It is, to the best of my knowledge, the first time that the issue of Microsoft's patent threats against Linux have been framed in a context of anticompetitive conduct.

It presents a history, albeit not totally comprehensive, of some of the notable anticompetitive conduct from the past, like against DR-DOS and Netscape and WordPerfect, but it also presents current issues, including the saga of how ISO/IEC DIS 29500, formerly known as OOXML, got approved as a standard:

The EC is also investigating Microsoft's actions to manipulate the vote of the International Organization for Standardization / International Electrotechnical Commission on the recent standardization of Office "Open" XML ("OOXML"). As reported widely in the press and on the Internet, Microsoft's manipulation of the standards setting process in favor of OOXML included financial inducements, threats, misleading information, and committee-stuffing. These investigations are compelling examples of Microsoft's continued misconduct related to its monopolies in operating systems and other products.

The paper mentions the netbook market in the section on the patent threats. Not only are the patents Microsoft claims are infringed not identified, they are of questionable value after recent court decisions, and no one can make sense of the current patent climate in the US to even know if they are or are not violating someone's patents, and that is just as true of proprietary as with Open Source software, the paper notes, ending that section like this:

Microsoft has sought to exploit the current absence of clarity in patent law in order to deter consumers from taking up offerings competing with Microsoft's own products.

Microsoft also used its monopoly power to control industry standards, thus requiring WordPerfect to implement proprietary technology or risk incompatibility with Windows.

Once Microsoft had achieved wide distribution for its own browser through these tactics, it then moved to "extend" (in effect, customize) industry standards for HyperText Markup Language ("HTML") and Cascading StyleSheets ("CSS") to ensure that users would become reliant on Microsoft's own web browser. Microsoft also introduced its ActiveX technology extensions, which allowed software written much like traditional computer programs to run in the Internet Explorer browser, but that only worked on Microsoft's monopoly operating system.

Then when it came to servers, we find similar conduct:

In the mid to late 1990s, computer networks were growing in speed and Microsoft sensed a threat to its core operating system monopoly from more centralized, server-based computing. Determined to head off any potential competition, Microsoft decided that it needed to add server operating systems to the "moat" surrounding its Windows operating system monopoly. To gain inroads into this market, Microsoft embraced industry standards for file-and-print sharing, user management, and identity verification so that its products would be compatible with the then-prominent Unix server operating systems. But as Microsoft's server systems started to gain a foothold in the market, Microsoft quietly started to "extend" support for industry standard protocols in its Windows operating system so that Windows clients would have a better experience when connected to Microsoft's servers. Eventually, by changing its Windows personal computer operating system so that Windows computers could not fully connect to any server that did not use Microsoft's proprietary extensions unless the users installed special software on their machines, Microsoft established and reinforced its dominance in the work group server operating system market, where Microsoft maintains a share of approximately 77%.

Even when Microsoft claims to be implementing a standard, the reality is that Microsoft's implementations routinely either only partially conform or else somehow extend the standard, so that software developed to work with Microsoft's version of the standard will not work with other vendors' implementations of the same standard. As just one example, Microsoft recently announced that Internet Explorer 8 would support a feature called "local storage," which allows websites to store a limited amount of data on users' computers so that users can interact with those sites offline, a feature that could help web applications become effective replacements for traditional desktop applications.... Unfortunately, Microsoft's implementation is subtly incompatible with the standard, which could lead web developers who test their sites in Internet Explorer 8 to write their sites in a way that will not work in other browsers.

Microsoft takes the long view. How about you? And how soon should the market notice such things and do something before it is too late, would you say? If you are a government or an agency, how are you going to avoid lock-in with the Microsoft standard? What evidence of change are you relying on? No. Seriously.

ECIS has just been granted standing as "an interested third party" in the EU Commission's current antitrust investigation of Microsoft, which resulted in preliminary findings that Microsoft is violating EU antitrust law by tying IE to Windows. This paper is in support of those findings. The opening words and the conclusion explain the purpose of this filing and the hopes behind it:

On January 15, 2009, the European Commission issued a new Statement of Objections to Microsoft, outlining the Commission's "preliminary view that Microsoft's tying of its web browser Internet Explorer to its dominant operating system Windows infringes the EC Treaty rules on abuse of a dominant position (Article 82)" and "distorts competition on the merits between competing web browsers." The European Commission's recent Statement of Objections validates the ongoing and urgent need to address Microsoft's practices that affect the openness of the Internet, consumer choice, and competition in general. This paper provides a brief history of Microsoft's misconduct and demonstrates that, in light of Microsoft's long and continuing use of anticompetitive tactics, the Commission's concerns are well justified.... Microsoft's conduct over the last two decades has demonstrated Microsoft's willingness and ability to engage in unlawful conduct to protect and extend its core monopolies. This conduct has caused real harm to consumers, who continue to pay high prices and use lower quality products than would have prevailed in a competitive market. By understanding Microsoft's history of anticompetitive conduct, developers, consumer groups, and government authorities will be better equipped to recognize current and future Microsoft misconduct at an early stage and intervene to prevent Microsoft from using tactics other than competition on the merits. ECIS remains hopeful that the European Commission's latest Statement of Objections addressing Microsoft's misconduct will finally mark the beginning of the end of Microsoft's two decades of anticompetitive behavior and consumer harm.

