I believe that our class libraries will be viewed as an alternative to the Java environment, yes.” Allchin Deposition, pp. 74-75.
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86. In fact, intellectual property rights are especially well suited to the goal of efficiently restoring competition. Knowledge assets such as copyrights and patents have the special feature that one party can use them without taking away the ability of others to do the same. For precisely this reason, mandatory licensing of existing intellectual property rights is a highly efficient way of restoring competition, to the benefit of consumers. Licensees can be transformed into more effective competitors without impeding the monopolist’s own ability to compete. To illustrate, suppose we had a case involving a pharmaceutical company found to have engaged in exclusionary practices that illegally eliminated the sole competitor for its blockbuster drug. Suppose further that the competing drug could not easily be revived simply by enjoining the exclusionary practices, perhaps because the FDA approval process for that drug had been disrupted in mid-stream. Mandatory licensing of the patent protecting the blockbuster drug, perhaps with some associated know-how, could provide an easy and efficient way to restore competition.
87. The principle of restoring competition will dictate the terms and conditions of any mandatory licensing that is imposed. In the drug example just above, mandatory, royalty- free licensing of the patent protecting the blockbuster drug might well create more competition than would have existed in the absence of the illegal exclusionary acts. For just this reason, I would not favor remedies in this case permitting rival operating systems to clone Windows or to copy the Windows source code.64 But note clearly: my refusal to support such remedies does not derive from some notion that Microsoft’s intellectual property is sacrosanct; rather it flows from my view that permitting the cloning of Windows would go beyond “restoring competition” in the monopolized market.
88. So far, I have identified one limiting principle regarding mandatory licensing to remedy an antitrust violation: the goal is to restore competition, but not to create more competition than would likely have prevailed in the absence of the illegal conduct.
64 My understanding is that the States’ Proposed Remedy does not permit cloning of Windows because Microsoft is not required to disclose the information necessary to implement the Windows APIs.
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89. A second limiting principle operates as well: the danger that mandatory licensing will dull innovation incentives. Fortunately, concerns about retarding innovation do not arise at all as regards the mandatory licensing of existing intellectual property rights to restore competition in a remedy proceeding.65 In the drug example given above, one obviously need not worry about delaying the development of the blockbuster drug that had already been developed and introduced into the market. Nor need one worry about retarding future innovation by establishing a precedent that antitrust violations may lead to mandatory licensing, any more than one would worry that ordering a divestiture of physical assets in a monopolization case will discourage companies from investing in plant and equipment.66
90. In a remedial proceeding, the danger of retarding innovation is therefore confined to mandatory licensing of intellectual property not yet developed. To extend our pharmaceutical example, a remedy that required the monopoly drug company to license future patents to its competitors could be problematic: such a mandatory licensing regime would presumably reduce the rate of return on R&D conducted by the monopoly drug company, possibly to the detriment of consumers. We can thus distill the second limiting principle as follows: mandatory licensing that significantly reduces the return on future research and development efforts by the monopolist can have undesirable side effects that work at cross purposes with the goal of efficiently restoring competition.
91. In our pharmaceutical example, there was a clear distinction between a pre-existing patent for today’s blockbuster drug and possible future patents. Implicit in the hypothetical was the assumption that a licensee with rights to today’s patent could compete effectively even if the licensee were given no rights to future patents that the monopolist might receive. Unfortunately, the situation in the software industry is more complex: a license to today’s version of a piece of copyrighted software may be of limited value unless the licensee also
65 In contrast, imposing mandatory licensing of existing intellectual property outside the context of a remedial proceeding can easily have undesirable effects on incentives to innovate. 66 In fact, efficient use of mandatory intellectual property licenses in the remedy phase will increase the returns to creating intellectual property assets. By investing in R&D that leads to patents and copyrights, the monopolist will make it possible for competition to be restored in a manner that is mo re efficient and thus less costly to the monopolist.
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has rights to successor versions. This is true because consumers want to use software products that can be improved over time and are wary of being “stranded” by adopting a product that cannot be improved and updated over time. For this reason, mandatory licenses to restore competition in the software industry may need to include rights to successor versions in order to be effective.
92. To summarize: (1) mandatory licensing of existing intellectual property rights is a very attractive and efficient way to restore competition; (2) mandatory licensing of future innovations can also help restore competition but can have undesirable side effects if it significantly reduces the monopolist’s return on innovation; and (3) in the software industry, a license to the current version of a piece of software may be of limited value unless the licensee also has rights to future successor versions. In some cases, tradeoffs will arise between the undesirable side effects of ongoing licensing in (2) and the need for licensees to have ongoing rights in (3); case-by-case analysis is then required to determine which licensing terms and conditions are most conducive to competition.
IX. Potential Threats to Microsoft’s Monopoly
93. We are now ready to look more closely at the States’ Proposed Remedy and assess its effectiveness in restoring competition. Since the primary purpose of the remedy is to reduce entry barriers into the market for PC operating systems and thereby enable threats to Microsoft’s monopoly, it is important to understand and assess the current products and technologies most likely to pose a threat to Microsoft’s monopoly in the years ahead. According to the principles described above, the remedy should help facilitate those threats, and others that may arise, while minimizing any inefficiencies introduced by the remedy itself.
94. In this section, I consider the various threats to the Windows monopoly in turn. For each threat, or type of threat, I provide a discussion of how the States’ Proposed Remedy will prevent the recurrence of Microsoft’s illegal conduct and/or affirmatively reduce the barriers faced by that threat. In the next section, I then discuss why Microsoft’s Proposed
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Remedy would be significantly less effective than the States’ Proposed Remedy both in preventing recurrence of Microsoft’s illegal conduct and in restoring competition.
95. While we cannot know with certainty the source of threats to Microsoft’s monopoly that are likely to arise in the next several years, we can identify what appear today to be the most promising threats and the more likely sources or routes for entry in the years ahead. A good working principle for an efficient and effective remedy is (a) to craft it broadly enough to stop Microsoft from using its monopoly power to impede or blockade entry from any one of a number of routes that we can envision at this point, and (b) affirmatively to lower the entry barriers facing a variety of potential entrants. Put differently, the remedial order should take a broad view of what constitutes a “nascent technology” that might threaten Microsoft’s operating systems monopoly in the years ahead.
96. The Findings of Fact identify the most significant potential threats to Microsoft’s monopoly circa 1998.67 The Findings of Fact offer a list of possible types of demand substitutes for Microsoft Windows.68 While the relative strengths of various threats have shifted over time, this list can still serve as the basis for discussing the threats to Windows now and in the next few years. I now address these threats in turn, explaining how they will be affected by the various provisions in the States’ Proposed Remedy. The threats arise from these areas:
· Desktop Operating Systems
· Cross-Platform Middleware
· Server-Based Computing and Network Computers
· Information Appliances
67 Microsoft’s own arguments at trial about threats to Windows also give some indication of future threats. See Direct Testimony of Richard Schmalensee, United States of America v. Microsoft Corporation, 98-1232, 3 January 1999. Professor Schmalensee listed six major avenues of attack on Microsoft’s dominant position in PC operating systems: (1) the “Middleware Gambit” (e.g., Navigator) ¶¶136-138; (2) Linux ¶¶139-141; (3) Java ¶¶142-151; (4) Network Comp uter ¶¶152-154; (5) Operating Systems for Handheld Devices (e.g., PalmOS, EPOC for Psion) ¶¶155-157; and (6) Other Operating Systems (Apple iMac, BeOS) ¶¶158-159. 68 Findings of Fact ¶¶19-29
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A. Existing Rival Desktop Operating Systems
1. Apple Mac OS
97. The Court identified non-Intel-compatible operating systems, specifically the Apple Mac OS, as a potential threat to the Windows monopoly. The Court concluded that the Apple Mac OS did not currently constrain Microsoft’s monopoly power because existing users of Windows find it expensive to switch to Apple and because Apple lacks the broad base of applications enjoyed by Windows.69
Remedy Provision #14a, Continued Provision of Office to Macintosh
98. This provision requires Microsoft to continue providing Microsoft Office for the Apple Macintosh operating system. This provision will help prevent Microsoft from again using Office to threaten Apple, and will assure actual and potential users of Apple computers that a very popular and important application, Microsoft Office, will continue to be available on Apple computers. The provision will not do a great deal to affirmatively enhance competition, but should help prevent Microsoft from weakening a direct rival.
99. Provision #14a will clearly benefit consumers by assuring users of the Apple Macintosh that Office will continue to be available to them. The provision should be low-cost and easy to implement, as it simply involves extending an existing agreement that has already proven workable in practice.
100. Microsoft’s Proposed Remedy has no comparable provision. Under Microsoft’s Proposed Remedy, Microsoft could cease to support Office on the Mac OS, thereby weakening the Mac OS as a rival to Windows. Of course, this is precisely what Microsoft threatened to do back in 1997, a threat that worked effectively against Apple.70
69 Findings of Fact ¶¶20-21. 70 “Apple increased its distribution and promotion of Internet Explorer not because of a conviction that the quality of Microsoft’s product was superior to Navigator’s, or that consumer demand for it was greater, but rather because of the in terrorem effect of the prospect of the loss of Mac Office.” Findings of Fact ¶355.
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Remedy Provision #12, Internet Browser Open Source License71
101. Provision #12 requires Microsoft to disclose and license all source code for its Browser software for the next ten years. This provision will help insure that Internet Explorer 6.0 and its successors will be available to Apple for the Apple Mac OS.72 Currently, Internet Explorer 6.0 is not available on the Macintosh. According to Microsoft’s web site, Microsoft has no current plans to make a version of Internet Explorer 6.0 for the Macintosh.73 Provision #12 also allows customization of Internet Explorer for the Apple Mac OS. Such customization may help to lower the applications barrier to entry facing Apple and thus help undermine the monopoly power of Windows.
102. Microsoft asserts that under Provision #12 it will have no incentive to innovate in browsers.74 Microsoft says that under Provision #12 it would consider stopping all of its investments in browsers.75 Bearing in mind that Internet Explorer is a complement to Windows and that Microsoft does not charge customers separately for Internet Explorer, these assertions do not make economic sense to me. As an economist, I ask how Microsoft currently is earning a return on its browser investments and how that will change under Provision #12. (I also ask how innovation by others will be enabled by this Provision #12. Consumers care about industry-wide innovation, not just Microsoft innovation.) To the extent that new browser source code developed by Microsoft is used with Windows, Microsoft will continue to earn a return on its browser investments through its licensing of Windows. Overall, Microsoft will continue to have strong incentives to develop browser code that works well with Windows, and third parties will gain the ability to develop browser code based on Internet Explorer that works well on rival operating systems
71 In addition to helping restore competition, my understanding is that Provision #12 is also intended in part to deny Microsoft the fruits of its illegal acts. 72 I offer no opinion on the precise technical definition of the term “Browser” or on whether Provision #12 should include MSN Explorer 6.0 and its successors. 73 See http://www.microsoft.com/windows/ie/evaluation/faq/default.asp visited 26 March 2002. 74 Allchin Deposition, pp. 254-255. 75 Deposition of Steven A. Ballmer, State of New York, et al. v. Microsoft Corporation , 98-1233, 8 February 2002, (hereafter, Ballmer Deposition), pp. 145-146.
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including the Mac OS. In sum, Provision #12 is likely to enhance the overall rate of innovation in browsers even as it lowers the applications barrier to entry.
