Thursday, June 28, 2001

I. Introduction

A. Background

In July 1994, officials at the Department of Justice

("DOJ"), on behalf of the United States, filed suit against

Microsoft, charging the company with, among other things,

unlawfully maintaining a monopoly in the operating system

market through anticompetitive terms in its licensing and

software developer agreements. The parties subsequently

entered into a consent decree, thus avoiding a trial on the

merits. See United States v. Microsoft Corp., 56 F.3d 1448

(D.C. Cir. 1995) ("Microsoft I"). Three years later, the

Justice Department filed a civil contempt action against Mi-

crosoft for allegedly violating one of the decree's provisions.

On appeal from a grant of a preliminary injunction, this court

held that Microsoft's technological bundling of IE 3.0 and 4.0

with Windows 95 did not violate the relevant provision of the

consent decree. United States v. Microsoft Corp., 147 F.3d

935 (D.C. Cir. 1998) ("Microsoft II"). We expressly reserved

the question whether such bundling might independently

violate ss 1 or 2 of the Sherman Act. Id. at 950 n.14.

On May 18, 1998, shortly before issuance of the Microsoft

II decision, the United States and a group of State plaintiffs

filed separate (and soon thereafter consolidated) complaints,

asserting antitrust violations by Microsoft and seeking pre-

liminary and permanent injunctions against the company's

allegedly unlawful conduct. The complaints also sought any

"other preliminary and permanent relief as is necessary and

appropriate to restore competitive conditions in the markets

affected by Microsoft's unlawful conduct." Gov't's Compl. at

53, United States v. Microsoft Corp., No. 98-1232 (D.D.C.

1999). Relying almost exclusively on Microsoft's varied ef-

forts to unseat Netscape Navigator as the preeminent inter-

net browser, plaintiffs charged four distinct violations of the

Sherman Act: (1) unlawful exclusive dealing arrangements in

violation of s 1; (2) unlawful tying of IE to Windows 95 and

Windows 98 in violation of s 1; (3) unlawful maintenance of a

monopoly in the PC operating system market in violation of

s 2; and (4) unlawful attempted monopolization of the inter-

net browser market in violation of s 2. The States also

brought pendent claims charging Microsoft with violations of

various State antitrust laws.

The District Court scheduled the case on a "fast track."

The hearing on the preliminary injunction and the trial on the

merits were consolidated pursuant to Fed. R. Civ. P. 65(a)(2).

The trial was then scheduled to commence on September 8,

1998, less than four months after the complaints had been

filed. In a series of pretrial orders, the District Court limited

each side to a maximum of 12 trial witnesses plus two

rebuttal witnesses. It required that all trial witnesses' direct

testimony be submitted to the court in the form of written

declarations. The District Court also made allowances for

the use of deposition testimony at trial to prove subordinate

or predicate issues. Following the grant of three brief con-

tinuances, the trial started on October 19, 1998.

After a 76-day bench trial, the District Court issued its

Findings of Fact. United States v. Microsoft Corp., 84

F. Supp. 2d 9 (D.D.C. 1999) ("Findings of Fact"). This

triggered two independent courses of action. First, the Dis-

trict Court established a schedule for briefing on possible

legal conclusions, inviting Professor Lawrence Lessig to par-

ticipate as amicus curiae. Second, the District Court re-

ferred the case to mediation to afford the parties an opportu-

nity to settle their differences. The Honorable Richard A.

Posner, Chief Judge of the United States Court of Appeals

for the Seventh Circuit, was appointed to serve as mediator.

The parties concurred in the referral to mediation and in the

choice of mediator.

Mediation failed after nearly four months of settlement

talks between the parties. On April 3, 2000, with the parties'

briefs having been submitted and considered, the District

Court issued its conclusions of law. The District Court found

Microsoft liable on the s 1 tying and s 2 monopoly mainte-

nance and attempted monopolization claims, Conclusions of

Law, at 35-51, while ruling that there was insufficient evi-

dence to support a s 1 exclusive dealing violation, id. at 51-

54. As to the pendent State actions, the District Court found

the State antitrust laws conterminous with ss 1 and 2 of the

Sherman Act, thereby obviating the need for further State-

specific analysis. Id. at 54-56. In those few cases where a

State's law required an additional showing of intrastate im-

pact on competition, the District Court found the requirement

easily satisfied on the evidence at hand. Id. at 55.

