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IN THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT .....................................x MICROSOFT CORPORATION, : Defendant.Appellant, : v. : UNITED STATES OF AMERICA, : Plaintiff.Appellee. : : No. 00.5212 MICROSOFT CORPORATION, : No. 00.5213 Defendant.Appellant, : v. : STATE OF NEW YORK, ex rel. : Attorney General Eliot Spitzer, : et al., : Plaintiffs.Appellees. : : .....................................xMonday, February 26, 2001
Washington, D.C. The above.entitled matter came on for oral argument, pursuant to notice, commencing at 9:30 a.m. BEFORE: THE HONORABLE HARRY T. EDWARDS, Chief Judge. THE HONORABLE STEPHEN F. WILLIAMS, Judge. THE HONORABLE DOUGLAS H. GINSBURG, Judge. THE HONORABLE DAVID B. SENTELLE, Judge. THE HONORABLE A. RAYMOND RANDOLPH, Judge. THE HONORABLE JUDITH W. ROGERS, Judge. THE HONORABLE DAVID S. TATEL, Judge. APPEARANCES: Appearing on Behalf of Plaintiff.Appellee United States of America: JEFFREY P. MINEAR, ESQ. DAVID C. FREDERICK, ESQ. United States Department of Justice Office of The Solicitor General 950 Pennsylvania Avenue, N.W. Washington, D.C. 202.514.4063 Appearing on Behalf of Defendant.Appellant Microsoft Corporation: RICHARD J. UROWSKY, ESQ. STEVEN L. HOLLEY, ESQ. Sullivan & Cromwell 125 Broad Street New York, New York 10004 212.558.4000 Appearing on Behalf of the State of New York, et al.: JOHN G. ROBERTS, JR., ESQ. Hogan & Hartson 555 13th Street, N.W. Washington, D.C. 20004.1109 202.637.5600 P-R-O-C-E-E-D-I-N-G-S (9:30 a.m.)
THE CLERK: Case No. 005212, et al., United States of America, et al., versus Microsoft Corporation, appellant. First issue: Monopoly maintenance. Mr. Urowsky for appellant; Mr. Minear for appellees. Second issue: Tying. Mr. Urowsky for appellant; Mr. Roberts for appellees.
THE COURT: Because of the breadth and complexity and importance of the issues on appeal, the arguments in this case will be heard over the course of two days. Today the Court will hear arguments on monopoly maintenance and the tying issues. Counsel will be allowed 75 minutes per side on the monopoly maintenance issue and 45 minutes per side on the tying issue.
The Court may take a short break after the appellant's opening argument, and then we are likely to take a recess for lunch at the conclusion of the arguments on monopoly maintenance. We will reconvene promptly at the conclusion of any break.
Tomorrow, the Court will hear arguments on the attempted monopolization, relief and conduct of the trial and extrajudicial statements.
We are now ready to hear arguments.
MR. UROWSKY: Good morning.
THE COURT: Good morning.
MR. UROWSKY: Chief Judge Edwards, and may it please the Court, my name is Richard Urowsky, and I represent Microsoft. These are appeals from the final judgment finding Microsoft liable under Sections 1 and 2 of the Sherman Act and ordering a breakup of the company as well as other extreme relief.
Before turning directly to the government's monopoly maintenance claim, I'd like to make one point that lies at the heart of this case and cuts across all claims asserted in the complaints. Nothing Microsoft did foreclosed Netscape from any portion of the marketplace.
The District Court found that Netscape distributed 160 million copies of Navigator in 1998 alone. This was sufficient to saturate the entire marketplace which consisted of approximately 100 million Internet users at the time.
The District Court also found that between 1996 and 1998, the period at issue in this case, Netscape's installed base of users increased from 15 million to 33 million. In other words, millions of people chose to use Navigator despite the fact that Internet Explorer was included in every copy of Windows. In fact, James Barksdale, Netscape's CEO, testified that Netscape had between 40 and 70 million users at the time of trial. And internal Netscape documents from October of 1997, a year before the commencement of trial, estimate that Navigator's installed base was 65 million, up from 40 million the year before. That's an increase of 25 million users during the very period when the alleged restraints were supposed to be in effect.
This evidence shows that Netscape had unfettered access to consumers. Indeed, Microsoft's inclusion of Internet Explorer in Windows may have facilitated Navigator's distribution by providing a convenient means of downloading the program from the Internet. The absence of any foreclosure from any part of the marketplace undermines every claim in this case.
I'd like to ..
THE COURT: Foreclosure means more than simply impeding access?
MR. UROWSKY: It means preventing access, typically in cases like this by either locking up customers, which is not an issue in this case, or effectively foreclosing all channels of distribution.
THE COURT: That's the approach that the Supreme Court has adopted?
MR. UROWSKY: Well, it's the approach certainly that the courts of appeals have adopted.
The leading case on this point is Omega Environmental, which is a case from the 9th Circuit which addresses this very issue. The claim in that case, Your Honor, was that the defendant had exclusive control over the most desirable means of distribution. And the 9th Circuit rejected that claim as a matter of law, determining that there was the ability on the part of the plaintiff to distribute directly to consumers and to develop alternative distributors and to compete with the defendant for existing distributors; and therefore, as a matter of law, the claim could not be allowed.
THE COURT: Isn't the question, though, in this part of the case not how much Navigator is out there, but the extent to which Microsoft's behavior impeded? In other words, but for the violation the District Court found, Navigator would be even more.
MR. UROWSKY: I don't think that's ..
THE COURT: And also the District Court findings, at least in this part of the case, were not based, as I understand it, on limiting Navigator as a browser but its potential to serve. Isn't that what this part of the case is all about?
MR. UROWSKY: Your Honor, I agree with the second part of that. I think that there is no evidence that there was any impediment to Netscape's distributing Navigator pervasively in the marketplace. There is a finding by the District Court that Netscape had the ability to offer its software literally to every PC user world.wide to adopt and use. So ..
THE COURT: Was that finding made as a part of the rejection of exclusive dealing part of the case or this point?
MR. UROWSKY: It's contained in the District Court's conclusions of law.
THE COURT: Rejecting the exclusive dealing, right, which has nothing to do with this.
MR. UROWSKY: I think it has, with great respect, everything to do with this because the question that I think is pertinent here is whether in any sense Netscape was excluded from the marketplace. And that is not a different question under Section 1 and Section 2. Either they were excluded or they were not. And the District Court found that they were not and dismissed the Section 1 claim that alleged that they were on this ground. So I think in this regard the District Court's findings are just consistent.
THE COURT: Your response is something that is pervasive to your case. That is, our handbook for circuit practice requests that appellants set forth the standard of review and address that. Is your brief under that?
MR. UROWSKY: I thought we had in our opening brief; and the standard, obviously, is under Rule 52 for factual determination.
THE COURT: Right, and when you referred to what was held as a matter of law in some other case, the question before us, which I'm not sure you did put in your brief to, is review of finding of fact; right?
MR. UROWSKY: I think we did address that in our opening brief, Your Honor. The standard is .. obviously, the standard set forth in Rule 52 is clearly erroneous.
THE COURT: That standard is clearly erroneous.
MR. UROWSKY: On issues of law there is de novo review. And in this context traditionally issues of law have been deemed not only the articulation of legal standards, but the proper application of those standards to the facts and the correctness of the analysis from a legal and, in this context again, economic standpoint.
THE COURT: Are you contending the factual findings underlying the District Court's equation on this issue are erroneous or are you not?
MR. UROWSKY: We have contested a relatively small number of factual determinations as clearly erroneous. However, it's our position in this court that even if the court were to accept all of the findings of the District Court, the decision below would have to be reversed in all respects as a matter of law.
I'd like to turn now to what I maybe immodestly would call a problematic examination of the monopoly maintenance claim. I'd like to start out by addressing the question of anticompetitive conduct, because I think that's the most straightforward part of this case and because it provides potentially a dispositive ground for resolving it.
The District Court identified essentially four categories of conduct to support the monopoly maintenance claim. The first was the alleged tying of Internet Explorer to Windows.
The second were Microsoft's license agreements with computer manufacturers, whom I will refer to, as is conventionally done, as OEMs.
The third were Microsoft's distribution agreements with Internet access providers, whom I will sometimes refer to as IAPs.
And the fourth relates to Microsoft's development of an implementation of job technology.
Turning first to tying. Microsoft's inclusion of Internet Explorer technologies in Windows was not anticompetitive for at least two reasons. First, it resulted in improvements to the operating system that benefited consumers. And second, it did not prevent distribution of competing web browsing software. It's well established in the cases that product design decisions cannot be anticompetitive under Section 2 if they result in improvements to the product. If the rule were otherwise, leading firms would be deterred from improving their products for fear that such improvements would lead to charges of acquisition or maintenance of monopoly. Clearly, a rule of that nature, which has been systematically rejected by the courts, is contrary to public policy.
The second basis for the District Court's acceptance of the monopoly maintenance claim relates to Microsoft's OEM licenses. This is, again, Microsoft's licenses to computer manufacturers.
The District Court found that there were essentially two provisions of these licenses that were anticompetitive. The first is the requirement that OEMs permit the initial startup sequence of Windows to be completed uninterrupted the very first time the PC is turned on. Let me underscore that what is at issue in this dispute is only the very first time the computer is booted up. There is no dispute about subsequent startups.
The second feature of Microsoft's OEM licenses that the District Court found to be anticompetitive was the requirement that OEMs display the Windows desktop screen after the computer boots.
These features of the OEM licenses, I submit, Your Honors, were not anticompetitive for two reasons: First, in refusing to permit OEMs to make unauthorized modifications of Windows, Microsoft is exercising its rights under federal copyright law. As the holder of valid copyrights, Microsoft may bring infringement actions to prevent distributors, in this case the OEMs, from altering its copyrighted operating systems.
In fact, two leading cases, Second Circuit's decision in Gilliam and Judge Posner's decision in WGN, expressly recognize that federal copyright law enables a copyright holder to prevent unauthorized modifications of copyrighted works.
Although ..
THE COURT: That's a bit broad, isn't it? I mean the Gilliam case is a good deal narrower proposition because there was a much greater intrusion into the copyrighted work. I think the court said it was mutilated. The Monty Python case; right?
MR. UROWSKY: That's correct, Your Honor. The Gilliam court said that .. that is correct as to the facts.
THE COURT: But you're talking here about any alteration of the desktop screen; correct?
MR. UROWSKY: That's correct.
THE COURT: Including the removal of an icon.
MR. UROWSKY: That's correct.
THE COURT: Why would that so mutilate your copyrighted product?
MR. UROWSKY: I don't think the holding .. I don't think the rule of Gilliam is as permissive as ..
THE COURT: Would you agree that there has to be some materiality threshold?
MR. UROWSKY: No, I don't really. If you read Gilliam, you will see that what Judge Lombard ..
THE COURT: You are saying an immaterial change. Immaterial in every respect can be legally consequential.
MR. UROWSKY: I think that I'm saying that the changes that are at issue here are clearly material and significant and that there is no basis in law for holding that even immaterial changes are permissible.
THE COURT: Where is the -- what is there in the record to suggest that this would be a material change?
MR. UROWSKY: The user interface is the sole feature of the operating system that is exposed to consumers, Microsoft's customers. And our position is that any alteration of the user interface of the product would be material and significant.
THE COURT: But I'm asking if there's anything in the record, not just your assertion, but any evidence to suggest that it would be material. Is there any evidence about how consumers would perceive this screen or would be confused about the source of it or wonder whether they have gotten the legitimate product or what have you?
MR. UROWSKY: I believe there is testimony on that subject. I'm sorry, Your Honor, I can't cite you to a particular ..
THE COURT: Can you give me any more than that?
MR. UROWSKY: .. provision of the record.
THE COURT: What's the finding relevant to this?
MR. UROWSKY: I am reminded that there is testimony by Mr. Kempin on this subject.
THE COURT: Can you refer me to the finding of the District Court that covers this?
MR. UROWSKY: I'm not sure that the District Court addresses this subject because the district .. that is to say, this subject being materiality and its necessity for a copyright claim.
THE COURT: I thought the District Court did suggest that there would be no impact on consumer perception or that there was nothing to substantiate your concern.
MR. UROWSKY: I think what the District Court said here is that if there were alterations and they had an adverse impact on the quality of the product, that that would be corrected by the market because the market at the OEM level is highly competitive, and I'm not sure whether that's correct or not, but I don't think it quite addresses the question that Your Honor is raising.
THE COURT: Let me ask you about and this goes back to Judge Sentelle's original questions to you. The District Court's Finding 228, which you don't challenge, says that the company's restrictions here were not motivated to protect its copyright. Here is what it says. The removal of the icon, et cetera, 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.
Now, you don't challenge that, frankly.
MR. UROWSKY: We have not challenged that finding.
THE COURT: Since your obligation is .. since findings of fact are considered binding on us unless demonstrated to be clearly erroneous, I don't see how you can get a reversal on this part of your case.
MR. UROWSKY: I think we can get a reversal if as a matter of law the .. as a matter of copyright law, the licensees are not permitted to make any changes unless they are authorized to do so by their licenses.
THE COURT: So you are back to it being even an immaterial change is ..
MR. UROWSKY: That is our position. But I'd like to point out one other thing, if I may, Your Honor, and that is that the government's theory of this case is that it is important that OEMs be able to make these changes. And so it's a little difficult to see why the crux of the government's case in this area can be accepted without accepting that there is importance to maintaining the integrity of the Windows desktop.
I wanted to make one just final observation in response to a question Judge Ginsburg asked me that I didn't have a moment to respond to. And that is, if you read the Gilliam case, you will see that although the alterations were significant in that case, and although the court holds by Judge Lombard that minor alterations would have been permissible, Judge Lombard also observes that the license in that case permitted minor alterations.
THE COURT: Backing you up just a moment, you would -- is it your position that you are not challenging the court's relevant findings of fact on this subject, but saying that as a matter of law, you went anyway because any authorization is a violation? Is that your position?
MR. UROWSKY: That is correct, Your Honor. THE COURT: So you are not challenging the underlying findings of fact.
MR. UROWSKY: Yes. I think I answered Judge Tatel on that subject.
THE COURT: But to challenge it on a basis of law, what do you do if the District Court relies on two Supreme Court cases about the intersection between copyright and antitrust law?
MR. UROWSKY: I'm sorry. I'm not ..
THE COURT: Well, the District Court in its conclusions, if you look at Joint Appendix 2420 and 2421, refers to quotes from Eastman Kodak saying the court has held many times that power granted through some rational legal advantage such as copyright can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next. And then there's another Supreme Court. And also data general from the First Circuit. So isn't that what the District Court was focusing on here?
MR. UROWSKY: I think Your Honor is correct that is what the District Court is focusing on. But I think that the passage you just referred to is a misreading of those cases and it certainly is not the reading that has been given more recently in this area by among other courts, the federal circuit. It is true, of course, that patent rights can be misused or copyright rights can be misused if they are extended beyond the field in to which they are granted. But the question we have before us today is may the holder of a copyright simply exercise the rights granted by the Copyright Act, which is a federal statute and therefore is entitled to equal weight with the antitrust laws.
Now, in the Intel.Intergraph case, which was decided last year by the federal circuit, the federal circuit held squarely that the mere exercise of copyright rights, even if they have impact on competitors, is not actionable under the antitrust laws. That holding was reaffirmed more recently by the federal circuit in the ISO .. I'm sorry .. Independent Service Organizations ..
THE COURT: No, I appreciate that, but what I'm getting at is that since you are not challenging the finding of fact, number 28, about what your focus was here, why is the court legally wrong in its analysis of the interception between copyright and antitrust law?
MR. UROWSKY: Because I think the District Court assumed that Microsoft was asserting some right to use its copyrights beyond the literal scope of Section 106 of the Copyright Act, and we are not doing that. Our position is that OEMs are prohibited from copying or making derivative works of Microsoft copyrighted operating systems unless authorized to do so by their license. That is the essence of a copyright right.
THE COURT: Mr. Urowsky, let me take you back to some threshold questions and make sure that there's nothing the court is supposed to be agonizing over on your theory of the case save what you've put in the brief. But some of what you are arguing here, I think we are going to assume your pressing points of greatest concern. Do you have anything that we need to worry about a lot on your arguments with respect to market share or the definition of the relevant market? MR. UROWSKY: I think that our position is set out comprehensively in the briefs. Our position on market share is that market share in and of itself is not the significant element here. What's significant is whether the market share has been achieved effortlessly because of control of elements of supply or whether market share has been achieved as a result of relentless, unremitting and ferocious competition.
THE COURT: So that will take us to the conduct questions. What about the definition of relevant market about which you say some things? Are there any things that you think are important that we ought to know no?
MR. UROWSKY: I think the position again is set forth in the brief. But in very summary form, there is a great and not benign contradiction underlying the government's case. On the one hand, the theory of liability is that the most significant forms of competition confronting the Windows operating system are nonoperating system software technologies.
THE COURT: They're looking to victims in the middleware or alleged middleware market. And you are saying that's excluded from the definition of the relevant market.
Mr. UROWSKY: Precisely.
THE COURT: That is ironic, but so what?
What do we do with it? Forgetting the causation questions, what do we do with it with respect to the definition of the relevant market other than observe that it's ironic?
MR. UROWSKY: I think that we need to take the next step and say that essentially the theory of liability impeaches the market definition. The purpose of defining a market is to identify the locus of effective competition.
THE COURT: All right. Let's assume that we change the market definition and include it, the middleware or alleged middleware group, with respect to the platform that we are arguing about, and we even included a Mac. What happens to your theory of the case? How does that change our analysis in any important way?
MR. UROWSKY: I think what it then tells you is that the court cannot rely on a structural analysis to establish market power because now we have no idea of what market shares any of these participants have. And because in this case there is a extraordinary heterogeneity to the participants who are competing to be successful software platforms, being a successful software platform is a very desirable thing. That's why so many of these companies are investing so heavily in this area of technology.
THE COURT: Let me be more pointed to see whether we move on or there is something that I should worry about here. You make the claim that the definition of the relevant market is incorrect.
MR. UROWSKY: Yes, Your Honor.
THE COURT: Let's assume we agree with you it is incorrect. If you were writing the opinion, you would say and therefore what?
MR. UROWSKY: I would say and therefore the District Court's determination as to monopoly power cannot stand, because there's no analysis of all of the elements that ought to be included in the market which are constraints on Microsoft's ..
THE COURT: In your argument as well because while you want the middleware included in the relevant market, you allow, as we all must, that it is only a hope. It is not an existing market at this point.
MR. UROWSKY: And then that brings ..
THE COURT: That isn't going to change the analysis very much. And if you add Mac in, you still have a share that's in the 80s.
MR. UROWSKY: With great respect, Your Honor, I don't agree with that.
THE COURT: Which?
MR. UROWSKY: I don't agree with the part about the inclusion of other technologies in the marketplace not having an impact on the analysis.
THE COURT: All right. Well, then, tell me how.
MR. UROWSKY: Because in this business, even a competitor who has not achieved mass market success .. I query whether some of these technologies have already achieved what borders on mass market success. I'm thinking particularly at this point of Linux, certainly Apple, and Java as well.
But even without achieving mass market success, because of the economics of the business, they represent incredible threats, and the reason .. and incredible threats and consequently incredible constraints on behavior, on pricing behavior, on research and development, on the initiation of new products.
THE COURT: I think the court could agree with you that they're represent constraints without saying that they are severe enough to refute the claim of market power, which surely Microsoft does have a certain amount of freedom to choose its prices; right? I'm not sure that that makes it all that different from most other leading software makers in their particular field, but it does have that.
MR. UROWSKY: There's no question that like almost every other supplier of a successful software product or any other intellectual property product, Microsoft has some market power and some discretion in pricing, but that is not equivalent to monopoly power.
I might respectfully invite the Court's attention to the monopoly power analysis that was undertaken by both sides in the District Court .. a monopoly pricing analysis that was undertaken by both sides in the District Court in which each side computed a short.term profit maximizing price for Windows based on the assumptions that, one, Microsoft had monopoly power, and two, that it was protected by substantial barriers to entry.
In the case of Microsoft's expert, Dean Schmalensee, he concluded that the monopoly price for Windows ought to be $900 a copy as opposed to the less than $65 a copy that's actually charged to OEMs. The government's expert replicated the exercise, accepted the methodology, made different assumptions, and he got the price down to he said within a couple of hundred dollars of the actual price.
THE COURT: Mr. Urowsky, may I ask you, does this all come down to a question of technology? The fact of the matter is that Navigator was not a competitor with Windows. Navigator was at most a potential competitor.
MR. UROWSKY: That's correct, Your Honor.
THE COURT: And how close it was, how probable it was that it would become a competitor depended upon predicting technological developments. Isn't that right?
MR. UROWSKY: That is correct.
THE COURT: And technological developments really don't depend upon what Navigator's market share was.
MR. UROWSKY: That's correct, Your Honor.
THE COURT: It may depend upon a deep pocket, but once the acquisition took place of Netscape by AOL, there can be no claim that there's not a sufficiently deep pocket.
MR. UROWSKY: I agree with that, Your Honor. The ..
THE COURT: And in fact, your claim, as I understand it, is that because the District Court specifically found that there was insufficient evidence to demonstrate that Navigator would compete with Windows, that the monopolization .. monopoly maintenance claim has to fall.
MR. UROWSKY: That's correct because ..
THE COURT: Because you could exclude Navigator from the world, and it wouldn't .. that doesn't help you maintain the monopoly in Windows because Navigator was not a competitor.
MR. UROWSKY: That's precisely correct, Your Honor. If I might just follow up for a moment -. THE COURT: Wait, wait, wait. Let's finish the discussion on this. Does antitrust law not contemplate the possibility that we will protect nascent seedlings of competition? Indeed, there's no doubt. There are lots of ironies in this case. Your client is shooting at that which you just described as a nonexistent market. There's no doubt that all of your witnesses say the concern here .. it was interesting to read the Dean's testimony .. the concern here was not about the traditional operating system. The concern is about this middleware, Netscape, Java in combination. Do we not protect those possibilities if they're reasonable possibilities?