103. If the Court remains concerned that Provision #12 will reduce industry-wide browser innovation (despite my argument to the contrary just above), an alternative is to require Microsoft to license the source code for the current version of Internet Explorer (as of some date in the near future), but not to require ongoing licensing of Internet Explorer source code. Following the intellectual property principles I explained above, this alternative would obviate any concerns about Microsoft’s incentives to invest in Browser technology. Licensing existing browser source code would still benefit consumers and promote innovation by enabling third parties to make improvements to the Internet Explorer source code. The shortcoming of this alternative, however, is that Microsoft, building on its natural advantages as the developer of Internet Explorer and the supplier of Windows, might soon regain proprietary control over the dominant browser, thus undermining some of the pro-competitive benefits of Provision #12 as drafted.
104. Microsoft’s Proposed Remedy has no comparable provision. Under Microsoft’s Proposed Remedy, Microsoft could simply choose not to port Internet Explorer to the Mac OS or to any rival operating system that was a threat to Windows, thereby increasing the applications barrier to entry. Under Microsoft’s Proposed Remedy, third parties gain no access to Microsoft’s browser source code and thus no ability to develop a cross-platform browser based on the Internet Explorer code.
2. Linux
105. Linux is another operating system that could grow to become a more attractive substitute for Windows on the desktop.76 Today, Linux may well be the software most likely to erode Microsoft’s monopoly power in the next several years. According to Mr. Brian Valentine, Senior Vice President of Microsoft’s Windows Division, “[Linux] is a very
76 Linux is also (indeed, at this time primarily) a server operating system. Linux has gained some visibility and support as a server operating system over the past few years. Server operating systems and server-based computing are discussed below. Interoperation between Linux servers and Windows desktops is addressed in the subsection below on server-based computing.
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serious competitive threat to us in the server space.”77 Mr. Valentine also states that the Linux desktop operating system is “a big threat on the desktop.”78
106. For a number of reasons, it is difficult to track accurately the number of installed copies of Linux and to identify whether the installations are on a server or a desktop.79 First, any one installation may be used as both a client and a server. Second, Linux can be, and frequently is, freely copied and distributed, so data on commercial sales of Linux account for only a subset of installations. Third, while downloads of Linux can be tracked, some proportion of the downloaded copies of Linux are never installed. While acknowledging these difficulties, the Linux Counter Organization maintains a website to track Linux installations. That website estimates there were approximately 18 million Linux users worldwide as of January 2002.80 In April 2000, the website estimated there were 14 million Linux users worldwide.81
107. Linux has been much less successful on desktops than it has been on servers. Linux’s share of server operating systems is reported by some sources to be over twenty-five percent, although other sources put the Linux share much lower.82 The Linux share of desktop operating systems is tracked by several organizations, and not surprisingly, given the difficulties of tracking Linux distributions, there is considerable divergence in the share
77 Valentine Deposition, p. 96. 78 Valentine Deposition, p. 136. 79 Brody, Steven. “IDC Says Linux Likely to Lead OS Growth: but getting exact numbers for Linux is impossible.” Sun World, March 1999. 80 “Linux Counter: Estimates of the number of Linux users,” www.counter.li.org/estimates.php visited 15 January 2002. 81 “Linux Counter: Estimates of the number of Linux users,” www.linux.org, visited 26 April 2000. 82 Ackerman, Elise, “Despite a Tough Road, Linux Has Never Been More Popular,” San Jose Mercury News, 13 December 2001. A Gartner study, sponsored in part by Microsoft, found the Linux share of server operating systems to be approximately 8 percent. Galli, Peter, “Battle Brews Over Linux Server Share,” EWeek, 10 June 2001, http://zdnet.com.com/2102-11-503810.html visited 24 January 2002. Microsoft group product manager Doug Miller has stated: “While I admit there has been interest in Linux, this by no means accounts for one out of every four new servers sold. That is simply ridiculous.” Thurrott, Paul, “Linux Falters on the Desktop,” WinInfo, 15 January 2002, http://www.wininformant.com/Articles/Print.cfm?ArticleID=23749 visited 24 January 2002.
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estimates. By all accounts, however, the Linux share is small, certainly no more than five percent of the desktop operating system market and likely much lower.83 Mr. Michael Tiemann, Chief Technology Officer of Red Hat, puts Linux’s share of the desktop operating system market at less than two percent.84 Ford and Royal Dutch/Shell are reportedly “at least partly” abandoning Windows in favor of Linux,85 and some high-tech companies use Linux on a few desktops.86 Although Linux supporters are optimistic about expanding their desktop market share, there is scant evidence of real progress on the desktop.
108. Although Linux may come to offer a more effective threat to Microsoft’s dominant position, there is no basis for any great confidence that this will occur in the near future without other facilitating factors such as cross-platform middleware or a stronger Linux position in client-server networks. Indeed, the experience from IBM’s OS/2 is that a frontal assault on Windows is an uphill battle, even for an adversary as strong and determined as IBM. While Linux has the potential to grow into a more effective substitute for Windows on the desktop, Linux has so far faced difficulty overcoming the applications barrier to entry.
109. In this context, the remedy can usefully take certain steps affirmatively to help Linux (and perhaps other non-Microsoft operating systems) overcome the applications barrier to entry.87 Specifically, the applications barrier to entry facing Linux would be lower if
83 Black, Jane, “Is XP an Open Door for Open Source?” BusinessWeek Online, 25 October 2001 p. 1. http://www.businessweek.com:/print/technology/content/oct2001/tc20011025_8523.htm visited 26 October 2001, (hereafter, “Black, Business Week Online”). “Linux Desktop Growth Stalled at ‘Miniscule’ 0.24%,” Linuxgram, Issue 198, 3 January 2002, http://www.linuxgram.com/article.pl?sid=02/01/03/1540253§ion=198 visited 22 January 2002. 84 Written Direct Testimony Of Michael Tiemann, Chief Technology Officer Of Red Hat, Inc., State of New York, et al. v. Microsoft Corporation, 98-1233 (hereafter, Tiemann Direct Testimony), ¶31. 85 Lagesse, David, “Out the Windows,” U.S. News & World Report, vol. 132, no. 1, 14 January 2002. 86 Black, BusinessWeek Online. 87 Other provisions that will strengthen Linux as a threat to Windows are discussed below in the section on client/server networks. Since the current strength of Linux is on servers, provisions to insure that server operating systems other than Windows can interoperate well with Windows clients are especially important to the future viability and success of Linux.
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Linux were able to run two of the most important Windows applications: Office and Internet Explorer.
Remedy Provision #14b, Auction of Licenses to Port Office
110. Provision #14b requires Microsoft to offer for sale at auction three licenses to sell Office for use on operating systems other than Windows and Macintosh.88 Although not requiring that any licensees port Office to Linux in particular, the provision at least enables companies supporting Linux to gain the ability, by winning one of these three licenses, to make Office, or components of Office, available on Linux. Mr. Tiemann states: “In fact, I am fairly certain that Red Hat would be interested in bidding on one of these licenses for the purpose of porting Office to Linux.”89 In conjunction with other improvements in Linux, such as greater ease of use and an improved user interface, the ability of Linux to achieve compatibility with Office could significantly increase the chance that Linux will indeed become a strong alternative on the desktop.
111. Professor David Sibley, economic expert for the Department of Justice, states that “I agree that this remedy would be a more direct attack on the applications barrier to entry.”90
112. Mr. Tiemann describes why Provision #14 could significantly enhance competition in the market for PC operating systems:
However, in the space in which Red Hat believes a Linux desktop operating system is most likely to gain traction initially, the enterprise marketplace, there are two Microsoft products that comprise an applications barrier to entry for Linux in and of themselves – Microsoft Office and Internet Explorer. … the playing field in the enterprise market would level dramatically (although by no means would it be level) if Office and Internet Explorer were available on the Linux operating system.91
88 Provision #14c, Provision of Necessary Information, insures that the winners of the porting licensees from Provision #14b will obtain the information necessary to port subsequent versions of Office as well. 89 Tiemann Direct Testimony ¶100. 90 Sibley Declaration ¶76. 91 Tiemann Direct Testimony ¶85.
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Office is the albatross around Red Hat’s neck.92
First, if the goal of a remedy in this proceeding is to restore the potential for competition in the operating system market, my extensive experience with customers has made clear that that potential cannot be restored without the availability of Office.93
113. Provision #14b has a number of highly attractive properties from the perspective of promoting competition. First, by using an auction mechanism, the parties who most value the porting rights can be expected to win those rights. These are precisely the companies that are most capable of performing the porting and those with complementary products – especially, rival operating systems – that will most benefit from compatibility with Office. Second, by structuring the auction so that an up-front fee is paid to Microsoft, but no running royalties, the non-Windows versions of Office can truly be priced independently of Microsoft and not be burdened with ongoing royalties (a variable cost). Third, the licenses to be auctioned under this Provision do not specify just what portions of Office will be ported to which operating systems; efficiency is enhanced by leaving these decisions to market forces. Fourth, because the rights auctioned off do not include making a version of Office on Windows or Macintosh, the platforms on which Microsoft has chosen to provide Office, Microsoft’s Office franchise is not directly impacted by this provision. Put differently, Provision #14b involves auctioning off rights that Microsoft has decided not to exploit.94 Provision #14b will affect Microsoft’s Office business on Windows only to the extent that this provision succeeds in enhancing competition between Windows and other operating systems. Fifth, the provision is far less regulatory than would be a comparable provision requiring Microsoft to perform the porting. Such a porting requirement would likely lead to a series of disputes about the quality, timing, and price of the port provided by Microsoft. Furthermore, because licensees rather than Microsoft actually perform the porting, Provision #14b only imposes on Microsoft the cost of disclosing the information and tools required for the porting. The risk that porting
92 Tiemann Direct Testimony ¶87 Mr. Tiemann also indicates that, in his experience, potential Linux customers consider the lack of Office on Linux to be a major drawback to Linux on the desktop. 93 Tiemann Direct Testimony ¶99.
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Office to Linux is very expensive and not commercially attractive – as asserted by Microsoft – will be borne by the winners of the auction, not by Microsoft.95
114. The precise number of licenses auctioned off under Provision #14b is not critical to the effectiveness of this provision. The advantage of having three licenses is that multiple approaches can be taken by separate licensees; the licensees might port to different operating systems or focus on different aspects of Office. But even one license would provide a significant boost to competition and substantial benefits to consumers.
115. Microsoft’s Proposed Remedy has no comparable provision. Under Microsoft’s Proposed Remedy, Microsoft could simply continue not offering a version of Office for Linux, or any other operating system, as part of its strategy to protect the Windows monopoly. Under Microsoft’s Proposed Remedy, Office remains an important part of the applications barrier to entry.
Remedy Provision #12, Internet Browser Open Source License
116. Provision #12 will help Linux overcome the applications barrier to entry.96 Linux could be a significantly stronger rival to Windows in the market for PC operating systems if the source code of Internet Explorer could be used as the basis for a browser running on Linux. Provision #12 also opens up the possibility that Microsoft’s browser source code can be used as the basis for a cross-platform browser, the very type of middleware that was at the center of this case.97 Again, Mr. Tiemann’s testimony is pertinent:
94 Microsoft considered making a version of Office for Linux a few years ago but decided against doing so. Mr. James Allchin of Microsoft testified that he would have opposed this project because it would make Linux more attractive versus Windows. Allchin Deposition, p. 83. 95 Microsoft has asserted that porting Office to Linux would take several years and hundreds of millions of dollars. Offered Testimony of Jon DeVaan, Defendant Microsoft Corporation’s Offer of Proof, United States of America v. Microsoft Corporation, 98-1232, 24 May 2000. 96 See above for my discussion of how Provision #12 will likely affect browser innovation. 97 Microsoft regards Internet Explorer as a platform for developers. “My job is to make sure that Internet Explorer and the browsing capabilities in Windows provide an attractive and appealing platform for developers…” Deposition of Chris Jones, State of New York, et al. v. Microsoft Corporation, 98-1233, 22 February 2002, p. 97.
