V. MICROSOFT's RESPONSE TO THE BROWSER THREAT
F. Excluding Navigator from Important Distribution Channels
5. Directly Inducing ISVs to Rely on Microsoft's Browsing Technologies Rather than APIs Exposed by Navigator
337. Since 1995, more and more ISVs have, like Intuit, enhanced the features of their applications by designing them to take advantage of the type of content and functionality accessible through browsing software. An increasing number of these applications actually rely on browsing software to function. Microsoft's efforts to maximize Internet Explorer's share of browser usage at Navigator's expense were intended to encourage developers to use Windows- specific technologies when they wrote their applications to rely on a browser. In addition to creating this incentive indirectly, by disadvantaging Navigator, Microsoft also targeted individual ISVs directly, extracting from them commitments to make their Web-centric applications reliant on technology specific to Internet Explorer.
338. Because of the importance of "time-to-market" in the software industry, ISVs developing software to run on Windows products seek to obtain beta releases and other technical information relating to Windows as early and as consistently as possible. Since Microsoft decides which ISVs receive betas and other technical support, and when they will receive it, the ability of an ISV to compete in the marketplace for software running on Windows products is highly dependent on Microsoft's cooperation. Netscape learned this lesson in 1995.
339. 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.
340. By exchanging its vital support for the agreement of leading ISVs to make Internet Explorer the default browsing software on which their products rely, Microsoft has ensured that many of the most popular Web-centric applications will rely on browsing technologies found only in Windows and has increased the likelihood that the millions of consumers using these products will use Internet Explorer rather than Navigator. Microsoft's relations with ISVs thus represent another area in which it has applied its monopoly power to the task of protecting the applications barrier to entry.
6. Foreclosing Apple as a Distribution Channel for Navigator
341. In the summer of 1995, Microsoft had been willing to cede to Netscape the development of browsing software for the Mac OS, provided that Netscape would stop competing with the platform-level browsing technologies that Microsoft was developing for its 32-bit Windows products. The genesis of this offer had been Microsoft's belief that Netscape could never become the leading platform for network-centric software development if it did not distribute a middleware layer for the soon-to-be dominant 32-bit Windows platform. But once Netscape confirmed its determination to offer a middleware layer that would expose the same set of APIs on Windows, the Mac OS, and other platforms, Microsoft recognized that it needed to stifle the attention that developers would be inclined to devote to those APIs, even when the they rested on top of a non-Windows platform like the Mac OS. After all, if Navigator became so popular on the Mac OS that developers made extensive use of the APIs exposed by that version of Navigator, those developers would be disposed to take advantage of identical APIs exposed by the version of Navigator written for the dominant platform, Windows. Microsoft therefore set out to convince developers that applications relying on APIs exposed by Navigator would not reach as many Mac OS users as applications that invoked platform technologies found exclusively in Windows. Therefore, Microsoft set out to recruit Mac OS users to Internet Explorer, and to minimize Navigator's usage share among Mac OS users.
342. Just as pre-installation and promotion by OEMs is one of the most effective means of raising the usage share of browsing software among users of Intel-compatible PC systems, pre-installation and promotion by Apple is one of the most effective means of raising the usage share of browsing software among the users of Apple PC systems. Recognizing this, Bill Gates consistently urged Microsoft executives to persuade Apple to pre-install the Mac OS version of Internet Explorer on its PC systems and to feature it more prominently than the Mac OS version of Navigator.
343. By the summer of 1996, Apple was already shipping Internet Explorer with the Mac OS, but it was pre-installing Navigator as the default browsing software. After a meeting with Apple in June 1996, Gates wrote to some of his top executives: "I have 2 key goals in investing in the Apple relationship - 1) Maintain our applications share on the platform and 2) See if we can get them to embrace Internet Explorer in some way." Later in the same message, Gates expressed his desire that Apple "agree to immediately ship IE on all their systems as the standard browser."
344. One point of leverage that Microsoft held over Apple was the fact that ninety percent of Mac OS users running a suite of office productivity applications had adopted Microsoft's Mac Office. In 1997, Apple's business was in steep decline, and many doubted that the company would survive much longer. Observing Apple's poor performance in the marketplace and its dismal prospects for the future, many 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.
345. Recognizing the importance of Mac Office to Apple's survival, Microsoft threatened to cancel the product unless Apple compromised on a number of outstanding issues between the companies. One of these issues was the extent to which Apple distributed and promoted Internet Explorer, as opposed to Navigator, with the Mac OS.
