IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

 

UNITED STATES OF AMERICA,

Plaintiff,

vs.

MICROSOFT CORPORATION,

Defendant.

 

STATE OF NEW YORK ex rel.

Attorney General ELIOT SPITZER, et al.,

Plaintiffs,

vs.

MICROSOFT CORPORATION,

Defendant.

 

MICROSOFT CORPORATION,

Counterclaim-Plaintiff,

vs.

ELIOT SPITZER,

Attorney General of the State of New York,

In his official capacity, et al.,

Counterclaim-Defendants.

 

 

Civil Action No. 98-1232 (TPJ)

 

Civil Action No. 98-1233 (TPJ)

 

 

 

DEFENDANT MICROSOFT CORPORATION‚S

SUPPLEMENTAL OFFER OF PROOF

Defendant Microsoft Corporation ("Microsoft") respectfully submits the following supplemental offer of proof in opposition to entry of the government‚s proposed final judgment.

Michael Capellas

Michael Capellas is President and Chief Executive Officer of Compaq Computer Corporation, the second largest computer company in the world and the largest global supplier of personal computers, headquartered in Houston, Texas. Microsoft anticipates that Mr. Capellas would testify to the following general propositions at an evidentiary hearing.

1. Customers have come to depend on Microsoft introducing new and innovative products on a regular basis. Distracting Microsoft with a break-up will slow its release of new products and innovations, thereby delaying the availability of new products and innovations to customers.

2. What customers want from Compaq and other OEMs are computers that "just work" right out of the box; home users generally do not want to assemble lots of components, and business users do not want to act as their own system integrators. The base platform that most customers want includes a personal computer, an operating system and a set of basic productivity applications that can be used to accomplish important tasks. Compaq provides such a solution to customers by integrating the PC with the operating system and the associated hardware peripherals and software applications. The fact that the operating system and certain key applications have been developed and tested by a single company to work seamlessly together generally makes the software more reliable, better performing, and less costly for OEMs to deploy and support, all benefits that flow to the OEM‚s customers.

3. Breaking Microsoft into two separate companiesųputting operating systems in one company and development tools and applications in another companyųwill make it more difficult for OEMs to provide customers with the tightly integrated product offerings they demand. Compaq‚s experience is that complementary products created by unrelated companies do not work as well together as products created by a single company. The result will be that OEMs will have to expend considerable additional resources testing the software products to ensure that they work together well.

4. If the user interface for Windows and applications designed to run on the operating system diverged because the same company was no longer developing Windows and its development tools, personal computers would become more difficult to use. Customers want more consistency of operation, not less.

5. The rapid growth of the PC operating business is largely the result of open industry standards in computing where technologies are adopted that allow new software and hardware offerings to be introduced that are compatible with offerings from others in the industry and with the industry‚s installed base. A key open industry standard is the Windows operating system.

6. The base level of consistency of the Windows desktop across multiple brands of personal computers increases ease of use, lowers training and support costs, and gives customers more choices in personal computers. Allowing every OEM to modify Windows in ways as substantial as replacing the Windows desktop with another user interface would undermine the consistency of the operating system, hurting customers.

7. Allowing OEMs to remove components of Windows (such as Internet Explorer and DirectX) would destroy the integrity of Windows as a development platform. Customers want to know that all of the APIs relied on by the Windows applications they use are supported by the version of the operating system installed on their new machine. That would not be true if OEMs started removing components of Windows that exposed APIs to developers.

8. Forcing Microsoft to treat the top 20 OEMs in exactly the same way is not fair to Compaq. Compaq is several times the size of the 20th largest OEM and has both the willingness and ability to work with Microsoft on joint development and marketing projects that smaller OEMs do not. There is no reason why Compaq should not receive more resources from Microsoft given our greater investment in testing, distributing and promoting Microsoft‚s technology. Otherwise, there is little incentive for Compaq to make these substantial investments, which ultimately benefit customers through better and more innovative products at lower prices.

