I. Background

1. On May 18, 1998, plaintiffs the United States and twenty States and the District of Columbia filed actions against defendant Microsoft Corporation, alleging violations of the Sherman Act, 15 U.S.C. §§ 1 & 2, and the antitrust and consumer protection laws of the respective plaintiff States. The actions were consolidated, and expedited discovery ensued. Trial began on October 18, 1998, and concluded on June 26, 1999.

2. Defendant Microsoft Corporation ("Microsoft") is a corporation organized under the laws of the State of Washington with its headquarters in Redmond, Washington.

1. Answer ¶ 41.

3. Microsoft's principal business is the licensing of computer software, which it conducts on a world-wide basis. Microsoft licenses computer software throughout the United States and elsewhere and delivers operating systems to computer manufacturers and others across states lines and international borders, and its business has had a substantial effect on interstate commerce.

1. Answer ¶ 5.

4. Microsoft, among other things, licenses operating system and application software for personal computers. The personal computer industry, which has seen tremendous growth over the last decade, is an important, robust sector of the United States economy. Microsoft software dominates critical sectors of that industry.

1. See infra Part II (Microsoft possess monopoly power in operating systems).

2. Tevanian Dir. ¶¶ 6, 14, 22, 35 (Microsoft is also dominant in a number of applications, including office productivity suites).

5. A Personal Computer ("PC") is a computer designed for use by one person at a time.

1. Microsoft Press Computer Dictionary, at 361 (3d ed. 1997) (GX 1050).

5.1 PCs (which include both desktop and laptop models), can be distinguished from more powerful, more expensive computers known as Servers, which are designed to provide services and functionality to multiple users, either in local area network or over the Internet.

1. Warren-Boulton Dir. ¶ 20.

2. Microsoft Press Computer Dictionary, at 430 (3d ed. 1997) (GX 1050).

5.2 A typical PC system consists of a number of components, including a microprocessor, dynamic memory, a hard disk, a keyboard, a monitor, and an operating system.

1. Warren-Boulton Dir. ¶ 20.

6. PCs are built primarily by firms known as Original Equipment Manufacturers ("OEMs"). OEMs typically purchase from different third-party vendors and preinstall various hardware and software components for their systems, including the operating system and application software.

1. Warren-Boulton Dir. ¶ 23.

7. OEMs develop and sell their PCs to consumers in a competitive market and design their PCs and their hardware and software features to respond to consumer demand.

1. See infra Part II.A; ¶ 15.1.1.

2. Warren-Boulton Dir. ¶ 24.

8. An Operating System is the "central nervous system" of the PC.

1. Barksdale Dir. ¶ 69.

8.1. An operating system performs two basic functions. First, the operating system allows the various components of the PC to communicate and function with each other; it provides "the software that controls the allocation and usage of hardware resources such as memory, central processing unit time, disk space, and peripheral devices."

1. Microsoft Press Computer Dictionary, at 341 (3d ed. 1997).

2. Farber Dir. ¶ 11 (the operating system "controls the execution of programs on computer systems and may provide low-level services such as resource allocation, scheduling and input-output control in a form which is sufficiently simple and general so that these services are broadly useful to software developers").

8.2. Second, an operating system provides a "platform" by exposing Applications Programming Interfaces ("APIs") that applications use to "call upon" the operating system's underlying software routines in order to perform various functions, such as displaying a character on a monitor.

1. Schmalensee Dir. ¶¶ 93-94.

9. An Application is a software program "used to perform specific user-oriented tasks".

1. Farber Dir. ¶ 11.

9.1. Applications typically "run on top" of the operating system and draw upon the services that the operating system's "platform" provides.

1. Warren-Boulton Dir. ¶ 22

9.2. The term Platform is used in the software industry to describe software that "provides features or services that can be used by software applications."

1. Schmalensee Dir. ¶ 93.

10. Microsoft produces a number of PC operating systems, including MS-DOS and successive versions of its Windows operating system, the most recent version of which is Windows 98. Since at least the mid-1990s, Microsoft has dominated the market for PC operating systems. As will be explained, Microsoft's market share has remained well in excess of 90% during that period.

1. See infra Part II.B.2; ¶ 21.

11. Applications are produced by numerous firms, including firms like Microsoft that also produce operating systems and others, known as Independent Software Vendors ("ISVs"). Microsoft's application software is dominant in several key categories, most notably in office productivity suites.

1. See infra Part V.F.1.b.(1).; ¶ 287.2.1.

12. All the components of a PC system -- the microprocessor and other hardware, operating system, and applications software -- must be compatible with each other. For instance, software, including the operating system and applications, must be designed to be compatible with the PC's microprocessor, and application software must be compatible with the operating system.

12.1. There are different types of PC systems.

12.1.1. An Intel-compatible PC is one designed to function with Intel's x86/Pentium families of microprocessors or compatible microprocessors manufactured by Intel or other firms. Microsoft's Windows operating system, and different types of UNIX operating systems, are examples of operating systems that run on Intel-compatible PCs.

1. Fisher Dir. ¶ 62.

12.1.2. There are other types of PCs that use microprocessors that are not Intel-compatible, such as the Apple Macintosh computer system. Operating systems designed to run on Intel-compatible PCs, known as Intel-compatible PC operating systems, will not function on an incompatible PC like the Macintosh; and operating systems designed for an incompatible PC like the Macintosh will not function on an Intel-compatible PC.

1. Gosling Dir. ¶ 7.

12.2. Applications programs are typically written to run on a particular operating system and cannot run on other operating systems unless the developer goes to the time and expense to "port" the program to the other operating system. For example, the version of Microsoft's popular Office productivity suite designed to run on Microsoft's Windows operating system cannot run on the Apple Macintosh or even on other Intel-compatible operating systems.

1. See infra II.B.3.b.(1); ¶ 26.1.2.

13. One of the most important applications today is an Internet Web browser ("browser").

13.1. A browser is a "client application that enables a user to view HTML documents on the World Wide Web, another network, or the users's computer; follow the hyperlinks among them; and transfer files." A browser enables "the user to examine, display, scan, and navigate via the Internet" information located on the "Web."

1. Microsoft Press Computer Dictionary, at 505 (3d ed. 1997) (GX 1050).

2. Farber Dir. ¶ 11.

13.1.1. The Internet is a global network that links many millions of PCs and a smaller number of servers together. Begun in the early 1960s, the Internet exploded in popularity with the emergence of the World Wide Web ("Web") in the mid-1990s.

1. Maritz Dir. ¶ 50.

13.1.2. "The Internet is a global network of computers constructed by patching together many local area networks that use widely varying communication media such as telephone lines, dedicated data cables, and wireless links." The Internet links PCs by means of servers, which run specialized operating systems and applications designed for servicing a network environment.

1. Felten Dir. ¶ 11.

13.1.3. In simplest terms, servers host and provide access to the Internet's content. In the case of the Web, this content consists principally of Web Pages, which are created by Internet Content Providers ("ICPs"). There are millions of web pages located on the thousands of servers that comprise the Internet.

1. See infra Part V.E.1.a; ¶ 255.

13.1.4. Web pages can be accessed over those thousands of servers from millions of PCs because the Internet uses a number of widely-accepted standards. For instance, web pages are typically written in Hypertext Markup Language (HTML) and are transferred between servers and PCs using a common protocol known as Hypertext Transfer Protocol (HTTP).

1. Felten Dir. ¶ 13. (The Web is "characterized by a set of standard data formats, including HyperText Markup Language ('HTML'), and a set of standard communication protocols, such as HyperText Transfer Protocol ('HTTP'), that together allow computers to share multimedia documents that may contain links to other such documents.").

13.1.5. Consumers typically access the Internet through the services of an Internet Access Provider, which can be an Internet Service Provider ("ISP"), such as Earthlink or AT&T Worldnet, or an On-Line Service ("OLS"), such as America Online or Prodigy. Internet access providers are commercial firms that connect users to the network of servers that comprise the Internet.

1. See infra V.D.1; ¶ 213.

13.2. Although graphical web browsers have existed since 1993, the first widely-popular commercial graphical browser was developed and brought to market by Netscape Communications in late 1994. Microsoft introduced its browser, Internet Explorer, in 1995.

1. See infra Part III.B.1; ¶ 53.1.1; Part V.B.2.c; ¶ 126.

II. Microsoft Possesses Monopoly Power Over Operating Systems

14. Microsoft possesses monopoly power over operating systems for Intel-compatible personal computers.

14.1. Microsoft's monopoly power in Intel-compatible personal computers is demonstrated by its customers' lack of any commercially viable alternative to Windows and certain Microsoft conduct that makes sense only if there is a monopoly to protect. See infra Part II.A; ¶¶ 15-16.

14.2. A traditional structural analysis, which shows that Microsoft possesses a dominant market share protected by immense barriers to entry, confirms that Microsoft has monopoly power. See infra Part II.B; ¶¶ 17-32.

14.3. Microsoft's monopoly power is also evidenced by its ability to control price. See infra Part II.C; ¶¶ 33-38.

14.4. Dean Schmalensee's analysis that Microsoft lacks monopoly power is contrary to the evidence, inconsistent with his prior testimony and writings, and otherwise unreliable. See infra Part II.D; ¶¶ 39-50.

A. Microsoft's monopoly power is established by direct evidence of its existence and exercise

15. That Microsoft has monopoly power in operating systems is directly evidenced by the "sustained absence of realistic commercial alternatives" to Microsoft's operating system product.

1. Fisher, 6/1/99am, at 11:17-18.

15.1. Microsoft's principal customers, computer manufacturers (OEMs), lack any commercially viable alternative to Windows.

15.1.1. OEMs are the most important direct customers of operating systems. Because competition among OEMs is intense, they respond to consumer demand. OEMs thus not only are important customers in their own right, but also are surrogates for determining the commercial alternatives reasonably available to consumers.

1. Dr. Warren-Boulton testified that the "great majority of operating systems installed on PCs are installed on new machines by OEMs." Warren-Boulton Dir. ¶ 23; id. at ¶ 23 n.7 (noting that in 1997, 87.6% of all copies of Windows 95 were installed by OEMs).

2. Professor Fisher testified: "OEMs's are, in some sense, the representative of the consumer for certain purposes. They are in competition with each other. They gain if they deliver what end users actually want. They wouldn't care about the restrictions on them if they don't think that it mattered in their dealings with consumers." Fisher, 6/2/99am, at 22:1-6.

3. Dean Schmalensee conceded that "OEMs respond to consumer demand." Schmalensee, 1/25/99am, at 15:16 (sealed session).

4. See also Rose Dir. ¶ 17 ("If there were sufficient customer demand for a different operating systems for personal computers, Compaq would consider licensing that operating system."); Von Holle Dep., 1/13/99, at 299:15 - 300:1 ("if viable alternative emerged" to Windows, Gateway "would evaluate" them because Gateway likes "to make sure that" its "customers are offered a . . . choice of products that become popular in the market place"); Ransom Dep. (played 12/16/98pm), at 71:20 - 72:4 ("If there's a product with a competitive advantage or a price advantage, frankly, we would consider it. But it has not been presented to us.").

15.1.2. OEMs uniformly testify that they lack any commercially viable alternative to Windows:

1. The testimony of Garry Norris, former Director of Strategy and Software at IBM Personal Computer Company, vividly illustrates the absence of commercially viable alternatives to Windows. Norris testified that, "without Windows 95, you couldn't be in the P.C. business." Norris, 6/7/99am, at 66:18-20. Indeed, Norris explained, IBM concluded in the summer of 1995 that, if it did not obtain a Windows 95 license, it would "lose . . . anywhere from 30 to 90 percent" of its sales volume, and "the IBM P.C. company would be out of business" in "three to twelve months." Norris, 6/7/99am, at 65:16 - 67:18.

2. The testimony of Microsoft's own OEM witness, Compaq's John Rose, illustrates OEMs' dependence on Windows. Compaq preinstalls Microsoft operating systems on over 90% of its PCs, including 100% of its popular Presario line, Rose, 2/17/99pm, at 12:25 - 15:3; Rose Dir. ¶ 17 (since 1993, Compaq has "not consistently loaded any alternatives to Windows on personal computers it markets to consumers."), because Compaq has no commercially viable alternative to Windows. Rose, 2/17/99pm, at 8:16-20.

3. Gateway's Penny Nash testified that for Gateway to stop licensing Microsoft operating systems would "be suicide." Fisher Dir. ¶ 63 (quoting Nash Dep. 11/18/97, at 5-6); see also Von Holle Dep., 1/13/99, at 298:2-23, GX 357 (sealed); Fisher Dir. ¶ 63 (quoting Brown Dep., 3/5/98, at 10-11).

4. Other OEMs gave similar testimony: Mal Ransom of Packard Bell, a leading OEM, testified that Packard Bell pre-installs Windows on 100% of its PCs and has done so for several years. Ransom Dep. (played 12/16/98pm), at 68:14 - 69:23. Packard Bell loads Windows because it is "the only viable choice." Ransom Dep. (played 12/16/98pm), at 69:5. Frank Santos testified that Hewlett-Packard has not considered any other operating system for its consumer line of PCs "because there isn't any out there." Fisher Dir. ¶ 63 (quoting Santos Dep., 4/13/98, at 7-8).

15.1.3. All three economic experts in this case agreed that there is no commercially viable alternative to Windows to which a significant OEM can switch in response to a substantial price increase or its equivalent by Microsoft.

1. Professor Fisher testified that Microsoft's power is shown by evidence that "Microsoft's customers do not believe that they have serious commercial alternatives to Windows." Fisher, 6/1/99am, at 11:9-19; see also Fisher Dir. ¶ 63.

2. Dean Schmalensee conceded that there are no reasonable substitutes for Windows to which a major OEM can switch and that Microsoft can raise the short-term price of Windows. Schmalensee, 1/20/99am, at 33:3-8; see also 1/13/99pm, at 68:17 - 69:2.

3. Dr. Warren-Boulton testified that OEMs consider Windows "commercially necessary" and that "if confronted with a 10% increase in their Windows license, they would not switch to operating system products for other hardware platforms." Warren-Boulton Dir. ¶ 39 (summarizing OEM testimony); Warren-Boulton, 11/23/98pm, at 70:9-12 (testifying that it is "commercially necessary to be able to offer Microsoft operating system . . . to end users").

15.1.4. Microsoft knows that OEMs have no choice but to load Windows.

15.1.4.1. Microsoft told OEMs that they lack any alternative to Windows and, indeed, that Microsoft was "the only game in town."

1. Norris of IBM testified that Microsoft executives repeatedly sought to use the fact that IBM had no "commercially viable alternative" to Windows (Norris, 6/7/99am, at 66:18-20), and feared losing access to Windows, to pressure IBM into dropping products that competed with Microsoft. See infra Part V.C.2.b.(3); ¶¶ 209-212. Indeed, Norris testified, the Microsoft executive in charge of its relationship with the IBM PC company bluntly told IBM during negotiations, "'where else are you going to go? This is the only game in town.'" Norris, 6/7/99am, at 66:21 - 67:6.

15.1.4.2. OEMs told Microsoft that they lack any viable alternative to Windows.

1. John Romano of Hewlett Packard wrote to Microsoft, when it imposed costly screen restrictions upon Hewlett Packard, that "if we had another supplier, I guarantee you would not be our supplier of choice." GX 309.

2. Gateway urged Microsoft - redacted - GX 357 (sealed).

15.1.4.3. Other operating system vendors recognize that they do not provide a viable alternative to Windows.

1. John Soyring of IBM testified: "As a result of the applications and device support for Windows, in my view, suppliers of PCs have no commercially viable choice but to license Windows and to offering on the vast majority of PCs they ship." Soyring Dir. ¶ 11.

2. Avadis Tevanian of Apple computer testified: "For the foreseeable future, Microsoft will maintain a market share in excess of 90 percent of the desktop operating system market, a dominance that will enable it to continue to effectively control both price and technologies." Tevanian Dir. ¶ 14.

3. The CEO of Red Hat Linux also insists that Red Hat is not a viable competitor to Microsoft. In a Washington Post article he said: "'It just tells you how desperate Microsoft is for a competitor that they're holding up a software box produced by 100 guys in the hills of North Carolina.'" He also said: "'We are absolutely not a viable competitor at this time. We have every intention of being one. But how long will it take? Realistically, it will be twenty years.'" GX 1568.

15.1.5. Microsoft set the Windows royalty recognizing that OEMs have no viable alternative to Windows.

1. Joachim Kempin, Microsoft's Vice President for OEM sales, testified that the prices set by other operating system vendors were not a consideration in setting the Windows 98 royalty. Kempin, 2/25/99pm, at 97:24 - 98:23. To the contrary, Microsoft set the royalty for Windows 98 by "'compar[ing] it with Windows 95.'" Id. at 98:6 (quoting Kempin's deposition, 21:20 - 22:6); see also Kempin, 2/25/99pm, at 98:15-23 (quoting Kempin's deposition, 22:10-22:6) (Kempin also did not consider "'competition more generally'").

2. Kempin testified that he did not consider the prices set by other operating system vendors because, "with Windows 95 or 98, when it comes to value propositions, it just doesn't come close to anything else. Meaning I believe competitors are basically selling inferior-type products." Competitors products are "inferior," Kempin explained, because "the number of applications, peripheral devices, support on that platform, basically, is so huge that the benefits of buying into that platform is huge." Kempin, 2/25/99pm, at 98:24 - 99:5 (quoting Kempin's deposition, 22:19-24).

3. Kempin, in contemplating "OEM pricing thoughts," wrote that although conceivably, "[o]ur high prices could get a single OEM . . . or a coalition to fund a competing effort," he considers it "doubtful." He concluded: "Could they convince customer to change their computing platform is the real questions. [sic]. The existing investments in training, infrastructure and applications in windows computing are huge and will create a lot of inertia." GX 365.

15.1.6. OEMs do not believe alternatives to Windows are likely to emerge in the next several years such that Microsoft is constrained from being able to raise price or reduce quality today.

1. Garry Norris testified that without a Windows 95 license, "the IBM P.C. company would be out of business" in "three to twelve months." Norris, 6/7/99am, at 65:16 - 67:18.

2. Professor Fisher testified that there is no reason to "believe that OEMs would substitute other operating systems for Microsoft's Windows operating system in favor of anything that can now be seen on the horizon"; that is, in "the next few years." Fisher, 1/6/99am, at 69:23 - 70:1.

15.2. Both OEMs and applications developers (ISVs) recognize that they are dependent on Microsoft and fear that Microsoft will use its monopoly power to harm them if they favor Microsoft's rivals.

1. When Microsoft released a Java development kit that reflected Microsoft's "breaking away from pure Java," Paul White of Symantec, an ISV, wrote that "it's better to say nothing than risk the blast from MS." GX 2078.

2. Barry Schuler of AOL testified that, because its applications must run on Windows, "there's an absolute dependency on what the future direction of that operating system." DX 2810.

3. William Harris testified: "Intuit's dependence on the Windows operating system creates additional dependence on the supplier of the operating system, Microsoft. We depend on Microsoft for the information, specifications, training, development assistance and development tools necessary to develop our products in an effective and timely manner." Harris Dir. ¶ 28.

4. Hewlett Packard's John Romano testified that - redacted - DX 2582A (sealed).

5. A Compaq presentation entitled "Microsoft Meeting Preparation -- Portable and Software Marketing PC Division" dated January 13, 1993, states: - redacted - The presentation continued: "Judgment: How retaliatory would they get?" and lists the possibilities as follows: "Pricing advantage -- Revenue from updates -- Access to early SDKs -- Field sales activities (Microsoft has ~900 field sales people) -- Support and training -- Inclusion in advertising -- Tone toward Compaq in press and with customers -- Selection and elevation of other OEMs as leaders -- Make integration relations even more strained than they are today -- Access to source code, modification ownership -- Microsoft directional information and plans -- Customers." GX 433 (sealed).

16. Microsoft repeatedly took actions that make sense only because it has monopoly power to protect.

1. Fisher, 6/1/99am, at 12:14-17.

16.1. Microsoft's expensive effort to gain browser usage share can be explained only as an effort to protect Microsoft's position in operating system and thus demonstrates substantial and durable market power.

1. As detailed below, Microsoft engaged in a very costly course of conduct designed to gain a substantial share of the market for Internet browsers. See infra Part V.G.

2. This conduct evidences monopoly power because, as will be explained (see infra Part V.G.), Microsoft could not have expected to recoup its hundreds of millions of dollars in browser-related costs except by thwarting threats to its position in operating systems and thereby increasing or prolonging its monopoly profits in operating systems.

16.2. Microsoft's monopoly power is also evidenced by its ability, for several years, to force other firms to cooperate in Microsoft's efforts to exclude threats to its dominant position in operating systems.

16.2.1. This conduct includes, among other things:

1. Forcing OEMs to accept Microsoft's Internet Explorer browser as a condition of licensing Microsoft's Windows operating system. See infra Part V.B.

2. Forcing OEMs to agree to costly restrictions on their ability to customize their PC systems; OEMs agreed to those restrictions, in the words of one executive, because they lack any "choice of another supplier." GX 309. See infra Part V.C.1.

3. Threatening to retaliate against OEMs that favored products that threaten Microsoft's operating system monopoly. See infra Part V.C.2.

4. Threatening to retaliate against Intel if Intel developed platform-level software or favored Netscape or Sun in various ways. See infra Part VI.

16.2.2. This conduct is part of a predatory course of conduct that makes no sense unless Microsoft expected it to lead to monopoly recoupment in the operating system market. All these acts reduced the value of Windows to end users. Microsoft would not rationally have reduced the value of Windows unless it anticipated that doing so would create or increase monopoly power and thereby enable it to earn greater monopoly profits.

1. Professor Fisher testified: "Microsoft has, I think, plainly taken actions which only make sense if they believe that they have a monopoly to protect. Those are, of course, the actions which are in large part the subject of this case." Fisher, 6/1/99am, at 12:14-17.

2. Dean Schmalensee conceded that, if a firm can impose a tie-in "that implies the firm has some power over price." Schmalensee, 1/19/99am, at 40:12-22. Dean Schmalensee also previously wrote that: "Evidence that competitors have conspired to fix prices or divide markets is treated as very good evidence that these competitors have market power" (GX 1514), and that such evidence "perhaps" could indicate "monopoly power." Schmalensee, 1/14/99pm, at 46:14 - 47:6.

3. Dr. Warren-Boulton testified that "to the extent there is evidence . . . which shows that Microsoft has . . . used its position in the operating system market to exclude competitors from either that market or from markets that might facilitate the entry of a firm into that market, then that's direct evidence of the ability to exclude" and "that by itself is direct evidence of the existence of monopoly power." Warren-Boulton, 12/1/98am, at 32:3-20.

B. Microsoft's monopoly power is also demonstrated by a structural analysis

17. Microsoft's monopoly power is confirmed by a traditional structural analysis, which shows that Microsoft possesses a dominant share of a well-defined market protected by immense barriers to entry.

1. Professor Fisher testified that "Microsoft's high market share is an indication that it possesses monopoly power. The analysis of barriers to entry confirms that monopoly power exists." Fisher Dir. ¶ 65.

2. Dr. Warren-Boulton likewise testified that Microsoft "possesses monopoly power" because it "for several years has enjoyed, and is projected for several years to retain, a market share in excess of 90%," and this share "is protected by substantial barriers to entry." Warren-Boulton Dir. ¶ 7.

17.1. The standard way to determine monopoly power is (1) to ascertain whether a firm possesses a very large share of a properly defined market and then (2) to determine whether substantial barriers to entry protect that share by impeding the ability of rivals to enter or to expand.

1. Professor Fisher testified that "the ordinary way you proceed in an antitrust case is to define a market and look at market shares" and then determine whether there are substantial barriers to entry. Fisher, 6/1/99am, at 12:2-13; see also Fisher, 6/1/99am, at 6:1-3 (explaining that this is the "standard way" to determine monopoly power); Fisher Dir. ¶¶ 32-39 (testifying that "monopoly power is conventionally addressed by defining 'the relevant market' and assessing shares in the market share"); Warren-Boulton Dir. ¶¶ 18, 42-44.

2. Dean Schmalensee conceded that: "'The traditional and most common approach in an instance where one can define a relevant market in the antitrust sense'" is "'to first look at shares of that arket and then if shares are large, to move on to consider conditions of entry.'" Schmalensee, 1/13/99pm, at 24:9-25 (quoting GX 1526 (Schmalensee's testimony in Bristol)).

17.2. A large share of a well-defined market protected by substantial entry barriers warrants an inference of monopoly power.

1. Professor Fisher testified: "A large share of a properly defined market" is indicative of the ability to exercise substantial market power, and that where "there are significant barriers to entry, monopoly power can be present." Fisher Dir. ¶¶ 32-36, 39.

2. Dean Schmalensee conceded that, if Microsoft's Windows operating system enjoys the protection of substantial barriers to entry, then he could not conclude that Microsoft lacks monopoly power. Schmalensee, 1/14/99am, at 8:22 - 9:9.

3. Dr. Warren-Boulton testified "that market share is an indicator of monopoly power. It is one of several indicators of monopoly power." Warren-Boulton, 11/19/98am, at 56:22-23.

1. Operating systems for Intel-compatible PCs comprise a relevant market

18. The purpose of defining markets is to determine whether substantial and durable market power can be exercised; accordingly, a properly defined relevant market should include the set of products over which a single firm, if it controlled production of those products, could exercise substantial market power.

1. Dean Schmalensee testified that a relevant market consists of the "smallest aggregate that could be profitably monopolized." Schmalensee, 6/24/99pm, at 58:15-23.

2. Dr. Warren-Boulton testified that a properly delineated antitrust market includes the set of products over which a single firm, if it controlled production of those products, could exercise substantial market power. Warren-Boulton Dir. ¶¶ 26-32.

3. Professor Fisher testified that the purpose of defining a market is to determine the "set of things that could constrain the power of the alleged monopolist." Fisher, 6/1/99am, at 9:17-24.

18.1. The relevant market thus should include only reasonable substitutes that in a reasonable period of time could constrain -- and thus defeat -- an attempt to exercise substantial market power.

1. Professor Fisher testified that a relevant market "should include all those products that reasonably serve to constrain the behavior of the alleged monopolist." Fisher Dir. ¶ 32; Fisher, 6/1/99am, at 9:18-21 (stating that "in defining a market and then in examining market power, you typically look at . . . things that could constrain the power of the alleged monopolist.").

2. Dr. Warren-Boulton also testified that a relevant market should include substitute products that could prevent the exercise of monopoly power. Warren-Boulton Dir. ¶¶ 27-28. He further testified that it is "important not to define the market too broadly" by including products that are not reasonable substitutes, "for that might understate the power of the firm whose conduct is being examined." Warren-Boulton Dir. ¶ 28.

18.2. These include:

18.2.1. Demand responses. The relevant market should include products to which consumers could switch, without substantial difficulty, in response to an attempt by firms in the candidate market to exercise substantial market power.

1. Professor Fisher testified that, in defining a market, one must look at "demand substitutability," which "concerns the question of what are the products or the firms to which the alleged monopolist's customers could readily turn in the event of an increase in price." Fisher, 6/2/99am, at 69:22 - 70:1; Fisher, 6/1/99am, at 9:21-24 ("demand substitutability" refers to "the set of products to which customers can turn in the event of an attempt to earn supernormal profits" by the alleged monopolist); Fisher Dir. ¶¶ 32-33 (same).

18.2.2. Supply responses. The relevant market should also include firms that do not presently produce the product in question or a reasonable substitute for it but which, without substantial difficulty, could do so in response to an attempt by firms in the candidate market to exercise substantial market power.

1. Professor Fisher testified that, in defining a market, one must look at "supply substitutibility," which "refers to the ability of firms who do not now produce demand substitutable products, easily to produce demand substitutable products." Fisher, 6/2/99am, at 70:9-11; Fisher, 6/1/99am, at 10:8-13 (same); Fisher Dir. ¶¶ 32, 34 (same).

19. Operating systems for Intel-compatible PCs comprise a relevant market because they lack good substitutes; that is, there are no substitutes that in a reasonable period of time could defeat -- i.e., render unprofitable -- an attempt by a monopolist over such operating systems from exercising substantial market power.

19.1. Other "platform" products, such as Internet browsers and Java, are not good substitutes for operating systems because they cannot function without an operating system.

1. Jim Barksdale testified: "I am not suggesting that the browser is a replacement for the operating system; Navigator still needs an operating system, such as Windows 98, running underneath it, but Navigator can and does serve as a platform for certain network-centric applications." Barksdale Dir. ¶ 82; Barksdale, 10/20/98pm, at 72-74 (Barksdale testified that while Netscape could serve as a substitute for certain platform chacteristics, he does not believe that Netscape could seriously substitute for all platform characteristics).

2. James Clark, founder and former Chairman of Netscape, testified that: "Netscape is not an operating system. It's not even a networked operating system. . . . Netscape was developing a platform. A platform is not the same as an operating system. . . . The idea was to make it independent of the Microsoft operating system, but no attempt whatsoever to displace the Microsoft operating system." Clark Dep. (7/22/98) at 44:25 - 46:16 (DX 2562). Clark explained Netscape intended to provide a software layer that would run on top of otherwise incompatible operating systems and enable them to use network or web based applications, but that "layer still relied on there being some kind of machine and some kind of operating system underneath." Clark Dep. (7/22/98) at 48:5 - 49:4 (DX 2562). Clark categorically denied that Netscape intended for the browser to replace the operating systems that it relied upon. Clark Dep. (7/22/98) at 48:5 - 50:4 (DX 2562).

3. Netscape's Richard Schell similarly testified that Netscape intended to be "operating system agnostics," (i.e., work well with all operating systems), but not to replace operating systems. When Microsoft counsel followed up by asking whether he regarded "the notion of Navigator replacing Windows [as] a slightly ridiculous assertion," Schell explained: "There are 14 million lines of code in Windows 9X. They must do something. For us to have thought that we would replace all of those would have been a stretch of the imagination. We thought we could provide functionality that enhanced not only Windows but Unix and the Macintosh and . . . for some developers and some users, that would become their primary environment, but we would never think that that meant we were replacing Windows." Schell Dep. (9/15/98), at 103:17 - 104:22 (DX 2587).

4. Dean Schmalensee testified that he is not aware of any "software that only browses and does not do anything else and requires no other software to run." Schmalensee, 6/23/99am, at 53:2-10; id. at 57:14-17 (same for other "web-based applications").

5. Professor Fisher testified: "In the present case, the growth of the Netscape browser or the widespread use of original Java might have perfectly well have broken down the applications barrier to entry and allowed other operating systems to compete. But it would be the other operating systems that were then in the market, not . . . either Netscape, the browser market, or Sun because of Java." Fisher, 6/1/99am, at 18:5-11.

19.2. Intel-compatible server operating systems are not good substitutes for Intel-based PC operating systems because they lack the features and breadth of applications users demand and are prohibitively more expensive.

1. Sean Sanders of Novell testified that server operating systems do not compete with Windows. Sanders Dep., 1/13/99pm, at 184:13 - 185:1. He further explained that to convert Novell's server operating systems into desktop operating system would require starting "all over again" and building the operating system "from the ground up." "It is not easily transferable to" the desktop "role at all." DX 2584.

2. Sun's Brian Croll testified that Sun's Solaris operating system does not compete with Windows. Croll Dep. (played 12/15/98pm), at 56:23 - 57:13.

3. Ron Rassmussen, of Santa Cruz Operating Systems, testified: "People are not purchasing our operating system as a desktop as much as they did at one time" and that it is "more effective for our strategy to move into a purely server role." DX 2581 (testifying that using SCO's operating system for desktop use is prohibitively expensive for users).

4. Paul Maritz agreed "that the applications you find on a server are different from those you find on an Intel PC acting as a desktop." Maritz, 1/27/99pm, at 28:18 - 29:1.

5. Dr. Warren-Boulton testified that "Intel-compatible operating system products that are designed . . . to operate 'servers' are not viable substitutes for a desktop operating systems" because they "are generally more expensive yet do not provide the features consumers demand when they purchase PC operating systems." Warren-Boulton Dir. ¶ 40.

19.3. Nor do other devices, which run other (non-Intel-compatible) operating systems, constrain the exercise of substantial market power over Intel-compatible PC operating systems.

19.3.1. A PC operating system accounts for only a very small percentage of the cost of a PC system; therefore, even a substantial increase in the price of a PC operating system above competitive levels will result in only a trivial increase in the cost of a PC computer system to users.

1. Maritz testified that the Windows royalty is "less than 5% of the price of a typical new computer." Maritz Dir. ¶¶ 21, 132.

2. Professor Fisher testified that a 10% increase in the price of a PC operating system will result in only approximately 1 % increase in the price of PC. Fisher, 6/1/99am, at 27:7-25.

3. Dr. Warren-Boulton similarly testified that "even a 10% increase in the price of the OS would result in at most a 1% increase in the price of even inexpensive PCs." Warren-Boulton Dir. ¶ 37.

19.3.2. A common-sense economic analysis, therefore, shows that users will not in significant numbers incur the substantial costs of switching away from Intel-based PCs, and hence from Windows, in response to even a large increase in the price of the operating system.

1. Professor Fisher testified that the "[q]uestion at issue in assessing Microsoft's power is not whether a change--an increase in the price of the P.C. as a whole would cause people to turn to other non-P.C. devices, or for that matter, to Apple," but rather "whether an increase in the operating system price will cause that to happen." Fisher, 6/1/99am, at 27:1-6. He then concludes that it will not because even a 10% increase in the price of the operating system would result in "less than a 1 percent increase in the P.C. price." Fisher, 6/1/99am, at 27:14-16.

2. Dr. Warren-Boulton similarly observed that "even a 10% increase in the price of the OS would result in at most a 1% increase in the price of even inexpensive PCs," and in light of "the cost to users of switching to another platform, such a small increase in the price of the PC platform would not be expected to result in a large reduction in the demand for PCs, and thus for PC operating systems." These facts led him to conclude "that PC operating systems are a separate market." Warren-Boulton Dir. ¶ 37; see also Warren-Boulton, 11/23/98pm, at 8:20-25, 9:17-25.

19.3.3. The evidence confirms that a substantial price increase for PC operating systems (a trivial increase in the price of the PC) will not result in switching away from PC systems, and hence PC operating systems, sufficient to make the substantial price increase in the operating system unprofitable.

19.3.3.1. OEMs. As explained, OEMs will not switch away from Windows (let alone start building other types of personal computers) in response to a substantial exercise of market power (such as increased restrictions or prices) over Intel-compatible PC operating systems.

1. See supra ¶ 15.1.

19.3.3.2. Apple. The most obvious possible substitute for users are other personal computers, such as Apple's Macintosh. But even Apple -- the closest substitute to PCs -- does not constrain the exercise of power over operating systems for Intel-based PCs.

1. Dean Schmalensee conceded that Microsoft's present operating system competitors, including Apple, are not "the primary constraint on Microsoft's pricing." Schmalensee, 1/14/99am, at 24:16-25.

2. Although some users do switch from PCs to the Macintosh, Apple's Avadis Tevanian testified that Apple still cannot gain substantial share and, therefore, cannot effectively compete with Microsoft. Tevanian, 1/4/99pm, at 9:20 - 12:18.

3. Plaintiffs' economists testified that consumers' switching from PCs to the Macintosh is not the result of the exercise of market power over PC operating systems and, therefore, does not show an effective constraint on Microsoft's ability to exercise substantial market power. Warren-Boulton, 11/23/98pm, at 6:18 - 15:12; see also Fisher Dir. ¶ 137 ("Apple represents the main potential alternative to desktop PCs running Microsoft's Windows. (Although that alternative is not sufficient to keep Microsoft from having monopoly power.)"); Warren-Boulton, 11/23/98pm, at 8:20-25 (testifying that if the cost of the Windows operating system increased "by a small but significant amount . . . not enough people are going to decide . . .to switch to the Mac platform" to include Mac in the market). Switching to the Macintosh simply means the value of Microsoft's monopoly is shifting, not that its monopoly power is dissipating. Warren-Boulton, 11/23/98pm, at 13:3 - 15:12 (testifying that the question is "'what is the constraint on the monopoly pricing of the operating system'" and that the "fact that demand for the product, as a whole, is increasing or decreasing is not the relevant question'").

19.3.3.3. Other information appliances. There is similarly no evidence that other information appliances constrain Microsoft's ability to exercise substantial market power over operating systems for Intel-compatible personal computers.

19.3.3.3.1 First, most such appliances are complements to, rather than substitutes for, personal computers, so switching is not likely.

1. Steve Case stated publicly and testified that: "It's hard to imagine that PCs won't be the dominant way people connect with the Internet for many years to come, and Microsoft has a pretty amazing lock on that business. . . . Other devices will emerge, but I doubt any will challenge Windows." Case Dep. (played 6/4/99am), at 44:17 - 45:4; Ct. Ex. 1.

2. AOL's Barry Schuler testified: - redacted - Schuler Dep., 5/5/99, at 183:18-21 (sealed). - redacted - Schuler Dep., 5/5/99, at 183:24 - 184:12 (sealed).

3. Professor Fisher testified that other devices are not presently good "substitutes for PC's. And you can perfectly well have a monopoly in operating systems for PC's, despite the fact that there are or may be a number of operating systems for hand-held devices, TV set-top boxes and so on." Fisher, 1/12/99am, at 7:14-16; Fisher, 1/12/99am, at 7:19 - 8:7. Professor Fisher further testified that other information appliances do not presently constrain Microsoft's behavior. Fisher, 6/2/99am, at 83:20-23.

4. Bill Gates stated that for "most people at home and at work, the PC will remain the primary computing tool; you'll still want a big screen and a keyboard" for many applications and "you'll need plenty of local processing power for graphics, games, and so on. But the PC will also work in tandem with other cool devices. You'll be able to share your data--files, schedule, calendar, email, address book, etc.--across different machines; and you wont have to think about it; it will be automatic." GX 2059 (Newsweek article dated 5/31/99). In a similar vein, the IDC forecasts that for PCs and other information appliances, there will be "some competition between these two categories of devices. However, it is more true that the two devices will help lift each other. As a rising tide raises all ships, the growth of the Internet as an important tool for communication, commerce, and entertainment will provide ample justification for both form factors." DX 2423, at 35.

5. See also infra Part VII.D.C.3; ¶ 396.2.

19.3.3.3.2 Second, even if other information appliances became better substitutes for a wider range of PC functions in the future, a small increase in the price of PC systems caused by a large increase in the price of the operating system will not result in substantial switching to other information appliances. In other words, while other information appliances may affect relative ubiquity of PCs, and thus the value of Microsoft's monopoly over operating systems for Intel-based PC operating systems, those appliances do not undermine the fact that there is a market for such operating systems that is capable of being monopolized.

1. Dr. Warren-Boulton testified that a small increase in the price of the overall computer system will not induce large numbers of users to incur the costs required to switch to other devices. Warren-Boulton, 11/23/98pm, at 14:16-23; Warren-Boulton Dir. ¶¶ 37-39.

2. Professor Fisher testified that, for this reason, the existence of other information appliances was "basically totally irrelevant" to the monopoly power analysis. Fisher, 6/3/99pm, at 65:1-7. "The fact that other devices are going to be important, too, is interesting, but we're not talking here, by the way, about a monopoly of PCs themselves. We're talking about a monopoly of operating systems for PCs, and to believe that this has something to do with eroding Microsoft's monopoly power in operating systems, you would have to believe that small changes in the price of the operating system for PCs would cause people no longer to buy PCs, but to ship" "these other devices." Fisher, 6/3/99pm, at 65:23 - 66:6. See also Fisher, 6/1/99am, at 27:14-22.

19.3.3.3.3 Third, because the issue for market definition is whether a non-trivial increase in the price of the operating system will cause switching away from PC operating systems (to other information appliances running other operating systems or otherwise) to a sufficient extent to render that price increase unprofitable, there is no need to reach the question of whether PCs themselves comprise a relevant market (that is, whether a large price increase in the cost of a PC would be rendered unprofitable by switching).

1. Fisher, 6/2/99pm, at 30:2-13; 6/3/99pm, at 65:23 - 66:6.

20. Microsoft internal documents and the testimony at trial of its witnesses also support delineating a market for Intel-based desktop operating systems.

1. Joachim Kempin testified, Microsoft tracks the share of "[o]perating systems for Intel PC[s]." Kempin, 2/25/99pm, at 94:24 - 95:7.

2. Microsoft internal documents analyze as "competition" other "x86 Os[s]" -- that is, other Intel-based operating systems -- but do not characterize as competition other types of operating systems. GX 401.

2. Microsoft possesses a dominant, persistent, and increasing share of the market for operating systems for Intel-compatible PCs

21. Microsoft possesses a dominant, persistent, and increasing share of the relevant market.

21.1. Microsoft presently enjoys a market share in excess of 90%.

1. Data sponsored by Professor Fisher and Dr. Warren-Boulton shows that Microsoft's share of Intel-based PC operating systems is well over 90%. GX 1.

2. Professor Fisher testified: "Microsoft's share of personal computer operating systems is very high and has remained stable over time. Microsoft's worldwide share of shipments of Intel-based operating systems has been approximately 90 percent or more in recent years . . . . Even if operating systems for non-Intel-based computers are included in the market definition, Microsoft's share is still very high and stable." Fisher Dir. ¶ 64.

21.2. This share, which Microsoft has possessed since at least the early 1990s, has been stable through the many changes that have occurred in the computer industry.

1. Dr. Warren-Boulton testified: "This high market share has been remarkably stable." Warren-Boulton Dir. ¶ 45.

2. Data sponsored by Professor Fisher and Dr. Warren-Boulton shows that Microsoft's share of Intel-based PC operating systems is projected to rise to 96% by 2001. GX 1.

3. Professor Fisher testified: "Here, Microsoft's share of the P.C. operating systems business has been high and stable for some years. Further, it's expected that it will remain high for some years." Fisher, 6/1/99am, at 12:2-8.

4. Microsoft North America FY96 Reviews, an internal financial report compiled in June 1996, reported that the - redacted - GX 402, at MS6 6001734 (sealed), GX 403, at MS6 6006356 (Microsoft North America FY97 Reviews) (sealed).

21.3. Microsoft's share is projected to rise even further in the next century.

1. Rational Software "believes its continued success will become increasingly dependent on its ability to support the Microsoft platform, including Windows 95, Windows 98, and Windows NT operating systems." GX 1663 (SEC 10-Q), at 5. Mike Devlin, a Microsoft witness, testified that Rational's "increased dependence" on Microsoft will indeed be the result of "the increasing market share of the Microsoft platform." Devlin, 2/4/99am, at 25:22 - 26:1; Devlin, 2/4/99am, at 14:8 - 15:9.

2. IBM's John Soyring testified that Microsoft's 92% market share will "stay that high, if not get higher" in the next two or three years. Soyring, 11/18am, 71:24 - 72:4.

3. Professor Frank Fisher testified: "Here, Microsoft's share of the P.C. operating systems business has been high and stable for some years. Further, it's expected that it's going to remain high for some years." Fisher, 6/1/99am, at 12:2-8.

4. Dr. Warren-Boulton testified that Microsoft's share of operating systems "has been above 90% since at least the early 1990s and this dominance is forecast through at least 2001." Warren-Boulton Dir. ¶ 45; see also Warren-Boulton, 11/19/98am, at 57:24 - 58:5 (referring to GX 1, which contains the IDC's "projections of continuous and sustained and increasing market shares").

5. A report prepared for Microsoft in September 1997 states: "Win32 penetration by household primary machines is currently 70% and projected to reach 90% by December 1998." GX 447, at MS7 001195.

22. Precise calculation of Microsoft's market share or of the contours of the market is, in any event, unimportant.

22.1. Even if one included in the market other products -- such as "middleware" and other operating systems -- Microsoft would still possess monopoly power.

1. Dr. Warren-Boulton testified that "even if the market were defined more broadly to include operating system products for all personal computers--such as those offered by Apple or some vendors of UNIX based operating systems that do not use an Intel-compatible microprocessor--my conclusion that Microsoft possesses monopoly power in a relevant market would still stand." Warren-Boulton Dir. ¶ 41.

2. Professor Fisher similarly testified that even "if operating systems for non-Intel-based computers are included in the market definition, Microsoft's share is still very high and stable." Fisher Dir. ¶ 64.

3. Professor Fisher testified that Microsoft possesses monopoly power even if threats to its monopoly power, such as Netscape and Java, are included in the relevant market. Fisher, 6/2/99am, at 61:11 - 62:10; 6/1/99am, at 46:12 - 47:19.

22.2. Market definition and calculation of market shares are intended only to aid in determining whether a firm has monopoly power, so precise calculation is not necessary where refinement and precision will not change the ultimate determination of monopoly power.

1. As Professor Fisher testified, "there will often be no bright line between defining products as in the market" and "leaving them out while remembering that firms that do not produce them can enter fairly readily. But the lack of such a clear line will not matter, so long as one remembers that market definition need not be precise and that its purpose is to assist in analyzing the constraints on the behavior of the alleged monopolist." Fisher Dir. ¶ 36; see also Fisher, 6/2/99am, at 57:19 - 59:1 (discussing Fisher, "Microecomomics: Essays in Theory and Applications" (DX 2487)).

3. Microsoft's dominant market share reflects monopoly power because its position in operating systems is protected by high barriers to entry

23. Microsoft's dominant market share reflects monopoly power because that share is both the source of, and protected by, immense entry barriers that prevent rivals from entering or expanding.

a. Definition of barriers to entry

24. An entry barrier is any factor that permits firms already in the market to earn returns above the competitive level without inducing entry or expansion that would erode those returns.

1. Professor Fisher testified that a barrier to entry "permits the incumbent firms" to "earn supernormal profits without having their business bid away by the expansion of competitors or the entry of new firms." Fisher, 1/6/99am, at 52:20-23; Fisher, 6/1/99am, at 47:20-24.

2. Dean Schmalensee characterized as consistent with his definition of an entry barrier "'any factor that permits firms already in the market to earn returns above the competitive level while deterring outsiders from entering.'" Schmalensee, 1/14/99am, at 6:17 - 7:19 (quoting Areeda & Hovenkamp).

b. The applications barrier to entry protects Microsoft's dominant position in operating systems

25. The principal barrier to entry into operating systems is what has been termed in this case the applications barrier to entry.

1. Professor Fisher testified that the "dominant position of Microsoft's operating system is protected by the applications programming barrier to entry." Fisher Dir. ¶ 82; Fisher, 6/1/99am, at 48:4-11.

2. Dr. Warren-Boulton testified that "the applications barrier to entry sustains Microsoft's dominance, critically contributes to its monopoly power, and helps explain why other Intel-compatible operating systems, such as OS/2 and Linux, have persistently small market shares." Warren-Boulton Dir. ¶ 56.

25.1. The applications barrier to entry results from a chicken-and-egg problem: Users will not in large numbers use an operating system other than Windows unless it supports a set of applications comparable to the set of applications available for Windows, but ISVs will tend not to write comparable applications for other operating systems in large numbers because those operating systems lack a large number of users.

1. Avadis Tevanian testified that Microsoft's dominant position rests in part on "a commercial symbiosis that exists between application programs and the computer operating systems on which those programs run. An application program is condemned to commercial failure if it will not operate reliably on the operating system of a sufficiently large installed base of computer systems. Similarly, the commercial viability of an operating system is critically dependent on the availability of application programs . . . ." Tevanian Dir. ¶ 15.

2. Dr. Warren-Boulton testified that as "an operating system gains popularity, the incentive to develop software for the operating system increases because the larger number of users for the operating system product implies a greater potential market for software developers. The development of yet more applications for that operating system, in turn, increases the value of the operating system to end users who, as explained, purchase operating systems in significant part based upon the quality and variety of applications available for it." Warren-Boulton Dir. ¶ 53.

25.2. In other words, Microsoft's very large market share and installed base of users -- which create incentives for ISVs to write first and foremost to Windows rather than to other operating systems -- are themselves the source of an immense entry barrier that keeps the share of operating system rivals low and protects Microsoft's monopoly power.

1. Professor Fisher testified that "Microsoft's high market share leads to more applications being written for its operating system, which reinforces and increases Microsoft's market share, which in turn leads to still more applications being written for Windows than for other operating systems, and so on." Because of this pattern, Microsoft's "share is not likely to be eroded by new entry as long as the applications programming barrier to entry remains strong." Fisher Dir. ¶ 70.

2. Dr. Warren-Boulton testified that "an operating system product can rise to dominate the market, and once that dominance is achieved maintain it, because of both the large number of complementary software applications available for it and the flow of new applications that are written to it." Warren-Boulton Dir. ¶ 54.

(1) Microsoft possesses a dominant market share because software developers have powerful incentives to write applications first and foremost to Windows

26. The economic factors that create incentives to write applications first and foremost to Windows, and reinforce Microsoft's dominant market share, have three aspects.

26.1. First, Microsoft has a dominant share of PC operating systems because a much greater breadth, depth, and number of applications run on Windows than on other operating systems.

26.1.1. Users demand operating systems in order to run applications; and the greater the number, variety, and quality of applications available for a particular operating system, the greater the demand for that operating system.

1. In a Microsoft marketing plan entitled "Winning @ Internet Content" dated June 22, 1996, Andrew Wright wrote, "Microsoft's success to date as a platform company has primarily been driven by the availability of compelling applications for Microsoft operating systems. Operating systems, including Windows 95, Windows NT etc, are a means to an end and not an end in themselves. End users buy computers and operating systems to run applications." GX 407.

2. Microsoft's Chris Jones wrote in August 1995 that: "While there are many factors which determine an OS purchase, fundamentally consumers purchase the system that runs the cool applications first and best." GX 523, at MS98 0103654.

3. Avadis Tevanian testified that "the commercial viability of an operating system is critically dependent on the availability of application programs--including well-accepted, broadly-used application programs--that are written for use on that system." Tevanian Dir. ¶ 15.

4. Microsoft admitted in its Answer that the "popularity of an operating system is to some extent a function of the number, variety, and quality of applications available to use with that operating system . . . ." Answer ¶ 58.

5. Microsoft's pricing decisions reflect the fact that Windows is demanded precisely because of the number of applications written for Windows. Kempin testified that "competitors are producing, essentially . . . inferior-type products" because "the number of applications written for [Windows] is so huge" is an observation of the "result of the applications barrier to entry, and it's a fairly clear statement." Kempin, 2/25/99pm, 98:15-99:5 (quoting Kempin's deposition, 21:20-22:6, 22:19-24). This, Professor Fisher explained, is exactly what one would expect Kempin, a non-economist, to say rather than saying "I am protected by the applications barrier to entry and so, I have freedom as to pricing." Fisher, 6/1/99pm, at 5:15 - 6:5.

26.1.2. Applications written for one operating system generally do not run on another because each operating system has its own, unique set of application programming interfaces ("APIs") to which applications are written.

1. Because operating systems have different APIs, "software applications written for one operating system will not run well on any other operating system." Barksdale Dir. ¶ 71.

2. See also Soyring Dir. ¶¶ 6-7 ("For an application to operate properly on an operating system, it must be designed to work" with that operating systems's APIs.); Gosling Dir. ¶ 12 (testifying that applications are largely "platform-specific"); Tevanian Dir. ¶ 12 ("Application programs must be developed so that they are compatible with the APIs of the underlying operating system. For example, Microsoft's popular word processing program, Word for Windows, will run on the Windows operating system; it cannot run on the Mac OS operating system.").

26.1.3. A vastly larger number of applications are written for Windows than the number written for other operating systems.

1. There are "tens of thousands" of applications that run on Windows. Martiz, 1/25/99pm, at 22:10-13; Rose, 2/17/99pm, at 24:24 - 25:9 (testifying that there are over 70,000 applications available for Windows).

2. According to Microsoft's own economic expert, the number of applications available for other operating systems is at least an order of magnitude lower. DX 2098, at E2 (reporting that approximately 12,000 applications are available for the Macintosh, 900 for BeOs, and 250 for Linux).

26.1.4. As a result, Microsoft has a dominant share of the installed base of operating system users and of the operating system market.

1. Microsoft's Brad Chase explained, "Content drives systems. Windows won the desktop OS battle because it had more applications earlier than any other platforms." GX 510, at MS7 004130.

2. Microsoft's Ben Slivka testified that "an advantage Windows has today in the marketplace and why customers prefer Windows today over Macintosh OS or some other operating systems is that there are a large number of applications that customers need . . . that are available primarily on Windows or have their best expression on Windows." Slivka Dep., 1/13/99, at 717:22 - 718:4.

3. Microsoft's own witness, Compaq's John Rose, conceded that the huge number of applications available for Windows relative to other operating systems is "certainly the prime reason" why Compaq lacks a commercially viable alternative to Windows. Rose, 2/17/99pm, at 19:21 - 20:20. As Rose elaborated (Rose, 2/17/99pm, at 24:24 - 25:9):

   Q: Now, is it fair to say that the absence of any other operating system that can run those 70,000 applications or any predominant chunk of them is a prime reason why you believe there is not at present commercially viable alternative to Windows?

   A: Yes, that is part of it.

   Q: Okay.

   A: The fact that other operating environments do not support that rich set of applications which are being utilized by hundreds of millions of personal computer users.

4. Joachim Kempin testified that he didn't consider other operating systems in setting the royalty for either Windows 95 or Windows 98 because "'the simple fact that the number of applications, peripheral devices, support on that platform, basically, is so huge that the benefits for buying into that platform is huge'" Kempin, 2/25/99pm, at 98:18 - 99:5 (quoting Kempin's deposition). As Professor Fisher testified, Kempin's testimony reflects Microsoft's perception that it is "protected by the applications barrier to entry." Fisher, 6/1/99pm, at 5:13 - 6:5.

5. Packard-Bell's Mal Ransom testified: "There are appropriate applications, be they games or education or reference that are - that work with the operating system. That's a major factor for us in the consumer business that consumers can go buy solutions that match with our operating system. And Windows has really become a worldwide standard in that regard." Ransom Dep. (played 12/16/98pm), at 69:24 - 70:10.

6. For additional evidence, see Von Holle Dep., 1/13/99, at 298:2-23 (testifying that Gateway lacks a commercially viable alternative to Windows because "there's not enough support in the form of applications in the marketplace to-to run on alternative operating environments"); Tevanian, 11/4/98pm, at 11:12 - 12:18 (testifying that "it's still the case that the predominant number of applications in the market do not run on the Macintosh, and because of that, most people will just refuse to buy a macintosh, they'll want safety in the applications that are on Windows").

26.2. Second, because of the economic incentives they confront, ISVs tend to write first and foremost to the operating system with the dominant share, which is Windows.

1. Professor Fisher testified that the principal reason "that ISVs write for Windows first," is that "there are economies of scale and it pays to write for the system that has the most users." Fisher, 6/1/99am, at 54:2-5.

26.2.1. Software development is characterized by substantial economies of scale. The fixed costs of producing software, including applications, is very high. By contrast, marginal costs are very low. Moreover, the costs of developing software are sunk; once expended to develop software, resources so devoted cannot be used for another purpose.

1. Paul Maritz testified that "software products can be produced and distributed in vast quantities very rapidly. Once a software product is created, the cost to copy is near zero, and the product can be quickly distributed around the block or around the world via the Internet or other networks." Maritz Dir. ¶ 115.

2. Intuit's William Harris testified that "the economics of software development make high volume sales critical to profitability. The fixed costs of developing software -- including, among other things, research, development, programming and testing -- are very large and can only be offset by high volume sales. By contrast, the variable costs of manufacturing software once it has been developed are quite low. Thus, it is essential for profitability of most PC-based software products that the product be compatible with Windows. At Intuit, compatibility with Windows is so critical that the company will focus on such compatibility even if this requires slowing or abandoning development of software for use with other operating systems." Harris Dir. ¶ 25.

3. Dr. Warren-Boulton testified that "operating systems in particular, and software in general, are characterized by economies of scale. The bulk of the costs are development costs" whereas the costs "of producing and marketing individual copies of the product ('the marginal costs') are, by comparison, quite small." Warren-Boulton Dir. ¶ 47.

26.2.2. The result of economies of scale and sunk costs is that applications developers seek to sell the highest number of copies; for it is only through selling a large number of copies (for which the marginal cost is low) that the large, sunk fixed costs necessary to develop software can be recovered

1. Harris Dir. ¶ 25.

2. Professor Fisher testified that because of the "upfront costs of writing the software" and the fact that marginal costs of distributing it are "essentially zero," ISVs will have "a big incentive to write for the most popular operating system and write for it first because you have the possibility of lots of sales, and that means your costs per sale will be very low." Fisher, 6/1/99am, at 59:10-16.

26.2.3. This creates overwhelming incentives to write first and foremost for Windows because writing for Windows -- the operating system with the dominant share -- gives applications developers by far the highest expected return for the sunk costs incurred.

26.2.3.1. An application that is written for one operating system, like Windows, will operate on another operating system only if it is "ported" to that system. As numerous witnesses testified, porting applications is both time-consuming and expensive.

1. John Soyring testified that it took IBM "about a year and a half to port Netscape Navigator from Netscape's Windows implementation to OS/2, and that was having access to the Netscape source code and having the Netscape engineers working side by side with us in their laboratories in California." Soyring, 1/18/98pm, at 65:15 - 66:18; Soyring Dir. ¶ 7 (porting "can be both costly and time consuming.").

2. Jim Barksdale testified that "it is time-consuming and expensive, however, to take a piece of applications software developed for the Windows platform and port it to the OS/2 or Macintosh platform or to some other platform." Barksdale Dir. ¶ 75.

3. James Gosling testified that the "tedious process, which is known as 'porting' software to other platforms, dramatically increases the cost of software programs, and consumes scarce time and resources that could otherwise be devoted to developing innovative applications." Gosling Dir. ¶ 13.

26.2.3.2. As a result of these factors, ISVs tend to write applications first and foremost for the highest volume platform, Windows.

1. Microsoft's Steve Ballmer wrote in July 1997: "It's important for us to keep developer focus. And market share is an important part of that. If you don't have good market share, you're going to lose developer interest." GX 679, at 8.

2. iIntuit's William Harris testified that "it is essential for profitability of most PC-based software products that the product be compatible with Windows. At Intuit, compatibility with Windows is so critical that the company will focus on such compatibility even if this requires slowing or abandoning development of software for use with other operating systems." Harris Dir. ¶ 25.

3. Jim Barksdale testified that, because of Microsoft's large market share, "if anybody wants to build a product, they build it there first. You don't start a company building for some niche operating system. You always start with . . . the current version of Windows . . . if you're going to be out there selling any product, you have to be on that year's product or you can't succeed in any reasonable way." Barksdale, 10/27/98am, at 70:18 - 71:9; Barksdale Dir. ¶ 73 (Barksdale explains that "ISVs looking at this world quite sensibly write most of the software for the platform with the widest use. That means that most applications are written for the Windows platform.).

4. Dr. Warren-Boulton testified that "market share is, . . . overwhelmingly, the critical issue in determining . . . developers' decisions." Warren-Boulton, 11/19/98am, at 86:14-16; Warren-Boulton Dir. ¶ 53 (testifying that the development of more applications for a given operating system "increases the value of the operating system to end users" who "purchase operating systems in significant part based upon the quality and variety of applications available for it." If the operating system's market share increases, "that, in turn, is likely to cause software developers to devote yet more resources to writing applications for that operating system").

5. Ron Rasmussen, Vice-President of the Santa Cruz Operation, testified at his deposition that "all the application vendors look at market share and the cost/benefit analysis of providing that application on any operating system. So if it costs them more than they believe they're going to get in revenue or if they believe their revenue is just a trade from one operating system to another, there's no financial benefit for producing that application on other operating systems." Rasmussen Dep., (played 12/15/98am), at 58:3-9.

26.3. Third, the result of the above factors is that Windows exhibits very strong network effects that reinforce demand for Windows.

26.3.1. A network-effect is a phenomenon in which the attractiveness of a product increases with the use of that product by others.

1. Fisher Dir. ¶ 42.

26.3.2. Windows exhibits strong network effects because each user benefits from the fact that there are a multitude of other Windows users, that Windows has a dominant market share, and that ISVs therefore write first and foremost to Windows. The fact that ISVs write first and foremost to Windows, in turn, reinforces demand for Windows and thereby augments Microsoft's dominant position and perpetuates ISV incentives to write applications principally for Windows; and so on.

1. James Gosling testified that, as a result of the incentives to write "first" and often "only" for Windows (Gosling Dir.¶ 15), "more software applications are available for Windows users, which makes that platform even more attractive for customers. This, in turn, reinforces the dominance of Windows, and leads even more developers to develop software for Windows." Gosling Dir. ¶ 18.

2. Intuit's William Harris testified: "The development of software that is compatible with the Windows operating system itself reinforces the dominance of Windows, because consumers seek to purchase the operating system that is compatible with the greatest number of software applications. In turn, software producers want their products to be compatible with the operating system that is most widely used by consumers. This creates a self-reinforcing cycle (sometimes referred to as a 'network effect'), which tends to perpetuate and enhance the dominance of the leading operating system." Harris Dir. ¶ 27.

3. James Barksdale testified: "Because so much software is written for the Windows platform, consumers who want to take full advantage of their computers and to have the maximum number of choices of applications available continue to purchase machines with a preinstalled Windows operating system. At the same time, the more personal computers sold with Windows operating systems, the more ISVs continue to write applications for the Windows platform. In other words, the sale of computers with Windows operating systems feeds the development of software for the Windows platform, which in turn, generates additional sales of computers with Windows operating systems." Barksdale Dir. ¶ 74.

4. Professor Fisher summarized: "Microsoft's high market share leads to more applications being written for its operating system, which reinforces and increases Microsoft's market share, which in turn leads to still more applications being written for Windows than for other operating systems, and so on." Fisher Dir. ¶ 70.

5. Dr. Warren-Boulton testified that the development of more applications for a given operating system "increases the value of the operating system to end users" who "purchase operating systems in significant part based upon the quality and variety of applications available for it." If the operating system's market share increases, "that, in turn, is likely to cause software developers to devote yet more resources to writing applications for that operating system." Warren-Boulton Dir. ¶ 53.

26.3.3. This self-reinforcing cycle is confirmed by the observed market facts: Windows' market share has been, and remains, much larger than rivals; most ISVs develop new applications first and in the great numbers for Windows; and the continued assurance of a large, up-to-date stock of applications for Windows ensures that users demand Windows.

1. See supra ¶ 26.1.3.

2. Dr. Warren-Boulton testified that "the applications barrier to entry sustains Microsoft's dominance" and because of it "no rival has succeeded in mounting a sustained effective threat to Microsoft's market dominance." Warren-Boulton Dir. ¶ 56.

3. John Soyring testified that "OEMs have no commercially viable choice but to license Windows." Even though other operating systems exist, OEMs "cannot reasonably base their businesses on these alternatives, due, in large measure, to the lack of applications and device support." Soyring Dir. ¶ 11.

(2) The same factors that reinforce Microsoft's large market share inhibit other operating systems from challenging Windows

27. Just as Microsoft's high market share creates incentives for ISVs to develop applications first and foremost to Windows, the absence of a significant installed base makes it much more expensive -- indeed, prohibitively so -- for other operating systems to ensure the availability of a sufficient set of applications to enable those operating systems to become good substitutes for Windows.

1. Professor Fisher testified that when a firm gains a large market share due to network effects, "it will prove increasingly difficult for other firms to persuade customers to buy their products in the presence of a product that is widely used. The firm with a large share may then be able to charge high prices or slow down innovation without having its business bid away." Fisher Dir. ¶ 43.

2. Dean Schmalensee agreed with John Soyring's testimony that part of the reason for OS/2's failure was that "IBM did not have a sufficient number of applications to compete effectively with Microsoft." Schmalensee, 1/14/99am, at 34:15-25. Similarly, Dr. Warren-Boulton observed that "IBM has found with OS/2 that it is simply impossible to effectively compete with Microsoft in the home computer market because of the problem that it doesn't have enough applications." Warren-Boulton, 11/24/98am, at 53:5-8. This competition between OS/2 and Windows illustrates the operation of network effects, in which "the firm with the largest market share becomes larger and the firm with the smaller market share becomes smaller." Warren-Boulton, 11/24/98am, 52:20-21.

27.1. First, contrary to Microsoft's contention that all it takes to create a rival to Windows is applications in a few key categories (Schmalensee, 6/22/99pm, at 60:12-20; Maritz, 1/27/99pm, at 10:2 - 11:2), to provide a viable substitute for Windows, a rival operating system would need to offer both (1) a large, diverse, and frequently updated set of applications and (2) assurances to users that such applications will be available in the future.

1. See supra ¶ 26.2.3.

2. Although both Linux and Be OS, two relatively new Intel-based PC operating systems, support several hundred applications -- including applications in the categories users tend to use most (such as word processing, personal finance, and browsing)-- neither, as Dean Schmalensee conceded, can effectively substitute for Windows. (Schmalensee Dir. ¶ 107, 108). The reason, as Microsoft's own OEM witness, John Rose, explained, is that such "operating environments do not support that rich set of applications which are being utilized by hundreds of millions of personal computer users." Rose, 2/17/99pm, at 24:24 - 25:9.

3. Avadis Tevanian testified that Apple -- despite having thousands of applications, including applications in all the "categories" users frequently employ -- cannot gain users from Microsoft because "it's still the case that the predominant number of applications in the market do not run on the Macintosh, and because of that, most people will just refuse to buy a Macintosh, they'll want safety in the applications that are on Windows." Tevanian, 11/4/98pm, at 11:12 - 12:18.

4. Paul Maritz conceded that other information devices, running other operating systems, cannot "be a real competitor" unless they support "a wide range of applications." Maritz, 1/27/99pm, at 11:3-24 (quoting Maritz's deposition).

5. Professor Fisher testified that an "entrant would have to get written for it -- and show that there was an assurance that this would continue -- applications of the general number and breath for Windows, and I would suppose that for the more popular applications, the entrant would probably need the same ones." Fisher, 1/13/99am, 5:9-14; Fisher, 6/1/99am, at 56:2-9 (similar).

27.2. Second, Microsoft's large installed base makes it prohibitively expensive for rival operating systems to acquire the large set of applications necessary to compete effectively with Windows.

27.2.1. The sunk costs required for an operating system vendor itself to create the necessary applications itself are prohibitively large.

1. Dean Schmalensee conceded that no operating system vendor will develop the necessary applications on its own. Schmalensee, 1/14/99am, at 15:23 - 16:9.

2. Professor Fisher testified that an entrant faced with incurring significant sunk costs for an uncertain return "isn't going to go in" because "it's going to have to battle the incumbent and because it will have to give up these hostages to fortune." Fisher, 6/1/99am, at 50:18-25.

3. Dr. Warren-Boulton testified that "competition between two suppliers, each with very high fixed costs and very low marginal costs, would likely result in a decrease in prices, further reducing the profitability of entry to the would-be entrant. Entry into head-to-head operating system competition with Microsoft thus would be time consuming, risky, and costly; profiting from such entry would be at best very uncertain and long in coming." Warren-Boulton Dir. ¶ 48.

27.2.2. Accordingly, in order to ensure the availability of a set of applications comparable to that available for Windows, a potential rival would need to induce a large number of ISVs to write to its operating system.

1. Dean Schmalensee testified that the question is whether "the ISV community, can be convinced to provide applications programming for an alternative operating system." Schmalensee, 1/14/99am, at 15:23 - 16:9.

2. Dr. Warren-Boulton testified that to "offer a product that a significant number of consumers wish to have installed on their PCs," vendors of alternative "operating systems would have to create, or induce others to create, an extensive set of compatible software applications. This would be not merely expensive, but also very risky." Warren-Boulton Dir. ¶ 57.

27.2.3. The cost to an entrant of inducing ISVs to write applications for their operating system exceeds the cost faced by Microsoft when it induced ISVs to write applications for the DOS and/or Windows operating system because Microsoft did not face a highly penetrated market dominated by a single competitor.

1. Professor Fisher testified: "After Microsoft's victory, the cost of pursuading ISV's to build such a stock rather than write for Windows has got to be much more substantial than it was for Microsoft to persuade them in the first place." Fisher, 6/1/99am, at 53:22 - 54:1.

27.2.3.1. In deciding whether to write for a particular operating system, an ISV will consider the return it expects from incurring sunk costs, and that depends on the number of users it expects the operating system will have.

1. Dr. Warren-Boulton testified that it is not the return if the firm succeeds that governs investment decisions, but rather expected return, including the risk if the venture fails. Warren-Boulton, 11/19/98pm, at 52:11 - 53:7, 70:2 - 71:10.

2. Dean Schmalensee testified that "ISVs will not write applications software for an operating system unless they expect enough consumers to use that operating system." Schmalensee Dir. ¶ 100; Schmalensee, 6/23/99pm, at 59:10-22 (same).

27.2.3.2. ISVs will not in large numbers expect that a niche (or new) operating system will succeed in competing against Windows because ISVs face a "collective action problem": a rival operating system cannot succeed without a large number of applications, but no individual ISV can be assured that a sufficient number of ISVs will write all the applications necessary for rival operating systems to succeed. As a result, each individual ISV will continue to write first and foremost for Windows because that is what it will expect its rivals to do; and other operating systems will therefore be unable to gain appreciable share from Windows.

1. Professor Fisher testified that for a new operating system vendor to be successful, it "takes an awful lot of people" writing applications. But in assembling this critical mass, there "is a collective action problem. That is, in deciding to write for a new system, each ISV will not take into account the fact that his action" will have "some influence on the success of the new operating system." Fisher, 6/1/99am, at 58:10-18.

2. Tevanian testified, regarding Apple's inability to persuade developers to write for the proposed Rhapsody operating system: "Developers, including Microsoft, told Apple that they were concerned that Apple would not be able to obtain a critical mass of application programs written to work with the new Rhapsody APIs and that customers, accordingly, would not buy computers containing the new operating system." Tevanian Dir. ¶ 19.

3. Dr. Warren-Boulton summarized developer incentives: "If you think of it as a trojan horse, any individual applications writer looks at the market for operating systems, and he says, 'I'm writing to the PC platform. 90, 95 percent of the people who are likely to use my application are using Windows; and therefore, it's worth it for me individually to make a decision to use J/Direct.' On the other hand, if you look at the interests of applications writers as a whole, if they all do that, nobody will write in cross-platform applications. So, it is a quandary. What is in the interests of individual application writers to do may not be in the interests of applications writers as a group." Warren-Boulton, 11/23/98pm, at 40:2-13.

4. Microsoft's Steve Ballmer wrote in July 1997: "It's important for us to keep developer focus. And market share is an important part of that. If you don't have good market share, you're going to lose developer interest." GX 679, at 8.

5. William Harris explained that, because of Microsoft's dominant market share, Intuit had "abandoned development of Macintosh-compatible versions of QuickBooks and has dramatically reduced development of Macintosh-compatible versions of Quicken and TurboTax." Harris Dir. ¶¶ 25-26.

27.2.3.3. A rival operating system vendor cannot effectively solve this problem by paying the necessary number of ISVs to write for its operating system because the sunk costs of doing so are massive relative to the expected return.

