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| Steven McGeady US, MS |
United States: James Barksdale
from Matt Anestis (manestis@law.harvard.edu)
(Note: The document below outlines the argument Barksdale made in his direct testimony and contributed to during his live testimony. Quotes not otherwise attributed are Barksdale. I tried to use his words to keep the flavor of the testimony, but I’m afraid it ran to three rather than two pages. D10 means page 10 of the direct testimony, 27AM10 means page 10 of the A.M. testimony on the 27th)
BACKGROUND
Jim Barksdale is the President and CEO of Netscape and has been since Jan 95 - Netscape was founded in April 1994 by Jim Clark and Marc Andreessen. (D31)
Barksdale is the DOJ’s first witness and presented direct testimony as well as 5 days of cross examination (Oct 19, 20, 21, 22, 26) and 1 day of re-direct and re-cross (Oct 27)
THE DOJ WOULD CLAIM THEIR CASE WAS ADVANCED BECAUSE BARKSDALE ALLEGES THE FOLLOWING STORY LINE DURING HIS DIRECT AND LIVE TESTIMONY:
1) Netscape’s browser threatened the Windows platform
a) “Netscape’s browser, using Java, provided both the technical means and the broad distribution to offer a new ‘super platform’ for developers of network-centric applications” (D10)
b) “When Netscape entered the ‘Window’s world’ . . we knew our ‘window of opportunity’ was building the bridge between the platform dependent computer operating system world and the cross platform environment of the internet” (D42 – discussed D43-D48)
2) In response to this threat Microsoft allegedly approached Netscape during a meeting on June 21, 1995 and presented the ultimatum: split the browser market (with MS getting the Win95 market) or Microsoft would destroy Netscape (D15 – Discussed in detail D59 – 65 – Documents from Andreessen, Reeback, and some Microsoft Employees were brought out during re-direct 27AM25-40)
“Microsoft apparently came to Netscape with a single focus: to convince Netscape not to compete with its Windows 95 browser product, Internet Explorer. Microsoft proposed a division of the browser market between our companies” (D16)
“[Microsoft] proposed that a ‘line’ be drawn between the area in which we developed products and competed and the area in which they developed products.” (D61)
“I had never been in a meeting in my 33-year business career in which a competitor had so blatantly implied that we should either stop competing with it or the competitor would kill us. In all my years in business, I have never heard nor experienced such an explicit proposal to divide markets.” (D62)
Andreessen’s testimony on this point was also played in court (27AM25-27) where he says: “in my understanding, Microsoft was asking Netscape to divide the market, to establish those areas in which Netscape could compete and could not compete . . .” (27AM26)
DOJ lawyers read from the deposition of Chris Jones a Microsoft employee the following: “Do you recall any discussion about a desire on anyone – on the part of the Microsoft, who was participating, to be able to persuade or influence Netscape not to Compete with Microsoft? – And he Answers: Absolutely” 27AM40
3) Barksdale claimed that when Netscape did not agree to the demand, Microsoft preceded to use their monopoly power to “cut off Netscape’s air supply” using the following tactics
a) Giving the browser away for free
Barksdale claimed that Netscape’s business model had always depended on charging for the browser as a main source of revenue (D13) (The DOJ also read into the record Andreessen’s testimony that charging “was fundamental to the company’s business plan” 27PM14-16)
Microsoft could afford to do this due to the revenues from Windows: “Our business model works even if all Internet software is free. . . we are still selling operating systems. What does Netscape’s business model look like (if that happens)? Not very good.” (Bill Gates – Financial Times of London June 16, 1996) – D67)
When MS announced that their browser would be given away for free (Dec 7, 1995) , Netscape’s stock fell $30 per share “to the reported glee of Microsoft’s executives” (D18)
Barksdale claims on re-direct that “ . . . the act of making it free, which is way below cost, is predatory. I mean, you wouldn’t do it for other reasons. You certainly wouldn’t do it on Macintosh, which wasn’t your O/S. You wouldn’t do it on Unix. You wouldn’t do it on Win 3.1 because you are trying to get people to upgrade from 3.1 to 95 and from 95 to 98. That’s their whole business Model. So, by giving it away on 3.1, you actually slow down the upgrade to your o/s. The only reason you do that is because you’re following Netscape’s lead and you’re trying to put them out of business.” (27PM30)
b) Bundling Internet Explorer into Windows (D19)
DOJ lawyers submitted a 1998 Microsoft Marketing Review Document that said “It came with my computer, is the number one reason people switch to IE” (27PM10-11, Gov Exhibit 233)
c) Cutting off Netscape’s avenues of distribution
i) ISPs (D72 – D85) – Internet service providers – (Earthlink, AOL, etc)
- Barksdale believes Microsoft entered into exclusive or restrictive deals with all of 8-10 largest ISPs (D73)
- AOL backed out of Netscape deal to sign a deal with Microsoft - Barksdale claims Steve Case and David Colburn of AOL told him that “they would not have entered the agreement with Microsoft but for access to the Windows desktop” (D77)
- Barksdale said that Microsoft was giving away browser free or “better than free” by giving away software, advertisements, preferred treatment and even “paying bounties to licensees whose customers signed up for Microsoft’s internet services” (D78) so that “in many cases, even when a potential customer preferred Netscape’s technology, they felt forced to choose Internet Explorer because it was free.” (D79)
- “Earthlink described Microsoft’s pressures and tactics as ‘medieval.’” (D82)
ii) OEMs (D85-D92) Original Equipment Manufacturers (Dell, Compaq, IBM, etc)
- Barksdale got reports that 1) OEMs were required to keep the IE icon on the desktop and 2) various financial incentives were offered to OEMs to get them to ‘prefer’ IE over Navigator and 3) subtle and not-so-subtle verbal pressure was put on the OEMs not to have anything to do with us (D86)
