III. MICROSOFT’S POWER IN THE RELEVANT MARKET
33. Microsoft enjoys so much
power in the market for Intel-compatible PC operating systems that if it wished
to exercise this power solely in terms of price, it could charge a price for
Windows substantially above that which could be charged in a competitive
market. Moreover, it could do so for a
significant period of time without losing an unacceptable amount of business to
competitors. In other words, Microsoft
enjoys monopoly power in the relevant market.
34. Viewed together, three main facts indicate that Microsoft
enjoys monopoly power. First,
Microsoft’s share of the market for Intel-compatible PC operating systems is
extremely large and stable. Second,
Microsoft’s dominant market share is protected by a high barrier to entry. Third, and largely as a result of that
barrier, Microsoft’s customers lack a commercially viable alternative to
Windows.
Market Share
35. Microsoft possesses a dominant, persistent, and increasing
share of the world-wide market for Intel-compatible PC operating systems. Every year for the last decade, Microsoft’s
share of the market for Intel-compatible PC operating systems has stood above
ninety percent. For the last couple of
years the figure has been at least ninety-five percent, and analysts project
that the share will climb even higher over the next few years. Even if Apple’s Mac OS were included in the
relevant market, Microsoft’s share would still stand well above eighty percent.
The Applications Barrier to Entry
Description of the Applications Barrier to Entry
36. Microsoft’s dominant market share is protected by the same
barrier that helps define the market for Intel-compatible PC operating systems. As explained above, the applications barrier
would prevent an aspiring entrant into the relevant market from drawing a
significant number of customers away from a dominant incumbent even if the
incumbent priced its products substantially above competitive levels for a
significant period of time. Because
Microsoft’s market share is so dominant, the barrier has a similar effect
within the market: It prevents
Intel-compatible PC operating systems other than Windows from attracting
significant consumer demand, and it would continue to do so even if Microsoft
held its prices substantially above the competitive level.
37. Consumer interest in a PC operating system derives primarily
from the ability of that system to run applications. The consumer wants an operating system that runs not only types
of applications that he knows he will want to use, but also those types in
which he might develop an interest later.
Also, the consumer knows that if he chooses an operating system with
enough demand to support multiple applications in each product category, he
will be less likely to find himself straitened later by having to use an
application whose features disappoint him.
Finally, the average user knows that, generally speaking, applications
improve through successive versions. He
thus wants an operating system for which successive generations of his favorite
applications will be released — promptly at that. The fact that a vastly larger number of applications are written
for Windows than for other PC operating systems attracts consumers to Windows,
because it reassures them that their interests will be met as long as they use
Microsoft’s product.
38. Software development is characterized by substantial economies
of scale. The fixed costs of producing
software, including applications, is very high. By contrast, marginal costs are very low. Moreover, the costs of developing software
are “sunk” — once expended to develop software, resources so devoted cannot be
used for another purpose. The result of
economies of scale and sunk costs is that application developers seek to sell
as many copies of their applications as possible. An application that is written for one PC operating system will
operate on another PC operating system only if it is ported to that system, and
porting applications is both time-consuming and expensive. Therefore, application developers tend to
write first to the operating system with the most users — Windows. Developers might then port their
applications to other operating systems, but only to the extent that the
marginal added sales justify the cost of porting. In order to recover that cost, ISVs that do go to the effort of
porting frequently set the price of ported applications considerably higher
than that of the original versions written for Windows.
39. Consumer demand for Windows enjoys positive network
effects. A positive network effect is a
phenomenon by which the attractiveness of a product increases with the number
of people using it. The fact that there
is a multitude of people using Windows makes the product more attractive to
consumers. The large installed base
attracts corporate customers who want to use an operating system that new
employees are already likely to know how to use, and it attracts academic
consumers who want to use software that will allow them to share files easily
with colleagues at other institutions.
The main reason that demand for Windows experiences positive network
effects, however, is that the size of Windows’ installed base impels ISVs to
write applications first and foremost to Windows, thereby ensuring a large body
of applications from which consumers can choose. The large body of applications thus reinforces demand for
Windows, augmenting Microsoft’s dominant position and thereby perpetuating ISV
incentives to write applications principally for Windows. This self-reinforcing cycle is often
referred to as a “positive feedback loop.”