1. Professor Fisher testified that one "might pay ISVs to write to your operating system. That in itself is part of the barrier to entry, that you have to pay them to turn away from Windows." Fisher, 6/1/99am, at 55:23 - 56:1. He further testified that doing so in order to challenge Windows was infeasible because of the very collective action problem that prevents ISVs from doing so on their own. He explained: "There is a collective action problem. That is, in deciding to write for a new system, each ISV will not take into account the fact that his action will have something to do with the success of . . .some influence on the success of the new operating system, because he won't reap all the rewards from that. It takes an awful lot of people doing this to make it a go." Fisher, 6/1/99am, at 59:2-18.

2. John Soyring testified that "Microsoft's enormous installed base, along with the wealth of applications and hardware device support for Windows, noted above, makes it difficult for IBM or any other company to successfully offer a new operating system for desktop and mobile PCs. Any company that attempted to do so would have to spend an enormous amount of money and time on development, marketing, and support." He further observed that this "task would be easier if there were some reasonable way to ensure that all the applications now on Windows would run on the new product. Unfortunately, there is not." Soyring Dir. ¶ 13.

3. MCI's David Limp testified that "it would be hard to get into the PC space" because: "There's a lot of home-grown application development, which has been written directly to Windows and Win--not to the languages of the Web but Windows languages, that unseating that is--you know, I tried it for eight years of my life at Apple. It's just a very hard problem, and it takes a lot of resources, and nobody has been successful, so, I mean, just putting on your business hat, you kind of veer to the easier problem, right? And that's a hard problem. IBM couldn't do it. Sun is having a tough time. Apple basically couldn't do it, so it's an uphill battle and, and we chose to fight our competition in an area that was more wide open that we could define ourselves, that was--that we could redefine the playing field." Limp Dep., 7/30/98, at 143:6-25 (DX 2576).

4. James Gosling testified that "it's very difficult for a developer to financially justify developing software for a platform like Solaris which has very low volume. The differential between Solaris and Windows is something like a hundred to one, which would mean the financial return would be about a hundred to one different, and yet the engineering effort is about the same." Gosling, 12/10/98pm, at 26:16 - 27:3.

(3) The persistence of Microsoft's huge market share is itself evidence of high entry barriers

28. That Microsoft's monopoly is protected by high entry barriers is reflected in the fact that, for the last several years, Microsoft has possessed a dominant share of the market and other operating systems have gained no more than a trivial share of the market.

1. Dr. Warren-Boulton testified that "the applications barrier to entry sustains Microsoft's dominance, critically contributes to its monopoly power, and helps explain why other Intel-compatible operating systems, such as OS/2 and Linux, have persistently small market shares." Warren-Boulton Dir. ¶ 56.

(4) The testimony of Apple and IBM illustrates the strength of the applications barrier to entry

29. The experience of Microsoft's most significant operating system rivals in the middle and late 1990s, IBM and Apple, confirms the strength of the applications barrier to entry.

30. IBM's inability to gain widespread developer support for its OS/2 Warp operating system illustrates how the massive Windows installed base makes it prohibitively costly for a rival operating systems to attract applications sufficient to substitute for Windows.

30.1. IBM in 1994 introduced its Intel-based OS/2 Warp operating system, targeted at the consumer market, and spent tens of millions of dollars in an effort to attract ISVs and in an unsuccessful attempt to clone part of the Windows API set.

1. Soyring testified that IBM "spent tens of millions of dollars working with ISV's around the world . . . to try to convince them to develop" for OS/2. Soyring, 11/18/98pm, at 58:20 - 60:1, 66:19 - 67:8.

2. Soyring further testified that IBM devoted substantial resources in an ultimately unsuccessful attempt to clone part of the Windows API set. Soyring, 11/18/98pm, at 61:15 - 62:1.

30.2. Despite these efforts, IBM could obtain neither significant market share nor ISV support for OS/2 Warp.

1. Soyring testified that, even when "it would have made economic sense for an ISV to port their application to OS/2, many times they felt those programmers could be better spent building new functions or new applications for Windows because it provided a potential for greater economic return for them" and because "of the larger number of . . . Windows application users." Soyring, 11/18/98pm, at 67:11-24.

2. As Soyring summarized, IBM found that it was caught "in a vicious cycle. First, the limited number and type of OS/2 applications has resulted in a limited demand for OS/2. That, in turn, has meant that relatively few PCs are shipped with OS/2, and that the installed base of OS/2 is relatively small. This relatively small installed base of OS/2 installations has further reduced the incentive for application developers to spend the resources necessary to port their existing applications to OS/2 and to then offer and support them on OS/2." Soyring Dir. ¶ 9.

3. OEMs -- including IBM's PC business -- will not preinstall OS/2, and the reason is the absence of applications. Romano Dep. (played 12/16/98pm), at 33:4-19 (Hewlett Packard has "not seriously" considered installing OS/2); Ransom Dep. (played 12/16/98pm), at 70:11 - 71:8 (OS/2 was "trying to make a push at the consumer market. And the big problem with it is we needed OS/2 plus Windows because OS/2 did not have the compatibility. OS/2 was an operating system and worked fine on the systems, but you needed Windows for the compatibility of all the applicants. So it didn't make any sense resource-wise -- and by resource, I don't mean just double charging, but the resources of the machine to have two operating systems on it."); Romano Dep. (played 12/16/98pm), at 72:5-23 (because of the lack of applications compatible with OS/2, it was not a viable choice for Packard Bell.).

30.3. Thus, although at its peak OS/2 ran approximately 2,500 applications and had 10% of the market, IBM determined that the applications barrier to entry was too severe to compete against Windows in the consumer segment of the market and, for that reason, in 1996 stopped trying to convince ISVs to write to OS/2.

1. Soyring Dir. ¶ 5; Soyring, 11/18/98pm, at 61:2-4.

2. Soyring testified that IBM determined that it "would not be able to compete" against Windows because the "application barrier was just too high for us to be able to compete" by promoting "OS/2 Warp 3 to consumer users." Soyring, 11/18/98pm, at 99:22 - 100:5. Thus, he explained, in 1996 IBM stopped trying to induce developers to write for OS/2's APIs altogether because of it's inability to compete against Windows. Soyring, 11/18/98pm, at 93:19-21.

3. Dean Schmalensee agreed with Soyring's testimony that part of the reason for OS/2's failure was that "IBM did not have a sufficient number of applications to compete effectively with Microsoft." Schmalensee, 1/14/99am, at 34:15-25.

4. Dr. Warren-Boulton testified that "IBM has found with OS/2 that it is simply impossible to effectively compete with Microsoft in the home computer market because of the problem that it doesn't have enough applications." Warren-Boulton, 11/24/98am, at 53:5-8. This competition between OS/2 and Windows illustrates the operation of network effects, in which "the firm with the largest market share becomes larger and the firm with the smaller market share becomes smaller." Warren-Boulton, 11/24/98am, at 52:20-21.

30.4. Microsoft's contention that OS/2's failure was a consequence of IBM's own mistakes is misplaced because it confuses the reasons for the failure of early versions of OS/2 with the reason -- the applications barrier to entry -- that OS/2 Warp cannot gain substantial market share today.

1. As Soyring testified, IBM rectified many of OS/2's problems by the time of OS/2 Warp's release. Soyring explained that "the reductions in size that we made in the operating system program were such that it made it very competitive in terms of the amount of memory that was required, so it turned out to be quite suitable, and we had a fair amount of success initially selling the products at least to a particular subset of the home users." Soyring 11/18/98pm, at 58:25 - 59:7.

2. Microsoft suggested that OS/2 Warp failed because IBM didn't spend enough to attract developers. Soyring, 11/18/98pm, at 92:20 - 93:1. This, however, is entirely consistent with the applications barrier to entry. As Soyring testified, because of Microsoft's installed base, the cost to IBM of attracting significant developer interest was prohibitive. Soyring Dir. ¶ 13.

31. The inability of Apple effectively to compete with Windows also evidences the operation of the applications barrier to entry.

31.1. Although Apple's Macintosh operating system supports more than 12,000 applications, that stock of applications is not sufficient to enable Apple to substitute for Windows for a large number of users.

1. Avadis Tevanian testified that "the predominant number of applications in the market do not run on the Macintosh, and because of that, most people will just refuse to buy a Macintosh. They'll want safety in the applications that are on Windows. Or in some cases they'll be required to run Windows. For example, in almost every corporation in the world, they have to run some specific applications that are only on Windows." Accordingly, despite the fact that the iMac is selling well, "in the grand scheme of things, there is still the Windows monopoly, that it's a situation where people need to run Windows applications, and they buy Windows computers." Tevanian, 11/4/98pm, at 11:21 - 12:13.

2. Dr. Warren-Boulton testified that there are approximately 12,000 applications available for users of the Macintosh operating system, but that Apple cannot constrain Microsoft's ability to exercise market power. Warren-Boulton, 11/23/99pm, at 16:7-13.

31.2. The absence of a large installed base, in turn, reinforces the disparity between the applications available for the Macintosh operating system and those available for Windows, further inhibiting Apple sales.

1. Microsoft's Paul Maritz conceded that "fewer software developers create products for the Apple Macintosh because there are fewer Apple Macintosh customers to buy such products." Maritz Dir. ¶ 179.

2. Apple's Avadis Tevanian testified that an "application program is condemned to commercial failure if it will not operate reliably on the operating system of a sufficiently large installed base of computer systems. Similarly, the commercial viability of an operating system is critically dependent on the availability of application programs--including well-accepted, broadly-used application programs--that are written for use on that system." Tevanian Dir. ¶ 15. Consequently, "Apple has learned through experience" that "the symbiosis between operating system[s] and application programs creates significant barriers to the introduction and growth of competing operating systems." Id. at ¶ 16.

31.3. Also illustrative is Apple's inability to gain developer support for its Rhapsody operating system in 1997.

31.3.1. Rhapsody offered users new, attractive technologies; but taking advantage of these technologies would have required ISVs substantially to rewrite their applications, a process requiring a substantial investment and, therefore, a significant volume of sales to recoup.

1. Avie Tevanian testified that "the biggest reason" ISVs would not write Rhapsody applications was that "they needed to have an economic incentive, they needed to know that they could sell a lot of copies of their applications; and to sell a lot of copies of their applications, they needed to know that there were going to be lots of copies of the operating system, and they just didn't believe that Apple had any chance of selling a lot of copies of this operating system." Tevanian, 11/4/98pm, at 44:5-13.

31.3.2. Developers refused to make this investment because they did not believe that Apple could gain significant volume against Windows to make the additional sunk costs worthwhile.

1. Tevanian testified that developers "didn't see that Apple would ever get sufficient volume on Rhaspody so that they thought they would have an economic return on their investment." Tevanian, 11/4/98pm, at 83:20-23.

2. Tevanian explained that the Windows installed base was the reason why developers thought Apple "had no chance of achieving any significant volume with a new operating system." Tevanian, 11/4/98pm, at 85:19-23.

31.3.3. Other reasons may have contributed to Rhapsody's failure -- Apple's financial difficulties and Microsoft's refusal to support its ability to work with Windows NT -- do not detract from the illustration Rhapsody provides of the applications barrier to entry.

1. The very document Microsoft introduced in support of its assertion that Apple's financial distress hurt Rhapsody shows, in fact, developer concern as to whether Apple could gain sufficient share to make their investment worthwhile. DX 1769 ("For Developers, the ramp for Rhapsody is not irrelevant."); see also Tevanian, 11/4/98pm, at 96:23 - 99:23.

2. The force of the applications barrier to entry is demonstrated by the steps Apple took following Rhapsody's initial failure. Apple incorporated some of the Rhapsody technology into its new Macintosh operating system in a way that did not require ISVs significantly to rewrite their applications. As Tevanian testified, this greatly reduced the costs to developers of supporting Rhapsody because: "The economic model for them is very simple. They just keep their existing investment." Tevanian, 11/4/98pm, at 91:13-21. In short, ISVs are willing to develop for Apple when they can recoup their past investments. But because of the Windows installed base, they are generally unwilling to make substantial investments required "to go into new areas." Tevanian, 11/4/98pm, at 83:2-7.

c. Other entry barriers reinforce the applications barrier to entry

32. Although the applications barrier to entry is an important factor that prevents other operating systems from developing into reasonable substitutes for Windows, other factors also inhibit the ability of other operating systems to enter or expand.

32.1. Switching costs. Switching to a new operating system requires users of existing systems to scrap existing investments in applications, training, and certain hardware.

1. Dr. Warren-Boulton testified that computer users "are reluctant to switch from Windows to another operating system, even another PC operating system, because to do so requires them to replace application software, to convert files, and to learn how to operate the new software. Often, switching also means replacing or modifying hardware. Businesses can face even greater switching costs, as they must integrate PCs using the new operating systems and application software within their PC networks and train their employees to use the new software." Warren-Boulton Dir. ¶ 49; id. ¶ 36.

2. James Gosling testified that a Windows user switching to the Apple iMac would "have to buy every piece of software all over again." Gosling, 12/10/98pm, at 19:15 - 20:1.

32.2. Other network effects. In addition to augmenting ISVs' incentives to write for Windows, Microsoft's high market share increases the value of Windows in other ways. These include, among other things, common file formats and low training costs because of user familiarity.

1. Professor Fisher testified that the ubiquity of Windows "may enable firms to avoid training costs when personnel are moved within the firm or new personnel are hired from outside. This gives firms an incentive to have the same user interface throughout its own computers and the same interface that is widely used by other firms. Other network effects include the ease of exchanging files and the opportunity to learn from others." Fisher Dir. ¶ 67.

2. Dr. Warren-Boulton testified that switchers to another platform would "need to expend time and money learning how to use a computer designed for a different processor. And both switchers and new users would have to bear costs resulting from any incompatibility or impaired compatibility between their computer and PCs used by colleagues or others with whom the users may wish to communicate or share files." Warren-Boulton Dir. ¶ 17.

3. Dr. Warren-Boulton also testified that the applications barrier to entry "is supplemented by other barriers to entry that derive from network effects. Books, publications, training, user groups, and news groups for the incumbent operating system product provide a large sense of community for its users. Users can exchange files, and perhaps more readily use their computers to communicate, with other members of the group. Finally, when the incumbent operating system is installed at work, it leads users to select the same operating system product for use at home." Warren-Boulton Dir. ¶ 55.

4. "It's important for them to be able to leverage one web browser class -- for example, a training session -- among all the various users of that browser, so that, to the extent it's possible, you want the features of that browser to look and feel and act and work the same, regardless of whether the employee is running a Unix work station or an Intel-based PC." Weadock, 11/17/98am, 19:25 - 20:6 (discussing GX 217, at MS98 0109146) (corporations "want a common platform for web apps, basic end user feature similarity, simship, and it is the number one reason corps and ISPs wait or don't go with IE as std. browser")

32.3. Sunk costs of developing an operating system. Like other software, developing an operating system requires incurring significant sunk costs (although actual production costs are low), and the significant sunk costs that must be incurred to develop an operating system deter entry.

1. Dr. Warren-Boulton testified: "If you build an operating system and you fail, you can't take the OS and do much else with it. That money is gone. And that makes it into a very risky business. And economists generally recognize that the higher the share of costs that are sunk, the greater the barrier to entry into that business, which really makes good sense." Warren-Boulton, 12/1/98am, at 31:2 - 31:8.

C. Microsoft's ability to control the price of Windows evidences its monopoly power

33. Microsoft's monopoly power is also evidenced by its ability to control the price of its operating systems.

1. Professor Fisher testified that a firm's "substantial ability to vary, and, indeed, to raise" price "without fearing that its customers will turn elsewhere" can be evidence monopoly power. Fisher, 6/1/99am, at 11:14 - 12:17.

1. Microsoft does not consider rival operating systems in pricing Windows 95 or Windows 98

34. Microsoft does not consider competitors in setting the price for Windows 98, and Microsoft does not fear that increasing the price of Windows will cause its customers to turn elsewhere.

1. See supra Part II.A; ¶ 15.1.5.

2. Microsoft raised the prices of obsolete versions of Windows

35. Microsoft's substantial pricing discretion is also demonstrated by its ability to increase the royalty for older versions of Windows, versions that Microsoft characterized as "obsolete," following the release of new versions.

a. Microsoft increased the Windows 95 price when it released Windows 98

36. Following the release of Windows 98, Microsoft, increased the price of Windows 95 to the same level as Windows 98.

1. Professor Fisher testified that - redacted - Fisher, 1/12/99pm, at 47:2-9 (sealed session).

2. Dean Schmalensee acknowledged that Microsoft - redacted - Schmalensee, 1/25/99am, at 51:25 - 52:12 (sealed session); Schmalensee, 1/25/99am, at 44:22 - 45:9 (sealed session).

3. Current OEM licenses list royalties for - redacted - See e.g., GX 461 at MS98 0009500 (IBM license) (sealed); GX 1190 at MS98 0008922 (Compaq license) (sealed). See also Schmalensee, 1/25/99am, 51:25 - 52:7 - redacted - (sealed session).

4. The average actual price of a Windows 95 standard license - redacted - GX 1404 (chart of prices sponsored by Professor Fisher) (sealed); DX 2330 (chart of license dates sponsored by Dean Schmalensee) (admitted in sealed session).

36.1. Microsoft's increase of the Windows 95 royalty to the same level as the Windows 98 royalty is not consistent with a competitive market.

1. Microsoft witnesses repeatedly asserted that - redacted - Schmalensee, 1/25/99am, at 15:6-18 - redacted - (sealed session); Rose, 2/17/99pm, at 26:14 - redacted - ; id. at 30:9-31:11 (same) (sealed session).

2. - redacted - Fisher, 1/12/99pm, at 45:16-22 (sealed session). - redacted - Fisher, 1/12/99pm, at 46:21-22 (sealed session). If operating systems "were a competitive market, and Microsoft didn't have some power over price, then when the better product came out, you would expect to see the price of the older product at least stay the same and, quite possibly, go down, but it didn't. It went up." Fisher, 1/11/99pm, at 43:9-13.

36.1.1. Dean Schmalensee's testimony that - redacted - (Schmalensee, 1/25/99am, at 27:9-11 (sealed session)) is wrong, and he ultimately acknowledged that he did not investigate whether

1. Professor Fisher presented a chart showing that - redacted - GX 1404 (sealed); Fisher, 1/11/99am, at 19:18-22 (sealed session). These figures included - redacted - Fisher, 1/12/99pm, at 46:16-25 (sealed session)

2. Dean Schmalensee presented no evidence comparing - redacted - Indeed he conceded - redacted - Schmalensee, 1/25/99am, at 49:21 - 51:24 (sealed session).

3. Instead, Dean Schmalensee presented a chart showing - redacted - Schmalensee, 1/25/99am, at 31:18 - 32:7 (sealed session); DX 2332 (admitted in sealed session).

4. Dean Schmalensee also asserted that "Microsoft did not in fact increase prices for Windows 95/98 after December 1997." Schmalensee Dir. ¶ 164. But he himself introduced a chart showing - redacted - DX 2330 (sealed). - redacted - ; e.g., GX 1190, at MS98 000892, MS98 0008930 (sealed); compare GX 449, at MSV 0002629 (1995 - redacted - (sealed). Dean Schmalensee appeared to ground his erroneous assertion on the fact that - redacted - (Schmalensee, 1/25/99am, at 50:3-9) (sealed session); - redacted - Dean Schmalensee conceded he did not investigate whether - redacted - Id. at 54:21 - 55:4.

b. Microsoft used the threat of withholding discounts on Windows 95 to double the price charged IBM for Windows 3.1 following the release of Windows 95

37. Similarly evidencing substantial and durable market power over operating systems for Intel-compatible personal computers is Microsoft's threat to withhold substantial discounts for Windows 95 in order to force IBM to accept a doubling of its royalty for Windows 3.11.

37.1. Microsoft put IBM to the choice of abandoning its favorable royalty for Windows 3.11 or sacrificing commercially crucial MDA discounts for Windows 95.

1. Garry Norris testified that IBM, in part because of its assistance in developing the product, enjoyed a $9 royalty for Windows 3.11. Norris, 6/7/99pm, at 8:18-23, 12:8-18; 6/8/99am, at 81:23 - 82:19; GX 2194, at 90353. IBM's contract with Microsoft guaranteed IBM that rate until September 1997. Norris, 6/7/99pm, at 8:18-23.

2. In April 1996, Norris testified, Microsoft proposed to IBM what Microsoft termed its "Windows desktop family agreement." Norris, 6/7/99pm, at 14:13 - 15:4. The proposed agreement consisted of a single contract covering a number of Microsoft operating system products, including Windows 95, Windows 3.11, and Windows NT. Through this agreement, Microsoft conditioned substantial discounts to Windows 95, and a license to Microsoft's newest version of Windows NT, on IBM abandoning its favorable rate for Windows 3.11 and accepting a much higher rate (initially proposed at $62). Norris, 6/7/99pm, at 8:13 - 9:16, 13:16 - 14:4. IBM could sign a Windows 95 license without giving up its favorable Windows 3.11 rate, but if it did, Microsoft would withhold MDA discounts on Windows 95 amounting to $75 million a year. Norris, 6/7/99pm, at 9:4-9, 10:21-25.

37.1.1. Microsoft sought to raise IBM's Windows 3.11 royalty, and thereby to migrate its installed base to Windows 95, in order to ensure Microsoft's continued market dominance.

1. Norris testified that Microsoft told IBM that it conditioned discounts vital to the IBM PC Company's business on IBM abandoning its favorable rate for Windows 3.11 because Microsoft "wanted more customers to move to Windows 95, and more customers to move to Windows NT." Norris, 6/7/99pm, at 12:1-7, 39:20 - 40:2.

2. As Dr. Warren-Boulton testified, one way Microsoft reinforces the applications barrier to entry is to "migrate" its "installed base" of users -- those already using Windows operating systems -- to newer versions of its operating system. Increasing the number of Windows 95 users increases the incentives of ISVs to develop for Windows 95, thus reinforcing the applications barrier to entry. Warren-Boulton, 11/23/98pm, at 75:13 - 77:7.

37.1.2. Microsoft also told IBM that, even if it signed the agreement Microsoft proposed, it would not get as good a deal as IBM's rival, Compaq, because IBM (unlike Compaq) competed against Microsoft.

1. See infra Part V.C.2.b(3); ¶ 209.2.1.

37.1.3. IBM ultimately acquiesced in Microsoft's demands and gave up its $9 royalty for Windows 3.11 because it lacked any viable commercial alternative to Windows 95 and the discounts Microsoft threatened to withhold were necessary in order for IBM to compete against OEM rivals.

1. Norris testified that IBM gave in to Microsoft's demands because IBM "did not have a choice. We had no place else to go. We had to have Windows 95 in order to be in the PC business," and Microsoft was threatening to increase IBM's costs "by $75 million" a year. Norris, 6/7/99pm, at 13:9-25, 40:3-15 (same).

2. Norris further testified that a Microsoft account manager told IBM that accepting these terms was the "Cost of doing business with Microsoft." GX 2186; Norris, 6/7/99pm, at 74:20 - 75:10.

37.1.4. Although IBM was able to negotiate the originally offered $62 royalty Microsoft proposed for Windows 3.11 down to an effective royalty of approximately $19.50, Microsoft's threatened withholding of $75 million in MDA discounts, and its ability to increase the price charged IBM for its inferior Windows 3.11, demonstrate substantial market power.

37.1.4.1. IBM's assent to Microsoft's demands demonstrates that Microsoft possesses substantial pricing discretion with respect to Windows 95. Microsoft threatened to withhold $75 million in discounts to IBM without concern that IBM would shift its business to another operating system vendor or that charging a high price to IBM would hasten the day when a viable alternative to Windows would arise.

1. Professor Fisher testified that Microsoft's monopoly power is evidenced by the fact that its "customers do not believe that they have serious commercial alternatives to Windows." Fisher, 6/1/99am, at 11:9-19.

37.1.4.2. The price IBM paid for Windows 3.11 would have increased even more had IBM not kept its shipments of Windows 3.11 below 8% of all Microsoft operating systems that it shipped. Microsoft's ability to change the Windows 3.11 royalty depending on the extent to which IBM facilitated Microsoft's objective of moving users to Windows 95 is further evidence of monopoly power.

1. GX 2186 (document discussing IBM's royalty payments to Microsoft states as "Special Condition one" that "If win 3.11 vol. <8% of total volume for the contract period IBM receives rebate of $5m + $6 per copy of all win 3.11 shipments").

2. Garry Norris testified that there was a two-part agreement under which "Microsoft offered IBM an incentive, and the incentive was that if IBM's shipments of Windows 3.11 fell below eight percent of its total Microsoft operating shipments, Microsoft would rebate to IBM 5 million U.S. dollars, which had been agreed upon in a previous settlement agreement in 1995. The second aspect of that was that after shipments did, in fact, fall below eight percent, then the price for Windows 3.11 would receive an additional $6 rebate." Norris, 6/7/99pm, at 37:10-20; see also Norris, 6/9/99pm, at 48:9 - 49:5 (same).

3. Other aspects of Microsoft's pricing of Windows are consistent with monopoly power

38. Other aspects of Microsoft's pricing of Windows are consistent with Microsoft's possession of monopoly power.

38.1. The increasing price of Windows. In contrast to other components of a personal computer (where prices have substantially decreased), the price of Windows has increased in both absolute and relative terms in the past several years.

38.1.1. The price OEMs pay for Microsoft's operating systems has risen in absolute terms in the past several years.

1. Professor Fisher testified that he has "looked at what's happened to Microsoft's operating system price over time, and it isn't falling, and I don't believe it's falling even on a quality corrected basis. And for that matter, it isn't even constant. It's rising." Fisher, 1/11/99pm, at 41:24 - 42:3; see also GX 1404 (sealed) (chart sponsored by Professor Fisher showing

2. The royalty - redacted - Rose, 2/17/99pm, at 30:9-18 (sealed session).

3. - redacted - GX 1430 (sealed).

4. - redacted - See supra Part II.C.2.a; ¶ 32.

5. Kempin acknowledged that - redacted - Kempin, 2/25/99pm, 126:5 -128:13 (sealed session); GX 1506 (sealed); GX 1508 (sealed).

38.1.2. The price OEMs pay for Microsoft's operating systems has risen in relative terms in the past several years.

1. Kempin wrote to Gates in December 1997 that the price of Microsoft's operating systems to OEMs has increased "over the last ten years" while "other components" of PC systems "have come down and continue[] to come down." GX 365, at MS7 007194.

2. See Romano Dep. (played 12/16/98pm), at 33:20 - 34:21 (testifying that the prices of all components of the PC have decreased except the operating system, the price of which has increased); Warren-Boulton, 12/1/98am, at 26:16 - 30:9; GX 439 (Microsoft chart demonstrating price increase); GX 1430 (chart based on GX 439) (sealed); Warren-Boulton Dir. ¶ 61.

3. Compare Schmalensee, 6/23/99am, at 14:15 (testifying that "hardware costs are falling") with DX 2301 (admitted in sealed session) (chart sponsored by Dean Schmalensee showing

38.1.3. Although Dean Schmalensee asserted that - redacted - + (Schmalensee, 1/25/99am, at 11:11 - 15:18) (sealed session), that assertion is not supported by the evidence:

1. Microsoft, as explained, raised the price of Windows 95 to the same level as Windows 98. But Microsoft did not at the same time increase the quality of Windows 95. See supra Part II.C.2.a; ¶ 36.1.

2. As Professor Fisher testified, this relative increase in the price of Windows "ought to at least make one suspicious" of Microsoft's assertion that its price increases merely reflects adjustments for increased product quality. Fisher, 1/11/99pm, at 43:14-23; Fisher, 1/13/99am, at 39:13 - 41:9.

3. See supra ¶ 38.1.2 (price of operating system has increased relative to other components of PC system).

38.2. Microsoft's pricing of its Windows 98 upgrade. Microsoft's pricing of its Windows 98 upgrade also is consistent with Microsoft's possession of monopoly power.

38.2.1. The evidence shows that Microsoft had substantial discretion in setting the price of its Windows 98 upgrade product, the operating system product it sells to existing users of Windows 95.

1. A contemporaneous Microsoft study shows that it could have charged $49 for the product -- and there is no reason to believe that price would have been unprofitable -- but concluded it could earn greater profits by charging $89. Warren-Boulton, 12/1/98am, at 24:8 - 25:13; GX 1371, at MS7 003730, MS7 003748.

2. The existence of a range of prices over which Microsoft believed it could profitably sell its upgrade product is, at a minimum, consistent with its possession of substantial market power. Warren-Boulton, 12/1/98am, at 24:8 - 25:13.

38.3. Microsoft's ability to price discriminate. Microsoft's sustained ability to price discriminate is probative of market power and, therefore, consistent with monopoly power.

38.3.1. Price discrimination is probative of the existence of market power and, therefore, is consistent with monopoly power.

1. Price discrimination is the practice of setting different prices for the same product to different customers. Schmalensee, 1/21/99am, 30:11-16. Dean Schmalensee testified that he continues to agree with his statement in his 1982 article from the Harvard Law Review, that it is "a standard textbook proposition that for a seller to practice price discrimination profitably, it must have some control over price, some monopoly power." GX 1514. By "some monopoly power" in that quotation, Dean Schmalensee says he meant "market power." Schmalensee, at 1/14/99pm, 47:7-14; see also Schmalensee, at 1/21/99pm, 4:22 - 5:4.

2. Professor Fisher testified that Microsoft's ability to price discriminate indicates its ability to earn supranormal profits from OEMs which do not pay the low price. Fisher, 1/11/99pm, 41:17 -23. Because monopoly power is a "high and sustained degree of market power," Professor Fisher testified, evidence that Microsoft has market power helps form the basis for his opinion that Microsoft has monopoly power. Fisher, 1/13/99am, at 26:16-22.

3. Microsoft introduced an excerpt from a current economics textbook, which states that for a firm to be able to engage in price discrimination, the firm must have some market power. The book further comments: "Even though all firms would like to price discriminate, many are not able to do so." DX 2271, at page 434.

38.3.2. Microsoft engages in price discrimination by charging different OEMs different prices for Windows.

1. Professor Fisher testified that - redacted - Fisher, 1/11/99am, at 18:14 - 19:8 (sealed session).

2. Summarizing the charts he sponsored, Professor Fisher testified that the price differences among OEMs cannot be explained except in light of Microsoft's exercise of market power. Fisher, 1/13/99am, 57:16 - 58:9.

3. As Professor Fisher's charts show, - redacted -

   For instance, GX 1403 (sealed), GX1432 (sealed), and GX 1433 (sealed) show - redacted - GX 1405 (sealed), GX 1406 (sealed), GX 1407 (sealed) - redacted - GX 1416 (sealed), GX 1417 (sealed), GX 1419 (sealed), and GX 1420 (sealed) show - redacted - GX 1408 (sealed), GX 1409 (sealed), GX 1410 (sealed), GX 1412 (sealed), GX 1414 (sealed), and GX 1415 (sealed) show - redacted - GX 1422 (sealed), GX 1423 (sealed), GX 1426 (sealed), and GX 1428 (sealed) show - redacted -

4. Professor Fisher testified, referring to his charts - redacted - Fisher, 1/11/99am, at 20:12-18 (sealed session).

5. Further, Professor Fisher testified, Microsoft's price discrimination is part of a system which tends to increase Microsoft's future revenues and reinforce the barriers to entry protecting Microsoft's monopoly. Fisher, 1/11/99pm, at 44:3 - 45:13. - redacted - Fisher, 1/11/99pm, at 44:3 - 45:13. - redacted - Fisher, 1/11/99pm, at 30:8-11 (sealed session).

6. - redacted - DX 2307.

7. Dean Schmalensee repeatedly emphasized - redacted - DX 2306; Schmalensee, 1/25/99am, at 29:6-11 (sealed session). But his chart DX 2307 shows - redacted - DX 2307; Schmalensee, 1/25/99am, at 22:17-22 (sealed session).

38.3.3. Among the five largest OEMs, - redacted -

1. According to a chart sponsored by Dean Schmalensee, - redacted - DX 2307.

2. According to Dean Schmalensee, - redacted - DX 2307. In October 1997, Gates wrote to Kempin, Microsoft's Vice President in charge of OEM relations, "[o]verall, we will never have the same relationship with IBM that we have with Compaq, Dell and even HP because of their software ambitions. I could deal with this just fine if they weren't such rabid JAVA backers." GX 257.

3. Professor Fisher showed, focusing on the same language mix and time period as Dean Schmalensee, that - redacted - GX 1432 (sealed).

D. Dean Schmalensee's contrary analysis is unreliable

39. Dean Schmalensee testified that Microsoft lacks monopoly power. Refusing to define a relevant market, Dean Schmalensee opined that Microsoft cannot be a monopolist because it does not behave like a monopolist. Dean Schmalensee's analysis is deeply flawed. It is based on suppositions that are contrary to both the evidence and common sense and contradicts his prior writings and testimony.

1. Dean Schmalensee's approach to market definition is flawed

40. Dean Schmalensee testified that there is no purpose for which defining a market in which Microsoft sells operating systems is relevant (Schmalensee, 1/13/99pm, at 37:12-22). The reasons Dean Schmalensee gave for refusing to define a market, and his objections to the market the plaintiffs defined, are not credible and are unreliable.

40.1. First, Dean Schmalensee testified that assessing market share is "not helpful in an industry like software" because "entry is possible from many known and unknown sources" and a software industry is too "dynamic" to apply the traditional tools of antitrust analysis (Schmalensee Dir. ¶ 187). This reason for refusing to define a market is inconsistent with the testimony Dean Schmalensee gave in the Caldera case, his prior writings, and sound analysis.

40.1.1. In the Caldera case, in which Microsoft is being sued by a producer of a rival operating system, Dean Schmalensee defined a market for Intel-compatible desktop operating systems -- the very market he testified here has no purpose.

1. Schmalensee, 1/13/99pm, at 29:9-14.

40.1.2. Dean Schmalensee's refusal to define a relevant market in this case also conflicts with his prior writings.

1. In a paper entitled "Diagnosing Monopoly Power in Antitrust Cases," Dean Schmalensee wrote that "market share has long been the legal touchstone for deciding whether a firm has market power" and that any weaknesses in that approach "do not make a case for abandoning the traditional concern with market share." GX 2335, at page 1.
2. In a Harvard Law Review article entitled "Another Look At Market Power," Dean Schmalensee quoted an article by Landes & Posner as saying that the "standard method of proving market power in antitrust cases involves first defining a relevant market in which to compute the defendant's market share, next computing that share, and then deciding whether it is large enough to support an inference of the required degree of market power." GX 1514, at 5. Schmalensee endorsed "the basic approach of Landes & Posner" and said that computing market share "can provide information about the importance of market power, but markets differ considerably and shares should be interpreted in light of evidence on market demand elasticities and other conditions." GX 1514, at 9.

40.1.3. Dean Schmalensee's analysis is, in any event, unsound. Defining markets and assessing shares is appropriate in this case, and Dean Schmalensee's refusal to do so leads to analytic errors.

1. Professor Fisher testified that, although "the question of what is a relevant market in this case, and in most cases, is not a question with very definite answers," it is nonetheless useful because it "is a way of starting to summarize what are the things you have to understand" to determine "the constraints on the alleged monopolist." Fisher, 6/1/99am, at 7:17 - 8:5.
2. Professor Fisher testified that, because the critical question in this case is whether Microsoft has "monopoly power in PC operating systems" -- the product Microsoft sells -- it is sensible to begin the analysis by determining whether other products can constrain Microsoft's ability to exercise power over PC operating systems; that is, to determine whether PC operating systems are a relevant market. Fisher, 6/1/99am, at 7:23 - 8:10; see also Fisher Dir. ¶¶ 8-9.
3. By contrast, Dean Schmalensee's refusal to define a relevant market led him to engage in a flawed assessment of barriers to entry. By "not focusing on market definition to begin with," Professor Fisher testified, Dean Schmalensee improperly focused on ease of entry "into the microcomputer software industry" rather than the difficulty of entry into Intel-based PC operating systems. Fisher, 6/1/99am, at 9:3-12. Whether entry into the microcomputer "industry" is easy says nothing about whether it is easy to offer a product that can effectively compete against Microsoft's operating system. Fisher, 6/1/99am, 8:21 - 11:8.

40.2. Second, Dean Schmalensee asserted that the market definition is not useful here because it is "illogical" to exclude other "platform" products that threaten Microsoft's position in operating systems -- including Internet browsers and Java -- and platforms are "too heterogenous" to be a market (Schmalensee Dir. ¶ 336; Schmalensee, 1/13/99pm, at 32:3-17; Schmalensee, 6/23/99pm, at 58:15 - 59:21). This argument is badly flawed.

40.2.1. It is Dean Schmalensee's analysis that is illogical. By his reasoning, one could never define a market -- even if it included all of the products (like PC operating systems) that are substitutes for and compete against one another -- as long as there are complements for those products (like browsers or other platform software) that other firms could use to develop new or strengthen existing substitute products.

1. Under Dean Schmalensee's reasoning, it would be illogical not to place in the same relevant market:

   1. an oil refiner in California and a railroad company that is planning on building a new line into California, if the railroad could threaten the oil refiner's position by facilitating the entry into the California market of oil refined in other States. Fisher, 6/1/99am, at 15:13 - 17:21 (giving example of producer of bulky commodity); or

   2. a manufacturer of automobiles and a producer of methanol, if methanol threatens the automobile manufacturer's position by facilitating the development of cars that run on methanol. Fisher, 6/1/99am, at 16:5-12.

2. In these examples, as Professor Fisher testified, a product (like railroads or methanol) is properly not included in the relevant market -- because it is not a reasonable substitute for products in the market (oil and automobiles) -- even though it threatens to increase competition within that market because it is an important complement that can facilitate growth or entry by products that compete with products in the market. Fisher, 6/1/99am, at 15:7 - 18:11. By contrast, under Dean Schmalensee's reasoning, defining a market in such circumstances would not be a useful enterprise. Schmalensee, 6/22/99pm, at 25:7 - 26:7. Dean Schmalensee's position is untenable because, for example, a market for oil refining plainly can be defined even though railroads may threaten an oil refiner's market power. Fisher, 6/1/99am, at 15:7 - 18:11.

40.2.2. Although platform products such as Netscape and Java are complements to operating systems, they are not substitutes for operating systems. Thus, even though they pose a threat to Microsoft's dominant position in the personal computer operating system market, they are not in that market.

1. See supra ¶ 19.1.

2. Dean Schmalensee conceded, "conceptually, there is a difference, and an important difference" between operating systems and platforms. Schmalensee, 6/21/99am, at 20:7-10. "An operating system operates the computer...runs the disk drive, runs the printer, manages the interfaces and so forth." Schmalensee, 6/21/99am, at 20:4-6. By contrast, a "platform" exposes "a set of APIs" that can "be used by other software developers." Schmalensee, 6/21/99am, at 19:15.

3. Thus, although "operating systems, typically, are platforms" and "many platforms are operating systems" Schmalensee, 6/21/99am, at 20:7, platforms cannot fully substitute for operating systems; see also Gosling Dir. ¶ 8.

4. Java and Internet browsers threaten Microsoft's position in operating systems, not because they can develop into another operating system, but rather because the platform they supply could erode the applications barrier to entry and facilitate the entry and expansion of another operating system. Schmalensee, 1/13/99pm, at 35:5-12 (agreeing that "middleware" is a competitive threat to Windows even though a firm supplying middleware is "not a potential entrant into the business of supplying operating systems that would compete with Microsoft").

5. Just as a railroad cannot threaten a monopoly oil refiner unless there is another oil refiner whose entry the railroad can facilitate, so Java and Internet browsers cannot threaten Microsoft's position in operating systems unless there are other operating systems on which those "middleware" products can be run. Fisher, 6/1/99am, at 18:5-11 ("In the present case, the growth of the Netscape browser or the widespread use of original Java might have perfectly well have broken down the applications barrier to entry and allowed other operating systems to compete. But it would be the other operating systems that were then on the market, not . . . either Netscape, the browser market, or Sun because of Java."); Schmalensee, 6/23/999am, at 57:14 - 58:3 (conceding that, at present, an operating system is essential to access web-based applications).

40.2.3. There is no evidence that Java and Netscape constrain Microsoft's ability to exercise monopoly power today. Thus, even if the market should, as Dean Schmalensee improperly insists, include "every significant constraint" on "the alleged monopolist" (Schmalensee, 6/24/99pm, at 60:10-20), Java and Netscape should not be included in the market.

1. Dean Schmalensee conceded that what he characterizes as Microsoft's existing competitors are not a significant constraint on its ability to exercise market power. Schmalensee, 1/14/99am, at 23:5-18, 24:16-21.

2. Dr. Warren-Boulton testified that, "under the particular economic conditions in this market, I would not expect the prospect of such a threat" to Microsoft's monopoly "in the future to significantly affect current pricing by Microsoft." Warren-Boulton, 11/19/98pm, at 33:6-14.

40.3. Third, Dean Schmalensee asserted that market share is not useful in an industry characterized by significant intellectual property protection and low marginal costs (Schmalensee, 1/20/99pm, at 63:21 - 65:4). This argument ignores both the relevant issue -- whether Microsoft's conduct is constrained by competition from others -- and the importance of other entry barriers.

1. Professor Fisher testified that "the applications barrier to entry protects Microsoft" "independent" of its intellectual property rights in Windows. Fisher, 6/2/99am, at 14:24 - 15:4. Although a copyright-protected movie cannot prevent new movies from being written, the applications barrier to entry inhibits the entry and expansion of other Intel-based PC operating systems. Fisher, 6/2/99am, at 13:20 - 15:4.

2. Dean Schmalensee's opinion that Microsoft lacks monopoly power because of low barriers to entry is flawed

41. Dean Schmalensee testified that Microsoft lacks monopoly power because "Microsoft does not have the protection of substantial barriers to entry" (Schmalensee, 1/14/99am, at 8:22 - 9:9). Dean Schmalensee's reasons for finding the absence of economically meaningful barriers to entry are flawed and inconsistent with the evidence.

a. Dean Schmalensee is wrong that the applications barrier to entry is low

42. Dean Schmalensee asserted that "the facts are inconsistent" with the existence of a high applications barrier to entry (Schmalensee, 6/22/99pm, at 56:9-12). But the evidence is to the contrary.

42.1. Dean Schmalensee conceded virtually all of the critical facts that underlie the applications barrier to entry.

1. Dean Schmalensee conceded that operating systems seeking to substitute for Windows face a "chicken-and-egg problem . . . . Consumers will not use an operating system if there are not enough applications written to it. ISVs will not write applications software for an operating system unless they expect enough customers to use that operating system." Schmalensee Dir. ¶ 100; Schmalensee, 6/23/99pm, at 58:10 - 59:24.

2. Dean Schmalensee conceded that most applications are "written for Windows first and sometimes only" for Windows. Schmalensee, 1/13/99pm, at 61:22 - 62:4.

3. Dean Schmalensee conceded that Windows has a much larger stock of applications than are available for other PC operating systems and "that the rich set of applications available for Windows contribute significantly to the attractiveness of that platform, and that . . . by itself gives it an advantage over other platforms." Schmalensee, 1/19/99am, at 50:3-12.

4. Dean Schmalensee conceded that "to attract as much attention as Microsoft attracts, for a brand new entrant, might require" spending more than Microsoft does. Schmalensee, 1/14/99am, at 16:10-25.

5. Dean Schmalensee conceded that, because of the absence of sufficient applications available for other operating systems, there is no operating system to which a large OEM presently could switch and that Microsoft could raise the short-term price of Windows. Schmalensee, 1/13/99pm, at 42:16-22, 46:10-12; 6/23/99pm, at 60:9 - 61:4; Schmalensee, 1/20/99pm, at 38:13-17 (agreeing that "if Microsoft were to increase its prices by 10 percent or 15 percent or 20 percent now, it would increase its short-term profits").

6. Dean Schmalensee conceded that "switching costs and network effects may be larger for some operating systems than for many applications programs." Schmalensee Dir. ¶ 130.

7. Dean Schmalensee conceded that ISVs will not write to a particular operating system unless they believe the expected return will cover the costs ISVs must sink. Schmalensee Dir. ¶ 105; Schmalensee, 1/13/99pm, at 61:10-13 (stating that the "reasons for not porting or not writing to for particular operating system" are "normally business reasons. You write for an operating system if you think it's likely to be profitable to do so.").

8. Dean Schmalensee conceded "that the applications programming barrier to entry . . . is something that does, in fact, make it more difficult for people to enter the business of supplying operating systems." Schmalensee, 1/14/99am, at 9:10-18.

42.2. Despite these concessions, Dean Schmalensee argued that the applications barrier to entry is low because there is no evidence that rivals face higher costs to compete effectively than does Microsoft and that any cost disadvantage is not significant (Schmalensee Dir. ¶¶ 105, 132; 1/14/99am, at 16:14-25; 6/23/99pm, at 11:22). The evidence is inconsistent with this argument.

1. As explained, because of Microsoft's massive installed base, the expected return to ISVs from writing to other operating systems is lower than the return from writing to Windows; other operating system vendors thus face higher costs in inducing a large number of ISVs to write to their operating systems. See supra Part II.B.3., ¶ 27.

2. Because of the collective action problem referred to above, ISVs are very unlikely to write to other operating systems in sufficient numbers to enable those operating systems to become viable substitutes for Windows. See supra Part II.B.3., ¶ 27.2.3.2 -.3.

3. Dean Schmalensee did not analyze "what it would take someone with a hypothetical attractive operating system" to obtain sufficient developer support to duplicate the applications available for Windows. Schmalensee, 1/14/99am, at 14:23 - 15:22.

42.3. In support of his argument that other operating systems do not face a cost disadvantage in attracting ISVs that prevents effective competition against Microsoft in PC operating systems, Dean Schmalensee pointed to the recent success of several niche operating systems, including Linux and BeOS (Schmalensee Dir. ¶¶ 138-40, 158). But the ability of Linux and BeOS in attracting both developer attention and consumer interest has been limited and thus confirms, rather than undermines, the existence of the applications barrier to entry.

42.3.1. BeOS is marketed as a specialized complement to Windows because it lacks the range of applications necessary to substitute for Windows.

1. BeOS's founder, Jean Louis Gassée, stated: "'We don't want to compete directly with Microsoft to be the only operating system on the PC . . . but we can be complementary.'" GX 568 (quoting Gassée). Dr. Warren-Boulton testified that BeOS is a complement, rather than a substitute, for Windows. Warren-Boulton, 12/1/98am, at 45:5 - 49:10.

2. Thus, BeOS is being loaded by OEMs not instead of Windows, but together with Windows "as a 'dual boot,' letting users switch between the two as needed." GX 568.

3. Although Dean Schmalensee asserted that BeOS's strategy of becoming a complement to Windows through "dual boot" was merely a stepping stone to challenging Windows (Schmalensee, 1/13/99pm, at 54:8-25), that testimony is undermined by his later testimony that there is no substantial demand for dual boot systems. Schmalensee, 6/23/99pm, at 62:2-23.

42.3.2. Linux is principally marketed as a server operating system, and its employment as a desktop operating system is confined to specialized tasks because its lacks applications comparable to Windows'.

1. The CEO of Red Hat, an important Linux vendor, stated that Red Hat Linux "is almost exclusively being used today to run specialized server computers that distribute data on the Internet or internal corporate networks." GX 1568. He further added: "Just because we exist doesn't mean Microsoft doesn't have a monopoly with desktop machines. It's like a telephone company executive holding up a walkie-talkie and saying this is a competitor to local phone service." GX 1568.

2. The President and CEO of Caldera, another Linux vendor, testified that Caldera's OpenLinux product does not compete with Windows 95, and that Caldera does not "have the application base to really compete as a desktop" with Windows. Warren-Boulton, 12/1/98am, at 50:4 - 51:15 (play Sparks deposition); see also Warren-Boulton, 12/1/98am, at 56:17 - 57:16 (to the extent Linux is competing with Microsoft, it is competing in the server market; Caldera does not view itself as a competitor in the desktop market because it does not have the necessary stock of applications).

3. An IBM executive stated: "The limiting factor for Linux breaking into the desktop area right now is simply the lack of available applications written for the operating system." GX 2091. He explained that "users tend to deploy Linux for smaller, simpler tasks rather than for huge, enterprise-scale transactions." GX 2091. Another IBM executive added that, although "it is technically possible to install Linux on an IBM thinkpad," there "are just not enough applications to make it worthwhile." GX 2091.

4. Dean Schmalensee conceded that Linux is "not a major competitor today." Schmalensee, 1/13/99pm, at 45:23. Although Dean Schmalensee also asserted that "the majority of sales of Linux" are "for desktops" (1/13/99pm, at 73:18-19), he later contradicted that testimony, conceding that the "bulk" of Linux users "at present are" using Linux on "servers." 6/23/99pm, at 66:5 - 67:5.

5. Although a small number of OEMs are offering Linux on some portions of their line (DX 2434 (reporting that Dell is offering Linux)), a representative of another prominent OEM stated: "We see Linux as a server phenomenon right now more than a desktop phenomenon." GX 2091.

42.3.3. Thus, although Linux and BeOS have attracted some developer attention, consistent with the applications barrier to entry, they have not attracted sufficient developer attention to provide an effective substitute for Windows for a large number of users.

1. As explained, BeOS and Linux have thousands of fewer applications available than Windows. See supra Part II.B.3., ¶ 26.1.3.

2. Dr. Warren-Boulton testified that although BeOS is a viable "specialized" niche operating system, it cannot effectively substitute for users because it lacks the "extraordinary width of applications available . . . on Windows." Warren-Boulton, 11/23/98am, at 18:8-22. Dr. Warren-Boulton further testified that the absence of applications prevents Linux from gaining substantial market share, and that only the advent of a large stock of cross-platform applications could Linux present substantial competition to Windows. Warren-Boulton, 12/1/98am, at 57:8 -59:4.

3. Bill Gates reportedly stated regarding Linux: "Like a lot of products that are free, you get a loyal following even though it's small. I've never had a customer mention Linux to me." GX 1378.

4. Bryan Sparks testified that Linux cannot effectively compete with Windows because it "just" doesn't "have the applications base to really compete as a desktop." Warren-Boulton, 12/1/98am, at 51:12-15 (playing Sparks deposition).

5. An IBM executive explained: "The limiting factor for Linux breaking into the desktop area right now is simply the lack of available applications written for the operating system." GX 2091. Another added that, although "it is technically possible to install Linux on an IBM thinkpad," there "are just not enough applications to make it worthwhile." GX 2091.

6. Professor Fisher testified that "Linux is going to remain a quite successful niche operating system for some time to come, and it's not in fact going to offer a serious threat to Microsoft." Fisher, 6/3/99pm, at 25:14-17.

42.3.4. The existence of niche operating systems, such as Linux and BeOS, is entirely consistent with Microsoft's possession of monopoly power; and Dean Schmalensee is wrong when he argues that, if the applications barrier to entry is high, other operating systems vendors or vendors of other platform products that also can be complements to Windows are "wasting their time" seeking to attract developers (Schmalensee, 6/23/99am, at 23:16 - 27:10; 1/13/99pm, at 55:1-22).

1. Professor Fisher testified: "It's well-accepted that a firm can have monopoly power with a fringe of competitors." Fisher, 6/1/99am, at 22:4-17.

2. Professor Fisher further testified that it is not sufficient to overcome the applications barrier to entry "that there may be some ISV's or even many ISV's that will write to operating systems other than Windows" because "what makes the applications barrier to entry so severe" is "the breadth and depth of the numerous applications that are written or Windows." Fisher, 6/1/99am, at 55:15 - 56:19.

3. Dr. Warren-Boulton testified that the fact firms are porting to Linux shows that they are betting Linux will be profitable, not that Linux will substitute for Windows. Warren-Boulton, 11/19/98pm, at 99:7 - 100:4.

4. Dr. Warren-Boulton testified that "the existence of fringe competitors that are in the operating system market does not mean in any way that Microsoft does not have monopoly power" because of the applications barrier to entry. Warren-Boulton, 11/19/99am at 19:16 - 20:3.

42.3.5. Any threat Linux and BeOS pose to Microsoft's position is speculative and does not prevent Microsoft from enjoying monopoly power today.

1. The CEO of Red Hat, a leading Linux vendor, stated: "We are absolutely not a viable competitor" to Windows "at this time. We have every intention of being one, but how long will that take? Realistically, it will be 20 years." GX 1568.

2. Dean Schmalensee conceded that Linux is not a significant constraint today on Microsoft's ability to exercise power and cannot predict when it will exert such a constraint. Schmalensee, 1/13/99pm, at 52:25 - 53:8; 1/14/99am, at 23:16-25. He conceded that he had made no estimate of how many PCs have Linux preinstalled now or will have Linux preinstalled in the future. Schmalense, 6/23/99pm, at 65:17-24. Dean Schmalensee testified that he didn't "pretend to be able to forecast" whether there will be substantial demand for Linux in the future. Schmalensee, 6/23/99pm, at 73:7-12.

3. Dr. Warren-Boulton testified that: "I have absolutely no evidence that Microsoft's pricing" of Windows "is constrained by perceived or actual competition" including "the availability of Linux." Warren-Boulton, 11/19/98pm, at 96:20 - 97:1.

42.4. Dean Schmalensee is wrong that, even if other operating system vendors face substantially higher costs than Microsoft faces today, that does not amount to an entry barrier because an entry barrier exists only if the costs to a rival operating system today are higher than the costs Microsoft incurred when it entered (Schmalensee, 6/22/99pm, at 62:8-20).

42.4.1. For one thing, this definition of a barrier to entry contradicts the approach to entry barriers taken by Dean Schmalensee elsewhere in his testimony and in his prior writings.

1. Dean Schmalensee described as "broadly consistent" with his definition of barriers to entry the proposition that a barrier to entry is any factor that "permits a firm already in the market to earn returns above the competitive level while deterring others from entering." GX 1516; Schmalensee, 1/14/99, at 6:17 - 7:19. And he testified that a barrier to entry exists if there are factors that "disadvantage . . . firms that otherwise would be capable of competing efficiently." Schmalensee 1/21/99am, at 33:2-5; 6/22/99pm at 70:3-24 (testifying that a barrier to entry exists if the rival cannot "attract the resources to expand and to become competitive").

2. Dean Schmalensee previously wrote that: "In general, a clear signal of low barriers is provided only by effective, viable entry that takes a nontrivial market share . . . ." GX 1513 ((Richard Schmalensee, Ease of Entry: Has the Concept Been Applied Too Readily, 56 Antitrust L.J. 41, 42 (1987)).

42.4.2. Moreover, successful entry into PC operating systems is much more difficult today than 15 years ago. The network effects that underlie the applications barrier to entry are much larger today than when Microsoft entered because PC penetration (the percent of potential PC users who already use PCs) is higher and Microsoft is a well-established incumbent with a dominant market share.

1. Professor Fisher testified: "When Microsoft won the network battle, when Windows became the dominant operating systems, there were . . . many fewer P.C.'s, and there was no incumbent operating system of equal power and importance. There were, of course, other operating systems to fight and there were other operating systems to, as it were, overcome. One of them, of course, was Microsoft's own operating system, DOS. The cost after . . . after Microsoft's victory . . . of persuading ISV's to build such a stock rather than write for Windows has got to be much more substantial than it was for Microsoft to persuade them" to write for Microsoft operating systems "in the first place." Fisher, 6/1/99am, at 53:6 - 54:1. In other words, "the economy of scale" that underlies the applications barrier to entry "is bigger now." Fisher, 6/1/99am, at 54:2-10. See also Fisher, 6/1/99am, at 56:14 - 58:18 (Although there might be some incentive for ISVs breaking into the market to write for new operating systems, that is not enough to induce ISVs in general to write to other operating systems such that they can substitute for Windows.)

2. Demonstrating the increased penetration of PCs, Microsoft's own documents show that its shipments of operating systems rose from 11.4 million units in 1990 to 51.9 million units in 1996. GX 439.

3. Dr. Warren-Boulton testified that, when Microsoft entered the operating system market, the applications barrier to entry was not comparable to that which potential entrants face today. He explained: "[C]ompare the difficulty there with the difficulty today where you are faced with an incumbent with tens of thousands of API's, a huge stock of applications--trying to play catch-up at that point, it's just very difficult." Warren-Boulton, 11/24/98am, at 48:17 - 49:6.

42.5. Dean Schmalensee's assertion that the history of competition for operating systems shows that the category is easily contestable and that "inflection" points that displace rivals occur frequently is also belied by the evidence and his prior writings.

42.5.1. Dean Schmalensee previously observed that the "fact that entry has occurred in the past does not imply there are no barriers to entry or that entry is necessarily easy."

1. GX 1513 (Ease of Entry Article).

42.5.2. The evidence shows not, as Dean Schmalensee claims, frequent displacement of a dominant firm, but rather Microsoft's demonstrated ability to perpetuate its market power.

1. Microsoft, according to Dean Schmalensee's own analysis, has had the dominant PC operating system since at least the late 1980s. Schmalensee Dir. ¶¶ 118-119.

2. Microsoft has maintained that dominance notwithstanding the development of, among other things, (i) the graphical user interface; (ii) the migration of PC operating systems from 16-bit to 32-bit chip architecture; and (iii) the advent of the Internet, all of which Microsoft claims to be "inflection points." Maritz ¶ 15.

3. Professor Fisher testified after being asked about the history of users switching operating systems that while "it's true that users would switch to [another] operating system if they perceived there to be a significant advantage," the "problem is that because of the network effects or what's sometimes been termed the applications barrier to entry, users are not very likely to perceive that in the present circumstances of Windows. And Microsoft does its best to see that they won't." Fisher, 1/6/99am, at 81:25 - 82:10.

42.6. That Microsoft, like other operating system vendors, must continue to attract ISV attention and improve its product (Schmalensee Dir. ¶ 160; Maritz, 1/28/99pm, at 6:13 - 7:9) is entirely consistent with a high applications barrier to entry and with market power.

42.6.1. Because of its large installed base, the costs to Microsoft to attract sufficient ISVs to make its operating system broadly attractive to users are far less than the costs to its rivals.

1. See supra Part II.B.3., ¶¶ 25-27.

42.6.2. Because of its ability to ensure "backward compatibility," Microsoft can migrate its installed base between its operating system releases, thus perpetuating its advantage and, hence, the applications barrier to entry.

1. Rational's Mike Devlin testified that, "because Microsoft strives to make its operating system product 'backwardly compatible,' we (and our customers) know that a program we write using the APIs for one Microsoft operating system will likely run on its successor." Devlin Dir. ¶ 15.

2. Microsoft executive Ben Slivka wrote: "Regardless of all the cool, sexy features in OS/2 (multi-tasking, better graphics API, memory protection), it was not a no brainer upgrade from MS-DOS -- customers had to give something up in order to switch to OS/2: their existing software! Only with Windows 95 (where we have focused on compatibility to an amazing extent) are we finally going to enable to move customers away from MS-DOS." GX 21, at MS98 0102396 (emphasis in original).

42.6.2.1. Microsoft's efforts to attract ISVs are consistent with monopoly power because monopoly power does not mean unlimited power, because even a monopolist has an incentive to increase demand for its product, and because attracting ISVs reinforces the applications barrier to entry.

1. See infra ¶ 50.

b. Dean Schmalensee's contention that entry into the microcomputer software industry is easy is a red herring

43. Dean Schmalensee argues that "there are no barriers in the microcomputer software industry that prevent" new entry (Schmalensee Dir. ¶ 37). But whether entry into the microcomputer software industry as a whole is easy is beside the point because the relevant question is not whether entry into the "industry" is easy or even whether producing a PC operating system is easy, but rather whether producing an operating system with sufficient applications to challenge Windows is easy.

1. Professor Fisher testified: "This case . . . centers on monopoly power in the market for PC operating systems. The question of entry into the microcomputer software industry in general is not relevant." Fisher, 6/1/99am, at 9:3-17; Fisher 6/1/99am, at 23:6-20.

2. As Professor Fisher further explained, there is no evidence that the microcomputer industry in general does or could constrain Microsoft's ability to exercise substantial market power over PC operating systems. "To take a simple but illuminating example, Nintendo produces games. Games are in the microcomputer software industry," but they are "not a constraint on Microsoft's power in . . . pricing its Windows operating system." Fisher, 6/1/99am, at 10:3-7.

3. Nor is the fact that others in the microcomputer industry could hire programmers and produce a PC operating system relevant. Those firms are "not going to be able to produce an operating system with those programmers, or with other programmers, which can overcome the economies of scale and the network externalities that are required." Those firms are "not going to be able to produce an operating system which attracts a very large number of applications writers, enough to overcome Microsoft's very commanding lead." Fisher, 6/1/99am, at 10:23 - 11:6.

44. The factors that, according to Dean Schmalensee (Schmalensee Dir. ¶ 95), make entry into the "microcomputer software industry" easy are not enough to overcome the applications barrier to entry into personal computer operating systems.

44.1. That the microcomputer software industry has abundant skilled programmers and a ready supply of capital cannot, as Microsoft implies (Schmalensee Dir. ¶¶ 39-44), overcome the economies of scale that create the applications barrier to entry.

1. As explained, the evidence shows that, despite the ready availability of programmers and capital, the economic incentives to write for niche operating systems are insufficient to warrant sinking the huge costs necessary to create an operating system and set of applications capable of substituting for Windows for a large number of users. See supra Part II.B.3.b; ¶¶ 25-31.

2. Professor Fisher testified that "if there were no other barrier to entry into operating systems . . . acquiring programmers and financing and so forth wouldn't be a problem" but there nonetheless "is a very substantial barrier to entry. I suppose it would be harder to get in if it weren't easy to get programmers, but getting good programmers is not near enough to get into the P.C. operating system business." Fisher, 6/1/99am, at 23:21 - 24:4.

3. Dr. Warren-Boulton testified that although there appears to be no capital entry barrier (Warren-Boulton, 11/19/98pm, at 65:25 - 66:6), the applications barrier to entry presents a huge entry barrier. Warren-Boulton Dir. ¶ 59.

44.2. Microsoft's argument that rivals can overcome the applications barrier to entry by mimicing the Windows user interface and cloning the Windows APIs is inconsistent with the evidence. To the contrary, cloning the Windows APIs is infeasible because the number of APIs is very large and constantly changing.

1. John Soyring of IBM testified: "Not only is it difficult to reliably duplicate the function of each API, another company can not realistically duplicate the function of all of the APIs since Microsoft continues to introduce new APIs. Applications will not work correctly if they use APIs whose functions have not been duplicated. Therefore, there will always be a risk that some application important to a user now -- or in the future -- will fail. This uncertainty places a heavy drag on any chance for long-term success. Given the expense, time and uncertainty involved, I do not think supporting Windows applications on another operating system for desktop or mobile PCs offers any reasonable opportunity for a positive financial return, and I would not recommend that IBM attempt to provide additional support for Windows applications in OS/2." Soyring Dir. ¶ 13. Soyring further testified that, because IBM "lacked the technical capability or the legal rights" to Microsoft's Windows 95 source code, it could not ensure that Windows applications would run on OS/2. Soyring, 11/17/98pm, at 76:4-20.

2. Bryan Sparks of Caldera, a Linux vendor, testified that "writing a Windows compatible operating system that's capable of running Windows applications without Microsoft's supplied operating system is very difficult. We tried that for sometime in a sister company when I was at Novell, and we just determined that the breadth of API's is astonishing" and that Microsoft "adds API's at what we perceive as an incredible rate, and keeping up with that API and developing a compatible product is very, very difficult. And even if you created that, you'd have a hard time branding it as an acceptable platform because of the breadth of the API." Sparks Dep. (played 12/1/98am), at 52:15 - 53:25.

3. Microsoft's Joachim Kempin noted in December 1997 that cloning the Windows APIs "would be a lot of work and potentially" pose "patent problems for someone attacking us." GX 61. Bill Gates understood that the more difficult a technology is to clone, the more control over it Microsoft would have; in discussing Microsoft's strategy for its HTML rendering engine (code named "Trident"), Gates wrote: "I think we want to make Trident extremely hard to clone. I think we want to patent elements of Trident. I think we want to make extensions to Trident on an ongoing basis." GX 351.

4. Dr. Warren-Boulton testified: "Certainly, at this point, cloning . . . in the sense of developing an operating system which would provide the complete set of API's that is in Windows 98, is physically almost impossible and, as a practical business matter, is not reasonable." Warren-Boulton, 11/19/98pm, at 29:13-21.

c. Dean Schmalensee is wrong in arguing that the existence of potential threats to Windows shows that barriers to entry are low

45. Dean Schmalensee argued that the threat to the applications barrier to entry posed by Internet browsers and Java is inconsistent with the conclusion that entry barriers are high (Schmalensee, 6/22/99pm, at 71:6 - 74:17). This testimony is misconceived.

1. As Professor Fisher testified, the fact that barriers to entry might someday be eroded, whether by Internet browsers, Java, or other threats, known or unknown, does not affect whether Microsoft has monopoly power today. Fisher, 6/1/99am, at 14:9- 15:6; 6/1/99am, at 25:25 - 26:18.

2. Dean Schmalensee's position, as Professor Fisher testified, proves too much. It implies that "any monopolist who took action to preserve its monopoly and saw a threat worth taking action would be able to argue successfully that the fact it took the actions means that it can't have monopoly power." Fisher, 6/1/99am, at 13:12-20.

3. Microsoft has taken steps to ensure that these threats cannot overcome the applications barrier to entry, and its conduct has reinforced the already substantial entry barriers. Fisher, 6/1/99am, at 12:9-17; Fisher, 6/1/99am, at 60:4 - 62:2; Fisher, 6/1/99am, at 66:9-25.

46. The possibility that other information applications might eventually wrest some business away from personal computers similarly does not show, as Microsoft argues (Maritz ¶¶ 104, 275-77), that entry barriers are low.

46.1. First, other devices, as explained, do not constrain Microsoft's ability to exercise power over PC operating systems and thus do not affect whether Microsoft has monopoly power.

1. See supra Part II.B.2; ¶ 19.

46.2. Second, even if other devices were to become better substitutes for some PC uses and gain wider use, that would affect only the value or size of Microsoft's monopoly power, not its existence. In any event, the evidence shows that demand for PCs, and thus the value of Microsoft's monopoly, will if anything increase.

1. See supra Part II.B.2; ¶ 19.

2. Steve Ballmer recently stated that the "PC will remain a very important central device to the way computing happens, in our view, over the course of the next ten years." GX 2301, at 4. He further commented that he could "accept the notion of new devices. I just don't accept the idea that the PC goes away. And so while other things, other environments may grow up faster, the PC stays important." Id. at 5.

3. Bill Gates wrote in May 31, 1999, opinion piece for Newsweek that, "despite pundits who had predicted the end of personal computers, sales continue to rise." He concluded: "For most people at home and at work, the PC will remain the primary computing tool." GX 2059.

4. The very report Microsoft introduced in support of its contention that information appliance shipments will soon overtake PC shipments in fact shows the opposite. It states: "When viewed in its all-encompassing scale, with all form factors and all customer segments, PC's far out-ship information appliances on a unit basis . . . and dwarf the market on a value basis." DX 2423, at page 6. As Professor Fisher testified, the report shows "that the PC isn't going away" but, to the contrary, will "remain extremely important" and that Microsoft's "[m]onopoly over PC operating systems will, therefore, continue to be important." Fisher, 6/3/99pm, at 69:14-18; see also GX 2082 (IDC chart showing that number of PC units shipped is expected to continue to grow significantly until at least 2002, and that despite slightly faster growth in shipments of information appliances, in 2002 there will still be several tens of millions more PC units shipped); GX 2083 (IDC chart showing that the expected value of PC units shipped will remain vastly larger than the expected value of shipments of other information appliances until at least 2002).

5. Steve Case testified, "'It's hard[] to imagine that PCs won't be the dominant way people connect with the internet for many years to come and Microsoft has a pretty amazing lock on that business . . . . Other devices will emerge, but I doubt any will challenge Windows.'" Fisher, 6/4/99am, at 44:17 - 45:4 (quoting Case Dep. (quoting Ct. Ex. 1) (citation omitted)). Case further testified that AOL "'[h]as no intention of battling Microsoft's core business'" and "'no flight of fancy that [AOL] can dent in any way, shape or form what is a Microsoft monopoly in the operating system business.'" Fisher, 6/4/99am, at 43:19 - 44:16 (quoting Case Dep. (quoting Ct. Ex. 1)).

46.3. Third, other devices could threaten Microsoft's monopoly only if PCs were effectively eliminated as an important computing device. The evidence shows precisely the opposite: that demand for PCs will remain robust for the foreseeable future.

1. Professor Fisher testified: "So long as PCs remain an important computing device, and a device which has the property that you need them to do certain applications," that "[o]ne cannot imagine" that "a small change in the price of the Windows operating system is going to cause a lot of people to abandon PCs and go to these other devices." Fisher, 6/3/99pm, at 82:4-19, 65:23 - 66:6. Professor Fisher rejected the proposition "that the possible innovations in various other devices" will "reduce the problem of Microsoft's monopoly." Fisher, 6/1/99am, at 28:12-15.

2. Professor Fisher further testified: "Microsoft has monopoly power over operating systems for PCs. The question of the influence of other devices, in this case information appliance devices, would only become relevant to Microsoft's monopoly power over PC operating systems if it did one of two things, and I don't think either one is going to happen. One is that information appliance unit shipments would become so big and so widespread that people would drive . . . PCs out." "This chart" DX 2423 "shows PC shipments growing and continuing to grow, and it matches the obviously sensible proposition that PCs are going to continue to be important and indeed very important." Fisher, 6/3/99pm, at 65:9-22.

3. Further evidence that PCs will continue in importance is the fact that non-PC devices cannot be used to accomplish tasks for which PCs are necessary. For instance, Microsoft pointed to gaming console as a source of possible competition to PCs (Fisher, 6/2/99pm, at 72:21 - 76:19); but the very exhibit Microsoft introduced states that "'the new Sony machine will not process text or calculate a budget.'" Fisher, 6/3/99pm, at 72:15-17 (quoting DX 2553). It further reports: "Sony executives went to some pains today to assert that their new machine was not a competitor to Wintel, the combination of Microsoft corporation's Windows operating system and Intel's pentium microprocessors that dominates the personal computer industry." DX 2553.

4. Dean Schmalensee does not have a basis to opine that Microsoft's monopoly will be extinguished by the existence of other devices. When asked whether he had reached a judgment about "the extent to which" the "personal computer operating system will continue to be an important business going forward into the future," he responded that he was being tempted "to prophesy again," and that "from everything" he had "seen, at least for some number of years -- and it would be hard to say how many -- . . . a lot of work will be done on the desktop using desktop equipment. How much, how fast, how the trends will go, I don't know, but it seems apparent to me that for some time to come," the PC operating system "will be an important business." Schmalensee, 6/23/99pm, at 41:15 - 42:14.

47. Dean Schmalensee's speculation that operating-system neutral, web-based applications developed on the Internet could some day erode the applications barrier to entry (Schmalensee, 6/23/99am, at 36:15 - 41:22) also does not mean that Microsoft lacks monopoly power.