- Most notably “[Netscape] also learned that Microsoft had threatened to terminate Compaq’s Windows license. This would have put Compaq – the largest PC OEM in the world – out of business. This demonstrates Microsoft’s unprecedented power” (D89) – Barksdale claims this leads to Compaq’s decision not to put Navigator on the desktop
- Barksdale concludes that Microsoft pressure has led Netscape to be forced into very limited distribution deals with all the major OEMs (D92)
iii) ISVs (D92-D95) – Independent Software Vendors (Intuit, Adobe, etc)
- “My understanding is that Microsoft coerced Intuit into adopting its technology. Intuit later informed us that Microsoft was offering the inclusion of Quicken code into Windows and the display of Quicken.Com on the desktop. I believe Microsoft’s unique ability to place Quicken on the Windows desktop and the vast opportunity that access to the monopoly desktop would give Intuit was the reason Intuit went with Microsoft” (D94)
iv) ICP (D95 – D98) – Internet Content Providers (Disney, ESPN, etc)
- Barksdale described “better than free” terms that Microsoft offered
d) Pressuring Netscape’s customers (D99-D104)
Barksdale also claims that Microsoft pressured their corporate customers and offered deals like partnering with KPMG in electronic commerce or giving away free software or exposure in print advertising in return for using IE (D100)
e) Not giving Netscape technical specifications that it needed
Barksdale claims that Dan Rosen of Microsoft suggested that Netscape would not get the Windows 95 Technical specs they asked for unless they agreed to the June 21 meeting proposal (D17) – They didn’t agree and didn’t get the API’s they needed until after the launch of Win95 (D65) (For the re-direct on Microsoft being slow to give APIs see 27AM52-62)
Microsoft held back a “scripting tool” that MS was already freely distributing to ISPs (D106 27AM62-68)
f) “In 1996 Microsoft imposed a new license restriction on the OEMs, one requiring that the first, or ‘boot-up’, screen be controlled by Microsoft rather than the OEM, so that, as Steve Ballmer, Microsoft Executive Vice President, told Forbes magazine, Netscape’s browser would not be able to take over the desktop.” (D20)
g) Creating technical problems with Netscape’s products
“I began receiving reports of technical problems that resulted from using Netscape in conjunction with certain Microsoft products and in conjunction with accessing certain Web sites” (D22)
Microsoft’s home page and developers network had periods when they might not have worked with Navigator according to Barksdale (D107)
4) Barksdale claims that the result of all of this has been less innovation in the browser market as a whole and the chilling of future companies who won’t enter a new market for fear of being targeted and destroyed by Microsoft
Microsoft: James Barksdale
from Alan S. Kellman (akellman@law.harvard.edu)
This summary assumes that you are at least somewhat familiar with the direct testimony of Barksdale. The government summary should therefore be read before reading this summary.
Warden tries to bring out a few major themes throughout the cross-examination. The first is that most of Barksdale's testimony is actually hearsay. He consistently challenges Barksdale on personal knowledge of the statements in the direct testimony. As it turns out, most of the testimony is indeed second or third hand hearsay, and Barksdale is forced many times to say that he cannot be sure about many of the claims in his direct testimony. However, more importantly, Warden emphasizes at every step the financial success of Netscape and the fact that the company need not rely on browser revenues to be a major force in the Internet software market. This is the most important point because Barksdale's major theme throughout the direct is that Microsoft has crushed Netscape's browser product and is thus driving Netscape out of business. Finally, Warden often tries to portray Netscape as the true monopolist here. They were the ones with the 85% market share at one time. How can a company with such a dominant market share (Netscape) worry about a lack of innovation coming from an internet upstart (Microsoft)?
The following are very short summaries of some of the more interesting exchanges from the point of view of Microsoft:
Barksdale admitted that Netscape urged the government to pursue the contempt proceeding against Microsoft in regard to the consent decree. Additionally, Netscape sought the Justice Department's help to block Microsoft from having a Microsoft Network ("MSN") icon on the desktop. When questioned about how this hurt Netscape, Barksdale replied that it hurt Netscape as well as AOL, a company he considered to be a "kindred spirit." It was further established that at the time Netscape urged the government to intervene and remove the MSN icon from the desktop, AOL was a well established company with a thriving business that had a desktop icon on 90% of desktops. Warden questioned Barksdale, "So, AOL, as I understand you, with your support, was trying to deny Microsoft Network a position that AOL itself already had on many PCs; Is that correct?"
Warden challenged Barksdale to define the term "Browser Product." Barksdale responded:
"A browser is generally assumed to be a product that allows you to - using a graphical-user interface or an easy-to-use interface for normal human beings, nontechnologists, to easily peruse the World Wide Web and to gather information, to bring it back and be able to do things . . . like edit it, resend it or print it or whatever. . . . Well, I would say that it's sold independently that it has its own market, that it has its own relevance, that its got an ability to get it separate and apart from other products, would be one of the product characteristics."
Warden next had Barksdale describe the history of the Netscape browser, especially the eventual inclusion of e-mail and other functionalities. It is Netscape's claim that Microsoft illegally bundles IE with Windows 95. However, Barksdale admitted that e-mail is not part of what he would define as a browser, yet Netscape Communicator includes e-mail as part of the package. As a matter of fact, Netscape, for a while, dropped the stand alone browser and licensed only the full Communicator package. At the time Netscape had approximately 70% of the market. Barksdale admitted that by adding e-mail capabilities they entered competition with stand alone e-mail software products, such as Eudora.