40. What for Microsoft is a positive feedback loop is for would-be
competitors a vicious cycle. For just
as Microsoft’s large market share creates incentives for ISVs to develop
applications first and foremost for Windows, the small or non-existent market
share of an aspiring competitor makes it prohibitively expensive for the
aspirant to develop its PC operating system into an acceptable substitute for
Windows. To provide a viable substitute
for Windows, another PC operating system would need a large and varied enough
base of compatible applications to reassure consumers that their interests in
variety, choice, and currency would be met to more-or-less the same extent as
if they chose Windows. Even if the
contender attracted several thousand compatible applications, it would still
look like a gamble from the consumer’s perspective next to Windows, which
supports over 70,000 applications. The
amount it would cost an operating system vendor to create that many
applications is prohibitively large.
Therefore, in order to ensure the availability of a set of applications
comparable to that available for Windows, a potential rival would need to
induce a very large number of ISVs to write to its operating system.
41. In deciding whether to develop an application for a new
operating system, an ISV’s first consideration is the number of users it
expects the operating system to attract.
Out of this focus arises a collective-action problem: Each ISV realizes that the new operating
system could attract a significant number of users if enough ISVs developed
applications for it; but few ISVs want to sink resources into developing for
the system until it becomes established.
Since everyone is waiting for everyone else to bear the risk of early
adoption, the new operating system has difficulty attracting enough
applications to generate a positive feedback loop. The vendor of a new operating system cannot effectively solve
this problem by paying the necessary number of ISVs to write for its operating
system, because the cost of doing so would dwarf the expected return.
42. Counteracting the collective-action phenomenon is another
known as the “first-mover incentive.”
For an ISV interested in attracting users, there may be an advantage to
offering the first and, for a while, only application in its category that runs
on a new PC operating system. The user
base of the new system may be small, but every user of that system who wants
such an application will be compelled to use the ISV’s offering. Moreover, if demand for the new operating
system suddenly explodes, the first mover will reap large sales before any
competitors arrive. An ISV thus might
be drawn to a new PC operating system as a “protected harbor.” Once first-movers stake claims to the major
categories of applications, however, there is a strong chance that the new
operating system could stall; it would not support the most familiar
applications, nor the variety and number of applications, that attract large
numbers of consumers, and there would no longer exist a first-mover incentive
to attract additional ISVs to the important application categories. Although the upstart operating system might
find itself with enough applications support to hold a fraction of the market,
the collective-action phenomenon would still prevent the system from gaining
the kind of positive feedback momentum that can turn a fringe entrant into a
rival that would put competitive pressure on Windows.
43. The cost to a would-be entrant of inducing ISVs to write
applications for its operating system exceeds the cost that Microsoft itself
has faced in inducing ISVs to write applications for its operating system
products, for Microsoft never confronted a highly penetrated market dominated
by a single competitor. Of course, the
fact that it is extremely difficult for an efficient would-be rival to
accumulate enough applications support to compete with Windows does not mean
that sustaining its own applications support is effortless for Microsoft. In fact, if Microsoft stopped investing the
hundreds of millions of dollars it spends each year inducing ISVs to write
applications for Windows, it might become easier than it currently is for a
competitor to develop its own positive feedback loop. But given that Windows today enjoys overwhelmingly more
applications support than any other PC operating system, it would still take
that competitor years to develop the necessary momentum. Plus, while Microsoft may spend more on
platform “evangelization,” even in relative terms, than any other PC
operating-system vendor, it is not difficult to understand why it is worthwhile
for the principal beneficiary of the applications barrier to devote more
resources to augmenting it than aspiring rivals are willing to expend in
speculative efforts to erode it.
44. Microsoft continually releases “new and improved” versions of
its PC operating system. Each time it
does, Microsoft must convince ISVs to write applications that take advantage of
new APIs, so that existing Windows users will have incentive to buy an
upgrade. Since ISVs are usually still
earning substantial revenue from applications written for the last version of
Windows, Microsoft must convince them to write for the new version. Even if ISVs are slow to take advantage of
the new APIs, though, no applications barrier stands in the way of consumers
adopting the new system, for Microsoft ensures that successive versions of
Windows retain the ability to run applications developed for earlier
versions. In fact, since ISVs know that
consumers do not feel locked into their old versions of Windows and that new
versions have historically attracted substantial consumer demand, ISVs will
generally write to new APIs as long as the interfaces enable attractive,
innovative features. Microsoft
supplements developers’ incentives by extending various ‘seals of approval’ —
visible to consumers, investors, and industry analysts — to those ISVs that
promptly develop new versions of their applications adapted to the newest
version of Windows. In addition,
Microsoft works closely with ISVs to help them adapt their applications to the
newest version of the operating system — a process that is in any event far
easier than porting an application from one vendor’s PC operating system to
another’s. In sum, despite the
substantial resources Microsoft expends inducing ISVs to develop applications for
new versions of Windows, the company does not face any obstacles nearly as
imposing as the barrier to entry that vendors and would-be vendors of other PC
operating systems must overcome.