MR. UROWSKY: I think clearly the antitrust laws protects them, but it doesn't protect them from competition.
THE COURT: It does protect them from predatory conduct.
MR. UROWSKY: It protects them from exclusionary conduct.
I wanted to make just one observation about why competitors like Netscape or potential competitors like Netscape are so dangerous in this market.
You have to understand we're dealing with what comes close to being a pure R&D market. And it's one where once a firm develops a successful product and tests it, it is in a position to supply the entirety of demand. There are no constraints on output. Marginal costs are essentially zero. And there are to some extent network effects. So a company like Netscape founded in 1994 can be by the middle of 1995 clearly a potentially lethal competitor to Windows because it can supplant its position in the market because of the characteristics of these markets.
THE COURT: I want to back up just a moment to the market definition. Do those affect your question, isn't it -- Isn't that a question of fact?
MR. UROWSKY: No, Your Honor, I don't believe it is. At best, it's a mixed question of fact and law.
THE COURT: Certainly not pure law, is it? MR. UROWSKY: Well, I think if you look at this court's decision in the Southern Pacific Communications case, you'll see that the Court had no trouble in determining that legal standards were not properly applied and correcting market definition. The 8th Circuit has just done that in Concord Boat.
THE COURT: What standard do you say you of review as applicable to this market definition question?
MR. UROWSKY: I think this is a de novo standard of review.
THE COURT: De novo?
MR. UROWSKY: Yes. Regarding both the articulation of the legal rule and its application.
THE COURT: How can it possibly be de novo? The District Court gave specific factual reasons for excluding Mac and excluding middleware, precise factual reasons for doing both. And you challenge neither?
MR. UROWSKY: Well, I think that we do challenge .. as I said earlier, we do challenge a number of findings of fact relating to market definition.
THE COURT: Well, like what? You didn't, with respect to Mac, Finding 20 and 21, about the reasons why people wouldn't switch to Mac OS. I don't see you challenging. You have a sense in your brief which says you don't agree with it, but certainly not -- that doesn't amount to a clearly erroneous challenge. The District Court said that middleware didn't want to expose enough APIs to prevent any future possibility of competition. I don't see you challenging that. I just don't see how you can make the argument that this is the definition of market is a question of law.
THE COURT: Something as fact bound as that, it's hard to see how you can treat it as a legal question as opposed to a fact finding.
MR. UROWSKY: Well, as I said a moment ago, I think that this court in Southern Pacific had no trouble doing that. The 8th Circuit has had no trouble doing it recently in Concord Boat.
THE COURT: Those are something from one of those -- I don't have those cases in front of me. I don't recall you pointing out in your brief anything that shows what you just said. Can you quote us the portion of either of those decisions?
MR. UROWSKY: I'm sorry. I don't ..
THE COURT: To which you are alluding when you said the court had no trouble? I mean we have your assertion the court had no trouble doing that. But what is the language of the court upon which you rely to reach that conclusion?
MR. UROWSKY: It's the sections of this court's decision in Southern Pacific, Your Honor, that deal with market definition.
THE COURT: Mr. Urowsky, I want to come back to the series of questions I asked you. Why isn't it sufficient if Microsoft, if the executives of Microsoft thought .. forget about what the truth is .. but thought that Navigator potentially could threaten Windows? If they thought and acted accordingly, why isn't that enough, even if it turns out, as the District Court found, that at least at this point Navigator doesn't have enough APIs and really couldn't compete with the Windows operating system? Why isn't it enough that the intent was there?
MR. UROWSKY: I think it is enough that if the -- if Navigator was perceived as a potentially strong competitor against the Windows operating system, that Windows .. that Microsoft was entitled to take competitive steps to defeat that competitor in the marketplace. If I may, Your Honor ..
THE COURT: Excuse me. Another point. I thought you said in this regard that intent is not relevant.
MR. UROWSKY: I'm sorry?
THE COURT: In your brief I thought you took the position that intent is not relevant.
THE COURT: That's what I thought.
MR. UROWSKY: That is correct.
THE COURT: That's only relevant if it helps you, right?
MR. UROWSKY: No, Your Honor.
THE COURT: I thought you were quite clear in your brief in saying that intent -- that whatever the government can prove out of your documents about an intent to cut Navigator off at the knees is irrelevant because it's only objective facts that count here.
MR. UROWSKY: That's correct.
THE COURT: You just told Judge Randolph the opposite. You told him I believe that if your intent is exculpatory, then it's relevant. If your intent shows that you genuinely perceive Netscape as an actual and imminent threat to the OS, then you are entitled to take measures that you wouldn't otherwise be entitled to take.
MR. UROWSKY: I think what I was .. I'm sorry if that's ..
THE COURT: Perhaps I'm the only one.
MR. UROWSKY: .. if that's the way the answer came out. I think what I was trying to point out is that because of the nature of this business, even what proved in the end to be very nascent forms of competition can be perceived as highly dangerous and act as strong constraints on the behavior of market participants, and that therefore, that is relevant to ..
THE COURT: The government agrees with the beginning of your statement except how it says it might act in this case not as a warrant for strong measures but simply as the warrant for a course of conduct that they describe as exclusionary. They seem to agree that you perceive this as a major threat early on. Indeed, as I read the record, before Netscape perhaps realized the potential that it had. Is that a fair characterization of your client's insight?
MR. UROWSKY: I think I agree with the early on point.
THE COURT: Yes, early on. And I think before Netscape realized it. And they started according to the government, therefore saturation binding Netscape in a way that Netscape couldn't even understand your motive for since they didn't see themselves as an OS competitor, unlike, say, Java -- the Java effort.
MR. UROWSKY: Well, I think they saw themselves as a competitor. They didn't see themselves as an OS competitor.
THE COURT: Right. They thought they were in the browser market.
MR. UROWSKY: They thought they were a platform competitor. And that part has proved true.
THE COURT: Isn't there .. before you sit down, isn't there a great deal of tension between your argument regarding the definition of the relevant market and your argument regarding lack of causation? Now you find it ironic, given the position the government takes. But isn't your position contradictory?
Let me just explain. You say that Navigator should have been included in the relevant market. Why? Because it's a potential competitor. Then later you say there was no causation between our actions toward Navigator and the monopoly maintenance. Why? Because Navigator was not a potential competitor. How can those two statements stand?
MR. UROWSKY: Because of the causation argument is addressed to the District Court's determination which defines the markets as it does, and therefore, identifies as the relevant form of injury the failure for there to have been new entry in to the OS segment.
Now, if you change the theory of the case, the causation issue is going to change accordingly.
If I may, Your Honors, I'd like to reserve.
THE COURT: You're not close yet. How much time did you want to reserve? How much did you reserve?
MR. UROWSKY: Twenty minutes, and I now have 4 minutes and 23 seconds.
THE COURT: You've only been talking for 45 at most. I think the courtroom set the clock incorrectly.
MR. UROWSKY: I'm sorry, Your Honor. Sometimes it's hard to keep track of time.
THE COURT: Well, we tried to make it easier for you, and I think we made it more difficult. THE COURT: No, he's got another 15. Don't go anywhere yet, Mr. Urowsky.
THE COURT: Could you pass the issue of explicit restrictions in contracts as a restriction on the distribution on competing browsers?
MR. UROWSKY: Well ..
THE COURT: Where was it, can you explain how that has either pro competitive effects or given the position of Microsoft can be seen as having legitimate business purpose?
MR. UROWSKY: Sure, Your Honor. I assume you are referring, at least in the initial ..
THE COURT: The most obvious case is the one with AOL. The 85 percent rule.
MR. UROWSKY: Yes. Well, I think that it is true .. you need to go back and look at what the competitive situation was when that contract was negotiated in 1996. At that time Netscape enjoyed a user share of something like 80 plus percent, by their reckoning. Microsoft had been in the business for about a year and had managed to achieve approximately 5 percent market penetration, notwithstanding the fact that its technology was part of every copy of Windows 95 installed on a machine.
In those circumstances, the courts have recognized that exclusive distribution contracts can be distinctly pro competitive because they propel a competitive product into the marketplace and serve to deconcentrate the market, which is precisely what happened here. With prices falling to zero ..
THE COURT: Doesn't it turn in part on what purpose Microsoft has in increasing the use of IE? If its goal in increasing the use of IE is primarily to deflate the middleware prospects of Navigator and Java, which for a substantial period was carried out with it, doesn't that begin to look like monopoly maintenance.
MR. UROWSKY: I think the issue is whether Java and Navigator were perceived as being direct platform competitors against Windows. If that is correct, then Microsoft was entitled to adapt the Windows platform and seek to secure as widespread distribution of technologies that were part of the Windows platform in order to compete so long as ..
THE COURT: It might be entitled to pursue widespread distribution without using every possible means to secure that distribution.
MR. UROWSKY: So long as Netscape had complete access to the marketplace.
THE COURT: Well, you say complete. Then you speak many times of the 160 million copies. But can't we draw a distinction between better and worse access?
MR. UROWSKY: The District Court found that Netscape had access literally to, quote, every PC user world.wide to offer Navigator to them.
THE COURT: That's just because you could download it?
MR. UROWSKY: Because you can download it, because you can distribute the retail channel.
THE COURT: The District Court was wrong in considering any transaction costs involved.
THE COURT: Clearly erroneous.
MR. UROWSKY: I think the answer to that is yes, but there is no showing in this record that if there were any increases in distribution costs, that they were significant. May I ..
THE COURT: What about the bottom line statistic and who has what share of the market?
MR. UROWSKY: Your Honor, it is undisputed in this record that Netscape's entire marketing budget for 1998 was under $10 million for marketing Navigator, NetCenter, and everything else. Defendant's Exhibit 2440 ..
THE COURT: Do we worry about the convenience for the consumer, forgetting Netscape's budgeting?
MR. UROWSKY: There is no evidence that .. there is no evidence ..
THE COURT: It's not easier for me to have Netscape on the screen when I boot up the second time and choose between IE and Netscape than to have to go onto the Internet and download?
MR. UROWSKY: And that was perfectly possible. Netscape could have gone to the OEMs the way AOL did and secured complete or virtually complete presence on the Windows desktop the first time Your Honor booted up.
THE COURT: I thought there was testimony that indicated that the OEMs wouldn't want that because they if they put two browsers on the .. on their original equipment, they'll get more service calls. And if they get more service calls, they get more than three service calls, their profit margin is such that they would only break even or lose. Wasn't there evidence of that?
MR. UROWSKY: There is a scrap of evidence in the record on that.
THE COURT: There is a finding by the District Court.
MR. UROWSKY: There is also undisputed evidence in the record that Netscape was being shipped by such unknown companies as IBM, Gateway, Sony.
THE COURT: This is only four out of the six channels.
THE COURT: This is a good example. This is an excellent example of a Standard review problem. You can point to evidence that supports the District Courts, I don't mean to beat a dead horse on this, but this is an appeals court and it's a horse we need to beat.
THE COURT: It's the only kind we ever get.
THE COURT: I mean this is it. This is our standard of review. You made a very powerful argument about your view of the facts, but we are not a District Court.
THE COURT: I had the strong sense you thought we were a jury when I was reading your discussion. In fact, you'll find these in the brief in which you really if you had a discussion, a standard of review that we're all having that you lay forth what the evidence is in your view. And I don't see now when you feel there's a scrap of evidence, that scrap underlies a finding. How is that finding clearly erroneous under the standard of review we have to apply?
MR. UROWSKY: Well, there is .. I think I was trying to address Chief Judge Edwards' question about convenience. If there is a finding that it was .. that there were impediments to securing OEM distribution, I won't challenge that, but I do point out that the evidence is undisputed that OEMs, including major OEMs, were distributing Navigator on the desktop, and there is also evidence that .. evidence and a finding by the District Court that in the case that Compaq, which was not featuring Navigator until the time of trial, that the payment of a relatively paltry sum which was not even paid in cash, but through barter advertising, put Navigator on the Presario line of Compaq computers, which is one of the leading ..
THE COURT: What about the add/remove problem? What nonpredatory purpose did Microsoft have in setting up a system that would not .. and I don't want your answer to focus me on the integration of the other browser functions in the operating system. I fully understand what you did, why you did it, and it makes good sense. I'll concede that starting out, okay? That isn't my question. My question is very simple. Why take the action that you did, which was inconsistent from your original position, which would allow a consumer to invoke add/remove and disable access to Internet Explorer?
MR. UROWSKY: Well, a consumer can do that. You can just take the icon and move it to the trash receptacle on the desktop.
THE COURT: On the add/remove.
MR. UROWSKY: The add/remove is a more complicated, technically complicated.
THE COURT: Not really. No, it's not. I mean I'm not buying that one for a minute. It's not technically complicated at all.
MR. UROWSKY: Well, all right. If you go to look at OSR 2, which is the first update of the Windows operating system with IE 3 in it, IE 3 was not removable by the add/remove utility because the add/remove utility is primarily concerned with new features that are put on the operating system after it's been elevated to a new baseline which OSR 2 was.
Now, if you download an update of IE 3 onto OSR 2, you can run the add/remove utility because that's being added on to what is the new baseline. Microsoft periodically incorporates interim updates in the operating system into a new baseline version that it can describe to developers so that they know what's in the operating system and can make use of the features. That's basically the reason, apart from the technical reason that Your Honor adverted to at the outset.
THE COURT: I think one of your principal witnesses acknowledged that decision that you made, that the company made, to limit that capability to the consumer was questionable. And that's why I'm asking the question. What sense did it make? It certainly looks predatory as opposed -- I still don't understand your answer to explain why it was a good pro competitive move as opposed to a predatory move.
MR. UROWSKY: Because although ..
THE COURT: In other words, it's the simplest thing in the world. I understand what you are saying as a technical matter. But the answer is, and you should know this, and I'm sure you do, the answer is, and this is what the government is going to say, beyond what you've just said, it was the simplest thing in the world for Microsoft, especially when you are under pressure and you realize people are getting angry, including the OEMs, to leave the possibility there without regard to whether it's an upgrade or not. And the District Court it seems to me is saying over and over again it made no sense and it looks predatory. I was wondering if you had some explanation to show me how it really was competitive or pro competitive because I can't figure that one out.
MR. UROWSKY: Well, I think it's pro competitive in a couple of different ways. One, it's making the functionality available to the user. If the user doesn't want to use it, he doesn't have to use it. Second, it's elevating the baseline functionality of the operating system to a new level so that developers can rely on the essential componentry being there when they develop their applications.
THE COURT: Why not let the OEMs remove it?
MR. UROWSKY: And third, it doesn't exclude other rival suppliers.
THE COURT: Why not let the OEMs remove it?
MR. UROWSKY: Because the OEMs are not Microsoft's real customers. End users are. And they generally, like other distributors ..
THE COURT: If you don't have OEMs, you are out of business. You are not handing anything to the .. you've got to go through the OEMs. Is that a question?
MR. UROWSKY: It has been in the past, Your Honor.
THE COURT: Mr. Urowsky, if I take Explorer and throw it into the trash bin, dump it in there, just move the icon and dump it in there, have I violated your copyright?
MR. UROWSKY: No, because the end user copyright license permits that. The OEM license does not.
THE COURT: Let me ask you Judge Williams was asking you about these agreements. And the District Court .. that as to the OEM conditions, that you had offered certain pro competitive explanations, and he for one reason or another discounted them. But as to the ISV agreements, the District Court found that you put forward no pro competitive business ends whatsoever. Is that a clearly erroneous finding or is that a clear error?
MR. UROWSKY: Well, I think it's clear error. You said ISP.
THE COURT: ISV as in Victor.
MR. UROWSKY: Oh, ISV. I don't ..
THE COURT: What was your evidence of a pro competitive end?
MR. UROWSKY: An effort was made to secure .. to really to do two things: One, secure distribution of the underlying IE technology through ISV products, through developers' applications products; and two, to ensure that where those products were sold to the installed base, which may consist of users who don't have machines that had been upgraded in the operating system to the level where the application can perform properly, that the ISV distributes the components in order to ensure that the application is properly supported by the operating system.
THE COURT: Mr. Urowsky, in response to a number of specific claims by the government against various contractual relations and terms and so on, the OEM licensing, the IAP bounties, the ISV relationship you were just addressing, in each case you give us reasons that relate to the promotion of the sale and enrichment of the Windows product. What is Microsoft's interest, though, not in just the sale of units, of Windows and of IE, but in subsequent usage of IE? Why did you take steps to encourage the usage of IE to the exclusion of alternative browsers?
MR. UROWSKY: Well, I don't know what Microsoft did or even could exclude users from using alternative products that are available to them.
THE COURT: Well, you had arrangements by which IAPs and ISVs were to put IE front and center in order to encourage usage.
MR. UROWSKY: Yes.
THE COURT: Why? What was your interest in usage other than the government's dark explanation? MR. UROWSKY: Microsoft's interests in increasing usage is to make the technologies popular so that developers of applications will recognize that users know about these technologies, recognize that they're on the machines, and develop applications that exploit the technology and then sell more applications --
THE COURT: By that, you mean sell more applications that use the browser.
MR. UROWSKY: Correct.
THE COURT: But that still doesn't tell me why you want it used.
MR. UROWSKY: Because the more that end users engage and use Microsoft's technologies, the more developers are interested in exploiting those technologies in their applications.
THE COURT: And are there opportunities to exploit applications .. applications to exploit the availability of Internet Explorer that are lost if the user is on Navigator?
MR. UROWSKY: I don't know if they're lost if the user is on Navigator. But if the IE technologies are viewed as marginal and Navigator is viewed as the standard for browsing the world.wide web, then it's likely that standards will evolve in directions that would make it impossible for Microsoft to secure the dedication of developers to exploit the underlying technology.
THE COURT: Is it your view or your premise here that one or another of these browser platforms will become a standard, that there is not a stable equilibrium in which there are two or three products with significant market share?
MR. UROWSKY: No. I think it's our position now that the standards are open standards and that ..
THE COURT: Did you say now?
MR. UROWSKY: Yes.
THE COURT: What about during the time the record was compiled?
MR. UROWSKY: I think at that time those standards were open standards.
THE COURT: You described Netscape having 80 percent of the market space; right? And your attempt to dislodge it to at least that extent relegating it to 20, in which -- together with your statement about the need for a standard that encourages applications developments, suggests that there is going to be one standard or another, and the only question is which one.
MR. UROWSKY: Well, I think what ..
THE COURT: Which may put some irony into the government's position if we are going to have a monopoly either way.
THE COURT: Right.
MR. UROWSKY: Well, the danger in 1995 and early '96 was that Netscape would essentially develop proprietary standards for browsing. That danger was eliminated when it became clear that Netscape was not going to be the sole mass market purveyor of browsing technology. The standards are now open standards, and there's every likelihood they'll remain that way.
If I may, I'd like to save a few minutes for rebuttal.
THE COURT: Let me just ask you one question, which I promise has nothing to do with the standard review. It has to do with the high performance issue surrounding the high performance JVM.
MR. UROWSKY: Yes, Your Honor.
THE COURT: Your position -- Microsoft's position is that Microsoft improved the product by making it faster, right?
MR. UROWSKY: I'm sorry?
THE COURT: That you improved .. that Microsoft's changes to Java, to the JVM, made it operate faster on Windows; right?
MR. UROWSKY: That's not exactly right. Microsoft didn't change somebody else's product.
THE COURT: No, I understand that. But the modifications you made in how software writers use it, right, users made it faster? Am I wrong about that?
MR. UROWSKY: I'm not sure I know how to answer that question. Microsoft built a JVM that was by all accounts the fastest and most accurate JVM available in the market. It also .. and I think this may be what Your Honor is referring to .. developed technology called J/Direct that permitted applications writers not only to write in Java but also to call the underlying operating system. And --
THE COURT: The District Court found that reduced the portability of the system.
MR. UROWSKY: Yes. The District Court also found that it was faster and it was easier for developers to use.
THE COURT: Well, that's my question. Are we to disregard the disadvantage that the District Court found or is it your position that those -- that the lack of portability didn't occur?
MR. UROWSKY: I think our position is that so long as Microsoft was competing in ways that improved technology and gave developers greater choices, if it impeded in some respects the porting of applications from one operating system to another, that that is irrelevant. That was Sun's responsibility.
THE COURT: You don't make an argument that the development of these key words, that were Microsoft differentiated Microsoft's JVM from others, increased speed.
MR. UROWSKY: The key words were in the tools, not in the JVM. And the key words were an aid to developers who wanted to make native calls in the Windows operating system notwithstanding that they were writing in Java.
THE COURT: That's if they knew about them. That's if they knew about the difference between what Microsoft was offering and the other product.
MR. UROWSKY: That's correct. They are professional developers, and there is no evidence in the record that any professional developer was ever misled by it, and it would be a very dumb developer who would have been.
THE COURT: The question is were those modifications and tools necessary to improving .. to the improvements that the record reflects?
MR. UROWSKY: Absolutely. Absolutely, because it permitted .. you know, everybody speaks about Java as though this is the second coming of technology. If Java were such a splendid vehicle for writing cross.platform applications, there would be .. THE COURT: Does that give me the answer to this question? What you're now saying? Why was that necessary to the improvements?
MR. UROWSKY: Because there is .. you can't write full.featured .. and the District Court found this. You can't write sophisticated, full.featured applications using the range of support provided by the Java class libraries. That's why the developers are making these direct calls on the operating system. And by providing them a way to do that quickly and easily, you are letting them bring their applications to market more quickly.
THE COURT: Is there something in the record that shows that these key words made things quicker than otherwise? Because I didn't see that.
THE COURT: We'll give you a break.
THE COURT: Mr. Urowsky, before you sit down,
(Laughter.)
THE COURT: Earlier a few moments ago ..
MR. UROWSKY: I thought I was just the opening act.
THE COURT: If you do a good job, you get to play again.
(Laughter.)
THE COURT: It's pinball.
(Laughter.)
THE COURT: A few minutes ago, I want to make sure I understood your answer. I asked you about the company's interest in encouraging the usage of IE. And you said that by making it pervasive, ubiquitous, what have you, widespread, it would be an encouragement, if I understood you, to software developers to write applications that would exploit some advantages unique to IE. Is that correct?