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It is my opinion that today a user must have IE in order to have a full web-browsing experience, and that IE therefore creates a very high barrier to entry not just for competing web browsers, but for other operating systems that do not run IE.98
IE does not run on Linux, and therefore it represents a factor in the applications barrier to entry that I believe to be second in importance only to Microsoft Office.99
As a result of Microsoft’s tactics, a large amount of content on the Internet today is not accessible unless the user has IE.100
First, if IE were open-sourced, the open-source community of software developers would be able to create a version of IE for Linux, thereby providing Linux with one of the key pieces of software that it currently lacks and making it a much more realistic alternative to Windows for many customers. Second, IE is middleware, and is itself a significant platform for software development. If IE were ported to Linux and thereby made cross- platform (i.e., able to run on multiple operating systems), as it likely would be after being open-sourced, all applications written to IE would also be available on Linux, thus further eroding the applications barrier to entry.101
117. Microsoft’s Chairman, Mr. William Gates, has recognized that porting Internet Explorer to Linux would make Linux a stronger competitor to Windows as an Intel-compatible PC operating system.102
118. Microsoft’s Proposed Remedy has no comparable provision. Under Microsoft’s Proposed Remedy, Microsoft could simply choose not to port Internet Explorer to Linux, or to any rival operating system that was a threat to Windows, thereby using its illegally gained control over the dominant browser to enhance the applications barrier to entry. Under Microsoft’s Proposed Remedy, third parties gain no access to Microsoft’s browser source code and thus no ability to tailor Internet Explorer to other platforms or to develop a cross- platform browser based on the Internet Explorer code.
98 Tiemann Direct Testimony ¶106. 99 Tiemann Direct Testimony ¶107 Mr. Tiemann also indicates that many enterprise customers do not regard other browsers running on Linux, such as Netscape Navigator and Mozilla, to be acceptable substitutes for Internet Explorer. 100 Tiemann Direct Testimony ¶109. 101 Tiemann Direct Testimony ¶112. 102 Responding in 2001 to a proposal by IBM to port IE 6 to Linux, Mr. Gates writes “IE 6 cross platform from IBM is an interesting idea. We would have to limit it in some ways or it helps Linux too much.” PX 327.
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B. Cross-Platform Middleware
119. The Court also identified cross-platform middleware as a potential threat to Windows. Cross-platform middleware can greatly reduce the risks associated with entry by a new operating system. Of course, much of this case has been about a two-stage entry process in which widely used cross-platform middleware serves as the pre-condition for entry or expansion by rival operating systems. For the cross-platform middleware threat to be realized, ISVs must write to the APIs exposed in the middleware. So far at least, ISVs writing on Windows have not relied on APIs exposed by cross-platform middleware extensively enough to reduce significantly the applications barrier to entry.
120. The threat of entry posed by middleware involves several stages before a true substitute to the operating system can emerge. The stages are: (1) one or more pieces of middleware are written that expose APIs, and (2) this middleware gains widespread distribution, most likely by offering consumers valuable new functionality. At this point, the middleware has become a very real platform threat to Windows. Positive feedback can kick in at this point, adding to the middleware’s attractiveness to ISVs. This leads to two more steps: (3) the middleware expands to expose an increasing number of APIs and runs on other operating systems (if it had not already), and (4) ISVs increasingly write to the APIs exposed by the middleware rather than to the APIs exposed by Windows. Now the stage is set for enhanced competition in the PC operating system market: (5) the middleware facilitates porting of other applications from Windows to one or more rival operating systems, which thereby (6) lowers the applications barrier to entry into the PC operating systems market. The end result is (7) many applications, including this middleware itself, can now run on one or more operating systems other than Windows, which become stronger rivals to Windows. If this process in fact unfolds, then an alternative to Windows gains popularity, benefits from its own positive-feedback loop, and erodes Microsoft’s monopoly power in the PC operating systems market.
121. Most individual middleware threats are long shots, take some time to mature, and are quite delicate. Therefore, cross-platform middleware threats tend to be highly susceptible to disruption by the established monopolist, Microsoft, whose position is threatened. One of the lessons of this case is that Microsoft’s monopoly will most likely be effectively
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challenged when several threats are aligned. Put differently, one piece of cross-platform middleware complements others in breaking down entry barriers. This observation provides further support for insuring that the remedy applies to a broad range of middleware.
122. The best practical way to facilitate the emergence of middleware threats is for the remedy to embrace a parity principle: Microsoft should provide third-party middleware the same ability to interoperate with Windows that Microsoft provides to middleware developed internally.
123. Obviously, it would be desirable to try to revive the threats posed by two pieces of cross- platform middleware that were the centerpieces of this antitrust case: Netscape’s Navigator and Sun’s Java. I begin by discussing these two types of middleware and the remedial provisions specific to them; I then discuss more generally the impact of remedial provisions on cross-platform middleware.
1. Browsers
124. The prospect of reviving Netscape Navigator, or indeed any other browser, as a serious platform threat to Windows is remote, given the dominant position enjoyed by Internet Explorer as a result of Microsoft’s illegal conduct. The most recent data show Internet Explorer’s usage share approaching ninety percent, with Netscape accounting for the bulk of the remaining usage and the open source browser Opera accounting for less than one percent.103 As discussed earlier, the browser war is over, so reviving Netscape Navigator as a serious threat to Windows does not appear feasible. The browser war may be over, but the effects of Microsoft’s illegal victory persist and are significant, since the browser is arguably the most important type of middleware in today’s networked world.
103 For example, WebSideStory, a software service that tracks browser market share data, reported in October 2001 that Internet Explorer had a global usage share of 89.03%; Netscape, 10.47%; and Opera, 0.33%. WebSideStory, “Microsoft and Opera Browsers More Popular Among Swedes Than Rest of World,” 31 October 2001, www.websidestory.com/cgi-bin/wss.cgi?corporate&news&press_1_149 visited 24 January 2002.
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125. An alternative approach to facilitating a cross-platform browser is to open up Internet Explorer so that it can be ported to and customized for other operating systems outside of Microsoft’s control. Such porting will lower the applications barrier to entry by making this important application available on rival operating systems (as noted above) and by allowing today’s dominant browser code to attract developer interest as cross-platform middleware.
Remedy Provision #12, Internet Browser Open Source License
126. This provision restores the prospect of a cross-platform browser, based now on Internet Explorer rather than Netscape Navigator. Furthermore, as described by Mr. David Richards of RealNetworks, Microsoft currently designs Internet Explorer to favor Microsoft middleware over rival middleware, specifically to favor Windows Media Player (WMP) over the RealOne Player.104 Under Provision #12, third parties could modify Microsoft’s Browser code to eliminate such biases and thus lower the barriers facing rival middleware.
127. Microsoft’s Proposed Remedy contains no provision comparable to Remedy Provision #12. Under Microsoft’s Proposed Remedy, Microsoft retains complete control of the dominant browser, Internet Explorer. Under Microsoft’s Proposed Remedy, Microsoft could unilaterally decide whether to offer a version of Internet Explorer for operating systems other than Windows, and whether or not any non-Windows versions of Internet Explorer would offer comparable functionality to the Windows version. In contrast, under Remedy Provision #12, the great advantage Windows currently enjoys by virtue of Microsoft’s control over the dominant browser would be partially neutralized.
2. Java
128. Unlike Netscape Navigator, Sun’s Java technologies have continued to enjoy considerable success, especially on platforms not dominated by Microsoft Windows. As described by Richard Green, J2EE (“Java 2 Enterprise Edition”) has been very successful on application
104 Direct Testimony of David Richards, State of New York, et al. v. Microsoft Corporation, 98-1233, (hereafter, Richards Direct Testimony), ¶¶79-84.
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servers, and J2ME (“Java 2 Micro Edition”) has been extremely successful on handheld devices, especially wireless smartphone handsets.105 In short, where it has faced the market test outside the power of Microsoft’s monopoly, Java is proving to be very popular and valuable software.
129. In contrast, Java has done quite poorly on the desktop. For a number of years Microsoft has not distributed the latest version of Java with Windows; recently, Microsoft removed Java entirely from the standard OEM and retail releases of Windows XP. Sun does makes J2SE (“Java 2 Standard Edition”) available to OEMs via a free download from the Sun website. Naturally, ISVs are less inclined to write to the Java platform if Java is not broadly and uniformly distributed on the desktop. As noted in the Findings of Fact, the OEM channel is very important for broad desktop distribution.
130. In short, Java remains a very promising technology. Java was dealt a severe setback by Microsoft’s illegal conduct but has been carried forward by Sun (in no small part because the demand for Java extends beyond the realm of Microsoft dominance). Java continues to offer the prospect of cross-platform functionality and a means of lowering the applications barrier to entry. The remedy should therefore include provisions to help restore the threat posed by Java, which grew in part out of the widespread distribution of Java to PC users through Navigator.
Remedy Provision #13, Java Distribution
131. Provision #13 calls for Microsoft to distribute Java with Windows and Internet Explorer. This is a low-cost way of partially restoring the threat Java posed prior to Microsoft’s violations, while allowing OEMs, end users, and developers ultimately to decide whether in fact they want to adopt Java technologies. Provision #13 should impose minimal costs on Microsoft while improving the distribution of Java and increasing customer choice.106
105 Direct Testimony of Richard Green, State of New York, et al. v. Microsoft Corporation, 98-1233, ¶¶119-125. 106 Microsoft has raised various concerns about the operation of Provision #13. Only one has merit, in my view: the cost of requiring that users who download Internet Explorer also receive a JRE. Due to the size of JREs, they can be slow to download, especially for users with dial-up connections. I support a variation on Provision #13 that gives consumers the choice of whether also to receive a JRE when they download Internet Explorer.
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132. Microsoft’s Proposed Remedy contains no explicit provision that acts affirmatively to restore the threat posed by Java five years ago.107 Indeed, Microsoft’s Proposed Remedy does not appear to include any meaningful provision designed specifically to counteract the adverse impact of Microsoft’s illegal conduct directed at Java, including Microsoft’s deception of Java developers.
3. Other Middleware Threats
133. For reasons explained at length above, no remedy can be effective if confined to browsers and Java. Within the category of middleware, an effective remedy must encompass other types of middleware that could serve to lower the applications barrier to entry. Although we cannot predict with precision what will be the most promising middleware threats in the years ahead, we can look at the strategies and tactics surrounding today’s middleware products to help identify remedial provisions that will lower the barriers to entry facing cross-platform middleware. To illustrate the issues involved, I now discuss one specific type of middleware that appears significant today: media players. I make no attempt here comprehensively to catalog the middleware threats facing Microsoft now, much less in the years ahead.
