Excerpts From Microsoft Case

By The Associated Press,

Excerpts from U.S. District Judge Thomas Penfield Jackson's conclusions of law in the Microsoft antitrust case, issued Monday:

The United States, 19 individual states and the District of Columbia ... bring these consolidated civil enforcement actions against defendant Microsoft Corp. (NasdaqNM:MSFT - news) ... under the Sherman Antitrust Act. The plaintiffs charge, in essence, that Microsoft has waged an unlawful campaign in defense of its monopoly position in the market for operating systems designed to run on Intel-compatible personal computers. ... Specifically, the plaintiffs contend that Microsoft violated Section 2 of the Sherman Act by engaging in a series of exclusionary, anti-competitive and predatory acts to maintain its monopoly power. They also assert that Microsoft attempted, albeit unsuccessfully to date, to monopolize the Web browser market, likewise in violation of Section 2. Finally, they contend that certain steps taken by Microsoft as part of its campaign to protect its monopoly power, namely tying its browser to its operating system and entering into exclusive dealing arrangements, violated Section 1 of the Act.

Upon consideration of the Court's Findings of Fact ... the Court concludes that Microsoft maintained its monopoly power by anti-competitive means and attempted to monopolize the Web browser market, both in violation of Section 2. Microsoft also violated Section 1 of the Sherman Act by unlawfully tying its Web browser to its operating system. The facts found do not support the conclusion, however, that the effect of Microsoft's marketing arrangements with other companies constituted unlawful exclusive dealing under criteria established by leading decisions under Section 1.

The 19 states and the District of Columbia ... seek to ground liability additionally under their respective antitrust laws. The Court is persuaded that the evidence in the record proving violations of the Sherman Act also satisfies the elements of analogous causes of action arising under the laws of each plaintiff state. For this reason, and for others stated below, the Court holds Microsoft liable under those particular state laws as well.

Section 2 of the Sherman Act declares that it is unlawful for a person or firm to ``monopolize ... any part of the trade or commerce among the several States, or with foreign nations. ...'' This language operates to limit the means by which a firm may lawfully either acquire or perpetuate monopoly power. Specifically, a firm violates Section 2 if it attains or preserves monopoly power through anti-competitive acts. ...

The Court must first ascertain the boundaries of the commercial activity that can be termed the ``relevant market.'' ... Next, the Court must assess the defendant's actual power to control prices in - or to exclude competition from - that market. ...

The licensing of all Intel-compatible PC operating systems worldwide does in fact constitute the relevant market in the context of the plaintiffs' monopoly maintenance claim. ...

The plaintiffs proved at trial that Microsoft possesses a dominant, persistent and increasing share of the relevant market. Microsoft's share of the worldwide market for Intel-compatible PC operating systems currently exceeds 95 percent, and the firm's share would stand well above 80 percent even if the Mac OS were included in the market. The plaintiffs also proved that the applications barrier to entry protects Microsoft's dominant market share. ... Together, the proof of dominant market share and the existence of a substantial barrier to effective entry create the presumption that Microsoft enjoys monopoly power. ...

Over the past several years, Microsoft has comported itself in a way that could only be consistent with rational behavior for a profit-maximizing firm if the firm knew that it possessed monopoly power, and if it was motivated by a desire to preserve the barrier to entry protecting that power.

In short, the proof of Microsoft's dominant, persistent market share protected by a substantial barrier to entry, together with Microsoft's failure to rebut that prima facie showing effectively and the additional indicia of monopoly power, have compelled the Court to find as fact that Microsoft enjoys monopoly power in the relevant market.

In a Section 2 case, once it is proved that the defendant possesses monopoly power in a relevant market, liability for monopolization depends on a showing that the defendant used anti-competitive methods to achieve or maintain its position. ...

If the evidence reveals a significant exclusionary impact in the relevant market, the defendant's conduct will be labeled ``anti-competitive'' - and liability will attach - unless the defendant comes forward with specific, procompetitive business motivations that explain the full extent of its exclusionary conduct. ...

Proof that a profit-maximizing firm took predatory action should suffice to demonstrate the threat of substantial exclusionary effect; to hold otherwise would be to ascribe irrational behavior to the defendant. Moreover, predatory conduct, by definition as well as by nature, lacks procompetitive business motivation. ...

In other words, predatory behavior is patently anti-competitive. Proof that a firm with monopoly power engaged in such behavior thus necessitates a finding of liability under Section 2. ...

In this case, Microsoft early on recognized middleware as the Trojan horse that, once having, in effect, infiltrated the applications barrier, could enable rival operating systems to enter the market for Intel-compatible PC operating systems unimpeded. Simply put, middleware threatened to demolish Microsoft's coveted monopoly power. Alerted to the threat, Microsoft strove over a period of approximately four years to prevent middleware technologies from fostering the development of enough full-featured, cross-platform applications to erode the applications barrier. In pursuit of this goal, Microsoft sought to convince developers to concentrate on Windows-specific APIs and ignore interfaces exposed by the two incarnations of middleware that posed the greatest threat, namely, Netscape's Navigator Web browser and Sun's implementation of the Java technology. Microsoft's campaign succeeded in preventing - for several years, and perhaps permanently - Navigator and Java from fulfilling their potential to open the market for Intel-compatible PC operating systems to competition on the merits. Because Microsoft achieved this result through exclusionary acts that lacked procompetitive justification, the Court deems Microsoft's conduct the maintenance of monopoly power by anti-competitive means.

