Opinion ID: 185418
Heading Depth: 3
Heading Rank: 4

Heading: Dealings with Internet Content Providers, Independent Software Vendors, and Apple Computer

Text: 122 The District Court held that Microsoft engages in exclusionary conduct in its dealings with ICPs, which develop websites; ISVs, which develop software; and Apple, which is both an OEM and a software developer. See Conclusions of Law, at 42-43 (deals with ICPs, ISVs, and Apple supplemented Microsoft's efforts in the OEM and IAP channels). The District Court condemned Microsoft's deals with ICPs and ISVs, stating: By granting ICPs and ISVs free licenses to bundle [IE] with their offerings, and by exchanging other valuable inducements for their agreement to distribute, promote[,] and rely on [IE] rather than Navigator, Microsoft directly induced developers to focus on its own APIs rather than ones exposed by Navigator. Id. (citing Findings of Fact p p 334-35, 340). 123 With respect to the deals with ICPs, the District Court's findings do not support liability. After reviewing the ICP agreements, the District Court specifically stated that there is not sufficient evidence to support a finding that Microsoft's promotional restrictions actually had a substantial, deleterious impact on Navigator's usage share. Findings of Fact p 332. Because plaintiffs failed to demonstrate that Microsoft's deals with the ICPs have a substantial effect upon competition, they have not proved the violation of the Sherman Act. 124 As for Microsoft's ISV agreements, however, the District Court did not enter a similar finding of no substantial effect. The District Court described Microsoft's deals with ISVs as follows: 125 In dozens of First Wave agreements signed between the fall of 1997 and the spring of 1998, Microsoft has promised to give preferential support, in the form of early Windows 98 and Windows NT betas, other technical information, and the right to use certain Microsoft seals of approval, to important ISVs that agree to certain conditions. One of these conditions is that the ISVs use Internet Explorer as the default browsing software for any software they develop with a hypertext-based user interface. Another condition is that the ISVs use Microsoft's HTML Help, which is accessible only with Internet Explorer, to implement their applications' help systems. 126 Id. p 339. The District Court further found that the effect of these deals is to ensure [ ] that many of the most popular Web-centric applications will rely on browsing technologies found only in Windows, id. p 340, and that Microsoft's deals with ISVs therefore increase[ ] the likelihood that the millions of consumers using [applications designed by ISVs that entered into agreements with Microsoft] will use Internet Explorer rather than Navigator. Id. p 340. 127 The District Court did not specifically identify what share of the market for browser distribution the exclusive deals with the ISVs foreclose. Although the ISVs are a relatively small channel for browser distribution, they take on greater significance because, as discussed above, Microsoft had largely foreclosed the two primary channels to its rivals. In that light, one can tell from the record that by affecting the applications used by millions of consumers, Microsoft's exclusive deals with the ISVs had a substantial effect in further foreclosing rival browsers from the market. (Data introduced by Microsoft, see Direct Testimony of Cameron Myhrvold p 84, reprinted in 6 J.A. at 3922-23, and subsequently relied upon by the District Court in its findings, see, e.g., Findings of Fact p 270, indicate that over the two-year period 1997-98, when Microsoft entered into the First Wave agreements, there were 40 million new users of the internet.) Because, by keeping rival browsers from gaining widespread distribution (and potentially attracting the attention of developers away from the APIs in Windows), the deals have a substantial effect in preserving Microsoft's monopoly, we hold that plaintiffs have made a prima facie showing that the deals have an anticompetitive effect. 128 Of course, that Microsoft's exclusive deals have the anticompetitive effect of preserving Microsoft's monopoly does not, in itself, make them unlawful. A monopolist, like a competitive firm, may have a perfectly legitimate reason for wanting an exclusive arrangement with its distributors. Accordingly, Microsoft had an opportunity to, but did not, present the District Court with evidence demonstrating that the exclusivity provisions have some such procompetitive justification. See Conclusions of Law, at 43 (citing Findings of Fact p p 339-40) (With respect to the ISV agreements, Microsoft has put forward no procompetitive business ends whatsoever to justify their exclusionary terms.). On appeal Microsoft likewise does not claim that the exclusivity required by the deals serves any legitimate purpose; instead, it states only that its ISV agreements reflect an attempt to persuade ISVs to utilize Internet-related system services in Windows rather than Navigator. Appellant's Opening Br. at 114. As we explained before, however, keeping developers focused upon Windows--that is, preserving the Windows monopoly-is a competitively