An interesting point was made by Warden when while discussing Barksdale's claim that the browser that comes with the PC is the browser that most people are going to use, without even trying the other. It was pointed out that up until IE 3.0 was released, IE 1.0 and 2.0 were the only browsers that were bundled with an operating system, yet Netscape still had over 70% of the market share. Only with the introduction of IE 3.0 (and the first time reviewers considered the Microsoft product to be competitive) did Netscape begin its decline in market share.
Barksdale was then question about the actual price at which the browser was sold, and whether Navigator was distributed free of charge and the potential advantages of doing that. Barksdale maintained that the only customers who received Navigator free of charge were educational consumers and nonprofit organizations. Also ISP consumers may also have gotten it free but Netscape charged the ISP for Navigator. The purpose of this line of questioning was to show that the revenue from the Browser itself was not that important to Netscape. In fact the real goal was to get as large a market share as possible even if that involved giving the software away for free. This was evident from the fact that Netscape did not pursue users who downloaded the software but did not pay after the 90 day trial period. A deposition statement by Jim Clark also stated that Netscape was planning to give away their browser for free because Gates had made it known in October 1994 that Microsoft would do the same. In addition, there is also a Clark e-mail from December 1994 that states that Netscape's business was never the client (browser). To bolster this point Warden led Barksdale through a financial analysis of Net Center, Netscape's portal web site. As it turns out it is extremely popular, and Marc Andreessen has even stated that:
"Netscape made a strategic choice to make its browsing software free and focus on building net center because, in doing so, Netscape swapped into a higher growth business."
Barksdale generally agreed with this statement.
Another approach was to pit Barksdale against Clark. Often Warden would force Barksdale to disagree with e-mail or deposition testimony of Clark. The e-mail discussed above is one example. Another is Clark's deposition testimony that Internet distribution is one of the cheapest and best forms of software distribution for a company like Netscape. Barksdale had to take the position in his direct testimony that the ISP and OEM channels were much more effective for Netscape. Barksdale is also forced to disagree with statements made by Andreessen, such as a statement that Netscape is the most widely used software of all time.
Warden introduced four product reviews comparing IE 3 to Navigator 3 and 4. The reviews indicated that IE was at least as good if not better than Navigator. Warden also produced 19 more "reviews" that all favored IE over Navigator. Barksdale countered that these were not real head-to-head reviews and that his marketing group had found only 16 such reviews. The tally from those 16 was 10 in favor of IE and 6 in favor of Navigator.
The following are additional interesting facts that came out of the testimony:
· Private placement memorandum for Netscape series C preferred stock, dated January 16, 1995: Stated that Netscape anticipated that "web browser functions" would be added to the operating systems of all major OS vendors including Microsoft at no additional cost.
· Netscape was working on a browser product, Communicator 6.0, that was to be fully Java implemented. However, they abandoned the Java implementation for a C++ implementation instead. Part of the reason was that it ran quicker on C++.
· Netscape is in fact available from AOL. It is not part of the AOL interface but can be downloaded and used as part of AOL
· Neither the Compaq nor NCR agreements with Microsoft required the OEM to remove the Netscape icon from the desktop. Rather, in the case of Compaq, Microsoft only considered Compaq to be in breech if it removed the IE icon from the desktop.
· There was a feeling within the Netscape camp that the reason Netscape did not get the Intuit contract was because they did not have a componentized browser and Microsoft did (IE 3)
· According to the Zona Report 60% of North American corporations use Navigator. This was part of testimony that established that Netscape is actually gaining market share in the enterprise market.
· Can't access Barksdale's own web page · Bill Gates wasn't the only corporate executive threatening a rival. Mark Andreessen was quoted as saying that Netscape would "reduce Windows to a set of poorly debugged device drivers." Barksdale shrugged off these and other such comments as a young man making jokes.
United States: David Colburn
Here are my notes on David Colburn's direct and live testimony.
("par." refers to paragraph from Colburn's direct testimony. When there is a date and a session, I am referring to the trial transcript.)
Colburn is the Senior VP of Business Affairs for AOL, responsible for negotiation and oversight of many significant contracts, including AOL’s browser contracts with Netscape and Microsoft from 1995-1998.
AOL has 13 million subscribers and distributes browsers to them as part of its free client software.
In 1994, AOL bought a browser company and began distributing its browser with its client software. (par. 10).
In 1995, AOL decided to stop developing its own browser and to license third-party browsers. (par 12)
In October 1995, AOL began negotiations with Netscape. (par 22) Microsoft became aware of the negotiations and contacted AOL about licensing IE. (par 23) AOL signed a licensing agreement with Netscape on March 11, 1996. (par. 22) Netscape agreed to componentize its browser at AOL’s cost. (par 22) But, because of AOL’s exclusivity agreement with Microsoft for IE, Netscape did not devote significant resources to the componentization and only just recently is there a beta version available.
At the start of the AOL-Microsoft negotiations, "Gates delivered a characteristically blunt query. How much do we need to pay you to screw Netscape? This is your lucky day." (10/29 pm session, at 37, lines 9-11; gov’t exhibit 38) AOL signed an agreement with Microsoft on March 12, 1996, whereby IE became the default AOL browser and AOL software would be distributed with Windows 95 and promoted in the "Online Services" folder, along with a limited number of other online services. (par 29) AOL promised "virtual exclusivity" for IE on AOL—AOL was severely limited in its ability to distribute and promote other browsers. (par 29)
Being included in the Online Services folder and bundled with Windows was extremely important for AOL, because (1) AOL was in competition with MSN, which was bundled with Windows and had an icon on the desktop, and (2) AOL wanted to show to the industry that it had Microsoft’s support and avoid any perception in the marketplace that there are interoperability problems. This "was the fulcrum of the deal." (10/29 pm session, at 34, line 11) This did not put AOL on par with MSN in the Windows distribution, but at least it was close.
