104. QuickTime is Apple’s software architecture for creating, editing, publishing, and playing back multimedia content (e.g., audio, video, graphics, and 3-D graphics). Apple has created versions of QuickTime to run on both the Mac OS and Windows, enabling developers using the authoring software to create multimedia content that will run on QuickTime implementations for both operating systems. QuickTime competes with Microsoft’s own multimedia technologies, including Microsoft’s multimedia APIs (called "DirectX") and its media player. Because QuickTime is cross-platform middleware, Microsoft perceives it as a potential threat to the applications barrier to entry.

105. Beginning in the spring of 1997 and continuing into the summer of 1998, Microsoft tried to persuade Apple to stop producing a Windows 95 version of its multimedia playback software, which presented developers of multimedia content with alternatives to Microsoft’s multimedia APIs. If Apple acceded to the proposal, Microsoft executives said, Microsoft would not enter the authoring business and would instead assist Apple in developing and selling tools for developers writing multimedia content. Just as Netscape would have been free, had it accepted Microsoft’s proposal, to market a browser shell that would run on top of Microsoft’s Internet technologies, Apple would have been permitted, without hindrance, to market a media player that would run on top of DirectX. But, like the browser shell that Microsoft contemplated as acceptable for Netscape to develop, Apple’s QuickTime shell would not have exposed platform-level APIs to developers. Microsoft executives acknowledged to Apple their doubts that a firm could make a successful business out of marketing such a shell. Apple might find it profitable, though, to continue developing multimedia software for the Mac OS, and that, the executives from Microsoft assured Apple, would not be objectionable. As was the case with the Internet technologies it was prepared to tolerate from Netscape, Microsoft felt secure in the conviction that developers would not be drawn in large numbers to write for non-Microsoft APIs exposed by platforms whose installed bases were inconsequential in comparison with that of Windows.

106. In their discussions with Apple, Microsoft’s representatives made it clear that, if Apple continued to market multimedia playback software for Windows 95 that presented a platform for content development, then Microsoft would enter the authoring business to ensure that those writing multimedia content for Windows 95 concentrated on Microsoft’s APIs instead of Apple’s. The Microsoft representatives further stated that, if Microsoft was compelled to develop and market authoring tools in competition with Apple, the technologies provided in those tools might very well be inconsistent with those provided by Apple’s tools. Finally, the Microsoft executives warned, Microsoft would invest whatever resources were necessary to ensure that developers used its tools; its investment would not be constrained by the fact that authoring software generated only modest revenue.

107. If Microsoft implemented technologies in its tools that were different from those implemented in Apple’s tools, then multimedia content developed with Microsoft’s tools would not run properly on Apple’s media player, and content developed with Apple’s tools would not run properly on Microsoft’s media player. If, as it implied it was willing to do, Microsoft then bundled its media player with Windows and used a variety of tactics to limit the distribution of Apple’s media player for Windows, it could succeed in extinguishing developer support for Apple’s multimedia technologies. Indeed, as the Court discusses in Section VI of these findings, Microsoft had begun, in 1996, to use just such a strategy against Sun’s implementation of the Java technologies.

108. The discussions over multimedia playback software culminated in a meeting between executives from Microsoft and Apple executives, including Apple CEO, Steve Jobs, at Apple’s headquarters on June 15, 1998. Microsoft’s objective at the meeting was to secure Apple’s commitment to abandon the development of multimedia playback software for Windows. At the meeting, one of the Microsoft executives, Eric Engstrom, said that he hoped the two companies could agree on a single configuration of software to play multimedia content on Windows. He added, significantly, that any unified multimedia playback software for Windows would have to be based on DirectX. If Apple would agree to make DirectX the standard, Microsoft would be willing to do several things that Apple might find beneficial. First, Microsoft would adopt Apple’s ".MOV" as the universal file format for multimedia playback on Windows. Second, Microsoft would configure the Windows Media Player to display the QuickTime logo during the playback of ".MOV" files. Third, Microsoft would include support in DirectX for QuickTime APIs used to author multimedia content, and Microsoft would give Apple appropriate credit for the APIs in Microsoft’s Software Developer Kit.

109. Jobs reserved comment during the meeting with the Microsoft representatives, but he explicitly rejected Microsoft’s proposal a few weeks later. Had Apple accepted Microsoft’s proposal, Microsoft would have succeeded in limiting substantially the cross-platform development of multimedia content. In addition, Apple’s future success in marketing authoring tools for Windows 95 would have become dependent on Microsoft’s ongoing cooperation, for those tools would have relied on the DirectX technologies under Microsoft’s control.

110. Apple’s surrender of the multimedia playback business might have helped users in the short term by resolving existing incompatibilities in the arena of multimedia software. In the long run, however, the departure of an experienced, innovative competitor would not have tended to benefit users of multimedia content. At any rate, the primary motivation behind Microsoft’s proposal to Apple was not the resolution of incompatibilities that frustrated consumers and stymied content development. Rather, Microsoft’s motivation was its desire to limit as much as possible the development of multimedia content that would run cross-platform.

111. RealNetworks is the leader, in terms of usage share, in software that supports the "streaming" of audio and video content from the Web. RealNetworks’ streaming software presents a set of APIs that competes for developer attention with APIs exposed by the streaming technologies in Microsoft’s DirectX. Like Apple, RealNetworks has developed versions of its software for multiple operating systems. In 1997, senior Microsoft executives viewed RealNetworks’ streaming software with the same apprehension with which they viewed Apple’s playback software — as competitive technology that could develop into part of a middleware layer that could, in turn, become broad and widespread enough to weaken the applications barrier to entry.

112. At the end of May 1997, Gates told a group of Microsoft executives that multimedia streaming represented strategic ground that Microsoft needed to capture. He identified RealNetworks as the adversary and authorized the payment of up to $65 million for a streaming software company in order to accelerate Microsoft’s effort to seize control of streaming standards. Two weeks later, Microsoft signed a letter of intent for the acquisition of a streaming media company called VXtreme.

113. Perhaps sensing an impending crisis, executives at RealNetworks contacted Microsoft within days of the VXtreme deal’s announcement and proposed that the two companies enter a strategic relationship. The CEO of RealNetworks told a senior vice president at Microsoft that if RealNetworks were presented with a profitable opportunity to move to value-added software, the company would be amenable to abandoning the base streaming business. On July 10, a Microsoft executive, Robert Muglia, told a RealNetworks executive that it would indeed be in the interests of both companies if RealNetworks limited itself to developing value-added software designed to run on top of Microsoft’s fundamental multimedia platform. Consequently, on July 18, Microsoft and RealNetworks entered into an agreement whereby Microsoft agreed to distribute a copy of RealNetworks’ media player with each copy of Internet Explorer; to make a substantial investment in RealNetworks; to license the source code for certain RealNetworks streaming technologies; and to develop, along with RealNetworks, a common file format for streaming audio and video content. Muglia, who signed the agreement on Microsoft’s behalf, believed that RealNetworks had in turn agreed to incorporate Microsoft’s streaming media technologies into its products.

114. RealNetworks apparently understood import of the agreement differently, for just a few days after it signed the deal with Microsoft, RealNetworks announced that it planned to continue developing fundamental streaming software. Indeed, RealNetworks continues to do so today. Thus, the mid-summer negotiations did not lead to the result Microsoft had intended. Still, Microsoft’s intentions toward RealNetworks in 1997, and its dealings with the company that summer, show that decision-makers at Microsoft were willing to invest a large amount of cash and other resources into securing the agreement of other companies to halt software development that exhibited discernible potential to weaken the applications barrier.

115. IBM is both a hardware and a software company. On the hardware side, IBM manufactures and licenses, among other things, Intel-compatible PCs. On the software side, IBM develops and sells, among other things, Intel-compatible PC operating systems and office productivity applications. The IBM PC Company relies heavily on Microsoft’s cooperation to make a profit, for few consumers would buy IBM PC systems if those systems did not work well with Windows and, further, if they did not come with Windows included. IBM’s software division, on the other hand, competes directly with Microsoft in other respects. For instance, IBM has in the past marketed OS/2 as an alternative to Windows, and it currently markets the SmartSuite bundle of office productivity applications as an alternative to Microsoft’s Office suite. The fact that IBM’s software division markets products that compete directly with Microsoft’s most profitable products has frustrated the efforts of the IBM PC Company to maintain a cooperative relationship with the firm that controls the product (Windows) without which the PC Company cannot survive.

116. Whereas Microsoft tried to convince Netscape to move its business in a direction that would not facilitate the emergence of products that would compete with Windows, Microsoft tried to convince IBM to move its business away from products that themselves competed directly with Windows and Office. Microsoft leveraged the fact that the PC Company needed to license Windows at a competitive price and on a timely basis, and the fact that the company needed Microsoft’s support in many more subtle ways. When IBM refused to abate the promotion of those of its own products that competed with Windows and Office, Microsoft punished the IBM PC Company with higher prices, a late license for Windows 95, and the withholding of technical and marketing support.

117. In the summer of 1994, the IBM PC Company told Microsoft that, with respect to licensing Microsoft’s operating-system products, it wanted to be quoted terms just as favorable as those extended to IBM’s competitor, Compaq. It was IBM’s belief that Compaq paid the lowest rate in the industry for Windows and enjoyed unparalleled marketing and technical support from Microsoft. In response to the IBM PC Company’s request, Microsoft proposed that the companies enter into a "Frontline Partnership" similar to the one that existed between Microsoft and Compaq. Pursuant to that proposal, Microsoft and the IBM PC Company would perform joint sales, marketing, and development work, and the PC Company would receive future Microsoft products at the lowest rates in the industry.

118. At the same time that it offered the IBM PC Company the rather general terms in the Frontline Partnership Agreement, Microsoft also offered the PC Company specific reductions in the royalty rate for Windows 95 if the company would focus its marketing and distribution efforts on Microsoft’s new operating system. Specifically, the PC Company would receive an $8 reduction in the per-copy royalty for Windows 95 if it mentioned no other operating systems in advertisements for IBM PCs, adopted Windows 95 as the standard operating system for its employees, and ensured that it was shipping Windows 95 pre-installed on at least fifty percent of its PCs two months after the release of Windows 95. Given the volume of IBM’s PC shipments, the discount would have amounted to savings of between $40 million and $48 million in one year. Of course, accepting the terms would have required IBM, as a practical matter, to abandon its own operating system, OS/2. After all, IBM would have had difficulty convincing customers to adopt its own OS/2 if the company itself had used Microsoft’s Windows 95 and had featured that product to the exclusion of OS/2 in IBM PC advertisements.

119. Representatives from IBM and Microsoft, including Bill Gates, met to discuss the relationship between their companies at an industry conference in November 1994. At that meeting, IBM informed Microsoft that, rather than enter into the Frontline Partnership with Microsoft, IBM was going to pursue an initiative it called "IBM First." Consistent with the title of the initiative, IBM would aggressively promote IBM’s software products, would not promote any Microsoft products, and would pre-install OS/2 Warp on all of its PCs, including those on which it would also pre-install Windows. IBM thus rejected the terms that would have resulted in an $8 reduction in the per-copy royalty price of Windows 95.

120. True to its word, IBM began vigorous promotion of its software products. This effort included an advertising campaign, starting in late 1994, that extolled OS/2 Warp and disparaged Windows. IBM’s drive to best Microsoft in the PC software venue intensified in June 1995, when IBM reached an agreement with the Lotus Development Corporation for the acquisition of that company. As a consequence of the acquisition, IBM took ownership of the Lotus groupware product, Lotus Notes, and the Lotus SmartSuite bundle of office productivity applications. Microsoft had already identified Notes as a middleware threat, because it presented users with a common interface, and ISVs with a common set of APIs, across multiple platforms. For its part, SmartSuite competed directly with Microsoft Office. In mid-July 1995, IBM announced that it was going to make SmartSuite its primary desktop software offering in the United States.