346. At the end of June 1997, the Microsoft executive in charge of Mac Office, Ben Waldman, sent a message to Gates and Microsoft's Chief Financial Officer, Greg Maffei. The message reflected Waldman's understanding that Microsoft was threatening to cancel Mac Office: The pace of our discussions with Apple as well as their recent unsatisfactory response have certainly frustrated a lot of people at Microsoft. 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. I also believe that Apple is taking this threat pretty seriously . . . .
347. Waldman was actually an advocate for releasing Mac Office 97 promptly, and he pressed for that outcome in his message to Gates and Maffei. Although they applauded Waldman's devotion to the product, Gates and Maffei made clear that the threat of canceling Mac Office was too valuable a source of leverage to give up before Microsoft had extracted acceptable concessions from Apple. Maffei wrote Waldman, "Ben - great mail, but [we] need a way to push these guys and this is the only one that seems to make them move." In his response to Waldman, Gates asked whether Microsoft could conceal from Apple in the coming month the fact that Microsoft was almost finished developing of Mac Office 97.
348. In order to assure his superiors that he was pursuing corporate policy despite his personal convictions, Waldman reported to Maffei in his June 1997 message that he had recently told his counterpart at Apple that Maffei "would be recommending to Bill [Gates] that we cancel Mac Office 97." Waldman believed that his counterpart "got the message that we would, in fact, cancel." Waldman went on to write that when his counterpart had asked what specific problems Microsoft had with Apple's recent response to Microsoft's proposals, Waldman had replied by mentioning four issues, including "IE equal access." By that, Waldman meant Microsoft's demand that the Mac OS make Internet Explorer just as available to its users as it made Navigator. According to Waldman, the Apple employee had responded that Apple would not be able to change the Mac OS's default browser from Navigator until it released the next version of the operating system product in the summer of 1998.
349. A few days after the exchange with Waldman, Gates informed those Microsoft executives most closely involved in the negotiations with Apple that the discussions "have not been going well at all." One of the several reasons for this, Gates wrote, was that "Apple let us down on the browser by making Netscape the standard install." Gates then reported that he had already called Apple's CEO (who at the time was Gil Amelio) to ask "how we should announce the cancellation of Mac Office . . . ."
350. Within a month of Gates’ call to Amelio, Steve Jobs was once again Apple's CEO, and the two companies had settled all outstanding issues between them in three agreements, all of which were signed on August 7, 1997. Under the agreement titled "Technology Agreement," which remains in force today, Microsoft's primary obligation is to continue releasing up-to-date versions of Mac Office for at least five years. Among the obligations that the Technology Agreement places on Apple are several relating to browsing software.
351. First, Apple has agreed, for as long as Microsoft remains in compliance with its obligation to support Mac Office, to "bundle the most current version of Microsoft's Internet Explorer for Macintosh . . . with all system software releases for Macintosh Computers (‘MacOS’) sold by Apple." The Technology Agreement also provides: "While Apple may bundle browsers other than Internet Explorer with such Mac OS system software releases, Apple will make Internet Explorer for Macintosh the default selection in the choice of all included internet browsers (i.e., when the user invokes the "Browse the Internet" or equivalent icon, the Mac OS will launch Internet Explorer for Macintosh)." In fulfillment of this requirement, Apple did not include Navigator in the default installation of the Mac OS 8.5 upgrade product. In other words, Navigator is not installed on the computer hard drive during the default installation, which is the type of installation most users elect to employ. Therefore, most users who upgraded their Macintosh systems to Mac OS 8.5 were unable to access Navigator without doing a customized installation. Having already installed an altogether adequate browser (Internet Explorer) when the Mac OS 8.5 upgrade completed its default installation process, however, most users are unlikely to trouble to install Navigator as well.
352. The Technology Agreement further provides that "[a]ny other internet browsers bundled in the Mac OS system software sold by Apple shall be placed in folders in the software as released." In other words, Apple may not position icons for non-Microsoft browsing software on the desktop of new Macintosh PC systems or Mac OS upgrades. Moreover, the agreement states that "Apple will not be proactive or initiate actions to encourage users to swap out Internet Explorer for Macintosh." Both Apple and Microsoft read this term to prohibit Apple from promoting non-Microsoft browsing software. The agreement even states that Apple will "encourage its employees to use Microsoft Internet Explorer for Macintosh for all Apple- sponsored events and will not promote another browser to its employees." Pursuant to this provision, Apple's management has instructed the firm's employees to not use Navigator in demonstrations at trade shows and other public events. Also with regard to the promotion of browser technology, the agreement requires Apple to display the Internet Explorer logo on "all Apple-controlled web pages where any browser logo is displayed." Finally, the agreement grants Microsoft the right of first refusal to supply the default browsing software for any new operating system product that Apple develops during the term of the agreement.