47.1. First, the possible development of a range of web-based applications even roughly comparable to the set of applications available for Windows is entirely speculative.

1. Bill Gates wrote, with regard to AOL's acquisition of Netscape, "Platform threat - AOL doesn't have it in their genes to attack us in the platform space." GX 2241, at MS98 0231890 (sealed; cited portion published).

2. Dean Schmalensee conceded that he performed no study or analysis to determine how many web-based applications exist or how much investment in that area has been made. Schmalensee, 6/23/99am, at 49:16 - 50:23; Schmalensee, 6/23/99pm, at 37:15 - 38:10.

3. Dean Schmalensee conceded that he performed no study of the number of web-based applications that require Windows. Schmalensee, 6/23/99am, at 54:21 - 55:9.

4. Dean Schmalensee, when asked if "there will come a time in the future when people will spend as much effort developing web-based applications as they do developing applications for Windows" responded: "I'm not a prophet . . . . I cannot, as I sit here, represent that I know what will happen in this regard in the future." Schmalensee, 6/23/99pm, at 38:18 - 39:2; Schmalensee, 6/23/99pm, at 39:13 - 40:1 ("one extrapolates current trends with some hazard in this business, and as I say, I'm not a prophet").

5. Dean Schmalensee conceded that he did not, and could not, determine the number of web-based applications would exist in the next couple of years. Schmalensee, 6/23/99am, at 50:24 - 51:7.

6. Professor Fisher testified that he conducted no study of the number of web-based applications because "however interesting those applications are they are nowhere near enough to overcome the . . . applications barrier to entry into operating systems for PCs." Fisher, 6/3/99pm, at 81:6-15.

47.2. Second, because web-based applications require a browser, Microsoft could vitiate this potential threat by gaining a substantial share of browsers and then using proprietary extensions.

1. See infra Part VII.D.

48. Dean Schmalenee is also wrong in arguing that the possibility of entry should be assessed "over a long period of time," beyond the next several years (Schmalnesee Dir. ¶ 184).

1. As Professor Fisher testified, this argument confuses the question of the period over which Microsoft could recoup predatory investments designed to preserve its monopoly power with whether that power exists. For example, under Dean Schmalensee's reasoning, one could not determine whether AT&T was a monopolist in 1980 without considering "the telephone industry well into the next millennium because it is possible that if it succeeded in driving out MCI, it would still recoup money 30 years later." Fisher, 6/1/99am, at 18:12 - 20:10-15.

3. Dean Schmalensee's contention that "long term threats" prevent Microsoft from exercising monopoly power today is flawed

49. Dean Schmalensee bases his argument that barriers to entry are low, and thus that Microsoft lacks monopoly power, principally on his contention that Microsoft's pricing of Windows is severely constrained by largely unknown long-term threats to its position. Dean Schmalensee reasons that, if Microsoft were a monopolist, it would be charging more than $1,800 for Windows, instead of the approximately $70 it in fact charges, and infers from this that Microsoft is engaging in massive limit pricing designed to exclude threats that have not yet arisen (Schmalensee, 1/21/99am, at 11:17-18, 13:11-19, 23:25 - 24:5). The evidence, however, is at odds with Dean Schmalensee's argument.

49.1. First, limit pricing -- lowering price and thus sacrificing revenues today in order to deter entry tomorrow -- is irrational if potential rivals know that the firm can lower price later, if and when competition emerges. In that event, rivals will be deterred by the prospect of price reductions in response to competition, and there would be no reason for the monopolist to sacrifice revenues by cutting prices today. Dean Schmalensee's limit-pricing analysis thus must assume that Microsoft cannot credibly threaten to lower price in the future. Microsoft, however, plainly has the power to lower prices in the future, if and when competition emerges.

1. Professor Fisher and Dr. Warren-Boulton both testified that it is not plausible that Microsoft keeps the price of Windows significantly lower than Microsoft otherwise would in order to deter entry because Microsoft can lower its price should such entry occur. Potential entrants evaluate the profits they would earn after entry, and they recognize that Microsoft's price now is not a guide to what Microsoft would charge -- and what profits are therefore available to the entrant -- if entry actually occurred. Fisher, 6/2/99am, at 6:2 - 7:14; Warren-Boulton, 12/1/98am, at 43:14 - 45:5.

2. Microsoft can credibly lower price tomorrow in response to entry because, as Dean Schmalensee himself testified, the marginal cost to Microsoft of producing and selling additional copies of Windows through an OEM is "zero." Schmalensee, 1/20/99pm, at 68:5-20; Warren-Boulton, 11/19/98am, at 58:25 - 59:3; Schmalensee Dir. ¶ 85.

3. Dean Schmalensee asserted that the greatest threats to Windows' dominance are not other PC operating systems, but rather "paradigm shifts." Schmalensee, 1/13/99pm, at 65:7-24. But there is no reason to think that the possibility of "paradigm shifts" is affected by the prices Microsoft charges today. Fisher, 1/11/99pm, at 47:19 - 48:17.

49.2. Second, Dean Schmalensee's hypothesis that Microsoft is engaging in massive limit pricing is also inconsistent with how Microsoft views the constraints on its pricing of Windows.

1. Kempin testified that he did not consider competing operating systems or "'competition more generally'" in setting the Windows 98 royalty. See supra Part II.A; ¶ 15.1.5.

2. Kempin's memorandum on Microsoft's pricing of Windows 98, sent to Bill Gates, does not identify long-term threats as a constraint on Microsoft's pricing of Windows. Long-term threats are described instead as possibilities that could "derail" Microsoft's strategy. GX 365.

3. Based on this evidence, Professor Fisher testified that long-term entry is not a significant consideration in Microsoft's choice of a price for Windows. Fisher, 1/13/99am, at 23:5-14 (it is doubtful "long-term entry . . . is . . . at the forefront of the Microsoft corporate mind").

49.3. Third, the analysis Dean Schmalensee advanced says nothing about whether Microsoft possesses monopoly power. To the contrary, Dean Schmalensee's analysis (Schmalensee, 6/23/99am, at 6:3 - 9:17) shows, at most, that Microsoft is not seeking to maximize its short-term profits exclusively through operating system royalties.

1. Professor Fisher testified that Dean Schmalensee's analysis at most could show only that Microsoft is not taking out its monopoly power in the short-run price of Windows. Fisher, 1/12/99pm, 16:12 - 17:17. But it "wouldn't tell you anything about the power itself. It wouldn't tell you whether Microsoft had power. It would tell you whether it was exercising power in a particular way." Fisher, 6/1/99pm, at 9:3-12; Fisher, 1/11/99pm, at 48:13 - 50:19 (even if one concluded that Microsoft had priced to deter future entry, that would not necessarily mean that Microsoft lacks monopoly power today).

49.3.1. An analysis that focuses entirely on short-run prices is inappropriate because it ignores the fact that Microsoft may charge what seems like a "low" short-term price in order to maximize its profits in the future for reasons unrelated to deterring entry.

49.3.1.1. By keeping price low today and "growing" the market, Microsoft earns greater complementary revenues in the future.

1. Paul Maritz testified: "Microsoft broadly licenses operating system products to computer manufacturers at attractive prices (typically less than 5% of the price of a new computer). Such broad licensing promotes the adoption and use of Microsoft's operating system products, which in turn promotes the development of a wide range of useful complementary hardware and software products that are compatible with Windows and thus with other Windows-related products." Maritz Dir. ¶ 132.

2. Professor Fisher testified that a monopolist like Microsoft has a greater incentive than a nonmonopolist would to set a low price with the purpose of furthering the general popularity of computing because only the monopolist reaps the full future reward of the greater popularity. Fisher, 1/12/99pm, 66:4 - 67:9, referencing colloquy at Fisher, 1/12/99am, 24:13 - 25:21.

3. Professor Fisher further testified that, because Windows users often buy upgrades and other complementary products from Microsoft in years after their initial Windows purchase and because the number of copies of Windows sold has grown every year, Microsoft earns greater complementary revenues per copy of Windows than can be captured in Dean Schmalensee's equation. Fisher, 6/4/99am, at 13:23 - 15:3. Dean Schmalensee improperly compared current Windows revenues to current revenues from complementary products. Fisher, 6/4/99am, at 13:23 - 15:3.

4. In fact, Dean Schmalensee did not investigate the complementary revenues Microsoft receives from the sale of Windows. Rather, he accepted his staff's representation that Microsoft "record[s] operating system sales by hand on sheets of paper" and, for that reason, lacked "a sophisticated internal accounting system" from which he could estimate anticipated complementary revenues. Schmalensee, 1/20/99pm, at 46:3 - 49:8.

49.3.1.2. Dean Schmalensee ultimately conceded that Microsoft may be pricing low today to obtain long-term benefits that depend on network effects.

1. Dean Schmalensee testified that Microsoft "keeps price low so that a lot of people use Windows, and I can attract applications vendors for both reasons, both because a lot of people use it and because there are more applications for it." Schmalensee, 6/22/99pm, at 39:13-18.

2. In this regard, Dean Schmalensee's testimony is consistent with Professor Fisher's testimony that Microsoft has "an overriding interest in preserving the applications barrier to entry and taking advantage of the network effects. When it sells Windows, the more Windows it sells, the more the network effects are. That, by the way, is a reason for keeping the price of Windows lower than would otherwise be the case, and there are other reasons as well." Fisher, 1/12/99am, at 21:8-14.

49.3.1.3. Dean Schmalensee's focus on short-term price also overlooks the fact that Microsoft takes a portion of its monopoly returns, not in cash payments, but rather in the form of costly restrictions upon its customers and commitments by them to behave in ways that augment and maintain Microsoft's monopoly power.

1. Professor Fisher testified that Microsoft "takes some of its profits in the form of protection of its monopoly." Fisher, 1/12/99am, at 19:20-21. Professor Fisher further testified that there are examples in other industries of sellers with monopoly power choosing to exercise that power by means other than charging as high a price as possible for the monopolized product; in the late 1970s, for example, the two airlines that owned computer reservations systems found it more profitable -- before the Civil Aeronautics Board intervened -- to raise rival airlines' costs by biasing the systems' flight displays than to raise the price to those airlines of participating in the systems. Fisher, 1/12/99am, at.14:11 - 17:3.

2. - redacted - GX 1498, at GW 019843 (sealed).

3. Garry Norris of IBM testified that some of Microsoft's MDA milestones require IBM to take acts that exclude Microsoft's potential rivals. Indeed, Norris testified, referring to the language in his contemporaneous notes of their March 6, 1997 meeting, that Microsoft's Bengt Akerlind told IBM "no Netscape and receive more MDA dollars across the P.C. company" and threatened IBM with "MDA repercussions" unless IBM agreed to promote IE exclusively. Akerlind told Norris that Microsoft might impose these repercussions, i.e., raise the price of Windows to IBM, either by modifying MDA milestones themselves or by exercising its discretion to decide whether IBM had met its MDA milestones. GX 2164; Norris, 6/8/99am, at 29:19 - 30:23; Norris, 6/8/99am, at 31:24 - 32:12.

4. - redacted - GX 1436 (sealed). - redacted - Fisher 1/12/99pm, 41:19 - 43:20 (sealed session).

5. Microsoft offered IBM substantial MDA discounts to reduce support for OS/2; had IBM accepted the provisions offered by Microsoft, Microsoft's annual Windows revenues from IBM would have dropped by $40 to $48 million, given IBM's volume of Windows shipments at that time. Norris, 6/7/99am, at 22:16-18. Norris testified that Microsoft offered to reduce the price IBM paid for Windows 95 if IBM, in Microsoft's words, agreed to "adopt Windows 95 as the standard operating system for IBM" and to make it "the only OS mentioned" in advertisements and marketing materials. Norris 6/7/99am, at 20:1 - 23:5 (quoting GX 2132). IBM did not agree to these provisions and others because they would have had the effect in the marketplace of effectively putting its own OS/2 operating system product "to the grave." Norris 6/9/99am, at 10:18-24.

6. Kempin recognized that one tactic Microsoft could use to effectively decrease the cost to Windows would be to "Reduce some of the more rigid licensing requirements, which increase costs to the OEMs." GX 365.

49.3.2. Dean Schmalensee's analysis is also flawed because it leads to absurd results.

1. Professor Fisher demonstrated that, at the price that would maximize Microsoft's short-run profits, given Dean Schmalensee's undisputed assumption that Microsoft's short-run marginal cost of Windows equals zero, the elasticity of demand for Windows must equal one. Ct. Ex. 2-A; Ct. Ex. 2-B; Fisher, 1/12/99pm, at 13:16-16:19.

2. If Microsoft believes that it is operating at a point on the demand curve at which the elasticity of demand for Windows equals one, Microsoft must believe that a 10% increase in the price of Windows -- about $5 -- would lead to about a 10% decrease in the number of copies of Windows it sells. As Professor Fisher testified: "If you look at the testimony of the OEMs and you just think about it, that can't possibly be right. You can't believe that. It would believe it would lose 10% if it raised the price only $5, and the OEMs have no other place to go." Fisher, 1/12/99pm, at 16:16 - 17:8 (testifying about Microsoft's pricing).

49.4. Fourth, even taken on its own terms, Dean Schmalensee's calculation of a "short term" monopoly price for Windows of more than $1,800 is wrong.

49.4.1. Dean Schmalensee's calculation depends on his assumptions about three variables, all measured in the same year:

1. the average hardware price of a PC less the price of Windows;

2. the elasticity of demand for PCs, and

3. the average revenues Microsoft earns from sales of other complementary products (GX 1960).

49.4.1.1. Average price of a PC. Dean Schmalensee used $2,000 as the average price of a PC, even though that average was calculated by including higher-priced computers, such as workstations, and does not reflect the fact that, in setting its prices, Microsoft takes into account the downward trend in PC prices.

1. Dean Schmalensee acknowledged that his $2,000 figure includes significantly more expensive servers and that "presumably" the right number to use would be one that includes only desktop PCs. Schmalensee, 6/24/99pm, at 71:23 - 73:9.

2. Professor Fisher testified that the $2000 figure Dean Schmalensee used in January for the average price of a PC (including Windows) significantly overstates today's true average price, whether or not that price properly includes monitors. Fisher, 6/4/99am, at 6:5-21; DX 2492 (citing $953 price).

3. The average price of PCs has clearly fallen in recent years and continues to fall. Fisher, 6/4/99am, 11:10 - 12:3. In February 1999, PC Data reported, sub-$600 PCs (not including monitor) were the fastest-growing retail segment and constituted 19.9% of all retail sales. DX 2493. Even the IDC study cited by Dean Schmalensee as the source for his estimate of average PC price shows PC prices falling historically and for the forseeable future. GX 2300; see also DX 2498, at 22. Dean Schmalensee acknowledged that it is appropriate to take the decline in hardware prices into account and lowered the average price of a PC in his formula from $2,000 in his January testimony to $1,800 in his June testimony. Schmalensee, 6/23/99am, at 14:11-17.

4. Contrary to Dean Schmalensee's $2,000 figure, Microsoft executives looked to the future expected price of the PC in setting the Windows royalty, and Joachim Kempin's December 1997 memorandum to Bill Gates discusses how Microsoft's pricing should take into account the growth of the sub-$1,000 PC market segment. GX 365.

49.4.1.2. Elasticity of demand for PCs. Dean Schmalensee assumed that the elasticity of demand for PCs is 2 (Schmalensee, 1/21/99am, at 10:19-20; Schmalensee, 6/24/99pm, at 62:17-19), but the reasons he gave for doing so are arbitrary and unsound.

1. Dean Schmalensee asserted that an elasticity of 2 followed from plaintiffs' assertion that PCs were a market (Schmalensee, 1/21/99am, at 10:5-7; Schmalensee, 1/20/99pm, at 39:1-3; Schmalensee, 1/20/99pm, at 40:22 -23). But neither plaintiffs nor their experts took the position that PCs are a market. Neither Dr. Warren-Boulton nor Professor Fisher testified that there is a market for operating systems for Intel-based PCs, and Professor Fisher made clear that conclusion does not require defining a market for personal computers. Fisher, 6/2/99pm, at 30:2-13; Fisher, 6/3/99pm, at 65:23 - 66:6.

2. Dean Schmalensee gave inconsistent testimony about his own views on the plausible range of elasticities.

   1. In his October 1998 deposition, he testified that there is a plausible range one could think of, and that "'numbers below one are pretty implausible. Numbers above five and six are pretty implausible, based on elasticities one encountered, but that's a pretty wide range, economically, and I don't think I know enough to narrow it.'" Schmalensee, 6/24/99pm, at 63:16-20 (quoting Schmalensee's deposition).

   2. In his trial testimony, Dean Schmalensee testified he had done no work since his deposition to estimate the price elasticity for PC systems and had seen no estimates in the literature. Schmalensee, 1/20/99pm, at 39:8-11.

   3. Yet in his rebuttal direct testimony, when asked whether he had previously testified "that a range of up to 6 was plausible," he answered: "No, it isn't. I went back and looked at everything I've said in this proceeding on the subject, and I don't think that's consistent with what I said. . . . I never said 4 was plausible and I don't believe it." Schmalensee, 6/23/99am, at 18:16-24.

   4. Dean Schmalensee sought to reconcile this inconsistent testimony by characterizing his deposition testimony as an "outlier" among his testimony on the topic. He contended that his January testimony was consistent with his current contention that an elasticity of four in this market is "totally implausible." Schmalensee, 6/24/99pm, 64:12-23; id. at 67:23 - 69:6.

3. Dean Schmalensee arbitrarily assumes an elasticity of demand for PCs of 2 despite having testified at his deposition that the elasticity could plausibly range up to five or six and despite having cited no studies of the PC industry by himself or others to justify his assumption. Schmalensee, 6/24/99pm, at 63:16 - 65:15.

49.4.1.3. Complementary revenues. Dean Schmalensee used an incorrectly low and arbitrarily-derived estimate of Microsoft's complementary revenues from Windows sales.

1. Dean Schmalensee derived his estimate of complementary revenues by arbitrarily dividing the revenue of Microsoft's applications group (which he regarded as the repository of complementary revenues) by the revenue of Microsoft's platforms group (which he regarded as representing revenue from the sale of Windows), and then doubling that figure to reach what he called a "generous" estimate of approximately $100 in complementary revenues per copy of Windows. Schmalensee Dir. App. B, at B-4 n.11 ; Schmalensee, 1/21/99am, at 11:23 - 12:1 (characterizing this estimate as "generous"); Schmalensee, 1/21/99am, at 17:25 - 18:25 (explaining methodology).

2. Correcting for Dean Schmalensee's errors, Professor Fisher estimated Microsoft's true complementary revenues as $160, before any doubling for conservatism -- that is, more than three times Dean Schmalensee's estimate. Fisher, 6/1/99pm, at 15:16 - 17:5. And this is quite apart from Dean Schmalensee's failure to take full account of future complementary revenues because of his formula's limitation to the short-term. See supra ¶ 49.1.

49.4.2. Despite the conceptual defects in Dean Schmalensee's formula, as Professor Fisher testified, it is nonetheless possible using plausible estimates of each of the variables in the formula to estimate a short-term profit-maximizing price for Windows that is close to the price Microsoft actually charges.

1. Professor Fisher testified that using an elasticity of demand for PCs of four (within the range that Dean Schmalensee testified is "plausible"), a current price per PC of $1,000, and a corrected complementary-revenues estimate of $160, Dean Schmalensee's equation shows that the price for Windows that would maximize Microsoft's profit is $65 -- very close to the actual price of Windows. Fisher, 6/1/99pm, 17:17 - 18:2. Using an elasticity of five -- also within Dean Schmalensee's range -- would produce, according to Dean Schmalensee's analysis, a profit-maximizing price of $40, which is in fact below the actual price of Windows. Fisher, 6/1/99pm, at 18:3-6; see also Fisher, 6/1/99pm, 11:8-23.

2. Professor Fisher further testified that performing the same exercise with the significantly higher price per PC that was typical in 1996 or 1997 still produces estimates, according to Dean Schmalensee's analysis, that are within a few hundred dollars of the actual price of Windows in 1996 or 1997. Fisher, 6/2/99am, at 31:13-21.

4. Dean Schmalensee is wrong that Microsoft's other behavior is inconsistent with monopoly power

50. Dean Schmalenssee argued that Microsoft is not a monopolist because it does not "behave like a firm with monopoly power" (Schmalensee Dir. ¶ 180 (emphasis omitted)), but his analysis is flawed.

50.1. As an initial matter, Schmalensee's approach is flawed because it implicitly but wrongly assumes that monopoly power means unlimited power and ignores the fact that a monopolist has an incentive to increase its monopoly profits by improving product quality.

1. Dr. Warren-Boulton testified that, "to an economist, every monopolist faces competition. Every monopolist faces potential entry. But the reason why he faces competition or potential competition is because profit-maximizing behavior is to raise your prices until you run into that competition. . . . So something is out there, whether it's entry, whether it's just simply demand falls off, or whatever reason, there is a reason why" a monopolist "doesn't increase the price further than he is already increasing it." Warren-Boulton, 11/19/98am, at 38:23 - 39:18.

2. Dr. Warren-Boulton also testified: "There's nothing about monopoly power that indicates that a profit-maximizing monopolist has some incentive not to listen to its customers." Warren-Boulton, 11/30/98am, at 29:22 - 30:11. >

3. Professor Fisher testified that even a monopolist has incentive to increase demand for its product. Fisher, 1/12/99pm, at 19:1 - 20:15.

50.2. Microsoft's general efforts to innovate are thus consistent with monopoly power, even if absent innovation Microsoft might eventually lose its monopoly power (see Maritz Dir. ¶ 153).

1. Professor Fisher testified that one "can't look at an industry or a market, and . . . from merely the fact that innovation is going on, conclude that there can't be monopoly power." Fisher, 1/12/99pm, at 19-20; 6/3/99am, at 8:11-14.

2. Dr. Warren-Boulton testified that "a company always has the option, if you like, of simply stopping technical innovation . . . I just don't understand why anyone would want to do that . . . there is nothing I conclude from that as to whether or not" Microsoft "is a monopoly or not. A monopolist also has the same incentive to innovate as a competitive firm." Warren-Boulton, 11/19/98am, at 79:12-25.

3. Dr. Warren-Boulton further explained: "if Microsoft were to simply . . . shut down its R&D version . . . it would probably lose its monopoly power within a reasonable time period," but that is entirely consistent with Microsoft's possession of monopoly power today. Warren-Boulton, 11/19/98pm, at 41:8 - 43:14.

50.3. Microsoft's efforts (amounting to several hundred millions of dollars a year) to induce ISVs to write applications that run on Windows are also consistent with monopoly power.

50.3.1. Inducing ISVs to write more and better applications makes Microsoft's operating system more attractive, thus increasing the monopoly profits Microsoft can earn.

1. Paul Maritz testified that Microsoft's efforts to work with developers result in "great applications for Microsoft's Windows family of operating system products," which in turn increases Windows' attractiveness to consumers. Maritz Dir. ¶¶ 127, 136.

2. See supra ¶ 26.1.

50.3.2. Inducing ISVs to write more and better applications to Windows also increases the applications barrier to entry because it increases the attractiveness of the Windows platform, which reinforces ISVs' incentives to write first and foremost to Windows, and reduces the resources ISVs can devote to writing to other operating systems.

1. Dr. Warren-Boulton testified that inducing ISVs to develop for Windows is "an investment in creating the applications barrier to entry." Warren-Boulton, 11/24/98am, at 39:13-14.

50.4. Microsoft's argument that the existing installed base of Windows users and piracy together prevent Microsoft from exercising monopoly power (Schmalensee, 1/14/99am, at 25:4-22; Maritz Dir. ¶ 123) is also flawed.

50.4.1. The evidence shows that, whatever constraint piracy imposes on Microsoft's pricing, it is not substantial and does not prevent Microsoft from enjoying monopoly power.

50.4.1.1. Microsoft discourages piracy by penalizing OEMs through MDAs for shipping naked machines.

1. Dean Schmalensee testified that Microsoft's MDAs penalized OEMs for shipping naked machines, and that the purpose of the penalty is to reduce piracy. Schmalensee, 6/23/99pm, at 67:13 - 70:17; 69:7 - 70:18.

2. - redacted -

50.4.1.2. There is no evidence that piracy prevents Microsoft from exercising substantial monopoly power. To the contrary, the evidence shows that Microsoft has substantial and durable discretion over its pricing of Windows notwithstanding the possibility of piracy.

1. See supra Part II.C., ¶¶ 33-38.

50.4.2. The evidence similarly shows that the modest constraint created by its installed base does not prevent Microsoft from enjoying monopoly power.

1. As Professor Fisher testified, Microsoft prohibits licensees from transferring operating systems to new computers; there is thus no "secondary market" in operating systems. Fisher Dir. ¶ 77.

2. The installed base cannot affect the price of operating systems acquired in connection with OEM sales. "New operating systems are principally acquired in connection with the purchase of new computers and only secondarily in connection with upgrades. At best, Microsoft's installed-base argument relates to its pricing of upgrades. It does not apply to the more important channel of new computers." Fisher Dir. ¶ 75; Warren-Boulton, 11/19/98am, at 64:18 - 66:8 (testifying that consumers buying an operating system with a new PC and an "upgrade" operating system have different demand characteristics).

3. And, as Dr. Warren-Boulton explained, the constraint on Microsoft's pricing of upgrades is modest because, although software "never wears out" (Maritz Dir. ¶ 202), it can become obsolete. Warren-Boulton, 11/19/98am, at 64:7-17. Indeed, as explained, Microsoft's pricing of its Windows 98 upgrade product evidences substantial pricing discretion and thus monopoly power even in that market segment. See supra ¶ 36.

III. Alternative Platform-Level Technologies, Especially Internet Browsers and Java, Threaten Microsoft's Operating System Monopoly

A. Middleware technologies have the potential to reduce the applications barrier to entry and facilitate operating system competition

51. The applications barrier to entry, as explained, is the result of a chicken and egg problem: An operating system cannot attract a sufficiently large set of applications o challenge Windows without a large installed base with which to attract ISVs, and cannot obtain a large installed base without a large and attractive set of applications.

1. See supra Part II.B.3; ¶¶ 23-32.

52. Middleware technologies -- principally Internet browsers and Java, which are designed to run on top of an operating system -- threaten to facilitate the creation of competition to Windows by reducing the importance of Windows APIs and thereby eroding the applications barrier to entry.

1. Chris Jones described in an August 1995 e-mail: "We are so dominant in all other aspects of the market that we can never be displaced by a full frontal assault. However, when we do leave a hole in our strategy, there are many companies eager to move in and try to leverage this hole to grow into our other businesses. And they have: you only have to browse the Web to realize that NetScape, Sun, Apple, Adobe, and MacroMedia are establishing a presence. The real threat to our business is solutions like Java, which present a different programming model than Windows and take developer and content provider mind share. This platform offering is quickly evolving, with two key players moving forward with their offerings and evangelism. In addition to Java, NetScape has announced an interface for plugging in different document types, while in turn Apple is building a programmable browser using OpenDoc. The Result -- People Aren't Writing to Our Interfaces. The solutions people have implemented today do not benefit Windows uniquely -- they work on all platforms equally well. More importantly, these solutions are being driven by other companies rather than our own -- specifically, NetScape and Sun. Without an alternative to this platform we will lose control of a critical segment of the developer (and customer) market." GX 523, at MS98 0103658.

2. Paul Maritz testified: "If a middleware product provides a set of APIs to software developers that makes them more productive and enables them to create better software products, the value of any underlying operating system will, of course, be greatly reduced." Maritz Dir. ¶ 236.

3. Dr. Warren-Boulton testified that a competitive threat to Microsoft's operating system monopoly is less likely to come from other operating system products than from extensions to complements of Windows that also can serve as platforms to which ISVs write applications programs . . . The wide dissemination of the complement among PC end users means that application developers can reach a broader base of potential customers by writing to it than by writing to an operating system that competes directly with Windows 95/98 and starts with very low market penetration and installed base." Warren-Boulton Dir. ¶¶ 65-66; see also Schmalensee Dir. ¶ 136; Tevanian Dir. ¶ 46.

B. The widespread use of non-Microsoft Internet browsers threatened to erode the applications barrier to entry and Microsoft's monopoly power

1. The nature of the browser threat

53. Internet browsers, including Netscape Navigator, possess three key middleware characteristics that make them threats to Microsoft's operating system monopoly in ways that traditional operating systems, without middleware assistance, are not.

53.1. First, by contrast to traditional operating system competitors to Windows, Internet browsers can gain (and have gained) widespread usage based on their value as a complement to Windows, without having first to compete against Windows as a substitute.

1. Dr. Warren-Boulton testified: "Although a PC operating system cannot successfully compete against Microsoft's operating systems without first overcoming formidable barriers to entry, the situation is different for a product (e.g., browsers or Java technology) that is both initially a complement from an end user perspective and a potential substitute for the Windows 95/98 platform to which applications developers can write. Because applications written to such a complement are compatible with Windows, their developers can sell their applications to users of the Windows operating system. Eventually, a sufficient number of such applications may become available to support an alternative platform to Windows. " Warren-Boulton Dir. ¶ 65; see also Warren-Boulton, 12/1/98am, at 67:19 - 68:8.

53.1.1. With the advent of widespread popular use of the Internet in 1994-95, browser products became a widely-used complement to Windows. Netscape Navigator emerged as the browser market leader and quickly attracted a large installed base of users.

1. As Netscape CEO James Barksdale testified: "The commercial release of Netscape Navigator 1.0 occurred on December 15, 1994. By the end of the second quarter of 1995, Netscape had collected over $10 million in revenue generated by the browser alone. By the end of 1995, Netscape had collected approximately $45 million in revenue from browsers," (Barksdale Dir. ¶ 18) had "over 70 percent market share for Internet clients and had distributed 15 million browsers around the world through a variety of channels including ISPs, OEMs, and resellers as well as over the Internet." Barksdale Dir. ¶ 66.

2. James Clark, founder and former Chairman of Netscape, testified that Netscape attained an "85 percent market share." Clark Dep., 7/22/98, at 39:3-9 (DX 2562).

53.1.2. Netscape enjoyed early success with its innovative browser.

1. Barksdale testified that Netscape Navigator "hid the technological complexities of the Internet from the end user. Its introduction into the marketplace had a profound effect; the product was an immediate and huge success precisely because of its ease of use and its ability to bring so much new multimedia information to the consumer." Barksdale Dir. ¶ 12; see also Schmalensee, 6/23/99pm, at 47:23 - 48:3.

2. In a presentation in April 1996, Microsoft Senior Vice-President Brad Silverberg made clear that Netscape and Sun "are smart, aggressive, and have a big lead. This is not Novell or IBM we are competing with." GX 40 (emphasis in original).

3. Indeed, in May 1996 Mr. Gates had made clear to Microsoft's top executives his impressions of Netscape as a strong competitor: "During this Thinkweek I had a chance to play with a number of Netscape products. This reinforced the impression that I think all of us share that Netscape is quite an impressive competitor. They are moving at full speed." GX 41, at MS6 6012952.

53.2. Second, because Internet browser products, including Netscape Navigator, expose APIs to which ISVs can write, Internet browsers can serve as a "platform" for other software used by consumers.

1. Gates recognized that Netscape Navigator exposed APIs: - redacted - Gates Dep., 8/27/98, at 54:4-12 (DX 2568A) (sealed); see also Gates Dep. (played 12/2/98am), at 21:25 - 22:18.

2. As Apple's Avadis Tevanian explained: "Internet-related technologies such as browsers are important in the development of future software platforms which could operate 'on top' of different operating systems. These software platforms could be used to run various applications such as programs that display, edit, manipulate and transmit various types of content." Tevanian Dir. ¶ 45.

3. Microsoft's James Allchin testified that middleware products such as browsers running on top of a conventional operating system can serve as a platform for other software. Allchin Dir. ¶ 35; Dertouzos Dep., 1/13/99, at 427:18 - 428:4; Slivka Dep., 1/13/99, at 712:21 - 715:6.

4. Allchin acknowledged that browser products such as Netscape's expose "certainly hundreds, maybe thousands" of APIs to application developers without being included in any operating system. Allchin, 2/3/99pm, at 10:1; see also Maritz, 1/25/99pm, at 29:22 - 30:19 (distinguishing Netscape's browser from browser "shells" built on top of Internet Explorer in that Netscape's browser had the capability of developing into an alternative platform); GX 489, at MS6 6000311 ("Navigator/NetOne provides a new API set -- in near/medium term, Navigator provides the volume platform for ISVs & Corps to target.").

5. Barksdale testified that Netscape sought to "allow people to build applications on top of our browser using what is called the NSAPI, the Netscape Application Programmer Interface," Barksdale , 10/27/98am, at 73:11-25. As a result, "the browser is not only useful for browsing the Web but also can serve as a platform for the development of all sorts of network-centric software applications, such as online-banking software products. These network-centric applications, in essence, sit on top of the browser and take advantage of its Web-oriented functionality." Barksdale Dir. ¶ 15; see also Colburn Dir. ¶ 8; Andreessen Dep. (played 12/1/98am), at 63:22 - 66:1; Clark Dep., 7/22/98, at 44:25 - 46:16 (DX 2562); Schell Dep., 9/15/98, 103:17 - 104:22 (DX 2562).

6. Professor Fisher testified: "Netscape's browsers contain their own set of APIs (as well as a set of Java APIs) to which applications developers can write applications. As a result, applications can be developed that will run on browsers regardless of the underlying operating system." Fisher Dir. ¶ 84; see also Warren-Boulton Dir. ¶ 69; Warren-Boulton, 11/23/98pm, at 34:12 - 35:13.

53.3. Third, Internet browsers, including Netscape Navigator, have been ported to multiple operating systems, thereby enabling application developers to write cross-platform applications using browser APIs. Applications written for the browser will run on multiple operating systems.

1. Dr. Tevanian described the importance of Internet-oriented platforms, including browsers: "Importantly, applications written for such platforms would be able to run on any computer that has the software platform, regardless of the underlying operating system." Tevanian Dir. ¶ 45.

2. As Professor Fisher summarized: "The browsers produced by Netscape run on many different operating systems, including Windows, the Apple Macintosh operating system, and various flavors of the UNIX operating system." Fisher Dir. ¶ 83; GX 13 (listing 22 operating systems on which Netscape Navigator runs); see also Schmalensee, 6/21/99am, at 20:10 - 21:7 (explaining how the Web and the browser serve as a platform).

3. Microsoft's Paul Maritz, among others, recognized that Netscape's browser represented an alternative platform to which ISV's may write cross-platform programs. Maritz, 1/25/99pm, at 28:7-11; see also McGeady, 11/9/98pm, at 56:4-25 (describing Maritz's comments to Intel about how Netscape's browser posed a "cross-platform threat").

4. Andreessen testified "that because Navigator or Communicator tend to support more operating system platforms, it's easier to write a cross-platform application." Andreessen Dep., 7/15/98, at 165:11 - 166:6 (DX 2555); see also Clark Dep., at 7/22/98, 48:21 - 49:21 (DX 2562) (explaining that Netscape's objective was "to provide a computer- and operating system-independent layer for applications that were network based to be developed").

5. Dr. Warren-Boulton testified: "The issue is not Netscape as a stand-alone alternative to Windows. The issue is . . . the existence of an independent browser industry supporting cross-platform standards in encouraging a set of applications which is large enough so that someone will provide a platform." Warren-Boulton, 11/23/98am, at 80:8-13.

54. Internet browsers, in particular Netscape Navigator, thus posed a threat to Microsoft's operating system monopoly because they threatened to reduce the applications barrier to entry; in the words of Bill Gates, non-Microsoft browsers threatened to "commoditize" Windows.

1. Bill Gates, "The Internet Tidal Wave," May 26, 1995. GX 20, at MS98 01128763.

2. Barksdale summarized the threat posed by Netscape to Microsoft's Windows monopoly: "These innovations arising from the development of browser technology, particularly Navigator, were eventually noticed at Microsoft. The possibility of a vast library of applications written in Java or other OS-neutral languages coupled with independent user interfaces and platforms, such as those provided by Navigator, posed a serious threat to the Windows monopoly." Barksdale Dir. ¶ 85.

3. As Barksdale pointed out, given the APIs, whether extensive or limited, exposed by Netscape Navigator, the "big threat" to Microsoft "would be that if developers began developing for the browser and because it was across these 19-some platforms as I mentioned, it then has the potential that OEM's could put different types of operating systems on their machines because the other programs and applications out in the general market would be able to run on top of the browser and not be particular as to which operating system was installed with the PC." Barksdale, 10/27/98pm, at 4:19 - 5:9; see also Barksdale, 10/27/98am, at 74:10-16 (explaining that if Netscape's browser were successful, it could potentially "marginalize or commoditize the platform characteristics of the operating system beneath it").

4. Professor Fisher testified: "To the extent that browsers support applications independent of the operating system, they could erode the applications programming barrier to entry that protects Microsoft's monopoly in operating systems." Fisher Dir. ¶ 82; Fisher Dir. ¶¶ 85-86, 90 (collecting internal MS documents; citing GX 354, GX 473, GX 510, GX 1016); Fisher, 1/12/99pm, at 68:20 - 69:2 (explaining that OS and Java threaten to facilitate a substitute's entry).

55. Non-Microsoft browsers posed an especially serious threat because network-based computing in general, and the Internet in particular, quickly blossomed into a very important way users employ their PCs; if Microsoft were unable to control the standards and interfaces that are central to network-based computing, other firms could develop rival platforms using those standards and interfaces and would be able to challenge the applications barrier to entry.

1. In his May 1995 memo, "The Web is the Next Platform," Microsoft's Ben Slivka wrote that "we should be extending the web with as many Microsoft technologies as possible, even if we have to modify those technologies in ways not original [sic] intended by their designers." He concluded: "If Microsoft doesn't enhance the Web, there is a nightmare scenario where an OS-neutral Web platform arises, and then a company like Matsushita or Siemens could come out with a $500 'Web Box' that runs web applications (with no need for Windows, or MS-DOS compatibility, or Intel compatibility), and consumers make the obvious choice between a $2000 Windows PC and the $500 Web Box. Say good-bye to Windows." GX 21, MS98 0102397.

2. A June 1996 Microsoft marketing report, "Winning @ Internet Content," states: "The rise of the Internet has been driven by the success of a series of 'platforms' that utilize these protocols at their core and provide a set of APIs for ISVs to develop on top of. By far the most successful platform to date has been Netscape's, with Netscape Navigator on the browser and Netscape Suite Spot on the server. The core threat for Microsoft is the potential for this platform to abstract the Win32 API. For example, if Netscape continues its success in getting ISVs and ICVs to develop applications for Netscape's client/server Api's, these API's could be the most important API's in the future, putting Win32 and Microsoft's platform position in jeopardy." GX 407, at MS6 5005709.

3. See also infra Part VII.D.

2. Microsoft recognized the threat that Internet browsers, in particular Netscape Navigator, posed to its operating system monopoly

56. Microsoft recognized that Internet browsers not controlled by Microsoft could threaten its monopoly by eroding the applications barrier to entry.

56.1. The contemporaneous documents show that Microsoft's executives recognized the browser threat and developed their business strategy to respond to it.

1. In a May 26, 1995, memo entitled "The Internet Tidal Wave," Gates announced to the rest of Microsoft that he assigns "the Internet the highest level of importance. In this memo I want to make clear that our focus on the Internet is critical to every part of our business. 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 the graphical user interface (GUI)." Gates identified "a new competitor 'born' on the Internet" -- Netscape. "Their browser is dominant, with 70% usage share, allowing them to determine which network extensions will catch on. The are pursuing a multi-platform strategy where they move the key API into the client to commoditize the underlying operating system." GX 20, at MS98 0112876; see also GX 16; GX 17; GX 336, at MS7 007443; Gates, 1/13/99, at 460:15 - 461:10, 407:9-18 (Gates stated that Netscape was "creating a product that would either reduce the value or eliminate demand for the Windows operating system if they continued to improve it and we didn't keep improving our product.")

2. iMcGeady described what Microsoft executives, including Mr. Gates, told Intel about its view of Netscape in 1995: "If you begin to get a few leading-edge application developers that are developing for the Netscape environment, then that makes that environment that much more attractive both for end users and for other applications developers. And so more applications developers come to up [sic] which brings more users to it and more application developers, that's the positive feedback loop. That's what he wanted to prevent happening, that kind of a feedback loop which everyone seeks in this industry . . . If independent software developers began to write applications or plug-ins that worked directly with the browser, then, first of all, they may not--they may no longer write them to work directly with Windows, but more importantly, then Netscape begins to be the one who is setting--who is defining those application programming interfaces we discussed earlier, and Netscape then is much more in control of the rate of innovation and the kinds of innovations that happen for those applications, and Microsoft is, correspondingly, less in control." McGeady, 11/9/98pm, at 59:22 - 60:11; see also McGeady, 11/9/98pm, 57:10 - 58:8; GX 279, at MS CID 00077 (Notes of an August  2, 1995 meeting with Mr. Gates).

3. Maritz wrote in May 1995 to other senior Microsoft executives that "we all agree . . . that the Internet represents a big threat/opportunity to our current businesses" and that "Priority #1 is to not lose control of key interfaces and protocols that applications/titles use. O'Hare needs to evolve into an extensible client that encourages 'online applications' to take full advantage of Windows and other MS assets." GX 148. Maritz, 1/28/99am, at 56:20 - 57:1 (Maritz explaining that Navigator is a threat to Windows "if more and more application programs get their services from Navigator and not from Windows, the perceived value of Windows is going to decline, and the ability to have those applications moved to other platforms will also be increased"); see also GX 503, at MS6 6008248.

4. In his May 1995 memo, "The Web is the Next Platform," Ben Slivka wrote that "The Web is an application platform (complete with APIs, data formats, and protocols) that threatens Windows -- many corporate developers and ISVs could develop and deliver their solutions more quickly, to a wider audience, with the Web than they can with Windows or MSN as it exists today." GX 21, at MS98 0102395; see also GX 329; GX 399, at MS98 0103343 (Ben Slivka wrote: "The Web could make Windows irrelevant in the next few years."); GX 521, at MS98 0103337; Slivka Dep., 1/13/99, at 724:1-8 (Slivka testified: "You know, whether it was Navigator 1 or Navigator 2 or Navigator 3, the point was not that that thing as it stood then would immediately kill Windows. . . . The point was that that thing could grow and blossom and provide an application development platform which was more popular than Windows.").

5. Brad Chase described in an April 1996 planning memo how Microsoft would lose "the Internet platform battle" if it did not increase consumer usage of Internet Explorer: "The industry would simply ignore our standards. Few would write Windows apps without the Windows user base. . . ." GX 39, at MS6 5005720. He goes on to say that, "Netscape is already entrenched in our markets all over the world. The situation today is scary." GX 39, at MS6 5005724 (emphasis in original); see also GX 510, MS7 004127 (Chase warned that competing Internet browsers could eventually "obsolete Windows"); GX 59 (Chase observed in April 1997 that "IE share is critical. Without it, we lose the desktop, which translates to Windows and Office revenue over time."); GX 828, MS98 0118367 (In March 1998, Chase notes: - redacted - ") (sealed); GX 40, at MS6 6005550 (Silverberg writes: "Our competitors are trying to create an alternative platform to Windows."); GX 407, at MS6 5005716; GX 475.

6. In a May 1997 Internet Explorer 5 Planning document, Chris Jones analyzed Netscape's approach as follows: "Netscape Communicator defines a new platform, taking advantage of the lessons learned from Visual Basic, Visual C++, Java and Web content. They are completely focused on turning their applications framework (HTML, object model, scripting, and JFC) into the primary way developers deliver Internet-centric applications." GX 494, at MS7 004614. Mr. Jones also testified that "as soon as the internet came around . . . it was clear that you could take and create something that extended and enhanced what was on the internet and a set of services that are HTML and create an alternate environment that wouldn't need Windows anymore, that would abstract away all the value that Windows provided and make it just a general purpose--to quote a Netscape vice-president--partially debugged device drivers. And boy, you know, I'm not in the business of shipping partially debugged device drivers." Jones Dep., 1/13/99, at 574:24 - 575:22, 578:2-14 ("If you mean did we think that the Netscape browser was a platform threat, the answer to that question is yes because the services that it provided were compelling alternatives to the services on Windows.").

7. Microsoft's Yusuf Mehdi agrees that "having users use our software . . . is an important goal for us to defend the Windows market share and provide a platform for those developers to write to. And to the extent at that Netscape would have a more popular platform that people wrote to and used instead, that would be a threat to the business for the Windows business for Microsoft." Mehdi Dep., 1/13/99, at 637:14 - 638:22.

8. As Dr. Warren-Boulton summarized: "Microsoft clearly regarded Netscape, particularly initially, as a direct threat to its operating system in the sense that Netscape might, in fact become . . . a complete and direct competitor." Warren-Boulton, 12/1/98am, at 42:14-20; see also Warren-Boulton Dir. ¶ 87 (collecting quotes from Microsoft personnel, citing GXs 20, 39-40, 503, 510).

56.2. At trial, Microsoft's witnesses acknowledged that Netscape Navigator posed a competitive threat to Windows because it provided an application platform that threatened to erode the applications barrier to entry.

1. Dean Schmalensee testified that "Netscape apparently envisioned pursuing a middle ware strategy to compete with Windows. Netscape Navigator relied on APIs in Windows and in that sense was an application. In addition to expanding its features, Netscape promoted its client products as 'platforms,' and encouraged ISVs to write to them by providing APIs and other 'hooks,' and offered services and software tools . . ." Schmalensee Dir. ¶ 137; Schmalensee, 1/13/99pm, at 33:21 - 34:5 (agreeing Netscape and Java are threats to Microsoft because applications written to those platforms "can be run cross-platform"); Schmalensee, 1/13/99pm, at 35:5-14 ; Schmalensee, 6/21/99am, at 23:10-19 ("I believe that Netscape was a potential platform competitor, and Java was certainly by -- was and is, by any definition, an actual platform competitor.").

2. Allchin agreed that Netscape's browser posed a platform threat to Windows. Allchin, 2/1/99pm, at 55:22; Allchin, 2/1/99pm, at 60:23-25 (conceding that the "web application platform" was a threat to Windows and that integrating the browser into Windows was a response to that threat); Allchin, 2/1/99pm, at 60:3-4 ("they were a platform competitor, absolutely"); Allchin, 2/3/99pm, at 8:20-22 (discussing GX 47: "by this time it was obvious to me that Netscape was certainly adding enough APIs, that that was the competitor to Windows."); Allchin, 2/3/99pm, at 9:1-8, 10:9-15, 28:12-15.
3. Maritz stated that he considered Netscape both an actual platform competitor, "in terms of how people could structure applications," and a "potential" platform competitor. Maritz, 1/26/99am, at 28:13-23; Maritz, 1/26/99am, at 30:4-6 (Microsoft's "initial concerns about Netscape focused on their ability to expose API's and their ability to expose new facilities to web pages."); Maritz, 1/25/99pm, at 26:20 - 27:19 ("During the first half of the calendar year 1995," Microsoft came to believe that "Netscape was becoming a platform . . . that other software could depend upon, and they were extending it's capability as a platform. And one of the natures of a software platform is that it exists to enable other software and if the other software is depending upon your competitor's platform, even if it's running on top of your own platform, over time the value of the platform can become diminished . . . .").

C. Cross-Platform Java also presented a middleware threat to Microsoft's operating system monopoly

57. Cross-platform Java is another middleware technology that has the potential to erode the applications barrier to entry by gaining widespread usage of APIs without competing directly against Windows as an operating system.

1. The nature of the Java threat

58. James Gosling and others at Sun Microsystems developed Java in significant part to provide developers a choice between writing cross-platform applications and writing applications that depend on a particular operating system.

58.1. Java consists of a series of interlocking elements designed to facilitate the creation of cross-platform applications, i.e. applications that can run on multiple operating systems.

1. Gosling testified: "The Java technology is intended to make it possible to develop software applications that are not dependent on a particular operating system or particular computer hardware . . . . A principal goal of the Java technology is to assure that a Java-based program -- unlike a traditional software application -- is no longer tied to a particular operating system and hardware platform, and does not require the developer to undertake the time-consuming and expensive effort to port the program to different platforms. As we said in the Preface to The Java Programming Language, 'software developers creating applications in Java benefit by developing code only once, with no need to 'port' their applications to every software and hardware platform.' . . . Because the Java technology allows developers to make software applications that can run on various JVMs on multiple platforms, it holds the promise of giving consumers greater choice in applications, operating systems, and hardware. The Java technology has the potential not only to free individual consumers from concern about whether the software they want to run is supported by a given operating system, but also to permit corporations and Internet users more easily to mix different types of computing systems across a network." Gosling Dir. ¶¶ 20-29(b); see also Gosling, 12/3/98am, at 6:3-6.

2. Gosling stated this theme in internal documents as early as August 1995: "The issue of making developers CPU and OS independent is that they can port to Sun or to Windows. . . . Sun's or any alternate CPU company (MIPS and SGI) key to success is apps. Apps are the key to volume. Java allows developers to decrease their dependence on Intel and Microsoft." DX 1285; see also DX 2012, at SUN 87 001685 ("Sun is attempting to establish Java as a viable computing platform which is hardware and operating system independent.").

3. In his June 1999 rebuttal testimony, Dean Schmalensee recognized "Java is used for a wide range of things. It's how my son first learned computer programming. It's used to run on a wide array of platforms. That, of course, is one of its most important selling features from Sun." Schmalensee, 6/23/99pm, at 50:5-11.

4. As the District Court for the Northern District of California found: "Sun's JAVA Technology comprises a standardized application programming environment that affords software developers the ability to create and distribute a single version of programming code which is capable of operating on many different, otherwise incompatible, system platforms and browsers. Most computer systems implement platform-dependent programming environments, such as Microsoft's Win32 programming environment. Programs created to run on a particular platform will not function on a different platform. Thus, a software developer must choose the platforms for which it will develop and support different versions of the same program. Sun's platform-independent JAVA Technology, which can be implemented on many different system platforms and browsers, obviates the need for creating and supporting different versions of the same program." Sun Microsystems, Inc. v. Microsoft Corp., 999 F. Supp. 1301, 1302 (N.D. Cal. 1998).

58.1.1. Java provides ISVs a programming language with which to write applications. Java also includes a set of "class libraries," a collection of programs written in Java, that offer APIs that ISVs can use to develop software applications.

1. Microsoft's Paul Maritz summarized the different aspects of Java: "Java, the programming language; Java the virtual machine, which you need to execute Java programs; and then there's this collection of other programs written in Java, which I call the Java classes. And it's that collection of software that is being put forward by Sun, and that Netscape has announced their intent to cooperate with Sun, that forms another body of middleware that I am concerned about." Maritz, 1/26/99am, at 18:22 - 19:23.

2. As the District Court for the Northern District of California summarized: "The Java programming environment allows software developers to create a single version of program code that is capable of running on any platform which possesses a compatible implementation of the Java runtime environment. The Java programming environment comprises (1) Sun's specification for the Java language, (2) Sun's specification for the Java class libraries and (3) the Java compiler." Sun Microsystems, Inc. v. Microsoft Corp., 21 F. Supp. 2d 1109, 1112 (N.D. Cal. 1998).

58.1.2. The Java programming environment also provides software developers a Java "virtual machine" (JVM) that, when ported to different operating systems, serves as the "host" or "adaptor" to which programs written in the Java language can be run, independent of the underlying operating system. Together, the Java class libraries and virtual machine are often referred to as the "Java runtime environment" (JRE).

1. As Gosling explained, Java makes it much easier for ISVs to develop platform-independent software because Java programs "need not run by interacting with a particular operating system's APIs. Instead, they typically interact with a Java virtual machine ('JVM'), which is an intermediate software layer that translates the Java-based program for the particular operating system and hardware platform that the Java virtual machine runs on. In essence, the Java-based program views the JVM as an operating system, and the operating system views the JVM as a traditional application . . . once a JVM is developed for a software platform, if the JVM is fully compliant with the Java specifications, . . . it should run most Java-based programs without the need to recompile or otherwise modify the programs. . . . Such programs thus have the potential to run on any PC, other type of computer, or even devices not traditionally thought of as computers (such as cellular telephones), provided that the machines have compatible JVMs installed on them."; see also Gosling Dir. ¶¶ 24, 25, 28; Gosling, 12/2/98am, at 55:5-11 (any Java program, if written properly and properly compiled into bytecodes, should run equivalently on any properly-designed and implemented Java virtual machine, regardless of the underlying platform is); Gosling, 12/10/98pm, at 21:8-14 (describing the JVM as an adaptor).

2. Sean Sanders, an executive with Novell Corporation, testified: "The Java virtual machine is essentially yet another software layer that allows people to run Java-based applications and to help them -- provide them the tools that they could use to yet build and develop and to -- for optimization of any other Java applications that they might want to develop." Sanders Dep., 1/13/99, at 188:18 - 189:15.

3. The District Court for the Northern District of California described the Java architecture as follows: "Sun's JAVA Technology is a so-called 'class-based' language in that its functionality is determined by the Java classes available to the programmer. Therefore, new functionality requires developing new Java classes. Programs written in the Java programming language are compiled into intermediate instructions called bytecodes or Applets. These bytecodes or Applets are then 'interpreted' by another computer program which emulates a hypothetical CPU called the Java Virtual Machine. The Java Virtual Machine translates the Applets into instructions understood by the specific computer CPU on which the Java Virtual Machine is running. Therefore, a specific interpreter or virtual machine is needed for each computer CPU on which the Java program is run." Sun Microsystems, Inc. v. Microsoft Corp., 999 F. Supp. 1301, 1302-03 (N.D. Cal. 1998) (citations omitted.).

58.2. Because Java offers alternative APIs, applications written using standard Java programming tools and class libraries can run on any operating system for which there is a Java virtual machine. The widespread adoption of a cross-platform Java programming environment could reduce computer users' dependency on the Windows operating system.

1. As Gosling explained: "As more new Java-based programs are developed, distributed and used, new operating systems may be developed to take advantage of the existing body of Java-based software. In other words, potential developers of new operating systems and hardware platforms need not be deterred by the absence of platform-specific programs for their new systems, so long as there is a JVM available to enable existing Java programs to run on the systems. This may give new operating systems and hardware platforms a chance to compete in markets previously dominated by a particular vendor." Gosling Dir. ¶ 29; Gosling, 12/10/98pm, at 28:20 - 29:2 ("Once the APIs that developers develop to are ones that are realized on many different operating systems, then those operating systems can compete with Windows. And that would lead to sort of a lesser -- lesser role for Windows in that they would have to compete with these operating systems on the merits of the operating system rather than on the lock that tends to be inherent in the APIs and the binary compatibility.").

2. Soyring explained IBM's rationale for supporting Java: "Primarily because the value that it provides to IBM's customers and the value it provides to IBM. As you probably know, IBM has a variety of operating systems, primarily four different ones. Many of our customers have many of these different -- several -- one or more of these operating systems installed. It's less expensive for them and less time-consuming for them to be able to buy one application or one software product that they can buy, maintain, and support but run it on different operating system platforms." The success of cross-platform Java would enhance the ability of other operating systems "to compete." . . . What drives demand for the sales of operating systems is the availability of applications. And if there is a large install base of Java that's consistently implemented, what it does is create an economic opportunity for commercial software developers to be able to develop a commercial software application using Java and then make it available to sell and be run on many different operating systems rather than just on one." Soyring, 11/18/98pm, at 54:8 - 55:10; see also Soyring Dir. ¶ 28 ("The Java technology from Sun is designed to allow Java-compatible application programs to run on a wide variety of different hardware and operating systems. This would provide users with the benefits of increased number of applications and would reduce the cost of ISVs of developing applications for multiple operating systems. This characteristic of Java also has the potential to undermine the Windows application advantage . . . .").

3. Barksdale testified that "the cross-platform benefits of Java, allowed for the development of software applications that were directed more to the Internet than to the desktop, and thus had the potential to serve as a partial substitute for the Windows OS as a development platform." Barksdale Dir. ¶ 15; see also Sasaki Dep. (played 12/16/98pm), at 31:24 - 32:7 (explaining that Java has the potential to level the playing field among operating systems).

4. Dean Schmalensee readily acknowledged that cross-platform Java technology poses a competitive threat to Windows by potentially rendering underlying operating systems less significant: "Sun's Java poses potentially serious competitive implications for Windows. . . . If Java achieves its advocates ambitions, operating systems would become less important in the marketplace, and the important standards would come to be determined by Sun, which vigorously defends its control over the Java language." Schmalensee Dir. ¶¶ 141-142; see also Warren Boulton, 11/19/98pm, 31:8-12 (concluding "an increasing number of users may be able to simply do without Windows entirely").

2. Microsoft recognized the Java threat

59. Microsoft understood the threat Java posed to its monopoly power. Java offered ISVs the ability to create a robust set of cross-platform applications that might reduce the applications barrier to entry.

59.1. Java provided software developers with a platform to create applications that could run on different operating systems and hardware platforms.

1. Eubanks testified: "One of the great things with Java is that when you create a Java application, it will run on any machine that has a Java virtual machine." Eubanks, 6/16/99am, at 68:11-20.

2. Gosling, whose responsibilities include working with numerous application developers and who himself has a career of experience as a developer, made clear that Java's theme of "'write once, run anywhere' was terrifically attractive to developers. Developers want this more than just about anything you can imagine." Gosling, 12/3/98am, at 32:10-12.

3. Soyring testified: "'Write once run everywhere' . . . has been the holy grail of programming for many years to be able to write an application once and then run it on many different operating systems or hardware platforms, and we find that Java is a technology that most closely approaches this by a long distance versus any other technology, and we have been able to successfully demonstrate with a set of our clients that it is possible using the Java technology to write an application once, compile it once and then run that exact same code on a variety of different operating systems, giving our customers the choice to choose different operating systems and different hardware platforms." Soyring, 11/18/98pm, at 51:18 - 52:6; see also Sanders Dep., 1/13/99, at 186:20 - 187:3 (stating that Java "provides the benefit of an application-running environment that would allow people to run applications independent of any kind of operating system or cpu type of restraints they may currently be facing").

4. Barksdale testified that "Java allows software developers to write cross-platform applications that will run on any operating system, increasing consumer flexibility and ease of use, while reducing development costs associated with writing an application and then porting it to run on various different operating systems . . . . The Java programming technology solves the platform dependency problem that has so long plagued software development. Programs written in Java can be run on any platform that has a Java virtual machine and Java class libraries, which Navigator does." Barksdale Dir. ¶¶ 15, 83.

59.2. Microsoft recognized, and continues to recognize, the competitive threat that Java poses to Windows by providing an attractive cross-platform programming environment that could erode the applications programming barrier to entry.

1. Dr. Warren-Boulton summarized the evidence of Microsoft's perception of the competitive threat posed by Java: "Microsoft has, almost from the beginning, recognized that the clearest threat to that monopoly power is the emergence of Java technologies combined with an independent browser market. Their response to that threat has been to attempt to take that technology, and instead of making it multi -- cross-platform, has been to transform that technology into a technology that is Windows-specific so as to prevent the emergence of a large stock of applications that could be used on any operating system . . . ." Warren-Boulton, 12/1/98am, at 19:24 - 20:8.

2. Dr. Fisher, similarly, summarized the evidence that Microsoft treated Java as a significant competitive threat to Windows. Fisher Dir. ¶¶ 204-207.

59.2.1. Microsoft executives have throughout the past four years treated cross-platform Java as a serious threat to Microsoft's operating system dominance.

1. In a June 1996 e-mail to Microsoft executive staff, Paul Maritz focused on the need to "fundamentally blunt Java/AWT momentum and to re-establish ActiveX and non-Java approaches as a viable strategy for structuring software." The reason Mr. Maritz provided for this objective was to "protect our core asset Windows -- the thing that we get paid $'s for. While Java per se is not the problem, if everything & everybody moves to Java as a language, then it will be so much more easy for AWT to become the API, and Windows is damaged." GX 42, at MS6 6010347 (emphasis in original); see also GX 473, at MS6 6006237 ("Java. Gaining as scripting language . . . Class libraries define 'API.' Becoming the 'brand' for software components."); GX 504, MS98 0169096 (Maritz writing that:"Java. Sun's goal is: -- Java class library/runtime = new OS API -- leverage this new API to replace Windows by JavaOS.").

2. In August 1996, Bob Muglia wrote: "When a Java developer writes to AWT, they are writing to Sun APIs, and their application can be easily run on competitive platforms." GX 466, at MS6 5003781; see also Muglia, 2/26/99pm, 10:5 - 11:22 (by offering an alternative platform, Sun could get developers to write to the Java platform and not to Windows, and therefore the applications that they wrote would not be focused on Windows).

3. In September 1996, Adam Bosworth sent Bill Gates and others an e-mail discussing Java. Bosworth noted, "I think it is important to understand that Java is not just a language. If it were just a language, it would not be a threat to us. We would and could easily just build the best implementation of this language and be done. It is, however, much more. It is an alternative to COM. . . . Java is on Unix and requires no dealing with setup, install, de-install, or anything else. Thus it is really easy to understand how a system for dynamically authoring Web pages on the server that depended upon Java objects rather than COM ones would have wider appeal."Gates responds: "This scares the hell out of me. Its still very unclear to me what our OS will offer to Java client applications code that will make them unique enough to preserve our market position. Understanding this is so important that it deserves top priority." GX 983, MS7 032895.

4. In January 1997, an internal Microsoft analysis described the "platform challenge" posed by Java: "possible emergence of a set of APIs and underlying system software that lead to a lesser or no role for Windows." GX 51, MS7 005534.

5. In a February 1997 e-mail to Jim Allchin, Mr. Gates again addressed the cross-platform threat posed by Java: "What will we have that the Java Runtime will not have? . . . The fact is that applications can be run on the server against an HTML client. . . . Most applications will have very little client code in the future. . . . The fact is there will be lots of machines where HTML/some level of Java is all they will have in common. Cheap devices and old PCs will be like this. It makes it very easy for people to think they should just program to this. . . . Lets work together to find the solution to this. I can say I am more scared than you are but that is not what will help us figure out where we should go." GX 475; see also GX 590 (Gates writing: "Java is the biggest threat to us and I certainly shouldn't be doing Apple events unless we are getting some help from us on this.").

59.2.2. Microsoft's witnesses in this litigation conceded that Java presented a significant potential threat to Windows.

1. Gates testified repeatedly that he perceived Java to be a threat to Windows: Gates Dep., (played 12/2/98am), at 22:19 - 23:1. Gates stated: "we did think of" Java APIs "as something that competed with us for the attention of ISV's in terms of whether or not they would take advantage of the advanced features of Windows." Gates Dep. (played 12/2/98am), at 24:15-22; see also Gates Dep., 8/27/98, at 90:12-19 (DX 2568).

2. Muglia also testified that Microsoft considered Java a serious cross-platform threat: ""Although Java was a new and unproven technology, Microsoft took Sun's claims seriously. . . . Sun has adopted a business strategy that seeks to transform the Java programming language into a full operating environment and software development platform. A key requirement of Sun's strategy is delivering on its WORA claim -- that programs written in Java, to the Java development platform, will run without modification on any underlying platform for which there is a JVM." Muglia Dir. ¶¶ 8, 10; see also Muglia, 2/26/99pm, at 4:8-18 (Muglia believed in 1995 and 1996 that Java represented a serious threat to Microsoft's operating system business); Muglia, 2/26/99pm, at 7:2-19 (explained that the cross-platform threat consisted of the JVM and Java class-libraries) ; Muglia, 2/26/99pm, at 9:3-21 (explained that: "what they were trying to do was get developers to write to that alternative platform. So, even if -- even if a developer wrote a Java program and that program runs on Windows, even in the case where it runs on Windows, it's not written to Microsoft's programming interfaces. So when I said slide in their platform, what I meant is that they could, in essence, make what everything else that our platform did irrelevant, thus enabling to replace Windows and make it obsolete, so to speak.").

3. Maritz also testified: "If successful, software developers could write programs to run on Sun's technology, and neither Windows nor any other operating system would provide significant value to customers." Maritz Dir. ¶ 243; Maritz, 1/26/99am, 20:23 - 21:3 (the Java foundation classes posed a potentially serious platform threat); Maritz, 1/28/99am, 59:10 - 60:17, 62:3 - 63:17 (Maritz explained Java is a form of middleware. Sun's goal was to provide most of the OS services through the Java runtime. The browser and Java have the potential to serve as a virtual operating system.).

4. Dean Schmalensee also acknowledged the cross-platform threat Java poses to Windows: "Sun would like ISVs to write pure Java so that their applications can run anywhere, in principle. Microsoft would like ISVs to design applications that would run on Windows. It matters to those companies what choice the ISV makes, assuming it's a good application." Schmalensee, 6/22/99pm, at 23:23 - 24:7.

5. Slivka also testified regarding the Java threat: "my recollection was that this cross-OS Java platform stuff that we were attempting to do with AFC, he [Bill Gates] was very unhappy with that." "He thought that was a big threat to Windows." Slivka Dep., 9/4/98, at 367:13 - 369:3 (DX 2591); see also, Slivka, 1/13/99, at 735:13 - 736:4 ("All this comes back to Windows and the threat, you know, Sun's very direct threat to our Windows platform, and the success of Windows on the client. So, this seemed like if the library space fragmented, the 'write once, run anywhere,' I guess, actually is what Sun called it, that would be a lot less probable . . . I guess the end was to protect the Windows franchise, not to defeat the 'write once, run everywhere.'").

D. The threats to Microsoft's monopoly posed by Internet browsers and Java are mutually reinforcing, and they could be essential to the emergence of other platform-level threats to Microsoft's operating system monopoly

60. The competitive threats posed by non-Microsoft Internet browsers and cross-platform Java are, to a significant degree, interdependent.

60.1. Dissemination of Java virtual machines and Java runtime environments not controlled by Microsoft hinges in significant measure on the widespread distribution of non-Microsoft Internet browsers.

60.1.1. Industry witnesses recognize that Internet browsers are the principal distribution vehicle for Java Virtual Machines and JREs and that, because Microsoft distributes only its own (as will be discussed below, non-cross-platform) implementation of the JRE with its browser, Netscape Navigator was the principal distribution vehicle for cross-platform Java.

1. IBM's John Soyring testified that Netscape has been a significant distributor of Java virtual machines: "Netscape is a very high-volume distribution vehicle for Java virtual machines on operating systems other than OS/2." Soyring, 11/18/98am, at 89:8-12; see also Soyring Dir. ¶¶ 28 ("The reason this relates to browsers is that Netscape Navigator has been the prime distribution vehicle for Sun's Java technology while Internet Explorer contains the Microsoft version of Java.").

2. Barksdale testified that "the widespread distribution of Netscape Navigator facilitated widespread distribution of the Java programming language developed at Sun Microsystems." Barksdale Dir. ¶ 15; see also Sasaki Dep. (played 12/16/98pm), at 31:6-8; 32:8-11.

60.1.2. Microsoft, both in contemporaneous documents and through its witnesses at trial, recognized that Internet browsers are essential to distribute JVMs and Java class libraries and, in particular, that Netscape was the principal distribution vehicle for a cross-platform Java runtime environment.

1. Muglia acknowledged at trial that Netscape has been "one of the largest volume distributors of JVMs." Muglia Dir. ¶ 15.

2. Maritz conceded that Netscape, in May and June 1995, "was an important distribution vehicle for Java APIs." Maritz, 1/26/99pm, at 59:21 - 60:6; Maritz, 1/26/99am, at 30:10 - 31:2.

3. Documents written by Maritz in 1997 expressly link Netscape nad Java as a threat. GX 52, MS7 003270 (January 1997 Microsoft presentation identifies as a "Scenario: Emergence of a new API" and notes that "Sun AWT provides base cross-platform API" and further, that "Navigator/NetOne provides: additional API's" and "a volume platform for ISVs & Corps to target, since runtime gets shipped with Navigator"); GX 113; GX 514, at MS7 007509 ("If we look further at Java/JFC as being our major threat, then Nscp is the major distribution vehicle.").

60.2. Conversely, the ability of Internet browsers to supply an attractive set of APIs is enhanced by the viability of cross-platform Java APIs. The browser and Java APIs sets can together provide the foundation for developers seeking to write cross-platform applications, particularly network- and Internet-oriented applications.

1. Contemporaneous Microsoft documents describe the interdependence of competitive browser and Java products. E.g., GX 466, at MS6 5003781 ("Without question, the Java platform API's have surpassed the Macintosh as the #2 platform for software development. In concert with this, Netscape has its own offering of platform API's called Netscape One which is also built on Java. Collectively, these two initiatives represent the most serious threat to our core Windows business which Microsoft has seen in years. The Windows franchise is fueled by application development which is focused on our core APIs. When a developer writes an application to AWT, even if they are using Windows and Visual J++, they are not supporting our platform. Instead, they are furthering Sun's momentum, potentially opening up the opportunity for our competitor to slide in its own operating system offering." ); GX 485, at MS6 5005195 ("The Internet challenge is critical as Netscape, Sun and others try to build a non-Microsoft platform alternative.").

2. Gosling also summarized how browsers and Java technology together can be particularly significant for Internet-oriented applications: "Because the Java technology is particularly useful for running software that is downloaded over a network, such as the Internet, we adapted the Java technology to work in conjunction with web browsing programs known as 'browsers.' . . . Java technology in essence permits certain software programs to run within browsers. Java-based programs can be downloaded from the Internet or other network to a user's computer without regard to what operating system or hardware is installed." Gosling Dir. ¶¶ 34-35.

3. Dr. Warren-Boulton also explained that competitive browsers may over time competitive browsers tend to threaten the Windows monopoly more as a complement to, and distribution vehicle for, Java, rather than as an independent platform in its own right. Warren-Boulton, 12/1/98am, at 42:7 - 43:10; see also Warren-Boulton, 11/19/98am, at 48:13-24 (Java an implicit complement to browsers).

61. Because of the growing importance of network computing (over the Internet and otherwise), Internet browsers and Java in combination posed a serious threat to the applications barrier to entry.

1. See infra Part VII.D; ¶¶ 398-400.

62. The success of cross-platform browser and Java products could also facilitate innovation in new forms of computer hardware.

1. As Professor Fisher explained: "Similarly, browsers could reduce the power of the operating system monopoly by facilitating the expansion of network computing, in which users with 'thin clients' use a network to access applications residing on a server computer rather than hosting the application on the PC itself." Fisher Dir. ¶ 87.

2. In an April 1997 Memo entitled "Preserving the desktop paradise," Brad Chase commented that Netscape and Sun might not only reinvigorate operating system software competition, but also facilitate the success of low-cost hardware: "Our competitors are still hard at work trying to obsolete Windows. More people than ever now believe they will. Netscape and Sun endeavor to commoditize the OS and drive developers to adopt their technologies and APIs. This is more true today than ever and these technologies are precisely those that may make the NC viable." GX 512, at MS7 004149; see also DX 1490, at MS7 007476 (identifying network computer as a "competitive threat").