Having found Microsoft liable on all but one count, the

District Court then asked plaintiffs to submit a proposed

remedy. Plaintiffs' proposal for a remedial order was subse-

quently filed within four weeks, along with six supplemental

declarations and over 50 new exhibits. In their proposal,

plaintiffs sought specific conduct remedies, plus structural

relief that would split Microsoft into an applications company

and an operating systems company. The District Court

rejected Microsoft's request for further evidentiary proceed-

ings and, following a single hearing on the merits of the

remedy question, issued its Final Judgment on June 7, 2000.

The District Court adopted plaintiffs' proposed remedy with-

out substantive change.

Microsoft filed a notice of appeal within a week after the

District Court issued its Final Judgment. This court then

ordered that any proceedings before it be heard by the court

sitting en banc. Before any substantive matters were ad-

dressed by this court, however, the District Court certified

appeal of the case brought by the United States directly to

the Supreme Court pursuant to 15 U.S.C. s 29(b), while

staying the final judgment order in the federal and state

cases pending appeal. The States thereafter petitioned the

Supreme Court for a writ of certiorari in their case. The

Supreme Court declined to hear the appeal of the Govern-

ment's case and remanded the matter to this court; the Court

likewise denied the States' petition for writ of certiorari.

Microsoft Corp. v. United States, 530 U.S. 1301 (2000). This

consolidated appeal followed.

B. Overview

Before turning to the merits of Microsoft's various argu-

ments, we pause to reflect briefly on two matters of note, one

practical and one theoretical.

The practical matter relates to the temporal dimension of

this case. The litigation timeline in this case is hardly

problematic. Indeed, it is noteworthy that a case of this

magnitude and complexity has proceeded from the filing of

complaints through trial to appellate decision in a mere three

years. See, e.g., Data Gen. Corp. v. Grumman Sys. Support

Corp., 36 F.3d 1147, 1155 (1st Cir. 1994) (six years from filing

of complaint to appellate decision); Transamerica Computer

Co., Inc. v. IBM, 698 F.2d 1377, 1381 (9th Cir. 1983) (over

four years from start of trial to appellate decision); United

States v. United Shoe Mach. Corp., 110 F. Supp. 295, 298 (D.

Mass. 1953) (over five years from filing of complaint to trial

court decision).

What is somewhat problematic, however, is that just over

six years have passed since Microsoft engaged in the first

conduct plaintiffs allege to be anticompetitive. As the record

in this case indicates, six years seems like an eternity in the

computer industry. By the time a court can assess liability,

firms, products, and the marketplace are likely to have

changed dramatically. This, in turn, threatens enormous

practical difficulties for courts considering the appropriate

measure of relief in equitable enforcement actions, both in

crafting injunctive remedies in the first instance and review-

ing those remedies in the second. Conduct remedies may be

unavailing in such cases, because innovation to a large degree

has already rendered the anticompetitive conduct obsolete

(although by no means harmless). And broader structural

remedies present their own set of problems, including how a

court goes about restoring competition to a dramatically

changed, and constantly changing, marketplace. That is just

one reason why we find the District Court's refusal in the

present case to hold an evidentiary hearing on remedies--to

update and flesh out the available information before serious-

ly entertaining the possibility of dramatic structural relief--so

problematic. See infra Section V.

We do not mean to say that enforcement actions will no

longer play an important role in curbing infringements of the

antitrust laws in technologically dynamic markets, nor do we

assume this in assessing the merits of this case. Even in

those cases where forward-looking remedies appear limited,

the Government will continue to have an interest in defining

the contours of the antitrust laws so that law-abiding firms

will have a clear sense of what is permissible and what is not.

And the threat of private damage actions will remain to deter

those firms inclined to test the limits of the law.

The second matter of note is more theoretical in nature.

We decide this case against a backdrop of significant debate

amongst academics and practitioners over the extent to

which "old economy" s 2 monopolization doctrines should

apply to firms competing in dynamic technological markets

characterized by network effects. In markets characterized

by network effects, one product or standard tends towards

dominance, because "the utility that a user derives from con-

sumption of the good increases with the number of other

agents consuming the good." Michael L. Katz & Carl Shapi-

ro, Network Externalities, Competition, and Compatibility,

75 Am. Econ. Rev. 424, 424 (1985). For example, "[a]n

individual consumer's demand to use (and hence her benefit

from) the telephone network ... increases with the number

of other users on the network whom she can call or from

whom she can receive calls." Howard A. Shelanski & J.