MR. UROWSKY: That's correct.
THE COURT: How is that different than .. what are you saying different than the government is saying when it describes the same activity as your attempt to bolster the .. what it calls the applications barrier to entry?
MR. UROWSKY: Well, this is a very big question, but there is no doubt that Microsoft makes heroic efforts to encourage applications writers to write to the Windows platform and competes with other platforms in that regard in the way Your Honor adverted to and in many, many other ways that are far more significant. And this is a competitive fact of life in the platforms business. Every successful platform developer must do this. It is a form of competition.
THE COURT: The court will take a ten.minute recess.
(A short recess was taken.)
THE COURT: Good morning. You may proceed.
MR. MINEAR: Thank you, Your Honor, and may it please the Court. My name is Jeffrey Minear, and I will speak on behalf of the appellees for this portion of the argument. The United States and numerous individual states sued Microsoft because the company uses monopoly power to stifle the competitive process.
The government specifically proved that Microsoft violated Section 2 of the Sherman Act through a campaign of anticompetitive acts to protect its operating system monopoly. Microsoft took extraordinary steps and spent extraordinary revenue to prevent consumers from selecting certain innovative technologies, such as Navigator and Java, that in time could weaken the applications barriers entry that protected the operating systems monopoly.
THE COURT: How much did they spend?
MR. MINEAR: The expenditures for IE itself were on the order of a hundred million dollars a year.
THE COURT: That was for developing, though. There's nothing wrong with that, was there? You are not challenging that aspect.
MR. MINEAR: No, we are not.
THE COURT: But you said they spent extraordinary sums. Apart from that hundred million dollars, what did they spend?
MR. MINEAR: They also spent $30 million a year on average in marketing for a product that they were giving away for free, and we think that that is significant.
Now, Microsoft's own documents demonstrate that it took the steps, the anticompetitive steps that I will speak of later, to protect it Windows monopoly. The government did not dream up this theory. We found it in Microsoft's documents. And those documents laid out the business strategy for protecting the monopoly and maintaining it through anticompetitive acts.
THE COURT: Is there any case in which the relevant market is defined to exclude the substitute service that is the alleged victim of the predatory conduct? I can't find any.
MR. MINEAR: Your Honor, I think that that does not characterize correctly the government's case. The government views middleware as a threat to the operating system monopoly because it makes other operating systems a better substitute for the Windows operating system. That is the way in which the middleware would erode the applications.
THE COURT: That's not the way your brief is written. I mean I am deadly serious. I went over this over and over again. I think you are going to hear a lot of questions on the ironies in the theory, but that is not the way your brief is written.
You conclude having pointed to the predatory .. the alleged predatory conduct by saying and the destructive effects here were to the middleware market. There is never a reference to Linux, BeOs, to any of the other operating systems. There's a dramatic shift. You talk about operating systems starting off, but your premise is not that Microsoft has destroyed those possibilities, but rather that Microsoft has destroyed a nascent possibility.
MR. MINEAR: Your Honor, with respect .. I believe that our brief makes the point --the point that I just made, namely, that middleware posed a threat because if it were widely introduced and widely adopted, it could be ported to a number of operating systems.
THE COURT: Right, and eventually make the operating systems relatively insignificant.
MR. MINEAR: Yes, and make them -- actually make them better competitors.
THE COURT: No, make them relatively insignificant because the principal, the substantive work that the operating system does would be taken over by the middleware. That's your whole theory.
MR. MINEAR: Only a part ..
THE COURT: And indeed, if you were relying on Microsoft's papers, that is certainly what the Dean argues. That was the threat that Microsoft contemplated, that is, that middleware would virtually wipe out anything of great import that operating systems now offer substantively. They would be there but not nearly as important.
MR. MINEAR: Your Honor.
THE COURT: I still want to come back to my question.
MR. MINEAR: Yes, Your Honor.
THE COURT: Assume I'm right. Okay? I understand you are going to argue your case. I'd still like to know is there any case that you can point me to in which the relative market is defined to exclude the substitute service that's the alleged victim of the predatory conduct.
MR. MINEAR: Your Honor, I think that I cannot point to a particular case, but I think it certainly is reasonable to see why that could be that this situation can arise, particularly when the threat itself is quite nascent and does not yet pose a threat to .. in the relevant market to the product at issue.
Again, I'd like to emphasize, though, that our theory is different, and we believe our theory is reflected in the District Court's findings and the District Court's conclusions. I think the District Court was quite clear as to this point. The threat that Microsoft's -- that Navigator posed was to make other operating systems competitive with Windows. That would in effect, in Mr. Gate's words, commoditize the operating systems and lead to a diminution or a erosion of the applications barrier to entry that had sustained the Microsoft operating system monopoly.
THE COURT: You addressed Mr. Urowsky's really last point, which was that, yes indeed Microsoft was trying to as he says it stimulate software producers to use its platform. Now I take it that any competitor in the platform market would have to do that; right?
MR. MINEAR: Yes, Your Honor.
THE COURT: Okay. So that must be done. That is part of the competition for the platform market.
MR. MINEAR: Your Honor, our brief makes clear that we have no objection to Microsoft's broad distribution of its product, its development of IE. Those are part of the competitive process which we favored.
THE COURT: You do say that the OEMs have to have, under antitrust law, the right not to include IE, although it's unclear how much of IE they have a right not to include.
MR. MINEAR: Well, Your Honor, our view with regard to the OEMs is again as stated in the District Court's factual findings. The OEMs found that it was not profitable and contrary to consumer interest to provide -- to deny consumers a choice of browsers. Consumers wanted a choice of browsers, and they wanted to provide ..
THE COURT: I'm sorry. Why wouldn't having both browsers on the machine be a choice of browsers?
MR. MINEAR: The problem was, as the OEMs knew, this was confusing to the individual consumer. It increased their support cost. If you increase the support costs, and you could lose the profit on any given machine. And they also had ..
THE COURT: You are arguing that this was the creation of an artificial and I take it serious barrier. On that point doesn't the uncontradicted testimony that ten OEMs included both, and Mr. Barksdale's testimony that Netscape was completely interoperable with Windows, where Windows had IE, doesn't that undermine that position?
MR. MINEAR: The District Court credited the testimony of others that indicated there was consumer confusion. This came from both the OEMs themselves ..
THE COURT: Is there measurement of the scale of consumer confusion?
MR. MINEAR: No, but I believe ..
THE COURT: I mean there are an awful lot of people who have both right on their computer; right?
MR. MINEAR: Yes. But nevertheless, the OEMs, who were very close to the customers, they're the ones who received the support calls, viewed this as a real problem. They complained to Microsoft about this. And there was no good reason not to provide that ..
THE COURT: Well, in a sense you and Mr. Urowsky agree that there was a reason, namely, to stimulate software programmers to program in whichever it is, either Java or Windows.
MR. MINEAR: I'd like to pause to look at that question of motivating developers to provide applications. Those developers would be providing those applications whether Navigator was on the system or whether IE is on the system. And instead, in our view, there ought to be competition on the merits between those two browsers. And that is what Microsoft's actions were foreclosing.
THE COURT: To have a cross.platform middleware, you envisioned having a competitive situation?
MR. MINEAR: No.
THE COURT: Of course not. We are going to replace one monopoly with another if you're right; right? That's what Judge Ginsburg was suggesting.
MR. MINEAR: Your Honor, the question is we don't know if this is a win or ..
THE COURT: Take your theory all the way through. That's what this case ultimately is about is whether or not the Microsoft -- the alleged Microsoft monopoly should be replaced by what you say over and over in your brief should be the Netscape.Sun combination together middleware monopoly. It would have to be a monopoly because you can't compete to offer that which you envision them offering; right?
MR. MINEAR: Judge Edwards, I disagree with your characterization of what this case is all about. It's all about allowing the competitive process to determine who will be the winner in the market.
THE COURT: But the winner -- we are not disagreeing so far. The winner will be a monopoly; right?
MR. MINEAR: We do not know that. I think we have would have to allow the market to determine that.
THE COURT: You don't seriously assume that you have a competing middleware operation, do you?
MR. MINEAR: I can't say that it's inconceivable that a situation could arise where there would be ..
THE COURT: You haven't argued that. Let's put it that way. You haven't argued that. The end result is not going to be a competing .. a number of folks will say here we are, consumers. We are all competing as the middleware operation. Choose one.
MR. MINEAR: We haven't argued an end result one way or the other.
THE COURT: When you prepare a case like this, believe me, you think about every piece including the end result. There is some irony. Maybe it's not irony. Maybe in this business because of its dynamic nature, what we are going to see from here on in is competition, who is going to be the next monopoly and what the form will be. Maybe that's what we are doing.
Let me ask you about some questions in causation, if I will, because that's what's really bothering me --
MR. MINEAR: Yes, sir.
THE COURT: -- about your theory. Professor Areeda and a number of others say that impermissible, exclusionary behavior is conduct other than competition on the merits that reasonably appears capable of making a significant contribution to maintaining the monopoly; right?
MR. MINEAR: That's correct.
THE COURT: So there's got to be a causal connection between the conduct and the maintenance of the monopoly; right?
MR. MINEAR: Yes.
THE COURT: So a monopolist cannot be seen to advance monopoly power by destroying something that doesn't reasonably threaten the monopoly; right?
MR. MINEAR: I disagree there. The monopolist can in fact be seen as destroying competition if he correctly perceives that this is a threat.
THE COURT: I said doesn't it reasonably threaten the monopoly.
MR. MINEAR: But if it will.
THE COURT: Doesn't it reasonably. It's not reasonable for anyone to assume that this threatens the monopoly. That's all I'm asking. No trick yet.
(Laughter.)
MR. MINEAR: All right.
THE COURT: Is that an objective test that Judge Edwards just stated? It's an objective test, isn't it?
MR. MINEAR: Yes, based on -- it's a reasonable threat, yes.
THE COURT: Now, if an institution is not a threat because it has neither the interest nor the capacity to challenge the monopoly, what do we say about that? Is that a reasonable threat?
MR. MINEAR: I'm afraid I don't understand. Can you repeat that, Your Honor?
THE COURT: Let's say, for example, Microsoft whimsically has a thing about a grocery chain. They don't like them. They have got a lot a power, a lot of friends in society, and they use their connections to destroy the advertising possibilities for this grocery chain which goes under. Okay? They use lots of things. That's not going to be a Sherman Act Section 2 problem, is it?
MR. MINEAR: No, it isn't because they do not have monopoly power in the grocery market.
THE COURT: Exactly. Okay, so if we are looking at .. that's my point. If we are looking at an institution that is not reasonably going to compete with Microsoft in this middleware area, we won't worry about it; right? For example, the grocery store.
MR. MINEAR: The grocery store, yes.
THE COURT: Now, here is some of what's in the record that's worrying me with those concessions in mind. Mr. Barksdale says .. he was unequivocal in saying that Netscape never maintained in any serious way that Navigator was a substitute even for the platform characteristics of Windows.
Let me just give you my scenario. The Dean was unequivocal in testifying that Netscape never sought to achieve middleware status to be a viable competitor to the Windows operating system. The District Court found there wasn't enough evidence to say that this could ever happen, certainly not Netscape alone, but they were focused on Netscape and Java because that's the way you're presenting the case. Netscape itself did not act to become a viable platform. For example, it never developed the componentized version of the browser. Netscape .. the testimony is clear that Netscape currently enjoys sufficient usage to share .. usage share to offer the ISV as a viable platform, and yet they haven't done it.
And there are problems in the connection between Netscape and Sun. They have not put all of what Sun needs in order to be able to distribute that which Sun would need to be a viable platform. Now, your whole theory of the case is not that Netscape alone is going to be the middleware platform, but that Netscape and Sun together.
There is no doubt in my mind that Sun has the capacity, based on everything I see, to be in the middleware business. But you argue the case very clearly that it must be Netscape, the carrier, and Sun together. And I went back and checked it again.
Now, if I am right in looking at this record, that Netscape neither has the interest nor has done anything to facilitate the possibility, what's different from Netscape and the grocery store?
MR. MINEAR: Your Honor, I think that the facts that you've chosen from the record, or the evidence you've chosen from the record, don't correctly capture the factual findings of the District Court or the government's theory of the case.
THE COURT: Well, the District Court on the possibility was clear. The District Court said he couldn't make any findings. The District Court said he could not conclude that Netscape and Sun together would achieve the status that you are envisioning.
MR. MINEAR: It said that it could not ultimately achieve that status, but I think the District Court was also quite clear that Microsoft's steps prevented competition in the market that could have led to that ..
THE COURT: But if it's a grocery store, what difference does it make? If we have a paranoid monopolist who shoots at anything, whether it's viable or not.
MR. MINEAR: The crucial difference, Your Honor, is that the grocery store threat poses no threat to Microsoft's monopoly.
THE COURT: What I'm suggesting to you, and you have to tell me where the record is different, because I've looked at this over and over and over again. Your argument is you must have Netscape and Sun together. I can't find anything of import in the record to suggest that Netscape has an interest in or capacity to serve in the middleware platform market.
MR. MINEAR: Your Honor, I think that the evidence .. I cannot cite you the particular evidence except to say that I believe there is a mixture of evidence with regard to Netscape's plans and expectations and certainly Microsoft ..
THE COURT: You've got to do better than that. I mean we've heard a lot up to now about the facts and findings and how we are supposed to defer to them. I'm speaking very directly now. I'm telling you I can't find any, that I've pored through the record. I've found one statement early on where someone at Netscape said you know we are going to take over the world. But then Barksdale was very clear in his testimony that Netscape was not intending to, not designed to enter this middleware market. That's not what it was about.
Now, where is the counter.evidence? Where are the findings that you can rest on to show me we have something other than a grocery store?
MR. MINEAR: Your Honor, I have to disagree with your characterization of Mr. Barksdale's testimony.
THE COURT: I read it. I just read his words.
MR. MINEAR: Yes, but I believe his words indicate that they were not going to compete with Windows as an operating system.
THE COURT: No, I read the words. Platform. He didn't say operating system.
MR. MINEAR: Your Honor, I think that his content, his discussion in context together with Microsoft's perceptions of what were going to be done and the discussions that came out of the June 21st ..
THE COURT: Perceptions can't carry me anywhere on causation, because all that causes me to imagine is the paranoid monopolist. That's someone who gets up, who has ideas way ahead of the rest of the world, and gets up in the middle of the night and shoots at any movement. All right, fine. That doesn't tell me anything that Microsoft saw Netscape as a real threat.
What I'm trying to figure out is did Netscape perceive the possibility, have the capacity to perform, and then do what it could and should have done? And some of these things are fairly easy, like the componentized version of the browser, which they didn't do.
MR. MINEAR: They were working on that, however. The record indicates that they were planning to develop such a componentized version for some of the software developers who wanted it. But going --
THE COURT: Nothing that -- First of all, when you talk about perceptions, you agree with me that the Areeda test, which you are adopting, is an objective test, so it's not going to turn on what Microsoft's perceptions were.
And second of all, isn't this, I asked the same question of Mr. Urowsky. Isn't this a question not of economics or not of market penetration or any of that, but a question of technological development? And Judge Edwards is asking you, as I understand it, where is the evidence that Netscape either had the potential or was on the road to technological development to set up or expose API sufficient to have applications written so that it would become a platform in competition with Microsoft? And if you don't have that evidence, then how can you possibly say that there's causation here?
MR. MINEAR: Your Honor, I point to two pieces of evidence that I think are important. First of all is the combination of Navigator with Java. And second is the fact that when Microsoft approached Netscape to cede the market, what they were seeking was a cession of platform capabilities. And Netscape refused to go along with that.
THE COURT: That doesn't mean that Netscape either had the capacity or interest to do it. I won't give my own take on what I saw in the record. But yes, there's no doubt that Microsoft had a large vision at that point. But there's nothing to indicate that Netscape had the same vision or if they did, that they intended to act on it. And so that they concluded that meeting by saying, go away. Microsoft didn't tell me anything.
MR. MINEAR: Your Honor, I think we disagree on this point. And I think we do agree, though, however, that Netscape and Java together did pose a threat.
THE COURT: If Netscape has the capacity and interest to do what it takes to enter the middleware platform area. Now, if Barksdale says no, that's not what we are going to do, the Microsoft testimony through the Dean says they're not doing anything to ready themselves for the platform, and the evidence shows that there are serious technical problems in the connection between Netscape and Java, the combination that you are relying on, I don't know what that shows us on causation.
MR. MINEAR: Your Honor, that connection they're talking about between Navigator and Java, the problems there, I think there is testimony in the record from Dr. Gosling that Navigator and Java were working together to try and develop cross.platform capabilities. Now, Netscape fell behind in certain respects, but that was primarily because it had its air supply cut off, to use the terms that were used .. THE COURT: Where is the record evidence on that? Where are the facts? Where are the facts on that they could not, for example, componentize? They could not write the right script for Java because of things that Netscape -- that Microsoft were doing? Where are the findings?
MR. MINEAR: A specific example of that is the finding of the District Court that Netscape had discontinued the development of a JNI even though it was useful for the job implementation.
THE COURT: That was another point I was going to raise with you. Go ahead.
MR. MINEAR: Because they did not have the funding that was necessary to continue the work because of the competitive pressure that they were under. Remember, the Netscape business model was originally to sell their browser, and they had to change their model when Microsoft offered its browser for free. And that cut back on the revenues that they had for certain types of development.
THE COURT: What is Sun's model? Because Java is always depicted as this cross.platform technology which will commoditize the operating system. How is Sun going to make money if they put it out there for free? Then obviously, we are in a wonderful world where this we'll call it generally the platform monopoly is disposed of. But if it's going to simply be the successor of Microsoft, I'm not sure what exactly the function of the suit is.
MR. MINEAR: I believe that Java licenses its Java programming language and its JVM so it does receive revenues from that. Developers are free to use it.
THE COURT: And the more developers use it, the more money it makes; right?
MR. MINEAR: Yes. The more developers that use it, the more widely it's distributed, the more money that Java makes.
THE COURT: So it does become the new monster; right?
MR. MINEAR: It could potentially. All of these were potential threats.
THE COURT: Why not? I mean isn't that really the government's theory .. I mean the government persuaded the District Court to make this finding of fact that essentially Netscape needed to become the standard. That's because it needed universality. It needed not to have competition, in effect.
MR. MINEAR: Your Honor, I think that what we indicated at trial, that by becoming the standard did not mean that it had to become a monopolist. It simply had to have sufficiently widespread use that applications writers would view it as an alternative to writing ..
THE COURT: That's not what the District Court found. If you look at Finding 378, the District Court found specifically that Netscape or Navigator had become the standard. It's just exactly what Judge Williams said. How do you explain Finding 378?
MR. MINEAR: By becoming the standard, it did not need to become the only browser. Microsoft realized that simply by preventing it from having a sufficiently broad usage level, it could .. it would not attract applications development. And usage is key here. I think that's something that's important to understand in terms of the anticompetitive acts that Microsoft took to protect its monopoly. That as Microsoft itself recognized, that it's usage that determines what's important here, not merely distribution; and the fact that numerous copies of Netscape could have been distributed does not answer the question of whether there was sufficient usage that applications writers would be writing to Netscape and Java as platforms.
THE COURT: Suppose that happened, and they were writing to that platform. Doesn't it follow from your case about consumer confusion that either Netscape or IE is going to end up as the sole occupant of the desktop?
MR. MINEAR: Again, that may happen, but I don't think we can predict the market.
THE COURT: Well, tell us how you think it might not. Assuming there isn't .. we're all wondering about this curiosity in this case. It really looks like one monopoly replacing another. We all ask you the same question in different ways. We can't imagine how you are imagining otherwise. Indeed, your brief seems to accept that possibility.
Is that what we are really talking about, one monopolist replacing another? Are we fighting for monopoly --fighting for the newest, latest monopoly status?
MR. MINEAR: Your Honor, my answer again is we don't know. And I'd like to give you two responses to this.
THE COURT: You have to have a theory as to -- First, you have a theory as to Microsoft's motivation. And you have sort of implicitly a theory as to what this nascent or embryonic competition was. But unless you .. the whole fight for getting programmers to program in the language, turns, it seems to me, on the notion that you want universality. MR. MINEAR: Your Honor, our theory of the case is this: that the middleware was viewed by Microsoft as a threat. Perhaps they realized it even before Netscape did. But in any event, they realized it was a threat to their monopoly on operating systems. That operating system monopoly is protected by the applications barrier to entry. And they recognized the way middleware would threaten that monopoly is by eroding that barrier to entry, that it would become popular enough that people would write to that ..
THE COURT: Right. If you write to Java Netscape, your Java Netscape, there would be an applications barrier in the new middleware market. There would have to be. You can't compete reasonably if you want a cross.platform uniformity. That's what we are asking. You can't keep avoiding the question. If that's the answer, say yes. If you are hopelessly confused about it, say that too. But I mean, this really leaps out, Counsel.
Are we talking about monopoly to monopoly? Because you surely don't mean to envision Microsoft competing fairly with Netscape Java and having competing middleware applications that consumers are going to try and sort out.
MR. MINEAR: Well, Your Honor, if we assume that this is competition for monopoly, the fact still remains that that's a form of competition that is subject to Section 2.
THE COURT: I didn't say it was a bad thing, but you seem to be running from it as if it is. It's curious because we don't normally see it. And it may be the nature of this kind of a market, but it seems to be that that's what you're talking about.
MR. MINEAR: I apologize, Your Honor. I was simply trying to clarify that I simply can't predict what the market will look like. I think we have to leave that to the market ..
THE COURT: There was a time, I suppose, when before, when Java first arrived as a concept, in which it was tenable to hope that Java would be able to run on any underlying platform. Is that correct? Underlying OS, pardon me. Right?
MR. MINEAR: Yes.
THE COURT: So that you could have coexistent, stable equilibrium with Java and Windows coexisting.
MR. MINEAR: Yes, and I think ..
THE COURT: But the events seem to have overshadowed that. Java hasn't realized the potential that was initially perceived, and it starts to look more like a potential alternative to Windows rather than a co.occupant of the desktop.