Groklaw also has a collection of legal filings in the Caldera v. Microsoft case regarding DR-DOS, which are also referenced, so those of you who don't have PACER accounts can read what is available and follow along. Also referenced is Novell v. Microsoft, the antitrust case regarding WordPerfect, and we have that too. The reference to smiling at Novell while pulling the trigger can be found in Novell's complaint, but if you'd like to read it in full, you'll find it on this Groklaw page, a report on the Comes v. Microsoft antitrust trial in Iowa, where portions of this Jim Allchin email were read to the jury:

"We need to slaughter Novell before they get stronger....If you're going to kill someone, there isn't much reason to get all worked up about it and angry. You just pull the trigger. Any discussions beforehand are a waste of time. We need to smile at Novell while we pull the trigger."

One can learn from history. ECIS notes this about the US antitrust case:

Unfortunately, however, as discussed further below and as noted by several prominent commentators, the U.S. browser case was settled with a consent decree that has been wholly ineffective in restoring competition to the state that prevailed prior to Microsoft's unlawful actions.

Ellison and Sun co-founder and Chairman Scott McNealy were among the valley business leaders who pushed for the Department of Justice to file its antitrust suit against Microsoft in 1998. In the end, Ellison found the 2001 settlement of the case "astonishing." Microsoft, he complained, "lost the trial, but the government paid them a reward for violating the law." Prominent valley business attorney Gary L. Reback notes Ellison's comments in his new book "Fight the Market!" Two years later, Reback points out, Ellison would draw "inspiration for the Antitrust Division's indolence" and publicly proclaim his plans to "roll up" the market for complex mission-critical business software "into very, very few companies with one dominant player," Oracle.

Here it is as text, so the entire world can read it, including those who depend on screen readers and so that it is easily searchable. There are 176 footnotes! This text version, then, was indeed a labor of love. We made the following change: we collected all the footnotes at the end, with links that will take you back and forth easily. Just click on the footnote number. That makes it easier for the blind to read a long and complex document like this one, without footnotes interspersed confusingly in the middle of sentences. Other than that, we hope it's exactly the same, as we strive for accuracy. But as we always say, for anything that matters, please rely on the PDF. Perfection is a mighty high bar.

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Microsoft



A History of Anticompetitive Behavior and

Consumer Harm

March 31, 2009

TABLE OF CONTENTS

II. MICROSOFT'S HISTORY OF ANTICOMPETITIVE CONDUCT .................................3

A. Microsoft's Campaign To Destroy DR-DOS ..........................................................3 B. Microsoft's Anticompetitive Per Processor License Fees .......................................5 C. Microsoft's Retaliation And Price Discrimination Against IBM ............................6 D. Microsoft's Organized Collective Boycott Against Intel ........................................7 E. Microsoft's Elimination Of Word Perfect ...............................................................7 F. Microsoft's Deceptive WISE Software Program.....................................................9 G. Microsoft's Elimination Of Netscape ....................................................................10 H. Microsoft's Attempts To Extinguish Java .............................................................14 I. Microsoft's Elimination Of Rival Media Players ..................................................16 J. Microsoft's Campaign Against Rival Server Operating Systems..........................18

A. Microsoft's Failure To Comply With The Final Judgment ...................................20 B. Microsoft's Campaign of Patent FUD against Linux and Open Source Software.....................................................................................23 C. Microsoft's Ongoing Misconduct Has Sparked Further European Commission Investigations .........................................23

V. MICROSOFT'S MONOPOLIES HAVE HARMED CONSUMERS ..............................25

A. Microsoft's Operating System Monopoly Has Harmed Consumers .....................25 B. Microsoft's Office Monopoly Has Harmed Consumers........................................26 C. Microsoft's Web Browser Monopoly Has Harmed Consumers ............................28

2

On January 15, 2009, the European Commission issued a new Statement of Objections to Microsoft, outlining the Commission's "preliminary view that Microsoft's tying of its web browser Internet Explorer to its dominant operating system Windows infringes the EC Treaty rules on abuse of a dominant position (Article 82)" and "distorts competition on the merits between competing web browsers."1 The European Commission's recent Statement of Objections validates the ongoing and urgent need to address Microsoft's practices that affect the openness of the Internet, consumer choice, and competition in general. This paper provides a brief history of Microsoft's misconduct and demonstrates that, in light of Microsoft's long and continuing use of anticompetitive tactics, the Commission's concerns are well justified.2

* * *

"This anti-trust thing will blow over. We haven't changed our business practices at all."