3. Maritz also focused on the potential for new hardware development, facilitated by browser and Java, in his trial testimony. Maritz Dir. ¶¶ 31, 259 ("impending competition from so-called 'network computers'").

4. As Microsoft's Ben Slivka stated in his deposition, a "nightmare scenario is that the web grows into a rich application platform in an operating-system neutral way, and then a company like Siemens or Matsushita comes out with a $500 'WebMachine' that attaches to a TV." Slivka Dep., 1/13/99, at 712:6-11 (commenting on GX 1016).

5. AOL's Barry Schuler also testified that - redacted - In order to achieve that, - redacted - Schuler Dep., 5/5/99, 159:12 - 160:4 (DX 2810A) (sealed).

IV. Microsoft Attempted To Enter Market-Division Agreements To Eliminate Platform-Level Software That Threatened Its Operating System Monopoly

A. Microsoft tried to eliminate the browser threat by proposing a naked market-division agreement to Netscape

63. Microsoft initially tried to eliminate the threat non-Microsoft browsers posed to the applications barrier to entry by attempting to bribe, and later threatening, Netscape into giving up its core Window 95 web-browsing business. Had Netscape accepted Microsoft's market-division proposal, Microsoft would have succeeded in killing the browser threat in its infancy and likely would have acquired a monopoly over browsers.

1. Microsoft first unsuccessfully sought to purchase or license Netscape's browser software code

64. Before it fully recognized the threat that Internet browsers posed to its operating system monopoly, Microsoft unsuccessfully sought to purchase or license the software code for Netscape's Navigator browser.

64.1. When Microsoft decided that it wanted to offer its own Internet browser product in late 1994, it opened discussions to license browser software code with several companies, including Netscape.

1. Microsoft's Thomas Reardon "contacted Netscape in the early fall of 1994 and explained his desire to explore whether Netscape would be willing to consider some sort of licensing arrangement for the first version of its web browsing software." Rosen Dir. ¶13 (citing Reardon Dep., 9/9/98, at 153-54, 224).

64.2. Netscape representatives rejected Microsoft's proposal.

1. Barksdale testified that Netscape did not want to sell their software "at the price they [Microsoft] offered. They offered a flat fee of a couple of million dollars to take us out of the game. And that would have killed our product in their space." Barksdale, 10/21/98am, at 28:6-10; Barksdale Dir. ¶ 96 ("those discussions did not prove fruitful because Netscape was not interested in Microsoft's proposal, which was to purchase the Navigator code for what Netscape considered to be a low flat fee payment.").

64.3. In late December 1994, in what he described as "a moment of weakness," Netscape then-CEO James Clark -- without the knowledge of the rest of the Netscape board -- attempted to reopen those discussions, but he was rebuffed by Microsoft. The discussions went no further and were not renewed.

1. Barksdale Dir. ¶ 97.

2. According to Barksdale, Clark said he turned to Microsoft because of "fear on the part of a small company looking into the eyes of the world's most powerful software company and kind of feeling that they might somehow help us if we licensed it to them." Barksdale, 10/27/98am, at 49:22 - 50:1.

3. Clark Dep., 7/22/98, at 58:6 - 60:18 (DX 2562)

2. When Microsoft recognized the threat that Netscape's browser posed to its monopoly, Microsoft set out to eliminate the threat by seeking Netscape's agreement not to compete and to divide the browser market

a. Microsoft recognized that it could cripple the browser threat by eliminating Netscape as a browser supplier for Windows 95

65. With Netscape's dramatic success in early 1995, Microsoft realized that Internet browsers, in particular Netscape, posed a serious threat to the applications barrier to entry that protects Microsoft's monopoly power. Microsoft thus also recognized that inducing Netscape to abandon its efforts to develop platform-level browsing software for Windows 95 would eliminate the browser threat to its operating system monopoly.

65.1. By June of 1995, Microsoft recognized that Netscape was a significant competitor in Internet browsers and therefore posed a threat to Microsoft's operating system monopoly.

1. See supra Part III.B.2; ¶ 56.1.

65.2. In the first half of 1995, Microsoft and other industry participants expected that Windows 95 would quickly become the dominant PC operating system when it was released.

1. Barksdale Dir. ¶ 110 (In the June 21, 1995, meeting between representatives of Netscape and Microsoft, "We all anticipated" that Windows 95 "would shortly be the dominant operating system.")

65.3. Microsoft understood, therefore, that it could eliminate the platform threat posed by Netscape's browser by convincing Netscape not to make its browser available as an alternative platform for Internet software development on Windows 95. Indeed, convincing Netscape not to offer a competitive, platform-level browser on Windows 95 was Microsoft's primary goal for its negotiations with Netscape.

1. On April 14, 1995, Daniel Rosen, the person at Microsoft most responsible for negotiating a deal with Netscape (Rosen Dir. ¶7), wrote to Paul Maritz and other Microsoft executives about "the potential structure of a [Microsoft] relationship with Netscape." Rosen wrote that the "acceleration of Internet related activities makes it critical that we begin to make these choices ASAP, or they will be made for us . . . . With Netscape, we face a small, aggressive, FOCUSED competitor or ally. Their focus is both good news and bad. They can be successful, simultaneous with our success, if we can decide what we want . . . . Will they adopt our tools? Will they cede the client and its standards to us?" GX 18 (emphasis added).

2. This goal was reiterated on May 15, 1995, when Rosen wrote to Maritz and others that "our goal should be to wrest leadership of the client evolution from [Netscape]." GX 331, at MS98 0103672. On May 25, Thomas Reardon was even more direct, writing in an email to Rosen and others that any agreement to exchange "protocol specs" with Netscape "would really be a veiled effort on our part to move them off of the Windows client." GX 952 (emphasis added).

3. One week later, Maritz wrote to Bill Gates and Rosen that he viewed Microsoft's "imperative to be first and foremost to ensure that we keep control of the standard Internet client api's and protocols," that in order to do so Microsoft would have to "coopt Netscape," and that he was open to any strategy that would achieve that result. GX 953.

4. Microsoft's intention to eliminate competition from Netscape was expressed again that same day by Thomas Reardon, who sent a list of "working goals" for Microsoft's relationship with Netscape to Maritz and other Microsoft executives. Those goals included "move Netscape out of the Win32 Internet client area" and "avoid cold or hot war with Netscape. Keep them from sabotaging our platform evolution." Reardon also wrote that Dan Rosen "points out that we must offer them [Netscape] some story as to how they can slowly shift away from the core client business, or at least the core Win32 client business" and that "Dan feels there is reasonable hope for engaging Netscape in long term strategic cooperation, where Netscape might run with the Mac and Win16 clients." GX 24.

5. There is no meaningful difference, in these discussions, between the terms "Internet client" and "browser." Rosen, 2/22/99am, at 30:10-17 ("The client . . . was focused on all of those things one needed to connect a PC to the Internet to do useful things."); GX 20, at 5 (lengthy May 26, 1995 Gates memo refers to "O'Hare," which became Internet Explorer 1.0, in the same paragraph as both "our Internet client" and "our browser"); GX 22 (May 31, 1995, e-mail to Maritz and others states that "Netscape is very influential on what happens with Clients"); Rosen 2/22/99pm, at 8:23-25 ("I think it would be fair to say" that Microsoft's Internet client "would include certain components that were then shipping with the browser, but not necessarily all of them."); Rosen 2/23/99am, at 6:20-7:3 (defining the Windows "client code" as "TCP/IP, Internet shortcuts, HTTP and HTML rendering, among others").

b. Microsoft first suggested that Netscape not compete with it in the Windows 95 browser business at a June 2, 1995, meeting

66. Microsoft began discussing Netscape's Windows 95 browser plans in a June 2, 1995, meeting with James Barksdale. At that meeting, Microsoft suggested that Netscape consider abandoning its independent base of platform-level browsing code on Windows 95 and merely build on top of Microsoft's code.

66.1. James Barksdale visited Microsoft and met with Daniel Rosen, Nathan Myrhvold, and Paul Maritz. Both sides discussed potential points of technical and other cooperation.

1. The meeting "explored possible areas of collaboration between the two companies." Barksdale Dir. ¶ 101. "Microsoft principally was interested in getting" Netscape "to consider adopting certain security protocols, incorporating into Navigator certain viewers that would enhance Microsoft content, and other technologies . . . ." Barksdale Dir. ¶ 101; see also GX 25 (Rosen summary: Microsoft wants Netscape "Support of STT"); GX 26 (Microsoft offered to provide Netscape "with early disclosure of any 'standards and protocols' that would allow" Netscape to improve its browser so that it could work with MSN content, and Microsoft suggested that Netscape "could be the preferred or perhaps exclusive developer of these sorts of products."). There were also discussions of Microsoft possibly bundling Netscape server software. GX 25, at MS98 0009972; see also GX 26.

2. The meeting was "very friendly, non threatening," GX 26; see also Barksdale Dir. ¶ 101; GX 25 (Rosen's notes: "a cordial, open discussion of issues and direction."); Rosen Dir. ¶ 64.

66.2. Microsoft's goal at the time of the meeting was to "move Netscape out of the Win32 Internet client area." Rather than directly confront James Barksdale with that plan on June 2, however, Microsoft initially suggested that Netscape consider not competing and, instead, "using Microsoft's underlying code for its browser, adding their value-added components on top."

1. Rosen's notes of the meeting record, under the heading "What Microsoft wants from Netscape," that Microsoft asked Barksdale for "Strong support of Win95 and its evolution path. (Stronger support than for other products like Acrobat or Java). This might include using Microsoft's underlying code for its browser, adding their value-added components on top." GX 25, at MS98 0009972.
2. Thomas Reardon conceded that Netscape's "core client" already included an HTML renderer but noted: "There's lots of value-added stuff beyond HTML rendering in the Navigator product." Reardon Dep., 9/9/98, at 347:20-25 (DX 2606). A value-added application was "roughly anything that takes advantage of an API. It's an application. That's it. . . . But I should qualify it. I was making a distinction between core client technology, HTML, HTTP, transport technology, rendering technology, and programs that run above that or alongside of that independent of HTML, the HTML rendering itself." Reardon Dep., 9/9/98, at 343:23 - 345:10 (DX 2606).

66.3. James Barksdale responded by stressing the importance of Netscape's upcoming Windows 95 browser to Netscape's plans. He did not fully appreciate until the later June 21 meeting the import of Microsoft's statements that Netscape should simply use Microsoft's underlying code and add value-added components on top of it .

1. Barksdale "wanted to stress the importance of the client to Netscape's business strategy." Barksdale Dir. ¶ 101. He informed the Microsoft participants that Netscape planned to release a retail version of Navigator on Windows 95 shortly and that Windows 95 and Windows 3.1 were Netscape's primary browser distribution platforms. GX 25, at MS98 0009972 (Rosen's notes). When the parties discussed "browser cooperation," Barksdale responded that "he would like to explore ways to cooperate, but he wants to continue to add value in browser code." In fact, Barksdale even suggested at one point that Microsoft "distribute his browser." GX 25, at MS98 009972.

2. Barksdale told the Microsoft attendees that Netscape was planning to charge for its retail browser product to all but student and non-profit customers, that they were "selling a lot of site licenses for browsers," and that they were pleased with the revenues they were receiving from licensing both browser and server software to enterprises. GX 25, at MS98 at 0009972.

66.4. Microsoft's internal discussions following the June 2 meeting further demonstrate that Microsoft's principal goal for any "strategic relationship" was convincing Netscape to abandon the Windows 95 Internet client market.

1. On June 5, 1995, Daniel Rosen circulated his notes of the June 2 Netscape meeting to Bill Gates, Paul Maritz, and other Microsoft executives, giving an optimistic assessment of the potential for a "broad strategic relationship" between Microsoft and Netscape. GX 25, at MS98 0009973. Maritz responded that he did not believe "that Netscape is 'ready for a broad strategic relationship.' It was clear that he/they view the client as a key place to make money, since that 'hook is so important for selling additional software.' Barksdale was primarily interested for us to distribute his client and his server . . . ." GX 27.

c. At a June 21, 1995, meeting Microsoft expressly proposed a naked market-division agreement to stop Netscape from offering a competing platform

67. At a subsequent meeting held on June 21, 1995, under the pretext of exploring forms of complementary collaboration, Microsoft proposed to Netscape that the two firms divide the browser market, with Netscape to cease developing its independent browser for the Windows 95 market.

67.1. On June 21, 1995, Microsoft representatives Daniel Rosen, Chris Jones, Thomas Reardon, Richard Wolf, Anthony Bay, James Allard, and Barb Fox came to Netscape for a follow-up meeting to the June 2, 1995, meeting.

1. Rosen Dir. ¶¶ 70-75 (list of Microsoft attendees, who they were, and what Rosen expected them to discuss at the meeting); GX 32 (formal agenda for the meeting).

67.2. On the morning of June 21, 1995, prior to meeting with Netscape, the Microsoft representatives had a pre-meeting at the St. Claire Hotel in San Jose to discuss their objectives for the meeting. The consensus from that discussion was that Microsoft's primary goals for the meeting were to determine whether Netscape intended to compete with Microsoft at the platform level and, if so, to convince Netscape not to do so.

1. Rosen testified that he "had asked the group of Microsoft representatives to meet in a conference room . . . rented in the St. Claire Hotel in San Jose." Rosen Dir. ¶ 79. Jones attended the meeting as the representative of the platform group at Microsoft (Rosen, 2/22/99am, at 55:5-6), and "gave the best summary of the purpose and goals of the meeting," during the pre-meeting discussion, "so we nominated him to give our goals statement." Rosen Dir. ¶ 82.

2. Jones, when asked whether he recalled at the premeeting "any discussion about a desire of anybody on the part of Microsoft who was participating to be able to persuade or influence Netscape not to compete with Microsoft," testified: "Absolutely." Jones Dep., 1/13/99, at 582:10-18. See also Jones Dep., 10/27/98am, at 39:25 - 40:17.

3. Discussion at the premeeting focused on the "line between solutions and platform" and on how to persuade Netscape to stay on the solutions side of that line on Windows 95. Jones Dep., 1/13/99, at 581:4-19. When asked whether there was "any discussion about trying to influence Netscape in any way to either move toward or stay on one side of the line . . . as opposed to simply finding out where it was that they intended to do business," Jones answered: "It was both." Jones Dep., 10/27/98am, at 39:24 - 40:11.

67.3. Following their premeeting, the Microsoft delegation met with Janes Barksdale, Marc Andreessen, Mike Homer, and Ram Shriram for approximately four hours. The discussion covered a wide range of technical issues from the pre-arranged agenda.

67.4. In addition, the Microsoft team, led by its designated spokesman Chris Jones, told the Netscape representatives that Netscape should not develop a browser for Windows 95 because Microsoft intended to develop its own Windows 95 browser. Microsoft proposed that the two companies agree not to compete with each other by drawing a "line" between what Microsoft called "the platform" and what it called "solutions," with Netscape agreeing not to compete on the platform side of the line. In exchange for Netscape's agreement to abandon a Windows 95 browser and to stay on the solutions side of the line, Microsoft offered not to compete with Netscape in browsers that ran on operating systems other than Windows 95 and in non-platform solutions that ran on top of Windows 95 and Internet Explorer.

1. James Barksdale testified: "I experienced something I had not ever seen happen in my more than thirty years of experience with major U.S. corporations . . . . Microsoft apparently came to Netscape with a single focus: to convince Netscape not to compete with its Windows 95 browser product, Internet Explorer. Microsoft proposed a division of the browser market between our companies: if Netscape would agree not to produce a Windows 95 browser that would compete with Internet Explorer, Microsoft would allow Netscape to continue to produce cross-platform versions of its browser for the relatively small market of non-Windows 95 platforms: namely, Windows 3.1, Macintosh, and UNIX. Moreover, Microsoft made clear that if Netscape did not agree to its plan to divide the browser market, Microsoft would crush Netscape, using its operating system monopoly, by freely incorporating all the functionality of Netscape's products into Windows." Barksdale Dir. ¶ 25.

2. "Microsoft's officials made clear that they believed that Netscape should work with them on areas other than a browser for Window 95, but that we should not develop our own browser for Windows 95 because they intended to build a Microsoft browser for the Windows 95 operating system. They proposed that a 'line' be drawn between the area in which we developed products and competed and the area in which they developed products. Microsoft proposed that we build products that would run on top of the Windows 95 operating system and browser. They offered to allow us to continue to develop browsers for other operating systems, as long as we did not try to compete with them in developing a browser for the Windows 95 platform." Barksdale Dir. ¶ 110.

3. Netscape's Marc Andreessen "who is an extraordinarily fast typist," took detailed notes on his laptop computer as the meeting was going on. Barksdale Dir. ¶¶ 108, 112. Those simultaneous notes record that Microsoft asked Netscape "would you be interested in having a partnership where NS gets all the non-Win95 stuff and MS gets all the Win95 stuff? If NS doesn't want to, then that's one thing. If NS does want to, then we can have our special relationship. THREAT THAT MS WILL OWN THE WIN95 CLIENT MARKET AND THAT NETSCAPE SHOULD STAY AWAY." GX 33, at NSC 017100 (emphasis in original).

4. Microsoft's Chris Jones, when asked whether there was "any discussion in the meeting with the Netscape people that essentially, under some form of a deal or partnership, Microsoft could take, essentially would take the part of the business that related to Windows 95 and Netscape could handle remaining parts of the business, for example, the cross platform clients" answered: "Oh, I believe there was a discussion of that nature, yes." Jones Dep. (played 10/27/98am), at 40:19 - 41:3.

5. Microsoft left no doubt of its intent to convince Netscape to agree to stop competition. Andreessen testified: "I got the feeling that I was being visited by a force that was extremely powerful in the space where I chose to operate, and that I was basically being given the terms and conditions by which an arrangement would be struck, where, among other things, the market would be segmented and our company would be allowed to succeed in certain limited areas, and Microsoft would be allowed to succeed in areas that it chose to define." Andreessen Dep., 7/15/98, at 429:10-20 (DX 2555). He wrote in a June 21 email, that: "Much of the conversation centered on a discussion of how the line would be drawn between the platform and their value added." GX 535.

6. Chris Jones opened the meeting by commenting that Microsoft "believes" that there is a "set of things that are provided in Internet servers and browsers that will be in the core operating systems or given away with the OSs, as a facility like the Win32 API. What MS needs is someone -- a partner -- who is going to take those core services to build on top of them and create solutions for customers. MS has some ideas about what these features are, where the line is, and who the partners should be. All of the relationship points revolve around critical fact of -- is Netscape the kind of company that's going to partner with MS on this or not? Will MS & NS be able to cooperate & agree on the line, where it's drawn, etc. If not, companies will compete. If so, then arrangement can be highly beneficial, with 'aligned interests'." GX 33, at NSC 017098 (Andreessen's notes) (emphasis added).

67.5. In addition to offering not to compete with Netscape for non-Windows 95 browsers and for "solutions," Microsoft also offered to make Netscape a "preferred" ISV and to give Netscape preferential access to technical information about how to make its products work better with Microsoft's operating systems.

1. "Microsoft officials said that, if we agreed to the 'special relationship' they proposed, Microsoft would support us by making Netscape a 'preferred' ISV. The Microsoft personnel made clear that issues concerning the RNA API and related technical information we had been seeking could be resolved '[d]epending on how we walk out of this room today.' If we agreed to the 'special relationship they proposed, the Microsoft representatives said that we would be the first ISV to receive the technical information . . . ." Barksdale Dir. ¶ 110. Concerning Barksdale's repeated requests for the RAS "dialer" APIs that Netscape had been requesting, Rosen responded: "We can fix that problem. In a perfect world, anyone can plug into that. With a special relationship with you, you'll be the first to plug into it." GX 33, at NSC 017101. Microsoft effectively stated that, if Netscape agreed not to compete, "then we [Netscape] can have our special relationship." Id.

2. Microsoft offered to "consider licensing us the ability to turn Navigator into a container," but only "IN THE CONTEXT OF THE LARGER DEAL," and stated that the necessary APIs "have been abstracted out into a layer above the normal Office Compatible program and people who want to use them are picked specifically by MS and are arbitrary -- MS reserves right to say who's in and who's out. Again, part of the broader discussion . . . There are things we can do if we're working together that we can't do otherwise." GX 33, at NSC 017099 (Andreessen's notes). Microsoft also offered to help Netscape do "tight integration" with MSN, but only on the condition that the two companies have a "tight relationship. . . . . If we didn't have a tighter relationship, you'd be back to what a normal ISV can do." GX 33, at NSC 017100. Microsoft also suggested that MSN content "could in fact be hosted on a Netscape server," but "they refuse to talk about it until we have the broader relationship established." GX 33, at NSC 017100-1.

67.6. Microsoft made clear that all of this preferential treatment and its own willingness not to compete on non-Windows 95 browsers and "solutions" on top of Internet Explorer depended on Netscape's agreement not to compete and to divide markets and that, if Netscape declined the offer, "Microsoft would crush them."

1. To Barksdale and Netscape, "the main goal for this meeting was to get access to certain code and APIs necessary for . . . product development . . . ." Barksdale asked "whether obtaining those things was tied to . . . acceptance of this 'special relationship' Microsoft had proposed . . . ." Microsoft answered that Netscape's "obtaining the necessary technical information 'certainly isn't independent'" of Netscape's acceptance. "Microsoft made it very clear that they would attempt to crush" Netscape "by attempting to own the client." Barksdale Dir. ¶¶ 110-112. See also GX 34 (June 22, 1995 AOL email detailing Andreessen's report, one day after the meeting, of Microsoft's threat that "if Netscape didn't do the deal, Microsoft would crush them.").

2. Microsoft indicated "implicitly" that it "would bring full force of all of its energy to crush us in the market . . . [p]resumably using many of the same tactics they have used over the last three years, to seek to make sure that we didn't have the opportunity to succeed as an independent company." The "tactics" Microsoft would employ included exclusionary contracts with ISVs and OEMs and "release of full-on competitive or even cloned products that would be priced at a level that would make it impossible for [Netscape] to compete, which subsequently happened." Andreessen Dep., 7/15/98, at 429:10 - 431:8 (DX 2555).

67.7. The testimony of James Barksdale and Marc Andreessen about Microsoft's June 21 market-division proposal is credible and consistent with the available contemporaneous documents from Netscape, Microsoft and third parties like America Online .

1. See supra ¶ 67.2, 67.4, 67.8-.9.

67.8. Microsoft's internal discussions following the June 21, 1995, meeting leave no doubt that Microsoft proposed an agreement not to compete and to divide markets.

1. On the evening of the June 21 meeting, Dan Rosen prepared a summary and sent it to the other Microsoft attendees for their comments. The summary, though "naive" (GX 537), is substantially consistent with Marc Andreessen's notes and James Barksdale's memory of the meeting and makes clear that Microsoft's goal was to prevent platform-level competition. GX 535.
   • Rosen wrote in part that "ChrisJo summed up the purpose nicely: 'We need to understand if you will adopt our platform and build on top of it or if you are going to compete with us on the platform level.'" GX 535.

   • Rosen also wrote that: "Much of the conversation centered on a discussion of how the lines would be drawn between the platform and their value added. On the client end, we discussed 'sucking most of the functionality of the current Netscape browser (but not the toolbar, cool places or advertising) into the platform; they seemed OK with this concept." GX 535.

2. Thomas Reardon responded to Rosen's draft the next morning with a more skeptical assessment, though one which unequivocally confirms that moving Netscape out of the Windows 95 browser market was Microsoft's central goal for the meeting. He wrote that Netscape was "trying to preempt ohare with a win95 product of their own. i do not think they are so easily displaced from win95 client arena, they continue to move down the path of selling/giving away a 'premium' browser for win95." GX 535 (emphasis added).

3. Richard Wolf's comments on Rosen's draft agreed with Rosen that Netscape would not be "competing with us in defining a platform . . . ." but expressed skepticism that Netscape would be willing to "drop a broad based client in favor of vertical markets." GX 501.

4. Chris Jones began his response to Rosen's draft with a list of "Microsoft's goals, in priority order." Number one on that list was that Microsoft "Own client platform." Confirming precisely Barksdale's and Andreessen's descriptions of the meeting, Jones wrote: "The critical question is: Do they want to align strategically with us or not? Are they willing to bet that we'll be successful, and will they make the commitment and changes necessary in their strategy to do this? Because of our priority to own client and server platform, if they can agree to use our client code on Win 95, and use our BackOffice and NT APIs, and promote these as the solutions, then they will have aligned with our businesses and we have a deal." GX 557 (emphasis added).

5. After gathering those comments from the other Microsoft attendees, Rosen sent a revised draft to Bill Gates, Nathan Myhrvold, Paul Maritz, and 17 others on the afternoon of June 22, 1995. That draft incorporated Chris Jones's assessment of Microsoft's objectives: "Our goals going into the meeting were (in priority order): 1. Establish Microsoft ownership of the Internet client platform for Win95." He also echoed Jones's view that "the critical question" is whether Netscape would be willing to "align strategically with us . . . The test of this alignment will be Netscape's agreement to use Microsoft's client code on Win 95." Rosen, ignoring Reardon's more skeptical assessment, ended instead with the optimistic conclusion that Netscape "seemed to embrace this strategy" in the meeting. GX 536, at MS98 009585, MS98 0009587 (emphasis added).

6. Reardon disagreed and responded with an e-mail entitled: "Netscape meeting: reality." Leading off a list of eight points about the meeting that he felt Rosen had missed, Reardon wrote: "1) Netscape is preempting O'Hare. We sent them a list of about thirty talking points. They sent back ten, nearly all revolving around shipping their Win95 browser." Reardon also described Rosen's view that Netscape was "OK with this concept" of Microsoft sucking browser functionality into the platform as "bunk. . . . There was a noticeable increase in the level of tension," Reardon wrote, "whenever this sort of language came up. one clearly telling quote from Barksdale: 'all we want is our god given 95% market share for the browser'. he said this with a wink, but i don't know what could be more clear." Reardon concluded that: "We will compete on just about every technology. . . . maybe i am being a dick, but there is no deal here." GX 536, at MS98 0009584 - 0009585.

7. Top Microsoft management agreed that Rosen was inaccurate. Brad Silverberg forwarded Reardon's "reality" email to Bill Gates, who responded that "I think Thomas is reading the situation pretty well. I think Dan is great but I agree he is being a little naive in this case." GX 537.

8. In a July 12, 1995, phone call with Dan Rosen, James Barksdale discussed a possible server joint venture for Windows . After a series of internal messages, Paul Maritz summarized recent events regarding Netscape: "My thoughts: we originally hoped that there was some way to leverage a relationship with Netscape based on a business model whereby they would be prepared to cede the client to us or at least give us some major advantage, if we could give them some major advantage in the server area. They are not prepared to give us a significant client advantage (either for O'Hare or for MSN), so we should treat them as an ISV, but not much more." When Rosen ventured that Netscape "may be willing to give us a client advantage," Maritz wrote that with respect to "them building on top of our browser, I am very skeptical that they would agree to this. Their history is to [sic] closely bound up with the browser - this is after all Andreessen's company." Rosen replied that, "Given your message, I understand that you don't see the need to continue discussions with Netscape at a 'strategic' level." Maritz responded with one word, "Right." GX 540 (emphasis added).

67.9. The account of the June 21 meeting contained in Microsoft and Netscape records is also corroborated by a contemporaneous memorandum from the files of America Online.

1. On June 22, 1995, one day after the meeting took place, AOL's David Kaiser reported being told by Marc Andreessen that "Microsoft was at Netscape yesterday. . . . They wanted:

   • equity

   • a board seat

   • Netscape to renounce the network as a platform

   • Netscape to disclose all plans to microsoft

   • Netscape to limit access to APIs

And in return, Netscape would be Microsoft's special partner, get inside information, etc . . . and if Netscape didn't do the deal, Microsoft would crush them." GX 34.

3. Microsoft's after-the-fact assertion that its market division proposal was simply exploring forms of legitimate cooperation is pretextual and contrary to the evidence

a. Microsoft's contention that it was not trying to get Netscape out of the browser business is erroneous and rests on a misleading play on words

68. Microsoft's witnesses did not genuinely dispute the basic substance of Barksdale's and Andreessen's testimony about the June 21 meeting; instead, they attempted to cast the proposal not to compete in a less sinister light through a manipulation of the word "browser." Although Microsoft's negotiators made clear to Barksdale and Andreessen that Microsoft wanted Netscape out of the Win32 browser business, Microsoft now contends that it simply wanted Netscape to build what Microsoft calls a "browser" on top of "Microsoft technologies." This contention is inconsistent with the contemporaneous documents and is, in any event, of no consequence. Even on Microsoft's version of the facts, its proposal to Netscape was a naked attempt to eliminate platform-level competition and to divide markets.

68.1. Mr. Rosen testified that Microsoft's objective for the June 21, 1995, meeting was to convince Netscape to build software products on top of the "Microsoft technologies" or "browsing software" that Microsoft was building into Windows.

1. Daniel Rosen admitted that: "We wanted to persuade Netscape's engineers to develop browser and other software offerings on top of Windows 95" (Rosen Dir. ¶ 127) and that Microsoft "did make clear that there would be browsing software in Windows 95 and that we expected users to take advantage of that software." Rosen Dir. ¶ 128; see also Rosen Dir. ¶ 50; Rosen, 2/22/99am, at 10:2-10.

2. Thomas Reardon testified: "I knew that we were going to be providing Internet APIs for HTML rendering, for HTTP, et cetera. I wanted Netscape to use those APIs. That simple." Reardon Dep., 9/9/98, at 343:23 - 349:9 (DX 2606) (sealed).

68.1.1. But Mr. Rosen's testimony on this point was inconsistent.

68.1.1.1. At times, Mr. Rosen testified that Microsoft wanted Netscape to continue to build a Windows 95 "browser" as part of a joint venture with Microsoft.

1. Rosen Dir. ¶ 127 ("We wanted to persuade Netscape's engineers to develop browser and other software offerings on top of Windows 95."); Rosen, Dir. ¶ 50 (Microsoft did not want Netscape to agree to stop developing browser software for use on Windows); Rosen, 2/22/99am, at 8:12-24 (allegedly Microsoft "spent considerable effort during the spring of 1995 trying to convince Netscape to build and market" a browser to run on Windows 95.); see also Rosen, 2/22/99am, at 11:13-18 (same).

68.1.1.2. At other times, Mr. Rosen testified that, because Microsoft purportedly would be building "browsing software" into Windows 95 (Rosen Dir. ¶ 128), the proposal was instead that Netscape should concentrate on "higher-level client-side applications (like groupware and multimedia extensions)" (Rosen Dir. ¶ 59).

1. Rosen testified that when James Barksdale said that he "wanted to continue to add value in browser code" at the June 2, 1995 meeting, Rosen understood that comment "to be consistent with the sort of higher-level client-side applications (like groupware and multimedia extensions) that I described above." Rosen Dir. ¶ 59.

2. Rosen testified that Microsoft encouraged Netscape to develop "'cool looking and sounding app[lication]s' that took full advantage of Internet-related features in Windows 95. Examples of such applications included so-called 'groupware' packages, multimedia extension packages and the like." Rosen Dir. ¶ 50 (citing DX 734).

68.1.1.3. In the end, Mr. Rosen presented no clear explanation of what kind of software he envisioned Netscape creating as part of any deal and simply repeated the vague words "cool looking and sounding apps."

1. Rosen testified that Microsoft's "principal interest -- making Windows more desirable -- was best served by encouraging Netscape to stay in the client software business and to develop what Mr. Reardon had called 'cool looking and sounding apps' that took full advantage of Internet-related features in Windows 95." Rosen Dir. ¶ 50 (citing DX 734).

2. Rosen testified that "it was strongly in Microsoft's self-interest to encourage Netscape to continue to 'add value' on top of Windows, that is, to accept the invitation publicly extended by Thomas Reardon in Germany in April 1995 to become one of the favored 'Web ISVs' for Windows 95. Having Netscape continue to develop what Mr. Reardon called 'cool looking and sounding apps' for Windows 95 would, we believed, boost demand for Windows 95." Rosen Dir. ¶ 124.

68.1.1.4. On cross-examination, Mr. Rosen seemed to settle on a story that Microsoft wanted Netscape to build a "browser" of some kind on top of the browser code that Microsoft now says it was building into Windows 95.

1. Rosen, 2/22/99am, at 10:2-10 (there was "a lot of discussion about whether they would adopt the Microsoft technologies that we were building into Windows 95 to build such a product or whether they would try to do more things on their own").

68.1.2. The contemporaneous documents do not reflect any such understanding within Microsoft at that time and make clear that none was communicated to Netscape. Microsoft never said, and Netscape never understood, what kind of software, if any, Microsoft wanted it to build on the Windows 95 platform.

1. Barksdale testified, in reference to Microsoft's proposal that Netscape build software in the form of vertical applications, "that was never clear to me what that was." Barkdale, 10/21/98am, at 42:16-18.

2. Barksdale testified that "it would be a little difficult to figure out what that might be unless you go up to the server . . ." and that "it got very, very confusing to me because the line seemed to automatically exclude what we thought was going to be one of our very best products." Barksdale, 10/22/98pm, at 37:13 - 38:2.

68.2. Mr. Rosen's apparent contention that Netscape would have been free to build a "browser" on top of the "Microsoft technologies" in Windows 95 is just a play on words.

68.2.1. There was no meaningful distinction between the "technologies" Mr. Rosen now claims Microsoft intended to reserve for itself and Microsoft's browser, Internet Explorer. The contemporaneous documents make it clear that the "platform" technologies that Microsoft said it would build into Windows would duplicate the entire functionality of Netscape's browser product, with the possible exception of "the toolbar, cool places or advertising."

1. Rosen's notes stated that: "Much of the conversation centered on a dicussion of how the lines would be drawn between the platform and their value added. On the client end, we discussed 'sucking most of the functionality of the current Netscape browser (but not the toolbar, cool places or advertising) into the platform; they seemed OK with this concept." GX 535.

2. Andreessen's notes reflect that Microsoft asked whether Netscape would be "interested in having a partnership where NS gets all the non-Win95 stuff and MS gets all the Win95 stuff? . . . THREAT THAT MS WILL OWN THE WIN95 CLIENT MARKET AND THAT NETSCAPE SHOULD STAY AWAY." GX 33 (emphasis in original).

68.2.2. In any event, building on top of those "Microsoft technologies" would have required Netscape to abandon its independent platform-level browser and associated APIs and, along with them, any hope of competing with Microsoft at the platform level.

68.2.2.1. Several companies have recently written specialized browsing programs on top of the so-called Internet "technologies" that Microsoft distributes with Windows 95 and Windows 98; they are often called "shell browsers," and consist of a small amount of user interface code that relies on Internet Explorer to do the actual work of connecting to the Internet and displaying retrieved information.

1. See infra V.C.1.c; ¶ 187.2

68.2.2.2. Because the underlying code relied on by a shell browser is Internet Explorer's, such a browser does not offer platform competition to Internet Explorer.

1. Rosen conceded that if Netscape adopted all of Microsoft's underlying technologies for its browser, they would no longer pose a platform threat. Rosen, 2/22/99pm, at 31:9-12; Rosen, 2/23/99am, at 54:3-6. (similar).

2. Maritz conceded that if Netscape adopted Microsoft's technologies for its browser, that would "mitigate" the platform threat. Maritz, 1/26/99pm, at 49:3-10; see also Maritz, 1/26/99am, at 29:19-22 (Netscape's APIs made it a threat); Maritz, 1/26/99am, at 30:4-6 (same); Maritz, 1/26/99pm, at 53:9-12 (Microsoft's goal was to keep control of the browser APIs).

3. When asked whether "a browser like Encompass that uses the technologies of the Microsoft platform is not going to be viewed as a serious competitive threat to Microsoft," Maritz, answered: "Correct." Maritz, 1/25/99pm, at 30:5-8; see also Maritz, 1/25/99pm, at 30:14-19.

4. Professor Fisher testified that, for purposes of his conclusions in this case, there was "absolutely no difference" between shell browsers and Internet Explorer. Fisher, 1/5/99pm, at 20:4-23.

b. Rosen's other testimony, both regarding the June 21, 1995, meeting and more generally, is evasive and misleading

69. To the extent that Mr. Rosen's testimony about the June 21 meeting diverged from James Barksdale's in more than a semantic way, Mr. Rosen's testimony was incredible. Mr. Rosen's demeanor on the stand was evasive and unhelpful, and his testimony was riddled with inconsistent and implausible assertions.

69.1. First, Mr. Rosen testified that he never viewed Netscape as a competitive threat in early 1995 and was not aware of a single person within Microsoft who did (Rosen, 2/22/99am, at 48:13). That assertion is flatly inconsistent with the contemporaneous documents, the testimony of Microsoft's other witnesses, and Mr. Rosen's role in the Netscape discussions.

1. See supra Part III.B.2; ¶ 56.1.

2. Rosen wrote a May 1995 memo that the "threat of another company (Netscape has been mentioned by many) to use their Internet WWW browser as an evolution base could threaten a considerable portion of Microsoft's future revenue." GX 331.

3. When confronted with that memo on cross examination Rosen claimed first that he did not believe what he had written even at the time he wrote it and that he had never sent the memo to the people to whom it is addressed (Rosen, 2/22/99am, at 23:24 - 27:18). Rosen's testimony was demonstrably false, and he was quickly forced to admit that his testimony was untrue, conceding that he must have sent the memo to Ben Slivka. Rosen, 2/22/99pm, at 4:22 - 5:9.

69.2. Second, Mr. Rosen testified that Netscape always considered its leadership position in Internet client software to be a financial dead-end and a waste of engineering resources and was therefore eager to cede to Microsoft responsibility for client technologies on Windows 95 (Rosen Dir. ¶44; Rosen, 2/22/99am, at 41:3-4). But the record shows that everyone at Microsoft, including Rosen, understood that client innovation was an important part of Netscape's business strategy.

1. Rosen's notes from the June 2, 1995 meeting with James Barksdale report that Netscape was "pleased so far with their ability to sell servers and browsers to enterprises . . ." that they "are selling a lot of site licenses for browsers . . . . Windows 95 and Win 3.1 are their primary browser development platforms." Rosen also reported that "Netscape feels that they must be free to support any protocol, API, etc. that becomes popular, without restriction." And on the subject of "browser cooperation," Barksdale said that "he would like to explore ways to cooperate, but he wants to continue to add value in browser code." GX 25.

2. Maritz responded to Rosen's notes from the June 2 meeting with the comment that "It was clear that he/they view the client as a key place to make money, since that 'hook is so important for selling additional software.' Barksdale was primarily interested for us to distribute his client and his server." GX 27.

3. Commenting on Rosen's draft of his notes from the June 21 meeting, Thomas Reardon suggested that he "add something about barksdale's joking about 95% market share, i think it is somewhat telling. . . . i do not think they are so easily displaced from win95 client arena, they continue to move down the path of selling/giving away a 'premium' browser for win95." GX 535.

4. Rosen wrote on May 15, 1995, that Microsoft would have to "wrest leadership of the client evolution from" Netscape. GX 331 (emphasis added).

69.3. Third, Mr. Rosen was deliberately evasive during cross-examination about the meaning of the words "browser" and "client" in his testimony.

1. Rosen testified that when, Richard Wolf used the word "client" in DX 771, he meant "browser." Rosen, 2/23/99am at 30:7-21, 59:19-21.

2. But when Rosen used the word "client" in GX 23, two hours later, he meant something entirely different. Rosen, 2/23/99am, at 47:4-8.

3. Rosen conceded that Internet Explorer was "Microsoft's Internet client." Rosen, 2/22/99am, at 42:11-13. And when asked whether "Netscape had leadership of the Internet client with respect to various platforms . . ." Rosen answered: "Yes." Rosen, 2/22/99am, at 40:1-3.

69.4. Fourth, Rosen claimed that Microsoft was not building a browser of its own in mid-1995 (Rosen 2/22/99am, at 15:1-23), that he had never heard any mention of a "browser battle" between Microsoft and Netscape (Rosen, 2/22/99am, at 17:1-18), and that he was not aware that gaining browser market share was a goal of Microsoft (Rosen, 2/22/99am, at 18:2-5). Those statements are false. They are contradicted by the rest of the trial record and the testimony of other Microsoft witnesses.

69.4.1. Mr. Rosen testified that the June 21, 1995, meeting was "primarily a technical 'brainstorming session' to seek areas of cooperation on technologies, protocols and the like" (Rosen Dir. ¶ 68), rather than a "'relationship' discussion" (Rosen Dir. ¶ 55) at which issues of broad business strategy and alignment would have been discussed. That contention is belied by the contemporaneous documents.

1. Rosen's own notes from the earlier June 2, 1995, meeting suggested that the "Next Steps" should be for each side to "prepare a list of the things they want from and are willing to give to form a relationship" and concluded that "Netscape is open to a broad strategic relationship with Microsoft." GX 25.

2. And when Rosen sent Microsoft's list to Netscape, it included client terms, server terms, authoring terms, technology terms, services terms, marketing terms, and general terms including the possibility of a Microsoft investment in Netscape and a seat on Netscape's board. GX 556.

69.4.2. There is no contemporaneous evidence that anyone at Microsoft, including Mr. Rosen, ever discussed or contemplated a proposal that Microsoft would license Netscape's cross-platform browsers and distribute them under Microsoft's brand name (Rosen Dir. ¶¶ 97, 99). In light of the documents, Mr. Rosen's prior testimony, and the clear and credible testimony of James Barksdale, Mr. Rosen's trial testimony on this point is neither credible nor persuasive.

1. The internal documents suggest, at most, that Microsoft discussed letting Netscape "run with the Mac and Win16 clients," (GX 24) on its own in return for Netscape's agreement to vacate the Windows 95 market.

2. By contrast, at trial Rosen testified that what Barksdale and Andreessen remember as an offer to cede the non-Windows 95 browser business to Netscape was actually such a proposal and attempted to portray that offer as merely a "continuation" of Microsoft's December 1994 discussion with Netscape about the possibility that Microsoft would license Netscape's browser code for Windows 95. Rosen Dir. ¶ 97. This characterization of events first emerged in Rosen's testimony at trial.

69.4.3. Mr. Rosen's testimony that the discussion about the "line" between Windows 95 and the browser at the June 21 meeting was initiated and pressed by Netscape, not Microsoft (Rosen Dir. ¶¶ 85-88, 95), is also inconsistent with the evidence.

1. When asked at his deposition who were "the primary speakers on this topic of the line," Rosen answered that "it was primarily Thomas Reardon and potentially some discussions with Chris Jones." Rosen Dep., 2/22/99pm, at 56:16-21.

2. Chris Jones testified that the subject of "the line" was extensively discussed at the Microsoft premeeting, where no Netscape personnel were present. Jones Dep., 2/22/99pm, at 40:14-22, 49:5-20.

69.4.4. Mr. Rosen's testimony that Microsoft wanted Netscape to continue to make products that exposed APIs to independent software developers is wholly inconsistent with the contemporaneous documents and the testimony of Microsoft's other witnesses.

1. See supra Part III.B; ¶ 56 (detailing Microsoft's recognition that Netscape could develop APIs that could threaten the applications barrier to entry).

c. Microsoft's contention that it engaged in legitimate joint venture discussions with Netscape is contrary to the evidence

70. Microsoft asserts more generally that the June 21, 1995, meeting was merely an effort by Microsoft to find ways that Microsoft and Netscape could work collaboratively together (Rosen Dir. ¶¶ 54, 77, 79). But the evidence shows that Microsoft's offers to aid or collaborate with Netscape were merely a pretext designed to secure Netscape's agreement to Microsoft's naked market division proposal and that those offers were not genuinely intended to further any procompetitive collaboration between the two companies.

70.1. First, contemporaneous Microsoft documents make plain that its objective at the June 21, 1995, meeting was to eliminate the browser threat to the applications barrier to entry and that any proposed "joint venture" was merely an artifice to mask Microsoft's anticompetitive purpose.

70.1.1. Microsoft's internal correspondence both before and after the June 21, 1995, meeting leaves no doubt that securing Netscape's agreement not to compete with Microsoft in the Windows 95 browser market was Microsoft's primary objective for that meeting. Those issues commanded the attention of Microsoft executives at the very highest levels and were the subject of extensive discussion.

1. See supra ¶¶ 66.2, 66.4, 67.2, 67.8.

2. In a June 1, 1995 email to Bill Gates and other Microsoft executives, Thomas Reardon wrote: "Dan points out that we must offer them some story as to how they can slowly shift away from the core client business, or at least the Win32 client business . . . . " GX 24.

70.1.2. Netscape understood the Microsoft proposal would put Netscape out of business.

1. Marc Andreessen testified at his deposition that "the proposal . . . would result in crippling Netscape as a potential competitor of Microsoft, and, indeed, as an independent company." Andreessen Dep., (played 10/27/98am), at 25:11 - 18:14.

2. Barksdale agreed with Andreessen's assessment that Microsoft intended to divide the market and effectively "cripple" Netscape. Barksdale, 10/27/98am, at 29:17.

3. Barksdale testified: "Most of the matters on which they would have had Netscape confine its work were not commercially valuable." Barksdale Dir. ¶ 113.

70.1.3. Microsoft swiftly abandoned any plans for a collaboration with Netscape when Netscape rejected the market division.

1. Paul Maritz wrote that "we originally hoped that there was some way to leverage a relationship with Netscape based on a business model whereby they would be prepared to cede the client to us or at least give us some major advantage, if we could give them some major advantage in the server area. They are not prepared to give us a significant client advantage (either for O'Hare or for MSN), so we should treat them as an ISV, but not much more." GX 540.

2. Dan Rosen understood from Maritz's email that Maritz no longer saw "the need to continue discussions with Netscape at a 'strategic' level." GX 540.

70.2. Second, the one aspect of Microsoft's offer that was clear -- Microsoft's offer to refrain from competing with Netscape in the Macintosh, Unix, and 16-bit Windows segments of the browser market -- would not have aided any legitimate, procompetitive collaboration between the two companies and was nothing more than a naked bribe designed to secure Netscape's agreement to the market division scheme.

70.2.1. One of the inducements that Microsoft offered in exchange for Netscape's agreement to abandon the Windows 95 browser business was a promise not to compete with Netscape's browser on other platforms.

1. See supra ¶ 67.4.

2. Microsoft was thinking about a "long term strategic cooperation, where Netscape might run with the Mac and Win16 clients," at least as early as June 1, 1995. GX 24; see also GX 33; Jones Dep., 10/28/98am, at 40:18 - 41:3.

70.2.2. The contemporaneous documents do not suggest that Microsoft contemplated any technical or marketing efficiencies from such an arrangement.

1. See supra ¶¶ 67.2, 67.4, 67.8.

70.3. Third, that Microsoft's "joint venture" characterization is pretextual is confirmed by the fact that eliminating Netscape as a browser supplier would have reduced the value of, and thus demand for, Windows and was completely unnecessary to achieve any legitimate purpose.

70.3.1. Microsoft makes money by selling copies of its operating systems, and its legitimate business interests lie in maximizing consumer demand for that software. Browsers are complements to operating systems; a good Windows 95 browser would therefore have increased demand for Windows, and thus Microsoft's profits, regardless of whether that browser was produced by Microsoft.

1. Fisher testified, "if browsers are complements to operating systems . . . it should not matter who makes the complement." Fisher Dir. ¶ 129(b).

2. Warren-Boulton testified that "Microsoft has a legitimate interest in ensuring that Windows users are able to acquire high quality browsers at low prices, because that would increase the demand for Microsoft's operating system." Warren-Boulton Dir. ¶ 187.

3. Rosen testified that "it was strongly in Microsoft's self-interest to encourage Netscape . . ." to build applications for Windows 95 because those applications would "boost demand for Windows 95." Rosen Dir. ¶ 124 (emphasis in original).

70.3.2. That general principle was particularly true of Netscape's web browser in late 1994 and 1995. Netscape's browser was the "killer app" of 1995 and generated tremendous consumer enthusiasm and demand for PCs.

1. Barksdale specifically described Netscape's Navigator, which would run on top of Windows 95, as "the killer app of 1995." Barksdale, 10/27/98pm, at 71:6-11.

2. See supra Part III; ¶ 53.1.2..

3. Barksdale testified that, at the time of the June 21, 1995 meeting, Netscape's browsing software "delivered incomparably better performance than other browsers available at the time," and that consumers preferred it by a wide margin. Barksdale Dir. ¶ 231.

4. Barksdale described Netscape's final version of Navigator 1.0 as a product which "delivered many times the performance of other browsers available at the time," with innumerable innovative features. Barksdale Dir. ¶ 54

5. Barksdale testified that Netscape's browser was available across many different platforms, including Mac, OS/2, and various "flavors" of UNIX. Barksdale Dir. ¶ 80. Further, the cross-platform availability of Netscape Navigator was of great value to enterprises seeking to standardize their software and training efforts, Barksdale Dir. ¶ 80; infra Part V.B.1.b.(2); ¶ 107, and to independent software vendors seeking to maximize the appeal of their programming efforts, Barksdale ¶ 85.

70.3.3. By contrast, Microsoft's first version of Internet Explorer for Windows 95 was still in development and was not released until July 1995. Cross-platform versions of Internet Explorer did not become available for the Macintosh and UNIX operating systems until much later. And when Internet Explorer 1.0 for Windows 95 was eventually released, it was markedly inferior to Netscape's then-current browsing software.

1. Barksdale testified that the release of Navigator 1.0 "delivered incomparably better performance than other browsers available at the time;" more specifically, "Microsoft's 1.0 release of Internet Explorer was substantially inferior to Navigator's 1.0 release." Barksdale ¶¶ 231-232.

2. Reviews in the trade press consistently concluded that Netscape Navigator was faster and more functional than Internet Explorer. Schmalensee Dir. App. F Table F-1 (all publications Dean Schmalensee listed selected Netscape over Internet Explorer in 1995).

3. Recognizing that performance gap, consumers preferred Netscape Navigator to Internet Explorer by an overwhelming margin in late 1995 (Myhrvold Dir. ¶ 26-27), even though a license for Navigator cost $39 and Microsoft was giving away Internet Explorer for free. Schmalensee Dir. ¶ 275; Myhrvold Dir. ¶ 104. In fact, consumers still preferred Navigator to Internet Explorer by almost four to one as late as January 1997. GX 5.

4. Barksdale testified that Netscape's browser share in January 1996 was approximately 84 percent. Barksdale, 10/21/98pm, at 33:1-4.

70.3.4. Moreover, by June 21, 1995, Netscape had already invested millions of dollars to develop a new version of its browser for Windows 95; these investments promised to further enhance the value of Windows and thus offered consumers significant benefits.

1. A May 11, 1995 email from Dan Rosen to Tom Johnston at Microsoft, asking to "borrow/copy the Netscape Win95 new client they gave us," makes it clear that Microsoft had a beta version of Netscape's Windows 95 browser more than a month before the meeting. GX 1892.

2. Barksdale testified, "At the same time Microsoft was releasing Internet Explorer, Netscape was well on its way to its 2.0 release of Navigator." Barksdale ¶ 233.

70.3.5. The tremendous consumer enthusiasm for browsing software and the Internet in late 1995, and the clear preference of consumers for Netscape's browser at that time, demonstrate that consumers would have been harmed if Netscape had acceded to Microsoft's demands and abandoned its Windows 95 web browser.

1. James Barksdale described Navigator as a "separate" product which helps Microsoft sell Windows, adding, "a lot of people buy computers because they want to run the Netscape Navigator. It would help them to cooperate with companies like ours." Barksdale, 10/27/98am, at 71:23 - 72:1.

2. Barksdale testified, "that's why they wouldn't have asked us to get out of it immediately. We were going to release product in about a month. It was going to be great for Windows 95. It was going to help them sell a lot more because the Navigator is a hot application that ran on top of Windows 95. It was the killer app of 1995." Barksdale, 10/27/98pm, at 71:6-11.

70.4. Fourth, the pretextual nature of any joint venture proposal is also illustrated by the fact that Microsoft threatened to withhold technical support that Netscape needed in order to "add value" on top of Microsoft's platform and retaliated against Netscape by withholding that support when Netscape rejected the market division proposal.

70.4.1. Microsoft retaliated against Netscape by withholding the dialer API.

70.4.1.1. Microsoft knew that Netscape needed certain critical technical information and assistance in order to complete its Windows 95 browser in time for the retail release of Windows 95; indeed, Netscape had repeatedly asked Microsoft for some version of the dialer API and obtaining it was Netscape's primary objective at the June 21, 1995, meeting.

1. Beginning in March 1995, Netscape's technical staff corresponded with Microsoft repeatedly in an effort to discuss the technologies necessary for the development of a Netscape browser that would work efficiently on Windows 95. Barksdale Dir. ¶ 95; Barksdale Dir ¶ 106; DX 728

2. Reardon, in a June 23, 1995, email string to Maritz and others entitled "Netscape meeting: reality," wrote: "We sent them a list of about thirty talking points. They sent back ten, nearly all revolving around shipping their Win95 browser." GX 536.

3. On July 7, 1995, Mike Homer wrote to Daniel Rosen that "I know that we have discussed this with you before, but I wanted to reiterate how urgently we need the following information: 1. RNA (remote network access) phonebook API. Currently the only way to create/edit phonebook entries is through the WIN 95 interface. Our product will need to create an RNA phonebook entry for the registration server (this would happen during install) and also to configure the customer's new account once the account has been created. To make these calls, we need to have an API that will allow him to configure the required information. We first requested these in early June . . . ." Barksdale added: "Dan - these are big deals, please help us." GX 240.

4. Barksdale testified, in reference to the meeting with Microsoft, that: "Our top priority was to obtain APIs and other technical information we needed from Microsoft in order to release a browser compatible with the Windows 95 operating system." Barksdale Dir. ¶ 105.

70.4.1.2. At the June 21 meeting, Microsoft representatives informed Netscape that Microsoft possessed a secret internal dialer API and that, if Netscape was sufficiently cooperative on other matters, that technology could be made available to Netscape immediately.

1. Andreessen's notes reflect that when Barksdale asked about the RAS "dialer" APIs that Netscape had been requesting, Rosen responded: "We can fix that problem. In a perfect world, anyone can plug into that. With a special relationship with you, you'll be the first to plug into it." Rosen also stated that: "We need to give you code. Our alternative is to give you stuff that wasn't developed for that purpose. There's internal stuff that implements internal APIs, and those APIs are known only within Microsoft." J. Allard then added that: "'Depending on how we walk out of this room today, we have a solution for your problem...' or else in 3 months." Rosen concluded by saying that: "If we had a special relationship, you wouldn't be in this position." GX 33.

2. Barksdale testified that Microsoft's message was, in essence, "'depending on how we get along here today, you can have the thing right now and we'll all be good friends, and if it doesn't . . . go our way, then you may have to wait a little while for it.'" Barksdale, 10/27/98am, at 53:3-8; see also Barksdale, 10/27/98am, at 54:20-23.

70.4.1.3. Microsoft's representatives at the June 21, 1995, meeting repeatedly threatened that, if Netscape did not agree to the proposed "special relationship" with Microsoft, Microsoft would provide that technology on a delayed basis, if at all.

1. Marc Andreessen's contemporaneous notes record, for example, that Microsoft offered to "consider licensing us the ability to turn Navigator into a container," but only "IN THE CONTEXT OF THE LARGER DEAL." GX 33 (emphasis in original). Andreessen's notes also reflect that Microsoft explained that "[t]here are things we can do if we're working together that we can't do otherwise," and that Microsoft offered to help Netscape do "tight integration" with MSN, but only on the condition that the two companies have a "tight relationship;" "If we didn't have a tighter relationship, you'd be back to what a normal ISV can do." GX 33.

2. Barksdale testified that, over the weeks leading up to the meeting, Netscape repeatedly asked Microsoft to provide "dialer" APIs that would enable Netscape's Windows 95 browser to access the Internet through a dial-up ISP. Barksdale Dir. ¶¶ 106, 111.

3. Andreessen's notes record that when James Barksdale raised the issue at the June 21 meeting, Daniel Rosen acknowledged that Microsoft had an internal solution to the dialer problem and offered to provide those internal APIs to Netscape, but only on the condition that Netscape agree to the previously outlined "special relationship." "We can fix that problem. In a perfect world, anyone can plug into that. With a special relationship with you, you'll be the first to plug into it. Others will be in the future." GX 33.

4. Andreessen's notes reflect that Microsoft representative J. Allard then clarified that "'[d]epending on how we walk out of this room today, we have a solution for your problem . . . ' or else in 3 months" and that Dan Rosen added, "[i]f we had a special relationship, you wouldn't be in this position." GX 33.

70.4.1.4. Microsoft followed through on its threat. When Netscape rejected Microsoft's market division proposal, Microsoft -- despite Netscape's repeated requests for assistance -- withheld a working version of the dialer API until October, a little more than the "3 months" threatened by James Allard at the June 21 meeting. The delay pushed back the release of Netscape's browser until substantially after the release of Windows 95 (and Internet Explorer) and caused Netscape to miss most of the holiday selling season.

1. On July 7, 1995, Mike Homer wrote to Daniel Rosen that "I know that we have discussed this with you before, but I wanted to reiterate how urgently we need the following information: 1. RNA (remote network access) phonebook API. . . . We first requested these in early June . . . ." Barksdale added: "Dan - these are big deals, please help us." GX 240.

2. On July 18, 1996, Rick Schell wrote to Paul Maritz that Netscape "repeatedly asked for the API set that would allow us to make phone book entries. Microsoft did not provide those APIs until October 1995, which caused us to miss most of the holiday selling season. However, those APIs were used prior to that by Microsoft's Plus pack, available at the time of the Win95 launch." GX 241.

3. Barksdale testified that "we did not receive the APIs and other technical information we had been seeking until October 1995 . . . or approximately three months later, which was well after the launch of Windows 95 and was precisely what Microsoft had threatened at the June 21 meeting." Barksdale Dir. ¶114. See also GX 240; GX 241; Barksdale, 10/22/98pm, at 53:14-18.

70.4.2. Microsoft also retaliated against Netscape by refusing to give Netscape a license to a scripting tool that was necessary for Netscape to enable its Windows 95 users to access certain Internet service providers.

70.4.2.1. In 1996, Netscape attempted to negotiate a license for a readily-available scripting tool that Netscape needed to make its browser compatible with some dial-up ISPs.

1. Barksdale Dir. ¶207.

2. Barksdale testified that Netscape "believed that the scripting engine was readily available. John Freeborg, a Netscape employee, confirmed that fact by making up the name of an ISP and getting on Microsoft's ISP mailing list, using his home address. On June 28, 1996, Freeborg received a packet from Microsoft explaining that the scripting engine we were requesting was available to ISPs for redistribution on a royalty-free basis if the ISP signed a Microsoft license that, among other things, required the ISP to use Internet Explorer as the 'preferred web browser.'" Barksdale Dir. ¶ 208. See also GX 239; GX 243; GX 245.

70.4.2.2. A licensing agreement for the scripting tool was approved by both Netscape's and Microsoft's legal departments, and Netscape forwarded a signed copy to Microsoft for signature on July 18, 1996.

1. Barksdale testified that: "By mid-July, both Netscape's legal department and Microsoft's legal department had approved the licensing agreement under which we sought the scripting tool. Rick Schell signed the agreement on Netscape's behalf on July 18, 1996. The agreement was forwarded to Microsoft for signature." Barksdale Dir. ¶ 209

2. Julie Herendeen wrote on July 26, 1996 that "John sent the contract to Ed Mitchell at Microsoft for signature last Thursday. Ed gave the contract to Carl Stork, head of the PC/Win 95 division on Thursday 7/18." GX 243.

70.4.2.3. Microsoft responded by writing a letter to Netscape refusing to discuss the scripting license unless Netscape cooperated with Microsoft on other, unrelated matters.

1. On August 14, 1996, John Freeborg of Netscape wrote that Will Poole of Microsoft "advised us that Paul Maritz has written a letter to Rick listing all open issues between Microsoft and Netscape (one of which will be the scripting license) where they feel both parties could be more cooperative. He wouldn't elaborate on specifics, but they are unwilling to keep the Win 95 scripting license as a separate issue." GX 248.

70.4.2.4. Netscape never got a license to the scripting tool and, as a result, was unable for a time to do business with certain ISPs.

1. Barksdale testified that "we were never able to license the scripting tool" and that "Microsoft's refusal to license the scripting tool to us -- a tool that was freely available to others for redistribution on a royalty free basis -- effectively foreclosed Netscape for a period of time from doing business with those ISPs, such a Sprynet, that required scripting." Barksdale Dir. ¶ 213

70.4.3. Microsoft also retaliated against Netscape by embarking on a relentless campaign to prevent other companies in the computer industry from aiding Netscape in any way.

70.4.3.1. Microsoft threatened to retaliate against personal computer OEMs that did business with Netscape by changing the terms of their Windows 95 licensing agreements.

1. Barksdale testified that "Microsoft made clear through its words and actions that PC computer manufacturers should not get too close to Netscape or there could be negative consequences in their dealings with Microsoft. This was a serious matter for those OEMs; without a Windows license, and without cooperation from Microsoft in general, their P.C. businesses are worthless." Barksdale Dir. ¶ 30.

2. Barksdale testified that "I was told that senior executives of Microsoft, including Bill Gates, called the CEOs of certain OEMs to warn them that there would be negative consequences resulting from doing business with Netscape." Barksdale Dir. ¶ 163.

3. When NCR put a Netscape logo on its home page, a Microsoft representative told NCR that Netscape was Microsoft's "#1 competitor" and that NCR's "licensing relationship" with Microsoft "is going to get a lot harder." GX 192.

4. An employee with Netscape's Japanese affiliate reported on November 12, 1996 that "I have heard many times from our partners who have OEM agreement with us to bundle Navigator in their PCs that, MS threatens them that if they OEM our Navigator, MS tries to increase the royalty license for Windows." GX 199; Barksdale Dir. ¶ 172 (same).

5. See also infra Part V.C.2.b; ¶¶ 205-208 (Microsoft threatened to penalized firms that favored Netscape).

70.4.3.2. Microsoft executives also threatened ISPs and ISVs that entered into cooperative agreements with Netscape.

1. Barksdale testified that, when Pacific Bell announced a joint venture with Netscape, Microsoft executive Steve Ballmer called to "express[] displeasure over the announcement," and to say that Pacific Bell "had become 'an enemy' of Microsoft by doing business with Netscape." Barksdale Dir. ¶ 164.

2. In a June 14, 1996, e-mail, Autodesk told Netscape that they were "taking a lot of grief (phone calls, email threats, etc.)" from Microsoft "for working so closely with you guys." GX 76.

3. When Microsoft learned that Attachmate was bundling Netscape Navigator with their products and planning to develop a TCP/IP gateway, Microsoft threatened to bundle its own 3720 emulation software (which is directly competitive with another Attachmate product) into the operating system. Attachmate abandoned its TCP/IP project and ceased distributing Navigator. GX 91.

4. Acceptance of Microsoft's market-division proposal would have resulted in both the maintenance of Microsoft's operating system monopoly and a Microsoft monopoly in the browser market

71. Had Netscape accepted Microsoft's naked proposal to divide the browser market, Microsoft would have succeeded in thwarting the browser threat in its incipiency and would have eliminated the principal threat Microsoft perceived to its monopoly position in operating systems.

71.1. Netscape's acceptance of Microsoft's offer would have eliminated the threat to Microsoft's operating system monopoly that Netscape presented in 1995.

71.1.1. Netscape was the only significant browser supplier, and thus the only significant potential browser threat to Microsoft's operating system monopoly, in 1995. Accordingly, had Microsoft convinced Netscape to accept its offer, Microsoft would quickly have gained a sufficient share of browsers to ensure that no other browser rival controlled browser-related APIs.

1. Professor Fisher testified that Microsoft's market division proposal "is significant, first, because if Netscape had agreed, Microsoft would have succeeded in eliminating its only serious browser competitor and in monopolizing the market for browsers." Fisher Dir. ¶ 99.

2. Fisher testified that, from the introduction of Internet Explorer 1.0 on, Netscape was always Microsoft's "only serious browser competitor." Fisher Dir. ¶ 99.

3. Barksdale testified that "by the end of 1995, Netscape had an over 70 percent market share for Internet clients." Barksdale Dir. ¶ 66.

71.1.2. Had Netscape accepted Microsoft's offer, Netscape would have been relegated to a small and ever-decreasing share of the overall browser market.

1. Marc Andreessen testified at his deposition that "the proposal . . . would result in crippling Netscape as a potential competitor of Microsoft, and, indeed, as an independent company." Andreessen Dep. (played 10/27/98am), at 25:11 - 18:14.

2. Barksdale agreed with Andreessen's assessment that accepting Microsoft's proposal would have crippled Netscape as an independent company. Barksdale, 10/27/98am, at 29:17.

3. Barksdale testified that: "Most of the matters on which they would have had Netscape confine its work were not commercially valuable." Barksdale Dir. ¶ 113.

4. Andreessen also testified that he believed "in addition that it is of very little likelihood that Microsoft would have chosen to live up to" its side of the bargain, "because once we had been reduced to such a state of weakness, we would have had no market power whatsoever, and our desires would have been irrelevant." Andreessen Dep. (played 10/27/98am), at 26:23 - 27:3.

71.1.3. By quickly gaining a substantial share of the browser business, Microsoft would have ensured that browser rivals could not gain sufficient usage to induce applications developers to write to their platform rather than to Windows and would thereby have maintained its operating system monopoly.

1. Warren-Boulton testified that, "by reducing the market share of competing browsers to low levels, Microsoft could significantly diminish the possibility that applications developers will write to those browsers' APIs." Warren-Boulton Dir. ¶ 88.

72. Microsoft would also have quickly monopolized the browser market.

72.1. As will be explained, there is a separate product market for Internet browsers.

1. See infra Part VII.B.1; ¶ 384.

72.2. Had Netscape accepted Microsoft's proposal, Microsoft would swiftly have gained a dominant share of browsers.

1. See supra ¶ 71.1.1.

72.3. Microsoft's large share of the browser market would have been protected by substantial barriers to entry, including Microsoft's control of the standards and extensions web site developers employ.

1. Dr. Fisher testified that "if IE were the dominant browser and Microsoft decided to support only Windows-based technology, developers would have little incentive to create applications that were not Windows-based." Fisher Dir. ¶ 95.

2. See also infra Part VII.D.1; ¶¶ 398-400.

72.4. Microsoft would therefore have gained monopoly power over browsers.

1. See infra Part VII.B.3.e; ¶ 390.

B. Microsoft's proposal of market-division agreements to eliminate other potentially threatening middleware confirms the anticompetitive character of its course of conduct against the browser

2. Microsoft similarly attempted to divide markets with Apple

73. Microsoft made other efforts to divide markets with platform-level competitors. Those efforts establish a pattern and practice of attempts to eliminate competition by agreement with rivals.

74. Microsoft sought to divide markets with Apple for the purpose of eliminating competing platform-level technology.

a. Apple's QuickTime multimedia software, like the browser, is platform-level software that Microsoft viewed as a potential threat to its operating system monopoly

75. Apple Computer's QuickTime is its software architecture for the creation, editing, publishing, and playback of multimedia content (e.g., audio, video, graphics, and 3D) on the Macintosh and Windows operating systems. QuickTime is cross-platform; developers using QuickTime technology can create multimedia content that will run on QuickTime implementations for both Windows and Macintosh.

1. Tevanian Dir. ¶¶ 47, 50-51, 54, 57-59, 67-68; Tevanian, 11/5/99am, at 27:1-7; 11/4/99am, at 45:3 - 46:6 (testifying concerning QuickTime's API and cross platform capabilities).

76. Apple, through QuickTime, competes against Microsoft, among other firms, in providing multimedia functionality to Windows users.

1. Tevanian testified that QuickTime competes with Microsoft's multimedia technologies, including Microsoft's multimedia APIs (DirectX) and media player (Windows Media Player). Tevanian Dir. ¶¶ 69-70. See generally Tevanian ¶¶ 57, 60-65.

2. Eric Engstrom, Microsoft's former general manager for multimedia, acknowledged that Apple competes to varying degrees with Microsoft in trying to convince developers to target their respective multimedia APIs, codecs and file formats suitable for their respective players. Engstrom, 2/23/99pm, at 35:24 - 36:10, 79:4 - 84:6 See also Tevanian Dir. ¶¶ 57, 60-65 (explaining APIs, file formats, protocols, codecs). Engstrom also acknowledged that Apple's QuickTime multimedia player is cross-platform, while Microsoft's Direct X multimedia technology is not. Engstrom, 2/23/99pm, at 97:18 - 98:2.

77. Because QuickTime is cross-platform middleware, Microsoft perceived QuickTime as a potential -- albeit somewhat distant -- threat to its control over platform-level interfaces and standards that developers invoke and, therefore, to its monopoly power.

1. Microsoft's Ben Slivka testified that Microsoft considered audio/visual streaming technologies to be part of a "growing collection of technologies" that "were a threat to the Windows platform" because they could reduce the applications advantage that Windows has today. Slivka Dep., 9/3/98, at 243:20 - 245:8 (DX 2591).

2. Dr. Avadis Tevanian, Senior Vice President of Software Engineering at Apple Computer, also recognized the threat that QuickTime could pose to Microsoft's operating system monopoly, testifying that: "The widespread popularity and use of QuickTime pose a significant threat to Microsoft. The cross-platform capability of QuickTime holds the promise of weakening the symbiotic relationship between the operating system and application programs that is the foundation of Microsoft's monopoly position and that poses such a substantial barrier to competition in the operating systems market." Tevanian Dir. ¶ 75; see also Tevanian Dir. ¶¶ 51, 57-59 (describing QuickTime's cross-platform capabilities).

3. In his May 1995 "Internet Tidal Wave" memo to his staff on the threat the Internet posed to Microsoft's operating system position, Bill Gates specifically expressed his concern about the popularity of QuickTime formats on the Internet, which he attributed in part to QuickTime being cross platform, and the difficulty of dislodging established formats, and directed his staff to develop a competitive strategy. GX 20 at 4, 6.

4. Professor Fisher testified that, with Apple's QuickTime technology, "Microsoft was confronted with platform-level software to which applications programs could be written" and that the "platform-level APIs threatened to erode the applications programming barrier to entry into the PC operating systems by supporting applications programs that could be used with multiple operating systems." Fisher Dir. ¶ 118, at (a) and (b).

5. Warren-Boulton testified that it is "now more the combination of browsers with cross-platform technologies" that are "seen as a threat . . . ." Warren-Boulton, 11/19/98am, at 48:13-24.

6. See infra ¶ 84.

b. Just as with Netscape, Microsoft sought to divide markets with Apple in order to eliminate the threat that QuickTime's platform-level components might pose

78. In order to eliminate the possibility that QuickTime's platform-level components would become part of a platform that could threaten Microsoft's operating system monopoly, Microsoft sought to allocate markets with Apple in a manner strikingly similar to its attempt to divide markets with Netscape.