121. Microsoft did not intend to capitulate. In July, Gates called an executive at the IBM PC Company to berate him about IBM’s public statements denigrating Windows. Just a few days later, Microsoft began to retaliate in earnest against the IBM PC Company.

122. The IBM PC Company had begun negotiations with Microsoft for a Windows 95 license in late March 1995. For the first two months, the negotiations had progressed smoothly and at an expected pace. After IBM announced its intention to acquire Lotus, though, the Microsoft negotiators began canceling meetings with their IBM counterparts, failing to return telephone calls, and delaying the return of marked-up license drafts that they received from IBM. Then, on July 20, 1995, just three days after IBM announced its intention to pre-install SmartSuite on its PCs, a Microsoft executive informed his counterpart at the IBM PC Company that Microsoft was terminating further negotiations with IBM for a license to Windows 95. Microsoft also refused to release to the PC Company the Windows 95 "golden master" code. The PC Company needed the code for its product planning and development, and IBM executives knew that Microsoft had released it to IBM’s OEM competitors on July 17. Microsoft’s purported reason for halting the negotiations was that it wanted first to resolve an ongoing audit of IBM’s past royalty payments to Microsoft for several different operating systems.

123. Prior to the call on July 20, neither company’s management had ever linked the ongoing audit to IBM’s negotiations for a license to Windows 95. IBM was dismayed by the abrupt halt in the license negotiations and the prospect that it might not get a license for Windows 95 until the audit process concluded. IBM’s executives executives surmised that all of its major competitors had already signed licenses for Windows 95. The PC Company would lose a great deal of business to those competitors during the crucial back-to-school season if it could not begin pre-installing Windows 95 on its PCs immediately. The conclusion of the audit appeared to be weeks, if not months, away. The PC Company thus faced the prospect of missing the holiday selling season as well. IBM executives pleaded with Microsoft to uncouple the license negotiations from the ongoing audit and offered Microsoft a $10 million bond that Microsoft could use to indemnify itself against any discrepancies that the audit might ultimately reveal. IBM also offered to add a term to any Windows 95 license agreement whereby IBM would pay penalties and interest if any future audit disclosed under-reporting of royalties by IBM.

124. On August 9, 1995, a senior executive at the IBM PC Company went to Redmond to meet with Joachim Kempin, the Microsoft executive in charge of the firm’s sales to OEMs. At the meeting, Kempin offered to accept a single, lump-sum payment from IBM that would close all outstanding audits. The amount of this payment would be reduced if IBM offered a concession that Kempin could take back to Gates. As one possibility, Kempin suggested that IBM agree to not bundle SmartSuite with its PCs for a period of six months to one year. He explained that the prospect of IBM bundling SmartSuite with its PCs threatened the profit margins that Microsoft derived from Office and constituted a core issue in the relationship between the two companies. The IBM executive rejected Kempin’s suggestion. In a follow-up letter, Kempin stated that Microsoft would require approximately $25 million from IBM in order to settle all outstanding audits. Kempin reiterated that,

If you believe that the amount I am asking for is too much, I would be willing to trade certain relationship improving measures for the settlement charges and/or convert some of the amounts into marketing funds if IBM too agrees to promote Microsoft’s software products together with their hardware offerings.

The message was clear: IBM could resolve the impasse ostensibly blocking the issuance of a Windows 95 license — the royalties audit — by de-emphasizing those products of its own that competed with Microsoft and instead promoting Microsoft’s products.

125. IBM never agreed to renounce SmartSuite or to increase its support for Microsoft software, and in the end, Microsoft did not grant IBM a license to pre-install Windows 95 until fifteen minutes before the start of Microsoft’s official launch event on August 24, 1995. That same day, the firms brought the audit issue to a close with a settlement agreement under which IBM ultimately paid Microsoft $31 million. The release of Windows 95 had been postponed more than once, and many consumers apparently had been postponing buying PC systems until the new operating system arrived. The pent-up demand caused an initial surge in the sales of PCs loaded with Windows 95. IBM’s OEM competitors reaped the fruits of this surge, but because of the delay in obtaining a license, the IBM PC Company did not. The PC Company also missed the back-to-school market. These lost opportunities cost IBM substantial revenue.

126. Even once the companies had resolved the audit dispute, Microsoft continued to treat the IBM PC Company less favorably than it did the other major OEMs, and Microsoft executives continued to tell PC Company executives that the treatment would improve only if IBM refrained from competing with Microsoft’s software offerings. On January 5, 1996, Kempin sent a letter to a counterpart at the IBM PC Company. In it, Kempin expressed his belief that the PC Company would enjoy a closer, more cooperative relationship with Microsoft if only IBM’s software arm did not compete as aggressively with the products that comprised the core of Microsoft’s business:

As long as IBM is working first on their competitive offerings and prefers to fiercely compete with us in critical areas, we should just be honest with each other and admit that such priorities will not lead to a most exciting relationship and might not even make IBM feel good when selling solutions based on Microsoft products. . . .You are a valued OEM customer of Microsoft, with whom we will cooperate as much as your self-imposed restraints allow us to do. Please understand that this is neither my choice or preferred way of doing business with an important company like IBM. In addition, we would like to see the IBM PC company being more actively involved in assisting Microsoft to bring key products to market . . . . To date the IBM PC company has not always been an active participant in these areas - understandable given your own internal product priorities. I hope you can help me to change this.

In closing, Kempin wrote, "You get measured in selling more hardware and I firmly believe if you had less conflict with IBM’s software directions you actually could sell more of it."

127. When Kempin spoke to the same executive at the end of the month, he repeated a message he had delivered more than once before: The fact that the IBM PC Company pre-installed SmartSuite on its PC systems made Microsoft reluctant to help IBM sell more PC systems. After all, the more PC systems IBM sold with SmartSuite, the fewer copies of Office Microsoft could sell. For this reason, as Kempin explained to a group of IBM PC Company representatives in August 1996, Microsoft refused to provide IBM press releases with quotes endorsing any PC system that IBM shipped with SmartSuite. Microsoft later expanded that rule to cover any IBM PCs shipped with the World Book electronic encyclopedia instead of Microsoft’s Encarta. IBM might have been less concerned about Microsoft’s refusal to offer endorsements if such quotes did not appear frequently and prominently in press releases announcing new PC systems from other OEMs such as Compaq. Microsoft’s conspicuous silence with respect to IBM PCs sent the message to customers that IBM’s PCs did not support Windows as well as PCs manufactured by other OEMs did.

128. Microsoft also denied the IBM PC Company access to the so-called "enabling programs" that Microsoft ran for the benefit of OEMs such as Compaq, Hewlett-Packard, and DEC, even though IBM met the prescribed objective criteria for admission. Like the absence of public endorsements, IBM’s exclusion from Microsoft’s enabling programs led customers to question whether the Microsoft software they needed would work optimally with IBM’s PCs. IBM learned through surveys it conducted that the firm had lost between seven and ten large accounts, representing about $180 million in revenue for IBM, because the tension between Microsoft and IBM led customers to doubt that Windows would not work as well with IBM PCs as with PCs produced by firms with which Microsoft was on cordial terms. Microsoft justified its exclusion of the PC Company from the enabling programs with its suspicion that IBM might use the programs to gain entrée with customers and then attempt to sell those customers IBM software instead of Microsoft products. At the same time, a Microsoft executive told a counterpart at IBM that the PC Company would be admitted to the programs when IBM’s CEO repaired his relationship with Bill Gates.

129. Microsoft’s executives were persistent despite IBM’s repeated refusals to sacrifice its own software ambitions to improve its relations with Microsoft. In February 1997, one executive from Microsoft told a group of IBM PC Company executives that Gates might relent in his reluctance to cooperate with their company if IBM moderated its support for Notes and SmartSuite. In a meeting held the next month, Microsoft representatives conditioned fulfillment of two objects of IBM’s desires on the company’s willingness to pre-install Microsoft’s products in the place of competing applications, such as SmartSuite, and objectionable middleware, such as Notes. The first inducement that the Microsoft representatives blandished before the PC Company was early access to Windows source code, which Compaq and a handful of other OEMs enjoyed. IBM wanted this early access in order to ensure its hardware’s contemporaneous compatibility with Microsoft’s operating system products. Next, Microsoft offered IBM permission to certify itself as being compliant with certain hardware requirements that Microsoft imposed (and that customers had come to look for as a sign of an OEM’s ability to support Windows). Self-certification would have decreased the time it took IBM PCs to reach the market, and IBM knew that the privilege was already being extended to some of its main OEM competitors. With respect to both benefits, the representatives from Microsoft explained that Microsoft would extend them to the PC Company on the condition that it stop loading its PC systems with software that threatened Microsoft’s interests.

130. The discriminatory treatment that the IBM PC Company received from Microsoft on account of the "software directions" of its parent company also manifested itself in the royalty price that IBM paid for Windows. In the latter half of the 1990s, IBM (along with Gateway) paid significantly more for Windows than other major OEMs (like Compaq, Dell, and Hewlett-Packard) that were more compliant with Microsoft’s wishes.

131. Finally, Microsoft made its frustration known to IBM by reducing, from three to one, the number of Microsoft OEM account managers handling Microsoft’s operational relationship with the IBM PC Company. This reduced support impaired still further IBM’s ability to test, manufacture, and ship its PCs on schedule, further delaying IBM’s efforts to bring its PC products to market against the competition in a timely manner.

132. In sum, from 1994 to 1997 Microsoft consistently pressured IBM to reduce its support for software products that competed with Microsoft’s offerings, and it used its monopoly power in the market for Intel-compatible PC operating systems to punish IBM for its refusal to cooperate. Whereas, in the case of Netscape, Microsoft tried to induce a company to move its business away from offering software that could weaken the applications barrier to entry, Microsoft’s primary concern with IBM was to reduce the firm’s support for software products that competed directly with Microsoft’s most profitable products, namely Windows and Office. That being said, it must be noted that one of the IBM products to which Microsoft objected, Notes, was like Navigator in that it exposed middleware APIs. In any event, Microsoft’s interactions with Netscape, IBM, Intel, Apple, and RealNetworks all reveal Microsoft’s business strategy of directing its monopoly power toward inducing other companies to abandon projects that threaten Microsoft and toward punishing those companies that resist.

133. Once it became clear to senior executives at Microsoft that Netscape would not abandon its efforts to develop Navigator into a platform, Microsoft focused its efforts on ensuring that few developers would write their applications to rely on the APIs that Navigator exposed. Developers would only write to the APIs exposed by Navigator in numbers large enough to threaten the applications barrier if they believed that Navigator would emerge as the standard software employed to browse the Web. If Microsoft could demonstrate that Navigator would not become the standard, because Microsoft’s own browser would attract just as much if not more usage, then developers would continue to focus their efforts on a platform that enjoyed enduring ubiquity: the 32-bit Windows API set. Microsoft thus set out to maximize Internet Explorer’s share of browser usage at Navigator’s expense.

134. Microsoft’s management believed that, no matter what the firm did, Internet Explorer would not capture a large share of browser usage as long as it remained markedly inferior to Navigator in the estimation of consumers. The task of technical personnel at Microsoft, then, was to make Internet Explorer’s features at least as attractive to consumers as Navigator’s. Microsoft did not believe that improved quality alone would depose Navigator, for millions of users appeared to be satisfied with Netscape’s product, and Netscape was known as ‘the Internet company.’ As Gates wrote to Microsoft’s executive staff in his May 1995 "Internet Tidal Wave" memorandum, "First we need to offer a decent client," but "this alone won’t get people to switch away from Netscape." Still, once Microsoft ensured that the average consumer would be just as comfortable browsing with Internet Explorer as with Navigator, Microsoft could employ other devices to induce consumers to use its browser instead of Netscape’s.

135. From 1995 onward, Microsoft spent more than $100 million each year developing Internet Explorer. The firm’s management gradually increased the number of developers working on Internet Explorer from five or six in early 1995 to more than one thousand in 1999. Although the first version of Internet Explorer was demonstrably inferior to Netscape’s then-current browser product when the former was released in July 1995, Microsoft’s investment eventually started to pay technological dividends. When Microsoft released Internet Explorer 3.0 in late 1996, reviewers praised its vastly improved quality, and some even rated it as favorably as they did Navigator. After the arrival of Internet Explorer 4.0 in late 1997, the number of reviewers who regarded it as the superior product was roughly equal to those who preferred Navigator.

