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Exclusionary Contracts

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Previous page EXCLUSIONARY CONTRACTS In addition to "tying", the government alleges that Microsoft entered into a series of contracts with online service providers (OLSs) like AOL, Internet Service Providers (ISPs) and Internet Content Providers (ICPs) to foreclose Netscape's browser distribution. But the evidence introduced at trial shows that none of these types of contracts impaired Netscape’s ability to distribute software to its customers. These three categories of contracts are briefly discussed, in turn, below. OLS AGREEMENTS Microsoft licensed Internet Explorer 3.0 and higher to OLSs to enable them to build custom access software for their services on Internet Explorer's state-of-the-art componentized technology. (To this day Netscape Navigator still is not componentized.) Microsoft also included access software for the OLSs in Windows and the OLSs agreed to use the Internet Explorer software and promote such software in various ways. Of these agreements, only the agreement with AOL appears to be commercially significant. Through the testimony of Brad Chase, Professor Schmalensee (our economist) and others, Microsoft introduced the following evidence concerning AOL: * Although the government alleges that Microsoft's agreement with AOL provides for "virtual exclusivity" for Internet Explorer, 22 per cent of AOL customers use Navigator as their primary Web browsing software. * Under AOL's agreement with Microsoft, every single one of AOL’s customers could elect to use Navigator, and nothing in the AOL/Microsoft agreement prevents them from doing so. * AOL is free to promote Navigator in limited ways within its service. AOL even includes links within the service from which Navigator can be downloaded. * Notwithstanding any contractual provision, AOL was likely for business and engineering reasons to attempt to standardize on client software from Microsoft or Netscape, not both. Microsoft and Netscape competed aggressively for this business, and Microsoft won because Microsoft was willing to offer more value to AOL than Netscape did. (Evidence from Netscape shows that it was focusing on business software at the time, tempering its interest in any deal with consumer-oriented AOL.) That is competition at work. * In view of the recently announced merger of AOL and Netscape, it seems likely that AOL will migrate its big customer base over to a new Netscape-based client. If that were to happen today, Microsoft would lose about half its usage share for Internet Explorer, and Netscape's share would grow by about half. In that event, Netscape would be the clear leader by a very substantial margin in Web browser usage share, instantly rendering moot all of the claims that Microsoft is likely to succeed in dominating Web browser usage through the conduct alleged in the complaint. ISP AGREEMENTS Microsoft entered into agreements with certain ISPs relating to their inclusion in an Internet sign up "referral server" run by Microsoft, and accessed from Windows 95. The government alleged that "(t)hese contracts have the purpose and effect of excluding the Netscape Navigator browser from distribution through the vast majority of U.S. [Internet Access Providers]." Through Cam Myhrvold, we introduced the following evidence: * The challenged agreements pertained to only about ten of the 4500 ISPs in existence today. Plenty of ISP distribution remained available to Netscape regardless of the terms of the challenged agreements with ten ISPs. * Contrary to government allegations, the challenged agreements did not require the ten ISPs to distribute IE exclusively. In fact, as Cam testified, "every one of the ISPs in the Windows 95 Referral Server also distributed Netscape’s web browsing software, sometimes in large quantities, and almost all still do". For example, Concentric and Earthlink, two of the ISPs in the Windows 95 Referral Server, collectively distributed millions of copies of Netscape Navigator. * The usage share for Navigator among customers of ISPs in the Windows 95 Referral Server is about the same as among all users of the Internet. In other words, the challenged agreements had little effect. * Microsoft's agreements concerning the Windows 98 Referral Server contain none of the challenged provisions. ICP AGREEMENTS Microsoft entered into agreements with certain ICPs relating to their development of content formatted for the Internet Explorer 4 Channel Bar. The government alleged that these agreements "exclude competing browsers" and thereby "threaten to tip the browser battle decisively in Internet Explorer’s favor..." Through Will Poole, we introduced the following evidence: * Microsoft entered into the challenged agreements with only about 24 ICPs (relating to 31 Web sites). But there are far more than one million sites on the Web, thousands of which are commercially significant and available to Netscape for any deals it might like to do. * The agreements could not have had any effect on Web browser distribution because only six of the 24 ICPs distributed any Web browsing software at all. * The agreements placed no limits on the ICPs ability to format their content to enable it work great with Netscape, including Netscape's implementation of the Channel Bar concept, called NetCaster. * All of the agreements were short-term, and all have expired as of 31 December 31 1998. Furthermore, in April 1998, just seven months after IE 4 (and its Channel Bar) shipped, Microsoft waived the contract terms challenged by the government. * Although the government alleged that access to the Channel Bar was a "must have" for ICPs hungry for viewers, in reality the Channel Bar did not find favor with customers, and will not appear in Internet Explorer 5.0 and higher... to avoid "dicking around with the low level stuff". Again, this discussion makes no sense unless the premise of the discussion was that Netscape would be building a Windows 95 browser—and that Netscape might want to use some Microsoft Internet-related Windows technologies in so doing. In fact, Netscape did use some of the cool new Internet technology we showed them that day, such as Internet Shortcuts. * The allegation that the meeting constituted "bullying" or a "threat" by Microsoft is belied many facts in evidence. For example, the meeting was preceded by a series of other cordial and professional meetings between the companies in which they discussed a range of possible business relationships, including a Netscape proposal that Microsoft ship Netscape client and server code in