Gregory Sidak, Antitrust Divestiture in Network Industries,

68 U. Chi. L. Rev. 1, 8 (2001). Once a product or standard

achieves wide acceptance, it becomes more or less en-

trenched. Competition in such industries is "for the field"

rather than "within the field." See Harold Demsetz, Why

Regulate Utilities?, 11 J.L. & Econ. 55, 57 & n.7 (1968)

(emphasis omitted).

In technologically dynamic markets, however, such en-

trenchment may be temporary, because innovation may alter

the field altogether. See Joseph A. Schumpeter, Capitalism,

Socialism and Democracy 81-90 (Harper Perennial 1976)

(1942). Rapid technological change leads to markets in which

"firms compete through innovation for temporary market

dominance, from which they may be displaced by the next

wave of product advancements." Shelanski & Sidak, at 11-12

(discussing Schumpeterian competition, which proceeds "se-

quentially over time rather than simultaneously across a

market"). Microsoft argues that the operating system mar-

ket is just such a market.

Whether or not Microsoft's characterization of the operat-

ing system market is correct does not appreciably alter our

mission in assessing the alleged antitrust violations in the

present case. As an initial matter, we note that there is no

consensus among commentators on the question of whether,

and to what extent, current monopolization doctrine should be

amended to account for competition in technologically dynam-

ic markets characterized by network effects. Compare Ste-

ven C. Salop & R. Craig Romaine, Preserving Monopoly:

Economic Analysis, Legal Standards, and Microsoft, 7 Geo.

Mason L. Rev. 617, 654-55, 663-64 (1999) (arguing that

exclusionary conduct in high-tech networked industries de-

serves heightened antitrust scrutiny in part because it may

threaten to deter innovation), with Ronald A. Cass & Keith

N. Hylton, Preserving Competition: Economic Analysis, Le-

gal Standards and Microsoft, 8 Geo. Mason L. Rev. 1, 36-39

(1999) (equivocating on the antitrust implications of network

effects and noting that the presence of network externalities

may actually encourage innovation by guaranteeing more

durable monopolies to innovating winners). Indeed, there is

some suggestion that the economic consequences of network

effects and technological dynamism act to offset one another,

thereby making it difficult to formulate categorical antitrust

rules absent a particularized analysis of a given market. See

Shelanski & Sidak, at 6-7 ("High profit margins might appear

to be the benign and necessary recovery of legitimate invest-

ment returns in a Schumpeterian framework, but they might

represent exploitation of customer lock-in and monopoly pow-

er when viewed through the lens of network economics....

The issue is particularly complex because, in network indus-

tries characterized by rapid innovation, both forces may be

operating and can be difficult to isolate.").

Moreover, it should be clear that Microsoft makes no claim

that anticompetitive conduct should be assessed differently in

technologically dynamic markets. It claims only that the

measure of monopoly power should be different. For reasons

fully discussed below, we reject Microsoft's monopoly power

argument. See infra Section II.A.

With this backdrop in mind, we turn to the specific chal-

lenges raised in Microsoft's appeal.

II. Monopolization

Section 2 of the Sherman Act makes it unlawful for a firm

to "monopolize." 15 U.S.C. s 2. The offense of monopoliza-

tion has two elements: "(1) the possession of monopoly power

in the relevant market and (2) the willful acquisition or

maintenance of that power as distinguished from growth or

development as a consequence of a superior product, business

acumen, or historic accident." United States v. Grinnell

Corp., 384 U.S. 563, 570-71 (1966). The District Court ap-

plied this test and found that Microsoft possesses monopoly

power in the market for Intel-compatible PC operating sys-

tems. Focusing primarily on Microsoft's efforts to suppress

Netscape Navigator's threat to its operating system monopo-

ly, the court also found that Microsoft maintained its power

not through competition on the merits, but through unlawful

means. Microsoft challenges both conclusions. We defer to

the District Court's findings of fact, setting them aside only if

clearly erroneous. Fed R. Civ. P. 52(a). We review legal

questions de novo. United States ex rel. Modern Elec., Inc.

v. Ideal Elec. Sec. Co., 81 F.3d 240, 244 (D.C. Cir. 1996).

We begin by considering whether Microsoft possesses mo-

nopoly power, see infra Section II.A, and finding that it does,

we turn to the question whether it maintained this power

through anticompetitive means. Agreeing with the District

Court that the company behaved anticompetitively, see infra

Section II.B, and that these actions contributed to the mainte-

nance of its monopoly power, see infra Section II.C, we affirm

the court's finding of liability for monopolization.