Empirical Evidence of the Applications Barrier to
Entry
45. The experiences of IBM and Apple, Microsoft’s most significant
operating system rivals in the mid- and late 1990s, confirm the strength of the
applications barrier to entry.
OS/2 Warp
46. IBM’s inability to gain widespread developer support for its
OS/2 Warp operating system illustrates how the massive Windows installed base
makes it prohibitively costly for a rival operating system to attract enough
developer support to challenge Windows.
In late 1994, IBM introduced its Intel-compatible OS/2 Warp operating system
and spent tens of millions of dollars in an effort to attract ISVs to develop
applications for OS/2 and in an attempt to reverse-engineer, or “clone,” part
of the Windows API set. Despite these
efforts, IBM could obtain neither significant market share nor ISV support for
OS/2 Warp. Thus, although at its peak
OS/2 ran approximately 2,500 applications and had 10% of the market for
Intel-compatible PC operating systems, IBM ultimately determined that the
applications barrier prevented effective competition against Windows 95. For that reason, in 1996 IBM stopped trying
to convince ISVs to write for OS/2 Warp.
IBM now targets the product at a market niche, namely enterprise
customers (mainly banks) that are interested in particular types of application
that run on OS/2 Warp. The fact that IBM
no longer tries to compete with Windows is evidenced by the fact that it prices
OS/2 Warp at about two-and-one-half times the price of Windows 98.
The Mac OS
47. The inability of Apple to compete effectively with Windows
provides another example of the applications barrier to entry in
operation. Although Apple’s Mac OS
supports more than 12,000 applications, even an inventory of that magnitude is
not sufficient to enable Apple to present a significant percentage of users
with a viable substitute for Windows.
The absence of a large installed base, in turn, reinforces the disparity
between the applications made available for the Mac OS and those made available
for Windows, further inhibiting Apple’s sales.
The applications barrier thus prevents the Mac OS from hindering
Microsoft’s ability to control price, regardless of whether the Mac OS is
regarded as being in the relevant market or not.
Fringe Operating Systems
48. The applications barrier to entry does not prevent
non-Microsoft, Intel-compatible PC operating systems from attracting enough
consumer demand and ISV support to survive.
It does not even prevent vendors of those products from making a
profit. The barrier does, however,
prevent the products from drawing a significant percentage of consumers away
from Windows.
49. As discussed above, Be markets an Intel-compatible PC
operating system, called BeOS, that is specially suited to support multimedia
functions. The operating system
survives on a relatively minuscule number of applications (approximately 1,000)
and a user base which, at around 750,000, is trivial compared to the number of
Windows users. One of the reasons the
BeOS can even attract that many users despite its small base of applications is
that it advertises itself as a complement to, rather than as a substitute for,
Windows. Although the BeOS could run an
Intel-compatible PC system without Windows, it is almost always loaded on a
system along with Windows. What is
more, when these dual-loaded PC systems are turned on, Windows automatically
boots; the user must then take affirmative steps to invoke the BeOS. While this scheme allows the BeOS to occupy
a niche in the market, it does not place the product on a trajectory to replace
Windows on a significant number of PCs.
The special multimedia support provided by the BeOS may, for a small
number of users, outweigh the disadvantages of maintaining two large, complex
operating systems on one PC. Of that
group, however, it is likely that only a tiny number of users will find that
support so attractive that they would be willing to forego Windows, and its
huge base of compatible applications, altogether.