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

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

Recognizing that preinstallation by OEMs and bundling with the proprietary software of IAPs led more directly and efficiently to browser usage than any other practices in the industry, Microsoft devoted major efforts to usurping those two channels. ...

With respect to OEMs, Microsoft's campaign proceeded on three fronts. First, Microsoft bound Internet Explorer to Windows with contractual and, later, technological shackles in order to ensure the prominent (and ultimately permanent) presence of Internet Explorer on every Windows user's PC system, and to increase the costs attendant to installing and using Navigator on any PCs running Windows. Second, Microsoft imposed stringent limits on the freedom of OEMs to reconfigure or modify Windows 95 and Windows 98 in ways that might enable OEMs to generate usage for Navigator in spite of the contractual and technological devices that Microsoft had employed to bind Internet Explorer to Windows. Finally, Microsoft used incentives and threats to induce especially important OEMs to design their distributional, promotional and technical efforts to favor Internet Explorer to the exclusion of Navigator.

Microsoft's actions increased the likelihood that preinstallation of Navigator onto Windows would cause user confusion and system degradation, and therefore lead to higher support costs and reduced sales for the OEMs. Not willing to take actions that would jeopardize their already slender profit margins, OEMs felt compelled by Microsoft's actions to reduce drastically their distribution and promotion of Navigator. The substantial inducements that Microsoft held out to the largest OEMs only further reduced the distribution and promotion of Navigator in the OEM channel. The response of OEMs to Microsoft's efforts had a dramatic, negative impact on Navigator's usage share. The drop in usage share, in turn, has prevented Navigator from being the vehicle to open the relevant market to competition on the merits.

Microsoft fails to advance any legitimate business objectives that actually explain the full extent of this significant exclusionary impact. ...

Internet Explorer is not demonstrably the current ``best of breed'' Web browser, nor is it likely to be so at any time in the immediate future. The fact that Microsoft itself was aware of this reality only further strengthens the conclusion that Microsoft's decision to tie Internet Explorer to Windows cannot truly be explained as an attempt to benefit consumers and improve the efficiency of the software market generally, but rather as part of a larger campaign to quash innovation that threatened its monopoly position.

It is apparent that Microsoft's conduct is effectively explained by its foreboding that OEMs would preinstall and give prominent placement to middleware like Navigator that could attract enough developer attention to weaken the applications barrier to entry. In short, if Microsoft was truly inspired by a genuine concern for maximizing consumer satisfaction, as well as preserving its substantial investment in a worthy product, then it would have relied more on the power of the very competitive PC market, and less on its own market power, to prevent OEMs from making modifications that consumers did not want. ...

Microsoft adopted similarly aggressive measures to ensure that the IAP channel would generate browser usage share for Internet Explorer rather than Navigator. To begin with, Microsoft licensed Internet Explorer and the Internet Explorer Access Kit to hundreds of IAPs for no charge. Then, Microsoft extended valuable promotional treatment to the 10 most important IAPs in exchange for their commitment to promote and distribute Internet Explorer and to exile Navigator from the desktop. Finally, in exchange for efforts to upgrade existing subscribers to client software that came bundled with Internet Explorer instead of Navigator, Microsoft granted rebates - and in some cases made outright payments - to those same IAPs. ... It is fair to conclude that these inducements and restrictions contributed significantly to the drastic changes that have in fact occurred in Internet Explorer's and Navigator's respective usage shares. Microsoft's actions in the IAP channel thereby contributed significantly to preserving the applications barrier to entry.

There are no valid reasons to justify the full extent of Microsoft's exclusionary behavior in the IAP channel. ...

More generally, it is crucial to an understanding of Microsoft's intentions to recognize that Microsoft paid for the fealty of IAPs with large investments in software development for their benefit, conceded opportunities to take a profit, suffered competitive disadvantage to Microsoft's own OLS and gave outright bounties. ...

Because the full extent of Microsoft's exclusionary initiatives in the IAP channel can only be explained by the desire to hinder competition on the merits in the relevant market, those initiatives must be labeled anti-competitive. ...

In sum, the efforts Microsoft directed at OEMs and IAPs successfully ostracized Navigator as a practical matter from the two channels that lead most efficiently to browser usage. Even when viewed independently, these two prongs of Microsoft's campaign threatened to ``forestall the corrective forces of competition'' and thereby perpetuate Microsoft's monopoly power in the relevant market. Therefore, whether they are viewed separately or together, the OEM and IAP components of Microsoft's anti-competitive campaign merit a finding of liability under Section 2.