A. Monopoly Power

While merely possessing monopoly power is not itself an

antitrust violation, see Northeastern Tel. Co. v. AT & T, 651

F.2d 76, 84-85 (2d Cir. 1981), it is a necessary element of a

monopolization charge, see Grinnell, 384 U.S. at 570. The

Supreme Court defines monopoly power as "the power to

control prices or exclude competition." United States v. E.I.

du Pont de Nemours & Co., 351 U.S. 377, 391 (1956). More

precisely, a firm is a monopolist if it can profitably raise

prices substantially above the competitive level. 2A Phillip

E. Areeda et al., Antitrust Law p 501, at 85 (1995); cf. Ball

Mem'l Hosp., Inc. v. Mut. Hosp. Ins., Inc., 784 F.2d 1325,

1335 (7th Cir. 1986) (defining market power as "the ability to

cut back the market's total output and so raise price").

Where evidence indicates that a firm has in fact profitably

done so, the existence of monopoly power is clear. See Rebel

Oil Co. v. Atl. Richfield Co., 51 F.3d 1421, 1434 (9th Cir.

1995); see also FTC v. Indiana Fed'n of Dentists, 476 U.S.

447, 460-61 (1986) (using direct proof to show market power

in Sherman Act s 1 unreasonable restraint of trade action).

Because such direct proof is only rarely available, courts

more typically examine market structure in search of circum-

stantial evidence of monopoly power. 2A Areeda et al.,

Antitrust Law p 531a, at 156; see also, e.g., Grinnell, 384 U.S.

at 571. Under this structural approach, monopoly power may

be inferred from a firm's possession of a dominant share of a

relevant market that is protected by entry barriers. See

Rebel Oil, 51 F.3d at 1434. "Entry barriers" are factors

(such as certain regulatory requirements) that prevent new

rivals from timely responding to an increase in price above

the competitive level. See S. Pac. Communications Co. v.

AT & T, 740 F.2d 980, 1001-02 (D.C. Cir. 1984).

The District Court considered these structural factors and

concluded that Microsoft possesses monopoly power in a

relevant market. Defining the market as Intel-compatible

PC operating systems, the District Court found that Micro-

soft has a greater than 95% share. It also found the compa-

ny's market position protected by a substantial entry barrier.

Conclusions of Law, at 36.

Microsoft argues that the District Court incorrectly defined

the relevant market. It also claims that there is no barrier to

entry in that market. Alternatively, Microsoft argues that

because the software industry is uniquely dynamic, direct

proof, rather than circumstantial evidence, more appropriate-

ly indicates whether it possesses monopoly power. Rejecting

each argument, we uphold the District Court's finding of

monopoly power in its entirety.

1. Market Structure

a. Market definition

"Because the ability of consumers to turn to other suppliers

restrains a firm from raising prices above the competitive

level," Rothery Storage & Van Co. v. Atlas Van Lines, Inc.,

792 F.2d 210, 218 (D.C. Cir. 1986), the relevant market must

include all products "reasonably interchangeable by consum-

ers for the same purposes." du Pont, 351 U.S. at 395. In

this case, the District Court defined the market as "the

licensing of all Intel-compatible PC operating systems world-

wide," finding that there are "currently no products--and ...

there are not likely to be any in the near future--that a

significant percentage of computer users worldwide could

substitute for [these operating systems] without incurring

substantial costs." Conclusions of Law, at 36. Calling this

market definition "far too narrow," Appellant's Opening Br.

at 84, Microsoft argues that the District Court improperly

excluded three types of products: non-Intel compatible oper-

ating systems (primarily Apple's Macintosh operating system,

Mac OS), operating systems for non-PC devices (such as

handheld computers and portal websites), and "middleware"

products, which are not operating systems at all.

We begin with Mac OS. Microsoft's argument that Mac

OS should have been included in the relevant market suffers

from a flaw that infects many of the company's monopoly

power claims: the company fails to challenge the District

Court's factual findings, or to argue that these findings do not

support the court's conclusions. The District Court found

that consumers would not switch from Windows to Mac OS in

response to a substantial price increase because of the costs

of acquiring the new hardware needed to run Mac OS (an

Apple computer and peripherals) and compatible software

applications, as well as because of the effort involved in

learning the new system and transferring files to its format.