50. The experience of the Linux operating system, a version of
which runs on Intel-compatible PCs, similarly fails to refute the existence of
an applications barrier to entry. Linux
is an “open source” operating system that was created, and is continuously
updated, by a global network of software developers who contribute their labor
for free. Although Linux has between
ten and fifteen million users, the majority of them use the operating system to
run servers, not PCs. Several ISVs have
announced their development of (or plans to develop) Linux versions of their
applications. To date, though, legions
of ISVs have not followed the lead of these first movers. Similarly, consumers have by and large shown
little inclination to abandon Windows, with its reliable developer support, in
favor of an operating system whose future in the PC realm is unclear. By itself, Linux’s open-source development
model shows no signs of liberating that operating system from the cycle of
consumer preferences and developer incentives that, when fueled by Windows’
enormous reservoir of applications, prevents non-Microsoft operating systems
from competing.
Open-Source Applications Development
51. Since application developers working under an open-source
model are not looking to recoup their investment and make a profit by selling
copies of their finished products, they are free from the imperative that compels
proprietary developers to concentrate their efforts on Windows. In theory, then, open-source developers are
at least as likely to develop applications for a non-Microsoft operating system
as they are to write Windows-compatible applications. In fact, they may be disposed ideologically to focus their
efforts on open-source platforms like Linux.
Fortunately for Microsoft, however, there are only so many developers in
the world willing to devote their talents to writing, testing, and debugging
software pro bono publico. A small corps may be willing to concentrate its efforts on
popular applications, such as browsers and office productivity applications,
that are of value to most users. It is
unlikely, though, that a sufficient number of open-source developers will
commit to developing and continually updating the large variety of applications
that an operating system would need to attract in order to present a
significant number of users with a viable alternative to Windows. In practice, then, the open-source model of
applications development may increase the base of applications that run on
non-Microsoft PC operating systems, but it cannot dissolve the barrier that
prevents such operating systems from challenging Windows.
Cloning the 32-Bit Windows APIs
52. Theoretically, the developer of a non-Microsoft,
Intel-compatible PC operating system could circumvent the applications barrier
to entry by cloning the APIs exposed by the 32-bit versions of Windows (Windows
9x and Windows NT). Applications
written for Windows would then also run on the rival system, and consumers
could use the rival system confident in that knowledge. Translating this theory into practice is
virtually impossible, however. First of
all, cloning the thousands of APIs already exposed by Windows would be an
enormously expensive undertaking. More
daunting is the fact that Microsoft continually adds APIs to Windows through
updates and new versions. By the time a
rival finished cloning the APIs currently in existence, Windows would have
exposed a multitude of new ones. Since
the rival would never catch up, it would never be able to assure consumers that
its operating system would run all of the applications written for Windows. IBM discovered this to its dismay in the
mid-1990s when it failed, despite a massive investment, to clone a sufficiently
large part of the 32-bit Windows APIs.
In short, attempting to clone the 32-bit Windows APIs is such an
expensive, uncertain undertaking that it fails to present a practical option
for a would-be competitor to Windows.
Viable Alternatives to Windows
53. That Microsoft’s market share and the applications barrier to
entry together endow the company with monopoly power in the market for
Intel-compatible PC operating systems is directly evidenced by the sustained
absence of realistic commercial alternatives to Microsoft’s PC operating-system
products.
54. OEMs are the most important direct customers for operating
systems for Intel-compatible PCs.
Because competition among OEMs is intense, they pay particularly close
attention to consumer demand. OEMs are
thus not only important customers in their own right, they are also surrogates
for consumers in identifying reasonably-available commercial alternatives to
Windows. Without significant exception,
all OEMs pre-install Windows on the vast majority of PCs that they sell, and
they uniformly are of a mind that there exists no commercially viable
alternative to which they could switch in response to a substantial and
sustained price increase or its equivalent by Microsoft. For example, in 1995, at a time when IBM
still placed hope in OS/2's ability to rival Windows, the firm nevertheless
calculated that its PC company would lose between seventy and ninety percent of
its sales volume if failed to load Windows 95 on its PCs. Although a few OEMs have announced their
intention to pre-install Linux on some of the computers they ship, none of them
plan to install Linux in lieu of Windows on any appreciable number of PC (as
opposed to server) systems. For its
part, Be is not even attempting to persuade OEMs to install the BeOS on PCs to
the exclusion of Windows.