-- Bill Gates, Microsoft founder and then-CEO (1995)3

Microsoft owns several monopoly products, including its Windows operating system and Office suite of productivity applications.4 These monopolies are extremely lucrative: Microsoft

That barrier--the "applications barrier to entry"--stems from two characteristics of the software market: (1) most consumers prefer operating systems for which a large number of applications have already been written; and (2) most developers prefer to write for operating systems that already have a substantial consumer base. This "chicken-and-egg" situation ensures that applications will continue to be written for the already dominant Windows, which in turn ensures that consumers will continue to prefer it over other operating systems.7

If we own the key "franchises" built on top of the operating system, we dramatically widen the "moat" that protects the operating system business.... We hope to make a lot of money off these franchises, but even more important is that they should protect our Windows royalty per PC.... And success in those businesses will help increase the opportunity for future pricing discretion.8

Although Microsoft has paid many multimillion-dollar settlements for its antitrust violations over the years, these settlements have proven a small price for such a large ongoing revenue stream. Microsoft's past conduct demonstrates its ability and willingness to engage in

3

II. MICROSOFT'S HISTORY OF ANTICOMPETITIVE CONDUCT

This section reviews a number of Microsoft's past actions to extinguish potential competitive threats. These include Microsoft's: (a) campaign against DR-DOS; (b) anticompetitive per processor license fees; (c) retaliation against IBM; (d) threats and retaliation against Intel; (e) elimination of Word Perfect; (f) deceptive WISE software program; (g) elimination of Netscape; (h) deception of Java developers; (i) elimination of rival media players; and (j) campaign against rival server operating systems. While not comprehensive, these examples of Microsoft's past misconduct provide a clear illustration of the types of acts that Microsoft has taken to protect and extend its monopolies.

A. Microsoft's Campaign To Destroy DR-DOS

"[W]e need to make sure Windows 3.1 only runs on top of MS DOS."

--David Cole, Microsoft Senior Vice-President10

"The approach we will take is to detect dr [DOS] 6 and refuse to load. The error

message should be something like 'Invalid device driver interface.'"

--Phillip Barrett, Microsoft Windows Development Manager11

In the early 1980s, Microsoft purchased an early version of a standard disk operating system ("DOS") that became known as MS-DOS.12 At the time, a number of rival operating systems offered features, such as the ability to run multiple programs at the same time, that Microsoft's operating systems would not offer until years later.13 At the time, operating systems were just beginning to move from a command-based interface to a graphical user interface.14 Microsoft developed a graphical user interface known as Windows.15 Early versions of Windows did not actually "run" the computer rather, they were a shell surrounding the underlying DOS program, which in turn ran the computer.16 Initially, Windows embraced the DOS standard, which meant that Windows would run on top of any DOS, including DR-DOS, Microsoft's principal rival in the DOS market.17

3

In the case of DR-DOS, Microsoft's initial decision to make Windows interoperable helped promote rapid adoption of the Windows shell. At the same time, however, it meant that many consumers chose the superior DR-DOS over MS-DOS. In an email to then-Vice President Steve Ballmer, Microsoft founder and then-CEO Bill Gates wrote:

"Our DOS gold mine is shrinking and our costs are soaring--primarily due to low prices, IBM share, and DR-DOS.... I believe people underestimate the impact that DR-DOS has had on us in terms of pricing."22

4

B. Microsoft's Anticompetitive Per Processor License Fees

"Another [DR-DOS] prospect bites the dust with a per-processor DOS agreement."

--Microsoft sales employee in an internal email27

In 1994, the U.S. Department of Justice ("DOJ") filed an antitrust suit against Microsoft challenging this conduct, resulting in a consent decree under which Microsoft agreed to stop using per processor license fees.29 But the anticompetitive practice had already been quite effective in reducing competitors' share, particularly when combined with Microsoft's other actions directed against DR-DOS.30 The DOJ consent decree also sought to impose some

5

C. Microsoft's Retaliation And Price Discrimination Against IBM

"As long as IBM is working first on their competitive offerings and prefers to fiercely compete with us in critical areas, we should just be honest with each other and admit that such priorities will not lead to a most exciting relationship...."

--Joachim Kempin, Microsoft Senior Vice-President32

6

Microsoft's Organized Collective Boycott Against Intel

"Intel has to accept that when we have a solution we like that is decent that that is the solution that wins."

--Bill Gates, Microsoft founder and then-CEO37

Microsoft used a similar approach in 1995, when it forced Intel to drop development of Native Signal Processing ("NSP"), a set of instructions that would have allowed a computer's processor to directly support audio, video, and 3D graphics. Intel is a manufacturer of microprocessor chips that are purchased by OEMs to use in the computers they manufacture.