Findings of Fact p 20. The court also found the Apple

system less appealing to consumers because it costs consider-

ably more and supports fewer applications. Id. p 21. Micro-

soft responds only by saying: "the district court's market

definition is so narrow that it excludes Apple's Mac OS, which

has competed with Windows for years, simply because the

Mac OS runs on a different microprocessor." Appellant's

Opening Br. at 84. This general, conclusory statement falls

far short of what is required to challenge findings as clearly

erroneous. Pendleton v. Rumsfeld, 628 F.2d 102, 106 (D.C.

Cir. 1980); see also Terry v. Reno, 101 F.3d 1412, 1415 (D.C.

Cir. 1996) (holding that claims made but not argued in a brief

are waived). Microsoft neither points to evidence contradict-

ing the District Court's findings nor alleges that supporting

record evidence is insufficient. And since Microsoft does not

argue that even if we accept these findings, they do not

support the District Court's conclusion, we have no basis for

upsetting the court's decision to exclude Mac OS from the

relevant market.

Microsoft's challenge to the District Court's exclusion of

non-PC based competitors, such as information appliances

(handheld devices, etc.) and portal websites that host server-

based software applications, suffers from the same defect:

the company fails to challenge the District Court's key factual

findings. In particular, the District Court found that because

information appliances fall far short of performing all of the

functions of a PC, most consumers will buy them only as a

supplement to their PCs. Findings of Fact p 23. The Dis-

trict Court also found that portal websites do not presently

host enough applications to induce consumers to switch, nor

are they likely to do so in the near future. Id. p 27. Again,

because Microsoft does not argue that the District Court's

findings do not support its conclusion that information appli-

ances and portal websites are outside the relevant market, we

adhere to that conclusion.

This brings us to Microsoft's main challenge to the District

Court's market definition: the exclusion of middleware. Be-

cause of the importance of middleware to this case, we pause

to explain what it is and how it relates to the issue before us.

Operating systems perform many functions, including allo-

cating computer memory and controlling peripherals such as

printers and keyboards. See Direct Testimony of Frederick

Warren-Boulton p 20, reprinted in 5 J.A. at 3172-73. Oper-

ating systems also function as platforms for software applica-

tions. They do this by "exposing"--i.e., making available to

software developers--routines or protocols that perform cer-

tain widely-used functions. These are known as Application

Programming Interfaces, or "APIs." See Direct Testimony

of James Barksdale p 70, reprinted in 5 J.A. at 2895-96. For

example, Windows contains an API that enables users to

draw a box on the screen. See Direct Testimony of Michael

T. Devlin p 12, reprinted in 5 J.A. at 3525. Software develop-

ers wishing to include that function in an application need not

duplicate it in their own code. Instead, they can "call"--i.e.,

use--the Windows API. See Direct Testimony of James

Barksdale p p 70-71, reprinted in 5 J.A. at 2895-97. Win-

dows contains thousands of APIs, controlling everything from

data storage to font display. See Direct Testimony of Mi-

chael Devlin p 12, reprinted in 5 J.A. at 3525.

Every operating system has different APIs. Accordingly,

a developer who writes an application for one operating

system and wishes to sell the application to users of another

must modify, or "port," the application to the second operat-

ing system. Findings of Fact p 4. This process is both time-

consuming and expensive. Id. p 30.

"Middleware" refers to software products that expose their

own APIs. Id. p 28; Direct Testimony of Paul Maritz

p p 234-36, reprinted in 6 J.A. at 3727-29. Because of this, a

middleware product written for Windows could take over

some or all of Windows's valuable platform functions--that is,

developers might begin to rely upon APIs exposed by the

middleware for basic routines rather than relying upon the

API set included in Windows. If middleware were written

for multiple operating systems, its impact could be even

greater. The more developers could rely upon APIs exposed

by such middleware, the less expensive porting to different

operating systems would be. Ultimately, if developers could

write applications relying exclusively on APIs exposed by

middleware, their applications would run on any operating

system on which the middleware was also present. See

Direct Testimony of Avadis Tevanian, Jr. p 45, reprinted in 5

J.A. at 3113. Netscape Navigator and Java--both at issue in

this case--are middleware products written for multiple oper-

ating systems. Findings of Fact p 28.