136. In addition to improving the quality of Internet Explorer, Microsoft sought to increase the product’s share of browser usage by giving it away for free. In many cases, Microsoft also gave other firms things of value (at substantial cost to Microsoft) in exchange for their commitment to distribute and promote Internet Explorer, sometimes explicitly at Navigator’s expense. While Microsoft might have bundled Internet Explorer with Windows at no additional charge even absent its determination to preserve the applications barrier to entry, that determination was the main force driving its decision to price the product at zero. Furthermore, Microsoft would not have given Internet Explorer away to IAPs, ISVs, and Apple, nor would it have taken on the high cost of enlisting firms in its campaign to maximize Internet Explorer’s usage share and limit Navigator’s, had it not been focused on protecting the applications barrier.

137. In early 1995, personnel developing Internet Explorer at Microsoft contemplated charging OEMs and others for the product when it was released. Internet Explorer would have been included in a bundle of software that would have been sold as an add-on, or "frosting," to Windows 95. Indeed, Microsoft knew by the middle of 1995, if not earlier, that Netscape charged customers to license Navigator, and that Netscape derived a significant portion of its revenue from selling browser licenses. Despite the opportunity to make a substantial amount of revenue from the sale of Internet Explorer, and with the knowledge that the dominant browser product on the market, Navigator, was being licensed at a price, senior executives at Microsoft decided that Microsoft needed to give its browser away in furtherance of the larger strategic goal of accelerating Internet Explorer’s acquisition of browser usage share. Consequently, Microsoft decided not to charge an increment in price when it included Internet Explorer in Windows for the first time, and it has continued this policy ever since. In addition, Microsoft has never charged for an Internet Explorer license when it is distributed separately from Windows.

138. Over the months and years that followed the release of Internet Explorer 1.0 in July 1995, senior executives at Microsoft remained engrossed with maximizing Internet Explorer’s share of browser usage. Whenever competing priorities threatened to intervene, decision-makers at Microsoft reminded those reporting to them that browser usage share remained, as Microsoft senior vice president Paul Maritz put it, "job #1." For example, in the summer of 1997, some mid-level employees began to urge that Microsoft charge a price for at least some of the components of Internet Explorer 4.0. This would have shifted some anticipatory demand to Windows 98 (which was due to be released somewhat later than Internet Explorer 4.0), since Windows 98 would include all of the browser at no extra charge. Senior executives at Microsoft rejected the proposal, because while the move might have increased demand for Windows 98 and generated substantial revenue, it would have done so at the unacceptable cost of retarding the dissemination of Internet Explorer 4.0. Maritz reminded those who had advocated the proposal that "getting browser share up to 50% (or more) is still the major goal."

139. The transcendent importance of browser usage share to Microsoft is evident in what the firm expended, as well as in what it relinquished, in order to maximize usage share for Internet Explorer and to diminish it for Navigator. Not only was Microsoft willing to forego an opportunity to attract substantial revenue while enhancing (albeit temporarily) consumer demand for Windows 98, but the company also paid huge sums of money, and sacrificed many millions more in lost revenue every year, in order to induce firms to take actions that would help increase Internet Explorer’s share of browser usage at Navigator’s expense. First, even though Microsoft could have charged IAPs, ISVs, and Apple for licenses to distribute Internet Explorer separately from Windows, Microsoft priced those licenses, along with related technology and technical support, at zero in order to induce those companies to distribute and promote Internet Explorer over Navigator. Second, although Microsoft could have charged IAPs and ICPs substantial sums of money in exchange for promoting their services and content within Windows, Microsoft instead bartered Windows’ valuable desktop "real estate" for a commitment from those firms to promote and distribute Internet Explorer, to inhibit promotion and distribution of Navigator, and to employ technologies that would inspire developers to write Web sites that relied on Microsoft’s Internet technologies rather than those provided by Navigator. Microsoft was willing to offer such prominent placement even to AOL, which was the principal competitor to Microsoft’s MSN service. If an IAP was already under contract to pay Netscape a certain amount for browser licenses, Microsoft offered to compensate the IAP the amount it owed Netscape. Third, Microsoft also reduced the referral fees that IAPs paid when users signed up for their services using the Internet Referral Server in Windows in exchange for the IAPs’ efforts to convert their installed bases of subscribers from Navigator to Internet Explorer. For example, Microsoft entered a contract with AOL whereby Microsoft actually paid AOL a bounty for every subscriber that it converted to access software that included Internet Explorer instead of Navigator. Finally, with respect to OEMs, Microsoft extended co-marketing funds and reductions in the Windows royalty price to those agreeing to promote Internet Explorer and, in some cases, to abstain from promoting Navigator.

140. Even absent the strategic imperative to maximize its browser usage share at Netscape’s expense, Microsoft might still have set the price of an Internet Explorer consumer license at zero. It might also have spent something approaching the $100 million it has devoted each year to developing Internet Explorer and some part of the $30 million it has spent annually marketing it. After all, consumers in 1995 were already demanding software that enabled them to use the Web with ease, and IBM had announced in September 1994 its plan to include browsing capability in OS/2 Warp at no extra charge. Microsoft had reason to believe that other operating-system vendors would do the same.

141. Still, had Microsoft not viewed browser usage share as the key to preserving the applications barrier to entry, the company would not have taken its efforts beyond developing a competitive browser product, including it with Windows at no additional cost to consumers, and promoting it with advertising. Microsoft would not have absorbed the considerable additional costs associated with enlisting other firms in its campaign to increase Internet Explorer’s usage share at Navigator’s expense. This investment was only profitable to the extent that it protected the applications barrier to entry. Neither the desire to bolster demand for Windows, nor the prospect of ancillary revenues, explains the lengths to which Microsoft has gone. For one thing, loading Navigator makes Windows just as Internet-ready as including Internet Explorer does. Therefore, Microsoft’s costly efforts to limit the use of Navigator on Windows could not have stemmed from a desire to bolster consumer demand for Windows. Furthermore, there is no conceivable way that Microsoft’s costly efforts to induce Apple to pre-install Internet Explorer on Apple’s own PC systems could have increased consumer demand for Windows.

142. In pursuing its goal of maximizing Internet Explorer’s usage share, Microsoft actually has limited rather severely the number of profit centers from which it could otherwise derive income via Internet Explorer. For example, Microsoft allows the developers of browser shells built on Internet Explorer to collect ancillary revenues such as advertising fees; for another, Microsoft permits its browser licensees to change the browser’s start page, thus limiting the fees that advertisers are willing to pay for placement on that page by Microsoft. Even if Microsoft maximized its ancillary revenue, the amount of revenue realized would not come close to recouping the cost of its campaign to maximize Internet Explorer’s usage share at Navigator’s expense. The countless communications that Microsoft’s executives dispatched to each other about the company’s need to capture browser usage share indicate that the purpose of the effort had little to do with attracting ancillary revenues and everything to do with protecting the applications barrier from the threat posed by Netscape’s Navigator and Sun’s implementation of Java. For example, Microsoft vice president Brad Chase told the company’s assembled sales and marketing executives in April 1996 that they should "worry about your browser share[] as much as BillG" even though Internet Explorer was "a no revenue product," because "we will lose [sic] the Internet platform battle if we do not have a significant user installed base." He told them that "if you let your customers deploy Netscape Navigator, you will loose [sic] leadership on the desktop."

143. Decision-makers at Microsoft worried that simply developing its own attractive browser product, pricing it at zero, and promoting it vigorously would not divert enough browser usage from Navigator to neutralize it as a platform. They believed that a comparable browser product offered at no charge would still not be compelling enough to consumers to detract substantially from Navigator’s existing share of browser usage. This belief was due, at least in part, to the fact that Navigator already enjoyed a very large installed base and had become nearly synonymous with the Web in the public’s consciousness. If Microsoft was going to raise Internet Explorer’s share of browser usage and lower Navigator’s share, executives at Microsoft believed they needed to constrict Netscape’s access to the distribution channels that led most efficiently to browser usage.

144. Very soon after it recognized the need to gain browser usage share at Navigator’s expense, Microsoft identified pre-installation by OEMs and bundling with the proprietary client software of IAPs as the two distribution channels that lead most efficiently to browser usage. Two main reasons explain why these channels are so efficient. First, users must acquire a computer and connect to the Internet before they can browse the Web. Thus, the OEM and IAP channels lead directly to virtually every user of browsing software. Second, both OEMs and IAPs are able to place browsing software at the immediate disposal of a user without any effort on the part of the user. If an OEM pre-installs a browser onto its PCs and places an icon for that browser on the default screen, or "desktop," of the operating system, purchasers of those PCs will be confronted with the icon as soon as the operating system finishes loading into random access memory ("RAM"). If an IAP bundles a browser with its own proprietary software, its subscribers will, by default, use the browser whenever they connect to the Web. In its internal decision-making, Microsoft has placed considerable reliance on studies showing that consumers tend strongly to use whatever browsing software is placed most readily at their disposal, and that once they have acquired, found, and used one browser product, most are reluctant — and indeed have little reason — to expend the effort to switch to another. Microsoft has also relied on studies showing that a very large majority of those who browse the Web obtain their browsing software with either their PCs or their IAP subscriptions.

145. Indeed, no other distribution channel for browsing software even approaches the efficiency of OEM pre-installation and IAP bundling. The primary reason is that the other channels require users to expend effort before they can start browsing. The traditional retail channel, for example, requires the consumer to make contact with a retailer, and retailers generally do not distribute products without charging a price for them. Naturally, once Microsoft and Netscape began offering browsing software for free, consumers for the most part lost all incentive to pay for it.

146. The relatively few users who already have a browser but would prefer another can avoid the retail channel by using the Internet to download new browsing software electronically, but they must wait for the software to transmit to their PCs. This process takes a moderate degree of sophistication and substantial amount of time, and as the average bandwidth of PC connections has grown, so has the average size of browser products. The longer it takes for the software to download, the more likely it is that the user’s connection to the Internet will be interrupted. As a vanguard of the "Internet Age," Navigator generated a tremendous amount of excitement in its early days among technical sophisticates, who were willing to devote time and effort to downloading the software. Today, however, the average Web user is more of a neophyte, and is far more likely to be intimidated by the process of downloading. It is not surprising, then, that downloaded browsers now make up only a small and decreasing percentage of the new browsers (as opposed to upgrades) that consumers obtain and use.

147. The consumer who receives a CD-ROM containing a free browser in the mail or as a magazine insert is at least spared the time and effort it would take to obtain browsing software from a retail vendor or to download it from the Web. But, just as the consumer who obtains a browser at retail or off the Web, the consumer who receives the software unsolicited at home must first install it on a PC system in order to use it, and merely installing a browser product takes time and can be confusing for novice users. Plus, a large percentage of the unsolicited disks distributed through "carpet bombing" reach individuals who do not have PCs, who already have pre-installed browsing software, or who have no interest in browsing the Web. In practice, less than two percent of CD-ROM disks disseminated in mass-distribution campaigns are used in the way the distributor intended. As a result, this form of distribution is rarely profitable, and then only when undertaken by on-line subscription services for whom a sale translates into a stream of revenues lasting into the future. The fact that an OLS may find it worthwhile to "carpet bomb" consumers with free disks obviously only helps the vendor of browsing software whose product the OLS has chosen to bundle with its proprietary software. So, while there are other means of distributing browsers, the fact remains that to a firm interested in browser usage, there simply are no channels that compare in efficiency to OEM pre-installation and IAP bundling.

148. Knowing that OEMs and IAPs represented the most efficient distribution channels of browsing software, Microsoft sought to ensure that, to as great an extent as possible, OEMs and IAPs bundled and promoted Internet Explorer to the exclusion of Navigator.