107 The DOJ indicates that it considered a similar provision but rejected it for two reasons. DOJ Response, ¶431. First, “it is not the proper role of the government to bless one competitor over others, or one potential middleware platform over others, nor is the government in the best position to do so.” If there were a number of similarly situated middleware platforms with run-time environments, I would agree that it would be desirable to require Microsoft to carry one of them rather than to specify any particular product to be carried. (In similar fashion, as part of the consent order arising out of the Time Warner/Turner merger, the FTC required Time Warner to carry one 24- hour news channel to compete against CNN, which Time Warner was acquiring. Time Warner then elected to satisfy this provision by carrying MSNBC rather than Fox News.) In this case, however, Sun’s Java, which was the target of a number of Microsoft’s anticompetitive acts, is unique. Second, the DOJ states “mandatory distribution of a particular product likely would lead to a decrease in innovation and improvement in that product because its developer will have no incentive to make it better.” I strongly disagree with this claim. Sun will clearly have strong incentives to continue to improve and promote Java in order to attract developers to the Java platform and in order to induce OEMs to load JREs on the machines that they ship.
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a) Media Players
134. The Findings of Fact specifically identify media players as a category of cross-platform middleware that threatened Microsoft.108 Media players have grown in importance over the past five years, as more and more users take advantage of faster computers and on-line connections (in conjunction with handheld devices and CD burners) to download and play music. No doubt the use of personal computers to view video material will grow in the years ahead as well. In short, the computer has evolved from a text-oriented tool into a multi-media device, with vastly more digital content available now than ever before.
135. Media players promise to become even more important in the years ahead. Jupiter Media Metrix forecasts that the online music market will grow six-fold over current revenues to $5.5 billion in 2006.109 This trend is likely to be reinforced by the wider deployment of high-speed (“broadband”) Internet access to households, which has been forecasted to increase more than six-fold to 35.1 million households by 2006.110 Wider online media adoption will also be promoted by the emergence of digital rights management (DRM) systems endorsed by content providers.111
108 “Microsoft noted the dangers of Apple’s and RealNetworks’ multimedia playback technologies, which ran on several platforms (including the Mac OS and Windows) and similarly exposed APIs to content developers. Microsoft feared all of these technologies because they facilitated the development of user-oriented software that would be indifferent to the identity of the underlying operating system.” Findings of Fact ¶78. “In 1997, senior Microsoft executives viewed RealNetworks’ streaming software with the same apprehension with which they viewed Apple’s playback software — as competitive technology that could develop into part of a middleware layer that could, in turn, become broad and widespread enough to weaken the applications barrier to entry.” Findings of Fact ¶111. “Microsoft’s intentions toward RealNetworks in 1997, and its dealings with the company that summer, show that decision-makers at Microsoft were willing to invest a large amount of cash and other resources into securing the agreement of other companies to halt software development that exhibited discernible potential to weaken the applications barrier.” Findings of Fact ¶114. 109 Jupiter Media Metrix, “Subscriptions Will Account For Almost Two-Thirds of US Digital Music Sales in 2006, Reports Jupiter Media Metrix,” 15 January 2002, http://www.jmm.com/xp/jmm/press/2002/pr_011502.xml visited 24 January 2002. 110 Jupiter Media Metrix, “Over 40 Percent of US Online Households To Connect Via Broadband By 2006, Reports Jupiter Media Metrix,” 17 October 2001, http://www.jmm.com/xp/jmm/press/2001/pr_101701.xml visited 24 January 2002. 111 GartnerG2, “GartnerG2 Says ‘Big 5’ Record Labels Must Standardize Digital Music Delivery To Profit From The Market Opportunity.” 29 August 2001, http://www3.gartner.com/5_about/press_releases/2001/pr20010829c.html visited 24 January 2002.
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136. Clearly, media players are an important, widely used category of cross-platform middleware, precisely the type of middleware most relevant for this case. In this context, we are witnessing a battle between Microsoft and Real Networks in the media player category.112 Microsoft’s Windows Media Player competes directly with the RealOne Player offered by Real Networks.113 Mr. Allchin of Microsoft indicates that RealNetworks is a platform threat to Microsoft.114 Mr. Valentine of Microsoft indicates that digital media was central to the excitement surrounding Windows XP.115
137. The battle between Microsoft and RealNetworks shows some striking parallels with the browser war that was central to this case: RealNetworks was an early innovator in media players, and its players historically have enjoyed a substantially larger installed base of users than has the Windows Media Player. The RealOne Player is not only a mass-market application but a platform on which content providers can deliver their content: RealNetworks lists a large number of RealOne Partners, including Content Partners, Technology Partners, Authoring Tools and Service Providers, and Consumer Portable Device Manufacturers.116 Plus, the media players offered by RealNetworks are cross- platform: previous versions of the RealPlayer have run on Linux and the Apple Mac OS as well as Windows, and RealNetworks plans to make the RealOne Player available on these operating systems later this year. RealNetworks promotes a “Create Once, Play Anywhere” model.
138. Facing the threat from RealNetworks, Microsoft has employed a host of tactics to win the media player battle. Microsoft has bundled its Windows Media Player into Windows XP. Beyond this, Mr. Richards describes various tactics employed by Microsoft in the media player battle that restrict the choices of OEMs, ISVs, and end users and favor Microsoft’s Windows Media Player over rival media players. Media players thus offer an excellent
112 Other media players include MusicMatch, AOL’s Nullsoft Winamp and Spinner, and Apple’s QuickTime. 113 RealNetworks also supports its Real Player and Real Jukebox, predecessors of the RealOne Player. 114 Allchin Deposition, pp. 145-146. 115 Valentine Deposition, pp. 71-72.
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example to see just how a remedy can operate best to give non-Microsoft middleware the opportunity to gain usage and lower the applications barrier to entry.
139. Under the parity principle emphasized above, the remedy should permit non-Microsoft media players to interoperate as effectively with Windows as does Windows Media Player. Mr. Richards describes a number of ways in which Microsoft has withheld or delayed the disclosure of APIs and technical information to RealNetworks to favor Microsoft’s Windows Media Player over RealNetwork’s RealOne media player. His examples are: (1) Copy to Audio CD;117 (2) Play All;118 (3) Media Search Function;119 (4) Secure Audio Path;120 and (5) IE Media Bar.121
140. Microsoft’s Proposed Remedy would limit these practices to some degree, but it does not implement the parity principle. As Mr. Richards of RealNetworks states in his evaluation of the shortcomings of Microsoft’s Proposed Remedy, that remedy (a) does not cover Windows Media Player 8 in its disclosure regime (Section III.D) because WMP 8 is not “Microsoft Middleware;” (b) does not include the disclosure of file formats or registry settings; (c) does not attempt to achieve “interoperability” as defined in the States’ Proposed Remedy; (d) does not include services; and (e) has a significant security exception (Section III.J.1) that Microsoft could use to refuse to disclose information critical to media players.122
116 RealNetworks, “RealOne Partners: Worldwide Industry Support for RealOne Platform,” http://www.realnetworks.com/solutions/ecosystem/realone_partners2.html, visited 24 January 2002. 117 Richards Direct Testimony ¶¶67-68. 118 Richards Direct Testimony ¶¶69-70. 119 Richards Direct Testimony ¶¶71-74. 120 Richards Direct Testimony ¶¶75-78. 121 Richards Direct Testimony ¶¶79-84. 122 Richards Direct Testimony ¶¶85-100
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b) Fledgling Middleware
141. The most promising middleware threats are those products that introduce new technologies providing significant value to a large set of consumers and thus can gain rapid widespread adoption, even ubiquity, before Microsoft offers comparable functionality. This is precisely what happened with Netscape Navigator. As noted by Assistant Attorney General Charles James: “For all of its claimed technological prowess and industry foresight, Microsoft had fallen behind in the race to commercialize the Web browser technology. An upstart company called Netscape had beaten the mighty Microsoft to the punch and quickly gained a respectable market share as the preferred technology for navigating the then-burgeoning Internet.”123 The trial record in this case is replete with evidence showing that Microsoft was behind Netscape in offering an Internet browser and struggling to catch up.
142. The clear implication of the Netscape episode is that Microsoft should be prohibited from impeding fledgling middleware. Indeed, what the Court of Appeals refers to as “nascent technology” can easily emerge in the form of fledgling middleware.
4. The States’ Proposed Remedy and Middleware
143. For the many reasons identified above, the remedy should ensure that a wide range of middleware is given a chance to take root and grow rapidly without interference by Microsoft. A number of the provisions of the States’ Proposed Remedy work together to promote this aim.124
123 James, Antitrust Magazine, p. 59. 124 This section focuses on the provisions of the States’ Proposed Remedy. The following section explains why Microsoft’s Proposed Remedy is far weaker and less effective at restoring middleware competition than is the States’ Proposed Remedy.
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a) Interoperation of Non-Microsoft Middleware with Microsoft Platform Software
144. Rival middleware products must work well with Windows to gain initial acceptance. So long as Windows remains the dominant desktop operating system, rival middleware developers will have a great deal of difficulty gaining widespread adoption for their products unless they are given the information necessary to achieve parity with Microsoft middleware regarding interoperation with Windows.
Remedy Provision #4, Disclosure of APIs, Communications Interfaces, and Technical Information
145. Provision #4 will serve to insure that providers of non-Microsoft middleware have the same access to information about Windows as do Microsoft middleware developers. Clearly, such information is crucial to the development of middleware that works well with Windows.
146. Although Provision #4 raises some technical issues that are outside my expertise, such as the precise definition of “Microsoft Middleware Product,” I believe that a simple economic principle, the parity principle, can guide the remedial disclosure regime: developers of non- Microsoft middleware should be given access to the same information that is available to developers of Microsoft middleware for the purpose of interoperating with Windows.125 Applying the parity principle will clearly improve the performance of non-Microsoft middleware, to the benefit of consumers, and thus make it easier for innovative middleware to lower the applications barrier to entry.
147. Microsoft has long had a very substantial program to provide information to ISVs so they can write applications that run on Windows. Indeed, the success of Windows derives in no small part from Microsoft’s ability to attract the development community to the Windows platform. Windows benefits by sharing information with ISVs.126 Provision #4 should be
125 Under the parity principle I support, the information disclosed under Provision #4 can be used for interoperation with Microsoft Platform Software but not for the purpose of cloning Windows. 126 Valentine Deposition, p. 33.
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viewed in this context: Provision #4 builds upon Microsoft’s existing disclosure practices by imposing some clear rules on Microsoft to ensure that Microsoft does not disadvantage rival middleware as regards the information needed to interoperate with Windows.
148. Microsoft’s current practice is to publish APIs after they have been tested and if they have broad applicability. Microsoft sometimes decides not to publish APIs because they are unstable and their use could cause applications not to work or Windows to crash.127 Once published, Microsoft will not change an API and break compatibility.128 As I understand Provision #4, it does not require Microsoft to publish unstable, internal APIs. Rather, it requires Microsoft to use its existing procedures to disclose the same APIs that are used by Microsoft’s own middleware developers.
149. Mr. Valentine has testified that the Windows division tells the internal Microsoft community to write to the published APIs just like ISVs.129 According to Mr. Valentine:
[W]e are pretty hard core inside Microsoft that says don't use internal APIs, because it just breaks.130
And so even inside Microsoft, I do not suggest anybody writes to internal APIs. In fact, we go out of our way so that they don't do that, because that way we don't have to have that guarantee on compatibility between builds or even releases of Windows. So if anybody's writing to an internal API they'll get a piece of mail to me that says, “Stop that.” I mean, if you need the functionality let's make it a public API, and then let's publish it for everybody to use, and then we'll have the contract that says we'll support that API.131
150. Under the parity principle I support, Provision #4 would help to insure that Microsoft indeed gives ISVs the same access to information about Windows that Microsoft makes available to the Microsoft internal development community, even when those ISVs pose a threat to the Windows monopoly.