MR. MINEAR: And the reason why that potential hasn't been recognized ..
THE COURT: I understand part of your theory is that Microsoft assured that it wouldn't come to fruition.
MR. MINEAR: Yes.
THE COURT: Now, but, if -- let's go back to the Edenic days in which people thought these two might coexist in the sense that applications would run on either one. What about your theory of consumer confusion on the desktop? Wouldn't there still be only one on any given desktop?
MR. MINEAR: Would there be confusion if Java was running on all desktops together with ..
THE COURT: No, no. Well, maybe that's where you are going. I'm sorry. If Java and Windows were installed on the same PC desktop, according to the record we have here, one would expect consumer confusion, calls to the OEMs, no profit in it for the OEMs to carry both of them, and only one would ultimately be installed.
MR. MINEAR: No, I don't think that's the case again, Your Honor, because Java .. we have to remember the role that the browsers played in invoking Java, that the browsers would be installed on the operating system. And the browser would most likely go to a web.based application. It would find a Java applet there most likely, the full.fledged Java application ..
THE COURT: But take Judge Ginsburg's question.
MR. MINEAR: Yes.
THE COURT: It's the same question. You wouldn't use IE and Netscape Java. You'd have to pick one or the other.
MR. MINEAR: Yes, I think that's probably true.
THE COURT: And so would an OEM.
MR. MINEAR: An OEM would as well.
THE COURT: So if that's probably true, then your answer to your own prior question which you didn't want to answer, but you said now .. I think the implication of what you just said now is there would probably emerge a single, ubiquitous winner in this competition.
MR. MINEAR: I would by no means wish to exclude that possibility.
THE COURT: That's a possibility, but it's not fatal to your argument by any means, right.
MR. MINEAR: Yes.
THE COURT: There needs to be what Sedgwick calls competition for the field as opposed to competition within the field.
THE COURT: This whole argument, though, does it only deal with OEMs because you still have the IAP market out there?
MR. MINEAR: Yes, that's correct.
THE COURT: This argument only deals with OEMs; right?
MR. MINEAR: Yes, in a sense, although the IAPs also are forced to select a primary browser of one kind or another. And so I suppose you could say that that could arise. Now, the IAPs, I suppose do have the possibility and actually the preference to offer their users alternative browsers.
THE COURT: Right.
MR. MINEAR: And so you do have .. you can have the situation where in fact the consumers are evenly divided between IE and Netscape, and applications writers would act in response to what happens. But what's important is how we get there.
THE COURT: That is exactly the question. What methods of competition are permissible? It appears to be the government's position that the mere inclusion by Microsoft with its operating system of its browser is ipso facto exclusionary. It is a forbidden form of competition.
Now, Mr. Urowsky said .. gave an answer as to why it was doing all this, and his answer covered the other methods of seeking distribution which are quite different from Dean Schmalensee. He said it was in order to encourage applications writers to write to Microsoft, to Windows. I take it the new competitive --the new potential monopolist is also entitled to do things in order to encourage applications writers to write to it.
MR. MINEAR: Yes.
THE COURT: Which of -- how do we draw the line between the permissible and the impermissible?
MR. MINEAR: Well, first of all, Section 2 applies to the monopolist and the actions the monopolist might be taking. So we have to be clear on that.
THE COURT: We still have to have a line.
MR. MINEAR: Yes. But with regard to what Microsoft was doing with respect to Windows, we have no objection to Microsoft offering IE as part of the Windows package. Where Microsoft crossed the line ..
THE COURT: Well, but if one can compete for applications writers, why isn't Microsoft entitled to try to seek usage, right?
MR. MINEAR: Yes. The problem here is the way in which they tried to obtain the usage.
THE COURT: And what exactly is it that makes it impermissible?
MR. MINEAR: Okay. In the OEM channel, fist of all ..
THE COURT: Put aside explicit exclusion.
MR. MINEAR: Yes. Your Honor, first of all, in the OEM channel .. I won't dwell on tying since that will be the discussion of this afternoon, but that was one of the methods that they used. But even if you view Windows and IE as a single product, that still was anticompetitive for Microsoft to refuse to allow the OEM to remove IE as it easily could have been done under Windows 95.
THE COURT: If it's a legitimate business purpose to encourage software writers to write to your system, what is Microsoft supposed to do in this context?
MR. MINEAR: Microsoft is supposed to allow competition on the merits.
THE COURT: Yes.
MR. MINEAR: And that means that the OEMs and the consumers are entitled to have a choice between Navigator and IE.
THE COURT: You're much stronger position on the consumers than on the OEMs; right? The OEMs do not necessarily have the consumers and Microsoft's interests at heart, or even the pure consumers' interests at heart; right? They have their own issues.
MR. MINEAR: But the District Court I think quite properly found that they're an accurate proxy for consumers. If we look ..
THE COURT: Do they have any interest in preventing fragmentation, which consumers do have an interest in?
MR. MINEAR: No. Well, perhaps they do. They have an interest in satisfying consumers ultimately. And the most direct way ..
THE COURT: Why isn't it having consumers able to either delete or more simply ignore a browser quite sufficient?
MR. MINEAR: Well, the OEMs were responding ..
THE COURT: It -- it seems I should go back to this. If Microsoft is entitled to compete to get writers to write to its system.
MR. MINEAR: What Microsoft cannot do is foreclose a competitor from reaching the market through means that are not pro competitive.
THE COURT: That's what I'm trying to find out. It is pro competitive for Sun to use methods to get its technology out there and thereby induce applications writers to write to it. What methods are permissible for Microsoft to do the same, if any?
MR. MINEAR: Microsoft was free to offer its browser with IE and allow the OEMs to make a determination. What they were not free to do was to force the OEM and therefore the consumer to use IE.
THE COURT: I don't understand how it forces the consumer at all. As I understand it, the government's position is that the inclusion of the four libraries in OE is perfectly okay. The only thing that's fatal in terms of what Microsoft is doing is insisting that iexplorer.exe be included. What is it .. what is the pro competitive interest that makes it a matter of antitrust law for Microsoft not to be allowed to get that to a consumer, who can then totally ignore it?
MR. MINEAR: The problem is the consumer might not realize that he or she has a choice. And this will occur in a situation, as the OEMs described it, of consumer confusion. They are trying to respond to the consumer demand for Navigator, and they found in response that they were receiving that they had to load IE. If they put IE and Navigator both on the system, that the consumer would be confused, and so that led to a declining use ..
THE COURT: Is that consumer confusion quantified in any way?
MR. MINEAR: It's described. It's not quantified, but it is certainly described in the testimony.
THE COURT: Isn't there -- I mean if you are imposing on one firm a set of competitive restrictions that you aren't imposing on other firms .. let us say you acknowledge the legitimacy of a particular form of competition in general. Haven't you got to have a pretty good method for weighing at what point it becomes impermissible?
MR. MINEAR: Yes, Your Honor. But I think that the case law and common sense and the facts of this case provide direction on these matters.
THE COURT: Do you have any case that says that a manufacturer cannot define his product and let it get through to the consumers? I'm putting aside tying cases. Which we will come that this afternoon.
MR. MINEAR: I will point out the tying cases. But here let's look to the individual facts. And why is it that the OEM could not invoke the add/remove function that was available to the consumer in order to provide the consumer ..
THE COURT: You and Mr. Urowsky are on the same page on that; right? To get -- to have it out there, to have it used to encourage applications writers. You are on the same page, but all you disagree is as to what's permissible for whom, which is all that's at stake here.
MR. MINEAR: But the difference in our view is that we view Microsoft as a monopolist and it's protecting its operating system monopoly as well. THE COURT: But is it your position with respect to anything that has to do with encouraging applications writers to write to its system, it is -- it can do nothing. Let's say it can incur no cost which is explicitly aimed at that goal, exclusively at that goal.
MR. MINEAR: With all respect, Your Honor, we have to look at why are they incurring these costs, that IE generated no revenue. And according to IE --
THE COURT: Yes, but I mean we are round and round.
THE COURT: That's why they're emphasizing the applications. The encouragement to write applications.
MR. MINEAR: But the applications, if Navigator were on Windows rather than IE, those applications would be written to Navigator, and it also would encourage sales of Windows ultimately. So whether you have IE or Navigator makes no effect -- has no effect on the revenue.generating product here.
THE COURT: Yes, but it does in the long run because it has to do with what applications writers write to; right? That's the theory of your case.
MR. MINEAR: And the theory of our case is that Microsoft was concerned that if they wrote to Navigator, that would erode the applications barrier to entry and reduce monopoly power.
THE COURT: And by the same token, Sun was concerned that unless everybody was writing to Java, it would not be established as a cross.platform technology; right?
MR. MINEAR: I don't think .. well, first of all, Java I don't think had any monopoly power in these situations.
THE COURT: No, not at the time of trial or now.
MR. MINEAR: Yes. And so I think we do have to distinguish the Java situation and the motivations for those that are competing ..
THE COURT: I understand there is a difference between a monopolist preserving his turf and the challenger trying to get its turf. You still are very vague on what methods of competition are permissible.
MR. MINEAR: Well, why don't we move on to some of the other methods so that ..
THE COURT: Well I don't want to move on because I want to ask you a different .. I have a concern about just this issue, what is slightly different from Judge Williams, which is that as I read the District Court findings and conclusions, I didn't see the District Judge wrestling with this issue. The District Judge's findings all seem to focus just on the anticompetitive effects of including IE in Windows. There was no sort of counterbalance, no consideration .. at least I couldn't find it .. by the District Court of the business justifications for doing it and weighing the two against each other.
MR. MINEAR: The reason, Your Honor, is because the court had great difficulty in finding the business justifications when IE was not a revenue generating product. And ..
THE COURT: Well, was this argument that we've heard today not made before the District Court? That is, that what Microsoft was doing was trying to encourage software writers to write for it and that's why it was included in the browser? The argument was made in the District Court. There is a lot of evidence on this.
MR. MINEAR: Yes, but I think the response that was made to that was that is not going to increase the sale of Windows.
THE COURT: Why is that defined as the sole, legitimate function of Microsoft?
THE COURT: The District Court didn't say that anyway, did it? That's you today.
MR. MINEAR: I think the District Court did make the point that these .. that Microsoft's actions in promoting IE did not generate revenue because IE was not revenue generating. And it also did not encourage the sale of Windows because either IE or Navigator running on Windows would encourage the sale of Windows.
THE COURT: How about encouraging the survival or protecting the survival of Windows? Is that not legitimate?
MR. MINEAR: I don't think there's ever been any question about Windows surviving.
THE COURT: I'm deadly serious. If you are right about the expectations of this .. if the middleware notion is a viable notion .. and Windows -- I mean Microsoft has been totally out front. I mean that's so funny reading this initially. It depends on how you are looking at this, what you think. Microsoft is totally out front in saying oh, yeah, we perceive that concern. If that thing develops, if that seed is allowed to grow, we are in trouble. Now, our market share as Windows may stay as is until then suddenly we drop dead when Sun becomes the new monopoly, but we are not going to let that happen. That's what Judge Williams is asking. What are they supposed to do?
You said it might be monopoly to monopoly is what we are looking at in these dynamic markets. Well, Windows and Microsoft are allowed to compete for the next stage; right?
MR. MINEAR: Yes, they are.
THE COURT: Okay, what Judge Williams keeps asking you is what are they allowed to do. If the next stage is a monopoly, not just let's bring everybody in and all compete fairly. It's a monopoly. MR. MINEAR: They're allowed to compete on the merits of their product, and that is key, that the Sherman Act does not simply turn a blind eye to markets that are destined to become monopolies.
THE COURT: Is it your position .. you have mentioned a number of times that this was not a revenue.generating product for Microsoft. Is it your position that Microsoft created a barrier to entry in the browser market? The barrier being pretty insurmountable. That is, you can't earn a dime if you develop a browser.
MR. MINEAR: Well, we haven't made that argument. I mean certainly seems that there's some force to what you're suggesting, Your Honor.
THE COURT: That would keep all potential browser manufacturers out indefinitely, wouldn't it? I mean you would have to be a fool to get into that market.
MR. MINEAR: Well, yes. In fact, an argument can be made that offering the browser for free was a form of predatory pricing. Now, we are not arguing that here.
THE COURT: For good reason.
MR. MINEAR: We are going so far as to say that is permissible. What we are concerned about are very specific anticompetitive acts that were detailed by the District Court.
THE COURT: But will you articulate for me the line between the permissible and the impermissible? And you might do this in relation to the Lorraine Journal case, which is cited in neither the government nor Microsoft's brief. But that is a case of leveraging monopoly in one market into another or at any rate nipping competition in the bud, but there you had a clearly exclusive dealing requirement. And here you have a few into periphery. But no one is really exercised about them.
MR. MINEAR: Yes, Your Honor. I think Lorraine Journal is highly pertinent. We haven't relied on it --
THE COURT: But you don't have conduct like that.
MR. MINEAR: I think that we do. I think that we do. What we had in Lorraine Journal was really a reverse tie, that advertisers who wanted to advertise with the newspaper could not advertise on the radio.
THE COURT: Right. Right.
MR. MINEAR: We are seeing conduct of that same sort.
THE COURT: You have a tiny bit that parallels that. You have the 85 percent rule with AOL and so forth. For the most part, you have vigorous promotion of IE.
MR. MINEAR: Vigorous promotion of a product again that is given away for free, which should give the court some concern about the pro competitive nature of what's going on.
THE COURT: But remember, you are accepting the proposition that a firm seeking to establish its position in cross.platform technology has an imperative interest in getting applications writers to write to it. The question is how are they to do that.
MR. MINEAR: Yes whether they're on top or on the bottom? That in the case --
MR. MINEAR: We think the District Court drew the correct line.
THE COURT: Where would you say that line is? Because it clearly goes beyond explicit exclusion, the Lorraine Journal model.
MR. MINEAR: Yes. And I would say this, that the line with regard to the OEMs was the failure to allow Navigator to have any prospect for usage, for distribution that would lead to usage. It was an exclusion from distribution. And this is where we disagree with Microsoft.
THE COURT: But your exclusion from distribution is the inference from the insistence on distribution. Right? That is the actual act that Microsoft did, insist on distribution of IE. And you said that that inherently excludes. There are not withstanding ten OEMs that include both.
MR. MINEAR: Your Honor with regard to ..
THE COURT: It's just the inclusion of one excludes the other. That's your proposition.
MR. MINEAR: That's right. That's what the District Court found in these circumstances that the inclusion of one ..
THE COURT: With ten including both? Is that perhaps clearly erroneous?
MR. MINEAR: The fact is that the District Court found as a result of this campaign, Navigator was ..
THE COURT: Let's just go back on Finding 159. Is it clearly erroneous to say that the inclusion of IE necessitates the exclusion of Netscape when there are ten OEMs that do it?
MR. MINEAR: We don't know the level ..
THE COURT: Maybe it's something peculiar about the firms that complained.
MR. MINEAR: Your Honor, it depends where Netscape is being contained on those OEMs. For instance, as the court .. the court found that Navigator only was on a tiny fraction of the desktops of these OEM machines. Sure, Navigator might be there somewhere, but it would be in a place that would not ..
THE COURT: Well, the due diligence documents suggests it's not all that tiny. What is it, 22 percent? I know if you have questioned the authenticity and so forth.
MR. MINEAR: More than that, Your Honor, I would like to direct you specifically to GX 2116 which I think sheds light. This is a sealed document. So I am not at great liberty to speak to its contents. THE COURT: Is it a chart?
MR. MINEAR: No, it's not a chart, but that sheds light on the 22 percent figure. And I believe you'll find it will indicate that Navigator was not on the desktop to a large extent.
THE COURT: Can I just follow.up. There is a chart, though, and I don't think it's under seal, that shows that out of the 60 PCs that are manufactured by the various companies, that Navigator is on four. I think that's right.
MR. MINEAR: Yes, four subchannels of the 60 channels.
THE COURT: What percentage do those four represent?
MR. MINEAR: I'm not sure if we have a specific percentage, but it is low.
THE COURT: The closest that you have is the 22 percent figure in the AOL document.
MR. MINEAR: That is ..
THE COURT: Could those four represent 22 percent.
MR. MINEAR: We believe 22 percent is what it represents. I think that Dr. Fisher testified to this and offered some clarity on these matters. The 22 percent is best understood as representing the 22 percent of the OEMs that sell PCs have Navigator on some portion of one of their lines. So it means the actual amount of coverage is far less than 22 percent. It's not on 22 percent of the machines. Normally there are 22 percent of the OEMs.
THE COURT: If these OEMs include Navigator on some of the units they ship or some lines, the 22 percent simply represents the degree to which consumers want it; right?
MR. MINEAR: No. I think all it represents ..
THE COURT: It's out there for them to choose. They can choose that line.
MR. MINEAR: All it means is of the OEMs that are out there in the market, only 22 percent of them are carrying Navigator and then to what level and only on some lines.
THE COURT: The 22 percent figure, I'm quite sure, appears as a percentage of shipments.
MR. MINEAR: I think it's more ambiguous than that. I refer you to our brief. We do discuss this, and again to the sealed exhibit I spoke to before.
THE COURT: Can I just ask you, is all of the evidence regarding how users, end users react, relevant to the line drawn that Judge Williams is asking you about? In other words, given the nature of the market that the monopolist is facing, are its actions constrained by the nature of the end users' conduct or is that irrelevant?
MR. MINEAR: Are you talking about Microsoft's actions constrained by end users' conduct? THE COURT: Yes. I mean there is all the information that Microsoft had that users would use what they got on the PC they bought. And they led to that view of the end users' conduct. The question is, is there anything wrong with that or does it constrain their conduct because they are a monopolist. My real question is, is the end user information irrelevant to drawing the line that Judge Williams is asking you about.
MR. MINEAR: I think it's highly relevant. Microsoft clearly understood through its own documents that the end users would use most likely the Navigator that was most prominently displayed on the computers. And so for that reason, they took the step to ensure that their icon would be present and that Navigator's would not. They went as far as ..
THE COURT: That's the critical step you make. The presence of IE is the absence of Navigator. MR. MINEAR: Yes, and the factual findings support that.
Because the time is flying by, I would like to talk about some of the other channels of distribution. One matter I'd like ..
THE COURT: Before you do that, could you address Microsoft's highperformance, JVM? Because I have the same question for you about that as you did about the inclusion of IE on Windows. As I read the District Court's finding, it found it anticompetitive because it reduced portability; right?
MR. MINEAR: Yes, Your Honor.
THE COURT: But there was no consideration that I could see in the District Court of balancing that against the improvements that Microsoft built in to it.
MR. MINEAR: Your Honor, I think the District Court noted that Microsoft was entitled to develop a high performance JVM. And that alone would not have been anticompetitive. But what Microsoft did in addition was to add developer tools that were designed in a sense to hoodwink developers, to fool them into using ..
THE COURT: Meaning what precisely?
MR. MINEAR: Meaning that these developer tools had key words and compiled directives that were specific to Microsoft implementation of Java.
THE COURT: Those key words .. your view is that those key words were not necessary for Microsoft to improve the JVM?
MR. MINEAR: Not ..
THE COURT: I thought your position was they were completely separate, that there were things I guess the pushing of J that Microsoft did, I guess the pushing of J/Direct, that sort of thing, that you conceded enhanced the speed but had some effect on essentially making pure Java less attractive, and then for the key words, you saw that as uniquely bad in the sense of having no normal business justification.
MR. MINEAR: Your Honor, with regard to the key words, the problem with that in the compiled directives is that it did not inform developers that if they use these key words and compiled directives in writing the programs, the programs would not be cross.platformed. They would only run on the Microsoft system. Dr. Gosling testified this could lead to developer confusion.
THE COURT: You don't make that argument, do you, as to J/Direct, and you don't make it generally as to the fast character of Microsoft's Windows, JVM.
MR. MINEAR: The JVM by itself, we have not pressed that issue that developing ..
THE COURT: Are you saying there was nothing anticompetitive about the high quality of Microsoft Windows JVM?
MR. MINEAR: That by itself we did not view as an anticompetitive act, simply developing a technology that works better. What is anticompetitive is then accompanying it with developer tools that are designed to fool developers in to writing only one program.
THE COURT: So it turns entirely .. the proposition turns entirely on the developer tools.
MR. MINEAR: No. There is another aspect to this too that I should mention. And that is, that Microsoft in its implementation left out a very important Java API. It's known as JNI. JNI makes it easier to port a program from one platform to another when there's a need to make native calls. And by not including the JNI when it was easy to do so, it again had the effect of reducing the cross.platform capabilities of Java.
THE COURT: Let me ask you this. I just can't remember. I am simply sitting here trying to recall. Did Microsoft say in its packet to the developers that this is perfectly consistent with Java's aim to be a cross.platform piece of software?
MR. MINEAR: I don't recall, but I believe that their J/Direct .. there was a preface at the beginning that certainly would lead a user to believe. I can't say ..
THE COURT: Because that becomes fairly important. I just don't remember. I have to go back and look at it. Because Java is clearly a programming tool that may or may not be used for cross.platform purposes; right?
MR. MINEAR: Yes.
THE COURT: And if Microsoft is competing head to head with Java in this nascent middleware market, it's not surprising that Microsoft would not write to the cross.platform piece of Java, use Java in that way, that it would write .. use Java, the powerful programming tool for its own purposes.
MR. MINEAR: Yes.
THE COURT: The deceit would only be to suggest otherwise; right?
MR. MINEAR: Well, yes, Your Honor.
THE COURT: Now, where is there something in the record that they suggested otherwise as opposed to there being some developers who didn't pay attention?
MR. MINEAR: As I said, first of all, Dr. Gosling, who was the creator of Java, indicated that the developers were confused.
THE COURT: But that may be, but were they confused because were not attentive or were they confused because Microsoft labeled something to indicate look, this is part of the whole cross.platform Java piece, and we are making an offer, and we think it's a little better than what Java is doing, but it's not inconsistent with cross.platform functionality.
MR. MINEAR: Your Honor, again, I think we would both have to go back to the preface of Java. But in addition, we have the Microsoft internal documents that indicate this was a specific goal of Microsoft.