9. Forcing Microsoft to disclose technical information simultaneously to everyone in the computer industry would prevent the sorts of cooperative development efforts that have led to important innovations like Plug-and-Play. Such cooperative development cannot occur in public where competitors are free to appropriate the resulting technology for use in their products.

10. OEMs and their customers benefit from Microsoft‚s addition of new features and functionality into its operating system, making it more capable and easier to use. Compaq does the same thing with its Tru-64 UNIX operating system because that is what customers want. Restricting Microsoft‚s ability to improve Windows in competition with other operating systems would not help consumers.

Dr. Steven Davis

Dr. Steven Davis is Professor of Economics at the University of Chicago‚s Graduate School of Business. He has also been a visiting faculty member at the University of Maryland, MIT, and Stanford University. He was the author (along with Jack MacCrisken and Keven Murphy) of "Integrating New Features into the PC Operating System: Benefits, Timing, and Effects on Innovation," which analyzes the economic benefits of integration in the software industry and which was submitted during the liability phase in connection with Dean Schmalensee‚s testimony. He and Professor Murphy are also the authors of "A Competitive Perspective on Internet Explorer," which appears in the May 2000 issue of the American Economic Review, the preeminent academic journal for economists in this country. Microsoft anticipates that, if given adequate time to complete his analysis of the government‚s proposed remedies, Professor Davis would testify to the following general propositions at an evidentiary hearing.

1. For more than a decade, Microsoft has followed a consistent strategy of integrating new features into its desktop operating systems. This strategy has provided many benefits to consumers in the form of more rapid innovation, greater ease of use, and lower costs. Microsoft‚s approach to server operating systems and applications that run on serversųwhere it faces strong competition from entrenched incumbents (e.g., Novell, Sun, IBM, and Oracle)ųhas many of the same elements. Microsoft‚s Windows NT (now Windows 2000) server operating system runs on relatively inexpensive hardware and is closely integrated with various other products, such as SQL Server (for databases), Exchange Server (for e-mail and related functions), and various products for Web sites (such as BizTalk Server 2000). Although Microsoft provides the external "hooks" (APIs) needed for its operating systems to interoperate with other systems, it coordinates the introduction of new features at different levels (server operating systems, server applications such as SQL server, and client operating systems); without such coordination, these innovations could not be introduced quickly, if at all.

2. There are, of course, alternative strategies, and they are well represented by many of the enterprisesųsuch as Sun and Oracleųthat serve on the boards of the Computer and Information Industry Association and the Software and Information Industry Association. Many companiesųsuch as Sun and other vendors of UNIX systems and mainframesųsell a vertically integrated combination of hardware and system software. Several companies with strong positions in server hardware or softwareųsuch as Sun and Oracleųhave worked hard to promote "thin clients" that would move most of the computing from the desktop to the server. Although Microsoft could have followed these fundamentally different business models, it did not, and breaking the company up along artificial lines at this late date would sharply reduce its ability to compete. Consumers would suffer as a result, both because a potentially strong, and low-price competitor would be artificially disadvantaged and because consumers would be deprived of choice.

3. Interestingly, the Chief Economist of the Antitrust Division of the U.S. Department of Justice, Dr. Timothy Bresnahan (formerly a Professor of Economics at Stanford University) made this very point in the context of the Microsoft case just last year. Dr. Bresnahan‚s paper includes an insightful discussion of the competing business models employed by competitors in server-based database software (a business that was never at issue in this case, but which the government‚s proposed remedy explicitly would affect in fundamental ways). In this competition, Oracle is the successful incumbent, and Microsoft is the challenger. In contrast to the dominant incumbent, Microsoft offers an approach that emphasizes integration and standardized software (as opposed to the more service-oriented, customized approach of Oracle). It is worth quoting Professor Bresnahan‚s conclusions at some length:

From a societal perspective, it is hard to see a better epochal competition situation than this. The events of recent years make it clear that there will be considerable market power in server DBMS. It seems nearly certain that there will be a dominant firm. But there is a real contest for dominant position at the present.