neutral goal. Microsoft having offered no procompetitive justification for its exclusive dealing arrangements with the ISVs, we hold that those arrangements violate 2 of the Sherman Act. 129 Finally, the District Court held that Microsoft's dealings with Apple violated the Sherman Act. See Conclusions of Law, at 42-43. Apple is vertically integrated: it makes both software (including an operating system, Mac OS), and hardware (the Macintosh line of computers). Microsoft primarily makes software, including, in addition to its operating system, a number of popular applications. One, called Office, is a suite of business productivity applications that Microsoft has ported to Mac OS. The District Court found that ninety percent of Mac OS users running a suite of office productivity applications [use] Microsoft's Mac Office. Findings of Fact p 344. Further, the District Court found that: 130 In 1997, Apple's business was in steep decline, and many doubted that the company would survive much long er.... [M]any ISVs questioned the wisdom of continuing to spend time and money developing applications for the Mac OS. Had Microsoft announced in the midst of this atmosphere that it was ceasing to develop new versions of Mac Office, a great number of ISVs, customers, developers, and investors would have interpreted the announcement as Apple's death notice. 131 Id. p 344. Microsoft recognized the importance to Apple of its continued support of Mac Office. See id. p 347 (quoting internal Microsoft e-mail) ([We] need a way to push these guys[, i.e., Apple] and [threatening to cancel Mac Office] is the only one that seems to make them move.); see also id. ([Microsoft Chairman Bill] Gates asked whether Microsoft could conceal from Apple in the coming month the fact that Microsoft was almost finished developing Mac Office 97.); id. at p 354 (I think ... Apple should be using [IE] everywhere and if they don't do it, then we can use Office as a club.). 132 In June 1997 Microsoft Chairman Bill Gates determined that the company's negotiations with Apple  'have not been going well at all.... Apple let us down on the browser by making Netscape the standard install.' Gates then reported that he had already called Apple's CEO ... to ask 'how we should announce the cancellation of Mac Office....'  Id. at p 349. The District Court further found that, within a month of Gates' call, Apple and Microsoft had reached an agreement pursuant to which 133 Microsoft's primary obligation is to continue releasing up-to-date versions of Mac Office for at least five years.... [and] Apple has agreed ... to bundle the most current version of [IE] ... with [Mac OS]... [and to] make [IE] the default [browser].... Navigator is not installed on the computer hard drive during the default installation, which is the type of installation most users elect to employ.... [The] Agreement further provides that ... Apple may not position icons for nonMicrosoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades. 134 Id. p p 350-52. The agreement also prohibits Apple from encouraging users to substitute another browser for IE, and states that Apple will encourage its employees to use [IE]. Id. p 352. 135 This exclusive deal between Microsoft and Apple has a substantial effect upon the distribution of rival browsers. If a browser developer ports its product to a second operating system, such as the Mac OS, it can continue to display a common set of APIs. Thus, usage share, not the underlying operating system, is the primary determinant of the platform challenge a browser may pose. Pre-installation of a browser (which can be accomplished either by including the browser with the operating system or by the OEM installing the browser) is one of the two most important methods of browser distribution, and Apple had a not insignificant share of worldwide sales of operating systems. See id. p 35 (Microsoft has 95% of the market not counting Apple and well above 80% with Apple included in the relevant market). Because Microsoft's exclusive contract with Apple has a substantial effect in restricting distribution of rival browsers, and because (as we have described several times above) reducing usage share of rival browsers serves to protect Microsoft's monopoly, its deal with Apple must be regarded as anticompetitive. See Conclusions of Law, at 42 (citing Findings of Fact p 356) (By extracting from Apple terms that significantly diminished the usage of Navigator on the Mac OS, Microsoft helped to ensure that developers would not view Navigator as truly cross-platform middleware.). 136 Microsoft offers no procompetitive justification for the exclusive dealing arrangement. It makes only the irrelevant claim that the IE-for-Mac Office deal is part of a multifaceted set of agreements between itself and Apple, see Appellant's Opening Br. at 61 (Apple's 'browsing software' obligation was [not] the quid pro quo for Microsoft's Mac Office obligation[;] ... all of the various obligations ... were part of one 'overall agreement' between the two companies.); that does not mean it has any procompetitive justification. Accordingly, we hold that the exclusive deal with Apple is exclusionary, in violation of 2 of the Sherman Act.