Microsoft argues that, because middleware could usurp the

operating system's platform function and might eventually

take over other operating system functions (for instance, by

controlling peripherals), the District Court erred in excluding

Navigator and Java from the relevant market. The District

Court found, however, that neither Navigator, Java, nor any

other middleware product could now, or would soon, expose

enough APIs to serve as a platform for popular applications,

much less take over all operating system functions. Id.

p p 28-29. Again, Microsoft fails to challenge these findings,

instead simply asserting middleware's "potential" as a com-

petitor. Appellant's Opening Br. at 86. The test of reason-

able interchangeability, however, required the District Court

to consider only substitutes that constrain pricing in the

reasonably foreseeable future, and only products that can

enter the market in a relatively short time can perform this

function. See Rothery, 792 F.2d at 218 ("Because the ability

of consumers to turn to other suppliers restrains a firm from

raising prices above the competitive level, the definition of the

'relevant market' rests on a determination of available substi-

tutes."); see also Findings of Fact p 29 ("[I]t would take

several years for middleware ... to evolve" into a product

that can constrain operating system pricing.). Whatever

middleware's ultimate potential, the District Court found that

consumers could not now abandon their operating systems

and switch to middleware in response to a sustained price for

Windows above the competative level. Findings of Fact

p p 28, 29. Nor is middleware likely to overtake the operat-

ing system as the primary platform for software development

any time in the near future. Id.

Alternatively, Microsoft argues that the District Court

should not have excluded middleware from the relevant mar-

ket because the primary focus of the plaintiffs' s 2 charge is

on Microsoft's attempts to suppress middleware's threat to its

operating system monopoly. According to Microsoft, it is

"contradict[ory]," 2/26/2001 Ct. Appeals Tr. at 20, to define

the relevant market to exclude the "very competitive threats

that gave rise" to the action. Appellant's Opening Br. at 84.

The purported contradiction lies between plaintiffs' s 2 theo-

ry, under which Microsoft preserved its monopoly against

middleware technologies that threatened to become viable

substitutes for Windows, and its theory of the relevant mar-

ket, under which middleware is not presently a viable substi-

tute for Windows. Because middleware's threat is only nas-

cent, however, no contradiction exists. Nothing in s 2 of the

Sherman Act limits its prohibition to actions taken against

threats that are already well-developed enough to serve as

present substitutes. See infra Section II.C. Because market

definition is meant to identify products "reasonably inter-

changeable by consumers," du Pont, 351 U.S. at 395, and

because middleware is not now interchangeable with Win-

dows, the District Court had good reason for excluding

middleware from the relevant market.

b. Market power

Having thus properly defined the relevant market, the

District Court found that Windows accounts for a greater

than 95% share. Findings of Fact p 35. The court also

found that even if Mac OS were included, Microsoft's share

would exceed 80%. Id. Microsoft challenges neither finding,

nor does it argue that such a market share is not predomi-

nant. Cf. Grinnell, 384 U.S. at 571 (87% is predominant);

Eastman Kodak Co. v. Image Technical Servs., Inc., 504 U.S.

451, 481 (1992) (80%); du Pont, 351 U.S. at 379, 391 (75%).

Instead, Microsoft claims that even a predominant market

share does not by itself indicate monopoly power. Although

the "existence of [monopoly] power ordinarily may be in-

ferred from the predominant share of the market," Grinnell,

384 U.S. at 571, we agree with Microsoft that because of the

possibility of competition from new entrants, see Ball Mem'l

Hosp., Inc., 784 F.2d at 1336, looking to current market share

alone can be "misleading." Hunt-Wesson Foods, Inc. v.

Ragu Foods, Inc., 627 F.2d 919, 924 (9th Cir. 1980); see also

Ball Mem'l Hosp., Inc., 784 F.2d at 1336 ("Market share

reflects current sales, but today's sales do not always indicate

power over sales and price tomorrow.") In this case, howev-

er, the District Court was not misled. Considering the

possibility of new rivals, the court focused not only on Micro-

soft's present market share, but also on the structural barrier

that protects the company's future position. Conclusions of

Law, at 36. That barrier--the "applications barrier to en-

try"--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. See Findings of

Fact p p 30, 36. 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. Id.

Challenging the existence of the applications barrier to

entry, Microsoft observes that software developers do write

applications for other operating systems, pointing out that at

its peak IBM's OS/2 supported approximately 2,500 applica-

tions. Id. p 46. This misses the point. That some develop-

ers write applications for other operating systems is not at all

inconsistent with the finding that the applications barrier to

entry discourages many from writing for these less popular

platforms. Indeed, the District Court found that IBM's

difficulty in attracting a larger number of software developers

to write for its platform seriously impeded OS/2's success.