THE COURT: I don't have any doubt they were writing. See, that's the irony in this case. That's what Judge Williams keeps asking you. They're competing. They're not hesitating. They tell you, we are competing with Java. We are competing with Netscape. We all know that. They are competing for the middleware platform. They do not want to give it away. We understand that. So it's not surprising that Microsoft would take Java and use the programming tool sans cross.platform.
MR. MINEAR: The question then becomes whether these actions of deceit are anticompetitive.
THE COURT: No, no, whether there were actions of deceit because it's not surprising that they're using the programming tool only to write to Windows.
MR. MINEAR: Well, there certainly were actions of deceit from Microsoft's perspective, from its own internal documents. They say such things as subversion is our best tool. Perhaps I can give you some of the quotes from ..
THE COURT: We are getting back to my grocery store.
THE COURT: Forgetting what the acts were that you say were the acts of deceit. Not why Microsoft can be shown to have known they were acting .. nefarious acts is it you're saying are acts of deceit?
MR. MINEAR: The acts of deceit here are the development of developer tools that were misleading from an objective perspective. And we add to that Microsoft knew that.
THE COURT: Misleading because?
MR. MINEAR: Because they did not alert developers that if they wrote using these tools, they would not be writing cross.platform applications.
THE COURT: It's inherently misleading to not tell somebody something. What do you think Microsoft affirmatively did do to mislead of deceive?
MR. MINEAR: Again, this goes back to the discussion Judge Edwards and I were having, that as I recall the actual representations in the Java developer tools, it did suggest that these were going to be cross.platform tools. But again, I would look to what Microsoft's own documents say, GX 1327, where Microsoft's John Ludwig emphasized subversion has always been our best tactic with regard to Java implementation. A later e.mail that is, GX 1332 ..
THE COURT: You see, Counsel, the problem with that is, and that's what I was trying to suggest earlier, that only is helpful if you have conduct that is reasonably confusing and it might lend some clarity. Otherwise, you just have the grocery store.
MR. MINEAR: Your Honor ..
THE COURT: I mean they can kill things. They may have other problems under other laws, but it doesn't mean that they violated Section 2 of the Sherman Act.
MR. MINEAR: Your Honor, we think the internal documents here are highly relevant because they indicate that Microsoft knew how this market worked.
THE COURT: If you can point to some specific conduct that's confusing and then the internal documents give some clarity with respect to that conduct.
MR. MINEAR: And Microsoft surely thought they were confusing enough. And I quote: We should just quietly grow JXX share and assume that people will take more advantage of our classes without ever realizing they are building Windows 32 only Java applications.
THE COURT: Does that in some meaningful way focus on the nonuse of JNI?
MR. MINEAR: That does not. This particular passage is going to the developer tools.
THE COURT: If you link up the statements of evil purpose with specific conduct?
MR. MINEAR: In the case of JNI, I think the answer there is that it was cost.free for Microsoft to include that. In fact, they were sued by Sun for failing to include it as part of their contract.
And in addition, it was not to Microsoft's benefit not to include JNI because the more programs that were written for Java overall that could run on Windows in any form would be beneficial to Windows and serve as a complement that would make Windows more attractive.
THE COURT: Mr. Minear, I need to take you back for a moment to the 22 percent issue. This is your brief. Microsoft's challenge to the District Court's finding, the finding being that Microsoft, quote, largely succeeded in exiling Navigator from the crucial OEM distribution channel, closed quote. Exile is a little less precise than a percentage figure, but that's what the District Court said.
Microsoft's challenge to the District Court finding rests on one ambiguous statement in one document coming out of the November '98 AOL Netscape acquisition. You then quote the document and say .. this portion that is unsealed. The quotation is, Estimate client, IE Navigator browser, on 22 percent of OEM shipments with minimal promotion. Not 22 percent of the OEMs were shipping some units with Navigator. 22 percent of the units shipped have Navigator. And therefore, it would seem to have been open to consumers on the merits to choose units with Navigator to the greatest extent they want it, to whatever extent they want it. It could have been 70 percent if that's what they preferred.
MR. MINEAR: Your Honor, I would point out Dr. Fisher's testimony where he discussed this at some length the ambiguity of the statement. All you have with regard to document DX 2440 is that single statement which I think is ambiguous.
THE COURT: Exile, I'll grant you is ambiguous. 22 percent seems rather precise.
MR. MINEAR: But more important than that, the 22 percent was not on the desktop. If you examined GX 2116 .. I have forgotten now whether it was GX or DX .. I think it will make that clear. Being on the desktop was of critical importance here.
The record supports for fact finding 239 on OEM foreclosure, I think is really quite compelling. I would point to Mr. Barksdale's direct testimony, paragraph 159 through 161, where he indicated that there was a decrease in the .. a dramatic increase in the availability of Netscape. He explained ..
THE COURT: The availability now. We are not talking about the degree to which it was chosen, but the degree to which it was made available.
MR. MINEAR: The degree to which it was chosen. I think it is accurate to say. The fact was it was on very few. I think his testimony, as I recall, paragraph 173, indicates that .. actually goes through user by user and indicates on how few machines it was carried and how it had minimal or little promotion. That is key here also, the fact that the exile term I think is accurate in describing what Microsoft's actions did with respect to the Netscape's Navigator's availability on the OEM channel.
Now, we haven't talked at all about the IAP channel. I'd like to talk about that briefly. But before we do, I would simply mention the screen restrictions also. And this court raised questions of copyright with regard to whether or not copyright provides an affirmative defense for the anticompetitive conduct that Microsoft engaged in.
The District Court in this case, I think there was discussion of the findings of fact the District Court made. The District Court told Microsoft in a motion for summary judgment, you have to come forward with more information. You have to show what code is actually .. you are claiming a copyright for. You have to provide a factual basis on which to make a copyright defense.
Microsoft made no effort along those lines. That's significant. That's why the District Court questioned whether a copyright issue was even in this case. And in fact, even now, Microsoft hasn't really provided a tenable copyright theory.
THE COURT: I'd like to ask you a First Amendment question. Suppose that Microsoft is able to include the code that is involved in the browser in its shipments. All right? Just have the code. And as I understand it, the government is not contesting the bulk of the code of four libraries can be included. And the stipulation of '98 accepted that certainly. Okay?
MR. MINEAR: Your Honor ..
THE COURT: But it's forced to allow OEMs to put Navigator on the desktop, right? And have it appear in the initial bootup.
MR. MINEAR: Yes.
THE COURT: Can Microsoft also require the OEMs to have on the screen a little notice saying your friendly OEM is putting up Navigator? We think IE is really great. And to get access to IE, do the following. Would that be all right?
MR. MINEAR: I think the answer is we have to focus on what we are talking about are not the copyrights themselves that are involved but rather conditions on the licensing of the copyright. And those each have to be evaluated for their ..
THE COURT: I'm just trying to figure out how far the government goes in its belief that Microsoft cannot have IE out there with Windows. And it seems to me a critical claim, that although it can have a code in Windows, it's got to allow the OEMs to suppress the availability of the browser. I'm saying is do they possibly have a right to just alert the end user that perhaps would like IE that it's tucked away there, or is that a violation of the antitrust laws?
MR. MINEAR: I wouldn't say that that is a clear violation of the antitrust laws.
THE COURT: Well, is it an obscure violation of the antitrust laws?
MR. MINEAR: It's a difficult question you are asking, and I'm not sure I can give you an answer. THE COURT: I think it has to do with the meat of the claim that inclusion of IE at all is itself a violation. But you don't push 100 percent of the way because you allow inclusion of the libraries which is the bulk of the code.
MR. MINEAR: I would point out, Your Honor, how modest some of these changes are in terms of copyright interests, for instance, the removal of the IE icon from the desktop. That is something that any user can do, and yet they prohibit the OEM from removing that icon. It's not clear that that's protected by copyright law at all. This is a matter of pushing a button and having it deleted or changing the code.
THE COURT: Are Netscape's licensed agreements with OEMs in evidence?
MR. MINEAR: I believe that some of them are. They may perhaps be sealed.
THE COURT: Do you know whether they allow .. whether Netscape allows alterations to Navigator by OEMs?
MR. MINEAR: The general practice among other OEMs with respect to other software vendors is to allow these types of changes that Microsoft objects to. So Microsoft is surely acting differently than other operating system vendors act.
THE COURT: Do you know, though, when Netscape enters into a license agreement with the OEM, for example, is part of the license agreements that are in evidence -- we can check this -- a requirement that the Navigator icon appear?
MR. MINEAR: I do not know the answer to that, Your Honor.
THE COURT: Mr. Minear, following up on some of what I hear Judge Williams asking, what is your greater concern? The inability of the OEMs and the consumers to suppress IE or the failure of Microsoft to allow Netscape to appear front and center first bootup?
MR. MINEAR: It's hard to choose between the two, but I think I would point to the latter. What we are concerned about here is the OEMs and consumers have a choice of browser, that the choice not be dictated by the aspects of the market that Microsoft understands and takes control of.
THE COURT: So it's the latter, that is, Netscape ought to appear as a possibility.
MR. MINEAR: Yes, I think that's right, yes.
THE COURT: I'm asking you which do you see as the graver concern on your part. Which is the graver concern?
MR. MINEAR: The fundamental concern that I have to emphasize again here is that there be consumer choice and competition on the merits of the two products that are being offered to consumers.
THE COURT: But if the two are mutually exclusive and OEMs are the ones who are the gatekeepers, the OEMs that choose Netscape will prevent consumers, except to the extent of course that the OEM market is itself competitive, will prevent the end users from getting access to IE.
MR. MINEAR: I think the point you made is an important one here, that the OEM market by all appearances is very competitive.
THE COURT: Then what's the worry? The people who like IE will go for the OEMs that have IE. The people who like Navigator will go for the OEMs that carry it.
MR. MINEAR: But this goes back again to the problem of the two browsers on one machine that the OEMs determined was not satisfactory. It confused consumers. It increased their costs which ultimately increased consumer costs. So the fact is that the OEMs are a good proxy for what consumers wanted, and the consumers wanted access to Navigator. All the OEMs were looking for was to have a choice, to actually have ..
THE COURT: How do we know this was a good proxy? It really doesn't follow to me. Thinking as a consumer, quite the contrary. Your preference would normally be to have both available, and you make the choice. You keep dropping back to the prior stage, which is very confusing in the argument.
MR. MINEAR: The other alternative, of course, a fine alternative is for the OEMs to be able to offer their consumers a choice by simply providing that information during the start.up.
THE COURT: Well, you know, I'm not sure what the record says about this, but again, intuitively I think consumers with a modicum of ability in this area would prefer to have both there and fool with them themselves and make their choice at that stage, not at the time of selling the equipment because the consumer doesn't know what he or she is looking at that stage. When I buy the computer, and an OEM says do you want IE or Navigator on, that question for many consumers is a question that has no import. They don't understand the difference.
MR. MINEAR: But the OEMs are in a position to do surveys to make determinations of what consumers want.
THE COURT: What would their surveys show at a point where Navigator has 80 percent of the market and IE has 5 percent? They would show that no one has ever heard of IE; right?
MR. MINEAR: That may very well be the case, but what IE has to do is compete on the merits to show that they have a better product.
THE COURT: Which you can only do by persuading OEMs to carry it and the OEMs won't carry it because of the market surveys, as you've just said. MR. MINEAR: This is the same constraint that anyone is facing in a market that is subject to network effects. The key here is that you do not employ anticompetitive tactics as a monopolist to prevent your product from reaching the end user.
I would like to speak just very briefly to the IAP channel because I do think that that's important. The contracts that were involved there, I think, are clearly exclusionary, the AOL contracts that were mentioned before.
These contracts basically had four critical features. First, they required that the AOL distribute Internet Explorer as its default browser. If that alone were all that Microsoft had bargained for, that would not cause a problem. But in addition, those contracts prohibited organizations, such as America Online, to respond to questions, to provide an alternative browser unless a subscriber specifically asked for it and in addition put a cap on the number of copies of an alternative browser that AOL could provide.
Now, there was no competitive justification for these types of caps. Again, IE is a no-revenue product, so it can't be justified on increasing revenue here. And either browser is likely to improve the attractiveness of Windows. So the revenue.generating product, Windows, was enhanced by either browser. This is the type of exclusionary conduct that has traditionally been discouraged by Section 2.
On top of that, we also have types of threats and coercion that were directed to particular OEMs.
THE COURT: Excuse me one second. With the cap on AOL, as I understand the record, the finding is that the users there are the quintessential novices; right?
MR. MINEAR: That's correct.
THE COURT: And so the cap never really was a constraint. They used whatever AOL shipped.
MR. MINEAR: That was in part because they had no way of finding out about the alternative or knowing that it was available on AOL. The ISPs, the Internet service providers, and the online service providers, both of those groups are generally agnostic with regard to the browser. They want to meet consumer demand. If the consumer wants Navigator they provide their system with Navigator. If the consumer wants IE they provide it ..
THE COURT: No, no. The evidence is the consumer doesn't have a preference, the AOL user. They don't know anything about this choice.
MR. MINEAR: I'm not sure the evidence shows that. I think consumers come in all fashions. Some are knowledgeable. Some are not. In any event, it is truly peculiar to say there is a 15 percent cap on subscribers that come from any source, not simply from a desktop promotion.
THE COURT: There's an interesting passage in Jefferson Parish which would bear more perhaps on tying but has some application here as well to the effect that .. here. Sorry. I can't find the quotation, but the passage is to the effect that any consumer who knows that there's an alternative is sophisticated enough to choose it.
MR. MINEAR: Well, I think that that's broad generalization, though, Your Honor.
THE COURT: That dealt with anesthesiologists. Here we go. The evidence indicates that some surgeons and patients preferred respondent services to those of Rhue. But there is no evidence that any patient who was sophisticated enough to know the difference between two anesthesiologists was not also able to go to a hospital that would provide him with the anesthesiologist of his choice.
Now, that's putting the burden on those who would show that the consumer is too stupid to figure this out, which is in this case the government. MR. MINEAR: But if that were the case, Your Honor, if that were the case, why would Microsoft impose these restrictions? Why would it impose the requirement that you cannot inform or tell your subscribers that to have an alternative they have to affirmatively ask? Why would it impose the condition that you cannot convert more than 15 percent?
THE COURT: They told us it was because of the same reason you gave. They wanted to encourage applications to be written for their browser.
MR. MINEAR: They wanted to discourage Navigator usage in order to maintain their monopoly. That is what the District Court found. And that is what we submit was the motivation and the purpose and the effect of those provisions.
THE COURT: Mr. Minear, we have had some confusion on the clock. You've got about four more minutes.
MR. MINEAR: Thank you, Your Honor.
I think I would just like to turn to the cumulative effects of Microsoft's actions because we've been discussing their actions seriatim, as if each one were an individual, unrelated piece.
As the District Court recognized, Microsoft's conduct was not simply a series of isolated, unrelated events, but rather a coordinated course of anticompetitive conduct, and that conduct was directed to maintaining its monopoly power.
The District Court found that Microsoft spent and forewent vast revenues on numerous fronts in a campaign to discourage Navigator's usage and thereby prevent erosion of the applications --
THE COURT: Could I ask you, is it the government's position that the same standard for exclusionary conduct applies under Section 2 as Section 1?
MR. MINEAR: No, Your Honor. In terms of if you're talking to the exclusionary conduct .. let me rephrase that. The District Court, we believe, erred in rejecting the exclusionary characteristics of the conducts under Section 1.
THE COURT: He said it was total.
MR. MINEAR: He said it required total foreclosure. We believe that was incorrect, but we did not take an appeal on that because the remedy provided the relief that we needed as to that count. But we believe that the Section 2 violation ..
THE COURT: You could have taken a conditional appeal, couldn't you?
MR. MINEAR: We could have, Your Honor, but we oftentimes do not take appeals even though issues may be incorrectly decided. That's a function of the Solicitor General.
THE COURT: So that's going to be settled if this aspect is back before the District Court. That matter would be foreclosed because you didn't appeal it.
MR. MINEAR: The exclusionary contracts will not arise again as far as their status under Section 1.
But in any event, I'd like to point out that under Section 2, those contracts did in fact have an exclusionary impact in the context of our Section 2 claims being anticompetitive.
Now, the District Court correctly found that Microsoft's actions were not competition on the merits. They were not profit-maximizing. They made no business sense except for the expectation that they would preserve Microsoft's monopoly power. Microsoft's actions were effective. Navigator's usage plummeted during this period by 30 percent and has continued to fall.
Now, the Court correctly found that Microsoft's actions had as their purpose and effect --
THE COURT: It has continued to fall?
MR. MINEAR: Up until the remedy occurred in ..
THE COURT: Are you talking as of today?
MR. MINEAR: I'd have to step outside the record to speak to that issue. And I'm happy to, if you would like.
THE COURT: It's like hiding an elephant with a handkerchief. If there's something that happened, isn't it fairly recently ..
MR. MINEAR: I want to be candid with the court. I was referring in terms of after the trial ended, the Microsoft Navigator share continued to fall, and that's reflected in Navigator Exhibit 23. I won't speak to what's happened since that time since that's outside the record. What's important is that Microsoft's actions were a deliberate attack on the competitive process. The Court correctly found that Microsoft's actions had as a purpose and effect, the preservation of Microsoft's monopoly power.
Thank you, Your Honor.
THE COURT: Thank you.
THE COURT: Mr. Urowsky, you have 15 minutes.
MR. UROWSKY: Thank you, Your Honor. Let me start about where Mr. Minear left off on the Internet access provider contracts, and that would include the AOL contract.
The District Court found that those contracts were not exclusionary and were not a violation of Section 1, and the District Court did not believe that Section 1 was violated. Only if there was a complete foreclosure from the market, the District Court understood perfectly well, because it said so in its summary judgment opinion, that there had to be substantial foreclosure; and if there was substantial foreclosure, that would give rise to a violation of Section 1.
In fact, the District Court found that Netscape was not foreclosed from offering its products literally to every PC user world.wide .. that's the phrase that is used .. indicating that the District Court understood that the market was not segmented on the demand side, and that all users could be reached.
Second, on the question of whether developers were in some sense impeded in writing applications for Navigator, I respectfully invite the Court's attention to Finding 28 entered by the District Court which is that Navigator never exposed sufficient APIs to host personal productivity applications.
Third, as to the meaning of the entry in Defendant's Exhibit 2440, which is Goldman Sachs' summaries of the due diligence performed by AOL and Goldman Sachs specifically relating to shipments in the OEM channel, I think the statement is pretty clear that what they are finding is that -- what they have found is that Navigator was present on 22 percent of shipments in that channel with little effort being made and .. little promotion effort being made. And if you look just below that entry on that page, you will see that specifically it says that Netscape was not paying anything.
THE COURT: What about just above that entry? There is something called .. it's 40 million in the mirror market? What does that mean?
MR. UROWSKY: Yes, Your Honor. There is an analysis of the distribution of the 160 million that were distributed in 1998; and the analysis, if I remember it correctly, is that approximately 60 million were distributed from Netscape's website and so.called mirror sites.
THE COURT: Forty million from the mirror sites. But what is a mirror site?
MR. UROWSKY: A mirror site is a non.Netscape site that is authorized by Netscape to provide Navigator or other products for downloading from that site.
The other figures that appear just below that, Your Honor, is a hundred million copies on the part of the so.called Netscape partners. And I believe that Netscape partners numbered somewhere in the range of 15 or 16,000. And if you are interested in what kinds of firms were made up of this 15 or 16,000 universal partners, all you need to do is look at Defendant's Exhibit 9, which provides a statistical analysis.
THE COURT: I'm guessing this won't reveal my ignorance, but I am focused on the breakdown of the 160 million. Are you saying, in answer to Judge Randolph's questions, that sixty million were actually downloaded from Netscape's website?
MR. UROWSKY: From Netscape's website and the mirror sites, that's correct, Your Honor. 60 million.
THE COURT: I mean I have to say that I have only done downloading of these things with the help of much more skilled people. So I took seriously the proposition that that was a big barrier. But 60 million people just downloaded it?
MR. UROWSKY: One could .. yes.
THE COURT: Sixty million were downloaded, not necessarily 60 million individuals.
MR. UROWSKY: I think we have to assume it was not one person downloading it 60 million times.
THE COURT: I think there is probably room for variations in.between.
THE COURT: Why was this not clarified in the record? Why are we guessing as to what that reference means?
MR. UROWSKY: I think the reference to the 22 percent, I think it was clarified in the record. I think what happened is that plaintiff's principal economist, Dr. Fisher, tried to suggest, as counsel for the government did, that the phrase "with little promotional effort" meant that there was little promotional effort being made by the OEMs who were making the distribution.
THE COURT: I understand, but we are guessing here. You say one person didn't download it 60 million times. But large corporations, et cetera, who knows? And I'm just not clear why this wasn't all clarified.
MR. UROWSKY: I think the answer to your question is that Mr. Barksdale testified that he doesn't know who is downloading.
THE COURT: He doesn't know what?
MR. UROWSKY: Excuse me. I misspoke. I don't know .. I'm sorry. I don't understand precisely the ambiguity that Your Honor is inquiring about regarding the 22 percent.
THE COURT: Well, we are trying to find out. Judge Williams has suggested the difficulty he has. Maybe your assistant has the answer.
MR. UROWSKY: I'm reminded that because the case was handled on a pretrial basis, we didn't receive this document until after the case in chief had been completed and there was no witness ..
THE COURT: The District Court would not allow you an opportunity to clarify this? It seems to have grown in significance.
MR. UROWSKY: There wasn't a witness called.
THE COURT: An additional deposition? An evidentiary witness?
THE COURT: The question is how many users does 60 million downloads represent?
THE COURT: That's the bottom line. And the answer is we don't know from this record; is that correct?
MR. UROWSKY: We don't know precisely, but I think we have to assume that 60 million downloads is a significant number in a market where there are approximately a hundred million Internet users world.wide at that time. I also need to say that the 60 million download figure is then supplemented by another distribution of a hundred million through these Netscape partners. So we are looking at aggregate distribution of 160 million copies.
THE COURT: Where in the record does the 60 million show?