1. Professor Fisher expressly drew the parallel between Microsoft's conduct with regard to Netscape and Apple: Faced with platform level software that developers could target and thus reduce barriers to entry in the operating system market, Microsoft responded "by attempting to get the supplier of the alternative platform to withdraw from offering it and to concentrate instead on products that did not offer platform potential," and "was prepared to act to preclude the supplier . . . from succeeding in offering the platform, 'even if such actions did not make sense from a business standpoint.'" Fisher Dir. ¶ 118, at (c) and (d).

78.1. In a series of communications with Apple in 1997 and 1998, Microsoft pressured Apple to cease competing with Microsoft in multimedia playback on Windows in exchange for Microsoft's supporting QuickTime as a multimedia authoring solution. Microsoft's proposal was strikingly similar to its proposal to Netscape: In both instances, Microsoft offered the firm producing platform-level software Microsoft's support and a free hand in a complementary product in return for abandoning platform-level client software for Windows; and in both instances, Microsoft threatened to injure the other firm's business if it did not agree to the proposal.

78.1.1. Microsoft first proposed its market-division scheme to Apple in 1997 and continued its efforts to secure Apple's acquiescence throughout the year.

1. In April 1997, Microsoft's Eric Engstrom and Christopher Phillips suggested to Apple that they cede the multimedia playback market to Microsoft and focus solely on the "authoring" area of multimedia, i.e., the development of software tools used to create multimedia content and the APIs to enable such tools. Tevanian Dir. ¶ 78; Schaaff Dep., 1/13/99, at 192:8 - 196:1 (at a meeting between Tim Schaaff of Apple and Eric Engstrom and Chris Phillips of Microsoft, MS proposed that Apple scale back its efforts in multimedia playback on Windows in return for MS support for QuickTime as a multimedia authoring solution). Microsoft did not at that time offer multimedia authoring capabilities or APIs. Schaaff Dep., 1/13/99, at 193:13-21.

2. Later in 1997, Microsoft repeatedly pressured Apple to cede the multimedia playback market to Microsoft. In an August 1997 meeting between Apple and Microsoft, Microsoft urged "Apple to withdraw from the market for multimedia playback capability." Tevanian Dir. ¶ 80.

3. The following month, Mr. Engstrom "again urged Apple to focus on the authoring segment and to cede the playback business to Microsoft." Tevanian Dir. ¶¶81-83; Schaaff Dep., 1/13/99, at 196:3 - 199:4; see infra ¶ 78.2.

4. In October 1997, at another meeting between Apple and Microsoft, Microsoft stated that it "would allow Apple to continue with QuickTime playback for the Mac operating system, but would require Apple to relinquish the QuickTime playback capability in Windows." Tevanian Dir. ¶ 84. At this meeting, Mr. Phillips again encouraged Apple to back off QuickTime as a playback technology for Windows. In return, Phillips offered support for QuickTime as an authoring technology. Schaaff Dep., 1/13/99, at 200:16 - 206:11. Phillips also offered to support QuickTime in some way on the Windows CE operating system. Schaaff Dep., 1/13/99, at 206:15 - 207:14.

5. Engstrom admitted that one of his goals in all his discussions with Apple was to have Apple agree on a single audio/video playback runtime for Windows based on Microsoft's Direct X, and that he told Apple that Microsoft's support for QuickTime as an authoring solution on Windows was dependent on that agreement. Engstrom, 2/24/99am, at 25:16 - 28:12; 36:20 - 37:15. Engstrom also admitted that he hoped to "move the locus of competition upstream," in other words, away from competition in audio/visual playback on Windows. Engstrom, 2/24/99am, at 36:6-19. Engstrom also conceded that it would be pointless for Apple to continue to offer its own multimedia runtime on Windows if it accepted Microsoft's proposal. Engstrom, 2/24/99am, at 40:6 - 42:13; 55:6-23.

78.1.2. Microsoft continued to propose dividing the multimedia business between the companies -- including giving Apple a free hand in authoring -- well into 1998.

1. On February 13, 1998, Dr. Tevanian met with Microsoft's Don Bradford to discuss the technical problems that Windows and Internet Explorer caused with QuickTime and to discuss threatening comments made by Microsoft employees. Tevanian Dir. ¶¶ 85-87. At that meeting, Mr. Bradford "conveyed the same proposal that Microsoft had presented in the past. Specifically, if Apple would abandon the playback segment of the business, Microsoft would be willing to endorse QuickTime as the solution for the authoring portion. Mr. Bradford told me that Mr. Gates thought that would be a way to resolve our dispute." Tevanian Dir. ¶¶ 88-89. Dr. Tevanian testified that Bradford's response to Tevanian "was very simple, and although he did it in a less threatening way, he said -- he basically said, 'Well, we want to fix this; we want to be able to work together, and Bill wonders if a way to solve this is for us to take playback and you to take authoring.' And I told him simply, 'No, that's not acceptable.'" Tevanian, 11/5/98am, 29:10-25.

2. Phillip Schiller, an Apple marketing vice-president, testified that, in an April 1998 telephone conversation with Eric Engstrom, Engstrom offered to support Apple in multimedia authoring but made clear that this support was conditioned on Apple ceasing competition in multimedia playback on Windows. Engstrom told Schiller that Apple had to "give up playback on Windows." Schiller Dep., 1/13/99, at 240:19 - 242:22; see also Tevanian Dir. ¶¶ 90-92 (Engstrom tells Schiller that Apple would "have to give up multimedia playback on Windows" in order to work together with Microsoft on authoring.).

3. Mr. Engstrom admitted that he told Apple that, if Apple agreed to use Microsoft's DirectX as their runtime for Windows, then Microsoft would support Apple's authoring technology, and that if Apple did not agree to adopt the DirectX runtime, then Microsoft would enter the authoring business. Engstrom, 2/24/99am, at 37:16 - 39:25. Although Engstrom denied that he had offered to stay out of authoring, he admitted that he told Apple that if Apple targeted its authoring solution to Microsoft's DirectX, that he "would probably not invest as rapidly in that solution as otherwise." Engstrom, 2/24/99am, at 39:15-25.

4. At a June 15, 1998, meeting, attended by Eric Engstrom as well as Dr. Tevanian and Apple CEO Steve Jobs, Microsoft proposed that "Microsoft would take over the playback market for Windows, while allowing Apple to control the much smaller playback business for the Macintosh." Tevanian Dir. ¶¶ 93-94. Microsoft's proposal entailed, inter alia, Apple adopting
   1. DirectX as the runtime for Windows,

   2. Microsoft's proprietary streaming technology, and

   3. Microsoft's AAF file format for authoring, all of which Dr. Tevanian believed were inferior. Tevanian Dir. ¶ 95.

   Dr. Tevanian testified that "Microsoft's proposal amounted to a forced abandonment of one of Apple's most successful and innovative products" and adoption of Microsoft's playback, streaming, and authoring technology. Tevanian Dir. ¶ 96. Microsoft's agenda for the meeting suggests that Microsoft's Direct X will be the only runtime on Windows: "Run-Time is Direct X on Windows, QuickTime on the Mac." GX 912; see also GX 908 (July 6, 1998 Waldman email to Gates et al.) (summarizing Mr. Jobs' view of the proposal: "essentially 'Apple should give up QT and use [Microsoft's] stuff'").

78.2. In order to coerce Apple's acceptance of its market-division proposal, Microsoft told Apple that, if Apple did not agree to Microsoft's offer of a free hand in authoring, Microsoft would engage in predatory conduct.

1. In September 1997, Microsoft's Engstrom "again urged Apple to focus on the authoring segment and to cede the playback business to Microsoft." Tevanian Dir. ¶¶ 81-83. At a meeting at the Fairmont Hotel in San Jose, California, Mr. Engstrom told Apple's Schaaff that Microsoft intended to control multimedia playback on Windows and that Microsoft would devote 100-150 engineers to authoring if that was what was necessary to control multimedia playback. Engstrom also told Schaaff that Bill Gates did not think that authoring was a significant business opportunity for Microsoft, but that Microsoft would be willing to invest whatever was necessary to control multimedia playback, "even if it didn't make sense from a business standpoint." Schaaff, 1/13/99, at 196:3 - 199:24.

2. Schaaff took this as a threat that, if Apple did not "back off" from the Windows playback business, Microsoft would double or substantially increase the size of their team to compete both in playback and authoring. Schaaff Dep. 1/13/99, at 196:3 - 199:24; Tevanian Dir. ¶ 83 ("Mr. Engstrom noted at the meeting that Microsoft's Bill Gates was not interested in an authoring program because the market for this product was too small. He assured the Apple representatives, however, that if Microsoft needed to make an investment in providing authoring tools to push Apple out of the playback market, then Microsoft would devote all the necessary resources to accomplish this goal.").

3. Dr. Tevanian's interpretation was the same as Mr. Schaaff's: "What Mr. Engstrom was saying was that he made us an offer, which is, if we were to cede the playback market, he would give us the authoring market. And if we didn't take that offer, he would immediately deploy engineers to just kill us in that space, too." Tevanian, 11/5/98am, at 82:19-23. "The threat was that they would leverage their other advantages in the market and just pound on us in any way they possibly could." Tevanian, 11/5/98am, at 84:2-4. Engstrom admitted he had said that developing an authoring solution was "not the highest return for that particular investment." Engstrom, 2/24/99am, at 38:22-24.

4. Professor Fisher explained Microsoft's anticompetitive purpose in threatening to enter into the multimedia authoring business: "Microsoft was going to devote 100 to 150 engineers to competing against Apple on this, even though, said the Microsoft representative, it made no business sense. Sounds like a threat to me. It doesn't sound like the kind of thing that one company says to another and says, you know, we are going to hang tough on this. This says we are going to go out of our way to hurt you." Fisher, 1/6/99pm, at 70:14-21. Professor Fisher further noted: "If it doesn't make sense from a business standpoint, you have to ask what is the possible motive for it, and here the motive is to get Apple to cooperate." Fisher, 1/6/99pm, at 73:11-14; see also Fisher Dir. ¶117, 118 (Microsoft's actions with regard to Apple's multimedia playback technology show that Microsoft was "prepared to act to preclude the supplier of a potential platform-level software from succeeding in offering the platform, even if such actions 'did not make sense from a business standpoint'" and "Microsoft will respond immediately to prevent any other firm from writing platform-level software. This is true even though this software could increase the functionality and performance of, and thus demand for, Windows-based PCs.").

5. Engstrom conceded that he told Schiller that if Microsoft and Apple did not work together on multimedia software for Windows, then Microsoft would have to offer authoring solutions that might be incompatible with Apple's, that he was "mystified by Apple's insistence on going it alone in developing and marketing a multimedia runtime for Windows, and that "given Microsoft's resources and expertise," Microsoft was likely to be successful in authoring technology. Engstrom Dir. ¶ 68.

c. Microsoft's purpose in proposing a division of markets to Apple was to ensure Microsoft's continued control over platform-level interfaces

79. Microsoft's purpose in attempting to allocate markets with Apple, as with its attempt to allocate markets with Netscape, was to prevent Apple from successfully establishing platform-level software that might reduce Microsoft's control over interfaces and standards that developers use and thereby erode the barriers to entry to the operating system market.

79.1. First, Microsoft's purpose is evident from both its contemporaneous documents and the testimony of its witnesses.

1. Engstrom's supervisor, David Cole, in an email to Gates, Engstrom and Waldman made clear that Microsoft's primary goal in its talks with Apple was to "get Apple to give up on having a runtime on Windows." GX 270 (4/28/98 Cole email).

2. Even Engstrom, who claimed that he never explicitly asked Apple to give up its Windows' runtime, admitted at trial that everyone knew it would make no sense for Apple to continue to offer its own multimedia runtime on Windows if it accepted Microsoft's proposal to use Microsoft's Direct X runtime. Engstrom, 2/24/99am, at 40:6 - 42:13; 55:6-23 ("If they are going to adopt our runtime, they are going to have to, at some level, give up mentally and emotionally, on building this duplicative set of services, because it wouldn't make sense for them to build a service on top of ours that uses our services while they are still building a service that is -- you know, that they view as their hope for their future, you know, that sits next to this piece of Windows.").

79.2. Second, Microsoft expressly communicated its purpose of controlling platform-level software to Apple.

1. Timothy Schaaff testified that Microsoft multimedia chief Eric Engstrom told him and other executives that "Microsoft wanted to have control over the user interface . . . and that Microsoft was determined that the essential APIs that were the foundation of the operating system should all come from Microsoft and not come from a third party." Schaaff Dep., 1/13/99, at 194:21 - 195:18; Schaaff Dep., 8/28/98, at 283:21 - 284:11 ("they stated that it was Microsoft's opinion, point of view, that they intended to control APIs for the playback of multimedia content on the Windows platform, and hence they did not wish to see proliferating or competing with Microsoft with a separate set of APIs . . . in the playback space") (DX 2506).

2. Dr. Tevanian testified that "Engstrom bluntly warned Mr. Schiller 'We're going to compete fiercely on multimedia playback and we won't let anyone have playback in Windows. We consider that part of the operating system, so you're going to have to give up multimedia playback on Windows.'" Tevanian Dir. ¶ 91; Schiller Dep., 1/13/99, at 240:19 - 242:22. Dr. Tevanian recounted that, "what they were proposing at every level -- and sometimes very direct threats -- was effectively killing QuickTime. . . . And Mr. Hoddie said, 'do you want us to knife the baby'? That was his words. 'Knife the baby' meaning kill QuickTime. And Mr. Phillips repeated back to him, 'Yes, we're talking about knifing the baby.'" Tevanian, 11/5/98am, at 28:15 - 30:4.

3. Steve Jobs confronted Microsoft about Microsoft's public messages that Microsoft would use its power in the PC operating systems market to kill QuickTime. In an e-mail to Bill Gates, Steve Jobs stated that "There is one thing that threatens to be quite divisive, and that is the Microsoft NetShow team's recent behavior. They are really going out of their way to say that they intend to kill QuickTime, and are being quite threatening and rude about it. . . . We intend to fight and win with QuickTime, and I hope this honest and proper effort doesn't meet with down and dirty tactics and tough rhetoric from the NetShow group -- it could really tarnish our entire, budding relationship." GX 904; see also GX 897 (In a January 1998 email to Gates and others re "Steve Jobs Call," Don Bradford reported on a telephone call he received from Jobs. "Steve called back to express his concern over NetShow's public message about killing QuickTime."). Dr. Tevanian testified that Jobs' was referring to statements made by Microsoft's Netshow team that Microsoft would kill QuickTime because Microsoft's technology would be everywhere because it would be bundled with Windows and with Internet Explorer on the Macintosh, but Microsoft would never allow QuickTime to survive on Windows. Tevanian, 11/5/98am, at 94:16 - 95:8.

79.3. Third, Microsoft's purpose is evident from the nature of the proposal: Microsoft wanted Apple to cease developing complementary software that runs well on Windows (an activity it usually encourages); Microsoft's proposal, if accepted, would have reduced demand for Windows and thus makes sense only as an effort to eliminate potential competition to Microsoft's operating system monopoly.

1. See infra ¶ 300.

80. Had Apple accepted Microsoft's proposal, Microsoft's efforts to pressure Apple to cease competing on the Windows platform would likely have reduced competition and innovation in multimedia playback, particularly in the development of cross-platform APIs.

1. Dr. Tevanian testified: "Yes, it is true that the Microsoft proposal was that Apple cede the market for multimedia playback on Windows. But from our perspective, that was essentially ceding it for everything, because, let's remember, as we talked about yesterday, one of the goals for QuickTime was to be cross-platform, so you could develop content and run it on either Windows, or Macintosh, or any other operating system. If we couldn't put that technology on windows -- if we had to cede that to Microsoft, then it would have undermined one of the primary goals of the whole product. Having it on the Macintosh would have been irrelevant." Tevanian, 11/5/98am, at 27:1-11.

2. Microsoft's efforts to convince Apple to give up QuickTime multimedia playback on Windows not only would have required Apple to cease innovating in multimedia playback on Windows, but would have also impeded Apple's ability to innovate on the authoring side because they would be limited to using the Windows playback mechanism. Schaaff, 1/13/99, at 203:3 - 205:3.

3. Mr. Engstrom admitted that, if Apple had accepted Microsoft's proposal and had not continued shipping a multimedia runtime for Windows, Apple would have been dependent on Microsoft for execution of Apple's authoring solutions. Engstrom, 2/24/99am, at 48:5 - 49:1.

d. Microsoft retaliated against Apple, just as it did with Netscape, when Apple refused to accept Microsoft's proposal

81. When Apple refused to accept Microsoft's proposal to cease competition in multimedia on Windows, Microsoft retaliated against Apple. The retaliation ranged from inserting misleading error messages in Windows to offering or withholding assistance to Apple as it suited Microsoft's strategic goals.

81.1. Microsoft introduced misleading error messages into Windows that urged users to replace QuickTime with Microsoft technology.

1. Dr. Tevanian testified that Microsoft has inserted misleading error messages in Windows informing users that they might not be able to play certain multimedia files and asking users if they wanted to reconfigure their systems to use Microsoft's Active Movie technology instead of Apple's QuickTime technology. Tevanian Dir. ¶¶ 108-110 and Attachment 5; GX 917; GX 918; Tevanian, 11/4/98am, at 27:12 - 28:22.

2. Dr. Tevanian, an experienced software engineer, testified that such error messages are unlikely to issue accidentally. Tevanian, 11/4/99am, at 61:17 - 62:5.

81.2. When Microsoft made changes to Internet Explorer 4.0 and Windows that resulted in impaired functioning of QuickTime, Microsoft opportunistically responded to Apple's requests for assistance by fixing the problem when it suited Microsoft's strategic interests and refusing to provide meaningful assistance when it did not.

81.2.1. With the release of Internet Explorer 4.0, Microsoft changed the interaction between Windows and Internet Explorer so that data in certain media files were preferentially routed to Internet Explorer for playback. The changes prevented QuickTime from processing the data and frustrated users' attempts to access certain content. QuickTime also experienced additional difficulties operating with Internet Explorer 4.0 and Windows 98. These problems occurred at the very time that Microsoft tried to convince Apple to give up its multimedia platform-level software.

1. Dr. Tevanian testified: "When Microsoft produced its first plug-in capable browser [Internet Explorer 3.0] and needed to compete in the Netscape-dominated market by being technologically compatible, Microsoft used and adhered to Netscape's plug-in architecture. With the growth of Microsoft's browser market share through the bundling of Internet Explorer and Microsoft multimedia software with Windows, Microsoft reduced the compatibility between its browser and the open Netscape standard, starting with the introduction of Internet Explorer 4.0." Tevanian Direct ¶ 102.

2. Tevanian further testified: "With the successive releases of Microsoft's Internet Explorer 4.0, Microsoft Windows 98, and Microsoft multimedia software, Apple has seen a steady degradation of QuickTime's capability to play back a variety of QuickTime compatible media file formats while operating with Microsoft's Internet Explorer running on the Windows operating system." Tevanian Dir. ¶ 100; see also Tevanian Direct ¶ 101 & Attachment 4 (chart of test results with various formats); Tevanian, 11/4/98am, at 28:23 - 29:13 (" In that case what would happen is when a user was browsing the web, looking at web pages, and would find QuickTime content, files that were based on QuickTime, instead of playing using QuickTime, even if QuickTime was installed, Internet Explorer would play -- would try to play it using Microsoft technology and would often fail. So QuickTime was not being allowed to actually access the data and play it correctly. The user wouldn't know it was broken, and often the web page would show that it required QuickTime, yet QuickTime would not be invoked after release -- excuse me, after being installed. And we had no way to solve this that we knew of.").

3. Schaaff testified that, when Microsoft introduced Internet Explorer 3.0, it promoted its compatibility with the Netscape browser plug-in APIs. Since QuickTime already supported the Netscape browser plug-in API, Apple was able to ensure that QuickTime was generally compatible and operated properly with both Navigator and Internet Explorer 3.0. With the release of Internet Explorer 4.0, certain file types that were previously routed to QuickTime were no longer routed to QuickTime. Apple's investigation revealed that the mechanism for routing media types in the Windows operating system, the Windows registry, which is largely undocumented, was not routing media types to QuickTime as expected. Depending on the file type, this can result in the user not being able to access the content at all or in an impaired manner. Schaaff, 1/13/99, at 211:16 - 222:5; Tevanian Dir. ¶¶ 102-106. Apple's efforts to reverse engineer the Windows registry software to correct the problem met with only limited success. Tevanian Dir. ¶ 105.

4. Dr. Tevanian testified that the introduction of incompatibilities could undermine the establishment of Apple's multimedia platform. Tevanian, 11/4/98am, at 45:3 - 46:12. It is also clear that these problems were occurring at the same time as Microsoft's public campaign to convince developers that Microsoft's multimedia technology would "kill" QuickTime on the Windows platform. Tevanian, 11/5/98am, at 94:3 - 95:17.

5. Microsoft email confirm that "support for the Windows file types are build (sic) into IE itself," that the Windows registry gives a preference to Microsoft's ActiveX controls, and that Microsoft discouraged Apple from writing its own ActiveX controls to route playback of both of Microsoft formats and industry standards like MIDI. GX 911; GX 274.

81.2.2. When Apple first requested Microsoft's assistance, Microsoft corrected one of the problems caused by its redesign because doing so suited its strategic objective of blunting other platform-level threats.

1. In August 1997, Dr. Tevanian sent Bill Gates an e-mail explaining that Internet Explorer 4.0 disabled QuickTime and QuickTimeVR on Windows and that IE4 set the default for ".mov" media files to Microsoft's ActiveMovie, rather than QuickTime. GX 265 (8/8/97 Tevanian email to Gates).

2. Unbeknownst to Dr. Tevanian, Mr. Gates forwarded Tevanian's e-mail to Paul Maritz. Mr. Gates sought to ensure that the problem was used to Microsoft's advantage; he instructed Mr. Maritz: "I want to get as much mileage as possible out of our browser and JAVA relationship here. In other words a real advantage against SUN and Netscape. Who should Avie be working with? Do we have a clear plan on what we want Apple to do to undermine SUN?" GX 265 (8/8/97 Gates email to Maritz).

3. Dr. Tevanian testified that Microsoft responded to his request to Gates by fixing the file associations for the specific file type he mentioned. Tevanian, 11/4/98am, at 29:14-22, 54:9-22.

4. Internal Microsoft email confirm that Microsoft provided a method that overrode the ActiveX preference for MOV and QT, (MOV is the format Dr. Tevanian asked Gates about), but that Microsoft did not wish to do this for any other file formats. GX 911 (8/5/98 Perry email; 8/6/98 Larkin email); GX 265 (8/8/97 Tevanian email to Gates).

81.2.3. By contrast, when Apple rejected Microsoft's proposal to allocate multimedia technology, Microsoft abandoned meaningful efforts to help Apple solve the compatibility problems.

1. Dr. Tevanian testified that he could not understand why MS could and did correctly fix the .mov problem, but not the other problems. Tevanian, 11/4/98am, at 31:9 - 32:9, 54:9-22.

2. Dr. Tevanian also testified that Microsoft delayed responding to Apple's complaints. Tevanian, 11/4/98am, at 29:14-22 ("We contacted Microsoft. In fact, I recall at that time, the first time we noticed this, I contacted Bill Gates directly and asked him to fix it in one specific area, which he did. He got it fixed somehow. But in many other areas, it never got fixed. We tried to interact with Microsoft. We were getting close to shipping QuickTime 3. We weren't getting fast-enough responses. We did try to solve it ourselves. We couldn't solve it. And that was the end of that story."); Tevanian, 11/5/98pm, at 77:8-15 ("our engineers questioned the data they received from Microsoft. Here we are now, again, in context, a full year -- in fact, it's almost a year to the date after which I first notified Mr. Gates that we were having problems, and with that notification, Microsoft was somehow able to fix one of the file types, and we just could not understand why if they fixed one of them they didn't fix all of them.").

3. Dr. Tevanian testified that, after trying for months to obtain information or assistance from Microsoft to correct the problems and receiving an inadequate response, Apple received the beta for the Windows Media Player a few days before the final product was to ship, a grossly insufficient amount of time to detect and correct any problems that might exist. Tevanian, 11/4/98am, at 36:22 - 38:10.

4. Contemporaneous documents confirm Apple's repeated attempts to persuade Microsoft to correct the problem with Windows taking over the QuickTime file associations. For example, on July 21, 1998, Tim Schaaff sent a lengthy e-mail to Engstrom and Cristiano Pierry at Microsoft detailing the problems, and noting that the fixes Microsoft claimed to have provided Apple did not solve the problems. Schaaff explained in part that: "To the extent that Internet Explorer 4 relies on this undocumented info from the Windows Registry to determine which software should be invoked to process different MIME types on the web page, third-party developers, like Apple, are getting hurt. . . . It's unacceptable that every time a new version of the Media Player, or Direct X, or Windows itself is installed that QuickTime is getting overridden by your software." GX 272. A week later, having received no response, Schaaff resent this mail. GX 272 (7/28/98 Schaaff email)

5. Another week later, on August 4, 1998, still having received no response, Apple CEO Steve Jobs again requested Microsoft's assistance to solve the file association problem. GX 911 (8/4/98 Jobs email to Maffei).

6. On August 5, 1998, Microsoft's Pierry finally responded, suggesting only that Apple develop an ActiveX control, a Microsoft proprietary technology, but at the same time discouraging Apple from doing so. GX 272.

7. In an internal Microsoft e-mail to Jim Allchin, Pierry explained Microsoft's conduct. First, he noted that the reason that QuickTime is able play .mov files was because Microsoft had gone out of its way to provide an overwrite method. GX 911. 8/5/98 Pierry email) Pierry stated, "I really do not want to provide a similar mechanism to enable them to" play other file types. GX 911. Pierry then explained that his "response to Apple right now is sorry, but support for the Windows file types are build (sic) into Internet Explorer itself. The only way to take over, and we discourage you from doing so, is to write your own active x control. It turns out that they can probably just delete our MIME types from the registry, then IE would have to use the plug-in. But this would be a very wrong thing for them to do and it would cause app compatibility problems for them." GX 911 (8/5/98 Pierry email) (emphasis added).

8. None of the email traffic with Apple mentions the undocumented "enable plug-in flag" which Microsoft wrote to enable .mov and .qt to play properly Engstrom, 2/24/99am, at 12:21-25. Nor does e-mail traffic mention the alleged defects in Apple's plug-in instruction that Microsoft proffered at trial as the cause of the problem. Engstrom, 2/24/99am, at 20:25 - 21:20.

81.3. Microsoft also retaliated against Apple by inducing third parties not to support QuickTime on Windows.

1. Tevanian testified that a third party hardware vendor TrueVision was prohibited by Microsoft from marketing or promoting driver software for QuickTime for Windows, and from writing driver software for QuickTime for Windows that would operate with more than the Final Cut product. Tevanian Dir. ¶¶ 134-138; Schiller Dep., 1/13/99, at 243:15 - 247:12.

2. Engstrom admitted that Microsoft entered into a contract with TrueVision that prohibited TrueVision from developing or promoting non-Microsoft interfaces for its driver software for approximately four months. Engstrom Dir. ¶ 120.

e. Just as with Netscape, Microsoft's proposal was unrelated to any efficiency-enhancing sharing of technology

82. Microsoft's effort to force Apple to exit the playback market for Windows was unrelated to achieving any efficiency or proconsumer benefit.

82.1. First, Microsoft asserts that it was simply seeking a way to increase consumer satisfaction by providing uniform standards for multimedia. Engstrom Dir. ¶ 46-47. But forcing Apple to exit the playback market on Windows was not reasonably necessary to achieve workable standards, which could have been achieved through cross-licensing codecs (and other software) and/or cooperation on standards and protocols for data creation, storage and transfer, while maintaining the consumer benefits and innovation that competition provides.

1. Tevanian testified that, through cross-licensing, Microsoft and Apple could "establish a level playing field where everyone can compete. We viewed it as important to have open standards where customers could buy technology and vendors could have different implementations of the technology." Tevanian, 11/5/99am, at 60:4-13.

2. Tevanian explained that a "single approach" has benefits but ending competition was not necessary to achieve them: "we have a different view of how to achieve that than Microsoft does. In particular, we view the way to achieve that is to establish open standards where everyone can compete with different implementations, and they could compete based on the quality of the implementations or other metrics that would be important to consumers. In the Microsoft model, the goal was to control it, so not only would they control the interfaces, but they would control the implementations. . . . So while it may have appeared to have benefitted consumers, the way they were proposing to achieve it we did not agree with." Tevanian, 11/5/99pm, at 31:8 - 32:11.

3. Timothy Schaaff testified that Apple personnel - redacted - DX 2586; Schaaff Dep., 8/28/98, at 508:7 - 512:10 (DX 2586A) (sealed). Mr. Schaaff also testified about discussions internally and with Microsoft about other arrangements with potential benefits for consumers that did not depend on eliminating competition in the playback market. DXs 2586; Schaaff Dep., 8/28/99, at 337:19 - 338:15 (DX 2586) (licencing codecs) (sealed), 353:15 - 354:3 - redacted - 361:18 - 365:2 (same).

4. In its June 15 written proposal, Microsoft listed a number of items, such as cross licensing codecs, that would have improved compatibility and interoperability issues but do not inherently require that the two firms agree to cease competition. GX 912.

82.2. Second, the contemporaneous evidence demonstrates that, far from seeking to benefit consumers by improving the ensuring compatibility, Microsoft's overriding objective was to control the APIs to which developers write.

1. See supra ¶ 78.

2. Engstrom wrote that it was important to convince Intel not to assist Sun in writing Java multimedia APIs, "esp. those that run well, ie native implementations, on Windows." GX 235.

3. Microsoft told Intel that it sought to eliminate platform-level threats through a strategy of "embracing" the platform-level standards, "extending" them in Microsoft-dependent ways, and thereby "extinguishing" the threat to Microsoft's control over standards. See supra Part V.A.3; ¶ 91

4. See infra ¶ 84.

83. Engstrom's testimony (Engstrom Dir. ¶ 49) that he never told Apple that it would have to give up its runtime on Windows is not credible.

83.1. Engstrom's testimony is contrary to the more reliable testimony of Schaaff and Schiller, as well as inconsistent with the contemporaneous documents.

1. See supra ¶¶ 78.2, 79.2

2. Microsoft's David Cole clearly expressed to Mr. Gates and Mr. Engstrom that eliminating Apple's QuickTime runtime was Microsoft's ultimate goal: "If we can get Apple to give up on having a runtime on Windows . . . ." GX 270.

83.2. Engstrom ultimately conceded that Apple would have little incentive to develop a runtime if it accepted Microsoft's offer.

1. Engstrom testified that "none of the presentations . . . were predicated on the fact that they would have to stop" offering a QuickTime runtime on Windows (Engstrom, 2/24/99am, at 51:22-24) but later conceded that if Apple adopted the Microsoft runtime, "they are going to have to, at some level, give up, mentally and emotionally, on building this duplicative set of services because it wouldn't make sense . . . ." Engstrom, 2/24/99am, at 55:6-23. What Mr. Engstrom appears to mean by duplicative is competitive. Engstrom, 2/24/99am, at 51:14-21; 35:24 - 36:13.

2. Microsoft also attempted to divide markets with RealNetworks, using the same carrot and stick approach it used with other potential platform rivals

84. Microsoft engaged in a similar attempt to divide markets with RealNetworks as part of its pattern and practice of seeking anticompetitive agreements to eliminate potential threats to the applications barrier to entry.

84.1. Microsoft perceived that RealNetworks (then known as Progressive Networks) multimedia streaming software had the potential to develop into a platform threat, at least in the multimedia area.

1. On June 5, 1997, Microsoft's Jim Durkin reported on an internal Microsoft strategy meeting attended by Messrs. Gates, Maritz and Muglia. GX 1576 (6/5/97 Durkin email). Durkin quoted Microsoft Vice-President Muglia as saying: RealNetworks "is like Netscape. The only difference is we have a chance to start this battle earlier in the game." GX 1576. Durkin also reported that Gates and Maritz had made the decision that "Winning the streaming battle means three things - winning the file format war, winning the client architecture war, and winning the server wars." GX 1576.

2. Mr. Maritz testified that, as of June 1997, Gates believed that streaming was a strategic area that Microsoft needed to win. Maritz, 1/27/99am, 56:25 - 57:10; GX 1576.

3. Mr. Maritz also admitted that, although he believed in June 1997 that RealNetworks did not pose the same sort of threat as Netscape, it "had the potential to grow, over time, into a software platform.@ Maritz, 1/27/99am, 57:15 - 58:4.

4. Mr. Engstrom testified that RealNetworks presented some set of APIs that compete with Microsoft's APIs for developer attention (Engstrom, 2/23/99pm, at 35:24 - 36:10; 83:21 - 84:6) and that RealNetworks technology operates cross platform (Engstrom, 2/23/99pm, 98:3-25).

84.2. Microsoft told RealNetworks that it viewed the "core" multimedia streaming functionality on the client as part of the operating system and requested that RealNetworks cease competing with Microsoft in offering that functionality.

1. Bruce Jacobsen, Chief Operating Officer of RealNetworks and a former Microsoft employee, testified that he met with Microsoft Vice-President Robert Muglia in the summer of 1997, to discuss, among other things, Microsoft's distribution of RealNetworks software with Windows and Internet Explorer. Jacobsen Dep., 1/13/99, at 153:2 - 158:25; cf. GX 1369 (sealed) (7/18/97 Agreement between Progressive Networks and Microsoft); GX 884 (sealed) (6/17/97 agreement between Progressive Networks and Microsoft).

2. Mr. Jacobsen recorded a summary of the meeting shortly after the meeting. GX 1368. Mr. Jacobsen summarized the meeting as follows: AWas cordial but pointed. His basic message was the [sic] wanted us out of core AV. He said that MSFT had concluded that fundamental datatypes like words and numbers were in essence a core part of the operating system . . . He said that he thought video was one of the most exciting datatypes -- since monitors were visual things, video had to be though [sic] like 'words'. and microsoft had to control this franchise. He said that anyone who competed against MSFT in the operating system 'lost' -- that there were only two people left in town who still competed against msft as a potential OS vendor -- Sun and Oracle -- and the rest had been obliterated, and MSFT was targeting these last two. He referenced their scalability day as part of killing Sun. So the message was that if we wanted to do value add on top of their video, fine; if not, we were an OS contender and msft would target us for obliteration. He cited PeopleSoft as ok -- he said adobe had pretensions of OS, but had basically backed off.@ GX 1368.

84.3. In order to induce RealNetworks to cease competing in core streaming, Microsoft proposed that, if RealNetworks stopped competing in base level streaming, Microsoft would give its full support to RealNetworks as a value-added software provider; but if RealNetworks continued to compete, Microsoft would use its resources to injure it.

1. Mr. Jacobsen testified that Muglia explained that Microsoft would seek to injure RealNetworks' business if RealNetworks continued to compete in the fundamentals of audio/visual streaming. Jacobsen Dep., 1/13/99, at 155:4 - 158:25. Mr. Jacobsen quotes Muglia as saying that Microsoft had won most of the operating system wars and the only remaining threats were Oracle and Sun. Jacobsen Dep., 1/13/99, at 156:22 - 157:4. Muglia said Microsoft was trying "to reduce the economic viability of those companies so they wouldn't have the wherewithal to invest and position themselves as operating system competitors of Microsoft." Jacobsen Dep., 1/13/99, at 156:22 - 157:4. Muglia told Jacobsen that a company like Adobe had at one point "operating system pretenses" or "pretensions" but had been chased out of that space. Jacobsen Dep., 1/13/99, at 157:5-10. Muglia told Jacobsen that Microsoft wanted RealNetworks to be like PeopleSoft, a value-added provider that builds applications on top of operating systems but does not threaten any core part of Microsoft's environment. Jacobsen Dep., 1/13/99, at 157:11 - 158:8. Muglia continued: "On the other hand, if you try to do the fundamentals of streaming audio and video, then we would view you as a core competitor and use all our resources to hurt you in your core businesses. " Jacobsen Dep., 1/13/99, at 157:18-22; 158:9-25 (Jacobsen asked Muglia whether Microsoft was asking RealNetworks to abandon core streaming audio and video and Muglia replied affirmatively).

2. Mr. Muglia warned RealNetworks, Jacobsen testified, that "Microsoft would aggressively target us as a company, using all of Microsoft's resources, if we stayed in the audio and video space . . . . Bob also said, and I agreed with him, that Microsoft had been successful prior in targeting companies and having severe economic effects on them. Bob did not use Borland as an example, but Borland certainly popped to my mind . . . . The phrase that runs through the industry is that Microsoft performed a cashectomy on Borland, that it lowered the prices of its product, which caused severe disruptions in Borland's cash flow and also in the stock price, which caused Borland to take a series of significant steps, including disposing of some products which historically had been significant competitors to Microsoft products . . . . The example he did use of Adobe . . . where Microsoft had had a very significant effort and success in changing the destiny of a company . . . . So, there was very clear message that they wanted us to leave the space, and that there would be consequences if we didn't. Jacobsen Dep., 1/13/99, at 161:20 - 163:1.

3. GX 1368 (quoted above).

4. Muglia Supp. Dir. ¶ 26 (Muglia denies mentioning PeopleSoft, but admits citing SAP, another software company that builds on top of, but does not compete with, Windows, as a model for what Microsoft expected from RealNetworks).

84.4. Microsoft induced RealNetworks to enter into a contract that restricted its ability to work with other potential platform-level competitors to Microsoft, Sun and Netscape.

1. See infra Part V.F.2; ¶ 286.

84.5. As with Netscape and Apple, RealNetworks's product experienced new technical problems working with Windows when RealNetworks declined to abandon the core streaming business.

1. Mr. Jacobsen testified that Microsoft's Windows Media Player took over MIME types without giving users a choice, overwrote Real Networks software without giving users a choice, essentially depriving the user of the use of the $29.95 player that had previously been installed. Some but not all of these problems were patched following Mr. Glaser's testimony before the United States Senate. Jacobsen Dep.,1/13/99, at 163:3 - 167:21, 173:8 - 174:8.

V. Microsoft Engaged In A Predatory Campaign To Crush The Browser Threat To Its Operating System Monopoly

85. With the browser threat to its operating system monopoly still robust after its failure to divide markets with Netscape, Microsoft embarked on a calculated campaign to protect its monopoly by thwarting the widespread adoption of rival browser products. That campaign had as its object increasing Microsoft's share of the browser market and sufficiently weakening Netscape and other rivals to ensure that non-Microsoft browsers (or other middleware) did not become an important platform to which developers wrote applications that ran on PCs.

A. After Netscape refused Microsoft's offer to divide the browser market, Microsoft embarked on a predatory campaign to eliminate the browser threat

3. Microsoft made obtaining browser share a central corporate objective

86. Failure to divide the browser market with Netscape frustrated Microsoft's objective of eliminating the threat that widely-used non-Microsoft browsers, in particular the Netscape browser, posed to Microsoft's operating system monopoly.

87. Microsoft nonetheless recognized that it could blunt the browser threat by weakening rivals and gaining browser market share.

1. In an April 6, 1995 internal memorandum entitled "Netscape as Netware," Paul Maritz explained the threat posed by Netscape if Netscape enjoyed high market share. Maritz stated that if Netscape Navigator gained "significant market share," then "content providers see more to be gained in exploiting unique features of Netscape clients than in trying to be 'generic' across all clients." Maritz explained: "This feedback loop drives Netscape market share higher (as content providers encourage its use) to the point where Netscape can go 'proprietary'. . . Eventually they become a real 'platform,' and they are eating 'per PC' revenue that would otherwise go to the OS or to the Apps." GX 498, at MS98 0168614.

2. In an April 4, 1996 internal Microsoft memorandum, entitled "FY97 Planning Memo 'Winning the Internet platform battle'," Brad Chase wrote, "Go for maximum browser share. Why should you care? This is a no revenue product, but you should worry about your browser share, as much as BillG because: we will loose [sic] the Internet platform battle if we do not have a significant user installed base. The industry would simply ignore our standards. Few would write Windows apps without the Windows user base. -- at your level, if you let your customers deploy Netscape Navigator, you loose [sic] the leadership on the desktop." GX 39, at MS6 5005720 (emphasis in original).

88. Microsoft understood the importance of increasing browser market share and made gaining browser market share a central corporate goal. This "very important" and "#1" goal to increase browser market share -- articulated among others by Bill Gates and his senior executives -- was a central focus of Microsoft's corporate strategy from 1995 to the present day.

1. In his "Netscape as Netware" memorandum, Paul Maritz wrote: "I think the most important thing we can do is to 'not lose control' of the Web client. By controlling the client, you also control the servers. We should not allow any one Web client to get to high volume. This means (i) not letting a vacuum open up, and (ii) ensuring that we get broad distribution for our Web client." GX 498, at MS98 0168614.

2. Bill Gates wrote, in January 1996, that "Winning Internet browser share is a very, very important goal for us." GX 295.

3. Paul Maritz, in June 1996, repeated that "Without browser share, everything is hard. So job # 1 is browser share." GX 42, at MS6 6010346.

4. Microsoft executive Carl Stork wrote in September 1996 that "Browser share is Job 1 at this company, and OSR2 is the vehicle to get IE3 on these machines." GX 44.

5. In an internal March 25, 1997 Microsoft e-mail exchange between Stork, Megan Bliss, and others, Bliss wrote: "I thought our #1 strategic imperative was to get IE share (they've been stalled and their best hope is tying tight to Windows, esp. on OEM machines). That is, unless I've woken up in an alternative state and now work for Netscape." GX 56, at TXAG 0009634.

6. An April 1998 marketing plan for IE5 lists as an Specifically, the document read: - redacted - GX 432 (sealed).

4. Microsoft embarked on a predatory and anticompetitive course of conduct designed to gain browser share

89. To achieve its goal of weakening browser rivals and protecting its operating system monopoly, Microsoft set out on a campaign to gain browser market share through predatory and anticompetitive means. Microsoft's practices included giving its browser away "forever free," coercing third parties not to deal with or support competitive browsers, and to carry its browser in ways that disadvantaged rivals, and paying other browser suppliers' customers and distributors not to carry other browsers or to do so only on disadvantageous terms. Among other things:

89.1. Microsoft, without legitimate justification and for the purpose of blunting the browser threat, tied its Internet Explorer browser to Windows, refusing to offer an unbundled option despite the plain existence of separate demand for browsers and operating systems. See infra Part V.B.

89.2. Microsoft imposed anticompetitive restrictions on OEMs' ability to modify the Windows desktop and start-up screens, even though doing so reduced the value of Windows. See infra Part V.C.1.

89.3. Microsoft bestowed favors on OEMs that assisted Microsoft in its exclusionary strategy, punished OEMs that did not, and contractually restricted OEMs from removing the browser. See infra Part V.C.2.

89.4. Microsoft entered into exclusionary contracts with ISPs and OLSs accounting for the majority of consumer Internet access in the United States for the purpose and with the effect of limiting competitor browser usage and raising rivals' costs. See infra Part V.D.

89.5. Microsoft entered into exclusionary agreements with ICPs that included restrictive provisions that cannot be explained except as components of a predatory campaign designed to exclude browser rivals and protect Microsoft's operating system monopoly. See infra Part V.E.

89.6. Microsoft entered into an exclusionary agreement with Apple designed to limit competitive browser usage, raise rivals' costs, and increase usage of Internet Explorer on the MacIntosh operating system. See infra Part V.F.

89.7. Microsoft, after studying Netscape's sources of revenues and for the purpose of cutting off Netscape's "air supply," invested hundreds of millions of dollars in developing, promoting, and distributing its Internet Explorer browser, even though it planned to and did make the browser "forever free" and did not collect browser-related ancillary revenues. See infra Part V.G.

90. Microsoft had no plan or expectation that these acts would be profitable or make business sense, except by preventing rival browsers from developing into a rival development platform and thereby preserving Microsoft's operating system monopoly.

1. In an internal memorandum Bill Gates sent on May 19, 1996, to his senior executives, he outlined a strategy against Netscape in the "browser war." Gates indicated that Microsoft would price many of Microsoft's Internet products "free." After outlining his strategy, Gates concluded that: "At some point financial minded analysts will begin to consider how much of a revenue stream Netscape will be able to generate." GX 41, at MS6 6012954-56.

2. Paul Maritz emphasized that Microsoft's goal of increasing browser share was more important than earning revenue from the browser. In a July 11, 1997 internal Microsoft email, Maritz wrote: "There is talk about how we get more $'s from the 1000+ people we have working on browser related stuff, but I have not lost sight of the fact that Browser Share is still an overwhelming objective. You may notice that I have kept IE marketing spend at very high level through FY'98. and resisted pressure to reduce this or switch it to other products. I also said 'no' on the proposal to charge separately for the Shell." GX 112; Maritz, 1/26/99pm, at 18:25 - 20:8, 21:22 - 22:22 (Maritz testified that he rejected a proposal about splitting IE4 and charging a price for one of the pieces because "it would interfere with the objective" he "had which was to get more people using Internet Explorer.").

3. See also infra Part V.G.

3. Microsoft's efforts to pressure Intel to stop developing or supporting platform-level software illustrate Microsoft's predatory intent and tactics

91. In various meetings in 1995, Microsoft (i) forced Intel not to support rival platform-level software and (ii) candidly articulated its predatory plan to use its monopoly power and other predatory means to thwart the browser threat. Microsoft's use of its monopoly power to pressure Intel not to support Netscape or offer Intel's own platform-level technologies well illustrates both Microsoft's predatory intent and the anticompetitive practices it employed to blunt threats to its operating system.

a. In an August 1995 meeting, Microsoft pressured Intel into not resuming platform-level software and not supporting Netscape and Java

91.1. As will be detailed below (Part VI.B.2.), Intel had developed software that Microsoft viewed as a platform-level software that might someday compete with Windows. In response to this potential threat, Microsoft engaged in a campaign to force Intel not to ship its software, then known as NSP. This effort culminated in an August 2, 1995, meeting, in which Bill Gates -- in a blunt use of Microsoft's monopoly power -- threatened to withdraw support for Intel's microprocessors unless Intel dropped support for platform-level software efforts and cooperated in Microsoft's Internet strategies.

1. In May 1995, Microsoft vice-presidents Paul Maritz, Brad Silverberg, and Microsoft's Carl Stork, met with Intel executives to discuss Intel's NSP program. The Microsoft executives complained that Intel was shifting the software boundary with its NSP project by writing software that Microsoft considered to be part of its operating system space. GX 275; McGeady, 11/9/98pm, at 23:3 - 26:23. In Microsoft's view, NSP made Intel a competitor in Microsoft's operating system space. GX 275; McGeady, 11/9/98pm, at 26:25 - 27:11.

2. Bill Gates explained to Intel's Andy Grove that Intel's attempts to compete with, rather than follow, Microsoft in software were unacceptable: "The problem we have is that we have to sort of choose in software related issues which company will lead and which will follow. In chips its very clear. In software you have a group that won't allow us to lead and has all the prestide (sic) and profits of Intel to drive them forward." GX 277.

3. In an internal July 7, 1995 Microsoft e-mail, Gates reported that he had tried to convince Grove "to basically not ship NSP." GX 278; Maritz Dir. ¶ 320. Gates predicted that Intel would exert less pressure to ship NSP in 1995 but that it "will take a major effort for us to convince them to back off from this." Gates further elaborated that Microsoft is the "software company here and we will not have any kind of equal relationship with Intel on software." GX 278.

4. In an August 28, 1995 memorandum summarizing the meeting, Steven McGeady wrote: "On August 2 1995, in a meeting of Intel and MS executives, Bill Gates told Intel CEO Andy Grove to shut down the Intel architecture labs." GX 280. According to McGeady, Gates was upset that Intel was "making investments in software of any sort" because "he felt that anything" Intel "did in software was competitive." McGeady 11/9/98pm, at 10:10 - 14:3.

5. McGeady explained the reason Intel abandoned its NSP development: "Intel did fail to introduce NSP into the marketplace because, as a primary cause, Microsoft in particular Bill Gates, told Andy Grove that MS did not want NSP in the marketplace," and because "Microsoft helped . . . in our business interests by threatening to withhold support for other microprocessors in the meantime." McGeady, 11/10/98pm, at 81:6-23.

6. See also infra Part VI.B.2; ¶¶ 347-350.

91.2. During this meeting on August 2, 1995, Microsoft told Intel not only that it wanted Intel to stop developing platform-level software, but also that it wanted Intel not to support other platform-level software that ran on Windows, especially Netscape's browser and Sun's Java technologies, in any way that could contribute to their development as a rival platform.

1. Gates made clear to Intel executives on August 2, 1995, that "Microsoft would not support" Intel's "next processor offerings if we did not get alignment between Intel and Microsoft on platform issues" and on communications issues, i.e., Internet issues. McGeady, 11/9/98pm, at 14:14 - 15:4; GX 279 ("Gates would not agree to let processors/OSs programs to progress unencumbered by platform communications program issues.").

2. In addition to setting limits on Intel's software efforts, Gates raised "Internet issues." GX 279, at MS CID 00078. Gates cautioned that Microsoft was "very sensitive to what Intel might do on the client side. Example: JAVA, a show stopper." Id. (By "client," Gates meant "browser." Maritz, 1/27/99am, at 27:12-21).

3. McGeady explained that Gates also told Intel that it should "concentrate 70% of" its "resources on working with Microsoft's technology and 3- percent on any third parties'" technologies such as Netscape. McGeady, 11/12/98pm, 19:5 - 20:9. Gates further explained, with regard to this "30/70 use of 3^rd party technologies," that "Intel using Netscape in Windows environment is not a problem (provided we [Intel] do not set up the 'positive feedback loop' for Netscape that allows it to grow to de facto std.)." GX 279, at MS CID 00078.

4. As McGeady testified, Gates permitted Intel's internal use of Netscape browser as a stand-alone application on Windows, but "he didn't want" Intel "to do anything that would encourage developers to begin to move to Netscape, thereby increasing the value of that platform to create this positive feedback loop, this increasing-returns kind of situation with Netscape." McGeady, 11/12/98pm, 19:5 - 20:9. McGeady also testified that "it was very clear that Bill did not want us doing any development or technology work with Netscape that would improve . . . the viability of Netscape Navigator in the marketplace. They wanted us to, if we absolutely had to, use it just as a standalone product. He would acquiesce to that, but he didn't want us doing any technical work with them." McGeady 11/12/98pm, 20:10-20; GX 279 (Whittier's minutes) ("BG: Supporting certain third party deals will be problem . . . we need to consider in the context of their (pervasive) internet program to assure we are not unknowingly stepping on one of their key strategies!").

b. In subsequent meetings in the Fall of 1995, Microsoft explained to Intel that its strategy would be to kill Netscape and control Internet standards

91.3. After Microsoft used its monopoly power to prevent Intel from developing its own platform-level software, Microsoft continued to pressure Intel not to support Netscape's browser and bluntly described to Intel its predatory scheme and objective. At a meeting held on November 9, 1995, Microsoft executive Paul Maritz met with Intel executives and explained to Intel, in explicit terms, that Microsoft's strategy was to kill Netscape and control Internet standards.

91.3.1. During this meeting, Paul Maritz told Intel that Microsoft would "cut off Netscape's air supply" -- that, in other words, by "giving away free browsers," Microsoft would choke off Netscape's sources of revenue and retard its ability to invest in developing its technology.

1. McGeady testified that Maritz told Intel that Microsoft planned to "cut off Netscape's air supply," or in other words, "by giving away free browsers, Microsoft was going to keep Netscape from getting off the ground." McGeady, 11/9/98pm, at 53:6-23; GX 1640.

2. McGeady testified that Maritz explained Microsoft's strategy "was, first of all, to give the browser away from (sic) free, keep Netscape from getting any revenue from it, and that was their specific cut off of air supply. In other words, don't allow them to have any revenue to continue paying their engineers to build new products." McGeady, 11/9/98pm, at 54:21 - 55:16.

3. Maritz's inconsistent testimony to the contrary lacks credibility. When asked whether he told Intel that Microsoft's plan was to "cut off Netscape's air supply," Maritz testified at his deposition "it's possible, but I just don't recall it," Maritz, 1/25/99 pm, 74:18-75:16, but at trial, Maritz testified unequivocally and inconsistently that he "never said in the presence of Intel personnel or otherwise, that Microsoft would cut off Netscape's air supply or words to that effect." Maritz, 1/25/99pm, at 72:21 - 73:16; Maritz Dir. ¶ 333. And despite claiming that he did not say "words to the effect" of Microsoft planned to "cut off Netscape's air supply," he testified that he "may have pointed out on occasion that the base Internet technologies, the browser and the Internet server, we were going to incorporate into Windows and not charge for it separately." Maritz, 1/26/99am, 7:22 - 8:1. Maritz also conceded that he told Intel "on many occasions that it was" Microsoft's "strategy to integrate Internet support into" its "operating system and not charge for it separately." Maritz, 1/26/99am, 7:22 - 8:8.

91.3.2. Paul Maritz also explained to Intel representatives that Microsoft's response to the browser threat was to "embrace, extend, extinguish"; in other words, Microsoft planned to "embrace" existing Internet standards, "extend" them in incompatible ways, and thereby "extinguish" competitors.

1. McGeady testified that Maritz told Intel that Microsoft's strategy was to "embrace, extend, extinguish." McGeady, 11/9/98pm, at 53:17 - 54:8; McGeady, 11/10/98 am, at 21:22 - 23:19; GX 564.

2. McGeady testified that Microsoft was going to take Internet standards, like HTML, "and extend it to the point where it was incompatible with the Netscape browser and encourage people to develop to their version of HTML so that pages couldn't be read with Netscape's browser." McGeady, 11/9/98pm, at 55:7-14.

3. Russell Barck, an Intel executive, testified at his deposition that "in relation to Netscape, . . . Maritz . . . said the term 'embrace and smother' with respect to a strategy with respect to Netscape." Maritz, 1/26/99 am, 55:19 - 57:1.

4. Rob Sullivan testified at his deposition that Maritz said the phrase "embrace and smother." Maritz, 1/26/9am, 57:2-11. When asked about his understanding of the meaning of the embrace and smother concept, Sullivan testified that he "understood that concept to mean that Microsoft intended to deprive Netscape of revenue and viability." Microsoft would achieve this "by giving away their products, by embracing the Internet standards and extending them in a way that favored the Windows platform." Maritz, 1/26/99am, 58:16 - 59:8.

91.3.3. Paul Maritz also explained to Intel representatives that another aspect of Microsoft's strategy to combat Netscape was to create dependencies between the operating system and the browser.

1. McGeady testified that, based on the meeting with Maritz, Microsoft planned "to create some various levels of dependencies between the operating system and the browser that would differentially advantage their browser." McGeady, 11/9/98pm, at 54:15 - 55:14; GX 564.

91.4. Microsoft continued to monitor to ensure that Intel did not voice public support for Netscape, even to the point of regulating Intel's internal browser use.

1. In an internal June 6, 1996 email, Bill Gates reported to other executives that he spoke with Intel's CEO, Andy Grove, and Bill Gates reported: "I said it was important that Intel NOT ever publicly say they are standardizing on Netscape browsers." McGeady, 11/9/98pm, 49:3 - 50:2; GX 289.

92. Microsoft's efforts to ensure that Intel not support Netscape, and its blunt warning that it would "cut off" Netscape's "air supply," were neither isolated events nor normal competitive banter or "locker room talk." Rather, they were part of a calculated, multifaceted predatory scheme, the details of which are set forth below.

B. Microsoft tied its Internet Explorer browser to Windows 95 and Windows 98 in order to impede browser rivals such as Netscape, and for no legitimate purpose

93. A central part of Microsoft's predatory campaign to prevent Netscape's browser from developing into a platform that could erode the applications barrier to entry was Microsoft's tying of its Internet Explorer browser to Windows 95 and Windows 98 and its refusal to offer, or to permit OEMs to offer, an unbundled option.

93.1. Internet browsers and personal computer operating systems are separate products. Consumers view browsers and operating systems as separate products and demand one without the other. In response to that separate demand, Microsoft and other software firms have found it efficient to promote and distribute browsers and operating systems separately. See infra Part V.B.1; ¶¶ 96-119.

93.2. Despite the existence of this separate demand for browsers and operating systems, Microsoft tied its browser to its Windows operating system, and refused to offer an unbundled option, for the purpose of hindering the development of Netscape and other browsers. See infra Part V.B.2; ¶¶ 120-149.

93.2.1. Microsoft tied Internet Explorer 1 and 2 to Windows 95 by requiring OEMs to obtain Internet Explorer in order to obtain Windows 95 and prohibited OEMs from removing Internet Explorer.

93.2.2. Subsequently, fearing that its merely contractual tie was not sufficient to eliminate the threat that Netscape's browser posed to its operating system monopoly, Microsoft changed its product design in Internet Explorer 3 and 4 to commingle browser and operating system code. Still, recognizing the desire of users to have the Windows 95 operating system without Internet Explorer, Microsoft designed and advertised an easy means for users to remove the browser. Microsoft, however, refused to provide a version of Windows 95 from which the browser had been removed or to permit OEMs to remove the browser from the PCs they sold.

93.2.3. Microsoft designed Windows 98 to further implement the tying arrangement by eliminating the end user's ready ability to "uninstall" Internet Explorer and by interfering with his ability to choose a different default browser.

93.3. There is no sound justification for Microsoft's tying Internet Explorer to Windows. See infra Part V.B.3; ¶¶ 150-167.

93.4. Microsoft's tying arrangement and contractual prohibition on unbundling inflicted significant harm on competition and consumers. See infra Part V.B.4; ¶¶ 168-176.

1. Internet Explorer and Windows operating systems are separate products

94. Internet browsers and operating systems, including Internet Explorer and Windows, are separate products that are sold in separate product markets. There is separate demand for both browsers and operating systems that is efficient for suppliers to meet.

a. Browsers and operating systems are universally recognized by industry participants to be separate products

(1) An Internet browser supplies web browsing

95. An Internet web browser ("Internet browser") is a software program that

enables its user to view, retrieve, and manipulate content located on the Internet's World Wide Web and other networks (hereinafter "web browsing").

1. Microsoft's own dictionary defines a "web browser" as a "client application that enables a user to view HTML documents on the World Wide Web, another network, or the user's computer; follow the hyperlinks among them; and transfer files." Microsoft Press, Computer Dictionary (3d ed. 1997), at 505 (GX 1050).

2. Professor Franklin Fisher defined a browser as "the application that permits users to access and browse the world wide web or, for that matter, other networks." Fisher, 1/6/99am, at 5:3-5.

3. Dr. Warren-Boulton defined a browser as "software that enables computer users to navigate and view content on the World Wide Web." Warren-Boulton Dir. ¶ 68.

(2) Industry participants view a browser as an application, and not as part of an operating system

96. Industry participants -- including consumers, other operating system vendors, ISVs, corporate information technology officers, academic computer scientists, and the industry press (including Microsoft's own computing dictionary) -- universally regard web browsers as application programs separate from the underlying operating system.

96.1. Other operating system vendors, even those that bundle a browser or multiple browsers with their operating system products, have always considered the browser to be a separate application.

1. Apple Computer's Avadis Tevanian testified: "The fact that Internet Explorer and Navigator are bundled with the Mac OS does not make them part of the operating system. The Mac OS operating system will continue to function if either or both of these browsers are removed . . . [and] we permit value added resellers the flexibility . . . to remove browsers or other applications . . . ." Tevanian Dir. ¶ 26; see also Tevanian Dir. ¶¶ 8-9 (explaining the difference between operating systems and applications).
2. John Soyring from IBM testified that "IBM has not found it necessary technically to integrate the browser with the operating system -- the browser worked well running on the operating system like any application." Soyring Dir. ¶ 18.
3. Sun officials consistently describe Sun's "HotJava" browser as an "application that performs web-browsing functionality." Sasaki Dep. (played 12/16/98pm), at 22:5-18.
4. Brian Croll testified that the browser that Sun bundles with the Solaris operating system environment is "an application that runs on the environment. That's basically on top of the CDE." Croll Dep. (played 12/15/98pm), at 38:12-14. Croll later defined an "application" as "a piece of software that sits on top of the operating system and that people use and performs a function that they are looking for." Id. at 66:11-16.
5. Ron Rasmussen from The Santa Cruz Operation testified that SCO "bundles" Netscape Navigator with its OpenServer and Unixware products (Rasmussen Dep. (played 12/15/98am), at 54:10 - 56:25), but that "our view is that the browser is an application." Rasmussen Dep. (played 12/15/98am), at 64:20. Rasmussen also testified that "when SCO says 'we bundle a feature,' it means its a feature which is not part of the core base operating system functionality. It means that it's something that the user can choose to install or remove, and the operating system, whose primary function it is to serve applications, will still function properly." Rasmussen Dep. (played 12/15/98am), at 55:14-19.

96.2. Consumers also regard browsers as applications rather than as parts of any operating system product.

1. Jon Kies, the Senior Product Manager at Packard Bell/NEC, testified that "browsers are considered by most of our customers as a third party application." Kies Dep. (played 12/16/98am), at 7:19-20.

2. Glenn Weadock concluded from his research and interviews that corporate information managers "typically consider browser software as application software, like email or word processing, not as an operating system or as part of a particular operating system." Weadock Dir. ¶ 22 (collecting illustrative statements by corporate managers). Weadock further testified: "No corporate PC manager, in fact no one outside of the Microsoft organization, has ever described a Web browser to me as operating system software or as part of Windows 95 or any other operating system." Weadock Dir. ¶ 22 (emphasis in original).

3. Boeing's Scott Vesey testified: "From my perspective, I would view them as software applications because they are tools that are used to interpret data rather than what I would normally view as the operating system, which is the components of software that are used to directly manipulate the hardware that forms that PC. The applications are used to interpret or parse data." Vesey Dep., 1/13/99, at 284:15 - 285:9.

4. Netscape's Jim Barksdale testified: "Consumers have had no problem appreciating that browsers are separate products," and "still demand Netscape Navigator and Netscape Communicator separately from any operating system products." Barksdale Dir. ¶ 90.

96.3. When the industry press or prospective customers evaluate the features and quality of Internet Explorer, they invariably compare it to Netscape's Navigator browser application, and not to any operating system.

1. Barksdale testified that "the industry as a whole recognizes browsers as separate products from operating systems. Browser market share is tracked (separately from operating system market share) by many third party organizations, such as IDC and DataQuest. The 'browser wars,' referring to the commercial battle between Netscape Navigator and Microsoft Internet Explorer, are frequently reported on in the press. I have seen many product reviews comparing Navigator to Internet Explorer; I have never seen a product review comparing Navigator to any Windows operating system." Barksdale Dir. ¶ 90.

2. An internal Gateway presentation from March 1997 includes a detailed "Basic Feature Comparison" between "Netscape and Microsoft Browser Products." GX 357 (sealed).

3. Many press reviews of browsers directly and explicitly compare Internet Explorer to Netscape Navigator and Communicator and talk about them as applications independent of any particular operating system. See, e.g., GX 1262 (1996 ZDNet review); GX 1272 (1997 CMPnet review); GX 1274 (1997 PC Week Online review); GX 1285 (1997 ComputerShopper.com review); GX 1287 (1998 PC Magazine Online review); GX 1288 (1998 ZDNet News review).

96.4. Experts in software design describe browsers as applications, and not as parts of any operating system.

1. James Gosling of Sun Microsystems testified that "the browser is best understood as a software application, not as a part of a computer's operating system. This is true both as a matter of function and as a matter of software design. As a matter of function, browsers perform tasks for the end user that relate to obtaining and displaying content on the Internet or other networks. Users may wish to choose a particular Internet browser that best fits their needs, or if they have no need to 'browse the Web,' perhaps no browser at all. Technically, browsers are treated by the computer like any other application. In virtually every operating system with which I am familiar, the particular files that enable browsing are loaded into memory and used in exactly the same way as other software applications. Even in Windows 98, where Microsoft apparently loads some browser-related files into memory even when the user may never need that functionality, these files are loaded in the same way as other software applications. In essence, Microsoft simply shifts the time required to load the browser code from when it is first needed by the user to every time the computer boots up." Gosling Dir. ¶¶ 38-39.

2. Gosling also testified: "A browser is an application that, like a JVM, runs on the operating system installed on a user's computer. It permits the user to access information encoded in hypertext markup language, or HTML, and other types of content found on the Internet or other networks, and to navigate around these networks." Gosling Dir. ¶ 34; Gosling, 12/9/98pm, at 41:20-23.

3. Professor Felten testified that "Internet Explorer is part of the distribution which Microsoft sells under the name Windows 98. However, their Internet Explorer is an application which can be separated from Windows 98." Felten, 12/14/98am, at 30:21-24.

4. Marc Andreessen testified that "I can't say that I ever thought that a browser was necessarily separate from everything. But it would certainly be fair to say that I think that the browser has been separate from an operating system, for example." Andreessen Dep., 7/15/98, at 122:20 - 123:7 (DX 2555).

5. Even Dr. Michael Dertouzos, Director of the Laboratory for Computer Science at M.I.T. and formerly on Microsoft's witness list, agreed: "Historically and today, it is the case that browsers are treated as applications." Dertouzos Dep., 1/13/99, at 414:2-4.

(3) In its ordinary commercial conduct, Microsoft treats Internet Explorer as a separate product

97. Microsoft similarly treats Internet Explorer as a product separate from its Windows line of operating system products.

(a) Microsoft promotes Internet Explorer as a product, positions it in competition with other Internet browsers, and tracks its market share relative to those of other browsers

97.1. Microsoft distributes Internet Explorer separately from Windows in a variety of different channels, including retail sales, service kits for ISVs, free downloads over the Internet, and with other products produced both by Microsoft and third-party ISVs.

1. On cross-examination, Microsoft's Cameron Myhrvold conceded that Internet Explorer is distributed separately from Windows in "many, many ways." Myhrvold, 2/9/99pm, at 37:7 - 38:7.

2. An internal Microsoft "Timeline Summary" - redacted - GX 669 (sealed).

3. When asked whether Microsoft released "something called Internet Explorer 3 separately from OSR2 around the time that OSR2 was released," Carl Stork answered that Microsoft "released it on the Web and I believe we released it in some kind of a retail Internet starter kit type of product as well." Stork Dep., 8/11/98, at 38:18-23 (DX 2595).

97.2. From the introduction of Internet Explorer 1.0 in mid-1995 to the present day, Microsoft has always promoted and marketed Internet Explorer as a product separate from Windows.

1. Soyring testified that "Microsoft itself has at certain times treated Internet Explorer as separate from Windows. In the fall of 1997, Microsoft held a major public relations event to introduce Internet Explorer 4, independent of Microsoft's promotion of Windows." Soyring Dir. ¶ 19.

2. In describing Microsoft's marketing plans for Internet Explorer in August of 1995, Yusuf Mehdi wrote that Microsoft would "treat it as a distinct product in the sense of setting up clear news, reviews, and feature coverage objectives." GX 153.

97.3. Microsoft's internal strategy documents dealing with Internet Explorer consistently described Netscape Navigator (and not any of Microsoft's traditional operating system competitors) as Internet Explorer's "primary competitor" and identified gaining "browser share" vis-a-vis Netscape as the primary objective for Internet Explorer marketing efforts.

1. An "Internet Product Management Strategy" in November 1995 identifies Netscape as the "primary competitor" and lists as its objective to "Make the IE the people's choice of Web browsers via aggressive distribution and promotion." GX 673, at MS6 6005881.

2. In notes from an offsite meeting among the Internet Explorer project team in November 1997, Microsoft's Chris Jones describes the role of the Internet Explorer team as "gain browser share." GX 364, at MS7 004722.

3. In December 1996, Microsoft's David Cole wrote: "There is still the message here that Internet Explorer is still a browser, where Nav is groupware. No credit for Netmeeting, mail, news, etc. We need to change that perception." Microsoft's Yusuf Mehdi responded that "it is probably a good example though of the need to have a single group taking on communicator else we wil never get the full message across. I have thought more about our conversation and more firmly believe that you need a single group and product that you market against communicator. It makes sense to me that this use the IE brand and team because of equity, experience, and relevancy in product, team, and marketing. The group would market IE4 which includes: Active Desktop, Browser, Mail, News, Netmeeting, FrontPad, Admin Kit, etc." GX 658, at MS6 6010327.

4. In June 1997, Chris Jones sent a memo to Bill Gates entitled "How to get to 30% share in 12 months." The memo contains a lengthy discussion of how Microsoft should design and market Internet Explorer to take market share away from Netscape. GX 334, at MS98 0104679.

97.4. Internal Microsoft assessments of Internet Explorer's success invariably compared its features, performance, and market penetration to those of Netscape Navigator.

1. A March 1997 Microsoft "Competitive Guide" compared the features of Internet Explorer 4.0 against those of Netscape Communicator. GX 477, at MS7 004179.

2. Chris Jones' notes from a November 1997 Internet Explorer team meeting claims that "[w]e have won every head to head review against Netscape." GX 364, at MS7 004719.

97.5. In fact, the contemporaneous documents show that Microsoft regularly tracked Internet Explorer's market share relative to that of Netscape Navigator.

1. A January 1998 "IE International Business Review" slide presentation breaks down 1997 browser shares in both domestic and international markets. GX 815, at MS98 0202889.

2. An October 1996 e-mail from Yusef Mehdi to Paul Maritz and others reports current browser share as measured by weekly call downs, share at random web sites, and Internet Explorer downloads. GX 344.

3. See also e.g., GX 713 (April 1998 Mehdi email comparing Internet Explorer and Navigator share and noting that "48 is a big number and implies that we have caught Netscape"); GX 495 (comparison of Internet Explorer and Navigator share); GX 700 (same); GX 708 (same); GX 713 (same); GX 714 (same); GX 714A (same); GX 716 (same).

(b) Microsoft treated Internet Explorer and Windows separately until the issue arose in litigation

(1) Before litigation, Microsoft called Internet Explorer a browser in its ordinary commercial conduct

98. In the ordinary course of its business, Microsoft has frequently described Internet Explorer as a browser application rather than a part of the operating system.

1. In a July 1995 memo to the OEMs, Microsoft described Internet Explorer as a "32-bit Windows 95 World Wide Web browser and graphical FTP utility." GX 36.

2. In December 1995, Brad Silverberg wrote to Bill Gates and Paul Maritz that Internet Explorer 3.0 "is a standalone web browser that runs on Win95." GX 37.

3. See also GX 141 (Windows 95 would contain "[a]ll the necessary plumbing" to access the Internet, including a TCP/IP stack and support for the PPP and SLIP protocols, and that it would "[s]upport[] popular third party Internet applications, such as Mosaic").

99. Microsoft also entered into extensive agreements with PC OEMs, ISVs, ISPs, and ICPs regarding the placement and promotion of Internet Explorer that were separate from any agreements regarding licensing terms for Windows and that invariably referred to Internet Explorer as a "browser," not as a part of the operating system.

1. A September 1996 amendment to a May 1996 licensing agreement with Compaq required Compaq to "Offer the Microsoft Internet Explorer as the preferred worldwide web browser for users of any COMPAQ Internet Product(s) listed in Exhibit B [Support Software CD for Compaq Desktop, Portable and Workstation Products and Compaq Resource Kit for Microsoft Windows NT]." GX 1130, at MSV 0005706 (Ex. D, Amd. 1).