127 Allchin Deposition, pp. 132-133. 128 Valentine Deposition, p. 38. 129 Valentine Deposition, p. 36. 130 Valentine Deposition, p. 44. 131 Valentine Deposition, p. 45.
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151. Microsoft objects to the secure facility described in Provision #4c, in which third parties can study, interrogate, and interact with the Windows source code so their products can Interoperate with Windows. Microsoft asserts that Provision #4c unreasonably invades Microsoft’s intellectual property rights. However, as I understand it, the secure facility in Provision #4c is simply a device to help enforce the disclosure regime described in Provisions #4a and #4b. So long as proper limits are placed on the use to which the disclosed information is used, and so long as reasonable protections are put into place so that Microsoft’s source code is not misappropriated, I see no conflict between Provision #4 and Microsoft’s intellectual property rights to Windows.132
Remedy Provision #5, Notification of Knowing Interference with Performance
152. If Microsoft knowingly interferes with or degrades the performance or compatibility of non-Microsoft Middleware, Provision #5 requires that Microsoft must have a good cause and must provide notice to the affected ISV. This provision gives some protections to ISVs to enable their products to work well with Windows, both now and in the future.
153. This provision does not prevent Microsoft from improving its software, even if such improvements necessarily interfere with the performance of non-Microsoft Middleware. Microsoft merely must have a good cause for such interference and must notify the affected ISV. In conjunction with Provision #4, the developer of the non-Microsoft middleware should then have both the ability and incentive to modify its software to overcome any degradation in performance that Microsoft could not itself avoid. The costs of the notification required by Provision #5 appear to be small, and the benefits to ISVs and to consumers potentially large.133
Remedy Provision #3, Continued Licensing of Predecessor Version
132 In this respect, I find it relevant that Microsoft currently shares its source code with many third parties. Mr. Allchin describes how: (1) Microsoft’s “shared source” program includes agreements with enterprise customers; (2) Microsoft shares its source code with service providers who offer support services for Windows; and (3) Microsoft shares source code with research institutions. Allchin Deposition, p. 172. Some OEMs also have access to Microsoft’s source code, including IBM, Compaq, and formerly HP, as does Intel. Allchin Deposition, p. 173. 133 Microsoft’s Proposed Remedy has no comparable provision, despite the fact that §3.c of the Initial Final Judgment did contain such a provision.
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154. Provision #3 requires Microsoft to continue to make available the immediately previous version of Windows. This provision works together with Provision #5 to afford some added protection to suppliers of rival middleware: if Microsoft changes its operating system and thereby impedes the functionality of the rival middleware, OEMs and Third- Party Licensees can continue to license the predecessor version of Windows to preserve the full functionality of the rival middleware. So, ISVs can anticipate a longer period of time during which the current Windows operating system is available; this tends to reduce the risks and increase the returns associated with the development of non-Microsoft middleware.134 This provision also will help make OEMs less reliant on ongoing technical support by Microsoft and thus bolster the other provisions concerning OEM choice and non-retaliation by Microsoft. The net result of Provision #3 will be modestly to reduce the risks faced by rival middleware that are associated with new versions of Windows.
155. Continued licensing of the immediate predecessor version of Windows will serve to enhance consumer choice at minimal cost to Microsoft. Microsoft’s technical expert, Professor Stuart Madnick, indicates that most operating system vendors support their current version or that version and the one preceding it.135 I disagree with Mr. Ballmer’s assertion that continued licensing of the immediate predecessor version will harm consumers.136 One of the core principles of economics is that consumers are better off if they have more choices; Provision #3 will directly enhance consumer choice.
134 It is unclear at this point how attractive predecessor versions will be to end users, and thus to OEMs and Third- Party Licensees. However, this provision does not appear to introduce any meaningful inefficiency into the market, and it could be attractive precisely in the situation where it is needed: when popular non-Microsoft middleware is crippled by a new version of Windows. 135 Professor Madnick indicates that IBM offers two versions of its AIX operating system and Sun offers two versions of its Solaris Operating Environment. Expert Report of Stuart E. Madnick, State of New York et al. v. Microsoft Corporation, 98-1233, 25 January 2002, ¶59. 136 Ballmer Deposition, p. 85.
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b) Freedom of OEMs and End Users to Adopt Non-Microsoft Middleware and Freedom of ISVs and IHVs to Support Rival Middleware
156. OEMs and end users must have the ability to adopt non-Microsoft middleware whether or not Microsoft offers middleware with comparable functionality. Microsoft must not be permitted to reward or punish OEMs based on whether they support non-Microsoft middleware.
Remedy Provision #2a: Mandatory, Uniform Licensing for Windows Operating Systems Products
157. Uniform licensing of Windows Operating System Products to Covered OEMs and Third- Party Licensees will prevent Microsoft from rewarding or punishing OEMs based on whether they use, support, or distribute rival middleware. The Court’s findings confirm Microsoft’s use of such a strategy in the past.137 Microsoft is expressly permitted to offer reasonable, uniform volume discounts, which are pro-competitive.
Remedy Provision #2b, Equal Access
158. This equal access provision will help prevent Microsoft from rewarding or punishing OEMs based on whether they use, support, or distribute rival middleware. Instances of unequal access to the Windows operating system are documented in the Court’s findings.138 The limited exception for bona fide joint development efforts allows Microsoft to protect specific technical and business information as part of a joint development effort between Microsoft and a Covered OEM.
159. Microsoft’s economic expert, Professor Kenneth Elzinga, criticizes Provision #2b:
The requirement of equal treatment, including marketing support for all licensees, makes no economic sense. No firm should be required to expend the same resources on
137 Findings of Fact ¶¶122-132. See especially “In the latter half of the 1990s, IBM (along with Gateway) paid significantly more for Windows than other major OEMs (like Compaq, Dell, and Hewlett-Packard) that were more compliant with Microsoft’s wishes.” Findings of Fact ¶130. 138 Findings of Fact ¶¶115-132. See especially “The message was clear: IBM could resolve the impasse ostensibly blocking the issuance of a Windows 95 license – the royalties audit – by de-emphasizing those products of its own that competed with Microsoft and instead promoting Microsoft’s products.” Findings of Fact ¶124.
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marketing and support for a customer who licenses 10,000 units of Windows per year as a customer that licenses millions.139
160. I agree with Professor Elzinga that it makes no sense to require Microsoft to expend the same level of resources on customers of very different sizes, but I see no reason why Provision #2b would operate in that peculiar fashion. A more sensible interpretation of Provision #2b is to require equal quality of support; thus, customer service for a Third- Party Licensee with 10,000 units would involve far fewer Microsoft resources than would customer service for a large OEM that ships millions of Windows PCs.140
Remedy Provision #2c, OEM and Third-Party Flexibility in Product Configuration
161. Provision #2c is one of the key provisions in the States’ Proposed Remedy that I emphasized at the outset of my testimony. I consider Provision #2c important because it serves to prevent a recurrence of a number of the illegal acts committed by Microsoft that could otherwise impede third-party middleware from gaining distribution and usage through the important OEM channel.
162. Working together with Provisions #2a and #2b, Provision #2c will make it commercially viable for Covered OEMs and Third-Party Licensees to use, distribute, and support non- Microsoft middleware if they so choose, even when these choices act contrary to the interests of Microsoft. This provision seeks to prevent the type of desktop and boot sequence restrictions noted by the Court.141 Nothing in this provision impedes Microsoft from improving its operating system or middleware.
Remedy Provision #8, Ban on Adverse Actions for Supporting Competing Products
163. This provision prevents Microsoft from exercising its monopoly power to discourage other industry participants from supporting non-Microsoft products or services. The broad
139 Elzinga Report, p. 14. 140 I should add that there is nothing magical about the 10,000 figure defining “Third Party Licensees” in the States’ Proposed Remedy. This figure could be raised without substantially undermining the effectiveness of the States’ Proposed Remedy. 141 Findings of Fact ¶¶202-229.
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language of Provision #8 should help make it enforceable. Provision #8 will serve to protect against actions similar to those undertaken by Microsoft in the past.142
164. Professor Elzinga states:
This provision appears to prohibit Microsoft (but not its competitors) from participating in the kinds of technological joint ventures and alliances that are important in high technology industries and generate consumer benefits.143
165. I see no reason why Provision #8 would have the undesirable effects feared by Professor Elzinga. Nothing in Provision #8 should prevent Microsoft from choosing joint venture or alliance partners based on their contributions to such efforts. Nor should Provision #8 prevent Microsoft from exercising reasonable business judgment in working with third parties to develop and promote Microsoft software. For example, at a design preview for a new capability of Office,144 nothing in Provision #8 should prevent Microsoft from inviting companies who are interested and will add value.
Remedy Provision #10, Respect for User, OEM, and Third-Party Licensee Choices
166. This provision helps insure that Microsoft does not override user choices and thus impede the distribution or use of rival middleware.145
Remedy Provision #6, Ban on Exclusive Dealing
167. This provision prevents Microsoft from entering into contracts that explicitly exclude rival middleware. Previous occasions of such conduct by Microsoft have been identified by the
142 Findings of Fact ¶¶239-241. See especially “Microsoft threatened to penalize individual OEMs that insisted on pre-installing and promoting Navigator.” Findings of Fact ¶241. 143 Elzinga Report, p.21. 144 See Ballmer Deposition, pp. 117-120. 145 “The decision to override the user’s selection of non-Microsoft software as the default browser also directly disinclined Windows 98 consumers to use Navigator as their default browser, and it harmed those Windows 98 consumers who nevertheless used Navigator.” Findings of Fact ¶172.
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Court.146 The broad language of Provision #6 should help make it more easily, and effectively, enforceable.147
Remedy Provision #7, Ban on Contractual Tying
168. This provision prevents Microsoft from granting a Windows Operating System Product license on condition that the licensee agree to license, promote or distribute any Microsoft Middleware Product. This provision will prevent Microsoft from using its monopoly power to compel the adoption of Microsoft’s Middleware Products, as the Court has found it to have done in the past.148 Clearly, such contractual tying by Microsoft can impede the adoption of non-Microsoft middleware.
5. Middleware Summary
169. Overall, the States’ Proposed Remedy will help promote competition by non-Microsoft middleware, and thus to lower the applications barrier to entry, in two distinct but complementary ways: (1) by preventing Microsoft from impeding the adoption of rival middleware, and (2) by affirmatively assuring that rival middleware will have the same ability to interoperate with Microsoft’s monopoly operating system as does Microsoft’s own middleware.
C. Server-Based Computing
170. The Court identified server-based computing generally as an area that could spawn threats to Windows. The Court found that server-based computing, as of several years ago, lacked the variety and ease-of-use to attract many PC users. The Court considered Network Computers specifically, but found that problems of latency, congestion, asynchrony,
146 Microsoft desired “that IBM promote Internet Explorer 4.0 exclusively and warned that if IBM pre-installed Navigator on its PCs, ‘We have a problem.’” Findings of Fact ¶237. 147 Provision #6 could be narrowed so that it does not cover agreements wholly unrelated to Microsoft Platform Software. 148 “In contrast to other operating system vendors, Microsoft both refused to license its operating system without a browser and imposed restrictions – at first contractual and later technical – on OEMs’ and end users’ ability to remove its browser from its operating system. As its internal contemporaneous documents and licensing practices reveal, Microsoft decided to bind Internet Explorer to Windows in order to prevent Navigator from weakening the applications barrier to entry, rather than for any pro-competitive purpose.” Findings of Fact ¶155.