MR. UROWSKY: Defendants' Exhibit 2440. I'm also reminded by colleagues that there is a document in the record which says that approximately 50 percent of Netscape's user base was secured through downloading.
THE COURT: Yes. That's that survey that one of your witnesses testified about.
MR. UROWSKY: Your Honor, I think it's Defendant's Exhibit 2583, and I believe that's .. I believe that's an internal Netscape document because of the code number and it would be at page 36457. That is for the 50 percent of their user base being secured through downloading.
To respond to a question you asked earlier, Judge Williams, if our supposition is correct that Netscape was securing this level of distribution through downloading and through its partners, it would make perfect sense not to rely on the OEM channel for distribution if that required paying the OEMs. Now, eventually, Netscape came to a point in January of '99, where they did enter into an agreement with Compaq, which I mentioned earlier, which was essentially a barter agreement. Compaq preloaded Navigator on the Presario ..
THE COURT: But by this time, Mr. Urowsky, this was '98. What year was the Goldman Sachs document created?
MR. UROWSKY: Late 1998.
THE COURT: By that time Windows .. Microsoft is giving it away; right? I mean they really had no other choice but to give it away .. Netscape didn't.
MR. UROWSKY: That's correct. They began free distribution in .. starting January of '98, I think.
THE COURT: And that was in response to Microsoft not charging.
MR. UROWSKY: That's correct.
THE COURT: The standard that all this is ultimately directed to, as I recall, but I may have been confused, is whether there was a substantial amount of commerce foreclosed; right?
MR. UROWSKY: That's correct.
THE COURT: And you are saying no because the people who wanted Navigator got Navigator.
MR. UROWSKY: That's correct.
THE COURT: Why isn't the appropriate measure of whether substantial amount of commerce was foreclosed whether revenues dropped from whatever it was to close to zero for Netscape?
MR. UROWSKY: Because in this business there is frequent free distribution of products which are offered in connection with other products or services that generate the revenue. In the case of Microsoft, IE generates additional sales of Windows. In the case of Netscape, distribution of Navigator drives attention to the Net Center website which generates revenues. In the case of ..
THE COURT: I understand why that is, so what you are saying about this market, why that is an answer to the legal question of how one measures foreclosure when asking was there substantial foreclosure.
MR. UROWSKY: I think if there is substantial foreclosure, it has to be of distribution, meaning that the supplier was unable to reach the public, and that you may measure that in markets where products are distributed at a positive price and revenue. In markets where it's not, it seems much more sensible to look at it in terms of units. And our contention is that Netscape was not foreclosed ..
THE COURT: You know, I think, Mr. Urowsky, maybe this lies underneath your answer. But I think it would be more productive to search for an explanation in terms of whether we are talking about consumer welfare or competitor welfare. And in this context, as opposed to tying, I think we are still talking about consumer welfare which suggests that we should be looking at consumers' access to the units and not Netscape's revenues from the units.
MR. UROWSKY: That's my feeling.
THE COURT: That may not carry over .. may or may not carry over into tying, which is something of an outlier within the antitrust universe.
THE COURT: May I ask one question. If, in fact, 60 million users were, or somewhat less than that, downloading Navigator in 1998, then how can it be that Netscape's market share dropped so precipitously?
MR. UROWSKY: Because the market was exploding, and therefore, even though Netscape's share declined, the absolute number of users increased dramatically.
THE COURT: You said there is a hundred million users.
MR. UROWSKY: A hundred million users overall.
THE COURT: World.wide.
MR. UROWSKY: World.wide.
THE COURT: Some Navigators are being shipped on OEMs and 60 million downloads. So how can their market share be down to whatever it was, what, 15 percent?
MR. UROWSKY: Not 15 percent. In 1998 it would have been approximately 50, five.zero, percent, and that would represent a fairly dramatic increase in the base of users. The District Court says 15 .. from '96 to '98, from 15 million to 33 million. There is a better number, I think certainly a consistent number, in Defendants' Exhibit 2440, which is roughly 38 million, and this is again the Goldman Sachs ..
THE COURT: When the record closed, what was Netscape's market share?
MR. UROWSKY: I think around 45 percent. But the ..
THE COURT: Excuse me. Is that measured as usage?
MR. UROWSKY: That's correct.
THE COURT: So another explanation is people were downloading it but didn't use it because they didn't like it.
MR. UROWSKY: That's correct.
THE COURT: If it's a free download, and you've got both of them on your machine, and you can choose which one to use.
MR. UROWSKY: That's correct.
THE COURT: Mr. Urowsky, what is the hundred million for exclusive distribution program in your DX 2440?
MR. UROWSKY: I'm sorry. I couldn't hear
THE COURT: The other hundred million which is obscurely described, as exclusive distribution program partners, 16k partners.
MR. UROWSKY: Right. I think the 16k is 16,000.
THE COURT: So what's it mean?
MR. UROWSKY: It means that Netscape had arrangements with other companies, apparently 16,000 of them, which provided that those companies would distribute Navigator. And the reason I invited Your Honor's attention to Defendant's Exhibit 9 is that that contains a kind of, at least, rough statistical breakdown of what kind of company .. what kind of firms were in this group of 16,000 distribution partners. You will see a lot of OEMs.
THE COURT: Your time is up, Mr. Urowsky.
MR. UROWSKY: Thank you very much, your Honor.
THE COURT: We have concluded the argument on the first segment. We will reconvene at 1:45 for the second stage today.
(At 12:33 p.m. the hearing was recessed to reconvene at 1:45 p.m.)
A-F-T-E-R-N-O-O-N S-E-S-S-I-O-N (1:52 p.m.)
THE COURT: You came back for more. We may proceed.
MR. UROWSKY: Thank you, Your Honor. I'm afraid I'm all you have today, at least on this side.
Good afternoon. The subject of this afternoon's argument is the tying claim. The allegation that Microsoft created a technological tie between Internet Explorer and Windows is central to the government's case under both Sections 1 and 2 of the Sherman Act.
In sustaining that claim under Section 1 the District Court ignored established precedent including this Court's June 1998 decision in an earlier case involving Microsoft.
As in any tying case, the threshold issue here is whether Windows and Internet Explorer are separate products. In articulating the test for addressing this issue, in the consent decree case, this court referred to cases under both Sections 1 and 2 as well as the Areeda treatise synthesizing the learning on the subject and even the District Court agreed that that articulation was meant to be a framework for resolving the issue.
The District Court nevertheless rejected this Court's test and instead applied the so.called "consumer demand test" of Jefferson Parish and Kodak, the very tests that the Government pressed on this Court in 1998 and which the Court declined to accept.
Both Jefferson Parish and Kodak, however, dealt with contractual ties, not challenges to product design. For example, Kodak involved an alleged tie of replacement parts for Kodak photocopiers and repair service. As this Court observed, the Supreme Court would not have subjected an integrated product, such as a self.repairing copier, to this same analysis.
In other words, the ability to identify separate demand for parts and repair service would not suggest that such an integrated product was really a tie.in.
This Court also recognized, and I think this point is quite important, that the application of the consumer demand test to product design decisions would chill innovation because it would retard integration which in many fields has been the engine for achieving technological progress.
THE COURT: Let me ask you. Our previous decision has been subjected to some criticism by the government in terms of the threshold is too low. And that at least the concurring dissenting opinion suggested there was a way to be more consistent with Jefferson Parish's emphasis on consumer demand than the majority opinions have been.
My question is whether or not you think under that alternative approach the concerns that you have about innovation are satisfactorily addressed?
MR. UROWSKY: Your Honor, we don't.
THE COURT: Why not?
MR. UROWSKY: Well, for several reasons. One reason is that in any balancing analysis it is very difficult to determine in an objective way what values are on either side of the scale and find some way to make them commensurate.
Second, when product design decisions are made, the people who are developing products frequently don't know what they would have to know in order to make the balance. That is to say, in order to determine whether the effect on competition ..
THE COURT: Even under the decision, you can't just bolt them together, whatever that means. You have to have some plausible technological benefits.
MR. UROWSKY: That is correct.
THE COURT: So there is some examination right there, isn't there?
MR. UROWSKY: That is correct. And the third reason I was going to advance, if I may, which I think addresses that in part, is that the history of development at least on the Windows platform, which is an open platform that thousands of developers build applications for, is that there has been no foreclosure of competing technologies on account of the incorporation of Microsoft technologies in the operating system.
So, for example, when Microsoft included Internet Explorer in Windows in the initial iteration of Windows 95, it immediately met competition from Netscape which, notwithstanding the fact that IE 1 and IE 2 are part of Windows, took 80 percent of usage share. Netscape took 80 percent of usage share.
THE COURT: What I'm trying to understand, is you don't argue that Section 1 has no applicability to software.
MR. UROWSKY: No, I do not argue that.
THE COURT: And what I'm asking is why aren't the concerns that you have adequately addressed by a slightly more rigorous test so that you don't get subject to the criticism that the software companies can always come up with some plausible explanation and, in other words, you become exempt from the strictures of the tying law.
MR. UROWSKY: What I was trying to say in addressing that, is that in light of the fact that there is no foreclosure because of the inclusion of these features, because others can compete with the feature, that the test doesn't need to be any stricter than it is. And there is example after example after example in the record of this case on it. Apple QuickTime multimedia play-back software which competes with Windows on the Windows platform. The corresponding Microsoft technology is DirectX.
RealNetworks streaming media, which is a different kind of multimedia technology, competes on a Windows platform directly with the operating system technology in Windows and I could adduce other examples.
So if there is no foreclosure, if there can be open competition on the Windows platform with operating system technology and where, in some cases, such as the early case of Navigator, the external provider of the software literally takes the whole or close to the whole market, then it isn't clear to me why we need to become involved in a stricter test which will involve more imponderables and particularly items that are imponderable as you look into the future which any product planner has to do.
It's relatively easy, though not easy, to apply those tests even retrospectively. But trying to employ them prospectively is virtually impossible.
I think that under the standard that was articulated by this Court in June of 1998, which was a standard that required Microsoft, among other things, to demonstrate that there had been an integration and that carried with it certain plausible benefits, that Microsoft clearly prevails under that test. There are many benefits to Microsoft's integrated design of Windows 98. Let me just identify four.
First, Internet Explorer components of Windows expose APIs that permit developers to write web.enabled applications. Let me give you an example of that. Probably the most popular web.enabled application is Intuit's Quicken, which is a personal finance application package. And what Internet Explorer permits Quicken to do is go out onto the Internet and bring back current financial information which is then embedded in Quicken, processed and displayed in a Quicken window.
All of this is seamless, meaning that the user doesn't even know that it isn't Quicken that is doing all this, but rather, Quicken invoking the elements of Internet Explorer.
Now, this is an example of something that Navigator cannot do. It is a monolithic application.
THE COURT: But that's not the question, whether Navigator can do it.
MR. UROWSKY: I'd like to .. I make that point for two reasons, Judge Randolph. One is that under the June 1998 decision, I believe that there was a requirement, specifically in this arena, that the benefit was not one that could be achieved by combining the operating system with a, quote stand-alone browser, close quote, like Quicken. And that's one of the reasons I make the point.
Another reason I make the point is in response to an argument that was made this morning that essentially Microsoft doesn't benefit any more by having users employ Internet Explorer rather than Navigator.
THE COURT: I thought the test was whether you could achieve .. whether by installing .. whether by putting the two products together, and forming a third product, that Microsoft achieves something that the individual consumer could not achieve by installing the product separately.
MR. UROWSKY: Which I think is essentially the same test that I just articulated; that you can't .. the focus on the consumer being that if the consumer could achieve the same result by taking the stand-alone browser and running it on the operating .. THE COURT: If I can stop you, you're going to give us four and you've only managed one. One, I just want to make sure, are any of the four benefits that you're mentioning now, are any of them among the 19 that the -- I can't remember the name, Allchin, was it?
MR. UROWSKY: Mr. Allchin, right.
THE COURT: .. was cross-examined about and admitted all 19 were benefits that could be achieved by installing separately? Are any of the four you mentioned ..
MR. UROWSKY: These are all benefits that are covered in Mr. Allchin's testimony. But his testimony is not that these can be achieved by running standalone browser on Windows. His testimony on cross.examination is that you can achieve most of the benefits, not all, but most of the benefits on Windows 98 by installing IE 4 on Windows 95.
But of course that testimony proves absolutely nothing of any consequence because installing IE 4 on Windows 95 is just a way of having Microsoft go in, tear out old operating system files and replace them with new files and extend the functionality of the operating system. In other words, you're rebuilding the operating system, or updating the operating system on the computer.
Let me proceed to the other three I was going to mention. One, there are two very popular features on Windows 98. One is Windows Update which permits users to update their operating systems by going out to a Microsoft web site on the World Wide Web and having the web site search a user's computer to make sure that it has all components that are up to the moment. And if they are not up to the moment, the web site will automatically download and update the user's operating system.
THE COURT: So you're view of the word plausible means more than coming up with a minor distinction. You're talking about real tangible technological advancements that could not be achieved by combining two independent products.
MR. UROWSKY: I'm not sure that that is the intention of the author of the 1998 opinion.
THE COURT: No, my point is exactly how you're interpreting it. You're giving us very solid major, in my words, advances that the consumer could not develop.
MR. UROWSKY: Because I think we passed the test with flying colors here. It's not a close case. But that doesn't mean that the standard needs to be or should be made more severe for the reasons I alluded to earlier, Your Honor.
THE COURT: Well, in response to Judge Randolph's question you said Mr. Allchin was simply talking about Windows 95 and IE 4. Would that passed the test?
MR. UROWSKY: I believe that was in fact the holding of the June, 1998, decision, albeit in a preliminary way, because it was the appeal of the preliminary injunction.
THE COURT: I thought that decision focused a lot on the fact that Windows 95 was a totally new product for all kinds of different reasons. So the standard for plausibility you're saying, if I understand you correctly, is quite significant.
MR. UROWSKY: I think it is significant but I don't think it requires product improvements of the dimension of the ones I just mentioned in order to satisfy ..
THE COURT: I want to understand where the line is.
MR. UROWSKY: I think the line is here. The benefit to consumers has to be plausible. That means it has to appear on its face as a benefit, and the benefit is not under the 1998 decision a, quote, net benefit, close quote.
That then would engender in the trial courts endless proceedings about whether on balance in view of legions of experts the product is truly better or whether from somebody's point of view it's better in some ways and worse in other ways and we have judicial administration of product design. I think that was intended not to be the outcome of the June of 1998 decision.
The additional benefits I'll just point to are the HTML Help system in Windows 98.
Third ..
THE COURT: So your position is that this Court is free to ignore the emphasis in Jefferson Parish on consumer demand; is that correct?
MR. UROWSKY: Because Jefferson Parish didn't deal with integrated products.
THE COURT: I understand that. I'm trying to get some instruction from the Court as to what are the relevant considerations, and you're saying that is simply not a relevant consideration?
MR. UROWSKY: That's correct, because you can meet demand for product A and product B by an integrated product. You need both elements of demand by an integrated more technically advanced product.
The third benefit I want to draw the Court's attention to is that in Windows 98, the IE, or Internet Explorer, components generate the user interface including the start button and the icons on the desktop. And fourth, they also provide for seamless browsing between information sources of all kinds in a single window using the navigational paradigms of the World Wide Web, which is basically forward and backward and working from lists of favorites and lists of histories.
This is essentially a rationalization of the user interface so that the user doesn't have to use one kind of method to secure information that is on his hard disk, use another method to gather -- get information from the web and open another window to get information from the local area network. It's designed to simplify and make the technology more useful to individuals.
Nor is the integration in Windows 98 subject to the bolting exception that this Court identified in the 1998 decision. The integration in Windows 98 is not simply conjoining previously existing blocks of code. It is the development of code that performs multiple functions, including displaying HTML pages from the World Wide Web, including displaying the user interface which is itself in HTML and so forth.
THE COURT: Suppose we don't agree with you that we're bound by Microsoft here. In other words the consent decree case, we're sitting en banc, suppose we think we're still bound by Jefferson Parish.
MR. UROWSKY: If you thought you were still bound by Jefferson Parish, one I think you would nevertheless have to conclude for two entirely separate reasons that this was not an unlawful tie.in under Section 1.
The first reason is that there is no foreclosure of rivals of the tied product. It is crystal clear in footnote 34 in Jefferson Parish and the text which it elucidates that foreclosure which is almost always an accompaniment of a tie.in arrangement is a requirement for application of the per se rule.
THE COURT: Are you essentially arguing that there is no substantial effect on commerce? Are you invoking that arm of Jefferson Parish case.
MR. UROWSKY: No. I'm sorry, Your Honor. I didn't mean to interrupt. I'm arguing that there is no foreclosure of rival products, period. I'm not addressing the jurisdictional requirement of the statute that there be more than a negligible amount of interstate commerce affected.
I'm saying that foreclosure of a rival of the putative tied product is a requirement of the per se tie.in offense under Section 1. And I think the Supreme Court makes that point with indelible clarity at footnote 34 of Jefferson Parish.
The second reason I don't believe that the integration of this technology into Windows can be deemed a tying arrangement is that tying typically, and I think under the cases, must entail the forced purchase of a second product by the consumer. And since Internet Explorer is given away as part of Windows and over the Internet and probably in half a dozen other ways, there isn't the forced purchase of a second product.
THE COURT: I don't understand that argument at all. Under the arrangements with the OEMs the person who bought Windows bought IE. It seems to me in a sort of classic tying terminology that's a forced purchase.
I mean, the fact that the consumer can get IE or Netscape free through some other means is a highly relevant and interesting phenomenon, but it doesn't seem to me that it negates the proposition that IE came along automatically with Windows.
MR. UROWSKY: Came along automatically free with Windows. The District Court repeatedly finds in its findings that Microsoft made Internet Explorer available ..
THE COURT: Isn't it just a restatement of the proposition that the two items, call them items not products were bundled? When items are bundled physically and in price, you buy one; you get the other. That's in many respects what the forcing under Jefferson Parish means.
MR. UROWSKY: I think that's not quite so clear. In Jefferson Parish, the Supreme Court notes that there was a separately stated charge for anesthesiological services and it relies on that finding in the holding.
THE COURT: That's part of its general comparison of the different practices in the field as between, for example, radiology and anesthesiology.
MR. UROWSKY: Or other services provided by the hospital, such as medicine, nursing care, and so on. I don't think the Supreme Court was suggesting in Jefferson Parish that we now have to turn hospitals, you go in with a menu and bring your own nurse and your own dietitian.
THE COURT: The conclusion on nurses and dietitians and radiologists and so forth was not that they weren't tied but they were fundamentally the same product. In other words, it seems to me the correct reading of Jefferson Parish is that sort of certain forcing that clear that represents the way in which all competitors in the market operate, it's okay.
MR. UROWSKY: Well, in any event, the Supreme Court appears to have thought it was significant that there was a separate, separately stated charge for the service found to be a separate product in that case. And although I might agree with Your Honor that in certain cases we would have to allocate in some very complicated cost accounting way of value to every feature .. that may be impossible .. to every feature of every product, it's not all that persuasive an argument in a situation where the feature is at the same time being given away free by half a dozen other means.
If I may, I think ..
THE COURT: Isn't there still a cost to the consumer? I mean, let's assume you're right that Explorer is totally free. The consumer who wants Navigator instead still has to go get it and the cost may be minimal but it's still a cost. And there's capacity on the computer to receive that. So for the consumer who wants Navigator or some other browser, it isn't free.
MR. UROWSKY: Well, the cost of Navigator once it faced serious competition is zero.
THE COURT: I understand. I'm talking about the cost, the time it takes to get it .. I mean, it may be not much but there may be consumers who are easily discouraged from downloading it so that they don't do it.
MR. UROWSKY: There are many ways other than downloading to secure it. And there is every reason to believe that any computer user that wanted that product could get it.
With great respect to Your Honor, there are three central characteristics, economic characteristics, of software distribution. It's easy, fast and cheap. Those aren't technical terms. Mr. Clark, the founder of Netscape, testified that downloading software from the Internet was the best distribution system ever devised by human wit, because it's so fast, so easy and so cheap and so pervasive.
One of the reasons the software industry is as competitive as it is, is that you can't stop people from distributing software. They can get it to the whole market, and they can do it almost instantly. If I may, I would like to reserve the remainder of my time for rebuttal.
MR. ROBERTS: Your Honor, may it please the Court, let's begin with the basic question of which test controls: The test articulated by the panel in the consent decree appeal or the test articulated by the Supreme Court in Jefferson Parish and Eastman Kodak.
The panel majority in Microsoft 2, the consent decree appeal, stated no fewer than four times in its opinion that it was construing the consent decree and not interpreting the statute. We think the Court meant that.
In footnote 14 the panel majority in Microsoft 2 said that the consent decree does not bar an action under the Sherman Act. We think the Court meant that.
The particular provision that the Court was called upon to construe in Microsoft 2 referred to integrated products. It was therefore natural for the Court to attempt to develop a test for integrated products.
Under Jefferson Parish and Eastman Kodak, that is not the pertinent question. The question is whether there is sufficient consumer demand so that it is efficient for a firm to offer the products separately.
The panel in Microsoft 2, because it was construing a consent decree, was not bound by Jefferson Parish or Eastman Kodak. This Court today can frame the question of the Sherman Act.
In addition, the panel in Microsoft 2 recognized that it was dealing with a very incomplete factual record. It was dealing with an improvidently, improperly noticed, preliminary injunction and it specifically said that its conclusions were quote, subject to reconsideration on a more complete factual record.
We now have that more complete factual record. And in a number of very particular respects, that factual record calls into question some of the assumptions that were made by the panel majority in Microsoft 2. No fault of theirs. It was an incomplete factual record.
I'll take one example to start with. The panel in Microsoft 2 addressed the question of separating the browser Internet Explorer from the operating system and said if you do that, really all you're doing is taking out four lines of code. That doesn't look like a separate product. It looks like a key to get into Internet Explorer.
Finding of fact 185 explains that if you run the Felten program to remove the browser functionality, it's not just four lines that are left behind. What is left is sufficient code that doesn't have to be loaded when you boot up Windows from the hard drive to the RAM to have Windows 98 take up 20 percent less RAM when it's booted up. So that may start to look like enough to be considered a separate product.