149. Consumers determine their software requirements by identifying the functionalities they desire. While consumers routinely evaluate software products on the basis of the functionalities the products deliver, they generally lack sufficient information to make judgements based on the designs and implementations of those products. Accordingly, consumers generally choose which software products to license, install, and use on the basis of the products’ functionalities, not their designs and implementations.

150. While the meaning of the term "Web browser" is not precise in all respects, there is a consensus in the software industry as to the functionalities that a Web browser offers a user. Specifically, a Web browser provides the ability for the end user to select, retrieve, and perceive resources on the Web. There is also a consensus in the software industry that these functionalities are distinct from the set of functionalities provided by an operating system.

151. Many consumers desire to separate their choice of a Web browser from their choice of an operating system. Some consumers, particularly corporate consumers, demand browsers and operating systems separately because they prefer to standardize on the same browser across different operating systems. For such consumers, standardizing on the browser of their choice results in increased productivity and lower training and support costs, and permits the establishment of consistent security and privacy policies governing Web access.

152. Moreover, many consumers who need an operating system, including a substantial percentage of corporate consumers, do not want a browser at all. For example, if a consumer has no desire to browse the Web, he may not want a browser taking up memory on his hard disk and slowing his system’s performance. Also, for businesses desiring to inhibit employees’ access to the Internet while minimizing system support costs, the most efficient solution is often using PC systems without browsers.

153. Because of the separate demand for browsers and operating systems, firms have found it efficient to supply the products separately. A number of operating system vendors offer consumers the choice of licensing their operating systems without a browser. Others bundle a browser with their operating system products but allow OEMs, value-added resellers, and consumers either to not install it or, if the browser has been pre-installed, to uninstall it. While Microsoft no longer affords this flexibility (it is the only operating system vendor that does not), it has always marketed and distributed Internet Explorer separately from Windows in several channels. These include retail sales, service kits for ISVs, free downloads over the Internet, and bundling with other products produced both by Microsoft and by third-party ISVs. In order to compete with Navigator for browser share, as well as to satisfy corporate consumers who want their diverse PC platforms to present a common browser interface to employees, Microsoft has also created stand-alone versions of Internet Explorer that run on operating systems other than 32-bit Windows, including the Mac OS and Windows 3.x.

154. In conclusion, the preferences of consumers and the responsive behavior of software firms demonstrate that Web browsers and operating systems are separate products.

155. In contrast to other operating system vendors, Microsoft both refused to license its operating system without a browser and imposed restrictions — at first contractual and later technical — on OEMs’ and end users’ ability to remove its browser from its operating system. As its internal contemporaneous documents and licensing practices reveal, Microsoft decided to bind Internet Explorer to Windows in order to prevent Navigator from weakening the applications barrier to entry, rather than for any pro-competitive purpose.

156. Before it decided to blunt the threat that Navigator posed to the applications barrier to entry, Microsoft did not plan to make it difficult or impossible for OEMs or consumers to obtain Windows without obtaining Internet Explorer. In fact, the company’s internal correspondence and external communications indicate that, as late as the fall of 1994, Microsoft was planning to include low-level Internet "plumbing," such as a TCP/IP stack, but not a browser, with Windows 95.

157. Microsoft subsequently decided to develop a browser to run on Windows 95. As late as June 1995, however, Microsoft had not decided to bundle that browser with the operating system. The plan at that point, rather, was to ship the browser in a separate "frosting" package, for which Microsoft intended to charge. By April or May of that year, however, Microsoft’s top executives had identified Netscape’s browser as a potential threat to the applications barrier to entry. Throughout the spring, more and more key executives came to the conclusion that Microsoft’s best prospect of quashing that threat lay in maximizing the usage share of Microsoft’s browser at Navigator’s expense. The executives believed that the most effective way of carrying out this strategy was to ensure that every copy of Windows 95 carried with it a copy of Microsoft’s browser, then code-named "O’Hare." For example, two days after the June 21, 1995 meeting between Microsoft and Netscape executives, Microsoft’s John Ludwig sent an E-mail to Paul Maritz and the other senior executives involved in Microsoft’s browser effort. "[O]bviously netscape does see us as a client competitor," Ludwig wrote. "[W]e have to work extra hard to get ohare on the oem disks."

158. Microsoft did manage to bundle Internet Explorer 1.0 with the first version of Windows 95 licensed to OEMs in July 1995. It also included a term in its OEM licenses that prohibited the OEMs from modifying or deleting any part of Windows 95, including Internet Explorer, prior to shipment. The OEMs accepted this restriction despite their interest in meeting consumer demand for PC operating systems without Internet Explorer. After all, Microsoft made the restriction a non-negotiable term in its Windows 95 license, and the OEMs felt they had no commercially viable alternative to pre-installing Windows 95 on their PCs. Apart from a few months in the fall of 1997, when Microsoft provided OEMs with Internet Explorer 4.0 on a separate disk from Windows 95 and permitted them to ship the latter without the former, Microsoft has never allowed OEMs to ship Windows 95 to consumers without Internet Explorer. This policy has guaranteed the presence of Internet Explorer on every new Windows PC system.

159. Microsoft knew that the inability to remove Internet Explorer made OEMs less disposed to pre-install Navigator onto Windows 95. OEMs bear essentially all of the consumer support costs for the Windows PC systems they sell. These include the cost of handling consumer complaints and questions generated by Microsoft’s software. Pre-installing more than one product in a given category, such as word processors or browsers, onto its PC systems can significantly increase an OEM’s support costs, for the redundancy can lead to confusion among novice users. In addition, pre-installing a second product in a given software category can increase an OEM’s product testing costs. Finally, many OEMs see pre-installing a second application in a given software category as a questionable use of the scarce and valuable space on a PC’s hard drive.

160. Microsoft’s executives believed that the incentives that its contractual restrictions placed on OEMs would not be sufficient in themselves to reverse the direction of Navigator’s usage share. Consequently, in late 1995 or early 1996, Microsoft set out to bind Internet Explorer more tightly to Windows 95 as a technical matter. The intent was to make it more difficult for anyone, including systems administrators and users, to remove Internet Explorer from Windows 95 and to simultaneously complicate the experience of using Navigator with Windows 95. As Brad Chase wrote to his superiors near the end of 1995, "We will bind the shell to the Internet Explorer, so that running any other browser is a jolting experience."

161. Microsoft bound Internet Explorer to Windows 95 by placing code specific to Web browsing in the same files as code that provided operating system functions. Starting with the release of Internet Explorer 3.0 and "OEM Service Release 2.0" ("OSR 2") of Windows 95 in August 1996, Microsoft offered only a version of Windows 95 in which browsing-specific code shared files with code upon which non-browsing features of the operating system relied.

162. The software code necessary to supply the functionality of a modern application or operating system can be extremely long and complex. To make that complexity manageable, developers usually write long programs as a series of individual "routines," each ranging from a few dozen to a few hundred lines of code, that can be used to perform specific functions. Large programs are created by "knitting" together many such routines in layers, where the lower layers are used to provide fundamental functionality relied upon by higher, more focused layers. Some preliminary aspects of this "knitting" are performed by the software developer. The user who launches a program, however, is ultimately responsible for causing routines to be loaded into memory and executed together to produce the program’s overall functionality.

163. Routines can be packaged together into files in almost any way the designer chooses. Routines need not reside in the same file to function together in a seamless fashion. Also, a developer can move routines into new or different files from one version of a program to another without changing the functionalities of those routines or the ability to combine them to provide integrated functionality.

164. Starting with Windows 95 OSR 2, Microsoft placed many of the routines that are used by Internet Explorer, including browsing-specific routines, into the same files that support the 32-bit Windows APIs. Microsoft’s primary motivation for this action was to ensure that the deletion of any file containing browsing-specific routines would also delete vital operating system routines and thus cripple Windows 95. Although some of the code that provided Web browsing could still be removed, without disabling the operating system, by entering individual files and selectively deleting routines used only for Web browsing, licensees of Microsoft software were, and are, contractually prohibited from reverse engineering, decompiling, or disassembling any software files. Even if this were not so, it is prohibitively difficult for anyone who does not have access to the original, human-readable source code to change the placement of routines into files, or otherwise to alter the internal configuration of software files, while still preserving the software’s overall functionality.

165. Although users were not able to remove all of the routines that provided Web browsing from OSR 2 and successive versions of Windows 95, Microsoft still provided them with the ability to uninstall Internet Explorer by using the "Add/Remove" panel, which was accessible from the Windows 95 desktop. The Add/Remove function did not delete all of the files that contain browsing specific code, nor did it remove browsing-specific code that is used by other programs. The Add/Remove function did, however, remove the functionalities that were provided to the user by Internet Explorer, including the means of launching the Web browser. Accordingly, from the user’s perspective, uninstalling Internet Explorer in this way was equivalent to removing the Internet Explorer program from Windows 95.

166. In late 1996, senior executives within Microsoft, led by James Allchin, began to argue that Microsoft was not binding Internet Explorer tightly enough to Windows and as such was missing an opportunity to maximize the usage of Internet Explorer at Navigator’s expense. Allchin first made his case to Paul Maritz in late December 1996. He wrote:

I don’t understand how IE is going to win. The current path is simply to copy everything that Netscape does packaging and product wise. Let’s [suppose] IE is as good as Navigator/Communicator. Who wins? The one with 80% market share. Maybe being free helps us, but once people are used to a product it is hard to change them. Consider Office. We are more expensive today and we’re still winning. My conclusion is that we must leverage Windows more. Treating IE as just an add-on to Windows which is cross-platform [means] 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 about an integrated solution — that is our strength.

Allchin followed up with another message to Maritz on January 2, 1997:

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. Pitting browser against browser is hard since Netscape has 80% marketshare and we have <20%. . . . 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. This must come from you. . . . Memphis [Microsoft’s code-name for Windows 98] 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.

167. Maritz responded to Allchin’s second message by agreeing "that we have to make Windows integration our basic strategy" and that this justified delaying the release of Windows 98 until Internet Explorer 4.0 was ready to be included with that product. Maritz recognized that the delay would disappoint OEMs for two reasons. First, while OEMs were eager to sell new hardware technologies to Windows users, they could not do this until Microsoft released Windows 98, which included software support for the new technologies. Second, OEMs wanted Windows 98 to be released in time to drive sales of PC systems during the back-to-school and holiday selling seasons. Nevertheless, Maritz agreed with Allchin’s point that synchronizing the release of Windows 98 with Internet Explorer was "the only thing that makes sense even if OEMs suffer."

168. Once Maritz had decided that Allchin was right, he needed to instruct the relevant Microsoft employees to delay the release of Windows 98 long enough so that it could be shipped with Internet Explorer 4.0 tightly bound to it. When one executive asked on January 7, 1997 for confirmation that "memphis is going to hold for IE4, even if it puts memphis out of the xmas oem window," Maritz responded affirmatively and explained,

The major reason for this is . . . to combat Nscp, 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. . . . IE integration will be [the] most compelling feature of Memphis.

Thus, Microsoft delayed the debut of numerous features, including support for new hardware devices, that Microsoft believed consumers would find beneficial, simply in order to protect the applications barrier to entry.

169. Allchin and Maritz gained support for their initiative within Microsoft in the early spring of 1997, when a series of market studies confirmed that binding Internet Explorer tightly to Windows was the way to get consumers to use Internet Explorer instead of Navigator. Reporting on one study in late February, Microsoft’s Christian Wildfeuer wrote:

The stunning insight is this: To make [users] switch away from Netscape, we need to make them upgrade to Memphis. . . . It seems clear to me 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.

Microsoft’s survey expert, Kumar Mehta, agreed. In March he shared with a colleague his "feeling, based on all the IE research we have done, [that] it is a mistake to release memphis without bundling IE with it."

170. Microsoft’s technical personnel implemented Allchin’s "Windows integration" strategy in two ways. First, they did not provide users with the ability to uninstall Internet Explorer from Windows 98. The omission of a browser removal function was particularly conspicuous given that Windows 98 did give users the ability to uninstall numerous features other than Internet Explorer — features that Microsoft also held out as being integrated into Windows 98. Microsoft took this action despite specific requests from Gateway that Microsoft provide a way to uninstall Internet Explorer 4.0 from Windows 98.