55. OEMs believe that the likelihood of a viable alternative to
Windows emerging any time in the next few years is too low to constrain
Microsoft from raising prices or imposing other burdens on customers and
users. The accuracy of this belief is
highlighted by the fact that the other vendors of Intel-compatible PC operating
systems do not view their own offerings as viable alternatives to Windows. Microsoft knows that OEMs have no choice but
to load Windows, both because it has a good understanding of the market in
which it operates and because OEMs have told Microsoft as much. Indicative of Microsoft’s assessment of the
situation is the fact that, in a 1996 presentation to the firm’s executive
committee, the Microsoft executive in charge of OEM licensing reported that
piracy continued to be the main competition to the company’s operating system
products. Secure in this knowledge,
Microsoft did not consider the prices of other Intel-compatible PC operating
systems when it set the price of Windows 98.
56. As the Court found above, the growth of server- and
middleware-based applications development might eventually weaken the
applications barrier to entry. This
would not only make it easier for outside firms to enter the market, it could
also make it easier for non-Microsoft firms already in the market to present a
viable alternative to Windows. But as
the Court also found above, it is not clear whether ISVs will ever develop a
large, diverse body of full-featured applications that rely solely on APIs
exposed by servers and middleware.
Furthermore, even assuming that such a movement has already begun in
earnest, it will take several years for the applications barrier to erode
enough to enable a non-Microsoft, Intel-compatible PC operating system to
develop into a viable alternative to Windows.
Price Restraint Posed by Microsoft’s Installed Base
57. Software never expires, so consumers who already have a
version of Windows with which they are content and who are not shopping for a
new PC system are somewhat reluctant to incur the cost of upgrading to a new
version of Windows. Fortunately for
Microsoft, the pace of innovation in PC hardware is rapid, and the price of
that hardware has declined steadily in recent years. As a result, existing PC users buy new PC systems relatively
frequently, and OEMs still attract at a healthy rate buyers who have never
owned a computer. The license for one
of Microsoft’s operating system products prohibits the user from transferring
the operating system to another machine, so there is no legal secondary market
in Microsoft operating systems. This
means that any consumer who buys a new Intel-compatible PC and wants Windows
must buy a new copy of the operating system.
Microsoft takes pains to ensure that the versions of its operating
system that OEMs pre-install on new PC systems are the most current. It does this, in part, by increasing the
price to OEMs of older versions of Windows when the newer versions are
released. Since Microsoft can sell so
many copies of each new operating system through the sales of new PC systems,
the average price it sets for those systems is little affected by the fact that
older versions of Windows never wear out.
Price Restraint Posed by Piracy
58. Although there is no legal secondary market for Microsoft’s PC
operating systems, there is a thriving illegal one. Software pirates illegally copy software products such as
Windows, selling each copy for a fraction of the vendor’s usual price. One of the ways Microsoft combats piracy is
by advising OEMs that they will be charged a higher price for Windows unless
they drastically limit the number of PCs that they sell without an operating system
pre-installed. In 1998, all major OEMs
agreed to this restriction. Naturally,
it is hard to sell a pirated copy of Windows to a consumer who has already
received a legal copy included in the price of his new PC system. Thus, Microsoft is able to effectively
contain, if not extinguish, the illegal secondary market for its
operating-system products. So even
though Microsoft is more concerned about piracy than it is about other firms’
operating system products, the company’s pricing is not substantially
constrained by the need to reduce the incentives for consumers to acquire their
copies of Windows illegally.
Price Restraint Posed by Long-Term Threats
59. The software industry in general is characterized by dynamic,
vigorous competition. In many cases,
one of the early entrants into a new software category quickly captures a
lion’s share of the sales, while other products in the category are either
driven out altogether or relegated to niche positions. What eventually displaces the leader is
often not competition from another product within the same software category,
but rather a technological advance that renders the boundaries defining the
category obsolete. These events, in
which categories are redefined and leaders are superseded in the process, are
spoken of as “inflection points.”