The Court in Microsoft 2 focused on how Internet Explorer code was shared with operating system code.
THE COURT: Mr. Roberts, can you reasonably argue that there is a separate market for browserless operating systems?
MR. ROBERTS: Findings of fact 149 to 154.
THE COURT: I'm looking at them right now and I've read them over and over again. And I .. because .. and maybe I'm thinking too much about what I think I know as opposed to focusing on the record. So I'm being honest with you.
It seems to me .. I won't say it's an absurd proposition. It's a highly questionable proposition for anyone to now suggest that there is a separate market for a browserless operating system in part because all operating systems include browsers and for lots of other reasons. It's a fairly absurd proposition.
So I was very curious to figure out what the District Court opinion had to say about that, and I must say, as I trace what I think are a number of speculative observations about the District Court, I can't find any underlying hard information to back up the inference. There is no clear finding.
There is some speculation about inconvenience and employers don't like to have the Internet available to employees. There is no data that I can find. Maybe it's there and you can point me to it.
MR. ROBERTS: There are two separate points and I want to distinguish between them. The first is the precise question you asked: Is there a market for a browserless operating system?
THE COURT: Right. And where's the data to support that?
MR. ROBERTS: But the second point, which is related, and if they follow sequentially in the findings, do consumers want to choose their operating system separately from choosing their browser?
And there was the testimony, for example, of the representative from Boeing, that they like .. they use different operating systems. They want a standard browser so they don't want to buy them to get them. They want to choose them separately.
The District Court did find that there is sufficient consumer demand for a browserless operating system, particularly referring, as Your Honor, did to companies that their employees have no business surfing the web or they may in some circumstances but they obviously want some without a browser.
THE COURT: The makers of operating systems who were willing to remove the browser, did they offer any discount?
MR. ROBERTS: I'm not aware of that, Your Honor. I do know ..
THE COURT: I think that Mr. Schmalensee's contention on that has no rebuttal. The government has done nothing to call my attention to any rebuttal material.
MR. ROBERTS: First of all, those companies, that constitutes every other company besides Windows.
THE COURT: That's right.
MR. ROBERTS: Besides Microsoft. Microsoft was the only company that enforced the tie.
THE COURT: Let's focus for a moment, and it's really what I was struggling with Mr. Urowsky on. In terms of pricing, which after all is very important in these things, the purchasers of other operating system makers were in fact required to take the option of a browser. Isn't that correct?
MR. ROBERTS: They were .. no. They were allowed to remove the browser from the operating system.
THE COURT: But when they got the operating system, they got with it an entitlement to the browser; right?
MR. ROBERTS: Correct.
THE COURT: It seems to me Jefferson Parish and the other tie.in cases are reasonably clear. The concern is about this forcing of the consumer because once having paid for an item, it's silly to go buy another.
It was a great concern, in Jefferson Parish explicitly about the poor competitor who was trying to break into that market and has a hard time doing so, because the person who stocked, sold the tying good already has the tied product; isn't that correct?
MR. ROBERTS: That's correct. But there is evidence on the market and there is no reason to speculate.
THE COURT: I understand you're arguing there may be different contract clauses between Microsoft and the other producers. But the basic theme, it seems to me of Jefferson Parish and looking at separate demand is to ask the question, and this is the Areeda reading of the text, are competitive sellers also bundling the item?
If they are, partitian is taking care of this and the forcing that is going on, the fact that people find themselves in possession of one maker's product is therefore innocent or at least not covered by Percy.
MR. ROBERTS: I think that's a critical point. It's the difference between bundling, combining and forcing. There is no problem with Microsoft putting together the operating system and the browser and offering it as one package. The problem ..
THE COURT: But that act alone, in terms of the pricing concerns, that have historically driven tie.in law, ends the case.
You're moving into new territory of a peculiar situation where the defendant has said, in a sense, you can't throw it away or we're going to make it slightly hard for you to throw it away. You have to move the icon on your machine.
But that kind of thing has not driven tie.in law. You're taking tie.in law into a new and interesting territory.
MR. ROBERTS: With respect, Your Honor, I think not. I think Kodak and Jefferson Parish as well point out this critical distinction. The question is not show us the benefits from a combination. In your hypothetical ..
THE COURT: I agree.
MR. ROBERTS: The other manufacturers do offer them together.
THE COURT: And therefore, it follows someone who isn't in a position to tie, independent seller of the tied good is cut off at the knees.
MR. ROBERTS: The difference is that no other vendor requires them to be kept together. And that's important. And if you look back at the ..
THE COURT: It may be important for your monopoly maintenance. Maybe not ..
THE COURT: Section 2 question is not a tying question.
MR. ROBERTS: It certainly is. It is the forcing aspect that raises the tie.
THE COURT: Do you have any tying case that turns on some sort of requirement that the consumer actually keep possession of the tied good as opposed to being forced to buy it?
MR. ROBERTS: It's not a question of keep possession.
THE COURT: Wasn't Jefferson Parish .. I mean, there is not a big market for surgery without anesthesia; is there?
MR. ROBERTS: No.
THE COURT: Or even the other way around.
THE COURT: So if we give you the package, I mean, you can do away with the anesthesia if you want to and have your operation, but ..
MR. ROBERTS: But that is the key distinction, because it is .. and we need to emphasize, it is not the combination. Given the package; there is nothing wrong with that. Preventing the OEMs from taking off the icon in response to consumer demand, that's what the consumers want.
THE COURT: Let me give you a hypothetical and see if you think it's a tying case. Suppose that Microsoft offered the operating system with IE, said you can take it off or do whatever you like with it, erase the code. But it had plugged into the operating system a few lines of code that as soon as Navigator was added, caused the entire system to collapse. Right? Disaster. Terribly unfair competition and probably antitrust violation of some sort. Not a tie. Not a tie.
MR. ROBERTS: That's where it analyzes the so.called reverse tie. In other words, as soon as you try to .. if you do try to add something else, you have a disaster. I think that would probably be what's called the reverse tie like the New England Journal case.
Again, if I could just emphasize the important distinction. Combination is fine. That's why all this argument about, oh, this is going to chill innovation, how do we tell it to do, you can combine to your heart's content.
But the problem comes in when you say, and you, the OEMs, who are sensitive to consumer demand, you can't take that off, even if, as the facts show, that is what the consumers want.
THE COURT: I didn't hear your answer to Judge Randolph. What is the answer to the hospital case? The hospital did not allow the patient to say, okay, I'll pay for the anesthesiology but I want to get my own. I'll pay you for yours but I want to throw it away and bring in my own. That wasn't allowed.
MR. ROBERTS: That's right. That was forcing. And given the proper market power in that case, they recognized that they were dealing with separate products.
If you go back and look at the older so.called technology tying cases, Berkey Photo, Telex case out of Oklahoma and some of those, that language from those cases is often quoted for the proposition that courts need to be reluctant and not enmesh themselves in design decisions. And that's right. But in those cases the vendor continued marketing the standalone products.
THE COURT: Who won Jefferson Parish?
MR. ROBERTS: It was found not to be a violation. But it was not because they were not separate products. The Court held that they are separate products.
And as I was saying in the Berkey Photo situation, the distinction is they continue to market them as standalone products. So they were letting the market decide.
THE COURT: The other operating system makers are not marketing operating systems as standalone products. True they are more permissive than Microsoft in letting you destroy the extra code or remove it in advance, whatever the system is but you pay for it.
So you're in exactly the position that the court in Jefferson Parish is very concerned about. The consumer finds himself with the tied good and therefore has no interest in any competitor's version of it.
MR. ROBERTS: There is no forcing. There is no forcing to make .. that makes the bundling ..
THE COURT: The price bundle is the forcing and the other producers do it equally. The practice of the other competitive sellers in the market is enough, for example, to distinguish in radiology for the Court to regard that as a single product.
MR. ROBERTS: There were separate, as the Court found, consumer demand for the products separately. Microsoft ..
THE COURT: But you get it by looking at the practices of the sellers. It isn't a matter of whether the consumer is out there saying I would like a car without a radio. I would like a car, a GM car with a Ford radio.
What do the producers actually do? What the producers do in this field is to include, some of them, offering the option of deleting the extra tied item. But no discount.
MR. ROBERTS: That's not the way the Supreme Court looked at it in Jefferson Parish. They did ask patients and they asked doctors, do you want a separate anesthesiologist from that provided by the hospital?
THE COURT: They certainly looked at the behavior of competing firms with respect to anesthesiology as opposed to the other things, which they distinguished. The Areeda reading of the text is to look at what firms in competition do as a sign and if there's a profit to be made by separating in terms of the competition we'll do it.
MR. ROBERTS: Jefferson Parish looked at consumer demand, the ultimate consumer. That is what the findings of fact ..
THE COURT: -- largely reflected in the behavior of the providers.
MR. ROBERTS: Reflected in a way .. we're dealing with doctor's recommendations if that's what Your Honor means rather than the patient. But they're consumer preferences, and that's of course what Jefferson Parish and Eastman Kodak say. You look at consumer demand.
THE COURT: Let me ask you again so that you can help me. This is one of the cases, one of the places for me, where the failure of the findings of fact to point to any record, citations, makes it very, very difficult on appellate review because they are very conclusionary statements here that I tried to trace to determine whether there was any real data to support the observation that there was a market for browserless operating systems. It is certainly not intuitive given that all of the operating systems offer browsers that can be removed or deleted.
But in making your argument that in all the other cases they can be removed and therefore Microsoft is forcing, you're ignoring Microsoft's counter.argument which is they don't integrate as deeply.
But in any event, make that your second answer. Tell me if there is any data to back up .. I quite frankly .. I hear my colleagues in the first part of this argument that we're supposed to defer to factual findings. But when I find factual findings that look very conclusionary and there is no citation to anything, I don't think my obligation as an appellate court is to defer to them. So what is the data?
MR. ROBERTS: I would refer the Court primarily to the government's proposed findings of fact, which is sort of an annotated compilation of the evidence that supports the proposed findings. I remember offhand the Boeing example. There is testimony from Boeing, we want a browserless ..
THE COURT: Is there anything other than Boeing?
MR. ROBERTS: Yes. I cite it as the one I recall. They are detailed in the proposed findings of fact. I think that's where I would look to find the underlying evidence.
But I don't understand Microsoft to contend that those findings are clearly erroneous. What they contend is they're beside the point. They have a different focus. They are saying we're going to put these together and because there are benefits, it is not separate products.
And that approach has been definitively rejected by the Supreme Court. In Kodak they dealt with it specifically.
THE COURT: Given the present development that Judge Edwards is talking about, it's almost like you're saying I would like to buy a clock radio without a clock.
MR. ROBERTS: I think not.
THE COURT: That's a tied product under your theory because even though they are technologically integrated, there are separate markets for clocks and separate markets for radios.
MR. ROBERTS: It makes a difference to consumers. The OEMs were telling Microsoft that people want Navigator. So let us take IE off.
THE COURT: See, the people wanting Navigator is a different question. And that does go to your Section 2 claim. It doesn't prove to me anything about whether there is a true separate market for browserless operating systems.
MR. ROBERTS: Well, the browserless operating systems, those are again addressed in the findings of fact, and our proposed findings of fact details the evidence in the record that supports that. They refer to companies that don't have a use for the browser. Their employees are not supposed to be using the browser. So they don't ..
THE COURT: Let me ask you about that. Presumably there are two kinds of purchasers who end up with browser networks. One is browsers .. consumers of the kind you're talking about, who don't want one at all. And then there are consumers that want a different browser; right?
MR. ROBERTS: Right.
THE COURT: The ones that don't want it at all, there is this language in Jefferson Parish that suggests that while that may be a harm to the consumer, it's not a harm to competition because they wouldn't buy one otherwise.
MR. ROBERTS: That's right. And we don't think .. that doesn't show the impact in the tied product market. But we do think it's pertinent to deciding whether they are separate products. Yes, we don't rely on consumers who don't want a browser to show foreclosure in the tied product market.
Consumers who do want a browser want a different browser.
THE COURT: Consumers want a different one, which they can then get free as it turns out.
MR. ROBERTS: It turns out, as the District Court emphasized that the key to usage .. and it's important to recognize that distinction. Millions of downloading and all that, that's not the important point. Usage is what's important in terms of whether it has the potential to become a competing platform for software applications.
The District Court specifically found if you're out of the OEM channel, if you're not in the box that the consumer buys, that's going to affect usage. And the OEMs were not interested in putting two browsers on the products. Because again, the findings of fact are clear. That takes away their profit margin ..
THE COURT: But the consumer has access to the alternative browser at no charge.
MR. ROBERTS: The consumer has access, yes.
THE COURT: If we're just focusing on the question of whether the tie forecloses access by the consumer, the answer is no; right?
MR. ROBERTS: Findings of fact 239 to 241 point out that Microsoft was successful in foreclosing Navigator's access to the OEM channel.
THE COURT: To the OEM channel. But the question is, were they foreclosing consumers from getting it?
MR. ROBERTS: The impact on consumers is made at the point of the OEM channel. That is the way this business works. If you're not going to get on the computer the fact that you could get a browser from somewhere else ..
THE COURT: Remember, we're talking only about consumers who wanted the other browser. Right? We crossed that bridge a moment ago. The ones who didn't want Navigator are irrelevant. The ones who want Navigator are the ones we're looking at. And they can get it.
And then you've got this statement, let me ask you what you do with it, in Jefferson Parish. I read it earlier. The evidence indicates that some surgeons and patients preferred respondent's services to those of Rhue but there is no evidence that any patient who was sophisticated enough to know the difference between the two anesthesiologists would not also be able to go to a hospital that would provide him with the anesthesiologist of his choice.
Do you see the parallel?
MR. ROBERTS: What we do with that, is to rely on the findings of fact which show that what is available as a practical matter to consumers is decided by the OEM channel. Microsoft knew this.
THE COURT: What about the consumers who want Navigator? Those are the only ones we're interested in; right?
MR. ROBERTS: They don't know. The competition is snuffed out because they don't know. There would be no objection ..
THE COURT: So does Microsoft have an obligation to tell them or simply to not get out of .. not get in their way if they want to access it?
MR. ROBERTS: Microsoft has an obligation not to tie separate products as a means of forcing Navigator out of the OEM distribution channel, which is exactly what happened.
THE COURT: Channel to consumers who want Navigator. By definition, they must already know about it or they couldn't want it.
MR. ROBERTS: Your Honor, that is not correct. My point is, there should be competition to decide what is the browser the consumers want.
And Microsoft was unwilling to engage in that competition. And we know exactly why. They said so in their documents. We are not going to win so we have to, quote, it's important to leverage the OS asset to make people use IE instead of Navigator.
Now, if they don't know that Navigator would be a better choice, that doesn't mean that they are .. the benefits of competition are not also lost to them because Microsoft is leveraging the OS asset to make people use IE. It would have been perfectly all right if they'd offered the package it and said you can compete. But by ..
THE COURT: Is there a loss of consumer surplus when the consumer doesn't know? I guess that's the question.
MR. ROBERTS: I guess my answer would be yes. I mean, there is no great benefit to ignorance. And there is loss of competition, and the harm ..
THE COURT: But the consumer can't have the loss of something it values if it doesn't know that it exists.
MR. ROBERTS: The overriding harm of course is the fortification of the applications barrier to entry that protect --
THE COURT: That was this morning.
THE COURT: That's not a tying argument at all.
MR. ROBERTS: The tying argument is that by the tie they were able to force Navigator out of this distribution channel.
THE COURT: You may have a claim entirely based on the particular way in which IE was included in the monopoly maintenance but it's not a tying claim.
You're relying on a per se rule. What do you see is the function of the per se rule? Why should the Court set aside a narrow group of, a narrow type of conduct in the per se treatment?
MR. ROBERTS: The District Court didn't even address the question ..
THE COURT: No, it's a question of law. Why is it per se? Why is there a special rule of the per se tie.in?
MR. ROBERTS: Because the Court can assume that there is going to be an impact on competition.
THE COURT: Can the Court make that assumption very validly when it mechanically applies rules derived from areas where the idea of a consumer throwing the thing away is unthinkable.
MR. ROBERTS: In this ..
THE COURT: You're a pioneer. You should take credit for it.
MR. ROBERTS: No, Your Honor. We're trying to get the Court to apply what we think are unambiguous guidelines of determining separate products set forth in Jefferson Parish and Eastman Kodak.
The harm .. to establish the tie.in case, and it satisfies under the facts of this case, the rule of reasonable approach or per se approach, which is why that is not an issue on which the parties have joined or the District Court made any conclusions. It's not necessary. There is sufficient foreclosure in the market for the tied product.
I mentioned the operating system monopoly simply to emphasize that this is not one of those areas of tying where all the economists say you're silly to worry about it because there's only one monopoly rent or anything like that. That is because the browser represented an innovative threat to the applications barrier to entry. That was the point the District Court ..
THE COURT: Back to Section 2, now?
MR. ROBERTS: I'm just explaining why this tie in particular is of particular concern to the government.
THE COURT: I don't understand how you think that the mere tie itself forecloses market entry. It's the additional acts that are the subject of Section 2 that you may or may not be right. We certainly understand your argument.
The mere tie does not foreclose Netscape from being a competitor, from being a viable competitor.
MR. ROBERTS: The District Court found that it did for this reason.
THE COURT: The District Court, like I said, there are some findings that are merely just conclusions and I find no basis for them. So I'm not in that camp that says because the District Court lists something under findings of fact it's gospel. There has to be a fact in fact.
THE COURT: It has to be supported.
THE COURT: And it has to be supported by something other than the mere statement of the District Court.
MR. ROBERTS: And what the District Court said is plainly supported by the facts. Microsoft's documents explain it, that they won the browser war. We are not making up the fact that Navigator is out in the cold and IE has steadily increased its usage share while Navigator's goes down.
That's ignoring the reality, and the reality is clearly documented in the District Court's findings that say, for example, there are only in four of 60 OEM channels.
THE COURT: The District Court wasn't saying that, I don't think. If so, explain to me how so, by virtue of the mere, what you call, tie. It was because of the alleged Section 2 predatory conduct.
MR. ROBERTS: The combination of all of the conduct, certainly.
However, the foreclosure from the tie comes from the simple fact and you may not think it's correct or you may think it is. But the District Court found that an OEM is not going to put two browsers on the machine, and that most people who open up the box on Christmas morning are going to look to see if it has a browser. They are not going to go shopping for another browser once it has a browser.
THE COURT: Is it a general principle that an OEM will not put two on? Is that sort of the way gravity works?
MR. ROBERTS: The District Court found that it caused consumer confusion.
THE COURT: In effect some OEMs are reluctant to put two on. Is that really in terms of .. I'm looking beyond the conclusionary terms. The actual evidence was some OEMs were reluctant to put two on.
We have to assume they would have some affirmative motive to do so, right, before we even have to worry about it. So presumably, it's only among the set of OEMs who have a desire to put Navigator on independently that we are concerned with. MR. ROBERTS: Their motive was to respond to consumer demand. The Court gave a reason. And the reason is one that would apply across the board. That you find that when you have two on, it causes confusion. People call up. They say, I have two browsers here. Which one am I supposed to use, sort of thing. And if you get three phone calls from owners, you've lost your profit on the machine. So it's not worth their while. That affects the benefits of competition for the consumer.
THE COURT: Is there any data beyond the three calls per consumer? In other words, if you get three calls per consumer, you lose the profit on the unit you sold to that consumer. When they had experience with two browsers, to the extent there was any experience, did they find out how many buyers out of the thousand called?
MR. ROBERTS: No, I am not aware ..
THE COURT: So you lose your profit on that unit. But that unit is just a few units out of millions. What's the difference?
MR. ROBERTS: You have to assume that we're dealing with companies that are going to be acting rationally. If there were no costs to putting two browsers on, then, yeah, they could put two browsers on.
But there were costs and the District Court found, finding of fact 159, Microsoft knew that. That's why they undertook this browser war. They were going to win the browser war by increasing the usage of IE. And they increased the usage of IE by tying it to the operating system that every OEM had to put ..
THE COURT: Could Microsoft lawfully bundle both IE and Netscape?
MR. ROBERTS: I don't know that there are other browsers out there. But I think the answer would be no. In any event, they were still going to be separate products. And they are separate products because the consumer demand for them is separate.
THE COURT: Wait a minute. By the logic of your case, I think it would have to be yes. If they bundled them both, then there was no foreclosure of Netscape.
MR. ROBERTS: I was assuming that the same rules applied and you're not allowed to remove anything.
THE COURT: Yeah.
MR. ROBERTS: There is nothing wrong with them putting together whatever combination they want. It is the forcing aspect that becomes the problem: Saying you .. we put it together and you can't take it off.
THE COURT: You have to leave Netscape on; we'd still be here.
MR. ROBERTS: You have to leave it on.
Now, if there was some reason people want to take it off it could be a tying case. It may not meet the other requirements of tying. But it wouldn't fail because they were not separate products. Browser and the operating system are separate products. Because there is separate consumer demand for them.
THE COURT: But you also argue that if we apply our opinion in Microsoft 2, you win on that score.
MR. ROBERTS: It certainly is a steeper hill to climb but I think ..
THE COURT: Could you make the attempt because I'm not clear?
MR. ROBERTS: Sure. The opinion of Microsoft 2, construed from the consent decree provision, providing for an integrated product. It further has to be plausible, facially plausible benefits.
I think the first question is benefits to whom? The District Court found that the combination presented no benefits to the people who wanted a browserless operating system found that it introduced degradation and bugs. The District Court specifically found ..
THE COURT: I can't remember, did he address the nonbrowser functions which occupy almost all code in IE?
MR. ROBERTS: Yes. It turns out ..
THE COURT: They didn't want any of those functions, either?
MR. ROBERTS: Well, no. He recognized, based on the finding of fact 149, that consumers buy machines for functions, not for code. We don't go to the store and say, I want a machine that has code. You go in and say, I want a browser.
THE COURT: Did you know that these consumers that did not want a browser wanted the code that provided the nonbrowser functions in IE?