2. A July 1996 license and distribution agreement with Compaq required Compaq to "Offer the Microsoft Internet Explorer as the preferred worldwide web browser for users of the Support Software CD for Compaq Desktop Products." GX 1137, at MSV 005747.

3. The Internet Sign Up Wizard Referral and Microsoft Internet Explorer License and Distribution Agreement with AT&T, dated July 23, 1996, - redacted - GX 1212, at MS6 5000435 (Ex. B, §6) (sealed).

4. The August 1995 Internet-Sign Up Wizard Referral Agreement with CompuServe - redacted - GX 1144, at MS6 5001138 (Exhibit B, Section 5) (sealed).

5. The December 1995 Internet Explorer Source License & Distribution Agreement with CompuServe required that Compuserve to "ship the Internet Explorer as its primary World Wide Web browser software client for Windows 95 . . . ." GX 1125, at MS6 5000091.

6. An August 1996 Internet-Sign Up Wizard Referral and Microsoft Internet Explorer License and Distribution Agreement with Earthlink - redacted - GX 1141, at MS6 5000015 (Exhibit C, § 6) (sealed).

7. A May 1996 Internet Explorer Addendum to Strategic Relationship Framework Agreement with MCI - redacted - GX 1132, at MS6 6008292 (sealed).

8. A September 1996 Promotion & Distribution Agreement with Prodigy - redacted - GX 1148, at MS6 50010000 (Section 3.1) (sealed).

9. Numerous Memoranda of Understanding that Microsoft entered with major OEMs in July and August of 1997 provided significant inducements for those OEMs to promote and distribute Microsoft's upcoming Internet Explorer 4 browser, which initially was offered and distributed wholly separate from any operating system release. See, e.g., GX 163 (under seal) (8/29/97 "Memorandum of Understanding ("MOU") re: Internet Explorer 4.0,"- redacted - GX 1166 (under seal) (7/21/97 MOU with DEC, similar language); GX 1168 (under seal) (8/8/97 MOU with Packard-Bell, similar language); GX 1171 (under seal) (8/20/97 MOU with Dell, similar language).

10. See also e.g., GX 856, at MS98 0100300 (Section 2.3(d)) (July 1997 Disney Active Desktop agreement); GX 1159, at TM 000057 (June 1997 Hollywood Online Active Desktop agreement); GX 1157, at MS98 0100570 (Section 2.2) (June 1997 Intuit agreement); GX 1153, at MS98 0100811 (Section 2.1(a)) (December 1996 Pointcast agreement); GX 855, at WD 0004 (Section 2.3) (July 1997 Wired Digital Active Desktop agreement); GX 1166 (July 1997 IE4 launch event agreement).

100. Similar references to Internet Explorer as a "browser" appear in Microsoft's internal and external correspondence right up to the present day.

1. Microsoft describes Internet Explorer 5.0 as a "smaller, faster, more stable browser." GX 688.

2. An Internet Explorer 5 OEM Marketing Review from May 1998 asserts that "IE has around 50% browser share," and that end users "view both browsers as parity products." GX 233, at MS98 0125654.

(2) Since litigation began, however, Microsoft has made a concerted effort to change its language in order to aid its legal position

101. Recently, however, in order to support its litigation position that Internet Explorer and Windows 98 are the same product, Microsoft officials have made a concerted effort to reposition Internet Explorer and change the terminology used by Microsoft personnel.

1. When Bill Gates was preparing to testify before the Senate in March 1998, he sent an e-mail to top Microsoft executives suggesting the need for a "survey . . . where ISVs declare whether they think having the browser in the operating system the way we are planning to do it makes sense and is good." GX 377, at MS98 0122148. Nathan Myrhvold responded that the survey was "a GREAT idea," but that "it is CRUCIAL to make the statement . . . worded properly. Saying 'put the browser in the OS' is already a statement that is prejudicial to us. The name 'Browser' suggests a separate thing. I would NOT phrase the survey or other things in terms of 'put the browser in the OS.' Instead you need to ask a more neutral question about how internet technology needs to merge with local computing. I have been pretty successful in trying this on various journalists and industry people." GX 377, at MS98 0122146 (emphasis in original).

2. That same month, James Allchin wrote to Yusuf Mehdi that he was "very concerned over how IE is presented in win98 (and NT5). Even the simple things like the About Box makes it appear separate. Furthermore, our IE web site needs a sweep . . . where we ensure it is clear th[at] IE is just a capability of Windows . . . ." GX 378. Mehdi responded that they were "making good progress reviewing the language of ie as a feature of windows with the web team. (we don't refer to it as a product or even browser, it is browsing software)." GX 378.

b. The recognition that browsers and operating systems are separate products reflects the marketplace reality that consumers, for a wide variety of reasons, demand operating systems and Internet browsers separately

102. Consistent with the universal recognition that browsers and operating systems are separate products and that different browsers have different characteristics, many consumers desire to separate their choice of operating system from their choice of browser.

1. Professor Fisher testified: "There is a market for Internet browsers. Before Microsoft gave away its browser for free, a price for browsers was determined in the market and the market could have continued to perform this function. There is substantial demand for browsers that is separate from the demand for operating systems. Browsers are distributed separately from the operating system by ISPs and by retailers. There is demand for operating systems without browsers and for operating systems with a choice of browsers." Fisher Dir. ¶ 80.

2. A survey conducted by Compaq in February 1998 of 283 PC decision makers at U.S. companies found that "About 80% of companies wipe or reformat the hard drives of new desktops. . . . The operating system re-installed most often are OSR2 and the retail version of Windows 95. Large businesses lean more toward the retail version of Windows 95," which does not include a browser. GX 1242, at 7.

3. Dell's Joseph Kanicki testified: "'Some businesses and government customers prefer not to have Internet Explorer pre-installed on their computers because, one, the customer may have its own software or software standards which do not include the latest version of Internet Explorer; two, the customer may wish to install a competitive browser instead of Internet Explorer; or three, the customer may wish to prevent its employees from accessing or attempting to access the Internet or World Wide Web.'" Kanicki Dep., 1/13/99, at 332:12 - 333:22 (quoting Kanicki Decl. ¶ 2).

(1) Some consumers demand browsers and operating systems separately because different browsers have different features and they prefer to obtain a PC containing only the desired browser

103. Although Netscape Navigator and Internet Explorer deliver roughly comparable functionality to the end-user, they are not identical. Each program has unique attributes that may appeal to different audiences, and there is considerable dispute as to which product's implementation of even their shared features is superior.

1. See infra Part V.B.3.c.(1)(a); Part V.B.4.c.

(2) Some consumers, particularly corporate customers, demand browsers and operating systems separately because they prefer to standardize on the same browser across many PCs and across different operating systems

104. Many corporations use a variety of different hardware and operating system platforms in various departments throughout their organization.

1. Scott Vesey of Boeing testified that "Boeing is a multi-platform company and that it supports computers that operate with a number of different operating systems," including Unix, Macintosh, and a variety of Windows platforms. Vesey Dep., 1/13/99, at 269:13 - 270:24.

2. Weadock testified that in his interviews, "some managers (including those at Informix, Ford, Federal Express, Boeing, and Morgan Stanley/Dean Witter) have stated that their organizations deploy a variety of operating systems and hardware platforms, and therefore prefer a browser having greater cross-platform availability and compatibility." Weadock Dir. ¶ 24a.

105. Such organizations experience significant benefits in the form of increased productivity and lower training and support costs from standardizing on one browser across all of their various hardware and operating system platforms.

1. Vesey testified that the "various browser standardization or browser acquisition decisions that Boeing has made" were "made separately from decisions about acquiring an operating system," and that he would "prefer" to have "the option of continuing to be able to choose what Web browser Boeing uses independently from any decisions Boeing might make about what operating system to use." Vesey Dep. (played 11/17/98am), at 52:12 - 53:14.

2. An internal Boeing presentation entitled "ARR 525 Recommendation: Windows Browser Evaluation" by Scott Vesey in October 1997 identified "[p]latform support" as a key issue and noted that "Solaris, HP-UX . . . and AIX are standard UNIX variants within Boeing, and that IE 4.0 for UNIX/Solaris would not be in production until Q1 98. In contrast, Communicator 4.0 was available on all platforms." GX 634, at TBC 000537.

3. Vesey testified that the "Netscape browser was a product that we could run across all of the platforms that we had currently installed in the Boeing company both Windows, Macintosh, and Unix workstations using a common software product with common user interface." Vesey Dep., 1/13/99, at 271:6-24.

4. Microsoft's Joe Belfiore testified that Microsoft makes the user interface of the cross-platform versions of Internet Explorer consistent with the Windows version to decrease training costs. Belfiore Dep., 1/13/99, at 369:13 - 370:21.

5. In discussing the benefits to organizations from having a standard word processor, a standard spreadsheet, or a standard web browser, Weadock testified that "[t]here are many benefits, many cost savings, and configuration savings. You have benefits to the user in terms of productivity. They don't get distracted. They -- they can learn one application and use that to do word processing or to do web browsing. There are also advantages in terms of technical support. You don't have to teach your technical support staff all about how to support two browsers. You can teach them how to support one browser because that's the standard in the company." Weadock, 11/17/98am, at 70:11-15; see also Weadock Dir. ¶¶ 38-39.

6. Joe Kanicki of Dell Computer explained that, in Dell's experience, corporations often want to standardize on a single browser for "stability and for support. The total cost of ownership for the corporation stabilizes. The more frequently products are revised, the more expensive it is or potentially could be for a corporation to stay up with those revisions." Kanicki Dep., 1/13/99, at 331:3 - 332:10

106. Standardizing on one browser also permits an organization to develop specialized internal applications or viewable content more cheaply and with confidence that those resources will be compatible with all its internal systems that focus on the Internet.

1. Vesey testified that "the single defining quality" that makes the web valuable to Boeing is the ability "to put an electronic document in one place and have it be accessible by virtually anybody, irrespective of platform." Vesey Dep. (played 11/17/98am), at 23:13-19.

2. Vesey testified that, if Boeing had to deploy both Navigator and Internet Explorer, its support costs would "'be higher due to a couple of things. Probably first and foremost would be that the potential for a web application developer to develop an application that depended specifically on a particular site, from the end user perspective that would possibly be the biggest impact. They would have to know . . . when I'm assessing this particular web site, I have to use this particular browser. And then if they tried to go to that site with an alternative browser, they wouldn't be able to render whatever content was available there. The other reason, the other essential reason, would have to do with . . . the local use of the software. On the Windows 95 desktop there is a default browser setting. And the default browser behavior, generally speaking, when you have IE 4 and Netscape 4 installed, you can alternate between having either set as the default browser. . . . In some cases, those default browser settings do become confused and can make it difficult for the user to get a particular browser configured as the default browser. So that can become confusing for end users." Vesey Dep., 1/13/99, at 288:2 - 289:11.

3. Glenn Weadock testified that "companies often develop intranets designed to work with a -- with a particular browser." He also testified that "if something works and looks right in Navigator, it may not work and look right to employees who are running Internet Explorer." Weadock, 11/17/98am, at 73:15-19.

4. Weadock testified that users sometimes "develop their own applications that (if useful and well designed) may spread throughout an organization. The development of intranets internal company networks based on Internet technologies has accelerated this trend. The greater the degree of software standardization, the greater the likelihood that such user-developed applications can work properly throughout the organization." Weadock Dir. ¶ 38.

5. Weadock testified that "some organizations develop their own custom software that only works with a particular browser, and that compatibility with that custom software may provide an ongoing motivation to use that particular browser." Weadock Dir. ¶ 24c.

107. For these reasons, a company that desires to standardize on a single browser across several different hardware and operating system platforms will want to make its browser choice independent of the decision to purchase any one operating system.

1. Weadock testified: "If a company is deciding, in part at least, on which browser it wants to standardize on, based on a variety of hardware platforms in the organization running different operating systems, then it's a very short logical jump to state that companies are making this browser decision independent from the decision that they make about any one operating system." Weadock, 11/17/98am, at 16:8-15.

2. Based on his research and interviews with corporate information managers, Glenn Weadock testified that organizations generally want to make browser decisions and operating system decisions separately. Weadock Dir. ¶ 21; see also Vesey Dep. (played 11/17/98), at 52:12 - 53:14 (Boeing). Weadock testified that there is substantial demand for the original (retail) version of Windows 95 among corporations, "[b]ecause they have the greatest control over what applications they can install onto it, because it is the cleanest version of Windows 95. It doesn't contain software that they don't want. And, in particular, it doesn't contain Internet Explorer, which they may not want." Weadock, 11/17/98am, at 62:12-20; Weadock, 11/16/98pm, at 24:23 - 25:4 (testifying that some users may elect to forego the technological advances of later versions of Windows and use the retail version of Windows 95 because it did not come with a web browser).

108. Microsoft recognized this separate demand for browser standardization across, and independent of, demand for operating systems.

1. David Cole urged his Win32 Internet Explorer 4 team to assist the teams working on the Win16, Unix and Mac versions of Internet Explorer since "[g]etting the cross platform versions done is key to market share on all platforms, including Win32." GX 60, at MS7 004624.

2. A January 1998 draft of a Transition Plan for Internet Explorer 5 for Macintosh included the following: "Microsoft has now put out several versions of Internet Explorer on several platforms. While the win32 version of IE has continued to make serious strides in terms of functionality, and major inroads in terms of market share, the cross-platform versions have not made the same market share gains. While the lack of cross-platform market share is troubling, the negative impact on win32 IE market share is unacceptable . . . . As we talk to more and more customers, it is becoming increasingly apparent that the cross-platform browsers directly affect overall IE market share exponentially." GX 370, at MS98 0121263.

3. In November 1997, Brian Hall reported on a focus group study of Internet Explorer 4 and Navigator 4 users, listing as a "key takeaway" that "The desire is for one 'core browser' with similar UI and same content and feature support across platforms." GX 219, at MS7 006361.

4. Paul Maritz wrote in a June 1996 e-mail: "We have no desire to sell anything on UNIX. However, owing to customer demand, we are going to have to provide an IE solution on UNIX." GX 653, at MS98 0156372.

5. According to Microsoft's own data, corporations "want our offerings to be as consistent as possible" "to avoid confusion among their users and support staff . . . [t]hey want uniformity on authoring, deployment, management, and general browser user interface." GX 217, at MS98 0109147.

(3) Some consumers demand browsers and operating systems separately because they may wish to upgrade one without upgrading the other

109. Many consumers and OEMs demand browsers and operating systems, including Internet Explorer and Windows, separately in order to have the ability to upgrade the operating system without changing browsers.

1. Microsoft's Bill Veghte testified that Microsoft considered shipping Windows 98 with Internet Explorer 3 instead of Internet Explorer 4, because there was OEM demand for hardware-related improvements like USB support that were ready for inclusion before IE4 was completed. Veghte Dep., 1/13/99, at 783:2 - 786:8.

2. Gateway's James Von Holle testified that Gateway asked Microsoft to release support for new hardware devices, including "AGP graphics, DVD disks, and dual displays," for Windows 95, instead of holding those features for Windows 98. Von Holle Dep., 1/13/99, at 302:6 - 303:12.

3. An internal Gateway list - redacted - GX 357, at GW 026522 (sealed).

4. Dell's Joseph Kanicki testified that when customers who do not have the current version of Internet Explorer are updating their operating systems, they may not want to upgrade to the new version of Internet Explorer. Kanicki Dep., 1/13/99, at 335:17 - 336:2.

110. Conversely, consumers may want to obtain upgrades to their browser application software without altering their operating system.

1. As Glenn Weadock testified, "changing operating system software has a greater potential for creating problems than changing a single application does, inasmuch as all applications rely on the operating system" and a change to the operating system "can cause unwanted problems with other applications still residing on the system, or confusion among users now confronted with changes to the operating system." Weadock Dir. ¶ 32g.

2. Microsoft's Chris Jones acknowledged that customers may want to get "the latest browsing technology" but have their "start menu and task bar . . . remain the same." Jones Dep., 1/13/99, at 552:22-24.
3. Veghte testified that it remains important for Microsoft to ship Internet Explorer 5 as a separate product "because there will be a class of customers that may want to get those capabilities without upgrading their operating system." Veghte Dep., 1/13/99, at 787:5-13 (emphasis added).

(4) Some customers demand browsers and operating systems separately because they want no web browsing capability at all

111. Some consumers demand browsers and operating systems, including Windows and Internet Explorer, separately because they want no web browsing capability at all. Not all PC users want browsers, but all need operating systems.

1. Microsoft's David Cole acknowledged that Microsoft "had feedback from corporate customers that wanted to prevent access to the Internet, so when . . . they buy a new machine from a PC manufacturer, they want the ability to remove easy access to the Internet so their employees, you know, aren't spending their time out on the Web doing whatever." Cole Dep., 1/13/99, at 395:1-20.

2. Joseph Kanicki from Dell testified that he believed some of Dell's customers did not want Internet Explorer because "the customer may wish to prevent its employees from accessing or attempting to access the Internet or World Wide Web." Kanicki Dep., 1/13/99, at 333:11-22.

3. Weadock testified that some organizations "may wish to make it difficult for certain employees to access the public Internet, in order to reduce the amount of unproductive time employees spend 'surfing the Net' on subjects unrelated to their jobs. Without a browser, accessing the Internet's World Wide Web is impractical." Weadock Dir. ¶ 23a.

4. Sun's Curtis Sasaki testified that "many corporate customers . . . want to restrict their user's access to the web" and that Sun has been told by various customers, including the Florist Trade Bureau and several universities, that "many of them did not want their employees to have access to web browsing." Sasaki Dep. (played 12/16/98pm), at 26:25 - 28:22.

5. Soyring testified that "[some] enterprise customers want to control the applications which can be used by employees in the enterprise, and do not want employees to spend time 'surfing the internet.'" Soyring Dir. ¶ 17.

6. When asked whether he was "aware of any customers who did not want to install the Web browser because they didn't want their customers surfing the web," IBM's Jeffrey Howard answered that "I am aware that we did have requests coming in from our field personnel that talked to those large customers who reported back to use that they wanted to restrain, you know, what applications customers could get to, and specifically having their employees sitting and surfing the Web on work time was a fear that was sometimes voiced." Howard Dep., 8/31/98, at 115:20 - 116:6 (DX 2572).

7. Packard Bell/NEC's Mal Ransom testified that "Typically, our corporate customers don't want or don't necessarily want access to the Internet or browser loaded on their employees' machines, so they've got the choice of what they do." Ransom Dep. (played 12/16/98pm), at 74:4-8.

8. Compaq's John Rose estimated that only 70% of businesses are running a web browser on their desktops. Rose, 2/18/99pm, at 53:22 - 54:3.

9. Sun's James Gosling testified that for systems without a display, like a server, a customer would have no use for a browser. Gosling, 12/10/98pm, at 60:17 - 61:2.

111.1. Even in organizations that use the Internet regularly, there will usually be at least some employees who do not need browsing functionality.

1. IBM's John Soyring testified, for example, that some of IBM's customers wanted OS/2 without a browser for "systems used by baggage handlers or bank tellers." Soyring Dir. ¶ 17.

2. Weadock testified that "even when we look at a company that is investing heavily in intranet technology, such as Federal Express, . . . they don't necessarily have browsing software or browsers on all of their PCs. There are just some categories of users who may have no need to access an intranet or the Internet." Weadock, 11/16/98pm, at 15:15-25.

111.2. Although a corporation might restrict an employee's access to the Internet in other ways, such as by removing the modem or ethernet connector from certain PCs or by limiting Internet access to a proxy server, such alternatives are often less efficient than simply using a PC without a browser.

1. Weadock testified that an employee might need a modem installed for dial-up telecommuting, even if the employer wished to restrict his or her access to the Web. Weadock, 11/17/98am, at 41:17 - 42:16.

2. Weadock also testified that "those methods don't address the resource use issues of having browsers on the . . . PCs. They also don't address the issues of user confusion that might arise from attempting to run software that is there and perhaps accessible, even though I've tried to remove it and couldn't, and then pick up the phone and call the Help desk and say, 'Hey, What's this?' So there are lots of reasons, other than just resource use, that companies may want no browser software on a PC. It's generally accepted practice among IT managers in businesses large and small to put the least amount of software on a computer that will do what their users need to do. You just save all kinds of costs that way, all the way from resource use to support and training." Weadock, 11/17/98am, at 42:3-16.

3. Jeffrey Howard testified that there are other ways to prevent users from browsing the Web from OS/2, but that "most customers, particularly in the Warp Version 3 and Warp Connect time frame, usually found hard disk space to be at a premium and tried to have the minimal amount of code that they could installed on the desktop machine itself just from a management standpoint and from a support standpoint, because you needed the space available for swap files and paging, et cetera." Howard Dep., 8/31/98, at 118:21 - 119:4 (DX 2572).

(5) OEMs are surrogates for end users; and thus, for the above reasons, they too demand browsers and operating systems separately

112. Because the personal computer OEM industry is extremely competitive and OEMs must satisfy consumer demand to stay in business, OEMs also demand browsers and operating systems, including Internet Explorer and Windows, separately.

1. Gateway repeatedly asked Microsoft for a version of Windows 98 with web browsing uninstalled, in part because they were "concerned that the installation of the full MS product (including channels) results in a much slower system performance if the customer chooses an alternate browser after full installation on IE4." GX 1073, at MS 98 0204593.

2. Jon Kies testified that Packard Bell/NEC took advantage of the January 1998 stipulated remedy to offer some of its PC models without Internet Explorer. Kies Dep. (played 12/16/98am), at 6:11-19.

3. Kanicki testified that because Dell's customers "may wish to install a competitive browser instead of Internet Explorer," Dell's license agreement with Microsoft permits it "to install a competitive browser on a machine that is shipped with Windows 95 or Windows 98." Kanicki Dep., 1/13/99, at 336:4-19.

4. Mal Ransom testified that because many of Packard-Bell/NEC's "commercial customers don't want access to the Internet or browser loaded on their employees' machines," for the Versa line of notebook computers those customers "get the choice of which browser to pre-install," if any. Ransom Dep. (played 12/16/98pm), at 73:13 - 74:11.

5. Compaq also made efforts to satisfy its customers' demand for browsers other than Internet Explorer. See infra Part V.B.2.c; ¶ 130.1.

c. To satisfy this separate demand, firms -- including Microsoft -- have found it efficient to supply browsers and operating systems separately

113. To satisfy this separate demand, both operating system vendors and browser vendors supply browsers and operating systems separately.

(1) Internet Explorer and other browsers have been, and continue to be, supplied separately from operating systems

113.1. Browser suppliers have found it efficient to supply browsers separately from operating systems.

1. Netscape's Barksdale testified: "Indeed, Netscape does not sell any operating system products, and was able to sell millions of browser licenses to consumers and enterprises separately from any operating system." Barksdale Dir. ¶ 90.

2. James Gosling testified: "The HotJava browser is a software application that was released by Sun in 1995. At the time the HotJava browser was developed, Sun contemplated undertaking the revisions and improvements necessary to maintain it as a competitive product for desktop computers such as Windows PCs. However, after Microsoft announced that its Internet Explorer browser would always be given away for free, Sun concluded that it made little business sense at that time to compete vigorously to sell a consumer browser application to compete against a product that was being given away for free." Gosling Dir. ¶ 37; Gosling, 12/3/98pm, at 80:17 - 81:3 (testifying that Sun never sold HotJava "as a commercial browser" because, "given that the market price for browsers, those days, seemed to be zero, it hardly seemed like a sensible thing to do").

3. Dr. Warren-Boulton noted that "Opera, which has limited presence in some distribution channels, is distributed independently of an operating system product." Warren-Boulton Dir. ¶ 76.

113.2. Microsoft also found, and continues to find, it efficient to supply its browser separate from any of its operating system products in numerous channels.

113.2.1. Microsoft has consistently offered its Internet Explorer browser on a standalone basis at retail, by downloading, and through ISPs, OLSs and ISVs.

1. See supra Part V.B.1.a.(3); ¶ 99.

113.2.2. In response to competition from other browsers, and in order to satisfy demand for a standard browser product to run on multiple operating systems and thereby increase Internet Explorer's market share, Microsoft also created standalone versions of Internet Explorer that run on other operating systems and earlier versions of Windows.

1. A Microsoft focus group study in November 1997 shows that "Win32 browser qualities are reflected on to other platform version in users' minds" and users' desire "is for one 'core browser' with similar UI and same content and feature support across platforms." GX 218, at MS7 006353.

2. Chris Jones wrote in November 1995: "To compete with netscape, we need to have cross platform (Win3.1,Win32,Mac) clients which support the NT server (log-on, security, etc.)." GX 334, at MS98 0104685.

3. Barksdale testified: "To compete with Netscape, Microsoft began offering cross-platform versions of Internet Explorer." Barksdale Dir. ¶ 91.

4. James Allchin stated that Internet Explorer for the Macintosh is an application, and not a part of any operating system. Allchin, 2/2/99pm, at 13:8-12.

5. Dean Schmalensee testified that Internet Explorer for the Macintosh and for Windows 3.x are applications, and not part of the operating system. Schmalensee, 1/20/99am, at 20:14 - 21:9.

113.2.3. Except for minor differences to comply with user interface guidelines for those other systems, and evidencing that they respond to the same separate demand for Internet browsers, the non-Windows versions of Internet Explorer supply the same browsing functionality and "look and feel" to the end user as Internet Explorer for Windows 95/98.

1. Professor Edward Felten testified: "The Windows 98 and Solaris versions of IE Web browsing offer nearly identical user interfaces, and the MacOS version offers the same user interface modified to meet the user interface guidelines specified by Apple for Macintosh software." Felten Dir. ¶ 75; Felten Dir. ¶ 82 (testifying that a user's web browsing experience with the versions of Internet Explorer running on the Sun Solaris, Apple Macintosh, and Windows 98 is substantially similar).

2. Joe Belfiore testified that Microsoft makes cross-platform Internet Explorer to appeal to companies with non-Windows operating systems and makes the user interface of the cross-platform versions consistent with the Windows version to decrease training costs. Belfiore Dep., 1/13/99, at 369:13 - 370:21.

3. Microsoft created the cross-platform versions of Internet Explorer specifically to appeal to organizations that wanted to use the same browser across multiple platforms. See supra Part V.B.1.b.(2); ¶ 110.

(2) Operating system vendors -- at least those which, unlike Microsoft, lack market power -- supply operating systems separately from browsers

114. Operating systems are efficiently provided separate from browsers, and every operating system vendor other than Microsoft supplies operating systems separately.

(a) Some operating system vendors offer consumers the choice of licensing the operating system without a browser

115. A number of operating system vendors offer consumers the choice of licensing the operating system without a browser.

115.1. Sun does not bundle any browser with its JavaOS operating system.

1. Sasaki testified that Sun licenses its JavaOS product separately from its HotJava browser; "the product Java OS ships to our licensees, our licensees can also license the browser technology [called HotJava], and its up to them to decide whether or not they include it in their product or not." Sasaki Dep. (played 12/16/98pm), at 21:25 - 23:6. Sasaki also testified that the price of JavaOS does not include a browser (Sasaki Dep. (played 12/16/98pm), at 26:8-16) -- and that only 21 out of Sun's 36 JavaOS licensees also licensed the HotJava browser. Sasaki Dep. (played 12/16/98pm), at 26:17-24.

115.2. Lucent offers an unbundled option.

1. James Frasca testified that Lucent's "view is that the web browser is part of the application suite, not the operating system" and that Lucent has licensed versions of Inferno without a web browser. Frasca Dep., 1/13/99, at 137:15-19; Frasca Dep., 1/13/99, at 141:19-22; Frasca Dep., 1/13/99, at 143:8-9; Frasca Dep., 1/13/99, at 144:16 - 145:9 (Lucent would license to a hardware OEM a version of the Inferno product without the browser if the OEM wanted to distribute a third-party browser).

115.3. Santa Cruz Operation offers an unbundled version of its operating system.

1. With Unixware 7, a multi-user product, SCO bundles only "a single-user license for the administrator to read Online Doc and to manage the web server." Additional browser licenses for additional users must either be purchased from SCO "as an optional product" or acquired elsewhere. Rasmussen Dep. (played 12/15/98am), at 59:23 - 60:15.

115.4. Caldera offers an unbundled version of its operating system.

1. Bryan Sparks testified that Caldera allows OEMs to offer an unbundled version of its operating system. He explained: "It doesn't make sense for us to" require OEMs to include the browser. He continued: "The reseller knows what the customer needs better than we do. He is closer to the customer. We let him decide that. He is buying the boxed product and has the browser, but we don't mandate that he install it or configure it, if he doesn't wish to." Sparks Dep. (played 12/16/98am), at 50:12-23.

(b) Operating system vendors other than Microsoft sometimes bundle one or more browsers with their systems but allow VARs, OEMs, or end users to remove them or not to install them

116. Operating system vendors that lack Microsoft's monopoly power, and hence its incentive to engage in anticompetitive conduct that thwarts consumer demand, do not impose contractual or technical restrictions on OEMs' or end users' ability to remove a browser.

116.1. No operating system vendor other than Microsoft places restrictions on its customers' ability to remove an unwanted browser.

1. Allchin testified, "as I sit here today, I don't know of any" operating system vendor other than Microsoft that bars its customers from removing any browser. Allchin, 2/3/99am, at 45:11-19.

116.2. Even when other vendors offer a browser with their operating system, they allow OEMs and end users to remove it or not to install it.

116.2.1. Although IBM includes a browser as an application in its OS/2 Warp version 4 operating system package, the installation process allows the user to choose whether or not to install it. IBM also permits any other OEM or value-added reseller (VAR) selling computers with OS/2 to remove the browser before the sale.

116.2.1.1. IBM does not consider the browser to be part of the operating system.

1. John Soyring testified on cross-examination that IBM's Web Explorer "is not part of the OS/2 operating system itself. . . . We did develop it separately as a separate program. It is included in the OS/2 Warp product package. And we set it up as a selectively installable and selectively removable application program that can be either used with or not with OS/2." Soyring, 11/18/98am, at 21:12 - 22:2; see also Soyring Dir. ¶¶ 14-18.

2. Soyring also testified that OS/2 performs properly as an operating system whether or not any web browser is installed. Soyring, 11/18/98pm, at 78:5-7.

116.2.1.2. IBM permits users to not install or to remove their browsers.

1. Soyring testified that users of IBM's OS/2 operating system have always been free not to install "Web Explorer," to remove that browser after installation, and to install a competing browser if desired. Soyring, 11/18/98pm, at 77:12-17.

2. IBM's Dana O'Neal testified, " - redacted - O'Neal Dep., 8/31/98, at 72:3-7 (DX 2578A) (sealed).

116.2.1.3. IBM makes the browser removable from its operating system because it recognizes that there is a separate demand for browsers and operating systems.

1. Jeffrey Howard testified that he was "aware that we did have requests coming in from our field personnel that talked to those large customers who reported back to us that they wanted to restrain, you know, what applications customers could get to, and specifically having their employees sitting and surfing the Web on work time was a fear that was sometimes voiced." Howard Dep., 8/31/98, at 115:20 - 116:6 (DX 2572).

116.2.1.4. IBM includes a browser in its packaging for OS/2 for the same reason it bundles other applications like a word processor: because it helps convince customers that key applications exist for OS/2, which is necessary in order to overcome the applications barrier to entry.

1. Soyring testified that IBM chose to bundle Netscape Navigator in particular with some later versions of OS/2 "because, at that time, its brand was the most popular brand recognition in the industry. And, again, it goes back to the problemg we were facing before in that not--popular applications just hadn't been buil[t] for OS/2. So we thought by, one, delivering customers earlier, and, secondly, getting a major brand to recognize and adopt the OS/2 operating system by offering a product would be an additional spur for--or stimulant to sell additional OS/2 copies. So we entered into a licensing agreement. We spent millions of dollars with Netscape to be able to make that happen and we packaged it as part of the next generation of OS/2 Warp, which is OS/2 Warp 4 in the shrink-wrapped product." Soyring, 11/18/98am, at 39:3-19; Soyring, 11/18/98am, at 44:9 - 45:1 (explaining that the same reasoning drove IBM to bundle word processing, spreadsheet, database, and personal information management applets in OS/2); Soyring, 11/18/98pm, at 75:10-21 (discussing users' perceptions that they would have "a difficult time finding applications" for OS/2).

116.2.2. Apple bundles both Internet Explorer and Netscape Navigator with the MacOS but permits both end users and value added resellers to delete either or both.

116.2.2.1. Apple does not consider a browser to be part of the operating system.

1. Tevanian's definition of an operating system says nothing about browsing capability. He defined an operating system as "the primary software that controls a computer. The operating system provides various basic services for a computer such as process management, user interaction, data management for the hard disk, network interfaces and control of peripheral devices such as printers and keyboards." Tevanian Dir. ¶ 8.

116.2.2.2. Apple allows users and resellers to remove either Navigator or Internet Explorer or both if they wish and does not "hard-code" anything in its operating system to require the use of a particular browser.

1. Apple's Tevanian testified: "The Mac OS operating system will continue to function if either or both of these browsers are removed. As noted above, we permit value-added resellers ('VARs') the flexibility to reconfigure our systems to meet their direct customers' needs. We provide VARs the flexibility to remove browsers or other applications, and to reconfigure the Macintosh desktop to address what they perceive to be their customers' desires." Tevanian Dir. ¶ 26.

2. After the Court asked Tevanian whether it is "possible for you to extricate your browser from operating system without otherwise impairing the operation of the system," Tevanian replied, "Yes, other than you can't browse the web." Tevanian, 11/5/98pm, at 67:10-15; Tevanian, 11/5/98pm, at 70:9-17 (testifying that the operating system would remain intact).

116.2.2.3. Apple allows users to remove the bundled browsers because it understands that there is separate demand for browsers and operating systems.

1. Upon being asked whether he felt that there was a "separate market" for Internet browsers, Tevanian stated that he thought "it's fair to say there is a market. There are some people who, first, they would select the operating system; then they might select the browser, and not want to make the decision together. So in that sense, it's separate from the desktop computer market in general." Tevanian, 11/4/98pm, at 18:3-22.

116.2.3. Sun bundles its "HotJava" browser with its Solaris operating system but permits end users to remove that application.

116.2.3.1. Sun does not consider a browser to be part of the operating system.

1. Curtis Sasaki's definition of an operating system says nothing about providing browsing capability. He says that an operating system includes "a kernel which controls how things are managed in terms of memory. It also controls the I/O functionality, such as talking to a network, talking to your keyboard, displaying things on the screen. So, that's called device drivers. So all of that is what I would consider an operating system, as well as a set of APIs which are on top, which application developers write to." Sasaki Dep. (played 12/16/98pm), at 17:16-25; Sasaki Dep. (played 12/16/98pm), at 26:8-10 ("Q:: Is the browser part of the operating system? A: No. It's separate. Q: When--are--does the price of the Java OS product include a browser? A: No. It does not. Q: Are there separate prices for browsers? A: That's correct.").

2. Sun's James Gosling similarly excludes browsing capability from his defintion of an operating system. He says that an "operating system has two primary functions: (1) to interact with and control the computer's processor and other hardware (monitors, keyboards, disk drives, etc.); and (2) to interact with, and execute instructions from, software applications, generally through a series of applications programming interfaces known as 'APIs.'" Gosling Dir. ¶ 8. Based on this definition, Gosling concludes that "the browser is best understood as a software application, not as part of a computer's operating system." Gosling Dir. ¶ 38; Gosling, 12/9/98pm, at 30:23 -31:9.

116.2.3.2. Sun permits and makes it easy for end-users, VARs, and OEMs to remove bundled browsers from the operating system if they so desire and does not "hard-code" anything in its operating system to require the use of a particular browser.

1. Gosling testified that Sun included the "HotJava" browser on the CD-ROM with its Solaris operating system, but "it was absolutely a replaceable, repluggable application. We didn't tell anybody that it was nonremovable, like any of the other pieces that happened to be there. Customers can and do use replacements for just about everything." Gosling, 12/9/98am, at 38:16-25.

2. Brian Croll testified that when an OEM or a VAR licenses Solaris 2.6, it is not required to ship the HotJava browser to its end user customers. Sun provides two means for OEMs and VARs to offer an unbundled version of the operating system: "At one level you can choose not to add that package which has the Java browser as well as other things, if that's the first choice. Then the second choice is, once you have loaded it, you can go through the de-install process to take away." Croll Dep. (played 12/15/98pm), at 66:22 - 68:4.

3. Moreover, Croll testified that OEMs and VARs are permitted to supply their end user customers with additional browsers or a different browser if they choose to do so because "there is no reason for us to keep them from doing that." Croll Dep. (played 12/15/98pm), at 68:5-13.

4. Curtis Sasaki stated that when the Java OS is in use on a network, "the system administrator . . .can remove the browser and not affect Java OS." Sasaki Dep. (played 12/16/98pm), at 29:3 - 30:7.

116.2.3.3. Sun allows users, VARs, and OEMs to remove bundled browsers because it understands that there is separate demand for browsers and operating systems.

1. James Gosling testified that he could not think of "any plausible technical reason to design Windows 98 in a way that makes it difficult to remove Internet Explorer." By contrast, Gosling proposed several reasons "why it would be desirable to design the operating system so that the browser could be removed," including the facts that users might want to deploy their operating systems without displays (e.g. as a server), they might want to replace their browsers with superior products, or they might want to utilize specialized browsers, such as a browser designed for persons with visual impairments. Gosling, 12/10/98pm, at 60:10 - 62:1.

2. Croll testified that the Web Start and Answer Book 2 features of the Solaris operating system do not require the use of the HotJava browser that is bundled with the OS in order to function "because we assume that after the operating system is loaded for the first time that customers are going to want to have other browsers." Croll Dep. (played 12/15/98pm), at 64:23 - 65:12.

116.2.4. The Santa Cruz Operation (SCO) bundles Netscape Navigator with its products but permits customers to choose whether to install or remove it.

116.2.4.1. SCO does not consider a browser to be part of the operating system.

1. When asked whether any browser product is part of the core of any SCO operating system product, Ron Rasmussen answered no. "Our view is that the browser is an application." Rasmussen Dep. (played 12/15/98am), at 64:13-20.

2. Rasmussen testified that SCO "bundles" Netscape Navigator with its OpenServer and Unixware products, (Rasmussen Dep. (played 12/15/98am), at 54:10 - 56:18) but that "Our view is that the browser is an application." Rasmussen Dep., (played 12/15/98am), at 64:20. Rasmussen also testified that "When SCO says 'we bundle a feature,' it means it's a feature which is not part of the core base operating system functionality. It means that it's something that the user can choose to install or remove, and the operating system, whose primary function it is to serve applications, will still function properly." Rasmussen Dep. (played 12/15/98am), at 55:14-19.

116.2.4.2. SCO permits end users, VARs, and OEMs to remove bundled browsers from the operating system if they so desire and does not "hard-code" anything in its operating system to require the use of a particular browser.

1. Rasmussen testified that there are a number of ways to remove the bundled browser from Unixware 2.1.3: "The first way is during installation of the operating system, the browser can be deselected so it never does get installed on the system -- on the hard disk of the computer." Moreover, "[i]f they chose to install Navigator as part of the operating system installation, they can go back in with a utility to do software removal and they can, again -- they get a point-and-pick list and they can select it for removal." Rasmussen Dep. (played 12/15/98am), at 60:21 - 62:7.

2. Rasmussen further testified that Navigator is uninstallable and/or removable from Unixware 7 "in the same fashion" as from Unixware 2.1.3. Rasmussen Dep. (played 12/15/98am), at 62:15-24.

3. Similarly, Rasmussen testified that Navigator is optional on Open Server Release 5 as well: The browser is "removable both at initial system load time so it never gets onto the system, and it's also removable afterwards if you chose during initial system load to install it." Rasmussen Dep. (played 12/15/98am), at 62:25 - 63:6.

116.2.4.3. SCO allows users, VARs, and OEMs to remove bundled browsers because it understands that there is separate demand for browsers and operating systems.

1. Rasmussen testified that the reason SCO gives its users those options with regard to the web browser is that: "Not everybody wants the functionality in the operating system, so we provide them that option to remove it or install it at a later time." Rasmussen Dep. (played 12/15/98am), at 62:25 - 63:18. Rasmussen further explained that "people are buying the operating systems to run applications, and if their application does not require a web browser, then perhaps they don't want the web browser there. So if you're running an accounting application and you don't need the web browser, perhaps you don't want to install it to save space on the disk, or, in some instances, we've had resellers tell us they consider the web browser an unproductivity tool as people surf the web rather than doing their work." Rasmussen Dep. (played 12/15/98am), at 63:19 - 64:6.

116.2.5. Operating system vendor Be, Inc., bundles the only browser currently available with its BeOS but permits users to remove it.

116.2.5.1. Be does not consider a browser to be part of the operating system.

1. Although both Be and Microsoft's James Allchin describe the Net Positive browser as an "integrated browser," Be refers to Net Positive as an application and lists it in the "apps" directory on the computer. Allchin, 2/2/99am, at 14:3-11.

116.2.5.2. Be permits end-users, VARs, and OEMs to remove bundled browsers from the operating system if they so desire and does not "hard-code" anything in its operating system to require the use of a particular browser.

1. The Net Positive browser can be removed from the BeOS. Although Be's help system will not function fully in the absence of a browser, the help system will work if another browser or HTML renderer is installed after Net Positive is removed. Allchin, 2/2/99am, at 10:4 - 21:4.

2. Allchin acknowledged that removing the Net Positive browser from the applications directory frees up 1.3 megabytes of RAM on the BeOS applications directory. Allchin, 2/2/99am, at 13:5 - 19:20; GX 1771.

116.2.6. Novell bundles a browser with Netware but permits the user to remove it and use a third-party browser.

116.2.6.1. Novell does not consider a browser to be part of the operating system.

1. Novell's Sean Sanders defined "a desktop operating system" in a way that says nothing about browsing capability. He defined it as "a special set computer programs that allows for the management of . . . computing resources that a specific end user would use on their desktop PC. So it allows them to kind of--behind the scenes it does some management of the physical computer such as managing the memory, the disk drive and some of the other technical aspects that are included within the box. But it also provides a--kind of a--generally a friendly front end to the system that the user can manipulate to better use their software programs and the resources that are generally there specific to the desktop." Sanders Dep. (played 1/13/99), at 185:13 - 186:3.

116.2.6.2. Novell permits end-users, VARs, and OEMs to remove bundled browsers from the operating system if they so desire and does not "hard-code" anything in its operating system to require the use of a particular browser.

1. David Wright testified that the Netware 5.0 operating system will function without the browser. Wright Dep. 9/18/98, at 16:4-12 (DX 2601). Similarly, if the browser is initially installed and then uninstalled, the operating system will still function. Wright Dep., 9/18/98, at 16:13-18 (DX 2601).

2. When asked how the relationship between browser products and Novell's Netware differed from the relationship between Internet Explorer and Windows 98, Weadock testified: "It differs in several fundamental ways. For example, Netware as an operating system does not depend on any particular browser. The browser that comes on the Netware CD is used, for example, to access the help and documentation for the Netware product. Users -- customers that choose not to use that browser with Netware can remove it. Users that choose to use another browser, a different browser, can install a different browser. They can install Internet Explorer if they want. So in those key areas we see differences between how Novell, quote unquote, bundles Netware and a browser -- I mean, it's a very loose bundling and it offers the customer significant choices -- with what Microsoft is doing with Windows 98, in which the browser is nonremovable, in which the files associated with the browser do, in fact, disable the operating system if you go out and delete them one by one, and in which case the customer is not completely free to install an alternative browser because of the hardwired methods within the user interface of Windows 98 that still invoke Internet Explorer regardless of the actions that the customer may have taken to reverse or disable that choice." Weadock, 11/17/98am, at 47:1 - 48:1; see also Weadock, 11/16/98am, at 84:13-23.

116.2.6.3. Novell allows users, VARs, and OEMs to remove bundled browsers because it understands that there is separate demand for browsers and operating systems.

1. Sanders testified that, when a user installs the Intra-Netware product, they have a choice of whether or not to install Netscape Navigator. Sanders Dep., 1/13/99, at 186:10-16. Sanders explained that Novell's rationale for giving users this choice is that: "Some users do not have desire to use all of the functionality that comes in the entire bundle that is Intra-Netware, and as such, we provide them with the option to make those decisions as to what they would choose to use and not to use." Sanders Dep., 1/13/99, at 190:18 - 191:2.

116.2.7. Caldera gives users a choice of multiple browsers with its OpenLinux product but makes them easily and fully removable.

1. Caldera bundles the KDE browser on its OpenLinux operating system; in addition, "Netscape is preloaded by default onto those systems." Felten, 6/10/99am, at 26:1-20.

116.2.7.1. Caldera does not consider a browser to be part of the operating system.

1. Sparks testified that he does not consider any browser to be "part of the Linux operating system." Sparks Dep. (played 12/16/98am), at 50:8-11.

116.2.7.2. Caldera permits end-users, VARs, and OEMs to remove bundled browsers from the operating system if they so desire and does not "hard-code" anything in its operating system to require the use of a particular browser.

1. Professor Edward Felten testified that Caldera's KDE browser "is separable and removable and replaceable." Felten, 6/10/99am, at 25:12-17. When asked what his basis was for saying that the browser is separate from the operating system, Professor Felten answered: "Well, there are several reasons for saying that. First of all, the KDE browser is developed by a different organization than the one that develops the Linux operating system. . . . In addition, the Linux operating system works with other browsers. In fact, the OpenLinux works fine with Netscape, and Netscape is preloaded by default onto those systems. And, in addition, the KDE browser runs on other operating systems, such as Solaris, HP-UX and IRIX." Felten, 6/10/99am, at 26:1-18.

2. Allchin conceded that the browser bundled by Caldera comes from a different organization, KDE (Allchin, 2/1/99pm, at 73:5-15) and that the operating system will continue to work if it is removed. Allchin, 2/1/99pm, at 73:25 - 74:13.

116.2.7.3. Caldera allows users, VARs, and OEMs to remove bundled browsers because it understands that there is separate demand for browsers and operating systems.

1. Bryan Sparks testified that Caldera allows OEMs to sell a version of OpenLinux without a browser because: "Why wouldn't we? As long as we had a contract. I'm not in a position where I can be picky on customers that I can get. So if they wanted to customize it, they'd be happy to." Sparks Dep. (played 12/16/98am), at 50:24 - 51:8.

(c) Until recently, Microsoft likewise accommodated this separate demand by enabling users to remove Internet Explorer from Windows

117. Although Microsoft required OEMs and users to obtain Internet Explorer in order to obtain Windows, it nonetheless continued, until recently, to recognize separate demand for an operating system without a browser by supplying end users (although not OEMs) with a means of removing or "uninstalling" the browser.

1. See infra Part V.B.2.d.(4).(a); ¶ 139.

2. Microsoft tied Internet Explorer to Windows in order to impede browser rivals and protect its operating system monopoly

118. By contrast to other operating system vendors, Microsoft both refused to license its Windows operating system without a browser and imposed restrictions-- first contractual and later technical -- on OEMs' and end users' ability to remove its browser from Windows. As its internal contemporaneous documents and licensing practices reveal, Microsoft decided to tie Internet Explorer and Windows together in order to prevent Netscape from developing into a significant threat to Microsoft's operating system monopoly, and not for any pro-competitive purpose.

a. Before it decided to blunt the browser threat, Microsoft did not plan to tie its browser to Windows

119. Microsoft argues that it made the decision to build its own browser and bundle it with Windows 95 at an April 1994 retreat dedicated to Internet issues (Allchin Dir. ¶¶ 225-227). That argument is inconsistent with the evidence, which shows instead that Microsoft had no firm plans at that time to bundle its browser with the operating system.

119.1. Microsoft's internal correspondence and external communications from early to mid-1994 show that Microsoft was planning, at most, to bundle low-level Internet "plumbing" such as a TCP/IP stack, but not applications such as a browser, with Windows 95.

1. In response to a question about how to handle press and OEM inquiries concerning Microsoft's internet plans, Alec Saunders wrote in April 1994: "It's getting very confusing and at the moment a lot of external people are asking if we will be shipping internet apps. The position we have taken so far is that Chicago [Windows 95] contains all the plumbing you need to hook up to the net -- but cool apps like Mosaic are stuff you need to obtain from 3rd parties." GX 124.

2. A February 1994 email from David Cole to Bill Gates and other senior executives reporting on "Chicago beta 1 content" provides a detailed description of features of Windows 95 but does not mention integration or bundling of web browsing functionality. Its only mention of Internet support is a reference under the title "Networking" to "Complete TCP/IP support. A fast, protmode stack with no low memory requirements. A full set of TCP utilities. Windows Sockets support for 16 and 32-bit apps. DHCP support for 'plug and play' TCP/IP networking." GX 597, at MS98 0010791.

3. Steven Sinofsky wrote in June 1994: "We do not currently plan on any other client software [in the upcoming release of Windows 95], especially something like Mosaic or Cello." In fact, Microsoft's goal at the time was to "get[] as many third parties writing as many internet things on top of WinSock as posible, including as many WWW, Gopher, TN3270, etc clients as they can afford to do." GX 125.

4. A November 1994 draft of a "communications story" for marketing Windows 95 made no mention of inclusion of an Internet browser, claiming only that Windows 95 "supports popular Internet applications, such as Mosaic, WinWAIS or WinGopher." Brad Chase responded that "i don't think we deliver what you say. I think integration is impt but we don't really integrate. You still use a phone for example. You have to get some third party program to actually have a UI into the Internet." GX 601.

119.2. Microsoft publicly stated throughout 1994 that Windows 95 would not include a browser.

1. A November 1994 marketing brochure entitled "Microsoft Windows 95 Questions and Answers" responds to the question "Can Windows 95 connect to the Internet?" as follows: "Yes. Windows 95 includes the networking support you need to connect to the Internet. It includes a fast, robust, 32-bit TCP/IP stack . . . as well as PPP or 'dial-in' support. Windows 95 supports the large number of tools used to connect to the Internet, such as Mosaic, WinWAIS, and WinGopher, through the Windows Sockets programming interface. Windows 95 also includes standard Internet support, such as telnet and ftp." GX 398, at MS98 0107100.

119.3. The testimony of Phillip Barrett, a former Microsoft employee who was responsible for the early development of Internet Explorer, confirms that Microsoft had no genuine plans to bundle a browser with Windows 95 in 1994.

1. Barrett testified that he attended the April 1994 "offsite" at which the subject matter was "what was Microsoft going to do about the internet." (Barrett Dep., 1/13/99, at 100:3-14) and participated in a "breakout" session led by Bill Gates and also including Brad Silverberg and John Ludwig (Barrett Dep., 1/13/99, at 101:14-18) which focused on "the internet service providers and the necessary plumbing--plumbing being the infrastructure--to allow large numbers of people to get online and use the internet." Barrett Dep., 1/13/99, at 101:21-25.

2. Barrett testified: "The plans were to put a TCP/IP pack . . . and then dial up modem support" into either Windows 95 or a subsequent service pack. Barrett Dep., 1/13/99, at 106:9-14. Barrett does not "recall any discussions taking place" about building a web browser into Windows 95, (Barrett Dep., 1/13/99, at 107:2-4) and testified that, to the best of his knowledge, no such plans had been made by the conclusion of the retreat. Barrett Dep., 1/13/99, at 107:24. Barrett testified that Bill Gates' assertion that Microsoft decided to integrate a web browser into Windows 95 at the April 1994 retreat "is not consistent with my memory of the retreat." Barrett Dep., 1/13/99, at 111:9-10.

3. Barrett testified that, after the retreat, he moved into the Windows group "to focus on Internet technology." Barrett Dep., 1/13/99, at 108:2-7. Barrett's new job was to "figure out a strategy" with respect to development of a web browser. Barrett Dep., 1/13/99, at 108:13-16. Barrett testified that he and his group did not develop a web browser and that at the time he left Microsoft in October 1994 he was not aware of any plans to develop a browser for inclusion in Windows 95. Barrett Dep., 1/13/99, at 108:21 - 109:9. Barrett also testified that Microsoft could not have had such formal plans without his knowledge, because they "would have fallen into [his] area of responsibility." Barrett Dep., 1/13/99, at 109:11-21.

120. Even after it became aware of the threat posed by Netscape's browser, and as late as June 1995, Microsoft had no firm plans to bundle its browser with Windows 95. Instead, Microsoft planned to ship its browser in a separate "frosting" package (eventually called Microsoft "Plus"), for which it planned to charge.

1. A January 1995 draft press release announcing the purchase of the Mosaic code stated: "At the present time there are no plans to ship. . . the Mosaic software in the Windows 95 box when it ships in August of this year. . . . Our plan is to deliver this capability shortly after Windows 95 ships." GX 138, at MS6 600545.

2. A document entitled "Top 20 Features Microsoft Windows 95" lists "Plumbing for the Internet" as number 13, and states that "Windows 95 . . . has all the necessary 'plumbing' built into the operating system, and provides you with all the necessary 32-bit drivers such as TCP/IP to access the net, dial up protocols such as [PPP and SLIP, and] built in tools and utilities to make the basic connections, such as FTP and telnet. Now you can access the internet directly, through the Microsoft Network, or add WEB browsing capabilities by adding Microsoft Plus! to Windows 95." GX 152.

3. In an email exchange with Ben Slivka on June 15, 1995, Brad Chase observed that "there is still an effort to throw this [Internet Explorer/O'Hare] into windows 95." Slivka responded that "[the u]pgrade schedule is pretty tight," and that "[i]f we're not in the upgrade, it makes our life easier, and we get more Plus revenue. . . :-)" GX 149.

4. Ben Slivka suggested to Brad Silverberg in April 1995 that Microsoft might not want to put Internet Explorer in the Windows 95 box because of size constraints. "Putting in the Web browser is possible, but it's 475k (compressed 170k), and it's not useful unless you're already online, and you're already struggling to fit on 12 disks." GX 146.

5. A June 28, 1995, update for Microsoft executives on the testing process for adding O'Hare to the OEM version of Windows 95 states that "we still don't have a firm go-ahead. Each 'Meeting to decide to do/not do this' becomes 'let's keep going and meet in two more days.'" GX 151.

6. Based on Microsoft's internal contemporaneous documents, and other evidence, Professor Fisher concluded that Microsoft made the decision to bundle Internet Explorer with Windows "no earlier than the middle of 1995." Fisher, 1/6/99pm, at 26:7-8.

b. Microsoft changed its plans, and decided to tie its browser to Windows, in order to impede Netscape

121. In late 1994 and early 1995, however, executives within Microsoft began to realize that the popularity of Netscape's browser posed a serious threat to Microsoft's operating system monopoly.

1. See supra Part III.B.2; ¶ 56.

122. As a result, Microsoft decided that gaining a large share of the Windows 95 browser usage market was the best way to prevent Navigator from developing into a genuinely competitive rival platform.

1. See supra Part V.A.

123. Microsoft considered a variety of strategies for rapidly gaining a large share of the browser market and, as explained, tried to coerce Netscape into abandoning its Windows 95 browser business altogether.

1. See supra Part IV.A.

124. But in early 1995 Microsoft executives also began to consider bundling Internet Explorer with the upcoming release of Windows 95 and forcing OEMs to take it.

1. In an April 1995 email, Brad Silverberg told Ben Slivka and John Ludwig that "I have spoken to Paulma and he is in agreement that we should get our Internet client distributed as broadly as possible as soon as possible. What this means is that I want Ohare in Win95." GX 608.

2. A June 1995 summary prepared by John Gray of a meeting discussing the issue reports that they "[t]enatively decided to procede on path of putting Ohare and Rome into initial OEM products but NOT in retail." GX 612, at MS98 0122185.

125. Microsoft's motive in tying Internet Explorer to Windows 95 (that is, in refusing to offer OEMs the option of licensing Windows without the browser) was to thwart the platform threat posed by Netscape's browser.

1. On June 23, 1995, John Ludwig wrote to Paul Maritz and others that "obviously netscape does see us as a client competitor. i'm glad you didn't tell them many specifics. we have to work extra hard to get ohare on the oem disks." GX 623.

2. In April 1995, Rick Rashid of Microsoft wrote to Paul Maritz that "[j]ust as they [Netscape] are a threat to us, we are a threat to them. Our best interest is served by effectively eliminating the special browser and special server model altogether and making the Windows desktop the 'browser' and Windows NT the 'server.'" GX 521.

3. Allchin conceded that he believed that including Internet Explorer in the OEM version of Windows 95 would be a way to help increase Internet Explorer's market share. Allchin, 2/3/99am, at 56:7-11. "The sooner we got it to everybody, the better off we would be. That was absolutely believed. And we were going to distribute it through every vehicle we could." Allchin Dep. (played 2/3/99am), at 58:2-5; Allchin, 2/3/99am, at 58:9-22.

4. Dr. Warren-Boulton testified that "if, indeed, Windows 98 were provided separately and distinctly without browser functionality, that given what I understand to be the costs, incremental costs, of providing it separately and given what I understand to be the potential demand for the product to be provided separately, that it would be profitable to provide that product separately." However, "because of Microsoft's incentive to control the browser market, what would otherwise be profitable to sell as a separate product is not being sold as a separate product." Warren-Boulton, 11/24/98pm, at 37:3 - 38:2. "A monopolist of an operating system has a particular incentive not to allow the market to have, if you like, a level playing field choice." Warren-Boulton, 11/24/98am, at 59:10-12.

5. Based on the contemporaneous internal Microsoft documents, and other evidence, Professor Fisher concluded that "Microsoft made its decision to combine its browser and operating system not to achieve efficiencies but to foreclose competition." Fisher Dir. ¶ 143; Fisher, 1/12/99pm, at 10:21 - 11:3 (testifying that "it's all over the Microsoft documents. They did this in order to thwart the platform threat, in order to prevent the possibility that Netscape and Java would lead to a situation in which the applications barrier to entry into operating systems would be eroded.").

c. Microsoft used its operating system monopoly to compel OEMs licensing Windows 95 also to license Internet Explorer 1 and 2

126. Reflecting Microsoft's very late decision to tie Internet Explorer to Windows to combat the Netscape platform threat, the first version of Windows 95 for the retail channel did not include Internet Explorer. Microsoft offered Internet Explorer only in a separate "plus pack" CD that it distributed entirely separately from Windows 95.

1. James Allchin testified that "Microsoft included Internet Explorer 1.0 in the OEM version of Windows 95, but not in the initial retail version. Rather, in the retail channel Internet Explorer 1.0 was included in the Plus! package, a set of software enhancements that Microsoft offered to customers upgrading to Windows 95. Allchin Dir. ¶ 247.

2. David Cole acknowledged that subsequent retail versions of Windows 95 came with Internet Explorer 1.0 and 2.0 on a separate disk; the primary disk contained the original version of Windows 95 that was released at retail in July 1995. Cole Dep., 1/13/99, at 401:10 - 402:25.

127. By contrast, Microsoft required OEMs to license a version of Windows 95 that included Internet Explorer 1 and, later, Internet Explorer 2. Microsoft required OEMs to install Internet Explorer on all PCs on which Windows 95 was installed and contractually prohibited those OEMs from removing the browser.

1. Amendment No. 2 to Microsoft OEM License Agreement for Operating Systems wth Dell Computer Corporation, - redacted - GX 1121 (sealed).

2. Compaq's John Rose conceded that Microsoft's contractual provisions required Compaq to include Internet Explorer with the PCs it shipped. Rose, 2/18/99pm, at 8:25 - 10:1.

3. Microsoft's operating system license agreement with Gateway, - redacted - GX 458, at MS98 0009146 (sealed); GX 652 (Gateway response to a CID) (sealed); GX 1129 (Amnd. No. 1 to Packard-Bell's operating system license with nearly identical provisions in the "Additional Terms," sections (a)(1) and (a)(1)(C)); GX 1183, at MS98 0009095-0009096 (Hewlett-Packard's license with nearly identical provisions in the "Additional Provisions Key," (sections (q)(a) and (q)(a)(iii)) (sealed).

128. Because the OEMs had no commercially viable alternative to Windows 95, Microsoft succeeded in forcing them to agree to its tying arrangement, despite clear demand from OEMs for Windows without Internet Explorer.

128.1. For instance, Compaq removed the Internet Explorer icon in part to feature Netscape; but, when Microsoft threatened to terminate Compaq's Windows license, Compaq quickly capitulated to Microsoft's demands that it restore the icon.

128.1.1. In late 1995, Compaq removed the Internet Explorer (and MSN) icons from the Windows 95 desktop on its Presario line of personal computers in order to feature Netscape.

1. John Rose acknowledged: "I understand that, in early 1996, Compaq did remove, on some consumer products, the Internet Explorer icon (as opposed to Internet Explorer software) from the Windows 95 default desktop on its Presario line of personal computers." Rose Dir. ¶ 25.

2. Rose also acknowledged that Compaq had a strategy to feature Netscape along with AOL. Rose, 2/19/99am, at 64:14-23.

3. See also Part V.C.2.a.(1); ¶ 202.2.

128.1.2. Microsoft responded to the removal of the Internet Explorer (and MSN) icons by threatening to terminate Compaq's Windows license.

1. Microsoft's Don Hardwick and Microsoft in-house counsel Peter Miller both sent letters to Compaq stating Microsoft's intent to terminate the Windows 95 license agreement between the companies if Compaq did not restore the icons to their original status. GX 649; GX 650.

2. See also Part V.2.a.(1); ¶ 202.3.

128.1.3. In response to Microsoft's threat, Compaq restored the icons to the desktop.

1. On June 21, 1996, Compaq gave in to Microsoft's demands. Celeste Dunn sent a letter to Hardwick stating that Compaq has "made the changes you requested to the Windows 95 desktop of the current release of the Compaq Presario systems. We have replaced the Microsoft Network and Internet Explorer icons on the Windows 95 desktop as executable icons so they look and function exactly the same as how we originally received them from Microsoft and have placed Microsoft Network, Internet Explorer icons and Internet Setup Wizard icons in their original locations under the Start button on the Windows 95 desktop." The letter also pointed out that icons for AOL and for Netscape were on the Windows 95 desktop for Presario systems. GX 645.

2. On June 25, 1996, Microsoft sent Compaq a letter withdrawing the Notice of Intent to Terminate Compaq's Windows operating system license agreement based on Compaq's representations. GX 301.

128.2. Other OEMs recognized that they had no choice but to license Internet Explorer along with Windows.

1. See supra ¶ 129.

d. Microsoft next tied Internet Explorer 3 and 4 to Windows 95

(1) Microsoft concluded that merely tying Internet Explorer to Windows was not sufficient to defeat Netscape and that, to win the browser war, it must make Windows and Internet Explorer difficult to separate

129. Microsoft eventually concluded that its purely contractual tie between Windows 95 and Internet Explorer would not be sufficient to prevent Netscape from developing into a serious threat to the applications barrier to entry. It decided, therefore, to make Windows and Internet Explorer difficult to separate.

1. In a 1996 marketing plan entitled "How to get to 30% Share in 12 Months," Brad Chase wrote, "Shell Integration. The Internet is a part of Windows. We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience. Shell/Browser user model becomes the same." GX 684, at MS6 6007119.

2. A review of marketing plans for Internet Explorer 3 states: "What we can do that Netscape can't -- Building on our Windows assets -- Integration, a customer win, we can do this better -- Other technology assets (direct, active etc.) -- Incentives." GX 488, at MS6 5005758.

3. A January 1996 Microsoft presentation describes as a Response Summary to cross-platform Java: Increased Internet Explorer share, Integrate with Windows. GX 52, at MS7 003270.

(2) In furtherance of this objective, Microsoft tied Internet Explorer 3 to Windows by commingling the code that supplies web browsing with the code that supplies operating system functions, forcing OEMs to license that product, and refusing to supply an unbundled option

130. In order to aid its effort to win the browser war, Microsoft offered its operating system only as part of a software package (which it calls "Windows 95" or "Windows 98") that also contained Internet Explorer 3 (and eventually Internet Explorer 4) and in which much of the underlying software code that supplies web-browsing and operating system functions is contained in the same files. Microsoft thus not only used its monopoly power to force OEMs (and end users) to take the browser with the operating system, but also made the browser and operating system difficult to separate. Microsoft did so despite the fact that it had, as a matter of software design, significant discretion as to how to package its browser and operating system products. Microsoft made a strategic design decision, rather than a design decision driven by considerations of demand and cost.

(a) Software routines and files need not be developed or distributed together to achieve seamless integration of their functions

131. Microsoft had significant discretion because whether different software products are delivered by one or multiple groups of code is a matter of packaging rather than engineering.

131.1. Software consists of a series of detailed instructions to the various components of a computer. It is usually written in one of many specialized artificial languages designed to be comprehensible to human programmers and then "compiled" into a form that interacts directly with the hardware.

1. Professor David Farber testified that a "compiler translates instructions (written in a language efficient for programmers) into the language understood by the computer hardware." Farber Dir. ¶ 19.

131.1.1. The software code necessary to supply the functionality of a modern application or operating system can be extremely lengthy and complex.

1. Professor Farber testified: "Applications may be large, often involving a very large number of routines." Farber Dir. ¶ 17.

2. Microsoft estimates that the set of instructions that it calls Windows 98 consists of approximately 18 million individual lines of code. Allchin, 2/2/99am, at 41:12-17.

131.1.2. To make that complexity manageable, modern software is usually written as a series of individual routines, ranging from a few tens to a few hundreds of lines of code apiece, that perform specific functions. Large programs are created by "knitting together" many such simple routines with higher level routines.

1. Professor Farber testified that routines "typically contain a few tens to a few hundreds of lines of code each." Farber Dir. ¶ 13.

2. Professor Farber testified that "each software product is built up from simple low level routines that are then called by routines at a higher level of composition. Routines at each level are called by yet higher level routines until the desired functionality of the end product is achieved. In this manner, all software is built up layer by layer through the use of often large numbers of routines, but each with limited complexity." Farber Dir. ¶ 14.

3. Joe Belfiore testified that "when we do good software architecture, what we're able to do is to break what is a complex and very full set of functionality into meaningful components, each of which sort of can be self-contained and can implement the job that it's supposed to do in a very efficient way. And if you do a really good job of this, then each of those separate components are very useful to other parties that want to take advantage of them." Belfiore Dep., 1/13/99, at 377:2-11.

131.2. As a result of its modular structure, modern software is extremely malleable. Underlying routines can be packaged together in essentially any way that the designer chooses.

1. "As a result of this layering," Professor Farber testified, "software has an inherently malleable and modular structure which gives software developers broad freedom in combining (i.e., bundling) different functions into software products." Farber Dir. ¶ 15.

2. Glenn Weadock testified that software designers have great flexibility "in how to combine the atomic units of code, called subroutines or functions, to make up files (or "libraries") on disk . . . . They can create a so-called 'monolithic' program that consists of a single, large file; they can create a highly modular program that uses a hundred different library files (called DLLs, for Dynamic Linked Library) to contain a thousand different subroutines; or they can choose any intermediate degree between these two extremes." Weadock Dir. ¶ 29.

3. Belfiore conceded that the organization of files into various DLLs can be changed or designed with specific goals in mind. Belfiore Dep., 1/13/99, at 153:23 - 154:4.

4. Hadi Partovi testified that Microsoft has moved functions in one DLL into different DLLs in succeeding versions of the product. Partovi Dep., 1/13/99, at 659:7-23.

5. Weadock testified: "A software designer with source code access may choose to place an application subroutine into a file that contains operating system subroutines . . . . Microsoft, for example, has chosen to design Internet Explorer so that some of the code that it uses co-resides in the same library files as other code needed for Windows 98 or even Windows 95 to run." Weadock Dir. ¶ 30.

6. Professor Edward Felten testified that SHDOCVW.DLL "is a great example of the point I'm trying to make about packaging of functions into files. This SHDOCVW file is really a bundle of separate functions. It contains some functions having to do with displaying the Start menu. It contains some functions that have to do specifically with Web browsing, and it contains some general user interface functions as well. And to talk about this file as doing one thing or being part of one product is really incorrect." Felten, 12/14/98am, at 60:18 - 61:2.

7. Professor Felten testified: "Due to the malleable nature of software, functions may be moved from one DLL to another, or a single DLL may be disaggregated into two DLLs." Felten Dir. ¶ 60.

131.3. Software routines need not reside in the same file to function together in a perfectly seamless fashion. Except at the extremes, therefore, how a software engineer chooses to organize routines into particular files is a matter of packaging as opposed to engineering necessity.

1. Professor Farber testified that "a software developer is free (subject to minimal limitations of no relevance here) to change the partitioning of routines among files at any time without changing their function or correct operation when the files are combined during execution in an end user's computer. Thus, there is generally no technical reason why a particular routine must be included in the same file with another routine so long as the routines are appropriately compiled and linked in the end user's computer." Farber Dir. ¶ 18.

2. Professor Felten testified that as part of the transition from Internet Explorer 4 to Internet Explorer 5, Microsoft split SHDOCVW.DLL into two parts, SHDOCVW.DLL and a new file called BROWSEUI.DLL. He also testified that Microsoft moved some code from SHDOCVW.DLL into SHELL32.DLL. Felten, 6/10/99am, at 49:4-15.

3. William Harris testified that software development "is inherently flexible. There are numerous ways in which to design a program to achieve the same functionality or effect. Similarly, a developer can combine, or separate, any two or more software products or components. It is typically the goal to combine such products or components in such a way as to appear 'seamless' to the user, in other words to make the two products appear like one. A good example of this is what Intuit has done with Quicken and Internet Explorer." Harris Dir. ¶ 82.

131.4. Files of software routines need not be shipped, or even designed, together to achieve seamless integration of their functions. Whether the necessary files are shipped together with the operating system, installed by an OEM prior to selling a computer in the retail channel, or accumulated by the end user through the purchase of separate products from multiple companies, the functionality ultimately delivered to the consumer can be exactly the same.

1. Professor Farber testified: "All the routines that are called directly or indirectly by a program should be available when the program is being used. But whether those routines originate from one particular software program or another is irrelevant to the performance of the functions, so long as the software is written and installed such that the programs work together." Farber Dir. ¶ 18.

2. Professor Farber also testified that "software has an inherently malleable and modular structure which gives software developers broad freedom in combining (i.e. bundling) different functions into software products. This malleability also gives a software developer two related types of design freedom: (1) to integrate two separate cd-roms because the functions on one particular cd-rom can be integrated by an OEM or retail end user with functions on another cd-rom and (2) to determine which functions to include within software sold as one product and which to separate and sell as a different product, whether produced by the same or a different software developer, for installation and use together by the a retail end user." Farber Dir. ¶ 15.

3. Professor Felten testified: "The mere fact that two functions are implemented in the same file, or that two products are 'integrated' into a single product, does not imply that they must be implemented in this fashion; because of the nature of software, functions can be separated into distinct files, or 'integrated' products can be separated into distinct products without any loss of capability." Felten Dir. ¶ 31.

4. Professor Felten testified: "In some cases in Windows 95 and IE 4, functions used in Web browsing and functions unrelated to Web browsing are implemented in the same program file. That these functions are implemented in the same file does not mean that these functions are inevitably intertwined." Felten Dir. ¶ 31.