This was only the first of several agreements between MS and AOL regarding AOL’s use of IE and AOL’s presence on the desktop. The next agreement was signed on Oct 28, 1996, titled the "Promotional Services Agreement." MS agreed to pay AOL $.25 for each member that AOL converted to IE from another browser. In addition, MS agreed to pay $600,000 if AOL met a certain goal of conversion. The agreement included additional obligations for AOL to promote exclusively IE. Microsoft made a series of changes to how it promoted online services through the Windows distribution, significantly diluting the value of the Online Services folder. Initially, Microsoft included an Internet Connection Wizard on the desktop, basically at par with the Online Services folder. At first, this did not affect much the value of the Online Services folder. But, in IE 4.0, Microsoft included a "channel bar" as part of the "active desktop" which would link to the ICW if the user did not yet have an ISP. Thus, "AOL entered into the Active Desktop Marketing, Promotion and Distribution agreement" in September 1997. (par. 40) It turned out that the active desktop was not very successful, but at the time AOL thought it would be much more important. (par 41) The agreement further limited AOL’s relationship with Netscape. The agreement prohibited AOL from using its web sites to promote Navigator (except for paid advertising), and "from compensating Netscape for marketing, distribution, or promoting AOL content." (par 42) Needless to say, this puts severe restraints on any Netscape-AOL strategic partnerships.
In Windows 98, Microsoft included an ICW as part of the welcome screen that a user first sees when using a new computer for the first time. AOL perceived that one of Microsoft’s objectives was to reduce the value of the Online Services folder even more. AOL wanted to maintain comparable exposure to MSN or other online services promoted by Microsoft, so AOL entered into the "Internet-Sign up Wizard Referral Agreement" in October, 1998. AOL can elect at the end of the year not to continue the exclusivity and Online Services folder provisions of the March 1996 agreement, but Microsoft has demanded that AOL continue these provisions or lose the listing in the referral server.
In the cross examination, Microsoft brought out that part of the AOL and Netscape negotiations at the end of 1995/start of 1996 were agreement to stay out of each other’s market. Netscape had agreed not to compete in online services and AOL agreed not to compete with respect to server software. Microsoft elicited from Colburn that "as part of a strategic relationship that was not something out of the ordinary." (Oct 28, pm session, at 56, lines 21-22) But, during the redirect, the DOJ asked Colburn about what he perceived the differences between what Netscape and AOL were discussing and what Microsoft had proposed to Netscape in the browser market. Colburn responded, "We were really forced together on this strategic relationship because we had a competitor out there who had unusual leverage that they could take advantage of to get into our business. So we were looking to come together in a joint alliance to get ourselves some advantages to be able to compete on an equal playing field…." (Oct 29, pm session, at 40, lines 4-10) On the other hand, Microsoft was a huge monopolist in OSs and told Netscape, essentially, don’t compete with us, give up half your market, or we’ll crush you.
There are other differences that the DOJ didn’t explore. Microsoft wanted Netscape to abandon a significant part of its market. Netscape and AOL were only agreeing to stay out of markets that neither were, at the time, significant players in. Also, the markets that AOL and Netscape considered dividing were more separated than the markets that Microsoft wanted to divide with Netscape. Microsoft wanted to split the browser market in two. AOL and Netscape wanted to split the browser/server market from the online-services market. In other words, AOL and Netscape were agreeing to stay out of each other’s core markets, while Microsoft was trying to divide Netscape’s core markets.
A major portion of the cross-examination by Microsoft was an attempt to show that IE was chosen because it was technologically the better choice for AOL. Although Microsoft did make some headway and get limited admissions, Microsoft ultimately loses on this point in the face of innumerable clear statements by Colburn that the bundling with Windows was the "fulcrum of the deal." The bundling was "a critically important competitive factor that was impossible for Netscape to match." (par 24) Besides that, this does not explain why AOL was driven to accept the exclusivity agreement while it had wanted to give its customers a choice of browsers. (par 26) Even if AOL chose IE to be the default browser because it was somewhat superior to Navigator technologically, AOL would have still chosen to distribute and/or promote Navigator, were it not for the enormous leverage Microsoft had through its OS monopoly. Unfortunately, the DOJ did not seize on this point directly in its redirect, although I believe there is enough evidence already admitted for the DOJ to make a strong argument in its closing.
There are a few other interesting tidbits:
On the definition of a browser:
Par 8: "From AOL’s perspective, a browser is a software application that is different from and not a part of the underlying operating system. Browsers are layered on top of operating systems, and have the ability to act as a platform from which software applications and other programs on the Internet can be launched or driven. Browsers thus provide some of the platform characteristics of an operating system, since they can manage the calls to an operating system, although they are not themselves operating systems. From an application programmer’s perspective, browsers can be a platform for which programs can be written, and can provide support across different operating systems."
On the value of icons on the desktop:
Par 9: "… By placement of icons on the desktop, the desktop provider can direct or influence the navigation of a user to preferred functions and features of the operating system or to particular application programs or Internet destinations."
I think this is part of a very important concept in the broader context of this case, which I will elaborate on in a future post.
Microsoft: David Colburn
NOTE: The website does not currently link to Colburn's cross-examination, so I've attempted to reconstruct Microsoft's argument from examining the exhibits that it introduced during the cross-examination
POINTS THAT HURT OUR (MICROSOFT'S) CASE
1. Colburn summarized the history of the competition between MSN and AOL -- including AOL's allegation that the links to MSN on the Windows desktop gave Microsoft an unfair advantage over AOL.