Perhaps I have surprised you with my remark that this situation is excellent. Many analysts will say that the proposed replacement of separate DBMS and server OS firms with a unified, more proprietary structure is bad. They will favor the continuation of incumbent Oracle against entrant Microsoft on this industry structure argument. This is an error. The reason I am so sure it is an error is that I trust the customers in the server DBMS market to make their own decisions. Customers, spending their own money, will choose between two very different structures. They may choose integration over flexibility and choice, and choose Microsoft. Or they may make the opposite choice and stay with Oracle and Unix. It would be the height of arrogance on our part to tell them to prefer the current situation over its possible replacement.

Timothy F. Bresnahan, "New Modes of Competition: Implications for the Future Structure of the Computer Industry," in Jeffrey A. Eisenach and Thomas M. Lenard (eds.), Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace. Boston: Kluwer, 1999, 155, 183.

4. Professor Davis shares Professor Bresnahan‚s belief that such competition between distinct alternatives is highly desirable in software markets. The government‚s breakup proposal would prevent this type of competition from occurring, rendering Microsoft‚s strategy impossible by forcing the complementary technology into separate companies and limiting these companies‚ ability to cooperate. It is also worth noting Professor Bresnahan‚s conclusion regarding a (then-hypothetical) structural remedy that would split Microsoft‚s operating system software from the rest of the company: "It is flat-out picking winners." (Id. at 206.) Neither he nor Professor Davis thinks that the government or the courts should be in the business of picking winners (or handicapping others so they become losers).

Jeffrey Katzenberg

Jeffrey Katzenberg is a founder and officer of DreamWorks, one of the fastest growing and most technologically advanced entertainment companies in the United States. Mr. Katzenberg founded DreamWorks together with film director Steven Spielberg and music industry entrepreneur David Geffen. DreamWorks‚ principal operations include a motion picture studio, two animation studios (one producing traditionally hand-drawn animated films and the other producing films which employ state-of-the-art computer-generated imaging), a television production company, a music company, and a variety of Internet interests focused on the creation of original content for delivery over the Internet. Located in Los Angeles, DreamWorks employs approximately 1,600 people. Microsoft expects that Mr. Katzenberg would testify to the following general propositions at an evidentiary hearing.

1. The production of animated films, whether hand-drawn or computer-generated imaging, is virtually dependent on the use of software technology to compete effectively. As a major producer of animated films, much of DreamWorks‚ business is therefore dependent on the use of software. DreamWorks currently uses a number of different Microsoft products, including Microsoft client operating systems, server operating systems and applications. DreamWorks uses servers and workstations produced by a variety of vendors. It is essential to DreamWorks‚ business that the software it uses works well together and with all of the various computer hardware it uses in its operations.

2. DreamWorks uses Microsoft products because they work extremely well together and with the various hardware used at the company. In addition, Microsoft products are far more reliable than other software products employed by DreamWorks. By using Microsoft operating systems, applications and other products, which are designed and tested to work well together, DreamWorks does not have to act as its own systems integrator, which saves the company significant time and money. If Microsoft were broken upųas the government proposesųMicrosoft‚s operating systems, applications and other products over time would become less and less compatible, both with each other and with the various hardware products used by DreamWorks. Such decreased compatibility would adversely affect DreamWorks‚ business because the company would have to expend substantial resources ensuring that the software it purchases interoperates with the company‚s other software and with the different kinds of computers the company uses. It has been DreamWorks‚ experience that the costs involved in ensuring interoperability usually exceed the costs of replacing the affected computer hardware; thus decreased compatibility would likely cause DreamWorks to replace a significant portion of its computer hardware. In addition to integration/replacement costs, DreamWorks would incur productivity losses from a decrease in compatibility among software and hardware components.