MR. ROBERTS: And he found that it was easy, finding of fact 177 from Dr. Felten, it is easy to remove browser functionality without affecting that underlying code.
THE COURT: That's just IE Explorer itself. 62 kilobytes. It's nothing.
MR. ROBERTS: No. Finding of fact 185 said when you do that, it is something.
THE COURT: That makes no sense to me, absolutely no sense to say that removal of lines of code amounting to 62 kilobytes is 20 percent of the program.
MR. ROBERTS: That's because when you remove the functionality, it turns out there is code that doesn't have to be summoned from the hard drive to the RAM when Windows 98 boots up. That is what Dr. Felten explained.
And besides, Dr. Felten was just showing that this could be done. Presumably Microsoft would do it in a different way that might show there is more communal code than shared code.
THE COURT: But if consumers want the four libraries that are the bulk of IE, your proposed tie doesn't give them any particular .. your solution to the proposed tie doesn't give them anything of any value. They've still got the 6 mgs. of hard drive occupied. Whenever they use these browser functions, they bring them to life.
MR. ROBERTS: What Felten showed was that you could remove browser functionality without compromising Windows 98.
THE COURT: Absolutely. That's the four lines of code.
MR. ROBERTS: Right.
THE COURT: The stipulation that the department and Microsoft reached in 1998, in compliance with the injunction even though it spoke of removing IE altogether, could in fact be solved entirely by deleting four lines of code.
MR. ROBERTS: One of the consequences of that, and this is finding of fact 185, supported at appendix page 976, is that there is more left there of Internet Explorer when you remove the four lines. Everything else is not shared with Windows 98.
THE COURT: I'm a little .. what you're talking about is that it was .. these findings deal with whether it was technologically feasible to get rid of, to sell a browserless Windows.
MR. ROBERTS: To remove browser functionality, yes.
THE COURT: But the question, I think, Microsoft 2 poses is not that. It's whether there is a benefit to consumers. And you may be able to remove an air.conditioner from a car and the car will function properly. But you can't deny that a car with an air.conditioner provides a benefit to consumers. And so it's the affirmative question.
MR. ROBERTS: Findings of fact 188 and 199 show that there is .. that the combination can be done as effectively by the ultimate consumer. That is the cross.examination of Allchin.
THE COURT: This is the 19 points in cross.examination.
MR. ROBERTS: Yes. I'm not sure that that would meet the test of Microsoft 2.
But the important point, and I would like to return to it, is that the focus of Jefferson Parish and Eastman Kodak, which do bind this Court today, is not on the benefits from the combination.
In Eastman Kodak, Kodak said, look, it is better to have parts and services sold together. That's what consumers want. And the Court, at 478 to 479 in U.S. Reports, said maybe so. It's not an antitrust violation to combine it. But what we don't see the benefit of is forcing consumers to take that.
Now, that same analysis should apply here. It may be of benefit to combining the operating system and the browser, but that's not the question. The question is, are there benefits to forcing consumers to take those two products together.
THE COURT: What do you make then of footnote 42 in Jefferson Parish where the court suggests that had the hospital been able to justify on the basis of, for example, providing 24 hour service or flexible service which is what they argue .. you wouldn't .. apply the per se test.
MR. ROBERTS: I don't read the footnote that way, Your Honor. I read that footnote combined with several of the others as saying don't tell us what the benefits are. There is one where the District Court -- it rejected the District Court's focus on whether this is improved health care.
Those are decisions for the market to make. If the combination is better, the market will say that. If the combination ..
THE COURT: But since the District Court made no findings as to why contractual .. a contract wouldn't have solved the problem, there is no basis for departing in the prior cases suggesting that had they done it they would have.
MR. ROBERTS: I guess that's an inference I'm not prepared to make given the other footnotes prior to that where the Court said, basically, we don't care if this improves health care because the question along those lines is for the market to decide.
That's what happened ..
THE COURT: There is a whole series of a pre- and post Jefferson Parish cases where the Courts took account of alleged business justifications of tie.in and did not apply the per se rule if there was such one that couldn't be accomplished in some less restrictive means.
MR. ROBERTS: I don't think there is any dispute on what the motivation for the tie was in this case. We got it from the Microsoft documents if you want to look at them. They are not going to be considered legitimate. This is Mr. Allchin, quote, I don't understand how IE is going to win. We must leverage Windows more.
THE COURT: Your answer to the question is there is no legitimate business justification here.
MR. ROBERTS: Not for the forcing. And this again .. I hesitate to repeat myself. But it is our basic point, and that is that we are not standing in the way of any combination. What we're standing in the way of is forcing.
If the combination has benefits and is good, more power to them. But it's the forcing, saying even if consumers want that off, you can't take it off. It raises the problems under the tying law.
THE COURT: The consumer can or can't? The consumer can take it off; right?
MR. ROBERTS: No. And, again, the chronology is interesting. When you are talking about Windows 95, Internet Explorer 3 and 4, yes. They could do the add/remove function. But the OEMs could not.
THE COURT: -- but if we're talking about consumer choice, the consumer can, and doesn't your argument, if it doesn't fall apart it at least becomes a little more suspect.
MR. ROBERTS: They made it very difficult for the ultimate consumer to remove Internet Explorer even though it was easy with Windows 95, and even though it was only a matter of contract with Internet Explorer 1 and 2. It's a steady progression ..
THE COURT: On the Internet they can certainly hide it and if they choose to -- if they want a different anesthesiologist, they can call him and put him on Start Up.
MR. ROBERTS: Again, I have two points. One it's not easy to run, to hide it for the consumer who opens the box.
THE COURT: I thought somebody said you take the icon and move it to the trash.
MR. ROBERTS: No. That's not the Felten .. Felten's program removes the browser functionality, it's not easy to hide it without affecting the operating system.
THE COURT: How is the consumer harmed as between the Felten program and if it's the case, that you can take the icon and put it in the trash? How is he harmed by not knowing the Felten program?
MR. ROBERTS: Well, my understanding is you just take the icon and put in the trash. There are many other ways to activate ..
THE COURT: Sure, if the consumer chose to do so. There are lots of ways to get back into it. It's not going to bother the consumer as he brings up his Start Up screen and puts Netscape on it.
MR. ROBERTS: The consumer ..
THE COURT: Your argument really sounds not so much concerned about IE being there, because we all know the consumers can choose not to use it. We all understand that. That isn't the question.
What you're really aggravated about in this case is that Netscape is not there. And Netscape has difficulty getting there.
MR. ROBERTS: What we're aggravated about is that.
THE COURT: A shortcut to our legal terminology -- It's a long day.
(Laughter.)
MR. ROBERTS: The decision about what is there, about what OEM is going to offer is not being made by competition. It's being made by Microsoft's tie. That's what we're aggravated about. If Internet Explorer could compete with Navigator, they should have competed on the merits.
The documents spell out, we can't win on the merits so we have to leverage the OS asset. Now that has consequences. It has consequences in the market for the tied product. Navigator is out in the cold.
It also has fundamental consequences for maintaining Microsoft's operating system monopoly. That is why the New England Journal is such an important case. That was the situation where you had ..
THE COURT: Why didn't the government cite it?
MR. ROBERTS: It was in the amicus brief that was filed. The reason ..
THE COURT: A ruling against tying?
MR. ROBERTS: The reason it's important is because it recognizes what's going on here. You had the newspaper with a monopoly. New technology came along ..
THE COURT: They made an exclusionary contract. If you advertise with them, you cannot in any way advertise with us.
MR. ROBERTS: A reverse tie. And what the Supreme Court's opinion said, this is a big problem because you are trying to snuff out innovation that threatens your monopoly.
And that is exactly what's going on with the tie in this case. The browser represented a threat to Microsoft's operating system monopoly, and Microsoft leveraged that monopoly to foreclose competition in a tied product market because that was the way ..
THE COURT: The whole market or just the OEM? What about IAP? If the leading IAP with a market power and a large share said, look, if you want my service, you have to take Navigator, is that illegal tying?
MR. ROBERTS: I would think it would be. It would be separate. Well, I guess I'm not sure if it was a separate products between what the IAP is providing and what the browser is providing. But if they were separate products ..
THE COURT: Well, the browser is a separate product according to your argument here, isn't it?
MR. ROBERTS: You also have to look at the other requirements for a tie.in. That's why ..
THE COURT: If it forecloses.
MR. ROBERTS: But is there market power?
THE COURT: I assumed there was.
MR. ROBERTS: If it is forced, yes, if there is foreclosure. If all the elements are met, it would satisfy that test.
But, again, in the case of the OEMs, for the same reason that caused the Supreme Court such concern in New England Journal.
And I would just like to state again ..
THE COURT: I would like to pursue Judge Randolph's hypothetical, suppose you had much more of a sophisticated IE market and AOL has a huge share. Let's suppose all the other little IAPs also the minute you sign up, they send you whatever their browser is.
When you download it, just automatically flows in so everyone is signing up and then the IAP finds himself with some browser. But they only paid, they paid just the way they pay ordinarily. Their 20 bucks a month; right?
I think on your theory, even though they're absolutely free to switch browsers, you've got a tie. Per se tie.
MR. ROBERTS: If they are free to switch, there is no forcing.
THE COURT: You can switch here.
THE COURT: You are free to switch by having one sign up with the IAP. You get a free browser without any difficulty. They just pop at you from the net.
MR. ROBERTS: But that's not how it works with the OEM channel. And that's the difference. The difference there is the consumer --
THE COURT: The browser went beyond the OEM channel. They are heading towards the net, aren't they?
MR. ROBERTS: Certainly. They not only foreclosed the OEM channel but took actions with respect to the IAPs, with Internet service vendors across the board.
THE COURT: People are free to switch.
MR. ROBERTS: If people are free to switch then there is no forced tie.
THE COURT: If I buy equipment that has only IE on it, I'm free to switch.
MR. ROBERTS: You're free to switch. But what the District Court found is that the OEM channel is the key one for effective competition. Consumers are going to basically take what comes with the system. And that is not the result of competition. That is the result of Microsoft leveraging its OS asset, as it explained.
THE COURT: It sounds like a Section 2 case.
THE COURT: What do you make of the 60 million downloads?
MR. ROBERTS: Well, there's a difference between usage and distribution. Again, the District Court found the key question is usage. It doesn't mean 60 million people are using Navigator.
THE COURT: No, no, but does it mean 60 million people took a look at it?
MR. ROBERTS: The significance of that number is very unclear. We don't know what it means. What it means, 20 of those 60 million are me trying to download it.
THE COURT: That makes 30 between us.
(Laughter.)
MR. ROBERTS: I don't know what it means. But again the critical point, it does not mean usage. And usage is the key question when it comes to whether it would develop into an alternative platform for software applications.
THE COURT: There may be some ambiguity about what the 60 million means. But it must mean at the very least, must it not, a significant number in the millions of individuals downloaded Netscape and used it?
MR. ROBERTS: I'm unwilling to speculate that it even means that, Your Honor.
THE COURT: You put, the government put an exhibit in, it's Government's 23 at the remedy stage, showing that in 1998, when this 60 million download figure was, that Netscape had a 50 percent market share that dropped by March 2000 to less than 20 percent.
MR. ROBERTS: I've got the chart .. Appendix 14.
THE COURT: Right. We may be getting ahead of ourselves. But if you had some .. had an evidentiary hearing on that chart, then maybe we would have some indication of what 60 million downloads means.
MR. ROBERTS: We don't think Microsoft has shown that the findings of fact in 239 to 241, that say, for example, that Navigator had only a tiny percentage of the distribution through the OEM channels, we don't think they have carried their burden of showing that that is clearly erroneous.
THE COURT: The answer to the 60 million downloads is yes, that was 1998. Look what happened after that.
MR. ROBERTS: Well, it was a sharp drop because, of course, the browser was already there. The OEMs were not going to put another one on. And that's what consumers got.
THE COURT: But you're losing sight of the difference between usage and availability. If the download really means that some number, some number, let's say, between 10 and 60 million people, downloaded it, had access to it and nonetheless decided to use IE, you don't have any complaint about that, do you?
MR. ROBERTS: No. If they are comparing Navigator and IE, and they are choosing IE, that's competition. We have no gripe.
THE COURT: Well, this highly suggestive datum, 60 million downloads, suggests that people are .. people who have already bought a PC, so by definition they have, by your account, have been forced fed Explorer, are now downloading Navigator; right?
It's not people who don't have a PC. It's not people who don't have IE. It's people who do have it.
MR. ROBERTS: I don't think there is any basis for speculation that it's not being used because IE is a better product. The District Court found there is no basis for assuming that IE was a better product. It found that there's a steady decline in usage and they found that that usage was caused by the tie and the other effort that Microsoft ..
THE COURT: If the 60 million means 60 million people actually had it on their machine and the usage is plummeting, do you have a problem with that?
MR. ROBERTS: If it's as a result of competition, no. But if it's the result of competition, why does Microsoft have to force people to take them to get it? If they are willing to compete, why don't they do .. what was the case in the prior ..
THE COURT: Maybe because they are entering a market where Netscape has 80 percent.
MR. ROBERTS: But that's always the case when there are barriers to entry. It's what protects them in the operating system market. But that doesn't mean that they're free to engage in what constitutes illegal conduct under Section 1 of the Sherman Act.
THE COURT: You're time is up, sir.
MR. ROBERTS: Thank you, Your Honor.
THE COURT: Thank you, Mr. Roberts.
MR. UROWSKY: I have just a few points to make, Your Honor.
On the question of whether OEMs are willing to ship two browsers, I would like respectively to invite the Court's attention to the fact that three OEMs testified at trial, Compaq, Apple and IBM, and they all ship two browsers.
There is also testimony in the record ..
THE COURT: And can those browsers be removed?
MR. UROWSKY: Those browsers can be removed because the implementation of the browser in those cases is as an application and not as operating system functionality.
THE COURT: Just to be complete here, would you tell us which two? Which two did they ship? MR. UROWSKY: I believe in the case of IBM, it was an IBM.developed browser called Web Explorer and Netscape, I think.
In the case of Apple, it was Internet Explorer and Netscape.
And in the case of Compaq, I believe it was Internet Explorer and Netscape.
There are other browsers available in the marketplace that are shipped by other OEMs.
THE COURT: Doesn't the fact they can be removed mean it is not comparable to the forced tie that Microsoft offers?
MR. UROWSKY: With great respect, Your Honor, I don't believe that's so. There is no indication that removing .. first of all, in those cases there no question .. well, in the case of IBM and Apple, there is no question about removal by an OEM because IBM and Apple are integrated providers of computers and software.
THE COURT: No, but the consumer can remove them.
MR. UROWSKY: Yes.
THE COURT: Okay.
THE COURT: Mr. Urowsky, you said in your opening argument that this wasn't forced purchase of the second product because Microsoft is not charging for it. What constrains, what restrains Microsoft from charging for Internet Explorer?
MR. UROWSKY: Actually, I didn't hear the question.
THE COURT: What constrains Microsoft from charging for Internet Explorer?
MR. UROWSKY: Well, Microsoft could have charged for it, but the practice of long standing in the development of operating systems over time is that they include more and more features and functionality without separate charge.
In other words, if you think about it, basically what it means is that over time the price of operating systems, the quality adjusted price of operating systems has been going down.
THE COURT: If Netscape disappeared from the face of the earth tomorrow, Microsoft could impose a $10 charge on its next version of Windows for Internet Explorer and there would be absolutely no constraint; right?
MR. UROWSKY: I don't agree with that. There are ..
THE COURT: Isn't it the competition with other versions of Windows that constrains you?
MR. UROWSKY: It's competition with other versions of Windows. It's competition with the installed base which will refuse to acquire new operating systems. There is pervasive piracy in the software industry.
As soon as you begin to move the price of a software product, you will engender resistance. That is one of the reasons why Microsoft doesn't do it. It's one of the reasons why there hasn't been an increase of any significance in the price of Windows since August, 1995, notwithstanding the hundreds and hundreds of millions of dollars that have gone into research and development to produce Windows 98 and subsequent improved versions.
Further to this theme about operating system providers, about OEMs not willing to ship two browsers, Mr. Barksdale's complaint in his direct testimony was that prior to 1996, meaning from August, 1995 to August, 1996, he was getting tremendous distribution in the OEM channel. At that time, every copy of Windows 95 coming out of the OEM channel had Internet Explorer on it.
If he was getting tremendous distribution during that year, then obviously the OEMs were willing to ship two browsers on the product. They weren't afraid of increased costs associated with providing service.
The problem arose for Mr. Barksdale when Microsoft dramatically improved Internet Explorer with the release of Version 3 and the OEMs then had true quality browsing software on the machine. And therefore, they weren't going to pay Netscape to ship the browser. Indeed, in some instances, they wanted to be paid to do it.
THE COURT: You said Apple ships two, two browsers? Right?
MR. UROWSKY: Yes.
THE COURT: Didn't the District Court find that Apple shipped the IE browser only after Microsoft threatened to discontinue Mac Office?
MR. UROWSKY: The District Court makes that as a finding, but, of course, even the District Court acknowledges that there was a far larger set of disputes between Microsoft and Apple which had to do mostly with patent and other intellectual property claims that Apple was preparing to ..
THE COURT: I don't understand the relevance of that.
MR. UROWSKY: Because all of the issues that .. affecting the relationship between Microsoft and Apple were resolved in a set of three agreements negotiated together and executed on the same day.
THE COURT: They were all subject to the same threat.
MR. UROWSKY: What I'm saying is that ..
THE COURT: I don't see why adding things to the threat makes any difference. If the resolution of this set of disputes was done under the shadow of Microsoft's threat to discontinue Mac Office, I'm not sure what it tells us about the significance of Apple's carrying two browsers.
MR. UROWSKY: Well, but it was also the product of a cross.licensing arrangement between Apple and Microsoft. It was also the product of an investment in Apple by Microsoft, which essentially .. THE COURT: That's a little surprising that they carry Explorer in a folder and Navigator is the default browser. Even after this agreement, Apple continued to have Navigator as the default browser; is that right?
MR. UROWSKY: No.
THE COURT: I have it turned around?
MR. UROWSKY: Precisely.
THE COURT: They carry Explorer under the agreement as default and Navigator in the folder.
MR. UROWSKY: That's correct, Your Honor.
THE COURT: Any separate data in the record on usage among Apple users?
MR. UROWSKY: Not in the record.
THE COURT: I suppose Apple users are particularly prone to avoid Internet Explorer.
MR. UROWSKY: That's what I have .. I have seen data but they are not in the record, and your intuition is correct.
I want to make just a couple of other points. One is that I think we have to come to grips with the fact that the government's position currently on what constitutes IE is simply access to software that is on the computer and that what they define as a breaking of the alleged tie is removing consumer access to the product.
And that is not what is normally viewed as a tying arrangement. And it is very difficult to see what is accomplished for the benefit of consumers by permitting OEMs to hide that functionality from them.
THE COURT: Under the more conventional view, if there's a tie, it's at the time of sale; right?
MR. UROWSKY: That's correct.
THE COURT: So it's a tie of your bundling Explorer and not your making it difficult to remove.
MR. UROWSKY: That would be correct. If that could be conceptualized as a tie as opposed to integration of the functionality, then it's hard to see how that tie is vitiated by hiding functionality from the end user. I think it's more insult to injury if you really believe that it's a tie.
There is in the record Defendant's Exhibit 68, a private placement memorandum for Netscape. It's dated January, 1995, where they acknowledge frankly that, in making disclosure to investors, that several operating system suppliers are already bundling browsing software with the operating system and that they have every reason to believe that every operating system supplier will do it in time at, I think the phrase is, "little or no cost".
I think this addresses the Court's interest in the question of whether there is a market for browserless operating systems. I think even Netscape recognized the clear trend as far back as January of 1995.
THE COURT: Let me ask you the same question. Was Mr. Roberts correct, that indeed if I searched really hard and looked at what he has referred me to, that I will find data supporting the District Court's suggestion that there is a market for browserless operating systems?
MR. UROWSKY: I think you will find some bits of evidence that suggest that some customers at one point along the way didn't want .. wanted a version of Windows 95 that didn't have browsing software in it. And those customers generally were satisfied by a version of Windows 95 that did not have IE 1 or IE 2 in it, which is to say, the original version released in the retail channel as opposed to the OEM channel.
Whether there is any reason to believe after Internet Explorer was improved in August, 1996, that there was a measurable group of purchasers who were interested in the upgraded version of Windows 95 without any browsing software, I think is debatable. In any event, there is no real quantification.
THE COURT: I think the question -- a more precise question here is whether there is a market for operating systems with browsers that can't be removed. Isn't that the question in view of the government's theory, that this is a forced tie?
MR. UROWSKY: I don't believe that that .. I don't believe that that is a relevant inquiry, Your Honor. I think that it is the government's burden to show, if the Jefferson Parish tests were applied, that there was a demand for browserless operating systems and a separate demand for browsers, and, under Jefferson Parish as I read it, that it was not efficient to deliver them together to the market, which of course it almost certainly was because adding additional software to a software product essentially costs nothing. And software products are frequently distributed together where there's a thought that they may be complimentary.
I think my last point is that we do not accept finding of fact 185. It is one of, I guess, maybe two dozen or so findings that we are challenging. That is the finding relating to the effect of running Mr. Felten's prototype program to remove access, end user access to Internet Explorer.
There is testimony at December 14, 1998, the morning session at page 42 that running Mr. Felten's program leaves 99.9 percent of the Windows code intact.
I said that was my last remark, but I looked down. I made the mistake of looking down for a moment and I thought I would just add one observation in response to a question that was addressed to Mr. Roberts about whether it would be an unlawful tie for Microsoft to bundle both Internet Explorer and Navigator with Windows.
And I might point out that that was in part the relief that the government initially sought in this case. It's in the prayer in the complaint.
Thank you, Your Honor.
THE COURT: Thank you. This part of the case is submitted. We will convene again tomorrow morning at 9:30 a.m. Thank you.
(At 3:25 p.m., the hearing was recessed
to reconvene at 9:30 a.m., Tuesday,
February 27, 2001.)
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