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insecurity across the network, and the limitations of server resources degraded performance.149 Yet this is an area where technology is advancing rapidly: servers are becoming more and more powerful, Internet connections are becoming faster and faster, and extensive software is being developed to take advantage of these hardware advances.
171. In fact, the next “inflection point” in the software industry appears to be the emergence of “Web services,” an architecture permitting many different devices – including personal computers, servers, and handheld devices such as personal digital assistants and cell phones – to interoperate and provide services over the Web.150 The emergence of Web services makes client/server interoperability critical to an effective remedy.
172. I believe there is a consensus today that some of the most exciting developments in computing over the next few years will revolve around networks of clients and servers. As an economist, the precise labels that one attaches to these developments are unimportant; in particular, whether one includes server operating systems in one’s definition of “middleware” is a matter of semantics, not economics. The important economic point is that client/server networks may offer the possibility for users of personal computers, especially those in a business setting, to obtain the applications they need whether or not their computers are running Windows.
1. The Growing Importance of Client-Server Networks
173. In the two years since the Findings of Fact were issued (and closer to three years since much of the evidence was offered at trial), server-based computing, client-server networks, distributed applications, and Web services have become more and more important. I do not believe there is any dispute that client-server networks and server-based computing are increasingly important as the personal computer continues to evolve from a stand-alone
149 Findings of Fact ¶26. 150 See, for example, DX 174, Microsoft Corporation, Microsoft .NET Web Services: Interoperability across platforms, applications, and programming languages, February 2002: “The computing industry is at an inflection point around a new model of Internet-based, distributed computing. Web services provide the promise of a computing model that delivers interoperability across platforms, programming languages, and applications...” Microsoft has made it clear that Web services, and the XML protocol that supports them, are central to computing in
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device to a device for connecting to local and wide-area networks.151 Microsoft recognizes the growing importance of networking with its .NET initiative, as well as its various efforts surrounding Windows 2000 as a “domain” involving clients and servers.152 The fact is, the PC is no longer a stand-alone device, but is more and more part of a network. For consumers and home PCs, the network is usually the Internet reached through an ISP, possibly via a broadband connection such as DSL or cable. Popular applications that involve the PC talking to servers through the Internet include e-mail, instant messaging, e-
the years ahead. According to Mr. Gates of Microsoft: “Our .NET vision for Web services is as important to Microsoft as was our vision of the PC. It affects every corner of the company.” PX 238. 151 “The competitive significance of most Non-Microsoft Middleware…was and will continue to be highly dependent on content, data and applications residing on servers and passing over networks such as the Internet or corporate networks to that middleware running on personal computers.” Competitive Impact Statement, United States of America v. Microsoft Corporation, 98-1232, 6 November 1999, p. 36. 152 “We kept the same vision statement for 25 years, talking about the PC as a tool on every desk and in every home. It was only about 18 months ago we changed it for the first time in our history to talk about having the power of computing any time, any place, on any device. … The Microsoft product family that addresses this new era we call .NET. So, in the same way that Windows was our product for graphics interface, .NET is our platform for this new era. It's the first time somebody has talked about an operating system that runs across the different devices.” Speech by Bill Gates, “CHI 2001 Conference on Human Factors in Computing Systems,” Seattle, Wash., 2 April 2001, www.microsoft.com/BillGates/Speeches/2001/04-02chi.asp visited 27 March 2002. “A revolution is upon us … As a result of the changes in how businesses and consumers use the Web, the industry is converging on a new computing model that enables a standard way of building applications and processes to connect and exchange information over the Web. This new Internet-based integration methodology, called ‘XML Web Services,’ enables applications, machines, and business processes to work together in a way never previously possible.” Microsoft White Paper, “A Revolution is Upon Us,” (with cover memo from Bill Gates), June 2001, www.microsoft.com/net/defined/net_today.pdf visited 27 March 2002. “Microsoft is creating an advanced new generation of software that melds computing and communications in a revolutionary new way…We call this initiative Microsoft .NET. ..Microsoft .NET will drive the Next Generation Internet… The Microsoft .NET platform will revolutionize computing and communications in the first decade of the 21st century by being the first platform that takes full advantage of both.” Microsoft White Paper, “Microsoft .NET: Realizing the Next Generation Internet.” 22 June 2000, http://www.microsoft.com/italy/partner/prodotti/BusinessOnLine/582.htm visited 27 March 2002. “Today at the Enterprise 2000 Launch, Microsoft Corp. President and CEO Steve Ballmer joined with leading enterprise partners and customers to …[demonstrate] solutions for emerging requirements that take enterprise computing beyond traditional internally focused systems to deliver deep integration with customers, industry partners and employees, any time and any place.” “Microsoft and Industry Leaders Unleash Arsenal for the New Enterprise; Enterprise System and Software Vendors, Consulting and Support Services and Microsoft .NET Platform Herald New Era of Enterprise Agility,” 26 September 2000 press release, www.microsoft.com/presspass/press/2000/Sept00/E2KumbrellaPR.asp visited 24 January 2002. “And we've got a dedicated team at Microsoft, heads down, focused in on the opportunities, because if you want to let people have things where they want and when they want, you've got to support models of server-based storage, server-based computing and very high availability.” Steve Ballmer, Paine Webber Growth and Technology Conference, 8 June 1999, New York, www.microsoft.com/presspass/exec/steve/06-08painewebber.asp visited 18 January 2002.
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commerce, on-line music, on-line gaming, and Web browsing generally. For PCs in the workplace, in addition to the Internet there is commonly some type of LAN (or a more complex internal network at larger firms) that can involve highly sophisticated security, authorization, access to resources, databases, and complex interactions between clients and servers.
174. The clear implication of these trends is that the remedy should place great emphasis on making sure that Microsoft cannot use its Windows monopoly to impede the ability of non-Microsoft servers to compete effectively and to serve up applications to desktops. In this context, it is important to note that Microsoft has already gained significant ground in selling Windows server operating systems over the past several years (see Figure 1). Competitors to Microsoft for server operating systems include Sun’s Solaris, Novell’s Netware, and Linux.
Figure 1 – Unit shares of the <$100k server market, Q1 1996 – Q1 2001
70%
60%
50% Win/NT
40% Unix Netware 30% Linux Other 20%
10%
0%
1996 Q1 1996 Q3 1997 Q1 1997 Q3 1998 Q1 1998 Q3 1999 Q1 1999 Q3 2000 Q1 2000 Q3 2001 Q1
Source: IDC Quarterly Server Tracker Database, 7 June 2001
175. The Justice Department’s economic expert shares my view that efficient interoperation between non-Microsoft servers and Microsoft clients is very important for breaking down the applications barrier to entry:
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The basis for the client-server focus is that there is now a growing number of applications that run on servers, rather than on the desktop. … It represents a strong source of competition to Microsoft in the business computing segment and may yet make a serious attack on the applications barrier to entry in the desktop PC market. Therefore, it is important that rival middleware be able to operate with Microsoft server operating systems. It is equally important that a non-Microsoft server be able to operate with Windows as efficiently as would a Microsoft server. Communications interfaces are essential for that purpose and are just as necessary to rival middleware developers as is access to Windows APIs.153
2. Microsoft Uses its Client Monopoly to Disadvantage Server Rivals
176. My understanding is that Microsoft has in fact used its client-side monopoly to disadvantage rivals selling operating systems for servers. In particular, non-Windows servers cannot today interoperate as effectively with Windows clients as can Windows servers due to lack of access to APIs, Communications Interfaces, and Technical Information.
177. I note in this regard that Microsoft markets superior integration between clients and servers when selling against rival servers such as Linux.154 I am not suggesting that there is anything anti-competitive about Microsoft offering or marketing integrated products that serve customers’ needs. However, the more that customers value client/server integration and efficient client/server interoperation, the greater are the consumer benefits of a disclosure regime that enables better integration of non-Microsoft servers and Windows desktops. Such disclosures generate direct consumer benefits in terms of the performance of non-Windows servers and will help to restore competition on the desktop.
178. I offer here two examples of ways in which Microsoft is reportedly favoring Windows servers over non-Windows servers based on technical information about Windows clients.155
153 Sibley Declaration ¶56, emphasis supplied. 154 Valentine Deposition, p. 106. 155 Mr. Tiemann of Red Hat offers more examples where Microsoft’s failure to disclose information about Windows has reportedly disadvantaged non-Windows servers in competition with Windows servers. Tiemann Direct Testimony ¶¶130-166.
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a) Kerberos-Based Authentication and Authorization
179. Authentication is the process of identifying an individual user, usually based on a username and password.156 In security systems, authentication is distinct from authorization, which is the process of giving individuals access to system objects based on their identity. Authorization is typically granted only after authentication has been accomplished. Authentication and authorization are critical elements of security systems in client and server networks, and they are typically accomplished by software that resides on each side of the client-server interaction.
180. Authentication is accomplished in many network architectures via the Kerberos Network Authentication Service protocol.157 The Kerberos protocol accomplishes secure data interchange between client and server using a data structure called a “ticket.” One field in a Kerberos ticket, “auth-data,” can be used to pass authorization data between client and server. The data in this field are specific to the authentication service, are not further specified or prescribed by the standard, and may be encrypted. The field is typically used to identify network resources together with the user’s rights to each of those resources. For example, the field might identify a user’s access rights to various files and printers.
181. Microsoft uses a version of Kerberos for authentication and authorization in its Windows 2000 operating system products.158 Microsoft has extended the standard Kerberos by incorporating proprietary information into the auth-data field in Kerberos tickets.159 Microsoft has on occasion, and as recently as late February 2002, released some information about its extensions to Kerberos. According to Dr. Ledbetter of Novell, the information that Microsoft has released, including the newly disclosed information, does
156 Webopedia, webopedia.internet.com/TERM/a/authentication.html visited 14 October 2001. 157 J. Kohl and C. Neuman, “The Kerberos Network Authentication Service (V5),” IETF RFC 1510, September 1993, http://www.faqs.org/rfcs/rfc1510.html visited 14 October 2001. 158 Dr. Ledbetter of Novell provides more information about Kerberos. Direct Testimony of Dr. Carl S. Ledbetter, State of New York, et al. v. Microsoft Corporation, 98-1233 (hereafter, Ledbetter Direct Testimony), ¶¶97-104. 159 “Microsoft includes a user’s Win2K authorization data in the authorization data field, which is part of every Kerberos ticket. Microsoft calls this field the Privilege Attribute Certificate (PAC).” Microsoft Corporation, “Kerberos in Win2K,” msdn.microsoft.com/library/en-us/dnntmag99/html/win2k.asp visited 23 January 2002.