With NSP, Intel hoped to create a platform for multimedia applications that would run on any operating system, not just Windows. Microsoft thus viewed NSP as a serious threat to its Windows monopoly. In order to extinguish NSP, Microsoft told Intel that it would make Windows incompatible with Intel chips if Intel did not abandon the technology, and Microsoft forced its OEM customers into a collective boycott of Intel's microprocessor chips.38 Bill Gates reported to other senior Microsoft executives, "Intel feels we have all the OEMs on hold with our NSP chill."39 Intel ultimately ceded to Microsoft's pressure and abandoned its NSP development efforts.40

Shortly thereafter, Microsoft again put pressure on Intel. This time around, Microsoft wanted Intel to stop assisting Sun Microsystems in the promotion of its Java technology. As Bill Gates wrote in a 1997 email message, "If Intel has a real problem with us supporting [Intel's microprocessor rival, AMD] then they will have to stop supporting Java Multimedia the way they are."41

As a district court subsequently found, Microsoft's campaign to induce "Intel to stop helping Sun create Java Multimedia APIs, especially ones that run well ... on Windows" was a successful one.42

E. Microsoft's Elimination Of Word Perfect

"If we own the key 'franchises' built on top of the operating system, we

dramatically widen the 'moat' that protects the operating system business.... We

hope to make a lot of money off these franchises, but even more important is that

7

they should protect our Windows royalty per PC."

--Jeff Raikes, Microsoft President43

"I have decided that we should not publish these [Windows 95 user interface]

extensions. We should wait until we have a way to do a high level of integration

that will be harder for likes of Notes, WordPerfect to achieve, and which will give

Office a real advantage.... We can't compete with Lotus and WordPerfect/Novell without this."

--Bill Gates, Microsoft founder and then-CEO44

Beginning in 1994, Microsoft launched an anticompetitive campaign to extinguish WordPerfect, an office productivity application owned by Novell and competing with Microsoft's Office suite. Office productivity applications (including word processing, spreadsheet, and presentation applications) are one of the most important groups of applications and contribute substantially to the applications barrier to entry protecting Microsoft's operating system monopoly.

When Microsoft began this campaign, WordPerfect enjoyed widespread popularity. In order to eliminate its competitor, Microsoft withheld crucial technical information about Windows, going so far as to extend the Windows API, the set of commands a program uses to communicate with the operating system, to ensure that WordPerfect did not work smoothly with Microsoft's monopoly operating system.45 Microsoft also used its monopoly power to control industry standards, thus requiring WordPerfect to implement proprietary technology or risk incompatibility with Windows.46 And it excluded WordPerfect from the major channels of distribution for office productivity applications.47 For example, Microsoft forbade OEMs from pre-installing Novell products and gave discounts for refusing to sell other developers' office productivity applications.48 As part of Microsoft's strategy to eliminate Novell, "[a] top Microsoft executive wrote that Microsoft should 'smile' at Novell, falsely signifying Microsoft's willingness to help the two companies' common customers integrate their various products,

8

Microsoft extinguished WordPerfect and gained a monopoly in office productivity application suites, accomplishing its goal of "dramatically widen[ing] the moat" protecting its lucrative Windows monopoly.

F. Microsoft's Deceptive WISE Software Program

"Please give me one good reason why we should even consider [enabling Microsoft technology to work on competing systems]. (Hint: any good answer needs to include making more money and helping kill Unix, Sybase or Oracle.)"

--James Allchin, Microsoft Senior Vice-President51

In 1994, Microsoft engaged in similarly deceptive conduct to combat the growing popularity of the UNIX operating system within corporate networks. Microsoft faced a choice: whether to "love it to death (invest a lot of money and kill it slowly) or ignore it (invest no money on the expectation it will die quickly)."52 Microsoft chose initially "to invest in interoperating" with UNIX,53 by promoting its Windows Interface Source Environment

9

Microsoft's plan was successful. By 1996 Microsoft had captured a large share of the corporate market. Microsoft then took the next step in its standard "embrace, extend, extinguish" playbook and extended the Windows API without copying its changes to the WISE program. This meant that developers could no longer smoothly port applications to UNIX and Macintosh.55 In public, however, Microsoft continued to lead developers into believing that this software was still fully cross-platform.56 In 1997, Bill Gates noted in an internal email that those developers who wrote applications for the then-available software without realizing that it would not port all APIs to UNIX and Macintosh were "just f*****."57 He was right: Microsoft had successfully extinguished the cross-platform threat to its operating system monopoly. In a subsequent antitrust suit, a district court called this move "a classic 'bait-and-switch' tactic."58

G. Microsoft's Elimination Of Netscape

"Microsoft first proposed to Netscape that, rather than compete with each other, the two companies should enter an illegal conspiracy to divide up the market. When Netscape refused, Microsoft then used its Windows monopoly to, in Microsoft's own words, 'cut off Netscape's air supply.'"