60. The exponential growth of the Internet represents an
inflection point born of complementary technological advances in the computer
and telecommunications industries. The
rise of the Internet in turn has fueled the growth of server-based computing,
middleware, and open-source software development. Working together, these nascent paradigms could oust the PC
operating system from its position as the primary platform for applications
development and the main interface between users and their computers. Microsoft recognizes that new paradigms
could arise to depreciate the value of selling PC operating systems; however,
the fact that these new paradigms already exist in embryonic or primitive form
does not prevent Microsoft from enjoying monopoly power today. For while consumers might one day turn to
network computers, or Linux, or a combination of middleware and some other
operating system, as an alternative to Windows, the fact remains that they are
not doing so today. Nor are consumers
likely to do so in appreciable numbers any time in the next few years. Unless and until that day arrives, no
significant percentage of consumers will be able to abandon Windows without
incurring substantial costs. Microsoft
can therefore set the price of Windows substantially higher than that which
would be charged in a competitive market — or impose other burdens on consumers
— without losing so much business as to make the action unprofitable. If Microsoft exerted its power solely to
raise price, the day when users could turn away from Windows without incurring
substantial costs would still be several years distant. Moreover, Microsoft could keep its prices
high for a significant period of time and still lower them in time to meet the
threat of a new paradigm.
Alternatively, Microsoft could delay the arrival of a new paradigm on
the scene by expending surplus monopoly power in ways other than the
maintenance of high prices.
Significance of Microsoft’s Innovation
61. The fact that Microsoft invests heavily in research and
development does not evidence a lack of monopoly power. Indeed, Microsoft has incentives to innovate
aggressively despite its monopoly power.
First, if there are innovations that will make Intel-compatible PC systems
attractive to more consumers, and those consumers less sensitive to the price
of Windows, the innovations will translate into increased profits for
Microsoft. Second, although Microsoft
could significantly restrict its investment in innovation and still not face a
viable alternative to Windows for several years, it can push the emergence of
competition even farther into the future by continuing to innovate
aggressively. While Microsoft may not
be able to stave off all potential paradigm shifts through innovation, it can
thwart some and delay others by improving its own products to the greater
satisfaction of consumers.
Microsoft’s Pricing Behavior
62. Microsoft’s actual pricing behavior is consistent with the
proposition that the firm enjoys monopoly power in the market for
Intel-compatible PC operating systems.
The company’s decision not to consider the prices of other vendors’
Intel-compatible PC operating systems when setting the price of Windows 98, for
example, is probative of monopoly power. One would expect a firm in a competitive market to pay much closer
attention to the prices charged by other firms in the market. Another indication of monopoly power is the
fact that Microsoft raised the price that it charged OEMs for Windows 95, with
trivial exceptions, to the same level as the price it charged for Windows 98
just prior to releasing the newer product.
In a competitive market, one would expect the price of an older
operating system to stay the same or decrease upon the release of a newer, more
attractive version. Microsoft, however,
was only concerned with inducing OEMs to ship Windows 98 in favor of the older
version. It is unlikely that Microsoft
would have imposed this price increase if it were genuinely concerned that OEMs
might shift their business to another vendor of operating systems or hasten the
development of viable alternatives to Windows.
63. Finally, it is indicative of monopoly power that Microsoft
felt that it had substantial discretion in setting the price of its Windows 98
upgrade product (the operating system product it sells to existing users of
Windows 95). A Microsoft study from
November 1997 reveals that the company could have charged $49 for an upgrade to
Windows 98 — there is no reason to believe that the $49 price would have been
unprofitable — but the study identifies $89 as the revenue-maximizing
price. Microsoft thus opted for the
higher price.
64. An aspect of Microsoft’s pricing behavior that, while not
tending to prove monopoly power, is consistent with it is the fact that the
firm charges different OEMs different prices for Windows, depending on the
degree to which the individual OEMs comply with Microsoft’s wishes. Among the five largest OEMs, Gateway and
IBM, which in various ways have resisted Microsoft’s efforts to enlist them in
its efforts to preserve the applications barrier to entry, pay higher prices
than Compaq, Dell, and Hewlett-Packard, which have pursued less contentious
relationships with Microsoft.
65. It is not possible with the available data to determine with
any level of confidence whether the price that a profit-maximizing firm with
monopoly power would charge for Windows 98 comports with the price that
Microsoft actually charges. Even if it could
be determined that Microsoft charges less than the profit-maximizing monopoly
price, though, that would not be probative of a lack of monopoly power, for
Microsoft could be charging what seems like a low short-term price in order to
maximize its profits in the future for reasons unrelated to underselling any
incipient competitors. For instance,
Microsoft could be stimulating the growth of the market for Intel-compatible PC
operating systems by keeping the price of Windows low today. Given the size and stability of its market
share, Microsoft stands to reap almost all of the future rewards if there are
yet more consumers of Intel-compatible PC operating systems. By pricing low relative to the short-run
profit-maximizing price, thereby focusing on attracting new users to the
Windows platform, Microsoft would also intensify the positive network effects
that add to the impenetrability of the applications barrier to entry.