171. The second way in which Microsoft’s engineers implemented Allchin’s strategy was to make Windows 98 override the user’s choice of default browser in certain circumstances. As shipped to users, Windows 98 has Internet Explorer configured as the default browser. While Windows 98 does provide the user with the ability to choose a different default browser, it does not treat this choice as the "default browser" within the ordinary meaning of the term. Specifically, when a user chooses a browser other than Internet Explorer as the default, Windows 98 nevertheless requires the user to employ Internet Explorer in numerous situations that, from the user’s perspective, are entirely unexpected. As a consequence, users who choose a browser other than Internet Explorer as their default face considerable uncertainty and confusion in the ordinary course of using Windows 98.

172. Microsoft’s refusal to respect the user’s choice of default browser fulfilled Brad Chase’s 1995 promise to make the use of any browser other than Internet Explorer on Windows "a jolting experience." By increasing the likelihood that using Navigator on Windows 98 would have unpleasant consequences for users, Microsoft further diminished the inclination of OEMs to pre-install Navigator onto Windows. The decision to override the user’s selection of non-Microsoft software as the default browser also directly disinclined Windows 98 consumers to use Navigator as their default browser, and it harmed those Windows 98 consumers who nevertheless used Navigator. In particular, Microsoft exposed those using Navigator on Windows 98 to security and privacy risks that are specific to Internet Explorer and to ActiveX controls..

173. Microsoft’s actions have inflicted collateral harm on consumers who have no interest in using a Web browser at all. If these consumers want the non-browsing features available only in Windows 98, they must content themselves with an operating system that runs more slowly than if Microsoft had not interspersed browsing-specific routines throughout various files containing routines relied upon by the operating system. More generally, Microsoft has forced Windows 98 users uninterested in browsing to carry software that, while providing them with no benefits, brings with it all the costs associated with carrying additional software on a system. These include performance degradation, increased risk of incompatibilities, and the introduction of bugs. Corporate consumers who need the hardware support and other non-browsing features not available in earlier versions of Windows, but who do not want Web browsing at all, are further burdened in that they are denied a simple and effective means of preventing employees from attempting to browse the Web.

174. Microsoft has harmed even those consumers who desire to use Internet Explorer, and no other browser, with Windows 98. To the extent that browsing-specific routines have been commingled with operating system routines to a greater degree than is necessary to provide any consumer benefit, Microsoft has unjustifiably jeopardized the stability and security of the operating system. Specifically, it has increased the likelihood that a browser crash will cause the entire system to crash and made it easier for malicious viruses that penetrate the system via Internet Explorer to infect non-browsing parts of the system.

175. No technical reason can explain Microsoft’s refusal to license Windows 95 without Internet Explorer 1.0 and 2.0. The version of Internet Explorer (1.0) that Microsoft included with the original OEM version of Windows 95 was a separable, 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. 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" panel. This demonstrates the absence of any technical reason for Microsoft’s refusal to supply Windows 95 without Internet Explorer 1.0 and 2.0.

176. Similarly, there is no technical justification for Microsoft’s refusal to license Windows 95 to OEMs with Internet Explorer 3.0 or 4.0 uninstalled, or for its refusal to permit OEMs to uninstall Internet Explorer 3.0 or 4.0. Microsoft’s decision to provide users with an "uninstall" procedure for Internet Explorer 3.0 and 4.0 and its decision to promote Internet Explorer on the basis of that feature demonstrate that there was no technical or quality-related reason for refusing to permit OEMs to use this same feature. Microsoft would not have permitted users to uninstall Internet Explorer, nor would consumers have demanded such an option, if the process would have fragmented or degraded the other functionality of the operating system.

177. As with Windows 95, there is no technical justification for Microsoft’s refusal to meet consumer demand for a browserless version of Windows 98. Microsoft could easily supply a version of Windows 98 that does not provide the ability to browse the Web, and to which users could add the browser of their choice. Indicative of this is the fact that it remains possible to remove Web browsing functionality from Windows 98 without adversely affecting non-Web browsing features of Windows 98 or the functionality of applications running on the operating system. In fact, the revised version of Professor Felten’s prototype removal program produces precisely this result when run on a computer with Windows 98 installed.

178. In his direct testimony, Felten provides a full technical description of what his prototype removal program does. This description includes a list of the twenty-one methods of initiating Web browsing in Windows 98 that were known to Felten when he developed his program. When the revised version of Felten’s program is run on a computer with Windows 98 and no other software installed, Web browsing is not initiated in response to any of these methods.

179. James Allchin tried to show at trial, by way of a videotaped demonstration, that the functionality of Internet Explorer could still be enabled, even after the prototype removal program had been run, by manually adding a new entry to the Windows Registry database. During Felten’s rebuttal testimony, one of Microsoft’s attorneys directed Felten to perform a second demonstration intended to show that the functionality of Internet Explorer could still be enabled, even after the prototype removal program had been run, by hitting the "control" and "N" keys simultaneously after running the Windows Update feature. Neither of these methods of initiating Web browsing was among the twenty-one documented methods known to Felten when he developed his program. Furthermore, the latter demonstration was hardly a reliable test of Felten’s program, because the Encompass shell browser and other applications had been installed on the Windows 98 PC system used in the demonstration. At most, the two demonstrations indicate that Felten did not know all of the methods of initiating Web browsing in Windows 98 when he developed his program, and that he did not include steps in his program to prevent the invocation of Internet Explorer’s functionality in response to methods of which he was unaware. Microsoft has special knowledge of its own products, and it alone chooses which functionalities in its products are to be documented and which are to be left undocumented. Felten was aware of this fact, and he himself noted that his own documentation of initiation methods was not exhaustive.

180. Allchin also attempted to show that Felten’s program causes performance degradations in Windows 98, as well as malfunctions in certain Windows 98 applications and the Windows Update feature of Windows 98. Those demonstrations, however, were performed on a PC on which several third-party software programs had been installed in addition to Windows 98, and which had been connected to the Internet via a dial-up connection. Felten’s program was not intended to be definitive and had not been verified under preconditions other than those for which it was designed. Thus, there was no reason to expect that his program would operate flawlessly during Allchin’s demonstrations, and nothing can be inferred from any failure to do so.

181. In fact, the revised version of Felten’s program does not degrade the performance or stability of Windows 98 in any way. To the contrary, according to several standard programs used by Microsoft to measure system performance, the removal of Internet Explorer by the prototype program slightly improves the overall speed of Windows 98.

182. Given Microsoft’s special knowledge of its own products, the company is readily able to produce an improved implementation of the concept illustrated by Felten’s prototype removal program. In particular, Microsoft can easily identify browsing-specific code that could be removed from shared files, thereby reducing the operating system’s memory and hard disk requirements and obtaining performance improvements even beyond those achieved by Felten.

183. Microsoft contends that Felten’s prototype removal program does not remove Internet Explorer’s Web browsing functionalities, but rather "hides" those functionalities from the perspective of the user. In support of that contention, Microsoft points out that Felten’s program removes only a small fraction of the code in Windows 98, so that the hard drive still contains almost all of the code that had been executed in the course of providing Internet Explorer’s Web browsing functionalities. Some of that code is left on the hard drive because it also supports Windows 98's operating system functionalities. Microsoft did not offer any analytical basis, however, for distinguishing this sharing of code from the code sharing that exists between all Windows applications and the operating system functionalities in Windows 98.

184. While Microsoft’s observation suggests that Felten’s program does not greatly reduce Windows 98's "footprint" on the hard disk, that point is irrelevant to the question of whether Felten’s program removes Internet Explorer’s functionalities from Windows 98. This is because the functionalities of a software product are not provided by the mere presence of code on a computer’s hard drive. For software code to provide any functionalities at all the code must be loaded into the computer’s dynamic memory and executed. To uninstall a software program or to remove a set of functionalities from a software program, it is not necessary to delete all of the software code that is executed in the course of providing those functionalities. It is sufficient to delete and/or modify enough of the program so as to prevent the code in question from being executed.

185. This deletion and modification is precisely what Felten’s program does to Windows 98. After Felten’s program has been run, the software code that formerly had been executed in the course of providing Web browsing functionalities is no longer executed. Web browsing functionalities are not merely "hidden" from the user. To the contrary, Felten’s program deletes and modifies enough of Windows 98 so as to prevent the necessary code from being executed altogether. Since code that is not to be executed does not need to be loaded into memory, Felten’s program is able to reduce the memory allocated to Windows 98 by approximately twenty percent.

186. As an abstract and general proposition, many — if not most — consumers can be said to benefit from Microsoft’s provision of Web browsing functionality with its Windows operating system at no additional charge. No consumer benefit can be ascribed, however, to Microsoft’s refusal to offer a version of Windows 95 or Windows 98 without Internet Explorer, or to Microsoft’s refusal to provide a method for uninstalling Internet Explorer from Windows 98. In particular, Microsoft’s decision to force users to take the browser in order to get the non-Web browsing features of Windows 98, including support for new Internet protocols and data formats is, as Allchin put it, simply a choice about "distribution."

187. As Felten’s program demonstrated, it is feasible for Microsoft to supply a version of Windows 98 that does not provide the ability to browse the Web, to which users could add a browser of their choice. Microsoft could then readily offer "integrated" Internet Explorer Web browsing functionality as well, either as an option that could be selected by the end user or the OEM during the Windows 98 setup procedure, or as a "service pack upgrade."

188. Unlike a "pocket part" supplement to a book, a software upgrade need not consist only of new material. A service pack upgrade may install a combination of new software files and/or replacements for existing software files. The use of such service packs to distribute new functionality is a standard feature of Windows applications generally. Microsoft could offer "integrated" Internet Explorer Web browsing functionality as a service pack upgrade that would locate the relevant software and replace it with the current Windows 98 software. In this way, any consumer who wished to do so could easily acquire all of the functionality, features, and performance of the current version of Windows 98 by obtaining the browserless operating system package and the service pack upgrade and then installing them together.

189. Microsoft contends that a service pack must necessarily be deemed part of the operating system when it replaces and adds a large number of core operating system files in the process of upgrading the operating system to a higher level of functionality. This contention is false. Both Microsoft Word, an application program, and Norton Utilities, a suite of utility and application programs, replace and add files to Windows without thereby becoming part of the operating system.

190. Microsoft’s actual use of a service pack upgrade to offer integrated Internet Explorer Web browsing functionality (Internet Explorer 4.0) separately from the Windows 95 operating system illustrates the feasibility of this approach. In fact, it produces results remarkably similar to those that could be achieved by offering integrated Internet Explorer Web browsing functionality as a separate service pack upgrade to a browserless Windows 98 operating system. When installed together by the end user, the combined software provides nearly all of the features that Microsoft attributes to the "integrated" design of Windows 98. Of the missing features, all but WebTV for Windows can be obtained by thereafter installing a separately obtained copy of Internet Explorer 5.0. Microsoft has presented no evidence that the WebTV functionality could not easily be included in the stand-alone version of Internet Explorer 5.0.

191. Therefore, Microsoft could offer consumers all the benefits of the current Windows 98 package by distributing the products separately and allowing OEMs or consumers themselves to combine the products if they wished. In fact, operating system vendors other than Microsoft currently succeed in offering "integrated" features similar to those that Microsoft advertises in Windows 98 while still permitting the removal of the browser from the operating system. If consumers genuinely prefer a version of Windows bundled with Internet Explorer, they do not have to be forced to take it; they can choose it in the market.

192. Windows 98 offers some benefits unrelated to browsing that a consumer cannot obtain by combining Internet Explorer with Windows 95. For example, Windows 98 includes support for new hardware technologies and data formats that consumers may desire. While nevertheless preferring to do without Web browsing, Microsoft has forced Windows users who do not want Internet Explorer to nevertheless license, install, and use Internet Explorer to obtain the unrelated benefits. Although some consumers might be inclined to go without Windows 98's new non-browsing features in order to avoid Internet Explorer, OEMs are unlikely to facilitate that choice, because they want consumers to use an operating system that supports the new hardware technologies they seek to sell.