3. In addition to possibly imposing compatibility-related costs on third parties, breaking up Microsoft would increase the number of suppliers with which DreamWorks must deal. Currently, DreamWorks licenses a variety of software productsųincluding applications and operating systemsųfrom Microsoft pursuant to a single license agreement. In so doing, DreamWorks deals with only one account representative from Microsoft, who answers the company‚s questions and assists the company with problems related to a large number of products. If Microsoft were broken up, DreamWorks would be forced to deal with multiple vendors in licensing software and obtaining support and assistance, resulting in increased inefficiency, complexity, and based on DreamWorks‚ experience, cost.

4. Microsoft‚s principal competitors, including Sun Microsystems and IBM, stress the fact that they provide integrated solutions to customers‚ computing needs. In fact, Microsoft‚s competitors, as part of their marketing strategy, assert that they provide more closely integrated products than Microsoft currently offers. This marketing strategy reflects the fact that consumers (including DreamWorks) prefer that the technology they utilize be as integrated as possible, thus maximizing interoperability and minimizing the number of vendors with which a company must deal.

5. DreamWorks has come to rely on the consistency of Microsoft‚s operating systems. Because the Windows desktop is consistent across various different brands of computers, DreamWorks can use multiple brands of computers knowing that the different machines will look and act the same way. This minimizes both training costs and user confusion at DreamWorks. In addition, the consistency of Microsoft‚s operating systems means that applications designed to run on a particular Microsoft operating system will actually work on that operating system, regardless of the brand of computer being used. If Microsoft‚s operating systems no longer were consistent across multiple brands of computers, DreamWorks would spend more time and money on training and installation.

6. The innovative software products and the integration between products that Microsoft has created have assisted DreamWorks in producing cutting-edge products. DreamWorks hopes to continue to benefit from future Microsoft innovations. If Microsoft‚s ability to produce exciting new products that work well together were restricted, as will be the case if Microsoft is broken up, DreamWorks‚ business would suffer.

Edward Mcvaney

Edward McVaney is the Chairman and CEO of J.D. Edwards & Company. J.D. Edwards is a leading supplier of e-business solutions throughout the world and has approximately 6,000 customers. It employs about 5,400 employees in 50 offices worldwide with its headquarters in Denver, Colorado. For more than 20 years, J.D. Edwards has assisted companies of all sizes to take advantage of new technologies by delivering functionality in enterprise software that addresses a number of critical core business processes including finance, manufacturing, distribution/logistics and human resources. It also provides industry-specific solutions to the industrial, consumer and service industries. Microsoft anticipates that Mr. McVaney would testify to the following general propositions at an evidentiary hearing.

1. J.D. Edwards offers the J.D. Edwards‚ OneWorld enterprise application architecture. This is an object-based, event-driven technology designed to provide the information access and other user benefits of traditional client/server systems while masking complexity and accommodating future change. OneWorld combines mission-critical enterprise applications with an integrated toolset for tailoring those applications to the needs of a particular customer‚s business. Nearly 70 percent of the company‚s customers run their OneWorld software on Microsoft‚s Windows NT platform because it provides scalability and a high number of features at a relatively low overall cost.

2. J.D. Edwards and its customers would be harmed in a number of ways if Microsoft were split into two companies. Segregating tools from the operating system and placing them in two separate companies would create problems for all applications developers who need a set of common tools that are developed together with the operating system.

3. J.D. Edwards also supports the Microsoft Component Object Model (COM, for short) that enables application integration between OneWorld and third-party applications. COM is Microsoft‚s approach to object-oriented programming that relies on the use of, and interaction between, "objects" (mini-programs containing data and procedural code that are often built into larger programs by developers) to simplify the task of the software vendor who writes applications and to increase the efficiency of the software. COM is widely accepted for creating, deploying, managing and integrating distributed applications. The government‚s proposal to put tools in a separate company from the operating system would jeopardize support for COM, and this is a source of concern to J.D. Edwards.

4. J.D. Edwards prefers to minimize the number of different vendors used to supply Information Technology services and products. If Microsoft were broken up, J.D. Edwards‚ costs would increase because it would have to deal with two companies rather than one. This increases complexity and is likely to raise procurement and support costs.