Windows. Similarly, although Netscape has accused Microsoft of demanding an equity position in Netscape at the meeting, we have written proof that it was Jim Clark, the Chairman of the Board of Netscape, who initially suggested to Microsoft that we should invest in Netscape. * After the meeting, Microsoft proceeded to give Netscape special dev support in building their Windows 95 browser, including direct access to Microsoft's Windows 95 developers (who were very busy preparing for the commercial release of Windows 95 in August 1995). JAVA The government alleges that Microsoft engaged in unlawful conduct by allegedly attempting to defeat the Sun promise of "Write Once, Run Anywhere". Bob Muglia testified that Microsoft simply provided developers a choice: they could write "pure Java" apps (as Sun terms it) that would run cross-platform to the extent permitted by Java today, or they could write apps in Java that would also benefit from unique Windows innovations. We believe that providing such innovative platform technology to developers is the essence of pro-competitive conduct. Certainly nothing in the antitrust laws compels any company to follow a competitor’s lead in implementing a new technology. Like any other company, Microsoft is free as a matter of antitrust law to follow as much or as little as Sun’s lead as it sees fit. INTEL NSP SOFTWARE In April 1995 Intel announced that it had developed software called "NSP" that was designed to allow Intel x86 microprocessors to perform tasks usually performed by separate DSP chips. The government alleged at trial that Microsoft "bullied" Intel into withdrawing NSP from the market. Through the testimony of Paul Maritz and contemporaneous documents, however, we have shown that Microsoft and Intel merely engaged in routine and desirable technical discussions concerning the utility of NSP in the PC architecture. There was one big problem with NSP: it was designed to run on Win 3.1. But in April 1995 Microsoft (and Intel) were looking forward to the release of Windows 95, which carried the prospect of boosting sales of new PCs (and thus Intel chips). NSP was a full generation behind Microsoft's operating system development efforts. Through a series of meetings and technical papers (now in evidence), Microsoft advised Intel that customers or OEMs who installed NSP on machines running Windows 95 would experience a range of incompatibilities. Microsoft also provided technical feedback to Intel regarding many other deficiencies in NSP, and offered to work with the company to make NSP suitable for commercial release. (This too is in evidence.) Intel initially expressed interest in working with Microsoft to repair NSP, but later, without further communication with Microsoft, decided to discontinue its NSP efforts. Intel and Microsoft continued to work together, and much of Intel's NSP work has now been incorporated into Windows in modified form. APPLE Apple made three allegations against Microsoft. They were addressed by Paul Maritz and Eric Engstrom. Sabotage. Apple alleged that Microsoft "sabotaged" Apple QuickTime when running on Windows. This claim got a lot of ink. But, like RealNetworks' similar claim before a Congressional committee, it isn't true. * The Apple witness who claimed that Microsoft took "several steps to sabotage QuickTime" admitted on cross examination that he had no basis to testify that Microsoft deliberately created any incompatibilities to injure any Apple product. He also refused to be cross-examined on the technical interactions between QuickTime and Windows, saying that he was not familiar with the software in question. Therefore, even apart from any rebuttal from Microsoft, there is a failure of proof on the sabotage claim. * The Apple developer who is familiar with the software in question testified by deposition that he had never suggested that Microsoft has intentionally created any incompatibilities with QuickTime. * Eric Engstrom testified, on the basis of exhaustive testing by Microsoft, that the "incompatibilities" identified by Apple related almost entirely to programming errors in QuickTime. In particular, Apple failed to adhere to Netscape’s specifications for how to install a Netscape plug-in (which Internet Explorer supports). Microsoft easily created a patch for the Apple installation program, and the patch works. * Eric testified that MindCraft, an independent lab, confirmed Microsoft's conclusions. We all know that subtle and sometimes not-so-subtle incompatibilities often arise between various components of PC systems, even components developed by a single company. Here the government has opportunistically seized upon one such instance, using it to gin up a claim of malicious conduct by Microsoft. But the state of the evidentiary record on the "sabotage" claim is (a) a mere accusation, without supporting facts and (b) a detailed rebuttal by Microsoft, identifying the Apple programming errors and fixing them. * QuickTime "market division". Apple vaguely alleged that Microsoft offered to "divide" a "market" related to multimedia software. Eric testified that he merely engaged in preliminary and exploratory discussions with Apple to determine whether there was any basis for the companies to work together on multimedia technologies for the benefit of both companies and customers. Far from seeking to push Apple off Windows, the proposals Eric floated would have affirmatively promoted the QuickTime brand and various QuickTime technologies on Windows. In any event, nothing came of the discussions. Microsoft Office 98 Macintosh Edition. Apple alleged that in mid-1997 Microsoft threatened to "cancel" Office for the Mac unless Apple gave preferred distribution to Internet Explorer on the Mac. Paul Maritz testified to the full scope of the negotiations between Apple and Microsoft, which primarily concerned Apple’s threat to hit Microsoft with a major patent lawsuit targeting Windows and Office, including Mac Office. Apple demanded a $1.2 billion payment from Microsoft in connection with those patents. In the context of these negotiations, Microsoft advised Apple that it probably would not make business sense for Microsoft to continue to invest in developing Mac Office absent some appropriate patent cross-license agreement between the parties. (At the time Microsoft was considering discontinuing Mac Office development even apart from any patent threat against the product from Apple.) Internet Explorer was a relatively minor part of the broad set of agreements, including a patent cross-license, that Apple and Microsoft executed in August 1997. Next page

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