193. Microsoft’s argument that binding the browser to the operating system is reasonably necessary to preserve the "integrity" of the Windows platform is likewise specious. First, concern with the integrity of the platform cannot explain Microsoft’s original decision to bind Internet Explorer to Windows 95, because Internet Explorer 1.0 and 2.0 did not contain APIs. Second, concern with the integrity of the platform cannot explain Microsoft’s refusal to offer OEMs the option of uninstalling Internet Explorer from Windows 95 and Windows 98 because APIs, like all other shared files, are left on the system when Internet Explorer in uninstalled. Third, Microsoft’s contention that offering OEMs the choice of whether or not to install certain browser-related APIs would fragment the Windows platform is unpersuasive because OEMs operate in a competitive market and thus have ample incentive to include APIs (including non-Microsoft APIs) required by the applications that their customers demand. Fourth, even if there were some potential benefit associated with the forced licensing of a single set of APIs to all OEMs, such justification could not apply in this case, because Microsoft itself precipitates fragmentation of its platform by continually updating various portions of the Windows installed base with new APIs. ISVs have adapted to this reality by redistributing needed APIs with their applications in order to ensure that the necessary APIs are present when the programs are launched. To the same end, Microsoft makes the APIs it ships with Internet Explorer available to third-party developers for distribution with their own products. Moreover, Microsoft itself bundles APIs — including those distributed with Internet Explorer — with a number of the applications that it distributes separately from Windows.

194. Microsoft also contends that by providing "best of breed" implementations of various functionalities, a vendor of a popular operating system can benefit consumers and improve the efficiency of the software market generally, because the resulting standardization allows ISVs to concentrate their efforts on developing complementary technologies for the industry leaders. Microsoft’s refusal to offer a version of Windows 98 in which its Web browser is either absent or removable, however, had no such purpose. Rather, it had the purpose and effect of quashing innovation that exhibited the potential to facilitate the emergence of competition in the market for Intel-compatible PC operating systems.

195. Furthermore, there is only equivocal support for the proposition that Microsoft will ultimately prove to be the source of a "best of breed" Web browser. In fact, there is considerable evidence to the contrary. Both Microsoft and the plaintiffs have used product evaluations to support their claims about the relationship between innovations in Web browser technology and consumer choices regarding the use of Web browsers. These product evaluations generally compare Internet Explorer with Navigator by identifying the beneficial and detrimental features of each. Because the evaluations disagree as to which features are most important, there is no consensus as to which is the best browser overall. When read together, the evaluations also do not identify any existing Web browser as being "best of breed" in the sense of being at least as good as all others in all significant respects. Moreover, there is nothing in the evaluations, nor anywhere else in the evidence, to suggest that further innovation efforts by vendors other than Microsoft in the field of Web browser technology are no longer necessary or desirable. To the contrary, many of the product reviews suggest further innovations in both Microsoft and non-Microsoft Web browsers that would benefit consumers.

196. Despite differences in emphasis, the product evaluations do generally concur as to which browser features are beneficial, which browser features are detrimental, and why. Thus, the evaluations provide extensive detailed information about consumer preferences that can be used to predict likely directions in the evolution of Web browser technology.

197. First, the evaluations suggest that, although most Web publishers charge nothing for access to their sites, consumers recognize that there are search and communication costs associated with Web transactions. Accordingly, consumers prefer, and benefit from, innovations in Web browser technology that reduce these costs. Second, consumers recognize that the Web contains a vast and growing range of digital information resources, many of which contain viruses that are capable of causing devastating and irreversible harm to their security and privacy interests. Accordingly, consumers prefer, and benefit from, innovations in Web browser technology that help them identify and avoid harmful Web resources. Third, consumers recognize that they frequently lack adequate information to enable them to assess accurately the costs, risks, and benefits of performing a particular Web transaction. Accordingly, consumers prefer, and benefit from, innovations in Web browser technology that help them assess these costs, risks, and benefits prior to performing the transaction.

198. The reduction of search and communication costs, the identification and avoidance of harmful Web resources, and the provision of more accurate information as to the costs, risks, and benefits of performing Web transactions are just three of the many possible areas of innovation in the field of Web browser technology. Far from demonstrating that Internet Explorer is currently a "best of breed" Web browser, the evidence reveals Microsoft’s awareness of the need for continuous improvement of its products. For example, Microsoft frequently releases "patches" to address security and privacy vulnerabilities in Internet Explorer as they are discovered. In sum, there is no indication that Microsoft is destined to provide a "best of breed" Web browser that makes continuing, competitively driven innovations unproductive.

199. Since the World Wide Web was introduced to the public in 1991, the resources available on the Web have multiplied at a near-exponential rate. The Internet is becoming a true mass medium. Every day Web resources are published, combined, modified, moved, and deleted. Millions of individuals and organizations have published Web sites, and Web site addresses are pervasive in advertising, promotion, and corporate identification.

200. The economics of the Internet, along with the flexible structure of Web pages, have made the Web the leading trajectory for the ongoing convergence of mass communications media. Many television and radio stations make some or all of their transmissions available on the Web in the form of static multimedia files or streaming media. Many newspapers, magazines, books, journals, public documents, and software programs are also published on the Web. Multimedia files on the Web have emerged as viable substitutes for many pre-recorded audio and video entertainment products. Web-based E-mail, discussion lists, news groups, "chat rooms," paging, instant messaging, and telephony are all in common use. In addition to subsuming all other digital media, the Web also offers popular interactive and collaborative modes of communication that are not available through other media.

201. The use of Web browsers to conduct Web transactions has grown at pace with the growth of the Web, reflecting the immense value that subsists in the digital information resources that have become available on the Web. Consumer demand for software functionality that facilitates Web transactions, and the response by browser vendors to that demand, creates a market for Web browsing functionality. Although Web browsers are now generally not licensed at a positive price, all Web transactions impose significant costs on consumers, and all browser vendors, including Microsoft, have significant economic interests in maximizing usage of the browsing functionality they control.

b. Preventing OEMs from Removing the Ready Means of Accessing Internet Explorer and from Promoting Navigator in the Boot Sequence

202. Since the release of Internet Explorer 1.0 in July 1995, Microsoft has distributed every version of Windows with Internet Explorer included. Consequently, no OEM has ever (with the exception of a few months in late 1997) been able to license a copy of Windows 95 or Windows 98 that has not come with Internet Explorer. Refusing to offer OEMs a browserless (and appropriately discounted) version of Windows forces OEMs to take (and pay for) Internet Explorer, but it does not prevent a determined OEM from nevertheless offering its consumers a different Web browser. Even Microsoft’s additional refusal to allow OEMs to uninstall (without completely removing) Internet Explorer from Windows does not completely foreclose a resourceful OEM from offering consumers another browser. For example, an OEM with sufficient technical expertise (which all the larger OEMs certainly possess) could offer its customers a choice of browsers while still minimizing user confusion if the OEM were left free to configure its systems to present this choice the first time a user turned on a new PC system. If the user chose Navigator, the system would automatically remove the most prominent means of accessing Internet Explorer from Windows (without actually uninstalling, i.e., removing all means of accessing, Internet Explorer) before the desktop screen appeared for the first time.

203. If OEMs removed the most visible means of invoking Internet Explorer, and pre-installed Navigator with facile methods of access, Microsoft’s purpose in forcing OEMs to take Internet Explorer — capturing browser usage share from Netscape — would be subverted. The same would be true if OEMs simply configured their machines to promote Navigator before Windows had a chance to promote Internet Explorer, Decision-makers at Microsoft believed that as Internet Explorer caught up with Navigator in quality, OEMs would ultimately conclude that the costs of pre-installing and promoting Navigator, and removing easy access to Internet Explorer, outweighed the benefits. Still, those decision-makers did not believe that Microsoft could afford to wait for the several large OEMs that represented virtually all Windows PCs shipped to come to this desired conclusion on their own. Therefore, in order to bring the behavior of OEMs into line with its strategic goals quickly, Microsoft threatened to terminate the Windows license of any OEM that removed Microsoft’s chosen icons and program entries from the Windows desktop or the "Start" menu. It threatened similar punishment for OEMs who added programs that promoted third-party software to the Windows "boot" sequence. These inhibitions soured Microsoft’s relations with OEMs and stymied innovation that might have made Windows PC systems more satisfying to users. Microsoft would not have paid this price had it not been convinced that its actions were necessary to ostracize Navigator from the vital OEM distribution channel.

204. Although Microsoft’s original Windows 95 licenses withheld from OEMs permission to implement any modifications to the Windows product not expressly authorized by Microsoft’s "OEM Pre-Installation Kit," or "OPK," it had always been Microsoft’s practice to grant certain OEMs requesting it some latitude to make modifications not specified in the OPK. But when OEMs began, in the summer of 1995, to request permission to remove the Internet Explorer icon from the Windows desktop prior to shipping their PCs, Microsoft consistently and steadfastly refused. As Compaq learned in the first half of 1996, Microsoft was prepared to enforce this prohibition against even its closest OEM allies.

205. In August 1995, Compaq entered into a "Promotion and Distribution Agreement" with AOL whereby Compaq agreed to "position AOL Services above all other Online Services within the user interface of its Products." An addendum to the agreement provided that Compaq would place an AOL icon — and no OLS icons not controlled by AOL — on the desktop of its PCs. Pursuant to its obligations, Compaq began in late 1995 or early 1996 to ship its Presario PCs with the MSN icon removed and the AOL icon added to the Windows desktop. At the same time, Compaq removed the Internet Explorer icon from the desktop of its Presarios and replaced it with a single icon representing both the Spry ISP and the browser product that Spry bundled, i.e., Navigator. Compaq added this icon in part because it recognized Navigator to be the most popular browser product with its consumers; it removed the Internet Explorer icon because it did not want its PCs desktops to confuse novice users with a clutter of Internet-related icons.

206. When Microsoft learned of Compaq’s plans for the Presario, it informed Compaq that it considered the removal of the MSN and Internet Explorer icons to be a violation of the OPK process by which Compaq had previously agreed to abide. For its part, AOL informed Compaq that it viewed the addition of an icon for Spry as a violation of their 1995 agreement. AOL did not object to the presence of a Navigator icon; what concerned AOL was the fact that clicking on this icon brought the user to the Spry ISP. Despite the protests from Microsoft and AOL, Compaq refused to reconfigure the Presario desktop. Finally, after months of unsuccessful importunity, Microsoft sent Compaq a letter on May 31, 1996, stating its intention to terminate Compaq’s license for Windows 95 if Compaq did not restore the MSN and Internet Explorer icons to their original positions. Compaq’s executives opined that their firm could not continue in business for long without a license for Windows, so in June Compaq restored the MSN and IE icons to the Presario desktop.

207. Microsoft did not further condition its withdrawal of the termination notice on the removal of the AOL and Navigator icons; AOL, however, did protest both the continued presence of a Spry icon and the reappearance of the MSN icon. After AOL sent Compaq a formal notice of its intent to terminate the Promotion and Distribution Agreement in September 1996, Compaq removed the Spry/Navigator icon. For reasons discussed below, Compaq did not then replace the Spry/Navigator icon with an icon solely for Navigator.

208. In its confrontation with Compaq, Microsoft demonstrated that it was prepared to go to the brink of losing all Windows sales through its highest-volume OEM partner in order to enforce its prohibition against removing Microsoft’s Internet-related icons from the Windows desktop.

209. If the only prohibition had been against removing Microsoft icons and program entries, OEMs partial to Navigator still would have been able to recruit users to Navigator by configuring their PCs to promote it before the Windows desktop first presented itself. This is true because the average user, having chosen a browser product, is indisposed to undergo the trouble of switching to a different one. With the release of Windows 95, some of the high-volume OEMs began to customize the Windows boot sequence so that, the first time users turned on their new PCs, certain OEM-designed tutorials and registration programs, as well as "splash" screens that simply displayed the OEM’s brand, would run before the users were presented with the Windows desktop.