5. If computer manufacturers were to create their own varying versions of the Windows operating system as a result of the government‚s proposed remedies, J.D. Edwards‚ testing and support costs would likely increase dramatically. J.D. Edwards could no longer rely on the existence of Windows as a consistent and stable platform and would have to select a number of versions to support. Depending on the number of versions it selects, J.D. Edwards‚ testing and support costs are likely to multiply accordingly.

6. One of the reasons that J.D. Edwards develops software applications that run on the Windows operating system is because it can be certain that the code accessed through Windows Application Programming Interfaces (APIs) will be installed on each personal computer with Windows. That means that J.D. Edwards and other software developers do not have to distribute that code with their products, saving distribution time and costs and support costs. In addition, J.D. Edwards‚ customers and the customers of other application developers benefit from a simpler, faster and less costly installation process. If the Windows platform is fragmented, then software developers and their customers will be harmed by the loss of those benefits.

7. In running its own business, J.D. Edwards decided to move to a single infrastructure based on Microsoft products. In management‚s view, one of the main benefits of Microsoft products is the common interface and integration of the different tools. This simplicity lets users become productive immediately and minimizes support costs. J.D. Edwards follows an internal policy of upgrading to any new version of a Microsoft product within six months of its release. Microsoft‚s common user interface significantly reduces training time required for product upgrades. Splitting Microsoft into two companies will undoubtedly cause the products to become less compatible over time and the common user interface will become a thing of the past.

8. J.D. Edwards benefits both in terms of the operations of its own business and in terms of its customer offerings by Microsoft‚s constant addition of new features to its products. For example, the inclusion of Windows Installer technology in Windows 2000 has made a significant difference in terms of the ease and cost of installing new software. If Microsoft is no longer able to innovate or if restrictions proposed by the government slow the pace of innovation, then J.D. Edwards and its customers will suffer.

Tony Nicely

Tony Nicely is the Chairman of GEICO, one of the largest auto insurance companies in the United States. GEICO provides insurance for 4.5 million policyholders on 6.9 million automobiles as of April 2000. At its corporate headquarters in Washington, D.C. and its other offices around the country, GEICO employs more than 18,000 people. Microsoft anticipates that Mr. Nicely would testify to the following general propositions at an evidentiary hearing.