2. Colburn alleged that AOL would not have negotiated a browser license with Microsoft if Microsoft had not indicated a willingness to include AOL on the Windows desktop. (Paragraph 25)
3. Colburn alleged that on October 28, 1996, AOL and Microsoft entered a deal in which Microsoft agreed to pay AOL $.25 per AOL member that AOL converted to IE from another browser. Microsoft also allegedly agreed to pay AOL $600,000 if AOL converted a substantial portion of its installed base by a specified date (paragraph 38).
4. Colburn alleged that at the time that AOL first entered into an agreement with MS, IE and Navigator were "comparable" (paragraph 33).
5. Colburn listed a number of factors that he believed would lead AOL to renew its "exclusive" contract with AOL (paragraph 47). Some of these factors might be interpreted as resulting from anticompetitive behavior.
POINTS IN COLBURN'S TESTIMONY AND EVIDENCE THAT HELP MICROSOFT
1. Microsoft has introduced evidence which suggests that it's browser was and is better suited for AOL's needs than Navigator.
Defendant's Exhibit 1730 http://www.microsoft.com/presspass/trial/exhibits/oct98/1730/sld001.htm
This exhibit is a chart in which AOL compared the expected short-term and long-term benefits of Navigator to IE. In several important categories, IE outperformed Navigator.
Defendant's Exhibit 1730
http://www.microsoft.com/presspass/trial/exhibits/oct98/1731/sld002.htm
This is an internal AOL e-mail in which Bob (Hawkins?) favorably compares IE to Navigator. Bob says that he entered a meeting with MS biased towards Navigator, but left "squarely in Microsoft's camp." Bob argues that MS has a stronger commitment to 16-bit technology and a smaller memory footprint.
In addition, Colburn admits that AOL needed a componentized broswer -- a feature which at the time only IE could offer (paragraph 34). Netscape has yet to offer a componentized browser.
2. Microsoft introduced evidence suggesting that Netscape is difficult to work with (giving an alternate reason for AOL to prefer Netscape).
Exhibit 1545
http://www.microsoft.com/presspass/trial/exhibits/oct98/1545/sld001.htm
This is a draft of an e-mail from Steve Case to Barksdale in which Case tells Barksdale that he is tired of Netscape's bad attitude.
3. Microsoft is arguing that exclusionary agreements, such as the ones between AOL and Microsoft, are common business practices.
Exhibit 530
http://www.microsoft.com/presspass/trial/exhibits/oct98/530/sld001.htm
This an agreement between AOL and Netscapse that AOL will not advertise for IE in conjunction with AIM.
4. Although Colburn claims that the chance to get AOL on the Windows desktop was the reason that AOL began negotiations with Netscape, he later appears to contradict this assertion by claiming that AOL wanted to support both browsers (paragraph 28), suggesting that AOL would have attempted to negotiate a license agreement anyway.
What DOJ has established on
redirect . . .
(1) Mr. Boies first sought to have Mr. Colburn distinguish between the
strategic relationship between Netscape and AOL (before AOL cut a deal
with MS) and the relationship that Microsoft attempted to have with
Netscape. Mr. Colburn characterized the strategic relationship between
AOL and Netscape as an attempt to join forces against a larger
competitor whereas from he believed (i.e., speculated) that MS was
trying to protect its existing OS position when it sought to make a deal
with Netscape.
(2) Mr. Boies questioned Mr. Colburn about the provisions in AOL's
contract with Microsoft that excluded dealings with Netscape. Mr.
Colburn claimed that when he negotiated the contract with MS, MS's
number one goal was to get AOL's browser share and preclude Netscape (p.
13). Mr. Colburn stated that one of AOL's goals was to get parity with
MSN (p.13).
(3) Mr. Boies asked Mr. Colburn whether the exclusive dealings contract
hurt AOL and its consumers. Mr. Colburn argued that there were things
that AOL gained and lost, but consumers would have benefited from having
a choice between browsers.
(4) Mr. Boies attempted to get Mr. Colburn to admit that Netscape was a
better browser than IE, by comparing footprint size, memory
requirements, and cross platform support for channels. Mr. Colburn
admitted that Netscape was better than IE in these areas, but then
reiterated his point that the two browsers were comparable (although
each was better in certain areas) (p. 16)
(5) Mr. Colburn stated that America Online's Distribution Messaging
Service (AIM) was not a method of distribution for the Netscape browser
(p.16).
(6) On recross, Mr. Warden tried unsuccessfully to get Mr. Colburn to
admit that the a large portion of the IE4 was an OS upgrade, most of
which went into the windows directory. Mr. Colburn acknowledged that one
of his technicians made that statement in an e-mail, but refused to
endorse that position.
(7) Mr. Warden questioned Mr. Colburn on whether AOL users were free to
download Netscape. Mr. Colburn admitted that this was true, but then
pointed out that under AOL's arrangement with MS, it was much more
difficult for AOL users to find Netscape, download it, and install it on
their own.
United States: Bill Gates
Please note that transcript page numbers included in parentheses throughout the document. References to government exhibits have also been included. The government exhibits are available on the course website.
The Department of Justice has attempted to advance its case by presenting evidence relating to Microsoft's attempts to (i) dissuade Netscape from competing with Microsoft in the market for browsers, (ii) limit competition in the market for runtime applications by dividing the market with Apple, (iii) exclude Netscape's browser from the OEM distribution channel, and (iv) exclude Sun Microsystems's Java from the OEM distribution channel. Note that the DOJ presented videotaped excerpts from Gates' deposition.