5. Professor Felten testified that Windows Explorer is configured to allow other, entirely separate applications to display information in its embedded subwindows. "This 'Active Documents' specification that Microsoft has released allows anyone to write a piece of software that can display anything in an embedded subwindow like this. And so, one of the points to make about this is that the fact that a completely separate application like Microsoft Word or like some ISV application can display something in that embedded subwindow, does not imply that Microsoft Word or that ISV application is part of Windows Explorer. It just says that it can display something inside that window frame that Windows Explorer puts up." Felten, 12/14/98pm, 50:4-14.

6. Weadock testified that Novell designed "an HTML-based help system that is -- that works with multiple browsers. It works with Navigator. It works with Internet Explorer." Weadock, 11/17/98am, at 48:14 - 49:5.

(b) Although recognizing it could have chosen a different approach, Microsoft made Internet Explorer 3 and Windows difficult to separate and offered only a bundled version to OEMs and end users

132. Although it recognized its ability to choose other approaches, beginning with Internet Explorer 3 Microsoft placed in the same files the routines that supply both operating system functionality and web browsing functionality, and Microsoft refused to give OEMs the option of combining the two products themselves.

132.1. The OSR 2.0 release of Windows 95, released in August 1996, updated DLLs that supplied both web browsing and other functions.

1. Microsoft Vice-President David Cole testified that "Internet Explorer 3.0 is an integral part of the OEM Service Release 2.0 (or 'OSR 2.0'). . . . OSR 2.0, which was first made available to computer manufacturers in August 1996, includes a wide range of product enhancements in addition to Internet Explorer 3.0, such as support for larger hard drives, improved multimedia support, a variety of networking enhancements, new power management features, and many others." Cole Decl. ¶¶ 41-42 (DX 2220).

2. Weadock testified that a software developer "may choose to place an application subroutine into a file that contains operating system subroutines . . . . Microsoft, for example, has chosen to design Internet Explorer so that some of the code that it uses co-resides in the same library files as other code needed for Windows 98 or even Windows 95 to run." Weadock Dir. ¶ 30.

3. Professor Felten testified that there "is other software code specific to IE web browsing that could be deleted from these shared program libraries." Felten Dir. ¶ 58.

4. Felten testified that SHDOCVW.DLL "is really a bundle of separate functions. It contains some functions having to do with displaying the Start menu. It contains some functions that have to do specifically with Web browsing, and it contains some general user interface functions as well. And to talk about this file as doing one thing or being part of one product is really incorrect." Felten, 12/14/98am, at 60:15 - 61:2.

132.2. Microsoft did not offer OEMs a version of Windows without web browsing. Microsoft refused to do so despite the fact that it offered Internet Explorer 3 separately to end users in a way that, when combined with an earlier version of Windows 95, supplies precisely the same functions.

1. When asked whether he considered the retail version of Internet Explorer 3 to be "integrated" with Windows 95, once installed by the customer, Carl Stork answered: "Once it's installed, I consider it to be integrated. . . . It was developed much as we develop our operating system upgrades that the end result would be an integrated whole. And it's just a question of how it's delivered." Stork Dep., 8/11/98, at 53:18 - 54:14 (DX 2594).

133. In addition to offering OEMs Windows only with Internet Explorer already installed, Microsoft prohibited OEMs by contract from removing any aspect of the browser from the Windows software package.

1. See supra Part V.B.2.c.; ¶ 127.

134. Because OEMs have no viable commercial alternative to Windows, Microsoft's refusal to offer an unbundled option coerced OEMs into licensing the browser as a condition of licensing Windows.

1. See supra Part II.A; ¶ 15; Part V.B.2.c; ¶ 130.

(3) Microsoft similarly tied Internet Explorer 4 to Windows

135. Microsoft also used its monopoly power to force OEMs to license and distribute Internet Explorer 4 as a condition of licensing Windows.

135.1. Microsoft initially offered Internet Explorer 4 to OEMs in September 1997 on a separate disk from Windows 95 and gave OEMs the option of licensing Windows 95 without it. Microsoft recognized that Internet Explorer 4 could be distributed separately from Windows and that, once added to the system by OEMs or end users, it would have the same functionality as if it had been bundled with Windows in the first place.

1. A December 11, 1997 letter from Microsoft to OEMs notes that Microsoft had initially shipped IE 4.0 to the OEMs as part of a "supplemental release of Updated Windows Features" in late September. GX 1064, at MS6 6013683.

2. When asked whether there were any ways in which installing the version of Internet Explorer 4 available on the web would result in a different experience for the user in any way, as compared with receiving Windows 95 and Internet Explorer 4 "integrated" on a new computer, Stork answered "I'm not aware of any." Stork, 8/11/98, at 48:9 - 52:24 (DX 2594).

135.2. By December 1997, however, Microsoft retracted that option and instead required OEMs to license and install Internet Explorer 4 as a condition of licensing Windows 95.

1. GX 418 (Microsoft business terms with Toshiba) (sealed); GX 410 (Microsoft business terms with Digital Equipment Corp.) (sealed); GX 538 (Microsoft business terms with Packard Bell NEC, Inc.) (sealed); GX 625 (Microsoft business terms with Micron Electronics, Inc.) (sealed); GX 588 (Microsoft business terms with Gateway 2000 Inc.) (sealed); GX 697 (Microsoft business terms with Sony Corporation) (sealed); GX 1059 (Microsoft business terms with Hitachi LTD) (sealed).

2. In May 1997, David Cole wrote to Paul Maritz and Moshe Dunie that "The overriding priority is getting market share up. Getting IE4 into memphis is part of that." GX 626.

(4) Microsoft also tied the browser to the operating system by refusing to license OEMs, and refusing to permit OEMs to offer their customers, Windows with Internet Explorer "uninstalled"

136. Although Microsoft designed Internet Explorer and Windows to be difficult to separate and forced OEMs to license the combined product, it nonetheless provided a ready means for users to remove or "uninstall" the browser. But Microsoft denied OEMs the option of licensing Windows 95 with Internet Explorer uninstalled and prohibited OEMs from offering such a version of Windows to their customers.

(a) Microsoft configured Internet Explorer to "uninstall" in response to demand for Windows without Internet Explorer

137. Microsoft configured both Internet Explorer 3 and 4 to "uninstall" from Windows 95 through the "Add/Remove" control panel.

137.1. The "uninstall" feature removes the end-user's ability to browse the web with Internet Explorer but does not adversely affect other software installed on the computer.

1. Professor Felten testified that Internet Explorer 3 can be removed from Windows 95 through Microsoft's "Add/Remove" control panel. Felten Dir. ¶¶ 23-24 (explaining the process); see also GX 1202 (videotaped demonstration of that process). Professor Felten also testified that that process "has no apparent effect on the non Web browsing functions" of Windows 95. Felten Dir. ¶ 27.

2. A Microsoft technical support article entitled "Cannot Uninstall Microsoft Internet Products in OSR 2" describes a two-step process for removing IE 3 from OSR 2 using the Add/Remove Programs Control Panel. The article does not describe any adverse effect of the removal of Internet Explorer 3 on any non browsing functionality provided by Windows 95. GX 1367.

3. Professor Felten testified that Internet Explorer 4 can also be removed from Windows 95 via the "Add/Remove" control panel. That process causes the system to revert to the previous version of Internet Explorer installed on the system (or, in the case of an OEM version of Windows 95 originally shipped with Internet Explorer 4, to Internet Explorer 3). Internet Explorer web browsing can then be entirely removed from the system by following the "remove" procedure for that earlier version. Felten Dir. ¶ 32; GXs 165, 166, and 172 (Microsoft Knowledgebase articles describing that process).

4. After performing experiments on versions of Windows 95 and IE, Glenn Weadock concluded: "Two practical methods exist of removing Internet Explorer 3.02 from a Windows 95 machine. One can run the Microsoft-supplied deinstallation program to effectively disable the user's ability to run the web browser program, while leaving enhancements to operating system files in place. (Note that this option is apparently not available to OSR2 users, but its effects can be simulated by reinstalling Internet Explorer 3.02 using the downloadable version from Microsoft's Web site, and then deinstalling as one would do on an earlier version of Windows 95.) Alternatively, one could revert the system so that it contains the original versions of the DLL files that the Internet Explorer 3.02 installation enhances. Either method results in a fully functioning Windows 95 system, although the second method may result in the removal of enhancements that some application software vendors may use for their convenience in providing Internet-related features to users." DX 1715, at ATR 22876.

5. Microsoft's Allchin conceded that there were "a variety of ways" to remove Internet Explorer from Windows 95. Allchin, 2/2/99pm, at 4:21-24.

137.2. Microsoft configured Internet Explorer to "uninstall" in response to demand for an operating system without Internet Explorer. Indeed, Microsoft advertised to end users that the "Add/Remove" control panel could be used to remove Internet Explorer from Windows 95.

1. A Web page from Microsoft's website entitled "The IE Challenge" encourages customers to install and use Internet Explorer 3.0, and notes "IE Uninstalls Easily if you want to use a newer version, or simply get rid of it (and so does Navigator!)." GX 352.

2. Microsoft's Web site describes "How to Uninstall Internet Explorer 4.0," and lists situations in which a user might want to take that action. GX 164; see also GX 165 (describing a different method); GX 166 (describing how to "manually" uninstall Internet Explorer 4.0); GX 170 (Microsoft technical article describing how to uninstall Internet Explorer 4.0 in Win95 and WinNT using Add/Remove); GX 172 (describing how to remove Internet Explorer 4.0 from Win95 using IEREMOVE.EXE).

3. David Cole testified that Microsoft designed Internet Explorer 3 to Add/Remove from Windows 95 because "users have given us feedback that they would like choices about what they see on their desktop and they don't see on their desktop, and in that particular case we had feedback from corporate customers that wanted to prevent access to the Internet, so when they -- they buy a new machine from a PC manufacturer, they want the ability to remove easy access to the Internet so their employees, you know, aren't spending their time out on the Web doing whatever." Cole then testified that having Add/Remove capability addressed that concern by removing "the obvious user-accessible means to run -- to run Internet Explorer." Cole Dep., 1/13/99, at 395:7 - 396:6.

(b) "Uninstalling" Internet Explorer removes the Internet browser product

138. Software products routinely share code. A single file -- in the case of Windows 95 and 98 called a dynamic linked library -- may be used by many different programs, regardless how the file originally came to be installed on the system.

138.1. An operating system like Windows makes shared code available for use by all of the applications on the system. Microsoft has designed Windows so that many of the files that perform basic functions, like drawing a window on the monitor, can be used by third-party software applications.

1. Professor Farber testified that software developers "write their programs with the expectation that certain functions can and will be performed by the operating system of the computer on which the software will be used. The application invokes the operating system by calling routines supplied as part of the operating system. The interconnection is referred to as an application-programming interface (API)." Farber Dir. ¶ 20.

2. Professor Felten testified that "IE Web browsing uses some code that is specific to IE Web browsing, and some code that is shared (that is, it supports other functions in addition to IE Web browsing). There is nothing unique about IE Web browsing in this regard: virtually all PC applications make use of some application-specific code and some shared code that ships with Windows." Felten Dir. ¶ 61.

3. Professor Felten testified that "it's a mistake to say that because code is invoked in some case, that code is specifics [sic] to what's happening in that case. The code that detects key presses, for example, is used by almost every application. And so if one wanted to conclude that that code was part of the Web browser, I suppose you could, but you would also have to conclude that it's part of the personal finance package, it's part of the multimedia player, it's part of the word processor and everything else. You have to look a little bit more carefully than does this code get used in executing this function or not." Felten, 12/14/98am, at 59:6-18; Felten, 12/14/98pm, at 6:22 - 7:14 ("To use an example different than the one I used this morning, another example, you would look at the code which is able to draw windows in general, draw window on the screen. That code is used by virtually every application. And although it's used by every application, it's not really right to say it's part of every application.").

138.2. Shared code is not, however, the exclusive province of operating systems. Applications programs can, and routinely do, also share code with other applications programs.

1. Professor Felten testified: "When I use the word 'platform,' at least all I mean is that this is software that offers API's -- software that offers services to other software. And whether something is a platform or not says nothing about whether it's part of the operating system, whether it has to be shipped with the operating system, or anything like that. I described before all the third-party products would serve as platforms on Windows." Professor Felten also testified that the availability of platform-level services saves work for other software developers, "regardless of who offers that platform service and regardless of whether it's packaged with the operating system." Felten, 12/14/98am, at 52:13 - 53:5.

2. Professor Felten testified that "many or most application programs offer APIs these days and, of course, they are not part of any operating system." Felten, 6/10/99am, at 53:25 - 54:2.

3. Microsoft's David Cole conceded that "system services," defined as "modules of code that provide function for other modules of code," can be found in any software package, not just operating systems." Cole Dep., 1/13/99, at 390:2-14.

4. Michael Devlin conceded that Rational's products call upon APIs that are provided by Microsoft applications, such as Microsoft Access, and even by third-party applications, in addition to APIs provided by Windows. Devlin, 2/4/99am, at 41:6 - 42:3.

5. Richard Schell testified that the fact that Internet Explorer contains DLLs did not change his conclusion that it was an application. "Well, there are two issues here. One is: Does the fact that it's made up of DLLs make it not an application? And the answer to that is no. Lots of applications consist of DLLs along with a main program. I mean, you can pick up any application that's out there. There are lots and lots of DLLs that come along with them. You just go down the -- pick up Windows 95, go through the -- you know, using the Explorer, you can find DLLs for every application, so the fact that it has -- that there are DLLs that constitute the application doesn't make it not an application. The fact that they happen to be distributed with the operating system also doesn't make it not an application. Microsoft can, does, has distributed DLLs with the operating system that are helpers for other things, and it's their choice to distribute those -- those things. The unfortunate fact of the matter is that Microsoft as a monopolist chooses what they distribute with the operating system whenever it pleases them, and then they say, well, it's part of the operating system." Schell Dep., 9/15/98, at 252:5 - 254:3 (DX 2587).

138.2.1. The various applications that comprise Microsoft's suite of office productivity software, for example, share a great deal of code.

1. Robert Muglia testified that Microsoft Office is "an integrated package" including distinct applications known as Word and Excel, which were "designed to be integrated" together into Office but that Microsoft nonetheless distributes Word and Excel separately. "The way I might say that is that Office is an integrated package overall. It was designed to be integrated. We produced, because our customers would like us to produce it, a separate word-processing program that we derived from the overall integrated Office package and a separate spreadsheet program." Muglia, 2/26/99pm, at 67:17 - 70:3.

138.2.2. Java virtual machines are shipped in the Java runtime environment with Java "class libraries" that are freely available for the use of anyone programming in Java.

1. James Gosling testified that Java virtual machines include a collection of code called the Java classes, which provide basic building blocks (or "APIs") that Java developers can use in their programs. Gosling, 12/2/98am, at 47:14 - 49:10.

2. Gosling testified that Sun and others also make additional Java class libraries freely available to developers, who must then ensure that they are present on the end user's machine. Gosling, 12/2/98am, at 56:23 - 57:16.

139. Because applications may share code with each other and with the operating system, when an application is added to Windows, the pertinent shared code may or may not be loaded, and when the application is removed, shared code generally is left behind.

139.1. When an application is added to Windows, it routinely checks to make sure that all of the shared program libraries, or DLLs, that the application invokes are present. Typically, if any of those DLLs are missing, or present in an outdated version, the application will install them.

1. Weadock testified that applications that change Windows DLLs are common. Weadock, 11/17/98am, at 25:15 - 26:10.

2. Boeing's Scott Vesey testified that "many applications do make changes in the Windows system subdirectory." Vesey Dep., 1/13/99, at 153:21-23 (DX 2596).

3. Carl Bass, Chief Technical Officer and Vice President of Engineering at Autodesk, testified that Autodesk's principal product, AutoCAD, uses the WININET file included with Internet Explorer 3.0 and 4.0 and that, "if the necessary version is not present, or if the version of WININET on the user's PC is older than the version included with AutoCAD, the program will install the version of WININET that is bundled with AutoCAD." Fisher ¶ 165.

139.2. Conversely, it is well-recognized -- including by Microsoft -- that shared DLLs should be left behind when removing software products from a multiproduct system.

1. Professor Felten testified that "leaving in place shared files that perform other functions conforms to the ordinary way in which software application programs are removed." Felten Dir. ¶ 57.

2. Page 29 of Microsoft's Handbook for Applications suggests: "User data files including the following should remain on the hard disk: Resources that other programs might use, such as sharable DLLs, sharable fonts, and sharable Registry entries. It is better to err on the side of safety regarding other applications. If you are not sure whether removing a DLL might harm other applications, it is better to leave it behind." GX 431, at 29.

140. Accordingly, it is commonplace to describe a product as having been "removed" from a multi-product system even when the shared code that is used and distributed by that product and others remains behind.

1. William Harris testified that "removing an application does not mean removing all components of the application, in other words it does not require deleting components shared by other applications. Quicken, like most applications, utilize shared components of software code, or 'DLLs'. Any time multiple applications share a DLL, and you remove one of the applications and the shared DLL along with it, the other application will no longer work properly. So for example, if Quicken called on a DLL that was used by another application, like Internet Explorer, and an end user removed Quicken and the shared DLL, the other application would not work properly. This is easily avoided, though, by retaining the shared DLL when removing or uninstalling an application." Harris Dir. ¶ 86.

2. Professor Felten testified: "The code that detects key presses, for example, is used by almost every application. And so if one wanted to conclude that that code was part of the Web browser, I suppose you could, but you would also have to conclude that it's part of the personal finance package, it's part of the multimedia player, it's part of the word processor and everything else." Felten, 12/14/98am, at 59:6-18; Felten, 12/14/98pm, at 6:22 - 7:14 ("To use an example different than the one I used this morning, an example, you would look at the code which is able to draw windows in general, draw windows on the screen. That code is used by virtually every application. And although it's used by every application, it's not really right to say it's part of every application.").

141. Because they share code with both the operating system and with each other, software products commonly are defined -- including by Microsoft -- according to the functionality they supply to the consumer, rather than by the code they distribute.

1. Glenn Weadock testified that "both industry professionals and computer customers think of a software product more as that which enables a set of related features than as a collection of specific files. For example, when a reviewer evaluates a software product in a computer magazine, the reviewer typically focuses on the product's feature set . . . . The list of files that come in the box, or the list of code units that those files contain, is rarely if ever provided." Weadock Dir. ¶ 15.

2. Weadock also testified that defining software products "as a particular collection of files is ultimately impossible if code units within the same file are shared, either by multiple applications or by a single application and an operating system. . . . Attempting to define software strictly as a collection of files is a fruitless exercise when some of those files perform double duty in different contexts." Weadock Dir. ¶ 14.

3. John Rose testified that "consumers want to purchase a personal computer that allows them to view, communicate, or manipulate visual graphics displayed on the personal computer's screen regardless of whether the data or software code that responds to the manipulation resides on the personal computer's hard-disk drive, a CD-ROM, or on a computer that may be continents away. For basic features of the computing experience, it is irrelevant to users whether the feature is incorporated in application or operating system software." Rose Dir. ¶ 22.

4. Jones described Internet Explorer for the Macintosh as "the thing that will let [our customers] go and deploy and take advantage of the services on the Internet and computing on the Internet." Jones also testified that the Internet Explorer 5 package "contains a set of features that people can use to browse the Web, that ISVs can target and ICPs can target." Jones Dep., 1/13/99, at 555:18 - 556:7.

5. Carl Stork testified that: "If you were to try to say the browser is just viewing web pages, it really wouldn't be very interesting for end users because the Internet is so much more than that" including "communications plumbing, things like TCP/IP stacks, dial-up networking, PPP. Proxy Server perhaps. Things like URL resolution, HTML rendering, playing with various formats, whether it's things like active server pages or ActiveX controls. Java outputs. Media streams. Supportive protocols to send and receive e-mail. The ability -- possibly the ability to transfer through things like FTP. I don't know if I mentioned the ability to have Java applets. I mean for an Internet experience -- for things to be attractive, things need to work seamlessly, which means you need a broad stream of capabilities." Stork Dep., 1/13/99, at 759:10 - 760:8.

6. Professor Felten testified that because there is a long code path necessary to perform almost any function in a modern computer, "it would be a mistake to say that because something is on that code path, it's necessarily part of the application that the user is using." Felten, 12/14/98am, at 57:20 - 58:19.

7. Weadock pointed out that "Microsoft's word processing software product, Word for Windows, ships with the file COMCTL32.DLL, but that file is also used by Windows 95." Weadock Dir. ¶ 14.

8. Weadock testified that applications that change shared program libraries, or DLLs, that are shipped with Windows are common. Such applications include Norton Utilities and Microsoft Word. "I don't know anybody that thinks that Microsoft Word, or Norton Utilities, or Microsoft Golf, or any of these other various products that may include updated DLL's are part of Windows. They are separate applications. The fact that an application includes Windows DLL's or DLL updates does not make it therefore part of the operating system." Weadock, 11/17/98am, at 25:15 - 26:10.

9. Professor Felten testified that Windows Explorer is configured to allow other, entirely separate applications to display information in its embedded subwindows. But "the fact that a completely separate application like Microsoft Word or like some ISV application can display something in that embedded subwindow, does not imply that Microsoft Word or that ISV application is part of Windows Explorer. It just says that it can display something inside that window frame that Windows Explorer puts up." Felten, 12/14/98pm, at 49:25 - 50:14; Felten, 12/14/98pm, at 50:15-25 ("Q: And does the fact that other applications like Microsoft Word or, perhaps, third-party ISV applications can use the embedded window as a viewer to display things say anything about whether or not that application is part of the operating system? A: No. Certainly, if it did, one would have to conclude that from this picture that Microsoft Word is part of the operating system, and we know that's not the case.").

142. As a result, whether a product, including Internet Explorer, is present on a PC from the perspective of end users depends on whether its functionality can readily be accessed, not on whether some of the code that is necessary to supply those functions may be present.

142.1. It is common in the computer industry for the underlying code necessary to employ a software product to be installed on a computer, but in a disabled and unusable form. When the end user actually purchases the product, he or she then receives an "activation key," or password, which enables the dormant functionality.

1. Weadock testified that "it is possible, and sometimes a matter of commercial practice, to have software that exists on a disk or PC in the sense that its code modules are physically present, but does not exist in any practical way from the user's standpoint because the software is hidden, protected, or otherwise disabled." Weadock Dir. ¶ 19 (collecting examples).

2. Weadock testified that, as a variation on the same theme, software is often promoted by making trial versions freely available for download from the Internet. That software functions for a trial period, but then disables itself unless the user purchases an activation key. "Expired trialware or shareware physically exists on the PC in terms of bits and bytes, but once expired, the program is effectively absent until the user pays for it." Weadock Dir. ¶ 19.

3. Phillip Barrett testified that the way Real Networks' products "Player and PlayerPlus are related is basically there's one player. PlayerPlus features are activated by a license key that one gets by coming to our web site and going through a secure form and purchasing that license key." Barrett Dep., 1/13/99, at 112:17 - 113:2.

142.2. Accordingly, it is commonly accepted in the industry that a software product is not present on a particular machine unless the end user has access to the functionality it supplies.

1. Weadock testified: "The existence of a software product on any particular PC -- that is, whether it is effectively present or absent from the customer standpoint-depends on both the presence of the software enabling the product's feature set, and the means to use that feature set." Weadock Dir. ¶ 18.

2. Weadock testified that corporate technical support managers consider "inhibiting the user-accessible means of access to a software product (e.g., an icon on the 'desktop' screen of the user interface, or entries in menus of program options) has the same effect, from the support cost standpoint, of removing a program in its entirety . . . . Because removing the user-accessible means of using a browser product makes the product disappear from the perspective of the user, support costs are significantly reduced . . . ." Weadock Dir. ¶ 28b.

3. Barrett testified that, although a user may have the bits of code that implement the Player Plus functionality installed on their machine, "From the user's perspective, what they have is the standard player" until they pay for an upgrade key, because they are unable to access the Player Plus features. Barrett Dep., 1/13/99, at 113:11 - 114:4 (GX 1450).

142.3. Thus, removing the ability to browse the Web using Internet Explorer effectively removes the Internet Explorer product.

1. Jon Kies testified that "if we provide" Windows 95 "without Internet Explorer in the menu item, the customers feel like there's no browser installed whether or not the actual code may exist below the surface or the user interface." Kies Dep. (played 12/16/98am), at 27:1-16.

2. Professor Felten testified: "If you have removed the ability to browse the Web, as far as the user is concerned, Web browsing -- the Web browser is gone." Felten, 12/14/98am, at 33:5-14.

3. Professor Fisher testified that "a browser consists of the ability to do the things I described. Now, to the extent that removing the visible means of access removes that ability, I suppose one could say that without the visible means of access, there isn't a browser." Fisher, 1/6/99am, at 8:19-24. Fisher further testified that Microsoft's tie of Internet Explorer and Windows 98 would "from an economic perspective" "disappear" if "Microsoft removed all means of accessing Internet Explorer code or software technology within the Windows 98 product as Microsoft designed it." Fisher, 1/6/99am, at 9:21 - 10:4.

4. Microsoft's Cole testified that, "at a minimum," a user who invokes Microsoft's Add/Remove procedure to remove a software product "might expect the visible aspects of the program or update or whatever it happens not to be there anymore, so in appearance it might be gone from the end user's perspective." Cole Dep., 1/13/99, at 394:4-9 (GX 1465).

(c) Microsoft used its operating system monopoly to deny OEMs the ability to license or sell Windows with Internet Explorer uninstalled

143. Although Microsoft provided, through the "uninstall" capability, a ready means for users to remove Internet Explorer from Windows 95, Microsoft refused to permit OEMs to obtain, or license to their customers, Windows with Internet Explorer uninstalled.

143.1. Microsoft denied Gateway's request for a version of Windows from which Internet Explorer had been uninstalled.

1. In a letter to Gateway addressing Gateway's earlier statement, "We want IE to have uninstall (for as much of the code as can be removed without disabling the system)," Microsoft responds by saying that "Internet Explorer technologies are an integral part of Windows 98 and cannot be uninstalled . . . . Consequently, the concept of an 'uninstall' lacks practical significance in this context." GX 1073, at MS98 0204593.

143.2. Microsoft prohibited the OEMs from selling PCs with Windows installed and Internet Explorer uninstalled.

1. See supra Part V.B.2.c; ¶¶ 127, 129, 132, 135.

143.3. Microsoft also prevented OEMs from removing the Internet Explorer icon or any other aspect of the browser.

1. See infra Part V.C.1.a; ¶ 177; Part V.C.2.a.(1); ¶ 199.

e. Microsoft also tied Internet Explorer to Windows 98

144. Microsoft determined that it could better exclude Netscape both by continuing its welding of browser and operating system and by making the products further inseparable. It did so with Windows 98.

(1) Microsoft concluded that defeating Netscape required it to tie its browser more tightly to the operating system

145. In late 1996 and early 1997, Microsoft designed and tested, and considered shipping, a version of Windows 98 that, like Windows 95, was merely bundled with Internet Explorer 3 components, rather than more tightly "integrated" with Internet Explorer 4.

1. In December 1996, David Cole and his Internet Explorer development team discussed "de-coupling" the Internet Explorer 4 browser from the Windows shell. According to Cole, "After thinking about this for the past couple of days, it's clear to me (and others) that we must de-couple the Browser from ActiveDesktop and the shell integration features. ActiveDesktop and the new shell UI must be a completely optional component for users and corporations. The default is the IE 4 browser without the shell enhancements. If the user installs the new shell, they will have some things to learn and pay a performance price. By coupling these together, I think the overall effort has suffered. We've got a compromised new shell design that tries to be too Windows 95 shell compatible in my view. We don't have HTML on the desktop because we are worried about performance. But even in compatibility mode, performance will degrade and there will be differences that could stall adoption of the browser platform. . . . What I really want is a browser and ActiveDesktop which do not change shell32 at all, or at most some carefull [sic] hooks are added and we ship it everywhere. I don't understand why most of ActiveDesktop can't be done without any shell changes at all." A member of the development team responded that "It's good to have a decision like this. We need to investigate hard what we will loose [sic] if we don't update shell32.dll even in the full IE 4.0 install -- that's an option we've never considered. It will definitely simplify our testing metrix and is a good way to cut dev/testing cost." GX 46.

2. In March 1997, Jim Allchin reported to Paul Maritz on the status of Internet Explorer 4 and Memphis and listed options, including "drop IE 4 from Memphis and NT 5. There is a strong push to do this. We are wasting hundreds of people's time on builds that don't work, etc. Frankly, we may have to do this anyway to make progress. If we drop it, then we know we must either go out without IE 4 in the final or we have to be honest in that both systems will take perhaps a half year slip because we would have to fix the quality/performance/size later and go through beta tests much later." GX 110.

3. In March 1997, Megan Bliss asked Carl Stork whether "IE 4 and Memphis are joined at the hip." Stork responded, "We do not have closure on the issues below at present . . . IE 4 is not being developed as joined to Memphis at the hip -- at present Memphis is an afterthought. It is not one of the four main test platforms for IE4. We are being encouraged by the IE4 team to release a Memphis Beta 1 with the old shell. We need to rethink the plans & make sure we have a plan that makes sense. Today I would not tell anyone that it is possible to ship an integrated IE4/Memphis product in 1997." GX 160.

4. Bill Veghte conceded that Microsoft considered shipping Windows 98 with Internet Explorer 3 instead of Internet Explorer 4 because there was OEM demand for hardware-related improvements (e.g., USB support) that were ready for inclusion in Memphis prior to the time Internet Explorer 4 was ready. He also testified that they released outside Microsoft a version of Memphis without Internet Explorer 4. Veghte Dep., 1/13/99, at 783:2 - 786:8 (GX 1477).

5. Chris Jones also testified that Microsoft shipped a pre-beta version of Windows 98 to hardware manufacturers that did not have Internet Explorer 4. Jones Dep., 1/13/99, at 536:8 - 537:3.

6. Jonathan Roberts wrote to Allchin, Dunie, and Stork in March 97 to discuss options regarding the proposed bundling of Internet Explorer 4 and Windows 98. One of those options was to "De couple Memphis and IE and ship Memphis in July/August and connect with IE in the OEM channel when it ships." Carl Stork responded that "Currently IE4 is so immature (and big & slow & compat-bug prone) that it is impending our self hosting process. We find tons of bugs but so many are in IE components that our test & repro efforts are becoming meaningless on the OS. We are also finding more and more resistance on the team to install the builds because things don't work. I am at the stage where I do not recommend that we release anything with IE4 integrated under the name of a Memphis beta. Customers would experience too many problems and the performance would be unacceptable as well - it would be so bad as to blemish the reputation of Microsoft and of Windows . . . . More importantly, at this point it is getting in the way of valid development testing & repro work for Memphis." Roberts summed up the exchange with the following: "I'm depressed. I wasn't aware things were so bad with IE. This makes the following trade-off very painful, Hardware support for Spring machines and some TCO benefits vs IE penetration." GX 355, at MS7 003001.

146. Microsoft eventually concluded, however, that in order to win the "browser war" it needed to create a stronger tie between Internet Explorer and Windows than its OEM licensing practices achieved with Windows 95. The contemporaneous documents show that Microsoft's decision to further bind Internet Explorer and Windows 98 was driven, not by the technical merits of any such integration, but instead by a strategic desire to drive up Internet Explorer's market share vis-a-vis Netscape Navigator.

1. In December 1996, James Allchin wrote Paul Maritz an e-mail entitled "concerns for our future": "Ensuring that we leverage Windows. 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 . . . Maybe being free helps us, but once people are used to a product it is hard to change them. . . . My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform losing our biggest advantage -- Windows marketshare. We should dedicate a cross group team to come up with ways to leverage Windows technically more . . . We should think first about an integrated solution -- that is our strength." GX 47; GX 655, at MS7 003375 (one of the "Objectives for Memphis Release" is to "provide ship vehicle for strategic internet components").

2. On January 2, 1997, Allchin wrote to Maritz: "You see browser share as job 1. . . . I do not feel we are going to win on our current path. We are not leveraging Windows from a marketing perspective and we are trying to copy Netscape and make IE into a platform. We do not use our strength -- which is that we have an installed base of Windows and we have a strong OEM shipment channel for Windows . . . . I am convinced we have to use Windows. This is the one thing they don't have. . . .We have to be competitive with features, but we need something more: Windows integration. . . . If you agree that Windows is a huge asset, then it follows quickly that we are not investing sufficiently in finding ways to tie IE and Windows together." "Memphis must be a simple upgrade, but most importantly, it must be killer on OEM shipments so that Netscape never gets a chance on these systems." GX 48.

3. Maritz responded to Allchin's January 2, 1997 email (GX 48) by agreeing "that we have to make Windows integration our basic strategy" and proposing that Microsoft hold the release of Memphis (Windows 98) to "sync" with IE4. GX 49. Allchin agreed to that plan, arguing that instead of "letting people think about whether they should choose Nav/Communicator vs. IE," Microsoft "should move the argument to Windows (Memphis and NT 5.) and drive it because of ZAW [Zero Administration Windows], etc. as the reason to use IE." GX 50. Allchin also argued that integration "is the only thing that makes sense, even if OEMs suffer." GX 50.

4. In a January 1997 internal MS presentation on the "NC and Java Challenge," in a section called "response summary," the first bullet point is "Increase IE share - integrate with Windows." GX 51, at MS7 005536.

5. In an email to Bill Gates and Paul Maritz on February 18, 1997, Allchin wrote that "I am convinced the path we're on is the wrong one. We are playing into Netscape's strengths and against our own. . . . We focus attention on the browser battle where we have little market share instead of focusing the battle at integrating things into Windows where we have market share and a great distribution channel." GX 354.

6. Christian Wildfeuer, reporting on the result of a focus group study in February 1997 of the upcoming release of Windows 98, observed that most of the study group were "Navigator users. They said they would not switch, would not want to download IE 4 to replace their Navigator browser. However, once everything is in the OS and right there, integrated into the OS, 'in their face' so to speak, then they said they would use it b/c there would be no more need to use something 'separate.' The stunning insight is this: To make them switch away from Netscape, we need to make them upgrade to Memphis. . . . It seems clear that it will be very hard to increase browser market share on the merits of IE 4 alone. It will be more important to leverage the OS asset to make people use IE instead of Navigator." GX 202, at MS7 004343.

7. Jonathan Roberts wrote to Allchin, Dunie, and Stork in March 1997 to discuss options regarding the proposed bundling of Internet Explorer 4 and Windows 98. Roberts framed the issue as a "trade-off between ensuring we have new device support in the OEM channel for the Spring line of machines and generating twenty or so million more dollars in RUP upgrades versus driving IE 4.0 penetration and a simpler customer proposition. Based on my understanding of the company priorities, we should opt for the plan of record and keep them synced . . . Hold Memphis for IE 4.0 and ship in August-December. Pros: This is absolutely the best way to drive IE 4.0 penetration. Customer feedback, including that from over 200 folks in over 15 focus groups, indicates that people want the two to be tied together. If they are de coupled, then Navigator has a good chance of winning. In a browser battle, victory will go to the incumbent." GX 355, at MS7 003000.

8. In a January 7, 1997 e-mail to Allchin, Maritz argued that Microsoft should hold Windows 98 for IE 4 even if it pushed the release date back to August or September. "The major reason for this is to combat Netscape. We have to position the browser as going away, and do deeper integration on Windows. The stronger way to communicate this is to have a new release of Windows and make a big deal out of it. We will thus position Memphis as Windows 98. IE integration will be the most compelling feature of Memphis." GX 53; see also Allchin, 2/3/98pm, at 27:12-17 (agreeing with Maritz's email).

9. Kumar Mehta reported in March 1997 that "based on all the IE research we have done" his feeling "is that it is a mistake to release memphis without bundling IE with it." Because "IE users are more likely than other browser users to get it with their computers, . . . effectively we would be taking away the distribution channel of almost a quarter of all IE users." Moreover, "80% of those who do not use IE say they have no plans to switch to it. Which means that if we take away IE from the o/s, most nav users will never switch to us. Also from all our research with IS and web professionals we know that they eventually expect us to win the browser war because Ie will be bundled with the operating system and they will have no real reason to purchase navigator." Jonathan Roberts responded that Mehta's report "validates why it is important to keep IE with Memphis." GX 205; GX 736, at MS98 0128504.

10. In an e-mail to Allchin on March 20, 1997, Roberts wrote that "Internet Explorer has a much stronger chance of winning once it is integrated into the operating system. An integrated browser makes Netscape a nonissue -- a superfluous product for all but the most committed Netscape user." GX 355, at MS7 003002.

11. In June 1997, Chris Jones sent a memo to Bill Gates entitled "How to get to 30% share in 12 months." Among other things, Jones wrote: "We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience." GX 334, at MS98 0104683.

12. In July 1997, Microsoft executive Moshe Dunie, commenting on a proposal to stop shipping the Windows 98 shell with Internet Explorer 4 after the release of Windows 98, noted that such a proposal "would certainly increase significantly Win98 upgrade sales. I know there is the browser share counter argument ... But it is an intriguing thought..." He received the following response from Paul Maritz: "It is tempting, but we have to remember that getting browser share up to 50% (ore more) is still the major goal." (ellipses in original). GX 113.

13. In December 1997, Allchin wrote to Cole, Dunie and other executives that: "We have several goals from my perspective as a company -- no matter where the work is done. That is why this is tough. We have to continue to win against Netscape on the browser. This means that we need to consider downlevel and xplatform solutions. In addition, it is possible (although that is yet to be proven to me) that we might have to ship more frequently than once per year. And at the same time we need more integration with Windows -- both technically and marketing-wise. We need that for business reasons (ignoring the perception issue of the DOJ). I see this as critical. This is a hard balance, but I feel that we need to slant things much more toward Windows while we still accomplish the other goal against Netscape." GX 480.

(2) To accomplish this objective, Microsoft made the browser and the Windows 98 operating system more difficult to separate by, among other things, eliminating the "uninstall" capability and hindering users from making other browsers the default

147. To achieve its objective of further impeding browser rivals, Microsoft made Internet Explorer 4 and Windows 98 more difficult to separate.

147.1. With Windows 98, Microsoft continued to supply Windows and Internet Explorer in a form in which the underlying web browsing routines and other routines have already been combined in the same DLLs.

147.2. The only functional difference between Windows 98, on one hand, and Windows 95 combined with Internet Explorer 4, on the other hand, is a few features that Microsoft easily could separately supply and which can now be obtained by combining Windows 95 and Internet Explorer 5.

1. See infra Part V.B.3.c.(1).(b); ¶¶ 159-161.

147.3. There are, however, other differences between Windows 95 and Windows 98. Among other things, Microsoft eliminated the end user's ability to "uninstall" Internet Explorer from Windows 98, despite retaining the uninstall option for numerous other features.

1. Professor Felten testified that, although the Web browsing experience in Windows 95 OSR 2.5 and Windows 98 is very similar, Microsoft does not provide a mechanism for removing Internet Explorer Web browsing from Windows 98. Felten Dir. ¶¶ 35-37, 52.

2. GX 1366 is a series of screen shots of Windows 98's "Add/Remove" function, showing dozens of functions that can be added or removed by the user, including, among other things, internet tools, desktop wallpaper, mouse pointers, dial-up networking, virtual private networking, and hyper terminal. Internet Explorer is not one of them.

3. James Allchin testified that Microsoft provides a ready means of removing many files and features that Microsoft considers to be "integrated" features of Windows (Allchin, 2/2/99pm, at 5:2-5) such as the TCP/IP stack (Allchin, 2/2/99pm, at 7:12-15) and dial-up networking, Netmeeting, and the personal web server (Allchin, 2/2/99pm, at 10:3 - 11:11).

4. When asked to estimate "how many of the components of Windows 98 can be readily removed by procedures that Microsoft makes available," Allchin testified that "the number is going to be quite high, if you consider all of the approaches for, you know, which drivers or file systems you're using and everything. So, you know, one of the great things about Windows is it's so configurable . . . ." Allchin, 2/2/99pm, at 11:12-22.

147.4. Microsoft was well aware that its customers wanted the ability to remove web browsing functionality from Windows 98 but nonetheless chose to eliminate that feature in order to force adoption of Internet Explorer.

1. Gateway specifically requested that Microsoft provide a way to uninstall Internet Explorer from Windows 98, in part because it was "concerned that the installation of the full MS product (including channels) results in a much slower system performance if the customer chooses an alternate browser after full installation on IE4." Microsoft refused. GX 1073, at MS98 0204593 (4/24/98 letter from Microsoft to Gateway).

2. . In response to a CID, Gateway stated that: - redacted - GX 652, at ATR 30008 (sealed).

3. Joe Belfiore testified that he was concerned that the omission of an add/remove option for Internet Explorer in Windows 98 would create a "customer satisfaction issue," in part because some users would have applications that were incompatible with Internet Explorer 4. Belfiore Dep., 1/13/98, at 366:8-11.

4. OEMs uniformly believed that they had no choice but to license Windows 98. Ransom testified that Packard Bell must "pre-install 100 percent of its consumer machines with Windows 98" because it is "the only viable choice." Ransom Dep. (played 12/16/98pm), at 68:25 - 69:5; see also supra Part II.A; ¶ 15.1 (collecting similar testimony from Compaq, IBM, Gateway, and Hewlett-Packard executives). In addition, Microsoft's licenses for Windows 98 forbid OEMs from removing Internet Explorer or its icon. GX 1190 (sealed); GX 660 (sealed); GX 458 (sealed); see also infra Part V.C.1.a; ¶ 177 (collecting cites to other OEM licenses). Thus, OEMs were forced to distribute Internet Explorer.

147.5. Microsoft also designed Windows 98 to override the user's choice of default browser in certain circumstances.

1. Professor Felten testified: "In all versions of Windows released prior to OSR 2.5, the Default Browser is activated whenever the user asks to initiate Web browsing." Felten Dir. ¶ 50.

2. Professor Felten also testified, however, that in some cases "Windows 98 uses IE 4 Web browsing even if the user has specified another browser as the Default Browser. There are several situations in which this can occur. First, when the user initiates the Web Help function described in paragraph 36, and chooses the option of clicking on the 'Support Online' link, the system will always initiate IE Web browsing, instead of launching the Default Browser, to go to the Support Online Web site. Second, certain menus in Windows Explorer contain URL Shortcuts created by Microsoft. A user who selects the 'Home Page' or 'Search the Web' URL Shortcut found in the 'Go' menu in Windows Explorer will always initiate IE Web browsing to go to the particular Web site, rather than launching the Default Browser. Third, if a user places a Web page on the Active Desktop, and then clicks on a Web link on that page, this action will again initiate IE Web browsing even if the user has designated another browser as the Default Browser. Finally, Windows Explorer allows a user to type into the Address Bar a command to search the Web. Typing the word "Go" followed by a phrase or word that a user wants to search for on the Web will initiate IE Web browsing to display the response to the search request, regardless of the user's choice of Default Browser. This is an example of what the industry refers to as "hard-coding," in this case, forcing the use of IE Web browsing." Felten Dir. ¶ 51.

3. Both Professor Felten and Professor Farber described the significant problems for PC users created by Internet Explorer ignoring or overriding their choice of Navigator as their default browser. For example, Professor Farber testified that "the way Microsoft packages and distributes the Internet Explorer caused real problems. My personal experience, I think, is a good example of that. I tried to use Netscape. I keep trying to use it and, periodically, I install it and I keep seeing IE pop up in funny places and interfere with it. And so as a product, it is very difficult to use. I am not a person that wants to use multiple browsers. I focus on one, like I focus on one word processor. It's just too difficult to use one and then suddenly when error occurs, you're faced with another one." Farber, 12/9/98am, at 53:3-16; Felten, 12/14/98am, at 27:11-19, 29:11-17; Felten, 12/14/98pm, at 14:7-11.

3. There is no technical or economic justification for Microsoft's tying of Internet Explorer and Windows

148. Microsoft contends that its forced licensing of Internet Explorer is justified by numerous benefits that depend either on what it calls its "integrated" design or its contractual restrictions. But contemporaneous evidence shows that Microsoft's conduct was motivated by a desire to thwart rivals and protect its operating system monopoly rather than to benefit consumers, and other evidence demonstrates that Microsoft's justifications are pretextual.

a. Microsoft's "welding" of its browser thwarted the substantial demand for Windows without an Internet browser

149. As an initial matter, Microsoft's refusal to supply either Windows 95 or Windows 98 without web browsing, and its contractual prohibition on OEMs supplying such a product, thwarted consumer demand for a browserless OS.

1. See supra Part V.B.1.b.(4); ¶ 111.

150. This reduced the value of Windows to customers who preferred a browserless operating system. Indeed, as explained in detail below, Microsoft's tying arrangement inflicted on a number of customers substantial inefficiencies and consumer harm.

1. Dr. Warren-Boulton testified: "Even if Internet Explorer is preferred by some users, it is not preferred by all users. Consumer welfare is maximized when the market is responsive to consumer demand, not when a firm with monopoly power over one product requires purchasers also to take an unwanted product or makes it difficult or costly for them to obtain a related product they desire." Warren-Boulton Dir. ¶ 158.

b. There is no technical reason for Microsoft's refusal to meet demand for Windows without web bowsing

151. There is no reason -- other than its campaign to protect its operating system monopoly through weakening browser rivals -- for Microsoft's steadfast refusal to meet the demand for Windows without Internet Explorer. Microsoft easily could have offered, or permitted OEMs to offer, the option of Windows 95 or 98 without web browsing.

(1) Microsoft easily could have supplied Windows 95 without web browsing

151.1. First, no technical reason can explain Microsoft's refusal to license Windows 95 without Internet Explorer 1 or 2.

151.1.1. The version of Internet Explorer (1.0) that Microsoft included with the "plus pack" and the original OEM version of Windows 95 was a separate, executable program file supplied on a separate disk. Web browsing thus could be installed or removed without affecting the rest of Windows 95's functionality in any way. The same was true of Internet Explorer 2.0.

1. Professor Felten testified, with respect to Windows 95, that he has "determined that removing IE1 from this version of Windows is easily accomplished by removing the IE1 program file (sometimes called an 'executable') and removing any icons on the Windows desktop and Windows Start menu items that refer to IE1. After doing this, a user cannot browse the Web without adding more software to the system, but the functionality of the operating system is unaffected." Felten Dir. ¶¶ 21, 22 (same for IE2).

2. In a communication directed to OEMs on July 3, 1995, Microsoft indicated that it had "decided" to include Internet Explorer (among other things) in the OEM release of Windows 95. Microsoft acknowledged that it would have been "possible for the OEM to integrate these tools into their manufacturing process themselves," but Microsoft said that it was pre-installing Explorer to "save each OEM the time and effort" that would require. GX 36.

3. Glenn Weadock testified: "The operating system doesn't need a browser to work, as Microsoft showed, when it released the original retail version of Windows 95, which, as we discussed earlier, does not contain a browser." Weadock, 11/16/99pm, at 92:16-22.

151.1.2. Microsoft, moreover, created an easy way to remove Internet Explorer 1.0 and 2.0 from Windows 95 after they had been installed, via the "Add/Remove" feature in the Windows 95 "Start Menu." This, too, demonstrates the absence of any technical reason for Microsoft's refusal to supply Windows 95 with web browsing.

1. Professor Fisher testified that "Microsoft has argued that it must force OEMs to take IE because the absence of IE may undermine the quality of the operating system, to the detriment of users. However, several facts contradict this suggestion. For example, Microsoft provided ways to remove IE in Windows 95--a function that would most likely not have been provided if it led to a decrease in the quality of the operating system." Fisher Dir. ¶ 159.

151.2. Second, there is no technical reason for Microsoft's refusal to license Windows 95 to OEMs without web browsing, either by providing a version of Windows 95 with Internet Explorer 3 or 4 uninstalled or by permitting OEMs to uninstall Internet Exlorer 3 or 4.

151.2.1. Microsoft's decision to provide an "uninstall" procedure for Internet Explorer 3 and 4 to end users, and to promote Internet Explorer on the basis of that feature, shows that there was no technical or quality-related reason for refusing to permit OEMs to use the procedure. Microsoft would not have permitted end users to uninstall Internet Explorer, and consumers would not have demanded such an option, if that process fragmented or degraded the other functionality of the operating system.

1. Professor Fisher testified: "Microsoft provided ways to remove IE in Windows 95 -- a function that would most likely not have been provided if it led to a decrease in the quality of the operating system." Fisher Dir. ¶ 159.

2. Celeste Dunn of Compaq testified that when Compaq was planning to remove the Internet Explorer and MSN icons from the desktop, Microsoft tested Compaq's Windows configuration and had not detected any technical problems. Dunn Dep., 10/23/98, at 187:12-25 (DX 2566).

151.2.2. Microsoft's agreement in January 1998 to provide OEMs an uninstall option also demonstrates that there was never any bona fide technical justification for Microsoft's refusal to license Windows 95 with Internet Explorer "uninstalled."

1. Jon Kies testified that Packard Bell/NEC took advantage of the January 1998 stipulated remedy to offer some of its PC models without Internet Explorer Kies Dep. (played 12/16/99am), at 6:11-19.

2. Professor Fisher testified that "OEMs would not negotiate to remove IE if the operating system would be adversely affected, since a poorly operating computer would reflect poorly on the OEM and would be likely to increase the number of customer support calls; also, large customers would not request an operating system with IE removed if they felt this system would be adversely affected." Fisher Dir. ¶ 163.

(2) Microsoft easily could have supplied Windows 98 without web browsing and enabled OEMs and users to "uninstall" the browser

152. As with Windows 95, there is no technical justification for Microsoft's refusal to meet demand for a browserless version of Windows 98.

153. As Professor Felten demonstrated, Microsoft could easily supply a version of Windows 98, without the ability to browse the web, to which users could add the browser of their choice. In fact, Professor Felten's prototype removal program, although only a concept program designed in a relatively short period of time and without the benefit of Microsoft's internal expertise, produces precisely that result when run on a computer with Windows 98 installed.

1. Professor Felten testified that his "analysis demonstrates that it is possible for Microsoft to divide Windows 98 into two programs, one that replicates the function of the current version of Windows 98 except that Web browsing is removed, and another that adds IE 4 Web browsing to the first program, such that an OEM or user who installed the two programs in sequence would end up with software functionally identical to today's version of Windows 98. Microsoft, with its intimate knowledge of its own products, would have little difficulty performing this task." Felten Dir. ¶ 66.

2. Professor Felten also testified that his "prototype removal program removes Internet Explorer. It removes the ability to browse the Web, and it prepares the machine to accept the installation of another web browser. So, if you're in that state where IE Web browsing has been removed and nothing has been put in its place, then all of the Web-browsing functions, features are not there; and, in particular, the ability to display a Web page inside an embedded subwindow is gone . . . ." Felten, 12/14/98pm, at 46:14 - 48:2.

3. Professor Felten testified that his "programs demonstrate that Microsoft can deliver a version of Windows 98 from which the IE web browser has been removed, and they can deliver that in a way which does not affect the non web-browsing functionality of Windows 98. . . . Microsoft can then produce an IE installation program which puts the system back, in effect, to what it is in today's Windows 98." Felten, 6/10/99am, at 9:4-12.

154. Professor Felten's program does not degrade the performance or stability of Windows 98 in any way.

154.1. Professor Felten testified repeatedly and credibly that he had been using a Windows 98 computer, on which his program had been run, for more than seven months with no discernible loss in performance or stability.

1. Professor Felten testified that "I should tell you that for seven and a half months now I have been using a PC from which Internet Explorer has been removed and Netscape substituted -- that's since the 23^rd of April -- on my primary desktop computer at work. And since I'm a computer scientist, I use that machine pretty intensely. I have see no problems in that time. My primary desktop computer at home I have been using Windows 98 in the same configuration with Web browsing removed and Netscape in place since the midle of August. My testimony in this case was written on that machine, and I have never seen a problem -- other than the Windows Update issue which I described to you before, your honor." Felten, 12/14/98pm, at 42:13 - 43:2; Felten, 12/14/98pm, at 43:15-20 (same); Felten, 12/14/98pm, at 52:1-17 (same).

154.2. Professor Felten also testified that he ran several performance testing programs provided by Microsoft and discovered that removing Internet Explorer from Windows 98 via the prototype removal program actually yielded a modest performance gain.

1. Professor Felten testified that: "Microsoft turned over to us a set of ten performance measurement programs that they use for measuring performance of various Microsoft software, in particular measuring performance related to what Mr. Allchin calls the core IE DLLs." Felten, 6/10/99pm, at 13:17-22.

2. Professor Felten testified that, "in these performance tests, what we found was on the whole, removing the Internet Explorer browser from Windows makes Windows a little faster." Felten, 6/10/99pm, at 14:17-19.

3. Professor Felten testified that "there were ten tests, and on one of the tests there was no statistically significant difference between the two systems. On six of the tests there was a performance improvement due to removing Internet Explorer -- the Internet Explorer browser. And on three of the tests there was a slight performance slowdown due to removing the IE web browser. And I want to point out the three slowdowns are considerably smaller than the six performance improvements on the other test. So, on the whole, what we see is a slight performance improvement due to removing IE." Felten, 6/10/99pm, at 15:2-13.

4. Professor Felten testified that Windows 98 uses less dynamic memory (RAM) after the prototype removal has been run, which has a positive effect on system performance. Professor Felten testified that "with the browser, the amount of memory allocated after boot was 35.6 megabytes. And in the other scenario, with the IE web browser removed, the amount of allocated memory was 29.8 megabytes. That's a difference of about six megabytes, or about 20 percent, in the memory use of Windows." Felten, 6/10/99pm, at 20:16-21.

154.3. Most of the performance problems that Microsoft alleges about Windows 98 after Professor Felten's program had been run were merely acknowledgments that Professor Felten had, in fact, successfully removed web browsing from the system. For example, Microsoft argues that Professor Felten's program removes the user's ability to type in a web page from the "Start" menu or to place content from a web page on the "Active Desktop." Felten, 12/14/98pm, at 29:1-8; Felten, 12/14/98pm, at 30:19 - 31:7. Such observations demonstrate merely that Professor Felten's program does what it was intended to do.

154.4. Microsoft attempted to demonstrate that Professor Felten's program degrades the general performance of Windows 98 in ways unrelated to web browsing, but the video demonstration that Microsoft offered as evidence did not prove what it purported to prove.

154.4.1. On the video tape, Microsoft employee Yusuf Mehdi led what appeared to be a guided demonstration of a Windows 98 machine connecting to Microsoft's Windows Update web site. DX 2161. Mehdi said that Microsoft had "not made any other changes to this computer or Windows 98 except to run Dr. Felten's program as he describes in his expert report and his written direct testimony." DX 2161 (played 2/1/99pm), at 5:13-20. He also said that the computer was taking an unusually long time to complete that operation because of "performance degradation that has occurred because of running the Felten program."

1. Mehdi stated that "As you can see, at the bottom of the page here, we're actually connecting out to the Internet and fetching that data. It's taking a very long time, however--unusually long--to access that web site. That's a result of the performance degradation that has occurred because of running the Felten program." DX 2161 (played 2/1/99pm), at 7:12-18.

2. Mehdi stated that "Dr. Felten chose to let customers access this one web site which is done using the IE code in Windows 98 including MSHTML, URLMON, and WININET among other files. However, Dr. Felten's changes make access very slow." DX 2161 (played 2/1/99pm), at 7:21-25.

3. Mehdi stated that "as I have already demonstrated in showing how slowly the Windows Update site loaded, the performance of the government version of Windows 98 is much slower." DX 2161 (played 2/1/99pm), at 15:17-20.

154.4.2. In fact, however, almost nothing about the purported demonstration was accurate and truthful.

154.4.2.1. In the first place, Microsoft's sponsoring witness for the videotape, James Allchin, acknowledged that there were serious discrepancies in the appearance of certain title bar screens on the "demonstration PC" in the video. As a result, it initially appeared to him that, contrary to the claim made in the video, Professor Felten's program had not even been run on that machine though he later produced a different explanation.

1. Compare GX 1688 (screen shot from unmodified Windows 98 machine attempting to access Windows Update, showing ""Microsoft Windows Update - Microsoft Internet Explorer" at top) with GX 1689 (screen shot from a machine on which Professor Felten's program had been run, showing "Microsoft Windows Update - Windows 98" at top), and GX 1692 (screen shot from DX 2161, showing "Microsoft Windows Update" at top).

2. Allchin initially stated on cross-examination that it appeared that Professor Felten's program had apparently not been run on the demonstration machine at all. Allchin, 2/2/98am, at 27:8-18 (testifying that "from what I'm seeing here right now, I believe that that was done on a pre-Felten system, although the point still stands. He has performance problems and the Windows Update doesn't work, but I believe, from what I'm seeing here, they filmed the wrong system."); Allchin, 2/2/98am, at 28:23-24 ("In this particular case, . . . I did not think the Felten program had been run.").

154.4.2.2. In addition, as Mr. Allchin conceded on cross-examination, Microsoft's representation that it had "not made any other changes to this computer or Windows 98 except to run Dr. Felten's program as he describes in his expert report and his written direct testimony," was false (DX 2161 (played 2/1/99pm), at 5:13-20). To the contrary, the videotape demonstration was apparently compiled by splicing together footage from several different machines, some of which had both extensive additional software installed and several unexplained manual changes to the Windows Registry.

1. Allchin testified that "I believe some of those machines had Office on it, for example, and some of them had some of the other browsers that were done. Those weren't all the same machine, and they all didn't have exactly the same thing on it." Allchin, 2/2/99am, at 29:24 - 30:5.

2. When asked whether "some of the machines--at least some of the time somebody had manually changed the registry," Allchin answered: "Yes. There is a part of the film that shows that they had apparently rerun the test a couple of times filming, and they had added--it's very easy to add empty entries to the registry." Allchin, 2/2/99am, at 36:5-23.

3. Allchin conceded that the registry changes shown on the tape would not be there if you installed Felten's program on a virgin machine and did nothing else. Allchin Dep. (played 2/2/98am), at 40:16-21.

4. Allchin conceded that the statement on the tape, that nothing had been done to the machine but Professor Felten's program, was untrue, because "they had been through a rehearsal." Allchin, 2/3/99pm, at 57:5-19.

5. Allchin conceded that even though the videotape narration claims that, other than running Professor Felten's program, "we have not made any other changes to this computer," in fact the number of icons visible on the desktop changes several times during the video, clearly demonstrating that changes had been made or that more than one PC must have been used for the so-called "demonstration." Allchin, 2/3/99pm, at 64:3-19.

154.4.2.3. Allchin also conceded on cross-examination that it would not in any event be technically possible to measure the kinds of alleged performance degradation under the circumstances purportedly depicted on the video. The entire premise of the demonstration was, therefore, inaccurate and misleading.

1. Allchin, 2/2/99am, at 21:17-22 ("The test that we know shows performance has to be done in a controlled circumstance. You cannot prove the performance slowdown when you're connected to the Internet. You can only prove it in a controlled situation, which is how we test the performance degradation.").

c. There is no technical reason for Microsoft not to meet demand for Windows 95 or Windows 98 without web browsing by offering further separation between the browser and the operating system

155. Beyond its plain ability to enable OEMs and users to "uninstall" Internet Explorer, there is no technical reason for Microsoft's refusal to offer OEMs and users the option of further separation between the browser and the operating system.

(1) Microsoft easily could supply versions of Windows 95 and Windows 98 without the routines that provide web browsing and still offer users the same alleged benefits of its "integrated" features and design

156. Although Microsoft contends that removing the routines that supply only web browsing from Windows 95 or Windows 98 will deprive consumers of the benefits of its "integrated" design and features, this contention is deeply flawed. First, such "integration" could never supply any meaningful benefits to consumers who do not wish to browse the web using Internet Explorer. Second, supplying an unbundled version of Windows 98 to those consumers would not prevent Microsoft from offering an "integrated" version to those consumers that desired it. Because of the malleable nature of software, the "integration" necessary to produce any such benefits could be achieved just as effectively by OEMs or end users installing a separately distributed product. Whether Microsoft chooses to call that product a "browser" or an "operating system upgrade" is, from both a technical and an economic perspective, immaterial.

(a) Bundling the browser with the operating system is inefficient for users that do not want the browser

157. Bundling browsing-only routines into large system DLLs is inefficient for users who do not want web-browsing functionality.

157.1. Microsoft has never contended (and could not plausibly contend) that the presence of browsing-only routines in its large DLLs improves system performance even if those routines are never invoked by any code path on the system. Routines that are not executed are simply dead weight and degrade system performance.

1. Professor Felten testified that: "Any code in a DLL that supports only one function of the DLL may be removed without endangering other functions of the DLL. For example, code that supports only IE Web browsing functions may be removed without endangering any non Web browsing functions of Windows 98." Felten Dir. ¶ 62.

2. See infra Part V.B.4.c.(1); ¶ 170.

157.2. It can thus be efficient to place routines that are used only for web browsing into large system DLLs only if the system is designed to deliver web browsing functionality. And it is, by the same token, not inefficient for Microsoft to disaggregate browsing-only routines from files like SHDOCVW.DLL in the versions of Windows 98 that it delivers without web-browsing functionality.

1. Professor Felten testified that Microsoft split certain DLLs from Internet Explorer 4 to Internet Explorer 5, which shows "of course, that these DLL files are not indivisible and they are not fixed. And so arguments that say that `A' and `B' are in the same DLL, and, therefore, we cannot separate them, are not correct." Felten, 6/10/99am, at 51:23 - 52:2.

2. Hadi Partovi testified that Microsoft has moved functions in one DLL into different DLLs in succeeding versions of the product. Partovi Dep., 1/13/99, at 659:7-23.

3. Professor Felten testified that SHDOCVW.DLL "is a great example of the point I'm trying to make about packaging of functions into files. This SHDOCVW file is really a bundle of separate functions. It contains some functions having to do with displaying the Start menu. It contains some functions that have to do specifically with Web browsing, and it contains some general user interface functions as well. And to talk about this file as doing one thing or being part of one product is really incorrect." Felten, 12/14/98am, at 60:18 - 61:2.

157.3. Bundling routines into large system DLLs in fact creates substantial inefficiencies for users who do not wish to use the functionality that those routines deliver.

157.3.1. Installing software on a system that the end user does not desire and will not use degrades performance by unnecessarily consuming system resources, increasing the likelihood of software conflicts, and increasing the complexity of the user interface. Those problems are exacerbated when the unwanted software is integrated into the operating system because operating system code is often loaded into the "working set" in dynamic memory, whereas unused applications typically sit dormant on the hard drive.

1. See infra Part V.B.4.c.(1); ¶¶ 164.1-2.

157.3.2. Microsoft understood that its decision to "integrate" Internet Explorer into Windows 98 would in fact substantially degrade the performance of Windows 98 for those users who desired to browse the web with Netscape Navigator, or not at all.

i See supra Part V.B.2.3; ¶¶ 145-47.

157.3.3. As Microsoft recognizes, bundling new functionality into the operating system can also make testing difficult and can slow the rate of innovation.

1. In August 1996, Hank Vigil sent Paul Maritz an e-mail entitled "Gravity or Anti-Gravity" and observed "Once something has been pulled into the OS, the requirements of quality, breadth of compatibility and scale mean that lots of dependencies and trade-offs happen. The net result is that the monolithic code base ships on long cycles after lots of testing. There is also a tendency to meet all needs: be everything to every consumer. Despite the advantages of integrating more and more functionality into the OS, there seem to be areas that can/would benefit by breaking out of the OS so that they can develop richer functionality faster. This allows for groups to discover, re-define and exploit customer needs in ways that are hard when teams believe that OS gravity is the central law." GX 157, at MS98 0167387.

2. Brad Silverberg, commenting on the e-mail, agreed that "This is a very good and important point. To me, the optimal strategy is something in between: key components evolve and improve and get delivered independently of the OS release cycles, and then synch up when there is an OS release, providing additional integration. Clearly the needs for many components require that they release in much faster cycles than the OS itself can. The most obvious example is the browser. Yes, it will be integrated into the os, and ie4 integrates deeply enough that it takes over the os's UI; but it is on a much faster release schedule. We would be dead if we had to synch with OS's." GX 157, at MS98 0167387.

3. Maritz testified that: "There is a cost to integrating things into your operating system. It means more work to be done, more things to be tested, more software to be written." Maritz, 1/27/99pm, 47:6-12.

4. Jonathan Roberts wrote to James Allchin, Moshe Dunie, and Carl Stork in March 1997 to discuss options regarding the proposed bundling of IE 4 and Windows 98. One of those options was to "De couple Memphis and IE and ship Memphis in July/August and connect with IE in the OEM channel when it ships." Stork responded that "Currently IE4 is so immature (and big & slow & compat-bug prone) that it is impeding our self hosting process. We find tons of bugs but so many are in IE components that our test & repro efforts are becoming meaningless on the OS. We are also finding more and more resistance on the team to install the builds because things don't work. I am at the stage where I do not recommend that we release anything with IE4 integrated under the name of a Memphis beta. Customers would experience too many problems and the performance would be unacceptable as well - it would be so bad as to blemish the reputation of Microsoft and of Windows. . . . More importantly, at this point it is getting in the way of valid development testing & repro work for Memphis." GX 355.

157.3.4. And even Microsoft's own engineers have expressed skepticism about Microsoft's decision to bundle more and more unrelated features into the Internet Explorer DLLs.

1. In an August 1997 e-mail, Christian Fortini wrote: "We have to stop adding non-browsing features into Trident and start taking some of the existing ones out. We should shrink the core Trident code base down to a very compact (and fast) HTML rendering and manipulation engine and hopefully limit the number of people in this code base." GX 1377, at MS7 004591. "Trident" is Microsoft's code name for the file MSHTML.DLL. Felten, 6/10/99am, at 46:23-24.

2. Commenting on GX 1377, Professor Felten testified that Fortini "appears to think that there are features in there that are not related to browsing, and he's advocating taking them out. . . . And he seems to say that, if that is done, that will cause the HTML rendering engine to be more -- to be faster and more compact. In other words, he seems to think that it's desirable for technical reasons." Felten, 6/10/99am, at 47:4-12.

(b) Tying the browser to the operating system is not necessary to achieve the benefits sought by users who want both the operating system and the Internet Explorer browser

158. Microsoft is entirely free to offer a bundled version of the operating system and the browser to OEMs and users that want it; it does not need to require OEMs and users to take that version in order to offer it to those that want it.

1. See infra Part V.B.3.d.(3); ¶ 165.2.

159. Moreover, even if Microsoft were unable to offer a bundled version, and even if it were most efficient for web browsing routines to be placed in large DLLs, operating system functionality and web browsing functionality can still efficiently be sold or distributed separately. Microsoft could deliver web browsing functionality separately to those that desire it, in the form of updated DLLs.

159.1. As previously explained, the malleable nature of software has two important implications.

159.1.1. First, except at the extremes, software routines need not reside in the same file to function together in a perfectly seamless or "integrated" fashion. The organization of routines into files (including DLLs) is thus largely a matter of design discretion, as opposed to engineering necessity.

1. See supra Part V.B.2.d.(2)(a); ¶ 131.

159.1.2. Second, even if placement of certain routines in the same files has engineering benefits, it is not necessary for those routines to be shipped together to achieve that benefit. Users can be supplied with files containing some of the routines and, should they also desire the others, can obtain a different file containing the additional, related routines.

1. See supra Part V.B.2.d.(2)(a); ¶ 126.4.

159.2. Therefore, there is no technical reason why Microsoft could not ship even fully "integrated" web browsing functionality as a separate product that could be installed on Windows 98.

1. James Gosling testified that "regardless of whether a particular file is installed on a computer with the original operating system, or separately by a computer manufacturer, or by an end user installing a program, the computer will operate in the same manner." Gosling Dir. ¶ 42

2. Professor Farber testified that: "Microsoft claims in its memoranda filed with this Court that certain 'efficiencies' result from its 'integration' of some of the files (or DLLs) that are included in its Internet Explorer (IE) product as part of Windows 98. . . . The claims that efficiencies exist from this combination of functions are misleading. While the combination may offer certain efficiencies, these same efficiencies can be achieved without bundling of the Web browser software with what Microsoft calls its Windows operating system. This is because there are no technical barriers that prevent Microsoft from developing and selling its Windows operating system as a stand alone product separate from its browser software . . . . Windows 98 (like all other software) necessarily consists of modules which are malleable and separable. There are no technical efficiencies for users achieved by combining Microsoft's browser software with the remainder of the software sold as Windows 98 that could not be achieved by writing two programs in a manner that later could be loaded and 'integrated' either by the retail end user (i.e., just as end users install any other application that runs on Windows) or by an OEM." Farber Dir. ¶ 24.

3. Professor Felten testified that "the nature of software is such that it is easy to aggregate unrelated functions into the same file, or to 'integrate' separate products into a single product. The mere fact that two functions are implemented in the same file, or that two products are 'integrated' into a single product, does not imply that they must be implemented in this fashion; because of the nature of software, functions can be separated into distinct files, or 'integrated' products can be separated into distinct products without any loss of capability." Felten Dir. ¶ 31.

159.3. Microsoft concedes that the version of Internet Explorer separately distributed over the Internet accomplishes its "integration" in precisely that way.

1. See infra ¶ 159.4.

2. Carl Stork testified that Microsoft distributed Internet Explorer 3 separately from the Windows 95 because "Internet Explorer 3 represented significant customer improvements over previous generations of Internet Explorer. And we wanted to provide that to as many of our customers as we could. We have in the past released advances to components that are part of the operating system separately from the operating system as well. Another example to that would be DirectX, which has frequently both been made available on the Web as well as to be shipped with applications. And there are others as well where I could cite the same thing." Stork Dep., 8/11/98, at 40:19 - 41:7 (DX 2594).

159.4. As Microsoft's Jim Allchin conceded, all of the benefits offered by the "integration" of Internet Explorer with Windows 98 can already be achieved by an end user who installs the most recent, separately downloaded version of Internet Explorer onto a version of Windows without Internet Explorer.

159.4.1. Separate delivery of Internet Explorer 4 and the original browerless retail release of Windows 95 provides nearly all the web-related features of Windows 98; as Mr. Allchin conceded when asked about 19 separate features of Windows 98, Microsoft's decision to include the routines that supply those features in Windows, rather than in a separate browser product, is simply a choice about "distribution."

1. When asked whether a user could achieve the "integration of Internet technologies" accomplished by Windows 98 by "combining a retail version of Windows 95 and a retail version of Internet Explorer 4, both purchased separately," Allchin answered: "Yes. IE is replacing core Windows files, and it becomes a modified Windows system that has this integration in it." Allchin, 2/1/99pm, at 37:15-25.

2. When asked whether Windows 98 was therefore "just a distribution vehicle" for the technologies that Microsoft also distributed as Windows 95 and Internet Explorer 4, Allchin answered: "It's the same code out of Windows." Counsel for the United States then asked: "It's the same code, and all we're talking about are different distribution vehicles, in your words; correct, sir?" Allchin answered: "Yes, that's what I said, yes." Allchin, 2/1/99pm, at 39:18-25.