  1. As an insurance company with thousands of employees in many different offices who rely on computers to get their jobs done, GEICO is very focused on finding efficient and cost-effective solutions for its computing needs. GEICO relies on several Microsoft products in critical aspects of its operations, including client operating systems like Windows 98, business productivity applications like Microsoft Office, server operating systems like Windows NT Server and server applications like Microsoft Exchange and SQL Server. GEICO would be adversely affected if anything slowed the release of new and improved versions of these products or decreased their ability to work together seamlessly in our complex computing environment.
  2. Like all companies seeking to lower costs and decrease the complexity of its operations, GEICO is interested in having fewer suppliers rather than more. Dividing Microsoft into two companies would make it more costly and difficult for GEICO to license the software it needs to run its business. GEICO currently licenses software from Microsoft under an enterprise license agreement that covers a variety of products, including both operating systems and applications. That arrangement is far preferable to having to negotiate and maintain separate agreements with two different suppliers, each with its own contracting procedures. Having a single account representative from Microsoft that we can contact to resolve a wide range of issues is good for GEICO.
  3. One of the most attractive aspects of Microsoft‚s products is that they are designed, developed and tested to work well together. GEICO does not desire to act as its own systems integrator, building software on a component-by-component basis and then testing that software to see whether it works with our applications and with different brands of computers in use around the company. It is inevitable that splitting Microsoft in half and taking closely complementary products like Windows NT Server and SQL Server and placing them in separate companies will make it more difficult to improve those products and cause them to become less compatible over time.
  4. GEICO depends on the stability and consistency of Microsoft‚s operating systems both in terms of functionality accessible by end users and in terms of running other software on top of the operating systems. As to the former, it would increase training and support costs and make our personal computers harder to use if different brands of machines looked and behaved differently. The basic consistency of the Windows desktop across multiple brands of personal computers is good for GEICO, giving us the option of mixing and matching personal computers with the knowledge that there will be consistency at the operating system level. As to the latter, it would increase GEICO‚s deployment and support costs if certain brands of new personal computers did not contain components of Microsoft‚s operating systems that were relied on by our applications. We expect applications designed for Windows to run across many different brands of personal computers; if that assumption were no longer valid, that would complicate our ability to install applications throughout the company.
  5. GEICO benefits from Microsoft‚s steady addition of new features to its operating systems. For example, the inclusion of Internet support in Windows made it easier for us to operate our corporate intranet, which is a backbone for communications around the company. Another example is Microsoft‚s inclusion of Windows Installer technology in Windows 2000. This new technology will make it possible for GEICO to install automatically new applications without physically touching any of the machines, which was a very time-consuming and expensive process. Microsoft has been a driving force in making software more capable, easier to use and less expensive to maintain. Restricting the ability of Microsoft or any successor company to innovate as quickly would be bad for GEICO.
  6. Microsoft‚s competitors, including UNIX vendors like Sun Microsystems with Solaris and IBM with AIX, market their products on the basis that they are very tightly integrated through all layers, starting with microprocessors and running up through applications. That simply reflects the desire of customers like GEICO to have more integration, not less.
  7. GEICO has a heterogeneous computing environment consisting of mainframe computers, minicomputers, servers, workstations and personal computers from multiple vendors. Despite the government‚s contention that Microsoft has impeded interoperability with UNIX and other operating systems, GEICO has found that Microsoft products work well in mixed environments based on their support of industry standard protocols like HTTP and TCP/IP. In fact, Microsoft does more to promote interoperability than many other vendors, which are interested in selling their proprietary client/server solutions to GEICO.

Dean Richard Schmalensee

Richard Schmalensee is Professor of Economics and Management and Dean of the Sloan School of Management at MIT. Microsoft anticipates that, if given adequate time to complete his analysis of the government‚s proposed remedies, Dean Schmalensee would testify to the following general propositions at an evidentiary hearing in addition to the subjects described in the Offer of Proof submitted in open court on May 24, 2000.

1. The competitive landscape in the high technology field is shifting from personal computers to other machines, to Web-based applications and to software as a service that is available from the Web. That this would happen soon was obvious to everyone familiar with this business during the trial. The plaintiffs seemed to suggest this was fantasy. It is reality now.

2. It has also become increasingly clear that Linux is a serious competitor as an operating system for a variety of non-PC devices that compete directly with personal computers running Windows. An example of this increasing competition is reflected in a series of recent announcements by AOL and Gateway. Last month, Gateway announced that it would develop and sell a machine targeting the AOL on-line service and other AOL offerings that would run on a version of Linux customized by a team including Linux‚s original developer, Linus Torvalds. The machine is to use AOL/Netscape‚s "Gecko" browser technology, also known as Navigator 6.0. The AOL/Gateway machines automatically will launch a feature known as "Instant AOL" that is a customized version of AOL‚s online service. They also will offer e-mail, Instant Messenger, news, popular AOL content and personalized services. The machines, and others like it, will provide direct competition for personal computers running Windows.