Id. p 46.

Microsoft does not dispute that Windows supports many

more applications than any other operating system. It ar-

gues instead that "[i]t defies common sense" to suggest that

an operating system must support as many applications as

Windows does (more than 70,000, according to the District

Court, id. p 40) to be competitive. Appellant's Opening Br. at

96. Consumers, Microsoft points out, can only use a very

small percentage of these applications. Id. As the District

Court explained, however, the applications barrier to entry

gives consumers reason to prefer the dominant operating

system even if they have no need to use all applications

written for it:

The consumer wants an operating system that runs not

only types of applications that he knows he will want to

use, but also those types in which he might develop an

interest later. Also, the consumer knows that if he

chooses an operating system with enough demand to

support multiple applications in each product category,

he will be less likely to find himself straitened later by

having to use an application whose features disappoint

him. Finally, the average user knows that, generally

speaking, applications improve through successive ver-

sions. He thus wants an operating system for which

successive generations of his favorite applications will be

released--promptly at that. The fact that a vastly larger

number of applications are written for Windows than for

other PC operating systems attracts consumers to Win-

dows, because it reassures them that their interests will

be met as long as they use Microsoft's product.

Findings of Fact p 37. Thus, despite the limited success of

its rivals, Microsoft benefits from the applications barrier to

entry.

Of course, were middleware to succeed, it would erode the

applications barrier to entry. Because applications written

for multiple operating systems could run on any operating

system on which the middleware product was present with

little, if any, porting, the operating system market would

become competitive. Id. p p 29, 72. But as the District Court

found, middleware will not expose a sufficient number of

APIs to erode the applications barrier to entry in the foresee-

able future. See id. p p 28-29.

Microsoft next argues that the applications barrier to entry

is not an entry barrier at all, but a reflection of Windows'

popularity. It is certainly true that Windows may have

gained its initial dominance in the operating system market

competitively--through superior foresight or quality. But

this case is not about Microsoft's initial acquisition of monopo-

ly power. It is about Microsoft's efforts to maintain this

position through means other than competition on the merits.

Because the applications barrier to entry protects a dominant

operating system irrespective of quality, it gives Microsoft

power to stave off even superior new rivals. The barrier is

thus a characteristic of the operating system market, not of

Microsoft's popularity, or, as asserted by a Microsoft witness,

the company's efficiency. See Direct Testimony of Richard

Schmalensee p 115, reprinted in 25 J.A. at 16153-14.

Finally, Microsoft argues that the District Court should not

have considered the applications barrier to entry because it

reflects not a cost borne disproportionately by new entrants,

but one borne by all participants in the operating system

market. According to Microsoft, it had to make major invest-

ments to convince software developers to write for its new

operating system, and it continues to "evangelize" the Win-

dows platform today. Whether costs borne by all market

participants should be considered entry barriers is the sub-

ject of much debate. Compare 2A Areeda & Hovenkamp,

Antitrust Law s 420c, at 61 (arguing that these costs are

entry barriers), and Joe S. Bain, Barriers to New Competi-

tion: Their Character and Consequences in Manufacturing

Industries 6-7 (1956) (considering these costs entry barriers),

with L.A. Land Co. v. Brunswick Corp., 6 F.3d 1422, 1428

(9th Cir. 1993) (evaluating cost based on "[t]he disadvantage

of new entrants as compared to incumbents"), and George

Stigler, The Organization of Industry 67 (1968) (excluding

these costs). We need not resolve this issue, however, for

even under the more narrow definition it is clear that there

are barriers. When Microsoft entered the operating system

market with MS-DOS and the first version of Windows, it did

not confront a dominant rival operating system with as mas-

sive an installed base and as vast an existing array of

applications as the Windows operating systems have since

enjoyed. Findings of Fact p p 6, 7, 43. Moreover, when

Microsoft introduced Windows 95 and 98, it was able to

bypass the applications barrier to entry that protected the

incumbent Windows by including APIs from the earlier ver-

sion in the new operating systems. See id. p 44. This made

porting existing Windows applications to the new version of

Windows much less costly than porting them to the operating

systems of other entrants who could not freely include APIs

from the incumbent Windows with their own.

Previous Page          Back to the top          Next Page