--Joel Klein, Assistant Attorney General (quoting Paul Maritz, Microsoft's then-Group Vice President of the Platform Applications Group)59

10

Microsoft first sought to deal with this threat through a direct market allocation proposal: Microsoft told Netscape that if Netscape would agree to stop exposing APIs, Microsoft would provide Netscape with special help in developing "value-added" software applications that relied on Microsoft's proprietary technologies.60 Netscape rejected Microsoft's proposal.

Microsoft then responded by taking steps to "cut off Netscape's air supply."61 It developed its own web browser, Internet Explorer, and then technologically and contractually tied Internet Explorer to its monopoly Windows operating system.62 To ensure that only Internet Explorer ran well on Windows, Microsoft designed Windows, as its then-Vice President Brad Chase wrote, to make "running any other browser a jolting experience."63 To ensure that Internet Explorer had exclusive access to the primary browser distribution channels, Microsoft also used an extensive set of exclusive-dealing contracts with OEMs, independent software vendors ("ISVs"), Apple, and others.64

Microsoft was very aggressive in its campaign to shut Netscape out of all major distribution channels. For example, when Apple resisted distributing Microsoft's Internet Explorer web browser with its Mac OS operating system, Microsoft threatened to stop supplying Microsoft Office for Mac OS.65 As the district court found, "ninety percent of Mac OS users running a suite of office productivity applications [used] Microsoft's Mac Office. In 1997, Apple's business was in steep decline.... 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,

11

The importance of Office to Apple did not go unnoticed by Microsoft. As Microsoft's then-program manager for Windows, Ben Waldman, explained in an email to Bill Gates and then-CFO Greg Maffei: "The threat to cancel Mac Office 97 is certainly the strongest bargaining point we have, as doing so will do a great deal of harm to Apple immediately."67 Or, as one Microsoft Vice President put it in an email to Ben Waldman, "MacOffice is the perfect club to use" to persuade Apple to "materially disadvantage[] Netscape."68 Apple capitulated and began pre-installing Internet Explorer as the default (and exclusive) browser on Mac machines. Apple even agreed to push its own employees to use Internet Explorer.69

Once Microsoft had achieved wide distribution for its own browser through these tactics, it then moved to "extend" (in effect, customize) industry standards for HyperText Markup Language ("HTML") and Cascading StyleSheets ("CSS") to ensure that users would become reliant on Microsoft's own web browser.70 Microsoft also introduced its ActiveX technology extensions, which allowed software written much like traditional computer programs to run in the Internet Explorer browser, but that only worked on Microsoft's monopoly operating system.71

As shown in the graphic below, Microsoft's campaign was highly successful.72

12

13

Microsoft's Attempts To Extinguish Java

"Kill cross-platform Java by grow[ing] the polluted Java market."

--MicrosoftVJ98 SKUs and Pricing Proposal78

"[W]e should just quietly grow j++ share and assume that people will take more

advantage of our classes without ever realizing they are building win32-only java

apps."

--Microsoft's Thomas Reardon79

In 1996, Microsoft turned its attention to Sun Microsystems' Java middleware technologies as another nascent threat to its operating system monopoly.80 Sun Microsystems was at the time promoting its Java technologies with the slogan, "Write-once-run-anywhere" to illustrate the cross-platform benefits of writing Java applications.81

Microsoft immediately recognized Java as middleware and moved to eliminate this threat. As usual, Microsoft first embraced Java by licensing the technology from Sun Microsystems and investing in building its own Java-related developer tools.82 Microsoft then

14

Microsoft also used exclusive agreements to promote its "polluted" version of Java and, as noted above, Microsoft threatened Intel to stop Intel from supporting Sun Microsystems' Java standards.86 As the D.C. Circuit later explained, "Microsoft's Paul Maritz told a senior Intel executive that Intel's [development of software that was compatible with] Sun's Java standards was as inimical to Microsoft as Microsoft's support for non-Intel microprocessors would be to Intel.... Microsoft threatened Intel that if it did not stop aiding Sun on the multimedia front, then Microsoft would refuse to distribute Intel technologies bundled with Windows."87 Intel capitulated, and dropped its support for Java.

Microsoft's overall plan to neutralize Java as a middleware threat was extremely successful.88 As the Fourth Circuit explained in a subsequent private suit brought by Sun Microsystems:

First, Microsoft "embraced" the Java technology by licensing from Sun the right to use its Java Technology to develop and distribute compatible Products. Second, Microsoft "extended" the Java platform by developing strategic incompatibilities into its Java runtime and development tools products.... Third, Microsoft used its distribution channels to flood the market with its version of the Java Technology in [what Sun characterized as] an attempt to "hijack the Java Technology and transform it into a Microsoft proprietary programming and runtime environment."89

15

RealNetworks "is like Netscape. The only difference is we have a chance to start

this battle earlier in the game."