3. Many industry analysts have questioned the ability of Microsoft to adapt to the current and ongoing changes in the competitive landscape. They have described Microsoft‚s technology as outdated and a remnant of the personal computer era. According to prominent industry analysts, Microsoft will find it difficult to leave behind the technology that thrust it to the pinnacle of the high tech industry and, accordingly, will not be able to compete effectively with companies that do not have its legacy. For example, Giga Information Group pointed out in a March 2000 report that: "Devices that are good at some critical things will displace the jack-of-all-trades personal computer as the platform of choice for most applications. Giga believes this transformation will be almost completed by 2005." In January 2000, Giga stated: "It is clear that the era of the personal computer is over, largely replaced by what will likely be called the Internet era. With this transition, control of the market appears to be moving from companies like Microsoft and Intel, to companies like the new AOL/Time Warner. This transition, which we expect will take three to five years to complete, will be particularly painful, and, as we‚ve noted before, we have some doubts whether Microsoft will make it." Forrester Research expressed the view in November 1999 that: "the high-tech industry has already moved on to Internet-based systems that are independent of Microsoft‚s tools and operating systems. Internet commerce, which will account for $170 billion of sales worldwide in 1999, now occupies center stage for users and entrepreneurs Ų and will for years to come." Summit Strategies has observed: "While Microsoft executives have become adept at chanting the "software-as-services" mantra, the company has yet to articulate a comprehensive or convincing strategy to exploit this elemental shift in its core market."

4. Plaintiffs‚ remediesųby making an increasingly artificial distinction between operating systems and applications and by unreasonably limiting Microsoft‚s ability to work with other firmsųseem likely to make Microsoft‚s already very difficult task of competing in this changing industry nearly impossible.

John Whitacre

John Whitacre is the Chairman and CEO of Nordstrom, Inc., one of the nation‚s premier fashion specialty retailers. Nordstrom has 104 stores located in 23 states, and it specializes in a customer-intensive style of retailing. It also serves customers through its online presence at http://www.nordstrom.com, and in November 1999, Nordstrom formed a subsidiary known as Nordstrom.com to promote the rapid expansion of its catalog and e-commerce businesses. Nordstrom employs on a full or part-time basis an average of approximately 40,000 employees throughout the country. It operates approximately 10,000 personal computers in its business. Microsoft anticipates that Mr. Whitacre would testify to the following general propositions at an evidentiary hearing.

1. As a large retailer, Nordstrom has significant computing needs both in its traditional retail business and in its online businesses such as NORDSTROMshoes.com, the largest shoe store in the world. Immediate access to information is critical to a business such as ours that requires rapid response to sales trends, close coordination with many different vendors, efficient movement of merchandise from point of manufacture to the retail floor and the careful balancing of inventory levels. One of Nordstrom‚s key initiatives that we believe will have a significant and long-term impact on our business is to strengthen our information resources and processes in order to meet the ultimate objective of serving our customers better. At the same time, Nordstrom recognizes the necessity of finding efficient and cost-effective solutions to its computing needs and has turned increasingly to Microsoft products to meet those needs. Nordstrom relies on several Microsoft products, including client operating systems, business productivity applications (Microsoft Office), server operating systems (Windows NT Server and NT Enterprise Edition), server applications (SQL Server, SMS and Exchange) and developer tools such as Microsoft Visual Studio. Nordstrom would be adversely affected if anything slowed the release of new and improved versions of these products or decreased their ability to work together seamlessly in our complex computing environment.

2. Dividing Microsoft into two companies would make it more costly and difficult for Nordstrom to license the software it needs to run its business. Like all companies seeking to lower costs and decrease complexity, Nordstrom is interested in having fewer suppliers rather than more. Nordstrom currently licenses software from Microsoft under an enterprise license agreement that covers a variety of products, including both operating systems and applications. We prefer that arrangement to having to negotiate and maintain separate agreements with multiple suppliers, each with its own contracting procedures. In addition, Nordstrom likes the efficiency of working with a single account representative from Microsoft to resolve a wide range of issues and thinks that is good for Nordstrom‚s business. Recently Dan Nordstrom, President CEO of Nordstrom.com, said: "The development of Nordstrom.com on the Microsoft platform, which occurred in under six months, would not have been possible without an incredible contribution from Clare Harris (our Microsoft Account Executive). Throughout the process, Clare was both intensely committed, and extremely honest in her assessment of the many bumps, hurdles, and small mountains that were confronted along the way. When I needed a reality check on where things really stood, I turned to Clare and consistently received feedback that was just as balanced and forthright as any of my own team. I can‚t think of anyone in the technology industry that I trust on the level I do Clare."