Market Division Proposals
The Department of Justice attempted to prove Gates' awareness of Microsoft's proposal to divide the market for browsers at the June 1995 meeting with Netscape. Gates denied having any knowledge of the proposed market division scheme in 1995. Gates claimed that the alleged overture was brought to his attention by a recent article in the Wall Street Journal. (9) Gates also indicated that a proposal of this nature would be violative of company policy. (10) The DOJ produced evidence that raised doubts about the truthfulness of Gates' denial. The DOJ submitted e-mail sent by a Microsoft employee to Gates on June 1, 1995 that set forth Microsoft's working goals in its relations with Netscape. (Gov. Exhibit number unspecified) The goals included "move Netscape out of the WIN32 internet client area" and "avoid cold or hot war with Netscape." (6)
The DOJ also attempted to cast light on Microsoft's stance towards Apple's QuickTime application. Queried about whether he could recollect any attempts to "get Apple to agree not to market QuickTime in any respect, or to limit the marketing of QuickTime in any respect," Gates responded in the negative. (72-73) Gates indicated that there were technical discussions about whether "a common runtime was achievable" (75) - a product described as "something new ... which would be better for both companies." (78) In response to Gates' denial of any awareness of proposals by Microsoft officials to divide the market for runtime applications, the government introduced a July 23, 1998 article from the Wall Street Journal in which assertions to the contrary were presented. (79-80)
Exclusion of Netscape and Sun from OEM Distribution Channel
The DOJ produced e-mail sent by Gates to Microsoft executives on August 8, 1997 in which he asked "[d]o we have a clear plan on what we want Apple to do to undermine Sun?" (Gov. Exhibit 365) In the e-mail, Gates also indicated that he wanted Microsoft's relationship with Apple to yield "a real advantage against Sun and Netscape." (16) Gates' responses to questions regarding the nature of Microsoft's relationship with Apple were evasive.
Other e-mail submitted by the DOJ cast additional light on Microsoft's relationship with Apple. The DOJ produced e-mail sent to Gates by a Microsoft employee on February 13, 1998 in which MacOffice is described as "the perfect club to use on [Apple]." (Gov. Exhibit 366) The e-mail indicated that Apple was concerned that if either Netscape or Microsoft ceased to develop browsers for Apple, the remaining rival would also lose interest, and that "getting Apple to do anything that significantly materially disadvantages Netscape will be tough." During the deposition Gates stated that he never directed anyone to attempt to get Apple to do things that would significantly or materially disadvantage Netscape. (22-23)
Gates' testimony was unconvincing. The reference to the perfect club in the e-mail required explication. E-mail submitted by the DOJ as exhibits indicated that Microsoft executives were attempting to decide whether to proceed with MacOffice in 1997. Gates claimed that cancellation had been discussed because Microsoft executives had expressed concerns about the commercial viability of the product. (30) During the deposition, the DOJ cast doubt on the motive for cancellation proffered by Gates. E-mail from a Microsoft software developer to Gates sent on June 27, 1997 urged Gates to "[make] a final decision to finish MacOffice97 and detach this issue from the current Apple decision." (Gov. Exhibit 263) E-mail sent on January 21, 1998 by another Microsoft software developer to Gates describes MacOffice as the "biggest Apple carrot." (Gov. Trial Exhibit 267) The e-mail produced by the DOJ suggest that Gates' efforts at trial to sever the decision to produce MacOffice from other aspects of its relationship with Apple should be treated with skepticism. The decision to develop MacOffice97 was clearly an integral component of Microsoft's dealings with Apple.
The DOJ focused its inquiry on Microsoft's objectives in its relationship with Apple. Gates testified that the allusions to the negotiations with Apple in the e-mail sent in June 1997 referred to ongoing discussions regarding a patent cross-license. (33) The DOJ cast doubt on the veracity of Gates' testimony by referring to an e-mail sent by Gates to Microsoft employees on June 23, 1996 in which he indicates that the two goals in investing in a relationship with Apple were maintaining their applications share on the Apple platform, and getting Apple to embrace Internet Explorer. (Gov. Exhibit 369) In spite of Gates' vehement protestations to the contrary, the goals seemed to be couched in terms of a proposed deal between Apple and Microsoft that would lead to an endorsement of Internet Explorer technology by Apple. (47, 51-53)
The government introduced e-mail sent on August 21, 1997 by a member of the Microsoft executive staff following a meeting in August 1997. (Gov. Exhibit 370) The sender indicated that Gates had emphasized the importance of including Internet Explorer in the October 1997 OS release from Apple. The sender added "Bill was clear that his whole goal here is to keep Apple and Sun split." (60) The DOJ also submitted the August 5, 1997 bundling agreement between Apple and Microsoft. The agreement appears to further the goals described by Gates in earlier e-mail. (Gov. Exhibit 1167) The agreement specified inter alia that "Apple will ship Internet Explorer for Macintosh bundled in all units of Mac OS system software Apple shifts to distributors," "Apple will make Internet Explorer for Macintosh the default selection in the choice of all internet browser," and "Apple will not be proactive or initiate actions to encourage users to swap out Internet Explorer for Macintosh." The bundling is conditioned on Microsoft's continued production and development of MacOffice. (see generally 63-65) Viewed together with the earlier e-mails discussing the cancellation of MacOffice97, there is evidence that suggests that Microsoft was wielding the application as a club in its dealings with Apple.
Other e-mail submitted by the DOJ lend credence to the motives imputed to Gates in the August 21 e-mail. For example, e-mail sent on April 14, 1997 by a Microsoft employee to Gates describes a conversation between the sender and Gates. During this conversation Gates is said to have asked "[o]ne, what is out business model for Java?" and "[t]wo, how do we wrest control of Java away from Sun?" (Gov. Exhibit 372)
Conclusion
The DOJ has succeeded in advancing its case against Microsoft on a number of fronts. The allegations of efforts to divide markets with competitors has been advanced by the evidence suggesting that Gates may have been aware of the activities of Microsoft executives. The evidence relating to Microsoft's dealings with Apple lend credence to the allegations that Microsoft was engaged in exclusionary conduct of one form or another in the market for browsers. Finally, considerable doubt has been cast on Gates' truthfulness as a witness.