--Robert Muglia, Microsoft Senior Vice-President90

In 1997, Microsoft recognized that media players also represented a nascent threat to its profitable operating system monopoly. Like web browsers, media players are middleware products that expose APIs to software developers.91 Fearing that media players might come to support multimedia applications on any operating system, Microsoft took action to eliminate the threat.

Consistent with its previous tactics, Microsoft first embraced the leading media player software, designed by RealNetworks, announcing an agreement to collaborate in streaming media.92 The agreement encouraged RealNetworks to make its media player Windows-dependent in return for compensation from Microsoft.93 As Robert Muglia informed RealNetworks' Chief Operating Officer, "anyone who competed against [Microsoft] in the operating system 'lost.'"94 When RealNetworks continued to compete against Microsoft,95 however, Microsoft became increasingly aggressive in its actions. In particular, as it had done with the browser, Microsoft tied its own media player to Windows.96

RealPlayer was, however, not the only multimedia threat to Microsoft. Microsoft took separate action to eliminate another competitor in the multimedia space, Burst.com, Inc.

16

When Microsoft first began bundling Windows Media Player with its monopoly operating system, Microsoft also released a version of its media player for Apple's Mac operating system. During the period when Windows Media Player was competing with RealPlayer and Apple QuickTime, Microsoft frequently released new versions of its product for the Mac. By 2003, however, Microsoft had gained the upper hand, capturing more users than

17

J. Microsoft's Campaign Against Rival Server Operating Systems

"Sun, Oracle and Netscape are all pushing a new model of [almost] centralized

computing. They all acknowledge that Microsoft holds tremendous sway over the

desktop platform, so they all want to quickly strip as much value and spending as

possible off the desktop and onto the server where they can charge premium

prices and push their own platform offerings."

--Aaron Contorer, Microsoft C++ General Manager107

What we are trying to do is use our server control to do new protocols and lock

out Sun and Oracle specifically"

-- Bill Gates, Microsoft108

In the mid to late 1990s, computer networks were growing in speed and Microsoft sensed a threat to its core operating system monopoly from more centralized, server-based computing. Determined to head off any potential competition, Microsoft decided that it needed to add server operating systems to the "moat" surrounding its Windows operating system monopoly.109 To gain inroads into this market, Microsoft embraced industry standards for file-and-print sharing, user management, and identity verification so that its products would be compatible with the then-prominent Unix server operating systems.110But as Microsoft's server systems started to gain a foothold in the market, Microsoft quietly started to "extend" support for industry standard protocols in its Windows operating system so that Windows clients would have a better experience when connected to Microsoft's servers.111 Eventually, by changing its Windows personal computer operating system so that Windows computers could not fully connect to any server that did not use Microsoft's proprietary extensions unless the users installed special

18

Microsoft's conduct eventually drew scrutiny from the European Commission, which condemned Microsoft's refusal to release information that would allow other server operating systems to connect to personal computers running Microsoft's Windows operating system.114 In a 2004 decision, the European Commission found that if Microsoft succeeded in eliminating other server operating systems as competitive threats, then innovation would be severely limited.115 And, in fact, after releasing Windows Server 2003 to lukewarm reviews,116 Microsoft failed to release a new server version of Windows until 2008.117 Even then, many reviewers noted that, despite aggressive marketing to small- and midsize-business users and a special edition of the server operating system just for these users, Microsoft had done very little to address their needs, and instead had essentially re-packaged a scaled-down version of an existing enterprise-level product.118

III. MICROSOFT CONTINUES TO ENGAGE IN ANTICOMPETITIVE CONDUCT

Despite international scrutiny of Microsoft's anticompetitive conduct, Microsoft has continued to take similar unlawful actions to eliminate potential competitive threats. The only real difference between Microsoft's more recent practices and its earlier ones is that, as Mr. Gates predicted, Microsoft has now changed its document retention practices.119

19

Microsoft's Failure To Comply With The Final Judgment

In 2003, the DOJ discovered that Microsoft had built a feature into Windows that invoked Microsoft's Internet Explorer browser, rather than the user's chosen default browser, contrary to the clear obligations of the Final Judgment.120 Similarly, in 2004, Microsoft attempted to require licensees of its middleware offering, the .NET Framework, to obtain Microsoft's prior consent before publishing any benchmark testing results for the software.121 In 2005, Microsoft demanded that manufacturers of portable music players sign exclusive deals if they wanted integration with Microsoft's Windows Media Player.122 And in 2007, Microsoft made changes to allow consumers limited choice of desktop search products in Windows Vista only following an extensive government investigation and pressure from a number of U.S. States. While Microsoft eventually made changes to its conduct in each of these instances, these incidents all demonstrate Microsoft's willingness to use its monopoly products aggressively first and make changes later only when confronted about its behavior. This is particularly striking coming, as it does, within the very limited range of issues covered by the Final Judgment.123 In fact, the district court overseeing the Final Judgment extended the decree for two more years, to November 12, 2009, because Microsoft still has not come into compliance with its obligations regarding communications protocols.124

20

B. Microsoft's Campaign of Patent FUD against Linux and Open Source Software

"This is not a case of some accidental, unknowing infringement. There is an

overwhelming number of patents being infringed."