3. Nordstrom highly values the fact that Microsoft‚s products are designed, developed, and tested to work well together. Features like a common interface make a big difference in terms of ease of administration, ease of use and ultimately in the total cost of ownership. Nordstrom does not have the resources to act as its own systems integrator, building software on a component-by-component basis and then testing that software to see whether it works with our applications and with the different brands of computers in use around the company. Splitting Microsoft in half and taking closely complementary products like Windows NT Server and SQL Server and placing them in separate companies will inevitably make it more difficult to improve those products and cause them to become less compatible over time.

4. Nordstrom depends on the stability and consistency of Microsoft‚s operating systems both in terms of functionality accessible by end users and in terms of running other software on top of the operating systems. As to accessibility by users, it would increase training and support costs and make our personal computers harder to use if different brands of machines looked and behaved differently. The basic consistency of the Windows desktop across multiple brands of personal computers is good for Nordstrom, giving us the option of mixing and matching personal computers with the knowledge that there will be consistency at the operating system level. As to compatibility among software, it would increase Nordstrom‚s deployment and support costs if certain brands of new personal computers did not contain components of Microsoft‚s operating systems that were relied on by our applications. We expect applications designed for Windows to run across many different brands of personal computers. If that were no longer true, that would complicate our ability to install applications throughout the company or limit our ability to procure hardware.

5. Nordstrom benefits from Microsoft‚s steady addition of new features to its operating systems. For example, the inclusion of Internet support in Windows made it easier for us to operate our corporate intranet. Another example is Microsoft‚s inclusion of Windows Installer technology in Windows 2000, which will make it possible for Nordstrom to automatically install new applications without physically touching any of the machines. Microsoft has been a driving force in making software more capable, easier to use and less expensive to maintain. Restricting the ability of Microsoft to innovate quickly would be bad for Nordstrom.

* * *

For the foregoing reasons, as well as the reasons stated in Microsoft‚s other submissions, the Court should decline to enter the government‚s proposed final judgment.

Respectfully submitted,
______________________________

William H. Neukom
Thomas W. Burt
David A. Heiner, Jr.
Diane D‚Arcangelo
Christopher J. Meyers
MICROSOFT CORPORATION
One Microsoft Way
Redmond, Washington 98052
(425) 936-8080
John L. Warden (Bar No. 222083)
Richard J. Urowsky
Steven L. Holley
Theodore Edelman
Michael Lacovara
Richard C. Pepperman, II
Christine C. Monterosso
Bradley P. Smith
SULLIVAN & CROMWELL
125 Broad Street
New York, New York 10004
(212) 558-4000

Counsel for Defendant

Counterclaim-Plaintiff

Microsoft Corporation

May 31, 2000

CERTIFICATE OF SERVICE

I hereby certify that on this 31st day of May, 2000, I caused a true and correct copy of the foregoing Defendant Microsoft Corporation‚s Supplemental Offer of Proof to be served by facsimile and by overnight courier upon:

Phillip R. Malone, Esq.
Antitrust Division
U.S. Department of Justice
450 Golden Gate Avenue, Room 10-0101
San Francisco, California 94102
Fax: (415) 436-6687

Kevin J. O‚Connor, Esq.
Office of the Attorney General of Wisconsin
P.O. Box 7857
123 West Washington Avenue
Madison, Wisconsin 53703-7957
Fax: (608) 267-2223

Christine Rosso, Esq.
Chief, Antitrust Bureau
Illinois Attorney General‚s Office
100 West Randolph Street, 13th Floor
Chicago, Illinois 60601
Fax: (312) 814-2549

And by facsimile and by hand upon:
Richard L. Schwartz, Esq.
Deputy Chief, Antitrust Bureau
New York State Attorney General‚s Office
120 Broadway, Suite 2601
New York, New York 10271
Fax: (212) 416-6015

______________________
Bradley P. Smith