3. When again asked whether "a user who had purchased Windows 95 at retail and who added IE 4 purchased at retail would have exactly the same experience," Allchin again answered: "Yes, for exactly the same reason, i.e., he is replacing core system files, no matter how you got it." Allchin, 2/1/99pm, at 41:9-14.

4. Allchin agreed "that you can get those benefits either by buying Windows 98 or by having purchased an original retail version of Windows 95 to which you added IE 4 either downloaded or bought from retail or gotten in some other way." Allchin, 2/1/99pm, at 45:9-25.

5. Carl Stork testified that the Internet Explorer 4 team developed its "set of technologies" for several different "ship vehicles," one of which was "a retail upgrade for Windows 95," and another of which was inclusion in Memphis. Stork Dep., 1/13/99, at 772:1-6.

6. In a February 1997 summary of the results of Internet Explorer 4 and Windows 98 focus groups, Christian Wildfeuer discussed the reaction to the new "WebView" user interface available with both products: "Interestingly, they attributed these new features to Windows and not to Internet Explorer, and this despite the fact that we repeatedly hammered home the message that they would get all that in IE 4 for free, if they downloaded it off the Web." GX 202 (emphasis added).

159.4.2. The remaining features can be obtained by combining a separately-obtained Internet Explorer 5 and a version of Windows 95 on which Internet Explorer 4 has been installed.

1. Professor Felten testified that Allchin "mentioned three features: HTML Help, Update Windows, and WebTV for Windows" that were available in Windows 98 but not to a Windows 95 user with Internet Explorer 4. Felten, 6/10/99am, at 18:18-19. Professor Felten further testified that the HTML Help and Windows Update functionality are delivered by the version of Internet Explorer 5 that Microsoft is currently making available separate from Windows 98. Felten, 6/10/99am, at 19:10-16.

2. Professor Felten testified that the separately downloadable version of Internet Explorer 5 does not include the WebTV functionality "but that does not mean that it could not. In fact, if you look at Windows 98, you'll see that WebTV for Windows is an optional feature, which means the user has the option to install it or not. And if the user has installed it, the user can take it away at any time." Felten, 6/10/99am, at 19:20 - 20:2.

159.5. Microsoft's contention that a user cannot get the same benefits from combining Netscape with Windows is beside the point; the important point is that Microsoft does not have to bundle Windows and Internet Explorer in order for those users who want both to get the benefits of both.

1. Professor Felten testified that Allchin's assertion -- that installing Navigator on top of the original retail version of Windows 95 results in losing 19 or 20 different features available on the integrated Windows 98 -- is "not really related" to the issue of whether Internet Explorer has to be included with Windows. Felten continued: "If you want to understand the relationship between Windows 98 and Internet Explorer, you can't do it by looking at the relationship between two different products, Windows 95 and Netscape Navigator. So I don't see the relevance of that to any argument that IE has to be delivered with Windows 98." Felten, 6/10/99am, at 16:13-23.

2. Instead, Professor Felten testified that "the relevant comparison is what happens when you combine the original retail version of Windows 95 -- that's the one that came without any browser -- what happens when you combine that with IE 4 distributed separately, or perhaps IE 5 distributed separately." Felten, 6/10/99, at 17:2-6.

159.6. Industry participants, including Microsoft, routinely describe software products as seamlessly "integrated" even when they are not shipped together or even produced by the same company.

159.6.1. Microsoft, for example, describes Office as "integrated" with the operating system and each of its separate components, even though the functionality supplied to the end user is identical whether the components are purchased together or separately.

1. Robert Muglia testified that Microsoft Office is "an integrated package" including distinct applications known as Word and Excel, which were "designed to be integrated" together into Office, but that Microsoft nonetheless distributes Word and Excel separately. "The way I might say that is that Office is an integrated package overall. It was designed to be integrated. We produced, because our customers would like us to produce it, a separate word-processing program that we derived from the overall integrated Office package and a separate spreadsheet program." Muglia, 2/26/99pm, at 67:17 - 70:3.

2. In response to Muglia's comments about Office, Professor Felten testified: "In this instance, Microsoft makes Word and Excel available separately for those users who want them. Or for those users who want both, Microsoft provides a single box they can buy which gives them a single install. So, in other words, Microsoft can give the user the choices they want . . . The same is true with regard to Internet Explorer and Windows. Microsoft could provide a single install for those users who want both Windows and Internet Explorer, without taking away the other choices such as buying only Internet Explorer." Felten, 6/10/99pm, at 12:1-17.

159.6.2. Intuit describes a browser as "integrated" into Quicken, even though Intuit must obtain a browser from another company.

1. William Harris testified that in early 1995 Intuit was interested in "the possibility of bundling a browser and with some light integration." This meant creating a "mechanism" "by which, within the Quicken product, one could instantiate the browser and instruct the browser as to the URL that should be displayed." Harris, 1/4/99pm, at 8:23 - 9:5.

159.7. Other operating system and browser vendors deliver similar benefits, and describe their products as seamlessly "integrated," even though they can be distributed and installed separately.

159.7.1. For example, the Caldera Open Linux product, which Allchin himself demonstrated, provides "integrated" features yet is completely removable and replaceable, just like any application installed on top of the operating system.

159.7.1.1. Caldera OpenLinux, combined with the "KDE" browser, provides "integrated" features similar to those delivered by the combination of Windows 98 (or, as noted above, the combination of the retail version of Windows 95 and Internet Explorer 4 or 5).

1. Professor Felten testified that the video demonstration produced by Allchin "claimed to show . . . that Caldera OpenLinux shipped a browser, which Mr. Allchin characterized as integrated, and that that browser had some of the features that Mr. Allchin said were benefits of the integration of IE into Windows. In other words, it claimed to show that Caldera was, in some sense, acting like Microsoft in achieving these benefits supposedly by putting in an integrated browser." Felten, 6/10/99am, at 23:7-14.

2. During James Allchin's cross-examination, the government produced a still screen shot of Microsoft's video presentation that demonstrates that the combination of Caldera OpenLinux and the KDE browser provides integrated features similar to those offered by Windows 98 and IE, including 1) single-window navigation (also known as unified viewing) between the Web and local files, including the use of back and forward buttons to let the customer manage local files and folders, as well as internet content; 2) unified favorites list; and 3) unified history list. See GX 1707 (still screen shot of Microsoft video demo played in the record at Allchin, 2/1/99am,at 61:1 - 66:21); see also Felten, 6/10/99am, at 23:20 - 24:21 (examining GX 1707).

159.7.1.2. The KDE browser is entirely separate from the OpenLinux operating system; it is produced by a different company; it is easily replaced by another operating system installed on top of OpenLinux; consumers can uninstall it at any time.

1. The KDE browser is produced separately from the OpenLinux operating system, by a different company. Felten, 6/10/99am, at 26:5-14.

2. The KDE browser can be easily replaced with other browsers installed separately on top of OpenLinux, and will then deliver the same integrated functionality. Felten, 6/10/99am, at 26:15-18.

3. OpenLinux customers can choose not to install the KDE browser or can uninstall it at any time. Felten, 6/10/99am, at 26:22-25.

4. The KDE browser provides similar integration when installed separately on top of other operating systems to which it is ported but with which it is not bundled. Felten, 6/10/99am, at 26:19-20 ("KDE browser runs on other operating systems, such as Solaris, HP-UX and IRIX"); Felten, 6/10/99am, at 27:1-11 (KDE browser provides integrated features if installed on top of other operating systems).

5. For all of these reasons, Professor Felten testified, "The Caldera example contradicts" Allchin's testimony (Allchin Dir. ¶ 3) "because the KDE browser is an add-on product and it comes from a third party, and yet it achieves these benefits of integration that Mr. Allchin says can only be achieved by bolting the browser onto the operating system." Felten, 6/10/99am, at 28:4-8. He continued: "What we see with Caldera is a pair of products, if you will -- the Linux and the KDE browser -- which work well together, and are integrated in that sense, but are not inseparable." Felten, 6/10/99am, at 29:9-12.

159.7.2. The Be OS product also provides integrated features using a removeable, replaceable browser application installed on top of the operating system.

1. During its video demonstration, Microsoft employee Vinod Vallipolil stated: "The demonstration will show that the Be OS includes browsing and multimedia functionality, which are built directly into the operating system, and that no third party code is required in order to exercise this functionality." Allchin, 2/1/99am, at 58:11-15.

2. GX 1771 (a series of screen shots that shows that the browser on Be, Net Positive, is an application listed under the "apps" directory which can be removed by clicking on it and dragging it to the trash can; removal results in reduction of size taken up by applications from 4.3 megabytes to 3.0 megabytes -- a reduction of 1.3 megabytes); see also Allchin, 2/2/99am, at 13:5 - 19:13 (Boies walks through GX 1771 with Allchin).

3. The Net Positive browser can be removed from the Be OS. Removing the Net Positive browser from the applications directory frees up 1.3 megabytes of RAM on the Be OS applications directory. Allchin, 2/2/99am, at 13:5 - 19:13; GX 1771.

4. Although Be's help system will not function fully in the absence of a browser, the help system will work if another browser is installed after Net Positive is removed. Allchin, 2/2/99am, at 20:5 - 21:4.

160. Accordingly, even if Microsoft's design creates benefits for some users, forcing all of its customers to take an "integrated" browser is wholly unnecessary to achieve those benefits; Microsoft's decision to force users to take the browser in order to get the operating system is, as Mr. Allchin put it, simply a choice about "distribution."

1. Professor Fisher testified regarding the two senses of "integrated": "One of them is to call two software items integrated if they run seamlessly together. . . The second is integration in the sense that it is impossible or very difficult to split it apart. Now, as to whether that is anticompetitive, I think for that one has to think about some more. The consumer benefit doesn't come from . . . the fact that code is designed in that form. The consumer benefit comes from seamless operation. Microsoft, in Windows 95, designed Internet Explorer, particularly Internet Explorer 4.0, and Windows 95 to work seamlessly togther and be integrated in that form. And there is, you know, evidence that they could have perfectly well designed Windows 98 and Internet Explorer to also work seamlessly without having the what I have referred to the other day as the welded feature, the difficulty of taking it apart feature. If that is so, then I think yes, it probably was anticompetitive . . . because they could have done it in a way that is less restrictive." Fisher, 1/12/99pm, at 4:5 - 6:20.

2. Professor Fisher testified: "there is substantial testimony from Microsoft witnesses . . . that the advantages to consumers from the combination of Windows 98 and IE . . . could be achieved just as substantially as in having Windows 95 and IE separately without the two of them being, so to speak, so tightly welded as they are in Windows 98." Fisher, 6/1/99am, at 42:17-23. That testimony, Professor Fisher explained, led him to conclude that "there are no particular consumer benefits from getting the things together as opposed to getting them separately, but there are no particular advantages -- I mean economic cost advantages to Microsoft from delivering them together, as opposed to just delivering them separately." Fisher, 6/1/99am, at 44:23 - 45:3.

(2) Microsoft's forced licensing of its browser is not necessary to provide OEMs and users with other benefits, such as new file formats and data protocols

161. There is also no technical reason to force users to take the browser with the operating system in order to supply them with the other consumer benefits Microsoft identifies. Each of those benefits can be supplied separately by the browser and the operating system.

161.1. Non-browsing features. Microsoft points out that Windows 98 includes non-web browsing features such as DVD and USB support (Allchin Dir. ¶¶ 119-120). But there is no reason to force users to take routines that supply web browsing to obtain these features.

1. Professor Felten testified that there are "plenty of things in Windows 98, unrelated to browsing, that are not in Windows 95. Plenty of Features. For example, support for new kinds of hardware devices." Felten, 6/10/99am, at 34:7-10. Professor Felten further testified that there is no technical reason to require users to take Internet Explorer to obtain these features. Felten, 6/10/99am, at 39:11-15.

161.2. Support for new Internet protocols and data formats. Nor does providing support for new data formats and Internet protocols provide, as Microsoft suggests (Allchin Dir. ¶¶ 212-213), a justification for forcing users and OEMs to take Microsoft's browser.

161.2.1. File formats are commonly supplied separately. For instance, Adobe Acrobat Reader, a third-party application provided entirely separately from Windows, provides support for the popular "PDF" file format commonly used for viewing text retrieved over the Web.

1. Professor Felten testified: "One example is the Adobe PDF viewer. `PDF' stands for portable document format. And it's a very commonly-used format for describing documents so that you can move them from computer to computer, print the, view them on your screen and so on. And Adobe makes available some programs with names like PDF reader or PDF viewer that are widely used for viewing and printing PDF documents. . . . It may be provided with some OEM's, but I don't know of any instance in which an OEM is forced to take it or a user is forced to take it." Felten, 6/10/99am, at 42:11-23.

2. Professor Felten testified: "again, in general, there's really no connection between offering users the ability to support a new protocol or a new format -- there's no connection between that and forcing them to take any particular software product." Felten, 6/10/99am, at 43:3-6.

161.2.2. Similarly, Microsoft need not force customers to take its web browser to supply support for HTML.

161.2.2.1. Including only an HTML rendering engine in its operating system -- an option Microsoft specifically considered but rejected -- would suffice.

1. Microsoft has a file which, among other things, contains an HTML rendering machine; that file is MSHTML.DLL. Felten, 6/10/99am, at 44:20-22. When asked whether there were any inherent reason to put different functions -- HTML rendering and other functions -- together in the same DLL, Professor Felten testified: "there are many ways in which functions can be grouped into DLL's. . . . You might make a decision based on whether things fit in a certain way," like you would with organizing grocery bags, "but fact that the ice cream and the carrots are in the same bag doesn't necessarily mean that they are related in some way. . . . It's possible to put unrelated functions into the same DLL." Felten, 6/10/99am, at 45:6-19.

2. Specifically regarding MSHTML.DLL, Professor Felten testified: "You have the function of an HTML rendering engine in there, and you have other things as well. Those things could be separated, but they are not." He further explained that the rendering engine could be taken out of the DLL, or alternative the other stuff could be taken out. Felten, 6/10/99am, at 45:21 - 46:4.

3. In a March 1997 e-mail, similarly, Allchin discussed the idea of separating the "shell" from the "browser" (IE 4). In doing so, he presented some development options, including the following: "Move the shell -- but not the browser -- to the OS team. This was my recommendation before as you know. It may not be the thing you want to do for other reasons, but it is the right thing to do for the OS (both Memphis and NT). IE 4 would just plug into the environment." GX 616 (emphasis added).

4. See also supra Part V.B.3.c(1)(c); ¶ 161.

161.2.2.2. Indeed, other operating system vendors -- which lack Microsoft's monopoly power -- include a separate HTML rendering engine, even when they bundle a removable browser.

1. Apple's Avadis Tevanian testified that in the Mac OS "there are multiple HTML renderers," including "one independent of the Netscape Navigator and Internet Explorer technologies." Tevanian, 11/5/98pm, at 67:20 - 68:4.

d. The post hoc economic justifications Microsoft's witnesses have advanced for tying Internet Explorer to Windows are contrary to the evidence

162. Microsoft's economic justifications for forcing users to take the browser with the operating system, and for making the two difficult to separate, cannot be squared with the evidence.

(1) Microsoft's conduct was not plausibly designed or intended to increase demand for Windows

163. Microsoft's tying of Internet Explorer to Windows, and the decision to make it non-removable, was not intended to increase demand for Windows.

163.1. Although creation of an appealing new complement can increase demand for a product, the value of a product is maximized by helping consumers use the complement of their choice, including complements (like browsers) produced by other firms.

1. Professor Fisher testified that "if browsers are a complement to operating systems such that the sale of browsers that can be used with Windows will increase demand for Windows, it should not matter who makes the complement." Fisher Dir. ¶ 129(b).

2. Professor Fisher testified that if Microsoft were genuinely trying to maximize demand for Windows, "I don't know that Microsoft would have an interest in promoting the Netscape browser, but Microsoft would surely have no interest in restricting its distribution, since people who wanted to use the Netscape browser with Windows would be happier people with Windows. To some extent, it would increase the sale of Windows." Fisher, 6/1/99am, at 66:3-8.

163.2. Microsoft did not, however, seek to aid consumers who wanted a non-Microsoft browser. To the contrary, it took deliberate, active, and costly steps to impair the distribution and usage of Netscape Navigator, including raising the costs to both OEMs and consumers of supporting and using Navigator through its tying arrangement and related contractual restrictions.

1. The tying of Internet Explorer to Windows itself made it more difficult for users to obtain other browsers. See infra ¶¶ 169-171.

2. Professor Fisher testified that "if browsers are complements to operating systems such that the sale of browsers that can be used with Windows will increase demand for Windows, it should not matter who makes the complement. But Microsoft cared greatly who made the browsers used with Windows." Fisher Dir. ¶ 129(b)

3. Professor Fisher testified that "Microsoft even tried to discourage Netscape from offering Netscape's browser for use with Windows - an action inconsistent with browsers being a complement to Windows, whose distribution Microsoft wanted to maximize." Fisher Dir. ¶ 129(c).

4. Professor Fisher testified that "Microsoft was preoccupied not with increasing total sales of browsers but with Microsoft's share of browser sales. Indeed, Microsoft studied, and tried to implement, ways to disable Netscpe and reduce total browser sales. That conduct doesn't 'make sense from a business standpoint' if browsers are viewed as a means of increasing sales of Windows. But this conduct makes good sense if browsers are viewed as a competitive threat to Microsoft's Windows monopoly." Fisher Dir. ¶ 129(e).

5. When asked whether Microsoft did, in fact, attempt to restrict distribution of the Netscape browser, Fisher testified: "Oh, you bet you. To take a particular example, in its contracts with ISPs, Microsoft doesn't merely require that the ISP ship some minimum number -- I think it's usually around 85% -- of Internet Explorers to the ISP subscribers. That requirement alone would have permitted the ISP to ship both IE and Netscape Navigator. The contracts, in fact, require that the ISP not ship more than, in this example, 15 percent of other browsers to the ISPs. That's a restriction on Netscape. If Microsoft were really interested in selling Windows, it wouldn't have any interest in doing that. And it can't have any interest in doing that to protect its, quote, sales of IE, end quote, because it doesn't have any, quote, sales of IE, end quote. It's a no-revenue product." Fisher, 6/1/99am, at 66:12-25.

6. Dr. Warren-Boulton testified that "Microsoft's . . . efforts to increase IE's share by excluding Netscape and making it more difficult for users to obtain Netscape's browser could only reduce the value of its operating system to consumers." Warren-Boulton Dir. ¶ 187.

(2) Microsoft's tie-in and related restrictions were not reasonably necessary to preserve the integrity of the Windows platform

164. Microsoft's argument that tying the browser to the operating system is reasonably necessary to preserve the "integrity" of the Windows platform (Allchin Dir. ¶ 85; Kempin Dir. ¶ 29) is pretextual.

164.1. First, concern with the "integrity" of the platform cannot explain Microsoft's original decision to tie Internet Explorer to Windows 95 because Internet Explorer 1 and 2 did not contain APIs.

1. See infra Part V.G.6.a; ¶ 312.1.

164.2. Second, concern with integrity of the platform cannot explain Microsoft's refusal to offer OEMs the option of Windows 95 or 98 with Internet Explorer uninstalled or its equivalent because APIs, like all other shared files, are left on the system when Internet Explorer is uninstalled.

1. Professor Felten testified that "I have implemented the prototype removal program to continue to support the ability of ISVs to use all of the shared program libraries shipped with Windows 98. Such shared program libraries are left substantially unchanged, though they are no longer used in the course of Web browsing without the addition of another software program such as AOL's access software or Intuit's Quicken personal finance software. Microsoft could have produced a version of Windows 98 without Web browsing in a way that did not adversely affect the functionality of ISV applications." Felten Dir. ¶ 56.
2. Professor Felten testified that leaving shared files in place "conforms to the ordinary way in which software application programs are removed," as well as to the instructions that Microsoft itself gives to application developers. See Felten Dir. ¶ 57 (citing GX 431, Microsoft's Handbook for Applications, p. 29).
3. Dr. Warren-Boulton testified that "Microsoft's objective of supplying ISVs with a consistent platform does not provide an economic justification for biasing OEMs' choice of which browser to feature" because "Microsoft's design decision was arbitrary; Microsoft could have put 'platform files' [such as shared files] entirely in the operating system and not included any such files in its browser product." Warren-Boulton Dir. ¶ 165; id. ¶¶ 166-167.

164.3. Third, Microsoft's concern that offering OEMs the choice as to whether to install certain browser-related APIs would fragment the Windows platform (Kempin Dir. ¶ 29) is insubstantial because OEMs, which operate in a competitive market, have ample incentives to include APIs (including non-Microsoft APIs) for applications their customers demand.

1. Professor Fisher testified that Microsoft's concern with offering developers a stable, up-to-date platform is insubstantial because "it's not obvious that those APis have to be Microsoft's API's for there to be a stable set of API's offered to developers." Fisher, 6/3/99am, at 21:21 - 22:20.

164.4. Fourth, even if there were some potential benefit from forced licensing of a single set of APIs to all OEMs, any such justification could not apply in this case because Microsoft itself perpetuates fragmentation of the platform.

1. Dr. Warren-Boulton testified: "There are millions of PCs running earlier versions of Windows releases that lack the latest versions of Windows 95 or Windows 98. To ensure that the software they develop runs no matter which version of Windows a PC contains, ISVs commonly redistribute necessary shared program libraries with their software. In short, Microsoft's own practice of continually updating its platform means that application developers must repliate part of the platform with the software they distribute and, therefore, that the effect on an OEM removing certain parts of the 'platform' is likely to be small." Warren-Boulton Dir. ¶ 170.

164.4.1. Because Microsoft frequently releases new APIs with its updated versions of Internet Explorer and Windows, the installed base of Windows PCs has very different sets of APIs. Microsoft's practice of continually updating those APIs perpetuates this fragmentation.

1. Professor Fisher testified that "the Microsoft APIs are not, in fact, stable. They change. And ISVs have to keep embedding pieces of the appropriate APIs into their own software and shipping it out." Fisher, 6/3/99am, at 22:11-14. He also testified that "ISVs have to redistribute IE code anyway because Microsoft has put so many different releases out there." Fisher Dir. ¶ 165.

2. Dr. Warren-Boulton testified: "There are millions of PCs running earlier versions of Windows releases that lack the latest versions of Windows 95 or Windows 98. To ensure that the software they develop runs no matter which version of Windows a PC contains, ISVs commonly redistribute necessary shared program libraries with their software. In short, Microsoft's own practice of continually updating its platform means that application developers must replicate part of the platform with the software they distribute. . . ." Warren-Boulton Dir. ¶ 170.

3. John Gailey, Director of Engineering for Novell, declared that: "Because Microsoft is constantly changing and updating the system services provided by Windows 95, Novell bundles some of those operating system services with GroupWise in order to ensure that all users have available to them the latest version of the system service GroupWise is calling upon." Fisher Dir. ¶ 165 (quoting Gailey Decl. 11/17/97).

164.4.2. ISVs have adapted to this reality by redistributing needed APIs with their applications in order to ensure that the APIs get installed on the user's PC; to facilitate this, Microsoft makes the APIs it ships with Internet Explorer available to third party developers for distribution with their products.

1. Microsoft's David Cole testified that many ISVs redistribute Internet Explorer in order to "upgrade the operating system to the level they need to run their application. . . . That's a very common practice." Cole Dep., 1/13/99, at 390:20-24.

2. James Allchin testified that "Microsoft does license developers whose products rely on Internet Explorer technologies to ship them with their products so that older versions of Windows can be upgraded to the necessary level of functionality." Allchin Dir. ¶ 135. Allchin testified that "we do this for graphics and everything else. We take the system to the installed base, provide pieces of software that upgrade it. Games that run easily on Windows 95 wouldn't operate correctly on Windows 95 without additional software . . . called DirectX. So, we either have updated Windows 95, we put it on the web site or even let people, ISVs, vendors, ship that software. So it's all about how far we take it about adding new functionality to the system for the installed base." Allchin, 2/1/99pm, 47:10-19; see also Maritz Direct ¶ 171; Jones Dep., 1/13/99, at 535:6 - 536:6.

3. William Harris testified that: "The combination, or separation, of software products or components will almost always have some potential advantages and some potential disadvantages. For Intuit, in particular, distributing a browser with our products, rather than as part of the operating system, has some real advantages. The fact that Intuit currently distributes a version of Internet Explorer with Quicken is illustrative of this point. Intuit has exerted hundreds of hours testing and verifying that Quicken will operate with the specific version of Internet Explorer that comes with Quicken. If a Quicken customer does not already have a compatible version of Internet Explorer, Quicken will install the version of Internet Explorer that comes with Quicken. This ensures that Quicken will work the way it was intended and tested." Harris Dir. ¶ 85.

4. Professor Fisher testified that "ISVs have to redistribute IE code anyway because MS has put so many different releases out there." Fisher Dir. ¶ 165; see also Felten, 6/10/99am, at 61:10-14.

5. Glenn Weadock testified that applications that update Windows DLLs are common. Weadock, 11/17/98am, at 25:15 - 26:10.

6. Robert Muglia testified that, because of differences in implementations of Java, ISVs similarly redistribute Java virtual machines with their Java programs to ensure that those programs will function properly. Muglia Dir. ¶¶ 87, 104, 107.

164.4.3. This is equally true of Microsoft, which distributes APIs -- including those distributed with Internet Explorer -- with a number of Microsoft applications.

1. Muglia testified that Microsoft will distribute Internet Explorer with Office 2000: "There is updated Windows functionality that we need to take advantage of. So, to make sure that functionality is on the user's computer, we are distributing it with Office 2000, just like other ISVs have the option to do." Muglia, 2/26/99pm, at 67:3-11; see also GX 727 (Microsoft Office 97 redistributes all of Internet Explorer 3, and installs certain Internet Explorer components that it needs to function properly).

2. Professor Felten testified that Microsoft itself redistributes various Internet Explorer components with its application products Office 97, Money 98, Money 99, Frontpage 98, Visual Studio 6.0, MSN, and Plus 98. Felten, 6/10/99am, at 62:13-15.

3. GX 2220 (series of screen shots captured from the beginning of the installation process for Visual Studio) ("Visual Studio comes with the latest version of Internet Explorer 4.01. The updated version of Internet Explorer 4.01 is an essential component of Visual Studio 6.0 Enterprise Edition and installation is required."); see also Felten, 6/10/99am, at 67:12 - 71:4.

164.5. Although Gordon Eubanks testified that redistributing software components was inefficient for ISVs, he admitted that Symantec, in fact, routinely redistributed Internet Explorer components in its ordinary business.

1. Eubanks testified that, until recently, Symantec "shipped a rendering engine with Norton Utilities so we could display HTML because we couldn't count on every customer having a browser." Eubanks, 6/16/99pm, at 76:25 - 77:3.

2. Eubanks testified that "in the past, we did distribute this HTML rendering DLL, and it was used by components of Norton Utilities." Eubanks, 6/16/99pm, at 74:5-8.

(3) Microsoft's quality-related justifications are pretextual

165. Microsoft's quality-related justifications are similarly pretextual.

165.1. As explained, Microsoft's design of Windows 98 delivers to end users no technical benefit (aside from the ability to browse the web) that could not be achieved in a version without web browsing.

1. See infra Part V.B.2.e.(3)(b); ¶¶ 151-154.

165.2. Microsoft's concern that meeting demand for Windows without Internet browsing will degrade product quality or its reputation is insubstantial in any event because, if consumers genuinely prefer the version of Windows bundled with Internet Explorer, they would choose it in the market.

1. Professor Fisher testified that "if consumers prefer seamless operation, they would chose it in a competitive market," and that "competition leads to a consumer-driven arrangement of . . . what gets produced, what gets distributed and so on. If welding it together actually provided benefits, then consumers would choose the welded version as opposed to a separate version, and they would be willing to pay more." Fisher, 1/12/99pm, at 6:3 - 7:7.

2. Professor Fisher testified that: "The consumer gets the same benefits if it . . . acquires those two things separately. In that event, there is no reason why Microsoft shouldn't offer them typically separately throughout and let consumers decide, if those are really good benefits, that they want to acquire them." Fisher, 6/1/99am, at 44:6-12.

3. Dr. Warren-Boulton testified that if removing Internet Explorer from Windows 98 "would affect the way in which Windows 98 would operate either by itself without a browser or with Netscape, then that would mean in the market people would look at that product and say 'I don't like that product very much.' And what would happen is people wouldn't choose it, and so the outcome of the test would be, in fact, that people would say I don't want to have the two products separately." Warren-Boulton, 11/24/98pm, at 22:25 - 23:7.

4. Dr. Warren-Boulton testified that "I don't think that Microsoft -- there is any reason why Microsoft cannot inform the customers that this is a Windows 98 product that does not have IE." Warren-Boulton, 11/24/98pm, at 23:15-20.

165.3. Ensuring ease of preinstallation and configuring the product similarly cannot justify Microsoft's tie-in.

165.3.1. OEMs can provide the benefit of preinstalling and configuring to end users just as effectively as Microsoft, and those OEMs that want Microsoft to perform that service can obtain a bundled version from Microsoft.

1. When asked whether "some customers might like to open up a new PC, plug it in, and get connected to the Internet easily," Professor Felten testified: "Absolutely. I think also that those customers would prefer to have the browser of their choice pre-installed on the system. And I'm not saying that OEM's should not be free to do that. The whole point that I'm trying to make in my testimony and the whole point of the prototype removal program is trying to make is that that choice could be provided to end users, to OEM's and all along the supply chain so that users can have what they want." Felten, 12/14/98pm, at 28:2-13.

2. Professor Farber testified that none of his testimony "denies the possible convenience or preference of some users for 'one stop shopping' for bundled products such as the current version of Windows 98 sold as one product by Microsoft. Those OEMs and retail end users who may find this convenience outweighs any technical inefficiencies described here can certainly still choose to buy Windows 98 in the form it now exists." Farber Dir. ¶ 28.

3. Muglia conceded that the inconvenience of multiple setup procedures for customers is no reason not to offer an unbundled version of Microsoft Office; "Sure, of course not. Again, we're just providing choices for customers. We're saying if people want to buy just a word processor or spreadsheet, they have the option to do so." Muglia Dep. (played 6/10/99pm), at 11:17-21.

4. IBM's John Soyring testified that PC suppliers "generally have ample ability to include applications such as a browser with an operating system and load this combined set of products on their machines." Soyring Dir. ¶ 21; see also id. ¶ 22 ("[PC suppliers] can install browsers on the operating system on machines they ship, so long as they are given appropriate information by the browser supplier and are given any information specific to the particular operating system involved by the browser supplier or the operating system supplier.").

5. When asked whether the convenience of a single installation procedure was "a compelling rationale requiring users to take Internet Explorer along with Windows," Professor Felten answered: "No, it's not. If a user wants both Windows and Internet Explorer, they -- Microsoft can offer them that option with the single install. But a user who only wants Windows without Internet Explorer can get that in a single install." Felten, 6/10/99pm, at 5:19 - 6:1.

6. Professor Felten testified that "Microsoft could provide a single install for those users who want both Windows and Internet Explorer, without taking away the other choices such as buying only Windows or only Internet Explorer." Felten, 6/10/99pm, at 12:14-17.

165.3.2. Microsoft gives users the option of installing or uninstalling other programs that it distributes with Windows or with other software bundles.

1. A series of screen shots from Windows 98 shows that the operating system has menus from which various software programs, unlike IE, can be installed or uninstalled from Windows. GX 1700.

2. WebTV for Windows can be optionally installed or removed from Windows 98 despite the fact that it is delivered along with the integrated Internet Explorer 5. Felten, 6/10/99, at 19:24 - 20:20 (WebTV falls under "add/remove" control panel on Windows 98).

3. Microsoft provides single installation with "no assembly required" optionally in the case of Microsoft Office, allowing users to choose whether to obtain all the programs bundled together in Office at the same time or separately. See supra ¶ 165.3.1; Felten, 6/10/99pm, at 11:22 - 12:17.

4. Microsoft's tying of Internet Explorer to Windows has caused significant exclusionary effects and consumer harm

166. Microsoft's coercive binding of Internet Explorer to Windows raised the costs of using other browsers, facilitated Microsoft's objective of preventing Netscape from developing into a viable threat to the applications barrier to entry, and thereby harmed consumers and aided Microsoft in its objective of preserving its operating system monopoly.

a. Installing a second product in a software category imposes costs on OEMs

167. Microsoft's conduct raised the costs to OEMs of carrying Netscape or other browser products.

(1) Increased technical support costs

167.1. OEMs bear essentially all the customer support costs for the computers they sell, including those related to Windows, even though Windows is Microsoft's product.

1. Microsoft's licensing agreements with PC OEMs require them to - redacted - GX 418 (Toshiba) (sealed); see also GX 410 (DEC), at MS98 0008841 (sealed).

2. Joseph Kanicki testified that Dell bears support costs for the computers it sells. Kanicki Dep., 1/13/99pm, at 342:5-7.

3. Gayle McClain testified that Gateway provides customer support for the machines they sell, and that "a new user could call regarding almost anything," including being confused by clutter on the desktop. McClain also testified that there is no mechanism for Microsoft to reimburse them for any of those support costs. McClain Dep., 1/13/99pm, at 616:15 - 617:12.

4. both the hardware and software on the PCs it sells. Rose, 2/18/99pm, at 41:23 - 42:11; see also Rose Dir. ¶ 15 ("Many of our consumer customers do not care to know the constituent components (or even the components' brand names). Rather, they are buying the 'out of the box' experience. They want their computers to be simple and easy to use right out of the box, and they look to the Compaq brand to make that experience a good one.").

5. Soyring testified: "Software suppliers often provide better pricing to PC suppliers if the PC supplier responds to the support calls from customers and handles the initial analysis of potential problems. This activity can range from simple to very complex and can even involve review and analysis of the source code for the software involved." Soyring Dir. ¶ 20.

167.2. Adding a second product in a given category, including a browser or the visible means of accessing the browser, can significantly increase those support costs.

1. When asked whether Compaq's support costs would go up if they installed more than one browser on a PC, Rose testified that "I would expect that as the number of multiple things go up, the support costs would go up." Rose, 2/18/99pm, at 42:12-22. Rose testified that Compaq had evaluated the relative costs and benefits of preinstalling more than one product in any particular software category, and reached the following conclusions: "'That, one, it's expensive; puts a greater cost burden on Compaq; adds more complexity; causes confusion to the customers, particularly consumer customers, that don't have any personal computing experience.'" Rose Dep. (read 2/18/99pm), at 45:25 - 47:13; see also Rose, 2/18/99pm, at 47:25 - 48:14.

2. Soyring testified that, "even if there is customer demand for another browser, the PC supplier has to consider the cost of the second browser. Even if the other browser supplier offers it to the PC supplier for free, the PC supplier will incur substantial additional costs, including additional testing, distribution and support costs." Soyring Dir. ¶ 27.

3. Soyring also testified: "Whenever manufacturers install an additional program, there usually is incremental cost, not just the fee for the license, but training their staff to build the image that's preloaded on the hard disk, or whatever media they choose, to train their support staff, because typically contracts with software manufacturers require that the first two levels of customer contact, if there's a support problem, is with the P.C. manufacturer; therefore, there is additional training cost. There's costs that go into their marketing programs to explain the various products that they've installed and the value to their customer. So yes, there are additional costs." Soyring, 11/18/98am, at 70:15 - 71:1.

4. Microsoft's Gayle McClain testified that multiple icons, or "redundancy of function in various places," is confusing to end users (McClain Dep., 1/13/99pm, at 623:6 - 624:11), and that Gateway wanted to remove icons from Windows 98 because of concern about clutter on the screen. McClain Dep., 1/13/99pm, at 614:5 - 615:9.

5. According to John Kies, Senior Product Manager for the Packard-Bell/NEC Versa Notebook product line, Packard-Bell/NEC would not preinstall Navigator if Internet Explorer is already preinstalled because "It wouldn't make sense to have two very large programs installed using up the hard disk drive and it might be confusing to the end user as to why two of the same applications were included." Kies Dep. (played 11/17/98am), at 68:13-21.

6. Based on this testimony and other evidence, Professor Fisher concluded that "some OEMs preferred to load only one browser to avoid user confusion and the resulting consumer support costs, and to avoid increased testing costs." Fisher Dir. ¶ 150.

7. Dr. Warren-Boulton explicated OEM testimony that having Internet Explorer increases the costs, and reduces the benefits, of a second browser (Warren-Boulton 11/24/98pm, at 59:18 - 59:25); further, he testified that Internet Explorer support costs are significant costs to OEMs. Warren-Boulton, 11/24/98pm, at 26:19 - 27:10.

(2) Additional testing costs

167.3. Preinstalling a second product in a given software category can also increase the OEM's testing costs.

1. Dr. Warren-Boulton testified that if OEMs purchase Windows "already with IE on it, then you've got to test to make sure that your system is compatible with the Windows IE bundle. If it didn't come with IE on it, then you just would have to test it with Netscape. So the point is that, I think as Mr. Kempin has pointed out, if you use IE, you only need to test it once. If you want to use Netscape, you've got to test it twice." Warren-Boulton, 11/30/98am, at 14:16 - 24.

2. Professor Fisher testified that "some OEMs preferred to load only one browser to avoid user confusion and the resulting consumer support costs, and to avoid increased testing costs." Fisher Dir. ¶ 150.

3. Weadock testified: "It is certainly also important that we avoid the testing costs associated with supporting a dual browser end-user environment or an environment in which users click one place and run one browser and click somewhere else and run another browser. That increases an organization's testing costs, because now they have to -- they can't rely on Navigator being the only browser that users will activate." Weadock 11/17/98am, at 74:3-11.

(3) Opportunity costs

167.4. Preinstalling a second application in a given software category also takes up scarce and valuable space on the computer's hard drive and desktop.

1. According to John Kies, Senior Product Manager for the Packard-Bell/NEC Versa Notebook product line, Packard-Bell/NEC would not preinstall Navigator if Internet Explorer is already preinstalled because "It wouldn't make sense to have two very large programs installed using up the hard disk drive and it might be confusing to the end user as to why two of the same applications were included." Kies Dep. (read 11/17/98am), at 68:13-21.

2. Stephen Decker testified that Compaq stopped preinstalling Netscape on the computers it sells because "with the inclusion of Internet Explorer from Microsoft, that category is already filled because of the inclusion of that product as part of the operating system, and then also to actually license the additional browser that would involve both time by Compaq to put that particular agreement in place, we would have another product that would take up real estate on our hard drive and, you know, there potentially would be some additional licensing fees, and we would have to pay for that technology. . . ." Decker Dep. (read 2/18/99am), at 61:8-21.

3. Professor Fisher testified that "some OEMs viewed the desktop and/or disk space as scarce real estate and were generally reluctant to preinstall more than one software title in each functional category." Fisher ¶ 151.

b. Microsoft's tie-in and associated contractual restrictions raised the costs to OEMs of, and thus deterred OEMs from, preinstalling Netscape and other non-Microsoft browsers

168. Microsoft's conduct has deterred OEMs from loading Netscape (and other browser rivals) and thus significantly contributed to Microsoft scheme to raise rivals' costs and gain browser usage share.

1. A Microsoft OEM sales manager, Candace Grisdale, responded as follows to a May 1998 news article suggesting that Hewlett-Packard might bundle Navigator on all its PC lines: "HP we've known was close to NSCP but each time we've asked them of their plans, they have said they do not want to carry the burden of two browsers, unless the customer segment demands it." GX 323.

2. Mal Ransom testified that Netscape approached Packard Bell about preinstalling Navigator. Packard Bell seriously considered do so, but decided not to because Packard Bell did not want to carry the burden of two browsers on its machines. Ransom Dep. (played 12/16/98pm), at 74:12 - 75:6.

3. Compaq removed Netscape once it was compelled by Microsoft to restore the Internet Explorer icon to the desktop because of the increased costs of supporting a second browser. See infra Part V.C.1.b.(2); ¶ 179.

4. Professor Fisher testified that, "since Microsoft's tying arrangement ensures that IE is on every Windows PC, the result is a significant exclusionary effect that ensures that IE is the only browser on most PCs shipped by OEMs." Fisher Dir. ¶ 152; see also Fisher, 1/6/99pm, at 12:21 - 13:2 (OEMs don't find it profitable to install Navigator because Internet Explorer is already there).

5. Dr. Warren-Boulton testified that a significant exclusionary effect can be inferred from the fact that IE users are more likely than Netscape users to have gotten their browser through the OEM channel. Warren-Boulton, 11/24/98pm, at 58:16 - 59:12.

6. See generally infra Part VII.A (describing both the raising of rivals' costs and its impact on OEM carriage of Navigator).

c. Microsoft's conduct similarly raised the costs to end users of employing non-Microsoft browsers

169. Microsoft's conduct similarly raises the costs to end users of employing non-Microsoft browsers.

(1) It is undesirable for a consumer who wants one type of browser to have a different browser pre-loaded on his PC

170. For a consumer who desires to use a particular browser, the existence of a different browser pre-loaded on the PC is not only superfluous but also, for several reasons, undesirable.

1. Professor Felten testified: "Providing code that people actually use is efficient, but providing code that is not being used, or packaging code that is not being used, or code that the user does not want along with code the user does want, as Microsoft has done in this case, is not efficient and makes things worse for the users." Felten, 12/14/98am, at 51:14-21.

2. Professor Felten also testified that "in general if you know that the user does not want something, it can only be inefficient to force them to take it. And you will note that with respect to Internet Explorer in Windows 98, we are talking about forcing the user to install software that they don't want onto their hard disk. When they boot Windows, that software they don't want is loaded into the memory. And as Professor Farber explained, in some cases that software is even run, and Internet Explorer pops up even though the user doesn't want it. It's certainly inefficient to do that. I also want to point out that when I talk about efficiency, as a computer scientist, I'm using it in the broadest sense. That is, I'm including -- I'm including inefficiencies that develop, for example, because of user confusion because of unwanted behavior. Mr. Weadock talked about the cost in support calls and lost productivity because of those cases, and those also apply in the case of Windows 98 and IE." Felten, 12/14/98pm, at 11:16 - 12:9.

3. Weadock testified: "If an organization wants to standardize on a specific browser for reasons of cross-platform access, then they may want to choose a browser like Navigator, as opposed to a browser like Internet Explorer, in which case they don't want Internet Explorer on the machine." Weadock, 11/17/98am, at 43:5-10.

170.1. Unused software on a PC, particularly a program as large as a modern browser, takes up scarce and valuable space on the user's hard drive and may therefore increase hardware resource requirements.

1. Professor Felten testified: "Forcing some users or OEMs to take software they do not want is inefficient, since the unwanted software needlessly uses resources such as disk space and memory, and increases the complexity of the user interface by cluttering it with unwanted icons, menu items, and programs." Felten Dir. ¶ 67.

2. Weadock testified that "if a user wants Windows 98, doesn't want Internet Explorer and wants Netscape, then the commingling of code between Windows 98 and IE may result in a total package that uses more memory and more disk space than if Microsoft had not commingled Internet Explorer and Windows 98. So, it's not a benefit for everybody." Weadock, 11/16/98pm, at 44:16-23.

3. Weadock testified: "The required hardware resources can increase significantly when an operating system integrates application software," and that "Windows 98 requires a great deal more disk space and significantly more memory than Windows 95, largely due to Internet Explorer software." Weadock Dir. ¶ 32d.

170.2. The drain placed on a system by additional, undesired software increases when that software is "integrated" in some fashion with the computer's operating system because code used by the operating system is more likely to consume critical dynamic memory, or RAM, in addition to storage space on the hard drive. For this reason, "integrating" certain additional software into the operating system is also more likely to cause stability problems.

1. Weadock testified: "The likelihood of an application failure affecting the operating system may increase when code is shared between the two." For example, "I have noticed in my own experiments with Windows 98 that the failure of an Internet Explorer Window can cause the entire desktop to malfunction." Weadock Dir. ¶ 32a.

2. Weadock testified: "An application that modifies operating system files could create (and, in the case of Internet Explorer, has been documented in some cases to create) conflicts with other applications and with company-developed applications." Weadock Dir. ¶ 32b.

3. Finally, Weadock testified: "It may become more difficult to enforce security when an operating system integrates application software." For example, "[s]ecuring the system against users running programs that management doesn't want them to run becomes more difficult as application software is folded into the operating system." Weadock Dir. ¶ 32e.

4. John Soyring testified that "integration could be inefficient and disadvantageous to customers" because, for example, "integration generally increases the size of the operating system, and therefore, the size of the hardware required to run it effectively. In addition, it may slow the use of other applications, and may provide function which certain customers do not want." Soyring Dir. ¶ 25.

5. James Gosling testified that, "in Windows 98, . . . Microsoft apparently loads some browser-related files into memory even when the user may never need that functionality . . . . In essence, Microsoft simply shifts the time required to load the browser code from when it is first needed by the user to every time the computer boots up." Gosling Dir. ¶ 37.

6. Felten testified that, "as more memory gets used up, the system starts having to do complicated things to keep all the programs running, and so use of more memory generally translates into reduced performance." Felten, 6/10/99pm, at 18:16-20.

7. In an email from Jonathan Roberts to Bill Gates and others in July 1997, Roberts points out that a 16 MB Navigator user "will have a much slower experience with 98 than 95," because "if they access help or an HTML page while in Explorer or in My Computer they will be loading the IE HTML rendering engine and significantly increasing the working set." GX 725.

8. In December 1996, David Cole and his Internet Explorer development team discussed "decoupling" IE4 from the Windows shell, in part because "if the user installs the new shell, they will have some things to learn and pay a performance price. By coupling these together, I think the overall effort has suffered. We've got a compromised new shell design that tries to be too Windows 95 shell compatible in my view. We don't have HTML on the desktop because we are worried about performance. But even in compatibility mode, performance will degrade and there will be differences that could stall adoption of the browser platform." GX 46.

9. Professor Felten also testified: "There are two costs that come from loading unnecessary code into memory. First of all, it takes time to read that code off the disk, and that means that the response time of some operation is slower because you spend extra time loading this data into memory. Also, the unwanted code takes up space in memory, and memory space is a limited resource. Something else may have to get moved out of memory or something else may not be able to work because the system has run out of memory. The user ultimately might be forced to run out and buy more memory or upgrade their PC in order to get enough memory to loaded the unwanted code along with the code they actually want." Felten, 12/14/98pm, at 57:10-22.

10. AOL's Barry Schuler testified that - redacted - Schuler Dep., 5/5/99, at 136:21 - 137:6 (DX 2810A) (sealed).

170.3. Unused software can also increase consumer confusion and support costs by needlessly increasing the complexity of the user interface.

1. Professor Felten testified that "in general if you know that the user does not want something, it can only be inefficient to force them to take it. . . . I also want to point out that when I talk about efficiency, as a computer scientist, I'm using it in the broadest sense. That is, I'm including -- I'm including inefficiencies that develop, for example, because of user confusion because of unwanted behavior. Mr. Weadock talked about the cost in support calls and lost productivity because of those cases, and those also apply in the case of Windows 98 and IE." Felten, 12/14/98pm, at 11:15 - 12:9.

2. Weadock testified that it is "generally accepted practice among IT managers in businesses large and small to put the least amount of software on a computer that will do what their users need to do. You just save all kinds of costs that way, all the way from resource use to support and training." Weadock, 11/17/98am, at 41:17 - 42:16.

3. Weadock testified that commingling operating system and application code can create user confusion. For example, Microsoft's fusion of Windows Explorer and Internet Explorer may confuse consumers as to whether they are viewing local or remote data. Weadock Dir. ¶ 32c.

(2) The hard-coding of Internet Explorer makes users less likely to use Netscape with Windows 98

170.4. Microsoft's decision to frustrate the user's choice of default browser in Windows 98 by forcing the use of Internet Explorer in certain situations decreases the value of other browsers to end users.

1. Professor Felten testified that a user can install Netscape Navigator on Windows 98, "but there is a problem using it. And Professor Farber described this the other day. He talked about what happened when he tried to install Navigator on his Windows 98 PC. And Internet Explorer kept popping up in his face, as he put it. That's the sort of phenomenon that I refer to in my testimony as hardcoding access to Internet Explorer 4. And so that hardcoding does prevent the user from using Netscape Navigator in all the cases where they would like to." Felten, 12/14/98am, at 27:8-19; see also Felten 12/14/98am, at 29:6-17 ("there are also situations where IE pops up when a user does not want it"); Felten, 12/14/98am, at 44:12-17 (although "Windows 98 gives the user more choices than Windows 95 did, . . . there's one area in which it gives the user less choice, which is web browsing").

2. Dr. Warren-Boulton testified that he personally bought a Windows 98 machine, but "never had the intention of using IE, and I wound up installing Windows Navigator." Nonetheless, "IE keeps popping back up again. It is, perhaps, people more technically adept would be able to avoid it, but I can't seem to avoid running into IE." Warren-Boulton, 11/24/98pm, at 30:22 - 31:4.

3. Dean Schmalensee conceded that, if the integration of a software product into the operating system degrades the performance of a different product or makes it less convenient for users to use that product, that would be a harm to consumers. Schmalensee, 1/19/99am, at 39:21 - 40:3.

170.5. Microsoft's "hard-coding" of Internet Explorer to Windows 98 is particularly burdensome for organizations that want to standardize on a non-Microsoft browser.

1. When asked whether organizations remain "free to standardize on Netscape Navigator if they want," Weadock answered: "Not in the case of Windows 98. They are not free to fully standardize on Navigator because Windows 98 enforces certain user actions to bring up Internet Explorer, so I would say no, they were completely free to standardize on a product if the operating system imposes requirements to use an alternative nonpreferred product in some cases." Weadock, 11/17/98pm, at 7:17 - 8:2.

2. When asked how the fact that Windows 98 comes with Internet Explorer affects a corporation that has standardized on Navigator, John Kies of Packard Bell/NEC stated that "it would require the end user to uninstall Internet Explorer 4.0 or install next to it Netscape Communicator. And this -- then they would have two browsers on it, where most companies would just prefer to support one browser and, once again, go back into the training issue. And most corporations would not -- would prefer not to have any items in the user interface that they're not ready to support." Kies Dep. (played 11/17/98am), at 72:8-19; see also Kies Dep. (played 11/17/98am), at 72:8 - 73:7.

3. In a presentation entitled "Why Internet Explorer 5.0?" Scott Vesey of Boeing wrote, "We do not have a choice. Internet Explorer will be installed as a component of our next generation desktop operating system. The extent to which we might be able to disengage it needs to be determined. Operating System integration. Microsoft is unlikely to back away from their commitment to integrating the Web browser into the operating system." Under "Risks," Vesey noted, "Two browsers on all Wintel mahcines. IE comes in the operating system and is available for use as a browser. Netscape would have to be separately installed. Not able to fully disengage browser. May be able to remove IE icon from the desktop (to be determined). Windows Explorer can still be used to access internet protocols: (ex. http and ftp). Difficult to enforce Netscape as 'The Browser' on the Wintel environment." GX 638, at TBC 000412.

4. A "Win98 Browser choice matrix" prepared by Vesey included the following option (among others): "Accept Win98 as is with full Internet Explorer integration. Use IE as the 'Standard' browser. Install Netscape Communicator as 'Alternate' browser." Under "Impact/Risk" of this option, Vesey wrote "Possible DLL and registry contention issues. User confusion about what browser should be used. Developers will develop sites that require one or the other browser requiring users to switch browser depending on what site is being accessed." Another option presented is "Remove Internet Explorer Desktop icon, disable browser function for Web served documents" and "Install Netscape Communicator as 'Standard' browser." The Impact/Risk of this option is "The extent to which it will be possible to disable Internet Explorer." GX 633.

5. In that same document, Vesey suggests that: "Installing Netscape as an alternative browser may lead to user confusion about what browser to use. Some sites may require a specific browser. We have been working to minimize this possibility but this risk still exists. --- Removing Explorer (or disabling the web access capabilities) will likely prove to be impractical or impossible. This will leave us with 3 likely alternatives: Install both browser, allow user to select which browser to use. -- Install only Explorer, require all web sites to be completely neutral. -- Remove Explorer (or disable all web access capabilities) and install Communicator for web access." GX 633.

6. An internal Boeing document describing Boeing's "Browser Decision History" discusses planning for 1999, and notes, "Internet Explorer v5 will be so deeply embedded in NTW 5, Office 2000, & Outlook 2000 that we will not be able to extricate it -- Therefore both Netscape and Internet Explorer browsers will be installed on Windows desktops -- Netscape will continue to be the standard web browser, next step will be to determine how to constrain use of Internet Explorer as the browser -- Continue to evaluate 1999 browser direction." GX 631.

7. An internal Boeing presentation entitled "Enterprise-wide Web Browsers for the Desktop" by Scott Vesey in March 1998, stated: "Installing both web browsers may: Confuse users about which browser to use. Increase end user support costs." GX 635, at 11; see also GX 637.

170.6. Because of these costs, many firms will have to choose between a preferred non-Microsoft browser like Netscape and Windows 98.

170.6.1. Many customers feel strong pressure to use Windows 98 as their operating system for various reasons, including a desire to remain compatible with other users and a desire to use new hardware or peripherals that Windows 95 does not support. Many of these customers are likely to forgo installing Netscape Navigator (or other browsers) on their computers.

1. Weadock testified that "many customers (depending on their size or profile) feel strong pressure to use Windows 98 for various reasons, including the following: (a) The organization's customers, suppliers, or clients are likely to use it, and business reasons exist to use the same software that customers, suppliers, or clients use. (b) Windows 98 brings new technological benefits, such as a more efficient file system; support for new types of hardware, such as high-capacity optical disks; support for new hardware devices, such as printers and network cards; better control of power-saving features on both desktop and portable PCs; Year 2000 compliance; and a number of new and enhanced housekeeping utilities that Microsoft claims (and I concur) can reduce support costs. . . . (c) The organization relies on hardware that is being discontinued by the manufacturer and replaced by hardware that doesn't work with Windows 95 but that does work with Windows 98. . . . At some point in the life cycle of an outdated operating system, computer hardware manufacturers tend not to devote resources towards making their newest products compatible with that outdated operating system." Weadock Dir. ¶ 42.

2. Boeing's Scott Vesey testified that, "in the long term," Boeing could not continue to use Windows 95 but would eventually "have to move forward in a new operating system version as hardware is not supported by Windows 95." Vesey, 1/13/99, at 280:13-16.

3. Vesey wrote that "The main reasons for moving to Internet Explorer 5.0 in Q2/3 of 1999 of the 18-month tactical plan are: We do not have a choice. . . . The integration between Internet Explorer and the desktop operating system cannot be fully disabled. . . . Our only choice is whether we will install two browsers or just install Internet Explorer." GX 637 (emphasis in original).

170.6.2. A number of corporations have chosen instead the costly option of forgoing Windows 98 and the non-browser related benefits it provides in order to use the browser of their choice and have reverted to the original retail release of Windows 95 (which does not include Internet Explorer).

1. Glenn Weadock testified that "some companies are resisting, or electing not to use, Windows 98 largely or in part because it would force them to have a two-browser desktop (for example, Chrysler, where the Manager of Performance and Cost Management stated that two browsers would increase support costs)." Weadock Dir. ¶ 41.

2. Weadock testified that many organizations have gone back to the retail version of Windows 95, even though doing so entails various costs, because "they have the greatest control over what applications they can install onto it, because it is the cleanest version of Windows 95. It doesn't contain software that they don't want. And, in particular, it doesn't contain Internet Explorer, which they may not want." Weadock, 11/17/98am, at 62:12-20; see also Weadock, 11/17/98am, at 27:9-20 ("Boeing went back to the original retail version of Windows 95")

3. A survey conducted by Compaq in February 1998 of 283 PC decision makers at US companies found that "About 80% of companies wipe or reformat the hard drives of new desktops. . . . The operating system re-installed most often are OSR2 and the retail version of Windows 95. Large businesses lean more toward the retail version of Windows 95." GX 1242, at 34.

d. Microsoft's conduct has caused other significant inefficiencies and consumer harm

(1) Microsoft's commingling of the browser and operating system reduces system performance

171. Microsoft's commingling of the code that supplies browsing and other operating system functionality reduces system performance for customers that do not desire to browse the web using Internet Explorer.

1. See supra Part V.B.4.c(1); ¶ 169.

2. Professor Felten testified that Windows 98 uses approximately 20% less dynamic memory after the prototype removal program has removed Internet Explorer web browsing, measurably improving performance. See supra Part V.B.3.b(2); ¶ 154.2; see also Felten, 12/14/98pm, at 56:3-13.

3. In an e-mail from Jonathan Roberts to Bill Gates and others in July 1997, Roberts states "Even with the option to turn off the default loading of Active Desktop, Windows 98 is inescapably most appealing to the Internet Explorer user. Of course, the plan is Win 98 with Web integration converts a huge base, but a die hard 16MB Nav user is hard to move. If they access help or an HTML page while in Explorer or in My Computer they will be loading the IE HTML rendering engine and significantly increasing the working set. This means, that in many scenarios, the 16 MB nav user will have a much slower experience with 98 than 95." GX 725.

4. Paul Maritz conceded that "in certain circumstances, applications in general, not just Netscape's browser, can run slower on Windows 98 versus 95 in memory-constrained situations; in other words, running a machine with smaller amounts of memory." Maritz, 1/27/99pm, at 4:7-16; see also Maritz, 1/27/99pm, 4:17-23.

5. Chris Jones's notes from a November 1997 offsite meeting among Internet Explorer project team members report that "Performance overall, in particular with integrated shell, is a problem. The IE 4 browser, while fast, is simply too big for customers to install and adopt, both in terms of memory usage (working set), and also in terms of disk footprint (install size). The integrated shell adds additional requirements, and customers are not deploying on 32 MB NT systems." GX 364, at MS7 004719.

6. Gateway expressed concern to Microsoft in April 1998 that "the installation of the full MS product (including channels) results in a much slower system performance if the customer chooses an alternate browser after full installation on IE4." GX 320.

7. Weadock testified that if "we look at Windows 98, we see a situation where Internet Explorer can't be removed, it takes up memory resources; it takes up disk space. If a company can't remove that and then obtains -- to use your word -- Netscape Navigator, because there is so much RAM and disk and processor overhead already associated with the nonremovable Internet Explorer in Windows 98, they can't obtain Navigator and put it to work on their system without a substantial performance penalty, as I think one of the Microsoft employees in one of the e-mails that I've seen expressed concern about." Weadock, 11/16/98am, at 63:1-11.

8. Professor Farber testified that "combining applications with an operating system into a single product available with all functions combined imposes technical inefficiencies for OEMS, other software developers and retail end users, including redundancy, performance degradation of unused software and increased risk of 'bugs;' and . . . any function provided by an operating system (as distinct from higher level files) that does not satisfy the criteria of simplicity, general applicablitiy and accessibility reduces the efficiency of the operating system environment and the applications that use it." Farber Dir. ¶ 27.

(2) Microsoft's commingling of the browser and operating system causes undesirable system complexity, incompatibilities and security concerns

172. Microsoft's commingling of the browser and operating system also introduces undesirable system complexity and incompatibilities with other software.

1. A November 1997 internal Microsoft memo from Brian Hall quotes participants from Internet Explorer user focus groups as saying: "why do we need to see local files through our web browser? It's like a whole other version of windows explorer in a web browser. Need one or the other, don't need both." GX 218.

2. One of the recommendations of an ISP focus group consulted by Microsoft was: "Turn off the Active Desktop. Didn't like that a browser introduced UI changes -- they didn't want to be in the business of training poepl [sic] how to use the UI when it is really a part of the OS." GX 375.

3. Weadock testified that: "User confusion can result from combining application code and operating system code, for example, as Microsoft has done with Windows 98 and the "single Explorer." Weadock Dir ¶ 32c. "An application that modifies operating system files could create (and, in the case of Internet Explorer, has been documented in some cases to create) conflicts with other applications and with company-developed applications." Weadock Dir. ¶ 32b; see also Weadock 11/17/98am, 37:24 - 38:13.

4. Professor Felten testified that "in general if you know that the user does not want something, it can only be inefficient to force them to take it. And you will note that with respect to Internet Explorer in Windows 98, we are talking about forcing the user to install software that they don't want onto their hard disk. When they boot Windows, that software they don't want is loaded into the memory. And as Professor Farber explained, in some cases that software is even run, and Internet Explorer pops up even though the user doesn't want it. It's certainly inefficient to do that. I also want to point out that when I talk about efficiency, as a computer scientist, I'm using it in the broadest sense. That is, I'm including -- I'm including inefficiencies that develop, for example, because of user confusion because of unwanted behavior. Mr. Weadock talked about the cost in support calls and lost productivity because of those cases, and those also apply in the case of Windows 98 and IE." Felten, 12/14/98pm, at 11:15 - 12:9.

5. Professor Farber testified that "combining applications with an operating system into a single product available with all functions combined imposes technical inefficiencies for OEMS, other software developers and retail end users, including redundancy, performance degradation of unused software and increased risk of 'bugs'; and . . . any function provided by an operating system (as distinct from higher level files) that does not satisfy the criteria of simplicity, general applicablitiy and accessibility reduces the efficiency of the operating system environment and the applications that use it." Farber Dir. ¶ 27.

6. In a Boeing planning document written in July 1998 on deployment of 5.0 level browsers starting in 1999, Scott Vesey noted the following about IE4: "The problem for Internet Explorer 4.0 is that it modified the Windows 95 operating system DLL's. Several conflicts were identified with commercial software packages. All known conflicts have been resolved, ether by the software vendor or by a Microsoft patch. However, concern exists for conflics with Boeing custom written applications. Due to these concerns and because there was not a compelling tecnology reason to change the standard web browser vendor, the Netscape browser was selected as the browser standard." GX 637; see also GX 632; GX 634; GX 635; Vesey Dep. (played 11/17/98am), at 90:6-14.

7. Professor Felten testified that "giving users or OEMs the choice of what Web browsing software, if any, to have on their systems is technically efficient. Although some users or OEMs may benefit from bundling together separate software products desired by those users or OEMs, significant inefficiencies may also arise for others. Forcing some users or OEMs to take software they do not want is inefficient, since the unwanted software needlessly uses resources such as disk space and memory, and increases the complexity of the user interface by cluttering it with unwanted icons, menu items, and programs. Had Microsoft originally designed a version of Windows 98 without Web browsing, this version would have been significantly smaller than the version Microsoft actually released." Felten Dir. ¶ 67.

173. The bundling of a browser or other application software with an operating system increases the vulnerability of the system to viruses or unauthorized usage.

1. The following colloquy took place between the Court and Professor Felten: "THE COURT: . . . Are there any security issues involved in a choice of a browser or whether to get a browser at all? . . . It seems self-evident to me, but maybe it's not, that the presence of a browser increases the risks of penetration by a virus or something like that. THE WITNESS: Certainly. If you are in the position of, say, a computer systems administrator in a large organization and you're concerned that you less-trained users might accidentally introduce a virus or something like that -- you might well choose to not have browsers on your users' computers in order to prevent that means of spread of virus." Felten, 6/10/99am, at 39:18 - 40:7.

2. Weadock testified: "It may become more difficult to enforce security when an operating system integrates application software." For example, "[s]ecuring the system against users running programs that management doesn't want them to run becomes more difficult as application software is folded into the operating system." Weadock Dir. ¶ 32e.

e. Dean Schmalenseee's testimony that Microsoft's conduct did not result in significant competitive and consumer harm is unreliable

174. Microsoft's testimony that consumers benefitted from its tying arrangement and associated contractual restrictions (E.g., Schmalensee, 6/21/99am, at 10:5 - 11:5, 36:18 - 37:11), rests on faulty assumptions.

174.1. First, Dean Schmalensee conceded that he did not investigate whether Internet Explorer could be removed from Windows 98 or why Microsoft made it non-removable.

1. When asked whether he investigated what functions of Windows 98 were removable, Schmalensee answered, "Absolutely not. It seemed to me that the key issue was whether users had a choice as to which software they employed, and whether it had to be removed or just not used seemed to me completely immaterial." Schmalensee, 1/20/99am, at 5:24 - 6:5; see also Schmalensee, 1/20/99am, at 10:5-9 (same).

2. When asked whether he looked at "any internal Microsoft documents to determine why Microsoft decided not to make Internet Explorer removable from Windows 98," Schmalensee said: "No. I did not. I inquired what they did, not -- as we've said several times, not what they said about what they were doing." Schmalensee, 1/20/99am, at 14:19-24.

174.2. Second, Dean Schmalensee also conceded that he did not investigate the consequences of commingling software code in the same files.

1. Schmalensee conceded that he has no "quantitative answer" to the question of how much shared code there is between Windows 95 and Internet Explorer, and Windows 98 and Internet Explorer. Schmalensee, 1/19/99pm, at 31:4-8. See generally Schmalensee, 1/19/99pm, at 32:10-18 (similarly conceding that he does not know how many DLLs contained shared code in Windows 95 and Windows 98).

2. When asked what percentage of the Internet Explorer code in Windows 98 is shared by other operating system functions, Schmalensee testified that "I don't have that breakdown. I don't know." Schmalensee, 1/20/99am, at 11:11-14; see also Schmalensee, 1/20/99am, at 12:9-14 ("I can't answer that question. And I didn't investigate it, because it's not important for the reasons I've given you several times.").

174.3. Third, Dean Schmalensee implicitly assumes (Schmalensee Dir. ¶ 232), contrary to the evidence, that a user can consistently enforce his or her choice of default browser in Windows 98.

1. See supra Part V.B.2.e(2); ¶ 147.5.

174.4. Fourth, Dean Schmalensee's and other Microsoft witnesses' contention that Microsoft has merely offered an additional choice of browsers (Schmalensee, 1/21/99pm, at 37:24 - 38:8, Schmalensee, 6/21/99am, at 37:4-7) is wrong. While the development of Internet Explorer itself provided additional options to users, its tying of the browser to the operating system denied users the option of forgoing Internet Explorer and increased their costs of using other browsers.

1. See supra Part V.B.4; ¶¶ 166-175.

C. Microsoft imposed a variety of other anticompetitive restraints on the OEM channel in order to impede rivals such as Netscape

1. Microsoft imposed exclusionary restrictions on OEMs' ability to modify the Windows desktop and start-up sequence

175. In addition to its tying arrangement, Microsoft forced OEMs to agree to restrictions on their ability to modify the Windows desktop and start-up sequence. As with its tying arrangement, Microsoft's OEM desktop and start-up restrictions raised rivals costs, harmed consumers, and cannot be explained except as part of Microsoft's effort to blunt the threat to its operating system monopoly posed by non-Microsoft browsers.

a. Microsoft imposed the "Windows Experience" restrictions in response to, and in order to stop, OEMs' featuring Netscape Navigator more prominently than Internet Explorer.

176. When Microsoft first released Windows 95, OEMs customized the Windows 95 desktop and start-up sequence in various ways designed to meet consumer demand; and they did so with Microsoft's tacit or express consent.

176.1. OEMs operate in a competitive environment; to thrive, OEMs must supply what their customers demand, differentiate their products, minimize their support costs, and offer PCs that are easy to use.

1. Professor Fisher explained: "OEM's are, in some sense, the representatives of the consumer for certain purposes. They are in competition with each other. They gain if they deliver what end users actually want. They wouldn't care about the restrictions on them if they didn't think that it mattered in their dealings with consumers." Fisher, 6/2/99am, at 22:1-6.

2. Dr. Warren-Boulton testified: "As Microsoft has acknowledged, OEMs are in the business of satisfying their customers. They are exceedingly unlikely to market a product that does not meet consumer demand." Warren-Boulton Dir. ¶ 160.

3. Garry Norris testified that IBM sought to "differentiate PC's that were shipping from IBM versus those shipping from competitors" in order to ensure that new users, "a large percentage" of whom "are novices," understand "how to navigate . . . their PC." Norris, 6/7/99pm, at 42:14-25. "The reason" IBM "invested the millions of dollars . . . was, in fact, to differentiate the IBM Aptiva 'out of box' experience and end-user experience with that of our competitiors.'" Norris, 6/7/99pm, at 56:10-18. Norris further testified that, if IBM "designed a confusing or a poor" product, IBM would be negatively impacted "in the market." Norris, 6/7/99pm, at 69:2-14.

4. A Hewlett-Packard executive told Microsoft: "PC's can be frightening and quirky pieces of technology into which" consumers "invest a large sum of their money. It is vitally important that PC suppliers dramatically improve the consumer buying experience, out of box experience as well as the longer term product usability and reliability." GX 309.

5. Compaq's Celeste Dunn testified that the PC consumer segment is "a really tough segment of the market, because there is a lot of price point pressure." Dunn Dep., 10/23/98, at 26:19-25 (DX 2566).

176.2. With the release of Windows 95, OEMs sought to achieve these objectives -- and to meet consumer demand -- by, among other things, customizing the Windows start-up sequence to include tutorials and other features that run in the "boot-up" or "start-up" process before the user is presented with the Windows desktop.

1. IBM. IBM developed an "out-of-box" (Norris, 6/7/99pm, at 46:18 - 48:25) experience that included the "IBM Welcome Center" in the start-up sequence that instructed users on basic features of their PCs, such as "how to use a mouse, how to run Windows 95" and "what an icon is." Norris, 6/7/99pm, at 42:9 - 43:9. IBM placed the Welcome Center in the start-up sequence because usability studies showed that "a large percentage of new users are novices" and IBM "wanted to ensure that they understood how to navigate, so to speak, through their PC." Norris, 6/7/99pm, at 42:14 - 43:3. By making new users "more self-sufficient" before they reached the Windows desktop for the first time, the Welcome Center helped IBM reduce support costs. Norris 6/7/99pm, at 59:1-15; GX 2191 (the Aptiva "Windows Guide" heightened "the consumer's experience with new features of their computer system"); GX 2187 ("If anything our welcome program helps acquaint the user with the machine, mouse, Windows, and gently delivers them to the Windows desktop.").

2. Hewlett-Packard. Hewlett-Packard also developed an "out-of-box experience" that included placing several screens in the start-up process. Romano Dep., (played 12/16/98pm), at 38:7-14.

3. Dell. Dell PCs automatically completed the set-up of all software during the boot-up sequence. Kanicki Dep., (played 12/16/98pm), at 65:3-18.

4. Compaq. Microsoft allowed Compaq to "add Compaq welcome screens and non-MS advertisements." GX 292.

176.3. Although Microsoft's original Windows 95 licenses prohibited certain OEM modifications,

1. Microsoft's Windows 95 licenses typically provided: - redacted -

2. But a Microsoft letter to Hewlett-Packard acknowledged that HP permitted users a choice of an alternative desktop "shell," in addition to the graphical user interface provided by the ordinary Windows desktop. GX 294.

177. By contrast, when OEMs customized their PCs in ways that threatened Microsoft's objective of gaining browser usage share, Microsoft moved quickly both to enforce and to augment its restrictions.

177.1. Microsoft construed its licenses to prohibit OEMs from removing the Internet Explorer icon from the desktop.