66. Furthermore, Microsoft expends a significant portion of its
monopoly power, which could otherwise be spent maximizing price, on imposing
burdensome restrictions on its customers — and in inducing them to behave in
ways — that augment and prolong that monopoly power. For example, Microsoft attaches to a Windows license conditions that
restrict the ability of OEMs to promote software that Microsoft believes could
weaken the applications barrier to entry.
Microsoft also charges a lower price to OEMs who agree to ensure that
all of their Windows machines are powerful enough to run Windows NT for
Workstations. To the extent this
provision induces OEMs to concentrate their efforts on the development of
relatively powerful, expensive PCs, it makes OEMs less likely to pursue
simultaneously the opposite path of developing “thin client” systems, which
could threaten demand for Microsoft’s Intel-compatible PC operating system
products. In addition, Microsoft
charges a lower price to OEMs who agree to ship all but a minute fraction of
their machines with an operating system pre-installed. While this helps combat piracy, it also makes
it less likely that consumers will detect increases in the price of Windows and
renders operating systems not pre-installed by OEMs in large numbers even less
attractive to consumers. After all, a
consumer’s interest in a non-Windows operating system might not outweigh the
burdens on system memory and performance associated with supporting two
operating systems on a single PC. Other
such restrictions and incentives are described below.
1.
Microsoft’s
Actions Toward Other Firms
67. Microsoft’s monopoly power is also evidenced by the fact that,
over the course of several years, Microsoft took actions that could only have
been advantageous if they operated to reinforce monopoly power. These actions are described below.
IV. THE MIDDLEWARE THREATS
68. Middleware technologies, as
previously noted, have the potential to weaken the applications barrier to
entry. Microsoft was apprehensive that
the APIs exposed by middleware technologies would attract so much developer interest,
and would become so numerous and varied, that there would arise a substantial
and growing number of full-featured applications that relied largely, or even
wholly, on middleware APIs. The
applications relying largely on middleware APIs would potentially be relatively
easy to port from one operating system to another. The applications relying exclusively on middleware APIs would
run, as written, on any operating system hosting the requisite middleware. So the more popular middleware became and
the more APIs it exposed, the more the positive feedback loop that sustains the
applications barrier to entry would dissipate.
Microsoft was concerned with middleware as a category of software; each
type of middleware contributed to the threat posed by the entire category. At the same time, Microsoft focused its
antipathy on two incarnations of middleware that, working together, had the
potential to weaken the applications barrier severely without the assistance of
any other middleware. These were
Netscape’s Web browser and Sun’s implementation of the Java technologies.
1.
The
Netscape Web browser
69. Netscape Navigator possesses three key middleware attributes
that endow it with the potential to diminish the applications barrier to
entry. First, in contrast to
non-Microsoft, Intel-compatible PC operating systems, which few users would
want to use on the same PC systems that carry their copies of Windows, a
browser can gain widespread use based on its value as a complement to
Windows. Second, because Navigator
exposes a set (albeit a limited one) of APIs, it can serve as a platform for
other software used by consumers. A
browser product is particularly well positioned to serve as a platform for
network-centric applications that run in association with Web pages. Finally, Navigator has been ported to more
than fifteen different operating systems.
Thus, if a developer writes an application that relies solely on the
APIs exposed by Navigator, that application will, without any porting, run on
many different operating systems.
70. Adding to Navigator’s potential to weaken the applications
barrier to entry is the fact that the Internet has become both a major
inducement for consumers to buy PCs for the first time and a major occupier of
the time and attention of current PCs users.
For any firm looking to turn its browser product into an applications
platform such to rival Windows, the intense consumer interest in all things
Internet-related is a great boon.
71. Microsoft knew in the fall of 1994 that Netscape was
developing versions of a Web browser to run on different operating
systems. It did not yet know, however,
that Netscape would employ Navigator to generate revenue directly, much less
that the product would evolve in such a way as to threaten Microsoft. In fact, in late December 1994, Netscape’s
chairman and chief executive officer (“CEO”), Jim Clark, told a Microsoft
executive that the focus of Netscape’s business would be applications running
on servers and that Netscape did not intend to succeed at Microsoft’s expense.