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not include sufficient technical detail to enable full bilateral interoperability.160 Thus, Microsoft has reportedly degraded the performance of rival server operating systems by concealing the details underlying its implementation of Kerberos.
b) Digital Signatures
182. Beginning with Windows 2000, certain Microsoft software that provides functionality necessary to access system resources carries a digital “signature.”161 According to Dr. Ledbetter, Microsoft has not disclosed the information necessary for competing software efficiently to “read” these “signatures,” thereby making it harder for non-Microsoft software to interoperate efficiently with Windows 2000 clients.162 Dr. Ledbetter indicates that this lack of disclosure by Microsoft has adversely affected the attractiveness of Novell’s Netware and of Novell’s directory services, eDirectory.163 Dr. Ledbetter also states that Microsoft would not be required to disclose the digital signatures under Microsoft’s Proposed Remedy.164
3. Disclosure to Enable Server Interoperation with Windows Clients
183. The States’ Proposed Remedy insures that non-Windows operating systems running on servers, and non-Microsoft middleware running on servers, are given the information necessary to interoperate as effectively with Windows clients as are Windows server operating systems and Microsoft middleware running on servers.165 The Remedy thus
160 Ledbetter Direct Testimony ¶104. 161 “Windows 2000 drivers and operating system files have been digitally signed by Microsoft to ensure their quality.” Microsoft Corporation, “Code Signing For Windows 2000,” Windows 2000 Professional Documentation, www.microsoft.com/windows2000/en/professional/help/ visited 19 January 2002. 162 “[O]nly the Windows 2000 Server operating system software can handle all calls initiated by client PCs that run Windows 2000 software.” Ledbetter Direct Testimony ¶77. 163 “Novell’s middleware software can no longer read calls sent by Windows-based client PCs and redirect those calls to request services from non-Microsoft software.” Ledbetter Direct Testimony ¶76. 164 Ledbetter Direct Testimony ¶156. 165 As exp lained in the following section, Microsoft’s Proposed Remedy would be far less effective at enabling threats to Windows arising from server-based computing.
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preserves competition in servers and lowers the barriers faced by server operating systems entering (or supporting entry to) the desktop market.
Remedy Provision #4, Disclosure of APIs, Communications Interfaces and Technical Information
184. This provision is critical to enable non-Windows operating systems such as Linux, Netware, Solaris, and Unix generally to interoperate effectively with Windows PC clients. Provision #4 also will help enable non-Microsoft middleware running on servers to interoperate with Windows PC clients. This provision will directly benefit consumers by enabling networks with non-Windows servers and Windows clients to perform better and by preserving competition in servers. This provision will lower the barriers to entry into the market for PC operating systems, facilitating entry based on cross-platform middleware and by server operating systems.
Remedy Provision #16, Adherence to Industry Standards
185. Provision #16 requires that Microsoft publicly disclaim that it implements a Standard if and when Microsoft ceases to implement that Standard. Provision #16 does not prevent Microsoft from extending or modifying Standards, and does not prevent Microsoft from making product improvements. As I understand Provision #16, it is effectively a “Truth in Standards” provision, preventing Microsoft from engaging in deception, as the Court found it did with Java.166 Were Microsoft deceptively to gain proprietary control over important interfaces, rival operating systems would find it harder to compete against Windows. Provision #16 will help prevent Microsoft from deceptively subverting industry standards and thereby excluding rivals seeking to offer operating systems for servers and/or clients.
186. Microsoft’s Proposed Remedy contains no provision comparable to Remedy Provision #16. Indeed, Microsoft’s Proposed Remedy does not appear to contain any provision that explicitly prohibits Microsoft from again deceiving third-party developers at it did with Java.
166 Court of Appeals, pp. 55-56.
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D. Handheld Computing Devices
187. Handheld devices167 are becoming more and more capable.168 The ability of handheld devices to store, process, display, and communicate information has grown rapidly in the past five years. The Palm Pilot, RIM’s Blackberry device, and the new digital cellular smart phones manufactured by Nokia and others are notable examples, but this category includes also Compaq’s IPAQ, Psion’s Revo and many others. Over time, these handheld devices may be able to offer a substitute for at least some sales of personal computers (including laptops).169 To the extent that Microsoft gains control over operating systems for handheld devices, this potential threat to the Windows monopoly would be defused.
188. Much like desktop PCs, handheld devices run on an operating system platform. The leading handheld operating systems are Palm’s Palm OS, Microsoft’s Windows CE, and Symbian’s Symbian OS. Each of these operating systems exposes APIs that applications can invoke, and a number of applications have been written to run on each operating system. For example, Microsoft has written versions of Word and Excel to run on its Windows CE operating system, and there are more than 13,000 third party applications available for the Palm operating system.170
189. Mr. Michael Mace, Chief Competitive Officer of PalmSource, describes the extent to which handheld devices may be alternatives to desktop computers.
167 The Handheld Computing Devices defined in the States’ Proposed Remedy overlaps with the information appliances discussed by the Court in the Findings of Fact. In its discussion of information appliances, the Court listed hand-held computers, “smart” wireless telephones, television set-top boxes, and game consoles. Television set-top boxes and game consoles are not Handheld Computing Devices, although these other devices may also have the potential to replace various functions performed today by personal computers. Findings of Fact ¶22. 168 According to Microsoft: “New computing form factors, including non-PC information devices, are gaining popularity and competing with PCs running Microsoft’s software products.” Microsoft 2001 10-K, p. 9. 169 The Court found that “while some consumers may decide to make do with one or more information appliances in place of an Intel-compatible PC system, the number of these consumers will, for the foreseeable future, remain small in comparison to the number of consumers deciding that they still need an Intel-compatible PC system.” Findings of Fact ¶23. 170 Direct Testimony of Michael Mace, Chief Competitive Officer of PalmSource, Inc., State of New York, et al. v. Microsoft Corporation, 98-1233, (hereafter, Mace Direct Testimony), ¶12.
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Because of improvements in handheld technology, handhelds are beginning to replace some personal computers ("PCs"). Handhelds will not replace all PCs in the near term -- the PC is still much better for creating large documents, such as presentations. But increasingly, handhelds are replacing some common uses of PCs, and it's commonplace for our customers to now carry a handheld rather than a notebook PC when on the road.171
190. Microsoft recognizes that Handheld Computing Devices afford some competition to personal computers running Windows.
Anything that is an operating system that provides an application development environment that is a computing device that is a threat to the PC in general, right? And hand-held devices I think are an alternative device to the PC, and as those become richer and stronger and more powerful and, you know, more general-purpose computing, then it is a competitive threat to the PC, that's not good, either.172
191. Handheld devices are often linked directly to PCs (such as the Palm HotSync feature) and to servers (perhaps with a wireless connection). Thus, while handheld devices are a potential substitute to the PC, they are also used in conjunction with PCs, which creates opportunities for Microsoft to use its monopoly power to influence the development of handheld devices.
Remedy Provision #4, Disclosure of APIs, Communications Interfaces, and Technical Information
192. Provision #4 applies to Handheld Computing Devices. As a result, the States’ Proposed Remedy would prevent Microsoft from disadvantaging rivals offering operating systems for Handheld Computing Devices. This provision will benefit consumers directly as handheld devices running non-Microsoft operating systems work better as a result of improved access to the information necessary to interoperate more effectively with Windows. Consumers also will benefit indirectly as Microsoft comes under somewhat greater pressure to improve Windows to fend off the added competition from improved Handheld Computing Devices.
171 Mace Direct Testimony ¶13. 172 Valentine Deposition, p. 137.
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193. Microsoft’s Proposed Remedy does not cover interoperability between handheld devices and personal computers at all. Under Microsoft’s Proposed Remedy, Microsoft could hide interfaces between Windows and Handheld Computing Devices and thus impair the performance of handheld devices running non-Microsoft operating systems.
X. Critique of Microsoft’s Proposed Remedy
194. Microsoft’s Proposed Remedy has numerous shortcomings that greatly undermine its effectiveness.173 Without intending to be comprehensive, I now discuss some of the more significant shortcomings of Microsoft’s Proposed Remedy.
A. Interoperability Disclosure in Microsoft’s Proposed Remedy is Flawed
195. Provisions III.D. (API Disclosure) and III.E (Protocol Licensing) in Microsoft’s Proposed Remedy are significantly weaker versions of the States’ Proposed Remedy Provision #4. Fundamentally, Microsoft’s Proposed Remedy differs from the States’ Proposed Remedy by failing to implement the parity principle articulated above with respect to non-Microsoft middleware and non-Windows operating systems running on servers.174 More specifically, we can identify a number of significant ways in which these provisions in Microsoft’s Proposed Remedy are weaker and less effective than Provision #4 in the States’ Proposed Remedy:
· Depth of Disclosure: Microsoft’s Proposed Remedy definitions of “APIs and related Documentation” and “Communications Protocols” are significantly narrower than are the corresponding definitions of “APIs, Technical Information, and Communications Interfaces” in the States’ Proposed Remedy. My understanding is that the depth of disclosure under Microsoft’s Proposed Remedy would not permit third parties to achieve
173 I have purposefully kept this portion of my testimony brief, as many of the drawbacks of Microsoft’s Proposed Remedy have been identified in the various Tunney Act Comments. In this respect, I note especially the comments of a number of distinguished economists: (1) Kenneth Arrow; (2) Rebecca Henderson; (3) Robert Litan, Roger Noll, and William Nordhaus; and (4) Joseph Stiglitz and Jason Furman. These comments track mine in many respects. 174 The Department of Justice appears to endorse the parity principle: “The intent of Section III.D is to ensure that future middleware threats will have the information about Windows they need in order not to be disadvantaged relative to Microsoft’s own middleware.” DOJ Response ¶283. However, in my opinion, Microsoft’s Proposed Remedy does not in fact implement this principle.
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comparable performance to Microsoft when interoperating with Windows.175 In part, this is because Microsoft’s Proposed Remedy does not adopt the definition of “Interoperability” used in the States’ Proposed Remedy.176
· Timing of Disclosure: Provision III.D in Microsoft’s Proposed Remedy calls upon Microsoft to disclose APIs associated with a new version of a Windows Operating System in a “Timely Manner.” According to Definition R, “Timely Manner” means “at the time Microsoft first releases a beta test version of a Windows Operating System Product that is made available via an MSDN subscription offering or of which 150,000 or more beta copies are distributed.” This provision does not even seek, much less achieve, parity between Microsoft’s middleware developers and third-party middleware developers. In contrast, the States’ Proposed Remedy requires disclosure of interface information no later than when such information is “used by Microsoft’s own Platform Software developers in software released by Microsoft in alpha, beta, release candidate, final or other form.”177
· Scope of Disclosure of APIs: Microsoft can control and greatly limit the scope of the required Disclosure of APIs under Microsoft’s Proposed Remedy. Section III.D requires disclosure of APIs “that are used by Microsoft Middleware to interoperate with a Windows Operating Systems Product.” Under Definition J, Microsoft Middleware is confined to “software code that Microsoft distributes separately from a Windows Operating System Product to update that Windows Operating Systems Product.” The net result of these definitions is that Microsoft has several means to avoid disclosing the interfaces between any functionality and Windows, including by refraining from distributing the software code enabling that functionality separately from Windows. For example, under Microsoft’s Proposed Remedy, Microsoft is under no obligation to disclose new interfaces between Windows Media Player 8 and Windows, unless and until Microsoft chooses to distribute a media player using those interfaces separately from Windows. Nor would Microsoft be required to disclose the interfaces between Office and Windows, because Office does not qualify as Microsoft Middleware.
Furthermore, Microsoft may well be able to avoid making certain critical disclosures, or at least delay such disclosures, by invoking the exceptions from Provision III.J.1 of Microsoft’s Proposed Remedy relating to anti-piracy, anti-virus, software licensing, digital rights management, encryption, or authentication systems. These exceptions cover some very important areas of software development. (This point applies to Communications Protocols as well as APIs.) Microsoft also can discourage or delay disclosure by imposing requirements on the parties seeking the interface information by
175 Again, the Justice Department accepts, but does not implement, the parity principle: “The United States views Non-Microsoft Middleware as competing for usage with Microsoft Middleware, and thus this provision seeks to ensure that Non-Microsoft Middleware will not be disadvantaged.” DOJ Response ¶277. 176 Under Definition q in the States’ Proposed Remedy, “Interoperate” means the ability of two products to effectively access, utilize and/or support the full features and functionality of one another.” 177 Under Definition pp in the States’ Proposed Remedy.