210. Promoting non-Microsoft software and services was not the only, or even the primary, purpose of the OEM introductory programs. The primary purpose, rather, was to make the experience of setting up and learning to use a new PC system easier and less confusing for users, especially novices. By doing so, the OEMs believed, they would increase the value of their systems and minimize both product returns and costly support calls. Since just three calls from a consumer can erase the entire profit that an OEM earned selling a PC system to that consumer, OEMs have an acute interest in making their systems self-explanatory and simple to use. A secondary purpose motivating OEMs to insert programs into the boot sequence was to differentiate their products from those of their competitors. Finally, OEMs perceived an opportunity to collect bounties from IAPs and ISVs in exchange for the promotion of their services and software in the boot sequence. Thus, among the programs that many OEMs inserted into the boot sequence were Internet sign-up procedures that encouraged users to choose from a list of IAPs assembled by the OEM. In many cases, a consumer signing up for an IAP through an OEM program would automatically become a user of whichever browser that IAP bundled with its proprietary software. In other cases, the IAP would present the user with a choice of browsers in the course of collecting from the user the information necessary to start a subscription.

211. In addition to tutorials, sign-up programs, and splash screens, a few large OEMs developed programs that ran automatically at the conclusion of a new PC system’s first boot sequence. These programs replaced the Windows desktop either with a user interface designed by the OEM or with Navigator’s user interface. The OEMs that implemented automatically loading alternative user interfaces did so out of the belief that many users, particularly novice ones, would find the alternate interfaces less complicated and confusing than the Windows desktop.

212. When Gates became aware of what the OEMs were doing, he expressed concern to Kempin, the Microsoft executive in charge of OEM sales. On January 6, 1996, Gates wrote to Kempin: "Winning Internet browser share is a very very important goal for us. Apparently a lot of OEMs are bundling non-Microsoft browsers and coming up with offerings together with Internet Service providers that get displayed on their machines in a FAR more prominent way than MSN or our Internet browser." Less than three weeks later, Kempin delivered his semi-annual report on OEM sales to his superiors. In the report, he identified "Control over start-up screens, MSN and IE placement" as one interest that Microsoft had neglected over the previous six months. The ongoing imbroglio with Compaq was prominent in Kempin’s thinking, but he also recognized that establishing control over the boot process was necessary to ensure preferential positioning for MSN and Internet Explorer.

213. In an effort to thwart the practice of OEM customization, Microsoft began, in the spring of 1996, to force OEMs to accept a series of restrictions on their ability to reconfigure the Windows 95 desktop and boot sequence. There were five such restrictions, which were manifested either as amendments to existing Windows 95 licenses or as terms in new Windows 98 licenses. First, Microsoft formalized the prohibition against removing any icons, folders, or "Start" menu entries that Microsoft itself had placed on the Windows desktop. Second, Microsoft prohibited OEMs from modifying the initial Windows boot sequence. Third, Microsoft prohibited OEMs from installing programs, including alternatives to the Windows desktop user interface, which would launch automatically upon completion of the initial Windows boot sequence. Fourth, Microsoft prohibited OEMs from adding icons or folders to the Windows desktop that were not similar in size and shape to icons supplied by Microsoft. Finally, when Microsoft later released the Active Desktop as part of Internet Explorer 4.0, it added the restriction that OEMs were not to use that feature to display third-party brands.

214. The several OEMs that in the aggregate represented over ninety percent of Intel-compatible PC sales believed that the new restrictions would make their PC systems more difficult and more confusing to use, and thus less acceptable to consumers. They also anticipated that the restrictions would increase product returns and support costs and generally lower the value of their machines. Those OEMs that had already spent millions of dollars developing and implementing tutorial and registration programs and/or automatically-loading graphical interfaces in the Windows boot sequence lamented that their investment would, as a result of Microsoft’s policy, be largely wasted. Gateway, Hewlett-Packard, and IBM communicated their opposition forcefully and urged Microsoft to lift the restrictions. Emblematic of the reaction among large OEMs was a letter that the manager of research and development at Hewlett-Packard sent to Microsoft in March 1997. He wrote:

Microsoft’s mandated removal of all OEM boot-sequence and auto-start programs for OEM licensed systems has resulted in significant and costly problems for the HP-Pavilion line of retail PC’s.

Our data (as of 3/10/97) shows a 10% increase in W[indows]95 calls as a % of our total customer support calls . . . .

Our registration rate has also dropped from the mid-80% range to the low 60% range.

There is also subjective data from several channel partners that our system return rate has increased from the lowest of any OEM (even lower than Apple) to a level comparable to the other Microsoft OEM PC vendors. This is a major concern in that we are taking a step backward in meeting customer satisfaction needs.

These three pieces of data confirm that we have been damaged by the edicts that [] Microsoft issued last fall. . . .

From the consumer perspective, we are hurting our industry and our customers. PC’s can be frightening and quirky pieces of technology into which they invest a large sum of their money. It is vitally important that the PC suppliers dramatically improve the consumer buying experience, out of box experience as well as the longer term product usability and reliability. The channel feedback as well as our own data shows that we are going in the wrong direction. This causes consumer dissatisfaction in complex telephone support process, needless in-home repair visits and ultimately in product returns. Many times the cause is user misunderstanding of a product that presents too much complexity to the common user. . . .

Our Customers hold HP accountable for their dissatisfaction with our products. We bear [] the cost of returns of our products. We are responsible for the cost of technical support of our customers, including the 33% of calls we get related to the lack of quality or confusion generated by your product. And finally we are responsible for our success or failure in the retail PC market.

We must have more ability to decide how our system is presented to our end users.

If we had a choice of another supplier, based on your actions in this area, I assure you [that you] would not be our supplier of choice.

I strongly urge you to have your executives review these decisions and to change this unacceptable policy.

215. Even in the face of such strident opposition from its OEM customers, Microsoft refused to relent on the bulk of its restrictions. It did, however, grant Hewlett-Packard and other OEMs discounts off the royalty price of Windows as compensation for the work required to bring their respective alternative user interfaces into compliance with Microsoft’s requirements. Despite the high costs that Microsoft’s demands imposed on them, the OEMs obeyed the restrictions because they perceived no alternative to licensing Windows for pre-installation on their PCs. Still, the restrictions lowered the value that OEMs attached to Windows by the amount of the costs that the restrictions imposed on them. Furthermore, Microsoft’s intransigence damaged the goodwill between it and several of the highest-volume OEMs.

216. Microsoft was willing to sacrifice some goodwill and some of the value that OEMs attached to Windows in order to exclude Netscape from the crucial OEM distribution channel. Microsoft’s restrictions succeeded in raising the costs to OEMs of pre-installing and promoting Navigator. These increased costs, in turn, were in some cases significant enough to deter OEMs from pre-installing Navigator altogether. In other cases, as is discussed in the next section, OEMs decided not to pre-install Navigator after Microsoft brought still more pressure to bear.

217. Microsoft’s license agreements have never prohibited OEMs from pre-installing programs, including Navigator, on their PCs and placing icons and entries for those programs on the Windows desktop and in the "Start" menu. The icons and entries that Microsoft itself places on the desktop and in the "Start" menu have always left room for OEMs to insert more icons and program entries of their own choosing. In fact, Microsoft leaves enough space for an OEM to add more than forty icons to the Windows desktop. Still, the availability of space for added icons did not make including a Navigator icon inexpensive for OEMs. Given the unavoidable presence of the Internet Explorer and MSN icons, adding a Navigator icon would increase the amount of Internet-related clutter on the desktop. This would lead to confusion among novice users, which would in turn increase the incidence of support calls and product returns. Microsoft made this very point clear to OEMs in its attempts to persuade them not to pre-install Navigator on their PCs. Furthermore, OEMs recognized that including multiple Navigator icons in an attempt to draw users’ attention away from Internet Explorer would only increase the amount of clutter on the desktop, thus adding to user confusion. Although the Windows 98 OEM license does not forbid the OEM to set Navigator as the default browsing software, doing so would fail to forestall user confusion since, as the Court found in the previous section, Windows 98 launches Internet Explorer in certain situations even if Navigator is set as the default.

218. The restrictions on modifying the Windows boot sequence, including the prohibition against automatically loading alternate user interfaces, deprived OEMs of the principal devices by which to lure users to Navigator over the high-profile presence of Internet Explorer in the Windows user interface. An OEM remained free to place an icon on the desktop that a user could click to invoke an alternate user interface. Plus, once invoked, the interface could be configured to load automatically the next time the PC was turned on. This mode of presentation proved to be much less effective than the one Microsoft foreclosed, however, for studies showed that users tended not to trouble with selecting an alternate user interface; they were content to use the interface that loaded automatically the first time they turned on their PCs. Furthermore, while Microsoft’s restrictions never extended to the interval between the time when the PC was turned on and the time when Windows began loading from the hard drive into RAM, developing anything more complicated than a simple splash screen to run in that period would have involved, at a minimum, the writing of a DOS utility and, at the maximum, the pre-installation of a second operating system. Such measures were simply not worth the cost. Finally, although the Windows 98 license does not prohibit an OEM from including on the keyboard of its PCs a button that takes users directly to an OEM-maintained site containing promotion for Navigator, such a configuration is extremely costly for an OEM to implement, and it represents a less effective form of promotion than automatically advertising Navigator in the initial boot process.

219. In the spring of 1998, Microsoft began gradually to moderate certain of the restrictions described above. The first sign of relaxation came when Microsoft permitted some fifty OEMs to include ISPs of their choice in Microsoft’s Internet Connection Wizard. Then, in late May and early June 1998, Microsoft informed seven of the highest-volume OEMs that it was granting them the privilege of inserting their own registration and Internet sign-up programs into the initial Windows 98 boot sequence. If the user selected an IAP using the OEM program, Microsoft’s Internet Connection Wizard would not run in the boot sequence. Microsoft subsequently extended these same privileges to several other OEMs, upon their request.

220. It is important to note that Microsoft’s tractability emerged only after the restrictions had been in place for over a year, and only after Microsoft had managed to secure favorable promotion for Internet Explorer through the most important IAPs. Furthermore, while Microsoft permitted the OEMs to include in their registration and sign-up programs promotions for their own products (including OEM-branded shell browsers built upon Internet Explorer) and for ISPs (but only if and when those ISPs were selected by consumers in the sign-up process), Microsoft continued to prohibit promotions for any other non-Microsoft products, including Navigator. In a single exception, Microsoft granted Gateway’s request that it be permitted to give consumers who used Gateway’s sign-up process and selected Gateway.net as their ISP an opportunity to choose Navigator as their browser. Microsoft granted this permission orally, and it did not extend similar privileges to any other OEMs.

221. Microsoft asserts that the restrictions it places on the ability of OEMs to modify the Windows desktop and boot sequence are merely intended to prevent OEMs from compromising the quality and consistency of Windows after the code leaves Microsoft’s physical control, but before PC consumers first begin to experience the product. In truth, however, the OEM modifications that Microsoft prohibits would not compromise the quality or consistency of Windows any more than the modifications that Microsoft currently permits. Furthermore, to the extent that certain OEM modifications did threaten to impair the quality and consistency of Windows, Microsoft’s response has been more restrictive than necessary to abate the threat. Microsoft would not have imposed prohibitions that burdened OEMs and consumers with substantial costs, lowered the value of Windows, and harmed the company’s relations with major OEMs had it not felt that the measures were necessary to maximize Internet Explorer’s share of browser usage at Navigator’s expense.