353. At the same time that it entered the Technology Agreement, Microsoft concluded a "Preferred Stock Purchase Agreement" and a "Patent Cross License Agreement" with Apple. These latter two agreements place obligations on Microsoft that are unrelated to Mac Office, and they bind Apple in areas other than browsing software. The fact that Microsoft and Apple entered two other agreements at the same time that they entered the Technology Agreement does not change the fact that Microsoft's commitment to continue developing Mac Office was at least partial consideration for Apple's commitment to distribute and promote Internet Explorer more favorably than Navigator. Indeed, the language of the agreements themselves demonstrates that Microsoft and Apple saw the Mac Office and Internet Explorer obligations as more closely linked to each other than to any other obligations the parties simultaneously undertook: Whereas the provision in the Technology Agreement setting forth Apple's obligations relating to browsing software explicitly states that those obligations will last as long as Microsoft complies with its obligation to continue supporting Mac Office, the provisions in the other two agreements describing the patent cross-license and Microsoft's purchase of Apple stock mention neither browsing software nor Mac Office.
354. That the Mac Office and browsing software obligations are tied to each other is highlighted by the fact that the Microsoft executives who negotiated the agreement believe that Microsoft's remedy, were Apple to fail to meet its obligations with respect to browsing software, would be to discontinue Mac Office. When, in February 1998, a Microsoft employee proposed giving Apple an HTML control in exchange for Apple's agreement to use Internet Explorer as its standard browser internally, Waldman informed the employee that Apple was already obligated to use Internet Explorer as its standard browser internally and that Microsoft would revive the threat to discontinue Mac Office if Apple failed to comply with its obligation. In Waldman's words: Sounds like we give them the HTML control for nothing except making IE the "standard browser for Apple?" I think they should be doing this anyway. Though the language of the agreement uses the word "encourage," I think that the spirit is that Apple should be using it everywhere and if they don’t do it, then we can use Office as a club. For at least a year after the Technology Agreement went into effect, Waldman and other Microsoft employees continued to use the threat of reduced commitment to Mac Office in holding Apple to its commitments to support Internet Explorer.
355. Apple increased its distribution and promotion of Internet Explorer not because of a conviction that the quality of Microsoft's product was superior to Navigator’s, or that consumer demand for it was greater, but rather because of the in terrorem effect of the prospect of the loss of Mac Office. To be blunt, Microsoft threatened to refuse to sell a profitable product to Apple, a product in whose development Microsoft had invested substantial resources, and which was virtually ready for shipment. Not only would this ploy have wasted sunk costs and sacrificed substantial profit, it also would have damaged Microsoft's goodwill among Apple's customers, whom Microsoft had led to expect a new version of Mac Office. The predominant reason Microsoft was prepared to make this sacrifice, and the sole reason that it required Apple to make Internet Explorer its default browser and restricted Apple's freedom to feature and promote non- Microsoft browsing software, was to protect the applications barrier to entry. More specifically, the requirements and restrictions relating to browsing software were intended to raise Internet Explorer's usage share, to lower Navigator's share, and more broadly to demonstrate to important observers (including consumer, developers, industry participants, and investors) that Navigator's success had crested. Had Microsoft's only interest in developing the Mac OS version of Internet Explorer been to enable organizational customers using multiple PC operating-system products to standardize on one user interface for Web browsing, Microsoft would not have extracted from Apple the commitment to make Internet Explorer the default browser or imposed restrictions on its use and promotion of Navigator.
356. Microsoft understands that PC users tend to use the browsing software that comes pre-installed on their machines, particularly when conspicuous means of easy access appear on the PC desktop. By guaranteeing that Internet Explorer is the default browsing software on the Mac OS, by relegating Navigator to less favorable placement, by requiring Navigator's exclusion from the default installation for the Mac OS 8.5 upgrade, and by otherwise limiting Apple's promotion of Navigator, Microsoft has ensured that most users of the Mac OS will use Internet Explorer and not Navigator. Although the number of Mac OS users is very small compared to the Windows installed base, the Mac OS is nevertheless the most important consumer-oriented operating system product next to Windows. Navigator needed high usage share among Mac OS users if it was ever to enable the development of a substantial body of cross-platform software not dependent on Windows. By extracting from Apple terms that significantly diminished the usage of Navigator on the Mac OS, Microsoft severely sabotaged Navigator's potential to weaken the applications barrier to entry.