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invoking Provision III.J.2. The requirement that the third party “has a reasonable business need for the API, Documentation, or Communications Protocol for a planned or shipping product” and “meets reasonable, objective standards established by Microsoft for certifying the authenticity and viability of its business” is an open invitation for Microsoft to pry into the business affairs of third parties seeking to interoperate with Windows. While some such checks are reasonable, they should not be under Microsoft’s control.
· Scope of Disclosure of Communications Protocols: Provision III.E in Microsoft’s Proposed Remedy only applies to Communications Protocols that are “implemented in a Windows Operating System Product installed on a client computer” and “used to interoperate natively … with a Microsoft server operating system product.” The States’ Proposed Remedy Provision #4 includes Communications Interfaces between Personal Computers, Servers, and Handheld Computing Devices.
· Disclosure Regime vs. Licensing Regime: Provision III.E in Microsoft’s Proposed Remedy only requires that Microsoft “shall make available for use by third parties … on reasonable and non-discriminatory terms” certain Communications Protocols.178 Microsoft’s Proposed Remedy is silent on what constitutes “reasonable and non- discriminatory terms.”179 In contrast, the States’ Proposed Remedy is a true disclosure regime that does not permit Microsoft to charge royalties or impose other restrictive conditions on parties seeking access to this critical information necessary for efficient interoperation with Microsoft Platform Software. B. Stifling of Fledgling Middleware
196. Under Microsoft’s Proposed Remedy, Microsoft can engage in a whole host of tactics designed to impede the distribution and adoption of rival middleware, especially non- Microsoft middleware that is young and not yet matched by Microsoft. Three explicit provisions in Microsoft’s Proposed Remedy would make it relatively easy for Microsoft to impede the emergence of fledgling middleware, thereby undermining the effectiveness of the remedy.
178 For example, regarding Kerberos, Microsoft’s Proposed Remedy would require that Microsoft license some aspects of its proprietary extension to Kerberos on “reasonable” terms, whereas the States’ Proposed Remedy Provision #4 would require that Microsoft freely disclose its Kerberos implementation. 179 Professor Sibley recognizes that the issue of how Microsoft will decide what constitute “reasonable and non- discriminatory” charges for access to communications protocols is a genuine concern. Sibley Declaration, ¶67. The DOJ asserts that “Allowing Microsoft to charge a royalty is appropriate” because Microsoft historically has charged royalties or received other consideration for the licensing of Communications Protocols. DOJ Response, ¶338. This assertion does not alter my opinion that a disclosure regime is superior to a licensing regime for the purpose of restoring competition. In any event, if a licensing regime is to be used, at the very least Microsoft should be
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197. First, Microsoft’s Proposed Remedy allows Microsoft greatly to restrict OEMs from launching rival middleware or from displaying such middleware more prominently than Microsoft’s middleware. The key provision is III.C.3 from Microsoft’s Proposed Remedy, which states that Microsoft cannot restrict an OEM from launching automatically Non- Microsoft Middleware “if a Microsoft Middleware Product that provides similar functionality would otherwise be launched automatically.” Microsoft can thus restrict an OEM from launching rival middleware before such time as Microsoft offers similar functionality; recall in this regard the importance of the head start enjoyed by Netscape back in 1995 Furthermore, according to Definition K, any new functionality that Microsoft includes in Windows and does not distribute separately does not qualify as a “Microsoft Middleware Product.” And, even if distributed separately, Microsoft Middleware is not a “Microsoft Middleware Product” unless it is Trademarked and provides functionality that “is similar to the functionality provided by a Non-Microsoft Middleware Product.”
198. The net result of these tangled definitions and provisions is striking: Microsoft can easily restrict an OEM from automatically launching any threatening new middleware product (a) until such time as Microsoft is ready to offer comparable functionality; (b) by simply including that functionality in Windows and not distributing it separately, a strategy MS has followed so far with Windows Media Player for Windows XP; or (c) if that middleware product has not already achieved at least one million copies of distribution in the prior year.180 By any of these obvious devices, Microsoft can insure that there is no
required to explain now, not later, its methodology for determining “reasonable and non-discriminatory” royalties for the use of Communications Protocols. 180 Microsoft might defend this worrisome provision by pointing out that consumers value faster initial boot-up times for their computers. But this argument is directly contrary to one of the themes of this case: consumers are generally served better if OEMs – who operate in a highly competitive market and have strong incentives to differentiate themselves by offering machines with characteristics that users value – are permitted to choose which software to load on their machines and how to present that software to consumers.
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“Microsoft Middleware Product” with the relevant new functionality so that Provision III.C.3 does not apply.181
199. Second, if Microsoft does not (yet) offer Platform Software that competes with the rival middleware, then Microsoft can retaliate against any ISV or IHV for developing, using, distributing, promoting, or supporting the rival middleware. Provision III.F.1 prohibits such retaliation by Microsoft only if the rival middleware competes with Microsoft Platform Software (or runs on software that competes with Microsoft Platform Software). Truly innovative middleware that Microsoft simply does not yet offer is not afforded protection from such retaliation by Microsoft.182 Indeed, under Microsoft’s Proposed Remedy Microsoft can threaten to withdraw support from an ISV that develops new, cool software that Microsoft has not yet developed on its own.
200. Third, Microsoft can easily use Provision III.J from Microsoft’s Proposed Remedy to delay the provision of critical interface information to a small company attempting to build support for its innovative type of middleware, especially middleware dealing with authentication or digital rights management. For example, Microsoft could deny or at least delay disclosure to a small company developing innovative middleware (a) by simply asserting that such disclosure would compromise security, (b) by questioning whether the small business had a reasonable business need for a planned or shipping product, or (c) by stating that the small business failed to meet Microsoft’s own standards for viability. All of these tactics could prove effective at delaying upstart middleware providers from getting a head start on Microsoft. Small software houses will find it much harder to gain a first- mover advantage based on secrecy if required to meet these conditions, which could
181 As if this were not favorable enough to Microsoft, Provision III.C.3 goes on to give Microsoft the right to require that the user interface for the Non-Microsoft Middleware be “of similar size and shape to the user interface displayed by the corresponding Microsoft Middleware Product.” 182 Professor Sibley recognizes that ISVs designing innovative middleware are not protected from retaliation, but expresses hope that it will be in Microsoft’s own interests to support applications that do not compete against Microsoft’s own applications. Sibley Declaration, ¶45. This case makes it clear, however, that Microsoft’s general interests in supporting applications that run on Windows do not apply to middleware that threatens Windows’ monopoly position.
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involve significant disclosure of their business plans to Microsoft before they can receive the necessary interface information from Microsoft.
201. The conclusion is inescapable: under Microsoft’s Proposed Remedy, Microsoft would be given enormous latitude to enter into exclusionary and restrictive agreements with OEMs and ISVs to slow down innovative rivals until Microsoft could catch up and overwhelm those would-be rivals with its many other advantages. The States’ Proposed Remedy permits none of these entry-deterring, exclusionary tactics by Microsoft.
C. Interference with Rival Middleware
202. Microsoft’s Proposed Remedy contains no provision comparable to the States’ Remedy Provision #5. Therefore, under Microsoft’s Proposed Remedy Microsoft can, without good cause, interfere with the performance of rival middleware. Furthermore, Microsoft is under no obligation to inform the affected ISV that the performance of its middleware has been, or will be, degraded, even when Microsoft is fully aware of this fact, making it harder for the ISV to remedy the problem promptly on its own.183
D. Term of Microsoft’s Proposed Remedy
203. The current strength and likely durability of Microsoft’s monopoly argues for a relatively long period during which any Court Order facilitates entry into the market for operating systems.
204. Due to the critical role of expectations (by ISVs, IHVs, OEMs, and end users), and the fact that entry takes time and may well occur through a multi-stage process (such as cross- platform middleware followed by new operating systems, or an increased role for non- Windows server operating systems followed by the growth of non-Windows clients), the decree should last long enough to assure industry participants that Microsoft will not be able to again stifle entry (due to the expiration of the decree) for years to come after entry is attempted. For example, applications writers are less likely to port their applications to
183 Such self-help by an ISV is made more difficult since the ISV cannot study, interrogate, and interact with Microsoft’s source code, as is provided in the States’ Proposed Remedy Provision #4c.
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a new operating system if Microsoft will be able, within a year or three, to enter into agreements with OEMs and ISVs discouraging them from distributing or supporting cross- platform middleware important to that operating system. Five years is too short a time to give the assurances necessary for entry to become significantly less risky, especially given that some of Microsoft’s disclosure duties only apply after an initial delay and especially given that Microsoft can easily engage in delaying tactics by taking advantage of the flawed enforcement provisions in Microsoft’s Proposed Remedy.
205. The remedial order also must last for a number of years to be effective at facilitating entry, given that serious threats to the monopoly simply do not arise very often. If a major threat arises every five to ten years, a five-year decree with initial lags and weak enforcement is very unlikely to restore competition in any meaningful sense (even if the exceptions and carve-outs were cured).
E. Enforceability of Microsoft’s Proposed Remedy
206. An overriding problem with Microsoft’s Proposed Remedy is its lack of effective enforcement.184 For example, under Microsoft’s Proposed Remedy Microsoft could easily choose to limit its disclosures to Real Networks, Sun, IBM, or third-parties generally under the security carve-out in Provision III.J. Even assuming that third-parties were able to learn that they were missing important information that was used by Microsoft’s own developers of middleware or server operating systems, any effort to achieve parity with Microsoft’s internal developers would face delays and uncertainty. Even if a challenge to Microsoft’s interpretation reached the Court, the process of enforcing Microsoft’s Proposed Remedy would be greatly impeded by the inability of the Court to see evidence uncovered by the Technical Committee regarding Microsoft’s failure to comply.185 And, even if Microsoft is proven to engage in a pattern of willful and systematic violations, the
184 On this point, I am in agreement with Professor Lawrence Lessig, who provided testimony on the Microsoft Settlement before the Senate Committee on the Judiciary, 12 December 2001, http://lessig.org/content/testimony/msft/msft.pdf visited 24 January 2002. I also take note in this respect of the Direct Testimony of John Shenefield, State of New York, et al. v. Microsoft Corporation, 98-1233.
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result explicitly identified in Microsoft’s Proposed Remedy is merely a two-year extension of Microsoft’s Proposed Remedy itself.186
207. Rapid and effective enforcement is especially important for middleware threats, which gain strength when they are “cool new things” that Microsoft does not yet offer. Faced with a cool new type of middleware that threatens to erode the applications barrier to entry, Microsoft will have strong incentives to impede its distribution and adoption. Even a six- month delay, during which time Microsoft could bring its considerable resources and power to bear, could make all the difference. Between the opportunities for exclusion explicitly granted to Microsoft under Microsoft’s Proposed Remedy and the opportunity for delay inherent in Microsoft’s Proposed Remedy’s flawed enforcement mechanisms, fledgling middleware will remain very much at risk under Microsoft’s Proposed Remedy.
I declare under penalty of perjury that the foregoing is true and correct. Executed on 5 April 2002 in Oakland, California.
Carl Shapiro
185 “No work product, findings or recommendations by the TC may be admitted in any enforcement proceeding before the court for any purpose, and no member of the TC shall testify by deposition, in court or before any other tribunal regarding any matter related to this Final Judgment.” Microsoft’s Proposed Remedy, Provision IV(D)4(d). 186 Microsoft’s Proposed Remedy, Provision V(B).
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