-- Microsoft General Counsel and Intellectual Property and Licensing Vice

President Horacio Gutierrez 128

The open source Linux operating system is the principal rival to Microsoft Windows. Linux has been taken up by both corporate customers and, increasingly, by private individuals

21

Consistent with its behavior in response to other competitive threats, Microsoft has used unfair and anti-competitive tactics to try and slow the uptake of Linux. In particular, Microsoft has made and continues to make broad, unsubstantiated claims that software developers distributing Linux or other open source software, as well as their customers, are infringing Microsoft's patents.130 However, although Microsoft has claimed that as many as 235 patents may have been infringed131, it has consistently failed to identify which patents are at issue.

Microsoft's tactic is to spread fear, uncertainty and doubt ("FUD") as to whether developers and users of open source software may be the target of future patent infringement suits, and thereby chill consumer enthusiasm and demand for Linux and open source solutions. Indeed, Microsoft's unwarranted threats have brought such pressure to bear on Linux users that some have felt compelled to enter into royalty-bearing patent licenses with Microsoft.132 Microsoft's campaign of FUD effectively works to impose a "tax" on the use of the most viable alternative software to Windows: faced with an intimidating and powerful potential litigant known for its hardball tactics, Linux users are driven to pay the licensing fee despite the speculative nature of the IP claims. Microsoft's bullying tactics therefore raise the overall cost and slow down market penetration by innovative technologies intended to compete with Microsoft's monopoly products.

Moreover, there is a strong likelihood that Microsoft's patent FUD campaign may be unfounded in law. Recent U.S. jurisprudence clarifies that the scope for patenting business methods, which lie at the heart of many software patents, is much narrower than was previously thought to be the case.133 In addition, one of the thresholds for patentability that an invention is not obvious to a person skilled in the art has recently become harder to meet.134 As such, many of the patents held by Microsoft are likely to be of questionable validity today. Furthermore, given the myriad of software patents in existence, consumers may often be unable to determine with certainty whether their use or distribution of certain software products actually infringes another company's IP rights. Therefore, contrary to the broad and categorical statements of Mr. Gutierrez as to the intentional nature of any alleged patent infringements, it is widely recognized in the industry that, regardless of whether proprietary or open source software is used, there is a

22

In an apparent escalation of its patent FUD strategy, Microsoft sued the navigational system vendor, TomTom, for patent infringement at the end of February 2009. Three patent claims related to Linux are included in the lawsuit.135 At least two of them are related to highly questionable patents on long file name support in Windows, which have been partially invalidated by an EC patent court on the grounds that Microsoft's patent claims were "not based on inventive activity".136 While Microsoft has publicly claimed that its action is not directed against Linux or open source, and the case was settled in March 2009 pursuant to a mostly-confidential agreement, this represents an aggressive development of Microsoft's use of spurious or highly questionable patent claims to intimidate and eliminate competition from Linux in order to maintain or strengthen its dominant position in the OS market.

C. Microsoft's Ongoing Misconduct Has Sparked Further European

Commission Investigations

As noted at the outset, the European Commission ("EC") is also investigating ongoing misconduct by Microsoft, culminating in its issuance of a Statement of Objections to Microsoft on January 15, 2009, concerning the tying of the Internet Explorer web browser to the Windows operating system.137 In addition, the EC continues to investigate a number of other actions Microsoft has taken to tie products to Windows as well as Microsoft's refusal to enable interoperability with certain of its monopoly technologies, including Sharepoint, Outlook, Exchange, and Office.138 The EC is also investigating Microsoft's actions to manipulate the vote of the International Organization for Standardization / International Electrotechnical Commission on the recent standardization of Office "Open" XML ("OOXML"). As reported widely in the press and on the Internet, Microsoft's manipulation of the standards setting process in favor of OOXML included financial inducements, threats, misleading information, and committee-stuffing.139 These investigations are compelling examples of Microsoft's continued misconduct related to its monopolies in operating systems and other products.