222. Microsoft asserts that it restricts the freedom of OEMs to remove icons, folders, or "Start" menu entries that Microsoft places on the Windows desktop in order to ensure that consumers will enjoy ready access to the features that Microsoft’s advertising has led them to expect. The Windows trademark would be blemished, Microsoft argues, if consumers could not easily find the features that impelled them to purchase a Windows-equipped PC. At the same time that it has put forward this justification, however, Microsoft has permitted OEMs to de-activate Microsoft’s Active Desktop and its associated "channels" prior to shipment. More significant is the fact that Microsoft’s license agreements require OEMs to bear product support costs. So if a consumer has difficulty locating a feature that he wants to use, he will call a customer service representative employed by the OEM that manufactured his PC. Since only a few calls erase the profit earned from selling a PC system, OEMs are loathe to do anything that will lead to consumer questions and complaints. Therefore, if market research indicates that consumers want and expect to see a certain icon on the Windows desktop, OEMs will not remove it. Since OEMs share Microsoft’s interest in ensuring that consumers can easily find the features they want on their Windows PC systems, Microsoft would not have prohibited OEMs from removing icons, folders, or "Start" menu entries if its only concern had been consumer satisfaction. In fact, by forbidding OEMs to remove the most obvious means of invoking Internet Explorer, Microsoft diminished the value of Windows PC systems to those corporate customers, for example, who did not intend for their employees to browse the Web and did not want a browser taking up hardware resources. Incidentally, there is no merit in the hypothesis that OEMs might cause problems in the functioning of the rest of Windows by removing Internet Explorer’s desktop icon and program entry, because Microsoft still allows users to do exactly that.

223. According to Microsoft, its restrictions on the ability of OEMs to insert programs into the initial Windows boot sequence are meant to ensure that all Windows users experience the product the way Microsoft intended it the first time they turn on their PC systems; after all, there would be little incentive to develop a high-quality operating-system product if OEMs were free to alter it for the worse before handing it over to consumers. This argument might be availing were it not for the fact that Microsoft currently allows several of the largest-volume OEMs to make major modifications to the initial Windows 98 boot sequence. Microsoft permits each of these OEMs to configure its own splash screens, tutorials, registration wizards, Internet sign-up wizards, and utilities so that they run automatically when the consumer first turns on a new PC system. Either Microsoft stopped caring about the consistency of the Windows experience in 1998, when it tempered its restrictions on modifications to the boot sequence, or preserving consistency was never Microsoft’s true motivation for imposing those restrictions in the first place. With all the variety that Microsoft now tolerates in the boot sequence, including the promotion of OEM-branded browser shells, it is difficult to comprehend how allowing OEMs to promote Navigator in their tutorials and Internet sign-up programs would further compromise Microsoft’s purported interest in consistency.

224. Although Microsoft has tolerated a variety of OEM modifications to the Windows boot sequence, it has never acquiesced to an alternate user interface that automatically obscures the Windows desktop after the PC system has finished booting for the first time. In demanding the removal of such automatically loading user interfaces, Microsoft has postulated that consumers who purchase Windows PCs expect to see the Windows desktop when their PC systems finish booting for the first time. If consumers instead see a different user interface, they will be confused and disappointed. What is more, Microsoft asserts, OEM shells have tended to be of lower quality than Windows. One OEM’s version allegedly even disabled the ability of a Windows user to invoke functionality by clicking the right button of his mouse.

225. The alternate shells that OEMs have developed may or may not be of lower quality than Windows. One thing is clear, however: If an OEM develops a shell that users do not like as much as Windows, and if the OEM causes that shell to load as the default user interface the first time its PCs are turned on, consumer wrath will fall first upon the OEM, and demand for that OEM’s PC systems will decline commensurately with the resulting user dissatisfaction. The market for Intel-compatible PCs is, by all accounts, a competitive one. Consequently, any OEM that tries to force an unwanted, low-quality shell on consumers will do so at its own peril. Had Microsoft’s sole concern been consumer satisfaction, it would have relied more on the power of the market — and less on its own market power — to prevent OEMs from making modifications that lead to consumer disappointment.

226. At times, Microsoft has argued that the limitations it imposes on the ability of OEMs to modify Windows originate in a desire to prevent its platform from becoming fragmented, like UNIX. Microsoft believes that ISVs benefit from the fact that Windows presents the same platform for applications development, irrespective of the underlying hardware. Certainly, Microsoft has a legitimate interest in ensuring that OEMs do not take Windows under license, alter its API set, and then ship the altered version. This fact does not add credibility to Microsoft’s stated justification, though, for two reasons. First, Microsoft itself creates some degree of instability in its supposedly uniform platform by releasing updates to Internet Explorer more frequently than it releases new versions of Windows. As things stand, ISVs find it necessary to redistribute Microsoft’s Internet-related APIs with their applications because of nonuniformity that Microsoft has created in its own installed base. More important, however, is the fact that none of the modifications that OEMs are known to have proposed making would have removed or altered any Windows APIs.

227. To the extent Microsoft is apprehensive that OEMs might, absent restrictions, change the set of APIs exposed by the software on their PCs, the concern is not that OEMs would modify the Windows API set. Rather, the worry is that OEMs would pre-install, on top of Windows, other software exposing additional APIs not controlled by Microsoft. In the case of alternate user interfaces, Microsoft is fearful that, if these programs loaded automatically the first time users turned on their PCs, the programs would attract so much usage that developers would be encouraged to take advantage of any APIs that the programs exposed. Indeed, one user interface in particular that OEMs could configure to load automatically and obscure the Windows desktop — Navigator — exposes a substantial number of APIs. Therefore, Microsoft’s real concern has not been that OEM modifications would fragment the Windows platform to the detriment of developers and consumers. What has motivated Microsoft’s prohibition against automatically loading shells is rather the fear — once again — that OEMs would pre-install and give prominent placement to middleware that could weaken the applications barrier to entry.

228. Like most other software products, Windows 95 and Windows 98 are covered by copyright registrations. Since they are copyrighted, Microsoft distributes these products to OEMs pursuant to license agreements. By early 1998, Microsoft had made these licenses conditional on OEMs’ compliance with the restrictions described above. Notwithstanding the formal inclusion of these restrictions in the license agreements, the removal of the Internet Explorer icon and the promotion of Navigator in the boot sequence would not have compromised Microsoft’s creative expression or interfered with its ability to reap the legitimate value of its ingenuity and investment in developing Windows. More generally, the contemporaneous Microsoft documents reflect concern with the promotion of Navigator rather than the infringement of a copyright. Also notable is the fact that Microsoft did not adjust its OEM pricing guidelines when it lifted certain of the restrictions in the spring of 1998.

229. Finally, it is significant that, while all vendors of PC operating systems undoubtedly share Microsoft’s stated interest in maximizing consumer satisfaction, the prohibitions that Microsoft imposes on OEMs are considerably more restrictive than those imposed by other operating system vendors. For example, Apple allows its retailers to remove applications that Apple has pre-installed and to reconfigure the Mac OS desktop. For its part, IBM allows its OEM licensees to override the entire OS/2 desktop in favor of a customized shell or to set an application to start automatically the first time the PC is turned on. The reason is that these firms do not share Microsoft’s interest in protecting the applications barrier to entry.

230. Microsoft’s restrictions on modifications to the boot sequence and the configuration of the Windows desktop ensured that every Windows user would be presented with ready means of accessing Internet Explorer. Although the restrictions also raised the costs attendant to pre-installing and promoting Navigator, senior executives at Microsoft were not confident that those higher costs alone would induce all of the major OEMs to focus their promotional efforts on Internet Explorer to the exclusion of Navigator. Therefore, Microsoft used incentives and threats in an effort to secure the cooperation of individual OEMs.

231. First, Microsoft rewarded with valuable consideration those large-volume OEMs that took steps to promote Internet Explorer. For example, Microsoft gave reductions in the royalty price of Windows to certain OEMs, including Gateway, that set Internet Explorer as the default browser on their PC systems. In 1997, Microsoft gave still further reductions to those OEMs that displayed Internet Explorer’s logo and links to Microsoft’s Internet Explorer update page on their own home pages. That same year, Microsoft agreed to give OEMs millions of dollars in co-marketing funds, as well as costly in-kind assistance, in exchange for their carrying out other promotional activities for Internet Explorer.

232. Microsoft went beyond giving OEMs incentives to promote Internet Explorer. The company’s dealings with Compaq in 1996 and 1997 demonstrate that Microsoft was willing to exchange valuable consideration for an OEM’s commitment to curtail its distribution and promotion of Navigator. In early 1996, at around the same time that Compaq was removing the MSN and Internet Explorer icons and program entries from the Presario desktop, Compaq announced its intention to work with Netscape for its internal Internet needs and on Internet server initiatives. In response, Microsoft insisted that Compaq support Microsoft’s Internet initiatives throughout its business. To make its displeasure felt, Microsoft initiated a series of cooperative ventures with some of Compaq’s competitors, including DEC and Hewlett-Packard.

233. When Compaq eventually agreed to restore the MSN and Internet Explorer icons and program entries to the Presario desktop, it did so because its senior executives had decided that the firm needed to do what was necessary to restore its special relationship with Microsoft. On May 13, 1996, Compaq signed an addendum extending the firms’ Frontline Partnership to the realm of network-related products. Pursuant to the addendum, Compaq agreed to ship Internet Explorer as the default browser product on all of its desktop and server systems, to adopt and promote Internet Explorer internally, and to focus the majority of Compaq’s key network-oriented announcements and marketing activities on Microsoft’s technologies and strategy. In September of the same year, Compaq agreed to offer Internet Explorer as the preferred browser product for its Internet products and to use two or more of Microsoft’s hypertext markup language ("HTML") extensions in the home page for each of those products. Then in February 1997, Compaq committed itself to promote Internet Explorer exclusively for its PC products in exchange for Microsoft’s agreement to pay Compaq a bounty for each user that signed up for Internet access using a Compaq PC. Despite the view of some within Compaq that the firm’s goal should be "to feature the brand leader Netscape," Compaq elected not to resume the pre-installation of Navigator on its Presario PCs after it removed the joint Spry/Navigator icon. In fact, Compaq stopped pre-installing Navigator on all but very small percentage of its PCs.

234. In return for Compaq’s capitulation and revival of its commitment to support Microsoft’s Internet strategy, Microsoft has guaranteed Compaq that the prices it pays for Windows will continue to be significantly lower than the prices paid by other OEMs. Specifically, the operating system licenses signed by Compaq and Microsoft in March 1998 gave Compaq "[g]uaranteed better" pricing than any other OEM for Windows 95, Windows 98, and Windows NT Workstation (versions 4 and 5) until April 2000. Compaq’s license fee for Windows is so low that other OEMs would still pay substantially more than Compaq even if they qualified for all of the royalty reductions listed in Microsoft’s Market Development Agreements ("MDAs"). What is more, while Microsoft requires other OEMs to verify actual compliance with particular milestones in order to receive Windows 98 royalty reductions, Microsoft has secretly agreed to provide the full amount of those discounts to Compaq regardless of whether it actually satisfies the specified conditions. In addition to a guaranteed most-favorable price on Windows, Compaq has enjoyed free internal use of all Windows products for PCs since March 1998.

235. Microsoft’s relations with Compaq beginning in late 1996 illustrate the blandishments that Microsoft is willing to extend to OEMs that ally with it to help it capture browser share. Microsoft’s relations with Gateway and the IBM PC Company, by contrast, reveal the pressure that Microsoft is willing to apply to OEMs that show reluctance to cooperate on this front.

236. In February 1997 a Microsoft account representative told his counterpart at Gateway that Gateway’s use of Navigator on its own corporate network was a serious issue at Microsoft. He added that Microsoft would not do any co-marketing and sales campaigns with Gateway if the firm appeared to be anything but pro-Microsoft. If Gateway would replace Navigator with Internet Explorer, Microsoft would compensate Gateway for its investment in Netscape’s product. If Gateway refused, Microsoft might be compelled to audit Gateway’s internal use of Microsoft products. Gateway was separately told by Microsoft representatives that its decision to ship Navigator with its PCs could affect its business relationship with Microsoft. Despite the pressure from Microsoft, Gateway refused to switch its internal use to Internet Explorer or to stop shipping Navigator with its PCs. Although Micr