Microsoft: Bill Gates
OK. For Microsoft the Gates deposition really only established one thing. That we really need to keep that guy off the witness stand. His performance was so spectacularly poor that it prompted a Wall Street Journal article titled "Even Great CEOs Can Be Terrible Witnesses" (WSJ 11/9/98 B1). Otherwise, it's a little tricky to summarize what Gates' testimony accomplished from the Microsoft perspective, because there's no Microsoft "cross" to work from.
Appearances aside, Gates managed to avoid admitting murder or giving away his first born child. DOJ threw a bunch of allegations at him, and he claimed complete ignorance as to most of them. He doesn't remember, for example, plotting to divide up the browser market with Netscape in a June 1995 meeting.
Most of the DOJ questions concerned Microsoft's dealings with Apple. Specifically, whether Microsoft threatened to cancel its Office update for Mac ("Macoffice" -- comes with fries and a drink for $2.99) in order to badger Apple into ditching Netscape, Sun and Apple's multimedia application. Gates asserted that he did not know whether, at the time of the deposition, Apple was free to ship Netscape without also shipping Internet Explorer (p. 51). Instead, he claimed that the most important concession from Apple were licenses on Apple patents.
If DOJ did any damage with the exchange, it was by destroying Gates' credibility. Nobody with a house as big as Gates' could possibly be as uninformed and forgetful as he claimed to be. Although he definitely looked bad, Gates' evasive, unresponsive answers certainly didn't give DOJ any new ammunition to shoot back at him. And for what it's worth, his spokesman says, "Bill always rocks back and forth." (WSJ, above).
United States: Avadis Tevanian
BACKGROUND
Tevanian is the Senior VP of Software Engineering for Apple, responsible for nearly all software products developed there. He was at NeXT before it was acquired by Apple.
His basic argument is that Microsoft has leveraged it OS monopoly to control emerging markets for software that allows one to send, create, receive, and display multimedia technologies.
For instance, when Apple bought NeXT, Apple attempted to utilize this new knowledge to create a new OS, Rhapsody. Application developers wouldn't go for it, though, because of Microsoft's dominance.
BROWSER & PATENT DISPUTES
In early 1997, Apple and Microsoft got involved in two arguments:
Microsoft threatened to withdraw application support (most notably, Microsoft Office) from Mac OS unless Apple agreed to Microsoft's terms to settle these arguments.
In response to this very serious threat, Apple agreed to: make IE the default browser, put IE on the desktop, and only actively protmote IE (though it could still include Netscape, within a folder). In a concurrent agreement, Apple settled the patent dispute, for $150 million and some cross-licensing agreemnts. Apple feels that its customers generally do not change this default arrangment, meaning that IE's placement virtually guarantees it primary usage among Apple users. Apple also argues that it would have never settled these arguments this way were it not for the threats Microsoft made concerning the application markets.
In return, Microsoft agreed to: continue developing Office for five years and continue giving Apple IE for free for five years.
MULTIMEDIA: QUICKTIME
The popularity of a cross-platform media application like Quicktime threatens the symbiotic relationship between OS and applications that Microsoft depends upon (much like Netscape threatens Microsoft's OS monopoly). ActiveX and NetShow are the competing products Microsoft claims are part of the OS.
In response to the threat Quicktime poses, Microsoft used its power to attempt to defeat QT in a number of ways:
OEM's (like Compaq) and ISV's (like AVID) are unwilling to side with Apple for fear of reprisals from Microsoft.
So, in summary, Tevanian's argument is that Microsoft used both its OS monopoly and its near-monopoly over the applications market to force Apple to grant IE prime placement within the Mac OS and to impede the growth of Quicktime.
Microsoft: Avadis Tevanian
TEVANIAN CROSS EXAMINATION
Dr. Tevanian's direct testimony focused, as outlined in David's summary, on two main points: Apple's bundling of IE with its OS and a battle between Apple and Microsoft over dominance in the Internet Multimedia market. The main thrust of Microsoft's cross-examination was to chip away at the foundation of those two claims.
The main strategy here was to paint the episodes referenced in Tevanian's testimony as innocuous, ordinary business discussions, meetings and agreements, between competitors. The dominant strategy employed by MS attorney Edelman was to lay a strong foundation for suggesting that the sinister story painted by Tevanian in relaying the events was a product of an incomplete version of the events twisted by a company that had lost its edge in the software market and no longer had clout with developers or consumers.
A. MICROSOFT FORCED APPLE TO GIVE PREFERENTIAL TREATMENT TO INTERNET EXPLORER OVER NETSCAPE
Tevanian's claim was that Microsoft forced Apple to bundle IE rather than Netscape with Mac OS by threatening to cease further development of its Microsoft Office Suite on the Macintosh Platform. Microsoft challenged this claim on a variety of fronts:
- Microsoft stressed in cross-examination that demand for Office on the Macintosh platform is not based on any Macintosh OS monopoly. By threatening to cease R&D on future upgrades of the Office Suite, Microsoft, it would seem was not leveraging any monopoly. MS never threatened to cease sales of the current Office Suite on the Macintosh platform -- just to discontinue future upgrades.
- Apple's insistence on nearly universal consumer demand for Office on the Mac is curious -- if most Mac consumers want Office or nothing, then why does Apple bundle a different productivity suite with the iMac?
- The agreement that was signed regarding IE was part of a 6-part agreement which included provisions regarding alleged IP infringements by Microsoft against Apple. Apple has publicly described that collective agreement as beneficial to the company -- it includes cash investments by Microsoft, and a commitment towards future development of Office Suite products for the Macintosh.