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Although Microsoft has repeatedly promised to support open standards, both with its recent "Interoperability Principles"140 and its announcements for Internet Explorer 8,141 Microsoft has routinely made similar promises of standards support in the past without fulfilling them.142 As a result, many observers have greeted Microsoft's various announcements and orchestrated fanfare with skepticism. For example, following one recent Microsoft interoperability announcement, the European Commission released a short statement noting that Microsoft's promise of interoperability followed "at least four similar statements by Microsoft in the past on the importance of interoperability."143 As the Commission observed, it took Microsoft three years even to approach releasing the amount of interoperability information the European Court of First Instance had ordered it to release.144

Even when Microsoft claims to be implementing a standard, the reality is that Microsoft's implementations routinely either only partially conform or else somehow extend the standard, so that software developed to work with Microsoft's version of the standard will not work with other vendors' implementations of the same standard. As just one example, Microsoft recently announced that Internet Explorer 8 would support a feature called "local storage," which allows websites to store a limited amount of data on users' computers so that users can interact with those sites offline, a feature that could help web applications become effective replacements for traditional desktop applications.145 This feature is part of HTML 5, the next version of the

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V. MICROSOFT'S MONOPOLIES HAVE HARMED CONSUMERS

Microsoft's conduct has allowed it to protect its monopolies, which has led to a lack of choice, higher prices, and less innovation than would otherwise have prevailed in a competitive marketplace. The barriers to entry surrounding Microsoft's core monopolies remain very high, and Microsoft's market shares and profit margins in desktop operating systems, office productivity suites, and browsers have continued to reflect its overwhelming monopoly power in these markets.148 In short, Microsoft's misconduct has harmed and continues to harm consumers significantly.

A. Microsoft's Operating System Monopoly Has Harmed Consumers

For fifteen years, Microsoft's share of desktop operating systems has remained above 90%. In 2002, when the Final Judgment in United States v. Microsoft was entered, Windows XP was the most common desktop operating system. Microsoft did not release a successor to Windows XP until 2007, when it released Windows Vista. Even then, the "Vista" that

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The Windows API is ... so deeply embedded in the source code of many Windows apps that there is a huge switching cost to using a different operating system instead. ... It is this switching cost that has given customers the patience to stick with Windows through all our mistakes, our buggy drivers, our high TCO, our lack of a sexy vision at times, and many other difficulties... Customers constantly evaluate other desktop platforms, [but] it would be so much work to move over that they hope we just improve Windows rather than force them to move. In short, without this exclusive franchise called the Windows API, we would have been dead a long time ago.154

Microsoft's tactics to prolong its operating system monopoly through means other than competition on the merits go hand-in-hand with its admitted lack of innovation.

B. Microsoft's Office Monopoly Has Harmed Consumers

Microsoft's Office suite likewise maintains a 95% market share.155 The standard Office suite includes Word (word processing software), Excel (spreadsheets), PowerPoint

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Microsoft's monopoly power in office productivity applications has, likewise, bred complacency that is harmful to consumers. Even Microsoft's founder and former Chief Software Architect, Bill Gates, asserts that the only real competitive pressure on Microsoft to improve Office today is that consumers might not upgrade to the next version.160 Between 1997 and 2007, Microsoft released only three new versions of Microsoft Office, a very slow pace by software industry standards, and reviewers noted that each release offered only small improvements over the previous ones.161 It was not until 2007, with the advent of competing

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C. Microsoft's Web Browser Monopoly Has Harmed Consumers

For the past decade, Microsoft has maintained a dominant share in the web browser market.164 Since Microsoft's success in exterminating Netscape, however, it has invested little in developing its Internet Explorer web browser. During Microsoft's push to destroy Netscape, it released four major new versions of Internet Explorer in two years.165 But after it successfully excluded Netscape from the market, Microsoft slowed browser development, releasing only two new versions between 1998 and 2001, neither of which was a major upgrade.166 After 2001,

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The Web browser is probably the most frequently used category of software in the world. But in recent years, the browser most people rely on--Microsoft's Internet Explorer--has been stagnant, offering very few new features. This is a common pattern with Microsoft. The company is aggressive about improving its software when it first enters a market. But once it crushes its competitors and establishes an effective monopoly, as it has in Web browsers, Microsoft seems to switch off significant innovation.170

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Microsoft's anticompetitive conduct in the browser market has also firmly entrenched Internet Explorer as the super-dominant web browser in the workplace. Among other things, during the years after Microsoft exterminated Netscape and before Firefox came on the scene, many corporate information technology departments built applications and company intranets on

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VI. CONCLUSION

Microsoft's conduct over the last two decades has demonstrated Microsoft's willingness and ability to engage in unlawful conduct to protect and extend its core monopolies. This conduct has caused real harm to consumers, who continue to pay high prices and use lower quality products than would have prevailed in a competitive market. By understanding Microsoft's history of anticompetitive conduct, developers, consumer groups, and government authorities will be better equipped to recognize current and future Microsoft misconduct at an early stage and intervene to prevent Microsoft from using tactics other than competition on the merits. ECIS remains hopeful that the European Commission's latest Statement of Objections addressing Microsoft's misconduct will finally mark the beginning of the end of Microsoft's two decades of anticompetitive behavior and consumer harm.

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