72. As soon as Netscape released Navigator on December 15, 1994,
the product began to enjoy dramatic acceptance by the public; shortly after its
release, consumers were already using Navigator far more than any other browser
product. This alarmed Microsoft, which
feared that Navigator’s enthusiastic reception could embolden Netscape to
develop Navigator into an alternative platform for applications
development. In late May 1995, Bill
Gates, the chairman and CEO of Microsoft, sent a memorandum entitled “The
Internet Tidal Wave” to Microsoft’s executives describing Netscape as a “new
competitor ‘born’ on the Internet.” He
warned his colleagues within Microsoft that Netscape was “pursuing a
multi-platform strategy where they move the key API into the client to
commoditize the underlying operating system.”
By the late spring of 1995, the executives responsible for setting
Microsoft’s corporate strategy were deeply concerned that Netscape was moving
its business in a direction that could diminish the applications barrier to
entry.
B. Sun’s Implementation of the Java
Technologies
73. The term “Java” refers to four interlocking elements. First, there is a Java programming language
with which developers can write applications.
Second, there is a set of programs written in Java that expose APIs on
which developers writing in Java can rely.
These programs are called the “Java class libraries.” The third element is the Java compiler,
which translates the code written by the developer into Java “bytecode.” Finally, there are programs called “Java
virtual machines,” or “JVMs,” which translate Java bytecode into instructions
comprehensible to the underlying operating system. If the Java class libraries and a JVM are present on a PC system,
the system is said to carry a “Java runtime environment.”
74. The inventors of Java at Sun Microsystems intended the
technology to enable applications written in the Java language to run on a
variety of platforms with minimal porting.
A program written in Java and relying only on APIs exposed by the Java
class libraries will run on any PC system containing a JVM that has itself been
ported to the resident operating system.
Therefore, Java developers need to port their applications only to the
extent that those applications rely directly on the APIs exposed by a
particular operating system. The more
an application written in Java relies on APIs exposed by the Java class
libraries, the less work its developer will need to do to port the application
to different operating systems. The
easier it is for developers to port their applications to different operating
systems, the more applications will be written for operating systems other than
Windows. To date, the Java class
libraries do not expose enough APIs to support the development of full-featured
applications that will run well on multiple operating systems without the need
for porting; however, they do allow relatively simple, network-centric
applications to be written cross-platform.
It is Sun’s ultimate ambition to expand the class libraries to such an
extent that many full-featured, end-user-oriented applications will be written
cross-platform. The closer Sun gets to
this goal of “write once, run anywhere,” the more the applications barrier to
entry will erode.
75. Sun announced in May 1995 that it had developed the Java
programming language. Mid-level
executives at Microsoft began to express concern about Sun’s Java vision in the
fall of that year, and by late spring of 1996, senior Microsoft executives were
deeply worried about the potential of Sun’s Java technologies to diminish the
applications barrier to entry.
76. Sun’s strategy could only succeed if a Java runtime
environment that complied with Sun’s standards found its way onto PC systems
running Windows. Sun could not count on
Microsoft to ship with Windows an implementation of the Java runtime
environment that threatened the applications barrier to entry. Fortunately for Sun, Netscape agreed in May
1995 to include a copy of Sun’s Java runtime environment with every copy of
Navigator, and Navigator quickly became the principal vehicle by which Sun
placed copies of its Java runtime environment on the PC systems of Windows
users.
77. The combined efforts of Netscape and Sun threatened to hasten
the demise of the applications barrier to entry, opening the way for
non-Microsoft operating systems to emerge as acceptable substitutes for
Windows. By stimulating the development
of network-centric Java applications accessible to users through browser products,
the collaboration of Netscape and Sun also heralded the day when vendors of
information appliances and network computers could present users with viable
alternatives to PCs themselves.
Nevertheless, these middleware technologies have a long way to go before
they might imperil the applications barrier to entry. Windows 98 exposes nearly ten thousand APIs, whereas the combined
APIs of Navigator and the Java class libraries, together representing the
greatest hope for proponents of middleware, total less than a thousand. Decision-makers at Microsoft are
apprehensive of potential as well as present threats, though, and in 1995 the
implications of the symbiosis between Navigator and Sun’s Java implementation
were not lost on executives at Microsoft, who viewed Netscape’s cooperation
with Sun as a further reason to dread the increasing use of Navigator.
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