- The agreement that Apple signed with MS does not prohibit Apple from including Netscape with Mac OS -- it simply prohibits Apple from being proactive in encouraging users to change their default browser to Netscape. And on cross, MS demonstrated how relatively simple it is to change the default browser in Mac OS -- a relatively intuitive process that can be accessed by typing "change default browser" into the help system.
{Note that Apple's main response here -- the claim that the simplicity of the process belies the complexity involved for most users in getting Netscape installed from the CD is negated by Tevanian's later admission towards the end of his testimony that in later Mac OS 8.0 editions where the OS was preinstalled, Netscape was installed on the machine before the user ever got the computer}.
- Apple's claim that MS strong-armed them into agreement on IE by threatening to choke off the supply of Office for the Mac is somewhat weakened by the specter of Apple holding its potential multi-billion dollar infringement suit over Microsoft's head during the negotiations.
B. MICROSOFT'S ATTACK ON QUICKTIME
Tevanian claimed in direct that Microsoft, believing that QuickTime as a cross-platform application threatened the Windows monopoly, approached Apple with a cooperate or die ultimatum on the multimedia authoring/playback market. Microsoft mounted another multi-pronged defense:
- Tevanian's direct testimony asserted certain erroneous facts which he later corrected in a errata filing submitted to the Court after his testimony had already been made public. In this errata he admits that his claim that MS could not support streaming of HTML files over the internet was mistaken; in essence, that puts the MS multimedia product on a technologically equal plane to QuickTime in this respect -- weakening the claim that MS was trying to force Apple to adopt a clearly inferior product.
- One main focal point in this line of questioning: Tevanian had testified to certain incompatibilities between IE and quicktime that he implied were deliberately planned by MS to derail Quicktime. MS disputed this one claim in several ways:
- When Apple first discovered an incompatibility, Tevanian sent an email to Gates outlining the problem; Gates actually fixed the specific problem referred to by the email. What happened then was that Apple assumed that all of the incompatibilities had been fixed at that point, and when they realized that there were other file types that still did not work, it was too close to Quicktime's 3.0's release date for them to enter into serious dialogue with MS as to how to fix it.
- Apple was also set back in its ability to properly test compatibility with IE because it refused to sign MS's standard beta confidentiality agreement.
- If IE did not work with popular Quicktime formats that should have been counterproductive to MS -- it would have induced people to switch to Netscape which did support the Quicktime plug-in without any glitches.
- Apple claimed that its Quicktime plug-in worked with IE 3.0 and that MS deliberately introduced incompatibility in IE 4.0. MS demonstrated on cross, however, that certain error messages that are generated in IE 4.0 would also have arisen in IE 3.0 -- raising questions about the maliciousness ascribed to MS.
- The real dominant competitor in the multimedia player market is RealNetwork who has an 85% market share.
- MS emphasized on cross that Tevanian had no direct knowledge of any actual threats made by MS against Apple regarding Quicktime. MS introduced evidence that suggested that Apple actually threatened MS with a DOJ action during the negotiations.
- Tevanian had claimed that Compaq refused to bundle Quicktime out of fear of MS's response. MS introduced deposition testimony which suggested that the reason Compaq refused to bundle Quicktime was because Apple was insisting on charging royalties for each copy of the software -- while MS's software was free.
- MS had suggested that Apple could solve its incompatibility problems by making Quicktime into an ActiveX control that would fit better with IE. Apple has resisted trying this option both because it claims not to trust MS and because promoting ActiveX hurts its own business plan because ActiveX is more Windows-specific and cannot be translated directly to the Mac.
- Tevanian claims that MS used a pretext of negotiating with Apple over cross-licensing of codecs in order to strong-arm Apple in carving up the market, with Apple taking the server side and MS taking the Multimedia player side. That pretext, however, was relevant -- in that cross-licensing codecs might have made the two products more compatible, lessening the worries for Quicktime developers.
MISCELLANEOUS
- One piece of testimony which seemed interesting to the Judge, at least: Tevanian had testified in an earlier depo that Apple's new Sherlock program which permits searching the internet from a standard OS search box was bundled with Mac OS; now he claims it is built-in. He clarified his earlier testimony as imprecise, and now defines the difference between bundled and built-in as whether or not the component can be removed without damaging the functioning of the OS.
- Tevanian had highlighted the failure of the Rhapsody OS as an indication of the barriers to entry that MS's monopoly creates in the OS market. On cross, MS introduced evidence suggesting that Rhapsody failed in large part because it would have required Mac programmers to redesign existing Mac applications on a fairly large scale in order to take advantage the new features, and the Mac designers balked at such a move.
from Andrew Bloch (abloch@law.harvard.edu)
from Chris Parry (cparry@law.harvard.edu)
from Ken Murata (kmurata@law.harvard.edu)
from Mike D'Annunzio (mdannunz@law.harvard.edu)
from David Melaugh (dmelaugh@law.harvard.edu)
Apple currently bundles IE, Netscape, and AOL with its OS. Apple allows resellers to reconfigure the computers to not include any of these. Obviously, none are "integrated" into the OS.
* Patent infringement (unclear precisely what this was over)
* Mac OS included both Netscape and IE, but Netscape was the
"default".
I will assume familiarity with what, precisely, Quicktime is; check pgs. 20-24 of the testimony for more details.
* Attempted to convince Apple to get out of multi-media playback
market, and only focus on the content-creation end of the market
(evidence of several meetings to this effect is presented).
* Impeded growth of QT by writing OS to sabotage QT & present
misleading error messages (for instance, streaming playback
doesn't work).
from Owen Cyrulnik (ocyrulni@law.harvard.edu)